Washington Court of Appeals Revives Claims Against Auditor in Madoff-Related Litigation

In a case pending in Washington state, the state intermediate Court of Appeals revived a case against Ernst & Young as the auditor for a Madoff-feeder fund under state securities laws and state tort laws.  See Futureselect Portfolio Management, Inc. v. Tremont Group Holdings, Inc. (http://www.courts.wa.gov/index.cfm?fa=controller.managefiles&filePath=Opinions&fileName=681303.pdf).  The Court first applied Washington law because that is the state where the alleged misrepresentations were relied upon, even though the auditor had performed its work and disseminated its representations from New York (which were received in Washington).  It appears that Washington law was substantially more favorable than New York law to plaintiff.  Washington securities law clearly provided a private right of action whereas New York's Martin Act did not.  Negligent misrepresentation in New York requires near privity between the investor and the auditor and the Court held than Washington law mandates no such relationship. Under the Washington Securities Act, the Court held that plaintiffs had sufficient alleged that the auditor was a "seller of securities" because they alleged facts sufficient to plead that the auditor's representation were a "substantial contributing factor" in the sale.  The Court appeared to hold that acting as an auditor coupled with allegations that the plaintiffs justifiably relied on the audit opinion is enough to meet this requirement at the pleading stage.

The Court applied Washington law on the negligent misrepresentation claim equally broadly, holding that an auditor can be liable to a plaintiff if the auditor knew that the recipient of the audit opinion (its client) would disseminate that opinion to others.  Coupled with allegations of negligence and reliance, the Court held that plaintiffs had stated a claim against Ernst & Young.

Generally, the case reflects a fairly aggressive application of Washington law to the facts and a low pleading bar to auditor liability claims in Washington State.