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Court dismisses securities claim.

A U.S. district court in Illinois dismissed a suit charging an accounting firm with negligence and violations of federal securities law and the Racketeer-Influenced and Corrupt Organizations Act.

The case was brought by investors in a real estate development created by Pavilion Development Corp. Pavilion issued securities to investors for the purported purpose of raising capital for a residential development called "Honeytree." The investors alleged they were induced to invest in the securities by false and misleading statements and omissions of facts by Pavilion and its officers. They further claimed their securities were worthless.

The accountants, Berry, McEnerney and Cukierski (BMC), performed various accounting services for the partnership. The investors claimed BMC aided and abetted Pavilion's alleged securities fraud and were negligent in providing services to Pavilion.

The court dismissed the securities law claims, noting the investors' pleadings were nothing more than bare allegations BMC had been reckless in not knowing that the information Pavilion reported was false and misleading and in not knowing that the offering materials to which BMC contributed were intended for soliciting investors. These allegations were insufficient to turn a possible negligence claim into an action for securities fraud, the court concluded.

The court also dismissed the investors' negligence action, noting the Illinois Public Accounting Act provides that "no person, partnership or corporation licensed to practice public accountancy under the Act shall be liable for civil damages to be sons not in privity of contract." In light of the statute and its legislative history, BMC could not be liable to third-party investors for negligent misrepresentation. (Robin et al. v. Falbo, U.S District Court for the Northern District of Illinois Eastern Division, no. 91 C 2894) Editor's note: Thanks to Randy Sue Schreiber of Querrey & Harrow for contributing the Robin v. Falbo case, which she successfully defended. Edited by Wayne Baliga, CPA, JD, CPCU,vice-president of AON Corp.
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Title Annotation:Robin v. Falbo
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1993
Words:313
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