The opinion of the court was delivered by: Walls, District Judge
Defendants Cendant Corporation, Inc. ("Cendant"), Ernst & Young, LLP ("E&Y"), E. Kirk Shelton ("Shelton"), and Christopher K. McLeod ("McLeod") have renewed their motions to dismiss the Amended Complaints in the above actions. *fn1 The Third Circuit's August 10, 2000 Opinion (the "August 10 Opinion") reversed and remanded this court's earlier determination to dismiss the complaint under Rule 12(b) for failure to state a claim under Section 10(b) and Rule 10b-5, and claims against individual defendants for control person liability under Section 20(a). See Semerenko v. Cendant Corp. et al., 223 F.3d 165 (3d Cir. Aug. 10, 2000). Issues now before the Court are:
1. Whether plaintiffs' allegations against E&Y satisfy the "in connection with" requirement of Section 10(b);
2. At what point in time Cendant's alleged misrepresentations could no longer be trusted sufficient to fulfill the reasonable reliance requirement;
3. Whether the complaint must be dismissed against Cendant, E&Y, Shelton and McLeod for failure to plead fraud and scienter with particularity; and
4. Whether plaintiffs have sufficiently plead Section 20(a) claims against Shelton and McLeod.
This Court holds that plaintiffs have satisfied the "in connection with" requirement as to E&Y. The Court also concludes that plaintiffs have adequately plead scienter against E&Y and Shelton. The Court finds, however, that plaintiffs have failed to plead scienter against Cendant with regard to claims by purchasers of ABI stock after April 15, 1998. The Court grants plaintiffs' request for leave to file an Amended Complaint to add allegations against McLeod sufficient to plead fraud and scienter with particularity, but holds that McLeod may not be liable to post-April 15, 1998 purchasers. Consequently, this Court denies E&Y's motion to dismiss the Section 10(b) claim; grants Cendant's motion to dismiss plaintiffs' Section 10(b) claims based upon post-April 15, 1998 purchases of ABI stock; denies Shelton's and McLeod's motions to dismiss plaintiffs' Section 10(b) and Section 20(a) claims for purchasers before April 15, 1998, and grants Shelton's and McLeod's motions to dismiss Section 10(b) and 20(a) claims as to post-April 15, 1998 purchasers. It further directs plaintiffs to file their Second Amended Complaint within fifteen days of the date of entry of this Opinion and Order. Finally, this Court holds that to the extent certain defendants have not moved to dismiss post-April 15, 1998 claims, plaintiffs could reasonably rely upon the alleged misrepresentations in the April 15, 1998 announcement until July 14, 1998, when Cendant announced that the accounting restatements would actually be much greater than originally anticipated and affected other major CUC business units.
This Court's earlier opinion dismissed the Complaint on several grounds, including (1) that plaintiffs had failed to satisfy the "in connection with" requirement of Section 10(b) and Rule 10b-5; (2) plaintiffs failed to establish reasonable reliance on the alleged misrepresentations; and (3) plaintiffs failed to establish loss causation. See P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546 (D.N.J. April 30, 1999) (the "April 30 Opinion"). Accordingly, the Court also dismissed the Class's Section 20(a) claim against the individual defendants on the basis that a claim for control person liability cannot be maintained in the absence of an underlying violation of the Exchange Act. Because of its decision to dismiss the Complaint under Rule 12(b)(6), this Court did not determine whether the Class's complaint also failed to satisfy the heightened pleading requirements of Rule 9(b).
By its August 10 Opinion, the Third Circuit remanded and directed this Court to apply the standards enunciated by the Second and Ninth Circuits in their discussions of the "in connection with" requirement when the alleged fraud involves the public dissemination of false and misleading information. Those circuits have held that
. . . where the alleged fraud involves the public dissemination of information in a medium upon which an investor would presumably rely, the "in connection with" element may be established by proof of the materiality of the misrepresentation and the means of its dissemination. Semerenko, 223 F.3d at 176, citing In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 963, 965 (2d Cir. 1993); Securities & Exch. Comm'n v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993); In re Leslie Fay Cos. Sec. Litig., 871 F. Supp. 686, 698 (S.D.N.Y. 1995).
