es of the nine hundred million approximately seven hundred million of the securities that were involved were sold under private offering memorandums were issued or sponsored by company called mortgages limited which is a company that was operating the ponzi scheme and the issuer here the other two hundred million  managers of radical bunny that's where that comes from all of the investments on their face at least purported to be mortgaged backed securities defendant mayor hoffman with respect to the two hundred thousand sold through radical bonnie and these were mortgages limited promissory notes supposedly secured to turned out to be unsecured  the radical bunny managers received and reviewed the auditor reports and that occurred under our allegations with the consent of mayor hoffman ad as did it the placing of the audit reports  accepted mr hammer if i can if i can help focus at least my concern it appeared to me that the district court relied quite heavily on the arizona appellate court's decision in standard chartered to invoke reports and i think your theory is that they should have discovered that there were in fact no mortgages that were backing these securities but my concern is what allegations do you have in the complaint that go beyond that act of negligence from which it would remove my or hofman from the safe harbor and render them liable they're specifically and they start on page one fifty four and they run through page one sixty where the acts of cyan knowledge on the part of their hofman are detailed and what those allegations terry for example is that by august of two thousand and seven mortgages limited incorporated all the f c c findings and those of the years on a corporation commission there hofmann knows under the allegations that are pleaded there and pages i just gave you from this testing it's built testing on this has stop thirty five million and new dollars coming in on radical bunny and you have a situation where the art reports like negligent misrepresentation and the problem i'm having with the argument is that i understand from reading the record that apparently there was a decision made tactical or not to do to not pursue the negligent misrepresentation claim when seeking to amend the original complaint so why should we consider those same allegations when considering the remaining claim well actually you consider them has collapsed was newton knew or should have known i you know knowing that the business has stopped originating loans and knowing that money is still coming in in my mind stops short of a stablish ing c enter on the part of the accountant to establish fraud i mean i'm comparing the accountants here to what i believe to be the remaining claim against the lawyers who actually assisted in the drafting of statements once they told their client what you're doing is in violation of the arizona securities laws and i understand the district court  refused to dismiss the lawyers because of that fact we don't i don't see an allegation to that effect with regard to the account but what the authors did here that different than what occur and standard investment if you change the facts a little bit make them you say you allege they were involved but as i understand it your theory of involvement is that in the face of what you just represented they nonetheless issued clean audit reports knowing that those reports were going to be shared with others beyond the client that they prepared the report for but what more do you have beside that fact to establish that they were actually involved in the sale of the securities once once you agree to to bundle make your audit report part of a law that points out that it is not uncommon for audit reports to be shown to others by the client and that the accountants oh no duty to third parties their duty is o to the client and in the standard charter situation as i read that case i thought the issue was in connection with the sale of the bank that the the accounting firm pricewaterhouse knew that their reports were going to be disclosed to the prospective purchaser who was obviously interested in determining the financial condition of the bank that it was acquiring but the arizona court nonetheless said that's not enough to establish liability for security thrive and that makes perfect sense in a business closing where you have a one time transaction where an auditor is asked by its client to make an audit memorandum and so it goes to price waterhouse it's all out of her and it says can we use your audit report and our offering memorandum can raise some money and we need three hundred million that was a purchase price now you've cut out there your audit report as part of the offering materials that are being used to solicit and encourage investors to bring in money but under your hypothetical that the accountants now have a new client do they not that the new client is not the bank that's being acquired it's the acquiring bank in order to help it raise the fun but the duty that exists i guess i'm still struggling i don't think you've answered my question i'm sorry what what active participation do you allege the accountants engaged in beyond simply giving permission or acknowledging or not objecting to the fact that mortgages limited was going to share the audit reports with prospective investor you act is that this is i'm going to have to consider the duration here to know this is going on for three years and eleven different private offering memoranda understand all that my question i don't think it is all that difficult either you have an allegation of active participation or you don't and i'm asking beyond the preparation of what appears to be according to your your allegations negligently prepared audit report which issued a clean opinion when a competent accountant should not have done that what more do you have to show that they were participating in the sale of these that there is a they knew their audit report was was misleading because among other things it represented that mortgages limited was a loan originator when they knew that it was not a loan originator and it authorize that misleading knowingly misleading audit report to be distributed to investors and you have two hundred fifty million dollars in new money coming in where this these orders had a ten year relationship with this company it wasn't just ineptness it wasn't gross negligence one can infer on the basis of what you've legit in the complaint that they knew better and they were deceiving folks ok people who might invest it was an act of deception and an act of deception equals