Anwar et al v. Fairfield Greenwich Limited et al

Filing 786

MEMORANDUM OF LAW in Opposition re: #775 FIRST MOTION to Certify Class.. Document filed by Pricewaterhouse Coopers Accountants N.V., Pricewaterhousecoopers L.L.P.. (Attachments: #1 Certificate of Service)(Maguire, William)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PASHA S. ANWAR, et al.,
Plaintiffs,
v.
FAIRFIELD GREENWICH LIMITED, et al.,

Master File No. 09-cv-118 (VM)

Defendants.
This Document Relates To: All Actions

MEMORANDUM OF LAW OF PRICEWATERHOUSECOOPERS LLP
AND PRICEWATERHOUSECOOPERS ACCOUNTANTS N.V. IN
OPPOSITION TO PLAINTIFFS’ MOTION FOR CLASS CERTIFICATION
Timothy A. Duffy
KIRKLAND & ELLIS LLP
300 North LaSalle
Chicago, Illinois 60654
Tel: [phone]
[e-mail]

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

Attorneys for PricewaterhouseCoopers LLP
Attorneys for PricewaterhouseCoopers
Accountants N.V.

TABLE OF CONTENTS
Page
I.

Individual Issues of Reliance Bar Certification Against the PwC Firms.............................1
A.

Plaintiffs Cannot Prove Reliance on a Class-Wide Basis. .......................................1

B.

The Claims of the Proposed Class Representatives Are Not
Typical of Those of the Proposed Class. .................................................................3

II.

Individual Issues Will Also Preclude Plaintiffs from Satisfying the Credit Alliance
Test on a Class-Wide Basis..................................................................................................5

III.

Individualized Inquiry Is Also Necessary With Respect to Affirmative Defenses. ............7

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TABLE OF AUTHORITIES
Page(s)
CASES
Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 269 F.R.D. 252 (S.D.N.Y. 2010).......2, 3
Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) ............................................3
Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010) ................................1, 7
Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52 (2d Cir. 2000)..............................3
Credit Alliance Corp. v. Arthur Anderson & Co., 65 N.Y.2d 536 (1985) .......................................6
CRT Invs., Ltd. v. BDO Seidman, LLP, 85 A.D.3d 470 (1st Dep’t 2011) .......................................6
In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992) .....................................3
Global Fin. Corp. v. Triarc Corp., 93 N.Y.2d 525 (1999) ..............................................................7
Gunnells v. Healthplan Servs., Inc., 348 F.3d 417 (4th Cir. 2003) .................................................1
Hous. Works, Inc. v. Turner, 179 F. Supp. 2d 177 (S.D.N.Y. 2001) ...............................................6
Levitt v. PricewaterhouseCoopers, LLP, No. 04 Civ. 5179, 2007 WL 2106309 (S.D.N.Y.
July 19, 2007).............................................................................................................................3
Malack v. BDO Seidman, LLP, 617 F.3d 743 (3d Cir. 2010) ..........................................................2
Marisol A. v. Giuliani, 126 F.3d 372 (2d Cir. 1997) .......................................................................3
McLaughlin v. Am. Tobacco Co., 522 F.3d 215 (2d Cir. 2008) ......................................................2
Myers v. Hertz Corp., 624 F.3d 537 (2d Cir. 2010), cert. denied, 132 S. Ct. 286 (2011) ...............7
Oscar v. BMW of N. Am., LLC, 274 F.R.D. 498 (S.D.N.Y. 2011) ..................................................3
Piteo v. Gottier, 963 A.2d 83 (Conn. App. 2009) ............................................................................7
Robinson v. Metro-North Commuter R.R. Co., 267 F.3d 147 (2d Cir. 2001) ..................................1
Saltz v. First Frontier, LP, 782 F. Supp. 2d 61 (S.D.N.Y. 2010) ....................................................6
SIPC v. BDO Seidman, LLP, 222 F.3d 63 (2d Cir. 2000) ...........................................................2, 6
Starr v. Georgeson S’holder, Inc., 412 F.3d 103 (2d Cir. 2005) .....................................................3

