Court Opinion

ID: 9779781
Source: CourtListenerOpinion
Date Created: 2023-08-30 00:45:05.007274+00
Date Added: 2024-06-11T07:33:40.467202
License: Public Domain

OPINION OF THE COURT
Pigott, J.
In these actions, plaintiffs, former limited partners of Lip-per Convertibles, LP, assert direct claims of fraud against PricewaterhouseCoopers, LLP (PwC), the auditor of Lipper Convertibles’ annual financial statements for the years 1995 through 2000. Plaintiffs claim that PwC fraudulently declared the partnership’s financial statements to be accurate and prepared in conformity with generally accepted accounting principles (GAAP), when in fact they were not. Plaintiffs argue that they were induced by PwC’s fraud into making
*267their initial investments in the partnership. But because PwC showed that the damages plaintiffs claimed to have suffered were the result of the conduct of the fund and not a direct diminution of plaintiffs’ initial investments, the order of the Appellate Division granting PwC’s motion for summary judgment dismissing the fraud cause of action should be affirmed.
Factual Background
Lipper Convertibles (the Fund) was a private investment hedge fund managed by Lipper Holdings, LLC, a Delaware limited liability company, for the benefit of limited partners who were passive investors in the Fund. In general, pursuant to a partnership agreement, limited partners of the Fund held interests equal to their initial investment amounts plus (or minus) any gains (or losses) resulting from the partnership’s investment activities. For its duties as manager, Lipper Holdings received 20% of the net profits purportedly received by the Fund. During the relevant time period, PwC was the Fund’s auditor, reviewing the financial statements that detailed the Fund’s performance and the value of each partner’s interest.
Between 1997 and 2001, plaintiffs collectively invested more than $120 million to purchase limited partnership interests. Plaintiffs claim that they made these investments in justifiable reliance upon the representations about the Fund’s operations and performance in the financial statements audited by PwC. The financial statements and reports, which showed consistent growth in the value of the Fund’s portfolio, however, fraudulently overstated the Fund’s assets by many millions of dollars.
In 2002, the fraud was publicly disclosed after the Fund’s portfolio manager unexpectedly resigned. Lipper Holdings, as general partner, conducted a review of its portfolio and discovered that its manager had used an improper method for valuing the Fund’s securities, materially overstating the value of the holdings. The former manager was later investigated by the Securities and Exchange Commission (SEC) and criminally prosecuted, resulting in a guilty plea to securities fraud. PwC’s accountant in charge of conducting the audits of the financial statements was ultimately suspended by the SEC for his failings. The SEC found that the representations by PwC—that it had conducted audits that complied with GAAP—were materially false and that its approval of the certification of the Fund’s financial statements was “highly unreasonable.”
The result of the improper valuation methods was that Lip-per Convertibles had, over the years, reported increasingly *268inflated assets, capital and profits. In February 2002, after completing a reevaluation, Lipper Convertibles announced to its limited partners, including plaintiffs, that it had reduced its assessment of its net equity value by approximately $400 million, a 40% “write down” in its previously reported capital. This resulted in the withdrawals of many limited partners’ investments, and the decision that Lipper Convertibles be liquidated. A proceeding to dissolve the Fund was commenced. The general partner retained an accounting firm, EDO Seidman, to determine a methodology for the distribution of the assets. The plan developed by EDO Seidman involved revaluing the assets of the Fund, on a month-by-month retrospective basis, and then recalculating the existing limited partners’ percentage interests for the purpose of the distribution.
In October 2002, a formal liquidation proceeding was commenced to allow the general partner to distribute the assets to the limited partners in accordance with the EDO Seidman plan. After some litigation not relevant here, the plan was implemented and plaintiffs collectively recovered about $111.5 million.
