Illinois Supreme Court rules on economic loss doctrine.The Illinois Supreme Court ruled a CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firm could be held liable for economic damages attributable not only to breach of contract but also to negligent conduct. In 1975, the Congregation of the Passion, Holy Cross Province, appointed Cranford D. Newell to manage its investment and retirement funds. Newell employed a modified arbitrage arbitrage: see foreign exchange. arbitrage Business operation involving the purchase of foreign currency, gold, financial securities, or commodities in one market and their almost simultaneous sale in another market, in order to profit from price trading strategy In finance, a trading strategy (see also trading system) is a predefined set of rules to apply. Usually, this refers to a means used to replicate an option in order to give it an arbitrage free value in the sense that the cost of buying some financial assets to give the same , in which he bought bonds trading lower than government bonds in general and sold short bonds trading higher. Newell submitted periodic investment reports to the congregation on a cost basis. The congregation's staff also recorded the investments on a cost basis. Consequently, no unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. or losses were reflected in either Newell's reports or the congregation's internal records. When the congregation's accountants, Touche, Ross & Co., first became aware of Newell's investments in 1976, it decided a cost basis was appropriate and included in the financial statements a lengthy footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." explaining Newell's arbitrage investment strategy and its decision to book the investments at cost. The congregation alleged it relied on Touche's judgment in accepting the accounting method. In 1980, Touche attempted to verify the $3.6 million in investments reported in the financial statements, but Newell couldn't furnish the information it requested. After further investigation, Touche could verify only $1.2 million of the $3.6 million. Shortly thereafter, Touche issued its 1980 financial statements, restating the investment's value from cost to market. As a result, the account showed a $2.4 million loss. The congregation closed its account with Newell in 1981. After settling all claims with securities dealers, it had a net loss of $3,819,352. The congregation then sued Touche for failing to detect and disclose the irregularities in the investment account. A federal court dismissed claims against Touche for aiding and abetting a·bet tr.v. a·bet·ted, a·bet·ting, a·bets 1. To approve, encourage, and support (an action or a plan of action); urge and help on. 2. securities fraud. The congregation then filed claims against Touche in state court, alleging negligence, breach of fiduciary duty Noun 1. fiduciary duty - the legal duty of a fiduciary to act in the best interests of the beneficiary legal duty - acts which the law requires be done or forborne and breach of contract. The court ruled in the congregation's favor, awarding it $3.8 million in damages. The appellate court A court having jurisdiction to review decisions of a trial-level or other lower court. An unsuccessful party in a lawsuit must file an appeal with an appellate court in order to have the decision reviewed. sustained the verdict and Touche appealed to the Illinois Supreme Court. The issue before the court was whether recovery of a purely economic loss was restricted to breach of contract claims or was possible in negligence cases as well. In ruling for the congregation, the court said accountants must make certain decisions independently and clients have the right to rely on their expertise, even if it is not specifically memorialized in a contract. Since the duty to observe reasonable professional competence exists independently of any contract, the economic loss doctrine does not bar recovery for a negligent breach of that duty. (Congregation of the Passion, Holy Cross Province v. Touche Ross & Co., Docket A written list of judicial proceedings set down for trial in a court. To enter the dates of judicial proceedings scheduled for trial in a book kept by a court. no. 73224, Agenda 25, Illinois Supreme Court 4/21/94) |
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