AMERICA, 94 N.Y.2d 330, 348; NEW YORK UNIV. V CONTINENTAL INS. CO., 87 N.Y.2d 308, 318). THE OMISSION ON WHICH SIPC CLAIMS RELIANCE, HOWEVER, DID NOT COME FROM BDO, IT CAME FROM THE NASD. AS A RESULT, THE ROLE OF THE NASD CANNOT BE IGNORED. THE INESCAPABLE CONCLUSION FROM THE COMPLAINT'S REFERENCE TO THE REPORTING RULES AND THE REGULATORY "EARLY WARNING SYSTEM" IS THAT THE NASD HAD A SIGNIFICANT ROLE IN CHOOSING WHAT INFORMATION IT WANTED TO RECEIVE AND, IN ADDITION, WHAT IT DEEMED WORTHY OF COMMUNICATING. IN SUCH A SITUATION SIPC'S RELIANCE ON SILENCE FROM THE NASD CANNOT BE EQUATED WITH ITS RELIANCE ON ANY AFFIRMATIVE MISREPRESENTATION OR CONCEALMENT OF MATERIAL FACT BY BDO.
THIS IS SO BECAUSE THE REPORTING SYSTEM ON WHICH SIPC RELIED PUT TOO MUCH DISCRETION IN THE HANDS OF THE NASD FOR SIPC TO BE ABLE TO CLAIM ANY SIGNIFICANT DIRECT RELIANCE ON BDO. SEC FILING REQUIREMENTS, INCLUDING THOSE REGARDING INDEPENDENTLY AUDITED STATEMENTS, COLLECTIVELY ENABLE THE RELEVANT REGULATORY AUTHORITIES TO PERFORM THEIR OVERSIGHT FUNCTIONS (SEE GENERALLY, TOUCHE ROSS & CO. V REDDINGTON, 422 US 560, 569). THE "REPORTS AND RECORDS PROVIDE THE REGULATORY AUTHORITIES WITH THE NECESSARY INFORMATION TO OVERSEE COMPLIANCE WITH AND ENFORCE THE VARIOUS STATUTES AND REGULATIONS WITH WHICH THEY ARE CONCERNED" (ID.). THE SEC AND THE NASD THEN USE SUCH INFORMATION AND THEIR REGULATORY EXPERTISE TO EVALUATE A BROKERAGE FIRM'S FINANCIAL STATUS, LOOKING AT THE FIRM'S COMPLIANCE WITH THE NET CAPITAL RULE
AND OTHER INDICATORS OF FINANCIAL HEALTH (SEE, ID.; 17 CFR §240.17A 5). THE INSTANT CASE ILLUSTRATES THE EVALUATIVE REGULATORY ROLE PLAYED BY THE SEC AND THE NASD WITH RELATION TO COMMUNICATIONS TO SIPC. HERE, THE CONSIDERABLE NEGATIVE INFORMATION OF BARON'S FINANCIAL DISTRESS IN THE BDO AUDIT REPORTS WAS NOT COMMUNICATED TO SIPC. THE REGULATORS' EVALUATIVE ROLE MAKES SIPC'S CLAIM OF RELIANCE ON SILENCE FROM THE NASD AS AN INDICATOR OF "GOOD NEWS" UNTENABLE.
SIPC'S COMPLAINT ASSUMES THAT SILENCE FROM THE REGULATORS CAN MEAN ONLY ONE THING. IN THIS CASE, HOWEVER, THE ABSENCE OF COMMUNICATION FROM THE NASD TO SIPC COULD HAVE MEANT ANY NUMBER OF THINGS, AMONG THEM THAT THE REGULATORS WERE NOT CAREFULLY READING DEFENDANT'S AUDITS. THE VAGARIES INHERENT IN SIPC'S THEORY OF LIABILITY CONVINCE US THAT NO INFORMATION AT ALL IS SIMPLY TOO LITTLE INFORMATION ON WHICH TO BASE A CLAIM FOR FRAUDULENT MISREPRESENTATION HERE. WHERE BDO'S REPORTS WERE FILTERED THROUGH THE NASD'S OWN PROCESS OF EVALUATION, SIPC CANNOT CLAIM JUSTIFIABLE RELIANCE ON THE FILTERED STATEMENTS, OR THE ABSENCE THEREOF, AS REPRESENTING EITHER THE SUM OR SUBSTANCE OF BDO'S REPRESENTATIONS. THE REGULATORY FRAMEWORK INVOLVED IN THIS CASE THUS CREATES AN INSURMOUNTABLE DISCONNECT BETWEEN BDO'S REPRESENTATIONS AND SIPC'S PURPORTED RELIANCE ON THOSE REPRESENTATIONS.
NEGLIGENT MISREPRESENTATION
THE ELEMENTS OF A CAUSE OF ACTION FOR NEGLIGENT MISREPRESENTATION ARE LIKEWISE NOT PRESENT HERE. BDO DID NOT ENGAGE IN CONDUCT LINKING IT TO SIPC IN SUCH A WAY AS TO CREATE A RELATIONSHIP BETWEEN THE TWO THAT SUFFICIENTLY APPROACHED PRIVITY (CREDIT ALLIANCE CORP. V ARTHUR ANDERSON & CO., 65 N.Y.2d 536).
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