Cromer Finance Ltd. v. Berger

137 F.Supp.2d 452

CROMER FINANCE LTD. and Prival N.V., et al., Plaintiffs, v. Michael BERGER, Fund Administration Services (Bermuda) Ltd., Ernst & Young International, Ernst & Young Bermuda, Kempe & Whittle Associates Limited, Deloitte & Touche (Bermuda), Deloitte Touche Tohmatsu, Deloitte & Touche L.L.P., Bear Stearns & Co., Inc., Bear Stearns Securities Corp., Financial Asset Management, Inc., and John Does 1-100, Defendants.

ARGOS et al., Plaintiffs, v. Michael BERGER, Financial Asset Management, Inc., Fund Administration Services (Bermuda) Ltd., Ernst & Young International, Deloitte Touche, Deloitte Touche Tohmatsu, Deloitte & Touche L.L.P., Bear Stearns & Co., Inc., and Bear Stearns Securities Corp., Defendants.

No. 00 CIV. 2284(DLC).

No. 00 CIV. 2498 (DLVC).

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

April 17, 2001.

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Richard L. Stone, Jeffrey H. Squire, Mark A. Strauss, Kriby, McInerney & Squire, LLP, New York City, for Plaintiffs Cromer Finance, Ltd. et al.

Steven S. Honigman, Richard P. Swanson, Jonathan E. Polonsky, Veronica E. Rendon, Alexandera Khlyavich (admission pending), Thelen Reid & Priest LLP, New York City, for Plaintiffs Cromer Finance, Ltd. et al.

Steven E. Greenbaum, Scott M. Berman, Berlack, Israels & Liberman LLP, New York City, for Plaintiffs Argos et al.

Daniel J. Kramer, Harry S. Davis, Adam J. Freedman, Schulte Roth & Zabel LLP, New York City, for Defendants Bear Stearns Securities Corp. and Bear Stearns & Co., Inc.

Gregg L. Weiner, Fried, Frank, Harris, Shriver & Jacobson, New York City, for Defendants Fund Administration Services (Bermuda), Ltd., Kempe & Whittle Associates Limited, and Ernst & Young Bermuda.

Richard A. Martin, Manuel A. Mercader, Heller Ehrman White & McAuliffe LLP, New York City, for Defendant Ernst & Young International.

Michael J. Dell, Gregory Horowitz, Susan D. Hawkins, Kramer Levin Naftalis & Frankel LLP, New York City, for Defendant Deloitte & Touche Bermuda.

John T. Behrendt, Mark B. Holton, Gibson, Dunn & Crutcher LLP, New York City, for Deloitte Touche Tohmatsu.

Timothy P. Harkness, Davis Polk & Wardwell, New York City, for Defendant Deloitte & Touche LLP.

Martin I. Kaminsky, Edward T. McDermott, Pollack & Kaminsky, New York City, for Defendant Financial Asset Management, Inc.

Roger Marting, Circleville, OH, for Defendant Financial Asset Management, Inc.

OPINION AND ORDER

COTE, District Judge.

These actions arise from alleged violations of the federal securities laws as well as related state law claims. Plaintiffs Cromer Finance Ltd. ("Cromer") and Prival N.V. ("Prival") (collectively, the "Cromer Plaintiffs") filed a class action complaint on March 24, 2000. Plaintiffs in the Argos action (collectively, the "Argos Plaintiffs") filed a complaint on April 3, 2000. The cases were accepted by this Court as related to SEC v. Berger, 00 Civ. 333.

The plaintiffs were investors in an offshore investment fund managed from New York by Michael Berger ("Berger"). That fund traded United States securities, and the plaintiffs allege enormous losses based on Berger's fraudulent management of the fund. They have sued, among others, the Bermuda accounting firms that served as the fund's administrators or auditors, as well as American and international affiliates of those Bermuda entities. All of the defendants except Berger have moved to dismiss the complaints in these two actions.¹ The affiliates of the Bermuda accounting firms do not contest that there is personal jurisdiction over them, but they do deny any involvement with Berger's fund or the fraud and contend that they have been sued in a search for "deeper pockets." The Bermuda entities argue, among other things, that there is neither subject matter jurisdiction over the claims against them nor personal jurisdiction over them individually.

The motions to dismiss by the affiliates of the Bermuda entities, as well as the United States clearing broker for the fund's trading, are granted. In brief, there are insufficient allegations that these defendants knew of or assisted in the alleged fraud. Each of the many theories asserted by the plaintiffs to impose derivative liability on them for the alleged misdeeds of Berger and the Bermuda-based entities fail. In addition, certain claims against one of the Bermuda-based fund administrators is dismissed as barred by the statute of limitations, and for other reasons. The remaining motions to dismiss the Cromer action are largely denied. In particular, the Court concludes it has both subject matter and personal jurisdiction over the Bermuda-based defendants. The parties shall have ten days in which to notify the Court why the analysis in this Opinion does not resolve the motions to dismiss the claims in the Argos Complaint as well.

