Nyu's Memo Opposing Merkin Motion To Dismiss

SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY ------------------------------------------------------------NEW YORK UNIVERSITY, Plaintiff, - against ARIEL FUND LIMITED, GABRIEL CAPITAL CORPORATION, J. EZRA MERKIN, FORTIS BANK (CAYMAN) LTD., FORTIS PRIME SOLUTIONS (CAYMAN) LTD., FORTIS BANK, BDO TORTUGA, and BDO INTERNATIONAL, Defendants. -------------------------------------------------------------

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Index No. 08603803/2008 Hon. Justice Richard D. Lowe PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO THE MOTION TO DISMISS OF DEFENDANTS J. EZRA MERKIN AND GABRIEL CAPITAL CORPORATION

TABLE OF CONTENTS Pages PRELIMINARY STATEMENT .....................................................................................................1 STATEMENT OF FACTS ..............................................................................................................6 ARGUMENT ...................................................................................................................................9 I. II.

The Standard For Resolving a Motion to Dismiss ...........................................................9 Plaintiff Has Standing to Assert the Common Law Claims for Breach of Contract, Breach of Fiduciary Duty, Negligence, Gross Negligence, Recklessness and Negligent Misrepresentation ...............................................................9 III. The Amended Complaint States a Valid Cause of Action for Breach of Contract ..........................................................................................................................11 IV. Plaintiff Has Stated Claims for Breach of Fiduciary Duty ............................................13 V. Plaintiff Has Stated a Claim Under New York’s Business Corporation Law §720................................................................................................................................15 VI. Unjust Enrichment .........................................................................................................16 VII. Count VIII States a Valid Direct Claim Against Merkin for Fraud ...............................17 VIII. The Amended Complaint States a Valid Cause of Action for Aiding and Abetting Madoff’s Fraud and Conversion of Assets .....................................................19 IX. Plaintiff has Pled Claims for Negligent Misrepresentation, Gross Negligence and Negligence...............................................................................................................20 X. Plaintiff Has Stated A Claim Under New York’s GBL § 349 .......................................21 XI. Plaintiff’s Claims Are Not Preempted Under The Martin Act ......................................22 CONCLUSION ..............................................................................................................................25

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TABLE OF AUTHORITIES Cases 511 West 232nd Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, (2002)............................9 Abrams v. Donati, 66 N.Y.2d 951, 498 N.Y.S.2d 782, 489 N.E.2d 751 (1985) ..........................10 AHA Sales, Inc. v. Creative Bath Products, Inc., 58 A.D.3d 6, 867 N.Y.S.2d 169 (N.Y. App. 2008) .....................................................................................................................16 Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp., 351 F.Supp.2d 79 (S.D.N.Y. 2004) .......................................................................................................................15 Amfesco Industries, Inc. v. Greenblatt, 172 A.D.2d 261, 568 N.Y.S.2d 593 (1st Dept. 1991) ........................................................................................................................................16 Bd. of Educ. of Cold Spring Harbor Cent. Sch. Dist. v. Rettaliata, 78 N.Y.2d 128, 572 N.Y.S.2d 885 (1991) ................................................................................................................17 Board of Managers of the Arches at Cobble Hall Condominium v. Hicks & Warren, LLC, 14 Misc. 1234 (2007) .....................................................................................................22 Bouhayer for Benefit of Gregovar Food Specialties, Inc. v. Georgalis, 169 Misc.2d 779 (1996) ................................................................................................................................16 Bridgestone/Firestone, Inc. v. Recovery Credit Serv., Inc., 98 F.3d 13 (2d Cir. 1996).................11 Bullmore v. Banc of America Secs. LLC, 485 F.Supp.2d 464 (S.D.N.Y. 2007) .................... Passim Bullmore v. Ernst & Young Cayman Islands, 45 A.D.3d 461 (1st Dept. 2007). ................. Passim Caboara, et al., v. Babylon Cove Development, LLC, 54 A.D3d 79 (2d Dept. 2008) ...................... Ceribelli v. Elshanayan, 990 F.2d 62 (2d Cir. 1993) ....................................................................10 Continental Ins. Co. v. Mercadante, 22 A.D. 181 (1st Dept. 1927) ...............................................11 Coronado Dev. Corp. v. Millikin, 175 Misc. 1, 22 N.Y.S.2d 670 (N.Y. Sup. Ct. N.Y. County 1940) .................................................................................................................................11 Fraternity Fund, Ltd. v. Beacon Hill Asset Management LLC, et al., 376 F.Supp.2d 385 (S.D.N.Y. 2005) ....................................................................................................... Passim Guggenheimer v. Ginzburg, 43 N.Y.2d 268 (1977) .......................................................................9 HF Mgmt. Servs. LLC v. Pistone, 34 A.D.3d 82, 818 N.Y.S.2d 40 (1st Dept. 2006) ..................15 Hochman v. LaRea, 789 N.Y.S.2d 300 (2d Dept. 2005) ...............................................................17 Hotaling v. A.B. Leach & Co., 247 N.Y. 84 (1928) ......................................................................11 Kimmell v. Schaefer, 89 N.Y.2d 257 (1996) ..................................................................................20 Kopel v. Bandwidth Tech. Corp., 56 A.D.3d 320, 868 N.Y.S.2d 16 (1st Dept. 2008) ..................15 Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dept. 2007). ................................................................................................................23,24 Mandelblatt v. Devon Stores, 132 A.D.2d 162, 521 N.Y.S.2d 672 (1987) ..................................15 Oswego Laborers’ Local 214 Pension Fund v. Marise Midland Bank, 85 N.Y.S.2d 20, 25 (1995) ......................................................................................................................21,22 Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, 446 F.Supp.2d 163 (S.D.N.Y. 2006).................................................................................18, 19 Primavera Familienstifung v. Askin, 130 F.Supp.2d 450 (S.D.N.Y. 2001) ......................... Passim Rapoport v. Schneider, 29 N.Y.2d 396 (1972) ..............................................................................16 Rasmussen v. A.C.T. Envtl. Servs., 292 A.D.2d 710, 739 N.Y.S.2d 200 (3d Dept. 2002) ........................................................................................................................................15 Reuben H. Donnelley Corp. v. Mark I Mktg, Corp., 893 F.Supp. 285 (S.D.N.Y. 1995) ...............14 Richbell Information Servs v. Jupiter Partners, L.P., 309 A.D.2d 288, 765 N.Y.S.2d

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575 (1st Dept. 2003). ...........................................................................................................9, 11 Rosicki v. Cochems, __ N.Y.S.2d __, 2009 WL 323486 (N.Y.A.D. 2d Dept. Feb. 10, 2009). .......................................................................................................................................20 Scalp & Blade, Inc. v. Advest, Inc., 218 A.D.2d 882 (4th Dept. 2001) ............................15, 21, 24 State of New York v. Samaritan Asset Management Services, Inc., 2008 WL 4745487 (Oct. 29, 2008). ......................................................................................................................22 Stern Bros. v. New York Edison Co., 251 A.D. 379, 296 N.Y.S. 857 (1st Dept. 1937) .................... Stutman v. Chemical Bank, 95 N.Y.S.2d 24 (2000) ......................................................................21 Tradewinds Fin. Corp. v. Refco Sec., Inc., 5 A.D.3d 229, 773 N.Y.S.2d 395 (1st Dept. 2004) ........................................................................................................................................15 United States v. Skilling, No. 06-20885, 2009 WL 22879 (5th Cir. Jan. 6, 2009). .......................12 Whitehall Tenants Corp. v. Estate of Olnick, 213 A.D.2d 200 (1st Dept. 1995) ...........................23

