N.Y. court prevents third-party shareholder suits

By John O'Brien | Oct 26, 2010


ALBANY, N.Y. (Legal Newsline) - New York's highest court says it will not broaden the remedies available to shareholders who wish to sue third parties like auditors over the fradulent conduct of companies.

The state Court of Appeals reached that decision in answering certified questions from two lawsuits, one alleging a fraudulent scheme by American International Group and another brought over the collapse of Refco.

Other third parties the plaintiffs sought to make liable include investment bankers, financial advisors and lawyers.

"Critically, the presumption of imputation reflects the recognition that principals, rather than third parties, are best-suited to police their chosen agents and to make sure they do not take actions that ultimately do more harm than good," Judge Susan Phillips Read wrote in an opinion released Thursday.

The court was divided 4-3 on the issue, with judges Victoria Graffeo, Robert Smith and Theodore Jones joining Read. The Refco suit says accountants should have detected corporate malfeasance.

The AIG suit was brought against PricewaterhouseCoopers, which allegedly should have done the same when auditing AIG.

"We are also not convinced that altering our precedent to expand remedies for these or similarly situated plaintiffs would produce a meaningful additional deterrent to professional misconduct or malpractice," Read wrote.

PwC reached a settlement with AIG shareholders worth $97.5 million last year.

"In short, outside professionals -- underwriters, law firms and especially accounting firms -- already are at risk for large settlements and judgments in the litigation that inevitably follows the collapse of an Enron, or a Worldcom or a Refco or an AIG-type scandal," Read wrote.

Judge Carmen Beauchamp Ciparick filed a dissent that says the majority decision prevents litigation against a third party that actively colludes "with corrupt corporate insiders."

"The majority... is willing to allow dismissal of the complaints at this early stage of litigation based on agency principles and public policy, effectively creating a per se rule that fraudulent insider conduct bars any actions against outside professionals by derivative plaintiffs or litigation trustees for complicitous assistance to the corrupt insider or negligent failure to detect the wrongdoing," she wrote.

Judges Jonathan Lippman and Eugene Pigott joined Ciparick. The questions were certified to the court by the U.S. Court of Appeals for the Second Circuit and the Delaware Supreme Court.

From Legal Newsline: Reach John O'Brien by e-mail at jobrienwv@gmail.com.

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