     14-1249-cv
     In re MF Global Holdings Ltd. Investment Litig. (Deangelis v. Corzine)

                          UNITED STATES COURT OF APPEALS
                              FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER
     RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED
     ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
     PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A
     DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
     ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST
     SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

 1            At a stated term of the United States Court of Appeals
 2       for the Second Circuit, held at the Thurgood Marshall United
 3       States Courthouse, 40 Foley Square, in the City of New York,
 4       on the 22nd day of May, two thousand fifteen.
 5
 6       PRESENT: DENNIS JACOBS,
 7                ROSEMARY S. POOLER,
 8                PETER W. HALL,
 9                              Circuit Judges.
10
11       - - - - - - - - - - - - - - - - - - - -X
12       IN RE MF GLOBAL HOLDINGS LTD. INVESTMENT
13       LITIGATION (DEANGELIS V. CORZINE)
14       - - - - - - - - - - - - - - - - - - - -X
15       BEARING FUND LP, AUGUSTUS
16       INTERNATIONAL MASTER FUND, LP, KAY P.
17       TEE, LLC, MARK KENNEDY, THOMAS G.
18       MORAN, ROBERT MARCIN, PARADIGM ASIA
19       LTD., PARADIGM EQUITIES LTD.,
20       PARADIGM GLOBAL FUND I LTD., PS
21       ENERGY GROUP, INC., SUMMIT TRUST
22       COMPANY, HENRY ROGERS VARNER, JR.,
23       THOMAS S. WACKER,
24                Plaintiffs-Appellants,
25
26                    -v.-                                               14-1249-cv
27


                                                  1
 1   PRICEWATERHOUSECOOPERS LLP,
 2            Defendant-Appellee.*
 3   - - - - - - - - - - - - - - - - - - - -X
 4
 5   FOR APPELLANTS:            ANDREW J. ENTWISTLE (Merrill G.
 6                              Davidoff, Berger &
 7                              Montague, P.C., Philadelphia,
 8                              Pennsylvania, Charles R.
 9                              Eskridge III, Susman
10                              Godfrey LLP, Houston, Texas, on
11                              the brief), Entwistle & Cappucci
12                              LLP, New York, New York.
13
14   FOR APPELLEE:              JAMES J. CAPRA, JR. (James P.
15                              Cusick & David M. Fine, on the
16                              brief), King & Spalding LLP, New
17                              York, New York.
18
19        Appeal from a judgment of the United States District
20   Court for the Southern District of New York (Marrero, J.).
21
22        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED
23   AND DECREED that the judgment of the district court be
24   AFFIRMED.
25
26        Plaintiffs--representatives of a class of former
27   commodities customers of MF Global Inc. (“MFGI”)--appeal
28   from the judgment of the United States District Court for
29   the Southern District of New York (Marrero, J.), dismissing
30   their claims against PricewaterhouseCoopers LLP (“PwC”). We
31   assume the parties’ familiarity with the underlying facts,
32   the procedural history, and the issues presented for review.
33
34        In 2010 and 2011, MFGI allegedly raided commodities
35   customer accounts, which it maintained in its capacity as a
36   futures commission merchant, in an effort to stave off
37   collapse. See generally In re MF Global Holdings Ltd. Sec.
38   Litig. (“MF Global I”), 982 F. Supp. 2d 277, 288-300
39   (S.D.N.Y. 2013) (describing collapse of MFGI). In so doing,
40   MFGI violated the Commodity Exchange Act (“CEA”) and
41   regulations promulgated by the Commodity Futures Trading
42   Commission (“CFTC”). See 7 U.S.C. § 6d(a)(2); 17 C.F.R.