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Plaintiff, New York University (“NYU”) respectfully submits this Memorandum of Law in opposition to Defendants J. Ezra Merkin’s (“Merkin”) and Gabriel Capital Corporation’s (“Gabriel”) Rule 3211(a) (1) and (7) motion to dismiss the First Amended Complaint (“Cmplt”) filed on January 22, 2009. NYU is simultaneously filing a separate memorandum in opposition to the motion to dismiss of Ariel Fund Limited (“Ariel” or the “Fund”), which is incorporated herein. PRELIMINARY STATEMENT NYU, an investor in Ariel, states valid direct and derivative claims arising under New York common law and New York statutory law against the investment manager, Merkin, who controls Ariel, Gabriel, the corporation of which Merkin is 100% owner, BDO, the accounting firm that purportedly audited Ariel’s records, and Fortis Bank (Cayman) Ltd., Fortis Prime Solutions (Cayman) Ltd., Fortis Bank, and other Fortis Bank entities. As a result of Merkin’s misconduct in turning over more than $300 million of Ariel assets (and in excess of $2 billion overall of affiliated funds’ assets) to Bernard Madoff (“Madoff”), despite overwhelming “red flags” that Madoff’s trading results were implausible and likely fraudulent, and other wrongdoing in connection with the management and disclosures to investors about Ariel, NYU seeks legal and equitable relief, including an accounting, an order restraining the continued dissipation of Ariel Fund assets and the appointment of a receiver pursuant to §6401(a). Ariel, in form, a Cayman Islands corporation, is one of numerous investment vehicles created by Merkin to serve as the depository for funds Merkin raised and purportedly managed from his New York City offices.1 For the first years of Ariel’s existence, Merkin held Ariel’s

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As discovery has shown, in reality, although Merkin charged investors a hefty annual “management fee” for his services of 1% of the Fund balance and a 20% annual “incentive” fee on the Fund’s earnings and increase in value,

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“founders shares,” the only shares with voting rights.2 At its inception, and for several years, including through January 1994 when NYU made its first investments, the sole Ariel director was the Company’s financial institution affiliate, MeesPierson Management (Cayman) Limited (“MeesPierson”), 1993 Prospectus at p. 13. Some time thereafter, MeesPierson was replaced by two individual directors, Don Seymour and Aldo Ghisletta. Cmplt, ¶¶19, 21. Ariel never had formally appointed corporate officers, and Seymour and Ghisletta “delegated” their executive responsibilities to the “Investment Advisor.” Id. According to the series of Ariel “prospectuses,” the private placement memoranda furnished to its prospective investors, which were incorporated by reference into the subscription contracts of purchasing investors, Ariel was required to use Merkin’s company, Gabriel, as its “Investment Advisor”; indeed, in the case of Merkin’s death or incapacity, the Ariel Fund would immediately terminate and all investors’ stock would be redeemed. To persuade potential investors to purchase participating shares in Ariel, each of the prospectuses touted Merkin’s educational background and purported investment experience, while remaining silent about the true “managers” exercising the investment discretion over investors’ funds -- i.e., Teicher, Madoff, and later Cerberus.3 As discovery has shown, this was hardly surprising because at the time that Merkin was peddling Ariel shares to NYU and others (in late 1993), Teicher had already been convicted of several counts of federal securities fraud for, inter alia, using insider information in trading puts and calls in registered securities, and was about to begin his incarceration in a federal jail in New Jersey, from which he would continue to manage Ariel assets through phone calls made to his

Merkin secretly handed over the “management” of the Funds first to Victor Teicher (“Teicher”) and Teicher’s employees (who shared offices with Merkin), and to Madoff, and later to Steven Feinberg of Cerberus. Teicher, Madoff and Feinberg managed Ariel’s assets from their offices in New York City. 2 See the Prospectus dated November 30, 1993 (“1993 Prospectus”) included within Exhibit 1 to the Cmplt, at p. 14. 3 See the 1993 Prospectus at p. 11, the February 1996 Prospectus at pp. 14-15 and the October 2001 Prospectus at p. 16. The February 1996 Prospectus and October 2001 Prospectus are attached as exhibits to the Cmplt.

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employees working at Merkin’s Park Avenue address. Moreover, by this time, Teicher himself had warned Merkin that the trading results Madoff reported were not possible.4 The 1993 Prospectus permitted Merkin to “consult” with other professionals but provided that he would retain “overall responsibility for funds invested with other persons.” Id. at p. 13. The 1996 and 2001 Prospectuses explicitly permitted Merkin to use “Independent Money Managers,” but required him to “exercise reasonable care in selecting such independent money managers” and to “monitor the results of these money managers.”5 The prospectuses, which would ultimately become the terms of the contracts with investors, explicitly recognized that Ariel investors could directly sue the Investment Advisor (i.e., Gabriel and Merkin), but sought to “exculpate” them for their acts and omissions, “unless such act or omission constitutes gross negligence, fraud or willful misconduct,” see, e.g., the 1993 Prospectus at p. 9. The prospectuses explicitly referred to Investment Advisory Agreements between Ariel and Gabriel. See 1993 Prospectus at p. 11. These prospectuses form the basis of NYU’s “direct” contract claims. The Advisory Agreements as between Ariel and Gabriel, form the basis of NYU’s derivative contract claims. In 1994, following NYU’s first investment in Ariel, like all other investors in Ariel, NYU began to receive quarterly reports authored and signed by Merkin which purported to inform NYU of the current value of NYU’s interest in Ariel, the Fund’s earnings, its summary balance sheet, investment categories, investment strategy and material events occurring over the quarter.

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The deposition transcripts of Merkin’s and Teicher’s testimony are being filed under seal as Appendix 1 and 2 to Plaintiff’s declaration. The facts relating to Teicher’s role and conviction are discussed at length in the depositions of Merkin Tr. at pp. 25-71 and Teicher Tr. at pp. 121-22, 131-42, 174-79. The charges against Teicher, and the chronology of his crimes, trial and conviction are described in Merkin Ex. 12 at pp. 199-201. Merkin admitted contemporaneous knowledge of these facts during his testimony, Merkin Tr. at 202. Teicher’s testimony that he continued to manage Ariel assets pursuant to telephone calls made from the New Jersey jail, appears at Teicher Tr. 121-22. 5 See the 1996 Prospectus at p. 12, 2001 Prospectus at p. 13.

