In a professional malpractice case, be it legal malpractice or accounting malpractice, plaintiff must be able to show proximate cause.  Might a firm be liable for damages based upon issues that arose before its retention?  It might be, but in Cannonball Fund, Ltd. v Marcum & Kliegman, LLP
2013 NY Slip Op 32891(U)  November 14, 2013  Supreme Court, New York County  Docket Number: 651674/2011  Judge: Bernard J. Fried it was not.

"Plaintiffs bring this action against Marcum & Kliegman, LLP ("M&K"), alleging professional malpractice stemming from M&K’s engagement as an auditor of Dutchess Private Equities Fund, L.P. and Dutchess Private Equities Cayman Fund, Ltd. (the "Funds") in 2008. Defendant M&K moves to dismiss the complaint pursuant to CPLR 321 l(a)(l) and (7).

Briefly, the allegations giving rise to this action are as follows. According to the Complaint, the Funds were hedge funds with a similar stated strategy of investing in companies with positive cash flow and in fully secured or liquid securities. (Complaint paras 27, 36). The Funds’ common investment manager was Dutchess Capital Management LLC. (Complaint para 16). Between 2004 and 2007, Plaintiffs invested over $13 million in the Funds, with the bulk of the investments made in 2006 and 2007. (Complaint para 6-11).

Plaintiffs allege that they suffered damages as a result of M&K’s negligence.(Complaint if 238). Plaintiffs allege that had M&K performed a proper audit, or, I
alternatively, refused to certify the Funds’ financial statements, then Plaintiffs would have been alerted to the Funds’ problems. (Complaint if 238). Plaintiffs allege that, armed with this  knowledge, they could have made an informed decision as to whether they should remain invested in the Funds or put in requests for "gated redemptions, in which investors could request redemption, subject [to] an amount and timing to be determined by" the Funds. (Complaint if 60). Alternatively, Plaintiffs allege that they could have removed the Funds’ management or changed the Funds’ investment strategy. (Complaint if 238). M&K moves to dismiss the complaint pursuant to CPLR 3211 (a)( 1) and (7). M&K argues that the allegedly negligent Audit Opinion could not have proximately caused the Plaintiffs’ injuries. The Audit Opinion was issued on June 16, 2008. (Complaint if 60). However, all of the redemptions from the Funds were suspended in February 2008 and since that time the Plaintiffs were effectively prohibited from withdrawing their investments. (Complaint , 174). Plaintiffs have demanded full redemption from the Funds, and their
demands have been denied. (Complaint , 183). Thus, M&K argues that even ifthe Audit Opinion had disclosed different information, the resulting losses to the Plaintiffs would have been the same.

However, any new management hired after the Audit Opinion was issued could not have done anything to rectify the losses incurred by the Funds’ prior to the time the Audit Opinion was issued in June 2008. For example, in April 2008, two months prior to the issuance of the M&K Audit Opinion, the Funds reported a 33% loss, partially due to the decline in value of the Funds’ investment in Challenger. (Complaint ,-i 177). Any new management hired after June 2008 could not have prevented this loss.

Accordingly, Plaintiffs have failed to allege that M&K’s negligence was the proximate cause of  laintiffs damages and thus the Complaint fails to state a cause of action for accounting malpractice.