Opinion ID: 3000059
Heading Depth: 2
Heading Rank: 3

Heading: Post-Closing Common Law Fraud

Text: Tricontinental also maintains that the district court erred in dismissing Count V of the Amended Complaint, entitled “For Common Law Fraud, Based Upon Actions Taken After September 21, 1998, To Conceal the Fraud in the Asset Purchase Agreement.” R.117 at 66. This count alleges that, during the period after the sale and until July 18, 2000, “each of these Defendants participated in a fraudulent scheme to conceal the fraud in the acquisition of Texcan. This scheme consisted of a series of fraudulent activities, including the issuance of fraudulent and misleading audits of Anicom’s financial results for the years 1998 and 1999.” Id. Tricontinental also alleges that [b]ecause these irregularities were deliberately and knowingly hidden from Plaintiffs in September of 1998, Plaintiffs were fraudulently induced to enter into the Asset Purchase Agreement. Because their sale of valuable assets was the result of fraud, Plaintiffs were entitled to rescind the Asset Purchase Agreement under both the common law of Illinois and under the Illinois Securities Act, 815 ILCS 5/13, et seq., and would have done so, but for the Defendant’s postclosing fraudulent conduct and concealment. Id. at 67. Finally, Tricontinental avers that 10 (...continued) show, as explained by Tricontinental, that “[t]he intra-company stock transfer was not a separate transaction, but the final step of the overall transaction, in which Tricontinental Industries was involved at every step,” Reply Br. at 4, then, we believe, Tricontinental may be entitled to relief. Consequently, we cannot uphold the district court’s dismissal of the negligent misrepresentation claim on this basis. 30 No. 05-4322 [b]ecause of the Defendants’ material misrepresentations in connection with the 1998 and 1999 audits, and because of Plaintiffs’ reliance upon those misrepresentations, Plaintiffs did not discover that they had been fraudulently induced to enter into the Asset Purchase Agreement until July of 2000, at which time recission of the Texcan transaction would not have prevented the losses that Plaintiffs suffered from Defendants’ fraud. Id. at 68.11 The district court treated Tricontinental’s claim as a claim for “fraudulent concealment” and held that Tricontinental had not met the heightened pleading requirement of Rule 9(b): To satisfy this requirement, Tricontinental must plead the “who, what, when, where, and how” involved in the alleged fraud. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990). Tricontinental does not meet this burden. Nothing in the pleadings before me alleges with this degree of particularity the representations made by PwC after Tricontinental’s stock purchase. Tricontinental does allege omissions on the part of PwC. However, as discussed in my previous memorandum opinion . . ., PwC had no duty to reveal mislead- ing statements on the part of its clients. R.169 at 3-4. The district court also determined that Tricontinental had not pleaded adequately the scienter requirement. Id. 11 As with its negligent misrepresentation claim, Tricontinental invites this court’s attention to allegations contained in the Second Amended Complaint as well as in the Amended Complaint. For the reasons set forth supra note 8, we shall consider only those allegations set forth in the Amended Complaint. No. 05-4322 31 Tricontinental takes issue with these conclusions. Although acknowledging that PwC had no independent duty to reveal any fraud contained in the 1997 audit statement—Tricontinental nevertheless maintains that PwC did have an independent duty to conduct the 1998 and 1999 audits with care and to be truthful in those audit statements. Its failure to do so, Tricontinental maintains, constituted fraud. Turning to the scienter requirement, Tricontinental alleges that PwC was aware of substantial billing improprieties during 1998 and 1999, and yet gave no indication of these problems in the 1998 and 1999 financial statements and audits. Tricontinental further alleges that PwC’s failure to reveal these problems was fueled by its desire to maintain a good business relationship with Anicom. Taken together, Tricontinental believes that these allegations suffice to establish intent to defraud. Generally speaking, a claim for fraud must include the following elements: “(1) a false statement of material fact; (2) defendant’s knowledge that the statement was false; (3) defendant’s intent that the statement induce the plaintiff to act; (4) plaintiff’s reliance upon the truth of the statement; and (5) plaintiff’s damages resulting from reliance on the statement.” Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 591 (Ill. 1996). Here, the critical element is whether the facts alleged in the Amended Complaint, and the reasonable inferences taken from those facts, permit the conclusion that PwC’s allegedly false statements in 1998 and 1999 were made with the intent to induce Tricontinental not to seek rescission. We do not believe that Tricontinental has met this pleading requirement. This court has stated that, with respect to allegations of scienter in cases of fraud against accountants, the complaint should identify what the 32 No. 05-4322 accountant had to gain by covering up (or being complicit in) the fraud of their clients. DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir. 1990). Typically, an accountant’s interest in fees, standing alone, will not suffice to establish fraudulent intent. See id. (“An accountant’s greatest asset is its reputation for honesty, followed closely by its reputation for careful work. Fees for two years’ audits could not approach the losses E & W would suffer from a perception that it would muffle a client’s fraud.”); see also GSC Partners CDO Fund v. Washington, 368 F.3d 228, 238 (3d Cir. 2003) (“[P]laintiffs now argue that CSFB had a motive to commit fraud because it stood to receive underwriting and financial advisory fees. This allegation is undoubtedly true but equally unavailing.”); Fisher v. Offerman & Co., 1996 WL563141, at  (S.D.N.Y. 1996) (“[A]n underwriter’s alleged motive to earn its underwriting fees is not alone sufficient to sustain a strong inference of fraudulent intent. If it were, every underwriter, law firm, accountant, and investment advisor whose compensation or commission depended on the completion of an initial public offering would have a motive to commit fraud, which would make Rule 9(b) wholly meaningless.”). PwC’s alleged interest in generating fees, however, is the crux of Tricontinental’s scienter argument. Additionally, we are troubled by the tenuous relationship between the alleged motivation for the inducement—the desire for continued fees—and the action that PwC allegedly was trying to induce—Tricontinental not seeking rescission. Essentially, Tricontinental argues as follows: If PwC’s statements had revealed Anicom’s allegedly fraudulent billings, Tricontinental would have sought rescission No. 05-4322 33 against Anicom.12 Upset by this action, Anicom, in turn, would have terminated its relationship with PwC. As a result of Anicom’s displeasure, PwC would have lost the fees generated by its relationship with Anicom. We believe that this theory of motive involves too many assumptions and too much speculation to support a reasonable inference that PwC made false statements with respect to the 1998 and 1999 financial statements for the purpose of inducing Tricontinental not to seek rescission. Consequently, we affirm the judgment of the district court with respect to Tricontinental’s common law fraud claim based on PwC’s post-closing statements.