The US District Court for the Southern District of New York dismissed a complaint against J. Ezra Merkin and Gabriel Capital Corporation (together, Defendants), which together managed Ascot Fund Limited (Ascot), an offshore hedge fund. Plaintiff, a nonprofit, had invested in Ascot in 2002 and again in 2004. Ascot in turn invested substantially all of its assets with Bernard Madoff. Plaintiff asserted various claims, alleging that Defendants made material misrepresentations and omissions about Ascot’s investment strategies. In particular, Plaintiff alleged that Defendants breached their obligations by, among other things, ceding management of Ascot’s assets to Madoff without conducting adequate due diligence on Madoff and by ignoring red flags of Madoff’s fraud. 

Plaintiff’s fraud claim relied on a “holder” theory of liability, alleging that Ascot’s misrepresentations and omissions caused Plaintiff to retain, as opposed to buy or sell, securities. The District Court noted that it is unsettled whether New York law recognizes a “holder” claim to recover lost profits or out-of-pocket losses (i.e., the investment itself). Regardless, the court found that Plaintiff failed to plead its claim with sufficient particularity and dismissed the claim without prejudice, thereby allowing Plaintiff to replead. 

The timeliness of the action was at issue because Plaintiff had not asserted its claim until more than four years after the exposure of Madoff’s fraud and Ascot’s investment with Madoff. As a result, the District Court dismissed many of Plaintiff’s claims as untimely, including certain of Plaintiff’s fraud claims as well as Plaintiff’s breach of fiduciary duty and gross negligence claims. In reaching this conclusion, the court rejected Plaintiff’s theory that its claims were tolled by a pending private class action or, alternatively, a settled 2009 enforcement action by the New York State Attorney General (NYAG). The principal of tolling embodied in the Supreme Court decisionAmerican Pipe and Construction Co. v. Utah, involving the interplay between putative class actions and individual claims, was inapplicable because Plaintiff was not a member of the putative class in the related class-action lawsuits. The NYAG action also did not serve to toll Plaintiff’s claim as it does not purport to aggregate individual claims but to vindicate public policy by enforcement of the law. 

Matana v. Merkin, No. 13 Civ. 1534 (PAE) (S.D.N.Y. July 30, 2013).