The accounting firm in this case is not liable under the law. It is quite clear that section 10(b) does not apply to those firms solely engaged in providing an independent audit of a firm’s financial statements. In order for Touche Ross to be liable the firm would have to receive a financial stake in one of the business entities involved in the scam and knowingly, willingly distort the numbers so as to encourage investment. Such an interest would by the established bright line test make the accountants liable for damages.
In this instance the accountants did no such thing they took the extraordinary step of blatantly telling the customer in so many words that the data upon which they were basing their investment decision was garbage. This alone established their innocence as would become very clear after the establishment of a bright line test. The need for a bright line test is evident. The ambiguity of section 10(b) makes it possible to hold a firm liable for harm caused by information in its possession if that information could substantially alter the outcome of a financial transaction if released by the accounting firm.
The court and the law needed to be able to clearly and consistently decide whether and when a firm should disclose information to a client. This was done by establishing a list of words that by definition whenever they appear in a document these words amount to a call for action by the author.
In this case the defendants alleged that Touche Ross had failed to reveal certain facts. These being that David Greenberg was a convicted felon; that his twelve year old son was the sole director, officer and shareholder of one of the corporations serving as a general partner to the defendants; and that the defendants committed fraud against various insurance companies by making claims for incurred losses using bogus invoices as the proof for such losses; and (2) knowingly provided false and misleading financial projections which management included in the offering memoranda given to the plaintiffs.
The plaintiffs have no reason to complain here. They knew from the beginning that these projections were worthless as a guide to determining whether this was a good investment. The projections were clearly labeled as being nothing more than a restatement of management’s views without any verification of the statements or figures contained in the documents. It would seem only common sense to expect no material help from the accountants and to suspect that that the whole deal offered by the defendants is phony. If it were otherwise why would this accounting firm do so little for the money it received?
The law cannot be a guard against the stupidity or greed of citizens. The plaintiffs did not do their homework and thus they got robbed by those who did. It is true that there is a sucker born every minute. With this said it naturally follows that the plaintiffs should not be allowed to retry their case at another level of the system because by their own admission they knew that the memo upon which their case is built was a fake which Touche Ross allowed to go into the offering only because they could not stop another person or entity from telling lies about them anymore than you or I can govern the speech and conduct of another.
This knowledge probably prompted their inclusion of the warning labels for the financial data. Lastly, now that plaintiffs had reasons to believe the accountants were wary of the defendants or at least cautious for fear of being held liable for the conclusions drawn from the data. The plaintiffs should have backed out of the deal. They most certainly should accepted the principle of buyer beware when the people they thought would be their watchdogs did just that by scrupulously avoiding any actions beyond those normally required of an accountant.
Such normal actions do not require the accounting firm to report on the sordid past of the officers of an audited firm, nor does fidelity to duty require the accountants to pass judgment on the decisions of management. All that is required is for the accountants to decide on whether the numbers tell the same story as management. Here they told the truth in as diplomatic manner as possible attempting to warn the investors I think but in such a manner that they could remain true to the implicit principle of doing no harm to their client’s interests which any professional must observe in their dealings with the public.
If I had been the account manager at Touche Ross It is simply too easy to say run to the police and have everyone arrested. The “evidence” upon which you base your actions is circumstantial and by your own admission unverified. So, how do you know before the fact that any crime has been committed here? The invoices and lack of investigation do not make hard evidence merely they are good grist for the rumor mill until you can actually find proof. At best they are ethical reasons to dig deeper should conscience demand this but professional duty does not demand such behavior.