Anwar et al v. Fairfield Greenwich Limited et al

Filing 1389

ENDORSED LETTER addressed to Judge Victor Marrero from Timothy A. Duffy dated 6/8/2015 re: Both of plaintiffs' remaining claims against the PwC Defendants are precluded by SLUSA and should be dismissed. 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 6/8/2015) (lmb)

Kl RKLAND &... ELLIS LLP
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Timothy A. Duffy.PC
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June 8, 2015

l'

VIA FAX
Hon. Victor Marrero
District Judge, United States District Court
Southern District of New York
500 Pearl Street
New York, New York I 0007
Re:

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

Dear Judge Marrero:
The Anwar plaintiffs admit that their purchase of shares of the Fairfield funds, the assets
of which were purportedly invested in covered securities, satisfies SL USA 's "covered securities"
requirement. In addition, they have no answer to the fact that both of their claims depend on
alleged misrepresentations by the PwC Defendants in connection with their purchase of those
covered securities.
I.

SLUSA Precludes Plaintiffs' Negligence Claim.

Plaintiffs claim that Kingate "makes clear that negligence by auditors in failing to detect
a fraud involving covered securities is a textbook Group 4 claim'' not barred by SLUSA. (Id. at
8.) They argue that the PwC Defendants' liability arises from the breach of "duties owed
directly to Plaintiffs as investors in the Fairfield Funds," and that their negligence claim '"would
not require any showing of false conduct on the part of [PwC]. '" (Id. at 8-9.)
Plainti tTs' assertion that they have "no need to plead or prove any misstatement at all"
(Letter at 9.), is, as outlined in the PwC Defendants' initial letter, contrary to the allegations in
plaintiffs' own complaint and the position they have consistently taken in this Court and in the
Court of Appeals: that their negligence claim against the PwC Defendants is premised on the
alleged falsity of the PwC Defendants' audit opinions.
Plaintiffs' assertion is also contrary to Credic Alliam:e, which governs their negligence
claim. Under Credit Alliance, Plaintiffs' negligence claim "depends" on their ability to prove a
misstatement. As Plaintiffs acknowledged in opposing PwC Defendants' motion to dismiss,
New York permits a plaintiff who is not in privity with an accountant to bring a negligence claim
only if the plaintiff can satisfy the requirements of Credit Alliance. One such requirement is that
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KIRKLAND&. ELLIS LLP

Hon. Victor Marrero
.lune8,2015
Page 2

the plaintiff relied on an "inaccurate" or misleading audit report. The requirement of a
misleading report triggers the false conduct element of Kingate: "When the success of a class
action claim depends on a showing that the defendant committed false conduct conforming to
SLUSA's specifications, the claim will be subject to SLUSA, notwithstanding that the claim
asserts liability on the part of the defendant under a state law theory that does not include false
conduct as an essential element .... " Kingate, 784 F.3d at 149. Although negligence is a state
law theory that docs not include false conduct as an essential element, for plaintiffs who are in
privity with the defendant accountant, here, the success of the Anwar plaintiffs' class and
individual actions all depend on showing that the PwC Defendants engaged in false conduct
conforming to the Credit Alliance requirements, including issuing an "inaccurate" or misleading
audit report. Accordingly, plaintiffs' Credit Alliance negligence claim "depends" on establishing
a misleading statement. Their letter cites no support for any conclusion to the contrary.
The Anwar plaintiffs cannot rely on the illustration in Kingate, because that illustration
does not involve a Credit Alliance negligence claim. To the contrary, in the illustration, the
plaintiff is in contractual privity with the auditor it is suing. A negligence claim by an auditor's
client is not subject to Credit Alliance, and does not necessarily require a showing that the
auditor engaged in false conduct. Jn contrast, the Anwar plaintiffs are not in privity with the
PwC Defendants, must satisfy Credir Alliance, and must plead and prove reliance on a false
statement by the PwC Defendants, which puts their claim in Group 2.
Plaintiffs cannot avoid this result by arguing that in order to trigger SLUSA preclusion,
the relevant misstatements must be "about a SLUSA-covered security." (Letter at 9; see also id.
al 2 (arguing that misrepresentation or omission must be "concerning" a covered security).)
Nothing in SLUSA, Kingate, or any other Supreme Court or Second Circuit case requires that
the misstatement "concern" or be "about" a SLUSA-covered security. Rather, the requirement is
that the misstatement be made "in connection with" a covered security, and the alleged false
statements by the PwC l)efendants here were unquestionably made "in connection with"
purported investments in covered securities. As explained in Kingare, in the Madoff context, "in
connection with" includes "negligent misrepresentations and misleading omissions in connection
with the Funds' investments with Madoff." Kingate, 784 F.3d at 151.
Plaintiffs allege that the PwC Defendants' misstatements include that "the Funds'
financial statements presented fairly, in all material respects the financial condition of the
Funds." (Letter at I 0.) And plaintiffs allege th.at this statement was false precisely because the
Funds financial statements misrepresented "the multi-billion dollar valuations of the Funds'
investments," i.e., the value of the listed "covered securities." (SCAC if 305 .) Simply put: The
Anwar plaintiffs allege that the PwC Defendants' representations in their audit reports that the

