New York's High Court Rejects Attempts To Expand Liability Of Outside Professional Service Providers For Failing To Detect Corporate Fraud

In Kirschner v. KPMG LLP, 2010 NY Slip Op. 07415, 2010 WL 4116609 (N.Y. Oct. 21, 2010), a majority of the New York Court of Appeals declined to expand liability of outside professional service providers who allegedly failed to detect or stop corporate wrongdoing. Through the interplay of two legal principles soundly “embedded in New York law” — namely, the “in pari delicto” defense and the “adverse interest” exception to the general rule that corporate executives’ wrongdoing is imputed to the corporation — the Court rejected attempts by investors to recoup some of their investment losses from the issuers’ outside auditors. If the dissent is to be believed, this decision “effectively immunizes auditors and other outside professionals from liability wherever any corporate insider engages in fraud.”

The Court of Appeals was asked to rule on questions of New York law certified and submitted by the United States Court of Appeals for the Second Circuit and the Delaware Court of Chancery in the cases of Kirschner v. KPMG LLP and Teachers’ Retirement System of Louisiana v. PricewaterhouseCoopers LLP. Plaintiffs in each case sought to hold outside auditors liable for assisting or failing to detect and stop, either knowingly or merely negligently, fraudulent acts committed by executives at the corporations whose financial statements they were auditing.

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