13‐3642‐cv
Elendow Fund, LLC v. Rye Inv. Mgmt.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
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SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in
the City of New York, on the 16th day of December, two thousand fourteen.
PRESENT: PIERRE N. LEVAL,
DENNY CHIN,
SUSAN L. CARNEY,
Circuit Judges.
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ELENDOW FUND, LLC,
Plaintiff‐Appellant,
v. 13‐3642‐cv
RYE INVESTMENT MANAGEMENT, TREMONT
CAPITAL MANAGEMENT INC., TREMONT GROUP
HOLDINGS, INC., TREMONT PARTNERS, INC.,
MASSACHUSETTS MUTUAL LIFE INSURANCE CO.,
MASSMUTUAL HOLDINGS LLC, OPPENHEIMER
ACQUISITION CORPORATION, RUPERT ALLAN, JIM
MITCHELL, ROBERT SCHULMAN, RYE SELECT
BROAD MARKET XL FUND, L.P.,
Defendants‐Appellees,
KPMG LLP,
Defendant.
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FOR PLAINTIFF‐APPELLANT: LEE S. SHALOV, McLaughlin & Stern, LLP,
New York, New York.
FOR DEFENDANTS‐APPELLEES SETH M. SCHWARTZ (Jason C. Vigna, on the
Rye Investment Management, brief), Skadden, Arps, Slate, Meagher & Flom
Tremont Capital Management, LLP, New York, New York.
Tremont Group Holdings, Inc.,
Tremont Partners, Inc., Rupert Allan,
Jim Mitchell, and Robert Schulman:
FOR DEFENDANTS‐APPELLEES CAROL E. HEAD (Joseph L. Kociubes, on the
Massachusetts Mutual Life Insurance brief), Bingham McCutchen LLP, Boston,
Co. and MassMutual Holding LLC: Massachusetts.
FOR DEFENDANT‐APPELLEE David A. Kotler, Dechert LLP, New York,
Oppenheimer Acquisition Corp.: New York.
FOR DEFENDANT‐APPELLEE Ralph A. Siciliano, Jamie B.W. Stecher, and
Rye Select Broad Market XL Fund, David J. Kanfer, Tannenbaum Helpern
L.P.: Syracuse & Hirschtritt LLP, New York, New
York.
Appeal from the United States District Court for the Southern District of
New York (Griesa, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Plaintiff‐appellant Elendow Fund, LLC (ʺElendowʺ) appeals from the
district courtʹs September 17, 2013 judgment dismissing Elendowʹs complaint alleging
securities fraud, common‐law fraud, negligent misrepresentation, breach of contract,
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and breach of fiduciary duty. We assume the partiesʹ familiarity with the facts,
procedural history, and issues for review, which we summarize briefly below.
Elendow is an investment fund that invested in the Rye Select Broad
Market XL Fund, L.P. (the ʺXL Fundʺ), which acted as a Bernard Madoff feeder fund,
and which also sought to achieve a highly leveraged return tied to the Madoff fundʹs
performance by entering into derivative contracts with various counterparties.
Elendow suffered significant losses as a result of the impacts, both direct and indirect,
on the XL Fund of Madoffʹs fraud. In its complaint, Elendow alleged, inter alia, that
defendant‐appellee Tremont Partners, Inc. (ʺTremontʺ), the general partner of the XL
Fund, fraudulently induced it to invest in and become a limited partner with the XL
Fund, and that Tremont knew or should have known of the fraudulent aspects of
Madoffʹs operation because Tremont was aware of certain ʺred flagʺ warning signs. The
district court below dismissed Elendowʹs complaint in its entirety under Fed. R. Civ. P.
12(b)(6) and 9(b).
We review the district courtʹs dismissal of Elendowʹs complaint for failure
to state a claim de novo. Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002).
To survive a Rule 12(b)(6) motion to dismiss, a complaint must plead ʺenough facts to
state a claim to relief that is plausible on its face.ʺ Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007). ʺAny complaint alleging securities fraud must satisfy the heightened
pleading requirements of the [Private Securities Litigation Reform Act, 15 U.S.C. § 78u‐
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4(b),] and Fed. R. Civ. P. 9(b) by stating with particularity the circumstances
constituting fraud.ʺ ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase
Co., 553 F.3d 187, 196 (2d Cir. 2009).
For substantially the reasons articulated by the district court in its opinion,
we affirm. We add only the following:
With respect to Elendowʹs fraud claims, we agree with the district court
that the complaint failed to adequately plead scienter, as similar cases in this Circuit
have held. Elendow fails to plead sufficient red flags to show that the inference that
Tremont must have been aware of fraud is ʺat least as compelling as any opposing
inference of nonfraudulent intent.ʺ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 314 (2007); see, e.g., Saltz v. First Frontier, LP, 782 F. Supp. 2d 61, 71‐72 (S.D.N.Y.
2010) (rejecting red flag theory as insufficient to support strong inference of scienter),
affʹd, 485 F. Appʹx 461, 464‐65 (2d Cir. 2012); Newman v. Family Mgmt. Corp., 748 F. Supp.
2d 299, 310 (S.D.N.Y. 2010) (rejecting red flag theory as less compelling inference
compared to nonfraudulent intent), affʹd, 530 F. Appʹx 21, 24 (2d Cir. 2013); Meridian
Horizon Fund, LP v. Tremont Grp. Holdings, Inc., 747 F. Supp. 2d 406, 413 (S.D.N.Y. 2010)
(rejecting red flag theory as insufficient to support strong inference of scienter), affʹd,
487 F. Appʹx 636, 640 (2d Cir. 2012). As we have previously observed in a similar
context, ʺthe more compelling inference as to why Madoffʹs fraud went undetected for
two decades was his proficiency in covering up his scheme and deceiving the SEC and
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other financial professionals.ʺ Meridian, 487 F. Appʹx at 641 (internal quotation marks
omitted).
We similarly agree with the district courtʹs dismissal of Elendowʹs breach
of fiduciary duty claim, which was asserted under Delaware law. The district court
held, inter alia, that Elendowʹs claim for breach of fiduciary duty was derivative, and
could therefore be brought only by the XL Fund. To determine whether Elendowʹs
claim is derivative or direct, we consider the following questions: ʺ(1) who suffered the
alleged harm . . . ; and (2) who would receive the benefit of any recovery or other
remedy . . . ?ʺ Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004);
Albert v. Alex. Brown Mgmt. Servs., Inc., No. Civ.A. 762‐N, Civ.A. 763‐N, 2005 WL
2130607, at *12 (Del. Ch. Aug. 26, 2005). The Delaware Supreme Court has explained
that ʺ[t]he stockholderʹs claimed direct injury must be independent of any alleged injury
to the corporation. The stockholder must demonstrate that the duty breached was
owed to the stockholder and that he or she can prevail without showing an injury to the
corporation.ʺ Tooley, 845 A.2d at 1039. Here, Elendowʹs damages would be measured
by the difference between the values of its investments before and after the XL Fund
suffered losses in its Madoff investments. As Elendowʹs injury is intertwined with the
XL Fundʹs injury, Elendowʹs action may be brought only as a derivative action. See
Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008) (concluding that claims are derivative in
nature when harm arises solely out of stock ownership).
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We have considered Elendowʹs remaining arguments and conclude they
are without merit. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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