Seiffer v. Topsy's Intern., Inc.

Citations: 487 F. Supp. 653; 1980 U.S. Dist. LEXIS 10588Docket: Civ. A. No. KC-3435

Court: District Court, D. Kansas; March 19, 1980; Federal District Court

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In the case of Seiffer et al. v. Topsy's International, Inc. et al., multiple parties are involved, including plaintiffs Robert Seiffer and others against defendants Topsy's International, Inc. and Bear Stearns Co., among others. The case was filed in the United States District Court for the District of Kansas under Civil Action No. KC-3435 on March 19, 1980. Numerous law firms and attorneys represent the various parties involved, indicating the complexity and extensive nature of the case. Defendants include multiple financial and investment firms, as well as third-party defendants such as Touche Ross Co. and G. Kenneth Baum. The document lists numerous legal representatives for each party, highlighting the significant legal resources allocated to the case.

Frank Cicero, Jr. and Tefft W. Smith of Kirkland & Ellis, along with other attorneys, represent various third-party defendants in a legal matter involving Topsy's International, Inc. Plaintiffs, purchasers of common stock and convertible subordinated debentures from Topsy's, allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. They claim defendants engaged in a scheme to artificially inflate Topsy's stock market value through misleading statements and omissions of material facts, particularly regarding the acquisition of SaxonS, a franchising business for roast beef sandwiches, in 1968.

The plaintiffs assert that these misrepresentations continued post-offering to conceal the true financial state of Topsy's and maintain inflated market prices. On February 4, 1969, Topsy's publicly offered $6,000,000 in convertible subordinated debentures and shares of Class A Common Stock, with the offering's prospectus indicating that proceeds would finance the development of SaxonS locations. The memorandum outlines the legal framework for assessing the plaintiffs' claims, including jurisdiction, the elements necessary for establishing fraud, and the responsibilities of accountants involved. The document further details the timeline of events from the acquisition of SaxonS until the offering closure and beyond.

Information provided to the public about Topsy's was largely positive until March 6, 1970, when a letter to shareholders disclosed the repurchase of three SaxonS franchised units, resulting in a $292,000 reduction in second quarter earnings. Subsequently, on June 24, 1970, Topsy's announced the discontinuation of SaxonS operations. A class action was certified on June 27, 1974, under Seiffer v. Topsy's International, Inc., encompassing purchasers of Topsy's Common Stock from September 28, 1968, to March 10, 1970, and debentures from February 4, 1969, to March 10, 1970. This timeframe aligns with shareholder notifications regarding the SaxonS acquisition and subsequent losses. 

On September 30, 1968, Topsy's Class A Common Stock bid prices were recorded between 35 and 36, with asked prices ranging from 35 to 37. A 100% stock dividend declared on October 18, 1968, doubled the shares but halved their market price. Following the dividend, bid prices dropped to 20, with asked prices at 21. From February 4, 1969, to March 10, 1970, prices steadily declined, with bids falling to between 3 7/8 and 5 by the latter date.

The initial complaint was filed on November 11, 1971, by several plaintiffs against Topsy's and its executives, including founder Jerry D. Berger, president James T. House, and secretary-treasurer Harry Nuell, alleging violations of securities laws. Subsequent amended complaints added new plaintiffs and defendants, including underwriters from the 1969 offering, while narrowing the alleged violations to specific sections of the 1933 and 1934 Acts and Kansas securities laws. The underwriters also cross-claimed against Topsy's executives and filed third-party complaints against legal counsel involved in the 1969 offering.

G. Kenneth Baum served as a director of Topsy's, which underwent auditing by Touche, Ross from 1967 to 1973. G. H. Walker & Co., an underwriter, filed a cross-claim against Topsy's and others, later substituted by White, Weld & Co. Topsy's and its co-defendants also cross-claimed against the underwriters and filed third-party complaints against Tucker Charno and Touche, Ross. On October 10, 1973, plaintiffs amended their complaint to add multiple defendants, including Tucker Charno and several individuals associated with Rouche Ross. Cross-claims were reasserted, and Tucker Charno filed a third-party complaint against Baum. In July 1974, the underwriters initiated third-party complaints against Bryan, Cave, McPheeters, McRoberts, and various individuals linked to Dempsey-Tegeler Co., which resulted in the dismissal of some complaints. A Fourth Amended Complaint sought to add Bryan Cave and other defendants but was denied by the court. Settlements were reached in March 1976, with Topsy's paying $1,000,000 and other parties contributing additional amounts, including $16,500 from Baum. Subsequent settlements with other underwriters and Tucker Charno were approved by the court in 1977 and 1978, respectively. Claims against Touche, Ross and related cross-claims remain unresolved. A trial commenced on January 15, 1979, and concluded on April 11, 1979. Baum submitted a cross-claim for indemnity against Topsy's on May 8, 1979. The court has since been reviewing extensive evidence and arguments in preparation for its decision, acknowledging the efforts of all counsel involved.

Jurisdiction and venue in this case are established under Section 22(a) of the Securities Act of 1933 and Section 27 of the Securities Exchange Act of 1934, with the court confirming its proper jurisdiction in an order from October 2, 1972. Touche Ross, a partnership, claims it has not been sued and is not a defendant; however, it has participated in the case under its common name and has been adequately notified of the proceedings. The Third Amended Complaint names certain partners as "d/b/a Touche, Ross . Co.," and the court finds Touche Ross properly named as a defendant without any prejudice resulting from the naming issue.

Regarding the right of action, Touche Ross contests the plaintiffs' ability to bring a private action under Section 10(b) of the 1934 Act and Rule 10b-5, noting that neither explicitly provides for such a right. Historical rulings, including Kardon v. National Gypsum Co. and support from the Supreme Court, indicate that a private right of action under Rule 10b-5 has been recognized. The court affirms that a private right of action exists in this case. 

The court also addresses Section 17(a) of the 1933 Act, which is similar to Rule 10b-5, concluding that denying a private action under Section 17(a) would be impractical due to the similarities in the conduct prohibited. Touche Ross argues that Section 18 of the 1934 Act is the exclusive remedy for misleading SEC filings; however, the court maintains that the remedies under Section 10(b) and other provisions are cumulative, not mutually exclusive, and previous case law does not alter this conclusion.

The Court in Reddington determined that a private cause of action could not be implied from Section 17(a) of the 1934 Act, which mandates that broker-dealers maintain records and file reports as prescribed by the SEC. Applying the Cort v. Ash test, the Supreme Court found no language in Section 17(a) indicating a civil cause of action for damages. The Court also considered Section 18(a), which allows for a cause of action against those making materially misleading statements in SEC filings, but concluded that it was not applicable to the Reddington plaintiffs, as this section only grants rights to purchasers or sellers who relied on such misrepresentations. The Court suggested that Section 18(a) might provide an exclusive remedy for misstatements in reports, but did not address how it interacts with other sections, such as Section 10(b), which have established implied causes of action.

To establish a private cause of action, plaintiffs must demonstrate that the violations are connected to the purchase or sale of securities, that the misrepresentations or omissions are material, that the defendant acted with scienter beyond mere negligence, and that there is a causal link between the violations and the plaintiffs' injuries. The "in connection with" element is established in this case. Materiality must reflect factors significant to a reasonable shareholder's decision-making, as defined in various legal precedents. The test for materiality considers the importance of the defect and its potential impact on investor judgment, weighing the likelihood and magnitude of the event against the company's overall activity.

In a 1972 Supreme Court case regarding Rule 10b-5, the Court established that, in instances of non-disclosure, proof of reliance is not necessary for recovery; instead, it suffices that the omitted facts are material, meaning a reasonable investor would likely find them significant in their decision-making. This principle aligns with the standard of materiality set forth in TSC Industries v. Northway, Inc. (1976), which states that an omitted fact is material if a reasonable shareholder would consider it important when deciding how to vote. The standard requires that the omitted fact would have had actual significance in the shareholder's deliberations, altering the "total mix" of available information.

Additionally, a framework for assessing the degree of fault is provided, categorizing conduct from deliberate to innocent, based on the intent and knowledge of the defendant. Deliberate conduct involves intent to harm, while knowing conduct includes awareness of potential harm. Reckless conduct denotes conscious disregard for misleading others, whereas negligent conduct involves unreasonable actions without intent. Innocent conduct applies when the defendant lacks reasonable awareness of the true facts. The Supreme Court has affirmed that a private cause of action under Section 10(b) and Rule 10b-5 necessitates an allegation of "scienter," defined as intent to deceive, manipulate, or defraud, placing the threshold above mere negligence.

Recklessness can be treated as intentional conduct for establishing liability in certain legal contexts, particularly concerning civil liability under Section 10(b) and Rule 10b-5, although the Tenth Circuit has not directly addressed this in private damage suits. In Edward J. Mawod. Co. v. SEC, the court recognized that reckless behavior meets the scienter requirement. The Tenth Circuit has emphasized that willful or intentional misconduct is necessary for recovery under these provisions. Judge Rogers has interpreted this requirement to include recklessness. Various appellate courts, including the Second, Third, Fifth, and Seventh Circuits, have also affirmed that recklessness suffices to meet the scienter requirement. The Seventh Circuit’s Sundstrand Corp. case defines recklessness as highly unreasonable conduct that significantly departs from ordinary care standards and poses a risk of misleading others, applicable to both misstatements and omissions. It clarifies that mere negligence cannot replace scienter. This standard aligns with the common law understanding of accountants' fraud, allowing recovery for fraud if a misrepresentation is made knowingly, willfully, or with reckless disregard for its truth. The Ultramares Corp. case establishes that liability hinges on whether defendants had an honest belief in the truth of their statements. If they lacked such belief, they could be found liable for fraud.

