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Wright v. Ernst & Young LLP, 152 F.3d 169, Fed. Sec. L. Rep. P 90,266

Facts

Irene Wright, representing a class of investors, alleged that Ernst & Young, as the outside auditor for BT Office Products, violated antifraud provisions by approving BT's misleading financial statements that were disseminated to the public. The complaint centered on a press release issued by BT on January 30, 1996, which contained unaudited financial results that were later restated, leading to significant losses for investors. Ernst & Young had previously issued audit opinions on BT's financial statements but did not disclose that it had only performed a limited review of certain accounts, which contributed to the misleading nature of the financial information released.

The gravamen of the amended complaint is that Ernst & Young violated the antifraud provisions of the Act by orally approving BT's materially false and misleading financial statements that BT in turn disseminated to the public in a January 30, 1996 press release.

Issue

Whether Ernst & Young can be held liable for false or misleading statements made by BT Office Products in a press release, despite the fact that the press release did not attribute any statements to Ernst & Young.

The question we must answer is whether, under the Act, persons who purchase stock in a company that issued a press release containing false and misleading financial information, with a notation that the information is unaudited and without mention of its outside auditor, can recover from the auditor for its private approval of the information contained in the press release.

Rule

Under the Securities Exchange Act and SEC Rule 10b-5, primary liability can only be imposed on those who make a material misstatement or omission that is relied upon by investors. Secondary actors, such as accountants, cannot be held primarily liable unless they themselves made a false statement at the time of dissemination.

Section 10(b) of the Act provides in pertinent part: It shall be unlawful for any person, directly or indirectly … (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.

Analysis

The court analyzed whether Ernst & Young made any actionable misstatements. It concluded that the press release did not attribute any statements to Ernst & Young and explicitly stated that the financial results were unaudited. Therefore, the court found that Ernst & Young did not directly or indirectly communicate any misrepresentations to investors, and thus could not be held liable under the Act.

In this case, BT's press release did not attribute any assurances to Ernst & Young and, in fact, did not mention Ernst & Young at all. Thus, Ernst & Young neither directly nor indirectly communicated misrepresentations to investors.

Conclusion

The Court of Appeals affirmed the district court's dismissal of the amended complaint, holding that no false or misleading statement was attributed to Ernst & Young at the time of public dissemination, and therefore, the claims against the firm could not stand.

Accordingly, the judgment of the district court is affirmed.

Who won?

Ernst & Young LLP prevailed in the case because the court found that the allegations did not establish that the firm made any false or misleading statements that could lead to liability under the Securities Exchange Act.

The court also observed that sustaining the amended complaint in light of Ernst & Young's 'clearly tangential role in the alleged fraud would effectively revive aiding and abetting liability under a different name, and would therefore run afoul of the Supreme Court's holding in Central Bank.

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