Rembaum et al v. Banco Santander, S.A. et al
Filing
31
OPINION AND ORDER: For the aforementioned reasons, and for reasons that will be explained at a conference scheduled for May 10, 2011, at 3:30 p.m., Defendants' motion to dismiss is granted in part and denied in part. The Clerk of Court is directed to close this motion (Docket No. 14). So Ordered (Signed by Judge Shira A. Scheindlin on 5/2/2011) (js)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------------)(
OPINION AND ORDER
IN RE OPTIMAL U.S. LITIGATION
10 Civ. 4095 (SAS)
-------------------------------------------------------------)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
This putative class action arises out of Plaintiffs' investment in the
Optimal Strategic U.S. Equity fund ("Optimal U.S."), which in tum invested onehundred percent of its assets with Bernard L. Madoff ("Madoff') and his firm,
Bernard L. Madofflnvestment Securities LLC ("BMIS"). Plaintiffs'Second
Amended Complaint ("SAC") alleges that Defendants - Optimal U.S.'s investment
advisor, an employee thereof, and two closely-affiliated Banco Santander entities
failed to conduct adequate diligence regarding Madoff, ignored "red flags" that
should have alerted them to Madoffs fraud, and made misstatements and
omissions in connection with the sale of Optimal U. S. shares, causing Plaintiffs to
lose their investments and allowing Defendants wrongfully to collect management
fees. Defendants now move to dismiss all fifteen counts asserted in the SAC,
including thirteen state law and two federal securities law claims.
-J
II.
BACKGROUND1
A.
The Funds and Sub-Funds (Non-Parties)
Optimal U.S. and Optimal Arbitrage Ltd. (together, the “Funds”) are
sub funds of Optimal Multiadvisors, Ltd. (“Optimal Multiadvisors”), an investment
fund incorporated in the Commonwealth of the Bahamas.2 Optimal Multiadvisors
offered non-voting participating shares (“Participating Shares”) in Optimal U.S. to
Plaintiffs and other similarly situated investors, each share constituting a passthrough economic interest proportional to the Plaintiff’s investment with Madoff.3
B.
Defendants
There are four named defendants in this action.
Banco Santander, S.A. (“Banco Santander”), headquartered in
Madrid, Spain, is the parent company of Grupo Santander, one of the largest
financial conglomerates in the world.4
Optimal Investment Management Services, S.A. (“OIS”), an
investment management company incorporated in Switzerland, is a wholly-owned
1
Unless otherwise noted, all facts are drawn from the SAC and
presumed true for the purposes of this motion.
2
See SAC ¶¶ 69, 70.
3
See id. ¶ 71.
4
See id. ¶ 65.
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subsidiary of Banco Santander.5 OIS owned all ordinary voting shares (“Voting
Shares”) of Optimal Multiadvisors6 and served as the investment manager of
Optimal U.S.7
Banco Santander International (“Santander U.S.”) is also a whollyowned subsidiary of Banco Santander, headquartered in Miami, Florida.8 It
conducts business in the United States as an Edge Act corporation organized under
Section 25A of the Federal Reserve Act.9
Jonathan Clark was employed in New York by OIS and Santander
Investment Securities, Inc. (“Santander Investment”) from mid-2003 until mid2008.10 Clark reported to Hugh-Burnaby Atkins, the head of OIS’s New York
office, and to Manuel Echeverria, Optimal U.S.’s original tie to Madoff.11 Hired in
5
See id. ¶ 67.
6
See id. ¶ 70.
7
See id. ¶ 4.
8
See id. ¶ 66.
9
12 U.S.C. §§ 611 et seq.
10
See SAC ¶ 68.
11
See id. In the 1990s, when Optimal U.S. began investing Plaintiffs’
assets with Madoff, Echeverria served as head of Banco Santander’s International
Private Banking Division’s Portfolio Management and Fund Management Group.
See id. ¶ 4. In 2001, the International Private Banking Division was renamed OIS
and established as a subsidiary of Banco Santander (rather than merely an
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2003 to monitor Madoff, Clark, together with Atkins, “handled [Optimal U.S.]
day-to-day.”12
C.
Plaintiffs
1.
“Pioneer” and “Pioneer Plaintiffs”
The “Pioneer Plaintiffs” are fifty-six non-U.S. persons and entities
who invested in Optimal U.S. based on advice provided by Pioneer International
Ltd. (“Pioneer”), an investment advisory firm incorporated in the British Virgin
Islands with principal headquarters in Hertzlia, Israel; Pioneer’s advice was in turn
based on Defendants’ misrepresentations.13 The Pioneer Plaintiffs are residents
primarily of Israel, the Island of Guernsey, the British Virgin Islands, and
Colombia; the remainder are residents of Panama, Mexico, Switzerland, the
Netherlands, and the Island of Jersey.14
Pioneer and Optimal Multiadvisors are parties to a Private Placement
Agreement (“PPA”) that “regulates and controls the contractual relationship
between [Optimal Multiadvisors] . . . and Pioneer [], as non-exclusive private
unincorporated entity); functionally little, if anything, changed. See id. ¶ 5.
12
Id. ¶ 68.
13
See id. ¶¶ 11-60.
14
See id. ¶¶ 12-60. The Island of Jersey is a British Crown Dependency
off the coast of Normandy, France.
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placement agent, for the Private Placement of the Optimal Funds.”15 The PPA
provides that “[i]n consideration of the services provided by [Pioneer], [Optimal
Multiadvisors] shall pay a placement fee . . . based on the net investment value [of
Optimal U.S.] as of month end” to be “calculated monthly by [Optimal
Multiadvisors], and paid quarterly . . . .”16 The last section of the PPA contains a
forum selection clause:
19. Applicable Law and Jursidiction
. . . Each of the parties hereto irrevocably submits any disputes
which may arise from this agreement to the exclusive jurisdiction
of the courts of the Commonwealth of The Bahamas.17
2.
“Santander Plaintiffs”18
The “Santander Plaintiffs” are three foreign citizens/non-U.S.
residents including Solange Broccoli, Gaston Broccoli, and Hugo Valentin
Galinanes.19 Although all three held their Optimal U.S. investments in accounts
15
Ex. C to Declaration of Paulo R. Lima, counsel for Defendants, in
Support of Defendants’ Motion to Dismiss (“Lima Decl.”), § 2 (hereinafter
“PPA”). I may properly consider Defendants’ evidentiary submissions to
determine whether this Court is the proper forum for this action. See infra Part
IV.A.
16
PPA § 7.
17
Id. § 19.
18
The Pioneer Plaintiffs and Santander Plaintiffs are referred to
collectively as “Plaintiffs,” with Pioneer separately designated as “Pioneer.”
19
See SAC ¶ 62.
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with non-party Santander Bank & Trust, Ltd. in the Bahamas (“SBT Bahamas”),20
Santander U.S. was responsible for marketing and selling shares of Optimal U.S. to
each of the Santander Plaintiffs.21 Santander U.S. employees based in Miami
would “regularly offer to open bank accounts at Santander affiliates in the
Bahamas or Switzerland, and invest in [Optimal U.S.].”22 Individuals opening
accounts at SBT Bahamas (such as the Santander Plaintiffs) were required to sign
“Santander PRIVATE BANKING” “Account Agreement[s] (including Terms and
Conditions).”23 The “Terms and Conditions Governing [SBT] Accounts”24 in turn
contained a Bahamian forum selection clause under which SBT account-holders
irrevocably submit to the exclusive jurisdiction of The
Commonwealth of The Bahamas in any action or proceeding
20
See id. ¶ 252; 4/15/11 Letter from Plaintiffs to the Court in Response
to Questions Posed During 4/13/11 Conference Call (“4/15/11 Pl. Letter”) at 2.
21
See SAC ¶ 251. See also id. ¶ 247 (“Santander U.S. mailed bank
statements, [Optimal U.S.] explanatory memoranda, and other documents relating
to [Optimal U.S.] regardless of whether the investor had an account at Santander
U.S. or at a non-U.S.-based Santander banking affiliate.”); id. ¶ 251 (“Galinanes
never spoke with anyone from [SBT Bahamas]. Nicholas Coubrough and Ximena
Goni were the Santander U.S. bankers who handled [Solange and Gaston
Broccoli’s] investments.”).
22
Id. ¶ 253.
23
See id. ¶ 254; SBT Bahamas Account Agreement (Including Terms
and Conditions) (“Account Agreement”), Ex. 25 to SAC, at 1.
24
Terms and Conditions Governing Accounts, Santander Bank & Trust
Ltd. (“SBT Terms & Conditions”), Ex. B to Lima Decl.
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arising out of or relating to the Account or this Agreement, and
irrevocably agree that all claims in respect of any action or
proceeding may be heard and determined in those courts.25
D.
Madoff’s Fraud
Madoff raised billions of dollars under the guise of operating an
investment fund, kept secret from the U.S. government,26 which purportedly
utilized a “split strike conversion” strategy involving the purchase and sale of U.S.
equity securities and options.27 On December 11, 2008, Madoff admitted that his
investment advisory operation was “a giant Ponzi scheme.”28 There is no record of
BMIS or Madoff having cleared a single purchase or sale of securities at the major
clearing house in this country (the Depository Trust & Clearing Corporation) or
25
Id. § 78 (emphasis added).
26
See SAC ¶ 80.
27
See id. ¶ 81. As described in a June 2004 Explanatory Memorandum
(“EM”), this strategy involved purchasing a basket of thirty to forty large
capitalization S&P 100 stocks (to correlate with the general market); purchasing
out-of-the-money or at-the-money S&P Index put options in the same dollar
amount; and selling out-of-the-money S&P 100 Index call options representing a
dollar amount of the underlying index equivalent to the dollar amount of the basket
of shares purchased. See id. ¶ 202 (citing June 2004 EM, Ex. 13 to SAC, at 30-31).
“‘This strategy aims to limit losses when stock prices decline while still affording
an upside potential that is capped to the strike price of the short call when the stock
prices rise. The long/short call position constitutes a ‘synthetic’ short of the
market, which provides a hedge against the long stock positions.’” Id. (quoting
June 2004 EM, Ex. 13 to SAC, at 30-31).
28
Id. ¶ 83.
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any other trading platform on which BMIS could have reasonably traded
securities.29 Nor is there any evidence that Madoff or BMIS ever purchased or sold
any of the options reported to BMIS’s investment advisory investors, such as
OIS.30
E.
Optimal U.S.’s Investment in Madoff; Red Flags
Optimal U.S. began investing Plaintiffs’ assets with Madoff in the late
1990s based on Echeverria’s relationship with Madoff.31 Over the years,
Echeverria continued to increase the funds under management with Madoff as
Echeverria’s meetings and visits to Madoff’s offices cemented the relationship.32
These meetings and visits raised numerous red flags about Madoff that Defendants
concealed from Plaintiffs while failing to perform the due diligence they had
agreed to perform pursuant to Optimal U.S. offering documents.33 For example,
Defendants knew (but did not disclose) that Madoff concealed his advisory
29
See id. ¶ 81.
30
See id. ¶ 82.
31
See id. ¶ 84.
32
See id.
33
See id.
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business from the SEC34 and from the investment community generally;35 that
Madoff did not charge an investment management fee, implausibly foregoing
millions in advisory fees;36 that Madoff acted as an investment advisor, broker, and
custodian, a highly irregular combination;37 that Madoff’s family members
controlled BMIS;38 that Madoff refused to provide any independent verification of
actual trading;39 that Defendants’ internal quantitative due diligence software
showed that Madoff’s returns could not be replicated and were mathematically
implausible;40 that, in Defendants’ view, Madoff did not have independent
auditors;41 and that Optimal U.S.’s contracts with Madoff were not executed by the
correct parties.42
F.
False Representations to Pioneer
34
See id. ¶¶ 85-92.
35
See id. ¶¶ 93-99.
36
See id. ¶¶ 100-103.
37
See id. ¶¶ 104-113.
38
See id. ¶¶ 114-118.
39
See id. ¶¶ 119-148.
40
See id. ¶¶ 149-161.
41
See id. ¶¶ 162-164.
42
See id. ¶¶ 165-166.
