Opposition Brief — Peat Marwick Main & Co. v. Roberts

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No. 89-475

In the Supreme cn

United States

OCTOBER TERM, 1989

PEAT MARWICK MAIN & Co.,

Petitioner,

VS.

Puitip D. ROBERTS, et al.,

Respondents.

~—

—

BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

Davip B. GOLD,

A Professional Law Corporation

Davip B. GOLD, Esq.

SOLOMON B. CERA, Esq.*

595 Market Street, Suite 2300

San Francisco, California 94105

Telephone: (415) 777-2230

Attorneys for Respondents

* Counsel of Record

BOWNE OF SAN FRANCISCO. INC. + 190 NINTH ST. + S.F.. CA 94103 + (415) 664-2300

i

QUESTION PRESENTED

Did respondents state a cause of action for aiding and abetting

a violation of Section 10(b) of the Securities Exchange Act of

1934 (the “Exchange Act’), 15 U.S.C. § 78j(b), against Peat

Marwick Main & Co. (“Peat Marwick”), a nationally recognized

public accounting firm, sufficient to withstand a motion to dismiss

under Rule 12(b) (6), Fed.R.Civ.P., where they alleged that Peat

Marwick: (i) participated in the preparation of allegedly false and

misleading offering documents on which respondents relied in

investing approximately forty-five million dollars ($45,000,000)

in cash in unregistered limited partnership interests; (ii) con-

sented to the use of its name in such offering documents after

having learned of their falsity by virtue of an investigation it

conducted, thereby inviting the investing public to rely on the

firm’s reputation as a selling tool and as evidence of the genuiness

of the offerings; (iii) had effective control over the occurrence of

the offerings; and (iv) subsequent to dissemination of the alleg-

edly false and misleading offering documents, rendered allegedly

false and misleading audit reports on partnership financial state-

ments and disseminated allegedly false and misleading tax forms

on which respondents relied in making additional capital contri-

butions to the partnerships.

ii

PARTIES BELOW

Respondents Philip D. and Lynn Roberts, Denny and Karen

Delk, Jack T. Bell, and Arthur B. Gauss are representatives of a

class, certified pursuant to Rule 23(b)(3), Fed.R.Civ.P., defined

to include all persons and entities, excluding any defendants, who

purchased or otherwise acquired an interest in any of thirty-eight

limited partnerships named as defendants below. Complaint § 12.

Petitioner Peat Marwick Main & Co. is a partnership of

certified public accountants and is the successor-in-interest to

Peat, Marwick, Mitchell & Co., which was named as a defendant

below.

Houston Harbaugh, P.C. was a defendant/appellee below but

is not a party to this proceeding.

The American Institute of Certified Public Accountants and

Lomas Mortgage U.S.A., Inc. participated as amicus curiae on

behalf of petitioner in the United States Court of Appeals for the

Ninth Circuit.

iil

TABLE OF CONTENTS

Page

EE SEE EES ED i

ee nsec ks auch ncberenseens ll

ee es cs occ eeveecsses l

I OOD, ce ccc cece eces l

B. The Role Of Peat Marwick In The Alleged Fraud.. 2

C. Procedural Background Giving Rise To The Petition

Ee 6

D. The Legal Issues Raised By The Petition For A Writ

EG ea bas akbssecwosssescecs 7

measons For Demying The Writ ...................00.. 9

I

The Writ Should Be Denied Because It Seeks Review Of An

Issue Which Was Not Briefed Or Decided Below And As

To Which There Is Unanimity Of Opinion Among The

ae RE 9

II

There Is No Conflict Among The Courts Of Appeals As To

The Pleading Issue Raised By This Appeal ........... 13

II]

The Ninth Circuit’s Decision Does Not Conflict With Any

ais Gonos ices encsccesseces 19

IV

Public Policy Considerations Support Denial Of Review... 21

SIG ya 24

iV

TABLE OF AUTHORITIES

Cases

Page

Abell v. Potomac Ins. Co., 858 F.2d 1104 22 (Sth Cir. 1988) 21

Adickes v. S.H. Kress and Co., 398 U.S. 144 (1970) ..... 9

Affiliated Ute Citizens of Utah v. United States, 406 U.S.

128 (1972), reh'g denied, 407 U.S. 916............... 22

Aldrich v. New York Stock Exchange, 446 F.Supp. 348

| Eee By: a ere) en 13

Anderson v. Francis I. DuPont & Co., 291 F.Supp. 705

el. ae Chaba Seas Kote net ane n * 15

Andreo v. Friedlander, Gaines, Cohen, Eic., 660 F.Supp.

fe an 19

Bane v. Sigmundr Exploration Corp., 848 F.2d 579 (Sth Cir.

ak PCRS ORs sa hk a dk ee web ReS koe Ae week eas 17

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490

Ea. a cbc Cet Sete MORhS AR AUEL ES apes © 16

Basic Inc. v. Levinson, ___ U.S. —__, 108 S.Ct. 978

i bess 25 ee Mee Rae aaah a e 68 22

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

A | SRR re er ern mms ee Saree epee 11

Brennan v. Midwestern United Life Ins. Co., 259 F.Supp.

673 (N.D. Ind. 1966), 286 F.Supp. 702 (N.D. Ind. 1968),

aff'd, 417 F.2d 147 (7th Cir. 1969), cert. denied, 397 U.S.

St a SCA ad by oeEKanc4eU baewaweeas es a6 5 11

Cleary v. Perfectune, Inc., 700 F.2d 774 (lst Cir. 1983) .. 10

Deutschman v. Beneficial Corp., 841 F.2d 502 (3d Cir.

Pa PH ELEN es Ov 6h 15s cOER Vee b ove VNR Kua w eds: 20

wes ¥. SEC, 463 US. 666 CI9GS) s.r. ccc eens 20

Edwards & Hanly v. Wells Fargo Securities Clearance

Corp., 602 F.2d 478 (2d Cir. 1979), cert. denied, 444 U.S.

SE es epee den «5 <% 10, 18

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ....... 9

Gould v. American-Hawaiian S.S. Co., 535 F.2d 761 (3d

Re a oe Nevin a ead hans 18

Harmsen v. Smith, 693 F.2d 932 (9th Cir. 1982), cert.

Po a BO ) ee eee ee 15

Herm v. Stafford, 663 F.2d 669 (6th Cir. 1981) ......... 18

Vv

TABLE OF AUTHORITIES

CASES

Page

Herman & MacLean v. Huddleston, 459 U.S: 375

ie ee ee. ak ease ones 10, 12, 22

IIT, An International Investment Trust v. Cornfeld, 619

en en keene asecadetenses 8, 16

In re Gas Reclamation, Inc. Securities Litigation, 659

fo SS og 8 8 a. ee ee 15

index Fund, Inc. v. Hagopian, 609 F.Supp. 499 (S.D.N.Y.

