PHILADELPHIA – A federal judge has stayed litigation brought by plaintiffs who claim they were defrauded by an illegal financial scheme, allegedly executed by a public accounting firm and two of its employees.
U.S. District Court for the Eastern District of Pennsylvania Judge Wendy F. Beetlestone ordered the stay on Jan. 22, finding that it would remain in effect while arbitration proceedings between plaintiffs Linda Bedell, Landon Bedell and Keaton Bedell, and defendants Mark S. Carrow, Citrin Cooperman & Company and others are completed.
Citrin Cooperman, a public accounting firm that specializes in audit and tax services, is alleged to have played a role in the overall alleged scheme and employed Carrow. Citrin Cooperman had moved to compel arbitration pursuant to the Federal Arbitration Act,
“Plaintiffs allege that beginning in 2004 and for about fifteen years thereafter, defendants convinced and encouraged Bedell and her family to invest in a series of hedge funds managed, by Smith and Carrow. While the exact mechanics of the scheme are not at issue here, the allegations are that the Funds were not what they were touted to be,” Beetlestone said.
“Rather, they were a series of elaborate Ponzi schemes through which defendants siphoned off plaintiffs’ money all while misleading them about the Funds’ nature, health, growth, and operations. Plaintiffs allege that by the time they discovered the fraud in 2019, there was little left to recover: they had lost some $35 million.”
Citrin Cooperman came in about six years after the initial investment, when Carrow became the managing partner of its Philadelphia office. However, Carrow told Bedell (apparently falsely) that he would no longer be directly involved in managing the Funds. Shortly thereafter, he convinced her to retain Citrin Cooperman as her personal accountant and tax adviser.
Each year from 2011 to 2018, Bedell entered into an engagement letter with Citrin Cooperman. The engagement letters uniformly provided that the firm would prepare Bedell’s federal, state and local tax returns, as well as render such accounting and bookkeeping assistance as necessary to prepare her returns.
Separate engagement letters would be issued to cover the terms of other financial services not specified in the letters, according to Beetlestone.
Bedell would later give Carrow access and control over most of her financial assets and investments, resulting in her transferring millions of dollars into the Funds at Citrin Cooperman’s direction, including through a pension plan which Citrin Cooperman helped her set up.
“All of the engagement letters except for one signed in 2011 include a materially identical arbitration provision which provides that: ‘Any dispute arising out of or relating to this engagement, or breach thereof, shall first be submitted for good faith mediation administered by the American Arbitration Association and its Rules for Professional Accounting and Related Services Disputes’ and, if mediation did not resolve the matter within sixty days, ‘The parties shall submit the dispute for arbitration’ also administered by the AAA,” Beetlestone said.
“Plaintiffs here do not dispute that they entered into valid agreements to arbitrate disputes with Citrin Cooperman. The issue here is whether the claims they have brought fall within the scope of the language of those provisions. Whether a dispute falls within the scope of an arbitration provision depends on the relationship between the breadth of the arbitration provision and the nature of the claim.”
As to the dispute over what activities the arbitration provisions covered, Beetlestone explained the scope of Citrin Cooperman’s engagement was “plainly not limited to the preparation of Bedell’s annual tax returns” and instead, “the catch all clause of the engagement letters was triggered by Citrin Cooperman’s add-on services and the provision of those services was governed by the terms of the engagement letters – including the arbitration provisions.”
“The claims plaintiffs make against Citrin Cooperman – aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and negligent misrepresentation – must be arbitrated. They each share factual underpinnings that stem from Citrin Cooperman’s conflicting roles as independent auditor to the Funds and as Bedell’s financial advisor centered around advice to Bedell to invest in the Funds,” Beetlestone said.
“In short, the claims are premised on allegations that Citrin Cooperman leveraged its role as the Funds’ independent auditor to provide Bedell a steady stream of misinformation about the financial strength and efficacy of the Funds, thereby inducing her investments. Claims that stem from Citrin Cooperman’s conduct as the independent auditor are therefore related – indeed inextricably intertwined – with its role as Bedell’s financial adviser and tax preparer, and thus covered by the broad arbitration provision.”
U.S. District Court for the Eastern District of Pennsylvania case 2:20-cv-03804
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com