Ohio Bureau of Workers’ Compensation v. MDL Active Duration Fund, Ltd.

The Ohio Bureau of Workers’ Compensation (Ohio) (plaintiff) filed a complaint against an investment fund, MDL Active Duration Fund, Ltd. (the fund) (defendant) and two other parties that created or managed the fund (defendants). As alleged in Ohio’s complaint, the fund issued a private placement memorandum (PPM) to attract investors, and Ohio reviewed the PPM in deciding to make an investment. The PPM contained language regarding how much of the fund’s assets could be expected to be leveraged to “increase yield and enhance total return.” The PPM stated that up to 150 percent of the fund’s assets could be leveraged and that leveraging came with risks and rewards. The PPM also cautioned that the 150 percent cap was “intended as a guideline and [might] be changed from time to time at the sole discretion of the Board of Directors.” The fund sustained losses and, according to Ohio, was frequently leveraged well above 150 percent between April and December 2004. According to the complaint, the fund never intended to cap its leveraging at 150 percent, and the fund’s board of directors had not exercised its discretion to change the percentage. In September 2004, the fund’s manager disclosed that the fund’s assets had been leveraged by approximately 900 percent. Ohio alleged that even this September disclosure was indicative of fraud because the fund’s assets had actually been leveraged by approximately 1,900 percent. The fund filed a motion to dismiss Ohio’s claims of common-law fraud and securities fraud, arguing that the claims were not pleaded with sufficient particularity and that Ohio was unjustified in relying on a leverage cap of 150 percent given that the figure was disclosed to be merely a guideline.