Firefighters' Retirement System et al v. Citco Group Limited et al

Filing 557

RULING AND ORDER granting in part 538 Motion to Compel. CFS Cayman is ORDERED to produce SAS 70 reports for the time period of 1/1/2007 through 9/1/2010 within fourteen (14) days of this Ruling. Signed by Judge Shelly D. Dick on 3/9/2018. (LLH)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF LOUISIANA
FIREFIGHTERS’ RETIREMENT
SYSTEM, ET AL.
CIVIL ACTION
VERSUS
13-373-SDD-EWD
CITCO GROUP LIMITED, ET AL.
RULING AND ORDER ON MOTION TO COMPEL
Before the court is a Motion to Compel Discovery from Citco Fund Services (Cayman
Islands) Limited Regarding Ernst & Young (the “Motion to Compel”)1 filed by plaintiffs,
Firefighters’ Retirement System (“FRS”), Municipal Employees’ Retirement System of Louisiana
(“MERS”), and New Orleans Firefighters’ Pension & Relief Fund (“NOFF”) (collectively,
“Plaintiffs”).

Defendants, Citco Technology Management, Inc. (“CTM”), Citco Banking

Corporation N.V. (“Citco Banking”), Citco Fund Services (Cayman Islands) Limited (“CFS
Cayman”), and The Citco Group Limited (“Citco Group”) (collectively, the “Citco Defendants”)
have filed an Opposition.2 Plaintiffs were granted leave to file the Motion to Compel during a
February 8, 2018 status conference, and the Motion to Compel was discussed during a March 6,
2018 status conference.

For the reasons set forth herein, Plaintiffs’ Motion to Compel is

GRANTED IN PART.
I.

Background
On March 1, 2013, Plaintiffs filed suit against 23 defendants, including the Citco

Defendants, asserting claims under the Louisiana Securities Act and Louisiana Unfair Trade
Practices Act, as well as third party beneficiary, unjust enrichment, breach of contract, negligent

1

R. Doc. 538.

2

R. Doc. 548.

1

misrepresentation, and general tort claims.3 Plaintiffs’ claims arise from a $100 million investment
loss. In April of 2008, the Louisiana Funds purchased 100,000 Series N Shares offered and issued
by FIA Leveraged Fund (“Leveraged”) for $100 million.4 After a series of investment transactions
initiated by Leveraged, in March of 2011, Plaintiffs sought to redeem their Series N shares.5
Ultimately, the shares went unredeemed and Plaintiffs determined that the investment was illiquid
and, thus, the N shares, for which there was no market, were valueless.6
In their Petition, Plaintiffs assert that CFS Cayman served as administrator of Leveraged
and, inter alia, assisted in computing the Net Asset Value of the funds’ shares. 7 As a defense to
Plaintiffs’ claim that CFS Cayman was required to value the assets held in the Fletcher funds and
failed to adequately do so, the Citco Defendants assert, inter alia, that a draft “Project Ladder”
report prepared by Ernst & Young (“E&Y”) on behalf of Plaintiffs in 2011 “identified several
parties involved in the valuation process, but said nothing about Citco in that regard” and explain
that in light of the 2011 Project Ladder draft report, the Citco Defendants have asked Plaintiffs’
witnesses during depositions “to confirm…that the EY report makes no mention whatsoever of
Citco with respect to asset valuation.”8
Plaintiffs contend that because the Citco Defendants’ rely on the draft Project Ladder report
to support a defense, E&Y’s past work for Citco has been placed at issue. Plaintiffs explain that
prior to Plaintiffs’ retention of E&Y in 2011, E&Y “was also an auditor and consultant for CFS
3

R. Doc. 1-3.

4

R. Doc. 1-3, ¶ 34.

5

R. Doc. 1-3, ¶ 41.

6

R. Doc. 1-3, ¶¶ 34-45 & 18. Leveraged was a feeder fund which Plaintiffs allege was formed primarily to invest in
a master fund, Fletcher Income Arbitrage, Ltd. R. Doc. 1-3, ¶ 10.
7

