Court ofAppeaLcof the

State of9cw9tork.— •1 —

TEACHERS’ RETIREMENT SYSTEM OF LOUISIANA andCITY OF NEW ORLEANS EMPLOYEES’ RETIREMENT SYSTEM,

derivatively on behalf of Nominal Defendant American International Group, Inc.,Plaintiffs-Appellants,

—against—PRICEWATERHOUSECOOPERS LLP,

Defendant.-Respondent.

MARC S. KIRSCHNER, as TRUSTEE OF THE REFCO LITIGATION TRUST,Plaintzff.Appellant,

—against—KPMG LLP, GRANT THORNTON LLP, MAYER BROWN LLP, INGRAM MICRO

INC., CIM VENTURES INC., WILLIAM T. PIGOTT, MAYER BROWNINTERNATIONAL LLP, PRICEWATERHOUSECOOPERS LLP, LIBERTY CORNERCAPITAL STRATEGIES, LLC, BANC OF AMERICA SECURITIES, LLC, CREDIT

SUISSE SECURITIES (USA) LLC, DEUTSCHE BANK SECURITIES, INC.,Defendants-Respondents,

BECKENHAM TRADING COMPANY, INC., ANDREW KRIEGER, ERNST &YOUNG LLP, TONE N. GRANT, ROBERT C. TROSTEN, REFCO GROUP

HOLDINGS, INC., PHILLIP R. BENNETT, SANTO C. MAGGIO, EMF FINANCIALPRODUCTS, DELTA FLYER FUND, LLC, and ERIC M. FLANAGAN,

Defendants.

ON QUESTIONS CERTIFIED BYTHE U.S. COURT OF APPEALS FOR THE SECOND CIRCUIT

AND THE SUPREME COURT OF THE STATE OF DELAWARE

BRIEF OF AMICI CURIAE AMERICAN INSTITUTE OF CERTIFIED PUBLICACCOUNTANTS AND NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC

ACCOUNTANTS

WILLKIE FARR & GALLAGHER LLP Bradley M. Pryba, Esq.787 Seventh Avenue 3 Park AvenueNew York. New York 10019 New York, New York 10016(212) 728-8000 (212) 719-8364Counsel/or the American Institute of Counselfor the New York State Socic ofC’ertijied Public Accountants Certified Public Accountants

Dated: July 22, 2010

CORPORATE DISCLOSURE STATEMENT

The American Institute of Certified Public Accountants is a nonprofit

corporation formed under the laws of the District of Columbia. It has no parent

companies, subsidiaries or affiliates that have issued shares to the public.

The New York State Society of Certified Public Accountants is a nonprofit

corporation formed under the laws of the State of New York. It has no parent

companies, subsidiaries or affiliates that have issued shares to the public.

TABLE OF CONTENTS

TABLE OF AUTHORITIES.ii

PRELIMINARY STATEMENT 1

INTERESTS OF THE AICPA AND THE NYSSCPA 3

ARGUMENT 6

I. THE NATURE OF SERVICES PROVIDED BY CPAS 6

II. THE INPARIDELICTO DEFENSE SHOULD REMAIN AVAILABLETO AUDITORS WHO ARE ALLEGED TO HAVE ACTEDWRONGFULLY ii

A. Imputation And Application Of The In Pan Delicto Defense ShouldContinue To Depend Exclusively On The Conduct Of TheWrongdoing Insiders 11

B. The Adverse Interest Doctrine Should Remain Applicable Only WhereThe Agent Has “Totally Abandoned” The Interests Of TheCorporation 17

C. In Pan Delicto Should Not Be Supplanted By Comparative Negligence.22

III. THE QUESTIONS BEFORE THE COURT HAVE SERIOUS POLICYIMPLICATIONS FOR THE PROFESSION 24

COIbCL1.JSIO1’J 29

TABLE OF AUTHORiTIES

CASES Page(s)

546-552 West 146th Street LLC v. Atfa,54 A.D.3d 543, 863 N.Y.S.2d 412 (1st Dep’t 2008) 14, 17, 20

Arbegast v. Board ofEduc. ofS. New Berlin Cen. Sch.,65 N.Y.2d 161, 480 N.E.2d 365,490 N.Y.S.2d 751 (1985) 22

Baena v. KPMG LLP,453 F.3d 1 (1st Cir. 2006) 14,21,25

Barker v. Kallash,63 N.Y.2d 19, 468 N.E.2d 39,479 N.Y.S.2d 201 (1984) 22

Bateman Eichler, Hill Richards, Inc. v. Berner,472U.S. 299, 306 (1985) 12,16

Buy v. Arthur Young & Co.,834P.2d745 (Cal. 1992) 8,11,24

But/more v. Ernst & Young Cayman Is.,20 Misc. 3d 667, 861 N.Y.S.2d 578(Sup. Ct. N.Y. Cnty. 2008) 12, 14, 21

Capital Wireless Corp. v. Deloitte & Touche,216 A.D.2d 663, 627 N.Y.S.2d 794 (3d Dep’t 1995) 14

Cenco Inc. v. Siedman & Siedman,686 F.2d 449 (7th Cir. 1982) 14, 18

Center v. Hampton Affiliates, Inc.,66 N.Y.2d 782, 488 N.E.2d 828,497 N.Y.S.2d 898 (1985) passim

Defer LP v. Raymond James Fin., Inc.,654 F. Supp. 2d 204 (S.D.N.Y. 2009) 18

Free Enter. Fund v. PC’A OB,No.08-861,2010WL2555191 (June28,2010) 23

—11—

Herbert H. Post & Co. v. Sidney Bitlerman, inc.,219 A.D.2d 214, 639 N.Y.S.2d 329 (1st Dept 1996) 7

Howard v. Poseidon Pools, Inc.,72 N.Y.2d 72, 530 N.E.2d 1280,534 N.Y.S.2d 360 (1988) 22

Kirschner v. KPMG LLP,590 F.3d 186 (2d Cir. 2009) 2, 3

Maim v. XL Capital Ltd.,499 F. Supp. 2d 117 (D. Conn. 2007) 20

Manning v. Brown,91 N.Y.2d 116, 689 N.E.2d 1382,667 N.Y.S.2d 336 (1997) 22

Maxwell v. KPMG LLP,520 F.3d 713 (7th Cir. 2008) 26

NCP Litigation Trust v. KPMG LLP,901 A.2d 871 (N.J. 2006) 14

Off Comm. of Unsecured Creditors ofAllegheny Health,Educ. & Research Found. v. Price WaterhouseCoopers LLP,989 A.2d 313 (Pa. 2010) 14

