Full opinion text
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS THE SECOND AMENDED CLASS ACTION COMPLAINT McMAHON, District Judge: INTRODUCTION This is one of a series of actions (all pending before different judges of this court) in which investors in so-called “feeder — funds” funds that invested client assets with Bernard J. Madoff — seek to recover from those feeder funds and their fiduciaries. In this case, the defendants fall into three groups: Ivy Asset Management and related parties, including Ivy’s principal, Lawrence Simon (the “Ivy Defendants”); and John P. Jeanneret and entities associated with him (the “Jeanneret Defendants”); and Margolin (the “Accounting Defendants” or “Margolin Defendants”). Plaintiffs also sue the Bank of New York (“BONY”), which acquired Ivy in 2000. In deciding these motions, the Court has the advantage of being able to refer to a thorough and well-reasoned decision by my colleague, The Hon. Leonard B. Sand, who in the main denied motions to dismiss virtually identical claims against the Ivy and Jeanneret Defendants in cases relating to another of the Madoff feeder funds, Beacon Associates. Judge Sand also dismissed analogous claims against a different accounting firm and BONY. The Margolin Defendants’ motion to dismiss is granted; the Jeanneret Defendants’ motion to dismiss the federal securities law claims against them is denied; the Ivy Defendants’ motion to dismiss the federal securities law claims against them is granted in part and denied in part. The various state law claims are disposed of in the same manner that Judge Sand disposed of identical claims in the Beacon Associates litigation. BACKGROUND I. Statement of Factual Allegations The Madoff Scheme As Judge Sand wrote in his recent opinion and order in In re Beacon Associates Litigation, 745 F.Supp.2d 386 (S.D.N.Y.2010), the basic facts surrounding Madoffs historic Ponzi scheme are by now well known. In the interest of brevity, I will not repeat them here, but simply adopt Judge Sand’s description of the Madoff fraud. Plaintiffs The named Plaintiffs in the securities class actions represent two classes of investors. The first class, known as the “Income Plus Class,’ ” is made up of persons who invested in a hedge fund called the Income-Plus Investment Fund, which was promoted through Offering Memoranda (OMs) that were issued in 1993, and again in 2003. (December 17, 2010 Letter from Barbra Hart (“Hart Letter”) at 1.) The second class, the so-called Direct Investor Class, is made up of persons who entrusted money to John P. Jeanneret Associates (JPJA) pursuant to Discretionary Investment Management Agreements (“DIMAs”), with the understanding that the money so entrusted would be invested with Madoff or his enterprise, Bernard Madoff Investment Securities (“BMIS”). (Id. at 2-3.) To the extent that persons who had DIMAs with JPJA invested in Madoff by a more circuitous route — as, for example, by having JPJA place them into Beacon Associates or Income Plus, which in turn invested in/with Madoff — such individuals are not members of the Direct Investor Class. (Id. at 2.) Although Plaintiffs counsel refers to this class as the “Ivy Direct Investor Class,” a more appropriate moniker, and the one this court will use, is the JPJA Direct Investor Class. Defendants The Ivy Defendants: Ivy Asset Management Corp., and later its successor in interest, Ivy Asset Management, LLC, were investment advisors to the Income-Plus Fund. (Second Amended Class Action Complaint (“SCAC”) ¶ 1.) Ivy was founded in 1983 by Lawrence Simon and Howard Wohl, who are also named as Defendants in this action. Ivy is a registered investment advisor. It serves as an investment advisor to asset managers and other investment advisors, and it manages the assets of high net worth individuals and institutions. (Id.) Ivy also maintains and manages certain proprietary Funds of Funds. (Id. ¶¶ 36-38.) Beginning in or about 1987 and continuing until around 2000, Ivy invested the assets of some of its proprietary funds with Madoff. (N.Y. AG Compl. ¶ 31.) Ivy was acquired by Defendant Bank of New York Mellon Corp. (BONY) in October 2000. (Id. ¶ 7.) Other Ivy-related Defendants include various individuals who worked for Ivy during the late 1990s and into the following decade: Adam Geiger who began working at Ivy in 1997 and eventually served as Ivy’s Chief Investment Officer until at least May 2006. (Id. ¶ 39.) Jeffrey Lindenbaum who served as Ivy’s Chief Financial Officer from before 2000 until March of 2001. (Id. ¶ 40.) John Rogers, who began working at Ivy in July 2000, and eventually served as Managing Director in the Ivy Investment Products Group until March of 2004. (Id. ¶ 41.) Sean Simon, who began working at Ivy-in July of 2000, and eventually served as Managing Director in the Ivy Investment Products Group until April 2007. (Id. ¶ 42.) Kevin Bannon, who served as a member of the Ivy Board of Directors and Chief Investment Officer from sometime prior to March 31, 2004 until April 2007. (Id. ¶ 43.) Steven Pisarkiewcz, who served as Chairman of the Ivy Board of Directors from July 2003 until April 2007. (Id. ¶ 44.) Robert Meschi, who began working at Ivy in January 2000 in a position referred to as the “Director of Research” and eventually served as a Director of Ivy Investments from April 2002 until May 2006. (Id. ¶ 45.) Susan Rabinowitz, who served as Ivy’s Vice President of Investments from 2003 until March 2004. (Id. ¶ 46.) Alan Chuang, who served as Ivy’s Director of Investments and Head of Portfolio Management from January 2006 until May 2006. (Id. ¶ 47.) Gregory Van Inwegen who, from January 2007 until after December 2008, served as a Director of Ivy’s Investments Quantitative Research and Risk Management division and ultimately Managing Director and Chief Investment Risk Officer of Ivy. (SCAC ¶ 48.) Sean Cumiskey who, from January 2006 until after December 2008, served as Managing Director, Head of Ivy’s Investment Strategies Group, Capital Markets Coverage Team, and as a member of the Manager Approval Committee. (Id. ¶ 49.) Stuart Davies who from January 2006 until sometime before January 2009, worked in numerous positions at Ivy including Managing Director and Head of Ivy’s Investments in Europe and Asia, as a Member of Ivy’s Manager Approval Committee, and Global Head of Investments. (Id. ¶ 50.) Joseph Burns, who worked at Ivy from January 2006 until after December 2008 eventually serving as Ivy’s Director of Investments and Head of Long/Short Equity. (Id. ¶ 51.) Mark Santero, who served as a Managing Director in Ivy’s Investments from January 2006 until February 2007 and also as a member of Ivy’s Manager Approval Committee. (Id. ¶ 52.) Peter Noris, who served as Ivy’s Chief Investment Officer from February 2007 until sometime after March 2008 and as chair of Ivy’s Manager Investment Committee. (Id. ¶ 53.) Farzine Hachemian, who worked at Ivy from May 2007 until December 2008 and, starting March 2008, headed Ivy’s Portfolio Management Group. (Id. ¶ 54.) Scott Wennerholm, who served on Ivy’s Board of Directors from March 2008 until December 2008. (Id. ¶ 