SECURITIES INVESTOR PROTECTION CORPORATION, and JAMES W. GIDDENS, as Trustee for the liquidation of the business of A.R. Baron & Co., Inc., Plaintiffs-Appellants,
v.
BDO SEIDMAN, LLP, Defendant-Appellee.
Docket Nos. 99-7719 (L); 99-7720 (C)
August Term, 1999
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Argued: February 9, 2000
Decided: June 05, 2000
Appeal from an order of the United States District Court for the Southern District of New York (Loretta A. Preska, Judge), granting defendant's motion to dismiss plaintiffs' claims for fraudulent misrepresentation, negligent misrepresentation, and breach of contract. The Second Circuit affirms the district court's dismissal of the plaintiffs' claims on behalf of broker-dealer customers. With respect to plaintiff SIPC's claims on its own behalf, this Court certifies to the New York Court of Appeals the questions of whether, under New York law, a plaintiff may state a claim for fraudulent or negligent misrepresentation against an accountant with whom the plaintiff had minimal direct contact, but whose reports were prepared for the client with the knowledge that the plaintiff would receive any negative information contained therein.
Affirmed in part; questions certified. [Copyrighted Material Omitted]
KENNETH J. CAPUTO, ESQ. (Stephen P. Harbeck, Esq., on the brief), Washington, D.C., for plaintiff-appellant Securities Investor Protection Corporation.
JAMES B. KOBAK, JR., Hughes Hubbard & Reed LLP (Daniel H. Weiner, on the brief), New York, NY, for plaintiff-appellant James W. Giddens, as Trustee for the liquidation of the business of A.R. Baron & Co., Inc.
MICHAEL R. YOUNG, Willkie Farr & Gallagher (Jeffrey O. Grossman, Willkie Farr & Gallagher; Scott M. Univer & Barbara A. Taylor, BDO Seidman, LLP, on the brief), New York, NY, for defendant-appellee BDO Seidman, LLP.
Before: MESKILL and SOTOMAYOR, Circuit Judges, and KEENAN,* District Judge.
ORDER
Certificate to the New York Court of Appeals pursuant to Local Rule § 0.27 and New York Compilation of Codes, Rules & Regulations, title 22, § 500.17(b).
OPINION
SOTOMAYOR, Circuit Judge:
Plaintiff-appellants Securities Investor Protection Corporation ("the SIPC") and James W. Giddens ("the Trustee"), as trustee for the liquidation of the business of A.R. Baron & Co., Inc. ("Baron") (collectively, "the plaintiffs"), brought this action against the accounting firm BDO Seidman, LLP ("Seidman"), claiming that Seidman engaged in fraud, negligent misrepresentation, and breach of contract by filing false audit reports on Baron's behalf with the Securities and Exchange Commission ("SEC"). The plaintiffs allege that Seidman's conduct caused financial damage both to Baron's customers, whom the Trustee represents in liquidation and to whose claims the SIPC is subrogated, and to the SIPC in its own right insofar as it has advanced funds to cover the costs of Baron's liquidation. The district court dismissed the plaintiffs' claims, finding that the SIPC lacked standing to sue on its own behalf and that neither the SIPC nor the Trustee could state a claim upon which relief could be granted on behalf of Baron's customers because the customers did not themselves directly rely on Seidman's audit reports. For the reasons that follow, we find that the court erred in concluding the SIPC lacked standing to sue on its own behalf, but we affirm the district court's dismissal of both the SIPC's and the Trustee's claims on behalf of Baron's customers. With respect to the claims the SIPC brings on its own behalf, we certify to the New York Court of Appeals the question of whether the SIPC may recover damages where Seidman was aware that the SIPC would receive from the SEC any negative information about Baron's financial condition contained in the audit reports, but never provided those reports directly to the SIPC or engaged in more than minimal direct contact with it.
