Otto Candies, LLC v. KPMG LLP
| Decision Date | 28 February 2019 |
| Docket Number | C.A. No. 2018-0435-MTZ |
| Parties | OTTO CANDIES, LLC, CANDIES MEXICAN INVESTMENTS S. DE R.L. DE C.V., COASTLINE MARITIME PTE. LTD., MARFIELD MARITIME INC., SHANARA INTERNATIONAL SA., GULF INVESTMENTS AND SERVICES LTD., BLUE MARINE TECHNOLOGY GROUP, BLUE MARINE SHIPPING II, S.A. DE C.V., CALVI SHIPPING C.V., OCEAN MEXICANA, S.A. DE C.V., HALANI INTERNATIONAL LTD., SHIPYARD DE HOOP B.V., HOOP LOBITH INTERNATIONAL B.V., WAYPOINT ASSET MANAGEMENT LLC, ASHMORE EMERGING MARKETS CORPORATE HIGH YIELD FUND LIMITED, ASHMORE EMERGING MARKETS HIGH YIELD PLUS FUND LIMITED, ASHMORE EMERGING MARKETS TRI ASSET FUND LIMITED, ASHMORE EMERGING MARKETS DEBT AND CURRENCY FUND LIMITED, ASHMORE EMERGING MARKETS SPECIAL SITUATIONS OPPORTUNITIES FUND LIMITED PARTNERSHIP, ASHMORE SICAV EMERGING MARKETS DEBT FUND, ASHMORE SICAV EMERGING MARKETS CORPORATE DEBT FUND, ASHMORE SICAV EMERGING MARKETS HIGH YIELD CORPORATE DEBT FUND, HBK MASTER FUND L.P., ICE 1 EM CLO LIMITED, ICE GLOBAL CREDIT (DCAM) MASTER FUND LIMITED, ICE FOCUS EM CREDIT MASTER FUND LIMITED, ICE GLOBAL CREDIT ALPHA MASTER FUND LIMITED, ICE ORYX ALPHA MASTER FUND LIMITED, LARRAIN VIAL S.A. SOCIEDAD ADMINISTRADORA DE FONDOS DE INVERSION, MONEDA INTERNATIONAL INC., MONEDA LATIN AMERICAN CORPORATE DEBT, PADSTOW FINANCIAL CORP., MONEDA S.A. ADMINISTRADORA GENERAL DE FONDOS, MONEDA DEUDA LATINOAMERICANA FONDO DE INVERSION, MONEDA RENTA CLP FONDO DE INVERSION, NORDIC TRUSTEE ASA, and COÖPERATIEVE RABOBANK U.A., Plaintiffs, v. KPMG LLP, KPMG CÁRDENAS DOSAL, S.C., and KPMG INTERNATIONAL COOPERATIVE, Defendants. |
| Court | Court of Chancery of Delaware |
David E. Ross, ROSS, ARONSTAM & MORITZ LLP, Wilmington, Delaware; Terry L. Wit, A. William Urquhart, Juan P. Morillo, Derek L. Shaffer, Lauren H. Dickie, QUINN EMANUEL URQUHART & SULLIVAN, LLP; San Francisco, California and Washington, D.C.; Attorneys for Plaintiffs
Kevin R. Shannon, Matthew F. Davis, and Christopher N. Kelly, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Gregory G. Ballard and Jose F. Sanchez, SIDLEY AUSTIN LLP, New York, New York; Attorneys for Defendant KPMG Cárdenas Dosal, S.C.
Todd Schiltz, DRINKER BIDDLE & REATH LLP, Wilmington, Delaware; Robert A. Scher and Jonathan H. Friedman, FOLEY & LARDNER LLP, New York, New York; Attorneys for Defendant KPMG, LLP
Timothy Jay Houseal, Jennifer M. Kinkus, William E. Gamgort, YOUNG CONAWAY STARGATT & TAYLOR LLP, Wilmington, Delaware; Ana C. Reyes, WILLIAMS & CONNOLLY, LLP, Washington, D.C.; Attorneys for Defendant KPMG International Cooperative
The plaintiffs in this negligent misrepresentation case are creditors and bondholders of what was Latin America's largest offshore oil and gas services company, Oceanografía S.A. de C.V., referred to in this decision as OSA. Based in Mexico, OSA had a banking and financial services relationship with Citigroup, Inc., a Delaware company headquartered in New York, and Citigroup's Mexican subsidiaries. Part of that relationship involved an expansive cash advance credit line that Citigroup's Mexican subsidiaries extended to OSA over several years.
OSA allegedly scammed the cash advance facility with years of forged and fraudulent invoices. When Mexican state-owned entities exposed the fraud and Citigroup withdrew its credit line, OSA crumpled into bankruptcy. The plaintiffs seek $1.1 billion in damages from the accounting services firm, KPMG, that audited OSA, Citigroup, and Citigroup's Mexican subsidiaries. They sued three KPMG entities based out of the U.S., Mexico, and Switzerland, respectively. The U.S. entity audited Citigroup's financial statements for the relevant years of 2010 through 2013. The Mexican entity audited certain of the financial statements from OSA and Citigroup's Mexican subsidiaries during those same periods. Both entities are member firms of the Swiss entity, which did not issue any audits. The plaintiffs are not creditors or clients of the defendants, and assert no connection to them other than relying on the defendants' audits and related financial materials.