Furthermore, the Third Circuit held that Class members could have reasonably relied upon the anticipated restatement of Cendant's 1997 financial information discussed in the April 15, 1998 announcement and were not precluded from reasonable reliance on the defendants' later statements about Cendant's intent to merge with ABI. Id. at 183. However, the Circuit also held that Class members were not entitled to indefinite reliance upon the alleged April 15, 1998 misrepresentations, explaining that Cendant (1) announced on July 15, 1998 that it had revised the restatement of its 1997 income; and (2) disseminated the formal results of the Audit Committee's investigation on August 27, 1998. The Court of Appeals observed that one or both of these actions might have cured the effect of the alleged misrepresentations in the April 15, 1998 announcement and rendered the disclosure thereafter unreliable. Id. This Court was required to determine "the point at which the particular misrepresentations could no longer be trusted." Id. *fn3
Lastly, the Third Circuit instructed this Court to determine whether, if the Section 10(b) requirements are met, the Complaint should nevertheless be dismissed because of plaintiffs' failure to satisfy the heightened pleading requirements for fraud under Rule 9(b). Id. at 173, 187.
In its renewed motion, Cendant seeks dismissal of the plaintiff's claims based upon purchases of ABI stock after April 15, 1998. All defendants, except Corigliano and Forbes who have not renewed their motions, seek dismissal of the complaint for failure to plead fraud and scienter with particularity. *fn4 Shelton and McLeod seek dismissal of the Section 20(a) claims against them, apparently in recognition that their concession of the "in connection with" requirement for purposes of the 12(b)(6) motion resurrects those claims unless the complaint is dismissed for failure to plead fraud or scienter with particularity.
I. Standard for a Motion to Dismiss
Under Fed. R. Civ. P. 12(b)(6), the Court is required to accept as true all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See In re Cendant Corp. Derivative Action Litig., 189 F.R.D. 117, 127 (D.N.J. 1999); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the claimant can prove any set of facts consistent with his allegations that will entitle him to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions case in the form of factual allegations. See Miree v. DeKalb County, Ga., 433 U.S. 25, 27 n. 2, 97 S.Ct. 2490, 2492 n. 2, 53 L.Ed.2d 557 (1977). Moreover the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed. R. Civ. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 101-02, L.Ed.2d 80 (1957). The Court may consider the allegations of the complaint, as well as documents attached to or specifically referenced in the complaint, and matters of public record. See Pittsburgh v. West Penn Power Co., 147 F.3d 256, 258 (3d Cir. 1998).
II. Section 10(b) and Rule 10b-5
As the Court has written, see In re Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999); see also Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp. 2d 417 (D.N.J. 1999); P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F. Supp. 2d 546, 552 (D.N.J. 1999), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), prohibits the use of fraudulent schemes or devices in connection with the purchase or sale of securities. Under Section 10(b), it is unlawful to "employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention" of any rule promulgated by the SEC designed to protect the investing public. 15 U.S.C. § 78j(b). To implement the statute, the SEC enacted Rule 10b-5, violation of which gives rise to a private cause of action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975); see also In re Cendant Corp. Litig, 60 F. Supp. 2d at 367-68. That Rule makes it unlawful: (1) "[t]o employ any device, scheme, or artifice to defraud," (2) "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or (3) "[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5. The Supreme Court has held that standing to bring a private cause of action under Rule 10b-5 is limited to actual purchasers or sellers of securities. Blue Chip Stamps, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539.
This tort, although statutory in origin, sounds in the common law of fraud and deceit and retains, in modified form, the common law elements of duty, breach, causation, and damage. See Huddleston v. Herman & MacLean, 640 F.2d 534, 547 (5th Cir.1981) (10b-5 claim derived from common law action for deceit), modified on other grounds, 459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983); see also In re Cendant Corp. Litig, 60 F. Supp. 2d at 368-69. The plaintiff must prove knowledge by the defendant, an intent to defraud, misrepresentation or failure to disclose, materiality of the information, and injurious reliance by the plaintiff. Thomas v. Duralite Co., 524 F.2d 577 (3d Cir. 1975); Rochez Bros., Inc. v. Rhoades, 491 F.2d 402 (3d Cir. 1973). More precisely, these elements form the following test: To form a 10b-5 claim, a plaintiff must allege that the defendant made (1) a misstatement or an omission (2) of a material fact (3) with scienter (knowledge) (4) in connection with the purchase or sale of a security (5) upon which plaintiff reasonably relied, and (6) that reliance proximately caused injury to the plaintiff. Kline v. First Western Government Sec., Inc., 24 F.3d 480, 487 (3d Cir.), cert. denied sub nom., Arvey, Hodes, Costello & Burman v. Kline, 513 U.S. 1032, 115 S.Ct. 613, 130 L. Ed. 2d 522 (1994); In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir.1989) (citing Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 942-43 (3d Cir.), cert. denied, 474 U.S. 935, 106 S. Ct. 267, 88 L. Ed. 2d 274 (1985)); see also In re Cendant Corp. Litig, 60 F. Supp. 2d at 368-69.
