You are on page 1of 29

INDEX NO.

653216/2015

FILED: NEW YORK COUNTY CLERK 10/15/2015 04:47 PM


NYSCEF DOC. NO. 11

RECEIVED NYSCEF: 10/15/2015

SUPREME COURT OF THE STATE OF NEW YORK


COUNTY OF NEW YORK
------------------------------------------------------------------- x
:
PUBLIC SECTOR PENSION INVESTMENT
:
BOARD,
:
:
Plaintiff,
:
:
- against :
:
SABA CAPITAL MANAGEMENT, L.P., SABA
:
CAPITAL OFFSHORE FUND, LTD., SABA
:
CAPITAL, LLC and BOAZ WEINSTEIN,
:
:
Defendants.
:
:
------------------------------------------------------------------- x

Index No. 653216/2015


Motion Seq. 001
ORAL ARGUMENT REQUESTED

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS


MOTION TO DISMISS THE COMPLAINT

SUSMAN GODFREY L.L.P.


Jacob W. Buchdahl
Arun Subramanian
Mark Musico
560 Lexington Avenue, 15th Floor
New York, New York 10022
Phone: (212) 336-8330
jbuchdahl@susmangodfrey.com
asubrama@susmangodfrey.com
mmusico@susmangodfrey.com
FRIEDMAN KAPLAN SEILER & ADELMAN LLP
Eric Corngold
Anne E. Beaumont
7 Times Square
New York, New York 10036
Phone: (212) 833-1100
ecorngold@fklaw.com
abeaumont@fklaw.com
Attorneys for Defendants

TABLE OF CONTENTS
Page(s)
TABLE OF AUTHORITIES ......................................................................................................... iii
PRELIMINARY STATEMENT .....................................................................................................1
FACTUAL BACKGROUND ..........................................................................................................3
I.

THE FUND IS A HIGH-RISK VEHICLE FOR SOPHISTICATED


INVESTORS............................................................................................................3

II.

THE INVESTMENT MANAGER HAS BROAD DISCRETION TO


DETERMINE THE NAV ........................................................................................4

III.

PSPS REDEMPTION REQUIRED EXTRAORDINARY EFFORTS


TO LIQUIDATE AND VALUE BONDS ...............................................................6

LEGAL STANDARD ......................................................................................................................7


ARGUMENT ...................................................................................................................................8
I.

II.

III.

PSPS BREACH OF CONTRACT CLAIM SHOULD BE


DISMISSED ............................................................................................................8
A.

The Fund Documents Authorized the Investment Managers


Valuation of the Bonds at Issue ...................................................................8

B.

The Fund Documents Place No Obligations on the Fund


Regarding Valuation ..................................................................................10

PSPS TORTIOUS INTERFERENCE CLAIM SHOULD BE


DISMISSED ..........................................................................................................11
A.

Dismissal of the Contract Claim Requires Dismissal of the


Tortious Interference Claim .......................................................................11

B.

Mr. Weinstein and Saba Capital Cannot Be Held Liable for


Interfering with the Contracts of Entities They Supervise or
Control ....................................................................................................12

PSPS BREACH OF FIDUCIARY DUTY CLAIM SHOULD BE


DISMISSED ..........................................................................................................15
A.

PSP Lacks Standing to Assert a Direct Breach of Fiduciary


Duty Claim .................................................................................................15

B.
IV.

In the Alternative, PSPs Breach of Fiduciary Duty Claim


Should Be Dismissed as Duplicative of Its Contract Claim ......................18

PSPS AIDING AND ABETTING CLAIM SHOULD BE


DISMISSED ..........................................................................................................19
A.

The Same Principles That Require Dismissal of PSPs Breach


of Fiduciary Duty Claim Require Dismissal of Its Aiding and
Abetting Claim ...........................................................................................19

B.

New York Law Also Requires the Dismissal of PSPs Aiding


and Abetting Claim ....................................................................................20

CONCLUSION ..............................................................................................................................23

ii

TABLE OF AUTHORITIES
Page(s)
Cases
150 Broadway N.Y. Associates, L.P. v. Bodner,
14 A.D.3d 1, 784 N.Y.S.2d 63 (1st Dept 2004) ................................................................ 7
ABF Capital Mgmt. v. Askin Capital Management, L.P.,
957 F. Supp. 1308 (S.D.N.Y. 1997)...................................................................... 15, 16, 17
Application of Brookside Mills, Inc.,
276 A.D. 357, 94 N.Y.S.2d 509 (1st Dept 1950) ............................................................ 12
Ascot Fund Ltd. v. UBS PaineWebber, Inc.,
28 A.D.3d 313, 814 N.Y.S.2d 36 (1st Dept 2006) .......................................................... 21
BBS Norwalk One, Inc. v. Raccolta, Inc.,
60 F. Supp. 2d 123 (S.D.N.Y. 1999)................................................................................. 19
Boss v. Am. Exp. Fin. Advisors, Inc.,
15 A.D.3d 306, 791 N.Y.S.2d 12 (1st Dept 2005) ............................................................ 8
Brooks v. Key Trust Co. Natl Assn,
26 A.D.3d 628, 809 N.Y.S.2d 270 (3d Dept 2006) ................................................... 18, 19
Caniglia v. Chicago Tribune-New York News Syndicate, Inc.,
204 A.D.2d 233, 612 N.Y.S.2d 146 (1st Dept 1994) ...................................................... 14
Celle v. Barclays Bank P.L.C.,
48 A.D.3d 301, 851 N.Y.S.2d 500 (1st Dept 2008) ................................................... 18, 19
Davis v. Scottish Re Group Ltd.,
Index No. 654027/2013, 2014 WL 7475035 (Sup. Ct. (N.Y. Cty.) Oct. 14, 2014).......... 15
Druck Corp. v. The Macro Fund (U.S.) Ltd.,
No. 02 Civ. 6164 (RO), 2003 WL 21297284 (S.D.N.Y. June 4, 2003)............................ 16
Druck Corp. v. The Macro Fund (U.S.) Ltd.,
No. 02 Civ. 6164 (RO), 2007 WL 258177 (S.D.N.Y. Jan. 29, 2007)................... 15, 16, 17
EBC I, Inc. v. Goldman, Sachs & Co.,
5 N.Y.3d 11, 832 N.E.2d 26 (2005) .................................................................................. 14
Fiala v. Metropolitan Life Ins. Co.,
6 A.D.3d 320, 776 N.Y.S.2d 29 (1st Dept 2004) ............................................................ 20

