DANIEL R. GOLDENSON, et al., Plaintiff,
JOHN L. STEFFENS, et al., Defendant.
Plaintiff DANIEL R GOLDENSON represented by ALFRED CECIL FRAWLEY, IV, JAY P. MCCLOSKEY, SHAUN GARRY, THIMI R. MINA MCCLOSKEY, MINA, CUNNIFF, LLC.
Plaintiff SUZANNE K GOLDENSON represented by ALFRED CECIL FRAWLEY, IV, JAY P. MCCLOSKEY, SHAUN GARRY, THIMI R. MINA.
Plaintiff SKG PARTNERS LP represented by ALFRED CECIL FRAWLEY, IV, JAY P. MCCLOSKEY, SHAUN GARRY, THIMI R. MINA.
Plaintiff SKG GENERAL CORP represented by ALFRED CECIL FRAWLEY, IV, JAY P. MCCLOSKEY, SHAUN GARRY, THIMI R. MINA.
Defendant JOHN L STEFFENS represented by MAX NICHOLAS SPEARS & IMES, LLP, ALEXIA PAPPAS VERRILL DANA LLP, DAVID SPEARS, SPEARS & IMES, LLP, JAMES T. KILBRET, DRUMMOND WOODSUM, MICHELLE SKINNER.
Defendant GREGORY P HO represented by MAX NICHOLAS, ALEXIA PAPPAS, DAVID SPEARS, JAMES T. KILBRETH, MICHELLE SKINNER.
Defendant SPRING MOUNTAIN CAPITAL represented by MAX NICHOLAS GP LLC, ALEXIA PAPPAS, DAVID SPEARS, JAMES T. KILBRETH, MICHELLE SKINNER.
Defendant SPRING MOUNTAIN CAPITAL represented by MAX NICHOLAS LP, ALEXIA PAPPAS, DAVID SPEARS, JAMES T. KILBRETH, MICHELLE SKINNER.
Defendant SPRING MOUNTAIN CAPITAL represented by MAX NICHOLAS LLC, ALEXIA PAPPAS, DAVID SPEARS, JAMES T. KILBRETH, MICHELLE SKINNER.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
JOHN A. WOODCOCK, JR. CHIEF UNITED STATES DISTRICT JUDGE
Daniel and Suzanne Goldenson invested in several hedge funds. One, the Ascot Fund, was a feeder fund to notorious Ponzi-schemer Bernard Madoff. Another, the QP I Fund, had significant exposure to Mr. Madoff’s fraud. The Goldensons allege that they suffered substantial financial losses when Mr. Madoff’s fraud was uncovered in December, 2008. The Goldensons claim that John Steffens, Gregory Ho, and assorted institutional defendants committed a panoply of statutory and common law wrongs in connection with these investments and their subsequent losses.
Before the Court is the Defendants’ Motion for Summary Judgment. The Court concludes that a fact-finder, viewing all the evidence in a light most favorable to the Goldensons and drawing all reasonable inferences, could legally conclude that at least some of the Defendants are liable on almost all of the remaining counts. On this record, the Court grants the Motion for Summary Judgment only partially as to Count IV, partially as to Count VII, and as to Count XI in its entirety.
I. LEGAL STANDARD
A court may grant summary judgment under Federal Rule of Civil Procedure 56 if the record demonstrates that there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). “Material” means that the fact “‘has the potential to change the outcome of the suit under the governing law if the dispute over it is resolved favorably to the nonmovant.’” Navarro v. Pfizer Corp., 261 F.3d 90, 93-94 (1st Cir. 2001) (quoting McCarthy v. Nw. Airlines, Inc., 56 F.3d 313, 315 (1st Cir. 1995)). “Genuine” means that “‘the evidence about the fact is such that a reasonable jury could resolve the point in favor of the nonmoving party.’” Id. (quoting McCarthy, 56 F.3d at 315). The Court must examine the record evidence “in the light most favorable to, and drawing all reasonable inferences in favor of, the nonmoving party.” Feliciano de la Cruz v. El Conquistador Resort & Country Club, 218 F.3d 1, 5 (1st Cir. 2000).
A. Procedural History
The Plaintiffs are Daniel R. Goldenson, Suzanne K. Goldenson, SKG Partners, L.P., and SKG General Corp. (collectively “the Goldensons”); the Defendants are John L. Steffens,  Gregory P. Ho, Spring Mountain Capital G.P., LLC, Spring Mountain Capital, LP, and Spring Mountain Capital, LLC (collectively “the Defendants”). The Goldensons filed their original eleven-count Complaint (ECF No. 1) on October 27, 2010, and an Amended Complaint on April 21, 2011 (ECF No. 38). The Court dismissed without prejudice one count, for “punitive damages, ” on August 4, 2011. Goldenson v. Steffens, 802 F.Supp.2d 240 (D. Me. 2011).
On May 1, 2013, after nearly two years of discovery, the Defendants filed a Motion for Summary Judgment. Mot. for Summ. J. (ECF No. 200) (Motion). This motion included a Defendants’ Statement of Material Facts (DSMF) (ECF No. 201) supported by affidavits from Mr. Steffens, Decl. of John L. Steffens (ECF No. 197) (Steffens Decl.); Mr. Ho, Decl. of Gregory P. Ho (ECF No. 202) (Ho Decl.); and Alison Ward, a legal assistant to counsel for the Defendants, Mot. to Seal Attach. 13 Decl. of Alison Ward (ECF No. 195) (Ward Decl.).
The Goldensons filed their opposition to the motion on June 24, 2013. Mot. to Seal Attach. 1 Pl.’s Opp’n to Def.’s Mot. for Summ. J. (ECF No. 211) (Pl.’s Opp’n). With it came a reply to the Defendants’ statement of material facts and the Goldensons’ statement of additional material facts. Mot. to Seal Attach. 2 Pl.’s Opposing Statement of Material Facts and Statement of Additional Facts (ECF No. 211) (PRDSMF, PSAMF). The Goldensons also filed affidavits from attorney Alfred Frawley IV, Aff. of Alfred C. Frawley IV (ECF No. 214) (Frawley Decl.); attorney Jay McCloskey, Aff. of Jay P. McCloskey (ECF No. 215) (McCloskey Decl.); and Daniel Goldenson, Aff. of Daniel R. Goldenson (ECF No. 216) (Goldenson Decl.).
The Defendants replied to the Goldensons’ opposition on July 15, 2013. Mot. to Seal Attach. 1 Def.'s Rep’y Mem. of Law (ECF No. 222) (Def.’s Reply). They also filed a reply to the Goldensons’ statement of additional material facts. Mot. to Seal Attach. 2 Def.’s Reply to Pl.’s Statement of Additional Facts (ECF No. 222) (DRPSAMF). With the reply statement of facts came an additional affidavit from Mr. Steffens, Mot. to Seal Attach. 3 Reply Decl. of John L. Steffens (ECF No. 222) (Steffens Reply Decl.), and a new affidavit from attorney Max Nicholas, Decl. of Max C. Nicholas (ECF No. 226) (Nicholas Decl.) On the same day they filed their reply, the Defendants requested oral argument on the Motion. Mot. for Oral Argument/Hearing (ECF No. 227). The Court granted that motion and held oral argument on February 28, 2014. Order Granting Mot. for Oral Argument/Hearing (ECF No. 230).
B. Summary Judgment Facts
1. The Defendants’ Undisputed Facts
The Defendants offer the facts below in their Statement of Material Facts.
The Court adjusted the Defendants’ versions to reflect successful denials or qualifications by the Goldensons.
a. Background About the Goldensons
Mr. and Mrs. Goldenson are married. DSMF ¶ 1; PRDSMF ¶ 1. Between them, Mr. and Mrs. Goldenson have established and control a number of entities that have, at various times, held assets or engaged in financial dealings. DSMF ¶ 2; PRDSMF ¶ 2. These include SKG Partners, L.P.; SKG General Corp.; Goldenson Partners, L.P.; Goldenson Management, L.P.; D.R. Goldenson & Company, Inc.; 1991 Insurance Trust; and 2005 Insurance Trust. DSMF ¶ 2; PRDSMF ¶ 2. Mr. Goldenson graduated Phi Beta Kappa from Princeton University earning a Bachelor of Arts degree and majoring in economics. DSMF ¶ 3; PRDSMF ¶ 3.
Mr. Goldenson was in the real estate development business in the 1970s and 1980s. DSMF ¶ 4; PRDSMF ¶ 4. His real estate development activities included buying industrial land and buildings, and leasing them to such clients as Lockheed Martin and a company called Mathematica. DSMF ¶ 4; PRDSMF ¶ 4. Mr. Goldenson developed and managed these properties, then later sold them to Public Real Estate Trust in Great Britain for a gross profit of $12 million and an after-tax profit of $8 million. DSMF ¶ 4; PRDSMF ¶ 4. Mr. Goldenson testified that he did “everything [him]self” without the benefit of investment advice. DSMF ¶ 4; PRDSMF ¶ 4.
When he was an undergraduate at Princeton, Mr. Goldenson started a company called Resource Publications. DSMF ¶ 5; PRDSMF ¶ 5. Resource Publications was a publishing company that published career opportunity guides, principally in engineering. DSMF ¶ 7; PRDSMF ¶ 7. After starting the company, he expanded it and sold it to another company for restricted stock that he thought was worth $1, 000, 000, but that he later liquidated for $300, 000. DSMF ¶ 7; PRDSMF ¶ 7.
Mr. Goldenson subsequently started a company called eMedguides, Inc. DSMF ¶ 6; PRDSMF ¶ 6. eMedguides was an online venture whose purpose was to “index the medical internet in every field of medicine.” DSMF ¶ 6; PRDSMF ¶ 6 (quoting Def.’s D.G. 2011 Dep. Tr. 277:8-11). eMedguides was an “ambitious project.” DSMF ¶ 6; PRDSMF ¶ 6. Mr. Goldenson sold eMedguides to the Physicians’ Desk Reference group for approximately $2 million. DSMF ¶ 6; PRDSMF ¶ 6. He personally retained “40 percent or 38 percent” of the sale amount, and “a friend of [his] son’s who had gone to Princeton” retained between 5 and 7 percent. DSMF ¶ 6 (quoting Def.’s D.G. 2011 Dep. Tr. 277:07-24); PRDSMF ¶ 6.
