tax audit history despite, upon information and belief, having represented the Rothschild Group before the I.R.S. Complaint at P 68. The basis of the plaintiff's allegations that Eisenberg Honig knew of Trupin's negative tax audit history is an article in New York magazine, dated June 18, 1984, which stated that Eisenberg Honig represented Trupin before the I.R.S. in 14 tax audits. Id. at P 63. This information is alleged to be repeated in the deposition testimony of Alan Asher, a defendant in an action in the United States District Court of New Jersey, Harris v. Eisenberg Honig et al. Complaint at P 62. The plaintiffs do not state when these tax audits occurred, nor whether Eisenberg Honig was Trupin's counsel at the time.
If a promotor fails to sell, or his investment vehicles fails to qualify for promised tax benefits in one offering, and the same promoter then offers similar investments without disclosing the failure of his previous attempts, this nondisclosure may amount to a material omission. Martin v. EVP Second Corp., [1991 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 96,115 (S.D.N.Y. 1991). Plaintiffs have alleged that, as tax counsel for Trupin, Eisenberg Honig knew that previous tax shelters had failed to qualify for tax benefits. Plaintiffs have also alleged that Eisenberg Honig knew that these real estate trusts were structured in exactly the same way, and therefore should have known that these tax shelters would also fail to qualify.
The next question is to what extent Eisenberg Honig is responsible for this omission. The law firm maintains that it was not, on the grounds that it was only retained to provide tax advice. While all parties admit that Trupin's equipment trusts failed to qualify as tax shelters, Eisenberg Honig vehemently maintains -- and the plaintiffs do not dispute -- that its tax advice was correct and these particular real estate tax shelters were not disallowed by the I.R.S.
Because Plaintiffs fail to dispute this, the Complaint still fails to allege loss causation. Given that Eisenberg Honig knew of the failure and knew of its omission, that omission would be material if the I.R.S. treated the real estate partnership interests in the same manner as it treated the equipment trusts, and that this disallowance of tax benefits caused the plaintiffs' financial loss. The plaintiffs do not allege this, and therefore it is unclear how Eisenberg Honig's omission about Trupin's prior tax history has caused the Plaintiffs' loss.
What securities lawyers call 'loss causation' is the standard common law fraud rule (on which see Prosser and Keeton on the Law of Torts § 110, at p. 767 (5th Ed. 1984)), merely borrowed for use in federal securities fraud cases. . . . The plaintiffs allege that they invests in the defendants' limited partnerships because of the defendants' misrepresentations, and that their investment was wiped out. But they suggest no reason why the investment was wiped out,"
Bastian v. Petren Resources Corp., 892 F.2d 680, 683-84 (7th Cir.) cert. denied, 496 U.S. 906, 110 L. Ed. 2d 270, 110 S. Ct. 2590 (1990), at least, no reason that could be traced to Eisenberg Honig's failure. The plaintiffs merely allege that they have been damaged to the extent of their entire investment in the Investor Partnerships. Complaint at PP 76, 80, 106.
The charge that Barry Trupin immediately looted the Sarasota partnership, id. at PP 42, 43, successfully alleges loss causation, for it does demonstrate why the plaintiffs lost money, but it fails to allege transaction causation against Eisenberg Honig. Plaintiffs' losses stemming from Trupin's alleged bogus checkbook entries cannot be part of their 10(b) claims against Eisenberg Honig, whose role in the allegedly fraudulent deal ceased once the tax opinion letters for the Offering Materials were done. Therefore, plaintiffs' claims against Eisenberg Honig are dismissed with leave to replead.
The Securities Claims Against the Becker Defendants
The Complaint still fails to state any facts from which intent or knowledge on the part of the Becker defendants may be inferred. Specifically, the Complaint alleges, in language which is almost exactly similar to the first Amended Complaint, that Becker made certain forecasts and representations and that "the defendant Becker knew, or should have known, that each of the aforementioned assumptions was false." Complaint at P 52. See Ahmed, 781 F. Supp. at 1025. Although this prior opinion found that the plaintiffs had pleaded the details of the alleged misrepresentations with sufficient particularity (id.), both that complaint and the present one have failed to plead any facts which could provide an inference of scienter. Indeed, the only new facts which the current complaint has added consist of details about three other partnerships offered by the Rothschild Group, all structured in the same way at about the same time and audited by the Becker Defendants.
While accountants have a duty to investigate the obvious, they have no obligation to seek out fraud. If they do not know the data they audit is fraudulent, and the fraudulent nature of the data given them is not apparent, accountants are not liable if they audit it in accordance with GAAP. IIT v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980). Plaintiffs here have not alleged any failure of the Becker Defendants to conform to GAAP, nor any specific deviation from any identified accounting standards. They merely allege that the Becker Defendants must have known and failed to reveal the fraud in the chain of title and the controlled status of the ostensibly unaffiliated North American corporation in three other partnerships.
The plaintiffs allege that the Becker Defendants knew the Sarasota Property had been purchased at an inflated price because the Becker Defendants had audited three other Trupin partnerships, all identically structured, all featuring North American as an unaffiliated seller, and all therefore fraudulent. The only thing new in their allegations is details of the previous three partnerships, all offered within the year, which serve merely to prove that the Sarasota partnership offering was, indeed, structured in exactly the same way. This still fails to allege how the Becker Defendants knew the data they were auditing was fraudulent.
Aside from this, the plaintiffs have not alleged any new facts. Instead of describing how Becker defendants knew this, they state that the Becker Defendants knew or "recklessly" failed to discover the inflated valuations and omitted this material information. Mere participation in prior transactions, absent any pleading of facts from which it could be inferred that any of these transactions were fraudulent, is insufficient under Rule 9(b). Dannenberg v. Dorison, 603 F. Supp. 1238, 1241 (S.D.N.Y. 1985). "The gist of the Complaint . . . is an alleged failure to investigate . . . . a purported failure to investigate [does] not rise above the level of negligence, which is legally insufficient." O'Brien, 719 F. Supp at 228 (citations omitted).
The Second Amended Complaint, unlike the Amended Complaint, has alleged the Becker Defendants' aiding and abetting of the underlying securities fraud in a separate count from that charging all the defendants with primary wrongdoing. However, because the plaintiffs have alleged no new facts from which an inference of scienter could be inferred, the aiding and abetting count fails as well.
The claims against Eisenberg Honig are dismissed with leave to replead for the reasons stated above. The claims against the Becker Defendants are dismissed with leave to replead.
The motions of Eisenberg Honig for summary judgment and for sanctions under Rule 11, Fed. R. Civ. P., are denied.
It is so ordered.
New York, N. Y.
January 5, 1993
ROBERT W. SWEET
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