Newsroom | Daniel Krasner Comments on Delaware High Court Litigation by AIG Shareholders Against Auditors | Wolf Haldenstein Adler Freeman & Herz LLP

03/08/10

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Del. High Court Seeks Input On AIG Claims Against PwC

By Samuel Howard

Law360, New York (March 05, 2010) -- Grappling with an appeal in shareholder derivative litigation against American International Group Inc., the Delaware Supreme Court has asked New York's highest court to clarify if AIG can in fact sue PricewaterhouseCoopers LLP for failing to detect the alleged fraud by AIG's top brass.

In an encouraging swing for the plaintiffs, Justice Randy J. Holland of the Delaware Supreme Court turned to the New York Court of Appeals on Wednesday to resolve shareholders’ challenge to a ruling that barred derivative claims against PricewaterhouseCoopers under the doctrine of in pari delicto.

The Delaware Chancery Court had dismissed the shareholder derivative allegations that PwC failed to detect a massive accounting fraud perpetrated by AIG’s senior officers. The court imputed the misconduct of the officers to AIG and then foreclosed derivative claims against the auditor, deeming AIG too embroiled in the alleged fraud to seek damages for PwC’s alleged wrongdoing.

Contemplating New York law, the Chancery Court said an auditor is immune to breach of duty claims when fraud is committed by corporate insiders.

The plaintiffs appealed, contending that under New York law in pari delicto does not apply to the derivative claims because PwC did not conspire with the AIG officers but merely failed to detect fraud.

Mulling the appeal, Justice Holland concluded that the court of last resort is required to answer, in the first instance, whether the doctrine of in pari delicto applies to derivative claims under New York law seeking damages for PwC's failure to properly audit the AIG.

“Would the doctrine of in pari delicto bar a derivative claim under New York law where a corporation sues its outside auditor for professional malpractice or negligence based on the auditor’s failure to detect fraud committed by the corporation, and the outside auditor did not knowingly participate in the corporation’s fraud, but instead failed to satisfy professional standards in its audits of the corporation’s financial statements?” the court asked the New York Court of Appeals.

Daniel Krasner, attorney for the appellants and partner at Wolf Haldenstein Adler Freeman & Herz LLP, said the New York court’s involvement is a boon to plaintiffs as that court can best ascertain the limits of the doctrine.

“Obviously, this is a favorable result for the plaintiffs," Krasner said. “We are optimistic the New York appeals court will agree with us about where the doctrine of in pari delicto does and does not apply.”

When the chancery court dismissed the suit, it found that the claims would stand under Delaware law and recommended referring the matter to the New York court for clarification, Krasner noted.

Steven Silber, spokesman for PwC, declined to comment on pending litigation.

PwC had served as AIG's auditor and certified financial statements that were revised downward by several billions of dollars once the company's fraudulent accounting came to light, according to the suit, which shareholders filed in 2004.

The suit accuses former AIG directors and officers, including CEO Maurice R. Greenberg and former Chief Financial Officer Howard I. Smith, of orchestrating an elaborate and widespread fraud that overstated the value of the company by billions of dollars.

AIG was forced to restate years of financial statements after the misconduct was uncovered, resulting in a $3.5 billion reduction in stockholder equity, according to the suit.

Attorneys for PricewaterhouseCoopers could not be reached for comment Friday.

The plaintiffs are represented on appeal by Wolf Haldenstein Adler Freeman & Herz LLP and Grant & Eisenhofer PA.

PricewaterhouseCoopers is represented by Connolly Bove Lodge & Hutz LLP and Cravath Swaine & Moore LLP.

The case is Teachers Retirement System of Louisiana et al. v. PricewaterhouseCoopers LLP, case number 454, 2009, in the Supreme Court of the State of Delaware.