So, can they?  New York’s answer to this question will have a significant impact on shareholder suits against outside auditors.  Recently, the Supreme Court of Delaware certified a question to the New York Court of Appeals, meaning that Delaware is applying New York law in a case and has asked New York’s highest court to rule on a point before it proceeds.

This case was brought in Delaware Chancery court by a multitude of plaintiffs against a multitude of defendants as a result of the AIG meltdown.  The certified question involves a negligence claim by the stockholders of AIG against PricewaterhouseCoopers (“PwC”). 

PwC moved to dismiss the claim, asserting in pari delicto, and the court granted the motion.  The stockholders appealed that decision to the Supreme Court of Delaware, which chose to certify a question to the New York Court of Appeals before ruling on the appeal.

The In Pari Delicto Defense

The in pari delicto defense allows a defendant in a lawsuit to claim that the plaintiff is at least equally at fault.  If successful, the plaintiff’s claim must be dismissed. 

The Adverse Interest Exception

For the defense to be successful, a court must “impute” the illegal actions of a corporation’s senior officers to the corporation, meaning that the court must hold the corporation responsible for its employees’ actions. 

But, New York recognizes a total abandonment version of the adverse interest exception.  If the employee(s) totally abandoned the corporate interest, a court will not impute their actions to the corporation and the in pari delicto defense will fail.

The Stockholder Suit Exception

Additionally, there is generally an exception to the in pari delicto defense for stockholder suits.  This exception provides that the in pari delicto defense will not bar stockholders from suing wrongdoers within their corporation. 

It is not clear in many jurisdictions, including New York, whether this exception applies when stockholders sue wrongdoers outside the corporation, such as outside auditors.

The Certified Question

The long, complicated question breaks down into two basic questions.  First, generally, can outside auditors use the in pari delicto defense to block suits by stockholders?  Second, what if those outside auditors merely failed to perform the audit in accordance with PCAOB standards and are not co-conspirators in the fraud?

Auditors should pay close attention to this case.  If the court answers yes, auditors operating in New York will no longer be able to prevent stockholder suits with the in pari delicto defense.  A yes response would mean stockholders will be able to successfully sue outside auditors for mere negligence in failing to prevent fraud committed by a corporation.