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Pioneer, which traditionally did not invest in single manager hedge
funds (such as Madoff), considered investing in Optimal U.S. in late 2007
principally because it believed an established and respected large financial
institution (Banco Santander/OIS) had performed and would continue to perform
ongoing due diligence and oversee the investment.43 During a meeting with OIS
representatives on October 29, 2007, in Geneva, Switzerland, an OIS
representative offered to put Clark, an OIS employee, on the phone, in order to
respond to Pioneer’s questions about Optimal U.S. and due diligence on Madoff.44
During the call, Clark stated that he worked out of Banco Santander’s and OIS’s
New York office where he maintained regular contact with the Madoff operation
and monitored Madoff; that Madoff provided “full transparency” to Defendants
who monitored Madoff’s trading on a “segregated account” for Optimal U.S. on a
continuous basis (a falsehood); and that Defendants had given Madoff an
investment “mandate” that he executed under their control and daily monitoring.45
G.
False and Misleading Statements and Omissions in Optimal U.S.
Explanatory Memoranda and Marketing Materials
Defendants sold investments in Optimal U.S. pursuant to EMs that
43
See id. ¶¶ 224-225.
44
See id. ¶¶ 227-228.
45
See id. ¶¶ 229-230.
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contained no disclosure of Madoff or BMIS,46 contained terse risk disclosures,47
and claimed that OIS made the investment decisions, while the “Broker Dealer”
(Madoff) was merely responsible for execution.48 In fact, Defendants abdicated all
investment management functions over Optimal U.S. to Madoff while charging full
management fees of millions of dollars per year.49 Defendants also issued to
Plaintiffs numerous updates, performance reports, and marketing and sales
materials that contained “uniform misrepresentations and material omissions that
induced Plaintiffs to invest and retain their investment in [Optimal U.S.].”50
Defendants failed to disclose that no one had conducted meaningful due diligence
on Madoff prior to establishing Optimal U.S. and selecting Madoff as an execution
agent and broker for Optimal U.S.; no one was meaningfully monitoring or
independently verifying Madoff’s trading activity; Defendants had effectively no
access to Madoff’s operations; and Defendants had no independent basis for stating
that Madoff was executing a split-strike conversion strategy.51
46
See id. ¶ 194.
47
See id. ¶¶ 195-201.
48
See id. ¶ 203.
49
See id. ¶¶ 6, 223.
50
Id.
51
See id. ¶ 234.
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H.
Defendants’ Involvement in Optimal U.S.
OIS drafted the EMs provided to Optimal U.S. investors,52 who were
required to acknowledge that they had received such documents as a condition to
buying shares in Optimal U.S.53 To provide reassurance of OIS’s capabilities, the
EMs emphasized that Banco Santander stood behind OIS,54 and an October 2008
OIS presentation on Optimal U.S. emphasized that the reason to invest in Optimal
U.S. was its affiliation with Banco Santander.55 All EMs and marketing materials
“were distributed by OIS, Santander U.S, and other subsidiaries of Banco
Santander, without regard for corporate structure and formalities.”56 Moreover,
Banco Santander and its affiliates were “deeply involved in risk management at
OIS, especially with respect to [Optimal U.S.].”57 Finally, in addition to the annual
management fee charged by OIS based on the market value of Optimal U.S. each
year – a management fee that OIS shared with Santander U.S. as compensation for
Santander U.S.’s sales efforts – Santander U.S. charged Plaintiffs a sales
52
See id. ¶¶ 217-220.
53
See id. ¶ 233.
54
See id. ¶ 206.
55
See id. ¶ 244.
56
Id.
57
Id. ¶ 258.
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percentage of the amount invested at the time of their investment in the Funds.58
I.
Plaintiffs’ Claims and Defendants’ Arguments
The Pioneer and Santander Plaintiffs assert the following claims: (1)
common law fraud against OIS, Banco Santander, and Clark, and negligent
misrepresentation against all four Defendants, in connection with Plaintiffs’
decisions to purchase and hold Optimal U.S. shares (Counts I-IV); (2) gross
negligence against all Defendants (Count V); (3) breach of fiduciary duty against
OIS and Santander U.S. (Count VI); (4) aiding and abetting both breach of
fiduciary duty and fraud against Banco Santander and Santander U.S. (Counts VIIVIII); (5) third party beneficiary breach of contract against OIS (Count IX); (6)
unjust enrichment against all Defendants (Count X); (7) violation of section 10(b)
of the Securities Exchange Act of 1934 (“Exchange Act”)59 and Rule 10b-560
promulgated thereunder against OIS and Clark (Count XI); and (8) violation of
section 20(a) of the Exchange Act61 against Banco Santander (Count VII). Pioneer
asserts common law fraud, negligent misrepresentation, and gross negligence
58
See id. ¶ 262.
59
15 U.S.C. § 78j.
60
17 C.F.R. § 240.10b5.
61
15 U.S.C. § 78t(a).
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claims against OIS, Banco Santander, and Clark (Counts XIII-XIV). Defendants
advance three primary arguments in their motion to dismiss: first, that the
Bahamian forum selection clauses contained in the PPA and the SBT Terms &
Conditions govern the Pioneer and Santander Plaintiffs’ claims; second, that the
Exchange Act does not apply to the “extraterritorial” transactions forming the basis
for Plaintiffs’ federal securities claims; and third, that Plaintiffs’ common law
claims fail either for lack of standing or for failure to state a claim. I address each
argument in turn.
III.
LEGAL STANDARDS
A.
Motion to Dismiss
In deciding a motion to dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6), the court evaluates the sufficiency of the complaint under the
“two-pronged approach” suggested by the Supreme Court in Ashcroft v. Iqbal.62
First, a court “‘can choose to begin by identifying pleadings that, because they are
no more than conclusions, are not entitled to the assumption of truth.’”63
“Threadbare recitals of the elements of a cause of action, supported by mere
62
556 U.S. ---, ---, 129 S.Ct. 1937, 1950 (2009).
63
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal,
129 S.Ct. at 1950). Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d
55, 59 (2d Cir. 2010).
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conclusory statements, do not suffice” to withstand a motion to dismiss.64 Second,
“[w]hen there are well-pleaded factual allegations, a court should assume their
veracity and then determine whether they plausibly give rise to an entitlement for
relief.”65 To survive a Rule 12(b)(6) motion to dismiss, the allegations in the
complaint must meet a standard of “plausibility.”66 A claim is facially plausible
“when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”67
Plausibility “is not akin to a probability requirement;” rather, plausibility requires
“more than a sheer possibility that a defendant has acted unlawfully.”68
“In considering a motion to dismiss for failure to state a claim
pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the
complaint, documents attached to the complaint as exhibits, and documents
64
Iqbal, 129 S.Ct. at 1949 (citing Bell Atl. Corp. v. Twombly, 550 U.S.
544, 555 (2007)).
65
Id. at 1950. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d
111, 124 (2d Cir. 2010).
66
Twombly, 550 U.S. at 564.
67
Iqbal, 129 S. Ct. at 1949 (quotation marks omitted).
68
Id. (quotation marks omitted).
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incorporated by reference in the complaint.”69 However, the court may also
consider a document that is not incorporated by reference, “where the complaint
‘relies heavily upon its terms and effect,’ thereby rendering the document ‘integral’
to the complaint.”70
B.
Federal Rule of Civil Procedure 9(b)
Rule 9(b) provides that “the circumstances constituting fraud . . . shall
be stated with particularity.” To satisfy the particularity requirement, a complaint
must: “‘(1) specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made, and (4)
explain why the statements were fraudulent.’”71 However, “intent, knowledge, and
other conditions of mind may be averred generally.”72
C.
Amendments to Pleadings
“Rule 15(a) provides that, other than amendments as a matter of
69
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010)
(citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)).
70
Id. (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.
2006)). Accord Global Network Commc’ns, Inc. v. City of N.Y., 458 F.3d 150, 156
(2d Cir. 2006).
71
Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)
(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)).
72
Fed. R. Civ. P. 9(b).
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course, a party may amend the party’s pleading only by leave of court or by written
consent of the adverse party; and leave shall be freely given when justice so
requires.”73 “[W]hether to permit a plaintiff to amend its pleadings is a matter
committed to the Court’s sound discretion.”74 The Supreme Court has explained
that:
[i]f the underlying facts or circumstances relied upon by a plaintiff
may be a proper subject of relief, he ought to be afforded an
opportunity to test his claim on the merits. In the absence of any
apparent or declared reason – such as undue delay, bad faith or
dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice
to the opposing party by virtue of allowance of the amendment,
futility of amendment, etc. — the leave sought should, as the rules
require, be “freely given.”75
“Where it appears that granting leave to amend is unlikely to be productive,
however, it is not an abuse of discretion to deny leave to amend.”76
IV.
FORUM SELECTION CLAUSES
73
Slayton v. American Express Co., 460 F.3d 215, 226 n.10 (2d Cir.
2006) (quotation marks omitted).
74
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir.
2007) (quotation marks omitted).
75
Foman v. Davis, 371 U.S. 178, 182 (1962). Accord, e.g., Jin v.
Metropolitan Life Ins. Co., 310 F.3d 84, 101 (2d Cir. 2002).
76
Lucente v. International Bus. Machs. Corp., 310 F.3d 243, 258
(2d Cir. 2002) (quotation marks and citations omitted).
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A.
Applicable Law77
Determining whether to dismiss a claim based on a forum
selection clause involves a four-part analysis. The first inquiry is
whether the clause was reasonably communicated to the party
resisting enforcement. The second step requires [courts] to
classify the clause as mandatory or permissive, i.e., to decide
whether the parties are required to bring any dispute to the
designated forum or simply permitted to do so. Part three asks
whether the claims and parties involved in the suit are subject to
the forum selection clause. If the forum clause was communicated
to the resisting party, has mandatory force and covers the claims
and parties involved in the dispute, it is presumptively
enforceable. The fourth, and final, step is to ascertain whether the
resisting party has rebutted the presumption of enforceability by
making a sufficiently strong showing that enforcement would be
unreasonable or unjust, or that the clause was invalid for such
reasons as fraud or overreaching.78
In making this four-part determination, a court may rely on “pleadings and
affidavits”79 but “[a] disputed fact may be resolved in a manner adverse to the
77
Neither the Supreme Court nor the Second Circuit has “specifically
designated a single clause of Rule 12(b) as the proper procedural mechanism to
request dismissal of a suit based upon a valid forum selection clause.” Asoma
Corp. v. SK Shipping Co., Ltd., 467 F.3d 817, 822 (2d Cir. 2006) (quotation marks
omitted). In any case, “where one party has shown an apparently governing forum
selection clause, the party opposing litigation in the so designated forum must
make a strong showing to defeat that contractual commitment.” Id.
78
Phillips v. Audio Active Ltd., 494 F.3d 378, 383-84 (2d Cir. 2007)
(quotation marks and citations omitted).
79
Anwar v. Fairfield Greenwich Ltd., 742 F. Supp. 2d 367, 371
(S.D.N.Y. 2010) (“Anwar II”) (citing Tropp v. Corp. of Lloyd’s, 385 Fed. App’x
36, 37 (2d Cir. 2010); New Moon Shipping Co., Ltd. v. MAN B & W Diesel AG,
121 F.3d 24, 26 (2d Cir. 1997) (noting that district court reviewed “pleadings,
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plaintiff only after an evidentiary hearing.”80
Regarding step three, courts apply “general contract law principles
and federal precedent to discern the meaning and scope of the forum clause.”81
Under those principles,
when ascertaining the applicability of a contractual provision to
particular claims, [courts] examine the substance of those claims,
shorn of their labels. This approach is consistent with the focus
on factual allegations rather than on the causes of action asserted
when deciding whether a [forum selection] clause applies to
particular claims.82
B.
The Forum Selection Clause in the PPA Between Pioneer and
Optimal Multiadvisors Does Not Bind Pioneer
Defendants OIS, Clark, and Banco Santander move to dismiss
Pioneer’s claims against them for (1) common law fraud, (2) negligent
misrepresentation, and (3) gross negligence on the grounds that those claims “arise
affidavits, and other papers”); TradeComet.com LLC v. Google, Inc., 693 F. Supp.
