Anwar v. Fairfield Greenwich Ltd.

728 F.Supp.2d 372

Pasha S. ANWAR, et al., Plaintiffs,
v.
FAIRFIELD GREENWICH LTD., et al., Defendants.

No. 09 Civ. 0118 (VM).

United States District Court,
S.D. New York.

Aug. 18, 2010.

David A. Barrett, Boies, Schiller & Flexner, LLP, Christopher Lovell, Victor E. Stewart, Jody Krisiloff, Lovell Stewart Halebian Jacobson LLP,

James Abram Harrod, III, Carl Lester Stine, Chet Barry Waldman, James Abram Harrod, III, Robert Craig Finkel, Wolf Popper LLP, Robert Alan Wallner, Jean Lee, Kent Andrew Bronson, Kristi Stahnke McGregor, Robert Alan Wallner, Milberg LLP, William M. O'Connor, Crowell & Moring LLP, Brian Dale Graifman, David Alan Gehn, Gusrae, Kaplan, Bruno & Nusbaum, PLLC, David A. Barrett, Boies, Schiller & Flexner, LLP, Jody Krisiloff, Lovell Stewart Halebian Jacobson LLP, Catherine A. Torrell, Cohen Milstein Sellers & Toll P.L.L.C., Daniel W. Krasner, Demet Basar, Gregory Mark Nespole, Wolf Haldenstein Adler Freeman & Herz LLP, Hillary Sobel, Jeffrey Charles Zwerling, Robert S. Schachter, Stephanie Elizabeth Kirwan, Richard A. Speirs, Zwerling, Schachter & Zwerling, David J. Molton, Martin S. Siegel, Brown Rudnick LLP, Joseph Emanuel Neuhaus, Sullivan and Cromwell, LLP, New York, NY, Sashi Bach Boruchow, Stuart Harold Singer, Boies, Schiller & Flexner LLP, Fort Lauderdale, FL, Matthew W. Cheney, Crowell & Moring LLP, Daniel S. Sommers, Joshua Seth Devore, Steven Jeffrey Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, Paul Edouard Dans, Rivero Mestre & Castro, Jeffrey F. D. Bogert, Bogert & Rembold, P.L., Laurence Edward Curran, III, Curran & Associates, Coral Gables, FL, David Alan Rothstein, Jeffrey Brett Kaplan, Lorenz Michel Pruss, Dimond Kaplan & Rothstein, Coconut Grove, FL, Robert E. Linkin, Dimond Kaplan & Rothstein, PA, Richard E. Brodsky, The Brodsky Law Firm, Miami, FL, Michael Jules Aguirre, Aguirre, Morris & Severson LLP, San Diego, CA, for Plaintiffs.

Abn Amro Life S.A., pro se.

Mark Geoffrey Cunha, Michael Joseph Chepiga, Paige Elizabeth Fleming, Paul Jacob Sirkis, Peter Eric Kazanoff, Sara Ann Ricciardi, Simpson Thacher & Bartlett LLP, Glenn Kurtz, White & Case LLP, Andrew J. Levander, David Scott Hoffner, Dechert, LLP, Adam K. Grant, Daniel R. Benson, Daniel J. Fetterman, Marc E. Kasowitz, Kasowitz, Benson, Torres & Friedman, LLP, Helen Virginia Cantwell, Mark P. Goodman, Debevoise & Plimpton, LLP, Eliot Lauer, Curtis, Mallet-Prevost, Colt & Mosle, LLP, Mindy M. Yu, Kirkland & Ellis LLP, Gabrielle Sean Marshall, Sarah Loomis Cave, William R. Maguire, Hughes Hubbard & Reed LLP, Lawrence P. Eagel, Bragar, Wexler & Eagel, P.C., Stephen Lee Weinstein, Eiseman, Levine, Lehrhaupt & Kakoyiannis, P.C., Glenn Kurtz, White & Case LLP, Edward M. Spiro, Robert James Anello, Claudio Godinez Roumainochoa, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., Peter Eric Kazanoff, Simpson Thacher & Bartlett LLP, Steven Wolowitz, Mayer Brown LLP, Michael Joseph Moscato, Timothy Neil McCabe, Curtis, Mallet-Prevost, Colt & Mosle, LLP, Jonathan David Cogan, Michael Sangyun Kim, Kobre & Kim LLP, David J. Molton, Martin S. Siegel, Brown Rudnick LLP, Jack Yoskowitz, Seward & Kissel LLP, Anne K. Small, Wilmerhale, Brad Eric Konstandt, Fraser Lee Hunter, Jr., Howard M. Shapiro, Wilmer Cutler Pickering Hale & Dorr, L.L.P., Michael Joseph Chepiga, Simpson Thacher & Bartlett LLP, Kenneth A. Zitter, Law Offices of Kenneth A. Zitter, Claudio Godinez Roumainochoa, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., Sharon L. Nelles, Allison Caffarone, Bradley Paul Smith, Sullivan & Cromwell, LLP, Patrick Barrett Berarducci, Sullivan & Cromwell, LLP, New York, NY, Jennie Boehm Krasner, Dechert, LLP, Princeton, NJ, Amanda McGovern, Dyanne Eyce Feinberg, Elizabeth A. Izquierdo, Lewis Nathan Brown, Terence Michael Mullen, Gilbride Heller & Brown P.A., Ricardo Alejandro Gonzalez, Greenberg Traurig, P.A., Hilarie Bass, Ricardo Alejandro Gonzalez, Greenberg Traurig, P.A., Miami, FL, Matthew Buckley,