Olsen v. Town ofRichfield,81 N.Y.2d 1024, 616 N.E.2d 498,599 N.Y.S.2d 912 (1993) 22

Prudential-Bache Sec., Inc. v. Citibanlç NA.,73 N.Y.2d 263, 536 N.E.2d 1118,539 N.Y.S.2d 699 (1989) 12,13

SEC v. Arthur Young & C’o,,590 F.2d 785 (9th Cir. 1979) 7

Shearson Lehman Hutton, Inc. v. Wagoner,944 F.2d 114 (2d Cir. 1991) 12

S. Cherry St., LLC v. Hennessee Group LLC,573 F.3d 98 (2d Cir. 2009) 20

—III-

Symbol Tech., Inc. v. Deloitte & Touche, LLP,

69A.D.3d 191, 888 N.Y.S.2d 538 (2dDep’t2009) 13, 14, 17

Teachers ‘Ret. Sys. ofLouisiana v. PricewaterhouseCoopers LLP,

No. 454/2009, 2010 WL 728794(Del. Mar. 3,2010) 2

Thabault v. Chait,541 F.3d512 (3dCir. 2008) 14

Ultramares Corp. v. Touche,255 N.Y. 170, 174N.E. 441 (1931) passim

In re Wedtech Sec. Litig.,138B.R.5(S.D.N.Y. 1992) 14

In re Worlds of Wonder Sec. Litig.,35 F.3d 1407 (9th Cir. 1994) 25

STATUTES

15 U.S.C. § 78j(b) (2006) 23

Pub. L. No. 107-204 § 602, 116 Stat. 245 (2002) 23

RULES AND REGULATIONS

17 C.F.R. § 201.102(e)(ii)(2006) 23

SEC Rule lOb-5 23

LEGISLATIVE MATERIALS

IHLR. Rep. No. 104-369 (1995) (Conf. Rep.) 27

H.R. Rep. No. 105-803 (1998) (Conf. Rep.) 27

—111—

OTHER AUTHORITIES

AUl10.0l 7

AUllO.02 7

AUll0.O3 8,9

AU230.l3 7,8

AU3l6.O7 9

AU3l6.O8 9

AU316.O9 9

AU316.10 9

AU317.02 13

AU3l7.07 8

AU317.08 8

AU333.06 9

CS § 100.01 etseq 10

Carl Pacini, Mary Martin & Lynda Hamilton,At the Interface ofLaw and Accounting: An Examinationofa Trend Toward a Reduction in the Scope ofAuditorLiability to Third Parties in The Common Law Countries,37 Am. Bus. L.J. 171 (2000) 28

Restatement (Third) of Agency § 5.03 (2006) 13, 18

Restatement (Third) of Agency § 7.07 (2006) 13

Restatement (Second) of Torts § 552(2)(a) (1977) 24

Eric L. Talley, Cataclysmic Liability Risk Among BigFourAuditors, 106 Colum. L. Rev. 1641 (2006) 26,27,28

TS § 100.01 et seq 10

—111—

U.S. Chamber of Commerce,Auditing: A Profession at Risk 4 (January 2006) 27

U.S. Chamber of Commerce, Commission on the Regulationof U.S. Capital Markets in the 21st Century -

Report and Recommendations (March 2007) 9, 10, 25, 26

U.S. Treasury Advisory Committee on theAuditing Profession Final Report (Oct. 6, 2008) 26

Michael R. Young,Accounting Irregularities And Financial FraudChap. 1 (3d ed. 2006) 25

—111—

PRELIMINARY STATEMENT

The American Institute of Certified Public Accountants (“AICPA”) and the

New York State Society of Certified Public Accountants (“NYSSCPA”) respectfully

submit this brief as amici curiae in support of the positions of Defendants-

Respondents KPMG LLP (“KPMG”), Grant Thornton LLP (“Grant Thornton”), and

PricewaterhouseCoopers LLP (“PwC”) in Marc S. Kirschner, as Trustee ofthe Refco

Litigation Trust v. KPMG LLP et al. (“Refco”), and Defendant-Respondent PwC in

Teachers ‘Retirement System ofLouisiana and City ofNew Orleans Employees’

Retirement System, derivatively on behafofNoininal Defendant American

International Group, Inc. v. FricewaterhouseC’oopers LLP (“AIG”).

The potential implications of these cases are vast. The Appellants in both cases

seek to eviscerate — if not eliminate altogether — the principle of imputation and the

related defense of in pan delicto, long available to auditors and other professionals in

connection with claims asserted by or on behalf of companies whose senior managers

defrauded their auditors, the market, and the investing public. Gutting those

doctrines, even if only at the motion to dismiss stage, would expand auditor liability

well beyond the boundaries of established precedent and out of proportion to an

auditor’s ability to detect and prevent management fraud. The expenses of litigation

and discovery in accounting fraud cases can be so significant as to virtually compel

accounting firms to settle even the least meritorious claims, the costs of which may

be passed on to clients in the form of higher fees. As discussed below, these and

other important policy considerations — which underlie the longstanding legal and

equitable principles at issue — weigh against curtailing defenses available to auditors

as against clients who engaged in intentional misconduct.

To avoid burdening the Court with argument presented by Respondents and

other amici, the AICPA and NYSSCPA focus on certain inaccuracies and

misconceptions in the arguments of the Refco Trustee and AIG Plaintiffs, and the

implications for CPAs and the capital markets should those unsound arguments be

accepted. More specifically, the AICPA and NYSSCPA address the following

questions certified to this Court and Appellants’ arguments with respect thereto:

(1) [Whether] the doctrine of in pan delicto [would] bar aderivative claim under New York law where a corporationsues its outside auditor for professional malpractice ornegligence based on the auditor’s failure to detect fraudcommitted by the corporation; and, the outside auditor didnot knowingly participate in the corporation’s fraud, butinstead, failed to satisfy professional standards in its auditsof the corporation’s financial statements;’

(2) Whether the adverse interest exception is satisfied byshowing that the insiders intended to benefit themselves bytheir conduct;2and

(3) Whether the exception is precluded where the misconductconferred some benefit upon the corporation.

Teachers’Ret. Sic. o/Louisiana v. PricewaterhouseCoopeis LLP, No. 454/2009, 2010 WL728794 (Del. Mar. 3, 2010).

