J.P. Morgan Sec., Inc. v Ader2013 NY Slip Op 31190(U)

May 30, 2013Sup Ct, New York County

Docket Number: 650005/09Judge: Melvin L. Schweitzer

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FILED: NEW YORK COUNTY CLERK 06/03/2013 INDEX NO. 650005/2009

NYSCEF DOC. NO. 91 RECEIVED NYSCEF: 06/03/2013

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SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY

PRESENT: HEll/I t-l L. SC~lJ.)e)Tl.EIL Justice

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0~ Abe.~ \-\A\lt;.Ra,-\",b c.cVC A'$OC.I"T£~, LP ) 'I ..e.t~

PART L(S"'

INDEX NO. ~ OOQS" I ott I

MOTION DATE ___ _

MOTION SEQ. NO. 00:3

The following papers, numbered 1 to __ , were read on this motion tolfor ____________ _

Notice of Motion/Order to Show Cause - Affidavits - Exhibits I No(s)., _____ _

Answering Affidavits - Exhibits _______________ _ I No(s). ____ _

Replying Affidavits ___________________ _ I No(s). ____ _

Upon the foregoing papers, it Is ordered that this motion.

Dated: ~ :3c:.j 1?13

1. CHECK ONE: ..................................................................... 0 CASE DISPOSED / ON-FINAL DISPOSITI N

IllGRANTED IN PART 0 OTHER

o SUBMIT ORDER

2. CHECK AS APPROPRIATE: ........................... MOTION IS: 0 GRANTED 0 DENIED

3. CHECK IF APPROPRIATE: ................................................ 0 SETILE ORDER

DDONOTPOST o FIDUCIARY APPOINTMENT 0 REFERENCE

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1 SUPREME COURT OF THE STATE OF NEW YORK

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COillfTY OF NEW YORK: PART 45 ,~' ----l------------------------------------x; J.P. MORGAN SECURITIES INC., . c,

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Plaintiff/Counterclaim Defendant,

-against-

JASON ADER, HA YGROUND COVE ASSOCIATES LP, Hk YGROUND COVE FUND MANAGEMENT

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· .. LLC, HA YGROUND COVE ASSET MANAGEMENT . " LLC, ~A YGROUND COVE INSTITUTIONAL : ; PARTNERS LP, HAYGROUND COVE CAPITAL

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PARTNERS LP, HAYGROUND COVE OVERSEAS I

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PARTNERS, LTD., HA YGROUND COVE LOW BET A : 'r I 'I

FUNQ LP, HA YGROUND COVE LOW BETA FUND . , LTD.,IHAYGROUND COVE TURBO FUND LP,

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HA YGROUND COVE TURBO FUND LTD., , HA YGROUND COVE ACQUISITION STRATEGIES FUNr? LP, and HA YGROUND COVE ACQUISITION STRATEGIES FUND LTD.,

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· ,. : .'" , I Defendants/Counterclaim Plaintiffs. :1,

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MELtlN L. SCHWEITZER, J.: I 'I I ,

Index No. 650005/09

DECISION AND ORDER

Motion Sequence No. 003

II Plaintiff J.P. Morgan Securities LLC (formerly known as J.P. Morgan Securities Inc.) 'I , ~ ,

(JPM~ moves, pursuant to CPLR 3212, for summary judgment on all of its claims and to dismiss ~

all of:defendants' counterclaims. ~ 1 Background 1

Amended Complaint, j 1. I Below is a summary of the allegations of plainti IT' s a~ended complaint.

I JPM is a broker-dealer and investment banking firm. Bear Stearns & Co. Inc. (Bcar.

Stea~s) is the surviving entity in a merger with JPM that ocsurred in late 2008. After th'e I -

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merger, Bear Stearns changed its name to J.P. Morgan Securities Inc. (i.e., the plaintiff herein). ~ ~.

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The amended complaint refers to JPM and Bear Stearns, interchangeably, as the same entity. I , l

'I Defendant Jason Ader is the sole member, president, a~d chief executive officer of ~ , . i (

defemlant Hayground Cove Asset Management LLC (HC Asset). The various Hayground Cove ~ 1

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defen4ants are referred to as the Hayground Cove entities. ~: j .; i Ader, a fonner analyst at Bear Steams, ceased employment at that entity on February 10,

2003 tlo fonn his own hedge fund. [n July and August 2003, ~der and Bear Stearns entered into :1

a serie~ of preliminary agreements by which Bear Stearns agr~ed to invest in Ader's hedge funds I

(now ~alled Hayground Cove) subject to negotiation of a defi~itive set of agreements. The . ,I '~.

partie~ contemplated a revenue sharing arrangement entitling Bear Stearns to 25% of revenues ~ ~. I

earned by the Hayground Cove entities adjusted for shared expenses according to a specified l 'J

I 1, calculation method.

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:1 Bear HGC Holdings, Inc. (Bear HGC), a Bear Stearn~ affiliate, agreed to make an initial i :

invest~ent of $10 million in Hayground Cov~ Institutional Partners LP (HC Partners) by way of

'I :-a letter agreement dated August 4, 2003 (August 2003 Letter Agreement). On November 24,

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I r 2004, Bear Stearns entered into two definitive agreements with Ader and the Hayground Cove

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entitie~, finalizing and restating the terms of Bear Stearns' investment. In the first agreement ,j , : ~

(2003!Investment Agreement), among Bear Stearns, Bear HGC, Ader, HC Partners, and : ~ i .

