1991 U.S. Dist. LEXIS 15329 (S.D.N.Y. 1991).
Similarly, the Amended Complaint pleads facts supporting the inference that D&T recklessly disregarded the alleged overstatement of $ 426,000 attributable to the booking of the Montreal Litho transaction as a sale rather than as a consignment. Paragraph 37 alleges that, at the time of the Review Report, D&T knew that QMAX had not been paid for the transaction and that the receivable was over one year old; that, whereas Montreal Litho accounted for 23% and 15% of QMAX's net sales in 1987 and 1986, respectively, it had failed to order any more products from QMAX; and that:
prior to the time it consented to the use of its Review Report, D&T, in effect, admitted that it knew of problems with earlier reported results because D&T had to delay giving its audit opinion QMAX's latest annual financial statements . . . until it could resolve and reconcile, inter alia, all the accounts receivable. . . . In addition, the D&T personnel responsible for the review admitted that they knew or were uncertain whether QMAX's accounts receivable were fairly presented in conformity with GAAP because, prior to the issuance of [the Consent Letter], Ed Bentley and Thomas Knipper said specifically that the "Montreal Litho" issue would have to be fully resolved before D&T would issue its audit report on the 1988 financial statement.
Am. Comp. P37.
Taken together, these allegations raise the inference that D&T suspected that something was amiss with this transaction, yet failed to take further steps to determine the nature of the problem before issuing the Review Report and Consent Letter. According to the Amended Complaint, such an investigation would have led D&T to discover that the terms of the contract with Montreal Litho provided that payment was not due and risk of loss did not pass until the goods were accepted by Montreal Litho's customers and therefore that receivables were overstated. Thus, the Amended Complaint adequately pleads D&T's scienter with respect to the overstatement attributable to the Montreal Litho Sale.
The Amended Complaint does not, however, plead facts from which it can be inferred that D&T knew or recklessly disregarded that the financial statements were overstated by $ 82,000 due to the reinstatement of inventory that did not exist. While the Amended Complaint alleges in detail the circumstances giving rise to the alleged overstatement, and that QMAX's receiving reports as of June 30, 1987 reflected that the raw materials necessary to formulate the 400 kilos were not received as of June 30, 1987, it does not allege that D&T was aware of these receiving reports or any other source indicating the non-existence of the inventory. Furthermore, in contrast to their allegations regarding the Estee Lauder Sale and the Montreal Litho Sale, the Investors have failed to plead any facts establishing that D&T had any reason to be suspicious of this entry. The allegation contained in P36 that D&T had advised QMAX to develop a cost accounting system to determine pricing and inventory is not a sufficient basis on which to conclude that D&T deliberately closed its eyes to facts indicating that the Inventory was overstated. As such, these allegations do not rise above a charge of negligence. See The Limited, Inc., 683 F. Supp. at 394.
The Amended Complaint also satisfactorily pleads D&T's scienter with respect to the GAAS/GAAP Allegations to the extent they relate to the Estee Lauder Sale and the Montreal Litho Sale. The Investors specify the various accounting standards violated by the accounting of these transactions in the financial statements, See Am. Comp. PP42, 44, 46, 47, and allege that D&T knowingly or recklessly ignored these principles in conducting the Review. The allegations supporting an inference of recklessness with respect to the overstatements attributable to the Estee Lauder Sale and the Montreal Litho sale also serve to undergird the allegation of recklessness with respect to D&T's representation that the financial statements were in conformity with GAAP and other accounting standards. Cf. National Union Fire Ins. Co. v. Cooper, 729 F. Supp. 1423, 1433 (S.D.N.Y. 1989).
Aiding and Abetting Claim
To establish aiding and abetting liability under § 10(b), a plaintiff must demonstrate: (1) a securities violation by a primary wrongdoer, (2) knowledge of the wrongdoing, and (3) substantial assistance in the primary wrongdoing. Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983). D&T has attacked the Amended Complaint's pleading only of the scienter element, albeit in a footnote in its Reply Memorandum. See D&T Reply Memo. at 14 n.14. D&T argues that the Investors have failed to plead the degree of scienter necessary to support an aiding and abetting claim on the grounds that, absent the existence of a fiduciary duty to plaintiffs, such "scienter is of the high 'conscious intent, 'or . . . 'something closer to an actual intent to aid in the fraud.'" IIT v. Cornfeld, 619 F.2d 909, 925 (2d Cir. 1980); see Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 552 (S.D.N.Y. 1990). As such, D&T contends, even if the Amended Complaint is found to support an inference of recklessness, this state of mind is insufficient to satisfy the scienter requirement of an aiding and abetting claim.
According to the Amended Complaint, D&T knew that its Review Report would be disseminated to the Investors and relied upon by them in making their investments in the Notes. See, e.g., Am. Comp. P52. It has been held that such a role gives rise to a fiduciary duty "to those who foreseeably read and rely on the statements." See Cooper, 729 F. Supp. at 1433. Thus, the Amended Complaint's allegations supporting an inference of recklessness satisfy the scienter requirement of the aiding and abetting claim. Even in the absence of a fiduciary relationship, the recklessness allegations would suffice because, as already concluded, the Amended Complaint withstands D&T's attack on the primary violation claim against it. See Mishkin, 744 F. Supp. at 552 ("The more closely related the alleged aider and abettor is to the primary violation, the lower the level of scienter required).
For the foregoing reasons, the motion by D&T, Schuberth and Randall to dismiss the Amended Complaint against them pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) is denied.
It is so ordered.
ROBERT W. SWEET
New York, N.Y., August, 1992