Footnote 12 of the Hochfelder opinion aims to uphold the scienter standards from Ultramares and O'Connor v. Ludlam concerning accountants' liability, requiring plaintiffs to demonstrate that defendants did not genuinely believe their disclosed information was accurate and complete. Direct evidence of a defendant's state of mind is not necessary; circumstantial evidence can suffice, especially if shoddy accounting practices indicate a lack of genuine belief. This allows for liability despite assertions of good faith if the misleading nature of the information was evident. Recklessness, as defined by the McLean court, meets the scienter requirement.

Causation must link the violations of Section 10(b) and Rule 10b-5 to the plaintiffs' injuries, which involves two elements: transaction causation and loss causation. Transaction causation requires a relationship between the alleged misrepresentations and the plaintiffs' purchases of securities, where common law fraud necessitates proof of justifiable reliance. However, federal securities law has moved away from requiring reliance to establish transaction causation. The Supreme Court in Mills v. Electric Auto-Lite emphasized that a material defect in proxy statements inherently affects shareholder decision-making. This standard ensures that trivial defects do not establish a cause of action, which is also reflected in Affiliated Ute. The Second Circuit in Titan Group noted that materiality and reliance serve to limit Rule 10b-5's application to situations with a factual causation between the act and the injury.

Demonstrating reliance is often impractical in cases involving widespread misrepresentations and omissions affecting numerous investors; thus, materiality becomes a focal point. The presumption of reliance arises from a finding of materiality, allowing defendants to rebut this presumption. Regarding loss causation, plaintiffs must show that declines in market price are linked to the alleged fraud, with a rebuttable presumption in favor of plaintiffs if a price drop occurs between purchase and discovery of the fraud. The Kansas statute of limitations for fraud applies, along with federal tolling doctrines. The doctrine emphasizes that fraudulent conduct by a defendant may excuse a plaintiff's lack of diligence in discovering the fraud, preventing the statute of limitations from barring claims until the fraud is discovered. This standard allows for tolling even without active concealment by the defendant, focusing on when a plaintiff should have discovered the fraud. An objective standard of due diligence is to be applied in assessing this.

Determining when a reasonable investor should have discovered allegations of fraudulent concealment is critical to assessing whether the plaintiffs’ claim against Touche Ross, filed on October 10, 1973, is time-barred. The relevant inquiry focuses on whether the fraud could have been discovered before October 10, 1971. 

In securities fraud cases, a distinction is made between primary and secondary defendants. Primary wrongdoers are entities with direct duties to the public, such as accountants who make misrepresentations or fail to disclose necessary facts in their statements to investors. Accountants may be considered primary wrongdoers when their certified financial statements contain falsehoods, as illustrated in McLean v. Alexander, where the court held that the accountant's knowledge and investigation did not infer awareness of misleading information.

Accountants can also be liable as aiders and abettors when they knowingly assist in another party's violation of securities laws. The case of Brennan v. Midwestern United Life Insurance Co. established liability for parties that actively aid primary violators. The essential criteria for aiding and abetting, as outlined in Woodward v. Metro Bank of Dallas, require proof that a securities law violation occurred, the aider-abettor had awareness of their role in an improper activity, and that they knowingly and substantially assisted in the violation. The Woodward court did not adopt the definition from Landy v. Federal Deposit Insurance Corp. regarding aiding and abetting claims.

An independent wrong, rather than a direct violation of securities law, is referenced in relation to the knowledge an aider-abettor must possess regarding their role in a fraudulent scheme. The "knowing" aspect of substantial assistance was omitted in the Landy case, raising concerns about over-inclusiveness and the essential connection to securities laws. The Woodward decision emphasizes that an aider-abettor should not only be aware of their role but also understand how their actions contribute to the fraud. Critical knowledge requirements include awareness of the securities law violation, understanding one's role, and providing knowing assistance, rather than merely acting with recklessness or negligence. 

Professor Ruder argues that requiring extensive investigation into the activities of those being assisted could impose an unreasonable burden on standard business operations, such as managing finances or providing legal advice. Therefore, liability should be established through clear judicial precedents or explicit statutory language. The significance of "substantial" assistance is highlighted, aligning with common law tort principles that limit liability to those whose conduct is a substantial factor in causing a loss. 

To prove aiding and abetting liability, a plaintiff must demonstrate that there were violations of securities laws, that the accountant (Touche Ross) was aware of these violations and their role, and that they provided substantial assistance with this knowledge. An accountant adhering to accepted auditing standards is not shielded from liability if they knowingly assist in a fraud; conversely, if they act without knowledge of their contribution to fraudulent activities, they will not be held liable.

Topsy's International, Inc. originated from a popcorn shop established by Jerry Berger in Kansas City in 1949. Before mid-1968, Topsy's operated various snack operations, including snack bars in department stores and mobile units. The franchising of popcorn and ice cream shops commenced in 1967. In December 1967, Topsy's conducted a public offering of 210,000 shares of Class A Common Stock at $19.00 per share, with shares sold by Topsy's and several individuals, including Berger and Ralph Tucker. The offering was underwritten by Dempsey-Tegeler, with legal counsel from Tucker Charno and accounting services from Touche Ross, which had audited Topsy's since a merger with Lipoff, Sharlip and Pesman in 1967. Sharlip, a partner at Touche Ross, provided advisory services and attended board meetings until 1970. Topsy's management prepared its quarterly and annual reports, with Touche Ross only auditing the financial statements included in annual reports and not reviewing the quarterly reports. Following the public offering, Jack Halper from Dempsey-Tegeler joined Topsy's board to monitor operations. The franchising announcement correlated with a significant increase in Topsy's stock price, rising from about $1.93 to a range of $7 to $11 per share. At the time of the offering, Topsy's had six franchised locations and plans for more.

In late 1967, Topsy's expressed interest in fast-food franchising, particularly roast beef restaurants, coinciding with its public offering. Although Topsy's considered a merger with Arby’s, it did not materialize. A consultant was engaged to explore franchising options, and by April 1968, Topsy's was actively investigating roast beef franchising. Interest in SaxonS began in early 1968 when House visited a restaurant in Columbus, Ohio, and was impressed. SaxonS had been incorporated since January 1967, with principal shareholders William West, Leland Henry, and William Sapp, the latter two having more extensive restaurant experience than West, who transitioned from aquarium manufacturing to the restaurant industry in 1964.

Following House's visit, Berger and House communicated with a franchisee who provided financial projections and recommended contacting West. West was invited to Kansas City in mid-1968, where he discussed SaxonS operations and expressed interest in expansion but noted a lack of capital. After West's visit, Berger and House traveled to Columbus to analyze SaxonS's sales and financial records, including cost analyses. No representatives from Touche Ross were involved in these discussions or analyses.

Upon concluding that Topsy's should acquire SaxonS for up to $500,000, Berger dispatched House, Tucker, and Sharlip to Columbus at the end of July 1968. Tucker negotiated the sale terms, House assessed operational aspects and cost projections, while Sharlip reviewed financial records with SaxonS's controller, George Noxon. On August 6, 1968, Sharlip reported back to Berger, including unaudited financial statements and potential accounting methods for recognizing franchise income.

A letter projected $100,000 in royalties based on $225,000 volume from franchises sold, and estimated a profit of $200,000 from equipment sales to franchisees over the next year. It did not advise Topsy's on whether to purchase SaxonS, a decision made by Berger prior to the letter. Sharlip's letter had no significant effect on Topsy's decision, and had he identified serious financial issues during his review, the purchase might have been reconsidered. The projections were deemed conservative by Berger, who acknowledged Sharlip's limited time for a thorough assessment. The income recognition alternatives listed by Sharlip were not applied; instead, only $2,500 of a $10,000 franchise fee was recognized at sale, deferring the rest. Consequently, SaxonS reported a net income of $35,572 for the year ending July 31, 1968, compared to Noxon's $82,300 for the year ending June 30, 1968. Deferred amounts would enhance potential income for Topsy's post-August 1, 1968, which would be included in its consolidated income, a procedure deemed acceptable. 

An acquisition agreement dated August 1, 1968, was prepared and discussed at a special board meeting on August 22, 1968, attended by directors including Berger, but not Sharlip. Berger presented SaxonS as well-managed with significant potential but lacking capital, indicating the acquisition would expedite Topsy's entry into the roast beef franchising market. The board unanimously approved the purchase of all outstanding SaxonS stock for $300,000, with West given the option to receive stock if he remained as president. The transaction involved $203,915 in cash and 3,342 shares of Topsy's Class A Common Stock. Accompanying the acquisition agreement were unaudited financial statements, a sales brochure, lease schedules, and franchise agreements. The selling shareholders warranted the financial statements were accurate and compliant with accounting principles, with no material adverse changes or undisclosed liabilities since their date, and confirmed all taxes due were paid.

Shareholders of SaxonS agreed to indemnify Topsy's and SaxonS against any losses or expenses arising from breaches of representations or warranties by the sellers in the agreement. In September 1968, Sharlip instructed Paul Eppenaur from Touche Ross to conduct audit procedures on SaxonS' balance sheet as of July 31, 1968, to facilitate an opinion on Topsy's consolidated financial statements for the 1969 fiscal year. Eppenaur's scope was limited; he spent three days reviewing unaudited financial statements, familiarizing himself with accounting records, and sending confirmations regarding accounts receivable and payable. His work focused exclusively on the balance sheet and did not involve an earnings audit, which would have required more extensive procedures.

Upon returning to Kansas City, Eppenaur analyzed franchise agreements and corporate minutes to assist in the accounting of franchise fee income. Until March 1969, he did not anticipate issuing a separate audit opinion, only contributing to Topsy's consolidated financial statements. When he learned of the expectation for an opinion in March, he completed necessary audit schedules and prepared related documentation, leading to the issuance of an audit opinion on May 7, 1969. This report referred to the date of his field work completion on September 11, 1968, and included a footnote regarding SaxonS' federal income tax liability. 

The acquisition agreement also included provisions related to leases in Ft. Lauderdale and Columbus, which were guaranteed by the selling shareholders, stipulating that the buyer would replace the sellers as guarantors upon landlord consent.

