Full opinion text
MEMORANDUM AND ORDER EARL E. O’CONNOR, District Judge. This matter is before the court on numerous motions for summary judgment. The court has considered the voluminous material submitted by all parties and is now prepared to rule. For convenience, the court provides an index of the pending matters. I.Factual Background. 1541 A. TBG’s Preacquisition Due Diligence Investigation. 1542 1. TBG’s Due Diligence Team. 1542 2. Price Waterhouse’s “Businessman’s Review”. 1542 3. Recognition of Past Revenue. 1545 4. Projections for Future Performance . 1546 a. Sales and Revenue Projections. 1546 b. Cash Flow Projections. 1546 5. The Completion Status of CHSI Products. 1547 6. Ernst and Whinney’s Role. 1548 a. Ernst’s Knowledge of CHSI Affairs. 1548 b. Ernst’s Audit of CHSI’s Financials. 1549 c. Ernst’s Comfort Letter. 1549 7. TBG’s Knowledge of CHSI’s Accounting Methods. 1550 8. TBG’s Analysis of CHSI’s Market Strength. 1553 9. TBG’s Review of CHSI’s Management. 1554 B. TBG’s Motivation to Acquire CHSI. 1555 C. TBG’s Post-Acquisition Investigation. 1557 II. Discussion. 1557 A. Reliance Issues. 1558 B. Causation Issues. 1562 C. Reliance Required on TBG’s Claim for Negligence Against Ernst- 1564 D. Bendis and ’ Schreier’s Stock Purchase Agreements. 1565 E. TBG’s Negligent Misrepresentation Claim Against Bendis. 1567 F. Bridgmon’s Cross-Claims Against Bendis and Schreier. 1569 G. Masinton’s Claim for Contribution Against Bendis. 1569 H. Billington’s Claims Against Bendis and Schreier. 1569 III. The Choice of Law Issue. 1572 IV. Motions for Reconsideration. 1572 V. Conclusion. 1572 I.Factual Background The facts pertinent to the instant motions are as follows. This case arises out of the June 10, 1986, acquisition of Continental Healthcare Systems, Inc. (“CHSI”) by plaintiff TBG, Inc. (“TBG”). CHSI was a computer software company specializing in developing and marketing computer-based information systems for hospitals and other health care providers. TBG was one of over forty companies within the Thyssen-Bornemisza Group which employed approximately 13,-700 employees worldwide in 1985. TBG’s reported assets for fiscal 1985 were approximately $1.15 billion and group sales totalled $1.84 billion. TBG alleges that defendants Richard A. Bendis (CHSI CEO), Terrance Schreier (CHSI COO), and Ernst and Whinney (CHSI’s outside accounting firm) made material misrepresentations and omissions both: 1) during the period when TBG was making inquiries about CHSI from January 1, 1986, to June 10, 1986, the date the acquisition closed; and 2) in public filings by CHSI with the SEC immediately before the purchase (including the fiscal 1985 Form 10-K, the fiscal 1986 first quarter Form 10-Q and related financial statements), the May 20,1986, proxy statement, and defendant Ernst and Whinney’s comfort letter. TBG alleges misrepresentations and omissions concerning: 1) the status of completion of CHSI products; 2) the prospects for CHSI’s future business; 3) the terms of CHSI contracts; 4) the status of purported sales of CHSI products; 5) revenue recognized by CHSI; 6) CHSI’s financial statements; and 7) the employment status of certain CHSI officers and employees. On January 26, 1986, TBG and CHSI reached an agreement in principle for TBG to purchase CHSI at $9.00 per share, subject to the results of TBG’s due diligence review. As preconditions to the acquisition, TBG required representations and warranties from CHSI, Bendis, and Schreier concerning: the employment status of CHSI employees, the accuracy of CHSI’s financial statements, and the completion status of CHSI products. TBG also required a comfort letter from Ernst and "Whinney, CHSI’s independent accountant. TBG was not a novice investor. During the three years surrounding the acquisition of CHSI, TBG completed eight acquisitions (two of which were software companies) and conducted due diligence investigations as a part of several of those acquisitions. TBG began its due diligence investigation of CHSI in January 1986 which continued, at some level, until the deal closed June 10,1986, at a total cost for the due diligence investigation alone of $445,000. A. TBG’s Preacquisition Due Diligence Investigation 1. TBG’s Due Diligence Team TBG assembled a due diligence team consisting of over fifteen members of TBG’s corporate staff and employees of TBG’s subsidiary companies. In addition, TBG employed the following outside consultants to assist in the due diligence review and advise TBG regarding the acquisition: 1) the international accounting firm of Price Water-house; 2) the New York law firm of Cravath, Swain, and Moore (“Cravath”); 3) the national marketing consulting firm Boston Consulting Group; and 4) the management consulting firm John Arnold Executrak Systems, Inc. TBG also consulted with Sheldon Dor-enfest and Associates, a healthcare software consulting firm. TBG’s due diligence investigation was not designed to detect fraudulent misconduct by the sellers or their agents. Nonetheless, according to TBG’s expert Cyril Moscow, an experienced corporate attorney, the due diligence conducted by TBG was “within a customary range of business investigations for businesses of this type.” 2. Price Waterhouse’s “Businessman’s Review” TBG hired Price Waterhouse to conduct a special “businessman’s review” of CHSI in February 1986. The businessman’s review was not a full audit, but was intended to provide TBG with an understanding of selected components of the balances on CHSI’s October 31,, 1985, financial statements, the accounting principles used by CHSI in arriving at those balances, and any significant changes in the management or financial operations of CHSI through January 31, 1986. As a part of its review, Price Waterhouse sought information about CHSI’s financial position and the accuracy of representations by CHSI’s management. Price Waterhouse read CHSI’s financial statements and Ernst and Whinney’s corresponding reports for the fiscal year ending October 31, 1985, and the five preceding fiscal years. TBG did not conduct, or have Price Waterhouse conduct, a complete audit of CHSI’s financial statements and thus, TBG maintains, it relied on Ernst and Whinney’s audit of CHSI’s statements. Price Waterhouse summarized the findings of the businessman’s review in a written report to TBG, dated February 28, 1986. In the report, Price Waterhouse opined that Ernst and Whinney performed “sufficient field work to render an opinion in accordance with generally .accepted auditing standards.” Price Waterhouse advised TBG that CHSI’s revenue recognition policies were very aggressive and reported that CHSI’s billing cycle did not coincide with its revenue recognition practices. Price Waterhouse also advised TBG that CHSI’s aggressive revenue recognition policies led to significant unbilled receivables at year-end. As a part of the review, Price Waterhouse representatives interviewed key CHSI management officials, primarily, Richard Bendis (CEO), W. Terrance Schreier (COO), Richard Masinton (CFO), and Paul Billington (Controller) about how CHSI’s accounting policies were implemented with respect to specific contracts. Specifically, a representative of Price Waterhouse, Richard Cutler (TBG’s Senior Vice President and General Counsel), and Schreier reviewed and discussed CHSI’s significant third-party relationships and possible contingent and undisclosed liabilities. Price Waterhouse and TBG also reviewed all