Cilp Associates, L.P. v. Pricewaterhouse Coopers LLP
735 F.3d 114
2d Cir.2013Background
- Lipper Convertibles was a hedge fund (two NY limited partnerships); limited partners purchased partnership interests, not direct securities ownership. Principal trader Edward Strafaci valued portfolio securities (illiquid convertibles) and PwC audited year-end financials 1996–2000, issuing unqualified opinions.
- Plaintiffs (multiple limited partners) invested ~$8.8M in five purchases between May 1998 and April 2001. Strafaci left in Jan 2002; Fund later announced large downward revaluation (~40–45%) and was liquidated.
- BDO Seidman prepared retrospective revaluations (BDO Reports, 2002–2003) using third‑party pricing, showing historic overvaluation (11%–49.4% differences) and the state court ordered distributions based on BDO’s figures.
- Strafaci pleaded guilty in 2004 to securities fraud, admitting he intentionally overvalued securities (valuing on hoped‑for future prices, not stated fair‑value methodology) and that those valuations affected investors’ decisions.
- Plaintiffs sued PwC asserting direct Section 10(b)/Rule 10b‑5 claims (they waived derivative claims); District Court granted summary judgment for PwC holding plaintiffs’ injuries were derivative and dismissed state claims; plaintiffs appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing / direct vs. derivative injury under Section 10(b) | Plaintiffs bought interests at fraudulently inflated prices and thus suffered direct, date‑of‑investment injuries. | PwC: plaintiffs’ losses were the Fund’s losses (shared by all partners) and thus derivative; Okongwu affidavit said damages are plaintiffs’ pro rata share of partnership losses. | Vacated summary judgment on federal claims; genuine dispute exists whether plaintiffs suffered direct injury at purchase (triable issue). |
| Sufficiency of evidence (BDO Reports & Strafaci plea) to create triable issue | Strafaci plea + BDO Reports establish overvaluation at relevant dates; exact precision of overstatement is damages, not liability. | PwC argued the BDO Reports were procedurally and substantively insufficient and Okongwu rebutted their import. | Court: plea allocution + BDO Reports (in combination) create a triable issue; District Court erred in discounting BDO. |
| Scienter required for Section 10(b) | Evidence (expert: 95% of Strafaci valuations higher than independent quotes; growing disparities) supports recklessness/conscious misbehavior by PwC. | PwC argued plaintiffs failed to show PwC acted with scienter in issuing audit opinions. | Remanded to district court to decide scienter in first instance (fact‑intensive; summary resolution inappropriate here). |
| State law fraud / negligent misrepresentation claims | Plaintiffs maintained direct state claims distinct from derivative Fund claims. | PwC relied on Continental Casualty (NY Court of Appeals) and other law that such claims are derivative absent direct date‑of‑investment injury. | Affirmed dismissal of state law claims (plaintiffs conceded dismissal under NY law / Continental Casualty). |
Key Cases Cited
- Gould v. Winstar Commc’ns, Inc., 692 F.3d 148 (2d Cir. 2012) (summary judgment standard and scienter discussion)
- Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 15 N.Y.3d 264 (N.Y. 2010) (limited partners’ state law claims treated as derivative absent direct date‑of‑investment injury)
- Bankers Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir. 1988) (shareholder/limited‑partner distinction between direct and derivative claims)
- Vivenzio v. City of Syracuse, 611 F.3d 98 (2d Cir. 2010) (movant’s burden on summary judgment)