connection between the defendant's conduct and the injury suffered; (5) the moral blame attached to defendant's conduct; and (6) the policy reasons behind preventing future harm. Id. at 342.
Plaintiffs have not established the six Goodman factors. "Aftermarket" misrepresentations (i.e., statements made after a public stock offering rather than in the offering prospectus) are not intended to induce investor stock purchases, but rather to inform existing stockholders of corporate developments and to meet Securities and Exchange Commission ("SEC") reporting requirements.
Unlike statements made in connection with a public offering, claims arising out of statements made in routine SEC filings, press releases, and shareholder reports are not intended to affect future shareholders. Plaintiffs' theory of negligent liability was unnecessary in view of the broad protections already afforded plaintiffs under the securities laws.
Plaintiffs rely on International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806, 223 Cal. Rptr. 218 (1986), in trying to establish their negligent misrepresentation claims. In refusing to dismiss the claim for negligent misrepresentation in that instance, however, the Butler Court emphasized the defendants' special status as independent auditors who issued certified financial statements. Furthermore, plaintiffs' brief ignores later decisions critical of Butler's foreseeability test. See e.g. Christiansen v. Roddy, 186 Cal. App. 3d 780, 787, 231 Cal. Rptr. 72 (1986) (rejecting Butler's foreseeability standard as an "aberrant viewpoint").
Tort claims of negligent misrepresentation cannot be made on the basis of alleged misstatements in routine public business announcements. Count III of plaintiffs' amended complaint fails to state a claim against Wyse Technology, and is hereby dismissed in accordance with Rule 12(b)(6).
The situation with respect to Arthur Young is slightly different. The complaint alleges that Arthur Young audited and issued unqualified opinions on the financial statements of Wyse Technology. It is further alleged that Arthur Young knew of or recklessly disregarded: (1) overstatements of reported sales and net income, (2) improper revenue recognition techniques, (3) overstatement of inventory and accounts receivable, and (4) failure to maintain adequate warranty and return reserves.
Regardless of these allegations, Arthur Young asserts that it owed no duty of care to plaintiffs, who were open-market purchasers of stock who do not claim to have received or relied personally on the financial statements issued by Arthur Young.
Plaintiffs rely on Butler to try to establish a duty of Arthur Young to plaintiffs. In Butler, the duty of an independent auditor was extended to "reasonably foreseeable" persons who actually receive and rely on negligently prepared, unqualified audited financial statements. Butler, 177 Cal.App.3d at 820.
Arthur Young rebuts plaintiffs' position by arguing that the holding in Butler should not be expanded to cover persons, such as plaintiffs here, who did not personally receive, read, or rely on the financial statements or opinions of the auditor. According to Arthur Young, the establishment of a duty in Butler was based specifically on the finding that the plaintiffs actually received and relied upon the auditors' statement.
Arthur Young's assessment of the Butler case is convincing. The Court in Butler actually distinguished Goodman v. Kennedy, where no duty was found owed by the professional to the plaintiff on the specific grounds that the plaintiff in Goodman in contrast to the plaintiff in Butler, had neither seen nor relied on the alleged misrepresentations:
In Goodman, the attorney-defendant gave confidential information to his client regarding a pending SEC registration. The client, without mentioning the attorney's advice, sold stock to the buyer-plaintiff. The attorney's advice was incorrect, and the buyer-plaintiff suffered damages when the SEC cancelled the registration. The court held that the attorney did not owe the third party buyers a duty of care because the advice was not transmitted to them. Although the client relied on the attorney's advice, the buyers did not.