Opposition Brief — Heritage Capital Corp. v. Deloitte, Haskins & Sells

FILED

s

No. 93-154 SEP 1 1993

as

UFTILE & Trt Whe

IN THE yah STEER

Supreme Court of the Anited States

OCTOBER TERM, 1993

HERITAGE CAPITAL CORPORATION; NORTH RIVERSIDE

VENTURE INC.; AND VENTURTECH II, LIMITED

PARTNERSHIP,

Petitioners.

V.

DELOITTE HASKINS & SELLS.

}

Re Sponde nt.

Brief In Opposition To

Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Fourth Circuit

BRIEF IN OPPOSITION

JAMES T. WILLIAMS, JR.”

JEFFREY E. OLEYNIK

DANIEL M. SROKA

Of Counsel: BROOKS, PIERCE, MCLENDON,

HUMPHREY & LEONARD

Suite 2000 Renaissance Plaza

230 North Elm Street (27401)

Post Office Box 26000

Greensborv, NC 27420

(919) 373-8850

BARBARA A. MENTZ

Associate General Counsel

DELOITTE & TOUCHE

1633 Broadway, 9th Floor

New York, NY 10019-6754

(212) 492-3884

Attorneys for Respondent

*Counsel of Record

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

mry

1.

QUESTIONS PRESENTED

IS AN AUDITOR’S REPORT TO A CLOSELY HELD COM-

PANY WHICH THE AUDITOR KNOWS AND INTENDS

TO BE SOLELY FOR THE BENEFIT OF ITS CLIENT

DEEMED TO BE A REPRESENTATION BY THE AUD-

ITOR TO ALL POTENTIAL FUTURE INVESTORS OF

THE AUDIT CLIENT FOR PURPOSES OF A CLAIM OF

A PRIMARY VIOLATION UNDER SECTION 10(b)?

CAN THERE BE AIDING AND ABETTING LIABILITY

UNDER SECTION 10(b) WHERE THE DEFENDANT

OWED THe PLAINTIFF NO FIDUCIARY OR OTHER

DUTY AND DID NOT TAKE ANY AFFIRMATIVE AC-

TION TO ASSIST THE ALLEGED PRIMARY VIOLA-

TION?

il

LIST OF PARTIES TO THE PROCEEDINGS IN THE

UNITED STATES COURT OF APPEALS FOR THE

FOURTH CIRCUIT

Deloitte Haskins & Sells is now known as Deloitte

& Touche.

rns

iil

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES. ...........:cccccsssseeceeseeeseeenees iv

STATEMENT OF THE CASE ...........cccssseeeeeeeeeeeeeeees

REASONS FOR DENYING THE WRIT ..............002++ 4

A. The Courts Below Properly Applied The

Standard For Summary Judgment And

Found That Petitioners Failed To Establish

The Basic Elements Of Either A Primary Or

Secondary Section 10(b) Claim .............008

B. For P ses Of A Primary Section 10(b)

Claim, There Is No Authority, Much Less A

Split Of Authority, As To Petitioners’ Prop-

osition That A Report Issued By An Auditor

To Its Audit Client Is Deemed To Be A Rep-

resentation Made To All Future Investors .. 13

C. There Is No Split Of Authority On The Ele-

ments Of An Aiding And Abetting Liability

Claim As Presented By The Facts Of This

Sa eh clipnsswansuassanbsencnencsscenensss 19

1. Absent A Duty Of Disclosure, Petitioners

Had To Prove That DH&S Acted With

High Conscious Intent And A Specific Mo-

tivation To Aid A Fraud In Order To Pre-

vail On Their Aiding And Abetting

ta sc cascecssbeenedbasesoxarecurees 21

2. In Pring, The Allegations Of Secondary

Liability Under Section 10(b) Are Fun-

damentally Different Than Petitioners’ Al-

legations In The Present Case ................ 26

NUMER TINIIIES “couiccesiiapenvasrasetsrnrsecesnasecsscsvenvsensesesnszess 28

~]

iv

TABLE OF AUTHORITIES

CASES Page

Ades v. Deloitte & Touche, 799 F. Supp. 1493

(S.D.N.Y. 1992) oo cccssesssssectsescctcce 15

Admiralty Fund v. Hugh Johnson & Co., 677 F.2d

1801 (9th Cir, 1982) occ, 24

Akin v. Q-L Invest. Inc., 959 F.2d 52] (5th Cir.

ROOD: sixinsrscoronnvinsnnvsitsner snbvessassevetunctveccccmicas,.o, 14

Barker v. Henderson, Franklin, Starnes & Holt, 797

F.2d 490 (7th Cir. DO ibieeenriinisaneetan. 21,23

Basic, Inc. v. Levinson, 485 U.S. 224 (1988) ........ 20

Celotexr Corp. v. Catrett, 477 U.S. 317 (1986) ....... 7

Chiarella v. United States, 445 U.S, 229 (1980) ... 20,21

Cleary v. Perfectune, Inc., 700 F.2d 774 (1st Cir.

EMI) sssowssnntabsantsdanasvntadeonssensisinasarcsesinssecia...,. 22

DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.),

cert. denied, 498 U.S. 94] EEDBD cesiceverersscese 7,19,20

Dirks v. United States, 463 U.S. 616 (1983) -......... 20,21

FDIC v. First Interstate Bank, 885 F.2d 423 (8th

SMO crcrcsancesietbnucssiuessagssencsseescaueascic, 27

Farlow v. Peat, Marwick, Mitchell &- Co., 956 F.2d

982 (10th Cir, 1992) occ 23

First Interstate Bank of Denver, N.A. v. Pring, 969

F.2d 891 (10th Cir. 1992), cert. granted sub

nom. Central Bank of Denver v. First Inter-

state Bank of Denver, N.A., 1992 WL 353224

(OD sscruinsssreinseenscnnssenseesipvrtorsoasciveassesesccce.., 20,25,26

Frymire-Brinati v. KPMG Peat Marwick, __ F.2d

—, 1993 U.S. App. LEXIS 19657 (7th Cir.

