for the middle district of florida jeffrey s. araj, m.d...
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UNITED STATES DISTRICT COURTFOR THE MIDDLE DISTRICT OF FLORIDA
JEFFREY S. ARAJ, M.D., On Behalf of Himself Civil Action: 6:09-cv-00903-JA-GJKAnd All Others Similarly Situated,
Plaintiff,
vs.
JML PORTFOLIO MANAGEMENT LTD.,SWISS LIFE HOLDING AG, and NOMURAHOLDINGS, INC.,
Defendants.
AMENDED CLASS ACTION COMPLAINT
Lead Plaintiffs Jeffrey S. Araj, M.D. and Ernest Lice ("Plaintiffs") bring this action on
behalf of themselves and all of all persons or entities who (i) owned the Nomura --- All Weather
Fund (Nomura Fund -) on December 10, 2008, or (ii) were sold variable annuity policies of
Swiss Life through JML Portfolio Management Ltd. ("JML") which invested in the Nomura
Fund from January 3, 2006 to December 10, 2008 (the Class Period), and who sustained losses
thereby (the "Class"). These allegations contained herein are based on personal knowledge as to
Plaintiffs and their own acts, and on information and belief as to all other matters based on the
investigation conducted by and through counsel, which included the review of complaints filed
by the United States Government, the New York Attorney General, and the Securities and
Exchange Commission (the "SEC"), papers and pleadings filed in actions commenced by state
municipalities and administrative agencies, and quarterly and periodic reports issued to potential
investors and limited partners, news reports published in the financial press, auditor reports, and
other available information.
NATURE OF THE ACTION
1. On December 11, 2008, Bernard L. Madoff ("Madoff") was arrested by federal
authorities for operating a $50 billion Ponzi scheme, in which Madoff used the principal
investments of new clients to pay the fictitious "returns" of other clients. The SEC charged
Madoff and Bernard L. Madoff Investment Securities LLC ("13MIS") were charged with
securities fraud and other federal offenses. The United States Attorney's Office for the Southern
District of New York also criminally charged Madoff and 13MIS with securities fraud.
2. On the day he was arrested, Madoff admitted that there "is no innocent
explanation" for his fraudulent conduct. According to the SEC, when Madoff turned himself in
to the authorities, he told two employees at BMIS that he was "finished," that he had "absolutely
nothing," that it was "all just one big lie," and that BMIS was "basically, a giant Ponzi scheme."
Madoff confessed that his firm, BMIS, had been insolvent for years and estimated the losses
from his fraud to be at least $50 billion. According to the Trustee of BMIS, almost $170 billion
flowed through BMIS over the last twenty years. At the time of his arrest, the Federal Bureau of
Investigation ("FBI"), the SEC and Financial Industry Regulatory Authority ("FINRA") had
closed off Madoff s offices to begin the long process of unraveling the decades-long fraud
committed by Madoff and his fellow co-conspirators. The Madoff fraud is alleged to be the
investo rlargest
ever committed
3. On March 12, 2009, Madoff pleaded guilty to all eleven criminal charges,
admitting in court that he operated a Ponzi scheme.
4. On June 29, 2009, District Court Judge Denny Chin of the Southern District of
New York sentenced Madoff to 150 years in prison, calling Madoff s actions "extraordinarily
evil." Judge Chin concluded: "This kind of irresponsible manipulation of the system is not
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merely a bloodless financial crime that takes place just on paper, but it is instead . . . one that
takes a staggering human toll."
5. Although Madoff has been charged both civilly and criminally, Madoff was
unable to perpetrate this fraud by himself. Numerous funds of funds ("FOF"), investment
advisors, auditors, and others -- including Defendants -- facilitated Madofrs fraud and
committed their own violations of law by investing and allowing to be invested billions of
dollars of their clients' money with Madoff and his related entities. They did so by, among other
things: (a) making false and misleading statements to existing and potential investors regarding
the (i) investment strategies and objectives of the • funds, and (ii) their oversight, thorough
manager research, careful due diligence, risk allocation, and portfolio management of the funds
and (b) breaching their fiduciary duties with regard to (i) performing, or failing to perform,
adequate due diligence and (ii) monitoring of Madoff and BMIS (e.g., the performance of
Madoff s trading strategy) despite the existence of myriad red flags.
6. As a result of Defendants' wrongful conduct, including making false and
misleading statements in the Private Placement Memoranda, audit reports, and other documents
about, inter alia, the degree of due diligence performed by them and their actual failure to
conduct due diligence into Madoff and/or BMIS, the Nomura Fund's investments in Madoff
and/or BMIS have been wiped out in whole, thereby damaging Plaintiffs and the Class.
7. Plaintiffs seek to recover damages caused to them and to the Class by Defendants'
violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act"), as well as for common law fraud, negligent misrepresentation, breach of fiduciary duty,
and unjust enrichment under Florida State law.
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JURUSDICTION AND VENUE
8. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated
thereunder by the SEC, as well as under the laws of the State of Florida. This Court has
jurisdiction over the subject matter of this action pursuant to 28 U.S.C. §§ 1331 and 1337,
Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and pursuant to the supplemental jurisdiction
of this Court, 28 U.S.C. § 1367.
9. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15
U.S.C. § 78aa, and 28 U.S.C. § 1391(b). Substantial acts in furtherance of the alleged fraud and
other wrongdoing and/or their effects have occurred within this District.
10. In connection with the acts and omissions alleged in this Complaint, Defendants,
directly or indirectly, used the mail and instrumentalities of interstate commerce, including, but
not limited to, the mails, interstate telephone communications, and the facilities of the national
securities markets.
PARTIES
A. Plaintiffs
11. Plaintiff Jeffrey S. Araj, M.D. ("Araj") is, and was at all times relevant hereto, an
individual residing in the State of Florida. During the Class Period, Plaintiff Araj invested over
$900,000 through JML and Swiss Life, of which $100,000 was invested in the Nomura Fund, as
set forth in the certification filed with his initial complaint. Due to the activities alleged herein,
Plaintiff Arai has lost all of his investment in the Nomura Fund, and has paid substantial
advisory fees for illusory services. On or about March 3, 2006, Plaintiff Araj purchased a
variable annuity sold by JML for 1,235,838 Swiss Francs or about $926,000. The company
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issuing the variable annuity policy was Capital Leben. Capital Leben was later acquired by
Swiss Life.
12. The investment portfolio of the variable annuity policy was supposed to be
invested in a broadly diversified group of mutual funds. Swiss Life invested about 11% of the
portfolio in the Platinum All Weather Fund that was offered through Nomura. Shortly after the
Madoff ponzi scheme became public, Plaintiff Araj received a letter from JML (a copy of which
is attached as Exhibit A), advising him that approximately 20% of the Normura Fund had been
invested in something called the Santa Clara II Fund, and the remaining 80% in a Sub-Fund of
Directors Fund SPC Ltd., both of which were invested with BMIS. The attached fact sheet
(Exhibit B) on the Directors Fund SPC suggests that it simply turned over all of its assets of $433
million to Madoff. It claims to have followed the same split-strike conversion strategy that
Madoff pretended to be following and like him, it never reported a loss in seventeen years. As a
result, the entire Nomura Fund was written down to zero; and 100% of Plaintiff Araj's
investment in the Nomura Fund was written down to zero. The loss to Plaintiff Araj is 114,727
Swiss francs or about $100,000.
13. Plaintiff Ernest Lico ("Lico") is, and was at all times relevant hereto, an
individual residing in the State of West Virginia. During the Class Period, Plaintiff Lico
invested over $177,000 through JML and Swiss Life, of which 14% was invested in the Nomura
Fund, as set forth in the attached certification (a copy of which is attached as Exhibit C). Due to
the activities alleged herein, Plaintiff Lico has lost all of his investment in the Nomura Fund, and
has paid substantial advisory fees for illusory services. Plaintiff Lico also purchased a variable
annuity sold by JML. The company issuing the variable annuity policy was Capital Leben.
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B. Defendants
14. Defendant JML Portfolio Management Ltd. ("JML") is an investment
management company located at Baarerstrasse 53, Zug, Switzerland. JML has over 21,000
clients. According to JML's website:
JML focuses on providing international clients with tailor-madeinvestment opportunities with emphasis on the fundamental issuesof privacy, asset protection, international diversification andearnings potential.
The profiles and expectations of our clients are many and varied.The starting point for the asset management services we provide isto get to know each client's individual needs and investment goals.After analysing your specific needs, we will define a solution thatwill help you reach arid maintain your objectives. Then weimplement the chosen strategy, giving you the benefit of our soundexpertise and decade-long experience in managing assets fordiscerning clients.
See http://www.jml.co in/ index.p hp?id---1 94.
15. Defendant JML is registered as an investment adviser with the SEC under the
U.S. Investment Advisers Act of 1940.
16. Defendant Swiss Life (Lichtenstein) AG ("Swiss Life") is a company organized
under the laws of the Principality of Lichtenstein with its principal place of business in that
country.
17. Defendant Nomura Holdings, Inc. ("Nomura Holdings") is a bank holding
company organized under Japanese law having its main office at 9-1, Nihonbashi 1-chome,
Chuo-ku, Tokyo 103-8645, Japan.
Controlling Defendant
18. Defendant Dr. Felix Horlacher ("Horlacher") was, at all relevant times, Chief
Executive Officer ("CEO") ofJML.
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CLASS ACTION ALLEGATIONS
19. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of the Class, consisting of all persons and entities who (i)
owned the Nomura Fund on December 10, 2008, or (ii) were sold variable annuity policies of
Swiss Life through JML which invested in the Nomura Fund from January 3, 2006 to December
10, 2008 (the "Class Period") for claims arising under the Exchange Act, and claims arising
under common law and state law (collectively, the "Class Period") and who sustained losses
thereby (the "Class"). Excluded from the Class are Defendants named herein, members of the
immediate family of Defendant Horlacher, executive officers and/or any affiliate of the Nomura
Fund, Swiss Life, and Nomura Holdings, and any entity in which any excluded person has a
controlling interest, and the legal representatives, heirs, successors and assigns of any excluded
person.
20. This action is properly maintainable as a Class action because:
(a) The members of the proposed Class are dispersed geographically and are so
numerous that joinder of all Class members is impracticable. While the exact
number of Class members is unknown to Plaintiffs at this time and can be
ascertained only through appropriate discovery, Plaintiffs believe that Class
members number in the hundreds, if not thousands;
(b) Plaintiffs' claims are typical of those of all members of the Class because all
have been similarly affected by Defendants' actionable conduct in violation of
the federal securities laws and Florida state and common law as alleged
herein;
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(c) Plaintiffs will fairly and adequately protect the interests of the Class and have
retained counsel competent and experienced in Class action litigation.
Plaintiffs have no interests antagonistic to, or in conflict with, the Class that
Plaintiffs seek to represent;
(d) The questions of law and fact common to the members of the Class
predominate over any questions affecting individual members of the Class.
Among the questions of law and fact common to the Class are:
( i) whether Defendants' acts ancUor omissions as alleged herein violated
• the federal securities laws;
(ii) whether Defendants' representations to Plaintiffs and the other Class
members misrepresented and/or omitted material facts;
(iii) whether Defendants acted with knowledge or with reckless disregard
for the truth in misrepresenting and/or omitting material facts;
(iv) whether Defendants' conduct alleged herein was intentional, reckless,
or grossly negligent or in violation of fiduciary duties owed Plaintiffs
and other Class members and, therefore, violated the statutory and
common law of Florida; and
(v) to what extent the members of the Class have sustained damages and
the proper measure of damages.