Ry REGEN Re Sas a EES Pye eee ee eee 15

Investors Research Corp. v. SEC, 628 F.2d 168 (D.C. Cir.),

cert. denied, 449 U.S. 919 (1980) ...............20.. 10

Jett v. Sunderman, 840 F.2d 1487 (9th Cir. 1988) ...... 10, 15

Krause v. Commissioner, 92 T.C. 11 (1989) ............ 2

Latigo Ventures v. Laventhol & Horwath, 876 F.2d 1322

RIE ERIS Sees Gp pee ee ea 17,18

LHLC v. Cluett, Peabody & Co., 842 F.2d 928 (7th Cir.),

cert. denied, __. U.S. ___.,, 109 S.Ct. 311 (1988) .... 18

Massachusetts Mutual Life Ins. Co. v. Russell, 473 U.S. 134

ee le eels Leeda kOe Saws 08 ll

Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456

ia os Wes CON 2 0 60 RARS OO 11

Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert. denied,

ee er 10, 15, 18

Miree v. DeKalb County, GA., 433 U.S. 25 (1977) ...... 9

Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793

(3d Cir.), cert. denied, 439 U.S. 930 (1978) ....... 8,10, 14

Pargas, Inc. v. Empire Gas Corp., 423 F.Supp. 199 (D.

Md.), aff'd, 546 F.2d 25 (4th Cir. 1976) ............. 10

Renovitch v. Stewardship Concepts, Inc., 654 F.Supp. 353

I ee a be aw ha Cheek wx 15

Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646

ESAS A OPEN Per eee ene 3,6

Roberts v. Heim, 670 F. Supp. 1466 (N.D. Cal. 1987), aff'd

in part and rev'd in part sub nom. Roberts v. Peat,

Marwick, Mitchell & Co., 857 F.2d 646 (9th Cir. 1988) 5,6

Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir.

SE SA keen an ta Od uae es WRENS BSNS 66 A 7

Vi

TABLE OF AUTHORITIES

CASES

Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir.),

cert. denied, 439 US. 1039 (1978) ...........00000..

Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th

Cir. 1986), rehearing en banc denied, 806 F.2d 1070 (11th

Cir. 1986), cert. denied, 480 U.S. 946 (1987) .......

Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989) ..

Schneberger v. Wheeler, 859 F.2d 1477 (11th Cir. 1988),

cert. denied, U.S. —_—, 109 S.Ct. 2433 (1989) ...

Scientex Corp. v. Kay, 689 F.2d 879 (9th Cir. 1982) .....

SEC v. Capital Gains Research Bureau, 375 U.S. 180

(E9GS) ... .4s.0cnnk een eens ba eG e Raw as, 6.0

SEC v. Coffey, 493 F.2d 1304 (6th Cir. 1974), cert. denied,

2 US. Gee Se eae Ch ee tees tah kON Koa bees

SEC v. First Securities Co., 463 F.2d 981 (7th Cir.), cert.

Gouied, Gp UL Tee Ce he aaa ra ak cant neste

SEC v. National Student Marketing Corp., 457 F.Supp. 682

(D.D.C. Tete hens ce ee ia vce cass

SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986) ..........

SEC v. Washington County Util Dist., 676 F.2d 218 (6th

Civ. VRRD. .s.< i:cdc a ee a ee rth he <a

Sirota v. Solitron Devices, Inc., 673 F.2d 566 (2d Cir.), cert.

Genhad,, 450 UAE. ie Gee os es een anda taawes ss

Spectrum Financial Companies v. Marconsult, Inc., 608

F.2d 377 (9th Cir. 1979), cert. denied, 446 U.S. 936

Cb | PS Ee as ae

Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033 (7th

Cir.) cert. denied, 434 U.S. 875 (1977) ..............

Tucker v. Janota, [1979 Transfer Binder] Fed.Sec.L.Rep.

(eae ee © 8) eS eo) eee

United States v. Arthur Young & Co., 465 U.S. 807 (1984)

United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986),

Cy oe 3 See oe eee

United States v. Chiarella, 445 U.S. 222 (1980) .........

Walker v. KFC Corp., 515 F.Supp. 612 (S.D. Cal. 1981),

modified on other grounds, 728 F.2d, 1215 (9th Cir. 1984)

White v. Abrams, 495 F.2d 724 (9th Cir. 1974) .........

Page

22

Vii

TABLE OF AUTHORITIES

CASES

Page

Woods v. Barnett Bank of Ft. Lauderdaie, 765 F.2d 1004

RE AP ra 10

Woodward v. Metro Bank, 522 F.2d 84 (Sth Cir. 1975) ..10, 18

Zabriskie v. Lewis, 507 F.2d 546 (10th Cir. 1974) ....... 10

Law Reviews

Comment, Aiding And Abetting Liability Under Securities

Exchange Act Section 10(b) and SEC Rule 10b-5: The

Infusion of A Sliding-Scale, Flexible-Factor Analysis, 22

RM RPees BOUT GOUEEE BUD snc c cscs escsacsesess 7

Fischel, Secondary Liability Under Section 10(b) of the

Securities Act [sic] of 1934, 69 Calif-L.Rev. 80 (1981) 12

Rules and Regulations

Federal Rules of Civil Procedure

ee. 6 5 is 64 8 6 8 per Peet ee ee 3, 16

Ne od eaves ses iasisnnckeaee ii

kas week a ee ween ove cseeas 6

United States Code

STIS PEED oc ce cece ccccncces 18

De kg eee eenceaseceee wes 2

Securities Exchange Act of 1934

ee passim

SERIE TTT TTT OTT Te 12, 18

Ce EE DGD ese seccecnnesnncs 13

Supreme Court Rules

eae ete ea eu kken sedan veed ae eees 10

SRE a a a 10

Other Authorities

5 Wright & Miller, Federal Practice and Procedure, § 1286

eT | er ee Tree eee reer ee eee eee 6

H.R. Rep. No. 355, 98th Cong., 2d Sess 10 (1983) reprinted

in 1984 U.S. Code Cong. & Admin. News 2274, 2283... 12

No. 89-475

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1989

PEAT MARWICK MAIN & Co.,

Petitioner,

VS.

Puitip D. ROBERTS, et al.,

Respondents. —

BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

STATEMENT OF THE CASE

A. The Underlying Litigation

The underlying litigation was initiated on December 31, 1984

when certain of the respondents, together with other individuals

not parties hereto, filed a class action complaint in the United

States District Court for the Northern District of California

against various defendants, including Peat Marwick. In essence,

respondents alleged that they sustained damages as a result of

their purchase of limited partnership interests in reliance on

offering memoranda which omitted and misrepresentated mate-

rial facts in violation of the antifraud provisions of the federal

securities laws and state law.

Respondents claim that the offering memoranda omitted to

state that their partnership investments were part of a single,

interrelated and integrated fraud scheme by which thirty-eight

(38) limited partnerships were formed and sold purportedly to

engage in the application of certain enhanced oil recovery

2

(“EOR”) technologies to oil-bearing properties. Pursuant to the

offerings, the partnerships’ promoters collected two hundred mil-

lion dollars ($200,000,000) in cash from the members of the

class.' In addition, it was represented in the offering memoranda

that investors would be able to claim certain tax deductions as a

result of their investments. However, the Internal Revenue Ser-

vice (“IRS”) disallowed these tax deductions in their entirety,

and has claimed that the United States has been wrongfully

deprived of one billion two hundred million dollars

($1,200,000,000) in tax revenues as a result of the alleged

fraudulent scheme. See generally Krause v. Commissioner, 92

T.C. 11 (1989) (discussing the contention that certain of the

partnerships at issue are abusive tax shelters).

In claiming that their partnership invesiments were part of an

integrated fraud scheme, respondents also allege that: (i) the

represented tax benefits were not available from the inception of

the offerings; (ii) that the EOR technologies purportedly licensed

by the partnerships were either known to be ineffectual or were

licensed by the partnerships from related parties at grossly in-

flated prices; (iii) that the partnerships acquired interests in

properties from undisclosed partnership promoters at inflated

prices; and (iv) that the partnership interests were offered and

sold in violation of the registration requirements of the Securities

Act of 1933.

