Second Circuit Vacates Dismissal of Certain Claims Against Audit Firm

On August 23, 2023, the Second Circuit issued a decision in New England Carpenters Guaranteed Annuity and Pension Funds, et al. v. DeCarlo, et al., No. 20-1643-cv (2d Cir. Aug. 23, 2023), affirming the Southern District of New York’s dismissal of certain claims against BDO USA LLP, while affirming in part and vacating in part the dismissal of claims against other defendants. The District Court initially dismissed claims against BDO under Sections 11 of the Securities Act of 1933 and 10(b) of the Securities Exchange Act of 1934 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 our April 24, 2020 Bulletin.

With respect to claims against BDO, the Second Circuit held that while certain statements were potentially actionable misstatements under Section 10(b), including statements 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, the Court ultimately affirmed dismissal because the Complaint failed to allege that BDO’s alleged misstatements in its Audit Opinion were material. The Court held the Complaint failed to allege any link between BDO’s statements and material errors in AmTrust’s 2013 Form 10-K, and that the statements identified in the Complaint were “so general” that a reasonable investor would not depend on them as a guarantee, and therefore they were not material in this case.

The case is New England Carpenters Guaranteed Annuity and Pension Funds, et al. v. DeCarlo, et al., No. 20-1643-cv (2d Cir. Aug. 23, 2023). 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.