Judge Limits Reliance Theory in BDO Seidman Securities Case

Judge Limits Reliance Theory in BDO Seidman Securities Case - 8/11/2009

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2009 News and Press Releases

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News	News 2009
HEADLINES \| SETTLEMENTS AND DISMISSALS \| COURT FILINGS LINKS TO OTHER NEWS \| NEWS ARCHIVE	HEADLINES ARCHIVED SETTLEMENTS AND DISMISSALS ARCHIVED

DISMISSAL NEWS:

Judge Limits Reliance Theory in BDO Seidman Securities Case, The Court Denied Class Status To Plaintiffs Suing BDO Seidman For Securities Fraud Based On A Fraud-Created-The-Market Theory Of Reliance
Gina Passarella

The Legal Intelligencer. August 11, 2009
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EXCERPT: A federal judge has denied a motion for class certification made by a group of investors seeking to hold accounting firm BDO Seidman responsible for poor returns on their purchase of notes and other securities from American Business Financial Services. In determining whether the plaintiffs in Malack v. BDO Seidman met qualifications for receiving class status, U.S. District Court Judge Thomas N. O'Neill Jr. for the Eastern District of Pennsylvania gave a lengthy analysis of the varying cases in New Jersey, Pennsylvania and other district and circuit courts that dealt with the issue at hand in Malack -- a fraud-created-the-market theory of reliance. The theory relaxes the burden of proof for plaintiffs regarding reliance when it comes to newly issued securities, which is what the plaintiffs purchased from now bankrupt ABFS. The idea is that because the notes are new and the price isn't determined by the market, but by the seller, investors can rely on securities laws to protect them from fraud. Plaintiff John A. Malack alleged ABFS improperly delayed labeling loans delinquent, making the value of the portfolio look better than it actually was. The plaintiffs argued BDO's audit reports approving ABFS's accounting standards allowed them to rely on the value of the notes. This, the plaintiffs argued, was all in violation of Rule 10b-5 of Section 10(b) of the U.S. Securities Exchange Act of 1934. But the judge said receiving a lower-than-expected return isn't enough to prove reliance because the fraud-created-the-market theory requires the whole operation to be a sham. O'Neill said in a footnote that the application of the fraud-created-the-market theory is disputed among circuit courts that have considered it. He said those that have applied it have done so narrowly. There are two tests under the theory to determine whether reliance is present – economic unmarketability and factual or legal unmarketability.

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