Fund of Funds, Ltd. v. Arthur Andersen & Co.
| Citation | 545 F. Supp. 1314 |
| Decision Date | 16 July 1982 |
| Docket Number | No. 75 Civ. 540 (CES).,75 Civ. 540 (CES). |
| Parties | The FUND OF FUNDS, LIMITED, F.O.F. Proprietary Funds, Ltd., and IOS Growth Fund, Limited, a/k/a Transglobal Growth Fund, Limited, Plaintiffs, v. ARTHUR ANDERSEN & CO., Arthur Andersen & Co. (Switzerland), and Arthur Andersen & Co., S.A., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Cadwalader, Wickersham & Taft, George D. Reycraft, Richard J. Wiener, Haven C. Roosevelt, New York City, for plaintiffs.
Breed, Abbott & Morgan, Edward J. Ross, James D. Zirin, New York City, Wilson & McIlvaine, Charles W. Boand, Chicago, Ill., for defendants.
CONTENTS
Statement of Facts ....................... 1326 1343
Contentions of the Parties ............... 1343 1345
Subject Matter Jurisdiction .............. 1345 1351
Primary Liability ........................ 1351 1354
Aiding and Abetting Liability ............ 1354 1359
Common Law Fraud ......................... 1359 1362
Breach of Contract ....................... 1362 1365
Jury Instructions ........................ 1365 1372
Evidentiary Rulings ...................... 1372 1374
Damages .................................. 1374 1378
Judgment ................................. 1378 1382
Conclusion ............................... 1382
Plaintiffs brought suit for defendants' alleged violations of the federal securities laws, common law fraud and breach of contract. All of these claims arise out of plaintiffs' investments in natural resource interests (the "overcharge" claims more fully described at pp. 1328-1335 infra) and the sale of a portion of a particular investment in the Canadian Arctic used to calculate unrealized appreciation on the remainder of plaintiffs' interest (the "revaluation" claim, see pp. 1335-1343 infra). The defendants as plaintiffs' accountants and auditors were charged with primary violations of section 17(a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77q(a) (1976), and section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) (1976), and aiding and abetting violations of those provisions. Subject matter jurisdiction is based upon section 22 of the 1933 Act, 15 U.S.C. § 77v (1976), section 27 of the 1934 Act, 15 U.S.C. § 78aa (1976), diversity of citizenship and pendent jurisdiction.
The case was tried to a jury beginning July 13, 1981. After some 55 trial days and over two weeks of jury deliberation, defendants were held liable for: aiding and abetting violations of section 10(b) of the 1934 Act, and sections 17(a)(1), 17(a)(2), and 17(a)(3) of the 1933 Act regarding the "overcharge" claims; primary violations of section 10(b) and section 17(a)(3) regarding the "revaluation" claims; aiding and abetting violations of section 10(b) and sections 17(a)(1), 17(a)(2), and 17(a)(3) regarding the revaluation claims; and common law fraud and breach of contract regarding both the overcharge and revaluation claims. The jury found that AA was not liable for primary violations of sections 10(b), 17(a)(1), and 17(a)(3) regarding the overcharge claims and that AA was not liable for a primary violation of section 17(a)(1) concerning the revaluation claim.1 The jury assessed damages for each recoverable overcharge claim at $47,966,079 and for each recoverable revaluation claim at $32,751,763. Following submission of proposed forms of judgment and memoranda, we issued a Memorandum Decision reducing the verdict by the allocable amounts of several prior settlements and awarding prejudgment interest. The Memorandum Decision and judgment entered thereon were sealed because the amount one of prior settlement included in the calculations was previously sealed.
