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Standard Chartered PLC v. Waterhouse

November 7, 1996


Appeal from the Superior Court of Maricopa County. Cause No. CV 88-34414. The Honorable John R. Sticht, Judge.

Amended per order dated January 13, 1997.

Noel Fidel, Presiding Judge, William F. Garbarino, Judge, Sheldon H. Weisberg, Judge.

The opinion of the court was delivered by: Fidel; Garbarino; Weisberg


The plaintiffs are Standard Chartered PLC, a British banking corporation, and two of its subsidiaries, Standard Chartered Bank and Standard Chartered Overseas Holdings, Ltd. (collectively "SC"). The defendant is Price Waterhouse, an accounting firm ("PW"). S. Ct. brought this action as assignee or successor in interest to certain tort and statutory damages claims owned originally by Union Bancorp of California ("Union") and United Bank of Arizona ("United"). The gravamen of the action is that Union was caused to buy United, a bank that it would not otherwise have bought, by PW's negligent audit of United and approval of misleadingly favorable financial statements that United had prepared. After a lengthy trial by jury, the jury rendered multiple plaintiffs' verdicts of $338,053,778; and the trial court granted PW a new trial on two of many asserted grounds. S. Ct. appeals from the grant of a new trial. PW appeals from the trial court's refusal to grant it judgment notwithstanding the verdict ("JNOV"), and asserts by cross-appeal several additional grounds to support the grant of a new trial. In the course of our opinion, we consider the following issues:

1. Is a negligence claim against an auditor assignable? Yes.

2. Did PW "participate in or induce" Union's purchase of United so as to subject PW to liability under the Arizona Securities Act? No.

3. In serving as United's independent auditor and in certifying United's financial soundness to Union, did PW act as a fiduciary to either United or Union? No.

4. Does a party irretreivably waive a ground for JNOV by neglecting to include that ground within a motion for directed verdict at the close of the evidence? Or may the motion be considered nonetheless if the issue (a) is purely legal, (b) was aired in prior motions so that the adverse party cannot reasonably claim surprise, and (c) is not one to which the adverse party, had there been a motion for directed verdict, might have responded by seeking leave to reopen to present further evidence? The latter.

5. Is there a claim for "auditor negligence" separate and distinct from a claim for negligent misrepresentation? No.

6. Does Arizona law measure the range of liability for negligent misrepresentation by the ordinary negligence yardstick of reasonable foreseeability, or does it employ the more circumscribed range of liability set forth in section 552 of the Restatement (Second) of Torts? The latter.

7. Must a plaintiff in a negligent misrepresentation claim prove loss causation and out-of-pocket damages? Yes.

8. When the negligence that a third party attributes to an auditor is the failure to detect and report the financial mismanagement and inaccurate reporting of the auditing client, may the auditor attempt to reduce its share of liability by allocating fault to the negligent client? Yes.

9. Does apportionment of fault in Arizona Revised Statutes Annotated ("A.R.S.") § 12-2506 apply to economic damage claims? Yes.

After addressing these and other issues, we conclude that this case must be retried, but on SC/Union's negligent misrepresentation claim alone. On all other claims that S. Ct. brought on behalf of Union, and on all claims that S. Ct. brought on behalf of United, we conclude that PW is entitled to JNOV.


SC is a United Kingdom banking corporation with subsidiaries worldwide and more than $35 billion in assets. In the mid-1980s, S. Ct. decided to expand its bank holdings in the United States. Through Union, a wholly-owned subsidiary, S. Ct. sought to acquire United, then the fourth largest bank in Arizona.

PW had functioned as United's independent auditor since 1970. As an auditor, PW annually examined United's books and records to investigate and verify the accuracy of its financial statements. United's financial statements, including balance sheets and income statements, were a primary source of information, both for United itself and for others outside the company, concerning the actual condition of United's operations, assets, and liabilities.

PW audited United for fiscal years 1985 and 1986 for an annual fee of approximately $140,000, and each year issued unqualified opinions supporting the accuracy, completeness, and regularity of United's financial statements. An auditor's "unqualified" opinion on a company's financial statements is an opinion without reservations or qualifications and amounts to a representation that the contents are reasonably accurate with no material exceptions.

In September 1985, Union and United entered into a merger agreement by which Union would purchase all of United's capital stock. PW was not a party to the agreement. The agreement did not require an audit or certification of United as a condition of closing, and neither took place. The agreement did require, however, that Union be given all United financial statements audited by PW, other United financial information reviewed by PW, and "management letters" prepared by PW describing any weaknesses that it found in United's internal controls. Within the agreement, United also consented for Union to receive from PW any information about United that Union might request. The agreement conditioned Union's obligation to perform on the absence of a material adverse change in United's financial condition and on receipt of certification that United's shareholders' equity was at least $135 million as of the merger's effective date.

