United States District Court, D. New Jersey
KENNETH M. KRYS, MARGOT MACINNIS, and THE HARBOUR TRUST CO. LTD., Plaintiffs,
ROBERT AARON, DERIVATIVE PORTFOLIO MANAGEMENT LLC, DPM-MELLON, LLC, DERIVATIVE PORTFOLIO MANAGEMENT, LTD., DPM-MELLON, LTD, and BANK OF NEW YORK MELLON CORPORATION, Defendants.
JEROME B. SIMANDLE, Chief District Judge.
In this lengthy multi-district securities litigation, the parties filed 29 in limine motions. By Orders dated May 26, 2015, June 16, 2015, and June 18, 2015 [Docket Items 697, 698, 721, & 725], the Court addressed 26 of the parties' motions. On the oral argument records on June 15, 2015 and June 17, 2015, however, the Court reserved decision with respect to three motions. This Memorandum Opinion addresses those reserved motions, and specifically concerns:
1. Defendants' motion in limine to exclude references to whether Defendant Robert Aaron violated the Irish Stock Exchange Rules [see Docket Item 598];
2. Defendants' motion in limine to exclude introduction of and references to auditing problems unrelated to SMFF [see Docket Item 603]; and
3. Plaintiffs' motion in limine to preclude Defendants from introducing a May 17, 2006 letter from the Northeast Regional Office of the Securities and Exchange Commission to Christopher Sugrue, the Chairman of PlusFunds [see Docket Item 616].
For the reasons that follow, Defendants' motion to exclude references to violations of the Irish Stock Exchange Rules will be granted in part and denied without prejudice in part, and their motion to exclude evidence concerning auditing problems unrelated to SMFF will be granted in its entirety. Plaintiffs' motion to preclude Defendants from introducing the May 17, 2006 letter will be granted in part and denied without prejudice in part. The Court finds as follows:
1. The Court first address Defendants' motion to exclude references to Defendants' alleged violations of the Irish Stock Exchange listing requirements. The various SPhinX offering memoranda disclosed, on their face, SPhinX's listing on the Irish Stock Exchange, and instructed, in relevant part, that SPhinX would adhere to the "Listing Requirements and Procedures" of the Irish Stock Exchange for as long as the SPhinX shares remained so listed. [See Docket Item 675-4 at i, 22 (Offering Memorandum dated July 12, 2002); Docket Item 675-5 at i, 22 (Offering Memorandum dated May 2004).]
2. As relevant here, those investments restrictions required that "no more than 20% of the value of the gross assets" of each SPhinX portfolio could "be lent to or invested in the securities of any one issuer" or could "be exposed to the creditworthiness or solvency of any one counterparty." [Docket Item 675-4 at 22; Docket Item 675-5 at 22.] In other words, the Listing Requirements required segregation and imposed an obligation upon SPhinX's directors to confirm and assure that its assets remained segregated. As a result, Mr. Aaron confirmed in a letter dated June 25, 2002 to the Irish Stock Exchange (among other entities) that he had reviewed the Offering Memorandum, the "Continuing Obligations of the Irish Stock Exchange, " and that he had "ensure[d] compliance" with these obligations. [Docket Item 675-2 at 1-2.]
3. In moving to exclude any reference to Defendants' alleged violation of the Irish Stock Exchange requirements, Defendants argue that any such reference would interject an irrelevant body of law into this litigation, and would create a danger that references to "breaches'" or "violations'" of the Irish Stock Exchange rules might mislead the jury into concluding that Defendants necessarily committed the breaches alleged by Plaintiffs. [Docket Item 598-1 at 2-4.] Plaintiffs, however, take the position that any reference to these issues would not serve to interject Irish law, but would instead be used as an example of Mr. Aaron's "false representations" concerning "the accuracy of SPhinX financial statements, the protections afforded SPhinX assets administered by DPM, and the compliance with the requirements of the SPhinX Offering Memorandum." [Docket Item 675 at 1-2, 6-7.]
