Howard Rosen v. Cascade International, Inc. , 256 F.3d 1194 ( 2001 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
________________________ JULY 11, 2001
THOMAS K. KAHN
No. 99-14681 CLERK
________________________
D. C. Docket No. 91-08652 CV-LCN
JAMES ZIEMBA, PATRICIA MACDOUGLE, et. al.,
Plaintiffs-Appellants,
versus
CASCADE INTERNATIONAL, INC., VICTOR G. INCENDY, et. al.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Southern District of Florida
_________________________
(July 11, 2001)
Before ANDERSON, Chief Judge, CARNES, Circuit Judge, and NANGLE*, District
Judge.
ANDERSON, Chief Judge:
_______________________
* Honorable John F. Nangle, U.S. District Judge for the Eastern District of Missouri, sitting by
designation.
I. INTRODUCTION
By way of an amended complaint filed in 1992, Plaintiffs, shareholders of
Cascade International, Inc., ("Cascade"), brought this securities class action against
Cascade officers and directors, including Victor Incendy, Cascade's President and
CEO; Bernard H. Levy, Cascade's independent auditor; Coopers & Lybrand
("C&L"), an accounting firm; Gunster, Yoakley, & Stewart, P.A. ("GY&S"), a law
firm; and others, alleging, inter alia, violations of Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5,
promulgated thereunder.
In an Order dated December 16, 1993, the district court granted several
defendants' motions to dismiss, including such motion filed by GY&S. See In re
Cascade Int'l Sec. Litig., 840 F. Supp. 1558 (S.D. Fla. 1993). The district court
denied C&L's motion to dismiss, except with respect to Plaintiffs' claims of
negligent misrepresentation and common law fraud. See id. Plaintiffs filed a
motion for entry of final judgment pursuant to Fed. R. Civ. Proc. 54(b) as to
GY&S and other defendants. This motion was denied.
In 1994, C&L filed a motion to reconsider the district court's ruling on
C&L's motion to dismiss in light of Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439 (1994), in which
2
the Supreme Court held that a private plaintiff may not maintain an aiding and
abetting suit under § 10(b). In an Order dated June 27, 1995, the district court
granted C&L's motion to reconsider and dismissed Plaintiffs' § 10(b) claim against
C&L in light of Central Bank. See In re Cascade Int'l Sec. Litig., 894 F. Supp. 437(S.D. Fla. 1995). The district court also denied Plaintiffs’ motion for leave to
amend their complaint. See id. Plaintiffs filed a motion for entry of final judgment
pursuant to Fed. R. Civ. Proc. 54(b) or 28 U.S.C. § 1292(b), which was denied.
After further proceedings,1 final judgment was entered by the district court
on September 30, 1999. On October 27, 1999, Plaintiffs filed a timely notice of
appeal. They appeal only their claims against C&L and GY&S for primary
liability under § 10(b) and the district court's denial of their motion to amend their
complaint.
The finality of the September 30, 1999 Order renders the prior interlocutory
orders appealable without Rule 54(b) certification. See Barfield v. Brierton, 883
F.2d 923, 930 (11th Cir. 1989) (noting that "the appeal from a final judgment
draws in question all prior non-final orders and rulings which produced the
1
Settlements with several defendants received final court approval in 1998 and 1999.
Voluntary dismissals were granted as to several defendants prior to September 30, 1999. On
September 30, 1999, the district court granted Plaintiffs' motion for entry of final default
judgment as to Victor Incendy and Bernard Levy. The district court ordered the case closed and
denied all pending motions as moot. A separate final default judgment was entered the same
day.
3
judgment"). Thus, this Court has jurisdiction over this appeal. See 28 U.S.C. §
1291.
II. BACKGROUND FACTS
Accepting all well-pleaded facts in the complaint as true,2 we assume the
following facts. Cascade became a public company in 1985. At all relevant times,
Cascade's stock was traded on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") market under the symbol "KOSM."
Cascade's primary business involved the formulation, manufacture, and retail sale
of women's apparel, cosmetics, and fragrances. Its activities were operated through
numerous subsidiaries, including Jean Cosmetics; Boutiques Allison, Inc.; Fran's
Fashions, Inc.; and Conston Corp.
By the close of Cascade's fiscal year ended June 30, 1987, Cascade was
already reporting impressive gains through sales of cosmetics and women's
apparel. In each of its Form 10-Ks filed in 1989, 1990, and 1991, Cascade
reported considerable growth and profits. These 10-Ks contained statements by
Cascade's independent auditor, Bernard Levy, in which he attested to the fact that
he had conducted his audits of Cascade "in accordance with generally accepted
2
At the motion to dismiss stage, we accept all well-pleaded facts as true, and all
reasonable inferences therefrom are construed in the light most favorable to the plaintiff. See
Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1273 n.1 (11th Cir. 1999).
4
auditing standards."
On August 20, 1991, the SEC wrote to Incendy, Cascade’s President and
CEO, stating that it was reviewing transactions by Cascade and/or its subsidiaries
and requesting numerous documents, including a list of all stores and cosmetic
counters operated by Cascade. In September 1991, rumors began to circulate that
Cascade's reported profits were questionable. On October 1, 1991, the Overpriced
Stock Service ("OSS") issued a report on Cascade, in which it stated that "the odds
of trouble ahead" were "high." In mid-October, several class action lawsuits were
filed. Cascade reported that there were "no negative developments" in its
operations and said the suits were "without merit." It threatened litigation against
market analysts who questioned the company's financial condition.
Then, on November 20, 1991, Cascade announced that its financial
statements for the fiscal year ended June 30, 1991, "may not be accurate" and that
it had been unable to locate Incendy for several days. The National Association of
Securities Dealers halted trading in Cascade stock until the company could provide
the public with accurate financial statements. On December 13, 1991, the newly
appointed interim chair of Cascade, Aaron Karp, announced that the Cascade
Board had authorized the filing of a bankruptcy petition under Chapter 11 of the
United States Bankruptcy Code. Cascade and its subsidiaries subsequently filed
5
for bankruptcy protection. In a letter issued to Cascade shareholders in January
1992, Karp revealed that Cascade had materially misrepresented its assets, profits,
and revenues and had issued millions of unauthorized shares of stock. On July 7,
1992, Plaintiffs filed this amended class action on behalf of purchasers of Cascade
common stock between August 11, 1989, and November 19, 1991, inclusive.
