The defendants Investment Management Services, Inc. ("IMS"), International Fund Services, Inc. ("IFS") and Thomas F. Grizzetti ("Grizzetti") (collectively the "IMS Defendants") have moved for summary judgment pursuant to Rule 56, Fed.R.Civ.P. dismissing the Second Amended Complaint ("SAC") of plaintiff, the Jordan (Bermuda) Investment Company, Ltd. ("JBIC" or "Plaintiff"). JBIC has also moved for summary judgment under the same rule for the relief sought in the SAC against the IMS Defendants and against Hunter Green Investments LLC ("Hunter Green LLC") and John Shilling ("Shilling") (collectively the "Hunter Green Defendants"). As set forth below, the motion of the IMS Defendants is granted and that of JBIC is granted in part and denied in part.

This action was brought by JBIC to recover damages for a failed $5.0 million investment made by the Jordan Trust (the "Trust"), JBIC's assignor, in 1998. At issue is the responsibility of the Defendants for the loss.

Prior Proceedings

JBIC filed its complaint December 5, 2000 as the assignee of the claims of the Trust, alleging that the Trust was fraudulently induced to transfer five million dollars to the Beacon Emerging Debt Fund, Ltd. ("Beacon" or the "Fund"), present in dissolution in the British Virgin Islands.

The SAC was filed on November 21, 2003. The SAC alleged that in order to induce John W. Jordan II ("Jordan"), the trust's sole trustee, to invest in Beacon, defendant Shilling, a principal of Hunter Green Investments Ltd. ("Hunter Green") falsely represented to Jordan that Beacon could, and would, issue a special class of shares to the Trust; Class J shares would not utilize leverage as part of its investment strategy; and Beacon would obtain Jordan's prior written approval before allocating any Fund portfolio securities to the Class J shares. (SAC, ¶¶ 16, 17, 31.) The SAC also alleged that all defendants intentionally failed to disclose that Class J shares did not exist (id., ¶ 42); the Trust's monies were subject to the claims and liens of Beacon's creditors (id., ¶ 43); Beacon was investing the Trust's monies and utilizing leverage (id., ¶ 44); and the securities purchased by the Fund were acquired through use of leverage and were subject to margin calls (id., ¶ 45).

With respect to the IMS Defendants, the SAC alleged that IFSI mailed to the Trust April and May 1998 account statements which purportedly misrepresented the existence of Class J shares and failed to disclose the "facts" that Beacon had used the Trust's monies to make investments; Beacon had utilized leverage with respect to the Trust's monies; the Trust's monies were subject to the claims and liens of Beacon's creditors; and the investments purchased with the Trust's monies were purchased utilizing leverage, were pledged to Beacon's creditors and were subject to margin calls. (Id., ¶¶ 46-49.) The SAC alleged claims against the defendants for fraud and breach of fiduciary duty (primary and aiding and abetting), as well as claims for civil conspiracy and concerted action. (Id., ¶¶ 55-96).

Discovery has proceeded in the course of which the orders of January 26, March 2, June 29, July 27, 2005 and September 26, 2006 and January 31, 2007 were entered.

The instant motions were heard on January 31, 2007 and the opposition of Shilling to the JBIC motion was filed on May 9, 2007.

The Facts

The facts are set forth in the IMS Defendants' and Plaintiff's Rule 56.1 Statements and the responses thereto. Certain of the underlying facts are not disputed. The material factual disputes are noted below.

JBIC is a corporation organized and existing under the laws of Bermuda with its principal place of business in the State of Illinois and is the assignee of the claims of the Trust, an investor in Beacon. The Trust was organized under the laws of the State of Illinois and is a charitable remainder trust and is exempt from income tax under United States tax laws, but risks realizing "unrelated business taxable income" in the event it utilizes leverage to make investments.

IMS is a corporation organized and existing under the laws of the State of Delaware with its principal place of business located in New York. In 1997 and 1998, IMS was engaged in the business of providing information technology and middle office support services to hedge funds, and to one of its affiliates, IFSI.

According to the Plaintiff, IFSI was only nominally Beacon's administrator while IMS (P-281, at 1920; P-293; P-175, at 198), performed most of the work required by the Administrative Services Agreement including front office administration services (market data, real time P L and risk systems), all middle office administration (trade operations, confirmations, trade settlements) and back office administration services, such as net asset valuation through technology and the staff to do so were located IMS's offices in New York.

Citations to Plaintiff's exhibits will be denoted by the designation "P-" followed by the number 5 of the exhibit.

Grizzetti and others at IMS were signatories on certain of Beacon's accounts and conferred with counsel with respect to the preparation of Confidential Private Placement Memorandum. An IMS employee, Ted Hughes, acted as Beacon's operations manager.

International Fund Services, Inc. ("IFS") is a corporation organized and existing under the laws of the State of Connecticut with its principal place of business in the State of New York. IFS was not involved with any aspect of fund administration and had no business dealings with Beacon or the Trust.

Grizzetti is a resident and citizen of the United States residing in New York, and was in 1997 and 1998 an officer of IMS.

Defendant Hunter Green LLC was a limited liability company organized and existing under the laws of the State of Connecticut, with its principal place of business in Connecticut and was the Primary Sub-Adviser and Commodity Trading Adviser to Beacon, and an affiliate of Hunter Green, the Investment Manager of Beacon. (Id.) Shilling was a principal of Hunter Green LLC and Hunter Green. (Id. at ¶ 3). Hunter Green LLC has not filed opposition to JBIC's summary judgment motion.

Ilya Kaminsky ("Kaminsky"), a principal of Hunter Green LLC and Hunter Green, was Beacon's head trader responsible for making all decisions regarding the purchase, sale and financing of all securities acquired on behalf of Beacon and its shareholders.

Beacon was a hedge fund organized as a corporation under the laws of the British Virgin Islands on August 31, 1996. The shares of stock issued by Beacon were sold only to sophisticated investors pursuant to a Private Placement Memorandum, dated October 1, 1997 (the "PPM"), and certain supplements thereto.

Non-party IFSI is a corporation organized and existing under the laws of Ireland with its principal place of business in Dublin and the administrator of the Fund pursuant to the terms of an Administrative Services Agreement dated November 1, 1996. The Plaintiff has contended that IMS was the administrator of Beacon.

All claims against IFSI were dismissed by the Court in Jordan (Berm.) Inv. Co. v. Hunter Green Invs., 205 F. Supp. 2d 243 (S.D.N.Y. 2002).

Jordan, the Trustee of the Trust, is and was, at all relevant times, a sophisticated investor.

Jordan retained outside counsel, Steven Rist ("Rist"), then a member of Bryan Cave LLC, to conduct due diligence on behalf of the Trust in connection with a contemplated investment in Beacon. Rist and his colleagues at the Bryan Cave law firm reviewed offering materials, subscription and Fund documents, organizational documents of the Funds which revealed that Beacon had been authorized to issue specified classes of common stock. One such document, the Memorandum of Association (the "Memorandum of Association") provided that "[t]he authorized capital is made up of 5,000,000 Shares of U.S. $0.01 par value each, divided into 5 classes designated A through E respectively, with each class consisting of 1,000,000 shares. Each class is divided into 100 Series numbered 1-100, with each Series consisting of 10,000 Shares."

Prior to authorizing the Trust's investment in Beacon, Jordan and Rist also requested and reviewed the PPM and a Class J Supplement to the PPM (the "Class J Supplement"), which was issued by Beacon in connection with the Trust's contemplated purchase of Beacon Shares.

The PPM specifically disclosed that "[t]he Fund levarages its capital" by "borrowing funds from securities broker-dealers, banks, or others" in "significant amounts" (PPM (Def. Ex. 7) at I000022 and I000046), and that the Fund may "purchase securities on margin, as well as finance positions and lend funds through repurchase and reverse repurchase agreements" (Id. at I000037). The PPM also disclosed that a "broker-dealer could liquidate assets held in the account to satisfy the Fund's obligations to the broker-dealer" and that "[l]iquidation in that manner could have extremely adverse consequences." (Id. at I000046).

The Class J Supplement, which the Trust and its representatives also received and reviewed, disclosed in pertinent part that "[t]he Fund is authorized to issue 1,000,000 shares of its Class J common stock . . . which are intended to be issued pursuant to this offering." (Class J Supplement (Def. Ex. 13) at 2.) The Class J Supplement further disclosed that "Class J Shares shall be exclusively issued The Jordan Trust," and that the shares "will invest on an unlevered basis." (Id.)

Class J shares were Class B shares renamed "J" for Jordan. (Def. Ex. 14 at 165).

On or about March 24, 1998, Hunter Green issued a side letter (the "Side Letter") pursuant to which Hunter Green agreed to consult with Jordan and obtain his prior written approval of all investment decisions pertaining to the investment portfolio of the Fund's Class J shares.

According to Plaintiff, the Trust agreed to purchase Class J Shares of Beacon pursuant to a subscription agreement (the "Subscription Agreement") dated March 30, 1998. The Trust never received any such shares, and in litigation proceedings in the British Virgin Islands Beacon and its creditors agreed, and the Court so ordered, that the Trust was never a shareholder of Beacon.

