In re Herald, Primeo and Thema Funds Securities Litigation

Filing 336

REPLY to Response to Motion re: #252 JOINT MOTION to Dismiss. Reply Declaration of Marc A. Weinstein in Further Support of the Ernst & Young Defendant's Motion to Dismiss the Complaints and in Opposition to Plaintiffs' Motion for Leave to Amend the Complaints. Document filed by Ernst & Young (Cayman). (Attachments: #1 Exhibit A)(Weinstein, Marc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

In re HERALD, PRIMEO and THEMA
FUNDS SECURITIES LITIGATION

Master File No. 09 Civ. 289
(RMB) (HBP)

This Document Relates To:
09-cv-289 and 09-cv-2032
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REPL Y DECLARATION OF MARC A. WEINSTEIN IN FURTHER SUPPORT OF THE
ERNST & YOUNG DEFENDANTS' MOTION TO DISMISS THE COMPLAINTS AND
IN OPPOSITION TO PLAINTIFFS' MOTION FOR LEAVE TO AMEND THE
COMPLAINTS

Marc A. Weinstein, pursuant to 28 U.S.C. § 1746, declares under penalty of perjury as follows:
1.

I am a member of the Bar of this Court and of the firm Hughes Hubbard & Reed

LLP, attorneys for Defendant Ernst & Young Ltd. ("EY Cayman"). I submit this reply
declaration in further support of the motions ofEY Cayman, Ernst & Young, S.A. ("EY Lux"),
and Ernst & Young Global Limited ("EYG") (collectively the "EY Defendants") to dismiss the
Complaints.
2.

For the reasons set forth in Defendants' Joint Reply Memorandum, Plaintiffs have

failed to demonstrate why any of the claims asserted against any of the EY Defendants should
not be dismissed. See Sections I.B. (forum non conveniens), II.A (SLUSA), II.B (Mmiin Act),
I1.C (Lack of Standing), I1.D (Lack of Duty), II.F (Supervening Cause), I1.G (Failure to Plead
Vicarious Liability), and III (Failure to State Claims). I submit this reply declaration to address
several additional points relating to the EY Defendants that further require dismissal of the
claims against them.
3.

Improper Lump Pleading: In their Complaints, Plaintiffs made no effort to

particularize allegations against each of the three EY Defendants. We pointed out this improper
pleading tactic in the Moving Brief, and there set out the authority in this Circuit holding that
Complaints like Plaintiffs' that lump the EY Defendants together are deficient. (Moving Brief at
III(B)( 4)). Plaintiffs not only ignore that clear authority, they compound their error by extending
the tactic to the opposition brief. Thus, Plaintiffs continue to group the three EY Defendants
together indiscriminately, whether or not each particular EY defendant has been named in a
particular complaint or count, in arguing, for exmnple, that "there was sufficient privity between
E&Y and the shareholders of the Primeo and Herald funds ... to support claims for gross
negligence, negligence, and misrepresentation under New York law." (Opp'n 48.) However,

those claims were not brought against EY Lux in the Herald Complaint (not to mention that EY
Lux, much like EYG, never issued a single audit report at issue and thus made no statements to
anyone, much less to any investor).
4.

Moreover, in their opposition, Plaintiffs make little to no effort to distinguish the

allegations against the EY Defendants from those against all other defendants in the three
actions. For example, Plaintiffs reference purported allegations against the "EY Defendants"
with respect to claims never asserted against any EY defendant (see, e.g., Opp'n 48 (third-party
beneficiary claims» and defenses not raised by any EY defendant (see, e.g., Opp'n Br. 25
(personal jurisdiction». Plaintiffs cannot assert new allegations against parties in their
opposition by relying on allegations from complaints in which those parties are not named. Cf
Wright v. Ernst & Young LLP, 152 F.3d 169, 178 (2d Cir. 1998) (allegations that do not appear

in the complaint may not enter the case for the first time in opposition papers). Plaintiffs'
seeming indifference to the specific claims brought against each EY defendant makes evident the
paucity of any allegations against each EY defendant.
5.

Statute of Limitations: Plaintiffs concede that New York's three-year statute of

limitations applies to all claims brought against the EY Defendants. (Opp'n 56.) Plaintiffs
attempt to avoid this procedural bar to claims based upon audit reports issued more than three
years before suit was filed by baldly asserting that EY Cayman's annual audits for the fiscal
years 2003 through 2007 constituted one continuous representation rather than separate mmual
engagements. (Opp'n 56-57.) Plaintiffs' argument is unavailing.
6.

