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David B. Newman, Et Al. V. Family Management Corporation, Et Al. 08

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David B. Newman, Et Al. V. Family Management Corporation, Et Al. 08 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK DAVID B. NEWMAN and IRA FM/0 DAVID NEWMAN- PERSHING LLC as Custodian, on behalf of themselves and all 08 Civ. 11215 Others Similarly Situated, and Derivatively on behalf of FM LOW VOLATILITY FUND, L.P., JURY TRIAL DEMANDED Plaintiffs, V. c.r)(7) . ; FAMILY MANAGEMENT CORPORATION, -0 SEYMOUR W. ZISES, ANDREA L. TESSLER, ANDOVER ASSOCIATES LLC I, c ANDOVER ASSOCIATES MANAGEMENT cn CORP., BEACON ASSOCIATES LLC I, BEACON ASSOCIATES MANAGEMENT CORP., JOEL DANZIGER, HARRIS MARKHOFF, MAXAM ABSOLUTE RETURN FUND, LP, MAXAM CAPITAL MANAGEMENT LLC, MAXAM CAPITAL GP, LLC, MAXAM CAPITAL MANAGEMENT LIMITED, and SANDRA MANZKE, Defendants, and FM LOW VOLATILITY FUND, L.P., Nominal Defendant. FIRST AMENDED CLASS ACTION AND DERIVATIVE COMPLAINT Plaintiffs David B. Newman and IRA F/B/O David Newman, Pershing LLC as Custodian, of which David B. Newman is the owner ("Newman IRA") (together, "Plaintiffs"), on behalf of themselves and the Class (defined below), and on behalf of the Nominal Defendant (defined below), allege upon the investigation made by and through their counsel, complaints \543457 filed by the United States Government, the Securities and Exchange Commission (the “SEC”) and other entities, and reports and interviews published in the financial press, as follows: I. SUMMARY OF ACTION 1. This is both a derivative action brought by Plaintiffs, who are limited partners of FM Low Volatility Fund LP (the “Fund”), on behalf of the Fund, and a class action on behalf of all persons, other than Defendants (defined below), who invested in the Fund between April 8, 2008 through and including December 11, 2008 (the “Class Period”), to recover damages caused by Defendants’ violations of the federal securities laws and common law (the “Class”). 2. This case arises from the egregious conduct of the Defendants, who knowingly or recklessly allowed Class members’ investments in the Fund to be used as part of a massive, fraudulent Ponzi scheme perpetrated by Bernard L. Madoff through his investment firm, Bernard L. Madoff Investment Securities, LLC (“BMIS”). 3. On December 10, 2008, the Ponzi scheme began to unravel after Bernard Madoff informed his sons that BMIS’ investment advisory business was a complete fraud. Madoff stated that he was “finished,” that he had “absolutely nothing,” that “it's all just one big lie.” He confessed he had been running “basically, a giant Ponzi scheme,” in which he used the principal investments of new clients to pay phantom returns to other clients. Madoff stated that the business was insolvent and that it had been for years. Madoff also stated that he estimated the losses from this fraud to be approximately $50 billion. Published reports now indicate that the losses from Bernard Madoff’ s fraud are estimated to be $65 billion. 4. On December 11, 2008, Bernard Madoff was arrested by federal authorities and both he and BMIS were charged with securities fraud and other federal offenses by the SEC. In addition, the United States Attorneys’ Office for the Southern District of New York charged Bernard Madoff with securities fraud and other felony counts. On March 12, 2009, Bernard \543457 2 Madoff pleaded guilty to all of the eleven charges leveled against him and admitted that he had not made trades for his clients since at least the early 1990’s, despite telling investors that he was investing their funds using a “split-strike conversion strategy.” This strategy allegedly involved the purchase of 30 to 40 large capitalization S&P 500 stocks and the simultaneous sale of out-of- the-money calls on the S&P 500 Index and the purchase of out-of-the-money puts on the S&P 500 Index. This strategy allegedly allowed Bernard Madoff to limit losses when stock prices fell, while still allowing an upside potential capped to the stock price of the short call when stock prices rose. While the split-strike conversion strategy, if used, would have required significant trading, Irving Picard, the bankruptcy trustee of BMIS, stated that there is no evidence that Bernard Madoff traded any securities from 1996 to the present. 5. Madoff could not and did not perpetrate this massive fraud on his own. Numerous “hedge funds of funds” (“FOF” ), which invest in other investment funds instead of investing directly in stocks, bonds or other securities, investment advisors and others, including the Defendants named herein, facilitated Bernard Madoff’ s fraud and also violated the law by causing and/or blindly permitting their investors’ assets to be invested with Bernard Madoff, BMIS or Bernard Madoff-related entities (collectively, “Madoff”). FOFs that invested directly with Madoff were “feeder funds,” and FOFs that invested with Madoff through other FOFs were “sub-feeder funds.” 