If the Landlord does not approve the proposed substitution, the Buyer will indemnify the Sellers against liabilities from certain guarantees. The Sellers may choose to pay a commitment premium, and the Buyer must obtain insurance to cover rental payments for the leases or for a maximum of fifteen years. To incentivize the Landlord to relieve the Sellers of their liabilities regarding leases for specific units in Florida and Ohio, the Buyer will purchase the Ft. Lauderdale Unit for $215,000 and share liability for the lease at the Columbus location with SaxonS, Inc. 

Topsy's, which acquired the Ft. Lauderdale unit around September 7, 1968, for approximately $214,900, recorded this purchase as an intercorporate debt owed by SaxonS. Concurrently, a SaxonS unit was being built in Waco, Texas, under a lease agreement with Elmco, Inc., which required certain revisions to the minimum rental amount or options to purchase. The Buyer could cancel the agreement if the Sellers failed to meet any of the stipulated conditions within thirty days. If the Sellers communicated their inability to comply, the Buyer had five days to waive the cancellation right. 

On September 30, 1968, Topsy's purchased the Waco property for $179,000, charging the cost to SaxonS. In August 1968, before Topsy's board approved the acquisition, key meetings occurred with potential operational leaders for SaxonS, including a food service consultant and a candidate who later declined the position due to doubts about the business concept. Following the acquisition, Topsy's rebranded SaxonS Inc. to SaxonS Sandwich ShoppeS, Inc., and established a new board of directors.

Berger conducted multiple visits to Columbus to understand SaxonS' operations, inspecting both active and under-construction units. Following George Noxon’s resignation as SaxonS controller, David Henry took over the role. Herbert Martin, the controller for Topsy's, reviewed SaxonS' financial records in Columbus. William West managed daily operations and, alongside Henry, generated financial reports for Topsy's review. James Jouras assisted Berger with legal matters concerning SaxonS, such as franchise agreements and contracts.

A Kansas City Star article dated August 23, 1968, authored by Ben Schifman, revealed Topsy's acquisition of SaxonS, citing Berger as a source. The article inaccurately stated there were nine units operational and under construction, whereas the correct figures were eight operational and ten under construction by July 31, 1968. It also mentioned plans for six new units in Kansas City, which the plaintiffs did not disprove. Although Berger offered Harry Weinberg a position at SaxonS, it was declined. There was no evidence to suggest that Touche Ross influenced Schifman's article.

On September 23, 1968, an 8-K report prepared by Tucker Charno, signed by Topsy's president House, detailed the acquisition of SaxonS, including unaudited financial statements and acquisition agreements. There was no evidence indicating any misleading information in this report or Touche Ross's involvement in its creation.

Topsy's communicated directly with shareholders in a letter dated September 26, 1968, asserting that SaxonS had twenty-one units operational or under construction, consistent with the earlier article. House testified that new constructions commenced between July 31 and September 26, negating claims of misrepresentation. The letter claimed SaxonS employed approximately one hundred people based on information from West, but no direct evidence confirmed this number. Even if the actual count was lower, including franchisee employees would surpass one hundred, indicating this representation was not material.

West is characterized as an "experienced restauranteur and franchiser" who would lead operations post-acquisition. He has around three years of experience with SaxonS, and while the term "restauranteur" for a fast-food franchising operation may be debated, it is not deemed materially misleading. Following the SaxonS acquisition, Topsy's engaged in discussions with Wells McTaggert from Dempsey-Tegeler regarding a public securities offering aimed at funding SaxonS's expansion. A decision was made by Berger, House, Nuell, Tucker, and West to conduct a secondary offering of Topsy's Class A Common Stock. Topsy's and Dempsey-Tegeler signed a letter of intent for a public offering of $4 to $6 million in convertible debentures, contingent upon an SEC registration statement. This letter, dated October 7, 1968, required certified financial statements from Touche Ross. McTaggert consulted Bryan Cave's counsel regarding compliance with state securities laws, specifically for "blue sky" work. Jack Lerner from Bryan Cave drafted the indenture for the debentures, focusing on the underwriting description in the preliminary prospectus, leveraging his extensive public offering experience. Tucker enlisted James Jouras, who was inexperienced with registration statements, to assist with the registration, providing him models from previous offerings. On October 16, 1968, a comprehensive meeting for the 1969 offering was held in Kansas City with various stakeholders, including Topsy's and Touche Ross personnel, where draft narratives for the prospectus were reviewed and edited. Lerner noted that Sharlip contributed figures related to SaxonS, which were available to other attendees. After the meeting, Lerner submitted the draft to the printer, with the initial proof dated October 19, 1968, lacking only the audited financial statements, which were added by October 23, 1968. Proofs were circulated among key individuals for review, particularly focusing on the SaxonS section to ensure accuracy. Comments collected were incorporated by Jouras and forwarded to Lerner. Touche Ross, particularly through Paul Eppenaur, helped prepare detailed financial schedules for Part II of the registration statement and ensured consistency between the narrative sections and the audited financial statements of Topsy's.

Touche Ross recognized its responsibility to report any misrepresentations or critical omissions related to Topsy's to the company or its attorneys. On October 29, 1968, Tucker submitted the registration statement, which included the preliminary prospectus, underwriters' agreement, and indenture, to the SEC. The registration statement was signed by Topsy's officers Berger, House, and Nuell, and directors West, Schultz, Baum, Halper, and Pierce. Selling shareholders Berger, House, Nuell, West, and Tucker confirmed they had reviewed the statement and disclosed no adverse information about Topsy's. West and Tucker later opted out as selling shareholders. McTaggert and Tucker recommended a stock split to enhance Topsy's stock appeal by increasing shares traded and lowering the price per share, which was unanimously approved by Topsy's board on October 18, 1968. Following Topsy's letter of intent, Dempsey-Tegeler assembled an underwriting group, distributing registration documents to prospective underwriters. Each underwriter appointed Dempsey-Tegeler as their agent and agreed to an Agreement Among Underwriters, granting Dempsey-Tegeler authority to execute the Underwriting Agreement and manage the sale of securities. Twenty-three underwriters participated, with Dempsey-Tegeler representing them in the Underwriting Agreement, where Topsy's warranted compliance with the 1933 Securities Act and SEC regulations, ensuring the registration statement and prospectus were accurate and that no adverse changes had occurred since the last reported information. The underwriters' obligations were contingent on several conditions, including assurances from Dempsey-Tegeler and Bryan Cave regarding the accuracy of the registration statement, legal opinions from Tucker and Bryan Cave, and confirmations from Topsy's leadership regarding the absence of material misrepresentations or omissions, along with a letter from Touche Ross certifying the financial statements' compliance with the Securities Act.

Touche Ross issued a letter indicating that they found no reason to believe the unaudited sales, net earnings, and earnings per share for the four-month periods ending November 30, 1967, and 1968, were non-compliant with the Act or accounting practices from previous years. Despite the customary practice of conducting a "due diligence meeting" prior to offerings in 1968 and 1969, no such meeting was held for Topsy's 1969 offering. McTaggert deemed it unnecessary based on the diligence satisfied during the 1967 offering and sought to fulfill this obligation through discussions with Berger about a research report on SaxonS by G. H. Walker.

William Gill, a securities analyst at G. H. Walker, became interested in Topsy's after learning about its acquisition of SaxonS in September 1968. He engaged in multiple discussions with company management, revealing inconsistencies in statements regarding SaxonS units. Gill's report published on October 10, 1968, inaccurately claimed there were ten SaxonS units operational and twenty-nine under construction, while actual records showed only seven units being built. An internal document from December 13, 1968, reported ten units under construction, contradicting the G. H. Walker report. The report's forecast of fifty operational units by the end of 1969 was overly optimistic. Although Gill noted limited evidence of average annual sales volume per unit, he received varied estimates from management, mitigating the potential for a material misrepresentation. Touche Ross had no involvement in the G. H. Walker report's preparation, but troubling aspects included the casual exchange of potentially sensitive information among management, showing a lack of concern for accuracy and regulations regarding insider information. Additionally, a Kansas City Times article on October 11, 1968, quoted Jerry Berger expressing expectations of significant profits from SaxonS.

Berger inaccurately claimed that sixty-three franchises were sold in the last month, with each franchisee paying $10,000 to SaxonS, a statement contradicted by SaxonS's card file, which recorded only five franchise agreements during September and October. This significant discrepancy indicates a material misrepresentation, and Berger either knowingly made the false statement or displayed reckless indifference to the truth. Furthermore, Berger did not correct the misleading information regarding the number of units under construction, contrary to data in the Gill report, which he was aware of. Additionally, he predicted that each shop would average $300,000 in annual sales, consistent with the Gill report.

Regarding Topsy's 1968 Annual Report, distributed in late October 1968 and audited by Touche Ross, the report included financial statements without any opinion on SaxonS's financials, only referencing it in a note about subsequent events. Topsy's acquired SaxonS for $203,915 in cash and shares, and while it was noted that each franchisee paid a $10,000 fee, the report did not clarify that not all fees had been collected, which some argue is misleading due to a refundable component of the fee. However, the omission is deemed not materially misleading, as detailed refund information would be unexpected in the report's context. Touche Ross cannot be held responsible for this omission, as their focus was on inconsistencies within the certified financials. Additionally, a postcard included with the report inaccurately claimed twenty-nine SaxonS units were in various stages of design or construction, while internal records indicated only eleven units were operational and ten under construction as of November 20, 1968. The postcard's misrepresentation was prepared by House, Tucker, and West.

Touche Ross is not liable for the statements made in various articles and had no obligation to oversee them. In a column dated October 30, 1968, Ben Schifman of the Kansas City Times quoted Topsy's annual report, which claimed no long-term debt was incurred during fiscal 1968, despite expenditures of approximately $400,000 for SaxonS locations and $837,000 for new fixtures. Plaintiffs argued this was misleading because it did not disclose a short-term $400,000 loan used for purchasing SaxonS units; however, the statement was deemed not misleading in context. On November 1, 1968, Schifman reported on the public offering, detailing the allocation of proceeds, which included funds for working capital and property purchases related to SaxonS. The planned addition of about 50 SaxonS units was also mentioned.