B. The Role Of Peat Marwick In The Alleged Fraud

Peat Marwick’s request to invoke this Court’s jurisdiction is

based on an erroneous premise. Thus, it is argued that the United

States Court of Appeals for the Ninth Circuit erred in reversing

the district court’s dismissal with prejudice, pursuant to Rule

' The offerings in which Peat Marwick was directly involved resulted

in cash investments of approximately forty-five million dollars

($45,000,000).

* Peat Marwick incorrectly states that the sole basis for respondents’

claims is the failure of the EOR technologies. Petition for Certiorari at

4. As noted, respondents’ allegations focus on several aspects of the

partnership offerings, only one of which concerns the technologies.

3

12(b)(6), Fed.R.Civ.P., of respondents’ claim against Peat

Marwick for aiding and abetting a violation of Section 10(b) of

the Exchange Act, because the only allegation as to Peat

Marwick was the truthful statement that the firm agreed to

perform accounting services for the partnerships in the future.

Petition for Certiorari at 3.

However, as the Ninth Circuit correctly observed in reversing

the district court’s improvident dismissal of respondents’ claim,

the facts which give rise to the claim for relief against Peat

Marwick go well beyond mere “agreement to provide future

services.” As the Ninth Circuit noted,

In substance, the investors’ fourth amended complaint re-

cited the following facts, the truth of whieh is presently

assumed: (1) the offering documents indicated that Peat,

Marwick agreed to perform accounting services for the

partnerships; (2) before Peat, Marwick agreed to perform

future services, it reviewed the offering memoranda and

investigated partnership management, learning of fraudulent

material; (3) through this process, Peat, Marwick partici-

pated in drafting the memoranda or had effective control

over the contents by consenting to the use of its name; (4)

Peat, Marwick audited and opined on the financial state-

ments of, and prepared the tax returns for the partnerships

for the years ending December 31, 1981, December 31, 1982,

December 31, 1983, and December 31, 1984; (5) these

opinions were disseminated to the investors; (6) by assisting

in the preparation of the memoranda and its investigation of

the management of the partnerships, Peat, Marwick knew in

what respects the memoranda were. false and misleading, and

furthered the fraud by consenting to inclusion of its name.

Roberts v. Peat, Marwick, Mitchell & Co., 857 F.2d 646, 652 (9th

Cir. 1988). , ;

The Ninth Circuit’s accurate statement of respondents’ allega-

tion highlights the fatal error of Peat Marwick’s petition. In its

zeal to capture this Court’s attention, Peat Marwick misstates

respondents’ allegation in a futile attempt to show that the Ninth

4

Circuit’s decision constitutes an extension of existing law and

conflicts with authority from other circuits.

Contrary to Peat Marwick’s contention, however, respondents’

aiding and abetting allegation is not based solely on what Peat

Marwick self-servingly characterizes as its “silence or inaction” in

the face of its alleged knowledge that a fraud was afoot. Instead,

Peat Marwick is alleged to have engaged in manipulative and

deceptive conduct by participating in the preparation of false and

misleading offering documents, agreeing to lend its name and

credibility to such materials while knowing they were infected

with fraud, and by continuing to participate in a fraudulent

scheme through dissemination of allegedly false and misleading

audit reports and tax forms which respondents relied on in making

additional cash contributions over a period of several years. This

demonstrates the folly of Peat Marwick’s assertion that respon-

dents’ claim is merely that Peat Marwick remained silent about

the alleged fraud when it had no independent duty to disclose and,

_ therefore, no aiding and abetting claim will lie.

Peat Marwick audited and opined on the financial staternents

for at least five (5) of the partnerships syndicated in 1981.

Complaint { 17(a). The offering memoranda for those partner-

ships represented that Peat Marwick would perform accounting

services therefore, including preparing reports on audited partner-

ship financial statements. Jd. Subsequent to dissemination of Peat

Marwick’s report on the financial statements for the 1981 partner-

ships, it continued to permit its name to be used in offering

memoranda for two (2) partnerships syndicated in 1982. /d.

Obviously, then, this case involves far more than Peat Marwick’s

silence or inaction. It involves Peat Marwick’s participation in

preparation of allegedly false and misleading 1981 offering memo-

randa, rendition of audit services to those partnerships, including

issuance of unqualified opinions on their financial statements,

followed by dissemination of new partnership offering memoranda

which continued to reflect Peat Marwick’s participation.’ Indeed,

> One of the partnership offering memoranda actually contained a

report on the financial statement of one of the issuing entities. Com-

plaint 9] 17(a).

Peat Marwick continued to render reports on partnership financial

statements and tax forms into 1984. This hardly bespeaks “silence

or inaction” on the part of Peat Marwick.’

The Ninth Circuit reversed the district court precisely because

the lower court misconstrued respondents’ allegation in the same

manner in which it is erroneously presented by Peat Marwick in

its petition. Roberts v. Heim, 670 F. Supp. 1466, 1482 (N.D. Cal.

1987), affd in part and rev'd in part sub nom. Roberts v. Peat,

Marwick, Mitchell & Co., 857 F.2d 646, 652-653 (9th Cir. 1988).°

As discussed below, there cannot be any serious question that

under the applicable pleading standards which must be applied,

*The significance of these facts cannot be understated. By way of

’ example, respondent Arthur B. Gauss purchased an interest in a 1982

partnership pursuant to an offering memorandum which represented

that Peat Marwick would provide future accounting services, including

preparation of reports on audited partnership financial statements. By

the time Dr. Gauss invested, Peat Marwick had completed its audit of

the 1981 partnerships and had rendered unqualified opinions on those

partnerships’ financial statements. These 1981 partnerships were identi-

fied in the offering memorandum relied on by Dr. Gauss in purchasing

his interest in a virtually identical 1982 partnership. Obviously, had Peat

Marwick declined to render an unqualified report on the 1981 partner-

ship financial statements, or at least qualified its report thereon, Dr.

Gauss would likely never have been offered the opportunity to invest in a

1982 partnership or, if he had, would have been alerted to the possibility

of a fraud. As a result, it cannot seriously be questioned that Peat

Marwick engaged in a manipulative and deceptive act in agreeing to be

identified in the 1982 partnership offering memoranda after completing

its audit of the 1981 partnerships’ financial statements.

> The district court’s analysis of Peat Marwick’s motion to dismiss

consisted of one paragraph in a twenty-five (25) page opinion which

addressed complex issues concerning class certification, motions to

dismiss, and motions for summary judgment brought by virtually all of

the one hundred three (103) defendants named below. Roberts v. Heim,

supra, 670 F.Supp. 1466. Perhaps this explains the district court’s

failure to address the totality of the factual allegations made against Peat

Marwick.

6

respondents alleged a cognizable claim for relief against Peat

Marwick as an aider and abettor of a securities fraud.°

C. Procedural Background Giving Rise To The Petition For A

Writ of Certiorari

The relevant complaint for purposes of this proceeding is

a respondents’ one hundred fifty-three (153) page Fourth |

Amended Complaint, filed June 16, 1986. Respondents alleged

- therein claims against Peat Marwick for, inter alia, primary and

secondary violations of Section 10(b) of the Exchange Act and

Rule 10b-5 promulgated thereunder, 17 C.F.R. { 240.10b-5. The

district court entered summary judgment in favor of Peat

Marwick on the primary violation claim and dismissed the aiding

and abetting claim with prejudice. 670 F.Supp. 1466, 1474, 1482.