2d 370, 375 n.3 (S.D.N.Y. 2010) (“In deciding a motion to dismiss [due to a forum
selection clause] pursuant to either Federal Rule of Civil Procedure 12(b)(1) or
12(b)(3), a court may consider evidentiary matters outside the pleadings, by
affidavit or otherwise, regarding the existence of jurisdiction.”) (quotation marks
omitted)).
80
New Moon, 121 F.3d at 29.
81
Phillips, 494 F.3d at 386.
82
Id. at 388-89 (internal citations omitted) (citing JLM Indus., Inc. v.
Stolt-Nielsen SA, 387 F.3d 163, 173 (2d Cir. 2004); Genesco, Inc. v. T. Kakiuchi &
Co., 815 F.2d 840, 846 (2d Cir. 1987)).
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out of the [PPA] between Pioneer and [Optimal] Multiadvisors, which contains an
exclusive forum selection clause requiring that disputes be resolved in the courts of
The Bahamas.”83 As a reminder, under that clause, Pioneer “irrevocably submits
any disputes which may arise from this agreement to the exclusive jurisdiction of
the courts of the Commonwealth of The Bahamas.”84 Defendants argue that
because the damages Pioneer claims it suffered include the “loss of fees that would
[have] been earned had the Pioneer Plaintiffs continued to invest in [Optimal
U.S.],” and because those fees are “none other than the placement fees specified in
the PPA,”85 Pioneer’s claims necessarily arise out of the PPA and, therefore, are
within the scope of the forum selection clause.86 Plaintiffs counter that Pioneer’s
claims are not subject to the forum selection clause because the PPA “concerns
only Pioneer’s role as placement agent and the commissions that [Optimal
Multiadvisors] paid Pioneer” and because Pioneer is “not suing to recover those
83
Defendants’ Memorandum of Law in Support of Motion to Dismiss
(“Def. Mem.”) at 26-27.
84
PPA § 19 (emphasis added).
85
Def. Mem. at 27 (citing SAC ¶¶ 380, 387) (emphasis in original).
86
Pioneer does not dispute that the PPA was “reasonably communicated
to [it]” or that the forum selection clause contained in the PPA is “mandatory.”
Phillips, 494 F.3d at 386 (“A forum selection clause is viewed as mandatory when
it confers exclusive jurisdiction on the designated forum or incorporates obligatory
venue language.”).
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commissions and is not suing [Optimal Multiadvisors].”87 Upon an “examin[ation
of] the substance of [Pioneer’s] claims as they relate to the precise language of the
clause,”88 I find the forum selection clause inapplicable to Pioneer’s claims.
1.
Meaning of “Arise From”
To “arise out of” means “‘to originate from a specified source,’ and
generally indicates a causal connection.”89 Those words do not “encompass[] all
claims that have some possible relationship with the contract, including claims that
87
Plaintiffs’ Memorandum of Law in Opposition to Defendants’ Motion
to Dismiss (“Opp. Mem.”) at 29.
88
Phillips, 494 F.3d at 389 (citing New Moon, 121 F.3d at 33 (“The
scope of the forum selection clause is a contractual question that requires the courts
to interpret the clause and, where ambiguous, to consider the intent of the
parties.”). Accord John Wyeth & Bro. Ltd. v. CIGNA Intern. Corp., 119 F.3d 1070,
1075 (3d Cir. 1997) (“[W]hether or not a forum selection clause applies depends
on what the specific clause at issue says.”)).
89
Phillips, 494 F.3d at 389 (quoting Websters Third New International
Dictionary 117 (1981)) (citing Coregis Ins. Co. v. American Health Found., Inc.,
241 F.3d 123, 128 (2d Cir. 2001)). Defendants do not argue that this Court should
interpret “arise from” any differently from “arise out of.” See Def. Mem. at 27
(arguing that “Pioneer’s claims necessarily arise out of the PPA . . . .”) (emphasis
added). Although Defendants direct the Court to Roby v. Corporation of Lloyd’s,
where the Second Circuit found “no substantive difference . . . between the phrases
‘relating to,’ ‘in connection with’ or ‘arising from,’” it made clear that such a
finding was limited to “the present context,” 996 F.2d 1353, 1361 (2d Cir. 1993) –
where the court was considering both arbitration clauses and forum selection
clauses, and where the forum selection clauses pertained to disputes “of whatsoever
nature arising out of or relating to” and for “all purposes of and in connection
with” the agreements, id. at 1359, 1361 (emphases added). In any event, the court
treated the words “arising from” as equivalent to “arising out of.” See id. at 1361.
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may only ‘relate to,’ be ‘associated with,’ or ‘arise in connection with’ the
contract.”90 In Phillips v. Audio Active Ltd., the Second Circuit rejected the
Seventh Circuit’s conclusion that “all disputes the resolution of which arguably
depend on the construction of an agreement ‘arise out of’ that agreement,”91 noting
the “significan[ce]” of “the absence of a congressional policy on forum clauses
prompting us to err on the side of coverage.”92 Thus, the Phillips court “[saw] no
reason to presume the parties meant anything other than the dictionary definition of
the term [“to arise under”]: to originate from a specified source.”93 “This meaning
is especially likely where parties wishing to designate a mandatory forum to hear a
broader category of disputes are free to do so.”94
90
Phillips, 494 F.3d at 389 (emphasis added).
91
Omron Healthcare, Inc. v. Maclaren Exps. Ltd., 28 F.3d 600, 603 (7th
Cir. 1994).
92
Phillips, 494 F.3d at 390 (acknowledging that “[l]ike the Seventh
Circuit, typically we view phrases similar to ‘arise out of’ in arbitration clauses to
cover collateral matters that implicate issues of contract construction,” but
“declin[ing] to import whole the interpretive guidelines developed by the federal
courts to assess the scope of arbitration clauses into the present context” because
“[o]ur assessment of the scope of arbitration clauses is governed by the Federal
Arbitration Act which establishes as a matter of federal law that any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration,
including where the problem at hand is the construction of the contract itself”)
(quotation marks and citations omitted) (emphasis added). Id. at 389-90.
93
Id. at 390.
94
Id.
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The Phillips court then stated the relevant inquiry: “whether
[plaintiff’s] rights” (there, predicated on valid ownership of copyrights to certain
songs) “originate from” the agreement containing the forum selection clause95
(there, a recording contract providing that “‘any legal proceedings that may arise
out of [the contract] are to be brought in England’”96). The court held that they did
not; plaintiff was “assert[ing] no rights or duties under that contract.”97 Therefore,
the federal copyright claims did not “arise out of the contract” and consequently
fell outside the scope of the forum selection clause.98
2.
Pioneer’s Claims Do Not “Arise From” the PPA
Applying Phillips’ analytical framework, it is clear that Pioneer does
not assert any rights or duties under the PPA in bringing its fraud, negligent
misrepresentation, or gross negligence claims. The “substance” of those claims is
95
Id.
96
Id. at 382 (quoting the recording contract at issue) (emphasis added).
97
Id. at 392 (“Appellant does not rely on the recording contract to
establish his ownership of the relevant copyrights, but on his authorship of the
work, a status . . . entitled to copyright protection.”) (distinguishing “[plaintiff’s]
case from one in which a plaintiff-creator asserts that the relevant copyrights
reverted to him upon breach of contract by the defendants”). Id. at 390-91.
98
Cf. Bense v. Interstate Battery Sys. of Am., 683 F.2d 718, 720 (2d Cir.
1982) (forum selection clause that applied to “causes of action arising directly or
indirectly from [the agreement]” covered federal antitrust actions) (emphasis
added).
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that OIS, Clark, and Banco Santander falsely represented to Pioneer that OIS
would invest its monies in a legitimate fund and that Defendants would monitor,
verify, and conduct due diligence into the investments made with Madoff.99 To
state these three claims collectively, Pioneer must show that Defendants (1)
knowingly made (2) false and misleading misrepresentations and/or omissions; (3)
Pioneer’s justifiable reliance upon those representations; (4) direct and proximate
(5) damages; and (6) Defendants’ duty, as a result of a special relationship, to
impart full and correct information and to exercise due care in the management of
the Pioneer Plaintiffs’ assets.100 Based on this recitation, Pioneer’s right to sue on
these claims does not “originate from, and therefore ‘arise out of,’ the [PPA].”101 It
arises out of OIS’s, Clark’s, and Banco Santander’s extra-contractual duties to
accurately represent the manner in which the Pioneer Plaintiffs’ monies would be
invested and to invest those monies with due care – duties not specified in the PPA,
which instead outlines Pioneer’s duties as a placement agent.102 Moreover, to the
99
See SAC ¶¶ 376-393.
100
See Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001) (citing
Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996)); Hydro
Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000).
101
Phillips, 494 F.3d at 391.
102
See, e.g., PPA § 3.4 (“[Pioneer] acknowledges and agrees that the
shares or units of [Optimal U.S.] cannot be offered, directly or indirectly, to ‘US
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extent the PPA contains any “representations” by Optimal Multiadvisors,103
Pioneer is not suing over them; it is suing over the alleged misrepresentations and
omissions contained in the EMs, the marketing materials, and Clark’s
misstatements during a telephone conference on October 29, 2007.104
It is true that the “fees that would [have] been earned” under the PPA
comprise part of the damages Pioneer seeks for Defendants’ alleged fraud and
negligent misrepresentation. But Pioneer also seeks damages for loss of business
and reputational damage; moreover, the dispute does not center on, e.g., Pioneer’s
“right” to those fees under the PPA. Indeed, without the PPA, Pioneer’s claims
Persons’ as defined in the relevant prospectus or offering memorandum of the
Optimal Funds.”); id. § 5 (enumerating certain “Rights and Duties of [Pioneer]”);
id. § 11 (describing the “Duty [of Pioneer] to Exercise Due Diligence”). Accord
Transcript of Pre-Motion Conference Held on November 4, 2010 (“11/4/10 PMC
Tr.”) at 17:23-18:3 (“There’s nothing [in the PPA] saying that disputes concerning
the sale of shares by the purchasers of shares are in any way governed by [the
PPA] in any fashion. There’s nothing in here saying that it applies to anything
other than the finder’s fee to which Pioneer is entitled for selling the fund shares.”)
(Mr. Miller, counsel for Plaintiffs).
103
See, e.g., PPA § 12.2(c) (representing that Optimal Multiadvisors is
“duly authorized and licensed . . . by any relevant authority or self-regulatory body
to carry out the activities and services covered by [the PPA].”).
104
Accord 11/4/10 PMC Tr. at 22:6-7 (“Plaintiffs are suing on the
offering memoranda which contain no forum selection clause.”) (Mr. Miller,
counsel for Plaintiffs).
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would be just as tenable.105 For these reasons, I decline to dismiss Pioneer’s claims
for improper venue.106
C.
The Santander Plaintiffs Are Bound by the Forum Selection
Clause Contained in the SBT Terms and Conditions
Defendants argue that the Santander Plaintiffs’ claims should be
dismissed for improper venue based on the “exclusive forum selection clause in the
SBT Terms & Conditions”107 according to which those plaintiffs agreed to
“irrevocably submit to the exclusive jurisdiction of The Commonwealth of The
Bahamas in any action or proceeding arising out of or relating to the Account or
this Agreement, and irrevocably agree that all claims in respect of any action or
105
See Phillips, 494 F.3d at 391 (“Indeed, if [plaintiff] were to succeed in
persuading the trial court of his interpretation of the recording contract, success on
the merits of his copyright claims would leave the recording contract
undisturbed.”). Cf. Bense, 683 F.2d at 721-22 (contract containing forum clause
was the source of the right, duty and injury asserted by the plaintiff where plaintiff
could only show injury by demonstrating that the defendant had breached the
contract by terminating without due cause).
106
Defendants do not move to dismiss Counts XIII-XV for failure to
state claims. However, Defendants intend to file a forum non conveniens motion,
which this Court advised the parties it would entertain following disposition of the
instant motion. See Def. Mem. at 29 n.22; 11/4/10 PMC Tr. at 27:19-21.
Therefore, in light of this Court’s holding that the forum selection clause does not
apply to Counts XIII-XV, Defendants may argue, in conjunction with their forum
non conveniens motion (or any renewed motion to dismiss), that the claims
nonetheless should be dismissed under Rule 12(b)(6).
107
Def. Mem. at 29.
