Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC

Certain investors, including the Pension Committee of the University of Montreal Pension Plan (collectively, the investors) (plaintiffs), invested money in two hedge funds based in the British Virgin Islands—Lancer Offshore, Inc. and OmniFund Ltd. (collectively, the funds), both managed by Michael Lauer through his wholly owned company, Lancer Management Group, LLC (Lancer). The funds marketed themselves to the investors through various materials, including private placement memoranda. These memoranda represented that the funds would primarily invest in publicly traded common stock. In practice, however, Lancer pursued a risky strategy in which the funds invested mostly in restricted securities in small companies. Many of these securities were not freely tradeable on the open market. To effectuate these investments, the funds utilized Banc of America Securities, LLC (BAS) (defendant) as their prime broker and thereby permitted BAS to earn substantial commissions and fees on the funds’ trades. BAS also prepared monthly account statements to detail the values of the securities that it held in its custody on behalf of the funds. BAS periodically issued position reports that purported to show the net asset value of these securities. These reports, which contained BAS’s name at the top of each page, were made available to Lancer and the funds. Accordingly, to the investors, the position reports falsely suggested an inaccurately high net asset value of the funds’ holdings. This high net asset value resulted in the investors remaining invested in the funds when they otherwise might have exited their positions. The high net asset value also caused Lancer to be paid improperly high fees. Eventually, when the investors liquidated their positions, they incurred substantial losses. The investors subsequently sued BAS in federal court. The investors claimed that BAS aided and abetted the fraud committed by Lancer and committed a breach of fiduciary duty. BAS moved to dismiss for failure to state a claim. Specifically, BAS argued that the investors failed to allege the requisite proximate causation between BAS’s alleged misconduct and the investors’ losses. The district court ruled in BAS’s favor, and the investors appealed.