R. Doc. 1-3, ¶¶ 46-48. See also, R. Doc. 1-3, ¶¶ 70-71.

R. Doc. 548, p. 2. In the instant Motion to Compel, Plaintiffs explain that they retained E&Y “in July of 2011 to
meet with EisenAmper (Fletcher’s Auditors) and review the value of the assets held by Leveraged. E&Y prepared a
draft report dated September 6, 2011 but it never became final.” R. Doc. 538-2, p. 5. The review performed by E&Y
of the Fletcher funds and Plaintiffs’ investment in Leveraged is referred to by the parties as “Project Ladder.”
8

2

Cayman on the very issues which are the subject of the lawsuit and may be biased in its testimony
because of the amount of fees that Citco pays E&Y.”9 In addition to potential bias, Plaintiffs seek
to compel discovery responses “for the purpose of seeing whether [E&Y] criticized Citco internal
controls and techniques on valuation of assets of funds held by companies of which [Citco] serve
as administrator.”10 Per their Motion to Compel, Plaintiffs assert that the following, broadly
worded, discovery requests are at issue:
Interrogatory 17: Please describe any services that EY performed
for You between January 1, 2007 and September 1, 2010.11
Request for Production 125: Please produce any reports prepared
in connection with any services that EY performed for You between
January 1, 2007 and September 1, 2010.12
Request for Production 126: Please produce any documents that
identify, describe, or relate to any services that EY performed for
You between January 1, 2007 and September 1, 2010.13
However, Plaintiffs’ briefing focuses on compelling production of “Statement on Accounting
Standards 70” (“SAS 70”) reports,14 and during the March 6, 2018 status conference, counsel for
Plaintiffs confirmed that they are only seeking to compel production of the SAS 70 reports.
In opposition to the Motion to Compel, the Citco Defendants argue that compelling
discovery of “wide-ranging documents and information related to run-of-the-mill auditing work a

R. Doc. 538-2, p. 2. See also, R. Doc. 538-2, p. 11 (“E&Y’s service to Citco would make it difficult for E&Y to
critique Citco when it was performing a major contract of work for it. Further, because it was performing work for
Citco, it is unlikely that E&Y would be critical of Citco when completing analysis on the Funds’ behalf. This potential
bias of E&Y is relevant to the claims made by the Funds….”).
9

10

R. Doc. 538-2, p. 2.

11

Interrogatories to CFS Cayman, R. Doc. 538-6.

12

Requests for Production to CFS Cayman, R. Doc. 538-7.

13

Requests for Production to CFS Cayman, R. Doc. 538-7. Both the Interrogatories and Requests for Production
define “you” as “Citco Fund Services (Cayman Islands) Limited.” R. Docs. 538-6 & 538-7. As stated herein, the
Citco Defendants explain that CFS Holdings actually retained E&Y and that CFS Holdings is the parent company of
CFS Cayman.
14

It appears that Plaintiffs refer to “SAS 70” and “FASB 70” interchangeably.

3

division of the international accounting firm Ernst & Young…performed between 2007 and 2010
for a nonparty Citco entity, Citco Fund Services (Holdings) Limited (‘CFS Holdings’)” would be
irrelevant and disproportional.15 With respect to relevancy, the Citco Defendants contend that
“the forensic work of the EY team Plaintiffs retained in 2011 has nothing to do with the audit work
an entirely different group of EY personnel did for CFS Cayman’s parent company CFS Holdings
from 2007 to 2010” and that there is no evidence that “one team knew about the other…and no
conceivable basis for concluding that the EY forensic team skewed the results of its report for
Plaintiffs in light of an entirely separate relationship with CFS Holdings.”16 With respect to
proportionality, the Citco Defendants argue that documents already produced establish that CFS
Holdings was a client of E&Y and that “to the extent any such EY reports and communications
mention Fletcher or Leveraged or any related matters, they would already have been produced.”17
II.