BACKGROUND
I. The Securities Investor Protection Act
The SIPC is a private, nonprofit membership corporation formed pursuant to the Securities Investor Protection Act of 1970 ("SIPA"), 84 Stat. 1636, as amended, 15 U.S.C. §§ 78aaa-78lll. Congress passed the SIPA in response to a rash of failures among securities broker-dealers in the late 1960s, resulting in significant losses to customers whose assets either were unrecoverable or became tied up in the broker-dealers' bankruptcy proceedings. See Securities Investor Protection Corp. v. Barbour,
The SIPA regulatory scheme imposes two primary duties on the SIPC: monitoring active broker-dealers and overseeing the liquidation of failed firms. In order to monitor broker-dealers and ensure their continuing financial viability, the SIPC relies primarily on the SIPA reporting system, which requires broker-dealers to file annual audit reports with the SEC and with one of several self-regulating bodies within the broker-dealer industry. See 17 C.F.R. § 240.17a ("Rule 17a"). These reports must include, inter alia, an analysis of the broker-dealer's compliance with the "net capital rule," which prohibits a broker-dealer from maintaining an aggregate debt greater than 1500% of its net capital, seeid. § 240.15c3-1, and other information regarding the broker-dealer's financial condition. Rule 17a requires broker-dealers to employ an independent public accountant to file these reports. Seeid. § 240.17a-5. If the information provided to the SEC and the industry self-regulating body indicates that a broker-dealer is approaching financial difficulty, those entities must notify the SIPC, which, if it deems the broker-dealer to be in danger of failure, may choose to commence liquidation proceedings. See Barbour,
To initiate liquidation, the SIPC may apply for a "protective decree" in federal district court invoking the protections of the SIPA. See 15 U.S.C. § 78eee(a)(3). If the court finds grounds for granting the application, it must appoint a trustee, chosen by the SIPC, to oversee the liquidation of the business. Seeid.§ 78eee(b)(3). The trustee exercises the same powers that a bankruptcy trustee exercises with respect to a debtor, including the power to distribute customer property, satisfy customer claims, and liquidate the broker-dealer's business. Seeid. §§ 78fff(a), 78fff-1(a). To ensure prompt settlement of customer claims during liquidation, the SIPC may advance funds to the trustee from the SIPC Fund for use in satisfying claims up to $500,000 per customer1 and for administrative costs of the liquidation. See id.§ 78fff-3(a)(1). Under the terms of the SIPA, the SIPC becomes subrogated to customer claims to the extent it has advanced funds to cover those claims. Seeid.§§ 78fff-3(a), 78fff-4(c).
II. The events in this case
Pursuant to the SIPA, Seidman served as the independent certified public accountant and auditor for Baron, a registered securities broker-dealer, from 1992 through 1995. During that time, several members of Baron's management - known as the "Bressman Team," after Baron's Chief Executive Officer Andrew Bressman - engaged in several illegal activities, including, according to the plaintiffs' complaint, fraud in the sale of securities, manipulation of initial public offerings and after-market trading, and personal use of corporate credit. Ultimately, thirteen Baron employees pleaded guilty to or were convicted of criminal wrongdoing and Baron itself pleaded guilty to one count of enterprise corruption.
Baron filed for bankruptcy in 1996. On July 11, 1996, the United States District Court for the Southern District of New York (Preska, J.) entered an order finding, inter alia, that Baron's customers were in need of the protections of the SIPA and directing the appointment of the Trustee to oversee Baron's liquidation. See Securities Investor Protection Corp. v. Baron & Co., No. 99 Civ. 5171 (S.D.N.Y. July 11, 1996). Since that time, the Trustee has disbursed over $2.5 million to customers and creditors, and the SIPC has advanced over $5.5 million to cover customer claims and administrative costs of the liquidation.
