Opinion
652251/2017
08-06-2020
STARR RUSSIA INVESTMENTS III B.V., Plaintiff, v. DELOITTE TOUCHE TOHMATSU LIMITED, Deloitte LLP, Deloitte CIS Limited, Deloitte CIS Holdings Limited, Zao Deloitte & Touche CIS, Defendant.
Starr Russia Investments III B.V. (Plaintiffs) Boies Schiller Flexner LLP, 55 Hudson Yards, New York, NY 10001, (212) 446-2300 Deloitte Touche Tohmatsu Limited (Defendants) HUGHES HUBBARD & REED, One Battery Park Plaza, New York, NY 10004 (212) 837-6000 Deloitte LLPDeloitte CIS LimitedDeloitte CIS Holdings Limited, KRAMER LEVIN NAFTALIS & FRANKEL LLP, 1177 Avenue of the Americas, New York, NY 10036 (212) 715-9100 ZAO Deloitte & Touche CIS, Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019 (212) 839-5300
Starr Russia Investments III B.V. (Plaintiffs) Boies Schiller Flexner LLP, 55 Hudson Yards, New York, NY 10001, (212) 446-2300
Deloitte Touche Tohmatsu Limited (Defendants) HUGHES HUBBARD & REED, One Battery Park Plaza, New York, NY 10004 (212) 837-6000
Deloitte LLPDeloitte CIS LimitedDeloitte CIS Holdings Limited, KRAMER LEVIN NAFTALIS & FRANKEL LLP, 1177 Avenue of the Americas, New York, NY 10036 (212) 715-9100
ZAO Deloitte & Touche CIS, Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019 (212) 839-5300
Andrew Borrok, J.
The following e-filed documents, listed by NYSCEF document number (Motion 021) 604, 605, 606, 607, 608, 609, 610, 611, 612, 613, 614, 615, 616, 617, 618, 619, 620, 621, 624, 626, 627, 628, 629, 630, 631, 632, 633, 634, 635 were read on this motion to/forDISCOVERY.
Upon the foregoing documents and for the reasons set forth below, Starr Russia Investments III B.V.'s (Starr Russia ) motion to compel Deloitte Touche Tohmatsu Limited (DTTL ) to produce documents responsive to Request Nos. 20-23, 29, 31, and 34 of Starr Russia's First Set of Requests for Discovery and Inspection of Documents to DTTL (NYSCEF Doc. No. 606) is decided in accordance with the below.
For completeness, to the extent that DTTL and the UK Deloitte Defendants argue that the instant motion is an improper motion to renew or reargue the court's decision and order on Starr Russia's first motion to compel, dated October 23, 2019, the argument is unavailing. The court did not specifically rule on the seven document requests at issue in this motion in its prior order.
By way of background, Starr Russia brought this action against DTTL, Deloitte LLP (Deloitte ), Deloitte CIS Limited (Deloitte CIS ), Deloitte CIS Holdings Limited (Deloitte CIS Holdings ; Deloitte, Deloitte CIS, and Deloitte CIS Holdings, collectively, the UK Deloitte Defendants ), and ZAO Deloitte & Touche CIS (D-ZAO , and together with DTTL and the UK Deloitte Defendants, the Deloitte Entities ), alleging that (1) in 2007 and 2008, the Deloitte Entities fraudulently induced Starr Russia to make a 2.58 billion ruble investment in a Russian bank known as Investment Trade Bank (ITB ), which became insolvent in 2015 resulting in a total loss of Starr Russia's investment, and (2) D-ZAO conducted fraudulent audits of ITB's financial statements to induce Starr Russia to maintain its investment in ITB after 2010 (Am. Compl., ¶¶ 3, 10-16, 47-66, 110-142). Starr Russia further alleged in its Amended Complaint that D-ZAO was acting as the "agent or alter ego" of DTTL and the UK Deloitte Defendants with respect to its engagement with ITB (id. , ¶ 32). Starr Russia asserted four causes of action against D-ZAO, DTTL and the UK Deloitte Defendants: (1) fraud, (2) aiding and abetting fraud, (3) aiding and abetting breach of fiduciary duty, and (4) negligent misrepresentation. Jurisdiction was asserted as against D-ZAO based on CPLR §§ 302(a)(1), (3)(i) and (ii) (id. , ¶ 40), DTTL based on CPLR §§ 301 and 302(a)(1), (2), (3)(i) and (ii) (id. , ¶ 36), and (3) and the UK Deloitte Defendants based on CPLR §§ 302(a)(2), (3)(i) and (ii) (id. , ¶¶ 38-39).
