Opinion
B324097
07-30-2024
MICHAEL COLACO, Plaintiff and Appellant, v. MARCUM LLP et al., Defendants and Respondents
Outwater & Pinckes, David E. Outwater and Randi E. Pinckes for Plaintiff and Appellant. Garrett & Tully, Stephen J. Tully, Ryan C. Squire, Brian W. Ludeke, and John C. Tully for Defendants and Respondents.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County No. BC711605. Ruth Ann Kwan, Judge.
Outwater & Pinckes, David E. Outwater and Randi E. Pinckes for Plaintiff and Appellant.
Garrett & Tully, Stephen J. Tully, Ryan C. Squire, Brian W. Ludeke, and John C. Tully for Defendants and Respondents.
ASHMANN-GERST, J.
After he lost his investment with certain investment funds, plaintiff and appellant Michael Colaco (Colaco) brought this action against Marcum LLP, the accounting firm that the funds had retained to audit the investments, and its partner, Steve Rapattoni (collectively Marcum), alleging that Marcum made negligent misrepresentations in its audit opinions. Marcum successfully moved for summary judgment on the grounds that Colaco's complaint was time-barred. Colaco appeals, arguing that triable issues of fact exist regarding when he knew or should have known that Marcum's audit was flawed.
We affirm.
FACTUAL AND PROCEDURAL BACKGROUND
Factual background
Stuart Frost (Frost) created Frost VP Seed LLC (Seed Fund) and Frost VP Early Stage Fund II, L.P. (Fund II). Frost also created the incubator, Frost Data Capital, LLC. The model of the Frost Funds was that they would form new companies, called portfolio companies, which would share the cost of the incubation services provided by Frost Data Capital, including providing officers, back office staff, accounting and financial, marketing, consulting, and other services. The portfolio companies paid the incubator monthly fees for those services.
The Seed Fund and Fund II are referred to as the Frost Funds.
Marcum audited Seed Fund's financial statement for 2012 through 2015, and it audited Fund II's financial statement for 2013 through 2015. Each audit report indicates that the funds' audited financial statements were "fairly presented." Colaco alleges that before he made his $6 million investment, Frost told him that Marcum's 2012 audit of the Seed Fund was "clean" and Colaco relied upon this statement when he decided to invest in the Fund II general partner.
That an audit is unqualified, or "clean," "is the highest level of assurance . . . an auditor can give on an organization's financial statements." (In re Ikon Office Solutions, Inc. (3d Cir. 2002) 277 F.3d 658, 663, fn. 4.)
On May 29, 2013, Colaco, a sophisticated businessman and investor, signed an operating agreement for Frost Venture Partners GP, LLC, by which he invested $6 million for a membership in the general partner of Fund II. In the subscription agreement and investor questionnaire for Fund II that Colaco signed in connection with his investment, Colaco acknowledged "the various risks of" his investment "as well as the fees and conflicts of interest to which the Fund [was] subject." He expressly consented and agreed to "the payment of fees so described to the parties identified as the recipients thereof, and to such conflicts of interest." Moreover, before he invested in Fund II, Colaco was advised by lawyers assisting him with his investment due diligence that, given Frost's conflict of interest, there was a risk of abusive behavior by Frost in overcharging incubation fees.
Colaco testified that before he made his 2013 investment relating to Fund II, he heard from Bill Guerry (Guerry), Frost Data Capital's chief financial officer, that there was a potential for a conflict of interest with respect to these incubation fees that were charged to the portfolio companies.
Colaco was a board member of several of the companies in the Fund II portfolio that paid incubator fees to Frost Data Capital. In 2014 and 2015, he received board minutes and financial information concerning those companies, including the amount of incubation fees the portfolio companies were paying each month.
Also in 2014 and 2015, the chief executive officers (CEOs) of some of the portfolio companies complained to Colaco that the incubation fees were excessive. In fact, on July 26, 2014, Colaco sent Frost an e-mail in which he raised a concern about whether the burn rate (i.e., rate of expenditure) of each company was being properly managed. Colaco was aware that the incubator fees had a direct impact on the companies' burn rates.
Other CEOs told Colaco that they were "extremely satisfied" with the incubation services. But Colaco was on the board of the companies whose CEOs reported that the fees were excessive; he was not on the boards of the companies whose CEOs were "extremely satisfied."
