3 amended complaint 05/21/2010

UNITED STATES DISTRICT COURT FORTHE SOUTHERN DISTRICT OF NEW YORK

IN RE J.P. JEANNERET ASSOCIATES, INC., et aL Master - . 'vr3 VI

Li \-

This Document Relates to: ERISA Actions7- ' !

tLJu.S. s - D. N.Y°

CASHIE'RSFIRST AMENDED CONSOLIDATED CLASS ACT1NCOMPtAT

Plaintiffs Boards of Trustees ("Trustees -) of the Buffalo Laborers Security Fund, Welfare

Fund and Welfare Staff Fund (collectively, the "Buffalo Laborers Plans -), in their respective

capacities as fiduciaries of the plans, allege the following on behalf of the Buffalo Laborers Plans

and all others similarly situated:

BACKGROUND

I. This consolidated class action is brought pursuant to the Employee Retirement

Income Security Act, as amended, 29 U.S.C. § 1001 et seq. ("ERISA"), seeking legal and

equitable relief, including restitution, for the Buffalo Laborers Plans and similarly-situated

ERISA plans (the "Class Members," also collectively referred to herein as the -ERISA Plans" or

the "Plans") that, as a result of imprudent and unlawful conduct by Defendants (as defined

below), lost substantial amounts of money through the fraudulent investment scheme

orchestrated by Bernard L. Madoff ("Madoff") and Bernard L. Madoff Investment Securities,

LLC ("Madoff Securities").

2. This case arises from a massive, fraudulent scheme that was orchestrated by

Madoff through his investment firm, Madoff Securities, and others. The scheme was facilitated

by Defendants, who, in breach of their fiduciary duties owed to Plaintiffs and to the other Class

Members, caused and permitted the ERISA Plans" assets to be invested with Madoff Securities.

1

The fraudulent investment scheme carried out by Madoff and Madoff Securities is well-

documented as the largest Ponzi scheme in history.

3. Numerous "fund of funds," investment managers, investment advisors and others,

including the Defendants herein, facilitated Madoff s fraud by investing and allowing billions of

dollars to be invested in Madoff and Madoff Securities without performing adequate due

diligence, despite the existence of numerous warning signs. These red flags included, among

other things, abnormally high and stable investment results reportedly obtained by Madoff

regardless of market conditions, the fact that Madoff Securities was audited by a small obscure

accounting firm with no capacity to audit an entity of the apparent size and complexity of Madoff

Securities, inconsistencies between publicly available financial information and the amount of

money that Madoff managed for clients, and the shroud of secrecy surrounding Madoff s

operations.

4. On December 10, 2008, Madoff informed his senior employees that his

investment advisory business, Madoff Securities, was a complete fraud. Madoff stated that he

was "finished," that he had "absolutely nothing," and that "it's all just one big lie." He confessed

that he had been running "basically, a giant Ponzi scheme." Madoff admitted that the business

was insolvent and that it had been for years. Madoff estimated the losses from this fraud to be

approximately 550 billion.

5. On December 11, 2008, Madoffs fraud was exposed to the world. The Securities

and Exchange Commission ("SEC") charged both Madoff and Madoff Securities with securities

fraud. At the time of his arrest, Madoff was quoted as saying that "there is no explanation" for

what had happened and that he "paid investors with money that wasn't there."

2

6. On March 12, 2009, Madoff pled guilty to 11 counts of fraud, money laundering,

perjury, and theft. In connection with his guilty plea, Madoff admitted that "for many years up

until my arrest on December 11, 2008, 1 operated a Ponzi scheme through the investment

advisory side of my business, Bernard L. Madoff Securities LLC, which was located here in

Manhattan, New York at 885 Third Avenue. - On June 29, 2009, Madoff was sentenced by

United States District Court Judge Denny Chin to 150 years in prison for his crimes.

7. The Plans are multiemployer pension, health and/or welfare benefit plans

established for the benefit of union-represented laborers and their families.

8. Defendants J.P. Jeanneret Associates, Inc. ("Jeanneret Associates"), its founder,

John P. Jeanneret, Ph.D ("Dr. Jeanneret,"), Paul L. Perry, ("Perry") (collectively, the "Jeannerett

Defendants"). Ivy Asset Management LLC ("Ivy Asset Management"), the individual Ivy

Defendants (described below) and The Bank of New York Mellon Corporation ("BNY Mellon")

were fiduciaries with respect to those plans, as that term is defined under ERISA § 3(21)(A), 29

U.S.C. § 1002(21).

9. Jeanneret Associates served as an investment manager of the Plans during the

Class Period (defined below) and was responsible for managing and directing the investment of

certain assets of the Plans. Ivy Asset Management, a subsidiary of BNY Mellon, served as

investment advisor to Jeanneret Associates with respect to the Madoff-related investments. Each

of the Defendants described below owed certain fiduciary duties to the Plans under ERISA.

Among these duties was an obligation to manage the Plans' assets prudently, loyally and in the

best interests of plan participants.

10. As ER1SA fiduciaries, Defendants breached their fiduciary obligations owed to

the Plans and, directly or indirectly, caused the Plans to suffer hundreds of millions of dollars in

3

losses through Madoff-related investments. These losses were easily preventable. Had

Defendants conducted due diligence, they would have detected the obvious red flags surrounding

Madoff and Madoff Securities, including the following:

(a) Madoff Securities' returns were abnormally steady, with very little

volatility, including only five months of negative returns in the past 12 years;

(b) the inability of other firms using a "split-strike conversion" strategy to

generate returns comparable to those allegedly earned by Madoff Securities;

(c) despite the size and scale of Madoff Securities, its auditors, Friehling &

Horwitz, consisted of one small office in Rockland County, New York, with just three

employees;

(d) in 1999 and 2005, one of Madoff s competitors, Harry Markopolos, wrote

letters to the SEC describing in detail how Madoff Securities was a fraudulent Ponzi scheme;

(e) monthly account statements sent to investors of Madoff Securities did not

support the returns supposedly being earned;

(0 Madoff maintained a shroud of secrecy over his operations;

(g) Madoff s purported investment strategy bore a strikingly low correlation to

the market; and

(h) trading volumes reflected in accounts were vastly in excess of actually

reported trading volumes.

11. As Eric Weber, managing director of Wall Street investment bank Freeman & Co.

explained:

[A] diligent investment adviser would have quickly becomesuspicious of Madoff and taken extra precautions. The adviserwould have visited Madoffs auditor's office, quizzing the auditorand spot-checking the audit report data; arranged to watch

4

Madoff s staff conduct trades; asked other financial experts if theycould duplicate the returns Madoff claimed to be achieving; andindependently verified Madoff actually made the trades he claimed.The careful investment managers walked away.

See Stan Linhorst, How Warning Signs Eluded Bernard Aladoff's Man in Syracuse, The Post

Standard (March 29, 2009), available at: http://www.syracuse.com/news/index.ssf/2009/03/

how_warning_signs_eluded_bema.html.

12. Defendants Jeanneret Associates and Ivy Asset Management accepted millions of

dollars in investment advisor fees in connection with the capital they invested on behalf of the

ERISA Plans. In exchange for such fees, Jeanneret Associates and Ivy Asset Management were

obligated to vet suitable investment managers, assemble a diversified group of investments,

follow a professional investment strategy, and conduct ongoing due diligence. Defendants,

however, failed to exercise adequate due diligence and, accordingly, breached their ERISA

fiduciary owed duties to the ERISA Plans.

13. As described below, Defendants suffered from numerous conflicts of interest that

disincentivized them to adequately perform their fiduciary functions. Defendants thus had

financial incentives to "turn a blind eye - to the imprudence of the Madoff-related investments, at

the risk of losses to the ERISA Plans.

14. As described in a lawsuit recently filed by the office of New York Attorney

General Andrew Cuomo (the "Cuomo Complaint"), Ivy Asset Management had discovered the

imprudence of investing with Macloff by no later than 1997 yet, in an effort to safeguard its own

profits, took no action to protect the assets of the ERISA Plans. Cuomo Complaint TT 50-65.

Tellingly, by at least 2002 Ivy Asset Management was telling prospective clients that its

obligations as a fiduciary barred it from investing client assets with Madoff and internal Ivy

5

documents recorded that we are [not] satisfied as a fiduciary to invest client assets [with

Madoff]." Id. 411114.

15. Defendants' actions vis-a-vis the Buffalo Laborers Plans and other members of the

Class constitute a breach of Defendants fiduciary duties owed to the ERISA Plans and breach of

Defendants' obligations under ERISA. As a direct result of Defendants' fiduciary breaches and

other unlawful activities, the Buffalo Laborers Plans and the other Class Members suffered

significant losses.

16. ERISA §§ 409 and 502 authorize ERISA plan fiduciaries, such as Plaintiffs, to

sue for losses suffered by their plans as a result of breaches of fiduciary duty, for the purpose of

obtaining relief on behalf their plans.

17. Accordingly, pursuant to ERISA § 502(a)(2), 29 U.S.C. § 1132(a)(2), and Fed. R.

Civ. P.23, Plaintiffs bring this action on behalf of the Buffalo Laborers Plans and on behalf of

similarly situated ERISA plans that were subject to, and affected by, Defendants' unlawful

conduct in the same manner and with the same debilitating effect. Plaintiffs allege that

Defendants, having undertaken a fiduciary role with respect to the Plans and other Class Members,

breached their duties of prudence, loyalty, and exclusive purpose under ERISA § 404(a) as

described herein.

18. Plaintiffs seek to recover losses and other equitable relief on behalf of the ERISA

Plans for which Defendants are liable pursuant to ERISA §§ 409 and 502(a)(2), 29 U.S.C. §§

1109 and 1132(a)(2).

JURISDICTION AND VENUE

19. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §

1331 and ERISA § 502(e)(1), 29 U.S.C. § 1132(e)(1).

6

20. Venue is proper in this district pursuant to ERISA § 502(e)(2), 29 U.S.C. §

1132(e)(2), because one or more Defendants reside or may be found in this district and/or the

alleged breaches occurred in this district.

PARTIES

Plaintiffs

21. Plaintiffs are the trustees of the Buffalo Laborers Plans, each of which is a

multi-employer plan within the meaning of ERISA § 3(37), 29 U.S.C. §1002(3)(37). The sole

purpose of each of the Buffalo Laborers Plans is to provide benefits to certain members of

Buffalo Laborers Local 210 union on whose behalf participating employers contribute to the

Plans.

Jeanneret Defendants

22. Defendant Jeanneret Associates is a New York corporation established in 1988

that serves as an Investment Manager for pension and profit sharing plans. Jeanneret Associates

is headquartered and has its principal place of business in Syracuse, New York. Jeanneret

Associates is a registered investment advisor. Upon information and belief, Jeanneret Associates

had over $946 million under management and over 75% of the firm's clients were pension and

profit-sharing plans.

23. Defendant John P. Jeanneret, Ph.D. ("Dr. Jeanneret") is the founder, president,

chief executive officer and chief compliance officer of Defendant Jeanneret Associates. Dr.

Jeanneret holds a Bachelor of Arts degree in Economics and Accounting, a Master of Arts in

Economics and Business, and a doctorate in Philosophy, Economics and Finance, all from the

State University of New York at Binghamton. Jeanneret has been a Registered Investment

Advisor, registered with the SEC, from 1973 to the present. Together with Defendant Paul Perry,

Jeanneret (a) determined and delivered investment advice for a fee to Taft-Hartley funds and

7

other institutional investors provided by Jeanneret Associates, (b) acting on behalf of Jeanneret

Associates exercised discretionary authority and control over the assets of the Buffalo Laborers

Plans and other Class Members, and (c) invested the assets of Jeanneret Associates" clients with

Madoff, both directly and indirectly.