Haygrbund Cove Fund Management LLC (HC Fund), the parties agreed that Bear HGC's limited .I \', ~ ~

partner interest in HC Partners would be transferred to Bear Stearns, and that Bear Stearns would I ~

maindin its investment in HC Partners for the time and under,'the conditions stated in the 2003 I !

'I t 'I Investment Agreement. j

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I The Revenue Sharing Agreement (RSA), also dated November 24,2003, among Bear

1 . 1 Steams, Ader, Hayground Cove Partners Ltd.; Hayground Cove Overseas Partners, Ltd., HC

'! I Capit~l Partners LP, HC Fund, and Hayground Cove Associates LP, specified the terms by which

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Bear Steams was entitled to share in the revenue of the Hayground Cove entities. The parties to :1 ~! , 1

the agreement entered into the First Amendment to the RSA, (fated February 5, 2005 (First 1 ~,

Amendment), by which the parties chiefly amended the calculation of the maximum operating I

expenkes that the Hayground Cove entities would be entitled ~~ deduct from revenue for purposes J "', j !J

of caleulating Bear Steams' share. II .Ii I This action is based on the allegation that, beginning + 2004, defendants have deprived

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lPM Of the "Revenue Share" to which it is entitled under the RSA, and that defendants intend to ~

conti~ue to apply their erroneous calculation inputs and methods to future Revenue Shares.

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Speci~cally, defendants have deducted from gross revenues an amount exceeding what they 1 .

actualily paid in marketing fees pursuant to allowable contracts with third parties, which reduced I • :, 1 ~

lPM's revenue entitlement. 1

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~ I:; i Moreover, defendants have improperly taken the "Expense Cap deduction" thereby ,I I

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reduc~ng lPM's revenue share by an amount that is not in accord with the parties' agreements. In 1

additipn, despite the plain language of the RSA and the well-~nderstood meaning of "assets 1 : J>

under: management" (AUM) in the industry, defendants have improperly included leverage and ~ .. ij ..

short positions (i.e., borrowings) within their calculation of AUM. When defendants calculate ~ ~ 'I' ' '

the management fees earned for purposes of calculating the revenues, however, defendants do 1 ' ~

not include such borrowing in determining AUM. Inclusion of such borrowing would increase i 1 j'

the re;venues and, therefore, the Revenue Share owed to lPM;' Defendants have thereby I

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improperly increased the "Maximum Eligible Operating Expep.ses" over that allowed under the 1i.

RSA lnd, accordingly, reduced the revenues and Revenue Sh~re paid to JPM below the amount ~ . 'I ~

actually due.:~ 1 1

1 Furthermore, in calculating the Revenue Share for cal~'ndar years 2006 and 2007, ,j j

defendants have taken a legal and organizational expense deduction after applying the 25% I •

ReveJue Share percentage, thus improperly reducing JPM's Revenue Share by the entire amount il '

of such expenses, rather than by 2.5%. In addition, the RSA c~ps at $75,000 the total amount of ~ , ;~

such ltgal and organizational expenses. Defendants have ded~cted $24,000 per year for each of

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the ye~s 2003-2007, for a total of $120,000 in legal and organizational expenses. , ,

, : The complaint contains two causes of action. The first cause of action alleges that

. . defendants breached the RSA by failing to pay JPM the full amount of the Revenue Share to

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which: it is entitled under that agreement. I' ! (, I ~

The second cause of actiori is for a declaratory judgment. JPM seeks a determination as .,

to the forrect interpretation of the RSA, asserting that this wil} affect future Revenue Share' ~ f, ~ :I'l

paym~nts due to it. ~' I ~ i JPM seeks: (1) damages of not less than $8,000,000, with interest; (2) a declaration of the 1 ~

rightslofthe parties under the RSA,.specifically: (a) that only ~ustomary marketing fees actually

paid tb eligible third parties pursuant to arm's length contract~ may be deducted from gross .

~ : revenUes for determining revenue under sections 2.1 and 6.1 (t) of the RSA; (b) that deduction of

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the Expense Cap under sections 2.1 and 6.1 (t) of the RSA mllst be taken from gross revenues ; ~.

j :~ before applying the 25% Revenue Share percentage, not after; (c) that AUM, for purposes of ,I' j

'I ',. calculating the Maximum Eligible Operating Expenses under:section 6.1 (n) of the RSA, does

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not in~lude leverage, short positions, or other debt; (d) that de~uction of legal and organizational

'I ! expenses under sections 2.1 and 6.1 (t) of the RSA must be taken from gross revenues before

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applyihg the 25% Revenue Share percentage, and that the total amount of such expenses is

1 : capped at $75,000, and, thus, may not be deducted in the future.

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Second Amended Answer r ,I

j' Below is a summary of defendants' second amended apswer. , ~

. . i To induce Ader (the leading gaming and lodging industry analyst at Bear Steams) to stay , .. 'I !,

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at Bear Steams through completion of the "Wynn IPO," Bear Steams vice-chairman Mickey ! ' f '

Tarnopol represented to Ader that Bear Steams intended to provide Ader with a range of I: ' '

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financing, and other support necessary for his planned investment management firm. Ader ~ ;

agreed, and elected to forego alternative seeding offers from other investors. ~ , ; t I

~ After the Wynn IPQ announcement in October 25,2002, Barry Cohen, a Bear Steams

1 i partne~ specializing in hedge funds and investment management, along with Bear Steams chief

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financ)al officer, Samuel Molinaro, and Steven Begleiter represented to Ader that Bear Steams 1 ' ;'

would; support Ader in either starting an independent investm~nt management firm or operating , ,I ,

an affiliated fund within Bear Steams Asset Management (BSAM). All three advocated the 1 ~ I J

BSAM option, telling Ader that working within BSAM would allow him to keep his unvested

shares1 of Bear Steams stock, own half of his business, and afford him direct access to Bear I j'

Steards' large team of brokers and sales people to generate in~estment in his business. Bear

I : Stearns subsequently advised Ader that it would no longer support the BSAM option, however,

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becau~e of concern that a successful venture by Ader would encourage other star analysts to ,I : I :r

leave Bear Steams' investment bank to pursue investment management ventures. ,I ' '

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~ r I f I f I ~ ~ In early 2003, Bear Stearns, through Barry C~hen, shi;fted its efforts toward convincing ,I ..