The plaintiffs originally filed this suit in Delaware's Superior Court. They allege that all three defendants, through a complex web of agency and joint venture liability, negligently failed to catch OSA's frauds in their audits of OSA (Count I), Citigroup's Mexican subsidiaries (Count II), and Citigroup itself (Count III). As a result, the plaintiffs claim that the audits misrepresented OSA's health and status, and allege that they then relied on those misrepresentations in choosing to do business with, or otherwise remain creditors and bondholders of, the doomed company. The defendants all moved to dismiss. After jurisdictional discovery, the Superior Court transferred the case to the Court of Chancery because it lacked subject matter jurisdiction over the plaintiffs' negligent misrepresentation claims. The parties renewed the motions to dismiss in this Court.
I grant the motions to dismiss. This Court lacks personal jurisdiction over the Mexican and Swiss entities, who have not engaged in any Delaware contacts related to the heart of the plaintiffs' claims. For similar reasons, I also conclude that Mexico is the appropriate forum for claims against the Mexican defendant. Delaware can only hear claims against the U.S. defendant. The parties contest which jurisdiction's law governs those claims, but I conclude that the plaintiffs have failed to adequately plead their claims under any of the proposed sources of law. For these and other reasons set out below, I must dismiss the plaintiffs' claims.
I draw the relevant facts from the allegations in, and those documents incorporated by reference into, the Complaint.
Non-party OSA was Latin America's largest oil and gas services company, with revenues of approximately $920 million in 2012 and projected to hit approximately $1.6 billion by 2017.1 OSA's largest client was Mexico's state-owned oil and gas company, non-party Petroleos Mexicanos ("Pemex").2 The plaintiffs are a collection of OSA's bondholders, creditors, and companies that did business with OSA ("Plaintiffs"). They include shipping companies, bondholders from two bond issuances in 2008 and 2013, and lenders.3
Non-party Citigroup is a Delaware corporation, headquartered in New York, that provides banking and financial services. Citigroup and two of its Mexican subsidiaries, non-parties Grupo Financiero Banamex S.A. de C.V. and Banco Nacional de México, S.A. (together, "Banamex"), served as bankers, financial advisors, and credit lenders to OSA.4
In 2008, Citigroup established a credit facility for Pemex contractors, including OSA, through Banamex.5 OSA obtained cash advances through the credit facility. The advances started with limits of $70 million in 2009 but, by 2014, had ballooned to over $500 million.6 OSA supported its cash advance requests by submitting invoices or other documentation to Citigroup for services OSA purportedly provided to Pemex.7 Pemex then paid Citigroup directly for OSA's services based on the invoices OSA submitted to Citigroup.8 On top of that payment, Citigroup charged OSA interest on the cash advances above Mexico's inter-bank interest rate.9
Plaintiffs allege that "[b]eginning as early as 2010 and continuing through February 2014, [OSA] requested at least 166 fraudulent cash advances from Citigroup totaling at least $750 million."10 Based on these falsified materials, Citigroup advanced cash to OSA far beyond the value of services OSA performed.11 According to Plaintiffs, OSA and Citigroup worked together to "exploit[] the deficient and non-functioning internal control processes both at [OSA] and Citigroup/Banamex" in a mutually beneficial fraudulent scheme.12 The alleged result of this complex fraud was simple: because OSA inflated its invoices, (i) OSA got more cash than it needed to fund its work for Pemex, (ii) Pemex paid Citigroup and Banamex more than necessary for the work OSA performed, and (iii) Citigroup and Banamex received interest based on those higher invoices.
In 2013, an arm of the Mexican federal government, the Secretaría de la Función Pública (the "SFP"), investigated the insurance policies that OSA was required to provide to Pemex, found the policies to be insufficient, and banned OSA from entering into new contracts with Pemex for nearly two years.13 The SFP published its decision on February 11, 2014.14 Citigroup then launched its own internal investigation, although it continued to provide cash advances to OSA during the interim.15 During Citigroup's investigation, Pemex uncovered OSA's fraudulent cash advance scheme.16 On February 28, 2014, Citigroup issued a press release disclosing OSA's plot.17 On March 1, 2014, Mexican authorities seized OSA and its assets.18 Later that year, Mexican authorities determined that at least some Banamex employees played a role in the cash advance scheme and fined Banamex approximately $2.3 million.19 OSA filed for bankruptcy.20
On February 26, 2016, Plaintiffs sued in Delaware's Superior Court.21 The defendants are three arms of KPMG, an international accounting services firm. KPMG, LLP ("KPMG US") is a Delaware entity headquartered in New York. KPMG Cárdenas Dosal, S.C. ("KPMG Mexico") is a Mexican entity. KPMG International Cooperative ("KPMG International")22 is a Swiss cooperative. Unlike KPMG US and KPMG Mexico, KPMG International is not an accounting firm and does not perform audits. Instead, KPMG International serves as an umbrella organization to protect and coordinate the various member firms in the KPMG network.23 KPMG US and KPMG Mexico are each member firms of KPMG International.24
KPMG Mexico audited OSA for the years 2010 through 2012 (the "OSA Audits"). KPMG Mexico allegedly assisted with the OSA audit for 2013, but stopped its work because of OSA's...
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