Anwar et al v. Fairfield Greenwich Limited et al

Filing 1468

PwC DEFENDANTS' MEMORANDUM OF LAW IN OPPOSITION TO PLAINTIFFS' MOTION IN LIMINE NO. 3 TO EXCLUDE DECISIONS REACHED IN OTHER CASES OR PROCEEDINGS. This Document was previously filed under seal in envelope doc. number 1458 and unsealed pursuant to Order doc. number 1463. (rjm)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
:
:
ANWAR, et al.,
:
Plaintiffs,
:
v.
:
:
FAIRFIELD GREENWICH LTD., et al.,
:
:
Defendants.
:
:
:

MASTER FILE NO.
09-CV-00118 (VM)

PwC DEFENDANTS’ MEMORANDUM OF LAW
IN OPPOSITION TO PLAINTIFFS’ MOTION IN LIMINE NO. 3 TO
EXCLUDE DECISIONS REACHED IN OTHER CASES OR PROCEEDINGS

FILED UNDER SEAL PURSUANT TO CONFIDENTIALITY ORDER

William R. Maguire
Sarah L. Cave
HUGHES HUBBARD & REED LLP
One Battery Park Plaza
New York, New York 10004
Tel: [phone]

Emily Nicklin, P.C.
Timothy A. Duffy, P.C.
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Tel: [phone]

Attorneys for Defendant
PricewaterhouseCoopers Accountants N.V.

Attorneys for Defendant
PricewaterhouseCoopers LLP

TABLE OF CONTENTS
Page(s)
PRELIMINARY STATEMENT .....................................................................................................1
BACKGROUND OF DUTCH DECISIONS ..................................................................................3
The Decision of the Disciplinary Council ...........................................................................3
The Decision of the Dutch Court .........................................................................................4
ARGUMENT ...................................................................................................................................5
I.

The Decisions Of The Disciplinary Council And Dutch Court Regarding
PwC Netherlands’ Audits Of The Funds Are Relevant And Admissible. ...........................5
A.
B.

The Decisions Are Critical Impeachment Evidence. ...............................................7

C.
II.

The Decisions Evaluated The Same Audits
Under The Same Standards That Apply Here..........................................................5

Rule 403 Does Not Justify Exclusion Of The Evidence. .........................................9

The Other Decisions Are Also Admissible..........................................................................9

CONCLUSION ..............................................................................................................................12

(i)

TABLE OF AUTHORITIES
Page(s)
CASES
A.I. Trade Fin., Inc. v. Centro Internationale Handelsbank AG, 926 F. Supp. 378
(S.D.N.Y. 1996) .........................................................................................................................9
Daubert v. Merrell Dow Pharm., 509 U.S. 579 (1993) ...................................................................8
Ebbert v. Nassau Cnty., No. CV 05-5445 (FB) (AKT), 2008 WL 4443238 (E.D.N.Y.
Sept. 26, 2008) ...........................................................................................................................7
Hart v. RCI Hospitality Holdings, Inc., 90 F. Supp. 3d 250 ............................................................9
Hollman v. Taser Int’l Inc., 928 F. Supp. 2d 657 (E.D.N.Y. 2013) ................................................8
KPMG LLP v. Eastham Capital Appreciation Fund L.P., et al., No. 654139-2013, 2013
WL 7018202 (N.Y. Sup. Ct. Aug. 21, 2013) ....................................................................10, 11
MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, No. 09 CIV. 3255, 2012 WL 2568972
(S.D.N.Y. July 3, 2012) .............................................................................................................8
Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531 (S.D.N.Y. 1990) .............................6
Poe v. Charlotte Mem’l Hosp., Inc., 374 F. Supp. 1302 (W.D.N.C. 1974) .....................................6
TVT Records v. Island Def Jam Music Grp., 250 F. Supp. 2d 341 (S.D.N.Y. 2003) ......................6
United States v. Garland, 991 F.2d 328 (6th Cir. 1993) ..................................................................9
STATUTES AND RULES
Fed. R. Evid. 105 .............................................................................................................................9
Fed. R. Evid. 403 .............................................................................................................................9

(ii)

