An Ontario court has dismissed an effort to seek damages against the legal and audit professionals that advised failed payday lender, the Cash Store Financial Services Inc., alleging that they failed to detect and disclose financial issues at the company.
The Superior Court of Justice dismissed claims against KPMG LLP and Cassels Brock & Blackwell LLP from the failed company’s estate, alleging that they knew, or should have known, that the company was insolvent by late 2011 — well before it ultimately filed for creditor protection in 2014. The suit was seeking between $119.3 million and $177.9 million in damages, along with disgorgement of certain legal fees.
“In general terms, this case concerns Cash Store’s deterioration from a growing and profitable business in its first few years of operation to an insolvent entity requiring CCAA protection in 2014,” the court said.
At one point, the company had more than 500 branches and it was publicly traded on the Toronto Stock Exchange between 2002 and 2014, and on the New York Stock Exchange between 2010 and 2014.
According to the decision, the estate alleged that, in the context of an “evident insolvency and existential regulatory threat,” the advisory firm should have prevented the company from making certain alleged misrepresentations in its financial statements in 2012 that hid its true financial condition.
“… this case raises questions as to the nature and extent of the duty of professional advisors … to take a client’s representations about the client’s operations with a grain of salt, and to perform independent investigations, including investigations beyond the ostensible scope of a professional advisor’s formal engagement, to satisfy itself as to whether or not the client’s public disclosure precisely and fairly captures the nature and details of the client’s business,” the court noted.
Related claims against Canaccord Genuity Corp. involving a valuation exercise and a resulting fairness opinion were settled on the eve of trial, the court noted. And the estate also settled its claim against a number of Cash Store’s former directors and officers.
However, at trial, the court found that the claims against KPMG and Cassels must fail.
“I am hard-pressed to attribute fault, as the plaintiff urges, for Cash Store’s pronounced and increasing difficulties, from a point in 2012 through its application for CCAA protection in April of 2014, to KPMG or Cassels,” the decision said.
“In the case of KPMG, there is in my view nothing to suggest that KPMG’s conduct, in any of its work for Cash Store, fell below the standard of care required. Moreover, … there is in my view no link between KPMG’s audits and reviews of Cash Store’s annual and interim financial statements and Cash Store’s ultimate demise,” it said.
Additionally, the court said it wasn’t the job of either firm to make business decisions for the company.
“Cash Store had a sophisticated and experienced management team to make strategic and other business decisions,” it said.
The court also found that the claims against the firms were barred under the limitation period for civil actions.