NEW YORK (Reuters) – Investors looking to fasten with a ~ blame on auditors for failing to flag risks ahead of the credit critical situation are having a hard time getting their cases to stick.
All of the “Big Four” auditors be in possession of been sued by investors who collectively seek to recoup billions of dollars depraved in the financial meltdown. But while some key cases are hitherto to be resolved — and a recent civil fraud lawsuit in expectation of Ernst & Young by New York prosecutors potentially opens a novel front — auditors so far have scored some significant court victories.
Lawsuits consider been dismissed against Deloitte & Touche over its audits of pledge financier Fannie Mae, as well as a case against PricewaterhouseCoopers accusing it of helping hide risks at underwriter American International Group.
KPMG settled a lawsuit stemming from its audits of mortgage lender Countrywide Financial Corp, now part of Bank of America, concerning a relatively modest amount.
“Every time somebody comes up through a new fraudulent scheme, auditors miss it,” said Andrea Kim, a partner at law firm Diamond McCarthy LLP in Houston who represents plaintiffs in auditor lawsuits. “The historical pattern is that they find a way to manage the litigation to limit their liability.”
The credit juncture, which pushed the U.S. financial system to the brink of exhaustion, led to a wave of investor litigation against banks, lenders and others. Auditors are first targets because investors try to rope in as many defendants being of the cl~s who possible to increase recoveries. Auditors also may have the deepest pockets if the company they audited files for bankruptcy.
Plaintiffs in recent auditor litigation include activist investor Bruce Sherman, the Teachers’ Retirement System of Louisiana and self-sufficient New York City and New York State pension funds.
Government actions furthermore can open the door to private lawsuits. That may happen in the continue a~ of the New York Attorney General’s civil fraud suit in law against Ernst & Young over its audits of Lehman Brothers, whose 2008 bankruptcy was the largest in U.S. history, legal experts said.
“To the reach that any regulator blazes a path of wrongdoing, the class-subject bar often will bring follow-on lawsuits because a lot of the legwork has been finished,” said Scott Berman, a partner at Friedman Kaplan Seiler & Adelman LLP who represents investors in securities judicial contest.
The New York lawsuit accuses Ernst & Young of helping Lehman impress tens of billions of dollars off its balance sheet to hide its accurate leverage. Ernst rejects the allegations and has said it intends to guard itself against the suit.
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Plaintiffs, however, appearance many legal hurdles.
The New York Court of Appeals in October upheld the prime mover of “in pari delicto,” or equal fault. The reigning allowed PricewaterhouseCoopers to win dismissal of a lawsuit over its audits of AIG, that had to be propped up with 2 billion of federal bailouts.
New York civil community’s highest court denied plaintiffs’ requests to broaden exceptions to the establish, reaffirming an auditor’s defense where the company it audited was equally to censure for wrongdoing.
“This squarely states that at least for purposes of New York science of ~s, the ‘in pari delicto’ defense will be available in greatest part cases to accounting firms,” said William McSherry, a partner at enactment firm Crowell & Moring LLP in New York.
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