24. Defendant Paul L. Pen-y ("Perry-) is the director and an owner of Defendant

Jeanneret Associates. Perry holds a Bachelor of Science in Finance and Quantitative Analysis

from New York University. Prior to his position at Jeanneret Associates, Perry was a Financial

Consultant for Shearson Lehman Hutton and Gruntal and Company, Inc. Together with

Defendant Jeanneret, Perry (a) determined and delivered investment advice for a fee to Taft-

Hartley funds and other institutional investors provided by Jeanneret Associates, (b) acting on

behalf of Jeanneret Associates exercised discretionary authority and control over the assets of the

Buffalo Laborers Plans and other Class Members, and (c) invested the assets of Jeanneret

Associates' clients with Madoff, both directly and indirectly.

Ivy Defendants

25. Defendant Ivy Asset Management, a Delaware limited liability company, located

at One Jericho Plaza, Jericho, New York 11753, is a registered Investment Advisor under the

Investment Advisors Act of 1940 and a commodity trading advisor under the Commodity

Exchange Act. Ivy Asset Management is a wholly-owned subsidiary of BNY

26. Defendant Lawrence Simon ("Larry Simon -) was a co-founder of Ivy Asset

Management and served as Chief Executive Officer and President of Defendant Ivy Asset

Management from approximately January 1984 to January 2006, when he became Vice

Chairman of the company, a position he held until at least February 2007. He also served on Ivy

Asset Management's Board of Directors from October 2000 to November 2006. Defendant

Larry Simon served as a fiduciary of the ER1SA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C.

8

§ 1002(21)(A), in that he exercised discretionary authority or discretionary control respecting

management of the ERISA Plans' funds, exercised authority or control respecting management

or disposition of the ERISA Plans' assets. rendered investment advice for a fee or other

compensation, direct or indirect, with respect to moneys or other property of each ERISA Plan,

and/or had discretionary authority or discretionary responsibility in the administration of the

ERISA Plans.

27. Defendant Howard Wohl ("Wahl") was a co-founder of Ivy Asset Management

and served as Chairman of Defendant Ivy Asset Management from approximately January 1984

to October 2000, after which point he assumed the post as ivy Asset Management's Vice

Chairman. Defendant Wahl also served as Chief Investment Officer of Defendant Ivy Asset

Management from approximately October 1996 to October 2000. He served on Defendant Ivy

Asset Management's Board of Directors from October 2000 until November 2006. Defendant

Wohl served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. §

1002(21)(A), in that he exercised discretionary authority or discretionary control respecting

management of the ER1SA Plans' funds, exercised authority or control respecting management

or disposition of the ERISA Plans' assets, rendered investment advice for a fee or other

compensation, direct or indirect, with respect to moneys or other property of each ER1SA Plan,


ERISA Plans.

28. Defendant Adam L. Geiger ("Geiger") joined Ivy Asset Management in 1997 as

the Head of Research and then served as Director of Investments of Defendant Ivy Asset

Management from approximately 1999 to April 2002, and Managing Director and Head of

Investments from April 2002 to January 2006. He also served on Ivy Asset Management's

9

Strategic Operating Committee from approximately March 2005 until December 2005. Geiger

also was Chief Investment Officer and a member Manager Approval Committee until at least

May 2006. Defendant Geiger served as a fiduciary of the ERISA Plans pursuant to ERISA §

3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised discretionary authority or discretionary

control respecting management of the ERISA Plans' funds, exercised authority or control

respecting management or disposition of the ERISA Plans' assets, rendered investment advice

for a fee or other compensation, direct or indirect, with respect to moneys or other property of

each ER1SA Plan, and/or had discretionary authority or discretionary responsibility in the

administration of the ERISA Plans.

29. Defendant Jeffrey R. Lindenbaum ("Lindenbaum") served as Chief Financial

Officer of Defendant Ivy Asset Management from before 2000 until March 2001. Defendant

Lindenbaum served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C.






ERISA Plans.

30. Defendant John D. Rogers ("Rogers") served as Director, Products and Markets of

Defendant Ivy Asset Management from July 2000 to April 2002; Managing Director, Products

and Markets, from April 2002 until March 2003; and Managing Director, Investment Products

Group from March 2003 until on or after the end of March 2004. Defendant Rogers served as a

fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he

10

exercised discretionary authority or discretionary control respecting management of the ERISA

Plans' funds, exercised authority or control respecting management or disposition of the ERISA

Plans' assets, rendered investment advice for a fee or other compensation, direct or indirect, with

respect to moneys or other property of each ERISA Plan, and/or had discretionary authority or

discretionary responsibility in the administration of the ERISA Plans.

31. Defendant Sean C. Simon ("Sean Simon"), son of Larry Simon, served from April

2002 to January 2006 as Managing Director and Head of Global Client Development and Global

Client Services of Defendant Ivy Asset Management, and as co-President from January 2006

until January 2009, when he was named Chief Executive Officer of Defendant Ivy Asset

Management. During that time he also served as a member of Defendant Ivy Asset

Management's Board of Directors. From approximately March 2005 until December 2005, Sean

Simon also served as a member of Ivy Asset Management's Strategic Operating Committee and

co-chaired Defendant Ivy Asset Management's Executive Committee. From approximately May

2006 to the present he also served on Defendant Ivy Asset Management's Manager Approval

Committee (subsequently renamed the Investment Committee). He was an advisory member

with veto power of the Investment Committee from approximately April 2007 through the end of

2008. Defendant Sean Simon served as a fiduciary of the ERISA Plans pursuant to ERISA §





each ERISA Plan, and/or had discretionary authority or discretionary responsibility in the


11

32. Defendant Kevin J. Bannon ("Bannon") served as a member of the Board of

Directors of Defendant Ivy Asset Management from sometime prior to March 31, 2004 until

approximately April 2007, during which time he also served as Chief Investment Officer and

Member of the Investment Committee of Ivy Asset Management's parent, the Bank of New

York. Defendant Bannon served as a fiduciary of the ERISA Plans pursuant to ER1SA §







33. Defendant Steven Pisarkiewiez ("Pisarkiewiez") served as Chairman of the Board

Directors of Defendant Ivy Asset Management from July 2003 until approximately April 2007.

During this time, Pisarkiewicz also served as Executive Vice President of the Bank of New York.

Defendant Pisarkiewicz served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(2I)(A),

29 U.S.C. § 1002(21)(A), in that he exercised discretionary authority or discretionary control

respecting management of the ERISA Plans' funds, exercised authority or control respecting

management or disposition of the ERISA Plans' assets, rendered investment advice for a fee or

other compensation, direct or indirect, with respect to moneys or other property of each ERISA

Plan, and/or had discretionary authority or discretionary responsibility in the administration of

the ERISA Plans.

34. Defendant Robert Meschi ("Meschi") served as Manager of Research of

Defendant Ivy Asset Management from January 2000 until April 2002, Assistant Vice President

12

from October 2000 until April 2002, Director of Investments from April 2002 until

approximately May 2006, and a member of Ivy Asset Management's Manager Approval

Committee from approximately December 7, 2005 until approximately May 2006. Defendant

Meschi served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. §

1002(21)(A), in that he exercised discretionary authority or discretionary control respecting


or disposition of the ERISA Plans . assets, rendered investment advice for a fee or other



ERISA Plans.

35. Defendant Susan Rabinowitz ("Rabinowitz") served as Vice President of

Investments of Defendant Ivy Asset Management from about 2003 until approximately the end

of March 2004. Defendant Rabinowitz served as a fiduciary of the ERISA Plans pursuant to

ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that she exercised discretionary authority or

discretionary control respecting management of the ERISA Plans' funds, exercised authority or

control respecting management or disposition of the ERISA Plans' assets, rendered investment

advice for a fee or other compensation, direct or indirect, with respect to moneys or other

property of each ERISA Plan, and/or had discretionary authority or discretionary responsibility in

the administration of the ERISA Plans.

36. Defendant Alan Chuang ("Chuang -) served as Director of Investments and Head

of Portfolio Management of Defendant Ivy Asset Management from approximately January 2006

until approximately May 2006 and during that time was a member of Ivy Asset Management's

Manager Approval Committee. Defendant Chuang served as a fiduciary of the ERISA Plans

13

pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised discretionary

authority or discretionary control respecting management of the ER1SA Plans' funds. exercised

authority or control respecting management or disposition of the ERISA Plans assets, rendered

investment advice for a fee or other compensation, direct or indirect, with respect to moneys or

other property of each ERISA Plan, and/or had discretionary authority or discretionary

responsibility in the administration of the ER1SA Plans.

37. Defendant Gregory van Inwegen ("van Inwegen") served as Director of

Investments Quantitative Research and Risk Management and a Member of the Management

Approval Committee (subsequently renamed the Investment Committee) of Defendant Ivy Asset

Management from approximately January 2, 2007 until approximately March 18, 2008, when he

became Managing Director and Chief Investment Risk Officer of Defendant Ivy Asset

Management. He continued to serve in that capacity beyond the end of 2008. Defendant van

Inwegen also was a member of the Investment Committee, the chair of the Risk Management

Committee and the leader of the Risk Management and Quantitative Research Team. Defendant

van Inwegen served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C.


management of the ERISA Plans' funds. exercised authority or control respecting management




ERISA Plans.

38. Defendant Sean Cumiskey ("Cumiskey") served as Managing Director, head of

the Investment Strategies Group and the Capital Markets Coverage Team, as well as serving as a

14

member of the Manager Approval Committee (subsequently renamed the Investment Committee)

of Defendant Ivy Asset Management from January 2006 until after December 2008. He was a

member of Defendant Ivy Asset Management's Executive Committee from approximately March

2008 through the end of 2008. Defendant Cumiskey served as a fiduciary of the ERISA Plans

pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised discretionary

authority or discretionary control respecting management of the ERISA Plans' funds, exercised

authority or control respecting management or disposition of the ERISA Plans' assets, rendered



responsibility in the administration of the ERISA Plans.

39. Defendant Stuart Davies ("Davies") served as Managing Director, Investments,

Head of Investments in Europe and Asia and Member of the Manager Approval Committee

(subsequently renamed the Investment Committee) of Defendant Ivy Asset Management from

January 2006, and member of the Investment Risk Committee from May 2006 until January

2007, when he became Global Head of Investments with responsibility for Ivy Asset

Management's investment philosophy, portfolio strategy and asset allocation. He served in this

capacity and continued to serve as a member of Ivy Asset Management's Manager Approval

Committee (subsequently renamed the Investment Committee) and a Member of Defendant Ivy

Asset Management's Executive Committee from March 2008 until sometime before January 9,

2009. Defendant Davies served as a fiduciary of the ERISA Plans pursuant to ERISA §




15




40. Defendant Joseph Burns ("Burns") served as Director of Investments and Head of

Long/Short Equity of Defendant Ivy Asset Management from approximately January 2006 until

December 2006. In December 2006, he became Managing Director, Investments and Head of

Investments, Europe and Asia where he served until after December 2008. Throughout that time

period he also served on Defendant Ivy Asset Management's Manager Approval Committee

(subsequently renamed the Investment Committee). Defendant Burns served as a fiduciary of the

ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised

discretionary authority or discretionary control respecting management of the ERISA Plans'

funds, exercised authority or control respecting management or disposition of the ERISA Plans'

assets, rendered investment advice for a fee or other compensation, direct or indirect, with respect

to moneys or other property of each ERISA Plan, and/or had discretionary authority or

discretionary responsibility in the administration of the ER1SA Plans.