significant accounting principles used by CHSI to determine whether they complied with generally accepted accounting principles (“GAAP”) applied on a consistent basis. TBG and Price Waterhouse reviewed CHSI’s aggressive revenue recognition practice known as “Plant 7.” Price Waterhouse also reviewed unaudited financial data for the three months ending January 31, 1986, and discussed current financial matters with CHSI management. Eugene Gaughan and Steve Goodbarn, both of Price Waterhouse, and Ian Robertson of TBG reviewed Ernst and Whinney’s work-papers from the 1985 audit of CHSI on a page-by-page basis and met with Jim Olson and Randy Buseman of Ernst and Whinney to discuss CHSI revenue recognition policies. TBG admits that, as part of the businessman’s review, Price Waterhouse reviewed all major contracts in force at CHSI (including sales agreements, license and royalty agreements, employment contracts, leases, lines of credit, supplier and customer contracts, union contracts, and government contracts), contracts important to CHSI’s sales revenue for fiscal 1985, and contracts entered into during the first quarter of fiscal 1986. In addition, TBG’s outside counsel, Cravath, was also responsible for reviewing all contracts identified in the schedules to the Merger Agreement and CHSI’s Proxy Statement. Price Waterhouse’s objective was to understand the composition of recorded 1985 revenue and any significant implications CHSI’s contracts might have on future revenue. Price Waterhouse’s February 28, 1986, report discussed, among others, the following contracts: 1) the joint venture with the 4800 Corporation; 2) the Abbott Laboratories contract; 3) the National Medical Enterprises contract; and 4) the Lee’s Summit licensing/sales contract. TBG, however, maintains that notwithstanding Price Waterhouse’s review of all major contracts and the reference to the Lee’s Summit transaction in its report, the defendants concealed the existence of the written Lee’s Summit demonstration agreement and its negative effect on CHSI revenues. The Lee’s Summit transaction apparently involved three original agreements, all executed on July 31, 1985: 1) a computer equipment purchase and installation agreement (Deposition Exhibit 798) for $161,230; 2) a software license agreement (Deposition Exhibit 799) requiring the hospital to pay CHSI $415,000 in monthly installments of $4,940; and 3) a demonstration site agreement (Deposition Exhibit 800) requiring CHSI to pay the hospital $415,000 in monthly installments of $4,940. The software license and demonstration site agreements were amended March 19,1986, (Deposition Exhibit 819) to reflect installation delays. CHSI reported $570,000 in revenue in the third quarter of 1985 associated with the Lee’s Summit contract. The demonstration site agreement required the hospital to serve as a model hospital to demonstrate CHSI products. CHSI agreed to compensate the hospital for that right. The net effect: $415,000 in CHSI reported revenue from the software licensing agreement was offset by CHSI’s liability to the hospital under the demonstration agreement. According to TBG, Lou AJmerini of Price Waterhouse asked Masinton (CHSI CFO) whether a written demonstration agreement existed and Masinton indicated that he was not aware of any such agreement. However, when Masinton later asked Bendis and Sehreier whether a written demonstration agreement existed, Bendis gave the written agreement to Masinton. Bendis and Schreier instructed Masinton not to disclose the document to Price Waterhouse or TBG and Masinton followed their instruction. Masin-ton discussed the written demonstration site agreement with Jim Olson of Ernst & Whin-ney, but neither Masinton nor Olson revealed the document to Price Waterhouse or TBG. TBG admits that Richard Cutler (TBG’s General Counsel) knew that CHSI had arrangements with various hospitals to serve as demonstration sites for CHSI products. However, TBG maintains that no one at TBG had knowledge of the Lee’s Summit written demonstration agreement or of its effect on reported revenues. Further, TBG contends that the demonstration agreement was not adequately disclosed on CHSI’s 1985 10-K or the schedules to the Merger Agreement. Defendants argue that TBG was, or should have been aware of the demonstration agreement. As proof, defendants submit: 1) Price Waterhouse’s report; 2) the Merger Agreement Schedules; and 3) notations by Lou Almerini of Price Waterhouse on a letter from the CEO of Lee’s Summit Hospital to Bendis of CHSI. First, Price Waterhouse’s February 28, 1986, report does not support defendants’ position. Although the report noted that Lee’s Summit Hospital was to serve as a demonstration and training site, the report made no mention of any payment due to the hospital by CHSI pursuant to a written demonstration agreement. A reasonable inference from the omission of this information is that Price Waterhouse was not aware of the demonstration agreement. Defendants’ argument with regard to Merger Agreement Schedule 3.1(m)(l’l) is equally unconvincing. Schedule 3.1(m)(ll) listed the July 31, 1986, “Computer Systems Demonstration Site Agreement” with Lee’s Summit Community Hospital as a marketing agreement. Nicole Bergman of Price Water-house stated that she circled the contracts she “need[ed] to see before signing,” that she had no reason to doubt that she had reviewed all documents not circled on the schedule, and admitted that the Lee’s Summit demonstration agreement was not among those circled on her copy of Schedule 3.1(m)(ll). However, the court finds Ms. Bergman’s testimony inconclusive to prove that she, in fact, reviewed the demonstration agreement in question; she testified that she had no specific recollection of reviewing the agreement. Although the jury is free to infer from Ms. Bergman’s testimony that she did, in fact, review the Lee’s Summit demonstration agreement, the court may not do so as a matter of law. Finally, defendants argue that Almerini reviewed and initialed the Lee’s Summit demonstration agreement as a part of his review of CHSI’s contracts. Defendants point to Almerini’s notes, Deposition Exhibit 1313-A, as proof that Almerini was aware that CHSI had a rental arrangement with the Lee’s Summit Hospital. Defendants thus conclude that Almerini had knowledge of the contents of the demonstration site agreement. However, Deposition Exhibit 1315 was a letter dated January 30,1986, from the CEO of Lee’s Summit Community Hospital to Richard Bendis, discussing a one year sublease of 439 square feet from the hospital at $9.50+ per square foot (a monthly obligation of approximately $348). By contrast, the July 31, 1985, demonstration site agreement (Deposition Exhibit 800), ■ obligated CHSI to pay the hospital $4,940 per month for seven years (a total obligation of $415,-000). As a result, even if Almerini reviewed exhibit 1315, nothing about the lease arrangement put Almerini on notice of the provisions in the demonstration agreement. The rental agreement and the demonstration site agreement were apparently two separate and distinct contracts, which imposed different obligations on CHSI. The court finds that TBG has raised a genuine issue of fact about whether the Lee’s Summit demonstration agreement was disclosed prior to the CHSI acquisition. The court cannot determine, as a matter of law, that TBG knew or should have known about the demonstration agreement. Accordingly, summary