Mr. Goldenson also started a company called Medbioworld that operated a medical website. DSMF ¶ 7; PRDSMF ¶ 7. To start the company, Mr. Goldenson first purchased a preexisting website company called ScienceKomm “‘that had every medical publication in every possible field.’” DSMF ¶ 7 (quoting Def.’s D.G. 2011 Dep. Tr. 278:12-13); PRDSMF ¶ 7. He purchased ScienceKomm because he judged it to be “a great platform” to start his own company; it was “‘the most comprehensive’” medical website in existence at the time. DSMF ¶ 7 (quoting Def.’s D.G. 2011 Dep. Tr. 277:2, 13-14); PRDSMF ¶ 7. Mr. Goldenson later sold Medbioworld to a company called Healthnostics in or around 2003 for $135, 000, a loss of approximately $65, 000 on his original investment. DSMF ¶ 7; PRDSMF ¶ 7.
In 2008, Mr. Goldenson started a company called Starting Out, Inc. DSMF ¶ 8; PRDSMF ¶ 8. Starting Out was a publishing company that published books on life skills education. DSMF ¶ 8; PRDSMF ¶ 8. He sold the company to the publisher McGraw-Hill in 2010 for approximately $800, 000, of which he personally retained $600, 000. DSMF ¶ 8; PRDSMF ¶ 8. Mr. Goldenson’s net profit on the investment was approximately half of his share of the sale amount. PRDSMF ¶ 8. Mr. Goldenson also started a corporation called Academic Databases with the intent of forming a business around it, but did not do so. DSMF ¶ 9; PRDSMF ¶ 9. Mr. Goldenson is the co-author of a book called “How To Succeed In Business Before Graduation.” DSMF ¶ 10; PRDSMF ¶ 10.
b. The Goldensons’ Financial Status and Dealings
i. Financial Background; Financial Advisor Relationships
As of October 2001, the Goldensons owned or controlled the following assets. They had approximately $10.7 million in Merrill Lynch and Morgan Stanley accounts, predominantly in municipal bonds. DSMF ¶ 11; PRDSMF ¶ 11.They had artwork of unknown provenance and value. DSMF ¶ 11; PRDSMF ¶ 11. They owned a home in Princeton, New Jersey that they later sold in 2004 for $1.6 million. DSMF ¶ 11; PRDSMF ¶11. Finally, they owned a residence and land in Maine. DSMF ¶ 11; PRDSMF ¶ 11.
The Defendants contend that in 2001 Mr. Goldenson was an “experienced and sophisticated investor, ” but the Goldensons dispute this characterization. DSMF ¶ 12; PRDSMF ¶ 12. Mr. Goldenson has said that he considers himself to be “educated about investments and the investment world” and a “careful and inquisitive” investor. DSMF ¶ 13; PRDSMF ¶ 13. Mr. Goldenson has also described himself as a “conservative investor.” DSMF ¶ 14; PRDSMF ¶ 14.
From 1991 to 2010, Brian Burns was one of the Goldensons’ financial advisors at Merrill Lynch, DSMF ¶ 15; PRDSMF ¶ 15, but the Goldensons considered Mr. Steffens to be “probably above all others our investment advisor.” PRDSMF ¶ 15. The Goldensons worked with Mr. Burns when he was at Drexel Burnham before and during 1991, when he moved to Merrill Lynch in 1991, and to Morgan Stanley in 2004. DSMF ¶ 15; PRDSMF ¶ 15. The Goldensons’ investment accounts with Mr. Burns were non-discretionary, and Mr. Burns discussed the merits of specific investment options with both Mr. and Mrs. Goldenson. DSMF ¶ 16; PRDSMF ¶ 16. Mr. Burns testified that he thought Mr. Goldenson was a “sophisticated investor” based on his knowledge and intelligence. DSMF ¶ 16; PRDSMF ¶ 16.
ii. Investments in Summit Hedge Funds
Plaintiff SKG Partners, L.P. made investments in, and withdrawals from, two hedge funds called Summit SP I Plus and Summit SP II, respectively, as follows. DSMF ¶ 17; PRDSMF ¶ 17. In 2005, SKG Partners contributed $1, 500, 000 to Summit SP II. DSMF ¶ 17; PRDSMF ¶ 17. In 2006, SKG Partners contributed $750, 000 to Summit SP II. DSMF ¶ 17; PRDSMF ¶ 17. In 2007, SKG Partners contributed $400, 000 to Summit SP I Plus. DSMF ¶ 17; PRDSMF ¶ 17. In 2008, SKG Partners contributed $300, 000 to Summit SP I Plus; withdrew $358, 873 from Summit SP I Plus; and withdrew $2, 162, 163 from Summit SP II. DSMF ¶ 17; PRDSMF ¶ 17. The amounts invested in the two hedge funds totaled $2.95 million; the amounts withdrawn totaled $2, 521, 036. DSMF ¶¶ 17-18; PRDSMF ¶ 17-18.
Mr. Goldenson redeemed assets the Goldensons had invested with Spring Mountain, in addition to assets they had invested with Ascot, in order to invest in Summit. DSMF ¶ 19; PRDSMF ¶ 19. Mr. Goldenson informed the Defendants before he decided to invest in Summit funds because he “wanted them to know that I was trying to diversify, ” but he did not ask for their views on the Summit Fund. PRDSMF ¶ 19.
Mr. Goldenson was introduced to Summit by James Straus, who was President and CEO of Straus Capital, LLC. DSMF ¶ 20; PRDSMF ¶ 20. During the same period when the Goldensons made and maintained their investments in QP I and Ascot, Mr. Goldenson corresponded with Mr. Straus and informed him that he had come up with his own “idea for a new fund that would generate returns considerably higher than those I am in now, and I would like to discuss it with you.” DSMF ¶ 20 (quoting Ward. Aff. Ex. K (ECF No. 195-23) (Mar. 3, 2006) (Straus Email)); PRDSMF ¶ 20. He further proposed “put[ting] a plan together” with Mr. Straus and others for a new fund. DSMF ¶ 20 (quoting Straus Email); PRDSMF ¶ 20.
iii. Other Investments and Trust Activity
In 2003, the Goldensons invested $1 million in a hedge fund called Eagle Yield LLC (“Eagle”). DSMF ¶ 21; PRDSMF ¶ 21. After 2001, the Goldensons invested $600, 000 in a hedge fund called Telemetry Fund. DSMF ¶ 22; PRDSMF ¶ 22.
During the same period when the Goldensons made and maintained their investments in QP I and Ascot, they invested $500, 000 in oil and gas-related limited partnerships based on Mr. Goldenson’s own research. DSMF ¶ 23; PRDSMF ¶ 23. Mr. Goldenson chose these investments because they were tax-friendly, and made “a very nice return” on them. DSMF ¶ 23; PRDSMF ¶ 23.
Since 1991, the Goldensons have worked with a large national law firm called Lowenstein Sandler LLP to create and utilize complex financial trusts for the purpose of transferring assets to their descendants without taxation. DSMF ¶ 24; PRDSMF ¶ 24. With Lowenstein Sandler, in 1991 the Goldensons created the 1991 Insurance Trust. DSMF ¶ 25; PRDSMF ¶ 25. That Trust holds a whole life insurance policy with a face value of $14 million. In 2005, the Goldensons and their lawyers created another trust, the 2005 Special Trust. DSMF ¶ 26; PRDSMF ¶ 26. In 2006, the Special Trust engaged in a complex series of financial transactions involving three parcels of real property owned or controlled by the Goldensons with appraised values of $2, 720, 000, $1, 185, 000, and $205, 000, respectively. DSMF ¶ 26; PRDSMF ¶ 26.
iv. Returns on the Goldensons’ Spring Mountain Investments
Beginning in or around 2003 and ending in or around 2006, the Goldensons held investments in two other funds managed by SMC besides QP I. DSMF ¶ 27; PRDMSF ¶ 27. Those funds were the SMC Leveraged Fund, LLC, and the SMC Alternative Strategies Fund, LLC. DSMF ¶ 27; PRDSMF ¶ 27. In QP I the Goldensons recovered the full amount of their principal investment and made a gain of $864, 186, of which $485, 838 has already been distributed to them. DSMF ¶ 27; PRDSMF ¶ 27. In SMC Leveraged Fund, LLC, the Goldensons recovered the full amount of their principal investment and made a gain of $720, 014, all of which has been distributed to them. DSMF ¶ 27; PRDSMF ¶ 27. In SMC Alternative Strategies Fund, the Goldensons recovered the full amount of their principal investment and made a gain of $56, 006 all of which has been distributed to them. DSMF ¶ 27; PRDSMF ¶ 27. In total, the Goldensons have made approximately $1.6 million on their Spring Mountain investments. DSMF ¶ 27; PRDSMF ¶ 27.
c. The History of the Goldensons’ Dealings With Mr. Steffens
There is a genuine dispute as to whether, prior to December 2001, the Goldensons had any business or investment dealings with Mr. Steffens. DSMF ¶ 28; PRDSMF ¶ 28.
i. The Goldensons Meet the Steffens
Mrs. Goldenson met Mr. Steffens’ wife, Louise Steffens, as early as the mid- 1990s, when both families had children at Princeton Day School. DSMF ¶ 29; PRDSMF ¶ 29. During that time, Mrs. Steffens and Mrs. Goldenson became social friends outside of their dealings at the Princeton Day School. DSMF ¶ 29; PRDSMF ¶ 29. Mrs. Goldenson first met Mr. Steffens in late 1999 when, in connection with her role as President of the Arts Council of Princeton, she requested and obtained a meeting with Mr. Steffens to introduce herself and request a donation. DSMF ¶ 30; PRDSMF ¶ 30. At the meeting, Mr. Steffens agreed to make a $100, 000 donation to the Council. DSMF ¶ 30; PRDSMF ¶ 30. The Arts Council received a donation in that amount from Mr. and Mrs. Steffens on December 24, 1999. DSMF ¶ 30; PRDSMF ¶ 30.