41. Defendant Mark Santero ("Santero") served as Managing Director, Investments

responsible for coordinating Research, Risk Management, and Portfolio Management of

Defendant Ivy Asset Management from approximately January 2006 until approximately

February 2007. During that period he also served as a member of Defendant Ivy Asset

Management's Manager Approval Committee. Defendant Santero served as a fiduciary of the

ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised



16




42. Defendant Peter D. Noris ("Noris -) served as Chief Investment Officer of

Defendant Ivy Asset Management from approximately February 20, 2007 until sometime after

March 18, 2008. Beginning in April 2007 and for the balance of his tenure, he chaired Defendant

Ivy Asset Management's Investment Committee. Beginning approximately March 18, 2008 until

the end of his tenure, Noris also served as a member of the Defendant Ivy Asset Management's

Executive Committee and its Investment Risk Management Committee. Defendant Noris served

as a fiduciary of the ER1SA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in

that he exercised discretionary authority or discretionary control respecting management of the

ERISA Plans' funds, exercised authority or control respecting management or disposition of the

ERISA Plans' assets, rendered investment advice for a fee or other compensation, direct or

indirect, with respect to moneys or other property of each ERISA Plan, and/or had discretionary

authority or discretionary responsibility in the administration of the ERISA Plans.

43. Defendant Farzine Hachemian ("Hachemian") served as Director, Investments and

a member of its Investment Committee of Defendant Ivy Asset Management from approximately

May 2007 until approximately December 2008. Beginning approximately March 2008, he

headed Defendant Ivy Asset Management's Portfolio Management Group and became a member

of the Investment Risk Management Committee of Defendant Ivy Asset Management and held

those positions until at least sometime after December 2008. Defendant Hachemian served as a

fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he

exercised discretionary authority or discretionary control respecting management of the ERISA

17

Plans' funds, exercised authority or control respecting management or disposition of the ERISA

Plans assets. rendered investment advice for a fee or other compensation, direct or indirect, with

respect to moneys or other property of each ERISA Plan, and/or had discretionary authority or


44. Defendant Scott E. Wennerholm ("Wennerholm") on Ivy Asset Management's

Board of Directors from approximately March 18, 2008 until sometime after December 2008.

Since September 2005, he has also served as the Chief Operating Officer of BNY Mellon Asset

Management, the corporate brand of Ivy Asset Management's parent, the Bank of New York.

Defendant Wennerholm served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(2I)(A),

29 U.S.C. § 1002(21)(A), in that he exercised discretionary authority or discretionary control


management or disposition of the ERISA Plans . assets, rendered investment advice for a fee or



the ERISA Plans.

45. Defendant Jonathan Little ("Little") served on Ivy Asset Management's Board of

Directors from approximately March 18, 2008 until sometime after December 2008. He also

serves as the Vice Chairman of BNY Mellon Asset Management, the corporate brand of Ivy

Asset Management's parent, the Bank of New York. Defendant Little served as a fiduciary of

the ERISA Plans pursuant to ERISA § 3(21 )(A), 29 U.S.C. § 1002(21)(A), in that he exercised




18



46. Defendant Ronald P. O'Hanley ("O'Hanley -) served on Ivy Asset Management's

Board of Directors from approximately March 18, 2008 until sometime after December 2008.

Beginning in January 2009, Defendant O'Hanley served as a manager of Ivy Asset Management.

He also serves as the President and Chief Executive Officer of BNY Mellon Asset Management,

the corporate brand of Ivy Asset Management's parent, the Bank of New York. Defendant

O'Hanley exercised served as a fiduciary of the ERISA Plans pursuant to ERISA § 3(21)(A), 29

U.S.C. § 1002(21)(A), in that he exercised discretionary authority or discretionary control


management or disposition of the ERISA Plans' assets, rendered investment advice for a fee or



the ERISA Plans.

47. Defendant Colleen Baldwin ("Baldwin"), at some or all relevant times, served as

Ivy's Chief Operating Officer and was an Ivy Executive. Defendant Baldwin's responsibilities

included developing customized products for Ivy's clients and managing Ivy's global business

operations, including fund accounting, finance, legal and compliance, infoimation technology,

human resources, and administration. Defendant Baldwin served as a fiduciary of the ERISA

Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that she exercised




19



48. Defendant Glenn Cummins ("Cummins") at some or all relevant times, served as

Ivy's Managing Director. Finance and Chief Financial Officer, and was an Ivy Executive. As an

Ivy Executive, Defendant Cummins was responsible for entering into investment advisory

agreements, establishing investment advisory fees, selecting investment managers, and

developing new products and services. Defendant Cummins served as a fiduciary of the ERISA

Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. § 1002(21)(A), in that he exercised discretionary

authority or discretionary control respecting management of the ERISA Plans' funds, exercised

authority or control respecting management or disposition of the ERISA Plans' assets, rendered



responsibility in the administration of the ERISA Plans.

49. On information and belief, based on Defendant Ivy Asset Management's Part II,

Form ADV filings with the SEC, Defendant Ivy Asset Management's Investment Committee

(formerly known as the Manager Approval Committee), at some or all relevant times, was

responsible for overseeing manager research and selection, reviewing the risk profile of and

approving all new investment managers, monitoring portfolio management and overseeing

operational due diligence and risk management, among other things. On information and belief,

at some or all relevant times, Defendants Chuang, van Inwegen, Cumiskey, Davies, Burns,

Hachemian, Norris, Lawrence Simon, Wohl, Geiger, Sean Simon, Meschi and Sauter() served on

the Investment Committee and/or Manager Approval Committee. Defendants Sean Simon and

Michael Singer served as non-voting advisory members of the Investment Committee, who had

20

veto power over the committee's decisions in circumstances where they deemed necessary. At

some or all relevant times, the Ivy Asset Management Investment Committee and its members

served as fiduciaries of the ERISA Plans pursuant to ERISA § 3(21)(A), 29 U.S.C. §

1002(21)(A), in that they exercised discretionary authority or discretionary control respecting



compensation, direct or indirect, with respect to moneys or other property of each Plan, and/or

had discretionary authority or discretionary responsibility in the administration of the ERISA

Plans. As such, the Ivy Asset Management Investment Committee and its members were

fiduciaries of each of the ERISA Plans as alleged below.

50. On information and belief, based on Defendant Ivy Asset Management's Part H,

Form ADV filings with the SEC, Defendant Ivy Asset Management's Strategic Operating

Committee managed the business operations of Defendant Ivy Asset Management and was

responsible for entering into investment advisory agreements, establishing investment advisory

fees, and selecting investment managers. On information and belief, at some or all relevant

times, Cummins, Baldwin, Geiger, Sean Simon, and Singer served on the Strategic Operating

Committee. At some or all relevant times, the Ivy Asset Management Strategic Operating

Committee and its members served as fiduciaries of the Plans pursuant to ERISA § 3(21)(A), 29

U.S.C. § 1002(21)(A), in that they exercised discretionary authority or discretionary control

respecting management of the Plans' funds, exercised authority or control respecting

management or disposition of the Plans' assets, rendered investment advice for a fee or other

compensation, direct or indirect, with respect to moneys or other property of each Plan, and/or

had discretionary authority or discretionary responsibility in the administration of the Plans. As

21

such, the Ivy Asset Management Strategic Operating Committee, and its members were

fiduciaries of each of the Plans as alleged below.

51. Defendants Ivy Asset Management's Investment Committee (formerly known as

the Manager Approval Committee) and Strategic Operating Committee are collectively referred

to herein as the "Ivy Committees."

52. Defendant BNY Mellon is a Delaware corporation headquartered at One Wall

Street, New York, New York 10286. According to its Form 10-K for the year ending December

31, 2008, BNY Mellon "is a global financial services company headquartered in New York, New

York, with approximately $928 billion in assets under management and $20.2 trillion in assets

under custody and administration. - At all relevant times, BNY Mellon owned 100% of Ivy Asset

Management. Effective January 1, 2009, the structure of BNY Mellon's ownership of Ivy Asset

Management changed, in connection with Ivy Asset Management's reorganization from a

corporation to a limited liability company. Specifically, BNY Mellon now owns 100% of

Alternative Holdings II, LLC, which owns 100% of Alternative Holdings 1, LLC, which owns

100% of Ivy Asset Management. At all relevant times, BNY Mellon had the ability to exercise

and did in fact exercise control over Ivy Asset Management's conduct regarding the investment

advisory services and fiduciary duty it owed to Plaintiffs. See Ivy Asset Management Form

ADV, filed June 30, 2009.

CLASS ACTION ALLEGATIONS

53. On behalf of the Plans, Plaintiffs bring this action as a class action pursuant to

Federal Rule of Civil Procedure 23(a), 23(b)(1 )(A) and, alternatively, 23(b)(3) on behalf of a

proposed Class consisting of the following:

All plans governed by ERISA which, pursuant to investment advicerendered by or investment decisions made by Jeanneret Associatesand/or Ivy Asset Management, invested directly or indirectly in any

22

Macloff-related investment and suffered losses as a result of theconduct alleged herein.

Excluded from the Class are (i) Defendants; (ii) all officers,directors, principals, and partners of Defendants and ofDefendants' parents, subsidiaries, or affiliates, at all relevant times;(iii) members of the immediate family of any of the foregoingexcluded parties; (iv) the legal representatives, heirs, successors,and assigns of any of the foregoing excluded parties; and (v) anyentity in which any of the foregoing excluded parties has or had acontrolling interest.

54. The Class is so numerous that joinder of all members is impracticable.

55. The Plans' claims are typical of the claims of all Class Members, as all Class

Members have been similarly affected by Defendants' conduct.

56. Plaintiffs will fairly and adequately protect the interests of the Class Members and

have retained counsel competent and experienced in complex ERISA class action litigation.

57. Class certification is warranted because prosecution of separate actions by the

members of the Class would create a risk of establishing incompatible standards of conduct for

Defendants. This is because, among other reasons: (i) Defendants owed and breached the same

ERISA-mandated duties to each member of the Class; and (ii) Defendants made similar

investments of the Class Members' assets.

58. Alternatively, certification is appropriate under Rule 23(b)(3) because common

questions of law and fact exist as to all Class Members and predominate over any questions

solely affecting individual Class Members and a class action is superior to all other available

methods for the fair and efficient adjudication of this controversy because joinder of all members

is impracticable. There will be no difficulty in the management of this action as a class action.

Among the questions of law and fact common to the Class are:

(a) whether Defendants owed fiduciary duties to the ERISA Plans;

23

(b) whether Defendants violated ERISA by failing to prudently manage the

assets of the ER1SA Plans;

(c) whether Defendants violated ERISA by failing to act prudently and solely

in the interests of the ERISA Plans and their participants and beneficiaries;

(d) when Defendants became aware or should have been aware of the

imprudence of the Madoff-related investments;

(e) whether Defendants violated their ERISA-mandated duties; and

(f) whether the ERISA Plans have sustained losses and, if so, the proper

measure of such losses.

SUBSTANTIVE ALLEGATIONS

A. Madoffs S65 Billion Ponzi Scheme

59. Madoff is a former chairman of the Board of Directors of the NASDAQ stock

market. He founded Madoff Securities in 1960 and was its chairman until December 11, 2008,

when he was charged with committing what may be the largest fraudulent investment scheme

ever perpetrated.

60. Madoff Securities is a broker-dealer and an investment advisor registered with the

SEC. The firm engaged in three distinct operations: (1) investment advisor services; (2) market

making services; and (3) proprietary trading. According to its Form ADV filing with the SEC on

January 2008, Madoff Securities had approximately $17 billion in assets under management.

61. Madoff started his firm in 1960 with an initial investment of $5,000 that he

reportedly earned from working as a lifeguard and installing sprinklers. At first, the firm "made

markets" via the National Quotation Bureau's Pink Sheets. In order to compete with other firms

that were members of the New York Stock Exchange, the firm began to actively use information

24

technology to disseminate its quotes. The technology that the finn helped to develop eventually

became the NASDAQ.

62. Madoff Securities lured investors with a promise of a risk-reducing strategy that

would generate consistently higher returns than those available through other investment

vehicles.

