Emerson v. Mut. Fund Series Trust

393 F.Supp.3d 220

Roger EMERSON, Mary Emerson, Robert Caplin and Martha J. Goodlett, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

v.MUTUAL FUND SERIES TRUST, Catalyst Capital Advisors LLC, Northern Lights Distributors LLC, Jerry Szilagyi, Tobias Caldwell, Tiberiu Weisz, Bert Pariser, and Erik Naviloff, Defendants.

2:17-cv-02565 (ADS)(GRB)

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

Signed June 25, 2019

Robbins Geller Rudman & Dowd, LLP, Attorneys for Co-Lead Plaintiffs the Folk Group and Plaintiffs Roger Emerson, Mary Emerson, Robert Caplin and Martha J. Goodlett, 58 South Service Road Suite 200, Melville, NY 11747, By: David Avi Rosenfeld, Esq., Samuel H. Rudman, Esq., Evan Jay Kaufman, Esq., William John Geddish, Esq., Of Counsel.

Labaton Sucharow & Rudoff LLP, Attorneys for Co-Lead Plaintiff Jeffrey Berkowitz, 100 Park Avenue 12th Flr., New York, NY 10017, By: Christopher Joseph Keller, Esq., James W. Johnson, Esq., Michael H. Rogers, Esq., Francis P. McConville, Esq., John Julian Esmay, Esq., Of Counsel.

Levi & Korsinsky, LLP, Attorneys for Catalyst Futures Fund Investor Group Plaintiffs, 1111 Summer Street Suite 403, Stamford, CT 06905, By: Shannon Lee Hopkins, Esq., Of Counsel.

Rosen Law Firm, P.A. P.C., Attorneys for the Farmers Group Plaintiffs, 275 Madison Avenue Suite 3400, New York, NY 10116, By: Philip Kim, Esq.

Lazare Potter Giacovas & Moyle LLP, Attorneys for Defendant Mutual Fund Series Trust, Catalyst Capital Advisors LLC, Jerry Szilagyi, and Erik Naviloff 875 Third Avenue, 28th Floor, New York, NY 10022, By: James F. Moyle, Esq., Jacob Ari Englander, Esq., Of Counsel.

Goodwin Procter LLP,, Attorneys for Northern Lights Distributors LLC, 620 8th Ave, New York, NY 10018, By: Elizabeth S. David, Esq., Mark Holland, Esq., Of Counsel.

Blank Rome LLP, Attorneys for Defendants Tobias Caldwell, Tiberiu Weisz and Bert Pariser, 405 Lexington Avenue, New York, NY 10174-0208, By: Michelle Gitlitz Courtney, Esq., Of Counsel.

MEMORANDUM OF DECISION & ORDER

SPATT, District Judge:

On April 28, 2017, the Plaintiffs brought this putative class action on behalf of certain persons who purchased shares of the Catalyst Hedged Futures Strategy Fund (the "Fund") seeking to pursue remedies under the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77a et seq. , against the registrant for the Fund, certain of the Fund's executive officers and/or trustees, the investment advisor to the Fund, and the underwriter for the ongoing offering of Fund shares to the public.

Presently before the Court is a motion by the Defendants to dismiss the Amended Complaint for failure to state a claim upon which relief may be granted pursuant to Federal Rule of Civil Procedure ("Rule" or "Fed. R. Civ. P.") 12(b)(6).

For the following reasons, the Court grants the Defendants' motion to dismiss the Amended Complaint in its entirety and dismisses the Plaintiffs' claims with prejudice.

I. BACKGROUND

The Fund is an open-end mutual fund that invests in cash, and cash equivalents, such as high-quality short-term fixed income securities, and long and short call and put options on Standard & Poor's 500 Index ("S&P 500") futures contracts. The Plaintiffs allege that the Defendants sold shares of the Fund pursuant to misrepresentations in publicly filed registration statements and prospectuses that the Fund was a low-risk investment suitable for capital preservation in all market conditions. Contrary to these representations, the Fund purportedly made numerous highly speculative investments that exposed the Fund to potentially unlimited losses of capital in rising markets. Giving rise to this action, the Fund had a "melt down" when the S&P 500 experienced a steady and rapid increase in value during the first two weeks of February 2017.

A. THE PARTIES.

The Plaintiffs are a putative class of persons or entities who purchased or otherwise acquired shares of the Fund in continuous offerings pursuant to registration statements and prospectuses for the Fund filed on November 1, 2014, November 13, 2014, November 1, 2015, November 5, 2015, November 1, 2016, November 3, 2016, April 6, 2017 and April 13, 2017 (the "Relevant Period").

Defendant Mutual Fund Series Trust (the "Trust"), the Fund's registrant, is registered under the Investment Company Act of 1940 (the "ICA") as an open-end investment company with several investment funds marketed under the Catalyst brand.

