Opinion
96 Civ. 0255 (GBD).
March 12, 2003
MEMORANDUM OPINION AND ORDER
Plaintiff, the Common Fund for Non-Profit Organizations ("Commonfund"), submitted a motion to this Court for judgment as a matter of law on its claim for breach of contract, or, in the alternative, for a new trial on both its breach of contract and negligence claims against defendant KPMG LLP ("KPMG") pursuant to Rules 50(b) and 59(a) of the Federal Rules of Civil Procedure. For the reasons set forth below, plaintiff's motion is denied.
Plaintiff, Commonfund, is a non-profit membership corporation that provides investment management services to its members. In 1981, the Board of Trustees of Commonfund appointed defendant, First Capital Strategists ("First Capital"), a partnership that provides securities lending and arbitrage investment services to its clients, as Commonfund's exclusive securities lending agent. The Board of Commonfund decided to adopt new investment strategies in early 1985, including index arbitrage trading involving both futures and options. Additionally, in late 1988, Commonfund engaged defendant KPMG as its new independent outside auditor.
In 1992, a trader for Commonfund's index arbitrage program lost approximately $250,000 while trading for Commonfund's account. Rather than reporting the loss to Commonfund, he secretly commenced a course of unauthorized trading to make up the loss. The trader then continued to lose tens of millions of dollars from Commonfund's account by making unhedged high-risk investments with Commonfund's money, by selling Commonfund securities without purchasing the corresponding futures or options to hedge that sale, and by engaging in types of trading that were not authorized by Commonfund. During the time that these losses were occurring, First Capital continued to falsely report profits to Commonfund every quarter, resulting in a misstatement of Commonfund's financial statements for the fiscal years 1992 through 1994.
The trader confessed his unauthorized trading on or about June 25, 1995 to First Capital partners. Commonfund was informed of the confession a few days later, at which point it immediately terminated the index arbitrage strategy. Commonfund then initiated this lawsuit in January 1996, naming KPMG, First Capital and four individual First Capital partners as defendants. The complaint also stated causes of action against KPMG for professional malpractice, breach of contract and negligent misrepresentation.
On October 2, 2000, plaintiff's two separate but related claims for negligence and breach of contract against KPMG were tried by a jury. At the end of plaintiff's case, the parties moved for judgment as a matter of law pursuant to Rule 50(a)(1) of the Federal Rules of Civil Procedure. This Court reserved decision on that motion. Defendant then rested its case without calling any further witnesses. The case was then given to the jury, and the jury returned a verdict in favor of defendant KPMG. Plaintiff then renewed its motion for judgment as a matter of law under rule 50(b) of the Federal Rules of Civil Procedure and also moved for a new trial pursuant to Rule 59(a) of the Federal Rules of Civil Procedure.
On September 27, 2000, defendants First Capital, Robert E. Frith, Keith H. Cunningham, and Paul Gangemi each filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Middle District of Pennsylvania. As a result of the bankruptcy filings, the action against those defendants was automatically stayed pursuant to 11 U.S.C. § 362(a). In addition, the Bankruptcy Court issued a Preliminary Injunction staying the litigation against defendant John J. McCollum pursuant to Sections 105 and 362 of the Bankruptcy Code. Subsequently, this Court severed the case against those defendants and granted KPMG's motion to dismiss its cross-claims against those defendants. On January 7, 2002, this Court So Ordered a Settlement and Stipulation of Dismissal of plaintiff's claims against defendants First Capital, Frith, Cunningham, Gangemi, and McCollum.
Rule 50 permits a Court to enter judgment against a party "if during a trial by jury a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue . . ." Fed.R.Civ.P. 50(a)(1). Pursuant to Rule 50(b), the party may renew its motion for judgment as a matter of law, and may alternatively request a new trial or join a motion for a new trial under Rule 59. Judgment as a matter of law may not properly be granted under Rule 50 "unless the evidence, viewed in the light most favorable to the opposing party, is insufficient to permit a reasonable juror to find in her favor." Galdieri-Ambrosini v. National Realty Dev. Corp., 136 F.3d 276, 289 (2d Cir. 1998) (citing Sir Speedy, Inc. v. L P Graphics, Inc., 957 F.2d 1033, 1039 (2d Cir. 1992). The court "`must give deference to all credibility determinations and reasonable inferences of the jury,' and may not weigh the credibility of witnesses or otherwise consider the weight of the evidence." Caruolo v. John Crane, Inc., 226 F.3d 46, 51 (2d Cir. 2000) (citing Galdieri-Ambrosini, 136 F.3d at 289). Therefore, a court should only grant a motion for judgment as a matter of law if: "(1) there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or (2) there is such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded [persons] could not arrive at a verdict against [it]."Id. (citations omitted) (alterations in original).
