Tricontinental Indust. v. Pricewaterhousecoopers

• Citation: 475 F.3d 824
• Decision Date: 17 January 2007
• Docket Number: No. 05-4322.,05-4322.
• Parties: TRICONTINENTAL INDUSTRIES, LIMITED and Tricontinental Distribution, Limited, Plaintiffs-Appellants, v. PRICEWATERHOUSECOOPERS, LLP, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

475 F.3d 824

TRICONTINENTAL INDUSTRIES, LIMITED and Tricontinental Distribution, Limited, Plaintiffs-Appellants, v. PRICEWATERHOUSECOOPERS, LLP, Defendant-Appellee.

No. 05-4322.

United States Court of Appeals, Seventh Circuit.

Argued June 7, 2006.

Decided January 17, 2007.

Jason M. Rosenthal, Schopf & Weiss, Chicago, IL, Allan B. Diamond, Michael S. Truesdale, (argued), Diamond, McCarthy, Taylor, Finley & Lee, Houston, TX, for Plaintiffs-Appellants.

Robert J. Kopecky, James J. Boland, (argued), Kirkland & Ellis, Chicago, IL, for Defendant-Appellee.

Before BAUER, RIPPLE and WOOD, Circuit Judges.

RIPPLE, Circuit Judge.

Tricontinental Industries Limited and Tricontinental Distribution Limited (collectively "Tricontinental") instituted this action against PricewaterhouseCoopers, LLP ("PwC"), for negligent misrepresentation, common law fraud and securities fraud. These allegations related to statements that PwC had made regarding the financial worth of its client, Anicom, Inc. ("Anicom") during negotiations involving the sale of Tricontinental's assets for Anicom stock. The district court dismissed Tricontinental's original, amended and second amended complaints for failure to state a claim, see Fed.R.Civ.P. 12(b)(6), and for failure to plead fraudulent conduct with the specificity required by Federal Rule of Civil Procedure 9(b). Tricontinental timely appealed. For the reasons set forth in this opinion, we affirm the judgment of the district court.

I BACKGROUND

A. Facts

1.

Because this is an appeal from a motion to dismiss, "[w]e accept all the factual allegations in the complaint and draw all reasonable inferences from these facts in favor of the plaintiff." Arazie v. Mullane, 2 F.3d 1456, 1465 (7th Cir.1993) (citation omitted).¹

Anicom, a wire distribution company, was founded in the early 1990s. Soon thereafter, its stock became publicly traded, and the company adopted a strategy to increase market share and to expand its geographical scope of operations. Between 1995 and 1997, Anicom acquired twelve companies. Each of these transactions involved some payment in the form of Anicom stock. During this time, PwC rendered accounting, audit and various types of consulting services to Anicom.

In September 1998, Anicom entered into an Asset Purchase Agreement ("Agreement") to acquire the wire and cable distribution assets of three companies — Texcan Cables Ltd. (known now as Tricontinental Distribution Limited), Texcan Cables, Inc. and Texcan Cables International, Inc.² According to the Agreement, Anicom acquired those assets in exchange for cash and Anicom stock.³

After the transaction, Tricontinental Distribution and Texcan Cables, Inc., transferred their stock to plaintiff Tricontinental Industries, Ltd., who was not a party to the Agreement.

2.

According to the allegations of Tricontinental's complaint, which we must accept as true for purposes of this appeal, in 1996, Anicom began engaging in improper accounting procedures to enable it to report that it had met sales and revenue goals. The procedures included the use of fictitious sales orders or "prebill[s]" for goods that were not ordered. R.135 at 9. PwC became aware of these practices in July 1997 when it was asked to investigate Anicom's billing practices at Anicom's Atlanta and Tampa offices. After conducting its investigation, PwC reported to Donald C. Welchco, Anicom's then Vice President and Chief Financial Officer, that improper billing had occurred at Anicom branches and that, in the absence of controls, the practice might arise at other branches as well. See id. at 47.

No mention of these irregularities was made in PwC's audits of Anicom's 1998 and 1999 financial statements. Indeed, PwC certified that Anicom's financial statements were accurate, complete and in conformity with Generally Accepted Accounting Procedures ("GAAP") and that its audits were performed according to Generally Accepted Accounting Standards ("GAAS").

On July 18, 2000, Anicom announced that it was investigating possible accounting irregularities that could result in revision of its 1998, 1999 and first quarter 2000 financial statements by as much as $35 million. Accordingly, Anicom announced that its 1998 and 1999 financial statements should no longer be relied upon.