judgment must be denied. Notably, TBG knew that the $620,000 from the Lee’s Summit contract would not be recognized by TBG in 1985 as revenue. The February 14, 1986, memorandum from Ian Robertson to Jim Castle informed TBG that the Lee’s Summit transaction did not qualify as a sale and a $620,000 reduction in 1985 reported revenue would be required under TBG’s conservative accounting practices. Robertson' did not state his rationale. His memorandum did not mention the demonstration agreement, but did indicate that more information was needed regarding actual delivery dates. We cannot conclude, as defendants urge, that TBG was, as a matter of law, precluded from alleging reliance because TBG restated CHSI’s numbers to exclude the Lee’s Summit revenue. TBG makes a plausible argument that, although TBG excluded the revenue in fiscal 1985, TBG expected to receive and recognize the revenue at some future time after delivery. TBG alleges that other material matters were also concealed and/or misrepresented by CHSI: 1) Schreier’s agreement that the East Texas Regional Hospital contract would be a “cashless deal” (meaning no money would change hands); 2) that Netkon and Telekon, the subject programs for several CHSI contracts, were not functional or ready for sale; 3) the financial inability of Physician’s Hospital Link (“PHL”) to pay under contracts with CHSI totalling $1.4 million; 4) the agreement that Compumed (an entity connected with the Sisters of Charity Hospitals) was not required to pay CHSI on their $1,713,194 sales contract; 5) even if payment were required, Compumed did not have the financial ability to make the payments and the Sisters of Charity Hospitals were not liable on the contract; and 6) CHSI recognized revenue from sales of Pharmakon 2000 in the first quarter of fiscal 1986 when the product was not functional or ready for sale. Having decided that summary judgment must be denied, the court need not discuss the merits of defendants’ motions on each of the above matters. Suffice it to say that the court has reviewed the record at length and, although unable to grant summary judgment, the court has serious questions about the strength of many of TBG’s claims in light of evidence that TBG knew about the matters it now alleges were misrepresented. Further, defendants have submitted significant evidence that TBG made a business decision to acquire CHSI over objections of key TBG personnel that $9 per share was too high a price and that the acquisition carried a high level of risk. 3. Recognition of Past Revenue Price Waterhouse and TBG restated CHSI’s 1984 and 1985 reported revenues and 1985 and 1986 projected revenues to comply with TBG’s more conservative revenue policies. TBG adjusted CHSI’s reported revenue downward to reverse the effects of: (1) various contracts TBG would not recognize under its more conservative revenue recognition practices (i.e., nonrecognition of contracts with Abbott Laboratories, National Medical Enterprises, and Lee’s Summit Community Hospital); 2) various “unusual” contracts which would not be treated as sales under TBG’s policies (fourth quarter 1985 contracts which were not signed until 45 days into the first quarter of 1986); 3) the effect of converting to capitalizing software development costs under FASB 86; and 4) the receivables sold to CIT. TBG urges that it relied on CHSI’s original financial statements as the “starting point” for analyzing and investigating CHSI. TBG insists that it did not restate CHSI’s revenue because it questioned the accuracy of CHSI’s financial statements or because TBG wished to rely on its own figures rather than CHSI’s, but only for purposes of better understanding CHSI’s financial picture under TBG’s more conservative accounting methods. Despite Irwin Jacobs’ statement that “everybody on Castle’s staff,” i.e., Con-over, Marovitz, Schwartz, Farnsworth, Cutler, and Haegele, agreed with Jacobs that CHSI’s accounting policies did not comply with GAAP. TBG maintains that at no time prior to acquiring CHSI did Price Water-house or anyone with TBG have “any reason to believe” that CHSI’s financial statements were not presented in accordance with GAAP. Further, TBG insists that TBG had no indication that Ernst and Whinney’s work was not performed in accordance with GAAS or that CHSI’s financials were materially false and misleading. TBG contends that CHSI’s wrestated revenue figures were presented to TBG’s Supervisory Board for use in approving the acquisition. In the Proposal to Acquire dated March 7, 1986, G.H. Thyssen, Chairman of TBG Holding, N.V. and CEO of TBG, stated: Due diligence included a detailed study of the company and its markets by S & T management and external consultants and a review of the accounts by TBG’s auditors and finance staff. Major findings were •that significant downward adjustments to sales and profits resulted from applying TBG’s accounting policies. TBG suggests that Thyssen’s comments establish that TBG’s purpose in restating CHSI’s figures was to apply TBG’s accounting policies and not to correct false or misleading information provided by CHSI. Curiously, a November 5, 1986, memorandum from G.H. Thyssen to his father Baron Thys-sen-Bornemisza, regarding the CHSI acquisition, stated that as a result of the due diligence process, “TBG did not accept CHSI’s accounts, which were restated under TBG accounting principles for Board presentation and future plans.” Deposition Exhibit 921. 4. Projections for Future Sales, Revenue, and Cash Flow a. Sales and Revenue Projections CHSI prepared sales and revenue projections for 1986 through 1990. Ernst had no involvement in preparing the CHSI sales and revenue projections; CHSI hired Arthur Anderson to prepare the model for CHSI’s financial projections. The TBG due diligence team, Boston Consulting Group, and Price Waterhouse reviewed CHSI’s projections to determine whether any adjustments were necessary. TBG contends that while TBG made suggestions and modifications to CHSI’s projections, TBG relied on the underlying data provided by CHSI, including the representations as to the status of completion of Phar-makon 2000. G.H. Thyssen (TBG CEO) testified in his deposition that he believed that CHSI was capable of achieving the restated projections contained in the Proposal to Acquire. Thyssen contends he held this belief notwithstanding the two-page letter from Paul Billington (CHSI’s Controller) to Burton Schwartz (CFO of BRS) dated April 23, 1986. The letter informed TBG that CHSI’s actual financial results for the first months of fiscal 1986 had fallen short of projected forecasts. Prior to the acquisition, Billington again suggested TBG revise the projections for CHSI to reflect the discrepancies between TBG’s projected figures and actual performance for the first seven months of fiscal 1986. However, Schwartz and Farns-worth of TBG did not feel revision was necessary. b. Cash Flow Projections Price Waterhouse and TBG reviewed CHSI’s existing cash flow and cash flow projections for fiscal 1986 through 1990. As a result, TBG knew that CHSI was deferring payment of bills and that CHSI’s cash flow was barely adequate. The Proposal to Acquire forecasted a $4.5 million cash shortfall for CHSI for the period from May 1, 1986, through November 30,1986. Paul Billington (CHSI Controller) estimated CHSI’s revised cash flow forecast for the first part of fiscal 1986 had increased by $300,000 to a