Fairfield Retirement Programs for Employees et al. v. NEPC LLC (2011)

MEMORANDUM OF DECISION ON DEFENDANT'S MOTION TO DISMISS (# 126)

Introduction

This litigation in the Connecticut Superior Court is part of the fallout from the massive fraudulent investment scheme perpetrated by Bernard L. Madoff.   The plaintiffs are the Town of Fairfield (Town) and the two retirement programs or retirement plans (Plans) funded by the Town for its approximately 1,500 current or former police, fire and other municipal employees.   The plaintiffs originally brought this action against two defendants ¹ to recover multi-million dollar losses sustained by the Plans, allegedly as a result of the actions of these defendants.   The defendant, KPMG LLP (KPMG) is a limited liability partnership that holds itself out as a national audit, tax and advisory firm that performs independent audits that meet applicable national standards.   The plaintiffs' allegations against KPMG are found in the fourth count of the complaint, alleging professional negligence on the part of KPMG. The defendant moves to dismiss the complaint against it on the ground that the plaintiffs lack standing to bring their claim of professional negligence.   Specifically, KPMG contends that the plaintiffs' claim is remote, indirect, and derivative, and that therefore the plaintiffs lack standing to assert it.   The plaintiffs object, contending that as a result of KPMG's wrongdoing, the plaintiffs were induced to leave their money with Bernard L. Madoff, albeit in a different fund not audited by KPMG, the Maxam Absolute Return Fund (Maxam Fund).

Motions to Dismiss for Lack of Standing—Legal Principles

“A motion to dismiss ․ properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court.”  (Internal quotation marks omitted.)  Gurliacci v. Mayer, 218 Conn. 531, 544 (1991).   ‘The motion to dismiss shall be used to assert (1) lack of jurisdiction over the subject matter ․” (Internal quotation marks omitted.)  Sadloski v. Manchester, 235 Conn. 637, 645–46 n.13 (1995).  “The motion to dismiss admits all facts which are well pleaded, invokes the existing record, and must be decided on that alone ․ Where, however ․ the motion is accompanied by supporting affidavits containing undisputed facts, the court may look to their content for determination of the jurisdictional issue and need not conclusively presume the validity of the allegations of the complaint.”  (Citation omitted;  internal quotation marks omitted.)  Ferreira v. Pringle, 255 Conn. 330, 346–47 (2001).   Here, a factual affidavit has been submitted by Christine Buchanan (Buchanan), a KPMG partner who served as an engagement partner on audits of the fund in which the plaintiffs had once invested.   The court will also consider Buchanan's affidavit in deciding the issue of standing.

“Standing ․ implicates a court's subject matter jurisdiction, which may be raised at any point in judicial proceedings.”  Stamford Hospital v. Vega, 236 Conn. 646 (1996).   Because the court's subject matter jurisdiction is implicated, a lack of standing is therefore a proper basis for granting a motion to dismiss.   See May v. Coffey, 291 Conn. 106, 112–13, 967 A.2d 495 (2009);  Connecticut State Medical Society v. Oxford Health Plans, 272 Conn. 469, 475 (2005).  “The plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised.”  Fink v. Golenbock, 238 Conn. 183, 199 n.13 (1996).  “Jurisdiction of the subject-matter is the power [of the court] to hear and determine cases of the general class to which the proceedings in question belong ․ A claim that [the] court lacks subject matter jurisdiction [may be raised at any time ․ Once the question of lack of jurisdiction of a court is raised, [it] must be disposed of no matter in what form it is presented ․” (Citations omitted;  internal quotation marks omitted.)   Goldberg v. Goodwill Industries, Superior Court, judicial district of Hartford, Docket No. CV 054009642 (January 3, 2006, Keller J.).

The Allegations

KPMG entered into an agreement with Tremont Capital Management Inc. and its successors (Tremont), to provide professional services to certain partnerships within Tremont.   This included a hedge fund in the form of a limited partnership known as the Rye Select Broad Market Fund, L.P., formerly known as American Masters Broad Market Fund, L.P. (Broad Market Fund).   As of December 2005, the plaintiffs had a limited partnership interest in the Broad Market Fund. This fund placed all of its investments under the management of Bernard L. Madoff, the former investment manager and founder of the market-making firm Bernard L. Madoff Investment Securities, LLC (collectively, Madoff).²  KPMG audited the financial statements of the Broad Market Fund, and it is based on these audits that the plaintiffs allege professional negligence against KPMG.