After conducting an internal investigation, Anicom further announced that, subject to audit, it believed that, for the period from the first quarter 1998 to the first quarter of 2000, the company had overstated revenue by approximately $39.6 million. None of the company's announcements or disclosures ever stated that full-year 1997 revenue or net income had been materially misstated or that any of Anicom's prior financial results were inaccurate in any way.

On January 5, 2001, Anicom filed for bankruptcy protection. The plaintiffs allege that this bankruptcy decreased the value of Anicom stock acquired in the September 1998 transaction, all of which was then owned by the plaintiff, Tricontinental Industries.

After Anicom's disclosure of possible irregularities, both the Securities and Exchange Commission ("SEC") and the Federal Bureau of Investigation ("FBI") conducted investigations. On May 6, 2002, the SEC instituted a civil action against six Anicom officers and employees for violations of the federal securities laws in connection with Anicom's 1998, 1999 and 2000 statements. The SEC complaint alleged that, to conceal this fraud, Anicom executives had lied to PwC during its audits and reviews. Additionally, in 2003, a federal grand jury returned indictments against several of Anicom's executives for fraud and obstruction of justice related to Anicom's 1998, 1999 and 2000 reported results.

B. District Court Proceedings

On July 18, 2001, Tricontinental filed this action against PwC and individual officers and directors of Anicom asserting claims related to the September 1998 transaction. The original complaint asserted that PwC had violated Section 10(b) of the Securities Exchange Act for false statements in filings before the SEC; it also asserted common law fraud based on

materially false and misleading statements . . . concerning the revenues, earnings, operations and financial condition of Anicom. These false and misleading statements were made to Plaintiffs in meetings and conversations in 1998 prior to September 21, 1998 and were contained in Defendants' various public filings, in the representations and warranties made by Anicom in the Asset Purchase Agreement, and in other documents prepared by Defendants in connection with the Asset Purchase Agreement.

R.1 at 28. Finally, the original complaint alleged a claim for negligent misrepresentation against PwC based on "consent letters it signed for Anicom's" registration statements for the first three quarters of 1998 and based on "its input into the determination of the equity value of the preferred shares," which reflected inflated sales and earnings figures. Id. at 29. PwC moved to dismiss these claims on several grounds, and the district court granted that motion.⁴

On January 28, 2003, the plaintiffs filed a motion for reconsideration and also filed a motion for leave to file an amended complaint. The court denied the motion to reconsider, but granted the motion for leave to file an amended complaint ("Amended Complaint"). In the Amended Complaint, Tricontinental asserted two claims against PwC:⁵ a negligent misrepresentation claim and a claim for common law fraud. With respect to the negligent misrepresentation claim, the complaint stated that

[p]rior to the time that PwC conducted its 1997 audit, PwC had assisted Anicom in raising money for acquisitions and finding acquisition candidates. And, in 1997, PwC well knew that Anicom was seeking to complete additional acquisitions. Indeed, in December 1997, PwC proposed to provide Anicom with ongoing assistance and advice on acquisitions and acquisition candidates.

R.117 at 63. Additionally, Tricontinental maintained that PwC knew that Tricontinental was relying on Anicom's audited financial statement for 1997 and, specifically, was relying on PwC's representation "that the audit was performed in a manner consistent with GAAS and that Anicom's financial statements conformed with GAAP." Id. at 64-65. These statements, Tricontinental alleged, "were materially false, misleading and without reasonable basis." Id. at 65. Additionally, Tricontinental claimed that

Anicom's financial statements and Form 10-Qs for the First and Second Quarters of 1998 contained statements that were materially false and misleading. PwC had the responsibility of reviewing those statements and reports before they were released or filed, and PwC did in fact review and provide assurance regarding them. The misstatements in Anicom's financial reports were so blatant that PwC could not have missed them in the course of any reasonable review procedure appropriate to the circumstances known by PwC to exist at the time . . . . Nonetheless, PwC did not withdraw or modify its 1997 audit opinion, but instead PwC let Plaintiffs rely upon that opinion.

Id.

The Amended Complaint also included a claim against PwC for common law fraud "Based Upon Actions Taken After September 21, 1998, To Conceal the Fraud in the Asset Purchase Agreement." Id. at 66. Among the allegations against PwC, Tricontinental stated that

[d]uring this period, each of these Defendants participated in a fraudulent scheme to conceal the fraud in the acquisition of Texcan. This scheme consisted of a series of fraudulent activities, including the issuance of fraudulent and misleading audits of Anicom's financial results for the years 1998 and 1999.

. . .

175. Although Plaintiffs did not know that they had a factual basis for rescission, the Principal Individual Defendants and PwC all knew that Plaintiffs had a basis for rescission. PwC and the Principal Individual Defendants also knew that, if the plaintiffs rescinded the Asset Purchase Agreement, the...