Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.

2d 143 (2003)

The test for distinguishing direct from derivative

829 A.2d 143 claims in the context of a limited partnership
Court of Chancery of Delaware, New Castle County. is substantially the same as that used when the
underlying entity is a corporation.
ANGLO AMERICAN SECURITY FUND,
10 Cases that cite this headnote
L.P., Diversified Long Term Growth Fund, L.P.,
Sterling Grace Capital Management, L.P., Drake
Associates, L.P., the Lorraine G. Grace Trust 1487 [2] Partnership Derivative Action
and Oliver R. Grace Junior Trust 90 II, Plaintiffs, The determination of whether a claim in the
v. context of a limited partnership is direct or
S.R. GLOBAL INTERNATIONAL FUND, derivative is made by careful application of a
L.P., Sloane Robinson Investment (Cayman), rather nuanced test that looks to the nature of
the injury and to the nature of remedy that could
Ltd. and Ernst & Young LLP, Defendants.
result if the plaintiffs are successful; when a
C.A. No. 20066–NC plaintiff alleges either an injury that is different
| from what is suffered by other partners or one
Submitted: April 25, 2003. that involves a contractual right of partners that
| is independent of the entity's rights, the claim is
Decided: Aug. 4, 2003. direct, while if the injury is one that affects all
partners proportionally to their pro rata interests
Synopsis in the partnership, the claim is derivative.
Limited partners sued limited partnership, general partner,
and limited partnership's auditor for breach of contract, breach 17 Cases that cite this headnote
of fiduciary duty, aiding and abetting breach of fiduciary duty,
negligence, negligent misrepresentation, and fraud following [3] Partnership Parties
general partner's withdrawal of funds from its capital account.
In a derivative action the plaintiff sues for an
Defendants challenged plaintiffs' standing, and moved to
injury done to the partnership and any recovery
dismiss the complaint for failure to state a claim and to
of damages is paid to the partnership; conversely,
state with particularity the circumstances constituting the
in a direct action the plaintiff sues to redress
alleged fraud. The Court of Chancery, New Castle County,
an injury suffered by the individual plaintiff
Chandler, Chancellor, held that: (1) limited partners' claims
and damages recovered are paid directly to the
against defendants were direct rather than derivative; (2)
plaintiff who was injured.
limited partners' complaint adequately stated claims for
breach of contract, breach of fiduciary duties, aiding and 4 Cases that cite this headnote
abetting breach of fiduciary duty, negligence, and negligent
misrepresentation; but (3) limited partners did not allege with
[4] Partnership Derivative Action
sufficient particularity their fraud claim.
In every case in the context of a limited
Defendants' motion to dismiss granted in part and denied in partnership the court must determine from the
part. complaint whether the claims are direct or
derivative and may not rely on either party's
Procedural Posture(s): Motion to Dismiss; Motion to characterization.
Dismiss for Failure to State a Claim.
7 Cases that cite this headnote

West Headnotes (24)

[5] Partnership Derivative Action
Because harm to a limited partnership will
[1] Partnership Derivative Action almost inevitably harm the partners and because
the entity itself is in some ways no more than

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

an amalgamation of a certain subset of partners' current partners but would not harm those who
interests, differentiation of direct from derivative later became partners as there were no shares to
claims can be elusive. sell and any withdrawing partner's interest was
liquidated, and newly admitted partners would
9 Cases that cite this headnote receive a windfall if fund recovered damages for
events occurring prior to their admission.
[6] Partnership Corporation
17 Cases that cite this headnote
Application of corporate law rules to disputes
related to a limited partnership necessitates a
bit of flexibility, because the facts unique to a [9] Partnership Derivative Action
limited partnership dispute include the contents Claims of limited partners against limited
of the limited partnership agreement and how partnership, general partner, and limited
it specifies or modifies the entity's function and partnership's auditors for failing to disclose
structure and the rights and responsibilities of the general partner's withdrawal of its funds from
general and limited partners. its capital account were direct rather than
derivative in nature, where limited partners
1 Case that cites this headnote had absolutely no control over management
of partnership, limited partners' interests were
[7] Partnership Derivative Action not freely transferable or tradable, partnership
existed solely as an investment vehicle in highly
For purposes of determining whether claims
speculative and volatile investments, and two
in a limited partnership context are direct or
month delay in disclosing that general partner
derivative, in some instances the relationships
had bailed out deprived limited partners of the
among the parties and the function and structure
same opportunity to cut their losses promptly
of the partnership itself may diverge from
before the value of the partnership's investments
the corporate model so dramatically that some
declined even further.
claims, which in a corporate context might be
classified as derivative, must be brought as 9 Cases that cite this headnote
direct claims in order to enable the injured
parties to recover while preventing a windfall to
individuals or entities whose interests were not [10] Pleading Mode of making amendment
injured. Parties may not amend the pleadings through
briefing on a motion to dismiss.
18 Cases that cite this headnote
2 Cases that cite this headnote

[8] Partnership Actions Between Partners

Though diminution of the value of a [11] Pretrial Procedure Motion and
business entity were classically derivative in proceedings thereon
nature, claims of limited partners against Motion by auditor of limited partnership to
limited partnership, general partner, and limited dismiss limited partners' claims of breach of
partnership's auditors for breach of contract, fiduciary duty and breach of contract against
breach of fiduciary duties, negligence, and fraud auditor was moot, even though the complaint
arising out of general partner's withdrawal of alleged that auditor owed both fiduciary and
funds from its capital account were direct in contractual duties to the limited partners, where
nature, where operation and function of the complaint did not allege that auditor breached
limited partnership as specified in the agreement either of those duties.
diverged radically from the traditional corporate
model; liability from the withdrawal accrued 2 Cases that cite this headnote
irrevocably and almost immediately to the

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

Fiduciaries are required, at the very least, to be

[12] Damages Allegations as to damage in honest and truthful when communicating with
general their principals.
Proof of damages and of their certainty need not
be offered in the complaint in order to state a
claim. [16] Pretrial Procedure Corporations and
associations; bank and trust companies;
13 Cases that cite this headnote
securities
Issue of whether limited partners' claims
[13] Partnership Pleading against general partner for breach of contract,
For purposes of claims by limited partners breach of fiduciary duties, negligence, negligent
against limited partnership, general partner, misrepresentation and fraud resulting from
and limited partnership's auditor for breach of general partner's withdrawal of its funds from
contract, breach of fiduciary duties, negligence its capital account were barred by exculpatory
and negligent misrepresentation as a result of clause in limited partnership agreement shielding
general partner's withdrawal of funds from its general partner from honest and negligent
capital account, allegations that general partner mistakes could not be resolved on motion to
impermissibly withdrew over $22 million from dismiss for failure to state a claim; complaint
the partnership, which exceeded the balance then alleged that the withdrawal was made during
available for withdrawal and amounted to the a time period when partnership was sustaining
general partner bailing out of the partnership, and significant losses and that withdrawal was not
then defendants wrongfully failed to disclose the disclosed in an annual statement even though
fact, amount, or implications of the withdrawal in similar transactions in the limited partners'
the annual statement provided to limited partners accounts were disclosed, and it was reasonable to
one month later that otherwise reported other infer from such allegations that general partner
post-year-end withdrawals, adequately pled a acted with some degree of bad faith. Chancery
causative link between the wrongs alleged and Court Rule 12(b).
the damages claimed.
3 Cases that cite this headnote
2 Cases that cite this headnote

