Law firm’s decision not to sue potential defendant could not be basis for malpractice claim because law firm acted reasonably where liability and damages were uncertain
Achtman v. Kirby, McInerney & Squire. LLP, ___ F.3d ___, 2006 WL 2720643 (2nd Cir. Sept. 25, 2006)
The United States Court of Appeals for the Second Circuit has held that law firms which served as class counsel in a securities fraud action are not liable for legal malpractice for failing to assert claims against the auditor of the securities issuer where the liability of the accounting firm, i.e. the auditor, was doubtful and damages were uncertain.
In April 1996, several class action suits were filed against Bennett Funding Group (BFG) alleging securities fraud based on an elaborate Ponzi scheme involving sham contracts and fictitious financial statements. The suits were consolidated and two law firms, the Kirby law firm and the Bernstein law firm, were appointed co-lead counsel. The class consisted of over 20,000 investors in BFG securities. Arthur Andersen & Co., which had audited BFG’s misleading 1989 and 1990 financial statements, was not named as a defendant. Mahoney Cohen, which had succeeded Andersen as BFG’s auditor, was named a defendant. A $125 million settlement, which included $14 million from Mahoney Cohen, was reached. Some BFG investors, represented by different law firms, had since filed individual actions against Andersen and in some instances had reached settlement agreements. In 1999, the firms representing those individual defendants attempted to bring a class action suit against Andersen on behalf of the BFG investors, but the suit was time-barred