Colaco testified that the portfolio companies' burn rate includes incubation fees paid to the Frost incubator.
Throughout this time, Colaco received financial documents regarding Fund II, but they were either incomplete and/or inconsistent. Colaco questioned Frost and Guerry regularly regarding whether the portfolio companies were getting good value for what they were spending on incubator fees.
In September 2015, Michael Kramer (Kramer), an investor in Fund II, contacted Colaco via e-mail, expressing his disappointment in Fund II's performance. Kramer described Frost as an "unethical [and] unscrupulous individual," and wanted to talk to Colaco about steps they could take to preserve their investments. During a follow-up conversation, Kramer told Colaco that he believed Frost had engaged in a Ponzi scheme to defraud investors. Colaco later learned that Kramer asked Frost to return his initial investment; Frost agreed to do so. Kramer encouraged Colaco to do the same.
Colaco testified that Frost described Kramer as an unhappy investor.
On January 29, 2016, Colaco received an anonymous e-mail accusing Frost of negligence and fraud: Frost "has maintained funding to portfolio companies that are not viable and uses those companies as piggy banks to fund people working on everything but the company they are employed by. He continues to run his Ponzi scheme, raising money from ignorant investors under the guise of a third fund knowing full well that the deals he has with his so called partners are not worth the paper they were written on."
The complaint
On June 26, 2018, Colaco and other investors filed the instant lawsuit for negligent misrepresentation against Marcum.The operative pleading is the third amended complaint. As summarized by the trial court: "Plaintiffs, including . . . Colaco . . ., are investors who invested in three investment entities called the Frost Funds. [Citation.] Defendant Marcum is a large accounting firm that issued audit opinions for the financial statements of the Frost Funds for each of the years ending 2012 through 2015. [Citation.] In making and maintaining their investments with the Frost Funds, Plaintiffs examined and/or relied on these financial statements. [Citation.] The gravamen of this action is that Marcum's financial statements contained certain negligent omissions and representations and that, had Marcum not been negligent in the preparation of the statements, Plaintiffs would have become aware of the issues with the Frost Funds and would not have lost their investments. [Citation.]
In 2018, an arbitration proceeding occurred between certain Frost entities and an investor, Hollencrest Bayview Partners, LP (theHollencrest arbitration). On June 7, 2018, the arbitrator issued his final award, finding that the incubator had imposed excessive incubator fees on the portfolio companies, and that Fund II's general partner, in which Colaco had invested, was liable for fraud and punitive damages. Colaco filed the instant lawsuit weeks later. On appeal, he claims that he was unaware of Marcum's alleged negligence until the issue was fleshed out in theHollencrest arbitration.
"The Frost Funds were started by non-party Stuart Frost. [Citation.] Frost used the Frost Funds to found and capitalize several companies that used big data to solve problems and generate profit. [Citation.] These companies, the Portfolio Companies, were directly or indirectly controlled by Mr. Frost. [Citation.]
"Mr. Frost had a separate incubator entity called Frost Data Capital, LLC .... [Citation.] Mr. Frost directed the Portfolio Companies to hire the Frost Incubator to provide shared advisory and support services to the Portfolio Companies. [Citation.] The Portfolio Companies paid the Frost Incubator monthly fees for these services. [Citation.]
"From Plaintiffs' perspective, the problem with these transactions is that Mr. Frost was on all sides of them." "Because Mr. Frost was on all sides of these transactions, they were 'related party transactions' under generally accepted accounting principles (GAAP). Under GAAP, when a firm such as Marcum conducts an audit of companies such as the Portfolio Companies, the audit sheets must include detailed information about any related party transactions. [Citation.]" But, "Marcum's audit sheets lacked any reference to any party transactions," prompting Colaco and the other allegedly damaged investors to sue Marcum and its partner, Steve Rapattoni, "for negligently misrepresenting that the audit sheets were prepared in accordance with GAAP, which in fact Marcum failed to disclose known related party transactions on any of the Frost Funds audit sheets for each of the years ending 2012 through 2015. [Citation.]"