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proceeding may be heard and determined in those courts.”108 “Given the breadth of
this provision,” Defendants argue, “the Santander [Plaintiffs] cannot plausibly
contest that their claims arise out of their investment accounts with SBT and, as
such, are subject to the forum selection clause.”109 The Santander Plaintiffs argue
that because they are not suing “for any banking-related reason” – such as money
being “improperly taken out of the account” – their claims are not covered by the
SBT Terms & Conditions, which “concern only the handling of bank accounts.”110
The Santander Plaintiffs are wrong. The Terms & Conditions make
clear that they govern not only traditional “bank accounts,” but also the Santander
Plaintiffs’ investment accounts held through SBT – the accounts through which
they purchased shares of Optimal U.S.111 Thus, the question is not whether the
108
SBT Terms & Conditions, Ex. B to Lima Decl., § 78 (emphasis
added). The Santander Plaintiffs do not contest the applicability of the SBT Terms
& Conditions to their accounts. See Transcript of Teleconference Held on April
13, 2011 (“4/13/11 Teleconf. Tr.”) at 11:3-6.
109
Def. Mem. at 29.
110
Opp. Mem. at 3. Accord 11/4/10 PMC Tr. at 20:14-15 (“[The SBT
Terms & Conditions do not] apply to the investment side of the banking activity at
all.”) (Mr. Miller, counsel for Plaintiffs).
111
See SBT Terms & Conditions, Ex. B to Supplemental Declaration of
Paulo R. Lima in Support of Defendants’ Motion to Dismiss (“Lima Supp. Decl.”),
at 3 (defining “Accounts” governed by the Terms & Conditions to include “any
and all accounts maintained by [a client] and [SBT], including, but not limited to, .
. . deposit accounts . . . and nondiscretionary investment management and advisory
-27-
SBT Terms & Conditions apply to the Santander Plaintiffs’ accounts, but whether
this “action” “aris[es] out of or relat[es] to” the Santander Plaintiffs’ investment
accounts with SBT such that “all claims in respect of [this] action” shall be heard
in the courts of The Bahamas.
1.
Meaning of “Relating To”
The term “related to” is typically defined more broadly [than the
phrase “arising out of”] and is not necessarily tied to the concept
of a causal connection. Webster’s Dictionary defines “related”
simply as “connected by reason of an established or discoverable
relation.” The word “relation,” in turn, as “used esp[ecially] in the
phrase ‘in relation to,’” is defined as a “connection” to or a
“reference” to. Courts have similarly described the term “relating
to” as equivalent to the phrases “in connection with” and
“associated with,” and synonymous with the phrases “with respect
to,” and “with reference to,” and have held such phrases to be
broader in scope than the term “arising out of.”112
2.
The Santander Plaintiffs’ Action Is “Relat[ed] to” Their
SBT Accounts
The Santander Plaintiffs’ action is “unquestionably ‘connected to,’
‘associated with,’ and brought ‘with reference to’”113 their investment accounts
with SBT. The action centers on their purchases of Optimal U.S. shares upon the
accounts.”).
112
Coregis, 241 F.3d at 128-29 (citations omitted). Accord Wyeth, 119
F.3d at 1074 (“To say that a dispute ‘arise[s] . . . in relation to’ [an] [a]greement is
to say that the origin of the dispute is related to that agreement[.]”).
113
Coregis, 241 F.3d at 130.
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recommendation and through representatives of Santander U.S. in Santanderaffiliated accounts otherwise covered by the SBT Terms & Conditions – accounts
they opened specifically to invest in Optimal U.S.114 In Anwar II, Judge Victor
Marrero of this Court similarly concluded that a forum selection clause, contained
in the “Terms and Conditions” applicable to plaintiffs’ bank accounts with the
Singapore Branch of Standard Chartered Bank, covered plaintiffs’ “dispute about
Standard Chartered’s diligence in investigating [a Madoff feeder fund] and its
representations about [that fund].”115 The clause was “broadly worded,” he noted,
“to encompass ‘any dispute arising out of or in connection with these [Terms and
Conditions], any Account, Transaction, or any Service.’”116 The factual scenario
here is virtually identical.
Moreover, Plaintiffs’ own pleadings evince the extent to which the
Santander Plaintiffs’ SBT accounts are “related to” this action. According to the
SAC, in 2008, when “Banco Santander affiliates implemented certain procedures
114
See SAC ¶¶ 253-256.
115
742 F. Supp. 2d at 373. Like the Santander Plaintiffs, the Anwar II
plaintiffs first signed a “Private Bank Account Application” in order to open their
accounts which expressly incorporated separate “terms and conditions” containing
a forum selection clause. See id. at 372.
116
Id. (quoting the forum selection clause contained in the terms and
conditions at issue in that case).
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that indicated growing concerns about Madoff,” it was SBT Bahamas – the entity
with which the Santander Plaintiffs held their accounts – that executed a waiver
with “private banking clients” who wished to “remain in the fund” (“SBT
Waiver”).117 Under the SBT Waiver, clients like the Santander Plaintiffs
“accept[ed] the following”:
“[SBT] has informed you that your investment in Optimal U.S.
may exceed the concentration limits recommended by [SBT],
based specifically in [sic] the investment profile you have selected
for your account with [SBT], for investments in Hedge Funds
managed by one manager.”118
In addition, the SBT Waiver expressly “provided the client the opportunity to
review the clients’ investments and reduce the exposure to Optimal U.S.” and
“provided various opportunities to ask questions and receive answers concerning
Optimal U.S.”119 The Santander Plaintiffs received these communications – which
form part of the basis for their fraud claims – because they held accounts through
SBT Bahamas that were governed by the SBT Terms & Conditions. There can be
no genuine dispute that this action “aris[es] out of or relat[es] to [their]
117
SAC ¶ 263.
118
Id. ¶ 264 (quoting the SBT Waiver, Ex. 29 to SAC) (translated to
English).
119
Id. ¶ 265 (citing the SBT Waiver).
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Account[s].”120
Finally, the Santander Plaintiffs are suing Santander U.S. – the entity
whose employees allegedly “regularly offer[ed] to open bank accounts at
Santander affiliates in the Bahamas or Switzerland [for investors], and invest in
Optimal U.S.”121 and mailed Plaintiffs their account statements.122 In fact, without
Santander U.S. as a named defendant in this action, the only remaining (and not so
firm) ground123 for this Court’s subject matter jurisdiction is the Exchange Act.124
If the Exchange Act claims are dismissed, this Court’s jurisdiction would likely be
based entirely on the theory that, under the Edge Act, this suit “aris[es] out of
transactions involving international or foreign banking” and names a “corporation
120
SBT Terms & Conditions § 78.
121
SAC ¶ 253.
122
See id. ¶ 252 (“Plaintiff Galinanes . . . regularly received his bank
statements mailed from [Santander U.S.] in Miami.”). Given these allegations,
Plaintiffs’ argument that “Defendants are . . . far[] removed from the [SBT]
accounts because the account[s are] with non-party [SBT] Bahamas” is
disingenuous at best. Opp. Mem. at 30.
123
See infra Part V.B.
124
The Class Action Fairness Act is also an alleged basis for jurisdiction,
but given that I am dismissing the Santander Plaintiffs from this action, the only
remaining plaintiffs are Pioneer and the Pioneer Plaintiffs who, according to the
SAC, “are atypical from everyone else in the class because there were specific
representations made to them that were made to no one else in the class.” 11/4/10
PMC Tr. at 8:5-9 (Mr. Membiela, counsel for Defendants).
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organized under the laws of the United States” – Santander U.S.125 Plaintiffs
cannot have it both ways. Either this action arises out of transactions involving
banking (in which case the forum selection clause applies) or it does not (in which
case this Court does not have Edge Act jurisdiction).126 For all of these reasons –
and because Plaintiffs have made no argument to “rebut[] the presumption of
enforceability”127 – I hold that this action “relate[s] to” the Santander Plaintiffs’
investment accounts, and is therefore governed by the Bahamian forum selection
clause.
3.
All Defendants May Enforce the Forum Selection Clause
Of course, Plaintiffs are not suing SBT; they are suing Santander U.S.,
Banco Santander (its parent), OIS (another Banco Santander subsidiary), and Clark
(an OIS employee). A forum selection clause may bind non-parties to a contract if
“the relationship between the non-party and the signatory [is] sufficiently close so
125
12 U.S.C. § 632.
126
Accord 11/4/10 PMC Tr. at 19:21-20:1 (“The way [Plaintiffs have]
pled [their claims, they arise out of their SBT accounts] because [they] have
alleged that the Santander entities operate as a unitary entity and that these shares
were bought in [those accounts]. And also, it’s part of [their] Edge Act
jurisdiction, [they’re] specifically alleging that [their claims] come[] out of the
transaction of their banking relationship.”) (Mr. Membiela, counsel for
Defendants).
127
Phillips, 494 F.3d at 384.
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that the non-party’s enforcement of the forum selection clause is foreseeable by
virtue of the relationship between the signatory and the party sought to be
bound.”128 In discerning whether parties are “closely related,” courts look to
whether the non-signatory “[is an] intended beneficiar[y] entitled to enforce” the
clause in question.129 “As Professor Corbin has said, a third party will have an
enforceable right ‘if the promised performance will be of pecuniary benefit to him
and the contract is so expressed as to give the promisor reason to know that such
benefit is contemplated by the promisee as one of the motivating causes of his
making the contract.’”130 However, “‘while . . . third-party beneficiaries to a
contract would, by definition, satisfy [this] requirement[ ] . . . , a third-party
beneficiary status is not required.’”131
128
Direct Mail Prod. Servs. Ltd. v. MBNA Corp., No. 99 Civ. 10550,
2000 WL 1277597, at *3 (S.D.N.Y. Sept. 7, 2000) (citing In re Lloyd’s Am. Trust
Fund Lit., 954 F. Supp. 656, 670 (S.D.N.Y. 1997)).
129
Roby, 996 F.2d at 1358 (alterations in original).
130
Id. at 1359 (quoting 4 Arthur L. Corbin, Corbin on Contracts § 776, at
18 (3d ed. 1967)).
131
Direct Mail, 2000 WL 1277597, at *3 (quoting Lipcon v.
Underwriters at Lloyd’s, London, 148 F.3d 1285, 1299 (11th Cir. 1998)). Accord
Roby, 996 F.2d at 1358 (holding that forum selection clause contained in contracts
between Lloyd’s and its investors applied to investors’ securities fraud claims
against the syndicates that competed for investments within Lloyd’s, in light of the
broad language of the clause and the syndicates’ pecuniary interest in uniform
resolution of the claims).
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Defendants Santander U.S., Banco Santander, and OIS are sufficiently
“closely related” to SBT such that enforcement of the forum selection clause by
those entities was foreseeable to the Santander Plaintiffs. For example, section
21L of the SBT Terms & Conditions132 expressly provides that SBT could “engage
other agents or subagents (that may be [SBT’s] affiliates) to provide investment
advisory, brokerage, and other services to [SBT] for the Advisory Accounts.”133
Of course, the Santander Plaintiffs’ claims against Santander U.S., Banco
Santander, and OIS – all SBT affiliates – are based on those Defendants’ provision,
albeit indirectly, of such “investment advisory . . . services to SBT.”134 Thus,
section 21L indicates that “the signatories [to the SBT account agreements
incorporating the SBT Terms & Conditions] intended the contract to benefit related
[Santander] companies” and “gave [the Santander Plaintiffs] reason to know that
one of the reasons motivating [SBT] to enter the contract was a desire to confer a
132
See SBT Terms & Conditions, Attachment to 4/20/11 Email from
Paulo R. Lima in Support of Defendants’ Motion to Dismiss (“4/20/11 Lima
Email”), § 21L. Section 21L, while referenced in Defendants’ Reply
Memorandum, was inadvertently excluded from the attachments to the Lima
Declarations.
133
Id. Similarly, the SBT Waiver distributed to the Santander Plaintiffs
in 2008 “explained that the investment in Optimal U.S. was not guaranteed by
[SBT] [or] any of its affiliates.” SAC ¶ 265 (citing SBT Waiver) (emphasis
added).
134
SBT Terms & Conditions, Attachment to 4/20/11 Lima Email, § 21L.