At the time of Mrs. Goldenson’s visit to Mr. Steffens’ office to request a donation, Mr. Goldenson had never met Mr. Steffens, though they saw each other at dinner events after Mr. Steffens donated to the Arts Council. DSMF ¶ 31; PRDSMF ¶ 31. Following Mrs. Goldenson’s initial meeting with Mr. Steffens in late 1999, Mrs. Goldenson’s social acquaintance with Mrs. Steffens grew into a “casual friendship” that entailed conversations about “future daughters-in-law” and related topics. DSMF ¶ 32; PRDSMF ¶ 32. After 1999, Mrs. Goldenson was “casual friends” with Mr. Steffens but did not have much contact with him. DSMF ¶ 33; PRDSMF ¶ 33. Mr. Goldenson and Mr. Steffens met for the first time after Mrs. Goldenson had first met Mr. Steffens. DSMF ¶ 34; PRDSMF ¶ 34. The two met through their wives at a social event. DSMF ¶ 34; PRDSMF ¶ 34. Although Mrs. Goldenson “didn’t have that much contact” with Mr. Steffens after she met him, Mrs. Goldenson had a “longer history” with Mr. Steffens and a “closer relationship” with him than Mr. Goldenson did. DSMF ¶ 35; PRDSMF ¶ 35.
ii. The Relationship Between Mr. Goldenson and Mr. Steffens Before November 2001
Between the first meeting of Mr. Goldenson and Mr. Steffens and the time when Mr. Goldenson visited Mr. Steffens at SMC’s offices in December 2001, they were together only a handful of times, always at social events. DSMF ¶ 36; PRDSMF ¶ 36. Before December 2001, Mr. Goldenson “discussed investments with Mr. Steffens” on “six to eight specific occasions, most of which were actually social occasions.” DSMF ¶ 37; PRDSMF ¶ 37. Mr. Goldenson apparently never visited Mr. Steffens at his Merrill Lynch office. DSMF ¶ 38; PRDSMF ¶ 38.
For many years Mr. Steffens served as Vice Chairman of the Board of Directors of Merrill Lynch. DSMF ¶ 39; PRDSMF ¶ 39. He was a senior executive with managerial and supervisory responsibilities for important parts of Merrill Lynch’s retail brokerage network. DSMF ¶ 39; PRDSMF ¶ 39. His duties at Merrill Lynch did not include advising individual accounts, with only three exceptions for accounts holding $2 billion to $6 billion in assets. DSMF ¶ 39; PRDSMF ¶ 39.
Mr. Burns’ name appeared on the Goldensons’ Merrill Lynch statements as their “executing broker, ” and Mr. Steffens’ name never appeared on any of their account statements. DSMF ¶ 40; PRDSMF ¶ 40. During his tenure at Merrill Lynch, Mr. Steffens and Mr. Burns did not know each other and did not work at the same location. DSMF ¶ 41; PRDSMF ¶ 41. After Mr. Steffens’ departure from Merrill Lynch in 2001, the Goldensons invested a total of $1.25 million with Mr. Burns. DSMF ¶ 42; PRDSMF ¶ 42. Mr. Steffens left Merrill Lynch in June 2001 and formally organized Spring Mountain Capital and the QP I fund on October 29, 2001. DSMF ¶ 43; PRDSMF ¶ 43.
iii. The November Dinner and the December Meeting
In November 2001, the Goldensons met Mr. Steffens and his wife at a restaurant in Princeton for “a social gathering.” DSMF ¶ 44; PRDSMF ¶ 44. That November 2001 dinner marked only the second time in the course of the Goldensons’ acquaintance with Mr. and Mrs. Steffens that the couples were together without a larger group of people. DSMF ¶ 44; PRDSMF ¶ 44. Over dinner, Mr. Steffens told the Goldensons that he had started Spring Mountain Capital and generally described its hedged investing concept. DSMF ¶ 45; PRDSMF ¶ 45. Mr. Goldenson expressed interest. DSMF¶ 45; PRDSMF ¶ 45.
On December 14, 2001, Mr. Goldenson visited Mr. Steffens at SMC’s offices in New York City to discuss a possible investment in an SMC fund. DSMF ¶ 46; PRDSMF ¶ 46. They had not spoken about a possible investment between the November dinner and the December 14 meeting. DSMF ¶ 46; PRDSMF ¶ 46.
d. Defendants in This Litigation
Defendants Spring Mountain Capital G.P., LLC, Spring Mountain Capital, LP, and Spring Mountain Capital, LLC are entities associated with the Spring Mountain Capital family of investment funds. DSMF ¶ 47; PRDSMF ¶ 47. Spring Mountain Capital G.P., LLC served as the general partner of the only Spring Mountain fund at issue in this case, Spring Mountain Partners QP I, LP. DSMF ¶ 47; PRDSMF ¶ 47. Spring Mountain Capital, LP provided investment management and administrative services to QP I and was referred to as the Management Company. DSMF ¶ 47; PRDSMF ¶ 47. Spring Mountain Capital, LLC was the general partner of the Management Company. DSMF ¶ 47; PRDSMF ¶ 47.
John L. Steffens formally organized Spring Mountain and the QP I Fund on October 29, 2001. DSMF ¶ 48; PRDSMF ¶ 48. At all relevant times, Mr. Steffens was the sole managing member of Spring Mountain Capital G.P., LLC; the managing director of the Management Company; and the sole managing member of Spring Mountain Capital, LLC. DSMF ¶ 48; PRDSMF ¶ 48. At all relevant times, Gregory P. Ho was a limited partner and Chief Operating Officer of the Management Company. DSMF ¶ 49; PRDSMF ¶ 49. He was a non-managing member of Spring Mountain Capital G.P., LLC and Spring Mountain Capital, LLC until December 18, 2008, when he became a managing member of both entities. DSMF ¶ 49; PRDSMF ¶ 49.
e. Spring Mountain’s Business Model
At all relevant times, Defendants created and managed investment funds, including QP I, their first fund. DSMF ¶ 51; PRDSMF ¶ 51. QP I was a “fund of funds”: a fund that invested in a portfolio of outside hedge funds run by different managers utilizing different investment strategies. DSMF ¶ 51; PRDSMF ¶ 51.QP I also made investments in private equity funds. DSMF ¶ 51; PRDSMF ¶ 51. The primary purpose of the “fund of funds” concept was to achieve diversity and limit the risk of any one investment. DSMF ¶ 51; PRDSMF ¶ 51. Before Mr. Steffens founded Spring Mountain, he had quantitative studies run on the impact of diversification among funds and strategies to help determine a level of diversification that would generate attractive risk adjusted returns. DSMF ¶ 51; PRDSMF ¶ 51. Mr. Steffens was the primary investor in QP I when it launched. DSMF ¶ 52; PRDSMF ¶ 52. He invested at least $30.5 million of his own personal assets in QP I and maintained that investment at all times. DSMF ¶ 52; PRDSMF ¶ 52.
After creating QP I, Spring Mountain went on to create at least fifteen additional investment funds. DSMF ¶ 53; PRDSMF ¶ 53. Each Spring Mountain Fund, including QP I, charged a standard management fee to each outside investor in the fund, and in turn the fund paid Spring Mountain Capital, LP to serve as investment advisor to the fund and manage the fund’s assets. DSMF ¶ 54; PRDSMF ¶ 54. Spring Mountain also offered managed account services for high net worth investors, pursuant to which the investor could pay a fee to maintain an account at SMC and receive investment advice and recommendations from SMC. DSMF ¶ 54; PRDSMF ¶ 54. The Goldensons were not eligible for a managed account at SMC, for which the minimum investment amount was $25 million, and never maintained such an account. DSMF ¶ 54; PRDSMF ¶ 54.
f. Defendants’ Relationship With Ezra Merkin
From the inception of Spring Mountain until December 16, 2008, Ezra Merkin was, at least, a limited partner in and consultant to Spring Mountain. DSMF ¶ 55; PRDSMF ¶ 55. Mr. Merkin also loaned money to Spring Mountain in January 2002. DSMF ¶ 56; PRDSMF ¶ 56.
Mr. Steffens first met Mr. Merkin in 1997. DSMF ¶ 57; PRDSMF ¶ 57. At the time Mr. Steffens met Mr. Merkin, and throughout his relationship with Mr. Merkin, Mr. Merkin had an excellent reputation in the investment community, of which Mr. Steffens was aware. DSMF ¶ 58; PRDSMF ¶ 58. Among other things, Mr. Steffens knew that Mr. Merkin was Chairman of Yeshiva University’s investment committee and a member of, and at times Chairman of, the investment committee for UJA-Federation of New York. DSMF ¶ 58; PRDSMF ¶ 58. Both of these committees had investment portfolios with billions of dollars in assets. DSMF ¶ 58; PRDSMF ¶ 58. Before starting Spring Mountain, Mr. Steffens spoke with individuals in the investment community who had dealt with Mr. Merkin on a long-term basis, including the then-General Counsel of Merrill Lynch. DMSF ¶ 59; PRDSMF ¶ 59. These individuals spoke highly of Mr. Merkin. DSMF ¶ 59; PRDSMF ¶ 59.
Mr. Merkin managed his own separate investment funds, including Ascot.DSMF ¶ 61; PRDSMF ¶ 61.
g. Defendants’ Understanding of Ascot and Inclusion of Ascot in QP I’s Portfolio of Funds
From QP I’s inception, Defendants sought out low-volatility, institutional quality investments with strong track records for QP I’s portfolio. DSMF ¶ 63; PRDSMF ¶ 63. Ascot was a well-established fund that met these criteria. DSMF ¶ 63; PRDSMF ¶ 63. Spring Mountain included Ascot as one of seven funds in QP I’s portfolio as of December 2001. DSMF ¶ 64; PRDSMF ¶ 64. QP I later came to hold as many as 40 outside hedge funds in its portfolio at a given time. DSMF ¶ 64; PRDSMF ¶ 64.
The decision to include Ascot in QP I’s portfolio was made by SMC’s investment committee. DSMF ¶ 65; PRDSMF ¶ 65. Prior to QP I’s investment in Ascot, analysts at SMC reviewed Ascot’s returns over a long period of time and found them to be consistent with returns achieved by other successful fund managers over a similar period of time. DSMF ¶ 66; PRDSMF ¶ 66. The analysts also tested Ascot’s performance and volatility in different markets using statistical models; these tests indicated that Ascot should achieve an unspectacular but steady return in a wide range of markets. DSMF ¶ 66; PRDSMF ¶ 66.
Prior to QP I’s investment in Ascot and throughout the duration of that investment, Defendants understood a “split-strike” strategy to entail buying an equity position in a stock while simultaneously buying put options below the current stock price and selling call options above the current stock price. DSMF ¶ 67; PRDSMF ¶ 67. Also prior to QP I’s investment in Ascot, Defendants ascertained that Ascot had an independent auditor, the national accounting firm BDO Seidman. DSMF ¶ 68; PRDSMF ¶ 68. BDO Seidman audited Ascot every year. DSMF ¶ 68; PRDSMF ¶ 68. Defendants reviewed Ascot’s audited financials annually throughout the duration of QP I’s investment in Ascot, though there is a genuine dispute as to whether they found anything “out of the ordinary.” DSMF ¶ 68; PRDSMF ¶ 68.