Marcum's motion for summary judgment
Marcum filed a motion for summary judgment, arguing, inter alia, that Colaco's claims were time-barred. According to Marcum, Colaco, a sophisticated businessman and investor, "had knowledge [of], and certainly the ability to discover the facts underlying his claims years before the two-year limitations period preceding the June 26, 2018[,] filing of his suit." "With all his knowledge of the facts of claimed wrongdoing and fraud against Frost during 2014 to January 2016, coupled with his knowledge there was an auditor of Fund II, Colaco had a duty to 'go find the facts' concerning the content of the audits he now alleges against Marcum-he could not 'wait for the facts to find him.' [Citation.] This is because at that point in 2014 and 2015, Colaco was charged with a duty to investigate, and therefore could 'not sit idly by for at that point the statute of limitations [began] to run.' [Citation.]"
"Furthermore, Colaco is also charged with knowledge of all facts a proper performance of the fiduciary duty to investigate he admits he owed would have yielded. [Citations.] Those facts are the same facts Colaco alleges against Marcum here: that Marcum was not aware and did not report the fraud and claims of excessive incubation fees Colaco himself was aware of, but didn't disclose to Marcum or anyone else. [Citation.] Therefore, as a matter of law, beginning by 2014 and continuing to January 2016, Colaco had notice that Marcum's audit reports at the very least 'might be incorrect' in not reporting the incubation fees of which Colaco had knowledge and notice, so as to commence the statute of limitations at that time, meaning it expired in 2016 and no later than January 2018-that is, long before he filed this action on June 26, 2018. [Citation.]"
Colaco's opposition
Colaco opposed Marcum's motion. He argued that factual questions existed regarding what Colaco heard about the incubator fees and how a reasonable investor would have interpreted Marcum's audit in light of the rumors. In other words, it was disputed whether complaints from other portfolio company CEOs would cause a reasonable investor to suspect that Marcum had failed to properly audit the Frost Funds. Finally, Colaco contended that the purported "storm warnings" that would have triggered inquiry notice were irrelevant to whether a reasonable person would have suspected that Marcum, the accounting firm, failed to follow auditing standards related to the portfolio company/incubator transactions. In sum, Colaco asserted that Marcum failed to show that "the information known to Colaco would, as a matter of law, cause a reasonable person to suspect that Marcum failed to audit the Incubator fees as required under professional standards. As such, the statute of limitations [could not] be adjudicated on summary judgment."
"Even assuming, arguendo, that Colaco was on 'inquiry notice' of his claims against Marcum, there" was still a triable issue of fact as to whether he exercised reasonable diligence and performed an adequate investigation.
Trial court order
The trial court granted Marcum's motion. It found that "the statute of limitations on Colaco's claim has run, and Colaco has not presented and cannot present evidence to raise a triable issue thereto." After summarizing the applicable law, the trial court identified the evidence that demonstrated that "Colaco was aware of the existence of the incubator and of the potential for abuse from the beginning. He was in possession of documents that contained the amounts of the incubator fees, and he repeatedly inquired about whether the incubator fees were fair."
The trial court continued: "Against this background, 'storm warnings' started to gather, first in 2014 and 2015, when some of the portfolio company CEOs raised concerns that the incubator fees were excessive. Kramer raised concerns in 2015, and an anonymous tipster who clearly had knowledge of the situation sent a detailed email listing additional concerns about the funds. The tipster's statement that [Mr.] Frost 'has maintained funding to portfolio companies that are not viable and uses those companies as piggy banks to fund people working on everything but the company they are employed by' because it speaks directly to how the Portfolio Companies were using their funds and would have provided a reasonably prudent investor even more of a reason to think that something was amiss with the clean status of the prior audit.
"As part of his case, Colaco is alleging, and must prove, that his reliance on the clean status of the audit was a substantial factor in causing him to make his investment. But a sophisticated and reasonably prudent investor who had relied on the clean status of an audit in making a very substantial investment, after seeing concerns and complaints about the incubator fees and the status of the funds in general pile up, would be compelled to go back to the audit and investigate it to see if it reported these problems. At that time, he or she would have seen that the audits did not, in fact, disclose the related party transactions he was concerned about. This would have put him or her on notice of the fact that the 'clean' status of the audit on which he or she relied was false, thus triggering the beginning of the limitations period. This is all the more true for an individual such as Colaco, who sat on the board of directors of several of the portfolio companies who are alleged to have paid the excessive fees. (Fn. omitted.)
