Reisman v. Kpmg Peat Marwick Llp

• Decision Date: 15 January 2003
• Docket Number: No. 00-P-1004.,00-P-1004.
• Parties: JoHoward REISMAN & others<SMALL><SUP>1</SUP></SMALL> v. KPMG PEAT MARWICK LLP.
• Court: Appeals Court of Massachusetts

Page 1060

787 N.E.2d 1060

57 Mass. App. Ct. 100

JoHoward REISMAN & others¹ v. KPMG PEAT MARWICK LLP.

No. 00-P-1004.

Appeals Court of Massachusetts, Suffolk.

Argued April 10, 2002.

Decided January 15, 2003.

Edward T. Dangel, III, Boston (Jonathan L. Glover with him) for the plaintiffs.

Kevin J. Lesinski (John R. Baraniak, III, Boston, with him) for the defendant.

Present: LENK, KASS, & MILLS, JJ.

LENK, J.

Soon after selling their interest in Varnet Software Corporation, a family business, for shares of stock in Marcam Corporation (Marcam), a publicly traded company, the Reismans² saw the value of their investment take a steady and precipitous plunge. When able to do so, they sold their Marcam stock at a much reduced price. After Marcam's subsequent restatement of certain recent financial reports revealed that the prior reports had overstated Marcam's revenues, the plaintiffs sued the defendant accounting firm, KPMG Peat Marwick LLP (Peat Marwick), alleging that the firm, which had certified Marcam's financials for those years, had committed fraud, made negligent misrepresentations, and violated G.L. c. 93A. Peat Marwick was granted summary judgment on these claims, and the plaintiffs have appealed.

Although denying the allegation of fraud, Peat Marwick in its motion for summary judgment, did not challenge the Reismans' contention that it had, in effect, helped Marcam "cook the books" by issuing audit opinions for financial reports containing inaccurate information stating that the reports were "free from material misstatement" and conformed with generally accepted accounting principles. Instead, it maintained that it was entitled to judgment on what it saw as undisputed material facts, because (1) it owed no legal duty to the plaintiffs, as they were not its clients, and (2) since the accounting fraud was concealed until after the Reismans had sold their Marcam stock, the Reismans could not establish the requisite causal connection between their injuries and Peat Marwick's misstatements. The Reismans contend on appeal that the entry of summary judgment in Peat Marwick's favor on all claims was improper because (1) material facts are very much in dispute and (2) the judge misconstrued applicable law. We reverse.

Facts. We recite, in some detail, the facts of record in the light most favorable to the Reismans, the parties opposing summary judgment. See Attorney Gen. v. Bailey, 386 Mass. 367, 371, 436 N.E.2d 139, cert. denied, 459 U.S. 970, 103 S.Ct. 301, 74 L.Ed.2d 282 (1982); Eck v. Kellem, 51 Mass.App.Ct. 850, 851, 748 N.E.2d 1047 (2001).

1. The persons and entities involved. At all relevant times Marcam was a public company headquartered in Newton, Massachusetts. It developed and sold application software to manufacturing companies, and its stock was traded on the National Association of Securities Dealers Automated Quotation system (NASDAQ). The defendant Peat Marwick is a national accounting firm with offices in Boston; it, along with Peat Marwick Canada, is part of a worldwide "federation of independent firms," which is coordinated through a council. Beginning in the 1980's, Peat Marwick's Boston office performed a range of accounting and other services for Marcam, including audits of its financial statements. The Reismans are a family consisting of Howard (father), Amalia (mother), Kenneth, Galite, and Talia (children). Plaintiff Amgata Holdings Ltd. (Amgata) is a Canadian holding company whose stock is owned by Howard Reisman. Amgata and the Reismans, whom we refer to together as the Reismans, owned all the common stock of Varnet Software Corporation (Varnet), a Montreal-based company founded by Howard Reisman in 1973, which manufactured software for business applications. Before the Varnet-Marcam transaction, Peat Marwick Canada had been Varnet's auditor.

2. Marcam's financial reports. In 1991, Marcam effectively took control (through an irrevocable option to purchase a controlling number of shares) of three of its European distributors, in Italy, Belgium, and the Netherlands. Howard Crossman, Peat Marwick's designated auditor for Marcam from 1991 onward, knew of this at the time it occurred. In its annual report for fiscal year 1991, Marcam reported net income of $6,053,000. In so doing, the report treated the three money-losing European operations as distributors rather than as subsidiaries. Had the losses from what were in fact the three subsidiaries been properly included on Marcam's consolidated financial statement, Marcam would have shown net income of only $3,623,000, a decline in revenue from the previous year. In the independent auditors' report included in Marcam's 1991 annual report,³ Peat Marwick stated in essence that Marcam's financial statements were free from material misstatement.⁴ According to the Reismans' expert witnesses, Crossman's failure, as chief auditor, further to question Marcam about its relationships with the "distributors" amounted to Peat Marwick's "reckless disregard" both of the facts and of its duty as an independent auditor.

