“Audit Reports Matter After All”

Robbins Geller Scores Important Appellate Win for AmTrust Investors

In a rare ruling, a panel of the U.S. Court of Appeals for the Second Circuit granted a petition for rehearing, and upheld investors’ previously dismissed claims against BDO USA, LLP, an outside auditor. 

Robbins Geller Rudman & Dowd LLP brought the suit in 2017 on behalf of investors in AmTrust, an insurance company, after it restated five years’ worth of financial results and acknowledged that the company had used erroneous accounting methods. Our Firm brought a securities suit on behalf of investors against AmTrust, certain directors, underwriters, and BDO, which performed audit work for AmTrust.

The district court dismissed several claims against AmTrust and BDO. Last year, the Second Circuit upheld key claims against AmTrust for misstating the company’s financial results, but upheld the dismissal of all claims against BDO. The panel agreed with the district court’s conclusion that BDO’s certification of AmTrust’s financials was boilerplate and not “material” to investors. Auditors typically use such standardized language to describe their conclusions.

Our team sought rehearing as to the claims against BDO, given the serious misconduct alleged against BDO in conducting its audits for AmTrust. The U.S. Securities and Exchange Commission supported our request for rehearing. According to The Wall Street Journal, the Second Circuit’s ruling on BDO prompted “new debate” within industry groups and investors about whether auditors’ certifications “matter to investors at all.”

This week, the Second Circuit panel granted our request for rehearing and concluded that BDO’s certification that its audit was conducted in accordance with industry standards was material to investors and revived the investors’ fraud claims against BDO. 

The ruling came after a rare grant of a rehearing and clarifies that outside auditors who provide unqualified audit opinions regarding a company’s financial results can be held liable for securities fraud. Partner Samuel H. Rudman, lead counsel in the case, told the Journal that the Second Circuit’s ruling is “a sentinel decision for investor protection . . . . The message here is simple, but increasingly important—auditors need to do their jobs and will be held accountable to investors when they don’t.”

Robbins Geller attorney Andrew S. Love argued the appeal for plaintiffs, and our team was led by Samuel H. Rudman, David A. Rosenfeld, Mark T. Millkey, William J. Geddish, Avital O. Malina, Robert D. Gerson, and Vincent M. Serra.

New England Carpenters Guaranteed Annuity & Pension Funds v. DeCarlo, 2023 WL 11965444 (2d Cir. Oct. 31, 2024).