Full opinion text
OPINION AND ORDER WILLIAM C. CONNER, Senior District Judge: The four above-captioned actions, which have been consolidated for all pre-trial purposes and which have been scheduled for a joint trial before this court, arise out of the collapse of JWP, Inc. (“JWP”). In 1980, JWP was a relatively small company whose business consisted primarily of owning a regulated water utility in the New York metropolitan area. Between 1984 and 1992, JWP expanded rapidly by acquiring more than sixty companies, usually in the fields of mechanical and electrical engineering, construction, and information products, services and technology. By 1992, JWP was an international conglomerate with projected revenues for that year of $4.3 billion and a reported net worth, as of December 31, 1991, of over $500 million. On January 27, 1992, David Sokol became JWP’s President and Chief Operating Officer. He subsequently uncovered numerous alleged accounting irregularities at JWP and its subsidiaries. In August 1992, at Sokol’s request, JWP retained Deloitte & Touche (“D & T”) to investigate. By the time Sokol’s and D & T’s investigations were complete, JWP had restated its audited consolidated financial statements for 1990 and 1991 and had twice restated its unaudited consolidated financial statements for the first two quarters of 1992. The writeoffs wiped out JWP’s entire net worth, and the company was placed in involuntary bankruptcy in December 1993. JWP’s troubles did not go unnoticed. Between August 6, 1992, and August 14, 1992, thirteen shareholder class action complaints were filed, followed by several more in the subsequent months. On November 2, 1992, this court issued an order consolidating the nineteen shareholder actions then pending into an action captioned In Re JWP, Inc. Securities Litigation (“In Re JWP”), Lead Case No. 92 Civ. 5815. On January 15,1993, the shareholder plaintiffs filed a consolidated class action complaint, and on September 24, 1993, the court certified a class consisting of all persons who purchased JWP common stock in the open market between May 1, 1991, and October 2, 1992. The class plaintiffs assert claims against the following defendants: Andrew Dwyer, JWP’s Chief Executive Officer, Chairman of its Board of Directors and, until David Sokol was appointed, its President; Ernest Grendi, JWP’s Executive Vice-President and Chief Financial Officer; Joseph Grendi, the Chief Financial Officer and Executive Vice President of various JWP subsidiaries (collectively, “management defendants”); Innis C. O’Rourke, Jr.; Edmund S. Twining, Jr.; Craig C. Perry; and George M. Duff, Jr. (collectively, “audit committee defendants”). The class plaintiffs have brought claims against these defendants for violations of §§ 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, and for common law fraud. On September 30, 1993, a number of institutional investors (“AUSA plaintiffs”), who had purchased long-term debt securities from JWP between November 1988 and March 1992, filed an action captioned AUSA Life Insur. Co. v. Dwyer (“AUSA v. Dwyer”), No. 93 Civ. 6830, against the management defendants, the audit committee defendants and Joseph Gallo, JWP’s Treasurer. The AUSA plaintiffs assert claims against each of the defendants under §§ 10(b) and 20 and under §§ 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 711 (2), 77o. They also assert common law claims against each of the defendants for fraud, negligent misrepresentation and tortious interference with contract. Subsequently, on April 28,1994, the AUSA plaintiffs filed an action captioned AUSA Life Insur. Co. v. Ernst & Young (“AUSA v. E& Y”), No. 94 Civ. 3116, against Ernst & Young (“E & Y”), JWP’s independent auditor. In that case, the AUSA plaintiffs assert claims under § 10(b) and for common law fraud and negligent misrepresentation. In addition, plaintiffs Melvin S. Aronoff and Rina Patricia Zilberman, as executrix of the estate of Andre H. Zilberman, (collectively, “Aronoff plaintiffs”) assert claims against the management defendants and the audit committee defendants. This action, filed on March 29, 1994, and captioned Aronoff v. Dwyer, No. 94 Civ. 2201, arose out of the August 1991 sale of a company owned by Aronoff and Andre Zilberman to JWP in exchange for a mixture of cash and JWP common stock. The Aronoff plaintiffs have brought claims against each of the defendants under §§ 10(b) and 20 and for common law fraud and negligent misrepresentation. Each of the defendants has filed a motion for summary judgment. In addition, the class plaintiffs and defendants E & Y and Gallo have made motions requesting that we hold two trials rather than a single joint trial of all four of these