Sec. Investor Corp. v. BDO Seidman, Docket Nos. 99-7719

Citation245 F.3d 174
Decision Date09 February 2000
Docket NumberDocket Nos. 99-7719
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Parties(2nd Cir. 2001) SECURITIES INVESTOR PROTECTION CORPORATION and JAMES W. GIDDENS, as trustee for the liquidation of the business of A.R. Baron & Co., Inc., Plaintiffs-Appellants, - v. - BDO SEIDMAN, LLP, Defendant-Appellee. (L), 99-7720(C) Argued:

KENNETH J. CAPUTO (Stephen P. Harbeck, on the brief), Washington, D.C., for Plaintiff Appellant Securities Investor Protection Corporation.

JAMES B. KOBAK, JR., Hughes Hubbard & Reed LLP (Daniel H. Weiner, on the brief), New York, NY, for Plaintiff Appellant James W. Giddens, as Trustee for the liquidation of the business of A.R. Baron & Co., Inc.

MICHAEL R. YOUNG, Willkie Farr & Gallagher (Jeffrey O. Grossman, Willkie Farr & Gallagher; Scott M. Univer & Barbara A. Taylor, BDO Seidman, LLP, on the brief), New York, NY, for Defendant Appellee.

Before: MESKILL and SOTOMAYOR, Circuit Judges, and KEENAN, District Judge*

Based upon the resolution of two questions certified to the New York Court of Appeals to determine whether claims brought by plaintiff-appellant Securities Investor Protection Corporation on its own behalf for fraud and negligent misrepresentation state a claim upon which relief may be granted under New York law, we affirm the judgment of the district court.

PER CURIAM:

This is the second occasion on which we address this appeal of a judgment of the United States District Court for the Southern District of New York (Loretta A. Preska, Judge) dismissing plaintiffs-appellant's claims for breach of contract, fraudulent misrepresentation, and negligent misrepresentation against defendant-appellee BDO Seidman, LLP ("Seidman"), the independent certified public accountant for securities broker-dealer A.R. Baron & Co. ("Baron"). Plaintiffs-appellants Securities Investor Protection Corporation ("SIPC") and James W. Giddens, as trustee for the liquidation of Baron (the "Trustee") alleged that Seidman's filing of false audit reports on behalf of Seidman caused financial damage both to Baron's customers and to SIPC itself. SIPC sued both for its own damages and, as subrogee of the claims of Baron's customers claims against Seidman, for their damages as well. The Trustee sued for Baron's customers' damages as their representative in liquidation proceedings. The district court (i) dismissed SIPC's claims on its own behalf for lack of standing, and (ii) dismissed SIPC's and the Trustee's claims on behalf of Baron's customers for failure to state a claim upon which relief could be granted. Securities Investor Protection Corp. v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653, 655-57 (S.D.N.Y. 1999).

In our prior opinion, we affirmed the district court's dismissal of the claims brought by both plaintiffs on behalf of Baron's customers. Securities Investor Protection Corp. v. BDO Seidman, LLP, 222 F.3d 63, 71-76 (2d Cir. 2000). We disagreed, however, with the district court's holding that SIPC lacked standing to sue on its own behalf. Id. at 69-71. We were thus presented with the question of whether SIPC's claims on it own behalf are claims for which relief could be granted under New York law. Finding that these claims raised issues that had not been clearly resolved by New York caselaw, and that resolution of these issues required a delicate balancing of state policy concerns, id. at 76-82, we certified the following two questions to the Court of Appeals:

1. May a plaintiff recover against an accountant for fraudulent misrepresentations made to a third party where the third party did not communicate those misrepresentations to the plaintiff, but where the defendant knew that the third party was required to communicate any negative information to the plaintiff and the plaintiff relied to his detriment on the absence of any such communication?

2. May a plaintiff recover against an accountant for negligent misrepresentations where the plaintiff had only minimal direct contact with the accountant, but where the transmittal to the plaintiff of any negative information the accountant reported was the "end and aim" of the accountant's performance?

Id. at 81.

The Court of Appeals has answered both questions in the negative. Securities Investor Protection Corp. v. BDO Seidman, LLP, 2001 N.Y. Slip. Op. 01470, 2001 WL 139117 (N.Y. Feb. 20, 2001) (attached here as an appendix). Accordingly, we affirm the district court's dismissal of SIPC's claims on its own behalf, albeit on a slightly different ground. See Shumway v. United Parcel Serv., Inc., 118 F.3d 60, 63 (2d Cir. 1997).