55.) Jonathan Little, who served on Ivy’s Board of Directors from March 2008 until December 2008. (Id. ¶ 56.) Ronald P. O’Hanley, who served on Ivy’s Board of Directors from March 2008 until December 2008. (Id. ¶ 57.) The Jeanneret Defendants: In the late 1980s, Simon met John P. Jeanneret, who, through his company, J.P. Jeanneret Associates, Inc., (JPJA), offered asset management and investment consulting services to upstate New York union pension and welfare funds. Paul L Perry, who is also named as a defendant in this action, was Jeanneret’s associate and a director of JPJA. (Id. ¶¶ 33-35.) The Accounting Defendants: Margolin, Winer & Evens LLP (“Margolin”) was the accounting firm retained as the independent auditor to the Income Plus Fund. In its role as auditor of the Income Plus Fund. Margolin regularly issued audit opinions regarding the financial statements issued by Income Plus. (SCAC ¶ 61.) Ivy/Jeanneret Contract In or about 1990. Ivy introduced Jeanneret to Madoff. The Second Amended Class Action Complaint does not allege whether Jeanneret sought the introduction or if the idea originated with Ivy. In 1991, Ivy and JPJA entered into an “Consulting Agreement” pursuant to which JPJA agreed to pay Ivy 50% of any fees that JPJA earned by placing investors with Madoff or other Ivy-recommended investment managers. (SCAC ¶ 80, 81, 161-162.) If the number of JPJA clients who invested with Ivy-recommended managers dropped below two, Ivy would instead be entitled to receive 60% of JPJA’s investment management fee. (Id. ¶ 162.) Ivy’s entree to Madoff was allegedly the number one reason why JPJA entered into this unorthodox (to say the least) arrangement. (Id. ¶¶ 160-162.) Ivy’s responsibilities under this agreement were as follows: (a) Research, identify, monitor, evaluate and meet with potential investment managers; (b) Recommend investment managers; (c) Advise ... as to the availability of opportunities to invest [JPJA’s] Client funds with particular investment managers; (d) Monitor, evaluate and meet with investment managers that are managing [JPJA’s] Client funds invested through [JPJA]; (e) Assess the performance of investment managers managing [JPJA’s] Client funds invested through JPJA and make periodic recommendations with respect to such performance; (f) Maintain such records as are mutually deemed appropriate by IVY and JPJA relating to the recommendation, retention, performance and services of investment managers recommended by IVY and selected by Associates to manage the Client funds invested through Associates: and (g)Provide associates with such documentation as it reasonably requires with respect to investments of [JPJA’s] Client funds with investment managers such that JPJA may maintain compliance with the record-keeping requirements of the Advisers Act. (1991 Consulting Agreement (“1991 CA”), Rosenthal Decl. Ex. C § 3.). In 1993, JPJA created The Income Plus Investment Fund as a vehicle through which individuals, charities, pension funds and retirement accounts, institutions and other entities — including other hedge funds — could invest with Madoff. JPJA offered unit interests in Income-Plus, which was structured as a tax-exempt collective investment trust designed to pool the investment assets of investor entities. (SCAC ¶ 181.) Income Plus Fund was established by a Declaration dated December 15, 1993, under the Master-Income-Pius Group Trust (“Group Trust”). (1993 Offering Memorandum (“1993 OM”), Rosenthal Decl. Ex. H.) The Group Trust was established pursuant to an Agreement of Trust (“Group Trust Agreement”) dated February 23, 1993, between the Custodial Trust Company, as Trustee, and Jeanneret Associates, as Investment Manager. (Id.) Participation in The Income Plus Fund was offered to investors through confidential Offering Memoranda (OM) that were released in 1993 and in 2003. (SCAC ¶ 50.) The Offering Memoranda were substantially identical. They identified' — Ivy described as a “global leader in alternative investment fund-of-funds portfolio management” with “approximately $12 billion of assets under management” — as JPJA’s “Investment Advisor.” (Id.) As the Investment Advisor, Ivy was obligated to advise JPJA with respect to investing Income Plus’ assets and to conduct due diligence on managers with whom JPJA allocated Income -Plus’ assets. (SCAC ¶ 81) (citing the 1993 OM.) JPJA, serving as the Investment Manager of the Income-Plus Fund, allegedly invested more than forty percent of the Fund with Madoff. (SCAC ¶ 94.) JPJA also executed “DIMAs” (Discretionary Investment Management Agreements) with various investors. Pursuant to the DIMAs, JPJA was appointed as attorney-in-fact for the investor for the purpose of “invest[ing] and reinvesting] the assets received and deposited with the custodian ... for investments by the Investment Manager, and/or to appoint other investment advisors subject to the Investment Manager’s oversight to invest and reinvest such assets, as fully as the Board itself could do.” (SCAC ¶ 153) (quoting the July 1, 1996 Discretionary-Investment Management Agreement between Local 267 Pension Fund and JPJA (the “1996 DIMA”), at 1.) The DIMAs listed BMIS as the investment “Custodian” with whom DIMA assets would be deposited. (Id.) (Citing id.) A one page summary entitled “Investment Guidelines” was attached to the DIMAs. In the DIMA Investment Guidelines’ description of the put and call options trading strategy that was listed as one of the primary trading strategies for the DIMA assets, the Guidelines provided that “at the discretion of Bernard L. Ma-doff, long put positions may carry expiration dates of greater duration than short call positions.” (Id. at 8.) JPJA allegedly placed money entrusted to it pursuant to the DIMAS directly with Madoff or BMIS, as contemplated by these provisions of the DIMAs. (SCAC ¶ 19.) Ivy’s Relationship to Jeanneret vis a vis Madoff When Ivy and Jeanneret first entered into their relationship, Ivy and its own clients also invested with Madoff. (Id. ¶ 96.) The Ivy Defendants knew of rumors calling Madoffs bonafides into question as long ago as the early 1990s. In fact, in 1991, Simon allegedly told a prospective investor that Madoff could be running a Ponzi scheme. (Id. ¶ 80.) In 1997, Ivy became suspicious about Madoffs stated investment strategy-the so-called “split strike” strategy because it seemed to Wohl that the number of S & P 100 Index options traded on a given day at the Chicago Board of Options was insufficient to support what Madoff claimed to be doing (based on Ivy’s estimate of how much money Madoff had under management). (Id. ¶ 86.) Internal memos written by Ivy employees at or about this time urged that Ivy “explore this further” and noted that Ivy had “inability to make sense of Madoffs strategy” because “his trades for our accounts are inconsistent with the independent information that is available to us.” (Id. ¶ 88.) Ivy also became concerned that Madoff might be using client money to fund his separate market-making business, and that there was no way to verify Madoffs trades with independent data because of his practice of “self-clearing” trades. (SCAC ¶ 93.) During the years 1997-98, Madoff gave Ivy at least three different explanations for his trading practices; none of the explanations made sense and the three were not consistent with each other. (Id.) Wohl actually argued, as early as 1998, that Ivy should divest itself of its Madoff investments completely. (Id. ¶ 100.) Simon, however, vetoed that idea, saying, “... .it is important to maintain at least some level of Ivy fund investments with Madoff in order to send a message to [our] advisor clients that we have confidence in him.” (Id. ¶ 101.) This is an extraordinary statement, given that Ivy (or at least Wohl) apparently did not have a great deal of confidence in Madoff. Simon reasoned as follows: Amount we now have with Bernie in Ivy’s partnership is probably less than $5 million. The bigger issue is the 190 mill of so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17 + % returns .... [to be] $1,275 Million Are we prepared to take all the chips off the table, have assets decrease by over $300 million and over overall fees reduced by $1.6 million or more, and, one wonders if we ever “escape” the legal issue of being the asset allocator and introduced, even if we terminate all Ma-doff related relationships? (SCAC ¶ 101) (quoting Simon e-mail.) To paraphrase: Simon reminded Wohl that Ivy itself actually had very little exposure to Madoff-less than $5 million — but the firm had considerable exposure to “relationships” (i.e., to Ivy’s clients), which collectively (i) had a lot of money invested with Madoff (“$190 million or so”), (ii) whose assets made up a significant fraction of Ivy’s total assets under management (estimated at 15%); and (in) which generated about 16% of Ivy’s annual revenue (the $1.6 million in fees). Ivy’s desire to keep those assets under management — and to continue earning those hefty fees — led Simon to reject Wohl’s suggestion. Ivy’s management also overrode the suggestion of its Chief of Investment Management, Adam Geiger, who had suggested a “middle of the road” approach, in which Ivy would (1) pull all of its proprietary Funds out of Madoff, (2) write to its advisory clients telling them what it had done and why, and (3) let the advisory clients decide whether to continue investing in Madoff s fund. (SCAC ¶ 104.) However, Ivy did limit its proprietary investment in Madoff to 3% of the fund’s value, which was only half of what it would normally have permitted under the rules applicable to its accounts. (Id. ¶ 105.) Ivy also recommended a “below-median allocation” for JPJA’s investment in Madoff. But Ivy insisted to its clients (including JPJA) that its only concern about Madoff was his continued ability to manage such a large pool of assets with his accustomed degree of success. (Id. ¶ 107.) Indeed, Jeanneret’s notes from a December 30, 1998 meeting with Ivy reflect that Ivy’s due diligence “shows no problem for Ma-doff.” (Id. ¶ 106.) Nonetheless, little by little, Ivy began to hint that its enthusiasm for Madoff was waning. On January 12, 1999, for example, Ivy sent a letter to Jeanneret, which stated, “We have no reason to believe that the Madoff account is anything other than what Ivy’s experience has shown and what the record demonstrates......[but] due to a lack of external corroborative evidence, we cannot ‘close the loop’ in a manner than gives us total comfort.” (Id. ¶ 107.) Ivy also reiterated concern about Madoff s lack of a separate custodian for the securities he traded, and stated that Ivy “continu[ed] to question [Madoffs] ability to manage what must be an enormous pool of capital with such consistently outstanding results.” (Id. ¶ 110.) (quoting January 12, 1999 Letter from Ivy to JPJA.) In April 2000, Ivy representatives met with Jeanneret, who asked, “Is he [Madoff] essentially legitimate?” (Id. ¶ 115) (quoting Ivy Notes of Meeting held April 2000.) Robert Meschi, Ivy’s Director of Research, responded, “essentially legitimate.” (Id.) (Emphasis added). However, Meschi admitted that Ivy was limiting its own stake in Madoff because Ivy could not “close the loop” on him. (Id.) Although Ivy expressed some concerns to JPJA in 2001 about Madoff, Ivy significantly mischaracterized and understated its concerns, stating in a letter to JPJA: “We take this opportunity to state our long-held concerns about the continued ability of this manager to produce consistent returns on what must be an enormous amount of capital under management, and to note our inability to perform due diligence due to limitations set by Madoff. For these reasons, we recommend harvesting profits or otherwise trimming allocations to this manager.” (SCAC ¶ 123) (quoting Ivy Letter to JPJA dated August 3, 2001.) Ivy Withdraws Its Proprietary Investments From Madoff In late 2000, Ivy withdrew its entire proprietary investments from the “essentially legitimate” Madoff. (Id. ¶ 117.) At the time, Ivy was about to be acquired by BONY — a transaction in which Simon and Wohl each stood to make approximately $100 million. There are conflicting allegations about who precipitated the withdrawal (Madoff or Ivy); Ivy insists that Madoff refused to deal with it after the BONY acquisition, but Wohl and Simon’s son Sean are both on record as having said that Ivy, not Madoff, ended the relationship. (Id. ¶ 118.) Shortly after getting Ivy’s own funds out of Madoff, Simon advised at least one client to divest its (small) Madoff investment. (Id. ¶ 121.) When Wohl told another client that Ivy had withdrawn its proprietary funds from Madoff, the client responded, “If it’s not good enough for you, then it should be out of us.” (Id. ¶ 122) (quoting NYAG Compl. ¶ 108.) However, Ivy did not tell Jeanneret/JPJA that it had extricated itself from any direct exposure to Madoff. And when Wohl suggested that Ivy exclude a large pension fund client that was heavily invested in Madoff from Ivy’s responsibility, Simon responded, ‘You may be spending too much time in the sun! If we give up Madoff, [Jeanneret] has the opportunity to move in.” (Id. ¶ 126) (quoting Larry Simon e-mail dated June 2001.) Simon wrote in June 2001 that this particular pension fund’s Madoff investment “helped to contribute towards building Ivy’s [assets under management] and credibility, despite our real concerns about him.” (Id. ¶ 103) (quoting Larry Simon email dated June 2001.) Ivy Reveals That It Is Not Performing Due Diligence on Madoff Finally, in a letter sent by Simon and Geiger to Jeanneret in August 2001, Ivy abandoned euphemisms like “can’t close the loop” and flat out admitted “[Ivy’s] inability to perform due diligence due to limitations set by Madoff.” (Id. ¶ 123) (quoting Ivy Letter to JPJA dated August 3, 2001.) In fact, according to testimony given by Simon, Ivy stopped making due diligence visits to Madoff, because it did not feel welcome after it had withdrawn its proprietary funds from Madoff. (Id. ¶ 123) (citing Testimony of Larry Simon.) Ivy apparently did not reveal its withdrawal from Madoff, or its advice to its own clients to do so, at that time. The 2003 Offering Memorandum for Income Plus/2007 Ivy Advisory Amendment In 2003, JPJA issued