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Noting last year’s “proliferation of frauds” by corporate officers, a state appellate court has made it easier to sue an accountant for allegedly certifying the accuracy of a corporation’s financial statements that contained numerous misrepresentations. New York’s Appellate Division, 1st Department, in Houbigant Inc. v. Deloitte & Touche LLP, 1598, reinstated fraud and aiding and abetting claims against Deloitte & Touche, while dismissing a malpractice claim against the accounting firm arising from the 1999 bankruptcy of Renaissance Cosmetics. Justice David B. Saxe, writing for the unanimous five-judge panel, said Houbigant, which owned trademarks for perfumes and licensed the marketing and sales of the scents to Renaissance Cosmetics, had provided sufficiently specific allegations against Deloitte based on the accounting firm’s certification of the accuracy of Renaissance’s audited financial statements for 1995, 1996 and 1997. Houbigant’s licensing agreement required Renaissance and its subsidiaries to maintain a net worth of at least $10 million to assure payment of their royalty obligations. However, in June 1998 it was publicly disclosed that Renaissance’s net worth had been overstated by nearly $200 million. Houbigant terminated its licenses in March 1999, and Renaissance filed for bankruptcy three months later. “Houbigant alleges that when Deloitte certified the accuracy of [Renaissance's] financial statements, it knew, but failed to acknowledge, that [Renaissance's] financial statements actually contained numerous serious irregularities and inaccuracies, which it knew could have a material impact on the accuracy of the financial statements’ recitation of the corporation’s net worth,” Justice Saxe said. That was sufficient to adequately plead the misrepresentation and scienter elements of fraud, he said. The fraud counts had been improperly dismissed on Deloitte’s motion to dismiss the complaint, Saxe said, because at the pleading stage “the plaintiff need not be able to make an evidentiary showing of exactly what the accountant knew as to falsehoods in the certified financial statements.” Although some previous 1st Department rulings “seem to indicate that a fraud pleading against an accountant must contain hard evidence,” Saxe said New York’s Civil Practice Law and Rules � 3016(b) and a 1985 New York Court of Appeals ruling, Credit Alliance Corp. v. Arthur Andersen & Co., 65 NY2d 536, had no such requirement. Requiring a showing that an accountant’s “knowingly false statement” and “direct participation” in the fraud on a dismissal motion would improperly apply a summary judgment standard to the dismissal determination, the judge said. “Keeping in mind the difficulty of establishing in a pleading exactly what the accounting firm knew when certifying its client’s financial statements, it should be sufficient that the complaint contains some rational basis for inferring that the alleged misrepresentation was knowingly made,” he said. “[T]o require anything beyond that would be particularly undesirable at this time, when it has been widely acknowledged that our society is experiencing a proliferation of frauds perpetrated by officers of large corporations, for their own personal gain, unchecked by the ‘impartial’ auditors they hired,” Justice Saxe added. ACCOUNTING MALPRACTICE On the other hand, he said, Houbigant’s claim of accounting malpractice against Deloitte should have been dismissed because Houbigant was not Deloitte’s client, and the “linking conduct” that would support a negligence claim by a non-client third party had not been shown. Acting Presiding Justice Eugene Nardelli and Justices John T. Buckley, Betty Weinberg Ellerin and George D. Marlow concurred with Saxe’s opinion. Houbigant was represented on the appeal by John W. Schryber of Patton Boggs and Mary E. Flynn and Kieran X. Bastible of New York’s Morrison Cohen Singer & Weinstein. Michael P. Carroll, Jerome G. Snider, Michael S. Flynn, William C. Komaroff, Matthew S. Stewart and Susan L. Shin of New York-based Davis Polk & Wardwell appeared for Deloitte & Touche.

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