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Current Developments in the Commercial Divisions of the
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Posted: February 7, 2016

Claims Against Auditors of Failed Fund Dismissed Under In Pari Delicto Doctrine

On January 19, 2016, Justice Bransten of the New York County Commercial Division issued a decision in FIA Leveraged Fund Ltd. v. Grant Thornton LLP, 2016 NY Slip Op. 50093(U), dismissing a claim under the in pari delicto doctrine.

In FIA Leveraged Fund, the plaintiffs brought a claim against the defendants “to recover approximately $47 million in damages for the allegedly deficient auditing services Defendants provided the Funds.” Among the grounds on which the defendants moved to dismiss was in pari delicto, arguing that the plaintiffs were in essence faulting the defendants for failing to uncover the plaintiffs’ own fraud. The court agreed, explaining:

As explained by the Court of Appeals, the [in pari delicto] doctrine mandates that courts will not intercede to resolve a dispute between two wrongdoers because a wrongdoer should not profit from his own misconduct. Pursuant to the doctrine, the misconduct of an authorized agent is imputed to the corporation even if the particular acts were unauthorized. Moreover, as an affirmative defense, in pari delicto is properly resolved on the pleadings.

Here, the record indicates that [the fund employees with whom the defendants dealt] managed the Funds, as well as their investment activities, in accordance with separate management agreements. Plaintiffs concede that [those employees] carried out fraudulent schemes to prop up the funds they managed. Notwithstanding the illegality of these actions, they are actions that nonetheless fall squarely within a manager’s scope of authority. Thus, the Court concludes that [those employees] were authorized agents of the [plaintiffs], and as such, the aforementioned misconduct—the very same misconduct Defendants are charged with failing to detect—may be imputed to [the plaintiffs].

(Internal quotations and citations omitted). The court rejected the argument that”the issue of imputation is governed by New York’s internal affairs doctrine, which provides that a corporation’s internal affairs are governed by the law of the place of incorporation,” not New York.

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