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From Securities Regulation Daily, February 26, 2013

Judge Certifies Madoff Feeder Fund Class Action, Excludes Certain Foreign Investors

By Amanda Maine, J.D.

A federal judge certified as a class investors in funds operated by the Fairfield Greenwich Group (FGG), a firm that invested in a Ponzi scheme spearheaded by Bernard Madoff. In addition to FGG, the defendants included a number of service providers who audited, administered, or served as custodians of the funds. The judge modified the plaintiffs' proposed class definition by excluding investors in several countries (Anwar v. Fairfield Greenwich Limited, February 22, 2013, Marrero, V.).

Plaintiffs' claims. The plaintiffs' second consolidated amended complaint alleged that FGG's marketing materials and periodic updates misrepresented that Madoff's strategy resulted in substantial, consistent returns and that FGG had performed due diligence of Madoff's operations. The plaintiffs alleged that FGG did not independently verify whether investments occurred or whether the returns touted by Madoff were accurate, and that FGG ignored red flags that should have put FGG on notice of Madoff's fraudulent activity.

The court readily agreed that the plaintiffs satisfied the prerequisites of Federal Rule of Civil Procedure 23(a) that the class be so large that joinder of all members would be impracticable, that the plaintiffs had demonstrated commonality of law and fact, that the claims are typical of the class, and that the representative parties fairly and adequately protect the interest of the class.

Predominance requirement. Under Rule 23(b)'s predominance requirement, the plaintiffs must establish that the action is maintainable as a class action. The defense argued that the proposed class should not be certified because individual issues of reliance would prevent a finding of predominance. Specifically, the defendants alleged that the plaintiffs either relied on non-uniform materials or did not uniformly rely on certain material. The court disagreed with the defendants' argument, noting that there was little publicly available information about the Madoff investments, which meant that the Madoff investment information the plaintiffs received was most likely obtained through FGG.

Superiority requirement and foreign countries. The court focused on the superiority requirement under Rule 23(b), which requires courts to consider the advantages of a class action against those of alternative available methods of adjudication. The defendants argued that a class action in this instance would not be a superior method because a resulting judgment would not be given a preclusive effect by the courts. This would affect investors in approximately 70 countries.

While the court entertained certain "dueling expert reports" about the likelihood of foreign recognition of a U.S. opt-out class action judgment, it rejected this testimony as conjecture. Instead, the court stated that "where a plaintiff sufficiently demonstrates that the stated policy of a foreign country is to recognize and enforce foreign judgments, or that its law is generally inclined to favor that course of action, such a showing would create a rebuttable presumption that, absent an affirmative showing to the contrary, recognition of a particular United States judgment, even in a class action litigation, does not violate a foreign country's public policy."

The court cited several instances where the plaintiffs had shown that including investors from particular countries in the class of investors would not violate the country's foreign policy. The court looked to precedent to conclude that investors in common law countries such as the United Kingdom and Canada could be included in the class. The court also allowed Spanish investors into the class, noting that Spanish law provides for "group actions" similar to class actions in the United States. Investors from several Latin American countries may also be included in the class, the court ruled. Among other reasons, the court took into account the unlikely ability of plaintiffs from the relevant Latin American countries to bring a duplicative action in their home countries. The court also included in the class investors from most members of the European Community who are signatories to the Lugano Treaty.

The court excluded investors from more than 20 countries in the class, stating that the plaintiffs had not sufficiently demonstrated that the courts of those countries would give preclusive effect to the judgment of the court. These countries include France, Switzerland, Israel, China, Japan, Germany, United Arab Emirates, and Qatar.

The case is No. 09 Civ 0118.

Attorneys: David A. Barrett, Adam S. Deckinger, Eli Justin Glasser and Jonathan Edgar Pollard (Boies, Schiller & Flexner, LLP) for Securities & Investment Company Bahrain, Harel Insurance Co., Ltd., AXA Private Management, St. Stephen's School, Pacific West Health Medical Center, Inc., Inter-American Trust and Bonaire Ltd. Mark Geoffrey Cunha (Simpson Thatcher & Bartlett, LLP) for Fairfield Risk Services, Ltd. Christopher Lovell and Victor E. Stewart (Lovell Stewart Halebian Jacobson, LLP) for Pasha S. Anwar and Julia Anwar. Carl Lester Stine and Chet Barry Waldman (Wolf Popper, LLP) for Pacific West Health Medical Center Inc. David J. Molton and Martin S. Siegel (Brown Rudnick, LLP) for Fairfield Sentry Ltd. Michael Joseph Chepiga (Simpson Thacher & Bartlett, LLP) for Fairfield Greenwich Ltd.

Companies: Securities & Investment Co. Bahrain; Harel Insurance Co., Ltd.; AXA Private Management; Inter-American Trust; Bonaire Ltd.; Fairfield Risk Services, Ltd.; Pacific West Health Medical Center Inc.; Fairfield Sentry Ltd.; Fairfield Greenwich Ltd.

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