2 Kirschner v. KPMG LLP, 590 F.3d 186 (2d Cir. 2009).

For the reasons discussed below, the AICPA and NYSSCPA respectfully

request that this Court answer the preceding questions as follows: (1) Yes, in pail

delicto bars recovery by a wrongdoing corporation against its auditors regardless of

the nature of the auditors’ alleged conduct;4 (2) No, the adverse interest exception is

satisfied only where the agent has “totally abandoned his principal’s interests

[and] cannot be invoked merely because he has a conflict of interest or because he

is not acting primarily for his principal;”5and (3) Yes, the adverse interest exception

is precluded where the corporation benefited in any way from the fraud.

INTERESTS OF THE AICPA AND THE NYSSCPA

The AICPA is the national organization of the certified public accounting

profession, all of whose more than 340,000 members are certified public accountants.

More than 30,000 of those members are licensed in New York State. AICPA

members work in all sectors of the business and financial services profession,

including public accounting, financial planning, tax, business & industry, law,

Id. The Second Circuit certified additional questions, as set forth in the parties’ briefs.

The AICPA and NYSSCPA recognize that the question certified by the Delaware SupremeCourt oniy addresses the applicability of the inpari delicto defense to claims of negligence.However, particularly in light of the Refco Trustee’s argument that allegations of knowingor intentional misconduct should also preclude an auditor from asserting the defense, theAICPA and NYSSCPA address the broader question of whether the defense should belimited in any way by the nature of the defendant’s alleged conduct.

Center v. hampton Affiliates, Inc.. 66 N.Y.2d 782, 784-85. 488 N.E.2d 828, 830, 497N,Y.S.2d 898, 900 (1985).

-3-

consulting, education and government. Among the AICPA’s purposes are the

promotion and maintenance of high professional standards of practice. Because of its

historical role in formulating standards relating to audits, reviews, compilations, and

attest engagements, and the reports issued thereon, the AICPA maintains a strong

interest in the scope and bases of civil liability sought to be imposed on accountants

pursuant to those standards. The AICPA regularly submits amicus briefs in actions

concerning these issues, including those in state and federal courts, as well as in this

Court and the U.S. Supreme Court.

The NYSSCPA, which has more than 27,000 members, also promotes and

assists in maintaining high professional standards of practice. In pursuit of these

ends, the NYSSCPA sponsors hundreds of continuing professional educational

programs annually through its educational foundation; administers the AICPA’s peer

rview program in New York State, which is designed to enhance the quality of its

members’ practices; investigates cases relating to alleged violations of the NYSSCPA

Code of Professional Conduct, including the issuance of corrective action and

member discipline to assure high standards of practice among its members; and

works with the AICPA, as well as with state and federal regulatory agencies that

oversee the accounting profession in New York, to protect the interests of its

members and the general public with respect to the practice of accountancy. The

NYSSCPA also regularly comments on proposed accounting and auditing standards

to assist standard-setting bodies in formulating standards. Over the past twenty years,

the NYSSCPA has submitted numerous briefs to the Court as amicus curiae so that

the Court’s rulings that affect the accounting profession can take into consideration

professional standards and policy matters that might otherwise not be brought to the

Court’s attention. The NYSSCPA believes that its perspective, which is based on a

broad, historical understanding of the accounting profession as the oldest and one of

the largest statewide accounting organizations in the country, will assist the Court in

considering the issues presented in this appeal.

Neither the AICPA nor the NYSSCPA has an interest in the particular disputes

between these litigants. However, amici are deeply concerned about Appellants’

attempts to expand accountants’ liability for management fraud by eliminating or

severely curtailing longstanding doctrines. Professional malpractice claims are

frequently asserted against auditors and other professionals following undetected

corporate frauds. For nearly a century, this State’s courts have balanced an injured

party’s interest in recovering damages with fair limits on accountants’ liability.6 The

positions advocated by the Refco Trustee and the AIG Plaintiffs will, if adopted by

the Court, upset that carefully constructed balance. Indeed, given this Court’s

longstanding holding in Ultramares, it would be extraordinary to overturn well

established common law doctrines so as to aid fraudsters (or those standing in their

See, e.g., Ultrarnares Corp. v. Thuche, 255 N.Y. 170. 174 N.E. 441 (1931).

cç

shoes) as against auditors — plaintiffs far less deserving than the allegedly reliant third

parties limited by Ultramares and its progeny.

As discussed below, the litigation burden on accounting firms today, frequently

perceived as “deep pockets,” is significant. In addition to the financial and

reputational exposure of lawsuits, increased litigation risk affects the profession’s

ability to recruit and retain highly qualified personnel. This, in turn, may further

reduce the availability, and therefore increase the cost, of accounting services in this

State and elsewhere. The threat of litigation beyond that which currently exists in not

necessary to ensure the delivery of audit and other CPA services in accordance with

professional standards, as numerous incentives already exist to compel quality work.

The AICPA and the NYSSCPA therefore respectfully request that this Court,

in its response to the questions certified to it by the Second Circuit and the Supreme

iourt of Delaware, uphold longstanding principles of agency law regarding

imputation and New York precedent concerning the in pan delicto defense, thereby

preventing clients and their successors from improperly transferring the costs of their

own employees’ fraud to their outside accounting firms.

ARGUMENT

I. THE NATURE OF SERVICES PROVIDED BY CPAS

To place in context the implications of Appellants’ arguments, it is important

to understand the limited role of the outside auditor, as well as the nature of other

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services CPAs may provide.7 An outside auditor is engaged to reach an independent

opinion as to whether a company’s financial statements, taken as a whole, as of and

for the relevant date or period, fairly present “in all material respects, [the

company’s] financial position, results of operations, and its cash flows in conformity

with generally accepted accounting principles.”8 Codification of Accounting

Standards and Procedures, Statement on Auditing Standards No. 1, § 110.01 (Am.

Inst. of Certified Pub. Accountants 1972) (“AU”). The purpose of an audit is to

obtain reasonable, not absolute, assurance that financial statements are free of

material misstatements; thus, the auditor cannot “guarantee” the accuracy of the

client’s financial statements.9 In part, this is because the auditor cannot — and does

The extent to which an auditor can be held liable for negligence is dependent upon whetherthe auditor violated applicable professional standards. See, e.g., SEC v. Arthur Young &Co., 590 F.2d 785, 788 (9th Cir. 1979); see also Herbert H. Post & Co. v. Sidney Bitterinan,Inc., 219 A.D.2d 214, 223, 639 N.Y.S.2d 329, 335 (1st Dep’t 1996). Audits of privatecompanies are governed by Generally Accepted Auditing Standards (“GAAS”), theprovisions of which are drafted by the AICPA’s Auditing Standards Board and adopted bythe various states as the standards against which their licensees will be judged. Theregulations related to auditing standards are identified by the abbreviation AU § . Theseregulations are available at,

Standards.htm. Audits of public companies are governed by the standards issued by the PublicCompany Accounting Oversight Board (PCAOB), which essentially adopted the AICPA’sstandards following its creation in 2002.8 Generally Accepted Accounting Principles, or GAAP, are the standards of financialaccounting that govern the preparation of financial statements by US. companies. GAAPare developed primarily by the Financial Accounting Standards Board (FASB), a private.nonprofit organization.

