Anwar et al v. Fairfield Greenwich Limited et al

Filing 1383

ENDORSED LETTER addressed to Judge Victor Marrero from Timothy A. Duffy dated 5/29/2015 re: I write on behalf of my client, PricewaterhouseCoopers LLP ("PwC Canada"), and defendant PricewaterhouseCoopers Accountants N.V. ("PwC Netherlands") (collectively, the "PwC Defendants") pursuant to the Court's May 6, 2015 Order regarding submissions regarding the effect of the Second Circuit's recent decision In re Kingate Management Limited Litigation, 784 F.3d 128 (2d Cir. April 23, 2015). ENDORSEMENT: The Clerk of Court is directed to enter into the public record of this action the letter above submitted to the Court by PwC defendants. (Signed by Judge Victor Marrero on 5/29/2015) (lmb)

KIRKLAND &. ELLIS LLP
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300 North LaSalle Sireet
Chicago, 1111no1s 60654
Timothy A. Duffy. P.C.
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Facaimlle:
[phone]

[phone]

www kindand.com

May 29, 2015
VIA FAX
Hon. Victor Marrero
District Judge, United States District Court
Southern District of New York
500 Pearl Street
New York, New York 10007

Re:

Anwar, et al. v. Fairfield Greenwich Limited, et al.
Master File No. 09·CV-00118 (VM) (THK)

Dear Judge Marrero:

I write on behalf of my client, PricewaterhouseCoopers LLP ("PwC Canada"), and
defendant PricewaterhouseCoopers Accountants N.V. ("PwC Netherlands") (collectively, the
"PwC Defendants") pursuant to the Court's May 6, 2015 Order regarding submissions regarding
the effect of the Second Circuit's recent decision Jn re Kingate Management Limited Litigation,
1
784 F.3d 128 (2d Cir. April 23, 2015).
As explained below, the Second Circuit's Kingate decision mandates the dismissal of
plaintiffs' remaining claims against the PwC Defendants: Count 13 ("Negligence") and Count
14 ("Negligent Misrepresentation"). (Second Consolidated Amended Complaint ("SCAC"),
Doc. No. 273 at~~ 433-445 (Sept. 29, 2009).) Both claims require that plaintiffs prove that the
PwC Defendants made ''a misrepresentation or omission of a material fact in connection with the
purchase or sale of a covered security," and are therefore precluded by the Securities Litigation
Uniform Standards Act of 1998 ("SLUSA"). 15 U.S.C. § 78bb(f)(l)(A).

The Kingate Framework
In Kingate, the Second Circuit outlined a framework of five categories of claims arising
from transactions "in connection with the purchase or sale of a covered security." Claims that a
defendant committed fraud ("Group 1"), made a negligent misrepresentation or omission
1

As ordered by the Court. counsel for the PwC Defendants have conferred with counsel for the other parties to
coordinate their submissions. This letter incorporates by reference and adopts the facts and arguments set forth in
the letter of this same date submitted by Citco Fund Services (Europe) B.Y., Citco (Canada) Inc., Citco Bank
Nederland N.V. Dublin Branch, Citco Global Custody N.V., Citco Fund Services (Bermuda) Limited, and The Citco
Gr<>up Limited (c-0))e¢tively, the "Citco Defendants").
Hong Kong

Lona on

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Munich

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Washington. D C

KIRKLAND &. ELLIS LLP

Hon. Victor Marrero
May 29, 2015
Page 2
("Group 2"), or aided and abetted a fraud ("Group 3"), are precluded by SLUSA. Kingate, 784
F.3d at 151. Claims that allege breach of a contractual, fiduciary, or tort-based duty ("Group 4")
or for collateral matters ("Group 5") are not precluded. Id. at 135. If the allegations involve
conduct that might "otherwise fit'' into Group 4 but "require proof' that a defendant "committed
knowing, intentional, or negligent misrepresentations or misleading omissions," the claims
belong in Groups 1 or 2 and are precluded by SLUSA. Id. at 135 n.6.