Amy E. Crawford, Brenton Rogers, Emily Nicklin, Kirkland & Ellis LLP, Timothy A. Duffy, Kirkland & Ellis LLP, Chicago, IL, Diane Lee McGimsey, Sullivan and Cromwell LLP, Los Angeles, CA, for Defendants.

Arjan Mohandas Bhatia, pro se.

Parasram Daryani, pro se.

Neelam P. Daryani, pro se.

Vikas P. Daryani, pro se.

Nikesh P. Daryani, pro se.

Ashokkumar Damodardas Raipancholia, pro se.

Dilip Damodardas Raipancholia, pro se.

Rajeshkumar Damodardas Raipancholia, pro se.

Kishu Nathurmal Uttamchandani, pro se.

Prerna Vinod Uttamchandani, pro se.

Rajendrakumar Patel, pro se.

Vandna Patel, pro se.

Kishin Mohandas Bhatia, pro se.

Suresh M. Bhatia, pro se.

Bharat Mohandas, pro se.

Aarvee Ltd., pro se.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

TABLE OF CONTENTS

I.	INTRODUCTION	387
II.	BACKGROUND	387

A.	THE FAIRFIELD GREENWICH FUNDS	387
B.	THE FUNDS AND MADOFF	389
C.	FGG'S FALSE STATEMENTS AND OMISSIONS	390
D.	RED FLAGS	391
E.	FEES PAID TO FGG	392
F.	CITCO	392
G.	GLOBEOP	394
H.	PRICEWATERHOUSECOOPERS	395

1.	Clean Audits	395
2.	Relationship with Plaintiffs	396
3.	Risks	396

III.

DISCUSSION

397

A.

THRESHOLD ISSUES COMMON TO ALL DEFENDANTS

397

1.	SLUSA	397
2.	Choice of Law	399
3.	Standing	400
4.	Martin Act	402

B.	FAILURE TO STATE A CLAIM	402
C.	FAIRFIELD GREENWICH DEFENDANTS	403

1.	FGG	403
2.	Securities Fraud Claims	404

a.	Application of Morrison	404
b.	Group Pleading	405
c.	Scienter	406
d.	Causation	411
e.	Section 20(a)	412

3.

Common Law Claims

414

a.	Fraud	414
b.	Gross Negligence	414
c.	Breach of Fiduciary Duty	415
d.	Negligent Misrepresentation	416
e.	Third-Party Breach of Contract	417
f.	Constructive Trust	419
g.	Mutual Mistake	420
h.	Unjust Enrichment	421

D.

ADMINISTRATORS AND CUSTODIANS

421

1.

Citco Defendants

421

a.	Rule 8(a)	422
b.	Federal Securities Claims	423

i.

Section 10(b) and Rule 10b-5 Claim Against Administrators

423

A.	Scienter	423
B.	Reliance	424

ii.

Section 20(a) Claim against Citco Group

425

A.	Control	425
B.	Culpable Participation	427

iii.

Statute of Limitations

428

c.

Third-Party Beneficiary Breach of Contract

428

i.	Administration Agreements	429
ii.	Custody Agreements	431

d.