Defendant Catalyst Capital Advisors LLC ("Catalyst Advisors") is the investment advisor for the Fund. Under the terms of a management agreement, Catalyst Advisors is responsible for formulating the Fund's investment policies, making ongoing investment decisions and engaging in portfolio transactions.

Defendant Northern Lights Distributors LLC (the "Distributor") is the principal underwriter and the national distributor for the shares of the Fund.

Defendant Jerry Szilagyi ("Szilagyi") was at all relevant times the Chairman of the Board of Trustees of the Fund, as well as the Fund's President and Principal Executive Officer. At all relevant times, Szilagyi was also the Chief Executive Officer and co-founder of Catalyst Advisors.

Defendants Tobias Caldwell ("Caldwell"), Tiberiu Weisz ("Weisz"), and Bert Pariser ("Pariser") were at all relevant times members of the Board of Trustees of the Fund.

Defendant Erik Naviloff ("Naviloff") was at all relevant times the Treasurer and Principal Financial Officer for the Fund.

Collectively, the Court will refer to Szilagyi, Caldwell, Weisz and Pariser as the "Trustee Defendants," and with Naviloff as the "Individual Defendants."

B. THE FUND AND RELEVANT OFFERING DOCUMENTS.

The Fund has three share classes, each sharing the same underlying portfolio of assets, but with each bearing different associated fees and expenses. All shares can be purchased at the Fund's net asset value, but Class A shares generally require buyers to pay an additional sales charge. Class A Shares (ticker "HFXAX") charged a maximum sales charge of 5.75%, a deferred sales charge of 1%, and annualized operating expenses of 2.35%; Class C Shares (ticker "HFXCX") charged annualized operating expenses of 3.10%; and Class I Shares (ticker "HFXIX") charged annualized operating expenses of 2.10%. Even though each class of shares experienced slightly different returns based on their varying expenses, all three classes were invested in and represented an interest in the same portfolio of assets during the Relevant Period.

The Fund operated as an open-ended mutual fund wherein shares of the Fund could be purchased only from the Trust in continuous, open-ended offerings pursuant to the Fund's registration statements. There was no secondary market for the Fund shares. At any time during the Relevant Period, investors could redeem their shares or purchase more shares from the Trust. Thus, each member of the putative class purchased shares of the Fund from the Trust pursuant to and traceable to the Fund's Registration Statements.

Throughout the Relevant Period, the Defendants annually filed nearly identical registration statements and prospectuses in connection with the continuous offerings of the Fund's shares. The Fund's shares were issued to investors pursuant to a series of registration statements and prospectuses that formed part of the registration statements filed with the Securities and Exchange Commission, which are referred to collectively herein as the "Registration Statements," including the following:

(a) Prospectus and Summary Prospectus dated November 1, 2014;

(b) Registration Statement dated November 13, 2014;

(c) Prospectus and Summary Prospectus dated November 1, 2015;

(d) Registration Statement dated November 5, 2015;

(e) Prospectus and Summary Prospectus dated November 1, 2016;

(f) Registration Statement dated November 3, 2016;

(g) Prospectus and Summary Prospectus dated April 6, 2017; and

(h) Registration Statement dated April 13, 2017.

The Prospectuses expressly incorporated by reference a Statement of Additional Information ("SAI") and the Fund's Annual Report for that year, each of which provided investors with additional guidance about, inter alia , the Fund's investment strategies and limitations. The Fund filed Annual Reports with the SEC on Form N-CSR dated September 9, 2015 and September 8, 2016. The Fund filed Semi-Annual Reports with the SEC on Form NCSRS dated March 11, 2015, March 10, 2016, and March 10, 2017, which were also incorporated into the Registration Statements by reference.

The Registration Statements referred investors seeking more information to the SAI, which "contain[ ] detailed information on Fund policies and operations." The defendants reissued and updated the SAIs throughout the Relevant Period. The Registration Statements directed investors to review the SAIs, Annual Reports and Semi-Annual Reports for additional information, including "management's discussion of market conditions and investment strategies." Disclosure of each Fund's complete holdings was required to be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. The Forms N-Q were also part of the Registration Statements. The following Forms N-Q, identifying the holdings of the Fund, were filed during the Relevant Period:

(a) Form N-Q dated December 1, 2014, relating to the period ending September 30, 2014;

(b) Form N-Q dated May 28, 2015, relating to the period ending March 31, 2015;

(c) Form N-Q dated November 27, 2015, relating to the period ending September 20, 2015;

(d) Form N-Q dated May 31, 2016, relating to the period ending March 31, 2016; and

(e) Form N-Q dated November 29, 2016, relating to the period ending September 30, 2016.

In addition, the Defendants periodically issued a Fund "Fact Sheet," which also solicited purchasers of Fund shares.

When discussing to the aforementioned documents as a collective, the Court will refer to them as the "Offering...