KAMMHOLZ; ALLEGAERT BERGER & 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 FORTHE 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 & 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