Date: Mon, 19 Nov 2007 10:55

From: Andrew Tettenborn

Subject: Alice in Wonderland (or how to extract millions from auditors)

If you're scammed by a company, obviously you can sue the company. But can you also sue its auditors for negligently failing to take steps to stop their client scamming you? At first sight, obviously not: that's just the sort of third-party claim that Caparo v Dickman [1990] 2 AC 605 is meant to strangle at birth.

Except that ... er... it seems you now can. In Stone & Rolls Ltd v Moore Stephens [2007] EWHC Comm 1826 SR scammed its bank out of a cool $170 million in a slick letter of credit fraud. The bank got judgment against it, but of course found no assets. Nothing daunted, the bank then bankrolled SR's liquidator to sue SR's auditors for damages (i.e. SR's liability to the bank of $170 million), which it could then pass on to the bank.

Langley J held it could do so, despite (a) the blatant avoidance of the duty of care argument in Caparo, and (b) the peculiarity of a corporate criminal effectively saying, in the best traditions of the hopeless underclass, "you negligently failed to stop me being wicked."

Does anyone share my initial view that all this is straight out of Alice in Wonderland, and (for want of a better word) plain screwy?

Andrew

--
Andrew Tettenborn MA LLB
Bracton Professor of Law
University of Exeter, England

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LAWYER, n. One skilled in circumvention of the law (Ambrose Bierce, 1906).

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