Delaware Court Acquits PricewaterhouseCoopers, Other AIG Advisers from Accounting Fraud Charges
The suits filed by American International Group (AIG) investor Teachers’ Retirement System of Louisiana, an AIG investor, at Delaware Supreme Court implicating PricewaterhouseCoopers and AIG’s brokers and reinsurers in an accounting fraud, have been turned down by Delaware court justices on grounds that the investors allowed the New York’s highest court to decide on the technicality of the case.
Teachers’ Retirement System of Louisiana charged auditors from PwC, General Re Corp., and broker Marsh & McLennan for abetting a fraudulent accounting practice that hid losses from subprime mortgages in AIG, making it appear healthy while the company was nearing a financial collapse.
The Delaware court turned down the suits of AIG investors requesting to open the case, arguing that the complainants have already agreed that New York’s high court decide whether the state’s law could bar their Delaware suits against PwC and other advisers, the accounting fraud having taken place in New York.
At the core of Delaware court’s argument was that the “in pari delicto” theory, which could bar suits from any investors against any third party such as auditors and advisers according to the decision of majority of New York Court of Appeals, blocked the Delaware suits against PwC, General Re Corp., and broker Marsh & McLennan (Kirschner v. KPMG LLP, No. 151, 2010 WL 4116609, N.Y. Oct. 20, 2010).
The in pari delicto theory provides that two persons or entities are equally at fault, whether the malfeasance in question is a crime against the society or a breach of civil duty owed to an individual, thus requiring the court to prevent them to act against each other.
In a December 15, 2010 oral argument before the Delaware Supreme Court, legal counsels of the AIG investors failed to convince the justices to exempt their clients from Kirschner v. KPMG LLP, arguing that the investors were not aware of the conspiracy happening between the auditors and advisers inside AIG.
Delaware court’s decision has set a bad precedent for cases involving third parties, warned Stuart Grant who stood as legal counsel for the AIG investors. He said that if auditors and advisers could not be taken to task due to this technicality as in the case of AIG investors vs auditors and advisers, “many will get off scot-free.”