Stephenson v. PricewaterhouseCoopers, LLP.
482 F. App'x 618
2d Cir.2012Background
- Stephenson, as Trustee, invested $60 million in Greenwich Sentry, a Delaware LP feeder into the Madoff Ponzi scheme.
- Greenwich Sentry was audited by PwC (Ontario LLP) from 2006 to 2008, which issued unqualified audit reports.
- After Madoff was exposed, Stephenson attempted to withdraw in December 2008 but the funds were gone.
- In January 2009, Stephenson sued PwC and others; the corrected amended complaint alleged NY professional malpractice and fraud.
- The district court dismissed the malpractice claim as preempted by the Martin Act and dismissed the fraud claim for lack of scienter.
- On appeal, the Second Circuit reviews de novo and later incorporates NY Court of Appeals’ ruling that the Martin Act does not preempt nonpremised common-law claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Martin Act preempts the malpractice claim | Stephenson contends the Martin Act preempts common-law malpractice claims. | PwC argues the district court properly dismissed as preempted. | Martin Act preemption not applicable; error in district court's dismissal. |
| Whether Stephenson has standing to bring a direct malpractice claim or a derivative holding claim | Stephenson can sue directly as an investor for negligence. | Tooley-based analysis shows the holding claim is derivative and lacks standing. | Inducement claim is direct, holding claim is derivative and lacks standing to sue directly. |
| Whether PwC owed Stephenson a duty as a potential investor | Stephenson pleads a duty under the Credit Alliance framework. | No duty owed to a non-contracting investor; no known party exists. | Plaintiff failed to plead a duty; no known-party prong satisfied. |
| Whether Stephenson adequately pleaded fraud with sufficient scienter | Alleges PwC’s reckless disregard or intent to deceive based on red flags. | Allegations do not show a strong inference of intent; many red flags not within PwC’s awareness. | SAC dismissed for failure to plead strong inference of scienter. |
Key Cases Cited
- Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536 (New York 1985) (test for establishing negligent accounting-privity relationships)
- Sykes v. RFD Third Ave. 1 Assocs., LLC, N.Y.3d 370 (N.Y. 2010) (knows the identity of relying party required for duty; lacking known party defeats claim)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (direct vs. derivative claims framework)
- White v. Guarente, 43 N.Y.2d 356 (N.Y. 1977) (standing concepts for partnership-related claims)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (recklessness standard and limits on liability for auditors)
- South Cherry St., LLC v. Hennessee Grp., LLC, 573 F.3d 98 (2d Cir. 2009) (limits on pleading recklessness and red flags)
- Chill v. General Electric Co., 101 F.3d 263 (2d Cir. 1996) (recklessness standard for fraud claims)
- Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir. 1990) (pleading falsity and scienter for fraud)
- Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478 (N.Y. 2007) (elements of fraud under New York law)
- Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 343 (N.Y. 2011) (Martin Act does not preempt non-Market Act claims)