United's "loan portfolio" consisted of the aggregated short-term and long-term debts that United's loan customers owed the bank. The loan portfolio was a significant component of United's assets, comprising $1.4 billion of United's total assets of $2.1 billion in 1985. As United's independent auditor, one of PW's functions was to periodically evaluate the loan portfolio, the individual customer accounts that comprised the loan portfolio, and United's internal lending controls in order to predict what proportion of the loans would ultimately be repaid. This evaluation in turn tested the accuracy of United's allowance for uncollectible loans, which United showed on its financial statements as a charge against income.

In November of 1985, PW representatives met with Union's chief financial officer, Jack Frazee, and others to solicit the retention of PW as United's auditor. One subject they addressed was the public financings that Union would undertake to raise money to fund the purchase of United. Frazee later met individually with PW's lead audit partner, Karl Almquist, to discuss PW's working relationships with United's managers and directors. Before the holidays in 1985, Frazee decided to rely on PW for ongoing financial information about United through the closing, and he communicated that decision to PW, to representatives of United, and to PW's competitor, Peat Marwick.

In early 1986, PW issued an unqualified audit opinion on United's 1985 financial statements. PW stated that it had conducted its audit in accordance with generally accepted auditing standards and that the information in the financial statements was fairly presented in accordance with generally accepted accounting principles. Based on the audited financial statements, Union bought United stock in the open market and proceeded toward closing.

An expert witness for S. Ct. testified at trial, however, that United's 1985 income statement had actually overstated income by approximately $27 million. The same expert testified that PW had not followed generally accepted auditing standards in preparing its audit opinion. Frazee further testified that, if Union had known of the undisclosed dwindling of United's shareholders' equity, Union would not have gone forward with the transaction.

In 1986, Union raised $300 million to help fund its acquisition of United by selling its own securities in three public offerings. PW helped Union prepare the financial information for these offerings. PW formally consented to the inclusion of its audit report on United's 1985 financial statements in Union's SEC filings for the securities issues. PW also wrote comfort letters to United's board of directors and Union's securities underwriters, stating that United's financial statements formally complied with federal accounting requirements.

Immediately before the Union-United acquisition closed on January 8, 1987, United provided Union a draft consolidated balance sheet showing that, as of December 31, 1986, its shareholders' equity was $147 million. This was well above the $135 million minimum required by the 1985 merger agreement. Through an intermediary at United, Union asked PW whether it would propose any adjustments to the consolidated balance sheet. Almquist was aware that Union sought the information in connection with the closing. He told the United intermediary that "our audit was not finished and we had a lot of work left to do before we could complete our audit as of December 31, 1986, but went on to explain that, as of that point in time, we knew of no adjustments that we would be proposing." Almquist cautioned that PW's audit work for 1986 was in a preliminary phase.

Union proceeded with the closing. At trial, S. Ct. presented expert testimony that if PW had followed generally accepted auditing standards in the 1985 and 1986 United audits, it would have discovered and disclosed before January 8, 1987, that United's financial statements were materially misstated and that its system of internal controls was materially unsound. As examples, S. Ct. presented evidence of problem loans to the Victorio Company, Larry Malanfant, and the Newbery Corporation, for which United should have reported predicted losses of approximately $34 million for 1985 and 1986. PW neither discovered nor disclosed these problem loans and the weaknesses in internal controls that had permitted such problems to develop.

In January 1988, one year after it acquired United for $334,239,225, SC/Union sold United to Citibank for $207.1 million, retaining certain United subsidiaries and loans receivable that Citibank did not want. On October 31, 1988, California First Bank acquired the stock of the S. Ct. subsidiary that owned Union. S. Ct. agreed to retain the impaired assets that Citibank had rejected, as well as any legal claims that Union could assert as a consequence of the purchase of United.

SC commenced this action against PW on December 30, 1988. S. Ct. undertook to prove that PW had carelessly carried out the audit of United, failed to investigate the solidity of United's loan portfolio and internal loan controls, and erroneously approved financial statements that significantly exaggerated the value of United's assets. S. Ct. asserted--exclusively as Union's and United's assignee--damages claims for auditor negligence, negligent misrepresentation, breach of fiduciary duty, racketeering, and violation of the Arizona Securities Act, A.R.S. § 44-1991 (1994). *fn1 S. Ct. claimed a net loss of $338,053,768, which it presented as the difference between its gross investment in United, including borrowing costs and the cost of supporting the assets after the sale to Citibank, and its receipts, including dividends on the United stock and the proceeds from sale to Citibank.