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pecuniary benefit on related [Santander] companies.”135
Furthermore, the Santander Plaintiffs received their SBT bank
statements from Santander U.S.,136 the entity allegedly responsible for opening
bank accounts at Santander affiliates for the express purpose of investing in
Optimal U.S.137 Moreover, the SAC characterizes the Defendants as “[o]perat[ing]
[a]s [a] [u]nitary [o]rganization.”138 For example, “Optimal U.S. was marketed and
sold indistinctly by Banco Santander’s subsidiaries, including OIS and Santander
U.S.”139 A necessary component of the Santander Plaintiffs’ fraud allegations
against Banco Santander is that those plaintiffs invested in Optimal U.S. (through
SBT accounts) in “reliance upon the good name of [Banco] Santander since OIS
was presented to the world as [Banco] Santander’s hedge fund arm.”140 Considered
135
Direct Mail, 2000 WL 1277597, at *4. Accord Roby, 996 F.2d at
1358-59. Indeed, as alleged, “Santander U.S. charged Plaintiffs a sales charge at
the time of the investment in the funds that was a percentage of the amount
invested.” SAC ¶ 262.
136
See SAC ¶ 247.
137
See id. ¶ 253.
138
Id. at 66 (heading). Accord id. ¶ 245 (“Banco Santander, OIS, and
Santander U.S. formed a tight weave of connections in which each entity played an
essential role with respect to Optimal U.S.”).
139
Id. ¶ 244.
140
Id. ¶ 257.
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in conjunction with section 21L of the SBT Terms & Conditions, “it was entirely
foreseeable that [] related [Santander] companies might [provide investment
advisory services to SBT clients] and thereby become bound up in any disputes
premised upon allegations of [impropriety related to the SBT accounts].”141
Therefore, Santander U.S., Banco Santander, and OIS may properly assert the SBT
forum selection clause in their defense. As for Clark, whose “liability arises out of
the same misconduct charged against [OIS]” – an entity sufficiently closely related
to SBT to enforce the forum selection clause – he, too, may enforce the forum
selection clause as an employee of OIS.142 For all of these reasons, Counts I-XII
are dismissed to the extent they are brought by the Santander Plaintiffs, who must
litigate these claims in The Bahamas.
V.
Exchange Act Claims143
A.
Applicable Law
141
Direct Mail, 2000 WL 1277597, at *4.
142
See, e.g., Roby, 996 F.2d at 1360 (“Courts in this and other circuits
consistently have held that employees or disclosed agents of an entity that is a
party to an [] agreement [containing a forum selection clause] are protected by that
agreement. . . . If it were otherwise, it would be too easy to circumvent [forum
selection clauses] by naming individuals as defendants instead of [entities].”).
143
Given my dismissal of the Santander Plaintiffs from this action,
references hereinafter to “Plaintiffs” are to the “Pioneer Plaintiffs” only, with
“Pioneer” designated separately.
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“To prevail in a Rule 10b-5 action based on subsection [10](b), a
plaintiff must prove that ‘in connection with the purchase or sale of securities, the
defendant, acting with scienter, made a false material representation or omitted to
disclose material information and that plaintiff’s reliance on defendant’s action
caused [plaintiff’s] injury.’”144 Secondary actors cannot incur primary liability
under the [Exchange] Act for a statement not attributed to that actor at the time of
its dissemination.”145 Section 10(b) applies to “only . . . [1] the purchase or sale of
a security listed on an American stock exchange, and [2] the purchase or sale of
any other security in the United States.”146
B.
Plaintiffs Adequately Allege that the Exchange Act Applies to
Plaintiffs’ “Purchases” of Optimal U.S. Shares
Defendants argue that Plaintiffs “cannot state federal securities law
claims because the Exchange Act does not apply extraterritorially to the foreign-
144
Vacold LLC v. Cerami, 545 F.3d 114, 121 (2d Cir. 2008) (quoting
Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999)).
145
Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998). A
secondary actor is “any part[y] who [is] not employed by the issuing firm whose
securities are the subject of allegations of fraud.” Pacific Inv. Mgmt. Co. v. Mayer
Brown LLP, 603 F.3d 144, 148 n.1 (2d Cir. 2010) (hereinafter “PIMCO”).
146
Morrison v. National Austla. Bank Ltd., 130 S. Ct. 2869, 2884 (2010).
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cubed transactions underlying their claims.”147 They direct the Court to In re
Banco-Santander Securities-Optimal Litigation,148 where a federal district court in
Florida dismissed plaintiffs’ federal securities claims because they “neither
purchased shares on an American stock exchange, nor did they purchase shares in
the United States. They made off-shore purchases in off-shore Bahamian
investment funds closed to United States investors.”149
Although the shares purchased by Plaintiffs are identical to those at
issue in Banco-Santander Securities-Optimal Litigation, the pleadings are slightly
different for, here, Plaintiffs have inserted a crucial sentence into the SAC: “[t]he
purchases and sales of the shares of [Optimal U.S.] by Plaintiffs and the Class took
place in the United States.”150 But Defendants argue that this allegation regarding
147
Def. Mem. at 15 (citing Morrison, 130 S. Ct. at 2884). “Foreigncubed” transactions are those in which “(1) foreign plaintiffs [are] suing (2) a
foreign issuer in an American court for violations of American securities laws
based on securities transactions in (3) foreign countries.” Morrison, 130 S.Ct. at
2894 n.11 (Stevens, J., concurring) (quotation marks omitted).
148
Nos. 09-MD-02073-CIV, 09-CV-20215-CIV, 2010 WL 3036990
(S.D. Fla. July 30, 2010).
149
See id. at *5.
150
SAC ¶ 352. See Opp. Mem. at 3-4 (“Plaintiffs in [Banco-Santander
Securities-Optimal Litigation] were not aware that the purchases of [Optimal U.S.]
shares took place in the United States, and did not plead that in the complaint nor
even argue it.”) (original emphasis removed).
Defendants call this allegation “conclusory.” Def. Mem. at 16.
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the U.S. locus of purchases and sales is “belied by the EMs attached to the SAC,
and, thus, may be ignored.”151 In particular, they point to the January 2008 EM,
which directs prospective Fund purchasers to mail and fax their completed
subscription forms to the Fund’s administrator, HSBC Securities Services (Ireland)
Limited (“HSSI”), in Ireland.152 Moreover, based on the EM’s warning that
“[d]irectors reserve the right to defer acceptance of such subscription until monies
are cleared,”153 Defendants argue that “the sale of the Fund shares became final
only upon the Administrator’s acceptance of the Subscription Form.”154 Therefore,
“they are not domestic transactions and cannot provide a basis for claims under
United States securities law.”155
Indeed, now that the “focus of the Exchange Act” is no longer “upon the place
where . . . deception originated, but upon purchases and sales of securities in the
United States,” Morrison, 130 S.Ct. at 2884 (emphasis added), whether a technical
“purchase” or “sale” of those securities has taken place in this country appears to
be the crucial question, and one that has both factual and legal elements.
151
Def. Mem. at 17 (citing Iqbal, 129 S.Ct. at 1951).
152
See January 2008 EM, Ex. 15 to SAC, at 37-38 (listing HSSI’s fax
number and address in Dublin and stating “this Subscription Form should be sent
to the following address and/or fascimile number, and if sent by fascimile, the
original must follow by post”) (emphasis in original).
153
Id. at 36.
154
Def. Mem. at 17.
155
Id.
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The defendants in “Anwar I”156 – another Madoff feeder-fund case
litigated in this district – made a similar argument: because a number of
administrative tasks associated with subscribing to shares in the “Offshore Funds”
occurred in other countries – including Plaintiffs’ sending their subscription
agreements to an administrator in Amsterdam and to the Offshore Funds’
investment manager in Bermuda – the transactions in question did not occur in the
United States.157 But Plaintiffs countered that no transaction occurred until
Plaintiffs’ subscription agreements were accepted by the Funds, and that this
approval occurred in New York, where Fairfield Greenwich Group – which
founded and operated the Funds – had an office, and where much of its executive
staff was concentrated.158 Judge Marrero deferred ruling on the question because it
presented “a novel and more complex application of Morrison’s transactional test”
given that the case “allegedly [did] not involve securities purchases or sales
executed on a foreign exchange.”159 Indeed, in adopting its “clear test” for the
application of the Exchange Act, the Morrison court seemed most concerned with
156
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 401 n.8
(S.D.N.Y. 2010) (“Anwar I”).
157
See id. 405.
158
See id.
159
Id.
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eliminating “interference with foreign securities regulation”160 – a concern that is
somewhat lessened in the context of transactions in securities not traded on foreign
exchanges. Accordingly, Judge Marrero found “that a more developed factual
record [was] necessary to inform a proper determination as to whether Plaintiffs’
purchases of the Offshore Funds’ shares occurred in the United States.”161
In this case, Plaintiffs do not contest that the subscription forms were
sent to the Fund administrator in Ireland or that “acceptance” occurred in
Ireland.162 Instead, they contend the shares were “purchased” where they were
issued,163 and that the Optimal U.S. shares were issued in New York. As evidence,
160
Morrison, 130 S. Ct. at 2886. Accord id. at 2884 (“We know of no
one who thought that the Act was intended to ‘regulat[e]’ foreign securities
exchanges – or indeed who even believed that under established principles of
international law Congress had the power to do so.”).
161
Anwar I, 728 F. Supp. 2d at 405.
162
They do point out, however, that Optimal U.S. investors who made
their subscription payments in U.S. dollars by telegraphic transfer (i.e., wire
transfer) sent their payments to HSBC Bank USA Inc. See January 2008 EM, Ex.
15 to SAC, at 37. “A search of the Swift and ABA Codes listed in the Optimal
U.S. Subscription Form for HSBC Bank USA Inc., see id., indicates that HSBC
Bank USA Inc. is located at 452 Fifth Avenue, New York, New York 10018.”
4/15/11 Pl. Letter at 2. Nevertheless, it is Plaintiffs’ position that “[w]here
payment is made, . . . where the money comes from and where it’s transferred to
does not necessarily indicate where [the shares are] ultimately [purchased].”
4/13/11 Teleconf. Tr. at 19:2-4 (Mr. Miller, counsel for Plaintiffs).
163
4/13/11 Teleconf. Tr. at 19:16-19 (“In this case, it’s where the shares
were issued is where the purchase actually is consummated. Until then the money
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they submit two “Contract Notes” issued by Santander U.S. to “Inversiones Mar
Octava,” an Optimal U.S. shareholder and a plaintiff in In re Banco Santander
Securities-Optimal Litigation.164 The contract notes read, “WE BOUGHT [SOLD]
FOR YOUR ACCOUNT IN : NYS.”165 Drawing all reasonable inferences in
Plaintiffs’ favor, the Contract Notes support Plaintiffs’ allegation that the
purchases of Optimal U.S. “took place in the United States.”166 Defendants’
argument, while promising, is better-suited for a motion for summary judgment in
the context of a more fully-developed factual record that unequivocally establishes
where all of Plaintiffs’ shares were “issued,” where they wired their subscription
is in the air. And whether it’s in the air over Ireland or any other place doesn’t
really amount to much.”) (Mr. Miller, counsel for Plaintiffs).
164
No. 09-20215-CIV (S.D. Fla.). See 4/15/11 Pl. Letter at 1; Contract
Notes, Ex. A to 4/15/11 Letter; Certification of Inversiones Mar Octava, Ex. B to
4/15/11 Letter. This Court may consider the Contract Notes on this motion to
dismiss because Plaintiffs relied on them in framing the SAC. See supra note 70;
4/13/11 Teleconf. Tr. at 20:15-19 (“[The contract notes were] relied upon in
Plaintiff[s’] complaint in – this underlying statement in paragraph 352 that the
purchases took place in the United States.”) (Mr. Ellman, counsel for Plaintiffs).
165
Contract Notes.
166
SAC ¶ 352. Defendants argue that the Contract Notes directly
contradict the SAC’s allegations that Plaintiffs’ investments “were made from
[their] bank accounts at Banc Julius Baer in Geneva Switzerland,” SAC ¶ 11.
However, the statement, “WE BOUGHT FOR YOUR ACCOUNT IN : NYS” is
ambiguous; it does not necessarily mean that the account-holder’s account was
located in New York. Drawing all reasonable inferences in Plaintiffs’ favor, it
means the shares were purchased or issued there.