The Trustee and the SIPC brought this action against Seidman in 1998, alleging that Seidman's deficient performance as Baron's certified public accountant permitted the Bressman Team's misconduct to continue undetected and that, as a result, neither the customers nor the SIPC were aware of Baron's precarious financial condition until shortly before the firm's collapse. Specifically, the plaintiffs claim, inter alia, that Seidman failed to follow proper audit procedures, failed to comply with SEC rules and regulations, and neglected to disclose Baron's inadequate internal fraud controls. They also allege that Seidman misrepresented Baron's financial condition in its audit reports to the SEC and to the National Association of Securities Dealers ("NASD"), the relevant industry self-regulating body for Baron. The Trustee sues on behalf of Baron's customers, both as bailee of the fund of customer property held by Baron prior to liquidation and as subrogee of the customers whose net equity claims it has paid. The SIPC sues both on its own behalf and as subrogee to the claims of the customers whose net equity claims it has satisfied through the SIPC Fund.
On June 4, 1998, Seidman moved to dismiss the plaintiffs' complaint pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), claiming that the plaintiffs lacked standing and that the complaint failed to state a claim upon which relief could be granted. In an opinion dated May 14, 1999, the United States District Court for the Southern District of New York (Preska, J.) granted the defendant's motion to dismiss. The court found that both the Trustee and the SIPC had standing to sue as subrogee of Baron's customers' claims, but that the SIPC had no authority to bring an action on its own behalf. SeeSecurities Investor Protection Corp. v. BDO Seidman, LLP,
DISCUSSION
We review de novo a district court's dismissal pursuant to Rules 12(b)(1) and 12(b)(6), taking all facts alleged in the complaint as true and drawing all reasonable inferences in favor of the plaintiff. See Jaghory v. New York State Dep't of Educ.,
I. Standing
A. The SIPC
The SIPC asserts standing in two capacities: 1) as subrogee to the customer claims it has paid through the SIPC Fund; and 2) in its own right, for losses sustained through satisfying the customer claims and for unreimbursed administrative expenses. The district court found that the SIPC had standing only in the former capacity, as subrogee to Baron's customers' claims. SeeSeidman,
1. Standing as subrogee
The SIPC's standing as the subrogee to the claims of Baron's customers rests on our holding in Redington v. Touche Ross & Co.,
The district court in this case determined that it was bound by our decision in Redington to find that the SIPC had standing to pursue claims on behalf of customers. In so holding, the district court questioned the wisdom of the Redington decision, see Seidman,
2. Standing to sue on its own behalf
In addition to bringing suit as subrogee of Baron's customers, the SIPC argues that the plain language of the SIPA permits the SIPC to sue in its own right for any losses it may have suffered as a result of Seidman's misconduct. We agree.
The SIPA endows the SIPC with "the power to sue and be sued, complain and defend, in its corporate name and through its own counsel, in any State, Federal, or other court." 15 U.S.C. § 78ccc(b)(1). The Act also provides that the SIPC, as a nonprofit corporation, shall "have all the powers conferred upon a nonprofit corporation by[] the District of Columbia Nonprofit Corporation Act." Id. § 78ccc(a)(1)(B). The D.C. Nonprofit Corporation Act grants nonprofit corporations the power "[t]o sue and be sued." D.C. Code Ann. § 29-505(2) (1981). The plain language of these statutes clearly contemplates that the SIPC, like any nonprofit corporation, will have the power to pursue actions on its own behalf.
Caselaw involving similar government-created corporations supports this reading of the SIPA. In Resolution Trust Corporation v. Coopers & Lybrand,
Seidman attempts to defeat this reading of the SIPA by relying on 15 U.S.C. § 78ddd, the provision that delineates the authority and operations of the SIPC Fund. Section 78ddd enumerates several ways the SIPC may generate revenue, including assessments on its members, borrowing, and obtaining loans from the SEC. Seeid. Seidman, invoking the expressio unius est exclusio alterius canon of statutory construction, argues that because this provision does not include the authority to sue independently to recover funds paid out in the course of its duties, Congress did not intend to grant the SIPC the ability to recover damages in a civil action.
