Jones v PriceWaterhouseCoopers LLP

[*1] Jones v PriceWaterhouseCoopers LLP 2004 NY Slip Op 51789(U) Decided on November 5, 2004 Supreme Court, New York County Moskowitz, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 5, 2004
Supreme Court, New York County

JEREMY M. JONES and PATRICIA L. JONES, AS CO-TRUSTEES OF THE JONES FAMILY TRUST; and JOHN E. KREITLER AS TRUSTEE OF THE JONES FAMILY INCOME TRUST, Plaintiff s,

against

PRICEWATERHOUSECOOPERS LLP, Defendant.



602962/2003

Karla Moskowitz, J.

This action against PriceWaterhouseCoopers LLP ("PwC") is yet another lawsuit resulting from the demise of Lipper Convertibles, L.P. ("Lipper Convertibles" or the "Partnership"). Plaintiffs Jeremy M. Jones and Patricia L. Jones are co-trustees of the Jones Family Trust and plaintiff John E. Kreitler is the trustee of the Jones Family Income Trust (the "Trusts" or "Plaintiffs"). The Trusts are limited partners in Lipper Convertibles. PwC was the accounting firm that provided accounting and auditing services for Lipper Convertibles. The Trusts have sued PwC for fraud, aiding and abetting fraud, aiding and abetting breaches of fiduciary duty, negligent misrepresentation and negligence.

By this motion, (seq. No. 2), PwC moves to dismiss or stay this action. First, PwC contends that this court must dismiss the claims for fraud and breach of fiduciary duty because these claims are duplicative of the Trusts' claim for accounting malpractice (the fourth cause of action) that Plaintiffs have labeled "negligence." PwC also contends that, at the very least, the court should stay this action, pending the Trustee's recovery in lawsuits against PwC among others, because whether Plaintiffs will have any out-of-pocket damages cannot be known until the Trustee recovers in the related proceedings. Finally, PwC contends that plaintiffs lack standing to assert claims for damages resulting from Lipper Convertibles' payment of allegedly excessive fees because these claims are derivative.

In addition, the Successor Liquidating Trustee that this court appointed on July 7, 2003 in the liquidation proceeding, In the Matter of the Application of Lipper Holdings, LLC, Case No. 603563/2002, has applied, via letter briefs dated May 26, 2004 and June 3, 2004, for a stay of this action pending resolution of the Trustee's own derivative action against PwC. That action seeks recovery, on behalf of the Partnership, for the same underlying conduct that Plaintiffs sue on in this lawsuit. Plaintiffs have opposed the Trustee's application for a stay through a [*2]memorandum of law dated June 1, 2004. The Trustee has also supplemented the record with letters dated August 2, 2004 and August 25, 2004. PwC has supplemented the record with a letter dated August 19, 2004 and Plaintiffs have supplemented the record with a letter dated August 13, 2004. Finally, CNA Employee's Retirement Trust and Continental Casualty Company (The "CNA Plaintiffs"), who have sued PwC in another action, have interposed an affirmation in opposition to the Trustee's application for a stay. Apparently, the CNA Plaintiffs and PwC have agreed to extend PwC's time to respond to their complaint until after this Court's resolution of this motion. (See Affirmation of Lynn Guggenhein dated June 1, 2004 at Ex A.).

For the following reasons, PwC's motion is denied, except as to the portion of Jones' claims that are derivative in nature and those claims are stayed. The Trustee's application for a stay is also denied, except as to the portion of Jones' claims that are derivative.

BACKGROUND

Lipper Convertibles was a private investment hedge fund that Lipper Holdings LLC managed. Plaintiffs made various investments in Lipper Convertibles commencing in January 1997. Plaintiffs claim they relied upon Lipper Convertibles annual and monthly reports detailing the performance of the Fund in making their investments. From 1995 through 2000, PwC audited the financial statements of Lipper Convertibles and represented to its limited partners, including Plaintiffs, that the financial statements fairly represented the financial status of the holdings of Lipper Convertibles. PwC also claimed to have audited the Partnership's annual reports pursuant to Generally Accepted Accounting Standards ("GAAS")

In reality, however, the value of Lipper Convertibles' securities holdings and the concomitant value of the Trusts' investments were significantly less than the statements reflected. Plaintiffs claim that faulty accounting practices allowed Lipper Holdings to inflate artificially the net asset value of Lipper Convertibles portfolio. An investigation that the law firm of Fried, Frank, Harris, Shriver and Jacobson performed allegedly concluded that the General Partner's valuations of the Fund's portfolio failed to "adhere to the pricing policies and procedures. . . mandated by the respective partnership agreements" and could not "be supported by any rational basis." (Compl. ¶ 7).

