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September 3, 1991

ARTHUR ANDERSEN & CO., et al., Defendants

Suzanne B. Conlon, United States District Judge.

The opinion of the court was delivered by: CONLON


 This purported class action *fn1" filed on behalf of a pension trust and ten individuals (collectively, "plaintiffs") charges the following defendants with violating the Securities Act of 1933: Needle in a Haystack, Inc. ("Needle"), Arthur Andersen & Co. ("Arthur Andersen"), James E. Bowser, Steve B. Zaboji, and George J. Myrick. The amended complaint also charges Needle and Arthur Andersen with violating the Illinois Consumer Fraud and Deceptive Business Practices Act ("the Consumer Fraud Act"), Ill.Rev.Stat. ch. 121 1/2, paras. 261-272. Pursuant to Fed.R.Civ.P. 12(b)(6), Arthur Andersen moves to dismiss the charges against it for failure to state a claim. In the alternative, Arthur Andersen requests that the court to order plaintiffs to post a bond in an amount sufficient to cover Arthur Andersen's litigation costs and reasonable attorneys' fees.


 On a motion to dismiss, the court accepts as true the well-pleaded factual allegations of the complaint and views those allegations in the light most favorable to the plaintiff. Gillman v. Burlington Northern R. Co., 878 F.2d 1020, 1022 (7th Cir. 1989). From December 21, 1989 through March 1990, Needle's underwriter solicited plaintiffs to purchase Needle's securities. Amended Complaint para. XIII. In connection with this solicitation, plaintiffs received Needle's offering prospectus dated December 21, 1989. Id. para. VII. The prospectus offered forty thousand units at a price of $ 6 per unit. Each unit consisted of three shares of common stock and twenty stock warrants. Id. para. VIII. Plaintiffs purchased a total of 21,567 units at a price of $ 129,402.00. Id. para. XI.

 Prior to plaintiffs' investment, Needle filed a Form S-18 registration statement with the Securities and Exchange Commission ("SEC"). Id. para. VII. The registration statement represented, inter alia, that Arthur Andersen had prepared Needle's audited financial statement, and that Arthur Andersen was an independent accounting firm. Id. para. IX.

 Plaintiffs maintain that Needle's prospectus and registration statement were materially misleading because Arthur Andersen did not render an independent and disinterested audit of Needle's financial statements. According to plaintiffs, Arthur Andersen originally refused to audit Needle's financial statements for the 1989 securities offering, because Needle owed Arthur Andersen approximately $ 37,500 in fees for prior accounting services. Id. para. XVI. Arthur Andersen told Needle that this outstanding debt rendered Arthur Andersen non-independent with respect to Needle's audit. Id. para. XVII. Needle and Arthur Andersen subsequently agreed that Needle would satisfy the $ 37,500 debt by paying Arthur Andersen $ 7,500 in cash, and executing a $ 30,000 promissory note to be paid from the proceeds of the securities offering. Id. para. XVIII. The registration statement failed to disclose that part of the proceeds from the offering would be used to satisfy Needle's debt to Arthur Andersen. Thus, the registration statement's representation of Arthur Andersen's independence was false. Id. para. XX.

 On April 9, Needle was contacted by certain Arthur Andersen representatives who had not previously been involved in the Needle offering. Id. para. XXII. These Arthur Andersen representatives had discovered that Arthur Andersen had not been an independent auditor with respect to Needle's financial statements. Upon making this discovery, Arthur Andersen notified the SEC that it had not conducted an independent audit of Needle's financial statements. Id. para. XXII. On April 12, 1990, representatives of Arthur Andersen and Needle met with officials from the SEC and disclosed the substance of the alleged misrepresentations in the registration statement. Id. para. XXIII. As a result of the meeting, the SEC agreed to take no action against Needle or Arthur Andersen, but Needle was forced to terminate its offering. Needle also agreed to terminate trading in Needle's securities. Id. para. XXIV. Needle intends to refile an entirely new registration statement; Arthur Andersen has agreed to procure and pay for a new audit from an independent auditor. Id.

 As a consequence of the foregoing events, plaintiffs were unable to sell, trade or exercise the warrants on the securities they purchased from Needle; the securities are now worthless. Id. paras. XXV-XXVI.


 Generally, the federal system of notice pleading does not favor dismissal for failure to state a claim. Gray v. Dane County, 854 F.2d 179, 182 (7th Cir. 1988). However, dismissal is proper if it appears beyond doubt that plaintiffs can prove no set of facts in support of their claim that would entitle them to the relief requested. Illinois Health Care Ass'n v. Illinois Dep't of Public Health, 879 F.2d 286, 288 (7th Cir. 1989), citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Similarly, dismissal is in order if the complaint fails to allege a necessary element required to obtain relief. R.J.R. Services, Inc. v. Aetna Casualty and Sur. Co., 895 F.2d 279, 281 (7th Cir. 1989).

 I. Section 11 of the 1933 Securities Act

 Count I of the amended complaint charges Arthur Andersen with violating section 11 of the Securities Act of 1933, 15 U.S.C. ยงยง 77k. Section 11 imposes liability on accountants who prepare or certify a registration statement if:

. . .any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary ...

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