The Second Circuit recently issued a significant decision, Overton v. Todman & Co.,2007 U.S. App. LEXIS 4239 (2d Cir. Feb. 26, 2007), the first in the circuit to hold that an accountant has a duty to correct its certified opinions and may incur primary liability for securities fraud for failing to do so.

Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit the fraudulent sale or purchase of any security. Neither Section 10(b) nor Rule 10b-5 expressly permit injured investors to sue for securities fraud, but since the early 1970s, the Supreme Court, in cases such as Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971), has recognized an implied private right of action for violations of Section 10(b) and Rule 10b-5.

In the aftermath of Bankers Life, this implied private right of action was used to reach not only primary participants in the alleged fraud, but also secondary participants, such as accountants, as aiders and abettors. The recognition of aiding and abetting liability changed, however, with the Supreme Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994).

In Central Bank, bond holders alleged that a developer was primarily liable for securities fraud for inflating the value of real estate securing the bonds, and that Central Bank, as indenture trustee, aided and abetted the fraud by failing to review the developer's real estate appraisal. In dismissing the suit against Central Bank, the Supreme Court rejected an implied right of action for aiding and abetting under Section 10(b) and Rule 10b-5, holding that secondary actors can only be held liable if all elements of a securities fraud claim are met.The Court did not, however, define when secondary actors meet those elements and left open the question of when secondary actors qualify for primary liability.

Overton "examine[s] one circumstance in which an accountant may incur primary liability for securities fraud." In Overton, plaintiffs alleged that Direct Brokerage Inc.'s accountant issued unqualified opinions that the financial statements accurately reflected DBI's financial health. But the accountant, plaintiffs alleged, failed to correct those opinions when errors in the financial statements came to light. In reversing dismissal of the securities fraud claim against the accountant, the Second Circuit "squarely" held that "an accountant violates the 'duty to correct' and becomes primarily liable under Section 10(b) and Rule 10b-5 when it (1) makes a statement in its certified opinion that is false or misleading when made; (2) subsequently learns or was reckless in not learning that the earlier statement was false or misleading; (3) knows or should know that potential investors are relying on the opinion and financial statements; yet (4) fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and (5) all the other requirements for liability are satisfied."

Overton can be harmonized with another recent Second Circuit decision, Lattanzio v. Deloitte & Touche, LLP, 2007 U.S. App. LEXIS 2061 (2d Cir. Jan. 31, 2007). In Lattanzio, Warnaco stockholders sued Deloitte after Warnaco's collapse, alleging that Deloitte, as Warnaco's auditor, was liable for securities fraud for making statements concerning Warnaco's financial health during the class period and failing to correct misstatements made before the class period. The Second Circuit affirmed dismissal of the securities fraud claim against Deloitte, holding that to state a securities fraud claim against an accountant, plaintiff must allege a misstatement attributed to the accountant at the time of dissemination and cannot rely on the accountant's assistance in drafting or compiling the filing. Deloitte, therefore, was not liable for the quarterly statements, which it did not audit, nor for the misstatements in the annual statement filed prior to the class period where the duty to correct the misstatements (i.e., when learning of the falsity) arose before the class period. Deloitte was also not liable for misstatements in the annual statement filed during the class period because plaintiffs failed to adequately plead loss causation. In other words, unlike in Overton, plaintiffs in Lattanzio failed to plead that the accountant made a material misstatement during the class period and without such misstatement, the accountant could not be held primarily liable for securities fraud.

Overton is important in that it addresses a question left open by Central Bank. It is, however, not a departure from the principles of Central Bank and its progeny.