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State consumer fraud act applied to accounting firm.

A U.S. district court ruled Illinois's Consumer Fraud and Deceptive Business Practices Act (the consumer fraud act) applies to audit services rendered by an accounting firm in conjunction with a securities offering.

The ruling arose from Arthur Andersen & Co.'s motion to dismiss an action by a group that invested in a company called Needle in a Haystack, Inc. Andersen audited Needle's financial statements, which were included in the company's public offering of 40,000 investment units. The suing investors purchased 21,567 units for $129,402.

After the offering, Andersen discovered it had not been independent during the audit. A $30,000 promissory note executed by Neeedle for earlier services by Andersen was to be paid from the proceeds of the securities offering, but the registration statement failed to disclose this fact.

Following a Securities and Exchange Commission investigation of Andersen's independence, Needle was forced to terminate its offering and agreed to stop trading its securities.

The investors holding the now worthless securities accused Andersen of violating provisions in both the Securities Act of 1933 and Illinois's consumer fraud act. Andersen moved to dismiss the consumer fraud claim, asserting

1. The investors were not "consumers" within the meaning of the Illinois act because they did not purchase any "merchandise" from Andersen.

2. The act does not apply to accounting services.

The court dismissed both arguments. It found Andersen's services qualified as "merchandise" under the act, which contains no provision exempting accounting services from its authority. Consequently, the investors could maintain an action against Anderson. (Daniel S. Lyne v. Arthur Andersen & Co., no 91C 1885, U.S. District Court for the Northern District of Illinois, Eastern Division, 9/3/91.)
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Title Annotation:Illinois's Consumer Fraud and Deceptive Business Practices Act and Arthur Andersen & Co.
Author:Baliga, Wayne J.
Publication:Journal of Accountancy
Date:Jan 1, 1992
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