Pursuant to the Subscription Agreement, the Trust agreed to purchase 5,000 Class J shares for a total price of $5 million which was wired to Beacon Bank of Ireland account at the Bank of New York and deposited in Beacon's account with the Bank of Ireland in Dublin on March 31, 1998.

Between April 1, 1998 and July 31, 1998, no more than $5 million of cash and securities held by Beacon was allocated to the Class J Shares by Hunter Green.

Neither IMS, IFS, Grizzetti nor IFSI was involved in making investment decisions for the Fund (Def. Ex. 6 at 232), or executing trades on behalf of Beacon. An IMS employee acting as operations manager for Beacon executed trades on behalf of Beacon. Only Shilling and Kaminsky of Hunter Green were responsible for allocating Fund securities to various share classes of the Fund. Once Shilling and Kaminsky purchased securities for the Fund, IFSI received instructions from them regarding the allocation of those securities to certain share classes. Hunter Green's allocations were communicated to IFSI, which utilized this information to calculate the net asset value (the "NAV") for each share class. According to the Plaintiff, IMS, not IFSI, received the asset allocation information and performed the net asset value calculations based on its rendering of services to Beacon.

Neither IMS, IFS, Grizzetti nor IFSI was aware of how Hunter Green financed the purchase of the Fund portfolio securities allocated to the Class J Shares. The Plaintiff imputes such knowledge to the IMS defendants because IMS was the repository of the Beacon records and controlled the Beacon bank account. The Class J Supplement and PPM were drafted by Beacon's outside counsel, Fred Santo, Esq. ("Santo") of the firm Katten Muchin Rosenman LLP.

Grizzetti may have reviewed a draft of the Class J Supplement before it was finalized (id. at 78-79), neither he, IFSI, IMS nor IFS drafted or participated in the drafting of any portion of the Class J Supplement or had any input as to its content. Grizzetti spoke with Shilling about the Trust investment and the allocation of Class J shares. There is no evidence presented relating to the substance of these conversations.

IMS, IFS, Grizzetti and IFSI made no representation to Rosenman Colin concerning the accuracy of any information disclosed in the PPM or Class J Supplement, other than the information describing IFSI's services as Administrator of the Fund and its affiliation with certain other entities that also were providing services to the Fund.

IMS, IFS, Grizzetti and IFSI never received or became aware of the existence of the terms of the Side Letter. They also did not know whether Jordan had authorized the investments made by Beacon on behalf of the Trust or whether his prior authorization was required. The Plaintiff infers such knowledge from the nature of dealing of the IMS defendants with Beacon and Shilling and the manner IMS maintained its records.

IFSI mailed and the Trust received monthly Beacon account statements in May, June, July and August of 1998. The monthly account statements sent by IFSI to the Trust reflected the total capital invested by the Trust in Beacon, the number of Class J shares issued to the Trust and the NAV of the shares at month's end in April, May, June and July of 1998, respectively. The monthly account statements reflect the "Total Beginning Capital" and "Total Ending Capital" in the respective month, as well as a "Per Share Value" and any "Income Allocation for the Month," but do not identify the date, amount, or security purchased or sold from the portfolio allocable to the Class J shares.

According to the IMS Defendants, IFSI would not have mailed monthly Beacon account statements to the Trust if it believed that the Class J Shares purchased by the Trust had not been validly authorized or issued.

Apart from receiving monthly account statements from IFSI, neither Jordan nor any other representative of the Trust had any contact with IMS, IFS, IFSI or Grizzetti before Beacon became insolvent. Jordan did not review or rely on any of the monthly Beacon account statements sent to the Trust by IFSI until August 1998, by which time the Fund had become insolvent as a result of the Russian debt crisis.

Had Jordan reviewed the monthly Beacon account statements at the time he first began to receive them from IFSI in May 1998, he would have recognized that there was investment activity in the account, and "would have pulled [the Trust's] money immediately, putting [defendants] on notice to give [him his] money back." (Jordan Dep. at 137-39, 141, 149-50.)

Neither IMS, IFS, Grizzetti nor IFSI represented to the Trust or any other person or entity that the Trust's $5 million investment in Beacon would be placed in a separately managed account.

Neither IMS, IFS, Grizzetti nor IFSI issued, or was responsible for the authorization or issuance of, any class of shares of Beacon.

According to the Defendants, neither IMS, IFS, Grizzetti nor IFSI drafted the minutes of any meeting of the board of directors of Beacon.

IFSI prepared and maintained monthly Beacon share registers which reflected, among other things, the number of each class of Beacon shares issued and outstanding at the end of each month, the NAV of each class of shares at the end of each month, and any purchases or redemptions of Beacon shares each month.

In March 1998, Rist advised Jordan that an investment by the Trust in a hedge fund that utilized leverage to make investments was an appropriate investment for the Trust.

In 1998, Jordan understood that share capital invested by stockholders through the purchase of shares of a corporation remained subject to the claims of the corporation's creditors for the life of the investment.

If the Trust earned "unrelated business taxable income," ("UBTI") all of the Trust's income in that year would become taxable. One way to earn UBTI is if a charitable remainder trust earned income from investments that are leveraged, i.e., investments that are not paid for fully from an investor's funds but utilize borrowing to pay for some portion of the investment.

According to the Defendants, "borrowing" by a hedge fund organized as a corporation in which the investor has purchased shares of stock does not earn UBTI. Prospectus at 29.

Beacon invested in foreign market debt instruments, and Beacon made leveraged investments. Beacon made leveraged investments by paying for a portion of its investments and by borrowing funds from securities broker-dealers, banks or others to pay for the remainder of the investment. Such leverage increased both the possibilities for profit and the risk of loss. (Id.)

Borrowings by Beacon were typically secured by the financial instrument that was being purchased and other assets. (Id.) The banks, brokerage houses and other entities from whom Beacon borrowed could sell the financial instrument that Beacon had purchased to repay the amounts borrowed by Beacon to purchase the financial instrument and had claims against other Beacon assets to the extent of any deficiencies if authorized under the terms of the applicable financing arrangements between the lenders and Beacon.

Each class of shares of Beacon was traded separately. Beacon's PPM dated October 1, 1997, insofar as it refers to the Class J shares, provided that shareholders may not redeem the shares of any series unless they have been held for at least six months.

IFSI entered into an Administrative Services Agreement with Beacon dated November 1, 1996. According to the Plaintiff, IFSI was only nominally Beacon's administrator. A letter dated November 17, 1998, on IMS stationery, signed by Grizzetti as the Chief Financial Officer of IMS stated that "we" are "the administrators for Beacon." The testimony of James Kelly ("Kelly"), President of IMS, Susan Byrne ("Byrne") of IFSI, and Shilling disputed that contention.

According to the Plaintiff, all middle office administration services for Beacon (trade operations, confirmations, trade settlements) were performed by IMS rather than IFSI. Before 1998, IFSI performed the back office administration services (net asset valuation, investor relations and maintenance of the shareholders registers). Whether IFSI or IMS performed the net asset valuations is a disputed factual issue.

Grizzetti, together with IMS's co-president, John Suglia, were signatories on Beacon's bank account. Whether Grizzetti and other IMS employees were signatories on Beacon's securities accounts is disputed.

Shilling and Grizzetti conversed with Beacon's lawyer who had more conversations with Grizzetti than Shilling. Beacon had no employees. An IMS employee, Ted Hughes ("Hughes"), was addressed as Beacon's operations manager.

Certain communications to Beacon were sent to IMS and to Hughes. Certain IMS officers also were officers or signatories of IFSI.

In early 1998, Jordan communicated to Shilling that he would be willing to invest some of the Trust's monies through Beacon but that the Trust's monies could not be, and Jordan would not permit them to be, leveraged.

Shilling represented to Jordan that, if the Trust invested through Beacon, none of its monies would be leveraged because although Beacon's investments were leveraged, no allocation of such securities to his account over the invested amount would be made. (Shilling Dep. at 4-22.)

According to Jordan, Shilling represented that Beacon would maintain a separate account for the Trust's monies in the form of a special and separate class of shares through which the Trust monies would be invested. Shilling has disputed that he stated that a separate account would be issued. Shilling has maintained that he represented that Class J shares would be issued solely to the Trust and that the Trust's monies would not be invested without first obtaining Jordan's prior written approval.

According to Jordan, the normal six month notice restriction on an investor withdrawing her money would not apply to the Trust; the IMS Defendants have cited to the language of the PPM.

On March 18, 1998, Shilling sent a letter to Chris Johnston, Jordan's assistant, enclosing a copy of the PPM ("March 18, 1998 Cover Letter") which reiterated in writing some of the representations Shilling had made to Jordan orally and represented that "Investments in this share class would be unlevered."

On March 19, 1998, Shilling sent a fax to Jordan suggesting six potential investments for the Trust's monies if the Trust decided to invest through Beacon and reaffirmed to the Trust that the Trust's monies invested through Beacon would be unlevered.

After the initial letter and fax, the Trust was provided with drafts of a specific supplement to the PPM and a side letter that were intended to implement the presentations made to the Trust. Rosenman Colin LLC ("Rosenman") drafted the documents that embodied Shilling's representations to the Trust. The draft of the Class J Supplement was then sent to the Trust. The Class J Supplement reiterated in writing to the Trust the prior oral and written representations made by Shilling to Jordan.