We reject this contention. Section 78ddd addresses methods by which the SIPC may obtain revenue in the ordinary course of its business; recovery of damages does not fall within this category, but rather constitutes a process for redressing injuries resulting from another's misconduct. Damages, in short, are not ordinary revenue. That § 78ddd does not include the ability to sue for damages as a method of obtaining funds, therefore, does not suggest that Congress intended to deprive the SIPC of that power. Cf.United States v. Mango,
We also reject the district court's conclusion that the SIPC lacked standing because its claim of injury was "primarily based on a theory of subrogation to customer claims." Seidman,
B. The Trustee
As with the SIPC's claims as a subrogee, the district court found that it was bound by Redington to find that the Trustee has standing to assert claims on behalf of Baron's customers. See supra I.A.1; Seidman,
As with the issue of the SIPC's standing, see supra I.A.1, Seidman argues that Redington wrongly decided the question of an SIPA trustee's ability to sue third parties, and urges us to review that issue here. Like the SIPC question, however, the issue of the Trustee's standing is not crucial to this appeal, because we find that the Trustee's claims on behalf of Baron's customers fail in any event under Rule 12(b)(6). See infraPart II. Accordingly, we assume without deciding that the Trustee has standing to sue Seidman on customers' behalf in this case, and proceed to consider its claims on the merits.
II. The Trustee's claims and the SIPC's claims on behalf of Baron's customers
Because both the Trustee and the SIPC in their capacities as subrogees assert claims on behalf of Baron's customers, the claims can survive dismissal only if the customers would have had a cause of action against Seidman for either fraudulent or negligent misrepresentation. The district court found that the plaintiffs were unable to meet this requirement with respect to their fraud claim because they could not show that Baron's customers had ever relied on Seidman's alleged misrepresentations. It further found that the plaintiffs' negligence claim failed because they had not established any privity-like relationship between the customers and the defendant. We agree with both conclusions and affirm the district court's dismissal of these claims.
A. Fraudulent misrepresentation
Under New York law,3 a plaintiff may state a claim for fraudulent misrepresentation made to a third party if he alleges that he relied to his detriment on the defendant's misrepresentation and that the defendant intended the misrepresentation to be conveyed to him. See Rosen v. Spanierman,
The district court correctly rejected this claim. Crucially, the plaintiffs concede that Baron's customers never received or reviewed any of the financial statements certified by Seidman. See Seidman,
The plaintiffs here argue, however, that they need not establish direct reliance by Baron's customers on Seidman's representations. Rather, they contend that they are entitled to a presumption of reliance because the customers depended on the regulatory process as a whole to ensure that Baron's financial condition was stable. In making this claim, the plaintiffs rely on a theory of "fraud on the regulatory process," an extension of the "fraud on the market" theory applicable in the federal securities context.5 Fraud on the regulatory process rests on the notion that in making investment decisions, an investor "relies, at least indirectly, on the integrity of the regulatory process and the truth of any representations made to the appropriate agencies and the investors." In re Towers Fin. Corp. Noteholder Litig., No. 93 Civ. 0810,
Whatever the merits of the "fraud on the regulatory process" theory - which the Second Circuit has never recognized, see Seidman,
Given that New York has not adopted even the well-recognized fraud on the market theory to allow a presumption of reliance in common-law fraud cases, we see no basis for applying the fraud on the regulatory process theory to achieve that end in this state-law case. Contrary to the plaintiffs' contention, therefore, we will not presume that Baron's customers relied on Seidman's misrepresentations. Rather, the plaintiffs must show that the customers "actually relied" on Seidman's certified statements to the SEC and the NASD regarding Baron's financial health. See Rosen,
B. Negligent misrepresentation
In New York, a plaintiff claiming negligent misrepresentation against an accountant with whom he has no contractual relationship faces a heavy burden. To prevail, the plaintiff must establish three elements: 1) the accountant must have been aware that the reports would be used for a particular purpose; 2) in furtherance of which a known party was intended to rely; and 3) some conduct by the accountant "linking" him or her to that known party. See Credit Alliance Corp. v. Arthur Andersen & Co.,
