United States District Court, S.D. New York
SAPIRSTEIN-STONE-WEISS FOUNDATION and IRVING I. STONE FOUNDATION, Plaintiffs,
J. EZRA MERKIN and GABRIEL CAPITAL CORPORATION, Defendants
For Sapirstein-Stone-Weiss Foundation, a charitable foundation, Irving I. Stone Foundation, a charitable foundation, Plaintiffs: David Edgar Bamberger, Brickman & Bamberger, New York, NY.
For J. Ezra Merkin, Gabriel Capital Corporation, Defendants: Kristina Arlene Moon, Dechert, LLP (NYC), New York, NY.
DECISION AND ORDER
VICTOR MARRERO, United States District Judge.
Plaintiffs Sapirstein-Stone-Weiss Foundation (" SSWF" ) and Irving I. Stone Foundation (" IISF," and collectively with SSWF the " Plaintiffs" ) filed the complaint in this action against Defendants J. Ezra Merkin (" Merkin" ) and Gabriel Capital Corporation (" GCC," and collectively with Merkin the " Defendants" ) alleging a variety of claims under New York common law including Breach of Fiduciary Duty, Fraud, Negligent Misrepresentation, Breach of Contract, Breach of Implied Obligation of Good Faith and Fair Dealing, Negligence, and Unjust Enrichment (the " Complaint" ). (Dkt. No. 1.) Defendants filed a timely Motion to Dismiss the Complaint. (Dkt. Nos. 7-8.) Plaintiffs filed their response (Dkt. Nos. 11-18) and Defendants filed a reply. (Dkt. No. 21.) For the reasons discussed below, Defendants' motion to dismiss is GRANTED in part and DENIED in part.
This case arises out of Plaintiffs' investments in Ariel Fund Limited (" Ariel" ), a Cayman Islands hedge fund. GCC is a Delaware corporation that serves as Ariel's investment advisor. Merkin is the sole shareholder and sole director of GCC.
A. PLAINTIFFS' INVESTMENTS IN ARIEL
In 2001, SSWF invested $1 million in shares of Ariel. In 2006, IISF invested $750,000 in shares of Ariel. Over the ensuing years, Defendants invested an increasing percentage of Plaintiffs' investments in Ariel in the Ponzi scheme operated by Bernard Madoff (" Madoff" ) under the auspices of Bernard L. Madoff Investment Securities, Inc. (" BMIS" ). On December 10, 2008, Madoff admitted to running the largest Ponzi scheme in history and was sentenced to 150 years in prison in June 2009 following his guilty plea. See
United States v. Madoff, No. 09 Cr. 213 (S.D.N.Y. June 29, 2009). At the time that the Madoff fraud was revealed, Defendants had entrusted to Madoff at least twenty-five percent of the investment capital of the Ariel Fund.
B. ALLEGED MISREPRESENTATIONS AND COMMISSIONS
The Complaint alleges that Defendants made various materially false and misleading statements and/or omissions relating to Plaintiffs' investments in Ariel. Specifically, Plaintiffs claim that Defendants improperly misrepresented and/or failed to disclose Merkin's role in managing Ariel, Ariel's investments in Madoff, and the true nature of Ariel's investment strategy. Plaintiffs point to the Offering Memoranda, Subscription Agreements, and related documents (collectively, the " Governing Documents" ) distributed by Defendants, in addition to quarterly performance letters (" Quarterly Letters" ) and various other representations or statements made by Defendants to Plaintiffs.
For example, Plaintiffs allege that the Governing Documents and Quarterly Letters contained various omissions and misrepresentations relating to the nature of Ariel's investments and strategies. According to the 1996 Offering Memorandum, Ariel represented that its investment strategies consisted of risk arbitrage and investments in distressed securities. In the 2006 Offering Memorandum, Ariel represented that its investment strategies consisted of risk arbitrage, investments in distressed securities, and private equity. The 2006 Offering Memorandum further represented that Morgan Stanley was Ariel's sole broker and that Morgan Stanley cleared all transactions for Ariel placed by other brokers. In the Quarterly Letters, Defendants also listed the various asset classes in which Ariel was invested.
According to Plaintiffs, the Governing Documents and Quarterly Letters were false and/or misleading because, while they purported to set forth the nature and strategies of Ariel's investments, they never disclosed either that Ariel was invested in Madoff or that a portion of the assets were being invested pursuant to the " split strike conversion" strategy employed by Madoff. Plaintiffs claim that, regardless of whether the Governing Documents permitted Defendants to delegate funds to third-party managers such as Madoff, Defendants' alleged failure to disclose Ariel's investments with Madoff, in addition to various affirmative misrepresentations - such as the fact that Morgan Stanley cleared all transactions, which Plaintiffs assert was a conscious misrepresentation because Madoff infamously self-cleared all transactions - violated the contractual and common law duties Defendants owed to Plaintiffs.
C. ARIEL'S FAILURE TO CONDUCT DUE DILLIGENCE
Plaintiffs also claim that Defendants' failure to conduct due diligence on Ariel's investments with Madoff was unreasonable and violated the contractual and common law duties Defendants owed to Plaintiffs.
Specifically, Plaintiffs point to Defendants' admitted failure to conduct any formal due diligence on Ariel's investments with Madoff despite a number of alleged " red flags" that Plaintiffs assert should have put Defendants on notice of Madoff's fraud, or at the least, ...