On March 23, 1998, Shilling sent to Rist, the Trust's attorney, drafts of the Class J Supplement ("March 23, 1998 Draft Class J Supplement") and the Investment Control Letter ("March 23, 1998 Draft Investment Control Letter").

The March 23, 1998 Draft Class J Supplement reiterated to the Trust the prior oral and written representations made by Shilling to Jordan. The March 23, 1998 Draft Class J Supplement also again represented to the Trust that the Class J Shares would be exclusive to the Trust or to other persons and entities approved in writing by the Trust and that the six month lockup period and early redemption penalties applicable to other classes of shares were not applicable to the Class J Shares, that the Class J Shares could be redeemed on thirty days prior written notice, that the Trust's monies would not be invested without the prior written approval of Jordan, that the Class J Shares would be exclusive to the Trust, and persons and entities approved by the Trust.

After reviewing the March 23, 1998 Draft Class J Supplement and the March 23, 19998 Draft Investment Control Letter, Rist and Shilling conferred and on March 24, 1998, Shilling sent to Rist drafts of the revised Class J Supplement and the Investment Control Letter. The March 24, 1998 revised Class J Supplement ("March 24, 1998 Draft Class J Supplement") reiterated the earlier oral and written representations to Jordan and the Trust.

The March 24, 1998 Draft Class J Supplement again represented to the Trust that the Class J Shares would be exclusive to the Trust and that the six month lockup period and early redemption penalties applicable to other classes of shares were not applicable to the Class J Shares and represented to the Trust that the Class J Shares could be redeemed on thirty days prior written notice.

Also on March 24, 1998, Shilling delivered to Rist a revised draft of the Investment Control Letter dated March 24, 1998 ("March 24, 1998 Draft Investment Control Letter"). The March 24, 1998 Draft Investment Control Letter again represented to the Trust that Beacon would consult with Jordan and obtain his written approval "for all investment decisions pertaining to the investment portfolio of the Class J Shares of the Fund.

Shilling sent the signed Investment Control Letter dated March 24, 1998 to Chris Johnston on March 30, 1998. On March 31, 1998, the Trust Bank wired $5,000,000 ("The Jordan Trust's Monies") to Beacon.

On March 30, 1998, Shilling sent to IMS a copy of the final Class J Supplement and, in his covering fax, he advised the IMS Defendants that, with respect to the Trust monies, "Class J Shares will be invested in debt instruments, most of which will probably be held to maturity — trading activity should be minimal. Ilya [Kaminsky] and/or I will advise you of positions that are to be held in Class J. Assuming the monies are received tomorrow, we will probably do several trades this week."

Santo testified that he sent the draft Class J Supplement to Grizzetti or Shilling or both and had conversations with Grizzetti. It was Beacon's practice to take Rosenman's draft class supplements, including the Class J Supplement, to "decide how and whether to use them and, if so, in what form." Grizzetti received "cc" on a tax advice letter from Beacon's accountants concerning the status of Beacon as an offshore entity taxed as a corporate entity and considered for tax purposes as a passive foreign investment company.

IMS redeemed $75,271.09 from Beacon on May 31, 1998. At the time the Trust wired its money to Beacon, IMS Global Investments X, Ltd. ("IMS Global") was an investor in Beacon and withdrew its entire account in the amount of $243,506.55 from Beacon on June 30, 1998. At the time the Trust wired its money to Beacon, Pamela Shilling, Shilling's wife ("Mrs. Shilling") was an investor in Beacon and withdrew $15,000.00 from Beacon on March 31, 1998 and the $25,182.07 remainder in her account on June 30, 1998. At the time the Trust wired its money to Beacon, New Canaan, Ltd. ("New Canaan") was an investor in Beacon. The only principal of New Canaan was Mrs. Shilling. At some point in time, New Canaan changed its name to Morpeth, Ltd. Morpeth withdrew $78,518.00 from Beacon on May 31, 1998 and $172,310.62 on June 31, 1998, leaving a negative balance of $8,990.21.

At the time the Trust wired its money to Beacon, Jonathan Vinnik ("Jonathan Vinnik") was an investor in Beacon. Vinnik was one of the founders of Hunter Green and Beacon and a shareholder of Hunter Green. Vinnik withdrew his entire account with Beacon in the amount of $222,125.72 on June 30, 1998.

At the time the Trust made its investment, Reva Sandra Vinnik, the mother of Jonathan Vinnik ("Ms. Vinnik") was an investor in Beacon. Ms. Vinnik, on June 30, 1998, withdrew her entire account with Beacon in the amount of $120,513.43.

At the time the Trust wired its money to Beacon, Steven D. Vinnik, the brother of Jonathan Vinnik ("Steven Vinnik") was an investor in Beacon. Stephen Vinnik, on June 30, 1998, withdrew his entire account with Beacon in the amount of $10,556.43.

At the time the Trust wired its money to Beacon, Swiss Bank Corporation ("Swiss Bank") was an investor in Beacon. Swiss Bank withdrew $78,518.00 Dollars on May 31, 1998, $93,502.46 on June 30, 1998 and $39,131.42 on July 31, 1998.

At the time the Trust wired its money to Beacon, Denis Vlassov, a friend of Jonathan Vinnik ("Vlassov") was an investor in Beacon. Vlassov withdrew his entire account of $56,600.81 on July 31, 1998.

At the time the Trust wired its money to Beacon, Larry Mizel, a friend of Jonathan Vinnik ("Mizel") was an investor in Beacon. Mizel withdrew his entire account, $234,395.73 on July 31, 1998.

At the time the Trust wired its money to Beacon, ALFA Bank, a shareholder of Hunter Green ("ALFA") was an investor in Beacon. ALFA withdrew $312,897.63 from Beacon on May 31, 1998.

At the time the Trust wired its money to Beacon, Bimsey Trading, Ltd. ("Bimsey") was an investor in Beacon. Bimsey was affiliated with Kaminsky, one of the founders and shareholders of Hunter Green. Bimsey withdrew its entire account with Beacon in the amount of $195,123.34 on May 31, 1998.

At the time the Trust wired its money to Beacon, William A. Silverstein ("Silverstein") was an investor in Beacon. Silverstein was a former co-worker of Shilling's at a previous place of employment. Silverstein withdrew his entire account with Beacon in the amount of $101,055.77 on June 30, 1998.

At the time the Trust wired its money to Beacon, Richard Margolin, a friend of Kaminsky ("Margolin") was an investor in Beacon. Margolin withdrew his entire account with Beacon in the amount of $121,753.27 on June 30, 1998.

At the time the Trust wired its money to Beacon, Peter J. Pinto, a friend of Vinnik and Kaminsky ("Pinto") was an investor in Beacon. Pinto withdrew his entire account with Beacon in the amount of $243,506.55 on June 30, 1998.

The "Class J Shares General Ledger Account Detail, April 1, 1998 (Inception) through September 28, 1998" reflected the transactions entered with into the Trust's monies. According to the Class J Shares General Ledger Account Detail, during the period from March 31, 1998 through May 31, 1998, the IMS Defendants and the Hunter Green Defendants entered into six different transactions.

On April 7, 1998, a Polish Treasury bill ("T-bill") in the amount of $712,435.71 maturing on March 17, 1999 was purchased through a transaction referred to as a "Total Return Swap." The Polish T-bill had a face value of PLN 21,000,000 and a U.S. Dollar Notional Value of $4,987,050. Under the terms of the Total Return Swap, Beacon, on the transaction date, was required to make an initial payment of $997,410, which was 20% of the value of the T-bill, and then on the maturity date of March 17, 1999, or another date agreed to by the parties, Bank Boston would pay Beacon for the bond according to a fixed formula. This was a leveraged investment.

On April 7, 1998, a Polish government bond maturing on June 12, 2001 was purchased through a transaction referred to as a "Total Return Swap" with a face value of PLN 3,738,000 and a U.S. Dollar Notional Value of $1,001,494.49 on the date of the transaction. Under the terms of the Total Return Swap, Beacon, on the transaction date, was required to make an initial payment of $200,299, which was equal to 20% of the face value of the bond, and then on the maturity date, or another date agreed to by the parties, Bank Boston would pay Beacon for the bond according to a fixed formula. The Fund used leverage to make the investment.

Depending on whether the value of the above investments declined before Bank Boston was obligated to pay Beacon, Beacon could be required to pay some or all of the unpaid balance of the purchase price for the investments. The Polish T-bill and bond were allocated among the Trust and other Beacon shareholders. Because Beacon paid only 20% of the purchase price of the assets underlying the Total Return Swap transactions with Bank Boston that are referred to above, those transactions were levered transactions. The transactions with Bank Boston were levered also because they incorporated by reference the ISDA Master Agreement (multi currency — Cross Border Form) (the "ISDA Master Form") and the ISDA Credit Support Annex (New York Law version) (the "ISDA CSA Form"). Pursuant to those agreements, Beacon was required to post collateral and maintain a level of collateral on each Total Return Swap transaction.

Finally, the Total Return Swap transactions referred to above were levered because, pursuant to the agreements between Beacon and Bank Boston, in the event Bank Boston had any obligations to Beacon under any of the above-referenced Total Return Swap transactions, Bank Boston was entitled to set-off against that liability any amount due to it under any other agreement between Beacon and Bank Boston. Beacon entered into at least four other Total Return Swap transactions with Bank Boston.