III. STANDARD OF REVIEW
The only issues on appeal are whether the district court erred in dismissing
Plaintiffs’ claims of primary liability under § 10(b) against C&L and GY&S, and
whether the district court erred in denying Plaintiffs’ motion for leave to amend
their complaint. We review the dismissal of a complaint under Rule 12(b)(6) of
the Federal Rules of Civil Procedure de novo. See Harris v. Ivax Corp., 182 F.3d
799, 802 (11th Cir. 1999). We review the district court’s refusal to grant leave to
amend for abuse of discretion, although “we review de novo the underlying legal
conclusion of whether a particular amendment to the complaint would be futile.”
Id. For the reasons stated below, we affirm.
IV. ALLEGATIONS
In their amended complaint, Plaintiffs allege the following with respect to
GY&S and C&L:
6
A. Allegations with respect to GY&S
1. GY&S represented Cascade on a variety of legal matters from the
summer of 1989 through Incendy’s disappearance in November 1991
and was retained to assist Cascade and Incendy in defending against
those who raised questions about the truthfulness of Cascade’s
reported financial condition.
2. On January 15, 1991, GY&S sent Incendy a letter regarding an
option agreement that Cascade had. GY&S told Incendy that all
material information about Cascade’s business and operations must be
accurately reflected in Cascade’s registration statement, and GY&S
recommended that Cascade correct any inaccuracies in Cascade’s
recently filed prospectus. No corrections were made.
3. In the summer and fall of 1991, Cascade and Conston were
considering a deal with Oleg Cassini. GY&S advised Cascade how to
issue information to the public regarding the proposed deal. In June
1991, Cascade issued two press releases regarding a purported
agreement that it and Conston had reached with Oleg Cassini. In the
fall of 1991, GY&S was actively involved in trying to help Cascade
and Conston “get out” of the purported agreement. GY&S made no
effort to cause Cascade to issue any press releases disclaiming the
June 1991 press releases.
4. The OSS published an article on October 2, 1991, raising questions
about Cascade. On October 7, 1991, GY&S prepared, without
“appropriate investigation or inquiry,” a memorandum for Incendy
suggesting statements that he could issue to the public in response to
the OSS Report and Cascade’s recent stock price decline. GY&S
allegedly did nothing to assure itself of the factual accuracy of its
proposed statements. Cascade then issued a document to the public
that was based largely on GY&S’s recommendations.
5. On October 2, 1991, in response to a request from Incendy, GY&S
sent Incendy an opinion letter regarding the bankruptcy status of
Conston. Despite its knowledge that Conston’s Plan of
Reorganization had been confirmed on April 18, 1991, GY&S
7
concluded that “there is no doubt that Conston is in bankruptcy.” This
letter enabled Incendy to justify the non-consolidation of Conston’s
financial statements with those of Cascade in 1991.
6. In October 1991, GY&S attorney Michael Platner spoke to stock
analysts, who were allegedly spreading rumors about Cascade and
advising people to sell Cascade stock short, and urged them to stop
raising questions about Cascade.
7. On October 30, 1991, Cascade issued a press release in which it
stated that it had instructed its attorneys to file suit against the OSS for
trade defamation and various other claims. Cascade also stated that it
believed there was a connection between the OSS Report and
shortselling activity that was orchestrated by brokerage firm analysts.
Although GY&S reviewed and approved the press release, it was
drafted by a different law firm. GY&S knew from its legal research
that a trade defamation suit would have “substantial difficulties,” and
it knew that its investigation had revealed no connection between
shortsellers and the OSS Report.
8. On November 7, 1991, GY&S attorney Michael Platner wrote a
letter to The Miami Review regarding an article that Platner heard was
being prepared about Cascade. Platner claimed that there was no
justification for printing such an incomplete and un-investigated
article.
B. Allegations with respect to C&L
1. C&L audited Fran’s Fashions’ consolidated balance sheet and its
consolidated statement of operations for the fiscal year ended June 29,
1991.
2. C&L issued an unqualified audit opinion in which it stated that its
audit of Fran’s Fashions had been conducted in accordance with
8
“generally accepted auditing standards” (“GAAS”).3 Plaintiffs allege
that this statement was false and misleading because numerous
auditing standards adopted by the American Institute of Certified
Public Accountants (“AICPA”) were violated. For example, they
allege that C&L did not maintain an independence in mental attitude
when conducting the audit; did not exercise due professional care in
the performance of the examination and preparation of the report; did
not obtain sufficient competent evidence to afford a reasonable basis
for its audit opinion; and did not make reasonably adequate
informative disclosures.
3. C&L audited Conston for the fiscal year ended March 2, 1991, and
the short period ended June 1, 1991. On August 1, 1991, C&L issued
an unqualified audit report which was included in Conston’s Form 10-
K filed with the SEC on August 30, 1991. This audit report stated that
the audit had been conducted in accordance with GAAS.
4. C&L knew that Fran’s Fashions and Conston were suffering
tremendous losses and would require significant and immediate funds
from Cascade in order to continue operating as going concerns, yet
C&L made no attempt to verify independently Cascade’s financial
data, which had been prepared by Cascade’s independent auditor,
Levy. Plaintiffs allege that numerous “red flags” put C&L on notice
that Cascade was incapable of providing Fran’s Fashions and Conston
with the required capital.
5. Plaintiffs allege that, had C&L properly conducted its audits of
Fran’s Fashions and Conston, it would have issued “going concern”
qualifications in connection with both subsidiaries’ financial
3
Generally accepted auditing standards (“GAAS”) are the standards prescribed by the
Auditing Standards Board of the American Institute of Certified Public Accountants (“AICPA”)
for the conduct of auditors in the performance of an examination. See SEC v. Price Waterhouse,
797 F. Supp. 1217, 1222-23 n.17 (S.D.N.Y. 1992). Generally accepted accounting principles
(“GAAP”) comprise a set of basic accounting principles pertaining to business entities that are
approved by the Financial Accounting Standards Board of the AICPA. See id. These principles
establish guidelines for measuring, recording, and classifying a business entity’s transactions.
See id.9
statements.
6. In the fall of 1990, Cascade asked C&L its opinion on whether
Conston’s financial statements needed to be consolidated with those
of Cascade. In concluding that consolidation was not necessary, C&L
purportedly relied on Financial Accounting Standard (“FAS”) No. 94.
Plaintiffs allege that C&L interpreted FAS No. 94 “too narrowly.” By
rendering such an opinion, Plaintiffs allege that C&L substantially
furthered the Cascade fraud by allowing Cascade to omit Conston’s
poor financial results from its own.
7. C&L received a copy of Cascade’s 1991 10-K shortly after it was
filed with the SEC on September 27, 1991. The 10-K revealed that
Conston’s financial statements still had not been consolidated with
those of Cascade. The 10-K also stated that there were 126 Fran’s
Fashions stores. Plaintiffs allege that C&L knew, or was reckless in
not knowing, that only 70-80 such stores existed.
