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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1989
- **Citation:** 493 U.S. 1002

## Text

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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 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

ye

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0346%3A2. Public record. Not legal advice.