Negligence, Gross Negligence, and Negligent Misrepresentation

431

i.	Duty of Care	432
ii.	Citco Group Secondary Liability	435
iii.	Gross Negligence	436

e.

Breach of Fiduciary Duty

437

i.	Individual Defendants	438
ii.	Citco Defendants	440

f.	Aiding and Abetting Breach of Fiduciary Duty and Fraud	442
g.	Unjust Enrichment	443
h.	Holder Claims	443

i.

Statute of Limitations

445

2.

GlobeOp

446

a.	Supervening Cause	446
b.	Fiduciary Duty	446
c.	Negligence and Gross Negligence	448

E.

AUDITORS

449

1.

Federal Securities Law Claims Against the PwC Member Firms

449

a.

Scienter

449

i.	Legal Standard for Accountants	449
ii.	The PwC Member Firms' Conscious Recklessness	449

A.	Professional Standards	450
B.	Red Flags	451

iii.

Plausible Opposing Inference

453

b.

Section 20(a) Claim Against PwC International

454

2.

Common Law Claims

454

a.	Gross Negligence	454
b.	Negligence and Negligent Misrepresentation	454

i.

Duty of Care

454

A.	Awareness That the Financial Reports Were to Be Used for a Particular Purpose	455
B.	Intention for a Known Party to Rely on the Financial Reports	455
C.	Linking Conduct Evincing the Accountants' Understanding of Plaintiffs' Reliance	456

c.	Breach of Contract	457
d.	Aiding and Abetting a Breach of Fiduciary Duty and Fraud	458
e.	Unjust Enrichment	458
f.	Vicarious Liability	458

i.	Control of the Audits	459
ii.	General Control	459

g.

Statute of Limitations

461

F.

LEAVE TO REPLEAD

461

IV.

ORDER

462

I. INTRODUCTION

This lawsuit is a putative class action on behalf of individuals and entities (collectively, "Plaintiffs") who invested large sums of money in four funds founded and operated by the Fairfield Greenwich Group ("FGG"). The overwhelming majority of Plaintiffs' money was in turn invested in the Ponzi scheme operated by Bernard Madoff ("Madoff") under the auspices of Bernard L. Madoff Investment Securities, Inc. ("BMIS"), and for which Madoff was sentenced to 150 years in prison following his guilty plea. See United States v. Madoff, No. 09 Cr. 0213, S.D.N.Y. June 29, 2009. Plaintiffs are now suing a number of Fairfield Greenwich entities, executives, and other professional service providers who audited, administered, or served as custodian of the funds. The Second Consolidated Amended Complaint, filed September 29, 2009 (the "SCAC"), alleges violations of federal securities law and common law tort, breach of contract and quasi-contract causes of action. FGG and numerous co-defendants (collectively, "Defendants") move to dismiss the SCAC in its entirety, asserting defenses grounded in federal and state law.

Because of the breadth of issues raised in Defendants' various submissions, the Court considers their motions in two separate rulings. The first Decision and Order (" Anwar I ") was issued July 29, 2010, and addressed a discrete issue arising solely under New York state law. See Anwar v. Fairfield Greenwich Ltd., 09 Civ. 0118, 728 F.Supp.2d 354, 2010 WL 3022848 (S.D.N.Y. July 29, 2010). This Decision and Order, to be referred to as " Anwar II," considers a host of arguments made by Defendants that all of Plaintiffs' claims should be dismissed.¹

II. BACKGROUND ²

A. THE FAIRFIELD GREENWICH FUNDS

The facts in this case are relatively straightforward; the complications arise in attempting to comprehend and dissect FGG's corporate structuring, an intricate

tangle of entities with, as alleged in the SCAC, connections of various strength to New York, Florida, Delaware, Bermuda, the United Kingdom, the Cayman Islands, and the British Virgin Islands. ( See SCAC ¶¶ 118, 120, 122, 141, 172, 173, 121, 130, 139, 143, 118, 170, 171.) This structure is comprised of, as alleged and pertinent to the motions to dismiss at hand, corporate entities that all apparently existed to accomplish the same task-managing funds invested almost exclusively with Bernard Madoff. Those entities, in addition to FGG, are Fairfield Greenwich Advisors LCC ("FGA"), Fairfield Greenwich Ltd. ("FGL"), and three wholly-owned FGL subsidiaries: Fairfield Greenwich (Bermuda) Ltd. ("FGBL"), Fairfield Risk Services Ltd. ("FRS"), and Fairfield...