Case of the Day: In re Certain Funds

The case of the day rejoices in the name In re Petition of Certain Funds, Accounts, And/Or Investment Vehicles Managed By Affiliates Of Fortress Investment Group LLC (S.D.N.Y. 2014). Fortress was an investment management firm. It invested in bonds and notes issue by two Saudi Arabian businesses, the Saad Group and Ahmad Hamad Algosaibi & Brothers, or “AHAB.” AHAB, you may recall, has been the subject of two prior posts, one in February 2013, the other in October 2011.

Fortress (more precisely, funds managed by Fortress) was the largest holder of the Golden Belt 1 sukruk, basically a bond structured not to violate Shari’a’s prohibition on lending money at interest. The bond was in default, “allegedly as a result,” according to the court, “of a massive fraud perpetrated by Maan Al Sanea,” the chairman of the Saad group.

The issuer of the sukuk (a Bahrain-based company, which, I take it, acts like an indenture trustee in the United States) made a claim against Saad Trading before the Saudi Arabian Negotiable Instrument Committee, a quasi-judicial tribunal. The proceeding is still pending. There are also pending liquidation proceeding in the Cayman Islands and Bahrain against various Saad Group and AHAB entities of which Fortress is a creditor. Fortress also planned to bring claims in Saudi quasi-judicial forums against the Saad Group and AHAB; tort and contract claims against KPMG, PricewaterhouseCoopers, and others who audited the financial statements that appeared in the bond prospectus; and a claim under the US/Saudi bilateral investment treaty.

In today’s case, Fortress sought leave to take discovery against KPMG and PwC, the audit firms. KPMG member firms in Saudi Arabia and Egypt, and PwC member firms in Dubai, apparently did the audit work. But Fortress sought discovery from the US-based affiliates of the two firms, and from KPMG International (a Swiss company) and PricewaterhouseCoopers International Ltd., (an English company).

Judge Buchwald rejected Fortress’s application on the grounds that Fortress had not satisfied the statutory prerequisites to application of § 1782. There were a few grounds. First, while the domestic entities affiliated with KPMG and PwC were of course “found” in New York for purposes of the statute, the foreign affiliates were not. The judge noted the Kreke Immobilieren case (see my post of January 2, 2014), which held that a branch of a foreign bank in New York rendered the foreign bank present in New York for purposes of the statute. But there the bank and the branch were not distinct legal entities, as was the case here. But more importantly, Fortress was not a party to the foreign proceedings that were pending, and unlike in Intel, Fortress apparently had little or no right to put evidence before the foreign tribunals. Fortress claimed to be “monitor[ing] the progress” of the Saudi proceedings and to be “receiving periodic reports” about the Cayman Islands and Bahrain proceedings, but these facts were insufficient to make them “interested persons.” Nor were the documents for use in the foreign proceedings, as Fortress could not show how it could introduce them in those proceedings.

Of course, Fortress did claim that it planned to bring some proceedings of its own. Here the judge adopted a narrow reading of Intel. It’s clear under Intel that § 1782 applications are proper to try to obtain evidence for use in at least some prospective proceedings. But while some courts say it is enough to show a likelihood that proceedings will occur, Judge Buchwald held that the applicant must show that a dispositive ruling is within reasonable contemplation. Otherwise, the application appears (to her) to be a fishing expedition that should be denied. Here I think the judge was striking out on her own a little bit. She cites no real authority for her narrow reading of Intel other than an old Eleventh Circuit case that says that the application should be denied “if the judge doubts that a proceeding is forthcoming, or suspects that the request is a fishing expedition.” But that reasoning fails to make the distinction between impending proceedings and an impending decision in proceedings that Judge Buchwald seeks to draw.

In short, I am not sure this is correctly decided. I think the judge’s real concern may have been that Fortress was seeking evidence from the audit firms purportedly to use against others but arguably for eventual use against the auditors themselves, even though Fortress apparently thought it needed more evidence before bringing a claim against the auditors. Perhaps that concern would have been better dealt with under Intel. Another reason it’s curious that the judge chose to hold that Fortress had not met the statutory prerequisites rather than to hold that the Intel factors did not favor discovery: usually judges prefer to make discretionary decisions if they can, rather than decisions where they lack discretion, in order to insulate themselves more effectively from an appeal.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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