From Casetext: Smarter Legal Research

Shapiro v. Cantor

United States Court of Appeals, Second Circuit
Sep 8, 1997
123 F.3d 717 (2d Cir. 1997)

Summary

holding that an accountant cannot be held liable under securities laws where it "did not issue an opinion or certification as to the prospectus"

Summary of this case from McNamara v. Bre-X Minerals Ltd.

Opinion

No. 1771, Docket No. 96-9529.

Argued June 17, 1997.

Decided September 8, 1997.

Lawrence Profeta, Warshaw, Burstein, Cohen, Schlesinger Kuh, LLP, New York, NY, (Stephen E. Powers, Warshaw, Burstein, Cohen, Schlesinger Kuh, LLP, New York, NY, on the brief) for Plaintiffs-Appellants.

Leon P. Gold, Proskauer, Rose, Goetz, Mendelsohn, LLP, New York, N Y (Mark E. Davidson and Richard L. Spinogatti, Proskauer, Rose, Goetz, Mendelsohn, LLP, New York, NY, on the brief) for Defendants-Appellees.

Investors brought suit for equitable relief and damages against accounting firm and related defendants under Section(s) 10(b) of the Securities Exchange Act of 1934, Section(s) 12(2) of the Securities Act of 1933, and the Racketeer Influenced and Corrupt Organization Act. Claims against the accounting firm were dismissed on the pleadings by the district court for failure to state a claim for relief.

The judgment of dismissal is affirmed.

Before: WALKER, CALABRESI, and LAY, Circuit Judges.

Honorable Donald P. Lay, United States Circuit Judge for the Eighth Circuit, sitting by designation.


In 1984 several individuals, David Greenberg, Bruce Greenberg, Norman Nick, Stephen Cantor and Marvin Greenfield (the principals), formed seven limited partnerships to develop and operate a chain of nearly 100 "Video USA" stores for the rental of video recordings. They also created various corporations to serve as general partners of the limited partnerships, as well as companies to manage and operate the video stores. The principals created three private placement offering memoranda dated November 23, 1984, June 12, 1985, and April 7, 1986.

The 116 limited partners invested approximately $13 million in the various limited partnerships. They claim that they were fraudulently induced to invest in the limited partnerships and that various defendants made material misrepresentations all in violation of Section(s) 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §(s) 78j(b), and Section(s) 12(2) of the Securities Act of 1933, 15 U.S.C. §(s) 77l(2). In addition, their complaint alleges the defendants engaged in a pattern of racketeering activity in violation of the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. §(s) 1962(b). They brought suit against individual defendants in the limited partnerships and corporations, the law firm that assisted in the development of the enterprise, and the franchise dealer, Mast Capital Investors, Ltd. The plaintiffs also joined the accounting firm of Touche Ross and Co., its successors in interest, Deloitte Touche, and Touche Ross employees Alan Friedman and Jerry Cohen (collectively Touche Ross).

The district court dismissed the RICO claims on the basis that no predicate acts of fraud exist to support such claims. The plaintiffs do not directly challenge the dismissal of the RICO claims on appeal. State claims were also raised against the Touche Ross defendants but these were dismissed for lack of independent federal jurisdiction.

The complaint was filed in December 1989 and amended to add additional plaintiffs in February 1990. In March 1990, all defendants except the law firm defendants filed motions to dismiss the amended complaint on various grounds. The trial court stayed discovery, but, for reasons unexplained, did not rule on the motions to dismiss until July 1996. At that time, it rejected many of the various defendants' defenses, but, relevant to the present appeal, the court dismissed all claims against Touche Ross. On August 7, 1996, plaintiffs voluntarily dismissed all remaining claims against the other defendants, rendering the judgment against Touche Ross final for appeal.

The District Court's Ruling

The amended complaint alleged that Touche Ross participated in the defendants' fraudulent scheme by providing accounting, auditing, and financial analysis in preparation of the offering memorandum. In particular, as the district court set out, plaintiffs pled (1) that Touche Ross had been retained to recommend internal controls and that it stated that it would conduct audits of the limited partnerships; (2) that it failed to disclose that one of the principals, David Greenberg, was a convicted felon and that his twelve-year-old son was the sole officer, director, and shareholder of one of the corporations, and that it failed to disclose inflated invoices, an insurance fraud scheme, and that managing principals had attempted to deter plaintiffs from pursuing their legal remedies; (3) that Touche Ross prepared financial projections that were attached as exhibits to the offering memoranda; (4) that Touche Ross "aided and abetted" the other defendants in their fraudulent schemes.