63. Madoff independently conducted his investment advisory service business apart

from his company's other services from a completely separate floor in Madoff Securities New

York offices. Madoff was secretive about the advisory business even when discussing it with

other employees of Madoff Securities. It was through this investment advisory services business

that Madoff conducted his massive Ponzi scheme.

64. The capital that Madoff used to facilitate the fraud was raised largely through

"feeder funds,- investment vehicles that acted as intermediaries between Madoff Securities and

investors. Many feeder funds were created by outside advisory firms that marketed the Madoff

funds to high net-worth individuals and institutional investors.

65. Madoff and his firm managed billions of dollars for investors using a purported

specialized investment strategy known as a "split-strike or conversion" strategy. Madoff

purportedly took large positions in a basket of large cap stocks that approximated the S&P 100

Index, then sold call options and purchased put options against the long stock positions. This

strategy was supposed to limit downside exposure by providing a partial hedge, while providing

consistent returns to investors. Based on this strategy, Madoff and his firm had apparently

produced an exceptional, though phantom, track record of returns for investors.

66. Madoff claimed that his purported investment strategy produced consistent gains,

even in declining markets. Indeed, as details of the fraud emerged, account statements issued to

25

Madoffs clients were examined which notably revealed modest, but steady, gains each month

regardless of market direction.

67. Madoff had an apparently successful track record year after year, with returns that

were unusually and unrealistically reliable. A hedge fund run by Madoff, which described its

strategy as focused on shares in the Standard & Poor's 100-stock index, averaged a 10.55%

annual return over the past 17 years.

68. Madoff was able to carry out the scheme for many years; however, when the

financial crisis became severe in the fall of 2008, client redemptions increased substantially. In

early December 2008, Madoff s Ponzi scheme collapsed. Investors in Madoff Securities and the

general public soon learned that Madoff s investment strategy was an enormous Ponzi scheme.

Incoming client money was often times never invested at all but used simply to fund redemptions

to existing clients.

69. On December 9, 2008, Madoff advised one of his senior employees that investors

were seeking some $7 billion in redemption for which Madoff was struggling to secure liquidity.

Madoff knew that he could never match incoming client investments with the amount of the

requested redemptions.

70. On December 10, 2008, Madoff informed his senior employees, including his

sons, that his investment advisory business was a "just one big lie." He confirmed he had been

running "basically, a giant Ponzi scheme." Madoff admitted that the business was insolvent and

that it had been for years. Madoff also stated that he estimated the losses from this fraud to be

approximately $50 billion; this figure was later raised to $65 billion.

26

71. On December 11, 2008, Madoff s fraud was exposed. The SEC filed a civil

action charging both Madoff and Madoff Securities with securities fraud and seeking emergency

relief to halt the fraudulent conduct. SEC v. Madgff, No 08 Civ. 10791 (S.D.N.Y.)

72. Also on December 11, 2008, criminal charges were filed against Madoff. When

he was anested by federal authorities, Madoff was quoted as saying that "there is no explanation"

for what happened and that he "paid investors with money that wasn't there."

73. By order dated December 15, 2008, the Court appointed a trustee to preside over

the liquidation of Madoff s business and stayed all further claims against Madoff Securities.

74. On March 12, 2009, Madoff pled guilty to 11 counts of fraud, money laundering,

perjury and theft, crimes which carry maximum terms totaling 150 years. In connection with his

guilty plea. Madoff admitted that "for many years up until my arrest on December 11, 2008, I

operated a Ponzi scheme through the investment advisory side of my business, Bernard L.

Madoff Securities LLC, which was located here in Manhattan, New York at 885 Third Avenue."

75. On June 29, 2009, Madoff was sentenced by United States District Court Judge

Denny Chin to 150 in prison for his abhorrent crimes.

B. The Plans' Investment Agreements with Jeanneret Associates

76. Each of the Plans operates for the sole and exclusive benefit of its participants and

their beneficiaries.

77. As a named fiduciary of the Plans, the Trustees were authorized to designate an

investment manager for the purpose of investing all or a part of the Plans' assets.

78. Following a due diligence investigation, each of the Plans retained Jeanneret

Associates for the purpose of managing a portion of plan assets. In connection therewith,

Jeanneret Associates and each Plan were parties to a Discretionary Investment Management

Agreement ("Investment Agreement").

27

79. Each Investment Agreement provided that Jeanneret Associates would serve as

the Plan's appointed investment manager to invest and reinvest such assets. Jeanneret Associates

accepted this appointment and expressly acknowledged its status as an ERISA fiduciary with

respect to the Plan. Jeanneret Associates also certified that -it is an Investment Manager as

defined in Section 3(38) of ERISA."

80. Jeanneret Associates was empowered to enter into agreements with investment

advisors delegating, subject to its oversight and supervision, its authority to invest all or any of

the plan assets provided, however, that the other investment advisors expressly accept fiduciary

responsibility to the Plans in such agreements. Under the Investment Agreements and pursuant

to ERISA, such delegation of authority did not relieve Jeanneret Associates of its fiduciary

responsibility with respect to the Plans.

81. The Investment Agreements provided that all activities conducted by Jeanneret

Associates and its chosen investment advisors would be conducted in a manner consistent with

ERISA and must be made with a primary objective of preserving capital.

82. Upon information and belief, Jeanneret Associates entered into substantially

similar Investment Agreements with the other ERISA Plans.

C. Defendants' Investment of the Plans' Assets with Madoff

83. Jeanneret Associates invested the Plans' assets with Madoff directly through

Madoff Securities, as well as indirectly through the Income-Plus Investment Fund ("Income Plus

Fund") and through feeder funds managed by Beacon Associates Management Corp. ("Beacon

Associates") ("Beacon Fund"). and Andover Associates Management Corp. ("Andover

Associates") ("Andover Fund"). as depicted below':

The Beacon Fund and the Andover Fund are part of a family of funds known as "Beacon/Andover GroupAlternative Investments.' As of October 20. 2008, this family of funds had assets of over $560.000,000.

28

ERISA PLANS ASSETS

V

JEANNERET Assoc.

INCOME PLUS ANDOVER FUND

BEACON FUND

7

MADOFF

84. Ivy Asset Management served as investment advisor to Jeanneret Associates, the

Income Plus Fund, the Beacon Fund and the Andover Fund.

85. Ivy Asset Management introduced Jeanneret Associates to Madoff in 1990 and

recommended that Jeanneret Associates invest its clients' assets with Madoff.

86. On May 15, 1991, pursuant to an investment consulting agreement, Jeanneret

Associates retained Ivy Asset Management to serve as investment advisor for its clients.

Pursuant to this agreement: (a) Jeanneret Associates agreed to provide Ivy Asset Management

with a list of its clients whose assets would be placed with investment managers recommended

by Ivy Asset Management; (b) Ivy Asset Management agreed to research, evaluate, recommend

and monitor investment managers; (c) Ivy Asset Management would receive 50 percent of

Jeanneret Associates' management fees; (d) Jeanneret Associates agreed to maintain at least two

clients that invest with investment managers introduced to them by Ivy Asset Management; (e)

29

Jeanneret Associates agreed to provide Ivy Asset Management with copies of the investment

agreements it executed with its clients; and (f) Ivy Asset Management disclaimed liability to

Jeanneret Associates for the acts and omissions of the investment managers it recommended.

87. Upon information and belief, pursuant to this agreement and pursuant to the terms

of the Investment Agreements, Ivy Asset Management received copies of the Investment

Agreements and assumed the duties of an ERISA fiduciary with respect to its role as investment

advisor to the Plans.

88. Upon the advice of Ivy Asset Management, Jeanneret Associates began holding

meetings with area unions for the purpose of convincing them to hire the firm to invest their

assets with Madoff. Dr. Jeanneret pitched Madoff investments by telling the unions that they

were safe investments that would offer less volatility than the market itself and would outperform

the market when the market was down. According to one source: "'He'd go from plumbers in

Syracuse or Albany to the Rochester plumbers. He'd say, 'I've got something here your sister

local in Syracuse thinks is good." See Linhorst, supra (quoting Robert Boreanz, a Buffalo

attorney who purportedly sat in union meetings with Dr. Jeanneret).

89. Jeanneret Associates sought to bolster Ivy Asset Management's credibility by

leveraging the prominent reputation of its parent BNY Mellon. For example, the Offering

Memorandum for the Income Plus Fund touts BNY Mellon as "the world's largest custodian

bank with $7.8 trillion in assets under custody as of June 30, 2003." On its website, Ivy Asset

Management touts its focus on "investing with highly skilled managers, creating diversified

portfolios and carefully monitoring performance..." Regarding due diligence, Ivy Asset

Management states: "Because the hedge fund industry is a global, 24/7 business, it requires

30

constant due diligence and an unrelenting commitment from our employees. - See

littp://www.ivyasset.com/ defining gualities.aspx.

90. The Jeanneret and Ivy Asset Management Defendants (a) chose to keep Ivy Asset

Management's purported disclaimer of liability concealed from Plaintiffs and the Class Members

and (b) led Plaintiffs and the Class Members to believe that they had actually verified the

reported results of the split-strike conversion strategy and exercised a level of control over the

investment strategy so as to avoid undue risk. In truth, the Jeanneret and Ivy Asset Management

Defendants' decision to invest with Madoff was made while knowing that an independent

evaluation of the strategy and results reported by Madoff did not support his results. The

Jeanneret and Ivy Asset Management Defendants also could not apprise themselves of the

functions of Madoff s operations, as no one was allowed access; they simply functioned as a

pass-through to Madoff for which they collected substantial fees as investment advisors.

91. The Income Plus Fund is a hedge fund structured as a tax-exempt collective

investment trust that was designed to pool the investment assets of certain qualified pension plans

and other entities on pooled-account basis. The Income Plus Fund was established by a

Declaration dated December 15, 1993, under the Master-Income-Plus Group Trust ("Group

Trust"). 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. Unit interests in the Income Plus Fund were

offered via confidential private placement memoranda (collectively, the "Offering

Memorandum").

31

92. The Offering Memorandum for the Income Plus Fund indicated that Jeanneret

Associates was an "investment manager" for the Group Trust and Income Plus Fund within the

meaning of Section 3(38) of the ERISA.

93. Jeanneret Associates served as the investment manager for the Income-Plus Fund

from the funds inception.

94. Pursuant to an engagement agreement, Jeanneret Associates retained Ivy Asset

Management to serve as investment advisor for the Income Plus Fund. With respect to Ivy Asset

Management, referred to as the "Advisor," the Offering Memorandum provided, in relevant part

Under the engagement agreement, the Advisor has agreed, withrespect to the Investment Manager's management of the assets ofthe Investment Fund, to (i) research, evaluate and meet withpotential investment managers of the assets of the InvestmentFund, (ii) make recommendations to the Investment Manager that itinvest assets of the Investment Fund with certain investmentmanagers by investing in investment vehicles operated by suchinvestment managers and/or by opening up directly-managedaccounts with such managers, and (iii) monitor, evaluate and assessperformance of investment managers that are managing assets ofthe Investment Fund and to make periodic recommendations toInvestment Manager with respect to such performance.

95. On information and belief, based on the 2003 Offering Memorandum, Ivy Asset

Management continued to provide the same services described above, but the fee-sharing

agreement with Ivy Asset Management was revised. Pursuant to the revised fee-sharing

agreement, Ivy Asset Management received 42% of Jeanneret Associates' fees until calendar

year 2005, at which point its share of the fees decreased to 40%.

96. The required minimum contribution to subscribe to units of the Fund was

$1,000,000. According to the Offering Memorandum, Jeanneret Associates, as investment

manager, with the assistance of Ivy Asset Management, as investment advisor, made all

investment allocation and reallocation decisions on behalf of the Income Plus Fund. Upon

32

information and belief, as of December 31, 2007, the net asset value of the Income Plus Fund

was approximately $295,000,000.