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See, e.g., Appendix C to Plaintiff’s Declaration. Each of these quarterly reports was false when issued, in that the assets turned over to Madoff were stolen, but the value of these assets were included in calculating NYU’s interest and the Fund’s balance sheet. The reported earnings on these assets were similarly illusory and falsely reported. See Merkin Tr. at 302. Although each quarterly report appeared to include an exhaustive description of the quarter’s events, none of the reports mentioned Madoff or the use of the highly suspect, “split-strike conversion strategy.” Merkin Tr. at 173. Every one of these reports were written to falsely imply that Merkin himself was actively managing Ariel assets, and every quarterly report also omitted any reference Teicher. Merkin Tr. at 175. Following the example of suits brought in federal and New York courts to address other similar frauds, NYU has sued, in its individual capacity, for violations of the terms of its own contracts, i.e., the prospectuses that, inter alia, required Gabriel (and Merkin) to engage in meaningful due diligence and professionally monitor Madoff’s activities and to calculate the “management” and “incentive” fees based upon real, not illusory, assets and earnings; and NYU has sued derivatively for Ariel’s own relationship with Merkin, in order to indirectly benefit all Ariel investors.

The contracts incorporating the prospectuses gave rise to confidential

investment advisory relationships between NYU and Merkin (much like a retainer contract between an attorney and client), and NYU has sued for Merkin’s breach of his fiduciary duties owed to NYU, as its investment advisor which arose after NYU made investments in Ariel. See, e.g., Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 376 F.Supp.2d 385, 407-08 (S.D.N.Y. 2005), and also Primavera Familienstifung v. Askin, 130 F.Supp.2d 450, 491 (S.D.N.Y. 2001)(recognizing that private placement memoranda may serve as the “contracts” establishing the relationship on which corporate investors may sue). The false and misleading

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statements and omissions, including with respect to the false statements of the value of Ariel assets contained in the quarterly reports, and which induced NYU to retain its investments in Ariel, also serve as the basis for NYU’s fraud and §349 deceptive practices claims. See, e.g., Primavera, 130 F.Supp.2d at 493. NYU has sued derivatively, under New York law, on behalf of Ariel as a nominal defendant to recover on its behalf (i.e., indirectly on behalf of all Ariel current investors) for the diminution of the value of Ariel shares, and to preserve the remainder of the Ariel res, in trust, for Gabriel and Merkin’s violation of their investment advisory agreement with Ariel, breach of duties to Ariel and corporate mismanagement. Defendants attack all these claims on a potpourri of grounds, including: (1) that the investors have no direct contract or fiduciary rights; (2) that the “Internal Affairs doctrine” requires this Court to apply Cayman Islands law rather than New York law, and that Cayman Islands law does not recognize NYU’s derivative claims; (3) that NYU cannot simultaneously plead derivative claims and individual claims; and (4) that the Martin Act pre-empts virtually all of NYU’s claims. Defendants also contend that NYU has failed to satisfy the pleading requirements for one or more elements of the various common law and statutory claims alleged. All of Defendants’ arguments lack merit. New York cases have repeatedly recognized that a contract may create a relationship of trust, including one between an investor and its investment advisor, which gives rise to fiduciary obligations and causes of action for the violations of those obligations. Fiduciary obligations may also arise without a formal written agreement. New York does not mechanically apply the “internal affairs doctrine,” and here the

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overwhelming cluster of contacts are in New York, and strong public policy concerns dictate that New York apply its own laws to remedy the vast injuries to its citizens that occurred here. Requiring NYU to defer to Ariel’s directors who are nothing more than figureheads who have delegated their responsibilities to Merkin, is not countenanced under the derivative claim provisions of either New York or Cayman Islands law (which applies English common law.) There is no substantive conflict between NYU’s individual and derivative claims, because NYU does not seek to recover any more than its allocable share of Ariel assets and seeks relief that, as a practical matter, will benefit all Ariel investors. The Martin Act, a statute passed to enhance not remove the protections for investors that otherwise already existed under state law, does not “pre-empt” NYU’s claims, which have all been adequately pled, as is more fully described below. Thus, each of the claims alleged in the Complaint should be sustained. STATEMENT OF FACTS In 1993 Merkin approached NYU to invest in Ariel Fund, a Cayman Islands open-ended investment company that Merkin had created in 1988, to be used for United States tax-exempt investors and foreign investors. In January 1994, NYU signed a subscription agreement, that incorporated the 1993 Prospectus, and invested $20,000,000 (half from its Main Endowment fund and half from a separate endowment fund of its Institute of Fine Arts). See Cmplt, Exhibit 1, at ¶14. The terms of the 1993 Prospectus created continuing rights and obligations as summarized in the Cmplt at ¶14, including: 

The Fund relies on the Investment Advisor to implement the Fund’s investment policies and objectives. The Investment Advisor has full discretionary authority to invest the assets of the Fund. (p. 4)

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Success Dependent on Investment Advisor. The success of the Fund depends primarily upon Ariel Management Corporation, Investment Advisor to the Fund. The death or incapacity of J. Ezra Merkin, owner of all outstanding shares of the Investment Advisor, would result in the termination of the

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Fund. (p. 5) 

Exculpation of the Investment Advisor from Liability. The Investment Advisory Agreement provides that the Investment Advisor is not liable for, and is indemnified by the Fund against, any act or omission unless such act or omission constitutes gross negligence, fraud or willful misconduct. As a result, investors in the Fund may be more limited in their rights of action against the Investment Advisor than would otherwise have been the case without such a limitation in the Investment Advisory Agreement. (p. 9)

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All of the outstanding capital stock of the Investment Advisor is owned by J. Ezra Merkin. The Investment Advisor and other entities controlled by J. Ezra Merkin are currently responsible for the management of assets in excess of $500,000,000. The Investment Advisory Agreement can be assigned to any entity controlled by J. Ezra Merkin. (p. 11)

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Under the Investment Advisory Agreement, the Investment Advisor has full discretionary authority to invest the assets of the Fund. The Fund pays the Investment Advisor, on a series by series basis, an investment advisory fee as of the last business day of each fiscal year (in the case of Shares held on or redeemed as of the end of such year) or (i) 1% per annum of the net asset value attributable to each such series of shares as of the first day of the fiscal year, or the date issued for shares issued during any year, (adjusted per annum for any partial years) plus (ii) 20% of the increase, if any, in the net asset value attributable to each series of shares as of the last business day of the fiscal year from either the net asset value attributable to each such series as of the first day of the fiscal year or, in the case of series of such Participating Shares purchased during the fiscal year, the aggregate subscription price paid for such series. (p. 11).