"All of the events discussed in this section took place by January 2016. [Marcum's] evidence demonstrates that the tolling of the statute of limitations due to delayed discovery ended by that date at the latest, which also means the statute of limitations on this claim ran by January 2018. [Marcum has] therefore presented evidence demonstrating that this action, which was filed on June 26, 2018, is time-barred."
The trial court then turned to Colaco's evidence to assess whether he raised a triable issue of fact. After reviewing his evidence, it determined that Colaco did not meet his burden. "[T]he fact that an investor may have heard forecasts for clearer skies does not invalidate the inquiry notice that other storm warnings may have provided the investor. In the same vein, and extending the analogy perhaps a bit too far, the fact that the forecasters of clear skies attempted to impeach the credibility of the forecaster of storms does not invalidate the inquiry notice provided by the storm warnings, especially when there is already some amount of animus between the two sides." All that mattered was that the investor (Colaco) was placed on notice that Marcum's audit might have been incorrect.
The trial court rejected Colaco's further argument that "even if Marcum [was] able to show that Colaco knew about the incubator fee mismanagement before June 2016, those wrongs [were] 'too attenuated' from the negligen[t] misrepresentation of Marcum to have provided Colaco with notice as a matter of law." After all, there was no evidence "of any express statements to Colaco about Marcum's wrongdoing in particular." And, "Colaco knew about the existence of the Portfolio Company/Incubator related party transactions and the potential for abuse. He repeatedly heard complaints about these related party transactions along with general concerns about the management of the funds and companies which were sufficient to place him on inquiry notice regarding incubator fee mismanagement. This, in turn, would have put a reasonably prudent investor who had heard that an audit was 'clean,' from none other than [Mr.] Frost, on notice that the status of the audit as 'clean' might not have been true, or wrong or erroneous. Thus, while the complaints and concerns Colaco heard about the Funds did not include any express 'suggestions' that the 2012 audit was inaccurate, the complaints certainly would have suggested to a reasonable prudent investor in Colaco's shoes, that is, one who had heard [that] the audit was clean, who had substantially relied on that conclusion in making his $6 million investment, and who had the specific knowledge about the incubator fees that Colaco at the time did, that the audit was inaccurate." Judgment was entered, and Colaco's timely appeal ensued.
DISCUSSION
I. Summary judgment and standard of review
A "motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." (Code Civ. Proc., § 437c, subd. (c).) A defendant moving for summary judgment bears the burden of showing that at least one element of a cause of action "cannot be established, or that there is a complete defense to the cause of action." (§ 437c, subd. (p)(2).) "The expiration of the applicable statute of limitations is one such complete defense. [Citations.]" (Genisman v. Carley (2018) 29 Cal.App.5th 45, 49.)
All further statutory references are to the Code of Civil Procedure unless otherwise indicated.
"A defendant moving for summary judgment based on the affirmative defense of the statute of limitations carries its burden by presenting evidence establishing that the plaintiff's claim is time-barred. [Citation.]" (Genisman v. Carley, supra, 29 Cal.App.5th at p. 49.) If the defendant meets this initial burden, the burden shifts to the plaintiff "to show that a triable issue of one or more material facts exists as to" the defense. (§ 437c, subd. (p)(2).) "That is, the plaintiff must submit evidence that would allow a 'reasonable trier of fact [to] find in plaintiff['s] favor on the statute of limitations issue.' [Citations.] 'If defendant[] presented evidence establishing the defense and plaintiff[] did not effectively dispute any of the relevant facts, summary judgment was properly granted. [Citation.]' [Citation.]" (Genisman, supra, at p. 49.)
We review the trial court's order de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in that party's favor. (Gonzalez v. Mathis (2021) 12 Cal.5th 29, 39.)
II. Relevant law
An auditor or accountant "owes no general duty of care regarding the conduct of an audit to persons other than the client. An auditor may, however, be held liable for negligent misrepresentations in an audit report to those persons who act in reliance upon those misrepresentations in a transaction which the auditor intended to influence ...." (Bily v. Arthur Young & Co. (1992) 3 Cal.4th 370, 376 (Bily).)