After a trial of eleven and one-half months, the jury found in favor of PW on SC/Union's racketeering count, and in favor of S. Ct. in the amount of $3,872,909 on SC/Union's Arizona Securities Act claim. On SC/United's tort claims of auditor negligence, breach of fiduciary duty, and negligent misrepresentation, the jury found in favor of S. Ct. in the amount of $338,053,778. On SC/Union's separately submitted tort claims of auditor negligence, breach of fiduciary duty, and negligent misrepresentation, the jury also found in favor of S. Ct. in the amount of $338,053,778, but assigned fault 85% to PW and 15% to Union.

PW moved for JNOV or, alternatively, for a new trial on the tort and Securities Act claims. The trial court declined to grant JNOV, but granted a new trial, determining that the jury's awards of different sums on Union's tort and Arizona Securities Act claims were "irreconcilably inconsistent," and that its identical damages awards to S. Ct. on Union's and United's claims were likewise "irreconcilable" or "hopelessly confused." The court granted the new trial on both liability and damages, explaining that "the issue of liability is inextricably interwoven with damages."

Formal judgment was entered in accordance with the trial court's rulings. PW's notice of appeal from the denial of its motion for JNOV generated our cause number 1 CA-CV 93-0461. SC's independent appeal from the grant of a new trial, and PW's corresponding cross-appeal, generated our cause number 1 CA-CV 93-0442. The two appeals have been consolidated as 1 CA-CV 93-0461. We have jurisdiction pursuant to A.R.S. § 12-2101(E) and (F)(1).


PW contends that Arizona law prohibits the assignment of all claims "sounding in tort" or those that are "personal" in nature. PW compares the accountant-client relationship to the attorney-client relationship and urges that Arizona's anti-assignment rule applies with special force to those "personal" claims that arise from a professional's services for a client. PW asserts that Union and United's assignment of their tort claims to S. Ct. is invalid, and bestows no standing on S. Ct. to bring this action.

PW relies heavily on a statement in a worker's compensation case, K. W. Dart Truck Co. v. Noble, 116 Ariz. 9, 11, 567 P.2d 325, 327 (1977), that "generally an unliquidated claim for damages arising out of a tort is not assignable." PW also relies on Sabon Investments, Inc. v. Braniff Airways, Inc., 534 F. Supp. 683, 685 (D. Ariz. 1982), in which a travel agency's federal tort action based on claims assigned to it by its clients was dismissed under the purported Arizona rule that "a cause of action in tort is not assignable absent a specific statute." However, upon close examination of the cases, we find the "Arizona anti-assignment rule" considerably narrower than PW suggests.

Early Arizona cases established survivability of a cause of action as the test of its assignability. Employers Casualty Co. v. Moore, 60 Ariz. 544, 142 P.2d 414 (1943); United Verde Extension Mining Co. v. Ralston, 37 Ariz. 554, 296 P. 262 (1931); Deatsch v. Fairfield, 27 Ariz. 387, 233 P. 887 (1925); accord Shepard v. Cal-Nine Farms, 252 F.2d 884 (9th Cir. 1958), cert. denied, 356 U.S. 951, 2 L. Ed. 2d 844, 78 S. Ct. 916 (1958). In Employers Casualty, the court explained the rule against assignment of personal injury claims as an application of the survivability standard; personal injury claims were not assignable because they were "strictly personal" and could not survive the death of the injured party. 60 Ariz. at 548, 142 P.2d at 415. A survivable claim, however, was an assignable claim, upon which the assignee could sue in his own name. United Verde, 37 Ariz. at 559, 296 P. at 264.

In later cases, the Arizona courts detached the rule of non-assignability of personal injury claims from the survivability standard and supported it on independent policy grounds. In Harleysville Mutual Insurance Co. v. Lea, 2 Ariz. App. 538, 541, 410 P.2d 495, 498 (1966), we explained that the non-assignability rule prevents "unscrupulous people" from "trafficking in law suits for pain and suffering." In State Farm Fire & Casualty Co. v. Knapp, 107 Ariz. 184, 484 P.2d 180 (1971), the supreme court cited Harleysville with approval and reaffirmed "the long-recognized and well-established legal principle prohibiting assignment of a cause of action for personal injury." Id. at 185, 484 P.2d at 181 (quoting Travelers Indem. Co. v. Chumbley, 394 S.W.2d 418, 425 (Mo. Ct. App. 1965)).

Harleysville and Knapp were personal injury cases, however; and in a case of that same era, our supreme court demonstrated that, for tort claims of an economic nature, the court continued to adhere to an assignability rule. See General Accident Fire & Life Assurance Corp. v. Little, 103 Ariz. 435, 438, 443 P.2d 690, 693 (1968). []In General Accident, judgment debtors assigned to their judgment creditor the right to proceed against their insurer for a bad faith failure to settle within policy limits. Id. at 436, 443 P.2d at 691. Our supreme court affirmed the trial court's holding that the assignment agreement conferred on the assignee-judgment creditor the right to assert the judgment debtors' claim for insurer bad faith. Id. at 437, 444, 443 P.2d at 692, 699. Rejecting an attack on the standing of the assignee, the court stated, "It has long been the law in Arizona, and the law in most if not all jurisdictions that an assignee of a chose in action may maintain suit thereon in his own name." Id. at 438, 443 P.2d at 693.

