Anwar et al v. Fairfield Greenwich Limited et al

Filing 664

MEMORANDUM OF LAW in Support re: #663 MOTION for Reargument of Part of the Court's Order dated August 18, 2010.. Document filed by Pricewaterhouse Coopers Accountants N.V.. (Attachments: #1 Certificate of Service)(Maguire, William)

William R. Maguire
Sarah L. Cave
Gabrielle S. Marshall
HUGHES HUBBARD & REED LLP
One Battery Park Plaza
New York, New York 10004
[phone] (telephone)
[phone] (facsimile)
[e-mail]
Attorneys for Defendant PricewaterhouseCoopers Accountants N.V.
Andrew M. Genser
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
Tel: [phone]
Emily Nicklin, P.C.
Timothy A. Duffy, P.C.
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Tel: [phone]
[e-mail]
Attorneys for Defendant PricewaterhouseCoopers LLP
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ANWAR, et al.,
Plaintiffs,

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

v.
FAIRFIELD GREENWICH LTD., et al.,
Defendants.

MEMORANDUM OF LAW OF DEFENDANTS PRICEWATERHOUSECOOPERS
ACCOUNTANTS N.V. AND PRICEWATERHOUSECOOPERS LLP
IN SUPPORT OF MOTION FOR REARGUMENT

Defendants PricewaterhouseCoopers Accountants N.V. (“PwC Netherlands”) and
PricewaterhouseCoopers LLP (“PwC Canada”) submit this memorandum of law in support of
their motion pursuant to Local Civil Rule 6.3 for reargument of that part of the Court’s Decision
and Order dated August 18, 2010, 728 F. Supp. 2d 372 (S.D.N.Y. 2010) (“Anwar II”) which
denied PwC Netherlands’ and PwC Canada’s Motions to Dismiss the negligence claims in
Plaintiffs’ Second Consolidated Amended Complaint (the “Complaint”).
Preliminary Statement
Contrary to the conclusion in Anwar II, the Appellate Division, First Department recently
held, on virtually identical allegations as were made here, that an investor in a fund that invested
with Madoff may not sue the fund’s auditor for negligence. See CRT Invs., Ltd. v. BDO
Seidman, LLP, No. 601052/09, 2011 WL 2225050 (1st Dep’t June 9, 2011), attached hereto as
Exhibit A.
In Anwar II, this Court dismissed all of plaintiffs’ claims against PwC Netherlands and
PwC Canada except for the negligence and negligent misrepresentation claims (Counts 13 and
14). Plaintiffs based their negligence claims on the allegation that audited financial statements
were addressed to and received by investors in the funds. Applying Credit Alliance Corp. v.
Arthur Andersen & Co., 65 N.Y.2d 536 (1985), the Court found that plaintiffs’ allegations were
sufficient at the pleading stage to support plausible inferences that: (i) PwC Netherlands and
PwC Canada were aware that the plaintiffs would use the financial reports that the firms had
produced for the “particular purpose” of evaluating investments in the Fairfield Funds, (ii) the
investors were “known parties” to the firms, and (iii) the fact that the audit reports were
“addressed to” the Funds’ shareholders was sufficient to establish “linking conduct” evincing the
firms’ understanding of plaintiffs’ reliance. See Anwar II, 728 F. Supp. 2d at 457 (internal
citations omitted).
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In CRT Investments, the Appellate Division reached the contrary result on the same
allegations -- that the audited funds’ financial statements had been addressed to and received by
investors. The First Department unanimously held that these same allegations were insufficient
to sustain a claim by fund investors against the funds’ auditor. CRT Invs., 2011 WL 2225050,
at *2. This authoritative statement of New York state law mandates the same result in this case.
Argument
I.

APPLICABLE STANDARD FOR REARGUMENT.
“An intervening change in controlling law” such as this is one of the well-recognized

grounds for granting reargument. Anwar v. Fairfield Greenwich Ltd., No. 09 Civ 0118 (VM),
2010 WL 3834057, at *1 (S.D.N.Y. Sept. 13, 2010) (citing Virgin Atl. Airways, Ltd. v. Nat’l
Mediation Bd., 956 F.2d 1245, 1255 (2d Cir. 1992)); see also Anwar v. Fairfield Greenwich Ltd.,
745 F. Supp. 2d 379, 383-84 (S.D.N.Y. 2010) (granting motion for reconsideration to prevent
manifest injustice).
II.

