The opinion of the court was delivered by: Denise Cote, District Judge
The plaintiffs sued, among others, the Bermuda accounting firm that
served as the Fund's auditor, Deloitte & Touche (Bermuda) ("DTB"), as
well as the Swiss verein of which it was a member, Deloitte Touche
Tohmatsu ("Deloitte"). After the claims against Deloitte were dismissed,
fundamentally because the complaint failed sufficiently to allege
Deloitte's scienter, plaintiffs successfully moved to amend their
complaint and reassert their action against Deloitte, based on a theory
Deloitte now moves for summary judgment on all claims against them.
This motion addresses the extent to which Deloitte's organized efforts at
globalization make partners who are responsible for that effort its
agents and thereby allow those partners' scienter to be imputed to
Deloitte. One of the individuals responsible for Deloitte's globalization
program was also the partner at DTB responsible for the Fund's audit.
Finding that the Cromer plaintiffs have raised questions of fact
regarding whether that partner's knowledge of the Fund's audit was within
the scope of his work as an agent of Deloitte, Deloitte's motion is
denied. Trial is scheduled for October 13, 2003.
To understand the context for this summary judgment motion, it is
useful to describe two prior opinions in this action: the Opinion in 2001
dismissing Deloitte from this action, Cromer Finance Ltd. v. Berger,
137 F. Supp.2d 452, 498 (S.D.N.Y. 2001) ("April 17 Opinion"), and the
Opinion in 2002 granting leave to amend the pleadings and reassert claims
against Deloitte, Cromer Finance Ltd. v. Berger, 2002 WL 826847, at *13
(S.D.N.Y. May 2, 2002) ("May 2 Opinion"). Each of these Opinions is
described below and incorporated by reference.
Plaintiffs asserted eight causes of action against DTB in their
original complaint: violation of Section 10(b) of the Securities Exchange
Act ("Section 10(b)"), violation of Rule 10b-5, aiding and abetting
common law fraud, aiding and abetting breach of fiduciary duty, common
law fraud, gross negligence, negligence and professional malpractice.
Plaintiffs brought all of these causes of action against Deloitte as
well, adding a claim for violation of Section 20(a) of the Securities
Exchange 3 Act.
Plaintiffs' claims against Deloitte were dismissed in the April 17
Opinion. The flaw in the case against Deloitte at that point in the
litigation was primarily the failure of plaintiffs to allege adequately
that Deloitte possessed the requisite scienter to be accountable under
the various theories of recovery. Cromer, 137 F. Supp.2d at 493-96. To
satisfy this scienter requirement within a claim of a Section 10(b)
violation, plaintiffs must show either "(1) . . . facts that constitute
strong circumstantial evidence of conscious misbehavior or recklessness,
or (2) allege facts to show that defendants had both motive and
opportunity to commit fraud." Id. at 468 (citation omitted). The complaint
at that time was deficient in alleging these elements, as it relied on
the presence of Deloitte's name and logo on the audits to show Deloitte's
knowledge of the allegedly false information contained therein. The April
17 Opinion states:
Id. at 493-94. The lack of an allegation of actual or constructive
knowledge on the part of Deloitte proved fatal to both causes of action
under the Securities Exchange Act, the 4 Section 20(a) claim, and the
common law fraud claim. Id. at 494. The remainder of plaintiffs' claims
were dismissed for similar reasons: the requirement of "actual knowledge"
to sustain claims of aiding and abetting common law fraud and aiding and
abetting breach of fiduciary duty, and the need to show a "substantive
communication" between Deloitte and investors to avoid dismissal of the
negligence, gross negligence and malpractice claims. Id. at 495-96.
The May 2 Opinion granted plaintiffs' motion to amend, whereby they
repleaded their claims against Deloitte. Plaintiffs' response to the need
to allege scienter for Deloitte was to allege that William A. Jack
("Jack"), the DTB partner in charge of the Fund's audits, was Deloitte's
agent during the performance of those audits. Plaintiffs alleged that
Deloitte conveyed actual authority to Jack through his participation in
Deloitte's Global Financial Services Industries practice ("GFSI"), and
because of this relationship, under agency law principles, any knowledge
acquired by Jack in the course of this agency could be imputed to his
principal. Cromer, 2002 WL 826847, at *2, *4. Finding that plaintiffs had
adequately alleged the existence of an agency relationship, they were
permitted to reassert their causes of action against Deloitte.*fn1
Discovery ensued and has concluded. Deloitte now moves for summary
The following facts are undisputed or as shown by the Cromer plaintiffs
unless otherwise noted.
The Fund was established in 1995, under the laws of the British Virgin
Islands, and began trading United States securities in Spring 1996. As
described in the Fund's audit for the year ending December 31, 1996
("1996 Audit"), the Fund was
designed to permit investors who are tax exempt United
States investors or who are neither citizens or
residents of the United States to participate in
investments in a broad range of highly liquid listed
securities, options and financial commodities. . . .
Short sales are utilized when deemed appropriate.
The Fund lost money. Berger's fraud was effectuated by manufacturing
false monthly account statements through which he hid the Fund's enormous
On April 15, 1997, DTB sent an engagement letter for the 1996 Audit to
the Fund's Bermuda-based administrator. This letter was also on
stationary bearing the logos of "Deloitte & Touche" and "Deloitte
Touche Tohmatsu." It identifies Jack as the partner in charge of the
audit, and is signed by Jack, below the words "Deloitte & Touche."
Similar letters were sent by DTB concerning the audits for the years 1997
and 1998, on November 24, 1997, and December 8, 1998, respectively. The
fees for the 1996, 1997 and 1998 audits were $10,000, $10,400, and
The 1996 Audit is dated May 27, 1997, was approved for distribution on
May 30, 1997, and was mailed to investors by the Fund administrator
between June 25 and July 4, 1997. The audit is addressed to "the
Shareholders of Manhattan Investment Fund Ltd.," and is signed "Deloitte
& Touche," in a cursive signature, above the date and the logo of
"Deloitte Touche Tohmatsu International." The cover letter represents
that the audit was conducted "in accordance with auditing standards
generally accepted in the United States of America." Audits for the
following two ...