EDIB) sonencscvseneseravernscoarasnansnsseusayseconecoesesss....., 11,15,16

Fund of Funds, Ltd. v. Arthur Andersen & Co.,

045 F. Supp. 1314 (S.D.N.Y. | | Raa Rea 15

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

cert. denied sub nom. Smith v. Harmsen, 464

U.S. 822 (RM tin rniccna Great 23,24

ie EOE aE AE wns Be ict

Table of Authorities Continued

Page

Heritage Capital Corporation; North Riverside Ven-

ture Inc.; and Venturtech II, Limited Partner-

ship v. Deloitte Haskins & Sells, (No. 92-1788,

4th Cir. 1992), affg, 790 F. Supp. 576

RITE Ass BOUT evtktnatcsceiiericitdteaelee roe 1

IIT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) ..... 21,22,24

Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gil-

bertson, 111 S. Ct. 2778, 115 L.Ed.2d 321

GRUPPEN succxxuseisssssnathansnihedasispeieinducersnueuasicisloucisies 2,3

Levine v. Diamanthuset, Inc., 950 F.2d 1478 (9th

Re WIRE ehdneosinsni beeen cnso as 27

Martin v. Pepsi Cola Bottling Co., 639 F. Supp. 931

YER NOD isk ecaatscsrsoictseceseienpiserchecesadeceiocc. 21

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587 (1986) ooo ecccccccccccceeesceesee. 7

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

denied, 474 U.S. 1072 CIMINO -wesiritevedcsetsetasceecces 20

Monsen v. Consolidated, Dressed v. Beef Co., Inc.,

079 F.2d 793 (3d Cir.), cert. denied, 439 U.S.

EF MWOOU sericea Giavickiniusen aici ke 22,24

Robin v. Arthur Young & Co., 915 F.2d 1120 (7th

Cir. 1990), cert. denied, 113 L.Ed.2d 250, 111

SB. CE, TBE CRGDI) vocccvicsssscscsascSbeasasscsescesessecc,... 20

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

(11th Cir. 1986), cert. denied, 480 U.S. 946

GEE -cssceracsemiuibaunccntacsapasa cca eee 14

Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991),

cert. denied, 112 S. Ct. 1475 (1992) ....... 19,20,21,27

Schneberger v. Wheeler, 859 F.2d 1477 (ilth Cir.

1988), cert. denied, 490 U.S. 1091 (1989) ....... 23

Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir.

1981), cert. denied, 455 U.S. 938 i 16

Sioux Ltd. Securities Litigation v. Coopers & Ly-

brand, 901 F.2d 51 (5th Cir. 1990) ................ 16

Table of Authorities Continued

Page

Sioux, Ltd. Securities Litigation v. Coopers & Ly-

brand, 914 F.2d 61 (5th Cir. 1990) we. 16

United States v. Arthur Young, 465 U.S. 805

I eis tx i cate ipadbckcatecasveccs i tieiren Nkacahirne sain 18

Wiley v. Hughes Capital Corporation, 746 F. Supp.

RNa RNS res 14

Woodward v. Metropolitan Bank of Dallas, 522 F.2d

RR BOON ooo acc syn is ual Coed bes dads 21,22,24,25

Zoelsch v. Arthur Andersen & Co., 824 F.2d 27

CE NT oo cack ies sis tusk donczéncesatavsilexceseces 23

STATUTES

Med es sa pasoupetasonecuanwanelucces 3

BI Fo ID ov sosnc vc i'cacscnianadasnsdeceescossvanoevaunensces 2

TN oh oot his ads Sounecessseicsndedeaavarceniisecs 2

N.C.Gen.Stat. § 78A-56 ..........cccssccsssscsccccccceeseseeeeees 4

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

HERITAGE CAPITAL CORPORATION; NORTH RIVERSIDE

VENTURE INC.; and VENTURTECH II, LIMITED

PARTNERSHIP,

Petitioners,

v.

DELOITTE HASKINS & SELLS,

Respondent.

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

Respondent Deloitte Haskins & Sells respectfully

submits this Brief in Opposition to the Petition for a

Writ of Certiorari to review the opinion of the United

States Court of Appeals for the Fourth Circuit in

Heritage Capital Corporation; North Riverside Ven-

ture Inc.; and Venturtech II, Limited Partnership v.

Deloitte Haskins & Sells, (No. 92-1788, 4th Cir. 1993)

because the Petition does not present any special and

important reasons that warrant review by this Court.

STATEMENT OF THE CASE

Petitioners commenced this action by filing a com-

plaint on December 31, 1988, in the United States

District Court for the Eastern District of North Car-

olina. The complaint alleged that Respondent, Deloitte

Haskins & Sells (“‘DH&S’’), an independent account-

ing firm which had audited certain year-end financial

statements prepared and issued by Learning Re-

sources, Inc. (‘‘LRI’’), violated Section 12(2) of the

Securities Act of 1933 and Section 10(b) of the Se-

curities Exchange Act of 1934, 15 U.S.C. §78G)\b),

and Rule 10b-5 promulgated thereunder (hereinafter

referred to as the ‘‘Section 10(b) claims’’). The com-

plaint further alleged that DH&S was liable for vio-

lating Section 78A-56 of the North Carolina Securities

Act and for common law fraud, breach of contract,

professional negligence and breach of fiduciary duty.

On October 3,.1991, the District Court granted

DH&S’ motion for summary judgment on Petitioners’

federal securities law claims, holding that (i) their

Section 12(2) claims were time-barred by the statute

of limitations set forth in Section 13 of the 1933 Act,

and (ii) their Section 10(b) claims were time-barred

by application of this Court’s decision in Lampf, Pleva,

Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct.

2773, 115 L.Ed.2d 321 (1991).

In January, 1992, DH&S moved for summary judg-

ment on Petitioners’ state law claims and Petitioners

simultaneously moved for summary judgment with re-

spect to their negligent misrepresentation and third

party beneficiary breach of contract claims. In an or-

der dated April 1, 1992, the District Court concluded

that there were no genuine issues of material fact

and granted DH&S’ motion on all state law claims

(and concomitantly denied Petitioners’ motion), hold-

ing that:

1. DH&S did not owe a duty to Petitioners under

North Carolina law governing Petitioners’ neg-

~“

3

ligent misrepresentation and third party ben-

eficiary breach of contract claims because there

was no evidence that DH&S intended or knew

that its audit work would be relied upon by

anyone other than its audit client, LRI. Ap-

pendix to Petition at 26a, 29a, 30a, 34a.

2. There was no evidence that DH&S engaged in

any conduct with the scienter necessary to

maintain an action for common law fraud un-

der North Carolina law. Appendix to Petition

at 35a.

3. There was no evidence that DH&S engaged in

any conduct with an intent to influence or con-

trol Petitioners’ investment decisions; conse-

quently, there was no basis under North

Carolina law to establish that DH&S owed

Petitioners a fiduciary duty. Appendix to

Petition at 37a.

4. There was no evidence that DH&S acted with

a conscious intent or a specific motivation to

assist an alleged fraud by LRI, and thus no

evidence to maintain a claim against DH&S

under North Carolina securities laws. Appen-

dix to Petition at 39a.

Subsequent to the District Court’s August 31, 1991

order granting DH&S’ motion for summary judgment

on Petitioners’ federal securities claims, the United

States Congress enacted legislation addressing the

Lampf decision. See 15 U.S.C. §78aa-1. In response,

the District Court reinstated the Section 10(b) claims

on February 3, 1992. In March 1992, DH&S moved

for summary judgment on these claims. DH&S’ mo-

tion was granted by the District Court on May 15,

1992. The District Court, in addition to its findings

set forth in its April lst order, found that:

i. DH&S did not know at the time it prepared

the audit reports that new investors, such as

Petitioners, were being solicited. Appendix to

Petition at 12a.