An observer might have concluded after Knapp and General Accident that the Arizona courts continued to contrast non-assignable personal injury tort claims with other, assignable, forms of tort claims; the only change was to free the distinction from the survivability standard and ground it in a policy against traffic in pain and suffering. In Dart, however, the supreme court introduced uncertainty by more broadly stating the anti-assignment rule. There, the court cited Knapp, 107 Ariz. 184, 484 P.2d 180, for the proposition that "generally an unliquidated claim for damages arising out of a tort is not assignable." 116 Ariz. at 11, 567 P.2d at 327. The supreme court repeated that language in Ross v. Superior Court (Dowell), 128 Ariz. 301, 302, 625 P.2d 890, 891 (1981).

We believe PW reads too much into the broad language of Dart and Ross. Because both Dart and Ross concerned the assignability of negligence claims for personal injuries, neither case required the court to consider the assignability of other kinds of claims arising out of torts. Further, the court did not purport in Dart or Ross to overrule the United Verde line of cases that articulated a general assignability rule. We therefore conclude that the broad language of Dart and Ross must be confined to its context--the context of a personal injury claim.

As PW points out, the Arizona courts have extended the non-assignability rule beyond bodily injury to legal malpractice claims. Schroeder v. Hudgins, 142 Ariz. 395, 690 P.2d 114 (App. 1984). We treated this extension, however, as an application of the rule against assignment of claims of an especially personal nature. Id. at 399, 690 P.2d at 118. Thus, we based our ruling in Schroeder upon the "uniquely personal" nature of the attorney-client relationship and the duty imposed on the attorney. Id.

PW argues that tort claims arising out of the relationship between the accountant and the client are likewise "purely personal" and non-assignable. They compare the relationship of accountant-client to that of attorney-client. While we express no opinion on the assignment of a claim for accountant malpractice during performance of accounting services other than the auditing function, we perceive a difference between the relationship of an independent auditor engaged to conduct an audit and that of an attorney with a client. The United States Supreme Court recognized the same distinction when it denied work product protection to an auditor, stating:

By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This "public watchdog" function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust.

United States v. Arthur Young & Co., 465 U.S. 805, 817-18, 79 L. Ed. 2d 826, 104 S. Ct. 1495, cert. denied, 466 U.S. 936, 80 L. Ed. 2d 456, 104 S. Ct. 1906 (1984).

In Schroeder, we relied in part on Goodley v. Wank & Wank, Inc., 62 Cal. App. 3d 389, 133 Cal. Rptr. 83 (App. 1976), to hold that an action for legal malpractice is not assignable. 142 Ariz. at 399-400, 690 P.2d at 118-19. In Goodley, the California Court of Appeal stated:

It is the unique quality of legal services, the personal nature of the attorney's duty to the client and the confidentiality of the attorney-client relationship that invoke public policy considerations in our Conclusion that [legal] malpractice claims should not be subject to assignment.

133 Cal. Rptr. at 87; accord Fireman's Fund Ins. Co. v. McDonald, Hecht & Solberg, 30 Cal. App. 4th 1373, 36 Cal. Rptr. 2d 424 (App. 1994). The attorney-client relationship is personal in both nature and objective. In contrast, from its inception the auditor-client relationship exists not merely for the benefit of the client, but also for the benefit of the shareholders and the public with whom the client may transact business.

Nothing that PW cites supports the view that a claim for auditor negligence is personal in a manner comparable to a claim for legal malpractice. In fact, the New York courts have approved the view that auditor negligence claims are to be treated like ordinary claims for conversion, negligence, or other wrongful injury to a corporate plaintiff's property, and are not extinguished upon transfer by merger. Platt Corp. v. Platt, 21 A.D.2d 116, 249 N.Y.S.2d 75 (App. 1964), aff'd mem., 204 N.E.2d 495 (1965).

As PW points out, the Arizona Supreme Court has treated legal and accountant malpractice actions as "similar" in the sense that both require the plaintiff to prove a professional standard of care. See Barmat v. John & Jane Doe Partners, 155 Ariz. 519, 523, 747 P.2d 1218, 1222 (1987). However, this similarity does not make the accountant-client relationship analogous to the attorney-client relationship with respect to assignability of claims. In part IV of this opinion, we conclude that neither United nor Union had a fiduciary relationship with PW. Here we conclude that the economic damage claims asserted against PW were not so "personal" to United and Union that those entities could not assign them to SC. See Amerifirst Bank v. Bomar, 757 F. Supp. 1365 (S.D. Fla. 1991) (finding Rule 10b-5 claims could be validly assigned by victim to another, who could sue despite lack of personal standing).