Additionally, under Rule 59(a) of the Federal Rules of Civil Procedure, "a new trial may be granted to all or any of the parties and on all or part of the issues." However, "a motion for a new trial ordinarily should not be granted unless the trial court is convinced that the jury has reached a seriously erroneous result or that the verdict is a miscarriage of justice." Caruolo, 226 F.3d at 54 (quoting Atkins v. New York City, 143 F.3d 100, 102 (2d Cir. 1998)). Therefore, the court may grant a new trial if "the jury's verdict is against the weight of the evidence." DLC Management Corp. v. Town of Hyde Park, 163 F.3d 124, 133 (2d Cir. 1998) (citing Byrd v. Blue Ridge Rural Elec. Co-op, 356 U.S. 525, 550 (1958)). A court considering a motion for a new trial must bear in mind that a motion should only be granted when the jury's verdict is "egregious," and the court should rarely disturb a jury's evaluation of a witness's credibility. Id. at 133-134. Moreover, a motion for a new trial on the ground that the verdict was against the weight of the evidence is in the sound discretion of the trial judge. Metromedia Co., v. Fugazy, 983 F.2d 350, 363 (2d Cir. 1992) (citing Brady v. Chemical Construction Corp., 740 F.2d 195, 200 (2d Cir. 1984); Bevevino v. Saydjari, 574 F.2d 676, 684 (2d Cir. 1978)).
Commonfund first argues that this Court should grant plaintiff judgment as a matter of law or a new trial on all claims because the evidence admitted at trial established that KPMG was liable to Commonfund for breach of contract by breaching its agreements to perform particular procedures as part of its audits. Commonfund argues that KPMG left uncontested evidence sufficient to require a verdict for plaintiff, or a new trial. Furthermore, Commonfund asserts that the method used by KPMG to dispute Commonfund's evidence, arguments of counsel in opening statement, cross-examination and summation, were not admissible and may have influenced the jury.
Plaintiff clearly defined in its opening statement the issues for the jury's determination. It argued that "this is a case about how Common Fund lost $137.6 million because KPMG, one of the nation's big five accounting firms, didn't do what it was repeatedly asked to do, what it repeatedly promised to do, what professional standards required it to do, and what it repeatedly assured Common Fund it had done." (Tr. at 38.) More directly, plaintiff argued to the jury that "between 1988 and 1992, the engagement letters, which were all virtually identical, made two important promises that related to First Capital. First, the engagement letters promised that KPMG would check the value of First Capital's investments. Second, they promised that they would review First Capital's internal controls, procedures that should have insured that Ahrens [First Capital's trader] complied with the guidelines. These were very important promises. If KPMG had kept these promises, Common Fund would never have suffered any substantial loss. . . . Now in addition to these specific promises, the engagement letters contain another important promise. KPMG in the engagement letters promised to perform its audits in accordance with generally accepted auditing standards, affectionately known as GAAS." (Tr. at 55, 58.)
Commonfund alleges that it proved each element of a contract claim, namely (1) existence of a contract; (2) non-performance by KPMG; (3) performance by Commonfund; and (4) damages caused by KPMG's breach. See Terwillinger v. Terwillinger, 206 F.3d 240, 246 (2d Cir. 2000). As to the first element of a contract claim, neither party disputes the existence of a contractual relationship between the parties between 1989 and 1994.See Memorandum In Support of Plaintiff's Motion For Judgment As A Matter of Law Or, In The Alternative, For A New Trial ("PL. Mem.") at 4; Defendant KPMG LLP's Memorandum of Law In Opposition To Plaintiff's Motion For Judgment As A Matter of Law Or In The Alternative For A New Trial ("Def. Mem") at 4. However, the scope of what was required of the parties under the contract was greatly disputed during the trial. Commonfund contends that in the engagement letters, KPMG promised to value the investments at First Capital and to review First Capital's internal controls. However, KPMG argues that "it was never hired to audit First Capital, that it was retained to review — but not audit or otherwise provide assurance about — internal controls at First Capital, that any valuation work that it was required to do was in connection with its audit of TCF's [Commonfund's] investment funds, and that by 1992, TCF [Commonfund] no longer cared whether KPMG visited First Capital." Def. Mem. at 4-5.