8. C&L did not withdraw its audit opinion on Conston’s March 2,
1991, and June 1, 1991, financial statements until November 29,
1991. C&L did not withdraw its auditor’s report for the consolidated
financial statements of Fran’s Fashions for the fiscal year ended June
29, 1991, until December 3, 1991.4
V. STANDARD FOR PLEADING VIOLATIONS OF SECTION 10(b)
AND RULE 10b-5
In their amended complaint, Plaintiffs allege that C&L and GY&S violated
Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated
4
In their amended complaint, Plaintiffs also allege that, in October 1991, a British
investment firm with large holdings in Cascade stock, Casenove & Co., contacted C&L in an
effort to determine the truth or falsity of Cascade’s public statements. C&L allegedly helped
allay Casenove’s fears and confirmed that all 126 of Fran’s Fashions stores existed. Plaintiffs
fail to allege reliance on C&L’s alleged statement to Casenove in their amended complaint, and
they make no reference to this allegation on appeal. Therefore, we do not consider this
allegation.
10
thereunder.
A. Section 10(b) and Rule 10b-5
Section 10(b) states:
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any
national securities exchange –
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities
exchange or any security not so registered, any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the [SEC]
may prescribe as necessary or appropriate in the public
interest or for the protection of investors.
15 U.S.C. § 78j (1997).
One of the rules adopted by the SEC, Rule 10b-5, provides:
It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce, or of the mails or of any facility of any
national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5 (2000).
11
In order to state a claim under § 10(b) and Rule 10b-5, a plaintiff must show
the following: "(1) a misstatement or omission, (2) of a material fact, (3) made
with scienter, (4) on which plaintiff relied, (5) that proximately caused his injury."
Bryant, 187 F.3d at 1281. A showing of severe recklessness satisfies the scienter
requirement. See McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th
Cir. 1989). "'Severe recklessness is limited to those highly unreasonable omissions
or misrepresentations that involve not merely simple or even inexcusable
negligence, but an extreme departure from the standards of ordinary care, and that
present a danger of misleading buyers or sellers which is either known to the
defendant or is so obvious that the defendant must have been aware of it.'" Id. at
814 (quoting Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. 1981)
(en banc)).
B. Federal Rule of Civil Procedure 9(b)
In order to survive a motion to dismiss, Plaintiffs' claims of fraud under §
10(b) and Rule 10b-5 also must satisfy the requirements of Fed. R. Civ. P. 9(b).
Rule 9(b) provides:
In all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity. Malice, intent,
knowledge, and other condition of mind of a person may be averred
generally.
12
Fed. R. Civ. P. 9(b).5 "The particularity rule serves an important purpose in fraud
actions by alerting defendants to the 'precise misconduct with which they are
charged' and protecting defendants 'against spurious charges of immoral and
fraudulent behavior.'" Durham v. Bus. Management Assocs., 847 F.2d 1505, 1511
(11th Cir. 1988) (quoting Seville Indus. Mach. Corp. v. Southmost Mach. Corp.,
742 F.2d 786, 791 (3d Cir. 1984)). The application of Rule 9(b), however, "must
not abrogate the concept of notice pleading." Id. Rule 9(b) is satisfied if the
complaint sets forth "(1) precisely what statements were made in what documents
or oral representations or what omissions were made, and (2) the time and place of
each such statement and the person responsible for making (or, in the case of
omissions, not making) same, and (3) the content of such statements and the
manner in which they misled the plaintiff, and (4) what the defendants obtained as
a consequence of the fraud." Brooks v. Blue Cross and Blue Shield of Florida,
Inc., 116 F.3d 1364, 1371 (11th Cir. 1997) (internal quotation omitted).
VI. DISCUSSION
In dismissing Plaintiffs’ § 10(b) claim against GY&S, the district court held
5
The Private Securities Litigation Reform Act of 1995, ("PSLRA"), 15 U.S.C. § 78u-
4(b), expressly requires plaintiffs alleging violations of § 10(b) to "state with particularity facts
giving rise to a strong inference that the defendant acted with the required state of mind."
However, we do not test the amended complaint in this case, filed in 1992, under the pleading
requirements of the PSLRA, because that Act did not take effect until 1995.
13
that GY&S had no duty to disclose negative information about its client, Cascade,
to third parties, such as Plaintiffs. On appeal, Plaintiffs argue that, even if GY&S
had no independent duty to disclose the Cascade fraud to Plaintiffs, once GY&S
made misleading statements of material fact, it had a duty to make a full and fair
disclosure. While Plaintiffs admit that no statements attributable to GY&S were
made directly to Plaintiffs, they argue that their allegations support GY&S’s
primary liability under § 10(b) because GY&S “played a significant role in
drafting, creating, reviewing or editing allegedly fraudulent letters or press
releases.”
In dismissing Plaintiffs’ § 10(b) primary liability claims against C&L, the
district court concluded that, because Plaintiffs did not allege that C&L’s audit
reports of Fran’s Fashions or Conston contained material misrepresentations or
omissions, nor did Plaintiffs allege that C&L made assurances to the public about
the accuracy of Cascade’s financial statements, the only alleged activity of C&L
that might possibly give rise to primary liability was C&L’s failure to disclose that
Cascade’s 1991 10-K was misleading. However, the district court concluded that
C&L had no duty to disclose the Cascade fraud, because “C&L did not hold itself
out as Cascade’s auditor and never made a public statement about the financial
condition of Cascade.” In re Cascade Int’l Sec. Litig., 894 F. Supp. at 443.
14
On appeal, Plaintiffs argue that C&L is primarily liable under § 10(b)
because it incorrectly advised Cascade that its financial results did not need to be
consolidated with Conston’s; it failed to include “going concern” qualifications in
its audit reports of Conston and Fran’s Fashions; and it failed to disclose the
alleged fraud contained in Cascade’s 1991 10-K.
GY&S and C&L argue that they cannot be held primarily liable under § 10(b)
in light of the Supreme Court’s decision in Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S. Ct. 1439 (1994), which
abolished aiding and abetting liability under § 10(b). They also argue that they did
not owe investors a duty to disclose the fraud surrounding Cascade because they
never issued a statement to the public about Cascade on which Plaintiffs relied.
We conclude that the district court’s orders dismissing Plaintiffs’ § 10(b)
primary liability claims against GY&S and C&L were appropriate and that the
district court did not abuse its discretion in denying Plaintiffs’ motion for leave to
amend. We therefore affirm.