actions. In the interests of clarity, we address each defendant’s motion in turn, indicating where necessary to which action that motion applies. The section addressing each defendant’s motion contains a statement of the facts relevant to that motion. DISCUSSION I. Motions for Summary Judgment Summary judgment should be granted when “there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). The Supreme Court has held that the entry of summary judgment is appropriate “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). The party seeking summary judgment “bears the initial responsibility of informing the district court of the basis for its motion, and identifying those [materials] which it believes demonstrate the absence of a genuine issue of material fact.” Id., at 323, 106 S.Ct. at 2553. It may discharge that burden merely by “pointing out to the district court [] that there is an absence of evidence to support the nonmoving party’s ease.” Id., at 325, 106 S.Ct. at 2554; Gallo v. Prudential Residential Servs., Ltd., 22 F.3d 1219, 1223-24 (2d Cir.1994). In order to defeat summary judgment, the nonmoving party must “go beyond the pleadings and ... designate ‘specific facts showing that there is a genuine issue for trial.’” Celotex, 477 U.S. at 324, 106 S.Ct. at 2553. No genuine issue for trial exists unless there is sufficient evidence favoring the nonmoving party for a reasonable jury to return a verdict for that party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). The burden on the nonmoving party is tempered, however, by the rule that “[t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor.” Id., at 255, 106 S.Ct. at 2513. A. E & Ys Motion E & Y served as JWP’s independent auditor from 1985 through the completion of its audit of JWP’s 1992 consolidated financial statement. Beginning in August 1992, E & Y was also involved in reviewing JWP’s consolidated financial statements for previously audited years in order to determine whether any of those consolidated financial statements should be restated. This review, instigated by Sokol and conducted by management and D & T in conjunction with E & Y, resulted in management’s decision to restate JWP’s 1990 and 1991 audited consolidated financial statements. On February 9, 1994, JWP engaged D & T, rather than E & Y, to audit its 1993 consolidated financial statement. The AUSA plaintiffs invested a total of $149 million in JWP debt securities, which they purchased through private placements between November 1988 and March 1992. The AUSA plaintiffs allege that in making those purchases, they relied directly on materially false and misleading statements that E & Y made in the unqualified audit reports that it issued on JWP’s 1987-1991 consolidated financial statements. The AUSA plaintiffs also allege that they relied directly on materially false and misleading representations that E & Y made in no-default certificates dated February 22, 1989, February 14, 1990, February 14, 1991, and February 13, 1992. They have asserted claims against E & Y under § 10(b) and for common law fraud and negligent misrepresentation. E & Y seeks summary judgment dismissing each of these claims. a. Section 10(b) In order to recover on a claim under § 10(b), the AUSA plaintiffs must prove that “in connection with the purchase or sale of securities, [E & Y], acting with scienter, made a false material representation or omitted to disclose material information and that [the AUSA plaintiffs’] reliance on [E & Y’s] actions caused [them] injury.” Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985). E & Y contends that the AUSA plaintiffs’ § 10(b) claim must be dismissed for two reasons: 1) it is barred by the applicable statute of limitations, and 2) the AUSA plaintiffs cannot demonstrate that the alleged misrepresentations were made in connection with the purchase or sale of JWP’s notes. We reject both arguments, i. Statute of Limitations In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 & n. 9, 111 S.Ct. 2773, 2782 & n. 9, 115 L.Ed.2d 321 (1991), the Supreme Court held that private actions under § 10(b) must be commenced within one year after the discovery of the facts constituting the violation and within three years after the violation occurred. The Second Circuit has held that “ ‘discovery5 ... includes constructive or inquiry notice, as well as actual notice.” Menowitz v. Brown, 991 F.2d 36, 41 (2d Cir.1993). The test is an objective one: A plaintiff in a federal securities case will be deemed to have discovered fraud ... when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud____ Moreover, when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry. Such circumstances are often analogized to “storm warnings.” Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 (2d Cir.1993) (internal citations omitted), cert. denied, — U.S. —, 114 S.Ct. 1401, 128 L.Ed.2d 74 (1994). If the plaintiff makes reasonably diligent inquiries but fails to discover the fraud, the running of the limitations period is tolled. See Westinghouse Elec. Corp. v. 21 Int’l Holdings, Inc., 821 F.Supp. 212, 222 (S.D.N.Y.1993). Issues of constructive knowledge and reasonable diligence are usually questions of fact for the jury to decide. See In re Integrated Resources Real Estate Ltd. Partnerships Securities Litigation, 815 F.Supp. 620, 638 (S.D.N.Y.1993). Summary judgment is appropriate, however, “when a court can readily impute knowledge of a probable fraud to the plaintiff from the face of the documents and facts in evidence supporting the motion for summary judgment ...,” id, and when no question of fact exists concerning the reasonable diligence of the plaintiffs inquiry. The plaintiff may not avoid her duty to inquire merely by relying on reassuring statements that management made in conjunction with the information that placed plaintiff on notice or on management’s continued failure to disclose the truth behind the allegedly misrepresented facts. See id., at 640. In September 1993, the AUSA plaintiffs and E & Y entered into a tolling agreement under which AUSA v. E & Y is deemed to have been filed on September 23, 1993. See Ex. 14, attached to Affidavit of Debra Brown Steinberg, dated Feb. 16, 1996. Therefore, the earliest date on which the AUSA plaintiffs could have been on inquiry notice and still have filed suit within the limitations period is September 23,1992. We find that sufficient storm warnings were present by August 14, 1992, to place the AUSA plaintiffs on inquiry notice of their claims. We are aware, of course, of the Second Circuit’s decision in In re Ames Dep’t Stores, Inc. Note Litigation, 991 F.2d 968 (2d Cir.1993). In that case, the Second Circuit observed that: holders of equity securities often, perhaps usually, have different concerns from those of holders of debt securities. What primarily matters to the latter is that the company meet its obligations on the debt instrument when due. In contrast, investors in equity securities generally are concerned with a company’s earning prospects since equity securities usually trade, to a greater extent, on a company’s earnings outlook. Ames, 991 F.2d at 980. Hence, the court held that the issuance of press releases and financial statements that revealed that the company was suffering losses and inventory control problems and had been hurt by a slow economy, but that did not significantly question its long-term financial viability, did not place its noteholders on inquiry notice. Moreover, the filing of one shareholder securities fraud suit did not place the noteholders on inquiry notice because the complaint was brief and did not mention allegations that were central to the noteholders’ case. We believe that this case may be distinguished from Ames because the storm warnings present in this case were much more extensive and because the information available to the public included allegations of precisely the type of accounting fraud that forms the heart of the AUSA plaintiffs’ case. Throughout the first half of 1992, JWP issued a series of statements in which it described 1992 as a rebuilding year for the company: it was getting its house in order following Sokol’s appointment and its earnings were suffering from the general economic downturn, but the future looked promising. See, e.g., Ex. 17, attached to Persehetz Aff. Then, on August 4,1992, and August 6,1992, JWP issued press releases that revealed the resignation of an outside director, the possibility that an accounting review would require the company to take as much as $60,-000,000 in after-tax writeoffs and the filing of two shareholder suits against JWP and its officers and directors. See Ex. 18, attached to Persehetz Aff.; Ex. 241, attached to Brown Steinberg Aff. In light of the Ames court’s comments about the distinction between noteholders’ and shareholders’ interests, these press releases alone did not contain sufficient information to place the AUSA plaintiffs on inquiry notice. The information that became available on August 14, 1992, compels a different conclusion, however. On that day, JWP issued a press release announcing that as a result of its outside auditors’ review, it was restating its consolidated financial statement for the first quarter of 1992 and revising its earning results from the second quarter to reflect net after-tax charges totalling $64,500,000. The August 14 press release also revealed that a total of