• (e) A class action is superior to other available methods for the fair and efficient
adjudication of the claims asserted herein because joinder of all members is
impracticable. Furthermore, because the damages suffered by individual
members of the Class may be relatively small, the expense and burden of
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individual litigation make it virtually impossible for Class members to redress
the wrongs done to them. The likelihood of individual Class members
prosecuting separate claims is remote; and
(f)
Plaintiffs anticipate no unusual difficulties in the management of this action as
a Class action.
SUMMARY OF ALLEGATIONS
21. On March 12, 2009, Madoff pled guilty to all eleven counts in the criminal
information filed by the United States Attorney's Office, admitting that he perpetrated a fraud
since the early 1990s (prosecutors charged that the fraud began in the early 1980s). In his plea
allocution, Madoff admitted that he never invested his investment advisory clients' funds in
securities, that he never employed the split-strike conversion strategy he (and Defendants)
touted, and that he never had custody of the securities he purportedly held for his investment
advisory clients. BMIS purportedly acted as prime broker and custodian for the assets Madoff
claimed to manage for his investment advisory clients. Instead, Madoff and BMIS merely
deposited client funds into an account at Chase Manhattan Bank, and distributed money from
this account to clients who requested redemptions, while also stealing some of those funds for
Madoff s own use or other purposes.
22. Madoff admitted that he caused to be created and sent to his clients false trading
confirmations and clients account statements that reflected bogus transactions and positions.
These trade confirmations and account statements were designed to give the appearance that he
had executed his strategy with perfect market timing, buying stocks when they were towards the
bottom of the price range for a given day, and then selling close to the top. Prosecutors charged
that Madoff hired numerous employees with little or no prior pertinent training or experience in
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the securities industry to perform these and other -back office" functions. Madoff admitted that
he knew that the audited financial statements he filed with the SEC were false and misleading.
BMIS's accountant was thereafter charged with fraud on March 18, 2009.
23. Madoff also described in his plea agreement how he wired money between
BMIS's bank accounts and the London bank account of BMIS's United Kingdom affiliate
Madoff Securities International Ltd. Prosecutors charged that these transfers were designed to
give the appearance that he was conducting securities transactions in Europe.
24. In order to keep the Ponzi scheme running, Madoff needed money, from new
investors. Notwithstanding that fact, Madoff limited the number of investors he would deal with
directly. Consequently, Madoff accepted investments from funds sold by, among others,
Defendants.
25. Further, in order to successfully execute this multibillion dollar financial scam,
Madoff and BMIS also required the cooperation of major financial institutions. As Madoff
received money from investors, he deposited it in a JP Morgan Chase account (the "703
Account," which refers to the last three digits of the account) and spent it; he also paid it out to
other investors who requested withdrawals. According to the SEC, "Nhe 703 Account was
nothing more than a slush fund." Madoff occasionally used a portion of these funds to buy U.S.
Treasuries and other short-term paper until it was needed to fund investor redemptions, finance
BMIS's broker-dealer operations, or to pay for the personal needs of Madoff, his family and his
close associates. Madoff also channeled a significant portion of that money -- including at least
$250 million in the last three years -- through Europe and back to BMIS's broker-dealer arm in
New York, claiming it was commissions from investing in Europe. These transfers primarily
went through Madoff Securities International, Ltd. ("MSIL"), Madoff s London operation.
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These money transfers violated United States money laundering laws and allowed Madoff and
his co-conspirators to conceal the nature of the Ponzi scheme. In the final few years of Madoff s
scam, MS1L became an increasingly important part of the Ponzi scheme, both as a means of
shielding from regulators and investigators the fact that no securities were actually being traded,
but also to allow Madoff family members and others to embezzle money for personal use
without attracting attention.
26. Madoff has claimed that he knew, starting in the early 2000s, that it was only a
matter of time before his Ponzi scheme was discovered. Any attempt to obtain confirmation
regarding security transactions would reveal that no security trading had actually occurred.
27. In January of 2004, Bernie Madoff and his brother, Peter Madoff organized a
Swiss ski trip sponsored by the National Stock Exchange. This ski trip was both a reward for
participating in the fraud and to discuss how to continue expanding the scheme. Amongst the
guests on the trip were Dr. Herschel Flax, the brother of MSIL director Leon Flax. The family of
top BMIS consultants, Alvin J. Delaire, Jr. and Michael Engler, were on the trip, as was Paul J.
Konigsberg, a senior tax partner at Konigsberg Wolf & Co. and a long-time business partner of
Madoff. Konigsberg helped Madoff open the MSIL office in London in 1983 and Konigsberg
and Madoff recommended clients to each other.
28. The turning point in the Madoff Ponzi scheme came in May of 2006 when Madoff
was convinced that he would be caught after an interview with the SEC. On May 19, 2006,
Madoff was interviewed by a team from the SEC, during which time he provided testimony
under oath. The questions were confrontational and the atmosphere intimidating. One of the
examiners wore the SEC enforcement jacket during the interview, not the type of outfit usually
worn in a friendly interview or deposition. At the end of the interview, which lasted for most of
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the day and during which Madoff admits he repeatedly lied, the interviewers asked him where
his securities were held. Madoff had been lying all day and quickly replied, "The Depository
Trust Corporation 1"DTC'1." At that point, according to Madoff, the SEC had their hand on the
door. The SEC only had to open the door to find the dead body, i.e. , the fraud. Madoff left the
examination thinking that his scam had been uncovered and that he would be closed down.
However, the next day came and went as did the rest of the week and then the months and years
passed without detection. As has now been admitted by the SEC, it never checked with the
Depository Trust Corporation,
29. In the aftermath of his May 2006 interview with the SEC, Madoff decided to shift
his fictional securities trading operation from the United States to London. At that time, Madoff
began to enlargen the role of his London office so that he could make it appear that security
transactions were executed by the London office rather than domestically. The London office
• became the hub of the scheme, a place where money could be sent to be laundered and used to
purchase extravagant luxuries for Madoff and his family. During his guilty plea on March 12,
2009, Madoff explained:
In more recent years, I used yet another method to conceal myfraud. I wired money between the United States and the United
• Kingdom to make it appear as though there were actual securitiestransactions executed on behalf of my investment advisory clients.Specifically, I had money transferred from the U.S. bank accountof my investment advisory business to the London bank account ofMadoff Securities International Ltd., a United Kingdomcorporation that was an affiliate of my business in New York,Madoff Securities International Ltd. was principally engaged inproprietary trading and was a legitimate, honestly run and operatedbusiness. Nevertheless to support my false claim that I purchasedand sold securities for my investment advisory clients in Europeanmarkets, I caused money from the bank account of my fraudulentadvisory business, located here in Manhattan, to be wire•transferred to the London bank account of Madoff SecuritiesInternational Limited ("MSIL").
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There were also times in recent years when I had money, whichhad originated in the New York Chase Manhattan bank account ofmy investment advisory business, transferred from the Londonbank account of Madoff Securities International Ltd. to the Bankof New York operating bank account of my firm's legitimateproprietary and marketing making business. That Bank of NewYork account was located in New York. I did this as a way ofensuring that the expenses associated with the operation of thefraudulent investment advisory business would not be paid fromthe operations of the legitimate proprietary trading and marketmaking business.
30. As with all of Madoff's statements, this statement is a mixture of truths, lies and
half-truths. To the outside world, MSIL was a legitimate business. However, the truth was that
MSIL (London) was being used and manipulated by Madoff and his co-conspirators to create the
illusion of securities transactions and to launder money through international banking transfers.
Madoff and his co-conspirators, with the knowing and substantial assistance of JP Morgan and
Bank of New York ("BNY"), used MSIL to transfer monies between New York and London.
The London office was simply a shell entity that allowed Madoff to embezzle investor monies
for personal use and to conceal information that would allow Madoff to run the Ponzi scheme
undetected. The books and records of the London operation showed numerous related party
transactions and other suspicious activity which had no business purpose. The London records
also showed transfers of large amounts of money between accounts, also for no apparent
business purpose.
31. Madoff admitted that he accomplished his fraud with a lot of smoke and mirrors
because no one either asked basic questions about his operation or if they did ask questions and
Madoff refused to answer, they acted as if Madoff had provided satisfactory information.
According to the SEC, in the aftermath of Madoff's confession, it took only a few days and a
phone call to the DTC to confirm that Madoff had never traded in any securities. Anyone doing
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professional due diligence could have ascertained these facts simply by seeking proof of a
depository, transfer agent, or where his securities were held.
32. Defendants marketed the Nomura Fund to investors (including Plaintiffs and the
members of the Class) as a gateway to Madoff s investment advisory services, though, for the
most part, they did so without disclosing that Madoff was the investment manager of the Nomura
Fund. Defendants solicited investments into the Nomura Fund.
33. Defendants had fiduciary obligations to oversee the Nomura Fund and ensure that
the Nomura Fund's assets were invested in legitimate investment products. In breach of their
fiduciary duties, Defendants raised millions of dollars for Madoff s improper operations and
received hundreds of millions of dollars in improper fees, knowing, or recklessly disregarding,
that Madoff was engaged in wrongful conduct with respect to the monies they placed under his
management.
34. As explained by the New York Attorney General in its action against Ezra Merkin
and others (Cuomo v. Ezra Merkin & Gabriel Capital Corp., NY Supreme Ct., No.
045087912009, the "N.Y. A.G. Action"), Madoff purportedly (a) bought stocks of selected
corporations that were included in the blue-chip S&P100 Index and simultaneously; (b) bought
put options below the current stock price to protect against large declines; and (c) sold call
options above the current price to fund the purchase of put options. The call options also, to
some degree, limited any gains that would be earned on the underlying stocks. Madoff claimed
that under the right market conditions, he could achieve steady returns of over ten percent per
year regardless of whether the market as a whole had advanced or declined. Defendants
represented that, through use of, among others, this strategy, the investment manager (i.e.,
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Madoff) could limit losses when stock prices decline while still affording an upside potential
capped to the stock price of the short call when stock prices rise.
35. As noted in the N.Y. A.G. Action, Madoff s purported investment strategy
evolved slightly over time. Madoff soon began to claim that he was using a larger "basket" of
stocks selected from the S&P Index, combined with put and call options on the S&P 100 Index
itself rather than options on individual stocks. The positions were supposedly held for a short
period of time lasting from a few days to no longer than about two months, and then liquidated.
Madoff claimed to execute the "split strike conversion" strategy six to eight times per year. At
some point, Madoff purportedly adopted the practice of exiting the market entirely at the very
end of each quarter and putting all funds in U.S. Treasury bills ("Treasuries"). For this reason,
Madoffs quarterly statements to investors, and the end-of-year audits of investor holdings, listed
only Treasuries.
36. In fact, as noted, Madoff never executed this strategy. The court-appointed
Trustee liquidating Madoff s assets stated that he found no evidence that, from at least 1996 to
the present, any stocks or options were traded by Madoff for investors.
FAILURE TO CONDUCT ADEOUATE DUE DILIGENCE
37. Funds, like the Nomura Fund, are complex investment vehicles that, unlike
mutual funds, are not subject to strict regulatory requirements for disclosure. Their lack of
transparency means that investors rely on fund managers to protect their investments by
conducting thorough research and due diligence when selecting outside managers and continuing
to conduct due diligence intermittently to ensure that the outside managers continue to meet the
selection criteria. Fund managers also have a duty to closely monitor the performance of the
underlying investments and to verify the information reported by the outside managers. Despite
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representing to prospective and existing investors that they were fulfilling their fiduciary duties
by performing these functions, Defendants conducted no or little due diligence; they did not
verify Madoff s and/or BMIS's reported results; and they recklessly disregarded glaring warning
signs that caused other industry professionals to steer clear of Madoff.