See AU § 110.02 (noting that “[b]ecause of the nature of audit evidence and thecharacteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurancethat material misstatements are detected”); AU § 230.1 3 (“Since the auditor’s opinion on the

not — reconstruct every transaction that the client entered into over the period covered

by the audit, or independently value every one of the client’s assets and liabilities.

Rather, auditors rely on selective sampling methods, other analytical procedures, and

professional judgment to review financial statements. See, e.g., Buy v. Arthur Young

& Co., 834 P.2d 745, 749 (Cal. 1992). (“For practical reasons of time and cost, an

audit rarely, if ever, examines every accounting transaction in the records of a

business.”).

While outside auditors are engaged to opine on a company’s financial

statements, GAAS recognize the fundamental proposition that, ultimately, “[t]he

financial statements are management’s responsibility.” AU § 110.03. Because the

client prepares its own financial statements, “it has direct control over and assumes

primary responsibility for their contents.”1°Buy, 834 P.2d at 762. “[A]udits are

performed in a client-controlled environment,” and “the client necessarily furnishes

the information base for the audit.” Id. Auditors, therefore, must rely on

financial statements is based on the concept of obtaining reasonable assurance. the auditor is

not an insurer and his or her report does not constitute a guarantee.”); AU § 3 17.07-08.

10 The client, not its auditor, is also responsible for, among other things, “adopting sound

accounting policies and for establishing and maintaining internal control that will. . . record,

process, and report transactions (as well as events and conditions) consistent withmanagement’s assertions embodied in the financial statements.” AU § 110.03.

management to provide them with financial information relevant to the audit.’1

Moreover, deceptive conduct by company personnel can interfere with the

auditor’s detection of misstatements, because management typically has the ability to

manipulate accounting records and override internal controls. See AU § 316.08-10.

For this reason, management is required to provide specific representations to an

auditor relating to, among other things, management’s responsibility for the fair

presentation of financial position, results of operations and cash flow, and

management’s belief that the financial statements are fairly presented in accordance

with Generally Accepted Accounting Principles (“GAAP”). See AU § 333.06.

GAAS also specifically recognize that even a properly planned and performed audit

cannot guarantee prevention or discovery of all material misstatements, particularly

those resulting from management fraud. See AU § 316.07-08 (because of the

characteristics of accounting irregularities, “particularly those involving forgery and

collusion,” even a “properly designed and executed audit may not detect a material

irregularity”). As the U.S. Chamber of Commerce has explained, “[i]f several high

officials of a company collusively engage in a complex and covert fraud, it would be

See AU § 110M3 (noting that an entity’s transactions and related assets, liabilities, andequities are all within the knowledge and control of management. and such information isobtained from management through the audit).

extremely difficult for any outside auditor of that company to ferret out the fraud.”2

In addition to auditing, CPAs provide a number of other valuable services. For

example, the accounting firm defendants in the Refco case provided services ranging

from auditing to tax to consulting and other advisory services. Each of these areas of

practice is governed by its own professional standards.’3

In light of the nature of the CPA’s role, the courts of New York and other

jurisdictions repeatedly have recognized the importance of limiting accountants’

liability in private litigation. For example, in the landmark case Ultramares Corp. v.

Touche, 255 N.Y. 170, 174 N.E. 441 (1931), this Court rejected a broader class of

plaintiffs than those essentially in “privity” with an auditor, holding that auditors

would otherwise be exposed to virtually unlimited liability. As Judge Cardozo

explained:

If liability for negligence exists, a thoughtless slip orblunder, the failure to detect a theft or forgery beneath thecover of deceptive entries, may expose accountants to aliability in an indeterminate amount for an indeterminatetime to an indeterminate class. The hazards of a businessconducted on these terms are so extreme as to enkindledoubt whether a flaw may not exist in the implication of aduty that exposes to these consequences.

12 U.S. Chamber of Commerce, Commission on the Regulation of U.S. Capital Markets in the21 St Century - Report and Recommendations (March 2007) (“Chamber of CommerceReport”) at 96.

13 See, e.g., AICPA Consulting Services Standards, CS § 100.01 ci seq. AICPA Tax ServicesStandards, TS § 100.01 ci seq.

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Id. at 179-80, 174 N.E. at 444. The California Supreme Court has further explained

the need for reasonable limitations on auditor liability, describing circumstances

similar to those in the Refco case in particular:

Although the auditor’s role in the financial reportingprocess is secondary and the subject of complexprofessional judgment, the liability it faces in a negligencesuit by a third party is primary and personal and can bemassive. The client, its promoters, and its managers havegenerally left the scene, headed in most cases forgovernment-supervised liquidation or the bankruptcy court.The auditor has now assumed center stage as the remainingsolvent defendant and is faced with a claim for all sums ofmoney ever loaned to or invested in the client. Yet theauditor may never have been aware of the existence, letalone the nature or scope, of the third party transaction thatresulted in the claim.

Buy, 834 P.2d at 763. The concerns that underlie these decisions could not be more

relevant. Accepting Appellants’ arguments would greatly expand accountants’

liability to clients and their successors, and may have a profound impact on the

viability of the profession.

II. THE INPARIDELICTO DEFENSE SHOULD REMAIN AVAILABLETO AUDITORS WHO ARE ALLEGED TO HAVE ACTEDWRONGFULLY.

A. Imputation And Application Of The Ii, Pan Delicto Defense ShouldContinue To Depend Exclusively On The Conduct Of TheWrongdoing Insiders.

In pan delicto (literally, “in equal fault’) is a defense available to a defendant

where the party seeking recovery is at least equally at fault for the wrong complained

11

of.’4 See, e.g., Bulirnore v. Ernst & Young cayman Is., 20 Misc. 3d 667, 670, 861

N.Y.S.2d 578, 581 (Sup. Ct. N.Y. Cnty. 2008). As the U.S. Supreme Court has

explained, “[t]he [in pan delicto] defense is grounded on two premises: first, that

courts should not lend their good offices to mediating disputes among wrongdoers;

and second, that denying judicial relief to an admitted wrongdoer is an effective

means of deterring illegality.” Bateman Eichler, Hill Richards, Inc. v. Berner, 472

U.S. 299, 306 (1985). The doctrine, therefore, necessarily assumes that the party

raising the defense engaged in (or, at the very least, is alleged to have engaged in)

some form of wrongdoing, but that the deterrent effect of denying relief to a

wrongdoer outweighs the remedial effect of broader recovery.

