Opinion ID: 3000059
Heading Depth: 2
Heading Rank: 5

Heading: Pre-Closing Common Law Fraud

Text: Finally, Tricontinental maintains that the district court erred in dismissing its claim for common law fraud based on misrepresentations made by PwC in its audit opinion related to Anicom’s 1997 financial statement. Although we agree with the district court that Tricontinental’s scienter allegations are problematic, we believe that Tricontinental’s claim for pre-closing fraud suffers from a more fundamental infirmity. As we explained in DiLeo, Rule 9(b) “requires the plaintiff to state ‘with particularity’ any ‘circumstances constituting fraud.’ . . . This means the who, what, when, where, and how . . . .” 901 F.2d at 627. Here, Tricontinental’s claim falls short with respect to the last requirement: Tricontinental does not allege how PwC’s fraud caused its losses. The Supreme Court of Illinois has stated that Illinois law is “similar to the analysis used by these Federal courts which require both transaction causation and loss causation in order to recover for misrepresentation in securities cases.” Martin v. Heinold Commodities, Inc., 643 N.E.2d 734, 747 (Ill. 1994). The plaintiff, the court noted, is required to show that “ ‘the untruth was in some reasonably direct, 38 No. 05-4322 or proximate, way responsible for his loss.’ ” Id. (quoting Huddleston v. Herman & MacLean, 640 F.2d 534, 549 (5th Cir. 1981). However, one could not reasonably infer from Tricontinental’s pre-closing claim that the losses it suffered after Anicom’s statement in July 2000 were caused by the alleged misrepresentation in the 1997 audit statement. Tricontinental’s loss followed Anicom’s revelation that it was investigating irregularities in its 1998 and 1999 financial statements. However, Tricontinental has not set forth any facts showing that the losses it suffered are proximately linked to the alleged misstatements in the 1997 financial statement. Tricontinental’s allegations focus on its detrimental reliance on the 1997 statement, which is at the heart of transaction causation. However, both transaction and loss causation are elements of fraud under Illinois law. Because Tricontinental did not plead adequately loss causation, its pre-closing fraud claim must fail.13 13 Additionally, as noted above, we agree with the district court that Tricontinental’s allegations with respect to scienter also fall short of the mark. Before this court, Tricontinental maintains that the district court required it to plead elements of scienter and intent with particularity—elements which, even under Rule 9(b), may be pleaded generally. Tricontinental submits that, if the district court had applied the proper standard in evaluating the allegations in the Second Amended Complaint, namely whether the complaint affords a basis for believing that the plaintiff could establish scienter, the district court would have concluded that the allegations provide a basis for believing that PwC acted with scienter in issuing its 1997 audit opinion. See Appellant’s Br. at 34. PwC contends, however, that the district court’s dismissal of this count was proper because Tricontinental failed to allege (continued...) No. 05-4322 39 13 (...continued) that it was PwC’s “intent that the statement induce the plaintiff to act” that dooms the claim. See Appellee’s Br. at 43-46. According to PwC, the plaintiffs “did not allege that PwC issued its 1997 audit opinion with the intent to induce the Texcan Entities to enter into that transaction, nor did plaintiffs allege that PwC issued its opinion with the intent to induce Tricontinental Industries to acquire Anicom stock from Texcan Entities in some later corporate transactions.” Id. at 44. Tricontinental argues in reply that it “satisfied its pleading obligation by alleging that PwC had a reason to expect that its audit report would be communicated to companies targeted by Anicom.” Reply Br. at 15-16. Tricontinental points to the Restatement (Second) of Torts § 533, comment g, as support for its position. Comment g states that “ ’if a firm of accountants employed to audit the books of a corporation gives a certificate fraudulently overstating its assets, knowing that the corporation intends to make use of it to obtain a loan, it is immaterial that the identity of the prospective lender is not know [sic] to the accountants.’ ” Id. at 16 (quoting Restatement (Second) of Torts § 533, cmt. g). We believe Tricontinental’s reliance on the Restatement is misplaced. Tricontinental has not shown that Illinois follows the Restatement with respect to this requirement. Indeed, Tricontinental’s argument seems to run afoul of the state supreme court’s articulation of the elements of common law fraud found in Connick v. Suzuki Motor Co., 675 N.E.2d 584, 591 (Ill. 1996), one of which is “defendant’s intent that the statement induce the plaintiff to act.” (emphasis added). In the absence of some evidence that Illinois courts would abandon this requirement in favor of the Restatement position, we must reject Tricontinental’s argument. 40 No. 05-4322