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Matana v. Merkin

United States District Court, S.D. New York

July 30, 2013

KEREN MATANA, Plaintiff,

As Amended August 1, 2013.

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For Keren Matana, a not-for-profit entity, Plaintiff: David Edgar Bamberger, Brickman & Bamberger, New York, NY.

For J. Ezra Merkin, Gabriel Capital Corporation, Defendants: Andrew J. Levander, Neil A. Steiner, LEAD ATTORNEYS, Daphne T Ha, Diane Nicole Princ, Dechert, LLP (NYC), New York, NY.


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Paul A. Engelmayer, United States District Judge.

Plaintiff Keren Matana (" KM" ) brings this action against defendants J. Ezra Merkin and Gabriel Capital Corporation (" GCC" ) (collectively, " defendants" ). KM invested $1.5 million in Ascot Fund Limited (" Ascot Fund" ), an off-shore hedge fund managed by Merkin and GCC. Ascot Fund, in turn, invested substantially all of its assets with Bernard Madoff. KM's investment was wiped out following the revelation that Madoff was operating a massive Ponzi scheme. KM now brings state law claims of fraud, breach of fiduciary duty, breach of the duty of good faith and fair dealing, gross negligence, and unjust enrichment.

Presently before the Court are two motions. Defendants move to dismiss the Complaint, and KM moves to strike several documents relied on by defendants in support of their motion. For the reasons stated, defendants' motion is granted, and KM's motion is granted in part and denied in part.

I. Background[1]

A. The Parties and Relevant Entities

KM is a not-for-profit organization formed under the laws of the state of Israel. Compl. ¶ ¶ 1, 25. GCC, formerly known as Ariel Management Corporation, is a Delaware corporation. Id . ¶ ¶ 1, 31. At all relevant times, Merkin owned 100% of the capital stock of GCC and exercised control over its operations and over the investment funds that GCC advised, including Ascot Fund. Id . GCC also advised Gabriel Capital L.P. (" Gabriel Fund" ), a Delaware limited partnership, and Ariel Fund Limited (" Ariel Fund" ), an off-shore entity that made parallel investments to Gabriel Fund. Id . ¶ ¶ 16, 51. Gabriel Fund and Ariel Fund also had significant exposure to Madoff. Id . ¶ 20.

Ascot Fund--the relevant entity here--is an off-shore hedge fund based in the Cayman Islands. It originally made parallel investments to those of Ascot Partners, L.P. (" Ascot Partners" ), a domestic limited partnership, of which Merkin was the general partner. Id . ¶ ¶ 7, 14. According to its February 1996 Prospectus, Ascot Fund was engaged in three different market-neutral arbitrage strategies designed to take advantage of price discrepancies among related securities. Id . ¶ 14 (citing 1996 Prospectus, at 1). The Complaint alleges, however, that this was untrue: Ascot Fund actually had a single strategy of

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entrusting all of its assets to Madoff, who acted as the sole broker, manager, and custodian of Ascot Fund's assets. Id . ¶ 14. The Complaint alleges that Madoff had been managing 98-100% of Ascot Fund's assets since 2001, and had been managing at least 88% of Ascot Fund's assets since 1992. Id . Ascot Fund was formed " solely to batch the accounts which [Merkin] had introduced to Madoff and to continue to charge [a] 1% [management] fee on them." Id . ¶ 48. On January 1, 2003, Ascot Fund was reorganized into a " master-feeder" structure, whereby it would simply invest all of its assets in Ascot Partners. Id . ¶ 18; see also 2003 Prospectus, at 1, 4.

B. KM's Investments

On October 1, 2002, KM invested $1 million in Ascot Fund. Compl. ¶ 26. The Complaint alleges that KM made this investment based on Ascot Fund's offering materials--specifically the 1996 Prospectus, see id . Ex. B. On January 1, 2004, KM invested another $500,000 in Ascot Fund. Id . ¶ 27. The Complaint alleges that this investment was based on a December 2002 Offering Memorandum. Id .[2] The Complaint alleges that KM also made these investments based on Merkin's reputation and oral representations, and the performance history of Merkin's funds. Id . ¶ ¶ 26-27.

After Madoff's fraud was exposed, the value of Ascot Partners', and thus Ascot Fund's, investments with Madoff was wiped out; KM lost $1.5 million. Id . ¶ 19.

C. Alleged Misrepresentations

The Complaint alleges that Merkin and GCC made numerous misrepresentations to their investors. These included misrepresenting the strategies that outside money managers might pursue and failing to exercise sufficient care in selecting those managers ( i.e., Madoff). Id . ¶ ¶ 17, 98(a)-(e), (h). The Complaint further alleges that Merkin and GCC falsely represented that the success of Ascot Fund was dependent on Merkin and his expertise, see id . ¶ ¶ 50, 98(f), when in fact Merkin was simply funneling investors' money to Madoff to invest, see id . ¶ ¶ 20, 58-59, 77. Merkin also allegedly falsely represented that transactions for Ascot Fund accounts would be executed over a registered options exchange. Id . ¶ 98(g), (i).

