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)

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Kl RKLAND &... ELLIS LLP /\ND AHILIAnC> PAR.TNE.R5HWS 300 North LaSalle Street Chicago. llilno1~ 60654 Timothy A. Duffy.PC To Call Writer Dlractty: (312) 862-2445 Facsimile (312) 862-2200 ('.312) 862-2000 www.k.irkland com I , . rcr 1 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 Hong Kong London Los Angeles Murueh New York Pelo Alie San l'ranclsco Shanghai Washington.DC. 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 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.

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