990 F.2d 1256 (9th Cir. 1993), 92-15901, Cope v. Price Waterhouse

Docket Nº:92-15901.
Citation:990 F.2d 1256
Party Name:Stephen COPE; France Bolei; Paul Costa; Donald Fuller, on behalf of themselves and the class they represent, Plaintiffs-Appellants, United States of America, Intervenor, v. PRICE WATERHOUSE; Kenneth Leventhal & Company; Stephen Roulac, Defendants-Appellees.
Case Date:April 07, 1993
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1256

990 F.2d 1256 (9th Cir. 1993)

Stephen COPE; France Bolei; Paul Costa; Donald Fuller, on behalf of themselves and the class they represent, Plaintiffs-Appellants,

United States of America, Intervenor,


PRICE WATERHOUSE; Kenneth Leventhal & Company; Stephen Roulac, Defendants-Appellees.

No. 92-15901.

United States Court of Appeals, Ninth Circuit

April 7, 1993

Editorial Note:

This opinion appears in the Federal reporter in a table titled "Table of Decisions Without Reported Opinions". (See FI CTA9 Rule 36-3 regarding use of unpublished opinions)

Argued and Submitted March 10, 1993.

RICO Bus.Disp.Guide 8274

Appeal from the United States District Court for the Northern District of California; Nos. CV88-4636-CAL, CV87-2987-CAL, Charles A. Legge, District Judge, Presiding.



Before GOODWIN, FERNANDEZ and T.G. NELSON, Circuit Judges.


Brichard & Co. ("Brichard") syndicated eight public limited partnership offerings, each of which was formed to acquire and operate a large apartment complex. Upon the financial collapse of the partnerships in 1987, the limited partners brought a class action suit against Price Waterhouse, which conducted certain audits for Brichard, and Kenneth Leventhal & Co., Stephen Roulac, and Stephen Roulac & Co. (collectively "the Consultants"), which prepared written pre-offering reports on the apartment complexes. 1 They asserted statutory claims under section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), California Corporations Code § 25504.1, 2 and the Racketeer Influenced and Corrupt Organizations Act ("RICO"); and common law claims of fraud, negligence, and negligent misrepresentation.

The district court granted summary judgment in favor of Price Waterhouse and the Consultants on all claims. We affirm.

Factual Background

Each of the Brichard public offerings was sold through an SEC-registered prospectus which contained pro forma statements of anticipated operating income. Appellants focus on alleged misrepresentations made by Brichard in the pro forma statements and the alleged liability of Price Waterhouse and the Consultants for these misrepresentations.

Price Waterhouse audited the Statements of Revenues and Direct Operating Expenses, and its audit reports appeared in the prospectuses. The prospectuses stated that the pro forma statements were "based upon the historical Statement of Revenues and Direct Operating Expenses included elsewhere herein and upon adjustments resulting from application of the assumptions set forth in the Notes below." Pursuant to firm policy, Price Waterhouse auditors read each prospectus for the purpose of considering whether there were any material misstatements of fact or material inconsistencies between the audited financial statements and other information in the prospectuses. After the partnerships began operations, Price Waterhouse also audited their year-end financial statements.

Although several of the "wrappers" for the offering materials identified Price Waterhouse as "Partnership accountant for the Prospectus and for the important audit of historical performance," Brichard did not engage Price Waterhouse to perform analysis or issue a report on any portion of a Brichard prospectus other than the historical financial statements. In fact, the pro forma statements explicitly noted that "[t]hese statements are not covered by the report of the independent accountants" and that "[t]hese statements do not purport to forecast actual operating results for any period in the future."

The Consultants prepared written reports addressed to Brichard which consisted of an economic analysis of four of the eight properties and a due diligence opinion letter analyzing the reasonableness of certain of Brichard's assumptions concerning seven of the eight properties. Each analysis specifically noted that the terms of the Consultants' engagement "did not provide for an examination of your financial projections or for reporting on events and transactions subsequent to the date of this report." Although several of the offering wrappers identified the Consultants as responsible for "economic analysis and due diligence review," the Consultants' reports were not included in the prospectuses nor were they distributed to any investors.

Secondary Liability Under Section 10(b)

A. Price Waterhouse

The district court held that the statute of limitations for section 10(b) claims announced in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S.Ct. 2773 (1991), applied to appellants' action against Price Waterhouse. The court later denied appellants' motion to reinstate their Rule 10b-5 action against Price Waterhouse pursuant to section 27A of the 1934 Act. 3 It ruled that section 27A, a special provision relating to the statute of limitations on private causes of actions, was unconstitutional.

In a published opinion, we held that section 27A is constitutional. Gray v. First Winthrop Corp., No. 91-16907, slip op. (9th Cir. April 7, 1993). Price Waterhouse argues, however, that there is an alternative ground for upholding summary judgment in its favor. See In re Apple Computer Securities Litigation, 886 F.2d 1109, 1112 (9th Cir.1989), cert. denied, 496 U.S. 943 (1990) (court "may affirm on any ground supported by the record"). Price Waterhouse contends that actual knowledge of fraud is necessary to impose aiding and abetting liability under section 10(b), and that there is no genuine issue of material fact regarding its knowledge of allegedly false and misleading statements in the Brichard prospectuses.

In Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (en banc), cert. denied, 111 S.Ct. 1621 (1991), we held that recklessness satisfies the scienter requirement for primary liability under section 10(b). Then, in Levine v. Diamanthuset, Inc., 950 F.2d 1478 (9th Cir.1991), we accepted the Hollinger standard of recklessness as applicable to a suit for secondary liability under section 10(b): "To state a claim of aiding and abetting securities fraud, one must plead (1) the existence of an independent primary wrong, (2) actual knowledge or reckless disregard by the alleged aider and abettor of the wrong and of his or her role in furthering it, and (3) substantial assistance in the wrong." Id. at 1483. 4

The Levine court carefully defined the parameters of the recklessness standard as a basis for aiding and abetting liability under section 10(b). Recklessness was a sufficient basis for liability given the facts of Levine, because the alleged aider and abettors' conduct consisted of "actual misrepresentations." 950 F.2d at 1484 nn. 4 & 6. The court found it unnecessary to discuss whether these parties had a duty to disclose any information, because their liability was "premised in part not on silence, but on actual...

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