Madoff-Related Derivative Suit Survives Dismissal Motion in New York Court

 

In a March 12, 2010 order in a Madoff-related derivative suit, the New York (Nassau County) Supreme Court, applying New York law, substantially denied defendants' motion to dismiss, holding among other things that demand was excused. As far as I am aware, this is the first Madoff-related derivative suit to survive a motion to dismiss. It is also the first Madoff-related lawsuit dismissal motion denial by a New York court of which I am aware.

The derivative suit was filed on April 1, 2009 by non-managing member of Andover LLC, on behalf of Andover LLC, as nominal defendant. Among the defendants are Andover's investment manager (Andover Management), general partner, and investment consultant (Ivy Asset Management) and Andover's auditor. The complaint alleged that Andover should recover damages for the defendants' negligence, gross negligence, breach of fiduciary duty, and for aiding and abetting breach of fiduciary duty.

The complaint alleges that the defendants committed these wrongs by permitting Andover to invest "approximately a quarter of its assets under the personal control of [Bernard Madoff] through his investment firm." The complaint alleges that as of December 31, 2007, Andover had assets of $57.7 million. The complaint further alleges that Andover's auditors were negligent in conducting annual audits by failing to plan and perform appropriate audits and appropriate tests that would have identified Madoff's fraud.

The plaintiff alleged that serving a demand on Andover's management to prosecute these claims would have been futile because Andover and its principles were involved in wrongdoing constituting the basis of the claims. The plaintiff also asserted that it would have been futile to demand that Andover pursue claims against Ivy because Ivy's agreement with Andover required Andover to indemnify Ivy. The plaintiff alleged it would have been futile to demand that Andover suit the auditor because Andover's misconduct was "inextricably interconnected" with that of management.

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