The plaintiffs allege that KPMG's 2005 audit was for the benefit of the Broad Market Fund's limited partners, which included the plaintiffs.   In March 2006, after performing the audit, KPMG distributed its audit report of the financial statements of the Broad Market Fund to Tremont, the fund's general partner.   The limited partners (including the plaintiffs) also received copies of the report, although it is unclear which entity provided them, as the affidavit of Buchanan denies any direct contact between KPMG and the limited partners of the Broad Market Fund. Buchanan also states that KPMG did not send its audit reports directly to the limited partners like the plaintiffs.   In the absence of a conflicting affidavit from the plaintiffs, the inference the court draws is that Tremont, as part of its duties and obligations as general partner, not to mention its status as investment advisor to the plaintiffs, forwarded the KPMG audit report to the fund's limited partners like the plaintiffs.   The report of KPMG represented that its audit was performed in accordance with generally accepted accounting standards and that it had evaluated the overall financial statement presentation of the Broad Market Fund to obtain reasonable assurance about whether the financial statements were free of material misstatements and had conducted a reasonable examination of evidence supporting the amounts and disclosures in the financial statements.

In its audit report of the Broad Market Fund's financial statements for 2005, KPMG represented that it had a reasonable basis for concluding that the financial statements of the Broad Market Fund for 2005 fairly presented the financial position of the fund as of December 31, 2005.   The plaintiffs contend that the Broad Market Fund's 2005 financial statements did not fairly present the fund's true financial condition as of December 31, 2005.   The plaintiffs allege that at the time KPMG conducted its audit of the financial statements of the Broad Market Fund for 2005, KPMG knew or should have known that proper performance of its audit function as to the Broad Market Fund reasonably required a due diligence investigation of the third party Madoff.

The plaintiffs contend that there was no independent verification of Madoffs investments for the Broad Market Fund, and that Madoffs broker-dealer company was audited by an unusually small accounting firm, a firm which the plaintiffs allege was “unqualified.”   This offered inadequate assurances of the validity of the broker-dealer's representations concerning the investments Madoff purportedly was holding on the Broad Market Fund behalf.   Further, in performing the audit of the financial statements of the Broad Market Fund for 2005, KPMG negligently failed to undertake a proper risk assessment and failed to properly examine, on a test basis, evidence supporting the amounts and disclosures in the financial statement and failed to evaluate the overall financial statement presentation of the Broad Market Fund to obtain reasonable assurance about whether the financial statements were free of material misstatement.

Additionally, the plaintiffs allege that they relied on KPMG's representations in its audit report.   They further allege that had KPMG's audit report advised that KPMG was unable to certify that there was a reasonable basis for concluding that the financial statements fairly presented the financial position of the Broad Market Fund as of December 31, 2005 and December 31, 2006, the plaintiffs would have withdrawn their investments from that fund, and would not have later invested in another Madoff-related investment vehicle, the Maxam Fund. When the Madoff Ponzi scheme was exposed, the plaintiff Plans sustained significant losses in the Maxam Fund, which was not a client of KPMG.

Discussion

As previously stated, the defendants move to dismiss the plaintiffs' complaint for lack of subject matter jurisdiction on the ground that the plaintiffs do not have standing to bring their claims.   The bases for the defendant's motion fall under two theories.   First, the defendant argues that the plaintiffs lack standing because their claim is derivative.   Specifically, the defendant contends that the plaintiffs' claim of professional negligence is premised on an alleged injury that resulted from their investment in an unrelated fund, the Maxam Fund. KPMG argues that even if the plaintiffs' injury could be said to have resulted from its relationship with the Broad Market Fund, the injury was to the limited partners as a group, rather than a unique injury suffered directly by the plaintiffs.   Therefore, any recovery would be received by the Fund. Further, KPMG argues that any fiduciary duties it owed ran solely to the Broad Market Fund and its general partner, and that any alleged breach of those duties must be brought by the general partner.³

