U.S. district court rules on securities claims.

The U.S. District Court for the District of Massachusetts dismissed aider and abettor liability claims against Price Waterhouse but sustained other securities law actions against the firm.

This case began when the plaintiffs, who were investors in Kendall Square Research Corporation, suffered losses as a result of allegedly materially misleading statements of revenue from the sale of the company's computer systems. They alleged that Price Waterhouse had access to all Kendall's financial documents and records in connection with its audits and reviews of Kendall's financial statements. The firm had issued an unqualified audit opinion on Kendall's financial statements for the company's 1992 fiscal year and also had reviewed Kendall's quarterly financial statements for the first two quarters of 1993.

The plaintiffs claimed Price Waterhouse reviewed and approved representations made in the prospectus for each of the company's 1992 and 1993 stock offerings.

In sustaining part of the plaintiffs' complaint, the court ruled that they had "alleged with sufficient particularity" that the firm knew in issuing its unqualified opinion that Kendall had improperly recognized revenue. In support of this ruling, the court noted that

1. Price Waterhouse had served as the company's independent auditor from 1989 through 1994.

2. The firm had had access to all the company's financial documents in connection with its audits and reviews.

3. The firm had audited and approved for inclusion in Kendall's fiscal 1992 financial statements revenues that were materially overstated and could not be reported under generally accepted accounting principles.

In dismissing a portion of the plaintiff' claim against Price Waterhouse, the court ruled that the firm's review and approval of quarterly financial statements and prospectuses did not constitute the making of a material misstatement. At most, the conduct constituted aiding and abetting liability. However, under the precedent established by the U.S. Supreme Court's ruling in Central Bank v. First Interstate Bank in late 1994, the U.S. District Court ruled in this case that accounting firms can no longer be held liable for aiding and abetting activities. Because the firm did not actually engage in the reporting of the financial statements and prospectuses but merely reviewed and approved them, the statements are not attributable able to it, and thus the firm cannot be found liable for making a material misstatement. (In re: Kendall Square Research Corporation securities litigation no. 93-12352-EFH, U.S. District Court, District of Massachusetts, 11/9/94.)

Editor's note: Thanks to John Hughes of Hutchins, Wheeler & Dittmar, Boston, for the Kendall Square case.