WHAT IF THE FACTS WERE DIFFERENT? If Todman had conducted an audit for DBI but had not issued a certified opinion about DBI’s financial statements, would the result in this case have been the same? Explain.

THE LEGAL ENVIRONMENT DIMENSION Did Overton have a valid reason to sue DBI’s auditors? Why or why not?

From 1999 through 2002, Todman & Company, CPAs, P.C., audited the financial statements of Direct Brokerage, Inc. (DBI), a broker-dealer in New York registered with the Securities and Exchange Commission (SEC). Each year, Todman issued an unqualified opinion that DBI’s financial statements were accurate. DBI filed its statements and Todman’s opinions with the SEC. Despite the certifications of accuracy, Todman made significant errors that concealed DBI’s largest liability—its payroll taxes—in the 1999 and 2000 audits. The errors came to light in 2003 when the New York State Division of Taxation subpoenaed DBI’s payroll records, and it became clear that the company had not filed or paid its payroll taxes for 1999 and 2000. This put DBI in a precarious financial position, owing the state more than $3 million in unpaid taxes, interest, and penalties. To meet its needs, DBI sought outside investors, including David Overton, who relied on DBI’s statements and Todman’s opinion for 2002 to invest in DBI. When DBI collapsed under the weight of its liabilities in 2004, Overton and others filed a suit in a federal district court against Todman, asserting, among other things, fraud under Section 10(b) and Rule 10b-5. The court dismissed the complaint. The plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit.