The opinion of the court was delivered by: Sand, J.
Plaintiffs in this case are investors in First Frontier, LP ("FF Fund"), a "sub-feeder fund" that indirectly invested in Bernard L. Madoff Securities LLC ("BMIS").*fn1 Plaintiffs assert claims against Defendants associated with the FF Fund, its auditors, the "feeder fund" in which the FF Fund invested, and John Does 1--100.*fn2 Defendants have moved to dismiss the First Amended Complaint ("FAC") in its entirety. For the following reasons, the motions are granted.
For the purposes of this proceeding, we take these facts alleged by Plaintiffs to be true. The FF Fund is a Delaware limited partnership. Defendant Frontier Capital Management, LLC ("Frontier Capital") is the General Partner of the FF Fund, and Frontier Advisors Corporation ("Frontier Advisors") is the FF Fund's Manager. Defendant Mark Ostroff is the General Manger of the FF Fund, President of Frontier Advisors, and Principal Member and Sole Manager of Frontier Capital. His spouse, "FNU" Ostroff, is the only other Member of Frontier Capital. These persons and entities are collectively referred to as the "FF Defendants."
Plaintiff Jack Saltz is the Trustee of the named Plaintiffs Susan Saltz Charitable Lead Annuity Trust, and Susan Saltz Descendants Trust. Plaintiffs invested in the FF Fund beginning in or about July 2005 and continued to make investments in subsequent years. They remained investors in the FF Fund at all times relevant to the Defendants' alleged wrongful course of conduct.
Interests in the FF Fund were offered through a Confidential Private Placement Memorandum dated January 18, 1999. FAC Ex. A ("FF PPM"). The FF Fund was to invest substantially all of the Fund's assets with a designated independent Investment Manager, identified as BMIS. Investments were to be made "pursuant to an agreement between the Partnership and the Investment Manager which provides, among other things, guidelines by which the Investment Manager will trade for the Partnership." FF PPM at 6. According to the offering materials, the General Partner "delegated to the Investment Manager sole and complete authority to manage the assets of the Partnership." FF PPM at A. Thus, it warned, "while the Investment Manager is bound by a written agreement to follow specified trading strategies, it is possible that the Investment Manager could violate the agreement, which violation could result in a riskier approach that could lead to a loss of all or part of the Partnership's investment." FF PPM at 6. Frontier Advisors received a 0.125% management fee at the end of each quarter. FF PPM at B.
Although BMIS is identified in the PPM as the Investment Manager, the FF Fund did not deal directly with BMIS but rather invested in the feeder fund Beacon Associates LLC I ("Beacon Fund"), a New York limited liability company. Through Beacon, "investment decisions and strategies were made, and implemented" by Defendants Ivy Asset Management Corporation ("Ivy") and Bank of New York Mellon Corporation ("BONY"). FAC ¶ 75. Plaintiffs allege they were never informed of Beacon's or Ivy's involvement, although their existence was disclosed in the annual audited report. See Brody Decl., Ex. E at 9--10.
Plaintiffs allege they invested and lost approximately $4.2 million as a result of the FF Fund's investments in Madoff.*fn3 Following the revelations of Madoff's fraud, Plaintiffs received multiple communications from Defendant Mark Ostroff regarding the status of distributions from the Beacon Fund and explaining that they were expected in mid to late 2009. Plaintiffs have not yet received distributions.*fn4
The Beacon Fund was a "feeder fund" in which the FF Fund's assets were invested before they were transferred to Madoff as part of a larger pool. Defendant Beacon Associates Management Corp ("BAMC"), a New York corporation, directs the business operations and affairs of the Beacon Fund, and makes allocation and reallocation decisions concerning the Fund's assets. BAMC is wholly owned by Defendants Joel Danzinger and Harris Markhoff and their immediate families. Joel Danzinger is the President and a Director of BAMC, and Harris Markhoff is the Vice President, Secretary, Treasurer, and a Director.
