The Second Circuit has issued another confirmation of the high bar for imposing liability on external auditors under the securities laws, and of the importance of the protections created for opinions by the Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The unpublished decision, Querub v. Moore Stephens Hong Kong, __ Fed. App’x __, 2016 WL 2942415 (2d Cir. May 20, 2016), affirmed the dismissal at summary judgment of a securities claim against a Hong Kong auditor that issued “clean opinions” for the financial statements of a China-based coal supplier.

Puda, a China-based, U.S.-listed company, owned a 90% stake in Shanxi—a company that supplied coal for steel manufacturing. Id. at *1. But in 2009, Puda’s chairman transferred ownership of Shanxi to himself. Id. While shareholder meeting minutes and some filings with Chinese regulatory authorities reflected the transfer, Puda’s 2009 and 2010 financial statements included Shanxi’s assets and revenues. Id. A Hong Kong auditor—Moore Stephens—issued clean opinions for Puda’s 2009 and 2010 financial statements under Public Company Accounting Oversight Board (“PCAOB”) standards. After learning of the Shanxi transfer in 2011, Moore Stephens resigned as Puda’s auditor and stated that its opinions on the 2009 and 2010 statements could no longer be relied upon. Id.

In assessing the securities claims brought by investors against Moore Stephens, the Second Circuit examined three issues. First, the court held that the district court had appropriately struck the plaintiffs’ expert witness: the witness lacked expertise or experience in PCAOB accounting standards—the auditing standard at issue—and so was not qualified as an expert. Id. at *2. Second, the court ruled that the plaintiffs could not establish that Moore Stephens had acted with sufficient recklessness to support liability. Id. at *3. Even if expert testimony on the PCAOB standards were not required, the “red flags” that plaintiffs claimed showed recklessness showed only “fraud by hindsight.” Id. Finally, the court explained that “[a]udit reports, labeled ‘opinions’ and involving considerable subjective judgment, are statements of opinion subject to the Omnicare standard . . . .” Because there was no evidence that Moore Stephens either didn’t believe its “clean audit opinions” or that it omitted material facts about those opinions, the court ruled that plaintiffs’ claims could not survive. Id.