The opinion of the court was delivered by: ROBERT W. SWEET
Defendants Deloitte & Touche ("D&T"), Winfried Schuberth ("Schuberth") and David Randall ("Randall") have moved for an order dismissing the amended complaint against them pursuant to Rules 12(b)(6) and 9(b), Fed. R. Civ. P.
For the following reasons, the motion is denied.
The plaintiffs in this action
(the "Investors") are a number of individual and corporate investors who purchased promissory notes (the "Notes") issued in August 1988 by QMAX Technology Group, Inc. ("QMAX"), a company which in 1988 was engaged in the development, manufacture and marketing of cosmetics and skin care products. QMAX defaulted on the Notes and filed for bankruptcy in August 1989.
D&T is the successor in interest to Touche Ross & Co. ("Touche"), a national accounting firm which acted as QMAX's independent auditor since prior to 1987. The Amended Complaint alleges that D&T issued an unqualified opinion of the audited financial statements of QMAX for the fiscal year ended June 30, 1987 and later consented to the use of that opinion in the 1987 audited financial statements and various filings with the Securities Exchange Commission.
The complaint in Ades v. Deloitte & Touche, No. 90 Civ. 4959 (RWS) was filed on July 26, 1990. A substantially similar complaint was filed in the companion case of Lane v. Deloitte & Touche, 90 Civ. 5056 (RWS) on July 30, 1990 (together, the "Complaint"). The Complaint alleged violations of § 10(b) of the Securities Exchange Act of 1934 ("§ 10(b)") and pendent state law claims. These claims were based on the allegation that the defendants knowingly misrepresented QMAX's financial condition in public filings and materials made available to the Investors prior to their purchase of the Notes. The portions of the Complaint relevant to D&T relate to alleged misrepresentations in a report, issued by D&T in August 1988 (the "Review Report") concerning QMAX's June 30, 1987 and March 31, 1988 financial statements, upon which the Investors allegedly relied in purchasing the Notes. These allegations fell into two broad categories: (1) claims that the work done by D&T for QMAX did not comport with generally accepted accounting principles ("GAAP"), generally accepted accounting standards ("GAAS") and other accounting regulations and guidelines (the "GAAS/GAAP Allegations") and (2) claims that D&T knew that various financial statements which they approved for QMAX contained materially inaccurate financial data (the "Substantive Allegations").
D&T moved to dismiss the Complaint against it on the grounds that it failed to plead fraud with particularity as required by Rule 9(b), Fed. R. Civ. P. Finding that the Complaint did not set forth facts from which a strong inference of scienter could be drawn with respect to the "Substantive Allegations," on July 7, 1991 this court granted D&T's motion in part, dismissing those allegations but not the "GAAS/GAAP Allegations." See Ades v. Deloitte & Touche, F. Supp. , slip op. at 5-7 (S.D.N.Y. July 7, 1991) ("Ades I ").
The Investors filed an amended and consolidated complaint on February 14, 1992 (the "Amended Complaint"). The present motion was filed on March 30, 1992. Oral argument was heard on May 13, 1992, at which time the motion was considered fully submitted.
Like the Complaint, the Amended Complaint asserts claims against D&T for primary and aiding and abetting liability under § 10(b) and Rule 10b-5 and for common law fraud, breach of contract, negligent misrepresentation and negligence. The Amended Complaint alleges that in mid-1988 QMAX issued the Notes to raise funds to meet certain immediate financial needs. The Notes were issued pursuant to the Securities Purchase Agreement between QMAX and each of the Investors. As a condition of the Investors' purchase of the Notes, QMAX was required to have D&T review, in accordance with standards established by the American Institute of Certified Public Accountants ("AICPA"), its consolidated interim financial statements as of March 31, 1988 and for the three-month and nine-month periods ended March 31, 1987 and 1988 and to have D&T ascertain whether any material change in QMAX's financial condition had occurred in its consolidated balance sheet as of June 30, 1987 and its unqualified opinion on QMAX's consolidated financial statements for fiscal year 1987 since D&T's September 14, 1987 report on these items and to consent to the use of its report in the Security Purchase Agreement.
According to the Amended Complaint, D&T represented in a report dated August 4, 1988 that it performed a review in accordance with AICPA standards of the consolidated interim financial statements of QMAX as of March 31, 1988 and for the three and nine month periods ended March 31, 1988 and 1987 (the "Review" and the "Review Report") and that these statements fairly represented the financial condition of QMAX and were in conformity with GAAP and other accounting standards. D&T also represented that it had previously examined, in accordance with GAAS, prior financial data for QMAX and that the information set forth in the accompanying condensed balance sheets as of June 30, 1987 was fairly stated in all material respects. By letter dated August 18, 1988, D&T consented to the use of the Review Report in the Securities Purchase Agreement between QMAX and the Investors (the "Consent Letter"). The Amended Complaint alleges that this letter constitutes a "subsequent events" review by D&T and an express and implied representation that there had been no material changed in QMAX's financial position from the date of the Review Report to the date of the Consent Letter.
The Amended Complaint alleges that after the closing of the sale of the Notes, D&T issued a qualified opinion expressing an uncertainty as to QMAX's ability to continue as a going concern due to, among other things, an increase in the allowance for doubtful accounts for fiscal 1988 over that previously disclosed in the financial statements that were the subject of the Review Report. On August 3, 1989, QMAX defaulted on the Notes and filed for protection under Chapter 11 of the Bankruptcy Code.