Following entry of judgment pursuant to Rule 54(b),

Fed.R.Civ.P., respondents appealed. In a per curiam opinion the

Ninth Circuit affirmed the summary judgment but reversed the

dismissal of the aiding and abetting claim. 857 F.2d at 648, 652.

° Respondents alleged that the reports on financial statements and

Form K-1 tax forms prepared by Peat Marwick gave rise to a claim for

@ primary liability under Section 10(b) of the Exchange Act. Summary

judgment on this claim in favor of Peat Marwick was affirmed by the

Ninth Circuit on the ground that payments on promissory notes made

after initial cash contributions were not separate purchases of securities.

875 F.2d at 649-652. Nonetheless, as the Ninth Circuit noted, Peat

Marwick’s continuing involvement in the offerings by virtue of its

preparation of these documents, which were disseminated to and relied

on by limited partners prior to making additional cash contributions,

supports the allegation that Peat Marwick knowingly rendered substan-

tial assistance to a fraudulent scheme. The fact that the allegations

respecting Peat’s audit reports and tax returns were set forth within

respondents’ primary violation claim is irrelevant. Complaint {ff 43(a),

60(a). It is well settled that, “[t]he entire pleading will be scrutinized to

determine if any legally cognizable claim can be found within it...A

pleading will be judged by its substance rather than according to its form

or label and, if possible, will be construed to give effect to all its

avertments.” 5 Wright & Miller, Federal Practice and Procedure, § 1286

at 383 (2d Ed. 1969) (footnotes omitted); see also Walker v. KFC

Corp., 515 F.Supp. 612, 619 (S.D. Cal. 1981), modified on other

grounds, 728 F.2d 1215 (9th Cir. 1984).

| S > |

; 7

Peat Marwick’s Petition for Rehearing with Suggestion for Re-

hearing En Banc in the Ninth Circuit failed to draw a single

supporting vote. The instant petition for a writ of certiorari

followed.

D. The Legal Issues Raised By The Petition For A Writ of

Certiorari

The petition for a writ of certiorari seeks this Court’s review of

a legal issue which has been resolved in a uniform manner by the

courts of appeals on numerous occasions. Thus, there can be no

dispute that all of the circuit courts have held that a private cause

of action exists for aiding and abetting a violation of Section

10(b) of the Exchange Act and that three elements must be

established in order for liability to attach: (1) the existence of a

primary wrong; (2) knowledge on the part of the aider and

abettor of the wrong; and (3) the aider and abettor’s substantial

assistance in the wrong. E.g., Rochez Brothers, Inc. v. Rhoades,

527 F.2d 880, 886 (3d Cir. 1975); SEC v. Rogers, 790 F.2d 1450,

1460 (9th Cir. 1986); Comment, Aiding And Abetting Liability

Under Securities Exchange Act Section 10(b) and SEC Rule 10b-

5: The Infusion of A Sliding-Scale, Flexible-Factor Analysis, 22

Loy.L.A.Rev. 1189, 1192-93 (June 1989).

Peat Marwick contends, however, that a “conflict” exists

among certain of the circuit courts because, it is claimed, the

Seventh and Second Circuits have held that an “independent”

duty to disclose must exist before silence can give rise to liability,

whereas the Ninth and Eleventh Circuits have held that partici-

pation in a fraudulent scheme may give rise to liability on the part

of an alleged aider and abettor, even in the absence of an

“independent” duty to disclose. Petition for Certiorari at 9.

There are three fundamental problems with these contentions.

First, there are no conflicts among the circuit courts as to the

existence of a private cause of action for aiding and abetting a

violation of Section 10(b) or the elements of such a claim.

Merely because some courts have applied the elements of the

aiding and abetting claim to different factual scenarios in different

ways does not constitute a “conflict” sufficient to invoke this

Court’s jurisdiction. Secondly, contrary to Peat Marwick’s asser-

8

tion, this is not a case about silence or inaction. As a result, even

if there were a conflict among the circuits respecting whether or

not silence is actionable as aiding and abetting absent an “inde-

pendent” duty to disclose, that issue simply is not raised by this

case. In any event, the cases are consistent in holding that the

existence or non-existence of a duty to disclose relates only to the

degree of scienter required in order to find an aider and abettor

liable, not whether the claim is valid in the first instance. E.g.,

Sirota v. Solitron Devices, Inc., 673 F.2d 566, 575 (2d Cir.), cert.

denied, 459 U.S. 838 (1982); IIT, An International Investment

Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980); Monsen v.

Consolidated Dressed Beef Co., 579 F.2d 793, 800 (3d Cir.), cert.

denied, 439 U .S. 930 (1978). Finally, the in terrorem effects Peat

Marwick claims will arise if the Ninth Circuit’s decision is

allowed to stand are illusory. Contrary to such hyperbole, the

decision in Roberts will not permit a securities plaintiff to allege

aiding and abetting liability against professionals whose only

involvement is lending their names to an offering. As noted, the

Ninth Circuit upheld the sufficiency of respondents’ allegation

because Peat Marwick is alleged to have been deeply embroiled

in a fraudulent scheme over a number of years, starting with its

participation in the preparation of false and misleading offering

materials and continuing through issuance of unqualified reports

on partnership financial statements and tax forms. As such, this

case is not the appropriate vehicle to review the issues raised by

Peat Marwick which were neither briefed or decided below and

have little, if any, relevance to the allegation made by

respondents.

9

REASONS FOR DENYING THE WRIT

I

THE WRIT SHOULD BE DENIED BECAUSE IT SEEKS

REVIEW OF AN ISSUE WHICH WAS NOT BRIEFED

OR DECIDED BELOW AND AS TO WHICH THERE IS

UNANIMITY OF OPINION AMONG THE COURTS OF

APPEALS

Peat Marwick seeks review of the Ninth Circuit’s decision in

Roberts in order to give this Court the opportunity to resolve the

previously reserved question of whether or not a private cause of

action exists for aiding and abetting a violation of Section 10(b)

of the Exchange Act.’ For several reasons, this issue should not be

resolved by this Court in the context of this case.

First, the issue of the existence of a private cause of action for

aiding and abetting a violation of Section 10(b) of the Exchange

Act was not briefed, argued, or addressed in either the district

court or the Ninth Circuit and thus should not be considered by

this Court in the context of this case. Secondly, for sound legal

and policy reasons, the courts of appeals unanimously hold that a

private cause of action for aiding and abetting a violation of

Section 10(b) of the Exchange Act exists. Finally, Peat Marwick

has failed to articulate any compelling reason why the Court

should take this opportunity to do away with aiding and abetting

liability, which is an important tool in the private enforcement of

the nation’s securities laws.

As a general rule, this Court wili not review issues not ‘consid-

ered by the district court or the court of appeals. E.g. Miree v.

DeKalb County, GA., 433 U.S. 25, 33-34 (1977) (“the fact that

this asserted basis of liability is so obviously an afterthought may

be some indication of its merit, but since it was neither pleaded,

argued, nor briefed in the District Court or the Court of Appeals,

we wil! not consider it”); Adickes v. S.H. Kress and Co., 398 U.S.

