Opinion
13927 Index No. 650144/20 Case No. 2020-03485
05-27-2021
Bruce BULLEN et al., Plaintiffs-Respondents, v. COHNREZNICK, LLP, Defendant-Appellant.
Sidley Austin LLP, New York (James O. Heyworth and Bruce R. Braun of the Bar of the State of Illinois, admitted pro hac vice, of counsel), for appellant. Oved & Oved LLP, New York (Glen B. Lenihan of counsel), for respondents.
Sidley Austin LLP, New York (James O. Heyworth and Bruce R. Braun of the Bar of the State of Illinois, admitted pro hac vice, of counsel), for appellant.
Oved & Oved LLP, New York (Glen B. Lenihan of counsel), for respondents.
Kapnick, J.P., Mazzarelli, Moulton, Mendez, JJ.
Order, Supreme Court, New York County (Barry R. Ostrager, J.), entered on or about July 27, 2020, which denied defendant accountant's motion to dismiss the complaint for failure to state a cause of action, unanimously affirmed, with costs.
Plaintiffs sufficiently alleged a cause of action for fraud with particularity ( CPLR 3016[b] ). The complaint contains "a particularized factual assertion which supports the inference of scienter," providing "some rational basis for inferring that the alleged misrepresentation was knowingly made" ( Houbigant, Inc. v. Deloitte & Touche, 303 A.D.2d 92, 97–98, 753 N.Y.S.2d 493 [1st Dept. 2003] ; see also Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559, 883 N.Y.S.2d 147, 910 N.E.2d 976 [2009] ). In particular, the "[a]llegations of ‘red flags,’ when coupled with allegations of GAAP and GAAS violations, are sufficient to support a strong inference of scienter" ( In re Bear Stearns Cos., Inc. Securities, Derivative & ERISA Litig., 763 F. Supp. 2d 423, 511 [S.D. N.Y.2011] ; see also State St. Trust Co. v. Ernst, 278 N.Y. 104, 112, 15 N.E.2d 416 [1938] ). "[A]t the pleading stage of a fraud case against an accountant, the plaintiff need not be able to make an evidentiary showing of exactly what the accountant knew as to falsehoods in the certified financial statements" ( Houbigant, Inc., 303 A.D.2d at 97, 753 N.Y.S.2d 493 ).
Plaintiffs also sufficiently alleged the element of reasonable reliance. They allegedly "took reasonable steps to protect [themselves] against deception by" having their advisor "examin[e] available financial information to ascertain the true nature of" the investment fund's asset valuation, including contacting defendant about the results of its audits, which were "matters peculiarly within the [defendant's] knowledge" ( IKB Intl. S.A. v. Morgan Stanley, 142 A.D.3d 447, 448–449, 36 N.Y.S.3d 452 [1st Dept. 2016] ). Moreover, "reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss" ( ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1045, 10 N.Y.S.3d 486, 32 N.E.3d 921 [2015] ). The same is true for the aiding and abetting fraud claim, to the extent that it may require a showing of reasonable reliance ( Bankers Conseco Life Ins. Co. v. KPMG LLP, 189 A.D.3d 402, 403, 137 N.Y.S.3d 10 [1st Dept. 2020] ).
Also as to the claim for aiding and abetting fraud, the complaint sufficiently alleged "actual knowledge" of the investment fund manager's fraud, which "need only be pleaded generally" ( Oster v. Kirschner, 77 A.D.3d 51, 55, 905 N.Y.S.2d 69 [1st Dept. 2010] ). The timing of defendant's alleged receipt of information from the prior auditor of a related fund indicating a material weakness in the process of asset valuation, as well as defendant's multiple years of auditing the fund's financial statements, allow for the inference that defendant "willingly turned a blind eye to evidence" that the fund's asset valuations were fraudulent with no documentation supporting them ( AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC, 108 A.D.3d 444, 446, 969 N.Y.S.2d 449 [1st Dept. 2013] ; see also Weinberg v. Mendelow, 113 A.D.3d 485, 488, 979 N.Y.S.2d 29 [1st Dept. 2014] ). The complaint also sufficiently alleged, inter alia, that defendant "ignored irregularities" in the fund's "books and records," which, if reviewed, would have uncovered the fraud ( Weinberg, 113 A.D.3d at 488, 979 N.Y.S.2d 29 ).
As to the claim for aiding and abetting breach of fiduciary duties, the complaint sufficiently alleged defendant's actual knowledge of the fund manager's improper related-party transactions and unauthorized loans to the related fund, given defendant's access to the fund's financial information ( Kaufman v. Cohen, 307 A.D.2d 113, 125–126, 760 N.Y.S.2d 157 [1st Dept. 2003] ), as well as defendant's "strong financial motive" to aid the fund manager, given its allegedly inflated fees (see In re Sharp Intl. Corp. [Sharp Intl. Corp. v. State St. Bank & Trust Co.], 281 B.R. 506, 513–516 [Bankr. E.D. N.Y. 2002], affd 302 B.R. 760 [E.D. N.Y.2003], affd 403 F.3d 43 [2d Cir.2005] ). There are allegations not only that defendant fail[ed] to act when required to do so," but also that defendant "affirmatively assist[ed]" the fund manager to convince one investor plaintiff to invest additional capital, which obviates any need for plaintiffs to allege that "defendant owe[d] a fiduciary duty directly to" them ( Kaufman, 307 A.D.2d at 126, 760 N.Y.S.2d 157, citing Sharp, 281 B.R. at 516 ). Finally, we do not find that plaintiffs have asserted nonactionable "holder" claims (compare Feinberg v. Marathon Patent Group Inc., 193 A.D.3d 568, ––– N.Y.S.3d –––– [1st Dept. 2021] ; Varga v. McGraw Hill Fin., Inc., 147 A.D.3d 480, 481, 48 N.Y.S.3d 24 [1st Dept. 2017], lv denied 29 N.Y.3d 908, 57 N.Y.S.3d 712, 80 N.E.3d 405 [2017] ). They do not seek "recovery for the loss of the value that might have been realized in a hypothetical market exchange that never took place," but instead assert "an out-of-pocket loss, specifically, the loss of their investment" ( Starr Found. v. American Intl. Group, Inc., 76 A.D.3d 25, 33, 901 N.Y.S.2d 246 [1st Dept. 2010], citing Continental Ins. Co. v. Mercadante, 222 A.D. 181, 182, 225 N.Y.S. 488 [1st Dept. 1927] ).