Appendix — Touche Ross & Co. v. Redington

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Supreme Court, U. S, ¥

| FILED

JAN 28 1979

APPENDIX

R., CLERK |

in the Supreme Court of the United States

OCTOBER TERM, 1978

No. 78-309

TOUCHE Ross & Co.,

Petitioner,

—_—_vVv.—

EDWARD S. REDINGTON, as Trustee for the liquidation of the

business of Weis Securities, Inc., and SECURITIES INVESTOR

PROTECTION CORPORATION,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

PETITION FOR CERTIORARI FILED AUGUST 23, 1978

CERTIORARI GRANTED NOVEMBER 27, 1978

SP VIN isviptiisiepesaguitindidalinndachadenterhasammndarieeaaeenis

Exhibit A to Complaint: Weis, Voisin & Co.,

Inc., Repo*t on Examination of Statement of

Financia! Condition, May 26, 1972 ...............

Exhibit B to Complaint: Weis, Voisin & Co.,

Inc., Answers to Financial Questionnaire

and Additional Information, May 26, 1972 ..

Exhibit C to Complaint: Weis, Voisin & Co.,

Inc. and Subsidiaries, Report on Exam-

ination of Consolidated Financial State-

ments, Year (52 Weeks) Ended May 26,

DPT i aisisssnsvincss «ceaiisadaididaictaiehiadanldimnbastresibentes

Exhibit D to Complaint: Weis, Voisin & Co.,

Inc. and Subsidiaries, Report on Exam-

ination of Consolidated Financial State-

ments, Five Years Ended May 26, 1972........

Defendant’s Notice of Motion to Dismiss, Filed

IRE EE, Fe isinadeeiakicstcakeibertaeenearidindicinion

Affidavit of Arnold I. Roth in Support of Motion to

Dismiss, Filed September 22, 1976 ................000005

Exhibit 1 to Affidavit of Arnold I. Roth:

Complaint in this Action, Filed April 30,

1976, Served May 12, 1976................cscccecerees

Exhibit 2 to Affidavit of Arnold I. Roth:

Summons in the State Court Action, pend-

ing in the Supreme Court of the State of

New York, County of New York, Served

bE. > oC a eR PRS BE i DOD

Exhibit 3 to Affidavit of Arnold I. Roth:

Complaint in the State Court Action, pend-

ing in the Supreme Court of the State of

New York, County of New York, Served

NE BE POD stsnnahtelcvlthsttapckaicdsbdidhdsageieqivscenanes

112

114

120

121

Affidavit of Wilfred R. Caron in Opposition to

Motion to Dismiss, Filed January 10, 1977...........

Affidavit of Clarence Fried in Opposition to Motion

to Dismiss, Filed January 10, 1977.0...

Affidavit of Bruce E. Baker in Opposition to Motion

to Dismiss, Filed January 10, 1977..........0.....eee

Exhibit A to Affidavit of Bruce E. Baker: Proof

of Claim dated July 11, 1973 .................ccccceee

Exhibit B to Affidavit of Bruce E. Baker: Proof

of Claim dated July 11, 1973 0.0...

Reply Affidavit of Arnold I. Roth in Support of

Motion to Dismiss, Filed February 7, 1977 ..........

Opinion of the United States District Court for the

Southern District of New York, Filed March 1,

EWP? 7 ovciscesischaipstaesescsndniaespasan oan,

Order and Judgment of the United States District

Court for the Southern District of New York,

Pe PIE Be WIPE F vocantrcesccsintilcacdasecaeiinieeaeees

Opinion of the United States Court of Appeals for

the Second Circuit, Filed April 21, 1978...............

Judgment of the United States Court of Appeals

for the Second Circuit, Filed April 21, 1978 .........

Order of the United States Court of Appeals for the

Second Circuit Denying Petition for Rehearing,

FOS Fy Bi Pi ttesininnceinsieeninadadanasediic

Order of the United States Court of Appeals for the

Second Circuit Denying Rehearing En Banc,

POG ONY 6 FID vrciserccccnsaviojioninsialintn pean

9-30

Relevant Docket Entries

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF NEW YORK

PROCEEDINGS

Filed complaint. Issued summons.

Filed summons’ with marshals return.

SERVED: TOUCHE ROSS & CO. on 5-12-76.

Filed stp & order that the time of deft to

answer etc, is extended to 6-23-76, Wyatt, J.

Filed Notice that pltff will take deposition of

Karl Brunhuber on 6-21-76 as indicated.

Filed Stip & Order that the time for dft. to

answer complaint is extended to 7-13-76... .

Ward J.

Filed Notice of Appearance of Rosenman

Colin Freund Lewis & Cohen. as indicated.

Filed pltffs first set of interrogatories.

Filed stip & order that the time for deft to

move etc, is extended to 9-15-76, etc, as

indicated. Conner J.

Filed defts objections and answers to inter-

rogatories to pltff.

Filed pltffs Affidavit & Notice of motion for an

order striking defts blanket objections to pltffs,

first set of interrogatories, etc, as indicated

rtble before Mag. Schreiber on 9-21-76.

Filed plitffs memorandum of law as indicated.

Filed defts Affidavit & Notice of Motion for

an order dismissing this action etc, as indicated

rtble on 10-1-76.

Filed memorandum of deft Touche Ross &

Co. in support of motion to dismiss, etc, as

indicated.

Filed stip & order that the deposition of Karl

Brunhuber is adjourned to 10-20-76, and pltffs

motion is adjourned to a mutually convenient

date to be determined after consultation with

Mag. Schreiber. Wyatt, J.

Filed defts Affidavit in opposition to the mo-

tion of the pltffs etc, as indicated.

Filed defts memorandum in opposition to

pltffs motion to compel further discovery.

DATE

[1976]

11-15

1977

1-10

2-07

2-14

3-01

3-15

PROCEEDINGS

Filed stip & order that pltffs shall have to 1-7-

77 to serve papers with respect to defts motion

of 9-15-76 to dismiss or stay this action etc, as

indicated, Wyatt, J.

Filed affidavit in opposition to motion to

dismiss.

Filed plitffs memo in opposition to motion to

dismiss.

Filed memorandum of pltffs Securities In-

vestor Protection Corp. in opposition to deft’s

motion to dismiss.

Filed pltffs Securities Investor Protection

Corp. affdvt. in opposition to deft’s motion to

dismiss complaint.

Filed defts. reply affdvt. to dismiss the com-

plaint and for related relief.

Filed defts. reply memorandum of deft.

Touche Ross & Co., in support of motion to

dismiss and for related relief.

Filed Pltffs. Redington, sur-reply memo-

randum of law.

Filed Opinion #45650 There can be no

jurisdiction simply because SIPC was created

by Act. of congress because there is no stock

ownership in SIPC by the United States. Fi-

nally, the Trustee is a citizen of New York and

is a pltff. along with SIPC. Partners of Touch-

e, the deft. are citizens of N.Y. Thus, there is

no complete diversity of citizenship within the

rule of Strawbridge v. Curtiss, 3 Cranch 267

(1806). The fifth, sixth, seventh, and eight[h]

claims of SIPC must be dismissed for lack of

jurisdiction over the subject matter..... So

Ordered... WYATT, J. Settle order and

judgment cn notice. m/n

Filed Order & Judgment this action is dis-

missed, and deft. have judgment against pltffs,

and each of them, dismissing this action . . . So

Ordered..... WYATT, J. Judgment Ent. on

3-15-77...m/n

DATE

[1977]

4-13

4-14

5-13

DATE

4-14-77

5-13-77

7-12-77

8-22-77

8-25-77

8-31-77

PROCEEDINGS

Filed Pitffs. Edward S. Redington, notice of

appeal to the U.S.C.A. from the order &

Judgment Ent. in this action on the 15th day of

March 1977. . Mailed All Copies.

Filed Pitffs. Securities Investor Protection

Corp. notice of appeal to the U.S.C.A. from

ihe order & Judgment Ent. in this action on

the 15th day of March 1977... Mailed all

copies.

Filed stipulation designating a copy of an

originally filed document to become part of

the record on appeal.

UNITED STATES COURT OF APPEALS

For THE SECOND CIRCUIT

FILINGS— PROCEEDINGS

Filed copies of docket entries and notice of

appeal (Edward S. Redington )

Filed copies of docket entries and notice of

appeal (Securities Investor Protection Corpo-

ration )

Filed record (original papers of district court)

Filed briefs, appellant, p/s ( Redington )

Filed briefs, appellant, p/s (SIPC)

Filed joint appendix, appellants, p/s

Filed motion for leave to file brief amicus

curiae, p/s (S.E.C.) (& in 77-7186)

Received stipulation consenting to the filing of

the S.E.C. amicus brief and for a modified

scheduling order, appellee, p/s (& in 77-

7186)

Filed order granting motion for leave to file a

brief as amicus curiae on consent. Further

ordered that appellees shall file a brief by 9-

23-77, reply brief, if any, by 10-25-77, appeal

ready to be heard during the week of 11-7-77.

Appellees shall deliver to appellants copy of

galley or page proof of its brief by 9-20-77

Filed brief, amicus curiae, p/s (SEC)

Filed printed briefs, appellee, p/s

DATE

10-25-77

11-14-77

4-21-78

5-5-78

7-7-78

7-71-78

7-13-78

7-17-78

7-21-78

7-24-78

8-23-78

9-25-78

9-29-78

12-4-78

FILINGS— PROCEEDINGS

Filed reply briefs, appellant, p/s (& in 77-

7186)

Filed reply brief, appellant, p/s (Sec. Investor

etc.) (& in 77-7186)

Argument heard (By: Lumbard, Mulligan,

Timbers, CJJ) (& in 77-7186)

Judgment reversed as to both plaintiffs and

remanded-Lumbard, C.J.

Concurring in separate opinion—Timbers,

tat

Dissenting in separate opinion—Mulligan,

C.J.

Filed judgment

Filed petition for rehearing and rehearing en

banc, appellee, pfs

Filed order denying petition for rehearing

Filed order denying petition for rehearing en

banc

Filed motion for leave to stay issuance of

mandate, appellee, pfs

Filed memorandum in opposition to motion

for leave to stay mandate, appellant, pfs

Filed reply to memorandum in opposition to

motion for leave to stay mandate, appellee, pfs

Filed order granting motion for leave to stay

issuance of mandate

Filed notice of filing petition for writ of cer-

tiorari (S.C. #78-309 )

Filed notice of filing petition for writ of cer-

tiorari (Redington ) S.C. #78-493

Filed notice of filing petition for writ of cer-

tiorari (Securities Investor Protection Corp. ),

S.C. #78-526

Filed certified copy of order granting petition

for writ of certiorari (S.C. #78-309 )

Complaint

Filed April 30, 1976, Served May 12, 1976

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

EDWARD S. REDINGTON, as Trustee for the

liquidation of the business of Weis Securities, Inc.,

and SECURITIES INVESTOR PROTECTION CORPORATION,

Plaintiffs,

—against—

TOUCHE Ross & Co.,

Defendant.

76 Civ. 1981 (IBW)

COMPLAINT

PLAINTIFFS DEMAND A TRIAL BY JURY

Plaintiffs E>warpD S. REDINGTON, Trustee for the

liquidation of the business of Weis Securities, Inc., and

SECURITIES INVESTOR PROTECTION CORPORATION, by their

respective attorneys, complaining of the Defendant, allege

as follows:

JURISDICTION AND VENUE

1. This action arises under the Securities Exchange

Act of 1934 (15 U.S.C. Sections 78a et seg.) (hereinafter

the “1934 Act’) and particularly under Section 17 thereof

(15 U.S.C. Section 78q), the Securities Investor Protection

Act of 1970 (15 U.S.C. Section 78aaa et seg.) (hereinafter

the “1970 Act’), and the common law.

2. This Court has jurisdiction over Plaintiff Reding-

ton’s claims by virtue of Section 27 of the 1934 Act (15

U.S.C. Section 78aa); Section 6 of the 1970 Act (15

U.S.C. Section 78fff); Sections 2a(7), 102 and 115 of the

Bankruptcy Act (11 U.S.C. Sections 1la(7), 502 and

515); Sections 1331 and 1334 of the United States Judicial

Code (28 U.S.C. Sections 1331 and 1334); and principles

of pendent jurisdiction. The amount in controversy,

exclusive of interest and costs, exceeds the sum of $10,000.

3. This Court has jurisdiction over the claims of

Plaintiff Securities Investor Protection Corporation by

virtue of Section 27 of the 1934 Act (15 U.S.C. Section

78aa), Sections 1331 and 1332 of the United States

Judicial Code (28 U.S.C. Sections 1331 and 1332), and

principles of pendent jurisdiction. The amount in con-

troversy, exclusive of interest and costs, exceeds the sum of

$10,000.

4. Defendant has its principal place of business in

this District and most of the acts alleged herein occurred

in this District.

PARTIES

5. Plaintiff Edward S. Redington (hereinafter the

“Trustee”), pursuant to the 1970 Act, was duly appointed

by Order of this Court dated May 30, 1973 as Trustee for

the liquidation of the business of Weis Securities, Inc.

(“Weis”), has duly qualified, and is presently acting in

such capacity. Section 6(b)(1) of the 1970 Act (15

U.S.C. Section 78fff(b)(1)) provides that a trustee

appointed under the 1970 Act shall be vested, inter alia,

with the same powers and title with respect to the debtor

and the property of the debtor as a trustee in bankruptcy

and a trustee under Chapter X of the Bankruptcy Act (11

U.S.C. Sections 501-676) have with respect to a bankrupt

and a Chapter X debtor.

ee ah

6. Plaintiff Securities Investor Protection Corporation

(hereinafter “SIPC”) is a non-profit membership corpo-

ration created by and organized under the 1970 Act whose

members are, with certain statutory exceptions, all persons

registered as broker-dealers under Section 15(b) of the

1934 Act (15 U.S.C. Section 780(b)) and, with certain

Statutory exceptions, all persons who are members of a

national securities exchange. SIPC has its principal place

of business in the District of Columbia. At all relevant

times Weis was a member of SIPC.

7. Defendant Touche Ross & Co. (“‘Touche Ross’’)

is a partnership of certified public accountants with its

principal place of business at 1633 Broadway in the City,

County and State of New York. In or about 1969 Touche

Ross was engaged by Weis as its independent certified

public accounting firm, and Touche Ross continued to act

in such capacity from about 1969 until about May 1973,

when the forced liquidation of Weis commenced.

COMMON ALLEGATIONS

8. At all relevant times prior to May 30, 1973, Weis

was a corporation registered as a broker-dealer with the

Securities and Exchange Commission (the “SEC”) and

was engaged in the business of a broker-dealer in secu-

rities. From June 1965 until May 1973, Weis was a

member of the New York Stock Exchange, Inc. (the

“Exchange’’), the self-regulatory organization designated

by SIPC to examine Weis for compliance with the appli-

cable financial responsibility rules which are imposed on

broker-dealers pursuant to Section 6 of the 1934 Act (15

U.S.C. Section 78f) for the protection of the public as a

minimum prerequisite for conducting a securities broker-

age business.

9. For each of its four fiscal years 1968 through 1971

(ended May 31), Weis’ audited financial statements re-

flected a profit. During early 1972 five of Weis’ officers

(the ““Weis Five”) became increasingly concerned that a

fair and accurate presentation of Weis’ results of oper-

ations for fiscal year 1972 would refiect that Weis was

cperating at a loss.

10. The Weis Five misstated the financial condition

and results of operations of Weis in financial reports

prepared at fiscal year-end 1972. These reports were

required to be filed with regulatory authorities pursuant to

Section 17 of the 1934 Act (15 U.S.C. Section 78q) and

were directly or indirectly submitted to Weis, its Board of

Directors, the SEC, SIPC, the Exchange, and Weis’ cus-

tomers, creditors, lenders and shareholders. Such mis-

Statements were accomplished, by inter alia, materially

Overstating assets, creating non-existent assets, under-

stating liabilities, overstating income, and understating

expenses. The purpose and effect of such material mis-

Statements were, inter alia, to create a false impression

that Weis’ earnings for the fiscal year ended May 26, 1972

were $1,700,000 before taxes whereas in truth and in fact

Weis had actually suffered losses in that period in excess

of $1,500,000.

11. Had Weis’ actual financial condition, its actual

results of operations, and the misstatements in its books

and records been truthfully reported at the end of Weis’

1972 fiscal year, Weis’ 1973 forced liquidation under the

1970 Act would not have become necessary, and most if

not all of Weis’ assets and its good will as a going concern

could have been preserved by a number of means

including, inter alia, change in Weis’ management, rever-

sal of its policy of growth and expansion, curtailment or

contraction of certain of its operations and business prac-

tices, gradual liquidation of some or all of its operations,

or merger with another securities firm. Moreover, if a

liquidation of Weis had been necessary as the result of

such truthful reporting, such liquidation could have

occurred at the end of Weis’ 1972 fiscal year, when its

assets were greater and the aggregate of its liabilities was

lower than a year later.

12. The incorrect and incomplete fiscal 1972 year-

end reports prepared by or under the direction of the Weis

Five were certified by Touche Ross as being correct and

complete. Consequently, the doctoring of Weis’ books,

records and required reports, the deterioration of its

financial condition and the violations of financial responsi-

bility rules could not be nipped in the bud at a time when

a forced liquidation of Weis could still have been avoided.

Instead, during Weis’ fiscal year 1973, Weis’ financial

condition deteriorated further as the Weis policy of

expansion continued unabated. Weis incurred substantial

operating losses, depletion of its assets, and depletion of

the property held by Weis in trust for its customers. The

Weis Five continued to make false and fictitious entries in

Weis’ books and records, and continued directly or

indirectly to submit false reports to Weis, its Board of

Directors, the SEC, SIPC, the Exchange, and Weis’ cus-

tomers, creditors, lenders and shareholders in order to

conceal Weis’ true financial condition.

13. Not until April and May of 1973, as a result of

separate investigations by the Exchange and the SEC, did

the misstatement of Weis’ financial condition come to

light. These investigations gradually revealed violations

of financial responsibility rules, Weis’ unsafe, unsatisfac-

tory and deteriorating financial condition, and the lack of

' accuracy and reliability of any of its financial statements,

including those certified by Touche Ross. These revela-

tions and the resulting uncertainties with respect to Weis’

true financial condition prevented Weis from being saved

as a going concern or being merged with another, finan-

cially more secure, brokerage firm, and resulted in Weis’

forced liquidation under the 1970 Act.

