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CMNY CAPITAL, L.P. v. DELOITTE & TOUCHE

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


April 1, 1993

CMNY CAPITAL, L.P. and PERMAL CAPITAL PARTNERS, L.P., Plaintiffs,
v.
DELOITTE & TOUCHE, Defendant.

The opinion of the court was delivered by: MARY JOHNSON LOWE

OPINION AND ORDER

 MARY JOHNSON LOWE, D.J.

 Before this Court is the motion filed July 12, 1991 by Deloitte & Touche ("D&T") to dismiss for failure to state a claim and for failure to plead fraud with particularity. Fed. R. Civ. P. 12(b)(6), 9(b). For the following reasons, D&T's motion to dismiss is denied with respect to plaintiffs' federal securities claim, but granted with respect to plaintiffs' state law negligence claim.

 BACKGROUND

 Defendant's motion was referred to Magistrate Judge Naomi Reice Buchwald, who issued a Report and Recommendation ("R&R") on May 29, 1992. Plaintiffs filed objections to the R&R pursuant to 28 U.S.C. § 636(b)(1), and defendants filed a reply to plaintiffs' objections.

 The R&R's detailed account of the facts is adopted for purposes of this opinion. A brief recital of the most salient points will suffice. Plaintiffs CMNY Capital, L.P. ("CMNY") and Permal Capital Partners, L.P. ("Permal") brought this suit to recover $ 6.054 million they invested in Collectors Guild, Inc. ("Guild") between January 1989 and March 1990. Guild went bankrupt in 1990, but its accountant Touche Ross & Co. ("Touche") remains solvent in the guise of successor D&T. During the relevant time period, two of plaintiffs' principals served as directors of Guild.

 Plaintiffs allege that Guild fraudulently misrepresented its financial condition to induce their investments. *fn1" They claim that Touche is liable for their losses because of its conduct in issuing a certified financial statement on or about December 23, 1988 for Guild's 1988 fiscal year, which ended September 30, 1988. Specifically, plaintiffs advance two theories of liability against Touche: (1) liability as an aider and abettor of securities fraud violations under § 10(b) of the Securities Exchange Act of 1934; and (2) liability for negligence under New York State law.

 DISCUSSION

 The standards for deciding a motion under rule 12(b)(6) are well-settled. A court's task

 

is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely but that is not the test. Moreover, . . . the allegations of the complaint should be construed favorably to the pleader.

 Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). A complaint "should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).

 In addition to the usual requirements of rule 12(b)(6), a plaintiff bringing a claim under § 10(b) must state with particularity the circumstances of the alleged fraud. Fed. R. Civ. P. 9(b); Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 115 (2d Cir. 1982). Rule 9(b) has been interpreted to require that a plaintiff allege facts that give rise to a "strong inference" of fraudulent intent. Kramer v. Time Warner, Inc., 937 F.2d 767, 776 (2d Cir. 1991); Ouaknine v. MacFarlane, 897 F.2d 75, 80 (2d Cir. 1990); Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989); Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987).

 A. § 10(b) Aider and Abettor Liability

 1. Scienter

 Plaintiffs' first claim is that Touche violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5 of the associated Securities and Exchange Commission regulations. 17 C.F.R. § 240.10b-5. Plaintiffs do not allege direct violations by Touche; rather, they allege that Touche is liable as an "aider and abettor" of Guild's violations. Liability under § 10(b) and rule 10b-5 requires proof that the defendant acted with scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). For purposes of rule 12(b)(6), a complaint sufficiently pleads an accountant's liability as an aider and abettor if it charges:

 

(1) A violation of section 10(b) by the accountant's client;

 

(2) Knowledge of the client's violation on the part of the accountant; and

 

(3) Substantial assistance by the accountant in the accomplishment of the violation.

 Decker, 681 F.2d at 119; IIT, An Int'l Inv. Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). These elements are not sharply distinct from one another; the statutory scienter requirement is loosely interwoven among all three. See IIT, 619 F.2d at 922.