The gravamen of the claims against DTTL are that DTTL was hired by ITB as its advisor based on its global network and its international reputation for integrity to assist in the fraud by identifying potential international investors, introducing ITB to those investors, marketing the investment to potential investors (in person and through written materials), negotiating the terms of the investments, advising ITB on the structure of the investments, participating in the preparation of transaction documents, promoting ITB to potential investors with knowledge or in reckless disregard of ITB's serious problems, and conducting due diligence on investors (id. , ¶ 2). To wit, Starr Russia alleges that DTTL described ITB as a conservative, well-run, mid-sized Russian bank with a "solid track record of sound financial performance," and portrayed ITB as a relatively safe investment, because ITB was part of a regulated industry that was well positioned to benefit from further growth opportunities in the Russian banking sector (id. , ¶ 3). In addition, DTTL represented that it expected ITB to conduct an Initial Public Offering within three to five years, which would provide Starr Russia with an exit strategy to protect its investment, and it also emphasized the attractiveness of the investment by portraying ITB as the subject of a bidding war (id. , ¶ 4).
Starr Russia further alleges in the Amended Complaint that, in direct reliance on these representations as well as Deloitte's international reputation for integrity, Starr Russia agreed to invest approximately $101 million in ITB in 2008, and an additional $8 million in 2009, for a total of $109 million (id. , ¶ 3-5). In addition, through 2010, DTTL continued to act as an intermediary between ITB and its principal and Starr Russia, continued lending credibility to ITB, and conducted a meeting to encourage Starr Russia to make additional investments in ITB (id. , ¶ 6). In 2012, Starr Russia was formulating an exit strategy with respect to its ITB investment (id. , ¶ 7). However, in reliance on representations made by DTTL, it chose to maintain its investment and agreed to convert its subordinated debt to an equity investment in ITB (id. ). DTTL also began playing an expanded role in 2012, including providing audit and assurance services to ITB, and in 2013, when ITB fired its former auditing firm, KPMG, the Deloitte Entities stepped in and began performing interim reviews and full audits of ITB's financial statements (id. , ¶¶ 8-11). In April 2014, DTTL issued a clean audit opinion for ITB's 2013 financial statements (id. , ¶ 11). Based on DTTL's continued representations of the soundness of the investment through 2015, Starr Russia did not pursue its exit strategy (id. ). In 2015, however, the Central Bank of Russia revealed that ITB's principal had engaged in a massive fraud and that ITB faced a huge capital deficit, and ultimately ordered another Russian bank to take over ITB (id. , ¶ 14). Starr Russia alleges that ITB's 2013 and 2014 audited financial statements were fraudulent and that DTTL failed to adhere to International Auditing Standards, and that DTTL was effectively acting as a vehicle for ITB's fraudulent scheme (id. , ¶ 15). The Deloitte Entities moved to dismiss the Amended Complaint (Mtn. Seq. Nos. 007, 008, and 009).
By orders, entered May 24, 2018 and July 2, 2018, the court (Ramos, J.) denied the motion in its entirety (NYSCEF Doc. Nos. 159, 169). The Deloitte Entities appealed. By decision and order, dated February 7, 2019 (the 2019 Decision ), the First Department modified the orders, and (1) dismissed the claims alleging fraudulent inducement of Starr Russia's 2008 investment in ITB as against the UK Deloitte Defendants, (2) ordered jurisdictional discovery as to the UK Deloitte Defendants based on alter ego liability with respect to D-ZAO, solely with respect to the claim relating to inducing Starr Russia not to exercise its 2010 option to exit the ITB investment, and (3) dismissed the claims against DTTL premised on an agency theory, and otherwise affirmed ( Starr Russia Invs. III B.V. v. Deloitte Touche Tohumatsu Ltd. , 169 AD3d 421, 422 [1st Dept 2019] ). Subsequently, by decision and order dated July 16, 2020 (the 2020 Decision ), the First Department clarified its 2019 Decision by indicating that (i) the discovery with respect to the UK Deloitte Defendants was based on the claim that the plaintiff did not exercise its exit option after November 26, 2010 based on misrepresentations, (ii) the Deloitte UK Defendants properly limited their production to documents that are relevant to (a) Starr Russia's decision to maintain its investment in ITB and (b) D-ZAO'S audits of ITB's financial statements, and (iii) because the First Department found jurisdiction over D-ZAO based on CPLR § 302(a)(2) and potential alter ego jurisdiction over the UK Deloitte Defendants, Starr Russia was not entitled to documents about their international revenue and marketing, which would only be relevant if it were trying to assert personal jurisdiction over them pursuant to CPLR § 302(a)(3)(ii) (Starr Russia Invs. III B.V. v. Deloitte Touche Tohumatsu Ltd. , ––– NYS3d –––– [1st Dept 2020]).