participation isn't it your argument  represented mortgages limit it was carly and the loan origination business it's more business so you need like they lied in effect is what you say nothing they would miss leading up that they was sloppy enough that they didn't that in common with someone else that can be participation and that's what they did here they joined with mortgages limited in helping mortgages limited solicit knowing  anything in a betting theory it's it's just picking up the language you're out of the definition of participation i thought the arizona supreme court had ruled that there is no aiding and abetting theory under arizona state start if i may with the securities that claim and if there's time will address the negligent misrepresentation investment management act as the court knows that the leading case are you having a hard time hearing and i'm not speaking loud enough testing how that is much louder or even i can hear him yeah i think i moved a little closer to the microphone to you ok great the leading case defining what participation  conducts annual audit and would have conducted the auditor regardless of any securities transaction does not participate in and reduce a trend a transaction even if it knows informally consents to the audit report being used in the transaction attached to securit filings if you look at the definition in standard chartered and grand of participate what you see is in grand let's take ground the defendants  venture made all sorts of misrepresentations to him knew about accounting fraud a question didn't tell him about it and that was not participation it was not participation the court said because they had no stake the defendant said the defendants had no stake in the sale and they didn't draft the sales agreement and then let's look at the definitions of induce standard chartered says it's an active definition it's purposeful you have to be trying to sell securities it's not enough that an auditor knows that the client will use the audit report to try to sell securities to have induced the auditor has to be trying to sell securities and and grand affirmed this definition it relied on this definition that set that set up paragraph twenty four of a grand it setting grand that was a classic case of inducement and then it said c standard chartered defining inducement and the reason was a classic case of inducement is that n mcmaster is got on a plane flew to arizona met with the defendant and encouraged him to invest in this in this joint venture they tried to get him to deficient no matter how grossly distorted the numbers are no matter how many oversights and how no matter how many inferences one can draw about about fraud and you assist the fraud that would be an aiding and abetting claim and the government can bring that claim but arizona in that recent case selvi gamma decided that you can't have a private right of action for that claim and it's following federal law in that respect we will know that the line between acting as a principal in the line between aiding and abetting is not so bright but i think it is it's pretty clear under under arizona law given the definition of participation inducement that era zoning has adopted it it doesn't have to do with your state of mind now i really do want to address this i enter argument because there's a new argument that they're making in their reply brief in their opening brief they said there's a safe harbor for participation for people acting the ordinary course and you don't get to take advantage of the safe harbor if you are knowingly assisting in fraud but that's the second step in the process the first step is you have to decide whether there was participation and inducement and if someone participated  then even if they participated you might be able to take advantage of a safe harbor if you were just acting in the ordinary course in the reply brief they're making a different argument which is even if you would otherwise not meet the definition of participation or inducement you can fall within that definition if you knew about fraud and this is a new argument in the reply brief and it's not an argument they raised in the district court if you look at their motion for leave to amend their apply in support of their motion earlier for him and they didn't make that argument and they if you look at the district court opinion when the district court addresses doesn't it come pretty close to understand mr hamel rick's argument if the accountants knew that mortgages ltd had stopped originating loans and they knew that the loans were not in fact secured by the mortgage or the securities were not in fact secured by the mortgages what more does the point of have to show if the evidence shows they knew darn well that their audit reports were being used to induce the investors to buy the securities because it conducted an audit and discovered the truth is your position is that they have absolutely no duty to tell at least to tell their client stop making that representation because their audit shows that's not right they claim they might have been aiding and abetting claim except for arizona eliminated aiding abetting except for actions by the government but it doesn't meet the definition of a participation inducement and it's telling that in the district court opinion on this this is  a seven the district court it does address a scienter with respect to mere office and it addresses it in the context of the aiding and abetting claim because that's what they were arguing and so but let's assume that that's not a problem that this is an argument they had been making all along and by the way i should mention that if you if you look at the allegations in the in the amended complaint that he refers to for cite enter this is that you are thirty nine for forty one this is that look at the table of contents for the amended complaint if there is a section see if it says mayor hoffman's rol and then if you go down to number nine on the next page it says mary hoffman aided and abetted a securities violation and then it has a section that says substantial assistance and then it has a section that society entered it was all this is all arguing for to is that an argument made made in pursuit of an eating and abetting claim but let's just assume that they were they were arguing that there is a slight enter exception to participation inducement if you have say enter you by definition purchase a bait and induce well one i don't think they have any authority for that proposition if you look at grand grand is a case involving allegations of slander