2. DH&S had no dealings or interaction with

Petitioners, and did not in any way encourage

or solicit Petitioners’ investments in LRI. Ap-

pendix to Petition at 13a.

3. There was no evidence that DH&S had an

intent to deceive, manipulate, or defraud any-

one. Appendix to Petition at 14a.

Petitioners appealed to the United States Court of

Appeals for the Fourth Circuit all of the District

Court’s summary judgment rulings in the April 1 and

May 15, 1992 orders, with the exception of that por-

tion of the April 1st order which held that DH&S did

not owe Petitioners a fiduciary duty. In a per curiam,

unpublished opinion dated April 30, 1993, the Fourth

Circuit affirmed each of the District Court’s rulings

based on the District Court’s opinions, and on May

21, 1998, issued its mandate. On July 29, 1993,

Petitioners filed with this Court a petition for writ

of certiorari solely with respect to the May 15th order

and the affirmance by the Fourth Circuit of the grant

of summary judgment as to Petitioners’ Section 10(b)

claims.

REASONS FOR DENYING THE WRIT

There are two fundamental reasons why the

Petition does not present any special and important

issues that warrant review by this Court. First,

Petitioners have not claimed that either the District

Court or the Fourth Circuit misapplied this Court’s

decisions regarding the appropriate standard for

granting summary judgment. Petitioners simply failed

to establish the facts necessary to support the req-

uisite elements of either a primary or an aiding and

abetting claim under Section 10(b). Accordingly,

Petitioners failed to convince either court below that

there was a genuine issue of material fact with re-

spect to any issue pertinent to DH&S’ alleged liability

under Section 10(b). The District Court, properly ap-

plying the summary judgment standards enunciated

by this Court, therefore entered summary judgment

in favor of DH&S on all claims. The Fourth Circuit,

in a per curiam, unpublished opinion affirmed the

judgments below based upon the District Court’s find-

ings of fact and conclusions of law. Petitioners’ re-

quest to this Court to engage in a third review of

the now worn factual record emphasizes the paucity

of significant legal issues of this case.

Second, the courts below granted and upheld sum-

mary judgment on the basis of established precedents

from this Court and applications of those precedents

by the Circuit Courts. Petitioners’ Section 10(b) claims

against DH&S as a primary violator failed because

there was no evidence that DH&S ever made any

representation to Petitioners. The absence of this crit-

ical element compelled a finding that the primary Sec-

tion 10(b) claims against DH&S were fatally deficient.

Similarly, Petitioners’ Section 10(b) claims based on

aider and abettor liability failed because there was no

evidence that DH&S owed Petitioners any duty or

that DH&S possessed the requisite intent to deceive

anyone. The established rule in the Circuit Courts is

a

that absent a duty to disclose or affirmative action

to assist a primary violation, there can be no aider

and abettor liability under Section 10(b) unless the

defendant possessed a specific and conscious intent

to deceive—i.e., the defendant consciously assisted the

alleged primary fraud—a level of scienter which the

District Court and Fourth Circuit found to be utterly

lacking here. Quite simply, the holdings of the District

Court, as affirmed by the Fourth Circuit, were

squarely based on this Court’s Section 10(b) decisions

and the consistent application of those decisions by

the lower appellate courts.

Having found the existing law fatal to their claims,

Petitioners ask this Court, in essence, to imply a right

of action under Section 10(b) which would make an

auditor the insurer of every investment which, at some

time in the future, might be made in its audit client.

This unprecedented and unworkable approach, which

would expand the universe of potential plaintiffs,

would not only expose professionals who have rela-

tionships with securities issuers to virtually unlimited

liability, but ultimately would endanger the viability

and advisability of professionals providing services to

such issuers.'! No authority, let alone a split of au-

thority, exists in the Circuit Courts to support this

expansive approach to Section 10(b).

1 The Seventh Circuit has discussed the undesirable economic

effects of such open-ended liability:

Duties to disclose or pay damages would raise the

costs of all audits, as accountants increased fees to

cover anticipated liabilities. Honest enterprises would

pay these fees no less than dishonest (for until the

audit ended, an accountant could not tell which was

which). So firms would purchase less accounting ser-

In sum, this case presents no special and important

reason why this Court should grant certiorari, since

the District Court entered, and the Fourth Circuit

affirmed, summary judgment in favor of DH&S based

on the undisputed facts and a straightforward appli-

cation of controlling law.

A. The Courts Below Properly Applied The Standard

For Summary Judgment And Found That Petitioners

Failed To Establish The Basic Elements Of Either

A Primary Or Secondary Section 10(b) Claim.

The District Court correctly applied the standards

for summary judgment established by this Court in

reaching its conclusions that DH&S neither commit-

ted, nor aided and abetted, a primary violation under

Section 10(b). Appendix to Petition at 21a-22a, citing

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

475 U.S. 574, 587 (1986); and Celotex Corp. v. Catrett,

477 U.S. 317, 327 (1986). Petitioners now ask for a

third review of the facts by this Court. That is not

the purpose of certiorari.

Petitioners use a significant part of their Petition

to state allegations which they say are derived from

the summary judgment record. Petition at 3-9. What

appears in the Petition, however, is not supported by

the record. Rather, it is a discursive statement of

arguments and contentions about the conclusions that

they would like to have been drawn from undisputed

facts that were before the District Court. They have

vices, and investors in all firms would lose at both

ends: the price would go up as the amount of oversight

went down. :

DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.), cert. denied,

112 L.Ed.2d 312, 111 S. Ct. 347 (1990).

twice before made such arguments and contentions

to no avail.2 What the record actually shows is that

Petitioners failed to present a genuine issue of ma-

terial fact, and that, the facts and evidence presented

to the District Court when analyzed under well-es-

tablished law were simply not sufficient to sustain

any of their claims.

Specifically, the District Court found that DH&S

did not make any representations to Petitioners. Ap-

pendix to Petition at 13a-14a, 30a. In fact, no DH&S

employee ever conversed with, or delivered any doc-

uments to, any of the Petitioners, much less solicited

any investments from Petitioners. Appendix to

Petition at 13a, 26a. The District Court found that

the mere fact that the auditor was aware that its

client might solicit investors in the future is not suf-

ficient. Appendix to Petition at 25a-26a. Further, the

2 There are numerous other assertions in the Petition that are

either out of context, incomplete, or which refer to allegations

in the complaint. Petition at 6-9. Such assertions are beside the

point as far as this Petition is concerned because they relate to

claims that a duty was breached, rather than to the central issue

of whether there was a duty in the first instance. Petitioners

mix these allegations with the concepts of duty and recklessness

in their Petition in an effort to support their theory that fore-

seeability establishes a primary duty under Section 10(b). That

argument by Petitioners, which is wholly without support either

legally or factually, is addressed in detail by DH&S in Section

B of this brief.