. 14. On May 24, 1973, the SEC commenced an action

in this Court (73 Civ. 2332) against Weis and the Weis

Five for injunctive relief to prevent them from conducting

the business of Weis in violation of the 1934 Act and the

rules and regulations promulgated thereunder. Also on

May 24, 1973 (the “Filing Date”), pursuant to Section

5(a)(2) of the 1970 Act (15 U.S.C. Section 78eee

(a )(2)), SIPC applied in this Court for a decree adjudica-

ting that the customers of Weis were in need of the

protection of the 1970 Act. On May 30, 1973 (the “Date

of Adjudication”) such a decree was granted, the liquida-

tion of Weis was ordered, and Plaintiff Edward S. Reding-

ton was appointed Trustee for the liquidation of the

business of Weis.

15. Upon the entry of the decree referred to in the

preceding paragraph, SIPC was required by the 1970 Act

to provide, and did provide to the Trustee, funds for the

payment of claims submitted by customers and certain

other creditors of Weis and for certain administrative

expenses of the liquidation.

16. At all relevant times, Defendant Touche Ross

held itself out to Weis, the SEC, SIPC, the Exchange and

the general public as possessing the ordinary skill, ability

and expertise of certified public accountants in accounting

and auditing matters, and as being qualified, inter alia, (i)

to examine and audit the books, records and accounts of

firms engaged in the securities business in accordance with

generally accepted auditing standards, (ii) to express

opinions with respect to the financial statements of such

firms as fairly reflecting their financial condition and

results of operations in accordance with generally accept-

ed accounting principles, and (iii) to prepare and assist in

the preparation of the reports concerning such books

records, accounts and opinions required by Section 17 of

the 1934 Act (15 U.S.C. Section 78q) and the rules and

regulations promulgated thereunder. Touche Ross further

ate me ne Sn on

held itself out as being familiar with accounting and

auditing practices and standards required by the SEC and

the Exchange for firms engaged in the securities business.

17. From approximately 1969 until the Date of

Adjudication, Touche Ross was engaged by Weis for

valuable consideration to serve as Weis’ independent

certified public accounting firm. During this period

Touche Ross agreed to conduct annual audits of the

affairs of Weis and to issue opinions and prepare reports

on its financial statements, all in accordance with Section

17 of the 1934 Act (15 U.S.C. Section 78q), generally

accepted auditing standards, generally accepted account-

ing principles, and the audit regulations of the SEC and

the Exchange. In accepting said engagement, Touche

Ross agreed to perform said services in a thorough,

proper, skillful and diligent manner.

18. Weis and its Board of Directors, customers,

creditors, lenders and shareholders, and the SEC, the

Exchange and SIPC relied on Touche Ross to apply the

standards and expertise, to express the opinions, to make

the certifications and to prepare or assist in the prepara-

tion of the reports discussed in paragraphs 16 and 17,

supra, for the purposes, among others, of (i) protecting

Weis from fraudulent activity of its officers, directors,

agents, and employees; (ii) safeguarding the existence

and use of Weis’ assets; (iii) assuring the accuracy of

financial data submitted directly or indirectly to the

Exchange, the SEC and SIPC, and generally made avail-

able to the public; (iv) determining whether Weis could

continue to engage in business as a broker-dealer in

securities; (v) determining whether or not significant

restrictions and alterations in the scope and nature of its

operations would be required in order for Weis to contin-

ue to engage in business as a broker-dealer; and (vi)

making informed business decisions concerning the future

operations of Weis on the basis of accurate financial

information.

19. In or about late 1971 or early 1972, Touche Ross

agreed with Weis to perform the aforementioned auditing

‘and accounting services for the year 1972. Among other

things, Touche Ross agreed (a) to prepare, cause to be

prepared, and assist in the preparation of financial state-

ments of Weis and to issue opinion letters with respect to

said statements; (b) to audit the affairs of Weis in

accordance with generally accepted auditing standards,

generally accepted accounting principles, and the audit

regulations promulgated by the Exchange and the SEC

pursuant to Sections 6 and 17 of the 1934 Act (15 U.S.C.

Sections 78f and 78q); (c) to notify the Exchange

promptly that such audit had been commenced; (d) To

prepare an answer to the financial questionnaire (the

“Answers to the Financial Questionnaire”) of the

Exchange based upon said audit; (e) to submit to the

Exchange (i) a copy of the Answers to the Financial

Questionnaire, (ii) an attestation that the requirements of

the audit regulations had been observed in the conduct of

the audit, and (iii) a statement that Touche Ross had

made a review of Weis’ accounting system, internal

accounting control, and procedures for safeguarding secu-

rities; (f) to furnish to the Exchange comments relative to

any material inadequacies found to exist in Weis’ account-

ing system, internal accounting control, and procedures for

safeguarding securities; and (g) to indicate any corrective

action taken or proposed.

20. Weis’ employment of Touche Ross as its inde-

pendent certified public accounting firm was not merely a

matter of private contract between Weis and Touche Ross,

but was required by the Exchange pursuant to its duty

under Section 6 of the 1934 Act (15 U.S.C. Section 78f) to

regulate its members’ conduct of their businesses and

supervise their financial condition for the benefit of the

public. Touche Ross knew or should have known that

Weis’ engagement of an independent certified public

so dnt SO ately Dae eee e= 6 ek tt

ee AD ia Da NAN EO iE a Ee ate te on ath toe

accounting firm was a requirement of the Exchange and

that it was for the benefit both of Weis in making

decisions with respect to the operation of its business and

of persons other than Weis.

21. Touche Ross’ examination of and report on Weis’

financial condition were not intended solely for the benefit

of Weis but were, pursuant to Section 17 of the 1934 Act

(15 U.S.C. Section 78q) and the rules and regulations

promulgated thereunder, intended for and submitted di-

rectly or indirectly to, inter alia, the SEC, the Exchange,

SIPC, and Weis’ customers, creditors, lenders and share-

holders. The Exchange was the organization designated

and relied upon by SIPC to examine Weis for compliance

with the applicable financial responsibility rules and to

alert SIPC of Weis’ financial difficulty.

22. Touche Ross knew or should have known that its

examination of and report on Weis’ financial condition

were a requirement of Section 17 of the 1934 Act (15

U.S.C. Section 78q) and the rules and regulations promul-

gated thereunder, and were for the benefit both of Weis

and of persons other than Weis.

23. In accordance with its engagement agreement,

Touche Ross purported to conduct an audit of Weis’

books and records for the fiscal year ended May 26, 1972

and in connection therewith (a) certified, prepared,

caused to be prepared, and assisted in the preparation of

financial statements of Weis; (b) certified and prepared

Weis’ Answers to the Financial Questionnaire; and (c)

issued four opinion letters (the “1972 Opinion Letters”’)

to the Board of Directors of Weis dated, respectively, July

7, 1972, July 7, 1972, July 21, 1972 and July 2i, 1972.

24. By means of the foregoing, Touche Ross repre-

sented and certified that it had examined (1) the statement

of Weis’ financial condition as of May 26, 1972, (ii) Weis’

Answers to the Financial Questionnaire as of May 26,

1972, (ili) Weis’ consolidated balance sheet for the 52

weeks ended May 26, 1972, and (iv) Weis’ consolidated

statement of earnings for the five years ended May 26,

1972. The letter pertaining to the Answers to the Finan-

cial Questionnaire stated that the Touche Ross exam-

ination had been made “in accordance with generally

accepted auditing standards, and accordingly included a

review of the accounting system, internal accounting con-

trol and the procedures for safeguarding securities in-

cluding such tests thereof ... as [Touche Ross] consid-

ered necessary in the circumstances, including the audit

procedures prescribed by the New York Stock Exchange

and the Securities and Exchange Commission.” The letter

also stated that the Answers to the Financial Question-

naire presented fairly the financial position of Weis at

May 26, 1972 in the form prescribed by the Exchange and

the SEC in conformity with generally accepted accounting

principles applied on a consistent basis. Each of the other

three 1972 Opinion Letters stated that the Touche Ross

examination had been conducted in accordance with

generally accepted auditing standards and that the

aforementioned financial statements presented fairly the

financial position of Weis and subsidiaries at May 26,

1972, and the results of operations and changes in their

financial position for the year and the five years then

ended, in conformity with generally accepted accounting

principles applied on a consistent basis. (The 1972

Opinion Letters and accompanying Answers to the Finan-

cial Questionnaire and financial statements are annexed

hereto as Exhibits A, B, C and D.)

25. Touche Ross knew, should have known and

intended that Weis and its Board of Directors would rely

on the 1972 Opinion Letters and accompanying Answers

to the Financial Questionnaire and financial statements

for various purposes, including those set forth in para-

graph 18, supra.

26. Touche Ross knew, should have known and

intended that the SEC, the Exchange and SIPC would rely

on the 1972 Opinion Letters and accompanying Answers

we Naas sete ee eles «erent

to the Financial Questionnaire and financial statements in

carrying out their respective regulatory, supervisory and

protective duties with respect to Weis, in determining

whether Weis was in compliance with the applicable

financial responsibility rules, and in determining whether

Weis was in financial difficulty.

27. Touche Ross knew, should have known and

intended that Weis’ customers, creditors, lenders and

shareholders would rely directly or indirectly on the 1972

Opinion Letters and accompanying Answers to the Finan-

cial Questionnaire and financial statements in making

decisions whether to commence or continue their respec-

tive relationships with Weis.

28. Touche Ross breached and failed to perform its

agreement and obligation to render auditing and account-

ing services with respect to Weis in a thorough, proper,

skillful and diligent manner and performed said services

in a negligent, reckless, careless, unskilled and grossly

negligent manner in that, among other things, it:

a. failed to audit, verify and examine the books,

records, accounts and financial statements of Weis in

accordance with generally accepted auditing standards,

generally accepted accounting principles, and the audit

regulations of the Exchange and the SEC;

b. failed to prepare, cause to be prepared, and assist

in the preparation of accurate financial statements of Weis

and Weis’ Answers to the Financial Questionnaire;

c. rendered the 1972 Opinion Letters, which were

false, inaccurate and incomplete;

d. failed properly to test, study and evaluate Weis’

system of internal accounting control;

e. failed to obtain competent evidential matter

sufficient to afford a proper basis for the 1972 Opinion

Letters; :

f. falsely certified that it had examined Weis’ books

and records in accordance with generally accepted audit-

ing standards, generally accepted accounting principles,

and the audit regulations of the Exchange and SEC; and

g. failed to inform or otherwise alert Weis, its Board

of Directors, the SEC and the Exchange (and, through the

Exchange, SIPC) (i) of the material errors in Weis’

Answers to the Financial Questionnaire and in Weis’

financial statements prepared in connection with the 1972

Touche Ross audit; (ii) of the existence of inaccurate and

unreliable books and records with respect to Weis; or (iii)

of the possibility that Weis was facing financial difficulty.

29. Specifically, among other things, Touche Ross

failed properly to audit, verify and examine:

(a) the Scheinman Hochstin & Trotta liquidation

omnibus account (the “SH&T Omnibus Account”), a

claimed asset of $745,000. If Touche Ross had audited,

verified and examined the SH&T Omnibus Account in

accordance with generally accepted auditing standards,

generally accepted accounting principles, and the audit

regulations of the Exchange and the SEC, it would have

discovered the following:

(1) that in or about April 1972 the SH&T

Omnibus Account had been debited in the amount of

approximately $625,000;

(2) that, contrary to generally accepted account-

ing principles, the offsetting credits for this debit were

to One Or more income accounts;

(3) that the purpose and effect of these improper

credits were to overstate Weis’ gross income by

approximately $625,000 and its net income and net

worth by approximately $312,500; and

te it OTS Nth tat A BO A Mt vt te te tt

(4) that an overstatement by this amount wa: a

material overstatement because it constituted over

30% of Weis’ claimed net income for the entire fiscal

year ended May 26, 1972 and over 4% of Weis’

claimed net worth as of that date.

(b) the Winslow, Cohu & Stetson (““WC&S”’) insur-

ance claim receivable, a claimed asset of $1,285,000. If

Touche Ross had audited, verified and examined the

WC&S insurance claim receivable in accordance with

generally accepted auditing standards, generally accepted

accounting principles, and the audit regulations of the

Exchange and the SEC, it would have discovered the

following:

(1) that, on or about May 8, 1972, the WC&S

insurance claim receivable had improperly been in-

creased in value (debited) from $600,000 to

$785,000 because of interest purportedly payable on

the claim;

(2) that, on or about May 25, 1972, the WC&S

insurance claim receivable had improperly been fur-

ther increased in value (debited) to $1,285,000 be-

cause of a purported increase in the value of the

claim;

(3) that, contrary to generally accepted account-

ing principles, the offsetting credits for these two

debits had been made to various income accounts;

(4) that the purpose and effect of these improper

transactions were to overstate Weis’ gross income by

approximately $685,000 and its net income and net

worth by approximately $342,500;

(5) that an overstatement by this amount was a

material overstatement because it constituted nearly

35% of Weis’ claimed net income for the entire fiscal

year ended May 26, 1972 and approximately 4.5% of

Weis’ claimed net worth as of that date.

irregularities and accounting transactions in the books of

Weis which included, inter alia, the following:

(1) The re-depositing into income accounts of at

least $800,000 worth of checks which were purport-

edly drawn to pay vendors or other creditors, thus

overstating Weis’ net income and net worth by at

least $400,000;

(2) The doubling (to approximately $432,000)

of accrued commission income for May 22-26, 1972,

thus overstating Weis’ net income, net worth, and net

capital by approximately $108,000;

(3) The improper crediting of income accounts

with proceeds from a sale-leaseback transaction, thus

overstating Weis’ net income and net worth;

(4) The improper transfer of certain short secur-

ity positions to dividend receivable accounts;

(5) The improper failure to record certain liabil-

ities of Weis on the books of Weis;

(6) The manipulation of certain error accounts

to reflect false credit balances of $100,000 to

$200,000, which then were taken into income, thus

overstating Weis’ net income, net worth and net

capital by approximately $50,060 to $100,000;

(7) The improper designation of up to $500,000

worth of miscellaneous receivables as “current” so

that it was not necessary to deduct them from capital

in computing Weis’ net capital ratio under Exchange

ete es, eee.

Rule 325, with the result that Weis’ net capital ratio

was made to appear to be below 10:1 and Weis thus

was not precluded by Exchange Rule 326 from

expanding its business.

30. Upon the discovery by Touche Ross of any one

or more of the false entries or improper accounting

transactions discussed in paragraph 29 above, Touche

Ross would have had an obligation to report such dis-

coveries, inter alia, to Weis, its Board of Directors, the

SEC and the Exchange (and, through the Exchange,

SIPC); and it would have had an obligation to report such

discoveries in the 1972 Opinion Letters and to refrain

from issuing the 1972 Opinion Letters in the form they

actually took.

31. As a direct and proximate result of Touche Ross’

failure to conduct the 1972 audit of Weis in accordance

with generally accepted auditing standards, generally ac-

cepted accounting principles, and the audit regulations of

the Exchange and the SEC:

a. the acts of the Weis Five as set forth in paragraphs

10 through 13 herein were not promptly discovered, and

the Weis Five were able to continue to make false and

fictitious entries in Weis’ books, records and financial

statements in order to conceal Weis’ true financial condi-

tion during its fiscal year 1973;

b. other misstatements and inaccuracies in Weis’

books, records and financial statements were not dis-

covered;

c. Weis, its Board of Directors, the Exchange, the

SEC, SIPC, and Weis’ customers, creditors, lenders and

shareholders were misled by Touche Ross into believing

or assuming that as of May 26, 1972 Weis was in sound

financial condition and in compliance with applicable

financial responsibility rules;

d. Weis, its Board of Directors, the Exchange, the

SEC and SIPC were prevented from (i) knowing the true

financial condition of Weis, (ii) performing their respec-

tive duties to safeguard the assets of Weis and the

property Weis was holding in trust for its customers, (iii)

taking and causing to be taken appropriate and immediate

remedial action at a time when a forced liquidation of

Weis under the 1970 Act could have been prevented, and

(iv) taking or causing to be taken appropriate and

immediate action to avoid or reduce the costs of satisfying

the claims of Weis’ customers;

e. the acts of the Weis Five as set forth in paragraphs

10 through 13 herein were not discovered by Weis, its

Board of Directors, the SEC, SIPC or the Exchange until

April and May 1973 at which time the only remedial

action that could be taken was the forced liquidation of

Weis under the 1970 Act, which caused and continues to

cause substantial injury to Weis and SIPC as well as Weis’

customers, creditors, lenders and shareholders;

f. the assets of Weis and the property Weis was

holding in trust for its customers were not on the Filing

Date or thereafter sufficient to satisfy the claims of Weis’

customers, creditors, lenders and shareholders;

g. Weis was unable to comply with the minimum

financial responsibility rules which would allow it to

conduct its business as a broker-dealer in securities, was

unable to restore itself to a condition in which it could

remain in business, and lost the value of its business and

assets as a going concern;

h. the assets of Weis were wasted and mismanaged;

and

i. Weis was caused to undertake financial obligations

which it could not satisfy and which it would not or could

not have undertaken had its true financial condition as of

May 26, 1972 been known to Weis and its Board of

Directors, the SEC, the Exchange and SIPC.

As AND For PLAINTIFF TRUSTEE’S

First CAUSE Or ACTION

32. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

33. Asa result of the errors and omissions of Touche

Ross, including those set forth in paragraphs 28 through

30 herein, Touche Ross violated, and aided and abetted

the Weis Five in violating, Section 17 of the 1934 Act (15

U.S.C. Section 78q) and the rules and regulations promul-

gated thereunder, which require broker-dealers such as

Weis to file with regulatory authorities accurate and

truthful reports of their financial condition, including

reports such as those certified by Touche Ross, in order to

ensure the integrity and safety of the nation’s securities

markets and of the brokers and dealers that participate

therein.

34. Weis, its Board of Directors, its creditors, custom-

ers, lenders and shareholders were among the class of

persons which Section 17 of the 1934 Act was designed to

protect and were among the beneficiaries of duties im-

posed on Touche Ross by Section 17 of the 1934 Act. The

- injuries which have occurred to Weis, its creditors, custom-

ers, lenders and shareholders as a result of the liquidation

of Weis were of the type that Section 17 of the 1934 Act

was intended to prevent.

35. As a result of Touche Ross’ violation of Section

17 of the 1934 Act and the rules and regulations promul-

gated thereunder, its aiding and abetting of the Weis

Five’s violation of Section 17 of the 1934 Act and the rules

and regulations promulgated thereunder, and its breach of

the duties imposed by Section 17 of the 1934 Act and the

rules and regulations promulgated thereunder, Weis, its

creditors, customers, lenders and shareholders have suf-

fered and will continue to suffer damages in an amount

which is presently estimated to be at least $51,000,000.

