Fraud in the Purchase of Securities: Reliance needs to be alleged properly!

Alleging common law fraud against accounting firms for fraudulent statements in financial reports is not as easy as it may seem.  In Dloogatch v. KPMG, the court stated that shareholders may state a common law fraud claim, if they can overcome standing issues, the proscription against derivative claims, and federal preemption.

However, the common law fraud claim must still be plead with particularity.  In other words, alleging that shareholders “relied” upon the financial reports and were “damaged” is insufficient to state a common law fraud claim.  These types of complaints will typically get dismissed pursuant to a properly crafted motion to dismiss.

In alleging fraud actual reliance must be alleged with specificity.  Where a holder is attempting to assert that he would have sold the stock, but for the fraudulent statements; more details are require.  For example, the particular misstatement, why it would have led to the holder’s sale of stock, the amount of stock that would have been sold, the dates of the purported transactions and similar specific information is required to allege “actual reliance.”

Although the   Dloogatch v. KPMG case dismissed the holder’s complaint for fraud in connection with not selling stock based on an accountant’s report; in reality, the case opens the door to making holder claims in IL.   If you have any additional concerns or questions relating to prosecuting or defending these matters, then please contact me.


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