Ader t( accept seed financing for an independent investment ~anagement firm from Bear

Stear~ls, rather than competing investors, including "Larch L4e," "Reservoir," "Man Group,"

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and "qZAM," with whom Ader had discussions. To induce h}m to do so, Cohen represented to ~ ,

Ader trat Bear Stearns was able to and intended to provide hi~ with marketing assistance,

including access to Bear Stearns' institutional clients, a strong 'prime brokerage operation, a 4 • i '

stronglteam of retail brokers and sales people, and full "capital: introduction" or "cap intro"

suppoh (i.e., introducing Ader to potential investors of capitad. ' J ' ,

, HC Asset was launched in February 2003. In August r003, Ader and the Hayground

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Cove ~ntities - in reliance on Bear Stearns' representations - selected Bear Stearns' seeding offer I . 1 !

over a~ternative and more favorable offers, which led to the signing of the RSA. Only well after

the si~lning of the RSA on November 24,2003, did Ader and ~he Hayground Cove entities begin ~ ~ I r J

to learr that Bear Stearns' representations, on which they relied in entering into the RSA and ~~' 1 ~

turning down other offers, allegedly had been false. i

I Notwithstanding continuing alleged false assura~ces ~om Barry Cohen beginning in late

I ; 2003, by late March or early April of2004, it became clear that, as Cohen finally admitted, Bear

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Stearns would not (and did not) fulfill its representations to d~fendants, ostensibly due to various

I! 'e regulatory and legal obstacles to its doing so. Thus, as it had intended all along, Bear Stearns

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failed fO provide Ader and the Hayground Cove entities with tpe promised marketing assistapce

II 1: and cap intro services.

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~ The answer thus contains three counterclaims.

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The first, for fraudulent inducement,

j contains allegations that defendants chose Bear Stearns' seeding offer over alternative seeding

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~ ~ offers ;based on its alleged false represen~ations described above, and upon which they reasonably

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and ju~tifiablY relied. When Bear Steams refused to provide tihe services that it had falsely '1 ! ~ ,

repres~nted it would provide, defendants were forced to spend their own resources in an attempt ~ ."

to repliace Bear Steams' assistance and defendants failed to re~lize additional profits. ~ l. I '

~ The second counterclaim, for negligent misrepresentation, alleges that Bear Steams had a t t

duty of care to provide accurate information to defendants, and that Bear Steams negligently 1 -;

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breacHed this duty by making false representations concerning the support and services it would I •

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provid1e to defendants. ~. :f

; The third counterclaim, for reformation based on mutual mistake, alleges that the parties , .

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agreedl that the Hayground Cove entities would deduct certainteligible operating expenses, up to

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the sp6cified Expense Cap deduction, reflecting a portion of the total management expenses. The I , ,I i

RSA ~:ontains a drafting error (mutual mistake) or unilateral ~}stake by defendants and improper

conduit by Bear Steams in seeking to conceal the mistake. T~'the extent that the RSA is ~ > .j ,.

incons'istent, it must be reformed to reflect the terms of the actual agreement on revenue-sharing I I ;

set forth on "Attachment A" (Term Sheet) to the August 2003' Letter Agreement.

'I : Arguments

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I , ~ JPM argues that: (1) defendants breached the RSA by (a) deducting operating expenses

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from Bear Stearns' Revenue Share instead of gross revenues, (b) deducting third-party marketing I . . ;1

expenses not actually incurred, and (c) applying an operating expense cap imprqperly based on ~ , . I .

notional AUM; (2) defendants' counterclaims are without evidentiary support; and (3) it is ~ j .

entitle(f to an award of interest and attorney's fees. ;. ,

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1 .( ~ Defendants argue that JPM is not entitled to summary judgment: (1) on defendants'

countJrclaims for fraud and negligent misrepresentation, as w:ll as its claim concerning the ~ ; j "

deduction of marketing fees; (2) on its contract claims, or thei~ reformation counterclaim j ;1

conce~ing treatment of the Expense Cap deduction under the;-RSA; (3) on its claim concerning

revenJe-generating AUM; and (4) ~n its claim for attorney's i~es. I ' I ~

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, The motion is granted to the extent of dismissing the counterclaims. The issue of the

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25% Expense Cap deduction is resolved in JPM's favor, i.e., that eligible operating expenses up I ~

to a d~fined maximum must be taken from gross revenues before applying the 25% Revenue

Share ~ercentage, not after; but summary judgment on the colplaint is denied because of , " ii'

materi,~l factual issues as to the other branches of the complai~t. I I ~ Discussion j. ~, L II i