A. Defendants Ignored Dozens of Warning SignsThat Madoffs Operations Were Not Le2itiniate
38. Defendants ignored myriad warning signs that Madoff was operating a fraud. By
failing to conduct due diligence on Madoff s operations, Defendants breached their fiduciary
duties to Plaintiffs and the Class and caused their statements regarding their ongoing due
diligence and oversight of outside investment managers to be materially false and misleading.
39. The numerous warnings signs included, but are not limited to, the following:
(a) Suspect Strategy: The description of Madoff s split-strike conversion strategy
appeared to be inconsistent with the pattern of returns in the track record,
which showed only seven small monthly losses over a 14 year period.
Moreover, the returns purportedly generated by this strategy could never be
replicated by quantitative analysts who attempted to do so. Michael Markov,
a hedge fund consultant, stated that he was hired by a fund in 2006 to look
into one of the feeder fund's returns and found that it was "statistically
impossible to replicate them." In May 1999, Harry Markopolos
("Markopolos"), a derivatives expert with experience managing the split-
strike conversion strategy used by Madoff, sent a letter to the SEC describing
how Madoff could not have generated the returns he reported using the split-
strike conversion strategy. As reported in May 2001, in an article entitled,
Madoff Tops Charts; Skeptics Ask How, appearing in MARMedge, a semi-
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monthly newsletter reporting on the hedge fund industry: "The best known
entity using a similar strategy, a publicly traded mutual fund dating from 1978
called Gateway, has experienced far greater volatility and lower returns during
the same period."
(b) Execution of the split strike conversion strategy for all of his accounts would
have had to trade more options than existed. According to Irving Picard, "the
number of put and call options that BMIS would have had to buy or sell on
any given day often exceeded the number of put and call options bought or
sold in the entire market on those days." For example. on October 14, 2005,
Madoff claimed that less than $17 billion in stock was being hedged by the
use of the options. The positions to run that amount of money would be
obvious and were just not there. According to a chief options strategist at
Oppenheimer & Co. in New York: "If he did it on an exchange, we would
have heard about it, and if he did it over the counter, the person he bought it
from would have hedged it on an exchange."
(c) It was not possible to find over-the-counter counterparties for his alleged
options trading, because Madoff was always on the winning side of the trade.
There was no incentive for a counterparty to continuously take the other side
of those trades because they would always lose money.
(d) A review of the Form 13F that institutional investment managers must file
quarterly with the SEC to report their securities holdings regularly showed
that the BMIS feeder funds held only a scattering of small positions in small,
non S&P 100 equities. Madoff told clients that his strategy was to be 100% in
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cash or U.S. Treasuries at every quarter end, to avoid making information
about the securities he was trading public. This was inconsistent with his split
strike strategy. The real reason was to keep secret the magnitude of the
investments being placed with Madoff and to explain why he had no trading
positions for an auditor to inspect at year-end. Since U.S. Treasury Bills exist
in book entry form only, this also explained why he had no physical securities
on hand for an auditor to inspect. An auditor could have corroborated the
existence of the U.S. Treasury Bills by asking to see independent confirmation
of the book entries.
(e) Suspect Market-Timing: Account statements revealed a pattern of purchases
at or close to daily lows and sales at or close to daily highs, which is virtually
impossible to achieve with the consistency reflected in Madoff s reported
results.
(f) Impossible Options Volumes: Trading volumes reflected in accounts were
vastly in excess of actually reported trading volumes. In particular, the S&P
100 Index options that Madoff purported to trade could not handle the size of
the combined FOF assets. A report from Bloomberg estimated that Madoff s
strategy would have required at least 10 times the S&P 100 Index option
contracts that traded on U.S. exchanges.
(g) No Stand Alone Hedge Fund: Madoff operated through managed accounts,
rather than by setting up a hedge fund of his own, where his fees would have
been much higher than the brokerage commissions he was charging. This is
particularly suspicious because a hedge fund requires annual audits.
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(h) Cash Positions: BMIS liquidated its securities positions at the end of each
quarter, presumably to avoid reporting large securities positions. In 2007
hedge fund investment adviser Aksia LLC ("Aksia") urged its clients not to
invest in Madoff feeder funds, concluding among other things that, after
reviewing Madoff s holdings, they were too small to support the size of the
assets Madoff claimed to be managing. Indeed, Irving Picard, the court-
appointed trustee charged with sorting out which Madoff assets remain,
reported that Madoff never (at least during the Class Period) engaged in any
trades.
(0 Lack of a Third Party Custodian and Administrator: The funds of funds
(FOF) had recognized administrators and auditors, but substantially all of the
assets were in the custody of BMIS. Moreover, BMIS initiated trades in the
accounts, executed the trades, and served as custodian and administrator for
the accounts. Thus, instead of using an outside prime broker as nearly all
hedge funds do, Madoff was his own prime broker and custodian of all the
assets he managed. A December 13, 2008 article in The Wall Street Journal
quoted Chris Addy, founder of Castle Hall Alternatives, which vets hedge
funds for clients, as follows: "There was no independent custodian involved
who could prove the existence of assets . . . There's a clear and blatant
conflict of interest with a manager using a related-party broker-dealer.
Madoff is enormously unusual in that this is not a structure I've seen."
(j) Obscure and Ill-Equipped Auditor: BMIS was audited by Friehling &
Horowitz ("F&H"), which had three employees, of which one was 78 years
19
old and living in Florida, one was a secretary, and the other was an active 47-
year old accountant, whose office in Rockland County, New York was 13 feet
by 18 feet. On March 18, 2009, David G. Friehling ("Friehling") was arrested
and criminally charged with securities fraud and with aiding and abetting
Madoff's Ponzi scheme. The SEC also filed a civil complaint against
Friehling and F&H, alleging that F&H never conducted even minimal audit
procedures on Madoff and/or BMIS and failed to confirm that the securities
BMIS purportedly held on behalf of its investors actually existed.
(k) Audit Reports: Audit reports of BMIS showed no evidence of customer
activity whatsoever, with neither accounts payable nor accounts receivable
from customers. BMIS appeared to be nothing more than a market maker --
not a firm with $17 billion in customer accounts.
(0 Madoff Publicly Spoke of Secrecy: Madoff perpetuated the secrecy in his
public statements. As reported in the May 2001 article in MAR/Hedge,
"[Madoffi won't reveal how much capital is required to be deployed at any
given time to maintain the strategy's return characteristics, but does say that
'the goal is to be 100% invested." Additionally, lals for the specifics of
how the firm manages risk and limits the market impact of moving so much
capital in and out of positions, Madoff responds first by saying, 'I'm not
interested in educating the world on our strategy, and I won't get into the
nuances of how we manage risk." On May 7, 2001, Barron's published an
article entitled Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even
asks his investors to keep mum. In that article, author Erin E. Arvedlund
20
wrote: "When Barron's asked Madoff how he accomplishes this, he says, 'It's
a proprietary strategy. I can't go into it in great detail.' What Madoff told us
was, 'If you invest with me, you must never tell anyone that you're invested
with me. It's no one's business what goes on here,' says an investment
manger who took over a pool of assets that included an investment in a
Madoff fund. When he couldn't explain to my satisfaction how they were up
or down in a particular month,' he added, 'I pulled the money out."
(m) Family Run Operation: Key positions at BMIS were controlled by Madoff
family members (Madoff's brother, two sons, and niece).
(n) Lack of Electronic Access: BMIS was supposedly technologically advanced
but FOF did not have electronic access to their accounts at BMIS. Paper
documentation provided Madoff with the ability to manufacture trade tickets
purporting to confirm investment results that had not and were not occurring,
and to falsify supporting documentation.
(o) Madofrs returns were unbelievably positive over time: • Although Madoff
claimed to invest in stocks that mimicked the S&P 100, his own returns
frequently deviated from that index. Madoff supposedly made money for his
investors even in the three months surrounding Black Monday in October
1987, when the S&P 100 fell 34%; during the recession in 1990-1992 and
market weakness throughout the first half of the 1990s; through the Asian
currency crises in 1997; during the Russian debt/Long Term Capital
Management crises in 1998; through the 2000-2002 bear market; and in the
last 14 months of BMIS's existence, when the S&P 100 fell 42 percent. These
21
results were not possible, no matter how much hedging Madoff claimed to be
engaging in. Between 1990 and 2005, Madoff reported minor losses for only
seven months, and never two months in a row.
(p) Madoff filled three roles generally filled by three separate companies: Madoff
was the investment adviser, custodian and administrator of the funds, and he
was the broker dealer who initiated and executed the phantom trades. This
meant there was no independent custodian or independent third party who
could verify the existence and value of Madoff s investments or transactions.
This lack of segregation of duties posed a potential conflict of interest and
called for increased due diligence, such as actually contacting counterparties
to the trades to verify the existence of the transactions and investments.
(q) Failure to Disclose. A custodian led the SEC to say "a simple inquiry to one
of several third parties could have immediately revealed the fact that Madoff
was not trading in the volume he was claiming. - For example, the SEC
reported a January 2005 statement for a feeder fund account showed it held
about $2.5 billion in S&P 100 equities, but records at the DTC, showed
Madoff held less than $18 million worth of S&P 100 stocks in his DTC
account that day. Madoff sometimes said the DTC cleared his trades. To
discourage clients from contacting the DTC, in some cases, BMIS said the
assets were custodied at someplace inconvenient, like in Europe. Because
Madoff never actually bought any stocks or options, contact with the alleged
custodian would have unmasked Madoff s operation.
22
(r) Madoff s conflict as a registered securities broker-dealer business. In that
business, he was a major trader of S&P 100 stocks. Therefore, there was a
conflict of interest between the broker-dealer and investing sides. Both traded
the same stocks and Madoff could arrange to benefit one side of the business
over the other through timing trades.
(s) BMIS took no fee for its money management services or any portion of the
fees the feeder fund charged investors. Instead, the only monies that BMIS
claimed to earn were a trading commissions of 4 cents for every share traded
and $1 for every option. In trading $6 billion, Madoff might earn about $80
million a year in commissions. In contrast, some of the feeder funds were
charging a management fee of 1%-2% of assets plus a performance fee of
20% of profits, sometimes for just turning the money over to Madoff On a $6
billion fund with 15% annual returns, the annual fee would be $60-$120
million and the profit-sharing that year would be $180 million, for a total of at
least $240 million that year. The next year, all things being equal, the total
would be $276 million. For some feeder funds, this windfall continued
growing for 20 years. Madoff said the commission was ample for him
because he was simply a broker dealer earning a commission on the trades he
conducted at others' direction. This fee structure gave the feeder funds a huge
incentive to turn a blind eye to Madoffs refusal to allow due diligence.
BMIS did not register with the SEC as an investment adviser until 2006.
Therefore, it did not formally have the duty to act as a fiduciary in its client's
best interests, and it did not have to annually file the important Form ADV,
23
which gives investors information about the adviser's education, business,
disciplinary history within the last ten years, services, fees, and investment
strategies. After BMIS finally did register with the SEC, its Form ADV in
January 2008 said it had $17 billion under management in 23 investment
accounts and fewer than six employees handled the investment advisory
functions. (At that time, BMIS was sending out statements to more than 4,900
active customer accounts with a purported value of $64.8 billion under
management).