A. Whether Plaintiffs Have Satisfied the "In Connection With" Requirement
As reviewed, the Third Circuit directed this Court to apply the "in connection with" requirement under standards enunciated by the Second and Ninth Circuits, that
[when] the alleged fraud involves public dissemination of information in a medium upon which an investor would presumably rely, the "in connection with" element may be established by proof of the materiality of the misrepresentation and the means of its dissemination. 223 F.3d at 176, citing In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d at 963, 965; Securities & Exch. Comm'n v. Rana Research, Inc., 8 F.3d at 1362; In re Leslie Fay Cos. Sec. Litig., 871 F. Supp. at 698.
Specifically, the Circuit allowed:
[T]he Class may establish the "in connection with" element simply by showing that the misrepresentations in question were disseminated to the public in a medium upon which a reasonable investor would rely, and that they were material when disseminated. Id. at 176 (emphasis added).
This Court was also directed to determine whether defendant E&Y "knew or had reason to know that Cendant would use its financial statements and audit reports when making a tender offer for shares of ABI common stock." Id. at 177. The Circuit cautioned, however, that "the issue of materiality typically presents a mixed question of law and fact, and . . . the delicate assessment of inferences is generally best left to the trier of fact," and accordingly directed this Court to "decide the issue of materiality as a matter of law only if the alleged misrepresentations are so clearly and obviously unimportant that reasonable minds could not differ in their answers to the question." Id. at 178.
E&Y is the only defendant to address this issue in its renewed motion. *fn5 The parties' arguments on this point focus on whether the E&Y's statements were foreseeably used in connection with the ABI tender offer. Specifically, they focus on whether E&Y's opinions were actually contained in the tender offer documents and whether E&Y gave its consent to do so. E&Y argues that plaintiffs have not established either that E&Y's audit opinions were actually included in the tender offer materials issued by Cendant to ABI investors or that it was foreseeable to E&Y that its opinions would be included in those materials. See E&Y Brief in Support of Renewed Motion to Dismiss ("E&Y Remand Br."), at 7. E&Y contends that the 1995 and 1996 Audit Opinions were not material at the time they were disseminated because at that time, no merger with ABI was contemplated. Id. Moreover, neither the opinions nor a discussion of the opinions were actually included in the tender offer documents and thus cannot be considered disseminated again at the time of the tender offer. Id. at 8. Furthermore, because E&Y cannot have known about the potential future merger with ABI when the 1995 and 1996 audit opinions were issued, it was not foreseeable that the two opinions would be used by Cendant in its tender offer documents. Id. E&Y claims that it never consented to the use of the audit opinions and thus could not have reasonably foreseen that the opinions would be used in connection with the ABI tender offer.
E&Y also asserts that its 1997 audit report was not included in the tender offer documents and that plaintiffs have failed to allege that E&Y knew or had reason to know Cendant would use the 1997 audit opinion with regard to CMS' 1997 financial statements when it made the tender offer. Id. at 9-10. This defendant states that it was never asked to consent to the use of that opinion in materials directed toward ABI investors. Id. at 10. Consequently, E&Y claims that plaintiffs have failed to meet the "in connection with" test. Id. at 9-10.
In response, plaintiffs submit portions of Cendant's S-4 Registration Statement filed February 20, 1998 with the SEC as part of the proposed merger which was to go forward if and when the tender offer was completed. The S-4 includes a "Consent" by E&Y, which reads:
We consent to the reference of our firm under the caption `Experts' and to the use of our report dated March 10, 1997 [with respect to the consolidated financial statements of CUC International Inc.], included in the Current Report on Form 8-K, dated January 29, 1998, and incorporated by reference in the Proxy Statement filed by Cendant Corporation . . . in connection with its offer to purchase 23,501,260 shares of common stock of American Bankers Group, Inc. . . . See Pizza Affidavit, Ex. B. at p. 16.
