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.
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.
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
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.