1 amended derivative complaint 02/06/2013

Case 1:09-md-02082-TPG Document 93 Filed 02/06/13 of 41

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

IN RE MERIDIAN FUNDS GROUP SECURITIES

ii

& EMPLOYEE RETIREMENT INCOME SECURITY

09md2082 (TPG) ACT (ERISA) LITIGATION

NEW JERSEY CARPENTERS ANNUITY FUND, et al.,

Plaintiffs,

VS.

MERIDIAN DIVERSIFIED FUND MANAGEMENT, LLC, et al.,

Defendants.

10 Civ. 5738 (TPG)

ECF Case

Jury Trial Demanded

C

AMENDED DERIVATIVE COMPLAINT

Plaintiffs New Jersey Carpenters Annuity Fund, New Jersey Carpenters Pension Fund,

and New Jersey Carpenters Welfare Fund (the "New Jersey Fund Plaintiffs") and George R.

Laufenberg, Adminstrator-Manager of the New Jersey Fund Plaintiffs (collectively, "Plaintiffs"),

by their undersigned attorneys, for their Amended Derivative Complaint against Defendants (in

10 Civ. 5738 (TPG)), allege the following upon information and belief, except as to information

about themselves, which is alleged upon personal knowledge. Plaintiffs' information and belief

is based upon the investigation conducted by Plaintiffs' counsel, including, inter alia, a review of


Meridian Diversified ERISA Fund, Ltd.'s statements and a complaint that it filed in the United

States District Court for the Southern District of New York.'

NATURE OF THE CASE

1. This is a derivative action brought by Plaintiffs on behalf of Meridian Diversified

ERISA Fund, Ltd. (the "Meridian Fund" or "Fund"). This action has been brought in the name

of and for the benefit of the Fund, for breaches of duties owed to the Fund.

2. The First to Sixth Causes of Action have been brought derivatively by the New

Jersey Fund Plaintiffs on behalf of the Fund. 2 The claims brought under the Employee

Retirement Income Security Act ("ERISA") (the Eighth through Twelfth Causes of Action) are

brought derivatively on behalf of the Fund by all Plaintiffs.

3. The Fund is an investment fund that placed millions of dollars (through Rye

Select Broad Market XL Portfolio Limited ("Offshore XL Fund"), an investment vehicle

associated with Tremont Group Holdings, Inc.) with Bernard L. Madoff ("Madoff') and his firm

Bernard L. Madoff Investment Securities, LLC ("BMIS"). On December 10, 2008, it was

disclosed that Madoff, acting through BMIS, had been running a Ponzi scheme.

4. On December 11, 2008, the FBI arrested Madoff for violating the federal

securities laws. Upon arrest, Madoff told the agents that "there is no innocent explanation" for

the scheme and confessed that he "paid investors with money that wasn't there." On that same

day, the United States Attorney brought criminal charges against Madoff, alleging that Madoff

The complaint ("Federal Complaint" or "Fed. Cplt.") was filed on April 10, 2009, in an action entitled Meridian Horizon Fund, LP, et al. v. Tremont Group Holdings, Inc., et al., 09 Civ. 3708 (the "Federal Action"). 2 These Causes of Action were dismissed by the Court by Order dated March 29, 2012, and are asserted herein so that they may be preserved for appeal.

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ran a multi-billion dollar Ponzi scheme. United States v. Madoff, No. 08-mj-2735 (S.D.N.Y.,

filed Dec. 11, 2008). On March 12, 2009, Madoff pled guilty to 11 felony counts.

5. On December 11, 2008, the United States Securities and Exchange Commission

("SEC") filed an action against Madoff in the United States District Court for the Southern

District of New York, SEC v. Madoff, 08 Civ. 10791; on February 9, 2009, the SEC submitted to

the federal court a proposed partial judgment, to which Madoff consented, imposing a permanent

injunction and continuing relief against him, including a permanent freezing of his assets.

6. All or nearly all of the Fund's assets invested with BMIS have been lost.

7. Defendants breached their duties and aided and abetted the breach of fiduciary

duties to the Fund by failing to conduct adequate due diligence, as they were required to do in

their roles as fiduciaries, and by engaging in grossly negligent conduct with respect to the

management of the Fund. At the same time, the Fund's investment manager collected substantial

fees on fictitious assets and profits.

VENUE AND JURISDICTION

8. Venue is proper in this Court as all of the Defendants are subject to personal

jurisdiction in this District. A substantial part of the events or omissions giving rise to the

claims occurred in this District, and each of the Defendants is subject to personal jurisdiction in

this District.

9. This Court has ruled that it has subject matter jurisdiction over this action under

ERISA. See Order dated May 11, 2011 (denying motion to remand).

THE PARTIES

Plaintiffs

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10. Each of Plaintiffs New Jersey Carpenters Annuity Fund, New Jersey Carpenters

Welfare Fund, and New Jersey Carpenters Pension Fund is a shareholder of the Fund, and has

owned stock during the period of the wrongdoing alleged herein.

11. Plaintiffs New Jersey Carpenters Annuity Fund, New Jersey Carpenters Pension

Fund, and New Jersey Carpenters Welfare Fund filed the original derivative complaint in this

action. Although their claims were previously dismissed by the Court (see Order dated May 3,

2012), the New Jersey Fund Plaintiffs assert those claims (the First through Sixth Causes of

Action) in this Amended Complaint to preserve them for possible appellate review.

12. Plaintiff George Laufenberg is Administrator-Manager of the New Jersey Fund

Plaintiffs.

Defendants

13. Nominal defendant Meridian Diversified ERISA Fund, Ltd. is an exempted

company organized under the laws of the Cayman Islands. The Fund is doing business in New

York. According to the Federal Complaint, the Fund was "managed from and within the State of

New York." See Fed. Cplt. ¶ 15.

14. Defendant Meridian Diversified Fund Management, LLC ("Meridian

Management") is the Fund's "Investment Manager." Meridian Management is organized under

the laws of Delaware, and maintains its principal office at 20 Corporate Woods Boulevard, 4th

Floor, Albany, New York 12211. Meridian Management was responsible for conducting due

diligence with respect to the Fund's investment activities. Meridian Management entered into an

Investment Management Agreement with the Fund, pursuant to which it (i) was obligated to

invest the Fund's assets "in accordance with the objectives and policies of the Fund," and (ii)

was paid substantial management fees by the Fund based, in part, on the reported net asset value


of the Fund's shares. (See Fund's private placement memorandum dated January 1, 2008

("PPM"), at p. 7). Under the Investment Management Agreement, Meridian Management's

monthly management fee is l/ 12 th of (i) 1.25% of the first $25 million of the net asset value, (ii)

1% of the second $25 million of net asset value, and (iii) 0.75% of net asset value in excess of

$50 million. (See PPM at p. 7).

15. Meridian Management: (a) is a fiduciary of the Fund within the meaning of

§3(21) of ERISA, 29 U.S.C. §1002(21), in that it exercises authority or control over the

management and disposition of ERISA covered employee benefit plan assets for the purpose of

investment, including those assets which were, in turn, entrusted to the discretion and control of

Madoff; (b) is an investment manager within the meaning of §3(38) of ERISA, 29 U.S.C.

§ 1002(38), which, by definition, is a fiduciary role in that it executed agreements expressly

recognizing its status as a fiduciary within the meaning of ERISA with the New Jersey Fund

Plaintiffs that are ERISA covered employee benefit plans; and (c) by way of correspondence

with the New Jersey Fund Plaintiffs expressly recognized its status as fiduciary within the

meaning of ERISA.

