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February 18, 2003


The opinion of the court was delivered by: Denise Cote, District Judge


Plaintiffs Cromer Finance Ltd. ("Cromer") and Prival N.V. ("Prival") (collectively, the "Cromer Plaintiffs") filed this securities class action complaint on March 24, 2000. The plaintiffs were investors in an off-shore investment fund, the Manhattan Investment Fund (the "Fund"), managed from New York by Michael Berger ("Berger"). That Fund traded United States securities, and the plaintiffs allege that the Fund lost in excess of $400,000,000.

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 of agency.

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.

Procedural History

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.

Motion to Dismiss

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:

The Complaint does not allege that [Deloitte] was even aware of the reports, much less aware that its name and logo were included on the audit reports. . . . The use of [Deloitte]'s name on the audit reports was undoubtedly of great importance to investors, providing a well-respected international organization's imprimatur on the audits and lending credence to the work of a small, relatively unknown Bermuda entity. Nonetheless, the use of a defendant's name on a document containing misleading information is, by itself, insufficient to constitute scienter.

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.

Motion to Amend

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 judgment.


The following facts are undisputed or as shown by the Cromer plaintiffs unless otherwise noted.

The Fund

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 losses.

DTB: The Fund's Auditor

DTB submitted a proposal to Berger to serve as the Fund's auditor by letter dated March 5, 1997. The letter is on stationery bearing the logos of both "Deloitte & Touche," with a Bermuda address, and "Deloitte Touche Tohmatsu International." The proposal is signed by Jack, who is identified as the "Audit Partner" who will be "responsible for supervising all phases of our audit services." Jack is described as spending "[t]he majority of his time serving our financial services industry clients" and as someone who "has significant experience with funds like Manhattan." In a section describing DTB's "credentials," the letter states that DTB is "part of Deloitte Touche Tohmatsu International," and notes that Jack "regularly attends international conferences and is in constant contact with our network of Investment Company specialists in the U.S. to ensure that we are abreast of current developments in the industry."

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 $14,000, respectively.

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 ...

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