Seiden v. Baker Tilly Hong Kong Limited
1:17-cv-02583
| S.D.N.Y. | Mar 22, 2019Background
- China North East Petroleum Holdings Ltd. (CNEP) was a Nevada corporation with SEC filings showing NY connections; Robert Seiden was appointed receiver and sued Baker Tilly Hong Kong Ltd. for negligent auditing of CNEP's 2009 financials.
- An independent accountant's report and bank records showed 176 undisclosed related‑party transactions in 2009 totaling approximately RMB 268 million (about $59M alleged) and numerous accounting red flags.
- Baker Tilly was engaged to audit CNEP's 2009 financial statements, agreed to follow PCAOB standards and U.S. GAAP, and issued an audit opinion filed with CNEP's 2010 Form 10‑K.
- Plaintiff alleges Baker Tilly knew of the related‑party transactions and red flags, failed to perform independent testing or appropriate audit responses, and issued a misleading Audit Opinion that omitted required GAAP disclosures.
- Baker Tilly was served in Hong Kong by FedEx, did not appear or answer, the Clerk entered default, and Plaintiff moved for default judgment only on Count Two (negligence and gross negligence).
- The Court found service proper, awarded default judgment on Count Two, and referred the case for an inquest on compensatory and punitive damages; attorney's fees were denied for lack of authority.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Service on foreign defendant | Service by FedEx to Hong Kong was proper under Rule 4(f)(2)(A) and Hague Article 10(a) | (No response) | Service by FedEx was proper and effective. |
| Appropriateness of default judgment | Default appropriate because Baker Tilly willfully failed to appear; no meritorious defense; plaintiff prejudiced | (No response) | Default judgment granted; factors (willfulness, lack of defense, prejudice) favor plaintiff. |
| Liability for negligence/gross negligence | Baker Tilly breached professional duty by ignoring red flags, violating GAAP/PCAOB, issuing false audit opinion causing loss | (No response) | Allegations and uncontroverted evidence suffice to establish negligence and gross negligence. |
| Damages, punitive damages, prejudgment interest, fees | Seek at least $59M compensatory, punitive damages, prejudgment interest, and attorneys' fees | (No response) | Inquest required for compensatory and punitive damages; prejudgment interest awarded at 9% from 9/30/2010; attorneys' fees denied. |
Key Cases Cited
- Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155 (2d Cir.) (default constitutes concession of well‑pleaded allegations)
- Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444 (2d Cir.) (factors district courts consider in default‑judgment decisions)
- Lenard v. Design Studio, 889 F. Supp. 2d 518 (S.D.N.Y.) (court must determine if complaint sufficiently pleads liability on default)
- Colnaghi, U.S.A., Ltd. v. Jewelers Prot. Servs., Ltd., 81 N.Y.2d 821 (N.Y.) (gross negligence standard: failure to exercise even slight care)
- Food Pageant, Inc. v. Consolidated Edison Co., 54 N.Y.2d 167 (N.Y.) (gross negligence and severe cumulative effect analysis)
- Cumis Ins. Soc'y, Inc. v. Tooke, 739 N.Y.S.2d 489 (App. Div.) (elements of professional negligence against auditors)
- Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y.) (ignoring numerous red flags can support gross negligence)
- Druskin v. Answerthink, Inc., 299 F. Supp. 2d 1307 (S.D. Fla.) (GAAP requires disclosure of material related‑party transactions)
- Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186 (2d Cir.) (attorneys' fees are not recoverable absent statute, contract, or rule)