15 N.Y.3d 264, 2010-05677, Continental Cas. Co. v. PricewaterhouseCoopers, LLP

Docket Nº:2010-05677
Citation:15 N.Y.3d 264, 933 N.E.2d 738, 907 N.Y.S.2d 139
Opinion Judge:PIGOTT, J.
Party Name:CONTINENTAL CASUALTY COMPANY et al., Appellants, v. PRICEWATERHOUSECOOPERS, LLP, Respondent. Eagle Partners, L.P., et al., Appellants, v. PricewaterhouseCoopers, LLP, Respondent. Jeremy M. Jones et al., Appellants, v. PricewaterhouseCoopers, LLP, Respondent.
Attorney:Pachulski Stang Ziehl & Jones LLP, New York City (Steven J. Ahmuty, Jr., Ilan D. Scharf and Dean A. Ziehl of counsel), and Susman Godfrey LLP, Los Angeles, California (Marc M. Seltzer of counsel), for appellants. Orrick, Herrington & Sutcliffe LLP, New York City (J. Peter Coll, Jr., Steven J. Fin...
Judge Panel:READ, J. (dissenting). Judges CIPARICK, GRAFFEO, SMITH and JONES concur with Judge PIGOTT. Judge READ dissents in a separate opinion. LIPPMAN Chief Judge taking no part.
Case Date:June 29, 2010
Court:New York Court of Appeals
 
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Page 264

15 N.Y.3d 264

933 N.E.2d 738, 907 N.Y.S.2d 139

CONTINENTAL CASUALTY COMPANY et al., Appellants,

v.

PRICEWATERHOUSECOOPERS, LLP, Respondent.

Eagle Partners, L.P., et al., Appellants,

v.

PricewaterhouseCoopers, LLP, Respondent.

Jeremy M. Jones et al., Appellants,

v.

PricewaterhouseCoopers, LLP, Respondent.

2010-05677

Court of Appeals of New York.

June 29, 2010

Page 265

[907 N.Y.S.2d 140] Pachulski Stang Ziehl & Jones LLP, New York City (Steven J. Ahmuty, Jr., Ilan D. Scharf and Dean A. Ziehl of counsel), and Susman Godfrey LLP, Los Angeles, California (Marc M. Seltzer of counsel), for appellants.

Orrick, Herrington & Sutcliffe LLP, New York City (J. Peter Coll, Jr., Steven J. Fink and Joshua M. Cutler of counsel), and Office of General Counsel, PricewaterhouseCoopers LLP (Andrew Plunkett of counsel), for respondent.

Page 266

[933 N.E.2d 739] OPINION

PIGOTT, J.

In these actions, plaintiffs, former limited partners of Lipper Convertibles, LP, assert direct claims of fraud against PricewaterhouseCoopers, LLP (PwC), the auditor of Lipper Convertibles' annual financial statements for the years 1995 through 2000. Plaintiffs claim that PwC fraudulently declared the partnership's financial statements to be accurate and prepared in conformity with generally accepted accounting principles (GAAP), when in fact they were not. Plaintiffs argue that they were induced by PwC's fraud into making

Page 267

their initial investments in the partnership. But because PwC showed that the damages plaintiffs claimed to have suffered were the result of the conduct of the fund and not a direct diminution of plaintiffs' initial investments, the order of the Appellate Division granting PwC's motion for summary judgment dismissing the fraud cause of action should be affirmed.

Factual Background

Lipper Convertibles (the Fund) was a private investment hedge fund managed by Lipper Holdings, LLC, a Delaware limited liability company, for the benefit of limited partners who were passive investors in the Fund. In general, pursuant to a partnership agreement, limited partners of the Fund held interests equal to their initial investment amounts plus (or minus) any gains (or losses) resulting from the partnership's investment activities. For its duties as manager, Lipper Holdings received 20% of the net profits purportedly received by the Fund. During the relevant time period, PwC was the Fund's auditor, reviewing the financial statements that detailed the Fund's performance and the value of each partner's interest.

Between 1997 and 2001, plaintiffs collectively invested more than $120 million to purchase limited partnership interests. Plaintiffs claim that they made these investments in justifiable reliance upon the representations about the Fund's operations and performance in the financial statements audited by PwC. The financial statements and reports, which showed consistent growth in the value of the Fund's portfolio, however, fraudulently overstated the Fund's assets by many millions of dollars.

In 2002, the fraud was publicly disclosed after the Fund's portfolio manager unexpectedly resigned. Lipper Holdings, as general partner, conducted a review of its portfolio and discovered that its manager had used an improper method for valuing the Fund's securities, materially overstating the value of the holdings. The former manager was later investigated by the Securities and Exchange Commission (SEC) and criminally prosecuted, resulting in a guilty plea to securities fraud. PwC's accountant in charge of conducting the audits of the financial statements was ultimately suspended by the SEC for his failings. The SEC found that the representations by PwC-that it had conducted audits that complied with GAAP-were materially false and that its approval of the certification of the Fund's financial statements was " highly unreasonable."

[907 N.Y.S.2d 141] [933 N.E.2d 740] The result of the improper valuation methods was that Lipper Convertibles had, over the years, reported increasingly

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inflated assets, capital and profits. In February 2002, after completing a reevaluation, Lipper Convertibles announced to its limited partners, including plaintiffs, that it had reduced its assessment of its net equity value by approximately $400 million, a 40% " write down" in its previously reported capital. This resulted in the withdrawals of many limited partners' investments, and the decision that Lipper Convertibles be liquidated. A proceeding to dissolve the Fund was commenced. The general partner retained an accounting firm, BDO Seidman, to determine a methodology for the distribution of the assets. The plan developed by BDO Seidman involved revaluing the assets of the Fund, on a month-by-month retrospective basis, and then recalculating...

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