Four Decades for Justice
On February 5, 2014, Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York granted, in its entirety, the motion to dismiss Cravath client Deloitte & Touche LLP from an action brought by SRM Global Master Fund LP in April 2013. SRM, a multibillion‑dollar offshore hedge fund, alleged over $200 million in damages, stemming primarily from its purchase of “total return swaps,” privately traded derivative instruments whose price is determined by the return on an underlying security -- in SRM’s case, Bear Stearns common stock.
SRM’s complaint alleged that Bear Stearns and Deloitte, as outside auditor, misrepresented the company’s exposure to the subprime housing market and fraudulently overstated the value of mortgages, swaps and other derivative financial instruments in violation of Sections 10(b), 18 and 20 of the Securities Exchange Act of 1934 and state common law. SRM had opted out of the consolidated securities class action lawsuit in New York federal court, In re The Bear Stearns Companies, Inc. Securities Litigation, Nos. 08‑md‑1963, 08‑cv‑2793 (S.D.N.Y.), which was filed in the wake of the collapse of Bear Stearns in March 2008 and was settled in 2012.
Cravath’s motion to dismiss on behalf of Deloitte was filed on July 2, 2013, and argued on October 23, 2013. In its decision, the court accepted defendants’ arguments on two issues of law with widespread importance in securities litigation. First, the court decided that SRM’s claims were time‑barred under the Second Circuit’s June 2013 decision in Police & Fire Retirement Sys. v. IndyMac MBS, Inc., 721 F.3d 95, which held that pending class actions do not toll statutes of repose. In doing so, the court applied IndyMac, which involved the statute of repose for claims under the Securities Act of 1933, to the statutes of repose for Sections 10(b) and 18 of the 1934 Act.
Second, the court ruled that the purchaser of a total‑return swap does not have an implied private right of action under Rule 10b‑5 or a Section 18 claim against the issuer of the security underlying the swap or that issuer’s auditors. The court declined to expand liability under the 1934 Act to unregistered swaps, where the defendants “have no ability to determine the number of swap transactions in existence,” and potential claims “could involve amounts many times that of capitalization.” The court further held that a purchaser of a total‑return swap may not bring a common‑law fraud claim against an auditor, such as Deloitte, based on the audit of the financial statements of the issuer of the security underlying the swap.
The Cravath team included partner Antony Ryan and associate Deke Shearon. The case is SRM Global Master Fund Limited Partnership v. The Bear Stearns Companies LLC, et al., No. 13‑cv‑2692 (S.D.N.Y.).
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