iii

Great Lakes Chem. Corp. v. Pharmacia Corp.,


788 A.2d 544 (Del. Ch. 2001)........................................................................................... 10
Horan v. John F. Trommer, Inc.,
125 N.Y.S.2d 34 (Sup. Ct. N.Y. Cty. 1953) ..................................................................... 14
Joan Hansen & Co. v. Everlast Worlds Boxing Headquarters Corp.,
296 A.D.2d 103, 744 N.Y.S.2d 384 (1st Dept 2002) ................................................ 12, 13
Kaufman v. Cohen,
307 A.D.2d 113, 760 N.Y.S.2d 157 (1st Dept 2003) ...................................................... 21
Koret, Inc. v. Christian Dior, S.A.,
161 A.D.2d 156, 554 N.Y.S.2d 867 (1st Dept 1990) ................................................ 12, 13
Melia v. Zenhire, Inc.,
42 Misc. 3d 1206(A), 984 N.Y.S.2d 632 (Sup. Ct. (Erie Cty.) 2013) .............................. 11
NBT Bancorp Inc. v. Fleet/Norstar Fin. Grp., Inc.,
87 N.Y.2d 614, 664 N.E.2d 492 (1996) ............................................................................ 11
OFSI Fund II, LLC v. Canadian Imperial Bank of Commerce,
82 A.D.3d 537, 920 N.Y.S.2d 8 (1st Dept 2011) ............................................................ 20
Petkanas v. Kooyman,
303 A.D.2d 303, 759 N.Y.S.2d 1 (1st Dept 2003) .......................................................... 14
Schultz v. Boy Scouts of Am., Inc.,
65 N.Y.2d 189, 480 N.E.2d 679 (1985) ............................................................................ 12
Simkin v. Blank,
19 N.Y.3d 46 (2012) ........................................................................................................... 7
Sky Top Farms, Inc. v. Bilinski Sausage Mfg. Co.,
73 A.D.3d 538 (1st Dept 2010) ......................................................................................... 7
Solow v. Stone,
994 F. Supp. 173 (S.D.N.Y.), affd, 163 F.3d 151 (2d Cir. 1998) .................. 12, 13, 20, 21
Taussig v. Clipper Grp., L.P.,
13 A.D.3d 166, 787 N.Y.S.2d 10 (1st Dept 2004) ............................................................. 7
Universal Express, Inc. v. McKinnon,
798 N.Y.S.2d 714 (Sup. Ct. Queens Cty. 2004) ............................................................... 15
Uni-World Capital, L.P. v. Preferred Fragrance, Inc.,
43 F. Supp. 3d 236 (S.D.N.Y. 2014)................................................................................. 22

iv

William Kaufman Org., Ltd. v. Graham & James LLP,


269 A.D.2d 171, 703 N.Y.S.2d 439 (1st Dept 2000) ...................................................... 19
Statutes
CPLR 3211(a)(1) ........................................................................................................................ 1, 7
CPLR 3211(a)(7) ........................................................................................................................ 1, 7

Defendants Saba Capital Management, L.P., Saba Capital Offshore Fund Ltd., Saba
Capital, LLC and Boaz Weinstein respectfully submit this memorandum of law in support of
their motion for an order dismissing the complaint pursuant to CPLR 3211(a)(1) and (7).
PRELIMINARY STATEMENT
In 2012 and 2013, Plaintiff Public Sector Pension Investment Board (PSP), an
experienced investor that manages over $100 billion, chose to invest $500 million in Saba
Capital Offshore Fund, Ltd. (the Fund).1 In January 2015, PSP informed the Fund that it
wished to redeem (i.e., liquidate) its entire investment at the end of the first quarter. As a
result, the Funds Investment Manager was required to sell a substantial proportion of the assets
held by Saba Capital Master Fund, Ltd. (the Master Fund), of which the Fund was a so-called
indirect feeder fund.2 As March 31 approached, the Investment Manager engaged in its regular
monthly exercise of determining the Funds net asset value (NAV), which required the
valuation of each of the more than 1,200 securities in the Master Funds portfolio. The
Investment Manager used a bid-wanted-in-competition (BWIC) auction to liquidate or value
thirty-one particularly illiquid bonds. PSP has no issue with the value assigned to twenty-nine of
them; this lawsuit is about the other two.
Through this lawsuit, PSP attempts to transform its disappointment with the values
attributed to those two bonds into four separate causes of action against four different
defendants. PSPs effort fails in the face of contractual provisions that preclude precisely the
type of after-the-fact second-guessing that PSP invites the Court to engage in here. As detailed

Investors in the Fund become shareholders in the Cayman Islands company that is the Fund.

The Fund itself holds no assets or securities other than shares of an intermediate feeder fund
which, in turn, holds only shares of the Master Fund. (Compl. 11.)

below, the documentation to which PSP agreed at the outset of its half-billion dollar investment
expressly provides that:

The Investment Manager has broad discretion to value the Master Funds
securities, and was permitted to use the BWIC auction process in valuing the
bonds at issue here;

All values assigned to securities and other assets and liabilities by the Investment
Manager will be final and conclusive as to all of the shareholders (emphasis
added) in the Fund, including PSP; and

PSP waived any claim arising out of a conflict of interest on the part of the
Investment Manager.

In the face of these binding, unambiguous contract provisions as well as the applicable law, each
of PSPs claims fails and should be dismissed.
PSPs breach of contract claim fails because it does not and cannot allege a breach of any
contract provision; in fact, PSP does not reference a single provision of any contract in its entire
complaint. That omission is unsurprising, because the valuation process PSP describes in its
complaint is entirely consistent with the governing documentsindeed, they required it under
the circumstances. The Investment Manager was not obligated to continue using a valuation
methodology under conditions in which it did not generate reasonable, reliable and accurate
valuations for the bonds at issue. Saba turned to a methodology that did achieve such valuations.
In any event, PSP cannot sue the Fund itself for breach of contract, because the governing
documents demonstrate that the Fund plays no role whatsoever in the determination of the NAV.
Nor does the law permit PSP to pull Boaz Weinstein individually and Saba Capital, LLC
(Saba Capital) into this case through a tortious interference claim. A party cannot tortiously
interfere with the contract of a party it controls or that is part of the same corporate structure.
Moreover, PSP does not (nor could it) allege that Saba Capital has anything at all to do with PSP,

