In re Kingate Mgmt. Ltd.

IN RE KINGATE MANAGEMENT LTD. LITIGATION

This Document Relates To: All Actions

09-CV-5386 (DAB)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 21, 2016

OPINION

DEBORAH A. BATTS, United States District Judge.

Plaintiffs were investors in two "feeder funds," which channeled billions of dollars in investments through Bernard L. Madoff ("Madoff") into Bernard L. Madoff Investment Securities LLC ("BMIS"). After Madoff's Ponzi scheme was exposed in December 2008, all of the Funds' investments in BMIS, and thus the value of Plaintiffs' investments, were lost. Plaintiffs now assert common law claims of negligence, gross negligence, negligent misrepresentation, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, mutual mistake, third party breach of contract, constructive trust, and unjust enrichment against Defendants, who were managers, consultants, administrators, and auditors of the two Funds. After remand from the Second Circuit Court of Appeals, before the Court is a Joint Motion of All Defendants to Dismiss the Corrected Second Amended Consolidated Class Action Complaint ("Joint Motion to Dismiss").

Defendants move to dismiss on a number of grounds: (1) SLUSA precludes most of Plaintiff's claims, (2) the Court lacks personal jurisdiction over Citi Hedge, (3) Plaintiff's claims against the Managers, Consultants, and Manzke are time-barred, (4) the Court should abstain from jurisdiction based on comity (5) Plaintiffs lack standing to sue, and (6) the SAC fails to state any claim against the Defendants. For the reasons stated below, the Joint Motion to Dismiss is GRANTED in part and DENIED in part.

I. BACKGROUND

A. Factual Background

The following facts are drawn from the Corrected Second Amended Consolidated Class Action Complaint ("Second Amended Complaint" or "SAC"), and are assumed true for the purposes of the Joint Motion to Dismiss.

1. The Parties

Plaintiffs are institutional and individual investors in two funds, Kingate Global Fund, Ltd. ("Kingate Global") and Kingate Euro Fund, Ltd. ("Kingate Euro," together with Kingate Global, the "Funds"). All Plaintiffs are located or reside outside of the United States. (SAC ¶¶ 15-23.) Plaintiffs bring their claims on behalf of a putative class of "all persons or entities who owned shares of the Funds as of December 10, 2008,and were damaged thereby," excluding from the Class all Defendants and related persons and entities. (SAC ¶ 7.)

Defendants are the Funds' Bermuda-based managers, Kingate Management Limited ("KML") and Tremont (Bermuda) Limited ("Tremont") (collectively, the "Managers"); Tremont's United States-based corporate parent, Tremont Group Holdings, Inc. ("Tremont Group"); the Managers' U.K.-based consultant, FIM Limited, its successor-in-interest FIM Advisors LLP, and FIM (USA) Inc. ("FIM" or the "Consultant"); certain individual directors and officers of the Managers and the Consultant, Carlo Grosso, Frederico M. Ceretti, Sandra Manzke, and Michael G. Tannenbaum;¹ the Funds' Bermuda-based administrator, Citi Hedge Fund Services, Ltd. ("Citi Hedge") (as successor-in-interest to the prior administrators of the Funds, BISYS Hedge Fund Services Limited and Hemisphere Management Limited); and PricewaterhouseCoopers Bermuda, which was the Bermuda auditor of the Funds ("PwC Bermuda").

2. The Funds and Investment with BMIS

Kingate Global was established in February 1994, and began selling shares on March 1, 1995. (SAC ¶ 39.) Kingate Euro wasestablished in April 2000 and commenced operations on May 1, 2000. (SAC ¶ 40.) Both of the Funds were organized and operated in the British Virgin Islands. (SAC ¶¶ 39-40.) Beginning on March 2, 1994, Kingate Global maintained an account with BMIS. (SAC ¶ 39(b).) Kingate Euro also maintained an account with BMIS. (SAC ¶ 40(c).)² Until 2008, "substantially all" of the Funds' assets were invested in BMIS. (SAC ¶ 39(a), 40(a).) Between March 1994 and December 10, 2008, Kingate Global invested $963.45 million with BMIS. (SAC ¶ 54.) From April 2000 through December 10, 2008, Kingate Euro invested $767.44 million with BMIS. (Id.) As of November 2008, the Funds' investments with BMIS were purportedly worth over $3 billion. (Id.)