In a Kansas City Star article on November 22, 1968, Topsy's fiscal 1968 earnings were reported to have increased significantly, with comments from Berger about the number of franchise units in operation, construction, and planning stages, aligning with an internal progress report. The term "in the planning stages" was considered vague and not significant. There was no indication of Touche Ross's involvement with these articles.

A letter to shareholders on December 18, 1968, reported ongoing growth in sales and earnings, attributed to the addition of SaxonS, with no evidence of false figures, and the phrase "accentuated by" was deemed meaningless and not misleading. On December 19, 1968, Schifman's column reiterated earnings information from the letter, while a January 12, 1969, Kansas City Star article by Ted Pollard discussed Topsy's without any misrepresentations. 

The final prospectus dated February 4, 1969, included many statements from the preliminary prospectus that plaintiffs claimed were misleading. A key preliminary matter involves the July 31, 1968, certified financial statements of Topsy's, which included specific notes on subsequent events.

Information regarding the acquisition of SaxonS Sandwich ShoppeS, Inc. is referenced in the "Business" section of the prospectus. Plaintiffs contend that a footnote in the document incorporated this section into the certified financial statements, potentially holding Touche Ross liable for misrepresentations. The court cited Escott v. BarChris Construction Corp., where the responsibility of accountants for various parts of a prospectus was debated. The court ruled that Peat, Marwick, the accountants in that case, only certified certain financial figures related to BarChris's consolidated balance sheet and did not certify the 1961 figures, some of which were unaudited. The court concluded that Touche Ross is not directly liable for the SaxonS narrative due to the footnote's limited purpose for reader convenience and not as an incorporation of all narrative content. However, Touche Ross could still face secondary liability for aiding or abetting any misrepresentations.

The SaxonS section of the prospectus inaccurately stated that the company had ten operating sandwich shops within specific locations, when in fact there were fourteen open as of February 4, 1969. Additionally, it failed to disclose that five franchised units were being operated by the company at that time, rendering the statements misleading.

Jouras and Lerner opted not to differentiate between franchisee-operated and company-operated units, a decision the plaintiffs failed to prove would impact investors significantly. The plaintiffs argued that the lack of disclosure regarding operational issues faced by all SaxonS shops rendered statements misleading. While some franchised units did experience operational difficulties and franchisee dissatisfaction, the statements in question did not address the success of SaxonS units and implied that the operation was relatively new, suggesting that operational challenges were typical for such businesses. There was no indication that management viewed the problems as insurmountable, which could have made the operational issues a material fact necessary to avoid misleading investors. 

Ed Manzione, SaxonS's director of operations, recognized challenges such as poor local management and issues related to the management capabilities of West but concluded that there remained potential for improvement. The prospectus cited that the pilot unit in Columbus achieved gross sales of approximately $413,000 in its first year; however, no sales figures for other units were provided. While the plaintiffs contended that this figure was not representative of other units and that sales were trending downward, the prospectus did not claim that the sales figure was typical. The nature of the pilot unit's location and supervision should alert investors to the possibility of higher sales. Reports indicated management expected average sales of $300,000 per unit, but sales data confirmed a declining trend for the pilot unit from its opening in July 1967 through December 1968.

Most successful fast food operations typically experience a decline in sales during their second month of operation, which generally rebounds shortly after. The critical issue at hand is whether the declining sales at the pilot unit and other units constituted an omission of a material fact, rendering the statements misleading. Given the limited significance of the isolated sales figure and the brief operating history of SaxonS, the omission is not deemed material. If it were, responsibility would lie with management and the attorneys responsible for the prospectus, rather than Touche Ross, who did not contribute to the decision-making regarding the sales figures or their presentation. West provided initial sales figures to Tucker, Berger, and House in July 1968, and these figures were managed by Topsy's management and attorneys. Although Touche Ross may have provided a specific figure at some point, this does not imply liability for aiding and abetting.

The prospectus indicated that, in addition to operating units, ten were under construction, expected to open by early 1969, and that franchises for 20 units were sold or in various stages of site selection. However, the SaxonS records revealed only six units under construction as of February 4, 1969, contradicting the claim of ten units under construction from October 30, 1968. Despite this understatement, the overstatement regarding units under construction is not considered a material misrepresentation. Regarding the franchise sales, the records indicated twenty-three franchises sold by February 4, 1969, with no shops opened or construction started. The broad language in the prospectus is found not to be misleading. Additionally, claims about franchisee obligations to open units were not shown to be misrepresentative. Lastly, while the architectural description of the SaxonS building might be subject to debate, it does not qualify as an actionable misrepresentation.

The prospectus inaccurately stated that each unit was a free-standing building, while the Tucson unit under construction was not. However, this misrepresentation is deemed immaterial. The prospectus detailed SaxonS lease arrangements, noting that only two properties in Fort Lauderdale and Waco are owned by SaxonS, while others are leased. The home office, a 10,000-square-foot two-story building constructed in 1968, is leased with an annual rental of $17,434, adjustable according to the Consumer Price Index, and the lease includes renewal options. When evaluating locations, SaxonS typically leases directly from property owners who then build according to SaxonS specifications, after which SaxonS subleases to franchisees, unless they choose to operate the location themselves. The duration of franchise agreements aligns with the lease terms. Plaintiffs claim misleading statements were made regarding rental comparisons, particularly that the pilot unit's rent in Columbus was higher than the home office's, and that the total lease obligations were not disclosed. However, the difference in rental amounts is considered immaterial due to the distinct purposes of the buildings, and there was no substantial evidence of the overall lease obligations impacting an investor's decision. A summary of leases from August 1969 did not provide definitive aggregate figures. The prospectus also outlined SaxonS' operations, including franchise sales and adherence to a comprehensive operations manual, with management undergoing training. Plaintiffs disputed the accuracy of these statements concerning the enforcement of operating procedures, which were based on information from SaxonS literature.

House indicated the existence of an operations manual outlining uniform procedures and a training program, which Manzione later revised due to dissatisfaction with their comprehensiveness and thoroughness. However, plaintiffs failed to prove that any statements about these materials were false, and evidence was insufficient to assess their quality. Regarding SaxonS's services to franchisees, the prospectus claimed a "comprehensive purchasing program," but this was merely an arrangement with a supplier in Chicago. While an advertising program was established, details were lacking, and dissatisfaction led to the hiring of a new advertising firm after Manzione's report. The record does not clarify the status of the advertising program at the time of the prospectus. Some cost control procedures were noted, but their modernity was unverified, and the nature of public and employee relations aids remained unclear. Management supervision consisted of area supervisors visiting franchisees, and Manzione's report recommended improvements, yet it was uncertain if any had been implemented by February 4, 1969. Information for the prospectus statements was derived from West, with Berger and House being informed about operations, but no evidence suggested Touche Ross knew the statements were misleading.

Regarding franchise requirements, the prospectus detailed an initial investment of $30,000, including a $10,000 franchise fee, $10,000 for equipment, and a $10,000 lease deposit, along with a 3% royalty on gross sales and a total of 4% for advertising. Plaintiffs argued that the franchise fee statement was misleading due to the lack of disclosure about inconsistent fee collection and the refundable nature of part of the fee if a site wasn’t found. The statement aimed to accurately reflect contractual requirements. As of February 4, 1969, 53 franchise agreements had been executed, with initial fees paid promptly in 32 cases.

In the North Palm Beach franchise, half of the franchise fee was paid shortly after the agreement was signed, with the remainder due upon the unit's opening in March 1968. For the Harper Woods, Michigan franchise, the fee was similarly split, with half paid at the signing on December 18, 1968, and the rest contingent upon lease signing. The other nineteen franchises involved blanket agreements, with no initial fees collected. According to the franchise agreement, if a location was not identified within eighteen months, the franchisee could terminate the agreement and receive a $7,500 refund. SaxonS deferred this amount until a lease was signed and maintained that the fee collection process was consistent with the agreement. 

Plaintiffs argued that statements regarding down payments on equipment were misleading, claiming SaxonS had not received any equipment down payments by July 31, 1968, and that the total equipment cost significantly exceeded the initial franchise investment. The franchise agreement from February 4, 1969, allowed franchisees to purchase equipment either from SaxonS or a third party, necessitating a $10,000 down payment for purchases through SaxonS. The plaintiffs' assertion about the lack of equipment down payments was based on Paul Eppenaur's deposition, which was later clarified at trial as a misinterpretation of a work paper, and no alternative evidence was provided.

Despite the prospectus not mentioning the option to purchase from third parties, it was determined that the statement was not misleading since the franchise agreement was publicly accessible. The expectation of additional costs beyond the initial investment was deemed reasonable for investors. Furthermore, the disparity in views regarding the desirability of high versus low franchisee investments was acknowledged. Regarding lease deposits, plaintiffs claimed that only one $10,000 and three $5,000 deposits had been collected by July 31, 1968; however, this information was considered irrelevant to the prospectus statements.

No evidence was presented regarding the collection of deposits as of February 4, 1969, and the document highlights the contractual requirements relevant at the time of the prospectus. The absence of historical data is deemed insignificant. Plaintiffs failed to demonstrate that the claims of a 3% royalty on gross sales and advertising expenditures were false or misleading. The prospectus outlined SaxonS' strategy for franchise expansion, emphasizing a focus on metropolitan market areas rather than random placements. Plaintiffs argued this was misleading due to the apparent geographical spread of units, but the prospectus made this distribution clear. Jouras drafted the statements based on West's explanation of the policy, and House confirmed the intent to concentrate future expansions in metropolitan areas. No evidence was provided by the plaintiffs to contradict this plan or to implicate Touche Ross in any inaccuracies.