A. Central Bank
Most of Plaintiffs’ allegations concerning GY&S and C&L fail in light of
the Supreme Court’s decision in Central Bank. As that case is central to our
analysis of Plaintiffs’ claims, we recite the facts and holding of that case.
15
In Central Bank, the Colorado Springs-Stetson Hills Public Building
Authority (the “Authority”) issued $26 million in bonds to finance public
improvements at Stetson Hills, a planned commercial and residential development
in Colorado Springs. See 511 U.S. at 167, 114 S. Ct. at 1443. The bonds were
secured by landowner assessment liens, and the bond covenants required that the
land subject to the liens equal at least 160% of the bonds’ outstanding principal
and interest. See id. The bond covenants also required the developer of Stetson
Hills, AmWest, to give Central Bank an annual appraisal verifying that the 160%
test was met. See id. In 1988, AmWest provided Central Bank with an appraisal
of the land securing the 1986 bonds and the land proposed to secure the 1988
bonds. See id. According to the developer’s 1988 appraisal, the land values
remained virtually unchanged from the 1986 appraisal, and thus the 160% test
appeared to be met. Soon afterwards, Central Bank received a letter from a senior
underwriter for the 1986 bonds. Noting that property values in Colorado Springs
were declining and that the developer’s appraisal was over 16 months old, the
underwriter expressed concern that the 160% test was not being met. See id.Because Central Bank was named as indenture trustee, it was concerned that the
160% was not being met, and it asked its in-house appraiser to review the 1988
appraisal. After determining that the 1988 appraisal appeared overly optimistic,
16
the in-house appraiser suggested that Central Bank retain an outside appraiser to
conduct an independent review. See id. at 167-68, 114 S. Ct. at 1443. However,
after an exchange of letters between AmWest and Central Bank in early 1988,
Central Bank decided to delay any independent review of the appraisal until the
end of the year, approximately six months after the closing on the 1988 bond issue.
The Authority defaulted on the 1988 bonds before the independent review took
place. See id. at 168, 114 S. Ct. at 1443.
After the default, the plaintiffs sought to hold Central Bank secondarily
liable under § 10(b) based on a claim that Central Bank had aided and abetted a §
10(b) violation. See id. The district court granted summary judgment to Central
Bank, and the Tenth Circuit reversed, holding that the plaintiffs had established a
genuine issue of material fact regarding the recklessness element of aiding and
abetting liability and that a reasonable fact-finder could conclude that Central Bank
had rendered substantial assistance by delaying the independent review of the
appraisal. See First Interstate Bank of Denver, N.A. v. Pring, 969 F.2d 891 (10th
Cir. 1992).
The Supreme Court granted certiorari and considered the question of
whether § 10(b) liability extends to those who do not commit a manipulative or
deceptive act within the meaning of § 10(b) but who instead aid and abet the
17
violation. See Central Bank, 511 U.S. at 167, 114 S. Ct. at 1443. After examining
the text of the statute, the Supreme Court held that “a private plaintiff may not
maintain an aiding and abetting suit under § 10(b).” Id. at 191, 114 S. Ct. at 1455.
The Supreme Court rejected the argument that the phrase “directly or
indirectly” in § 10(b) covers aiding and abetting liability, because such an
interpretation of the statute would extend liability to those “who do not engage in
the proscribed activities at all, but who give a degree of aid to those who do.” See
id. at 176, 114 S. Ct. at 1447. The Court recognized that, if it were to allow
recovery for aiding and abetting under § 10(b), a plaintiff could create liability
“when at least one element critical for recovery under 10b-5 is absent: reliance.”
Id. at 180, 114 S. Ct. at 1449. The Court stated:
A plaintiff must show reliance on the defendant’s misstatement or
omission to recover under 10b-5. Basic Inc. v. Levinson, 485 U.S.
[224], 243, 108 S. Ct. [978], 989-90 [(1988)]. Were we to allow the
aiding and abetting action proposed in this case, the defendant could
be liable without any showing that the plaintiff relied upon the aider
and abettor’s statements or actions. See also Chiarella [v. United
States], 445 U.S. [222], 228, 100 S. Ct. [1108], 1114 [(1980)]
(omission actionable only where duty to disclose arises from specific
relationship between two parties). Allowing plaintiffs to circumvent
the reliance requirement would disregard the careful limits on 10b-5
recovery mandated by our earlier cases.
Id. at 180, 114 S. Ct. at 1449-50. Though it held that a private plaintiff may not
maintain an aiding and abetting suit under § 10(b), the Supreme Court recognized
18
that this “does mean that secondary actors in the securities market are always free
from liability under the securities Acts.” Id. at 191, 114 S. Ct. at 1455. Rather,
“[a]ny person or entity, including a lawyer, accountant, or bank, who employs a
manipulative device or makes a material misstatement (or omission) on which a
purchaser or seller of securities relies may be liable as a primary violator under
10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are
met.” Id. (emphasis in original).
B. Post-Central Bank
Following Central Bank, the federal courts have split over the threshold
requirement to show that a secondary actor, such as a lawyer or an accountant, is
primarily liable under § 10(b). Compare In re Software Toolworks, Inc., 50 F.3d
615, 628 n.3 (9th Cir. 1994) (holding that accountants may be primarily liable for
statements made by others where the accountants reviewed the statements and
played a significant role in the drafting and editing of the statements); Carley
Capital Group v. Deloitte & Touche, L.L.P., 27 F. Supp. 2d 1324, 1334 (N.D. Ga.
1998) (holding that “a secondary actor can be primarily liable when it, acting alone
or with others, creates a misrepresentation even if the misrepresentation is not
publicly attributed to it”); In re ZZZZ Best Sec. Litig., 864 F. Supp. 960, 970 (C.D.
Cal. 1994) (concluding that primary liability attaches to accounting firm that was
19
“intimately involved” in the creation of false documents) with Anixter v. Home-
Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996) (rejecting “a rule allowing liability
to attach to an accountant or other outside professional who provided ‘significant’
or ‘substantial assistance’ to the representations of others” and holding that, to be
liable, secondary actors “must themselves make a false or misleading statement (or
omission) that they know or should know will reach potential investors”); Wright
v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) (holding that “a
secondary actor cannot incur primary liability under the [Securities] Act for a
statement not attributed to that actor at the time of its dissemination”).