Closely related to the in pan delicto defense is the agency principle of

imputation. Imputation reflects the notion that a corporation — a legal fiction that

cannot act except through its agents — is generally deemed to have knowledge of, and

thus bear responsibility for, the actions of its employees. See Prudential-Bache Sec.,

Inc. v. Citibank, NA., 73 N.Y.2d 263, 276, 536 N.E.2d 1118, 1125, 539 N.Y.S.2d

699, 707 (1989) (“[aj legal entity. . . necessarily functions through human actors its

14 Although recognized by the courts as a defense barring recovery in most contexts, in pandelicto has traditionally been treated as a standing rule in the context of suits by bankruptcytrustees. See Shearson Lehman Hutton, Inc. v. Wagoner. 944 F.2d 114, 120 (2d Cir, 1991).Amici support this treatment and believe it should be upheld in accordance with the principleof stare decisis, for the reasons expressed by Respondents and other amici. However, forthe sake of simplicity. this brief refers to inpari delicto as a “defense” regardless of thecontext in which it is discussed.

- 12-

officers, agents and employees — whose knowledge and conduct may be imputed to

the entity under the doctrine of respondeat superior”).

As this Court has held, a corporation generally cannot sue a third party for a

fraud committed by its own management, because “knowledge acquired by an agent

acting within the scope of his agency is imputed to his principal and the latter is

bound by such knowledge although the information is never actually communicated

to it.” Center v. Hampton Affiliates, Inc., 66 N.Y.2d 782, 784, 488 N.E.2d 828, 829,

497 N.Y.S.2d 898, 899 (1985); see also Symbol Tech., Inc. v. Deloitte & Touche,

LLP, 69 A.D.3d 191, 196, 888 N.Y.S.2d 538, 542 (2d Dep’t 2009) (“the misconduct

of managers acting within the scope of their employment will normally be imputed to

the corporation”). The agency analysis traditionally looks to two factors — the scope

of the agent’s authority, and the nature of the agent’s conduct. See, e.g., Center, 66

N.Y.2d 782, 488 N.E.2d 828, 497 N.Y.S.2d 898; Restatement (Third) of Agency §5.03, 7.07 (2006). Nowhere, however, does the imputation analysis consider the

actions of anyone outside the agent-principal relationship.

Nor does the availability of the in pan delicto defense depend upon the nature

of the defendant’s alleged conduct. New York courts that have addressed the scope

of the imputation and in pal-i delicto doctrines, as well as those in most other

jurisdictions, have focused exclusively on the conduct of the agents to determine

whether imputation applies (as the imputation doctrine requires) and, if it does, have

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held that recovery is barred by inpari delicto, regardless of the defendant’s alleged

level of culpability. See, e.g., Center, 66 N.Y.2d 782, 488 N.E.2d 828, 497 N.Y.S.2d

898; Symbol, 69 A.D.3d 191, 888 N.Y.S.2d 538; 546-552 West 146th Street LLC v.

Arfa, 54 A.D.3d 543, 863 N.Y.S.2d 412 (1st Dep’t 2008); Capital Wireless Corp. v.

Deloitte & Touche, 216 A.D.2d 663, 627 N.Y.S.2d 794 (3d Dep’t 1995); Bulimore,

20 Misc. 3d 667, 861 N.Y.S.2d 578; see also Baena v. KPMG LLP, 453 F.3d 1(1st

Cir. 2006); Cenco Inc. v. Siedman & Siedman, 686 F.2d 449, 454-56 (7th Cir. 1982);

In re Wedtech Sec. Litig., 138 B.R. 5, 9 (S.D.N.Y. 1992).’ As discussed more fully

below, a corporation generally is permitted to recover against its outside auditors for

management fraud only in those instances where the wrongdoing managers’ interests

were completely adverse to the company’s — that is, where the managers’ misconduct

was entirely self-interested and did not benefit the corporation. See Point II.B., infra.

The central arguments advanced by both the Refco Trustee and the AIG

Plaintiffs are thus predicated upon a faulty premise: that the imputation of

management misconduct to the company, and the implications of that threshold

determination for third parties against whom the company seeks to recover, should

15 Significantly, amici are not aware of any state or federal court outside the Third Circuit that

has held that the availability of the inpari delicto defense turns on the alleged state of mind

of the auditor defendant. Those courts that have so held the Supreme Courts of New

Jersey and Peimsylvania and the Third Circuit Court of Appeals were obviously not houndby the extensive New York precedent holding otherwise. See Off Comm. of Unsecured

C’reditors ofAllegheny Health, Educ. & Research Found. v. Price WaterhouseC’oopers LLP,

989 A2d 313 (Pa. 2010); Thabaultv, C’hait, 541 F.3d 512 (3d Cir, 2008) (following NC’PLitigation Trust); N’PLitigation Thst v. KPMG LLP, 901 A.2d 871 (NJ. 2006).

14-

turn not on the conduct of the corporation’s agents, but instead on the alleged level of

culpability of the third party defendant, Specifically, the Refco Trustee argues that

the misconduct of insiders should not bar recovery against an outside auditor if the

auditor is alleged to have acted either knowingly or negligently, essentially

eliminating the in pan delicto defense altogether.’6 The AIG Plaintiffs, on the other

hand, argue for a slightly different (but even more puzzling) standard, contending that

the defense should be available to auditors charged with knowing participation in

management fraud but not those charged with mere negligence.17

Accordingly, these positions seek to fundamentally alter the in pan delicto

doctrine, not only without the support of any precedent of this Court, but also in

contravention of longstanding agency principles. Specifically, Appellants seek to

shift the focus away from the conduct of the company’s agents to the precise nature

of the defendant’s alleged conduct. The inpani delicto defense has not historically

16 See, e.g., Refco Brief at 7-8 (“Where insiders’ fraud is alleged to have occurred with theknowledge and acquiescence of defendants, those defendants should be estopped fromraising in pan delicto as an affirmative defense. . . [t}he same is true when negligence isalleged against professionals who owe duties to a corporate client. .

.

