Hecht v. Andover Assoc. Mgmt. Co PDF

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Haik Gavadian Sandor Samuels BLAW 308 5 February 2018 Hecht v. Andover Assoc. Mgmt. Co Facts: Charlie Hecht made some investments in Andover Associates LLC I. Andover Associates Management Company was the LLC’s managing member. Andover Management kept Ivy Asset Management Corp. as its consultant. Ivy recommended Andover use Madoff who also charges much less for his services. Madoff was discovered to be a Ponzi scheme in December 2008. On the behalf of Andover Associates, Hecht brought legal action against Andover Management and Ivy on several grounds in NY Supreme Court. Hecht alleged that Ivy was negligent in recommending Madoff’s firm without performing a sufficient “due diligence” investigation of their operation. Hecht alleged that Andover Management was negligent in failing to react to the suspicious confirmation slips and other red flags Andover Associates would have learned of Madoff’s fraud and saved their assets. Andover management asked the court to dismiss Hecht’s complaint by citing the business judgment rule, a rule protecting managers from liability in good faith agreements. Issue: Did Andover Management have the duty to have an investigation of Madoff prior to giving Madoff management of Associates investments Should Managements actions be considered negligent? Does the Business judgment rule apply in Managements case of hiring new investors? Did Andover management breach the duty of diligence and prudence by delegating management of investments to Madoff without conducting any investigation?

Rule: The business judgement rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company. The duty of care stands for the principle that directors and officers of a corporation in making all decisions in their capacities as corporate fiduciaries, must act in the same manner as a reasonable prudent person in their position would. The fiduciary duty standards set by the RULLCA, management owes a duty to act with the best care, and managers must comply with the business judgment rule. Application: The defendant, Andover Management tried dismissing Hecht’s complaints by citing the business judgment rule, which would protect him from liability when he made this decision, because it was done out of good faith. They also claim that it means Ivy is their investor and Madoff is the manager. The plaintiff suing on the behalf of the Associates is Hecht who argues that Andover Management is in breach of the duty of diligence and prudence by delegating management of Associate investments to Madoff without conducting an investigation into his operation as would any prudent person, simply because Management delegated another to is not an excuse to fail one’s own duty of diligence and prudence. A party’s good faith does not relieve them from their fiduciary obligations. Hecht also argues that there was no paper trail indicating trades, or any other documentation backing up Madoff’s Ponzi scheme. The court sees gross negligence as failure to display the slightest amount of care or diligence. Management conducted their business without the concern of the Associates because of self-interest and that Madoff charged a much less fee than normal for his services. This should have given reason for search or at the least caught their attention, but they failed to detect it. It might seem that by trusting Madoff with the Associates’ funds, Management was showing

complete disregard for their Associates. Uncovering the fact that Madoff was a fraud after it was too late does not show diligence. Management’s motion to dismiss the negligence claim is denied. Conclusion: Andover Management’s motion to dismiss denied in favor of Hecht....