Amicus Curiae Brief — Peat Marwick Main & Co. v. Roberts

JOSEPH F. SPANIOL, JR.

CLERK

No. 89-475

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1989

PEAT MARWICK MAIN & COMPANY,

Petitioner,

v.

PHILIP D. ROBERTS, et al,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

BRIEF OF LOMAS MORTGAGE U.SA., INC.

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

Morris Harrell

Harriet E. Miers

Orrin Harrison III*

Of Counsel: Kurt A. Wimmer

Alan R. Bromberg LOCKE PURNELL RAIN HARRELL

Professor of Law (A Professional Corporation)

3315 Daniel 2200 Ross Avenue, Suite 2200

Dallas, Texas 75275 Dallas, Texas 75201-6776

(214) 692-2584 (214) 740-8000

Counsel for Amicus Curiae

- October 23, 1989 *Counsel of Record

QUESTION PRESENTED

Amicus curiae will address the following question:

Whether a truthful statement that a professional services

provider has agreed to perform future services contained in an

allegedly misleading offering memorandum, coupled with a

conclusory allegation that the professional services provider

knew of alleged misstatements in the memorandum, creates a

duty to disclose on the part of the professional services

provider sufficient to render its silence as to the alleged

misstatements actionable as aiding and abetting under Section

10(b) of the Securities Exchange Act of 1934 and Rule 10b-5

promulgated thereunder.

ii

TABLE OF CONTENTS

Page

6

ng iii

INTEREST OF THE AMICUS CURIAE ............ ]

I 3

REASONS FOR GRANTING THE PETITION ...... 5

I. The Decision Below Endangers A Consistent

Nationwide Functioning Of Federal Securities

Laws By Imposing Unprecedented Duties Upon

National Professional Services Providers ....... 6

II. The Decision Below Conflicts With Decisions

Of Other Circuits, Making National Securities

Offerings Difficult As A Practical Matter ...... 13

ES ls 7

ill

TABLE OF AUTHORITIES

Page

Cases

Abell v. Wright, Lindsey & Jennings, 858 F.2d 1104

(Sth Cir. 1988), cert. denied in relevant part,

PUP A Ue COE be hos we 6 hw hb 6 wb Ak A es as 14

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

bog Pe er ee Saree 15

Barker v. Henderson, Franklin, Starnes & Holt,

oe Fo Fe Le ee | errs eee eee 1]

Basic, Inc. v. Levinson, 108 S. Ct. 978 (1988) ......... 1]

Blue Chip Stamps v. Manor Drug Stores,

ie Ae 2 6 ne ero ar eee are ae 12

Chiarella v. United States, 445 U.S. 222 (1980) ........ 1]

Cleary v. Perfectune, Inc. 700 F.2d 774

bg wy era a ee ee Oe 14

Dirks v. Securities Exchange Comm'n,

ee a Ee ee > a, eee 1]

Ernst & Emst v. Hochfelder, 425 U.S. 185 (1976) .......; 5

Herman & MacLean v. Huddleston,

Sp Sh ee RO awk oe 8 Re aS 80's hs 5.10

IIT, an Intl Inv. Trust v, Conifeid,

ee Boge oe ee ee. eee eee 9, 14

iv

In re William R. Carter, [1981 Transfer Binder]

Fed. Sec. L. Rep. (CCH) 9 82,847

Ek a tk ee eee bee eae 16

Landreth Timber Co. v. Landreth,

og ee rae 13

Landy v. Federal Deposit Ins. Corp., 486 F.2d 139

(3d Cir. 1973), cert. denied, 416 U.S. 960 (1974) ..... 14

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

RS ee ks a kd wt ade a. ee & ink 10

LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928

A 15

Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335

MTU tt, bg wc slug ca 8 ok a6 a ee a ew Od ny)

Pinter v. Dahl, 108 S. Ct. 2063 (1988) .......00000.. 13

Radzanower v. Touche Ross & Co..

Me 7

Roberts v. Heim, 670 F. Supp. 1466

(Pee. Cl, 2967) ow ss atic EGG 4406's wa 3, 4.17

Roberts v. Peat Marwick Mitchell & €o.,-857 F.24 646

Nt ee bes Wa wb 6d es passim

Rudolph v. Arthur Anderson & Co., 800 F.2d 1040

(11th Cir. 1986), cert. denied,

480 U.S. 946 (1987)... 0... eee. 15, 16

Schlifke v. Seafirst Corp., 866 F.2d 935

ee Sah ye Blade b vee ee we ll, 14

v

Schneberger v. Wheeler, 859 F.2d 1477

(11th Cir. 1988), cert. denied,

Pa a Aes civ des ease 15, 16

Securities Exchange Comm’n v. Capital Gains

Research Bureau, Inc., 375 U.S. 180 (1963) ........ 7

Somerville v. Major Exploration, Inc., 576

Py UD. De TR a EOD he ec ee 6

Stokes v. Lokken, 644 F.2d 779 (8th Cir. 1981) ........ 15

Strong v. France, 474 F.2d 747 (9th Cir. 1973) ........ 17

United States v. Arthur Young & Co.,

ee )

