June 9, 2009
PENSION COMMITTEE OF THE UNIVERSITY OF MONTREAL PENSION PLAN, THE ALTAR FUND, ARIES TRADING, LTD., THE ARROWSMITH FUND LTD., AVISON COMPANY S.A., BANCO NOMINEES (I.O.M.) LIMITED, BANK OF BERMUDA (LUXEMBOURG), S.A., NOW CALLED HSBC SECURITY SERVICES (LUXEMBOURG) S.A., ON BEHALF OF LIBERTY ERMITAGE NORTH AMERICAN ABSOLUTE FUND LTD., BANQUE PRIVEE EDMOND DE ROTHSCHILD EUROPE, CACEIS BANK LUXEMBOURG, AS ASSIGNEE OF BANQUE PRIVEE EDMOND DE ROTHSCHILD EUROPE/ISOFIN F/K/A CREDIT AGRICOLE INVESTOR SERVICES BANK LUXEMBOURG, JOHN G. BARRIE, JR. IRA, AN INDIVIDUAL RETIREMENT ACCOUNT ("IRA") HELD ON BEHALF OF JOHN G. BARRIE, JR., BASE FORCE, LTD., BOMBARDIER TRUST (CANADA), AS AGENT OF THE ADMINISTRATORS OF THE PENSION FUNDS OF BOMBARDIER INC. WHOSE ASSETS ARE COLLECTIVELY INVESTED IN THE BOMBARDIER TRUST (CANADA) (FOREIGN ASSETS) FUND, THE BOMBARDIER TRUST (UK), THE BOMBARDIER TRUST (U.S.) MASTER TRUST, CEDAR FUND, CLEARWATER COMMERCIAL ENTERPRISES, INC., COMMONFUND GLOBAL HEDGED PARTNERS, LLC, CONDOR ALTERNATIVE FUND, THE CORBETT FAMILY CHARITABLE FOUNDATION INC., THE CORONATION INTERNATIONAL ACTIVE FUND OF FUNDS, FORTIS GLOBAL CUSTODY MANAGEMENT AND TRUSTEE SERVICES (IRELAND) LIMITED AS TRUSTEE FOR CORONATION UNIVERSAL FUND, THE DEVON TRUST, DIRMICA INVESTMENT LTD., DIVERSIFIED CAPITAL MANAGEMENT LTD., MELLON BANK, N.A., AS TRUSTEE FOR THE DOMINION RESOURCES INC. MASTER TRUST, ALAIN DUNAND, ETHOS INVESTMENTS LTD., FIRST TRUST CORP., AS TRUSTEE FOR THE BENEFIT OF PAUL J. SIMON, SHIRLEY A. SIMON AND JOSEPH CUETER, FONDATION LUCIE ET ANDRE CHAGNON, ANDRE CHAGNON, SOJECCI II LTEE., FONDATION LILLA, GOULAM INVESTMENTS INC., GT ALPHA, CHRISTA GUNTER, HERMES TRADING LTD., HSBC PRIVATE BANK (SUISSE) SA, FORMERLY KNOWN AS HSBC REPUBLIC (SUISSE) SA, DEFINED BENEFIT PLAN FOR HUNNICUTT & CO., INC., IRA, FOR THE BENEFIT OF WILLIAM HUNNICUT VFTC AS CUSTODIAN, THE ISRAEL HENRY BEREN CHARITABLE TRUST, JOYCE SINCLAIR SPOUSAL TRUST, KREDEITBANK LUXEMBOURG, A/C SPECIAL OPPORTUNITIES FUND, KUWAIT AND MIDDLE EAST FINANCIAL INVESTMENT COMPANY, LA COMPAGNIE FINANCIERE EDMOND DE ROTHSCHILD BANQUE, CECILE LESCOAT, LGT BANK IN LIECHTENSTEIN AG, L.H. LOGARITHM HOLDINGS SA, LIVSFORSLKRINGSSELSKAPET NORDEA LIV NORGE AS, MADISON TEXTILES, LTD., MAESTRO TRADING, INC., MIRELIS INVESTRUST SA, VITTORIO MOSCA, THE MORTON MEYERSON FAMILY FOUNDATION, THE 1999 MEYERSON CHARITABLE REMAINDER TRUST, MULTIVALOR