McKenna On Auditor Litigation: Securities Docket’s Mid-Year Update and Schein v. EY
Last Thursday I participated in the “2009 Mid-Year Review – Securities Litigation and Enforcement” sponsored by Securities Docket. The webcast is part of BrightTalk’s Securities Litigation Summit, and follows-up and provides an update to the popular “2008 Year in Review” we presented in January 2009.
I joined several of the leading bloggers in the securities litigation and SEC enforcement world — including Kevin LaCroix (The D&O Diary); Tom Gorman (SEC Actions); and Lyle Roberts (The 10b-5 Daily) — hosted by Securities Docket’s Bruce Carton for what promises to be lively and entertaining event.
My slides are here.
Bruce Carton has his summary here.
Here’s a replay of the webcast:
I got an email from Jim Peterson of Re: Balance yesterday afternoon. He poked at my comments about auditors and subprime lawsuits. He’s concerned about my use of the word “immunized” which, I guess, has special meaning for lawyers.
- Auditors immunizing from most subprime suits by claiming, “assertions of fraud are unjustified against those who were doing their best under circumstances that were exceedingly difficult…” The Michael Young defense.
“The notion of auditors being “immunized” from suit trips all over the practical fact that once a complaint survives motions to dismiss (which as Kevin noted, is going in plaintiffs’ direction lately), the likelihood of eventual settlement is overwhelming, and cases do not go to trial. The count since the 1995 “reform” act (big joke) is I think fewer than 10 in all — only a couple involving auditors…”
We spoke this morning and he is preparing a post for tomorrow that responds to the webcast. I clarified my “immunized” comment this way:
“I was talking about the “so far” effectiveness of shills like Michael Young of Wilkie Farr and other proxies for the audit firms and their interests like the Center for Audit Quality. They use their advisory panel memberships, conference speaking gigs, and the mostly naive mainstream media to put forth the theory that the auditors do not, can not, should not question their clients business strategy and therefore cannot be held responsible also for the spectacular failures that have occurred.
So far, and that’s a big “so far,” legislators, regulators, the press, and most of the plaintiff’s bar (with the exception of Steven Thomas, Stuart Grant, and a limited number of others) are unwilling to kick the tires hard on the “We tried hard,” and the “We were duped,” and “We are separate and equal member firms who have no control over each other…” defenses. Their reluctance is sometimes borne of laziness to dig into the details and try to understand complex topics and other times due to entrenched, traditional loyalties. Steven Thomas, for example, is on his own because according to the interview in American Lawyer, his former firm, Sullivan Cromwell, did not want to go up against audit firms even though he proved it could be done very well.”
Still coming is my exclusive interview with Steven Thomas post-BDO verdict. I alluded to a few of his comments in the webcast. Stay tuned for the full text next week.
In the meantime, if you’re interested in auditor related trials, there’s an interesting one going on again in Florida that’s being webcast in its entirety (gavel to gavel) by Courtroom View Network. It’s available for live and on demand on line viewing. Alan Schein contends in a suit filed in Broward Circuit Court that he relied on the E&Y audits that gave Illinois-based Superior Bank a clean bill of health for more than a decade in deciding to merge his mortgage marketing company with the bank in 1998.
Francine, Have you been closely following the Schein v E&Y case? Any impressions to share?
I have not been following this case close enough even though I do have access to the trial video live. Hope to catch up and have some impressions later this week.
A couple comments:
1) regarding the “f-word… aka Fraud”. There are three necessary and sufficient conditions to call something fraud: a misrepresentation that someone relies upon, harm to that person as a result of relying upon that misrepresentation, and INTENT. In order to call the B4 fraudsters you have to show they had intent to do the harm when they made the misrepresentation. This is a legal requirement. I am convinced that in some situations you can argue there was a misrepresentation and a harm… but can you argue intent (and win)?
2) Regarding being a plaintiff lawyer — most are defense lawyers… why??? Well, the plaintiffs are trying to get something from someone – and that someone usually has the money. So the defendants have the money to spend on their defense, and the plaintiff lawyers can’t get much from their client… thus they go to contingency basis.
Francine, interested in your thoughts on this as it relates to other litigation out there against auditors – the same argument used in this case was argued and won in Refco case also:
“A US District Court judge has dismissed claims against Grant Thornton International and its US subsidiary that arose following the collapse of Italian dairy company Parmalat.”