1. In Request No. 20, Starr Russia seeks "[a] copy of the DTTL Policies Manual and any prior versions of the DTTL Policies Manual used from 2007 through 2015" (NYSCEF Doc. No. 606, ¶ 20).
Following the First Department decisions in this case, any policy manual from 2007 to 2015 that was in place in 2008 or referred to in 2008 is relevant to the direct claims against DTTL and any policy manual that was in place during the 2010 exit decision is discoverable as to the UK Deloitte Defendants. In addition, to the extent that any such manual refers back to any prior manual, this is also discoverable and must be produced. As it relates to DTTL, the policy manuals are relevant to the issue of DTTL's contribution to the production of the materials that induced the Plaintiff to enter the transaction. To the extent that the policy manuals were not followed by D-ZAO, this is relevant to D-ZAO's liability. To the extent that the DTTL policy manuals promulgated a standard of care below that which should have been exercised (i.e., they did not follow International Auditing Standards as the Amended Complaint alleges), which either led to the creation of the documents that relate to Starr Russia's investment or Star Russia's decision not to exit, or to D-ZAO's audits of ITB, this is relevant to the direct claims against DTTL and D-ZAO. Finally, to the extent that the policy manuals were in place during the period November 26, 2010 or are incorporated by reference, this would also be relevant to the UK Deloitte Defendants' alter ego jurisdictional discovery to the extent that it demonstrates a process that the UK Deloitte Defendants were supposed to follow with respect to D-ZAO which, if not followed with respect to the ITB transaction and the 2010 exit decision, would support alter ego jurisdiction over the Deloitte UK Defendants.
To the extent that DTTL relies on McBride v. KPMG Intl. (135 AD3d 576 [1st Dept 2016] ) to argue that production of its policy manuals is not appropriate, DTTL's reliance is misplaced. In McBride , the plaintiffs-investors in a fund who were victims of a Ponzi scheme, brought claims against the auditors of the fund, financial institutions, and others involved in the fund including KPMG International and KMPG UK, for conversion, unjust enrichment, aiding and abetting fraud, fraud in the inducement, and breach of fiduciary duty ( id. at 576-577 ). The trial court granted the defendants' motions to dismiss, denied jurisdictional discovery and the plaintiffs appealed (id. ). The First Department affirmed, holding that (1) the court properly denied the plaintiffs' request for jurisdictional discovery with respect to KPMG UK because the plaintiffs failed to submit affidavits specifying facts that might exist but could not then be stated in support of jurisdictional discovery, and (2) the plaintiffs' claims against KPMG International based on the theory that KPMG International was vicariously liable for KPMG UK's alleged misconduct were properly dismissed as there were insufficient allegations to support liability based on a principal-agent relationship or on a theory of apparent authority ( id. at 577 ).
The claims being pursued as it relates to DTTL are direct claims and McBride, therefore, is simply inapplicable to the instant discovery motion. Critically, here, (i) although the First Department dismissed the claims against DTTL premised on an agency theory, the First Department held that, "[t]he court correctly declined to dismiss the claims asserted against defendant [DTTL] that are premised on allegations of its direct role in fraudulently inducing investment" ( Starr Russia , 169 AD3d at 422 ), and (ii) with respect to the UK Deloitte Defendants, the Plaintiff has sufficiently alleged facts that might give rise to alter ego jurisdiction over the UK Deloitte Defendants specifically with respect to Plaintiff's claims that it maintained its investment in ITB after 2010 based on certain misrepresentations (id. ). Accordingly, this information must be produced to the extent described herein.
2. In Request Nos. 21 and 22, Starr Russia seeks "[a]ll documents concerning any actions or materials described by DTTL or any other Deloitte Entity as a ‘practice review’ of D-ZAO's work by DTTL," and "[a]ll documents concerning communications with D-ZAO or any other Deloitte Entity concerning any actions or materials described by DTTL or any other Deloitte Entity as a ‘practice review’ " (NYSCEF Doc. No. 606, ¶¶ 21, 22).