Defendants PricewaterhouseCoopers Accountants N.V. (“PwC Netherlands”) and
PricewaterhouseCoopers LLP (“PwC Canada”) (collectively, the “PwC Defendants”)
respectfully submit this memorandum of law in opposition to Plaintiffs’ Motion in Limine No. 3
to exclude decisions reached in other cases or proceedings.
PRELIMINARY STATEMENT
Plaintiffs’ motion seeks to exclude evidence about two types of decisions: (1) two
decisions rejecting claims that PwC Netherlands’ audits of the Funds did not comply with the
professional auditing standards; and (2) decisions in other cases involving auditors of similarly
situated Madoff funds. The jury should be allowed to consider evidence about both types of
decisions.
With respect to the first category, Plaintiffs seek to exclude evidence that the Disciplinary
Council of Accountants and Auditors of the Netherlands (the “Disciplinary Council”) issued a
decision rejecting a complaint brought by investors in the Funds against a PwC Netherlands
engagement partner, Fred Gertsen, alleging that the audits he led did not comply with
International Standards on Auditing (“ISA”), and that the District Court of Amsterdam (the
“Dutch Court”) issued a decision rejecting a similar complaint brought by investors in the Funds
against PwC Netherlands alleging that its audits did not comply with ISA.
Plaintiffs’ argument that these decisions lack probative value because they were based on
different facts and circumstances, a different record, and a different legal standard (Pls.’ Mot. at
3-4), is wrong. The Disciplinary Council and the Dutch Court addressed the exact same
criticisms about the audits that Plaintiffs make here and considered whether the audits were
conducted in accordance with ISA – the same issue to be resolved in this case. And the
decisions were not, as Plaintiffs assert, “based on pleadings” (id. at 3); rather, they were reached

after consideration of exhibits, including the relevant audit workpapers, and a public hearing at
which witnesses were questioned.
That does not, of course, mean that the decisions are binding on the jury, but they are
plainly relevant and admissible. Among other reasons, the decisions are necessary to a proper
evaluation of the reliability of the opinions offered by the Plaintiffs’ audit expert, Dr. Douglas R.
Carmichael. Dr. Carmichael opines that the PwC Defendants failed to comply with the
professional standards because they did not perform certain procedures that he believes were
necessary to verify the existence of the Funds’ assets at BLMIS. But that exact same assertion
about the same procedures was rejected by the Disciplinary Council – the governing body of
auditors in the Netherlands – and by the Dutch Court. The PwC Defendants are entitled to crossexamine Dr. Carmichael, who has never signed an audit report, regarding this evidence, which
contradicts and undermines his opinions. The evidence is similarly important to a proper
evaluation of the PwC Defendants’ experts and of Mr. Gertsen, who all will testify that the
procedures suggested by Dr. Carmichael were not required by the professional standards, a
conclusion corroborated by the decisions of the Disciplinary Council and Dutch Court.
With respect to the decisions in other Madoff-related actions, there are two ways in
which the evidence is relevant, admissible, and probative. First, similar to the rationale for the
Dutch Court decision, these rulings by various courts are probative evidence that the theories
advanced by plaintiffs’ auditing expert, Dr. Carmichael, are not consistent with Generally
Accepted Auditing Standards in the United States (U.S. GAAS). Second, the decisions provide
reliable evidence as to what information other auditors, similarly situated to the PwC Defendants
obtained from BLMIS and what, if any, audit procedures they performed at BLMIS. As such,
the PwC Defendants’ experts are entitled to rely upon them, and use them at trial as evidence of