Wessel v. Buhler, 437 F.2d 279 (9th Cir. 1971) ........ 17

Zoelsch v. Anthur Anderson & Co., 824 F.2d 27

(2 oS: rr 15

Statutes and Regulations

1S U.S.C. § 77k(a)(4) (1982 & Supp. V 1987) ........ 10

1S U.S.C. § 77x (1982 & Supp. V 1987) ........000. 5

15 U.S.C. § 78tf (1982 & Supp. V 1987) ........0... 5

IS USC. § TBD) (19BZ) ow ce ees passim

15 US.C. § 80b-3(€)(5) (1982 & Supp. V 1987)... .. :

15 U.S.C. § 80b-9(e) (1982 & Supp. V 1987)... 2.2... 5

vi

Pe a ED oe cb hn isle wes ea es

17 C.F.R. § 201.2(e)(1)(iii), (3)(i) (1988) . 2... 2. ee.

eee ee er eer passir

Other Authorities

American Institute of Certified Public Accountants,

Auditing Standards § 509.07 (1985) .......4......

American Institute of Certified Public Accountants,

Professional Standards § 150 (1985) ..............

American Institute of Certified Public Accountants,

Professional Standards § 327.13 (1985) ............

Branson, Collateral Participant Liability Under the

Securities Laws: Charting the Proper Course,

SS SPP. 0G See OP EOD vn ce wes

Bromberg & Lowentels, Aiding and Abetting

Securities Fraud: A Critical Examination,

52 AlBemy L. Rev. GS7 (19GB) . ww we ns l

Bromberg & Lowentels, Securites Fraud

& Commodities Fraud (1988) ..............0045. |

Comment, Lender Liability for Securities

Law Violations of its Borrowers,

ee ES . S ]

Comment, Lenders’ Liability for Aicing and

Abetting Rule 10b-5 Violations: The Knowledge

Standard, 41 Sw. L.J. 925 (1987) ......... 10, 11-4

2 ONG Thin Ae ko te

gal rn gg thi.

Vii

Dooley, The Effects of Civil Liability on

Investment Banking and the New Issues Market,

ee Ws as GU PE 6 6 io CHS oie eh vw wenn 13

Fischel, Secondary Liability Under Section 10(b)

of the Securities Exchange Act of 1934,

ae See ane rer 6, 12

Gilmore & McBride, Liability of Financial

Institutions for Aiding and Abetting

Violations of Securities Laws, 42 Wash.

2 eS ay eee ee ee eee 13

Gormley, The Foreseen, The Foreseeable, and Beyond --

Accountants’ Liability to Nonclients,

14 Seton Piel L.. Mev. 328 (1984) .. 22 es )

H.R. 2480, § 22, 86th Cong., Ist Sess. (1959),

reprinted in Securities Acts Amendments, 1959,

Hearings Before a Subcomm. of the House Comm.

on Interstate and Foreign Commerce on

Secunties Exchange Comm’n Matters,

ee eG 5

Note, Common Law Malpractice Liability of

Accountants to Third Parties, 44 Wash. & -

Sy Se fk. ee eer eee ee ee )

Note, Liability for Aiding and Abetting

Violations of Rule 10b-5: The Recklessness

Standard in Civil Damage Actions,

se Se oS ee 13

Note, The Recognition of Aiding and Abetting in

the Federal Securities Laws, 23 Houston

™ SX 335. QAR reer ee 7

Vill

Restatement (Second) of Torts § 552 (1977)

Ruder, Multiple Defendants in Secunties Fraud

Cases: Aiding and Abetting, Conspiracy, in

Part Delicto, Indemnification and Contribution,

120 U. Pa. L. Rev. 597 (1972)

> eel

S. 3770, § 20, 86th Cong., 2d Sess.,

106 ¢ Ong. Rec. 15,613 (1960)

Ss. Rep. No. 47, 73rd Cong., Ist Sess. 6-7 (1933)

S. Rep. No. 1757, 86th Cong., 2d Sess. (1960)

SEC Legislation: Hearings Bejore a Subcomm. of

the Senate Comm. on Banking and Currency on

So. t270,-5. ti 7a SD 2700. 3. 218i, waa: $: i162.

86th Cong., Ist Sess. 288 (1959)

718 ( On. Rec S63 | 1934)

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1989

No. $9-475

PEAT MARWICK MAIN & COMPANY,

Petitioner.

PHILIP D. ROBERTS, e7 al,

Respondents

On Petition tor a Writ of Certiorari to the

United States Court of Appeals tor the Ninth Circuit

BRIEF OF LOMAS MORTGAGE U.S.A., INC.

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE

Amicus curiae Lomas Mortgage U.S.A.. Inc. ("Lomas") is

recognized as a premier provider of mortgage servicing. with

Offices in several states and a mortgage servicing portfolio that

extends nationwide.! For a national economy to function

eftectively, federal securities laws must be interpreted in a

| Pursvant to Rule 36 of the Rules of :his Court, the parties have

consented to the filing of this brief. Petitioner's letter of consent has been

filed with the Clerk of the Court. Respondents have granted verbal

consent but were not able to supply written consent prior to this Briefs

filing because of the earthquake in San Francisco. Pursuant to advice ot

the Clerk of the Court, Respondents’ written consent will be filed with the

Court immediately upon its receipt.

consistent manner. Lomas has, as a consequence of its

nauonwide presence, a keen interest in the uniform and

reasoned development of the laws under which mortgage

banking companies must operate. Because of this interest.