In the 1992 annual report, Marcam announced another steep rise in income, this time reporting $8,361,000 in net income when its actual net income was $6,678,000. By again treating the three European operations as distributors rather than subsidiaries, Marcam kept significant losses off the bottom line. In that report, Marcam also noted "an agreement in principle" it had reached to acquire the "worldwide marketing rights" to MAPICS (manufacturing, accounting, production, and information control system) software from IBM. In fact, in October, 1992, Marcam had agreed to purchase the MAPICS software outright. This characterization of the MAPICS acquisition as one only of marketing rights enabled Marcam to take advantage of an amortization period much longer than that traditionally permitted for software. In its independent auditor's report, Peat Marwick, which had advised Marcam in the negotiations to purchase MAPICS, certified that these financial statements were free from material misstatement.

Marcam's audited financial statements for 1993 showed net income of $2,550,000, down significantly from the 1992 reported net income of $8,361,000. These statements appeared in the 1993 annual report after the close of Marcam's September 30 fiscal year, months after the Marcam-Varnet deal had closed in June, 1993. The true facts about Marcam's 1993 net income, however, as would subsequently be reported, were even worse: Marcam showed a net loss of $12,684,000. In other words, for fiscal years 1991, 1992, and 1993, Marcam's audited annual financial reports, before they were restated in 1994, substantially overstated its earnings.

3. Project Snowbird. In late 1992, Howard Reisman decided to sell some or all of Varnet, which he had built into a successful enterprise over the course of twenty years. After Marcam expressed interest in buying Varnet in the spring of 1993, the two companies entered into active negotiations. To represent himself and his family in this transaction, Reisman⁵ gathered a team of professionals, including the investment banking firm of Fechtor, Detwiler & Company, Inc. (Fechtor), and the law firm of Nutter, McLennen & Fish.⁶ Marcam, in turn, brought in its own team, including, as herein relevant, Peat Marwick. The deal was dubbed "Project Snowbird" because of the Canadian connection. Following the advice of Peat Marwick, Marcam insisted that the deal be structured as a pooling-of-interests transaction (i.e., a stock swap),⁷ the same structure that Marcam had employed when making a number of other such acquisitions, including at least one in which Peat Marwick had involvement.

For years prior, Peat Marwick Canada had served as Varnet's accounting firm. With the Marcam deal in the offing, Varnet's chief financial officer contacted a partner at Peat Marwick's Boston office, thinking it more `likely to be versed in United States tax and accounting criteria. That office appointed an advisor to sit on the Varnet side of the negotiating table at an "all-hands" meeting, notwithstanding its role as advisor to Marcam. Because of Varnet's preexisting relationship with Peat Marwick Canada and Peat Marwick's status as an "independent" public accounting firm, Howard Reisman felt "comfortable" with the advisor's presence. Although there was no letter of engagement or billing arrangement, Reisman "considered [Peat Marwick] Boston to be [his] accountants" for purposes of the transaction.⁸ Because the deal was structured as a pooling-of-interests transaction, it was necessary to assess the value of the two corporations, and financial statements were accordingly among the matters discussed at the meetings between the parties. Peat Marwick and Varnet representatives met several times and Peat Marwick provided at least some advice concerning the pooling aspect of the transaction to the Varnet/Reisman team.

On May 10, 1993, Peat Marwick consented in writing to the incorporation of its earlier opinions on the Marcam financial statements in the Form S-8 Registration Statement to be filed with the Securities and Exchange Commission (SEC). Marcam filed the Registration Statement on Form S-8 with the SEC on May 14, 1993. Before that, Peat Marwick's Crossman had performed a "down-to-date" review of Marcam's financial situation to determine whether its financial statements were still free from false and misleading statements. According to the Reismans' experts, Peat Marwick by its consent in writing represented to the public that Marcam's reports remained accurate and free from false and misleading statements to the date of the Form S-8.

On or about May 13, 1993, Marcam filed with the SEC its unaudited Form 10-Q quarterly report for the period ending March 31, 1993, signed by Marcam's chief financial officer but not by Peat Marwick. Because Marcam's performance exceeded analysts' expectations, its stock rose sharply at the time. If the MAPICS...