[17] Partnership Pleading

[14] Partnership Withdrawal of capital Allegations that auditor for limited partnership
General partner's alleged withdrawal of its funds failed to disclose in annual statement general
from limited partnership after the end of the partner's post-year-end withdrawal of its funds
calendar year but before the release of the from limited partnership even though it disclosed
annual audited financial statement, and failure of similar transactions by the limited partners
general partner, limited partnership, and auditor provided a sufficient basis to infer that auditor
to report such withdrawal in the annual statement knew of the discrepancies and knowingly
even though post-year-end contributions and participated in the preparation of audited
withdrawals in the capital accounts of the limited financial statements that were not reflective
partners were reported, supported a claim against of the limited partnership's internal accounting
general partner, limited partnership and auditor records, for purposes of limited partners' claims
that the annual statement was materially false against auditor for aiding and abetting general
and misleading. partner's breach of its fiduciary duties.

[15] Fraud Fiduciary or confidential relations [18] Fraud Elements of Actual Fraud
Fraud Fraudulent Concealment

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

In order to state a claim of common law

fraud, the complaint must allege: (1) a false [21] Pleading Certainty, definiteness, and
representation of fact (or material omission) by particularity
the defendant; (2) with the knowledge or belief Allegations in general terms that defendants
that the representation is false or with reckless knew or believed annual statement was
indifference to its truth or falsity; (3) intent to materially false and misleading or acted with
induce the plaintiff's reliance; (4) actual and reckless disregard for its truth, factual allegations
justifiable reliance; which results in (5) harm to supporting inference that defendant general
the plaintiff. Chancery Court Rule 9(b). partner's withdrawal of its funds from its capital
account was made and recorded in corporate
8 Cases that cite this headnote books before completion of annual statement,
and allegations that post-year-end withdrawals
[19] Fraud Falsity of representations and from limited partners' accounts were reported
knowledge thereof and thus that defendants knew or believed
such transactions were appropriately reported
The second and third elements of a claim of
as subsequent events, adequately pled with
common law fraud, that defendant makes a
particularity the second element of common
false representation with the knowledge or belief
law fraud, that defendants made a false
that the representation is false or with reckless
representation in annual statement with intent to
indifference to its truth or falsity, and with intent
induce reliance, for purposes of limited partners'
to induce the plaintiff's reliance, may be averred
fraud claim against general partner, limited
generally, as such elements relate to conditions
partnership, and auditor. Chancery Court Rule
of the mind. Chancery Court Rule 9(b).
9(b).
9 Cases that cite this headnote
1 Case that cites this headnote

[20] Pleading Certainty, definiteness, and

[22] Pleading Certainty, definiteness, and
particularity
particularity
Allegations that general partner hired auditor
Allegations that limited partners were entitled to
to prepare annual statement, that such annual
only one audited financial statement each year,
statement was false and misleading because
that general partner was entrusted with making a
it failed to disclose as a subsequent event
wide range of innovative and highly speculative
that general partner had withdrawn over $22
investments, and reasonable inference that
million from its capital account even though
all defendants were of aware of such facts
other subsequent events disclosed included
and any suggestion that defendants may not
withdrawals by limited partners from their
have intended that limited partners rely on
capital accounts, and that such information
annual statement that did not disclose general
was material because the amount withdrawn
partner's withdrawal of its funds from its capital
exceeded the current balance in general partner's
account as a subsequent event was preposterous,
capital account and amounted to general partner
adequately pled with particularity the third
bailing out of the limited partnership at a
element of common law fraud, that defendants
time when partnership was sustaining significant
made a false representation with intent to induce
losses, adequately pled with particularity the
limited partners' reliance, for purposes of limited
first element of common law fraud, a false
partners' fraud claim against general partner,
representation of fact or material omission, for
limited partnership, and auditor. Chancery Court
purposes of limited partners' fraud claim against
Rule 9(b).
general partner, limited partnership, and auditor.
Chancery Court Rule 9(b).

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

[23] Pleading Certainty, definiteness, and Bruce E. Jameson and Allyson A. McKenzie, of Prickett,
particularity Jones & Elliott, P.A., Wilmington; Robert A. Cohen and
Fourth element of common law fraud, actual and Charles I. Poret, of Dechert, LLP, New York City, of counsel,
justifiable reliance, was inadequately pled with for S.R. Global International Fund, L.P. and Sloane Robinson
particularity for purposes of limited partners' Investment (Cayman), Ltd.
fraud claim against general partner, limited
Allen M. Terrell, Jr., Daniel A. Dreisbach, Paul D. Brown and
partnership, and auditor arising out of general
James H. McMackin, III, of Richards, Layton & Finger, P.A.,
partner's withdrawal of its funds from its capital
Wilmington, for Defendant Ernst & Young, LLP.
account and resulting failure of defendants to
report withdrawal as a subsequent event in
annual statement, where limited partners failed
to plead or assert that they read or considered OPINION
the contents of the annual statement, and only
CHANDLER, Chancellor.
asserted that they were in fact deceived by
defendants' acts, omissions, and conduct and Plaintiffs, Anglo American Security Fund, L.P., Diversified
relied thereon to their detriment. Chancery Court Long Term Growth Fund, L.P., Sterling Grace Capital
Rule 9(b). Management, L.P., Drake Associates, L.P., The Lorraine
G. Grace Trust 1487, and Oliver R. Grace Junior Trust
5 Cases that cite this headnote
90 II, bring this action against defendants, S.R. Global
International Fund, L.P. (the “Fund”) Sloane Robinson
[24] Pleading Certainty, definiteness, and Investment (Cayman), Ltd., (“Sloane”) the general partner of
particularity the Fund, and Ernst & Young LLP, (“E & Y”) the Fund's
Fifth element of common law fraud, harm independent auditors. Plaintiffs allege that Sloane breached
to the plaintiffs, was inadequately pled with its fiduciary duties to the limited partners of the Fund; that
particularity for purposes of limited partners' the Fund and Sloane breached the Fund's limited partnership
fraud claim against general partner, limited agreement (“Agreement”) and were negligent; that E &
partnership, and auditor arising out of general Y made negligent misrepresentations in the Fund's audited
partner's withdrawal of its funds from its capital financial statements and aided and abetted Sloane's breach
account and resulting failure of defendants to of fiduciary duty; and that all defendants engaged in fraud
report withdrawal as a subsequent event in against the limited partners of the Fund. 1 The defendants
annual statement, where limited partners failed challenge the standing of the plaintiffs to bring these claims
to plead particular facts from which the court and and have moved to dismiss the complaint under Court of
defendants could understand how alleged fraud Chancery Rule 12(b)(6) for failure to state a claim and
caused limited partners damages in excess of under Court of Chancery Rule 9(b) for failure to state with
$9.5 million. Chancery Court Rule 9(b). particularity the circumstances constituting the alleged fraud.