Because no other issues remain to be resolved, the judgment of the district court is hereby AFFIRMED.

APPENDIX

COURT OF APPEALS STATE OF NEW YORK

The Hon. Judith S. Kaye, Chief Judge, Presiding

USCOA, 2 No. 120

SECURITIES INVESTOR PROTECTION CORPORATION, AND JAMES W. GIDDENS, AS TRUSTEE FOR THE LIQUIDATION OF THE BUSINESS OF A.R. BARON & CO., INC., APPELLANTS,

v.

BDO SEIDMAN, LLP, RESPONDENT.

*****

SECURITIES INVESTOR PROTECTION CORPORATION APPEARED BY STEPHEN P. HARBECK, ESQ., GENERAL COUNSEL; JAMES W. GIDDENS APPEARED BY HUGHES HUBBARD &AMP REED, LLP; BDO SEIDMAN, LLP APPEARED BY WILLKIE FARR &AMP GALLAGHER, ESQS.

THE COURT, AFTER DUE DELIBERATION, ORDER AND ADJUDGES THAT CERTIFICATION OF QUESTIONS BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT, PURSUANT TO SECTION 500.17 OF THIS COURT'S RULES OF PRACTICE, ACCEPTED AND THE ISSUES PRESENTED ARE TO BE CONSIDERED AFTER BRIEFING AND ARGUMENT. CHIEF JUDGE KAYE AND JUDGES BELLACOSA, SMITH, LEVINE, CIPARICK, WESLEY AND ROSENBLATT CONCUR.

STUART M. COHEN

COURT OF APPEALS, CLERK'S OFFICE, ALBANY, JUNE 29, 2000

COURT OF APPEALS STATE OF NEW YORK

THE HON. JUDITH S. KAYE, CHIEF JUDGE, PRESIDING

USCOA, 2 NO. 11

SECURITIES INVESTOR PROTECTION CORPORATION AND JAMES W. GIDDENS, AS TRUSTEE FOR THE LIQUIDATION OF THE BUSINESS OF A.R. BARON & CO., INC.,

APPELLANTS,

v.

BDO SEIDMAN, LLP,

RESPONDENT.

SECURITIES INVESTOR PROTECTION CORPORATION APPEARED BY STEPHEN P. HARBECK, ESQ., GENERAL COUNSEL AND KALKINES ARKY ZALL &AMP BERNSTEIN, LLP; JAMES W. GIDDENS, AS TRUSTEE FOR THE LIQUIDATION OF THE BUSINESS OF A.R. BARON &AMP CO., INC. APPEARED BY HUGHES HUBBARD &AMP REED, LLP; BDO SEIDMAN, LLP APPEARED PRO SE AND BY WILLKIE FARR &AMP GALLAGHER, ESQS.; AND AMICI CURIAE APPEARED BY VEDDER PRICE KAUFMAN &AMP KAMMHOLZ; ALLEGAERT BERGER &AMP VOGEL, LLP AND RICHARD I. MILLER, ESQ.

THE COURT, AFTER DUE DELIBERATION, ORDERS AND ADJUDGES THAT FOLLOWING CERTIFICATION OF QUESTIONS BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT AND ACCEPTANCE OF THE QUESTIONS BY THIS COURT PURSUANT TO SECTION 500.17 OF THE RULES OF PRACTICE OF THE NEW YORK STATE COURT OF APPEALS, AND AFTER HEARING ARGUMENT BY COUNSEL FOR THE PARTIES AND CONSIDERATION OF THE BRIEFS AND THE RECORD SUBMITTED, CERTIFIED QUESTIONS, IN THE CONTEXT OF THE FACTS AND CIRCUMSTANCES PRESENTED, ANSWERED IN THE NEGATIVE. OPINION BY JUDGE CIPARICK. CHIEF JUDGE KAYE AND JUDGES SMITH, LEVINE, WESLEY, ROSENBLATT AND GRAFFEO CONCUR.

THE COURT FURTHER ORDERS THAT THE RECORD OF THE PROCEEDINGS FILED HEREIN BE RETURNED TO THE UNITED STATES COURT OF APPEALS, SECOND CIRCUIT.

