Client PwC Secures Complete Dismissal of Shareholder Action

May.10.2018

An Orrick litigation team scored a complete victory for longtime client PwC, securing the dismissal of a case seeking more than $20 million in damages.

The case was filed by Felix Glaubach, the co-founder and former president of Personal Touch Holding Corp., a health services company. Glaubach alleged that PwC had conducted independent audits of the company’s annual financial statements each year from 2008 to 2015, but that PwC had failed to detect that multiple executives were improperly paid millions of dollars within that time period in the form of fraudulent educational expenses. Glaubach asserted a series of direct and derivative claims against PwC, including accounting malpractice, negligent misrepresentation, and aiding and abetting fraud, and sought damages for the alleged decline in value of his shares in the company, reputational harm, and various other categories of damages stemming from Glaubach’s attempts to “save” the company after the alleged fraud came to light.

But Justice O. Peter Sherwood of the New York County Supreme Court (Commercial Division) granted PwC’s motion to dismiss in its entirety. In particular, the court found that Glaubach’s derivative accounting malpractice claim failed because Glaubach never demanded that the company’s board sue PwC, nor could he demonstrate that such a demand would be futile; and that each of Glaubach’s purportedly direct claims were derivative of harms to the company, thereby depriving Glaubach of individual standing to bring them.

The court’s decision further reinforced important New York precedent on issues of shareholder standing against third-party auditors.

Partners Morty Dubin and Alvin Lee led the New York-based Orrick team, which also included former partner Steve Fink and associate Jason Ervin.