On May 16, 2024, Justice Crane of the New York County Commercial Division issued a decision in A Participations Ltd. V. Infinity Q Capital Mgmt. LLC, 2024 NY Slip Op. 31788(U), dismissing a fraud claim against an auditor for failure adequately to allege scienter, explaining:
The court finds that Plaintiffs failed to state a cause of action for fraud against EisnerAmper. . . . In order to state a cause of action for fraud against an auditor, a plaintiff must allege that the auditor’s practices were so deficient as to amount to no audit at all, that there was a refusal to see the obvious, a failure to investigate the doubtful. Ultimately, to support a claim for fraud based on an auditor’s failure to adhere to generally accepted auditing standards, the auditor must actually know about the red flags and unjustifiably ignore them.
Here, Plaintiffs have failed to plead the elements of their fraud claim against EisnerAmper with sufficient particularity. Plaintiffs’ core allegation that EisnerAmper made false representations in the Annual Audits when it certified that the Hedge Fund’s financial statements were accurate, free from material misstatement, and fairly presented the financial position of the Hedge Fund fails to identify with specificity to whom EisnerAmper made the misrepresentations or which Plaintiffs received the audits and justifiably relied on them. Additionally, while Plaintiffs allege that EisnerAmper met with investors-including certain Plaintiffs and provided assurances regarding the valuation systems and financial statements, Plaintiffs provide no specific details regarding these meetings, such as which Plaintiffs EisnerAmper met with or when they met with them. This failure to allege the elements of fraud with particularity is fatal to the claim.
Further, the amended complaint fails to allege in non-conclusory terms that EisnerAmper had actual knowledge that its representations in the annual audits were false. If anything, the amended complaint’s allegations suggest constructive knowledge. Plaintiffs allege that EisnerAmper had access to all the information and data necessary to fully uncover the systemic fraud and prevent the massive damage incurred by Plaintiffs, but EisnerAmper fostered the fraud by willfully ignoring a litany of red flags. The amended complaint also alleges that EisnerAmper inappropriately relied on the fraudulent BV AL models and inputs created by the IQM Parties without confirming, corroborating, replicating, or independently verifying the valuations, intentionally disregarded the significant disparities between the counter-party valuations of OTC Positions that it audited against the values provided by the IQM Parties, and that EisnerAmper should have discovered the mathematically impossible valuations caused by the IQM Parties’ alleged mismarking of OTC Positions. Additionally, Plaintiffs allege that EisnerAmper failed to identify that the Identical Positions in each the Mutual Fund and Hedge Fund were being valued at drastically different figures at the same point in time, and that EisnerAmper willfully ignored substantial available data during its audit reviews that would have identified these clear red flags (i.e., Eisner Am per did not have actual knowledge of those red flags but could have). Because Plaintiffs have failed to allege actual knowledge in non-conclusory terms, the amended complaint fails to state a cause of action for fraud.
(Internal quotations and citations omitted).