As AND For PLAINTIFF TRUSTEE’S

SECOND CAUSE OF ACTION

36. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs | through 34

herein as though here set forth in full.

37. As a result of Touche Ross’ negligence per se in

violating Section 17 of the 1934 Act (15 U.S.C. Section

78q), and not as the result of any negligence of the

Trustee or Weis, Weis has suffered and will continue to

suffer damages in an amount which is presently estimated

to be at least $51,000,000.

As AND For PLAINTIFF TRUSTEE’S

THIRD CAUSE OF ACTION

38. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs 1 through 31

herein as though here set forth in full.

39. As a result of the negligence and malpractice of

Touche Ross, including that set forth in paragraphs 28

through 30 herein, and not as the result of any negligence

of the Trustee or Weis, Weis has suffered and will

continue to suffer damages in an amount which is present-

ly estimated to be at least $51,000,000.

do er

As AND For PLAINTIFF TRUSTEE’S

FourTH CAUSE OF ACTION

40. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs 1 through 31

herein as though here set forth in full.

41. The auditing and accounting services performed

by Touche Ross with respect to Weis were performed in so

reckless and grossly negligent a manner that Touche Ross

knew or should have known that the 1972 Opinion Letters

and the accompanying Answers to the Financial Question-

naire and financial statements were false, inaccurate and

incomplete.

42. By reason of the foregoing reckless and grossly

negligent conduct of Touche Ross, and not as the result of

any negligence of the Trustee or Weis, Weis has suffered

and will continue to suffer damages in an amount which is

presently estimated to be at least $51,000,000.

As AND For PLAINTIFF TRUSTEE’S

FIFTH CAUSE OF ACTION

43. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

44. In connection with the auditing and accounting

services performed by Touche Ross and as compensation

therefor, Weis paid Touche Ross a certain sum of money

(the “Touche Ross Fee”), the amount of which is not

presently known to Plaintiff Trustee.

45. By reason of Touche Ross’ breach of and failure

to perform its agreement to render said auditing and

accounting services in a thorough, proper, skillful and

diligent manner, Weis is entitled to general damages in

the amount of the Touche Ross Fee and to consequential

damages in an amount which is presently estimated to be

at least $51,000,000.

AS AND For PLAINTIFF TRUSTEE’S

SIxTH CAUSE OF ACTION

46. Plaintiff Trustee repeats and realleges each and

every allegation contained in paragraphs 1 through 31

herein as though here set forth in full.

47. In its engagement letter with Weis and other

communications to Weis, Touche Ross expressly and

impliedly warranted to Weis that its services to Weis

would be of a certain quality (i.e. that, inter alia, they

would comply with generally accepted auditing standards,

generally accepted accounting principles, and the audit

regulations of the Exchange and the SEC).

48. By reason of the breaches and failures of Touche

Ross, including those set forth in paragraphs 28 through

30 herein, those services were not of the warranted quality

and were wholly without value to Weis.

49. By reason of Touche Ross’ breach of warranty of

the quality of its services to Weis, Weis is entitled to

general damages in the amount of the difference between

the actual and warranted values of the services rendered,

and to consequential damages in an amount which is

presently estimated to be at least $51,000,000.

As AND For PLAINTIFF SIPC’s

First Cause Or ACTION

50. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

51. Touche Ross’ audit of Weis failed to comply with

the auditing standards and regulations piescribed by the

1934 Act and the rules and regulations promulgated

thereunder, in that the 1972 Opinion Letters and the

accompanying Answers to the Financial Questionnaire

and financial statements prepared by Touche Ross were

false, inaccurate and incomplete.

sdentit

52. As a consequence of the liquidation of Weis, the

SIPC fund has been or may be depleted in order to satisfy

the claims of over 34,000 customers and certain other

creditors of Weis and to pay for certain administrative

expenses of the liquidation.

53. As a result of Touche Ross’ failure to comply

with the auditing standards prescribed by the 1934 Act

and the rules and regulations promulgated thereunder,

and as a result of Touche Ross’ breach of the duties it

owed to SIPC thereunder, SIPC has suffered and will

continue to suffer damages in an amount which is present-

iy estimated to be at least $14,000,000.

As AND For PLAINTIFF SIPC’s

SECOND CAUSE OF ACTION

54. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

55. As a result of Touche Ross’ failure to comply

with the auditing standards prescribed by the 1934 Act

and the rules and regulations promulgated thereunder, in

that the 1972 Opinion Letters and accompanying Answers

to the Financial Questionnaire and financial statements

prepared by Touche Ross were false, inaccurate and

incomplete, Touche Ross breached the duties it owed to

the customers and certain other creditors of Weis by

misleading them into believing or assuming that Weis was

not in financial difficulty, and consequently over 34,000 of

- said customers and creditors ultimately filed claims in the

Weis liquidation proceeding.

56. The SIPC fund has been or may be depleted in

order to satisfy the claims of the over 34,000 customers

and certain other creditors of Weis, hereinabove men-

tioned in paragraph 55, and to pay for certain adminis-

trative expenses of the liquidation.

57. But for Touche Ross’ breach of the duties it owed

to the customers and certain other creditors of Weis by its

failure to comply with the auditing standards and regu-

lations prescribed by the 1934 Act and the rules and

regulations promulgated thereunder, the SIPC fund would

not have been depleted to the extent that it has been, if at

all, and consequently SIPC is subrogated to those claims

which such customers and certain other creditors of Weis

who have been paid out of the SIPC fund could have

asserted against Touche Ross based on the auditing and

accounting services performed by Touche Ross with re-

spect to Weis.

58. The aggregate of the claims of Weis’ customers

and certain other creditors which have been satisfied out

of the SIPC fund and for which Touche Ross is liable to

SIPC is presently estimated to be at least $14,000,000.

As AND For PLAINTIFF SIPC’s

THIRD CAUSE OF ACTION

59. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

60. Touche Ross had knowledge of or, but for its

errors and omissions, should have had knowledge of the

deception caused by the Weis Five, in violation of the

1934 Act and the rules and regulations promulgated

thereunder, by means of the filing or dissemination of the

1972 Opinion Letters and accompanying Answers to the

Financial Questionnaire and financial statements.

61. Touche Ross breached the duties it owed to SIPC

by failing to inquire as to, and to disclose, the deception

caused by the Weis Five, in violation of the 1934 Act and

the rules and regulations promulgated thereunder, by

means of the filing or dissemination of the 1972 Opinion

Letters and the accompanying Answers to the Financial

Questionnaire and financial statements.

of the Weis Five’s violation 0

and regulations promuigat

paragraphs 60 and 61 hereinabove,

i PC

uent depletion of the SI ™

pi 62 hereinabove, SIPC has suffered and wil

continue to suffer da

62. The SIPC fund has been or may be depleted in

i rs and

order to satisfy the claims of over 34,000 oe aad

certain other creditors of Weis and to pay

administrative expenses of the liquidation.

’ aidi betting

f Touche Ross’ aiding and a

tia or F the 1934 Act and the rules

lgated thereunder as discussed in

and as a result of the

fund as indicated in

mages in an amount which is present-

ly estimated to be at least $14,000,000.

As AND For PLAINTIFF SIPC’s

FouRTH CAUSE Or ACTION

64. Plaintiff SIPC repeats and realleges south

every allegation contained in paragraphs 1 throug

herein as though here set forth in full.

65. Touche Ross had knowledge of = “00 ow

‘errors and omissions, should have had — fied soloed

deception caused by the Weis Five, in vio atl ooabe

1934 Act and the rules, an Ty dissemination ofthe

r, by means of the hing

Oe ane Letters and the rpremcrt gd sa to

the Financial Questionnaire and financial state .

66. Touche Ross breached the pr it aye ‘gt

, ‘1 other creditors of Weis DY

customers and certain 0 Jn

inquire as to, and to disclose, the aes hae

is Five, in violati f the 1934 Act an

Weis Five, in violation 0 Ayre

regulations promulgated thereunder, by oppo oo

filing or dissemination of the 1972 Opinion carretera

accompanying Answers to the Financial Ques

and financial statements.

67. The SIPC fund has been or may be depleted in

order to satisfy the claims of over 34,000 customers and

certain other creditors of Weis and to pay for certain

administrative expenses of the liquidation.

68. But for Touche Ross’ aiding and abetting of the

Weis Five’s violation of the 1934 Act and the rules and

regulations promulgated thereunder, as discussed in para-

graphs 65 and 66 hereinabove, the SIPC fund would not

have been depleted to the extent that it has been, if at all,

and consequently SIPC is subrogated to those claims

which such customers and certain other creditors of Weis

who have been paid out of the SIPC fund could have

asserted against Touche Ross based on the auditing and

accounting services performed by Touche Ross with re-

spect to Weis.

69. The aggregate of the claims of Weis’ customers

and certain other creditors which have been satisfied out

of the SIPC fund and for which Touche Ross is liable to

SIPC is presently estimated to be at least $14,000,000.

As AND For PLAINTIFF SIPC’s

FIFTH CAUSE OF ACTION

70. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs 1 through 31

herein as though here set forth in full.

71. As a consequence of the liquidation of Weis,

SIPC was required to satisfy the claims of over 34,000

customers and certain other creditors of Weis and to pay

for certain administrative expenses of the liquidation.

72. As a result of the negligence and malpractice of

Touche Ross, including that set forth in paragraphs 28

through 30 herein, and not as a result of any negligence of

SIPC, SIPC has suffered and will continue to suffer

damages in an amount which is presently estimated to be

at least $14,000,000.

Tse ee

As AND For PLAINTIFF SIPC’s

SIXTH CAUSE OF ACTION

73. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

74. Asa result of the negligence and malpractice of

Touche Ross, including that set forth in paragraphs 28

through 30 herein (and not as a result of any negligence of

any customer or creditor of Weis), the customers and

certain other creditors of Weis were misled into believing

or assuming that Weis was not in financial difficulty, and

consequently over 34,000 of said customers and creditors

ultimately filed claims in the Weis liquidation proceeding.

75. The SIPC fund has been or may be depleted in |

order to satisfy the claims of the over 34,000 customers

and certain other creditors of Weis, hereinabove men-

tioned in paragraph 74, and to pay for certain adminis-

trative expenses of the liquidation. |

76. But for Touche Ross’ negligence and malpractice,

the SIPC fund would not have been depleted to the extent

that it has been, if at all, and consequently SIPC is

subrogated to thcse claims which such customers and

certain other creditors of Weis who have been paid out of

the SIPC fund could have asserted against Touche Ross

based on the auditing and accounting services performed

by Touche Ross with respect to Weis. si

77. The aggregate of the claims of Weis customers

and certain other creditors which have been satisfied out

_of the SIPC fund and for which Touche Ross is liable to

SIPC is presently estimated to be at least $14,000,000.

AS AND For PLAINTIFF SIPC’s

SEVENTH CAUSE OF ACTION

78. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

79. As a consequence of the liquidation of Weis, the

SIPC fund has been or may be depleted in order to satisfy

the claims of over 34,000 customers and certain other

creditors of Weis and to pay for certain administrative

expenses of the liquidation.

80. As a result of the malpractice of Touche Ross and

its breach of the duties it owed to SIPC (and not as a

result of any negligence of SIPC), in that the auditing and

accounting services performed by Touche Ross were

conducted in so reckless and grossly negligent a manner

that Touche Ross knew or should have known that the

1972 Opinion Letters and the accompanying Answers to

the Financial Questionnaire and financial statements were

false, inaccurate and incomplete, SIPC has suffered and

will continue to suffer damages in an amount which is

presently estimated to be at least $14,000,000.

As AND For PLAINTIFF SIPC’s

EIGHTH CAusE OF ACTION

81. Plaintiff SIPC repeats and realleges each and

every allegation contained in paragraphs | through 31

herein as though here set forth in full.

82. As a result of the malpractice of Touche Ross and

its breach of the duties it owed to the customers and

certain other creditors of Weis (and not as a result of any

negligence of any customer or creditor of Weis), in that

the auditing and accounting services performed by Touche

Ross were conducted in so reckless and grossly negligent a

mannér that Touche Ross knew or should have known

that the 1972 Opinion Letters and the accompanying

Answers to the Financial Questionnaire and financial

statements were false, inaccurate and incomplete, the

customers and certain other creditors of Weis were misled

into believing or assuming that Weis was not in financial

ee a ee

difficulty, and consequently over 34,000 of said customers

and certain other creditors ultimately filed claims in the

Weis liquidation proceeding.

83. The SIPC fund has been or may be depleted in

order to satisfy the claims of the over 34,000 customers

and certain other creditors of Weis, hereinabove men-

tioned in paragraph 82, and to pay for certain adminis-

trative expenses of the liquidation.

84. But for Touche Ross’ malpractice, recklessness

and gross negligence, the SIPC fund would not have been

depleted to the extent that it has been, if at all, and

consequently SIPC is subrogated to those claims which

such customers and certain other creditors of Weis who

have been paid out of the SIPC fund could have asserted

against Touche Ross based on the auditing and account-

ing services performed by Touche Ross with respect to

Weis.

85. The aggregate of the claims of Weis’ customers

and certain other creditors which have been satisfied out

of the SIPC fund and for which Touche Ross is liable to

SIPC is presently estimated to be at least $14,000,000.

WHEREFORE, plaintiffs demand judgment:

a. for $51,000,000 on Plaintiff Trustee’s First

Cause of Action;

b. for $51,000,000 on Plaintiff Trustee’s Second

Cause of Action;

c. for $51,000,000 on Plaintiff Trustee’s Third

Cause of Action;

d. for $51,000,000 on Plaintiff Trustee’s Fourth

Cause of Action;

e. for the amount of the Touche Ross Fee plus

$51,000,000 on Plaintiff Trustee’s Fifth Cause of

Action;

f. for an amount which is the difference between

the actual and warranted values of Touche Ross’

services with respect to Weis, plus $51,000,000, on

Plaintiff Trustee’s Sixth Cause of Action;

g. for $14,000,000 on Plaintiff SIPC’s First

Cause of Action;

h. for $14,000,000 on Plaintiff SIPC’s Second

Cause of Action;

i. for $14,000,000 on Plaintiff SIPC’s Third

Cause of Action;

j. for $14,000,000 on Plaintiff SIPC’s Fourth

Cause of Action;

k. for $14,000,000 on Plaiatiff SIPC’s Fifth

Cause of Action;

l. for $14,000,000 on Plaintiff SIPC’s Sixth

Cause of Action;

m. for $14,000,000 on Plaintiff SIPC’s Seventh |

Cause of Action;

n. for $14,000,000 on Plaintiff SIPC’s Eighth

Cause of Action;

o. for interest on the amounts demanded herein;

p. for the costs and disbursements of this action;

and

q. for such other, further and different relief as

to the Court may seem just and proper.

ee ne Eos ©

ee eee ee eee

eb tle Ase ein a SLANT ste Bae Breet mh me oe er ae

Dated: New York, New York

April 30, 1976

ek SRI 6 oH 1 ee ee

HUGHES HUBBARD & REED

By _/s/ JOHN S. ALLEE

_A Member of the Firm

Attorneys for Edward S.

Redington, as Trustee for

the liquidation of the busi-

ness of Weis Securities, Inc.

One Wall Street

New York, New York 10005

(212) WH 3-6500

HAWKINS, DELAFIELD &

Woop

By_/s/ CLARENCE FRIED

A Member of the Firm

Attorneys for Securities In-

vestor Protection

Corporation |

67 Wall Street

New York, New York 10005

(212) 952-4700

[ This page left blank intentionally. ]

ON Na AM RN ett ne na nl

Exhibit A to Complaint

WEIS, VOISIN & CO., INC.

REPORT ON EXAMINATION OF STATEMENT OF

FINANCIAL CONDITION

MAY 26, 1972

TOUCHE ROSS & CO.

——<—— Cl Cis

err

Toucue Ross & Co.

WEIS, VOISIN & CO., INC.

REPORT ON EXAMINATION OF STATEMENT OF

FINANCIAL CONDITION

MAY 26, 1972

TOUCHE ROSS & CO.

1633 BROADWAY

NEW YORK, NEW YORK 10019

July 7, 1972

Board of Directors

Weis, Voisin & Co., Inc.

New York, New York

We have examined the accompanying statement of

financial condition of Weis, Voisin & Co., Inc. as of May

26, 1972. Our examination was made in accordance with

generally accepted auditing standards, and accordingly

included such tests of the accounting records and such

other auditing procedures as we considered necessary in

the circumstances.

In our opinion, the statement of financial condition

referred to above presents fairly the financial position of

Weis, Voisin & Co., Inc. at May 26, 1972, in conformity

with generally accepted accounting principles applied on a

basis consistent with that of the preceding period.

Touche Ross & Co.

Certified Public Accountants

ToucueE Ross & Co. 38

WEIS, VOISIN & CO., INC.

STATEMENT OF FINANCIAL CONDITION

MAY 26, 1972

ASSETS

Cash 1,758,766

Deposits with clearing organizations and others 753,033

Receivables from brokers and dealers 8,775,852

Receivables from customers 76,376,206

Secured demand notes of subordinated lenders

(collateralized by securities, at quoted market

$6,625,570) 4,226,794

Miscellaneous receivables 3,610,935

Securities in firm trading and investment accounts:

Marketable securities, at quoted market 3,542,457

Securities not readily marketable, at fair value 949,908

Securities held under subordination agreements, at

quoted market 5,460,751

Investment in and advances to subsidiaries, at cost,

plus equity in undistributed earnings 1,153,583

Exchange memberships:

Owned, at cost (last sales prices $1,044,606 ) 1,289,938

Held under subordination agreement, at last

sales prices 421,494

Leasehold improvements, office furniture and fix-

tures, at cost, less accumulated amortization and

depreciation of $789,960 3,048,296

Excess of investment over net assets acquired, less

accumulated amortization of $76,465 ( Note 1) 2,217,403

Miscellaneous other assets 1,983,371

$115,568,787

See notes to statement of financial condition

te ew. --

WEIS, VOISIN & CO., INC.

STATEMENT OF FINANCIAL CONDITION

MAY 26, 1972

LIABILITIES AND STOCKHOLDERS’ EQUITY

Short-term bank loans, collateralized

by customers’ margin accounts

securities

Short-term bank loans, collateralized

by securities owned by the Com-

pany or covered by subordination

agreements

Payables to brokers and dealers

Payables to customers, including

$6,791,886 of fee credit balances

Securities sold but not yet purchased,

at quoted market

Accounts payable and _ accrued

expenses

Due to lessors on lease contracts cap-

italized

Subordinated liabilities and stock-

holders’ equity:

Liabilities subordinated to ll

claims of general creditors

( Note 2)

Stockholders’ equity:

Capital stock ( Note 2)

Additional paid-in capital

Retained earnings

Less treasury stock, at cost

Contingencies and commitments

( Note 3)

$15,237,951

2,374,800

2,767,078

3,811,397

8,953,275

1,366,017

7,587,258

$ 47,575,000

6,912,245

14,311,794

16,770,379

2,967,457

2,731,488

1,475,215

22,825,209

$115,568,787

ph Ms) ee ee

ToucueE Ross & Co.

