backOn October 31, 2024, after a petition for rehearing, the Second Circuit amended its August 23, 2023, opinion in New England Carpenters Guaranteed Annuity and Pension Funds v. AmTrust Financial Services, Inc., No. 20-1643-cv (2d. Cir. 2024) and vacated the Southern District of New York’s dismissal of Section 10(b) and Rule 10b-5 claims against BDO USA, LLP, while affirming in part and vacating in part the dismissal of claims against other defendants. The Second Circuit initially affirmed the dismissal of all claims against BDO related to its audit of the financial statements and system of internal controls of AmTrust Financial Services, Inc., which restated five years of financial results based upon improper revenue recognition and expense timing, as covered in the August 25, 2023, Auditor Liability Bulletin.
With respect to claims against BDO, the Second Circuit initially held that BDO’s alleged misstatements in its 2013 Audit Opinion that the audit was conducted in accordance with PCAOB standards when the Complaint alleged that the Engagement Partner and another BDO partner on the engagement failed to complete work papers prior to issuing the audit opinion, signed audit work papers without reviewing them, and failed to verify the completion of audit work prior to issuing the opinion, among other failures, were not material and thus insufficient to state a claim against BDO. However, in the amended Opinion, and “after due consideration of Appellants’ petition for rehearing,” the Second Circuit reversed course, holding that the misstatements were indeed material because the false certification with respect to conducting the audit in accordance with PCAOB standards “subjected unknowing investors to the risk that AmTrust’s financial statements were unreliable.”
Because the Second Circuit initially affirmed the dismissal of the claims against BDO because the Complaint failed to allege that the misstatements were material, the Second Circuit did not address whether the Appellants had adequately alleged loss causation and scienter. In its amended opinion, the Second Circuit held that Appellants adequately pled loss causation because there was a “clean match” between the misleading audit opinion and the subsequent public disclosure of BDO’s audit deficiencies three years later in a Wall Street Journal article, after which the price of AmTrust’s securities dropped. The Second Circuit reasoned that BDO’s alleged efforts to cover up their incomplete work and subsequent failure to correct its work papers to reflect the dates work was actually completed or to document their assessment of the omitted procedures, “continu[ed] to taint the total mix of available public information,” even after omitted audit procedures were completed. Consequently, even though BDO had completed the audit work, disclosure of the deficiencies in the Wall Street Journal article “revealed the continuing falsity of [BDO’s] audit certification.”
With respect to scienter, the Second Circuit held that the Appellants adequately alleged that BDO acted recklessly in conducting the audit and issuing the audit opinion because, as alleged in the Complaint, BDO senior partners and managers “knew that the audit did not comply with PCAOB standards and consciously concealed their noncompliance.” Rejecting BDO’s argument that the alleged conduct did not “approximate an actual intent to aid in the fraud being perpetrated by” Amtrust, the Second Circuit reasoned that the Appellants did not rely merely on Amtrust’s accounting irregularities or BDO’s failure to identify the same, instead, the Appellants allege that BDO consciously covered up its own misrepresentation that its audit complied with PCAOB Standards.
The case is New England Carpenters Guaranteed Annuity and Pension Funds, et al. v. DeCarlo, et al., No. 20-1643-cv (2d Cir. Oct. 31, 2024). Plaintiffs are represented by Robins Geller Rudman & Dowd LLP. BDO is represented by McDermott Will & Emery LLP. A copy of the opinion can be found here.