     16-3450-cv
     In Re: Kingate Management Limited Litigation

                               UNITED STATES COURT OF APPEALS
                                   FOR THE SECOND CIRCUIT

                                            SUMMARY ORDER

     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
     CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS
     PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
     PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A
     SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
     MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE
     (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A
     SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT
     REPRESENTED BY COUNSEL.
 1
 2         At a stated term of the United States Court of Appeals for the Second Circuit,
 3   held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the
 4   City of New York, on the 17th day of August, two thousand eighteen.
 5
 6          PRESENT: ROBERT A. KATZMANN,
 7                                   Chief Judge,
 8                           PIERRE N. LEVAL,
 9                           PETER W. HALL,
10                                   Circuit Judges.
11          ------------------------------------------------------------------
12
13          IN RE: KINGATE MANAGEMENT LIMITED LITIGATION
14
15          CRITERIUM CAPITAL FUNDS B.V., BBF TRUST, BANCA ARNER S.A.,
16          ALVARO CASTILLO, BG VALORES, S.A., JAQUES LAMAC, NITKEY
17          HOLDINGS CORPORATION,
18
19                                           Plaintiffs-Appellants,
20
21          LUCIEN GELDZAHLER,
22
23                                           Plaintiff-Consolidated

                                                         1
 1                      Defendant-Appellant,
 2
 3   SILVANA WORLDWIDE CORPORATION, WALL STREET SECURITIES,
 4   S.A., EITHAN EPHRATI, ANDBANC,
 5
 6                      Plaintiffs,
 7
 8                 v.                              No. 16-3450-cv
 9
10   TREMONT (BERMUDA) LIMITED, SANDRA
11   MANZKE, FIM ADVISERS LLP, MICHAEL G.
12   TANNENBAUM, TREMONT GROUP
13   HOLDINGS, INCORPORATED,
14   PRICEWATERHOUSECOOPERS LLP,
15
16                      Defendants-Appellees,
17
18   KINGATE MANAGEMENT LIMITED, FIM
19   (USA) INCORPORATED, CITI HEDGE FUND
20   SERVICE LTD,
21
22                      Defendants-Consolidated
23                      Defendants-Appellees,
24
25   PRICEWATERHOUSECOOPERS BERMUDA,
26   CARLO GROSSO, FIM LIMITED, FEDERICO M.
27   CERETTI,
28
29                      Consolidated Defendants-
30                      Appellees,
31
32   BERNARD L. MADOFF, GRAHAM H. COOK,
33   JOHN E. EPPS, CHARLES SEBAH, KEITH R.
34   BISH, CHRISTOPHER WETHERHILL, PHILLIP
35   A. EVANS, MARGARET EVERY, SHAZIEH
36   SALAHUDDIN, JOHANN WONG, PRESTON M.
37   DAVIS, BANK OF BERMUDA LIMITED,


                                  2
 1
 2                                    Defendants,
 3
 4   PRICEWATERHOUSECOOPERS, ANDORRA
 5   BANC AGRICOL REIG S.A., on behalf of itself
 6   and on behalf of all others similarly situated,
 7
 8                                    Consolidated Defendants.
 9
10   ------------------------------------------------------------------
11
12   FOR APPELLANTS:                                  DAVID A. BARRETT, Boies, Schiller &
13                                                    Flexner LLP, New York, N.Y. (Stuart
14                                                    H. Singer, Boies, Schiller & Flexner
15                                                    LLP, Fort Lauderdale, FL; Steven J.
16                                                    Toll, Joshua S. Devore, S. Douglas
17                                                    Bunch, Cohen Milstein Sellers & Toll
18                                                    PLLC, Washington, D.C., on the brief).
19
20   FOR APPELLEES:                                   CARMINE D. BOCCUZZI, JR., Cleary
21                                                    Gottlieb Steen & Hamilton LLP, New
22                                                    York, N.Y.; BARRY G. SHER, JODI A.
23                                                    KLEINICK, Paul Hastings LLP, New
24                                                    York, N.Y. (Anthony Antonelli, Mor
25                                                    Wetzler, Paul Hastings LLP, New
26                                                    York, N.Y.; Erica Klipper, Cleary
27                                                    Gottlieb Steen & Hamilton LLP, New
28                                                    York, N.Y.; Scott W. Reynolds, Erin
29                                                    E. Valentine, Chaffetz Lindsey LLP,
30                                                    New York, N.Y.; Dennis H. Tracey,
31                                                    III, Sanford M. Litvack, Hogan
32                                                    Lovells US LLP, New York, N.Y.;
33                                                    Kimberly Perrotta Cole, Jonathan D.
34                                                    Cogan, Kobre & Kim LLP, New
35                                                    York, N.Y.; Seth M. Schwartz,
36                                                    Skadden, Arps, Slate, Meagher &
37                                                    Flom LLP, New York, N.Y., Laura G.


