## Facts

- A state agency invested substantial public funds with an investment adviser in separately managed fixed-income accounts and later shifted large amounts into a Bermuda mutual fund created and managed by that adviser.
- The fund’s offering materials stated leverage could be used up to 150% of assets to increase yield and total return, warned that leverage posed significant risks, and described the 150% figure as a “guideline” changeable at the board’s discretion.
- The agency alleged that, during 2004, the fund repeatedly exceeded the 150% leverage level and did so without the governance and disclosures the agency understood would accompany any material increase.
- The agency alleged that a principal of the adviser/fund communicated leverage figures around 900%, while internal records later reflected leverage around 1,900%.
- The agency alleged that defendants misrepresented and omitted material information about the magnitude of leverage, the manner of risk management, and whether leverage levels were consistent with the offering materials and communications.
- After substantial losses tied to leveraged derivatives positions, the agency sued in federal court under Ohio law, asserting fraud-based claims, negligent misrepresentation, and breach of fiduciary duty, among other theories.
- Remaining defendants moved to dismiss under Rule 12(b)(6) and argued the fraud-based claims failed Rule 9(b) particularity and that reliance on a 150% “guideline” was unreasonable as a matter of law.

## Issues

1. Whether the complaint pleaded fraud and misrepresentation with sufficient particularity under Rule 9(b) and stated plausible claims under Rule 12(b)(6).
2. Whether the agency’s alleged reliance on leverage-related representations was unreasonable as a matter of law because the offering materials characterized the 150% figure as a changeable “guideline” and included risk warnings.
3. Whether general cautionary disclosures about leverage and risk defeated, at the pleading stage, claims based on alleged specific misstatements or omissions about actual leverage levels and related conduct.

## Decision

- The court denied the motion to dismiss in substantial part.
- The court held the complaint sufficiently alleged fraud, negligent misrepresentation, and breach of fiduciary duty under Ohio law to proceed past the pleadings stage.
- The court held Rule 9(b) was satisfied because the complaint identified the challenged documents and communications, the relevant time frame, the alleged speakers/entities, and the substance of the alleged misrepresentations and omissions.
- The court held the reasonableness of reliance could not be resolved as a matter of law on a motion to dismiss, given the alleged disparity between the stated 150% benchmark and alleged leverage in the 900%–1,900% range.
- The court held that generalized risk disclosures and “guideline” language did not, by themselves, bar claims alleging specific misstatements or omissions about the magnitude of leverage and related disclosures and conduct.

## Legal Principles

- On a Rule 12(b)(6) motion, the court accepts well-pleaded factual allegations as true and draws reasonable inferences in the plaintiff’s favor; dismissal is improper where the allegations state a legally cognizable claim.
- Rule 9(b) requires pleading fraud with particularity; identifying the alleged misrepresentations/omissions, responsible actors, pertinent documents or communications, and relevant time period may satisfy the requirement in complex financial cases.
- Under Ohio law, reasonable reliance is commonly a fact question not suited for dismissal where the complaint alleges concrete representations, contextual communications, and disputed investor understanding.
- Cautionary statements about general risks do not automatically preclude liability where the plaintiff alleges specific misstatements or omissions about the actual scope of the challenged conduct and failures to disclose material facts as events unfold.
- Allegations that an investment adviser and related fiduciaries failed to disclose material risk information and employed an extreme strategy inconsistent with communicated constraints can state a claim for breach of fiduciary duty at the pleading stage.

## Conclusion

The court permitted the agency’s core Ohio-law claims to proceed because the complaint pleaded detailed leverage-related misstatements and omissions, and because “guideline” phrasing and generic risk warnings did not conclusively negate reliance or defeat fraud and fiduciary-duty theories on a motion to dismiss.


Ohio Bureau of Workers’ Compensation v. MDL Active Duration Fund, Ltd., 476 F. Supp. 2d 809 (S.D. Ohio 2007)