In order for a secondary actor, such as a law firm or accounting firm, to be
primarily liable under § 10(b), the Plaintiffs “must show reliance on the
defendant’s misstatement or omission to recover under 10b-5.” See Central Bank,
511 U.S. at 180, 114 S. Ct. at 1449 (citing Basic Inc. v. Levinson, 485 U.S. 224,
243, 108 S. Ct. 978, 989-90 (1988)). Following the Second Circuit, we conclude
that, in light of Central Bank, in order for the defendant to be primarily liable under
§ 10(b) and Rule 10b-5, the alleged misstatement or omission upon which a
plaintiff relied must have been publicly attributable to the defendant at the time
that the plaintiff’s investment decision was made. See Wright, 152 F.3d at 175.
We apply the Central Bank principles first to the allegations made with respect to
20
GY&S and then to the allegations made with respect to C&L.
C. Allegations Concerning GY&S
1. Misrepresentations
In this case, with respect to the allegations concerning GY&S, Plaintiffs
have not alleged any misstatements by GY&S upon which Plaintiffs relied.
Indeed, Plaintiffs admit that no misrepresentations attributable to GY&S were ever
made to Plaintiffs. Instead, Plaintiffs base their claim on GY&S’s “significant role
in drafting, creating, reviewing or editing allegedly fraudulent letters or press
releases.” Such allegations of substantial assistance in the alleged fraud were the
kinds of allegations that were rejected in Central Bank.6 See, e.g., Wright, 152
F.3d at 171 (concluding that, under Central Bank, the plaintiffs who purchased
stock in a company that issued a press release containing false and misleading
information, with a notation that the information was unaudited and which did not
mention the name of its outside auditor, could not recover from the auditor for its
private approval of the information contained in the press release).
Plaintiffs argue that primary liability should attach to those who were never
identified to investors as having played a role in the misrepresentations. We
6
We also note that, in 1995, Congress authorized the SEC to bring enforcement actions
against one who “knowingly provides substantial assistance to another person” in violation of
the federal securities laws. See 15 U.S.C. § 78t(e) (West. Supp. 2001). Noticeably, Congress
did not create a private cause of action in this subsection. See, e.g., Wright, 152 F.3d at 176.
21
disagree. To permit Plaintiffs’ allegations against GY&S to survive a motion to
dismiss would permit Plaintiffs to avoid the “reliance” requirement for stating a
claim under Rule 10b-5. See Central Bank, 511 U.S. at 180, 114 S. Ct. at 1449(recognizing that liability cannot attach “when at least one element critical for
recovery under 10b-5 is absent: reliance”); Basic Inc., 485 U.S. at 243, 108 S. Ct.
at 989 (noting that “reliance is an element of a Rule 10b-5 cause of action”).
Holding GY&S primarily liable for its alleged conduct would “effectively revive
aiding and abetting liability under a different name, and would therefore run afoul
of the Supreme Court’s holding in Central Bank.” Wright, 152 F.3d at 175(quotation omitted).
2. Omissions
We also conclude that GY&S is not primarily liable for any alleged material
omissions. “[A] defendant’s omission to state a material fact is proscribed only
when the defendant has a duty to disclose.” Rudolph v. Arthur Andersen & Co.,
800 F.2d 1040, 1043 (11th Cir. 1986). This Court has recognized that a duty to
disclose arises not only “[w]here a defendant’s failure to speak would render the
defendant’s own prior speech misleading or deceptive,” but also “‘where the law
imposes special obligations, as for accountants, brokers, or other experts,
depending on the circumstances of the case.’” Id. (quoting Woodward v. Metro
22
Bank of Dallas, 522 F.2d 84, 97 n.28 (5th Cir. 1975)). Some of the factors that we
consider in determining whether a duty to disclose exists include: “the relationship
between the plaintiff and defendant, the parties’ relative access to the information
to be disclosed, the benefit derived by the defendant from the purchase or sale,
defendant’s awareness of plaintiff’s reliance on defendant in making its investment
decision, and defendant’s role in initiating the purchase or sale.” Id. (citing First
Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977)). Other
factors that we consider include “the extent of the defendant’s knowledge and the
significance of the misstatement, fraud or omission,” as well as “[t]he extent of the
defendant’s participation in the fraud.” Id.Consideration of these factors leads us to the conclusion that GY&S had no
duty to make any disclosures to Plaintiffs concerning its client, Cascade. First,
there was no attorney-client relationship between Plaintiffs and GY&S that might
have created a fiduciary obligation on the part of GY&S towards Plaintiffs. See
Chiarella v. United States, 445 U.S. 222, 230, 100 S. Ct. 1108, 1115 (1980) (noting
that “silence in connection with the purchase or sale of securities may operate as a
fraud actionable under § 10(b) . . .[,b]ut such liability is premised upon a duty to
disclose arising from a relationship of trust and confidence between parties to a
transaction”); Schatz v. Rosenberg, 943 F.2d 485, 492 (4th Cir. 1991) (holding
23
“that unless a relationship of ‘trust and confidence’ exists between a lawyer and a
third party, the federal securities laws do not impose on a lawyer a duty to disclose
information to a third party”). Second, because of its fiduciary obligations to its
client, Cascade, GY&S had certain privileges not to disclose information about
Cascade. See Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 497
(7th Cir. 1986) (“Neither lawyers nor accountants are required to tattle on their
clients in the absence of some duty to disclose. To the contrary, attorneys have
privileges not to disclose.”) (internal citations omitted). Third, as we have already
noted, no statements attributable to GY&S were ever made to Plaintiffs; therefore,
Plaintiffs could not have relied on GY&S in making their investment decisions.
Cf. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11th Cir. 1986)
(where investors in a company sued the company’s auditor for failure to disclose
alleged fraud, we concluded that the plaintiffs could, consistent with their
allegations, possibly prove a set of facts in which the auditor, whose audit reports
had been included in the company’s Private Placement Memorandum, could be
held to have a duty to disclose). Finally, there are no allegations that GY&S
solicited any purchase of Cascade securities or prepared any solicitation
documents. Under these circumstances, we conclude that the district court
correctly concluded that GY&S had no duty to disclose any fraud surrounding
24
Cascade to Plaintiffs.7
D. Allegations Concerning C&L
Plaintiffs’ allegations concerning C&L fall into three categories: (1)
misadvising Cascade that its financial results did not need to be consolidated with
those of Conston; (2) failing to include “going concern” qualifications in its audit
reports of Conston and Fran’s Fashions; and (3) failing to disclose the fraud
allegedly suggested by Cascade’s 1991 10-K.
