Thomas v. Berkowitz

94-4385 (U.S. Dist. Ct. D. N.J. 1997) (Unpublished)
  • Opinion Date: December 29, 1997

SECURITIES; ACCOUNTANTS; FRAUD; STATUTE OF LIMITATIONS—Even if the federal statute of limitations for a securities fraud claim has passed, a state cause of action may be alive. In certain circumstances, an accountant who successfully solicits foreclosure of the shares of a client’s corporation can be a “seller” of securities.

An accountant’s client purchased shares of a closely held corporation that was also a client of the accountant. The investor sued the accountant for fraud, violation of the Securities Acts of 1933 and 1934, and RICO, claiming it made the investment in reliance upon statements by the accountant and that it would not have invested in the company had he been fully aware of the company’s dismal financial state. The accountant moved for summary judgment, claiming that the company’s financial condition was fully disclosed to the investor.

Section 12(1) of the Securities Act of 1933 states that any person who sells an unregistered security in violation of Section 5 shall be liable to the buyer. Section 5 of the Act prohibits the interstate sale or delivery of unregistered securities. Although the accountant claimed he was not a seller under the Act, the United States Supreme Court defines a “seller” of securities to include the person who successfully solicits the purchase and is “motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” Pinter v. Dahl, 486 U.S. 622, 647 (1988). Section 12(2) of the Act applies to sales of all securities and provides that any person who makes an untrue statement of material fact or fails to state a material fact is liable to the buyer. Rule 10b-5 of the Securities Exchange Act of 1934 is a broad securities fraud rule requiring an investor to demonstrate a false representation of material fact, made with knowledge of its falsity and with an intent that it be relied on, and that the investor did rely and suffer loss as a result.

The United States District Court refused to conclude that the accountant was not a seller, finding inadequate evidence of the accountant’s role in the investor’s purchase of the securities. It was unclear just how active the accountant was in soliciting the purchase, or to what extent he may have been financially motivated, either for himself or for the company, to solicit the purchase. However, since the investor failed to comply with the Act’s one year statute of limitations, claims under Sections 12(1) and 12(2) were dismissed. N.J.S. 49:3-71 is the New Jersey analog to Section 12 of the Act. The Court found, just as had been found under Section 12, that there was a genuine issue of material fact, but did not dismiss this claim since there was no statute of limitations problem. As to the investor’s Rule 10b-5 claim, the Court found that it was not timely filed, since the statute of limitations for such a claim is one year after discovery of facts constituting the violation. The Court refused to toll the statute on the basis of equitable estoppel reasons, finding nothing that prevented the investor from timely discovering the alleged fraud or filing the complaint.
A successful RICO claim establishes a pattern of racketeering and demonstrates continued, or a threat of continuing, racketeering activity. The Court found no such activity nor any threat of it and dismissed the RICO claim.

Next, the Court stated that an essential element of common law fraud is reliance. The investor claimed he relied on company projections made by the accountant. However, under the New Jersey law of fraud, a material misrepresentation must be of a “presently existing or past fact.” Diaz v. Johnson Matthey, 869 F. Supp. 1155, 1164 (D. N.J. 1994). A plaintiff may not claim reliance on opinions regarding future events, or on failure to disclose certain events. Furthermore, the Court found that since the investor in this case conducted its own investigation into the financial status of the company it did not rely on any statement or disclosures of the accountant.