Partners David Deitch and Reid Skibell have authored a feature article in Business Law Today on how a recent Alabama federal court decision highlighted that auditor liability may turn on the vagaries of state receivership laws. The article is available here.
In a rare loss by an audit firm in a case involving financial-crisis-era fraud, on December 28, 2017, Judge Barbara Jacobs Rothstein found accounting giant PricewaterhouseCoopers (PWC) liable to the Federal Deposit Insurance Corporation (FDIC) for its failure to detect a $2 billion fraud. In the article, Deitch and Skibell explain that the decision departed from the typical rule that because receivers like the FDIC stand in the shoes of their debtors, they can only recover where the debtor itself could recover – which excludes cases where the debtor has “unclean hands.” Instead, and despite undisputed evidence of Colonial Bancgroup’s fraud, the court applied Alabama state law to view the FDIC, a government entity, as different from a normal successor-in-interest, and granted the receiver’s claim.
Deitch and Skibell compare Alabama state law to New York law, and in so doing conclude that the decision would likely have come out differently if New York law had governed the FDIC’s claims against PWC.