The Ontario Superior Court of Justice has found accounting firm Miller Bernstein responsible for some $10.6 million in losses sustained by 1,002 retail clients of defunct securities dealer Buckingham Securities.
“It’s very hard to get courts to find that auditors have a duty of care other than to the entity audited,” said Daniel Bach of Siskinds LLP, who represented Buckingham’s clients.
The lawsuit, commenced in 2010, took the form of a class action against Miller Bernstein. The claim was based on untrue statements made by Buckingham in its 1999 and 2000 public filings. Howard Kornblum, a partner at Miller Bernstein, admitted he audited and filed the false forms. He was disciplined by the OSC and the Institute of Chartered Accountants but continues to practise with Miller Bernstein.
After the class was certified, Bach brought a motion for summary judgment, which Justice Edward Belobaba granted on July 12.
Historically, Canadian courts, particularly the Supreme Court of Canada, have been loath to find auditors liable for pure economic loss to investors in or clients of an audited company. The leading case, a 1997 Supreme Court of Canada decision called Hercules Managements Ltd. v. Ernst & Young, generally protects auditors from liability. The Supreme Court last February heard another case called Deloitte & Touche v. Livent Inc., but has yet to release its decision.
But Belobaba concluded that, on the facts of this particular case, Kornblum and Miller Bernstein had an obligation to be mindful of the interests of the securities dealer’s clients “as a matter of simple justice.” The relationship between the clients and the auditor was sufficiently foreseeable and proximate to invoke a duty of care, the judge found.
“My analysis is based on the auditing standards applicable at the time and the evidence and admissions of the parties and their experts,” Belobaba wrote.
The auditors knew that the false forms were used by the OSC to police dealers and protect investors. In this case, the false filings hid the fact that Buckingham had failed to segregate its assets from those of its clients. Had the forms alerted the OSC to the non-compliance, no losses may have occurred.
“In short, (Miller Bernstein and Kornblum) well understood the consequences to ‘its client’s clients’ if the segregation or capital deficiency information was misstated (in the forms) — that a negligent audit of these (forms) could expose the class members to the very loss that they incurred,” Belobaba wrote.