16. Defendant William H. Lawrence ("Lawrence") co-founded Meridian Capital

Partners, Inc., the managing member of Meridian Management, and is Chairman, Chief

Executive Officer and Chief Investment Officer of Meridian Management. According to the

PPM (at p. 6), Lawrence "is a co-founder and partner of Meridian and is chairman of the firm's

Executive Committee and Portfolio Management Group. He oversees all aspects of the firm's

investment management function, and provides strategic leadership to the firm."

17. Defendant John L. Sica ("Sica") is a partner and President of Meridian

Management and a member of the firm's Executive Committee and Portfolio Management

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Group. According to the PPM (at p. 6), Sica "oversees the firm's client service and operational

functions" and "was active in the firm's financial reporting and fund administration function."

18. Defendant Donald J. Halldin ("Halidin") co-founded Meridian Capital Partners,

Inc., the managing member of Meridian Management, and is Vice-Chairman of Meridian

Management. According to the PPM (at p. 6), Haildin "serves as a special advisor to the firm

with a focus on the client service and business development functions."

19. Defendant Timothy M. Hickey ("Hickey") is a partner and Chief Financial

Officer of Meridian Management and a member of the firm's Executive Committee and

chairman of its Operating Committee. According to the PPM (at p. 6), Hickey is "responsible

for all aspects of the firm's financial reporting and fund administration functions, and oversees

the firm's compliance functions."

20. Defendant Laura K. Smith ("Smith") is a partner and Managing Director of

Operations for Meridian Management and a member of the firm's Executive Committee and

Operating Committee. According to the PPM (at pp. 6-7), Smith is "responsible for overseeing

all aspects of the firm's investor relations, human resources, and business administration

functions."

21. Defendant Robert J. Murphy ("Murphy") is a partner and Managing Director of

Meridian Management a member of the firm's Portfolio Management Group and Chairman of

the firm's Risk Management Group. According to the PPM (at p. 6), Murphy is "responsible for

manager research, due diligence, and monitoring, and also focuses on quantitative portfolio

analysis."

22. Defendant Howard B. Fischer ("Fischer") is a partner of Meridian Management,

the firm's sector head for hedged equity strategies, and a member of the firm's Portfolio

KIM


Management Group. According to the PPM (at p. 7), Fischer is "responsible for manager

research, due diligence, and monitoring, and also focuses on manager business and operational

risk analysis."

23. Defendant Peter M. Brown ("Brown") is Chief Compliance Officer of Meridian

Management and a member of the firm's Executive Committee, Risk Management Group and

Operating Committee. According to the PPM (at p. 7), Brown is "responsible for all aspects of

the firm's legal and regulatory compliance functions."

24. Defendants Lawrence, Sica, Halladin, Hickey, Smith, Murphy, Fischer, and

Brown are sometimes collectively referred to herein as the "Individual Management

Defendants."

25. The Individual Management Defendants, by virtue of their high-level positions

with Meridian Management directly participated in the management of these entities, were

directly involved in the day-to-day operations of these entities at the highest levels, and were

privy to confidential proprietary information concerning those entities and their business,

operations, growth, financial statements, and financial condition, as alleged herein.

26. Each of the Individual Management Defendants: (a) is a fiduciary of the Fund

within the meaning of §3(21) of ERISA, 29 U.S.C. §1002(21), in that they exercise authority or

control over the management and disposition of the ERISA covered employee benefit plan assets

for the purpose of investment, including those assets which were, in turn, entrusted to the

discretion and control of Madoff (b) is an investment manager within the meaning of §3(38) of

ERISA, 29 U.S.C. § 1002(38), which, by definition, is a fiduciary role in that they caused

Meridian Management to execute agreements expressly recognizing its status as a fiduciary and

investment manager within the meaning of ERISA with New Jersey Fund Plaintiffs, that

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included ERISA covered employee benefit plans; and (c) by way of correspondence with the

New Jersey Fund Plaintiffs expressly recognized Meridian Management's status as a fiduciary

within the meaning of ERISA. In addition, the Individual Management Defendants are

fiduciaries of the Fund by virtue of their roles as officers and directors of Meridian Management

and through providing investment advice for a fee, as well as by virtue of the role each played in

managing the Fund's investments, as stated in the PPM and described above.

27. The Individual Management Defendants were controlling persons of Meridian

Management. Each was in a position to control (and did control) the activities of Meridian

Management complained of herein. Additionally, each had knowledge of, and substantially

assisted Meridian Management with respect to, the wrongful acts of Meridian Management

complained of herein. (The Individual Management Defendants, and Meridian Management are

sometimes collectively referred to herein as the "Manager Defendants")

28. The Manager Defendants received substantial fees for their participation in the

management of the Fund. The Manager Defendants are jointly and severally responsible for the

breaches of fiduciary duty alleged herein, in that they constitute an integrated enterprise with

shared officers, directors, partners, personnel and other resources for the joint purpose of

providing investment management to the Fund and/or participated in the breaches of fiduciary

duty herein.

29. Defendant Martin Byrne ("Byrne") is a member of the Meridian Fund's Board of

Directors.

30. Defendant Christopher Bowring ("Bowring") is a member of the Meridian Fund's

Board of Directors.

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31. Defendants Byrne and Bowring, as directors of the Fund, are fiduciaries of the

Fund within the meaning of §3(21) of ERISA, 29 U.S.C. §1002(21), in that they exercise

authority or control over the management and disposition of the ERISA covered employee

benefit plan assets for the purpose of investment, including those assets which were, in turn,

entrusted to the discretion and control of Madoff.

32. According to the PPM: "The Directors [Byrne and Bowring] have delegated

primary responsibility for the day-to-day operations of the Fund to service providers, including

the Investment Manager [Meridian Management] and the Administrator." (PPM, p. 5).

Notwithstanding such delegation, Defendants Byrne and Bowring retained the fiduciary duties to

exercise the level of "care, skill, prudence, and diligence under the circumstances then prevailing

that a prudent man acting in a like capacity and familiar with such matters would use in the

conduct of an enterprise of a like character and with like aims." 29 U.S.C. §1 104(a)(1)(B).

33. Defendants Byrne and Bowring and the Manager Defendants are sometimes

collectively referred to herein as the "Fund Defendants."

SUBSTANTIVE ALLEGATIONS

34. The Fund is a limited liability company which was organized to invest assets.

According to the PPM: "The investment objectives of the Fund are preservation of capital and

superior risk-adjusted returns." (PPM, pp. vi , 1).

35. The Fund's activities were subject to the control of the Fund's directors and its

Investment Manager, Meridian Management. According to the PPM (at p. 25): "The

"management or control of the Fund's business ... is the sole responsibility of the Investment

Manager under the direction of the Directors. . . . The Directors may require any Shareholder, at

any time, to redeem its Shares, in whole or in part, from the Fund."

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36. The PPM describes particular activities to be performed by the Investment

Manager. Specifically:

(a) "The Investment Manager ... seeks out investments with a diverse group

of investment managers ... who the Investment Manager believes are able to meet the Fund's

objections of preservation of capital and superior risk-adjusted returns." (PPM, p. vi).

(b) "The Investment Manager is responsible for choosing the Fund Managers

and Investment Vehicles, and monitoring performance and ongoing asset allocation. The

Investment Manager selects Fund Managers that trade primarily in a wide range of equity and

debt securities. In addition, the Investment Manager selects Fund Managers that may invest in

options, warrants, currencies, futures contracts, options on futures contracts and other derivative

instruments, commodities (subject to regulatory compliance), partnership interests, money

market instruments, precious metals, other ownership interests and indebtedness and may utilize

a variety of specialized investment techniques described more fully herein." (PPM, p. 2).