Over the period when QP I was an investor in Ascot, Mr. Steffens reviewed Ascot’s trade sheets at least twenty times, and SMC analysts reviewed Ascot’s trade sheets as well, finding nothing suspicious. DSMF ¶ 70; PRDSMF ¶ 70. In addition, a quantitative analysis group at SMC reviewed a series of Ascot trades and confirmed that the positions reflected therein were reasonable. DSMF ¶ 70; PRDSMF ¶ 70.
Defendants understood that Mr. Merkin had authority over and responsibility for Ascot’s investment and trading decisions at all times. DSMF ¶ 71; PRDSMF ¶ 71. Defendants’ understanding was based on extensive discussions with Mr. Merkin about Ascot both prior to and throughout the period of QP I’s investment in Ascot. DSMF ¶ 71; PRDSMF ¶ 71. Ascot charged QP I a 1% to 1.5% fee to invest in Ascot, and Defendants considered that fee a payment to have Mr. Merkin be in charge of and responsible for their investment. DSMF ¶ 72; PRDSMF ¶ 72. If the Defendants had not believed that to be the case, they would not have paid Mr. Merkin a fee and they would not have invested in Ascot. DSMF ¶ 72; PRDSMF ¶ 72. The Defendants were aware that, for the most part, Mr. Merkin used Bernard Madoff to execute the split/strike strategy for Ascot. DSMF ¶ 73; PRDSMF ¶ 73.
Prior to and throughout the duration of QP I’s investment in Ascot, the Defendants understood from Mr. Merkin that he authorized the specific parameters for Ascot’s split strike strategy and decided what types of trades were permissible; that he decided when Ascot would be trading and when, instead, it would be out of the market; that he diverged from Mr. Madoff at various times in determining whether to be in or out of the market; that he closely oversaw [Mr.] Madoff’s trade execution on behalf of Ascot and reviewed it with Mr. Madoff; and that the decision whether to use the split-strike strategy, or Mr. Madoff at all, was always subject to Mr. Merkin’s discretion, good judgment, and regular reevaluation. DSMF ¶ 74; PRDSMF ¶ 74.
Mr. Madoff was a registered broker-dealer under the Securities Exchange Act of 1934 and was audited regularly by the SEC and the NASD. DSMF ¶ 77; PRDSMF ¶ 77. He had been Chairman of NASDAQ, an alternative exchange to the New York Stock Exchange. DSMF ¶ 77; PRDSMF ¶ 77. The Defendants also knew that the firms Deutsche Bank and BNP Paribas had done substantial diligence on Mr. Madoff and authorized substantial investments with him. DSMF ¶ 77; PRDSMF ¶ 77.
h. Background to the Goldensons’ December 14, 2001 Meeting with Mr. Steffens
In the fall of 2001, the Goldensons held a significant amount of municipal bonds that were maturing and could only be replaced by bonds with much lower interest rates. DSMF ¶ 78; PRDSMF ¶ 78. The prospect of lower rates, along with Mr. Steffens’ advice, made the Goldensons feel they “had to think of another way to create some income.” DSMF ¶ 79; PRDSMF ¶ 79. As noted earlier, it was in November 2001 that the Goldensons met Mr. and Mrs. Steffens at a restaurant in Princeton during which Mr. Steffens told the Goldensons about Spring Mountain and described its hedged investing concept, and Mr. Goldenson expressed interest. DSMF ¶¶ 44-46; 80-82; PRDSMF ¶¶ 44-46; 80-82.
i. Mr. Goldenson’s December 14, 2001 Meeting With Mr. Steffens and Subsequent Investment in QP I
On December 14, 2001, Mr. Goldenson visited Mr. Steffens at SMC’s offices in New York City in order to discuss a possible investment in an SMC fund. DSMF ¶¶ 46, 83; PRDSMF ¶¶ 46, 83. They had not spoken about a possible investment between the November dinner and the December 14 meeting. DSMF ¶¶ 46, 83; PRDSMF ¶¶ 46, 83. The meeting between Mr. Steffens and Mr. Goldenson lasted between forty-five and sixty minutes. DSMF ¶ 84; PRDSMF ¶ 84. At the meeting, Mr. Steffens explained the QP I fund, including, among other things, that QP I hedged risk by holding a portfolio of hedge funds with different strategies and submanagers. DSMF ¶ 85; PRDSMF ¶ 85. Mr. Goldenson expressed an interest in making an investment in QP I, and the Defendants subsequently sent the Goldensons a Confidential Memorandum (COM) for QP I, which Mr. Goldenson reviewed “relatively carefully.” DSMF ¶ 86; PRDSMF ¶ 86. The QP I COM stated that the Defendants would not be liable for any mistakes of judgment or other actions that did not constitute gross negligence, willful misconduct, or bad faith. DSMF ¶ 87; PRDSMF ¶ 87. It also contained a section titled “Risk Factors” that stated: “An investment in the Fund involves a high degree of risk, including the risk that the entire amount invested may be lost.” DSMF ¶ 87; PRDSMF ¶ 87.
On December 19, 2001, Mrs. Goldenson executed a subscription agreement for a $2 million investment in QP I and sent it to the Defendants. DSMF ¶ 88; PRDSMF ¶ 88. The QP I subscription agreement stated that the investor had “such knowledge and experience in financial and business matters that the Investor is capable of evaluating the merits and risks of the Investor’s investment in the fund and is able to bear such risks.” DSMF ¶ 89; PRDSMF ¶ 89.
Mr. Goldenson does not recall communicating with Mr. Ho prior to investing in QP I. DSMF ¶ 90; PRDSMF ¶ 90. Mr. Goldenson believes he was introduced to Mr. Ho on one occasion, in 2003, but does not recall having “‘any face-to-face discussions with him.’” DSMF ¶ 90 (quoting Def.’s 2011 D.G. Dep. Tr. 95:20-21); PRDSMF ¶ 90. Mr. Ho does not recall meeting Mr. Goldenson in person until the commencement of this lawsuit. DSMF ¶ 90; PRDSMF ¶ 90.
j. Mr. Goldenson’s December 14, 2001 Discussion With Mr. Steffens and Mr. Merkin About Ascot
At the same December 14, 2001 meeting at Mr. Steffens’ office, Mr. Goldenson asked Mr. Steffens if he had any “recommendations” for an additional investment separate from QP I. DSMF ¶ 91; PRDSMF ¶ 91. Mr. Steffens suggested that he consider an investment with Ascot. DSMF ¶ 92; PRDSMF ¶ 92.Mr. Steffens told Mr. Goldenson that QP I held Ascot as one of the funds in its investment portfolio. DSMF ¶ 93; PRDSMF ¶ 93. Mr. Steffens told Mr. Goldenson that Ascot was run by Ezra Merkin and that Mr. Merkin was his business partner. DSMF ¶ 94; PRDSMF ¶ 94. He further told Mr. Goldenson that Ascot employed a split-strike trading strategy and explained that strategy to Mr. Goldenson. DSMF ¶ 94; PRDSMF ¶ 94.
That same day, Mr. Steffens also introduced Mr. Goldenson to Mr. Merkin, who at the time worked in different rooms on different floors of the same building; both offices were owned by Gabriel Capital Corporation, which was owned by Mr. Merkin. DSMF ¶ 95; PRDSMF ¶ 95. Mr. Goldenson spoke with Mr. Merkin for approximately 45 minutes about Ascot, with Mr. Steffens present. DSMF ¶ 96; PRDSMF ¶ 96. Mr. Merkin described Ascot to Mr. Goldenson. DSMF ¶ 97; PRDSMF ¶ 97. As part of the presentation, he told Mr. Goldenson about the split-strike trading strategy used by Ascot and showed Mr. Goldenson several years’ worth of data reflecting Ascot’s performance. DSMF ¶ 97; PRDSMF ¶ 97.
k. The Goldensons’ First Direct Investment in Ascot
By the time Mr. Goldenson left Mr. Merkin’s office on December 14, 2001, he had made the decision to invest directly in Ascot. DSMF ¶ 98; PRDSMF ¶ 98. He subsequently received a COM from Ascot for a direct investment in that fund, but neither the Ascot COM nor the QPI COM that he received from the Defendants “ha[d] a material impact on [his] decision, ” because “[he] made the decision to invest before [he] even received the COMs.” DSMF ¶ 98; PRDSMF ¶ 98. The Ascot COM also stated, among other things and in a subsection called “Independent Money Managers”: “The Managing Partner [Mr. Merkin] may delegate investment discretion for all or a portion of [Ascot’s] funds to money managers, ” and also stated that “[Mr. Merkin] may not have custody over the funds invested with the other money managers.” DSMF ¶ 99; PRDSMF ¶ 99.
Mr. Steffens subsequently received at Spring Mountain’s offices a subscription agreement dated December 20, 2001 for a direct investment by the Goldensons of $2 million in Ascot. DSMF ¶ 100; PRDSMF ¶ 100. Mr. Goldenson did not consult with Mr. Steffens between the December 14, 2001 meeting and the time Mr. Steffens received the Ascot subscription agreement. DSMF ¶ 100; PRDSMF ¶ 100.
Mr. Steffens was disappointed to discover that the Goldensons were taking $2 million that they presumably could have invested with Spring Mountain Capital, which would have yielded fund management fees for SMC, and investing it instead in Ascot, which would yield no fees for SMC. DSMF ¶ 101; PRDSMF ¶ 101. Mr. Steffens forwarded the documents he received pertaining to Ascot to Mr. Merkin. DSMF ¶ 102; PRDSMF ¶ 102.