We hold that S. Ct. has standing to bring this suit.


We next consider PW's argument that the trial court erroneously denied JNOV on SC/Union's claim for damages under the Arizona Securities Act.

The statutory basis for SC's Securities Act claim is A.R.S. § 44-1991, which provides:

It is a fraudulent practice and unlawful for a person, in connection with a transaction or transactions within or from this state involving an offer to sell or buy securities, or a sale or purchase of securities . . . directly or indirectly to do any of the following:

2. Make any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.

Under section 44-2001 of the Securities Act, a purchaser injured by a violation of section 44-1991 may bring a private cause of action for rescission or damages. *fn2

SC brings such a cause of action, asserting that it was damaged by PW's untrue statements or misleading omissions "involving an offer to sell or buy securities or a sale or a purchase of securities, including Union's purchase of United Bancorp's stock on January 8, 1987, and Union's three public financings, dated April 7, 1986, May 14, 1986, and October 30, 1986." *fn3

PW did not sell any securities to Union. PW's liability under section 44-2001 arises, if at all, pursuant to A.R.S. § 44-2003, which provides:

An action brought under § 44-2001 . . . may be brought against any person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase, and such persons shall be jointly and severally liable to the purchaser or seller entitled to maintain such action.

(Emphasis added.) S. Ct. does not claim that PW in any sense "made" the sale within the meaning of section 44-2003. The question therefore narrows to whether the evidence permitted the Conclusion that PW "participated in or induced" the sale. See id.

The parties devote a portion of their briefs to federal cases interpreting federal securities statutes. See Securities Exchange Act of 1934, §§ 10(b), 18, 28, 28(a), 15 U.S.C.A. §§ 78j(b), 78r, 78bb, 78bb(a); Securities Act of 1933, §§ 11, 12(2), 15 U.S.C.A. §§ 77K, 77l(2). Because, however, there is no counterpart in those statutes to the participation-or-inducement standard of our state statute, the federal statutes do not guide us here.

The trial court granted S. Ct. partial summary judgment on its Securities Act claim, ruling that PW, as a matter of law, "'participated in or induced' the unlawful sale of securities within the meaning of A.R.S. § 44-2003." *fn4 PW contends that the trial court erred in granting S. Ct. partial summary judgment on this issue. Instead, PW argues, the trial court should have awarded JNOV to PW, ruling that PW, as a matter of law, neither "participated in" nor "induced" the sale within the meaning of the statute. PW argues that its conduct did not fall within the common and ordinary meaning of the words "participated in" and "induced." It further argues that the language of A.R.S. § 44-2003, the Arizona Securities Act, and the cases interpreting the Act require either the sharing of the proceeds or the active solicitation of a securities sale before a nonseller can be liable for having "participated in or induced" the sale. PW points out that it did not share in the proceeds of the sale of United's stock to Union and did nothing to "solicit" Union's purchase of United.

In response, S. Ct. asserts that the record contains voluminous evidence that PW made representations about United's financial status and that PW was actively involved in the sale of United's stock to Union. It contends that one may "participate in" or "induce" a sale without actively soliciting the sale or sharing in its proceeds. S. Ct. relies on State v. Superior Court, 123 Ariz. 324, 599 P.2d 777 (1979), overruled in part, State v. Gunnison, 127 Ariz. 110, 618 P.2d 604 (1980), as "binding Supreme Court precedent" for its position.

State v. Superior Court can be interpreted as extending participation-or-inducement liability under section 44-2003 to nonparties or nonagents who make untrue statements or material omissions while providing information about corporations whose securities are being sold, even though they take no active part in bringing about the transaction and receive no consideration from it. However, the procedural circumstances of State v. Superior Court lead us to conclude that we should interpret neither that case nor section 44-2003 so broadly.

In State v. Superior Court, a group of depositors of the failed Lincoln Thrift sued officers and employees of the Arizona Corporation Commission, among other defendants. Id. at 327, 599 P.2d at 780. In Count I of their complaint, the depositors alleged, pursuant to A.R.S. § 44-1991(2), that the Corporation Commission defendants made untrue statements or omitted material facts in connection with the thrift associations' sales of investment certificates. Specifically, the complaint alleged that these defendants falsely represented that the associations were well regulated by the Commission, that they had made all filings required by law, that their corporate papers and insurance certificates were in order, and that they were solvent. Id. at 328, 599 P.2d at 781. Count II alleged, among other things, that the Corporation Commission defendants aided and abetted the thrift associations' violations by failing to properly examine the associations' applications for registration of investment certificates in accordance with standards required by law, and by failing to disclose that the associations were not properly regulated and that their surety lacked sufficient assets to insure payment of their insured obligations. Id. at 328-29, 599 P.2d at 781-82.

