Opinion ID: 769835
Heading Depth: 2
Heading Rank: 2

Heading: The events in this case

Text: 5 Pursuant to the SIPA, Seidman served as the independent certified public accountant and auditor for Baron, a registered securities broker-dealer, from 1992 through 1995. During that time, several members of Baron's management - known as the Bressman Team, after Baron's Chief Executive Officer Andrew Bressman - engaged in several illegal activities, including, according to the plaintiffs' complaint, fraud in the sale of securities, manipulation of initial public offerings and after-market trading, and personal use of corporate credit. Ultimately, thirteen Baron employees pleaded guilty to or were convicted of criminal wrongdoing and Baron itself pleaded guilty to one count of enterprise corruption. 6 Baron filed for bankruptcy in 1996. On July 11, 1996, the United States District Court for the Southern District of New York (Preska, J.) entered an order finding, inter alia, that Baron's customers were in need of the protections of the SIPA and directing the appointment of the Trustee to oversee Baron's liquidation. See Securities Investor Protection Corp. v. Baron & Co., No. 99 Civ. 5171 (S.D.N.Y. July 11, 1996). Since that time, the Trustee has disbursed over $2.5 million to customers and creditors, and the SIPC has advanced over $5.5 million to cover customer claims and administrative costs of the liquidation. 7 The Trustee and the SIPC brought this action against Seidman in 1998, alleging that Seidman's deficient performance as Baron's certified public accountant permitted the Bressman Team's misconduct to continue undetected and that, as a result, neither the customers nor the SIPC were aware of Baron's precarious financial condition until shortly before the firm's collapse. Specifically, the plaintiffs claim, inter alia, that Seidman failed to follow proper audit procedures, failed to comply with SEC rules and regulations, and neglected to disclose Baron's inadequate internal fraud controls. They also allege that Seidman misrepresented Baron's financial condition in its audit reports to the SEC and to the National Association of Securities Dealers (NASD), the relevant industry self-regulating body for Baron. The Trustee sues on behalf of Baron's customers, both as bailee of the fund of customer property held by Baron prior to liquidation and as subrogee of the customers whose net equity claims it has paid. The SIPC sues both on its own behalf and as subrogee to the claims of the customers whose net equity claims it has satisfied through the SIPC Fund. 8 On June 4, 1998, Seidman moved to dismiss the plaintiffs' complaint pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), claiming that the plaintiffs lacked standing and that the complaint failed to state a claim upon which relief could be granted. In an opinion dated May 14, 1999, the United States District Court for the Southern District of New York (Preska, J.) granted the defendant's motion to dismiss. The court found that both the Trustee and the SIPC had standing to sue as subrogee of Baron's customers' claims, but that the SIPC had no authority to bring an action on its own behalf. SeeSecurities Investor Protection Corp. v. BDO Seidman, LLP, 49 F. Supp. 2d 644, 653-54 (S.D.N.Y. 1999). On Seidman's Rule 12(b)(6) claim, the court found that the plaintiffs could not state a cause of action for either fraudulent misrepresentation or negligent misrepresentation because they had not alleged that Baron's customers ever received or read Seidman's financial reports. See id.at 656-57. The court thus held that, under New York law, the plaintiffs could not establish either the reliance on the misrepresentations necessary to prevail on a fraud claim, see id.at 656, or the privity-like relationship between Seidman and the customers required for a negligent misrepresentation claim, see id.at 657. 2