The March 10, 1997 report is E&Y's unqualified audit opinion of CUC's consolidated financial statements for the fiscal years that ended January 31, 1997 and 1996. See Pizza Affidavit, Ex. C, at p. 20. That report stated, among other things:
In our opinion, based on our audits and the reports of the other auditors, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cendant Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Id.
As a result, plaintiffs argue that E&Y's contention that it never consented to the use of its audit opinions in the tender offer documents is false and that the audit opinion regarding Cendant's 1995 and 1996 financial statements was made a part of the 14D-1 with E&Y's unqualified consent. See Plaintiff Br., at 43. *fn6 Plaintiffs also emphasize that the Third Circuit did not require the opinion itself to be contained in the 14D-1 statement but rather only that E&Y had reason to know that its audit opinion would be advanced by Cendant when it made the tender offer. Plaintiffs point out that given the formal consent, the contention that it was not foreseeable that the opinion would be used in connection with the tender offer is not credible. Plaintiff Br. at 44. Plaintiffs also dispute E&Y's contention that E&Y would have had to know of the tender offer at the time the report itself was made to establish the "connection," arguing not only that this is an illogical extension of the Third Circuit's holding but that it would be absurd in light of Regulation 14D-1 and Regulation S-K 301(a) requirements of audited financial data for five previous years to be included. See Plaintiff Br. at 45 and n. 23. *fn7
However, E&Y replies that the February 1998 document was only a "preliminary copy" of a proposed registration statement-which was never disseminated in any format to investors- for a transaction that was never finalized, *fn8 and that the 14D-1 for the ABI tender offer discussed in the Complaint is the one filed on January 27, 1998, which does not even mention E&Y. E&Y Reply at 1-4. *fn9 As a result, even if Plaintiffs' argument were accepted, it would allow only purchasers of ABI stock after February 20, 1998 to maintain an action. E&Y Reply at 2. Plaintiffs reply that although the document was only a preliminary copy and filed with regard to the second portion of the transaction, it nevertheless shows that E&Y was not surprised that its name was used in connection with the tender offer, specifically in the tender offer documents.
E&Y points out that misstatements by E&Y in the February 1998 registration statement have not been alleged by plaintiffs at any time in the complaints. E&Y Reply at 2. It also avers that because plaintiffs chose to appeal this Court's dismissal of the complaints without seeking leave to replead, and because the Third Circuit expressly took the appeal on the understanding that plaintiffs had waived any right to file an amended complaint, they cannot now amend the complaint. See E&Y Reply, citing Semerenko, 223 F.3d at 173 & n. 3 (plaintiffs are "not free to add new factual allegations to comply with Rule 12(b)(6)").
The 1997 financial statements were issued on March 31, 1998, after the tender offer was made. At oral argument, plaintiffs contended that the 1997 financial statement "stands on its own." Plaintiffs appear to argue that because the tender offer had already been made, it is no defense that the March 31, 1998 report made no mention of the ABI tender offer, so long as it was material to the investors' decisions and was in a public medium upon which investors would rely. See Plaintiff Br. at 46. E&Y responds that it does not matter that the statements were made after the tender offer was made, because the statements in the March 31, 1998 report were not "aimed at" ABI investors. See E&Y Reply at 7. Moreover, at oral argument E&Y maintained that the 14D-1 makes no reference to the March 1998 financial statements.
At that oral argument, plaintiffs also pointed out that although the January Schedule 14D-1 filed with the SEC incorporates excerpted financial data from its financial statements, and directs readers:
Additional financial information is included in other documents filed by Parent with the SEC. The financial information summary set forth below is qualified in its entirety by reference to such other documents which have been filed with the SEC, including the financial information and related notes contained therein, which are incorporated herein by reference. See Greenberg Aff., Ex. A, at 22 (emphasis added).
Consequently, plaintiffs argue, the 14D-1 incorporates by reference Cendant's audited financial statements, contained in Cendant's public filings with the SEC.