Plaintiffs claim they relied on the financial statements that PwC audited both for Plaintiffs' initial investment and continued investments in Lipper Convertibles. Plaintiffs accuse PwC of falsely certifying that it had "conducted each of its audits in compliance with GAAS and that the financial statements. . . were prepared in accordance with GAAP." (Compl. ¶ 13). Plaintiffs also claim that PwC: rendered substantial assistance to, and facilitated, the scheme perpetrated by Lipper Holdings and the other principals and affiliates of Lipper Holdings" . . . [when it] issued false reports certifying that there were no material weaknesses in the Fund's internal accounting controls, when, in fact, they were inadequate (or nonexistent) to assure that the General Partner's securities valuation methodology complied with GAAP, industry standards and the terms of the Partnership Agreement.

(Complaint ¶ 16).

[*3]DISCUSSION

I. Duplicative Claims

PwC does not challenge the sufficiency of Plaintiffs' pleading. Rather, PwC contends that Plaintiffs' claims for fraud, negligent misrepresentation and aiding and abetting breach of fiduciary duty impermissibly duplicate Plaintiffs' malpractice claim, because these causes of action rely on the exact same conduct that forms the basis for Plaintiffs' malpractice claim. In opposition, Plaintiffs provide this court with a long exegesis on the differences between fraud and negligent misrepresentation, but do little to explain how their fraud claim relies on facts different from their malpractice claim. This is insufficient to defeat PwC's argument because "[c]ontrary to plaintiff's assumption, it is not the theory behind a claim that determines whether it is duplicative." (Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 290 AD2d 399).

Fortunately for Plaintiffs, the court, simply reading the complaint, finds that the claims for fraud, negligent misrepresentation and aiding and abetting breach of fiduciary duty are not duplicative of the malpractice claim. For example, as Plaintiffs recognize, the biggest factual difference between fraud and negligence is the element of scienter that a plaintiff must plead to state a claim for fraud. Here, the accounting violations that Plaintiffs describe were so pervasive and so easy to uncover that, if Plaintiffs can prove these allegations, they provide "strong circumstantial evidence of recklessness" or purposeful acts. (See Lewin v. Lipper Convertibles, 2004 WL 1077930 at *2 [S.D.NY May 12, 2004]; See also Houbigant, Inc. V. Deloitte & Touche LLP, 303 AD2d 92, 100 ["An auditor's failure to verify independently financial statements may give rise to a claim for fraud, especially where the auditor "had notice of particular circumstances raising doubts as to the veracity of such information"]) (citations omitted). Thus, Plaintiffs' fraud claim differs from their malpractice claim because Plaintiffs have additionally alleged a course of purposeful activity supporting the fraud claim, unnecessary for their malpractice claim. Moreover, at the very least, the malpractice claim would not cover that part of Plaintiffs' claim seeking recovery of their initial investment, because, at that point, there was no privity between the parties. (Houbigant, Inc. v. Deloitte & Touche LLP, 303 AD2d 92, 94) Also, just because a plaintiff alleges some of the same acts and misrepresentations in connection with its malpractice claim as with the fraud and breach of fiduciary duty claims, does not vitiate the fraud claim. (See Serio v. PriceWaterhouse Coopers LLC, 781 NYS2d 7).

Finally, PwC's assertion that the fraud must occur after the malpractice has no support in the case law. The cases PwC cites for this proposition involve medical malpractice exclusively. The court sees no reason why these cases would apply to the situation here where accountants are accused of assisting a massive fraud by purposefully disregarding acceptable accounting practices. Accordingly, the court denies that part of PwC's motion to dismiss the claims for fraud, negligent misrepresentation and aiding and abetting breach of fiduciary duty as duplicative.

II. Present Injury

PwC also contends that this case is premature because it is impossible to know at this time whether PwC's conduct has caused Plaintiffs any out-of-pocket loss. PwC contends that "Plaintiffs will have been injured only if the total dollar amount of their withdrawals, plus [*4]liquidating distributions, from the Partnership ultimately proves to be less than the amount they invested." (Def. Mem. At 10). However, whether or not Plaintiffs sustained actual loss is not a reason to dismiss because "the question of whether plaintiffs sustained actual losses presents an issue of fact" (See Nevelson v. Carro, Spanbock, Kaster & Cuiffo, 290 AD2d 399 [legal malpractice]). Accordingly, that part of PwC's motion seeking dismissal because Plaintiffs' damages are indeterminate at the present time is denied.