         *
              The Clerk of Court is respectfully directed to
     amend the official caption in this case to conform with the
     caption above.
                                  2
 1   § 30.7(a). Plaintiffs allege that PwC, which conducted
 2   audits of MFGI in 2010 and 2011 pursuant to 17 C.F.R.
 3   § 1.16, enabled MFGI’s unlawful conduct by failing to detect
 4   deficiencies in MFGI’s accounting and internal control
 5   procedures. In re MF Global Holdings Ltd. Inv. Litig. (“MF
 6   Global II”), 998 F. Supp. 2d 157, 174 (S.D.N.Y. 2014).
 7   Plaintiffs sued PwC for breach of fiduciary duty on behalf
 8   of MFGI and for professional negligence on behalf of MFGI
 9   and customers.1
10
11        The district court granted PwC’s motion to dismiss,
12   holding that: (1) the claims on behalf of MFGI were barred
13   by in pari delicto and (2) the professional negligence claim
14   on behalf of customers failed as a matter of law because PwC
15   was not in privity or “near-privity” with customers. MF
16   Global II, 998 F. Supp. 2d at 187-91. Plaintiffs appealed.
17
18        “We review a district court’s grant of a motion to
19   dismiss under Rule 12(b)(6) de novo.” Simmons v. Roundup
20   Funding, LLC, 622 F.3d 93, 95 (2d Cir. 2010) (internal
21   quotation marks omitted). We affirm the district court for
22   substantially the reasons set forth in its thorough and
23   well-reasoned opinion.
24
25        1. In Pari Delicto. Plaintiffs’ claims on behalf of
26   MFGI are barred by in pari delicto, an affirmative defense
27   which “mandates that the courts will not intercede to
28   resolve a dispute between two wrongdoers.” Kirschner v.
29   KPMG LLP, 15 N.Y.3d 446, 464 (2010). In “appropriate”
30   cases, the defense may be applied at the pleading stage.
31   Id. at 459 n.3.
32
33        Plaintiffs allege that MFGI, acting through directors
34   and officers who have also been sued (the “D&O Defendants”),
35   violated the segregation requirements of Section 4d of the
36   CEA, 7 U.S.C. § 6d(a)(2) (“Section 4d”), and 17 C.F.R.
37   § 30.7(a) (“Regulation 30.7”). The allegation defeats the
38   claim: a corporation that engages in malfeasance cannot sue
39   outside accountants who negligently failed to detect or
40   prevent that malfeasance. Kirschner, 15 N.Y.3d at 463, 477.
41


         1
              The trustee appointed to oversee the liquidation
     of MFGI under the Securities Investor Protection Act
     assigned MFGI’s claims to Plaintiffs. MF Global II, 998 F.
     Supp. 2d at 168-69.
                                  3
 1        Plaintiffs attempt to avoid in pari delicto by arguing,
 2   first, that PwC performed a special regulatory function
 3   pursuant to 17 C.F.R. § 1.16. Relying on Bateman Eichler,
 4   Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985), and
 5   Pinter v. Dahl, 486 U.S. 622 (1988), Plaintiffs assert that
 6   in pari delicto cannot be applied if its application would
 7   undermine a federal regulatory scheme. However, those cases
 8   addressed the federal common law of in pari delicto and
 9   discussed the circumstances under which that doctrine could
10   be invoked to preclude federal claims. Bateman Eichler, 472
11   U.S. at 301; Pinter, 486 U.S. at 635. This case concerns
12   the application of New York’s doctrine of in pari delicto to
13   New York claims. Absent federal preemption, the application
14   of a state law defense to state law claims is governed
15   exclusively by state law. See, e.g., Kirschner v. KPMG LLP,
16   590 F.3d 186, 194-95 (2d Cir. 2009) (certifying such
17   questions to the New York Court of Appeals). Plaintiffs
18   have identified no federal statute that preempts the New
19   York law of in pari delicto.2 Nor have they cited any New
20   York authority that adopts the principle articulated in
21   Bateman Eichler and Pinter.
22
23        Second, Plaintiffs argue that PwC’s wrongful conduct
24   was unrelated to MFGI’s because the negligent audits were
25   performed prior to MFGI’s violations of Section 4d and
26   Regulation 30.7. However, the gist of the claims against
27   PwC is that PwC should have--but failed to--detect
28   deficiencies in MFGI’s accounting and internal control
29   procedures, and that these deficiencies later enabled MFGI
30   to misuse customer funds. See Compl. ¶¶ 374-375. MFGI’s
31   misuse of customer funds is thus sufficiently linked with
32   PwC’s auditing failures: but for MFGI’s wrongful conduct,
33   there would have been no violations of Section 4d or
34   Regulation 30.7 for PwC to prevent. Plaintiffs assert that
35   in pari delicto bars claims based on failures to detect
36   wrongdoing, but not claims based on failures to prevent
37   wrongdoing. The case law makes no such distinction. See
38   Kirschner, 15 N.Y.3d at 464.
39
40        Finally, Plaintiffs argue that it is premature to apply
41   in pari delicto because there has been no definitive ruling
42   that MFGI engaged in wrongdoing. That argument is self-