Law and Analysis
“Unless otherwise limited by court order, the scope of discovery is as follows: Parties may

obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense
and proportional to the needs of the case, considering the importance of the issues at stake in the
action, the amount in controversy, the parties’ relative access to relevant information, the parties’
resources, the importance of the discovery in resolving the issues, and whether the burden or
expense of the proposed discovery outweighs its likely benefit. Information within this scope of
discovery need not be admissible in evidence to be discoverable.” Fed. R. Civ. P. 26(b)(1). “‘For
purposes of discovery, relevancy is construed broadly to encompass ‘any matter that bears on, or
that reasonably could lead to other matters that could bear on, any issue related to the claim or

15

See, R. Doc. 548, p. 1.

16

R. Doc. 548, p. 2.

17

R. Doc. 548, p. 3.

4

defense of any party.’” Tadlock v. Arctic Cat Sales, Inc., Civil Action No. 15-766, 2017 WL
1032516, at * 3 (M.D. La. March 17, 2017) (quoting Fraiche v. Sonitrol of Baton Rouge, Civil
Action No. 08-392, 2010 WL 4809328, at *1 (M.D. La. Nov. 19, 2010) (quoting Coughlin v. Lee,
946 F.2d 1152, 1159 (5th Cir. 1991); Fed. R. Civ. P. 26(b)(1)). A determination of relevancy is
tied to applicable substantive law and then weighed against the six proportionality factors. Any
information sought that is not relevant to a party’s claim or defense is not discoverable, regardless
of proportionality. The court must additionally limit the frequency or extent of discovery if it
determines that: “(i) the discovery sought is unreasonably cumulative or duplicative, or can be
obtained from some other source that is more convenient, less burdensome, or less expensive; (ii)
the party seeking discovery has had ample opportunity to obtain the information by discovery in
the action; or (iii) the proposed discovery is outside the scope permitted by Rule 26(b)(1).” Fed.
R. Civ. P. 26(b)(2)(C).
“For a motion to compel, ‘[t]he moving party bears the burden of showing that the materials
and information sought are relevant to the action or will lead to the discovery of admissible
evidence.’” Mirror Worlds Technologies, LLC v. Apple Inc., Case No. 6:13-cv-419, 2016 WL
4265758, at *1 (E.D. Tex. Mar. 17, 2016) (quoting SSL Servs., LLC v. Citrix Sys., Inc., No. 2-08cv-158, 2010 WL 547478, at *2 (E.D. Tex. Feb. 10, 2010)). “Once the moving party establishes
that the materials requested are within the scope of permissible discovery, the burden shifts to the
party resisting discovery to show why the discovery is irrelevant, overly broad or unduly
burdensome or oppressive, and thus should not be permitted.” Mirror Worlds Technologies, LLC,
2016 WL 4265758 at *1. See also, Wymore v. Nail, No. 5:14-cv-3493, 2016 WL 1452437, at *1
(W.D. La. April 13, 2016) (“Once a party moving to compel discovery establishes that the
materials and information it seeks are relevant or will lead to the discovery of admissible evidence,
the burden rests upon the party resisting discovery to substantiate its objections.”) (citing McLeod,
5

Alexander, Powel and Apffel, P.C. v. Quarles, 894 F.2d 1482, 1485 (5th Cir. 1990)); Rivero v.
Sunbeam Products, Inc., Civil No. 08-591, 2010 WL 11451127, at *4 (W.D. Tex. Jan. 12, 2010)
(“Plaintiffs, who bear the burden of proof in support of their motion to compel....”).
Evidence regarding witness credibility and potential bias is relevant.18 See, Woodrard v.
Diamond Offshore Drilling, Inc., Civ. A. 99-1661, 2000 WL 275797, at * 1 (E.D. La. March 9,
2000) (“A party clearly has the right to inquire as to the bias or prejudice of any witness.”)
(collecting cases); Rogers v. Crosby Tugs, Inc., Civil Action No. 12-2453, 2016 WL 9406114, at
* 1 (E.D. La. Jan. 22, 2016) (compelling responses to three discovery requests, limited in time to
three years, seeking information regarding total amount of clients plaintiff’s counsel referred to
plaintiff’s treating physician and total amount of monies paid to him because such information was
relevant to issue of physician’s potential bias). See also, Behler v. Hanlon, No. JFM-99-3877, 199
F.R.D. 553, 557 (D. Md. April 20, 2011) (explaining that “[e]xamples of relationships or
circumstances that permit a finding of bias or prejudice are nearly limitless and include” a business
relationship.) (citing 1 Michael Graham, Handbook of Federal Evidence, § 607.7 (4th ed. 1996)).
However, and as discussed during the March 6, 2018 status conference, to establish such bias, the
undersigned would expect to see an ongoing business relationship between E&Y and a Citco
entity. Here, Plaintiffs concede that they only seek SAS 70 reports for the time period of 2007
through 2010, and that Plaintiffs retained E&Y after that timeframe in 2011. Moreover, to the
extent Plaintiffs have subsequently limited their Motion to Compel to the SAS 70, it appears to the
undersigned that such reports would not be the most probative evidence with respect to bias (i.e.,
information regarding the scope of work E&Y performed for Citco entities, the amount paid for