(c) "The Investment Manager selects Fund Managers that are not generally

available to the investment public and who satisfy stringent selection criteria, which may

include, but are not limited to, the following general criteria:

(i) The ability to produce attractive long-term, risk-adjusted investment results.

(ii) The ability to perform well in markets where investment conditions are difficult.

(iii) The ability to produce investment results that are not highly correlated to other investment classes." (PPM, pp. 2-3).

(d) "In selecting Fund Managers, the Investment Manager collects, analyzes

and evaluates information regarding the personnel, history and background, and the investment

styles, strategies and performance of professional investment management firms. The selection

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process includes qualitative and quantitative analysis of historical performance track records of

investment managers, and evaluation of various groupings of investment managers for portfolio

construction purposes, given the Fund's investment objectives and policies. (PPM, p. 3).

(e) "The Investment Manager is responsible for all decisions concerning the

investments of the Fund, including with respect to the allocation of the Fund's assets to

underlying Fund Managers." (PPM, p. 6).

37. The Fund has acknowledged that it "lost" and has written off $32 million,

reflecting its investment with Madoff and BMIS through the Offshore XL Fund. See Fed. Cplt. ¶

35. According to the Federal Complaint, the Fund's $32 million investment consisted of $7

million invested in the Offshore XL Fund on October 1, 2006; (ii) $10 million invested in the

Offshore XL Fund on November 1, 2006; (iii) $5 million invested in the Offshore XL Fund on

January 1, 2008; and (iv) $10 million invested in the Offshore XL Fund on August 1, 2008. See

Fed Cplt. ¶ 31. Had the Fund Defendants followed and applied the appropriate due diligence and

risk-monitoring strategy and discharged their duties to the Fund, they would have realized that

the results claimed by Madoff and BMIS were impossible and would not have so invested the

Fund's assets or would have liquidated such investments, and the Fund would not have incurred

the losses.

38. According to the Federal Complaint: "The Tremont Defendants' failure to

exercise reasonable care enabled Madoff and BMIS to perpetrate and continue their fraudulent

scheme by convincing the Offshore Plaintiffs, [sic] to invest in, and remain invested in, the

Offshore XL Fund." Fed. Cplt. ¶ 198. Here, the Fund Defendants' failure to exercise reasonable

care enabled Madoff and BMIS to perpetrate and continue their fraudulent scheme.

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39. Other investment advisors and financial publications had publicly stated that

BMIS's trading results could not be replicated based on the model Madoff was purportedly

using. The trading results reported by BMIS were not consistent with publicly traded funds that

followed the same trading strategy, all of which had much lower returns and greater volatility

than reported by BMIS.

40. For example, Aksia, LLC, an independent hedge fund research and advisory firm,

identified red flags as early as 2007, which prompted Aksia to advise its clients against investing

with Madoff or any of his "feeder funds." Aksia reported the red flags it had found back in

2007, in a letter to its clients dated December 15, 2008 (the "Aksia Letter"). One red flag

reported in the Aksia Letter was that "[t]he Madoff feeder funds marketed a purported 'Split-

strike Conversion' strategy that is remarkably simple; however, its returns could not be nearly

replicated by our quant analyst."

41. In May 2001, Barron 's reported in the article "Don 'tAsk, Don't Tell: Bernie

Madoff is so secretive, he even asks his investors to keep mum" that certain option strategists for

major investment banks could not understand how BMIS and Madoff achieved the results that

they claimed from using the split strike conversion strategy. Madoff responded to Barron 's

questions regarding how he achieved consistently high returns stating that: "It's a proprietary

strategy. I can't go into great detail."

42. Similarly, in May 2001, MAR/Hedge - a hedge fund newsletter - reported that

one fund had "reported losses of no more than 55 basis points in just four of the past 139

consecutive months, while generating highly consistent gross returns of slightly more than 1.5%

a month and net annual returns roughly in the range of 15%." MAR/Hedge reported that "expert

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skeptics ... express[ed] bewilderment and indicated they were ... grappling to understand how

such results had been achieved for so long."

43. One basic technique to test the validity of a trading strategy in the securities

industry is to reverse engineer the trading strategy purportedly employed to see if alleged

performance results can be replicated. According to a December 18, 2008 article in The Wall

Street Journal, Harry Markopolos, who worked for a BMIS rival in Boston, was asked by his

superiors in 2000 why he couldn't get the same results as BMIS. Markopolos tried to reconstruct

Madoff s purported strategy, but was unable to achieve the same results.

44. Markopolos concluded Madoff must be a fraud. Markopolos's superiors told him

to check his math, given that Madoff was such a renowned trader. Markopolos enlisted the help

of Daniel DiBartolomeo, a top financial mathematician in Boston. DiBartolomeo spent hours

pouring through Markopolos's data and came to the same conclusion: the strategy Madoff said

he used could not have achieved the results he reported. Had the Fund Defendants reverse

engineered Madoff's trading strategy, they would have seen that the advertised results were

impossible.

45. Had the Fund Defendants evaluated the options positions Madoff claimed to have

open, they would have understood that the positions were in excess of the actual open interest in

the entire S&P put and call market in those securities. In addition, according to BMIS's ADV

Report filed with the SEC, BMIS had over $17 billion of assets under management in 23

accounts. The entry and exit of over $17 billion would have overwhelmed the S&P 100 put and

call market. Indeed, Aksia recognized this red flag, stating in the Aksia Letter that "[ut seemed

implausible that the S&P 100 options market that Madoff purported to trade could handle the size

of the combined feeder funds' assets which we estimated to be $13 billion."

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46. There were no independent trading records for Madoff and BMIS, because

Madoff self-cleared the Fund's trades through his own broker-dealer, BMIS. Moreover, BMIS

generated paper trade tickets despite claiming to have an automated order and execution process

for the strike-split conversion strategy, and Madoff s reputation was made as an early and

enthusiastic proponent of electronic trading. As stated in the Aksia Letter:

Madoff's website claimed that the firm was technologically advanced ("the clearing and settlement process is rooted in advanced technology") and the feeder managers claimed 100% transparency. But when we asked to see the transparency during our onsite visits, we were shown paper tickets that were sent via U.S. mail daily to the managers. The managers had no demonstrated electronic access to their funds accounts at Madoff. Paper copies provide a hedge fund manager with the end of the day ability to manufacture trade tickets that confirm the investment results.

47. Had Defendants conducted due diligence and risk monitoring into the trades

reported by BMIS, they would have discovered that many of the individual trades reported by

Madoff would have shown that they could not have taken place as represented in that many were

at reported prices higher than the price that the security in question traded at for the entire day

the trade was claimed to have been executed.

48. When Aksia tried to independently confirm the existence of Madoff feeder fund

securities, it was unable to do so:

There was at least $13 billion in all the feeder funds, but our standard 13F review showed scatterings of small positions in small (non-S&P 100) equities. The explanation provided by the feeder fund managers was that the strategy is 100% cash at every quarter end.

Form 13(f) is the reporting form filed by institutional investment managers, pursuant to Section

13(f) of the Securities Exchange Act of 1934, reporting the securities holdings of institutional

investors.

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49. The positions in securities represented by BMIS to its customers did not exist.

The Financial Industry Regulatory Authority ("FINRA") has suggested that there is no record of

trades through the Madoff firm for the fund accounts: "Our exams showed no evidence of

trading on behalf of the investment advisor, no evidence of any customer statements being

generated by the broker-dealer," said Herb Perone, spokesman for FINRA. At the first meeting

of BMIS creditors on February 20, 2009, the court-appointed trustee for the liquidation of BMIS,

Irving Picard, also confirmed that he had found no evidence that Madoff purchased securities for

at least the past thirteen years.