17 See, e.g., AIG Brief at 13-16 (arguing that the inpari delicto defense is unavailable because“[t]here is no allegation that PwC aided and abetted the fraud committed by AIG’s seniorofficers”). The flaws in the MG Plaintiffs’ theory become clear when one considers theeffects of its application in the Refco case, in which the auditors are alleged to have acted“knowingly or negligently.” If the Refco auditors were found to have knowinglyparticipated in the fraud, they would be shielded by in pan delicto under the AIG Plaintiffs’theory; however, if they were found merely to have been negligent, they would facesubstantial liability to the successor to Refco. a company whose senior managementorchestrated an elaborate, intentional fraud.

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been limited in its application based on the type of wrongdoing alleged against the

defendant, and Appellants have provided no legal basis for imposing such a rule.

And certainly to hold, as the Refco Trustee advocates, that only a completely

“innocent” party may invoke in pan delicto would directly contravene the very

purpose of the defense, which necessarily assumes that both parties engaged in some

form of wrongdoing. See Berner, 472 U.S. at 306 (holding that in pan delicto is

intended to prevent the courts from mediating “disputes among wrongdoers”)

(emphasis added). Put differently, Appellants — and the Refco Trustee in particular —

seek to replace the in pan delicto doctrine with an entirely new standard, under which

a guilty corporation would be barred from recovering against a third party defendant

only if the defendant is not accused of having done anything wrong.’8

Among other things, the creation of a new standard under which either

imputation or in pan delicto turns on the alleged conduct of a third party would

merely invite pleading gamesmanship. A plaintiff could avoid imputation altogether

by alleging that the auditor possessed whatever state of mind (knowledge or

negligence) were held sufficient to defeat the defense. Thus, any plaintiff could plead

around the defense simply by alleging that the auditor acted “knowingly

18 A rule prohibiting disputes among wrongdoers that does not apply when both parties arewrongdoers would be completely meaningless. Nor is a defendant who is not accused ofhaving done anything wrong in need of a defense.

16-

negligently,” as the Refco Trustee did here.19 In essence, the effect of any standard

that turns on the alleged conduct of the auditor would be to eliminate the in paui

delicto defense altogether, at least at the pleading stage.

B. The Adverse Interest Exception Should Remain Applicable OnlyWhere The Agent Has “Totally Abandoned” The Interests Of TheCorporation.

Just as imputation and in pan delicto are based on sound common law

principles, so too is the adverse interest exception, the only exception to imputation

recognized in New York. The exception provides that where an agent’s fraud

constituted a total abandonment of the corporate interest and did not benefit the

corporation in any way, the fraud is not imputed to the company and the in pan

delicto defense will not bar recovery. See, e.g., Center, 66 N.Y.2d at 784-8 5, 488

N.E.2d at 830, 497 N.Y.S.2d at 900. This adverse interest exception “has been

defined very narrowly in New York.” Symbol, 69 A.D.3d at 197, 888 N.Y.S.2d at

542; see also Arfa, 54 A.D.3d at 544, 863 N.Y.S.2d at 414.

Despite its name, the adverse interest “exception” is really nothing more than

an extension of the basic agency principles underlying imputation — that imputation is

justified where the agent was acting within the scope of his authority and for the

company’s benefit. But the adverse interest doctrine also reflects important policy

19 See Refco Brief at 9 (‘The complaints allege that the deièndants knowingly or negligentlyenabled Refco’s corrupt insiders to commit a massive fraud

considerations. As the courts have recognized, “if the owners of the corrupt

enterprise are allowed to shift the costs of its wrongdoing entirely to the auditor, their

incentives to hire honest managers and monitor their behavior will be reduced.”

Cenco, 686 F.2d at 455; see also DeferLP v. RaymondJames Fin., Inc., 654 F. Supp.

2d 204,218 (S.D.N.Y. 2009) (noting that imputation ofmanagement’s knowledge

and conduct to the company “creates incentives for the entity to create and maintain

effective internal communications.. .“); Restatement (Third) ofAgency § 5.03 cmt.

b (2006) (imputation encourages the responsible selection and oversight of

management).

The adverse interest exception recognizes that the incentive-shifting goals of

imputation and inpad delicto are not needed in cases of’Iraud against a

corporation.” See Cenco, 686 F.2d at 456 (“Fraud on behalfofa corporation is not

the same thing as fraud against it. Fraud against the corporation usually hurts just the

corporation; the stockholders are the principal ifnot only victims. . . [b]ut the

stockholders of a corporation whose officers commit fraud for the benefit of the

corporation are beneficiaries of the fraud.”). Shareholders and, by extension, boards

ofdirectors, have a built-in incentive to detect and prevent frauds, such as looting,

aimed at enriching certain insiders at the company’s expense — after all, it is the

company’s property that is being stolen. However, when management fraud benefits

the company, even in the short term, the shareholders’ and directors’ incentives are

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murkier. When a company is meeting or exceeding expectations and returning value

to its shareholders, there is a natural inclination to not ask too many questions about

how management is achieving those results in fact, there may be a strong

temptation for directors and shareholders to look the other way even if things don’t

seem quite right. This is because the shareholders and directors may themselves be

benefiting from the fraud, even if they don’t exactly know (or don’t want to know) of

its existence. Therefore, in those cases, courts use mechanisms such as imputation

and in pan delicto to realign the shareholders’ and directors’ interests with those of

potential investors, by preventing them from shifling responsibility for management

fraud onto third parties.

Notwithstanding these well-reasoned policy considerations, Appellants ask the

Court to expand the narrow adverse interest exception by holding that the exception

applies whenever the wrongdoing managers intended to benefit themselves in some

way (through, for example, increased compensation). They also assert that short-term

benefits to the company resulting from a fraud — such as an increase in stock price

and greater access to capital — should not negate the exception if the company suffers

long-term harm after the fraud is uncovered. Neither of these arguments is supported

by applicable precedent, and the acceptance of either would result in the exception

swallowing the rule, eviscerating both the imputation doctrine and the in pan delicto

defense.

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The rule articulated by this Court a quarter of a century ago is that “[tb come

within the [adverse interest] exception, the agent must have totally abandoned his

principal’s interests and be acting entirely for his own or another’s purposes. II

cannot be invoked merely because he has a conflict of interest or because he is not

acting primarily for his principaL” Center, 66 N.Y.2d at 784-85, 488 N.E.2d at 830,

497 N.Y.S.2d at 900 (emphasis added); see also Arfa, 54 A.D.3d at 544, 863

N.Y.S.2d at 414. Relying on that precedent, the courts of this State have properly

refused to allow claims to proceed merely because it was alleged that the corporate

agent benefited from the fraud in the form of increased compensation or equity value.