Like the district court, we find that the plaintiffs have failed to satisfy both the second and third elements of the Credit Alliance test.6 See Seidman,
1. "Known party"
To qualify as "known parties" under New York law, plaintiffs must be members of "a known group possessed of vested rights, marked by a definable limit and made up of certain components." White v. Guarente,
By contrast, absent some evidence that he or she comprises part of such a specific class, a plaintiff generally will be unable to satisfy the "known party" requirement. In Westpac Banking Corp. v. Deschamps,
These cases strongly resemble the one before us. In this case, the plaintiffs do not allege that Seidman prepared its audit reports for Baron's customers; rather, Seidman prepared those statements for filing with the SEC and the NASD, as required under the SIPA. Even if Baron's customers relied indirectly on the material contained in those reports - specifically, information indicating that Baron was financially healthy - in deciding to invest or maintain accounts with Baron, the complaint does not allege that Seidman ever knew those investors' identities, or even of the number of customers Baron had at any one time. At best, therefore, the plaintiffs can establish that Baron's customers constitute an unknown class of investors, each of whom potentially would rely on Seidman's representations. These circumstances are insufficient to render the customers "known parties" under New York law.
The plaintiffs nonetheless urge this Court to find that Baron's customers meet this requirement on the ground that any accountant knows, when contracting for services with a broker-dealer, that customers will rely on its audit reports to ensure the financial viability of the dealers with whom they invest. See Redington,
2. "Linking conduct"
The plaintiffs also fail to allege "linking conduct" between Seidman and Baron's customers sufficient to impose negligence liability on Seidman. To demonstrate linking conduct, a plaintiff generally must show some form of direct contact between the accountant and the plaintiff, such as a face-to-face conversation, the sharing of documents, or other "substantive communication" between the parties. See, e.g., Prudential Ins. Co. v. Dewey, Ballantine, Bushby, Palmer & Wood,
Where direct contact between the accountant and the plaintiff has been nonexistent or even minimal, however, the plaintiff cannot recover for negligence. In Security Pacific, for example, the New York Court of Appeals found linking conduct absent because the accountant had never provided or agreed to provide a copy of the audit report directly to the plaintiff, had not mentioned the plaintiff in its audit engagement letter with its client, and had shown no awareness that the audit would benefit primarily the plaintiff. See Security Pacific,
Given this high standard for establishing linking conduct, we have little difficulty concluding that the plaintiffs have not shown such a link between Seidman and Baron's customers. The complaint in this case alleges no direct contact whatsoever between the customers and the defendant. At best, it alleges contact between Seidman and the SIPC regulators, who themselves operate at least one step removed from Baron's investors. The plaintiffs therefore cannot establish the direct nexus necessary to give the customers - or, by extension, the SIPC and the Trustee suing on their behalf - a cause of action against Seidman for negligent misrepresentation.7
III. The SIPC's claims on its own behalf
Having affirmed the district court's dismissal of all claims on behalf of Baron's customers, we now consider the SIPC's claims for losses sustained in its own right. The success or failure of the SIPC's fraud claim depends on the precise extent of New York's reliance requirement, specifically whether the SIPC can establish reliance on Seidman's audit reports despite never having received or read those reports. Similarly, the SIPC's negligence claim turns on the stringency of the known party and linking conduct requirements under New York law. To assess this claim, we must determine: 1) whether the SIPC qualifies as a "known party" for purposes of negligence liability; and 2) whether the SIPC can show "linking conduct" despite its lack of any substantial direct contact with Seidman. Because New York caselaw indicates some uncertainty as to the contours of these limitations on liability, and because resolution of these issues requires a delicate balancing of state policy concerns, we certify these questions to the New York Court of Appeals. See Joblon v. Solow,
A. Fraudulent misrepresentation
