Ruling clears PwC in Portus lawsuit

Date: Thursday, April 16, 2009
Author: Paul Waldie, Golbeand mail.com

A recent decision by an Ontario judge to dismiss a lawsuit against the auditor of collapsed hedge fund company Portus Alternative Asset Management Inc. will make it even harder for investors to sue auditors, says a lawyer involved in the case.

"All consumers or investors should be disappointed because what [the ruling] is doing is narrowing whose responsible when things go wrong," said Joel Vale, a Toronto lawyer involved in the case.

The ruling, by Mr. Justice Paul Perell of Ontario Superior Court, threw out a class-action against Portus's auditor PricewaterhouseCoopers LLP.

"One can have great sympathy for [investors] who lost money from investing in the Portus hedge funds and one can share their anger, dismay and disappointment, but for there to be a cause of action, there must be something pleaded in addition to PwC's actual or apparent presence and that something has not been pleaded," the judge ruled in a decision dated April 7.

Toronto-based Portus was pushed into receivership by regulators in 2005 after two years of operation amid allegations of fraud. At its peak, it had about 28,000 clients and nearly $800-million in assets. Portus's two co-founders have been charged criminally.

Investors sued PwC for negligent misrepresentation. The case centred around the inclusion of PwC's name as auditor on various Portus documents, including an offering memorandum. The investors argued that PwC gave Portus an aura of legitimacy and that the firm should have warned investors if Portus misrepresented PwC's role at the company.

The PwC name "would lead [investors] to believe that the otherwise upstart hedge fund investment firm ... was affiliated with a major international auditing establishment," the lawsuit argued.

If the information was incorrect, the auditing firm had a "responsibility to alert the public that its name had been used by Portus without authorization, to warn not only those who previously invested in the Portus hedge fund, but also potential investors of the same."

Judge Perell said that wasn't good enough. The lawsuit "is based on what a Portus investor would connote, think, hope, infer or believe simply from the mere presence of an auditor's name on a Portus document," the judge said. "It is neither reasonable nor fair to impose liability on PwC without any misrepresentation or wrongdoing by it or any allegations that it participated in Portus' wrongdoing."

The suit "fails to plead how PwC could be reckless with respect to a false statement made by Portus or how PwC could be made liable for a false statement made by somebody else," the judge added.

Mr. Vale called the ruling "troublesome."

"This means that in the future when any investor reads a sales brochure or an offering memorandum that states who the auditor is, that shouldn't give comfort that anything is being done to protect the investor," he said. "We were hoping that the law would give some protection, or some liability, to an auditing firm who chose to be an auditor, which would imply that certain standards of due diligence had taken place. ... What this case is telling us is the investor can't go after the auditor."

A lawyer representing PwC would only say that the firm was pleased with the ruling.

Suing auditors has been difficult in Canada since a 1997 Supreme Court of Canada ruling that dramatically narrowed the scope of liability. The ruling basically said that "individual shareholders who chose to rely on the audit report in making personal investment decisions do so at their own peril," said Edward Waitzer, a partner at Stikeman Elliott LLP and a former chair of the Ontario Securities Commission. "Most people would think that that [decision] was sort of blow for investor protection or a blow for any kind of check on the gatekeeper role of auditors."

Earl Cherniak, a partner at Lerners LLP, said auditors are still frequently sued when companies collapse but most cases are settled out of court.