Second, the defendant argues that that the alleged injury is too remote and indirect from KPMG's alleged misconduct to impose liability, as all of plaintiffs' losses resulted from the plaintiffs' investment in the Maxam Fund, a fund that the defendant did not audit.   Thus, the plaintiffs are attempting to impose liability on KPMG for losses resulting from an investment in a fund that is separate and distinct from the fund KPMG was contracted to audit several years earlier.   Additionally, KPMG argues that the engagement letters governing the audit opinions of the Broad Market Fund state that if the general partner Tremont wanted to disseminate the audit opinions, KPMG would have to perform additional procedures related to the auditing.   KPMG claims that the plaintiffs do not allege that KPMG authorized anyone or any entity apart from the general partner to use or rely on its auditing reports.

Further, the defendant claims that because it never had any direct contact with the plaintiffs, limited partners in the Fund, there is insufficient evidence supporting the plaintiffs' argument that through its direct contact with the KPMG, the defendant created a separate and distinct fiduciary relationship with the plaintiffs such as would create a claim against KPMG. Based on the aforementioned positions, the defendant asserts that the plaintiffs' claims are indirect, remote and derivative in nature.

Derivative Claims Under Delaware Law

Because it is the defendant KPMG's audit of a Delaware limited partnership hedge fund that is at issue, and the plaintiffs are suing in their capacity as former limited partners of that same Delaware fund, the court will look to Delaware law for guidance, although the court agrees with the plaintiffs that the ultimate question of whether this court has subject matter jurisdiction is a matter of Connecticut law.   The Delaware Supreme Court has held that the test for determining whether a claim is derivative or direct is:  “Who suffered the alleged harm—the corporation or the suing stockholder individually—and who would receive the benefit of the recovery or other remedy?”  Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031, 1039 (Del.2004).   A claim is derivative if all of the “a [company's members are harmed and would recover pro rata in proportion with their ownership of the [company] solely because they are [members].”  Feldman v. Cutaia, 956 A.2d 727, 733 (Del.Ch.2008).   A claim is direct only where plaintiffs suffered some individualized harm not suffered by all of the stockholders [or partners] at large.”  Id. Thus, if the plaintiffs have not shown that they can prevail without showing injury to the partnership, they do not have standing to bring the claim, as it would be derivative in nature.

In analyzing whether a claim is derivative, the court looks to the nature of the alleged wrong, rather than the plaintiff's designation of the claim.   Attempts to “creatively ․ recast [their] derivative [claims] as direct claims are disfavored by Delaware courts.”  Feldman v. Cutaia, 956 A.2d 644, 659 (Del.Ch.2007), aff'd, 951 A.2d 727 (Del.2008).  “The test for distinguishing direct from derivative claims in the context of a limited partnership is substantially the same as that used when the underlying entity is a corporation.   In both instances the determination is made by careful application of a rather nuanced test.   The test looks to the nature of the injury and to the nature of remedy that could result if the plaintiffs are successful.   When, a plaintiff alleges either an injury that is different from what is suffered by other shareholders (or partners) or one that involves a contractual right of shareholders (or partners) that is independent of the entity's rights, the claim is direct.   If the injury is one that affects all partners proportionally to their pro rata interests in the corporation, the claim is derivative.   In a derivative action the plaintiff sues for an injury done to the partnership and any recovery of damages is paid to the partnership.   Conversely, in a direct action the plaintiff sues to redress an injury suffered by the individual plaintiff and damages recovered are paid directly to the plaintiff who was injured.   In every case the court must determine from the complaint whether the claims are direct or derivative and may not rely on either party's characterization.   Because harm to the entity will almost inevitably harm the stakeholders and because the entity itself is in some ways no more than an amalgamation of a certain subset of stakeholders' interests, differentiation of direct from derivative claims can be elusive.”   Anglo American Security Fund, LP v. S.R. Global International Fund LP, 829 A.2d 143 (Del.Ch.2003).