Kl RKlAND &.. ELLIS LLP

Hon. Victor Marrero
June 8, 2015
Page 3

financial statementc; were properly stated were false precisely because the financial statements
showed the Funds owned "covered securities" that did not, in fact, exist. Under Kingale, that is a
claim of false conduct "in connection with" a covered security, and therefore such a claim is
precluded by SLUSA.

II.

SLUSA Precludes Plaintiffs' Neglic:ent Misrepresentation Claim.

Plaintiffs assert that the "misstatements by PwC said nothing about Madoff or his
purported trading in covered securities. Nor do the misrepresentations in PwC's one-page audit
letters make any mention of Madoff or covered securities." (Letter at IO.) But Kingate does not
require explicit reference to covered securities. It is enough that the Anwar plaintiffs expressly
allege that the PwC Defendants' audit reports misrepresented both the audit work concerning the
covered securities and the accuracy of the Funds' financial statements, which reflected
ownership of the covered securities:
•

"PwC was required to plain and conduct audits that verified the existence
of the Funds' investments." (SCAC ~ 297.)

•

"PwC did not test the trades supposedly made by BMIS or confirm the
actual existence of securities in BMIS accounts. If PwC had made any
such efforts, it would have discovered the securities did not exist."
(SCAC ~ 310.)

•

"Had PwC performed appropriate audits (as it represented it had), it would
have learned that the securities transactions purportedly conducted by
Madoff did not occur and the assets of the Funds did not exist." (SCAC
~ 313.)

•

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

KIRKLAND &.. ELLIS LLP

Hon. Victor Marrero
June 8, 2015
Page 4

If alleging these misrepresentations does not put plaintiffs' claim into Group 2, it is hard to
imagine what would. 1

Conclusion
Both of plaintiffs' remaining claims against the PwC Defendants are precluded by
SLUSA and should be dismissed.
Respectfully,

.J~ o. rJJ~, Pc. / 1/,y
Timothy A. Duffy, P.C.
cc:

Counsel of Record (via email)

SO ORDERED .

6 :-cf- /J

.,,,,,.-

DATE

1

The Anwar plaintiffs are also mistaken in their suggestion that K111gart'! requires an "allegation that PwC was
complicit in Madoff's fraud involving covered securities." (Letter at I 0.) Nothing in Kingace suggests that
complicity in the underlying fraud is required for SLUSA preclusion. Indeed, the Second Circuit ordered the
Kingate Disl!'ict Court to dismiss negligent misrepresentation claims that, by their very nature, do not involve
See Kingate, 784 F .2d at 15 l.

complicit~ in any underlying fraud.