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the conduct of other auditors, even if the Court determines that the decisions themselves should
not be presented to the jury with respect to the legal rulings reflected therein.
BACKGROUND OF DUTCH DECISIONS
Plaintiffs’ motion reflects a misunderstanding of the issues addressed in the decisions of
the Disciplinary Council and Dutch Court and the evidentiary record on which those decisions
were based. The following description of the proceedings can be derived from the relevant
decisions and from the anticipated testimony of Mr. Gertsen.
The Decision of the Disciplinary Council
In the Netherlands, disciplinary proceedings concerning auditors are conducted before the
Disciplinary Council, which is a five-member body consisting of three appointed judges and two
accountants.
In January 2011, certain investors in the Funds filed a complaint against Mr. Gertsen with
the Disciplinary Council claiming that PwC Netherlands’ audits of the Funds did not comply
with the relevant professional standards.1 The investors filed exhibits with their complaint and,
in response, Mr. Gertsen filed a statement of defense that included as exhibits the relevant
workpapers that reflected the audit work PwC Netherlands conducted with respect to the
existence of the Funds’ assets. The investors and Mr. Gertsen filed additional briefs and exhibits
in advance of a public hearing before the Disciplinary Council that was held on July 1, 2011.
(Cave Decl. Ex. 9 (Disciplinary Council Decision § 1).) During the hearing, the Disciplinary
Council asked questions of Mr. Gertsen and another PwC Netherlands auditor, Chris Meijnders.

1.

The investors that filed the claim were Colima International Limited and Merus Trident Trust Company
Limited, and Stichting Fairfield Compensation Foundation, a Dutch entity that had been transferred the claims
of over 700 other investors in the Funds. (See Decl. of Sarah L. Cave in Supp. of the PwC Defs.’ Mem. of Law
in Opp’n to Pls.’ Mots. in Limine (“Cave Decl.”) Ex. 9 (Disciplinary Council Decision § 2.1).)

3

On January 6, 2012, the Disciplinary Council issued its decision on the merits, declaring
the complaint unfounded. (Id. § 5.) The Disciplinary Council rejected the investors’ argument
that Mr. Gertsen and PwC Netherlands did not have a sufficient basis to issue their opinions on
the Funds’ financial statements. (Id. § 4.7.2.)
In light of all the evidence, the Disciplinary Council concluded that Mr. Gertsen and PwC
Netherlands were entitled to rely on confirmations of the existence of assets held by BLMIS
“even where these originated from B[L]MIS itself.” (Id.) Therefore, the Disciplinary Council
rejected the argument that “Gertsen should have consulted with B[L]MIS’s auditor in order to
obtain insight into the scope of the latter’s audits” or that he should have made “inquiries with
the Depository Trust Company (DTC) and the Bank of New York (BNY).” (Id.) With respect to
the latter proposed procedure, the Disciplinary Council concluded that it “would have been
pointless” because the DTC would have had no information about the Fairfield funds. There is
no dispute that BLMIS had other clients besides the funds, so BLMIS client securities would
have been “held as aggregated positions in the name of B[L]MIS with DTC and with BNY.”
(Id.) In reaching its conclusion, the Disciplinary Council found support in the fact that no other
auditors performed the procedures that the investors claimed should have been performed by
PwC Netherlands. (Id.)
The investors elected not to exercise their right to appeal the Disciplinary Council
decision.
The Decision of the Dutch Court
Two of the same entities that filed the complaint with the Disciplinary Council (Colima
and the Stichting Foundation that holds the claims of more than 700 investors) subsequently filed
an action seeking damages against PwC Netherlands in the Amsterdam District Court raising the
same basic claim related to the audits of the Funds. (Cave Decl. Ex. 10 (District Court
4

Decision).) The parties submitted comprehensive briefs and more than 75 exhibits, including the
relevant workpapers reviewed by the Disciplinary Council. A hearing was held on July 3, 2014.
(Id. § 1.1.)
On September 3, 2014, the three-judge panel of the Dutch Court rendered its judgment
rejecting the investors’ claim against PwC Netherlands. (Id. § 7.) As explained by the Dutch
Court, “[t]he core of the dispute is whether PwC performed the auditing of the financial
statements of the Funds in a manner that may be expected from a reasonably acting and
reasonably competent external auditor.” (Id. § 5.1.) The Dutch Court concluded that the
investors had not provided any basis for the Dutch Court to disagree with the decision of the
Disciplinary Council, and thus rejected the investors’ argument that “PwC did not act as befits a
reasonably acting and reasonably competent auditor” when auditing the Funds. (Id. §§ 5.4, 5.5.)
The investors have appealed the judgment of the Dutch Court to the Court of Appeal for
Amsterdam.
ARGUMENT
I.