In 2006 and 2007, the plaintiffs withdrew their investments in the KPMO-audited Broad Market Fund. The plaintiffs then invested those funds in the Maxam Fund, an unrelated limited partnership hedge fund.   While this fund also had a connection to Madoff, the Maxam Fund had no relationship with KPMG whatsoever.   As previously stated, the plaintiffs are not seeking damages from their earlier investment in the Broad Market Fund, nor are they alleging any pecuniary loss from their investment in the Broad Market Fund. Nor do the plaintiffs contend that their claims are based on a loss to the Maxam Fund as a whole.   Rather, the plaintiffs are seeking damages for their detrimental reliance upon KPMG's audit opinions from a completely separate investment, opinions which led the plaintiffs to keep their money with Madoff, and not withdraw it entirely.   The plaintiffs accuse the defendant KPMG of professional negligence, in that it failed to conduct the necessary due diligence investigation of Madoff's investments for the Broad Market Fund and as a result, the plaintiffs were left to rely on inadequate audited reports of the Broad Market Fund when deciding whether to invest in the Maxam Fund.

The defendant claims that the plaintiffs' professional negligence claim is derivative because the plaintiffs did not suffer a harm independent of the Broad Market Fund and cannot prevail without showing injury to the partnership.   Thus, any harm resulting from KPMG's alleged misconduct in its auditing services would have affected the Broad Market Fund, and in turn, would have harmed the plaintiffs, as well as the Fund's other limited partners.   In response to the defendant's arguments, the plaintiff's claim that because both the Broad Market Fund and the Maxam Fund were under the umbrella of Madoff, they relied on KPMG's earlier audit opinion regarding the Broad Market Fund's financial statements when they later invested in the Maxam fund.   The plaintiffs argue that this makes their harm separate and distinct from any harm to the other Broad Market Fund limited partners.

“Professional negligence alone ․ does not give rise automatically to a claim for breach of fiduciary duty ․ [Thus] not every instance of professional negligence results in [a] breach of [a] fiduciary duty ․ Professional negligence implicates a duty of care, while breach of a fiduciary duty implicates a duty of loyalty and honesty.”  (Citations omitted;  emphasis in original;  internal quotation marks omitted.)  Sherwood v. Danbury Hospital, 278 Conn. 163, 195–96, 896 A.2d 777 (2006).  “[D]uty is not sacrosanct in itself, but is only an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is entitled to protection ․ While it may seem that there should be a remedy for every wrong, this is an ideal limited-perforce by the realities of this world.   Every injury has ramifying consequences, like the ripplings of the waters, without end.   The problem for the law is to limit the legal consequences of wrongs to a controllable degree ․ The final step in the duty inquiry, then, is to make a determination of the fundamental policy of the law, as to whether the defendant's responsibility should extend to such results.”  (Citations omitted;  internal quotation marks omitted.)  Perodeau v. Hartford, 259 Conn. 729, 756, 792 A.2d 752 (2002).

“The existence of a duty is a question of law and only if such a duty is found to exist does the trier of fact then determine whether the defendant violated that duty in the particular situation at hand ․ We have stated that the test for the existence of a legal duty of care entails (1) a determination of whether an ordinary person in the defendant's position, knowing what the defendant knew or should have known, would anticipate that harm of the general nature of that suffered was likely to result, and (2) a determination, on the basis of a public policy analysis, of whether the defendant's responsibility for its negligent conduct should extend to the particular consequences or particular plaintiff in the case ․ The first part of the test invokes the question of foreseeability, and the second part invokes the question of policy ․ We also have noted, however, that we are not required to address the first prong as to foreseeability if we determine, based on the public policy prong, that no duty of care existed.”  (Citation omitted;  internal quotation marks omitted.)  Neuhaus v. Decholnoky, 280 Conn. 190, 217–18, 905 A.2d 1135 (2006).

There is no dispute that KPMG had a relationship with Tremont, the general partner of the Broad Market Fund. There is also no dispute that under most factual scenarios, a professional negligence claim is a derivative claim that falls under the general partner's ability to bring claims for the fund.⁴  However, the plaintiffs here proffer a unique theory as to why their claim of professional negligence should not be treated as a derivative claim.   The plaintiffs argue that there was direct contact between KPMG and the plaintiffs—KPMG addressed its audit reports to “The Partners” of the Broad Market Fund and sent these reports directly to the plaintiff Plans.   As a result of these contacts, KPMG directly provided the plaintiffs with the material that they later relied upon to their detriment.   According to the plaintiffs, as a result of this contact, the plaintiffs suffered a unique harm that was not suffered by other limited partners, and therefore, the plaintiffs' claim must be viewed as a direct cause of action in which the plaintiffs have standing to pursue.