First, the district court found that the statement that Touche Ross had recommended certain internal controls and that it would assist management in implementing future internal controls was prepared by management, not Touche Ross. Although the plaintiffs urged that they had alleged that Touche Ross had made "false statements" in that regard, the district court relied on plaintiffs' own assertion "that the accountants acquiesced in permitting the use of a statement that Touche Ross had agreed to perform internal controls, management reporting, and internal audits." In addition, the court found that these allegations contained a statement of future conduct which was not actionable under Section(s) 10(b).

Next, the district court dealt with the plaintiffs' allegations that Touche Ross had performed financial projections that were attached to the offering memoranda. The court pointed out that the charge failed to allege specifically how the defendants violated Section(s) 10(b), but that it read the complaint as a whole as stating that Touche Ross's financial projections contained material misrepresentations and omissions. The court stressed that Touche Ross did not issue an opinion or certification as to the prospectus. Attached to each of the projections that Touche Ross issued was a letter which stated that the projection was based on management's "knowledge and belief" and cautioned that the projection "does not include an evaluation of the support for the assumptions underlying the projection." On this basis, the court found that the cautionary language "clearly bespeaks caution." The court found that under Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986), plaintiffs could not have reasonably relied on the financial statements.

Finally, the court addressed plaintiffs' allegations that Touche Ross was under a duty to disclose the fact that one of the principals was a convicted felon, that his twelve-year-old son was the sole officer of one of the corporations, that there was misappropriation by the various principals, that there were fraudulent invoices used, that there were fraudulent claims made against insurance companies, and that Touche Ross failed to disclose defendants' fraudulent conduct to deter plaintiffs from pursuing their legal remedies. The trial court rejected these allegations on the ground that Touche Ross had no duty to plaintiffs to disclose this information, citing Chiarella v. United States, 445 U.S. 222 (1980).

Discussion

Based upon our review of the overall record and briefs, we find no error in the district court's appraisal of plaintiffs' complaint. We thus find no error in the district court's dismissal of plaintiffs' complaint under Federal Rule of Civil Procedure 12(b)(6). In due respect to plaintiffs, it must be acknowledged that the complaint was filed before the Supreme Court decided Central Bank v. First Interstate Bank, 511 U.S. 164 (1994). Under Central Bank, secondary liability for "aiding and abetting" no longer is a basis for a Section(s) 10(b) claim. Id. at 191. The Supreme Court held that common-law principles could not be used to interpret Section(s) 10 and that aiding and abetting claims are not within the scope of Section(s) 10(b).

This circuit's post-Central Bank case of SEC v. First Jersey Sec., Inc., held the president of a brokerage firm primarily liable for orchestrating the manipulative acts of multiple branch offices in the sale of securities at excessive prices. 101 F.3d 1450, 1471-72 (2d Cir. 1996), petition for cert. filed, 65 U.S.L.W. 3799 (U.S. May 23, 1997) (No. 96-1862). Some district courts within this circuit have strictly applied the holding of Central Bank. For example, in In re MTC Elec. Techs. Shareholders Litig., 898 F. Supp. 974, 987 (E.D.N.Y. 1995), the district judge concluded:

[I]f Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, and no matter how substantial that aid may be, it is not enough to trigger liability under Section 10(b).

See also In re JWP Inc. Sec. Litig., 928 F. Supp. 1239, 1255-56 (S.D.N.Y. 1996) (dismissing misrepresentation claims against audit committee defendants where those defendants did not actually make the misrepresentations). Similarly, the Tenth Circuit observed: Reading the language of Section(s) 10(b) and 10b-5 through the lens of Central Bank of Denver, we conclude that in order for accountants to "use or employ" a "deception" actionable under the antifraud law, they must themselves make a false or misleading statement (or omission) that they know or should know will reach potential investors. In addition to being consistent with the language of the statute, this rule, though far from a bright line, provides more guidance to litigants than a rule allowing liability to attach to an accountant or other outside professional who provided "significant" or "substantial" assistance to the representations of others.

Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226-27 (10th Cir. 1996).