4. Evidence of Mr. Aaron's representations concerning SPhinX's compliance with segregation requirements have a clear tendency to make a fact of consequence in this action "more or less probable, " particularly to the extent that a misrepresentation of fact constitutes an element of Plaintiffs' fraud claim against Mr. Aaron. FED. R. EVID. 401(a)-(b). Indeed, Defendants do not challenge the introduction of these representations on relevance grounds. Rather, Defendants challenge the representations on the grounds that their connection to violations of the Irish Stock Exchange rules may prejudice, confuse, and/or mislead the jury. [See generally Docket Item 598.] Despite the relevance, the Court will not ignore that arguments or references to violations or breaches of the rules applicable to SPhinX's listing on the Irish Stock Exchange may confuse the jury's understanding of the violations and/or breaches actually alleged in this litigation. Labeling these requirements as violating Irish law would tend to cause the jury to believe that such a violation is actionable in this case, when there is no cause of action for breach of Irish law. Even more, these references may lead the jury to unfairly presume that Defendants' alleged violations of Irish law necessarily implies that Defendants breached or violates their obligations under the Offering Memorandum, Service Agreement, and applicable law. For these reasons, the Court will not permit Plaintiffs to argue that Defendants' breached and/or violated the rules of the Irish Stock Exchange, because the danger of confusion and unfair prejudice substantially outweigh the probative value of those references. See FED. R. EVID. 403. The Court will also preclude Plaintiffs from introducing any portion of the Listing Requirements and Procedures of the Irish Stock Exchange other than sections 2.35 and 2.52. The Court will, however, permit Plaintiffs to rely upon these limited sections of the Listing Requirements, in support of their claim that Defendants, and specifically Mr. Aaron, made a misrepresentation of fact concerning the segregation of SMFF's excess cash. These provisions 2.35 and 2.52 are probative of the materiality of the promise that such funds would be segregated and not exposed to the creditworthiness of the custodian of these funds. The Court will consider a limiting instruction to the jury, if requested by either party, concerning the purposes for which this evidence may be considered by the jury to avoid confusion or undue prejudice.
5. The Court turns to Defendants' motion to exclude the introduction of evidence concerning auditing problems unrelated to SMFF. SPhinX operated a family of 70 investment funds to provide investors with a platform for tracking the Standard & Poor's Hedge Fund Index. (See Joint Final Pretrial Order at 4.) This action, however, only concerns Defendants' alleged breaches of their various fiduciary and contractual auditing and accounting obligations with respect to one of the SPhinX funds, SMFF. (See generally id.) Plaintiffs allege, in particular, that Defendants facilitated the unauthorized movement of SMFF's excess cash into unsegregated accounts with Refco and failed to take certain corrective steps in the face of Refco's potential insolvency. (See generally id.)
6. As a result, in their motion to exclude evidence of non-SMFF auditing problems, Defendants argue that "documentation and testimony related to accounting and auditing-related breaches with respect to the other SPhinX Funds" should be excluded as irrelevant, prejudicial, and likely to confuse. [Docket Item 603-1 at 1, 8-9.] Plaintiffs, however, take the position that the "intertwined and highly interdependent" structure of SPhinX funds left SMFF necessarily "affected by the accounting and auditing problems" at other SPhinX funds. [Docket Item 688 at 7-8.]
7. The Court notes that the MDL District Court squarely decided this issue over 5 years ago. [See Docket Item 603.] Indeed, in a February 3, 2010 Report and Recommendation on Defendants' motion to dismiss and the "omnibus" issue of standing, the Special Master noted that the segregation of SMFF's excess cash and its protection from any losses at Refco formed the "gravamen" of Plaintiffs' complaint. [Docket Item 720-1 at 17.] The Special Master further noted that, in making these allegations, Plaintiffs referred "to the SPhinX family of hedge funds.'" [Id. (citation omitted).] Nevertheless, he concluded that "SMFF - and only SMFF -  opened the account and deposited the funds at issue with Refco LLC, " and therefore found that "only SMFF" had "the asserted right to segregation from the ills at Refco, " not the SPhinX "family' of hedge funds." [Id. (citation omitted).] For these reasons, the Special Master recommended that the claims brought by the SPhinX funds other than SMFF be dismissed with prejudice for lack of standing. [Id. at 18.] On March 31, 2010, the MDL District Court then adopted the Special Master's Report and Recommendation, and specifically "dismissed with prejudice" all counts that "purport to bring claims on behalf of SPhinX investors and any SPhinX fund other than SPhinX Managed Futures Fund." [Docket Item 720-2 at 2.]
8. That determination remains the law of the case. Plaintiffs do not appear to have challenged that ruling before the MDL District Court, nor have they identified any basis for this Court to depart from the MDL District Court's Order. See In re Pharmacy Benefit Mgrs. Antitrust Litig., 582 F.3d 432, 441 (3d Cir. 2009) (generally noting that "a Return to Go' card [should not] be dealt to parties involved in MDL transfers, " absent extraordinary circumstances); Hayman Cash Register Co. v. Sarokin, 669 F.2d 162, 169 (3d Cir. 1982) ("A disappointed litigant should not be ...