Deloitte Wins Appeal Affirming Dismissal of $200 Million Bear Stearns Securities Fraud Lawsuit

On July 28, 2016, a panel of the United States Court of Appeals for the Second Circuit affirmed a decision by the U.S. District Court for the Southern District of New York granting Cravath client Deloitte & Touche LLP’s motion to dismiss an action brought by SRM Global Master Fund LP. SRM, a multibillion‑dollar offshore hedge fund, alleged over $200 million in damages, stemming primarily from SRM’s 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.

According to the complaint, SRM 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 New York common law. SRM had opted out of the consolidated securities class action lawsuit, 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 Bear Stearns’s collapse in March 2008 and settled in 2012. (Cravath also represented Deloitte in that matter.)

In its opinion, the Second Circuit held that SRM’s federal securities law claims were time‑barred under Police & Fire Retirement Sys. v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir.), which held that pending class actions do not toll statutes of repose. The Second Circuit also dismissed SRM’s common law fraud claims because the complaint failed to sufficiently plead that SRM purchased or sold stock, or entered into or unwound swap agreements, in reliance on defendants’ alleged misrepresentations.

The Cravath team included partner Antony L. Ryan, who argued on behalf of Deloitte before the District Court and Second Circuit, 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.), No. 15‑0507 (2d Cir.).