1 Case that cites this headnote 1 In their briefing on this motion, E & Y and plaintiffs
address possible claims of breach of contract and
breach of fiduciary duty against E & Y. A motion to
dismiss such claims is moot, as the claims are not
Attorneys and Law Firms
pled in the complaint. See infra Part III.B.
*147 Kurt M. Heyman, Patricia L. Enerio, James Tobia
and Christal Lint, of the Bayard Firm, Wilmington; Martin P.
Unger, John Gionis and Candace Reid Gladston, of Certilman I. STATEMENT OF FACTS 2
Balin Adler & Hyman, LLP, East Meadow, NY, of counsel,
2
for Plaintiffs. Unless otherwise specified, all facts supporting and
discussed in this opinion are taken from the well-

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

pled allegations of the complaint and the terms of 18 withdrawal. This withdrawal was reported in the Fund's
the Agreement, which is integral to the complaint quarterly statement for the first quarter of 2000, which
and incorporated therein by reference. See White v. statement was received by the limited partners on May 9,
Panic, 783 A.2d 543, 547–48 n. 5 (Del.2001); In re 2000.
Santa Fe Pac. Corp. S'holder Litig., 669 A.2d 59,
69–70 (Del.1995). 4 Section 9.01(b) of the Agreement provides that
The plaintiffs each became limited partners of the Fund in when the net profits exceed net losses in any fiscal
or about August 1997, *148 with initial capital investments year, 15% of the excess is to be debited from the
ranging from over $0.4 million to approximately $11.9 capital accounts of the limited partners and “shall
million. The Fund is a Delaware limited partnership created be credited as of the end of the fiscal year to the
“to serve as a fund through which the assets of its Partners Capital Account of the General Partner.”
may be utilized” in investing in various types of securities and The plaintiffs take issue with the withdrawal on the bases
other financial instruments 3 or to act as what is commonly that (1) the withdrawal overdrew Sloane's capital account
termed a hedge fund. The Fund establishes in its books a because substantial losses sustained by the Fund during
capital account for each partner consisting of the partner's January and February 2000 had reduced the available balance
original capital contribution, plus any additional capital in Sloane's capital account below $22,350,704; (2) the
contributions, minus any capital withdrawals, and adjusted Agreement permits the general partner to withdraw funds
at the end of each fiscal period for the partner's proportional only on the last day of the month; and (3) the withdrawal
share of net profits and losses. The Fund is obligated to should have been disclosed as a Subsequent Event in the 1999
provide the partners with unaudited quarterly reports and Statement.
an audited annual financial statement as well as information
necessary for federal income tax purposes. Limited partners
of the Fund are not permitted to assign their interests without
II. STANDARD OF REVIEW
written consent of the general partner and must provide
written notice to the Fund thirty business days prior to making On a motion to dismiss under Court of Chancery Rule 12(b)
any capital withdrawal. Sloane, the general partner of the (6), the Court must assume the truthfulness of all well-pled
Fund, is a company organized under the laws of the Cayman facts contained in the complaint and view those facts and
Islands. E & Y, the Fund's auditor, is a Delaware limited all reasonable inferences drawn from them in the light most
liability partnership.
favorable *149 to the plaintiff. 5 In addition, the Court may
consider any documents integral to the complaint, that are
3 Limited Partnership Agreement of S.R. Global
incorporated by reference therein. 6 Conclusory allegations
International Fund, L.P. § 1.03 (as amended Sept. 1,
that are unsupported by facts contained in the complaint,
1997) [hereinafter Agreement]. Under this section
the Fund may utilize the partners assets in “holding, will not be accepted as true. 7 Dismissal is appropriate under
selling short, trading and otherwise investing in Rule 12(b)(6) only when it appears with reasonable certainty
securities and other financial instruments of any that the plaintiff would not be entitled to relief under any
name and nature which exist now or are hereafter reasonable set of facts properly supported by the complaint
created and rights and options related thereto.” Id. and any documents incorporated by reference therein. 8

As of December 31, 1999, Sloane's capital account in the

5
Fund was credited with $22,350,704 or 15% of the net See Grobow v. Perot, 539 A.2d 180, 187 (Del.1988)
4
profits to the limited partners in 1999. On February 18, (stating that “upon a motion to dismiss, only well-
2000, Sloane withdrew $22,350,704 from its capital account. pleaded allegations of fact must be accepted as
The credit to Sloane's capital account was recorded in the true” and that the Court “need not blindly accept as
Fund's audited 1999 financial statement (“1999 Statement”). true all allegations, nor must it draw all inferences
The 1999 Statement was provided to the limited partners from them in plaintiffs' favor unless they are
in March 2000. Although it did report other post-year- reasonable inferences”).
end capital contributions and withdrawals as “Subsequent
Events,” the 1999 Statement did not report Sloane's February

