Ventures v. Laventhol & Horwath, 876 F.2d 1322, 1325 (7th Cir.
1989). Thus the gravamen of Tricontinental’s complaint is an
omission: PwC's failure to disclose the “irregularities,” id. 7 41,
in the two unaudited 10-Q reports! from the first and second
quarters of 1998. The language of Rule 10b-5 forecloses this
theory. Rule 10b-5 makes it unlawful for any person to “make any
untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading.”
(emphasis added). The rule makes no reference to the statements of
others, and the highlighted portion demonstrates that a defendant
is liable only for those omissions that make his own statements
misleading. Nevertheless, Tricontinental offers several arguments
why PwC should be liable under the Rule 10b-5.

An omission of a material fact is only actionable under Rule
10b-5 if the defendant has a duty to disclose that fact. Stransky
v. Cummins Engine Co., Inc., 51 F.3d 1329, 1331 (7th Cir. 1995). A
duty to disclose arises where the failure to speak “would render

” or where

the defendant’s own prior speech misleading or deceptive,
“the law imposes special obligations, as for accountants, brokers,
or other experts, depending on the circumstances of the case.”

Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1206 (11th Cir. 2001)

+ The complaint alleges that PwC did not audit the first and
second quarter 10-Q reports until its year-end audit for 1998, id.
q 38, so as of the sale, PwC had not audited the quarterly reports.

4


stock of Anicom. See, e.g., Gustafson v. Alloyd Co., Inc., 513 U.S.
561 (1995). The securities were not issued pursuant to the later
filed registration statement.
Ifl.
PwC’s motion to dismiss is Granted. The individual defendants’

motion to dismiss the claims under §§ 11 and 15 of the 1933 Act is

GRANTED.
ENTER ORDER:
- SS
LLP Buel
Elaine E. Bucklo
United States District Judge
Dated: January 18, 2002


Tricontinental argues that PwC surely knew about the fraud
prior to the September 1998 closing because, pursuant to § 711.10
of the American Association of Certified Public Accountants
Professional Standards, PwC was required, before signing the
consent letters that permitted its 1997 audit to be included in
Anicom’s April and August 1998 registration statements, see PwC Ex.
C, to update that audit. But even if this is so (and the duty in §
711.10 generally does not extend beyond inquiry of officers and
executives as to whether any material change has occurred), this
does not create a duty to Tricontinental, who was not a purchaser
of the stock that was the subject of either of those registration
statements.

In addition, even if PwC knew or recklessly disregarded the
fact that the quarterly statements contained fraudulent sales
statements, that runs only to whether PwC acted with scienter, see
DiLeo, 901 F.2d at 629, and scienter is irrelevant if there was no
actionable misrepresentation or omission. Allowing a plaintiff to
bootstrap the existence of a fraudulent omission onto an
accountant’s knowledge of impropriety would eliminate the
requirement of a misrepresentation. See Latigo Ventures, 876 F.2d
at 1326 (disapproving “a claim that accountants who participate in
or even are merely aware of a fraud by a client have a duty under
Rule 10b-5 and the common law of Illinois to broadcast that fraud

to anyone who might buy the client’s stock. This theory of


{emphasis in original). State law, not federal securities law, is
the source of any duty that may exist here. DiLeo, 901 F.2d at 628.

In Illinois, an accountant has no duty to “blow the whistle on
improper behavior by [fits] clients.” Id. at 629; Latigo Ventures,
876 F.2d at 1326-27. The Illinois Public Accounting Act, 225 ILCS
450/0.01 et seg. (“IPAA”), does not create such a duty. The IPAA
insulates an accountant from liability to parties with whom it is
not in privity, except for fraud claims, § 30.1(1), and “other
acts, omissions, decisions or conduct, if [the accountants are]
aware that a primary intent of the client was for the professional
services to benefit or influence the particular person bringing the
action,” § 30.1(2). But the act speaks only of liability for the
accountant’s acts, not for the client’s acts, and it says nothing
about a duty to speak. § 30.1. The only case cited by
Tricontinental construing the IPAA does not support the existence
of an accountant’s duty to reveal its client’s misleading
statements. See Chestnut Corp. v. Pestine, Brinati, Gamer, Ltd.,
667 N.E.2d 543 (T1ll. App. Ct. 1996). In Chestnut Corp., the
accountant had made affirmative representations about an audit that
were misleading. Id. at 545. Here, in contrast, PwC is alleged to
have made no affirmative statements about the two allegedly
fraudulent quarterly reports. The Act does not create a duty of an

accountant to reveal its client’s improprieties.


about what PwC did or said, and those are the only acts for which
it can be liable. If PwC’s alleged omissions did not render its own
statements misleading, Tricontinental’s theory of recovery depends
on “aider and abettor” liability, which the Supreme Court expressly
rejected in Central Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A., 511 U.S. 164, 191 (1994).

