PwC Can't Shake Securities Fraud Claims

, The Litigation Daily

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The U.S. Court of Appeals for the Second Circuit has revived securities fraud claims against PricewaterhouseCoopers over its auditing work for the disgraced hedge fund Lipper Holdings.

In a ruling issued on Friday, the appeals court reversed the dismissal of an investor lawsuit alleging that PwC ignored red flags that Lipper Holdings inflated the value of its portfolio. Overruling a trial judge, the court determined that investors adequately plead that they were directly injured by PwC's conduct.

Lipper Holdings was a high-flying hedge fund that managed money for high-net-worth individuals. Its fall from grace began in 2002 with the resignation of portfolio manager Edward Strafaci, who admitted to grossly overstating the success of his portfolio, known as Libber Convertibles. PwC audited Lipper Convertible's books from 1996 to 2000. The hedge fund's founder, Kenneth Lipper, has been cleared of wrongdoing, as Crain's explained here.

Investors began suing PwC in 2002, alleging that it either knowingly or recklessly turned a blind eye to Strafaci's misrepresentations. In January 2010, lead plaintiffs counsel Kirby McInerney negotiated a $30 million settlement with PwC's lawyers at Orrick Herrington & Sutcliffe.

A group of investors represented by Wolf Haldenstein Adler Freeman & Herz opted out of that class action. They alleged fraud and negligent misrepresentation, as well as violations of federal securities laws like Section 10(b) of the Securities Exchange Act, which prohibits fraudulent misrepresentations in connection with the sale of securities.

U.S. District Judge Richard Berman in Manhattan dismissed all claims in the case on standing grounds in November 2010. In Berman's view, the plaintiffs were limited partners in Lipper Convertibles and therefore could only bring derivative claims on behalf of the partnership itself. "Plaintiffs have failed to establish standing because the evidence presented shows that, although their claims are denominated as direct, plaintiffs have, in fact, suffered only through diminution in the value of their share in [Lipper] Convertibles, rather than separately and distinct from the partnership," Berman wrote.

The Second Circuit affirmed the dismissal of the state law claims, but reversed Berman on the Section 10(b) claims. "We conclude that Strafaci's admission that he overvalued the securities during the period of time that the plaintiffs purchased their interests was sufficient to create a triable issue of fact as to whether the plaintiffs purchased their interests at an inflated price and thereby suffered a direct injury at the time of their investments," the court wrote.

Wolf Haldenstein partner Daniel Krasner argued at the Second Circuit on behalf of the investors. Orrick partner J. Peter Coll Jr. argued for PwC. Neither was available for comment.

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