Lomas brings to the Court’s attention the substantial danger in

which the decision below places reasoned development of the

nation’s securities laws.

In connection with a variety of financing transactions.

including securities offerings, the underlying security for the

capital raised is pooled mortgages. Whenever this is the case.

a protessional mortgage servicing company is needed to

efficiently and effectively service the pool of mortgages.

Lomas pertorms this service. and is described in offering

documents as having agreed to provide such services in the

future. If the decision below stands, Lomas and other

mortgage servicing companies will be subject to the great

expense of defending serious and costly litigation simpls

because such protessional services providers are identitied in

allegedly traudulent offering materials as agreeing to undertake

mortgage servicing responsibilities. Participation by sucl.

companies may become impractical or require such drastically

increased tees as to impair the feasibility of such transactions.

Particularly in light. of the proliferation of the Security

transaction “as an important financing tool for governmental

bodies as well as private concerns, the potential adverse impact

of the decision below is highly significant.

Lomas’s participation in this proceeding evidences the far- 2

reaching practical impact of the decision below. Although the

decision below dealt explicitly with accountants and attorneys.

the opinion has dramatic effects on all professional services

providers, including mortgage servicing companies, banks.

geologists, private mortgage insurance companies and othe!

companies providing various forms of insurance, and financi:!

entities serving as trustees. Inconsistent standards amone

Judicial circuits on the issues presented in this case could. as ;

tod

practical matter, impair innumerable commercial transactions.

The purpose of this brief is to provide an understanding of the

nature of the effects of the decision below on the national

commercial marketplace and explain why, in the view of

Lomas, the legal questions raised by the decision below are

critical enough to warrant review by the Court.

STATEMENT

In this case, the United States Court of Appeals tor the

Ninth Circuit held that the truthful statement that a

protessicnal had agreed to provide services in the future

contained in an allegedly misleading offering memorandum,

combined with conclusory allegations that the firm knew ot

alleged misstatements in the memorandum, creates a duty to

disclose on the part of the professional sufficient to make its

silence actionable under Section 10(b) of the Securities

Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78)(b) (1982)

(‘Section 10(b)") and Rule 10b-5 of the Securities Exchange

Commission (the "SEC"), 17 C.F.R. § 240.10b-5 (1988) ("Rule

10b-S"). Roberts v. Peat Marwick Mitchell & Co., 857 F.2d 646

(9th Cir. 1988), rev'g Roberts v. Heim, 670 F. Supp. 1466 (N.D.

Cal. 1987).

The allegedly fraudulent offering memorandum mentioned

Peat Marwick only once, in an indisputably true statement that

Peat Marwick "has agreed to perform accounting services tor

the Partnership, including the preparation of tax returns and

audited tinancial statements." The complaint alleged that "the

investors relied on Peat, Marwick’s reputation when deciding

to invest” and "they would not have invested had Peat.

Marwick disclosed the alleged fraud." Jd. at 653 (Pet. 15a).

On that basis, the decision below stated:

These facts may be sufficient to create a duty to disclose in

Peat, Marwick. Investors can reasonably be expected to

assume that an accounting firm would not consent to the

ee ene eee

4

use of its name On reports and offering memoranda it knew

were fraudulent. Thus, it may be reasonable to expect an

accountant to disclose fraud in this type of situation where

the accountant’s information is superior and the cost to the

accountant of disclosure is minimal.

Id. at 653 (Pet. 14a). The Ninth Circuit also considered

functionally parallel allegations concerning the conduct of

another professional services provider, the law firm of Houston

Harbaugh, which had rendered title opinions included within

the offering memorandum. Unlike its opinion as to. the

accounting firm, the decision below affirmed summary

judgment tor the law firm:

Unlike the allegations with respect to Peat, Marwick. no

duty with respect to Houston Harbaugh could possibly be

established by the facts alleged in the complaint . . . Even

it the facts alleged are true, Houston Harbaugh’s duty

cannot extend to disclosing the information the investors

wanted when it was hired only to determine marketubility

of utle. Otherwise, a party could be liable for unlimited

information even though it would be well beyond the matter |

tor which it was retained.

Id. at 654 (Pet. i5a-l6a). The decision below also attirmed.

without discussion, the district court’s dismissal of claims

against technology consultants in enhanced oil recovery. on the

basis that the "mere provision of information” and expertise to

a primary violator in the absence of allegations explaining how

the experts caused the fraud was insufficient to state a clainy

See Roberts, 670 F. Supp. at’ 1483

The Ninth Circunt denied a petition for rehearing anc

suggesuon tor rehearing ea banc without opinion (Pet. 18a).