  Magistrate Judge Buchwald concluded that plaintiffs' complaint does not sufficiently plead scienter on the part of Touche, and recommended that the § 10(b) claim be dismissed. R&R at 14-18. Plaintiffs object to Magistrate Judge Buchwald's conclusion on two grounds. First, they argue that Magistrate Judge Buchwald applied an incorrect standard for pleading scienter. Second, they argue that scienter is a question of fact that cannot be resolved on a rule 12(b)(6) motion.

 Scienter, the operative mental state requirement of § 10(b) as that section is interpreted by the Supreme Court, is defined as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst, 425 U.S. at 194 n.12. *fn2" In this circuit, "reckless conduct will generally satisfy the scienter requirement," IIT, 619 F.2d at 923 (emphasis omitted), but "special considerations" apply where aiders and abettors are concerned. "If the alleged aider and abettor owes a fiduciary duty to the plaintiff, recklessness is enough. If there is no fiduciary duty . . . the assistance rendered must be knowing and substantial." Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir. 1983) (citations omitted).

 Magistrate Judge Buchwald acknowledged that recklessness can satisfy the scienter requirement, but found that plaintiffs' complaint fails to allege recklessness in terms that can give rise to a "strong inference of intent." R&R at 16-17. As noted above, numerous cases in this circuit have recited the "strong inference of intent" language in deciding whether a complaint satisfies rule 9(b) in a § 10(b) action. Kramer, 937 F.2d at 776; Ouaknine, 897 F.2d at 80; Cosmas, 886 F.2d at 13; Connecticut Nat'l Bank, 808 F.2d at 962.

 Rule 9(b) pretermits claims that cannot be supported by strong inferences from the allegations. But rule 9(b) cannot require that those inferences support more than is necessary to state the claims. Rule 9(b) demands a strong inference of "intent" in a § 10(b) case only in the sense that "intent" means "scienter." Scienter is a flexible standard, and rule 9(b) must flex in tandem. Thus, the Second Circuit has reasoned that "'allegations of scienter are sufficient if supported by facts giving rise to a 'strong inference' of fraudulent intent.' For Rule 10(b)(5) purposes, scienter includes recklessness." Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 144 (2d Cir. 1991) (quoting Ouaknine v. MacFarlane, 897 F.2d 75, 81 (2d Cir. 1990)). The Court went on to find that the plaintiff's allegations established "a relatively strong inference that [the defendant] was reckless." Id. It follows that when an alleged aider and abettor is a non-fiduciary, rule 9(b) requires allegations that support a strong inference of assistance that is knowing and substantial. Armstrong, 699 F.2d at 91. When an alleged aider and abettor is a fiduciary, rule 9(b) is satisfied by allegations that support a strong inference of recklessness. Id..

 It seems axiomatic to add that a complaint based on fiduciary recklessness must allege the existence of a fiduciary relationship. The existence of such a relationship, however, is not one of "the circumstances constituting fraud" that rule 9(b) requires to be "stated with particularity." Fed. R. Civ. P. 9(b). The complaint need not state the basis of the fiduciary relationship with the same particularity that rule 9(b) would require; it need meet only the usual requirements of rule 12(b)(6).

 a. Non-fiduciary Aider and Abettor Liability: Knowing and Substantial Assistance

 Plaintiffs must show that they have stated a claim of either knowing and substantial assistance (if Touche was a non-fiduciary), or recklessness combined with a fiduciary relationship. Magistrate Judge Buchwald found no strong inference of intent to defraud on the part of Touche. This Court agrees as far as non-fiduciary liability is concerned; the complaint fails to support a strong inference of assistance that is knowing and substantial.

 The pertinent parts of the complaint aver as follows:

 

11. Max Munn, President of [Guild], contacted Touche and notified it that CMNY and Permal were awaiting the audited financial statements and would rely upon them in deciding to provide this funding.

 

. . . .

