The opinion of the court was delivered by: LEWIS KAPLAN, District Judge
The case is before the Court on motions by defendants ATC Fund
Services (Cayman) Limited ("ATC") and Amsterdam Trust Corp., B.V.
("ATC BV") (collectively the "ATC Defendants") to dismiss the
amended complaint ("Complaint").
At the center of this case is an alleged valuation fraud
involving hedge funds that invested in mortgage-backed and
related securities.*fn1 The two funds at issue here are
Bristol Fund, Ltd. ("Bristol") and Safe Harbor, L.P. ("Safe
Harbor") (collectively the "Funds"). They were created and
managed by defendants Beacon Hill Asset Management, LLC ("Beacon
Hill"), Safe Harbor Asset Management, LLC ("Safe Harbor Asset Management"), and their
four principals, defendants John D. Barry, Thomas Daniels, John
Irwin, and Mark Miszkiewicz (collectively, the "Beacon Hill
Defendants").*fn2 ATC was the administrator of the
Funds.*fn3
From March 2000 through September 2002, the Beacon Hill
Defendants allegedly misrepresented in offering memoranda and
elsewhere that the Funds' net asset values ("NAVs") would be
calculated in good faith using independent prices.*fn4
Contrary to those representations, they allegedly overpriced the
securities in the Funds' portfolios for purposes of reporting
NAVs in audited financial statements and month-end
reports.*fn5
ATC allegedly is liable on the theory that it calculated the
Funds' NAVs using the Beacon Hill Defendants' inflated prices
without verifying the accuracy of those prices.*fn6 It then
disseminated the NAVs to plaintiffs in month-end
reports.*fn7 Plaintiffs assert that Beacon Hill's prime
broker, Bear Stearns, independently valued the securities in the
Funds' portfolios and arrived at prices that would have resulted
in portfolio valuations that were lower than those based upon the Beacon Hill prices.*fn8 Although ATC allegedly received the
Bear Stearns prices, it "slavishly used the Beacon [Hill]
Defendants' marks . . . without verifying that the marks
reflected market value."*fn9
The Complaint asserts claims against ATC under Section 10(b) of
the Securities and Exchange Act of 1934 ("Exchange
Act"),*fn10 and Rule 10b-5 thereunder,*fn11 and on
state law theories.*fn12 It makes a claim against ATC BV for
control person liability under Section 20(a) of the Exchange
Act.*fn13
The ATC Defendants move to dismiss on various grounds,
including, primarily, that the Complaint fails to satisfy
Fed.R.Civ.P. 9(b) and/or the Private Securities Litigation Reform Act
("PSLRA").*fn14 Discussion
In deciding a Rule 12(b)(6) motion, the Court accepts as true
all well-pleaded factual allegations in the complaint and draws
all reasonable inferences in the plaintiff's favor.*fn15 A
district court may consider the full text of documents attached
as exhibits to the complaint, incorporated in it by reference, or
"integral" to the complaint.*fn16
Plaintiffs must "state with particularity facts giving rise to
a strong inference that the defendant acted with the requisite
state of mind."*fn17 This may be done "either (a) by
alleging facts that defendants had both motive and opportunity to
commit fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or
recklessness."*fn18 "[T]he inference may arise where the
complaint sufficiently alleges that the defendants: (1)
benefitted in a concrete and personal way from the purported
fraud, (2) engaged in deliberately illegal behavior, (3) knew facts or had access to information suggesting that their
public statements were not accurate, or (4) failed to check
information they had a duty to monitor."*fn19
Plaintiffs rely upon the conscious misbehavior or recklessness
approach.*fn20 They contend that "ATC knew facts or had
access to information suggesting that their public statements and
those of the Beacon Defendants were not accurate."*fn21 In
particular, they allege that ATC routinely received prices of the
securities in the Funds' portfolios from Bear Stearns and that
those prices would have resulted in portfolio valuations that
were lower than the valuations published by the Beacon Hill
Defendants.*fn22 Valuations based on Bear Stearns prices
would have been lower than those based on Beacon Hill prices by
10 to 15 percent in March 2000 and March 2001, 16.32 percent in
March 2002, 24.46 percent in April 2002, 12.45 percent in May
2002, 15.08 percent in June 2002, 31.43 percent in July 2002, and
37.62 percent in August 2002.*fn23 ATC allegedly stated in a
due diligence questionnaire for Bristol that it received
"position statements" from Bear Stearns, as well as from the
fund's managers, and that non-public securities were valued "from
the Prime Brokers, and underwriters; and verified with
Bloomberg."*fn24 Plaintiffs have not alleged facts sufficient to justify their
assertion that the Bear Stearns/Beacon Hill valuation disparity
created a red flag. As explained in the July 6 Opinion, "[t]he
defendants' hedge funds involved non-exchange listed securities,
the valuation of which may differ depending on the model used in
the calculations. In other words, valuation of such securities
was not a matter of looking up closing prices in the Wall Street
Journal, but involved the exercise of judgment."*fn25
Plaintiffs do not allege that the models used or the judgments
made by Bear Stearns were superior to those used or made by
Beacon Hill. They do not allege that the differences in
valuations were outside the range of what was considered normal
in the industry. Certainly they do not allege that the ATC
Defendants had any reason to think that Bear Stearns figures were
any better than those of the Beacon Hill Defendants.*fn26
Plaintiffs' theory of scienter appears to be based also upon
the mistaken assumption that ATC had the expertise or duty "to
conduct an independent valuation" of the securities in the Funds'
portfolios.*fn27 Although ATC allegedly was responsible for
computing the NAV of the Funds, that task is different from the task of valuing the securities in
the Funds' portfolios.*fn28 Fund documents delegated
responsibility for the former task to ATC and the latter to
Bristol's investment manager and Safe Harbor's general partner.
One such document was the Bristol offering memorandum. It
repeatedly stated that the fund's investment manager, Beacon
Hill, was responsible for valuing the fund's securities and
cautioned that this delegation of responsibility to the
investment manager created a potential conflict of interest
insofar as the investment manager's compensation was based upon
NAV.*fn29 In contrast, when describing ATC's
responsibilities as administrator, the offering memorandum
nowhere indicated that one of ATC's responsibilities was the
valuation of the securities in the fund.*fn30 Instead, it cited to the administration agreement between ATC and the
Fund, which lists one of ATC's "duties and functions" as
including responsibility for "computing the Net Asset Value of
the Company's shares . . ."*fn31 Safe Harbor's offering
memoranda also provided that the general partner, Safe Harbor
Asset Management, was responsible for valuing the securities in
the fund's portfolio, whereas its administration agreement with
ATC provided that the latter was responsible for computing ...