The Decisions Of The Disciplinary Council And Dutch Court Regarding
PwC Netherlands’ Audits Of The Funds Are Relevant And Admissible.
A.

The Decisions Evaluated The Same Audits
Under The Same Standards That Apply Here.

As the above description of the decisions makes clear, Plaintiffs’ argument that evidence
of the decisions of the Disciplinary Council and Dutch Court should be excluded because the
decisions were “based on different facts and circumstances” or were “based on pleadings” is
simply wrong. (Pls.’ Mot. at 3.) The facts and circumstances were, in fact, identical. The
proceedings were initiated by investors in the Funds based on claims that the very same audits at
issue here were deficient for the very same reasons.

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And the decisions were not based only on “pleadings” but rather were reached after a
public hearing at which witnesses were questioned and the review of dozens of exhibits,
including the relevant workpapers.2 Thus, Plaintiffs’ reliance on cases standing for the
proposition that “preliminary findings” are “not binding on a jury at trial” misses the mark.
(Pls.’ Mot. at 3-4.) The decisions were not “preliminary” and the PwC Defendants do not argue
that the decisions are binding on the jury; simply that evidence of the decisions is admissible.
Cf. TVT Records v. Island Def Jam Music Grp., 250 F. Supp. 2d 341, 347 (S.D.N.Y. 2003)
(findings at preliminary injunction hearing are not binding on the jury); Poe v. Charlotte Mem’l
Hosp., Inc., 374 F. Supp. 1302, 1312 (W.D.N.C. 1974) (findings in decision issuing temporary
restraining order are not binding on jury).
Similarly misguided is Plaintiffs’ argument that evidence of the decisions must be
excluded because they involved different legal standards. (Pls.’ Mot. at 4.) The standard by
which the audits were evaluated in the Netherlands is the same as the standard the jury will apply
here: “whether PwC performed the auditing of the financial statements of the Funds in a manner
that may be expected from a reasonably acting and reasonably competent external auditor.”
(Cave Decl. Ex. 10 (District Court Decision § 5.1); see Cave Decl. Ex. 9 (Disciplinary Council
Decision § 4.72).) See Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 538
(S.D.N.Y. 1990) (auditors undertake “to observe generally accepted auditing standards and

2.

Plaintiffs note that the Disciplinary Council issued its decision without reviewing the entire PwC Netherlands
audit file. (Cave Decl. Ex. 9 (Disciplinary Council Decision § 4.7.3).) But that is because, as the Dutch Court
observed, there was no dispute that PwC Netherlands did not perform the procedures that the investors there
(and Plaintiffs here) claim were required and therefore inspection of the entire audit file was unnecessary to
determine the claim. (Cave Decl. Ex. 10 (District Court Decision § 6.1).)

6

professional guidelines, with the appropriate reasonable, honest judgment that a reasonably
skillful and prudent auditor would use under the same or similar circumstances”).3
B.

The Decisions Are Critical Impeachment Evidence.

Plaintiffs ignore the PwC Defendants’ rights to cross-examine Plaintiffs’ audit expert
about matters that impeach his opinions and to the jury’s consideration of the applicable standard
of care.
Dr. Carmichael has opined that the professional standards required an auditor of a fund
with substantially all its assets at BLMIS to perform certain procedures: either independently
verify with the Bank of New York or Depository Trust Company the existence of assets held by
BLMIS or, alternatively, review the work performed by BLMIS’s auditor. (Cave Decl. Ex. 1
(Carmichael Rep. at 15, 154-56); see also Cave Decl. Ex. 2 (Carmichael Rebuttal Rep. at 32, 36);
Cave Decl. Ex. 3 (Carmichael Tr. 63:17-64:3).) According to Dr. Carmichael, no reasonable
auditor could have issued an unqualified opinion in similar circumstances without performing
one of these procedures. (Cave Decl. Ex. 3 (Carmichael Tr. 97:17-24).)
As discussed above, this opinion was directly rejected by the Disciplinary Council and
the Dutch Court. The PwC Defendants must be permitted to confront Dr. Carmichael with
evidence of this rejection of his opinions. Indeed, as explained more fully in the PwC
Defendants Opposition to Plaintiffs’ Motion in Limine No. 1, Dr. Carmichael’s only basis for his
opinions is his say-so. He has no actual experience in performing audits of investment funds, no
other auditor of a similarly situated fund interpreted the standards as he does, and the

3.

