David I. Ferber SEP IRA v Fairfield Greenwich Group
Annotate this CaseDecided on July 22, 2010
Supreme Court, New York County
David I. Ferber SEP IRA, Plaintiff,
against
Fairfield Greenwich Group, et al., Defendants.
Frank E. Pierce, et al., Plaintiffs,
against
Fairfield Greenwich Group, et al. Defendants.
Morning Mist Holdings Limited, et al., Plaintiff,
against
Fairfield Greenwich Group, et al. Defendants.
Fairfield Sentry Limited, Plaintiff,
against
Fairfield Greenwich Group, et al. Defendants.
600469/2009
APPEARANCES:
Plaintiffs:
Millberg, LLP
Pennsylvania Plaza
New York, NY 10019
By:
Kent A. Bronson
Kristi Stahnke McGregorOne
Seeger Weiss LLP
One William Street
New York, New York 10004
By:
Stephen A. Weiss
James E. O'Brien III
Christopher M. Van de Kieft
Defendants:
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017
By:
Mark G. Cunha
Peter E. Kazanoff
Michael J. Chepiga
Bernard J. Fried, J.
Plaintiffs filed these actions following the arrest of Bernard Madoff in December 2008. These four actions have been consolidated for trial.
The first of these four actions, Ferber, is a derivative action that was commenced by one of the limited partners in Greenwich Sentry, L.P. in February 2009. Plaintiff David I. Ferber SEP IRA (Ferber) is a Limited Partner of Greenwich Sentry. The complaint alleges claims of breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the defendants, along with claims of professional negligence, breach of contract and negligent misrepresentation against the accounting firm defendants, referred to collectively [*2]as Pricewaterhouse.
Nominal defendant Greenwich Sentry (the Fund) allegedly describes itself as "a private investment limited partnership which seeks to obtain capital appreciation of its assets through utilization of a nontraditional options trading strategy described as a split strike conversion'." The Fund is allegedly a "feeder fund," which placed almost all of the monies invested in it by its Limited Partners with Bernard Madoff and his firm, Bernard L. Madoff Investment Securities, LLC (Madoff Investments).
Greenwich Sentry allegedly held approximately $220 million in assets at the time of Madoff's arrest in December 2008, of which most, or almost all, is alleged to have been invested with Madoff and Madoff Investments. Defendant Fairfield Greenwich Group (FGG) is alleged to be an umbrella company that was intimately involved with many aspects of the Fund's operations, acting in multiple capacities, as both agent and principal of the Fund. FGG, like many of the entity defendants (collectively, the Fund Defendants), is alleged to have been controlled by the same people who controlled the Fund. FGG and its other related entities allegedly marketed the Fund to investors and purported to conduct due diligence on behalf of he Fund. FGG is alleged to have posted, on its website, a letter to its investors, dated January 8, 2009, stating that as of November 1, 2008, FGG had total assets under management of approximately $14.1 billion, of which approximately $6.9 billion was invested in vehicles connected to Madoff Investments. Plaintiff alleges that nearly all of Greenwich Sentry's assets that were invested with Madoff Investments have been lost.
The Fund Defendants were allegedly paid management, incentive, and administrator fees amounting to hundreds of millions of dollars for their expertise and professional experience in selecting and monitoring fund managers. While allegedly touting their "higher level" of due diligence over their competitors, the Fund Defendants allegedly allowed Madoff and Madoff Investments' conduct to go unchecked, while allegedly issuing false reports to investors presenting nonexistent or highly inflated profits and collecting fees based on such fictitious profits.
The Fund Defendants are alleged to have breached their fiduciary duties and aided and abetted the breach of fiduciary duties to the Fund and the Limited Partners by failing to conduct adequate due diligence, by falsely claiming to have conducted due diligence, and by collecting hundreds of millions of dollars in fees based on fictitious assets and profits, by failing to accurately calculate the net asset value of the Fund, failing to maintain accurate financial books and records, and by failing to distribute accurate monthly reports to the Limited Partners, while collecting fees on inflated net asset value.
Pricewaterhouse, as the Fund's independent auditor, is alleged to have failed to perform its audits of the Fund in accordance with generally accepted auditing standards (GAAS), and to have issued false audit opinions.
The Pierce and Morning Mist actions are similar to Ferber in that each is a derivative action brought by a limited partner on behalf of the funds in which the partner had invested, and each is based on similar facts and circumstances as those alleged in the Ferber [*3]complaint.
The fourth action, Fairfield Sentry, is a direct action that was commenced on May 29, 2009, at the direction of the fund's board of directors. The Fairfield Sentry Fund alleges that it is the largest victim of the fraud perpetrated by Madoff and seeks in excess of $919 million in investment management and performance fees that were allegedly paid to the defendants based on allegedly inflated net asset value reports derived from its investments with Madoff Investments and other parties.
