FDIC Makes A Case Against Auditors For Bank Failures

By Francine McKenna.

On the other hand, the auditors have one of the most powerful affirmative defenses known to third-party advisors – the doctrine of in pari delicto and the theory of imputation. We recently saw this defense used effectively to shoot down two cases against auditors under New York law – Teachers Retirement System of Louisiana v. PwC (a vintage AIG case) and Kirschner v. KPMG et al (a Refco bankruptcy case).

In the Refco case, the Bankruptcy Trustee brought claims against more than one third-party advisor. All were eventually dismissed.

The FDIC, as a receiver in bankruptcy, will stand in the shoes of the failed bank corporation. The in pari delicto doctrine is based on common law agency principles. The acts of fraudster bank executives are imputed to the bank corporation since they acted as agents of the corporation. They were authorized to act on its behalf unless it can be proven that they abandoned the corporation and their fraud was solely for their own interest.  That’s called an adverse interest exception. The doctrine of in pari delicto says that, “in a case of equal or mutual fault the position of the defending party is the stronger one."

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