In support of their assertion that their claim against KPMG is direct, the plaintiffs focus on viewing the facts of this matter under this court's previously riding on derivative claims in Retirement Programs v. Madoff, Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 095011561 (September 2010, Blawie, J.).   In that action this court denied the Maxam defendants' motion to dismiss for lack of standing as to them because, inter alia, it found that there was sufficient evidence of direct dealings between the plaintiffs and the Maxam defendants.   Specifically, the plaintiffs here allege that KPMG distributed the audit reports directly to the plaintiffs, and thus, KPMG created a direct relationship with the plaintiffs which bring any claims resulting from that relationship in this case into the same category as the Maxam defendants.

In response to the plaintiffs' assertion that KPMG had direct contact with the plaintiffs, the defendant submitted the Buchanan affidavit.   As previously stated, Buchanan avers that not only did KPMG not send its audit reports directly to the limited partners of the Broad Market Fund, but that KPMG had no contact with those limited partners.   In her affidavit, Buchanan states that the completed audit reports were sent to Tremont, the general partner of the Broad Market Fund. The court is not persuaded by the defendant's attempt to draw this distinction, as the KPMG “Auditors' Report” attached to Buchanan's affidavit show that the reports' headings stated “The Partners.”   The court finds that irrespective of whether KPMG's audit report of the fund was sent directly to the limited partners by KPMG, a colorable claim may be made that any limited partner (such as the plaintiffs were at the time) would be reasonably entitled to rely on the information and representations of KPMG contained therein.   When the allegations are viewed (as they must be at this stage) in a light most favorable to the plaintiffs, the plaintiffs have alleged a colorable claim of an individualized duty sufficient to survive a motion to dismiss for lack of standing.

Remote and Indirect

Although the court has already held that the plaintiffs have alleged a colorable claim of duty, it will briefly address the defendant's other argument—that the plaintiffs lack standing because the injuries claimed by the plaintiffs are too remote and indirect to be attributed to the defendant.

“Standing is the legal right to set judicial machinery in motion.   One cannot rightfully invoke the jurisdiction of the court unless he [or she] has, in an individual or representative capacity, some real interest in the cause of action, or a legal or equitable right, title or interest in the subject matter of the controversy ․ When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue ․ Standing requires no more than a colorable claim of injury;  a [party] ordinarily establishes ․ standing by allegations of injury.   Similarly, standing exists to attempt to vindicate arguably protected interests ․ Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved ․ The fundamental test for determining aggrievement encompasses a well-settled twofold determination:  first, the party claiming aggrievement must successfully demonstrate a specific, personal and legal interest in [the subject matter of the challenged action], as distinguished from a general interest, such as is the concern of all members of the community as a whole.   Second, the party claiming aggrievement must successfully establish that this specific personal and legal interest has been specially and injuriously affected by the [challenged action] ․ Aggrievement is established if there is a possibility, as distinguished from a certainty, that some legally protected interest ․ has been adversely affected ․ [I]t is the burden of the party who seeks the exercise of jurisdiction in his favor ․ clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute ․” May v. Coffey, supra, 291 Conn. 112–13.

In Connecticut, the general rule for standing to bring a claim has been stated:  “[A]s a general rule, a plaintiff lacks standing unless the harm alleged is direct rather than derivative or indirect.”  Connecticut State Medical Society v. Oxford Health Plans (CT), Inc., supra, 272 Conn. 481, citing Ganim v. Smith & Wesson Corp., 258 Conn. 313, 347–48 (2001).   As articulated in Ganim, “if the injuries claimed by the plaintiff are remote, indirect, or derivative with respect to the defendant's conduct, the plaintiff is not the proper party to assert them and lacks standing to do so.”  258 Conn. 347.   In the application of this general rule, it is clear that a party's characterization or labeling of a claim as direct or indirect has no bearing on the court's ultimate determination of standing to bring the claim.   Whether a party has standing based on a given set of facts is a question of law for the court to decide.  Id., 348.

