CA1: unclean corporate hands can’t sue auditor for inflated earnings

Baena v. KPMG LLP, No. 05-2868, has a fairly complicated bannkruptcy-related backstory, but it doesn’t matter much as “The only claim pertinent to this appeal was brought under Mass. Gen. Laws ch. 93A §§ 1-11 (2002) [(unfair or deceptive trade practices)].”  The ...”complaint charged that KPMG had wide access to L&H's financial records and activities; that despite discovering and in some cases warning managers of serious problems, KPMG failed to alert the independent directors of L&H and instead issued unqualified opinions and certified balance sheets...”  The allegations essentially claim that KPMG closed its eyes just to retain a client.  The court first determines that the bankruptcy trustee can pursue the claims of the KPMG’s client, “which under the plan of reorganization, he is entitled to do.”  (The court notes that the question of “who” may pursue a claim is one of prudential, not Article III standing, and concludes that the question of who may pursue the claim is really one of Massachusetts law.)

The court provides a sort of neat discussion about who is harmed by an inflated earnings.  Answer: we all are.  (Well, for a long time in the 90s, it seems like the answer was: nobody.  We were all an innocent country back then, Enron was America's hero of innovation.  Alf was but a recent memory.)

Anyway, as to the substance, the court concludes under Massachusetts law, the“In pari delicto” doctrine bars the claim because, although some courts dubiously called it one of “standing,” it really means that the client of KPMG can’t sue it for its own losses when it helped in the wrong.

J. Michael McBride comments here.