The Madoff Ponzi scheme was at the centre of a Supreme Court hearing last month, which has resulted in a ruling released by Puisne Judge Stephen Hellman this week.

Mr Hellman heard defendants PricewaterhouseCoopers (PwC) argue the statement of claim of plaintiffs Kingate Global Fund Ltd and Kingate Euro Fund Ltd (both in liquidation) should be amended in a complex presentation of law in regard to evidence, during a hearing in chambers. It is a part of a civil case that is focused on the duties of PwC, who acted as the Kingate companies’ auditor.

Mr Hellman’s ruling explained Kingate Global Fund Ltd and Kingate Euro Fund Ltd were investment companies and ‘feeder funds’ to Bernard L Madoff Investment Securities LLC.

PwC, the auditor for the Kingate funds, was appointed in that position for the Global Fund in 1999, and for the Euro Fund in 2000, and was in the role until 2008, the year Mr Madoff was arrested and the plaintiff investment companies collapsed, Mr Hellman explained in his ruling.

Kingate claim that damages against the auditor should be assessed for breach of contract, negligence, negligent misstatement and wilful misconduct, together with interest and costs. Mr Hellman said the amount claimed is likely to be “very substantial”.

PwC had applied to strike out the statement of claim because, they argued, “it was not confined to a statement in summary form of the material facts upon which the plaintiffs relied; it contained evidence and argument and/or was prolix (long-winded) and would thereby embarrass and/or delay the fair trial for action; or that it was otherwise an abuse of process.”

At the time of this hearing, the defendant’s case had been heard, but the plaintiff’s case had not yet been argued. Kingate and PwC had “agreed to voluntarily amend concerns the defendant had about the statement of claim.”

When the hearing had resumed in October, PwC sought, in respect of each audit year, an order for “the further and better particulars which it had requested in correspondence”, Mr Hellman stated.

They were: “details of each and every one of the individuals who is alleged to have known the matters expressed to have been known by the defendant ...,” and details of each individual “alleged to have had an awareness ... that they were not performing a competent audit but were acting in breach of duty, committing widespread and serial failures in every audit year,” and “alleged to have been ‘recklessly indifferent to (1) the Madoff fraud risk, (2) their adherence or otherwise to standards and conduct which they knew were expected and required for a competent audit, (3) whether the performance of audit work by them was in accordance with their duties to the plaintiffs, and thereby (4) whether their conduct was in breach of duty ... ”

The defendant also asked for details of each act or omission of the individuals which is alleged to have constituted a breach of contract, negligent misstatement and/or negligence and when each such act or omission occurred, and details of “each fact or matter relied upon by the plaintiffs in support of the allegations made against the individual/s ...”.

Mr Hellman stated in his ruling that Kingate Global Fund, Ltd and Kingate Euro Fund, Ltd lawyer Delroy Duncan had argued that in their proposed amended statement of claim that: “ ... whether individually or cumulatively across audit years, the defendant’s audit failures constituted breaches of contract, negligent misstatement and/or negligence, in each case amounting to wilful misconduct.

The plaintiffs also argued that the defendant conducted its audits with knowledge that its failings amounted to breach of duty, said Mr Hellman.

Mr Hellman wrote: “For each audit year from 1999 through 2007, the proposed amended statement of claim identifies six areas of audit responsibility. These are headed (i) planning, fraud risk and materiality; (ii) inappropriate reliance on and failure to seek to obtain sufficient understanding and evidence of internal controls at Madoff Securities; (iii) inappropriate reliance on and failure to review the purported internal controls work of Friehling & Horowitz (which was the external auditor of Madoff Securities) (iv) failure to substantiate the existence of the plaintiff’s investments and the occurrence of the plaintiff’s investment transactions; (v) failure to question, investigate or have regard to Madoff Securities questionable investment strategy and other indicia of potential impropriety; and (vi) failure to report and warn.”

Mr Hellman continued: “The plaintiffs allege that the defendant knew that it had a duty to perform each area of audit responsibility and had in many cases identified them. However it is alleged that the defendant intentionally failed to carry out the work or had reckless disregard as to whether it was carried out.”

The judge concluded that PwC is entitled to a further amendment to the amendment of claim. He said: “Mr Duncan explained that references in the proposed amended statement of claim to the defendant in each audit year are references to the senior members of the audit team for that year ... and at the start of the sections of the pleading dealing with each audit year. Thus an allegation that the defendant knew or was recklessly indifferent is an allegation that each of the senior member of the audit team for that audit year knew or was recklessly indifferent.” he said: “This explanation is implicit in the statement of claim but needs to be articulated in express terms.” He added: “This can most conveniently be achieved by further amending the proposed amended statement of claim to include the material facts summarised.”

However, the defendant’s request for “details of each act or omission etc of each of the senior members of the audit team” was: “ ... inappropriate.”

Mr Hellman continued: “What was material were the breaches of duty, identified in the conclusion to each of sections dealing with one of the audit years, for which each senior member of the team was on the plaintiff’s case jointly responsible.” He said: “I agree.”

In rejecting the defendant’s request, he said: “I note that had they been ordered, they might easily have run to another 400 pages, and would doubtless have elicited requests for yet further particulars.”