The prospectus included capsule financial information, reporting SaxonS' total assets and stockholders' equity as of July 31, 1968, at $436,554 and $83,572, respectively, with total revenues and net income for the year at $1,001,640 and $35,572. Plaintiffs did not claim this information was false, but argued it was misleading due to omissions regarding lease guarantees by Topsy's, contingent liabilities, and an IRS tax deficiency for 1967. The figures were provided by Topsy's controller, and while the figures resembled those found in financial statements, they were not presented as such. Material omissions would typically appear in footnotes of a financial statement.

Regarding lease guarantees, testimony indicated that Topsy's guaranteed some leases for SaxonS due to its insufficient net worth. Between August 1968 and February 1969, leases for four units were executed. Topsy's agreed to replace guarantees for three leases personally backed by West, Sapp, and Henry. However, it remains unclear if these substitutions occurred. The guarantees, affecting a maximum of six leases, were offset by subleases to franchisees. Despite plaintiffs' claims about these guarantees being contingent liabilities, the lack of specific dollar amounts and the low likelihood of the contingencies materializing led to the conclusion that the omissions were not significant.

Plaintiffs argue that there was a lack of disclosure regarding SaxonS's undercapitalization and contingent liabilities totaling $374,000.00 as of July 31, 1968, including liabilities from equipment financing guarantees and a promissory note for a franchisee. Franchisees could acquire equipment from SaxonS or third parties, and if acquired from SaxonS, they executed a promissory note secured by a security agreement. SaxonS was contingently liable as it assigned the note to Chakers Ohio Food Fixture Co., which in turn assigned it to CIT Corp. Key figures at Topsy's, including Jouras and Lerner, were aware of these contingent liabilities but deemed them immaterial, thus excluding them from the prospectus. 

Touche Ross, in their audit, identified that SaxonS guaranteed a loan taken by Polynesian Enterprises, owned by Sapp and Henry, but Berger believed the liability was not concerning due to Henry's financial standing. Topsy's secured indemnification from Sapp and Henry against potential losses from this note, considering any liability for SaxonS to be remote. 

The plaintiffs also claimed misleading omissions regarding a tax deficiency of $45,000.00 from SaxonS's 1967 tax return, known during Topsy's acquisition of SaxonS and noted in the accompanying financial statements filed with the SEC. Touche Ross was engaged to address the tax matter, primarily related to deferred income recognition for franchisees. The court finds that the omissions in the prospectus were not materially misleading.

In October 1968, Sharlip discovered a tax deficiency of $45,303.49 during a call with the IRS and informed Berger. A preliminary IRS report was sent to SaxonS in late December 1968 but did not reach Sharlip. The final Revenue Agent's Report detailing the deficiency was sent on February 12, 1969. SaxonS chose to contest the claim, ultimately settling in 1970 for $34,397.15. Plaintiffs argue that the IRS's tax deficiency assertion should have been disclosed as it exceeded 50% of SaxonS's stockholders' equity; however, most of this deficiency stemmed from taxes on deferred franchise fees, which were not recognized as income and therefore did not impact stockholders' equity. Upon selecting a franchise site, these deferred fees would be recognized as income, making tax liabilities payable. The IRS claim was recorded as a current liability on SaxonS's balance sheet as of July 31, 1968, with a footnote explaining the IRS review. The resulting minor effect on stockholders' equity from items other than deferred franchise fees was deemed immaterial to SaxonS's earnings or net worth at that time, and also to Topsy's financial position as of February 4, 1969.

Additionally, the financials of SaxonS were included in the Topsy's prospectus, stating that operations post-July 31, 1968, were not reflected in the consolidated statement of earnings. The management noted that including SaxonS's operations from its inception in January 1967 to July 31, 1968, would not significantly alter sales or net earnings. For the four months ending November 30, 1968, sales and earnings figures for SaxonS were reported, albeit as unaudited, with management asserting they were fairly presented. Plaintiffs did not contest the accuracy of these financial figures but argued for the inclusion of audited financials.

Audited financial statements were claimed to be complete but were allegedly omitted during the SEC registration process, with Sharlip accused of misrepresenting facts to the SEC. The registration statement for Topsy's indicated a January 1969 effective date for a securities offering. On January 10, 1969, Lerner informed Touche Ross about a delay in the offering due to accounting issues. Subsequently, on January 17, SEC representative Reford Burney advised Tucker of necessary changes to the prospectus, notably the inclusion of audited financial statements from SaxonS, as mandated by Item 27 of Schedule A of the 1933 Securities Act, which requires certified profit and loss statements and balance sheets of acquired companies if offering proceeds are used for acquisitions.

Despite this, Topsy's representatives, including Tucker Charno and legal counsel Bryan Cave, contended that Item 27 did not apply since the offering proceeds were not intended for the purchase of SaxonS. Topsy's financial position was robust, with $600,000 in cash and certificates of deposit as of July 31, 1968, indicating no financing needs. They argued that SaxonS was not significant in terms of sales or assets relative to the $6,000,000 in offering proceeds, and that its financial statements would not provide meaningful information to prospectus readers. 

During a conference call on January 21, 1969, with SEC Chief Accountants Office representative Clarence Sampson, Topsy's position was articulated, and it was acknowledged that audited financials for SaxonS were unavailable. Sampson suggested minor wording adjustments in the Use of Proceeds section and indicated that a footnote about the acquisition would suffice to clarify the situation. Following this discussion, revisions were made to the prospectus, including the removal of references to using offering proceeds for replacing working capital related to SaxonS and the addition of a footnote about short-term bank loans.

Note (5) was added to the Consolidated Statement of Earnings to clarify that SaxonS' operations were not included in the audited financial statements. A paragraph was added to the prospectus detailing unaudited sales, net earnings, and earnings per share for Topsy's and SaxonS for the four months ending November 30, 1968, as well as for Topsy's for the same period in 1967, based on information from Topsy's controller. A letter requested by Sampson, drafted by Jouras with input from Martin and revised by Tucker, supported Topsy's claim that proceeds were not used to acquire SaxonS, citing several financial points: 

1. The Company's net working capital was $375,591 as of July 31, 1968.
2. Current assets included $569,381 in cash, significantly above operational needs, comprising $150,000 in certificates of deposit.
3. Funding for the SaxonS purchase was derived from redeeming certificates of deposit and using available cash.
4. By December 31, 1968, the Company had advanced over $500,000 to SaxonS for site acquisitions and invested over $400,000 in expanding its own operations, borrowing only $550,000 in short-term bank notes for these expansions.
5. The Company remained profitable, met all obligations, including taxes, and maintained positive net working capital.

Plaintiffs alleged a misrepresentation in the Use of Proceeds section, claiming proceeds were used for SaxonS acquisition. They noted that the offering, which closed on February 11, 1969, included proceeds deposited in Topsy's bank account, which were then used to pay off a $400,000 loan related to properties purchased alongside SaxonS. They argued that this payment indirectly used proceeds for SaxonS, contradicting Topsy's statements to the SEC. The final prospectus altered the Use of Proceeds section, suggesting funds would not be used as previously indicated for the Waco and Ft. Lauderdale properties.

Part of the proceeds from Topsy's was indirectly used to purchase the Waco and Ft. Lauderdale properties, a fact known to Topsy's management at the time the final prospectus was issued. The Use of Proceeds section in the prospectus was misleading, and management bears responsibility for this. While Sharlip and McMurtry participated in a conference call with the SEC, there is no evidence indicating that Touche Ross was aware of Topsy's intentions to use the proceeds for a bank loan repayment. Misrepresentations to the SEC are not actionable but may indicate the parties' intent. During the call, it was claimed that Topsy's cash exceeded its needs, which plaintiffs contest, citing a $20,793 deficit in Topsy's regular account. However, plaintiffs did not demonstrate that cash for the acquisition was unavailable from other accounts or that Topsy's could not manage the $203,915 acquisition cost. Additionally, Sampson was informed that audited financials were not ready, a statement plaintiffs argue was false. Nevertheless, the audit preparation was incomplete, and while Eppenauer suggested an audit could take four to five weeks if started in September, some delay was unavoidable. The SEC required audited financials for any material acquisitions, which in this case involved considerable additional audit work. During the call, Sampson was told that SaxonS did not meet the SEC's "15% significant subsidiary" test based on total assets and sales as of July 31, 1968. However, when considering SaxonS' interim earnings for the four months ending November 30, 1968, they exceeded 15% of Topsy's consolidated net earnings. Sampson had access to this data from the preliminary prospectus and concluded that SaxonS did not meet the significant subsidiary criteria. Furthermore, plaintiffs argue that two statements in the Use of Proceeds section were misleading, specifically regarding the estimated costs for completion of units and the anticipated addition of SaxonS units.

Plaintiffs contend that the $200,000 estimate for a unit site was unreasonably low, particularly when compared to recent purchases of three Kansas City sites at prices of $109,000, $135,000, and $243,455. The largest site was resold, resulting in a net cost of $150,000. Testimony clarified that "equipping the building" referred to air conditioning and heating systems—SaxonS's responsibility—rather than restaurant equipment, which fell to the franchisee. The court found no evidence that the estimate was misleading or made in bad faith, nor did it significantly affect potential investors. Regarding the anticipation of fifty units, testimony indicated that Topsy's planned for this expansion as of November 1, 1968, which plaintiffs did not contest.

In the section concerning "Management and Principal Stockholders," the prospectus disclosed William West's roles, but plaintiffs claimed it was misleading due to undisclosed management dissatisfaction with West and intentions to replace him. This claim's viability was debated, although it was acknowledged that on February 3, 1969, an ad was placed seeking a new president for SaxonS, with plans for West to transition to chairman of the board. Berger testified that he did not intend to fire West, and Touche Ross was unaware of these plans. The court deemed Berger's explanation plausible, stating that a prospectus does not need to disclose every detail about management changes, which are expected in the context of significant expansion. It was noted that West's resignation was agreed upon shortly after discussions about control over debenture proceeds. Lastly, the prospectus included the total remuneration for Topsy's officers and directors for the fiscal year ending July 31, 1968.