5

REASONS FOR GRANTING THE PETITION

The subject Petition presents issues that are extraordinarily

ripe for this Court’s review. Despite the tota! absence of an

explicit basis for a private action for aiding and abetting under

either Section 10(b) or Rule 10b-5, the Court’s reservation of

decision concerning whether such an action is permissible,°

specific congressional intent against such implying such an

action,> and adequate remedies against such behavior in

criminal and administrative enforcement actions,? the lower

2 The Court has explicitly reserved decision on the quesuons ot!

“whether civil liability for aiding and abetting is appropriate” and “the

elements necessary to establish such a cause of action.” Ernst & Erase v.

Hociifelder, 425 U.S. 185, 192 n.7 (1976);- see Herman & MacLean \.

Huddleston, 459 U.S. 375, 379 n.5 (1983).

3 In 1989, Congress rejected a bill that would have made it unlawful

for anvone to aid or abet a violation of the securities laws. See H.R. 2480,

§ 22, 86th Cong., Ist Sess. (1959), reprinted in Securities Acts Amendments,

1989, Hearings Before a Subcomm. of the House Comm. on Interstate ana

Foreign Comnterce on Securities Exchange Comm'n Matters, 86th Cong... Ist

Sess. 89, 93, 170 (1959). The SEC agreed that "no civil liability ts

intended.” SEC Legislation: Hearings eae a Subcomm. of the Senate

Comm. on Banking and Currency on S. 1178, S. 1179, S. 1180, S. 118). and

S. 11/82, 86th Cong., Ist Sess. 288, 288, 370 (1959). In 1960, Congress again

rejected aiding and abetting legislation. See S. 3770, § 20, 86th Cong., 2d

Sess., 106 Cong. Rec. 15,613, 15,614 (1960); S. Rep. No. 1757, 86th Cong..

2d Sess. (1960).

+ The SEC has authority to discipline brokers that aid or abet

violations of the securities laws, see Act §§ 15(b)(4)(E), 15(b)(1), 15(b)(6)

(allowing SEC to revoke registration of brokers), and to discipline

investment advisors that aid or abet such violations, see Investments

Advisers Act, §§ 203(¢)(5) and § 209(e), 15 U.S.C. §§ 80b-3(e)(5), S0b-

Qe) (1982 & Supp. V 1987). The SEC can deny the right to practice

before the Commission to any attorney that has aided or abeited such a

violation. See 17 C.F.R. § 201.2(e)(1)(iii), (3)(1) (A988). Title 18 of the

federal criminal code also criminalizes aiding and abetting ot securities

violations. See 18 U.S.C. § 2 a) (1982), 15 U.S.C. §§ 7Sff, 77x (1982 &

Supp. V 1987)

6

federal courts have almost unanimously allowed such private

actions under Section 10(b) and Rule 10b-5.> With the

decision below, the lower courts’ exercise in judicial legislation

has finally gone awry. The Ninth Circuit has split from the

majority by permitting a professional services provider to be

held for trial on fraud charges conclusorily drawn trom the

single truthful disclosure that the professional would provide

services to the issuer of securities in the future. The resultani

disarray among the circuits, in combination with the flexibility

in forum choice accorded plaintitfs in securities fraud actions,°

threatens to undermine the commercial — practicabilities

underlying national securities offerings. For the reasons that

follow, the Court should review the decision below.

Il. The Decision Beiow Endangers A_ Consistent

Nationwide Functioning Of Federal Securities Laws By

Imposing Unprecedented Duties On_ Professional

Services Providers

The tederal securities laws present a balance between the

goal of promoting equality of information among potent. |

Ss

Although amucus limits itsel! in this brief to the question ©!

Whether the conduct in this case can permissidly constitute aiding an

abetung a securitics violauion, it agrees with Petitioner that the writ shoulc

also be granted to resolve the open question of whether aiding and abetun

ability is permissible at all in a private action. Accord, Bromberg &

Lowentels, Aiding and Abetting Securities Fraud: A Critical Examination, 5°

Albany L. Rev. 637, 773 (1988) (implied action should not be recognized):

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

eict of 1934, 69 Calif. L. Rev. SO (1981) (secondary liability is invalid):

Ruder, Muluple Defendants in Securities Fraud Cases: Aiding and Abetting

Conspiracy, in Part Delicto, Indemnification and Contribution, 120 U. Pa. |

Rey. S97, O46 (1972) (chairman of SEC arguing against such liability)

© Securities claims are, perhaps uniquely, subject to being instituted

in “the widest possible choice of forums,” Somerville vo Major Exploration

inc., 576 F. Supp. 902, 908 (S.D.N Y. 1983).

5

investors’ and the equally important goal of not interfering

with the "honest business" that permits a market in securities

to exist.8 The decision below endangers this delicate

equilibrium by creating new and unprecedented duties of

disclosure running from professional services providers to the

investing public at large. By creating such duties, the decision

below threatens to convert every professional whose conduct

touches a securities offering into a guarantor for the fidelity of

every aspect of that undertaking.

