By: David Margulies
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
Applying Indiana law, the Seventh Circuit firmly rejects the idea that a financial auditor has any obligation to investigate circumstances external to a company’s books and records in connection with its determination whether a going concern qualification should be included in an audit report.[1] The auditor must, however, consider and factor into its going concern determination information about external matters that it is “told by the firm or otherwise learns.”[2]  The trustee’s negligence and breach of contract claims against financial auditor Ernst & Young arose out of the collapse of Taurus Foods, a frozen meat distribution company that was involuntarily forced into bankruptcy two years after the issuance of an allegedly defective audit report.[3] The trustee asserted a “deepening insolvency” theory based on the auditor’s failure to include a going-concern qualification, thereby causing the managers of Taurus to refrain from liquidating immediately and losing an additional $3 million through continued operation.[4]

By: Michael Maffei
St. John's Law Student
American Bankruptcy Institute Law Review Staff
 
In a good news, bad news decision for prime brokers, the District Court in In re Manhattan Investment Fund v. Gredd[1] held that a prime broker is an initial transferee of funds held in a customer’s margin account, but recognized a “robust” good faith defense to transferee liability.  In this appeal from an award of summary judgment,[2] Bear Sterns had receive approximately $141 million to cover margin calls for a hedge fund that, in reality, was a “Ponzi” scheme.  In a holding that spells trouble for prime brokers, the Court rejected the argument that a prime broker is a “mere conduit” and lacks “dominion and control” over the funds in a margin account.  Applying the Second Circuit’s “nuanced” approach, the Court rejects the narrow view that a party must have unfettered control over funds in order to be an initial transferee.[3]  Since Bear Sterns could use the margin funds to protect itself against possible losses, it did not qualify as a mere conduit.  Further, the discretionary authority given it as prime broker to close out positions, which was standard in the industry, was sufficient “control” to trigger transferee status.