WEIS, VOISIN & CO., INC.

NOTES TO

STATEMENT OF FINANCIAL CONDITION

MAY 26, 1972

Note |:

As of October 1, 1971, the Company acquired certain

specified assets and assumed certain specified liabilities of

Scheinman, Hockstein & Trotta, Inc., a member firm of

the New York Stock Exchange. This acquisition has been

accounted for as a purchase and the excess of investment

over net assets acquired is being amortized over a twenty-

year period.

Note 2:

The capital stock of the Company is composed of the

following classes of stock:

Number of shares

Autho- Out- In

Description rized Issued standing treasury Amount

Common, par value

$1, Class A (voting) 150,000 150,000 110,948 39,052 $ 150,000

Common, par value

$1, Class B

(non-voting ) 150,000 150,000 149,080 920 150,000

Preferred, par value

$100, Class A 55,000 16,248 10,273 5,975 1,624,800

Preferred, par value

$100, Class B,

1% cumulative,

convertible 3,500 3,500 3,500 — 350,000

Preferred, par value

$100, Class C,

1% cumulative,

converible 2,500 1,000 1,000 — 100,000

Preferred, par value

$100, Class D, 6%

cumulative 10,000 — — — —

$2,374,800

Re ee ee ee

<a ke

TOUCHE Ross & Co.

The Company has granted stock options to subordi-

nated lenders to purchase Class B, non-voting common

stock as follows:

Option Exercise Expiration

granted amount date

Shares equa! to 2% 2% of total 1976

of total Class A stockholders’

and Class B equity at

common stock exercise date

issued and

outstanding at the

exercise date

10,907 shares $25 per share 1975

2,000 shares $35,000 Upon termination

of subordina-

tion agreement

The exercise of these options is subject to the written

approval of the New York Stock Exchange.

Note 3:

Aggregate rental commitments at May 26, 1972,

under material noncancelable leases for premises were

approximately $34,650,000 payable as follows:

Fiscal year

ending Amount

May 25, 1973 $ 3,000,000

May 31, 1974 2,825,000

May 30, 1975 2,875,000

May 28, 1976 2,750,000

May 27, 1977 2,725,000

May 26, 1978-1991 20,475,000

se ae

Exhibit B to Complaint

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

AND ADDITIONAL INFORMATION

MAY 26, 1972

TOUCHE ROSS & CO.

Toucue Ross & Co.

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

AND ADDITIONAL INFORMATION

MAY 26, 1972

TOUCHE Ross & Co.

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

AND ADDITIONAL INFORMATION

MAY 26, 1972

CONTENTS

Page

number

Report of independent certified public accoun-

tants | l

Answers to financial questionnaire:

Part I 2-11

Additional information:

Report of independent certified public

accountants 12

Net capital computation 13-18

Report on internal controls by independent certi-

fied public accountants 19

Note: In accordance with general instructions regarding the

preparation of this questionnaire, questions and

subdivisions have been omitted where the respondent

had nothing to report.

TOUCHE ROSS & CO.

1633 BROADWAY

NEW YORK, NEW YORK 10019

July 7, 1972

Board of Directors

Weis, Voisin & Co., Inc.

New York, New York

We have examined the answers to the financial

questionnaire of Weis, Voisin & Co., Inc. as of May 26,

1972. Our examination was made in accordance with

generally accepted auditing standards, and accordingly

included a review of the accounting system, internal

accounting control and the procedures for safeguarding

securities including such tests thereof for the period since

the prior examination date and such other auditing proce-

dures as we considered necessary in the circumstances,

including the audit procedures prescribed by the New

York Stock Exchange and the Securities and Exchange

Commission.

In our opinion, the accompanying answers to the

financial questionnaire present fairly the financial position

of Weis, Voisin & Co., Inc. at May 26, 1972, in the form

prescribed by the New York Stock Exchange and the

Securities and Exchange Commission, in conformity with

generally accepted accounting principles applied on a

basis consistent with that of the preceding period.

Touche Ross & Co.

Certified Public Accountants

WEIS, VOISIN & CO., INC. -2-

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PARTI Ledger balance Security valuation Commodity contracts

Question number and title of account Debit Credit Long Short Losses Gains

1. Bank balances and other deposits:

Cash on Hand $ 11,935

Cash on deposit:

Subject to immediate withdrawal 1,482,856

Segregated under the Commodity Exchange Act 263,975

Guaranty deposits with clearing organizations: .

General funds 599,143 $ 445,960

Segregated under the Commodity Exchange Act 25,010

Good faith deposits—brokers and dealers—Current 128,880

2. Money borrowed, and accounts carried for respondent

by other banking or brokerage houses, secured by or

containing customers’ collateral:

A. Money borrowed:

1. From banks, trust companies and other finan-

cial institutions $47,575,000 71,372,501

B. Accounts carried by other banking or bro: -age

houses:

1. Securities accounts:

a. Accounts with net debit balance, National

Clearing Corp. 453,361 $1,257,102 889,204

b. Accounts with net credit balance, Pacific

Coast Stock Exchange Clearing Corp. 197,272 193,123 314,089

2. Commodities accounts—futures:

a. Regulated commodities accounts:

ii. Accounts liquidating to a deficit 176,914 | $15,374 $49,214

b. Non-regulated commodities accounts:

ii. Accounts liquidating to a Deficit 44,022 16,140 30,839

3. Money borrowed, and accounts carried for respondent

by other banking or brokerage houses, unsecured, or

secured entirely by collateral owned by respondent

and/or its officers and directors, or by securities

covered by “satisfactory subordination agreements”:

A. Money borrowed:

1. From banks, trust companies and other finan-

cial institutions 6,912,245 12,806,501

WEIS, VOISIN & CO., INC. ,

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PART I

Question number and title of account

4. Other accounts and open items with brokers and deal-

ers:

A. Securities borrowed

B. Securities failed to deliver:

1. Outstanding less than 30 days

2. Outstanding 30 days or more:

30 through 39 calendar days

40 through 49 calendar days

50 through 59 calendar days

60 calendar days or more

C. Securities loaned:

1. For customers

2. For accounts reportable under 10, 11 and 12

D. Securities failed to receive:

1. For customers:

a. Outstanding less than 30 days

b. Outstanding 30 days or more

3. For accounts reportable under 10, 11 and 12:

a. Outstanding less than 30 days

b. Outstanding 30 days or more |

E. Open transactions in foreign securities with other

brokers

5. Valuation of securities in box, transfer and transit:

A. Negotiable securities in box and in transfer

Ledger balance

Security valuation Commodity contracts

Debit Credit

$2,641,600

5,051,188

97,518

25,311

5,932

66,921

$8,158,872

344,928

4,870,326

222,859

405,333

6,071

213,085 57,594

Long Short Losses Gains

$2,590,700

4,995,527

91,758

19,721

4,600

79,830

$ 8,083,063

350,387

4,963,022

251,152

422,999

5,516

708,348 1,502,139

37,949,184

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PART I

Question number and title of account

Customers’ securities accounts:

A. Cash accounts:

1. Accounts with debit balances

2. Accounts with credit balances

B. Secured Accounts:

1. Accounts with debit balances

2. Accounts with credit balances

C. Partly secured accounts (see Reserve—Question

13):

2. Accounts with credit balances

Unsecured accounts (see Reserve—Question 13)

Accounts with credit balances having open con-

tractual commitments

Accounts with free credit balances

Fully paid securities not segregated:

1. Segregation instructions issued:

a. Securities failed to receive

b. Securities due from customers

c. Pending execution of instructions (based

on tests, substantially all cleared within

three business days)

2. Substantially all in process of sale (based on

tests )

Customers’ commodities accounts:

A. Accounts with open future contracts liquidating to

an equity:

1. Regulated commodities

2. Non-regulated commodities

Unsecured debit balances

Accounts with free credit balances:

1. Regulated

2. Non-regulated

Om mo

-4-

Ledger balance Sécurity valuation Commodity contracts

Debit Credit Long Short Losses Gains

$ 4,201,268 $ 5,734,085 $ 346,799

$5,263,785 1,616,717 5,656,274

71,823,113 96,673,766 1,719,750

3,207,453 562,761 3,240,069

196 2,660

419,241 35,274

760,916 101,005

6,791,886

1,021,791

4,293,950

8,704,928

7,730,105

269,566 $36,216 $23,281

; 275,749 34,608 36,058

6,170

143,613

46,871

WEIS, VOISIN & CO., INC. m, #

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PARTI Ledger balance Security valuation Commodity contracts

Question number and title of account Debit Credit Long Short Losses Gains

8. Accounts of officers and directors:

A. Officers:

1. Securities accounts:

A. Bona fide cash accounts:

1. Accounts with debit balances $ 13,689 $ 14,600

B. Secured accounts:

1. Accounts with debit balances 101,240 117,326

F. Accounts with free credit balances $ 10,344

G. Fully paid securities not segregated 11,400

10. Trading and investment accounts of respondents:

A. Securities accounts:

1. Exempt securities 3,255,793 1,707,061 506,000

2. Other securities 2,749,793 $1,707,061

C. Arbitrage account 1,236,572 1,260,396 1,236,572 1,260,396

WEIS, VOISIN & CO., INC. -6-

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PARTI Ledger balance Security valuation Commodity contracts

Question number and title of account Debit Credit Long Short Losses Gains

11. Capital accounts:

C. Corporation capital:

1. Capital stock:

A. Authorized:

Class A, $1 par—150,000 shares

Class B, $1 par—150,000 shares

Preferred A, $100 par—55,000

Preferred B, $100 par, 1% cumula-

tive, convertible—3,500 shares

Preferred C, $100 par, 1% cumula-

tive, convertible—2,500 shares

Preferred D, $100 par, 6% cumula-

tive— 10,000 shares

B. Issued:

Class A, $1 par—150,000 shares $ 150,000

Class B, $1 par—150,000 shares 150,000

Preferred A, $100 par—16,248

shares 1,624,800

Preferred B, $100 par, 1% cumula-

tive, convertible—3,500 shares 350,000

Preferred C, $100 par, 1% cumula-

tive, convertible— 1,000 shares 100,000

C. Treasury stock:

Class A, $1 par—39,052 shares $ 750,071

Class B, $1 par—920 shares 18,400

Preferred A, $100 par—S,975.46

shares 597,546

2. Paid-in capital 2,767,078

3. Retained earnings 3,811,397

WEIS, VOISIN & CO., INC. RX

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PARTI Ledger balance Security valuation Commodity contracts

Question number and title of account Debit Credit Long Short Losses Gains

12. Subordinated accounts and borrowings:

A. Subordinated accounts:

Officer and directors:

1. Accounts with debit balances $ 39,939 $ 82,148

2. Accounts with credit balances $ 478,856 698,662

3. Securities not readily marketable 96,157

Debenture holders:

1. Accounts with debit balances 14,998 116,062

2. Accounts with credit balances 4 8,670

Customers:

1. Accounts with debit balances 690,260 1,431,460

2. Accounts with credit balances 2,256,768 3,005,725

3. Securities not readily marketable 21,867

B. Other subordinated borrowings:

Subordinated exchange memberships at market 421,494

Subordinated debentures 3,110,275

Secured demand notes—see Question 13 4,255,000

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PART I

Question number and title of account

13. Other accounts:

Exchange memberships:

Owned by respondent—at cost

Owned by stockholders (subordinated )—at last

sales prices

Leasehold improvements, office furniture and fix-

tures—at cost, less accumulated amortization

and depreciation of $188,916

Commodity difference accounts:

Regulated

Non-regulated

Loans and advances

Commissions receivable—last five trade dates

Insurance claim receivable re Winslow, Cohu &

Stetson, Inc.

Investment in and advances to subsidiaries—at

equity

Receivable from stockholders

Miscellaneous receivables:

Current

Other

Prepaid expenses and deposits

Deferred charges

Dividends and interest receivable, payable and

unclaimed:

Current (outstanding less than 30 days)

Not current

Scheinman, Hochstin & Trotta, Inc. liquidating

omnibus account

Secured demand notes receivable from subordi-

nated lenders, collateralized by:

Cash

Exempt securities

Non-exempt securities

Due from member firm

Excess of investment over net assets acquired, less

accumulated amortization of $76,465

Accrued customers’ interest receivable—current

Ledger balance Security valuation

Commodity contracts

Debit Credit Long Short

$1,289,938

421,494

1,341,057

$ 19,473

17,581

99,458

432,107

1,285,401

1,153,583

768,199

503,058

108,471

551,138

395,901

48,991

135,067

120,373

97,729

$ 635,277

233,431

$591,771

92,607

745,238

4,255,000

28,206

1,871,420

4,754,150

91,123

2,217,403

139,060

Losses Gains

$19,473

17,581

WEIS, VOISIN & CO., INC. 9.

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PARTI Ledger balance Security valuation Commodity contracts

Question number and title of account Debit Credit Long Short Losses Gains

13. Other accounts (continued ):

Purchased public relations contracts re acquisi-

tion of Thomas J. Deegan & Co., Inc., less

accumulated amortization of $29,432 $ 291,094

Leasehold improvements, office furniture and

fixtures—at cost acquired under lease con-

tracts, less accumulated amortization and

depreciation of $601,044 1,707,239

Due to lessors on lease contracts capitalized $ 1,475,215

Other liabilities 946,245

Reserve for doubtful accounts 200,000

Accrued interest payable 275,562

Accrued salaries and commissions 652,583

Floor brokerage payable 74,778

Federal, state, and local taxes payable on income 564,218

Unlocated security differences $ 43,821 $ 5,980

$112,435,971 $112,435,971 $154,014,358 $154,014,358 $139,392 $139,392

NOTE TO QUESTION 13:

Security count differences, discovered through physical count and verification procedures

pursuant to Rule 17a-5 and 17a-13, classified by date of discovery, which remained unresolved

or were bought or sold since the last examination date are as follows:

Security

valuation

Date of Number of

discovery securities Long Short

Unresolved differences May 26, 1972 60 $43,821 $5,980

Securities bought or sold: Bought Sold

March 24, 1972 3 $7,800

November 26, 1971 | 160

There were 14,624 securities with positions at May 26, 1972.

TOucHE Ross & Co. -10-

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PART |

16. Unrecorded assets, liabilities, and account-

abilities:

Under 31 leases for premises in effect as of May

26, 1972, aggregate annual rentals are as follows:

Fiscal year ending

IE Tt FE crkncoinpsckoksademanasietcnmenetauna $ 3,000,000

SEE TE I Bilccoluanskastnemanintinwmenueniaaiols 2,825,000

SE I IIE ins anaensdinsicncehionionadamnannageithe 2,875,000

IN cic asisceiscteiaceisseuaseunaranhents 2,750,000

Sy Ep . : RE 2,725,000

I Die, BT TIE vin eicinicscnccencesnncssenion 20,475,000

TOUCHE Ross & Co. ott.

WEIS, VOISIN & CO., INC.

ANSWERS TO FINANCIAL QUESTIONNAIRE

MAY 26, 1972

PART I

NOTE

The Company has granted stock options to subordinated lenders

to purchase Class B, non-voting common stock as follows:

Exercise Expiration

Option granted amount date

Shares equal to 2% of total 2% of total stock- 1976

Class A and Class B common holders’ equity

stock issued and outstand- at exercise date

ing at the exercise date

10,907 shares $25 per share 1975

2,000 shares $35,000 Upon termina-

tion of sub-

ordination

agreement

The exercise of these options is subject to the written approval of the

New York Stock Exchange.

ToucueE Ross & Co. -12-

ADDITIONAL INFORMATION

The additional information presented in the following

pages which has been taken primarily from accounting

and other records of the Respondent has been subjected to

the tests and other auditing procedures applied in our

examination of the answers to financial questionnaire of

Weis, Voisin & Co., Inc. as of May 26, 1972. In our

opinion, such information is fairly presented in all mate-

rial respects in relation to the answers to the financial

questionnaire taken as a whole although it is not necessary

for a fair presentation of financial position.

Touche Ross & Co.

Certified Public Accountants

TOUCHE Ross & Co. -13-

WEIS, VOISIN & CO., INC.

NET CAPITAL COMPUTATION

MAY 26, 1972

SUMMARY

Aggregate indebtedness $80,315,478

Y,, of aggregate indebtedness $ 5,354,365

Net capital:

Total credit items $30,099,473

Total debit items 21,867,090

NET CAPITAL 8,232,383

Capital in excess of minimum

requirements $ 2,878,018

Ratio of indebtedness to capital 976%

TOUCHE Ross & Co. -14-

Question

number

2Al

2B1

4Cl

4D 1

6A2

6B2

7TA2

7El

7TE2

WEIS, VOISIN & CO., INC.

NET CAPITAL COMPUTATION

MAY 26, 1972

Aggregate indebtedness

Money borrowed, collateralized

by customers’ securities

Credit balance in account car-

ried by other banking or bro-

kerage house

Open items with brokers and

dealers:

Securities loaned—customers’

securities

Securities failed to receive

customers’ securities

Foreign securities transactions

Customers’ security accounts:

Cash

Secured

Accounts with credit balances

having open contractual

commitments

Free credits

Customers’ commodity

accounts:

Equities in nonregulated com-

modities

Free credits—regulated

Free credits—nonregulated

Securities and commodities

accounts of officers and direc-

tors

Accrued interest payable

Accrued salaries and commis-

sions

Floor brokerage payable

Dividends and interest payable

Federal, state and local taxes

payable on income

Other liabilities

Total aggregate

indebtedness

$47,575,000

197,272

8,158,872

5,093,185

57,594

5,263,785

3,207,453

760,916

6,791,886

277,199

143,613

46,871

10,344

275,562

652,583

74,778

218,102

564,218

946,245

$80,315,478

TOUCHE Ross & Co. -15-

Question

number

Noe ee

WEIS, VOISIN & CO., INC.

NET CAPITAL COMPUTATION

MAY 26, 1972

Credit items

Ledger balances in partly se-

cured accounts

Firm trading and investment

accounts:

Securities long

Credit balance

Capital stock—A

Capital stock—B

Capital stock —Preferred—A

Capital stock —Preferred—B

Capital stock —Preferred —C

Paid-in capital

Retained earnings

Subordinated lenders’ ledger

balances—officers and direc-

tors

Subordinated lenders’ ledger

balances—debenture holders

Subordinated lenders’ ledger

balances—customers

Securities in subordinated lend-

ers’ accounts

Other subordinated borrowings

—memberships

Other subordinated borrowings

—debentures

Other subordinated borrowings

—secured demand notes

Reserve for doubtful accounts

Total credit items

196

3,255,793

1,707,061

150,000

1,624,800

350,000

100,000

2,767,078

3,811,397

478,856

2,256,768

5,460,751

421,494

3,110,275

4,255,000

200,000

$30,099,473

ToucueE Ross & Co. 16.