Amen4ed Complaint , 1 t 11. First Cause of Action. lj 'I I JPM contends that defendants breached the RSA by failing to pay its entitled amount of

the Rerrenue Share. According to JPM, the "basic outline of the RSA" was for Bear Stearns to 'I ~ "

receiv~ 25% of all Hayground's revenues for the prior calend~r year, defined as Hayground's ,I " " II I I

gross ~evenues minus certain allowable expenses, namely (1) bustomary marketing fees paid to I ~

I : third ~iarties, and (2) eligible operating expenses up to the Exprnse Cap (Revenue Share)

(memqrandum in support at 5). The Expense Cap is defined as "the lesser of (a) Eligible

operaJing Expenses for the applicable period and (b) the Maxf~um Eligible Operating Expenses ,I

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for suJh period" (RSA, § 6.1 [I]. Thus, the Revenue Share due to Bear Stearns is calculated as

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Reve~ue Share = 25% x (gross revenues - Expense Cap). i

! According to defendants, "compelling evidence" estab;ishes that: (a) the parties originally ~ ~ I '~

agreedl, as set forth in the Term Sheet, that Bear Stearns would reduce its 25% Revenue Share by

j ~ an Expense Cap of up to $600,000; (b) the parties never intended or agreed to alter that treatment

~ :" in the final RSA; and (c) the RSA, as drafted, changed the order of operations so that Bear

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Stearn~' Revenue Share is only reduced by 25% of the Expen~e Cap, or $150,000 (memorandum ~'.

. ·1. . !: In opposItion at 25). l'

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~ , I Defendants contend further that, by defining "25% annually of all gross revenues" as the I ~ •

ij ~ I ' "Revenue Share," and by providing for payment of the "Revenue Share," "less the Expense i ~',

Cap," ~he Term Sheet makes clear that the Expense Cap is subtracted from Bear's 25% Revenue

share.i That treatment is distinguished in the very next senten~e from marketing expenses, which

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are deducted "from revenues" - unlike the RSA, which treats both deductions alike

(memLandum in opposition at 27). Defendants also contend ;hat, by p'roviding for Bear Stearns I ',' :1 '

"to reduce its Revenue Share by 25% of Eligible Operating Expenses," capped at a maximum, 1 ;,

the entire Expense Cap is deducted from the 25% Revenue Sh~re. The next sentence I, ,

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distinguishes repayment of affiliate loans, which are "excluded from the Expense Cap, but will j "

be dedrctible from gross revenues before [Bear Stearns'] Rev~nue Share is calculated." In

contrast, the RSA takes both deductions from gross revenues (id. at 28).

1 Defendants' interpretation is untenable. "It is well se~~led that our role in interpreting a 1:'

contract is to ascertain the intention of the parties at the time they entered into the contract. If

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that intent is discernible from the plain meaning of the language of the contract, there is no need

, to 100~ further" (Evans v Famous Music Corp., I NY3d 452, ~58 [2004]). Such is the case here. , ~ , ~,

! Contrary to defendants' contention, the Term Sheet and the RSA provide for the same II ~, ,I . ,.

reSUlt'lWhiCh is consistent with JPM's interpretation. Under tte Term Sheet, the Revenue Share

is "25% annually of all gross revenues from the Fund and all reve~ues derived by the Principal or I . r 1 .

any Affiliate (to be defined) from any Related Activities (,Re{enue Share') less the Expense 'I :j 1

Cap" (JTerm Sheet at 5). In the section entitled "Expense Cap," "Bear HOC agrees to reduce its ~ . ~I r

Revenr Share by 25% of Eligible Operating Expenses . .. up: to a maximum of $400,000 ,of

Eligib~e Operating Expenses in year one. .. and $600,000 o,fEligible Operating Expenses in ;1 l

year t~o and thereafter ... " (emphasis added) (Term Sheet at ,6). Hence, based on the plain il ;. j .

language of the Term Sheet, the reduced amount of Bear Stearns' Revenue Share is 25% of ~ .:.'

Eligible Operating Expenses, not 100% of the expenses, up toi"the cap, as defendants contend. I .'

j For example, if the revenues totaled $10,000,000 and ihe eligible expenses totaled 'I "

$2,000,000, then Bear Stearns would be entitled to 25% of $1 0,000,000 after deducting eligible 'I . ~, I "

expen~es. Thus, $10,000,000 minus expenses up to the $400,000 cap (in year 1), amounts to 'I .. I ,

$9,600,000, which would yield $2,400,000 as Bear Stearns' 25% portion. According to ~ : 'I ~,

defendants, however, the Term Sheet provides that the entire Expense Cap is subtracted from 1 ~

'I ~ , , Bear Sfearns' 25% Revenue Share (memorandum in oppositio,n at 27-28). Thus, assuming again,

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that the revenues totaled $10,000,000 and the eligible expense's totaled $2,000,000, then, 'I I I;

defendants argue, Bear Stearns would be entitled to 25% of $10,000,000 or $2,500,000, minus :1 ii

expen~es up to the Expense Cap of $400,000 (in year 1), amoJnting to $2,100,000.

