Full opinion text
ORDER NESBITT, District Judge. This cause comes before the Court upon the Report and Recommendation of Magistrate Judge Barry L. Garber, filed May 19, 1993 (D.E. # 219), regarding Defendant Deltec Securities Corporation’s (“Deltec”) Motion to Dismiss, filed September 16, 1992 (D.E. # 128), Defendant Gunster, Yoakley & Stewart, PA.’s (“GY & S”) Motion to Dismiss, filed September 15, 1992 (D.E. # 130), Defendants Aaron Karp, Howard Sommers, and Karp and Sommers’s (collectively “K & S”) Motion to Dismiss, filed September 30, 1992 (D.E. # 147), Defendant Coopers & Lybrand’s (“C & L”) Motion to Dismiss, filed September 30,1992 (D.E. # 151), and Defendant Raymond James’s Motion to Dismiss, filed October 1, 1992 (D.E. # 155). I. BACKGROUND This action arises from the allegedly fraudulent activities of two law firms, an accounting firm, a securities broker, and an underwriter, as well as the officers and directors of the corporation, in relation to the issuance of shares of stock in Cascade International, Inc. (“Cascade”). Cascade was a publicly traded company made up of three divisions: cosmetics, fashion boutiques, and women’s apparel stores. Throughout the late 1980s, Cascade acquired a number of clothing stores, and had intended to sell cosmetics from counters ■within these stores. By 1991, however, the Securities and Exchange Commission (“SEC”) had begun to investigate Cascade, and in December of 1991, Cascade filed for bankruptcy after revelations that it had grossly misrepresented the number of cosmetic stores it operated, and after its President and Chief Executive Officer, Victor Incendy, had disappeared. In July of 1991, a number of complaints were filed in federal court by purchasers of the common stock of Cascade which primarily alleged violations of the securities laws against the above-named Defendants. These actions were soon consolidated into one class action, and this consolidated action was given multi-district litigation status. In their class action complaint, Plaintiffs accuse all Defendants of making materially misleading statements or omissions. Specifically, K & S, a law firm, is accused of making misrepresentations in Cascade’s filings with the SEC. GY & S, another law firm, is accused of making misleading statements, allegedly in an attempt to hide Cascade’s fraudulent activity, to people who were investigating the strength of Cascade. Plaintiffs allege that C & L, an accounting firm, made fraudulent misrepresentations in the process of auditing two of the subsidiaries of Cascade, Fran’s Fashions, Inc., and Conston, which were retailers of women’s clothing. C & L is also accused of furthering the fraudulent activity by failing to disclose that Cascade’s filings with the SEC were highly inaccurate. Raymond James, a securities broker, is accused of making false misrepresentations in the process of selling Cascade’s stock. Finally, Plaintiffs allege that Deltec, an underwriter for Cascade’s stock, acquired over a million unregistered shares from Cascade which it sold on the market in violation of the securities laws. The Complaint alleges violations by all Defendants of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (“§ 10(b)”), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.-10b-5 (“Rule 10b-5”), as well as alleges state common law claims for negligent misrepresentation and fraud. In addition, the Complaint also alleges violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq., against K & S only, and alleges that Deltec violated §§ 12(1) and 12(2) of the Securities Act of 1933, 15 U.S.C. § 77Ü (l)-(2) (“§ 12”). The accused Defendants have moved to dismiss these allegations. Magistrate Judge Barry L. Garber, in his Report and Recommendation filed May 17, 1993 (D.E. #219), recommended that all counts be dismissed against the law firms, K & S and GY & S, because Plaintiffs, inter alia, had failed to establish a duty to disclose on the part of a law firm to individuals with which the law firm did not have a fiduciary relationship. The Magistrate Judge also recommended that the counts for common law negligent misrepresentation and fraud be dismissed as to all Defendants for Plaintiffs’ failure to adequately allege their reliance on the alleged misrepresentations or omissions made by Defendants. All other counts, the Magistrate Judge stated, should not be dismissed, as Plaintiffs have adequately alleged all elements of these causes of actions. All parties have filed objections and responses to the Magistrate Judge’s Report and Recommendation. The . Court is required to conduct a de novo review of both these objections and the original motions to dismiss. 28 U.S.C. § 636(b)(1) (1993) (“A judge of the Court shall make a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made.”). II. STANDARD OF REVIEW The standard of review for a motion to dismiss has been clearly established. Rule 12(b)(6) of the Federal Rules of Civil Procedure authorizes a court to dismiss a claim on the basis of a dispositive issue of law. Neitzke v. Williams, 490 U.S. 319, 326, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338 (1989). However, the Court is confined to a review of the allegations pleaded in the Complaint, must accept those allegations as true, and must resolve any factual issues in a manner favorable to the nonmovant. See Quinones v. Durkis, 638 F.Supp. 856, 858 (S.D.Fla.1986). Thus, a claim may be dismissed pursuant to Rule 12(b)(6) only if it is clear that no relief could be granted under any set of facts consistent with the allegations. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232-33, 81 L.Ed.2d 59 (1984); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). Furthermore, Rule 9(b) of the Federal Rules of Civil Procedure requires that any allegations of fraud in a complaint must be stated with particularity. However, while Rule 9(b) “serves an important purpose in fraud actions by alerting defendants to the ‘precise misconduct with which they are charged,’ ” the requirements of Rule 9(b) “must not abrogate the concept of notice pleading.” Durham v. Business Management Associates, 847 F.2d 1505, 1511 (11th Cir.1988) (quoting Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3rd Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985)); (quoting Friedlander v. Nims, 755 F.2d 810, 813 n. 3 (11th Cir.1985)). Therefore, “while mere conelusory allegations of fraud will not satisfy Rule 9(b), allegations which provide a reasonable delineation of the underlying acts and transactions allegedly constituting the fraud are sufficient.” In re Sahlen & Associates, Inc. Se curities Litigation, 773 F.Supp. 342, 352 (S.D.Fla.1991). Applying these principles, and after careful consideration of the Magistrate Judge’s Report and Recommendation and a de novo review of the record, it is hereby ORDERED and ADJUDGED that the Report and Recommendation is adopted in its entirety for the reasons set forth below. III. DEFENDANTS AARON KARP, HOWARD SOMMERS, KARP AND SOMMERS, AND GUNSTER, YOAK-LEY & STEWART, P.A. In summary, the Magistrate Judge recommended that all counts of the Complaint be dismissed against the two law firms, K & S and GY & S, because Plaintiffs failed to demonstrate a law firm’s duty to disclose negative information about a client to anyone with whom the law firm does not have a fiduciary relationship. Plaintiffs object to this recommendation by