negative $4.8 million. TBG was aware of this additional cash flow shortfall because TBG monitored CHSI’s cash position and maintained regular contact with Billington regarding the cash situation between March 1986 and the June 10,1986, acquisition. A TBG interoffice memorandum from Jack Haegele to Jim Castle, dated May 13, 1986, recognized a seven-month negative cash flow of between $4.0 and $4.8 million as compared to the $3.3 million shortfall projected in the acquisition proposal. The bulk of CHSI’s revenues were generated by a relatively small number of significant contracts, i.e., Abbott, NME, CIT Corporation, CHMS, Lee’s Summit, Medical Center of Tyler, Texas, and 4800 Corporation. Price Waterhouse believed that CHSI’s tight cash flow was directly tied to this phenomenon and advised TBG that without the revenue from CHSI’s seven key contracts, CHSI would not have shown a gross profit in 1985. In addition, Price Water-house advised TBG that CHSI’s increasing accounts receivable and aggressive accounting policies were to blame for CHSI’s stretched financial position. Significantly, TBG did not review CHSI’s actual financial results for any period after October 31, 1985. TBG did not adjust projections for CHSI’s performance in light of CHSI’s actual performance for the period from November 1, 1985, through June 10, 1986. 5. The Completion Status of CHSI Products Joseph Paulsen, Vice President of Research and Design for BRS, a TBG subsidiary, conducted a two-day technical review of CHSI software products. Paulsen reviewed CHSI’s Pharmakon and Matkon systems and prepared a software evaluation report detailing the scope of his review and summarizing his findings and compiled a list of projected completion dates. Paulsen’s report stated, “I made no attempt to evaluate (either within a product or across product lines): — the completeness or adequacy of product function.” Nonetheless, G.H. Thyssen testified that he had been told and believed that TBG had evaluated the completeness and adequacy of the product function of CHSI’s software products prior to the acquisition. Thyssen also stated that such an evaluation would have been a very important factor in the acquisition. Paulsen’s evaluation dealt primarily with the technical organization of CHSI’s software products, rather than the completeness of product function. Paulsen met with Bendis (CEO), Schreier (COO), Masinton (CFO), and George Bridgmon (CHSI’s Vice President of Technical Services) to discuss CHSI software products. Paulsen and Conover viewed a demonstration on the Pharmakon 2000 system. However, CHSI advised Paulsen that Pharmakon 2000 had not been shipped or installed at an Alpha test site as of January 31,1986, would not be ready for Alpha testing until June 1986, and would not reach the PC/AT version until November 1986. Paulsen also knew that the Fikon and Surgikon systems would not be in alpha version until July 1986. TBG argues, however, that Marovitz (President of BRS, a TBG Subsidiary) was told by CHSI employees prior to the CHSI acquisition that Pharmakon 2000 had been designed, delivered, installed, and was actually in operation at a customer’s site. Marovitz also contends that Bendis and Schreier repeatedly told him that Pharmakon 2000 had passed quality control and was basically “done.” Castle (President of TBG’s Systems and Technology Strategic Unit (“STSU”)) was also told by Schreier that Pharmakon 2000 was on schedule and would be delivered in May 1986. According to Marovitz and Castle, TBG relied on the statements of CHSI employees regarding the completion status of the Pharmakon 2000 system. In addition, George Bridgmon (then CHSI’s Vice President of Technical Services) testified that he was instructed by Bendis and Schreier to misrepresent the status of completion of Pharmakon 2000 to TBG, including misleading Paulsen and TBG into believing that the programming on Pharma-kon 2000 was basically completed when, according to Kim Wineland (manager of product development for CHSI), CHSI was experiencing serious difficulties with the development of Pharmakon 2000 in the Spring of 1986. TBG’s expert Lawrence Pawola opined that, as of July 1986, Pharmakon 2000 had only the most basic capabilities and would satisfy only the least sophisticated hospital pharmacy. The first customer installation of Pharmakon 2000 occurred in the Spring of 1987. Despite numerous detailed discussions between Marovitz and Bridgmon, Bridgmon did not make any representations to Marovitz regarding the completion status of Pharma-kon 2000. Marovitz testified that Bridg-mon’s silence “made me [Marovitz] feel afraid the product wasn’t there.” Despite Marovitz’s concerns, TBG contends that it did not learn the true status of Pharmakon 2000 until after the deal closed. TBG admits it knew, prior to the acquisition, that CHSI’s announcement of the Phar-makon 2000 system had “cut off’ sales of Pharmakon 1000 because customers wanted to wait and purchase the updated version. Thus, timely delivery of Pharmakon 2000 was critical to many CHSI contracts. G.H. Thys-sen agreed to the acquisition knowing Phar-makon 1000 was a proven product, but that Pharmakon 2000 was not ready for market. Price Waterhouse advised TBG that CHSI’s Matkon, Fikon, Pharmakon 2000, and Patkon systems were not amortized during fiscal 1985 because the systems were not ready for release to customers by the October 31, 1985, fiscal year-end. Price Water-house reported: CHSI’s Fikon system was undergoing Alpha testing; development of the Patkon system had not proceeded as quickly as originally expected; and no installations of Patkon had been made at customer locations as of February 28, 1993. Price Waterhouse also noted that the three contracts to install Pharmakon and Matkon systems on IBM mainframe computers were at reduced rates because the programs still required further development. In that regard, Paulsen advised TBG that CHSI was trying to work out numerous problems encountered in extending the CHSI products to the IBM mainframe. Notably, in his October 10,1986, memorandum to G.H. Thyssen, Ian Robertson stated that TBG lacked the computer proficiency to adequately assess the completeness of CHSI’s products, given the specific timings involved. Robertson indicated that the only way TBG could have improved its technical analysis of CHSI would have been to have employed “an outside expert proficient in [the computer] field.” Robertson also noted that TBG’s analysis was complicated by trying to analyze key CHSI software at the same time that CHSI was developing the software. Robertson stated that CHSI’s deadlines appeared to have been met “so that there was no reason to assume, in the face of assurances to the contrary, that the development was not continuing to plan.” 6. Ernst and Whinney’s Role a. Ernst’s Knowledge of CHSI Affairs Defendant Ernst and Whinney (“Ernst”), outside accounting firm for CHSI, audited CHSI’s financial statements for fiscal years 1983 through 1985. Ernst & Whinney characterized CHSI as a “high risk” audit client, but believed it had “a good understanding of the Company and the management.” In connection with the TBG’s acquisition of CHSI, Ernst provided accounting and auditing services to CHSI, discussed CHSI’s merger proxy with the SEC, and responded to questions from the SEC regarding CHSI’s revenue recognition on computer software sales. TBG contends that Ernst learned important information concerning