The file reflects that the defendants moved to dismiss the complaint pursuant to Rule 12(b)(6), Arizona Rules of Civil Procedure, 16 A.R.S., for failure to state a claim upon which relief could be granted. Defendants asserted that the duties imposed on state agencies and officials were owed to the public generally, and that breaches of such duties did not give rise to individual causes of action. Petition for Special Action, State v. Superior Court, No. 14231 (filed Feb. 22, 1979). When the trial court denied the motion to dismiss, defendants filed a petition for special action relying exclusively on the public-private duty distinction. Id. ; see Massengill v. Yuma County, 104 Ariz. 518, 456 P.2d 376 (1969), overruled by Ryan v. State, 134 Ariz. 308, 656 P.2d 597 (1982). In their response to the petition, the plaintiffs stated:

Defendants are state officials who failed, in some cases negligently and in some cases willfully and maliciously, to carry out their express statutory duties to conduct annual examinations of Lincoln and U.S. Thrift Associations. Defendants allowed Lincoln and U.S. Thrift, as well as Omaha Surety, to continue operating with impunity when various defendants knew, and others should have known, that these companies were blatantly violating the law in virtually every transaction they conducted. Various of defendants, acting both as state officials and as individuals, went so far as to actively promote these companies to unsuspecting potential depositors and actively took part in Robert Fendler's scheme to defraud the depositors.

These facts must be taken as established since the order challenged herein is a denial of a motion to dismiss. It is defendants who chose to move to dismiss at the outset rather than waiting for discovery to establish the facts with more precision. Defendants are therefore bound by the facts as related by plaintiffs as long as such facts are consistent with the allegations of the complaint. The rule established by this Court is that a motion to dismiss may not be granted "unless it appears certain that the plaintiff would be entitled [to] no relief under any state of facts which is susceptible of proof under the claim as stated." Mackey v. Spangler, 81 Ariz. 113, 115, 301 P.2d 1026 (1956).

Response to Petition for Special Action, State v. Superior Court, No. 14231 (filed March 5, 1979) (emphasis added).

Confined to the issues that were framed by the pleadings, the supreme court first addressed itself to the public duty issue. After determining that Counts I and II were not based on a theory of negligence, the court stated:

Arizona discarded the concept of sovereign immunity for tort liability over fifteen years ago. Stone v. Arizona Highway Commission, 93 Ariz. 384, 381 P.2d 107 (1963). Because Counts I and II are not based on a theory of negligence, a "public duty defense," as discussed in Massengill v. Yuma County, 104 Ariz. 518, 456 P.2d 376 (1969), is inapplicable. We, therefore, need only determine if the pleadings in Counts I and II adequately state claims upon which relief can be granted.

123 Ariz. at 330, 599 P.2d at 783.

The court then determined that Count I did state a cause of action against the defendants. It reasoned:

Generally speaking, a purchaser of stock has no cause of action under the Arizona Securities Act for a rescission of the sale and recovery of the money paid for stock from one who received none of the consideration and was not a party to the sale. See Trump v. Badet, 84 Ariz. 319, 327 P.2d 1001 (1958). Pursuant to A.R.S. § 44-2003, however, an action under A.R.S. § 44-2001 may be brought against any person, including any dealer, salesman or agent, who made, participated in or induced the unlawful sale or purchase. Such persons are jointly and severally liable to the purchaser. This section, therefore, clearly fixes the liability of one who induces the unlawful sale or purchase. Trump, (supra) .

The theory of Count I is clearly that the misrepresentations and omissions of the Corporation Commissioner officer defendants induced the plaintiffs to become depositors in the Associations. As such, a cause of action, pursuant to § 44-1991, is properly stated against these defendants. A.R.S. § 44-2003.

Id. at 331, 599 P.2d at 784. *fn5

SC argues that State v. Superior Court held that officers and employees of the Arizona Corporation Commission can "participate in" or "induce" securities law violations when securities purchasers detrimentally rely upon incorrect information that the officers and employees have communicated to them in the course of performing their official duties. State v. Superior Court does not so hold. The meaning of the terms in section 44-2003 was never an issue. The only issue that confronted the court was whether the plaintiffs' claim should have been dismissed for failure to state a claim, and the court could only have approved dismissal if it determined that the plaintiffs were not entitled to relief under any facts susceptible to proof. Id. at 329, 599 P.2d at 782. Count I of the amended complaint in State v. Superior Court detailed specific omissions and representations of defendants and alleged that they constituted fraudulent practices. Id. at 330, 599 P.2d at 783. Based on these allegations, and accepting the allegations of the complaint as true, the supreme court determined that a cause of action for "inducing" plaintiffs to become depositors had been stated and was not subject to dismissal for failure to state a claim. Id. at 331, 599 P.2d at 784.