(Emphasis added) On April 1, 1997, NYU invested another $10 million and signed another subscription agreement, this time incorporating the February 1996 Prospectus. Cmplt ¶17, Cmplt Exhibit 2. In December 2001, NYU acceded to Merkin’s request to amend the past “prospectuses,” in accordance with the terms of an October 2001 Prospectus. Cmplt. ¶¶19-20, Exhibit 3. None of these Prospectuses disclosed the facts that, for most of this 1993-2001 period, Victor Teicher, a convicted felon, and his staff were the persons actively managing the majority of the Ariel assets, and that hundreds of millions of dollars of Ariel’s funds had also been delivered for management to Madoff -- even though Teicher had warned Merkin that Madoff’s returns were not possible,

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and other “red flags” dictated that Madoff could not be trusted to manage these funds. Cmplt ¶¶26-32. As discovery has shown, Merkin was paid more than $200 million for his purported management of Ariel (and affiliated Funds), and as of December 31, 2007, Ariel recognized an additional liability to Gabriel of $323 million as deferred “incentive fees” due to Merkin for his purported efforts in increasing the value of NYU’s and other Ariel investors’ interests. See the 2007 annual financial statements, Appendix D at NYU00672. From 2004 through October 2008, Merkin authored and signed quarterly reports sent to NYU and other investors to induce NYU and the investors to retain their interests in Ariel. Each of these reports was false and misleading in that it created the false impression that Merkin was managing NYU’s investment in Ariel while concealing that, in fact, Ariel’s assets had instead been turned over to Teicher and Madoff to manage. The quarterly statements also falsely reported the values of NYU’s investment, the values of the assets on Ariel’s balance sheet and Ariel’s quarterly earnings, as a result of Madoff’s Ponzi scheme. See Appendix C, Merkin Tr. at 329. In October 2008 at an otherwise routine meeting amongst Mr. Maertens and Tina Surh from NYU’s investment office, and Merkin at Merkin’s Park Avenue office, Merkin mentioned the name Bernard Madoff as a possible person to place some investments. As described in the Maertens affidavit, filed in connection with NYU’s original Order to Show Case, Merkin suggested to NYU that it consider investing some funds directly with Bernard Madoff. NYU immediately rejected the suggestion as “unsuitable” for an institutional investor, such as NYU, since Merkin represented that Madoff operated without oversight over his investment activity.

Merkin responded to that clear statement from his client, NYU, that under no

circumstances could NYU invest with a fund that lacked oversight, with -- silence. He failed to

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reveal to NYU that in fact NYU was already heavily invested with Madoff, indirectly, through its earlier investment in Ariel. In December 2008, NYU learned that Ariel assets had been delivered to Madoff, when Merkin advised that they had all been “victims” of Madoff, and that as a result Ariel would need to be wound down. ARGUMENT I.

The Standard For Resolving a Motion to Dismiss Rule 3026, CPLR requires that: “[p]leadings must be liberally construed.” Therefore, the

law is settled that in considering a motion to dismiss for failure to state a cause of action; the sole criterion is whether “from [the complaint’s] four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law.” Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977) The trial court must construe the complaint liberally, and accept as true the facts alleged in the complaint and any submissions in opposition to the dismissal motion, “and accord Plaintiffs the benefit of every possible foreseeable inference.” 511 West 232nd Owners Corp. v. Jennifer Realty Corp., 98 N.Y.2d 144, 151-52, (2002); see also Richbell Information Servs v. Jupiter Partners, L.P., 309 A.D.2d 288, 765 N.Y.S.2d 575 (1st Dept. 2003). II.

Plaintiff Has Standing to Assert the Common Law Claims for Breach of Contract, Breach of Fiduciary Duty, Negligence, Gross Negligence, Recklessness and Negligent Misrepresentation Defendants assert that NYU does not have standing to sue individually, rather than

derivatively, to assert common law claims of breach of contract, negligence and breach of fiduciary duty against Merkin and/or Gabriel because NYU did not suffer an injury separate and distinct from the injury suffered by Ariel. The series of cases arising from the collapse of funds managed by Beacon Hill Management, is instructive on this point. In Fraternity Fund v. Beacon Hill Asset Management, 376 F.Supp.2d 385 (S.D.N.Y. 2005) (Fraternity Fund I), plaintiffs-

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investors in three feeder funds (one of which, like Ariel, was a Cayman Islands company) brought claims under federal securities and common law against the investment managing company, Beacon Hill, and its directors.

The defendants made the identical argument in

Fraternity Fund I as being posed by Merkin and Ariel. The district court in Fraternity Fund I, applying New York substantive law, specifically held that: “a shareholder may sue individually ‘when the wrongdoer has breached a duty owed to the shareholder independent of any duty owing to the corporation wronged.’” Id. at 409, quoting Abrams v. Donati, 66 N.Y.2d 951, 953, 498 N.Y.S.2d 782, 489 N.E.2d 751 (1985). The court found that the harm that the Fraternity Fund investors complained of, i.e., their reliance upon the misstatements contained in the investor statements overstating the net asset values, the “NAVs” of the Fund, sent by the investment advisor, was a wrong committed on the individual investors separate and apart from any wrong committed on the fund. Indeed, in a later case in the Fraternity Fund series, Bullmore v. Banc of America Secs. LLC, 485 F.Supp.2d 464 (S.D.N.Y. 2007), a case brought by the fund’s liquidator to recover the improperly paid management fees and suing for the decline in the portfolio value, defendants argued that the Fund’s liquidator lacked standing, because “it was the investors, not the fund who suffered losses when the Master Fund portfolio value dropped.” Id. at 469. The court rejected this standing argument also, holding that, “[u]nder New York law, one may be liable both to a corporation and its shareholders if he or she violates independent duties owed to each. Id., citing Ceribelli v. Elshanayan, 990 F.2d 62, 63-64 (2d Cir. 1993) (citing cases). See also Primavera, 130 F.Supp at 491-92. There court in Primavera acknowledged that, depending upon the parties’ intent, a corporate investor might have contract claims pursuant to private placement memoranda, as well as common law fraud claims which, “can arise out of a contractual

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relationship when the “‘fraudulent misrepresentation [is] collateral or extraneous to the contract,’” citing Bridgestone/Firestone, Inc. v. Recovery Credit Serv., Inc., 98 F.3d 13, 20 (2d Cir. 1996). The heart of NYU’s claims against Merkin/Gabriel is that NYU’s retention of its investment in Ariel was based upon its reliance on false and misleading quarterly reports and statements of the growth in the NAV of the Fund, and other facts purporting to show that Merkin was properly managing the Ariel Fund assets. New York courts have long recognized investors’ rights to sue for false statements inducing them to “retain” their investments.

See, e.g.,

Continental Ins. Co. v. Mercadante, 22 A.D. 181 (1st Dept. 1927); Hotaling v. A.B. Leach & Co., 247 N.Y. 84, 93 (1928) (“As long as the fraud continued to operate and to induce the continued holding of the bond, all loss flowing naturally from that fraud may be regarded as proximate.”); Stern Bros. v. New York Edison Co., 251 A.D. 379, 381, 296 N.Y.S. 857, 859 (1st Dept. 1937) (“Fraud which induces non-action where action would otherwise have been taken is as culpable as fraud which induces action which would otherwise have been withheld.”) See also Coronado Dev. Corp. v. Millikin, 175 Misc. 1, 5, 22 N.Y.S.2d 670, 675 (N.Y. Sup. Ct. N.Y. County 1940). III.

