PricewaterhouseCoopers LLP (“PwC”), an international accounting firm, and The Citco Group Ltd. (“Citco”), a financial services group, are back at the center of a class action led by investors in several feeder funds that invested in the historic Ponzi scheme architected by Bernie Madoff. The action pleads federal securities law and state law violations arising out of PwC’s role as auditor of the funds and Citco’s part as the funds’ administrator and custodian.
On March 3, 2015, a judge in the Southern District of New York entered a Decision and Order granting class certification in the action for the second time. The first class certification was made back in February 2013, certifying the class as “all shareholders/limited partners in Fairfield Sentry Limited, Fairfield Sigma Limited, Greenwich Sentry, L.P. and Greenwich Sentry Partners L.P. (the “Funds”) as of December 10, 2008 who suffered a net loss of principal invested in the Funds.”
On the defendants’ appeal of the February 2013 order, the Second Circuit vacated the class certification insofar as it applied to Citco and PwC, holding that the District Court lacked rulings on whether “common evidence” exists to substantiate key elements of the negligence and negligent misrepresentations claims to satisfy requisite of Rule 23(b)(3) that “common issues predominate over individual issues.” The Second Circuit remanded for consideration as to “how common evidence can show (1) the existence of a duty of care applicable to the class . . . or (2) reliance by the class on alleged misrepresentations . . . ”
On remand, the District Court first held that New York law supports the conclusion that a duty of care was owed by the defendants to third-party class members where the use of the financial statements by third-parties were “not merely one possibility among many, but the ‘end and aim of the transaction.’” The Court then found sufficient common evidence that such a duty was owed to support that common issues among class members predominate over individual issues.
Next, the District Court addressed the reliance point for the misrepresentation claim, which can often be a sticking point for class certification in such actions where there are myriad reasons a party may enter into the transaction. However, the Court ruled, essentially, that in the context of purchases of securities, price carries the day, where the exchange of value alone is circumstantial evidence of reliance on false financial statements because, unlike consumer transactions, financial transactions lack the “personal idiosyncratic choice” that clouds the ultimate reasoning for the purchase. The Court then found that sufficient common evidence existed that misrepresentations and material omissions were relied upon in the investment decisions of the class members.
With respect to the reliance issue in the federal securities laws claims, the Court held that the plaintiffs were entitled to the presumption of reliance under the so-called Affiliated Ute precedent, where a party claiming that material information was concealed from him need not prove reliance, but need only prove that the type of information concealed is of the kind that an investor would typically consider in making an investment decision. Though the defendants can rebut the Affiliated Ute presumption, it must be done by showing that investors did not actually rely upon the omissions. In the context of class certification, the defendants would need to meet the high bar of showing that the investors who did not actually rely on the omissions predominate over the common evidence suggesting that investors ordinarily would rely on such omissions.
The case is Anwar v. Fairfield Greenwich Ltd., 1:09-cv-00118-VM-FM in the U.S. District Court for the Southern District of New York. The order can be viewed here.
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