Opinion ID: 895250
Heading Depth: 3
Heading Rank: 2

Heading: Fraudscope of liability

Text: Although similar in their essential elements, fraud is more difficult to prove than negligent misrepresentation due to the added element of intent to deceive. Richter, S.A. v. Bank of America Nat'l Trust & Sav. Ass'n, 939 F.2d 1176, 1185 (5th Cir.1991) (applying Texas law); see also Perenco Nig. Ltd. v. Ashland Inc., 242 F.3d 299, 306 (5th Cir.2001) (applying Texas law). In Ernst & Young v. Pacific Mutual , we confirmed the intent standard for fraud under section 531 of the Restatement (Second) of Torts, [14] as a party's reason to expect that its representations will affect other parties' conduct. Ernst & Young, L.L.P. v. Pacific Mutual Life Ins. Co., 51 S.W.3d 573, 575 (Tex.2001). In that case, Pacific Mutual bought notes issued by InterFirst. Id. Pacific Mutual later sued Ernst & Young, an accounting firm, for releasing audit reports that allegedly misrepresented the financial strength of a company that merged with InterFirst. Id. Seeking to prove that Ernst & Young knew that third-party investors would rely on the audit reports, Pacific Mutual produced affidavits stating that it is a commonly known and accepted practice in the financial industry for investors ... to rely on representations like those made by Ernst & Young. Id. at 576. The court of appeals held that these affidavits alone presented a fact issue as to whether the auditor had reason to expect that institutional investors would rely on its representations. Id. at 577. We rejected that view, holding that the reason-to-expect standard requires more than mere foreseeability; the claimant's reliance must be `especially likely' and justifiable, and the transaction sued upon must be the type the defendant contemplated. Id. at 580. We observed that the evidence referred to what is commonly `known' or `expected' in the investment community, but we noted that even an obvious risk that a third person will rely on a representation is not enough to impose liability. General industry practice or knowledge may establish a basis for foreseeability to show negligence, but it is not probative of fraudulent intent. Id. at 581 (citation omitted). We held that the trial court properly granted summary judgment to the accounting firm, which had no relationship with the investors and no special reason to expect the investors' reliance on the audit report. Id. at 583. In this case, the court of appeals held that there was a fact issue regarding whether Grant Thornton had reason to expect that it was especially likely that [the Funds] would receive and rely upon Epic's audited financial statements. 203 S.W.3d at 612. The court based its determination on the Indenture's reference to Epic securityholders. Id. (noting that the Indenture provides Epic `shall file with the Commission and shall furnish to the Trustee and each Securityholder ... copies of the quarterly and annual reports and of the information, documents, and other reports...'). Even if this provision suggested that Grant Thornton may have been aware of existing bondholders as a limited class, a question we need not reach, it does not meet the requisite standard as to prospective purchasers, like Cayman, who claim to have relied on the 1999 audit report. Cayman's claim is like the one we rejected in Pacific Mutual, and it fails for the same reasons.