grand is a case involving allegations of scheme liability grounds a case where the defendant's nacho and mcmasters food arizona and made all sorts of representations misrepresentations to the defendant to try to solicit a securities transaction and did not tell him about the accounting fraud and nevertheless the court holds no participation well if so i enter is an exception to the participation and inducement requirement granted to come out differently the other thing is if you look at the district court's analysis of the site enter allegations it i think it's entirely correct so first of all the district court says you have to be aware of the fraud this is that you are five and seven and under arizona law forty four doesn't do that and let me explain why if you look at their reply look at the argument they're making their reply brief pages sixty seven they say there's an audit in the standard sas eight say yes eight and this is a standard promulgated  the auditing standards board of the ai c p a and they say that standard gave us a duty to investigate and we should have investigated and we didn't well this the same thing was true in standard charter pricewaterhouse was alleged to have violated gas and if they had done a good audit they would have discovered the misrepresentations in the financial statements and then look at the allegations of what it is mayor hoffman supposedly knew the allegations of science are in the medical plate and and i hundreds of thousands of pages of mortgages limited documents so let's see what did they come up with where's the smoking gun for scienter so first they say they say we knew they conclusory really allege we knew that the radical bunny notes were not secured well if you look at what they actually allege this is paragraph five thirty four through five thirty seven of the amended complaint it's one fifty eight one fifty nine they say they actually allege that it was in big u s whether the notes were secured they say that may or hoffman received confirmation letters from their mortgages limited and radical bunny saying the notes were secured but it was quote ambiguous those letters were ambiguous and we should have followed up those aren't my words those are the those are the actual allegations of the complaint they say a reasonable auditor would have realized the notes were contrary to commercially normally wait the commercially normal way that security notes are written and that that's not sorry enter that's not awareness of fraud they say  hoffman did not investigate a lawsuit filed against them ellen in two thousand and eight in this menu complaint five forty seven five forty eight and they say this is contrary to a you five sixty one which again is an auditing standard and they said we didn't investigate the lawsuit again that it's not so i enter it's not an awareness of fraud and that loan origination issue they say that no one of the footnotes of the amended of the financial statement says financial s complaint well there's no allegation that that mayor off men knew that there would be no more alone originations and more importantly the complaint itself alleges that mehr that mortgages limited adopted a risky business strategy and strategy under which they would originate fewer but larger loans with delayed funding commitments that set paragraphs one hundred to the one hundred three of the complaint so there's the loan volume did not diminish there were the same number loans they were just larger loans with delayed funding commitments so there's there's nothing untrue about the note in the footnote that our mortgage was clearly involved in loan or region nations in two thousand and seven there's certainly no basis for f they they stopped in august two thousand and seven but there were a few more originations late in two thousand and seven that set the lead plaintiff supplemental xor for they allege that m hoffman knew that two employees were a lot resigned in late two thousand and seven and this is paragraph five eighteen of them ended complaint they should have asked the employees their reasons for leaving that is not knowing participation and fraud  these are violations alleged violations of of auditing standards not actual awareness of fraud in and there are couple more points on say enter to that all of these allegations of santer are allegations relating to two thousand and seven complaint says that the financial statement the audit report for the two thousand and seven financial statements was released in march of two thousand and eight that's be amended complaint paragraph five twenty one so even if this were not it would be and it's not it would be it would limit plaintiffs to people who invested after march two thousand and eight in a company that went bankrupt in june two thousand and and eight i don't i plan to start alleging that anyone actually saw those financial statements  finally where's the motive in cases against auditor is where scienter is found it's very difficult to show a motive why would merit hoffman ruin its reputation risk its reputation risk its ability to keep going as a company to to assess knowingly assist in fraud for what three years of audit fees it's just it's these are not plausible allegations of site enter much less allegations that rise to the level of purposes primarily frankly the that the need to file audited financial reports with the state of arizona for a commercial banker they didn't audit that the the other attempts that the transaction in type close the closing of the transaction there be no transaction without the closing and to closing entirely hinged on pricewaterhouse consenting to and providing an audit opinion and that's at nine forty five p second three twenty five if i may i'd like to touch briefly on the negligent misrepresentation claim and again the only issue on appeal here is whether the district court was correct in dismissing the original complaint because they they dropped the they did and that's not my word by the way that's their word in their motion for leave to amend to the district court they said we are dropping all of the claims except for the securities act and the aiding and abetting claims in order to streamline the litigation and in our brief we dressed two issues they also said to preserve her appeal on the dismissal of the the original comply i agree with that they can appeal the dismissal of the original complaint but what they can't do is say that the district court should have allowed them to go forward with a negligent misrepresentation claim based on the allegations of the amended complaint when they