Question

number

WEIS, VOISIN & CO., INC.

NET CAPITAL COMPUTATION

MAY 26, 1972

Debit items

Short securities in partly secured accounts $

Debit balances in unsecured accounts

Short securities in unsecured accounts

Debit balances in unsecured commodities ac-

counts

Firm trading and investment accounts:

Securities short

Debit balance

Treasury stock, class A

Treasury stock, class B

Treasury stock, preferred A

Subordinated lenders’ ledger balances

—officers and directors

Subordinated lenders’ ledger balances

—debenture holders

Subordinated lenders’ ledger balances

—customers

Exchange memberships—firm

Exchange memberships—subordinated lenders

Leasehold improvements, furniture and fixtures

ect.

Miscellaneous receivables

Loans and advances

Insurance claims receivable re Winslow, Cohu &

Stetson, Inc.

Investments in and advances to subsid-

iaries at equity

2,660

419,241

35,274

6,170

1,707,061

3,255,793

750,071

18,400

597,546

39,939

14,998

690,260

1,289,938

421,494

1,341,057

108,471

99,458

1,285,401

1,153,583

TOUCHE Ross & Co. -17-

Question

number Debit items

13 Prepaid expenses and deposits

13 Deferred charges

13 Dividends and interest receivable— noncurrent

13 Short securities receivable— dividends

13 Excess of investment over net assets acquired

13 Receivable from stockholders

+ Due from member firm

3 Purchased public relations contracts re acquisi-

tion of Thomas J. Deegan & Co., Inc.

13 Leasehold improvements, office

furniture and fixtures, acquired

under lease contracts 1,707,239

Less amount due to lessors 1,475,215

13 Scheinman, Hochstin & Trotta, Inc. liquidating

Omnibus account

13 Unlocated security differences—short

Charges to capital:

Haircuts” (Schedule 1 ):

Subordinated lenders—customers

Subordinated lenders—debenture holders

Subordinated lenders—officers and direc-

tors

Firm accounts

LA% of value of commodities

Penalties on fails to deliver

TOTAL DEBIT ITEMS

551,138

395,901

135,067

92,607

2,217,403

768,199

91,123

291,094

232,024

745,238

5,980

1,170,062

36,580

295,194

1,529,962

48,910

23,793

$21,867,090

TOUCHE Ross & Co. -18-

WEIS, VOISIN & CO., INC.

NET CAPITAL COMPUTATION

MAY 26, 1972

SUMMARY OF CAPITAL CHARGES

Long

Security

value

Subordinated accounts:

Customers $ 990

19,500

29,300

206,400

532,000

66,500

8,300

21,867

3,574,195

$4,459,052

Debenture holders §$ 5,600

119,132

$ 124,732

Officers and direc-

tors $ 2,475

5,200

27,780

82,850

10,500

10,100

11,800

96,157

630,105

$ 876,967

Capital charge

Amount

195

586

10,320

53,200

9,975

1,660

21,867

1,072,259

$1,170,062

$ 840

35,740

36,580

104

833

4,143

1,050

1,515

2,360

96,157

189,032

295,194

TOUCHE Ross & Co.

Firm accounts

Commodities:

Fails to deliver:

40 through 49

days

50 through 59

days

60 days or more

Long

Security

value

$1,261,635

66,482

238,655

53,461

3,350

122,950

56,678

949,908

1,739,246

$4,492,265

25,311

5,932

66,921

$ 98,164

Capital charge

100

Amount

1 330

7,160

2,673

335

18,443

28,339

949,908

521,774

1,529,962

FoF

1,186

20,076

23,793

$3,055,591

TOUCHE Ross & Co. -19-

WEIS, VOISIN & CO., INC.

REPORT ON INTERNAL CONTROL

MAY 26, 1972

We have examined the financial statements of Weis,

Voisin & Co., Inc. for the period ended May 26, 1972 and

have issued our report thereon dated July 7, 1972. Asa

part of our examination, we reviewed and tested the

Company’s system of internal accounting control to the

extent we considered necessary to evaluate the system as

required by generally accepted auditing standards. Under

these standards the purpose of such evaluation is to

establish a basis for reliance thereon in determining the

nature, timing, and extent of other auditing procedures

that are necessary for expressing an opinion on the

financial statements.

The objective of internal accounting control is to

provide reasonable, but not absolute, assurance as to the

safeguarding of assets against loss from unauthorized use

or disposition, and the reliability of financial records for

preparing financial statements and maintaining account-

ability for assets. The concept of reasonable assurance

recognizes that the cost of a system of internal accounting

control should not exceed the benefits derived and also

recognizes that the evaluation of these factors necessarily

requires estimates and judgments by management.

There are inherent limitations that should be recog-

nized in considering the potential effectiveness of any

system of internal accounting control. In the performance

of most control procedures, errors can result from misun-

derstanding of instructions, mistakes of judgment, care-

lessness or other personal factors. Control procedures

whose effectiveness depends upon segregation of duties

can be circumvented by collusion. Similarly, control

procedures can be circumvented intentionally by manage-

ment with respect either to the execution and recording of

transactions or with respect to the estimates and judg-

ments required in the preparation of financial statements.

Further, projection of any evaluation of internal account-

ing control to future periods is subject to the risk that the

procedures may become inadequate because of changes in

conditions, and that the degree of compliance with the

procedures may deteriorate.

Our study and evaluation of the Company’s system of

internal accounting control for the period November 26,

1971, the prior examination date, to May 26, 1972 was

made for the purpose set forth in the first paragraph

above, and it would not necessarily disclose all weaknesses

in the system. However, such study and evaluation

disclosed no conditions that we believe to be material

weaknesses.

Touche Ross & Co.

Certified Public Accountants

nee

(This page left intentionally blank. )

) 67

Exhibit C to Complaint

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

REPORT ON EXAMINATION OF CONSOLIDATED

FINANCIAL STATEMENTS

YEAR (52 WEEKS) ENDED MAY 26, 1972

TOUCHE ROSS & CO.

TOUCHE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

REPORT ON EXAMINATION OF CONSOLIDATED

FINANCIAL STATEMENTS

YEAR (52 WEEKS) ENDED MAY 26, 1972

TOUCHE ROSS & CO.

1633 BROADWAY

NEW YORK, NEW YORK 10019

July 21, 1972

Board of Directors

Weis, Voisin & Co., Inc.

New York, New York

We have examined the accompanying consolidated

balance sheet of Weis, Voisin & Co., Inc. and subsidiaries

as of May 26, 1972, and the related statements of

earnings, stockholders’ equity and changes in financial

position for the year (52 weeks) then ended. Our

examination was made in accordance with generally

accepted auditing standards, and accordingly included

such tests of the accounting records and such other

auditing procedures as we considered necessary in the

circumstances.

In our opinion, the consolidated financial statements

referred to above present fairly the financial position of

Weis, Voisin & Co., Inc. and subsidiaries at May 26, 1972,

the results of their operations and changes in their finan-

cial position for the year (52 weeks) then ended, in

conformity with generally accepted accounting principles

applied on a basis consistent with that of the preceding

year.

Touche Ross & Co.

Certified Public Accountants

TOUCHE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MAY 26, 1972

ASSETS

Cash

Deposits with clearing organizations and

others

Receivables from brokers and _ dealers

( Note 4)

Receivables from customers ( Note 4)

Secured demand notes of subordinated

lenders (collateralized by cash of $28,206

and securities, at quoted market

$6,625,570) ( Note 5)

Miscellaneous receivables ( Note 9)

Securities owned ( Note 6)

Securities held under subordination agree-

ments, at quoted market ( Note 5)

Exchange memberships:

Owned, at cost (last sales prices

$1,044,606)

Held under subordination agreements, at

last sales prices ( Note 5)

Leasehold improvements, office furniture

and fixtures, at cost, less accumulated

amortization and _ depreciation of

$1,008,058 ( Note 7)

Excess of investment over net assets

acquired, less accumulated amortization

of $76,465 ( Note 3)

Miscellaneous other assets ( Note 3)

1,842,307

753,033

8,775,852

76,376,206

4,226,794

3,763,785

4,492,365

5,460,751

1,289,938

421,494

3,513,321

2,217,403

2,396,602

$115,529,851

See notes to consolidated financial statements

te ES A RS. a i eens OSS

a a eS a mee Te

ToucueE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MAY 26, 1972

LIABILITIES AND STOCKHOLDERS’ EQUITY

Short-term bank loans, collateralized by

customers’ margin accounts securities

Short-term bank loans, collateralized by

securities owned by the Company or

covered by subordination agreements

Payables to brokers and dealers ( Note 4)

Payables to customers ( Note 4)

Securities sold but not yet purchased

( Note 6)

Accounts payable and accrued expenses

(Note 8)

Due to lessors on lease contracts capital-

ized ( Note 7)

Subordinated liabilities and stockholders’

equity:

Liabilities subordinated to all claims of

general creditors ( Note 5)

Stockholders’ equity ( Notes 9 and 10):

Capital stock

Additional paid-in capital

Retained earnings

Less treasury stock, at cost

Contingencies and commitments (Notes

11 and 12)

$14,977,921

,374,800

,767,078

3,811,397

8,953,275

1,366,017

7,587,258

$ 47,575,000

6,912,245

14,311,794

16,770,379

2,967,457

2,952,582

1,475,215

22,565,179

$115,529,851

ToucueE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS

YEAR (52 WEEKS) ENDED MAY 26, 1972

Revenues:

Commissions:

Customers $19,160,975

Clearing brokers 762,745

Investment banking 5,191,186

Principal transactions

( Note 6) 2,288,365

Interest 3,408,607

Fees 873,707

Other 161,718

31,847,303

Expenses:

Employee compensation $15,575,609

Commissions—clearing

brokers 456,247

Floor brokerage commis-

sions 892,825

Interest 3,120,501

Office and equipment rent-

als 3,024,609

Communications 2,596,221

Other operating expenses 4,394,017 30,060,029

EARNINGS BEFORE

TAXES ON INCOME 1,787,274

Taxes on income ( Note 8) 765,000

Net EARNINGS $ 1,022,274

Weighted average number of

common and common

equivalent shares out-

standing ( Note 13) 234,204

Earnings per common and

common equivalent share

(Note 13) $4.36

See notes to consolidated financial statements

ToucueE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

YEAR (52 WEEKS) ENDED MAY 26, 1972

Capital stock issued

Number of shares

Common Preferred

Class A Class B Class A, Class B Class C Additional

par par par par par paid-in Retained

$1.00 $1.00 $100.00 $100.00 $100.00 Amount capital earnings

Balance, June 1, 1971.................0006 150,000 150,000 16,248 — — $1,924,800 $2,469,921 $2,789,123

NT idaisiecsiveiianctisisbininsinissbasteiansthnennes — — — 3,500 1,000 450,000 — _

Excess of proceeds over cost of

treasury stock sold:

Common, Class A—29,375

I snishitthcaseasiauiiatiareiiisibapinaneein — — — _ 17,827 —

Common, Class B—40,750

i cietaniiedanssinnntesseicieawmnensees — _ — = — 279,330 _

Net earnings for the year (52

weeks ) ended May 26, 1972....... — _ _ — — _ _ 1,022,274

Balance, May 26, 1972.................0 150,000 150,000 16,248 3,500 1,000 $2,374,800 $2,767,078 $3,811,397

Capital stock in treasury

Number of shares

Common Preferred

Class A, Class B Class A,

par $1.00 par $1.00 par $100.00 Cost

Balance, June 1, 1971..................008 61,375 24,124 6,412.96 $ 2,162,929

PPI srcitvninsansendstectcpsicenssonaxecsonn 7,052 17,546 4,962.50 835,057

ei iauiiariiaidabnicabinservibstinddiasansiacseenicss (29,375) (40,750) (5,400.00 ) (1,631,969)

Balance, May 26, 1972..........e.000000 39,052 920 5,975.46 $ 1,366,017

See notes to consolidated financial statements

TOuCHE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION

YEAR (52 WEEKS) ENDED MAY 26, 1972

Source of funds:

Operations:

Net earnings

Non-cash charges—depreciation and

amortization

Increase in:

Short-term bank loans, collateralized

by customers’ margin account secu-

rities

Short-term bank loans, collateralized

by securities owned by the Company

or covered by subordination agree-

ments

Payable to brokers and dealers

Payable to customers

Securities soid but not yet purchased

Liabilities subordinated to all claims of

general creditors

Proceeds from issue of preferred stock

Proceeds from sale of treasury stock:

Cost

Excess of proceeds over cost

Other sources

$ 1,022,274

538,410

1,560,684

31,073,040

5,612,245

5,062,360

5,642,327

2,833,092

6,474,117

450,000

1,631,969

297,157

61,550

60,698,541

Ai cS ett nc tems,

[CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION —( Continued ) ]

Application of funds:

Increase in:

Deposits with clearing organizations 487,317

Receivables from brokers and dealers 4,064,603

Receivables from customers 42,799,812

Secured demand notes of subordinated

lenders 4,226,794

Miscellaneous receivables 1,397,252

Securities owned 924,121

Securities held under subordination

agreements 146,933

Exchange memberships owned 154,050

Exchange memberships held under

subordination agreements 152,768

Miscellaneous other assets 1,750,911

Purchase of leasehold improvements and

furniture and fixtures 1,937,996

Excess of investment over net assets ac-

quired 2,217,403

Purchase of treasury stock 835,057

61,095,017

Decrease in cash $ 396,476

See notes to consolidated financial statements

TOUCHE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL

STATEMENTS

!. PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the

accounts of Weis, Voisin & Co., Inc. and all of its

subsidiaries. The results of operations of companies

purchased are included from the dates of acquisition. All

significant intercompany balances and transactions have

been eliminated in consolidation.

2. ACCOUNTING:

In 1972 the Company adopted a fiscal year consisting

of the fifty-two or fifty-three week period ending the last

Friday of May. Prior to 1972, the Company’s fiscal year

ended on May 31.

Security transactions are recorded in the accounts on

settlement date. Commission income and related ex-

penses for transactions executed but not settled are accru-

ed on financial statement dates.

3. ACQUISITIONS:

Scheinman, Hochstin & Trotta, Inc.:

As of October 1, 1971, the Company acquired certain

specified assets and assumed certain specified liabilities of

Scheinman, Hochstin & Trotta, Inc. (SH&T), a former

member firm of the New York Stock Exchange. This

acquisition has been accounted for as a purchase and the

excess of investment over net assets acquired of

Oe ee eee a RR eri ce

TOUCHE Ross & Co.

$2,293,868 is being amortized over a twenty-year period.

As part of the purchase agreement a subordinated

lender of SH&T agreed to become a subordinated lender

of the Company and to indemnify the Company to a

maximum of $4,000,000 in the event the assumed liabi-

lities exceeded the acquired assets. Through May 26, 1972

the liabilities assumed exceed the assets acquired by

approximately $750,000 which is included in mis-

cellaneous other assets.

Thomas J. Deegan Company, Inc.:

As of July 1, 1971, the Company acquired the

outstanding capital stock of Thomas J. Deegan Company,

Inc. in exchange for 3,500 shares of its 1% cumulative

convertible preferred par value $100, Class B stock. The

Company is accounting for this acquisition as a purchase.

4. RECEIVABLES FROM AND PAYABLES TO BROKERS AND

DEALERS AND CUSTOMERS:

The components of receivables from and payables to

brokers and dealers as of May 26, 1972 are as follows:

Securities failed to deliver $ 5,246,870

Deposits paid for securities borrowed 2,641,600

Other 887,382

Total receivables from brokers and dealers $ 8,775,852

Securities failed to receive $ 5,642,689

Deposits received for securities loaned 8,433,450

Other 235,655

Total payables to brokers and dealers $14,311,794

“Fails” represent the contract value of securities which

have not been received or delivered by settlement date.

TOUCHE Ross & Co.

Receivables from and payables to customers repre-

sent the dollar balances arising in connection with normal

cash and margin transactions. The receivables are

collateralized by securities held by the Company which

are not reflected in the accompanying consolidated finan-

cial statements. Free credit balances totaling approxi-

mately $6,792,000 at May 26, 1972 are included in

payables to customers. Accounts of officers, directors and

stockholders are included in receivables from and pay-

ables to customers since they are subject to the normal

terms and regulations as to payment and, in the aggregate,

are not significant. |

5. LIABILITIES SUBORDINATED TO ALL CLAIMS OF

GENERAL CREDITORS:

Certain creditors of the Company have signed agree-

ments subordinating their debentures, exchange member-

ships or securities accounts to all claims of general credit-

ors, and thus the respective amounts are available to the

Company in computing net capital under the New York

Stock Exchange rule regarding capital requirements (see

Note 10). These agreements generally specify release,

payment, or redemption no less than six months following

the date on which the lender demands termination subject

to approval of the New York Stock Exchange. These

liabilities at May 26, 1972 are summarized as follows:

~ Rate of

interest

Debentures 7-10% $ 3,110,275

Secured demand notes 8% 4,255,000

Exchange memberships 6-8% 421,494

Equities in securities accounts:

Securities at quoted market 2.8-5% 5,460,751

Cash 4-10% 1,730,401

$14,977,921

TOUCHE Ross & Co. -3-

6. SECURITIES OWNED:

Securities owned at May 26, 1972 consist of the

Company’s regular trading and investment accounts and

are summarized as follows:

Marketable securities—at Cost

quoted market: seta

U.S. Government bonds $ 330,200 $ 332,560

Municipal bonds 175,800 162,587

Corporate debentures and

note 69,718 69,608

Corporate stocks 1,730,167 1,745,421

Arbitrage (convertible

within 30 days) 1,236,572 1,151,459

3,542,457 3,461,635

Securities not readily mar-

ketable—at fair value 949,908 508,244

$4,492,365 $3,969,879

Marketable securities sold but

not yet purchased—at

quoted market:

Corporate debentures and

notes $ 24,734 $ 24,700

Corporate stocks 1,682,327 1,671,581

Arbitrage (convertible

within 30 days) 1,260,396 1,192,206

$2,967,457 $2,888,487

Quoted market has been determined by reference to

available quotations as to marketable securities. The fair

values of securities not readily marketable have been

determined by management. Fair values as determined

are, in the aggregate, not less than cost.