The courts have acknowledged that nearly every corporate officer who engages in

fraud may benefit personally through performance-based bonuses or increased stock

price. Indeed, to suggest that a manager who fraudulently inflates his company’s

rsults in order to increase his own compensation or the value of his shares has

“totally abandoned” the company’s interests ignores the very purpose of incentive- or

stock-based compensation, which is to align the interests of the company and

management.

20 As the courts have recognized, “{ijn today’s corporate environment. . . nearly all executivesare compensated with stock options and incentive bonuses.” Maim v. XL Capital Ltd., 499F. Supp. 2d 117, 158 (D. Conn. 2007), ajf’d, 312 F. App’x 400 (2d Cir. 2009); see also S.Chem’ St., LLC i. Hennessee Group LLC, 573 F.3d 98, 109 (2d Cir. 2009) (noting “thedesire to maintain a high stock price in order to increase executive compensation” to be “agoal] possessed by virtually all corporate insiders”) (internal quotations omitted).

-20-

Likewise, courts have refused to allow claims to proceed even where it is

alleged that the corporation suffered from the fraud after it was revealed. Thus, the

exception has been held not to apply where management’s fraud benefited the

corporation in the short term, such as by boosting its reported financial results. See,

e.g., Builmore, 20 Misc. 3d 667, 861 N.Y.S.2d 578 (no “total abandonment” if fraud

permitted company to attract and retain capital from investors); see also Baena, 453

F.3d at 7 (applying in pan delicto because “fraud by top management to overstate

earnings.. . profits the company in the first instance”).

Appellants now seek to replace this objective, outcome-oriented standard with

a subjective, intent-based standard. But there is no legal or other basis to rewrite this

Court’s prior holding in C’enter and to overturn the holdings of numerous other courts

that have followed it. Indeed, such a departure would explode the adverse interest

exception beyond the established, narrow realm of alleged looting by management,

diversion of corporate opportunities to individuals, and similar conduct intended to

benefit management at the company ‘s expense. It would instead permit the

exception’s application to generic financial fraud cases where, as here, the plaintiff

alleges at least a short term benefit to the company resulting from management s

misconduct.

21 In fact, the Refco Trustee alleges a benefit to the company that lasted approximately eightyears.

2J

C. In Pan Delicto Should Not Be Supplanted By ComparativeNegligence.

Under established New York law, in pal-i delicto is and always has been a

complete bar to recovery by a wrongdoing company as against its outside auditors.

Appellants now ask this Court to rewrite that law and replace it with the legally and

conceptually distinct principle of comparative negligence. But Appellants have

provided no compelling reason to overturn decades ofjurisprudence and replace a

well-reasoned, workable, and predictable standard with a fact-intensive, slippery

slope analysis of comparative guilt that, by its very definition, could not be applied at

the pleading stage.

As an initial matter, this Court has consistently held that New York’s

comparative negligence statute, CPLR § 1411, does not abrogate common law

defenses — such as in pal-i delicto — that are not specifically addressed in the statute.

See, e.g., Manning v. Brown, 91 N.Y.2d 116, 689 N.E.2d 1382, 667 N.Y.S.2d 336

(1997); Olsen v. Town ofRichfield, 81 N.Y.2d 1024, 616 N.E.2d 498, 599 N.Y.S.2d

912 (1993); Howard v. Poseidon Pools, Inc., 72 N.Y.2d 72, 530 N.E.2d 1280, 534

N.Y.S.2d 360 (1988); Arbegast v. Board ofEduc. ofS. New Berlin Cen. Sc/i., 65

N.Y.2d 161, 480 N.E.2d 365, 490 N.Y.S.2d 751 (1985); Barker v. Kuliash, 63

N.Y.2d 19, 468 N.E.2d 39, 479 N.Y.S.2d 201 (1984). Even beyond that, the damages

principle of comparative negligence — which comes into play only after the respective

fault of the parties has been determined - is conceptually distinct from, and legally

unrelated to, the equitable defense of in pan delicto, which has long been recognized

by the courts of this State as a complete bar to recovery at the pleading stage.

Recognizing that their position lacks any legal basis, Appellants rely on the

familiar “wrong without a remedy” mantra, suggesting that a rule prohibiting a

company from recovering for its own malfeasance will somehow leave auditors

“immune from liability for their audit lapses, no matter how egregious.”22 Of course,

immunity for auditors is not what Respondents, or amici, are advocating. Auditors

can be (and typically are) held accountable for audit lapses in any number of ways.

They may face civil andlor criminal liability to regulators such as the Securities and

Exchange Commission (SEC), the Department of Justice (DOJ), the PCAOB, and

state authorities such as the New York State Board for Public Accountancy. The

federal securities laws, SEC rules, PCAOB standards, the AICPA and NYSSCPA

COdes of Professional Conduct, and state CPA laws all provide additional

mechanisms for ensuring audit quality and punishing transgressions.23 Auditors are

22 AIG Brief at 38; see also Refco Brief at 8-9 (arguing against a “safe harbor for those whoenable the looting and destruction of companies an unthinkable result for the State thatserves as the Nation’s financial center”).

See, Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2006) and SEC Rule lOb-5;Sarbanes-Oxley Act of 2002, Pub. U No. 107-204 § 602. 116 Stat. 245 (2002); 17 C.F.R. §201 .102(e)(ii)(2006) (permitting the SEC to bar an accountant from practicing before it); seealso Free Enter. Fund i PGAOB,No. 0886l,2010WL2555l9l,at*7(June28,20l0)(noting that the PCAOB initiates formal investigations and disciplinary proceedings that canresult in substantial fines, imprisonment, and dc-licensing) (citing 15 U.S.C. §,S 78ff(a),7202(b)(1), § 7215(c)(4) (2006)).

-23-

also subject to direct claims by shareholders, creditors, and other individuals and

entities that relied on the auditors’ representations, provided the necessary elements

can be proven — indeed, a number of such actions have been filed by shareholders and

creditors of Refco and AIG.24 In short, the in pan delicto defense in no way

immunizes auditors from responsibility for corporate fraud — it merely limits the

types of plaintiffs who are permitted to recover, starting with the responsible

corporation itself.

III. THE QUESTIONS BEFORE THE COURT HAVE SERIOUS POLICYIMPLICATIONS FOR THE PROFESSION.

It is widely accepted that company management is in the best position, and has

primary responsibility, to ensure the accuracy of its financial statements. See Rift,

834 P.2d at 762. Yet the Court’s acceptance of Appellants’ arguments would permit

a company whose corporate culture likely incubated fraud (by, for example, tying

management’s compensation to aggressive performance targets) to shift responsibility

for the resulting fraud to its outside auditors, who were in fact among its principal

24 Third parties, such as the creditors, can bring claims for fraud and in certain instances,negligent misrepresentation. See, e.g. Ultrarnares, 255 N.Y. at 179, 174 N.E. at 444(holding that accountants are subject to liability to third parties for common law fraud);Restatement (Second) of Torts § 552(2 )(a) (1 977) (negligent misrepresentation actionrequires plaintiff to he a person for whose benefit the defendant intends to supply theinformation or knows that the recipient intends to supply it).