First and foremost, Starr Russia is entitled to the practice reviews of D-ZAO because, among other things, the practice reviews are relevant to the claims as against D-ZAO. In addition, Starr Russia is entitled to know if DTTL believed that D-ZAO was doing a poor job generally and what DTTL did to correct any such poor job. To be clear, Starr Russia is not seeking to ground liability against DTTL based on D-ZAO's actions but on DTTL's action or inaction as it relates to the fraudulent inducement to enter this transaction and the practice reviews of D-ZAO are relevant to DTTL's policies and whether they contributed to the production of fraudulent documents in the ITB transaction which induced Starr Russia's investment decision and its 2010 exit decision. DTTL's attempt to limit the production to practice reviews of the ITB transaction fails because if DTTL knew or should have known that D-ZAO was not properly adhering to Deloitte standards with respect to subject areas relevant to the ITB advice or audits, and failed to act (or acted improperly) then this would be relevant to DTTL's direct liability. In addition, if they failed to provide any such practice reviews and they should have because the structure charts discussed below indicate that they were supposed to review D-ZAO's work, this would also be relevant to direct claims against DTTL. Finally, if DTTL failed to meet International Accounting Standards in conducting the practice reviews this would also be relevant to the direct claims against them as alleged in the Amended Complaint. Accordingly, this also must be produced to the extent set forth herein.
3. In Request No. 23, Starr Russia seeks "[a]ll documents concerning DTTL's response to D-ZAO's insolvency in 2010, including, but not limited to, any communications with D-ZAO or any other individual or entity regarding D-ZAO's insolvency or potential insolvency or any actions taken by DTTL with regard to, as a result or consequence of, or in preparation for, D-ZAO's insolvency" (NYSCEF Doc. No. 606, ¶ 23). This request is relevant to the direct claims against DTTL and their alleged participation in the fraud. It may explain their alleged involvement in the creation of the documents that induced Starr Russia to enter the transaction or their alleged failure to meet International Accounting Standards. It is also relevant as it relates to the 2010 exit decision and the alter ego claims against the UK Deloitte Defendants because it is relevant to whether there was ring-fencing of any potential claims — e.g., claims for investment advice, which would include Starr Russia's claim in connection with the ITB transaction, among other D-ZAO clients (see Baby Phat Holding Co., LLC v. Kellwood Co. , 123 AD3d 405, 407 [1st Dept 2014], citing Gammas v. Lockwood Assoc., LLC, 95 AD3d 1073 [2d Dept 2012] ["[a]llegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter ego theory"] ). Put another way, this very well could be said to be the Deloitte Entities taking positions to ensure that "what happens in Russia stays in Russia," and the UK Deloitte Defendants abusing the corporate form of D-ZAO as it relates to the 2010 exit decision and the auditing of the ITB investment. Therefore, this information must be produced to the extent set forth herein.
4. In Request No. 29, Starr Russia seeks "[a]ll documents concerning who pays the salaries, partner draws, or any other compensation of D-ZAO partners and employees" (NYSCEF Doc. No. 606, ¶ 29). Starr Russia has agreed, by stipulation with DTTL dated July 27, 2020, to limit this request to documents "from after November 26, 2010" (NYSCEF Doc. No. 626).
The 2019 First Department decision makes clear that the claims as against the UK Deloitte Defendants are based on alter ego and jurisdictional discovery is limited to the exit decision and from November 26, 2010 forward. Who paid compensation and whether corporate forms were abused is relevant to the issue of alter ego jurisdiction (see Baby Phat , 123 AD3d at 407 ). It is also relevant to the insolvency planning of D-ZAO. Accordingly, to the extent that this request has been limited by stipulation, the request is granted and this information must be produced.
5. In Request No. 31, Starr Russia seeks "[a]ll documents concerning the distribution of money collected from D-ZAO's clients to DTTL or any other Deloitte Entity under any fee sharing agreement or any other similar arrangement" (NYSCEF Doc. No. 606, ¶ 31). Starr Russia has also agreed to limit this request to documents "from after November 26, 2010" (NYSCEF Doc. No. 626).
To prevail on a claim based on alter ego liability, a plaintiff must establish: "the complete domination of one entity by the other with respect to the transaction being challenged to justify piercing the veil, and that such domination was used to perpetrate a wrong against the plaintiff causing the plaintiff's injury" ( Shaltiel v. Wildenstein , 288 AD2d 136, 137 [1st Dept 2001] ).