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TABLE OF AUTHORITIES
(Continued)
Page(s)
Sykes v. RFD Third Ave. 1 Assocs., LLC, 15 N.Y.3d 370 (2010) ....................................................6
UFCW Local 1776 v. Eli Lilly & Co., 620 F.3d 121 (2d Cir. 2010) ...............................................2
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) .................................................................1
Windsong Lane Farms v. Telmark, LLC, 77 A.D.3d 1395 (4th Dep’t 2010) ..................................7
STATUTES AND RULES
Fed. R. Civ. P. 23 .............................................................................................................................3
N.Y. C.P.L.R. § 202 .........................................................................................................................7

iii

As outlined in defendants’ joint brief, class certification is not appropriate in this
litigation. This is especially true of plaintiffs’ claims against PricewaterhouseCoopers LLP
(“PwC Canada”) and PricewaterhouseCoopers Accountants N.V. (“PwC Netherlands”). The
predominance inquiry must be conducted “by examining each cause of action independently of
one another, not the entire lawsuit.” Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 441 (4th
Cir. 2003) (collecting cases); see Robinson v. Metro-North Commuter R.R. Co., 267 F.3d 147,
162-70 (2d Cir. 2001) (separately evaluating each claim to determine appropriateness of class
treatment). There are significant individual issues of reliance, linking conduct, and affirmative
defenses unique to the PwC firms that preclude the required finding that common issues
predominate with respect to the claims against the PwC firms.
I.

Individual Issues of Reliance Bar Certification Against the PwC Firms.
Plaintiffs’ sole surviving claims against PwC Netherlands and PwC Canada are for

negligence and negligent misrepresentation. Anwar v. Fairfield Greenwich Ltd. (“Anwar II”),
728 F. Supp. 2d 372, 449-61 (S.D.N.Y. 2010). The Court allowed these claims to proceed past
the pleading stage because it found that the plaintiffs had alleged that the PwC firms knew that
investors would rely on their reports. Id. at 455-56. But in order to prevail on these claims,
plaintiffs will have to prove that they did, in fact, rely on the PwC reports. The requirement to
prove reliance is fatal to plaintiffs’ motion for class certification.
A.

Plaintiffs Cannot Prove Reliance on a Class-Wide Basis.

As the Supreme Court recently reaffirmed, in the absence of an applicable presumption of
reliance, individualized issues of proving actual reliance generally pose an “insuperable barrier”
to class certification.

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2552 n.6 (2011).

Plaintiffs assert that reliance can be proven through circumstantial, class-wide evidence because
the PwC firms issued uniform statements to the entire class. (Pls. Mem. at 12-27.) But even if it

were true (and it is not) that each class member received the same statements from the PwC
firms before investing, this does not establish reliance. “[P]roof of misrepresentation–even
widespread and uniform misrepresentation–only satisfies half of the equation; the other half,
reliance on the misrepresentation, cannot be the subject of general proof.” McLaughlin v. Am.
Tobacco Co., 522 F.3d 215, 223 (2d Cir. 2008); see also Abu Dhabi Commercial Bank v.
Morgan Stanley & Co., 269 F.R.D. 252, 261-65 (S.D.N.Y. 2010) (denying certification of class
of investors because reliance would have to be proved on an investor-by-investor basis).
Individual class members may have decided to invest in the Fairfield funds for any
number of reasons, which may or may not have included reliance on a report from one of the
PwC firms. In particular, plaintiffs detail their purported reliance on alleged misrepresentations
contained in the offering materials for the funds (see, e.g., Pls. Mem. at 1, 15), which were not
statements by nor otherwise attributable to the PwC firms. Thus, the fact of each class member’s
reliance on the PwC firms’ reports cannot be presumed or proven with generalities. Abu Dhabi,
269 F.R.D. at 265 (requirement to prove that specific investors relied upon specific information
to make specific purchases made it “impossible” to accept “plaintiffs’ theory of common,
circumstantial, evidence of class-wide reliance”). Instead, as the Second Circuit recently held,
“generalized proof” cannot be used where individuals may have relied on “alleged
misrepresentations to different degrees, or not at all.” UFCW Local 1776 v. Eli Lilly & Co., 620
F.3d 121, 136 (2d Cir. 2010).1

1. Plaintiffs’ alternative argument for the application of a “fraud-created-the-market” presumption (or more
accurately a “negligence-created-the-market” presumption with respect to the PwC firms) fails. As explained in
Malack v. BDO Seidman, LLP, 617 F.3d 743, 756 (3d Cir. 2010), “[t]he fraud-created-the-market theory lacks a
basis in common sense, probability, or any of the other reasons commonly provided for the creation of a
presumption.” It has been repeatedly rejected by district courts in this circuit. See, e.g., Abu Dhabi, 269 F.R.D. at
260. Moreover, even if it were the law in this circuit, “the fraud-created-the-market doctrine appears to be
applicable only in the context of federal securities fraud actions,” and thus could not apply to the common law
negligence claims against the PwC firms. Id.; see also SIPC v. BDO Seidman, LLP, 222 F.3d 63, 73 (2d Cir. 2000)
(“[F]ederal courts repeatedly have refused to apply the fraud on the market theory to state common law cases despite

