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“Your Work” Exclusion Applies to Subcontractor
Published in the April 2009 issue of Litigation Notes - View Article
The fact that an accounting firm is identified as auditor on an Offering Memorandum is not a basis for liability to investors, absent evidence of negligence by the accounting firm
In 2005, Toronto-based hedge fund manager, Portus Alternative Asset Management Inc. (“Portus”) collapsed. Some 26,000 Canadian investors lost approximately $730 million. A number of class actions were commenced as a result of this fraud including one by Garry Hurst, an octogenarian who invested $250,000 in Portus. The class action claimed $110 million in damages but did not name Portus as a Defendant. Rather, the only defendant was PriceWaterhouseCoopers (PwC) LLP, Canada (“PwC”). The claim against PwC was for “negligent misrepresentation, reckless misrepresentation and negligence for its role as Auditor of the Portus Group of Hedge Funds and the meltdown of the financial gate-keeping function of the Fund which imploded after the discovery of criminal activities and fraudulent improprieties perpetrated by the Fund and its principals against the Class”.
However, the Statement of Claim did not describe the nature of PwC’s retainer as auditor, did not allege that PwC actually audited the financial statements of Portus or that it was under any obligation to do so. The only misrepresentation attributable to PwC was that the following statement appeared on an Offering Memorandum issued by Portus: “Auditor: Pricewaterhouse Coopers LLP, Chartered Accountants, Toronto, Ontario”.
The alleged misrepresentation related not to whether the statement was true or false but to what the statement purportedly meant to a potential investor. The Statement of Claim went on to allege that by allowing its name to be used on the Offering Memorandum, PwC lent legitimacy to an “otherwise upstart hedge-fund investment firm”. This allegedly entitled the investors to believe that “the fund was legitimate and a bona fide investment that would be compliant with minimum financial gate-keeping standards delineated in the Offering Memorandum”.
PwC brought a motion to strike the Statement of Claim for failing to show a reasonable cause of action and alternatively as an abuse of process. The motions judge struck the Statement of Claim without leave to amend. After reviewing the facts, the Court concluded:
“The above analysis reveals that whether the naming of PwC was authorized or unauthorized (and not disavowed), the action against PwC is based on what a Portus investor would connote, think, hope, infer, or believe simply from the mere presence of an auditor’s name on a Portus document. Other than the naming of PwC as auditor, there is nothing to establish a relationship between the investors and PwC, and there are no promises, undertakings, or holding out of responsibility made by PwC to the investors.
Thus, it seems that according to Mr. Hurst, PwC is liable because it was actually or apparently on deck when the financial shipwreck happened. However, the proximity necessary for tortious liability certainly must be something more than just being in the vicinity of the wrongdoing. It is neither reasonable nor fair to impose liability on PwC without any misrepresentation or wrongdoing by it or any allegations that it participated in Portus’ wrongdoing. In my opinion it is plain and obvious that Mr. Hurst’s action is not a reasonable one or one capable of being developed from the law”.
Hurst v. PriceWaterhouseCoopers (PwC) LLP, Canada, 2009 CanLII 15655