50. The Fund Defendants could not have conducted the appropriate due diligence and

risk monitoring described, because, if they had, they would have observed blatantly inadequate

controls, conflicts of interest, and lack of separation of duties at BMIS. They would also have

had cause to question the existence of securities transactions allegedly made by BMIS, because a

comparison of transactions reported by BMIS against publicly available trade data for the

securities, which were all publicly traded, would have shown that various transactions could not

have been executed on the dates and/or prices reported by BMIS.

51. Madoff failed to trade through an independent broker, and, instead, self-cleared

through his wholly-owned company, BMIS. In well-managed investment programs, in order to

create an independent basis for confirming transaction executions and compliance with program

criteria, the fund manager processes the transactions through an independent broker. Madoff

failed to follow this standard industry practice.

52. Indeed, Andy Berg, CEO of Homrich & Berg Inc., one of Atlanta's largest

independent investment advisors, told The Atlanta Business Chronicle in a February 5, 2009

article that BMIS's failure to use a third-party custodian firm was "a black flag" for them. Berg

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advised a client who brought an existing relationship with BMIS to him to sell its investments

with BMIS immediately. Aksia also told its clients that BMIS's initiation and execution of

trades, and custody of feeder fund assets, "seemed to be a clear conflict of interest and a lack of

segregation of duties is high on our list of red flags."

53. A further operational and structural red flag was that BMIS 's entire internal audit

function, as well as its external independent auditor function, were being conducted by the strip-

mall based, three-person firm of Friehling & Horowitz, CPA's, P.C. ("F&H"), only one member

of which appears to have been a full time accountant. As explained in the Aksia Letter:

The feeder funds had recognized administrators and auditors but substantially all of the assets were custodied with Madoff Securities. This necessitated Aksia checking the auditor of Madoff Securities, Friehling & Horowitz (not a fictitious audit firm). After some investigating, we concluded that Friehling & Horowitz had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant (and the office in Rockland County, NY was only 1 3ft x 1 8ft large). This operation appeared small given the scale and scope of Madoff s activities.

54. Under the regulations of the American Institute of Certified Public Accountants

("AICPA"), every accounting firm that does auditing work is required to enroll in the AICPA's

peer review program under which experienced auditors assess such firm's audit quality yearly.

While F&H was a member of the AICPA, it had not been subjected to a peer review since 1993

because F&H had represented to the AICPA, in writing, that it did not perform any audits.

Whether a firm has been subject to a peer review, and the results of that review, are on public file

at the AICPA.

55. Also disturbing was the fact that BMIS was controlled by Madoff family

members. As explained in the Aksia Letter:

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Conversations with former employees indicated a high degree of secrecy surrounding the trading of these feeder fund accounts. Key Madoff family members (brother, daughter, two sons) seemed to control all the key positions at the firm. Aksia is consistently negative on firms where key and control positions are held by family members.

56. The failure to use an independent third party broker to clear the Madoff trades,

reliance on an obscure and blatantly inadequate auditor, and the concentration of family control

within BMIS should have stopped investment of Fund assets with Madoff and BMIS in its

tracks.

57. In 1992, the SEC investigated two accountants, Frank Avellino and Michael

Bienes, who had improperly raised money in Florida for BMIS/Madoff and promised guaranteed

returns of 13.5% to 20% to investors. These two accountants sold unregistered securities to

unsophisticated investors, raising $440 million. Through its investigation, the SEC discovered

that Avellino and Bienes transferred their clients' funds to Madoff, who then purportedly

invested the money. Yet, when investigators sought documents regarding those transactions,

they discovered that Avellino and Bienes kept few if any records.

58. According to an SEC complaint, Mr. Avellino began raising money for Madoff in

1962. Indeed, Avellino had been connected to Madoff for his entire career. After graduating

from the City University of New York in 1958, Mr. Avellino began working as an accountant at

a firm run by Saul Alpern, Madoff's father-in-law, where Madoff also once ran his operations.

Bienes joined Avellino in raising funds for Madoff in 1965. The SEC charged Avellino and

Bienes with operating an unregistered investment company and selling unregistered securities.

These facts, including Madoff s involvement, were publicly reported in a December 16, 1992

article in The Wall Street Journal.

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59. FINRA also reported five regulatory actions against BMIS, the first dating back to

1963: (1) in 1963, the National Association of Securities Dealers, Inc. ("NASD") fined and

censured BMIS for violation of NASD Rule 2230; (2) in 1975, the NASD again fined BMIS; (3)

in 2005, the NASD censured and fined BMIS for violation of SEC Rule 1 1AC1-4; (4) in 2007,

the NASD censured and fined BMIS for violation of SEC Rule 604, NASD Rule 2110, and

Interpretative Material 2110-2; and (5) in 2008, FINRA censured and fined BMIS for violation

of NASD Ruled 8211 and 8213.

60. Had the Fund Defendants conducted due diligence and risk monitoring of Madoff

and BMIS, these numerous SEC, NASD and FINRA actions would have raised red flags

warranting, at a minimum, further investigation into whether a manager such as Madoff/BMIS,

that had repeatedly acted in blatant disregard of regulations in place to protect investors, should

be managing the Fund's assets.

61. The Fund Defendants never questioned, at least publicly, why Madoff would let

feeder funds charge substantial fees based on a percentage of profits purportedly delivered by

BMIS, while BMIS simply charged a commission on trades allegedly executed. According to a

December 19, 2008 article in The Wall Street Journal, "[t]his is an unusual arrangement that

raised suspicions among rival money managers, some of whom doubted that it could generate

sufficient fee income."

62. Numerous other investment professionals who advised investors about potential

investments with Madoff or BMIS warned clients not to invest with Madoff. As noted above, in

a letter issued to clients on December 15, 2008, Aksia, LLC, an independent hedge fund research

and advisory firm, discussed the red flags it had previously identified as early as 2007, which

prompted Aksia to advise its clients against investing with Madoff or any of his feeder funds.

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Aksia explained that "[a] s a research firm we are forced to make difficult judgments about the

hedge funds we evaluate for clients. This was not the case with the Madofffeeder funds. Our

judgment was swift given the extensive list of redflags." (Emphasis added.) In other words, this

was a no-brainer for anyone doing the kind of due diligence and risk monitoring the Fund

Defendants should have been doing.

63. In 2003, a team from Société Générale's investment bank was sent to New York

to perform routine due diligence of Madoff and BMIS. The New York Times reported in a

December 17, 2008 article on the team's findings:

What it found that March was hardly routine: Mr. Madoffs numbers simply did not add up. Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.

The red flags at Mr. Madoffs firm were so obvious, said one banker with direct knowledge of the case, that Société Générale "didn't hesitate. It was very strange."

64. The Fund Defendants had responsibilities to establish due diligence procedures

and performance guidelines for managers with whom the Fund invested client assets. These

procedures were to be applied in creating general oversight and transparency regarding how the

Fund's assets were being invested. The Fund Defendants also were responsible for ensuring that

these procedures and guidelines, if any, were in fact being performed. However, as is evident

from the Fund Defendants' failure to heed the numerous red flags discussed above, the Fund

Defendants failed to perform even a minimum level of due diligence regarding Madoff and

BMIS.