ToucueE Ross & Co.

The increase in unrealized appreciation on securities

owned for the fiscal year ended May 26, 1972 of $285,516

is included in principal transactions on the statement of

earnings. The effect on net earnings (after taxes) is

$170,667 or $.73 per share.

7. LEASEHOLD IMPROVEMENTS, OFFICE FURNITURE AND

FIXTURES:

Leasehold improvements, office furniture and fixtures

include approximately $2,300,000 of such assets acquired

under lease contracts. The net book value of these assets

of approximately $1,700,000 collateralizes the amounts

due to lessors on lease contracts capitalized. The Com-

pany computes depreciation and amortization on the

straight-line method for financial statement purposes (see

Note 8).

8. TAXES ON INCOME:

Taxes on income indicate a significant variation in the

customary relationship to earnings before taxes on income

due to the effect of the different tax rates applied to

ordinary income and capital gains, and because federal

taxes on income were reduced by $113,000 of investment

tax credit. The Company accounts for the investment tax

credit by use of the flow-through method. Deferred

—4-

income taxes of $18,000 have been provided on the

difference in depreciation and amortization for leasehold

improvements, office furniture and fixtures acquired since

June 1, 1971, computed by the double-declining balance

method for tax purposes and the straight-line method for

financial reporting purposes. The liability for taxes on

income ($564,000 after reduction for estimated tax pay-

ments) at May 26, 1972 is included in accounts payable

and accrued expenses.

Ee em ee Ree es ay A

SoG bi NAS as Die Hs A ee

TOUCHE Ross & Co.

9. STOCKHOLDERS’ Eguity:

The capital stock of the Company is composed of the

following at May 26, 1972:

Number of shares

Autho- Out- In

Description rized Issued standing treasury Amount

Common, par value

$1, Class A (vo-

ting ) 150,000 150,000 110,948 39,052 $ 150,000

Common, par value

$1, Class B (non-

voting ) 150,000 150,000 149,080 920 150,000

Preferred, par value

$100, Class A 55,000 16,248 10,273 5,975 1,624,800

Preferred, par value

$100, Class B, 1%

cumulative, con-

vertible 3,500 3,500 3,500 — 350,000

Preferred, par value

$100, Class C, 1%

cumulative, con-

vertible 2,500 1,000 1,000 — 100,000

Preferred, ~ar value

$100, Ciass D, 6%

cumulative 10,000 — _ ‘i yom

$2,374,800

The Company has granted stock options (at option

prices not less than fair market value as determined by the

Company) to subordinated lenders to purchase Class B,

non-voting common stock as follows:

Option Exercise Expiration

granted amount date

Shares equal to 2% of 2% of total stock- 1976

total Class A and Class holders’ equity at

B common stock issued exercise date

and outstanding

at the exercise date

10,907 shares $25 per share 1975

2,000 shares $35,000 Upon termination

of subordination

agreement

ToucueE Ross & Co. -5-

The exercise of these options is subject to the written

approval of the New York Stock Exchange.

Subject to certain anti-dilution provisions, the 3,500

shares of Class B preferred stock are convertible, in whole

but not in part, into 3,500 shares each of Class A and

Class B common stock and the 1,000 shares of Class C

preferred stock are convertible, in whole but not in part,

into 2,000 shares of Class B common stock.

As of May 26, 1972, $768,000 included in mis-

cellaneous receivables in the accompanying consolidated

balance sheet was due from employees in connection with

the purchase of the Company’s capital stock.

10. Net CapITaL REQUIREMENTS:

The Company is required to comply with a New

York Stock Exchange regulation which provides that the

Company maintain a ratio of aggregate indebtedness to

net capital, as defined, not exceeding 15 to 1. The excess

net capital as computed under this rule was approximately

$2,878,000 at May 26, 1972.

11. COMMITMENTS AND CONTINGENCIES:

There are various lawsuits pending against the Com-

pany which, in the opinion of management, will be

resolved with no material adverse effect on the financial

condition of the Company.

Aggregate rental commitments at May 26, 1972

under material noncancellable leases for premises were

approximately $34,650,000 payable as follows:

Fiscal year ending Amount

May 25, 1973 $ 3,000,000

May 31, 1974 2,825,000

May 30, 1975 2,875,000

May 28, 1976 2,750,000

May 27, 1977 2,725,000

May 26, 1978-1991 20,475,000

PeieniAeeine! © cat. cheer TLR ttle

— ee)

TOUCHE Ross & Co.

In the normal course of business, the Company enters

into underwriting commitments. Transactions relating to

underwriting commitments which were open as of May

26, 1972 and subsequently settled, had no material effect

on the financial statements at that date.

12. PrRoFit SHARING PLAN:

The Company has a non-contributory profit sharing

plan, qualified under the Internal Revenue Code, which

covers substantially all employees with more than one

year’s service. The plan is funded through a self-

administered trust and may be terminated at any time by

the Company. Contributions to the Trust are made at the

sole discretion of the Company’s Board of Directors. The

amount charged to income during the year was $150,000.

13. EARNINGS PER SHARE:

Earnings per common share and common equivalent

share were computed by dividing net earnings by the

weighted-average number of Class A voting and Class B

non-voting common shares and common share equiva-

lents outstanding during the year. The number of com-

mon share equivalents outstanding during the year. The

number of common share equivalents outstanding includ-

ed, (1) weighted-average of 6,417 shares issuable on

conversion of the Class B preferred stock, (2) weighted

average of 1,360 shares issuable on conversion of the

Class C preferred stock and (3) 600 shares issuable on

exercise Of stock options which are dilutive. All other

stock options outstanding are anti-dilutive and are

excluded in computing earnings per share.

(This page left intentionally blank. )

Exhibit D to Complaint

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

REPORT ON EXAMINATION OF CONSOLIDATED

FINANCIAL STATEMENTS

FIVE YEARS ENDED MAY 26, 1972

TOUCHE ROSS & CO.

TOUCHE Ross & Co.

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

REPORT ON EXAMINATION OF CONSOLIDATED

FINANCIAL STATEMENTS

FIVE YEARS ENDED MAY 26, 1972

— we

TOUCHE ROSS & CO.

1633 BROADWAY

NEW YORK, NEW YORK 10019

Jaly 21, 1972

Board of Directors

Weis, Voisin & Co., Inc.

New York, New York

We have examined the accompanying consolidated

balance sheet of Weis, Voisin & Co., Inc. and subsidiaries

as of May 26, 1972, and the related statement of earnings

for the five years then ended and the related statements of

stockholders’ equity and changes in financial position for

the three years then ended. Our examination was made in

accordance with generally accepted auditing standards,

and accordingly included such tests of the accounting

records and such other auditing procedures as we consid-

ered necessary in the circumstances.

In our opinion, the aforementioned consolidated

financial statements present fairly the financial position of

Weis, Voisin & Co., Inc. and subsidiaries at May 26, 1972,

and the results of their operations and the changes in their

financial position for the periods indicated, in conformity

with generally accepted accounting principles applied on a

consistent basis.

Touche Ross & Co.

Certified Public Accountants

ToucueE Ross & Co.

Revenues ( Note B):

Commissions ( Note C):

Customers

Clearing brokers

Investment banking ( Note D)

Principal transactions ( Note E)

Interest ( Note F)

Fees

Other

Expenses:

Employee compensation (Note G)

Commissions—clearing brokers

Floor brokerage commissions

Interest

Office and equipment rentals

Communications

Other operating expenses

EARNINGS BEFORE TAXES ON INCOME

Taxes on income ( Note H)

Net EARNINGS

Weighted average number of common and common

equivalent shares outstanding ( Notes B and I)

Earnings per common and common equivalent

= 88

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS

Year ended May 31,

1968 1969 1970 1971

$10,069,939 $13,769,505 $10,834,529 $13,533,183

8,077,966 9,684,578 7,887,924 3,011,337

471,190 3,359,274 2,446,189 1,596,898

974,778 425,719 2,825,483 1,336,104

2,378,745 3,532,765 4,979,995 2,748,397

348,755 385,860 298,150 803,270

166,798 447,920 525,850 455,016

22,488,171 31,605,621 29,298,120 23,484,205

8,405,466 13,831,272 11,852,884 10,605,677

5,78 208 7,027,742 5,044,094 1,922,969

1,471,079 1,539,924 1,044,958 861,370

1,128,850 1,589,146 3,112,488 2,247,205

784,998 1,423,922 1,971,289 2,074,299

777,153 1,219,448 2,023,393 1,842,214

2,114,091 4,114,189 3,624,121 3,245,782

20,461,045 30,745,643 28,673,227 22,799,516

2,027,126 859,978 624,893 684,689

882,000 418,000 206,000 336,000

$ 1,145,126 $ 441,978 $ 418,893 $ 348,689

211,429 213,136 238,605 219,114

$5.42 $2.07 $1.76 $1.59

share ( Notes E, H and I)

See notes to consolidated statement of earnings

Year

(52 weeks)

ended May

26, 1972

(Note A)

$19,160,975

762,745

5,191,186

2,288,365

3,408,607

873,707

161,718

31,847,303

15,575,609

456,247

892,825

3,120,501

3,024,609

2,596,221

4,394,017

30,060,029

1,787,274

765,000

$1,022,274

234,204

$4.36

ToucueE Ross & Co. -3-

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED STATEMENT OF

EARNINGS

Nore A:

In 1972 the Company adopted a fiscal year consisting

of the fifty-two or fifty-three week period ending the last

Friday of May. Prior to 1972, the Company’s fiscal year

ended on May 31.

Security transactions are recorded in the accounts on

settlement date. Commission income and related

expenses for transactions executed but not settled are

accrued on financial statement dates.

Note B:

As discussed in Note 2 to the consolidated financial

statements, the Company acquired certain specified assets

and assumed certain specified liabilities of Scheinman,

Hochstin & Trotta, Inc., and acquired certain selected

assets of Winslow, Cohu & Stetson, Incorporated and

undertook to liquidate its assets and liabilities. The

statement of earnings reflects operations of these acquisi-

tions from their respective acquisition dates. Separate

statements of operations of these companies are not

included because both acquisitions were of offices, regis-

tered representatives and customers together with related

assets. Since processing operations and associated costs of

both companies have been eliminated, presentation of

past operational data and pro forma statements of oper-

ations for periods prior to acquisition would not be

meaningful.

a ar

TOucHE Ross & Co.

The statement of earnings reflects operations of VCL

Associates, a limited partnership, all of whose assets and

liabilities were transferred to the Company on May 27,

1971 (see Notes H and 2). The weighted average number

of common and common equivalent shares outstanding

for years prior to the date of acquisition reflect retro-

actively the shares issued in connection with the acquisi-

tion. Net earnings of this company prior to its acquisition

have been transferred to Additional Paid-in Capital.

Note C:

Details of commission income are as follows:

Over-the- Mutual Commod-

Year ended Listed counter funds ities Total

May 31, 1968 $14,991,050 $2,884,241 $157,323$115,291 $18,147,905

May 31, 1969 17,497,592 5,190,585 669,449 96,457 23,454,083

May 31,1970 14,002,091 3,856,612 261,732 102,018 18,222,453

May 31,1971 13,764,538 2,091,596 422,929 265,457 16,544,520

May 26, 1972 15,475,771 3,143,198 834,209 470,542 19,923,720

-4-

Note D:

Investment banking income is ac follows:

Underwriting

manage-

ment— Syndicate

Year ended manager member Total

May 31, 1968 $ 185,087 $ 286,103 $ 471,190

May 31, 1969 3,002,414 356,860 3,359,274

May 31, 1970 1,598,406 847,783 2,446,189

May 31, 1971 69,236 1,527,662 1,596,898

May 26, 1972 2,334,849 2,856,337 5,191,186

TOUCHE Ross & Co.

Nore E:

Securities owned and securities sold but not yet

purchased are valued at quoted market or fair value

resulting in unrealized appreciation/(depreciation),

which is reflected in principal transactions for each period.

The change in unrealized appreciation/( depreciation) as

shown below is due not only to fluctuations in the quoted

market or fair value of individual securities owned, but it

is also affected by gains/(losses) realized on transactions

in these securities during the period. For tax purposes

securities owned are valued at cost. The change in

unrealized appreciation/( depreciation) by year, the effect

on net earnings and the related per share effect are as

follows:

Change in Increase/( decrease )

unrealized in net earnings

appreciation /

Year ended (depreciation) Amount Pershare

May 31, 1968 $ 418,448 $ 301,348 §$ 1.43

May 31, 1969 (507,843) (365,343) (1.71)

May 31, 1970 20,233 13,533 .06

May 31, 1971 319,474 214,074 .98

May 26, 1972 285,516 170,667 Ry

Note F:

Interest income is derived from interest-bearing

securities and deposits, and from credit extended to

TOUCHE Ross & Co.

customers for security purchases on margin and is as

follows:

Interest on

margin

Year ended accounts Other Total

May 31, 1968 $2,352,305 $26,440 $2,378,745

May 31, 1969 3,465,047 67,718 3,532,765

May 31, 1970 4,966,369 13,626 4,979,995

May 31, 1971 2,721,393 27,004 2,748,397

May 26, 1972 3,390,844 17,763 3,408,607

Note G:

The Company has a noncontributory profit-sharing

plan, qualified under the Internal Revenue Code, which

covers substantially all employees with more than one

year’s service. The plan is funded through d self-

administered trust and may be terminated at any time by

the Company. Contributions to the trust are made at the

sole discretion of the Company’s Board of Directors. The

amount charged to income was $154,000 in 1968,

$209,000 in 1969, none in 1970 and 1971, and $150,000 in

1972.

Note H:

The effective rate of taxes on income varies from year

to year due primarily to the different tax rates applied to

ordinary income and capital gains, investment tax credits,

and the varying tax rates during the five-year period. The

Company accounts for the investment tax credits, which

amounted to $10,000 in 1968, $87,000 in 1969, none in

1970 and 1971, and $113,000 in 1972, by use of the flow-

through method. State and local taxes included in taxes

TOUCHE Ross & Co.

on income were $77,000 in 1968, $18,000 in 1969, $70,000

in 1970, $52,000 in 1971 and $112,000 in 1972. As

discussed in Notes B and 2, VCL Associates operated as a

limited partnership. Pro forma provisions for taxes on

income which would have been required had this business

operated as a corporation are included in taxes on income

in the following amounts: 1968—$2,900, 1969—$24,000,

1970—$207,800, and 1971—$2,200. These additional tax

provisions reduced consolidated net earnings per share in

1968 by $.01, 1969—$.11, 1970—$.87, and 1971—$.01.

Note I:

Earnings per common and common equivalent share

for each of the four years ended May 31, 1971 were

computed by dividing net earnings by the weighted-

average number of Class A voting and Class B non-voting

common shares outstanding during the respective years

since there were no dilutive common share equivalents

outstanding during this period. For the year (52 weeks)

ended May 26, 1972 the weighted-average number of

common sares was increased by common share equiva-

lents including (1) weighted-average of 6,417 shares

issuable on conversion of the Class B preferred stock, (2)

weighted-average of 1,360 shares issuable on conversion

of the Class C preferred stock and (3) 600 shares issuable

on exercise of stock options which are dilutive. All other

stock options outstanding during this period are antidilu-

tive and were excluded in computing earnings per share.

Note J:

No dividends have been paid by the Company.

TOUCHE Ross & Co.

WEIS VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MAY 26, 1972

ASSETS

a aac a snaninesiintioens $ 1,842,307

Deposits with clearing organizations and

EIS Ea es 753,033

Receivables from brokers and _ dealers

ia ee icsascideice nasitenienptes 8,775,852

Receivables from customers ( Note 3) .......... 76,376,206

Secured demand notes of subordinated len-

ders (collateralized by cash of $28,206,

and securities at quoted market

BOR FO) CINOND 4) os cnccncoccctecesessecerssccecese 4,226,794

Miscellaneous receivables ( Note 9) .............. 3,763,785

Securities owned, at quoted market or fair

II sin sntisnetcislensbsnasenssndviccseosseoces 4,492,365

Securities held under subordination agree-

ments, at quoted market ( Note 4)............. 5,460,751

Exchange memberships:

Owned—at cost (last sales prices

EN 1,289,938

Held under subordination agreements,

at last sales prices ( Note 4)................ 421,494

Leasehold improvements, office furniture

and fixtures—at cost, less accumulated

amortization and depreciation of

Bee ( INGED 6) ono. cccccsevicccccseseccesecceees 3,513,321

Excess of investment over net assets

acquired, less accumulated amortization

Se INET 0 OUIO Oh prrcreccocsathocserecsecesicecsccss 2,217,403

Miscellaneous other assets ( Note 2) ............. 2,396,602

$115,529,851

See notes to consolidated financial statements

SEG edoraregys tareencenee arene ee

adie

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

MAY 26, 1972

LIABILITIES AND STOCKHOLDERS’ EQUITY

Short-term bank loans (Note

¥ Paltsadiinmnianssteiehastibusassisins $ 54,487,245

Payables to brokers and deal-

eS) ee ee 14,311,794

Payables to customers (Note

BD ctcinishsevasdiavalipedaeuptiniatnies 16,770,379

Securities sold but not yet pur-

chased, at quoted market

4} } GRR ee 2,967,457

Accounts payable and ac-

crued expenses ( Note 8)..... 2,952,582

Due to lessors on lease con-

tracts capitalized ( Note 6).. 1,475,215

Subordinated liabilities and

stockholders’ equity:

Liabilities subordinated

to all claims of general

creditors ( Note 4)........ $14,977,921

Stockholders’ equity

(Notes 9 and 10):

Capital stock............. 2,374,800

Additional paid-in

Si cicteceniccscasens 2,767,078

Retained earnings.... 3,811,397

8,953,275

Less treasury

stock—at cost....... 1,366,017

7,587,258 22,565,179

Contingencies and commit-

ments ( Note 11 )..............00e

$115,529,851

Toucue Ross & Co.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

- Ss

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

Balance June |, 1969—as previously reported

Adjustment to reflect acquisition of VCL

Associates ( Notes 2 and B)

Balance June !, 1969—as adjusted

Issued

Excess of proceeds over cost of treasury stock

sold:

Common Class A 17,075 shares

Common Class B 40,626 shares

Net earnings for the year ended May 31, 1970

( Note B)

Pro forma taxes on income ( Note H)

Balance May 31, 1970

Excess of proceeds over cost of treasury stock

sold—common Class A 9,750 shares

Excess of cost over proceeds of treasury stock

sold—common Class B 14,250 shares

Net earnings for the year ended May 31, 1971

( Note B)

Pro forma taxes on income ( Note H)

Balance May 31, 1971

Issued

a of proceeds over cost of treasury stock

sold:

Common Class A 29,375 shares

Common Class B 40,750 shares

Net earnings for the year ended May 26, 1972

Baiance May 26, 1972

Capital stock issued

Number of shares

Common Preferred

Class A Class B Class A Class B Class C

par par par par par

$1.00 $1.00 $100.00 $100.00 $100.00

144,700 150,000 14,961 — ~

144,700 150,000 14,961 — —

5,300 — 1,287 — —

150,000 150,000 16,248 — _—

150,000 150,000 16,248 — —

sili pen _ 3,500 1,000

150,000 150,000 16,248 3,500 1,000

See notes to consolidated financial statements

Amount

$1,790,812

Additional

paid-in

capital

$ 967,778

(142,659)

1,790,812

133,988

825,119

127,450

344,755

628,025

305,142

207,800

2,438,291

82,581

(57,872)

4,721

2,200

1,924,800

450,000

2,469,921

17,827

279,330

$2,374,800

$2,767,078

Page l

Retained

earnings

$2,331,404

2,331,404

113,751

2,445,155

343,968

2,789,123

1,022,274

$3,811,397

a ee eee ee,

TOUCHE Ross & Co. -8-

Page 2

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF

STOCKHOLDERS’ EQUITY

Capital stock in treasury

Number of shares

Common Pre-

ferred

Class A Class B Class A

par par par

$1.00 $1.00 $100.00 Cost

Balance June 1, 1969

—as previously re-

ported 47,950

Adjustment to reflect

shares issued in con-

nection with acquisi-

tion of VCL Associ-

ates (Notes 2 and

41,250 - 4,157 $ 1,211,341

(12,000) —_ (260,000 )

29,250 4,157 951,341

21,750 9,297 1,802,184

(40,626) (6,945) (1,153,493)

10,374 6,509 — 1,600,032

28,000 1,191 1,037,814

(14,250) (1,286) (474,917)

B) —

Balance June 1, 1969

—as adjusted ~ 47,950

Purchased 19,000

Sold (17,075)

Balance May 31, 1970 49,875

Purchased 21,250

Sold (9,750)

Balance May 31, 1971 61,375

Purchased 7,052

Sold (29,375)

24,124 6,414 2,162,929

17,546 4,961 835,057

(40,750) (5,400) (1,631,969)

Balance May 26, 1972 39,052

920 5,975 $ 1,366,017

See notes to consolidated financial statements

TOUCHE Ross & Co. -9- Page |

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION

Year ended

May 31, May 31, May 26,

1970 1971 1972

SOURCE OF FUNDS:

Operations:

Net earnings exclusive

of earnings appli-

cable to VCL Associ-

ates credited to addi-

tional paid-in capital $

Noncash charges—

depreciation and

amortization

113,751 $ 343,968 $ 1,022,274

266,497

380,248

426,422

770,390

538,410

1,560,684

Decrease in:

Deposits with clearing

organizations and

others

Receivables from bro-

kers and dealers

Receivables from cus-

tomers

Miscellaneous

receivables —

Securities held under

subordination agree-

ments —

Exchange

memberships:

Owned —

Held under subordi-

nation agreements

238,940 — —

7,320,413 446,876 —

5,709,490 13,543,056 —

1,263,919 --

752,398 —

190,000 --

801,828 — —

he ed eee

TOUCHE Ross & Co.

{CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION —( Continued) }

Increase in:

Short-term bank loans,

collateralized by

customers’ margin

account securities

Short-term bank loans,

collateralized by

securities owned

by the company or

covered by

subordination

agreements

Payables to _ brokers

and dealers

Payables to customers

Securities sold but not

yet purchased

Accounts payable and

accrued expenses

Due to lessors on lease

contracts capitalized.

Liabilities subordinated

to all claims of gen-

eral creditors

Proceeds from the issue

of:

Common stock

Preferred stock

Proceeds from sale of

treasury stock:

Cost

Excess of proceeds

over cost

Year ended

May 31, May 31, May 26,

1970 1971 1972

18,737,500 -- 31,073,040

— 1,300,000 5,612,245

— 3,392,640 5,062,360

Sia — §,642,327

217,361 _ 2,833,092

— 837,782 —

487,763 320,424 —

933,576 352,089 6,474,117

132,750 — —

128,688 -~ 450,000

1,153,493 474,917 1,631,969

972,780 24,709 297,157

100

ToucueE Ross & Co.

[CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION —( Continued ) }

Year ended

May 31, May 31, May 26,

1970 1971 1972

Equity of VCL Associates

acquired as of May 27,

1971 — 637,204 _

Other sources — — 61,550

37,214,830 24,306,404 60,698,541

—10- Page 2

APPLICATION OF FUNDS:

Increase in:

Deposits with clearing

organizations and

others $ — $

Receivables from bro-

154,286 $ 487,317

kers and dealers — — 4,064,603

Receivables from cus-

tomers — — 42,799,812

Secured demand notes

of subordinated len-

ders — — 4,226,794

Miscellaneous

receivables 2,816,756 — 1,397,252

Securities owned 44,199 1,413,137 924,121

Securities held under

subordination

agreements 1,174,127 — 146,933

Exchange

memberships:

Owned 696,000 — 154,050

Held under subordi-

nation agreements _ 64,754 152,768

rary

cil MPN i dal. itd tt i cn aan? ah

101

TOucHE Ross & Co.

[CONSOLIDATED STATEMENT OF CHANGES IN

FINANCIAL POSITION —( Continued ) |

Year ended

May 31, May 31, May 26,

1970 1971 1972

Miscellaneous other

assets 543,416 39,862 1,756,911

Decrease in: |

Short-term bank loans,

collateralized by cus-

tomers’ margin ac-

count securities — 14,535,540 —

Payables to brokers

and dealers 20,486,933 — —

Payables to customers 7,985,597 5,695,133 —

Securities sold but not

yet purchased — 662,445 —

Accounts payable and

accrued expenses 298,020

Purchase of leasehold

improvements,

furniture and fixtures 606,969 1,400,183 1,937,996

Purchase of treasury

stock 1,802,184 1,037,814 835,057

Excess of investment over

net assets acquired — — 2,217,403

36,454,201 25,003,154 61,095,017

INCREASE/(DECREASE) IN

CASH $ 760,629 $ (696,750)$ (396,476)

See notes to consolidated financial statements

102

ToucueE Ross & Co. a)

WEIS, VOISIN & CO., INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL

STATEMENTS

1. PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the

accounts of Weis, Voisin & Co., Inc. and all of its

subsidiaries. The results of operations of companies

purchased are included from the dates of acquisition. All

significant intercompany balances and transactions have

been eliminated in consolidation. The parent company

accounts for its investments in subsidiaries by the equity

method.

2. ACQUISITIONS:

Scheinman, Hochstin & Trotta, Inc.: -

As of October 1, 1971, the Company acquired certain

specified assets and assumed certain specified liabilities of

Scheinman, Hochstin & Trotta, Inc. (SH&T), a former

member firm of the New York Stock Exchange. This

acquisition has been accounted for as a purchase and the

excess of investment over net assets acquired of

$2,293,868 is being amortized over a twenty-year period.

As part of the purchase agreement a subordinated

lender of SH&T agreed to become a subordinated lender

of the Company and to indemnify the Company to a

maximum of $4,000,000 in the event the assumed liabi-

lities exceeded the acquired assets. Through May 26, 1972

the liabilities assumed exceed the assets acquired by

approximately $750,000 which is included in mis-

cellaneous other assets.

103

TOUCHE Ross & Co.

Thomas J. Deegan Company, Inc.:

As of July 1, 1971, the Company acquired the

outstanding capital stock of Thomas J. Deegan Company,

Inc. in exchange for 3,500 shares of its 1% cumulative

convertible preferred par value $100, Class B stock. The

Company is accounting for this acquisition as a purchase.

VCL Associates:

As of May 27, 1971, the business and all of the assets

and liabilities of VCL Associates, a limited partnership,

were transferred to the Company in exchange for 12,000

shares of Class B common stock. Prior to the transfer, the

Company and VCL Associates were “under common

control” and the accounting for the transaction is similar

to that used in a pooling of interests. The number of

common shares outstanding for years prior to the date of

acquisition reflect retroactively the shares issued in con-

nection with the acquisition.

~j2—

Winslow, Cohu & Stetson; Incorporated:

As of September 29, 1969, the Company acquired

certain selected assets of a former New York Stock

Exchange member firm, Winslow, Cohu & Stetson,

Incorporated (WCS) and undertook to liquidate its assets

and liabilities. This acquisition has been accounted for as

a purchase. WCS assets realized and liabilities liquidated

through May 26, 1972 have resulted in a net deficiency of

approximately $411,000 which, in accordance with the

purchaSe agreement, has been charged in the financial

statements against the subordinated accounts ($4,315,402

at May 26, 1972) transferred from WCS. In the event that

the assets realized and liabilities liquidated result ulti-

mately in a net surplus, the Company will issue a 20-year

subordinated debenture to the former stockholders of

WCS in an amount equal to the net surplus.

104

TOUCHE Ross & Co.

3. RECEIVABLES FROM AND PAYABLES TO BROKERS

DEALERS AND CUSTOMERS:

The components of receivables from and payables to

brokers and dealers as of May 26, 1972 are as follows:

Securities failed to deliver:

Outstanding less than 30 days $ 5,051,188

Outstanding 30 days or more 195,682

Deposits paid for securities borrowed 2,641,600

Other 887,382

Total receivables from brokers and deal-

ers $ 8,775,852

Securities failed to receive:

Outstanding less than 30 days $ 5,386,021

Outstanding 30 days or more 256,668

Deposits received for securities losses 8,433,450

Other 235,655

Total payables to brokers and dealers $14,311,794

“Fails” represent the contract value of securities

which have not been received or delivered by settlement

date.

Receivables from and payables to customers repre-

sent the dollar balances arising in connection with normal

cash and margin transactions. The receivables are

collateralized by securities with a quoted market of

$100,306,000 held by the Company which are not reflect-

ed in the accompanying consolidated financial statements.

Free credit balances totaling approximately $6,792,000 at

May 26, 1972 are included in payables to customers.

Accounts of officers, directors and stockholders are includ-

ed in receivables from and payables to customers since

they are subject to the normal terms and regulations as to

payment and, in the aggregate, are not significant.

105

ToucueE Ross & Co. —13-

4. LIABILITIES SUBORDINATED TO ALL CLAIMS OF

GENERAL CREDITORS:

Certain creditors of the Company have signed agree-

ments subordinating their debentures, exchange member-

ships or securities accounts to all claims of general credit-

ors, and thus the respective amounts are available to the

Company in computing net capital under the New York

Stock Exchange rule regarding capital requirements (see

Note 11). These agreements generally specify release,

payment, or redemption no less than six months following

the date on which the lender demands termination subject

to approval of the New York Stock Exchange. These

liabilities at May 26, 1972 are summarized as follows:

Rate of

interest

Debentures 7 - 10% $ 3,110,275

Secured demand notes 8% 4,255,000

Exchange memberships 6 - 8% 421,494

Equities in securities

accounts:

Securities at quoted

market 2.8- 5% 5,460,751

Cash 4 - 10% 1,730,401

$14,977,921

106

TOucHE Ross & Co.

5. SECURITIES OWNED:

Securities owned at May 26, 1972 consist of the

Company’s regular trading and investment accounts and

are summarized as follows:

Marketable securities—at Cost

quoted market:

U.S. Government bonds $ 330,200 $ 332,560

Municipal bonds 175,800 162,587

Corporate debentures

and notes 69,718 69,608

Corporate stocks 1,730,167 1,745,421

Arbitrage (convertible

within 30 days ) 1,236,572 1,151,459

3,542,457 3,461,635

Securities not readily market-

able—at fair value 949,908 508,244

$4,492,365 $3,969,879

Marketable securities sold but

107

TOUCHE Ross & Co.

The following securities included above have quoted

market or fair values which exceed 5% of the balance

sheet caption:

not yet purchased—at

quoted market:

Corporate debentures

Quoted

market

or fair

value Cost

Marketable securities:

Alaska Interstate con-

vertible debenture 6%,

February 1, 1996 $404,421 $408,236

Harmony Gold Mining

Ltd. 240,663 212,596

Security National Bank

of Long Island 327,500 430,000

Securities not readily market-

able—

Electro-Catheter 234,983 48,330

Securities sold but not yet pur-

chased:

Alaska Interstate 396,250 435,239

Channel Companies, Inc. 948,500 948,500

Harmony Gold Mining

Ltd. ADR 259,125 215,437

and notes $ 24,734 $ 24,700

Corporate stocks 1,682,327 1,671,581

Arbitrage (convertible

within 30 days ) 1,260,396 1,192,206

$2,967,457 $2,888,487

—14-

Quoted market has been determined by reference to

available quotations as to marketable securities. The fair

values of securities not readily marketable have been

determined by management. Fair values as determined

are, in the aggregate, not less than cost.

6. LEASEHOLD IMPROVEMENTS, OFFICE FURNITURE

AND FIXTURES:

Leasehold improvements, office furniture and fixtures

include approximately $2,300,000 of such assets acquired

under lease contracts. The net book value of these assets

of approximately $1,700,000 collateralizes the amounts

due to lessors on lease contracts capitalized. The Com-

pany computes depreciation and amortization by the

straight-line method for financiai statement purposes (see

Note 8).

108

ToucueE Ross & Co.

Maintenance and repairs are charged to expense as

incurred. Renewals and betterments are capitalized. The

cost of assets retired or otherwise disposed of is removed

from the asset accounts and the related reserve for depre-

ciation is removed from the reserve account; any resulting

gain or loss is included in income.

7. SHORT-TERM BANK LOANS:

The Company borrows from banks primarily to

finance customers’ purchases on margin and dealer

inventory positions. At May 26, 1972, bank borrowings of

$6,912,245 were collateralized by securities owned by the

Company or covered by subordination agreements having

a quoted market of $12,807,000 and borrowings of

$47,575,000 were collateralized by securities owned by

customers having a quoted market of $71,373,000. The

customer-owned securities pledged are those securities for

which the Company has the right of hypothecation under

signed margin agreements.

-15-

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Included in accounts payable and accrued expenses

are the following:

Accrued salaries and commissions $653,000

Federal, state and local taxes on

income 564,000

Interest payable on short term-bank

loans and subordinated borrow-

ings 280,000

Unclaimed dividends and interest

items 218,000

109

Toucue Ross & Co.

Deferred income taxes of $18,000 have been pro-

vided on the difference in depreciation and amortization

for leasehold improvements, office furniture and fixtures

acquired since June 1, 1971, computed by the double-

declining balance method for tax purposes and the

straight-line method for financial reporting purposes.

9. STOCKHOLDERS’ EQUITY:

The capital stock of the Company is composed of the

- following at May 26, 1972:

Number of shares

Autho- Out- In

Description rized Issued standing treasury Amount

Common, par value

$1, Class A (vot-

ing ) 150,000 150,000 110,948 39,052 $ 150,000

Common, par value

$1, Class B (non-

voting ) 150,000 150,000 149,080 920 150,000

Preferred, par value

$100, Class A 55,000 16,248 10,273 5,975 1,624,800

Preferred, par value

$100, Class B, 1%

cumulative, con-

vertible 3,500 3,500 3,500 — 350,000

Preferred, par value

$100, Class C, 1%

cumulative, con-

vertible 2,500 1,000 1000 — 100,000

Preferred, par value

$100, Class D, 6%

cumulative 10,000 — — — —_

$2,374,800

110

Toucue Ross & Co. -16-

The Company has granted stock options (at opiton

prices not less than fair market value as determined by the

Company) to subordinated lenders to purchase Class B,

nonvoting common stock which are currently exercisable

as follows:

111

TOUCHE Ross & Co.

10. Net CaPIraAL REQUIREMENTS:

The Company is required to comply with a New

York Stock Exchange regulation which provides that the

Company maintain a ratio of aggregate indebtedness to

net capital, as defined, not exceeding 15 to 1. The excess

Expiration ;

Option granted ee date net capital as computed under this rule was approximately

oe $2,878,000 at May 26, 1972.

Shares equalto2%of 2% of total stock- 1976

total Class A and holders’ equity at 11. COMMITMENTS AND CONTINGENCIES:

Class Bcommon stock exercise date

issued and outstanding ($29.18 per share, There are various lawsuits pending against the Com-

at the exercise date $151,745 total at pany which, in the opinion of management, will be

Hoag tage = , May 26, 1972 resolved with no material adverse effect on the financial

10,907 shares $25 per share; 1975 condition of the Company.

$272,675 total ae Aggregate rental commitments at May 26, 1972

2,000 shares aon ang —. mae a under material noncancellable leases for premises were

,000 tota phe 8 sia approximately $34,650,000 payable as follows:

The exercise of these options is subject to the written

approval of the New York Stock Exchange.

Subject to certain antidilution provisions, the 3,500

shares of Class B preferred stock are convertible, in whole

but not in part, into 3,500 shares each of Class A and

Class B common stock and the 1,000 shares of Class C

preferred stock are convertible, in whole but not in part,

into 2,000 shares of Class B common stock. An increase of

150,000 shares in the number of Class A and Class B

common shares authorized was approved by the siock-

holders in June 1972.

As of May 26, 1972, $768,000 included in mis-

cellaneous receivables in the accompanying consolidated

balance sheet was due from employees in connection with

the purchase of the Company’s capital stock.

Fiscal year Ending Amount

May 25, 1973 $ 3,000,000

May 31, 1974 2,825,000

May 30, 1975 2,875,000

May 28, 1976 2,750,000

May 27, 1977 2,725,000

May 26, 1978-1991 20,475,000

In the normal course of business, the Company enters

into underwriting commitments. Transactions relating to

underwriting commitments which were open as of May

26, 1972 and subsequently settled, had no material effect

on the financial statements at that date.

112

Defendant’s Notice of Motion to Dismiss

Filed September 22, 1976

UNITED STATES DistTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

[Caption omitted in printing]

PLEASE TAKE NOTICE that, upon the annexed

affidavits of Arnold I. Roth (sworn to September 15,

1976), Philip H. Cohen (sworn to September 14, 1976)

and Barry N. Cooper (sworn to September 14, 1976), and

the complaint and the prior proceedings herein, the

undersigned will move this Court, before the Honorable

Inzer B. Wyatt, in Room 905, United States Court House,

Foley Square, New York, New York on October 1, 1976,

at 2:30 P.M., or as soon thereafter as counsel can be

heard, for an order

1. Pursuant to Rule 12(b), F.R.Civ.P., dis-

missing this action, said complaint, and each so-called

cause of action therein alleged, on the grounds that

this Court lacks subject matter jurisdiction and plain-

tiffs have failed to state a claim upon which relief can

be granted; and,

2. To the extent that the foregoing relief is not

granted, staying this action pending determination of

the action in the Supreme Court of the State of New

York, New York County, entitled Edward S. Reding-

ton, as Trustee for the liquidation of the business of

Weis Securities, Inc., and Securities Investor Protec-

tion Corporation v. Touche Ross & Co. (Index No.

