In Massachusetts, judge enters findings in a case questioning whether non-client investors can seek to hold accountants liable for their investment losses

By Greg Aceto and Elizabeth Libro at Aceto, Bonner & Cole PC

On June 15, 2016, Superior Court Judge Kenneth W. Salinger entered findings in a case questioning whether non-client investors can seek to hold accountants liable for their investment losses under Massachusetts General Laws, Chapter 93A, which regulates business practices to ensure consumer protection. Essentially, Chapter 93A protects consumers from unfair and deceptive business practices of companies they are engaged in trade or commerce with. This ruling, however, broadens the class of consumers who are protected by 93A by potentially allowing third-party, non-client investors to sue accounting firms for failed investments and investment losses.

Details of the case

The case Sgarzi, et al. v. Sharkansky & Company LLC, et al., involves Sharkansky & Company LLC, a Massachusetts Limited Liability Corporation that provides companies with tax, accounting, audit, and consulting services. The Plaintiffs argued that in 2005 Sharkansky audited the financial statements of Inofin, Inc., a motor vehicle finance company based in Rockland, Massachusetts, deeming the company to be in good financial standing. Further, the Plaintiffs argued that based on Sharkansky’s 2005 audit they chose to invest in Inofin which ultimately suffered losses totaling $9.7 million. As a result, the Plaintiffs filed various claims against Sharkansky, including counts for violation of Massachusetts General Laws, Chapter 93A and negligent misrepresentation. Sharkansky moved for Summary Judgment.

Sharkansky argued that it could not be held liable for negligent misrepresentation in its Inofin audit letter because it did not owe a duty of care to any of the Plaintiffs. The Court agreed with Sharkansky stating that an auditor only owes a duty of care to third-parties in a limited number of circumstances. Further, Judge Salinger stated that the "Defendants owed no duty of care to [the Plaintiffs] because there is no evidence that they prepared Sharkansky’s audit report ‘for the purpose of assisting’ potential future investors in Inofin ‘in any particular transaction.’" Therefore, the Defendant’s Motion for Summary Judgment in regards to negligent misrepresentation was allowed.

Additionally, Sharkansky argued that it could not be held liable to the Plaintiffs under Chapter 93A because it had no direct commercial relationship with any of them. Judge Salinger did not agree with the Defendant’s argument stating that the "Plaintiffs [could] prove that Defendant’s alleged malfeasance took place in a business context, and thus implicates c. 93A." Further, Judge Salinger stated that if the Plaintiff could show the Defendant had a commercial relationship with them or that the Defendant’s actions interfered with trade or commerce in some other way, then Chapter 93A applies reasoning that "[p]arties need not be in privity for their actions to come within the reach of c. 93A." Ultimately, Judge Salinger ruled that an accounting firm that knowingly or recklessly conveyed false information to help a client engage in a third-party commercial transaction may be in violation of Chapter 93A. Thus, the Defendant’s Motion for Summary Judgment in regards to the Chapter 93A claim was denied.

Lesson from the Case

This case provides a number of lessons for firms in Massachusetts that, directly or indirectly, assist their clients with future third-party transactions. It is important that these firms engage in due diligence and precisely disclose relevant information when assisting clients. Specifically, since as Judge Salinger found the firm can be held liable for third-party losses due to their alleged unfair and deceptive business practices. It is wise for companies that find themselves in these types of situations to seek the legal counsel of an experienced civil litigation attorney. The attorneys at Aceto, Bonner & Cole PC can review the details of your situation and discuss with you the best legal options that are available to ensure that your interests are fully protected.