allegations of management fraud during its 1984 audit of CHSI’s financials. Buseman made the following notation in his 1984 audit workpapers, Due to the extent of errors found and our inability to rely on various supporting documentation (such as bills of lading, etc.), inconsistent explanations received from various client personnel (no one knew the whole story), lack of reliance which could be placed on confirmations (indicating no problem when there were, etc.), we expanded our testing and reviews further in order to determine if there were other sales recognition problems.... Based on these additional tests, I discovered three more instances of improper revenue recognition. Notably, TBG admits it had full access to all of Ernst and Whinney’s workpapers which, presumably, included the above statement. TBG claims that members of Ernst’s audit team for CHSI learned that John E. Moenius (then CHSI’s CFO and VP of Finance) resigned in 1984, claiming that certain members of CHSI management (namely, Bendis and Schreier) “conspired to withhold information about certain transactions to ensure that revenue from these transactions would be recognized during the fourth quarter of CHSI’s fiscal 1984 year.” Moenius also identified “other questionable transactions.” Although the record is not clear whether Jim Olson (Ernst’s partner on the CHSI account) knew about Moenius’ allegations, Olson stated the following about Moenius’ resignation: The Company [CHSI] had been forecasting a very strong third quarter, which was at that time to be used as part of a registration for a stock offering. As a result of John’s persistence on these transactions, and our conclusion which came about as a result of our timely review of their quarter operations, the results of the third quarter were actually a loss, and the offer was aborted. Olson also stated, “I think John Moenius’ loss to the Company is significant. I believe he had a clear picture of revenue recognition, and his absence will affect the internal controls of the Company.” Paul Schieber, CHSI’s Controller in 1984, resigned the week after Moenius and went to work for Ernst and Whinney’s Kansas City office. Schieber discussed the circumstances and allegations surrounding Moenius’ resignation with members of Ernst and Whinney’s audit team for the CHSI audit. - Ernst also learned during its 1985 audit of CHSI that CHSI had recognized revenue on sales of the Pharmakon 2000 product. Ernst advised CHSI that Pharmakon 2000 revenue could not be recognized because the product was not complete. Ernst reviewed the Lee’s Summit transaction in connection with services performed in March 1986, shortly before CHSI’s 1986 form 10-Q for the first quarter of 1986 was filed. In addition, Masinton consulted Olson about the demonstration agreement and its impact on revenues. TBG, therefore, contends that Ernst knew CHSI had outstanding liability related to the demonstration agreement and should have insured the agreement was disclosed to TBG prior to issuing the comfort letter. In addition, when Masinton refused to sign off on CHSI’s fiscal 1986 first quarter Form 10-Q unless CHSI addressed his concerns about the appropriateness of recognizing revenue on certain incomplete products, CHSI called in Randy Buseman of Ernst and Whin-ney to review the transactions in question. Significant issues regarding the completion status of key CHSI products, i.e., Pharmakon 2000, Telekon, Netkon, and Pharmanet, came to Buseman’s attention. Buseman prepared a memorandum summarizing his review and analysis of questionable items. Buseman noted, “[t]he Company’s main concern with revenue recognition on this contract seems to be the status of Pharmakon 2000 development — i.e. is the product substantially complete at 1/31/86 so that revenue recognition is in accordance with the Company’s policy.” The memorandum discussed issues regarding revenue recognition on CHSI sales contracts during the first quarter of 1986, including, in detail, the Lee’s Summit Demonstration Agreement. Buseman’s “second” memorandum was identical, but contained the following notation at the end, “I understand that the particulars of significance of these transactions have been or will be communicated by CHS to all parties of interest, including TBG. We give no opinion as to the revenue recognition afforded any of the above transactions.” Ernst did not disclose either version of Buseman’s memoranda to TBG or Price Waterhouse. b. Ernst’s Audit of CHSI’s Financials Ernst issued an audit opinion on January 28, 1986, certifying that CHSI’s financials had been prepared according to GAAP and audited according to GAAS. The audit opinion which was appended to CHSI’s 1985 form 10-K stated, [i]n our opinion, the financial statements referred to above present fairly the financial position of Continental Healthcare Systems, Inc. at October 31, 1985 and 1984, and the results of its operations and changes in its financial position for each of the three years in the period ended October 31, 1985, in conformity with generally accepted accounting principles consistently applied during the period,.... Price Waterhouse’s February 28, 1986, report pointed out to TBG that audited finan-cials for CHSI were not available for the first quarter of fiscal 1986. Despite knowing that audited financials would not be available, TBG proceeded with the CHSI acquisition. c. Ernst’s Comfort Letter On May 20, 1986, despite the above information, Ernst prepared and delivered an accountant’s “comfort” letter to TBG. The comfort letter stated: We have examined-the balance sheets of Continental Healthcare Systems, Inc. (the “Company”) as of October 31, 1985 and 1984 and the related statements of income, stockholders’ equity, and changes in financial position for each of the three years in the period ended October 31, 1985, included in the Proxy Statements dated May 20, 1986; our report (which contain [sic] qualifications as set forth therein) with respect thereto is also included in the Proxy Statement. ... In our opinion, the financial statements examined by us and included in the Proxy Statement comply in form in all material respects with applicable accounting requirements of the Act and the related published rules and regulations. We have not examined any financial statements of the Company [CHSI] as of any date or for any period subsequent to October 31, 1985; the purpose (and therefore the scope) of the examination was to enable us to express our opinion on the financial statements as of October 31, 1985, and for the year then ended, but not on the financial statements for any interim period within that year. Therefore, we are unable to and do not express any opinion on the unaudited condensed balance sheet as of January 31, 1986 and unaudited condensed statements of income and changes in financial position for the three-month periods ended January 31, 1986 and 1985, included in the Proxy Statement, or on the financial position, results of operation, or changes in financial position as of any date or for any period subsequent to October 31, 1985. Prior to issuing the comfort letter, Ernst: 1) read the minutes of the CHSI Board of Directors meetings for the period from February 1, 1986, to May 16, 1986 (but not any minutes for meetings from May 17, 1986, through May 20, 1986); 2) read the unaudited condensed balance sheet as of January 31, 1986, and the unaudited condensed statements of income and changes