13996/76); and

113

3. Granting to defendant such other relief as is

just and proper.

September 15, 1976

TO:

ROSENMAN COLIN FREUND

Lewis & COHEN

By _/s/ ARNOLD I. ROTH

A Partner

Attorneys for Defendant

575 Madison Avenue

New York, New York 10022

212-644-7000

HUGHES HUBBARD & REED

Attorneys for Plaintiff

Edward S. Redington

One Wall Street

New York, New York 10005

HAWKINS, DELAFIELD & Woop

Attorneys for Plaintiff

Securities Investor

Protection Corporation

67 Wall Street

New York, New York 10005

114

Affidavit of Arnold I. Roth

in Support of Motion to Dismiss

Filed September 22, 1976

UNITED STATES DISTRICT CouRT

FOR THE SOUTHERN DISTRICT OF NEW YORK

[Caption omitted in printing]

STATE OF NEW YORK =:

COUNTY OF NEw YORK *

ARNOLD I. ROTH, being duly sworn, deposes and

says:

1. I am a member of the firm of Rosenman Colin

Freund Lewis & Cohen, attorneys for defendant Touche

Ross & Co. (“Touche Ross”) herein. I submit this

Affidavit together with the accompanying Affidavits of

Philip H. Cohen and Barry N. Cooper, in support of the

present motion by defendant Touche Ross for an order (i)

pursuant to Rule 12(b), F.R.Civ.P., dismissing the com-

plaint herein, each of the so-called “causes of action”

therein alleged, and this action, on the grounds of lack of

subject matter jurisdiction and failure to state a claim

upon which relief can be granted, and (ii) to the extent

that the foregoing relief is not granted, staying this action

pending determination of the action in the Supreme Court

of the State of New York, New York County, entitled

Edward S. Redington, as Trustee for the liquidation of the

business of Weis Securities, Inc., and Securities Investors

Protection Corporation v. Touche Ross & Co. (Index No.

13996/76) (the “State Court Action”’).

2. This is yet another in the series of actions in this

Court which arise from the liquidation under the Securities

Investor Protection Act of 1970 (“SIPA”) of the defunct

brokerage firm, Weis Securities, Inc. (“Weis”), and which

would impose liability upon defendant Touche Ross, a

REE 4 NEP, A RN seit.

i1l5

firm of certified public accountants, by reason of its work

on certain financial statements of Weis for periods ending

approximately a year before the Weis collapse. This

action is brought by plaintiffs Edward S. Redington

(“Redington”), the Trustee for the liquidation of Weis,

and Securities Investor Protection Corporation (“SIPC”),

and seeks from defendant Touche Ross aggregate alleged

damages of over $65,000,000.

3. Although plaintiffs seek to create the appearance

of federally-created claims primarily by the now familiar

tactic of alleging that the conduct of defendant Touche

Ross of which they complain violated the Securities

Exchange Act of 1934 (the “1934 Act”), they are here

asserting what are essentially state-created, common law

claims of negligence, malpractice, breach of contract and

breach of warranty. Indeed, so clear is the basic common

law nature of plaintiff's claims, even to plaintiffs them-

selves, that they did not even commence this action until

almost a year after they had commenced a separate action

(the “State Court Action”) in the New York State courts

seeking, on the basis of identical factual allegations and

almost identical claims as are now asserted in the com-

plaint in this action, the same relief against defendant

Touche Ross as they now seek here.

4. The accompanying memorandum sets forth in

detail the reasons which compel the granting of the

present motion and the dismissal of the complaint and

each of the “causes of action” therein alleged. This

affidavit (and the accompanying Cohen and Cooper

Affidavits) sets forth facts concerning this action and the

State Court Action, and pertinent to an understanding of

the many reasons why this action must be dismissed, and

why plaintiffs are and should be limited to proceeding

with their claims, if in fact they have any viable claims, in

the State Court Action.

116

5. This action was commenced on April 30, 1976, by

the filing of the compiaint herein. A copy of the complaint

is annexed hereto as Exhibit 1.

6. Almost ten months prior to the commencement of

this action, by service of a summons on July 3, 1975,

plaintiffs herein commenced the State Court Action in the

Supreme Court of the State of New York, County of New

York, under the title (which is the same as the title of this

action) Edward S. Redington, as Trustee for the liquida-

tion of the business of Weis Securities, Inc., and Securities

Investor Protection Corporation v. Touche Ross & Co.

(Index No. 13996/76). Copies of the summons, and the

subsequently served complaint, in the State Court Action

are annexed hereto as, respectively, Exhibits 2 and 3.

The parties to the State Court Action are the same as

the parties to this action and the complaint in the State

Court Action asserts identical factual allegations and

almost identical claims, and seeks identical relief, as does

the complaint in this action.

7. Defendant Touche Ross has commenced discovery

in the State Court Action, having served extensive inter-

rogatories therein on both plaintiff Redington and plaintiff

SIPC and notices to take the deposition of each. Objec-

tions and answers to the interrogatories were originally

due on, respectively, September 13 and September 20,

and the depositions were originally set to commence on

September 27 for plaintiff SIPC and on September 30 for

plaintiff Redington. At plaintiffs’ request, each of those

dates has been adjourned for approximately one month.

8. The extensive litigation in this Court arising out of

the collapse of Weis involves matters and facts pertinent

to this action, among which are those set forth below.

9. The complaint herein refers (14) to the “SEC

... action in this Court (73 Civ. 2332) against Weis and

117

the Weis Five for injunctive relief” an action which led to

plaintiff Redington’s appointment as Trustee. The com-

plaint of the Securities and Exchange Commission (the

“SEC”’) in that action, a copy of which is annexed hereto

as Exhibit 4, alleged violations of the securities acts in

connection with Weis’ allegedly false financial statements

only against Weis itself and certain of its officers. Even

after the “separate investigations by the Exchange and the

SEC” referred to in the complaint herein (¥ 13), the SEC

complaint did not allege that defendant Touche Ross had

committed or participated in or aided and abetted any such

violations. A necessary conclusion is that the

“investigations” by the SEC and the Exchange revealed

that defendant Touche Ross had not committed or been

involved in any violations.

10. Moreover, in the indictment filed in this Court

against several former Weis officers in United States v.

Arthur Levine et al. (73 Crim. 693), a copy of which is

annexed hereto as Exhibit 5, Count I significantly alleged

that those officers

“did fraudulently conceal from Weis’ auditors, Touche

Ross & Co., the existence and nature of the aforesaid

fraudulent books and records and, in addition, ... did

create directly and indirectly wholly fictitious documenta-

tion for the aforesaid fraudulent entries” (emphasis

added) (Exh. 5, p. 5),

and three of those officers, including the former Chairman

of the Board and Chief Executive Officer, the President

and the Comptroller, have admitted the truth of such

allegations by pleading guilty to Count I of the indictment

(see copy of criminal docket sheet annexed hereto as

Exhibit 6).

11. There are presently in this Court a number of

actions against defendant Touche Ross which arise out of

118

the Weis situation. Various decisions have been rendered

in those actions, and are referred to in the accompanying

memorandum as pertinent.

12. In one of those actions, which was brought as a

purported class action on behalf of the customers of Weis

during the relevant period, Judge Brieant recognized that

the claims against defendant Touche Ross by reason of its

involvement with Weis—claims which were the same as

those of plaintiffs Redington and SIPC here (indeed,

claims which plaintiff SIPC purports to assert here as an

alleged subrogee )—were not claims under the 1934 Act,

but were at most non-federal, common law claims for

negligence and malpractice which should be determined

by the State courts. Rich v. Touche Ross & Co., CCH Fed.

Sec. L. Rep. $95,514 (S.D.N.Y. 1976). Judge Brieant

held that the Rich plaintiffs did not state a claim for relief

under the 1934 Act, and dismissed their second amended

complaint, a copy of which is annexed hereto as Exhibit 7.

Thereafter, the plaintiffs in Rich v. Touche Ross & Co., as

have other customers, commenced a State court action

which is brought as a purported class action, and which is

now pending in the Supreme Court of the State of New

York, County of New York.

13. Another related group of such actions are the

three actions in this court entitled, respectively, Sheldon

Berger et al. v. Weis Securities, Inc., et al. (74 Civ. 186

(1.B.W.)), George P. Govatos, Sr. v. Weis Securities, Inc.,

et al. (74 Civ. 2832 (1.B.W.)) and Irwin S. Barshack v.

Weis Securities, Inc., et al. (74 Civ. 2833 (1.B.W.)).

Copies of the second amended complaint in the Berger

action, and the amended complaint in the Govatos and

Barshack action, are annexed hereto as, respectively,

Exhibits 8 and 9.

On June 27, 1975, Judge Wyatt rendered an unre-

ported decision on a motion by defendant Touche Ross to

119

dismiss the second amended complaint and amended

complaint. In that decision, a copy of which is annexed

hereto as Exhibit 10, Judge Wyatt granted the motion with

respect to claims made under Section 17(a) of the 1934

Act (claims which were similar to those asserted in this

action by plaintiffs Redington and SIPC).

14. This action involves claims based upon Section

17 of the 1934 Act and Rule 17a-5 thereunder. Because

Section 17 and Rule 17a-5 have been substantially

amended since the time in 1972 pertinent to this action,

copies of Section 17 and Rule 17a-5 in effect at that time

are annexed hereto as, respectively, Exhibits 11 and 12,

for the convenience of the Court.

15. For the reasons set forth in the accompanying

memorandum it is respectfully submitted that the present

motion of defendant Touche Ross be granted.

/s/ ARNOLD I. RotH

Arnold I. Roth

{Jurat omitted in printing]

120

Exhibit 1 to Affidavit of Arnold I. Roth:

Complaint in this Action

Exhibit 1 to the affidavit of Arnold I. Roth is the

complaint and the exhibits thereto. The complaint and

the exhibits thereto are printed in this appendix at pp. 5-

111, supra.

121

Exhibit 2 to Affidavit of Arnold I. Roth:

Summons in State Court Action

Served July 3, 1975

SUPREME COURT OF THE

STATE OF NEw YORK

COUNTY OF New YorK

EpwarbD S. REDINGTON, As Trustee for the

Liquidation of the Business of Weis Securities, Inc.,

and SECURITIES INVESTOR PROTECTION CORPORATION,

Plaintiffs,

—against—

TOUCHE Ross & Co.,

Defendant.

INDEX No.

Plaintiffs designate New York County as the place of Trial

SUMMONS WITH NOTICE

Plaintiff Edward S. Redington, Trustee, resides at

One Wall Street, New York, New York 10005.

Plaintiff Securities Investor Protection Corporation

(“SIPC”) resides at 900 Seventeenth Street,

N. W., Washington, D. C. 20006.

To the above named Defendant:

YOU ARE HEREBY SUMMONED to appear in this

action by serving a notice of appearance on the plaintiffs’

attorneys within 20 days after the service of this summons,

exclusive of the day of service.

Take notice that the object of this action is to recover

damages for negligence, malpractice, fraud, breach of

122

contract and breach of warranty in connection with audit-

ing and accounting services rendered by defendant to

Weis Securities, Inc., and in case of your failure to appear,

judgment will be taken against you by default for the sum

of $55,000,000.00 on behalf of plaintiff Edward S.

Redington, Trustee, and for the sum of $14,500,000.00 on

behalf of plaintiff SIPC, plus interest from July 7, 1972

and the costs and disbursements of this action.

The basis of the venue designated is the residence of

the defendant, which is 1633 Broadway, New York, New

York 10019.

Dated: July 2, 1975

HUGHES HUBBARD & REED

Attorneys for Trustee

One Wall Street

New York, New York 10005

(212) 943-6500

WILFRED R. CarRONn, Esq.

Attorney for SIPC

c/o Goldman & Drazen

One State Street Plaza

New York, New York 10004

(212) 422-0488

123

Exhibit 3 to Affidavit of Arnold I. Roth:

Complaint in State Court Action

Served May 3, 1976

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF NEw YORK

EDWARD S. REDINGTON, as Trustee for the

liquidation of the business of Weis Securities, Inc.,

and SECURITIES INVESTOR PROTECTION CORPORATION,

Plaintiffs,

—against—

TOUCHE Ross & Co.,

Defendant.

COMPLAINT

Index No.

Plaintiffs, EDWARD S. REDINGTON, Trustee for

the liquidation of the business of Weis Securities, Inc., and

SECURITIES INVESTOR PROTECTION CORPO-

RATION, by their respective attorneys, complaining of

the Defendant, allege upon information and belief, except

as to paragraphs I, 2, 4, 9, 10 and 17 hereof, as follows:

PARTIES

1. Plaintiff Edward S. Redington (the “Trustee”’)

was duly appointed by Order of the United States District

Court for the Southern District of New York dated May

30, 1973 as Trustee for the liquidation of the business of

Weis Securities, Inc. (“‘Weis’’) pursuant to the Securities

124

Investor Protection Act of 1970 (15 U.S.C. Section 78aaa,

et seq.) (hereinafter the “1970 Act”), has duly qualified,

and is presently acting in such capacity.

2. Plaintiff Securities Investor Protection Corporation

(“SIPC”) is a non-profit membership corporation created

by and organized under the 1970 Act whose members are,

with certain statutory exceptions, all persons registered as

broker-dealers under the Securities Exchange Act of 1934

(15 U.S.C. Section 78a, et seg.) (hereinafter the “1934

Act”) and, with certain statutory exceptions, all persons

who are members of a national securities exchange. The

duties and functions of SIPC are set forth in the 1970 Act

and include, inter alia, the initiation of liquidation pro-

ceedings against members of SIPC that have failed or are

in danger of failing to meet their obligations to customers,

the establishment of a fund from which to satisfy, within

certain limits, the claims of customers of SIPC members

that are being liquidated pursuant to the 1970 Act,

and—in consultation with and with the cooperation of the

Securities and Exchange Commission (“SEC”), the New

York Stock Exchange, Inc. (the ““Exchange”’) and other

self-regulatory organizations—the establishment of proce-

dures designed to detect approaching financial difficulty of

SIPC members and to ensure that such members are in

compliance with applicable financial responsibility rules.

SIPC relies entirely and solely on the SEC, the Exchange

and other self-regulatory organizations to monitor the

financial condition of SIPC members, to investigate any

SIPC member in financial difficulty, and to notify SIPC

thereof. At all relevant times Weis was a member of

SIPC.

3. Defendant Touche Ross & Co. (““Touche Ross’’)

is a partnership of certified public accountants with its

principal place of business at 1633 Broadway in the City,

125

County and State of New York. In or about 1969, Touche

Ross was engaged by Weis as its independent certified

public accounting firm, and Touche Ross continued to act

in such capacity from about 1969 until about May 1973,

when the forced liquidation of Weis commenced.

COMMON ALLEGATIONS

4. At all relevant times prior to May 30, 1973, Weis

was a corporation registered as a broker-dealer with the

SEC and was engaged in the business of a broker-dealer

of securities. From June 1965 until May 1973, Weis was a

member of the Exchange, the self-regulatory organization

designated by SIPC to examine Weis for compliance with

the applicable financial responsibility rules imposed on

broker-dealers pursuant to Section 6 of the 1934 Act (15

U.S.C. Section 78f) for the protection of the public as a

minimum prerequisite for conducting a business as a

broker-dealer in securities.

5. For each of its four fiscal years 1968 through 1971

(ended May 31), Weis’ audited financial statements re-

flected a profit. During early 1972 five of Weis’ officers

(the “Weis Five”) became increasingly concerned that a

fair and accurate presentation of Weis’ results of oper-

ations for fiscal year 1972 would reflect that Weis was

operating at a loss. The Weis Five misstated the financial

condition and results of operations of Weis in financial

reports prepared at fiscal year-end 1972. These reports

were required to be filed with regulatory authorities

pursuant to Section 17 of the 1934 Act (15 U.S.C. Section

78q) and were directly or indirectly submitted to Weis, its

Board of Directors, the SEC, SIPC, the Exchange, and

Weis’ customers, creditors, lenders and shareholders.

Such misstatements were accomplished by, inter alia,

materially overstating assets, creating non-existent assets,

understating liabilities, overstating income, and under-

126

stating expenses. The purpose and effect of such material

misstatements were, inter alia, to create a false impression

that Weis’ earnings for the fiscal year ended May 26, 1972

were $1,700,000 before taxes whereas in truth and in fact

Weis had actually suffered losses in that period in excess

of $1,500,000.

6. Had Weis’ actual financial condition, its actual

results of operations, and the misstatement in its books

and records been truthfully reported at the end of Weis’

1972 fiscal year, Weis’ 1973 forced liquidation under the

1970 Act would not have become necessary, and most if

not all of Weis’ assets and its good will as a going concern

could have been preserved by a number of means

including, inter alia, change in Weis’ management, rever-

sal of its policy of growth and expansion, curtailment or

contraction of certain of its operations and business prac-

tices, gradual liquidation of some or all of its operations,

or merger with another securities firm. Moreover, if a

liquidation of Weis had been necessary as the result of

such truthful reporting, such liquidation could have

occurred at the end of Weis’ 1972 fiscal year, when its

assets were greater and the aggregate of its liabilities was

lower than a year later.

7. The incorrect and incomplete fiscal 1972 year-end

reports prepared by and under the direction of the Weis

Five were certified by Touche Ross as being correct and

complete. Consequently, the doctoring of Weis’ books,

records and required reports, the deterioration of its

financial condition and the violations of financial responsi-

bility rules could not be nipped in the bud at a time when

a forced liquidation of Weis could still have been avoided.

Instead, during Weis’ fiscal year 1973, Weis’ financial

condition deteriorated as the Weis policy of expansion

continued unabated. Weis incurred substantial operating

losses, depletion of its assets, and depletion of the property

127

held by Weis in trust for its customers. The Weis Five

continued to make false and fictitious entries in Weis’

books and records and continued, directly or indirectly, to

submit false reports to Weis, its Board of Directors, the

SEC, SIPC, the Exchange, and Weis’ customers, creditors

lenders and shareholders in order to conceal Weis’ true

financial condition.

8. Not until April and May of 1973, as a result of

separate investigations by the Exchange and the SEC, did

the misstatement of Weis’ financial condition come to

light. These investigations gradually revealed the viola-

tions of financial responsibility rules, Weis’ unsafe,

unsat

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