Commonfund argues that at trial it proved that KPMG breached its contractual obligations. It asserts that there is "undisputed evidence in the record [that] demonstrates that KPMG did not, in any audit year from 1992 to 1994, value the investments at First Capital, as KPMG had repeatedly promised to do." Pl. Mem. at 6. Additionally, Commonfund claims that its audit expert, Ernest Ten Eyck, testified that KPMG failed to perform the market valuations of First Capital's positions, which was corroborated by the fact that "KPMG's audits did not detect the losses at First Capital, something that the promised market valuation would have discovered had it been performed." Pl. Mem. at 6. However, KPMG argues that there was substantial evidence that it performed the tasks that Commonfund alleged that it failed to carry out. Additionally, much of the evidence on this issue came from witnesses, both Commonfund's expert, as well as auditors from KPMG, which KPMG asserts is not subject to challenge by plaintiff since assessment of witness credibility is in the sole province of the jury. Def. Mem. at 9.
Commonfund further argues that it fulfilled its own obligations under the contracts by paying KPMG's fees in full and by providing KPMG with all of the information that it requested. KPMG contests this allegation arguing that "there was substantial evidence before the jury that TCF [Commonfund] had a secret side arrangement with its securities custodian that permitted securities from the portfolios of TCF's [Commonfund's] funds to be sold, but yet remain on TCF's [Commonfund's] custodial statements as if TCF [Commonfund] still owned them, which permitted [the broker's] unauthorized trading to go undetected." Def. Mem. at 6. Therefore, defendant argues that the custodial statements on which KPMG relied in performing its audits were inaccurate as a result of Commonfund's own actions.
Finally, Commonfund contends that they proved that damages resulted from KPMG's breach of contract. However, the jury never reached the issue of damages since it found neither a breach of contract nor negligence on KPMG's part. KPMG argues that even if the jury had reached the issue of damages, that Commonfund failed to prove that defendant KPMG caused damages resulting in losses of $137 million dollars.
In order for the jury to decide whether KPMG was in fact liable to Commonfund, the jury had to resolve factual disputes regarding the definitions of the terms within the contract, and whether or not the parties had performed their mutual obligations pursuant to that contract. Critical to this determination was deciding the meaning of the term "valuing the positions" and "reviewing the internal controls" at First Capital as described in the engagement letters. This Court finds that there was ample evidence in this record for a jury to accept defendant's position regarding the interpretation of the contract. The jury was not bound to accept Commonfund's view of the case merely because KPMG did not present a case of its own. The burden of proving this case by a preponderance of the evidence rested on plaintiff, and the jury was free to decide that Commonfund did not sustain that burden. This court finds that when viewed in the light most favorable to defendants, there was legally sufficient evidence for a reasonable jury to find in KPMG's favor on the breach of contract claim. See Galdieri-Ambrosini, 136 F.3d at 289. Therefore, plaintiff's motion for judgment as a matter of law pursuant to Rule 50(a)(1) of the Federal Rules of Civil Procedure, on this issue is denied. Moreover, this Court finds that the jury did not reach a seriously erroneous result, nor was the verdict a miscarriage of justice. See Caruolo, 226 F.3d at 54. Therefore, plaintiff's motion for a new trial pursuant to Rule 59(a) of the Federal Rules of Civil Procedure on this issue is also denied.
Commonfund also contends that this Court should grant a new trial on its negligence claim due to the "unrebutted evidence adduced at trial that KPMG failed to meet its professional obligations under generally accepted auditing standards ("GAAS")." Pl. Mem. at 11. Among the "unrebutted evidence" on which Commonfund relies is the testimony of its expert, Ernest Ten Eyck. Commonfund asserts that Mr. Ten Eyck expressed his opinion that KPMG failed to comply with GAAS audits, and that KPMG introduced no expert testimony to rebut the conclusions. However, as the Court instructed the jury during the trial, the jury was not required to accept testimony of an expert merely because he or she is an expert. See Tr. at 1489 ("You may give the expert testimony whatever weight, if any you find it deserves in light of all the evidence in the case. You should not, however, accept that witness's testimony merely because he is an expert."); see also 4 L. Sand, et al., Modern Federal Jury Instructions, Instruction 76-9 (2000). Moreover, the testimony from plaintiff's expert conflicted with the testimony of KPMG's auditors, requiring the jury to assess the credibility of these witnesses. Therefore, this Court should refrain from setting aside the verdict and granting a new trial on this basis. See Metromedia, 983 F.2d at 363.