The statute of limitations for a negligent misrepresentation claim is two years. (§ 339, subd. (1); Butcher v. Truck Ins. Exchange (2000) 77 Cal.App.4th 1442, 1467-1468.) "The limitations period commences when the cause of action accrues. [Citations.] 'Generally speaking, a cause of action accrues at "the time when the cause of action is complete with all of its elements."' [Citation.] 'An exception to the general rule for defining the accrual of a cause of action-indeed, the "most important" one-is the discovery rule.' [Citations.] The application of that rule is the crux of the dispute here." (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1317-1318.)
"The discovery rule 'postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action. [Citations.]" (E-Fab, Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th at p. 1318.)
"The discovery rule 'protects the plaintiff, whose cause of action is preserved when, despite diligent investigation, he is blamelessly ignorant of the cause of his injuries.'" (E-Fab, Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th at p. 1318.) "The discovery rule 'is based on the notion that statutes of limitations are intended to run against those who fail to exercise reasonable care in the protection and enforcement of their rights; therefore, those statutes should not be interpreted so as to bar a victim of wrongful conduct from asserting a cause of action before he could reasonably be expected to discover its existence.' [Citation.] Thus, in actions where the rule applies, the limitations period does not accrue until the aggrieved party has notice of the facts constituting the injury. [Citation.]" (Ibid.)
"Notice may be actual or constructive. [Citation.] Actual notice is 'express information of a fact,' while constructive notice is that 'which is imputed by law.' [Citation.]" (E-Fab, Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th at pp. 13181319.)
"For purposes of accrual of the limitations period, inquiry notice is triggered by suspicion. As the California Supreme Court explained in [Jolly v. Eli Lilly &Co. (1988) 44 Cal.3d 1103, 1111]: 'Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, [he or] she must decide whether to file suit or sit on [his or] her rights.' [Citation.] The court recently reaffirmed the suspicion rule in [Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 803], saying 'under the delayed discovery rule, a cause of action accrues and the statute of limitations begins to run when the plaintiff has reason to suspect an injury and some wrongful cause, unless the plaintiff pleads and proves that a reasonable investigation at that time would not have revealed a factual basis for that particular cause of action.' [Citation.]" (E-Fab, Inc. v. Accountants, Inc. Services, supra, 153 Cal.App.4th at p. 1319.) Thus, a plaintiff may not be intentionally dilatory in order to invoke the delayed discovery rule in his favor, because "plaintiffs are charged with presumptive knowledge of an injury if they have '"'information or circumstances to put [them] on inquiry'"' or if they have '"'the opportunity to obtain knowledge from sources open to [their] investigation.'"' [Citation.] In other words, plaintiffs are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation." (Fox, supra, 35 Cal.4th at pp. 807-808.)
"Inquiry notice arises in a securities action when circumstances suggest to an investor of ordinary intelligence the possibility that he has been defrauded. [Citation.] In the vernacular of the securities laws, '[s]uch circumstances are often analogized to "storm warnings."' [Citation.] Storm warnings may be found whenever there are '"any financial, legal, or other data, such as public disclosures in the media about the financial condition of the corporation"' that would tend to alert a reasonable person to the likelihood of fraud. [Citation.]" (Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 428.)
"'In such circumstances, the imputation of knowledge will be timed in one of two ways: (i) "[i]f the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose"; and (ii) if some inquiry is made, "we will impute knowledge of what an investor in the exercise of reasonable diligence[] should have discovered concerning the fraud, and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud." [Citation.]' [Citation.] Thus, once placed on inquiry notice by storm warnings, an investor must perform a reasonable investigation into the possibility of fraud. [Citation.] An investor who fails to fulfill this duty of inquiry will be charged with the knowledge of what an investor in the exercise of reasonable diligence would have discovered concerning the fraud, and this knowledge is imputed as of the date a diligent investigation would have turned up evidence sufficient to establish a cause of action. [Citation.]" (Deveny v. Entropin, Inc., supra, 139 Cal.App.4th at p. 428.)
This duty to investigate after being placed on inquiry notice by storm warnings extends to persons or entities beyond the one alleged fraudster. "It is not too much of a stretch to expect a . . . knowledgeable [investor] to extrapolate from his . . . knowledge of one cause of an injury . . . that there might be other concurrent causes," including alleged negligence by an accountant. (Czajkowski v. Haskell &White, LLP (2012) 208 Cal.App.4th 166, 178 (Czajkowski); see also Curtis v. Kellogg &Andelson (1999) 73 Cal.App.4th 492, 502 ["critical facts . . . should have aroused . . . suspicions about the correctness of the actions previously undertaken by" the accountant].)