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

6 11
Vanderbilt Income & Growth Assocs. v. Arvida/ As noted I do not rely on corporate records of
JMB Managers, Inc., 691 A.2d 609, 612–13 the fund, which are extrinsic to the pleadings. I
(Del.1996); Orman v. Cullman, 794 A.2d 5, 15–16 observe but similarly do not rely upon the plaintiffs'
(Del.Ch.2002). concession in their answering brief (also extrinsic
to the pleadings) that they have all withdrawn from
7
Grobow, 539 A.2d at 187 (stating that the fund. Plaintiffs neither concede nor deny that
“conclusionary allegations of fact or law not such withdrawal occurred before filing this action.
supported by allegations of specific fact may not be
12
taken as true”). See Vanderbilt Income & Growth Assocs., 691 A.2d
at 612–13.
8
Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d
[1] [2] [3] [4] [5] The test for distinguishing direct
1099, 1104 (Del.1985). See Vanderbilt Income &
from derivative claims in the context of a limited partnership
Growth Assocs., 691 A.2d at 613.
is substantially the same as that used when the underlying
Although notice pleading is sufficient to survive a motion
entity is a corporation. 13 In both instances *150 the
to dismiss under Rule 12(b)(6), Rule 9(b) requires that the
determination is made by careful application of a rather
circumstances constituting any alleged fraud be stated with
particularity. Conditions of the mind, notably scienter in a nuanced test. 14 The test looks to the nature of the injury
and to the nature of remedy that could result if the plaintiffs
fraud claim, may be averred generally. 9
are successful. 15 When a plaintiff alleges either an injury
9 that is different from what is suffered by other shareholders
“Malice, intent, knowledge and other condition of
(or partners) or one that involves a contractual right of
mind of a person may be averred generally.” CT.
shareholders (or partners) that is independent of the entity's
CH. R. 9(b).
rights, the claim is direct. 16 If the injury is one that affects
all partners proportionally to their pro rata interests in the
III. ANALYSIS corporation, the claim is derivative. 17 In a derivative action
the plaintiff sues for an injury done to the partnership and any
A. Standing of Plaintiffs
recovery of damages is paid to the partnership. 18 Conversely,
Defendants move to dismiss all claims on the basis that they
in a direct action the plaintiff sues to redress an injury suffered
are derivative in nature and the plaintiffs do not have standing
by the individual plaintiff and damages recovered are paid
to bring a derivative claim. Delaware partnership law requires
in a derivative action that the plaintiff be a partner (or assignee directly to the plaintiff who was injured. 19 In every case the
of one) at the time of bringing the action and at the time of court must determine from the complaint whether the claims
are direct or derivative and may not rely on either party's
the challenged transaction. 10 The Court is entreated to take
judicial notice of Fund records indicating that all plaintiffs characterization. 20 Because harm to the entity will almost
had withdrawn from the fund by the time this action was filed. inevitably harm the stakeholders and because the entity itself
These records are not integral to and are not incorporated by is in some ways no more than an amalgamation of a certain
reference into the complaint and the Court has not considered subset of stakeholders' interests, differentiation of direct from
derivative claims can be elusive.
them in ruling on these motions to dismiss. 11 Nonetheless,
if I determine that the action is derivative in nature the
13
Court may then consider extrinsic documents presented by the Litman v. Prudential–Bache Props., Inc., 611 A.2d
defendants indicating that the plaintiffs lack standing to bring 12, 15 (Del.Ch.1992).
a derivative action, thereby converting the motion to one for 14
See In re Cencom Cable Income Partners, L.P.
summary judgment under Rule 56. 12 Therefore, I now turn
Litig., 2000 WL 130629 at *3, 2000 Del.
to the defendants' argument that the claims in this case are
Ch. Lexis 10 (Del. Ch.) (citing DONALD J.
derivative.
WOLFE, JR. & MICHAEL A. PITTENGER ,
CORPORATE AND COMMERCIAL PRACTICE
10
6 Del. C. § 17–1002. IN THE DELAWARE COURT OF CHANCERY

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

§ 9–2(a), at 517 (1998) [hereinafter WOLFE & parties to recover while preventing a windfall to individuals
PITTENGER ]). or entities whose interests were not injured.
15
Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 352 21
Id. at *2, 2000 Del.Lexis 10, at *6. See also
(Del.1988); In re Cencom Cable Income Partners,
Jack B. Jacobs, Entity Rationalization: A Judges'
L.P. Litig., 2000 WL 130629 at *3, 2000 Del.Ch.
Lexis 10. Perspective, 38 BUS. LAW 1043 (2003).
22
16 In re Cencom Cable Income Partners, L.P. Litig.,
Moran v. Household Int'l, Inc., 490 A.2d 1059,
2000 WL 130629 at *3, 2000 Del.Ch. Lexis 10.
1070 (Del.Ch.1985).
The essence of the plaintiffs' claims is that Sloane withdrew
17
See In re Digex, Inc. S'holders Litig., 789 A.2d funds from its capital account in violation of the partnership
1176, 1189 (Del.Ch.2000) (quoting WOLFE & agreement; that this withdrawal exceeded the balance in the
PITTENGER § 9–2(a), at 517–18). account; and that timely disclosure of the withdrawal was
18 not given to the limited partners. It is undisputed that on
Kramer, 546 A.2d at 351 (quoting R. CLARK,
February 18, 2000, Sloane withdrew $22,350,704 from its
CORPORATE LAW 639–40 (1986)).
capital account. The plaintiffs contend that this withdrawal
19 breached the Agreement, which permits the general partner to
Id.
make withdrawals only on the last day of the month. When the
20
See In re Cencom Cable Income Partners, L.P. 1999 Statement was prepared and distributed to the limited
Litig., 2000 WL 130629 at *3, 2000 Del.Ch. Lexis partners, it disclosed (as “Subsequent Events”) information
10. about deposits and distributions related to the capital accounts
[6] [7] To further complicate matters, whereas corporations of limited partners that occurred after December 31, 1999, but
are largely creatures of statute with some limited did not disclose that on February 18, 2000, the general partner
contractual flexibility, limited partnerships offer greater withdrew over $22 million from its capital account. Plaintiffs
contractual flexibility with only a few statutory constraints. claim that this withdrawal is material because it amounts to
Consequently, the structure and function of a limited the general partner having “bailed out” of the Fund. Indeed,
partnership is sometimes analogous to the corporate the plaintiffs contend that due to losses sustained by the Fund
model with the limited partners having similar rights and in January and February 2000, the balance of the capital
responsibilities as corporate shareholders and the general account of the general partner, as of February 18, 2000, would
partner acting in much the same capacity as a corporate have been less than the amount that was withdrawn, causing a
board of directors—but not necessarily so. Application of negative balance in the account. Because the 1999 Statement
corporate law rules to disputes related to a limited partnership contained other information of a similar nature (post-year-end
withdrawals by limited partners) and because the withdrawal
necessitates a bit of flexibility. 21 This is true because
was material, the failure to disclose it in the 1999 Statement
the facts unique to a limited partnership dispute include
rendered the statement materially false and misleading.
the contents of the limited partnership agreement—how it
specifies or modifies the entity's function and structure and
The defendants point out that the various claims made by
the rights and responsibilities of the general and limited
the plaintiffs allege only two distinct types of injury, either
partners. In his opinion in In re Cencom Cable Income
diminution in value of the fund or misdisclosure of the
Partners, L.P. Litigation, then-Vice Chancellor Steele noted
withdrawal, each of which constitute derivative rather than
that, “In the partnership context, the relationships among the
direct claims. All claims with respect to the fact of the
parties may be so simple and the circumstances so clear-
February 18 withdrawal, according to the defendants, state
cut that the distinction between direct and derivative claims
merely a diminution in value of the Funds assets, which
becomes irrelevant.” 22 *151 Similarly, in some instances, injures the limited partners only in proportion to their pro rata
the relationships among the parties and the function and interest in the Fund. All claims related to the failure to report
structure of the partnership itself may diverge from the the withdrawal in the 1999 Statement, defendants argue, are
corporate model so dramatically that some claims, which in similarly derivative under the recent Court of Chancery ruling
a corporate context might be classified as derivative, must
in Manzo v. Rite Aid Corp. 23
be brought as direct claims in order to enable the injured