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payments, what the statement “WE BOUGHT FOR YOUR ACCOUNT IN : NYS”
means, and where their subscription agreements were “accepted.” At this stage,
Plaintiffs’ allegation that the purchases “took place in the United States,”167
factually supported by the Contract Notes, suffices to establish the applicability of
the Exchange Act to the transactions in question.
C.
Plaintiffs’ Section 10(b) Claims Against OIS and Clark, and
Section 20(a) Claim Against Banco Santander, Survive
Defendants’ Motion to Dismiss
Plaintiffs allege that OIS and Clark violated section 10(b) of the
Exchange Act, and that Banco Santander is liable under section 20(a) as a “control
person” of OIS. Defendants move to dismiss on the grounds that the Exchange Act
does not apply to the transactions of which Plaintiffs complain; that Plaintiffs have
failed to allege (1) actionable misstatements or omissions,168 (2) scienter, and (3)
167
SAC ¶ 352.
168
Plaintiffs sue Clark only for his allegedly “false and misleading
statements to Pioneer.” SAC ¶ 368. Accord id. ¶ 11 (“Each of the Pioneer
Plaintiffs invested in Optimal U.S. pursuant to an investment advisory agreement
with Pioneer, and based on the advice provided by Pioneer, which was based on
Defendants’ misrepresentations.”); Opp. Mem. at 4 (“Plaintiffs did not sue Clark
for the statements in the EMs, only for the statements he made directly to
Pioneer.”). In moving to dismiss the federal securities claims against them, OIS
and Clark discuss only the alleged misstatements and omissions contained in the
EMs without challenging the adequacy of the SAC’s allegations that the Pioneer
Plaintiffs (1) relied on Clark’s statements to Pioneer or (2) attributed the “advice
provided by Pioneer” to Clark. SAC ¶ 11. See PIMCO, 603 F.3d at 155
(“Secondary actors can be liable in a private action under Rule 10b-5 for only those
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reliance; and that Plaintiffs’ allegations fail to satisfy the elements of “control
person” liability. For reasons that will be explained at a conference scheduled for
Tuesday, May 10, 2011 at 3:30 p.m., Plaintiffs’ section 10(b) claims against OIS
and Clark, and their section 20(a) claim against Banco Santander as a “control
person” of OIS, survive Defendants’ motion to dismiss.
VI.
Common Law Claims
A.
Standing
Defendants argue that Plaintiffs lack standing to assert direct claims
for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, gross
negligence, breach of contract, and unjust enrichment because any wrongs
sustained were sustained by the Funds, the only entities that may bring suit
directly.169 In order to assess this argument, I must first determine what law
applies to the question of shareholder standing.
1.
Choice of Law
a.
New York Choice-of-Law Rules
In diversity actions, federal courts follow the choice-of-law rules of
statements that are explicitly attributed to them.”) (emphasis added).
169
See Def. Mem. at 1-3.
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the forum state to determine the controlling substantive law.170 Under New York
choice-of-law rules, courts first determine whether there is a substantive conflict
between the laws of the relevant choices.171 “In the absence of substantive
difference . . . a New York court will dispense with choice of law analysis; and if
New York law is among the relevant choices, New York courts are free to apply
it.”172
i.
Internal Affairs Doctrine
New York follows the internal affairs doctrine, which generally
requires that “questions relating to the internal affairs of corporations are decided
in accordance with the law of the place of incorporation.”173 This doctrine
“recognizes that only one State should have the authority to regulate a
170
See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); GlobalNet
Financial.com, Inc. v. Frank Crystal & Co., 449 F.3d 377, 382 (2d Cir. 2006).
171
See GlobalNet Financial.com, 449 F.3d at 382 (“The New York Court
of Appeals has held that ‘the first step in any case presenting a potential choice of
law issue is to determine whether there is an actual conflict between the laws of the
jurisdictions involved.’”) (quoting In re Allstate Ins. Co. (Stolarz), 81 N.Y.2d 219,
223 (1993)).
172
International Bus. Mach. Corp. v. Liberty Mut. Ins. Co., 363 F.3d 137,
143 (2d Cir. 2004).
173
Scottish Air Int’l, Inc. v. British Caledonian Group, PLC, 81 F.3d
1224, 1234 (2d Cir. 1996) (citations omitted). Accord City of Sterling Heights
Police and Fire Ret. Sys. v. Abbey Nat., PLC, 423 F. Supp. 2d 348, 363 (S.D.N.Y.
2006).
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corporation’s internal affairs – matters peculiar to the relationships among or
between the corporation and its current officers, directors, and shareholders –
because otherwise a corporation could be faced with conflicting demands.”174
The internal affairs doctrine “typically requires a court to consider the law of the
place of incorporation to decide a shareholder standing issue.”175
ii.
Tort Actions: Interest Analysis
To resolve conflicts in tort cases, New York applies an “interest
analysis” to identify the jurisdiction that has the greatest interest in the litigation
based on the occurrences within each jurisdiction, or contacts of the parties with
174
Edgar v. MITE Corp., 457 U.S. 624, 645 (1982). Accord Restatement
(Second) of Conflict of Laws § 302 cmt. e (“Uniform treatment of directors,
officers and shareholders is an important objective which can only be attained by
having the rights and liabilities of those persons with respect to the corporation
governed by a single law.”).
175
Anwar I, 728 F. Supp. 2d at 401 n.8 (citing Aboushanab v. Janay, No.
06 Civ. 13472, 2007 WL 2789511, at *6 (S.D.N.Y. Sept. 26, 2007)). Accord
Newman v. Family Mgmt. Corp., No. 08 Civ. 11215, 2010 WL 4118083, at *11
(S.D.N.Y. Oct. 20, 2010) (“The question of standing to bring a derivative suit is
governed by the law of the state of organization.”); Stephenson v. Citco Group
Ltd., 700 F. Supp. 2d 599, 608 (S.D.N.Y. 2010) (“When deciding issues of
shareholder standing, that is, whether claims should be brought directly or
derivatively, courts must look to the law of the fund’s state of incorporation.”)
(quotation marks omitted); Debussy LLC v. Deutsche Bank AG, No. 05 Civ. 5550,
2006 WL 800956, at *3 (S.D.N.Y. Mar. 29, 2006) (same).
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each jurisdiction, that “‘relate to the purpose of the particular law in conflict.’”176
When the law is one which regulates conduct, “the law of the jurisdiction where
the tort occurred will generally apply because that jurisdiction has the greatest
interest in regulating behavior within its borders.”177 A tort occurs in “the place
where the injury was inflicted,” which is generally where the plaintiffs are
located.178
b.
This Court May Apply New York Law to the
Question of Shareholder Standing Because There Is
No Conflict Between New York and Bahamian Law
Plaintiffs urge this Court to apply New York law to the question of
shareholder standing “because none of the Defendants include the Fund or its
directors and, instead, consist of third-party service providers”179 and because New
176
GlobalNet Financial.com, 449 F.3d at 384 (quoting Schultz v. Boy
Scouts of Am., Inc., 65 N.Y.2d 189, 197 (1985)). Accord Finance One Pub. Co. v.
Lehman Bros. Special Fin., Inc., 414 F.3d 325, 337 (2d Cir. 2005) (citation
omitted) (the interest analysis is a “flexible approach intended to give controlling
effect to the law of the jurisdiction which, because of its relationship or contact
with the occurrence or the parties, has the greatest concern with the specific issue
raised in the litigation”).
177
GlobalNet Financial.com, 449 F.3d at 384.
178
Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 492 (S.D.N.Y.
2001) (citation and quotation marks omitted). Accord Sack v. Low, 478 F.2d 360,
365-66 (2d Cir. 1973) (interpreting New York law).
179
Opp. Mem. at 18 (citing Tyco Int’l, Ltd. v. Kozlowski, No. 02 Civ.
7317, 2010 WL 4903201, at *6-7 (S.D.N.Y. Dec. 10, 2010); Anwar I, 728 F. Supp.
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York “has the most significant interest in the litigation.”180 Although New York’s
interest in the litigation would be my primary focus were I determining whether to
apply New York or Bahamian tort law to Plaintiffs’ substantive claims, that is not
my inquiry. Rather, my inquiry is whether Plaintiffs – the parties pleading those
torts – have standing to assert them.181 And that question is governed by the
internal affairs doctrine.182 Therefore, Plaintiffs’ argument for the application of
New York law – at least on these grounds – is inapposite.
However, Defendants concede that “United States law is in accord
2d at 401 n.8; Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am.
Sec., LLC, 446 F. Supp. 2d 163, 194 (S.D.N.Y. 2006); Ackert v. Asuman, 218
N.Y.S.2d 814, 817-18 (Sup. Ct. N.Y. Co. 1961)).
180
Id. at 17 (emphasis added).
181
Defendants’ Reply to Plaintiffs’ Opposition to Motion to Dismiss
(“Def. Reply”) at 1 (quoting Schultz, 65 N.Y.2d at 197). In this vein, aside from
Anwar I, none of the cases cited by Plaintiffs in support of their argument
addressed the question of whether the law of the state of incorporation should
apply to determine whether plaintiffs had standing to bring certain claims; instead,
they addressed whether foreign law should govern the claims themselves. See
Tyco, 2010 WL 4903201, at *6 (rejecting defendant’s argument that “Bermuda law
should apply to [plaintiffs’] claims of constructive fraud and forfeiture”) (emphasis
added); Ackert, 218 N.Y.S.2d at 817 (“a stockholder’s derivative action such as
this does not involve the internal affairs of the corporation in whose behalf it is
brought”) (emphasis added); Pension Comm., 446 F. Supp. 2d at 194 (rejecting
defendants’ argument that “[British Virgin Islands] law should apply to the claims
against them under the internal affairs doctrine”) (emphasis added).
182
See Def. Reply at 1 (citing Bagdon v. Bridgestone/Firestone, Inc., 916
F.2d 379, 382 (7th Cir. 1990)).
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with Bahamian law,”183 citing New York law.184 Indeed, Defendants’ application
of Bahamian and New York law demonstrates that there are no genuine differences
between the two.185 Therefore, because “New York law is among the relevant
choices,” this Court is “free to” – and does – apply it.186
2.
New York Law of Shareholder Standing
“Under New York law, a shareholder may bring an individual suit if
the defendant has violated an independent duty to the shareholder, whether or not
the corporation may also bring an action,”187 although “damages may be limited so
183
Def. Mem. at 4.
184
See id. at 4-5 (citing Druck Corp. v. Macro Fund Ltd., 290 Fed. App’x
441, 443 (2d Cir. 2008)).
185
See id. at 3-4 (contending that, under Bahamian law, (1) only the Fund
“may bring suit for alleged breaches of duties owed” and (2) “a shareholder cannot
recover for harms that ‘reflect’ losses suffered” by the Fund (the “Reflective Loss
Principle” under Bahamian law)).
186
International Bus. Machs., 363 F.3d at 143-44. Accord Anwar I, 728
F. Supp. 2d at 401 n.8 (applying New York law in part because “even if Delaware
law, the place of the Domestic Funds’ incorporation, were applied to claims
relating to the Domestic Funds, the result would be the same”).
187
Ceribelli v. Elghanayan, 990 F.2d 62, 63-64 (2d Cir. 1993) (citations
omitted). Accord Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F.
Supp. 2d 385, 408-09 (S.D.N.Y. 2005) (direct action allowed under New York law
because, while “some mismanagement and self-dealing . . . may have been
involved,” the “principal wrong . . . appears to have been a valuation fraud that
injured plaintiffs, not the Funds”).
-49-
as to avoid a double recovery.”188 “[U]nder New York law an allegation of
misrepresentation of present fact that is the inducement for the contract may state a
[direct] claim for fraud.”189 However, “allegations of mismanagement or diversion
of assets by officers or directors to their own enrichment, without more, plead a
wrong to the corporation only, for which a shareholder may sue derivatively but
not individually.”190
188
Ceribelli, 990 F.2d at 63-64. But see Druck, 290 Fed. App’x at 443
(finding claim “derivative, not direct, because [plaintiff] cannot prevail without
showing injury to [the fund] itself.”).
