SW Legal studies in Business

Insurer Did Not Rely on Financial Statements that Failed to Reveal Fraud
Description Appeals court held that an insurance company cannot sue an accounting firm for the losses it had to cover even though it caused by fraud by management of a firm that went bankrupt. Since the insurer did not rely on the financial statements prepared by the CPA firm, it could have no cause of action against the accountants.
Topic Accountant's Liability
Key Words Securities; Misrepresentation; Reliance
C A S E   S U M M A R Y
Facts The Securities Investor Protection Corporation (SPIC) claimed that BDO, an accounting firm, misinformed federal securities regulators about the precarious condition of a BDO client, Baron, a stock-brokerage firm. BDO served as CPA for Baron, filing its annual financial statements with the National Association of Securities Dealers (NASD), as required by securities regulators, up to the time of Baron's bankruptcy. Baron's managers were found to have engaged in numerous illegal securities practices. Their losses and theft of client funds were hidden in the accounting records. BDO never uncovered any problems at Barons until federal regulators had moved in and, eventually, the SPIC took over Baron's accounts and sued BDO for the losses suffered by clients that SPIC had to cover. The trial court dismissed the suit; the SPIC appealed.
Decision Affirmed. Under New York law, a plaintiff may not recover against an accountant for misrepresentations made to a third party, where the third party did not communicate the misrepresentations to the plaintiff. The financial statements were prepared for the NASD; the SPIC did not rely on the BDO reports, so the losses it has to cover are not related to reliance on the incorrect information relayed in the financial statements. "SPIC cannot claim reliance on alleged misrepresentations of which it was unaware even by implication."

Citation Securities Investor Protection Corp. v. BDO Seidman, LLP, 245 F.3d 174 (2nd Cir., 2001)

Back to Accountant's Liability Listings

©1997-2002  SW Legal Studies in Business. All Rights Reserved.