its investment, its redemption, the Fund, the Funds NAV, or the valuation of the Master Funds
portfolio. PSPs claim against Saba Capital should be dismissed for that additional reason.
PSPs claim for breach of fiduciary duty also fails for three principal reasons. First, under
Cayman law, such a claim is derivative, and can be brought only by the Fund. Second, PSP is
foreclosed from bringing a claim because it is no longer a shareholder of the Fund, having
redeemed its investment as of March 31, 2015. Third, PSPs breach of fiduciary duty claim is
duplicative of its contract claim, and should be dismissed for that additional reason.
Lastly, PSPs claim for aiding and abetting a breach of fiduciary duty also should be
dismissed. Cayman law does not recognize such a claim, and in any event, absent a viable claim
for breach of fiduciary duty, an aiding and abetting claim cannot stand. Moreover, just as with
PSPs tortious interference claim, the aiding and abetting claim is brought not against strangers
to the Saba corporate structure, but rather against Mr. Weinstein and Saba Capital, which PSP
alleges control, and are part of, that same structure. Those defendants cannot be held liable for
aiding and abetting a breach of fiduciary duty by another entity in the Saba corporate family.
FACTUAL BACKGROUND
I.

THE FUND IS A HIGH-RISK VEHICLE FOR SOPHISTICATED INVESTORS


Defendant Saba Capital Offshore Fund, Ltd. (the Fund) is an offshore investment

vehicle based in the Cayman Islands. (Compl. 11.) Defendant Saba Capital Management L.P.
(the Investment Manager) is responsible for the Funds investments. (Id. 12.) PSP alleges
that defendant Boaz Weinstein controls the Investment Manager, and that the Investment
Manager is [s]ubject to the supervision of defendant Saba Capital, LLC, which is also
controlled by Mr. Weinstein. (Id. 12-13.) Other than by defining it as the same entity as Mr.
Weinstein (id. 13), PSPs complaint makes no further independent mention of Saba Capital.

The Confidential Offering Memorandum3 (the OM) for the Fund sets forth certain
obligations of the Investment Manager (Compl. 15) and discloses a number of important risks
for potential investors in the Fund. The OM explains that the Fund seeks to exploit dislocations
in the credit market by buying and selling junk and investment grade debt, credit default swaps,
equities and derivatives. (OM at i.) The Fund explicitly warns all prospective investors that its
strategy is suitable only for sophisticated investors that do not require immediate liquidity for
their investments (id. at iii), and that investing in the Fund involves a high degree of risk,
including the risk that the entire amount invested may be lost. (Id. at 45.)
The OM also warns investors that the Fund may invest a portion of its assets in financial
instruments that are not publicly traded or that have become illiquid. (Id. at 46.) In describing
the Possible Adverse Effects of Substantial Redemptions, the OM notes that if there are
substantial redemptions of Shares within a limited period of time . . . the Investment Manager
may be required to liquidate positions of the Fund at an inappropriate time or on unfavorable
terms, resulting in lower net assets for the remaining shareholders and a lower redemption price
for the redeeming shareholders. (Id.) PSP therefore accepted this risk when it invested in the
Fund and at the time it made its request to redeem.
II.

THE INVESTMENT MANAGER HAS BROAD DISCRETION TO DETERMINE


THE NAV
PSP alleges that the Investment Manager is responsible for determining the Net Asset

Value (NAV) of the Fund according to the guidelines set forth in the OM. (Compl. 15.) But
the OM affords the Investment Manager extremely wide discretion in determining the value of
the Funds assets, including the two bonds at issue in this case.

A copy of the OM is attached as Exhibit A to the accompanying affirmation of Anne E.


Beaumont (the Beaumont Affirmation).

PSP alleges, falsely, that the Investment Manager agreed under the relevant contracts
(including the OM) to value the bonds only by using External Pricing Sources such as
independent pricing services and/or dealer quotations from a market maker or financial
institution regularly engaged in the practice of trading or pricing the assets. (Compl. 18-19.)
On the contrary, the OMs explicit provisions merely require that in determining the value of the
bonds, the Investment Manager consider[], among other factors, such External Pricing
Sources, in addition to recent trading activity or other information that, in the opinion of the
Investment Manager, may not have been reflected in the pricing obtained from such external
sources. (OM at 83 (emphasis added).)
Ultimately, the OM allows the Investment Manager to value such securities as it
reasonably determines to the extent that the Investment Manager determines that the valuation
of any securities pursuant to the above does not fairly represent fair value. (Id., emphasis
added.) The OM imposes no restrictions on what pricing sources or factors the Investment
Manager may consider in valuing individual securities. It also dictates that [a]ll values assigned
to securities and other assets and liabilities by the Investment Manager will be final and
conclusive as to all of the shareholdersincluding PSP. (Id., emphasis added.)
Importantly, the OM discloses that either Mr. Weinstein or the Investment Manager may
purchase or sell securities on its own behalf (id. at 69) and that Mr. Weinstein and other
affiliates together have made aggregate capital contributions in excess of $25,000,000 to
investment vehicles which have assets that are managed alongside those of the Fund. (Id. at 88.)
The OM explicitly notifies potential investors that by investing in the Fund, they have waived
any claim with respect to any liability arising from the existence of any such conflict of interest.
(Id. at 71.)

III.

PSPS REDEMPTION REQUIRED EXTRAORDINARY EFFORTS TO


LIQUIDATE AND VALUE BONDS
PSP invested $500 million in shares in the Fund in 2012 and 2013. (Compl. 14.) After

experiencing losses, PSP informed the Fund in January 2015 that it wished to liquidate its
investment. (Id. 17.) Because PSP (in addition to other redeeming investors) represented the
majority of the total investments in the Fund, the Investment Manager was required to sell a
large number of assets. (Id. 17.)
As the Investment Manager explored the available market for each of the hundreds of
securities held by the Fund, it found that a number of bonds had experienced a near-total
cessation in institutional-sized transactionsprecisely as the OM had warned, the market for a
number of the bonds had become illiquid, and the few available quotes for these bonds did not
represent buyers capable of or interested in transacting in the very large quantities held by the
Fund. For thirty-one such bonds, therefore, the Investment Manager elected to employ a bidwanted-in-competition (BWIC) process, or auction, to liquidate or value the bonds. As
explained in more detail below, this process was entirely consistent with the provisions of the
OM. The Investment Manager then determined the NAV for March 31, 2015, PSPs redemption
date, based on (a) the quotes obtained for liquid positions, (b) the BWIC bid prices for illiquid
positions that had not been sold, and (c) the amount of cash held by the Fund as a result of the
liquidation of positions through the BWIC process and otherwise.
PSPs allegation that [l]ess than one month later the Investment Manager abandon[ed]
the BWIC process (id. 21) is completely false.4 On the contrary, the Investment Manager
continued to use the BWIC process to determine the value of certain bonds in the Funds

