(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Alison Frankel

Nov 4 (Reuters) - Audit firm BDO must face a securities

fraud claim by a class of AmTrust Financial shareholders after a

federal appeals court took the rare step last week of revisiting

a decision that let BDO off the hook.

A three-judge panel from the 2nd U.S. Circuit Court of

Appeals ruled on Thursday that AmTrust shareholders

can proceed with a claim that BDO is liable for falsely

certifying its 2013 audit of the insurance giant. The new ruling

reverses a decision last August by the same judges, who said at

the time that shareholders failed to show BDO's allegedly false

certification mattered to AmTrust investors.

The 2nd Circuit's change of heart came after shareholder

lawyers from Robbins Geller Rudman & Dowd petitioned for

reconsideration by the three-judge panel.

That petition prompted the appeals court last November to

ask the U.S. Securities and Exchange Commission to weigh in.

The SEC, as I reported in February, urged the 2nd Circuit to

reinstate shareholders' claim against BDO, arguing that

investors place significant faith in auditors' certifications of

corporate financials. Even though auditor certifications are

standardized, the U.S. regulator said, investors rely on the

statements to provide "a clear and consistent signal" on

financial statements.

BDO opposed reconsideration in an April 9 brief. The auditor

insisted that the SEC's "sweeping and extreme position" would

"drastically expand the federal securities fraud laws." If the

2nd Circuit were to revive AmTrust shareholders' claims against

the audit firm, BDO argued, it would be sending a signal that

investors can sue for fraud whenever accountants acknowledge a

technical deficiency in their procedures.

Some key background: BDO has acknowledged that it issued a

"misstated audit opinion" on AmTrust in 2013. According to an

SEC order in 2018, when BDO's audit team fell behind schedule in

reviewing AmTrust's financial reports in 2013, BDO partners

instructed auditors to sign off on incomplete and unverified

work. Although BDO ultimately completed the audit, the SEC in

2018 suspended three BDO accountants for "improper professional

conduct."

The audit firm's lawyers at McDermott Will & Emery have

nevertheless argued throughout the AmTrust shareholder case that

the supervisory deficiencies cited in the SEC suspension order

had nothing to do with the substance of AmTrust's financial

reports and were therefore immaterial to AmTrust investors. BDO

has also argued that the allegedly false 2013 audit

certification did not cause AmTrust investors to lose money.

In the 2nd Circuit's new ruling, Judges Raymond Lohier and

William Nardini, as well as U.S. District Judge Rachel Kovner of

Brooklyn, sitting by designation, sided with the SEC and AmTrust

shareholders. Investors, wrote Lohier, were not required to

allege a specific link between BDO's allegedly false

certification and misstatements in AmTrust's financial

statements in order to show that the audit report mattered to

shareholders.

"BDO's certification that the audit was conducted in

accordance with [federal accounting] standards succinctly

conveyed to investors that AmTrust's audited financial

statements were reliable," the 2nd Circuit said. "The false

certification thus subjected unknowing investors to the risk

that AmTrust's financial statements were unreliable."

The 2nd Circuit pointed out that AmTrust's share price

dropped when The Wall Street Journal reported in 2017 on

problems with BDO's previous audit certification. That market

reaction, the appeals court said, was evidence of "a 'clean

match' between the misleading audit opinion and the subsequent

disclosure."

BDO counsel Tim Hoeffner of McDermott noted in an email

statement that the 2nd Circuit declined to revive a second fraud

claim against the audit firm, allowing investors only to proceed

with allegations that BDO's false certification violated the

Securities and Exchange Act. "With respect to the sole claim

reinstated," Hoeffner said, "we continue to believe that the 2nd

Circuit's original decision on that claim was correct and are

considering available remedies."

Shareholder lawyer Sam Rudman of Robbins Geller said it is

"almost unheard of" for a 2nd Circuit panel to change its mind

in response to a petition for rehearing.

"The decision is significant for the obvious reason that the

court is recognizing the common-sense reality that people care

about auditor opinions," Rudman said.

Shareholders originally sued AmTrust in 2017 after the

insurer restated five years' of financial statements. They

subsequently amended their complaint to add claims against BDO

based on its allegedly false certification of AmTrust's 2013

audit.

U.S. District Judge Lewis Kaplan of Manhattan dismissed the

entire case in 2020. The 2nd Circuit's ruling last August

revived shareholders' Securities Act claims over AmTrust stock

offerings in 2015 and 2016.

AmTrust, which is represented by Williams & Connolly, did

not provide a statement in response to my query on last week's

reinstatement of a claim against BDO.

Read more:

'Audits matter.' AmTrust shareholders get US SEC backing in

bid for appellate redo on BDO claim