another OM for Income-Plus (Id. ¶ 130.) Like its predecessor, this OM designated Ivy as the “Investment Advisor.” The 2003 OM listed the same responsibilities for Ivy as Investment Advisor that were listed in the 1991 OM-providing due diligence research with respect to potential investment managers, making recommendations to JPJA regarding which investment managers should select for investing Income Plus assets, and monitoring performance of investment managers that are managing Income Plus assets. (SCAC ¶ 129) (citing 2003 OM at 1.) In addition, the 2003 OM also explicitly stated that when Ivy and JPJA identified investment managers who “achieved above-average returns through different market cycles----[Ivy and JPJA] would engage in further investigation in order to validate the results shown and where possible judge the [investment manager’s] adherence to their stated strategy.” (Id.) (quoting the 2003 OM at 4.) Thereafter, JPJA continued to put its clients into Madoff investments, both directly and via their participation in Income Plus. It continued to pay handsome fees to Ivy pursuant to their agreement. That agreement was not modified until December 1, 2007, when Ivy and JPJA executed a new advisory contract. Plaintiffs allege in the SCAC that Ivy executed the 2007 agreement because it had determined that Madoff was one of Ivy’s “top ten business risks” and accordingly sought to insulate itself from potential liability arising from its sub-advisory relationship with JPJA. (SCAC ¶ 141.) The 2007 advisory agreement between Ivy and JPJA expressly excluded Madoff from Ivy’s scope of due diligence services. (Id. ¶ 141) (citing the 2007 Amended and Restated Subadvisory Agreement between Ivy and JPJA.) Madoff Fraud Revealed Madoffs fraud was finally uncovered in late 2008, after he confessed to his sons that he had been running a Ponzi scheme all along. The world learned the truth in headlines that appeared on the morning of December 11, 2008, when Madoff was arrested at his apartment. (Id. ¶ 12.) Madoff pleaded guilty to securities fraud and related offenses on March 12, 2009. He was eventually sentenced to 150 years in prison by The Hon. Denny Chin, Ma-doffs accountant, David Friehling of Friehling & Horowitz CPAs, P.C., is under indictment. His chief Financial Officer, Frank DiPascali, pleaded guilty to conspiracy to commit securities fraud and related offenses. Two computer programmers who worked for Madoff were indicted for aiding and abetting Madoffs scheme in November 2009. Irving Picard, the trustee of Madoffs bankrupt estate, continues to try to claw back assets from members of his family and various investors who over time “redeemed” more from the fraudulent investment fund than they “invested” in the first place. Recently, Pi-card has begun suing banks that failed to detect (or allegedly consciously avoided detecting) the true nature of Madoffs activities. On May 10, 2010, the New York State Attorney General filed a civil complaint against Ivy, Simon and Wohl in the New York State Supreme Court, alleging that they had committed fraud and related offenses. The above recital, which is taken principally from Judge Sand’s summary of the Second Consolidated Amended Complaint in the Beacon Associates lawsuit, is predicated in substantial part on allegations set forth in the Attorney General’s complaint. DISCUSSION I. Standard of Review In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court must liberally construe all claims, accept all factual allegations in the complaint as true, and draw all reasonable inferences in favor of the plaintiff. See Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 44 (2d Cir.2003); see also Roth v. Jennings, 489 F.3d 499, 510 (2d Cir.2007). However, to survive a motion to dismiss, “a complaint must contain sufficient factual matter ... to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, — U.S. -, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiffs obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (internal quotations, citations, and alterations omitted). Thus, unless a plaintiffs well-pleaded allegations have “nudged [its] claims across the line from conceivable to plausible, [the plaintiffs] complaint must be dismissed.” Id. at 570, 127 S.Ct. 1955; Iqbal, 129 S.Ct. at 1950-51. Section 10(b) and Rule lb-5 claims, like the ones asserted in this lawsuit, are subject to the special (and heightened) pleading requirements of the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. §§ 77z-l, 78u-4 and Fed.R.Civ.P. 9(b). These laws and rules require a complainant to: “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Fed. R. Civ. P, 9(b) (fraud must be pleaded with particularity); see, Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir.2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.1993)) (internal quotation marks omitted). Any type of fraud is subject to the heightened pleading rules of Rule 9(b), which provides that “intent, knowledge, and other conditions of mind may be averred generally.” However, in a federal securities case, the plaintiff must allege sufficient facts to create a “strong inference” of scienter. Kalnit v. Eichler, 264 F.3d 131, 137-38 (2d Cir.2001) A “strong inference” of scienter can be established through factual allegations showing “motive and opportunity to commit fraud” or “strong circumstantial evidence of conscious misbehavior or recklessness.” In re AOL Time Warner, Inc. Sec. & “ERISA” Litig., 381 F.Supp.2d 192, 206 (S.D.N.Y.2004). “ ‘While we normally draw reasonable inferences in the non-movant’s favor on a motion to dismiss,’ ” the PSLRA “establishes a more stringent rule for inferences involving scienter” because the PSLRA requires particular allegations giving rise to a strong inference of scienter. ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.2009) (quoting Teamsters Local 445 Freight Div., Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir.2008)). “An inference of scienter must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). Finally, in deciding a motion to dismiss, a court may consider the full text of documents that are quoted in or attached to the complaint, or documents that the plaintiff either possessed or knew about and relied upon in bringing the suit. Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir.2000) (citing Cortec Indus. Inc. v. Sum Holding L.P., 949 F.2d 42 (2d Cir.1991). cert denied. 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992)); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir.1996). “Plaintiffs’ failure to include matters of which as pleaders they had notice and which were integral to their claim — and that they apparently most wanted to avoid — may not serve as a means of forestalling the district court’s decision on the motion.” Cortec, 949 F.2d at 44 (2d Cir.1991); see also I. Meyer Pincus & Assocs. P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir.1991) (“plaintiff cannot evade a properly argued motion to dismiss simply because plaintiff has chosen not to attach the [document] to the complaint or to incorporate it by reference”). The pending motions will be evaluated against these standards. II. The Jeanneret Defendants’ Motion to Dismiss the Securities Claims Against Them is Denied. 