Lakeview Investments, LP v. Schulman et al
Filing
84
OPINION: re 68 MOTION to Dismiss The Complaint filed by Oppenheimer Acquistion Corporation, Oppenheimer Acquisition Corp., 62 MOTION for Judgment on the Pleadings filed by Massachusetts Mutual Life Insurance Co., 65 MOTION for Judgment o n the Pleadings filed by James V. Mitchell, Tremont Partners, Inc., Harry Hodges, Darren Johnston, Stuart Pologe, Patrick Kelly, Tremont Group Holdings Inc., Robert Schulman. Plaintiff Lakeview Investment, L.P. filed this class action in California state court alleging that defendants violated California state securities laws by making untrue statements in connection with the sale of limited partnership interests in two hedge funds, the Rye Select Broad Market XL Fund, L.P. and the Rye Select Market Fund, L.P. Defendants removed the case on the grounds that the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. §§ 78bb(f), 77p(b), precluded plaintiff from maintaining this action in state court. There are now two motions for judgment on the pleadings, and one motion to dismiss for failure to state a claim and lack of personal jurisdiction. For the foregoing reasons, the motions for judgment on the pleadings and for failure to state a claim are granted and the action is dismissed. This opinion resolves the documents listed as numbers 62, 65, and 68 on the docket of case 11 Civ. 1851. (Signed by Judge Thomas P. Griesa on 9/27/2012) (ja)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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LAKEVIEW INVESTMENT, LP
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Plaintiff,
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v.
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ROBERT SCHULMAN, et al.,
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Defendants.
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11 Civ. 1851
OPINION
Plaintiff Lakeview Investment, L.P. filed this class action in California
state court alleging that defendants violated California state securities laws by
making untrue statements in connection with the sale of limited partnership
interests in two hedge funds, the Rye Select Broad Market XL Fund, L.P. and
the Rye Select Market Fund, L.P. Defendants removed the case on the grounds
that the Securities Litigation Uniform Standards Act (“SLUSA”), 15 U.S.C. §§
78bb(f), 77p(b), precluded plaintiff from maintaining this action in state court.
There are now two motions for judgment on the pleadings, and one motion to
dismiss for failure to state a claim and lack of personal jurisdiction.
The motions for judgment on the pleadings and for failure to state a
claim are granted and the action is dismissed.
THE PLEADINGS
The following facts are taken from the pleadings in this action.
Plaintiff Lakeview Investment LP is a California-based hedge fund. It
purchased limited partnership interests in the Rye Select Broad Market XL
Fund, L.P. (“XL Fund”) and the Rye Select Broad Market Fund, L.P. (“Market
Fund”). It invested almost $24 million in the XL Fund and $1.2 million in the
Market Fund.
Defendant Tremont Partners is an investment advisor which served as
the sole general partner of the XL Fund and the Market Fund. Defendant
Tremont Group Holdings (“TGH”) is the parent holding company of TPI.
Plaintiff has also sued Oppenheimer Acquisition Corp. (“Oppenheimer”) (the
company that owns TGH), MassMutual Holding LLC (“MassMutual I”) (the
holding company that owns 80% of Oppenheimer), and Massachusetts Mutual
Life Insurance Company (“MassMutual II”) (the company that owns
MassMutual I).
Finally, Lakeview has sued various senior executives of the corporate
defendants, including Robert Schulman, James Mitchell, Harry Hodges, Darren
Johnston, Stuart Pologe, and Patrick Kelly.
At issue in this case are Lakeview’s investments in the XL Fund and the
Market Fund, which, as discussed above, together totaled approximately $25
million.
The Market Fund was a “feeder” fund to Madoff, meaning that money
invested in the Market Fund was subsequently invested with Bernard Madoff of
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Bernard L. Madoff Investment Securities (“BLMIS”), who purported to manage
it using a “split-strike conversion” investment method. This split-strike
conversion method supposedly consisted of the purchase of equities that are
components of the Standard & Poor’s (“S&P”) 100, the purchase of S&P 100
Index put options, and the sale of S&P 100 call options.
