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Fletcher Fixed Income Alpha Fund, Ltd. v. Grant Thornton Llp

Appeals Court of Massachusetts, Suffolk

July 14, 2016

GRANT THORNTON LLP & others. [2]

          Heard: January 6, 2016.

         Civil action commenced in the Superior Court Department on January 17, 2014.

         Motions to dismiss were heard by Janet L. Sanders, J.

          Rachel S. Fleishman, of New York (Philip Y. Brown with her) for the plaintiffs.

          Grant J. Esposito, of New York, for Grant Thornton LLP. William M. Connolly, of Pennsylvania, for EisnerAmper LLP & another.

          Jonathan D. Cogan, of New York, for SS&C Technologies, Inc.

          Present: Cypher, Grainger, & Meade, JJ.

          MEADE, J.

         The plaintiffs, Fletcher Fixed Income Alpha Fund, Ltd. (Alpha), and Massachusetts Bay Transportation Authority Retirement Fund (MBTARF), Alpha's sole shareholder, appeal from the dismissal of their claims for accounting malpractice and negligent misrepresentation against certain entities that audited and administered Alpha, for failing to discover the fund manager's fraud. The claims against the defendants, Grant Thornton LLP (Grant Thornton), and EisnerAmper LLP and EisnerAmper (Cayman) Ltd. (collectively, EisnerAmper), who served as auditors, were dismissed for lack of personal jurisdiction, a Superior Court judge ruling that the plaintiffs failed to show that their claims arose from the defendants' transaction of business in Massachusetts. The claims brought by MBTARF against SS&C Technologies, Inc. (SS&C), a former Alpha administrator, were dismissed for failure to state a claim upon which relief can be granted, the judge reasoning that Alpha was insolvent by the time SS&C was hired, thereby negating the element of proximate cause.

         Pending their appeal to this court, the plaintiffs settled with EisnerAmper. As to the remaining defendants, the plaintiffs principally argue that in deciding the issue of specific jurisdiction, the judge should have taken into account a broader range of contacts between Grant Thornton and Massachusetts, and should have considered Grant Thornton's knowledge that the audit reports would be sent to a Massachusetts entity. MBTARF also maintains that the judge held it to an incorrect pleading standard in dismissing its claims against SS&C for failure to allege facts to support causation. We affirm.

         1. Background.

         We summarize the undisputed facts from the judge's February 23, 2015, "Memorandum of Decision and Order on the Defendants' Motions to Dismiss Plaintiffs' Amended Complaint." MBTARF is a pension fund for public employees and retirees of Massachusetts Bay Transportation Authority. In June, 2007, MBTARF invested in Alpha. Alpha, along with FIA Leveraged Fund, Ltd. (Leveraged), and Fletcher Income Arbitrage Fund, Ltd. (Arbitrage) (collectively, the Fletcher funds), were operated in the Cayman Islands as feeder funds for Fletcher International, Ltd. (FILB), the master fund. The Fletcher funds were managed by one Alphonse Fletcher, through Fletcher Asset Management (FAM), based in New York. MBTARF invested $25 million in Alpha, all of which it lost the following year when Alpha became insolvent.

         In December, 2007, FAM hired Grant Thornton to provide auditing services for a number of Fletcher funds, including Alpha. Grant Thornton performed the work, and Grant Thornton Cayman Islands, an entity organized under the laws of the Cayman Islands, issued the audit reports. Grant Thornton Cayman Islands issued audit reports for 2007 and 2008, addressed to the board of directors and the shareholders of the audited funds. In March, 2010, Grant Thornton notified RAM that it was withdrawing its audit opinions for Arbitrage and Leveraged for 2007 and 2008, after the Securities and Exchange Commission challenged the accounting treatment of two $80 million "cashless notes" exchanged between the Fletcher funds. Grant Thornton instructed FAM to notify persons likely to rely on the withdrawn audit reports. Neither FAM nor Grant Thornton notified MBTARF, which had invested only in Alpha, that the reports for Arbitrage and Leveraged had been withdrawn. FAM then replaced Grant Thornton with EisnerAmper.

         SS&C was hired by FAM as Alpha's administrator in April, 2010. MBTARF previously had been informed by FAM in 2007 that the calculation of Alpha's value would be made in consultation with the fund administrator at the time. But MBTARF was not informed that when SS&C took over that role from its predecessor, SS&C would not participate in valuations. MBTARF claims that had it been so informed, it immediately would have redeemed its investment.

         The amended complaint alleges that Alphonse Fletcher committed fraud by inflating the value of the Fletcher funds. The plaintiffs claim that Grant Thornton is liable for improperly auditing the Fletcher funds, and that SS&C, as fund administrator, ...

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