On April 7, 1998, a Russian short term zero coupon "GKO" bond maturing on April 7, 1999 was purchased through West Merchant Bank Limited ("West Merchant") in a transaction referred to as a sub-participation in a forward contract. Pursuant to the terms of the agreement between Beacon and West Merchant, Beacon was purchasing "a funded sub participation to be granted by West Merchant in respect of certain rouble-denominated Russian State short term zero coupon Bonds . . . with a maturity falling on 7 April 1999" under a deferred purchase transaction or "Forward Transaction." The portion of the GKO bond that was subject to the Forward Transaction had a market value of RUR 14,245,887.75 on the date of the transaction and a cost of U.S. $2,487,500.

Pursuant to their agreement, Beacon was required to make a down payment of $497,500, or 20% of the $2,487,500 "spot price" of the bonds, with the remaining 80% due at a future date, except Beacon had the option of accelerating the forward transaction and paying the present value of the unpaid balance of the purchase price against which West Merchant would grant a funded sub-participation in the GKO bond that it held. West Merchant remained the owner of the GKO bond.

The sub-participation in the GKO bond was allocated among the Trust and Beacon's Class A shareholders. Specifically, the Trust was allocated 20% of the GKO bond maturing on April 7, 1999 while other Beacon shareholders were allocated 80% of the bonds.

On April 8, 1998, Russian rouble denominated coupon bearing "OFZ" bond with a maturity date of September 12, 2001 was purchased through West Merchant in a sub-participation in a forward contract. Pursuant to the terms of the agreement between Beacon and West Merchant, Beacon was purchasing "a funded sub-participation to be granted by West Merchant in respect of certain rouble-denominated coupon bearing Russian State Bonds . . . with a maturity falling on 12 September 2001" under a deferred purchase transaction of "Forward Transaction." The portion of the OFZ bond that was subject to the Forward Transaction had a market value of RUR 27,442,597.40 on the date of the transaction and a cost of U.S. $4,477,500. Pursuant to the agreement, Beacon was required to make a down payment of $895,500, or 20% of the $4,477,500 "spot price" of the bonds, with the remaining 80% due at a future date. West Merchant remained the owner of the relevant GKO bond. The Trust was allocated RUR 19,998,042, approximately 45% of the total RUR 44,770,617. Class A shareholders were allocated RUR 24,772,575, approximately 55% of the total of RUR 44,770,617.

Beacon and West Merchant entered into several forward exchange contracts in addition to those set forth above which also were subject to the Master Forward Sale Agreement dated as of July 28, 1997. Pursuant to that agreement, in the event of a default by Beacon under any of its forward contracts with West Merchant, West Merchant would be entitled to accelerate each such transaction and offset any gains on one transaction against any losses on another transaction.

On May 7, 1998, a Turkish Treasury Bill maturing on November 14, 1998 was purchased through Bank of American Global Capital Markets ("BofA") in a transaction referred to as a "Total Return Swap." The Turkish T-bill had a face value of Trl 1,250,000,000,000 and a U.S. Dollar value of $3,487,375 on the date of the transaction. Under the terms of the Total Return Swap, Beacon, on the transaction date, was required to make an initial payment of $697,475, which was 20% of the value of the Turkish T-bill. BofA was then required on the maturity date or another date agreed to by the parties, to pay Beacon for the T-bill according to a fixed formula. Depending on whether the value of the Turkish T-bill declined before BofA was obligated to pay Beacon for the T-bill, Beacon could be required to pay some or all of the unpaid balance of the purchase price for the T-bill. This also was a leveraged investment.

The "Trade Confirmation Recap and Allocation Schedule" reflects that the portion of the Turkish T-bill allocated to the Trust was $500,000 and the portion allocated to Beacon's Class A shareholders was $2,987,315.

The Total Return Swap transaction with BofA incorporated by reference the ISDA Master Agreement (multi currency — Cross Border Form) (the "ISDA Master Form") and the ISDA Credit Support Annex (New York Law version) (the "ISDA CSA Form"). BofA and Beacon entered into a Master Agreement, dated as of June 27, 1997, which included the ISDA CSA Form as a schedule thereto, and a Global Master Repurchase Agreement dated as of July 24, 1997. The Global Master Repurchase Agreement required Beacon to maintain, and in certain circumstances, increase the amount of collateral provided to BofA in connection with a transaction like the Turkish T-Bill, and contains a cross-default provision. The Master Agreement provides that BofA has a right of set-off vis a vis other transactions with Beacon and that, upon a change in value of the underlying traded instrument, BofA could demand that Beacon transfer additional collateral.

On May 13, 1998, Russian GKO 1/13/99 was purchased through Chase Manhattan Securities (C.I.) Limited ("CMSCI"). Pursuant to the agreement, CMSCI issued a note to Beacon in the principal amount of $3,641,706. In connection with the note, CMSCI entered into a GKO forward contract with a maturity date of January 13, 1999 and a face value of RUR 29,456,000. The note confirmation was signed by IMS's employee, Ted Hughes, on behalf of Beacon.

The IMS Defendants allocated the transaction to the Trust RUR 3,702,898.55 of the total RUR 29,456,000, i.e., 12.57%, and allocated to Beacon's Class A shareholders RUR 25,753,101.45, i.e., 87.43% of the total RUR 29,456,000 face amount of the GKO contract.

To pay for the Note, Beacon "obtained leverage financing from Chase through repurchase transactions governed under a Global Master Repurchase Agreement dated February 24, 1997." Beacon leveraged the amounts paid for the Note by entering into a series of repurchase transactions.

In addition, the Note Confirmation incorporates by reference the "Master GKO Linked (S Account) Note Agreement" dated as of April 22, 1997 between CMSCI and Beacon. The Master GKO Note Agreement provides that CMSCI is authorized "to set off and apply any and all deposits and other indebtedness at any time owing by CMSCI to or for the account of the Holder against any and all obligations of the Holder to CMSCI now or hereafter existing, although such obligations may be unmatured, including, without limitation, obligations of CMSCI to the Holder under any Note." Beacon and Chase also entered into a Global Master Repurchase Agreement dated February 24, 1997, which governed the repurchase transactions that Beacon was entering into as leverage to finance the payment of, among other things, the GKO Note maturing on January 13, 1999.

In August 1998, West Merchant delivered to Beacon demands that Beacon arrange for cash margin to be transferred to West Merchant in connection with the open forward exchange contracts, including the OFZ bond.

On August 26, 1998, and again on September 4, 1998, West Merchant gave Beacon notice that Beacon had failed to transfer the required cash margin and, therefore, was in default under each of the forward exchange contracts, including the forward exchange contract.

On October 19, 1998, West Merchant gave Beacon notice of its election to accelerate each of the forward exchange contracts.

The Global Master Repurchase Agreement provided that Beacon was required to maintain a certain margin level and in the event of a decline in the value of an Asset Chase may require Beacon to make a margin transfer to Chase and, in the event of any default, the amount due from Chase will be reduced by its set-off against any other agreement between them. The Global Master Repurchase Agreement applied to any GKO Transaction, such as the GKO transaction effected in the Note Confirmation dated January 13, 1998.

Beacon and Chase also entered into an ISDA Master Agreement which provided that upon the occurrence of any default under any agreement is a cross-default under any other agreement and the schedule to that Master Agreement authorizes Chase in the event of a default under any agreement to set-off against any amounts due to Beacon under any other agreement and requires Beacon to maintain "margin cover" and deliver additional collateral as necessary in the event of a decline in value of transaction.

In August 1998, Chase demanded that Beacon transfer additional collateral in respect of any of its transactions with Chase, including the transaction effected pursuant to the January 13, 1998 Note Confirmation. Beacon failed to make those collateral transfers resulting in a breach of the agreement.

There are two different versions of the Board minutes for January 20, 1998, February 19, 1998, March 18, 1998, April 23, 1998 and July 28, 1998. One set of the Board minutes for the July 28, 1998 meeting makes reference to fifteen numerical series of shares which are all part of the Class A Shares and then to "C", "J", "E" and "H" shares. The other set of Board minutes for the July 28, 1998 meeting makes reference to the same fifteen numerical series of Class A Shares, and "C" and "E" but changes the reference to "J" to "Class B (referred to as J)." The July 28, 1998 Board minutes characterizes Class B shares as referred to as "J" and the Shareholder Registers from April through July 1998 referred to the Trust as being in Class "B (referred to as J)."

The Summary Judgment Standard

In deciding a motion for summary judgment, a court shall render judgment "forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000).

The moving party has the initial burden of showing that there are no material facts in dispute, Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970), and can discharge this burden by demonstrating that there is an absence of evidence to support the nonmoving party's case, Celotex, 477 U.S. at 325. The nonmoving party then must come forward with "specific facts showing that there is a genuine issue for trial," Fed.R.Civ.P. 56(e), as to every element "essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.

The court "must resolve all ambiguities and draw all reasonable inferences in favor of the party defending against the motion."Lopez v. S.B. Thomas, Inc., 831 F.2d 1184, 1187 (2d Cir. 1987);see also Eastway Constr. Corp. v. New York, 762 F.2d 243, 249 (2d Cir. 1985). However, the court must inquire whether "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). If there is not, summary judgment is proper. See id. at 249-50.