         2
              The CEA provides a federal cause of action, but
     that cause of action cannot be brought against an auditor
     like PwC. See 7 U.S.C. § 25(a)(1).
                                  4
 1   defeating: if MFGI is ultimately found to have complied with
 2   Section 4d and Regulation 30.7, any negligence by PwC will
 3   have caused no injury.
 4
 5        Plaintiffs argue that the application of in pari
 6   delicto must await the outcome of the claims against the D&O
 7   Defendants. We disagree. “An affirmative defense may be
 8   raised by a pre-answer motion to dismiss under Rule 12(b)(6)
 9   . . . if the defense appears on the face of the complaint.”
10   Iowa Pub. Employees’ Ret. Sys. v. MF Global, Ltd., 620 F.3d
11   137, 145 (2d Cir. 2010) (internal quotation marks omitted).
12
13        The district court properly dismissed the claims
14   asserted on behalf of MFGI as barred by in pari delicto.3
15
16        2. Professional Negligence. Under New York law, an
17   accountant cannot be sued for professional negligence by a
18   party with whom it did not contract unless the relationship
19   between the plaintiff and the accountant was “so close as to
20   approach that of privity.” Credit Alliance Corp. v. Arthur
21   Andersen & Co., 65 N.Y.2d 536, 546 (1985) (citation and
22   internal quotation marks omitted). “Near-privity” has the
23   following elements: “1) the accountant must have been aware
24   that the reports would be used for a particular purpose;
25   2) in furtherance of which a known party was intended to
26   rely; and 3) some conduct by the accountant ‘linking’ him or
27   her to that known party.” Sec. Investor Prot. Corp. v. BDO
28   Seidman, LLP, 222 F.3d 63, 73 (2d Cir. 2000) (citing Credit
29   Alliance, 65 N.Y.2d at 551).
30
31        BDO Seidman controls this case. In that case, the
32   customer-plaintiffs of a bankrupt broker-dealer were not
33   “known parties”; although the accountant-defendant knew that
34   the broker-dealer’s customers would, as a class, rely on the
35   audits, it did not know that the “particular plaintiffs
36   bringing the action would rely on its representations.” BDO
37   Seidman, 222 F.3d at 75. And the requisite “linking
38   conduct” was absent because the accountant never directly
39   communicated with customers. Id. at 75-76.


         3
              Because we affirm on this basis, we need not
     consider whether the breach of fiduciary claim could have
     been dismissed on the additional ground that “[g]enerally,
     there is no fiduciary relationship between an accountant and
     his client.” Friedman v. Anderson, 803 N.Y.S.2d 514, 516
     (App. Div. 1st Dep’t 2005).
                                  5
 1        Here, Plaintiffs do not allege that PwC knew the
 2   specific identities of the “particular plaintiffs bringing
 3   the action” or “even . . . the number of customers [MFGI]
 4   had at any one time.” BDO Seidman, 222 F.3d at 75.
 5   Furthermore, as in BDO Seidman, there is no allegation that
 6   PwC engaged in any “linking conduct” with MFGI’s customers:
 7   the audit reports it prepared were delivered to MFGI, not
 8   customers.4
 9
10        The district court properly dismissed Plaintiffs’
11   professional negligence claim on behalf of customers.
12
13                            *    *   *
14
15        For the foregoing reasons, and finding no merit in
16   Plaintiffs’ other arguments, we hereby AFFIRM the judgment
17   of the district court.
18
19                                FOR THE COURT:
20                                CATHERINE O’HAGAN WOLFE, CLERK
21




         4
              Relying on Dorking Genetics v. United States, 76
     F.3d 1261 (2d Cir. 1996), and Kidd v. Havens, 577 N.Y.S.2d
     989 (App. Div. 4th Dep’t 1991), Plaintiffs argue that
     “linking conduct” does not always require direct
     communication between the accountant and the relying party.
     Neither case assists Plaintiffs. In Dorking Genetics,
     linking conduct was present because the defendant’s report
     was allegedly “tailored to the plaintiffs’ requirements.”
     76 F.3d at 1270. Here, PwC’s reports were tailored to the
     requirements of the CFTC and other regulators. In Kidd, the
     buyer received and read the title company’s report, even if
     he did not directly receive the report from the company.
     577 N.Y.S.2d at 990. Here, there is no allegation that
     Plaintiffs even received or read PwC’s audit reports.
                                   6
