SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-14-10550-00CL
DATE: 20150807

BETWEEN:

FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED, FAIRFIELD LAMBDA LIMITED AND KENNETH KRYS, AS LIQUIDATOR FOR FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED AND FAIRFIELD LAMBDA LIMITED

Plaintiffs

AND:

PRICEWATERHOUSECOOPERS LLP AND STEPHEN WALL

Defendants

AND BETWEEN:

PRICEWATERHOUSECOOPERS LLP

Plaintiff by counterclaim

AND:

FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED, FAIRFIELD LAMBDA LIMITED AND KENNETH KRYS, AS LIQUIDATOR FOR FAIRFIELD SENTRY LIMITED, FAIRFIELD SIGMA LIMITED AND FAIRFIELD LAMBDA LIMITED

Defendants by Counterclaim

BEFORE: Newbould J.

COUNSEL:
Patrick O’Kelly and James Mangan, for the Plaintiffs/Defendants by Counterclaim

Gerald L.R. Ranking and Kimberley E. Potter, for the defendants/plaintiffs by counterclaim

HEARD: August 5, 2015

ENDORSEMENT

[1] The defendants seek security for costs in this action involving a $5 billion claim for auditor’s negligence arising from audits of the corporate plaintiffs by PwC for the years ending 2006 and 2007. The corporate plaintiffs were funds that invested billions of dollars through accounts held at Bernard L. Madoff Investment Securities. Mr. Madoff eventually admitted to various fraud charges involving what has been described as the biggest Ponzi scheme in history and is serving a 150 year sentence.

[2] The action has been brought by the liquidator of the corporate plaintiffs. The defendants move for security for costs under rule 56.01 which provides in subsection 56.01(1)(d) that a court may order security for costs as is just where the plaintiff is a corporation or a nominal plaintiff, and where there is good reason to believe that the plaintiff has insufficient assets in Ontario to pay the defendant’s costs. The plaintiff funds are in liquidation and do not contest the right of the defendants to security for costs. The issue is the amount sought.

[3] To date, pleadings have been delivered but production of documents and discoveries have not taken place. In their material, the defendants sought an order for security for costs covering the entire action through to trial. However, at the outset of the hearing, and in accordance with a with prejudice offer made by them, the defendants advised that they were seeking at this stage of the action only an order covering costs through to the initial stage of the examinations for discovery. It is expected that the second stage of discoveries will take place after undertakings and refusals have been dealt with.

[4] Before dealing with the various heads of costs claimed, there are a number of issues raised by the plaintiffs. The first has to do with the hourly rates claimed on behalf of the defendants. Those rates are approximately 60% of the actual rates charged by the various lawyers working on the matter. The plaintiffs say that these rates are too high and do not reflect the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee.

[5] I have previously on a number of occasions been critical of the use today of the Subcommittee’s cost guidance. In Stetson Oil & Gas Ltd v. Stifel Nicolaus Canada Inc. 2013 ONSC 5213 I stated:

22 Regarding the use of the rates recommended in the practice direction of the Costs Subcommittee of the Civil Rules Committee, I have considerable difficulty with the rates in that practice direction. They were the rates contained in the cost grid introduced in January, 2002. When the cost grid was abolished on July 1, 2005, they were continued in the practice direction. These rates are completely outdated and unrealistic for an action fought by two major downtown Toronto law firms.

23 The practice direction is not a binding rule enacted as a regulation. It states that it "may provide some guidance to the profession as these changes are implemented". It is apparent that other courts agree that the rates are not realistic. I agree with R.J. Smith in First Capital (Canholdings) Corp. v. North American Property Group 2012 ONSC 1359, [2012] O.J. No. 885 that the rates should be adjusted to account for inflation, but I would go further.

24 In Canadian National Railway v. Royal & Sun Alliance Insurance Co. of Canada, 2007 ONCA 531, the Court of Appeal awarded trial costs on a partial indemnity basis of 65% of the fees charged to the client. In Eastern Power v. Ontario Electricity Financial Corporation, 2012 ONCA 366, the Court of Appeal awarded trial costs on a partial indemnity basis at 60% of actual rates charged the client. The trial judge, 2008 48132 (ON SC), [2008] O.J. No. 3722, had included a substantial indemnity cost award as a result of an offer at 90% of actual rates charged, and while this was set aside as the offer was not better than the results of the appeal, the Court of Appeal made no suggestion that the 90% figure would not have been appropriate if the costs were awarded on a substantial indemnity basis.