Finally, Commonfund argues that this Court should grant plaintiff's motion for a new trial because it alleges that the Court gave the jury an erroneous instruction on the doctrine of substantial performance. The plaintiff contends that the Court's instruction both created an erroneous impression regarding the standard of liability, and was exploited by defendant resulting in an error that was not harmless. In its charge, the Court instructed the jury that
Two, under the second element, plaintiff Common Fund must prove by a preponderance of the evidence that it performed its own obligations under the terms of the contract. It does not have to prove it performed every detail of the contract. It must prove, however, that it provided substantial performance of these duties and responsibilities. Substantial performance means a good faith effort that actually achieved the essential purpose of the contract and provided the defendant with the fundamental benefits that it was supposed to received from the contract.
Three, under the third element plaintiff Common Fund must prove by a preponderance of the evidence that defendant KPMG failed to perform its obligations under the terms of the contract. Again, as in the case of the plaintiff, the plaintiff [sic] does not have to perform every detail of the contract. The defendant, however, must also provide substantial performance of those duties and responsibilities. Again, substantial performance means a good faith effort that actually achieved the essential purpose of the contract and provided the plaintiff with the fundamental benefit that it was supposed to receive from the contract.
Tr. at 1501-02.
"[A] jury instruction will be deemed adequate, so long as the charge, taken as a whole, is correct and sufficiently covers the case so that a jury can intelligently determine the questions presented to it." Care Travel Co. v. Pan Am World Airways, Inc., 944 F.2d 983, 996 (2d Cir. 1991). However, "[a] jury charge is erroneous if the instruction misled the jury as to the proper legal standard or did not adequately inform the jury of the law." Hester v. BIC Corp., 225 F.3d 178, 186 (2d Cir. 2000).see also Courtney v. City of New York, 20 F. Supp.2d 655, 658 (S.D.N.Y. 1998) ("[w]hen the request for a new trial is based on an alleged error in the jury charge, a new trial is granted only when `taken as a whole, the jury instructions gave a misleading impression or inadequate understanding of the law.'") (citing Luciano v. Olsten Corp, 110 F.3d 210, 218 (2d Cir. 1997). "A court's charge must be tested by viewing it as a whole and will not be disturbed if it is `correct and sufficiently covers the case so that a jury can intelligently determine the questions presented to it.'" Pahuta v. Massey-Ferguson, Inc., 170 F.3d 125, 135 (2d Cir. 1999) (citing Hathaway v. Coughlin, 99 F.3d 550, 552-553 (2d Cir. 1996)). If an error exists, and where such error is other than harmless, a new trial is required. Holzappel v. Town of Newburgh, NY, 145 F.3d 516, 521 (2d Cir. 1998).
Commonfund requested the language on substantial performance regarding its own obligations under the contract in Plaintiff's Revised Requests to Charge, October 10, 2000 at 25 (citing Robert E. Kehoe, Instructions for Contract Cases § 6.03). Plaintiff contends that it need only substantially perform in order to honor its obligations under the contract, while nothing less than total performance by defendant of every representation and promise contained in the engagement letters was required. During the charging conference, this Court gave plaintiff the choice of either eliminating the language entirely from the instructions, or including the language of substantial performance for both parties. Given the nature of the evidence and issues before the jury, the Court stated that plaintiff "could not have it both ways" as plaintiff had requested in its proposed charge. (Tr. at 1369.) Commonfund replied that their position was that they wanted to have it both ways, but, with their objection registered, they requested that the Court leave the language in with regards to both plaintiff and defendant. Id.
