Law School Case Brief
In re Lehman Bros. Sec. - No. 09 MD 2017 (LAK), 2012 U.S. Dist. LEXIS 172089 (S.D.N.Y. Dec. 3, 2012)
Liability for auditor malpractice requires "either privity of contract between the plaintiff and the defendant or a relationship 'so close as to approach that of privity.'" Where there is no privity of contract between the plaintiffs and the defendant auditor, the auditor owes a duty to the plaintiffs only if: 1) the accountant was aware that the reports would be used for a particular purpose; 2) in furtherance of which a known party was intended to rely; and 3) some conduct by the accountant "linking" him or her to that third party.
Plaintiffs, who were participants in The Lehman Brothers Savings Plan ('the Plan"), brought a state law breach of fiduciary duty claim against defendant Fidelity Management Trust Company, as the Plan trustee. The Plan contended that Fidelity improperly failed to sue Ernst & Young, the outside auditor for Lehman Brothers Holdings Inc., on behalf of the Plan for professional malpractice. Fidelity moved to dismiss the complaint.
Did Fidelity, as the Plan Trustee, breach its fiduciary duty when it failed to sue outside auditor Ernst & Young for professional malpractice?
The Court held that the complaint failed to allege facts which, if true, would demonstrate the existence of a legal duty on the part of Ernst & Young to the Plan or its participants with respect to its audits of Lehman. Plaintiffs, as participants in the Plan, therefore failed to allege facts demonstrating the existence of any viable negligence claim on the part of the Plan against Ernst & Young. The "near privity" standard imposes a "heavy burden" that the plaintiffs failed to meet here. The complaint did not allege that the Lehman Plan audits were "prepared for the specific benefit" of the Plan or its participants. The complaint did not allege sufficient "linking conduct which evinced the accountant's understanding of the Plan's reliance." And while the complaint does allege that Ernst & Young audited the Plan in 2000-2006 and therefore knew that the summary plan description (SPD) incorporated Lehman's public filings, that was not enough. As such, Fidelity's motion to dismiss the complaint was granted.
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