The collapse of a hedge fund gives rise to a legal malpractice claim by various of the investors.  The hedge fund impresario is convicted of securities fraud, and then turns around to help the investors sue the funds’ attorney. 

In Eurycleia Partners, LP v Seward & Kissel, LLP ; 2009 NY Slip Op 04299 ; Decided on June 4, 2009 ; Court of Appeals ; Graffeo, J. we see that there is not enough connection between the attorneys and plaintiffs, and that plaintiffs cannot show the requisite relationship between the attorneys and the funds.
 

"The July 2007 amended complaint presents three main allegations against S & K. First, plaintiffs assert S & K learned at some point in 2005 that Wood River invested more than 10% of its assets in Endwave stock in violation of the 10% restriction contained in the offering memoranda. According to plaintiffs, S & K nonetheless persisted in drafting offering memoranda falsely representing that Wood River was adhering to the 10% cap as part of its investment policy. Second, plaintiffs claim that S & K falsely stated in the offering memoranda that TBS was Wood River’s auditor even though S & K knew from the inception that TBS had not been retained to perform any auditing work. Third, plaintiffs allege S & K learned in January 2005 that Wood River had violated securities laws by failing to file required notices when Wood River obtained 5% and, later, 10% of Endwave’s stock [FN5]. Plaintiffs maintain that S & K breached fiduciary duties owed to them, as limited partners, by failing to disclose the SEC violations to them.

Here, whether the claim is labeled fraud or aiding and abetting fraud, we conclude that neither the allegations in the complaint nor the surrounding circumstances give rise to a reasonable inference that S & K participated in a scheme to defraud or knew about the falsity of the two contested statements in the offering memoranda. The amended complaint conclusorily alleges that at some unspecified point in 2005 S & K became aware that more than 10% of Wood River’s holdings were invested with Endwave but, nonetheless, S & K continued to issue offering memoranda falsely representing that Wood River would not invest more than 10% of its assets in any given security.

We likewise find the amended complaint’s alternative allegation of fraud or aiding and abetting fraud — that S & K knew TBS was not Wood River’s auditor yet continued to list TBS in the offering memoranda — to be similarly conclusory. As the Appellate Division recognized, the complaint elsewhere alleges that in the summer of 2005 TBS falsely represented that it was the fund’s auditor and would conduct an audit. In short, although we are mindful that a plaintiff need not produce absolute proof of fraud and that there may be cases in which particular facts are within a defendant’s possession, it is also true that the strength of the requisite inference of fraud will vary based on the facts and context of each case.

A fiduciary relationship arises "between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation" (EBC I, Inc. v Goldman, Sachs & Co., 5 NY3d 11, 19 [2005] [internal quotation marks and citation omitted]). Put differently, "[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other" (AG Capital Funding Partners, L.P. v State St. Bank & Trust Co., 11 NY3d 146, 158 [2008] [internal quotation marks and citation omitted]). Ascertaining the existence of such a relationship inevitably requires a fact-specific inquiry. [*6]

Here, plaintiffs do not allege that they had direct contact or any relationship — contractual or otherwise — with S & K. Indeed, plaintiffs acknowledge that the offering memoranda advised prospective limited partners to consult their own legal counsel prior to investing in Wood River. Plaintiffs nevertheless contend that S & K’s attorney-client relationship with Wood River in and of itself created a fiduciary relationship between S & K and the limited partners themselves. We disagree. "