189
Druck, 290 Fed. App’x at 444 (quotation marks omitted). Accord
Ceribelli, 990 F.2d at 65 n.3 (“When misrepresentations induce a buyer to
purchase stock, and the losses suffered are a foreseeable consequence of the
misrepresentations, the misrepresentations proximately cause the buyer’s
injuries.”); Coronado Dev. Corp. v. Millikin, 22 N.Y.S.2d 670, 675 (Sup. Ct. N.Y.
Co. 1940) (“[D]epreciation resulting from the dissemination of false information as
to corporate assets or business or management, as distinguished from a wrongful
withholding or taking or dissipation of corporate property or interference with its
business, necessarily constitutes a direct injury to individual stockholders and is a
wrong to them rather than to the corporation . . . .”) (emphasis added). But see San
Diego Cty. Emps. Ret. Ass’n v. Maounis, No. 07 Civ. 2618, 2010 WL 1010012, at
*20 (S.D.N.Y. Mar. 15, 2010) (“Plaintiff’s claim [for breach of fiduciary duty
based on the making of misrepresentations] is derivative [under Delaware law],
because the misrepresentations that allegedly caused its losses injured not just
Plaintiff, but the Fund as a whole.”).
190
Abrams v. Donati, 66 N.Y.2d 95, 953 (1985) (“For a wrong against a
corporation a shareholder has no individual cause of action, though he loses the
value of his investment or incurs personal liability in an effort to maintain the
solvency of the corporation.”). Accord Debussy, 2006 WL 800956, at *3 (“When
the duty implicated in a breach of duty claim is the normal duty to manage the
affairs of the corporation . . . [t]hat duty is owed to the corporation and not
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3.
Plaintiffs Lack Standing to Assert Direct Claims for Breach
of Fiduciary Duty, Aiding and Abetting Breach of Fiduciary
Duty, Gross Negligence, Breach of Contract, and Unjust
Enrichment (Counts V-VII and IX-X)
Defendants argue that Plaintiffs’ claims for breach of fiduciary duty
(Count VI), aiding and abetting breach of fiduciary duty (Count VII), gross
negligence (Count V), third party beneficiary breach of contract (IX), and unjust
enrichment (Count X) should be dismissed, because “[t]he gravamen of Plaintiffs’
claims is that the Defendants failed to supervise adequately the investment of the
Funds’ assets, resulting in the loss of those assets,” thereby breaching duties owed
only to the Funds.191 They point to “a number of cases involving similarly situated
Madoff feeder funds” in which “courts have dismissed such common law claims
against investment advisors and other fund service providers for the very reason
that the plaintiffs lacked standing to pursue derivative claims.”192 Upon a close
separately or independently to the stockholders. Therefore, the injury flowing
from a claim of mismanagement – although . . . not by a corporate board of
directors but rather by the portfolio manager of [a] Trust’s assets – is a wrong to
the corporation.”).
191
Def. Mem. at 4.
192
Id. at 5 (citing Newman, 2010 WL 4118083, at *12; Goldweber v.
Harmony Partners, Ltd., No. 09-61902-CIV, 2010 WL 3702508, at *4 (S.D. Fla.
Sept. 16, 2010); West Palm Beach Police Pension Fund v. Collins Capital Low
Volatility Performance Fund, No. 09-80846-CIV, 2010 WL 2949856, at *3 (S.D.
Fla. July 26, 2010); Stephenson, 700 F. Supp. 2d at 610).
-51-
assessment of all five claims,193 I conclude that each is “a classic claim of fund
mismanagement that belongs to the Fund, and is therefore derivative.”194
a.
Plaintiffs’ Claims for Breach of Fiduciary Duty, Aiding and
Abetting Breach of Fiduciary Duty, Gross Negligence and
Unjust Enrichment Are Derivative
Plaintiffs’ breach of fiduciary duty claim is based on Defendants’
alleged “fail[ure] to conduct adequate due diligence and monitoring with respect to
Optimal U.S.’s investments, by failing to follow-up on red flags that would have
caused them to discover that Madoff was perpetrating a Ponzi scheme, and by
pocketing hundreds of millions of dollars in fees based on fraudulent asset values
and investment returns.”195 Similarly, Plaintiffs’ gross negligence claim is based
on Defendants’ alleged
fail[ure] to perform adequate due diligence before selecting BMIS
as Optimal U.S.’s execution agent for its split strike conversion
strategy, and before allowing BMIS to serve as custodian for
Optimal U.S.; fail[ure] to properly monitor Madoff and BMIS on
an ongoing basis to any reasonable degree; and fail[ure] to take
adequate steps to confirm BMIS’s purported account statements,
193
See Stephenson, 700 F. Supp. 2d at 610 (“[T]here is no reason that
some claims arising out of a case or controversy could not be direct while other
claims arising out of that case or controversy are properly derivative.”).
194
San Diego Cty, 2010 WL 1010012, at *20 (citing Debussy, 2006 WL
800956, at *3).
195
SAC ¶ 328.
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returns, transactions and holding of Optimal U.S.’s assets.196
Finally, Plaintiffs’ unjust enrichment claim is based on the same alleged “unlawful
acts and omissions and breaches of fiduciary duties” asserted in Plaintiffs’ breach
of fiduciary duty and gross negligence claims.197
These claims are derivative because “[e]ach is based on the alleged
mismanagement of the [] Fund through the failure to conduct adequate due
diligence and to discover and act upon red flags.”198 The cases to which Plaintiffs
196
Id. ¶ 319.
197
Id. ¶ 346.
198
Newman, 2010 WL 4118083 at *12 (dismissing plaintiffs’ direct
claims for breach of fiduciary duty, gross negligence and mismanagement,
malpractice and professional negligence, unjust enrichment, and aiding and
abetting breach of fiduciary duty). Accord West Palm Beach, 2010 WL 2949856,
at *3 (dismissing as derivative plaintiff’s claims for breach of fiduciary duty, gross
negligence, and unjust enrichment because “[b]y alleging that [the investment
manager] failed to conduct the necessary due diligence to discover the Madoff
Ponzi scheme, Plaintiff has pled ‘a paradigmatic derivative claim.’”) (quoting
Stephenson, 700 F. Supp. 2d at 610); Stephenson, 700 F. Supp. 2d at 610
(dismissing plaintiff’s breach of fiduciary duty claim as “‘a paradigmatic derivative
claim’” after concluding that “‘[t]he gravamen of plaintiff’s breach of fiduciary
duty claims [was] a failure to administer the fund such that the Madoff Ponzi
scheme would be discovered’”) (quoting Albert v. Alex. Brown Mgmt. Serv., Inc.,
Nos. Civ.A. 762-N, Civ.A. 763-N, 2005 WL 2130607, at *13 (Del. Ch. Aug. 26,
2005)); San Diego Cty., 2010 WL 1010012, at *20 (finding plaintiff’s “first
allegation – that Defendants broke fiduciary duties to [plaintiff] by failing to
manage properly the Fund – is, like Plaintiff’s gross negligence claims, a classic
claim of fund mismanagement that belongs to the Fund, and is therefore
derivative.”) (citing Debussy, 2006 WL 800956, at *3).
-53-
direct this Court are distinguishable.199 In Anwar I, Judge Marerro sustained direct
claims for gross negligence, breach of fiduciary duty, and unjust enrichment
against investment managers,200 but only after he rejected defendants’ “blanket
characterization” of plaintiffs’ common law claims as “mismanagement of the
Funds;”201 instead, he found that “[t]he principal wrong asserted by the Plaintiffs
here is essentially nondisclosure of or failure to learn facts which should have been
disclosed based on duties that were independently owed to Plaintiffs.”202 Although
Judge Marrero’s characterization would apply to Plaintiffs’ claims for negligent
misrepresentation and fraud in this case – which I will permit to proceed – their
breach of fiduciary duty, gross negligence, and unjust enrichment claims simply do
not allege “inducement” such that “recovery . . . would only flow to those
individuals . . . who were so induced.”203
Similarly, the claims sustained as direct in Fraternity Fund Limited v.
199
See Opp. Mem. at 19-20 (citing Anwar I, 728 F. Supp. 2d at 415;
Pension Comm., 446 F. Supp. 2d at 199-200; Fraternity Fund, 376 F. Supp. 2d at
409). See also id. at 26 (citing People ex rel. Cuomo v. Merkin, No. 450879/09,
2010 WL 936208, at *10-11 (Sup. Ct. N.Y. Co. Feb. 8, 2010)).
200
See Anwar I, 728 F. Supp. 2d at 414-16, 421.
201
Id. at 400.
202
Id. at 401 n.9.
203
Stephenson, 700 F. Supp. 2d at 612.
-54-
Beacon Hill Asset Management LLC and People ex rel. Cuomo v. Merkin “were
misrepresentation claims, not mismanagement claims.”204 And in sustaining a
breach of fiduciary duty claim against a fund administrator brought by investors,
Pension Committee of University of Montreal Pension Plan v. Banc of America
Securities, LLC did not address the question of shareholder standing.205 For all of
these reasons, I dismiss as derivative Plaintiffs’ claims for unjust enrichment, gross
negligence, and breach of fiduciary duty, and the aiding and abetting claim upon
which the breach of fiduciary duty claim is based.
b.
The Third Party Beneficiary Breach of Contract
Claim Is Derivative
Plaintiffs assert a breach of contract claim against OIS on the theory
that they are third-party beneficiaries to the Investment Management Agreement
(“IMA”)206 entered into between OIS and Optimal U.S.207 But even if Plaintiffs
204
West Palm Beach, 2010 WL 2949856, at *3 (distinguishing Fraternity
Fund, 376 F. Supp. 2d at 409). See Fraternity Fund, 376 F. Supp. 2d at 409;
Merkin, 2010 WL 936208, at *11 (“Here, the wrongs alleged include [the
investment manager’s] misrepresentations and omissions . . . . [T]he investors were
injured when they invested or retained their investments in reliance upon the
misstatements.”).
205
See Pension Comm., 446 F. Supp. 2d at 196-97. Cf. id. at 205
(denying the fund administrator’s motion to dismiss plaintiffs’ common law fraud
claims for lack of standing).
206
See IMA, Ex. A to Lima Decl. In exchange for “an investment
management fee . . . out of the assets of each class of Shares,” OIS agreed under
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were third-party beneficiaries to the IMA, they
could not demonstrate an injury (a breach of that contract)
independent of injury to [Optimal OIS] (the promisee and primary
beneficiary of the contract). Plaintiff[s] do[] not allege an
independent injury or breach of contractual obligations specific to
[them], but rather a general breach of the [IMA] that is applicable
to the [Fund] at large, and as such [they] could not demonstrate
[their] own injury without demonstrating that the [Fund] was
injured.208
Accordingly, Plaintiffs’ third party beneficiary breach of contract claim against
OIS is also derivative in nature, and is dismissed.209
the IMA to “use its best effort and judgement [sic] and due care in exercising the
authority granted to it [under the IMA]” and was liable to Optimal U.S. for any
loss “aris[ing] from willful default or gross negligence in performance of [OIS’s]
obligations or duties or where the Investment Manager did not act honestly, with
good faith or with a view to the best interests of the Fund.” Id. at 4.
207
See Opp. Mem. at 26.
208
Stephenson, 700 F. Supp. 2d at 611 (citing Primavera
Familienstiftung v. Askin, No. 95 Civ. 8905, 1996 WL 494904, at *9 (S.D.N.Y.
Aug. 30, 1996) (finding third party breach of contract claim derivative)). Accord
Orban v. Field, Civ. A. No. 12820, 1993 WL 547187, at *9 (Del. Ch. Dec. 30,
1993) (“The idea of shareholders having directly enforceable rights as third party
beneficiaries to corporate contracts is, I think, one that should be resisted. One of
the consequences of limited liability that shareholders enjoy is that the law treats
corporations as legal persons not simply agents for shareholders.”).
209
Because I dismiss Plaintiffs’ third-party beneficiary breach of contract
claim, their negligent misrepresentation claim cannot be “duplicative” of the
breach of contract claim, as OIS argues. See Def. Mem. at 8. And because this is
the only ground on which any of the four Defendants moves to dismiss Plaintiffs’
negligent misrepresentation claim, that claim survives this motion.
