The Glenmede Trust Company, N.A. v Infinity Q Capital Management LLC
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Brief Summary
This securities case arose from the collapse of the Infinity Q Diversified Alpha Fund, a retail mutual fund whose net asset value was allegedly inflated through manipulated valuations of complex derivatives and swaps.
The lower court dismissed claims under Securities Act of 1933 § 11 (15 U.S.C. § 77k) [creates liability for material misstatements or omissions in a registration statement] and § 15 (15 U.S.C. § 77o) [imposes joint and several liability on persons who control a person liable under § 11 or § 12], holding that Leonard Potter's signature disclaimer prevented § 11 liability and that, without a primary § 11 violation, the control-person claims failed.
The Appellate Division reinstated the § 11 claim against Infinity Q Capital Management LLC (IQCM), reinstated the § 11 claim against Potter, and reinstated the § 15 claim against Potter and Bonderman Family Limited Partnership, LP to the extent those claims alleged control of IQCM.
The court held that a person who signs a registration statement cannot unilaterally limit statutory § 11 liability through a disclaimer. It also found the complaints sufficiently alleged that Potter acted as IQCM's agent and that Potter and Bonderman Family Limited Partnership had enough power or potential power over IQCM to support pleading-stage § 15 control-person claims.
Background
According to the complaints, David Bonderman founded IQCM in 2014 to manage investment funds, including the Infinity Q Diversified Alpha Fund, a mutual fund offered to retail investors through the Trust for Advised Portfolios, a Delaware statutory trust administered through U.S. Bank's multiple-series-trust structure. The fund invested in hard-to-value derivatives and swaps. IQCM used Bloomberg's BVAL service to generate valuations, but plaintiffs alleged that chief investment officer James Velissaris manipulated inputs to BVAL and thereby overstated the fund's net asset value. The alleged fraud was later uncovered by the Securities and Exchange Commission, the mutual fund collapsed in February 2021 with an approximately $500 million shortfall, IQCM and Bonderman Family Limited Partnership were barred from the securities industry, and Velissaris pleaded guilty in a criminal case. Plaintiffs, who were investors in the mutual fund, sued over alleged false statements in the fund's 2019 registration statement, asserting that it misleadingly represented that the net asset value was determined in good faith using a third-party tool outside the fund's control.
Lower Court Decision
On motions to dismiss under CPLR 3211 [New York rule permitting dismissal at the pleading stage], Supreme Court held that Potter's signature on the registration statement was limited by a disclaimer stating that he signed only as to information specifically relating to Infinity Q Commodity Fund, Ltd., a subsidiary. Based on that conclusion, the court found no § 11 liability against Potter, no vicarious § 11 liability against IQCM, and no predicate violation to support § 15 control-person claims against Potter, IQCM, or Bonderman Family Limited Partnership. The court also held that neither Potter nor IQCM was adequately alleged to control the mutual fund or the trust, which it viewed as controlled by the trust's trustees.
Appellate Division Reversal
The Appellate Division modified both orders. It held that § 11 imposes strict liability on every person who signed the registration statement and that the statute does not permit a signatory to narrow that liability through a disclaimer. Because Potter signed the registration statement, the § 11 claim against him should not have been dismissed. The court further held that the complaints adequately alleged Potter acted as IQCM's agent, allowing the § 11 claim against IQCM to proceed on a respondeat superior theory. As to § 15, the court held that plaintiffs sufficiently pleaded that Bonderman Family Limited Partnership and Potter were control persons of IQCM, based on ownership, founding involvement, appointments of trusted personnel, and Potter's role as chief executive officer and signatory. However, the court agreed with dismissal of claims asserting that Potter or IQCM controlled the mutual fund or the trust, because the mutual fund was not a separate legal entity and the trust was controlled by its trustees.
Legal Significance
The decision underscores that liability under Securities Act of 1933 § 11 turns on whether a person signed the registration statement, not on whether the signer attempted to qualify or limit the scope of the signature. It also confirms a relatively lenient pleading standard for § 15 control-person claims in New York, especially where plaintiffs allege meaningful ownership, executive authority, or practical power to direct the primary violator's conduct. At the same time, it clarifies that a series mutual fund within a trust may not be treated as a distinct legal entity for control-person purposes when the trust itself is governed by trustees.
A signatory to a securities registration statement cannot avoid § 11 liability by adding a disclaimer, and allegations of executive authority or substantial ownership can be enough at the pleading stage to revive § 15 control-person claims tied to the entity that allegedly made the misstatements.