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Accordingly, establishing reliance with respect to the negligence claims against the PwC
firms necessarily requires an individual inquiry that would preclude a finding under Rule
23(b)(3) that common questions predominate. See, e.g., Levitt v. PricewaterhouseCoopers, LLP,
No. 04 Civ. 5179, 2007 WL 2106309, at *2-3 (S.D.N.Y. July 19, 2007) (predominance was not
met in case brought by investors in limited partnerships against accounting firm).2
B.

The Claims of the Proposed Class Representatives Are Not Typical of Those
of the Proposed Class.

Even if it were possible to conclude that individual issues of reliance do not foreclose on
plaintiffs’ motion for class certification, the motion would still fail because the specific facts
elicited in discovery demonstrate that the proposed class representatives cannot establish reliance
on an individual basis (let alone on behalf of others), and that their claims therefore cannot be
typical of those of the proposed class. In order to satisfy the typicality requirement of Rule
23(a)(3), the class representatives’ and the class members’ claims must “‘arise[ ] from the same
course of events’” and all must “‘make[ ] similar legal arguments to prove the defendant’s
liability.’” Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir. 1997) (quoting In re Drexel
Burnham Lambert Group, Inc., 960 F.2d 285, 291 (2d Cir. 1992)). Typicality cannot exist where
the class representatives are “‘subject to unique defenses which threaten to become the focus of
the litigation.’” Oscar v. BMW of N. Am., LLC, 274 F.R.D. 498, 508 (S.D.N.Y. 2011) (quoting
Baffa v. Donaldson, Lufkin & Jenrette Sec. Corp., 222 F.3d 52, 59 (2d Cir. 2000)). The
documents produced and testimony given by the proposed class representatives plainly show that
its wide acceptance in the federal securities fraud context.”). Nor can reliance be presumed under Affiliated Ute
Citizens of Utah v. United States, 406 U.S. 128 (1972), because plaintiffs’ claims against the PwC firms are
explicitly based on alleged affirmative misstatements, not an alleged failure to disclose. See Starr v. Georgeson
S’holder, Inc., 412 F.3d 103, 109 n.5 (2d Cir. 2005) (rejecting application of doctrine where primary allegation was
misstatement).
2. As detailed in Section III of the Citco Defendants’ Memorandum of Law, which is incorporated herein,
significant individual issues are similarly raised by plaintiffs’ “holder claims.”

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their claims do not arise from “the same course of events” when it comes to reliance on the
reports of the PwC firms, and that their claims against the PwC firms are subject to a variety of
arguments as to how they did not, in fact, rely on any PwC reports.
For example, Michael Wind, the trustee of the Dawson Bypass Trust, testified as follows:
Q:

In making your investment in Greenwich Sentry Partners, did you
rely on anything from PricewaterhouseCoopers (Netherlands)?

A:

No.
***

Q:

So you didn’t rely on anything that PwC (Canada) did to – in
making the decision to invest?

A:

No at that – not back then, no. Before I made the investment.

(Ex. A (Wind Dep.) at 296:7-10; 268:4-8.) 3
The testimony of the other proposed class representatives was similar:


Martin Bach testified that he did not receive any audited financial statements prior
to making the first investment for his family trust and did not even think the
auditor was PwC. (Ex. B (Bach Dep.) at 375:11-21; see also id. at 401:4-24.)



Two individuals testified for St. Stephen’s School. Both admitted they did not
rely on any information or reports from a PwC firm. (Ex. C (Pollock Dep.) at
284:3-9, 285:18-25 (no reliance on any representations by PwC Netherlands); id.
at 290:19-291:4 (no recollection of seeing any documents from PwC Canada or
reading an audit report for any of the funds); Ex. D (Routhier Dep.) at 144:9-15
(no reliance on audit reports).)



