From Continental Cas. Co. v. PricewaterhouseCoopers, LLP, 2010 WL 2569187 (N.Y. Ct. App. June 29, 2010):

In these actions, plaintiffs, former limited partners of Lipper Convertibles, LP, assert direct claims of fraud against PricewaterhouseCoopers, LLP (PwC), the auditor of Lipper Convertibles' annual financial statements for the years 1995 through 2000. Plaintiffs claim that PwC fraudulently declared the partnership's financial statements to be accurate and prepared in conformity with generally accepted accounting principles (GAAP), when in fact they were not. Plaintiffs argue that they were induced by PwC's fraud into making their initial investments in the partnership. But because PwC showed that the damages plaintiffs claimed to have suffered was the result of the conduct of the fund and not a direct diminution of plaintiffs' initial investments, the order of the Appellate Division granting PwC's motion for summary judgment dismissing the fraud cause of action should be affirmed. ***

PwC moved, pursuant to CPLR 3211, to dismiss the fraud claim, arguing that plaintiffs had pleaded no injury distinct from the injury attributed to the Fund as a whole, which was the subject of the Trustee action that had been brought on behalf of, and would inure to the benefit of, all injured limited partners. PwC argued that plaintiffs' action should be dismissed because it alleged only a derivative injury or, alternatively, should be stayed pending resolution of the Trustee's action. Plaintiffs responded by asserting that their claim was distinct from the Trustee's claim because they were seeking damages predicated on fraud in the inducement — that they had been fraudulently induced to rely on PwC's audits when they made their initial investment in the Fund and thus sustained injury on the very day of their purchase. They contrasted this injury with the damages the Trustee sought to recover, which included recovery for excessive management and incentive fees the Fund had paid as a result of the overvaluation.***

In a fraud action, a plaintiff may recover only the actual pecuniary loss sustained as a direct result of the wrong ***. Under this rule, the actual loss sustained as a direct result of fraud that induces an investment is the “difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain” ***. The damages are to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained***

Plaintiffs rely on an exception to the fraud damages rule recognized by this Court in Hotaling v. Leach & Co. (247 N.Y. 84 [1928]). In that case, the plaintiff was fraudulently induced into purchasing a bond for a certain sum of money ***. The trial court measured the damages by deducting from the price paid, plus interest from the date of payment, the value of the bond at the time of its sale ***. This Court held that this was the proper measure of damages, as plaintiff was entitled to recover from the defendants the loss proximately resulting from the fraud that induced the investment ***. The Court recognized, however, that this measure of damages was an exception to the general rule that “the actual pecuniary loss sustained as a direct result of fraud which induces a purchase ... is the difference between the amount paid and the value of the article received” ***.

Hotaling, however, differs from this case in significant ways. First, the Court in Hotaling rejected a measure of damages based on the market value of the bond when the plaintiff purchased it, explaining that such value could not be determined and would have left the plaintiff without any remedy***. Here, in contrast, plaintiffs could have come forward with portfolio valuations showing the amount of the claimed overvaluation of the portfolio on the day of their respective investments. Indeed, plaintiffs' expert acknowledged that such an analysis could be undertaken, but he failed to do one, and BDO Seidman undertook a similar calculation in relation to the liquidation proceeding. Further, there was no overlapping derivative claim in Hotaling that would inure to the plaintiff's benefit. Here, the Trustee has prosecuted claims seeking the very same categories of damages allegedly suffered by plaintiffs. The presence of the overlapping claims requires plaintiffs to come forward with direct, distinct date-of-investment injuries.

Plaintiffs failed to meet their burden. The only injury they seek to establish is the diminution in value of their limited partnership interests at liquidation. However, that diminution is attributable to their pro rata share of the partnership's losses after the date of their investments, and they experienced those losses in their capacities as limited partners in common with all other limited partners. Plaintiffs cannot recover their pro rata share of the partnership injury and also recover that same injury under the direct fraud action. Thus, PwC was entitled to summary judgment dismissing the fraud cause of action.