A massive stock fraud involving Chinese coal, and a US stock offering involved an opinion letter by defendant law firm.  The opinion letter overlooked a red flag, a huge red flag.  Nevertheless, too much time went by, and the claims were all dismissed on the statute of limitations and duplicitive pleading.

Murray v Morrison & Foerster LLP  2017 NY Slip Op 30602(U)  March 28, 2017
Supreme Court, New York County  Docket Number: 651024/2016  Judge: Saliann Scarpulla holds that the statute ran long before the case was commenced.

“Puda Coal, Inc. (“Puda”) was a Delaware corporation listed on the New York Stock fa~.change, which conducted its operations in China through Shanxi Puda Coal Group Co., Ltd. (“Shanxi Coal”). Puda reported in public filings that it owned a 90 percent interest in Shanxi Coal. In the Fall of2010, Puda hired plaintiff Brean, Murray, Carret & Co. (“Brean”) along with Macquarie Capital (USA) Inc. (“Macquarie”), to underwrite a public offering of Puda stock in the U.S. market to be conducted in December 2010. According to the allegations of the complaint, in November 2010, Macquarie hired Morrison, a law firm with substantial China-related expertise, as counsel for all underwriters, to conduct due diligence for the transaction and to provide legal advice regarding the offering. Macquarie also h~red international private investigation firm, Kroll Inc. (“Kroll”) to investigate the character, integrity and reputation of the individuals associated with Puda. Brean was not aware ofMacquarie’s retention of Kroll at the time of the offering or for years thereafter. Kroll issued a report on December 2, 2010 (“the Kroll Report”), which disclosed that Puda did not own a 90 percent interest in Shanxi Coal, in contradiction of Puda’s public representations and reports. In fact, in September 2009, Puda’ s 90 percent ownership in Shanxi Coal had been transferred to Ming Zhao, who was Chairman of Puda’s Board.ofDirectors, a major Puda shareholder, and an 8 percent owner of Shanxi Coal. Puda conducted two public offerings in 2010 without disclosing the change in ownership structure. Puda raised millions of dollars from investors selling shares in what was essentially an empty shell company. Kroll provided th~ Kroll Report to Macquarie via William Fang, an associate, who, on December 2, 2010, emailed the report to several other members of the Macquarie deal team, and then forwarded it to Morrison with a cover email that indicated “no red flags were identified.” Neither Macquarie nor Morrison picked up on the finding in the Kroll report that Puda did not, in fact, own a 90 percent interest in Shanxi Coal. ”

“The statute of limitations for malpractice is three years, and the limitations period begins to run on the day an actionable injury occurs, even if the aggrieved party is then ignorant of the wrong or injury. CPLR 214; McCoy y. Feinman, 99 N.Y.2d 295, 301 (2002). The doctrine of equitable estoppel is an extraordinary remedy which may bar a defendant from asserting a statute oflimitations defense, when the plaintiff was prevented from filing an action within the applicable time period due to its reason~~le reliance on defendant’s fraud, misrepresentations or deception. Putter v. North Shore Univ. Hosp., 7 N.Y.3d 548 (2006); Pahlad v. Brustman, 33 A.D.3d 518, 519 (1st Dept. 2006) affd 8 N.Y.2d 901 (2007). The party seeking estoppel must demonstrate due diligence on its part in trying to ascertain the facts and commence this action. Walker v. New York City Health & Hosps. Corp., 36 A.D.3d 509 (1st Dept. 2007). Equita.ble estoppel will not toll a limitations statute, however, where a plaintiff possesses timely knowledge sufficient to have placed it under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable statute oflimitations. Rite Aid Corp. v. Grass, 48 A.D.3d 363 (1st Dept. 2008). At oral argument, Br~an acknowledged that its malpractice claim accrued in December 2010, when the Puda public offering of stock occurred. It was then on inquiry notice of a potential malpractice claim as of April 2011, when Puda’s fraud was disclosed to the public. At that time, and certainly shortly thereafter when the first class action lawsuit was commenced against it, Brean was charged with making further inquiry and ascertaining all relevant facts and possible failures that occurred on Morrison’s part in failing to discover Puda’s actual ownership interest in Shanxi. ”

“First, it is well settled that concealment by a professional, or failure to disclose his or her own malpractice, does not give rise to a cause of action in fraud or deceit separate and different from the customary malpractice action, thereby entitling the plaintiff to bring his action within the longer period limited for such claims. Weiss v. Manfredi, 83 N.Y.2d 974 (1994); Simcuski v. Saeli, 44 N.Y.2d 442, 452 (1978). Here, Brean filed its malpractice complaint, and only after.Morrison moved to dismiss the complaint on statute of limitations grounds, did Brean file an amended complaint alleging fraud. Brean’ s allegation of Morrison’s concealment of its malpractice by resigning as counsel does not give rise to a claim for fraud. Further, the remaining basis for the fraud claim is duplicative of the legal malpractice claim because it arose from the same underlying facts and alleged similar damages. See Dinho/er v Medical Liab. Mut. Ins; Co., 92 A.D.3d 480 (Pt Dept. 2012). The key to determining whether a claim is duplicative of one for malpractice is discerning the essence of each claim. Johnson v. Proskauer Rose LLP, 129 A,D.3d 59, 68 (Pt Dept. 2015). In the remaining basis for its fraud claim, Brean alleges that Morrison made misrepresentations in the opinion letter, ‘in “affirmatively represent[ing] to Plaintiff that the firm had completed the work necessary in order to form its opinion” when in fact, it was issued with actual or .constructive knowledge of its falsity. Its malpractice claim states that Morrison was negligent in conducting its due diligence and in issuing its opinion letter without discovering Puda’s true ownership in ~hanxi. The allegations in both of those claims arise from the same underlying facts and allege similar damages. “