Firm Obtains Dismissal of Arbitration Petition by Accounting Firm Against Investors in $1.775 Billion Misrepresentation Case

The Firm represents a litigation trust that holds claims of investors in Millennium Health LLC, a California-based drug testing laboratory that filed for bankruptcy in 2015. The investors brought suit against Millennium’s former auditor, KPMG LLP, in California state court for negligent and fraudulent misrepresentations in audit reports pursuant to which the investors provided $1.775 billion in financing to the company. KPMG petitioned in New York to compel arbitration on the ground that it had an arbitration provision in its engagement agreement with the company and that the investors, as recipients of KPMG’s audit reports tied to that engagement agreement, were estopped from avoiding the arbitration clause even if they were not themselves signatories to the agreement. The trial court granted KPMG’s petition in part, sending the matter to arbitrators to make the determination of whether the dispute was arbitrable.

The Firm immediately obtained a temporary restraining order and, soon thereafter, a preliminary injunction against the referral to the arbitrators from the Appellate Division, First Department. In a Decision and Order dated April 16, 2020, the First Department unanimously reversed the trial court, and instead of remanding to that court for further proceedings, in the interest of justice denied KPMG’s petition to compel arbitration on the merits and awarded costs to the Firm’s client, the litigation trustee for the investors. The First Department ruled that investors’ receipt of KPMG’s audit reports on Millennium was too “indirect” a benefit from the KPMG-Millennium engagement agreement to prevent the investors from litigating their tort claims against KPMG in court.

The First Department's Decision and Order represents a complete victory for the investors, who now are permitted to proceed with their lawsuit in their chosen forum in California.

A copy of the First Department’s April 16, 2020 Decision and Order is attached.