When 2 + 2 = 5.

The Second Circuit today held an auditor potentially liable for federal securities fraud if it doesn’t correct a false or misleading report on its audit.  The court said:

The precise issue on appeal is whether an auditor may incur primary liability under § 10(b) and Rule 10b-5 when the auditor provides a certified opinion that is false or misleading when issued, subsequently learns or was reckless in not learning that the earlier statement was false or misleading, knows or should know that potential investors are relying on the opinion, yet fails to take reasonable steps to correct or withdraw its opinion and/or the underlying financial statements.  We hold that under such circumstances, an auditor becomes primarily liable for securities fraud, assuming all the other elements of a securities fraud claim are present. Since the complaint pleads precisely this theory of liability, we vacate the District Court’s dismissal and remand for further proceedings consistent with this opinion.

Overton v. Todman & Co., CPAs, P.C.., No. 06-2496-cv (2d Cir. Feb. 26, 2007).

Barry Barnett

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