(u) Large amounts of cash deposited by investors would sit in the JP Morgan 703
Account for periods of time — not invested. It also sent large amounts of cash
to London and back to New York. These banking patterns can be signs of
money laundering, and banks are required by law to report this type of
behavior, according to the Office of the Comptroller of the Currency
("OCC"), who is the primary regulator for national banks. JP Morgan did not
report these transactions to bank regulators.
B. Investment Professionals who did Conduct Due DiligenceDiscovered the Red Flags Warning that Madoff was Operating a Fraud
40. In the article Madoff Tops Charts: Skeptics Ask How appearing in the May 2001
MAR/Hedge (mentioned above), author Michael Ocrant wrote:
(a) "Madoff has reported positive returns for the last 11-plus years in assets
managed on behalf of the feeder fund known as Fairfield Sentry. . . . [The]
other [feeder] funds have demonstrated equally positive track records using
the same strategy for much of that period."
24
(b) "Those who question the consistency of the returns . . . include current and
former traders, other money managers, consultants, quantitative analysts and
fund-of-funds executives, many of whom are familiar with the so-called split-
strike conversion strategy used to manage the assets."
(c) These individuals "noted that others who use or have used the strategy. . . are
known to have had nowhere near the same degree of success."
(d) "The best known entity using a similar strategy, a publicly traded mutual fund
dating from 1978 called Gateway, has experienced far greater volatility and
lower returns during the same period."
(e) "The strategy and trading, [Madoff] says, are done by signals from a
proprietary 'black box' system that allows for human intervention to take into
account the 'gut feel' of the firm's professionals."
"As for specifics of how the firm manages risk and limits the market impact of
moving so much capital in and out of positions, Madoff responds first by
saying, 'I'm not interested in educating the world on our strategy, and I won't
get into the nuances of how we manage risk.'"
(g) "[Madoff] won't reveal how much capital is required to be deployed at any
given time to maintain the strategy's return characteristics, but does say that
'the goal is to be 100% invested.'
(h) "Madoff, who believes that he deserves 'some credibility as a trader for 40
years,' says: 'The strategy is the strategy and the returns are the returns.' He
suggests that those who believe there is something more to it and are seeking
an answer beyond that are wasting their time."
25
41. In the May 7, 2001, Barron's article, Don't Ask, Don't Tell: Bernie Madoff is so
secretive, he even asks his investors to keep mum, (mentioned above), Erin E. Arvedlund wrote:
(a) The private accounts managed by Madoff "have produced compound average
annual returns of 15% for more than a decade. Remarkably, some of the
larger, billion-dollar Madoff-run funds have never had a down year. When
Barron's asked Madoff . . . how he accomplishes this, he said, 'It's a
proprietary strategy. I can't go into it in great detail.' Nor were the firms that
market Madoff's funds forthcoming. ."
• (b) "Still, some on Wall Street remain skeptical about how Madoff achieves such
stunning double-digit returns using options alone . . . . [T]hree option
strategists at major investment banks told Barron's they couldn't understand
how Madoff chums out such numbers [using this strategy].
• (c)
Adding further mystery to Madoff s motives is the fact that "he charges no
fees for his money management services."
(d) "The lessons of Long-Term Capital Management's collapse are that investors
need, or should want, transparency in their money manager's investment
strategy. But Madoff s investors rave about his performance -- even though
they don't understand how he does it. 'Even knowledgeable people can't
really tell you what he's doing,' one very satisfied investor told Barron's.
'People who have all the trade confirmations and statements still can't define
it very well.' . . . This investor declined to be quoted by name. Why?
Because Madoff politely requests that his investors not reveal that he runs
their money."
26
(e) "What Madoff told us was, 'If you invest with me, you must never tell
anyone that you're invested with me. It's no one's business what goes on
here,' says an investment manger who took over a pool of assets that included
an investment in a Madoff fund. 'When he couldn't explain how they, were up
or down in a particular month,' he added, 'I pulled the money out.'"
42. In addition to the foregoing, on November 7, 2005, Markopolos submitted a letter
to the SEC, entitled The World's Largest Fledge Fund is a Fraud, in which he set forth in over 17
single-spaced pages and a two-page attachment, how Madoff's returns could not be real.
Markopolos identified 29 red flags that were signs of highly suspicious activity in BMIS,
including:
(a) "Why would B[ernie] M[adoff] settle for charging only undisclosed
commissions when he could earn standard hedge fund fees of 1%
management fee + 20% of the profits?"
(b) "The third party hedge funds and fund of funds that market this hedge fund
strategy that invests in BM don't name and aren't allowed to name Bernie
Madoff as the actual manager in their performance summaries or marketing
literature. . Why the need for such secrecy? If I was the world's largest
hedge fund and had great returns, I'd want all the publicity I could garner and
would want to appear as the world's largest hedge fund in all the industry
rankings."
(c) It is mathematically impossible for a strategy using index call options and
index put options to have such a low correlation to the market where its
returns are supposedly being generated from. This makes no sense! . .
27
However, BM's performance numbers show only 7 extremely small [monthly]
losses during 14 years and these numbers are too good to be true. The largest
one month loss was only -55 basis points (-0.55%) or just over one-half of one
percent! And BM never had more than a one month losing streak!"
(d) "Madoff does not allow outside performance audits."
(e) "Madoff s returns are not consistent with the one publicly traded option
income fund with a history as long as Madoff s."
"Why is Bernie Madoff borrowing money at an average rate of 16.00% per
annum and allowing these third party hedge fund, fund of funds to pocket
their 1% and 20% fees bases [sic] upon Bernie Madoff s hard work and
brains? Does this make any sense at all? Typically FOF's charge only 1%
and 10%, yet BM allow them the extra 10%. Why? And why do these third
parties fail to mention Bernie Madoff in their marketing literature? After all
he's the manager, don't investors have right to know who's managing their
money?"
(g) "BM goes to 100% cash for every December 31st year-end according to one
FOF invested with BM. This allows for 'cleaner financial statements'
according to this source. Any unusual_ transfers or activity near a quarter-end
or year-end is a red flag for fraud."
43. As summed up by Markopolos: "If 1 was the world's largest hedge fund and had
great returns, I'd want all the publicity I could gamer and would want to appear as the world's
largest hedge fund in all of the industry rankings. Name one mutual fund company, Venture
Capital firm, or LBO firm which doesn't brag about the size of their largest funds' assets under
28
management. Then ask yourself, why would the world's largest hedge fund manager be so
secretive that he didn't even want his investors to know that he was investing their money? Or is
doesn 'tit that [Madoff] e SEC and [the Financial Services Authority] to know that he
exists?"
44. In 2007, Aksia urged its clients not to invest in Madoff feeder funds after
performing due diligence on Madoff and discovered several red flags, including:
(a) Madoff s comptroller was based in Bermuda, whereas most mainstream hedge
funds have their own in-house comptrollers;
(b) Madoff s auditor, F&H, operated out of a 13 x 18 foot location in New City,
New York, and included one partner in his late 70s who lives in Florida, a
secretary, and one active accountant, whereas most hedge funds are audited by
a Big Three accounting firm. F&H is now under investigation by the district
attorney of Rockland County; and
(c) Aksia discovered the 2005 letter from Markopolos to the SEC described
above.
45. Aksia prepared its client advisory after, among other things, reviewing the stock
holdings of BMIS that were reported in quarterly statements filed with the SEC. Aksia
concluded that the holdings appeared to be too small to support the size of the assets Madoff
claimed to be managing. The reason for this was revealed on December 15, 2008, when
investigators working at Madoff s New York offices concluded that Madoff had been operating a
secret, unregistered investment vehicle from his office.
46. In addition to the foregoing, investment advisors and professionals who
thoroughly looked into Madoff s trading were unable to reconcile investors' account statements
29
with the reported returns. In a December 13, 2008 article in The New York Times, Robert
Rosenkranz, principal of hedge fund adviser Acorn Partners, was quoted as saying, "Our due
diligence, which got into both account statements of [Madoff s] customers, and the audited
statements of Madoff Securities, which he filed with the SEC, made it seem highly likely that the
account statements themselves were just pieces of paper that were generated in connection with
some sort of fraudulent activity."
47. As noted earlier, Madoff was his own prime broker and custodian of all the assets
he managed. As Chris Addy told The Wall Street Journal on December 13, 2008, such conduct
was unusual because without an independent custodian, there was no one "involved who could
prove the existence of assets. - According to Addy, "There's a clear and blatant conflict of
interest with a manager using a related-party broker-dealer."
48. Had Defendants conducted due diligence into Madoff, BMIS, and/or Madoff-
controlled entities, they would have discovered at least some of the dozens of red flags identified
herein. At the very least, like Aksia, Defendants should have been able to discover the existence
of Markopolos' letter, which would put them on notice of at least some of the 29 red flags
identified therein.
49. Instead, Defendants relied on the "reputation" of Madoff without conducting any
investigation (or due diligence) of the bona fides of Madoff and his operations, and/or an
analysis of the trading strategies and investment returns reported by Madoff, which remained
consistently high even during adverse market conditions.
50. Defendants acted with gross negligence and violated their duties by failing to
perform, or cause to be performed, appropriate due diligence that would have revealed that the
30
assets of the Nomura Fund were invested with Madoff, BMIS, and/or Madoff controlled entities
and by failing to monitor the Nomura Fund's investments in these Madoff entities.
C. Defendants Owed Fiduciary Duties to Plaintiffs andthe Class to Conduct, Manage and Supervise theirInvestments in Good Faith and with Due Care
51. Defendants owed fiduciary duties to its customers and investors. JML held itself
out as an investment advisor. Swiss Life and Nomura had duties to their investors to conduct
reasonable due diligence into the investments, especially since they were charging management
fees. According to JML's website:
Portfolio structuring and asset management services
.IML focuses on providing international clients with tailor-madeinvestment opportunities with emphasis on the fundamental issuesof privacy, asset protection, international diversification andearnings potential.
The profiles and expectations of our clients are many and varied.The starting point for the asset management services we provide isto get to know each client's individual needs and investment goals.After analysing your specific needs, we will define a solution thatwill help you reach and maintain your objectives. Then weimplement the chosen strategy, giving you the benefit of our soundexpertise and decade-long experience in managing assets fordiscerning clients.
Reliable professional client service
Your investment is monitored by our team of asset managers anda dedicated client relations manager is at your personal disposal.You will always have direct and personal access to a familiar.contact at JML, from the very first time you get in touch.
Access to investment performance details
A decisive factor in any long-term business relationship is theopportunity to meet or talk personally with your client relationsmanager and portfolio manager to discuss your investment.Keeping the communication channels between you, the customer,and JML short and clear creates transparency and mutualunderstanding. A direct dialogue allows you to tell us about yourgoals and enables us to respond in a way that satisifies [sic] yourrequirements, incorporating these into the strategic investmentplanning. This dialogue can take place at any time, however, once
31
per year is a minimum.
These reviews are intended to do more than merely present theinvestment results. It is equally important that we talk to you, toevaluate your new needs, offer you advice and explain thepotential impact on your existing investment structure. Ongoingreviews of the investment strategy and subsequent regulardiscussions with you are both tools which can help bring about theoptimum achievement of objectives. We report to you by:
• Weekly performance updates online
• Quarterly reports on the financial market outlook
• Quarterly reports on the global economic scenario
• Quarterly account statements
• Individual review and discussion of investment results - atleast once a year.
See http://www.iml.convindex.php ?id= I 85 (emphasis added in italics).
52. AlL's website also stated:
JML's core expertise
Our core skills lie in the managing of investment portfolios,emphasizing on:
Multi Asset Strategy Portfolios
• Conservative Strategy
• Balanced Strategy
• Enhanced Strategy
•• Dynamic Strategy
These portfolios are structured in accordance with IRS regulationsand therefore qualify for tax-deferral.