As is now well known, Madoff purportedly used a "split-strike conversion" strategy to manage invested assets, including those belonging to the Funds. However, the purported growth of and profits on assets invested with BMIS was entirely fictitious.³ When Madoff's Ponzi scheme was exposed in December2008, the Funds' investments in BMIS, and thus the Plaintiffs' shares in the Funds, became worthless. Both Funds are currently in liquidation proceedings in the Eastern Caribbean Supreme Court in the High Court of Justice of the British Virgin Islands. (SAC ¶ 42.) The Funds' Joint Liquidators are litigating claims on behalf of the Funds against KML, FIM Limited, FIM Advisers LLP, Grosso, Ceretti, and PwC in Bermuda. (Barrett Decl. Exs. 4-7.)

3. Offering Documents and Service Agreements

1. Information Memoranda and Subscription Agreements

In order to purchase shares in the Funds, every investor (or "subscriber") signed a Subscription Agreement ("SA"). The Subscription Agreement required that the investor make certain representations and warranties, including that the investor was a "professional investor," defined as either "an institution whose ordinary business or professional activity includes the buying and selling of investments," a "natural person [whose] individual net worth, or joint net worth with his/her spouse exceeds U.S. $1 million," or an institution with at least $5 million in assets. (SAC Ex. 1, at S-8.) The SA also required the investor to certify that it "possesses requisite knowledge and experience in financial matters such that it is capable of evaluating the merits and risks of an investment in the Fund(including without limitation, the ability to suffer a complete loss of the investment . . .)" and "is and will be able to bear the economic risks of its investment in the Shares." (Id. at S-9.) The SA also contemplated that the investor consulted with its own attorney, accountant or investment advisor about the potential investment. (Id. at (j).)

The SA contains a provision entitled "Waiver of Statute of Limitations" which reads, in relevant part:

Each investor in the Fund agrees to have waived, to the maximum extent permissible under the law, the right to bring any legal claim, action or other proceeding against the Fund, its Board of Directors and other officers unless such claim, action or proceeding is commenced within six (6) months from the date of the first to occur of (i) the original occurrence allegedly giving rise to such claim, action or proceeding, or (ii) the Shareholder's redemption of any Shares.

(SAC Ex. 1, at S-11.)

The SA also states that the "Subscriber agrees when entering into the Agreement to be bound by the laws of the BVI and in addition to the non-exclusive jurisdiction of the relevant courts therein subject to which laws this Agreement shall be governed and interpreted." (Id.)

Pursuant to the Subscription Agreement, each investor in each of the Funds received a copy of an Information Memorandum ("IM") upon purchase of shares in the Funds, and was required toacknowledge that the subscriber received, reviewed and understood the IM as a condition of buying shares. (SAC Ex. 1 at S-4.)⁴ The Information Memoranda detailed, inter alia, the investment process, the risks associated with investment, the roles and duties of the various parties associated with the Funds, and fees and expenses. (SAC ¶ 70; Kingate Global Fund, Ltd. Amended and Restated Information Memorandum, Oct. 6, 2008 ("Kingate Global IM"), SAC Ex. 1).

By the terms of each of the Memoranda, "no person [was] authorized . . . to give any information or make any representations [in connection with the offered securities] other than as contained" in the Memoranda. (Kingate Global IM.⁵) The IM also advised that the shares in the Funds "are not for sale to U.S. persons or to any member of the public in the British Virgin Islands." (Id.) Each Information Memorandum further advised investors that "[n]o person has been authorized to make any representations concerning the Fund or the . . . Shares which are inconsistent with those contained in this Memorandum, and any such representations should accordingly be treated as unauthorized and may not be relied upon by therecipient." (Id.⁶) The IM identified KML, FIM Advisers, and Citi Hedge as the Manager, Consultant, and Administrator, respectively, and explained that each was retained pursuant to a separate agreement. (Kingate Global IM at ii-iii.) The Management, Consultant, and Administration Agreements were made available to the investors at the Administrator's office. (Id. at 32.)

The IM listed Defendant Tannenbaum as a partner and director of the Managers. (Id. at 13.) As to the Managers' responsibilities, the IM stated, in pertinent part:

Pursuant to the Manager Agreement, the Manager evaluates and monitors the Investment Advisor and, in general, provides all necessary management services to the Fund.

. . .

Pursuant to the terms of the Manager Agreement, the Manager has agreed (i) to manage all aspects of the investment advisory services provided to the Fund, including the selection and evaluation of the Investment Advisor.

(Kingate Global IM at ii, 13; SAC ¶ 70.)

The Information Memoranda did not identify Madoff by name, but described the Investment Advisor as a "New York based NASD registered broker-dealer employing approximately 350 people and acting primarily as a market-maker in listed and unlisted stocksand convertible securities." (SAC ¶ 53; Kingate Global IM at 14.)

In the section entitled "Certain Risk Factors," the IM stated, in relevant part:

The Manager has delegated all investment management duties with regard to USD Shares to the Investment Advisor. As a result, the success of the Fund for the foreseeable future will

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