As noted above, see supraII.A, to recover in New York for misrepresentations made to a third party, the plaintiff must establish that he or she relied to his or her detriment on the misrepresentations and that the defendant intended those misrepresentations to be communicated to the plaintiff. See Rosen,
Although it dismissed the SIPC's claims on its own behalf for lack of standing, the district court also observed that the SIPC's fraud claim on its own behalf suffered from the same defect as its fraud claim on behalf of Baron's customers: the SIPC could not prove reliance because it could not show that it had ever read any of Seidman's allegedly false financial statements. See Seidman,
This "no news is good news" theory of reliance finds some support in New York law. Analyzing the reliance element in third-party fraud cases, several decisions have suggested that a plaintiff may demonstrate reliance where the third party does not directly repeat the defendant's misrepresentations to the plaintiff, but rather communicates them in a repackaged or summary form, on which the plaintiff then relied. In Tindle v. Birkett,
These cases suggest that so long as the plaintiff receives the substance of a defendant's misstatements, he or she may establish reliance on that information even if the defendant did not communicate with the plaintiff directly. See Tindle,
To find reliance in this situation, however, would involve expanding New York fraud law in a manner best entrusted to the Court of Appeals. Although New York law is fairly clear that a plaintiff may establish reliance on misrepresentations it receives from a third party in a repackaged form, such as a credit rating or a financial report, New York courts have not extended this rule to cover a third party's failure to convey information at all. As the district court correctly noted, the SIPC's theory of reliance "rests on the absence of any activity by [the SEC and the NASD], . . . rather than on any subsequent communication of Seidman's misrepresentation." Seidman,
Whether fraud liability encompasses reliance on the absence of communication, rather than on communication itself, is thus currently unclear under New York law. Resolving this issue will involve a detailed analysis of the policy concerns underlying New York's fraud rules, including the sometimes difficult balance between deterring fraud in accounting transactions and protecting accountants against "far-flung liability for inchoate or unintended injuries." Union Carbide Corp. v. Montell N.V.,
B. Negligent misrepresentation
We find New York law similarly uncertain with respect to the SIPC's claim for negligent misrepresentation. As described above, see supraII.B., New York courts have been extremely reluctant to permit recovery for negligent performance by an accountant absent some direct relationship between the plaintiff and defendant. Toward this end, the Credit Alliancefactors - that the accountant have prepared its audit for a "particular purpose," that the plaintiff be a "known party," and that he or she show "linking conduct" with the defendant - are designed to limit accountants' liability to only those potential plaintiffs to whom they have assumed some duty of care. SeeCredit Alliance,
Even given these strict limitations, however, this case presents a close question as to whether the SIPC has established the necessary "privity-like" relationship between itself and Seidman. First, we have little trouble finding that the SIPC has satisfied the "particular purpose" requirement. The plaintiffs' complaint alleges, inter alia, that Seidman "intended, knew or should have known that the SEC, the NASD and the SIPC would rely on [the audit reports] in carrying out their respective regulatory, supervisory and protective duties with respect to Baron, in determining whether Baron was in compliance with the applicable financial responsibility rules, and in determining whether Baron was in financial difficulty." Compl. para. 55. The complaint also references a letter accompanying the 1993 audit in which Seidman stated that the audit "was made for the purpose of forming an opinion on [Baron's] financial statements," but that some of its analysis was "supplementary information required by Rule 17a-5 of the Securities and Exchange Commission."8 SeeCompl. para. 22. Moreover, the record contains a second letter, accompanying the 1992 audit, stating that the report was "intended solely for the use of management, the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other regulatory agencies which rely on Rule 17a-5(g)." (emphasis added). These allegations are sufficient to suggest that Seidman prepared its audit reports for the "particular purpose" of satisfying Baron's obligations under the SIPA and its implementing regulations.