The Supreme Court in Connecticut Medical Society v. Oxford Health Plans, supra, recognized that “the application of this general rule to a particular factual scenario may not always yield a ready or obvious answer to the question of standing ․” 272 Conn. 481.   In that case, Connecticut's Supreme Court reiterated its endorsement of the trial court's use of the three-factor policy analysis it had previously set forth in Ganim, an analysis based on a series of U.S. Supreme Court decisions.  “First, the more indirect an injury is, the more difficult it becomes to determine the amount of plaintiff's damages attributable to the wrongdoing as opposed to other, independent factors.   Second, recognizing claims by the indirectly injured would require courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, in order to avoid the risk of multiple recoveries.   Third, struggling with the first two problems is unnecessary where there are directly injured parties who can remedy the harm without these attendant problems.”  Ganim v. Smith & Wesson Cor p., supra, 258 Conn. 353.

“The question of whether a set of harms suffered by the plaintiff is the direct, or the indirect, remote or derivative, consequence of the defendant's conduct, is not determined ․ simply by the court applying one set of labels or the other to the facts of the case.   It is, instead, part of the judicial task, based on policy considerations, of setting some reasonable limits on the legal consequences of wrongful conduct.   In this respect, it is akin to, if not precisely the same as, the judicial task of determining whether a tortfeasor owes a duty to one who has been injured, albeit indirectly, by the tortfeasor's conduct.   In that respect, we have stated:  [W]e recognize that duty is not sacrosanct in itself, but is only an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is entitled to protection ․ While it may seem that there should be a remedy for every wrong, this is an ideal limited perforce by the realities of this world.   Every injury has ramifying consequences, like the ripplings of the waters, without end.   The problem for the law is to limit the legal consequences of wrongs to a controllable degree ․ The final step in the duty inquiry, then, is to make a determination of the fundamental policy of the law, as to whether the defendant's responsibility should extend to such results ․ The same is true of the question of directness, as opposed to indirectness, remoteness and derivative injury, in the standing context.   Indeed, in federal standing jurisprudence, the courts have considered the questions of proximate cause—which we ordinarily analyze under the concept of duty— and standing as part and parcel of the same inquiry.   Here we use ‘proximate cause’ to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts.   At bottom, the notion of proximate cause reflects ideas of what justice demands, or of what is administratively possible and convenient.   Accordingly, among the many shapes this concept took at common law ․ was a demand for some direct relation between the injury asserted and the injurious conduct alleged.   Thus, a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover ․

“In everyday terms, the concept might be explained as follows:  Because the consequences of an act go endlessly forward in time and its causes stretch back to the dawn of human history, proximate cause is used essentially as a legal tool for limiting a wrongdoer's liability only to those harms that have a reasonable connection to his actions.   The law has wisely determined that it is futile to trace the consequences of a wrongdoer's action to their ultimate end, if end there is ․ We are persuaded by the analysis of standing employed by the United States Court of Appeals for the Second Circuit in Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., supra, 191 F.3d 235, drawn from the decision of the United States Supreme Court in Holmes v. Securities Investor Protection Corp., supra, 503 U.S. 268.   In Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., supra, 232–33, the plaintiff labor union health and welfare funds sued the defendant major tobacco companies alleging a conspiracy to deceive the public generally, and the plaintiffs specifically, regarding the health risks of smoking in order to shift the health related costs of smoking to the plaintiffs.   The Court of Appeals held that the financial harms alleged by the plaintiffs were remote, derivative and indirect and therefore, that the plaintiffs lacked standing to sue ․