Indeed, PSPs own due diligence provider was told as much before this lawsuit was filed.

portfolio well into the second and third quarters of 2015, as it waited for liquidity to return to
normal levels. Given that this lawsuit solely involves whether the NAV was properly determined
as of March 31, 2015, however, the subsequent NAV determinations are irrelevant.
After determining the March 31, 2015 NAV, and having sold a large number of assets in
highly challenging conditions, the Fund returned to PSP the cash value of its investment as
requested. On September 25, 2015, PSP filed this lawsuit.
LEGAL STANDARD
Dismissal pursuant to CPLR 3211(a)(7) is appropriate where, even viewing the
allegations in the complaint as true, the plaintiff fails to state a claim. The Court need not,
however, accept as true allegations consisting of bare legal conclusions as well as factual claims
flatly contradicted by documentary evidence. Simkin v. Blank, 19 N.Y.3d 46, 52 (2012).
Moreover, where a written agreement . . . unambiguously contradicts the allegations
supporting a litigants cause of action for breach of contract, the contract itself constitutes
documentary evidence warranting the dismissal of the complaint pursuant to CPLR 3211(a)(1),
regardless of any extrinsic evidence or self-serving allegations offered by the proponent of the
claim. 150 Broadway N.Y. Associates, L.P. v. Bodner, 14 A.D.3d 1, 5, 784 N.Y.S.2d 63, 65 (1st
Dept 2004); see also Taussig v. Clipper Grp., L.P., 13 A.D.3d 166, 167, 787 N.Y.S.2d 10, 11
(1st Dept 2004) (The interpretation of an unambiguous contract is a question of law for the
court, and the provisions of a contract addressing the rights of the parties will prevail over the
allegations in a complaint.); Sky Top Farms, Inc. v. Bilinski Sausage Mfg. Co., 73 A.D.3d 538,
538 (1st Dept 2010) (affirming grant of motion to dismiss where contract authorized defendant
to take the actiontermination of the contractthat formed the basis for the complaint).

ARGUMENT
I.

PSPS BREACH OF CONTRACT CLAIM SHOULD BE DISMISSED


PSP alleges that it purchased shares pursuant to the terms set forth in the Subscription

Agreement, the Confidential Offering Memorandum of the Fund, and the Memorandum and
Articles of Association of the Fund. (Compl. 14.) The Subscription Agreement provides that
these documents shall be governed and construed and enforced in accordance with the laws of
the Cayman Islands. 5 (Subscription Agreement at 8.) Given New Yorks well-settled policy
of enforc[ing] contractual provisions for choice of law, Boss v. Am. Exp. Fin. Advisors, Inc.,
15 A.D.3d 306, 307, 791 N.Y.S.2d 12, 14 (1st Dept 2005), Cayman law governs PSPs breach
of contract claim.
As detailed in the accompanying affidavit of Cayman counsel Laura Hatfield6 (the
Hatfield Affidavit), Cayman law, like New York law, provides that contracts are construed as
written, without recourse to extrinsic evidence, except where they cannot be due to ambiguity or
other circumstances not present here. See Hatfield Aff. 24-25.
A.

The Fund Documents Authorized the Investment Managers Valuation of the


Bonds at Issue

PSP alleges that the Fund and the Investment Manager agreed to value the MNI Bonds
by using External Pricing Sources. (Compl. 19.) That is false, and unambiguously
contradict[ed] by the parties contract. Contrary to PSPs allegations, the Offering
Memorandum states that securities like the MNI bondsthe two bonds at issue hereare
valued by the Investment Manager after considering, among other factors, . . . External Pricing

A copy of the relevant excerpt from the Subscription Agreement is attached as Exhibit B to the
Beaumont Affirmation.
6

A copy of the Hatfield Affidavit is attached as Exhibit C to the Beaumont Affirmation.

Sources, recent trading activity or other information that, in the opinion of the Investment
Manager, may not have been reflected in pricing obtained from such external sources. (OM at
83, emphasis added.) PSPs complaint does not even mention this controlling contractual
provision, let alone allege how any defendant violated it. Indeed, PSP does not even allege that a
BWIC auction itself is anything other than an External Pricing Source, given the broad
definition of that term as independent pricing services or dealer quotations from a market maker
or financial institution regularly engaged in the practice of trading in or pricing such securities.
(OM at 82-83.)
PSP then disparages the BWIC process used by the Investment Manager, but its
allegations amount to nothing more than the fact that the BWIC process had not previously been
used. (Compl. 19-22.) The Fund Documents do not limit the Investment Manager to a single
method for determining the NAV. Even assuming that the results of a BWIC auction are not
themselves External Pricing Sourcesthough the plain language of that definition includes
themnothing in the Offering Memorandum excludes the results of a BWIC auction from the
broad universe of other information the Investment Manager may consider when valuing
illiquid securities like the two MNI Bonds at issue here.
The breadth of discretion afforded to the Investment Manager does not end there. The
Memorandum further provides:
If the Investment Manager determines that the valuation of any securities pursuant
to [valuation methods specified earlier in the Memorandum, such as consultation
of External Pricing Sources] does not fairly represent the fair value, the
Investment Manager will value such securities as it reasonably determines and
will set forth the basis of such valuation in writing in the Funds records.
(OM at 83.) This provision plainly permitted the Investment Manager to use a BWIC auction to
price the illiquid bonds at issue in this case, regardless of whether it had done so previously.