This Court is constrained to conclude that plaintiffs have sufficiently plead facts which establish the "in connection with" element as to E&Y's alleged preparation of CUC's and Cendant's audited financial statements for the years 1995, 1996 and 1997. To repeat, this Court must determine whether (1) the statements were material and were disseminated in a medium upon which a reasonable investor would rely; and (2) whether E&Y "knew or had reason to know that Cendant would use its financial statements and audit reports when making a tender offer for shares of ABI common stock." Semerenko, 223 F.3d at 177. It should be noted that this language appears three times in the Third Circuit's opinion. Two references state that plaintiffs must establish that E&Y knew or had reason to know that Cendant would "use its financial statements and audit reports when making the tender offer for shares of ABI common stock." Both of those statements appear at 223 F.3d at 177 (emphasis added). The third statement appears in the conclusion, which requires a determination whether "it was reasonably foreseeable that Cendant would use its financial statements and audit reports in its tender offer for shares of ABI common stock." 223 F.3d at 187-188 (emphasis added). This Court agrees with the parties that the phrases "in its tender offer" and "when making a tender offer" are not explicitly defined. E&Y urges an interpretation of these statements that would require the entire financial statements and/or audit reports to appear-either in full or in part-in the 14D-1s. Plaintiffs, on the other hand, argue that incorporation of the company's financial statements by reference in the 14D-1s is sufficient to satisfy that standard. E&Y relies upon the fact that the Third Circuit initially required only a finding of materiality and dissemination in a public medium. Only after E&Y petitioned for rehearing did the Court add the third requirement. The Third Circuit stated:
In its petition for rehearing Ernst & Young contends that the alleged misrepresentations contained in the financial statements and audit reports that it prepared for Cendant should not be deemed to have been made in connection with the purchase of ABI common stock unless it was reasonably foreseeable that they would be incorporated in the tender offer documents. We agree. 223 F.3d at 176-177 (emphasis added).
This statement implies that the interpretation E&Y now urges is too narrow: the Third Circuit did not state that the financial statements or opinions were required to appear-either in full or in part-in the tender offer documents-nor with specific reference to E&Y. Rather, the test requires only that the financial statements and E&Y's opinions be "incorporated in the tender offer documents" and that such incorporation was reasonably foreseeable to E&Y.
The Amended Complaint satisfies this test. Plaintiffs allege that E&Y performed audits of 1995, 1996, and 1997 financial statements, which were later incorporated into Cendant's public filings. See Am. Compl. ¶¶ 107-108; 111. The publicly filed financial statements were then incorporated by reference into the tender offer documents. Specifically, the 1995 through 1997 unqualified audit opinions issued March 19, 1996, March 10, 1997 and February 3, 1998 were included in 1995, 1996 and 1997 form 10-K's filed with the SEC. See Am. Compl. ¶ 111. While the February 1998 audit was not filed publicly until March 31, 1998, the two previous audits from 1995 and 1996 were publicly filed in 1996 and 1997, before the beginning of the class period. Moreover, although the 1997 financial statements were not filed with the SEC until March 31, 1998, the 14D-1s incorporate by reference all financial information filed with the SEC. See Greenberg Aff., Ex. A, at 22. Any reasonable investor who sought to educate herself about Cendant before deciding to purchase shares of ABI would be alerted to, and directed to, all of Cendant's financial statements filed with the SEC upon review of the tender offer documents. Thus a reasonable investor after March 31, 1998 may have relied upon the 1997 financial statements as well as the 1995 and 1996 statements.
E&Y also maintains that plaintiffs have failed to show that E&Y could reasonably have foreseen that the documents would be used in the tender offer, because there was no way E&Y could have known that Cendant-which did not yet exist-would make a tender offer for ABI shares at the time the audit opinions were issued. This Court does not interpret the Third Circuit's test to require that E&Y actually had reason to know of the possibility of the specific tender offer, but only that it could anticipate that its opinions would be used to make a tender offer in the future. As plaintiffs point out, as of the time of the ABI tender offer, Regulation 14D required, through Schedule 14D-1, a tender offeror to disclose current financial information. See 17 C.F.R. §§ 240.14d-6((e)(1)(viii) (1997); 240.14d-100 (1997) ("Schedule 14D-1"). *fn10 If the offeror provided summary information, it was required to provide instructions to the reader as to how to obtain "complete financial information." Id. E&Y cannot maintain that it was not foreseeable to it that CUC or any successor would refer readers to its complete, publicly filed financial statements as part of a tender offer.
