Mosier v. Stonefield Josephson, Inc., CPAs

Summarized by Lars Fuller , BakerHostetler
10 years 1 week ago

Citation:

No. 13-56453 (9th Cir. Feb. 23, 2016)

Tag(s):

Ruling:

In a published decision, the 9th Circuit affirmed the district court's (C.D. Cal.) summary judgment in favor of accountants on tort claims brought by court appointed receiver against accountants who audited financial statements for fraudulent offerings of the companies for which the receiver was appointed. The 9th Circuit affirmed the district court's grant of summary judgment in favor of defendants on the receiver's claims for professional negligence and aiding and abetting the wrongful conversion of the companies' assets under California law. The panel held that the receiver did not raise a genuine issue as to causation because he did not show that either the companies or its investors relied on the audits, or that such reliance would have been reasonable, given the qualifications of the audits and the warnings contained therein. The panel also affirmed the district court's grant of summary judgment on a claim of unjust enrichment. The panel also affirmed the district court's finding of standing for the receiver to assert the claims on behalf of the entities, notwithstanding their participation in the fraud.

Procedural context:

Court appointed receiver of multiple affiliated entities that operated Ponzi scheme sued accounting firm in U.S. District Court that audited the financial statements for six of the entities' fraudulent offerings. The district court entered summary judgment in favor of defendant. Receiver appealed to 9th Circuit.

Facts:

Various affiliated entities made debt and equity offerings in life insurance policies and commercial real estate mortgages, raising $951 million. In their offering memoranda, the entities told investors to expect a return of between six to seven percent. However, the entities fraudulently paid its investors with money from new investors, and fraudulent transfers between affiliated entities. Management also looted money for their personal benefit. In 2003, the entities hired appellee, a CPA firm, to audit the financial statements for six of their offerings. The CPAs issued ten audit reports for fiscal years 2003 through 2007. In 2004, the CPAs began issuing qualified opinions about their clients' operations. Each of the CPAs audit reports expressed significant reservations about the entities' improper method of assigning value to assets and the unknown effects of those questionable practices on its financial statements. The CPAs also issued a letter in 2008 expressing further warnings regarding the accounting method utilized by the entities. Appellant Mosier was the court appointed receiver for the affiliated entities accused of defrauding investors of approximately $950 million in a Ponzi scheme. Mosier sued the CPAs who audited the financial statements for six of the entities' fraudulent offerings. Mosier alleged that the CPAs materially misrepresented the entities' financial condition, violating Generally Accepted Auditing Standards, failing to warn investors of the Ponzi scheme, and allowing the entities' management to prolong the life of their scheme and to loot and dissipate assets from the entities. Mosier alleged that the CPAs misstated the value of eighty to ninety percent of the entities' assets in the financial statements. Mosier alleged that if the CPAs had performed their audits competently, or simply resigned after discovering the entities' fraud, the entities could not have attracted new investors. Mosier sought $51 million from the CPAs in damages. Mosier asserted three claims: professional negligence, aiding and abetting wrongful conversion, and unjust enrichment. On summary judgment, the district court dismissed the first two claims, holding that Mosier had not raised a genuine issue of fact as to causation. The district court held that to show causation, Mosier would have to demonstrate that either the entities or investors relied on the audits, but Mosier failed to demonstrate reliance. The district court also found that Mosier failed to establish that any reliance could have been reasonable. The court also granted summary judgment dismissing the unjust enrichment claim, but Mosier did not appeal that determination.

Judge(s):

Pregerson, Trott, Stafford (sitting by designation)

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