25 I think it appropriate to award costs at 60% of the time charged for partial indemnity costs and 90% for substantial indemnity costs…

[6] The Court of Appeal has now said the same thing. In Inter-Leasing Inc. v. Ontario (Minister of Revenue) 2014 ONCA 683, Weiler J.A. for the Court stated:

5 I agree with the appellant that the cost rates set out in the Information for the Profession set out in the preamble to Rule 57 of the Rules of Civil Procedure are now out of date, and that amounts calculated at 55%-60% of a reasonable actual rate might more appropriately reflect partial indemnity, particularly in the context of two sophisticated litigants well aware of the stakes.

[7] I see no problem in the actual rates being charged in this case by counsel for the defendants. If anything, taking into account the size of this litigation, they are modest. The rate for example for Mr. Ranking, at $750 per hour, is much less than rates charged by many other senior counsel in Toronto in large cases, and calculating partial indemnity costs at 60% of his rate is reasonable. I have no doubt that the rates being charged by counsel for the plaintiffs are at least as high, and probably higher. To order security for costs on the basis of an outdated recommendation made over 15 years ago would not be realistic at all. I accept the rates and the estimate of costs being 60% of those rates.

[8] Another issue raised by the plaintiffs is that a counterclaim has been brought by PwC. It is contended that a defendant is not entitled to security for costs incurred in pursuing a counterclaim against a plaintiff. I accept that proposition as a general matter but consideration must be given to whether the counterclaim is in substance anything more than the defence of the action.

[9] This issue arose in Wilkings v Velocity Group Inc (2008), 2008 12500 (ON SCDC), 89 OR (3d) 751 (Div Ct), in which a defendant and plaintiff by counterclaim sought an order for security for costs of defending the action against it. It was claimed that the plaintiff could not be ordered to pay security for costs of the counterclaim. While acknowledging that principle, Cumming J. for the Court considered what in substance the main action was and what in substance was different, if anything, in the counterclaim. He stated:

[29] In summary, a defendant has the right to defend without having to post security for costs. It is only a plaintiff who may be required to post security. Likewise, a defendant to a counterclaim cannot be required to post security to mount its defence to the counterclaim. A plaintiff by counterclaim can be required to post security. It is a relevant factor in exercising discretion as to whether a plaintiff by counterclaim is required to post security to consider whether or not the counterclaim is in substance a reiteration of the plaintiff by counterclaim's defence to the main action. If it is, the court may exercise its discretion to deny the motion by the defendant by counterclaim that the plaintiff by counterclaim post security for costs or qualify the amount of security to otherwise be posted. Any initiating plaintiff required to post security cannot be required to include in the security posted any amount for costs related to being a defendant to a counterclaim.

[10] In this case, the brief counterclaim of PwC is in substance no more than the issues raised in the defence of the claim. The counterclaim raises no substantive issues that have not been raised in the statement of defence. In the language of Cumming J. in Wilkings at par. 21, the counterclaim is in substance a reiteration of the defence to the claim in the main action. I see no reason to reduce the amount of security for costs because of the counterclaim.

[11] The plaintiffs have provided their version of what would be a reasonable amount for security for costs in part based by orders for security for costs in the action of Livent Inc. (Special Receiver) v. Deloitte & Touche. They argue that in many ways it was more complicated than this case against PwC. This had led to arguments on both sides as to the comparability of the Livent case to this case. I decline to get into that debate. Every case depends on its circumstances. I do not know enough about the Livent case to be able to use it as a yardstick and I do not think that security for costs motions should get into minute or even general comparisons with other cases. Consideration should be given to the circumstances of the case being dealt with. The application of discretion applying the normal principles involved is what should take place. I also note also that in Livent, the security for costs of $1,225,000 ordered in favour of the defendants paled in comparison to the costs claimed by the winning plaintiff of $7.3 million.

[12] It should be noted that PwC has also been sued in the U.S. in a class action by investors covering the audits in question in this action in Canada and other audits as well. The plaintiffs contend that much of the work to be done in Canada in defending this action has already been done in the U.S., such as the delivery of four expert reports on behalf of PwC, and that the costs that might otherwise be incurred in defending the Canadian litigation should be somewhat lessened as a result. The defendants acknowledge that there may be some efficiencies caused by the work in the U.S. but say that they cannot simply rely on U.S. lawyers and what has occurred in the U.S. but will be required to do their own work in reviewing documents, conducting discoveries, considering what expert witnesses to be retained or used in Canada and all of the other things required to defend such a large action that is so critical to PwC. There is something in what each side says about this.

[13] There are four areas of work plus disbursements covered by the claim for security for costs. These cover work up to the initial stage of the examinations for discovery.