Plaintiffs assert that a salary statement in a prospectus is misleading due to authorized salary increases for executives Berger and House effective August 1, 1968, which were later rescinded. Berger's salary was raised to $50,000 and House's to $45,000, but after a review by Lerner and subsequent discussions, a board meeting on February 11, 1969, resulted in the rescission of these increases. The method of handling the rescinded amounts is unclear but likely involved charging them to drawing accounts. Additionally, on July 18, 1969, bonuses were approved for Berger and House, reflecting the difference between the rescinded salaries and the amounts they had received. 

The court found no misleading nature in the prospectus regarding salaries, stating it pertained to the fiscal year ending July 31, 1968, and a reasonable investor would assume future increases. Touche Ross was not responsible for the lack of information on salaries for the following fiscal year as their focus was on potential conflicts in the audited financials, which did not include post-July 31, 1968 salary increases.

Regarding the "Transactions with Management" section, plaintiffs claimed misleading omissions about a $25,000 bank loan guarantee for West. The board had authorized Berger to guarantee this loan due to West's financial difficulties. However, the omission was deemed immaterial, as it did not qualify as a significant subsequent event warranting disclosure in the certified financials.

The offering closed on February 11, 1969, with Topsy's and selling shareholders receiving net proceeds of $5,760,000 and $2,728,888, respectively. Berger and House certified the accuracy of Topsy's representations in the Underwriting Agreement, ensuring no material misstatements or omissions were present in the registration statement and prospectus.

Lerner, representing Bryan Cave, provided a legal opinion to the underwriters affirming that the registration statement and prospectus met the requirements of the Securities Act of 1933 and SEC regulations. Bryan Cave offered negative assurance, indicating no material misrepresentations or omissions were identified in the documents. Similarly, Jouras of Tucker Charno submitted a comparable opinion. On February 11, 1969, Touche Ross issued a "cold comfort" letter to the underwriters, confirming that the audited financial statements complied with legal standards but explicitly noted it had not audited any financial statements post-July 31, 1968, nor did it opine on the unaudited earnings for the four months ending November 30, 1968, or subsequent operations. Touche Ross conducted a limited review from July 31, 1968, to February 4, 1969, involving: 1) reading unaudited financial statements for the four-month periods ending November 30, 1968, and 1967; 2) reviewing minutes from stockholder and Board meetings; and 3) inquiring about changes in consolidated capital stock or long-term debt and any material adverse changes in financial position since specified dates. The firm emphasized that these procedures were not an audit and provided negative assurance that the unaudited financial statements were prepared in accordance with generally accepted accounting principles, with no significant adverse changes noted, except as disclosed in the registration statement. Additionally, a Kansas City Star article dated February 23, 1969, reported that construction on three SaxonS units in Kansas City was set to begin, with an expected opening around June 1.

House indicated that the company had five additional locations pending zoning approval and that SaxonS units were either operational or under construction in several states, including Alabama, Arizona, Florida, Georgia, Michigan, North Carolina, Ohio, Kansas, and Missouri. Plaintiffs argued that this statement was misleading, asserting that SaxonS had no shops in operation or under construction in Alabama, Georgia, or North Carolina, although House noted that franchises had been sold in those states without construction having commenced. The SaxonS records confirmed franchises sold in Georgia but not in Alabama or North Carolina. It was concluded that this statement constituted a misrepresentation, though it was deemed immaterial, reflecting Topsy's management's carelessness in public statements, with no implications for Touche Ross.

In a quarterly report dated March 19, 1969, prepared by Tucker and signed by House, Topsy's announced a dividend of 2 cents per share and highlighted positive unaudited operational results. The report claimed that funds from a successful debenture offering would enable business expansion, which conflicted with the prospectus stating proceeds would finance acquisition and development for SaxonS locations. House could not recall the rationale behind this inconsistency, but he affirmed that Topsy's intended to and did use the funds as outlined in the prospectus. This situation exemplified a casual management approach to public statements, with insufficient evidence to determine Topsy's intent or prove material misrepresentation.

A Kansas City Times article from March 20, 1969, reported on the shareholder letter, noting that SaxonS, acquired in August, contributed to significant sales and profit increases. Plaintiffs contended the article was misleading by omitting losses incurred by SaxonS in two of the three months of the second quarter, specifically a loss of $22,682.72 in December 1968. However, the statement was found to be more confusing than misleading, with no involvement from Touche Ross.

Lastly, G. H. Walker Research Notes from April 11, 1969, highlighted strong performance in Topsy's primary business despite slower-than-expected construction of new SaxonS units due to challenges in finding suitable locations. This delay was noted as a critical factor impacting reported earnings, contingent on the timing of profit recognition related to franchise fees and equipment sales aligned with the fiscal year-end of July 31.

Management anticipates placing 50 units in operation by the end of the current building season, benefiting from Topsy's strong cash position amid a tight financial climate. Following the acquisition of SaxonS, the number of open units increased from nine to 21 within a month. Although SaxonS' outlook appears promising, the company is exploring further acquisitions or mergers in the food service sector. Despite a recent decline in stock value after an earlier rise, a purchase is still recommended.

Plaintiffs allege that a report was misleading for not disclosing that SaxonS had sold only five franchises and refunded several franchisees in the previous six months, raising doubts about the expectation of fifty operational units. Evidence shows that eight franchises were sold between October 11, 1968, and April 11, 1969, and five franchise fees were refunded, though this omission was deemed not particularly significant. However, the limited franchise sales and refunds, along with management changes, suggest the expectation for fifty operational units was unrealistic and known to Topsy's management.

The report was based on conversations between William Gill and management figures Berger and House, reflecting carelessness on Topsy's part. Touche Ross had no involvement or duty to oversee Topsy's communications. 

In a quarterly report dated June 20, 1969, Topsy reported net sales of $3,073,849 and net earnings of $78,250. Herbert Martin, the controller, initially recorded $150,000 less in pre-tax profits and a net loss. After discussions with Berger, Martin was informed of unaccounted income from the sale of three franchises, which led to the inclusion of unsupported earnings in the shareholder letter. This misrepresentation resulted from false statements by Berger and Tucker, although Touche Ross was not implicated.

The letter also claimed there were thirty-one SaxonS units in various stages of development, but plaintiffs did not provide evidence to dispute this claim. The ambiguity of the term "development" prevents a determination of material misleadingness. Lastly, a new franchise agreement was implemented in Spring 1969, based on one previously used by International Industries, Inc., as introduced by a senior vice president of that company.

Rapoport was appointed president of SaxonS on August 1, 1969, under a new fifteen-year franchise agreement requiring a non-refundable initial fee of $25,000, recognized as income upon franchise establishment. Topsy's consulted Touche Ross regarding accounting for franchise fees and equipment leases, deciding that lease payments, discounted to present value minus equipment costs, would be accounted for when the unit opened. The agreement aimed to enhance SaxonS' earnings.

Nicholas Poulos, who had been with Topsy's since 1960 and became director of operations in 1969, purchased two SaxonS franchises in Columbus and Whitehall, Ohio. Although the franchise agreements were dated in early 1969, they were not executed until August 1969. Poulos financed the franchises with a $20,000 promissory note and $30,000 cash from a loan secured by Topsy's stock, personally guaranteed by House. Berger indemnified Poulos against potential losses. The franchises were later sold or franchised to others, with Topsy's either repaying the bank or returning funds to Poulos.

Arvin Gottleib, a friend of Berger and SaxonS' real estate agent, signed a franchise agreement on July 29, 1969, for a unit in Kansas City, which opened shortly thereafter. The franchise payment was received by SaxonS on August 22, 1969, with the unit's revenues and expenses allocated to Gottleib's account, excluding them from Topsy's 1969 financial statements. This transaction contributed approximately $40,000 to $45,000 in after-tax profit to Topsy's total earnings of about $370,000 for fiscal 1969, similar to Poulos' transaction aimed at boosting earnings.

In August 1969, Topsy's negotiated a settlement with West to repurchase shares acquired through the SaxonS transaction, agreeing to pay $111,314.25, while West would return $31,314.25 owed to Topsy's.

Payments totaling $111,314.25 were made prior to the agreement date, specifically $80,000.00 on August 6, 1969, and $31,314.25 on August 15, 1969. Topsy's began repurchasing its debentures in August 1969, spending $277,406.83 to buy back debentures worth $394,000.00 between August 5 and September 24, 1969. Berger testified that the repurchase, not required by the indenture, was recommended by Tucker and Touche Ross and was seen as beneficial for shareholders, resulting in an immediate earnings increase of $47,000.00 for the first quarter of fiscal 1970.

On October 24, 1969, a meeting involving Eppenaur, Robert Miller, and Topsy's management was convened to address securing advances made to SaxonS for property purchases, which lacked mortgage security. The intention was to establish security interests in these properties. Touche Ross indicated that while correcting entries could be made in the books, the original transactions would remain visible.

During the 1969 audit, Touche Ross provided an unqualified opinion on Topsy's consolidated financial statements as of August 2, 1969, published in the Annual Report on November 26, 1969. The report highlighted a revenue increase from $8,256,000.00 to $11,823,000.00 but a decline in earnings from $399,000.00 to $370,000.00, attributed to higher expenses in developing the SaxonS franchise and lower-than-expected revenues due to financial constraints. It noted previously reported earnings of $439,000.00, which were adjusted down after repurchasing two franchise agreements. By that time, twenty SaxonS units were operational, with three more anticipated to open soon, though expansion plans faced delays due to high costs of capital. The report concluded with an optimistic outlook on the company's financial stability and growth prospects.

The Message from Management did not attribute SaxonS' declining earnings to its operational difficulties. Eppenaur's 1969 audit memorandum outlined significant management efforts that year, including redesigning the building for cost efficiency, addressing franchisee dissatisfaction, managing taken-over operating units, developing a new franchise agreement, and seeking competent management. Despite these efforts, SaxonS faced an unprofitable year and an uncertain future, prompting management to reduce expansion plans amidst a tight money market and instability in the fast-food industry. They aimed to focus on current operations, negotiate settlements for unprofitable locations, and improve underperforming units by altering the menu to include hamburgers. A menu change has been implemented, but its impact on volume and profits remains unclear. 