*In this regard, the undisputed evidence before the District

Court was that DH&S’ audit reports on LRI’s financial state-

ments expressly stated that they were representations by DH&S

only to ‘‘the Board of Directors and Shareholders” of LRI, and

each of those reports was delivered directly and exclusively to

LRI.

or ee ae ee Ninn tactics in te

District Court concluded that DH&S did not intend

its audit reports to be representations to anyone other

than LRI. Appendix to Petition at 30a. The District

Court determined that DH&S’ audit reports on LRI’s

1982, 1983, 1984, and 1985 financial statements were

issued before DH&S had any knowledge of LRI’s so-

licitation of Petitioners and could not have been in-

tended to be representations by DH&S to them.

Accordingly, DH&S could not have intended its 1982

through 1985 audit reports to be representations to

Petitioners. Appendix to Petition at 29a-30a.

Petitioners contend here, as they did in the courts

below, that DH&S’ audit reports on LRI’s 1982

through 1985 financial statements were intended to

be representations to Petitioners based solely on the

fact that a 1982 auditor’s memorandum prepared by

DH&S discussed the fact that a particular potential

investor (Greylock Partners, which is not one of the

Petitioners) would be relying on a particular review

report (not an audit) of DH&S during negotiations

with LRI concerning a particular investment proposal

in 1982. The District Court rejected this argument,

recognizing that a specific memo in 1982 concerning

DH&S’ preparation of a specific report for LRI, for

use by a specifically identified potential investor in

connection with a particular investment transaction,

is not sufficient evidence that DH&S intended future

audit reports to be representations to ‘‘any potential

venture capital investor at any future time,” (Appen-

dix to Petition at 26a, emphasis in original of District

Court’s order of April 1, 1992), including the

Petitioners four or five years later.‘

‘In fact, the opposite conclusion can be drawn. When DH&S

10

As to the 1986 report, two of the Petitioners, North

Riverside and Heritage, have conceded that they could

not have relied on DH&S’ audit report on LRI’s 1986

financial statements. Petition at 4. Both entities in-

vested in LRI on December 31, 1986, three months

prior to the issuance of that audit report. Thus, any

reliance by them on DH&S’ 1986 report was chron-

ologically impossible. Petitioner Venturtech, which in-

vested in LRI in June, 1987, after the issuance of

DH&S’ audit report on LRI’s 1986 financial state-

ments, does not make this concession. However, the

District Court held that DH&S had no contact with

Venturtech whatsoever and neither knew nor in-

tended that its audit report on LRI’s 1986 financial

statements would be used in connection with any in-

vestment, or that it would be a representation to

Venturtech. Appendix to Petition at 33a. Venturtech

attempts to dispute this factual ruling by referring

to four documents in the record, but has twice failed

to convince a court that these documents raise any

genuine issue of a material fact regarding whether

DH&S knew of a pending investment in LRI by Ven-

turtech and intended its 1986 audit report to consti-

tute a representation to Venturtech in connection with

Venturtech’s investment decision.®

rendered services specifically for utilization by LRI in connection

with an investment, LRI and DH&S expressly noted it in their

engagement agreement. The absence of such an acknowledgment

between LRI and DH&S with respect to any of the audits com-

plained of by Petitioners refutes their contention that it was

foreseeable, let alone intended, by DH&S that any of its audit

reports would be relied upon by Petitioners in connection with

their investments in LRI.

5The District Court held just the contrary. Rather than es-

tablishing that DH&S knew of a pending investment by Ven-

| |

11

Recognizing that there is no evidence that DH&S

intended its reports to be representations to

Petitioners, Petitioners nevertheless suggest that such

audit reports should be deemed to be representations

by DH&S to Petitioners because ‘‘Deloitte knew of

LRI’s capital raising efforts’’ and therefore should

have foreseen that investors like Petitioners would

rely on DH&S’ audit report in making their invest-

ment decisions. Petition at 5. Petitioners further sug-

gest that the District Court (i) ignored this evidence

of “Deloitte’s knowledge of LRI’s capital raising ef-

forts” in finding DH&S owed no duty to Petitioners,

and (ii) essentially imposed a privity standard on an

accountant’s duty under federal securities laws.

Petition at 18. Both of these contentions are incor-

rect.

A review of the record belies Petitioners’ sugges-

tions that the District Court overlooked evidence or

that it established a privity standard. First, the Dis-

trict Court examined and rejected the concept that

mere knowledge by an auditor that there might be

future investments is enough. Appendix to Petition

at 25a-27a. This finding is in accord with established

authority. See Frymire-Bernativ. KPMG Peat Marwick,

turtech in LRI in June, 1987, three of these documents establish

that DH&S knew only that there were proposed investments in

LRI which would close on December 31, 1986, several months

before the issuance of its audit report on LRI’s 1986 financial

statements. Appendix to Petition at 33a. Petitioners did not

make any argument to the District Court regarding the fourth

document, LRI’s March 1993 board minutes. Moreover, it is

undisputed that Petitioners produced these minutes from their

own files. These minutes were not present in DH&S’ files nor

do any of DH&S’ audit workpapers or notes make any reference

to the issues discussed in these minutes.

12

__ F.2d __ , 1993 U.S. App. LEXIS 19657 (7th Cir.

1993). Second, the District Court reviewed in detail

the evidence Petitioners presented concerning pre-

vious venture capital investments in LRI and con-

cluded that—with the exception of a 1982 review

report prepared with specific knowledge by DH&S

that a particular investor, Greylock Partners, would

rely on the review report in making an investment

decision in 1982—‘“‘the record contains no evidence

that DH&S knew that the financial statements pre-

pared by it were distributed to, or used by, venture

capital investors.’’ Appendix to Petition at 27a.®

Simply put, what the District Court found was that

there was no evidence that DH&S knew that its audit

reports were to be distributed to or used by venture

capital investors, participated in any LRI securities

offering, made any representations regarding any such

offering, communicated in any way with any of

Petitioners in connection with the making of their

* Petitioners also assert a theory of liability based upon their

contention that DH&S failed to obtain management represen-

tation letters during the 1985 and 1986 audits. Petitioners argue

that such alleged failures require a finding, as a matter of law,

that LRI’s financial statements be deemed to be representations

of DH&S rather than LRI, despite the fact that it was LRI that

later furnished its 1985 financial statements to Petitioners and

its 1986 financial statements to Venturtech without the knowl-

edge or participation of DH&S. While DH&S does not agree

with Petitioners’ characterization of the evidence, the particular

facts are not germane to the Petition. Petitioners made their

assertion in the District Court and in the Circuit Court without

success. Petitioners offer no authority to support the theory.