1. Claims Under Section 10(b) and Rule 10b-5. The Jeanneret Defendants move to dismiss the claim asserted against them pursuant to Section 10(b) of the Exchange Act and Rule 10b-5, That motion is denied, as both proposed classes have viable claims for nondisclosure and misrepresentation employing well-settled theories of recovery. Section 10(b) of the 1934 Act provides that no person or entity may, in connection with the purchase or sale of a security, “use or employ ... any manipulative or deceptive device or contrivance” in contravention of an SEC rule. 15 U.S.C. § 78j(b). Rule 10b-5 makes it unlawful, in connection with the purchase or sale of a security, “(a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or ... omit ... a material fact necessary in order to make the statements made ... not misleading, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b-5. In order to succeed on a claim, a “plaintiff must establish that ‘the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiffs reliance on the defendant’s action caused injury to the plaintiff.’” Lawrence v. Cohn, 325 F.3d 141, 147 (2d Cir.2003) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir.2000)). In order for the misstatement to be material, “ ‘there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ” Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)). The statute of limitations for claims under the federal securities laws is the longer of two years from the date the fraud was discovered or five years from the date it was perpetrated. 28 U.S.C. § 1658(b); see also Nathel v. Siegal, 592 F.Supp.2d 452, 461 (S.D.N.Y.2008). The securities fraud action was filed on April 17, 2009. Misrepresentations or omissions that were made prior to April 17, 2004 are, therefore, time barred. However, the complaint in this case, like the complaint before Judge Sand, contains numerous allegations that, read together, tend to show that JPJA committed securities fraud in connection with its solicitation of investments during the five years immediately prior to the filing of this lawsuit, (a) Material Misrepresentation As long ago as 2001, the Jeanneret Defendants were told that Ivy was was unable to perform full-scale due diligence on Madoff s investments. (SCAC ¶ 123.) While Ivy was plainly withholding some information from JPJA — including the key fact that it had (allegedly) bailed out of its own stake in Madoff — Jeanneret knew that Ivy, which had a contractual obligation to “monitor, evaluate and meet with investment managers that [were] managing Client funds invested through [JPJA]” (1991 CA, Rosenthal Deck Ex. C § 3), was not living up to its obligations under that agreement. Despite this knowledge, in 2003 JPJA circulated an Offering Memorandum for Income Plus that contained the following language: The Investment Manager [JPJA] believes that satisfactory rates of return can be achieved on a consistent basis through various hedging and arbitrage strategies, which have been thoroughly researched by the Investment Manager and its Advisor, Ivy Asset Management Corp. As such the Investment Fund represents a vehicle for achievement of relatively consistent higher rates of return on pension and profit sharing plans and individual retirement accounts from year to year than the risk-free rate of return (i.e. Treasury Bills). The Investment Manager and the Ad-visor [Ivy] have and will continue to research, select and monitor the Managers that employ the varying strategies and techniques described [in the Offering Memorandum]. The Investment Manager and the Advisor begin the selection process by identifying Managers which have achieved above-average returns through different market cycles .... The Investment Manager and Advisor engage in further investigation in order to validate the results shown and where possible to judge the Managers’ adherence to their stated strategies. (SCAC ¶ 129) (quoting 2003 OM at 1 & 4) (emphasis added). There was nothing in the OM about circumscribed due diligence with regard to investments in Madoff highly material piece of information for Income Plus participants to have before they purchased their interests in that fund. Similarly, the Direct Investor Class invested on the basis of DIMAs that contained the following representation: [JPJA is] the [institutional investor’s] attorney-in-fact to invest and reinvest the assets received and deposited with the custodian ... for investment by the Investment Manager, and/or to appoint other investment advisors subject to the Investment Manager’s oversight to invest and reinvest such assets, as fully as the Board itself could do. The Investment Manager hereby accepts this appointment, hereby acknowledges that it is a fiduciary with respect to the Plan, and agrees to supervise and direct the investment of the assets of the Plan in accordance with (i) the written investment guidelines [¶]... ] and, (ii) the current funding policy and method that have been established to carry out the objectives of the Plan as communicated to the Investment Manager. Subject to the attached Investment Guidelines, the Investment Manager and/or any investment advisors appointed by the Investment Manager and subject to its supervision may, in its full discretion and without obligation on its part to give prior notice to the Board, (a) buy, sell, exchange, convert and otherwise trade in any stocks, bonds and other securities, and (b) establish and execute security transactions, through accounts with such brokers or dealers as the Investment manager and/or any appointed investment advisor may select, except to the extent otherwise directed by the Board; provided however, that all such activities shall be conducted in a manner consistent with the Investment Guidelines, the Investment Manager’s obligations hereunder ... (July 1, 1996 Discretionary Investment Management Agreement between Local 267 Pension Fund and JPJA (the “1996 DIMA”) at 1.) The Investment Management Agreement further stated that JPJA: Shall perform its duties [¶]... ] with the care, skill, prudence, and diligence, under the circumstances then prevailing, [...] and shall diversify the Investment Account Assets so as to avoid the risk of large losses ... (Id. at 2.) In that Jeanneret knew perfectly well that Ivy these statements in the DIMA also appear seriously flawed. At oral argument, counsel for the Jeanneret Defendants argued that (i) JPJA, not Ivy, was contractually obligated to its (JPJA’s) clients (whether pursuant to the OMs or the DIMAs) to perform due diligence on all of its investments (which would, of course, include Madoff); and (ii) the SCAC does not expressly allege JPJA (rather than Ivy) had failed to carry out that obligation, especially following Ivy’s August 2001 letter. But the most plausible inference one can draw from the facts pleaded in the SCAC is that JPJA (i) delegated the due diligence function to Ivy where Madoff was concerned; (ii) knew from August 2001 through sometime in 2007 that Ivy was not performing due