97. From its inception until December 2008, Jeanneret Associates invested over $38.7

million of the Income-Plus Fund's assets directly and indirectly with Madoff. As of November,

2008, the Income-Plus Fund's Madoff investment was valued at over $103 million. Between

1998 and 2008, Ivy Asset Management collected approximately $8.6 million in fees for its

advisory role with respect to the Income-Plus Fund.

98. Jeanneret Associates required the ERISA Plans to execute an "Adoption

Agreement," whereby the Plan agreed to the purchase of unit interests in the Income Plus Fund.

The Adoption Agreement incorporated by reference the Offering Memorandum and the Group

Trust Agreement. The Adoption Agreement provided that, as investment manager, Jeanneret

Associates "may delegate the authority to manage all or a portion of the assets of the [Income

Plus Fund] to investment managers who are independent of the Investment Manager or its

affiliates ("Managers") in order to take advantage of special portfolio management skills and

areas of expertise of certain managers and to reduce the risks to the [Income Plus Fund]"

(emphasis added). Contrary to these representations, in reality, these managers with purported

"special portfolio management skills and areas of expertise" included Madoff and Madoff

Securities.

99. The Offering Memorandum and other offering materials used to solicit

investments in the Income-Plus Fund represented to investors a sophisticated level of

management oversight and specific representations regarding rigorous initial and continuing due

diligence efforts over funds in which capital would be placed. In the Offering Memorandum,

Jeanneret Associates falsely represented that each of its selected money managers would be

33

"subject to initial and onaoin g, due diligence with regard to their business and investment strategy

implementation and results."

100. Jeanneret Associates repeatedly represented to the Plans that the Madoff

investments were sound. For example, in a letter dated July 16, 2007 to the administrator of the

Buffalo Laborers Security Fund, Dr. Jeanneret included a handwritten notation stating, with

respect to the Income Plus Fund, "P.S. Performance continues to get better!"

101. However, Defendants conducted themselves in a manner completely inconsistent

with their fiduciary duties and entrusted a substantial portion of the Plans' assets with Madoff.

102. For example, approximately one-third of the Income Plus Fund was invested

directly with Madoff Securities. Jeanneret Associates nevertheless falsely represented that it and

Ivy Asset Management would conduct proper due diligence to ensure that the Income Plus

Fund's assets were prudently invested. This was done for the express purpose of providing

investors such as the Buffalo Laborers Plans and other Class Members with a false sense of

security and oversight. For example, the Offering Memorandum falsely stated that "[t]he

Investment Manager [Jeanneret Associates] and the Adviser [Ivy Asset Management], however,

will monitor the activities of all Managers selected by the Investment Manager."

103. In addition to investing the Income Plus Fund's assets directly with Madoff

Securities, Jeanneret Associates, upon the advice of Ivy Asset Management, placed

approximately 10% of the Income Plus Fund's assets with Madoff indirectly through the Beacon

Fund. The Beacon Fund assets, in turn, were entrusted with Madoff and Madoff Securities.

104. Jeanneret Associates also invested Plan assets with Madoff through the Andover

Fund, as part of Jeanneret Associates' "Andover Associates Investment Program," marketed by

Jeanneret Associates as a substitute for fixed income investments. Jeanneret Associates

34

represented to the Plans that the Andover Fund was a -compelling alternative to fixed income

investments." Jeanneret Associates represented that "the goal of Andover Associates is to

produce a return of +8-10% with very low risk" and that it would "continue to provide excellent

investment returns on a risk-adjusted basis."

105. The Andover Fund was created by Joel Danziger and Harris Markhoff in 1993 at

the suggestion of Defendant Simon, who recommended that Ivy Asset Management serve as

investment consultant to the Andover Fund. Pursuant to an agreement with Andover Associates,

Ivy Asset Management was obligated to research and recommend managers, and once the

Andover Fund had invested with managers: (a) to "advise General Partner in writing as to the

allocation of [Andover] funds among investment managers, including timing or retaining and

terminating investment managers;" and (b) to "monitor, evaluate and meet with managers that are

managing Partnership funds ...." For these services, Andover Associates agreed to pay Ivy Asset

Management 50% of all fees earned by Andover Associates as manager of the fund. Ivy Asset

Management acted as an investment adviser to Andover Associates. Cuomo Complaint 38-39.

106. Over the course of the next fifteen years, Andover Associates invested $13 million

of the Andover Fund's assets with Madoff. Between 1998 and 2008, Ivy Asset Management

received approximately S2 million in fees from Andover Associates. Cuomo Complaint 40.

107. In 1995, Danzinger and Markoff formed the Beacon Fund, which was designed to

invest with Madoff. Cuomo Complaint 41.

108. From the inception of the Beacon Fund until 2000, the Beacon Fund invested

100% of its assets with Madoff thereafter, it maintained at least 71% of its assets with Madoff.

From 1995 to 2008, the Beacon Fund invested over $164 million with Madoff. Between 1998

35

and 2008, Ivy Asset Management received approximately $14.5 million in fees from Beacon

Associates. Cuomo Complaint 43.

109. Defendants also directly invested the assets of the Buffalo Laborers Plan and other

Class Members with Madoff through what was described as a "Limited Volatility Equity"

strategy.

D. Ivy Asset Management Discovered the Imprudence of Investing with Madoff YetFailed to Protect the Plans' Assets from Foreseeable Losses

110. As described in the Cuomo Complaint, by 1997 Ivy Asset Management (a) knew

that Madoff had provided false explanations for his trading and that there were not sufficient

Standard & Poor's 100 Index ("OEX-) options to support Madoffs purported strategy and (b)

was concerned that Madoff may be misappropriating client money placed with him and using

those funds in his market-making business. Because of such concerns, in 1998 Defendant Wohl

and Ivy Asset Management's Chief of Investment Management recommended total withdrawal

of Ivy Asset Management's proprietary funds' small position with Madoff; however, Ivy Asset

Management continued to maintain its Madoff position at that time in order to continue receiving

lucrative fees and to avoid alarming clients who had invested in Madoff and risk losing them as

clients.

111. Notwithstanding their knowledge and concern, the Ivy Defendants failed to take

any steps whatsoever to protect the Plans' assets from the losses that would occur once Madoff s

fraudulent operations met an inevitable demise. Between 1998 and 2008, Ivy Asset Management

collected over $40 million in investment advisory and consulting fees for clients with large

Madoff investments. Cuomo Complaint 3.

112. Ivy Asset Management was formed by Defendants Wohl and Simon in 1984. Ivy

Asset Management's relationship with Madoff began in 1987 when a client introduced

36

Defendants Simon and Wohl to Madoff. After a meeting at which Madoff purportedly explained

his strategy, Ivy Asset Management made an investment with Madoff for one of its proprietary

funds in October 1987 and maintained investments of the company's proprietary funds with

Madoff until they withdrew those assets in 2000. Defendants Simon and Wohl used their Madoff

advisory relationships to build Ivy Asset Management and each obtained more than $100 million

for selling the company to the Bank of New York. In a 2001 e-mail, Defendant Simon reminded

Defendant Wohl of the crucial role that advising a client to invest with Madoff had in the success

of Ivy Asset Management, saying "it helped to contribute towards building Ivy's AUM [assets

under management] and credibility, despite our real concerns about BLM [Madoffj." Id. 28-

31, 118.

113. The Cuomo investigation revealed that, in approximately 1991, Defendant Simon

told one prospective investor "that Madoff could be a Ponzi scheme, that they did not know how

much he was running." Id. IT 50.

114. Madoff provided Ivy Asset Management with evidence of his fraudulent scheme

by providing three different explanations for the apparent discrepancy, all of which were

inconsistent with Ivy Asset Management's observations and understanding of OEX options.

Madoff told Ivy Asset Management that: (1) it was "rare" for his option trades to exceed the

volume traded on the Chicago Board Options Exchange ("CBOE"), a statement contrary to Ivy

Asset Management's own observation; (2) he traded OEX options on other exchanges, which Ivy

Asset Management knew was an impossibility given that OEX options are a proprietary product

of CBOE and do not trade on any other exchange; and (3) he traded 30% to 50% of his options

over the counter, also an impossibility because Defendant Wohl knew that OEX options do not

trade in any volume over the counter. Id. TT 51-61, 70-74.

37

115. Ivy Asset Management knew that trading OEX options was a critical part of

Madoff s strategy and that the absence of a sufficient number of exchange traded options to

support his trades would strongly suggest that Madoff's reported trades were not actually being

made. Id. sij 51-54.

116. In the spring of 1997, Ivy Asset Management observed that there were not enough

options to support Madoff s purported trading strategy. Specifically, the company noticed an

enormous gap between the volume of OEX options traded on the CBOE and the number needed

to support Madoff s strategy for the assets he had under management. On March 13, 1997,

Defendant Wohl wrote a note on Ivy Asset Management's internal "Inform" database, stating,

"[Ivy's Chief of Investment Management] and I have checked the outstanding OEX options for

open interest and the max seems to support only about $1 B of invested dollars. We think he is

managing far more than that. We should explore this further!" Id. 1152.

117. The discrepancy of which Ivy Asset Management took note was substantial. Ivy

Asset Management estimated that Madoff had more than $2 billion under management, and yet

the volume traded on the CBOE was sufficient to support a split-strike strategy for only $1

billion. Defendant Wohl observed that the volume of OEX options traded on the CBOE would

not even support a split-strike strategy for the assets Ivy Asset Management and its clients had

with Madoff, which Defendant Wohl estimated to be less than 10% of the total assets Madoff had

under management. Id. 54.

118. The Cuomo investigation uncovered that Ivy Asset Management's Chief of

Investment Management discussed concerns about Madoffs purported option trading with a fund

manager ("Fund Manager") on May 5, 1997. The Chief of Investment Management testified that

he reached out to the Fund Manager because he was "interested in exploring this issue of the

38

open interest in the options and what size it might be relative to Madoffs capital under

management. - In an Ivy Inform note memorializing the call, he wrote:

[Fund Manager] returned my call. I posed our Madoff question relating to the factthat the overall open interest in the put and call options in our accounts withMadoff seem to be way below any reasonable estimate of the number of contractsMadoff should have based on any reasonable guess as to capital undermanagement. [Fund Manager] is aware of this problem.

Id. ¶ 55.

119. Additionally, the Fund Manager, who had invested substantial sums with Madoff,

noted that it seemed that Madoff was providing a -managed income stream." The note quotes

the Fund Manager as stating:

"Let me make it a little more interesting for you..." A woman in his building has$125k with Madoff. She showed [Fund Manager] her brokerage statements. Heraccount holds ONE long position, hedged with an OEX put and call. Yes, thetracking error is enormous, but strangely, her returns always seem very close tothose of all the other Madoff accounts of which [Fund Manager] is aware. Sowhat does this mean? it points to a managed return stream" and "He must havean unbelievable computer system."

Id II 56.

120. The May 5, 1997 note concluded:

[Fund Manager] said that understanding Madoff is like finding Pluto . . . youcan't really see it. you do it through inference, its effect on other objects. . . ."[Ivy's Chief of Investment Management], as you said, he could just possibly beon the up and up."

Id.

121. An internal memorandum distributed to Defendant Wohl dated May 16, 1997 also

raised questions concerning Madoff s option trades. Specifically, the memorandum noted that

Maloff had traded 917 OEX calls on a day that Bloomberg reported only 578 were traded, and

that the price Madoff reported was well below the exchange trade prices reported by Bloomberg.

39

In the memorandum, Ivy Asset Management's Chief of Investment Management wrote: This is

a clear example of our inability to make sense of Madoffs strategy, and one where his trades for

our accounts are inconsistent with the independent information that is available to us. - Id. 'f57.

122. Ivy Asset Management knew that this was a clear sign of impropriety. The Chief

of Investment Management later testified that it is -unusual for an account, a customer, to be able

to trade at a price, you know, substantially outside what's reported as being the range of that

security for that day. - Id.

