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IN RE INVESTORS FUNDING CORP. OF NEW YORK SECS. LI

December 8, 1980

In re INVESTORS FUNDING CORPORATION OF NEW YORK SECURITIES LITIGATION. Morris KATZ, et al., Plaintiffs,
v.
Jerome DANSKER, et al., Defendants. Rachel L. ROTHCHILD, Plaintiff, v. Jerome DANSKER, et al., Defendants. Dr. Bernard METRICK and Bernard Metrick, Custodian for Zachary Metrick, Plaintiffs, v. Jerome DANSKER, et al., Defendants. David HABER and Ruth Haber, Plaintiffs, v. Jerome DANSKER, et al., Defendants



The opinion of the court was delivered by: CONNER

OPINION AND ORDER

Before the Court are motions by defendants Peat, Marwick, Mitchell & Co. ("PMM") and Ernst & Whinney, as successor to S. D. Leidesdorf & Co. ("Leidesdorf") for summary judgment, pursuant to Rule 56, F.R.Civ.P., or alternatively to dismiss the complaint, Rule 12(b)(6), F.R.Civ.P. ("motions to dismiss") in the four above-subcaptioned cases ("Katz," "Rochchild," "Metrick" and "Haber"). In his Report Number 21 ("Report"), Magistrate Harold J. Raby recommends the granting of Leidesdorf's motion as to Katz, Rothchild, Metrick and Haber, the granting of PMM's motion as to Katz and Rothchild, and the denial of PMM's motion as to Metrick and Haber. Plaintiffs have filed objections to the Report to the extent it recommends the granting of the motions, while PMM has filed objections to the Report to the extent it recommends the denial of its motions. Consequently, this Court must make a de novo determination as to the motions, as required by 28 U.S.C. § 636(b)(1).

BACKGROUND

 Each of the complaints in the four cases under consideration seeks certification of a specified class of purchasers of securities issued by Investors Funding Corporation of New York ("IFC"), which petitioned for reorganization under Chapter X of the Federal Bankruptcy Act on October 21, 1974. The following chart summarizes for each of the four actions the purported plaintiff class, the named plaintiffs and the dates of purchases of IFC securities by each named plaintiff as set forth in the complaints: Action Class Plaintiff Purchase Dates Katz purchasers of a class A common Morris Katz January 7, 1969 stock and warrants exercisable for the purchase of class A common stock from January 1, 1968 to October 21, 1974 Rothchild purchasers of debentures from Rachel Rothchild March 11, 1968 December 31, 1967 to October 21, 1974 Metrick purchasers of class A common Bernard Metrick May 27, 1968 stock and arrants exercisable for the purchase of class A common stock from January 1, 1968 to October 21, 1974 Haber purchasers of debentures from David and Ruth April 5, 1972 December 31, 1967 to October 21, Haber 1974

 The substantive allegations of the four complaints are identical, and may be summarized as a unit. Each complaint names a multitude of defendants, including IFC's officers, directors, banks, attorneys and accountants. Each complaint states three counts, with the second being directed at PMM and Leidesdorf, the third being directed at certain banks, and the first being directed at all other defendants. The complaints allege a scheme by defendants other than PMM and Leidesdorf to defraud purchasers of IFC securities, in significant part by publishing financial statements which portrayed IFC's financial circumstances as relatively sound when in fact IFC was virtually or actually insolvent. The claims against PMM and Leidesdorf are stated in the familiar averments of accountant malpractice, including the fundamental allegations that PMM and Leidesdorf were engaged as the independent auditors of IFC for the calendar years 1968-1971 and 1972-1973, respectively; that PMM and Leidesdorf certified as accurate IFC financial statements which were in fact materially misleading; that, upon information and belief, PMM and Leidesdorf knew or recklessly failed to discover certain facts which should have led them to have further investigated and ultimately not to have certified the IFC financial statements as actually issued: and that consequently PMM and Leidesdorf are liable both as principals and as aiders and abettors of other defendants, pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder, and the common law.

 The record further indicates the following chronology of relevant events surrounding the services performed by PMM and Leidesdorf for IFC:

 (1) on March 5 and March 6 of 1969, a brief statement of IFC's net income for 1968 was released and appeared in the New York Times and the Wall Street Journal;

 (2) on May 1, 1969, IFC publicly issued its financial statements for the year 1968, copies of which were received by the Securities and Exchange Commission ("SEC") on IFC's 1968 Form 10-K report. These financial statements contained the report of PMM dated March 5, 1969, *fn1" the first report of PMM on IFC financial statements; and

 (3) according to the complaints, Leidesdorf did not commence services for IFC until February 28, 1973.

 DISCUSSION

 In support of their motions, PMM and Leidesdorf ("accountants") advance the following six grounds:

 (1) that any malfeasance by the accountants could not have been in connection with the purchase or sale of securities because plaintiffs' purchases predated the issuance of financial statements reported on by the accountants; *fn2"

 (2) that the complaints fail to plead scienter;

 (3) that the complaints fail to plead fraud with particularity as required by Rule 9(b), F.R.Civ.P.;

 (4) that the claims against the accounts are cognizable under Section 18 of the 1934 Act, 15 U.S.C. § 78r, and thus are not also impliedly actionable pursuant to Section 10(b);

 (5) that the Metrick and Haber actions are duplicative of the previously-filed Katz and Rothchild actions, respectively; and

 (6) that pendent jurisdiction over the common law claims is lacking.

 1. Purchases of Securities by Plaintiffs

 The accountants contend (except PMM as to Metrick and Haber ) that plaintiffs purchased their IFC shares prior to the issuance of any financial statements reported on by the accountants, and that consequently as a matter of law plaintiffs cannot state cognizable claims against the accountants pursuant to Section 10(b). This contention requires the ...


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