65. By reason of their positions and because of their ability to control the business of

the Fund, the Fund Defendants owed the Fund fiduciary obligations of fidelity, trust, loyalty, and

-19-


due care, and were and are required to use their utmost ability to control the Fund in a fair, just

and equitable manner and to act in furtherance of the best interests of the Fund so as to benefit

the Fund and not in furtherance of their personal interest. In addition, each of the Fund

Defendants owed to the Fund the fiduciary duty to exercise due care, loyalty, good faith, and

diligence in the management and administration of the Fund and in the use and preservation of

its assets.

66. Among other things, the Fund Defendants failed to:

(a) safely and prudently manage the Fund's business, operations and assets;

(b) perform, or supervise those tasked with performing, adequate due

diligence of the Fund's investments, including due diligence with respect to the Offshore XL

Fund, Madoff and BMIS;

(c) investigate red flags regarding Madoff and BMIS.

67. That government regulators, including the SEC, did not timely uncover Madoffs

Ponzi scheme does not justify defendants' conduct or limit defendants' responsibility. Indeed,

the Fund has stated that "the SEC's inadequacy in handling this matter has now been well-

documented" (see Plaintiffs' Memorandum of Law in Opposition to the Tremont Defendants'

Motion to Dismiss, dated July 14, 2009 (filed in the Federal Action), at page 6, footnote 3), and

"The Bernard Madoff scandal ... ha[s] battered the agency's reputation." Id. (ellipsis and

brackets in original) (quoting The Wall Street Journal article dated February 7, 2009).

DEMAND FUTILITY

68. Plaintiffs bring this derivative action in good faith and in the best interests of the

Fund, and it is in the best interests of the Fund if the conduct and prosecution of this action be

left to the Plaintiffs, and not the directors of the Fund or their affiliates. This derivative action is

-20-


meritorious and the claims herein are likely to succeed, and Plaintiffs will honestly, fairly and

adequately represent the interests of the Fund in prosecuting the wrongs detailed herein.

69. The Fund has acknowledged that it lost $32 million in connection with

investments with Madoff and BMIS. Any recovery of part or all of the losses from the Fund

Defendants is in the best interests of the Fund, and a recovery will exceed the legal fees payable.

70. The claims asserted herein are derivative claims and not direct claims, and a

reasonable alternative to derivative claims on behalf of the Fund is not possible.

71. Plaintiffs have not made demand on the directors of the Fund in connection with

bringing these derivative claims, since such demand would be a futile and useless act that is

excused.

72. The Fund filed a complaint (the Federal Complaint) against a number of entities

(Tremont Group Holdings, Inc., Tremont Partners, Inc., Tremont (Bermuda) Limited,

Oppenheimer Acquisition Corporation, KPMG LLP, and KPMG (Cayman) (collectively, the

"Federal Defendants")) in connection with certain damages purportedly sustained by the Fund

relating to Madoff's Ponzi scheme. The Federal Complaint, among other things, purports to

assert claims by the Fund for securities violations under Section 10(b) of the Securities Exchange

Act of 1934 and Rule 1 Ob-5 thereunder, fraud, breach of fiduciary duty, and negligence.

Importantly, however, the Fund has not sued the Fund Defendants. Thus, while claiming that the

Federal Defendants are responsible for losses sustained by the Fund, the Fund Defendants, using

the Fund's assets, improperly have sought to shift entirely their responsibility for losses to the

Federal Defendants.

73. Indeed, the Fund's allegations in the Federal Complaint demonstrate that the Fund

Defendants, themselves, are liable. The Federal Complaint points to red flags that were available

WIME


to the Fund Defendants, and that underscore the Fund Defendants' liability to the Fund. For

example, according to the Federal Complaint:

(a) "If the Tremont Defendants actually had conducted the due diligence and

monitoring they claimed they had, they would have been aware of [Madoff's Ponzi scheme].

The Tremont Defendants either failed to perform the due diligence or monitoring they claimed to

have performed, or they uncovered evidence of Madoffs Ponzi scheme, and knowingly or

recklessly misrepresented to plaintiffs' representatives that the XL Funds' assets existed and

were appreciating - all in order to continue collect substantial fees from plaintiffs." Fed. Cplt. ¶

6. Here, however, the Fund Defendants had both obligations and the ability to perform due

diligence that, according to the Federal Complaint, the Federal Defendants failed to perform.

(b) Audits of BMIS by its accounting firm, F&H, "were a sham" and F&H's

"reputation and the inadequacy of its work made its reports unreliable." Fed. Cplt. ¶ 9. Indeed,

according to the Federal Complaint, "F&H was a three person firm, with only one active

accountant (David Friehling), who worked out of a small storefront office, had not been 'peer-

reviewed,' and who reported to the American Institute of Certified Public Accountants

('AICPA') that he did not conduct audits." Fed. Cplt. ¶ 9. Additionally, according to the

Federal Complaint (at ¶ 18):

F&H is an accounting firm that operated out of a 238-square foot storefront office in Rockland County, New York. F&H had only three employees, one of whom was 80 years old and lived in Florida. Friehling, F&H's only active accountant, reported in writing to the AICPA that he does not conduct audits.

(c) "If the Tremont Defendants had conducted due diligence on Madoff and

BMIS, were familiar with Madoffs and BMIS's operations, and were monitoring Madoffs and

BMIS's transactions, internal controls, and operational risk as they represented, it would have

-22-


been so obvious to the Tremont Defendants that the assets did not exist and the trades had not

occurred ...." Fed. Cplt. ¶ 137.

(d) "[T]he Tremont Defendants controlled and limited plaintiffs' access to

Madoff and BMIS, and positioned and described themselves as the organization that would work

with Madoff and BMIS to provide responses to all information requests made by plaintiffs. * * *

For example, since late 2005, after the Tremont Defendants had previously granted plaintiffs'

representatives access to Madoff on a few occasions for limited meetings, they declined to

facilitate any additional contact with Madoff or BMIS, and emphasized that their role was, in

part, to minimize the need for plaintiffs to have direct contact with Madoff or BMIS. Doing so,

the Tremont Defendants explained, avoided disturbing Madoff." Fed. Cplt. ¶IJ 42-43. "[flt was

communicated to plaintiffs' representatives that the Tremont Defendants were unable to

coordinate a meeting with Madoff, despite the specific request of the plaintiffs' representatives to

do so ..." Fed. Cplt. ¶ 46. Thus, the Federal Complaint establishes that the Fund's

representatives did have access to Madoff such that they could engage in meaningful due

diligence; it also establishes that, at some point, direct contact between the Fund's

representatives and Madoff was cut off, thus creating an additional red flag.

(e) "The Tremont Defendants breached the fiduciary duties they owed to the

Offshore Plaintiffs [i.e., the Fund and other entities], and acted in bad faith, with gross

negligence and in utter disregard for due care and reasonable and prudent investment standards,

by failing to use reasonable care, or the competence or skill of a professional investment advisor,

in performing due diligence, managing plaintiffs' investments, providing accurate financial

disclosures, and overseeing Madoffs and BMIS's management of the Offshore Plaintiffs'

assets." Fed. Cplt. ¶ 182.

-23-


74. Defendants have stated, albeit self-servingly, that they performed due diligence.

In 2009, Defendant Sica stated:

[O]ur records show that Meridian did full due diligence on Tremont, as we have done over the past 14 years on all of the managers in the funds we manage. The due diligence history on the Tremont fund includes over 20 research meetings and substantive conference calls in the past three years alone. In addition, periodic background checks on Tremont principals and Bernard Madoff, reviews of Tremont regulatory filings, due diligence questionnaires, offering documents and countless more routine telephone and email contacts were part of our continuing due diligence activities. Importantly, we periodically sample- tested Madoff trade ticket confirmation source data made available to us by Tremont at our request and assessed Tremont's protocols for testing Madoff results against Bloomberg data. Our research team's most recent due diligence meeting was at Tremont's offices on November 12, 2008. This was all in addition to relying on audited financial statements from KPMG and E&Y with unqualified opinions, Madoff Securities and Tremont's SEC registration, and the fact that Tremont represented that it had adequate controls over the relevant assets.

