Plaintiffs, investors in a now defunct broker-dealer, sued the company’s accountants under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for failing to correct mistakes in its certified opinion of the company’s financial statements. Plaintiffs alleged that they relied on the erroneous statements in making a substantial investment in the broker-dealer subsequent to the time that the defendant accountants had learned of the errors in their certified statements.

The District Court dismissed plaintiffs’ claim, citing the United States Supreme Court’s decision in Central Bankfor the proposition that aider and abettor claims are not actionable under § 10(b) and ruling that an accountant’s failure to correct its certified opinion could amount to no more than aider and abettor liability. The Second Circuit, disagreed, noting that the Central Bank decision contemplated that secondary actors such as accountants could incur primary liability based on their misrepresentations or omissions. The Court also cited its own post-Central Bank decisions providing that an accountant has a duty to correct its certified opinions that it discovers to be mistaken and on which it knows the public is relying.

The Second Circuit held that that an accountant can be primarily liable under § 10(b) and Rule 10b-5 if it (i) makes a statement in its certified opinion that is false and misleading when made; (ii) subsequently learns or was reckless in not learning of the error; (iii) knows or should know that potential investors are relying on its opinion and financial statements; (iv) fails to take reasonable steps to correct the error or withdraw its opinion; and (v) all other requirements for § 10(b) and Rule 10b-5 liability are satisfied. Because it found all of the foregoing elements sufficiently pleaded, the Second Circuit reversed and reinstated the plaintiffs’ securities fraud claim. (Overton v. Todman & Co., CPAS, P.C., 2007 WL 574623 (2d Cir. Feb. 26, 2007))

Breach of Fiduciary Duty Claim for Excessive Investment Advisory Fees Dismissed

The District Court dismissed plaintiffs’ derivative action on behalf of three open-ended mutual funds, alleging that defendant, an investment advisor, violated § 36 of the Investment Company Act of 1940 by receiving excessive fees for the advisory services it provided to the Funds. The fees were approved on a yearly basis by the Funds’ board of trustees.

Applying the standard established by the Second Circuit in Gartenberg, the District Court determined that the fees charged by defendant were not so disproportionately large that they could not have been a result of arm’s-length bargaining between defendant and the Funds’ board of trustees. The Court found that the fees charged by defendant were within the range paid by institutional clients and defendant’s other mutual fund clients. Plaintiffs’ allegations of potential conflicts of interest through the board members’ social and professional relationships with defendant, without any evidence that the defendant attempted to exercise influence through those relationships, were insufficient to show that the fee negotiations were not conducted in good faith. The District Court declined to consider whether the Funds could have gotten more for their money from defendant ruling that “[s]ection 36(b) does not create a duty that advisers receive the lowest possible fee amount of compensation for the services they provide.” (Jones v. Harris Associates L.P., 2007 WL 627640 (N.D. Ill. Feb. 27, 2007))