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I note that although the Anwar I court sustained Plaintiffs’ third-party
beneficiary breach of contract claim under similar circumstances, it did so without
deciding whether that claim was direct or derivative.210 Moreover, in finding that
Plaintiffs were the intended beneficiaries of the Fund’s contract with the
investment manager in that case, the Anwar I court reasoned that
[i]t comports with common sense that an entity hired to manage
the investments of a pool of capital, particularly considering the
massive Funds at issue here, is intended to give a benefit to the
investors. The very purpose of pooling capital may be to
maximize investment opportunities, leverage and profits by virtue
of sheer volume, while avoiding the transaction costs associated
with each investor having a separate contract with an investment
manager and still benefitting directly from the manager’s
expertise.211
Of course, this will be the case with respect to any investment pool. Moreover, this
logic also explains why the right to sue for breach of the contract belongs to the
Fund, not to its shareholders.212
210
See Anwar I, 728 F. Supp. 2d at 402 (deferring ruling on the question
of standing because Plaintiffs’ “asymmetrical injury” argument was “ripe for
further factual development”).
211
Id. at 419.
212
Similarly, while it is true (as Plaintiffs point out) that individual
shareholders’ out-of-pocket losses varied depending upon when they partially or
fully redeemed their shares (due to the fluid nature of the Fund’s share ownership),
see Opp. Mem. at 21, that will be true in any case alleging corporate malfeasance
over a long period of time. But mere variation in losses does not give rise to
claims by individual shareholders alleging corporate malfeasance. See Def. Reply
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c.
Leave to Replead
In light of my (1) application of New York law and (2) holding that
Plaintiffs lack standing to bring these five claims, Plaintiffs are granted leave to
replead the claims as derivative, and to allege facts showing why, if applicable,
demand would be futile or otherwise excused.213 Defendants may then renew their
motion to dismiss these claims, at which point I will consider (1) Defendants’
arguments that Plaintiffs have nevertheless failed to state claims and (2) Plaintiffs’
argument that the “Wagoner Rule” nevertheless imbues Plaintiffs with standing214
– an issue this Court believes would benefit from additional briefing exploring
when the “Wagoner Rule” should apply as opposed to shareholder standing
doctrines such as demand futility.
at 3. Nor does the Fund’s two-tier equity structure have any bearing on Plaintiffs’
standing, as Plaintiffs mistakenly argue. See Opp. Mem. at 20 (arguing that
because Plaintiffs’ “Participating shares” became worthless while OIS’s “Ordinary
shares” were not affected, the diminution in value of Plaintiffs’ shares “did not
accrue to the corporation itself”).
213
See Marx v. Akers, 88 N.Y.2d 189, 198-201 (1996); Sacher v. Beacon
Assocs. Mgmt. Corp., No. 005424/09, 2010 WL 1881951, at *12 (N.Y. Sup. Ct.
Nassau Co. Apr. 26, 2010).
214
See Opp. Mem. at 21 (citing Shearson Lehman Hutton, Inc. v.
Wagoner, 944 F.2d 114, 120 (2d Cir. 1991) (“A claim against a third party for
defrauding a corporation with the cooperation of management accrues to the
creditors, not to the guilty corporation. . . . We therefore hold that the
[bankruptcy] trustee lacks standing to bring the [] claim, which belongs solely to
the creditors.”) (emphasis added)).
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B.
Common Law Fraud-Based Claims
1.
Applicable Law215
“Under New York law, to state a claim for fraud a plaintiff must
demonstrate: (1) a misrepresentation or omission of material fact; (2) which the
defendant knew to be false; (3) which the defendant made with the intention of
inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which
caused injury to the plaintiff.”216 Because the elements of common-law fraud in
New York are “substantially identical to those governing § 10(b), the identical
analysis applies.”217
To state a claim for aiding and abetting fraud under New York law, a
plaintiff must plead facts showing (1) the existence of a fraud; (2) defendant’s
knowledge of the fraud; and (3) that the defendant provided substantial assistance
215
Defendants “do not concede that New York law governs these claims,
which do not involve any New York individuals or entities.” Def. Mem. at 7.
However, they neither state which jurisdiction’s laws they believe should apply nor
argue that that jurisdiction’s laws are in conflict with New York tort law. Thus,
this Court is “free to apply” New York law because it is “among the relevant
choices.” International Bus. Mach., 363 F.3d at 143.
216
Wynn, 273 F.3d at 156 (citing Lama, 88 N.Y.2d at 421).
217
AIG Global Sec. Lending Corp. v. Banc of Am. Sec., LLC, No. 01 Civ.
11448, 2005 WL 2385854, at *16 (S.D.N.Y. Sept. 26, 2005) (citation and
quotation marks omitted).
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to advance the fraud’s commission.218 “The knowledge requirement of an aiding
and abetting fraud claim is satisfied by alleging actual knowledge of the underlying
fraud.”219 “Substantial assistance may only be found where the alleged aider and
abettor affirmatively assists, helps conceal or fails to act when required to do so,
thereby enabling the breach to occur.”220 Moreover, the plaintiff must allege that
the aiding and abetting defendant proximately caused the harm on which the
primary liability is predicated.221 At least with respect to an aiding and abetting
fraud claim, the “substantial assistance” and “causation” elements are interrelated –
“[w]hether the assistance is substantial or not is measured . . . by whether the
action of the aider and abettor proximately caused the harm on which the primary
liability is predicated.”222
2.
218
Plaintiffs’ Primary Fraud Claims (Counts I-II)
See Wight v. Bankamerica Corp., 219 F.3d 79, 91 (2d Cir. 2000).
219
JP Morgan Chase Bank v. Winnick, 406 F. Supp. 2d 247, 252
(S.D.N.Y. 2005) (citation omitted).
220
In re Sharp Int’l Corp., 403 F.3d 43, 50 (2d Cir. 2005). Accord
Pension Comm., 446 F. Supp. 2d at 210.
221
See McDaniel v. Bear, Stearns & Co., 196 F. Supp. 2d 343, 359
(S.D.N.Y. 2002) (quotation and citation omitted) (with respect to aiding and
abetting fraud claim, “[p]roximate cause exists where defendant’s actions were a
substantial factor in the sequence of responsible causation, and plaintiff’s injury
was reasonably foreseeable or anticipated as a natural consequence”).
222
Winnick, 406 F. Supp. 2d at 256 (quotation and citation omitted).
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Plaintiffs assert common law fraud claims against OIS, Clark, and
Banco Santander on the basis of misrepresentations made in connection with
Plaintiffs’ purchases of shares in Optimal U.S.223 In one paragraph, Defendants
move to dismiss these claims because “Plaintiffs have failed to allege that any
Defendant [1] knew the alleged misrepresentations were false [scienter] or [2]
made such alleged misrepresentations with the intention to induce reliance,”
directing the Court to OIS’s and Clark’s arguments for why the section 10(b)
claims against them should be dismissed.224
For the same reasons that Plaintiffs’ section 10(b) claims against OIS
and Clark survive this motion – reasons that will be explained at the May 10th
conference – Plaintiffs’ common law fraud claims against those two defendants
may also proceed.225 However, there is a dearth of briefing on the adequacy of
Plaintiffs’ common law fraud allegations as to the third defendant named in Counts
I-II, Banco Santander – no doubt due to the page limits imposed by this Court.
Therefore, I defer ruling on the issue. Defendants are invited to revisit their
223
See SAC ¶¶ 289-294.
224
Def. Mem. at 13.
225
See AIG, 2005 WL 2385854, at *16 (the elements of common-law
fraud in New York are “substantially identical to those governing § 10(b)”)
(citation and quotation marks omitted).
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argument that Plaintiffs have failed to state a claim for fraud against Banco
Santander, either in a renewed motion to dismiss (if Plaintiffs file a third amended
complaint) or in conjunction with their proposed forum non conveniens motion.
3.
Plaintiffs’ Aiding and Abetting Fraud Claims (Counts VII
and VIII)
Plaintiffs allege that Banco Santander and Santander U.S. are liable as
aiders and abettors to OIS’s alleged fraud.226 Defendants argue that Plaintiffs have
not pleaded facts that, if true, would constitute “substantial assistance” by
Santander U.S. or Banco Santander. While Plaintiffs have pleaded sufficient facts
as to Banco Santander, they have not done so as to Santander U.S. The SAC
alleges that in September 2002, Banco Santander ordered OIS to send a team to
investigate and meet with Madoff and a number of New York law firms.227 The
investigation resulted in at least two internal memoranda that were written by
OIS’s in-house counsel and addressed to Echeverria228 raising issues that “went to
the heart of Madoff’s Ponzi scheme,”229 but that were ignored both by OIS and
Banco Santander. Moreover, Banco Santander “was deeply involved in risk
226
See SAC ¶¶ 335-340.
227
See id. ¶ 87.
228
See id.
229
See id. ¶ 89.
-62-
management at OIS;”230 its Internal Audit team oversaw OIS’s risk controls.231
Finally, Banco Santander was “an active and integral participant in preparing,
drafting and making false representations to Plaintiffs”232 and actively marketed
Optimal U.S. based on the Banco Santander name.233 Thus, Plaintiffs have
adequately alleged that Banco Santander substantially assisted OIS’s fraud.234
However, Plaintiffs fail to state a claim against Santander U.S. for
aiding and abetting OIS’s fraud, as allegedly perpetrated upon the Pioneer
230
Id. ¶ 258. In an October 2008 presentation about Optimal U.S., OIS
emphasized repeatedly the pervasive role of its corporate parent, Banco Santander.
See id.; “Optimal U.S. October 2008 Presentation,” Ex. 21 to SAC. That
presentation was distributed to investors by OIS, Santander U.S., and other
subsidiaries of Banco Santander, without regard for corporate structure and
formalities. See SAC ¶ 244.
231
See SAC ¶¶ 259-261.
232
Id. ¶ 338.
233
See id. ¶¶ 257-259.
234
Defendants do not explicitly attack Plaintiffs’ aiding and abetting
claim for failure to allege Banco Santander’s “actual knowledge of the underlying
fraud,” a required element. Winnick, 406 F. Supp. 2d at 252. However, as noted
above, see supra Part VI.B.2, in their discussion of Plaintiffs’ fraud claims,
Defendants argue that “Plaintiffs have failed to allege that any Defendant knew the
alleged misrepresentations were false,” referring the Court to their discussion of
OIS’s and Clark’s scienter but failing to discuss in any detail Plaintiffs’ allegations
as to whether Banco Santander acted with the requisite level of scienter.
Therefore, if and when Defendants revisit this argument in the context of (once
again) moving to dismiss Plaintiffs’ fraud claims, they are invited to seek dismissal
of Plaintiffs’ aiding and abetting claims on this ground as well.
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Plaintiffs. The SAC focuses entirely on Santander U.S's marketing and sales
efforts directed toward the private banking clients of Santander U.S. and other
Santander affiliates
not the Pioneer Plaintiffs. 235 In the absence of any
allegations rendering plausible the inference that the Pioneer Plaintiffs' injury was
a direct or reasonably foreseeable result of Santander U.S.'s conduct,236 this claim
fails.
VII. CONCLUSION
For the aforementioned reasons, and for reasons that will be explained
at a conference scheduled for May 10,2011, at 3:30 p.m., Defendants' motion to
dismiss is granted in part and denied in part. The Clerk of Court is directed to
close this motion (Docket No. 14).
Dated:
New York, New York
May 2, 2011
235
See id.
236
See, e.g., Kolbeck, 939 F. Supp. at 249.
,~
246-257.
-64
- Appearances For Plaintiffs:
Edward W. Miller, Esq.
575 Lexington Avenue
Suite 2840
New York, New York 10022
(212) 758 1625
Alan Ian Ellman, Esq.
Javier Bleichmar, Esq.
Joel H. Bernstein, Esq.
Labaton Sucharow, LLP
140 Broadway
New York, New York 10005
(212) 907-0877
For Defendants:
Gustavo J. Membiela, Esq.
Samuel A. Danon, Esq.
Hunton & Williams
1111 Brickell Avenue
Miami, Florida 33131
(305) 810-2500
Paulo Roberto Lima, Esq.
Shawn Patrick Regan, Esq.
Hunton & Williams, LLP(NYC)
200 Park Avenue, 52nd Floor
New York, New York 10166
(212) 309-1395
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