and SGI's internally generated funds were not sufficient to meet SGI's net capital needs. (Cmplt. P 40).
Consequently, the following events occurred. In July of 1990, various regulatory agencies which controlled the ability of SGI and its subsidiaries to stay in business concluded that SGI's subsidiaries had a significant net regulatory capital deficit, and for all practical purposes closed down SGI and its subsidiaries. (Cmplt. P 41). As a result of these problems, SGI filed a Chapter 7 bankruptcy petition on August 22, 1990. (Cmplt. P 42). Additionally, in May of 1992, the Securities and Exchange Commission filed a civil action against the Partnership alleging that the Partnership had not transferred business assets and liabilities with a net book value of $ 6M in August of 1988 (Cmplt. P 43). The partners claim that the SEC's civil suit was the Partnerships' "first notice that the $ 6 million transfer had been ineffective." (Cmplt. P 43). Plaintiffs then assert that, from August of 1988 to May of 1992, Coopers "fraudulently concealed the ineffectiveness of the $ 6M transfer from the Partnership, the partners and the investors." This alleged fraudulent concealment was executed by: (1) submitting draft "comfort letters to the Partnership and its' attorneys regarding the propriety of the Closing Schedule (Cmplt. P 44a); (2) preparing and filing the Partnership's tax returns for 1988 and 1989, which indicated that the $ 6M transfer had been effective (Cmplt. P 44b); and (3) auditing and expressing unqualified opinions on the financial statements for SGI and its subsidiaries for the years ending December 31, 1988, and December 31, 1989, which also indicated that the $ 6M transfer had been effective. (Cmplt. P 44c).
A. Count I: Section 10(b) and Rule 10b-5
In Count I, Plaintiffs claim that the statements Coopers allegedly made violated § 10(b) of the Securities Exchange Act ("SEA")
and Rule 10(b)(5).
In order to state a claim under Rule 10b-5 and § 10b of the SEA, a plaintiff must demonstrate that: (1) the defendant made an untrue statement of a material fact or omitted a fact that rendered a statement made by the defendant misleading; (2) in connection with a securities transaction; (3) with the intent to mislead; and (4) the misrepresentation or omission caused plaintiff's loss. Schlifke v. Seafirst Corp., 866 F.2d 935, 943 (7th Cir. 1989). An omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988).
"An accountant can be held primarily liable under [Rule 10b-5] for material misstatements or omissions . . . made in connection with the sale of a security." Roberts & Matthews, Ltd. v. Lange, 1989 U.S. Dist. LEXIS 13856, 1989 WL 153006 at * 1 (N.D. Ill. Nov. 13, 1989). Regardless of whether the plaintiff is challenging a misstatement, an omission, or a prediction, the plaintiff also must establish that the defendant acted with scienter.9 Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875, 54 L. Ed. 2d 155, 98 S. Ct. 224, 98 S. Ct. 225, and cert. denied, Meers v. Sundstrand Corp., 434 U.S. 875, 54 L. Ed. 2d 155, 98 S. Ct. 224, 98 S. Ct. 225 (1977). In this Circuit, that means that the plaintiff must establish that the defendant acted at least recklessly. Renovitch v. Kaufman, 905 F.2d 1040, 1046 (7th Cir. 1990) (citations omitted). See also Cortec Indus. Inc. v. Sum Holding L.P., 839 F. Supp. 1021, 1025 (S.D.N.Y. 1993)
(an accountant's recklessness is sufficient to give rise to primary liability); Ades v. Deloitte & Touche, 799 F. Supp. 1493, 1500-01 (S.D.N.Y. 1992)(applying "reckless disregard" standard).
In this Circuit, primary liability under § 10b also requires an accountant's alleged misstatement to be certified, audited, prepared or reported. See DiLeo v. Ernst & Young, 901 F.2d 624, 626-27 (7th Cir. 1990). Cf. Roberts, 1989 U.S. Dist. LEXIS 13856, 1989 WL 153006, at *1 ("an audit is not a prerequisite to liability")(citing Gardner v. Surnamer, 599 F. Supp. 477, 481 (E.D. Pa. 1984), and Zoelsch v. Arthur Andersen & Co., 262 U.S. App. D.C. 300, 824 F.2d 27, 34-35 (D.C. Cir. 1987)). Preparation of the allegedly misstated information requires central involvement" by the accountants. For instance, in Barker v. Lee County Bank, 1985 WL 2529 (N.D.Ill. Sept. 13, 1985), aff'd, 797 F.2d 490 (7th Cir. 1986), the court dismissed an action brought by investors against an accounting firm under § 10b, because the accounting firm "neither prepared, signed, nor certified in any way the only prospectus materials that plaintiffs . . . sought to link to [the accounting firm] . . . ." In reaching this conclusion, the court focused on whether there was: (1) "central involvement" by the accountants in the preparation of prospectuses or other promotional material; or (2) "substantial contribution" by the accountant to the promotional material issued to the seller. 1985 WL 2529 at * 11-13. See also Roberts, 1989 U.S. Dist. LEXIS 13856, 1989 WL 153006, at * 1 (balance sheet attached to sales documents); Cortec, 839 F. Supp. at 1024 (opinion on financial statements and comfort letter); Ades, 799 F. Supp. at 1495 (review report on financial statements).
Plaintiffs have alleged with sufficient particularity that Coopers played a central role in the drafting and formation of the alleged misstatements which the Stotler Partnership incorporated into its Prospectus.
1. Coopers structured the Transaction by counseling and assisting the drafting and preparation of the SGI Prospectus. (Cmplt. P 30).