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

23 27
2002 WL 31926606, 2002 Del.Ch. Lexis 147 Id. at *3, 2000 Del.Ch. Lexis 10 at *9.
(Del.Ch. 2002).
28
Id. at *4, 2000 Del.Ch. Lexis 10 at *13–17.
29
1. Diminution of Value of the Fund Id. at *4, 2000 Del.Ch. Lexis 10 at *13.
Due to the structure and operation of the Fund, whenever the
[8] Delaware corporate 24 and limited partnership 25 cases value of the Fund is reduced, the injury accrues irrevocably
have agreed that a diminution of the value of a business and almost immediately to the current partners but will not
entity is classically derivative in nature. In Cencom, however, harm those who later become partners. Although other types
then-Vice Chancellor Steele held that two claims, which of injuries could harm the Fund as an entity in ways that
“at first appear derivative in nature since the alleged injury appropriately could be challenged in a derivative action, 30
devalues the partnership's assets,” were nonetheless direct injuries that result in a direct reduction of the Fund's assets
claims due to special circumstances present in the context will effect an almost immediate reduction in the capital
of that limited partnership. 26 Similarly, for *152 reasons accounts of each of the existing partners. Such losses confer
discussed below, I conclude that the operation and function of only a fleeting injury to the Fund, one that is immediately
the Fund as specified in the Agreement diverge so radically and irrevocably passed through to the partners. When an
from the traditional corporate model that the claims made in injured partner withdraws from the partnership, the partner's
the complaint must be brought as direct claims. capital account has already been diminished by any and all
diminutions of value to the Fund from the time of entering
24 the partnership until the time of withdrawal. There are no
See, e.g., Behrens v. Aerial Communications, Inc.,
2001 Del. Ch. LEXIS 80, at *15 n. 17 (Del. Ch.). successors in interest to partners so injured because there
are no “shares” sold to someone else, any withdrawing
25 partner's interest in the entity is liquidated. Any recovery
See, e.g., Litman, 611 A.2d at 16–17.
obtained by the Fund in a derivative action cannot provide a
26 2000 WL 130629 at *4, 2000 Del.Ch. Lexis 10. remedy to wronged former partners nor to their (non-existent)
Cencom provides an instructive analytical framework for successors in interest. If additional partners are later admitted,
categorizing the claims at issue here. That opinion held that they suffer no injury from previous reductions in the value
“superimposing derivative pleading requirements ... serves no of the fund because their capital accounts will reflect the full
useful or meaningful public policy purpose” in the context amount of their initial investments adjusted only for events
of certain narrow factual situations that may arise with occurring after their admission as partners. *153 Such newly
admitted limited partners would receive a windfall if the
respect to an alternative (non-corporate) entity. 27 The court
Fund were to recover damages for diminution of Fund value
identified two discernable purposes for classifying claims
prior to their admission as limited partners. Characterizing the
as derivative: (1) to ensure that any remedy accrues to the
plaintiffs' claims as derivative would thus have the perverse
entity that sustained the injury but does not confer benefits
effect of denying standing (and therefore recovery) to parties
on wrongdoers nor provide windfalls to the uninjured and
who were actually injured by the challenged transactions
(2) to provide a gatekeeping function that will both promote
while granting ultimate recovery (and therefore a windfall) to
corporate resolution of internal problems and deter strike
parties who were not. 31 This result is antithetical to the first
suits. 28 Because, in Cencom, (1) there was no ongoing
purpose of derivative litigation identified in Cencom, does
conduct (the partnership being in liquidation); (2) the only
nothing to further the gatekeeping functions of derivative
two parties to the partnership (the class of limited partners and
litigation requirements, and, in the words of Vice Chancellor
the general partner) were clearly adversaries in the pending
Steele, “makes no sense.” I hold that the plaintiffs' claims
litigation; and (3) the claims had proven to be sufficiently
related to Sloane's February 18, 2000, withdrawal are direct
meritorious to survive a motion for summary judgment, the
claims.
court determined that imposition of derivative requirements
would impede efficient and final resolution of the claims and
30
would simply “make[ ] no sense.” 29 For example, if the general partner violated § 3.03
of the Agreement and invested in a company for
the purpose of exercising control, thereby possibly

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

exposing the Fund to liability as a controlling Here, plaintiffs allege that at least one effect of the two-
shareholder, this theoretically could form the basis month delay in disclosing to the limited partners that the
of a claim that may be derivative in nature. general partner had bailed out of the Fund was to deprive the
Similarly, if the general partner were to engage limited partners of the same opportunity to “cut their losses”
in some (perhaps illegal) activities that led to promptly before the value of the Fund's investments declined
restrictions being placed on the Fund's ability to further. Nonetheless, the structure and function of the Fund, as
engage in certain types of potentially beneficial described in the terms of the Agreement, is so dissimilar to the
investment transactions, the harm would accrue corporate structure in which the Manzo claims were brought,
more directly to the Fund as an entity. Any harm that the reasoning and policy of that opinion are inapposite
to the investors would be indirect and would cease to the claims made in the complaint and, in any event, the
when an investor withdrew from the Fund. Such disclosure claim seems to implicate a contractual right of the
a scenario suggests another theoretical basis for a limited partners that is not similarly a right of the Fund itself.
derivative claim.
31 32
Although limited partners admitted to partnership Op. br. of S.R. Global Int'l Fund & Sloane
after the injury would not have standing to bring Robinson Inv., at 7 (quoting Manzo, 2002 WL
a derivative claim because they were not partners 31926606 at *––––, 2002 Del.Ch. Lexis 147, at
at the time of the challenged transaction, 6 Del. *18) (alteration and misquotation in original).
C. § 17–1002, they would reap the rewards if 33
Manzo, 2002 WL 31926606 at *–––– & n. 1, 2002
the claim were brought derivatively by a limited
Del.Ch. Lexis 147, at *4 & n. 1.
partner that did have standing because the recovery
would derive to the Fund and, therefore, to all of 34
Id., 2002 WL 31926606 at *––––, 2002 Del.Ch.
the partners in proportion to their pro rata interests. Lexis 147, at *18.
35
Id., 2002 WL 31926606 at *–––– – ––––, 2002
2. Misdisclosure in the 1999 Statement Del.Ch. Lexis 147, at *18–19.