A modern securities offering cannot be accomplished

without the assistance of scores of professional services

providers. Accountants, attorneys, bankers, brokers, engineers,

financial printers, geologists, lenders, mortgage servicing

companies. and other professionals are necessary parties. The

participation of such professionals can range from pervasive

assistance in crafting the offering to a mere pledge to be

available for the provision of services in the future. The latter

role, while minimal in character, is absolutely essential to the

The "primary purpose of the Securities Exchange Act was lo. . .

provide fair and honest mechanisms for the pricing of securities [and] to

assure that dealing in securities is fair and without undue preferences oF

advantages among the investors." Radzanower v. Touche Ross & Co., 426

U.S. 148, 155 (1976); see Securities Exchange Comm'n v. Capital Gains

Research Bureau, Inc.. 375 U.S. 180 (1963) (purpose is “to substitute a

philosophy of full disclosure for the philosophy of caveat emptor and thus

to achieve a high standard of business ethics in the securities indusiry’).

S As stated by President Roosevelt, "[t}he purpose of the legislation,

| suggest, is to protect the public with the least possible interference to

honest business.". S. Rep. No. 47, 73rd Cong., Ist Sess. 6-7 (1933)

Concern for the welfare of business pervades the legislative history of the

1934 Act. See Note, The Recognition of Aiding and Abetting in the Federal

Securities Laws, 23 Houston L. Rev. 821, 832 n.58 (1986). For example.

Congressman Wolverton stated that Congress understood "the necessity ol

taking every precaution to preclude even the possibility of curing one evil

by creating another or greater one" in avoiding legislaon that “would

adversely affect the business enterprises of our nation.” 78 Cong. Rec. 7863

(1934).

S

operation of the national securities marketplace. Without

assurance that a professional services provider will be available

to provide future financial reports or service a pool of

mortgages, tor example, an offering would be entirely

ineffectual.

Although such assurances of future services have become a

commercial necessity, the decision below threatens to make

provision ot such assurances practically impossible — or

prohibitively expensive. The decision permits a plaintiff to

make conclusory securities fraud allegations -- based wholly on

speculation and surmise -- on the basis of a professional's

pledge to provide future services. The decision below imposes

a duty of disclosure running from the professional to al!

potential investors, reasoning that the professional would not

permit its name to be mentioned had it not assured itself o!

the material truth of all aspects of the offering, whether in its

realm of expertise or not. See Roberts, 857 F.2d at 653 (Pet.

ida). Under the decision below, two likely outcomes. exist

First, professionals retained to perform future services wil

decline to be listed in amy offering memoranda. thus

diminishing the flow of information to the investing public

rather than maximizing it, contrary to the goal of the securities

laws. Cf. supra note 7. Second, professionals retained t

perform specitic and limited services in the future would -be

torced to undertake a due diligence investigation ot all aspects

ot the offering -- not merely their expertised portion -- before

consenting to the use of their names. This expanded duty.

clearly required under Roberts, would require tremendous

duplication of effort among the many professionals who mus!

provide services to accomplish a_ securities offering.

Accountants, bankers, and mortgage servicing companies.

among others, would al! be required to perform identical!

pervasive investigations of all aspects of the offering betore

permitting their names to be used in association with it. The

enormous cost of such investigations would add substantially &

the cost of all securities offerings

re)

The scope of the duty created by the decision below can be

best understood by comparing the duty it seeks to impose on

Peat Marwick to the established duty the common law imposes

on accountants. It is established that an accounting firm has

a "narrow duty of disclosure,” Pegasus Fund, Inc. v. Laraneta,

617 F.2d 1335, 1340 (9th Cir. 1980), under which it has "no

duty to see to correction of portions of the prospectus other

than the financial statement it prepared." J/7T, an Intl Inv.

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

J.). Even under more expansive theories of accountant duties

to third parties, "the accountant does not become an insurer

for every disappointed investor"? because an accountant’s

duties are limited to the application of accounting standards to

the particular aspect of the offering for which the accountant

was retained:!0

9 Note, Common Law Malpracuce Liability of Accountants to. Thre

Parties, 44 Wash. & Lee L. Rev. 187, 209 (1987), citing American Institute

of Certified Public Accountants, Professional Standards § 327.13 (1985),

Even under those jurisdictions following the approach of the Restatement

(Second) of Torts § 552 (1977), a professional only owes a duty of care to

a third party if (1) the third party is among the limited class of people the

professional intended to influence and (2) the type of transaction was such

that the professional intended to influence third parties. Note, supra, at

190 n.16,

10 An accountant does not guarantee that audited financial statements

are correct, but assures investors that an audit conducted under generally

accepted accounting principles and standards did not uncover any materia!

errors. See American Institute of Certified Public Accountants, Professional

Standards § 150 (1985); American Institute of Certified Public Accountants,

Auditing Standards § 509.07 (1985). Although an independent accountant’s

function is to assure certainty in the investing process, see United States \

Arthur Young & Co., 465 U.S. 805, 817-18 (1984), an accountant’s role ts

limited by the accountant’s lack of control over the chent’s records and

bookkeeping processes. See Gormley, The Foreseen, The Foresceatle, and

Beyond -- Accountants’ Liability to Nonclients, 14 Seton Hall L. Rev. S25,

553 (T9S4)

10

It is not the law that whenever an accountant discovers that

his client is in financial trouble he must blow the whistle on

the client for the protection of investors -- so that [the

detendant accounting firm] should have taken out an

advertisement in the Wall Street Journal stating that [its ,

client] was losing money, rather than waiting to report this

in the next audit report. That would be an extreme theory

of accountants’ liability, and it is one we decline to embrace

aS an interpretation of the common law of Illinois .