III. The trial court properly granted Marcum's motion for summary judgment
A. Undisputed facts
Here, the undisputed facts establish that Colaco's negligent misrepresentation cause of action accrued more than two years before he filed this lawsuit. At the time he invested in 2013, Colaco was advised of potential conflicts of interest, including those due to the incubation fees that the portfolio companies would be paying to the incubator. (WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148, 156, fn. 6 ["[r]eceipt of investment disclosures can trigger the statute of limitations in appropriate cases"].) He was also informed by lawyers advising him in the investment of the risk that Frost would overcharge the portfolio companies incubation fees.
Continuing into 2014 and 2015, Colaco received board minutes and financial information concerning the amount of incubation fees that the portfolio companies were paying to the incubator. At the same time, Colaco heard complaints from CEOs of some of the portfolio companies that the incubation fees were excessive. Colaco was bothered enough by these complaints to reach out to Frost and Guerry, but he did not follow up on the audits. In September 2015, Kramer, another investor in Fund II, contacted Colaco regarding the performance of the fund; Kramer accused Frost of being unethical and unscrupulous; Kramer later told Colaco that he got his money back from Frost. Finally, in January 2016, Colaco received an anonymous e-mail accusing Frost of negligence and fraud.
Given that Frost was the one being accused of fraud, just inquiring of him regarding others' concerns and complaints was not sufficient.
Despite all these red flags, Colaco did not follow up on Marcum's audits of Fund II when he should have. Because he waited and did not file the instant lawsuit until more than two years later, his claims are time-barred. (Stella v. Asset Management Consultants, Inc. (2017) 8 Cal.App.5th 181, 192193.)
It is irrelevant that Kramer and the anonymous e-mail referred to Frost's fraud as a "Ponzi scheme." While Frost may not have technically orchestrated a Ponzi scheme, that phrase alone triggers (or should trigger) a suspicion of wrongdoing.
B. Colaco's arguments on appeal
1. 2012 Seed Fund audit
Urging us to conclude otherwise, Colaco argues that while some documents may have put him on notice that "things could go wrong," the "[2012] clean audit assured him that everything was appropriately accounted for when [he] invested." There are several problems for Colaco with this argument. First, it is undisputed that Colaco did not rely upon the 2012 clean audit at the time he invested in the Seed Fund. (Bily, supra, 3 Cal.4th at pp. 376, 401 &fn. 12.) Rather, Colaco's claim is that in 2013, "he relied upon a statement by Frost that Marcum's audit of Seed Fund was 'clean' to invest $6 million in the Fund II General Partner." (Italics added.)
Second, after hearing about the 2012 clean audit of Seed Fund, Colaco gained other information that should have triggered his suspicions that Marcum's auditing statements were inaccurate. For example, as a board member of several of the companies in the Fund II portfolio that paid incubator fees to Frost Data Capital, Colaco reviewed financial information concerning those companies, including the amount of incubation fees they were paying. Then, in 2014 and 2015, he became aware that several CEOs of the portfolio companies had complained that the incubator fees were excessive. At around this time, Colaco questioned Frost and Guerry regarding the incubator fees.
And Colaco spoke with Kramer, who believed that Frost had engaged in a scheme to defraud investors. Taken together, this evidence establishes that Colaco knew that there were issues with the related party transactions and incubator fees; this same evidence should have tipped Colaco off that Marcum's purportedly "clean" audit was false.
2. Forecasts for clearer skies
According to Colaco, because other CEOs were satisfied with the incubation fees, there is a triable issue of fact as to whether he was put on notice of any wrongdoing. We are not convinced. As the trial court aptly noted, "the fact that an investor may have heard forecasts for clearer skies does not invalidate the inquiry notice that other storm warnings may have provided the investor." For the same reasons, the fact that Kramer may have been characterized by Frost and his management team as "a[n] unhappy investor" does not nullify the conclusion that Kramer's comments to Colaco put him on notice that Marcum's audit "might be incorrect." (Apple Valley Unified School Dist. v. Vavrinek, Trine, Day &Co. (2002) 98 Cal.App.4th 934, 943.)