Because the complaint fails to allege any misleading act or
omission, Tricontinental’s state law claims fail as well. See
Board of Educ. of City of Chicago v. A, C and S, Inc., 546 N.E.2d
580, 591 (Ill. 1989) (holding that both fraud and negligent
misrepresentation require a misrepresentation). PwC’s motion to
dismiss is granted.

II.

The individual defendants move to dismiss counts III and IV of
the complaint, which seek relief under sections 11 and 15 of the
Securities Act of 1933, 15 U.S.C. §§ 77k and 770, on the basis of
a registration statement filed pursuant to the agreement between
fTexcan, now Transcontinental, and Anicom. The motion is granted.
The purpose of the registration statement was to enable
Transcontinental to sell the Anicom stock that Transcontinental
received as part of its sale of Texcan,. That sale closed in
September, 1998. The agreement for the sale required that Anicom
register the stock within 60 days after the closing. Section 11 is

simply inapplicable to Transcontinental’s purchase in September of


Minute Order Form (06/97)

United States District Court, Northern District of [linois

Name of Assigned Judge Elaine E. Bucklo Sitting Judge if Other
or Magistrate Judge * than Assigned Judge
CASE NUMBER 01 C 5526 DATE 1/18/2002
CASE Tricontinental , et al. Vs. Anixter, et al.
TITLE

{In the following box (a) indicate the party filing the motion, c.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented. |

MOTION:

DOCKET ENTRY:

rep) Oo Fited motion of [ use listing in “Motion” box above.]

(2) qo Brief in support of motion due

(3) o Answer brief to motion due___. Reply to answer brief due

(4) a Ruling/Hearing on set for at

(5) a Status hearing[held/continued to] [set for/re-set for] on ___set for at

(6) oO Pretrial conference[held/continued to] [set for/re-set for] on set for at.

(7) a ‘Trial[set for/re-set for]on at.

(8) Oo [Bench/Jury trial] [Hearing] held/continued to at.

(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) O General Rule2] OOFRCP4i(a\(1) O FRCP41(a)(2).

(io) «oil {Other docket entry] | Enter Memorandum Opinion and Order granting Pricewaterhousecoopers’

motion to dismiss (26-1) and also the individual defendants’ motion to dismiss claims under Section 11
and 15 of the 1933 Act. Defendant, Pricewaterhousecoopers is, therefore, dismissed from the complaint.
‘The court also dismisses counts II] and IV of the complaint against the individual defendants.

(il) [For further detail see order attached to the original minute order.]
No notices required, advised in open court. Document
6
Number
No notices required. umber of notices
UY | Notices mailed by judge’s staff. uf Ig
Notified counsel by telephone. ‘| N él
Docketing to mait notices
Mail AO 450 form,
4) .
“_— a LYN02 Lou tsig sf
Copy to judge/magistrate judge. waaya
1718/2002
H
courtroom 04 iS dd § 1 Ny Ye 2d date mailed notice
Mpy deputy’s py
initials oc
Datentidal becbiheh ad! JF] 4
central Clerk’s Office naling deputy initials



whistleblower liability or financial good Samaritanism severs
accountants’ liability from the making of representations.”}.
B.

Tricontinental argues that PwC acted as more than a mere
auditor because PwC was “actively involved” in the transaction,
Compl. @ 40, and that its involvement gave rise to a duty to reveal
Anicom’s alleged financial shenanigans. However, the law that it
cites does not support this proposition. In SEC v. Seaboard Corp.,
677 F.2d 1289 (9th Cir. 1982), the defendant attorney’s liability
stemmed from his own misrepresentation in an opinion letter, and
not from his silence in the face of his client’s fraud. fd. at
1293, 195-96. See also Ackerman v. Schwartz, 947 F.2d 841, 848 (7th
Cir. 1991) (Attorney could not escape liability for statements in
opinion letter when he authorized client to release the letter to
prospective buyers.).

