The New York Attorney General has filed a lawsuit claiming that an audit firm violated New York State’s Martin Act by issuing a clean audit opinion that concealed the client’s true financial position.  The complaint alleges that the audit firm approved the use of certain repo transactions that made the client look less leveraged.  The complaint further argues that, although the transactions may have technically followed certain accounting rules, the clean opinion violated GAAS and GAAP by generally misleading investors about the true nature of the client’s financial position.  New York State seeks disgorgement of fees and restitution resulting from the client’s bankruptcy.

OUR TAKE: The New York State Attorney General is using the overbroad Martin Act to allege generalized securities fraud against third parties.  It is unlikely that this case could proceed under the federal securities laws.