1. Initial Case Assessment and Pleadings

[14] The defendants claim counsel fees of $259,436.76, which have already been incurred. The plaintiffs say that only $20,000 should be allowed. They state that considering the preliminary stage of the Canadian action and the lower amounts awarded as security with respect to pleadings, this amount is sufficient. I cannot accept the plaintiffs’ position. They have not provided any information as to how much time their lawyers spent in the assessment of the case and drafting the pleadings, and I have no doubt that they spent far more than $20,000 in time for this. The work has been done and it has not been asserted that time was spent which ought not to have been spent. This is an extremely important case for PwC as a $5 billion judgment would no doubt cripple it out of existence. It could be expected that the defendants would want their Canadian lawyers to thoroughly consider the case at the outset in order to plead a defence. I accept the amount claimed by the defendants.

2. Discovery Plan/Case Management Meetings

[15] The defendants claim $76,200 for this. It is based on 40 hours for Mr. Ranking, 80 hours for Ms. Armstrong and 100 hours for Ms. Potter. The plaintiffs say that nothing should be given for this work as they assert that work related to the development of a discovery plan is encompassed by the estimates for document production and preparation for discovery.

[16] This action is large and involves a number of parties. Apart from PwC, the Canadian firm, there are three other PwC entities referred to in the pleading, being PwC in the Netherlands, PwC International and PwC in Bermuda. The plaintiffs will want production from these firms. There are bound to be difficulties with production, including the fact that in the U.S. there are confidentiality orders regarding certain documents. There will need to be discussions with counsel in the U.S. and elsewhere. To say nothing should be taken into account is not reasonable, and again, as in all of the areas in issue, the plaintiffs have not put forward any information as to the amount of work they expect to do.

[17] I recognize what is advanced by the defendants is an estimate. It is hard to be sanguine about estimates at this stage but I have no doubt considerable time will be spent. I accept $75,000 for this head of work.

3. Document Review and Production

[18] The defendants claim $667,200 for this work. This estimate assumes that Ms. Potter and another associate will do the first level review (1600) hours, followed by a more targeted review by Ms. Armstrong (400) hours and Mr. Ranking (200) hours. 300 hours will be spent by a clerk. The total time estimated is 2,500 hours. The plaintiffs say only $128,325 should be allowed, being 25 hours for Mr. Ranking, 75 hours for Ms. Armstrong, 200 hours for Ms. Potter and 200 hours for a clerk, totalling 500 hours.

[19] The defendants point out that based on an assumption that 40 documents will be reviewed in an hour, a review of PwC’s 35,000 documents alone would take 875 hours. Fairfield Greenwich Group ran the plaintiff funds and PwC claims that if anyone should have known of the Madoff fraud, it would have been the Fairfield Greenwich Group. If the plaintiffs produced FGG’s 443,207 documents produced in the U.S. litigation, a review of those documents would take a further 11,080 hours, well in excess of the 2,500 hours claimed by PwC.

[20] I do not think it is an answer for the plaintiffs to say that other lawyers in the U.S. may have reviewed all of the documents produced and that there is little work to be done by Canadian counsel for PwC. Obviously Canadian counsel in defending this case must be familiar with all documents produced, or at least have reviewed them. On the other hand, there will undoubtedly be some work that has been done in the U.S. that will assist Canadian counsel.

[21] Saying in a case of this magnitude that senior counsel such as Mr. Ranking will or should spend only 25 hours in document review and production is completely unrealistic. The suggested time of 500 hours by the plaintiffs is also not realistic, and no estimated time that the plaintiffs’ counsel will spend has been provided to support such a low estimate. The documentary production will be massive, as might be expected in this litigation. I allow $500,000 for this head of work.

4. Examinations for Discovery

[22] The defendants claim $562,500 for the first stage of the examinations for discovery, being one half of the amount they claimed for both stages. The plaintiffs say that the amount should be one-half of $117,750, and that the discovery process will be made more efficient by the fact that members of PwC were previously examined and by the availability of transcripts from an ICAO disciplinary hearing.

[23] The estimate of the defendants is based on five weeks of discovery at 10 hours per day for a total of 250 hours for each of Mr. Ranking, Ms. Armstrong and Ms. Potter attending the discoveries and a further 250 hours for each lawyer for preparation. The plaintiffs assume there will be only three weeks of discovery.

[24] I cannot imagine that in a case such as this that the discoveries at the first stage before undertakings and refusals will take only three weeks. That is not the experience in this jurisdiction in large commercial cases involving this size of documentary production. I do think, however, that some of the time in reviewing documents will be used as well for discovery preparation, which should produce some efficiencies in later preparation for discoveries. How much is hard to say, and involves obviously some educated guess-work.