BACKGROUND²

This lawsuit is brought as a securities class action on behalf of purchasers of securities of the Manhattan Investment Fund, Ltd. ("Fund") during the class period, defined as October 1, 1995, through January 18, 2000. As a result of the defendants' conduct, plaintiffs³ and Class members have allegedly suffered damages of approximately $400,000,000.

The facts alleged in the Complaint include the following. Berger, a 28 year-old investment manager, established the Fund as an "open end investment company" in or about December 1995, under the laws of the British Virgin Islands. The Fund was designed for foreign investors and United States tax-exempt investors (e.g., pension funds and trusts). Through his wholly-owned company, Manhattan Capital Management, Inc. ("MCM"), Berger served as the investment manager and advisor for the Fund. The Fund had no offices, employees or operations of its own. Berger made investment decisions at MCM's offices in New York, and all of the Fund's assets were held in custody in New York by defendants Bear Stearns & Co., Inc. and Bear Stearns Securities Corp. (collectively, "Bear Stearns"), an investment bank and registered broker dealer.⁴

According to its confidential offering memorandum ("Offer Memo"), the Fund's investment objective was to "achieve capital appreciation, consistent with the preservation of capital" by investing "primarily in highly liquid listed issues." The Offer Memo informed investors that the Fund's investment technique included "short-selling" as well as the use of "leverage" or "margin."⁵ It also explained that the Fund's administration services were provided by "Fund Administration Services (Bermuda) Limited, an affiliate of Ernst & Young International" or "Kempe & Whittle Associates Limited, an affiliate of Ernst & Young International," and that the Fund had retained "Deloitte & Touche" at a Bermuda address, as independent auditors.⁶ The plaintiffs contend that defendants Ernst & Young International ("EYI"), Ernst & Young Bermuda ("EYB"), Kempe & Whittle Associates Ltd. ("K & W"), and Fund Administration Services (Bermuda) Ltd. ("FASB") held themselves out and functioned as "a single, unified company that performed administrative services on behalf of the Fund." Likewise, the plaintiffs allege that defendants Deloitte & Touche (Bermuda) ("DTB"), Deloitte Touche Tohmatsu ("DTT"), and Deloitte & Touche LLP ("DTUS") functioned as a "unified, multinational accounting firm" in this case.

The Fund commenced trading operations in or about Spring 1996, with an investment strategy that primarily involved the "concentrated short selling of securities of United States technology companies, including Internet companies, on the theory that those companies were trading at over-valued prices and were due for a correction." After an initial offering at $100 per share, with a minimum investment of 250 shares, the Fund offered its shares at a net asset value ("NAV") computed "to the penny" and determined on the basis of the listed prices on major securities exchanges of the securities held by the Fund. The NAV was calculated by EYB, K & W, and later FASB, on a monthly basis, based on daily, monthly, and yearly statements prepared by Bear Stearns. As sole custodian of the Fund's assets, Bear Stearns cleared all securities transactions. While Berger utilized many brokers, Bear Stearns was the only broker to extend margin credit in connection with the clearing and settlement of the Fund's trades. As of January 2000, the Fund had more than 200 investor accounts.

Berger utilized defendant Financial Asset Management, Inc. ("FAM") as an "introducing broker" which cleared all of its trades through Bear Stearns. Berger and FAM shared office space in New York, and the Complaint alleges that FAM collected "substantial commission income" as a result of its role in the Fund.

The Fraud

The plaintiffs allege that the fraudulent scheme began almost immediately after the Fund began trading operations in or about Spring 1996. According to the Bear Stearns monthly account statements and daily trading reports, Berger began losing money on a regular basis from the Fund's inception.⁷ Rather than accurately reporting these losses, Berger created "fictitious monthly account statements, purportedly in the name of FAM, which showed profitable performance for the Fund." These actions continued until early 2000, when Berger, after the United States Securities and Exchange Commission ("SEC") had initiated an investigation of the Fund, released a statement admitting to the fraud.

1. Involvement of Bear Stearns

Plaintiffs allege that Bear Stearns: (1) extended margin credit to the Fund which comprised "atypical, extraordinary and non-routine financing transactions" and exceeded the margin regulations established by the FED, NYSE, and Bear Stearns' own rules discussed above, and (2) tipped certain investors with whom Bear Stearns had social or business relationships as to the Fund's problems. As a result of these...