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I To construe the provisions in the maImer proffered by~defendants would ignore the clear ~ ,

provisions of the Term Sheet which the court declines to do (Diamond Castle Partners IV PRC,

~ ~f L.p. vJAClInterActiveCorp, 82 AD3d 421, 422 [1st Dept 201'1]). Moreover, defendants'

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interpietation fails to take into account the provision defining Expense Cap. In so doing, it il . l'

violat~s the rule that an agreement should not be interpreted i~ a manner that renders a provision j ,

meaningless (Beal Sav. Bank v Sommer, 8 NY3d 318, 324 [2007]). :1 l i Defendants argue that the "next sentence distinguishes, repayment of affiliate loans, which

are "e~cluded from the Expense Cap, but will be deductible from gross revenues before [Bear I "

Steam~'] Revenue Share is calculated" id. (emphasis added). 'The RSA, by contrast, takes both " I II "

" deductions from gross revenues" (memorandum in opposition: at 28). Defendants have not

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persu$ively shown how lPM's construction of the Expense Cap deduction is dependent upon 1 ~ I

the sel}tence about repayment of loans. They operate independently of one another.

. ~ The operative language in the Term Sheet is not ambig~ous, because it is not "susceptible

oftwoireasonable interpretations" (DMP Contr. Corp. v ESSex'!ns. Co., 76 AD3d 844,846

[1 st Dypt 2010]). But even if it were, the ambiguity is resolve.? by the RSA, which is the "

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controlling document. It is undisputed that the,RSA entitles Bear Steams to 25% of the revenues

for thJ prior calendar year (RSA, § 2.1), which, in tum, is defi:ed as "a11 gross revenues" less the

"ExpeLe Cap for the applicable period" (RSA, § 6,1 [t]). Th~ "Expense Cap" is defined as "the ~ t

lesser bf (a) Eligible Operating Expenses for the applicable period and (b) the Maximum Eligible

j , Operating Expenses for such period" (RSA, § 6.1 (I). Hence, the Expense Cap is taken from

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gross Jevenues prior to the calculation of Bear Steams' 25% :hare. The parties do not disagree ~

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~ , ' as to !!pM's interpretation of the RSA formula. Resort to defendants' proffered extrinsic

'd ~ . d eVI ence IS not warrante . ,

I JPM also alleges, in the first cause of action, that defe;dants breached the RSA by

deduc~ing third-party marketing expenses that were not actually incurred. It claims that, over the II ' i

'I . t course/ of the relationship, Hayground deducted a flat 20% of its fees (totaling $21 million) from

revenJe as "marketing fees" although the only evidence of an; appropriate deductible marketing 1 ~ . .

expenses was $50,000 in early 2004 (memorandum in support"at 22). Defendants allege that the j l 'I I,

20% d~duction was done in accordance with the parties' agreement to amend the provision

pertaJing to third-party marketing expenses. The motion is d~nied as to this claim because of I -

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the existence of material factual issues. ;~

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I It is undisputed that the RSA was not amended to refl~~t this alleged change in marketing

expenles. Defendants allege, however, that the parties orally ~greed to the modification and j ~.

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subse~uently performed in accordance with the agreed-upon change. Although JPM argues that

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the de~ense is waived, because defendants failed to plead it as~ affirmative defense, this

I • assertibn is itself improper, because JPM raised it for the first time in its reply papers (Agress v

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ClarkS~own Cent. School Dist., 69 AD3d 769, 772 [2d Dept 2010]). J

Defendants' cited evidence in the record (testimony of~Ader and Laura Conover, chief 1

operating officer of the Hayground Cove entities) is inconclusive on this point, and raises issues II . ;

of credibility. For example, Ader was equivocal as to the alleged modification:

~ "Q. Did Barry say to you that I agree with you Jason, ;:m may deduct a portion of ,I the commissions that you paid to the street as marketing expenses?

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~ i ~ l ~ Q. Tell me everything that you can recall about your first discussion with Barry

regarding brokerage commissions as marketing fees? ;

·1 A. Well, this issue came up after it became very clear that Bear Steams, despite j strong indications of their desire and intent to market the fund, that they were no ~ longer going to be able to fulfill those promises in anYl way for various compliance J reasons. So, we talked about different ways that funds go about getting marketed 1 by various relationships at other investment banks, br6kers, private client brokers, .. :1 and we t~lked about what one would pay various fee arr~ngements. Does it make : sense to Just do a percentage of management fees, does It make sense to do a I percentage of incentive fees or a combination ofboth.;·What I suggested to Barry ~I in that conversation is what I had seen typically and what I was hearing other

managers were doing where they were offering 20 percent of their management ~ fees and 20 percent of their incentive fees to brokers if} commissions for the :: benefit of helping the fund raise assets. And the brokers would have a strong

I interest in pursuing that opportunity because it meant more direct commissions to

, them as well. That was really my recollection of the substance of the discussion. :1 Obviously it was several years ago. ,;;, '

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, Q. Do you recall any other discussions with Barry Conen on this topic other than ~I the one that you have just testified to?'

1 A. Well, no. I mean we - after we had that conversation we really started to step 'I' up our commissions and had been operating very transparently that we would take , - to the extent that we were paying commissions and we were paying them a j deduction of 20 percent of our management fees and 20 percent of our incentive , fees to various brokerage firms like Deutsche Bank and UBS and others who had

been helpful and really working with our counterparties to try to help the firm :1 raise assets and get visibility and have meetings and gq on road shows and do all ~ the things necessary and where banks like that could be helpful. Every month we I reported it as we understood the deal to be. : ~ . ~, .

Q. I think at the beginning of your answer you did answer this, so I apologize but I . want to make it clear. Other than that discussion, you don't have a recollection of , any other discussions with Barry on this topic other than what you just testified

to? ~ I ~

~ A. That is my general understanding"

(Ader '6ep tr at 476:9-478:20)

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:1 r' ~ "Q. 1 know you testified that you're not the p~rson that did it, but do you have an II understanding of how the person who was responsible/or figuring out deductions ~ would go about that task and what documents they would rely on, etc.?