Thus, Plaintiffs’ complaint that the PwC Defendants’ experts are not qualified to describe the “different legal
standards and concepts that applied in these other proceedings” is without merit. (Pls.’ Mot. at 5.) The expert
and fact witnesses will discuss whether the audits were conducted in accordance with ISA; they will not be
called upon to discuss their view of the law, either in New York or the Netherlands. Cf. Ebbert v. Nassau Cnty.,
No. CV 05-5445 (FB) (AKT), 2008 WL 4443238, at *7 (E.D.N.Y. Sept. 26, 2008) (striking portions of expert
report offering legal conclusions).

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interpretation of the standards in the governing professional literature is also contrary to Dr.
Carmichael’s view. The PwC Defendants must be permitted to establish through crossexamination that Dr. Carmichael’s opinion has also been rejected by the governing body of
accountants in the Netherlands.
Where expert testimony is deemed admissible, “vigorous cross examination, presentation
of contrary evidence, and careful instruction on the burden of proof are the traditional and
appropriate means” to attack the expert evidence. E.g., MBIA Ins. Corp. v. Patriarch Partners
VIII, LLC, No. 09 CIV. 3255, 2012 WL 2568972, at *15 (S.D.N.Y. July 3, 2012); see Hollman v.
Taser Int’l Inc., 928 F. Supp. 2d 657, 670 (E.D.N.Y. 2013) (“[I]t is up to the opposing party to
examine the factual basis for the opinion in cross-examination.”). The PwC Defendants must be
afforded the ability to attack Dr. Carmichael’s opinions by conducting meaningful crossexamination, the “traditional and appropriate means of attacking shaky but admissible evidence.”
Daubert v. Merrell Dow Pharm., 509 U.S. 579, 596 (1993). Prohibiting cross-examination of
Dr. Carmichael on the rejection of his opinions by the Disciplinary Council and Dutch Court
would deprive the PwC Defendants of this fundamental right.
Exclusion of this evidence would also unfairly restrict the jury’s consideration of
evidence relevant to determining the appropriate standard of care. Fred Gertsen, the PwC
Netherlands audit partner who was vindicated in the Disciplinary Council decision, and the PwC
Defendants’ audit experts will all testify that the procedures identified by Dr. Carmichael were
not required by the applicable standard of care. This conclusion is corroborated by, among other
things, the similar conclusion reached by the Disciplinary Council and Dutch Court. The jury is

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entitled to consider this evidence in evaluating the testimony of Mr. Gertsen and the PwC
Defendants’ experts and weighing that against Dr. Carmichael’s beliefs.4
C.

Rule 403 Does Not Justify Exclusion Of The Evidence.

Nor is there any basis to exclude evidence of the decisions under Rule 403. (Pls.’ Mot. at
4-5.) These decisions are highly probative to critical issues in the case – the basis for the
opinions of the parties’ experts and the relevant standard of care. The PwC Defendants do not
seek to admit evidence of the decisions as binding on the jury’s determination of any issue and
any concern that might exist in that regard can be dealt with through an appropriate instruction.
See Fed. R. Evid. 105. There is no basis to find that the risk of confusion substantially outweighs
the probative value of the evidence.
Finally, Plaintiffs’ objection to the introduction of the actual decisions is no basis for
exclusion of any evidence about the decisions. (Pls.’ Mot. at 6-7.) The PwC Defendants do not
seek to place lengthy legal decisions in evidence and ask the jury to “decode them.” Hart v. RCI
Hospitality Holdings, Inc., 90 F. Supp. 3d 250, 276-277 (S.D.N.Y. 2015). But, whether the text
of the decisions is admitted or not, the PwC Defendants are entitled to introduce evidence of the
fact that the Disciplinary Council and Dutch Court rendered decisions rejecting the argument that
the procedures identified by Dr. Carmichael were required by the professional standards.
II.

