Case Problem with Sample Answer—Potential Liability to Third Parties. In 2006, twenty-seven people and entities became limited partners in two hedge funds that had invested with Bernard Madoff and his investment firm. The partners’ investment adviser gave them various investment information, including a memorandum indicating that an independent certified public accountant, KPMG, LLP, had audited the hedge funds’ annual reports.

Since 2004, KPMG had also prepared annual reports addressed to the funds’ “Partners.” Each report stated that KPMG had investigated the funds’ financial statements, had followed generally accepted auditing principles, and had concluded that the statements fairly summarized the funds’ financial conditions. Moreover, KPMG used the information from its audits to prepare individual tax statements for each fund partner. In 2008, Madoff was charged with securities fraud for running a massive Ponzi scheme. In a 2009 report, the Securities and Exchange Commission identified numerous

“red flags” that should have been discovered by investment advisers and auditors. Unfortunately, they were not, and the hedge funds’ partners lost millions of dollars. Is KPMG potentially liable to the funds’ partners under the Restatement (Third) of Torts? Why or why not? [Askenazy v. Tremont Group Holdings, Inc., 2012 WL 440675 (Mass.Super. 2012)] (See pages 889–891.)
—For a sample answer to Problem 34–7, go to Appendix H at the end of this text.