Opinion ID: 731037
Heading Depth: 2
Heading Rank: 4

Heading: application of texas gulf to the instant facts

Text: 32 Under Texas Gulf and Wessel, plaintiffs' claim survives a motion for judgment on the pleadings. Plaintiffs allege that E&Y produced a fraudulent audit report for CPC, knowing that CPC would include this report in its Form 10-K filed with the SEC. If true, E&Y made false assertions  'in a manner reasonably calculated to influence the investing public,'  Wessel, 437 F.2d at 282 (quoting Texas Gulf, 401 F.2d at 862), and thus in connection with securities trading in violation of Section 10(b) and Rule 10b-5. See In re Leslie Fay Companies, Inc., 871 F.Supp. 686, 688, 695 (S.D.N.Y.1995) (refusing to dismiss § 10(b) action against accounting firm that allegedly produced fraudulent audit reports that it knew would be included in its client's Form 10-K). 33 The fact that E&Y is an outside accounting firm does not foreclose liability under § 10(b). As Central Bank explained, [a]ny person or entity, including a lawyer, accountant, or bank ... may be liable as a primary violator under 10b-5.... 511 U.S. at ----, 114 S.Ct. at 1455 (emphasis added). In Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983), the Supreme Court upheld a verdict imposing direct § 10(b) liability on the accounting firm, Herman & MacLean, which had issued an opinion concerning certain financial statements and a pro forma balance sheet that were contained in the registration statement and prospectus. Id. at 378, 103 S.Ct. at 685 (footnote omitted). See also Knapp v. Ernst & Whinney, 90 F.3d 1431 (9th Cir.1996) (upholding § 10(b) liability for an outside accounting firm based on its audit report); Anixter v. Home-Stake Production Co., 77 F.3d 1215, 1227 (10th Cir.1996) (upholding § 10(b) liability for an outside accounting firm that knew its false audit opinions would reach the investing public). While an outside accounting firm might be blameless where it had no reason to know that its client would use its audit report to sell securities, or where it instructed its client not to release the report to the public, Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183, 189-90 (7th Cir.1993), the instant plaintiffs squarely alleged that E&Y knew that CPC would include its audit opinion in a Form 10-K. 34 Nor is E&Y protected by the fact that this case involves the dissemination of false information to the investing public by way of an independent audit report contained in a Form 10-K. These forms must be filed with the SEC on an annual basis. See 15 U.S.C. § 78m; 17 C.F.R. § 249.310. The stock price of publicly traded companies reflects information contained in Forms 10-K. As the Supreme Court has explained, [c]orporate financial statements [including Form 10-Ks] are one of the primary sources of information available to guide the decisions of the investing public. United States v. Arthur Young & Co., 465 U.S. 805, 810 & 811 n. 5, 104 S.Ct. 1495, 1499 & 1499 n. 5, 79 L.Ed.2d 826 (1984). Indeed, federal reporting requirements, such as the Form 10-K, exist to control the accuracy of the financial data available to investors in the securities markets.... Id. at 810-11, 104 S.Ct. at 1499. Fraudulent Forms 10-K thus fall within the ambit of § 10(b). See Rana, 8 F.3d at 1358 (liability under § 10(b) extends to a document such as a press release, annual report, investment prospectus or other such document on which an investor would presumably rely).