Plaintiffs Prevail in Madoff/ERISA Actions’ Motions to Dismiss
U.S. District Judge Thomas P. Griesa recently issued two important decisions striking down defendants’ motions to dismiss plaintiffs’ claims brought under the Employee Retirement Income Security Act of 1974 (“ERISA”) in connection with defendants’ roles as sub-feeder funds to the infamous Ponzi scheme orchestrated by Bernard L. Madoff.
In the Meridian class action, lead plaintiff Pension Trust Fund for Operating Engineers filed ERISA claims, among others, against Meridian Capital Partners, Inc. and others on its own behalf and on behalf of similarly situated multi-employer pension plans governed by ERISA who purchased or held shares in the Meridian Diversified ERISA Fund, Ltd. Meridian Diversified ERISA Fund, Ltd. made a significant investment in the Rye Select Broad Market XL Portfolio Ltd., which was managed by Tremont Partners, Inc. and served as one of the feeder funds for Bernard L. Madoff. Lead plaintiff alleged that, unbeknownst to the class, defendants had invested a significant portion of Rye Select funds into Madoff-managed investments that failed to align with defendants’ marketed due diligence, risk management and manager vetting procedures, and violated defendants’ fiduciary duties under ERISA.
Because lead plaintiff and the class were ERISA plans and named fiduciaries of those plans, the assets invested with defendants were deemed “plan assets.” By the funds holding plan assets, those who controlled the funds were considered functional fiduciaries with attendant duties and liabilities. The litigation team at Robbins Geller, led by David A. Rosenfeld and John K. Grant, successfully argued that defendants deliberately breached their duty of prudence by way of their “unawareness of, or blindness to,” the red flags raised by Madoff’s fraud. Judge Griesa wrote that “[t]he ERISA prudence standard is one of the highest duties known to the law,” and further noted that had defendants completed any of their purported due diligence and risk management, they would have or “should have been aware [that Madoff was managing the money under his scheme] and other red flags which should have set off alarms and made defendants question their investment.”
In the Austin Capital class action, lead plaintiffs Pension Trust Fund for Operating Engineers, Sheet Metal Workers’ National Pension Fund and International Brotherhood of Teamsters Local 705 Pension Fund represent a class of pension plans and other institutional investors that invested in hedge funds controlled by Austin Capital Management Ltd. Austin Capital, in turn, forwarded the investments to Rye Select Broad Market Prime Fund, LP (“Rye Select Prime Fund”), managed by Tremont Partners. The Rye Select Prime Fund was, in turn, invested with Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC. Once Madoff’s fraud was exposed, Austin Capital’s entire investment in the Rye Select Prime Fund was lost.
Similar to Meridian, lead plaintiffs in Austin Capital, who are represented by Robbins Geller and co-counsel, were able to successfully allege defendants’ breaches of fiduciary duties under ERISA. Specifically, defendants consistently misrepresented the extent of the due diligence that they had undertaken. As aptly stated by Judge Griesa, defendants’ actions raise “a significant doubt about whether defendants employed the appropriate methods to inform themselves before making the decision to invest in the Rye Select Prime Fund.”
As a result of the lead plaintiffs’ successful opposition to defendants’ motions to dismiss, both cases will proceed to discovery. According to Robbins Geller partner David A. Rosenfeld, “The hallmark of ERISA is to provide pension funds with significant protective measures and safeguards. Schemes like Madoff’s provide the quintessential example of why ERISA laws must be given teeth in order to adequately protect pension funds and their members.” John K. Grant, a partner at Robbins Geller, added that “these outstanding results are a testament to the firm’s capacity to protect fund assets in ERISA matters.”
In re Austin Capital Mgmt., Ltd., Sec. & ERISA Litig., No. 09-md-2075, 2012 U.S. Dist. LEXIS 181489 (S.D.N.Y. Dec. 21, 2012).
In re Meridian Funds Grp. Sec. & ERISA Litig., 917 F. Supp. 2d 231 (S.D.N.Y. 2013).