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State of New Jersey v. Qwest Communications International, Inc.

387 N.J. Super. 469, 904 A.2d 775 (App. Div. 2006)

ACCOUNTANTS; FRAUD — Aiding and abetting fraud is a recognized civil cause of action in the State of New Jersey, and an accountant or auditor who commits intentional acts of fraud or intentional acts that assist a client in committing fraud cannot rely upon the Accountant Liability Act as a defense.

An investor filed suit seeking damages for an alleged securities fraud against a corporation and its accounting firm for fraudulent activities which caused the company’s stock to trade at artificially inflated prices. The allegation was that the corporation employed improper accounting practices and issued false and misleading statements about the company’s revenues and profits. More specifically, the investor alleged that the accounting firm intentionally advised the company how to structure “swap transactions” that would artificially inflate revenues by reporting operating costs as capitalized expenses, thereby inflating the stock price. It alleged it suffered millions of dollars in losses when the artificially high stock price plummeted. It maintained that the accounting firm participated in, knew of, and/or recklessly disregarded the facts and circumstances of the company’s fraudulent acts when issuing public documents regarding the company’s financial status. In an amended complaint, the investor included details supporting its allegations regarding the accounting firm’s role in aiding and abetting the alleged fraudulent scheme, and identified specific fraudulent acts committed by the accounting firm.

The accounting firm filed a motion to dismiss the amended complaint on the ground that investor failed to state a claim upon which relief could be granted. It claimed that the investor’s complaint was premised on negligence (mischaracterized as fraud) and that this negligence claim would be barred under New Jersey’s Accountant Liability Act, N.J.S.A. 2A:53A-25b. The lower court granted the firm’s motion and dismissed the specific counts alleging aiding and abetting fraud. The investor appealed, arguing that its complaint was based in fraud and therefore was not barred the Act.

On appeal, the Appellate Division held that the Accountant Liability Act does not bar claims of aiding and abetting fraud and conspiracy to commit fraud because it only applies to actions for negligence. It also confirmed that there is an actionable tort of aiding and abetting fraud under New Jersey law. Further, it concluded that the investor had pled the fundamental basics of aiding and abetting fraud by alleging that the accounting firm aided and assisted the company in performing fraudulent reporting of earnings to inflate its stock prices. Accordingly, the Court reversed the lower court’s ruling and reinstated the investor’s complaint.

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