Federal Court Of Appeals Affirms Dismissal Of State Law Claim Of Fraud By Combination Of State Substantive Law Requirements And Federal Procedural Pleading Requirements

Stephenson v. PricewaterhouseCoopers (PWC), 11-1204-cv (2d Cir. 2012) (Summary Order), addresses the viability of claims against Canadian-organized PWC for fraud and negligence arising from PWC's unqualified audit reports attensting to the accuracy of one of the "feeder funds" into Bernard Madoff Investment Securities, LLC, which, as the Second Circuit says, "was later revealed to be a Ponzi scheme".

The Second Circuit analyzed the malpractice claim made against PWC. The District Court had determined that the claim had been preempted by New York's Martin Act. This ruling could not stand because, "[a]fter the briefs in this appeal were filed, the New York Court of Appeals held that the Martin Act does not preempt common law claims not premised on violations of the Act. Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 N.Y.3d 341, 353 (2011). Accordingly, the district court's dismissal of Stephenson's common law malpractice claim on this ground was error."

In analyzing other grounds to dismiss the claims, the Court of Appeals divided the claims into those alleging wrongdoing for "inducing" the plaintiffs investment and those arising out of the investor's decision to remain invested (also referred to as "holding" claims). Given that the plaintiff did not have a direct relationship with PWC, the Court of Appeals looked to New York substantive law requiring the plaintiff to show

that (1) the accountant was aware "that the financial reports were to be used for a particular purpose"; (2) "in the furtherance of which a known party . . . was intended to rely"; and...