## Facts

- Lakonia Management Ltd. invested about $50 million in 1994 as a shareholder of Long-Term Capital V, Ltd. (a “feeder” fund) that invested substantially all assets in Long-Term Capital Portfolio (the “master” fund) managed by entities controlled by John Meriwether and other principals.
- The offering materials warned that the investment was highly speculative and could result in loss of all capital; shares were unregistered, illiquid, and lacked a public market.
- The documents also disclosed that the funds used substantial leverage and that the fund could mandatorily redeem all or part of a shareholder’s shares at net asset value at any time.
- The funds initially performed well; Lakonia alleged its stake grew substantially and that it received a large partial redemption in late 1997.
- In 1998, following market turmoil tied to Russia, the portfolio rapidly declined; creditor banks increased margin demands and liquidity tightened.
- A recapitalization was arranged with creditor banks that received a 90% interest and operational control in exchange for providing capital; existing investors retained a 10% interest.
- Lakonia sued Meriwether, related fund entities, and bank lenders, asserting federal securities fraud, civil RICO, and state-law claims based on alleged misstatements and omissions about leverage, risks, and actions taken during the crisis and restructuring.

## Issues

1. Whether Lakonia plausibly pleaded a § 10(b)/Rule 10b-5 claim in light of extensive risk disclosures, including material misrepresentation or omission, scienter, reliance, and loss causation.
2. Whether alleged statements about strategy and management were actionable misrepresentations/omissions or non-actionable opinion, prediction, or puffery given the accompanying warnings.
3. Whether civil RICO claims premised on securities-fraud conduct were barred by the PSLRA and, if not, whether racketeering predicates were pleaded with required specificity.
4. After dismissal of federal claims, whether the court should retain supplemental jurisdiction over the state-law causes of action.

## Decision

- The court granted defendants’ Rule 12(b)(6) motions and dismissed the federal securities claims for failure to state a claim.
- The court dismissed the civil RICO claims, concluding they were barred by the PSLRA to the extent based on securities-fraud predicate acts and, in any event, were inadequately pleaded.
- Having dismissed all federal claims, the court declined supplemental jurisdiction over the remaining state-law claims and dismissed them without prejudice.

## Legal Principles

- Detailed, specific risk disclosures in offering materials can defeat securities-fraud claims when the alleged harm results from the realization of risks that were expressly disclosed (including leverage, illiquidity, and potential total loss).
- Loss causation is not adequately pleaded where the complained-of losses are attributed to disclosed market and leverage risks rather than to a corrective disclosure or a misstatement that changed the investment’s risk profile.
- Generalized promotional statements or opinions about investment strategy and competence are typically not actionable under Rule 10b-5 when accompanied by clear warnings of significant, identified risks.
- The PSLRA bars civil RICO claims to the extent they rely on conduct actionable as securities fraud; plaintiffs may not reframe a securities-fraud theory as racketeering to obtain RICO remedies.
- When all federal claims are dismissed before trial, a federal court may decline supplemental jurisdiction over state-law claims and dismiss them without prejudice under 28 U.S.C. § 1367(c).

## Conclusion

The court dismissed Lakonia’s securities and RICO claims at the pleading stage because the offering documents disclosed the leverage and illiquidity risks that later materialized, the alleged losses were attributed to market forces rather than actionable fraud, and the PSLRA foreclosed securities-based civil RICO; the remaining state-law claims were dismissed without prejudice after the federal claims were eliminated.


Lakonia Mgmt. Ltd. v. Meriwether, 106 F. Supp. 2d 540 (S.D.N.Y. 2000)