There is no such authority. Moreover, as set forth in detail

above, the undisputed facts and the conclusions of the District

Court show that there is no logic to the Petitioners’ contention.

13

investment decisions, or possessed an intent to de-

ceive anyone. Appendix to Petition at 12a-14a, 25a-

27a. Section 10(b) does not impose any duty on DH&S

under these circumstances that would give rise to

either primary or aiding and abetting liability.

B. For Purposes Of A Primary Section 10(b) Claim,

There Is No Authority, Much Less A Split Of Au-

thority, As To Petitioners’ Proposition That A Re-

port Issued By An Auditor To Its Audit Client Is

Deemed To Be A Representation Made To All Po-

tential Future Investors.

Petitioners assert that if an auditor knows that its

audit client may at some unspecified time in the fu-

ture have a need for investment capital, then the

auditor ‘“‘should know”’ that the unknown future inves-

tors will rely on the audit report. According to

Petitioners, it therefore follows that an audit report

issued solely to the audit client, perhaps years before

any actual investor appears, should ipso facto be

deemed an affirmative representation by the auditor

to the investor sufficient to create liability under Sec-

tion 10(b). Petition at 18-19. The District Court prop-

erly rejected this theory. Appendix to Petition at 25a-

27a. Petitioners reason for advancing this theory of

virtually unlimited liability is obvious. Petitioners must

circumvent the District Court’s holding that DH&S

made no representations to them and did not intend

to deceive Petitioners or anyone else. The mere fact

that an auditor knows that companies may in the

future need investment capital (which Petitioners ar-

gue makes foreseeable both the existence of such

investors and their reliance on the auditor’s report)

has not been determined by this Court or any Circuit

Court to constitute the predicate for imposing liability

14

under Section 10(b). Thus, Petitioners’ contentions do

not present for review either a split among the Circuit

Courts or a matter which has not been settled by

this Court.

Rather than cite any cases in support of this at-

tenuated ‘“‘foreseeability” theory, and without any log-

ical connection to their arguments, Petitioners leap

to cases applying the recklessness standard to Section

10(b) claims involving affirmative representations. In-

deed, Petitioners have admitted the critical fact which

makes each of their cases inapposite here. They con-

cede that ‘Deloitte did not solicit [Petitioners’] in-

vestments in LRI, nor did it help create a formal,

published prospectus including its name and work.”

Petition at 20. This is a dispositive concession, par-

ticularly in light of the District Court’s finding that

DH&S did not have any communication with any of

the Petitioners. Each of Petitioners’ ‘‘authorities’’ in-

volves a claim that a defendant either (i) prepared a

report specifically for inclusion in an offering docu-

ment directed to the plaintiff, such as a prospectus,

or (ii) participated in soliciting the plaintiff’s invest-

ment.

For example, in Rudolph v. Arthur Andersen & Co.,

800 F.2d 1040 (11th Cir. 1986), cert. denied, 480 U.S.

946 (1987), the plaintiff complained of an audit report

which the auditor knew would be included in a pro-

spectus i. be directed to the plaintiff. In Akin v. Q-

L Inves* (ne., 959 F.2d 521 (5th Cir. 1992), the al-

legations were that the audit report was prepared

expressly for distribution in a private placement mem-

orandum to be directed to the plaintiff. In Wiley v.

Hughes Capital Corporation, 746 F. Supp. 1264

(D.N.J. 1990), the plaintiff asserted that the auditor

iia wield sthasti

15

prepared a report specifically for inclusion in a pro-

spectus to be directed to the plaintiff. In Ades v.

Deloitte & Touche, 799 F. Supp. 1493, 1495 (S.D.N.Y.

1992) (which was a motion to dismiss), the allegations

before the court were that the auditor ‘“‘consented to

use of its ... opinion ... in various filings with the

Securities and Exchange Commission.” In Fund of

Funds, Ltd. v. Arthur Andersen & Co., 545 F. Supp.

1314 (S.D.N.Y. 1982), the audit client was a mutual

fund, which by law must publish a prospectus con-

taining audited financial statements.

In each of these cases, there were allegations that

the defendant-auditor intended to make an affirmative

representation to the plaintiff. Thus, the plaintiff's

reliance on the audit report was not merely ‘foresee-

able,’ as Petitioners contend.’ It was intended. That

7Even under Petitioners’ theory of ‘‘foreseeability,”’

Petitioners’ claims would fail because the District Court found

that DH&S did not know of any distribution of its reports to,

or use by, venture capital investors. Appendix to Petition at

27a. The Seventh Circuit has recently analyzed a similar con-

tention in Frymire-Brinati v. KPMG Peat Marwick, —_— F.2d

—_—., 1993 U.S. App. LEXIS 19657 (7th Cir. 1993). There, the

court focused on the “‘in connection with’’ element of a Section

10(b) claim against an auditor. Vacating a jury verdict and dis-

missing the Section 10(b) claim against the auditor, the Court

held, inter alia:

Any auditor’s opinion might be used in connection

with the sale of securities, but most financial state-

ments serve to assist existing investors who seek to

know the status of their firm and desire to monitor

the managers. To find the ‘‘connection’’ just because

the managers, unbeknownst to the auditors, show the

financial statements to some potential investor would

abolish the requirement that the defendant’s acts oc-

—

16

is quite different from this case where the District

Court found that DH&S did not intend for its reports

to be for the benefit of anyone other than its client

(Appendix to Petition at 30a) and, moreover, did not

even know that its reports were distributed to, or

used by, any investors (other than a review report

specifically for Greylock in 1982). Appendix to Petition

at 27a.

The other cases cited by Petitioners as supporting

their ‘‘foreseeability’’ theory involved information

which, although not included in an offering document,

was specifically intended by the defendant to be a

representation to the plaintiff. For example, in Sharp

v. Coopers & Lybrand, 649 F.2d 175 (8d Cir. 1981),

cert. denied, 455 U.S. 938 (1982), the defendant ac-

countants prepared a tax opinion for the specific pur-

pose of its distribution by the client to potential

investors. In Sioux, Ltd. Securities Litigation v. Coo-

pers & Lybrand, 914 F.2d 61 (5th Cir. 1990), the

auditing firm’s partner in charge of the audit per-

sonally represented to investors that a contingent li-

ability of the audit client would have no effect on the

client’s financial] statements.® Thus, there is no ques-

cur “in connection with” the purchase or sale of se-

curities.

As in Frymire-Brinati, the District Court concluded that the

ever present possibility of future investors is not enough to

impose liability on an auditor. Appendix to Petition at 25a-26a,

3la.

