conduct occurring before he purchased his stock in February,
Finally, plaintiff argues that, in addition to alleging that
Laventhol engaged in misrepresentations with respect to the
1983 financial statements, the First Amended Complaint alleges
that Laventhol engaged in material omissions. Plaintiff
thereby attempts to bring this case within the scope of the
Supreme Court's holding in Affiliated Ute Citizens v. United
States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d
741 (1972). In Affiliated Ute, the Court held that where
securities fraud is based primarily upon material omissions,
reliance and "causation in fact" are presumed. As Laventhol
points out, however, the alleged omissions here are simply the
converse of the alleged misrepresentations: Laventhol is
accused of failing to tell plaintiffs that the alleged
misrepresentations by Xonics and Cantor, Fitzgerald were
untrue. Every fraud case based on material misrepresentations
could be turned facilely into a material omissions case, and
thus plaintiff could avoid the necessity of pleading and
proving causation and reliance, if this Court were to accept
this argument. This case simply is not within the ambit of
Affiliated Ute because both misrepresentations and omissions
are alleged. Cavalier Carpets, Inc. v. Caylor, 746 F.2d 749
(11th Cir. 1984); Berg v. First American Bank Shares, Inc.
[Current Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 92,011 at
91,007 (D.D.C. April 17, 1985).
In Berg, the court ruled that a case "involving both alleged
misstatements and omissions relating to the sale of securities
cannot properly be characterized as an omissions case of the
type for which the Affiliated Ute presumption was fashioned."
Id. at 91,011 (citations omitted). Plaintiff's attempt to
diminish Berg is unpersuasive. Plaintiff first characterizes
the court's statement as dictum because the case was dismissed
for failure to state a claim under the federal securities laws
on the basis that the alleged misrepresentations and omissions
were not material. Plaintiff is wrong: the court's discussion
of reliance was in the context of an alternative holding.
Second, plaintiff contends that Berg is distinguishable
because the Berg court found that proof of reliance was
impossible. But that is precisely what Laventhol argues here:
plaintiff could not have relied, as a matter of law, on an
audited financial statement which issued five months after
plaintiff purchased his Xonics stock. To the extent that
plaintiff has pled reliance (First Amended Complaint, ¶ 47), he
has done so only in a conclusory, non-fact specific manner, and
thus those allegations may be disregarded in ruling on a Rule
12(b)(6) motion. Third, plaintiff argues that Berg's holding is
nonsensical because it "suggests that a defendant can avoid the
constructive reliance presumption of Affiliated Ute merely by
lying affirmatively in addition to omitting to state material
facts." (Plaintiff's Responsive Brief at 25.) The obvious
response is, as stated above, that if this Court were to accept
plaintiff's argument, a plaintiff could avoid the necessity of
pleading and proving the essential elements of causation and
reliance merely by alleging that the defendants' failure to
disclose that they were lying to him when he bought his stock
constituted a material omission. Moreover, plaintiff's
contention purposefully misunderstands the substance of
Laventhol's argument, which is that where the only alleged
material omissions consist of the defendant's alleged failure
to disclose that the alleged misrepresentations were not true,
then pleading and proof of reliance and causation is essential.
Finally, plaintiff's attempt to persuade this Court that the
holding of Berg is not the rule in the Seventh Circuit by its
sole citation to Sundstrand Corp. v. Sun Chemical Corp.,
553 F.2d 1033, 1048 (7th Cir. 1977), cert. denied, 434 U.S. 875, 98
S.Ct. 224, 54 L.Ed.2d 155 (1977), is unavailing because the
Sundstrand court found that the record in that case established
the existence of both material misrepresentations and omissions
as well as reliance thereon by plaintiff. Id. at 1048-49.
This Court holds that reliance cannot be presumed where the
alleged material omissions constitute only the converse of the
alleged affirmative and material misrepresentations. See also
Vervaecke v. Chiles,
Heider & Co., 578 F.2d 713, 716-18 (8th Cir. 1978); Grossman v.
Waste Management, Inc., 589 F. Supp. 395, 409 (N.D.Ill. 1984).
To the extent, however, that plaintiff has pled that
Laventhol knew of Xonics' financial problems in February, 1983
and failed to disclose those difficulties to plaintiff (First
Amended Complaint, ¶¶ 45d, 46e), plaintiff has alleged a
material omission in addition to material misrepresentations
for which pleading and proof of reliance is unnecessary under
Affiliated Ute. The question thus becomes whether, assuming for
the purposes of this motion that Laventhol knew of Xonics'
financial difficulties in February, 1983, Laventhol had a duty
to disclose that information to plaintiffs. As courts have
recognized, "In the absence of an affirmative duty to disclose,
there can be no liability for mere inaction or silence."
Feldman v. Simkins Industries, Inc., 492 F. Supp. 839 (N.D.Cal.
1980), aff'd, 679 F.2d 1299 (9th Cir. 1982). See also Chiarella
v. United States, 445 U.S. 222, 228-30, 100 S.Ct. 1108,
1114-15, 63 L.Ed.2d 348 (1980); Grossman v. Waste Management,
Inc., 589 F. Supp. 395, 409 (N.D.Ill. 1984); D & G Enterprises
v. Continential Illinois National Bank & Trust Co.,
574 F. Supp. 263, 269 (N.D.Ill. 1983).
Laventhol was Xonics' auditor engaged only to examine and
opine on its 1983 year-end financial statements. Plaintiff has
not alleged that Laventhol made any affirmative statements at
all to plaintiff before or at the time he purchased Xonics
stock — let alone affirmative misrepresentations. Thus, even
if Laventhol had actual knowledge of Xonics' problems, in the
absence of affirmative misrepresentations or other active
assistance in the fraud, Laventhol arguably had no duty to
disclose that knowledge to plaintiff.
Another way of formulating this rule is that one may not be
held liable as an aider or abettor to a fraud solely on the
basis of silence and inaction. Hochfelder v. Midwest Stock
Exchange, 503 F.2d 364, 374 (7th Cir. 1974), cert. denied,
419 U.S. 875, 95 S.Ct. 137, 42 L.Ed.2d 114 (1974);*fn8 Spatz v.
Borenstein, 513 F. Supp. 571, 583 (N.D. Ill. 1981). As the Ninth
Circuit, upon which plaintiff heavily relies, has stated with
respect to an accountant alleged to be liable as an aider and
abettor for failure to disclose his knowledge of the company's
financial irregularities and inadequate records:
There is not a scrap of authority supporting
this extraordinary theory of Rule 10b-5
liability, and we will not supply any in this
We find nothing in Rule 10b-5 that purports to
impose liability on anyone whose conduct consists
solely of inaction. . . . We perceive no
reason . . . thus to expand Rule 10b-5 liability.
On the contrary, the exposure of independent
accountants and others to such vistas of liability,
limited only by the ingenuity of investors and
their counsel, would lead to serious mischief.
Wessel v. Buhler, 437 F.2d 279, 283 (9th Cir. 1971). See also
Hudson v. Capital Management International, Inc., 565 F. Supp. 615
(N.D.Cal. 1983).*fn9 Accordingly, Laventhol's motion to
dismiss plaintiff's Section 10(b) and Rule 10b-5 claims for
failure to state a claim because the complaint fails to
adequately allege reliance and causation is granted. Plaintiff
is granted leave to further amend his First Amended Complaint
to cure these defects if he can do so consistent with the
guidelines posed by this Opinion and with his good faith
obligations under Rule 11.
To a certain extent, the reliance and causation analysis of
this opinion is applicable as well to the Xonics and Cantor,
Fitzgerald defendants. However, because plaintiff