In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192 n.2 (1976), this

Court reserved decision on the question of whether civil liability for

aiding and abetting a violation of Section 10(b) of the Exchange Act

and Rule 10b-5 promulgated thereunder is appropriate.

, _

10

144, 147 n.2 (1970) (where issues are neither raised before nor

considered by the Court of Appeals, this Court will not ordinarily

consider them). In this case, the issue of the existence vel non of

a private cause of action for aiding and abetting a violation of

Section 10(b) of the Exchange Act has simply never previously

been raised or decided. For this reason alone, the petition for a

writ of certiorari should be denied. -

In addition to the fact that the issue sought to be reviewed was

neither raised or decided below, the circuit courts unanimously

hold that there exists a private cause of action for aiding and

abetting a violation of Section 10(b) of the Exchange Act.*

Accordingly, there is no conflict among the courts of appeals as to

this issue, within the meaning of Supreme Court Rule 17.1 (a).

Moreover, given the uniformity of opinion among the circuit

courts on this issue, it appears that it is not the type of important

question of federal law which compels resolution by this Court at

this time. Supreme Court Rule 17.1(c).

Merely because this Court has previously reserved decision on

an issue does not mean that review thereof is necessary. For

example, this Court has never directly faced the issue of whether

there exists an implied private right of action for violations of

Section 10(b) of the Exchange Act but, rather, has repeatedly

accepted the existence of such a cause of action. E.g., Herman &

‘See, eg,, Cleary v. Perfectune, Inc., 700 F.2d 774, 777 (ist Cir.

1983); Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 602

F.2d 478, 484 (2d Cir. 1979), cert. denied, 444 U.S. 1045 (1980);

Monsen v. Consolidated Dressed Beef Co., Inc., supra, 579 F.2d at 799;

Pargas, Inc. v. Empire Gas Corp., 423 F.Supp. 199, 240-41 (D. Md.),

aff'd, 546 F.2d 25 (4th Cir. 1976); Woodward v. Metro Bank of Dallas,

522 F.2d 84, 97 (Sth Cir. 1975); SEC v. Coffey, 493 F.2d 1304, 1315

(6th Cir. 1974), cert. denied, 420 U.S. 908 (1975); Sundstrand Corp. v.

Sun Chem. Corp., 553 F.2d 1033, 1043 (7th Cir.) cert. denied, 434 U.S.

875 (1977); Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985), cert.

denied, 474 U.S. 1057 (1986); Jett v. Sunderman, 840 F.2d 1487, 1491

(9th Cir. 1988); Zabriskie v. Lewis, 507 F.2d 546, 553 (10th Cir. 1974);

Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1009-10 (11th

Cir. 1985); Investors Research Corp. v. SEC, 628 F.2d 168, 177 (D.C.

Cir.), cert. denied, 449 U.S. 919 (1980).

ll

MacLean v. Huddleston, 459 U.S. 375, 380 n. 10 (1983) (be-

cause the courts had “consistently recognized for more than 35

years” an implied private right of action under Section 10(b) and

Rule 10b-5 of the Securities Exchange Act of 1934, the issue was

“simply beyond peradventure”); Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723, 730 (1975) (twenty five years after

the first district court held that there was an implied right of

action under Rule 10b-5 of the Securities Exchange Act of 1934,

" the Court “confirmed with virtually no discussion the overwhelm-

ing consensus of the District Courts and Courts of Appeals that

such a cause of action did exist.”) (quoted with approval in

Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S.

353, 380 (1982)). :

A similar circumstance applies to the private cause of action for

aiding and abetting a violation of Section 10(b) of the Exchange

Act. Recognition of the existence of such a private cause of

action appears to stem from the seminal decision in Brennan v.

Midwestern United Life Ins. Co., 259 F.Supp. 673, 680-681 (N.D.

Ind. 1966) (motion to dismiss denied), 286 F.Supp. 702 (N.D.

Ind. 1968) (on merits after trial), affd, 417 F.2d 147 (7th Cir.

1969), cert. denied, 397 U.S. 989 (1970). Inasmuch as the

existence of a private cause of action for aiding and abetting a

violation of Section 10(b) of the Exchange Act has, since

Brennan, been repeatedly recognized in the federal courts for

more than twenty-three (23) years, there can be no serious

question that such a cause of action is properly ensconced within

Exchange Act jurisprudence.

(i)

In the face of this compelling history, the attempt to show that

the well-established private cause of action for aiding and abetting

a violation of Section 10(b) of the Exchange Act somehow

contravenes the intent of Congress or is inconsistent with the

statute itself should be rejected. In Massachusetts Mutual Life

Ins. Co. v. Russell, 473 U.S. 134 (1985), this Court reaffirmed

that congressional intent and statutory consistency constitute the

“essential predicate for implication of a private remedy.” /d. at

ance relll

12

145 citing Northwest Airlines, Inc. v. Transport Workers, 451

U.S. 77 (1981).°

Significant here is the fact that congressional intent to imply a

private right of action may be inferred in a situation where there

has been a routine and consistent recognition by the federal courts

that such a cause of action exists. Scientex Corp. v. Kay, 689 F.2d

879, 884 (9th Cir. 1982). Precisely that scenario exists here. The

district courts and courts of appeals have “routinely and consist-

ently” recognized the existence of a private cause of action for

aiding and abetting a violation of Section 10(b) of the Exchange

Act.

That Congress intended such a cause of action to remain

unimpaired is confirmed by the legislative history. Congress has

repeatedly rejected attempts to amend the federal securities laws

to prohibit aiding and abetting as a violation of Section 10(b) of

the Exchange Act. In 1975, the most comprehensive revisions of

the federal securities laws that have occurred since passage of the

Exchange Act were enacted, and no limitations were legislated on

the private cause of action for aiding and abetting a violation of

Section 10(b) of the Exchange Act, notwithstanding that such a

cause ‘of action had repeatedly been employed in federal deci-

sional law. See Herman & MacLean v. Huddleston, supra, 459

U.S. at 384-385 (describing the 1975 legislation). By 1983, a

congressional report had specifically endorsed, “the judicial appli-

cation of aiding and abetting liability to achieve the remedial

purposes of the securities laws.”’'° Furthermore, Section 28(a) of

* Much of Peat Marwick’s argument in this connection is based on an

almost decade old law review article espousing an extreme view of

application of aiding and abetting principles in the context of the federal

securities laws which, to our knowledge, has never been adopted.

Fischel, Secondary Liability Under Section 10(b) of the Securities Act

[sic] of 1934, 69 Calif.L.Rev. 80 (1981).

'° H.R. Rep. No. 355, 98th Cong., 2d Sess 10 (1983) reprinted in

1984 U.S. Code Cong. & Admin. News 2274, 2283. This extended a

treble damages civil penalty in SEC enforcement actions to persons who

aided or abetted insider trading violations by tipping. This authority was

removed by the Insider Trading and Securities Fraud Enforcement Act

13

the Exchange Act contains an explicit saving clause which pro-

vides that, “[t]he rights and remedies provided by this title shall

+e in addition to any and all other rights and remedies that may

exist at law or in equity.” 15 U.S.C. § 78bb(a). Finally, cov cts

have recognized that, in the absence of aiding and abetting

liability under Section 10(b), the basic remedial purposes of the

Exchange Act could be circumvented with impunity. E.g.,

Aldrich v. New York Stock Exchange, 446 F.Supp. 348, 355 n.5

(S.D.N.Y. 1977). This undesirable result would leave defrauded

investors with no federal remedy against key participants in

securities violations.

