| CRT Invs., Ltd. v BDO Seidman, LLP |
| 2011 NY Slip Op 04816 [85 AD3d 470] |
| June 9, 2011 |
| Appellate Division, First Department |
| CRT Investments, Limited, et al., Appellants, v BDOSeidman, LLP, et al., Respondents, et al., Defendants. |
—[*1] Edwards Angell Palmer & Dodge LLP, New York (Ira G. Greenberg of counsel), forrespondents.
Judgment, Supreme Court, New York County (Richard B. Lowe, III, J.), entered May 21,2010, dismissing the complaint against defendants BDO Seidman, LLP and BDO Tortuga, andbringing up for review an order, same court and Justice, entered May 7, 2010, insofar as itgranted said defendants' motions to dismiss the complaint, unanimously affirmed, with costs.Appeal from the order, entered May 7, 2010, unanimously dismissed, without costs, as subsumedin the appeal from the judgment.
This litigation arises out of plaintiffs' investment in the Ascot Fund, Limited, a CaymanIslands hedge fund audited by BDO Tortuga, which was a "feeder fund" for Ascot Partners, L.P.,a New York hedge fund audited by BDO Seidman. Plaintiffs asserted causes of action for fraud,aiding and abetting fraud, negligence, and gross negligence against these outside auditors forfailing to disclose that the fund was ultimately managed by Bernard Madoff.
Plaintiffs failed to meet their burden of demonstrating the existence of personal jurisdictionover BDO Tortuga under New York's long arm statute (Pramer S.C.A. v Abaplus Intl. Corp., 76 AD3d 89, 95 [2010]).Plaintiffs failed to rebut defendant's affidavit (see Roldan v Dexter Folder Co., 178 AD2d589, 590 [1991]), which established that BDO Tortuga has no presence in New York, that itperformed the audit of the Ascot Fund in the Cayman Islands, pursuant to engagement lettersexecuted in, and sent from, the Cayman Islands, and that there were only limited e-mails withanyone in New York "affiliated in any way with Ascot Fund." Although plaintiffs argue thatBDO Tortuga relied upon the audit work that BDO Seidman had performed with respect to theexistence and valuation of Ascot Partners and Ascot Fund's investments, there is no basis toconclude that BDO Tortuga should have reasonably expected to defend its actions in New York(see Kreutter v McFadden Oil Corp., 71 NY2d 460, 466 [1988]). All of the relevantparties to the cause of action (plaintiff, defendant, and audit client), and all of the work that BDOTortuga performed were in the Cayman Islands. Nor does sending a few [*2]e-mails and engagement letters into New York alter this result (see Kimco Exch. Place Corp. v ThomasBenz, Inc., 34 AD3d 433, 434 [2006], lv denied 9 NY3d 803 [2007]).
Plaintiffs' alternative argument, that BDO Tortuga is subject to personal jurisdiction underCPLR 302 (a) (3), is also unavailing. In the context of a commercial tort, where the damage issolely economic, the situs of commercial injury is where the original critical events associatedwith the action or dispute took place, not where any financial loss or damages occurred (seeO'Brien v Hackensack Univ. Med. Ctr., 305 AD2d 199, 201-202 [2003]; Mid-AtlanticResidential Invs. Ltd. Partnership v McGuire, 166 AD2d 205, 206-207 [1990]). Plaintiff'sclaim that it was sold the investment in New York is irrelevant, because the injury did not ariseout of its purchase of the investment here, but, rather, out of BDO Tortuga's alleged failure toappropriately perform its audit services. Defendants' affidavit also established that BDO Tortugadid not derive "substantial revenue" from interstate or international commerce (see LaMarcav Pak-Mor Mfg. Co., 95 NY2d 210, 214 [2000]).
Plaintiffs have failed to state a claim against BDO Seidman for fraud, aiding and abettingfraud and negligent misrepresentation. Although an intent to commit fraud is divined from thesurrounding circumstances, this does not mean "constructive knowledge, but actual knowledge ofthe fraud as discerned from the surrounding circumstances" (Oster v Kirschner, 77 AD3d 51, 56 [2010]). Plaintiffs' allegationsof generally accepted auditing standards violations "without corresponding fraudulent intent" areinsufficient to state a securities fraud claim against an independent accountant (Rothman vGregor, 220 F3d 81, 98 [2d Cir 2000] [internal quotation marks omitted]). "[S]ubstantialassistance," a necessary element of aiding and abetting fraud, means more than just performingroutine business services for the alleged fraudster (see Ulico Cas. Co. v Wilson, Elser, Moskowitz, Edelman & Dicker, 56AD3d 1, 11 [2008]). The complaint fails to plead a factual basis for inferring that BDOSeidman did anything more than perform the routine business of auditing. Where, as here, directcontact between the accountant and the plaintiff is minimal or nonexistent, the plaintiff cannotrecover for the accountant's alleged negligence (see e.g. Security Pac. Bus. Credit v PeatMarwick Main & Co., 79 NY2d 695, 706 [1992]). The fact that plaintiffs were entitled toand received a copy of the audited financial statements, or that BDO Seidman knew that theinvestors would rely upon the information contained in the financial statements, does notestablish the requisite linking conduct (see Houbigant, Inc. v Deloitte & Touche, 303AD2d 92, 94-95 [2003]). BDO Seidman's work in the course of the audit was performedpursuant to professional standards applicable in the context of any audit, and was not undertakenpursuant to any specific duty owed to plaintiffs (id.). Therefore, plaintiffs cannotestablish the direct nexus necessary to give them a claim against BDO Seidman for negligentmisrepresentation. Concur—Gonzalez, P.J., Tom, Friedman, Catterson and Richter, JJ.