Even when one party has not moved for summary judgment, the Court may, if there exists no genuine dispute of material fact, sua sponte grant summary judgment in favor of the non-movant. See Celotex, 477 U.S. at 326.

The Fraud Claim is Dismissed Against the IMS Defendants and Plaintiff's Motion is Denied as to the Fraud Claim Against Shilling

A plaintiff asserting a claim of fraud under New York law must establish, by clear and convincing evidence, that (1) the defendant made a material misrepresentation; (2) with knowledge of its falsity; (3) with the intent to defraud the plaintiff; (4) on which the plaintiff reasonably relied; and (5) that caused damage to the plaintiff as a result. See Schlaifer Nance Co. v. Estate of Warhol, 119 F.3d 91 (2d Cir. 1997).

A. The Absence of Material Misstatements of Facts

JBIC has claimed that the monthly account statements sent to the Trust by IFSI and representations by Shilling on behalf of Hunter Green falsely represented the existence and the issuance of the Class J shares. As to representations regarding the existence of Class J shares before the Trust made its investment, the SAC nowhere alleges that Jordan had any contact with any IMS Defendant prior to his investment in Beacon, nor does it allege that any IMS Defendant drafted any portion of the Class J Supplement. The only connection between Grizzetti and the Supplement is that Grizzetti reviewed a draft of the Supplement prepared by Santo and conferred with him. This fails to establish that Grizzetti was responsible for any of the representations made in the Supplement, or knew that any representation made therein was materially false and misleading.

JBIC has maintained that there were no Class J Shares because Beacon purportedly was not authorized to issue them. (SAC, ¶¶ 32-34.) For this argument, Plaintiff relies on the portion of Beacon's Memorandum of Association which recites that Beacon is authorized to issue share classes A through E, without making any reference to Class J. However, the Class J Shares were in fact Class B shares renamed "J" for "Jordan," and nothing in the Memorandum prohibited Beacon from renaming authorized share classes for marketing purposes. In fact, the Beacon Board of Directors authorized Beacon to redesignate existing share classes for precisely that purpose. Accordingly, neither the monthly account statements sent to the Trust nor the representations by Shilling falsely represented the existence of Class J Shares.

JBIC has alleged that the account statements sent to the Trust by IFSI failed to disclose that Beacon had used a portion of the Trust's $5 million capital contribution to make investments allocated to the Class J shares. (SAC, ¶¶ 47, 49.) However, the monthly account statements on their face revealed that the Trust's monies had in fact been invested in securities purchased by Hunter Green on behalf of Beacon. Jordan never looked at the account statements and has admitted that a review would have revealed that there had been investment activity in its account, and he "would have pulled [its] money immediately, putting them on notice to give [its] money back, because they violated [the] understanding." (Def. Ex. 1 at 137-39, 149-50.) Therefore, Jordan's testimony fails to establish that any IMS Defendant concealed Beacon's investments on behalf of the Trust.

As found above, the Class J Supplement disclosed that Class J shares would "invest on an unlevered basis." (Def. Ex. 13 at 60). This meant that, with respect to the $5 million invested by Jordan in Beacon, the Fund portfolio securities and cash allocated to the Class J shares would have a value of no more than $5 million. Jordan has claimed that he had a different understanding of what it meant to "invest on an unlevered basis." According to Jordan, any investment in a corporation that borrows money is a leveraged investment. (Def. Ex. 1 at 152-53.)

Even if Jordan's definition of the term "leveraged investment" is accepted — although it is contradicted most directly by Shilling — the use of "leverage" as defined by Jordan was fully disclosed in the PPM that Jordan and his counsel reviewed prior to the Trust's purchase of Class J shares. Indeed, the PPM expressly disclosed that Beacon, a corporation, would be borrowing money to purchase Fund portfolio securities, and the borrowings would be secured "by the Fund's securities and other assets." (Def. Ex. 7 at I000037, I000046.)

Borrowings by the Fund (as opposed to borrowings by the Trust) raised no "tax issues" for the Trust, contrary to contentions now advanced by JBIC. The SAC described the Trust's tax status as follows:

The Jordan Trust was created to establish a charitable remainder unitrust within the meaning of Section 4 of Revenue Process 90-31 Section 664(d)(2) and (3) of the United States Internal Revenue Code of 1986, as amended, and the Federal Income Tax regulations promulgated thereunder. As such, it is exempt from income tax under United States tax laws. Under those laws, if a charitable remainder unitrust receives any "unrelated business taxable income" [UBTI] income that otherwise would be exempt becomes taxable. A charitable remainder unitrust risks "unrelated business taxable income" by utilizing leverage with respect to its investments.

SAC, ¶ 15.

The purchase of securities on margin by the Fund did not constitute the "use of leverage" by the Trust. As expressly disclosed in the Beacon PPM provided to the Trust and its counsel, "the Fund's borrowing or purchasing of securities on margin should not cause the tax-exempt entity's income from the Fund to be treated as debt-financed income [UBTI] under [applicable] rules, since indebtedness of a corporation is generally not attributed to its shareholders." (Def. Ex. 7 at I000067.) Because no more than $5 million in cash and securities was ever allocated to the Class J shares, and because the Trust borrowed no money to acquire its Beacon stock, the Trust itself used no leverage in connection with its Beacon investment, and therefore did not receive any UBTI or lose its tax-exempt status, a fact that the Trust has not disputed. A claim that any defendants misrepresented the use of "leverage" is incorrect as a matter of law, as the Class J Supplement provided the allegedly concealed information. (Def. Ex. 7 at I000022 and I000046.)

No admissible evidence has been presented that the IMS defendants represented that the Trust would be investing in a separately managed account or in any other investment vehicle that could have protected the Trust's monies from the claims of Beacon's creditors. Every document provided to the Trust, including the PPM, the Class J Supplement, the Beacon Subscription Agreement, and the monthly account statements provided by IFSI, stated that the Trust was buying and holding a class of shares issued by a corporation, i.e., Beacon. Accordingly, the Trust was on notice that shareholders of corporations are subject to "the entire risk of the loss of [their] share capital, which must go to satisfy the creditors in case of misfortune." Warren v. King, 108 U.S. 389, 399 (1883); see also Farley Realty Corp. v. Commissioner of Internal Revenue, 279 F.2d 701, 704 (2d Cir. 1960). Indeed, Jordan admitted at deposition that he was aware of this risk. (Def. Ex. 1 at 122-23).

With regard to the Shilling, there is a factual dispute as to whether Shilling represented that Beacon would issue a separate class of shares and/or keep the Trust's money in a "separate account." (Shilling Dep. 232-33)

Finally, JBIC's allegation that the promise embodied in the Side Letter and other communications that Shilling would obtain Jordan's prior written approval of all investment decisions pertaining to the investment portfolio of the Fund's Class J shares did not constitute a statement of fact, but rather a promise to engage in future conduct. When there is no evidence that the statement was "made with a preconceived and undisclosed intention of not performing it," such a promise cannot serve as the basis for a fraud claim. New Shows, S.A. de C.V. v. Don King Prods., Inc., Nos. 99-9019, 99-9069, 2000 U.S. App. LEXIS 6319, at *8-9 (2d Cir. Apr. 6, 2000) (quoting Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986)); see also Phillips Credit Corp. v. Regent Health Group, Inc., 953 F. Supp. 482, 520 (S.D.N.Y. 1997) (holding that "statements which are promissory in nature at the time they are made and which relate to future actions or conduct" are not actionable unless the plaintiff can prove that the promisor "had no intention of carrying [them] out").

Here, there is a factual dispute incapable of resolution on this record as to whether Shilling harbored the intention of investing the Trust's monies without first seeking approval from Jordan. Furthermore, Shilling has asserted that the responsibility for obtaining such approval did not rest with him, because Kaminsky was responsible for all investment decisions. (Shilling Dep. 189-92, 230-32, 311, 435, 442-43.)

B. The Absence of Scienter

The element of scienter requires a plaintiff to prove that any alleged misrepresentations made by the defendants were "known [by them] to be untrue or recklessly made," and were "offered to deceive the other party and to induce them to act on it."Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1496 (2d Cir. 1992). Plaintiff has not made any such showing as to the IMS Defendants.

There is no evidence that the IMS Defendants ever had any intention to deceive the Trust. The account statements sent by IFSI to the Trust revealed the information that purportedly was concealed, namely, the allegedly unauthorized investment of the Trust's monies in Fund portfolio securities. Thus, proof of scienter is entirely lacking. See Dumas v. Wyeth, 283 F. Supp. 2d 948, 953-55 (S.D.N.Y. 2003).

On March 23, 2998, Beacon issued a Class J Supplement to the PPM which stated that Beacon was authorized to issue Class J shares, and that the shares were "intended to be issued pursuant to [the] offering" made to the Trust. On March 30, 1998, the Trust executed a Subscription Agreement pursuant to which it purchased 5,000 Class J shares for a total purchase price of $5 million. On the same day, Shilling advised IFSI of the Trust's purchase of Class J shares and forwarded a copy of the Class J Supplement to IFSI via facsimile. There is nothing in the record to show that IFSI or the IMS Defendants did not believe, and could not properly rely on, the representations of Beacon and Shilling that the Class J shares had actually been authorized and issued to the Trust.