Simply put, Peat Marwick’s request that this Court use this

case to unravel decades of sound law should be denied. As

Congress has recognized, the existence of a private cause of

action for aiding and abetting a violation of Section 10(b) of the

Exchange Act comports with congressional intent as well as the

letter and spirit of the statute itself.

THERE IS NO CONFLICT AMONG THE COURTS OF

APPEALS AS TO THE PLEADING ISSUE RAISED BY

THIS APPEAL

Peat Marwick attempts to conjure an issue for this Court’s

review by referring to an alleged conflict among certain circuit

courts regarding the pleading issue decided by the Ninth Circuit

in Roberts. As demonstrated below, there is no true conflict

among the circuit courts. Accordingly, the petition for a writ of

certiorari should be denied.

Initially, we note that the entire premise of Peat Marwick’s

argument respecting a circuit court “conflict” is dependent on the

conclusion that this appeal involves an aiding and abetting claim

against a participant in a securities transaction who is alleged to

have done nothing more than remain silent in the face of its

of 1988, wherein tippers were declared to be primary violators of

Section 10(b), rather than aiders and abettors.

14

alleged knowledge of a fraud.'' This contention is, of course,

wrong. This case is not about silence or inaction or, stated another

way, “whistleblower” liability. Peat Marwick is alleged to have

rendered substantial assistance to a fraud by engaging in-affirma-

tive manipulative and deceptive conduct. Specifically, Peat

Marwick is alleged to have participated in the preparation of false

and misleading offering memoranda, to have agreed to be identi-

fied therein, and to have prepared false and misleading audit

reports and tax forms relied on by limited partners in making cash

contributions to the partnerships. Obviously, such conduct does

not amount to “silence or inaction.”

Numerous cases have held that assistance to a fraud involving a

significantly lesser degree of involvement than that at issue here

can give rise to aider and abettor liability. For example, in Rolf v.

Blyth, Eastman Dillon & Co., 570 F.2d 38 (2d Cir.), cert. denied,

439 U.S. 1039 (1978), the Second Circuit found that a broker

rendered substantial assistance to a fraud by the ministerial acts

of processing securities transactions directed by an investment

advisor, reassuring the defrauded investor of the investment

advisor’s competence, and recklessly failing to learn of or disclose

the fraud. Jd. at 48. |

In Monsen v. Consolidated Dressed Beef Co., supra, 579 F.2d

793, a bank was found to have aided and abetted a borrower’s

continuation of a promissory note sale program violating the

registration and antifraud provisions of the federal securities laws,

based solely on the bank’s knowledge that the notes were unregis-

tered, that the note buyers were receiving no financial information

about the borrower, and that the borrower would not reveal to the

note buyers its financial difficulties or the subordinated nature of

the notes. /d. at 801-02. The Seventh Circuit in SEC v. First

Securities Co., 463 F.2d 981 (7th Cir.), cert. denied, 409 U.S. 880

(1972) held that a broker-dealer firm aided and abetted the

creation and mainienance of a fraudulent escrow by its president,

'' The reason for this characterization is that it is only in cases where

liability is based on “silence or inaction” that there is any discernible

distinction among the circuit courts insofar as application of aiding and

abetting principles are concerned.

15

because it provided him “with the trappings of a successful

investment counsellor, held him out as providing such counsel,

and then wilfully allowed the enforcement of a rule regarding the

opening of mail which was antithetical to the prevention of frauds

of the type which occurred.” /d. at 988.

Aiding and abetting liability has also been imposed on a lawyer

where he was present at the closing of a merger which he knew

had been approved on the basis of misleading proxy materials.

SEC v. National Student Marketing Corp., 457 F.Supp. 682, 712-

13 (D.D.C. 1978). See also Andérson v. Francis I. DuPont & Co.,

291 F.Supp. 705, 709 (D.Minn. 1968) (sufficiency of aiding and

abetting allegation against broker dealers sustained based on their

giving office space to an alleged primary violator, endorsing his

skill, and holding him out as an important customer); in re Gas

Reclamation, Inc. Securities Litigation, 659 F.Supp. 493, 504

(S.D.N.Y. 1987) (motion to dismiss denied where banks and

insurance companies reviewed and approved private placement

memorandum, devised marketing and financing scheme and en-

gaged in atypical financing); Jndex Fund, Inc. v. Hagopian, 609

F.Supp. 499, 509 (S.D.N.Y. 1985) (summary judgment to defen-

dant banks denied where banks allegedly failed to supervise

primary violators and provided funds used by them); Harmsen v.

Smith, 693 F.2d 932, 944-45 (9th Cir. 1982), cert. denied, 464

U.S. 822 (1983) (affirming jury verdict of aiding and abetting

liability against the daughter of the principal architect of a

fraudulent scheme and an officer and director of a conglomerate

involved in the scheme); Jett v. Sunderman, 840 F.2d 1487, 1494

(9th Cir. 1988) (summary judgment in favor of an insurer

reversed even in light of uncontroverted declaration that it was not

involved in preparation of offering materials where evidence

suggested it had knowledge of existence of a waiver in a bond

which may have been material to decision to invest); Renovitch v.

Stewardship Concepts, Inc., 654 F.Supp. 353, 359 (N.D. Il.

1987) (aiding and abetting claim upheld against attorneys where

they either assisted in the preparation of and/or approved the

statements made in allegedly false and misleading brochures used

to sell securities); Metge v. Baehler, supra, 762 F.2d at 625-30

(bank’s summary judgment motion denied where plaintiffs

16

claimed that bank knew issuer was selling worthless thrift certifi-

cates yet prolonged business of issuer by making atypical loans).

Clearly, numerous cases hold that conduct which does not even

approach the level of Peat Marwick’s participation as alleged in

Roberts can give rise to aiding and abetting liability. Moreover,

even accepting as true Peat Marwick’s incorrect position that this

case is about an alleged aider and abettor’s silence or inaction, it

is nonetheless clear that respondents’ allegation against Peat

Marwick states a claim for relief sufficient to withstand a motion

to dismiss under Rule 12(b)(6), Fed.R.Civ.P.

The crux of Peat Marwick’s argument is that a conflict exists

among certain of the circuit courts regarding whether or not, in

the context of a case involving silence or inaction on the part of

the alleged aider and abettor, there must exist an independent

duty to disclose—outside of the securities laws—before silence

can give rise to liability. Petition for Certiorari at 9. Thus, it is

contended that the decisions of the Seventh and Second Circuits

in Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490

(7th Cir. 1986) and I/T, An International Investment Trust v.

Cornfeld, supra, 619 F.2d 909, respectively, require that an

“independent” pre-existing duty to act or disclose exist in order

for aiding and abetting liability to be imposed, while the instant

case and Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th

Cir. 1986, rehearing en banc denied, 806 F.2d 1070 (11th Cir.

1986), cert. denied, 480 U.S. 946 (1987), do not impose such a

requirement. ¥

To begin with, neither this case, nor the decision in Rudolph,

involve silence or inaction. In both cases, accountants are either

alleged to have participated in the preparation of false and

misleading offering documents, or rendered audit reports on

financial statements which were false when rendered, or which

became false as a result of subsequent events. This contrasts

sharply with the decision in Barker, where, as the Ninth Circuit

noted, there was no evidence of any intent to deceive, that the

defendants had even seen the selling documents, or that their

17

names were used therein. 857 F.2d at 653.'? Likewise, in //T, the

Second Circuit recognized that liability may attach to an aider

and abettor even in the absence of an independent duty to disclose

if there is “clear evidence of the required degree of scienter...

and a concious and specific motivation for not acting on the part

of an entity with a direct involvement_in the transaction.” 619

F.2d at 927.

