Opinion ID: 222193
Heading Depth: 2
Heading Rank: 3

Heading: The Securities Act and Securities Exchange Act Claims against Alpert

Text: Applying these standards, we first consider whether the District Court erred in dismissing the Securities Act and Securities Exchange Act claims against Alpert that were premised on the theory that his statements in the Memorandum of 2003 were materially misleading. That Memorandum, as noted, stated that for more than two years, scalpers have been identified and restricted or banned from making further trades but that the Adviser did not completely eliminate all timers. The District Court was apparently of the view that because such statements were literally true, they could not be misleading. See Gabelli, 2010 WL 1253603, at . The law is well settled, however, that so-called half-truths  literally true statements that create a materially misleading impression  will support claims for securities fraud. See List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.1965); see also Rule 10b-5, 17 C.F.R. § 240.10b-5. Here, the complaint plausibly alleges that a reasonable investor reading the Memorandum would conclude that the Adviser had attempted in good faith to reduce or eliminate GGGF market timing across the board, whereas, as Alpert well knew but failed to disclose, the Adviser had expressly agreed to let one major investor, Headstart, engage in a very large amount of GGGF market timing, in return for Headstart's investment in a separate hedge fund run by Gabelli. The District Court therefore erred in dismissing the Securities Act and Securities Exchange Act claims. Alpert further argues, however, that even if the statements in the Memorandum were misleading, the District Court's determination can be affirmed on either of two alternate grounds: a failure to adequately allege materiality or a failure to adequately allege intent. As to materiality, a complaint may not properly be dismissed ... on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance. Ganino v. Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir.2000) (internal quotation marks omitted). Here, the complaint alleges that, pursuant to an undisclosed agreement between the defendants and Headstart, the latter was permitted to engage in market time trading up to $20 million per transaction and completed 836 such transactions over a three year period. In total, Headstart allegedly traded $4.2 billion in GGGF, approximately 62 percent of the total value of all trading in the Fund during that period, and earned $9.7 million in profits while other GGGF investors, who were not only themselves precluded from such trading but also unaware of its being undertaken by Headstart, suffered annual losses of at least 24.1%. Compl. ¶¶ 21, 40. Although the negative economic impact of these massive trades on GGGF's assets was less severe, see Compl. ¶ 2, it was still sufficient to create a jury issue as to its materiality. And, in any event, the notion that a reasonable investor would regard as immaterial the failure to disclose the secret arrangement by which the Fund and its Adviser, in return for a pay-off to another fund, allowed one GGGF investor to engage in highly profitable market timing while denying this opportunity to all other investors, borders on the frivolous. As to intent, the complaint alleges that Alpert knew, or was reckless in not knowing, that the statements in the Memorandum were misleading, because, inter alia, Alpert  the author of the Memorandum that reasonably gave the impression that the Adviser was making best efforts to eliminate scalping  had himself given the order to the market timing police to let Headstart continue its massive market timing, and because, as he also knew, Headstart was being given the preference in return for a secret pay-off in the form of an investment in Gabelli's hedge fund. Also, contrary to Alpert's contention that the complaint fails to allege that he knew market timing was harmful to the Fund, the complaint alleges that Alpert redeemed his own holdings in GGGF because, as he told a fellow Gabelli Funds officer, Marc Gabelli was allowing the GGGF to be scalped. Compl. ¶ 42. Accordingly, we find that the complaint adequately states claims against Alpert for violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act.