Moreover, the tender offer documents, with their incorporated financial statements, formed a reliance base for a reasonable investor. E&Y does not dispute that investors would rely upon the tender offer documents. By incorporation of the financial statements, those documents were a medium upon which reasonable investors would rely. In McGann v. Ernst & Young, 102 F.3d 390 (9th Cir. 1996), the Ninth Circuit reversed the grant of E&Y's motion to dismiss a Section 10(b) claim. Among other things, plaintiffs alleged that E&Y produced a fraudulent audit report for CPC, a publicly traded corporation, and that E&Y knew that CPC would include the report in its Form 10-K filed with the SEC. Id. at 397. That court explained that it was no defense that the case involved "the dissemination of false information to the investing public by way of an independent audit report contained in a Form 10-K," because such forms must be filed annually with the SEC and the stock price of a publicly traded company reflects information in such forms:
Corporate financial statements [including Form 10-Ks] are one of the primary sources of information available to guide the decisions of the investing public. . . . Indeed, federal reporting requirements, such as the Form 10-K, exist `to control the accuracy of the financial data available to investors in the securities markets. . . .'" Id. (emphasis added), quoting United States v. Arthur Young & Co., 465 U.S. 805, 810-811 n. 5, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984).
Similarly, in In re Leslie Fay Companies, Inc., 871 F. Supp. 686 (S.D.N.Y. 1995), a New York district court focused on the foreseeability of use of forms 10-K in connection with the sale of securities. Leslie Fay involved a Section 10(b) claim against an outside audit firm, BDO, for its issuance of unqualified audit opinions which were included in the company's 1990 and 1991 Form 10-Ks and in its annual reports to shareholders. Id. at 688. Plaintiffs alleged, among other things, that the statements failed to conform with several GAAP principles. The defendant, BDO, argued that because § 7 of the 1933 Securities Act requires an accountant's consent to use its statements in connection with a registration statement and Section 11(a)(4) allowed private suits against accountants only for misstatements made in connection with registration statements, the "in connection with" requirement of Section 10(b) was not meant to encompass non-public filings with the SEC. Id. at 696. The district court rejected such a narrow interpretation of the phrase used in Section 10(b), because of the differences between the 1933 and 1934 acts:
[T]he purpose of §10(b) and Rule 10b-5 is to protect persons who are deceived in securities transactions-to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer to be what it purports to be. Id., quoting Chemical Bank v. Arthur Anderson & Co., 726 F.2d 930, 943 (2d Cir.), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984).
This Court similarly rejects the contention that E&Y must have explicitly consented to the use of its opinions in the 14D-1 documents filed with the SEC that pertained to the ABI tender offer in order for it to have been foreseeable to E&Y that its statements would be used by Cendant when making such a tender offer. That Sections 7 and 11 of the `33 Act require the accounting firm to have given consent to use its statements in connection with registration statements is not determinative here, because the purpose of the `34 Act is to protect individual investors from, among other things, purchase of securities with fraudulently inflated market prices. And nothing in Regulation 14D purports to require the same type of consent as that required under the `34 Act.
Both Leslie Faye and McGann distinguished Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183, 189-90 (7th Cir. 1993), which involved a sale of unregistered preferred stock in a one-time private placement to corporate insiders. There after collapse of the business, investors who had bought the preferred stock sued KPMG, the auditors, alleging that the audit of the previous year's financial statements was fraudulent because KPMG certified the financial statements as showing certain investments at the lesser of cost or market value, despite knowledge that the values of those investments should have been shown at market instead of cost. 2 F.3d at 186. The Seventh Circuit reversed a jury verdict to plaintiffs on the Section 10(b) claim because plaintiffs had failed to satisfy the "in connection with" requirement. Id. at 1189-190. That court reasoned that KPMG had no reason to know that the "audited financial statement would be used to offer any securities, let alone the preferred stock sold in the private transaction at the end of 1984." Id. at 190 (emphasis added). KPMG's witnesses denied knowledge that such a use would be made, and the company's main ...