stating that K & S helped prepare Cascade’s fraudulent filings with the SEC, as well as drafted letters to shareholders and press releases which stated erroneous facts. Plaintiffs also argue that GY & S violated the securities laws by defending Cascade against accusations made by the press, securities analysts, and members of the public that the company was in financial difficulty, without investigating whether the representations made by GY & S on behalf of Cascade were true, as well as threatening those individuals with legal action if they investigated Cascade or published articles about the financial condition of the company. Also, Plaintiffs accuse GY & S of giving advice to Cascade without properly and fully investigating their client. Plaintiffs further argue that both firms discovered and ignored numerous “red flags,” i.e., facts which Plaintiffs allege should have made the defendant law firms aware that Cascade was committing fraud, or at least compelled them to investigate their client. Defendants K & S and GY & S respond by arguing that any representations that they made were only done on behalf of the client and were not representations made on behalf of the law firms to third parties, that the law firms were mere “scriveners” for Cascade, and that they had no fiduciary relationship, and thus no duty, to anyone but Cascade. Furthermore, the law firms argue, they never issued legal opinions to the general public but only to their client Cascade. The law firms also argue that they had no duty to investigate Cascade, no duty to “tattle” on their client, and had, in fact, an ethical duty not to reveal client confidences. Attorneys, the law firms argue, do not have the same duties as other professionals, like accountants and securities brokers, because they do not represent their own opinions about their client, but only act as a conduit for the client’s opinions. A. 10(b) and Rule 10b-5 Allegations As the Magistrate Judge correctly determined, in order for a cause of action to be maintained under § 10(b) and Rule 10b-5, a plaintiff must allege that a defendant made a misstatement or omission of a material fact. Moreover, most circuits, including the Eleventh Circuit, have held that a defendant’s misstatement or omission is actionable under § 10(b) and Rule 10b-5 only if the defendant had a duty to disclose negative information to the plaintiff. See Rudolph v. Arthur Anderson & Co., 800 F.2d 1040, 1043 (11th Cir.1986), cert. denied, 480 U.S. 946, 107 S.Ct. 1604, 94 L.Ed.2d 790 (1987) (“Rule lob-5, however, is not read literally. Instead, a defendant’s omission to state a material fact is proscribed only when the defendant has a duty to disclose.”). While the Eleventh Circuit has found a duty to disclose when the defendant was an accountant, see Rudolph, 800 F.2d at 1043 (quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84 (5th Cir. 1975)), or a banker, see Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004 (11th Cir.1985), there has been no decision in this circuit specifically creating this duty to disclose on the part of an attorney. However, the Fourth, Fifth, and Seventh Circuits have all held that an attorney does not have a duty to disclose potentially negative information about a client to a third party absent some kind of fiduciary relationship with the third party. See Schatz v. Rosenberg, 943 F.2d 485 (4th Cir.1991), cert. denied, — U.S. -, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992); Abell v. Potomac Ins. Co., 858 F.2d 1104 (5th Cir.1988), cert. denied, 492 U.S. 918, 109 S.Ct. 3242, 106 L.Ed.2d 589 (1989); Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490 (7th Cir.1986). Furthermore, the Eleventh Circuit has established a set of factors which a court must consider in weighing whether a professional had a duty to disclose negative information to the general public about a client. As Rudolph explained: In evaluating the circumstances, ‘we consider the relationship between the plaintiff and defendant, the parties’ relative access to the information to be disclosed, the benefit derived by the defendant from the purchase or sale, defendant’s awareness of plaintiffs reliance on defendant in making its investment decision, and defendant’s role in initiating the purchase or sale.’ Rudolph, 800 F.2d at 1043 (quoting Woodward, 522 F.2d at 97 n. 28). The Court must look at the circumstances of each case in determining whether a duty to disclose exists. Woodward, 522 F.2d at 97 n. 28. Reviewing these factors and the facts of this case, the Court concludes that few, if any, of the factors are supported by the allegations in the Complaint. Therefore, the Court finds that Rudolph does not warrant the creation of a duty to disclose negative information about a client on the part of an attorney. As Plaintiffs have failed to demonstrate any kind of fiduciary relationship between the defendant law firms and Plaintiffs, no duty to disclose exists, and, therefore, no action for securities fraud can be maintained against the defendant law firms. While Plaintiffs cite many cases in which a court allowed an action to progress against a lawyer or law firm, these cases involved direct misrepresentations made by the defendant law firm to a plaintiff with which the law firm had a fiduciary relationship. See, e.g., FDIC v. O’Melveny & Meyers, 969 F.2d 744 (9th Cir.1992) (finding a duty when law firm prepared documents to investors); Molecular Technology Corp. v. Valentine, 925 F.2d 910 (6th Cir.1991) (finding duty when law firm was in charge with editing public documents it knew to be false). Here, although GY & S may have made misrepresentations to parties other than their clients, Plaintiffs have not alleged a fiduciary relationship between GY & S and a third party to establish a duty to disclose. Accordingly, the counts alleging primary violation of § 10(b) and Rule 10(b)-5 must be dismissed against the defendant law firms. Plaintiffs argue that to dismiss the defendant law firms because they had no duty to disclose negative information to the public would allow law firms to act with impunity in issuing misleading legal opinions. However, what Plaintiffs fail to admit is that the actions of these law firms did not rise to such a level that they were expected to give full and accurate representations to third parties. These law firms represented Cascade, not any third party, and therefore did not have duty to investigate their client. While Plaintiffs claim a great injustice would be done to purchasers of Cascade stock if these law firms were to be dismissed from the suit, this Court does not believe that the current law requires a law firm to direct its activities from representation to investigation of their clients at the slightest suggestion that their clients may be involved in unsavory activities. The Court will not go so far as to require law firms to fully investigate them clients at any hint that they may be conducting fraudulent activities, and then to punish the law firms if they do not do so. Otherwise, the law firms would be charged with a duty to the public at large to “tattle” on their clients. See Abell, 858 F.2d 1104, 1133 (quoting Barker, 797 F.2d at 497) (“ ‘Neither lawyers nor accountants are required to tattle on their clients in the absence of some duty to disclose. To the contrary, attorneys have privileges not to disclose.’ ”). For all their rhetoric, Plaintiffs have failed to indicate what duty the defendant law firms had. As Plaintiffs have failed to allege that the law firms represented them, no duty has been created between them or with the public at large, and, therefore, the counts for primary violations of § 10(b) and Rule 10b-5 cannot be maintained and must be dismissed. B. Aiding and Abetting Allegations Plaintiffs’ Complaint also alleges liability on the part of the defendant law firms K & S and GY & S for aiding and abetting securities fraud. The Magistrate Judge recommended that these counts be dismissed as well, because Plaintiffs have failed to allege facts which indicate that the defendant law firms had the conscious intent necessary to maintain an action for aiding and abetting. Plaintiffs argue in their objection that the fact that the defendant law firms ignored the numerous “red flags,” as well as their active participation in threatening third parties with legal action if they investigated Cascade, demonstrates the high degree of knowledge, or scienter, necessary to maintain the aiding and abetting counts. Plaintiffs also argue that the “atypical” activities of the law firms in the manner in which they represented and defended Cascade is sufficient evidence to demonstrate the requisite scienter. Defendants respond by stating that none of their activities were atypical, nor do Plaintiffs allege any facts sufficient to demonstrate sufficient knowledge on the part of the defendant law firms to be aiders and abettors. As the Magistrate Judge correctly ascertained, the elements for aiding and abetting securities fraud are: ‘some other party has committed a securities law violation, ... the accused party has general awareness that his role was part of an overall activity that is improper, and ... the accused aider-abettor knowingly and substantially assisted the violation.’ Woodward, 522 F.2d at 94-95 (quoting SEC v. Coffey, 493 F.2d 1304 (6th Cir.1974), cert. denied, 420 U.S. 908, 95 S.Ct. 826, 42 L.Ed.2d 837 (1975)). Looking specifically at the third element, Plaintiffs must demonstrate that Defendants “knowingly” assisted the violation, in other words, that they possessed the requisite scienter. Applicable precedent instructs that an evaluation of whether a defendant knowingly assists in the fraud “turns upon whether the aider and abettor defendant owed a duty to the plaintiff.” Schatz, 943 F.2d at 496. If the defendant is under no duty to disclose, then the complaint must allege that the defendant acted with “a high degree of scienter, that is, with a ‘conscious intent’ to aid the fraud.” Woods, 765 F.2d at 1010. See also Schatz, 943 F.2d at 496 (“When there is no duty running from the alleged aider and abettor to the plaintiff, the defendant must possess a ‘high conscious intent’ and a ‘conscious and specific motivation’ to aid the fraud”). As previously determined in section III.A., supra, neither of the two law firms were under a duty to disclose their client’s activities, and, therefore, Plaintiffs must demonstrate “conscious intent” on the part of Defendants to maintain the aiding and abetting counts of the Complaint. However, Plaintiffs have failed to sufficiently allege the requisite degree of scienter. Plaintiffs argue that the allegations in their Complaint which assert that GY & S made statements to individuals other than their client establishes the requisite “conscious intent” necessary to meet this element. Furthermore, the numerous “red flags” should have warned the law firms of Cascade’s fraudulent activity, and their failure to investigate their client demonstrated “conscious intent” to aid and abet the fraudulent activity. However, “red flags,” or “aroused suspicions,” “do not constitute actual awareness of one’s role in a fraudulent scheme.” Abell, 858 F.2d at 1128. Furthermore, when no duty to disclose exists, “allegations that a defendant knew of the wrongdoing and did not act fail to state an aiding and abetting claim.” Schatz, 943 F.2d at 496. Thus, allegations that the law firms merely failed to investígate their client is not sufficient to establish an aiding and abetting claim. Moreover, as Woodward explained: In a case combining silence/inaction with affirmative assistance, the degree of knowledge required should depend on how ordinary the assisting activity is in the business involved. If the evidence shows no more than transactions constituting the daily grist of the mill, we would be loathe to find 10b-5 liability without clear proof of intent to violate the securities laws. Conversely, if the method or transaction is atypical or lacks business justification, it may be possible to infer the knowledge necessary for aiding and abetting liability. Woodward, 522 F.2d at 97. Here, when allegations of the alleged “red flags” are removed, in accordance with Abell, Plaintiffs’ Complaint fails to demonstrate how the law firms’ actions of merely rendering legal opinions or coming to the defense of their client demonstrated more than activity constituting the “daily grist of the mill” of a law fum. In addition, Plaintiffs have failed to demonstrate the existence of any “substantial assistance” on the part of Defendants as required by the aiding and abetting cause of action. This element has been defined as requiring more than allegations that the law firm acted as a scrivener for the client, but that the law firm “actively participate[d] in soliciting sales or negotiating terms of the deal on behalf of a client----” Schatz, 943 F.2d at 497. The Court finds, in accordance with the Magistrate Judge’s recommendation, that Plaintiffs have failed to allege any activities on the part of K & S and GY & S that constituted anything more than acting as scriveners for their clients or conducting activities that make up the “daily grist of the mill.” Therefore, without clear proof of intent to violate the securities laws, the Complaint fails to adequately allege proper claims against K & S and GY & S for aiding and abetting securities fraud. Accordingly, those counts of the Complaint must also be dismissed. C. RICO violations against Karp & Sommers Plaintiffs have asserted claims against Defendant Karp & Sommers for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(a)-(d), either as primary participants or as aiders and abettors. The Magistrate Judge recommended that these counts be dismissed because Plaintiffs have failed to allege sufficient knowledge on the part of K & S of the fraudulent activity. Plaintiffs argue that the Complaint is replete with references to K & S’s failure to investigate whether the large number of cosmetic counters Cascade represented to the public that it owned and operated actually existed. Defendant K & S responds that mere allegations that a law firm failed to investigate its client and drafted documents on behalf of its client are insufficient to demonstrate a RICO violation, and that mere reckless disregard for the activities of the client does not establish a RICO claim. In order for a count for RICO violations to survive a motion to dismiss, the Complaint must allege “two acts of racketeering with enough specificity to show that there is probable cause the crimes were committed. That determination is possible only if the factual basis of the predicate acts is set out with specificity.” Banco de Desarrollo Agropecuario, S.A. v. Gibbs, 640 F.Supp. 1168, 1175 (S.D.Fla.1986). Again, Plaintiffs have failed to demonstrate in their Complaint the requisite intent to defraud, and, therefore, have failed to sufficiently allege the factual basis of the predicate acts. Plaintiffs’ only support for Defendants’ knowledge is that the law firms allegedly drafted false press releases and recklessly disregarded facts about the financial condition of Cascade. However, reckless disregard is not a sufficient level of intent to allege the underlying crime. Andreo v. Friedlander, Gaines, Cohen, Rosenthal & Rosenberg, 660 F.Supp. 1362, 1370 (D.Conn.1987) (“Mere reckless disregard of the truth when drafting documents does not justify a finding of RICO civil liability on the basis that the party participated in the illegal enterprise.”). Thus, to pursue an action for civil RICO, Plaintiffs must demonstrate Defendant’s intentional participation in the conduct and affairs of the RICO enterprise. Becks v. Emery-Richardson, Inc., Nos. 86-6866-CIV-GONZALEZ, 87-1554-CIV-GONZALEZ, 1990 WL 303548, at *37 (S.D.Fla. Dec. 21, 1990). Plaintiffs have not alleged K & S’s intentional participation in the affairs of Cascade, and, therefore, the Complaint as to the RICO counts against K & S must be dismissed. Furthermore, the Supreme Court, in a decision handed down this year, significantly limited the application of the RICO statute in civil suits. See Reves v. Ernst & Young, — U.S.-, 113 S.Ct. 1163, 122 L.Ed.2d 525 (1993). Looking specifically at the language of § 1962(c), the Court held that in order “ ‘to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs,’ § 1962(c), one must participate in the operation or management of the enterprise itself.” Id., at-, 113 S.Ct. at 1173. As Plaintiffs have demonstrated no evidence that the defendant law firms participated in the operation or management of Cascade, Plaintiffs’ § 1962(c) RICO claims, as well as all other claims brought pursuant to the RICO act, must be dismissed. D. State Law Claims The Court agrees with the Magistrate Judge’s finding that because all of the federal claims have been dismissed from the Complaint as to K & S and GY & S, the Court should no longer exercise its pendent jurisdiction over the state claims. Rice v. Branigar Organization, Inc., 922 F.2d 788, 792 (11th Cir.1991) (“When a district court dismisses all of the federal claims before trial, the decision whether or not to exercise pendent jurisdiction over state-law claims is within its discretion.”). See also L.M.E., Inc. v. City of Hollywood, 605 F.Supp. 185, 190 (S.D.Fla.1985). Accordingly, the pendent state claims against KY & S and GY & S should be dismissed as well. E. Ethical violations Nothing in this opinion should be read to indicate that the Court condones the actions of these two law firms, or that because they are to be dismissed from this entire action that they are entirely blameless in this fraud. The Comí;, as courts have held in the past, cannot express an opinion as to whether what the law firms did violated the rules of ethics. As both the Fourth and Seventh Circuit have stated: [A]n award of damages under the securities laws is not the way to blaze the trail toward improved ethical standards in the legal ... profession[ ]. Liability depends on an existing duty to disclose. The securities laws therefore must lag behind changes in ethical and fiduciary standards. Schatz, 943 F.2d at 498 (quoting Barker, 797 F.2d at 497). This Court joins in agreement •with that statement, and is bound by Plaintiffs’ Complaint and the elements of the causes of action in considering whether the counts against the two law firms should be dismissed. IV. COOPERS & LYBRAND The Magistrate Judge recommended that the count for securities violations against the accounting firm Coopers & Lybrand should be allowed to remain, as Plaintiffs had sufficiently alleged all the requisite elements of a § 10(b) and Rule 10b-5 claim. C & L objects to this recommendation by arguing that it did not act as the accountant for Cascade but .only as the auditor for two of Cascade’s subsidiaries, Fran’s and Conston. Specifically, C & L argues that the only allegations of fraudulent misrepresentations in Plaintiffs’ Complaint, as they relate to C & L, occur in reference to Cascade’s 1991 10-K form, which C & L did not prepare. Plaintiffs respond by arguing that their Complaint sufficiently demonstrates that C & L was not a minimal participant in the auditing of Cascade, but in fact gave extensive advice to Cascade. Plaintiffs argue as evidence of C & L’s liability the fact that C & L failed to issue “going concern” opinions on Fran’s and Conston despite “red flags” that Cascade was in financial difficulty, and that C & L failed to consolidate Conston’s financial statements with Cascade’s, thus allowing Cascade to avoid reporting Conston’s significant losses, in violation of established accounting procedures. Furthermore, after C & L received Cascade’s 10-K, it failed to withdraw its opinion on Fran’s or Conston despite the gross errors it knew were contained in the 10-K. A. § 10(b) and Rule 10b-5 1. Duty to Disclose Defendant Coopers & Lybrand argues that, like the defendant law firms, an accounting firm also has no duty to disclose negative information about a company to the public when the accounting firm did not participate in preparing the financial statements of the main corporation (here, Cascade), but only participated in preparing the financial statements of two of the corporation’s subsidiaries. More importantly, C & L argues that it did not aid in the preparation of Cascade’s 1991 10-K form which stated, erroneously, that Cascade owned 126 Fran’s stores. Therefore, C & L had no duty to disclose any of the alleged fraud, as it was not the perpetrator of any of the fraud. This position, however, is contrary to the applicable precedent in the Eleventh Circuit. In Rudolph, the court denied a motion to dismiss filed by an accounting firm on the grounds that an accountant stands in a “special position of trust vis-a-vis the public,” noting that an accountant has a “duty to safeguard the public interest.” Rudolph, 800 F.2d at 1044. Because the public relies on an accountant’s representations when making investment decisions, and because the costs to an accountant of revealing potentially negative information are minimal, the accountant has a duty to disclose this information when preparing other accounting documents which rely on this negative information, regardless of whether it originally prepared the misleading documents. Plaintiffs are not arguing, as C & L believes they are, that an auditor of a subsidiary will always be liable for the fraud of the parent. However, when the auditor of a subsidiary knows of the fraudulent activities of the parent, it has a duty to disclose this information. Accordingly, although C & L did not prepare Cascade’s 1991 10-K form, Plaintiffs have demonstrated a set of facts which, if true, would entitle them to relief. By failing to disclose the false information contained in Cascade’s 1991 10-K, which C & L knew to be false, C & L violated the duty to disclose negative information to the public recognized by Rudolph. 