The Defendants never received any compensation from the Goldensons in connection with the Goldensons’ direct investments in Ascot. DSMF ¶ 103; PRDSMF ¶ 103. The only fees the Goldensons paid to the Defendants were for managing Spring Mountain funds in which the Goldensons invested. DSMF ¶ 103; PRDSMF ¶ 103.
l. The Goldensons’ Subsequent Direct Dealings With Ascot
After making their initial direct investment in Ascot, the Goldensons made two additional direct investments in Ascot in or about October 2002, each for $250, 000. DSMF ¶ 104; PRDSMF ¶ 104. On or about April 1, 2003, the Goldensons made a redemption of $250, 000 from Ascot. DSMF ¶ 105; PRDSMF ¶ 105. The Goldensons made the redemption in order to invest the money in a different hedge fund. DSMF ¶ 105; PRDSMF ¶ 105. On or about July 1, 2003, the Goldensons made a redemption of $500, 000 from Ascot. DSMF ¶ 106; PRDSMF ¶ 106. The Goldensons made the redemption in order to invest the money in a different hedge fund. DSMF ¶ 106; PRDSMF ¶ 106. On or about October 1, 2005, the Goldensons made a redemption of $600, 000 from Ascot. DSMF ¶ 107; PRDSMF ¶ 107. The Goldensons made the redemption in order to invest the money in a Summit hedge fund. DSMF ¶ 107; PRDSMF ¶ 107.
On or about October 1, 2006, the Goldensons made a direct investment of $40, 000 in Ascot. DSMF ¶ 108; PRDSMF ¶ 108.
On or about January 1, 2007, the Goldensons made a direct investment of $90, 670 in Ascot. DSMF ¶ 109; PRDSMF ¶ 109.
On January 1, 2007, the Goldensons made a direct investment of $250, 000 in Ascot. DSMF ¶ 110; PRDSMF ¶ 110.
On or about each of April 1, July 1, and October 1, 2007, the Goldensons made redemptions of $6, 000 from Ascot. DSMF ¶ 111; PRDSMF ¶ 111. The Goldensons did not consult with the Defendants regarding these specific redemptions. DSMF ¶ 111; PRDSMF ¶ 111.
On or about July 1, 2008, the Goldensons made redemptions of $6, 000, $20, 000, and $5, 000 from Ascot. DSMF ¶ 112; PRDSMF ¶ 112.
On or about October 1, 2008, the Goldensons made redemptions of $6, 000 and $20, 000 from Ascot. DSMF ¶ 113; PRDSMF ¶ 113.
By December 2008, the Goldensons had directly invested just under $2.9 million total in Ascot and withdrawn approximately $1.75 million from their direct investments in Ascot. DSMF ¶ 114; PRDSMF ¶ 114.
During the entire period when the Goldensons were direct investors in Ascot, Mr. Goldenson communicated on a regular basis directly with those running Ascot, including, rarely, Mr. Merkin. DSMF ¶ 115; PRDSMF ¶ 115. The Defendants were not privy to Mr. Goldenson’s communication with Ascot. DSMF ¶ 115; PRDSMF ¶ 115. During this period, Ascot sent the Goldensons reports detailing Ascot’s performance, which Mr. Goldenson relied on. DSMF ¶ 116; PRDSMF ¶ 116. In 2007, Mr. Merkin assured Mr. Goldenson in a direct communication between them that Ascot would continue to earn a return of 8% to 9%, which was consistent with its historical return. DSMF ¶ 117; PRDSMF ¶ 117. The Goldensons received copies of Ascot’s audited financial statements prepared by BDO Seidman, and relied on those statements in making their direct investments with Ascot. DSMF ¶ 118; PRDSMF ¶ 118.
m. Mr. Goldenson’s Communications With Defendants About Ascot After the Goldensons Had Invested in Ascot
Mr. Goldenson had “numerous” telephone conversations with Mr. Steffens and Mr. Ho in which Ascot was discussed, “but [they] had to do with the performance” of Ascot. DSMF ¶ 119; PRDSMF ¶ 119. Mr. Goldenson had conversations with Mr. Steffens or Mr. Ho that touched on the performance of Ascot either “every month for the first two years” after the Goldensons’ initial investments in QP I and Ascot, or “every month for . . . 12 or 18 [months].” DSMF ¶ 119; PRDSMF ¶ 119. In Mr. Goldenson’s telephone conversations with Mr. Ho that touched on Ascot’s performance, “[o]ther than telling me that [Ascot] was performing well and that they were very pleased with the performance of the Ascot Fund, no, he didn’t discuss anything else. These were calls about performance.” DSMF ¶ 120; PRDSMF ¶ 120.
Mr. Goldenson had a total of “25 [or] 30” telephone conversations with Mr. Ho “[o]ver a period of eight years.’” DSMF ¶ 121; PRDSMF ¶ 121.
n. The Collapse of Ascot and Its Effects
On December 11, 2008, Bernard Madoff was arrested and accused of running a Ponzi scheme. DSMF ¶ 123; PRDSMF ¶ 123. When Mr. Madoff was exposed as a fraud on December 11, 2008, the value of Ascot went essentially to zero. DSMF ¶ 124; PRDSMF ¶ 124. As a result, the Goldensons lost at a minimum the $1.15 million difference between the $2.9 million they had invested in Ascot over the years and the $1.75 million they had withdrawn from Ascot during that time. DSMF ¶ 125; PRDSMF ¶ 125. The Goldensons have not sued Mr. Merkin, though Mr. Merkin has not sought relief in bankruptcy court and has litigated a number of cases brought against him. DSMF ¶ 126; PRDSMF ¶ 126.
QP I took a write-down of at least $6.1 million on its investment in Ascot, and the Goldensons’ pro rata share of that amount was at least $200, 714. DSMF ¶ 127; PRDSMF ¶ 127. Spring Mountain funds collectively wrote down at least $34, 000, 000 on their holdings in Ascot. DSMF ¶ 128; PRSDMF ¶ 128.
Notwithstanding this share of QP I’s write-down, the Goldensons have made gains in both QP I and investments in other Spring Mountain funds, totaling over $1.6 million. DSMF ¶ 128; PRSDMF ¶ 128. This gain includes approximately $864, 000 in QP I, of which they have already received approximately $500, 000. DSMF ¶ 128; PRDSMF ¶ 128. It also includes approximately $776, 000 in other Spring Mountain funds. DSMF ¶ 128; PRDSMF ¶ 128.
Mr. Steffens personally lost approximately $4.6 million on his indirect investments in Ascot through Spring Mountain funds, and approximately $6.7 million altogether through his investments in Spring Mountain funds that, in turn, had invested in Mr. Merkin’s funds that had exposure to Mr. Madoff. DSMF ¶ 129; PRDSMF ¶129. Following Mr. Madoff’s fraud, in combination with other financial pressures in 2008, SMC was forced to liquidate its investment funds. DSMF ¶ 130; PRDSMF ¶ 130.
2. The Goldensons’ Additional Facts
The Defendants object to a number of the Goldensons’ statements on the grounds that they are supported only by Mr. Goldenson’s affidavit, which they claim varies from his deposition testimony. E.g., DRPSAMF ¶ 133. It is true that a statement in an affidavit that contradicts deposition testimony should be disregarded on summary judgment. Colantuoni v. Alfred Calcagni & Sons, Inc., 44 F.3d 1, 4-5 (1st Cir. 1994). The Third Circuit, in a searching analysis of this “sham affidavit” doctrine, explained that it is not an exercise in evidentiary weighing, forbidden at the summary judgment stage. Jiminez v. All American Rathskeller, Inc., 503 F.3d 247, 253 (3d Cir. 2007). Rather, a court should disregard a sham affidavit because it does not generate a “‘genuine issue for trial.’” Id. (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 249 (1986)).
It is this determination that permits trial judges to disregard contradictory affidavits. A sham affidavit is a contradictory affidavit that indicates only that the affiant cannot maintain a consistent story or is willing to offer a statement solely for the purpose of defeating summary judgment. A sham affidavit cannot raise a genuine issue of fact because it is merely a variance from earlier deposition testimony, and therefore no reasonable jury could rely on it to find for the nonmovant.
Id.; see also Orta-Castro v. Merck, Sharp & Dohme Química P.R., Inc., 447 F.3d 105, 110 (1st Cir. 2006) (upholding a district court’s rejection of an affidavit filed in response to a summary judgment motion, where the affidavit contradicted testimony given at two previous depositions and the affiant never testified as to difficulty remembering the contradicted facts).
However, not every variance from earlier deposition testimony renders an affidavit a “sham.” A court will disregard an affidavit as a sham if it “contradicts clear answers to unambiguous questions in an earlier deposition.” Gillen v. Fallon Ambulance Serv., Inc., 283 F.3d 11, 26 (1st Cir. 2002). “A subsequent affidavit that merely explains, or amplifies upon, opaque testimony given in a previous deposition is entitled to consideration in opposition to a motion for summary judgment.” Id. Moreover, “[a]dditional information may be provided by an affidavit submitted in opposition to a motion for summary judgment so long as the affiant did not testify at deposition that no such additional information existed.” Net 2 Press, Inc. v. 58 Dix Ave. Corp., 266 F.Supp.2d 146, 153 (D. Me. 2003).
a. The Goldensons’ Investment History
Prior to December of 2001, the Goldensons had never invested in hedge funds. PSAMF ¶ 131; DRPSAMF ¶ 131. The Goldensons always considered themselves to be “conservative” investors, meaning that their primary investment objective was to protect their principal in order to balance Mr. Goldenson’s start-up businesses. PSAMF ¶ 132; DRPSAMF ¶ 132. The Goldensons also desired to invest in a reliable investment strategy that was completely transparent. PSAMF ¶ 133; DRPSAMF ¶ 133.
In the early 1980s, the Goldensons began purchasing mostly “triple-A New Jersey municipal bonds” with mostly ten-year call back periods. PSAMF ¶ 134; DRPSAMF ¶ 134. By December of 2001, most of the Goldensons’ investments were placed in AAA municipal bonds. PSAMF ¶ 135; DRSPAMF ¶ 135. For perspective and strategic advice on the future “interest-rate climate” of these bonds, the Goldensons turned to Mr. Steffens, whom they considered a friend and investment adviser. PSAMF ¶ 137; DRPSAMF ¶ 137.
b. The Goldensons’ Relationship with Mr. Steffens at Merrill Lynch
Mr. Steffens was the Goldensons’ neighbor in Princeton. PSAMF ¶ 138; DRPSAMF ¶ 138. The Goldensons spent occasions with the Steffens that the Goldensons regarded as important, such as Valentine’s Day and “an engagement party that [the Goldensons] gave for [their] older son.” PSAMF ¶ 139; DRPSAMF ¶ 139.
While Mr. Steffens was the head of Merrill Lynch’s Private Client Group, the Goldensons “decided that we really would feel more comfortable having all of our bonds, or essentially all of our bonds, reposed at Merrill Lynch rather than in many accounts.” PSAMF ¶ 140; DRPSAMF ¶ 140. The Goldensons had “great trust and admiration’” for Mr. Steffens’ position on Wall Street and his professional judgment. PSAMF ¶ 141; DRPSAMF ¶ 141. While at Merrill Lynch, Mr.