[9] In support of their contention that claims related to non- *154 Under the terms of the Agreement, the limited
disclosure of the withdrawal in the Fund's 1999 Statement partners have absolutely no control over the governance and
are derivative, the defendants argue that if the plaintiffs' management of the Fund; the limited partners are entitled to
allegations were true, the plaintiffs have alleged, as did the very limited routine disclosures regarding the activities and
plaintiff in Manzo, only that they “experienced an injury performance of the Fund; the limited partners' interests in
suffered by all [investors] in proportion to their pro rata the Fund are not freely transferable or tradable; the liquidity
of the limited partners' investment is somewhat restricted
ownership interest.” 32 At first blush, Manzo appears to
and, perhaps, most importantly for purposes of this motion
be apposite. The plaintiff in Manzo challenged omissions
to dismiss, the Fund exists solely to utilize “the assets of its
and false disclosures in annual financial statements and
Partners” in various investment vehicles and maintains its
other information disclosed to the Securities Exchange
books to account separately for the value of each partner's
Commission, the shareholders, and the public over a period
assets at all times. The Fund operates more like a bank
of three years. 33 The specific injury alleged was unclear, with the individual partners each having accounts—albeit
but the plaintiff suggested that the misdisclosures resulted, accounts that are not federally insured or afforded virtually
at the very least, in depriving her and a class of similarly any regulatory protections against loss of the assets invested.
situated shareholders of accurate financial information upon This is not a typical corporate business venture in which the
which to base decisions to buy, sell, or hold shares in the value to the investors is based not only upon the physical
corporation. 34 The Court held in Manzo that this injury assets of the entity but also upon the speculative value of
was shared equally by all stockholders and any injury the entity as a going concern. Other than a general partner's
would derive to them only in proportion to their pro rata interest in management fees, there is no going-concern value.
ownership interest and did not implicate any contractual Yet, the limited partners have no capacity to replace a general
right of shareholders that was not similarly a right of the partner that fails properly to represent the limited partners'
corporation as a whole. 35 Therefore the claim was derivative.

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

interests. The only alternative available to a dissatisfied of due care to the Fund and its limited partners, including
limited partner is to withdraw from the Fund. plaintiffs” 37 in conjunction with the general statement that
the “action arises from the negligence, gross recklessness,
Even the choice of withdrawing is impossible to implement breach of fiduciary duty, breach of contract and fraud of
instantaneously because the Agreement provides that limited
all defendants.” 38 The complaint, however, clearly specifies
partners may withdraw only on the last day of the month
that the “omissions and the conduct of the Fund and defendant
and only after giving thirty business days notice. This is six
Sloane Robinson described in the complaint constituted a
weeks at a minimum. The Fund is designed for the purpose of
breach of contract and, in the case of Sloane Robinson,
engaging in some highly speculative investments. This can be
a breach of its fiduciary duties to the limited partners,
very rewarding as the partners found in fiscal year 1999 and
highly risky as was discovered in 2000. In every event, such including plaintiffs.” 39 The preceding paragraph alleges that
investments tend to be highly volatile and a delay of six or the alleged acts and omissions of all defendants, including
more weeks in withdrawing one's funds from such a vehicle E & Y, were “performed and transacted negligently and
can lead to massive changes to the value of the account from carelessly and with a reckless disregard for the consequences
the date the decision is made to withdraw until the funds may thereof.” 40
actually be withdrawn.
36 Compl. ¶ 53.
The plaintiff limited partners each appear to be sophisticated
parties that understood and voluntarily accepted the terms 37
Id. ¶ 54.
of the Agreement and assumed the risks of investing in the
38
Fund in order potentially to reap the rewards of undertaking Id. ¶ 1.
such risks. As such, these sophisticated investors reasonably 39
Id. ¶ 65 (emphasis added).
expected that the general partner would fulfill at least the
obligations it voluntarily accepted under the Agreement 40
Id. ¶ 64.
and as a fiduciary. As the defendants correctly point out,
[10] [11] In their answering brief, the plaintiffs disavow
Section 12.05 of the Agreement specifies the obligations
allegations of breach of fiduciary duty by E & Y—only that
of the general partner to report to the limited partners—
E & Y aided and abetted Sloan's alleged breach of fiduciary
unaudited quarterly reports of the fund performance, an
duty—but argue that breach of contract is alleged against E &
audited financial report annually, and a year-end report
Y. Parties may not amend the pleadings through briefing on
to each partner indicating the necessary gain and loss
information for Federal income tax purposes. Thus, the 1999 a motion to dismiss. 41 If the breach of contact claim is not
Statement was contractually required to be provided to the pled in the complaint, any motion to dismiss it is moot. Upon
partners and any claims that it was incomplete, or materially a thorough reading of the complaint, including the passages
false or misleading would state a direct claim. quoted above, it clearly does not allege that E & Y breached
any contract, or for that matter any fiduciary duty. Thus, E
& Y's motion to dismiss claims of breach of fiduciary duty
B. Claims Not Made in the Complaint and breach of contract are both moot because, even though
The characterization of which counts of the complaint allege the complaint alleges that E & Y owed both fiduciary and
which wrongful acts against which defendants is inconsistent contractual duties to the plaintiffs, it is not alleged that E & Y
among the Complaint and the various briefs filed in this breached either of those duties.
motion.
41
Cal. Pub. Employees' Ret. Sys. v. Coulter, 2002
For example, E & Y's Opening Brief in Support of Its Motion
Del.Ch. Lexis 144, at *41 (Del.Ch.); Orman, 794
to Dismiss, appears to interpret the complaint as alleging
A.2d at 28 n. 59.
breach of contract and breach of fiduciary duty against E &
Y. Apparently, such allegations are inferred from allegations
C. Motions to Dismiss Under Court of Chancery Rule
that *155 E & Y “bore a contractual duty to the Fund as
12(b)(6)
to which the limited partners, including plaintiffs, are third
As discussed with respect to the analysis of whether the
party beneficiaries,” 36 and “bore a fiduciary duty and a duty complaint states direct or derivative claims, the complaint