In short, State v. Superior Court arose from a motion to dismiss; this case arises from a trial. In that case, the court was obliged to assume the truth of allegations that certain defendants had actively promoted a fraudulent transaction; in this case, we examine evidence of a defendant's more remote relationship to a sale. In that case, the court was not obliged to determine the meaning of participation or inducement within A.R.S. § 44-2003; in this case, we are obliged to do so. Given these dissimilarities, State v. Superior Court does not resolve the issue that confronts us here.

We therefore come directly to the meaning of the phrase "participated in or induced" in A.R.S. § 44-2003. Looking to the dictionary, we find this pertinent definition of "participate":

2a: to take part in something (as an enterprise or activity) usu. in common with others . . . b : to have a part or share in something. . . .


Although PW's audit activities were tangentially related to and concurrent with the ongoing sale, and although it generated audit information that was used by the parties to the sale, PW did not partake in the sale of United's stock to Union any more than it made the sale. PW's function--to issue audit opinions about United's financial status--did not differ from the function it would have performed had no merger or sale been in process. And though PW made its audit opinions available to Union, it is uncontradicted that PW had no stake in the sale. PW provided its opinions to Union because it was asked to do so by its audit client and because it wished to continue as United's auditor after the sale. PW did not "participate in" the sale within the meaning of A.R.S. § 44-2003.

The dictionary also provides this pertinent definition of "induce":

1a : to move and lead (as by persuasion or influence) . . . : prevail upon: INFLUENCE, PERSUADE . . . b : to inspire, call forth, or bring about by influence or stimulation. . . . 3a : to bring on or bring about: EFFECT, CAUSE . . . .


Here, we cannot resolve the statutory meaning by reference to the dictionary alone. By reading "induce" particularly expansively, we might sweep within the statute any outsider to a securities transaction--no matter how remote from the transaction--who provided information that foreseeably contributed to, and thereby influenced, a buyer or seller's decision to engage in the transaction.

We do not believe, however, that the legislature intended by "induce" to extend Securities Act liability so far. Rather, we believe it better fits A.R.S. § 44-2003 to give "induce" the narrower and more active construction suggested by its synonyms "persuade" and "prevail." Returning to Webster's, we find the following exposition of the active connotations of "induce":

syn PERSUADE, PREVAIL: INDUCE may indicate overcoming indifference, hesitation, or opposition, usu. by offering for consideration persuasive advantages or gains that bring about a desired decision . . . PERSUADE may suggest a winning over by an appeal, entreaty, or expostulation addressed as much to feelings as to reason . . . PREVAIL may be used in situations in which strong opposition or reluctance is overcome by sustained argument and entreaty . . . .

Id. ; see also RESTATEMENT OF TORTS § 766 cmt. d (1939) and RESTATEMENT (SECOND) OF TORTS § 766 cmt. h (1979) (hereinafter RESTATEMENT (SECOND)) (defining "induce," in tort of intentional interference with contract, as a form of "purposeful" or "intentional causation"). These sources, in our opinion, capture the meaning of "induce" that best fits its usage in A.R.S. § 44-2003.

Three aspects of the statute assist us in reaching this Conclusion. First, section 44-2003 is titled "Joint and several liability of offending sellers and purchasers." The statute has carried a similar title since it was first adopted in 1951. See Securities Act of March 6, 1951, 1951 Ariz. Sess. Laws 46, 74 ("Liability of Offending Sellers and Purchasers"). The continuing focus of this title reveals that the legislature has always regarded "offending sellers and purchasers" as those principally subject to the civil actions permitted under section 44-2003.

Second, in extending liability to those who "make, participate[] in or induce[]" offending transactions, the legislature chose to identify the "dealer, salesman or agent" as examples of dealmakers, participants, or inducers who would qualify for joint and several liability under the statute. See A.R.S. § 44-2003. Dealers, salesmen, and agents have in common that they undertake on behalf of sellers or purchasers to promote the sale. Each has a financial incentive to accomplish the sale, and each engages in the kind of purposeful persuasive effort described above.

Third, our interpretation is supported by the structure of the Securities Act. Section 44-1991 makes it "unlawful for a person, in connection with a [securities] transaction within or from this state . . . [to m]ake any untrue statement of material fact, or omit to state any material fact necessary in order to make the statements made [under the circumstances] not misleading." A.R.S. § 44-1991(2) (emphasis added). Sections 44-2001 and 44-2003, however, do not provide a private civil remedy against anyone who makes a material misstatement in connection with a securities transaction. Had the legislature intended so extensive a private remedy, it could simply have done so against any person who violated section 44-1991. Instead, the legislature provided a private civil remedy only against the narrower range of persons "who made, participated in or induced the unlawful sale. . . ." A.R.S. § 44-2003. *fn6 Thus, PW argues, the words "made, participated in or induced" must be read:

(i) to require more than some collateral involvement in a securities transaction, because § 1991 already requires that any misstatement be made "in connection with" a securities transaction; and

(ii) to require more than that the misstatements merely had the effect of influencing a buyer to make a sale, because § 1991 already requires that any false statements be "material," i.e., that it "assume actual significance in deliberations of the reasonable buyer." [ Rose v. Dobras, 128 Ariz. 209, 214, 624 P.2d 887, 892 (App. 1981)].