As the Offering Memorandum makes clear: All values assigned to securities and other
assets and liabilities by the Investment Manager will be final and conclusive as to all of the
shareholders. (OM at 83, emphasis added.) PSP, a sophisticated investor, should be held to this
bargain. Cf. Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 555-56 (Del. Ch.
2001) (when dealing with a contract between highly sophisticated parties, allowing a party to
assert claims that are explicitly precluded by contract, would defeat the reasonable commercial
expectations of the contracting parties and eviscerate the utility of written contractual
agreements). PSP agreed to give the Investment Manager final and conclusive authority over
valuation despite being warned that the market prices of illiquid investments tend to be
volatile and may not be readily ascertainable (OM at 61), that sale of such securities often
requires more time (id.), and that, accordingly, the Fund is suitable only for sophisticated
investors who do not require immediate liquidity for their investments. (Id. at 61-62.) Despite
these warnings, and after the Investment Manager encouraged PSP to redeem its shares in three
installments, PSP insisted on an immediate liquidation. (Compl. 5.) PSP now seeks to avoid
the consequences of that decision by disregarding the terms of the contracts to which it agreed.
B.

The Fund Documents Place No Obligations on the Fund Regarding


Valuation

Even if PSP could identify a contractual provision that was breachedand it cannotthe
Fund is an improper target for PSPs allegations, because the Fund had no contractual
obligations with regard to the NAV. Under the Fund Documents, only the Investment Manager
had such obligations.
The section of the Offering Memorandum (OM) defining the process for
Determination of Net Asset Value is clear:
The Investment Manager and the Administrator will determine the Net Asset
Value of the Fund and the Master Fund in accordance with the guidelines set forth
10

below. All matters concerning valuation of securities and the allocation of


liabilities not expressly provided for below may be determined by the
Administrator in consultation with the Investment Manager, whose determination
is final and conclusive as to all shareholders.
(OM at 81, emphasis added.) The Offering Memorandum also makes clear that illiquid
securities, like the MNI Bonds that PSP alleges were valued improperly (Compl. 18-22), are
valued by the Investment Manager. (OM at 83, B, emphasis added.) Ultimately, [a]ll values
assigned to securities and other assets and liabilities by the Investment Manager will be final and
conclusive as to all of the shareholders. (Id. at 83.) Indeed, PSPs own complaint recognizes
that the Investment Manager is responsible for determining those NAVs, not the Fund.
(Compl. 15.) Accordingly, PSP fails to state a claim for breach of contract against the Fund.7
II.

PSPS TORTIOUS INTERFERENCE CLAIM SHOULD BE DISMISSED


A.

Dismissal of the Contract Claim Requires Dismissal of the Tortious


Interference Claim

Because there is no breach of contract, PSPs claim for tortious interference with contract
against Mr. Weinstein and Saba Capital necessarily fail as well. NBT Bancorp, Inc. v.
Fleet/Norstar Fin. Grp., Inc., 87 N.Y.2d 614, 619, 664 N.E.2d 492, 494 (1996) (dismissing
tortious interference claim on the ground that there was no breach of contract, an essential
element of both causes of action).8

The Funds only contractual obligation in connection with PSPs redemption was to pay PSP
the redemption proceeds at the NAV as set in accordance with various procedures not at issue
here. (See OM at 83-87, regarding Redemption of Shares.) PSP does notand cannotallege
the Fund failed to meet that obligation.
8

Because PSPs tortious interference claim sounds in tort, it is not governed by the contractual
choice of law provisions discussed above, which give no indication they were meant to
encompass extra-contractual causes of action. Melia v. Zenhire, Inc., 42 Misc. 3d 1206(A), at
*4, 984 N.Y.S.2d 632 (Sup. Ct. (Erie Cty.) 2013). Instead, the Court must apply New Yorks
interest analysis, which gives controlling effect . . . to the law of the jurisdiction which,
because of its relationship or contact with the occurrence or the parties, has the greatest concern
with the specific issue raised in the litigation. Schultz v. Boy Scouts of Am., Inc., 65 N.Y.2d 189,

11

B.

Mr. Weinstein and Saba Capital Cannot Be Held Liable for Interfering with
the Contracts of Entities They Supervise or Control

Even if PSP had pleaded a proper breach of contract claim, neither Mr. Weinstein nor
Saba Capital can be liable for tortious interference with the Funds or the Investment Managers
contracts given their alleged control over and supervision of those defendants. (Compl. 31.)
The elements of tortious interference are: (1) the existence of a contract, enforceable by the
plaintiff, (2) the defendant's knowledge of the existence of that contract, (3) the intentional
procurement by the defendant of the breach of the contract, and (4) resultant damages to the
plaintiff. Joan Hansen & Co. v. Everlast Worlds Boxing Headquarters Corp., 296 A.D.2d 103,
111, 744 N.Y.S.2d 384, 391 (1st Dept 2002). It is well established, however, that only a
stranger to a contract, such as a third party, can be liable for tortious interference with a
contract. Koret, Inc. v. Christian Dior, S.A., 161 A.D.2d 156, 157, 554 N.Y.S.2d 867, 869 (1st
Dept 1990). Accordingly, corporate officers are not personally liable to one who has contracted
with the corporation on the theory of inducing a breach of contract, merely due to the fact that,
while acting for the corporation, he has made decisions and taken steps that resulted in the
corporations promise being broken. Application of Brookside Mills, Inc., 276 A.D. 357, 367,
94 N.Y.S.2d 509, 518 (1st Dept 1950).
PSP alleges that Mr. Weinstein and Saba Capital (which its complaint chooses to group
together as a single entity) maintained control over and supervision of the Investment Manager
and the Fund. (Compl. 31.) More specifically, PSP alleges that Saba Management (under the
supervision and control of Weinstein) is responsible for determining the NAV of the Fund. (Id.
196, 480 N.E.2d 679, 683 (1985). Given that all of the allegedly tortious conduct took place in
New York, and there does not appear to be a jurisdiction with an interest in these claims greater
than New Yorks, New York law should govern. See Solow v. Stone, 994 F. Supp. 173, 177
(S.D.N.Y.), affd, 163 F.3d 151 (2d Cir. 1998).