1. Advice Regarding Consolidation
With respect to C&L’s advice to Cascade not to consolidate Conston’s
financial statements with those of Cascade, Plaintiffs argue that, by rendering such
advice, C&L “substantially participated” in the Cascade fraud by allowing Cascade
to omit Conston’s poor financial results from its own. This allegation fails to state
a claim against C&L under § 10(b) for the same reasons that Plaintiffs’
misrepresentation claim against GY&S fails: the absence of reliance. In reaching
this conclusion, we note that Plaintiffs do not allege that any audit report prepared
by C&L was ever contained in any of Cascade’s public documents filed with the
7
Indeed, in their initial brief on appeal, Plaintiffs appear to concede that GY&S had no
independent duty to make any disclosures regarding the Cascade fraud. Therefore, their claim
regarding GY&S’s failure to disclose arises solely from GY&S’s alleged prior misstatements.
However, because we concluded, supra, that GY&S is not primarily liable for any alleged
misstatements – because GY&S was never identified to investors and thus there was no reliance
– Plaintiffs’ claim regarding GY&S’s alleged omission fails.
25
SEC. Instead, Plaintiffs allege that Cascade’s independent auditor, Bernard Levy,
prepared the audit reports contained in Cascade’s public documents. Were we to
permit liability to attach to C&L because of advice that it gave to Cascade, without
any allegation that such advice was attributed to C&L, we would permit Plaintiffs
to avoid the reliance requirement of § 10(b) claims. In light of Central Bank, we
hold that C&L’s alleged substantial participation in the misrepresentation about
consolidation is not enough to state a claim under § 10(b).8
2. Going Concern Qualifications
With respect to Plaintiffs’ allegations regarding C&L’s failure to include
8
We hold alternatively that Plaintiffs’ allegations regarding C&L’s advice not to
consolidate Conston’s financial statements with those of Cascade fail to satisfy the pleading
requirements of Fed. R. Civ. P. 9(b). Far from supporting Plaintiffs’ allegation that C&L’s
advice was fraudulent, FAS No. 94 instead supports C&L’s advice to Cascade that consolidated
returns were not necessary. Conston was in bankruptcy at the time that the advice was given,
and FAS No. 94 states:
A majority-owned subsidiary shall not be consolidated if control is likely to be
temporary [or] if it does not rest with the majority owner (as, for instance, if the
subsidiary is in legal reorganization or in bankruptcy or operates under federal
exchange restriction, controls, or other governmentally imposed uncertainties so
severe that they cast significant doubt on the parent’s ability to control the
subsidiary).
FAS No. 94 (as quoted in ¶ 145 of Amended Complaint).
26
“going concern” qualifications in its audit reports of Conston and Fran’s Fashions,9
we can assume arguendo, but we expressly do not decide, that there are some
circumstances in which a shareholder of a parent company can prove a § 10(b)
violation when a misstatement about a subsidiary is made. Nevertheless,
Plaintiffs’ allegations fail to state a claim because they do not satisfy the pleading
requirements of Fed. R. Civ. P. 9(b).
According to the amended complaint, C&L audited Fran’s Fashions for the
fiscal year ended June 29, 1991, and issued an unqualified audit opinion stating
that its audit had been conducted in accordance with GAAS. C&L also audited
Conston for the fiscal year ended March 2, 1991, and the period ended June 1,
1991, and issued an unqualified audit report on August 1, 1991, which was
included in Conston’s 10-K filed with the SEC on August 30, 1991. This audit
report also stated that the audit had been conducted in accordance with GAAS.
Plaintiffs allege that C&L’s audit reports of Fran’s Fashions and Conston
were materially misleading because C&L violated auditing standards adopted by
the AICPA and because C&L “knowingly or recklessly” omitted “going concern”
qualifications for these Cascade subsidiaries. Plaintiffs allege that C&L knew that
9
According to AU Section 341 of the AICPA Statements on Auditing Standards, a
“going concern” qualification is used when there is “substantial doubt about the entity’s ability
to continue as a going concern for a reasonable period of time, not to exceed one year beyond the
date of the financial statements being audited . . . .”
27
Fran’s Fashions and Conston were “in dire financial condition” and would need
“significant, immediate funds” from Cascade in order to continue as going
concerns during fiscal year 1992. Plaintiffs allege that, had C&L properly
conducted its audits of Fran’s Fashions and Conston, it would have issued “going
concern” opinions in connection with both of these subsidiaries’ financial
statements, and the existence of such opinions would have required a similar
opinion on Cascade’s financial statements.
As part of Plaintiffs’ argument relating to C&L’s failure to include going
concern qualifications, they allege that C&L violated numerous AICPA standards
in auditing Fran’s Fashions. For example, Plaintiffs allege that C&L did not
maintain an independence in mental attitude when conducting the audit; did not
exercise due professional care in the performance of the examination and
preparation of the report; did not obtain sufficient competent evidence to afford a
reasonable basis for its audit opinion; and did not make reasonably adequate
informative disclosures.
“The Financial Accounting Standards of GAAP and the antifraud rules
promulgated under § 10(b) of the 1934 Act serve similar purposes, and courts have
often treated violations of the former as indicative that the latter were also
violated.” Malone v. Microdyne Corp., 26 F.3d 471, 478 (4th Cir. 1994).
28
However, allegations of violations of GAAS or GAAP, standing alone, do not
satisfy the particularity requirement of Rule 9(b). See, e.g., Chill v. Gen. Elec. Co.,
101 F.3d 263, 270 (2d Cir. 1996) ("Allegations of a violation of GAAP provisions
or SEC regulations, without corresponding fraudulent intent, are not sufficient to
state a securities fraud claim."); In re Software Toolworks Inc., 50 F.3d 615, 627
(9th Cir. 1994) ("[T]he mere publication of inaccurate accounting figures, or a
failure to follow GAAP, without more, does not establish scienter.") (quotation
omitted); Melder v. Morris, 27 F.3d 1097, 1103 (5th Cir. 1994) ("boilerplate
averments that the accountants violated particular accounting standards are not,
without more, sufficient to support inferences of fraud"); Decker v. Massey-
Ferguson, Ltd., 681 F.2d 111,120 (2d Cir. 1982) (holding that allegations
concerning violations of general accounting principles do not satisfy the
requirements of Rule 9(b)). See also McDonald v. Alan Bush Brokerage Co., 863
F.2d 809, 814 (11th Cir. 1989) (“Severe recklessness is limited to those highly
unreasonable omissions or misrepresentations that involve not merely simple or
even inexcusable negligence, but an extreme departure from the standards of
ordinary care . . . .”) (internal quotation omitted).
In order to plead fraud with sufficient particularity to satisfy Rule 9(b),
plaintiffs must therefore allege more than mere violations of auditing standards.
29
Plaintiffs here attempt to allege "more" by pointing to "red flags" that C&L
allegedly ignored when it issued its unqualified audit opinions on Fran's Fashions
and Conston. Plaintiffs allege:
1. During the course of C&L's 1989 audit of Allison, another Cascade
subsidiary, C&L questioned the paucity of workpapers that Levy
provided it regarding an acquisition audit Levy had done.
2. C&L's 1989 workpapers contained a newspaper article that
contained a photograph showing Levy as a member of the Cascade
management team, which called into question Levy's independence.
3. C&L was asked to perform services that otherwise would have been
the responsibility of Cascade's auditor, Levy.
4. A C&L employee sent Levy a checklist on procedures to follow in
preparing a 10-Q, indicating that Levy needed assistance in preparing
such a filing.
5. C&L was originally asked to audit Fran's Fashions for the fiscal
year ended June 3, 1990, but this request was "mysteriously
retracted," raising "the distinct possibility that the income statement
was in fact never audited."
6. In the course of auditing Fran's Fashions and Conston in 1991,
C&L saw no Jean Cosmetics counters, "calling into question the truth
of [Cascade’s] management's representations regarding Jean
Cosmetics."
7. Levy was a sole practitioner rather than a large Big Six accounting
firm.
8. Members of the Cascade Board had little or no retail clothing
experience.
9. C&L knew Fran's Fashions had lost millions of dollars during the
30
fiscal years ended June 30, 1990, and June 29, 1991, and this made
Cascade's reports of tremendous growth and profitability "highly
suspect since Fran's Fashions constituted a material part of Cascade's
business."
10. C&L learned during its audit of Fran's Fashions that many of its
accounts payable were long overdue.
11. C&L knew or recklessly disregarded that the person who signed
Cascade's 1989 and 1990 10-Ks as CFO did not act in that capacity.
Taking all of these allegations as true, Plaintiffs have failed to satisfy the
pleading requirements of Rule 9(b). In certain circumstances, courts have held that
allegations of violations of GAAP or GAAS, coupled with allegations of ignoring
"red flags," can be sufficient to state a claim of securities fraud. See, e.g., In re
Sunbeam Sec. Litig., 89 F. Supp. 2d 1326, 1344-47 (S.D. Fla. 1999) (holding that
plaintiffs pleaded fraud with sufficient particularity when they alleged that the
accounting firm had been "tipped off" that Sunbeam had overstated its
restructuring reserves and accounting firm ignored the information and issued its
unqualified audit opinion); In re Ikon Office Solutions, Inc. Sec. Litig., 66 F. Supp.
2d 622, 629-30 (E.D. Pa. 1999) (concluding that allegations that accounting firm
was informed at an Auditing Committee Meeting that Ikon's CFO was “cooking
the books” and accounting firm’s failure to investigate this and other information
about accounting problems supported a claim of reckless behavior by accounting
firm); In re Health Management, Inc. Sec. Litig., 970 F. Supp. 192, 203 (E.D.N.Y.
31
1997) (holding that violations of auditing principles accompanied by ignorance of
"red flags," including an analyst's letter warning the accounting firm of artificially
inflated accounts receivable, was sufficient to create a strong inference of
recklessness).
In this case, however, Plaintiffs have not alleged any facts suggesting actual
awareness by C&L of any fraud. Plaintiffs have pointed to no "tips," letters, or
conversations raising inferences that C&L knew of any fraud. Furthermore,
Plaintiffs have pointed to no facts suggesting that C&L was severely reckless in
not knowing about any fraud.
Plaintiffs' purported "red flags" consist of C&L's alleged possession of
documents and other information which Plaintiffs allege should have revealed the
need for going concern qualifications in C&L's audit opinions of Fran's Fashions
and Conston. At most, these allegations raise an inference of gross negligence, but
not fraud.
In order for Plaintiffs to survive a motion to dismiss on their claim regarding
C&L’s failure to include going concern qualifications in its audit reports of the two
Cascade subsidiaries, we would have to infer several conclusions: (1) that Fran’s
Fashions and Conston had a need for capital infusion; (2) that the capital infusion
had to come from Cascade; (3) that C&L therefore had a duty to investigate
32
Cascade; and (4) that such investigation would have disclosed all of the ugly facts
later revealed about Cascade. On the basis of the allegations here, this series of
inferences is too tenuous to amount to one of “those highly unreasonable omissions
or misrepresentations that involve not merely simple or even inexcusable
negligence, but an extreme departure from the standards of ordinary care.”
McDonald, 863 F.2d at 814 (quotation omitted).
Although Plaintiffs generally allege a duty on the part of C&L to investigate
Cascade, they point to no accounting principle which clearly sets out such a duty.
Plaintiffs argue that AU Section 341 (relating to an auditor’s consideration of an
entity’s ability to continue as a going concern) establishes such a duty. Section
341 provides generally that an auditor has a responsibility to evaluate whether
there is substantial doubt about an entity’s ability to continue as a going concern
for a reasonable period of time. However, a careful reading of that section reveals
that it sets forth no bright-line duties, and it certainly does not even mention any
duty of an auditor of a subsidiary to audit or investigate the parent. The language
of the general duty to evaluate whether there is “substantial doubt” indicates that
there are no bright lines and that discretion is necessarily involved. We doubt that
the sparse allegations here rise to the level of stating with particularity a violation
of AU Section 341. But we need hold only that Plaintiffs have failed to allege a
33
highly unreasonable misrepresentation or omission which constitutes an extreme
departure from standards of ordinary care. Especially in light of the disclosures
actually made, see infra, we readily so hold.
In addition to the lack of particularity of Plaintiffs’ allegations, especially as
to the circumstances which allegedly gave rise to an omitted duty and the manner
in which the alleged statements or omissions were misleading, we believe that the
disclosures actually made by C&L significantly undermine any hint of fraud. With
respect to the challenged financial statements for Fran’s Fashions for the fiscal year
ended June 29, 1991, which were audited by C&L, these statements disclosed a
negative net worth and significant losses. With respect to the challenged March 2,
1991, and June 1, 1991 financial statements for Conston, which were audited by
C&L, these statements disclosed that Conston had experienced operating losses in
prior years and was in bankruptcy until April 18, 1991, and that Conston’s
“continued existence [was] dependent upon its ability to substantially achieve its
plan of reorganization.” With respect to Plaintiffs’ alleged “red flags” relating to
C&L’s knowledge of losses and overdue accounts payable of subsidiaries, we thus
conclude that C&L did in fact disclose the substance of the alleged “red flags.”
With respect to the alleged “red flags” relating to Levy, we readily conclude that
they suggest negligence at most. Plaintiffs’ few remaining allegations of “red
34
flags” similarly can support nothing more than negligence.