There is no evidence to show that any IMS Defendants were aware of Jordan's view that any Fund borrowings would render his investment "leveraged" for tax purposes, nor is there any evidence to show that Defendants knew that the Fund portfolio securities allocated to the Class J shares originally were purchased by Hunter Green in part through the use of borrowed funds.

The evidence has established that Hunter Green, primarily through Kaminsky, had sole responsibility for making decisions regarding the purchase and sale of the Fund securities and for executing trades on behalf of Beacon. Neither IMS, Grizzetti, nor IFSI made decisions for the Fund, or executed trades on behalf of Beacon. Moreover, only Shilling and Kaminsky of Hunter Green were responsible for allocating fund securities to various share classes of the Fund. (Def. Ex. 4 at 43, 90, 159-60.) Once Shilling and Kaminsky purchased securities for the Fund, they instructed IFSI on how to allocate those securities among the Fund's share classes. Hunter Green's allocations were communicated to IFSI, which utilized this information to calculate the NAV for each share class. (Id.) Neither IFSI, Grizzetti, nor IMS had any information indicating whether the securities allocated to each share class had been purchased with borrowed funds, nor did IFSI need such information to calculate the Fund's NAV. Without knowledge of the Fund's borrowings or knowledge that such borrowings could have adverse tax consequences for the Trust, the IMS Defendants did not knowingly deceive the Trust regarding the use of leverage in connection with investments made on behalf of the Class J shares.

Jordan had no contact of any kind with any of the IMS Defendants before Beacon became insolvent. Jordan also has admitted that he did not review, much less rely upon, the only statements ever sent to him by IFSI — the monthly Beacon account statements showing the NAV of the Trust's Class J shares.

C. The Lack of Reasonable Reliance

As a matter of settled New York law, where, as here, "sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance." Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729, 737 (2d Cir. 1984). In the same vein, it also is settled law that "a party will not be heard to complain that he has been defrauded when it is his own evident lack of due care which is responsible for his predicament." Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 195 (2d Cir. 2003) (citation omitted).

Here, Jordan is an admittedly sophisticated investor who easily could have, but did not, obtain information from Beacon sufficient to determine whether (1) Class J shares had been validly authorized and issued; (2) the debt incurred by Beacon threatened the Trust's tax-exempt status, even though the Trust itself incurred no debt; (3) the Trust's status as a shareholder of a corporation subjected the Trust's share capital to the claims of Beacon's creditors; and (4) Hunter Green made any investments on behalf of the Trust without Jordan's consent.

With respect to the Class J shares, Jordan now points to a document, the Beacon Memorandum, as "proof" that Beacon was not authorized to issue those shares. (Def. Ex. 12 at RC 000378.) The Beacon Memorandum, however, was provided to Jordan's counsel for his review before the Trust made its investment. Consequently, any concern created by the Beacon Memorandum could have been addressed and resolved before the Trust invested in Beacon.

The Trust retained outside counsel to advise on the tax consequences of investing in a hedge fund, such as Beacon, which was organized as a corporation and which purchased securities on margin. The same counsel had provided similar tax advice to the Trust in connection with other, comparable "leveraged" hedge fund instruments, and had specifically advised the Trust in March 1998, before making its Beacon investment, that a hedge fund taxed as a corporation — even one that used leverage to make its investments — would "not generate UBTI and . . . continue[d] to be an appropriate investment for the Jordan Trust." (Def. Ex. 29 at 2299.)

Although Jordan claimed in his deposition (but not in his complaint) that he believed that the Trust's investment would be made through a separately managed account "walled off" from the assets of the Fund, nothing in the PPM, the Class J Supplement, or the Subscription Agreement refers to the creation of such an account. (Def. Ex. 1 at 43, 63-64, 68, 73-74, 107-08, 151.) Rather, these documents all expressly state that a purchaser of Beacon shares is investing in a hedge fund organized as a corporation. (Def. Ex. 7 at I000016-25; Def. Ex. 13 at 58; Def. Ex. 16 at I000267.) In any event, Jordan could not have reasonably concluded, based on the transaction documents provided to him, that the purchase of shares issued by a corporation — even a separate class of shares — would be tantamount to creating a separately managed account that would immunize the Trust's share capital from the claims of Beacon's creditors.

As for Shilling's commitment in the Side Letter to obtain Jordan's prior written approval for any investment allocated to the Class J shares, that contractual representation or covenant does not give rise to a fraud claim absent evidence that Shilling never intended to abide by the promise. See Chase v. Columbia Nat'l Corp., 832 F. Supp. 654, 660 (S.D.N.Y. 1993).

With respect to the alleged representation that the Trust's money would be placed in a separate account, Plaintiff has argued that the Trust's purported reliance thereon was reasonable because the "true" facts supposedly were known solely to defendants. (Pl. Opp. at 20, 21.) JBIC has claimed that the Trust reasonably believed it had established a separate account with Beacon because: (1) one sentence in the PPM stated that each class of Beacon shares "is traded separately," (Fitzgerald Aff. ¶ 86; Schwartz Decl. Ex. 7 at I00023), and (2) the Class J supplement stated that the Class J shares would be subject to a 30-day lockup period, while other Beacon share classes were subject to a six month lockup. (Fitzgerald Aff. ¶ 63.)

However, it is undisputed that shares of a hedge fund such as Beacon do not trade over a stock exchange the same way that publicly-held securities are traded. Rather, hedge funds are open-end funds that directly sell and redeem their shares to and from shareholders at the shares' NAV. See Strougo v. Bassini, 282 F.3d 162, 165 (2d Cir. 2002) (distinguishing between closed-end and open-end funds). In this context, the "trading" of hedge fund shares refers to the "act . . . of buying and selling for money."Black's Law Dictionary at 1338 (5th ed. 1979). Each class and series of Beacon shares, including the Class J shares, were sold and redeemed separately by the Fund pursuant to the PPM and the separate supplements thereto. Thus, the existence or absence of separate share classes is irrelevant to the legal question of whether shareholders are ever immune from the claims of the corporation's creditors. Either way, as a matter of settled law, share capital "must go to satisfy the creditors in case of misfortune." Warren, 108 U.S. at 399; see also Farley, 279 F.2d at 704.

The 30-day lockup period granted to the Class J shares fails to support the JBIC claim of reliance. Class J was not the only Beacon share class subject to a 30-day lockup. Other share classes, including Classes D and G, also had 30-day lockups, and there has not and could not be a claim that the holders of those shares were investing in separate accounts. (Schwartz Reply Decl. Exs. 45, 46.) In any event, even if there had been no lockup period and the Trust's shares were redeemable on demand, the shares would have remained the shares of a corporation, and thus all of the Trust's share capital would have remained subject to the claims of Beacon's creditors.

When the Trust actually intended to invest through a separate account, it plainly knew how to do so. For example, on June 15, 1998, it entered into an Investment Management Agreement with an investment adviser, American Investments Holding USA, Inc. ("AIH"), to invest through separate accounts to be opened with Lehman Brothers. (Schwartz Reply Decl. Ex. 51.) Pursuant to that agreement, AIH agreed to manage the money deposited by the Trust in its own separate Lehman accounts. (Id.) In contrast to a hedge fund investment, the arrangement with AIH involved no pooling of capital contributed by other investors. Jordan was aware of the difference between investing through separate accounts and hedge funds as reflected in the Trust's statement of assets as of December 31, 1998, which separately listed the amounts invested by the Trust in "Partnership Interests" (including "Beacon Emerging Debt Fund") and the amounts it had invested in "Privately Managed Accounts" (including "American Investments Holdings (Lehman Brothers)"). (Def. Ex. 52.)

In sum, the Trust not only had the benefit of legal advice in structuring its investments, it also utilized that advice to invest its assets both through separate managed accounts and the purchase of shares and limited partnership interests of hedge funds organized and/or taxed as corporations. Under the circumstances, as a matter of law, the Trust could not have reasonably relied on any representation that its purchase of Beacon Class J shares was tantamount to an investment in a "separate account," or that its share capital would be immune from the claims of Beacon's creditors, especially where Jordan himself acknowledged the bankruptcy risk inherent in the purchase of shares of investment companies. (See Jordan Dep. at 122-23.)

When JBIC filed this lawsuit, it alleged that the Trust had placed restrictions on its use of leverage because, as a charitable remainder trust, it risked "realizing unrelated business taxable income by utilizing leverage with respect to its investments." (SAC ¶ 12.)

