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Deloitte Touche Bermuda will have to stand trial on civil charges that it aided and abetted the massive fraud allegedly perpetrated on investors by Michael Berger’s Manhattan Investment Fund. Federal Judge Denise Cote of the Southern District of New York on Monday rejected a summary judgment motion by the accounting firm, which is accused of aiding and abetting the hedge fund’s alleged $400 million fraud through audits it conducted for fiscal years 1996 and 1997. Cote’s ruling in the class action Cromer Finance Ltd. v. Berger, 00 Civ. 2284, dealt with Deloitte Touche Bermuda’s (DTB’s) summary judgment motion on claims alleging securities fraud, aiding and abetting common law fraud and breach of fiduciary duty, common law fraud, negligence and professional malpractice. DTB argued the court lacked subject matter jurisdiction because none of the owners of share funds were U.S. residents and none of the losses were caused by its conduct in the United States. Having already dealt with jurisdictional challenges once in the case, Cote said neither the basis for jurisdiction, nor recent case law on the subject, has changed to the firm’s advantage. “All of the causes of action and defendants are tied together through their connection to the single scheme which was the fraud committed by Berger in New York,” Cote said. “It matters not, therefore, whether any beneficial owner of shares in the Fund or the two named plaintiffs are United States citizens.” Cote said DTB had also argued that “its conduct could not be aggregated with the conduct of any other defendant in assessing jurisdiction.” But the judge said the company was wrong about the standard for subject matter jurisdiction. “The issue is whether the court has jurisdiction over the transaction, not whether it separately has jurisdiction over the particular acts committed by each defendant in connection with the transaction,” she said. “Indeed, it is the simple fortuity of litigation that Berger himself will not be sitting as a defendant in the upcoming trial.” Berger is currently a fugitive from justice. In 2000, he admitted lying to investors in a guilty plea in the Southern District, but he fled before sentencing and has not been heard from since. DTB challenged the securities fraud counts by arguing that the plaintiffs could not prove they relied on the firm’s audits or that their losses were the foreseeable consequence of inaccuracies in the audits. The audits, the firm said, did not contain a confirmation of the process the fund used to calculate net asset value (NAV), and the plaintiffs failed to exercise due diligence because a review of the audits would have confirmed that the hedge fund had ignored its own limits on concentrating assets within a particular sector. But Judge Cote said, “Each of DTB’s arguments raises inherently fact intensive questions that are inappropriate for summary judgment.” “It is undisputed that the annual audit confirmed the reported year-end financial statements for the Fund, including the year-end NAV,” she said. “That is sufficient to support the presumption of reliance.” LOSS CAUSATION As for loss causation, DTB had argued that the real cause of investor losses were the hedge fund’s fraudulent net asset value calculations and Berger’s strategy of short-selling technology stocks. Judge Cote said the alleged connection between the firm’s audits and the fraud, at least for summary judgment purposes, was sufficient to go to trial, in part because the fund’s offer memo touted Deloitte & Touche as its independent auditor. “It does not require a long step from there to find that an investor’s losses are a reasonably foreseeable consequence of misstatements in the audit that go directly to the investment quality of a fund,” she said. Judge Cote did grant summary judgment on DTB’s motion to bar any presumption of reliance for the common law claims. Thelen Reid & Priest and Kirby, McInerney & Squire represented Cromer Finance. Kramer Levin Naftalis & Frankel represented DTB.

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