Goldenson believed that Mr. Steffens “was probably above all others our investment advisor.” PSAMF ¶ 142; DRPSAMF ¶ 142. For many years, Mr. Goldenson was always interested in what Mr. Steffens’ “perspective was about bonds and particularly the interest-rate climate, ” a topic the two talked about “even at social occasions.” PSAMF ¶ 143; DRPSAMF ¶ 143.
Mr. Steffens provided the Goldensons with strategic advice, [and] he provided knowledge and his opinion about the direction of interest rates. He . . . expressed to [Mr. Goldenson] on a number of occasions that he thought that [the Plaintiffs’] portfolio may not have been the best maintained in municipal bonds by the latter part of 2001. And that was very important strategic advice.
PSAMF ¶ 144; DRPSAMF ¶ 144. Mr. Steffens was “very free to provide advice, ” he “always had an opinion about the nature of the economic climate and direction of interest rates, ” and he was “a person about who you can discuss markets all day, every day.” PSAMF ¶ 145; DRPSAMF ¶ 145. Mr. Steffens made the Goldensons “aware that market conditions with municipal bonds could affect [their] principal, ” and consequently that their “bonds were not as secure for various reasons as [Mr. Goldenson] thought they were” because “in the changing-interest-rate environment [one] could find [one]self owning a lot less value than – than [the Goldensons] thought [they] had.” PSAMF ¶ 146; DRPSAMF ¶ 146.
Initially, Mr. Steffens’ warnings that the Goldensons would get lower returns if they continued to purchase municipal bonds to replace their called-in bonds “wasn’t a matter of concern” to them. PSAMF ¶ 147; DRPSAMF ¶ 147. Although the Goldensons “were attentive to ideas that were presented to [them by Mr. Steffens] as being very conservative that were different from municipal bonds, ” they were “not interested in risking [their] principal” or changing their investment strategy because they “loved municipal bonds.” PSAMF ¶ 148; DRPSAMF ¶ 148.“[T]he notion of doing something entirely different” was not something the Goldensons were comfortable with because they were very cautious about their investments. PSAMF ¶ 149; DRPSAMF ¶ 149.
Based on Mr. Steffens’ repeated warnings “about the nature of the economic climate and direction of interest rates” in the municipal bond market, however, the Goldensons became increasingly concerned about “whether or not [they] were in the right investment.” PSAMF ¶ 150; DRPSAMF ¶ 150.
c. Mr. Steffens Introduces the Goldensons to the Idea of Hedged Investments
Mr. Steffens had previously told the Goldensons that they should think about hedged investments—which, according to Mr. Steffens, “were actually more reliable than investments [in] municipal bonds”—because they were not subject to changing market conditions. PSAMF ¶ 151; DRPSAMF ¶ 151. These conversations were continuing when the Goldensons heard that Mr. Steffens had left Merrill Lynch to start a fund-of-funds. PSAMF ¶ 152; PRDSAMF ¶ 152. After Mr. Goldenson asked “whether [Mr. Steffens] thought [they] should continue to stay in municipal bonds, ” Mr. Steffens invited the Goldensons to hear more about this new fund of funds on “several occasions.” PSAMF ¶ 153; DRPSAMF ¶ 153. Because of their great respect for Mr. Steffens’ advice that the Goldensons should be thinking about hedge funds, the Goldensons “agreed to listen to what he was doing.” PSAMF ¶ 154; DRPSAMF ¶ 154.
d. The Defendants and J. Ezra Merkin Form Spring Mountain Capital and QP I
i. Formation of Spring Mountain Capital
Messrs. Steffens and Merkin’s “extensive dealings” began in 1997. PSAMF ¶ 155; DRPSAMF ¶ 155. Mr. Merkin helped finance Spring Mountain during the first year of its existence. PSAMF ¶ 156; DRPSAMF ¶ 156.
On October 29, 2001, Messrs. Steffens, Ho, and Merkin founded Spring Mountain Capital G.P., LLC. PSAMF ¶ 157; DRPSAMF ¶ 157. Mr. Merkin was entitled to 47.5% of SMC G.P., LLC’s net profits attributable to “(i) a capital contribution made by a new Member to the extent such capital contribution is to be distributed to any Member; (ii) merging or consolidating the Company with another Person; and (iii) selling any asset of the Company other than in the ordinary course of business.” PSAMF ¶ 158; DRPSAMF ¶ 158.
SMC G.P., LLC was “empowered to formulate the overall investment strategy to be carried out by the [QP I] Fund and to exercise full discretion in the management of the trading, investment transactions and related borrowing activities of the Fund in order to implement such strategy.” PSAMF ¶ 159); DRPSAMF ¶ 159.
On October 29, 2001, Messrs. Steffens, Ho, and Merkin founded Spring Mountain Capital, L.P. PSAMF ¶ 160; DRPSAMF ¶ 160. Mr. Merkin was entitled to 47.5% of SMC, L.P.’s net profits attributable to “(i) a capital contribution made by a new Partner to the extent such capital contribution is to be distributed to any Partner; (ii) merging or consolidating the Partnership with another Person; and (iii) selling any asset of the Partnership other than in the ordinary course of business.” PSAMF ¶ 161; DRPSAMF ¶ 161.
Mr. Merkin, through Jennyness Consulting, LLC, acted as a consultant to SMC G.P., LLC and SMC, L.P., a position which also entitled Mr. Merkin to 47.5% of the net operating income of both companies and, upon termination of the consulting agreement, to 47.5% of the incentive allocations and performance fees generated from all these companies’ clients and accounts. PSAMF ¶ 162; DRPSAMF ¶ 162. Mr. Merkin was “an investor in one or another” of the Spring Mountain funds, which may have included some “deferred pieces.” PSAMF ¶ 163; DRPSAMF ¶ 163.
In 2001 and into 2002, Spring Mountain operated out of Mr. Merkin’s offices. PSAMF ¶ 164; DRPSAMF ¶ 164.
ii. Formation of QP I
On October 29, 2001, Messrs. Steffens, Ho, and Merkin founded Spring Mountain Partners, L.P. QP I Fund by purchasing the first limited partnerships therein. PSAMF ¶ 165; DRPSAMF ¶ 165. The Defendants referred to Mr. Merkin as a financial “consultant” to “the Management Company and/or the General Partner” of QP I in communications to investors. PSAMF ¶ 166; DRPSAMF ¶ 166.
As part of his capital commitment to the QP I Fund, Mr. Steffens assigned $2, 000, 000 of his interest in Ascot to the QP I Fund. PSAMF ¶ 167; DRPSAMF ¶ 167. The Defendants thereafter waived their and Mr. Merkin’s management fees in the QP I Fund. PSAMF ¶ 168; DRPSAMF¶ 168.
e. Mr. Steffens Introduces the Plaintiffs to Spring Mountain
In late 2001, the Steffenses invited the Goldensons to dinner at a restaurant called Main Street in Princeton, New Jersey. PSAMF ¶ 169; DRPSAMF ¶ 169.Although Mr. Goldenson initially thought the dinner “was mostly going to be a social gathering, ” Mr. Steffens ordered an expensive bottle of wine and, at his wife’s prompting, the dinner quickly became a discussion of Mr. Steffens’ new Spring Mountain venture. PSAMF ¶ 170; DRPSAMF ¶ 170. Mr. Steffens was “eager to tell [Mr. Goldenson]” about his investment strategy. PSAMF ¶ 171; DRPSAMF ¶ 171.
Mr. Steffens told Mr. Goldenson that he had started his first hedge fund, called the QP I Fund, which was a well-diversified “fund of funds” that employed “numerous strategies performed by numerous sub-managers” that would spread any risks across many different investments and market strategies in order to balance its portfolio of funds. PSAMF ¶ 172; DRPSAMF ¶ 172. Mr. Steffens assured Mr. Goldenson that the QP I Fund was a conservative alternative to municipal bonds and “a very secure way to invest because you’re spreading your money among many different strategies, ” which would protect their principal. PSAMF ¶ 173; DRPSAMF ¶ 173. Mr. Steffens advised the Goldensons to put their money in hedged investments, and not municipal bonds, because their bonds were not going to be responsive to changing market conditions. PSAMF ¶ 174; DRPSAMF ¶ 174. Mr. Steffens suggested that the Goldensons would “be better off in hedged investments in general, ” which would provide the Goldensons with superior rates of return to their municipal bonds and a reduced risk of exposure to the adverse market trends he was predicting, including the rising of interest rates. PSAMF ¶ 174; DRPSAMF ¶ 174. The Goldensons’ trust and respect for Mr. Steffens led them to take his advice seriously. PSAMF ¶ 175; DRPSAMF ¶ 175.
Mr. Steffens then offered to have Mr. Goldenson come to his office in New York City to further discuss the QP I Fund, and told Mr. Goldenson to set up an appointment with his secretary. PSAMF ¶ 176; DRPSAMF ¶ 176.
f. Mr. Goldenson’s Meeting With Messrs. Steffens and Merkin in New York City
i. Mr. Steffens Describes the QP I Fund to Mr. Goldenson
Mr. Goldenson met Mr. Steffens to discuss an investment in the QP I Fund in New York City on December 14, 2001. PSAMF ¶ 177; DRPSAMF ¶ 177. During the meeting, Mr. Steffens described “his whole career.” PSAMF ¶ 178; DRPSAMF ¶ 178. Mr. Steffens then explained that the minimum investment in the QP I Fund was $2 million. PSAMF ¶ 179; DRPSAMF ¶ 179. Mr. Goldenson reiterated that the Goldensons were not interested in risking their principal. PSAMF ¶ 180; DRPSAMF ¶ 180. Mr. Steffens assured Mr. Goldenson that the QP I Fund was “an extremely conservative investment, ” that there was not any “risk . . . of . . . consequence, ” and that the QP I Fund was a “very-highly-diversified investment that was a preferential investment to what [the Goldensons] were doing at that time, which was investing in triple-A Bonds. [Mr. Steffens] felt [the QP I Fund] was superior in all respects.” PSAMF ¶ 180; DRPSAMF ¶ 180.
