Anwar v. Fairfield Greenwich Ltd., 2009 WL 5103234, *1+ (S.D.N.Y. Dec 23, 2009) (NO. 09 CIV. 0118, 09 CIV. 5012, 09 CIV. 2366, 09 CIV. 5650, 09 CIV. 2588)
In this consolidated derivative action, a New York federal magistrate judge recommended to remand the action to state court holding that securities litigation is not a mass action to be treated as class action, thus not removable under CAFA.
The plaintiffs brought numerous derivative actions against the defendants, Fairfield Greenwich Group, Fairfield Greenwich Limited, Fairfield Greenwich (Bermuda) Ltd., and Fairfield Greenwich Advisors LLC, following the defendants’ financial losses in connection with the widely-publicized fraudulent scheme perpetrated by Bernard L. Madoff.
Madoffshocked the global financial community when he confessed to running a multibillion dollar Ponzi scheme through his investment firm, Bernard L. Madoff Investment Securities, LLC (“BLMIS”). According to reports, Madoff systematically reported fictional assets and profits to investors in BLMIS; when earlier investors sought to collect their “profits,” Madoff simply paid them out of the capital received from newer investors. Essentially, BLMIS was worth nothing more than the paper on which Madoff prepared his monthly statements to investors.
Among Madoff’s largest victims were Greenwich Sentry, L.P. (“GS”), its successor, Greenwich Sentry Partners, L.P. (“GSP”), and Fairfield Sentry Limited (“FSL,” together with GS and GSP, the “Funds”), investment funds within the penumbra of the defendant Fairfield Greenwich Group. The Fairfield Greenwich Group is a self-described “global family of companies” that offers a variety of single manager funds, multi-strategy funds, and fund-of-funds to investors. Simply put, GS, GSP, and FSL are corporate entities set up by the defendants as pooled investment vehicles, and the defendants are corporate entities that advised, managed and maintained them.
All of this is enough to make your head spin. Don’t worry, it gets more complicated.
The defendants, in their role as investment manager of the Funds, directed all or almost all of the capital invested in the Funds – some billions of dollars – to BLMIS for investment. When BLMIS was exposed as a Ponzi scheme, the Funds, and, in turn, the investors in the Funds, lost virtually all of their investments. The defendants, however, had for years received management and performance fees in connection with these investments which, among other things, the plaintiffs now sought to recover under various tort and contract theories.
The plaintiffs in the Ferber action are two limited partners of GS, who commenced a derivative action in state court. The Ferber action was brought in the name of and for the benefit of Greenwich Sentry and its Limited Partners. The plaintiff in Pierce is a limited partner of GSP, who commenced a derivative action in state court several days later, on February 17, 2009. The Pierce action was similarly brought in the name of and for the benefit of Greenwich Sentry Partners and its Limited Partners. The plaintiffs in Morning Mist are two shareholders of FSL, a British Virgin Islands Company, who commenced a derivative action in state court on May 15, 2009. The Morning Mist action was brought “in the name of and for the benefit of Fairfield Sentry.” Finally, FSL – the plaintiff in the Sentry action – commenced a direct action to recover in excess of $919 million in investment management and performance fees that FSL paid the defendants based on inflated net asset value reports derived from FSL’s investments with BLMIS and C&M Trading.
See, I told you it got worse.
The defendants removed each of these actions to the federal court pursuant to CAFA. The plaintiffs subsequently moved to remand the actions to state court, arguing that these actions did not meet CAFA’s requirements.
The magistrate judge observed that the question of whether a derivative action – in this case Ferber, Pierce, and the Morning Mist – brought on behalf of a corporation or partnership in which there were over 100 investors qualified as a ‘mass action’ under CAFA was a matter of first impression in the court.
To reach CAFA’s 100 plaintiffs requirement, the defendants focused on the 700 shareholders of FSL in the Morning Mist action. The magistrate judge observed that the reach of CAFA simply did not extend to include the investors and the investors in investors and so on and so forth. Therefore, the magistrate judge declined to adopt the defendants’ expansive approach.
The magistrate judge noted that CAFA’s legislative history made it very clear that Congress envisioned ‘mass actions’ as claims by multiple plaintiffs ‘consolidated by State court rules,’ but not otherwise pled as class actions. The magistrate judge, however, noted that the defendants conceded that individual investors in the Funds have no right to bring a direct action, and therefore, a derivative action is maintainable, and rejected the contention that derivative actions, specifically, a securities litigation matter, was a mass action.
The defendants next claimed that Sentry was essentially an action to recover losses on behalf of the shareholders of the Fund. A direct action by a plaintiff corporation or other business enterprise, alleging harm to it by a defendant, is an action that belongs exclusively to the corporation. Therefore, the magistrate judge concluded that the defendants’ “unremarkable averment” that FSL has more than 700 shareholders was insufficient to support removal of the direct claims in Sentry.