“The Court of Appeals in Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., supra, 191 F.3d 236–37, stated ․ [t]he general tendency of the law, in regard to damages at least, is not to go beyond the first step ․ For that reason, where a plaintiff complains of injuries that are wholly derivative of harm to a third party, plaintiff's injuries are generally deemed indirect and as a consequence too remote, as a matter of law, to support recovery ․ At the same time, the Supreme Court noted the impossibility of articulating a black-letter rule capable of dictating a result in every case ․ Accordingly, it identified three policy factors to guide courts in their application of the general principle that plaintiffs with indirect injuries lack standing to sue ․ First, the more indirect an injury is, the more difficult it becomes to determine the amount of plaintiff's damages attributable to the wrongdoing as opposed to other, independent factors.   Second, recognizing claims by the indirectly injured would require courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, in order to avoid the risk of multiple recoveries.   Third, struggling with the first two problems is unnecessary where there are directly injured parties who can remedy the harm without these attendant problems ․ Application of these principles to the facts of the present case leads us to conclude that the harms claimed by the plaintiffs are indirect, remote and derivative with respect to the defendants' conduct, and that, therefore, the plaintiffs lack standing to assert them.”  (Citations omitted;  internal quotation marks omitted.)  Ganim v. Smith & Wesson Corp., supra, 258 Conn. 347 (2001).

First, KPMG argues that the plaintiffs withdrew their investment with the defendant's client, the Broad Market Fund, at a considerable profit.   Further, the defendant's audit reports of the Broad Market Fund did not, in any way, express an opinion on the Maxam Fund or any other fund tied into Madoff.   The plaintiffs allege that based on the defendant's audit of the Broad Market Fund, KPMG should have conducted additional due diligence on Madoff, since any available information about Madoff could not have provided KPMG with the assurance it was required to have that Madoff's representations regarding the Broad Market Fund's investments were valid.

It is true that these allegations have the potential to expand the sphere of auditor liability, and that “no Connecticut appellate decision to date has addressed the contours of accountants' liability to non-clients under Connecticut law.”  Retirement Program v. NEPC, LLC, 642 F.Sup.2d 92, 97 (2009).   When considering the potential liability of an accounting/auditing firm like KPMG in the face of these allegations, two primary issues must be resolved.   First, what standard of conduct determines the duty, breach of which will give rise to liability?   Here, professional negligence is alleged by the plaintiffs, rather than a more culpable cause of action such as fraud.   A consideration of this question raises the issue of whether KPMG did not discover what it should have discovered because it omitted some procedure that it should have employed, or whether KPMG did not state, or state properly, that which it knew.

Second, what is the ambit of the duty, i.e., what persons are entitled to sue accountants like KPMG on the basis that some connection can be traced between the failure of the accountants to perform their duty, and the financial loss allegedly suffered by the plaintiffs?   Each case naturally turns upon its own facts, and some line of demarcation must be drawn in terms of cause and effect.   Did the injury to the plaintiffs flow directly and proximately from the actions of KPMG?

Conclusion

This case is only at the pleading stage, and the plaintiffs have alleged sufficient facts demonstrating a colorable claim of duty that is sufficient to confer standing.   That is the end of the court's inquiry at this stage.   While the defendant KPMG advances arguments in support of its motion, many of those arguments rely on facts, or the finding of facts, that lie outside of the amended complaint and the single affidavit before the court.

In opposing the motion to dismiss, the plaintiffs have sufficiently distinguished the allegations in the instant case from its pending companion case, in which the plaintiffs seek the recoupment of its losses against a different set of securities industry professionals under different theories of law.   In the wake of the Madoff morass, many fortunes were ventured and lost.   Retirement funds previously believed to be conservatively invested were built upon sand, not rock.   The role of the accounting profession has increased in importance as the number and complexity of both securities instruments and securities transactions has increased.   As was noted by the Second Circuit, in an era long before the Madoff Ponzi, “In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar.”  (Citation omitted.)  Touche Ross & Co. v. Securities & Exchange Commission, 609 F.2d 570, 581 (2nd Cir.1979).

The defendant by way of this motion attacking the court's jurisdiction asks for too much.   Having chosen a motion to dismiss for lack of jurisdiction as the vehicle with which to challenge the validity of the allegations at the pleading stage, the defendant KPMG must abide by the limited parameters of such a motion.   The criteria for judging are different here.   It has to do with certain presumptions the court must adhere to in favor of the non-moving party in its ruling.   It is not that the allegations are true.   It is first and foremost that all of the allegations that the plaintiffs have made must be taken as true for purposes of this motion.   The sole affidavit of Buchanan filed in opposition does not suffice to deprive this court of jurisdiction in the face of a colorable claim of duty.