123. Following these concerns, in June 1997, Defendant Simon asked Madoff about the

possibility of trading more OEX options than what the exchange reported. Madoff told

Defendant Simon that it was "rare" and "not the norm" for his trades to exceed the volume traded

on the CBOE. In an internal email sent to Defendant Wohl on June 19, 1997, Defendant Simon

reported Madoff s explanation, stating:

We briefly discussed options and the possibility of trading in excess of what theexchanges report[]. Bernie claimed that's rare and to his memory hasn't been thenorm. As to other exchanges, some OEX is traded on foreign exchanges, verysmall, and banks (Chase, Bankers Trust Citibank to name a few) have writtencontracts in excess of what is reported for clients including BLM, but very fewtimes.

Id, ¶58.

124. Ivy Asset Management knew or should have known that Madoff s statements

raised numerous red flags about the nature of his operation. For example, the Cuomo Complaint

reveals that, when asked about Madoff s "explanation," Defendant Wohl testified as follows:

Q: He is saying it happens rarely, to his memory it hasn't been the norm, right?

A: That's correct.

40

Q: That would be inconsistent with your observation of a large disparity betweenthe amount available on the exchange and the volume he needed to support twobillion or more of assets, right?

A: I would suppose so.

Id. '1159.

125. Between March 1997 and December 1998, Madoff offered Ivy Asset Management

a second explanation regarding his option trades — this time stating that he traded options on

domestic exchanges other than the CBOE to supplement his trading. Ivy Asset Management

soon learned that this explanation also could not be true. During the Cuomo investigation,

Defendant Simon testified that Ivy Asset Management checked and found that there were

instances of OEX option trading on other exchanges "like the Philadelphia [and] the Cincinnati

Stock Exchange." However, such a check could only have informed Ivy Asset Management of

the opposite because, in fact, OEX options have never traded on any exchange other than the

CBOE. Id. if 60.

126. As early as 1997, Ivy Asset Management also suspected a relationship between

Madoff s money management operation and his market-making business. Soon thereafter, a

prominent hedge fund manager told Ivy Asset Management that a Madoff employee had

confirmed to him that Madoff was using client money as subordinated loans to his market-

making business. Id. !I 62.

127. Ivy Asset Management suspected that Madoff was lending to his market-making

business client funds that had been placed with him to be traded pursuant to a split-strike

strategy, and then paying to the clients -compensation" for his unauthorized use of their money.

This was expressed in a May 20, 1997 internal memorandum written by the Chief of Investment

Management and received by Defendants Simon and Wahl. The memorandum stated:

41

In the meantime. .can we pose to Bernie our thought that the managed accountsserve as a kind of subordinated lender to the business and that the returns earnedin the accounts actually represent compensation for the use of the money, which isbeing employed to provide the equivalent of specialist capital?

Id. 1162.

128. The Cuomo investigation revealed that, on January 21, 1999, Ivy Asset

Management received corroboration of its suspicion that Madoff was misappropriating client

funds by making unauthorized subordinated loans of client money to his market-making

operation. Specifically, a prominent hedge fund manager ("Hedge Fund Manager") told Ivy

Asset Management's Chief of Investment Management that, during a conversation with a long-

time acquaintance who worked for Madoff, the acquaintance had essentially confirmed that that

Madoff was doing this. As described in the Cuomo Complaint, the Chief of Investment

Management's conversation was reported in an internal e-mail to Defendants Simon, Wohl and

other Ivy Asset Management personnel. In relevant part, the email stated:

[Hedge Fund Manager] met last night with someone he has knownfor a long time who works for Bernie.

[Hedge Fund Manager] said, "let's talk reality here."

[Hedge Fund Manager] advanced the subordinated lending theoryabout what the strategy really is.

His contact gave it a nod — "you can think of it that way.-

Id. 1-1 95. This plainly contradicted Madoff s prior representations.

129. Ivy Asset Management knew or should have known that this meant that Madoff

might have been misappropriating client funds for his own use and providing clients with false

reports of investment activity. Ivy Asset Management had reason to be suspicious, particularly

as, during a meeting in March of 1996, Madoff had previously represented to them that there was

no connection between his market-making business and his money management operation.

42

Nonetheless, the Cuomo Complaint reveals that Defendant Wohl, Defendant Simon and the

Chief of Investment Management each testified that they had no recollection of Ivy Asset

Management ever having discussed this grave matter with Madoff or of conducting any other

investigation. Id. 64, 95-96.

130. The Cuomo investigation also revealed that Ivy Asset Management was concerned

that Madoff self-cleared and that his accountant was a tiny firm. Defendant Wohl testified that

Ivy Asset Management did not know much about Madoff s auditor other than that it had less than

five employees and had no reputation in the field. Additionally, Defendant Wohl testified that he

could not think of any broker-dealer of Madan size that was audited by a firm with less than

five employees. Id. 1[65.

131. Notably, the Cuomo investigation revealed that Ivy Asset Management told at

least one prospective client in 2002 that its obligations as a fiduciary prohibited it from investing

client assets with Madoff. According to the Cuomo complaint, an internal memorandum dated

January 14, 2002 recorded Ivy Asset Management's Director of Client Development telling a

prospective client that the company could not overcome "qualitative issues - regarding Madoff

and, therefore, "no matter how successful he continues to be, we are [not] satisfied as a fiduciary

to invest client assets [with Madoff]. - Id. TT 114.

132. Ivy Asset Management was plainly aware of the imprudence of investing the

Plans' assets with Madoff. For instance, the Cuomo investigation revealed that, when listing

managers who should be recommended to a prospective client, Defendant Wohl wrote, "Madoff

(NOT!)" and also responded with a resounding, "NO" when an Ivy Asset Management employee

asked whether the company was interested in placing new client assets with Madoff. Id. IT 115.

43

133. In 1998, with multiple concerns mounting about Madoff, ivy Asset Management

decided to limit its proprietary funds' exposures to Madoff. While its general asset allocation

rule allowed no more than 6-7% of a proprietary fund's assets to be invested with any single

manager, Ivy Asset Management adopted a special rule for Madoff, such that no more than 3% of

a fund's assets could be allocated to Madoff. The company's Chief of Investment Management

testified that this 3% limitation was imposed because "we obviously had a number of issues that

concerned [us] about Madoff -66.

134. On December 15, 1998, after determining that there were insufficient available

options in the marketplace to support Madoff s purported strategy, Ivy Asset Management's

Chief of Investment Management met with Madoff. During the meeting, Madoff gave his third

incredulous explanation as to how his purported option trades could be occurring. Contrary to

his earlier representations that he did little off-exchange trading and, then later, that he traded on

domestic exchanges other than the CBOE, Madoff now said that 30 to 50% of his option trading

was done off-exchange, with parties he identified only as major banks and institutions. Id. '1170.

135. Not only was this third explanation plainly inapposite to Madoff s two prior

explanations but it was also demonstrably false as Ivy Asset Management knew that there was

little or no off-exchange trading in OEX options. Defendant Wohl acknowledged this during the

Cuomo investigation:

Q. Did you ever hear of any options on the S&P 100 index being bought or sold inlarge volume off exchange?

A. No.

Q. Did his explanation concern you?

A. Yes.

Id. lj 71.

44

136. Notwithstanding the fact that they had never heard of OEX options being bought

or sold in large volume off-exchange, Defendants Wohl and Simon took no steps to determine if

what Madoff was claiming was true. Defendant Wohl testified:

Q: So you had nothing but [Madoff s] word for the fact that he was making tradesin volume over the counter, right?

A: Yes. That's why I told you that they [the purported off- exchange trades]concerned me greatly.

Id. 72.

137. On December 16, 1998, Defendant Wohl expressed his concern that even a 3%

investment with Madoff was too much. Defendant Wohl told Defendant Simon that Ivy should

have zero funds with Madoff, writing:

I'm concerned that [Madoff] now admits that he does not execute all ofthe index options on the exchange that there are "unknown" counterpartiesthat if these options are not paid off he'd lose less than 100%. It remainsa matter of faith based on great performance - this doesn't justify anyinvestment, let alone 3%.

Id, If 75 (emphasis in Cuomo Complaint).

138. Clearly, at this point Ivy Asset Management should have taken action to withdraw

its clients' investments with Madoff. However, the company was much more concerned with

maintaining its stream of lucrative profits than with complying with its fiduciary obligations. In

response to the concerns raised by Defendant Wohl, Defendant Simon argued that Ivy Asset

Management should not withdraw its own funds it had placed with Madoff — not because he

disagreed with Defendant Wohl's conclusions but because doing so could lead its clients to

withdraw their money from Madoff as well, which would significantly impact Ivy Asset

Management's total revenue. Defendant Simon wrote:

45

Amount we now have with Bernie in Ivy's partnerships is probably lessthan $5 million. The bigger issue is the 190 mil or so that our relationshipshave with him which leads to two problems, we are on the legal hook inalmost all of the relationships and the fees generated are estimated basedon 17+% returns .... [to be] $1.275 Million... Are we prepared to take allthe chips off the table, have assets decrease by over $300 million and ouroverall fees reduced by $1.6 million or more, and, one wonders if we ever"escape" the legal issue of being the asset allocator and introducer, even ifwe terminate all Madoff related relationships?

Id. 1176.

139. Thus, in order to preserve its own fraudulent revenue stream, Ivy Asset

Management maintained its investment in Madoff, failed to take any steps to protect the assets of

the Buffalo Laborers Funds and other Class Members, and failed to advise Plaintiffs of its

overwhelming concerning about the legitimacy of Madoff.

140. On December 17, 1998, in response to the competing emails from Defendants

Simon and Wohl, Ivy Asset Management's Chief of Investment Management expressed his

concern about Madoff and recommended an action that would "enable[] [Ivy] to preserve the

majority of the fees." In his response, he wrote:

I think the time has come for Ivy to resolve this question and to set a policy wecan all be comfortable with. Let me propose the following:Terminate all BLM investments for the Ivy Funds (the $5 mil or so)Write to the advisory clients telling them we have done so and the reasons why..Then leave the rest up to them.

Here are my reasons:

Legally, we will of course still have liability as investment advisor, particularlyfor the ERISA entities, but we will have insulated ourselves from liability as GPof our funds.

I imagine that our letters to clients would serve to at least partially exculpate Ivyshould the worst happen.

We have said that it is important to maintain at least some level of Ivy fundinvestments with Madoff in order to send a message to the advisory clients that

46

we have confidence in BLM (as well as in the other managers we recommend tothem). However, in view of Howard's deep concerns (which I share, though not tothe same extent), Ivy should perhaps no longer express the same vote ofconfidence in Madoff. Full withdrawals from the Ivy funds would send a veryclear message to the clients regarding Ivy's concerns about this investment.

If some clients decide to withdraw based on Ivy's withdrawals from our ownfunds, we would have to be prepared to accept that. Would the Engineers,Jeanneret and others walk away from Madoff if Ivy withdraws its money? I'm notsure, but I doubt it. Based on the amounts of capital they have invested withBLM, my perception is that they are quite satisfied with Madoff and would notwant to leave. In the case of Jeanneret, he hardly listens to our advice at all, andour pleas to the Engineers for more diversification have for the most part fallen ondeaf ears.

It's somewhat of a middle of the road approach, but I think it enables us topreserve the majority of the fees while reducing our legal risk.

Comments?

In his testimony, the Chief of Investment Management explained that what he meant by "should

the worst happen" was that Madoff was a fraud. His recommendation was not adopted. Id. 111

79-80 (emphasis added).

141. In addition to all of the above, Ivy Asset Management was specially positioned to

discover the imprudence of investing the Plans' assets with Madoff and/or Madoff Securities

because it served as the investment advisor to: (a) Jeanneret Associates; (h) the Income Plus

Fund; (c) the Andover Fund; and (d) the Beacon Fund—each of which invested with Madoff. In

such role, Ivy Asset Management provided advice with respect to such matters as choosing

managers, strategies and asset allocations and was uniquely positioned to discover the

imprudence of investing the Plans' assets with Madoff.

