IN RE KINGATE MANAGEMENT LIMITED LITIGATION; CRITERIUM CAPITAL FUNDS B.V., BBF TRUST, WALL STREET SECURITIES, S.A., BANCA ARNER S.A., ALVARO CASTILLO, on behalf of themselves and all others similarly situated, EITHAN EPHRATI, ANDBANC, SILVANA WORLDWIDE CORPORATION, BG VALORES, S.A., JAQUES LAMAC, NITKEY HOLDINGS CORPORATION, Plaintiff-Appellants,
TREMONT (BERMUDA) LIMITED, GRAHAM H. COOK, JOHN E. EPPS, SANDRA MANZKE, FIM ADVISERS LLP, CHARLES SEBAH, KEITH R. BISH, CHRISTOPHER WETHERHILL, MICHAEL G. TANNENBAUM, TREMONT GROUP HOLDINGS, INCORPORATED, PRICEWATERHOUSECOOPERS LLP, Defendant-Appellees, LUCIEN GELDZAHLER, Plaintiff-Consolidated Defendant-Appellant, KINGATE MANAGEMENT LIMITED, FIM (USA) INCORPORATED, CITI HEDGE FUND SERVICES LTD., Defendant-Consolidated Defendant-Appellees, PRICEWATERHOUSECOOPERS BERMUDA, CARLO GROSSO, FIM LIMITED, FEDERICO M. CERETTI, Consolidated Defendant-Appellees, BERNARD L. MADOFF, PHILLIP A. EVANS, MARGARET EVERY, SHAZIEH SALAHUDDIN, JOHANN WONG, PRESTON M. DAVIS, BANK OF BERMUDA LIMITED, Defendants, PRICEWATERHOUSECOOPERS, ANDORRA BANC AGRICOL REIG S.A., on behalf of itself and on behalf of all others similarly situated, Consolidated Defendants
Argued: April 9, 2013.
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Plaintiffs appeal from the judgment of the United States District Court for the Southern District of New York (Batts, J.) dismissing their state law class action claims as precluded by the Securities Litigation Uniform Standards Act of 1998 (" SLUSA" ) and denying leave to re-plead as futile. The Court of Appeals (Leval, J.) holds that SLUSA's preclusion provisions apply only to state law class action claims that charge the defendant with the false conduct specified in SLUSA, quoted or paraphrased from the Securities Act of 1933 and the Securities Exchange Act of 1934. We VACATE the district court's judgment of dismissal and REMAND.
DAVID A. BARRETT (S. Douglas Bunch, Steven J. Toll, Lisa M. Mezzetti, Daniel S. Sommers, Joshua S. Devore, Cohen Milstein Sellers & Toll PLLC, New York, NY; David Boies, Boies, Schiller & Flexner LLP, Armonk, NY; Stuart H. Singer, Carl E. Goldfarb, James Grippando, Boies, Schiller & Flexner LLP, Ft. Lauderdale, FL, on the brief), Boies, Schiller & Flexner LLP, New York, NY, for Plaintiff-Appellants.
SETH M. SCHWARTZ, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendant-Appellees Tremont (Bermuda) Limited and Tremont Group Holdings, Inc.
HOWARD J. RUBIN (Bruce M. Ginsberg, on the brief), Davis & Gilbert LLP, New York, NY, for Defendant-Appellees Graham H. Cook, John E. Epps, and Charles D. Sebah.
CARMINE D. BOCCUZZI (David Y. Livshiz, on the brief) Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Defendant-Appellee Citi Hedge Fund Services, Ltd.
SANFORD M. LITVACK (Dennis H. Tracey, III, Lisa J. Fried, on the brief), Hogan Lovells U.S. LLP, New York, NY, for Defendant-Appellee PricewaterhouseCoopers Bermuda.
JODI A. KLEINICK (Barry G. Sher, Mor Wetzler, on the brief), Paul Hastings LLP, New York, NY, for Defendant-Appellees FIM Advisers LLP, FIM Limited, FIM (USA), Inc., Carlo Grosso, and Federico H. Ceretti.
John Han, Jonathan D. Cogan, Carrie A. Tendler, Kobre & Kim LLP, New York, NY, for Defendant-Appellee Sandra Manzke.
Peter R. Chaffetz, Charles J. Scibetta, Erin E. Valentine, Chaffetz Lindsey LLP, New York, NY, for Defendant-Appellees Kingate Management Limited and Christopher Wetherhill.
Laura Grossfield Birger, Cooley LLP, New York, NY, for Defendant-Appellee Michael Tannenbaum. Michael S. Flynn, Michael P. Carroll, James H.R. Windels, Davis Polk & Wardwell LLP, New York, NY, for Defendant-Appellee PricewaterhouseCoopers LLP.