in financial position for the three-month ending January 31, 1986 and 1985; and 3) made inquiries of certain CHSI officials responsible for financial and accounting matters. Regarding those procedures, the comfort letter (with emphasis added) stated, The foregoing procedures do not constitute an examination made in accordance with generally accepted auditing standards. Also, they would not necessarily reveal matters of significance with respect to the comments in the following paragraph. Accordingly, we make no representations regarding the sufficiency of the foregoing procedures for your purposes. Nothing came to our attention as a result of the foregoing procedures, however, that caused us to believe that: (i) The unaudited condensed financial statements ..., included in the Proxy Statement, do not comply in form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder; or (ii) those unaudited condensed financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements.... Our examination of the financial statements for the periods referred to in the introductory paragraph of this letter comprised [sic] audit tests and procedures deemed necessary for the purpose of expressing an opinion on such financial statements taken as a whole. For none of the periods referred to in the preceding sentence nor any other period did we perform audit tests for the purpose of expressing an opinion on individual balances of accounts or summaries of selected transactions such as those enumerated below and, accordingly, we express no opinion thereon.... It should be understood that ... [our] procedures would not necessarily reveal any material misstatement of the amounts or percentages listed above. Further, we have addressed ourselves solely to the foregoing data as set forth in the Proxy Statement and make no representation as to the adequacy of disclosure or as to whether any material facts have been omitted. 7. TBG’s Knowledge of CHSI’s Accounting Methods TBG knew that CHSI’s revenue recognition policy permitted software revenue to be recognized upon receipt of a letter of intent to purchase if a signed contract or purchase order was received within 45 days of the close of the quarter. TBG also knew that 80% of CHSI’s software revenue was recognized upon execution of the letter of intent, with the remaining 20% of revenue recognized upon installation of the software. This practice of recognizing revenue on the “substantial completeness” of CHSI’s software was evident in Ernst and Whinney’s 1985 audit workpapers, which were made available to and examined by TBG during the preac-quisition investigation. TBG officials admit they were aware that CHSI’s revenue recognition policies were “very aggressive” prior to acquiring CHSI: Georg Heinrich Thyssertr-Bomemisza (Chairman of TBG’s Management Board) knew, after he received the due diligence reports from representatives of TBG and TBG’s consultants in the due diligence investigation, that TBG might have been overpaying by as much as $15 million dollars (almost one-half of the total $31.6 million purchase price) for CHSI’s assets. Manfred Kimmle (President of the Board of Management of TBG Holdings) testified that CHSI’s revenue recognition policies were very aggressive. Kimmle also advised G.H. Thyssen in January 1986 that CHSI’s financials were inflated (particularly with regard to revenues). Kimmle expressed his position against the CHSI acquisition at the TBG Board of Management meeting on July 3, 1986, as follows: “Company has limited substance, no track: new management, product licensed in, product development success unclear”; CHSI was a “cash trap”; the “1986 outlook [was] more than doubtful”; CHSI’s “longer-term outlook [was] questionable”; CHSI was “set-up for sale”; “Conclusion: vote against the deal. At minimum, protect TBG through price: Max. $20 min upfront, rest contingent payment ... kill deal on terms.” Ian Robertson (Vice President of Internal Audit for TBG) described CHSI’s accounting policies as “on the borderline of being generally accepted.” Robertson advised Jack Haegele (Senior Vice President of Finance for TBG) that CHSI’s revenues might be inflated because of a CHSI policy to recognize revenue if a purchase order came within 45 days. Eugene Gaughan (Partner with Price Wa-terhouse) concluded that CHSI’s revenue recognition policy was “far at the liberal side of the bell-shaped curve” of acceptable GAAP. TBG was so advised at a due diligence meeting on February 7, 1986. Lou Almerini (of Price Waterhouse) noted at the February 7, 1986, due diligence meeting, “Accounting policies. Liberal. Way toward the left under the bell-shaped curve of acceptable GAAP — hopefully under the curve, but we’re not sure.” He also noted at a presentation by Boston Consulting that CHSI was “fairly high risk acquisition;” “not as stable/reliable as CLSI;” “uncertain market potential;” “not a well established player in many markets.” Irwin Jacobs (Vice President of Operations for the TBG STSU) advised TBG staff members that CHSI’s revenue recognition policy was “off the page” and was not even under the bell-shaped curve of acceptable GAAP. Burton Schwartz (Vice President of Finance for BRS) concluded that CHSI chose “a very aggressive position for recognizing revenues.” Burton stated, “[i]t is no question that it is their intention to hype 1986 earnings to make the company’s financial results appear stronger.” Schwartz advised Castle that TBG was paying too much for CHSI. Irwin Jacobs (Vice President of Operations for TBG’s STSU) believed that “$40 million was too much to pay for a company that was projecting $17 million in sales.” In addition, TBG admits that TBG officials knew that Ernst and Whinney believed that CHSI’s revenue recognition policies were very aggressive. TBG memoranda also reveal some of the information TBG officers and staff knew about CHSI prior to the acquisition. On a January 17,1986, memorandum from Richard Cutler (TBG General Counsel) and William Bultman (TBG due diligence team member) to Manfred Kimmle (President of TBG Holdings), Kimmle made a handwritten note to G.H. Thyssen dated January 20, 1986 stating, “financials, revenue recognition, could be very inflated. Haegele/Auditors will have to thoroughly audit financials and reassess price.” In a January 21, 1986, memorandum to Cutler, Kimmle stated that he was concerned that CHSI may have been using very liberal-aggressive accounting in recognizing revenues and profits and, hence, TBG could have been offering much higher multiples (e.g., price/eamings ratio) than met the eye. During the February 7,1986 due diligence meeting, Boston Consulting advised Castle, Roepers, Conover, and Cutler that CHSI was a high risk acquisition because it was a relatively small company in a dynamic market where environmental trends were threatening its business. The February 28, 1986, Price Waterhouse report concluded: Many of the company’s products had only recently been developed and have indeterminate market potential. Further, the Company’s market — the health care industry — was undergoing regulatory and environmental changes whose effects on the future marketability of CHSI’s products are indeterminable. These factors suggest a very high degree of product and market risk. Kimmle’s March 5, 1986, memorandum to Bultman discusses alternatives in structuring the CHSI deal so as to minimize TBG’s up-front risk. Bultman stated, “based on the information