142. Ivy Asset Management – in addition to providing investment advice to Jeanneret

Associates, Beacon Associates and Andover Associates regarding the identification of potential

managers, due diligence, manager selection, portfolio allocation and rebalancing – also provided

47

certain administrative, back-office and other general support services. In performance of these

functions, Ivy Asset Management had access to the falsified account statements and fabricated

trade confirmation tickets that Madoff Securities generated in furtherance of the Ponzi scheme.

Thus, Ivy Asset Management was in a position to identify and report inconsistencies and other

red flags concerning the fraudulent nature of Madoff s operation.

143. Further indicative of its knowledge of the imprudence of investing with Madoff,

Ivy Asset Management divested its own holdings with Madoff at least eight years before

Madoff's scheme became public knowledge. According to BNY Mellon's 2008 Form 10-K filed

with the SEC, Ivy Asset Management "has not had any funds-of-funds investments with Madoff

since 2000."

144. The Cuomo investigation revealed that Defendant Sean Simon spoke dismissively

of Madoff in an email to BNY Mellon in 2008, stating, "[W]e fired him in 2000. - Cuomo

Complaint. Additionally, Ivy Asset Mana gement's Director of Client Development explained

the company's reasons for divesting its proprietary funds holdings with Madoffi

We used to use Madoff in our funds but elected to get out when we figured it wasjust too risky since we couldn't get our arms around how he does what he does. Itisn't that the strategy is complex. It is just that a number of questions that raisedoubts. We have known Madoff for a long time and have only the kindest thingsto say about him. However, from a business standpoint, we thought we couldn'tcontinue to take the risk.

During the Cuomo investigation, Defendant Wohl confirmed that in "the accounts that we ha[d]

control over, where we were the money manager, the decision-maker, we chose to terminate our

relationship with Madoff." Cuomo Complaint 105-06.

48

E. Each of the Defendants Failed to Exercise Due Diligence

145. In its Form ADV, Part E filings with the SEC, Jeanneret Associates made

representations regarding the investment management services and due diligence that the

company would provide. For example, Jeanneret Associates stated:

(a) Account statements "are reviewed to assure that investments are in

compliance with client guidelines and that brokerage or custodial services are being adequately

provided."

(b) Jeanneret Associates "seeks to maintain sufficient investment

diversification so that potentially large losses from any single investment may be avoided."

(c) Jeanneret Associates' goal with regard to selecting broker dealers and

commission levels is "to obtain best execution for the client and maximum reliability from the

financial institutions"

(d) Jeanneret Associates' "overriding concern" is "to achieve best execution

for all investment-related transactions."

146. However, rather than adequately conduct their duties of initial and ongoing due

diligence concerning the Madoff-related investments, Defendants imprudently placed hundreds

of millions of dollars with Madoff, directly and through the Income Plus Fund, the Beacon Fund

and the Andover Fund, despite the existence of numerous red flags.

147. These red flags included, among other things, the abnormally high and stable

positive investment results reportedly obtained by Madoff regardless of market condition,

inconsistencies between Madoff Securities" publicly available financial information concerning

its assets and the purported amounts that Madoff managed for clients, and the fact that Madoff

Securities was audited by a small, obscure accounting firm with no experience auditing entities

of the apparent size and complexity of Madoff Securities.

49

148. As fiduciaries, Defendants had a duty to prudently manage the Plans assets for

the sole and exclusive interest of the Plans' participants and beneficiaries, as set forth in Section

404(a) of ERISA, 29 U.S.C. § 1104(a).

149. Since at least 1992, there were various events that should have alerted Defendants

to the riskiness of the investments with Madoff Securities and caused Defendants to take action

to protect the ERISA Plans' assets. In 1992, the SEC filed a lawsuit against accountants Frank

Avellino and Michael Bienes, who sold $441 million in unregistered securities to 3,200 people,

promising returns of 13.5% to 20%. The money was invested entirely with Madoff. Although

Madoff was not formally charged, Avellino and Bienes agreed to close their businesses and

reimbursed their clients.

150. In May 1999, a derivatives expert, Harry Markopolos, sent a letter to the SEC

describing how Madoff could not have generated the returns he reported using the split-strike

conversion strategy and he encouraged the SEC to investigate Madoff.

151. In May 2001, a prescient article entitled "Madoff Tops Charts: Skeptics Ask

How" appeared in MAR/Hedge, a newsletter that reports on the hedge fund industry. In the

article, Michael Ocrant wrote:

Those who question the consistency of the returns . . . includecurrent and former traders, other money managers, consultants,quantitative analysts and fund-of-fund executives, many of whomare familiar with the so called split-strike conversion strategy usedto manage the assets.

***************

They noted that others who use or have used the strategy—described as buying a basket of stocks closely correlated to anindex, while concuiTently selling out-of-the-money call options onthe index and buying out-of-the-money put options on the index—are known to have had nowhere near the same degree of success.

***************

50

In addition, experts ask why no one has been able to duplicatesimilar returns using the strategy and why other firms on WallStreet haven't become aware of the fund and its strategy and tradedagainst it, as has happened so often in other cases; why MadoffSecurities is willing to earn commissions off the trades but has notset up a separate asset management division to offer hedge fundsdirectly to investors and keep all the incentive fees for itself, orconversely, why it doesn't borrow the money from creditors, whoare generally willing to provide leverage to a fully hedged portfolioof up to seven to one against capital at an interest rate of Libor-plus, and manage the funds on a proprietary basis.

152. On May 27, 2001, Barron's published an article entitled "Don't Ask, Don't Tell;

Bernie Madoff is so secretive, he even asks his investors to keep mum. - In the article, Erin

Arvedlund wrote in pertinent part:

The private accounts managed by Madoff "have producedcompound average annual returns of 15% for more than a decade.Remarkably, some of the larger, billion-dollar Madoff run fundshave never had a down year. When Barron's asked Madoff how heaccomplishes this, he says. 'It's a proprietary strategy. I can't gointo it in great detail.'"

[S]ome on Wall Street remain skeptical about how Madoffachieves such stunning double-digit returns using options alone.Three options strategists for major investment banks told Barron'sthey couldn't understand how Madoff churns out such numbersusing this strategy.

Adding further mystery to Madoffs motives is the fact that hecharges no fees for his money management service.

153. In 2005, Markopolos sent a detailed 17-page memo directly to the SEC regarding

Madoffs investment scheme. The memo described 29 red flags which indicated that that Madoff

was either running a Ponzi scheme or front running, placing favored orders before others when

placing them in the market. Markopolos identified 29 signs of suspicious activity in Madoff

Securities, including:

51

The third party hedge funds and fund of funds that market thishedge fund strategy that invests in BM don't name and aren'tallowed to name Bernie Madoff as the actual manager in theirperformance summaries or marketing literature... Why the need forsuch secrecy? if I was the world's largest hedge fund and hadgreat returns, I'd want all the publicity I could garner and wouldwant to appear as the world's largest hedge fund in all the industry(emphasis in original).

Why would [Madoffl settle for charging only undisclosedcommissions when he could earn standard hedge fund fees of 1%management fee + 20% of the profits? (emphasis in original)

Madoff does not allow outside performance audits. (emphasis inoriginal).

154. In 2007, hedge fund investment adviser Aksia LLC urged its clients not to invest

in Madoff feeder funds after performing due diligence on Madoff and discovered several red

flags, including:

(a) Madoff s auditor, Friehling & Horwitz, operated out of a 13x18 foot

location in New York and included one partner in his late 70s who lived in Florida, a secretary

and one active accountant; and

(b) Madoff s comptroller was based in Bermuda, whereas most mainstream

hedge funds have their own in-house comptrollers.

155. On January 16, 2009, the International Herald Tribune reported:

"It's a very strange set-up, since most prospectuses disclose thenames of the actual portfolio managers," said Drago Indjie, aproject manager at the Hedge Fund Center of the London BusinessSchool. "If you've been in the industry, this doesn't pass the smelltest."

156. Defendants also knew or should have known that Madoff was both the custodian

and broker/dealer of his managed accounts. It was unusual, if not unprecedented, for a hedge

52

fund manager not to use an independent custodian or prime broker. All trading in the fund was

through Madoff. All trade confirmations were generated by Madoff.

157. Madoff Securities was supposedly technologically advanced but funds did not

have electronic access to their accounts. This was because paper documentation provided

Madoff with the ability to manufacture trade tickets purporting to confirm investment results that

had not and were not occurring, and to falsify supporting documentation. This should have

caused Defendants to question the legitimacy of Madoff s operation.

158. Despite the size of Madoff s operation, it was audited by a very small accounting

firm (with as few as three employees) named Friehling & Horowitz. Such a small firm would not

be able to obtain sufficient evidential matter to support an audit opinion for an entity purportedly

Madoff s size, even if Madoff was the only client.

159. As Pensions and Investment reported on December 22, 2008:

"There were a thousand red flags, if you did the work. It didn'ttake much energy to reverse-engineer Madoff s track record andfind that his split-strike conversion method just would not haveworked in certain markets the way he said it did," said the chiefexecutive of a large institutional hedge fund-of-funds firm whoasked not to be identified.

Many observers agreed with another hedge fund-of-fundsexecutive who said, on condition of anonymity: "Among seriouspeople in the industry, (Mr.) Madoff was a joke. Some hedge fundproblems are unknowable. Sowood (Capital Management LP) wasunknowable. Long-term Capital Management (LP) wasunknowable. Amaranth (Advisors LLC) was somewhat knowable.Madoff was very knowable. All the trouble signs were there,written in red."

160. Similarly, Dalton Givens, a former senior vice president of Wachovia Securities,

has noted:

53

Generally, when you have someone that controls everything aboutthe fund, most [investment] firms wouldn't have anything to dowith it. I don't know why [Jeanneret] would have had that muchtrouble recognizing it.

See Linhorst, supra. Notably, despite being wined and dined by Madoff s sons, Givens -took a

few sniffs and didn't like the aroma." Id.

161. Numerous investment advisors and professionals who thoroughly looked into

Madoff s trading were unable to reconcile investors' account statements with the reported

returns. In a December 13, 2008 article in The New York Times, Robert Rosenkranz, principal of

hedge fund adviser Acorn Partners, was quoted as saying, "Our due diligence, which got into

both account statements of [Madoff s] customers, and the audited statements of Madoff

Securities, which he filed with the S.E.C., made it seem highly likely that the account statements

themselves were just pieces of paper that were generated in connection with some sort of

fraudulent activity."

162. As the SEC Inspector General reported, several private entities concluded that

Madoff s investment services were unsavory given the multitude of red flags:

The OIG also found that numerous private entities conducted basicdue diligence of Madoffs operations and, without regulatoryauthority to compel information, came to the conclusion that aninvestment with Madoff was unwise. Specifically, Madoff sdescription of both his equity and options trading practicesimmediately led to suspicions about Madoff s operations. Withrespect to his purported trading strategy, many simply did notbelieve that it was possible for Madoff to achieve his returns usinga strategy described by some industry leaders as common andunsophisticated. In addition, there was a great deal of suspicionabout Madoff s purported options trading, with several entities notbelieving that Madoff could be trading options in such highvolumes where there was no evidence that any counterparties hadbeen trading options with Madoff. The private entities'conclusions were drawn from the same "red flags" in Madoff soperations that the SEC considered in its examinations andinvestigations, but ultimately dismissed.

54

See SEC Inspector General's Investigation of Failure of the SEC to Uncover Bernard Madoff s

Ponzi Scheme, at p. 25.