The purported due diligence described above, if conducted adequately and in good faith, would

have revealed, at the very least, the same red flags that, according to the Fund's statements in the

Federal Complaint, demonstrate the liability of the Federal Defendants.

75. Defendants were keenly aware of the red flags. According to one investment

consulting firm (as to whom defendant Sica stated: "we respect their independence"), following

Madoff's arrest, Sica stated that Meridian Capital Partners, Inc. (the managing member of

Meridian Management) had met with Madoff twice at Madoff's offices. Sica also stated that he

was never comfortable with the self-custodian and broker/dealer set up. Sica understood, in

2009, that, according to the investment consulting firm, Meridian did not perform proper

operational and investment due diligence with respect to the Tremont investment.


76. The acts and practices complained of herein cannot be defended by the Fund's

directors (or any of the Fund Defendants), and are not subject to the protection of any

independent business judgment, and it would undoubtedly be to the benefit of the Fund to assert

these derivative claims and to recover the damages caused by the Defendants' wrongdoing.

77. The wrongs alleged herein constitute violations of the fiduciary duties owed by

the Fund's directors, among others, to the Fund. The directors are subject to liability for

breaching their fiduciary duties to the Fund by, among other things, causing the Fund's assets to

be invested with Madoff or BMIS through the Offshore XL Fund without performing adequate

due diligence or continued monitoring, causing or permitting the reckless investment practices

alleged herein, failing to adequately monitor Madoffs and BMJS's actions, and failing to detect,

prevent, or halt the wrongful acts alleged herein.

78. The directors and the remaining Fund Defendants exercise ultimate authority over

the Fund, and have substantially profited at the expense of the Fund.

79. The Fund Defendants face a substantial likelihood of liability in this action

because of their acts and omissions alleged herein, and they face substantial exposure to liability

for abrogation of their duties of oversight. The directors knew or should have known that the

Fund's assets were employed improperly and took no steps in a good faith effort to prevent or

remedy that situation, proximately causing substantial losses to the Fund.

80. The Fund Defendants have ratified the wrongful actions described herein, and the

defendants cannot be expected to prosecute claims against themselves, and persons or entities

with whom they have extensive interrelated business, professional and personal entanglements,

if Plaintiffs demanded that they do so. The Fund Defendants, because of these relationships,

- 25 -


have developed debilitating conflicts of interest that prevent them from taking the necessary and

proper action on behalf of the Fund.

81. Insurance policies covering the liability of an entity's directors generally purport

to exclude legal claims asserted directly by an entity against such persons. Thus, there was, and

is, a substantial disincentive for the Fund to bring any action directly against its directors.

Generally, under the terms of such insurance policies, an entity would be required by the

insurance carriers to cooperate in the defense of any claims, such as the present action, which

seeks to impose liability upon the directors and others.

82. Presumably, the policy or policies which the Fund maintains contain the

foregoing provision, and the insurance carriers would maintain that the Fund and its directors are

disabled from complying with any demand that would cause the Fund to institute, or prosecute

any action against the directors for the wrongful conduct alleged herein.

83. The directors participated in, approved, and/or permitted the wrongs alleged

herein, concealed or disguised those wrongs or recklessly, and/or negligently disregarded those

wrongs, and are therefore not disinterested parties and lack sufficient independence to exercise

business judgment, as alleged herein. The directors exhibited a sustained and systemic failure to

fulfill their fiduciary duties, which could not have been an exercise of good faith business

judgment.

84. Given the size, scope, and blatancy of the wrongdoing alleged above, the directors

and other Fund Defendants either knew of the financial risks or turned a blind eye to them. Such

conduct is not protected business judgment and exposes the directors, among others, to

substantial liability in this action.

-26-


85. The directors and other Fund Defendants lack the sufficient independence with

which to render a disinterested decision on whether to pursue the derivative claims alleged herein

against the Fund Defendants.

86. In addition, demand would be futile and useless for the additional following

reasons:

(a) The directors, because of their inter-related business, professional and

personal relationships, have developed debilitating conflicts of interest that prevent them from

taking the necessary and proper action on behalf of the Fund as requested herein;

(b) In order to bring this suit, the directors would be forced to sue themselves

and persons and entities with whom they have extensive business and personal entanglements,

which they will not do, thereby excusing demand; and

(c) The acts complained of constitute violations of the fiduciary duties owed

by the directors and these acts are incapable of ratification.

87. The Fund has been and will continue to be exposed to significant losses due to the

wrongdoing complained of herein, yet none of the Fund Defendants or the Fund itself has filed

any lawsuits or taken any other equivalent or similar actions against the Fund Defendants to

recover for the Fund the damages the Fund has suffered and will continue to suffer.

FIRST CAUSE OF ACTION

Breach of Fiduciary Duties (Against Fund Defendants)

88. New Jersey Fund Plaintiffs repeat and reallege the foregoing allegations as if fully

set forth herein.

89. The Fund has suffered damages due to the Fund Defendants' conduct as detailed

above. The claims asserted herein against the Fund Defendants are asserted on behalf of the

-27-


Fund to recover from the Fund Defendants the damages sustained and to be sustained by the

Fund due to the gross, willful and wrongful mismanagement, and waste of the Fund's assets.

90. The conduct detailed above was not due to an honest error of judgment but to the

Fund Defendants' gross, reckless, bad faith and/or willful disregard of their fiduciary duties and

of the rights and interests of the Fund. The Fund Defendants' conduct cannot be justified as

valid acts of business judgment because they engaged in systematic, gross mismanagement, and

wasteful activities, and materially misled the Fund in order to enrich themselves personally.

91. The Fund Defendants have individually or in concert breached fiduciary duties,

including duties of loyalty, care, and good faith owed to the Fund because they, among other

things:

(a) failed to establish and implement an adequate and functioning system of

internal financial and accounting controls to ensure the existence of the Fund's assets;

(b) failed to adequately perform, or to adequately supervise others who

performed, due diligence and continued risk monitoring of the Fund's business and operations

and the Fund's manager and portfolio;

(c) enriched themselves at the expense of the Fund by collecting fees for

services not performed and based upon the artificially inflated net asset value of the Fund;

(d) failed to adequately supervise the preparation and filing of audits, reports

or other information and to adequately examine and evaluate any reports of examination, audits,

or other financial information concerning the Fund; and

(e) wasted the Fund's assets.

92. By reason of the foregoing, the Fund has sustained and will continue to sustain

damages for which relief is sought herein.


SECOND CAUSE OF ACTION

Aiding and Abetting Breaches of Fiduciary Duties (Against Fund Defendants)


set forth herein.

94. Each of the Fund Defendants breached the fiduciary duties owed to the Fund in a

grossly negligent, willful and reckless manner, as detailed above.

95. Each of the Fund Defendants knowingly gave substantial assistance and

encouragement to, and aided and abetted each other in committing the breach of fiduciary duties

alleged above.

96. Each of the Fund Defendants acted in concert with other Fund Defendants to

commit the breaches of fiduciary duties detailed above, and knowingly participated in the other

Fund Defendants' breach of fiduciary duties.

97. The Fund has sustained and will continue to sustain damages by reason of the

foregoing.