2. Reliance In order for Plaintiffs to adequately allege a securities fraud violation against any defendant, they must allege that Plaintiffs somehow relied on the misrepresentations or omissions of that defendant. Ross v. Bank South, N.A., 885 F.2d 723, 728 (11th Cir.1989), cert. denied, 495 U.S. 905, 110 S.Ct. 1924, 109 L.Ed.2d 287 (1990). To satisfy this element, Plaintiffs allege the “fraud on the market” theory, which basically creates a presumption of reliance, when no individual reliance can be demonstrated, by accepting that, in a developed securities market, the material information published by the defendant is reflected in the price of the stock. See Basic Inc. v. Levinson, 485 U.S. 224, 241-42, 108 S.Ct. 978, 988-89, 99 L.Ed.2d 194 (1988); Lipton v. Documation, Inc., 734 F.2d 740, 745-46 (11th Cir.1984), cert. denied, 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985). The Magistrate Judge accepted this theory to satisfy the element of reliance. C & L objected to this finding of reliance, stating that at no time did they ever make public statements about Cascade, but only about the subsidiaries Fran’s and Conston. However, Plaintiffs argue that by not revealing information that C & L had a duty to reveal, C & L contributed to the fraud on the market which led to the increased price of Cascade’s stock. This allegation, if taken as true, would set forth adequate evidence of reliance through the fraud on the market theory, and, therefore, Plaintiffs have met their burden as to this element. As Plaintiffs have established sufficient support for all the elements of a primary-violation of 10(b) and Rule 10b-5, this count will not be dismissed as to C & L. B. Aiding and Abetting Plaintiffs also allege that C & L aided and abetted the violation of the securities laws. The Magistrate Judge, citing to Plaintiffs’ allegations that C & L knew that Cascade was representing that it had more Fran’s stores than it did, that it avoided consolidating the Conston financial statements with Cascade’s, and that it knowingly violated established accounting procedures, recommended that this count against C & L should not be dismissed. C & L objects to this recommendation by stating that since it was not Cascade’s auditor, it could not have knowledge of nor participate in any fraud. Furthermore, Plaintiffs do not have standing to sue as the audit reports were of the subsidiaries and not of Cascade. However, as has been previously discussed, Plaintiffs have alleged sufficient facts, such as their active attempts to avoid consolidating Conston and their failure to disclose relevant information after the publication of the 199110-K, that C & L knowingly and substantially participated in the fraud. Therefore, the motion to dismiss should not be granted. Merely because C & L did not publish the 1991 10-K does not mean that they could not know of the fraud and actively aid in perpetuating it through the other enumerated activities. V. DELTEC ASSET MANAGEMENT Plaintiffs have not asserted a § 10(b) or Rule 10b-5 allegation against Defendant Deltec, but instead have alleged both an aiding and abetting violation, as well as § 12 violations, against Deltec. Deltec, in its objection to the Magistrate Judge’s Report and Recommendation, requests that Count I of the Complaint be dismissed insofar as it seeks to impose primary liability against Deltec for § 10(b) and Rule 10b-5 violations. As Plaintiffs do not object to this request, and as no allegations of a primary violation against Deltec are made in the Complaint, the part of Count I that alleges a primary violation against Deltec is DISMISSED. A. Aiding and Abetting The Magistrate Judge found that Plaintiffs had pled sufficient evidence of knowledge on the part of Deltec to prevent the claim for aiding and abetting from being dismissed. Specifically, the Complaint alleges that Deltec knowingly received unauthorized shares of stock from Cascade, which it then sold on the open market. Deltec argues that Plaintiffs must plead with specificity “conscious intent” on the part of Deltec that it was participating in the fraud in order to survive a motion to dismiss, and that the mere ignoring of “red flags” is not sufficient activity to reach the high degree of knowledge required. However, Plaintiffs’ Complaint specifically alleges that Deltec knew that a large number of unauthorized shares had been issued by Cascade, knew that these shares were not transferable, yet sold those shares on the open market, which aided and abetted the overall scheme. (Compl. ¶ 224, 226). If true, these allegations establish the sufficient degree of knowledge on the part of Deltec, and at this stage in the proceedings, dismissing this count is unwarranted. B. Section 12 Plaintiffs have also sued Deltec under §§ 12(1) and 12(2) of the Securities Act of 1933. The Magistrate Judge recommended that these counts should not be dismissed, as Deltec sold securities of value to some of the class plaintiffs through an initial offering which was accompanied by a prospectus that contained misstatements or omissions. Deltec objects, arguing that the Complaint fails to indicate that any plaintiff bought shares of Cascade from Deltec, that no prospectus was issued, and that Deltec did not sell these shares through an initial offering. Plaintiffs adequately allege in their Complaint that one or more of the class plaintiffs may have bought shares from Deltec. (See Compl. ¶ 403). This is sufficient to meet this element of a § 12(1) cause of action. Plaintiffs also have clearly alleged in their Complaint that Deltec’s January 4,1990, prospectus failed to allege that the shares it was offering were unauthorized. (Compl. ¶ 409). If true, these allegations meet the requirements of a § 12(2) violation. Deltec further argues that Plaintiffs must allege reliance by the purchasing plaintiff on the prospectus. However, in Currie v. Cayman Resources Corp., 835 F.2d 780, 782 (11th Cir.1988), the Eleventh Circuit held that “ ‘plaintiffs need not prove that they relied in any way on the alleged misrepresentations or omissions.’ ” (quoting Hill York Corp. v. American Int’l Franchises, Inc., 448 F.2d 680, 695 (5th Cir.1971)). Consequently, Plaintiffs need not show reliance on the actual prospectus but must only show that Deltec’s prospectus contained misrepresentations or omitted material facts in order for Plaintiffs to maintain a § 12(2) cause of action. As Plaintiffs have alleged that there were inaccuracies in the prospectus, this count should not be dismissed on the grounds of inadequate allegations of reliance. Deltec also argues that § 12(2) only applies to sellers of stocks during an initial offering. Plaintiffs have alleged that Deltec’s sales through the January 4, 1990, prospectus were initial offerings to the public and that Deltec sold unregistered shares received from Cascade directly to Plaintiffs. These allegations, if true, are sufficient to allege that the shares at issue were purchased by Plaintiffs from Deltec through an initial offering. Finally, Deltec argues that Plaintiffs have not alleged fraud with the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure. However, the Complaint does specify the fraud Deltec allegedly engaged in through the selling of unauthorized shares and the failure to mention this in their prospectus. The Court finds that this is sufficient specificity under Rule 9(b) to withstand a motion to dismiss at this stage of the proceedings. As Plaintiffs have adequately alleged all elements of § 12 violations, this count of the Complaint shall not be dismissed. VI. RAYMOND JAMES The Magistrate Judge recommended that