Moreover, even if “active participation” in the transaction
(as opposed to in the fraud) were enough to establish liability
against PwC, the allegations in the complaint about PwC’s role are
conclusory and vague. The complaint says only that PwC
“participated directly in the negotiations with Plaintiffs,”
“represented Anicom in discussions with Plaintiffs about financial
and operational details” of the transaction, @ 40, and “dealt
directly with Plaintiffs,” 9 41. This falls short of the

particularity--the where, when and what required by Rule 9(b)--


defendant made a false statement or omission (2) of material fact
(3) with scienter (4) in connection with the purchase or sale of
securities (5) upon which the plaintiff justifiably relied (6) and
that the false statement or omission proximately caused the
plaintiff’s damages.” Otto v. Variable Annuity Life Ins. Co., 134
F.3d 841, 851 (7th Cir. 1998). “[PJleading fraud with specificity
is both an element of the SEC Rule 10b-5 cause of action and a
pleading requirement of the Federal Rules.” In re HealthCare
Compare Corp. Secs. Litig., 75 F.3d 276, 280-81 (7th Cir. 1996);
Fed. R. Civ. P. 9(b). To satisfy the particularity reguirement,
the plaintiff must allege “the who, what, when, where, and how: the
first paragraph of any newspaper story.” Dileo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir. 1990).

The complaint does not allege that PwC made any actionable
false statement or omission. Here, the only alleged affirmative
representations by PwC relate to its audit certification for 1997,
which was issued on March 30, 1998, and included in Anicom’s 1997
year-end 10-K filing, Compl. 9 35, as well as the August 18, 1998,
registration statement for the transaction, id. @ 38. The
statements in the 1997 audit are not alleged to be fraudulent. Id.
@ 24. The only other affirmative statements alleged are PwC's year-
end audits for 1998 and 1999, completed after the transaction, @
38-39, so they cannot form the basis of a Rule 10b-5 claim here

because Tricontinental could not have relied on them. Latigo


to dismiss the claims under §§ 11 and 15 of the Securities Act of
1933, 15 U.S.C. §§ 77k and 770. I grant the motions.
I.

Tricontinental alleges that, for the purposes of the September
21, 1998 transaction, it relied on Anicom’s year-end 1997 10-K
report, which had been audited by PwC, as well as two 10-Q
quarterly reports, not audited by PwC, but allegedly containing
false statements about earnings. PwC audited those reports as part
of its annual year-end audit, but not until after the transaction
was complete. Tricontinental alleges that PwC was aware that the
10-Q reports contained false statements, and that they were
obligated to reveal this fact because of their close participation
in the transaction. PwC moves to dismiss under Fed. R. Civ. P.
12(b) (6) for failure to state a claim and under Rule 9(b) for
failure to plead fraud with particularity.

On a motion to dismiss, I take all well pleaded factual
allegations in the complaint as true and draw all reasonable
inferences in favor of the plaintiffs. Szumny v. American Gen.
Fin., Inc., 246 F.3d 1065, 1067 (7th Cir. 2001). I will not dismiss
a complaint for failure to state a claim unless it appears beyond
doubt that the plaintiffs can prove no set of facts in support of
their claims that would entitle them to relief. Id.

A.

In a Rule 10b-5 case, “a plaintiff must establish that (1) the


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

TRICONTINENTAL INDUSTRIES LTD.
and TRICONTINENTAL DISTRIBUTION
LIMITED, formerly known as
TEXCAN CABLES LIMITED,

Plaintiffs,

Vv.

ALAN B, ANIXTER, SCOTT C. ANIXTER, No. O01 C 5526

CARL E. PUTNAM, DONALD WELCHKO,
WILIAM R. ANIXTER, PETER HUIZENGA,
IRA J. KAUFMAN, THOMAS J. REIMAN,
MICHEAL SEGAL, LEE B. STERN,
COOPERS & LYBRAND, L.L.P. and
PRICEWATERHOUSECOOPERS, LLP,

euen’:
we 2 1

Defendants.

MEMORANDUM OPINION AND ORDER

On September 21, 1998, Tricontinental Industries Ltd. and

Tricontinental Distribution Limited, formerly known as Texcan

Cables, Limited (“Tricontinental”), sold assets to Anicom, Inc., in
exchange for Anicom stock. Tricontinental sues individual officers
and directors of Anicom as well as PricewaterhouseCoopers, LLP
(“PwC”), an accounting firm that provided auditing and consulting
services to Anicom in the time surrounding the transaction, for
violations of the Securities Acts of 1933 and 1934, and for
violations of several Illinois laws. PwC moves to dismiss the
claims against it, which arise under 15 U.S.C. § 10(b) and SEC Rule

10b-5 as well as Illinois law. Several of the individual defendants

(Alan Anixter, Scott Anixter, Carl Putnam and Donald Welchko) Ve