The Amended Complaint States a Valid Cause of Action for Breach of Contract The Amended Complaint alleges, and the documents show, that in January 1994, NYU

signed a subscription agreement that incorporated by reference the 1993 Prospectus.

The

Defendants do not dispute that the Subscription Agreement constitutes a binding contract between Ariel and NYU, but contend, in essence, that since there is no signature block for Merkin, he is free to ignore the contractual obligations he undertook as described in the Prospectus. New York law does not require there be a signed piece of paper -- or even a writing -- to establish a binding contract. See Richbell Information Services v. Jupiter Partners, 309

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A.D.2d 288, 765 N.Y.S.2d 575 (1st Dept. 2003). Even though the subscription agreement is signed only by Ariel and NYU, the Prospectus fully sets out the obligations amongst Ariel, NYU and Merkin, the investment advisor. Indeed, the 1993 Prospectus even recognizes, at page 9, that the investors have a right of action against the Investment Advisor, and attempts to “exculpate” it, by providing for indemnity unless the wrongful act or omission “constitutes gross negligence, fraud or willful misconduct.” The prospectus further provides that, “As a result, investors in the Fund may be more limited in their rights of action against the Investment Advisor than would otherwise have been the case….” Id. Under the terms of the contract entered into in 1993 amongst the investors, Ariel, and Merkin/Gabriel, there were at least two duties that Merkin/Gabriel breached: 1) the duty to use due diligence and to act reasonably when making investments on behalf of the Fund; and 2) the mechanism of compensation whereby Merkin/Gabriel was to receive 1% of the value and 20% of the growth of the NAV in the Fund. By handing over a substantial portion of the Ariel funds to Madoff, when Merkin either knew or was “deliberately ignorant” of the fact that Madoff’s investment results were implausible and likely fraudulent, Merkin breached his contract with investors as well as engaging in gross negligence, fraud or willful misconduct. See, e.g., United States v. Skilling, No. 06-20885, 2009 WL 22879, at *15 (5th Cir. Jan. 6, 2009).

By taking or claiming

compensation based on illusory profits, Merkin falsely breached the contract terms regarding his compensation. Therefore, an action lies for breach of the 1993 contract. These same provisions were included in the later versions of Ariel’s prospectuses. In April 1997 when NYU entered into another $10 million subscription agreement for

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Ariel, it again signed another subscription agreement that incorporated the terms of the 1996 Prospectus. The 1996 Prospectus, in addition to the terms set out in the 1993 contract, added a new provision regarding “Other Investment Entities.”

This provision required that the

Investment Advisor, “will exercise reasonable care in selecting such independent money managers and … will monitor the results of those [other] money managers.” Cmplt Exh. 2 at p. 12. Clearly, in light of the “red flags” alleged in this case, the selection, and certainly the retention of Madoff as an independent money manager, violated these contract provisions, as well as providing the grounds for NYU’s tort claims. IV.

Plaintiff Has Stated Claims for Breach of Fiduciary Duty Defendants argue that Plaintiff has failed to plead a direct or a derivative claim for breach

of fiduciary duty against Gabriel and Merkin because Plaintiff did not stand in a fiduciary relationship with Defendants. See Defs. Gabriel and Merkin Motion to Dismiss at 11. In arguing that no fiduciary relationship existed between NYU and Gabriel and Merkin, Defendants attempt to claim that because Merkin and Gabriel had no written contractual relationship with Plaintiff and were not “parties” to the subscription agreements, they therefore owed NYU no duty. Id. at 11-12. First, as NYU has already shown, NYU did have contract rights from which a confidential relationship arose with Gabriel and Merkin. Moreover, contrary to the cases Defendants cite, New York courts routinely hold that there is a fiduciary relationship between an investor and its investment advisor when the advisor exercises discretion over his client’s investments. For example, in Bullmore v. Ernst & Young Cayman Islands, 45 A.D.3d 461 (1st Dept. 2007), the Appellate Division, First Department, held that a fiduciary duty can be created notwithstanding whether a contractual duty exists. Specifically, the court held that conduct

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amounting to a breach of a contractual obligation may also constitute the breach of a duty arising out of the relationship created by the contract which is nonetheless independent of such contract.” Id. at 463. The facts of Bullmore involved claims, including breach of fiduciary duties by a manager of a fund which held the assets, managed and valued securities and had nearly complete discretion in making transactions on the fund’s behalf. Id. at 462. Thus, in finding that a fiduciary duty existed as to the manager of the fund, the court in Bullmore held that: Professionals such as investment advisors, who owe fiduciary duties to their clients, “may be subject to tort liability for failure to exercise reasonable care, irrespective of their contractual duties” since in “these instances, it is policy, not the parties’ contract that gives rise to a duty of care.” Id. at 463. Likewise, in Fraternity Fund, Ltd., et al. v. Beacon Hill Asset Management LLC, et al., 376 F.Supp.2d 385 (S.D.N.Y. 2005), the court noted that a fiduciary relationship can exist based upon the actions of an investment advisor who had been alleged to have failed to monitor the performance of the fund and prevent defendants’ fraudulent conduct. Id. at 413. The defendants argued that the plaintiff’s fiduciary duty claim was inappropriate because it was duplicative of the plaintiff’s contract claim. Id. In rejecting the defendants’ argument, the court held that fiduciary duty claims could exist independent of the contract claim. Specifically in so holding the court stated that “a fiduciary relationship arises when one has reposed trust or confidence in the integrity or fidelity on another who thereby gains a resulting superiority of influence over the first, or when one assumes control and responsibility over another.” Id. at 414, citing Reuben H. Donnelley Corp. v. Mark I Mktg, Corp., 893 F.Supp. 285, 289 (S.D.N.Y. 1995). The court further noted that the plaintiff alleged that he had justifiably relied upon the trust and confidence of the investment advisor’s specific knowledge and his representations that he was to monitor the

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status and performance of the fund. Id. at 414. Thus, like the facts here, the court in Fraternity Fund, Ltd. held that a fiduciary relationship existed and denied the defendants’ motion to dismiss on that basis.6 Clearly, Merkin’s acts demonstrate that he was acting in fiduciary capacity by providing investment advice, and managing the assets of Ariel to which he had complete and unfettered discretion over the assets. Merkin made representations to investors, including NYU, about Ariel, including drafting and executing the quarterly statements on Ariel’s performance and by holding meetings with NYU representatives and acting in the capacity as the Investment Advisor. Thus, although Defendants claim that Gabriel and not Merkin was the Investment Advisor, Merkin as the sole shareholder and General Partner of Gabriel was, in fact, in a fiduciary relationship with Plaintiff and breached those duties.7 V.