Customized Asset Strategy Portfolios
• Individually structured, actively managed asset portfoliosheld within an insurance wrapper for added benefits
• Individually designed, self-directed, asset portfolios
• Insurance wrappers around your already existing, self-directed asset portfolio.
See http://wwvn jliil.com/index,php?id-186 (emphasis in original).
32
53. According to JML's Investment Strategies Pamphlet -- which can be found at
http://www2.fizfinancevillage.ehluploads/med ia/,111/1LInvestment_Strategies_Brochure.pdf --
JML touted itself as an effective asset management with highly-demanding discipline.
54. JML also represented on its website that its investment management process
("IMP") was "neutral and without conflicts of interest." See
http://web.arehive.oreiweb/20050415040236/ww vy ml. co m/index.e Im?tvo=257_263 and
http://web.arch ive.org/web/20060513071158/ww w.j ml. co in/fin space/juice?pagel D=30089).
JML further represented that its investment offerings specialized in and were based upon
diversification, capital appreciation, and asset protection:
As Swiss investment managers, JML understands the concerns ofinternational investors. Diversification, capital appreciation, assetprotection, privacy and tax considerations — these are our areas ofexpertise. At JML we make it our business to find the rightanswers and determine the right strategy for you as an investor.
See ha : // web.arel050909055951711e fm v —254 264 and
htt ://web.arch ive.ore/web/20060513071050/www.'m Leo rrt itins ace/ u ice.
• 55. Touting the Company's IMP, the website also stated: "Our process is unique
among asset managers. It's a diversified approach to investment management, relying on the
support of top independent specialists worldwide in the fields of strategy research, selection,
monitoring and controlling." According to the website:
• (a) The JML Investment Committee "defines the basic strategy for all
investment vehicles offered by the JIVIL Group. This involves, for example, the level of
home country bias with a time horizon of at least 18 months, but also includes tactical
decisions for the next twelve months with regard to currencies, regional allocation and
other factors. These decisions are then reviewed on a continuous basis. The [JML
Investment] Committee also decides on the launch of new investment products as well as
33
new cooperation agreements." See
hiip://web.archive.or2/web/200504 I 5040236/www.iml.comiindex.cfm?tvp=257_263.
(b) The Company is "assisted in [its] portfolio strategy research by a
renowned Swiss asset management institution." See
hit p://web.archive.org/web/20050415040236/www.jinl.coiniindex.cfm?typ-257_263.
(c) The "JML Product Management Team is in charge of coordinating the
various steps in the investment process, of making final decisions on the investments and
of ensuring that the best available partners for every task within the process are on board.
Within the whole process the responsibility is never delegated, rather the outside partners
perform an advisory and data collection role." • See
http://web.archive.t)ralweb120050415040236/www jinl.corrilindex.cfm?typ-257_263.
(d) The Company decides which types of investments should form the
structure of a certain JML asset class, which ones are the best ones, and which have a
record of above average returns while, at the same time, keeping risks and costs under
control, by means of quantitative pre-selection of. securities. See
hit ://web.archive.ora/web/20050415040236/www.'ml.corn/index.cfm?iv –257 263.
(e) The Company enlists "the services of leading research companies in
Switzerland and in Sweden" in deciding which investment philosophy and portfolio
techniques to use. See
hit ://web.archive.or }/web/2p_NT_/index.cfrnA —257 263.
34
•
(0 The Company performs a fund cost analysis with the assistance of "a team
of world-renowned experts from the United Kingdom." See
http://web.archive.org/web/20050415040236/www.jrnl.comlindex.cfmAvp=257_263.
(g) "The JML Product Administration Team ensures that the custodian for
your investments meets your needs for the portfolio as a whole and for each specific
transaction, as well as meeting our guidelines for investment management." See
http://web.at•ch ive.orevveb/200504 t 5040236/w m/index.ahVtyp=257263.
(h) The Company receives a monthly report prepared by "an external
controlling company, Switzerland's largest independent pension fund controller." This
report "compares the actual results with defined benchmarks" and enables the Company
"to take immediate measures." See
http://web.archive.org/web/20050415040236/www.jml.comiindex.cfm?typ=257263.
56. Beginning in 2006, the Company added a section to its website that was entitled
"Knowledge Center." This section elaborated on the Company's IMP which promised "more
return for less risk." See
iittp://web.archive.org/web!200605 m/finspaceiju ice?pagetD=109026 and
htt• ://web.archive.or Vweb/20060716100755/www: ml.co n1/fins • ace/binar ,Niedia=110013&o
•
57. JML also stated that its IMP was based upon delivery of "a clear picture of the
most important issues under examination and decisions to be made when investing assets or
savings." The webs ite stated in relevant part:
IML's investment plan delivers a clear picture of the mostimportant issues under examination and decisions to be made wheninvesting assets or savings. To ensure success, the really crucialelements are good organization and a clear overview of the
35
investment situation, including estimating risks precisely, andanalyzing yield potentials accurately. We at JML carefullycombine our investment categories to match the aims and•intentions of the individual investor. This approach ensures clearaccount structures, a strict division of tasks, and transparentdecision-making processes.
See hit )://web.arch ive.or_hveb/20060712034950/wr.vNA ml.corn/lins aceru ice? taaelD=68810.
58. According to JML, the "clear picture" was based upon a great deal of proprietary
research which weighed risks against returns:
For any portfolio, the optimal balance of risks and returns requiresa careful selection of investment products. The key question hereis one of choice. Which areas, currencies and market sectorsshould be included, and with what sort of weighting? How aremarket and currency-related risks best assessed? To help answerthese and related questions, we construct portfolio models, andbased on these, formulate investment strategy guidelines for themedium to long-term, which are continuously monitored andchecked.
See http://vveb.archive.or_16Neb/20061106130358/w‘kw.jinl.comffinspace/juice?pagelD=68813.
59. The Company further represented that JML's IMP included "tactical research"
(see http://web.archive.oreweb120061106130344/wAk WjM orn/finspace/juice?pagel D=68814)
to support the Company's investment security:
We observe the global economic climate closely, keeping a carefuleye on boom and bust cycles, interest rates, inflation, foreigncurrency movements, and so on. This enables us to make accurateforecasts for the various investment classes, as well as forinvestment regions and markets. This is the basis of our tacticalpolicy of allocation, which, using a specially defined range ofvariables, puts the emphasis on cycles of between 12 to 18 months.
See htt p://v, eh.archiv e.org/web/2006 11 06130344/www,inil.com/finspace/juice?pagel D=688140.
60. The Company represented that the technical research revealed that: "It has been
mathematically proven that to reduce the risk factor to negligible levels, a portfolio should
contain more than 20 individual titles." See
36
http://web.archive.org/vveb/20061106130344/ww jrni.corn/finspacej u iee?page1D=68814. tion:•
Diversification helps spread risks between countries, currenciesand markets. It enables us to benefit from opportunities as theyarise around the world. It provides us with a means of hedging ourbets against crises (such as war or oil shortages) and unexpectedevents (stock market crashes or natural disasters). Diversificationreduces risk. Or, for the same amount of risk, diversificationincreases returns.
* *
Risk is almost inevitable in any investment. Most assets carry theuncertainty of whether they will realize a return in the future, andif so, how much. Stock prices move up and down and dividendyields may vary from year to year. Our concepts of risk anduncertainty naturally impose negative biases to investments withhigh volatility. Yet research in different countries on the historicalperformance of stocks -- considered the most volatile asset class --show that investors are rewarded for taking on greater risk if theyhave the discipline to hold on to their investments. A buy-and-hold strategy in a globally-diversified portfolio can smoothen outthe bumps in the stock markets.
Your benefit — more return for less risk
This sort of interrelationship is what diversification is all about,and is the key element in Markowitz's Nobel prize-winningtheories. When investing in securities, diversification is the be-alland end-all of success over long-term. At JML we use modernportfolio optimization tools based on theories of Prof. Dr. HarryM. Markowitz, which help us to just do that. We find the rightallocation for your portfolio by strategic linking of titles in separateasset categories based on the Modern Portfolio Theory.
Seehttp://wcb.archive.org/web/2006 ace/binarv?med ia----110013
&open—true.
61. JML also represented that the Company's IMP included an ongoing quantitative
and qualitative evaluation which enabled a timely response to changed circumstances:
Quantitative analysis yields data history, and is consequentlystatistical. Equally important, and even decisive in the long term,is qualitative analysis. What we want to understand is why aparticular fund or manager was successful in the past. What
37
investment strategy did he follow, what investment methodsfigured in his approach? What sort of people are in the investmentmanagement team, and how do they organize their business?
What is the staff turnover rate, does it fluctuate excessively? Whatsort of funds belong in the portfolio, and which manager should bechosen to look after them? If it turns out that a variety of funds areof equal value, the deciding factor should be their cost. See
fittp://web. arc h ivc.o rgiweb/20061106130351/www.jm I.co m/finspa celjuicepageID-688 I 9.
* *
Quantitative analysis examines the results of the past, and isusually used together with a market index in order to classifyresults more easily. See
http://web. arch ive.orglweb/2006 I 106130351Iwwwjml.com/finspaceijuice?pagelD=68819.
* *
Qualitative analysis examines the decision-making process. Itscrutinizes the level of professionalism and depth of experience ofthe decision-makers themselves. Seehttp://web.arch ive.orgiweb/20061106130351/ww wjrnl.comitin spacc/1u icepagel D=68819.
* *
Are the funds returning their potential? What about the strategy asa whole, how is it shaping up? As part of an on-going process, wecompare the results with the benchmarks in real terms on amonthly basis for both individual positions and for the portfolio asa whole. Is it as successful as we thought it would be? Monitoringperformance like this enables us to intervene with any adjustmentsat exactly the right time. Seehttp://web.archive.org/web/20061106125154/www.iml.comlfinspace/ju ic e?pagel D=68820.
62. The foregoing representations were materially false and misleading because, as
further explained herein:
(a) JML did not engage in diversification and asset protection. As alleged
herein, JML caused Plaintiffs and Class members to place investment funds into
relatively non-diversified investments that were devoid of any asset protection feature.
38
(b) JML did not determine the right strategy for each client investor. As
alleged herein, JML caused Plaintiffs and Class members to place retirement funds into a
highly speculative and non-diversified investment which was devoid of any asset
protection feature.
(c) JML's IMP was not neutral and without conflicts of interest. As alleged
herein, JML caused Plaintiffs and Class members to place funds into investments which
enabled JML to maximize JML's earnings with minimal or no work.
(d) JML's IMP did not rely on the support of top independent specialists
worldwide in the fields of strategy research, selection, monitoring and controlling. JML
induced Plaintiffs and Class members to place investment funds into relatively non-
diversified investments that were devoid of any asset protection feature without
performing research and without and monitoring or controlling.
(e) JML's Investment Committee did not review investment decisions on a
continuous basis. JML caused Plaintiffs and Class members to place investment funds
into relatively non-diversified investments that were devoid of any asset protection based
upon a philosophy of maximizing fees while minimizing work. Once the investments
were placed, .TML did not review investment decisions on a continuous basis.
(f) JML's portfolio strategy was not assisted by research performed by a
renowned Swiss asset management institution. During the Class Period, JML's portfolio
strategy was based upon JML's maximization of fees and minimization of work.
(g) JML's Product Management Team, which was in charge of coordinating
the various steps in the investment process and responsible for making final decisions on
the investments, did not assure that the best available partners for every task within the
39
process were on board. As alleged herein, JML caused Plaintiffs and Class members to
place funds into investments such as the Nomura Fund or to invest in variable annuities
from others which invested in the Nomura Fund without the performance of any
meaningful due diligence.