III. Standing

PwC also contends that Plaintiffs lack standing to assert claims for damages resulting from Lipper Convertibles' payment of excessive management fees and incentive based fees because these claims are derivative and therefore belong to the Partnership. In this, PwC is correct. As it was the Partnership that paid the fees, any claim that Plaintiffs assert to recover those fees is derivative in nature. (See Broome v. ML Media Opportunity Partners L.P., 273 AD2d 63, 64 [wrongful deferral and payment of management fees claims were derivative in nature because they alleged no more than mismanagement and diversion of assets]). As this action is not derivative, to the extent Plaintiffs assert claims that rightfully belong to the Partnership, such as claims for excessive management fees that the Partnership paid, the court stays them.[FN1] This is particularly appropriate as the Trustee is already pursuing these claims against PwC on behalf of the Partnership in this court.

However, to the extent that Plaintiffs assert direct claims, such as fraud in the inducement of their initial investment in the Partnership, they are not derivative and the court therefore declines to dismiss them. (See Hirsch v. Arthur Andersen & Co., 72 F3d 1085, 1094 [2d Cir 1995] [claims based upon distribution of misleading private placement memoranda to investors was property of investors, not Trustee in bankruptcy]).

IV. Stay

Both PwC and the liquidating Trustee urge a stay of this action. The gist of both positions is that this lawsuit should await resolution of the Trustee's suit against PwC on behalf of the Partnership. The Trustee asserts that, because the Partnership is liquidating, his derivative suit differs from the sort of derivative suit that benefits an ongoing entity. This is because, the Trustee reasons, in a liquidation, anything the Trustee would recover is on behalf of the limited partners. However, this court has already ruled in this decision that the risk the Trustee will recover beyond what Plaintiffs will recover here is not a reason to dismiss this action. It is also not a reason to stay this action. The direct claims that Plaintiffs assert here are different than those the Trustee is asserting. Also, because plaintiffs with competing lawsuits are proceeding with discovery and their claims in other jurisdictions, means a stay could prejudice Plaintiffs in this case. Moreover, as the Trustee's case and this case progress, PwC can always argue that recovery in one should reduce recovery in the other or PwC can move to consolidate the cases or for a joint trial. [*5]

There is no practical reason these cases cannot proceed simultaneously. Indeed, it may be preferable in order to coordinate discovery and avoid duplication of effort in depositions and other discovery. For example, the depositions of the PwC witnesses in this action and the action that the Trustee has brought can proceed on the same day. The parties are directed to attend a status conference on November 9, 2004 at 10:00 a.m. with my court attorney to coordinate discovery efforts among the various lawsuits. This status conference will be in conjunction with the conference in Williamson v. PricewaterHouseCoopers, 602106/2004 that this court has previously scheduled.

Accordingly, it is

ORDERED THAT that part of the motion of PriceWaterhouseCoopers to dismiss this action is denied; and it is further

ORDERED THAT that part of the motion of PriceWaterhouseCoopers to stay this action is granted to the extent of staying only those claims Plaintiffs have asserted that are derivative in nature (i.e. the claims to recover excessive management fees and incentive compensation) and is otherwise denied; and it is further

ORDERED THAT the application of the liquidating Trustee to stay this action is granted to the extent of staying only those claims Plaintiffs have asserted that are derivative in nature (i.e. the claims to recover excessive management fees and incentive compensation) and is otherwise denied; and it is further

ORDERED THAT the remainder of the action is severed and shall continue.

The parties are directed to attend a status conference on November 9, 2004 at 10:00 a.m. in the courtroom, room 248, 60 Centre Street.

Dated: November 5, 2004

/s/ Karla Moskowitz

J.S.C.

Footnotes

Footnote 1: The court stays these claims rather than dismissing them for the reasons discussed in the decision and order of today in Morgado Family Partners, et al. v. Kenneth Lipper et al, Index No. 604396/2002 namely that the court cannot determine from the present record whether the Trustee lacks standing due to the doctrine of in pari delicto or whether the "adverse interest" exception applies.