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CSAM Capital, Inc. v. Lauder

September 22, 2009


Respondents appeal from an order of the Supreme Court, New York County (Herman Cahn, J.), entered January 25, 2008, which granted the petition and dismissed the arbitration proceeding commenced by them.

The opinion of the court was delivered by: Catterson, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Peter Tom, J.P., Angela M. Mazzarelli, Eugene Nardelli, James M. Catterson and Karla Moskowitz, JJ.


This proceeding arises out of an arbitration brought by the appellant investors against CSAM Capital, Inc., the general partner of a high-risk exchange fund, and allegedly related entities (hereinafter referred to as "CSAM"), alleging, inter alia, fraud in relation to the loss of their investments in the fund. The investors appeal from an order dismissing their claims as time-barred. Because we find that the investors could not have known of the fraud they allege, we reinstate their claim for arbitration.

The appellants are limited partners in DLJ Emerging Growth Partners, L.P., an exchange fund*fn1 (hereinafter referred to as the "fund"), having joined in 1999 and 2000. Prior to joining, the appellants received a private placement memorandum (hereinafter referred to as the "PPM") and a subscription booklet. The PPM underscored the high-risk nature of the fund, explaining that it was particularly risky because it contained newly emerging, high-technology dot-com stocks with little or no operating histories. The PPM said that an "active hedging strategy" would be implemented to mitigate the substantial risks inherent in the fund. According to the PPM, this hedging strategy would be overseen and implemented by 13 officers and directors having "extensive experience" and "significant expertise in the design and use of the sophisticated hedging techniques [...] " (emphasis added).

Additionally, the subscription booklet provided that any claims would be settled by arbitration, and that the agreement "shall be governed, construed, and enforced in accordance with the laws of the State of New York."

It is undisputed that, in March 2000, the fund had a total asset value of over $254 million, but had only engaged in one $30 million value hedge. After the hedge expired in May 2000, the fund did not engage in any further hedging. It is further undisputed that by September 2002, the fund had lost more than 90% of its value - approximately $240 million.

In the meantime, in July 2001, two of the appellants, James and Debbie Heller,*fn2 wrote a letter (hereinafter referred to as the "Heller letter") to John Paolella, Director of Exchange Fund Products for CSAM LLC. The Hellers said that their investment had been "decimated," and sought an explanation for a "series of irresponsible, wrong headed [sic], misguided and disastrous decisions by the fund managers def[ying] any definition of prudent financial management," suggesting that the cause was "gross mismanagement [...] and a breach of the fund management's fiduciary responsibility."

Paolella replied with a four-page letter dated August 17, 2001 (hereinafter referred to as the "Paolella letter"), outlining the reasoning behind the fund's investment decisions. The letter concluded as follows: "[T]he [f]und was structured to accommodate new and relatively untested companies of the so-called new economy.' Unfortunately, the extreme down turn [sic] in the valuations of new economy' securities paralleled the [f]und's downturn. In trimming the portfolio to meet margin calls, we endeavored to retain positions in those companies that had, in the General Partner's view, the greatest chance of survival and future growth. We hope that the [f]und will regain some of its lost value in the years to come."We hope that you now have a better understanding of the decisions that were made in the management of this [f]und. Although we understand your disappointment with the [f]und's performance thus far, we believe we have nevertheless discharged our duty as a fiduciary."

In 2004, the appellants received a consolidated financial statement (hereinafter referred to as the "CFS") dated December 31, 2003. The CFS disclosed that, in February 2003, a limited partner had commenced an arbitration "proceeding asserting [c]laims for breach of contract, breach of fiduciary duty, misrepresentation, and gross negligence' in connection with [CSAM's] management and operation of the Partnership." The CFS further stated that CSAM was defending the matter, and believed it to be without merit. The record does not reflect any attempt made on behalf of the appellants to investigate this claim further.

Also in 2004, two other investors, Dixon and Carol Doll, filed an arbitration statement of claim (hereinafter referred to as the "Doll SOC"). The record does not include factual evidence that the appellants were informed of this arbitration at that time. Moreover, although the Doll SOC included several counts of fraudulent misrepresentation in connection with the operation of the fund, it contained no claims or assertions relating to the qualifications of the fund's directors.

On November 7, 2006, Hugh M. Neuburger, whom the PPM had named as one of the 13 experts who would implement the fund's hedging strategy, testified at the Doll arbitration hearings. He admitted that he was one of only two of the named individuals who were actually involved in the fund's hedging strategy. He further testified that neither he nor the second individual had any prior hedging experience ...

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