STUART M. COHEN

COURT OF APPEALS, CLERK'S OFFICE, ALBANY, FEBRUARY 20, 2001

COURT OF APPEALS STATE OF NEW YORK

USCOA, 2 NO. 11

SECURITIES INVESTOR PROTECTION CORPORATION AND JAMES W. GIDDENS, AS TRUSTEE FOR

THE LIQUIDATION OF THE BUSINESS OF A.R. BARON & CO., INC.

APPELANTS,

v.

BDO SEIDMAN, LLP,

RESPONDENT.

KENNETH J. CAPUTO, FOR APPELLANT SECURITIES INVESTOR.

MICHAEL R. YOUNG, FOR RESPONDENT.

NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS; AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, AMICI CURIAE.

CIPARICK, J.:

ONCE AGAIN WE ARE CALLED UPON TO CONSIDER THE SCOPE OF AN ACCOUNTANT'S LIABILITY TO A NON PRIVY THIRD PARTY FOR MISREPRESENTATIONS. THIS TIME THE ISSUES ARE PRESENTED, THROUGH CERTIFIED QUESTIONS, IN THE CONTEXT OF THE HEAVILY REGULATED RELATIONSHIPS AMONG ACTORS IN THE FINANCIAL MARKETS.

PLAINTIFF SECURITIES INVESTOR PROTECTION CORPORATION (SIPC) CLAIMS THAT DEFENDANT BDO SEIDMAN (BDO), AN ACCOUNTING FIRM, FRAUDULENTLY OR NEGLIGENTLY MISINFORMED FEDERAL SECURITIES REGULATORS ABOUT THE PRECARIOUS FINANCIAL CONDITION OF BDO'S CLIENT A.R. BARON &AMP CO, A NEW YORK BASED STOCK BROKERAGE FIRM. DURING ITS FOUR YEARS OF OPERATION (1992 1996), BARON FILED ANNUAL FINANCIAL STATEMENTS WITH THE NATIONAL ASSOCIATION OF SECURITIES DEALERS (NASD) AS REQUIRED BY THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION (17 CFR §240.17A 5[D]). SEC RULES ALSO REQUIRED THAT BARON'S FINANCIAL STATEMENTS BE AUDITED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT (ID.). BARON HIRED BDO FOR THAT PURPOSE.

IN 1996, BARON FILED FOR BANKRUPTCY. A SUBSEQUENT INVESTIGATION REVEALED THAT BARON'S MANAGEMENT TEAM, LED BY ITS CHIEF EXECUTIVE OFFICER, ANDREW BRESSMAN, HAD ENGAGED IN CONDUCT THAT VIOLATED SECURITIES LAWS AND BROUGHT BARON TO THE BRINK OF FINANCIAL COLLAPSE. AS SIPC ALLEGES IN ITS COMPLAINT, BARON'S MANAGEMENT TEAM FRAUDULENTLY SOLD SECURITIES TO CUSTOMERS, MANIPULATED INITIAL PUBLIC OFFERINGS AND MANIPULATED TRADING IN THE AFTER MARKET IN ORDER TO CREATE ARTIFICIALLY INFLATED STOCK VALUES. SIPC FURTHER ALLEGES THAT THESE AND OTHER CRIMINAL ACTS WERE DONE FOR THE PERSONAL GAIN OF MEMBERS OF BARON'S MANAGEMENT TEAM, THEIR FRIENDS AND OTHER INSIDERS. A NEW YORK GRAND JURY INDICTED THIRTEEN OF BARON'S EMPLOYEES AND ALL WERE CONVICTED OF CRIMES FOR ACTIVITIES WHILE AT THE BROKERAGE FIRM. BARON ITSELF PLEADED GUILTY TO ONE COUNT OF ENTERPRISE CORRUPTION.

SIPC ALLEGES THAT WHILE BARON'S MANAGERS WERE MISAPPROPRIATING COMPANY ASSETS, THEY WERE SIMULTANEOUSLY CONCEALING THE COMPANY'S GROWING DEBT BY HIDING ITS INVENTORY OF "HOUSE STOCKS" IN CUSTOMERS' ACCOUNTS OR AT OTHER BROKERAGE HOUSES. IT IS UNDISPUTED THAT BDO'S AUDIT REPORTS NEVER NOTED SUCH PRACTICES. AS REQUIRED BY SEC RULE...

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