Mr. Steffens repeated that the QP I Fund was a well-diversified “fund of funds” that employed “numerous strategies performed by numerous sub-managers, ” which made the QP I Fund “a very secure way to invest because you’re spreading your money among many different strategies.” PSAMF ¶ 181; DRPSAMF ¶ 181.He described “in great detail how they engineered the selection of all of these strategies” and used multiple “managers so the investments were spread among lots of people so if one person didn’t do so well in a given month, somebody else might do better.” PSAMF ¶ 182; DRPSAMF ¶ 182. Mr. Steffens “was very proud of the fact that he had assembled a great many sort of mathematically-inclined people who really were the genius behind the specific mix of strategies that he had in [the] QP I” Fund. PSAMF ¶ 183; DRPSAMF ¶ 183.
Mr. Goldenson was “very inquisitive” about the facts and circumstances underlying the QP I Fund’s investment strategy, and he asked Mr. Steffens “extensive questions about the strategy” of Spring Mountain’s first fund. PSAMF ¶ 184; DRPSAMF ¶ 184. At the end of Mr. Steffens’ description of the QP I Fund, Mr. Goldenson “indicated that, because of the amount of money that was falling due with the[ir] bonds, [the Goldensons] were willing to consider another investment of a similar size [$2 million].” PSAMF ¶ 185; DRPSAMF ¶ 185. Mr. Steffens told Mr. Goldenson that “I can highly recommend my partner’s fund called the Ascot Fund, ” which was the only fund he recommended, and then proceeded to tell Mr. Goldenson “exactly what the Ascot Fund was all about.” PSAMF ¶ 186; DRPSAMF ¶ 186.
ii. Mr. Steffens Describes the Ascot Fund to Mr. Goldenson
Mr. Steffens told Mr. Goldenson that Mr. Merkin was his business partner at Spring Mountain and was Spring Mountain’s investment advisor. PSAMF ¶ 187; DRPSAMF ¶ 187. When Mr. Steffens brought the Ascot Fund to Mr. Goldenson’s attention, the first thing Mr. Steffens told Mr. Goldenson was that Ascot was “already a core holding of QP I. It’s about 7 percent. We have a great deal of faith in this, but we think that it’s worthy of your consideration for a major additional investment.” PSAMF ¶ 188; DRPSAMF ¶ 188. Mr. Steffens assured Mr. Goldenson that because Ascot was already a “core holding” of the QP I Fund, he and his staff at Spring Mountain closely monitored the fund. PSAMF ¶ 189; DRPSAMF ¶ 189.
Mr. Steffens told Mr. Goldenson that “my partner has developed a very reliable proprietary strategy that he’s been operating for more than 10 years that he developed.” PSAMF ¶ 191; DRPSAMF ¶ 191. Mr. Steffens told Mr. Goldenson that “Ezra [Merkin] traded this strategy – ran the strategy” before explaining what Mr. Merkin’s split-strike strategy was in “great detail.” PSAMF ¶ 192; DRPSAMF ¶ 192. Mr. Steffens explained to Mr. Goldenson that “Ezra conducted and developed and . . . used a computer to have signals to buy and sell simultaneously options surrounding a basket of stocks, and that because you were long and short simultaneously, he said, it’s really very secure.” PSAMF ¶ 193; DRPSAMF ¶ 193.Mr. Steffens told Mr. Goldenson that “[Ascot] was his partner . . . Ezra Merkin’s proprietary strategy and that he was doing the trades, that – that it was on his computer; it was like his algorithm.” PSAMF ¶ 194; DRPSAMF ¶ 194. Mr. Steffens emphasized that “Ezra’s made a real specialty of this . . . he’s quite an amazing trader. He’s known to be a terrific trader.” PSAMF ¶ 195; DRPSAMF ¶ 195. Mr. Steffens told Mr. Goldenson that Ascot had “very, very steady results, ” and told him that “you’re not going to make as much as you’ll make in QP I . . . [Y]ou may make, you know, probably, reliably 8 to 9 to 10 percent with the Ascot Fund, but it’s extremely conservative and reliable, and Ezra has been doing this for more than 10 years.” PSAMF ¶ 196; DRPSAMF ¶ 196. Mr. Steffens concluded by telling Mr. Goldenson “I really think that you would do well to consider a separate, independent, additional investment in the Ascot Fund.” PSAMF ¶ 198; DRPSAMF ¶ 198.
Although Mr. Goldenson was “quite intrigued with the fact that [Ascot] was so secure, that it was a strategy that [Mr. Steffens] said Ezra conducted and developed, ” using computer signals, he initially was “very concerned about the fact that it was one strategy” and “was extremely inquisitive.” PSAMF ¶ 199; DRPSAMF ¶ 199. Mr. Steffens assured Mr. Goldenson that Ascot was even more conservative than the QP I Fund and that the only real risks to Ascot were occasional periods of low to non-existent returns when Mr. Merkin decided current market conditions would not allow him to successfully execute the strategy. PSAMF ¶ 200; DRPSAMF ¶ 200. Mr. Steffens’ assurances that Ascot “was suitable for [the Plaintiffs] and it was extremely conservative” came in the context of Mr. Goldenson having informed him that the Goldensons did not want to risk their principal. PSAMF ¶ 201; DRPSAMF ¶ 201.
Mr. Steffens then asked Mr. Goldenson “can I introduce my – partner to you?” PSAMF ¶ 202; DRPSAMF ¶ 202. Mr. Goldenson accepted this offer; “[a]fter all, [Mr. Steffens] was suggesting to [him] that [Ascot] was a very secure place, highly secure, to put $2, 000, 000.” PSAMF ¶ 203; DRPSAMF ¶ 203.
iii. Mr. Goldenson Meets with Messrs. Steffens and Merkin to Discuss the Ascot Fund
Mr. Goldenson had never heard of Mr. Merkin before December 14, 2001. PSAMF ¶ 204; DRPSAMF ¶ 204. Mr. Steffens introduced Mr. Merkin “with really quite glowing terms. He said, ‘my partner is a brilliant trader’ and . . . ‘he’s known to – to have this proprietary strategy.’ And this was one of the things that greatly attracted [Mr. Goldenson] to join forces with Ezra [Merkin].” PSAMF ¶ 205; DRPSAMF ¶ 205.
Messrs. Steffens and Merkin then gave Mr. Goldenson a “two-on-one pitch to invest in the Ascot Fund and they were both talking about and encouraging [him] to do the very same thing.” PSAMF ¶ 206; DRPSAMF ¶ 206. During his meeting with both Messrs. Steffens and Merkin, Mr. Goldenson heard the same description of Ascot that he previously received from Mr. Steffens. PSAMF ¶ 207; DRPSAMF ¶ 207. Ezra Merkin “was very happy to describe the fact that . . . he had his own proprietary strategy” and “was very specific that he did the trading and referred to his computer and the signals . . . and how he did it.” PSAMF ¶ 208; DRPSAMF ¶ 208. Because “Ezra was Launny’s partner and – and Launny spoke so very highly of – of his partner and the reliability of this strategy, ” Mr. Goldenson “was intrigued with it right away, but [he] asked a lot of questions” about the proprietary strategy. PSAMF ¶ 209; DRPSAMF ¶ 209. Mr. Goldenson understood “proprietary” to mean Mr. Merkin’s “personal – like a patented product. . . . That it was an exclusive strategy that he himself had developed and wasn’t available all over the place.” PSAMF ¶ 210; DRPSAMF ¶ 210.
As Mr. Merkin described his purported proprietary strategy, Mr. Steffens “was an active part of the discussion” and kept “acknowledging and agreeing with Ezra” by making “comments along the way, really reassuring comments because most of [Mr. Goldenson’s] questions had to do with how secure [Ascot] was.” PSAMF ¶ 211; DRPSAMF ¶ 211. Mr. Steffens “repeated that it was a very conservative, very steady strategy” and said that “the strategy seemed to do better in higher-interest-rate environments, ” which Mr. Goldenson thought “was interesting.” PSAMF ¶ 212; DRPSAMF ¶ 212. Mr. Steffens reiterated that Ascot “‘was a strategy that Ezra performs. He does the trading. It’s done right here.’ And – and that was [Mr. Goldenson’s] full understanding” based on Mr. Steffens’ explanation that his “‘partner is an extraordinary trader’ right in front of [Mr. Merkin].” PSAMF ¶ 213; DRPSAMF ¶ 213.
Mr. Steffens told “[Mr. Goldenson] that [Mr. Merkin’s trading strategy] was a proven and very reliable strategy that [the Plaintiffs] could feel comfortable with as conservative investors.” PSAMF ¶ 214; DRPSAMF ¶ 214. Mr. Steffens told Mr. Merkin to “‘show Dan [Goldenson] your track record, ’ and they took out a piece of paper with years and years of – of data showing this remarkable performance.” PSAMF ¶ 215; DRPSAMF ¶ 215. Messrs. Steffens and Merkin claimed that “they were very good at selecting the bracketed opportunities” that the execution of Ascot’s split-strike strategy depended on and that “their winning ratio was far greater than their losing ratio.” PSAMF ¶ 216; DRPSAMF ¶ 216.
At the December 14, 2001 meeting, Messrs. Steffens and Merkin told Mr. Goldenson that he had to act quickly in order to invest before the first of the year or else he would have to wait three months. PSAMF ¶ 217; DRPSAMF ¶ 217. As far as Mr. Merkin can remember, this meeting “could well have been” his only face-to-face meeting with Mr. Goldenson. PSAMF ¶ 218 (quoting Merkin Dep. Tr. 120:12-13); DRPSAMF ¶ 218.
g. The Goldensons Invest in the Ascot and QP I Funds
Once the meeting was over, Mr. Goldenson “was very impressed with both strategies and because of the really great confidence and regard and respect that [the Goldensons] had for Launny [Steffens], ” the fact that Mr. Merkin was his business partner in Spring Mountain, the fact that Mr. Goldenson considered Mr. Steffens to be his investment advisor, and the fact that Ascot was already a core holding of the QP I Fund, Mr. Goldenson “was prepared to make a commitment.” PSAMF ¶ 219; DRPSAMF ¶ 219.