Laneo Ventures v. Laventhol & Horwath, 876 F.2d 1322, 1327

(7th Cir. 1989). Even as a principal participant in the issuance

of a prospectus under Section 11 of the Securities Act of 1933.

an accountant would be responsible only for those portions ot

the prospectus subject to the accountant’s expert review.!! In

stark contrast, under the decision below an accountant has «

duty to investigate the material truth of all representations

contained in an offering memorandum and, if any

representation is materially false, has a further duty to intorm

the investing public of that falsity. See Roberts, 857 F.2d at

653 (Pet. 14a). Such a holding is tantamount to "implication

of a duty to be one’s brother’s keeper, a duty unknown to

common or tederal securities law."!* Such an advanced

1 See Herman & MacLean v, Huddleston, 459 U.S. 378, 381 (1983)

Accountants are liable under Section 11 only for those matters which

purport to have been prepared or certified by them"). Under the plain_

language of Section 11, “every accounts Mt, engineer, or appraiser, or any

person whose profession gives authority to a statement made by him, who

has with his consent been named as having prepared or certified any part

of the registration statement, or as having prepared or certified any report

or Valuation which is used in connection with the registration statement

Is Subject to suit’ "with respect to the statement in such registration

statement, report, or valyation, which purports to have been prepared o!

certitted by himf.]" 1S U.S.C. § 77k(a)(4) (1982).

! Branson, Collateral Partic ipant Liability Under the Securities Law:

Charting the Proper Course, 65 Or. L. Rev. 327, 343 (1986): see Comment,

Lenders Liebilin for Aiding and Abetneg Rule 10b-S Violanons: Tiv

1]

investigatory duty certainly has no place in federal securities

law.

Contrary to decisions of this Court, the decision below

implies an expansive duty directly from the securities laws

rather than from a pre-existing independent duty owed by the

accountant to the potential investor. This Court has insisted

upon the presence of a duty: independent of securities law

before nondisclosure can constitute a violation of securities law.

See Chiarella v. United States, 445 U.S. 222, 230 (1980) C'such

liability is premised upon a duty to disclose arising from a

relationship of trust and confidence betveen parties to a

transaction"); Dirks v. Securities Exchange Comm'n, 463 U.S.

646, 653-54 (1983) (a “duty arises from the relationship

between the parties"); see also Basic, Inc. v. Levinson, 108 S.

Ct. 978, 987 n.17 (1988). The decision below, in contrast,

derives a duty to disclose from alleged knowledge of the fraud

itself, regardless of any independent duty. See Roberts, 857

F.2d at 653 (Pet. 14a). This derivation of a duty from the very

law allegedly violated produces a "circular" result:

When the nature of the offense is a failure to “blow the

whistle.” the defendant must have a duty to blow the

whistle. And this duty does not come from § 10(b) or rule

10b-5; if it did the inquiry would be circular. The duty

must come from a fiduciary relation outside securities law,

Schlifke v. Seafirst Corp., 866 F.2d 935, 948 (7th Cir. 1989),

quoting Barker v. Henderson, Franklin, Stames & Holt, 797 F.2d

490, 495-96 (7th Cir. 1986) (emphasis in original) (Easterbrook,

J.). The duty imposed by the decision below, then> has no

rational basis and cannot form the basis for imposition ot

hability.

Knowledge Standard, 41 Sw. L.J. 925, 941 (1987) ("Such a rule of law could

devastate the commercial banking industry’).

12

The imposition of the Roberts duty of investigation and

disclosure 1s inconsistent with business realities accompanying

the valid workings of the national securities marketplace.

Imposition of this unprecedented duty on professional services

providers will require such professionals to be ‘eld for trial on

the basis of no more than a bare allegation based wholly on

the mere mention of a professional’s name in conjunction with

provision of future services. The Court has recognized that:

(L}itigation under Rule 10b-S presents a danger ot

vexatiousness different in degree and in kind from that

which accompanies litigation in general . . . even |

complaint which by objective standards may have little

chance of success at trial has a settlement value to the

plaintitt out of proportion to its prospect of success at tria!

so long as he may prevent the suit from being resolved

against him by dismissai or summary judgment.

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739-45

(1975): see Fischel, supra note S, at 102 ("[e]ven if such a claim

cannot be proved at trial, it may have significant settlement

value). The expansive new duties created by the decision

below breed vexatious litigation for professionals engaged in

ordinary business activity, with all the expense and complexities

concomitant to that litigation. This Court should preserve the

effective functioning of the national securities market by

reviewing the decision below and correcting its imprope!

imposition of unprecedented new duties on protessional

services providers.

