Date: Mon, 19 Nov 2007 11:36

From: Robert Stevens

Subject: Alice in Wonderland (or how to extract millions from auditors)

Well, it was only a strike out ...

That said, the claim should have failed on the basis that ex turpi causa non oritur actio. As far as I can see, SR needed to rely upon their own wrongdoing in order to make out their claim and that should have been the end of the matter. Having read it through twice I don't understand why the judge thinks differently.

(The case is here.)

The reasoning is, I think, to be found in paragraph 65 (10) where the judge seems to lapse into the 'repugnant to the conscience of the ordinary citizen' test, which I had thought did not represent the law according to the House of Lords.

Of course, even if the claim succeeded the recoveries would not just be 'handed over' to the bank. The bank would be an unsecured creditor and would have to prove along with all the other mugs. So, I am not as impressed by the argument that Caparo is being circumvented.

RS

Quoting Andrew Tettenborn:

If you're scammed by a company, obviously you can sue the company. But can you also sue its auditors for negligently failing to take steps to stop their client scamming you? At first sight, obviously not: that's just the sort of third-party claim that Caparo v Dickman [1990] 2 AC 605 is meant to strangle at birth.

Except that ... er... it seems you now can. In Stone & Rolls Ltd v Moore Stephens [2007] EWHC Comm 1826 SR scammed its bank out of a cool $170 million in a slick letter of credit fraud. The bank got judgment against it, but of course found no assets. Nothing daunted, the bank then bankrolled SR's liquidator to sue SR's auditors for damages (i.e. SR's liability to the bank of $170 million), which it could then pass on to the bank.

Langley J held it could do so, despite (a) the blatant avoidance of the duty of care argument in Caparo, and (b) the peculiarity of a corporate criminal effectively saying, in the best traditions of the hopeless underclass, "you negligently failed to stop me being wicked."

Does anyone share my initial view that all this is straight out of Alice in Wonderland, and (for want of a better word) plain screwy?

Robert Stevens
Professor of Commercial Law
University College London

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