thirteen shareholder class action suits had been filed against the company and that Ernest Grendi, JWP’s longtime Chief Financial Officer, had been replaced, although he retained his position as Executive Vice President and his seat on the Board of Directors. See Ex. 4, attached to Persehetz Aff. Furthermore, JWP’s Form 10-Q for the second quarter of 1992 was filed the same day. That document contained financial statements reflecting the writeoffs and provided more details about the lawsuits. It stated that each of the suits alleged, inter alia, that JWP, its management and its directors had violated § 10(b) by materially overstating JWP’s inventory, assets and earnings and by making false and misleading statements in various public documents, including JWP’s annual reports. It also disclosed that one of the shareholders’ complaints, DiChiara v. JWP, Inc., No. 92 Civ. 5891, named E & Y as a defendant. See Ex. 5, at 14, attached to Persehetz Aff. It is beyond dispute that the AUSA plaintiffs were very concerned with having access to accurate and up-to-date financial information on JWP in order to assess the health of their quite substantial investments. The note agreements themselves bear witness to this concern by obligating JWP promptly to transmit to the AUSA plaintiffs copies of JWP’s unaudited quarterly and audited annual financial statements, its SEC filings, all audit reports submitted to JWP by its independent accountant and, on an annual basis, no-default certificates from its independent accountant. See, e.g., Ex. 9, at ¶ 5A, attached to Perschetz Aff. Thus, allegations of accounting fraud like those contained in the class action complaints disclosed in JWP’s Form 10-Q, coupled with the announcement that JWP’s CFO had been relieved of his duties, should have greatly concerned the AUSA plaintiffs, who are extremely sophisticated investors. See Lenz v. Associated Inns & Restaurants Co. of America, 833 F.Supp. 362, 375-76 (S.D.N.Y.1993) (holding that sophistication of investor is relevant factor in determining when plaintiff placed on inquiry notice). We therefore hold that the information available as of August 14, 1992, was sufficient to place the AUSA plaintiffs on inquiry notice of the probability of widespread accounting fraud, which could call into question the long-term financial health of JWP. We are not dissuaded from our conclusion by that portion of the August 14,1992, press release that stressed that JWP’s management believed that the company had a “solid foundation to rebuild earnings,” that it was “well positioned for earnings growth as the economy recovers” and that its “financial position [was] strong.” Ex. 4, attached to Perschetz Aff. When an investor has received information that places her on inquiry notice, she is not relieved of her duty of inquiry because management contemporaneously makes reassuring statements. See Integrated Resources, 815 F.Supp. at 640. Our conclusion that the AUSA plaintiffs were on inquiry notice as of August 14,1992, does not end our discussion of this issue, however. We must now consider whether the AUSA plaintiffs made a reasonably diligent attempt to uncover the alleged fraud. The evidence presented by the AUSA plaintiffs indicates that they took some steps to investigate the situation at JWP. Their representatives attended a meeting held by Dwyer, Sokol and Gallo at the offices of JWP’s investment banker on August 21, 1992. See Ex. 28, attached to Perschetz Aff. At that meeting, Sokol and Dwyer attempted to allay the concerns of JWP’s bank lenders and the AUSA plaintiffs about JWP’s continued financial viability. Sokol and Dwyer acknowledged that JWP was facing difficulties and informed the AUSA plaintiffs that as of September 80,1992, JWP might be in default of covenants in the note agreements that limited asset sales by JWP because it was attempting to sell off non-core businesses and pay down its debt. Sokol and Dwyer did not indicate, however, that JWP would fail to make payments to the AUSA plaintiffs as they came due. See Ex. 264, attached to Brown Steinberg Aff.; Ex. 265, attached to Brown Steinberg Aff. Furthermore, as required by the note agreements, JWP issued no-default certificates to the AUSA plaintiffs on August 26, 1992. Those certificates represented that as of June 30, 1992, Gallo, JWP’s Treasurer, was not aware of any defaults under its note agreements. See, e.g., Ex. 45, attached to Affidavit of Shari L. Steinberg, dated Jan. 5, 1996. The note agreements require, inter alia, that JWP keep proper books and records. See Ex. 9, at ¶5F, attached to Perschetz Aff. Therefore, a reasonable jury could consider these no-default certificates to be an affirmative representation by