RECENT NEW YORK CASE LAW ESTABLISHES THAT THE COMPLAINT
FAILS TO STATE NEGLIGENCE CLAIMS AGAINST PWC NETHERLANDS
AND PWC CANADA.
Under Credit Alliance, “[b]efore accountants may be held liable in negligence to non-

contractual parties who rely to their detriment on inaccurate financial reports, certain
prerequisites must be satisfied: (1) the accountants must have been aware that the financial
reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a
known party or parties was intended to rely; and (3) there must have been some conduct on the
part of the accountants linking them to that party or parties, which evinces the accountants’
understanding of that party or parties’ reliance.” 65 N.Y.2d at 551.
In CRT Investments, the plaintiffs invested in the Ascot Fund and Gabriel Capital, two
funds that invested in a New York fund called Ascot Partners, which in turn invested with

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Madoff. When the funds’ investments were lost in the Madoff fraud, the plaintiffs sued the
auditors of Ascot Partners and Gabriel Capital, BDO Seidman. The First Department affirmed
dismissal of the claims against BDO Seidman for failure to state a claim. CRT Invs., 2011 WL
2225050, at *2.
In support of their negligence claims, the plaintiffs in CRT Investments alleged that they
had received and relied on the fund’s audited financial statements. Id. In particular, the
plaintiffs claimed that “ . . . BDO Seidman’s audit report was addressed specifically to the
‘Limited Partners’ of Ascot Partners and Gabriel Capital.”1 Accordingly, the First Department
found that the plaintiffs’ allegations of “linking conduct” were limited to claims that they “were
entitled to and received a copy of the audited financial statements,” and that “BDO Seidman
knew that the investors would rely upon the information contained in the financial statements.”
CRT Invs., 2011 WL 2225050, at *2. The First Department held that such “minimal or
nonexistent” contact does not establish the “direct nexus necessary” to impose a duty on the
accountant toward the plaintiff investors. Id. The court emphasized that “BDO Seidman’s work
in the course of the audit was performed pursuant to professional standards applicable in the
context of any audit, and was not undertaken pursuant to any specific duty owed to plaintiffs.”
Id.

1.

CRT Invs., Ltd. v. Merkin, No. 601052/2009, Amended Complaint ¶ 49, filed June 2, 2009, available at
https://iapps.courts.state.ny.us/nyscef/ViewDocument?docIndex=IgUmTpvBOVJyDWrN44mR6g==. See also
CRT Invs., Ltd. v. Merkin, No. 601052/09, 2010 WL 4340433, at *3 (N.Y. Sup. Ct. May 5, 2010) (referring to
allegations that the audited financial statements of Ascot Fund and Gabriel Capital were “addressed to”
plaintiffs). The allegations of “linking conduct” between the plaintiffs and the auditors also included the
allegation that, “[o]nce CRT invested in Ascot Fund, it regularly received audited financial statements. . . .
Attached to the Ascot Fund financial statements that CRT received were the Ascot Partners audited financial
statements prepared by BDO Seidman. . . . BDO Seidman’s audited financial statements of the Ascot funds
were sent to CRT in New York.” CRT Invs. Am. Compl. ¶ 47.

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In Anwar II, this Court held that “actual face to face or similar direct contact” between
plaintiffs and the auditors was not required, and therefore, the fact that the Fairfield funds’ audit
reports were addressed to the plaintiffs “was sufficient to show linking conduct evincing the
PwC Member [Firms’] understanding of investors’ reliance.” Anwar II, 728 F. Supp. 2d at 456.
The intervening decision of CRT Investments demonstrates, however, that such “minimal or
nonexistent” contact is not sufficient to satisfy the “linking conduct” prong of Credit Alliance.
CRT Invs., 2011 WL 2225050, at *2 (citing Sec. Pac. Bus. Credit v. Peat Marwick Main & Co.,
79 N.Y.2d 695, 706 (1992)).
Rulings “from [state intermediate appellate courts] are a basis for ‘ascertaining state law
which is not to be disregarded by a federal court unless it is convinced by other persuasive data
that the highest court of the state would decide otherwise.’” DiBella v. Hopkins, 403 F.3d 102,
112 (2d Cir. 2005) (quoting West v. AT&T, 311 U.S. 223, 237 (1940)). The Credit Alliance
analysis employed by the First Department in CRT Investments is a sound indicator of how the
New York Court of Appeals would rule on this same issue.
Indeed, a recent decision by the Court of Appeals applying the Credit Alliance analysis to
negligence claims against a professional engineer is consistent with the First Department’s
analysis in CRT Investments. In Sykes v. RFD Third Avenue 1 Associates, LLC, the New York
Court of Appeals focused on the “known party” prong of Credit Alliance in affirming dismissal
of a negligent misrepresentation claim against building engineers. 15 N.Y.3d 370, 373-74
(2010).
In Sykes, plaintiff apartment owners, who had received and relied on offering plans prior
to purchasing their apartments, claimed that the defendant mechanical engineers, Cosentini
Associates, made negligent misrepresentations in the offering plans about the heating and air