THIRD CAUSE OF ACTION

Gross Negligence (Against Fund Defendants)


set forth herein.

99. Each of the Fund Defendants owed to the Fund duties properly to manage the

Fund and monitor its investments and the Fund reasonably relied on the Fund Defendants to

discharge such duties. Such duties included the performance of due diligence with respect to the

-29-


Fund's investments, including those with Madoff and BMIS through the Offshore XL Fund.

Defendants, acting with gross negligence, grossly failed to discharge their duties to the Fund.

100. The Fund has sustained substantial, foreseeable damages, which were proximately

caused by the Fund Defendants' gross negligence.

FOURTH CAUSE OF ACTION

Negligence (Against Fund Defendants)


set forth herein.

102. Each of the Fund Defendants owed to the Fund duties properly to manage the

Fund and monitor its investments, and the Fund reasonably relied on the Fund Defendants to

discharge such duties. Such duties included the performance of due diligence with respect to the

Fund's investments, including those with Madoff and BMIS through the Offshore XL Fund.

Defendants, acting negligently, failed to discharge their duties to the Fund.

103. The Fund has sustained substantial, foreseeable damages, which were proximately

caused by the Fund Defendants' negligence.

FIFTH CAUSE OF ACTION

Breach of Contract (Against Meridian Management)


set forth herein.

105. As the Fund's Investment Manager, Meridian Management was contractually

obligated to manage the Fund in good faith and to "select[] Fund Managers that are not generally

available to the investment public and who satisfy stringent selection criteria."

1111011111


106. In breach of its contract, Meridian Management failed to properly manage the

Fund and to select Fund managers who satisfied the requisite selection criteria.

107. The Fund has sustained substantial damages as a result of Meridian

Management's breach of contract.

SIXTH CAUSE OF ACTION

Unjust Enrichment (Against Manager Defendants)


set forth herein.

109. The Manager Defendants have received management fees to perform certain

duties which they did not perform, and have been unjustly enriched thereby.

110. Additionally, the management fees paid to the Manager Defendants were inflated

because they were based on reported net asset values that were themselves inflated as a result of

the conduct challenged herein.

111. The Manager Defendants have been unjustly enriched thereby.

112. The Manager Defendants, in equity and good conscience, should be required to

return their unjustly gained monies.

SEVENTH CAUSE OF ACTION

Breach of Fiduciary Duty Under ERISA (Against the Fund Defendants)

113. All Plaintiffs repeat and reallege the foregoing allegations as if fully set forth

herein.

114. This Count is brought by all Plaintiffs derivatively on behalf of the Fund against

the Fund Defendants. It is brought pursuant to ERISA §502(a)(2) and (3), 29 U.S.C.

-31-


§1 132(a)(2) and (3), for breaches of the fiduciary obligations imposed by ERISA §404, 29

U.S.C. § 1104, upon fiduciaries and persons who exercise control over the investment or

management of assets of employee benefit plans or who provide such plans with investment

advice for a fee.

115. ERISA requires that a fiduciary to an employee benefit plan act "with the care,

skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting

in a like capacity and familiar with such matters would use in the conduct of an enterprise of a

like character and with like aims." 29 U.S.C. §1 104(a)(1)(B).

116. The Fund is an investment fund or investment entity which solicited, accepted,

and received investments from ERISA covered employee benefit plans. At all times relevant to

the Complaint, Meridian Management exercised control over the investment or management of

assets of the Fund or provided the Fund with investment advice for a fee related to all or a

portion of the Fund. The Fund purchased shares in, or otherwise invested with the Offshore XL

Fund. The Offshore XL Fund was a so-called "feeder fund" for one or more Madoff-managed

investment vehicles or entities. The Offshore XL Fund invested assets entrusted to it exclusively

with Madoff entities.

117. At all times relevant to the Complaint, the Fund Defendants were fiduciaries

within the meaning of3 (21) of ERISA, 29 U.S.C. §1002(21), because a portion or all of the

assets of the Fund were Plan Assets under ERISA §3(42), 29 U.S.C. § 1002(42), and the

Department of Labor regulations thereunder, and because they had the authority and

responsibility to invest ERISA covered employee benefit plan assets and actually exercised

authority or control over the disposition of those employee benefit plan assets.

-32-


118. As fiduciaries with respect to the Fund, the Fund Defendants owed a duty of

loyalty to the Fund under §404(a)(1)(A) of ERISA, 29 U.S.C. 1 104(a)(1)(A), to act solely and

exclusively for the benefit of its participants and beneficiaries, and under §404(a)(1)(B) of

ERISA, 29 U.S.C. 1 104(a)(1)(B), to invest or manage plan assets "with the care, skill, prudence,

and diligence under the circumstances then prevailing that a prudent man acting in a like

capacity and familiar with such matters would use in the conduct of an enterprise of a like

character and with like aims." The Fund Defendants breached that duty by, inter alia:

(a) failing to investigate sufficiently the Offshore XL Fund to ensure that it

was safe, prudent, honest and suitable investments for employee benefit plans and their

participants and beneficiaries and through such failure failing to identify the risks associated with

the decision of the Offshore XL Fund to give control of the Fund's assets to Madoff and his

company;

(b) failing to prudently perform risk monitoring of the investments of the

Fund or to locate or give sufficient attention to warning signs about the unreliability and

unsuitability of the Offshore XL Fund because it was a Madoff-related investment vehicles;

(c) failing to prudently perform risk monitoring of the Offshore XL Fund's

investments during the period during which the Fund Defendants invested plan assets held in

those entities;

(d) failing to disclose to the Fund the true risks associated with investments by

the Fund; and

(e) failing to perform risk monitoring and divest the Fund of its investments in

the Offshore XL Fund when they knew or, through the exercise of the appropriate ERISA

standard of care, should have known, that the Offshore XL Fund was not a prudent investment.

- 33 -


119. The Fund Defendants breached the fiduciary duties owed to Fund under §404 of

ERISA with respect to each act and omission associated with the investment in, and decision to

invest in, and to remain invested in the Offshore XL Fund and/or Madoff-related entities.

120. In addition, at all relevant times, the scope of the fiduciary responsibility of each

of the Fund Defendants included the responsibility to appoint, evaluate, and monitor each of the

other fiduciaries.

121. Under ERISA, a monitoring fiduciary must ensure that the monitored fiduciaries

are performing their fiduciary obligations, including those with respect to the investment of a

plan's assets, and must take prompt and effective action to protect a plan and its participants

when they are not. In addition, a monitoring fiduciary must provide the monitored fiduciaries

with complete and accurate information in their possession that they know or reasonably should

know that the monitored fiduciaries must have in order to prudently manage a plan and a plan's

assets.

122. The Fund Defendants breached their fiduciary monitoring duties by, among other

things, failing to monitor the other fiduciaries' conduct resulting in the breaches of fiduciary duty

described above.

123. As a result of the above-described conduct, the Fund Defendants have breached

their fiduciary duties under §404 of ERISA to the Fund, causing it to incur substantial monetary

losses.

124. Pursuant to §409 of ERISA, 29 U.S.C. §1109, the Fund Defendants are personally

liable to the Fund for losses resulting from their fiduciary breaches and to restore to the Fund any

losses resulting from those breaches.

NYM


EIGHTH CAUSE OF ACTION

Breach of Fiduciary Duty Under ERISA (Against the Manager Defendants)


herein.