In Shaltiel , Moshe Shaltiel, an Illinois resident, and the sole beneficial owner of World Enterprises Services, Inc., a Panamanian corporation, sued Daniel Wildenstein, a French national residing in Switzerland and the president of the other defendant in the case, Wildenstein Institute, a not-for-profit organized under French law with no offices in New York ( id. at 136-137 ). Mr. Shaltiel owned a painting, which was purported to be a Modigliani that he consigned to a London auction house for sale ( id. at 137 ). Mr. Shaltiel alleged that one day an employee of the Wildenstein Institute sent a fax to the auction house stating in his view the artwork was not a Modigliani and that it was not being included in the Wildenstein Modigiliani catalogue (id. ). The defendants disputed that the person who sent the fax was an employee of the Wildenstein Institute (id. ). When the auction house received the fax, they withdrew the painting from the auction and Mr. Shaltiel sued for tortious interference with contract (id. ). The defendants moved to dismiss for lack of personal jurisdiction and for failing to join the alleged employee as an indispensable party (id. ). The trial court denied the motion and referred the issue of jurisdiction to a special referee to hear and report (id. ). The special referee, noting that discovery had been supplied by Wildenstein Co., a New York gallery, and that the gallery had paid some of the expenses of the Institute was the alter ego of the Institute and also concluded that the defendants' non-compliance with aspects of discovery under color of a French "blocking statute" provided an equitable basis to subject Mr. Wildenstein to the court's jurisdiction (id. ). The trial court confirmed the report (id. ). The First Department reversed holding:
There is an insufficient nexus with New York to subject the Institute to our jurisdiction. The evidence provided by plaintiffs is inadequate to justify disregarding the separate legal existence of the Institute and the Gallery. This evidence does not establish the complete domination of one entity by the other with respect to the transaction being challenged to justify piercing the veil, and that such domination was used to perpetrate a wrong against the plaintiff causing the plaintiff's injury (see, Morris v. New York State Department of Taxation and Finance, 82 NY2d 135, 141-142 ). There is no evidence that the Gallery abused the privilege of doing business in the corporate form to perpetrate the harm such as would invoke exercise of the court's equity jurisdiction (id. ). Moreover, plaintiffs do not even allege any dealings with the Institute, but only challenge harm caused by an alleged Institute employee communicating to a third party. As such, nothing is alleged supporting any dealings between plaintiffs and the Institute, let alone the Gallery, such as would have led them to believe that the Institute would be subject to suit in New York. Nor do we find any basis for asserting jurisdiction over Wildenstein, a non-resident of New York, as a sanction for discovery non-compliance. In view of the voluminous discovery ultimately provided, plaintiffs do not demonstrate that, in fact, they were deprived of discovery. Moreover, there is no real connection between this action and the State of New York.
(id. [emphasis added] ).
Shaltiel does not, however, stand for the proposition that the receipt of compensation is not relevant to direct claims (i.e., claims against DTTL) or alter ego analysis including whether there has been an abuse of corporate form (i.e., the basis for the claims against the UK Deloitte Defendants) and is therefore not discoverable. In fact, the First Department has held that allegations of payments made directly to an entity alleged to be an alter ego, including payments made before the transaction at issue, are sufficient to establish that the defendant commingled funds and disregarded corporate formalities ( Baby Phat , 123 AD3d at 407 ). In other words, although a plaintiff must prove domination and control with respect to the transaction to support alter ego jurisdiction, payments, distributions, fee sharing, or other similar arrangements are relevant to the issue of domination and control and are therefore discoverable.
As discussed above, the 2019 First Department decision limited the claims as against DTTL to direct claims and the payments to DTTL would be relevant to those direct claims and must be produced. As to the UK Deloitte Defendants, the claims are based on alter ego only and, under Shaltiel, only as to the 2010 exit decision and the payments made or arrangements which caused payments to be made to the UK Deloitte Defendants would be relevant from November 26, 2010 on as it relates to the exit decision and alter ego jurisdictional discovery. Accordingly, this information must also be produced to the extent set forth herein.
6. In Request No. 34, Starr Russia seeks "[c]opies of all organizational charts for DTTL for 2007 through 2015, including organization charts for Deloitte Touche Tohmatsu, the Swiss verein."
The organizational chart that shows the relationship between DTTL and the other entities is relevant to direct claims against DTTL so that Starr Russia can see how the Deloitte Entities purported to relate to one another, including with respect to various issues, including which Deloitte Entities were, or should have been making decisions, giving advice on audit practices, and/or creating documents upon which Starr Russia relied in making its investment, as well as potentially assisting Starr Russia in understanding the insolvency planning as to D-ZAO. Finally, with respect to the UK Deloitte Defendants, they are discoverable as it relates to D-ZAO from November 26, 2010 for the purpose of its alter ego jurisdictional discovery. Therefore, this information must also be produced to the extent set forth herein.
Accordingly, it is
ORDERED that Starr Russia's motion to compel is granted to the extent set forth herein and DTTL shall produce the same within 45 days of the date of this decision and order.