                                                  3
 1                                                Birger, Abigail B. Seidner, Cooley
 2                                                LLP, New York, N.Y., on the brief).
 3
 4         Appeal from a judgment of the United States District Court for the

 5   Southern District of New York (Deborah A. Batts, Judge).

 6         UPON DUE CONSIDERATION, it is hereby ORDERED, ADJUDGED,

 7   AND DECREED that the September 26, 2016 judgment of the District Court is

 8   AFFIRMED.

 9         Plaintiﬀ-Appellants Criterium Capital Funds, et al. (“Plaintiﬀs”) appeal

10   from the September 26, 2016 judgment of the District Court dismissing their class

11   action claims against Defendant-Appellees Kingate Management Limited, et al.

12   (“Defendants”). Plaintiﬀs were investors in Kingate Global Fund, Ltd. and

13   Kingate Euro Fund, Ltd. (the “Funds”), two “feeder funds” for Bernard L.

14   Madoﬀ Investment Securities that lost substantially all of their assets due to

15   Madoﬀ’s fraud. Defendants were the managers, auditors, consultant, and

16   administrator of the Funds. Plaintiﬀs brought common law claims against

17   Defendants alleging, inter alia, breach of contractual and tort-based duties in

18   connection with Defendants’ management and oversight of the Funds. In 2011,

19   the District Court dismissed all of Plaintiﬀs’ claims as precluded by the Securities

                                              4
 1   Litigation Uniform Standards Act of 1988 (“SLUSA”), Pub. L. No. 105-353, § 101,

 2   112 Stat. 3227, 3227-33. In re Kingate Mgmt. Ltd. Litig., 09-cv-5386, 2011 WL

 3   1362106, at *9 (S.D.N.Y. March 30, 2011) (“Kingate I”). This Court vacated that

 4   dismissal and remanded for further proceedings, holding that SLUSA precluded

 5   from proceeding in a covered class action only those state law claims “predicated

 6   on conduct of the defendant speciﬁed in SLUSA’s operative provisions, which

 7   reference the anti-falsity provisions of the [Securities Act of 1933 and Securities

 8   Exchange Act of 1934].” In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 149 (2d Cir.

 9   2015) (“Kingate II”). On remand, the District Court dismissed some of Plaintiﬀs’

10   claims as precluded by SLUSA, and the rest for lack of standing and failure to

11   state a claim under British Virgin Islands (“BVI”)/Bermuda law. In re Kingate

12   Mgmt. Ltd. Litig., 09-cv-5386, 2016 WL 5339538, at *18-30 (S.D.N.Y. Sept. 21, 2016)

13   (“Kingate III”). We assume the parties’ familiarity with the facts and procedural

14   history of this case, which we reference only as necessary to explain our decision

15   to aﬃrm.

16      I.      Waiver

17           Plaintiﬀs’ primary argument on appeal is that SLUSA, which precludes


                                               5
 1   certain class actions “based upon the statutory or common law of any State,” 15

 2   U.S.C. § 78bb(f)(1), does not apply to their claims, which are governed by foreign

 3   law. The District Court held that Plaintiﬀs waived this argument by failing to

 4   raise it in response to Defendants’ motion to dismiss Plaintiﬀs’ claims in Kingate

 5   I. Kingate III, 2016 WL 5339538, at *18 n. 23. “We review de novo a ﬁnding of

 6   waiver.” Call Ctr. Techs., Inc. v. Interline Travel & Tour, Inc., 622 F. App’x 73, 74 (2d

 7   Cir. 2015).

 8           We agree with the District Court that Plaintiﬀs waived this argument. In

 9   their Kingate I motion to dismiss, Defendants argued both that foreign law

10   applied to the dispute and that SLUSA precluded Plaintiﬀs’ claims. See, e.g.,

11   Kingate Mgmt. Ltd.’s Mot. to Dismiss, Dkt. 102 at 6, 22. 1 Plaintiﬀs thus had

12   “every incentive,” Call Ctr. Techs., Inc., 622 F. App’x at 75, to argue to the District