Mr. Goldenson felt fortunate to join these partnerships. PSAMF ¶ 220; DRPSAMF ¶ 220. He made the decision to invest in Spring Mountain “based upon the advice that [Mr. Steffens] gave [Mr. Goldenson] . . . and [not only as] the head of the company” but also as someone Mr. Goldenson considered a long-time advisor. PSAMF ¶ 221; DRPSAMF ¶ 221. Mr. Goldenson “made a decision to invest principally on [Mr. Steffens’] advice in his partner’s fund, the Ascot Fund, ” and his “very detailed description.” PSAMF ¶ 221; DRPSAMF ¶ 221. The “only reason [the Goldensons] invested with Ezra Merkin was because of Launny Steffens.” PSAMF ¶ 222; DRPSAMF ¶ 222.
i. The COMs for the QP I and Ascot Funds
Within two weeks after Mr. Goldenson’s meeting with Messrs. Steffens and Merkin, he received COMs for the QP I and Ascot Funds. PSAMF ¶ 224; DRPSAMF ¶ 224. Mr. Goldenson reviewed the COMs “in the context of what Launny [Steffens] had told [Mr. Goldenson].” PSAMF ¶ 225; DRPSAMF ¶ 225.
I. The QP I COM
To achieve its investment objective, the QP I COM advised that it employed a “five-step, top-down investment process” whereby it, among other things, identified, evaluated and selected managers for proposed strategies, constructed “a high performing and truly diversified portfolio, ” tested the portfolio, and “monitor[ed] the portfolio and its underlying managers and [made] adjustments.” PSAMF ¶ 226; DRPSAMF ¶ 226. The methodology documented in the COM was “very important” and “significant” to Mr. Goldenson. PSAMF ¶ 227; DRPSAMF ¶ 227.
The QPI COM stated that “the Submanagers selected by the General Partner will invest in and actively trade securities.” PSAMF ¶ 228; DRPSAMF ¶228. The QP I COM also advised prospective investors that they were
[i]nvited to meet with the General Partner to ask questions of, and receive answers from, the General Partner concerning the terms and conditions of this offering of the interests, and to obtain any additional information, to the extent that the General Partner possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the information contained herein.
PSAMF ¶ 229; DRPSAMF ¶ 229. The COM promised that the “General Partner and/or Management Company will make available to any prospective Investor such additional information as it may possess, or as it can acquire without unreasonable effort or expense, necessary to verify or supplement the information contained in this Memorandum.” PSAMF ¶ 230; DRPSAMF ¶ 230.
The QP I COM only identified Mr. Merkin as a “consultant” to the Fund. PSAMF ¶ 232; DRPSAMF ¶ 232. The QP I COM stated that “Schulte Roth & Zabel LLP . . . acts as counsel to the General Partner and the Management Company. In connection with this offering and ongoing advice to the Fund, the General Partner and the Management Company, Schulte Roth and Zabel LLP will not represent the investors.” PSAMF ¶ 233; DRPSAMF ¶ 233.
II. The Ascot COM
The 2002 Ascot COM gave the fund wide latitude to invest in a number of active investment strategies in the future:
Ascot Partners, L.P., a Delaware limited partnership formed on August 17, 1992, engages primarily in the practice of index arbitrage, convertible arbitrage and options arbitrage, in which individual or baskets of securities are purchased and/or sold against related securities such as index options or individual stock options. These strategies are used to take advantage of price disparities among related securities. The Partnership also may make investments in private debt claims and publicly traded securities of bankrupt and distressed companies and in risk arbitrage as well as make indirect investments, including investments in private investment partnerships, closed-end funds, and other pooled investment vehicles which engage in similar investment strategies (collectively “Other Investment Entities”).
PSAMF ¶ 234; DRPSAMF ¶ 234.
The 2002 Ascot COM made several references to using multiple independent money managers:
The managing partner may delegate investment discretion for all or a portion of the Partnership’s funds to money managers, other than the Managing Partner, or make investments with Other Investment Entities. Consequently, the success of the Partnership may also be dependent upon other money managers or investment advisors to Other Investment Entities. Although the Managing Partners will exercise reasonable care in selecting such independent money managers or Other Investment Entities, the Managing Partner and the General Partners may not have custody over the funds invested with the other money managers or with Other Investment Entities. Hence, the actions or inactions on the part of other money managers or the investment advisors to Other Investment Entities may affect the profitability of the Partnership. . . . The independent money managers and Other Investment Entities may trade wholly independent of one another and may at times hold economically offsetting positions.
PSAMF ¶ 236 (emphasis supplied by the Goldensons); DRPSAMF ¶ 236.
The 2002 Ascot COM promised that “[a]ll decisions with respect to the management of the capital of the Partnership are made exclusively by J. Ezra Merkin. Consequently, the Partnership’s success depends to a great degree on the skill and experience of Mr. Merkin.” PSAMF ¶ 238; DRPSAMF ¶ 238. Similarly, Ascot’s 2002 COM promised Mr. Merkin “utilizes a selective approach in evaluating potential investment situations, generally concentrating on relatively fewer transactions he can follow more closely.” PSAMF ¶ 239; DRPSAMF ¶ 239. The COM also represented that Ascot would “execute its trades through unaffiliated brokers.” PSAMF ¶ 240; DRPSAMF ¶ 240. It stated that “the managing partner is required to devote substantially his entire time and effort during normal business hours to his money management activities, including (but not limited to) the affairs of the Partnership.” PSAMF ¶ 241; DRPSAMF ¶ 241.
The Ascot COM also urged prospective investors to
[r]equest any additional information they may consider necessary in making an informed investment decision. Each prospective purchaser is invited, prior to the consummation of a sale of any interest to such purchaser, to ask questions of, and receive answers from, the managing partner concerning the partnership and this offering and to obtain any additional information to the extent the managing partner possesses the same or can acquire it without unreasonable effort or expense, in order to verify the accuracy of the information set forth herein.
PSAMF ¶ 24; DRPSAMF ¶ 242.
The Goldensons received an updated 2006 Ascot COM in November, 2006 which was materially the same as its previous COM. PSAMF ¶ 244; DRPSAMF ¶ 244. The 2006 Ascot COM provided that “[Ascot] may . . . invest in different investment funds and . . . enter into new investment advisory agreements without prior notice to or consent of [Ascot’s investors].” DRPSAMF ¶ 244. The 2006 Ascot COM also provided that “‘[Ascot] will make investments through third-party managers.” Id. ¶ 244. This 2006 COM characterized the roles of Morgan Stanley and Mr. Madoff as “unaffiliated . . . principal prime brokers and custodians” responsible for “clearing” transactions. PSAMF ¶ 245; DRPSAMF ¶ 245.
Mr. Madoff had actual custody of the funds he managed for Ascot. PSAMF ¶ 246; DRPSAMF ¶ 246. Mr. Madoff also cleared the securities he purchased. PSAMF ¶ 247; DRPSAMF ¶ 247. Morgan Stanley did not clear any of Mr. Madoff’s trades. PSAMF ¶ 248; DRPSAMF ¶ 248.
[A]ny reference to Madoff as a prime broker or custodian was itself misleading because it is not the practice in the securities industry for a prime broker or custodian to provide substantive investment advice to clients . . . . [A] prime broker might lend money to a fund, it might have custody of the fund assets, it might do the back-office clearance and settlement . . . [but t]he prime broker is not the substantive manager of a particular fund, and in that sense when [the 2006 Ascot COM] refer[s] to Madoff as a prime broker, that is very misleading, because indeed Madoff . . . was the one who ultimately had responsibility for managing the money. That’s where the ultimate decision was made; there’s no question about that.
PSAMF ¶ 249; DRPSAMF ¶ 249.
ii. The Mechanics of the Goldensons’ Investment in Ascot
During the December 14, 2001 meeting, Mr. Goldenson was instructed to wire any funds he invested in the Ascot Fund to Ascot’s account at Morgan Stanley. PSAMF ¶ 250; DRPSAMF ¶ 250. Based on Mr. Steffens’ instructions, the Goldensons sent their initial $2 million subscription agreements for Ascot and the QP I Fund to Mr. Steffens, along with a thank you for Mr. Steffens’ “invitations to join these partnerships.” PSAMF ¶ 251; DRPSAMF ¶ 251. On January 16, 2002, Mr. Merkin confirmed the Goldensons’ $2 million investment in Ascot effective as of January 1, 2002. PSAMF ¶ 252; DRPSAMF ¶ 252. Mr. Merkin also confirmed that the QP I Fund had made an additional $2 million investment in Ascot that same day. PSAMF ¶ 253; DRPSAMF ¶ 253. On January 17, 2002, Mr. Merkin loaned $2 million to Spring Mountain Partners, L.P. PSAMF ¶ 254; DRPSAMF ¶ 254.
h. Facts About Ascot Unknown To the Goldensons Until 2009
Mr. Merkin formed the Ascot Fund in 1992. PSAMF ¶ 255; DRPSAMF ¶ 255. Ascot Fund, Ltd. was the offshore companion fund to Ascot Partners, L.P. that invested all of its assets with Ascot Partners, L.P. PSAMF ¶ 256; DRPSAMF ¶ 256.
Ascot was a “feeder fund” for Mr. Madoff. PSAMF ¶ 257; DRPSAMF ¶ 257.Mr. Merkin established Ascot “largely but not entirely’ for the purpose of investing with Madoff.” PSAMF ¶ 258; DRPSAMF 258. Ascot did “virtually nothing” before it invested with Mr. Madoff, and his trading was “absolutely central to what Ascot did.” PSAMF ¶ 259; DRPSAMF ¶ 259. Mr. Merkin testified that he “can’t imagine” describing the options trading strategy employed by Mr. Madoff as his personal, rather than Mr. Madoff’s, trading strategy. PSAMF ¶ 260; DRPSAMF ¶ 260. Mr. Merkin further testified that Mr. Madoff’s purported “proprietary strategy” was “not necessarily unique, novel, or proprietary.” PSAMF ¶ 261; DRPSAMF ¶ 261.
Ascot’s funds were invested primarily with a managed account at Bernard Madoff Investment Securities, LLC. PSAMF ¶ 263; DRPSAMF ¶ 263. In 2001, MAR/Hedge’s article “Madoff Tops Charts; Skeptics Ask How” attributed to Madoff a description of the role feeder funds played in his investment operations. PSAMF ¶ 264; DRPSAMF ¶ 264. According to this article, feeder funds “provide all the administration and marketing [materials], raise the capital and deal with investors, says Madoff” and “Madoff Securities’ role, he says, is to provide the investment strategy and execute the trades.” PSAMF ¶ 264; DRPSAMF ¶ 264.
Between 2001 and 2008, Mr. Madoff “managed substantially all of the assets of Ascot.” PSAMF ¶ 265; DRPSAMF ¶ 265. As of December 31, 2007, Ascot had $1, 759, 650, 866.00 invested with Madoff and $0.00 ...