never asked the district court to do that i understand that but it's a little disturbing is it not given the allegations in the amended complaint that we would use the vehicle of twe one thing i think it would be a very dangerous policy for this circuit to allow that the original complaint in this case was filed almost five years ago the dismissal was almost four years ago they moved relieved to him and they tell the district court we don't want to proceed with a negligent misrepresentation claim we just want to we just want to appeal the original dismissal and then they come up here and say that the original dismissal was wrong because of allegations and it leader complaint that we told you we weren't filing for purposes of a negligent misrepresentation claim it just it it i think it's unfair to the parties years later to do that on appeal i think it's unfair to the district court to say frankly i think it's i don't think that's even a novo review if you're saying that they should have been able to they should be able to appeal based on what was in the amended complaint because the district court could not have abused its discretion in not allowing that claim to go forward when they weren't even asking for it in their motion that the one thing on them since i'm running out of time there are two issues in the brief on the negligent dissertation one was duty and wonders reliance and reliance i think is the much more straightforward issue because the district court correctly held that they have not alleged reliance what they alleged repeatedly was that mayor hoffman knew that investors would rely on the audit reports well they're coming at it from the wrong angle they don't know whether it's a action whether it whether the individual plaintiffs in this case i reviewed the audited financial statements and reviewed the audit reports and they don't allege they did and so the district court was correct in saying you haven't alleged reliance that these are facts within named plaintiff's knowledge and they don't bother alleging that i don't think it's an oversight the i won't go beyond the record to say there was testimony of well i won't be on the record but they had an opportunity to amend the district  rt says no reliance you haven't alleged that any individual plaintiff actually reviewed the audited financial statements or the audit of the audit reports instead of coming in in the amended complaint and adding allegations of reliance saying yes i did i reviewed the audited financial statements and it was significant to me for this reason facts within their knowledge they drop the claim and don't don't don't don't include any such allegations and the other reason i don't think it's an oversight is the plaintiffs in this case were not investing in mortgages limited to a financial statements that were attached the palms were mortgages limited by nature statements plaintiffs here were investigated mortgage backed securities and their investment depended on whether the bo repaid the loan and the underlying collateral on the real estate the palms themselves and this is that lead plaintiff supplemental excerpts page sixty four the palms themselves say you are not investing in mortgages limited we've attached mortgages unlimited financial statements vague those financial statements give you no indication of how your investment is going to perform and at what point then to did they tell the f c c that the financial statements are used to secure additional funding and to provide evidence of financial stability to investors that's it that's set out aircraft three zero one of the complaint and what it says is there's a there's a risk assessment been document in mortgages in america off men's work papers that said mayor hoffman knew that the the audit reports would be used to raise for purposes of investors who are interested in mortgage backed securities and that really goes to the duty question i think based on the original complaint that is not an adequate allegation of a duty that's everyone that is all investors in mortgages ltd and even beyond that statements that we used we used quoting to your line to secure additional funding what i'm saying is disappear additional funding when the you know what it hit the fan they were in desperate shape at that point well the work papers don't say that judge assigned to this case and she wrote an opinion on participation and inducement dealing with the officer and director defendants and she applied grand and why the way she applied it is important is because grand liberalized the standard for pleading it's and going as a police case it's all about pleading no decided after a trial like standard chartered and what grand held a couple of things that are relevant here that the provisions of the security zakk including the participate and induced the standard decided after judge murder handled the initial phases of this case when standard charter obviously was around but grand itself was the two thousand and ten k s and there are a number of other cases in two thousand and thirteen two thousand and twelve that were cited in the brief but she didn't have the advantage of judgment is specifically we relied on the two thousand and ten grand decision and what she said she interpret it as holding that you have to liberally interpret participate and induce and under that interpretation she declined even make a distinction between participation and in in three paragraphs she said it was either participation or inducement but i guess the concern i'm having is that in in a state securities fraud action are we not bound by the interpretation and grant one of the things granted it dead they haven't mentioned is it lowered the bar and how you prove inducement you can prove it by showing acts of encouragement and it can be encouragement by omission which so both of those cases they add something to standard chartered and they create a much more expansive interpretation at the pleading stage which is what graham was talking about how do you how do you plead it and grant also made the point which judgment applied that you don't need to separately go through an analysis judges down of inducement and participation if there's complaint if there is fraud here it will feel that language is inclusive the language and by that what he was saying was that if there is fraud it's going to fall under the making participating or inducing language and so we don't have to go through the separate analysis counsel your time has expected then thank you very much the case just argued is submitted will get your decision as soon as we can