Isakov v. Ernst & Young
"Allegations of [Generally Accepted Auditing Standards or other best practices] violations without corresponding fraudulent intent are insufficient to state a securities fraud claim against an independent accountant," pursuant to In re Tremont Sec. Law, State Law & Sec. Litig., a 2010 decision of the Southern District of New York. The plaintiff investor, in reliance on the defendant's audit, purchased $450,000 in Class A shares in an arbitrage fund. Allegedly, the defendant, Ernst & Young, indicated that audits that the defendant conducted between 2003 and 2008 complied with generally accepted accounting principles. In 2008, it was discovered that the majority of the arbitrage fund's secured collateral was illusory, as a result of a Ponzi scheme of the owner of PAC Funding LLC. Allegedly, PAC had fabricated purchase orders, bills of sales and other documents. The plaintiff investor sued the accounting firm of Ernst & Young, alleging he was fraudulently induced to purchase stock between 2006 and 2008 and that the defendant violated §10(b) of the Securities and Exchange Act and Rule 10b-5. The plaintiff also alleged that the defendant engaged in negligence or malpractice, in violation of state law. The defendant moved to dismiss and to enforce an arbitration clause. The plaintiff failed to adequately allege that the defendant knew about falsified documents and that the defendant's conduct approximated actual intent to aid in fraud. The court dismissed the plaintiff's §10(b) claim. An arbitration clause governed the plaintiff's negligence and professional malpractice claims, which the District Court stayed. The plaintiff's negligent inducement claim survived, and the court ordered the plaintiff to inform the court whether he intends to submit the negligent inducement claim to arbitration.