(h) JML did not keep risks and costs under control by means of quantitative
pre-selection of securities. As alleged herein, JML caused Plaintiffs and Class members
to place funds into investments such as the Nomura Fund or to invest in variable
annuities from others which invested in the Nomura Fund without the performance of any
meaningful due diligence.
JML did not enlist the services of leading research companies in
Switzerland and in Sweden in deciding which investment philosophy and portfolio
techniques to use. During the Class Period, JML's investment philosophy was based
upon JML's maximization of fees and minimization of work.
JML did not perform a fund cost analysis with the assistance of a team of
world-renowned experts from the United Kingdom. During the Class Period, JML's
funds cost analysis was based upon JML's maximization of fees and minimization of
work.
(k) JML's Product Administration Team did not ensure that the custodian for
each individual investor's investment met the individual investor's needs for the portfolio
as a whole or for each specific transaction. As alleged herein, JML caused Plaintiffs and
Class members to place funds into investments such as the Nomura Fund or to invest in
variable annuities from others which invested in the Nomura Fund without the
performance of any meaningful due diligence and in disregard of the investors' needs.
40
(1) JML did not provide each individual investor with more return for less
risk. Instead, JML induced Plaintiffs and Class members to place investment funds into
high risk, relatively non-diversified investments, that were devoid of any asset protection
feature without performing research and without and monitoring or controlling.
(m) JML did not deliver a clear picture of the most important issues under
examination or a transparent decision-making processes. Instead, JML induced Plaintiffs
and Class members to place investment funds into high risk, relatively non-diversified
investments that were devoid of any asset protection feature without performing research
and without and monitoring or controlling. It did so in order to maximize JML's fees
while minimizing JMUs work.
(n) JML did not formulate investment strategy guidelines for the medium to
long-term which were continuously monitored and checked. As alleged herein, once
JML caused Plaintiffs and Class members to place investment funds into high risk,
relatively non-diversified investments such as the Nomura Fund, JML never monitored or
checked these investments.
(o) JML did not make accurate forecasts for the various investment classes as
evidenced by the staggering losses sustained by Plaintiffs and Class members.
(p) JML did not employ diversification to spread risks between countries,
currencies and markets. As alleged herein, JML, through the Nomura Fund, placed funds
with Madoff in disregard of JML's own purported policies concerning diversification to
spread risks between countries, currencies and markets.
(q) JML did not perform an ongoing quantitative and qualitative evaluation
and, therefore JML was unable to timely response to changed circumstances. As alleged
41
herein, once JML caused Plaintiffs and Class members to place investment funds into
high risk, relatively non-diversified investments such as the Nomura Fund, JML never
performed any ongoing quantitative and qualitative evaluation.
D. Defendants Ignored the Red Flags Pointing Towards Madoff'sFraud Because Their Relationship with Madoff Benefited Them Financially
63. Both JML and Swiss Life charged management fees. In addition, the Nomura
Fund charged a fund fee. The fee charged by JML was .5% a year and the Swiss Life fee was
1%. JML, through its website, promised its investors asset protection, diversification, and
professional Swiss portfolio management. According to its web site, JML provides:
Professional asset management - Traditional Swiss quality
With over 30 years of experience, JML acts in the best interests ofour clients with unbiased and unrestricted advice and services,specializing in professionally managed investment strategies withunique advantages.
See htt ://www2Sizfinancevilla)exhiu loads/rnedia/JMLInvestment_Strategies_Brochure.pdf.
64. JML promised investment diversification and portfolio resiliency. JML
represented that its Multi-Asset Strategy involved a portfolio that was invested in a combination
of growth-oriented and safety-oriented funds and provided a solid basis for midterm capital
growth.
65. Defendants acted with gross negligence and violated their duties by failing to
perform, or cause to be performed, appropriate due diligence that would have revealed that the
assets of the Nomura Fund were invested with Madoff, BMIS, and/or Madoff controlled entities
and by failing to monitor the Nomura Fund's investments in these Madoff entities.
E. The Nomura Fund is Worthless
66. According to an Investment Fact sheet (dated January 30, 2009): "The Nomura --
All Weather Certificate includes shares in the Platinum All Weather fund. This fund invests
42
indirectly with Bernard L. Madoff Investment Securities LLC. The fund is unable to calculate
the net assets value, but it is likely that the shares could be written down to zero." See Exhibit D
attached hereto (emphasis added).
• COUNT I
• For Violations of Section 10(b) of the Exchange Actand Rule 10b-5 of the Securities and Exchange Commission Against All Defendants
67. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
68. This Count is asserted against all Defendants and is based upon Section 10(b) of
the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.
69. During the Class Period, Defendants directly engaged in a common plan, scheme,
and unlawful course of conduct, pursuant to which they knowingly or recklessly engaged in acts,
practices, and courses of business which operated as a fraud and deceit upon Plaintiffs and the
Class, and made various deceptive and untrue statements of material fact. The purpose and
effect of said scheme, plan, and unlawful course of conduct was, among other things, to induce
Plaintiffs and the Class to purchase Nomura Fund.
70. During the Class Period, Defendants, pursuant to said scheme, plan, and unlawful
course of conduct, knowingly or recklessly issued, caused to be issued, participated in the
issuance of, the preparation and issuance of deceptive and materially false and misleading
statements to Plaintiffs and the Class as particularized above.
71. In ignorance of the false and misleading nature of the statements described above •
and the deceptive and manipulative devices and contrivances employed by said Defendants,
Plaintiffs and the Class relied, to their detriment, on such misleading statements and omissions in
43
purchasing the Nomura Fund. Plaintiffs and the Class have suffered substantial damages as a
result of the wrongs herein alleged in an amount to be proved at trial.
72. By reason of the foregoing, Defendants directly violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices,
schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state
material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading; or (e) engaged in acts, practices, and a course of
business which operated as a fraud and deceit upon Plaintiffs and the Class in connection with
their acquisitions in the Nomura Fund.
COUNT II
For Violations of Section 20(a) of the Exchange Act(Against the Controlling Defendant)
73. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
74. Defendant Horlacher acted as a controlling person of the Nomura Fund within the
meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of his high level
position, participation in and/or awareness of the Nomura Fund's operations, and/or intimate
knowledge of the Nomura Fund's products, sales, accounting, selection of investment advisors
and managers, plans and implementation thereof, he had the power to influence and control and
did influence and control, directly or indirectly, the decision-making of the Nomura Fund,
including the content and dissemination of the various statements that Plaintiffs contend are false
and misleading. Defendant Horlacher had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
44
75. Defendant Horlacher had direct and supervisory involvement in the day-to-day
operations of the Nomura Fund and, therefore, had the power to control or influence the
particular statements giving rise to the securities violations as alleged herein, and exercised the
same.
76. By virtue of his position as controlling person, Defendant Horlacher is liable
pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of the wrongful
conduct, Plaintiffs and the Class suffered damages in connection with their purchase of the
Nomura Fund.
COUNT In
Common Law Fraud(Against All Defendants, Except for the Controllina Defendant)
77. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
78. Plaintiffs and other members of the Class, in reasonable and justifiable reliance
upon the statements and representations made by these Defendants, as previously set forth
herein, purchased investment interests in the Nomura Fund. Plaintiffs and the Class would not
have purchased their investment interests in the Nomura Fund except for their reliance upon the
representations made by these Defendants, performance reports, audit reports, and other
materials, and would never have purchased the Nomura Fund had they been aware that these
Defendants failed to conduct an adequate due diligence of Madoff and BMIS.
79. At the time the statements and misrepresentations were made by these
Defendants, performance reports, audit reports, and other materials, these Defendants knew them
to be false and intended to deceive Plaintiffs and the Class by making such statements and
representations.
45
80. At the time of the false statements, misrepresentations and omissions, set forth
above, each of these Defendants intended that Plaintiffs and the Class would act on the basis of
the misrepresentations and omissions contained in the performance reports, audit reports, and
other materials, in determining whether to purchase investment interests in the Nomura Fund.
Plaintiffs and the Class reasonably relied thereon to their detriment in making such decisions.
81. Had Plaintiffs and the Class known of the material facts that these Defendants
wrongfully concealed and misrepresented, and the falsity of these Defendants' representations,
Plaintiffs and the Class members would not have purchased their investment interests in the
Nomura Fund.
82. Plaintiffs and the Class, as a result of their purchase of investment interests in the
Nomura Fund and by reason of the wrongful concealments and misrepresentations by these
Defendants, have sustained damages, losing all of their respective investments in the Nomura
Fund in an amount yet to be determined, and to be proven at trial.
83. By reason of the foregoing, these Defendants are jointly and severally liable to
Plaintiffs and the Class.
84. These Defendants' fraudulent acts were willful and wanton and Plaintiffs and the
Class are entitled to punitive damages.
COUNT IV
Negligent Misrepresentation(Against Defendants JML and Horlacher)
85. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
86. These Defendants owed to Plaintiffs and the Class a duty: (a) to act with
reasonable care in preparing and disseminating performance reports, and other materials, which
46
were relied upon by Plaintiffs and the Class in deciding to purchase their investment interests in
the Nomura Fund; and (b) to use reasonable diligence in determining the accuracy of and
preparing the information contained in the performance reports and other materials.
87. These Defendants breached their duties to Plaintiffs and the Class by failing to
investigate, confirm, prepare and review with reasonable care the information contained in the
performance reports and other representations.
88. As a direct, foreseeable and proximate result of these Defendants' negligence in
performing their duties, Plaintiffs and the Class have sustained damages, losing all of their
investments in the Nomura Fund in an amount yet to be determined, and to be proven at trial.
89. By reason of the foregoing, these Defendants are jointly and severally liable to
Plaintiffs and the Class.
COUNT V
For Breach of Fiduciary DutyLAwainst Defendants „EVIL and Horlacher)
90. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
91. These Defendants breached their fiduciary duties to Plaintiffs and the Class.
92. As a result of their duties and responsibilities, as well as their conduct with
respect to the management of the assets of the Nomura Fund, as alleged herein, these Defendants
failed to fulfill their fiduciary duties owed to Plaintiffs and the Class by acting in bad faith, with
gross negligence and in utter disregard for due care and reasonable and prudent investment
standards.
47
93. As a proximate result of these Defendants' bad faith breach of fiduciary duties,
Plaintiffs and the Class have sustained damages, losing all of their investments in the Nomura
Funds in an amount yet to be determined, and to be proven at trial.
94. By reason of the foregoing, these Defendants are liable to Plaintiffs and the Class.
COUNTY!
For Gross Negligence and Mismanagement(A2ainst Defendants JML and Horlacher)
95. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
96. These Defendants were required to invest Plaintiffs' and Class members' money
in a manner consistent with the Company's investment objectives.
97. These Defendants owed fiduciary duties to Plaintiffs and the Class to conduct,
manage and supervise their investments in good faith and with due care. As set forth above,
these Defendants breached their fiduciary duties to Plaintiffs and the Class by acting in bad faith
and failing to exercise due care in the performance of their duties as fiduciaries.
98. These Defendants should have prevented, through the exercise of reasonable
diligence, the improper investing of the Nomura Fund's assets into Madoff, BMIS, and/or
Madoff-controlled entities.
99. These Defendants authorized, approved, participated in, failed to disclose, and
improperly concealed the improper conduct described herein.
100. Plaintiffs and the Class relied to their detriment on these Defendants to discharge
their duties as fiduciaries in a careful and prudent manner.