6. The Fund was one such sub-feeder fund. The FMC Defendants (defined below) knowingly, recklessly and in breach of their fiduciary duties to the Class and the Fund, permitted the Fund’s assets to be invested in three feeder funds, Andover Associates LLC I, Beacon Associates LLC I, and MAXAM Absolute Return Fund, LP (together, the “Feeder Funds”), that, unbeknownst to the members of the Class, were in turn invested in Madoff. By doing so, the \543457 3 FMC Defendants, together with the Feeder Fund Defendants (defined below), violated the law by, among other things, making false and misleading statements regarding the investment strategies and objectives of the Fund and the Feeder Funds, their purported due diligence and monitoring of the performance of the Fund and the Feeder Funds, and their purported due diligence and oversight of the outside managers of the Fund. Further, the FMC Defendants and the Feeder Fund Defendants, knowingly, recklessly and in a grossly negligent dereliction of their fiduciary duties, failed to perform adequate due diligence despite the existence of a myriad of “red flags” of Madoff’ s fraud, or, at a minimum, the impossibility of Madoff’ s reported returns; which other investment professionals, who did conduct proper due diligence, detected. These red flags included, among other things, the abnormally high and stable positive investment results reportedly achieved by Madoff regardless of market conditions; the impossibility of Madoff’ s purported split-strike conversion strategy which, if it had actually been carried out, would have required more option contracts than were traded in the market; that BMIS was audited by a small, obscure accounting firm with no experience auditing entities of the apparent size and complexity of BMIS; that BMIS did not use any outside administrators or custodians and, instead, itself calculated net asset values and generated account statements; and that Madoff granted limited, if any, access to his books and records under the guise of maintaining exclusivity. 7. Despite having failed to perform the requisite due diligence, which would have alerted them to these obvious warning signs, the FMC Defendants and several of the Feeder Fund Defendants collected large management, advisory, and performance fees from Plaintiffs and other members of the Class, which were wholly unearned and should be disgorged. \543457 4 8. As a result of Defendants’ undisclosed and wrongful conduct, including making false and misleading statements and failing to conduct adequate due diligence, the percentage of the Fund’s assets that were invested with Madoff, reportedly at least 60%, have been wiped out and the Fund has been placed into liquidation, causing the Class members’ investments in the Fund to be decimated. 9. Plaintiffs now seek to recover damages caused to the Class by Defendants’ violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), as well as for common law fraud, negligent misrepresentation, breach of fiduciary duty, unjust enrichment, gross negligence and mismanagement, aiding and abetting, and malpractice and professional negligence under New York law. Plaintiffs also seek to recover derivatively, on behalf of the Fund, for damages caused by Defendants’ fraudulent conduct, breaches of fiduciary duty, gross negligence and mismanagement, and malpractice and professional negligence. II. JURISDICTION AND VENUE 10. The claims asserted herein arise under Sections l0(b) and 20(a) of the Securities Exchange Act, 15 U.S.C. §§78j and 78t(a), and Rule 10b-5, 17 C.P.R. §240.10b-5, promulgated thereunder by the SEC, 17 C.P.R. § 240.10b.5., as well as under the laws of the State of New York. This Court has jurisdiction in this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. 78aa and pursuant to the supplemental jurisdiction of this Court. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337, Section 22 of the Securities Act, 15 U.S.C. § 77u, and Section 27 of the Exchange Act, 15 U.S.C. § 78aa. 11. Venue is proper in this judicial district pursuant to Section 22(a) of the Securities Act, 15 U.S.C. §77v, Section 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. §1391(b). \543457 5 Substantial acts in furtherance of the alleged fraud and/or its effects have occurred within this District. Additionally, defendants (defined below) maintain their headquarters or conduct substantial business in this District. 12. In connection with the acts alleged in this Complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets. III. PARTIES 13. Plaintiff David B. Newman, a resident of North Carolina, is a limited partner in the Fund. Plaintiff Newman IRA, which is owned by David B. Newman, also invested in the Fund. David B. Newman and the Newman IRA are collectively referred to as Plaintiffs.
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