New York Law Review

Securities Investor Protection Corp. v. BDO Seidman, 95 N.Y.2d 702 (2000): Accountant Liability to Non-Privy Third Parties

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Securities Investor Protection Corp. v. BDO Seidman, 95 N.Y.2d 702 (2000)

An accountant’s liability for negligent misrepresentation to a non-privy third party requires a relationship approaching privity, established by awareness of a specific purpose for the reports, knowledge of intended reliance by a known party, and linking conduct demonstrating understanding of that reliance.

Summary

The Securities Investor Protection Corporation (SIPC) sued BDO Seidman (BDO), an accounting firm, alleging negligent and fraudulent misrepresentation regarding audits of A.R. Baron & Co., a brokerage firm. SIPC claimed BDO’s misrepresentations led to delayed intervention, increasing liquidation costs. The New York Court of Appeals held that SIPC could not recover against BDO for either fraudulent or negligent misrepresentation because SIPC did not directly rely on BDO’s statements, and there was no relationship approaching privity between SIPC and BDO. The regulatory framework, including the NASD’s intermediary role, broke the causal chain.

Facts

A.R. Baron & Co., a brokerage firm, hired BDO to audit its financial statements, as required by SEC rules. BDO issued annual audit reports to the NASD, the designated self-regulatory organization. Baron’s management engaged in fraudulent activities, concealing debt and manipulating stock values. BDO’s audit reports initially showed a healthy debt-to-capital ratio for Baron. SIPC alleges that BDO’s failure to properly audit Baron delayed SIPC’s intervention, leading to increased costs for settling customer claims after Baron’s bankruptcy.

Procedural History

SIPC and the trustee for Baron’s liquidation sued BDO in the United States District Court for the Southern District of New York. The District Court dismissed SIPC’s claims. The Second Circuit Court of Appeals affirmed the dismissal of claims on behalf of Baron’s customers but allowed SIPC to sue on its own behalf. The Second Circuit certified two questions of New York law to the New York Court of Appeals regarding accountant liability to third parties.

Issue(s)

  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 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 misrepresentation 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?

Holding

  1. No, because the plaintiff cannot claim reliance on misrepresentations of which it was unaware, even by implication.
  2. No, because there was no “linking conduct” that put SIPC and BDO in a relationship approaching privity.

Court’s Reasoning

The Court reasoned that for fraudulent misrepresentation, the misrepresentation must form the basis of the plaintiff’s reliance. SIPC relied on the NASD’s silence, not BDO’s representations. The court distinguished this case from Tindle v. Birkett, where the plaintiff received a positive credit report. Here, SIPC was unaware of any of BDO’s alleged misrepresentations. The court emphasized the NASD’s evaluative role, stating that the absence of communication from the NASD to SIPC could mean various things, not just a clean bill of health. The court stated, “The regulatory framework involved in this case thus creates an insurmountable disconnect between EDO’s representations and SIPC’s purported reliance on those representations.”

For negligent misrepresentation, the Court applied the Credit Alliance test, requiring awareness of a specific purpose, knowledge of intended reliance by a known party, and linking conduct demonstrating understanding of that reliance. Here, there was no “linking conduct” creating a relationship approaching privity between SIPC and BDO. BDO’s audits were not prepared for SIPC’s specific benefit and were not sent to or read by SIPC. The Court reaffirmed the necessity of demonstrating a relationship approaching privity, clarifying that “end and aim” is not the sole determinant. The absence of direct contact and a clear link between BDO’s actions and SIPC’s reliance precluded a finding of negligent misrepresentation.

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