48
10!. As a direct and proximate result of the gross negligence and misconduct of these
Defendants, Plaintiffs and the Class have been harmed. These Defendants are liable to Plaintiffs
and the Class in an amount yet to be determined and to be proven at trial.
COUNT VII
For Unjust Enrichment(Against Defendants JML, Swiss Life and Horlacher)
102. Plaintiffs repeat and reallege each and every allegation contained in the foregoing
paragraphs as if fully set forth herein.
103. As a result of the misconduct detailed herein, the Nomura Fund has been forced to
begin liquidating, and Plaintiffs' and Class members' investments have been obliterated; yet
these Defendants have reaped substantial fees, dividends and other pecuniary benefits at the
expense of Plaintiffs and the Class.
104. These Defendants have therefore been unjustly enriched and equity and good
conscience require that these Defendants disgorge to Plaintiffs and the Class, all such unjust
enrichment in an amount to be determined at trial,
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
A. Determining that this action is a proper Class action, designating Plaintiffs as
Class representatives under Rule 23 of the Federal Rules of Civil Procedure and Plaintiffs'
counsel as Co-Lead Counsel;
B. Awarding compensatory damages in favor of Plaintiffs and the Class against
Defendants, for all damages sustained as a result of Defendants' wrongdoing, in an amount to be
proven at trial, including interest thereon;
C. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in
49
this action, including counsel fees and expert fees; and
D. Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
Dated: October 26, 2009
Respectfully submitted,
SONN & EREZ
By: s/Jeffrey R. Sonn Jeffrey R. Sonn
Broward Financial Centre500 E. Broward Boulevard, Suite 1600Fort Lauderdale, FL 33394Telephone: (954) 763-4700Facsimile: (954) 763-1866Email: jsonn(dsonnerez.com
BROAD & CASSELScott G. MillerGeorge (Trey) Tate, III390 North Orange AvenueSuite 1400Orlando, FL 32801-4691Telephone: (407) 839-4212Facsimile: (407) 254-1211Email: smillerki;broadandeassel.com
BROWN, GARGANESE, WEISS &D'AGRESTA, P.A.Jeffery S. Weiss, Esq.1111 North Orange AvenueSuite 2000Orlando, FL 32801Telephone: (407) 425-9566Facsimile: (407) 425-9596Email: jweissr-dprlandolaw.net
Liaison Counsel for Plaintiffs and the Class
50
LAW OFFICES OF HOWARD B. PROSSNITZHoward B. Prossnitz200 West Madison StreetSuite 2670Chicago, IL 60606Telephone: (312) 960- 1800Facsimile: (312) 984- 1047Email: howard@)prossnit7lavs .com
GAINEY & McKENNAThomas J. McKenna295 Madison AvenueNew York, NY 10017Telephone: (212) 983-1 300Facsimile: (212) 983-0383Email: tjmiaNN 200 l*fahoo.com
tjmckennea)gaineyandmckenna.com
Co-Lead Counsel for Plaintiffs and the Class
51
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on October 26th , 2009, I electronically filed the foregoing with
the Clerk of Court by using the CM/ECF system which will send a notice of electronic filing to
the following:
LAW OFFICES OF HOWARD B. PROSSNITZHoward Prossnitx, Esq.Law Office of Howard Pros snitz200 West Madison Street, Suite 2670Chicago, IL 60606
Brown, Garganese, Weiss & D'Agreta, PAJeffrey S. Weiss, Esq.111 N. Orange Avenue, Suite 2000P.O. Box 2873Orlando, FL 32802-2873
BROAD & CASSELGeorge "Trey" Tate, III, Esq.Robert Alfert, Jr., Esq.Broad and CasselBank of America390 N. Orange Avenue, Suite 1400Orlando, FL 32801-4961
CARLTON FIELDS, P.A.Daniel C. JohnsonFlorida Bar No. 855880Sam J. Salario, Jr.Florida Bar No. 83460CNL Center at City Commons450 S. Orange Avenue, Suite 500Orlando, FL 32801-3336
CHAFFETZ LINDSEY LLPPeter R. ChaffetzAndreas A. Frischknecht1350 Ave. of the Americas, 8th FloorNew York, NY 1019
further certify that I mailed the foregoing document by first class, U.S. mail, postage
prepaid to the following non-CM/ECF participants:
GAINEY & McKENNAThomas J. McKenna, Esq.Gainey and McKenna295 Madison AvenueNew York, NY 10017
By: /s/ Jeffrey R. SonnJeffrey R. Sonn, Esq.Broward Financial Centre500 E. Broward Blvd., Suite 1600Ft. Lauderdale, FL 33394Telephone: (954) 763-4700Facsimile: (954) 763-1866Email: isonnasonnerez.com
EXHIBIT A
•
darat.O.ON
SWISS PERSPECTIVE M4th Quarter Review - December 2008
Special Information Issue
Dear Client
At the end of October 2008, a portion of your Multi Asset Strategy portfolio was invested in the PlatinumAll Weather Fund through Nomura - ALL Weather Fund ISIN DE000NMOAA43. The Platinum All Weather Fundis an absolute return fund with two objectives: low volatility and consistent absolute returns. The fundoffered an 8-year track record with no losing months.
At the end of 2008, Platinum All Weather Fund Limited informed us as follows:
"Estimations indicate that approximately 20% of the Fund is invested in Santa Clara II Fund("Santa Clara") and approximately 80% in 3 Sub-Fund of Directors Fund 5PC Ltd (Directors SPC"),both of which we understand to be invested with Bernahrd L. Medoff investment Securities LLC.
The following information has been received from Santa Clara and Directors SPC:
- Santa Clara has reported that it intends to write down the value of its Madoff holdings to zeroand to institute compulsory redemption procedures, with a distribution of remaining proceeds.Santa Clara has further stated that, in the event the Madoff-exposed assets ever regain value,appropriate steps will be taken.
- Directors SPC has informed the Fund that it has decided to suspend calculations of the NetAsset Values as well as subscriptions and redemptions, and will keep investors updated as moreinformation becomes available.
Consequently, the Fund regrets that it is unable to calculate Net Asset Values and will be unableto service subscription or redemption requests until further notice.
We will keep you informed as further information develops."
We therefore have the unpleasant task of informing you that the All Weather Fund portion of your portfoliowill be written down to zero. The enclosed fact sheet an your Multi Asset Strategy portfolio shows thepercentage your portfolio that was invested in the Nomura - All Weather Fund at the time. The accountstatements and the fact sheets still show the positions at their previous value, as the write down was notyet in effect as per December 31, 2008.
We are waiting for further information as well as steps to be taken which we will pass On to you immedi-ately (there Is no need for you to take any action). We are taking all possible efforts to protect our clients'Interests and we truly regret that our clients are affected by this unprecedented fraud.
1.1Sincerely,
JML Portfolio Management Ltd.
"De Felix Horiacher Edith Karrer . •...
(4.424)... r
•
• CEO Senior Client Relations Manager
Impressum: SWISS PERSPECTIVE is published quarterly by Je1L Portfolio Management Ltd, Baarerstrasse 53,e?'•CH-6304 Zug, Switzerland Tel: +41 58 800 5400 Fax; +41 58 BOO 5401 Email: infoSjrnl.corn www.jml.com
JML POM all rights reserved.
!::.44:1- •
EXHIBIT B
Family Management Group AG Investment Manager: AIG Private Sank Placement Agent: Almas CapitalGassnerallate 38 Investment Advisor: FMG Capital Lid. AUM: 5433.99 Million FmGCH-0001 Zurich Bank and Custodian: AID Private Bank Minimum Investment: $100,000Switzerland Administrator: Circle Investment Support Subscriptions: Monthly
MAW:GEMENT GROUP
Auditor: EIDO British Virgin Islands Redemptions: Monthly with 30 day noticeLegal: Mapels S Calder / Sdley Austin
Contact: Aarthan R. Andrea Management Fee: 1.75% ISIN: VGG276721641Phone: *41 (0)44 201 1949 Performance Fee: 10% Valoren: CH4322508a silharnpfa milymanagemenlg roup.com
Directors Fund SPC Ltd., The Riverside Conservative Fund Inception: Dec -90 Current NAV: 313150.39
-
Directors Fund, Riverside Portfolio will invest via a non-recourse leveraged Instrument in one or more funds or managed accounts, restricted to a single strategy. Thestrategy is called 'spllt-strike conversloW and entails: (I) purchasing a basket of thirty to forty large-capitalization S&P 100 stocks, which together account for the greatestweight of the index and therefore, when combined, present a high degre e Of co rre lat ion with the general market; (ii) selling out-of-the money S&P 100 Index cat optionsrepresenting a dollar amount of the underlying Index equivalent to the dollar amount of the basket of shares purchased; NI) purchasing out-of-the-money or at.tne-moneyS&P index put options In the same dollar amount
The returns are pro forma, based on actual net returns of ungeareci account managed by me same subadvisor. adjusted to current leverage of 60%. This Is non recourseto the investor and provided at the fund level.
-Performance Statistics Risk Statistics
Statislics for the Period: Annualized Anntiefeed Annualized
Dec-90 - AuCompound Cumulative Worst Best Percent Standard Sharpe Max Annualized Bela
g-08
Return Return Month Month Profitable Deviation Ratio 3.00% Drawdown SoninoDF Riverside Conservative Fisid 16.01% 1265.64% -2.39% 5.96% 77% 5.36% 2.26 -2.54% 13.74
S&P SOO TR 10.32% 471.38% -14.46% 11.44% 65.26% 13.53% 0.68 -4-4.73% ,,14 0.12
Lehman Aggregate Beret Index 6.97% 230.70% -135% 3.87% 70.42% 167% 1.06 -515% 3.70 0.10
MOnthilPertormence 1%1 Net of reeNYear Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 'Year2006 1.27% -8.53% 0,01% 148% 1.20% -0.36% 1.33% 122% 5.73%2007 -0.13% -1.17% 3.07% 1.27% 029% 0.30% -0.17% 0.011% 1.35% 0.20% 1.93% -0.113% 7.74%2006 0.93% -0.33% 2.30% 1.48% 0.88% 0.44% 1.75% 0.91% 0.61% 0.16% 1.11% 1.06% 11.86%2005 OM% 0.07% 1.40% -0.20% 0.81% 0.36% -0.28% -0.21% 1.29% 3.15% 0.74% 0.71% 6.66%2004 1.48% 0.58% -0.27% 0.35% 0.69% 2.52% .0.35% 2.35% 0.54% -0.37% 1.18% 0.10% 9.36%2003 . -1.33% -0.57% 3.88% -0.43% 1.25% 1.70% 2.56% -0.03% 1.59% 2.29% -0.86% 021% 10.65%2002 -0.70% 0.63% 0.85% 1.32% 4.45% 0.04% 5.60% 0.29% -0.19% 0.97% -0.32% -0.34% 13.12%2001 2.82% -0.62% 1.71% 2.11% 0.00% -022% 0.18% 1.53% 0.92% 2.24% 1.94% . -0.10% 14.27%2000 3.97% -0.66% 3.25% -0.24% 2.04% 0.90% 0.53% 1.98% 40.47% 1.12% 0.58% -0.01% 13.63%1999 3.78% -149% 4.42% -0.07% 2.60% 3.14% 0.10% 1.23% 0.75% 1.53% 2.68% -0.04% 21.29%1998 1.13% 1.89% 348% 0.07% 3.13% 2.01% 0.95% -0.12% 1.29% 147% 0.98% -0.07% 19.21%1997 5.08% 0.80% 1.12% 2.58% 0.78% 2.17% 0.70% 0.18% 3.05% 0.31% 2.61% 0.10% 21.15%1996 2.39% 0.44% 2.10% 0.66% 2.42% -0.23% 3.36% -0.31% 1.96% 1.70% 2.85% 0.17% 16.87%1995 1.15% 0.79% 1.02% 2.01% 2.00% 0.24% 1.13% -0.50% 2.113% 2.59% 0.30% 120% 1725%1994 4.20% -1.72% 2.67% 2.32% 0.35% -0.19% 3.18% 0.12% 0.96% 3.315% -2.38% 045% 15.13%1993 -0.78% 3.65% 340% -0.62% 3.16% 1.23% -0.58% 3.30% 0.013% 3.27% -0.15% 0.30% 17.41%1992 0.34% 5.50% 1.49% 5.68% 4,32% 2.15% -0.79% 1.35% 0.20% 243% 2.44% 2.51% 24.00%1991 5.95% 2.32% 0.40% 2.22% 3.33% -0.09% 3.59% 1.53% 9.93% 5.50% -0.72% 2.69% 31.52%
Monthly Net Asset Values (31000 invested in 1990) Risk vs. Return Scatterplot$16,200 18% ---. -
16% •OF filversIde511'000 14% Consetverive
51f, 12% nund S&P 600 TR
$431)00 I 10% •
.8 8% •$1000 .5 Lentrnan
2 E 2 2 2 2 2 2 2.% Aggregate Bond
Index4 -3 3 -3 73- , 3 g 4 4 4 4 4 4 4 "' 2%
4=4.413F 2.1verulde Comet-votive rand0%
2% 4% 616 WA 10% 12% 14% 16%Ha TR
n•1.ohman Aggregate Bond index Annualized Standard Deviation
-
*Fpnea are pm Terms and for illustrative purposes only. Past performance is not indicative of future results'Only the aiming Memorandum. of which the present document is riots pan, should be relied upon for the purposes of considering an investment in the Fund.