Rapoport, appointed president in August 1969, intended to concentrate operations in the Kansas City area and close scattered locations for more effective advertising. Although there were indications that Berger may have considered withdrawing from SaxonS, this was not widely communicated, and Martin, who left Topsy's in October 1969, was unaware of any such decision. Eppenaur's memorandum indicated no decision to cease expansion. Touche Ross, the auditing firm, was not deemed responsible for monitoring the Message from Management section of the annual report. Plaintiffs claimed the financial statements were misleading due to the non-write-off of goodwill on the balance sheet, which represented the excess purchase price over net assets at acquisition. Touche Ross questioned the goodwill’s retention based on operational concerns, and management assured them of plans to improve SaxonS' performance, including design and menu changes. However, the effectiveness of these changes remains to be seen.

Goodwill would not have been written off unless management indicated an intent to liquidate SaxonS. Since management maintained that SaxonS was viable and that its issues could be resolved, Touche Ross could not deem the goodwill worthless without strong evidence. During the 1969 audit, Touche Ross raised concerns regarding the Poulos transactions, which Topsy's wanted included in reported earnings. Touche Ross determined these transactions should not be recognized as income since Poulos was fully financed and indemnified by Topsy's and Berger, thus lacking genuine risk. Consequently, the earnings from these transactions were excluded, leading to a reported net income of $439,300 for the first three quarters of 1969, but a loss in the fourth quarter due to the exclusion of Poulos earnings, resulting in lower overall annual earnings. Touche Ross' stance on these transactions aligned with generally accepted accounting principles (GAAP), and they had no obligation to review the Message from Management for additional disclosures.

Regarding the Gottleib transaction, Touche Ross evaluated its validity, recording, and fiscal timing. They concluded it was valid due to the unit being operational, a signed contract, and Gottleib being financially independent and at risk. The entire $25,000 franchise fee was recognized as income immediately per GAAP, and the associated equipment lease was accounted for under the financing method, with the total lease amount discounted to present value for revenue recognition. Expert testimony supported this accounting treatment. Touche Ross ultimately decided that the Gottleib transaction could correctly be recorded in fiscal 1969, influenced by the operational status of the unit and management's assertions that the agreement was effectively reached within that fiscal year, consistent with GAAP.

Touche Ross had no obligation to disclose additional information regarding the Gottleib transaction, as per accounting standards. The quarterly report dated November 28, 1969, indicated revenues of $2,842,000, net earnings of $208,000, and earnings per share of 23 cents, noting a non-recurring income of $47,000 (5 cents per share). Plaintiffs argue that the report and a related article in the Kansas City Times misled investors by failing to clarify that this non-recurring income stemmed from Topsy's repurchase of debentures. However, Touche Ross was not liable for statements made by Topsy’s management, nor for the article summarizing the report, as their prior discussions did not create a duty to review or explain the items.

At the annual shareholder meeting on December 10, 1969, attended by 20-25 shareholders and all officers except G. Kenneth Baum, Touche Ross was appointed as independent public accountants. Berger informed attendees that the decline in earnings per share during the fourth quarter was due to Touche Ross’ insistence on deferring certain fees and gains, which were related to the Poulos transactions. This was characterized as an attempt by Topsy's management to artificially inflate earnings. Berger also announced a decision to postpone expansion of the SaxonS franchise due to financing difficulties, suggesting that overhead costs would negatively impact profits in fiscal 1970.

The subsequent quarterly report on March 6, 1970, disclosed revenues of $2,926,000 but a net loss of $20,000, with earnings per share of a 2-cent loss. It noted that the results included charges for the repurchase of three SaxonS units, leading to a $292,000 reduction in second-quarter earnings. This report reinforced that Topsy had decided against expanding the SaxonS franchise. A meeting on March 19, 1970, involved Topsy's executives and two Kansas City attorneys to discuss matters further.

To terminate SaxonS quickly while protecting Topsy's security through real estate mortgages and equipment interests, management sought to minimize Topsy's exposure to litigation and negative publicity. Rapoport was tasked with canceling franchises, informing franchisees that SaxonS could not fulfill its obligations as outlined in the franchise agreements. He proposed a mutual non-involvement arrangement, where franchisees would operate independently without obligations to SaxonS, while the latter would refrain from interference.

Following a period of expansion, management recognized the need to scale back due to financial constraints and uncertainties in the fast-food sector. They aimed to renegotiate unprofitable locations and consider menu changes to enhance profitability, but ultimately determined that turning SaxonS around was unlikely. Consequently, by February 1970, they initiated plans to buy back all franchises and negotiate releases from franchisees and landlords to exit the business.

Touche Ross, the auditing firm, had no accountability for management's quarterly report or public statements regarding SaxonS. They also were not responsible for a related article in the Kansas City Times. Additionally, on June 1, 1970, Charles Feibleman, representing Indiana residents who purchased Topsy's securities, contacted Berger regarding alleged violations of federal securities laws. A subsequent meeting included key stakeholders but no representatives from Touche Ross. Feibleman indicated that his clients were targeting claims against Berger and House specifically.

Claims arose from oral statements made during discussions with Fry and misleading representations in the prospectus due to material omissions. Specifically, three claims concerned the pilot unit's first-year sales of $413,000, the number of units either open or under construction, and those that were company-owned or being bought back. The Feibleman claims were addressed in Topsy's board meetings on July 7 and July 28, 1970, but minutes from these meetings, prepared by Tucker, do not reference the claims. Touche Ross's junior partner, Robert Petsche, and Sharlip attended these meetings, with a memorandum indicating Touche Ross recognized only the first-year sales claim at that time. On July 13, 1970, Topsy's controller, Maurice Guy, requested Tucker to inform Touche Ross about the nature and status of potential stockholder actions discussed in the July 7 meeting. Tucker later provided an opinion on September 23, 1970, asserting that the statement regarding the pilot unit's sales did not misrepresent any material facts.

A settlement agreement was reached on July 20, 1970, between Berger, House, and around sixty-four claimants, where Berger agreed to pay $168,480 and House $39,520, with no evidence indicating these funds originated from Topsy's. The agreement included releases discharging Berger and House from all claims related to the purchase or holding of Topsy's Class A common stock or other securities. To address management concerns, Feibleman sought an opinion from securities law expert Louis Loss on whether the settlement needed to be disclosed to shareholders. Loss concluded that disclosure was not required under the circumstances and that failure to disclose the settlement would not increase potential civil liability unless there were subsequent stock transactions involving misstatements.

Liability may arise if a corporation or its officers provide additional misleading information regarding a settlement, potentially obscuring the settlement's existence. Touche Ross expressed concern over the Feibleman claims, suggesting Topsy's might face a material contingent liability to other unextinguished claimants. They focused on possible misrepresentations in the prospectus, particularly regarding a sales figure of $413,000 for a pilot unit, and believed the company would not be liable for oral misrepresentations by individuals Berger and House. A July 13, 1970 memorandum indicated that Touche Ross sought advice regarding a letter from counsel claiming no basis for legal action concerning the prospectus, suggesting that a settlement would not have been offered otherwise. Touche Ross concluded that no material contingent liability existed for Topsy's, and thus no disclosure in the audited financials was necessary. Plaintiffs did not demonstrate that Touche Ross's decision deviated from generally accepted accounting principles.

A June 24, 1970 report noted SaxonS’s lack of profitability, with management deeming further investment imprudent. Topsy's repurchased or terminated 14 franchises to cut staff and overhead. SaxonS operated three units in Ohio, with negotiations ongoing for two sales, while the third unit was modestly profitable under a franchisee contract. Despite offers to terminate agreements, five franchises remained, necessitating continued management support. Topsy's planned to discontinue SaxonS, writing down the real estate, fixtures, and equipment to present value, which included a $226,000 goodwill charge and $1,410,000 in reduced valuations. SaxonS faced substantial operating losses in the year-to-date, reporting revenues of $3,006,000 but a net loss of $1,882,000 for the sixteen weeks ending May 9, 1970.

The 1970 Annual Report elaborated on SaxonS's closure, with three franchise agreements still active and all company-owned units shut down. The Snack Bar and Popcorn Division remained profitable, increasing revenues by $932,432 compared to fiscal 1969, yielding pre-tax earnings of $522,748, down from $654,406 in 1969. However, Topsy's reported a net loss of $1,984,808 for the year, primarily due to losses from SaxonS, despite an extraordinary gain from bond repurchases.

The Company's financial status is strong, allowing for growth and exploration of new opportunities, with management expressing confidence in future prospects. The audited financial statements certified by Touche Ross do not address the Feibleman settlement. The plaintiff class includes those who purchased Topsy's common stock and debentures between September 28, 1968, and March 10, 1970, with the latter date marking the cessation of positive public statements regarding SaxonS. The amended complaint against Touche Ross was filed on October 17, 1973, but it did not relate back to an earlier complaint from March 11, 1971. Under the federal tolling doctrine, the court must assess if a reasonable investor could have discovered the alleged fraud before October 17, 1971. The plaintiffs carry the burden of proof regarding the statute of limitations. They assert that the fraud was discovered in late 1971 and could not have been uncovered earlier, citing that Farmer informed Robert C. Gordon about the misuse of Topsy's funds, leading to further disclosures. The plaintiffs argue that no reasonable investor could have uncovered the fraud based on public information before November 11, 1971. However, there is a potential inconsistency in the timeline of communications among the involved parties. The court's focus is on the timeframe of when the alleged fraud should have been discoverable, referencing relevant case law that considers factors that should have raised investor suspicions.