JWP’s management that the allegations of accounting fraud were not true. While we recognize that an investor may not satisfy his duty of inquiry by simply sitting back and accepting the reassurances of management, see Westinghouse, 821 F.Supp. at 223, we believe that signed no-default certificates differ qualitatively from a general verbal statement by management or a press release asserting that “everything’s OK.” We acknowledge that the evidence is far from overwhelming that the AUSA plaintiffs were reasonably diligent prior to September 23, 1992, in investigating whether they could assert the claims that they have since brought against E & Y. We are mindful, however, of the distinction that the Second Circuit drew in Ames between the interests of shareholders and those of noteholders. If the amount and type of information sufficient to put noteholders and shareholders on inquiry notice differs, it follows that what constitutes reasonable diligence may differ as well. The noteholders did make some efforts to investigate the long-term financial viability of JWP. Furthermore, a reasonable jury could find it significant that the AUSA plaintiffs received no-default certificates during the crucial time period. Therefore, we decline to hold, as a matter of law, that the AUSA plaintiffs were not reasonably diligent under the circumstances. We believe that this issue presents a question of fact for the jury to decide. ii. In Connection With Next, E & Y argues that it is entitled to summary judgment on the AUSA plaintiffs’ § 10(b) claim because none of the alleged misrepresentations that it made were in connection with the purchase or sale of JWP’s notes. In this circuit, in order to satisfy the “in connection with” requirement, the alleged misrepresentation must have “direct pertinence” to the purchase or sale of securities at issue in the case. See Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 847 (2d Cir.), cert. denied, 479 U.S. 987, 107 S.Ct. 579, 93 L.Ed.2d 582 (1986) (citing Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 942 (2d Cir.), cert. denied, 469 U.S. 884, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984)); In re Leslie Fay Cos., Inc. Securities Litigation, 871 F.Supp. 686, 697 n. 10 (S.D.N.Y.1995) (Conner, J.). A more exact formulation of this standard has proven elusive. The Second Circuit has, however, taken a broad view of the “in connection with” requirement. At least in fraud-on-the-market cases, the Second Circuit has held that misrepresentations that affect the integrity of the securities market or that constitute the sort of information that a reasonable investor would consider in evaluating a company’s prospects satisfy the “in connection with” requirement. See In re Ames Dep’t Stores, Inc. Stock Litigation, 991 F.2d 953, 965-66 (2d Cir.1993); see also Leslie Fay, 871 F.Supp. at 694-97 (examining relevant precedents at length and concluding that Ames court’s formulation of “in connection with” requirement was not affected by Central Bank of Denver, N. A v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994)). The Second Circuit has also stated that: when the fraud alleged is that the plaintiff bought or sold a security in reliance on misrepresentations as to its value, made by a defendant whose position made it reasonable for the plaintiff to rely on the representation and imposed some duty on the defendant to be honest ..., then whatever problems there may be with the ease, a connection between the fraud and the transaction should not be one of them. Ames, 991 F.2d at 967. We consider first whether E & Y’s audit reports were issued in connection with the AUSA plaintiffs’ purchases of JWP’s notes. Clearly, if the AUSA plaintiffs were shareholders bringing this action under a fraud-on-the-market theory, the holding in Ames would be directly controlling and E & Y’s audit reports would clearly satisfy the “in connection with” requirement.. Those audit reports are precisely the sort of information that a reasonable investor would consider in evaluating JWP’s prospects. Of course, this case differs somewhat from Ames because the AUSA plaintiffs purchased JWP’s notes in private placements, rather than in the open market, and assert that they relied directly on E & Ys audit reports in making the decision to invest. This distinction does not further E & Ys argument, however. Indeed, the circumstances of this ease present a more, rather than less, compelling scenario for finding that the “in connection with” requirement is satisfied. In this case, not only would it have been reasonable for the AUSA plaintiffs to consider E & Ys audit reports in forming their opinion of JWP’s notes, there is some indication that