Thus, the Ninth Circuit’s decision in Roberts, as well as

Rudolph, fall within a well settled line of decisional authority

which provides that aider and abettor liability may attach even

where there may be no “independent” duty to disclose, if the

evidence shows the requisite scienter. In these cases, the existence

or non-existence of a duty relates solely to the degree of scienter

required to find liability. This formulation provides ample protec-

tion to alleged aiders and abettors who may not have an “indepen-

dent” duty to disclose, because they can only be found liable if

they acted with the requisite scienter.'’ See, e.g., Rudolph, 800

'? Barker was decided on a motion for summary judgment, after a full

evidentiary record was assembled. Thus, apparently even the aiding and

abetting allegation in Barker survived the pleading stage. This same

problem arises with many of the decisions relied on by Peat Marwick,

where allegations apparently survived the pleading stage, as the Ninth

Circuit held should be the case here, but summary judgment was

ultimately entered in favor of the defendant. E.g, Bane v. Sigmundr

Exploration Corp., 848 F.2d 579 (Sth Cir. 1988) (summary judgment

evidence did not support inference that bank sought to cloak principal

defendants in aura of respectability or reliability); Schlifke v. Seafirst

Corp., 866 F.2d 935, 948 (7th Cir. 1989) (on summary judgment

motion, plaintiffs failed to show that banks had any knowledge of, or

acted recklessly, in failing to disclose fraudulent representations and

~ omissions).

' All of this, of course, undermines Peat Marwick’s argument that

differing standards among the circuit courts insofar as aiding and

abetting liability are concerned will give rise to forum shopping. To

begin with, Peat Marwick is wrong in contending that, for example, the

plaintiffs in Latigo Ventures v. Laventhol & Horwath, 876 F.2d 1322

(7th Cir. 1989) would have obtained a different result if their case was

heard within the Ninth or Eleventh Circuits. Even the Latigo Ventures

court recognized that the case before it was distinguisable from Roberts

18

F.2d at 1045; Metge v. Baehler, supra, 762 F.2d at 625; SEC v.

Washington County Util Dist., 676 F.2d 218, 226 (6th Cir. 1982);

Edwards & Hanly v. Wells Fargo Secs. Clearance Corp., supra,

602 F.2d 478, 484-85 (2d Cir. 1979); Gould v. American-

Hawaiian S.S. Co., $35--24-761, 780 (3d Cir. 1976); Woodward

v. Metro Bank, 522 F.2d 84, 97 (Sth Cir. 1975); Herm v. Stafford,

663 F.2d 669, 684 (6th Cir. 1981); Tucker v. Janota, [1979

Transfer Binder] Fed.Sec.L.Rep. (CCH) 9 96,701 (N.D. IIL

Nov. 1, 1978)."*

-”

Where the requisite degree of scienter exists, coupled with

substantial assistance, aider and abettor liability can properly be

imposed. In such circumstances, participants who are aiders and

abettors are not “insurers” of the primary violators’ wrongdoing. '°

and Rudolph because there was no allegation of reliance on the auditors

in making an investment decision. 876 F.2d at 1327. Moreover, the

concerns respecting forum shopping ignore the venue provisions of the

Exchange Act, 15 U.S.C. § 78aa, and the opportunity to move to change

venue pursuant to 28 U.S.C. § 1404(a).

'*The Ninth Circuit in Roberts recognized that a duty to disclose

must exist. 857 F.2d at 653. Such a duty may arise based on the facts of

the case. Jd. This is in keeping with the established principle that

whether or not a duty to disclose exists is a question of fact, dependent

on the particular facts and circumstances of the case. E.g., Spectrum

Financial Companies v. Marconsult, Inc., 608 F.2d 377, 381 (9th Cir.

1979), cert. denied, 446 U.S. 936 (1980); White v. Abrams, 495 F.2d

724, 735-36 (9th Cir. 1974).

'° Peat Marwick argues that several cases directly conflict with the

Ninth Circuit’s holding in Roberts. This is wrong. For example, as noted,

the Seventh Circuit in Latigo Ventures v. Laventhol & Horwath, supra,

876 F.2d at 1327 specifically found that the case was distinguishable

from Roberts. Similarly, in LHLC v. Cluett, Peabody & Co., 842 F.2d

928 (7th Cir. 1988), cert. denied, US. 109 S.Ct. 311 (1988),

the Seventh Circuit found that no claim was stated against an account-

ing firm because the document allegedly relied on by the defrauded

investor was not seen until after the investment decision had been made

and the transaction closed. Jd. at 932. No such circumstance is

presented here. Finally, in Schneberger v. Wheeler, 859 F.2d 1477 (1 \th

Cir. 1988), cert. denied, __. U.S. ____., 109 S.Ct. 2433 (1989), the

court of appeals affirmed entry of summary judgment for a defendant

19

THE NINTH CIRCUIT’S DECISION DOES NOT CON-

FLICT WITH ANY DECISIONS OF THIS COURT

In support of its petition for a writ of certiorari, Peat Marwick

contends that the Ninth Circuit’s decision conflicts with the

rationales of prior decisions of this Court. As we show, the cases

relied on by Peat Marwick are inapposite.

The decision principally relied upon to support this argument is

| United States v. Chiarella, 445 U.S. 222 (1980). There, an

| employee of a financial printer was convicted of securities fraud

| based on his having used material non-public information pur-

| loined from documents given his employer to purchase stock in a

| target company, without disclosing his knowledge to the seller.

This Court reversed the conviction, finding that Chiarella had no

' duty to disclose the information to the seller. Obviously, there are

numerous material distinctions between Chiarella and the facts of

this case.

Initially, it should be noted that in Chiarella the Supreme

Court required that an independent duty to disclose must exist

before nondisclosure becomes a primary violation. This does not

address the situation of whether or not an independent duty to

disclose must be found before aiding and abetting liability can be

imposed. In any event, the Chiarella decision does not conflict

| with the case law which holds that, absent a duy to disclose, an

aider and abettor can be liable if the requisite degree of scienter

and substantial assistance is shown. Furthermore, the decision in

Chiarella involved a purchaser's nondisclosure rather than, as

here, nondisclosures by one of the world’s largest accounting firms

which was involved in the preparation of documents which it

knew would be relied on by investors in making investment

decisions. As stated in Andreo v. Friedlander, Gaines, Cohen,

Etc., 660 F.Supp. 1362 (D-Conn. 1987):

bank because no evidence had been adduced that the bank had knowl-

edge of a fraud. /d. at 1480-81. Significantly, the decision in Schneberger

suggests that even if the bank had no independent duty to disclose, if

there had been the requisite showing of scienter, aiding and abetting

liability could properly be imposed. /d.

a ale

20

While it is not reasonably foreseeable that a seller would rely

on the disclosures of a purchaser (absent some special

relationship), it is reasonably foreseeable that investors

would rely on the expertise of the professionals that draft

offering memoranda and tax opinions. As a result, such

professionals should be under the obligation to not act in

reckless disregard of the truth when they undertake the

drafting of such documents. :

Id. at 1368.

