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The Pennsylvania state insurance commissioner’s case against Deloitte & Touche, filed over the liquidation of Reliance Insurance Co., will go forward now that Commonwealth Court President Judge James Gardner Colins has thrown out all of the accounting firm’s preliminary objections to the commissioner’s complaint. Commissioner M. Diane Koken alleges that Deloitte assisted Reliance in overstating its assets by more than $1 billion, helping lead to the insurance company’s downfall. With the 17-page ruling in Koken v. Steinberg, Koken’s seven-count complaint, alleging negligence, malpractice and breach of contract, will continue in its entirety. According to the opinion, Deloitte performed auditing and accounting services for Reliance for several years until 1999. Koken subpoenaed Reliance on Jan. 17, 2002, asking it to provide documents relating to Reliance’s liquidation. Deloitte claims to have submitted more than 250,000 pages of documents. Koken then sued several of Reliance’s former officers and directors in 2002, making allegations of improper transactions within the company, resulting in a “looting” of Reliance. Koken also sued Deloitte, claiming that it had committed breaches of contract in the performance of its accounting and actuarial duties for Reliance. In her complaint, Koken alleges that Deloitte “propped up Reliance’s reported financial position, deflected regulatory scrutiny, and permitted Reliance to pay out cash to its unregulated parent companies and undertake additional policyholder obligations when Deloitte … knew or should have known that Reliance was seriously financially troubled and was or would shortly be insolvent.” Deloitte’s actions resulted in a $1 billion overstatement of Reliance’s financial position, directly and proximately causing harm to Reliance, its policyholders and its creditors, Koken claimed. In the Commonwealth Court action, Deloitte argued that a liquidator, such as Koken, cannot assert state claims of breach of contract on behalf of creditors and policyholders without first showing that they are intended third-party beneficiaries. But Colins said he would not address that argument because under the Insurance Department Act and the Commonwealth Court’s own decision in Koken v. Fidelity Mutual Life Insurance Co., the law in Pennsylvania is well settled that an insurance regulator has the authority to represent policyholders and creditors as well as the overall public interest. Deloitte also argued that Koken’s claims of breach of contract to provide actuarial and auditing services should be dismissed because they merely restated the negligence claims and failed to state any contract claim. Colins cited three engagement letters written by Deloitte and countersigned by Reliance. Colins said the letters state that Deloitte would perform its work “with generally accepted auditing standards,” perform audits to reasonably assure Reliance that its financial statements were “free of material misstatement,” and express an opinion regarding the adequacy of Reliance’s loss reserves. Koken’s arguments relating to those statements served as a sufficient breach of contract claim, Colins said. “The complaint alleged in detail how Deloitte undertook to perform those services and, in the process, breached its duty of performance,” Colins said. “The liquidator has alleged the existence of a contract and specific breaches of the terms of that contract.” Deloitte claimed that even if there were contracts, accountants cannot be sued in contract for an alleged failure to properly provide services. Any such claim is one of malpractice, Deloitte said. But Colins said he did not agree. “Nothing in our law insulates accountants or other professionals from being sued in contract for a failure to properly perform professional services,” Colins said. “Neither party can demonstrate anything in our law that says that an accountant may or may not be sued in contract based on allegations of malpractice, and the court’s research discloses nothing.” Colins said he found a standard used in a 1993 opinion from the state supreme court helpful. In Bailey v. Tucker, the justices decided that a claim for a breach of the attorney-client agreement is a contract claim. “Thus, if an attorney agrees to provide his or her best efforts and fails to do so an action will accrue,” the justices said. Similarly, Deloitte made a promise to provide professional services, and Koken claimed that its alleged failure to perform those duties caused harm to Reliance, Colins said. “The court sees no reason to hold accountants to a different standard than our Supreme Court has applied to attorneys,” Colins said. Deloitte also argued that Koken’s claim that it aided and abetted breaches of fiduciary duties by Reliance executives should be dismissed because the commonwealth had not recognized the tort. Colins said Deloitte was wrong, finding that the state supreme court had asserted � 876 of the Restatement (Second) of Torts, regarding individuals acting in concert. Therefore, Colins said, the tort is a viable cause of action. In Skipworth v. Lead Industries Assoc. Inc., from 1997, the high court agreed with the Superior Court’s position that a claim of concerted action cannot be established if the plaintiff cannot identify the wrongdoer or the individual who acted in concert with the wrongdoer. The justices adopted that interpretation. Colins said the language of the opinion showed that the justices found such a claim viable in Pennsylvania. Deloitte argued that Koken did not allege the proper elements of an aiding and abetting claim. Colins said she did. He pointed out parts of her complaint in which she contended that Deloitte was aware of the fiduciary duties of Reliance’s officers and directors and knew of their alleged breaches of those duties, that Deloitte assisted in and encouraged that breach and that Deloitte’s assistance and encouragement caused harm to Reliance. Koken is represented by a team from Blank Rome. Ann B. Laupheimer of the Blank Rome team said that Koken was delighted with the decision and that the result is the one the team expected. “We will be proceeding vigorously and expeditiously,” Laupheimer said. Discovery has been ongoing since the complaint was filed, she said, and the taking of depositions will most likely begin soon. A team from Ballard Spahr Andrews & Ingersoll is representing Deloitte. Darryl J. May of the Ballard Spahr team said his client believes it will prevail. “Deloitte & Touche believes the plaintiff will not be able to prove the allegations of account malpractice, because those allegations are not true,” May said.

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