None of the individuals who testified in connection with the investment by
plaintiff Natalia Hatgis could say there was any reliance on the work of either
PwC entity. (Ex. E (Natalia Hatgis Dep.) at 377:13-18 (agreeing she “didn’t rely
on anything that PricewaterhouseCoopers (Netherlands) did … in making [her]
investment”); id. at 361:5-20 (does not recall relying on anything that PwC
Canada did); Ex. F (Nicholas Hatgis Dep.) at 188:8-18 (“nothing from
PricewaterhouseCoopers factored into the family decision to invest”); Ex. G
(Kessell Dep.) at 298:4-299:4; 308:9-309:8 (does not know what information
Hatgis used to decide to invest; did not review audited financials for the fund in
which Hatgis invested).)

3. References to “Ex. __” are to exhibits to the accompanying Declaration of Savvas A. Foukas.

4



Laurence Weiner, testifying for the Pacific West Health Medical Center
Employees Retirement Trust, likewise admitted he did not see any audited
financial statements prior to investing and also failed to identify any information
from a PwC entity among the materials he reviewed and relied upon in making an
investment. (Ex. H (Weiner Dep.) at 271:22-272:11; 298:4-15.)



Alon Kaufman, testifying on behalf of plaintiff Harel Insurance Company,
admitted that he had never received anything from PwC Canada (Ex. I (Kaufman
Dep.) at 302:17-307:20), and although he claimed that he “might have” seen a
financial statement audited by PwC Netherlands prior to making his firm’s initial
investment, he could not testify as to any reliance on this work beyond the fact
that the funds had audited financial statements. (Id. at 283:2-297:17; see also Ex.
J (Hessel Dep.) at 244:12-245:4 (fact of audit by reputable firm important).)



Individuals who testified for the remaining proposed class representative,
Securities & Investment Company Bahrain (“SICO”), did claim to have seen and
relied upon financial statements audited by both PwC Netherlands and PwC
Canada prior to making investments in Fairfield Sentry, but the SICO
representatives also reviewed the Offering Memorandum for Fairfield Sentry (Ex.
K (Saif Dep.) at 196:16-18; Ex. L (Al-Shirawi Dep.) at 80:13-25; Ex. M (Mallis
Dep.) at 105:4-14; Ex. N (Marshad Dep.) at 57:8-12; 58:8-21), which expressly
tells investors not to rely on any information not contained therein. (Ex. O.) In
addition, despite what they describe as an extensive and thorough due diligence
process, no one affiliated with SICO ever had any contact, communication, or
other interaction with either of the PwC firms. (Ex. M (Mallis Dep.) at 274:5-16;
275:10-25; 292:5-294:5; Ex. N (Marshad Dep.) at 239:15-19; 240:8-23; 241:15242:25; 247:22-251:15; Ex. K (Saif Dep.) at 262:19-263:11; 272:5-273:11; Ex. L
(Al-Shirawi Dep.) at 247:25-248:16; 249:6-25; 250:9-13; 258:5-261:10.)

The point here is not only that the evidence shows that most, and likely all, of the
proposed class representatives will be unable to establish reliance on a report by a PwC firm, but
also simply that this is an issue that will have to be litigated on a plaintiff-by-plaintiff basis. This
either renders the claims of these individuals atypical of the claims of the class as a whole, or it
underscores that reliance is inherently an individual inquiry and, in the words of the Supreme
Court, an “insuperable barrier” to class certification.
II.

Individual Issues Will Also Preclude Plaintiffs from Satisfying the Credit Alliance
Test on a Class-Wide Basis.
In order to satisfy the test set out in Credit Alliance Corp. v. Arthur Anderson & Co., 65