The losses to the Town and its Plans no doubt sprang from a number of interrelated factors and decisions.   Not all of these factors or decisions are necessarily actionable in tort against all the participants.   The defendant interposes numerous objections to its liability.   To paraphrase the Brownings, KPMG is in effect saying, “How can I disprove thee?   Let me count the ways.”   There are reasons both for and against these various propositions, but they are for another time.   The defendant cannot import its arguments perhaps more readily applicable to other Practice Book motions into a motion to dismiss for lack of jurisdiction.   They either do not meet the necessary burden of proof, or are beyond the scope of permissible review on such a motion.   While no doubt highly relevant on the merits, if ultimately proven to be true, many such arguments can be given little, if any, weight at this juncture in the face of a finding of a colorable claim of duty.

Accordingly, the defendant's motion to dismiss for lack of subject matter jurisdiction is denied.

IT IS SO ORDERED,

Blawie, J.

FOOTNOTES

FN1. On November 12, 2010, the plaintiffs withdrew their claims against the codefendant NEPC, LLC, a pension consulting firm.   KPMG is the only remaining defendant in this matter..  FN1. On November 12, 2010, the plaintiffs withdrew their claims against the codefendant NEPC, LLC, a pension consulting firm.   KPMG is the only remaining defendant in this matter.

FN2. In December 2008, Madoff surrendered to federal authorities and confessed to orchestrating one of the world's biggest securities fraud cases ever.   Essentially, Madoff admitted to a massive Ponzi scheme in which investors' funds entrusted to Madoff were not actually invested, but were used instead to fund Madoff's lifestyle, and to pay other investors' requests for redemption of principal and profits.   He was convicted and is currently serving a 150–year prison term.   While not all of the details of Madoff's conviction are found in the complaint, the court takes judicial notice of this fact as a matter of public record extensively and globally covered in the news.   See In re Tremont Securities Law, State Law & Insurance Litigation, 703 F.Sup.2d 362 (S.D.N.Y 2010)..  FN2. In December 2008, Madoff surrendered to federal authorities and confessed to orchestrating one of the world's biggest securities fraud cases ever.   Essentially, Madoff admitted to a massive Ponzi scheme in which investors' funds entrusted to Madoff were not actually invested, but were used instead to fund Madoff's lifestyle, and to pay other investors' requests for redemption of principal and profits.   He was convicted and is currently serving a 150–year prison term.   While not all of the details of Madoff's conviction are found in the complaint, the court takes judicial notice of this fact as a matter of public record extensively and globally covered in the news.   See In re Tremont Securities Law, State Law & Insurance Litigation, 703 F.Sup.2d 362 (S.D.N.Y 2010).

FN3. The only exception to the general partner's exclusive control to bring claims for the fund under Delaware law is that a limited partner may recover a judgment in its favor if the general partner refused to bring the action, or if an effort to cause the general partner to bring the action is not likely to proceed.  Del.Code Ann. tit. 6, § 17–1001 (2010).   In the present action, the plaintiffs do not allege that they made a demand on the general partner of the the Broad Market Fund to initiate litigation against KPMG. Additionally, a limitation worth noting is that “[i]n a derivative action, the plaintiff must be a partner ․ at the time of bringing the action.”  Del.Code Ann. tit. 6, § 17–1002 (2010)..  FN3. The only exception to the general partner's exclusive control to bring claims for the fund under Delaware law is that a limited partner may recover a judgment in its favor if the general partner refused to bring the action, or if an effort to cause the general partner to bring the action is not likely to proceed.  Del.Code Ann. tit. 6, § 17–1001 (2010).   In the present action, the plaintiffs do not allege that they made a demand on the general partner of the the Broad Market Fund to initiate litigation against KPMG. Additionally, a limitation worth noting is that “[i]n a derivative action, the plaintiff must be a partner ․ at the time of bringing the action.”  Del.Code Ann. tit. 6, § 17–1002 (2010).

FN4. As stated in footnote 4, the plaintiffs do not allege that they made a demand on the general partner of the Broad Market Fund to initiate litigation against KPMG..  FN4. As stated in footnote 4, the plaintiffs do not allege that they made a demand on the general partner of the Broad Market Fund to initiate litigation against KPMG.

Blawie, John F., J.