The plaintiff purchased stock at $47.00 per share, based on representations that it could increase to $75.00 soon. However, the stock price dropped significantly, leading the plaintiff to sell at $17.50 per share in March 1967. The plaintiff claimed to have discovered the misrepresentation by accident in August 1970 and filed a complaint in September 1971. The court ruled that the plaintiff's action was barred by the statute of limitations, emphasizing that even an unsophisticated investor should have recognized the significance of the stock's sharp decline in March 1967, which was not a concealed fact. The court noted the plaintiff had an opportunity to investigate the situation further but failed to do so despite having reason for suspicion. Citing precedents, the court highlighted that the statute of limitations begins when a plaintiff should have discovered the fraudulent scheme, not necessarily when all details of the fraud were known. Similar cases were referenced, including Berry Petroleum Co. v. Adams. Peck and Arneil v. Ramsey, where courts concluded that the plaintiffs should have recognized the fraud sooner due to public disclosures and market conditions, thus barring their claims under the applicable statutes of limitations.

One plaintiff was aware of significant issues regarding Blair’s problems by July 1970, and neither plaintiff took steps to uncover the fraud, resulting in their claims being time-barred. In the case of Cook v. Avien, the plaintiffs, misled into believing in Avien's promising future, purchased convertible subordinated notes in September 1968. They were informed of serious financial difficulties at a December 1968 shareholders meeting, where it was noted that earnings would be "anemic," and a subsequent interim report in February 1969 revealed substantial losses. Despite these warnings and a notable decline in stock price after January 1969, the plaintiffs did not file their lawsuit until March 1971, well after the apparent financial troubles became clear. The court determined that the plaintiffs had enough information to initiate the statute of limitations by January 1, 1970, and that a reasonable investor should have acted on the available data, which included the company's financial difficulties. The court indicated that waiting for market recovery while ignoring clear financial signs was unacceptable. Consequently, the one-year statute of limitations under Section 12(2) of the 1933 Act barred the plaintiffs' claim, although the issue related to Section 10(b) was remanded for further consideration due to an improper burden of proof on the defendants. Touche Ross argued that the sharp decline in stock prices should have raised the plaintiffs' suspicions, but the court noted that a general market downturn in 1969 and 1970 made it difficult to attribute the decline solely to Avien's issues. Additionally, there were conflicting public statements about SaxonS during this period, further complicating the plaintiffs' position.

The prospectus indicated that funds would primarily support the expansion of SaxonS, but Topsy's quarterly report from March 19, 1969, clarified that proceeds would instead benefit all business areas of Topsy. During 1968 and 1969, Topsy portrayed an optimistic outlook for SaxonS. However, by March 1970, Topsy announced significant net earnings losses and a strategy to repurchase franchised units of SaxonS. This was followed by further losses reported in June 1970, leading Topsy to conclude that SaxonS operations were unprofitable and would be ceased. Such drastic changes in management's strategy should have raised investor concerns.

In late 1969, investment firm Jas. Oliphant & Co. reported disappointing earnings per share for Topsy's International, which dropped from $0.47 to $0.41 year-over-year. Despite chairman Jerry Berger's optimistic estimate of $0.80 per share just weeks prior, the company later revised its outlook due to construction delays of new SaxonS locations, which affected anticipated franchise fees. Communication in October revealed that expansion was stalled due to high financing costs, with no progress on construction or lease negotiations. Topsy's held over $4 million in cash as of July 31, 1969, which could have been used for investments if a satisfactory return could be guaranteed.

There appeared to be a significant credibility gap between Topsy's management and the investment community, compounded by unexpected expenses like a $100,000 data processing charge. The first quarter's earnings of $0.23 per share included a non-recurring gain of $0.05, which was not disclosed as such. Current fiscal year earnings estimates range from $0.40 to $0.50 per share, but confidence in management’s plans remains low until tangible results are demonstrated. Oliphant's analysis highlighted the discrepancies between management's forecasts for SaxonS and actual financial outcomes, which raised suspicions among investors, including those associated with the Feibleman group, by spring 1970.

Claims predominantly focused on oral misrepresentations, with scrutiny also directed at public statements. Fry expressed significant concern about Topsy's stock price fluctuations, prompting numerous inquiries with management in 1969. Testimonies revealed that Marshall Gordon consulted his attorney in June 1969 regarding the stock's decline, while Mark Anthony suspected stock manipulation in 1970 and sought further legal investigation. By June 1970, following Topsy's announcement of SaxonS' failure, it was reasonable for investors to become suspicious and conduct due diligence. The statute of limitations allowed two years for action, yet no efforts to include Touche Ross in the case were made until 1973.

Plaintiffs relied on the theory that a note in the certified financial statements incorporated the SaxonS section, but the statute is not tolled while legal theories are developed from known facts. Anthony indicated in 1968 that he presumed Touche Ross had thoroughly investigated the prospectus. Consequently, the claim against Touche Ross is deemed time-barred by the two-year statute.

On the merits, despite the statute of limitations ruling, the case favors Touche Ross. The acquisition and development of SaxonS were driven by Berger's initiative, motivated by the prior success of Topsy's stock linked to franchise ventures. Berger believed that a successful SaxonS would enhance Topsy's financial standing and was not overly concerned with SaxonS' financial details at the acquisition time. Although there were indications that Sharlip might have uncovered serious issues with SaxonS' finances, Berger's actions and statements indicated a lack of transparency regarding SaxonS' management, notably his misleading assurances to Topsy's board and Schifman about West's leadership.

Topsy's management demonstrated consistent carelessness and occasional recklessness in public statements during fall 1968, frequently overstating the number of operational or under-construction units. While many of these overstatements were minor and not materially misleading, some were significant, such as the claims of twenty-nine units under construction and fifty units expected to operate by the end of 1969. Additionally, a statement by Berger regarding sixty-three franchises sold in the prior month constituted a material misrepresentation. An earlier analysis indicated that, apart from the Use of Proceeds section, the final prospectus did not contain material misrepresentations or omissions. However, the overall portrayal of SaxonS was overly optimistic despite management's knowledge of operational issues and declining sales.

Touche Ross, the auditing firm, was not found responsible for these misleading statements, as it was not proven that they were aware of Berger's alternative plans for the proceeds or that they assisted in Topsy's fraudulent conduct. After the offering, Topsy's management continued to misrepresent operations, inflating earnings by $150,000 in a June 1969 report. While Touche Ross was aware of some discrepancies, it acted according to generally accepted accounting principles and did not knowingly aid in fraud. The Feibleman settlement, occurring after SaxonS' losses were announced, is pertinent only to statute of limitations considerations and does not imply Touche Ross's awareness of fraudulent conduct.

In conclusion, while securities law violations were evident, plaintiffs did not demonstrate that Touche Ross knowingly participated in these violations. Touche Ross was afforded an opportunity to rebut the presumption of reliance by the class, arguing that investors were more focused on the franchising boom than on specific company details.

The testimony presented was deemed impressive but insufficient to solely determine the case's outcome, as it indicated that investors were "unreasonable." Relying on this evidence for exonerating Touche Ross could undermine federal securities regulations that depend on private causes of action for compliance. Touche Ross attempted to counter claims of reliance through testimony and affidavits from individual class members asserting they did not rely on specific public statements. However, these affidavits, prepared by Touche Ross and not subject to cross-examination, were deemed inadmissible. A rebuttable presumption favored the plaintiffs, linking the decline in stock price to fraud, which Touche Ross attempted to refute using expert testimony that attributed the stock's decline to general market conditions and sector-specific declines during 1969-1970. In contrast, the plaintiffs' expert estimated that only 22% of the decline was due to general market factors, with no direct link to fraud established. Consequently, Touche Ross effectively rebutted the presumption, placing the burden back on the plaintiffs to demonstrate what portion of the losses was due to alleged fraudulent acts, which they failed to do.

As a result of ruling in favor of Touche Ross, the court did not address the cross-claims for contribution against Touche Ross from Topsy's, Berger, House, Nuell, and Tucker Charno, nor Touche Ross' cross-claims against them. Topsy's cross-claim for indemnity against Touche Ross sought recovery of settlement payments and attorneys' fees, based on alleged breaches of fiduciary duties arising from their relationship, possibly implying an indemnification requirement by law or contractual obligation.

Plaintiffs' claims against Topsy's, Berger, House, and Nuell, settled for allegations of fraud, necessitated attorneys' fees related to defending against these fraud claims. Under the antifraud provisions of the 1934 Act, misconduct must involve recklessness or willful misconduct, exceeding mere negligence. Legal precedent establishes that individuals cannot insure against their own reckless or criminal actions, rendering indemnification agreements unenforceable in the context of securities law violations. In the case at hand, Touche Ross did not breach any duties towards Topsy's, Berger, House, or Nuell.

G. Kenneth Baum, an outside director of Topsy's and a control person of a brokerage firm, was not a defendant but a third-party defendant due to complaints against him by underwriters and Tucker Charno. Those third-party complaints were dismissed with prejudice in April and May 1979. On May 8, 1979, Baum filed a cross-claim against Topsy's, seeking indemnification for expenses related to his defense in this litigation, invoking Topsy's bylaws. However, since Baum was not a party when he filed this cross-claim, it will be dismissed.

During the trial, Touche Ross objected to certain exhibits and testimony as hearsay under a conspiracy theory. Although the evidence was conditionally admitted, its admissibility does not affect the case's outcome. The court considered this evidence in its decision, which resulted in a judgment for Touche Ross against the plaintiffs. Baum's cross-claim, as well as all other cross-claims, are dismissed. Touche Ross is instructed to prepare a Journal Entry of Judgment to reflect this decision.

It is unlawful for any individual to engage in fraudulent activities in the offer or sale of securities through any means of interstate commerce or mail. Specifically, it prohibits: (1) using any device or scheme to defraud; (2) obtaining money or property through untrue statements of material facts or omissions that could mislead; and (3) participating in any activities that constitute fraud or deceit against purchasers. Additionally, it is unlawful to employ manipulative or deceptive devices in connection with the purchase or sale of any securities, whether registered or not, in violation of rules established by the Commission for investor protection. The document also lists various settlement payments to underwriters, totaling $177,600, detailing the amounts attributed to different companies involved in these transactions.