We construe plaintiffs' complaint against Touche Ross as primarily alleging aiding and abetting the principal defendants. Allegations of "assisting," "participating in," "complicity in" and similar synonyms used throughout the complaint all fall within the prohibitive bar of Central Bank. A claim under Section(s) 10(b) must allege a defendant has made a material misstatement or omission indicating an intent to deceive or defraud in connection with the purchase or sale of a security. McMahan Co. v. Wherehouse Entertainment, Inc., 900 F.2d 576, 581 (2d Cir. 1990).

In pre-Central Bank cases, some courts did not distinguish precisely between primary liability and aiding and abetting liability. See, e.g. Akin v. Q-L Inv., Inc., 959 F.2d 521, 526 (5th Cir. 1992) (holding accountant may be liable even though false statement is not his own); Rudolph v. Arthur Anderson Co., 800 F.2d 1040, 1044 (11th Cir. 1986) (holding accounting firm potentially liable primarily and as aider and abettor by "[s]tanding idly by while knowing one's good name is being used to perpetrate a fraud . . ."); see also Roberts v. Peat, Marwick, Mitchell Co., 857 F.2d 646, 652-53 (9th Cir. 1988). Other cases preceding Central Bank accurately predicted the holding of Central Bank. See Dileo v. Ernst Young, 901 F.2d 624, 629 (7th Cir. 1990) (holding accountants owe no duty "to search and sing"); Farlow v. Peat, Marwick, Mitchell Co., 956 F.2d 982 (10th Cir. 1992) (affirming dismissal despite allegations that accountant certified client's financial statements that accountant knew were to be false). See also Robert A. Prentice, Locating that "Indistinct" and "Virtually Nonexistent" Line Between Primary and Secondary Liability Under Section 10(b), 75 N.C. L. Rev. 691, 760 (1997) (noting that before Central Bank, "the duty to blow the whistle on a client . . . was definitely a minority view," and opining that Central Bank marked "the end of any free-standing duty by collateral participants in securities transactions to blow the whistle . . .").

The plaintiffs seek to reconstruct their complaint by urging that they have made allegations that Touche Ross directly made a "material misstatement" and "omission" "in formulating and designing the private placement memoranda (including projections)." The plaintiffs essentially argue that the district court erred in applying the "bespeak caution" doctrine because Touche Ross knew that its projections were fraudulent and misleading. However, as the district court perceived, the claims are based primarily on the defendants' failure to disclose that David Greenberg — one of the principals — was a convicted felon; there exists no allegation that the projections misrepresented any financial fact. The plaintiffs' brief charges repetitively that the private placement memoranda "was a smoke screen designed to hide the [fact that] investment proceeds were to be placed at the mercy of a person who had been convicted and imprisoned for fraud." There is no allegation of a fraudulent misstatement in the projection itself.

We believe the district court correctly rejected this claim on the basis that Touche Ross cannot be liable for failure to disclose material information under Section(s) 10(b) unless it was under a duty to do so. See Chiarella, 445 U.S. at 228 ("[T]he duty to disclose arises when one party has information `that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.'").

In another post-Central Bank case, a district court observed:

The concept of a duty to disclose appears to stem from the extent of reliance on the accountant's work made by the public and the expectations of the public. Clearly, in a situation in which the accountant "gives an opinion or certifies statements" about a company — statements which the accountant later discovers may not have been accurate . . . — then the accountant has a duty to disclose the fraud to the public. . . .

Conversely, if an accountant does not issue a public opinion about a company, although it may have conducted internal audits or reviews for portions of the company, the accountant cannot subsequently be held responsible for the company's public statements issued later merely because the accountant may know those statements are likely untrue.

In re Cascade Int'l Sec. Litig., 894 F. Supp. 437, 443 (S.D.Fla. 1995)

Plaintiffs' argument is best summarized in its statement that the Touche Ross defendants were in complicity throughout with the principal defendants. This assertion of aiding and abetting does not support a claim under Section(s) 10(b) as interpreted by the Central Bank Court. Plaintiffs rely on pre-Central Bank cases which are no longer controlling.

We agree that an accountant shares in an insider's duty to disclose if the accountant exchanges his or her role for a role as an insider who vends the company's securities. However, while the plaintiffs allege that all of the defendants, including Touche Ross, originally "developed a plan to sell" interests in Video USA, the district court read the amended complaint as limiting Touche Ross's involvement to preparing the financial projections that were later included in the principal defendants' offering memoranda. Pahmer v. Greenberg, 926 F. Supp. 287, 306-07 (E.D.N.Y. 1996).