Although Merkin represented that he would perform due diligence on any outside managers with whom he invested, the Complaint alleges that Merkin did not do so. Id . ¶ ¶ 17, 21. Rather, it alleges that Merkin knew that Madoff did not permit investors to perform due diligence, id., rebuffed potential investors who sought to inquire about Madoff's operation, id . ¶ 72, and lacked a formal due diligence team, id . ¶ ¶ 74-75. These failings were especially egregious, the Complaint alleges, in light of the fact that Merkin was a " fund-of-funds" manager. Merkin therefore added little value to his investors other than by performing due diligence on the funds in which he invested. Id . ¶ 59.

The Complaint alleges that Merkin was warned about Madoff, id . ¶ 60, that other investors were suspicious of Madoff's performance, id . ¶ ¶ 64-65, and that Merkin ignored numerous red flags that should have alerted him to Madoff's fraud, id . ¶ 66. These red flags included: (1) that Madoff acted as his own custodian of securities; (2) that he did not charge management

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fees or performance incentives; (3) that he refused to explain his strategy in any detail; (4) that he had a track record so successful as to be unprecedented; (5) that he used a tiny auditing firm; (6) that he relied on private, over-the-counter options; and many others. See id .

In sum, the Complaint alleges numerous material misrepresentations in Ascot Fund's February 1996 Prospectus, see id . ¶ 98(a)--(j); numerous material misrepresentations made in the December 2002 Offering Memorandum, see id . ¶ 98(a)--(i); and numerous material omissions in these offering memoranda, see id . ¶ ¶ 99, 100(A)--(M). Additionally, the Complaint alleges that defendants induced KM to retain its investments in Ascot Fund by sending a " stream of quarterly letters to investors which painted a completely misleading picture of Merkin as a manager." Id . ¶ 101. The letters referenced by KM were dated July 1999; October 17, 2003; April 20, 2007; January 20, 2008; and July 21, 2008. Id .

D. Ascot Fund's Disclaimers

The offering materials provided to KM included certain disclaimers and cautionary language. For instance, the 1996 Prospectus cautioned that GCC " may delegate investment discretion for all or a portion of the assets of the Fund to money managers, other than [GCC]. . . . Although [GCC] will exercise reasonable care in selecting such independent money managers . . . [GCC] may not have custody over the funds invested with other money managers." 1996 Prospectus, at 9; accord 2002 Offering Memorandum, at 6; 2003 Prospectus, at 7. The 1996 Prospectus warned that GCC could engage outside managers " without prior notice to or consent of the shareholders" and that " [t]he success of the Fund is also dependent upon any investment advisors to Other Investment Entities." 1996 Prospectus, at 5; accord 2002 Offering Memorandum, at 5, 6; 2003 Prospectus, at 5.

E. Related Litigation

Two separate lawsuits--one brought by the New York Attorney General (" NYAG" ), the other an investor class action--are relevant to this motion. As explained below, KM invokes both lawsuits in the course of arguing that the statute of limitations governing its claims was tolled and has not expired. The Court, accordingly, briefly summarizes those lawsuits here.

The NYAG's Martin Act Lawsuit: The NYAG's lawsuit was brought in April 2009 under the Martin Act against Merkin and GCC, on behalf of investors in Merkin's funds, including Ascot Fund. Compl. ¶ 12; see also People v. Merkin , 26 Misc.3d 1237[A], 907 N.Y.S.2d 439, 2010 N.Y. Slip Op 50430[U] (1st Dep't 2010) (denying defendants' motion to dismiss). The NYAG has reached a settlement with the defendants in that litigation. Compl. ¶ 12. However, the Complaint alleges that, under that settlement agreement, Merkin retains the discretion to prevent parties from participating in the settlement under certain circumstances.[3] Id . The Complaint alleges that Merkin has exercised that discretion here to exclude KM from that settlement, see id., because of the actions of Benjamin Jesselson, one of the principals of KM, see id . ¶ ¶ 1, 25. Jesselson, whose family had a history of friendship with the Merkin family, see id . ¶ ¶ 34-40, 84, had invested money from family trusts in both Ascot Partners and Gabriel Fund; those investments were also wiped out. Id . ¶ ¶ 11-12. Unlike KM, however, Jesselson had a contractual right

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to arbitrate disputes relating to his investments. Jesselson brought claims against Merkin and GCC pursuant to that arbitration agreement, and won a $1.5 million award (the " Jesselson Award" ). Id . ΒΆ 12. The Complaint alleges that Merkin's counsel has advised KM that KM will not be permitted to participate in the NYAG settlement unless ...

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