INVEST INC., NATIONAL BANK OF CANADA, NEMROD LEVERAGED HOLDINGS LTD., NOBILIS S.A., SUZANNE FONTAN S.C.A., HALINVEST SARL, DELPHI GLOBAL LIMITED, JOAKIM LEHMKUHL, ISCANDAR INTERNATIONAL S.A., F/K/A SIMISA INTERNATIONAL S.A., LABISCOUTI TRUST, KIKOUSU TRUST, OKABENA MARKETABLE ALTERNATIVES FUND, LLC, THE PENSION COMMITEE OF REGIME DES RENTES DU MOUVEMENT DESJARDINS, ANNE-CHANTAL PIGELET, PICTET & CIE BANQUIERS, STEPHEN GROSS, IRVING TEITELBAUM, LAURENCE LEWIN, IN THEIR CAPACITIES AS THE TRUSTEES OF RCA IN TRUST, THE PENSION COMMITTEE OF THE PENSION PLAN FOR THE REGIME DE RETRAITE DE LA CORPORATION DE L`ECOLE POLYTECHNIQUE, ROTHSCHILD GESTION, SATNAM INVESTMENTS LTD., SEVEN SEAS PORTFOLIO A LIMITED, SIGNET MULTI-MANAGER INC., UEB (UNITED EUROPEAN BANK) GENEVA (SWITZERLAND), SIL NOMINEES LIMITED, SPGP (SOCIETE PRIVEE DE GESTION DE PATRIMOINE), JOANN ST. GERMAIN, THE STAFFORD FUND, LTD., SUCCESSOR TO THE STAFFORD OPPORTUNITY FUND, LTD., STARVEST FUNDS, LTD., THE TAURUS FUND, SUCCESSOR-IN-INTEREST TO TURKOS SEVENTEEN LIMITED, TEAM HAAS USA, LTD., TRENDTRUST SA, JAMES VAUGHAN, VENERE INVESTMENTS LIMITED, VIDACOS NOMINEES LIMITED, WESTWIND FOUNDATION HOLDINGS LTD., WYATT INCORPORATED EMPLOYEES PROFIT SHARING PLAN, 171212 CANADA, INC., AIS HOLDINGS SERIES TRUST II, COMMERZBANK GLOBAL ALTERNATIVE LIMITED, COMMERZBANK ALTERNATIVE STATEGIES-GLOBAL HEDGE, VESTA FORSIKRING AS, FUND NOMINEES LTD., ORAN LIMITED AND ABERDEEN INVESTMENTS LTD., PLAINTIFFS-APPELLANTS,
BANC OF AMERICA SECURITIES LLC, DEFENDANT-APPELLEE, CITCO FUND SERVICES (CURACAO), N.V., THE CITCO GROUP LIMITED, KIERAN CONROY, DECLAN QUILLIGAN, ANTHONY STOCKS, PRICEWATERHOUSECOOPERS (NETHERLANDS ANTILLES), INTERNATIONAL FUND SERVICES (IRELAND) LIMITED, RICHARD GEIST, JOHN W. BENDALL, JR. AND INTER CARIBBEAN SERVICES LIMITED, DEFENDANTS
Plaintiffs appeal from the judgment of the United States District Court for the Southern District of New York (Scheindlin, J.) dismissing without leave to replead Plaintiffs' claims against Banc of America Securities LLC, which allege that the Defendant aided and abetted fraud and breaches of fiduciary duty committed by the managers of a hedge fund in which Plaintiffs were investors and for which the Defendant served as prime broker. Because Plaintiffs sufficiently pleaded that Defendant's actions proximately caused the Plaintiffs' losses, the Court of Appeals (Leval, J.) vacates and remands.
