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In re Optimal U.S. Litigagion

October 14, 2011


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.



This putative class action arises out of plaintiffs' investment in the Optimal Stragegic U.S. Equity fund ("Optimal U.S." or the "Fund"), which in turn invested one-hundred percent of its assets with Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities LLS ("BMIS"). Plaintiffs allege that defendants failed to conduct adequate diligence regarding Madoff, ignored "red flags" that should have alerted them to Madoff's fraud, and made misstatements and omissions in connection with the sale of Optimal U.S. shares, causing plaintiffs to lose their investment and allowing defendants wrongfully to collect management fees.*fn1

On May 2, 2011, I granted in part defendants' motion to dismiss plaintiffs' Second Amended Complaint ("SAC") for improper forum, lack of standing, and failure to state certain claims.*fn2 First, I dismissed the Santander Plaintiffs from this action on the grounds that a forum selection clause contained in the Terms and Conditions governing their accounts with SBT ("SBT Terms & Conditions") required them to litigate all of their claims, against all defendants, in the Bahamas. Second, I dismissed the common law claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, gross negligence, third party breach of contract, and unjust enrichment brought by the Pioneer Plaintiffs and Santander Plaintiffs against OIS, Clark, and Banco Santander (Counts V-VII and IX-X) because any harm arising from such conduct was sustained by Optimal U.S., the only entity that could bring suit directly.

On August 26, 2011, I granted in part plaintiffs' motion for reconsideration of the May 2, 2011 Opinion and Order.*fn3 I reinstated the Santander Plaintiffs' claims against OIS, Clark, and Banco Santander, but not against Santander U.S. In addition, I held that the "Wagoner Rule does not imbue Plaintiffs with standing to bring Counts V-VII and IX-X, thereby again dismissing those Counts."*fn4

This opinion addresses defendants' renewed motion to dismiss federal securities fraud claims based on allegedly materially misleading statements and omissions in Explanatory Memoranda ("EMs") issued by Optimal Multiadvisors, Ltd. ("Multiadvisors") in light of the Supreme Court's recent decision in Janus Capital Group v. First Derivative Traders.*fn5 Defendants contend that these claims must be dismissed because, under Janus, the allegedly materially misleading statements and omissions were only made by Multiadvisors, not OIS. For the following reasons, defendants' motion is granted in part and denied in part.


A. Janus Capital Group

In Janus, plaintiffs brought federal securities law claims against Janus Capital Group, Inc. ("JCG") and Janus Capital Management LLC ("JCM") based on alleged false statements in mutual fund prospectuses. JCG "is a publicly-traded company that created the Janus family of mutual funds," which are organized "in a Massachusetts business trust, the Janus Investment Fund."*fn6 Janus Investment Fund, an independent legal entity owned by mutual fund investors, retained JCM as its investment adviser and administrator.*fn7 Janus Investment Fund issued prospectuses "describing the investment strategy and operations of its mutual funds" pursuant to federal securities laws.*fn8 Plaintiffs alleged that JCG and JCM 'caused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds].'*fn9 The Supreme Court granted certiorari "to address whether JCM can be held liable in a private action under Rule 10b-5 for false statements included in Janus Investment Fund's prospectuses."*fn10 It held that JCM could not be liable because it had not "made" the material misstatements in the prospectuses.*fn11

Under Section 10(b) of the Exchange Act*fn12 and Securities and Exchange Commission Rule 10b-5,*fn13

the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not 'make' a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker. And in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by-and only by-the party to whom it is attributed.*fn14

This rule is in accordance with the narrow scope given to the implied private right of action under Rule 10b-5.*fn15 The Court also rejected an argument by plaintiffs that the "'well-recognized and uniquely close relationship between a mutual fund and its investment advisor'" required a different result.*fn16 The Court declined to carve out an exception to the "ultimate authority" test based on the relationship of a mutual fund and its investment advisor because, in this instance, corporate formalities were observed -- JCM and Janus Investment Fund were legally separate entities and Janus Investment Fund's board was independent, even more so than required by statute.*fn17

The Court held that Janus Investment Fund "made" the allegedly materially misleading statements for purposes of Rule 10b-5 for several reasons. Janus Investment Fund had the statutory obligation to file the prospectuses, and it did so. The prospectuses did not give the appearance that JCM made the statements, nor was there any allegation that JCM actually filed the prospectuses.*fn18

JCM's involvement in preparing the prospectuses was more like a "speechwriter," assisting "Janus Investment Fund with crafting what Janus Investment Fund said in the prospectuses," which is insufficient as a matter of law to establish that JCM "made" the allegedly false statements under Rule 10b-5.*fn19

B. Piercing the Corporate Veil

1. Choice of Law

In diversity actions, federal courts follow the choice-of-law rules of the forum state to determine the controlling substantive law.*fn20 Under New York choice-of-law rules, courts first determine whether there is a substantive conflict between the laws of the relevant choices.*fn21 "In the absence of substantive difference . . . a New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it."*fn22 Where there is a conflict, New York choice-of-law principles dictate that "'[t]he law of the state of incorporation determines when the corporate form will be disregarded and liability imposed on shareholders.'"*fn23

2. New York Law

Courts in this district have described determining the proper pleading standard for piercing the corporate veil as a "knotty question."*fn24 Piercing the corporate veil is a "narrow exception to the doctrine of limited liability for corporate entities, and . . . courts should permit veil-piercing only under 'extraordinary circumstances.'"*fn25 New York courts will pierce the corporate veil only "when the [corporate] form has been used to achieve fraud, or when the corporation has been so dominated by an individual or another ...

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