We fully agree.

For all of these reasons, we conclude that the legislature did not mean, by use of the word "induce," to stretch civil liability under the Security Act to collateral actors such as PW, remote from the transaction, who neither financially participate, nor promote or solicit the transaction, but merely provide information that contributes to a buyer or seller's decision to close the deal.

We therefore hold that PW neither "participated in" nor "induced" a securities transaction within the meaning of A.R.S. § 44-2003. The trial court erred in granting S. Ct. partial summary judgment holding that PW "participated in or induced" the United sale as a matter of law, and further erred in denying PW JNOV on SC/Union's Arizona Securities Act claim.


We turn next to SC's common law tort claims, beginning with its claims for breach of fiduciary duty. PW moved unsuccessfully for JNOV on SC's claims for breach of fiduciary duty to Union and United, arguing that it owed no fiduciary duty to either. We separately consider PW's relationship with each bank.


PW argues that it never acted with respect to United as more than an accountant performing ordinary auditing services for a client and that, in an ordinary auditor-client relationship, no fiduciary duties arise. SC's answering brief does not address the merits of this issue, nor does S. Ct. attempt to defend the trial court's refusal to grant JNOV on the SC/United fiduciary duty claim.

The Ninth Circuit has explained why an auditor is not the fiduciary of its client:

More often a fiduciary is a person who holds property or things of value for another--a trustee, executor, receiver, conservator or someone who acts in a representative capacity for another in dealing with the property of the other. Here, [the auditor] was acting more in the capacity of arbitrator or fact finder not for one but for two persons. The duty of PMM was not to act as fiduciary for Franklin; it was, rather, to act independently, objectively and impartially, and with the skills which it represented to its clients that it possessed, to make accurate determinations of fact. It would be liable for acting negligently or fraudulently.

We do not say that a certified public accountant may never be a fiduciary. We do say it was not here.

Franklin Supply Co. v. Tolman, 454 F.2d 1059, 1065 (9th Cir. 1972).

For similar reasons the United States Supreme Court declined to extend work product protection to auditors:

The . . . work product doctrine was founded upon the private attorney's role as the client's confidential advisor and advocate, a loyal representative whose duty it is to present the client's case in the most favorable possible light. An independent certified public accountant performs a different role. By certifying the public reports that collectively depict a corporation's financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public. This "public watchdog" function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust. To insulate from disclosure a certified public accountant's interpretations of the client's financial statements would be to ignore the significance of the accountant's role as a disinterested analyst charged with public obligations.

United States v. Arthur Young & Co., 465 U.S. at 817-18.

SC has not brought to our attention any evidence that would support the existence of a fiduciary relationship between PW and United, and the mere status of PW as United's auditor did not give rise to such a relationship. The trial court therefore erred in denying PW's motion for JNOV on SC/United's claim for breach of fiduciary duty.


PW argues that S. Ct. also failed to establish a fiduciary relationship between PW and Union. *fn7 S. Ct. responds that a fiduciary relationship was demonstrated by evidence that Union, encouraged by PW to trust in PW's auditing expertise and knowledge of United, relied on PW to ensure that closing conditions of the United purchase were met. S. Ct. also relies on the fact that Union directly relied on PW's help in preparing and registering the securities offering that Union undertook to finance the United acquisition. This evidence, however, does not suffice to establish a fiduciary relationship.

Our case law distinguishes a fiduciary relationship from an arm's length relationship. See, e.g., Brazee v. Morris, 68 Ariz. 224, 228-29, 204 P.2d 475, 477-78 (1949); Rhoads v. Harvey Pubs., Inc., 145 Ariz. 142, 148-49, 700 P.2d 840, 846-47 (App. 1984). Mere trust in another's competence or integrity does not suffice; "peculiar reliance in the trustworthiness of another" is required. Stewart v. Phoenix Nat'l Bank, 49 Ariz. 34, 44, 64 P.2d 101, 106 (1937); Rhoads, 145 Ariz. at 148-49, 700 P.2d 840, 846-47. A fiduciary relationship is a confidential relationship whose attributes include "great intimacy, disclosure of secrets, [or] intrusting of power." Rhoads, 145 Ariz. at 149, 700 P.2d at 847 (quoting Condos v. Felder, 92 Ariz. 366, 371, 377 P.2d 305, 308 (1962)). In a fiduciary relationship, the fiduciary holds "superiority of position" over the beneficiary. Id. This superiority of position may be demonstrated in material aspects of the ...

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