Stephenson v. PricewaterhouseCoopers (PWC), 11-1204-cv (2d
Cir. 2012) (Summary Order), addresses the viability of claims
against Canadian-organized PWC for fraud and negligence arising
from PWC's unqualified audit reports attensting to the accuracy
of one of the "feeder funds" into Bernard Madoff
Investment Securities, LLC, which, as the Second Circuit says,
"was later revealed to be a Ponzi scheme".
The Second Circuit analyzed the malpractice claim made against
PWC. The District Court had determined that the claim had been
preempted by New York's Martin Act. This ruling could not stand
because, "[a]fter the briefs in this appeal were filed, the
New York Court of Appeals held that the Martin Act does not preempt
common law claims not premised on violations of the Act. Assured
Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341, 353
(2011). Accordingly, the district court's dismissal of
Stephenson's common law malpractice claim on this ground was
In analyzing other grounds to dismiss the claims, the Court of
Appeals divided the claims into those alleging wrongdoing for
"inducing" the plaintiffs investment and those arising
out of the investor's decision to remain invested (also
referred to as "holding" claims). Given that the
plaintiff did not have a direct relationship with PWC, the Court of
Appeals looked to New York substantive law requiring the plaintiff
that (1) the accountant was aware "that the financial
reports were to be used for a particular purpose"; (2)
"in the furtherance of which a known party . . . was intended
to rely"; and (3) some conduct on the part of the accountant
linking it to the party which "evinces the accountant['s]
understanding of the party['s] . . . reliance". Credit
Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551
Said the Second Circuit: "The New York Court of Appeals has
described these three factors as establishing a relationship
approaching that of privity between the accountant and the third
party claiming negligence." Securities Investor Prot. Corp. v.
BDO Seidman, LLP, 222 F.3d 63, 73 (2d Cir. 2000) (internal
quotation marks and alteration omitted).
The Court of Appeals then applied federal procedural rules, in
particular Rule 9(b) of the Federal Rules of Civil Procedure, and
said that the plaintiffs were required to "plead the factual
basis which gives rise to a 'strong inference' of
fraudulent intent". This was required at the pleading stage;
the Court reviewed the allegations and found that even alleged
failure to comply with generally accepted accounting standards was
not to raise an inference of fraud.
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