® Petitioners’ discussion of this case, however, does not reveal

this critical fact, which is set out in a prior opinion in the same

litigation. See Sioux, Ltd. Securities Litigation v. Coopers &

Lybrand, 901 F.2d 51, 53 (5th Cir. 1990X‘‘The plaintiffs ...

contend that Coopers & Lybrand’s partner in charge of the audit

17

tion that each of these cases was predicated on the

existence of an affirmative representation directly by

the auditor to the investor.®

In stark contrast to the facts of each case cited by

Petitioners, LRI was a closely held, non-reporting cor-

poration. Its securities were never registered under

the 1933 Act, or publicly offered, issued, or traded.

Neither LRI’s financial statements nor any related

audit reports, including DH&S’ audit reports com-

plained of by Petitioners, were ever included in any

registration statement, prospectus, offering circular,

or private placement memorandum. Further, DH&S

did not communicate with Petitioners and did not

solicit Petitioners’ investments in LRI. See Petition

at 20. The District Court therefore found that DH&S

made no representation to any of Petitioners.!°

assured them that the events [pertaining to the contingent li-

ability] did not affect the validity of the ... audit.”’).

®In discussing these cases, DH&S is not addressing whether

the courts ruled correctly regarding the ultimate issues before

them, but rather that the allegations and facts before these

courts were distinguishable from those of the present case where

the District Court held, and the Fourth Circuit affirmed, that

there was no evidence that DH&S had any contact with

Petitioners or consented to the use of its audit reports in any

materials which it knew would be provided to Petitioners.

1° The District Court found that at the time DH&S issued its

audit report on the 1985 financial statements, dated April 11,

1985, it did not know about the December 1986 investment or

its solicitation. The court similarly found that at the time DH&S

issued its 1986 audit report dated March 20, 1987, it did not

have any knowledge of the Venturtech investment which was

made in June 1987, or its solicitation. Petition at 33a. Petitioners

do not dispute any of these findings.

18

Thus, there is simply no Circuit Court authority to

support Petitioners’ theory that an audit report issued

only to the audit client is deemed to be a represen-

tation by the auditor to all potential future investors

in the audit client. Common sense compels the con-

clusion that an auditor must intend to make a rep-

resentation to a potential investor before it can intend

to mislead or deceive the investor by that represen-

tation. Indeed, the cases cited by Petitioners confirm

this logic; each addressed primary liability claims in-

volving an intended representation by the defendant

to the plaintiff.

The only other authority Petitioners cite to support

their foreseeability theory is dicta from United States

v. Arthur Young, 465 U.S. 805 (1984), which

Petitioners cite woefully out of context. In Arthur

Young, the sole issue before this Court was the scope

of the subpoena power of the Internal Revenue Ser-

vice (“IRS’’) under 26 U.S.C. §7604. Jd. at 807. The

accounting firm was not a party to the original action

and the IRS asserted no misrepresentation claims

against it. The action involved tax, not Section 10(b),

claims against the accountant’s client. Jd. at 817-18.

This Court held that the accountant’s workpapers

were (i) relevant to issues raised by the IRS and (ii)

not protected from discovery by any privilege. Thus,

contrary to Petitioners’ assertion, this Court’s deci-

sion in Arthur Young was not the genesis of any new

“watch dog’’ role for accountants, and in no manner

held, or even implied, that accountants have a uni-

versal fiduciary duty to every person to whom its

audit client provides its finai.zial statements."

Not only is Petitioners’ assertion that public policy favors

ee

13

C. There Is No Split Of Authority On The Elements Of

An Aiding And Abetting Liability Claim As Pre-

sented By The Facts Of This Case.

The Petitioners also seek review of the decisions

below with respect to dismissal of Petitioners’ aiding

and abetting claims under Section 10(b). The District

Court granted DH&S summary judgment on those

claims based upon its findings that DH&S had no

fiduciary or special duty to the Petitioners (which

Petitioners did not appeal to the Fourth Circuit), did

not take any affirmative actions to assist the alleged

fraud by LRI, and harbored no intent to deceive the

Petitioners or anyone else. Struggling under the

weight of those findings, the Petitioners seek to have

this Court decide that a claim of some form of reck-

less conduct, without more, it sufficient to impose

aiding and abetting liability under Section 10(b).”

However, neither this Court nor any Circuit Court

has held that reckless conduct alone, without either

a fiduciary or other special duty owed by the

defendant to the plaintiff or some affirmative action

by the defendant to assist the alleged fraud, suffices

placing ‘‘watch dog’’ responsibilities on auditors without au-

thoritative support, it has already been considered and rejected

by the Fourth Circuit, and other courts. See, e.g., Schatz v.

Rosenberg, 943 F.2d 485, 493-494 (4th Cir. 1991), cert. denied,

112 S. Ct. 1475 (1992); and DiLeo v. Ernst & Young, 901 F.2d

624, 629 (7th Cir.), cert. denied, 498 U.S. 941, 111 S. Ct. 347,

112 L.Ed.2d 312 (1990).

2 ]t is virtually impossible to determine where Petitioners’

arguments relating to primary liability stop and its arguments

relating to aiding and abetting start. Petitioners mix concepts

and allegations in a fashion that blurs the essential distinctions

between these two concepts of liability.

20

to impose liability for aiding and abetting under Sec-

tion 10(b).*°

This Court has twice held that Section 10(b) does

not in and of itself impose a duty to disclose a pri-

mary violation of another. Instead, such a duty, if it

exists, ‘‘arises from a relationship between the par-

ties.”” Dirks v. United States, 463 U.S. 616, 658 (1983).

More particularly, such a duty of disclosure exists if

there is ‘‘a fiduciary or other similar relation of trust

and confidence’ between the plaintiff and the

defendant. Chiarella v. United States, 445 U.S. 222,

228 (1980). In other words, the federal ‘‘securities

laws do not impose a general duty to speak ... these

duties must be found in state law.’’ DiLeo v. Ernst

& Young, 901 F.2d 624, 628 (7th Cir. 1990), citing

Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

The Fourth Circuit, in Schatz v. Rosenberg, 943 F.2d

485 (4th Cir. 1991), cert. denied, 112 S. Ct. 1475

(1992), expressly followed these precedents in holding

that Section 10(b) does not impose a duty to disclose

the misrepresentations of another unless there is a

“fiduciary or other confidential relationship’ between

the plaintiff and the defendant. Schatz, 943 F.2d at

490. See also Robin v. Arthur Young & Co., 915 F.2d

1120, 1125 (7th Cir. 1990), cert. denied, 113 L.Ed.2d

18 This Court has accepted for review the question of whether

there even exists a private cause of action for aiding and abet-

ting under Section 10(b) by issuing a writ of certiorari in First

Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891 (10th

Cir. 1992), cert. granted sub nom. Central Bank of Denver v.

First Interstate Bank of Denver, N.A., 1992 WL 353224 (U.S.),

and if such a cause of action exists, whether recklessness is an

appropriate standard upon which to predicate aider and abettor

liability under Section 10(b).

saad iaaieiaiiaiin aaa

21

250, 111 S. Ct. 1817 (1991) (“{G]Jeneral duties to speak

do not find their source in securities laws, ... but

instead ‘must come from a fiduciary relation outside

securities laws.’’’—emphasis added), quoting Barker v.