The district court did not misconstrue the amended complaint. Liberally reading the complaint does not require ignoring specific factual allegations in order to broadly read sweeping equivocal assertions. Indeed, we reach the same conclusion the district court reached by considering the allegations in context. The amended complaint first generally alleges that the principal defendants "together with" all other defendants "developed a plan to sell" interests in Video USA. Am. Compl. at Para(s) 155. It next vaguely explains the roles played in the alleged plan, asserting that certain principal defendants organized the limited partnerships "with the willing participation and active aid and assistance" of Touche Ross. Id. at 156. All defendants are then together accused of making "representations [in the placement memoranda] intended to induce" investments without disclosing David Greenberg's conviction or that his minor son was the only director and shareholder of one of the limited partnerships. Id. at Para(s) 157. The amended complaint finally alleges Touche Ross's particular involvement by maintaining that all defendants caused the mailing of the placement memoranda, "which included financial projections provided by Touche Ross." Id. at Para(s) 159.

We draw the only reasonable conclusion from these assertions: the plaintiffs' amended complaint alleges that Touche Ross's specific "participating" role in selling interests in Video USA was only in providing the financial projections that were included with the offering memoranda. Because this is consistent with the role of an accountant, and because the plaintiffs otherwise fail to articulate a "fiduciary or other similar relation of trust and confidence" between themselves and Touche Ross, we hold Touche Ross had no duty to disclose David Greenberg's criminal conviction or that his minor son was named the only officer of a limited partnership with management authority within Video USA.

In IIT v. Cornfield, we held that while an accountant's role may create a duty to disclose errors in financial statements, an accountant has no duty to disclose improper loans and investments since these wrongs are "not dependent on or tied to" the role of an accountant. 619 F.2d 909, 925 (2d Cir. 1980).

In sum, we find the district court did not err in dismissing plaintiffs' complaint against the Touche Ross defendants.

Leave to Amend

Plaintiffs contend that the district court abused its discretion by denying plaintiffs' motion to amend its complaint. Plaintiffs submitted, without court approval, an affidavit of a former Touche Ross accountant and named defendant Martin Cianciaruso. The affidavit allegedly set forth a factual basis to support plaintiffs' claim that Touche Ross directly participated in the limited partnership misstatements by preparing the offering memoranda.

Although a district court should freely give leave to amend a complaint, see Gary Plastic Packaging Corp. v. Merrill Lynch, Inc., 756 F.2d 230, 236 (2d Cir. 1985), we hold that the district court here did not abuse its discretion in denying plaintiffs' motion to replead. Plaintiffs acknowledge that they did not submit the Cianciaruso affidavit until two months after the hearing on this matter, and they do not dispute Touche Ross's account that they submitted the late affidavit without attempting to meet the requirements for late filing under Rule 6 of the Federal Rules of Civil Procedure.

Rule 6(d) establishes that "[w]hen a motion is supported by affidavit, the affidavit shall be served with the motion." The rule further provides that "opposing affidavits may be served not later than 1 day before the hearing, unless the court permits them to be served at some other time." Whether we treat the Cianciaruso affidavit as submitted in opposition to the defendants' motions to dismiss, as suggested by Touche Ross, or as submitted in support of the plaintiffs' request to amend, as it appears more appropriate, the plaintiffs' affidavit was not received by the district court. It is not part of the official record on appeal. Thus, the district court did not abuse its discretion in ignoring the affidavit, or by denying the motion to amend as futile.

As the district court could not consider the untimely affidavit without a proper motion, see Lujan v. National Wildlife Fed'n, 497 U.S. 871, 896 (1990) (applying Fed. R. Civ. P. 6 and noting that "any postdeadline extension must be `upon motion made'") (emphasis added), we likewise do not consider the affidavit. Id. at 894 (holding the court of appeals erred in relying on affidavits not admitted by the district court); see also Figgie Int'l, Inc. v. Bailey, 25 F.3d 1267, 1273 n. 21 (5th Cir. 1994) (citing Lujan as barring appellate court from enlarging the record on appeal with affidavits excluded in the district court). Beyond these assertions the plaintiffs have not discussed how they would amend the complaint to cure its deficiencies. In short, the plaintiffs have not shown facts or circumstances that would support a claim for relief even if allowed to amend. We therefore sustain the district court's denial of the motion to amend.

