Sharp v. Coopers & Lybrand

United States Court of Appeals for the Third Circuit · 1981 · Corporations

649 F.2d 175 (3d Cir. 1981)

Updated August 22, 2026

CorporationsSecurities fraudRule 10b-5Secondary liabilityDamagesSection 20(a)respondeat superioraccounting firm liability

Facts

Westland Minerals Corporation sold limited partnership interests in an oil-and-gas drilling program and used a Coopers & Lybrand tax opinion letter as part of its sales presentation. After learning that investors generally were being shown the letter, Coopers & Lybrand, through a partner, deliberately issued a revised letter in the firm name for that use. A jury found the October 11, 1971 letter contained material misrepresentations and omissions and that employee Herman Higgins acted intentionally and recklessly, though no partner acted with scienter. The named plaintiffs invested in reliance on the letter, the IRS denied the expected deductions, and the venture collapsed.

Issue

Can an accounting firm be held liable under Rule 10b-5 for a non-partner employee's fraudulent misrepresentations and omissions in an opinion letter when the firm knowingly issued the letter for use in influencing investors? Did the district court properly handle Section 20(a), reliance, and damages?

Rule

In the Third Circuit, respondeat superior generally is not broadly available in Rule 10b-5 actions, but it applies in the limited situation where an accounting firm drafts and issues an opinion letter with actual knowledge that it will be used to influence the investing public; in that circumstance the firm owes a stringent or high duty to supervise its employees, and failure to do so exposes it to liability for their Rule 10b-5 violations. Under Section 20(a), culpable participation is an element and, in a jury case, that factual issue must be submitted to the jury. A presumption of reliance may be used where, considering the circumstances and likely proof, it is logical to place on the defendant the burden of refuting reliance in a case involving material omissions mixed with misrepresentations. Rule 10b-5 damages must compensate for loss directly caused by the fraud and are measured by the amount paid minus the value the investment would have had at the time of purchase if all then-available truth had been disclosed, without hindsight and without predicted tax benefits.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A Phoenix accounting partnership prepared a tax opinion for a real-estate syndicator. After a partner learned the syndicator was handing copies to prospective investors at sales meetings across Arizona, the firm chose to issue a revised opinion in the firm name for that purpose. A senior staff accountant who drafted the revision intentionally omitted facts showing the tax benefits were doubtful, but no partner acted with scienter.

If investors later sue the accounting firm under Rule 10b-5, which is the strongest basis for holding the firm liable under the majority rule?

Explanation. The majority recognized only a limited respondeat superior exception. When an accounting firm drafts and issues an opinion letter with actual knowledge that it will be used to influence the investing public, the firm assumes a stringent or high duty to supervise employees working on that representation. Failure to discharge that duty permits liability for the employee's knowing or reckless Rule 10b-5 violation even if no partner personally had scienter.