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

496 (7th Cir. 1986) (emphasis added).

In the present case, the District Court found as a

matter of law that there was no fiduciary or other

special relationship between DH&S and Petitioners.

Appendix to Petition at 13a. Petitioners did not chal-

lenge that ruling on appeal to the Fourth Circuit. In

the absence of a fiduciary relationship between DH&S

and Petitioners, the rulings of Dirks, Chiarella, and

Schatz compel the conclusion that DH&S owed no

duty to Petitioners.

1. Absent A Duty Of Disclosure, Petitioners Had To Prove

That DH&S Acted With High Conscious Intent And A

Specific Motivation To Aid A Fraud In Order To Prevail

On Their Aiding And Abetting Claims.

The Fourth Circuit has held that in the absence of

a duty to disclose, the level of scienter necessary to

impose aiding and abetting liability under Section 10(b)

is ‘high conscious intent’ and a “‘conscious and spe-

cific motivation’’ to assist the fraud. Schatz, 943 F.2d

at 496, citing IJT v. Cornfeld, 619 F.2d 909, 925 (2d

Cir. 1980); Woodward v. Metro Bank of Dallas, 522

F.2d 84, 97 (5th Cir. 1975); and Martin v. Pepsi Cola

Bottling Co., 689 F. Supp. 931, 934-45 (D. Md. 1986).

The trial court concluded that DH&S had no such

intent, finding that there was no evidence ‘from

which a juror could conclude that DH&S deliberately

shut its eyes to the truth [or] intentionally failed to

conduct a proper audit.’’ Appendix to Petition at 14a.

22

Contrary to Petitioners’ suggestion, the rulings be-

low were squarely within the holdings of the Circuit

Courts which have addressed the situation presented

by the case at bar—.e., allegations of a failure to

disclose, but no finding of a fiduciary or other special

relationship. See Cleary v. Perfectune, Inc., 700

F.2d774, 777, 779 (1st Cir. 1983\noting that ‘‘courts

generally have held that in the absence of a duty of

disclosure, a defendant should be held liable as an

aider and abettor only if plaintiff proves the defendant

had actual knowledge of the improper activity of the

primary violator and his role in the activity,” and

dismissing the plaintiffs’ aider and abettor claim be-

cause they ‘‘failed to produce any evidence from which

it might be inferred that defendants’ inaction was

consciously intended to further the [primary viola-

tor’s] allegedly fraudulent activity’’); IJT v. Cornfeld,

619 F.2d 909, 925 (2d Cir. 1980\‘‘When it is impos-

sible to find a duty of disclosure, an alleged aider-

abettor should be found liable only if scienter of the

high ‘conscious intent’ variety can be proved.’’); Mon-

sen v. Consol, Dressed v. Beef Co., Inc., 579 F.2d 7938,

799 (3d Cir.), cert. denied, 439 U.S. 930 (1978 \if there

is no duty, inaction may provide a predicate of lia-

bility only where “plaintiff demonstrates that the

aider-abetter consciously intended to assist in the per-

petration of a wrongful act’); Woodward v. Metro

Bank of Dallas, 522 F.2d 84, 97 (5th Cir. 1975\‘‘When

it is impossible to find any duty of disclosure, an

alleged aider-abetter should be found liable only if

scienter of the high conscious intent variety can be

proved.’’); Metge v. Baehler, 762 F.2d 621, 625 (8th

Cir. 1985), cert. denied, 474 U.S. 1072, 88 L.Ed.2d

804, 106 S.Ct. 832 (1986X‘‘Simply put, in the absence

of a duty to act or disclose, an aider-abettor case

23

predicated on inaction of the secondary party must

meet a high standard of intent”’ 7.e., “‘high ‘conscious

intent’.”’); Harmsen v. Smith, 693 F.2d 932, 934 (9th

Cir. 1982), cert. denied sub nom. Smith v. Harmsen,

464 U.S. 822, 78 L.Ed.2d 97, 104 S. Ct. 89

(1983\plaintiff must prove “‘knowledge by the alleged

aider and abetter of the wrong and his or her role

in furthering it’’); Farlow v. Peat, Marwick, Mitchell

& Co., 956 F.2d 982, 989 (10th Cir. 1992\“‘if there

is no fiduciary duty ... the scienter requirement in-

creases so that [plaintiff] needs to show that

[defendant] acted with actual intent.’’); Schneberger v.

Wheeler, 859 F.2d 1477, 1480 (11th Cir. 1988), cert.

denied, 490 U.S. 1091 (1989\‘‘a defendant who is not

under any duty to disclose can be found liable only

if he acts with a high degree of scienter, that is, acts

with a ‘conscious intent’ to aid the fraud.’’); Zoelsch

v. Arthur Andersen & Co., 824 F.2d 27, 35-36 (D.C.

Cir. 1987) (‘‘in the absence of a duty to disclose, there

is nq liability unless the defendant ‘manifests a con-

scious intention to further the principal violation.”’);

Barker v. Henderson, Franklin, Starnes & Holt, 797

F.2d 490, 496 (7th Cir. 1986) (plaintiff must show

that the alleged aider and abetter ‘‘committed one of

the ‘manipulative or deceptive’ acts’’).

The rationale supporting the requirement that, ab-

sent a duty of disclosure, a high level of scienter must

be shown was clearly stated by the Third Circuit:

[K]nowledge of the underlying violation is a

critical element of proof in aiding and abet-

ting liability, for without this requirement,

... [professional service] organizations would

be virtual insurers of their customers against

security law violations. Culpability of some

24

sort is necessary to justify punishment of a

secondary actor, and mere unknowing par-

ticipation in another’s violation is an im-

proper predicate to liability.

Monsen v. Consol. Dressed Beef Co., Inc., 579 F.2d

793, 799 (3d Cir.), cert. denied, 489 U.S. 930 (1978).

The only Circuit Court authority which Petitioners

even contend holds that recklessness will satisfy the

scienter requirement for aider and abettor liability

under circumstances similar to the case at bar is Ad-

miralty Fund v. Hugh Johnson & Co., 677 F.2d 1301

(9th Cir. 1982). See Petition at 15. This reliance is

misplaced. The excerpt from Admiralty Fund quoted

by Petitioners is a general statement made without

any discussion of the duty issue.‘ In fact, there is

no discussion whatsoever in the Admiralty Fund de-

cision about whether the alleged aider and abettor

did, or did not, have a duty relationship with the

plaintiff. Moreover, subsequent to Admiralty Fund,

the Ninth Circuit held that a plaintiff must prove

“knowledge by the alleged aider and abettor of the

wrong and his or her role in furthering it.” See,

Harmsen v. Smith, 693 F.2d 932, 934 (9th Cir. 1982)

(emphasis in original), citing IJT v. Cornfeld, Monsen

4 It also should be noted that the Admiralty Fund court cites

in support of the quoted statement the Fifth Circuit’s decision

in Woodward v. Metro Bank of Dallas, a case which expressly

held (and is often cited for) the following:

When it is impossible to find any duty of disclosure,

an alleged aider-abettor should be found liable only if

scienter of the high “‘conscious intent’’ variety can be

proved.