Application of tbe Kineate Framework to Count 13: Negli,eence
Count 13 of plaintiffs' complaint alleges that the PwC Defendants were negligent in
issuing false audit reports, on which plaintiffs were entitled to rely, and did rely to their
detriment. Because this claim depends on proof of a misrepresentation or misleading omission
by the PwC Defendants, it falls squarely within Group 2, and is therefore precluded by SLUSA.
If all plaintiffs had to prove was negligence on the part of the PwC Defendants, their claim
would be a Group 4 claim and would not be precluded by SLUSA. But is clear from wellestablished New York law, this Court's prior rulings, and their own allegations and admissions,
they must prove that the PwC Defendants issued false audit reports. This puts their claims into
Group 2.
The Kingace court gave as an example of a Group 4 claim a claim by a client of an audit
firm that sues the auditor for violation of obligations to the client. 784 F.2d at 148. But unlike
the hypothetical plaintiff in the example given by the Kingate court, Plaintiffs here were not the
PwC Defendants' clients. The PwC Defendants' clients were the Fairfield funds. Plaintiffs here
are third parties to the auditor-client relationship between the PwC Defendants and the Fairfield
funds. Because plaintiffs do not have privity with the PwC Defendants, their negligence claim
must satisfy all the elements required by Credir Alliance Corp. v. Arthur Andersen & Co., 65
N.Y.2d 536, 553 (N.Y. 1985), including reliance on alleged false statements by the PwC
Defendants. The plaintiffs have not attempted to, and could not, establish liability based solely
on the PwC Defendants' alleged negligence or violation of any contractual or professional
obligation. Plaintiffs must prove they relied on false representations by the PwC Defendants in
order to prevail on their negligence claims, which places their claims in Group 2. 2

2

New York courts have recognized that third-party negligence claims based on alleged false &tatements by an
auditor are equivalent to negligent misrepresentation claims. See Cromer Fi11a111ee Ltd v. Berger, 13 7 }'. Supp. 2d
452, 495 n. 29 (S.D.N.Y. 2001) (analyzing a third-party negligence claim against an auditor as a claim for negligent
misrepresentation where the allegation was that negligent auditing led to a misrepresentation of a fund's financial
condition). See also Thomas G. Mackey, Note, Accountants' liability after Bi/y v. Arthur Young, 45 Hastings L.J.

KIRKLAND

&._

ELLIS LLP

Hon. Victor Marrero
May 29, 2015
Page 3

The record in this case allows no other conclusion. First, the alleged factual basis of
plaintiffs' claim is that the PwC Defendants issued false audit opinions. Plaintiffs allege:

mJ 261-67.)

•

The PwC Defendants issued "clean" audit opinions. (SCAC

•

The PwC Defendants knew plaintiffs "would rely" on the fact that they
"represented [they] conducted proper audits of the Funds, and issued
unqualified, or clean, opinions on the Funds' financial statements."
(SCAC if 277.)

•

The PwC Defendants misrepresented that they had "reasonable assurance''
that the funds' financial statements "were free of material misstatement."
(SCAC if 304.)

•

The PwC Defendants "opin[ions] that the multi-billion dollar valuations of
the Funds' investments were fairly presented in the financial statements"
were unfounded. (SCAC if 305.)

•

"As the independent party charged with certifying that it had reasonable
assurance that the Funds' financial statements were free of material
misstatement, PwC failed to meet its obligation to the Funds' investors
when it issued its audit opinions - opinions upon which it knew those
parties would rely." (SCAC if 312.)

•

The PwC Defendants' "audit reports misrepresented that [they] had
conducted the audits in compliance with GAAS and ISA and
mi.frepre,fented that the Funds' financial statements set out the true
financial condition of the Funds." (SCAC ~ 316 (emphasis added).)

Second, this Court has previously recognized that plaintiffs must show that the PwC
Defendants owed them a duty of care under Credit Alliance by: (1) pointing to a "statement" by
the PwC Defendants that the auditors knew would be used for a particular purpose, (2) "reliance
by a known party on that statement," and (3) conduct by the auditors "linking it to the relying
party and evincing its understanding of that reliance." Anwar v. Fairfield Greenwich Lid., 884 F.
Supp. 2d 92, 9 5 (S.D .N. Y. 2012) ("Anwar IF'). This Court has also recognized that plaintiffS'
147, 161 (1993) ("The very function of accountants that exposes them to liability is not so much the negligent
performance of the audit, as it is the representations made regarding the results of the audit.").

