UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK IN RE J.P. JEANNERET ASSOCIATES, INC., et aL Master - . 'vr 3 VI Li \ - 7- '! This Document Relates to: ERISA Actions tLJ u.S. s - D. N.Y° CASHIE'RS FIRST AMENDED CONSOLIDATED CLASS ACT1NCOMPtAT Plaintiffs Boards of Trustees ("Trustees -) of the Buffalo Laborers Security Fund, Welfare Fund and Welfare Staff Fund (collectively, the "Buffalo Laborers Plans -), in their respective capacities as fiduciaries of the plans, allege the following on behalf of the Buffalo Laborers Plans and all others similarly situated: BACKGROUND I. This consolidated class action is brought pursuant to the Employee Retirement Income Security Act, as amended, 29 U.S.C. § 1001 et seq. ("ERISA"), seeking legal and equitable relief, including restitution, for the Buffalo Laborers Plans and similarly-situated ERISA plans (the "Class Members," also collectively referred to herein as the -ERISA Plans" or the "Plans") that, as a result of imprudent and unlawful conduct by Defendants (as defined below), lost substantial amounts of money through the fraudulent investment scheme orchestrated by Bernard L. Madoff ("Madoff") and Bernard L. Madoff Investment Securities, LLC ("Madoff Securities"). 2. This case arises from a massive, fraudulent scheme that was orchestrated by Madoff through his investment firm, Madoff Securities, and others. The scheme was facilitated by Defendants, who, in breach of their fiduciary duties owed to Plaintiffs and to the other Class Members, caused and permitted the ERISA Plans" assets to be invested with Madoff Securities. 1 The fraudulent investment scheme carried out by Madoff and Madoff Securities is well- documented as the largest Ponzi scheme in history. 3. Numerous "fund of funds," investment managers, investment advisors and others, including the Defendants herein, facilitated Madoff s fraud by investing and allowing billions of dollars to be invested in Madoff and Madoff Securities without performing adequate due diligence, despite the existence of numerous warning signs. These red flags included, among other things, abnormally high and stable investment results reportedly obtained by Madoff regardless of market conditions, the fact that Madoff Securities was audited by a small obscure accounting firm with no capacity to audit an entity of the apparent size and complexity of Madoff Securities, inconsistencies between publicly available financial information and the amount of money that Madoff managed for clients, and the shroud of secrecy surrounding Madoff s operations. 4. On December 10, 2008, Madoff informed his senior employees that his investment advisory business, Madoff Securities, was a complete fraud. Madoff stated that he was "finished," that he had "absolutely nothing," and that "it's all just one big lie." He confessed that he had been running "basically, a giant Ponzi scheme." Madoff admitted that the business was insolvent and that it had been for years. Madoff estimated the losses from this fraud to be approximately 550 billion. 5. On December 11, 2008, Madoffs fraud was exposed to the world. The Securities and Exchange Commission ("SEC") charged both Madoff and Madoff Securities with securities fraud. At the time of his arrest, Madoff was quoted as saying that "there is no explanation" for what had happened and that he "paid investors with money that wasn't there." 2 6. On March 12, 2009, Madoff pled guilty to 11 counts of fraud, money laundering, perjury, and theft. In connection with his guilty plea, Madoff admitted that "for many years up until my arrest on December 11, 2008, 1 operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC, which was located here in Manhattan, New York at 885 Third Avenue. - On June 29, 2009, Madoff was sentenced by United States District Court Judge Denny Chin to 150 years in prison for his crimes. 7. The Plans are multiemployer pension, health and/or welfare benefit plans established for the benefit of union-represented laborers and their families. 8. Defendants J.P. Jeanneret Associates, Inc. ("Jeanneret Associates"), its founder, John P. Jeanneret, Ph.D ("Dr. Jeanneret,"), Paul L. Perry, ("Perry") (collectively, the "Jeannerett Defendants"). Ivy Asset Management LLC ("Ivy Asset Management"), the individual Ivy Defendants (described below) and The Bank of New York Mellon Corporation ("BNY Mellon") were fiduciaries with respect to those plans, as that term is defined under ERISA § 3(21)(A), 29 U.S.C. § 1002(21). 9. Jeanneret Associates served as an investment manager of the Plans during the Class Period (defined below) and was responsible for managing and directing the investment of certain assets of the Plans. Ivy Asset Management, a subsidiary of BNY Mellon, served as investment advisor to Jeanneret Associates with respect to the Madoff-related investments. Each of the Defendants described below owed certain fiduciary duties to the Plans under ERISA. Among these duties was an obligation to manage the Plans' assets prudently, loyally and in the best interests of plan participants. 