The XL Fund operated differently but was designed to achieve similar
results. Unlike the Market Fund, the money invested in the XL Fund was not
given directly to Madoff to be managed by Madoff. Rather, it was designed to
simulate the returns of the Market Fund. This was done in a complicated way
that need not be fully described here, but which involved entering into various
swap transactions with counterparties. The XL Fund’s offering documents
disclose that the manager of the Market Fund, whose returns the XL Fund was
attempting to simulate through its various swap transactions, was investing
the money in the Market Fund using a split-strike conversion method.
As is now well-known, in December of 2008, Madoff revealed that for
years he had been operating a massive Ponzi scheme. As a result of this
revelation, all of Lakeview’s investments in the XL Fund and Market Fund were
lost.
Lakeview filed this suit in March 2011. The suit is a class action on
behalf of Lakeview and other similarly situated California residents that
purchased limited partnership interests in the XL Fund and the Market Fund
in 2007 and 2008. The claims include claims for rescission and/or damages
under California state securities law based on defendants’ role in selling
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plaintiff securities based on false and misleading statements or omissions.
These alleged statements include misstatements concerning the investment
strategies of the XL Fund and the Market Fund, including that the Market
Fund was managed by a manager using the split-strike conversion method.
Plaintiff also seeks a declaration of rights under California law that defendants
owed Lakeview fiduciary duties of care, loyalty, candor, etc., in soliciting
investments. Although the request for a declaration of rights does not explicitly
allege this, the necessary implication is that Lakeview claims that defendants
breached such fiduciary obligations by making misrepresentations when they
sold securities to Lakeview.
There are three pending motions. The first is a motion for judgment on
the pleadings brought by the Tremont entities and the individual defendants,
arguing that Lakeview’s class action is precluded by SLUSA. They also argue
that Lakeview has failed to plead the requisite elements of its claims.
Oppenheimer and the MassMutual defendants also join in the arguments made
in the Tremont motion and also make separate arguments. For reasons that
will become apparent below, it is not necessary to address the separate
arguments made by Oppenheimer and the MassMutual defendants.
DISCUSSION
This case was removed, and defendants argue that it should be
dismissed, on the grounds that the state law claims presented by plaintiff in
this class action are precluded by SLUSA.
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To successfully remove a state law action pursuant to SLUSA,
defendants must establish that the state court action
(1) is a covered class action (2) based on state statutory or common
law that (3) alleges that defendants made a misrepresentation or
omission of a material fact or used or employed any manipulative
device or contrivance (4) in connection with the purchase or sale of
a covered security.
Romano v. Kazacos, 609 F.3d 512, 518 (2d Cir. 2010). SLUSA provides that no
such action “may be maintained in any State or Federal court by any private
party.” 15 U.S.C. § 78bb(f)(1). Once the case is removed from state court
pursuant to SLUSA, courts dismiss these claims as being “precluded” by
SLUSA. See id.; Romano, 609 F.3d at 518.
First, to be a “covered class action,” the complaint must seek damages on
behalf of 50 or more plaintiffs. Romano, 609 F.3d at 518. Here, there is no
dispute that the complaint seeks damages, or their functional equivalent in the
form of rescission of the securities purchased by plaintiff. Lakeview brings all
of its claims on behalf of a class of similarly situated California residents, and
alleges that the class is so numerous that joinder would be impracticable. In
its motion papers, plaintiff does not argue that there are less than 50 members
of this class, and these class allegations suggest that there are at least 50
members of the class such that joinder would be impracticable. Thus, the first
element of SLUSA preclusion is satisfied.
Second, all of plaintiff’s claims are based on California state law.
Therefore, this element is satisfied.
Third, plaintiff’s claims all rely on allegations that defendants made
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misrepresentations or omissions of facts. The California securities law claims
refer to various misrepresentations and omissions made by defendants. The
claim for a declaration of rights incorporates the substantive allegations about
defendants’ alleged misrepresentations and seeks a declaration that defendants
owed, among other things, a duty of “candor” toward plaintiff when “soliciting
investments.” Again, the implication is that plaintiff claims defendants
breached such duties by making misstatements. Thus, all of the claims rely on
a theory that defendants made unlawful misstatements or omissions.