diligence on Madoff; and (iii) did absolutely nothing about it. Since that inference is warranted if the facts pleaded are true, the SCAC adequately pleads material misrepresentation. Pursuant to the 1991 Consulting Agreement, JPJA retained Ivy to, inter alia, perform due diligence on all managers it recommended to Jeanneret — a group that includes Madoff. The 1991 Agreement remained in full force and effect, without any amendment that changed this delegation, until December 2007. At that time — less than a year before the Madoff house of cards came tumbling down — the Consulting Agreement was amended specifically to exclude Madoff from the list of managers on whom Ivy was contractually obligated to perform due diligence. It is fair to infer, from the fact that it entered into the 2007 amendment, that JPJA believed Ivy to be responsible for Madoff-related due diligence up until December 2007. From the totality of these well-pleaded facts one can fairly infer that JPJA continued “outsourcing” its promised due diligence obligation vis a vis Madoff to Ivy — even though it had been told that Ivy was unable to perform due diligence on Madoff— and that this was the state of affairs when the 2003 OM was prepared and at all relevant times thereafter. Furthermore, that inference is far more plausible than the alternative inference suggested by Jeanneret’s counsel, which is that JPJA could have begun performing due diligence on Madoff itself. Any such inference belied by Jeanneret’s alleged need to rely on Ivy in order to have any entree to Madoff at all. (SCAC 36, 78,82, 150.) Both the fact of the misrepresentation about performing due diligence and its materiality to a reasonable investor are patent. Income Plus investors were buying into a fund that would end up directing more than one third of its assets into investment with Madoff. (SCAC ¶ 94.) All of the funds invested by Direct Investors were invested directly with Madoff. (December 17, 2010 Hart Letter at 2.) (b) Reliance Reliance can be presumed from the materiality of the omission under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 31 L.Ed.2d 741(1972). (c) In Connection With the Purchase/Sale of Security The “in connection with” requirement for maintaining a private right of action under Rule 10b-5 is also satisfied on the allegations against JPJA. A nondisclosure or misrepresentation can serve as the basis for a private right of action only if it is made in connection with the purchase or sale of a security. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-32, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975): see also 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. For the Income Plus Class, the security purchased was the investor’s interest in Income Plus. There does not seem to be any dispute that the investor’s interest in Income Plus qualifies as a security. The matter is slightly more complicated for the Direct Investor Class, but I am convinced that (1) the Madoff “purchases” and “sales” are enough to meet the “in connection with” requirement; and that (2) plaintiffs allege sufficient facts to warrant the conclusion that the DIMAs themselves are “securities.” I will address the latter issue first. Plaintiffs Sufficiently Allege that the DIMAs are Securities: First, plaintiffs sufficiently allege that the DIMAs themselves are securities. As a result, their claims can withstand a motion to dismiss. Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(l), defines a “security” as: any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a “ ‘security’ ”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. 15 U.S.C. § 77b(l) (emphasis added.) For the DIMAs to constitute a “security,” they must fall within the definition of an investment contract. The Supreme Court in SEC v. Howey, Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), outlined a three-part test for determining when investment contracts are securities. The Court defined an “investment contract” as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise.” Id. at 299, 66 S.Ct. 1100. Thus, under Howey, an investment contract is a security if there is (1) an investment of money, (2) in a common enterprise and (3) with profits derived solely from the efforts of others. Id.; see also Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir.1994). To establish the existence of a “common enterprise,” Plaintiffs must show “horizontal commonality.” Revak, 18 F.3d at 87. Horizontal commonality is characterized as “the tying of each individual investor’s fortunes to the fortunes of the other investors by the pooling of assets, usually combined with the pro-rata distribution of profits.” Id. As the Second Circuit explained in Revak, “horizontal commonality ties the fortunes of each investor in a pool of investors to the success of the overall venture. In fact, a finding of horizontal commonality requires a sharing or pooling of funds.” Id. (quoting Hart v. Pulte Homes of Michigan Corp., 735 F.2d 1001, 1004 (6th Cir.1984)). Neither party argues that horizontal commonality exists here. Indeed, there are no allegations in the SCAC that the plaintiffs in the Direct Class pooled their money for a common purpose. Nonetheless, some courts have concluded that Howey’s “common enterprise” requirement can be satisfied with “vertical commonality.” Vertical commonality exists in two forms: (1) strict vertical commonality and (2) broad vertical commonality- Broad vertical commonality requires that the fortunes of the investors be linked to the efforts of the promoter or third party. Revak, 18 F.3d at 88. Although some circuits have concluded that the existence of broad vertical commonality is sufficient to meet the requirements of Howey, the Second Circuit squarely rejected this conclusion in Revak. The Court explained that “if a common enterprise can be established by the mere showing that the fortunes of investors are tied to the efforts of the promoter, two separate questions posed by Howey — whether a common enterprise exists and whether the investors’ profits are to be derived solely from the efforts of others — are effectively merged into a single inquiry: ‘whether the fortuity of the investments collectively is essentially dependent upon promoter expertise.’ ” Id. at 88 (quoting SEC v. Continental Commodities Corp., 497 F.2d 516, 522 (5th Cir.1974)). Therefore, Plaintiffs cannot rely on broad commonality to sustain their claim that the DIMAs are securities. Strict vertical commonality exists when the fortunes of the investor are tied to the fortunes of the promoter. Id. “Where strict vertical commonality exists, ‘the fortunes of plaintiff and defendants are linked so that they rise and fall together.’ ” Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Investments Ltd., 205 F.Supp.2d 243, 249 (S.D.N.Y.2002) (quoting Dooner v. NMI Ltd., 725 F.Supp. 153, 159 (S.D.N.Y.1989)). In Revak, the Second Circuit did not consider whether strict vertical commonality satisfies Howey’s requirement of a common enterprise. Nonetheless courts in this district have held that strict vertical commonality (like horizontal commonality) is sufficient to establish a common enterprise under Howey, See e.g., Jordan (Bermuda) Inv. Co., 205 F.Supp.2d at 249; Louros v. Cyr, 175 F.Supp.2d 497, 508-09 (S.D.N.Y.2001); H.G. Heine v. Colton, Hartnick, Yamin & Sheresky, 786 F.Supp. 360, 370 (S.D.N.Y.1992); Dooner v. NMI Limited, 725 F.Supp. 153, 158 (S.D.N.Y.1989); Perez-Rubio v. Wyckoff, 718 F.Supp. 217, 234 (S.D.N.Y.1989). Plaintiffs allege sufficient facts from which a trier could conclude that the DIMA links the fortunes of the investor to the fortunes of JPJA, Section 10 of the DIMA outlines the compensation of the investment manager (in this case, JPJA). The investment manager is paid (1) a basic quarterly fee in the amount of one-eighth of one percent (.00125) of the “closing value” of the assets in the investment account, and (2) a performance fee equal to 20% of the profits in the investment account that exceed the preferred return and the basic quarterly fee. (Local 267’s 1996 DIMA at 5.) “Profits” are defined as “the aggregate appreciation in value of all Investment Account Assets” in the calendar year. (Id.) Thus, JPJA’s compensation was dependent on the successful performance of the investment account. If profits were not generated in a calendar year, or if the profits did not exceed the preferred return, then JPJA did not receive a performance fee. Unlike a stockbroker, who collects a fee for every consummated transaction, JPJA’s financial compensation was linked to the fortunes of the investors in the Direct Class. Under strict vertical commonality, this is sufficient to satisfy the “common enterprise” requirement of Howey. Accordingly, the DIMAs are securities under the 1934 Exchange Act. Although I am discussing JPJA’s motion, I address two arguments relating to this issue that were made by Ivy in its post-oral argument letter dated December 17, 2010, because the issue is the same as to both parties’ motions. First, Ivy argues that, under a horizontal commonality analysis, the DIMAs cannot be deemed securities because the DIMA investments were not part of a pooled group of funds, thus preventing a finding of common enterprise. That is correct. However, it does not dispose of vertical commonality. Ivy also argues that the DIMAs are not securities, even under an application of the strict vertical commonality test, because Plaintiffs did not expect profits “solely from the efforts of the promoter or a third party.” (Ivy Rply. Brf. at 37) (quoting Howey, 328 U.S, at 297, 66 S.Ct. 1100.) In support of their contention, Ivy points to the provision of the DIMAs which stated that JPJA or the investment managers it appointed could exercise transactions “except to the extent otherwise directed by [Plaintiffs].” (Local 267 DIMAs, Rosenthal Deck Ex. E at 1-2.) Ivy further argues that the DIMAs also provided Plaintiffs with control over their investments because the agreements provided that Plaintiffs had the right to issue written investment guidelines to JPJA. Essentially, Ivy contends that these provisions of the DIMA agreements gave Plaintiffs the degree of control over DIMA investments that should cause the DIMAs to “fail the Howey test for a security.” (Ivy. Rply. Brf. at 37.) However, when determining whether a particular transaction constitutes a security under the Howey test, courts should look beyond the formal terms of the arrangement and assess whether the reasonable expectation was one of significant investor control, or third-party control over the investor’s funds. United States v. Leonard, 529 F.3d 83, 85 (2d Cir.2008). It appears to the Court that the DIMAs were not designed to be the type of investment vehicle through which investors would be actively involved in daily investment decisions or management. The DIMAs clearly state that JPJA and the investment managers it appointed could engage in financial transactions such as purchasing or selling stock “in [their] full discretion and without obligation on [their] part to give prior notice to [Plaintiffs].” (SCAC ¶ 153) (quoting Local 267 DIMA at 1-2.) Obviously Madoff acted without any interference at all from Plaintiffs; to the extent that DIMA money was invested exclusively (or primarily) with Madoff, it is absurd to conclude that Plaintiffs had significant control over their investments — they relied on Madoff to generate significant returns. While the DIMAs identified the BMIS “split-strike” strategy as one of the primary investment strategies that would be employed by DIMA investment managers, the DIMAs explicitly stated that the investment managers were not limited to that strategy and could invest the DIMA funds as they saw fit. (Id.) Viewing the provisions of the DIMA cited by Ivy against this backdrop of the tremendous discretion delegated to the investment managers in the DIMAs, the facts pleaded support a finding that the DIMAs were not designed for meaningful investor participation. Of course, if the facts adduced during discovery give the lie to this interpretation, the issue will no doubt be revisited. Madoff s Purported Buying and Selling: While it may seem counterintuitive, Madoffs purported buying and selling of securities is itself sufficient to satisfy the “in connection with” requirement. The “in connection with the purchase or sale” requirement must be construed “not technically and restrictively, but flexibly to effectuate its remedial purpose.” SEC v. Zandford, 535 U.S. 813, 820-21, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). In SEC v. Zandford, 535 U.S. 813, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002), the Supreme Court gave deference to the SEC’s interpretation of the “in connection with the purchase or sale” requirement, explaining that [T]he SEC has consistently adopted a broad reading of the phrase “in connection with the purchase or sale of any security.” It has maintained that a broker who accepts payment for securities that he never intends to deliver ... violates § 10(b) and Rule 10b-5. This interpretation of the ambiguous text of § 10(b), in the context of formal adjudication, is entitled to deference if it is reasonable. Id. at 819-20, 122 S.Ct. 1899 (internal citations omitted). Pursuant to a broad interpretation of “in connection with,” the Supreme Court held that the requirement was satisfied where a broker who had investment authority over a client’s account sold the securities in the account and pocketed the sales proceeds. Id. While the fraudulent conduct alleged — misappropriation of the proceeds of securities sales— was not the direct result of a purchase or sale, the broker’s scheme to defraud “coincided” sufficiently with the actual (and completely legitimate) sale of those securities to satisfy the “in connection with” requirement. Zandford, supra., 535 U.S. at 820, 122 S.Ct. 1899. There is, of course, a critically important difference between this case and Zandford: there the securities transactions really happened, while here they are completely fictitious. However, the Zandford Court cited with approval an SEC opinion in which the Commission concluded that the “in connection with” requirement could be satisfied even if