New York Supreme Court Grants Summary Judgment to Auditor on Fund Liquidators’ Claim that Auditor Negligently Failed to Detect and Report Fraudulent Valuations by Fund Managers

On June 19, 2008, the New York State Supreme Court in Manhattan granted summary judgment to the auditor of a failed Cayman Islands hedge fund on claims of negligence brought by the fund’s joint official liquidators. In the factual circumstances of the case, the court determined that the auditor’s failure to detect fraudulent valuations of portfolio securities by the fund’s managers, and the auditor’s resulting failure to alert the fund’s directors to the fraudulent valuations, did not constitute negligence. The case illustrates the standard of care to which US-based courts will hold auditors of Cayman Islands funds, and sheds light on the limits of the duties owed by auditors to fund investors and directors.

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