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United States District Court, S.D. New York

February 27, 2004.

ALTERAM S.A., et al., Plaintiffs, -against- BEACON HILL ASSET MANAGEMENT LLC, et al., Defendants

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge


This case, the genesis of which is briefly set forth in another order of even date, involves claims for violations of the federal securities laws, common law fraud, breach of contract, negligence and breach of fiduciary duty involving the management of three hedge funds. Presently pending before the Court are separate motions to dismiss the corrected and supplemental complaint on behalf of (1) defendant Beacon Hill Management, its principals and affiliates (collectively, the "Beacon Hill Defendants"), (2) defendant Asset Alliance Corporation, and (3) defendant ATC Fund Services Ltd., f/k/a, ATC Fund Administrators Ltd. ("ATC").*fn1

Defendants seek dismissal of the claims for federal securities violations and common law fraud on the ground, inter alia, that the complaint fails to plead fraud with the particularity required by Fed.R.Civ.P. 9(b) and, for the federal securities claims, by the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b). More specifically, the Beacon Hill Defendants argue that plaintiffs have not adequately pled facts identifying each alleged misstatement and why each statement is allegedly misleading, and, as the allegations are made on information and belief, the facts on which their beliefs are formed. See id. § 78u-4(b)(1). Moreover, the Beacon Hill Defendants and Asset Alliance Corporation contend that plaintiffs have failed to plead an actionable misstatement, as the complaint does not adequately allege that any of the statements were false when made. Page 2

  The alleged misstatements in this case fall into two principal categories: (1) statements concerning goals and objectives for the management of the hedge funds as well as the method of valuing the funds, and (2) month-end reports of rates of return and net asset values ("NAVs") for each of the funds for July, August and September 2002.*fn2 With regard to the former, the complaint fails to identify the place, time, speaker and recipient of the majority of statements. For example, the complaint alleges that the Beacon Hill Defendants represented in "Offering Memoranda for each Fund, in marketing materials, and in meetings, phone calls, and correspondence" that, inter alia, the funds were low risk and would invest primarily in mortgage-backed securities, using investments in treasuries and debentures to hedge against interest rate. Cpt. ¶ 33. There is no allegation as to when particular phone calls or meetings took place or who attended them, when offering memoranda or marketing materials were written or by whom, or which plaintiffs received and relied on any of the statements.

  Even where the complaint identifies the date, speaker and other particulars of an alleged misleading statement, it often fails adequately to plead facts explaining why the statement is misleading. Plaintiffs argue that the representations concerning the management of the funds became fraudulent at least as early as July 2002 when defendants allegedly abandoned their management strategies by acquiring for the funds a larger short position in Treasury bonds. Id. ¶ 77. But it is well established that "[t]he failure to carry out a promise made in connection with a securities transaction is normally a breach of contract . . . [and] does not constitute fraud unless, when the promise was made, the defendant secretly intended not to perform." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1176 (2d Cir. 1993).

  The complaint is equally insufficient with respect to the second category of statements. It alleges that the Beacon Hill Defendants overstated the funds" rates of return and NAVs in month-end reports disseminated by ATC for July, August and September 2002.*fn3 Not only does the complaint fail to link the month-end reports to many of the defendants or to allege which of the plaintiffs received them, but it fails to identify why the statements were misleading at the time they were made. Moreover, the allegations are made upon information and belief, see Cpt. ¶ 74, but the complaint fails to "state with particularity all facts upon which that belief is formed," 15 U.S.C. § 78u-4(b)(1). It provides no factual support for the belief that the reported figures in the monthly statements were false save that, beginning in October 2002, the Beacon Page 3 Hill Defendants began reporting that the NAVs had declined substantially from those reported as of August 31, 2002.*fn4 Cpt. ¶ 4. This alone is insufficient to support the belief that the month-end reports misstated existing data.*fn5

  As the complaint fails to comply either with 15 U.S.C. § 78u-4(b)(1) or Rule 9(b), the Court need not address defendants' remaining arguments for dismissal of the federal securities and common law fraud claims. Those claims are dismissed with leave to replead. As there is no independent basis of federal jurisdiction over the state law claims, they are dismissed as well subject to plaintiffs' right to include pendent state claims in any amended complaint.

  Accordingly, the motions [docket items 10, 13 and 17] to dismiss the corrected and supplemental complaint are granted with leave to replead on or before June 30, 2004. The Court is aware that the subject matter of this civil lawsuit is the subject also of a grand jury investigation pending in the District of New Jersey and that discovery has been stayed in all related actions until May 31, 2004 in an effort to avoid prejudice to the criminal investigation. See Order, Feb. 25, 2004, The government has represented that it does not expect to seek a further extension of the stay.


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