In a decision issued yesterday, the Second Circuit held that an accountant has a duty to correct its certified opinions, and may incur primary liability under § 10(b) and Rule 10b-5 if it fails to fulfill that duty in certain circumstances. The decision, written by C.J. Straub, claims to be the first in this Circuit to squarely hold that an accountant has such a duty or may be primarily liable under federal securities laws. The auditor in this case is Todman & Co., CPA, P.C., and its successor in interest, Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, LLP.
The decision, Overton v. Todman & Co., CPAs, P.C., No. 06-2496-cv, reversed a lower court decision dismissing a securities fraud claim against Todman & Co. Plaintiffs alleged that from 1999 through 2002, Todman & Co. issued opinions certifying that the financial statements of a broker-dealer accurately reflected the broker-dealer’s fiscal health. But the auditor, Plaintiffs alleged, failed to correct those opinions, ignoring warning signs that the broker-dealer’s financial statements understated its liability for payroll taxes. Plaintiffs alleged that, in 2003, the broker-dealer’s payroll tax liability led to the broker-dealer’s collapse.
After surveying its prior law on accountants’ primarily liability, the Second Circuit ruled that the District Court erred in dismissing the fraud claim against Todman & Co. The Second Circuit acknowledged that only in dicta did its previous opinions attribute to accountants a duty to correct certified opinions. “Presented with the opportunity to do so,” the Second Circuit’s Overton opinion “squarely” holds that “an accountant violates the ‘duty to correct’ and becomes primarily liable under § 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied.”
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