Plaintiff Fairfield Sentry alleges that it is in direct privity with a number of the defendants, which served as its investment adviser and risk manager from November 1990 through May 29, 2009. The defendants are alleged to have had fiduciary and contractual obligations to use their best efforts to perform the plaintiff's day-to-day investment activities and to supervise the activities of Madoff and Madoff Investments. Specifically, the defendants are alleged to have had an obligation to independently verify and examine the existence of trade and option hedging transactions reflected in the account statements and trade tickets that the defendants received from Madoff. Plaintiff alleges that it is in the best position to bring this action and that it has standing to assert direct claims against the defendants.
In previous proceedings, defendant Fairfield Greenwich Advisors LLC (FGA) removed these actions to federal court claiming that these were all class actions within the meaning of the Class Action Fairness Act of 2005 (CAFA). Codified in scattered sections of 28 USCA. Plaintiffs thereafter moved to remand these actions, which motion was granted in an order issued by United States District Judge Victor Marrero. Anwar v Fairfield Greenwich Ltd., 676 F Supp 2d 285 (SD NY Dec 23, 2009). This Anwar action is still pending in the District Court.
In an order filed on March 24, 2010, I stayed discovery pending oral argument on the motion to dismiss the second amended complaint in Anwar in the federal court. Defendants here move to stay the four consolidated actions until a decision on the pending federal court motion has been issued. See motion sequence No.003, Index No. 600469/2009; motion sequence #003, Index No. 600498/2009; motion sequence # 003, Index No. 601511/2009; and motion sequence #002, Index No. 601687/2009. (The second amended complaint in Anwar was filed on or about September 29, 2009.)
Plaintiffs in these state court actions, and in the direct Fairfield Sentry action in particular, claim that the disposition of the pending motion to dismiss in Anwar has no bearing on or relevance to the legal sufficiency or substantive merit of the claims in these actions since Anwar isa class action composed entirely of investors who did not have any privity with defendants.
Under CPLR 2201, a court may stay proceedings "in a proper case, upon such terms as may be just."
"It is only where the decision in one action will determine all the questions in the other
action, and the judgment on one trial will dispose of the controversy in both actions, that a [*4]case for a stay is presented. ... What is required is complete identity
of parties, cause of action and judgment sought."
Medical Malpractice Ins. Assn. v Methodist Hosp. of Brooklyn,
64 AD2d 558, 559 (1st Dept 1978) quoting Pierre Assoc. v Citizens Cas. Co. of NY, 32
AD2d 495, 497 (1st Dept 1969).
A stay is unwarranted where it "will only promote delay, not efficiency." Mt. McKinley Ins. Co. v Corning Inc.,
33 AD3d 51, 59 (1st Dept 2006).
A stay of an action can easily be a drastic remedy, on the simple basis that justice delayed is
justice denied. It should therefore be refused unless the proponent shows good cause for granting
it. Nothing but good cause would make for a "proper case". Some excellent reason would have to
be demonstrated before a judge is asked to bring to a halt a litigant's quest for a day in court.
Siegel, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR
C2201:7.The possibility that there might be two trials fails to provide a sufficient ground for
staying a case. Mt. McKinley Ins. Co. v Corning Inc., 33 AD3d at 59. Neither does the
fact that multiple suits may arise out of the same facts or transactions necessarily warrant a stay
where the suits involve different claimants or different claims. Bridgemarket Assoc. v City of
New York, 190 AD2d 561 (1st Dept 1993); see also Abrams v Xenon Indus., 145
AD2d 362 (1st Dept 1988) (stay denied despite the fact that the same fraudulent scheme was
alleged in both actions where there was not complete identity of parties or causes of action).
According to defendants, Anwar, a putative class action, was originally filed in New York State Supreme Court on December 19, 2008. The putative class members allegedly invested in one or more funds managed by the Fund Defendants, which in turn invested in Madoff Investments.
On January 7, 2009, Anwar was removed to the Southern District of New York, and over a dozen other related cases were subsequently filed, including these four state court actions. Plaintiffs' motion to remand these actions was thereafter granted. The plaintiffs in Anwar filed a second consolidated amended complaint on September 29, 2009. The Fund Defendants thereafter moved to dismiss the amended complaint, in the District Court, on December 22, 2009. Defendants seek a stay of these proceedings pending a decision on that motion to dismiss.
