Commercial Litigation and Arbitration

Securities Fraud — Auditor’s Failure to Correct Erroneous Audit

The Second Circuit ruled in Overton v. Todman & Co., 2007 U.S. App. LEXIS 4239 (2d Cir. Feb. 26, 2007), that an auditor may be primarily liable for securities fraud for failing to correct a certified financial statement that it later determines to have been false. This from a Court that has frequently exonerated auditors from primary liability unless they have affirmatively uttered a false statement. The Overton Court held:

“[W]e hold that an accountant violates the ‘duty to correct’ and becomes primarily liable under § 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied. [n.1 The additional components are those typical of all Rule 10b-5 claims, such as materiality, transaction causation, loss causation, and damages.]“

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