 

19. Touche, as an experienced public accounting firm, knew or should have known that the financial statement contained these misrepresentations since the financial records of [Guild] either contained information which should have led Touche to believe that the information was false or failed to contain necessary information to support the truth of the representation[s], the lack of which a reasonable accounting firm would have questioned and investigated further before rendering an unqualified opinion that the audited financial statement was properly prepared.

 

20. In its audit of the fiscal year 1988 statement, Touche also manifested gross negligence and recklessness by failing to perform the following audit procedures to ascertain the existence of [Guild's] defalcations:

 

a. The existence of internal control procedures should have been ascertained to assure the proper recording of transactions. Even the most cursory review would have revealed a singly dominated management unduly aggressive toward financial reporting which had difficulty retaining high quality senior financial personnel.

 

b. Cut-off procedures for year-end sales should have been reviewed. A physical presence, as well as a review of subsequent shipments to sale dates, would have revealed cut-off problems.

 

c. Proper confirmation of receivables and subsequent liquidation (vouching of payment) would have disclosed non-payment or the change to a barter transaction. Touche worked until at least February 1989; and there was enough time to perform their review for such large, material items.

 

d. Inventory at the public warehouse should have been counted and ownership verified.

 

e. Inventory value should have been ascertained through vouching payments and reviewing sales for the obsolescence review.

 

f. Legal payments should have been reviewed and a confirmation letter sent to all attorneys to disclose material litigation.

 

g. Large and unusual transactions should have been reviewed and followed through to subsequent litigation.

 

. . . .

 

24. Touche, by its long standing relationship with [Guild], and by reason of its knowledge that the financial statements were to be relied upon by CMNY and Permal, knew that [Guild] was violating § 10(b) of the Securities and Exchange Act of 1934 or recklessly disregarded the problems identified in the financial records of [Guild] so that knowledge of the violation can be attributed to it.

 

25. Touche substantially assisted [Guild] to violate § 10(b) of the Securities and Exchange Act of 1934 by rendering its opinion that the 1988 financial statement fairly presents [Guild's] financial situation and was prepared in accordance with generally accepted accounting principals [sic] and by failing to disclose the irregularities in the financial records.

 Am. Compl. PP 11, 19, 20, 24, 25. *fn3"

 Paragraph 19 of the complaint initially appears to satisfy the knowledge requirement, because it couches its allegation in the disjunctive: "knew or should have known." Closer inspection, however, reveals that "the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Paragraph 19 gives the reasons that Touche "knew or should have known" of the misrepresentations:

 

the financial records of [Guild] either contained information which should have led Touche to believe that the information was false or failed to contain necessary information to support the truth of the representation[s], the lack of which a reasonable accounting firm would have questioned and investigated further before rendering an unqualified opinion that the audited financial statement was properly prepared.

 Am. Compl. P 19 (emphasis added). Plaintiffs' bare allegation of actual knowledge is inconsistent with their accompanying allegations that records "should have led" to Touche's knowledge and that the lack of information "would have" led a reasonable accounting firm to that knowledge.

 Taken as a whole, these allegations cannot support a strong inference of knowing and substantial assistance. The inference to be drawn, if any, is that plaintiffs are unable to establish that Touche knew of the misrepresentations. Plaintiffs have failed to state a claim for which relief can be granted against a non-fiduciary accountant.

 b. Fiduciary Aider and Abettor Liability: Recklessness

 Plaintiffs contend that Touche stood as a fiduciary toward them, so that they need to demonstrate only recklessness. The fiduciary relationship and recklessness are separate elements, both of which must be supported by the complaint.

 Plaintiffs' allegations support the existence of a fiduciary relationship. Paragraph 11 of the complaint alleges that Touche was told of plaintiffs' impending reliance on the financial statement. This Court has held that "under Rule 10b-5 'recklessness is sufficient to establish scienter where the plaintiffs are third parties whose reliance upon the accountant's audit or opinion letter is reasonably foreseeable.'" Axel Johnson, Inc. v. Arthur Andersen & Co., 762 F. Supp. 599, 601 (S.D.N.Y. 1991) (citing Mishkin v. Peat, Marwick, Mitchell & Co., 658 F. Supp. 271, 273 (S.D.N.Y. 1987)). The allegation that Touche knew of plaintiffs' impending reliance sufficiently states a claim that a fiduciary relationship existed.