12

15.) By PSPs own admission, then, neither Mr. Weinstein nor Saba Capital was a stranger to
the contractnamely, the Fund Documents, which PSP alleges comprise a valid, binding, and
enforceable contract between and among PSP, the Fund, and the Investment Manager (id.
24)or to the specific contractual duty at issue in this case. Koret, 161 A.D.2d at 157. Because
the factual underpinning of [PSPs] complaint is that Mr. Weinstein and Saba Capital
interfered with the contracts of parties over which they exercised control, PSP fails to state a
claim for tortious interference as a matter of law against either party. Solow v. Stone, 994 F.
Supp. 173, 181-82 (S.D.N.Y.), affd, 163 F.3d 151 (2d Cir. 1998) (dismissing claim for tortious
interference where the premise of the complaint is that defendants were corporate insiders
who had authority over the breaching party).
PSPs complaint also lacks any allegations that would bring Mr. Weinstein or Saba
Capital within the narrow exception to a corporate actors immunity from liability for interfering
with the contracts of an entity he controls when he acts for his personal rather than the corporate
interests. Joan Hansen, 296 A.D.2d at 110. Indeed, the complaint is devoid of any allegation
that Mr. Weinstein or Saba Capital acted with the motive for personal gain as distinguished
from any gain to Saba Capital Management or the Fund. Joan Hansen, 296 A.D.2d at 110
(emphasis added). PSPs bare allegation that Mr. Weinstein acted to further his own personal
interests (Compl. 32) is insufficient as a matter of law to state a claim for tortious interference;
PSP did not and cannot make the additional allegations needed to distinguish Mr. Weinsteins
personal interests from those of the entities that PSP alleges he supervis[es] and control[s].
(Compl. 31.)9

PSPs bald assertion that Mr. Weinstein acted to further his own personal interests is not
entitled to the presumption of truth and the benefit of all favorable inferences which would be

13

And PSP makes no allegations whatsoever that are specific to Saba Capital. Nor could it:
none of the documentation relevant to PSPs investment assigns Saba Capital any duties or
obligations in respect of anything. PSP does not and cannot allege that Saba Capital is a party to
any of those documents, or that it has or should have any role in managing the Fund, redeeming
investments, valuing the Funds portfolio, or setting the NAV. Saba Capital does not belong in
this case, and all claims against it should be dismissed.
Moreover, PSPs own allegations demonstrate why PSP did not and cannot allege in
nonconclusory terms that Mr. Weinstein or Saba Capital had not acted in the corporate
interests. Petkanas v. Kooyman, 303 A.D.2d 303, 305-06, 759 N.Y.S.2d 1, 3 (1st Dept 2003).
The only potential personal gain to Mr. Weinstein or Saba Capital alleged is in PSPs assertion
that Defendants reduced the redemption proceeds to increase the reported NAV of Weinsteins
remaining investment in the Onshore Feeder Fund and the Intermediate Fund. (Compl. 26.)
That is not a benefit specific to Mr. Weinstein or Saba Capital, but rather a benefit to the Fund
and its shareholders in general. Any interest Mr. Weinstein or Saba Capital might have had in
increasing the NAV of any remaining investment thus was identical to the interests of the
Fund and its remaining investors. See Horan v. John F. Trommer, Inc., 125 N.Y.S.2d 34, 37
(Sup. Ct. (N.Y. Cty.) 1953) (dismissing claim for tortious interference against corporate directors
whose stock ownership made their interests identical with the corporations such that in
promoting their own good in any corporate transaction they would at the same time be serving
due to properly pleaded allegations. See EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 27,
832 N.E.2d 26, 36 (2005) (conclusory allegations are insufficient to survive a motion to
dismiss); Caniglia v. Chicago Tribune-New York News Syndicate, Inc., 204 A.D.2d 233, 23334, 612 N.Y.S.2d 146, 147 (1st Dept 1994) (on a motion to dismiss the facts pleaded are
presumed to be true and are accorded every favorable inference but allegations consisting of
bare legal conclusions, as well as factual claims inherently incredible or flatly contradicted by
documentary evidence are not entitled to such consideration).

14

that of the corporation, and plaintiff failed to allege any interest hostile to those of the
corporation); Universal Express, Inc. v. McKinnon, 798 N.Y.S.2d 714 (Sup. Ct. Queens Cty.
2004) (table op.) (dismissing tortious interference claim based on clear unity of interest
between allegedly breaching company and controlling party alleged to have interfered with
contracts).
III.

PSPS BREACH OF FIDUCIARY DUTY CLAIM SHOULD BE DISMISSED


PSP asserts a breach of fiduciary duty claim based on allegations that the Investment

Manager of the Fund, a Cayman Islands company, owed certain duties regarding the
management and administration of the Fund and in the investment and return of [PSP]s assets,
and breached those duties in valuing the funds securities, and calculating and reporting its NAV
at the time of PSPs redemption. (Compl. 35-37.) Such matters are squarely within the
internal affairs of the fund, and Cayman law therefore applies. See Druck Corp. v. The Macro
Fund (U.S.) Ltd., No. 02 Civ. 6164 (RO), 2007 WL 258177, at *1 (S.D.N.Y. Jan. 29, 2007)
(whether fees properly assessed against investor in connection with redemption of hedge-fund
investment was governed by law of place of funds incorporation).10
A.

PSP Lacks Standing to Assert a Direct Breach of Fiduciary Duty Claim

The Court should dismiss PSPs breach of fiduciary duty claim because PSP lacks
standing to bring it.
10

The law of a hedge funds place of incorporation governs a former investors breach of
fiduciary duty claim against the fund manager. See, e.g., ABF Capital Mgmt. v. Askin Capital
Management, L.P., 957 F. Supp. 1308, 1332 (S.D.N.Y. 1997) (applying Cayman law). New
York courts apply New Yorks choice-of-law rules, which mandate the use of interest analysis
to determine the law applicable to a tort claim such as breach of fiduciary duty. See Davis v.
Scottish Re Group Ltd., Index No. 654027/2013, 2014 WL 7475035, at *4 (Sup. Ct. (N.Y. Cty.)
Oct. 14, 2014). Where, as here, a breach of fiduciary duty claim arises out of the management of
a corporate entity, New York courts apply the internal affairs doctrine, which dictates that the
place with the greatest interest, and the source of the applicable law, is the place where the entity
is incorporated. See id. at *5.

