Auditor Held Liable in Negligence for Non-Clients' Losses

Case Comment: Lavender v. Miller Bernstein

The recent Ontario Superior Court decision, Lavender v Miller Bernstein,1 serves as a reminder - and a warning - that the Canadian jurisprudence is beginning to recognize a cause of action in negligence emerging from a negligent misrepresentation where the representor owes a duty of care to the representee. In this case, an auditor was found liable for the substantial financial loss of a securities dealer's clients, though it was the security dealer who fraudulently misrepresented information to its clients.

The fact that the plaintiffs were non-clients of the defendant and may have not even been aware of the defendant's role at the time of the loss is irrelevant, broadening the scope of liability for future negligence claims alike.

Background On July 6, 2001, the Ontario Securities Commission (OSC) placed Buckingham Securities into receivership as it had contravened several regulatory requirements. Moreover, the securities dealer concealed their breaches by falsifying information on financial documents that were eventually audited by the defendant, accounting firm Miller Bernstein. This resulted in a loss of over ten million dollars to the plaintiffs, a class on behalf of the Buckingham Securities' investors.

The plaintiffs alleged that the defendant negligently filed the misrepresented documents and, as such, they breached their duty of care to the class members. Specifically, they claimed that had the defendant correctly audited and filed accurate documentation, the OSC would have intervened before their financial assets were lost. The defendant denied liability and accused the plaintiff of "disguising" a claim in misrepresentation to avoid proving the elements of reliance and causation.

The primary legal issues considered were whether the defendant auditor owed a duty of care to the plaintiffs and, if so, whether they breached it.

The Court performed the two-step Anns-Cooper analysis...

Analysis The Court performed the two-step Anns-Cooper analysis2 in concluding that the defendant breached their duty of care to the plaintiffs.

First, the Court determined that there existed a sufficient level of foreseeability and proximity to establish a prima facie duty of care towards the plaintiffs. The defendant knew the consequences of failing to disclose the regulatory breaches in the documentation and that a negligent audit could expose the plaintiffs to financial damages. Additionally, it is reasonable...