In the spring of 2003, a Trustee was appointed, charged with, among other things, investigating and bringing claims against the former Fund managers, and any other culpable parties, on behalf of the limited partners who lost money as a result of the Fund’s collapse. In July 2004, the Trustee commenced an action against PwC for damages allegedly caused to the Fund by PwC’s improper audits. The Trustee alleged, among other things, that PwC was aware of the misstatements in the financial reports, but failed to bring them to the attention of the Fund’s management, instead falsely representing that the financial statements were prepared in accordance with GAAP Based on these allegations, the Trustee asserted causes of action for accountant malpractice, fraud, breach of fiduciary duty and breach of contract.*
The Instant Actions
At the end of 2003, plaintiffs commenced these three separate actions against PwC. Each action asserted claims of fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, negligent misrepresentation, and negligence. For their fraud cause of action, plaintiffs allege that PwC induced them to invest in the Fund through the year-end statements, as well *269as monthly reports, without having employed the proper auditing methods necessary to ensure that the financial statements were accurate.
PwC moved, pursuant to CPLR 3211, to dismiss the fraud claim, arguing that plaintiffs had pleaded no injury distinct from the injury attributed to the Fund as a whole, which was the subject of the Trustee action that had been brought on behalf of, and would inure to the benefit of, all injured limited partners. PwC argued that plaintiffs’ action should be dismissed because it alleged only a derivative injury or, alternatively, should be stayed pending resolution of the Trustee’s action. Plaintiffs responded by asserting that their claim was distinct from the Trustee’s claim because they were seeking damages predicated on fraud in the inducement—that they had been fraudulently induced to rely on PwC’s audits when they made their initial investment in the Fund and thus sustained injury on the very day of their purchase. They contrasted this injury with the damages the Trustee sought to recover, which included recovery for excessive management and incentive fees the Fund had paid as a result of the overvaluation.
Supreme Court denied, in part, PwC’s motion to dismiss. As relevant to this appeal, the court held that “to the extent that Plaintiffs assert direct claims, such as fraud in the inducement of their initial investment in the Partnership, they are not derivative and the court therefore declines to dismiss them.” (Jones v PricewaterhouseCoopers LLP, 2004 NY Slip Op 51789[U], *4.)
Discovery ensued. Each party presented an expert to address the extent of any distinct, nonderivative injury plaintiffs may have suffered. At the conclusion of discovery, PwC moved for summary judgment asserting, once again, that plaintiffs could not come forward with proof that they suffered an injury distinct from that suffered by the Fund, which damages were being pursued by the Trustee on behalf of plaintiffs and all other limited partners. In support of the motion, PwC submitted the affidavit of an expert economist who opined that all of the damages articulated by plaintiffs were derivative as they consisted only of plaintiffs’ pro rata share, as limited partners, of the Fund’s losses arising from (1) net income loss, (2) overpayments of general partner fees, and (3) overpayments of capital to withdrawn limited partners.
In opposition, plaintiffs submitted the affidavit of their own accounting expert, who argued that because the Fund had been *270overvalued at the time of the plaintiffs’ investment, the damages plaintiffs suffered should be calculated as “the difference between their initial investments and the amount they actually recovered through withdrawals or distributions from the Fund, plus an appropriate amount of prejudgment interest.” The expert concluded that the total shortfall among all the plaintiffs was approximately $35 million and claimed that plaintiffs would recover far less from the Fund in the then-pending liquidation proceeding.
Supreme Court granted PwC’s motion for summary judgment finding that plaintiffs failed to present evidence of a direct injury, noting that plaintiffs had shown only derivative injuries. The court held that PwC had made a prima facie showing that plaintiffs’ claims “all state derivative claims that all limited partners share equally proportionate with their investments in the Funds . . . [and] none of the [plaintiffs’] claimed direct injuries are independent of any alleged injury to the Partnerships.” (2007 NY Slip Op 33619[U], *5.) Addressing plaintiffs’ evidence, the court held that plaintiffs failed to carry their burden to respond to PwC’s prima facie showing with competent evidence:
“[Discovery is now closed and plaintiffs fail to produce any evidence to support their claim that they suffered a direct injury at the time of their investments that is distinct from the injury to the Partnerships ... In short, the only loss plaintiffs can demonstrate is the diminution in value of their investment in the Partnerships, stemming from the Partnerships’ overpayments and trading losses. Thus, the nature of the injury is derivative. As plaintiffs fail to rebut PWC’s prima facie showing, the court is constrained to grant PWC’s motions for summary judgment dismissing the complaints.” (Id. at *6-7.)
