In re Herald, Primeo and Thema Funds Securities Litigation

Filing 335

REPLY to Response to Motion re: #252 JOINT MOTION to Dismiss. Reply Declaration of Joseph Serino, Jr.. Document filed by Herald USA Fund, Franco Mugnai, Friedrich Pfeffer. (Serino, Joseph)

Joseph Serino, Jr.
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10014
Telephone:
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

IN RE HERALD, PRIMEO, AND THEMA FUNDS
SECURITIES LITIGATION

ECF Case
Master File No. 09 Civ. 0289 (RMB) (HBP)

This document relates to: Case No. 09 Civ. 289

REPLY DECLARATION OF JOSEPH SERINO, JR.
IN FURTHER SUPPORT OF HERALD FUND SPC, FRANCO MUGNAI,
AND FRIEDRICH PFEFFER’S MOTION TO DISMISS

I, Joseph Serino, Jr., declare:
1.

I am a member of the bar of this Court and a partner of Kirkland & Ellis LLP,

counsel for Defendants Herald Fund SPC, and its two Directors, Franco Mugnai, and Friedrich
Pfeffer. I submit this declaration in further support of Defendants’ joint motion to dismiss and in
reply to Plaintiff’s opposition.
2.

Herald SPC, Mugnai, and Pfeffer join only the arguments in Defendants’ joint

reply brief that correspond to the arguments they joined in Defendants’ Opening Brief and do not
rely upon any other declaration submitted with the reply brief, except for the Bagnall Reply
Declaration (but only to the extent applicable to arguments in which Herald SPC, Mugnai, and/or
Pfeffer join). By joining those arguments and that declaration, Herald SPC, Mugnai, and Pfeffer
do not intend to waive or contradict, and expressly reserve, any positions any of them may have
taken or may take in other litigation including, but not limited to, litigation with other
Defendants in this action or their affiliates.
3.

Personal Jurisdiction & Service of Process. Plaintiffs’ only attempt to tie Herald

SPC, Mugnai, or Pfeffer to New York are the bare assertions that Mugnai, an Italian citizen,
“signed Herald Fund’s BLMIS account opening documents and caused proceeds of Madoff’s
Ponzi scheme to be both sent to and received from accounts at JPM in New York City,” that
Mugnai and Pfeffer, a German citizen, knew that Herald SPC would send money to Madoff in
New York City, and that Mugnai and Pfeffer’s conduct is imputed to Herald SPC. (See Opp. at
26-27.) These vague and unsupported allegations are wholly insufficient to sustain personal
jurisdiction over Herald SPC, Pfeffer, or Mugnai. Moreover, Plaintiffs’ opposition does not
address, much less rebut, the fact that Plaintiffs have not effectuated proper service of process
over Pfeffer.
4.

Plaintiffs’ Common Law Claims Fail. As set forth in Defendants’ moving and
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reply brief, all common law claims against Herald SPC, Mugnai, and Pfeffer are preempted by
SLUSA and also independently fail under both foreign and New York law. (See Mot. to Dismiss
at 18-20, 22-24, 26-27, 30-33, 34-39; Reply at 9-16, 17-18, 20-27.)
5.

Plaintiffs’ RICO Claims Fail. Nothing in Plaintiffs’ opposition changes the

conclusion that the RICO claims against Herald SPC and Mugnai fail for the reasons set forth in
Defendants’ moving and reply briefs. (See Mot. to Dismiss at 39-45; Reply at 27-30.) In fact,
Plaintiffs make no mention of Herald SPC, Mugnai, or Pfeffer (who is not named as a defendant
in the RICO counts) when arguing that their RICO claims survive, except to suggest, apparently
in an attempt to establish personal jurisdiction, that Mugnai and Pfeffer supposedly knew that
Herald SPC was formed with the sole purpose of supplying money to Madoff and that this
knowledge can be imputed to Herald SPC. (See Opp. pp. 26-27) As a matter of law, these
conclusory allegations are insufficient to plead scienter under RICO where, as here, fraud forms
the basis of the RICO claim. See, e.g., MLSMK Investment Company v. JP Morgan Chase &
Co., 737 F.Supp.2d 137, 142 (S.D.N.Y. 2011) (when a civil RICO claim is grounded in fraud,
“the heightened pleading standard” of Rule 9(b) applies); Moore v. PaineWebber, Inc., 189 F.3d
165, 173 (2d Cir. 1999) (explaining that in the RICO context, “plaintiffs must allege facts that
give rise to a strong inference of fraudulent intent.”); Morin v. Trupin, 778 F.Supp. 711, 716
(S.D.N.Y. 1991) (“[A]ll of the concerns that dictate that fraud be pleaded with particularity exist
with even greater urgency in civil RICO actions.”).
6.

The Reflective Loss Doctrine Applies to Herald SPC.

In an attempt to

manufacture standing, Plaintiffs argue, incorrectly, that the reflective loss doctrine does not
apply to shareholders where the company elects not to pursue claims independently. (See Opp.
at 104-05.) Even if this were the case, however, Plaintiffs’ argument is of no moment, as Herald
SPC has in fact actively pursued claims against third parties. In 2009, Herald SPC commenced
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an action against the Fund’s custodian, HSBC Securities Services (Luxembourg) (“HSSL”), to
recover the full value of its assets. That action continues to be actively prosecuted by Herald
SPC in Luxembourg courts. Herald SPC also has initiated proceedings against its auditors, Ernst
& Young and Ernst & Young S.A., in the Cayman Islands.1 Furthermore, Herald SPC has filed a
SIPA claim in the underlying BLMIS bankruptcy action,2 the proceeds of which (together with
other recoveries) will be distributed among its stakeholders (including the Herald Plaintifs) in
accordance with Cayman Islands law. The Board of Directors of Herald SPC continues to
monitor and consider, with appropriate counsel, the feasibility and merits of additional claims.
So this is not a case where a company has refused to pursue obvious legal remedies to the
detriment of its underlying stakeholders. Thus, even under Plaintiffs’ own interpretation of the
reflective loss doctrine, that doctrine applies to Herald SPC and, accordingly, Plaintiffs lack
standing to sue Herald SPC.
WHEREFORE, on behalf of Defendants Herald SPC, Mugnai, and Pfeffer, I respectfully
request that the Complaint against them be dismissed in its entirety and with prejudice.
I declare under penalty of perjury that the foregoing is true and correct.

/s Joseph Serino, Jr.

Executed on October 28, 2011
New York, New York

Joseph Serino, Jr.

1

Herald SPC’s Writ of Summons was issued in December 2009 but, pursuant to a standstill agreement, has
not been served upon the defendants. The validity of the Writ of Summons has been extended on a number of
occasions by order of the Grand Court of the Cayman Islands. While the Writ of Summons was issued in order to
fully protect the interests of Herald SPC and its stakeholders, Herald SPC recognizes that it is not entitled to “double
recovery” and does not therefore intend to serve the Writ of Summons and actively prosecute the action until its
claim against HSSL is finally resolved. If Herald SPC is wholly successful in its claim against HSSL, it is
anticipated that the Writ of Summons would never be served and pursued.
2

Herald SPC’s position is that this claim properly ought to have been filed by HSSL as the legal account
holder. However, HSSL refused to do so, and Herald SPC was therefore forced to file the SIPA claim itself (with
full reservations of its rights as against HSSL). Again, this filing was made in order to protect the position of Herald
SPC and its stakeholders.

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