Unreported / Non-Citable
Background
North Investment Limited Partnership and Amy Elias invested as limited partners in Trinad Capital L.P. in 2005, a fund managed by Robert Ellin. In April 2022, they exercised their right to redeem the full investment. In April 2023, the fund’s outside accountants — Berkower LLC — prepared Schedule K-1 forms for plaintiffs that indicated the redemption capital had been distributed.
The distributions never actually happened. After more than a year of unsuccessful communications with Ellin, plaintiffs notified Berkower in mid-2024 that the K-1s were inaccurate and asked Berkower to revise them. Berkower responded that it could not act without Trinad’s approval. Plaintiffs filed this action in June 2025, asserting fraud, aiding and abetting breach of fiduciary duty, and a violation of California’s Unfair Competition Law (UCL) against Berkower, along with claims against Trinad and Ellin.
The Court’s Holding
The court dismissed all three claims against Berkower with leave to amend. The opinion turned on a single missing element: scienter — the defendant’s knowledge that its statements were false at the time they were made.
For the fraud claim, although Federal Rule 9(b) allows a party to allege intent and knowledge generally, the underlying allegations must still satisfy Rule 8’s plausibility standard. Plaintiffs’ only assertion of Berkower’s state of mind was a single conclusory phrase pleaded “upon information and belief” that the firm “knowingly or recklessly participated in the dissemination of [the] K-1s.” Without factual content from which the court could plausibly infer that Berkower actually knew, when it issued the April 2023 K-1s, that Trinad had not made the distributions, the claim failed.
The court also rejected plaintiffs’ argument that Berkower’s knowledge of the falsity in mid-2024 (after plaintiffs notified the firm of the error) supplied scienter. Under California law, fraud requires knowledge at the time of the representation — not awareness acquired later.
The aiding-and-abetting breach-of-fiduciary-duty claim required even more: actual knowledge of the specific primary wrong (Trinad’s and Ellin’s alleged breach of fiduciary duties to plaintiffs). The same conclusory pleading failed for the same reason. Plaintiffs cited cases where general knowledge allegations sufficed, but each of those involved additional facts (such as bank monitoring of unusual account activity) that made the inference of knowledge plausible — facts plaintiffs did not allege here.
The UCL claim was derivative of the fraud and aiding-and-abetting theories and fell with them. The court allowed plaintiffs until February 3, 2026, to amend, with the dismissal converting to one with prejudice if they failed to do so.
Key Takeaways
- Even under Rule 9(b)’s relaxed standard for pleading state of mind, plaintiffs must allege facts that make the inference of scienter plausible — conclusory allegations “on information and belief” will not do.
- For fraud, scienter must exist at the time of the misrepresentation; later-acquired knowledge does not retroactively make a prior statement fraudulent.
- Aiding-and-abetting breach of fiduciary duty requires the defendant’s actual knowledge of the specific underlying wrong it allegedly assisted.
- Cases that have allowed general knowledge allegations to suffice typically involve additional facts (monitoring of unusual activity, prior warnings) that make the knowledge inference plausible.
- UCL claims tied to fraud or aiding-and-abetting allegations rise and fall with those underlying theories.
- Outside accountants who prepare K-1s are not automatically liable for fraud merely because the K-1s turn out to be inaccurate; plaintiffs must allege facts showing the accountants knew the distributions never occurred.
Why It Matters
This decision is a useful reference for anyone considering a fraud or aiding-and-abetting case against a fund’s outside accountant or auditor over inaccurate tax forms. Investors who discover that K-1s misrepresented their account activity often look for deep-pocket professional defendants. This opinion demonstrates that scienter remains a real barrier: plaintiffs must plead concrete facts (red flags ignored, internal communications suggesting knowledge, repeated inconsistent reports) suggesting the accountant actually knew the underlying transactions never happened when the form was issued.
For accounting firms and other gatekeepers, the order is a reminder that they are not insurers of the accuracy of every form they prepare based on management representations. For investor-plaintiffs, the practical takeaway is to develop, before filing, factual allegations distinguishing knowledge from negligence — the difference between an actionable fraud claim and a non-actionable accounting error.