15

As detailed in the Hatfield Affidavit, under Cayman law, a claim for breach of fiduciary
duty against a hedge fund manager is a derivative claim that cannot be brought by an investor
except in certain circumstances not present here. Specifically, Cayman law treats any loss that
could be recovered by an investor through a direct claim as duplicativereflective, in Cayman
law termsof the loss of the fund itself, and therefore reserves to the fund alone the right to seek
such recovery. Thus, a claim by an investor in a Cayman hedge fund against the funds manager
is subject to dismissal. See Hatfield Aff. 26-31.
ABF Capital is directly on point. In that case, investors in a hedge fund asserted a claim
for breach of fiduciary duty against, among others, the funds investment manager, ACM. See
ABF Capital Mgmt. v. Askin Capital Management, L.P., 957 F. Supp. 1308, 1331-32 (S.D.N.Y.
1997). The investors alleged that they were injured because the manager had reported inaccurate
NAVs. The court applied Cayman law and held that, Because Plaintiffs allege no injury to
themselves distinct from the injury to the Funds, they have no standing to assert the breach of
fiduciary duty claim against ACM. Id. at 1332.
Druck Corp. is also instructive. In that case, a redeemed hedge-fund investor sued the
funds directors and manager for breach of contract and breach of fiduciary duty, alleging that he
was owed additional amounts in connection with his redemption. See Druck Corp., 2007 WL
258177, at *1. Whether the amounts were owed to the investor or not depended entirely on the
funds NAV at the time of the plaintiffs redemption.11 The court dismissed both claims,
applying Cayman law based on the funds incorporation there, and finding that, as to the breach

11

The opinion in Druck cited above does not detail the alleged circumstances of the plaintiffs
redemption. The summary here is based on another, earlier decision in the case. See Druck Corp.
v. The Macro Fund (U.S.) Ltd., No. 02 Civ. 6164 (RO), 2003 WL 21297284, at *1 (S.D.N.Y.
June 4, 2003).

16

of contract claim, plaintiff states no loss other than the same loss suffered by the Macro Fund as
a whole. (As noted below, the fiduciary duty claim was dismissed on the groundsalso
applicable herethat the plaintiff was no longer a shareholder of the fund.)
Likewise, PSP alleges that it was damaged as a result of the Investment Managers failure
to value properly the portfolio of the Fund which, PSP claims, resulted in the Funds March 31,
2015 NAV being inaccurately low and PSP receiving insufficient redemption proceeds. But, just
as in ABF Capital and Druck Corp., the alleged conduct by Saba Management of which PSP
complains applied to and affected all of the Funds investors equally, regardless of whether they
redeemed. That PSP, as a redeeming investor, realized losses due to the valuation of the Funds
portfolio for NAV purposes, does not change the analysisPSP was subject to the same NAV as
all other investors, and PSP does not and cannot allege otherwise. PSPs only complaint is as to
the calculation of the NAV; its decision ultimately to redeem its shares at the March 2015 NAV
was its own and is not the basis of any claim against the defendants here. Therefore, PSPs claim
that the NAVwhich impacted all shareholders in the same waywas improperly calculated is
a plain-vanilla derivative claim that only can be advanced by the fund itself and should be
dismissed.
Further, even if an investor in the Fund somehow had standing to bring a derivative
claim, PSP nonetheless could not bring it, because, having redeemed its investment prior to
bringing this action, it is no longer an investor in the fund. See Druck Corp., 2007 WL 258177,
at *2 (dismissing breach of fiduciary duty claim against fund manager by redeemed investor);
Hatfield Aff. 32-34.

17

B.

In the Alternative, PSPs Breach of Fiduciary Duty Claim Should Be


Dismissed as Duplicative of Its Contract Claim

Even if the Court were to find that PSP has stated a direct claim for breach of fiduciary
duty, the claim nonetheless should be dismissed as duplicative of PSPs breach of contract claim.
Where a claim is based upon the same facts and theories as [a] breach of contract claim that
claim is properly dismissed as duplicative. Brooks v. Key Trust Co. Natl Assn, 26 A.D.3d
628, 630, 809 N.Y.S.2d 270, 272 (3d Dept 2006). Accordingly, the Court in Brooks dismissed
an investors breach of fiduciary duty claim against his investment advisor where [t]he
allegations underlying plaintiffs fiduciary duty claimbased upon defendants self-dealing,
conflict of interests, and failure to advise plaintiff and prudently manage and diversify his
portfolio, and encouraging improper loans to plaintiff[were] either expressly raised in
plaintiffs breach of contract claim or encompassed within the contractual relationship by the
requirement implicit in all contracts of fair dealings and good faith. Id.
PSP alleges the Investment Manager breached fiduciary duties to act in good faith and
to use sound valuation practices when calculating the NAV of PSPs shares. (Compl. 35.)
But because the Fund Documents cover the precise subject matter of the alleged fiduciary
duty, PSPs breach of fiduciary duty claim must be dismissed as duplicative. Celle v. Barclays
Bank P.L.C., 48 A.D.3d 301, 302, 851 N.Y.S.2d 500, 501 (1st Dept 2008). PSP itself alleges
that the contracts pursuant to which it invested in the Fund set forth the proper manner of
valuation, having alleged that the Fund and the Investment Manager breached those contracts by
failing to calculate NAV in good faith in accordance with the procedures set forth in the Fund
Documents. (Compl. 25.)
In any event, the Offering Memorandum, with its detailed provisions for determining the
Net Asset Value of the Fund, speaks for itself. (OM at 81-83.) PSP cannot impose on the

18

Investment Manager a free-floating, additional fiduciary obligation to engage in good faith


and sound valuation practices where its obligations are already specified in a written contract.
(OM at 83.)
The alleged conduct underlying PSPs breach of contract claim is also identical to that
underlying its claim for breach of fiduciary duty. In both causes of action, PSP alleges that the
Investment Managers breach stems from its calculation of NAV in bad faith in a deliberate
and self-interested attempt to artificially reduce the amount of redemption proceeds and to
reduce the amount of redemption proceeds to be paid out to [PSP]. (Compare Compl. 26
(breach of contract) with 38 (breach of fiduciary duty).) Cf. William Kaufman Org., Ltd. v.
Graham & James LLP, 269 A.D.2d 171, 173, 703 N.Y.S.2d 439, 442 (1st Dept 2000) (affirming
dismissal of breach of fiduciary duty claim as duplicative where breach of contract allegations
referred to the same conduct constituting the allegations of breach of fiduciary duty); Brooks, 26
A.D.3d at 630; Celle, 48 A.D.3d at 302. As set forth above, there is no question that PSPs
complaint fails to allege any cognizable breach of contract. Because the allegations of breach of
fiduciary duty here are duplicative of the claim of breach of contract, PSPs fiduciary duty claims
should be dismissed as well.
IV.