10. As ER1SA fiduciaries, Defendants breached their fiduciary obligations owed to the Plans and, directly or indirectly, caused the Plans to suffer hundreds of millions of dollars in 3 losses through Madoff-related investments. These losses were easily preventable. Had Defendants conducted due diligence, they would have detected the obvious red flags surrounding Madoff and Madoff Securities, including the following: (a) Madoff Securities' returns were abnormally steady, with very little volatility, including only five months of negative returns in the past 12 years; (b) the inability of other firms using a "split-strike conversion" strategy to generate returns comparable to those allegedly earned by Madoff Securities; (c) despite the size and scale of Madoff Securities, its auditors, Friehling & Horwitz, consisted of one small office in Rockland County, New York, with just three employees; (d) in 1999 and 2005, one of Madoff s competitors, Harry Markopolos, wrote letters to the SEC describing in detail how Madoff Securities was a fraudulent Ponzi scheme; (e) monthly account statements sent to investors of Madoff Securities did not support the returns supposedly being earned; (0 Madoff maintained a shroud of secrecy over his operations; (g) Madoff s purported investment strategy bore a strikingly low correlation to the market; and (h) trading volumes reflected in accounts were vastly in excess of actually reported trading volumes. 11. As Eric Weber, managing director of Wall Street investment bank Freeman & Co. explained: [A] diligent investment adviser would have quickly become suspicious of Madoff and taken extra precautions. The adviser would have visited Madoffs auditor's office, quizzing the auditor and spot-checking the audit report data; arranged to watch 4 Madoff s staff conduct trades; asked other financial experts if they could duplicate the returns Madoff claimed to be achieving; and independently verified Madoff actually made the trades he claimed. The careful investment managers walked away. See Stan Linhorst, How Warning Signs Eluded Bernard Aladoff's Man in Syracuse, The Post Standard (March 29, 2009), available at: http://www.syracuse.com/news/index.ssf/2009/03/ how_warning_signs_eluded_bema.html. 12. Defendants Jeanneret Associates and Ivy Asset Management accepted millions of dollars in investment advisor fees in connection with the capital they invested on behalf of the ERISA Plans. In exchange for such fees, Jeanneret Associates and Ivy Asset Management were obligated to vet suitable investment managers, assemble a diversified group of investments, follow a professional investment strategy, and conduct ongoing due diligence. Defendants, however, failed to exercise adequate due diligence and, accordingly, breached their ERISA fiduciary owed duties to the ERISA Plans. 13. As described below, Defendants suffered from numerous conflicts of interest that disincentivized them to adequately perform their fiduciary functions. Defendants thus had financial incentives to "turn a blind eye - to the imprudence of the Madoff-related investments, at the risk of losses to the ERISA Plans. 14. As described in a lawsuit recently filed by the office of New York Attorney General Andrew Cuomo (the "Cuomo Complaint"), Ivy Asset Management had discovered the imprudence of investing with Macloff by no later than 1997 yet, in an effort to safeguard its own profits, took no action to protect the assets of the ERISA Plans. Cuomo Complaint TT 50-65. Tellingly, by at least 2002 Ivy Asset Management was telling prospective clients that its obligations as a fiduciary barred it from investing client assets with Madoff and internal Ivy 5 documents recorded that we are [not] satisfied as a fiduciary to invest client assets [with Madoff]." Id. 411114. 15. Defendants' actions vis-a-vis the Buffalo Laborers Plans and other members of the Class constitute a breach of Defendants fiduciary duties owed to the ERISA Plans and breach of Defendants' obligations under ERISA. As a direct result of Defendants' fiduciary breaches and other unlawful activities, the Buffalo Laborers Plans and the other Class Members suffered significant losses. 16. ERISA §§ 409 and 502 authorize ERISA plan fiduciaries, such as Plaintiffs, to sue for losses suffered by their plans as a result of breaches of fiduciary duty, for the purpose of obtaining relief on behalf their plans. 17. Accordingly, pursuant to ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), and Fed. R. Civ. P.23, Plaintiffs bring this action on behalf of the Buffalo Laborers Plans and on behalf of similarly situated ERISA plans that were subject to, and affected by, Defendants' unlawful conduct in the same manner and with the same debilitating effect. Plaintiffs allege that Defendants, having undertaken a fiduciary role with respect to the Plans and other Class Members, breached their duties of prudence, loyalty, and exclusive purpose under ERISA § 404(a) as described herein. 18. Plaintiffs seek to recover losses and other equitable relief on behalf of the ERISA Plans for which Defendants are liable pursuant to ERISA §§ 409 and 502(a)(2), 29 U.S.C.