In re Herald, Primeo and Thema Funds Securities Litigation

Filing 254

DECLARATION of Patricia M. Hynes in Support re: #252 JOINT MOTION to Dismiss.. Document filed by JP Morgan Chase & Co.. (Hynes, Patricia)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE HERALD, PRIMEO AND THEMA
:
FUNDS SECURITIES LITIGATION
:
:
This Document Relates to:
:
:

Master File No. 09 Civ. 289
(RMB) (HBP)
ECF Case
Electronically Filed

Davis v. Benbassat, No. 09 Civ. 2558
Repex Ventures, S.A. v. Madoff, No. 09 Civ.
289

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DECLARATION OF PATRICIA M. HYNES
ON BEHALF OF JPMORGAN CHASE & CO., JPMORGAN CHASE BANK, N.A.,
J.P. MORGAN SECURITIES LLC AND J.P. MORGAN SECURITIES LTD.

PATRICIA M. HYNES declares under penalty of perjury as follows:
1.

I am an attorney admitted to practice before this Court and am Senior Counsel with Allen

& Overy LLP, counsel for JPM. I make this declaration in support of JPM’s motion to dismiss
the Herald and Thema Complaints and in opposition to Plaintiffs’ motion for leave to amend.
PLAINTIFFS FAIL TO STATE A CLAIM AGAINST JPM
2.

Plaintiffs seek to hold JPM secondarily liable for various alleged breaches of duty by the

managers, directors, administrators, custodians, advisors and auditors of the Thema and Herald
funds that caused the funds’ assets to be invested in Madoff’s Ponzi scheme. TC ¶¶ 4, 7, 9, 1653, 132-306, 417-94, 503-17, 522-38; HC ¶¶ 10-39, 62-78, 81, 651-54, 661-771. JPM did not
have, and is not alleged to have had, any role in the management or operation of the funds, nor is
JPM even alleged to have provided banking services to them. HC ¶¶ 70, 73. JPM’s only
tenuous connection to the events underlying this lawsuit is that Madoff’s investment advisory
business happened to have a bank account at JPM (the “703 account”). TC ¶¶ 59, 313-34; HC ¶¶
79-80, 460-85.1 The claims against JPM are based on nothing but conclusory assertions of
“actual knowledge” that are largely plagiarized from complaints in other cases, including one
whose dismissal the Second Circuit recently affirmed because the complaint did not plead that
JPM had actual knowledge of Madoff’s fraud. See MLSMK Inv. Co. v. JP Morgan Chase & Co.,
No. 10-3040-cv, 2011 WL 2176152 (2d Cir. June 6, 2011) (summary order).2

1

Plaintiffs also allege that JPM invested its own money in certain funds that, in turn, invested
with Madoff, to hedge its exposure on structured derivative notes sold outside the United States
that paid a return based on the performance of those funds. See TC ¶¶ 335-57; HC ¶¶ 80, 43159. Plaintiffs do not allege that they invested in those notes, or that they suffered any harm as a
result of their issuance.
2

Davis added JPM to this action after MLSMK was filed, copying liberally from the MLSMK
complaint, including an allegation that JPM met with Madoff in the summer of 2008. See TC
¶ 347. The MLSMK plaintiff made up that allegation, which is false. See MLSMK, 2011 WL
2176152, at *2.

1

A.
3.

All Claims Against JPM Are Barred By The In Pari Delicto Doctrine

As Plaintiffs are suing derivatively to recover damages for injury suffered by the Thema

and Herald funds as a result of alleged breaches of duty by the funds’ agents, see Part II(C) &
(D),3 their claims against JPM are barred by the doctrine of in pari delicto. Under New York
law,4 the agents’ alleged misconduct is imputed to the funds, so no derivative action can be
sustained on their behalf against JPM for allegedly facilitating that misconduct. See Kirschner v.
KPMG LLP, 15 N.Y.3d 446, 465 (2010).
B.

Plaintiffs Have Not Pleaded Any Aiding And Abetting Claim Against JPM
1.

4.

No Pleading Of Actual Knowledge

Plaintiffs have not pleaded any aiding and abetting claim because they have not met their

“heavy” burden to plead that JPM had actual knowledge of the misconduct that it allegedly aided
and abetted. Chemtex, 490 F. Supp. 2d at 546; Part III(B)(4). Plaintiffs plead no facts to support
their conclusory assertions that JPM had actual knowledge of the alleged breaches of duty by the
managers, directors, administrators, custodians, advisors and auditors of the Thema and Herald
funds. See TC ¶¶ 495-502 (aiding and abetting negligence and gross negligence),5 ¶¶ 518-21
(aiding and abetting breach of fiduciary duty); HC ¶¶ 655-60 (aiding and abetting conversion),
¶¶ 777-95 (aiding and abetting breach of fiduciary duty). Plaintiffs do not, therefore, plead an
essential element of their aiding and abetting claims—that JPM actually knew that the alleged
primary violators were breaching their duties to the funds. See Mazzaro de Abreu v. Bank of Am.

3

Citations in the form “Part __” are to sections of Defendants’ Joint Memorandum of Law.