the counts for primary and secondary violations of § 10(b) and Rule 10b-5 against Raymond James, the securities broker, should not be dismissed. Plaintiffs have alleged that Raymond James issued misleading reports about the number of stores Cascade operated and about the strength and prospects of the corporation. A. Primary violations Raymond James argues that because the omissions in their reports were not materia], and because Plaintiffs have failed to allege the requisite scienter, the count for primary violations of the securities laws should be dismissed. First, Raymond James asserts that its omissions were not material because the omitted facts were part of the “total mix” of information available to the public. Whether the omissions were material or were part of the “total mix” of information in the market is not a decision to be made at the motion to dismiss stage, and is better reserved for, as the Magistrate Judge found, a motion for summary judgment. Second, as the Magistrate Judge found, the Complaint adequately alleges the “severe recklessness” required in a § 10(b) count. See McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir.1989) (“the rule of this Circuit is that a showing of ‘severe recklessness’ satisfies the scienter requirement”). Plaintiffs state that Raymond James represented that it had undertaken an extensive independent investigation of Cascade prior to recommending the company’s securities, and that it had continuously reassessed its evaluation of the company. (Compl. ¶¶ 158, 159.) B. Aiding and Abetting While the Magistrate Judge did not extensively review the aiding and abetting count as it applied to Raymond James, the Court finds that he was correct in his recommendation that the count should not be dismissed. Plaintiffs have adequately alleged sufficient activity on the part of Raymond James to indicate the requisite scienter necessary to maintain an aiding and abetting allegation. Specifically, Raymond James engaged in touting stock in a company which it said it had researched, when, in fact, that company was in severe financial trouble and had issued a fraudulent 10-K. At the motion to dismiss stage, it is premature to dismiss this count because, if true, the Plaintiffs may prevail. VII. STATE LAW CLAIMS While the pendent state law claims for fraud and negligent misrepresentation may be dismissed against Defendants K & S and GY & S, because the federal cause of action against these defendants are no longer viable, the pendent state law claims should also be dismissed, as well as the similar counts against all Defendants, for failure to state a claim upon which relief can be granted. A. Fraud As the Magistrate Judge correctly determined, one of the elements of common law fraud in Florida is reliance by Plaintiffs on the false representations of the Defendants. Johnson v. Davis, 480 So.2d 625, 627 (Fla.1985). However, Florida does not recognize a “fraud on the market” theory to establish reliance, but requires allegations of actual reliance. Sahlen, 773 F.Supp. at 371. As in Sahlen, the Complaint here fails to allege actual reliance by Plaintiffs on specific representations made by Defendants, but instead only alleges the more general reliance on the market as a whole, which is effected by the false representations of Defendants. Accordingly, the count for fraud as to all Defendants must be dismissed. B. Negligent Misrepresentation Actual reliance is also one of the elements for a negligent misrepresentation cause of action. See Atlantic Nat. Bank of Florida v. Vest, 480 So.2d 1328 (Fla. 2nd Dist.Ct.App.1985), rev. denied, 491 So.2d 281 (Fla.1986). As the Magistrate Judge determined, no allegation in the Complaint states that any Defendant made its negligent misrepresentation with the intent that Plaintiffs would rely on that representation in purchasing Cascade stock. Therefore, the negligent misrepresentation count against all Defendants must also be dismissed. VIII. CONCLUSION Accordingly, it is hereby ORDERED and ADJUDGED that: 1. Defendant Deltec Securities Corporation’s Motion to Dismiss, filed September 16, 1992 (D.E. # 128), is DENIED in part and GRANTED in part. Count I of the Consolidated Amended Class Action Complaint is DISMISSED only insofar as it seeks to impose primary liability against Deltec for § 10(b) and Rule 10b-5 violations. Count V (Negligent Misrepresentation) and Count VII (Fraud) of the Consolidated Amended Class Action Complaint are DISMISSED as to Defendant Deltec Securities Corporation. 2. Defendant Gunster, Yoakley & Stewart, P.A.’s Motion to Dismiss is GRANTED. Accordingly, Counts I, V and VII of the Consolidated Amended Class Action Complaint are DISMISSED as to Defendant Gunster, Yoakley & Stewart, P.A. 3. Defendants Aaron Karp, Howard Sommers, and Karp and Sommers’s Motion to Dismiss is GRANTED. Accordingly, Counts I, II, III, IV, V, and VII of the Consolidated Amended Class Action Complaint are DISMISSED as to Defendants Aaron Karp, Howard Sommers, and Karp and Sommers. 4. Defendant Coopers & Lybrand’s Motion to Dismiss is DENIED in part and GRANTED in part. Only Count V (Negligent Misrepresentation) and Count VII (Fraud) of the Complaint are DISMISSED as to Defendant Coopers & Lybrand. 5. Defendant Raymond James’s Motion to Dismiss is DENIED in part and GRANTED in part. Only Count V (Negligent Misrepresentation) and Count VII (Fraud) of the Consolidated Amended Class Action Complaint are DISMISSED as to Defendant Raymond James. DONE and ORDERED. REPORT AND RECOMMENDATION GARBER, United States Magistrate Judge. THIS CAUSE is before the Court pursuant to an Order of Reference entered in this cause on October 30, 1991. The following Report and Recommendation is submitted on the defendants’, Karp, Sommers and Karp & Sommers (collectively “K & S”); Raymond James Financial, Inc., and Raymond James & Associates, Inc. (collectively “Raymond James”); Deltec Asset Management Corporation (“Deltec”); Gunster, Yoakley & Stewart, P.A. (“GY & S") and Coopers & Lybrand (“C & L”) (collectively “defendants”), motions to dismiss the Consolidated Amended Class Action Complaint. BACKGROUND On October 18, 1991, plaintiff Howard Rosen filed a complaint on behalf of purchasers of common stock in Cascade International, Inc. (“Cascade”) alleging that Cascade, its officers, directors, independent auditors, and others violated provisions of the Securities Exchange Act of 1934 by misrepresenting revenues, profits, earnings and other aspects of Cascade’s operations. On April 22, 1992, the Court consolidated Rosen’s action with twenty-seven other plaintiffs (“plaintiffs”) in sixteen related cases. On July 7, 1992, the plaintiffs filed a Consolidated Amended Class Action Complaint (“Complaint”) on behalf of all persons who purchased common stock of Cascade between August 11, 1989 and November 19, 1991 (the “Class Period”) against the defendants. Cascade became a public company in 1985 when Incendy merged Jean Cosmetics with Cascade Importers, Inc., a shell corporation. In December 1985, Cascade acquired six fashion boutique stores and in February 1989 acquired two store chains, Diana and Allison, in which Cascade planned to sell its cosmetics. Cascade’s 1989 10-K described Cascade as comprised of three divisions: cosmetics, fashion boutiques and women’s apparel stores. The cosmetic division manufactured and sold high priced cosmetics and skin