Plaintiff Has Stated a Claim Under New York’s Business Corporation Law §720 BCL §720 states: “[a]n action may be brought against one or more directors or officers of

a corporation for …. neglect of, or failure to perform, or other violation of his duties in the management and disposition of corporate assets committed to his charge. BCL §720(a)(1)(A)-

6

Fraternity Fund, Ltd., relied upon a long line of cases which recognized the existence of fiduciary relationships between clients and their investment advisors. Rasmussen v. A.C.T. Envtl. Servs., 292 A.D.2d 710, 712, 739 N.Y.S.2d 200 (3d Dept. 2002), citing Scalp & Blade, Inc. v. Advest, Inc., 218 A.D.2d 882, 883 (4th Dept. 2001) (an investment advisor holds a position of trust and owes a fiduciary duty to its clients); Mandelblatt v. Devon Stores, 132 A.D.2d 162, 168, 521 N.Y.S.2d 672 (1987)(fiduciary relationship arises where one person is under a duty to act or give advice for the benefit of another upon matters within the scope of the relationship); Am. Tissue, Inc. v. Donaldson, Lufkin & Jenrette Sec. Corp., 351 F.Supp.2d 79, 102 (S.D.N.Y. 2004). 7 Defendants’ citations are otherwise inapplicable to the facts on this case. First, HF Mgmt. Servs. LLC v. Pistone, 34 A.D.3d 82, 94, 818 N.Y.S.2d 40 (1st Dept. 2006) does not concern the fiduciary relationships of an investment advisor, rather it discusses that an underwriter does not automatically have a fiduciary obligation to an issuer. The court in Kopel v. Bandwidth Tech. Corp., 56 A.D.3d 320, 868 N.Y.S.2d 16 (1st Dept. 2008) held that the plaintiff’s fiduciary duty was barred by the statute of limitations and there were no specific allegations pled to support the existence of a fiduciary duty. Tradewinds Fin. Corp. v. Refco Sec., Inc., 5 A.D.3d 229, 230, 773 N.Y.S.2d 395 (1st Dept. 2004) is also distinguishable as the allegations concerned the relationship involving nondiscretionary securities accounts, whereas here, Merkin had absolute and unfettered discretion to manage the monies NYU invested in Ariel.

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(B). Here, Ariel had no formally designated “officers”; the language in the prospectus clearly provides that Merkin himself has full discretion over the assets and business of Ariel. Moreover, §720(b) provides that such a claim may be brought directly or derivatively through BCL §626. Id. at (b).

The scope of acts covered by BCL §720 has been found to be quite broad.

Specifically, the New York Court of Appeals has held that BCL §720 “is broad and covers every form of waste of assets and violation of duty whether as a result of intention, negligence, or predatory acquisition.” Rapoport v. Schneider, 29 N.Y.2d 396, 400 (1972); see also Amfesco Industries, Inc. v. Greenblatt, 172 A.D.2d 261, 568 N.Y.S.2d 593 (1st Dept. 1991)(reversing dismissal of complaint which alleged that directors failed to discharge their duties and deprived the shareholders of what was owed to them); Bouhayer for Benefit of Gregovar Food Specialties, Inc. v. Georgalis, 169 Misc.2d 779, 780-85 (1996)(denying motion to dismiss derivative claims where defendant was alleged to have converted money and property and engaged in waste “where an officer of a corporation is found to have diverted corporate assets and opportunities, he may be held accountable.”). Defendants’ cases are simply distinguishable on their facts. 8 NYU has fully pled violations of §720 against Merkin. VI.

Unjust Enrichment NYU asserts a valid claim for unjust enrichment or money had and received against

Merkin and Gabriel. To state an unjust enrichment claim, “a plaintiff must allege that (1) the other party was enriched, (2) at that party's expense and (3) it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered.” AHA Sales, Inc. 8

Indeed Defendants’ reliance upon Bildstein v. Atwater, 222 A.D.2d 545, 635 N.Y.S.2d 88 (2d Dept 1995) is inapposite. The court in Bildstein specifically stated that there were no specific allegations of misconduct against the defendants. Whereas NYU’s amended complaint contains detailed information describing Merkin’s improper conduct in violation of BCL §720. Likewise, Abalon Precision Mfg. Corp. v. Flair Int’l Corp., 19 A.D.3d 338, 796 N.Y.S.2d 171 (2d Dept. 2005), is equally inapplicable as the plaintiff failed to allege that any of the defendants were officers or director defendants, thus, the Appellate Division upheld trial court’s dismissal of the BCL §720 claim.

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v. Creative Bath Products, Inc., 58 A.D.3d 6, 867 N.Y.S.2d 169, 180 (N.Y. App. 2008) (internal quotations omitted). Likewise, money had and received is a quasi-contract or a contract impliedin-law action based upon not permitting a party to keep what in equity and good conscience it should return. See Bd. of Educ. of Cold Spring Harbor Cent. Sch. Dist. v. Rettaliata, 78 N.Y.2d 128, 138, 572 N.Y.S.2d 885 (1991). NYU alleges that (1) Merkin or Gabriel were enriched by receiving both management and incentive fees; (2) at the expense of NYU and other investors in Ariel; and (3) that allowing “Merkin or Gabriel to be paid fees for improperly placing assets with Madoff, or based on illusory gains on those assets” constitutes unjust enrichment. (Cmplt, ¶¶ 99, 100). Defendants argue out of both sides of their mouth by contending first, that the various prospectuses do not constitute contracts with Merkin with respect to his compensation, and also that NYU’s unjust enrichment claim should be dismissed because of the existence of a valid contract. While Defendants correctly note that an unjust enrichment claim cannot be maintained if a valid contract exists (see Defs. Br. at 21), “[w]here, as here, there is a bona fide dispute as to the existence of a contract, or where the contract does not cover the dispute in issue, a plaintiff may proceed upon a theory of quasi-contract as well as breach of contract and will not be required to elect his or her remedies.” Id. (quoting Hochman v. LaRea, 789 N.Y.S.2d 300, 301 (2d Dept. 2005). Here, Defendants expressly argue: “There was no contract between NYU and either Merkin or the Management Company.” Defs.’ Br. at 8. Accordingly, there is a bona fide dispute as to the existence of a contract and NYU may proceed on its unjust enrichment claim. See id. (reversing trial court’s decision to dismiss unjust enrichment claims on the grounds that there was a bona fide dispute as to the existence of a valid contract covering the issue in dispute). VII.