PSPS AIDING AND ABETTING CLAIM SHOULD BE DISMISSED


A.

The Same Principles That Require Dismissal of PSPs Breach of Fiduciary


Duty Claim Require Dismissal of Its Aiding and Abetting Claim

The internal affairs doctrine also requires the application of Cayman law to PSPs aiding
and abetting claim. BBS Norwalk One, Inc. v. Raccolta, Inc., 60 F. Supp. 2d 123, 128-29
(S.D.N.Y. 1999). Cayman law does not recognize an aiding and abetting claim, and therefore
PSPs claim should be dismissed. Hatfield Aff. 35.

19

B.

New York Law Also Requires the Dismissal of PSPs Aiding and Abetting
Claim

Even if the Court were to conclude that New York law governs the aiding and abetting
claim, it should be dismissed for at least two independent reasons. First, the absence of a viable
claim for breach of fiduciary duty precludes the assertion of an aiding and abetting claim. See
OFSI Fund II, LLC v. Canadian Imperial Bank of Commerce, 82 A.D.3d 537, 540, 920 N.Y.S.2d
8, 11 (1st Dept 2011) ([a]s there is no breach of fiduciary duty claim, there can be no claim for
aiding and abetting breach of fiduciary duty); Fiala v. Metropolitan Life Ins. Co., 6 A.D.3d 320,
323, 776 N.Y.S.2d 29, 33 (1st Dept 2004) ([b]ecause the Fiala plaintiffs primary claims for
breach of fiduciary duty were properly dismissed, their claim for aiding and abetting a breach
of fiduciary duty cannot stand). Thus, dismissal of PSPs breach of fiduciary duty claim
requires dismissal of its aiding and abetting claim.
Second, the defendants against whom PSP asserts its aiding and abetting claim, Mr.
Weinstein and Saba Capital, LLC, areby PSPs own accountpart of the same corporate
structure as the Investment Manager, and therefore cannot be sued for aiding and abetting. As
detailed above, a tortious interference claim cannot be brought against a defendant that is a
member of the same corporate structure as the defendant that is alleged to have breached the
underlying contract. (See supra Part II.) Likewise, a claim for aiding and abetting also only can
be brought against a person or entity that is an independent actor, separate and distinct from the
corporate enterprise whose conduct is alleged to have been aided and abetted. See Solow v.
Stone, 994 F. Supp. 173, 181 (S.D.N.Y. 1998).
Just as with the tortious interference claim (see supra Part II), the Solow case is directly
on point. In that case, a shareholder of PPIE asserted a claim for aiding and abetting a breach of
fiduciary duty. Id. at 180. The defendants were PPIEs UK administrators in its insolvency

20

proceeding (akin to a trustee in bankruptcy), while PPIE itself was alleged to have breached its
fiduciary duty to the plaintiff shareholder. Id. at 180-81. The court observed that the
administrators were part of PPIEs corporate structure, a position qualitatively different from that
of the law firms, accounting firms, and banks that the Second Circuit has recognized as third
parties for purposes of an aiding and abetting claim. Id. at 181. Holding that no reasonable
fact-finder could conclude that the administrators were third parties in relation to PPIE, the
court dismissed the aiding and abetting claim. Id.
Here, again, PSPs own complaint alleges that Mr. Weinstein and Saba Capital are part of
the same corporate structure as the Investment Manager, not independent third parties. Indeed,
they are alleged to be much more integral parts of that structure than the court-appointed
insolvency administrators of PPIE that were found not to be third parties in Solow. For example,
PSP alleges that Saba Capital supervises the Investment Manager in its management of the
various Saba funds. (Compl. 12.) PSP also alleges that Mr. Weinstein controls both Saba
Capital and the Investment Managerthe latter being the same entity whose breach of fiduciary
duty Mr. Weinstein and Saba Capital allegedly aided and abetted. (Id. 13.) In addition, PSP
alleges that the determination of NAVs was to be carried out by the Investment Manager under
the supervision and control of Mr. Weinstein and Saba Capital. (Id. 15.)
Moreover, PSPs aiding and abetting claim fails to satisfy New York laws exacting
pleading standards for such a claim, which require particularized allegations of fact showing both
actual knowledge of and substantial assistance in a breach. See Ascot Fund Ltd. v. UBS
PaineWebber, Inc., 28 A.D.3d 313, 314, 814 N.Y.S.2d 36, 37 (1st Dept 2006); Kaufman v.
Cohen, 307 A.D.2d 113, 125, 760 N.Y.S.2d 157, 169 (1st Dept 2003). PSP does not even
attempt to allege facts to satisfy either of these elements; its allegations are entirely conclusory.

21

(Compl. 42-43.) For this additional reason, PSPs aiding and abetting claim should be
dismissed.
Indeed, PSPs aiding and abetting claim also duplicates its breach of contract claim
(which itself is not viable for the reasons detailed above in Part I). An aiding and abetting claim
that does not allege a breach of any obligation independent of a contract should be dismissed.
See Uni-World Capital, L.P. v. Preferred Fragrance, Inc., 43 F. Supp. 3d 236, 245 (S.D.N.Y.
2014). Here, as with PSPs breach of fiduciary duty claim, the allegations of aiding and abetting
mirror precisely the allegations of breach of contract. That is, the breach of contract claim alleges
a failure to calculate the Funds NAV correctly (Compl. 26), just as the aiding and abetting
claim does. (Id. 43.) The causes of action are entirely duplicative, and both have fatal defects
and should be dismissed.

22

CONCLUSION
For the foregoing reasons, Defendants respectfully request that the Court dismiss all four
causes of action in PSPs complaint with prejudice.
Dated: New York, New York
October 15, 2015

Respectfully submitted,
SUSMAN GODFREY L.L.P.

By:

s/ Jacob W. Buchdahl
Jacob W. Buchdahl
Arun Subramanian
Mark Musico
560 Lexington Avenue, 15th Floor
New York, New York 10022
Phone: (212) 336-8330
jbuchdahl@susmangodfrey.com
asubrama@susmangodfrey.com
mmusico@susmangodfrey.com
FRIEDMAN KAPLAN SEILER & ADELMAN
LLP
Eric Corngold
Anne E. Beaumont
7 Times Square
New York, New York 10036
Phone: (212) 833-1100
ecorngold@fklaw.com
abeaumont@fklaw.com
Attorneys for Defendants

23