The opinion of the court was delivered by: Leval, Circuit Judge
Before: LEVAL and B.D. PARKER, Circuit Judges.*fn1
Plaintiffs appeal from the judgment of the United States District Court for the Southern District of New York (Scheindlin, J.) dismissing their claims against Banc of America Securities LLC ("BAS"), without leave to replead, for failure to state a claim upon which relief may be granted. Fed. R. Civ. P. 12(b)(6). Plaintiffs were investors in two hedge funds based in the British Virgin Islands, Lancer Offshore, Inc. and OmniFund Ltd. ("the Funds"). They brought this action to recover losses they suffered on the liquidation of the Funds. Plaintiffs alleged that their losses resulted from frauds committed by Michael Lauer, who managed the Funds through Lancer Management Group, LLC ("Lancer Management").
Plaintiffs' claims against BAS allege that, in its role as the prime broker for the Funds, BAS aided and abetted the frauds and breaches of fiduciary duty committed by Lauer and Lancer Management. The district court dismissed the claims, ruling that Plaintiffs failed to satisfy their burden of pleading proximate causation for their losses. We disagree. The complaint includes allegations that BAS knowingly and substantially assisted Lauer and Lancer Management in deceiving Plaintiffs as to the net asset values of the Funds by falsifying the values of the Funds' holdings on Position Reports, which BAS knew would be relied upon by the Funds' auditor and administrators in calculating and verifying the Funds' net asset values ("NAVs"). It alleges further that the Plaintiffs "reasonably relied upon the [false] representations regarding the Funds' NAVs [net asset values] . . . in deciding to invest in and/or remain invested in the Funds," and that the falsely inflated net asset values were used to justify the payment of fees to Lauer, Lancer Management, and others, which drained the assets of the Funds. In our view, the complaint sufficiently pleaded that BAS's actions proximately caused the Plaintiffs' losses.
The allegations of the Second Amended Complaint (the "complaint"), which in the adjudication of a motion to dismiss under Rule 12(b)(6) must be accepted as true, drawing all inferences from the pleaded facts in Plaintiffs' favor, Wojchowski v. Daines, 498 F.3d 99, 104 (2d Cir. 2007), asserted the following facts:
The Allegations of the Complaint
1. Lauer, Lancer Management, and the Funds
Lauer was the founder, manager and sole shareholder of Lancer Management, which was the Funds' investment manager. Lauer and Lancer Management were responsible for all investment decisions for the Funds. Lancer Management managed the Funds in exchange for fees, which were based on the Funds' NAVs. Lauer and Lancer Management solicited investors in the Funds through personal contacts, third-party marketers or finders, and letters and other mailings, marketing materials, newsletters and private placement memoranda ("PPMs").
The PPMs represented that the majority of the Funds' assets would be invested in common stocks traded on the New York Stock Exchange, the American Stock Exchange or in the U.S. over-the-counter market. However, Lauer and Lancer Management caused the Funds to pursue an increasingly risky strategy, investing the Funds' assets in restricted (and thus not freely marketable) shares, warrants, and non-equity investments of a small number of "micro-cap and small-cap companies . . . many of [which] were not publicly traded at all." The majority of the securities in which the Funds invested were not listed on any exchange and were quoted, if at all, on the Over-the-Counter Bulletin Board and/or pink sheets.
2. The Fraud and Breaches of Fiduciary Duty of Lauer and Lancer Management
The PPMs provided that the NAVs of the Funds would be determined based on the market values of the securities held by the Funds. Specifically, the PPMs provided that listed or quoted securities were to "be valued at their last sales price on the date of determination." The PPMs also provided that listed or quoted securities not sold on the date of determination as well as unlisted securities were to "be valued at the mean between the 'bid' and 'asked' prices" of the most recent date on which such prices were quoted, and if no quotes had been in the past 15 business days, then at a valuation assigned by the Board of Directors. The PPMs also ...
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