Second, whether the SIPC has met its burden of showing that it was a "known party" depends largely on how the Court of Appeals resolves the SIPC's claim for fraudulent misrepresentation. As discussed previously, the "known party" element of a negligence claim requires fulfillment of two distinct factors. A plaintiff must show 1) that he or she is one of a specific, identifiable class of persons; 2) whom the accountant knew would rely on its audit performance. See, e.g.,White,
That the SIPC was a "known party," however, does not end our analysis. To satisfy the second Credit Alliancefactor, the plaintiff must show that Seidman knew the SIPC would rely on its audit performance. As detailed above, seesupra III.A, whether the SIPC in fact "relied" on Seidman's reports remains an open question under New York law. Should the Court of Appeals answer that question in the affirmative, we will be obliged to find that the SIPC has met its burden on this prong of the Credit Alliancetest. If, however, the court finds that the SIPC did not rely on Seidman's alleged misrepresentation, we will be unable to classify the SIPC as a "known party" for purposes of a negligence claim against Seidman. We therefore reserve decision on this issue until completion of the certification process.
Finally, turning to the "linking conduct" prong, we find that whether the SIPC has alleged a sufficient nexus between itself and Seidman to satisfy the third Credit Alliancefactor is also a close question under New York law. As noted above, this requirement ensures that a negligence action will go forward only where the plaintiff has had both direct and substantial contact with the defendant. The SIPC, however, has alleged almost no direct contact with Seidman. The only activity even approaching this threshold is Seidman's filing, as required by federal law, of an annual report with the SIPC regarding the status of Baron's membership in the SIPC. These "supplemental reports" did not address Baron's financial health, but rather analyzed whether the SIPC assessment had been calculated fairly and whether Baron had overpaid on its assessment during the previous year. See17 C.F.R. § 240.17a-5(e)(4). Otherwise, Seidman apparently dealt exclusively with the SEC and the NASD rather than the SIPC itself. Given that courts in New York have declined to find linking conduct based on a single instance of contact between the parties, seeSecurity Pacific,
On the other hand, a second line of caselaw suggests that in certain unique circumstances, where the plaintiff's reliance is the "end and aim" of the defendant's actions, the plaintiff need not establish a direct relationship between the parties to support liability. SeeDorking Genetics v. United States,
These cases carve out an exception to the direct-contact requirement that may support the SIPC's negligence claim here. As in Dorking and Kidd, Seidman's financial reports, while submitted to the SEC, were prepared primarily for the benefit of a third party - specifically, the SIPC. Furthermore, as in those cases, the industry here imposes unique duties on the defendant: federal law requires that a broker-dealers like Baron engage an independent accountant to prepare its audit reports, see17 C.F.R. § 240.17a-5, and evidence accompanying the SIPC's complaint indicates that Seidman tailored its reports to meet those regulations. Cf.Dorking,
Although these cases support the SIPC's negligence claim, we note that neither the New York Court of Appeals nor the majority of departments in the Appellate Division have recognized this "unique circumstances" exception to the linking conduct requirement. Consequently, we are reluctant to rely on this exception in assessing whether the SIPC's claim can survive, and we instead certify this question to the Court of Appeals as well. As with the fraud claim, the New York Court of Appeals is the most appropriate forum to rule on this issue, particularly given the court's clearly expressed desire, as a matter of state policy, to limit accountant liability for negligence to a narrow class of plaintiffs. SeeUltramares,
CONCLUSION
For the foregoing reasons, we vacate the district court's finding that the SIPC lacks standing to sue on its own behalf, but affirm its dismissal of the SIPC's and the Trustee's claims brought as subrogees of Baron's customers. With respect to the SIPC's claims on its own behalf for fraud and negligent misrepresentation, we certify the following questions to the New York Court of Appeals:
1. May a plaintiff recover against an accountant for fraudulent misrepresentations made to a third party where the third party did not communicate those misrepresentations to the plaintiff, but where the defendant knew that the third party was required to communicate any negative information to the plaintiff and the plaintiff relied to his detriment on the absence of any such communication?