[25] The plaintiffs say that there should not be security for costs for more than two lawyers for the defendants attending the discoveries, and point to one or two cases in which that has been said by the Master making an order for security for costs. The plaintiffs say that the defendants are not entitled to an order reflecting Cadillac service. I do not think there can be any hard and fast rule. Each case requires a consideration of the facts. This case is unique. With so many documents, I can understand wanting three counsel attend the discoveries. Certainly the plaintiffs have not said they will restrict themselves to two counsel on the discoveries. Having three counsel attend discoveries is not unknown in large “bet the farm” litigation. Further, it cannot be said at this stage that ultimately when costs are set for the winning side that costs for three counsel will not be allowed. In the circumstances I would not restrict an estimate for security for costs to only two counsel in this case.

[26] I allow $500,000 for this head of work.

5. Disbursements

[27] The defendants claim disbursements to date of $12,452.23, for expert fees of $1.8 million and other disbursements of $1,407,200. The plaintiffs say there should be nothing for the first, $51,000 for expert fees and $156,005 for other disbursements.

[28] Regarding experts, the $1.8 million is based on four experts at $450,000 each. This assumes the experts will prepare reports and testify at trial. In argument, Mr. Ranking said that he needed experts to advise him on what should be obtained on discovery from the plaintiffs and that he could live with two experts for that purpose and would want one-third of $450,000 for each witness, being for the first stage of the action. This which would amount to $300,000 at this stage.

[29] The plaintiffs’ argument on this is essentially that all expert work has been done in the U.S. litigation, and they come up with a figure of $25,500 for each of two experts for preparation and for trial. The problem with this is that the plaintiffs are saying that the defence in Canada must use the U.S. experts retained to defend PwC in the U.S. class action. There may be reasons why Canadian defence counsel may not want to use the reports of the U.S. experts. It is not open to the plaintiffs to direct Canadian counsel in what experts to use.

[30] Moreover, at this first stage of discovery, Canadian defence counsel must be educated for discovery purposes. What the fraud was exactly and whether PwC should have discovered it involves in part the way in which Madoff purported to buy and sell stocks, treasury bills, and options for Fairfield Sentry’s account in accordance with his “split-strike conversion” strategy. Understanding this business, which defence counsel must master, will be no easy task. Madoff’s system was designed to fool the most sophisticated investment professionals, investors, authorities, regulators, advisors and auditors, and it did so for many years. Expert advice to counsel will obviously be required and this is conceded by the plaintiffs.

[31] The amounts proposed by the plaintiffs are completely unrealistic. Expert evidence in complex commercial areas of the kind involved in this case are bound to be extremely expensive. As in other instances on this motion, the plaintiffs have not provided any indication of what they expect to spend on expert witnesses. I cannot help but think however that the $51,000 they propose for the defendants will be but a fraction of what they will spend. I allow $250,000 disbursements for expert fees.

[32] The amount for other disbursements is a claim based on 20% of full-indemnity fees, which was what was claimed by the plaintiff in Livent. The plaintiffs say it should be 20% of estimated partial indemnity fees. I agree it should be based on partial indemnity fees at this stage. Mr. Ranking in argument said he would be content with 20% of partial indemnity fees allowed at this stage. I will allow that. It will subsume the already incurred disbursements of $12,453.23. The total partial indemnity fees I have allowed are $1,334,437.76. Twenty percent of this amounts to $266,887.55, which is allowed.

Conclusion

[33] I recognize that this award for security for costs may represent a high water mark in terms of the amount ordered. However, each case must be dealt with taking into account the circumstances of the particular case. It can be expected that the case will rank well up in terms of complexity. That is clear from the pleadings, and the known circumstances of the Madoff Ponzi scheme. The size of the claim against PwC means that its livelihood is at stake. The amount awarded as security for costs is not intended to be a fraction of what the expected costs are to be. It is to be a reasonable estimate of what may ultimately be assessed by a court on a partial indemnity basis. In my view what is being awarded here is such a reasonable estimate.

[34] The amount allowed for security for costs to the end of the first stage of discoveries is $1,334,437.76 for fees and $516,887.55 for disbursements. Applicable HST is to be added to these amounts. These are to be posted within 60 days.

[35] The defendants are entitled to their costs of this motion. If costs cannot be agreed, brief written submissions may be made within 10 days by the defendants, along with a proper cost outline, and brief written submissions may be made by the plaintiffs in reply within a further 10 days.

Newbould J.

Date: August 7, 2015