I have received so far, the deal has unacceptably high risk if it involves some $30 million cash up-front with minimal contingent payments.” In his March 6, 1986, memorandum to Kimmle, Jack Haegele (Senior Vice President of Finance for TBG) concluded that TBG was “paying a premium for a company, with both significant market and legal risks — a company without a proven product or a management track record. I would not recommend doing this acquisition, it is too high a risk for the amount of money.” A March 10, 1986, memorandum from Bultman to Kimmle stated, “in my view the $9.00 per share price is seriously in excess of what the actual financial value of the company is at this time.... Hence, a cash purchase at $9.00 per share places all the business risk on TBG in addition to probably paying too much for the company.” During the March 12, 1986 Pre-Board Management meeting, TBG’s corporate staff advised G.H. Thyssen that the acquisition of CHSI was too risky and too expensive. Thyssen recognized that the staff who opposed the acquisition would agree to the purchase at $10 to $15 million less than the originally agreed price. Nevertheless, Thyssen intended to recommend the acquisition to the Board because of the company’s fit into the overall strategy of Castle’s STSU. Thyssen stated that the $10 to $15 million premium would be considered a corporate risk. An October 10,1986, memorandum to G.H. Thyssen from Ian Robertson explaining why the due diligence procedures failed to disclose the differences in goodwill and opening equity for CHSI, stated, [i]t was stated and accepted that there was a high degree of risk in the acquisition, and that the forecast growth was extremely aggressive and that the price was high. Due diligence had disclosed that controls were poor and that the various legal agreements left much to be desired but there was nothing to suggest that there might be any form of deception, only a general feeling of discomfort at the corporate staff level. It was, therefore, a business decision to go ahead with the acquisition. Paul Billington (CHSI Controller) calculated the adjustments to CHSI’s balance sheet necessary for revenue recognition under TBG’s more conservative policy. Throughout the acquisition process, Billington discussed the effect of these “blackhole” revenue adjustments to CHSI’s opening balance sheet with Burton Schwartz (Vice President for a TBG subsidiary). Schwartz was aware of the CHSI contracts recorded in the first quarter of 1986 that would not meet TBG’s revenue recognition criteria. In February 1986, Billington proposed adjustments to reduce CHSI’s accounts receivable by $1,671,-000 and discussed these adjustments with Schwartz. As the amount of the necessary adjustments grew, Billington kept Schwartz apprised of the increasing adjustment amount. As the “Adjustments to the Opening Balance Sheet” section of TBG’s Proposal to Acquire CHSI reflects, TBG contemplated these adjustments in deciding to acquire CHSI: CHSI’s current policy is to recognize most revenue on contract signing (about 80%) with the remainder upon installation. If acquired by TBG, CHSI will operate under a more conservative revenue recognition policy, booking systems sales upon shipment of both hardware and software. This change will result in a one-time charge to accounts receivable of $5 million, reflecting booked orders by CHSI that TBG would not have recognized. Accompanying this change is an increase in inventory of $1.6 million for hardware previously booked but not yet shipped. In addition, an increase of $2.1 million in Deferred Installations is required to reflect an increase in contracts received, but not yet recognized. 8. CHSI’s Market Strength Boston Consulting Group (“BCG”), a marketing consulting firm, assisted TBG in reviewing the hospital automation market and the growth potential of CHSI in that market. BCG investigated and analyzed the revenue forecasts and market share for CHSI’s two key software products — Pharmakon and Matkon. A key CHSI product, Pharmakon 2000, accounted for 45% ($10.4 million) of projected 1986 sales and 42% ($12.7 million) of projected 1987 sales. TBG considered the Pharmakon 2000 product to be CHSI’s most important product. BCG also briefly investigated the market prospects for some other CHSI software products, Surgikon, Fikon, and Patkon. BCG conferred with industry experts and members of CHSI’s management and conducted interviews with representatives from both large and small hospitals, some of which were CHSI customers. Members of TBG’s corporate staff also interviewed several CHSI customers during January and February of 1986 and consulted the healthcare software consulting firm of Sheldon Doren-fest and Associates for background information about CHSI’s market situation. BCG audited CHSI’s sales for 1985 and the first quarter 1986 and CHSI’s backlog list of pending sales. BCG advised TBG that there was only a 35%-40% chance that CHSI would achieve its financial projections. William Bultman (a member of TBG’s due diligence team) stated in a memorandum to James Castle (head of TBG’s due diligence team), “the volume of 1986 sales that have been booked [by CHSI] but not yet executed is critical towards understanding TBG’s 1986 risk — management should have these numbers.” BCG raised two “red flags” in the CHSI acquisition. First, CHSI did not have an overall system for large hospitals (the single/multi-vendor issue). Second, BCG was disappointed by the small number of potential sales and customers interested in buying a CHSI product. BCG advised Castle that there was “cause for concern” about whether CHSI would meet its projections for fiscal 1986 and 1987. Castle responded that the results of the backlog audit “didn’t worry him.” Castle told BCG, “you’ve done enough.” TBG also conducted its own extensive review of CHSI’s existing backlogs and orders in order to substantiate the financial projections for CHSI. Irwin Jacobs (Vice President of Operations for the TBG STSU) reviewed CHSI’s backlog. Jacobs reviewed CHSI’s sales projections for the third and fourth quarters of 1986 on a line-item by line-item basis with Don Trammel (CHSI’s Vice President of Sales and Marketing) and Bieh-ard Masinton (CHSI’s CFO) to determine the probability that CHSI’s orders would actually close. CHSI gave Jacobs a listing of “booked” sales, i.e., signed contracts with no contingencies. That list included: 1) a $537,000 sale to Healthcare International, Inc.; 2) a $1.6 million sale to Sisters of Charity (Compumed); and 3) a $1.4 million sale to Physician’s Hospital Link. Jacobs included all three contracts in his presentation to TBG’s Supervisory Board on March 14, 1986. 