, A. 1 believe 1 do.

I

, Q. Can you explain that to me? ,

! A. My understanding is that the amounts paid to the brokerage firms would be 'I aggregated and 1 think my understanding is that Barry had agreed to the 20 and 20 , amount - on the phone with Barry Cohen had agreed t~ a 20/20 amount on 1 management fees and incentive fees to both Laura and 'I and in almost all I instances every year our commissions were so far in excess of that that there was a ~I number far greater than we would have to produce in 4etail. So that it was - at ~ least my recollection of the audit was that it was very sufficient to support the ~ third-party marketing language" r :,Iil ~'

i,

(Ader1dep tr at 551 :7-552:4) ~

r 'I i Conover's deposition testimony is also it,lc<?nclusive.

t' t: :Y. ~,

I "Q. Do you have any reason to believe that in the months between October­~ September of '04 and October of '05 that Hayground ~hanged the way it was ~ calculating the revenue share? I ' ~,I . t

'1 I Mr. Greenblatt: Objection to form. ~

1 A. Yes. L

) Q. What is the basis for that? ~~ ~ ; 'I

I :.

: A. It appears to be that the marketing fees are being calculated different based on : a conversation that 1 know Jason had with Barry Cohen. \

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j Q. Tell me everything that you can recall about the corlversation. What exactly :1 did Jason say to Barry?, t-,I ' :1 . J

i A. 1 don't remember exactly word for word, however I~oo explicitly remember ~ Barry saying that it would be reasonable and customary to take a 20 percent I marketing fee deduction off your total management fees and total performance

! fees. . f;

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,

Q. Anything else, anything else Barry said specificall~?

"

A. No. i

'1 Q. You can't recall a single other thing that he said? "

I.

'" A. I don't remember. I don't remember him saying anything with respect to, you know, you must incur or up to or any of the words that you're implying. I know what I heard and he said 20 percent of management fees and 20 percent of performance fees we could deduct for marketing. ,I

"Q. After you had this conversation, did Jason tell you in words or substance from now on we should put a flat 20 percent, for marketing ~xpenses?

r· Mr. Greenblatt: Objection to form.

'I :1 A. We discussed it as I was on the call and I heard BaITy say that, so of course I'm

sure" ; II t

~ (Conover dep tr at 92:9-97:25).

~

, :i.

'I

I To be sure, the RSA contains a provision that req uire~' amendments to be in a writing

executed by all parties (RSA, § 8.5), and defendants are relying upon an alleged oral j t

modification to the RSA. t: " r l ~ Defendants argue that the parties' performance proveVhe terms of the alleged oral

amendment (Rose v Spa Realty Assoc., 42 NY2d 338, 343 [1977]). This is difficult to prove ,I ~ ,

inasmLch as the "performance must be unequivocally referabfe to the modification" (Nassau ~' '

Beekman, LLC v Ann/Nassau Realty, LLC, 105 AD3d 33, 40 list Dept 2013]). They also I '~

conte~d, however, that, under Section 5.1 of the RSA, Bear Stearns had the right to retain an

accolting firm to "verify the accuracy of all calculations (an~ their respective components) ~ t,

required pursuant to this Agreement," the results of which are "final and binding with respect to :

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the m~tters contained therein." Defendants assert that, on Oc~~ber 27,2005, Bear Steams ~ ':'

exerci~ed this right to retain an outside auditor, "Deloitte." The Deloitte "Agreed Upon II r '1 t'

Procedures" "repeatedly confirmed that Hayground was taking a 20% deduction for marketing ,I • Ii

fees," knd that commission expenses were included as part of marketing expenses (defendants

Rule lil9_a response, §§ 307-313). They contend that a report ~at Deloitte issued in 2005 i ~

accepibd the 20% marketing deduction, and that this is dispositive of the marketing expenses

issue L a matter of law. JPM does not address this defense iJ\ts reply papers. However, the

report Ithat defendants submi !ted is an unsigned "Preliminary ~raft" (exhibit 120 to affirmation of 'I ~ , '.

Jed I. Bergman, Esq.). Hence, although the assertion is insuffiCient to resolve the matter in ;1 J

defendants' favor, it militates in favor of denying the motion. t I )

4

~ The third alleged breach of the RSA is that defendants;applied an operating expense cap I :r'

improberly based on gross or notional AUM rather than revenhe-generating assets. As with the

h· d ~ k . h . I' f f: : . t Ir -party mar etmg expenses, ere, too, matena Issues 0 act eXISt. I ~

I According to JPM, it agreed to increase the Expense Cap as reflected in the First I r .

Amendment to the RSA, which provides that "Maximum Eligible Operating Expenses" (i.e., the " .' , , ,I ~

Expense Cap) for 2005 and beyond would increase by $300,090 for every $500,000,000 increase ~ ';' ~

in "average assets under management" (i.e. AUM) for a given,year, which was defined to be the

iJ . ~.'. averag'e of the four quarter-end "sum of the collectIve Revenue-generatmg assets under

II 1 manag'ement of Management Entities" (First Amendment, § 1). JPM argues that, in calculating

I 1

~; , the AU,JM, defendants improperly inflated the amount by using notional or gross assets - not only

4 • II ~ ...

the actual investor capital accounts but also leveraged assets ~hich increased the Maximum I ~

" , -ttl ~

"

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j

-j.