 Plaintiffs' complaint also supports the strong inference of recklessness required by rule 9(b) and § 10(b)(5). The Second Circuit has defined recklessness as "at the least, conduct which is 'highly unreasonable' and which represents 'an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir.), cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 (1978); see also SEC v. Price Waterhouse, 797 F. Supp. 1217, 1240 (S.D.N.Y. 1992) (recklessness provable by showing that "the accounting practices were so deficient that the audit amounted to no audit at all, or 'an egregious refusal to see the obvious, or to investigate the doubtful'") (citations omitted).

 The complaint in the present case does not use the exact language of the Rolf decision, but construed favorably to plaintiffs the complaint adequately avers that Touche "must have" known of the danger of Guild's § 10(b) misrepresentations. The Court is careful, in this respect, to distinguish between knowledge of misrepresentations and knowledge of the danger of misrepresentations. Although the complaint does not state a claim that Touche knew of the misrepresentations, it adequately states a claim that Touche must have known of the danger. The complaint contains many allegations that, if proved, could support a finding of recklessness. *fn4" Accordingly, the question of recklessness is not for the Court to decide at this stage of the case. See Axel Johnson, 762 F. Supp. at 602 (jury to decide whether alleged conduct was negligent, reckless, or intentional).

 The Court concludes that plaintiffs have pleaded § 10(b) fraud by a fiduciary accountant with particularity as required by rule 9(b), and have stated a § 10(b) claim for which relief can be granted against a fiduciary accountant.

 2. "Securities"

 D&T urges that if dismissal of the § 10(b) claim is not granted on the grounds recommended by Magistrate Judge Buchwald, then dismissal should be granted on the alternate grounds set forth in D&T's moving papers. D&T's first ground is that sixteen of the eighteen alleged securities purchases are really nothing more than loans, not "securities" within the meaning of the federal securities laws. According to D&T, plaintiffs "were acting just like commercial banks" by making repeated loans to Guild. Rep. Mem. in Supp. of Motion to Dismiss at 24. D&T concedes, however, that the remaining two transactions involved securities. Resp. to Pl's Obj. at 35.

 Plaintiffs submit that D&T's concession regarding two of the transactions is enough to undermine this ground for dismissal. Magistrate Judge Buchwald agreed, R&R at 7 n.6, and this Court also agrees. D&T may well have a meritorious defense to a number of the transactions based on their nature, but that is a matter more properly resolved by, for example, a motion for partial summary judgment.

 3. Reliance

 D&T's second alternative ground for dismissal of the § 10(b) claim is that plaintiffs cannot have relied upon the Touche financial statement, because two of plaintiffs' principals were Guild directors. According to D&T, investors who have access to a company's financial records must evaluate those records for themselves, not rely on the opinions of outside accountants. Mem. in Supp. of Motion to Dismiss 24-31. Magistrate Judge Buchwald rejected D&T's theory, emphasizing that directors are entitled to rely on certified financial statements by outside accountants. R&R at 20.

 D&T is correct that the law generally does not recognize fraud where a party had every opportunity to ascertain the facts for itself. But the cases it cites prove that the degree to which access precludes reliance is a matter of reasonableness dependent upon the identity of the persons having access and the nature of the information at issue. Jackson v. Oppenheim, 411 F. Supp. 659, 668 (S.D.N.Y. 1974) (insider's duty depends on "'the basis of what a party knows or reasonably should know considering the information to which he had access.'") (quoting Harnett v. Ryan Homes, Inc., 360 F. Supp. 878, 886 (W.D. Pa. 1973)), aff'd in part, rev'd in part, 533 F.2d 826 (2d Cir. 1976).

