Legal Actions Against Insurance Company May Implicate Deloitte

Michelle Remo, “Big 4″ observer
June 26, 2011 /

The New York Court of Appeals has ruled last week the fraud claims against an insurance company may snowball to include the firm’s auditors from Deloitte & Touche LLP.

In 2000, stockholders and bondholders of Philadelphia-based Reliance Group Holdings Inc. filed a class action suit against the insurance company over allegations of misleading statements, during which time the firm was running up to bankruptcy.

Now, the stakeholders want to bring their claims to higher grounds to grill Deloitte auditors, who looked into the financial reports of the insurance company. Deloitte served as the auditing firm for two units of Reliance, Reliance Financial Services Corp. and Reliance Insurance.

The claims have been brought to the forefront on behalf of bondholders by a trust, a “single entity” established under federal law to manage the reorganization plan for Reliance Group.

The trust was established in 2005. It then filed a lawsuit against Reliance Group before the New York Supreme Court on behalf of the bondholders and shareholders, claiming accounting fraud.

The New York appellate court said last week the claims could be heard.

A 6-1 opinion by the court subsequently reversed the decision of a lower court that previously dismissed allegations of fraud against Deloitte and Jan Lommele, a principal of the accounting firm who served as an actuary for Reliance Insurance Co.

Deloitte cited the Securities Litigation Uniform Standards Act (SLUSA) of 1998 as preempting the complaint because it did not represent a single entity.

In 2007, the lower court held that the trust was a single entity, a ruling reversed by the appellate division two years later that dismissed the bondholders’ claims. The decision claimed that the trust was not a single entity with regard to those claims.

The recent decision of the New York Court of Appeals did not preclude the bondholders’ actions accordingly based on the SLUSA.

Specifically, the ruling pointed out that the law specifies that “a corporation, investment company, pension plan, partnership or other entity, shall be treated as one person or prospective class member” if it is not founded for purposes of taking part in a suit.

 

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