The Citco Defendants argue that the cases relied on by Plaintiffs are inapposite because “EY is not a witness here,
and there is no motion pending to exclude any evidence at trial.” R. Doc. 548, p. 7, n. 1. That no representative of
E&Y may have been designated as a witness at this time does not preclude discovery of documentary evidence that
may bear on the question of bias.
18

6

such work, and the proportion of E&Y’s total work stemming from its contracts with Citco entities
would seem to be more probative).19
Notwithstanding the questionable relevancy and proportionality of the 2007-2010 SAS 70
reports to the issue of establishing E&Y’s potential bias, Plaintiffs have also explained that they
seek the SAS 70 reports in order to analyze whether CFS Cayman was complying with its own
internal controls. The Citco Defendants argue in opposition to the Motion to Compel that “[t]o
the extent CFS performs valuation work for any of its clients, a SAS 70 report would not opine on
techniques or models used to value specific types of illiquid assets.”20 However, no sample SAS
70 reports were attached to either parties’ briefing related to the Motion to Compel and during the
March 6, 2018 status conference, counsel for the Citco Defendants stated that he had not reviewed
the SAS 70 reports. In support of their position that the SAS 70 may contain information relevant
to CFS Cayman’s compliance with internal controls, Plaintiffs cite language from a July 2007
Citco Fund Services Audit Report wherein SAS 70 reports are described as follows:

19

During a February 8, 2018 status conference, production of the SAS 70 reports was discussed. See, R. Doc. 532.
During that conference, counsel for the Citco Defendants objected to allowing discovery regarding the Citco
Defendant’s retention of E&Y (including any production of SAS 70 audit reports), and asserted that work done by
E&Y’s forensic accounting group was separate from any internal control auditing conducted by E&Y (i.e., was a
completely different and separate division of E&Y) such that any connection between the two E&Y groups was too
attenuated to support Plaintiffs’ desire to conduct discovery regarding E&Y’s potential bias. Because both parties
were only presenting argument regarding this issue, the court granted Plaintiffs leave to file a Motion to Compel
Discovery Regarding E&Y’s Relationship with the Citco Defendants and explained that briefing and evidence
supporting or opposing the Motion to Compel should, inter alia, “outline the relationship and separations between the
E&Y divisions.” R. Doc. 532, p. 5. In opposition to the Motion to Compel, the Citco Defendants make assertions
regarding the size of E&Y and argue that the two teams completing work for Plaintiffs and CFS Holdings were
completely separate; however, they submit no evidence (such as an affidavit from E&Y) supporting this contention.
See, e.g., R. Doc. 548, p. 9, n. 3 (citing E&Y’s website for proposition that E&Y is a large international firm and
stating that “even if the two divisions of EY engaged separately by Plaintiffs on the one hand and by CFS Holdings
on the other knew of the work the other was doing, it is hard to fathom that EY would intentionally jeopardize its
reputation by skewing the findings of its public engagement for Plaintiffs supposedly to keep CFS Holdings happy.”).
The “Citco Fund Services – Divisional Audit Report – July 2007” relied on by Plaintiffs states only that “Citco has
engaged Ernst & Young to provide an opinion on the design and effectiveness of our controls (SAS 70) for the period
September 1, 2006 through September 30, 2007.” R. Doc. 546, Exhibit 2 (filed under seal). Likewise, the Project
Ladder scope of work indicates that “Ernst & Young LLP” was retained. R. Doc. 546, Exhibit 1 (filed under seal).
Although the undersigned agrees that it appears likely that different groups of E&Y performed work for Plaintiffs and
CFS Holdings, the division and separation between these groups is not clear from the evidence submitted.
20