EligJle Operating Expenses for 2005-08 and decreased the ~evenue Share. However, only

iJ ~: assets; that generate fees count. !.:

'I 1

~ According to defendants: (1) from 2005 to 2008, the ~.uM was calculated for purposes of

!I Jt the First Amendment by multiplying net assets by gross exposure, thus including leveraged and

~ j

~ : short positions, and this course of performance is the most persuasive evidence of the agreed

1 ;

intention of the parties; (2) JPM's interpretation is contradict~'d by record evidence that Bear

steart understood and agreed that the First Amendment applies to gross AUM; (3) it is

undisbuted th~t the purpose of the First Amendment was to a}ford defendants some relief on the

ExpJse Cap as the fund expenses grew, but JPM's interpretl~ion would have provided them , ~ , }

with rio relief at all; and (4) expert testimony and evidence 06ndustry custom and usage also' ~ : .

support defendants' position that leverage and short positions: can be included in a fund's AUM. II 1-~ :~ .

Thesej conflicting assertions raise material factual issues, and ~he language itself contained in the _

First tmendment is not dispositive as to whether leveraged arets may not be included in the

calcul;:ttion. ~ -

, ,

2. Second Cause of Action.

il Based on the existence of material issues of fact, discussed above, JPM is not presently " t' j (-

entitl~d to the request for a declaratory judgment. j" 'I Y

3. Costs and Attorney's fees. i -I

I ; :1 JPM seeks an award of attorney's fees pursuant to secr-ion 11 of the 2003 Investment

Agreetnent, and section 9 of the Investment Agreement, dated:July 1,2005. Both provisions are ,I :

substJntially the same. Section 11 (Indemnification) of the 2q03 Investment Agreement

~ provides:

-I -,

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I

of

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[* 18]

(a) The Subscriber understands the meaning and legal consequences of the representations, warranties, agreements, covenants and confirmations set forth herein and agrees that the subscription continued hereby, will be accepted in reliance thereon. The Subscriber agrees to indemnify and hold harmless the Partnership, the General Partner and their Affiliates, and the officers and directors of any of the foregoing (collectively, the "Partnership Indemnified Persons") from and against any and all loss, damage, liability or expense, including reasonable costs and attorneys' fees and disbursements, which a Partnership Indemnified Person may incur by reason of, or in connection with, any representation or warranty made herein by the Subscriber not having been true when made, or any failure by the Subscriber to fulfill any of the covenants or agreements set forth herein.

(b) The Principal and the General Partner, jointly and severally, agree to indemnify and hold harmless the Subscriber and its Affiliates, and the officers and directors of any of the foregoing (collectively, the "Subscriber Indemnified Persons") from and against any and all loss, damage, liability or expense, including reasonable costs and attorneys' fees and disbursements (collectively, "Damages"), which a Subscriber Indemnified Person may incur by reason of, or in connection with, any representation or warranty made herein or in the Revenue Sharing Agreement by the Principal, the General Partner, the Investment Manager, the Partnership, the 3(c)(1) Partnership, and/or the Offshore Fund not having been true when made, any misrepresentation made by the Principal, the General Partner, the Investment Manager, the Partnership, the 3( c)(1) Partnership, and/or the Offshore Fund or any failure by the Principal, the General Partner, the Investment Manager, the Partnership, the 3(c)(1) Partnership, and/or the Offshore Fund to fulfill any of the covenants or agreements set forth herein, in the Revenue Sharing Agreement or in any other document provided by the Principal, the General Partner, the Investment Manager, the Partnership, the 3(c)(1) Partnership, and/or the Offshore Fund to the Subscriber; provided, however, that in no event shall the Principal's personal liability pursuant to this Section 11 (b) exceed, in the aggregate, one million dollars ($1,000,000), except with respect to Damages arising out of the Principal's willful breach of a material term of this Agreement or the Revenue Share Agreement. For the avoidance of doubt, it is agreed and understood that the material provisions of the Revenue Sharing Agreement shall include, without limitation. Section 2. 1 and Article III thereof.

JPM has not demonstrated its entitlement to an award of attorney's fees pursuant to these

provisions, because they do not "contain language clearly permitting plaintiff to recover from

defendant the attorney's fees incurred in a suit against defendant" and they are "typical of those

18

[* 19]

• f"

1. ; ).

whic~ contemplate reimbursement when the indemnitee is required to pay damages on a

~ .~ third-party claim" (Hooper Assoc. v AGS Computers, 74 NYfd 487, 492 [1989]). The provision

j .

'I ' must ~'unequivocally be meant to cover claims between the contracting parties rather than

:1 "

third-~arty claims" (Gotham Partners, L.P. v High Riv. Ltd. Partnership, 76 AD3d 203, 207 " ' il ..,

[1st ~ept 2010], Iv denied 17 NY3d 713 [2011]). JPM argue~s that the Hayground Cove entities' I :1'

"

oblightions under the RSA (to which the provisions of the Investment Agreements refer) ~, 1 :

effeciively relate only to payment of the required revenue share, and "it is difficult to imagine I ~ It

il 1 how a breach could ever rise to third-party claims." Even if so, breach of the covenants

cont~ined in the Investment Agreements, the document that Ln~ins the provisions, could give

rise tb third-party claims. ~

secold amended answer j~ 1 ~

I! 1. First Counterclaim (fraudulent inducement). ~~ 'I l' ~ Defendants allege that, "as it had intended all along, ~ear Stearns failed to provide Ader

and ~ayground with the promised marketing assistance, 'caJ' intro' services or the level of access

to Blar Stearns's then-strong team of retail brokers and sale~peoPle - all of which were explicitly II ,.

