In an opinion dated yesterday, Judge Scheindlin denied a motion to dismiss from two auditing firms, Ernst & Young and PriceWaterhouseCoopers, in a securities class action. The auditors had issued “opinions” certifying the financial statements of a now bankrupt securities issuer (OSG), and argued that, under the Second Circuit’s recent decision in Fait v. Regions Financial Corp. (discussed in prior posts here and here), the plaintiffs would have to allege, under Section 11 of the Securities Act, that the auditors actually disbelieved their own opinions. Judge Scheindlin disagreed:
In this case, the alleged misstatements and omissions contained in the Registration Statement center upon the failure to disclose OSG’s significant tax liabilities under Section 956. Although the Internal Revenue Code is complex and often gives rise to debate, it cannot be said that statements of income tax liability are “subjective valuations.” There is in fact an objective measure of income tax liability, as evidenced by OSG’s public declaration that its financial statements should “no longer be relied upon,” as well as the IRS’s Proof of Claim in OSG’s bankruptcy proceedings. Defendants argue that the entire Audit Opinion is a statement of belief or opinion under Fait because it contains the word “opinion” in its title, and prefaces its conclusions with the phrase “in our opinion.” However, it would render Section 11 meaningless to find that an accountant’s liability turns on this semantic choice. Auditors may not shield themselves from liability under Section 11 merely by using the word “opinion” as a disclaimer. Plaintiffs are only required to allege subjective disbelief where the statements concern “inherently subjective” matters rather than “matters of objective fact.” The Auditor Defendants’ broad reading of Fait would undercut the statutory language establishing strict liability for accountants based on the materials they have certified. It is difficult to imagine what Congress might have meant by an accountant’s certification if not an audit affirming the accuracy of the documents in question. Here, the Audit Opinions allegedly endorsed the accuracy of the tax liabilities disclosed in OSG’s financial statements. Because those statements of tax liability are not “inherently subjective” valuations, Plaintiffs have adequately stated a claim against the Auditor Defendants under Section 11 without alleging subjective disbelief.