ITS OWN BEHALF. THE COURT CERTIFIED TO US TWO QUESTIONS OF NEW YORK LAW IN ORDER TO DETERMINE WHETHER SIPC'S ALLEGATIONS STATED CAUSES OF ACTION FOR NEGLIGENT AND FRAUDULENT MISREPRESENTATION:
"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 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?"
THE GRAVAMEN OF SIPC'S STATE LAW CLAIMS IS THAT, HAD BDO ACCURATELY INFORMED THE REGULATORY AUTHORITIES IN ITS AUDIT REPORTS ABOUT BARON'S PRECARIOUS FINANCIAL CONDITION, SIPC COULD HAVE INTERVENED EARLIER, THEREBY AVOIDING EXPENDITURES ASSOCIATED WITH THE LIQUIDATION. SIPC CONCEDES THAT AT NO RELEVANT TIME PRIOR TO THE LIQUIDATION DID IT ACTUALLY RECEIVE BDO'S AUDIT REPORTS. RATHER, SIPC CLAIMS IT RELIED ON A REPORTING SYSTEM CREATED BY FEDERAL SECURITIES LAW FOR DELIVERY OF NEGATIVE INFORMATION ABOUT BARON'S FINANCIAL CONDITION. THE QUESTION THUS BECOMES WHETHER, UNDER THE UNDISPUTED FACTS AND CIRCUMSTANCES PRESENTED, SIPC CAN STATE A CAUSE OF ACTION FOR EITHER FRAUDULENT OR NEGLIGENT MISREPRESENTATION. THAT QUESTION WE ANSWER IN THE NEGATIVE.
FRAUDULENT MISREPRESENTATION
WHILE CONCEDING THAT NONE OF BDO'S STATEMENTS CONCERNING BARON'S FINANCIAL HEALTH EVER REACHED IT, SIPC CLAIMS THAT, UNDER THE REGULATORY SCHEME, IT UNDERSTOOD SILENCE TO MEAN THAT BDO HAD GIVEN BARON A CLEAN BILL OF HEALTH. WE CONCLUDE, HOWEVER, THAT "NO NEWS IS GOOD NEWS" IS AN INSUFFICIENT BASIS FOR SIPC'S FRAUD CLAIM HERE.
THE PRINCIPLE WE REAFFIRM TODAY IS WELL ROOTED IN NEW YORK LAW. PLAINTIFF CANNOT SUSTAIN A CAUSE OF ACTION FOR FRAUD IF DEFENDANT'S MISREPRESENTATION DID NOT FORM THE BASIS OF RELIANCE (BRACKETT V GRISWOLD, 112 NY 454; WARREN V FOREST LAWN CEMETERY AND MAUSOLEUM, 222 A.D.2d 1059). AS CONCEDED IN THE COMPLAINT, SIPC RELIED TO ITS DETRIMENT ON THE IMPLICATION OF THE NASD'S SILENCE, NOT ON REPRESENTATIONS FROM BDO.
BEYOND THE GENERAL AND UNREMARKABLE PRINCIPLE THAT LIABILITY FOR FRAUD CAN BE IMPOSED THROUGH COMMUNICATION BY A THIRD PARTY, THE DIFFERENCES BETWEEN TINDLE V BIRKETT (171 NY 520) AND THE INSTANT CASE ARE CLEAR. IN TINDLE, PLAINTIFF RECEIVED DEFENDANT'S MISREPRESENTATIONS IN THE FORM OF A POSITIVE CREDIT REPORT UPON WHICH IT RELIED. IN THIS CASE, ALTHOUGH THE COMPLAINT ALLEGES BDO MADE A VARIETY OF MISREPRESENTATIONS, IT ALSO ALLEGES THAT SIPC DID NOT SPECIFICALLY KNOW OF ANY OF THEM. SIPC CANNOT CLAIM RELIANCE ON ALLEGED MISREPRESENTATIONS OF WHICH IT WAS UNAWARE EVEN BY IMPLICATION.
THIS IS NOT TO SAY THAT A MISREPRESENTATION CANNOT BE COMMUNICATED THROUGH SILENCE. THERE ARE SITUATIONS WHERE A MATERIAL OMISSION CAN INDUCE DETRIMENTAL RELIANCE AS EFFECTIVELY AS A FALSE STATEMENT (SEE, GAIDON V GUARDIAN LIFE INS. CO. OF