KIRKLAND &.. ELLIS LLP

Hon. Victor Marrero

May 29, 2015
Page 4

claims are "shareholders' tort claims based on misrepresentation, rather than mismanagement."
Id. at 99 (emphasis added). If plaintiffs cannot prove the PwC Defendants made a false
statement, on which they relied, they cannot establish that the PwC Defendants owed them a
duty of care, let alone establish liability.
Third, plaintiffs themselves have repeatedly argued that they are entitled to sue the PwC
Defendants for negligence under the Credit Alliance standard precisely because they were
entitled to rely. and did rely, on the allegedly false statements in the PwC Defendants' audit
reports. As they argued to the Second Circuit on the Rule 23(f) appeal - under the heading
"Common Evidence Establishes Reliance on PwC Audit Opinions":
The claims now remaining in this case against PwC are limited to injuries
suffered by those Fund shareholders who made additional investments (or held
existing investments) after PwC issued an audit opinion addressed to those
shareholders. All such audit opinions, of course, gave the Funds a clean bill of
health. It defies reason and common sense to claim that Class members did not
rely on the audits in making or holding investments, since anything other than a
"clean" audit is anathema to investors.
Both

direct

and

circumstantial

evidence

show

reliance

on

PwC's

misrepresentations on a class-wide basis. PwC's "clean" audit reports
misrepresented that the Funds held valuable assets and engaged in extensive
trading that produced large profits; the reports further misrepresented that PwC
had verified these facts through proper auditing processes.
St. Stephens School v. PricewaterhouseCoopers Accountams N. V, Dkt. No. 13-2340, Brief for
Plaintiffs-Appellees at 60 (Oct. I I, 2013) (emphasis added; internal citations omitted).
The negligence claim cannot be characterized as a Group 4 claim under Kingate, because
Group 4 claims are those that "would not require any showing of false conduct on the part of the
defendants." Plaintiffs' negligence claim is expressly based on the allegation that the PwC
Defendants issued audit reports that misrepresented the financial condition of the funds and the
PwC Defendants' audit work. Accordingly, Plaintiffs' negligence claim is a Group 2 claim,
requiring proof of "negligent misrepresentations and misleading omissions in connection with

KIRKLAND

~ELLIS

LLP

Hon. Victor Marrero
May 29, 2015
Page 5

the Funds' investments with Madoff," Kingate, 784 F.3d at 151, and is therefore precluded by
SLUSA. 3
Application of the Klngate Framework to Count 14: Ne2li2ent Misrepresentation

Plaintiffs' negligent misrepresentation claim also falls into Group 2. (SCAC

~~

438-

445.) In addition to sharing the same alleged basis in fact and the same requirement to establish

a duty of care on the part of the PwC Defendants under Credit Alliance, plaintiffs' particular
allegations in Count 14 are that the PwC Defendants "induced purchasers to hold their positions
in the Funds and to purchase additional interests in the Funds by falsely representing to Plaintiffs
that (i) [they] had conducted [their] audits in accordance with GAAS or ISA and (ii) the Funds'
financial statements 'present[ed] fairly, in all material respects, the financial positions of [the
Funds]," (SCAC ii 440 (emphasis added)), and that as "a result of their reliance upon the false
representations made by PwC, Plaintiffs have suffered damages." (/d. at~ 445.) It is hard to
imagine a claim more closely tailored for preclusion under SLUSA for alleging a
misrepresentation in connection with the purchase or sale of a covered security.
Conclusion

Because both of Plaintiffs' remammg claims for negligence and negligent
misrepresentation against the PwC Defendants require proof of "false conduct" they are
precluded by SL USA under Kingate, andtshould be dismissed.
The Clerk of Court is directed to enter into the public record
of his action the letter above submi ted to the Court by
W
"
~ ---;n-- ef-P7,

Respectfully,

~o.,4?+
Timothy A. Duffy, P.C.

3
The Second Circuit has made it clear that the scope of "false conduct" claims precluded under SLUSA is broad,
and encompasses "all the types of misleading or deceptive conduct identified in the relevant SLUSA provisions
(including a misrepresentation of a material fact, an untrue statement, and the use or employment of any
manipulative or deceptive device or contrivance)." Kingate, 784 F .3d at 132 n.1. This is consistent with the scope
of potential liability under the securities laws, where the issuance of a false audit opinion by the PwC Defendants
would likewise come within the scope of a potential enforcement action by the SEC, notwithstanding the lack of a
private right of action under those laws against the PwC Defendants. Id. at 151 & nn. 2 l & 22.