163. The report discussed how one CEO conducted due diligence and decided to steer

clear of Madoff:

The CEO was suspicious and obtained copies of an investor's lastfew account statements from Madoff Securities, and compared asample of trades on the statements with what was actually going onin the markets on the day Madoff was trading. The CEO stated hefound this "pattern which really seemed weird where the — wherethe purchases were all at or close to the lows of the day and thesales were at or close to the highs of the day," noting that "ofcourse, nobody can do that." His "suspicion was that the factpattern that [he] had seen seemed consistent with a Ponzi scheme.-The CEO said he "didn't conclude that that was the case, but [he]certainly thought there was enough of a risk that that was the casethat, you know, [he] certainly wouldn't touch it with a 10-foot

Id. at 414.

164. After investigating Madoff s operations, Societe Generale 's due diligence team

opted to internally blacklist Madoff and advise wealthy clients at its private banks against

investing with him. Indeed. as Drago Indjic, a project manager at the Hedge Fund Center of the

London Business School noted, many European hedge fund companies saw the tell-tale signs of

a Ponzi scheme all along:

Madoff did not pass due diligence for many European hedge fundcompanies . . Experienced people know there are many ways toprovide the kind of return stream offered by Madoff, almost like abank account, and one of them is Ponzi scheme.

Nelson D. Schwartz, European Banks Tally Losses Linked to Fraud, New York Times, Dec. 17,

2008.

165. In July 2008, the managers of the Fort Worth Employees' Retirement Fund

heeded the advice of Alboume Partners, a London due diligence firm, and liquidated its $10

55

million stake in the Rye Select Broad Market Fund, a fund that was entirely invested with

Madoff. According to a December 31, 2008 article in BusinessWeek, Alboume Partners had

"long-standing concerns about Madoffs trading strategy and consistent returns" and "had urged

clients for nearly a decade to avoid affiliate funds such as Rye." See Matthew Goldstein, The

Made' Case Could Reel in Former Investors, Dec. 31, 2008, BusinessWeek.

166. Rogerscasey, a domestic registered investment adviser providing investment

consulting services globally, issued several adverse ratings of Madoff-related feeder funds such

as Fairfield Greenwich and Tremont dating as far back as 2002, "based largely on concerns about

the integrity of the Madoff structure." A Rogerscasey newsletter published in December 2008

enumerates the severe warnings it issued regarding Madoff

• June 4, 2002 — We are exceedingly negative on Madoff as a hedge fund.

• November 21, 2002— [Tremont's] largest exposure.. . is to Madoff. . .where Tremont receives limited independent third-party transparency. . . .The only third party, independent transparency that Madoff provides to itsinvestors is being 100% in cash at the end of each year, so that its auditorcan verify with Madoffs banker. . . that the cash is real. Madoff has noprime broker and no plan administrator. It acts as a broker/dealer, self-clears, and sends its own trade confirms to its investors all of whom have-cash" accounts.

O February 27, 2003 — [Fairfield Greenwich] claims its due diligence isbased on [employee name] at their firm checking the trade confirms thatMadoff s broker dealer sends them. However, our point of view is that,since Madoff is self clearing, it could be making up its statements andtickets.

• February 26, 2004 — Although Tremont claims to receive access toMadoff s positions, the magnitude of the exposure and the truth ofTremont's transparency remain extremely disconcerting... . The Madoffexposure is a potential disaster. Even though some products would notbe directly affected . . . Tremont 's products will still see their reputationsvaporized when Madoff rolls over like a big ship.

Rogerseasey Flash, December 2008 at 1-2 (Emphasis added).

56

167. Ivy Asset Management routinely reviewed Jeanneret Associates' account

statements for the Income-Plus Fund as well as other investments and either knew or should have

known that Madoff s purported trading activity was impossible. Instead of reaching this

conclusion, Ivy Asset Management, in willful and wanton or reckless disregard for its duties to

the ERISA Plans, failed to take any action to pull the assets out of Madoff.

168. As Markopolos explained during his February 4, 2009 testimony before the House

Committee on Financial Services, fund managers should have been able to determine that Madoff

was a fraud based solely on the basis of analyzing options volumes trading volumes reflected in

accounts were vastly in excess of actually reported trading volumes. In particular, the S&P 100

Index options that Madoff purported to trade could not handle the reported trading volume. A

report from Bloomberg estimated that Madoff s strategy would have required at least 10 times

the S&P 100 Index option contracts that traded on U.S. exchanges. As the Markopolos'

testimony explained:

Markopolos: A lot of the victims thought that they were getting ahighly diversified portfolio. . .[Madoff] was purporting to own 30to 35 of the bluest chip stocks, the largest companies in America.And they'd see that on their statements. And they felt verycomfortable owning those companies, and they considered it a verydiversified basket, because it really was a diversified basket.

Rep. Ackerman: But there was nothing they could do to check itout, that he didn't actually buy it.

Markopolos: You could. As an individual investor you could not.But as a feeder fund, you should have been able to go to the NewYork Stock Exchange and see that those volumes of that stock didnot trade that day at that price. They could have gone to theOption Price Reporting Authority that the Chicago Board OptionsExchange offers. And you would have seen that no OEX indexoptions traded at those prices that day.

169. Had Defendants conducted adequate due diligence into Madoff and Madoff

Securities, they would have discovered at least some of the numerous flags identified herein.

57

170. Even if certain Defendants did not uncover the horrendous truth sun-ounding the

actual fraud, they should have concluded from the available evidence that investments in Madoff-

related securities were inconsistent with the high duty of prudence required of fiduciaries and

investment managers under ERISA. Defendants' failure to exercise adequate due diligence

caused the Class Members to suffer substantial losses as a result of their investments with

Madoff and Madoff Securities. Further, despite their duty of loyalty owed to the Plans,

Defendants failed to adequately resolve conflicts of interest.

171. Meanwhile, Defendants have been unjustly enriched in the form of unjustified

management fees. Defendants collected substantial fees from the ERISA Plans. For example,

with respect to the Income Plus Fund, the Jeanneret Associates collected from the fund a

quarterly management fee equal to 0.3125% of the fund's net asset value at the end of each

calendar quarter; 40% of this fee was paid to Ivy Asset Management. Such profits were made

through use of the ERISA Plans' assets and must be restored to the ERISA Plans pursuant to

Section 409(a) of ERISA.

172. As Markopolos testified before Congress, because Madoff was only compensated

through the commissions he charged fi-om the trades he purportedly executed for his investors,

funds-of-funds managers had a strong financial incentive to invest with Madoff. This is because

such managers "were paid so much to look the other way." As Markopolos explained:

To deliver 12 percent annual return, he needed to be earning a 16percent gross, because there were four percent in fees.. .And hewas passing the four percent in fees along to the feeder funds andkeeping only a smidgen for himself. And so those feeder fundswere incentivized not to ask the questions, to be willfully blind, ifyou will, and not get too intrusive into the Madoff scheme.

Testimony of Harry Markopolos before the House Committee on Financial Services, February 4,

2009 (hereinafter. -Markopolos Testimony").

58

173. Essentially, dealing with Madoff meant that a fund manager was required to

willfully abrogate his or her contractual and fiduciary obligations to the fund's investors in

exchange for the benefits of highly consistent returns and the lucrative management fees that

flowed therefrom. Madoff only collected commissions on the purported trades he executed and

thereby left a greater portion of assets from which Defendants collected their respective

percentages of fees

174. As fiduciaries, Defendants were forbidden from disregarding their appurtenant

obligations and being "willfully blind" in furtherance of increasing their own profits. To the

detriment of the ERISA Plans, however, Defendants failed to conduct adequate due diligence and

either ignored or inexcusably failed to recognize numerous red flags investing the ERISA Plans"

assets with Madoff was imprudent.

F. Defendants' Fiduciary Status

175. ERISA treats as fiduciaries not only persons explicitly named as fiduciaries under

§ 402(a)(1) but also any other persons who act in fact as fiduciaries, i.e., who performed

fiduciary functions.

176. ERISA § 3(21)(A)(i), 29 U.S.C. §1002(21)(A)(i), provides that a person is a

fiduciary "to the extent (i) he exercises any discretionary authority or discretionary control

respecting management of such plan or exercises any authority or control respecting management

of disposition of its assets, (ii) he renders investment advice for a fee or other compensation,

direct or indirect, with respect to any moneys or other property of such plan, or has any authority

or responsibility to do so. . .-

177. During the relevant time period, Defendants performed fiduciary functions under

this standard and thereby acted as fiduciaries under ERISA.

59

Jeanneret Defendants' Fiduciary Status

178. Jeannerett Associates was a fiduciary of the Plans in that (a) within the meaning of

Section 3(21) of ERISA, 29 U.S.C. § 1002(21), it exercised authority or control over a portion of

the ERISA Plans" assets for the purposes of investment; and (b) it was an investment manager,

within the meaning of Section 3(38) of ERISA, 29 U.S.C. § 1002(38), which by definition is a

fiduciary.

179. Jeanneret Associates exercised authority and control over the investment of Plan

assets. This included the authority to purchase, sell, convert and otherwise trade in any stocks,

bonds and other securities, as well as the authority to manage the assets of the Income Plus Fund.

Under its Investment Agreements with the Plans, Jeanneret Associates expressly acknowledged

its status as an ERISA fiduciary with respect to the Plans.

180. Under the Adoption Agreements for the Income Plus Fund, Jeanneret Associates

expressly acknowledged that, for the purposes of appointing any independent manager of any

portion of the Income Plus Fund's assets, it was a "named fiduciary" within the meaning of

Section 402(a) of ERISA. Further, under the Adoption Agreements, Jeanneret Associates

expressly acknowledged its status as a "fiduciary," within the meaning of Section 3(21) of

ERISA, 29 U.S.C. § 1002(21), of the ERISA Plans invested in the Income Plus Fund.

181. During the Class Period, Jeanneret Associates served as the Investment Manager,

within the meaning of ERISA § 3(38), 29 U.S.C. § 1002(38), for the Plans and for the Income-

Plus Investment Fund and, upon information and belief, the other Class Members.

182. As described above, Jeanneret Associates acknowledged in writing its status as

Investment Manager in each of the Investment Management Agreements, as well as in

documents provided to the Plaintiffs in connection with the Income Plus Fund. Upon information

60

and belief, Jeanneret Associates has similarly acknowledged its fiduciary status as Investment

Manager for the other members of the Class.

183. Further, upon information and belief, at all relevant times, the Income Plus Fund

held assets subject to ERISA because more than 25% of the fund's assets represented employee

benefit plan assets or (after the effective date of the Pension Protection Act of 2006) ERISA plan

assets, such that the persons with authority or control over the management or disposition of the

fund's assets or providing investment advice for a fee were fiduciaries of the investing ERISA

plans. Accordingly, as investment manager for the Income Plus Fund, Jeanneret Associates was

a fiduciary of the ERISA Plans with respect to their investments in the Income Plus Fund.

184. Upon information and belief, Dr. Jeanneret and Perry individually exercised

authority and control over ERISA Plan assets entrusted to Jeanneret Associates. Therefore, Dr.

Jeanneret and Perry personally functioned as ERISA fiduciaries with respect to the ERISA Plans.

Ivy Defendants' Fiduciary Status

185. Ivy Asset Management was a fiduciary of the Plans because it rendered

investment advice for a fee with respect to ERISA plan assets.

186. Each of the Individual Ivy Defendants and the Ivy Committees determined the

investment advice given by Ivy Asset Management. Consequently, each of these Defendants was

also a fiduciary with respect to the Plans.

187. Upon information and belief, Ivy Asset Management acknowledged its fiduciary

status with respect to the Plans. The Investment Agreements stated that Jeanneret Associates was

permitted to enter into agreements with investment advisors such as Ivy Management, provided

that in such agreements the other investment advisors also accept fiduciary responsibility with

respect to the Plan. Upon information and belief, pursuant to its agreement with Jeanneret

61

3 amended complaint 05/21/2010

Documents