Before: KATZMANN, Chief Judge, LEVAL and HALL, Circuit Judges.
LEVAL, Circuit Judge :
In this appeal, we confront a number of textual ambiguities as to the scope of the Securities Litigation Uniform Standards Act of 1998 (" SLUSA" ), Pub. L. No. 105-353, § 101, 112 Stat. 3227 (1998), which bars the maintenance of certain state-law-based class actions alleging falsity in connection with transactions in categories of securities that the Act identifies as " covered securities." Plaintiffs appeal from the judgment of the United States District Court for the Southern District of New York (Batts, J. ), which dismissed their state-law class action claims as precluded by SLUSA, and denied leave to re-plead as futile.
The ambiguities of SLUSA that we confront in considering this appeal include, first, the relationship of the transaction in covered securities to the alleged false conduct, second, the relationship of the alleged false conduct to the state law theory of liability, and third, the relationship of the defendant to the alleged false conduct, necessary in each case to bring a state-law class action suit within the scope of SLUSA's prohibitions.
With respect to the first ambiguity regarding the relationship between the securities transaction and the false conduct, two court decisions made since this appeal was argued govern our consideration. First is the Supreme Court's ruling in Chadbourne & Parke LLP v. Troice, 134 S.Ct. 1058, 188 L.Ed.2d 88 (2014); second, a panel of this court recently interpreted the Chadbourne decision in In re Herald, 753 F.3d 110 (2d Cir. 2014) (" Herald II " ). Under Herald II, we conclude that the alleged fraud in the instant case is " in connection with the purchase or sale of a covered security" and thus qualifies to bring the case within SLUSA's prohibition (assuming SLUSA's other necessary elements are met). 15 U.S.C. § 78bb(f)(1).
The second and third issues are complicated in this case by the numerous distinct state law theories of liability asserted in the Complaint. Our analysis of the statute leads us to the conclusions that: i) state law claims that do not depend on false conduct are not within the scope of SLUSA, even if the complaint includes peripheral, inessential mentions of false conduct; and ii) claims accusing the defendant of complicity in the false conduct that gives rise to liability are subject to SLUSA's prohibition, while claims of false conduct in which the defendant is not alleged to have had any complicity are not.
The operative Amended Consolidated Class Action Complaint (the " Complaint" ), filed May 18, 2010, following Plaintiffs' voluntary
dismissal of their federal claims, asserts only claims under state law. It alleges the following facts.
Plaintiffs are individuals and entities, each of which purchased shares in Kingate Global Fund, Ltd. (" Kingate Global" ) and/or Kingate Euro Fund, Ltd. (" Kingate Euro" ) (collectively, the " Funds" ) and continued to hold their shares until the exposure in December 2008 of the Ponzi scheme operated by Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC (" BMIS" ), a broker-dealer founded and run by Madoff. The Madoff Ponzi scheme resulted in the loss of the great majority of the Funds' assets. The Complaint asserts a class action on behalf of all shareholders in the Funds (with the exception of Defendants and certain affiliates of Defendants) as of the time Madoff's fraud was exposed.
The Funds are open-ended investment companies organized and operating in the British Virgin Islands. Defendants are persons and entities that served in roles affiliated with the Funds, including officers, directors, and managers of the Funds (the " Managers" ), auditors (the " Auditors" ), a consultant (the " Consultant" ), and the Funds' administrator (" Administrator" ). The names and roles of the defendants in connection with the Funds are set forth in the margin.
Plaintiffs invested in the Funds by purchasing shares. It appears to be common ground in this appeal that the shares of the Funds are not " covered securities," as defined by SLUSA, so that if the applicability of SLUSA depends on the plaintiffs' purchase of those shares, SLUSA cannot apply. The plaintiffs' expectations, however, based on the declared intentions of the Funds, was that the Funds would invest in common stock of Standard & Poors (" S& P" ) 100 companies, listed on United States exchanges. The latter securities are " covered securities" under the terms of SLUSA.
The Funds operated as " feeder funds" for BMIS, meaning that the Funds delegated custody of the investments and all investment decisions and duties to Madoff and BMIS. Between March 1994 and December 10, 2008, Kingate Global gave BMIS $963.45 million to invest for its account. Between May 1, 2000, and December 10, 2008, Kingate Euro gave BMIS $767.44 million of its funds to invest for its account. During those periods, BMIS provided the Funds with periodic account statements. The statements purported to show purchases and sales for the Funds'
accounts of " covered securities" --common stock of major companies included in the S& P 100 Index, and of options on the S& P 100 Index. According to the account statements, those investments produced a continuous course of very substantial profits and growth, so that by November 30, 2008, the Funds' investments with BMIS had grown to a combined value of over $3 billion.