prorrlised to Ader and Hayground, and on which they relied, to their detriment, in foregoing !I. ~

alterhative seeding offers" (second amended answer, ~ 29). ~s Bear Stearns intended, defendants

reaJnablY and justifiably relied on Bear Stearns' false reprekentations in foregoing alternative j "

seeding offers. When Bear Stearns refused to provide the services that it had falsely represented

it wJUld provide, defendants were forced to spend their own~resources in an attempt to replace II

Bear Stearns' assistance. I I , ,

19

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[* 20]

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~ ~ Notwithstanding these allegations, defendants have n9t shown that, when Bear Steams

madeithe alleged false promissory representations, it had no i~tention at that time of fulfilling the

promises. Defendants provide no facts to support the conclu~'ory assertions as to present intent. :1 1~ ~ ,

A claim 'based upon a statement of future intention must allege facts to show that the defendant, il j' " I' ,

at the: time the promissory representation was made, never intended to honor or act on his ,I ~,

statement'" (Laura Corio, MD., PLLC v R. Lewin Interior Design, Inc., 49 AD3d 411, 412 :~ ~' ,I, , ~

[1 st Ij>ept 2008] quoting Non-Linear Trading Co. v Braddis {1,ssoc., 243 AD2d 107, 118

1 [1 st IDept 1998]). A "mere statement of an intention, even if'expressed unconditionally and

:1 '~ uneq¥ivocally does not, on its own, give rise to a binding contract" (Smith v Smith, 66 AD3d 584,

~ r 585 [:1 st Dept 2009]). f

I] r I I I

1 2. Second counterclaim (negligent misrepresentation):

( "

Allegedly, Bear Steams negligently breached its duty!,~f care by making false

~ "" representations of fact, knowing that defendants were relying on these representations about I' j'

support services for Ader's planned investment management)irm. I • , '.

:1 t, !I A claim for negligent misrepresentation requires the party asserting it to demonstrate: "( 1)

the e,Lstence of a special or privity-like relationship imposiJ~ a duty on the defendant to impart :1 t:

corr~ct information to the plaintiff; (2) that the information ~as incorrect; and (3) reasonable ~ ~

reliahl, ce on the information" (JA. 0. Acquisition Corp. v StavitskY, 8 NY3d 144, 148, rearg

t' ~ "

deni~d 8 NY3d 939 [2007]). "Generally, a special relationsh~p does not arise out of an ordinary

~ 'r arm's length business transaction between two parties" (MBIA Ins. Corp. v Countrywide Home

II ;~ , ~

Lomis, Inc., 87 AD3d 287, 296 [1st Dept 2011). Defendants,do not satisfy these requirements . .I ,. ~ '., Ii

1

II 20

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[* 21]

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:: Defendants contend that Bear Stearns had a duty of care because of the "longstanding

emP1Jyment, advisory and business relationship with Ader, itg specialized knowledge of the

invesJment management industry, and its knowledge and evaiuation of Ader's and Hayground's 1 ~ ",

needsl." Nevertheless, defendants failed to demonstrate the efxistence of a special or privity-like

relatilnshiP imposing a duty on Bear Stearns to impart correct information to them, because this I \1

was ~ssentiallY an "arms-length business relationship" and Acler was an experienced financial

~ : analy~t (see Greentech Research LLC v Wissman, 104 AD3d ~540, 540-541 [1 st Dept 2013]).

'I :

Inde~d, the answer itself states that, "[p ]rior to deciding to e~ter the investment management ,I ' " -~ j,

businbs and forming Hayground, Ader was the leading gam!ng and lodging industry analyst at

Bear ~tearns for nearly a decade and was made one of the yo~ngest senior' managi~g directors in II f. '

II "

Bearisteams history" (second amended answer,' 11). i.,

'i Altho~gh Ader claims that he lacked experience in managing a hedge fund, the ~(

allegations do not support the assertion that Bear Stearns owed a duty of care to defendants,

Ii ~, whicp is required to assert such a claim (see Korea First Bank of N. Y v Noah Enters., Ltd., 12

~ '. ,I ju

AD3d 321, 323 [1st Dept 2004], Iv denied 4 NY3d 710 [200?]). Moreover, the essence of the II ~'

com~laint is not that Bear Stearns negligently rendered advi~e or information to defendants' 4 "

detri~ent. Rather, it is that it failed to do that which it prom'ised to do. It alleges that "Ader and

;1 . '. l' Hayground - In reliance on Bear Stearns' representations co~cerning marketing assistance,

,I ,~

acce~s to Bear Stearns' strong prime brokerage operation, and full 'cap intro'- selected Bear

I

Stearns' seeding offer over alternative and more favorable seeding offers" which led to the ,I f' I '

sign\ng of the RSA and "well after the signing of the RSA or November 24,2003, did Ader and

HayJround begin to learn that Bear Stearns' representations, ~n which Ader and Hayground had II ,~' !I ~.

21 ~ ~ 'I

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relied: in entering into the RSA and turning down other offers1

; had been false" (second amended ~ . . .

II l'

answyr, ~~ 26-27). i I 3. Third counterclaim (reformation).

I"

, il Based on the foregoing, the third counterclaim for ref~rmation of the RSA is also

dismissed. I 1 Accordingly, it is ~ I,

;1 ORDERED that the motion for summary judgment is: granted to t~e extent of dismissing

h;1 I . d' h . d . d j.

t e counterc aIms an IS ot erwlse eme . .~

Date1: May 30,2013 f; II l., :1

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