securities were never actually purchased or sold. Id. at 819-820, 122 S.Ct. 1899. That opinion issued in a matter called In In re Bauer, 26 S.E.C. 770, 1947 WL 24474 (1947). In Bauer, defendants recommended the purchase of certain stocks to prospective investors, explaining that they had “inside information” that indicated that the value of the stock was about to rise. Id. at 3. Once the investor agreed to purchase the recommended securities, the defendants collected his money, but never actually purchased the securities, Id. at 3, 5 — exactly like Madoff, though without an intermediary analogous to JPJA. The SEC concluded that the defendants had violated the anti-fraud provision of Section 10(b). Id. at 5. In Zandford, the Supreme Court explained that such an interpretation is entitled to deference. Zandford, 535 U.S. at 819-820, 122 S.Ct. 1899. The Eleventh Circuit relied on Zandford and In re Bauer to conclude that the “in connection with the purchase or sale” requirement is satisfied even where, as here, no securities were actually purchased or sold. In Grippo v. Perazzo, 357 F.3d 1218 (11th Cir.2004), Perazzo approached Grippo about investing money in foreign currency-exchange markets and debt securities through T.S.C. Financial Corp. Id. at 1220. Based on Perazzo’s representations, Grippo began investing with T.S.C. Financial. Id. Grippo eventually discovered that Perazzo was stealing the money rather than using it to buy securities and filed suit in federal district court. Id. at 1221. The district court dismissed Grippo’s securities claims, concluding that he had failed to satisfy the “in connection with’ ” requirement, because Grippo could not connect his payment of monies to Perazzo with any actual purchase of an identifiable security — or, for that matter, prove that the funds were ever actually invested in anything. Id. Relying on Zandford, the Eleventh Circuit reversed. Id. 1223-24. The court explained that the facts alleged by Grippo were analogous to the facts in In re Bauer. Id. at 1223. In both instances, the broker “ ‘accepts payment for securities that he never intends to deliver.’ ” Id. at 1223. Thus, the court held that Grippo had pled a securities fraud claim “even though he failed to identify any particular security purchased, because Perazzo accepted and deposited Grippo’s monies as payment for securities.” Id. at 1223-24. In Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340 (11th Cir.2008), the Eleventh Circuit again held that the actual purchase of securities was not necessary to satisfy the “in connection with the purchase or sale” requirement. In that case, Instituto de Prevision Militar (“IPM”) — a decentralized agency of the Republic of Guatemala that administers the pension funds of the Guatemalan Armed Forces — invested in “retirement trust accounts” with Pension Fund of America (“PFA”). Id. at 1342. Merrill Lynch was the trustee for the account and actively promoted and vouched for PFA. Id. at 1342-43. IPM wired the funds to Merrill Lynch and Merrill Lynch placed the funds in an account in PFA’s name. Id. at 1343. Merrill Lynch allowed PFA to transfer money out of the account at its discretion. Id. IPM eventually discovered that PFA was stealing rather than investing the money and sued PFA and Merrill Lynch alleging securities fraud under Section 10(b). Id. at 1343-44. The district court dismissed IPM’s complaint. In concluding that the “in connection with the purchase or sale” requirement was satisfied for purposes of SLUSA preemption (id. at 1351), the Eleventh Circuit relied on Zandford, and Grippo, The court explained that IPM had alleged a “fraud that induced it to invest with PFA, which means that its claims are ‘Fin connection with the purchase or sale’ ” of a security. Id. at 1349. Schnorr v. Schubert, 2005 WL 2019878 (W.D.Okla.2005), is another instance of a court’s construing the “in connection with the purchase or sale” requirement in a situation that did not involve the actual purchase or sale of securities. In Schnorr, the plaintiffs alleged that they deposited their money in defendants’ non-existent trading accounts, and defendants took the money. Id. at 1-2. After the ponzi scheme came to an end, the plaintiffs discovered that the money was never used by defendants to purchase securities. Id. at 2. In concluding that SLUSA preempted the plaintiffs’ claims, the district court concluded that the “in connection with the purchase or sale” requirement was satisfied even without an actual purchase or sale of a security by the defendants. Relying on Zandford, the court explained, When the Supreme Court adopted the SEC’s “broad reading” of the phrase “in connection with the purchase or sale of any security” in Zandford, it also adopted the SEC’s position that “a broker who accepts payment for securities that he never intends to deliver, or who sells customer securities with intent to misappropriate the proceeds, has acted ‘in connection with the purchase or sale of any security.’ ” Id. at 5. The court also relied on the Eleventh Circuits decision in Grippo, explaining that “a plaintiff need only allege that money changed hands in connection with a contract for the purchase or sale of securities; no actual purchase or sale of securities need be alleged” in order to satisfy the “in connection with the purchase or sale” requirement. Id. (Emphasis in original). The Court has not found any Supreme Court or Second Circuit jurisprudence that directly addresses whether phony purchases or sales of securities can be relied on to satisfy the “in connection with” requirement. However, given the Zandford Court’s reliance on In re Bauer (where there were no actual sales, only the entrustment of money and its theft), it seems likely that the requirement can be satisfied in circumstances like those at bar-where the plaintiffs part with money intending that it be invested in securities, only to have the person to whom that money is entrusted steal it. And while this is not dispositive, it bears noting that all of my colleagues who have encountered this issue in Madoff-related cases have concluded that, in the context of his Ponzi scheme, the “in connection with” requirement is satisfied by his phony purchases and sales. See, e.g., In re Beacon Assocs. Litig., 745 F.Supp.2d 386, 409-11 (S.D.N.Y.2010); Barron v. Igolnikov, 2010 WL 882890, at **4-5 (S.D.N.Y. Mar. 10, 2010); Levinson v. PSCC Servs., 2009 WL 5184363, at *7 (D.Conn. Dec.23, 2009). (d) Causation The SCAC pleads both transaction causation and loss causation. Transaction causation is akin to reliance; it requires only an allegation that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction. Plaintiffs have plainly alleged that, but for JPJA’s failure to disclose the due diligence issues, they would not have entrusted JPJA with their money with the understanding that it would be placed with Madoff for further investment, either directly or via Income Plus. (See, e.g., SCAC ¶¶ 110 and 153.) As for loss causation: a misrepresentation or omission is the proximate cause of an investment loss if the risk that caused the loss was within the zone of risk