The record confirms the Trust's focus on the tax consequences of leveraged investments. For example, when deciding whether to invest in Beacon, the Trust retained the firm of Bryan Cave LLP "to provide an opinion . . . with respect to the tax aspects of the investment." (Rist Dep. at 11-12.) Specifically, the "tax issue that the firm addressed was the exposure that the investment would have and avoiding the exposure to unrelated business taxable income." (Id. at 13-14.) At or about the same time, shortly before investing in Beacon, the Trust received written advice from Bryan Cave that in the event the Trust purchased shares of a hedge fund which utilized leverage to make investments, the Trust's income on those investments would not be taxed as UBTI, and therefore would "be an appropriate investment for The Jordan Trust." (Schwartz Decl. Ex. 29 at 2299, Ex. 40 at 2308.) As to an investment in Beacon, Bryan Cave concluded that the Trust's income would not taxed as UBTI because Beacon was organized and would be taxed as a corporation. (Rist Dep. at 14-18.) Before it purchased Beacon shares, the Trust was aware that it would be acquiring shares of a corporation, and that the corporation's fully disclosed use of leverage presented no tax problems for the Trust so long as the Trust itself borrowed no money to purchase its shares. Cf. Henry E. Nancy Horton Bartels Trust ex rel. University of New Haven v. United States, 209 F.3d 147, 151 (2d Cir. 2000) (holding that a trust's direct purchase of securities on margin subjected it to the unrelated business income tax).

JBIC now claims in its opposition brief that the Trust believed that the term "unlevered," as used in the Class J Supplement, meant no leverage of any kind, regardless of the tax consequences. (Pl. Opp. at 21.) However, the PPM disclosed that Beacon used leverage, i.e., the Fund itself borrowed money to make investments. In light of this disclosure, which was incorporated by reference in the Class J Supplement, (Schwartz Decl. Ex. 13 at 60), and Jordan's admitted understanding that the Trust would be making a "leveraged investment" whenever it purchased shares of a corporation with outstanding debt, (Jordan Dep. at 152-53), the Trust could not reasonably have believed that the purchase of Class J shares would expose it to no leverage of any kind.

Finally, Jordan stated at his deposition that: "I would never rely on Mr. Shilling. I wasn't — I didn't retain him and didn't pay him give me legal advice. Whatever he may have said, but I wouldn't pay any attention to him." This testimony undermines JBIC's contention that Jordan relied on the Side Letter or other representations made by Shilling in making its decision to invest in Beacon. (Jordan Dep. at 76.)

D. The Absence of Causation

JBIC has not established, as it must, that the Trust's loss was a "direct result of the defendant's wrongful actions and . . . independent of other causes." Bennett v. United States Trust Co., 770 F.2d 308 (2d Cir. 1985) (quoting Idrees v. American University of the Caribbean, 546 F. Supp. 1342, 1350 (S.D.N.Y. 1982)). In this case, plaintiff's injury was proximately caused by the Trust's own failure to review its monthly account statements, not by any purported misrepresentation made by the any defendants. Indeed, by Plaintiff's own admission, had the Trust read the statements, it immediately would have redeemed its Class J shares and avoided the loss it suffered on its investment. (Def. Ex. 1 at 149-50.)

JBIC has contended that the Trust should not be held responsible for its loss because: (1) the account statements purportedly failed to reflect any trading activity by the Class J shares; (2) the Trust's failure to read the statements was not an intervening act which broke the causal chain between the alleged fraud and the Trust's loss; and (3) the failure to read the statements was not the sole cause of the Trust's injury. (Pl. Opp. at 25.)

However, Jordan has admitted that the account statements contained enough information to enable the Trust to avoid its loss: upon reviewing the Trust's account statements for the first time in August 1998, he could "tell from that statement that some activity had gone on. . . . I was alarmed [that] . . . investments were obviously made that were unauthorized." (Jordan Dep. at 141.) Jordan's testimony and the account statements themselves completely undermine the assertion in Plaintiff's opposition brief that the "account statements do not reflect any trading activity at all." (Pl. Opp. at 25.). Cf. Compania Sud-Americana de Vapores S.A. v. IBJ Schroder Bank Trust Co., 785 F. Supp. 411, 422 (S.D.N.Y. 1992) (finding that confirmation slips contained sufficient information, so that if plaintiff "had exercised ordinary intelligence or made simple inquiries as required by New York law, it would have . . . uncovered the facts underlying the alleged scheme to defraud"). For example, the April 1998 statement showed that only one month after the Trust's initial $5 million investment, the Trust realized a gain of $121,306.50, a return of 2.43% for the month, or almost 30% on an annualized basis. (Schwartz Decl. Ex. 19.) Such outsized returns are indicative of returns on hedge fund investments, not interest accruing on money deposited in a bank account.

Moreover, Jordan's failure to read the account statements was not a foreseeable consequence of anything JBIC has accused the IMS Defendants of doing. Cf. Colorado Capital v. Owens, 227 F.R.D. 181, 190 (E.D.N.Y. 2005). IFSI and the IMS Defendants reasonably could have expected Jordan to monitor the status of his $5 million investment by reviewing the monthly account statements that were prepared and sent to him precisely so that he could read them. Indeed, under New York law, the Trust may have had an affirmative obligation to read the statements and "give notice of [any] errors therein." Frederic A. Potts, Co. v. Lafayette Nat'l Bank of Brooklyn, 269 N.Y. 181, 187 (1935) (dismissing claim where "an examination by the plaintiff of the monthly statement of its account . . . would have disclosed that the plaintiff had not received credit for checks" deposited in its account). Thus, the causal chain was broken by the Trust's disregard of its account statements, and the failure to read those statements was the sole cause of its loss. See also Scionti v. First Trust Corp., No. H-95-5493, 1999 U.S. Dist. LEXIS 23253, at *132 (S.D. Tex. June 24, 1999) (dismissing fraud claim where quarterly account statement "should have alerted [plaintiff] immediately that he needed to file suit if he did not intend to invest in" the securities disclosed in the statements); cf. ABF Capital Mgmt. v. Askin Capital Mgmt. L.P., 957 F. Supp. 1308, 1324 (S.D.N.Y. 1997) (finding adequate allegations of loss causation where complaint accused defendants of concealing information which, if disclosed to plaintiffs, would have enabled them to avoid their loss by prompting them to redeem or rescind their investments).

The Breach of Fiduciary Duty Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Fiduciary Duty Claim Against Shilling

A claim of breach of fiduciary duty requires proof of "the existence of a fiduciary duty between the parties and a breach of that duty by the defendant." Thermal Imaging, Inc. v. Sandgrain Sec., Inc., 158 F. Supp. 2d 335 (S.D.N.Y. 2001). A fiduciary relationship may be found "when one person is under a duty to act for or to give advice for the benefit of another within the scope of the relation." Levitin v. Painewebber, Inc., 159 F.3d 698, 707 (2d Cir. 1998) (quoting Flickinger v. Harold C. Brown Co., Inc., 947 F.2d 595, 599 (2d Cir. 1991)). In determining whether such a relationship exists, "New York courts typically focus on whether one person has reposed trust or confidence in another who thereby gains a resulting superiority or influence over the first." Thermal Imaging, 158 F. Supp. at 343. Even then, a fiduciary duty will arise only if the purported fiduciary voluntarily accepts the entrustment of confidence. See Kolbeck v. LIT Am., 923 F. Supp. 557, 572 (S.D.N.Y. 1996) ("That plaintiffs may have regarded defendants as their fiduciaries is not enough to establish a fiduciary duty when that duty otherwise would not exist."); Richardson Greenshields Secur., Inc. v. Mui-Hin Lau, 693 F. Supp. 1445, 1456 (S.D.N.Y. 1988). "At the heart of the fiduciary relationship lies reliance, and de facto control and dominance." United States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991) (internal quotation marks and citation omitted).

Here, any relationship between the Trust and the IMS Defendants "was far too attenuated to give rise to a fiduciary duty."Thermal Imaging, 158 F. Supp. 2d at 343. The Trust had no agreement or other arrangement with the IMS Defendants. Rather, with respect to Beacon, IFSI had a relationship solely with Hunter Green and Beacon, which retained IFSI pursuant to an Administrative Services Agreement to calculate Fund NAVs and prepare monthly account statements based solely on information provided to it by Beacon and Hunter Green. (Def. Ex. 30.) To IFSI, the Trust was, at most, a client of a client; they engaged in no direct transaction. As to IMS, IFS and Grizzetti, the Trust also had no contact, much less a relationship, with any of them. (Def. Ex. 1 at 66, 109.) Therefore, the evidence defeats any contention that the Trust and any IMS Defendant "shared a direct business relationship, let alone a fiduciary relationship." Thermal Imaging, 158 F. Supp. 2d at 343.

At his deposition, Jordan admitted that he had no contact with any IMS Defendant, other than the mailing of the monthly account statements by IFSI. (Def. Ex. 1 at 66, 109, 142-43, 145.) The mere sending of periodic account statements does not create a fiduciary duty. See Flickinger v. Harold C. Brown Co., 947 F.2d 595, 599 (2d Cir. 1991); Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 2000 U.S. Dist. LEXIS 8552, at *61 (S.D.N.Y. June 14, 2000) (holding that "mere contact, standing alone, does not create a fiduciary duty"). Moreover, Jordan admittedly never relied on the account statement mailed by IFSI, hired his own counsel to conduct the due diligence before deciding to invest in Beacon, and insisted on and obtained a Side Letter with Hunter Green vesting in Jordan full control over the Trust's investments. There is nothing to establish a fiduciary relationship between the Trust and the IMS Defendants.