13

Il. The Decision Below Conflicts With Decisions Of Other

Circuits, Making National Securities Offerings Difficult

As A Practical Matter

For the national market in securities offerings to function

effectively, securities laws must be interpreted with a high

degree of uniformity.'% As the Court has recognized, the

securities laws must be interpreted to remove uncertainties and

not in an ad hoc manner. See Pinter v. Dahl, 108 S. Ct. 2063,

2081 (1988): see also Landreth Timber Co. v. Landreth, 47)

U.S. 681, 696 (1985). The decision below, and the Eleventh

Circuit authority on which it relies, decimate a_ fragile

uniformity that had developed among the lower courts

concerning whether inaction can constitute “substantial

assistance” to a primary securities violatons without an

independent pre-existing duty. The decision below creates a

clear conflict between the Ninth and Eleventh Circuits and

each other circuit considering the question, and even stands in

conflict to the SEC itself. The Court should review the

decision below to impose a uniform construction upon federal

securities law and to protect those who participate in the

13 As commentators have pointed out, professionals parucipauing sn

the securities market "must have some framework within which to pattern

their actions. The theory of an effective marketplace assumes knowledy.

of the legal rules within which cach individual must operate. A failure to

define clearly these legal rules not only results in an inefficient marketplace

but also allocates risks unfairly." Gilmore & McBride, Liability of Financia!

Institutions for Aiding and Abetting Violations of Securities Laws, 42 Wash.

& Lee L: Rev. 811, 851 (1985). See A. Bromberg & L. Lowentels, Securires

Fraud & Commodities Fraud, § 8.5(615) at 8:520 (1988); see also Comment,

Lenders’ Liability for Aiding and Abetting Rule 10b-5 Violations: The

Knowiedge Standard, 41 Sw. L.J. 925, 941 (1987); Comment, Lender Liability

for Securities Law Violations of its Borrowers, 38 Okla. L. Rev. 133, 136-42

(1985); Note, Liability for Aiding and Abetting Violanons of Rule 10b-5: The

Recklessness Standard in Civil Damage Actions, 62 Tex. L. Rev. 1087 (1987);

Dooley, The Effects of Civil Liability on Investment Banking and the New

Issues Market, S8 Va. L. Rev. 776 (1972).

14

national securities market from being subject to fragmented

and varying duties among the various Circuits.

The clarity of the conflict between the decision below and

established precedent can be illustrated by a brief survey ot

recent opinions of the circuits and the SEC:

.

The First Circuit has found that evidence showing that

certain individuals had allowed their names to be listed in

an allegedly traudulent offering memorandum was

insufticient to impose aider and abettor liability. See Clean

\. Perfectune, Inc., 700 F.2d 774, 779 (1st Cir. 1983).

The Second Circuit has determined that inaction can give

rise to aider and abettor lability "only when there is i

conscious Or reckless violation of an independent duty v

act) and has held-that an accountant “had no independent

Guty to see to the correction of portions of the prospectiis

Other than the financial statement it prepared.” See IIT, a.

Jinti Inv. Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980)

The Third Circuit has determined that the handling of stock

purchases by brokers did not constitute "substantia:

assistance Of securities fraud even if the brokers hac

Known that the purchases were effected to defraud third

parties. See Landy v. Federal Deposit Ins. Corp., 486 F.2\

~

139, 163 (3d Cir. 1973), cert. denied, 416 U.S. 960 (1974).

{he Fitth Circuit has recently held that no cause of action

exists When a jaw tirm acting as underwriters’ counse!

undertook a due diligence investigation, discovered fraud.

and tailed to disclose such traud to investors. See Abell 1.

Wright, Lindsey & Jennings, 858 F.2d 1104 (Sth Cir. 1988

ceri. denied in relevant part, 109 S. Ct. 3242 (1989). The

court also-held that the law firm had not "assumed any

duties to these bondholders merely by allowing its name t

15

be included in the final offering statement." Jd. at 1122.!4

- The Seventh Circuit has affirmed the dismissal of fraud

claims against an accountant who not only lent his name to

a memorandum but approved an allegedly fraudulent

report. See LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d

928, 932-33 (7th Cir. 1988); see also Schlifke v. Seafirst

Corp., 866 F.2d 935, 947-48 (7th Cir. 1989).

- The Eighth Circuit has found that the involvement of an

attorney rendering opinions on the legality of alleged sales

of securities was "only tangential” and insufficient to state a

claim. See Stokes v. Lokken, 644 F.2d 779, 784 (8th Cir.

1981).

- The Eleventh Circuit has held that a lender could not be

held liable as an aider and abettor based on its failure to

disclose its knowledge that the issuer was financially

unsound. See Schneberger v. Wheeler, 859 F.2d 1477, 1480-

81 (11th Cir. 1988), cert. denied, 109 S. Ct. 2433 (1989).

But cf. Rudolph v. Arthur Anderson & Co., 800 F.2d 1040

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

below).

- The District of Columbia Circuit has held that) an

accounting firm mentioned in investment — solicitation

materials could not be subject to lability. See Zoelsch v.

Anhur Anderson & Co., 824 F.2d 27, 35-36 (D.C. Cir. 19387).

