You Can't Cheat an Honest Man - James Walsh [131]
The American Bar Association guidelines were designed to prevent lawyers from playing stupid when advising drug dealers. They apply equally well to lawyers playing stupid when advising Ponzi perps. The civil conspiracy angle mentioned by the court might make sense in some situations. Burned investors stand on stronger legal ground if they allege a conspiracy existed between lawyers or accountants and the Ponzi perps. The problem here: While the theory of a conspiracy makes a better argument, it requires a lot more evidence than a negligence claim.
It’s a short step from alleging a civil conspiracy to alleging an organized crime operation under RICO (and RICO’s triple damages). However, the federal courts severely limit RICO’s applicability to lawyers or accountants. In its 1993 decision Reves v. Ernst & Young, the Supreme Court explained theRICO restrictions.
The defendants in Reves were accountants who drafted misleading financial statements and were subsequently sued for both securities fraud and RICO violations. A jury found that the accountants had engaged in securities fraud; but the U.S. Supreme Court upheld the dismissal of the RICO claim, holding that the mere drafting of statements based on information supplied by the perp did not constitute sufficient participation in the operation or management of the enterprise. So, even if the accountants had engaged in intentional fraud, they could not be held liable under RICO.
In short, the Supreme Court ruled that lawyers or accountants do not incur RICO liability for the traditional functions of providing professional advice and services. It ruled that in order to be liable under RICO, an outside professional must have “participated in the operation or management of the enterprise itself,” and must have played “some part in directing the enterprise’s affairs.”
Some courts have given the matter some leeway. In the 1994 decision Friedman v. Hartmann, a federal court in New York ruled:
[I]t will not always be reasonable to expect that when a defrauded plaintiff frames his complaint, he will have available sufficient factual information regarding the inner workings of a RICO enterprise to determine whether an attorney was merely “substantially involved” in the RICO enterprise or participated in the “operation or management” of the enterprise.
But other courts, citing the Reves decision, have dismissed RICO claims without giving plaintiffs an opportunity to conduct discovery. Establishing Fiduciary Duty—to the Investors
In order to make a claim of professional negligence or breach of fiduciary duty, a burned investor has to show that the lawyer or accountant owed some direct fiduciary duty. This usually isn’t the case, since the professionals are hired by the company—and owe their duty to it.
This guideline stems back at least to a 1930s decision written by federal judge (and later U.S. Supreme Court Justice) Benjamin Cardozo which held that an accounting firm owes a duty of due care only to those in “privity of contract” with it or to “those whose use of its services was the end and aim of the transaction.”
This is still generally the law on the duty. However, the duty of accountants in some states has been expanded to include reasonably foreseeable reliance provided it lies “within the contemplation of the parties to the accounting retainer.” The 1985 New York Court of Appeals decision Credit Alliance v. Arthur Andersen & Co. also created a test which can expand Cardozo’s limits. The court ruled:
Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied:
1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes;
2) in the furtherance of which a known party or parties was intended to rely; and
3) there must have been some conduct