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

alleges two basic types of misconduct: (1) wrongful that plaintiffs claim damages stemming from their reliance
withdrawal from the Fund of $22,350,704 by Sloan and (2) on inaccurate financial statements or delayed disclosure of
inadequate and untimely disclosures to the limited partners Sloane's withdrawal, which resulted in the defendants failing
regarding that withdrawal. This misconduct is alleged to give to withdraw or delaying withdrawal of their contributions to
rise to various claims including breach of the partnership the Fund. E & Y then contends that, “To survive a motion
agreement (contract), breach of fiduciary duty, aiding and to dismiss, each of the claims for relief asserted by Plaintiffs
abetting breach of fiduciary duty, negligence, negligent require the pleading and proof of a damage element ....” 45
42
misrepresentation, and fraud. This misstates the standard of review on a motion to dismiss
under Rule 12(b)(6). 46 Plaintiffs allege with respect to each
42 claim made in the complaint that monetary damages were
In addition, Count VI alleged conversion and unjust
enrichment against Sloane. The plaintiffs' state suffered in excess of $9.5 million, which the plaintiffs assert
in their answering brief that this claim has been will be proven at trial. 47 Proof of these damages and of their
abandoned. certainty need not be offered in the complaint in order to state
With the exception of the fraud claim, discussed below, all a claim.
claims need only meet the rather forgiving notice pleading
44
standard of Court of Chancery Rule 8 43 in *156 order This includes the fraud claim against all
to state a claim and survive a motion to dismiss under defendants. Because fraud is subject to special
Rule 12(b)(6). Defendants contend that the various counts pleading requirements, the pleading of damages
fail to meet this standard for the following reasons: (1) the with respect to the alleged fraud is separately
damages pled are too speculative; (2) there is no sufficient discussed later in this opinion.
causal link established between the wrongs alleged and the 45 E & Y Op. Br. at 27 (emphasis added).
injury claimed; (3) defendants had no contractual or legal
duty to disclose the withdrawal at the time it was made; 46 In support of this innovative pronouncement, E
(4) the Agreement contains an exculpatory provision and the & Y offers three cases, Malpiede v. Townson,
plaintiffs have not alleged any bad faith; and (5) the aiding 780 A.2d 1075, 1096 (Del.2001); Stephenson
and abetting claim fails because the plaintiffs do not allege v. Capano Dev., Inc., 462 A.2d 1069, 1074
knowing participation by E & Y. I address in turn why each (Del.1983); Winston v. Mandor, 710 A.2d 835,
of these arguments is unavailing. 840 (Del.Ch.1997), and a restatement section,
RESTATEMENT (SECOND) OF TORTS § 552
43 (1965). These citations appear merely to state the
Rule 8(a) states that:
A pleading which sets forth a claim for relief, elements of various claims made in the complaint,
whether an original claim, counterclaim, cross- and damages is certainly an element of each of the
claim or third-party claim shall contain (1) a claims. None, however, provides any support for
short and plain statement of the claim showing the idea that proof must be provided at the pleading
that the pleader is entitled to relief and (2) a stage.
demand for judgment for the relief to which 47
the party deems itself entitled. Relief in the Damages in the amount of $500,000 were alleged
alternative or of several different types may be to have been suffered with respect to Count VI, but
demanded. as noted earlier, the plaintiffs disavow any intent to
CT. CH. R. 8(a). In addition, Rule 8(e) directs pursue this further as a separate claim.
parties to make averments that are “simple, concise, [13] The defendants propose that the causative link between
and direct” and adds that technical formality is not the wrongs alleged and the damages claimed is inadequately
a requirement in either pleadings or motions. Id. at pled. In part this amounts to a rehash of the arguments made
8(e). that the claims are derivative and not direct because Sloane's
withdrawal of funds, even if wrongful, improperly reduced
[12] With respect to all claims, 44 defendants assert that
the Fund's value and did no direct harm to the plaintiffs.
the complaint relies on a forbearance theory of damages
As explained above, I do not agree. The complaint alleges
that is unreasonably speculative. Particularly, E & Y stresses
that Sloane impermissibly withdrew over $22 million from

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

the Fund, which exceeded the balance then available for from liability “for honest mistakes in judgment [,] for
withdrawal and amounted to the general partner bailing out losses due to such mistakes[, and] for the negligence of
of the fund, 48 and then wrongfully failed to disclose the [the Fund's agents].” It is impossible to determine at this
fact, amount, or implications of the withdrawal *157 in the stage of the litigation whether the breach of fiduciary duty
1999 Statement. If these allegations are true, and I accept for and negligence claims are subject to exculpation under this
purposes of ruling on this motion that they are, the withdrawal provision. The complaint alleges that the withdrawal was
of funds in excess of those rightly available to Sloane would made during a time period when the Fund was sustaining
cause financial harm to all other partners. In addition, if the significant losses. It also alleges that this rather substantial
general partner bailed out of the fund but failed to notify withdrawal was not disclosed in the 1999 Statement even
the limited partners for almost a full quarter, there are many though similar transactions in the limited partners' accounts
factual scenarios, which may be proven at trial, that would were disclosed. It is reasonable to infer from this that the
result in financial harm to the limited partners. For now circumstances surrounding the withdrawal and the decision
it is enough that the complaint alleges that this behavior when to disclose it may indicate some degree of bad faith
was wrongful and caused the plaintiffs financial harm in the on the part of Sloane or the other defendants. Until a factual
amount stated. record is developed, a determination of the applicability of the
exculpatory provision to the claims would be premature.
48 It appears from the language of the Agreement
[17] Finally, E & Y asserts that the aiding and abetting claim
that if Sloane withdrew all of its capital account
must be dismissed for failure to allege knowing participation.
balance, this may have constituted the “retirement”
Plaintiffs insist that the audited financial statement, prepared
of the General Partner under § 5.02(c). It is
by E & Y, failed to disclose a material transaction by the
inappropriate, however, at this stage to make any
general partner but did disclose similar transactions by limited
findings on proper construction of the terms of the
partners. The complaint alleges that the information reported
Agreement.
in the 1999 Statement and the audited annual statement
[14] [15] Next, the defendants assert that there was no for 2000 report a course of events different from that
contractual or legal obligation, either under the Agreement reflected in the Fund's internal accounting records. These
or Delaware law, mandating immediate disclosure of Sloane's allegations provide a sufficient basis for the Court to infer
withdrawal from its capital account. This may be true, but it that the auditors preparing the financial statements knew
is not what the plaintiffs allege was required. The plaintiffs of the discrepancies and knowingly *158 participated in
allege that Sloane made the withdrawal after the end of the the preparation of audited financial statements that were not
calendar year but before the release of the annual audited reflective of the Fund's internal accounting records. If there is
financial statement. That same audited financial statement did some reason that E & Y did not believe that this was a breach
disclose post-year-end contributions and withdrawals in the of the general partner's and the Fund's fiduciary duties to the
capital accounts of limited partners. Accordingly, it is alleged limited partners, it may proffer evidence on that subject at
that the failure to report Sloane's withdrawal, while reporting trial.
similar transactions by limited partners, rendered the 1999
Statement materially false and misleading. The Agreement The defendants' motions to dismiss Counts I–V for failure to
requires, in § 12.05, that an audited financial statement be state a claim are denied.
provided to the partners promptly after the end of the year.
Under Delaware law, fiduciaries are required, at the very least,
to be honest and truthful when communicating with their D. Motion to Dismiss Fraud Claims
[18] [19] Under Court of Chancery Rule 9(b), the
principals. 49 These allegations, therefore, state a claim.
circumstances constituting any alleged fraud must be pled
with particularity. In order to state a claim of common law
49
See Malone v. Brincat, 722 A.2d 5, 10–11 fraud, the complaint must allege: (1) a false representation
(Del.1998). of fact (or material omission) by the defendant; (2) with
[16] Sloane also invokes § 3.04 of the Agreement to the knowledge or belief that the representation is false or
shield itself from liability for breach of fiduciary duty and with reckless indifference to its truth or falsity; (3) intent
negligence. Section 3.04(a) exculpates the general partner to induce the plaintiff's reliance; (4) actual and justifiable
reliance; which results in (5) harm to the plaintiff. The second