Plaintiff now claims that the language of the instruction as applied to both parties was somehow improperly and prejudicially considered by the jury with regard to the defendant. However, on the facts of this case, as presented to the jury during trial, the instruction could not have misled the jury because plaintiff neither introduced evidence nor argued that any minor or immaterial breach of the contract caused the loss to plaintiff. Therefore, Commonfund cannot now argue that instructing the jury that both plaintiff and KPMG need substantially perform their contractual duties and responsibilities was error, given that it argued throughout the trial that KPMG's breaches were both substantial and material. See, e.g., Pierce v. F.R. Tripler Co., 955 F.2d 820, 826 (2d Cir. 1992) ("[w]here a party presents no evidence to support a particular theory of his case, he has no right to a jury instruction on that point.") On the facts and evidence presented to the jury during trial, this jury could not have found that defendant only committed a minor excusable breach which caused the loss to plaintiff. The definition of substantial performance that was given to the jury was "a good faith effort that actually achieved the essential purpose of the contract and provided the plaintiff with the fundamental benefit that it was supposed to receive from the contract." Tr. at 1501-02 (emphasis added). Given this definition of substantial performance, the jury could not have reasonably determined that KPMG's effort actually achieved the essential purpose of the contract and provided plaintiff with the fundamental benefit it was supposed to receive, but at the same time breached the contract. If the jury found for plaintiff on the facts and evidence that plaintiff presented, the jury would have to conclude that the breaches that had occurred were material and therefore inexcusable. Having failed to convince the jury of its theory of the case, plaintiff now attempts to speculate that had defendant performed some unspecified insubstantial act, it may have uncovered the initial losses sustained by Commonfund at First Capital. Furthermore, the essence of the breach of contract that plaintiff alleges resulted in damages was defendant's alleged negligence in its performance of the audits. The jury clearly rejected plaintiff's theory that defendant was negligent in the performance of the contract. Therefore, there would have been an inconsistent result had the jury found that defendant breached the contract on this basis, but was not negligent. Negligent performance, rather than a failure or refusal to perform, was the only theory of plaintiff's alternative breach of contract claim. On the basis of the evidence presented, plaintiff clearly failed to demonstrate to the jury that any deficiency in KPMG's auditing procedures was a cause of Commonfund's losses.
The only argument that plaintiff makes concerning some insubstantial breach is defendant's failure to visit the offices of First Capital in 1992, the only year out of six years from 1989-1994 that defendant did not physically go to First Capital's offices during their audit of Commonfund. There was no evidence in this case, however, on which a reasonable jury could have concluded that the lack of this one visit was a breach of the contract that resulted in the damages to this plaintiff.
Additionally, the parties continued their contractual agreement every year from 1989 through 1994 based upon defendant's yearly representation that the audit was completed " substantially in accordance with the plan described in the engagement letters." See Wood v. Sherwood, 146 N.Y.S. 465, 467 (1914) (emphasis added). The plaintiff argued to the jury that this was a representation by defendant that the audit had been fully conducted in accordance with the contractual provisions. In plaintiff's opening statement, counsel repeatedly made reference to the SAS 61 letters written by KPMG to the Commonfund at the end of each audit. In describing these letters plaintiff's counsel argued that "these letters represented every year that the audit had been `completed substantially in accordance with our plan outlined in a letter to you dated' whatever date. It's a reference in each case to the engagement letter. So here they're telling them we did the audit in accordance with the letter we gave you." Tr. at 60, 69.
Plaintiff requested the following charge on defendant's failure to perform:
Commonfund must prove by a preponderance of the evidence that KPMG failed to perform its obligations under at least one of the contracts. Commonfund claims that KPMG failed to perform in various respects, including:
• failing to verify the market values of the investments managed by First Capital to appropriate external sources;
• failing to review and evaluate internal controls in place at First Capital; and
• failing to conduct the audits in accordance with Generally Accepted Auditing Standards.
If you find that KPMG was required to perform any of these obligations under any of the contracts, but failed to do so, you must find that KPMG breached its contract with Commonfund.
Pl's Revised Requests to Charge at 24.
The jury instruction given by the Court was consistent with the theories of the parties, the evidence presented, and the law. Given that, this Court's charge "sufficiently covers the case so that the jury could intelligently determine the questions presented to it." Pahuta, 170 F.3d at 135. This Court finds that the jury instruction was correct, and plaintiff is therefore not entitled to a new trial based on the challenged jury instruction. Moreover, in light of the evidence and theory of plaintiff's case, any error in giving the instruction would have been harmless. See e.g. Renz v. Grey Adver., Inc., 135 F.3d 217, 224 (2d Cir. 1997) (finding erroneous jury charge harmless where evidence was so strong that a correct jury charge would not have made a difference to the verdict).
Therefore, Commonfund's motion for judgment as a matter of law on its claim for breach of contract, or, in the alternative for a new trial on all claims against defendant KPMG is DENIED.