Count VIII States a Valid Direct Claim Against Merkin for Fraud

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NYU alleged Defendant Merkin made material misrepresentations or omissions year after year in his quarterly reports where he: (a) falsely created the impression that he was actually managing the Ariel funds and concealing that they were in fact being managed by Madoff and Teicher, a convicted felon; and (b) falsely inflated NYU’s interest in Ariel, and the assets and earnings of the Fund for monies stolen by Madoff and his illusory profits. Also in a face-to-face October 23, 2008 meeting, Merkin defrauded NYU by failing to disclose the material fact that the Ariel Fund was heavily invested with Madoff, after being told point-blank that NYU as an institutional endowment fund would not accept such a placement. Under New York law “to state a claim for fraud a plaintiff must demonstrate: (1) a misrepresentation or omission of material fact, (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied, and (5) which caused injury to the plaintiff.” Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, 446 F.Supp.2d 163, 195 (S.D.N.Y. 2006)(citations omitted)(applying New York law). Merkin’s false representations with respect to the managers and investment strategies for Ariel’s assets, and Ariel’s financial and operational performance, was intended to, and did, induce NYU to retain its investment with the Ariel Fund and therefore states a valid cause of action for fraud under New York law. Although Merkin has argued that he was a “victim” and was unaware of Madoff’s Ponzi scheme, his own inside expert, Victor Teicher, told him that Madoff’s returns were impossible. Armed with this information as well as the other “red flags” alleged in the Cmplt, apart from a series of discussion with Madoff, Merkin did nothing but deliver ever-increasing amounts of money to Madoff for investment. Under these circumstances, “Merkin may fairly be said to be suffering from “deliberate ignorance,” a condition that was found to satisfy even a criminal

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standard of scienter. United States v. Skilling, supra. VIII. The Amended Complaint States a Valid Cause of Action for Aiding and Abetting Madoff’s Fraud and Conversion of Assets “To state a valid claim for aiding and abetting fraud under New York law, a plaintiff must plead facts showing the existence of fraud, defendants’ knowledge of the fraud, and that the defendant provided substantial assistance to advance the fraud’s commission and damages.” Pension Committee of University of Montreal Pension Plan v. Banc of America Securities, 446 F.Supp.2d 163. While Merkin certainly does not dispute the existence of the Madoff fraud, he contends that the Cmplt is devoid of allegations that Merkin knew of the fraud or substantially assisted it. The Cmplt, however, is replete with allegations of the “red flags” that Merkin had to have callously ignored to have not known that Madoff was a fraud. Discovery adduced to date, including the deposition of Victor Teicher, shows even more evidence than is alleged in the pleadings of Merkin’s knowledge of Madoff’s suspicious trading practices. The recent Fifth Circuit opinion upholding use of the “deliberate ignorance” jury charge in the criminal trial of Jeffrey Skilling to establish the element of knowledge is telling. Deliberate ignorance . . . denotes a conscious effort to avoid positive knowledge of a fact which is an element of an offense charged, the defendant choosing to remain ignorant so he can plead lack of positive knowledge in the event he should be caught. . . . . [T]he key aspect of deliberate ignorance is the conscious action of the defendant-the defendant [must have] consciously attempted to escape confirmation of conditions or events he strongly suspected to exist. In simplest terms, deliberate ignorance is reflected in a criminal defendant’s actions that suggest, in effect, “Don’t tell me, I don’t want to know.” (citations omitted) If this type of “willful blindness” is sufficient to uphold a criminal conviction utilizing a “beyond a reasonable doubt standard,” it is sufficient for a pleading of aiding and abetting a fraud. Moreover, Merkin’s procurement of hundreds of millions of dollars in management and

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incentive fees is exactly the type of “extraordinary economic incentive” that can establish a claim of “willful blindness.” The Cmplt also sufficiently alleges that Merkin substantially assisted Madoff in carrying out his fraud by acceding to Madoff’s demand that he remain invisible to the investors in the Ariel Fund. Though Merkin denies making such an agreement with Madoff, the complete absence of any reference to him or his trading strategies in any of the quarterly reports gives rise to a contrary inference. IX.

Plaintiff has Pled Claims for Negligent Misrepresentation, Gross Negligence and Negligence The Court of Appeals has held that, in determining whether a negligent misrepresentation

claim has been established, the court is required to “consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust and confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose.” Kimmell v. Schaefer, 89 N.Y.2d 257, 259 (1996); Rosicki v. Cochems, __ N.Y.S.2d __, 2009 WL 323486 (N.Y.A.D. 2d Dept. Feb. 10, 2009). In Fraternity Fund, Ltd., et al. v. Beacon Hill Asset Management LLC, et al., 376 F.Supp.2d 385 (S.D.N.Y. 2005) the court upheld the plaintiffs’ negligent misrepresentation claims arising out of defendants’ failure to monitor the performance of the fund and prevent defendants’ fraudulent conduct. Specifically the court noted that the “special relationship” requirement to establish a negligent misrepresentation claim was satisfied based on the plaintiffs’ allegations of a relationship whereby the investors relied upon the fund managers’ expertise and representations in managing the assets. Moreover the court noted that such a special relationship was established due to the position which the managers held over the funds: “a duty to speak with care exists when `the relationship of the parties, arising out of contract or otherwise, [is]

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such that in morals and good conscience the one has the right to rely upon the other for information.’” Id. at 411. Moreover the court in Fraternity Fund noted that a duty to speak with care exists “only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.” Id. citing Kimmell v. Schaefer, 89 N.Y.2d 257, 263 (1996). See also, Bullmore v. Ernst & Young Cayman Islands, 45 A.D.3d 461 (1st Dept. 2007). Defendants do not challenge NYU’s other claims of gross negligence or negligence except to argue the facts in the Cmplt. As such, all NYU’s claims involving negligence should be sustained. X.

Plaintiff Has Stated A Claim Under New York’s GBL § 349 In order to state a claim under GBL §349, a plaintiff must establish three elements: “first,

that the challenged act or practice was consumer-oriented; second, that it was misleading in a material way; and third, that the plaintiff suffered an injury as a result of the deceptive act. Stutman, et al. v. Chemical Bank, 95 N.Y.S.2d 24, 29 (2000), citing Oswego Laborers’ Local 214 Pension Fund v. Marise Midland Bank, 85 N.Y.S.2d 20, 25 (1995). Plaintiff has alleged facts that satisfy each of these elements. In Scalp & Blade v. Advest, Inc. 281 A.D.2d 882 (4th Dept. 2001), in reversing the trial court’s dismissal of the plaintiff’s GBL §349 claims, the court held, on similar facts to those alleged in this case, that the plaintiff’s allegations concerning defendants’ actions as investment advisor constituted consumer oriented conduct under GBL 349: Given the statute’s explicit prohibition of deceptive acts or practices in the furnishing of any service and given the Court of Appeal’s characterization of the statute as applying to virtually all economic activity we see no basis for invoking any blanket exception under the statute for securities transactions or for limiting the statute’s applicability to the sale of goods.

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Id. (internal citations omitted). See also Board of Managers of the Arches at Cobble Hall Condominium v. Hicks & Warren, LLC, 14 Misc. 1234 (2007) (CBL §349, “applies to virtually all economic activity, not just consumer-oriented activity of modest proportion.”) Contrary to Defendants’ arguments, the Cmplt specifically alleges that Defendants’ actions were directed at consumers at large and the massive wrongs alleged in this case clearly have had an impact on consumers and the general public -- as well as being “deceptive” and injuring NYU. See, e.g. Cmplt ¶¶13, 15-19, 35-45, 106-113. Moreover, Defendants actions, by failing to protect the assets of NYU and others who invested in Ariel clearly has had an impact on consumers, generally. See Oswego Laborers’ Local 214 Pension Fund, et al. v. Marine Midland Bank, N.A., 85 N.Y.S. 2d 20, 25-6 (1995). Moreover, contrary to Defendants’ arguments, Plaintiff has alleged that Defendants’ conduct was deceptive, and that they made intentional misrepresentations as well as omitted to disclose material information concerning the Fund, its investments and the unsuitability of maintaining such a large percentage of the Fund’s assets with Madoff. XI.