126. This Count is brought on behalf of all Plaintiff against the Manager Defendants. It

is brought pursuant to ERISA §502(a)(2) and (3), 29 U.S.C. §1 132(a)(2) and (3), for breaches

of the fiduciary obligations imposed by §404, 405, 406, and 409 of ERISA, 29 U.S.C. §§1104,

1105, 1106 and 1109, upon fiduciaries of assets of employee benefit plans.

127. In the PPM, Meridian Management acknowledged that it is both an ERISA

fiduciary and Investment Manager of the Fund under §3(21) and 3(38) of ERISA, 29 U.S.C.

§1002(21) and 1002(38).

128. Under ERISA Section 402(c)(3), "a person who is the named fiduciary with

respect to control or management of the assets of the plan may appoint an investment manager or

managers to manage (including the power to acquire and dispose of) any assets of the plan." 29

U.S.C. §1 102(c)(3).

129. Under ERISA §405(d), if an Investment Manager has been appointed under

ERISA §402(c)(3), then the named fiduciary shall not be liable for the acts and omissions of

such Investment Manager, or be under an obligation to invest or otherwise manage any assets of

the plan which is subject to the management of such Investment Manager. See 29 U.S.C.

§1105(d).

130. Under the PPM, the fiduciaries of the Fund may appoint Meridian Management as

a named fiduciary within the meaning of §402(c)(3) of ERISA, 29 U.S.C. §1 102(c)(3), for the

limited purpose of appointing other Investment Managers with respect to ERISA plan assets that

- 35 -


were invested in the Fund. As a named fiduciary, Meridian Management had the power to

appoint managers of the underlying investment vehicles of the Fund, such as the Offshore XL

Fund, as Investment Managers of the Fund under §3(38) of ERI SA, 29 U.S.C. §1002(38), and to

delegate its management and control over the Fund assets to such underlying managers.

131. As a named fiduciary, Meridian Management may only delegate its control and

management over plan assets in the Fund to another entity if that entity accepts appointment as

an Investment Manager with respect to the plan assets. Because, on information and belief, no

other entity accepted appointment as an Investment Manager with respect to the plan assets of

the Fund, Meridian Management retained all control and management over such assets.

132. On April 10, 2009, Meridian Management commenced the Tremont Litigation,

against Tremont Group Holdings, Inc., Tremont Partners, Inc., Tremont (Bermuda) Limited,

Oppenheimer Acquisition Corporation, KPMG LLP, and KPMG (Cayman), alleging that it relied

on Tremont to conduct investigations into Madoff-related funds, that Tremont's investigation

was inappropriate, and that it relied on Tremont' s representations.

133. Since Meridian Management did not delegate their duties as Investment Managers

and ERISA fiduciaries in accordance with §402(c)(3) of ERISA to another Investment

Manager(s) and ERISA fiduciary(ies), Meridian Management is liable as a matter of law for any

and all losses to those assets that resulted from Meridian Management's actions or the actions of

any third party, such as Tremont or Madoff, that Meridian Management allowed to manage and

control such assets and cannot avoid such liability by claiming to have delegated to or relied

upon others to fulfill any of its duties.

-36-


134. The Manager Defendants breached their fiduciary duty to Fund under §404, 405,

406 and 409 of ERISA, 29 U.S.C. §SS11O4, 1105, 1106 and 1109 and are liable for any and all

losses by the Fund caused by such breach.

NINTH CAUSE OF ACTION

Breach of Co-Fiduciary Duty Under ERISA (Against the Fund Defendants)


herein.

136. ERISA imposes liability on a fiduciary, in addition to any liability which he may

have had under any other provision of ERISA, if he participates in a breach of fiduciary duty of

another fiduciary, with either actual or constructive knowledge of such a breach. See 29 U.S.C.

§1105 (a)(1).

137. In addition to liability that the Fund Defendants have pursuant to §404 of ERISA,

the Fund Defendants are also liable to the Fund under §405 of ERISA, 29 U.S.C. §1 105(a)(3),

for a breach of a fiduciary obligation by the other because the Fund Defendants participated

knowingly in, or knowingly undertook to conceal, the acts or omission of each other, knowing

such acts or omissions to be a breach.

138. By failing to comply with §404, the Fund Defendants enabled others to commit

the breach or breaches alleged herein.

139. The Fund Defendants had knowledge of, or, in the exercise of reasonable care,

should have had knowledge that each of the other Fund Defendants breached the fiduciary duties

owed to the Fund, but failed to make reasonable efforts under the circumstances to remedy the

breach or breaches.

-37-


ELEVENTH CAUSE OF ACTION

Disgorgement of Profits Under ERISA (Against the Fund Defendants)


herein.

141. ERISA §502(a)(3), 29 U. S.C. §1 132(a)(3), permits a plan participant,

beneficiary, or fiduciary to bring an action for appropriate equitable relief to redress violations

and/or enforce provisions of Title I of ERISA.

142. In the event that any of the Fund Defendants are not fiduciaries under ERISA

§3(21) with regard to any of the claims set forth above, each Defendant is liable under ERISA

§502(a)(3) for the ERISA violations set forth above because each Defendant knowingly

participated in those violations and, as a consequence and part of their participation in those

violations, received fees from the Fund. Accordingly, they must restore to the Fund all fees and

profits thereon received by any of the Fund Defendants on account of the Fund's investments of

assets in Madoff and Madoff-related investments.

WHEREFORE, Plaintiffs demand judgment and preliminary and permanent relief, as

follows:

A. authorizing the maintenance of this action as a derivative action, with the

Plaintiffs as derivative plaintiffs;

B. awarding compensatory damages against defendants, individually and severally in

an amount to be determined at trial, together with pre-judgment and post-judgment interest at the

maximum rate allowable by law;

-38-


C. imposing a constructive trust upon monies received, directly or indirectly, by

defendants from the Fund;

D. requiring defendants to return to the Fund monies paid to them by the Fund;

E. directing defendants to institute corrective actions with respect to the conduct

complained of herein;

F. awarding Plaintiffs the costs and disbursements of this action, including

reasonable allowances for Plaintiff's attorneys' and experts' fees and expenses; and

G. granting such other or further relief as may be just and proper under the

circumstances.

JURY DEMAND

Plaintiffs demand a trial by jury on all issues so triable.

February 4, 2013

MILBERG LLP

By: /5/ Robert A. Wallner Robert A. Wallner

Kent A. Bronson Kristi Stahnke McGregor Anita B. Kartalopoulos One Pennsylvania Plaza New York, New York 10119 Tel.: (212) 594-5300 Fax: (212) 868-1229 rwal1nermilberg.com [email protected] [email protected] akartalopou1osmilberg.com

WE


Stephen A. Weiss Parvin Aminolroaya SEEGER WEISS LLP 77 Water Street New York, New York 10005 Tel.: (212) 584-0700 Fax: (212) 584-0799 sweissseegerweiss.com paminoIroayaseegerweiss.com

Albert G. Kroll KROLL HEINEMAN, LLC Metro Corporate Campus I 99 Wood Avenue South Suite 307 Iselin, New Jersey 08830 Tel: 732-491-2100 Fax: 732-491-2120 [email protected]

Attorneys for Plaintiffs

D005\65231 lvi

1I


VERIFICATION

George Laufenberg, under pain of perjury under the laws of the United States, avers that

he is the Administrator-Manager of the New Jersey Carpenters Annuity Fund, New Jersey

Carpenters Pension Fund, and New Jersey Carpenters Welfare Fund, the plaintiffs in this action,

and verifies that the foregoing Amended Derivative Complaint is true and correct to the best of

his information, knowledge and belief.

DATED: 2J4-/I3 George L fenberg

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1 amended derivative complaint 02/06/2013

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