Defendants characterize the Pierce, Ferber, and Morning Mist actions, which are sub judice, as derivative actions that were all filed after Anwar was filed and removed to the District Court. Defendants argue that these state cases were commenced by a few individual investors in the respective funds, and that these funds are the same funds which are in issue in the Anwar litigation. The fourth case, Fairfield Sentry, was filed by the independent court-appointed liquidators of that fund, claim defendants.
Defendants state that all four state actions were consolidated by the District judge on a finding that the "complaints describe the same or substantially similar underlying events and operative facts, and assert claims arising out of the same or substantially similar actions [*5]against all or most of the same defendants." Defendants' Memorandum in Support, at 8. Defendants argue that the existence of overlapping issues and substantial identity of parties justifies the entry of a stay in this court. New York courts routinely stay state court cases in favor of a previously filed federal action where there are overlapping issues and common questions of law and fact, claim defendants, citing Asher v Abbot Labs. (307 AD2d 211 [1st Dept 2003]) and 2005 Tomchin Family Charitable Trust v Tremont Partners, Inc. (Index No. 600332/2009 [Sup Ct, New York County, 9/11/09] Lowe, J.). Defendants rely heavily on Justice Lowe's decision in Tomchin, where the court found that a stay of the state court proceedings was warranted in view of the fact that the parties were asserting derivative claims in both actions, and were seeking the same remedies based on similar allegations of alleged misconduct in the investing of a fund's assets with Bernard Madoff.
Tomchin is distinguishable from the present circumstances. Here, the plaintiffs in the state court actions are either the limited partners, suing derivatively on behalf of the funds they invested in, or the funds themselves. In Anwar, the plaintiffs are the individual shareholders who invested in the funds, and are allegedly so numerous that class action status is being sought. In each of the eight causes of action in the state proceedings, plaintiffs are seeking damages on behalf of the funds, or on behalf of the limited partners in their derivative capacities. In the 33 causes of action asserted in Anwar, plaintiffs are seeking to recover damages on a variety of theories, some of which overlap with the state court claims. However, all of these District Court claims anticipate that any recovery will ultimately be paid directly to the putative class members . Although the claims in these actions and in Anwar arise from similar facts and involve many of the same defendants, these similarities do not provide a sufficient reason to further delay these plaintiffs' day in court.
Defendants refer to language in the District judge's order of consolidation, which held that the complaints in these actions and in Anwar described the same or substantially similar underlying events and operative facts and arose out of the same or substantially similar actions against most of the same defendants. Defendants fail to acknowledge the language in the subsequently issued Report and Recommendations of the United States Magistrate Judge, Theodore H. Katz, which were adopted in their entirety by the District Judge. Defendants were trying to convince the Magistrate Judge "to look beyond the derivative nature of Ferber, Pierce and Morning Mist, and count each of the beneficial equity holders' in the Funds as individual plaintiffs in a larger mass action'" for purposes of satisfying the jurisdictional pleading requirements under the Class Action Fairness Act (CAFA). Anwar v Fairfield Greenwich Ltd., 676 F Supp 2d at 294 (SD NY 2009). In order to meet the requirement of 100 plaintiffs to qualify for federal CAFA jurisdiction, defendants asked the Magistrate Judge to count "investors in investors in investors" as individual plaintiffs in these derivative actions. In deciding the jurisdictional issue, a case of first impression, the Magistrate Judge held that CAFA does not extend as far as defendants urged, declining to adopt defendants' "astoundingly expansive approach." Anwar, at 295.
In the present cases, defendants urge me to disregard the plaintiffs' identity as limited [*6]liability companies in order to draw the conclusion that these plaintiffs and the individual class plaintiffs in Anwar are one and the same. Defendants here attempt to redefine the plaintiffs' legal identity for purposes of a stay, just as they attempted to redefine the meaning of an investor in Anwar, in an effort to come within the numerosity requirement under CAFA. Defendants should not be permitted to deny plaintiffs their chosen forum.
Defendants argue that a decision on a motion to dismiss in Anwar will either moot or preclude the claims for relief in this action. However, plaintiffs convincingly argue that neither result will follow.
Due to the substantial difference between the identity of the plaintiffs in these cases and those in Anwar, there is no purpose to be served by awaiting further action from the federal district court. Consequently, the temporary stay is lifted, and these actions shall continue.
Accordingly, it is
ORDERED that the temporary stay of these actions is vacated; and it is further
ORDERED that motion sequence #003, Index No. 600469/2009; motion sequence #003, Index No. 600498/2009; motion sequence # 003, Index No. 601511/2009; and motion sequence #002, Index No. 601687/2009, are denied; and it is further
ORDERED that the parties are directed to appear before the undersigned, in Room 248, on
October 1, 2010 at 9:30 a.m. for a Conference.
Dated:_______________________
ENTER:
__________________________________
J.S.C.
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