Plaintiff’s Claims Are Not Preempted Under The Martin Act It should be noted that Defendants Merkin and Gabriel do not argue and thereby concede

that Plaintiff’s breach of contract (Counts I and II), fraud (Count VIII), aiding and abetting fraud (Count IX), unjust enrichment (Count X) and negligence claims (Count XI) are not preempted by the Martin Act.

Thus, as to Plaintiff’s other claims, the only question for the Court’s

consideration is whether the other causes of action are merely Martin Act claims in disguise. Specifically, the Martin Act, GBL §352, only regulates the offer, sale or purchase of securities within the State of New York. See GBL §352 and State of New York v. Samaritan Asset Management Services, Inc., 2008 WL 4745487 at *3 (Oct. 29, 2008).

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Given that Plaintiff has not predicated its claims on wrongs performed in connection with its original purchase of the securities, as distinguished from claims arising after the investoradvisor relationship was established, the Martin Act, by its terms has no bearing on NYU’s claims. Moreover, even to the extent that some of the misconduct alleged in this case could be considered to overlap with the powers provided to the Attorney General under the Martin Act, those Court decisions that have “pre-empted” private claims on that basis, have misapplied New York law. In describing “pre-emption” under the Martin Act, the First Department in Kramer, et al., v. W10Z/515 Real Estate Limited Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dept. 2007), observed that many New York courts were incorrectly interpreting its earlier decision in Whitehall Tenants Corp. v. Estate of Olnick, 213 A.D.2d 200 (1st Dept. 1995).

Kramer

specifically clarified that the Martin Act, a statute intended to enhance investor protection, did not preempt otherwise properly pled private causes of action where they previously existed under the common law, and where the private plaintiffs were not relying on the Martin Act to satisfy one or more elements of those claims. Id. at 458-60. Kramer explicitly held that plaintiff’s properly pled fraud claims were not pre-empted. Id. While Kramer did not similarly sustain plaintiffs’ “aiding and abetting” and breach of fiduciary duty claim, its failure to do so was not based upon “pre-emption” under the Martin Act. Rather the court held that the plaintiff had simply failed to plead the necessary facts to satisfy the elements of each of the claims alleged. Id. at 461. Similarly, the Second Department in Caboara, et al., v. Babylon Cove Development, LLC, et al., 54 A.D3d 79 (2d Dept. 2008), held that the plaintiffs’ common law fraud and breach of contract claims were not preempted by the Martin Act. Id. at *80. The Court in Caboara

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explained that the Martin Act was established to expand the protections afforded to consumers by providing the Attorney General a right of action. Thus, it made no sense to assume that the legislature, in creating the Martin Act, had intended to reduce investors’ already existing rights: Here, nothing in the clear import of the language of the Martin Act requires a conclusion that the Legislature intended to abrogate any common-law remedy arising from conduct prohibited under the act. Nor are the remedies afforded the Attorney General made exclusive by the Martin Act. Thus, the plaintiffs' common-law fraud and breach of contract causes of action were neither abrogated nor supplanted by the Martin Act. Id. at *83. Indeed, the Appellate Division in Caboara distinguished the very cases relied upon by Defendants here and noted that “[n]o case from the Court of Appeals holds that the Martin Act not only failed to provide, expressly or impliedly, for a private right of action, but also, abrogated or supplanted an otherwise viable private cause of action whenever the allegations would support a Martin Act violation.” Id., citing Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dept. 2007). The Fourth Department, in Scalp & Blade et al. v. Advest, Inc., et al., 281 A.D.2d 882, 722 N.Y.S.2d 639, 640 (4th Dept. 2001), in a case with claims remarkably similar to those pled here, found that claims by investors against their investment advisor for breach of fiduciary duty, negligent misrepresentation and GBL §349 were not preempted under the Martin Act. Specifically, the Court, in reversing the trial court’s dismissal, stated that claims based upon a broker’s and investment advisor’s improper investment of the plaintiffs’ “assets in various speculative, risky and otherwise unsuitable investments” were not preempted under the Martin Act. Id. at 882-83. See also Bridge Street Homeowners Assn., et al. v. Brick Condominium Developers, LLC, 18 Misc.3d 1128 (2008) 2008 WL 344136 *1 (N.Y. Sup. 2008)(finding that the plaintiff’s breach of contract, negligence and common law fraud claims were not preempted

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by the Martin Act). Defendants’ reliance on CPC Intl v. McKesson Corp., 70 N.Y. 208, 276-77 (1987) and certain federal cases holding that various state law claims had been pre-empted, is misplaced. First, McKesson did not “pre-empt” plaintiff’s fraud claim; it merely held that plaintiff could not make out its case by relying upon the Martin Act. NYU respectfully submits that Kassover, et al., v. UBS AG, et al., 2008 WL 5331812 (S.D.N.Y. Dec. 19, 2008) was incorrectly decided, based upon the authorities and reasoning described above, but is, in any event, inapposite to the facts alleged in this case. Kassover pre-empted claims based upon the “purchases” of auction rate securities. NYU does not predicate its claims on false statements or breaches of duty in connection with NYU’s purchases of Ariel shares. Thus, none of NYU’s claims are pre-empted by the Martin Act, even under the authorities that Defendants cite.9 Conclusion For the reasons stated herein, each of NYU’s claims should be sustained. Dated: February 11, 2009

Respectfully, SCOTT + SCOTT LLP /s Joseph P. Guglielmo BETH KASWAN JUDY SCOLNICK JOSEPH GUGLIELMO 29 West 57th Street, 14th Floor New York, NY 10019 Telephone: (212) 223-6444 Fax: (212) 223-6334 Email: [email protected] [email protected] [email protected] and

9

Jana Master Fund v. JPMorgan Chase & Co., 19 Misc. 3d 1106 at *6 (2008), similarly found private claims predicated on the purchase and sale of debt securities preempted under the Martin Act.

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DAVID R. SCOTT 108 Norwich Avenue P. O. Box 192 Colchester, CT 06415 Telephone: (860) 537-5537 Fax: (860) 537-4432 Email: [email protected] Attorneys for Plaintiff

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CERTIFICATE OF SERVICE I hereby certify that on February 11, 2009, a copy of the foregoing Plaintiff’s Memorandum of Law in Opposition to the Motion to Dismiss of Defendants J. Ezra Merkin and Gabriel Capital Corporation was filed electronically and served via the Court’s electronic system on the following: Harry Sandick Howard Schiffman Taleah Jennings Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Attorneys for Defendant Ariel Fund Limited Andrew J. Levander Dechert, LLP 1095 Avenue of the Americas New York, NY 10036 Attorneys for Gabriel Capital Corporation and J. Ezra Merkin

/s/ Beth Kaswan BETH KASWAN 29 West 57th Street, 14th Floor New York, NY 10019 Telephone: (212) 223-6444 Fax: (212) 223-6334 Email: [email protected] Attorney for Plaintiff

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