 This Court certainly would reject plaintiffs' reliance to the extent they had actual knowledge concerning information they claim was misrepresented, and also to the extent that plaintiffs' directors at Guild reasonably should have known of that information. The problem with D&T's argument is that it is unreasonable to hold corporate directors responsible for the details of a full-blown financial audit, and most of the failures that plaintiff alleges are accounting failures connected with just such an audit. The cases cited by D&T thus are distinguishable, either because they involve personnel who can be held responsible for more detailed information, or because they involve information that is more superficial. See Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 730 (2d Cir. 1984) (personnel having access included negotiators, engineers, executives, attorneys, and accountants); Jackson, 411 F. Supp. at 666-67, 668-69 (director held responsible for relatively superficial information).

 Again, D&T's contention that access may preclude reliance is generally sound. Access requires a director to go beyond everyday action when investments are being made. But this limitation on reliance is itself limited by the need to keep directors' responsibilities within a reasonable perimeter. The question can be viewed as whether information lies within a reasonable extension of normal directorial responsibility, or instead close to the core of an area of responsibility imposed upon others. The allegations of the present complaint involve many activities that are central to an accountant's function, not a director's function. Am. Compl. PP 16, 20, 21. Requiring directors to carry out those activities would extend' directorial responsibility beyond recognition.

 Some of plaintiffs' allegations may involve information that is appropriately charged to the directors. See, e.g., Am. Compl. P 20(a) ("Even the most cursory review would have revealed a singly dominated management unduly aggressive toward financial reporting which had difficulty retaining high quality senior financial personnel."). But most of the complaint is devoted to matters that are not reasonably required of directors. Similarly, Magistrate Judge Buchwald noted that reliance may have been unreasonable after the 1988 financial statement had aged, R&R at 18 n.13, but plaintiff's reliance was reasonable at least for the initial investments. The Court therefore rejects D&T's contention that plaintiffs were precluded from relying on the certified financial statement.

 B. State Law Negligence

 Plaintiffs' second claim is brought under state law. The claim alleges that Touche negligently breached a duty of reasonable care owed to plaintiffs, and that plaintiffs relied to their detriment upon the Guild financial statement that Touche audited. Am. Compl. PP 30-33.

 D&T contends that Touche owed no duty of care to plaintiffs under New York law, and that the negligence claim should be dismissed. Magistrate Judge Buchwald agreed with D&T, and recommended dismissal of the negligence claim. Plaintiffs object, maintaining that Magistrate Judge Buchwald misapplied the law and that they have successfully stated a claim. This Court grants D&T's motion to dismiss the state law negligence claim.

 The New York Court of Appeals recited three prerequisites for accountant liability to third parties in Credit Alliance Corp. v. Arthur Andersen & Co., 483 N.E.2d 110, 65 N.Y.2d 536, 493 N.Y.S.2d 435 (1985):

 

(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.

 483 N.E.2d at 118, 65 N.Y.2d at 551, 493 N.Y.S.2d at 443. Magistrate Judge Buchwald found that plaintiffs failed to demonstrate that the "primary, if not exclusive, end and aim" of the financial report was to provide them with financial information, and that they failed to establish the "contractual or quasi-contractual privity" required by Credit Alliance. R&R at 21-22.

 Plaintiffs contend that Magistrate Judge Buchwald's emphasis on the "end and aim" of the report was an erroneous departure from Credit Alliance. This Court finds it unnecessary to decide the question as posed by plaintiffs, because an intervening decision by the New York Court of Appeals has clarified the law in general and the insufficiency of plaintiffs' complaint in particular. In Security Pacific Business Credit, Inc. v. Peat Marwick Main & Co., 597 N.E.2d 1080, 79 N.Y.2d 695, 586 N.Y.S.2d 87 (1992), the Court of Appeals explained that New York law requires plaintiffs to demonstrate "a relationship or bond with the once-removed accountants 'sufficiently approaching privity' based on 'some conduct on the part of the accountants.'" 597 N.E.2d at 1083, 79 N.Y.2d at 702-03, 586 N.Y.S.2d at 90. Various conduct might be relevant to such a demonstration: communication with the third party, a specific agreement to prepare a report for the third party's use or according to its requirements, or even a mere awareness that "a primary, if not the exclusive, end and aim of auditing its client was to provide [the lender] with the financial information it required." 597 N.E.2d at 1085-87, 79 N.Y.2d at 705-07, 586 N.Y.S.2d at 92-93; European Am. Bank & Trust Co. v. Strauhs & Kaye, 483 N.E.2d 110, 120, 65 N.Y.2d 536, 554, 493 N.Y.S.2d 435, 445 (1985). In any event, conduct by the accountant is a critical prerequisite.

