New Century v. KPMG - Should Theories of "Gatekeeper Liability" Allow Private Causes of Action for Fraud Against Third Parties?
Kevin La Croix, at his blog, The D&O Diary, writes,
In a development that may foreshadow further "gatekeeper" claims as part of the current credit crisis litigation wave, on April 1, 2009, the trustee for the New Century Financial Corp. liquidation initiated lawsuits in California and New York against KPMG and its international parent, seeking to recover $1 billion in damages for negligence and for aiding and abetting breaches of fiduciary duty.
After a thorough summary of the complaints filed against KPMG, he further states,
[t]he trustee’s filings in these complaints certainly suggest the possibility that auditors and other "gatekeepers" could be targeted in the wake of the subprime meltdown. Id.
Moreover, The Wall Street Journal points out that
[t]he claims are among the first to attempt to blame auditors for the subprime-mortgage crisis, which spread beyond lenders such as New Century and engulfed the global financial system.
In order for private plaintiffs to successfully litigate claims like the ones the New Century trustee asserts against KPMG, some theory of "scheme liability," or "gatekeeper liability" will most likely need to be accepted by the courts.
In 2007, the Supreme Court rejected a theory of "scheme liability" in the context of securities fraud litigation in Stoneridge Investment Partners v. Scientific-Atlanta. SCOTUSblog summarized the Court's holding in 2007 as well as the background of the case as follows:
Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive.
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The case involved what has been called “scheme liability,” in which everyone involved in a plot to deceive securities investors would be legally at fault, whether or not each of them had issued any public statements. The Securities and Exchange Commission had previously supported such liability, and wanted to enter the Stoneridge case to say so, but its participation was vetoed by the Bush Administration, with President Bush and Treasury Secretary Henry Paulson directly involved in the decision to keep the SEC out of the case. The Court took the case apparently to resolve a dispute among federal appeals courts on the issue.
Since "gatekeepers" are generally third parties, e.g., auditors like KPMG, Stoneridge has been construed so as to deny private causes of action for securities fraud based upon almost all theories of "gatekeeper liability." However, the plaintiffs in Stoneridge were investors. Here, the plaintiff is the New Century trustee. Furthermore, the trustee's claims for negligence and aiding and abetting breach of fiduciary duty, at least in California, are brought under California law whereas Stoneridge addressed fraud claims pursuant to federal law. So, one question is whether the holding in Stoneridge is even applicable, at least in California.
Also, in Stoneridge, the Court states that third parties, or "secondary actors" may be held both civilly and criminally liable for their roles in securities fraud; however, only the SEC may pursue civil remedies against said secondary actors. Thus, another question, as to whether these remedies are adequate, may arise.
The outcomes of New Century v. KPMG and similar lawsuits may eventually provide some answers to these questions. In any case, at least one thing that is certain--theories of "gatekeeper liability" are not dead.