Colaco resists this conclusion by arguing that even if the complaints about the incubator fees would lead to a suspicion that the fees were high, that was "insufficient to trigger the statute of limitations as to claims against [Marcum]." Colaco seems to be arguing that while these facts may have made Colaco suspicious about Frost, the Frost Funds, and the incubator, they shed no light on whether Marcum, the auditing firm, did anything wrong. We disagree with Colaco's "compartmentalization of its suspicion of wrongdoing." (MGA Entertainment, Inc. v. Mattel, Inc. (2019) 41 Cal.App.5th 554, 563; see Curtis v. Kellogg &Andelson, supra, 73 Cal.App.4th at p. 502; Czajkowski, supra, 208 Cal.App.4th at pp. 177-178, 179 ["Based on all the facts he knew before 2008, Appellant had a duty to investigate even a fiduciary's actions, or inquire about the work done, because on an objective basis, all of these circumstances placed him on" notice of facts sufficient to arouse a reasonable person's suspicions].) Colaco could not "don blinders to avoid the accrual of the statute of limitations" against Marcum (MGA Entertainment, Inc., supra, at p. 563), particularly given his admission that he would read an audited financial statement if alerted that "something [was] wrong in the company."
The cases Colaco cites, Courtney v. Waring (1987) 191 Cal.App.3d 1434, 1444, footnote 10 (Courtney), and Mosesian v. Peat, Marwick, Mitchell &Co. (9th Cir. 1984) 727 F.2d 873 (Mosesian), do not compel a different conclusion.
In footnote 10, the Courtney court stated: "It is exceedingly plausible that although plaintiffs recognized in September 1980 that they had been taken, they reasonably failed to suspect that professional negligence contributed to the fiasco. [Citation.] The question of when plaintiffs reasonably should have suspected attorney negligence is a factual issue not subject to resolution on demurrer. [Citation.]" (Courtney, supra, 191 Cal.App.3d at p. 1444, fn. 10.) Applying this language, Colaco contends that even if he was or should have been aware that the Frost Funds were problematic, there is no indication that those facts somehow should have triggered his suspicion that Marcum's professional negligence "contributed to the fiasco." (Ibid.) But the procedural posture of Courtney is different than the instant case; in Courtney, the court was considering the "nonspecific" allegations of a complaint and the propriety of an order sustaining a demurrer. (Ibid.) Here, we are well beyond the demurrer stage of the litigation, and, based upon the undisputed facts set forth above, we agree with the trial court that Colaco knew or should have known of Marcum's allegedly negligent audits at least by January 2016-making this litigation untimely.
Mosesian, supra, 727 F.2d 873 is also readily distinguishable. In that case, the plaintiff, on behalf of himself and other stockholders of an entity filed an action against the company's auditor, alleging that it "issued false and misleading reports on the financial condition of" the company. (Id. at p. 874.) The plaintiff further "alleged that on the basis of these reports, he and other stockholders purchased or held . . . stock and lost money." (Id. at pp. 874-875.) At issue was "when the statutes of limitations began to run in . . . securities fraud cases." (Id. at p. 874.) The district court "segregated the statute of limitations defense and granted [the plaintiff] a jury trial on that issue. The jury in the class action case rejected the statute of limitations defense and found that the class action was timely filed. The court entered judgment for [the auditor] notwithstanding the verdict." (Id. at p. 875.) The plaintiff appealed, and the Ninth Circuit reversed the judgment with directions that the judgment in favor of the plaintiff be reinstated.
The appellate court noted the "exacting" standard "when a court sets aside a jury verdict. A judgment notwithstanding the verdict is appropriate when 'the evidence permits only one reasonable conclusion as to the verdict.' [Citation.] Neither the district court nor this court may weigh the evidence or order a result it finds more reasonable if substantial evidence supports the jury verdict. [Citation.]" (Mosesian, supra, 727 F.2d at p. 877.) The court then summarized the "seven 'red flag' events" that the auditor contended were sufficient "to alert a reasonably prudent investor of wrongdoing on the part of [the auditor]." (Ibid.)
