In re Platinum-Beechwood Litigation

Background

Senior Health Insurance Company of Pennsylvania (SHIP) sued Lincoln International LLC and Lincoln Partners Advisors LLC, which the opinion collectively calls Lincoln. The claims at issue were aiding and abetting fraud and aiding and abetting breach of fiduciary duty under New York law. The court had previously dismissed three of SHIP’s five counts, leaving these two claims for summary judgment.

Lincoln Partners had agreed to provide Beechwood with quarterly positive-assurance valuations and monthly negative-assurance letters concerning Beechwood’s investments. SHIP separately entered into investment-management agreements with Beechwood entities. Those agreements included guaranteed annual returns in some circumstances and required valuation reports from an independent third-party valuation company, identified as Lincoln at the time.

Lincoln issued a positive valuation report on January 19, 2015, and a negative-assurance letter on February 19, 2015, concerning seven investments in SHIP’s custody accounts. The reports themselves did not reach SHIP or Wilmington Trust, the accounts’ custodian. The parties disputed whether valuation marks associated with Lincoln were later included in a spreadsheet that Beechwood sent to Wilmington and in Wilmington’s January 31, 2015 account statements.

Lincoln decided to end its engagement with Beechwood and sent a termination notice on March 9, 2015, backdated to be effective February 19, 2015. Later, federal investigations and civil and criminal proceedings concerning Platinum and Beechwood became public.

Legal standards and claims

To prove aiding and abetting fraud, SHIP had to show a fraud, Lincoln’s knowledge of the fraud, and substantial assistance that advanced the fraud. Aiding and abetting breach of fiduciary duty likewise required knowing participation, including substantial assistance to the primary violator. Substantial assistance can involve affirmative help, helping conceal the misconduct, or failing to act when the defendant had a duty to act. The assistance must also have proximately caused the plaintiff’s injury—that is, it must have been a sufficiently direct cause of the harm.

Under Rule 56 of the Federal Rules of Civil Procedure, the court must grant summary judgment when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law.

Court’s analysis

SHIP relied on two theories of substantial assistance. First, it argued that Lincoln overvalued SHIP’s investments and that those inflated values were used in Wilmington’s account statements. Second, it argued that Lincoln failed to disclose information about the alleged overvaluations and the relationship between Beechwood and Platinum to SHIP, Beechwood’s auditor, and Duff & Phelps, which replaced Lincoln.

The court assumed for purposes of its analysis that Lincoln had overvalued SHIP’s investments and that Lincoln’s marks somehow appeared in the January 31, 2015 Wilmington statements. Even with those assumptions, the court found no evidence that Lincoln’s conduct proximately caused SHIP’s injuries. The only performance-fee withdrawal before March 9, 2015 was a $1 million withdrawal on October 2, 2014, which occurred before Lincoln issued the valuation report and before the allegedly related marks reached SHIP. The next withdrawal occurred after Lincoln’s termination and concerned a period for which Lincoln had not valued SHIP’s assets.

The court also rejected SHIP’s theory that inflated valuations prevented Beechwood from making required true-up payments. The relevant 2014 true-up was measured as of December 31, 2014, but the December 31 statements did not reflect Lincoln’s valuations. SHIP also did not explain how Lincoln’s work through February 19, 2015 could affect the 2015 true-up, which was measured as of December 31, 2015.

As to the nondisclosure theory, the court held that inaction cannot constitute substantial assistance unless the defendant owed the plaintiff a fiduciary duty. The court found that Lincoln did not owe such a duty directly to SHIP, Beechwood’s auditor, or Duff & Phelps. SHIP did not argue in its brief that Lincoln owed those entities a fiduciary duty and confirmed during oral argument that it was not making that argument.

Disposition

Judge Jed S. Rakoff granted summary judgment in favor of Lincoln on both aiding-and-abetting claims and dismissed the amended complaint in its entirety. The court directed the Clerk to close the relevant motion entries and the case numbered 19-cv-7137.

The court expressly did not decide whether Lincoln overvalued Beechwood investments or failed to comply with the applicable accounting standard, whether Lincoln’s valuation marks reached SHIP, whether Lincoln actually knew about Beechwood’s alleged fraud and fiduciary-duty breach, or whether Lincoln International LLC had been engaged by Beechwood.