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

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## Record

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

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_0346%3A3. Public record. Not legal advice.