13   Court that SLUSA was inapplicable to foreign law claims. Instead, Plaintiﬀs put

14   forth numerous alternative defenses to SLUSA preclusion, see Pls.’ Opp’n to

15   Defs.’ Mot. to Dismiss, Dkt. 137 at 38-48, and argued that New York law applied,

16   id. at 13-21. Plaintiﬀs claim their omission did not constitute waiver, because at



     1   All docket entries refer to the district court docket, No. 1:09-cv-5386 (S.D.N.Y.).
                                                 6
 1   the time the argument would have been “purely academic.” Pls.’ Br. 9-10. To the

 2   contrary, both choice of law and the applicability of SLUSA to Plaintiﬀs’ claims

 3   were squarely before the District Court. Given the importance of SLUSA’s

 4   applicability to the disposition, the argument that SLUSA would not apply if the

 5   District Court found that BVI/Bermuda law applied should have been advanced

 6   at the time. Plaintiﬀs’ failure to timely raise it is not excused merely because the

 7   District Court only later determined that foreign law applied. We therefore agree

 8   with the District Court’s determination that Plaintiﬀs waived this argument by

 9   failing to raise it before the District Court in response to Defendants’ ﬁrst motion

10   to dismiss.

11        II.      SLUSA Preclusion

12              Plaintiﬀs also argue the District Court erred in ﬁnding that SLUSA

13   precluded their negligent misrepresentation claims against

14   PricewaterhouseCoopers (“PwC”) and Citi Hedge. The District Court dismissed

15   these claims for lack of subject matter jurisdiction pursuant to Federal Rule of

16   Civil Procedure 12(b)(1). 2 Kingate III, 2016 WL 5339538, at *20, *27-29. “On appeal



     2   Plaintiffs have not disputed—neither before the District Court nor in this
                                                 7
 1   from such a judgment, we review factual ﬁndings for clear error and legal

 2   conclusions de novo.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)

 3   (internal quotation marks omitted).

 4         Plaintiﬀs argue SLUSA does not preclude their negligent

 5   misrepresentation claims against PwC and Citi Hedge, because the alleged

 6   misrepresentations were not made “in connection with the purchase or sale of a

 7   covered security.” 15 U.S.C. § 78bb(f)(1). To that end, Plaintiﬀs point out that the

 8   alleged misrepresentations “make no mention of Madoﬀ or covered securities,”

 9   and concern only the audit reports, ﬁnancial statements, and Net Asset Value of

10   the Funds, “which are indisputably not covered securities.” Pls.’ Br. 18.

11         Our prior decision in Kingate II held that “the essential element of SLUSA

12   that requires falsity ‘in connection with’ a purchase or sale of a covered security

13   is satisﬁed in this case.” Kingate II, 784 F.3d at 142. We see no reason to depart

14   from that holding with respect to the negligent misrepresentation claims against




     appeal—that, assuming SLUSA preclusion applies to foreign law claims, Counts
     1-4, 8, 14, 20, and 27 of the Second Amended Complaint are precluded by
     SLUSA. We therefore affirm the dismissal of those claims as precluded by
     SLUSA.
                                               8
 1   PwC and Citi Hedge. As we explained in Kingate II, Plaintiﬀs “purchased the

 2   uncovered shares of the oﬀshore Funds, expecting that the Funds were investing

 3   the proceeds in S & P 100 stocks, which are covered securities.” Id. They made

 4   “attempted investments in covered securities, albeit through feeder funds.” In re

 5   Herald, 753 F.3d 110, 113 (2d Cir. 2014). Defendants’ alleged misrepresentations,

 6   which concerned the ﬁnancial health and value of the Funds, were thus “material

 7   to a decision by one or more individuals . . . to buy or to sell a ‘covered security,’”

 8   and satisﬁed SLUSA’s “in connection with” requirement. Chadbourne & Park LLP

 9   v. Troice, 571 U.S. 377, 387 (2014).

10      III.      Standing under BVI/Bermuda Law

11             Finally, Plaintiﬀs argue that the District Court erred in dismissing

12   Plaintiﬀs’ remaining claims for lack of standing under BVI/Bermuda law. We

13   review de novo a district court’s determination of an issue of foreign law. United

14   States v. Schultz, 333 F.3d 393, 401 (2d Cir. 2003); see Fed. R. Civ. P. 44.1 (“The

15   court’s determination [of foreign law] must be treated as a ruling on a question

16   of law.”).

17             The parties agree that under BVI/Bermuda law, the “reﬂective loss rule”


                                                  9
 1   generally bars shareholders from suing to recover losses that are merely

 2   reﬂective of the losses of the company in which they are invested. See Johnson v.