Therefore, assuming arguendo that there are some circumstances in which a
shareholder of a parent company can prove a § 10(b) violation when a false or
misleading statement about a subsidiary is made, Plaintiffs’ allegations related to
C&L’s audit reports of Fran’s Fashions and Conston nevertheless fail to satisfy the
pleading requirements of Rule 9(b).
3. Omission
Plaintiffs assert a failure to disclose, or a material omission, on the part of
C&L with respect to Cascade’s 1991 10-K. According to Plaintiffs’ allegations,
C&L received a copy of Cascade’s 1991 10-K shortly after it was filed with the
SEC on September 27, 1991. Plaintiffs allege that C&L should have noticed the
following errors with respect to Cascade’s 10-K: that Conston’s financial
statements still had not been consolidated with Cascade’s; and that the 10-K
erroneously indicated that there were 126 Fran’s Fashions stores when C&L should
have known that there were only 70-80. With respect to the failure to consolidate
Conston’s financial statements with those of Cascade, Plaintiffs allege that C&L
should have known that this was error, because C&L knew that by this time
Conston was no longer in bankruptcy. Plaintiffs allege that C&L should have
noticed these errors, and Plaintiffs argue that C&L had a duty to disclose these
35
errors by withdrawing its audit reports for Fran’s Fashions and Conston.10
We readily conclude that Plaintiffs have failed to allege fraud in this regard
with the necessary particularity. We note that Plaintiffs do not allege that any
affirmative misrepresentations in Cascade’s 1991 10-K were attributed to C&L.
Levy, not C&L, was Cascade’s independent auditor; it was Levy who prepared the
auditor’s report contained in Cascade’s 1991 10-K. Therefore, Plaintiffs relied on
Levy, not C&L, for the accuracy of Cascade’s 1991 10-K.
We also do not understand that the alleged errors in Cascade’s 1991 10-K
somehow rendered C&L’s previous audit reports of Fran’s Fashions and Conston
untrue or misleading. Plaintiffs do not allege that, nor do they explain why that
might be the case. Nor did anything in the 10-K render untrue or misleading
C&L’s private advice to Cascade in November 1990 that consolidation of
Conston’s financial statements was not necessary because it was in bankruptcy at
that time. Moreover, the fact that C&L gave this private advice to Cascade never
made its way into the public domain, and, accordingly, there was no reliance by
investors on C&L in this regard.
We also note that Plaintiffs seem to assume some duty on the part of an
10
C&L did in fact withdraw its audit report with respect to Conston on November 29,
1991, and with respect to Fran’s Fashions on December 3, 1991, in each case shortly after
Cascade announced on November 20, 1991, that Cascade’s financial statements might be
inaccurate and that it had been unable to locate Incendy for several days.
36
auditor to continue to monitor the public statements and filings not only of its own
client, but also of its client’s parent. However, Plaintiffs’ complaint points to no
accounting principle that imposes such a duty. Nor does Plaintiffs’ brief cite case
law imposing such a duty.11
Finally, with respect to other factors listed by Rudolph as relevant in the
duty to disclose analysis, see 800 F.2d at 1043, we note that there are no
allegations that C&L initiated the purchase or sale of Cascade securities, nor that
C&L derived any benefit from the purchase or sale of such securities.
Essentially, Plaintiffs argue that C&L should be liable under § 10(b) because
it did not withdraw its audit reports immediately after the September 27, 1991
filing of Cascade’s 10-K, waiting instead until November 29 and December 3,
1991. In light of the foregoing considerations, we have considerable doubt that
C&L had a duty to disclose arising from the alleged errors in Cascade’s 1991 10-
K.12 However, we need make no such definitive ruling in this case.13 Rather, given
11
We note below that, in this case, we need not make a definitive holding with respect to
any duty to disclose on the part of C&L. For similar reasons, we need not make any definitive
ruling with respect to the suggested continuing duty to monitor subsequent public filings.
Suffice it to say that, even if there were such a duty, Plaintiffs have failed to allege with the
necessary particularity the contours of such a duty or the underlying facts which would constitute
such an extreme departure from the standards of ordinary care as to state a viable fraud claim.
12
The facts of this case would seem to fall within the general rule referred to in Rudolph
that there is no “‘continuing duty to keep investors apprised of adverse developments long after
the date of the certified report.’” 800 F.2d at 1044 (quoting Ingenito v. Bermec Corp., 441 F.
Supp. 525, 549 (S.D.N.Y. 1977)). As Rudolph noted: “It would be asking too much to expect
37
the lack of particularity of Plaintiffs’ allegations with respect to the failure of C&L
to withdraw its previous audit reports of Fran’s Fashions and Conston immediately
after the September 27, 1991 filing of Cascade’s 10-K, and given the vagueness of
the duty, if any, which C&L is alleged to have breached, we hold that Plaintiffs
have failed to satisfy the particularity requirements of Rule 9(b).
E. Leave to Amend
Plaintiffs also argue that the district court erred in denying them leave to
amend their complaint in order to make additional allegations regarding C&L’s
conduct. The district court denied Plaintiffs’ motion for leave to amend,
concluding that the additional allegations would not state a claim under § 10(b).
We have recognized that, “[w]here it appears a more carefully drafted
complaint might state a claim upon which relief can be granted, . . . a district court
should give a plaintiff an opportunity to amend his complaint instead of dismissing
it.” Bank v. Pitt, 928 F.2d 1108, 1112 (11th Cir. 1991). However, “if a more
carefully drafted complaint could not state a claim . . ., dismissal with prejudice is
proper.” Id.accountants to make difficult and time-consuming judgment calls about the nature of routine
facts and figures turned up after a report has been completed.” Id. at 1044.
13
Thus, we need not address whether there may be some circumstances in which the
auditor of a subsidiary might have a duty to disclose upon which the shareholders of a parent
could base a § 10(b) claim.
38
In their brief to this Court, Plaintiffs set forth eleven additional allegations
which they claim would further demonstrate C&L’s “scienter” and “the existence
of a duty to disclose on the part of [C&L] under Rudolph.” However, after careful
review of these additional allegations, and in light of Rule 9(b) and Central Bank,
we conclude that the district court did not err in denying Plaintiffs’ motion for
leave to amend. See Pitt, 928 F.2d at 1112.
VII. CONCLUSION
We agree with the district court that Plaintiffs’ amended complaint fails to
state a claim against GY&S and C&L for primary liability under § 10(b). We also
hold that the district court did not abuse its discretion by denying Plaintiffs’ motion
for leave to amend. Accordingly, the judgment of the district court is
AFFIRMED.
39