R. Doc. 548, p. 8, n. 2.

7

In an effort to provide our clients and their auditors with comfort
that the operating environment of Citco Fund Services is operating
effectively, Citco has engaged Ernst & Young to provide an opinion
on the design and effectiveness of our controls (SAS 70) for the
period September 1, 2006 through September 30, 2007. The
controls in the SAS 70 are not intended to be all inclusive but rather
the controls relevant to the financial reporting process for our
clients. Two reports are produced: one for Ephesus clients and one
for Aexeo clients.
Internal audit spends a significant amount of time and effort
performing tests to support the issuance of these reports. We
document our results; provide them to management and Ernst &
Young for review and inclusion in the SAS 70 reports. These tests
serve a dual purpose meaning that we also use these results as a
barometer of the control environment to direct the audit plan.
These tests consist of reviewing evidence of the performance of
significant controls in the operating environment and performing an
ITF test. An Integrated Test Facility (ITF) is the process of running
sample transactions through the existing system to ensure that the
transactions are processed accurately and posted in a timely
manner.21
The thrust of Plaintiffs’ claims against CFS Cayman is that CFS Cayman failed to adequately
advise Plaintiffs with regard to the value of the assets of the funds at issue. In light of the above
language, which indicates that the reports may have bearing on whether CFS Cayman complied
with internal controls and best practices relevant to the financial reporting process, the undersigned
finds that Plaintiffs have met their burden of establishing that the discovery sought is relevant.
Moreover, despite the Citco Defendants’ vague assertion that responding to the proposed
discovery “would require Citco to incur significant additional expense and to devote substantial
additional resources,” the Citco Defendants have not explained how production of the SAS 70
reports would be unduly burdensome.22 During the March 6, 2018 status conference, counsel for

21

R. Doc. 546-1, Exhibit 2 (filed under seal).

The Citco Defendants additionally argue that “to the extent documents relating to EY’s work for Citco concerned
Fletcher, Leveraged or any of the issues on which the parties have agreed to provide discovery, those documents
would already have been produced pursuant to the broad electronic search parameters on which the parties long ago
agreed and that the Court has otherwise directed over the past several months.” R. Doc. 548, p. 10. However, the
22

8

the Citco Defendants stated that he did not know how many SAS 70 reports there were, or how
frequently such reports were issued. In light of the relevancy of the SAS 70 reports, Plaintiffs
subsequent limitation of their broadly worded discovery requests to only the SAS 70 reports, and
the lack of any information indicating that production of the SAS 70 reports would be unduly
burdensome, the undersigned finds that requiring production of SAS 70 reports for the time period
of January 1, 2007 through September 1, 2010 would not be disproportional to the needs of this
case.
IV.

Conclusion
For the reasons set forth herein, the Motion to Compel23 filed by plaintiffs, Firefighters’

Retirement System (“FRS”), Municipal Employees’ Retirement System of Louisiana (“MERS”),
and New Orleans Firefighters’ Pension & Relief Fund (“NOFF”) (collectively, “Plaintiffs”) is
GRANTED IN PART. CFS Cayman is ORDERED to produce SAS 70 reports for the time
period of January 1, 2007 through September 1, 2010 within fourteen (14) days of this Ruling.
Signed in Baton Rouge, Louisiana, on March 9, 2018.

S
ERIN WILDER-DOOMES
UNITED STATES MAGISTRATE JUDGE

undersigned finds that E&Y’s evaluation of the design and effectiveness of Citco Fund Services’ internal controls
would not be necessarily tied to Fletcher or Leveraged.
23

R. Doc. 538.

9