EXHIBIT C
CERTIFICATION OF NAMED PLAINTIFF
To; Thomas J. M.eKerma, Esq. Tel: 212-983-1300Gaincy & McKenna Fax: 212-983-0383295 Madison Avenue, 4th Floor e-mail: timckenna@gainevandrnckenna,comNew York, New York 10017
.„&eiecfroor---ree("Plaintiftn hereby retain Gainey & McKenna and such co-counsel it deemsappropriate to associate with, subject to their investigation, to pursue my claims on a contingent fee basis and forcounsel to advance tho costs of the case, with no attorneys fee owing except as may be awarded by the court at thoconclusion of the matter and paid out of any recovery obtained and I also hereby declare the following as to theclaims asserted under the law that:
Plaintiff reviewed the draft complaint to be filed in this matter and authorized the filing.
Plaintiff did not purchase the security that is the subject of this action at the direction of Plaintiff'scounsel or in order to participate in this private action.
Plaintiff is willing to serve as a representative party on behalf of the class, including providing testimonyat deposition and trial, if necessary.
I purch ed a variable annuity which is the subliect of this litigation by purchasing*olicyon 3 I/7 in the amount of $t7,304.zi . Of that amount, slightly over was put in the Nomura All Weather Fund and my loss in the Fund is about VW/12./ ao 114'°,
Plaintiff has sought to serve as a class representative in the following cases withinthe last three years:
Plaintiff has complete investment authority and is the agent and attorney-in-fact with full power andauthority to bring suit to recover for investment losses.
Plaintiff will not accept any payment serving as a representative party on behalf ofthe class beyond Plaintiff's pro raw share of any recovery, except such reasonable costs and expenses (includinglost wages) directly relating to the representation of the class as ordered or approved by the court.
I declare under penalty of perjury that the foregoing is true and correct.
Executed this 2P-clay of July, 2009
eli.ZZZA—etth •Signature
Z/44) Print Name (& Title if applicable)
EXHIBIT D
AGM.As
aMei
SWISS PERSPECTIVE M
4th Quarter Review - December 2008
Special Information Issue
Dear Client
At the end of October 2008, a portion of your Multi Asset Strategy portfolio was invested in the PlatinumAll Weather Fund through Nomura - All Weather Fund ISIN DE000NMOAA43. The Platinum All Weather Fundis an absolute return fund with two objectives: tow volatility and consistent absolute returns. The fundoffered an 8-year track record with no losing months.
At the end of 2008, Platinum All Weather Fund Limited informed us as follows:
"Estimations indicate that approximately 20% of the Fund is invested in Santa Clara It Fund("Santa Clara") and approximately 80% in a Sub-Fund of Directors Fund SPC Ltd (Directors SPC"j,both of which we understand to be invested with Bemahrd L. Medoff Investment Securities LLC.
The following information has been received from Santa Clara and Directors SPC:
- Santa Clara has reported that it intends to write down the value of its Medoff holdings to zeroand to institute compulsory redemption procedures, with a distribution of remaining proceeds,Santa Clara has further stated that, in the event the Madoff . exposed assets ever regain value,appropriate steps will be taken,
- Directors SPC has informed the Fund that it has decided to suspend calculations of the NetAsset Values as well as subscriptions and redemptions, and will keep investors updated as moreinformation becomes available.
Consequently, the Fund regrets that it is unable to calculate Net Asset Values and will be unableto service subscription or redemption requests until further notice.
We will keep you informed as further information develops."
We therefore have the unpleasant task of informing you that the All Weather Fund portion of your portfoliowill be written down to zero. The enclosed fact sheet on your Multi Asset Strategy portfolio shows thepercentage your portfotio that was invested in the Nomura All Weather Fund at the time. The accountstatements and the fact sheets still show the positions at their previous value, as the write down was notyet in effect as per December 31, 2008.
We are waiting for further information as well as steps to be taken which we will pass on to you immedi-ately (there is no need for you to take any action). We are taking all possible efforts to protect our clients'interests and we truly regret that our clients are affected by this unprecedented fraud.
Sincerely, - •
•JML Portfolio Management Ltd.
Dr. Felix Horlacher Edith Karrer
qj Ni&krzL, ;CEO Senior Client Relations Manager
Impressum: SWISS PERSPECTIVE is published quarterly by JML Portfolio Management Ltd, Baarerstrasse 53,01-1-6304 Zug, Switzerland Tel: +41 58 800 5400 Fax: +41 58 800 5401 Email: [email protected] www.jml.com0 JAL POM all rights reserved.
•
AILAIM
MULTI ASSET STRATEGY - CONSERVATIVE (CHF) 4...i M I.Investment Facts as of December 31, 2008
The portfolio is invested in safety-oriented bond, money maret, real estate and hedge funds as well as convertiblebonds. IIn addittn, a limited 25% of the portfolio is invested in equ4 and growth funds.
, i 1
Targets Holdings*...
Recommended investment horizon 5 years -Divtrsified Atternative Inv..Ce. ,DEDOB000111R4 21.15%Target return p.a. 4.25% MSF, Fixed Income W01540343132 14, 09%Target nsk p.a. 6.00% Nor[iura -All Weather Fund ',DE000NM0A443 13.70%
Ctiviirsiffed Alternative Inv. Cert. 11 01300112Q96C82 12,19%iG5 11.150 Lend CIA shortikilini-Future ,G600132 .839867 -9:81%Piciet money Market CHF CH0011292312 5.94%Performance NoMura 7 MI Star irund X50396005877 529%PuOic Private Real Estate Fund X50334587549 4.90%YTD -15.1%Ashinore ' GC.+00811rWW.Pli9 litil%2007 -3.1%CS tiroreal DE0009805002 1.00%2006 3.7%
2005 12.5% GS ,Global Core Equity Portfolio W0257370.246 0.83%2004 2.2% GS Enhanced Oil Participation 0B0083811G13 0.69%2003 9.2% 'DW$ Zurich Invest Aktien DE00013490145 0.55%2002 -11.5% GS Europe Core Equity Portfolio LU0133265339 0.47%2001 -0.9% GS Brazil Bovespa open end certificate 080081280463 0.46%
\.. .., CS ith;)rtfolio Real 0E0009751453 0.45%
JP Morgan Emerging Markets 41)0053685615 0.44%
' CS AsiSn Property LUO220210792 0.35%Asset Allocation .MLI F World Energy L00122376428 034%ML1 F World Mining LU0075056555 0.33%Alternative Investments 56,21% 1
Fixed Income 14.09% Clailden Leo infrastructure .W0246498066 0.30%MI Currency Hedging 9.81% RAF Convertible LU0114314536 0.28%Ifil Real Estate 6.70% 5ar4sin New Power -L1J0288930869 0.28%MI Money Market 5.94% . GS Next 11 Zertifikat GBODEYBKS34 0.27%IBM Emerging Markets 2.77% .11D Morgan Russia A - USD 1.00225506758 0.25%ii. Blue Chip Equities 1.85% JP Morgan Latin America Equity W0053687314 0.24%I= Natural Resources 1.53% ML0F.Wortd Gold W0055631609 0.24%on Special Themes 0.58% SAM. Sustainable Water LU0133061175 0.17%aNN Convertible Bonds 0.28%MN Gold 0.24%
I
i
1Currency Allocation (after hedging) -.)
NE EUR 48.00%=I 1.1513 29.00%ego CHF 16.00%
yi.:VC;m Others 8.00%
:-.i,,'tSt.:,•'
40 ---)' The fund allocation as well as the selection of investment funds may vary over time.Information and recommendations provided subject to change without notice and cannot be deemed as binding. Investors should notethat the performance of fund-linked insurance tracks the value of the selected fund portfolio. Performance figures do not considerpolicy risk premiums and costs. Past performance is no gua rantee of future results. C 2008 ..IML Portfolio Management Ltd.,8aarerstrasse 53, 6304 Zug, Switzerland, Phone *41 58 800 5400, Fax +41 58 800 5401, infotiijml.com , www.)ml.com
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDAORLANDO DIVISION
JEFFREY ARM, M.D.,
Plaintiff,
-vs- Case No. 6:09-cv-903-Orl-28GJK
JML PORTFOLIO MANAGEMENT, LTD,SWISS LIFE HOLDINGS AG and NOMURAHOLDINGS, INC.,
Defendants.
ORDER
This cause came on for consideration without oral argument on the following motion:
MOTION: SWISS LIFE (LIECHTENSTEIN) — AG'S SECONDUNOPPOSED MOTION TO MODIFY THE BRIEFING
- SCHEDULE WITILRESPECT TO ITS ANTICIPATEDMOTION TO DISMISS A' FORTHCOMINGCONSOLIDATED AMENDED COMPLAINT ANDMEMORANDUM . OF LAW IN SUPPORT (Doe. No 34)
FILED:.. September 14 2009
THEREON it is ORDERED that the motion is . 0ItANTED in part andDENIED.io part: -.
Plaintiff Araj, M.D., shall file an amended complaint on or before October 26, 2009. At
this point, Swiss Life is generally apprised of the factually and legal issues of this case and does
not need one month to respond to an amended complaint. Thus, Swiss Life shall respond to the
amended complaint within 20 days of its filing. If Swiss Life responds with a motion to dismiss,
Arai shall have eleven (11) days to respond in opposition to said motion. Swiss Life will then
have five (5) days to file a reply to Araj's response. Accordingly, the Unopposed Motion to
Modify the Briefing Schedule (Doc. No. 34) is GRANTED in part and DENIED in part.
DONE and ORDERED in Orlando, Florida on September 16, 2009.
GORY J . LLYUNITED STATES MAGISTRATE JUDGE
2