Case of the Day: Certain Funds v. KPMG

The case of the day is Certain Funds, Accounts and/or Investment Vehicles Managed by Affiliates of Fortress Investment Group LLC v. KPMG, LLP (2d Cir. 2015). This is the appeal from Judge Buchwald’s interesting § 1782 decision from July 2014. Here was my summary of the case from the prior post:

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.”

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.

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).

In the District Court, the judge denied Fortress’s application on the grounds that it had not satisfied the statutory prerequisites under § 1782. First, while the two US affiliates of the audit firms were found in SDNY, the Swiss and English firms themselves were not. Second, Fortress was not a party to the pending foreign proceedings and had no right to put in evidence in those proceedings. Third, while Fortress claimed it intended to bring its own foreign proceedings, the judge held that Fortress had failed to show that a dispositive ruling from a foreign tribunal was in reasonable contemplation.

In my prior post, I opined that the first and second points were right and the third was questionable. The Second Circuit has now affirmed Judge Buchwald on the second point and, on different reasoning, on the third point (finding it unnecessary to deal with the first point, which in any case only applied to some of the targets of the proposed discovery).

On the issue of Fortress’s status as an interested person in the pending foreign proceedings, the court shied away from holding on the strength of Intel, the leading case, that Fortress had to show a right to present evidence to the foreign tribunals or to appeal a bad outcome. The applicants in Intel had such rights in the European antitrust proceeding at issue there, but as the court noted, the Supreme Court in Intel did not expressly hold that a showing of those rights was required. Indeed, Intel cited with approval Smit’s view that the statute was meant to aid any person who has “a reasonable interest in obtaining the assistance.”1

The problem, then, is how to draw the line. The court suggested that Fortress’s financial stake in the foreign proceedings was insufficient without more. It thought that Fortress’s status a a creditor in the liquidation actions, and its ability to put evidence before persons who actually were parties to the foreign proceedigns, were closer questions. But even if such factors suggested that Fortress was an “interested person” (and the court expressly refused to decide that point), Fortress’s application failed because it had not identified any way in which it could use the evidence it hoped to get in any of the foreign proceedings. All Fortress was able to say was that the evidence would be relevant to the foreign proceedings. But “without some means of injecting the evidence into the proceeding, a § 1782 applicant cannot show that it has a role in the proceeding such that it may ‘use’ the information.”

Fortress lacked the right under Saudi law to require the Delegate (apparently a kind of trustee on behalf of the investors, and the party prosecuting the Saudi action) to introduce the evidence. The most it could do was to give the Delegate the evidence and hope that the Delegate would use it. This isn’t enough.

Similarly, under Cayman law, Fortress could “request the removal of an official liquidator; coordinate with other investors to request that the liquidator apply to the court for a discovery order; request the ability to participate in an oral examination; apply to the court with respect to the exercise or proposed exercise of the liquidator’s powers; … and seek to inspect the company’s records.” And in Bahrain, Fortress could “challenged before a competent court of law any proposal or decision made by the liquidator.” The court focused on the conditional nature of these rights. Fortress could make requests, seek the right to inspect, bring separate actions challenging actions, etc. In contrast, the applicant in Intel, which had the right to seek review of the antitrust agency’s decision in the same proceeding and to use the evidence obtained using § 1782 in that application.

So as to deter future bad arguments, the court noted that it was not inviting inquiries into whether evidence obtained in the US would be admissible in the foreign proceeding, but rather merely whether the applicant had a right to present it to the tribunal at all.

On the issue of the proceedings Fortress planned to bring, the court observed that it was necessary to show something more than a “subjective intent to undertake some legal action.” The applicant has to show “some objective indicium that the action is being contemplated.” This seems to me an unwise dictum, because it calls for objective evidence of the applicant’s intention, but the applicant’s intention is always subjective. It would be unfortunate if applicants now feel the need to generate a paper trail necessary to meet this standard, since that might impose otherwise unnecessary costs on a bona fide applicant, and an applicant with no true intent to bring a proceeding could probably create “objective indicia” suggesting such an intention anyway.

The court also discounted the fact that the English proceedings Fortress had referenced in its application were actually pending at the time of the Second Circuit’s oral argument, since what mattered was the record before the District Court. So far so good. It held that Fortress’s showing that it had retained counsel and was discussing the possibility of initiating litigation was not enough. This seems a little more problematic. There’s no requirement that the foreign proceedings be guaranteed to start within a specified time or indeed, to start at all. If there were, you might just as well require the foreign proceedings to be pending as a prerequisite to an application, except in cases where the § 1782 evidence is necessary to bring the claim. But all that is required is that they be in reasonable contemplation. However, given that about five years had passed between the default and the § 1782 application, the court was perhaps warranted in saying that in light of the passage of time, Fortress had to make some showing that it really was serious about the possibility of bringing proceedings abroad.

  1. Surely Smit’s view doesn’t mean what it literally says, since a journalist covering a foreign proceeding, for example, has a reasonable interest in obtaining evidence relevant to the proceeding!

2 responses to “Case of the Day: Certain Funds v. KPMG”

  1. jwb

    1. Related judgments from the JCPC are here and here. It’s a pretty fascinating case, and the JCPC decision provides vital context that the CA2 decision glosses over.

    2. No one mentioned the “… including criminal investigations conducted before formal accusation” modifier to “for use in a foreign or international tribunal”. Couldn’t the funds have argued that the sukuk issuer is akin to the prosecutor mulling over a charging decision? Since the statute appears to contemplate potential targets of a criminal investigation using discovery to influence criminal investigations prior to formal accusation, there is at least a weak argument by analogy the funds could have used here.

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