2. May a plaintiff recover against an accountant for negligent misrepresentation where the plaintiff had only minimal direct contact with the accountant, but where the transmittal to the plaintiff of any negative information the accountant reported was the "end and aim" of the accountant's performance?
Although we certify to the Court of Appeals the questions as framed above, we also wish to make clear that we have no desire to restrict the Court of Appeals' consideration of any state law issues it might wish to resolve in connection with this appeal. Therefore, though our immediate request is for answers to the questions as framed, we would welcome any guidance the Court of Appeals may care to provide with respect to any state law issues presented by this appeal.
Notes:
Notes
The Honorable John F. Keenan, of the United States District Court for the Southern District of New York, sitting by designation.
With respect to a customer's cash on deposit with a broker-dealer, the SIPC is not obligated to advance more than $100,000 per customer. See 15 U.S.C. § 78fff-3(a)(1).
The district court analyzed the plaintiffs' breach of contract claim under the heading of the fraud and negligence claims, finding that the plaintiffs' various allegations against Seidman "constitute 'a single form of wrongdoing under different names'" and that, in essence, the complaint in this case "[seeks] to recover for [Seidman's] negligent and fraudulent misrepresentations." See Seidman,
The parties do not dispute that New York law applies to the plaintiffs' fraud and negligent misrepresentation claims.
Indeed, Seidman's audit reports expressly stated that certain portions would be kept confidential pursuant to Rule 17a-5(e)(3), which permits a broker-dealer to withhold its "Statement of Financial Condition" from customers, see 17 C.F.R. § 240.17a-5(e)(3).
According to the "fraud on the market" theory, a plaintiff claiming securities fraud under § 10b of the Securities Exchange Act of 1934, 48 Stat. 881, as amended, 15 U.S.C. § 78a et seq., and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.17b-5, is entitled to a rebuttable presumption of reliance based on the notion that "in an open and developed securities market, the price of a company's stock is determined by the available material information." Basic Inc. v. Levinson,
The plaintiffs invoke fraud on the market as well as fraud on the regulatory process to argue for a presumption of reliance in this case. The fraud on the market concept, however, is inapposite here, because the conduct at issue does not involve the pricing or purchase of securities and the plaintiffs thus cannot show that the customers relied on the integrity of the market itself in deciding to invest with Baron. Accordingly, we agree with the district court that the plaintiffs' claims rely primarily on a fraud on the regulatory process argument, see Seidman,
The district court did not address whether the plaintiffs had satisfied the first element of their negligence claim by alleging that Seidman prepared its audits for a "particular purpose." Because we find that the plaintiffs' claim fails to meet the second and third Credit Alliance factors, we need not reach this issue on appeal.
We note that in Redington v. Touche Ross & Co., Index No. 13996/76 (N.Y. Sup. Ct. Aug. 3, 1981), the New York Supreme Court allowed a negligence action against an accountant by a broker-dealer's trustee, suing on behalf of customers, despite a lack of specific allegations of linking conduct. The New York Supreme Court decided Redington in 1981, however, four years before the Court of Appeals decided Credit Alliance. In light of Credit Alliance's requirement that the plaintiff establish some direct nexus with the defendant, and of the narrow reading of that requirement employed in subsequent cases, Redington does not support a finding of liability here.
Rule 17a-5 relates to the audit requirements for securities broker-dealers and includes guidelines for preparing reports on the broker-dealer's membership in the SIPC. See 17 C.F.R. § 240.17a-5(e). As we have noted previously, "[i]t is the reporting system created by [Rule 17] that provides the SEC and other regulatory authorities with the information needed to enforce the [SIPA-created] net capital rule." Redington v. Touche Ross & Co.,
The Court of Appeals also applied this standard in Glanzer v. Shepard,