Nutmeg Securities Ltd. v. McGladrey & Pullen

The underwriter of an initial public offering of a now-defunct corporation brought this action for damages against the corporation’s accounting firm, alleging the firm prepared false and misleading financial and audit reports knowing and intending the underwriter would rely on these reports in agreeing to underwrite the offering. The trial court applied a “Bily club” to the action and sustained the accounting firm’s demurrer without leave to amend. We reverse.

Facts and Proceedings Below

The complaint alleges in relevant part:

Plaintiff Nutmeg Securities, Ltd. (Nutmeg) is in the business of providing financial advice and underwriting for companies “going public” with their stock through an initial public offering (IPO). Defendant McGladrey & Pullen (McGladrey) is a firm of certified public accountants which performed accounting and auditing services for American Diversified Holdings, Inc. (AmDiv) in connection with AmDiv’s IPO.

In the fall of 1997 McGladrey and AmDiv devised a scheme by which AmDiv could launch its IPO based on false information contained in its financial reports. At the heart of this scheme was AmDiv’s representation it possessed $11 million in…