3 Amended Complaint 05/21/2010

61 Pages·2010·2.57 MB·English

UNITED STATES DISTRICT COURT FOR
THE SOUTHERN DISTRICT OF NEW YORK
IN RE J.P. JEANNERET ASSOCIATES, INC., et aL Master� - . 'vr
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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.
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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."
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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
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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
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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
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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. §§
1109 and 1132(a)(2).
JURISDICTION AND VENUE
19. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §
1331 and ERISA § 502(e)(1), 29 U.S.C. § 1132(e)(1).
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20. Venue is proper in this district pursuant to ERISA § 502(e)(2), 29 U.S.C. §
1132(e)(2), because one or more Defendants reside or may be found in this district and/or the
alleged breaches occurred in this district.
PARTIES
Plaintiffs
21. Plaintiffs are the trustees of the Buffalo Laborers Plans, each of which is a
multi-employer plan within the meaning of ERISA § 3(37), 29 U.S.C. §1002(3)(37). The sole
purpose of each of the Buffalo Laborers Plans is to provide benefits to certain members of
Buffalo Laborers Local 210 union on whose behalf participating employers contribute to the
Plans.
Jeanneret Defendants
22. Defendant Jeanneret Associates is a New York corporation established in 1988
that serves as an Investment Manager for pension and profit sharing plans. Jeanneret Associates
is headquartered and has its principal place of business in Syracuse, New York. Jeanneret
Associates is a registered investment advisor. Upon information and belief, Jeanneret Associates
had over $946 million under management and over 75% of the firm's clients were pension and
profit-sharing plans.
23. Defendant John P. Jeanneret, Ph.D. ("Dr. Jeanneret") is the founder, president,
chief executive officer and chief compliance officer of Defendant Jeanneret Associates. Dr.
Jeanneret holds a Bachelor of Arts degree in Economics and Accounting, a Master of Arts in
Economics and Business, and a doctorate in Philosophy, Economics and Finance, all from the
State University of New York at Binghamton. Jeanneret has been a Registered Investment
Advisor, registered with the SEC, from 1973 to the present. Together with Defendant Paul Perry,
Jeanneret (a) determined and delivered investment advice for a fee to Taft-Hartley funds and
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other institutional investors provided by Jeanneret Associates, (b) acting on behalf of Jeanneret
Associates exercised discretionary authority and control over the assets of the Buffalo Laborers
Plans and other Class Members, and (c) invested the assets of Jeanneret Associates" clients with
Madoff, both directly and indirectly.
24. Defendant Paul L. Pen-y ("Perry -) is the director and an owner of Defendant
Jeanneret Associates. Perry holds a Bachelor of Science in Finance and Quantitative Analysis
from New York University. Prior to his position at Jeanneret Associates, Perry was a Financial
Consultant for Shearson Lehman Hutton and Gruntal and Company, Inc. Together with
Defendant Jeanneret, Perry (a) determined and delivered investment advice for a fee to Taft-
Hartley funds and other institutional investors provided by Jeanneret Associates, (b) acting on
behalf of Jeanneret Associates exercised discretionary authority and control over the assets of the
Buffalo Laborers Plans and other Class Members, and (c) invested the assets of Jeanneret
Associates' clients with Madoff, both directly and indirectly.
Ivy Defendants
25. Defendant Ivy Asset Management, a Delaware limited liability company, located
at One Jericho Plaza, Jericho, New York 11753, is a registered Investment Advisor under the
Investment Advisors Act of 1940 and a commodity trading advisor under the Commodity
Exchange Act. Ivy Asset Management is a wholly-owned subsidiary of BNY
26. Defendant Lawrence Simon ("Larry Simon -) was a co-founder of Ivy Asset
Management and served as Chief Executive Officer and President of Defendant Ivy Asset
Management from approximately January 1984 to January 2006, when he became Vice
Chairman of the company, a position he held until at least February 2007. He also served on Ivy
Asset Management's Board of Directors from October 2000 to November 2006. Defendant
Larry Simon served as a fiduciary of the ER1SA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C.
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§ 1002(21)(A), in that he exercised discretionary authority or discretionary control respecting
management of the ERISA Plans' funds, exercised authority or control respecting management
or disposition of the ERISA Plans' assets. rendered investment advice for a fee or other
compensation, direct or indirect, with respect to moneys or other property of each ERISA Plan,
and/or had discretionary authority or discretionary responsibility in the administration of the
ERISA Plans.
27. Defendant Howard Wohl ("Wahl") was a co-founder of Ivy Asset Management
and served as Chairman of Defendant Ivy Asset Management from approximately January 1984
to October 2000, after which point he assumed the post as ivy Asset Management's Vice
Chairman. Defendant Wahl also served as Chief Investment Officer of Defendant Ivy Asset
Management from approximately October 1996 to October 2000. He served on Defendant Ivy
Asset Management's Board of Directors from October 2000 until November 2006. Defendant
Wohl served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. §
1002(21)(A), in that he exercised discretionary authority or discretionary control respecting
management of the ER1SA Plans' funds, exercised authority or control respecting management
or disposition of the ERISA Plans' assets, rendered investment advice for a fee or other
compensation, direct or indirect, with respect to moneys or other property of each ER1SA Plan,
and/or had discretionary authority or discretionary responsibility in the administration of the
ERISA Plans.
28. Defendant Adam L. Geiger ("Geiger") joined Ivy Asset Management in 1997 as
the Head of Research and then served as Director of Investments of Defendant Ivy Asset
Management from approximately 1999 to April 2002, and Managing Director and Head of
Investments from April 2002 to January 2006. He also served on Ivy Asset Management's
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Strategic Operating Committee from approximately March 2005 until December 2005. Geiger
also was Chief Investment Officer and a member Manager Approval Committee until at least
May 2006. Defendant Geiger served as a fiduciary of the ERISA Plans pursuant to ERISA §
3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised discretionary authority or discretionary
control respecting management of the ERISA Plans' funds, exercised authority or control
respecting management or disposition of the ERISA Plans' assets, rendered investment advice
for a fee or other compensation, direct or indirect, with respect to moneys or other property of
each ER1SA Plan, and/or had discretionary authority or discretionary responsibility in the
administration of the ERISA Plans.
29. Defendant Jeffrey R. Lindenbaum ("Lindenbaum") served as Chief Financial
Officer of Defendant Ivy Asset Management from before 2000 until March 2001. Defendant
Lindenbaum served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C.
§ 1002(21)(A), in that he exercised discretionary authority or discretionary control respecting
management of the ERISA Plans' funds, exercised authority or control respecting management
or disposition of the ERISA Plans' assets, rendered investment advice for a fee or other
compensation, direct or indirect, with respect to moneys or other property of each ERISA Plan,
and/or had discretionary authority or discretionary responsibility in the administration of the
ERISA Plans.
30. Defendant John D. Rogers ("Rogers") served as Director, Products and Markets of
Defendant Ivy Asset Management from July 2000 to April 2002; Managing Director, Products
and Markets, from April 2002 until March 2003; and Managing Director, Investment Products
Group from March 2003 until on or after the end of March 2004. Defendant Rogers served as a
fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he
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