Defendants timely moved for a new trial and for judgment notwithstanding the verdict. The standards for deciding these motions are exacting, but not identical. Hubbard v. Faros Fisheries, Inc., 626 F.2d 196, 199-200 (1st Cir. 1980); Lang v. Birch Shipping Co., 523 F.Supp. 1112, 1114 (S.D.N.Y.1981). On a motion for judgment n. o. v., we are commanded not to weigh the evidence or determine the credibility of the witnesses. Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir. 1970). We decide whether the evidence could only lead reasonable persons to a conclusion contrary to the verdict. Sirota v. Solitron, 673 F.2d 566, 572-573 (2d Cir. 1982); Hubbard v. Faros Fisheries, Inc., 626 F.2d at 199; Simblest v. Maynard, 427 F.2d at 4. All reasonable inferences must be made in favor of the party receiving the verdict. Id. Thus, we must affirm the verdict if we find sufficient evidence to support the jury's reasonable findings of fact although a different conclusion is also plausible. See Hubbard v. Faros Fishing, Inc., 626 F.2d at 200; O'Connor v. Pennsylvania R.R., 308 F.2d 911, 914-15 (2d Cir. 1962). See also Planters Mfg. Co. v. Protection Mutual Ins. Co., 380 F.2d 869, 874 (5th Cir. 1967), cert. denied, 389 U.S. 930, 88 S.Ct. 293, 19 L.Ed.2d 282 (1968). We may grant a new trial in the interests of justice where judgment n. o. v. would not be appropriate. Id. at 881, cert. denied, 389 U.S. 930, 88 S.Ct. 293, 19 L.Ed.2d 282; Isley v. Motown Record Corp., 69 F.R.D. 12, 16 (S.D. N.Y.1975). We may weigh the evidence on a motion for a new trial "and we need not view it in the light most favorable to the verdict winner". Bevevino v. Saydjari, 574 F.2d 676, 684 (2d Cir. 1978). Our object in deciding a motion for a new trial is to prevent a miscarriage of justice or an erroneous verdict. Id. We begin, however, with a statement of facts which a jury reasonably could find in support of the verdict.
Investors Overseas Services, Limited ("IOS, Ltd."), one of the high-flying financial investment vehicles of the 1960's, sponsored and managed mutual funds, among other diversified financial services. IOS, Ltd. was a Canadian company headquartered in Switzerland. Plaintiffs Fund of Funds, Ltd. ("FOF") and IOS Growth Fund, Ltd. ("IOS Growth") were open-ended "offshore" mutual funds controlled and managed by IOS, Ltd. FOF was also a Canadian company, although operations of FOF were directed from Switzerland and corporate records were maintained in Ferney-Voltaire, France. IOS Growth was a clone of FOF, spun-off in December 1969 in response to a change in German law to permit German investors to continue to invest in IOS's mutual funds. IOS Growth received an interest in FOF's assets proportionate to the interest of the German shareholders in FOF before the spin-off — about 4% of FOF's assets. As FOF and IOS Growth have identical interests, claims and positions with respect to the transactions at issue, we shall include IOS Growth in our references to FOF, except where expressly indicated to the contrary.
FOF initially invested in American mutual funds, hence its name. Due to SEC objections, FOF was forced to change its investment strategy in 1967.1.5 FOF incorporated FOF Proprietary Funds, Ltd. ("FOF Prop") as an umbrella for specialized discretionary investment accounts managed by individual investment advisors. FOF Prop's investments were largely concentrated in American securities. The subaccount advisors were compensated according to both the realized and unrealized (paper) appreciation of their portfolios.
After all the transactions pertinent to this suit,2 FOF, FOF Prop and IOS Growth were placed in liquidation under Canadian law, and John Orr was appointed permanent liquidator.
Defendants are Arthur Andersen & Co. ("AA") and Arthur Andersen & Co. (Switzerland), one of the "Big Eight" accounting firms. AA was employed as the auditor for IOS, Ltd. "and consolidated subsidiaries and affiliated funds". See Px-59. The Zurich office was officially responsible for a separate report as to FOF. The pertinent part of the engagement letter for 1968 is as follows:
Our audit work on companies for which we are responsible will consist of examination of the respective balance sheets and statements of net assets and investments as of December 31, 1968, and the related statements of income, surplus and changes in net assets for the year then ending in order to enable us to express an opinion on the financial position of the respective entities and the results of their operations. These examinations will be made in accordance with generally accepted auditing standards and will include all auditing procedures which we consider necessary in the circumstances. These procedures will include, among other things, review and tests of the accounting procedures and internal controls, tests of documentary evidence supporting the transactions recorded in the accounts and direct confirmation of certain assets and liabilities by correspondence with selected customers, creditors, legal counsel, banks, etc. While certain types of defalcations and similar irregularities may be disclosed by this kind of an examination, it is not designed for that purpose and will not involve the audit of a sufficiently large portion of the total transactions to afford assurance that any defalcations and irregularities will be uncovered. Generally, primary reliance for such disclosure is placed on a company's system of internal control and effective supervision of its accounts and procedures. Of course, any irregularities coming to our attention would be reported to you immediately.
Px-59 (emphasis added). The engagement letter for 1969 is identical in this respect. Px-165.
In late 1967 and early 1968, FOF decided to establish the Natural Resources Fund Account ("NRFA") as a subaccount of FOF Prop. The object of FOF in...
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