Woodward, 522 F.2d at 97.

25

v. Consol. Dressed v. Beef Co., Inc., Woodward v.

Metro Bank of Dallas—all of which stand for the prop-

osition that absent a fiduciary duty, a plaintiff must

show that the alleged aider and abettor acted with

conscious awareness of the fraud.

In the present case, the District Court in its April

lst order held that:

The plaintiffs have neither alleged nor proven

that DH&S possessed such a state of mind.

The court cannot find in the record, and the

plaintiffs have not presented, any evidence

indicating that DH&S conducted its audits

with a “high conscious intent’’ to aid a se-

curities violation.

Appendix to Petition at 39a. It went on to state in

its May 15th order that “‘there is [no] evidence from

which a juror could conclude that DH&S deliberately

shut its eyes to the truth and intentionally failed to-

conduct a proper audit.’’ Appendix to Petition at 14a.

Simply put, the District Court correctly held, and the

Fourth Circuit has affirmed, that without any evi-

dence of a conscious intent by DH&S to aid an alleged

fraud by LRI, summary judgment in favor of DH&S

on Petitioners’ secondary Section 10(b) claims was

compelled by the decisional law. There is no split of

authority, as Petitioners suggest, which would provide

a basis for the grant of a writ of certiorari.

Petitioners, unable to come forward with any rea-

son why this Court should grant certiorari, attempt

to bootstrap themselves into certiorari by invoking

another case before this Court. Petitioners assert that

First Interstate Bank of Denver, N.A. v. Pring, 969

F.2d 891 (10th Cir. 1992), cert. granted sub nom. Cen-

tral Bank of Denver v. First Interstate Bank of Den-

26

ver, N.A., 1992 WL 353244 (U.S.), addresses

“essentially the same arguments made by Deloitte—

that recklessness is not sufficient scienter when there

is no duty to disclose.’’ Petition at 16. However, the

allegations in Pring are fundamentally different from

the present case.

2. In Pring, The Allegations Of Secondary Liability Under

Section 10(b) Are Fundamentally Different Than

Petitioners’ Allegations In The Present Case.

In Pring, the plaintiffs sought recovery of losses

incurred upon the default of development bonds which

the plaintiffs had purchased. They asserted Section

10(b) aiding and abetting claims against Pring, a prin-

cipal of the developer, and against the indenture

trustee for the development bonds. The plaintiffs al-

leged that Pring remained silent with respect to the

alleged fraud with an ‘‘actual intent to aid the pri-

mary violation.” Jd. at 899. In the present case, the

District Court found no evidence that DH&S intended

to deceive anyone or intended to aid anyone else’s

deception. Appendix to Petition at 14a, 39a. Thus,

the claims against Pring are not relevant here.

The plaintiffs in Pring also alleged that the inden-

ture trustee aided and abetted the alleged primary

Section 10(b) violation. Specifically, they asserted that

the trustee “‘assisted the primary violation by affirm-

ative action” by agreeing to delay an independent

review of an appraisal of the property being devel-

oped with the bond proceeds. Jd. at 902 (emphasis in

original). Therefore, the issue before the Tenth Circuit

was: “[W]hen an alleged aider and abettor owes no

duty to plaintiffs, but takes affirmative action that

27

assists the primary violation,’® does recklessness sat-

isfy the scienter requirement for aiding and abetting

liability?’ Id. at 902 (emphasis added). The District

Court found, and the Fourth Circuit affirmed, that

there was no evidence of any such affirmative action

by DH&S in this case. Appendix to Petition at 39a.

The Tenth Circuit’s opinion in Pring recites various

cases demonstrating the type of affirmative assistance

which may be actionable under Section 10(b). Each

example was predicated on a direct interaction be-

tween the plaintiff and the alleged aider and abettor.

See, e.g., Levine v. Diamanthuset, Inc., 950 F.2d 1478

(9th Cir. 1991 defendant trust company interacted di-

rectly with defrauded investors by, inter alia, making

representations and issuing confirmations); and FDIC

v. First Interstate Bank, 885 F.2d 423 (8th Cir.

1989\defendant bank processed funds and adminis-

tered accounts of plaintiffs). Here, Petitioners concede

16 Consistent with the Fourth Circuit’s holding in Schatz and

the holdings of the other Circuit Courts discussed above, the

Tenth Circuit recognizes that in order to maintain a ciaim for

aiding and abetting liability under Section 10(b), the plaintiff

must show that the alleged aider and abettor provided substan-

tial assistance with respect to the primary violation, not simply

to the person committing the violation. As explained by the

Fourth Circuit in Schatz:

[Tjhe “substantial assistance element requires that a

lawyer must actively participate in soliciting sales or

negotiating terms of the deal on behalf of the client

to have “substantially assisted” a securities violation.

In other words, a plaintiff must prove that a defendant

rendered “substantial assistance’’ to the primary se-

curities violation, not merely to the person committing

the violation.

Schatz, 943 F.2d at 497 (emphasis added).

28 E

that DH&S did not solicit or negotiate the sale of

any LRI securities to them. Appendix to Petition at

13a. Indeed, there was no communication of any na-

ture between DH&S and Petitioners. Jd. Therefore,

the issues presented for review in Pring, and the 3

cases cited therein with respect to ‘‘affirmative as-

sistance,” are inapposite here. :

CONCLUSION

The grant of summary judgment by the District |

Court and the affirmance by the Fourth Circuit are

consistent with the decisions of this Court and well

supported by the record. There is no special and im-

portant reason for this Court to consider and no pur-

pose would be served by this Court’s review of the

opinions below. The Petition for a Writ of Certiorarn

should therefore be denied.

September 1, 1993 Respectfully submitted,

JAMES T. WILLIAMS, JR.*

JEFFREY E. OLEYNIK

DANIEL M. SROKA

Of Counsel: BROOKS, PIERCE, MCLENDON,

HUMPHREY & LEONARD

Suite 2000 Renaissance Plaza

230 North Elm Street (27401)

Post Office Box 26000

Greensboro, NC 27420

(919) 373-8850

EQS ORE OT TEE LET

oe

BARBARA A. MENTZ

Associate General Counsel

DELOITTE & TOUCHE

1633 Broadway, 9th Floor

New York, NY 10019-6754

(212) 492-3884

OTR REE IPE ES Se

Attorneys for Respondent

*Counsel of Record

CREO

PNT p wes