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conditioning systems. Sykes, 15 N.Y.3d at 372. The Court of Appeals held that plaintiffs failed
to sufficiently allege that they were “known parties”, about whose reliance the defendant
engineers should have known. Id. at 373-74. The Court of Appeals explained:
While Cosentini obviously knew in general that prospective purchasers of
apartments would rely on the offering plan, there is no indication that it
knew these plaintiffs would be among them, or indeed that Cosentini knew
or had the means of knowing of plaintiffs’ existence when it made the
statements for which it is being sued.
Id. The Court of Appeals emphasized that “[t]he words ‘known party or parties’ in the Credit
Alliance test mean what they say.” Id. To make this point, the court explained its decision in
Westpac Banking Corp. v. Deschamps, 66 N.Y.2d 16 (1985), which the Court issued shortly after
its decision in Credit Alliance. Id. at 373-74. Westpac had made a bridge loan to Turnkey and
then sued Turnkey’s auditors when Turnkey failed to repay the loan. Id. “Westpac alleged that,
when [Turnkey’s auditor] Seidman made the certification [of Turnkey’s financial statements], it
knew that a bridge lender would rely on it, and that it knew or could have known that Westpac
was a possible bridge lender.” Id. The Court of Appeals held that this was not enough:
Westpac claims only that it was one of a class of ‘potential bridge lenders,’ to
which class as a whole Seidman owed a duty, and that it should be considered a
‘known party’ because it was as of the date of the certification a substantial lender
to Turnkey, and ‘thus a prime candidate for a bridge loan.’ This is not, however,
the equivalent of knowledge of the identity of the specific nonprivy party who
would be relying on the audit reports’ (Credit Alliance Corp. v. Anderson & Co.,
65 NY2d, at p 554…).
Sykes, 15 N.Y.3d at 373-74 (quoting Westpac, 66 N.Y.2d at 19). The court observed that
Westpac “was, if anything, a stronger case for the plaintiff” than Sykes because the Westpac
plaintiff was already a lender to the auditor’s client at the time of the audit. Id. at 374. In Sykes,
on the other hand, it was “not even alleged that Cosentini knew or had the means of knowing that
plaintiffs were possible purchasers of an apartment.” Id. The Court of Appeals concluded that
because the engineers in Sykes “did not know ‘the identity of the specific nonprivy party who
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would be relying,’ the complaint falls short of satisfying the Credit Alliance test.” Id. (internal
citation omitted).
The Sykes and Westpac decisions illustrate that the First Department’s decision in CRT
Investments is consistent with the Court of Appeals’ application of the “known party” prong, and
as such, the decision in CRT Investments is a reliable indicator of how the Court of Appeals
would decide the issue. See Michalski v. Home Depot, Inc., 225 F.3d 113, 116 (2d Cir. 2000)
(“In determining how the Court of Appeals would rule on [a] question, the decisions of New
York State’s Appellate Division are helpful indicators.”). CRT Investments demonstrates that, in
order to establish a duty on the part of accountants to investors, a negligence claim must allege
conduct more substantial than the mere fact that financial statements were sent or even addressed
to investors. CRT Invs., 2011 WL 2225050, at *2. Plaintiffs’ negligence claims here failed to do
so, and, accordingly, should be dismissed.

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Conclusion
For the foregoing reasons, defendants PwC Netherlands and PwC Canada respectfully
request that this Court allow reargument of those portions of PwC Netherlands’ and PwC
Canada’s Motions To Dismiss directed to plaintiffs’ negligence claims (Counts 13 and 14), and
dismiss those claims against PwC Netherlands and PwC Canada.
Dated: New York, New York
June 23, 2011
Respectfully submitted,

/s/ William R. Maguire
William R. Maguire
Sarah L. Cave
Gabrielle S. Marshall
HUGHES HUBBARD & REED LLP
One Battery Park Plaza
New York, New York 10004
Tel: [phone]
[e-mail]
Attorneys for Defendant
PricewaterhouseCoopers Accountants N.V.
Andrew M. Genser
KIRKLAND & ELLIS LLP
601 Lexington Avenue
New York, New York 10022
Tel: [phone]
Emily Nicklin, P.C.
Timothy A. Duffy, P.C.
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Tel: [phone]
[e-mail]
Attorneys for Defendant
PricewaterhouseCoopers LLP

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