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

and third elements, because they relate to conditions of the reports some, but not all, of a particular type of transaction, it
mind, may be averred generally. 50 is reasonable to infer that those responsible for the preparation
*159 of the report know it to be misleading or have acted
50 with reckless disregard of whether the report presents an
“Malice, intent, knowledge and other condition of
accurate picture. The second element of fraud is adequately
mind of a person may be averred generally.” CT.
pled.
CH. R. 9(b)

1. False Representation or Omission of Material Fact 3. Intent That Plaintiffs Rely on Misrepresentation

[20] The Agreement requires that the Fund supply all [22] The limited partners of the Fund, including the
partners with an annual audited financial statement. The plaintiffs, were entitled to one and only one audited financial
complaint alleges that Sloane hired E & Y to prepare the statement each year. The general partner was entrusted with
1999 Statement. The 1999 Statement is alleged to be false making a wide range of innovative and highly speculative
and misleading because it failed to disclose as a Subsequent investments of the partners' invested assets. The only
Event the fact that Sloane had withdrawn over $22 million reasonable inference is that all defendants were aware of
from its capital account in February 2000, although other these facts and any suggestion that, in the face of such
Subsequent Events disclosed in the 1999 Statement included stark realities, the defendants may not have intended that
withdrawals by limited partners from their capital accounts. the partners rely on the information contained in the 1999
This information is alleged to have been material because it Statement is preposterous. The third element of fraud is
is alleged that the amount withdrawn exceeded the current adequately pled.
balance in Sloane's capital account and therefore amounted to
the general partner bailing out of the Fund at a time when the
Fund was sustaining significant losses. The first element of
4. Actual, Reasonable Reliance
fraud is adequately pled.
[23] Perhaps it is fair simply to accept that sophisticated
investors of millions of dollars did in fact rely on the one
2. Knowledge, Belief, or Reckless Disregard of Falsity piece of audited financial information received each year from
the Fund. It is certainly a reasonable inference that they did
[21] The complaint alleges in general terms that all so. Yet, Rule 9(b) requires the circumstances surrounding any
defendants knew or believed the 1999 Statement was alleged fraud to be pled with particularity and the plaintiffs
materially false and misleading or acted with reckless fail to plead even so much as an assertion that they read
disregard for its truth. In addition, the factual allegations or considered the contents of the 1999 Statement. Whether
support this assertion. Sloane's withdrawal was made on and how plaintiffs relied upon the 1999 Statement seems
February 18, 2000. The 1999 Statement was given to the to be the type of information that would be particularly
partners sometime in March of 2000. Although evidence within the control of the plaintiffs. The conclusory allegation
following discovery may prove otherwise, it is reasonable that “Plaintiffs were in fact deceived by the acts, omissions
to infer that the withdrawal was made and recorded in and conduct described in this complaint and relied thereon
the corporate books before the completion of the 1999 to their detriment” 51 is glaringly insufficient to meet the
Statement. Thus, Sloane and the Fund would have had particularity requirement of Rule 9(b). The fourth element of
knowledge of the withdrawal before the issuance of the fraud is inadequately pled to meet the requirements of Court
audited annual statement. In addition, E & Y should have had of Chancery Rule 9(b).
knowledge of the withdrawal through its careful inspection
of the corporate accounting records before certifying the 51
audited 1999 Statement. Because post-year-end withdrawals Compl. ¶ 80.
from limited partners' accounts were reported in the 1999
Statement it appears that all defendants knew or believed
5. Resultant Harm to Plaintiffs
that transactions of this type were appropriately reported as
Subsequent Events. When a financial statement selectively

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Anglo American Sec. Fund, L.P. v. S.R. Global Intern. Fund, L.P., 829 A.2d 143 (2003)

[24] The complaint alleges that as a result of the defendants'

fraud, plaintiffs suffered damages in excess of $9.5 million.
This is a “particular” enough amount of money even IV. CONCLUSION
for Rule 9(b) purposes. What is missing, however, are
particular facts from which the Court and the defendants can For the foregoing reasons, the defendants' motions to dismiss
understand how the alleged fraud caused this injury. Since the Counts I–V for failure to state a claim are DENIED;
plaintiffs' reliance on the alleged misrepresentation is averred defendants' motions to dismiss Count VI is MOOT because
nonspecifically, it is unsurprising that the next logical step the Court accepts the plaintiffs' representation in their
linking reliance to the resulting injury is similarly glossed answering brief that this claim will not be pursued; the
over in the complaint. It is not enough for the plaintiffs to defendants' motions to dismiss *160 Count VII for failure
complain that the defendants knowingly failed to disclose an to state a claim of fraud with adequate particularity is
important matter and then jump directly to the observation GRANTED.
that the plaintiffs believe that collectively they are now $9.5
million dollars short in their assets. The fifth element of fraud IT IS SO ORDERED.
is not pled with adequate particularity.

All Citations
Count VII is dismissed against all defendants for failure
to allege the circumstances of the alleged fraud with the 829 A.2d 143
particularity required by Court of Chancery Rule 9(b).

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