14 The Fifth Circuit has also held that no cause of action exists tor

aiding and abetting when a bank loaned funds to allegedly defrauded

investors and authorized use of the bank’s loan documents in investor

packages. See Bane v. Sigmundr Exploration Corp., 848 F.2d 579, 582. (Sth

Cir. 1988). The court held that the evidence "will not support: an

inference” that the bank “sought to cloak the principal defendants in an

aura Of respectability or reliability and thereby rendered knowing substantial

assistance to the principals.” Id.

16

- The SEC has held that a law firm could not be lable as an

aider and abettor even though it had actually discovered

fraud but failed to correct public misconceptions concerning

its client. See In re William R. Carter, [1981 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 9 82,847, 84,166 (SEC

Feb. 28, 1981).

The confusion among the lower courts is further illustrated

by the vacillation exhibited by the Eleventh and Ninth Circuits.

In the decision below, the Ninth Circuit relied upon Rudolph

\. Arthur Anderson & Co., 800 F.2d 1040 (11th Cir. 1986), cert.

dented, 480 U.S. 946 (1987), in which the court found that

aiding and abetting liability could be premised on an

accountant’s failure to disclose alleged fraud when the

accountant allegedly permitted a prior accurate audit to appear

in a placement memorandum even though it knew or should

have known’ the memorandum contained — unrelated

misrepresentations. See id. at 1044-46. Two vears later.

however, the Eleventh Circuit determined -- in an opinion that

did not mention Rudolph -- that a lender could nor be held

liable as an aider and abetter of a securities violation even

though bank o1ficers actually testified that the bank (1) knew

its financing program would make the investment more

aliractive: (2) possessed the issuer’s financial statements and

knew the issuer had a $14,000,000 working capital deticit: (3)

knew that the issuer had been sued by an investor: and (4)

had each specific investor sign a letter waiving any claims

against the lender. See Schneberger v. Wheeler, 859 F.2d 1477.

1480 (11th Cir. 1988), cert. denied, 109 S. Ct. 2433 (1989). The

rauionale underlying the Rudolph decision and the Schneberger

decision simpiv cannot be meshed. No doubt the Eleventh

Circuit is in a state of internal conflict concerning the proper

interpretation Of “substantial assistance” in an implied action.

17

The Ninth Circuit is in no less a state of internal confusion.

Although the decision below permits a finding of substantial

assistance without a_ pre-existing independent duty to

investigate and disclose, prior decisions of the Ninth Circuit

permit no such liability. In Strong v. France, 474 F.2d 747 (9th

Cir. 1973), and Wessel v. Buhler, 437 F.2d 279 (9th Cir. 1971).

considerably greater conduct was undertaken by each

professional services provider and no cause of action existed

under either set of facts. In Strong, even though two

defendants permitted their name and reputation to be used in

solicitation of an offering -- and one defendant even confirmed

the promoter’s "unquestionable character and reliability" -- the

Ninth Circuit found "no facts in this case which would impose

any duty of disclosure." Strong, 474 F.2d at 752. In Wessel, an

accountant took substantially more actions in support of an

offering than did Peat Marwick in the case before the Court,

vet the Ninth Circuit held that "there is not a scrap ot

authority supporting this extraordinary theory of Rule 10b-5

liability, and we will not supply any in this case." Wessel, 437

F.2d at 283. Indeed, the Ninth Circuit noted that "the

exposure of independent accountants and others to such vistas

of liability, limited only by the ingenuity of investors and their

counsel, would lead to serious mischief." Jd.

The "serious mischief” the Ninth Circuit predicted may be

illustrated by the internally inconsistent adjudications within the

decision below. First, a law firm that had actually performed

past services was limited in its duty of disclosure to the narrow

area of its expertise -- rendering title opinions. “Otherwise, a

party could be liable for unlimited information even though it

would be well beyond the matter for which it was retained.”

Roberts, 857 F.2d at 654 (Pet. 15a-l6a). The decision below

also affirmed, without any discussion, the district’ court's

dismissal of technological consultants because the "mere

provision of information" on which the allegedly fraudulent

offering was based cannot support liability. Roberts, 670 F.

Supp. at 1483. As to attorneys and consultants, the Roberts

18

duty appears to be limited to the area of expertise for which

the professionals were retained. For accountants, however, the

Roberts duty of investigation and public disclosure pervades

every aspect of an offering. Such varying degrees of duty in a

single opinion, without a word of discussion concerning why

one professional merits a narrow duty and another professional

merits a broad one, illustrates the unworkability of the Roberts

analysis and underlines the importance of the Court accepting

this case for review. — ,

CONCLUSION

For the foregoing reasons, the petition for a writ ot

certiorari should be granted.

Respectfully submitted,

Morris. Harrell

Harriet E. Miers

Orrin Harrison III*

Of Counsel: Kurt A. Wimmer

Alan R. Bromberg LOCKE PURNELL RAIN HARRELL.

Professor of Law (A Protessional Corporation)

3315 Daniel 2200 Ross Avenue, Suite 2200

Dallas, Texas 75275 Dallas, Texas 75201-6776

(214) 692-2584 (214) 740-8000

Counsel for Amicus Curiae

October 22. 1989 *Counsel of Record