Considering these "red flag events" along with the plaintiff's testimony and the testimony from an accounting expert, the Ninth Circuit concluded that while "[m]ost of the red flag events make it obvious that the company was in a poor financial condition[,] . . . [f]inancial problems . . . do not necessarily suggest accounting fraud." (Mosesian, supra, 727 F.2d at p. 878.) In other words, the "red flag events" were not "obviously inconsistent with the financial statements." (Ibid.)
Contrariwise, the red flag events here were inconsistent with Marcum's financial statements. As the trial court sensibly determined in its order granting Marcum's motion for summary judgment, a sophisticated investor like Colaco, should have "go[ne] back" to the audit (that he did not review before he invested) and investigated after he saw and heard complaints about the incubator fees and status of the funds. (See, e.g., Czajkowski, supra, 208 Cal.App.4th at p. 178.) Had Colaco done so, he would have seen the omissions in the audits and been on notice that the "'clean' status" was inaccurate.
There is no indication in Mosesian that the plaintiff was a sophisticated investor like Colaco.
In his reply brief, Colaco asserts that his sophistication "'[c]uts [b]oth [w]ays,'" and therefore should not be used against him. (Bolding omitted.) We reject this inference as unreasonable. (Martinez v. City of Beverly Hills (2021) 71 Cal.App.5th 508, 522.)
3. An investigation would have been fruitless
Urging us to conclude that his action is timely, Colaco argues that even if he had followed up with Marcum regarding its audits, Marcum still would have insisted that they were "clean." Aside from the fact that there is no evidence to support this claim, no legal authority supports Colaco's suggestion that Marcum had to admit fault in order to trigger the statute of limitations. (Czajkowski, supra, 208 Cal.App.4th at pp. 178-179.)
4. Damage not incurred until June 2018
For the first time on appeal, Colaco contends that his action is not time-barred because he did not incur damage until June 2018, when the arbitrator issued his award in the Hollencrest arbitration. There are at least two problems with this argument. First, Colaco failed to raise this argument below. (Mattco Forge, Inc. v. Arthur Young &Co. (1997) 52 Cal.App.4th 820, 847.) While an appellant challenging summary judgment may argue a new theory on appeal if it presents only a question of law (Zimmerman, Rosenfeld, Gersh &Leeds LLP v. Larson (2005) 131 Cal.App.4th 1466, 1489; Schmidlin v. City of Palo Alto (2007) 157 Cal.App.4th 728, 790; Reply 47), "[a] party waives a new theory on appeal when he fails to include the underlying facts in his separate statement of facts in opposing summary judgment" (City of San Diego v. Rider (1996) 47 Cal.App.4th 1473, 1493; see also Expansion Pointe Properties Limited Partnership v. Procopio, Cory, Hargreaves &Savitch, LLP (2007) 152 Cal.App.4th 42, 54 ["'possible theories that were not fully developed or factually presented to the trial court cannot create a "triable issue" on appeal'"]). Colaco fails to direct us to any facts in his responsive separate statement regarding when he discovered and/or incurred his damages and, after reviewing his additional undisputed material facts, we could not locate any. His assertion that he "did not hear . . . about any allegations of wrongdoing . . . by Marcum" less than two years before filing suit is insufficient. (§ 437c, subd. (p)(2) [plaintiff opposing summary judgment "shall set forth the specific facts showing that a triable issue of material fact exists"]; Cal. Rules of Court, rule 3.1350(f)(3).)
Regardless, it fails on the merits; there is no indication that Colaco's alleged damages only occurred when the Hollencrest arbitration award was issued. (Jordache Enterprises, Inc. v. Brobeck, Phleger &Harrison (1998) 18 Cal.4th 739, 750, 751, 754; Van Dyke v. Dunker &Aced (1996) 46 Cal.App.4th 446, 454-455 ["if the existence or effect of a professional's error depends on a litigated or negotiation determination's outcome, 'actual injury' occurs only when that determination is made"].) Rather, once Colaco had a suspicion of wrongdoing (by January 2016 at the latest, as set forth above), his action began to accrue. (Curtis v. Kellogg &Andelson, supra, 73 Cal.App.4th at pp. 501-502.)
DISPOSITION
The judgment is affirmed. Marcum is entitled to costs on appeal.
We concur: LUI P. J., CHAVEZ J.