Finally, all of these misrepresentations were “in connection with” the
purchase or sale of a covered security. In Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Dabit, 547 U.S. 71, 89 (2006), the Supreme Court held that this
“in connection with” requirement should be broadly interpreted. In Dabit, the
Court held that SLUSA precluded even claims brought by holders of securities
who do not allege that they purchased or sold the securities in reliance on
misrepresentations, but rather claim that they retained their securities in
reliance on such misrepresentations. Courts have also broadly construed the
“in connection with” requirement to bar claims based on purchases of
partnership interests in hedge funds that then invested the money in Madoff’s
Ponzi scheme. See In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386 (DAB),
2011 WL 1362106, at *7-9 (S.D.N.Y. Mar. 30, 2011) (dismissing case where,
inter alia, misrepresentations were alleged concerning Madoff’s trading
strategy); Wolf Living Trust v. FM Multi–Strategy Investment Fund, LP, No. 09
Civ. 1540 (LBS), 2010 WL 4457322, at *3 (S.D.N.Y. Nov. 2, 2010) (dismissing
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case where hedge funds “were created for the purpose of investing in [covered]
securities, and the misrepresentations ‘had the effect of facilitating Madoff's
fraud.’”); Barron v. Igolnikov, No. 09 Civ. 4471 (TPG), 2010 WL 882890, at *5
(S.D.N.Y. Mar. 10, 2010) (“In light of the Supreme Court's command that
SLUSA be construed expansively, it is enough that this fraudulent scheme was
in connection with the trading in the nationally listed securities in which
Madoff claimed to be engaged.”).
Here, the court finds that the “in connection with” requirement is met.
Plaintiff correctly points out that neither the XL Fund nor the Market Fund
traded in covered securities. However, the Market Fund was invested with
Madoff, who purported to trade in covered securities using his fictional “splitstrike conversion” method. The XL Fund was designed to mimic the returns of
the Market Fund. Plaintiff’s complaint repeatedly accuses defendants of
misrepresentations concerning the extent to which Madoff’s split-strike
conversion method would be used. These representations concerning the splitstrike conversion method appear in the offering documents for the XL Fund
and the Market Fund. Thus, Madoff’s trading in covered securities (or lack
thereof) is central to this complaint, and the “in connection with” requirement
is satisfied.
Therefore, all of the elements of SLUSA preclusion are met here.
In an effort to avoid dismissal of the entire complaint, Lakeview argues
that SLUSA does not require that the whole action be dismissed, but rather,
that only the “class” claims should be dismissed and the “individual” claims
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should survive. However, plaintiffs complaint does not distinguish between
any "individual" claims and class claims. All of the claims in the complaint are
brought by plaintiff "for itself and on behalf of all other California residents"
that invested in the XL Fund and Market Fund. There are no separate
"individual" claims that can be severed from "class" claims. The entire action
should be dismissed.
See,~,
Winne v. The Equitable Life Assurance Society
of the United States, 315 F. Supp. 2d 404,416 (S.D.N.Y. 2003) (dismissing
claims brought by plaintiff "on behalf of himself and a proposed class of
individuals" because "all three state-law causes of action fall within SLUSA's
parameters.") .
Although the defendants have raised other grounds for dismissal of the
case, there is no need to address such arguments because the entire complaint
is precluded by SLUSA and must be dismissed.
Conclusion
For the foregoing reasons, the motions for judgment on the pleadings
and for failure to state a claim are granted and the action is dismissed.
This opinion resolves the documents listed as numbers 62,65, and 68
on the docket of case 11 Civ. 1851.
So ordered.
Dated: New York, New York
September 27, 2012
USDCSDNY
DOCUMENT
ELECTRONICALLY FILED
Tomas P. Griesa
U.S. District Judge
DOC#: ____~~____
. DATEFILED: S
~i .JQI'J.
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