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Media Alerts - Trezziova v. Kohn--Second Circuit
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September 16, 2013
  Trezziova v. Kohn--Second Circuit
Headline: Second Circuit Holds that Plaintiffs' Madoff-Related State Law Class Action Claims Against JPMorgan Chase & Co. and the Bank of New York Mellon Corporation Are Precluded By the Securities Litigation Uniform Standards Act of 1998 ("SLUSA")

Area of Law: Securities

Issue Presented: Whether the plaintiffs' state law claims alleged a "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security" and were thus precluded by SLUSA.

Brief Summary: The plaintiffs, who represented various investors in foreign investment vehicles that had invested in Bernard L. Madoff Investment Securities ("Madoff Securities"), filed suit against JPMorgan Chase & Co. ("JP Morgan") and the Bank of New York Mellon Corporation ("BNY"), the banks at which Madoff Securities' accounts were held. They brought state law class action claims alleging that JPMorgan and BNY had known that Madoff Securities was violating its fiduciary duties and committing fraud, but did nothing because they wanted to continue collecting fees. The United States District Court for the Southern District of New York dismissed the claims against JPMorgan and BNY, holding that they were precluded by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), which was designed to ensure that class actions affecting the national securities market would be governed by federal securities law. The Second Circuit affirmed, explaining that SLUSA is "broadly worded" and that the allegations in the complaint were "more than sufficient to satisfy SLUSA's requirement that the complaint allege a 'misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.'" To read the full opinion, please visit: http://www.ca2.uscourts.gov/de...8c6698ef8a3/2/hilite/

Extended Summary: In 2008, a number of foreign investment corporations - Thema International Fund plc ("Thema"), Herald Fund SPC-Herald USA Segregated Portfolio One ("Herald SPC"), Herald (LUX) U.S. Absolute Return Fund ("Herald Lux"), and Primeo Select Fund and Primeo Executive Fund (together, "Primeo") - channeled funds from various investors to Bernard L. Madoff Investment Securities ("Madoff Securities"). It was estimated that Thema invested over $1 billion, while Herald SPC and Herald Lux invested approximately $1.5 billion and $225 million, respectively. Investors of the investment vehicles, unsurprisingly, suffered substantial losses when the Madoff Ponzi scheme was exposed.

Repex Ventures S.A., an investor in Herald Lux, filed a state law-based class action lawsuit in the Southern District of New York. Once other investors began to file similar claims against the foreign corporations, the district court consolidated the actions and appointed lead plaintiffs for each group of investors. Neville Seymour Davis was appointed lead plaintiff for the proposed class of Thema investors, Repex Ventures for the proposed class of Herald investors, and Schmuel Cabilly for the proposed class of Primeo investors. Davis and Repex filed amended class action complaints and later named Dana Trezziova, an investor in Herald SPC, as co-plaintiff. Davis, Repex, and Trezziova filed suit against a number of defendants in addition to the investment corporations, among which were managers and directors of the corporations, members of the Madoff family, and JPMorgan and BNY, where the Madoff Securities' accounts were held. The allegations against the foreign investment companies centered on the theme that they had not performed any independent investment selection or management, instead funneling the investments to Madoff Securities in exchange for fees. As to JPMorgan and BNY, the plaintiffs alleged that these banks had possessed actual knowledge that Madoff Securities was violating its fiduciary duties and committing fraud, but did nothing, choosing instead to ensure their own profits.

The district court ultimately dismissed the claims against all of the defendants. Second Circuit affirmed most of these dismissals in a summary order, see http://www.ca2.uscourts.gov/de...04d09ef973e/1/hilite/, and wrote a separate opinion affirming the dismissal of the claims against JPMorgan and BNY.

In its opinion, the Second Circuit explained that in an effort to combat "abusive and
extortionate securities class actions," Congress passed the Private Securities Litigation Reform Act (the "PSLRA"), 15 U.S.C. §§ 77z - 1, 78u - 4, in 1995. The PSLRA established more stringent pleading requirements for those securities fraud class actions filed in federal courts, and plaintiffs subsequently began filing their suits in state court to avoid compliance with the PSLRA. In response, in 1998 Congress enacted SLUSA, which provided that no action "based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging . . . a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1). Section 18(b) of the Securities Act of 1933 defines a "covered security" as one that is "listed, or authorized for listing, on the national exchanges" or has been "issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940." 15 U.S.C. § 77r(b).
The Second Circuit agreed with the district court that SLUSA applied to the plaintiffs' claims against JPMorgan and BNY, rejecting the arguments of Trezziova and Davis refuted that their investments with the foreign corporations were independent of Madoff Securities' transactions. The Second Circuit emphasized that the plaintiffs' complaints against the banks were "predicated...on the banks' relationship with, and alleged assistance to, Madoff Securities' Ponzi scheme, which indisputably engaged in purported investments in covered securities on U.S. exchanges." Furthermore, the plaintiffs' intentional or unintentional avoidance of explicit securities fraud language did not successfully shield their claim from SLUSA's requirements. In sum, the Second Circuit concluded that the plaintiffs were alleging a "misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security," and that SLUSA therefore applied.


Panel: Circuit Judges Parker and Carney; District Judge Rakoff, sitting by designation.

Argument Date: 04/05/2013

Date of Issued Opinion: 09/16/2013

Docket Number: No. 12‐156‐cv (L), 12‐162 (Con.)

Decided: Affirmed.

Case Alert Author: Amanda Zefi

Counsel: Francis A. Bottini, Jr., Chapin Fitzgerald Sullivan & Bottini LLP, San Diego, CA, for Plaintiff-Appellant Neville Seymour Davis. Timothy Joseph Burke, Stull, Stull & Brody, Beverly Hills, CA, for Plaintiff-Appellant Dana Trezziova. Susan L. Saltzstein, Skadden ARps, Slate, Meagher, & Flom, LLP, New York, NY, for Defendant-Appellee UniCredit S.p.A. Michael E. Wiles, Debevoise & Plimpton LLP, New York, NY, for Defendants-Appelles Alberto Benbassat, Stephane Benbassat, Genevalor, Benbassat & Cie, Gerald J.P. Brady, Daniel Morrissey, David T. Smith, Thema Asset Management Limited, and Thema International Fund plc. Thomas J. Moloney, Cleary Gottlieb Steen & Hamilton LLP, New York, NY, Defendants-Appellees HSBC Holdings plc, HSBC Securities Services (Ireland) Limited, HSBC Institutional Trust Services (Ireland) Limited, and HSBC Securities Securities (Luxembourg) S.A., Patricia M. Hynes, Allen & Overy LLP, New York, NY, for Defendant-Appellee JP Morgan Chase & Co., Thomas G. Rafferty, for Defendant-Appellee PriceWaterhouse Coopers (Dublin).

Author of Opinion: Judge Rakoff

Case Alert Circuit Supervisor: Professor Emily Gold Waldman

    Posted By: Emily Waldman @ 09/16/2013 04:04 PM     2nd Circuit  

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