9. TBG’s Review of CHSI Management Retaining the existing management team to operate CHSI was very important to TBG. TBG was a corporation with numerous subsidiaries and it did not have experienced staff managers available to step in and operate newly-acquired companies. According to G.H. Thyssen, this was especially true with regard to the CHSI acquisition because TBG was entering a new area and was counting on substantial growth from CHSI. In sum, TBG expected CHSI’s existing management to remain and run CHSI after TBG acquired the company. Accordingly, TBG argues, the cohesiveness, honesty, and integrity of CHSI’s management team were important factors in TBG’s acquisition decision. The management consulting firm of John Arnold Executrak Systems, Inc. (“Execut-rak”) was hired to: 1) demonstrate TBG’s commitment to make the merger work; 2) begin “smoking out” issues that could interfere with a successful merger; and 3) provide an independent assessment of CHSI’s management and their ability to work as a team. Various members of CHSI management met periodically, both before and after the closing, with representatives of Executrak in confidential interviews to discuss the merger and the impact of the merger on CHSI management. Executrak concluded, “the [management] group is strong as a team.... [S]olid teamwork has been established.... Individuals might be replaceable, but the group’s effective team-work and dynamism would not be easily duplicated.” Boston Consulting also evaluated CHSI in terms of its management and concluded that CHSI’s strength was “more in its management — and less in its market position.” Boston Consulting’s support for the acquisition was based, in large part, upon its conclusions about the quality of CHSI’s management. TBG believed that Masinton was CHSI’s Vice President of Finance and CFO. TBG found Masinton to be competent in that role. TBG also believed that Billington was CHSI’s Controller and was favorably impressed with Billington’s competence and abilities as Controller. Price Waterhouse concluded that Masinton and Billington were “key financial” officers and “key management” for CHSI. Bendis and Schreier made positive oral comments about the integrity of CHSI management and denied that they had any knowledge that any employee was unhappy or disgruntled or intended to leave CHSI. Moreover, Bendis and Schreier expressly represented to TBG that Masinton and Bill-ington would continue their employment as financial officers after the acquisition in the following affirmation: “To the best of the Company’s knowledge, no executive employee has any plans to terminate his employment with the Company or such Subsidiary as a result of the Merger or otherwise.” The Merger Proxy also represented that Masinton was CFO and Vice President of Finance: “All of the executive officers of Continental ■will remain in its employ after the Merger.” Schreier, as CHSI Secretary, signed a Certificate of Incumbency dated June 10, 1986, which certified, “the persons named below have been duly elected, have been duly qualified and are now officers of said corporation holding the respective offices listed beneath their names_” Richard S. Masinton was listed as Vice President — Finance, Treasurer, and Chief Financial Officer. Curiously, although both he and TBG claim that Masinton was not Vice President of Finance for CHSI on June 10, 1986, Masinton’s signature appears beside this designation on the Certificate of Incumbency. TBG maintains that Masinton was not Vice President of Finance, CFO, or Treasurer, but was Vice President of Product Development as of April 1986. Masinton stated that he changed positions to disassociate himself with CHSI’s finance department because of his concerns about the accuracy of CHSI’s reported revenues and whether CHSI provided materially misleading projections to TBG. Masinton’s change of position was reflected on a CHSI confidential internal organization chart, which was not revealed to TBG prior to the acquisition. Masinton and Billington met with Bendis and Schreier on May 30, 1986, to express their concerns about CHSI financial matters. Masinton and Billington informed Bendis and Schreier that Masinton’s exposure to CHSI products in his capacity as Vice President of Product Development had led him to the conclusion that certain products were not substantially complete. In light of that conclusion, Masinton believed that the Form 10-Q for the first quarter of 1986 and the financial projections supplied to TBG by CHSI were materially misleading. Before leaving the May 30, 1986, meeting, both Masinton and Billington either resigned or indicated an intention to resign. Masinton subsequently delivered a letter of resignation to Bendis and received a severance letter from Bendis dated June 13, 1986 (three days after the closing of the acquisition). Apparently, Billington did not resign at that time. In a letter to Billington dated July 17, 1986, Bendis, for CHSI, agreed to indemnify and hold Billington harmless for any misstatements contained in CHSI’s financial statements and projections in which Billington participated. TBG did not learn of Masinton’s true position or that Masinton and Billington had threatened to resign until after the acquisition closed, when Jay Newcom (CHSI’s corporate counsel) contacted Cutler (TBG General Counsel) and informed Cutler that Ma-sinton and Billington had threatened to resign from CHSI prior to the acquisition and that Masinton had raised questions regarding CHSI’s financial statements. In addition, Schreier was aware that F. Donald Trammell (CHSI’s Vice President of Sales and Marketing) planned to resign immediately after the closing of the acquisition. However, Schreier did not inform TBG of Trammell’s intentions. TBG also contends that Bendis misrepresented Moenius’ true reason for resigning from CHSI in that Bendis stated that Moeni-us was not able to take the pressure, when, in fact, Moenius resigned because of serious concerns about CHSI’s accounting and revenue recognition practices. Moenius allegedly believed that key CHSI management officials had conspired to withhold financial information in an effort to favorably impact CHSI’s fiscal 1984 financial picture. B. TBG’s Motivation to Acquire CHSI CHSI officers began exploring merger/acquisition prospects in 1984. TBG was first approached about purchasing CHSI by Shearson-Lehman, CHSI’s agent, in June of 1985. TBG decided not to pursue acquisition at that time. However, in December 1985, TBG’s Systems and Technologies Strategic Unit (“STSU”) decided to establish a presence in the hospital information area and Alex Roepers, TBG’s Director of Acquisitions, contacted Shearson-Lehman regarding CHSI. TBG agreed in principle to pay $9.00 per share — a total purchase price of approximately $31 million — for CHSI, a company with reported revenues in fiscal 1985 of only $14.2 million. Although TBG later restated revenues down to $9.3 million in accordance with its more conservative revenue recognition principles, TBG did not attempt to negotiate a lower purchase price and ultimately acquired CHSI at the original $9.00 per share price. TBG insists it was only interested in acquiring companies with at least a 20% per year growth rate and would not have paid $9.00 per share, $31.6 million, for CHSI unless TBG believed that CHSI was capable of growing at the 20% rate. TBG forecast CHSI sales at $23.1 million for fiscal 1986 and $31 million for fiscal 1987. TBG’s Proposal to Acquire, presented to TBG’s Supervisory Board for consideration of the CHSI acquisition, projected $55.7 million in sales in fiscal 1990 and forecast CHSI to be worth $102.2 million by the end of fiscal 1990. Boston Consulting Group advised TBG to proceed, despite concerns about “parts of the revenue forecast,” because CHSI had “strategic value as a ‘keystone’ for TBG’s medical group, and because of the quality of management.” Joseph Paulsen’s software evaluation report indicated that there were “excellent potential synergies [between CHSI and TBG] ... in terms of sharing software products.” The Proposal to Acquire noted that CHSI was “an excellent fit with the strategic model of TBG’s Systems & Techn