On November 29, 2011, the Southern District of New York (SDNY), dismissed claims by a class of foreign plaintiffs who invested in foreign feeder funds that invested in the ponzi scheme orchestrated by Bernard L. Madoff ("Madoff") and Bernard L. Madoff Investment Securities LLC ("Madoff Securities"). The foreign plaintiffs alleged common law claims for breach of fiduciary duty, conversion, gross negligence, negligence, aiding and abetting Madoff Securities' fraud, unjust enrichment and conspiracy against JPMorgan Chase & Co. and others in their roles as bankers to Madoff and Madoff Securities. Like most Madoff-related cases, the foreign plaintiffs alleged that the banker defendants ignored red flags that should have caused them to discover the fraud or conduct further due diligence. The banker defendants moved to dismiss under the Securities Litigation Uniform Standards Act of 1998, 15 U.S.C. § 77bb(f) (SLUSA). The foreign plaintiffs argued SLUSA did not apply because two required elements were missing: (1) a covered security; and (2) a misrepresentation or omission or a manipulative device or contrivance in connection with the purchase or sale of a security. The SDNY did not agree, and dismissed the case.
The SDNY found that Madoff's purported trading strategy utilized "indisputably covered securities." Additionally, the SDNY found that the complaint sounded in fraud, which was sufficient to satisfy SLUSA. The SDNY noted it was sufficient that the Madoff fraud was an integral part of the conduct that gave rise to the claims. In addition, the SDNY also determined that the "in connection with" requirement had been met because the fraud coincided with a securities transaction. The SDNY was satisfied by the fact that the fraud occurred in connection with Madoff's announced intention to purchase covered securities. Finally, the SDNY rejected the foreign plaintiffs' argument that SLUSA did not apply under the U.S. Supreme Court's decision in Morrison v. National Australia Bank Ltd, 130 S. Ct. 2869 (2010), which precluded the extraterritorial application of the federal securities laws. The court noted it was not applying SLUSA extraterritorially, but rather applying it to a class action that had been filed in the United States.
In re Herald, Primeo and Thelma Sec. Litig., No. 09 Civ 289 (RMB), slip op. (S.D.N.Y. Nov. 29, 2011).