 3   Gore Wood & Co., [2000] 2 A.C. 1 (H.L.). Applying this doctrine, the District Court

 4   held that “once Plaintiﬀs invested in the Funds, their cash became the property of

 5   the Funds,” and “any losses to Plaintiﬀs’ property, the shares, were by deﬁnition

 6   reﬂective of the diminished value of the Funds’ assets.” Kingate III, 2016 WL

 7   5339538, at *39.

 8         We agree. Plaintiﬀs seek compensation for the loss of their investments in

 9   the Funds, as well as for the loss of fees paid to the Funds. Their claim is that

10   they paid money to the Funds, and the Funds in turn lost that money. In essence,

11   they seek “to make good a diminution in the value of the shareholder’s

12   shareholding.” Johnson v. Gore Wood & Co., [2000] 2 A.C. 1 (H.L.). This “merely

13   reﬂects the loss suﬀered by the company,” and therefore “[n]o action lies.” Id.

14   Plaintiﬀs’ losses were not, as required by the reﬂective loss rule, “separate and

15   distinct from [the loss] suﬀered by the company.” Id.

16         Plaintiﬀs claim their loss was “asymmetrical” to the Funds’ loss, and

17   therefore not reﬂective of it. Pls.’ Br. 23. They reason that, measuring their loss on


                                               10
 1   a “net equity” basis (calculating their investments minus redemptions), the loss

 2   to the Plaintiﬀ class was greater than the loss to the Funds because, unlike

 3   Plaintiﬀs, some investors withdrew more from the Funds than they invested.

 4   Any recovery secured in the Funds’ liquidation proceedings thus will not make

 5   Plaintiﬀs whole. Plaintiﬀs’ argument fails because it relies on a loss-calculation

 6   methodology that is not applicable. The “net equity” method of calculating loss

 7   is used to distribute the proceeds of Securities Investor Protection Act (SIPA)

 8   liquidations. In re Bernard L. Madoﬀ Inv. Sec. LLC, 654 F.3d 229, 233 (2d Cir. 2011).

 9   But BVI/Bermuda law applies to this case, and under that law, liquidation

10   proceeds are likely to be distributed pro rata. The District Court was correct to

11   “reject[] the argument that because there may be a more beneﬁcial methodology

12   for calculating loss in the Second Circuit or the Plaintiﬀs may not recover as

13   much through the BVI liquidation proceedings, the reﬂective loss principle does

14   not apply.” Kingate III, 2016 WL 5339538, at *40.

15         Plaintiﬀs also argue their claims are permitted under the exception to the

16   reﬂective loss rule articulated in Giles v. Rhind, [2003] EWCA (Civ.) 1428. But that

17   exception applies only where a company, as a consequence of the defendant’s


                                              11
 1   wrongful conduct, is unable to pursue a cause of action to which it is entitled. See

 2   id.; Rehman v. Jones Lang Lasalle, [2013] EWHC 1339 (QB) [86] (applying the Giles

 3   exception where the company would have been deemed a third party barred

 4   from suit under the operative contract’s disclaimer provisions). It is inapplicable

 5   here, where the Funds can—and, in fact, have—brought claims against many of

 6   the Defendants.

 7         The District Court thus correctly concluded that Plaintiﬀs’ remaining

 8   claims were barred by the reﬂective loss rule. This is true of both Plaintiﬀs’

 9   Group 4 claims (those alleging breach of tort- and contract-based duties, see

10   Kingate II, 784 F.3d at 135) and their Group 5 claims (those seeking compensation

11   for fees, see id.). As to the Group 5 claims, Plaintiﬀs argue their loss of the 5%

12   subscription fee is not reﬂective of the Funds’ loss, because the fee was retained

13   by the Fund manager prior to investment in the Funds’ shares. However, as

14   Plaintiﬀs concede, the subscription instructions required the entire price of an

15   investor’s subscription, including the 5% charge, to be wired to a bank account

16   naming a Fund as beneﬁciary. The loss of that fee is thus rightly considered the

17   Funds’ loss, and the loss to Plaintiﬀs merely reﬂective.


                                               12
1         In addition, we see no abuse of discretion in the District Court’s denial of

2   leave to replead under the circumstances. We have considered Plaintiﬀs’

3   remaining arguments and concluded that they are without merit. 3 Accordingly,

4   the judgment of the District Court is AFFIRMED.


5                                         FOR THE COURT:
6                                         Catherine O’Hagan Wolfe, Clerk of Court

7




    3As we aﬃrm on other grounds, we do not consider Defendants’ alternative
    grounds for dismissal.
                                            13
