All Employees Must Wash Hands: Case Dismissed on the Grounds of In Pari Delicto

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In a January 19, 2016 Commercial Division decision by Justice Bransten, the court granted defendants’ motions to dismiss on the grounds of in pari delicto.

Plaintiffs FIA Leveraged Fund, Ltd. and Fletcher Income Arbitrage Fund, Ltd. (collectively, “Plaintiffs” or “Funds”) commenced this action against defendants Grant Thornton, LLP, EisnerAmper, LLP and EisnerAmber (Cayman), Ltd. (collectively, “Defendants”) asserting causes of action for negligence and accounting malpractice, alleging that Defendants failed to exercise reasonable and professional care in accordance with U.S. auditing standards when they issued audit reports containing material misstatements. In response, Defendants moved to dismiss based on the doctrine of in pari delicto, alleging that Plaintiffs could not succeed on their claims because Plaintiffs’ managing agents, Alphonse Fletcher (“Fletcher”) and Fletcher Asset Management (“FAM”), used fraudulent schemes to keep the Funds financially afloat.

While the Plaintiffs conceded that Fletcher and FAM engaged in fraudulent conduct, they argued that the “adverse interest” exception to imputation applied because Fletcher and FAM’s misconduct was for their personal benefit and, therefore, could not be attributed to the Funds. The “adverse interest” exception “exists where the authorized agent has totally abandoned his principal’s interests and is acting entirely for his own or another’s purposes.”  Here, the Court held that the exception did not apply because Fletcher and FAM’s misconduct was committed, at least in part, to benefit the Funds.  Thus, the misconduct of Fletcher and FAM imputed to the Funds, and the Court granted Defendants’ motions to dismiss on the basis of in pari delicto.

FIA Leveraged Fund Ltd v Grant Thornton LLP, Sup Ct, New York County, Jan. 19, 2016, Bransten, J., Index No. 651217/2015

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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