N.Y.2d 536, 551 (1985), plaintiffs will have to show that they were parties known to a PwC firm,
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whose reliance on a PwC report the PwC firm intended, and as to whom there is linking conduct
with the PwC firm. This showing will require an individualized inquiry into the course of
conduct between the PwC firms and each plaintiff.
Each plaintiff must prove that he, she, or it was individually known to the PwC Firms.
“The words ‘known party or parties’ in the Credit Alliance test mean what they say.” Sykes v.
RFD Third Ave. 1 Assocs., LLC, 15 N.Y.3d 370, 373 (2010). “[T]he accountant must have
known when preparing the audit that the particular plaintiffs bringing the action would rely on
its representations.” SIPC, 222 F.3d at 75. Thus, as courts evaluating other negligence claims
against auditors of funds that invested with Madoff have concluded, it is not enough that an
auditor “knew” that investors generally would receive and rely on audit reports. See Saltz v.
First Frontier, LP, 782 F. Supp. 2d 61, 83-84 (S.D.N.Y. 2010); CRT Invs., Ltd. v. BDO Seidman,
LLP, 85 A.D.3d 470, 472 (1st Dep’t 2011).
The linking-conduct requirement is likewise a bar to class certification. Where “direct
contact between the accountant and the plaintiff is minimal or nonexistent, the plaintiff cannot
recover for the accountant’s negligence.” CRT Invs., 85 A.D.3d at 472; see SIPC, 222 F.3d at 75
(same).4 Indeed, as this Court has held, even instances in which auditors have had direct contact
with plaintiffs regarding their audit work may not constitute linking conduct. Hous. Works, Inc.
v. Turner, 179 F. Supp. 2d 177, 219 (S.D.N.Y. 2001) (“Courts have uniformly required more
than phone calls, general communications or unacknowledged assertions of reliance in order to
establish ‘linking conduct’”); SIPC, 222 F.3d at 75 (“[A] plaintiff generally must show some
form of direct contact between the accountant and the plaintiff, such as a face-to-face
4. Merely addressing audit reports to shareholders generally is not linking conduct. See CRT Invs., 85 A.D.3d at
472 (fact that investors as a group “were entitled to and received a copy of the audited financial statements” does not
establish linking conduct). In both CRT Invs. and Saltz, where the court held there was no linking conduct, the audit
reports were addressed to the investors in the funds (in those cases, the funds’ partners). (Ex. P (Saltz Report) and
Ex. Q (CRT Invs. Report).)

6

conversation, the sharing of documents, or other ‘substantive communication’ between the
parties.”).

Because linking conduct must be shown on a plaintiff-by-plaintiff basis,

predominance cannot be shown. Further, because, as the testimony cited above shows, none of
the proposed class representatives had any direct contact or communication with either PwC
firm, they cannot represent a class of plaintiffs who must fulfill this requirement.
III.

Individualized Inquiry Is Also Necessary With Respect to Affirmative Defenses.
While defenses that implicate class members differently do not necessarily require denial

of class certification, courts consider potential defenses when assessing predominance. Myers v.
Hertz Corp., 624 F.3d 537, 551 (2d Cir. 2010), cert. denied, 132 S. Ct. 286 (2011). Here, the
negligence claims against the PwC Firms are subject to the defense of comparative negligence.
See Windsong Lane Farms v. Telmark, LLC, 77 A.D.3d 1395, 1397 (4th Dep’t 2010). By
necessity, the application of this defense involves a highly individualized inquiry into each class
member’s knowledge, sophistication, and behavior.

Further, for the non-New York class

members (who constitute the majority of the proposed class), the Court will have to determine
whether each plaintiff’s claims are timely under the law of both New York and their respective
jurisdiction.5 This requires ascertaining the limitations period in each of the dozens of relevant
jurisdictions, and then applying the relevant statute to each class member, including determining
and applying any relevant tolls or extensions that each jurisdiction’s statute may contain.6

5. Under New York’s borrowing statute, an action by a non-resident must be timely under the statutes of limitations
of New York and the jurisdiction where the cause of action accrued. N.Y. C.P.L.R. § 202. Accrual of a tort cause
of action for economic injuries occurs where the plaintiff resides. See Global Fin. Corp. v. Triarc Corp., 93 N.Y.2d
525, 529 (1999). The statute of limitations question is of particular significance to PwC Netherlands as it was not
named in this litigation until April 24, 2009 and issued its last report in mid-2006.
6. Even among the relevant U.S. jurisdictions, there is considerable variation in the statutes of limitations. New
York has a three-year statute, which may be extended if plaintiffs can prove that they are entitled to the so-called
continuous representation exception, Anwar II, 728 F. Supp. 2d at 461, while Connecticut has a three year statute
without any tolling or extension. See Piteo v. Gottier, 963 A.2d 83, 86-88 (Conn. App. 2009).

7

Dated: January 13, 2012
KIRKLAND & ELLIS LLP

HUGHES HUBBARD & REED LLP

/s/ Timothy A. Duffy
Timothy A. Duffy

/s/ William R. Maguire
William R. Maguire
Sarah L. Cave
One Battery Park Plaza
New York, New York 10004
Tel: [phone]
[e-mail]

300 North LaSalle
Chicago, Illinois 60654
Tel: [phone]
[e-mail]
Attorneys for PricewaterhouseCoopers LLP

Attorneys for PricewaterhouseCoopers
Accountants N.V.

8