-24

victims.25 As discussed above, it would thus remove a key incentive for companies to

police their own management. Paradoxically, then, the positions Appellants advocate

as a way to promote accountability by auditors would reduce the accountability of

audit clients, those first in the line of defense against misconduct by management.

There is no doubt a balance to be struck in ensuring that professionals duly

perform their services, and that those who do not are held to account for their

transgressions. But that balance already exists. As discussed above, auditors face

numerous forms of criminal, civil, and regulatory liability for audit lapses. And even

in the absence of formal sanctions, auditors already have “a great deal of incentive to

ensure accurate reporting,” and very little incentive to permit or assist management

fraud. Baena, 453 F.3d at 9; see also In re Worlds of Wonder Sec. Litig., 35 F.3d

1407, 1427 n.7 (9th Cir. 1994) (“It is highly improbable that an accountant would risk

surrendering a valuable reputation for honesty and careful work by participating in a

fraud merely to obtain increased fees.”).

Expanding liability further, as Appellants advocate, would have serious

implications. The accounting profession is significantly burdened by litigation

arising from a widened scope of liability and increasingly aggressive plaintiffs

seeking “deep pockets.” See, e.g., Chamber of Commerce Report at 104 (“The

25 See, e.g., Michael R. Young, Accounting frregularities And Financial Fraud, Chap. I (3ded. 2006) (explaining that financial fraud typically begins with overly aggressiveperformance targets set by the board and/or management).

biggest threat facing audit firms today is that a single mega-claim or several such

civil claims in succession could destroy an audit firm”); see also U.S. Treasury

Advisory Committee on the Auditing Profession Final Report, Oct. 6, 2008, at 11:7

(referring to “catastrophic claims”); VII:25 (noting that the six largest firms were, as

of September 2008, involved in 90 private actions each with claims over $100

million, 27 of which were over $1 billion, and 19 over $30 billion; since 1995, firms

have paid $5.66 billion to settle accounting cases); Eric L. Talley, Cataclysmic

Liability Risk Among Big Four Auditors, 106 Colum. L. Rev. 1641, 1644 (2006)

(aggregation of potential liability risks faced by auditors could “create a risk portfolio

that is ‘cataclysmic’ in nature,..

The adoption of Appellants’ arguments would encourage even more litigation

by making it much easier for plaintiffs to plead around a key defense, and certainly

increase the likelihood of complaints advancing beyond the pleading stage.26 While

the audit firm may ultimately prevail on summary judgment or at trial, the costs today

of discovery alone are enormous, particularly with proliferating document production

arising from electronically stored information. This results in costly (if not extortive)

settlements, often disproportionate to actual liability risk and, indeed, to the auditor’s

26 This concern is heightened in the context of actions by bankruptcy trustees. As JudgePosner recently explained, “judges must. . . be vigilant in policing the litigation judgmentexercised by trustees in bankruptcy” because “the trustee of a defunct business has little todo besides filing claims that if resisted he may decide to sue to enforce.” Maxwell v. KP.’1GLLP. 520 F.3d 713. 718 (7th Cir. 2008).

practical ability to detect and prevent management fraud.27

Increased litigation may also result in an increase in the cost of liability

insurance for auditors, a cost that will be passed on to clients in the form of more

expensive auditing services. See U.S. Chamber of Commerce, Auditing: A

Profession at Risk 4 (January 2006) at 7-8. Increased litigation risk is also affecting

the ability of the profession to recruit and retain high-quality personnel. See id. at 8

(“Qualified auditors face ever-growing incentives to exercise their professional

options and may opt to leave the profession altogether.”). This may further reduce

the availability, and therefore increase the cost, of audit services.

Accountants also may become more selective about the clients they serve,

choosing only those with “blue ribbon” risk management and oversight systems, and

rejecting those with less sophisticated internal controls, to minimize the accountant’s

litigation risk. Yet those are the clients that are in the greatest need of quality

auditors, and the failure to obtain such services may correspondingly affect those

companies’ investors, and ultimately the New York economy. See, e.g., Eric L.

Talley, Cataclysmic Liability Risk Among Big Four Auditors, 106 Colum. L. Rev.

1641, 1689 (2006) (to manage liability, “auditors can decide to sever relationships

27 See, eg., H.R. Rep. No. 105-803, at 13 (1998) (Conf. Rep.) (acknowledging the danger of“strike suits” filed “to extract a sizeable settlement from companies that are forced to settle.regardless of the lack of merits of the suit”); H.R. Rep. No. 104-369. at 31(1995) (Conf.Rep.) (reforms prompted in part by “the abuse of the discovery process to impose costs soburdensome that it is often economical for the victimized party to settle”).

--‘7-

with their riskiest clients, altering their ‘portfolio’ of clients to a safer sub-

population”); Carl Pacini, Mary Martin & Lynda Hamilton, At the Interface ofLaw

and Accounting An Examination ofa Trend Toward a Reduction in the Scope of

Auditor Liability to Third Parties in The Common Law Countries, 37 Am. Bus. L.J.

171, 173 (2000) (noting that increased litigation has caused accounting firms to be

“more aggressive in refusing to render services to high-litigation-risk firms”).

p

-28-

CONCLUSION

Dated: New York, New YorkJuly 22, 2010

Richard I. Miller, Esq.1211 Avenue of the AmericasNew York, New York 10036

(212) 596-6245

General CounselAmerican Institute of CertifiedPublic Accountants

Bradley M. Pryba, Esq.3 Park AvenueNew York, New York 10016

(212) 719-8364

Assistant Counsel for EthicsNew York State Society of CertifiedPublic Accountants

WILLKIE FARR & GALLAGHER LLP

By: LK lly Mj Hnatt(A Member of the Firm)Derek M. Schoenmann

787 Seventh AvenueNew York, New York 10019

(212) 728-8000

counselfor Amici Curiae American Institute of Certified Public Accountants andNew York State Society of certified Public Accountants

For the foregoing reasons, the Court should uphold longstanding principles of

agency law regarding imputation and New York precedent concerning the in pan

delicto defense in response to the questions certified to it by the Second Circuit and

the Supreme Court of Delaware, and rule in favor of the Respondents in both cases.

-29-