4

As Plaintiffs allege that all relevant conduct by JPM took place in New York, see TC ¶¶ 67, 70,
327; HC ¶¶ 79-80, all claims against JPM obviously are governed by New York law.
5

Davis’s claims for aiding and abetting negligence and gross negligence, TC Counts 11 & 12,
also should be dismissed because there is no such claim under New York law. See Part III(B)(4).

2

Corp., 525 F. Supp. 2d 381, 393 (S.D.N.Y. 2007).6
5.

Although knowledge of Madoff’s fraud clearly would not have given JPM actual

knowledge that the funds’ agents were breaching their duties to the funds, Plaintiffs attempt to
plead that JPM knew about Madoff’s fraud. TC ¶¶ 312-57; HC ¶¶ 430-85. As they are
unsuccessful in that endeavor, the claim for aiding and abetting Madoff’s fraud that Repex
asserts indiscriminately against all defendants, HC Count 19, should be dismissed as to JPM.
6.

First, Repex contends that JPM ignored or failed to investigate what it characterizes as

“red flags” surrounding Madoff’s 703 account. See HC ¶¶ 460-85. Repex opines that activity in
the 703 account “should have prompted a check-kiting investigation, which undoubtedly would
have revealed more suspicious behavior,” and that, if JPM had been taking seriously its
obligations under the federal money-laundering rules, it “would have noticed these red flags and
notified the proper authorities.” Id. ¶¶ 469-70, 478, 483 (emphases added). According to
Repex, JPM “knew or, in the absence of negligence, gross negligence or recklessness, should
have known” that the 703 account was being used for fraud and money laundering. See HC
¶¶ 468-69, 474-75, 480 (emphasis added).
7.

Such allegations about what a bank should or would have known if it had investigated red

flags “concede[] a lack of actual knowledge.” Rosner, 2008 WL 5416380, at *6-7; see also
Renner, 2000 WL 781081, at *8 (What a bank “should have known is irrelevant.”); Williams v.
Bank Leumi Trust Co., No. 96 CIV 6695(LMM), 1997 WL 289865, at *5 (S.D.N.Y. May 30,
1997) (Allegations about irregular account activity fail to plead a bank’s actual knowledge

6

The civil conspiracy claim that Repex indiscriminately asserts against all Defendants, HC
Count 1, should be dismissed as to JPM, first, because New York law recognizes no such claim,
and, second, because Repex does not plead that JPM entered into any agreement to participate in
any tortious conduct. See Part III(B)(8).

3

because they “[a]t most . . . raise the issue of constructive knowledge which is insufficient.”).7
Thus, Repex’s contention that “the JPMorgan Chase Defendants did not do their job” with
respect to the 703 account, HC ¶ 485, does not plead actual knowledge of Madoff’s fraud.8
8.

Second, Repex contends that “red flags” that JPM allegedly saw and questions it asked

when considering whether to invest in Herald in 2007, see HC ¶¶ 430-44, show that JPM had
actual knowledge of fraud. As the cases cited above hold, however, allegations about “red flags”
do not plead actual knowledge. Moreover, JPM went on to invest its own money in Herald, see
id. ¶ 446, confirming the implausibility of any inference that it actually knew that Madoff was
engaged in fraud. Nor does the allegation that JPM withdrew some, but not all, its investments
in certain funds in the midst of the severe market dislocations of October 2008 plead actual
knowledge of Madoff’s fraud, particularly as Repex pleads only that JPM “knew or should have
also known that Madoff and/or BMIS’ business was fraudulent.” HC ¶ 455 (emphasis added).9
2.
9.

No Pleading Of Substantial Assistance

All the aiding and abetting claims should also be dismissed due to Plaintiffs’ failure to

7

See also El Camino Res., Ltd. v. Huntington Nat’l Bank, 722 F. Supp. 2d 875, 923 (W.D. Mich.
2010) (noting that courts have “routinely rejected” the argument that a bank’s violation of antimoney-laundering rules pleads actual knowledge for aiding and abetting liability).
8

For the same reasons, Davis’s allegations that the 703 account did not come under suspicion by
JPM, see TC ¶ 59, that activity in the account “should have triggered an internal probe or
triggered alarms,” id. ¶¶ 319, 323, that JPM failed to investigate red flags, see id. ¶ 326, and that
JPM violated the money-laundering rules, see id. ¶¶ 327-34, do not plead actual knowledge.
9

Similarly, Davis’s parallel allegations that JPM did a poor job when conducting diligence into
the feeder funds and later withdrew a portion of its investments fail to plead actual knowledge.
See TC ¶¶ 335-57. Also wholly inconsistent with actual knowledge is Davis’s allegation that
JPM filed a suspicious activity report (“SAR”) as to Madoff in October 2008. See TC ¶ 344.
First, SARs report suspicions, not actual knowledge, and several courts have held that the
specific suspicions referenced in the SAR do not plead actual knowledge of Madoff’s fraud. See,
e.g., In re Tremont Sec. Law, State Law & Ins. Litig., 703 F. Supp. 2d 362, 368, 371 (S.D.N.Y.
2010); SEC v. Cohmad Sec. Corp., No. 09 Civ. 5680(LLS), 2010 WL 363844, at *5-6 (S.D.N.Y.
Feb. 2, 2010). Second, Davis does not explain how it is plausible that JPM would report its
suspicions to the authorities if, as he alleges, it was knowingly and deliberately facilitating fraud.

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