care products and imported designer fragrances which were sold under the name of Jean Cosmetics at Cascade’s cosmetic counters and its other retail outlets. The 1989 10-K stated that Jean Cosmetics operated approximately 188 cosmetic counters in women’s apparel stores, 11 of its own leased cosmetic sales outlets, and operated 23 fashion boutiques which sold women’s apparel, proprietary cosmetics, skin care, beauty aids and imported fragrances. In August 1990 Cascade acquired a controlling interest in Conston, a retailer of women’s clothing that had filed for bankruptcy relief. Cascade reported record revenues and substantial financial growth in its SEC filings, press releases and other public documents as its stock sales continued to increase. On September 27, 1991, Cascade filed its 1991 10-K which reflected its financial growth. In August 1991 the SEC began to investigate Cascade and its subsidiaries. In September 1991 the investment community began to question Cascade’s reported profits. On October 1, 1991 the Overprices Stock Service (“OSS”) issued a report on Cascade reporting on the difficulty of obtaining information from Cascade, that Cascade’s auditor had been fined and put on probation for incompetence, that Cascade and Conston differed on whether Jean Cosmetics were being placed into Conston stores, that Cascade did not consolidate Conston’s financial statement despite its majority interest, and that store formats were inconsistent with actual store checks. On November 20, 1991 Cascade announced that its financial statements for the fiscal year ending June 30, 1991 may not be accurate; it was not able to locate Incendy, and that Karp was elected as temporary chairman of the board. On December 16, 1991 Cascade filed for Chapter 11 bankruptcy relief. On January 8, 1992 Karp announced to Cascade shareholders that for at least the last two years Cascade’s audited and unaudited financial statements did not correctly reflect its revenues and earnings; large numbers of unauthorized shares of common stock were issued in violation of federal security laws; there were fewer retail outlets and cosmetic counters than represented; the cosmetics did not generate the represented income and there were just 70 retail clothing outlets. A January 1992 SEC filing revealed that on November 15, 1991 Incendy delivered to Karp 8,337,036 shares of Cascade stock for K & S to resolve Cascade’s problems; that Cascade had assets of $8 million and liabilities of $14.5 million, in contrast to the figures in the 1991 10-K which reported assets of $65.9 million and liabilities of $17.3 million, and that it had $6.8 million more outstanding shares of common stock than what was reported. According to a bankruptcy examiner’s report and recommendations, the entire Jean Cosmetic division was nonexistent; the losses of the apparel division and Jean Cosmetics were known to Cascade’s management as early as 1989 and Fran’s, Swim ’N Sport and J.B. Boutiques were all operating at a loss. The examiner recommended the removal of Sirmans and Karp which was affirmed by United States Bankruptcy Judge Robert A. Mark. The plaintiffs allege that throughout the Class Period that materially misleading statements or omissions were made by the defendants. It is alleged that C & L, auditors of Fran’s and Conston, in auditing Fran’s made false statements or omissions, furthered the fraud by opining that Conston’s financial statement should not be consolidated with Cascades’ and knew that Cascade was incapable of infusing capital into both of these subsidiaries which needed substantial capital to survive. Raymond James, a securities broker, is alleged to have made misrepresentations in selling Cascade’s stock. Deltec, an underwriter, is alleged to have acquired 1.2 million shares of unregistered common stock which it sold to the public. K & S, Cascade’s securities counsel, is alleged to have made misrepresentations in Cascade’s registration statements,, the January 4, 1990 Prospectus and Form 10-Ks. GY & S, Cascade’s counsel, is alleged to have acted as Cascade’s “hired gun” in fending off those who raised questions concerning Cascade. The Complaint alleges violations by the defendants of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5 of the Securities & Exchange Commission, 17 C.F.R. § 240.10b-5 and common law claims for fraud and negligent misrepresentation. The plaintiffs have also sued K & S under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq. and assert violations by Deltec of the Securities Act of 1933, §§ 12(1) and 12(2), 15 U.S.C. § 771(1), (2). The defendants have moved to dismiss the various counts of the Complaint. DISCUSSION I. STANDARD OF REVIEW For purposes of a motion to dismiss, “all facts alleged must be accepted as true.” Eddy v. City of Miami, 715 F.Supp. 1553, 1555 (S.D.Fla.1989); see In re Sahlen & Assoc., Inc., 773 F.Supp. 342, 351 (S.D.Fla.1991). It has long been the rule that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957). The motions to dismiss will be evaluated accordingly. II. SECTION 10(b) SECURITIES A. Primary Violations The elements of a cause of action under 10(b) or Rule 10b-5 require that the plaintiff allege: “(1) a misstatement or omission, (2) of a material fact, (3) made with scienter, (4) on which the plaintiff relied, (5) that proximately caused his injury.” Ross v. Bank South N.A., 885 F.2d 723, 728 (11th Cir.1989), cert. den., 495 U.S. 905, 110 S.Ct. 1924, 109 L.Ed.2d 287 (1990); see McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir.1989). The allegations for an action under 10(b) or 10b-5 must meet the specificity requirement under Rule 9(b) which provides that allegations of fraud must be pled with particularity. Fed.R.Civ.P. Rule 9(b); Sahlen, 773 F.Supp. at 352. Nonetheless, Rule 9(b)’s requirements “must not abrogate the concept of notice pleading” under Rule 8 of the Federal Rules of Civil Procedure. Durham v. Business Mgmt. Assoc., 847 F.2d 1505, 1511 (11th Cir.1988) (citing Friedlander v. Nims, 755 F.2d 810, 813 n. 3 (11th Cir.1985)). In sum, “while mere conclusory allegations of fraud will not satisfy Rule 9(b), allegations which provide a reasonable delineation of the underlying acts and transactions allegedly constituting the fraud are sufficient.” Sahlen, 773 F.Supp. at 352. The defendants contend the Complaint should be dismissed for failure to allege each defendants’ role in the fraud with the requisite specificity. The Court concludes that the Complaint adequately sets forth each defendants’ role in the alleged fraud to satisfy Rule 9(b). 1. False Representations Allegations of false representations of a material fact satisfy Rule 9(b) if the complaint alleges the statements or omissions made; the time and place of each statement or omission and the content and manner in which the plaintiffs were misled. Tapken v. Brown, No. 90-691-CIV-MARCUS, 1992 WL 178984 at *14 (S.D.Fla.1992, March 13, 1992). a. Duty to Disclose Defendants, K & S, GY & S, C & L and Deltec claim that any alleged omissions are not actionable as they did not have a duty to disclose. An “omission to state a material fact is proscribed only when the defendant has a duty to disclose.” Rudolph v. Arthur Anderson & Co., 800 F.2d 1040, 1043 (11th Cir.1986), cert. den., 480 U.S. 946, 107 S.Ct. 1604, 94 L.Ed.2d 790 (1987). Factors to consider in determining whether a duty to disclose exists depends upon the circumstances of each case. Woodward v. Metro Bank, 522 F.2d 84, 97 n. 28 (5th Cir.1975). Some factors to consider are ‘the relationship between the plaintiff and defendant, the parties’ relative access to the information to be disclosed, the benefit derived by the defendant from the purchase or sale, defendant’s awareness of plaintiffs reliance on defendant in making its investment decision, and defendant’s role in initiating the purchase or sale.’ Rudolph, supra, (quoting First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977), cert. den., 435 U.S. 952, 98 S.Ct. 1580, 55 L.Ed.2d 802 (1978)). In addition, a duty to disclose may be created once a disclosure is made. Id. Other factors indicating a duty to disclose are the defendant’s knowledge; the significance of the misstatement; whether the omission was intentional and the extent of the defendant’s participation in the fraud. Id. (citation omitted); see Tapken, supra, at *14; see also Chiarella v. United States, 445 U.S. 222, 230, 100 S.Ct. 1108, 1115-16, 63 L.Ed.2d 348 (1980). As to GY & S and K & S (the “law firms”), the Court concludes no duty to disclose exists. The Complaint alleges that K & S omitted to state material facts, ignored “red flags” and failed to investigate to determine the accuracy of Cascade’s public filings. K & S prepared various public reports, registration statements, prospectuses and Form 10-Ks which the plaintiffs claim K & S knew contained misrepresentations or recklessly disregarded the misrepresentations in these filings. The plaintiffs identify numerous “red flags” ignored by K & S such as Cascade’s failure to supply K & S with requested information about its finances, that K & S questioned the use of Cascade’s auditor and failed to inquire into the cosmetic counter lease arrangements. Further, the plaintiffs argue that K & S assumed a duty of full disclosure due to their participation in drafting public documents and shareholder letters. Similarly, the Complaint alleges that GY & S ignored “red flags” and failed to inquire as to the truth of Cascade’s financial statements. It is also alleged that both law firms had significant economic incentives not to inquire or disclose the fraud. While this Circuit has not squarely addressed whether an attorney sued as a primary violator of federal security laws has a duty to disclose, see Agapitos v. PCM Inv. Co., 809 F.Supp. 939, 946 (M.D.Ga.1992) (addressing attorney’s duty to disclose for aiding and abetting securities claim), other circuits have done so. A failure to disclose material information constitutes a securities fraud under § 10(b) only if there is a duty to disclose. Fortson v. Winstead, McGuire, Sechrest & Minick, 961 F.2d 469, 472 (4th Cir.1992) (citing Chiarella, 445 U.S. at 228, 100 S.Ct. at 1114 (1980)). The Fourth Circuit refused to hold a lawyer liable under § 10(b) for failing to disclose information about a client absent a confidential relationship with the third party. Schatz v. Rosenberg, 943 F.2d 485, 490 (4th Cir.1991) (citing Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 496 (7th Cir.1986)), cert. den.,-U.S. --, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992). The Fifth Circuit has held that an underwriter’s lawyers did not owe bondholders a duty to disclose inaccuracies in an offering statement despite its duty of due diligence to investigate the representations in the offering statement. Abell v. Potomac Ins. Co., 858 F.2d 1104, 1124-25 (5th Cir.1988) (stating the law generally recognizes suits against lawyers for their legal opinions “only if the non-client plaintiff can prove that the attorney prepared specific legal documents that represent explicitly the legal opinion of the attorney preparing them for the benefit of the plaintiff’), vacated on other grounds, 492 U.S. 914, 109 S.Ct. 3236, 106 L.Ed.2d 584 (1989). In Schatz, the plaintiffs maintained that the defendant’s lawyers were liable for securities fraud since they remained silent even though they knew its client’s financial statements and an update letter relied upon by the plaintiffs’ were false and that the lawyers had prepared draft closing documents containing misrepresentations. The court noted that the lawyers were not alleged to have made inaccurate legal representations and were sued for not “tattl[ing] on their client for misrepresenting his financial condition.” Schatz, 943 F.2d at 491. In adopting the rule enunciated by the Fifth and Seventh Circuits, the court held “that unless a relationship of ‘trust and confidence’ exists between a lawyer and a third party, the federal securities laws do not impose on a lawyer a duty to disclose information to a third party.” Id. at 492. This Court finds the reasoning of the Fourth, Fifth and Seventh Circuits as to attorney liability for failure to disclose material information persuasive. Similar to Schatz, the plaintiffs in this cause argue that the law firms are liable for not blowing the whistle on their client and for not making further inquiry once aware of the “red flags.” However, there are no allegations that the plaintiffs had a fiduciary relationship with the law firms, that the law firms actively solicited or prepared solicitation documents or issued any misleading legal opinions as to Cascade’s financial condition. The allegations in this cause are distinguished from those alleged in In re American Continental Corp./Lincoln S & L Secur. Litigation, 794 F.Supp. 1424 (D.Ariz.1992) where the court found material issues of fact whether the bank’s law firm knew of the fraud and despite such knowledge provided assistance in hiding loan files from regulators, offered detailed advice on setting up a bond sales program, participated in lobbying for investments, made political contributions on its client’s behalf, reviewed SEC statements and prospectuses and lent its name to a misleading legal opinion for inclusion in the bond registration statement. There are simply no allegations in this matter suggesting such conduct by the law firms; rather, the basis for their liability is the failure to “tattle on their client” which is not actionable. C & L also contends that it did not have a duty to disclose or “blow the whistle” on Cascade for the alleged misrepresentations contained within the 1991 10-K. The plaintiffs allege that C & L in auditing Fran’s and Conston ignored numerous “red flags”, such as the absence of Jean Cosmetics at Fran’s during the June 1991 audit of Fran’s, the losses suffered by Fran’s and Conston, the inability of Cascade to make the financial infusion for Fran’s and Conston and it had reviewed the 1991 10-K filed by Cascade depicting 126 Fran’s stores which C & L knew was false. In Rudolph, an accounting firm prepared audit reports and other financial statements for its client which were included in a memo offering partnership investment units for sale. Subsequently, its client devised a scheme to defraud the original purpose of the partnership investment and to the divert the funds. The plaintiffs alleged that during this period, the accountants were performing substantial non-auditing services and knew or failed to learn of its clients diversion. The court stated that: An investor might reasonably assume that an accounting firm would not permit inclusion of an audit report it prepared in a placement memo for an offering the firm knew to be fraudulent, and that such