The Other Decisions Are Also Admissible.
As the Court is well aware, the Madoff fraud spawned a number of legal proceedings. In

some of those proceedings, the public record evidences certain facts as to the audit work
performed by other firms auditing funds with investments held by BLMIS. The PwC

4.

The Court can, of course, take judicial notice of the decisions and their contents, even where the truth of the
statements in the decisions is subject to dispute. See A.I. Trade Fin., Inc. v. Centro Internationale Handelsbank
AG, 926 F. Supp. 378, 387 (S.D.N.Y. 1996) (citing United States v. Garland, 991 F.2d 328, 335 (6th Cir.
1993)).

9

Defendants’ experts have reviewed and relied upon these documents in forming their opinions
that none of the other dozens of auditors similarly situated to the PwC Defendants obtained more
information from, or performed any more extensive audit procedures at, BLMIS than did the
PwC Defendants. This fact is a critical component of the PwC Defendants’ evidence that shows,
contrary to Plaintiffs’ claims, that their work complied with applicable professional standards,
ISA and U.S. GAAS in the case of PwC Netherlands and U.S. GAAS in the case of PwC
Canada.
One example of the documents Plaintiffs seek to exclude from evidence is the Arbitration
Award in KPMG LLP v. Eastham Capital Appreciation Fund L.P., et al., No. 654139-2013,
2013 WL 7018202 (N.Y. Sup. Ct. Aug. 21, 2013) (the “KPMG Decision”). This proceeding
arose from audits performed by KPMG LLP (the U.S. firm) of the financial statements of the
Rye funds. Id. at 3. The Rye funds, like the Fairfield Greenwich Group (“FGG”) funds,
participated in the exact same “split-strike conversion” in which BLMIS purported to initiate
purchases and sales of securities based on its proprietary method, execute those transactions as
an SEC-registered broker-dealer, and hold custody of significant portions of the various funds’
assets. Indeed, the Rye funds and the FGG funds would share in pro rata allocations of the same
trades reported by BLMIS for all of its split-strike fund clients.
The KPMG Decision recounts the audit procedures undertaken by KPMG with respect to
BLMIS and reveals, essentially, that KPMG confirmed the existence of the assets with BLMIS
but did not seek any additional information from BLMIS with respect to its operations or
controls. Id. at 3. KPMG defended against the claims against it by arguing it was not required to
do more under U.S. GAAS. Id. at 3-4. The Panel agreed, finding that the issue of whether the
auditing standards required KPMG to do additional audit work was “unquestionably a judgment

10

call,” id. at 4, and that the plaintiffs had failed to present any evidence showing that KPMG’s
decision to not perform additional work was not what a “reasonably skillful and diligent
accountant[] would do under circumstances like those of the 2007 Rye funds audit [or] that any
other audit of a Madoff investor ever resulted in a qualified opinion.” Id. at 4.
The KPMG decision is relevant and highly probative here for three reasons: first, it
confirms that Plaintiffs have the burden to show that the PwC Defendants acted as no reasonable
auditor would have under the circumstances. Second, it evidences that KPMG performed
significantly fewer audit procedures than the PwC Defendants. The PwC Defendants, in addition
to confirming the assets held by BLMIS as KPMG did, visited BLMIS and made inquiries of
Madoff and other personnel to gain an understanding of its key internal controls and also
gathered evidence of the effective operation of those key controls via a review of BLMIS’s SEC
Rule 17a-5 Report on Internal Controls and its audited Statement of Financial Condition. Third,
it explains that plaintiffs failed to prove KPMG was negligent, and is thus probative evidence
that the PwC Defendants exercised their professional judgment in a manner consistent with other
professionals (and, indeed, forms part of the evidence that shows no fund auditor took the
approach advocated by Plaintiffs here), and was therefore not held to have violated applicable
professional standards.
Even if the Court were to conclude that it would be confusing to the jury or prejudicial to
Plaintiffs’ case for the jury to be shown the KPMG decision, the PwC Defendants should
nevertheless be allowed to rely on it – and other similar documents from various proceedings –
to show the facts concerning work done by other audit professionals and how the PwC
Defendants audit work was consistent with, or exceeded, that audit work, and that no other fund
auditor took the approach advocated by the Plaintiffs.

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