 In Security Pacific, there was only one instance of direct contact -- a phone call -- between the accountants and the plaintiff. Security Pacific, 597 N.E.2d at 1085, 79 N.Y.2d at 705, 586 N.Y.S.2d at 92. And that call was initiated by the plaintiff, negating its value as "indispensable linking conduct . . . attributable to [the accountant]." 597 N.E.2d at 1085, 79 N.Y.2d at 705, 586 N.Y.S.2d at 92. Further, the financial report itself was prepared in the ordinary course of year-end accounting. 597 N.E.2d at 1086, 79 N.Y.2d at 706, 586 N.Y.S.2d at 93. The accountant's work was not for the particular benefit of the plaintiff, but "for the benefit of [the accountant's] client . . . as a 'convenient instrumentality for use in the development of [the client's] business, and only incidentally or collaterally for the use of those to whom [the client] might exhibit it thereafter.'" 597 N.E.2d at 1087, 79 N.Y.2d at 708, 586 N.Y.S.2d at 94.

 The Security Pacific court distinguished the facts before it from those of European American, where there was a "direct nexus" consisting of the parties' "direct communications and personal meetings," 483 N.E.2d at 114, 120, 65 N.Y.2d at 545, 554, 493 N.Y.S.2d at 439, 445, and where those communications and meetings were for "the very purpose of discussing [the plaintiff's] financial condition and [the lender's] need for [the accountant's] evaluation." 483 N.E.2d at 120, 65 N.Y.2d at 554, 493 N.Y.S.2d at 445.

 The facts of this case differ in no substantial respect from those in Security Pacific. No direct contact whatsoever is alleged between plaintiffs and Touche. Plaintiffs allege that Guild's president "contacted Touche and notified it" that plaintiffs would be relying on the financial report, but this indirect contact is even further removed from "sufficiently approaching privity" than the direct contact between plaintiffs and accountants in Security Pacific. Plaintiffs do not allege that the financial reports were prepared for their particular benefit. Indeed, they do not object to Magistrate Judge Buchwald's specific finding that "the 1988 Report was an end of the year audit report filed in compliance with the securities laws." R&R at 22. D&T is not answerable for plaintiffs' incidental and collateral use of that report.

 The policy considerations outlined in Security Pacific are applicable here as well. "'The small price of a phone call'" should not give a lender "'additional loan protection [by] placing the auditor in the role of an insurer or guarantor of loans extended to its clients.'" 597 N.E.2d at 1086, 79 N.Y.2d at 705, 586 N.Y.S.2d at 93 (quoting lower court opinion). The borrower rather than the lender placed the call in this case, but that cannot make a difference or the policy would be a facade easily skirted. Surely an accountant's client would appreciate the value of assuring a prospective lender that a properly placed telephone call had backed up the pending transaction with "deep pocket surety coverage." Id..

 Plaintiffs recognized at the time of filing their objections that the Security Pacific decision might clarify New York's law in this area. Pl's Obj. at 15 n.*, 20 n.*. The decision did clarify matters, although not in the way plaintiffs hoped. D&T's motion to dismiss plaintiffs' state law negligence claim is granted.

 CONCLUSION

 D&T's motion to dismiss plaintiff's § 10(b) claim is denied.

 D&T's motion to dismiss plaintiff's state law negligence claim is granted.

 It Is So Ordered.

 Mary Johnson Lowe

 United States District Judge


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