The New York Court of Appeals has made clear that an accountant's standard

provision of audit services on an annual basis is insufficient to trigger the "continuing
representation" exception to the three-year statute oflimitations for malpractice actions.

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Williams v. PricewaterhouseCoopers LLP, 9 N.y'3d 1, 10-11 (2007); see also ATC Healthcare
Inc. v. Goldstein, Golub & Kessler LLP, 28 Misc. 3d 1237(A), at *3, *5 (N.Y. Sup. Ct. 2010)

(finding continuous representation exception inapplicable to annual audits; to do otherwise
would "in effect eviscerate the Statute of Limitations for accounting malpractice for the duration
of an accountant and his client's relationship").
7.

Plaintiffs' reliance on Symbol Technologies, Inc. v. DeloWe & Touche, LLP, 69

AD.3d 191 (2d Dep't 2009) (Opp'n 56-57), is misplaced. In Symbol Technologies, plaintiffs
alleged that Deloitte continued to provide auditing services in connection with the restatement of
prior audits without seeking the execution of new engagement letters, thus making the audit
services continuous through the period of restatement. Id. at 196. There are no such allegations
here. In fact, the Complaints here lack any allegations of a continuous representation, as
opposed to separate annual engagements. Similarly, unlike in Buchwald v. The Renco Group,
399 B.R. 722, 753-54 (Bankr. S.D.N.Y. 2009), the continuous representation exception does not
apply here because the Complaints fail to allege that the malpractice built upon itself or relied on
previous year's audits.
8.

Because the continuous representation exception does not apply, all claims

against the EY Defendants based on audit reports issued prior to March 19,2006 are time-barred.
9.

Aiding and Abetting: The EY Defendants fully endorse the arguments made in

Part III(B)(4) of the Joint Reply Brief, and in the reply affidavit of Patricia M. Hynes on behalf
of JPM demonstrating Plaintiffs' failure to allege any cognizable claim of aiding and abetting
under New York law. In addition to those points-which amply support dismissal of Plaintiffs'
aiding and abetting claims-it is noteworthy that all such claims have been dismissed against
accounting defendants in all the Madoff-related decisions. Even Anwar II rejected aiding and

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abetting claims against the funds' accountants, finding that the same series of "red flags"
Plaintiffs point to here, as well as similar conclusory assertions of "knowledge", failed to meet
New York's requirement of establishing "actual knowledge". 728 F. Supp. 2d at 453,458.
10.

Likewise, Plaintiffs' conclusory allegations that the "audit work that the

[accounting firm defendants] must have conducted would have given it actual knowledge or
information that it willfully ignored" (HC

~

559), is deficient because it sets fOlih no specific

facts that would give rise to an inference that any of the accounting firm defendants had actual

knowledge of the fraud. Such allegations that the accounting firm defendants "knowingly or
recklessly disregarded ... 'badges of fraud'" do not demonstrate actual knowledge or
recklessness. Nigerian Nat 'I Petroleum Corp. v. CWbank, NA., No. 98 Civ. 4960, 1999 WL
558141, at *7-8 (S.D.N.Y. July 30,1999). Further, in the cases Plaintiffs rely upon, specific
facts were alleged - such as the existence of emails in which the defendant acknowledged likely
fraudulent activity, see, e.g., Pension Committee of the Univ. of Montreal v. Bane ofAm. Sees.,
No. 05-Civ-9016, 2007 WL 528703, at *5 (S.D.N.Y. Feb. 20, 2007) - that arguably gave rise to
an inference of actual knowledge. Plaintiffs have alleged no such facts here.
11.

Plaintiffs have also failed to adequately plead substantial assistance against the

EY Defendants. They ignore the First Department's ruling that arms-length audit services do not
constitute "substantial assistance", see CRT Invs. Ltd. v. BDO Seidman, LLP, 85 A.D.3d 470,
472 (N. Y. App. Div. 2011) ("routine business of auditing" not sufficient basis for substantial
assistance), and cite no authority to the contrary. See also Renner v. Chase Manhattan, 98-Civ926,2000 WL 781081, at *12 (S.D.N.Y. June 16,2000). Thus, the claims must be dismissed
against the EY Defendants.

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12.

Foreign Law Applies: The accompanying foreign law reply declaration of

Graham Ritchie (attached hereto as Exhibit A) demonstrates that Plaintiffs' allegations against
the EY Defendants remain insufficient under the laws of the Cayman Islands. The EY
Defendants also rely upon the reply affidavits of Andre Prum and Fram;ois Kremer (Luxembourg
law) and James Bagnall (Cayman law) to the extent those affidavits address claims asserted
against one or more of the EY Defendants.
Executed on October 28, 2011

Marc A. Weinstein

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