Stephenson v. PRICEWATERHOUSECOOPERS, LLP
768 F. Supp. 2d 562
S.D.N.Y.2011Background
- Stephenson, as trustee, invested $60M in Greenwich Sentry, a BMIS feeder fund audited by PWC from 2006–2008.
- Greenwich Sentry relied on BMIS for investment management; PWC audited Greenwich Sentry’s financials and issued unqualified GAAP/GAAS opinions.
- Stephenson alleged that Greenwich Sentry’s and BMIS’s operations involved red flags and concentrated control by BMIS, without proper due diligence or risk controls.
- SAC added multiple GAAS/GAAP violation theories and red flags, arguing PWC’s unqualified opinion was knowingly fraudulent or reckless.
- The court previously dismissed most claims as derivative or preempted by the Martin Act, and found the fraud claim required a strong inference of scienter not shown in the SAC.
- Court permitted amendment but ultimately dismisses the fraud claim for lack of a strong inference of PWC’s conscious misbehavior or recklessness.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SAC pleads strong inference of fraud by PWC | Stephenson alleges GAAP/GAAS violations plus red flags showing recklessness. | PWC argues GAAP/GAAS alone do not establish scienter; red flags insufficient. | SAC fails to plead strong inference of fraudulent intent; claim dismissed. |
| Whether GAAP/GAAS violations alone establish scienter | GAAP/GAAS violations combined with red flags show scienter. | GAAP/GAAS violations by themselves are insufficient. | GAAP/GAAS violations alone do not establish scienter; insufficient. |
| Whether red flags alleged create actual awareness of fraud by PWC | Red flags, if known, would show PWC’s awareness and recklessness. | Allegations show access to information but not actual knowledge; red flags not clearly proven. | Red flags do not demonstrate actual knowledge or conscious recklessness. |
Key Cases Cited
- Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir.1995) (strong inference standard for scienter; motive or recklessness)
- Ashcroft v. Iqbal, 129 S. Ct. 1937 (U.S. 2009) (pleading standard: plausibility required)
- In re AOL Time Warner, Inc. Sec. Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) (GAAP/GAAS violations alone insufficient to show scienter; red flags considered)
- In re Tremont Sec. Litig., 703 F. Supp. 2d 362 (S.D.N.Y.2010) (red flags and auditor conduct; reliance on due diligence promises insufficient)