On or about August 9, 2004, memberships in the Fund were offered via an Offering Memorandum ("OM"). Prior to the revelation of the Madoff fraud, as of October 20, 2008, the Net Asset Value of the Fund was approximately $560 million. On or about December 18, 2008, investors in the FF Fund received a letter from Defendant BAMC informing the affected parties of the Madoff fraud and the intention to liquidate the fund. See FAC Ex. B.
Defendant Ivy is a limited liability company and wholly-owned subsidiary of Defendant BONY. Ivy is a registered Investment Advisor under the Investment Advisors Act of 1940 and a commodity trading advisor under the Commodity Exchange Act. BAMC engaged Ivy, who served as the Beacon Fund's link to Madoff, to provide it with advice regarding the selection and allocation of the Beacon Fund's assets among investment managers and investment pools.
The FF Defendants utilized the services of several accounting firms, including Defendant Anchin, Block & Anchin, LLP ("Anchin") and Lazar Levine & Felix LLP, now merged with Defendant ParenteBeard LLC ("ParenteBeard" and together with Anchin the "Auditor Defendants").*fn5 Plaintiffs allege that Anchin was an auditor for the FF Fund during the period at issue and "provided, among other things, annual reports and 10-Ks to the First Frontier clients, including the Plaitniffs." FAC ¶ 6. ParenteBeard was also retained by the FF Defendants to provide annual financial statements and auditors' reports to clients, including Plaintiffs during the relevant period.
In addition to the Defendants named in the FAC, Plaintiffs assert claims against John Does 1--100, who"were in positions of ownership and/or control over the Fund, including the members of the Managing Member's Advisory Board. By virtue of their high level positions, participation in and/or awareness of the Fund's investments, they had the power to influence and control, and did influence and control, directly or indirectly, the decision-making of the Fund." FAC ¶ 108.
Plaintiffs identify a number of "red flags" that were publicly available prior to the official announcement of Madoff's fraud. The alleged red flags include, among others, Madoff's consistent investment returns and the secrecy of his strategy-both written about in industry publications at the time-that Madoff's stock holdings appeared to be too small to support the size of fund he claimed, and Madoff's unusual fee structure, as well as the following: "(a) Madoff generally reported that he bought near daily lows and sold near highs with uncanny consistency; (b) Madoff always claimed to be fully invested in treasury bills at the end of each quarter, which was inconsistent with his purported strategy as it would require him to liquidate his positions even under favorable conditions; (c) a firm the size of [BMIS] was audited by an unknown two man operation, instead of one of the major accounting firms; and (d) Madoff's reported results were inconsistent with the split-strike strategy, which might reduce volatility but could not produce gains in a declining stock market." Pl. Opp. at 20; see also FAC ¶¶ 67--70. Plaintiffs note that a few other investors decided that investing with Madoff was too risky in light of the red flags, but Plaintiffs do not allege the Defendants were in contact with these investors or were otherwise aware of their decision not to invest.
On a motion to dismiss, a court reviewing a complaint will consider all material factual allegations as true and draw all reasonable inferences in favor of the plaintiff. Lee v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir. 1999). "To survive dismissal, the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient to raise a right to relief above the speculative level." ATSI Commc'ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 93 (2d Cir. 2007) (internal quotation marks omitted). Ultimately, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007). "[A] simple declaration that defendant's conduct violated the ultimate legal standard at issue . . . does not suffice." Gregory v. Daly, 243 F.3d 687, 692 (2d Cir. 2001).
Allegations of fraud must meet the heightened pleading standard of Rule 9(b), which requires that the plaintiff "state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). The complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). "[W]hile Rule 9(b) permits scienter to be demonstrated by inference, this must not be mistaken for license to base claims of fraud on speculation and conclusory allegations. An ample factual basis must be supplied to support the charges." O'Brien v. Nat'l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (internal citations omitted).
On a motion to dismiss, a court is not limited to the four corners of the complaint, but may also consider "documents attached to the complaint as an exhibit or incorporated in it by reference, . . . matters of which judicial notice may be taken, or . . . documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit." Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993).
a.Federal Securities Fraud Claims against the ...