Of the three IMS Defendants, only one, IMS, provided any service related to trading: it provided trade confirmation services directly to the Fund. To that end, after broker-dealers executed the trades directed by Hunter Green on behalf of the Fund, IMS reviewed the broker-dealer trade confirmation slips to determine whether the information reflected on the slips matched the terms of the orders placed by Hunter Green. (Hughes Dep. at 9-11, 14-15, 20.) As noted, IMS provided this ministerial service to the Fund, not to the Trust or any other Beacon shareholders.

As for the monthly account statements prepared by IFSI, IFSI's only duty in that regard was a contractual duty to the Fund to provide certain specified administrative services to the Fund, including preparation of account statements. (Schwartz Decl. Ex. 30, at 1.) In that regard, the applicable contract between IFSI and the Fund made the Fund "solely responsible for accurately and timely supplying IFSI with complete financial and other information in order for IFSI to provide the Services." (Id., § 3(a).) To underscore that IFSI was working solely for the Fund, the applicable contract further provided that it was "not intended to and shall not convey any rights to persons not a party to this Agreement." (Id. at 8.) See also Sazerac Co. v. Falk, 861 F. Supp. 253, 258 (S.D.N.Y. 1998).

Where, as here, "[t]here is no competent evidence that [defendant] participated in any investment of [plaintiff's] funds," and instead merely provided nondiscretionary administrative services, no fiduciary duty exists. Scionti, 1999 U.S. Dist. LEXIS 23253, at *131-32; see also Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F. Supp.2d 443, 447-48 (S.D.N.Y. 2005) (finding that where hedge fund documents limited administrator's role to computing the NAV of the funds, administrator owed no duty to fund shareholders "to conduct an independent valuation of the securities in the Funds' portfolios"); Compania Sud-Americana, 785 F. Supp. at 426 (finding no fiduciary relationship where there was "not a scintilla of evidence that the agreements between the parties were the result of unequal bargaining power or that [the bank] acquired any influence over [plaintiff]").

Here too, IFSI contracted to provide purely ministerial administrative services solely to the Fund. IFSI never undertook any duty to the Trust or any other Fund shareholder. It remains uncontroverted that neither IFSI nor any IMS Defendant had any contact with any representative of the Trust, and that the Trust's sole Trustee never had any idea that IFSI or any of the IMS Defendants even existed. (Jordan Dep. at 66, 109.) JBIC has not established, as it must, that the Trust ever reposed trust and confidence in IFSI or the IMS Defendants, or that as a result, the IMS Defendants or IFSI exercised any discretionary authority over the Trust's property. Accordingly, JBIC's breach of fiduciary duty claims against the IMS Defendants fail as a matter of law.

Shilling has maintained that he "made no investment decisions regarding plaintiff's monies, or Beacon's funds, and had no authority to do so." (Shilling Dep. at 56-57.) The record indicates that Hunter Green's head trader, Kaminsky, made all trading decisions and placed orders with broker dealers for execution of all Fund trades. (Shilling Dep. at 56-57, 232, 311, 435; Nowak Dep. at 58-59; Grizzetti Dep. at 50-51.) Kaminsky alone also decided how to allocate the Fund's investments among Beacon's share classes. (Shilling Dep. at 442-43; Nowak Dep. at 90-91.)

There is a genuine dispute of fact as to the exact contours of Shilling's role as the "primary contact" with Jordan and whether Shilling was responsible for soliciting the Trust's investment in Beacon. (Jordan Dep. at 56-57, 60-61, 65, 84-85; Shilling Dep. at 95.) In light of this dispute and Jordan's testimony that "I would never rely on Mr. Shilling," (Jordan Dep. at 76), JBIC has failed to establish that it "reposed trust or confidence" in Shilling sufficient to create a fiduciary duty on Shilling's part. Thermal Imaging, 158 F. Supp. at 343; see also Levitin v. Painewebber, Inc., 159 F.3d at 707.

Finally, where, as here, "damages are sought for breach of fiduciary duty under New York law, the plaintiff must demonstrate that the defendant's conduct proximately caused injury in order to establish liability." LNC Invs. v. First Fid. Bank, N.A., 173 F.3d 454, 465 (2d Cir. 1999). As found above, JBIC's failure to review the monthly account statements mailed to the Trust by IFSI broke the chain of causation.

The Aiding and Abetting Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Aiding and Abetting Claim Against Shilling

In order to establish aiding and abetting fraud or breach of fiduciary duty, a plaintiff must prove (1) fraudulent conduct or a breach of fiduciary duty by a third party; (2) defendants' actual knowledge of the alleged wrongs; and (3) defendants' substantial assistance in furtherance of the wrong. See Steed Fin. LDC v. LASER Advisers, Inc., 258 F. Supp. 2d 272, 282 (S.D.N.Y. 2003). Moreover, to prove the requisite level of assistance necessary, a plaintiff must demonstrate that "the acts of the aider and abettor proximately caused the harm to the [plaintiff] on which the primary liability is predicated." Bloor v. Carro, Spanbock, Londin, Rodman Fass, 754 F.2d 57, 62 (2d Cir. 1985).

A plaintiff must prove actual knowledge of an underlying fraud or breach of fiduciary duty to satisfy the knowledge requirement of each claim. See Wight v. BankAmerica Corp., 219 F.3d 79, 91 (2d Cir. 2000). As found above, neither IFSI nor any IMS Defendant had any actual knowledge that (1) Class J shares purportedly were not authorized or validly issued, (Def. Ex. 3 at 59-60, 116); (2) the Class J shares were purportedly invested on a leveraged basis, (Def. Ex. 4 at 90-91); or (3) Jordan's prior written approval for investing Class J shares was required, but allegedly not obtained, by Hunter Green, (Def. Ex. 6 at 189-92, 230-32; Def. Ex. 1 at 106-09; Def. Ex. 2 at 104-05; Def. Ex. 3 at 98-99). Rather, the record establishes that neither the IMS Defendants nor IFSI had any knowledge of these purported wrongs.See Kolbeck, 939 F. Supp. at 247 (holding that constructive knowledge of fraud is insufficient for aiding and abetting liability in the absence of a fiduciary duty).

As to Shilling, JBIC has failed to establish that any party breached a fiduciary duty or committed fraud, which itself precludes a finding of aiding and abetting breach on summary judgment. See Wight, 219 F.3d at 91-92.

To establish substantial assistance, a plaintiff must show that a defendant "affirmatively assist[ed], help[ed] conceal, or . . . fail[ed] to act when required to do so" to avert the fraud. Id. (quoting Diduck v. Kaszycki Sons Contractors, Inc., 974 F.2d 270, 284 (2d Cir. 1992)). As discussed above, there is a genuine dispute of fact as to whether Shilling went "beyond [his] ministerial functions and bec[ame] actively and directly involved in the actions of the other defendants." (Pl. Reply Mem. in Further Support, at 30.; Jordan Dep. at 56-57, 60-61, 65, 84-85; Shilling Dep. at 95.) JBIC therefore has failed to establish that Shilling substantially assisted in the breach of a fiduciary duty or commission of fraud. See Kolbeck, 939 F. Supp. at 247.

The Conspiracy and Concerted Action Claims Are Dismissed

Conclusion

Endovasc Ltd., Inc. v. J.P. Turner Co., LLC2004 WL 634171See Kaufman v. Eli Lilly Co.65 N.Y.2d 449456Catherwood v. American Sterilizer Co.139 Misc. 2d 901907-08aff'd148 A.D.2d 985

The eighth Count in the SAC, "Breach of Fiduciary Duty — Aiding and Abetting — against all Defendants" is erroneously styled as Count VII.

All claims against the IMS Defendants in the Second Amended Complaint are dismissed. The concerted action and conspiracy claims (Counts II, III, VI, and VII) against Hunter Green LLC and Shilling are dismissed.

The IMS Defendants shall submit judgment on notice.

It is so ordered.

JBIC v. HUNTER GREEN INVESTMENTS LLC

Summary

Opinion

OPINION

Prior Proceedings

The Facts

The Summary Judgment Standard

The Fraud Claim is Dismissed Against the IMS Defendants and Plaintiff's Motion is Denied as to the Fraud Claim Against Shilling

The Breach of Fiduciary Duty Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Fiduciary Duty Claim Against Shilling

The Aiding and Abetting Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Aiding and Abetting Claim Against Shilling

The Conspiracy and Concerted Action Claims Are Dismissed

Conclusion

JBIC v. HUNTER GREEN INVESTMENTS LLC

JBIC v. HUNTER GREEN INVESTMENTS LLC

Case Details

Citations

Citing Cases

JBIC v. HUNTER GREEN INVESTMENTS LLC

Summary

Opinion

OPINION

Prior Proceedings

The Facts

The Summary Judgment Standard

The Fraud Claim is Dismissed Against the IMS Defendants and Plaintiff's Motion is Denied as to the Fraud Claim Against Shilling

The Breach of Fiduciary Duty Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Fiduciary Duty Claim Against Shilling

The Aiding and Abetting Claim is Dismissed as to the IMS Defendants and Plaintiff's Motion is Denied as to the Aiding and Abetting Claim Against Shilling

The Conspiracy and Concerted Action Claims Are Dismissed

Conclusion

JBIC v. HUNTER GREEN INVESTMENTS LLC

JBIC v. HUNTER GREEN INVESTMENTS LLC

Case Details

CitationsCopy Citation

Citing Cases

Citations