The Appellate Division affirmed (57 AD3d 411 [2008]). This Court granted plaintiffs leave to appeal (13 NY3d 707 [2009]) and we now affirm.
Analysis
Neither party disputes that plaintiffs, as limited partners of a partnership, may assert a direct claim of fraud in the inducement. Indeed, PwC concedes that an individual investor may have a direct claim for an investment made in reliance on a *271fraud. Thus, for purposes of this appeal, we assume, without deciding, that plaintiffs properly alleged such a cause of action against PwC. The dispute on this appeal then is whether plaintiffs came forward with proof to refute PwC’s showing that all the damages claimed under that cause of action were plaintiffs’ share of partnership losses and thus derivative in nature.
In a fraud action, a plaintiff may recover only the actual pecuniary loss sustained as a direct result of the wrong (Reno v Bull, 226 NY 546 [1919]). Under this rule, the actual loss sustained as a direct result of fraud that induces an investment is the “difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain” (Sager v Friedman, 270 NY 472, 481 [1936]). The damages are to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained (see Lama Holding Co. v Smith Barney, 88 NY2d 413, 421 [1996]).
Plaintiffs rely on an exception to the fraud damages rule recognized by this Court in Hotaling v Leach & Co. (247 NY 84 [1928]). In that case, the plaintiff was fraudulently induced into purchasing a bond for a certain sum of money (id. at 85-86). The trial court measured the damages by deducting from the price paid, plus interest from the date of payment, the value of the bond at the time of its sale (id. at 87). This Court held that this was the proper measure of damages, as plaintiff was entitled to recover from the defendants the loss proximately resulting from the fraud that induced the investment (id. at 87, 92-93). The Court recognized, however, that this measure of damages was an exception to the general rule that “the actual pecuniary loss sustained as a direct result of fraud which induces a purchase ... is the difference between the amount paid and the value of the article received” (id. at 87-88).
Hotaling, however, differs from this case in significant ways. First, the Court in Hotaling rejected a measure of damages based on the market value of the bond when the plaintiff purchased it, explaining that such value could not be determined and would have left the plaintiff without any remedy (id. at 89-90). Here, in contrast, plaintiffs could have come forward with portfolio valuations showing the amount of the claimed overvaluation of the portfolio on the day of their respective investments. Indeed, plaintiffs’ expert acknowledged that such an analysis could be undertaken, but he failed to do one, and *272EDO Seidman undertook a similar calculation in relation to the liquidation proceeding. Further, there was no overlapping derivative claim in Hotaling that would inure to the plaintiffs benefit. Here, the Trustee has prosecuted claims seeking the very same categories of damages allegedly suffered by plaintiffs. The presence of the overlapping claims requires plaintiffs to come forward with direct, distinct date-of-investment injuries.
Plaintiffs failed to meet their burden. The only injury they seek to establish is the diminution in value of their limited partnership interests at liquidation. However, that diminution is attributable to their pro rata share of the partnership’s losses after the date of their investments, and they experienced those losses in their capacities as limited partners in common with all other limited partners. Plaintiffs cannot recover their pro rata share of the partnership injury and also recover that same injury under the direct fraud action. Thus, PwC was entitled to summary judgment dismissing the fraud cause of action.
Accordingly, the order of the Appellate Division should be affirmed with costs.

The Trustee settled with PwC in January 2010.