The Hurdles to Suing Outside Advisers for Fraud

Recommended read via White Collar Watch (Peter Henning).

In two decisions this year stemming from Refco’s collapse, the United States Court of Appeals for the Second Circuit and most recently the New York State Court of Appeals reaffirmed this limitation, dismissing lawsuits that challenged the protection that outside lawyers and accountants have from claims for damages, regardless of whether they were negligent or even participated in a fraud. The Supreme Court and Congress are unlikely to chip away at this protection any time soon.

One doctrine in question is the longstanding rule of in pari delicto, or mutual fault, which holds a company responsible for the wrongdoing of corporate officers and prevents it from suing others for its own misconduct. In an opinion issued last week in Kirschner v. KPMG, the New York Court of Appeals used this rule to shut out claims against outside advisers by the corporate shell created out of Refco’s bankruptcy.

Another limitation applied to securities fraud cases is that only those who are “primary violators” can be held responsible for the fraud, but not those who only aid the misconduct. Ever since the Supreme Court decided in 1994, in Central Bank of Denver v. First Interstate Bank, that investors could not sue lawyers, accountants, investment bankers and other professionals for aiding and abetting securities fraud unless they were primary violators, it has been difficult for private plaintiffs to find ways to reach those who assist in a fraud but were not directly responsible for it.

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