As was revealed in December 2008, however, the investments made by BMIS on behalf of the Funds turned out to be entirely fictitious. BMIS had made no purchases or sales of securities, and there were no profits or growth in its customers' accounts. Madoff had used the assets invested through BMIS either for his personal benefit or for distribution to account holders who demanded withdrawal of their investments. The Funds' investments through BMIS, which represented substantially all of the Funds' assets, were lost to Madoff's fraud.
Prior to the exposure of Madoff's scheme, the Funds, and the defendants speaking on their behalf, represented to their investors that the Funds' assets were being invested by an unnamed investment advisor, who was realizing substantial growth for the accounts of the Funds, using a trading strategy that involved purchasing S& P 100 stocks while concurrently selling call options and buying put options on the S& P 100 Index.
According to the allegations of the Complaint, in statements to investors, the Managers undertook obligations to evaluate and monitor the investment advisor, and the Auditors undertook obligations to audit the Funds' financial statements in accordance with established accounting principles. Each falsely represented to the Funds' investors from time to time (according to the allegations of the Complaint) that they had performed those obligations, when in fact they had not. The Administrator similarly undertook the obligation to determine the Funds' values and periodically made allegedly false representations to the Funds' investors of values that accorded with values reported by BMIS.
II. PROCEEDINGS BELOW
The Complaint asserts twenty-eight class action claims, each based on state common law. Some of the claims are based on false conduct; other claims are based on breach of other legal duties. The claims include fraud, constructive fraud, negligent misrepresentation, negligence, gross negligence, breach of contractual obligations, breach of fiduciary duties, constructive trust, mutual mistake, unjust enrichment, and aiding and abetting various aforementioned violations. Some of the numbered claims of the Complaint assert more than one theory of liability. We divide all of the allegations into five groups for purposes of analyzing SLUSA's application, with the understanding that certain counts of the Complaint may include allegations from more than one of these groups.
1. Group 1 consists of those allegations that predicate the named Defendants' liability on their own fraudulent misrepresentations and misleading omissions (i.e., those made with scienter), made in connection with the Funds' investments with Madoff in covered securities and with their oversight of these investments.
2. The allegations of Group 2 are similar to Group 1, with the exception that liability is premised on the named Defendants' negligent misrepresentations and omissions, rather than intentional misrepresentations and omissions.
3. The Group 3 allegations predicate liability on Defendants' aiding and abetting (rather than directly engaging in) the frauds underlying the Group 1 claims.
4. The allegations of Group 4 predicate liability on Defendants' breach of contractual, fiduciary, or tort-based duties owed to Plaintiffs, resulting in failure to detect the frauds of Madoff and BMIS.
5. The allegations of Group 5 seek compensation for fees paid to the named Defendants by the Funds on the grounds that those Defendants failed to perform the duties for which the fees were paid, or that the fees based on purported profits and values of the Funds were computed on the basis of inaccurate values.
Defendants moved for dismissal of the Complaint, on the grounds, inter alia, that the claims are all precluded by SLUSA. The district court agreed, finding essentially that each of the claims included false conduct in connection with transactions in covered securities. It dismissed the Complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. In re Kingate Mgmt. Ltd. Litig., No. 09 Civ. 5386, 2011 WL 1362106, at *9 (S.D.N.Y. Mar. 30, 2011) (" [T]he Court concludes that SLUSA bars Plaintiffs from pursuing any of their claims as a class in any state or federal court. Each of Plaintiffs' state law claims must be and hereby is DISMISSED." ). The district court also denied Plaintiffs' request for leave to re-plead their claims as futile. Id.
Plaintiffs brought this appeal.
Plaintiffs' principal contention on this appeal is that the district court erred in concluding that their claims are barred by SLUSA, which, as noted above, bars the
maintenance of certain state-law based class actions alleging falsity in connection with transactions in certain securities. The arguments presented require us to confront broad questions about the scope of SLUSA preclusion. We explore these questions in light of the sometimes ambiguous text, and the history and purpose of SLUSA.
A. Terms, History, and Purpose of SLUSA
SLUSA's broad, general terms are in some respects ambiguous, so that it is not always easy to understand whether SLUSA applies. Understanding the scope of SLUSA's applicability requires not only, as always, study of the words of the statute, but also, because of these ambiguities, an understanding of the prior ...