Conclusion

We agree with the district court that the amended complaint fails to state a claim against Touche Ross for violating Section(s) 10(b). We hold that the district court also did not abuse its discretion by denying the plaintiffs' request to replead their Section(s) 10(b) and RICO claims. Accordingly, the judgment of the district court is affirmed.


Summaries of

Shapiro v. Cantor

United States Court of Appeals, Second Circuit
Sep 8, 1997
123 F.3d 717 (2d Cir. 1997)

holding that an accountant cannot be held liable under securities laws where it "did not issue an opinion or certification as to the prospectus"

Summary of this case from McNamara v. Bre-X Minerals Ltd.

affirming dismissal of claims against outside accounting firm who provided accounting, audit, and financial analysis services in preparation of an allegedly false and misleading offering memorandum; the misrepresentations at issue were unrelated to financial information

Summary of this case from In re Salomon Analyst Level 3 Litigation

rejecting as untimely an affidavit filed by one of the plaintiffs two months after the hearing on his motion for leave to the complaint

Summary of this case from SmartStream Techs. v. Chambadal

construing complaint by "considering the allegations in context"

Summary of this case from Citibank N.A. v. City of Burlington

In Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997), the Second Circuit observed that "[i]f Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b).

Summary of this case from Thomas H. Lee Equity v. Mayer Brown, Rowe

In Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997), the Second Circuit held that allegations that an accounting firm failed to disclose the fact that one of the principals of a company for which it had created financial projections was a felon did not render it primarily liable under Section 10(b) because the firm had no duty to disclose such information about the principal.Id. at 721-22.

Summary of this case from Securities & Exchange Commission v. KPMG LLP

In Shapiro v. Cantor, 123 F.3d 717 (2d Cir. 1997), the Second Circuit held that allegations that an accounting firm failed to disclose the fact that one of the principals of a company for which it had created financial projections was a felon did not render it primarily liable under Section 10(b) because the firm had no duty to disclose such information about the principal.Id. at 721-22.

Summary of this case from Securities Exchange Commission v. Joseph

In Shapiro, the Second Circuit, observed that "[i]fCentral Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b).

Summary of this case from In re Warnaco Group, Inc. Securities Litigation

noting that "if an accountant does not issue a public opinion about a company, although it may have conducted internal audits or reviews for portions of the company, the accountant cannot subsequently be held responsible for the company's public statements issued later merely because the accountant may know those statements are likely untrue"

Summary of this case from In re Warnaco Group, Inc. Securities Litigation

noting that "in a situation in which the accountant `gives an opinion or certifies statements' about a company — statements which the accountant later discovers may not have been accurate — then the accountant has a duty to disclose the fraud to the public"

Summary of this case from In re Warnaco Group, Inc. Securities Litigation

In Shapiro, the Court examined the factual allegations in support of the Sections 11 and 12(2) claims and found that they referred to the prospectus at issue as false and misleading and repeatedly aver that the defendants "intentionally," "knowingly," or "recklessly" misrepresented information.

Summary of this case from S.E.C. v. Lucent Technologies, Inc.

In Shapiro, the Second Circuit held that the plaintiffs' allegations in connection with the failure to disclose material information serve to support only aiding and abetting liability, because the defendant — a non-fiduciary accounting firm — did not have a duty to disclose certain material information.

Summary of this case from In re Universal, S.A. Sec. Litig.

noting that where an accountant issues opinions or certified statements later discovered to be inaccurate, it has a duty to disclose the fraud to the public

Summary of this case from In re Livent, Inc. Noteholders Securities Litigation

In Shapiro v. Cantor, 123 F.3d 717, 721-22 (2d Cir. 1997), the Second Circuit extended that holding to bar claims for "conspiracy" under § 10(b).

Summary of this case from Goldberger v. Bear, Stearns Co., Inc.
Case details for

Shapiro v. Cantor

Case Details

Full title:SIDNEY SHAPIRO, CAROL E. ACKER, ROBERT J. ANDERSON, ROBERT ANDERSON…

Court:United States Court of Appeals, Second Circuit

Date published: Sep 8, 1997

Citations

123 F.3d 717 (2d Cir. 1997)

Citing Cases

Wright v. Ernst & Young LLP

The question we must answer is whether, under the Act, persons who purchase stock in a company that issued a…

In re Livent, Inc. Noteholders Securities Litigation

Beyond the standard fees and commissions associated with any investment bank's sales of securities, CIBC had…