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Lakeview Investment, Lp v. Robert Schulman

September 27, 2012

LAKEVIEW INVESTMENT, LP PLAINTIFF,
v.
ROBERT SCHULMAN, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Thomas P. Griesa, U.S. District Judge

OPINION

Plaintiff Lakeview Investment, L.P. filed this class action in California state court alleging that defendants violated California state securities laws by making untrue statements in connection with the sale of limited partnership interests in two hedge funds, the Rye Select Broad Market XL Fund, L.P. and the Rye Select Market Fund, L.P. Defendants removed the case on the grounds that the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. §§ 78bb(f), 77p(b), precluded plaintiff from maintaining this action in state court. There are now two motions for judgment on the pleadings, and one motion to dismiss for failure to state a claim and lack of personal jurisdiction.

The motions for judgment on the pleadings and for failure to state a claim are granted and the action is dismissed.

THE PLEADINGS

The following facts are taken from the pleadings in this action. Plaintiff Lakeview Investment LP is a California-based hedge fund. It purchased limited partnership interests in the Rye Select Broad Market XL Fund, L.P. ("XL Fund") and the Rye Select Broad Market Fund, L.P. ("Market Fund"). It invested almost $24 million in the XL Fund and $1.2 million in the Market Fund.

Defendant Tremont Partners is an investment advisor which served as the sole general partner of the XL Fund and the Market Fund. Defendant Tremont Group Holdings ("TGH") is the parent holding company of TPI. Plaintiff has also sued Oppenheimer Acquisition Corp. ("Oppenheimer") (the company that owns TGH), MassMutual Holding LLC ("MassMutual I") (the holding company that owns 80% of Oppenheimer), and Massachusetts Mutual Life Insurance Company ("MassMutual II") (the company that owns MassMutual I).

Finally, Lakeview has sued various senior executives of the corporate defendants, including Robert Schulman, James Mitchell, Harry Hodges, Darren Johnston, Stuart Pologe, and Patrick Kelly.

At issue in this case are Lakeview's investments in the XL Fund and the Market Fund, which, as discussed above, together totaled approximately $25 million.

The Market Fund was a "feeder" fund to Madoff, meaning that money invested in the Market Fund was subsequently invested with Bernard Madoff of Bernard L. Madoff Investment Securities ("BLMIS"), who purported to manage it using a "split-strike conversion" investment method. This split-strike conversion method supposedly consisted of the purchase of equities that are components of the Standard & Poor's ("S&P") 100, the purchase of S&P 100 Index put options, and the sale of S&P 100 call options.

The XL Fund operated differently but was designed to achieve similar results. Unlike the Market Fund, the money invested in the XL Fund was not given directly to Madoff to be managed by Madoff. Rather, it was designed to simulate the returns of the Market Fund. This was done in a complicated way that need not be fully described here, but which involved entering into various swap transactions with counterparties. The XL Fund's offering documents disclose that the manager of the Market Fund, whose returns the XL Fund was attempting to simulate through its various swap transactions, was investing the money in the Market Fund using a split-strike conversion method.

As is now well-known, in December of 2008, Madoff revealed that for years he had been operating a massive Ponzi scheme. As a result of this revelation, all of Lakeview's investments in the XL Fund and Market Fund were lost.

Lakeview filed this suit in March 2011. The suit is a class action on behalf of Lakeview and other similarly situated California residents that purchased limited partnership interests in the XL Fund and the Market Fund in 2007 and 2008. The claims include claims for rescission and/or damages under California state securities law based on defendants' role in selling plaintiff securities based on false and misleading statements or omissions. These alleged statements include misstatements concerning the investment strategies of the XL Fund and the Market Fund, including that the Market Fund was managed by a manager using the split-strike conversion method. Plaintiff also seeks a declaration of rights under California law that defendants owed Lakeview fiduciary duties of care, loyalty, candor, etc., in soliciting investments. Although the request for a declaration of rights does not explicitly allege this, the necessary implication is that Lakeview claims that defendants breached such fiduciary obligations by making misrepresentations when they sold securities to Lakeview.

There are three pending motions. The first is a motion for judgment on the pleadings brought by the Tremont entities and the individual defendants, arguing that Lakeview's class action is precluded by SLUSA. They also argue that Lakeview has failed to plead the requisite elements of its claims. Oppenheimer and the MassMutual defendants also join in the arguments made in the Tremont motion and also make separate arguments. For reasons that will become ...


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