Numerous cases have noted the factually unique context in

which Chiarella and a companion case, Dirks v. SEC, 463 U.S.

646 (1983), arose. For example, in Deutschman v. Beneficial

Corp., 841 F.2d 502 (3d Cir. 1988), the Third Circuit, in

reversing dismissal of a class action securities fraud complaint,

held that,

The district court’s reliance on Chiarella and Dirks is en-

tirely misplaced. Those cases dealt not with injury caused by

affirmative misrepresentations which affected the market

price of securities, but with the analytically distinct problem

of trading on undisclosed information; a theory of recovery

which Deutschman does not plead. The ‘disclose or abstain

from trading’ rule laid down in the insider trading cases

imposes on insiders a duty to disclose information which

need not otherwise be disclosed before they act on that

information in any uninformed marketplace. Market partici-

pants who are neither insiders nor fiduciaries of another type

need not disclose material facts, but can rely on the assump-

tion that all other participants have equal access to informa-

tion. Chiarella and Dirks involve only the question of when

outsiders and nonfiduciaries will be treated as insiders or

fiduciaries for purposes of the affirmative duty to disclose or

refrain from trading. The court in those cases declined to

extend the duty to disclose or abstain to mere tippees who

came into possession of otherwise undislosed information.

Nothing in those opinions, however, can be construed to

require the existence of a fiduciary relationship between a

section 10(b)-defendant and the victim of that defendant's

affirmative misrepresentation.

21

Id. at 506; see also Abell v. Potomac Ins. Co., 858 F.2d 1104, 1125

n. 22 (Sth Cir. 1988) (Chiarella and Dirks involved SEC charges

of breach of a specialized duty); United States v. Carpenter, 791

F.2d 1024, 1029 (2d Cir. 1986), affd, ___ U.S. ___.,, 108 S.Ct.

316 (1987) (“[t]o give Dirks such preclusive effect would

suggest that one application of a statute cannot admit of another

application not raised in the first case’’).

There is nothing in the Ninth Circuit’s decision in Roberts

which conflicts with the holding of Chiarella and Dirks. When

Peat Marwick participated in the preparation of the offering

materials and agreed to allow its name to be used to sell

securities, the investing public understood that Peat Marwick was

| vouching for the integrity of the offering, and reasonably assumed

| that the firm would not allow its name to be used to perpetrate a

fraud. Likewise, when Peat Marwick issued audit reports on the

partnerships’ financial statements and prepared tax forms, the

investing public could properly assume that, in the event a fraud

was afoot, Peat Marwick would disclose it. As the Eleventh

| Circuit in Rudolph held, “[s]tanding idly by while knowing one’s

good name is being used to perpetrate a fraud is inherently

misleading.” 800 F.2d at 1044. For Peat Marwick to contend

that its conduct in this case was not “communicative” miscon-

strues respondents’ allegations and defies reality. Simply put,

nothing in Roberts conflicts with this Court’s prior decisions.

IV

| PUBLIC POLICY CONSIDERATIONS SUPPORT DENIAL

OF REVIEW

| Peat Marwick advances several “public” policy considerations

| which it claims support review. These contentions should be

viewed with a wary eye, however, since they are proffered

on behalf of the accounting industry, not on behalf of the

investing public, for whose benefit the federal securities laws were

enacted in the first instance. Simply put, Peat Marwick’s policy

arguments are made in support of an unnecessarily restrictive

view of the federal securities laws. Such arguments should be

rejected.

ane

22

Any discussion of the policy implications of a particular deci-

sion must start with consideration of the laws which were applied,

their purpose, and how they have been interpreted. This Court has

repeatedly recognized that the federal securities laws should be

construed not technically and restrictively but flexibly to effectu-

ate their broad remedial purposes. E.g., Basic Inc. v. Levinson,

U.S. ___, 108 S.Ct. 978, 982 (1988); Herman & MacLean

v. Huddleston, supra, 459 U.S. at 386-87; SEC v. Capital Gains

Research Bureau, 375 U.S. 180, 195 (1963); Affiliated Ute

Citizens of Utah v. United States, 406 U.S. 128, 151 (1972), reh'g

denied, 407 U.S. 916.

This principle is especially important today, when severe

budget constraints have diminished the capability of the SEC to

police the ever growing number of public and private securities

offerings. The salutary goal of permitting a private plaintiff to

pursue a securities fraud should, if anything, be encouraged in this

environment.

Peat Marwick contends that the decision in Roberts departs

from established principles of accountant liability. Traditionally,

argues Peat Marwick, an accountant has only been held liable for

what it represented in opinions on the financial statements of

business entities. Peat Marwick goes on to suggest that the courts

and investors understand that accountants only act through their

reports and, therefore, the Ninth Circuit decision will somehow

undermine this understanding. This is an Alice in Wonderland

description of the accountant’s role in today’s business world.

Accountants routinely and increasingly offer services other than

conducting audits and preparing reports on financial statements.

Indeed, the accounting profession now relies on non-auditing

“consulting” and related services for a substantial part of its

revenues. In agreeing to involve themselves in private securities

offerings of the type at issue here, accountants undertake a

responsibility to refrain from rendering critical assistance to a

fraud on the investing public. That is especially true where, as

here, not only did the accountant embroil itself in a securities

offering by participating in the preparation of offering memo-

randa, but thereafter prepared reports on the issuer’s financial

Statements.

23

This Court has previously described the accountant’s role as

one of “public watchdog.” In United States v. Arthur Young &

Co., 465 U.S. 807 (1984), this Court stated:

By certifying the public reports that collectively depict a

corporation’s financial status, the independent auditor as-

sumes a public responsibility transcending any employment

relationship with the client. The independent public account-

ant performing this special function owes ultimate allegiance

to the corporation’s creditors and stockholders, as well as to

the investing public. This “public watchdog” function de-

mands that the accountant maintain total independence from

the client at all times and requires complete fidelity to the

public trust. :

_Id. at 817-818 (emphasis in original).

The adverse consequences Peat Marwick alleges will arise if

the Ninth Circuit’s decision is allowed to stand ring hollow.

Considerations such as the rising costs to accountants and their

clients attributable to potential securities law liability pale in

comparison to the damage—both monetary and psychologi-

cal—to which the investing public is exposed in fraudulent

securities schemes such as that in which Peat Marwick was

involved. Moreover, the threat to creation of new business ven-

tures which Peat Marwick claims the Roberts decision presents is

a fiction. No empirical evidence whatsoever is offered to support

the theory that increased exposure to securities law liability is

harming the creation of new businesses. It is not too much to ask

that professionals such as accountants, lawyers, and bankers

decline to involve themselves in transactions where they know

that a fraud is being committed. When they are involved in

fraudulent schemes, they should not be immune to suit under the

federal securities laws by investors who relied on their participa-

tion in making investments.

24

CONCLUSION

For the foregoing reasons, the Petition for a Writ of Certiorari

filed in this case should be denied.

Dated: San Francisco, California

November 14, 1989

w/ ct ; Respectfully submitted,

Davip B. GOLD,

A Professional Law Corporation

Davip B. GoLpb, Esq.

SOLOMON B. Cera, EsqQ.*

595 Market Street, Suite 2300

San Francisco, California 94105

Telephone: (415) 777-2230

Attorneys for Respondents

* Counsel of Record

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