they actually did so. The note agreements specifically state that JWP provided the AUSA plaintiffs with financial information from prior years, including audited year-end consolidated financial statements certified by E & Y. See, e.g., Ex. 9, at ¶ 8B, attached to Persehetz Aff. The audit reports are therefore directly related to the note purchases. E & Y contends that any alleged misrepresentations that it made in the audit reports for the years preceding each AUSA plaintiffs note purchase were not made in connection with that purchase because E & Y had no reason to know, when it issued those audit reports, that JWP would subsequently issue those notes. E & Y cites Frymire-Brinati v. KPMG Peat Marwick, 2 F.3d 183 (7th Cir.1993), and our discussion of that decision in Leslie Fay, 871 F.Supp. at 697-98, in support of its argument. In Frymire-Brinati, the Seventh Circuit held that a misrepresentation contained in an audit report satisfies the “in connection with” requirement if the accountant that issued the report knew or should have appreciated that the report would be used to purchase or sell securities. See Frymire-Brinati, 2 F.3d at 189. We have stated previously that we consider the Seventh Circuit’s “reason to know” formulation to be merely another way of stating “the principle articulated by Judge Friendly in Chemical Bank that ‘in connection with’ means that the fraud must have some direct pertinence to a securities transaction.” Leslie Fay, 871 F.Supp. at 697. This case provides us with no reason to depart from that conclusion, as we would reach the same result under the Seventh Circuit’s version of the standard. JWP financed its aggressive acquisition program through numerous private placements of debt securities between 1988 and 1992. E & Y was JWP’s independent auditor throughout that period and was indisputably aware of these activities. E & Y clearly had reason to know that JWP would disseminate its audit reports to prospective investors. Furthermore, we note that Frymire-Brinati concerned a rather atypical fraud in which a corporation sold preferred stock in a one-time private placement to corporate insiders that was specifically designed to sweeten the company’s balance sheet in order to facilitate a merger. The Second Circuit has cautioned district courts dealing with garden-variety securities fraud cases against taking too narrow a view of the “in connection with” requirement based on the reasoning of cases that dealt with atypical frauds. See Ames, 991 F.2d at 966-67. There is certainly nothing' atypical about the AUSA plaintiffs’ allegations against E & Y, which concern its knowledge of, or reckless failure to detect, accounting fraud in the form of overvalued assets, overstated earnings, understated liabilities and inadequate reserves. The only thing unusual about the allegations in this case is the sheer scale of the alleged fraud. We need not address in detail the issue of whether the no-default certificates satisfy the “in connection with” requirement. Prior to making their 1990 and 1992 note purchases, those AUSA plaintiffs who had previously purchased JWP’s notes received no-default certificates from E & Y pursuant to those earlier note agreements. Suffice it to say that those no-default certificates are clearly the sort of representations that are directly pertinent to subsequent note purchases, since the no-default certificates indicate that JWP’s financial situation, as it was evaluated by E & Y in the course of its annual audit, was sufficiently robust that JWP was not in default of its obligations under any of its loan or note agreements. Therefore, with respect to the § 10(b) claim of any AUSA plaintiff who received one or more no-default certificates under other note agreements with JWP prior to purchasing JWP’s notes in 1990 or 1992, the alleged misrepresentations in those documents satisfy the “in connection with” requirement. Finally, E & Y argues that the alleged misrepresentations contained in E & Y’s 1991 audit report cannot satisfy the “in connection with” requirement because the 1991 audit report was not publicly available until after the AUSA plaintiffs’ 1990 and 1992 note purchases were completed. E & Y is on more stable ground with this argument. Misrepresentations made after the purchase or sale in question cannot satisfy the “in connection with” requirement. See Goldman v. McMahan, Brafman, Morgan & Co., 1987 WL 12820, at * 8 (S.D.N.Y. June 18, 1987). It is undisputed that the 1991 audit report first became publicly available on March 12, 1992, and that the AUSA plaintiffs completed their 1992 note purchases on March 6, 1992. Furthermore, the AUSA plaintiffs do not allege that they relied on the 1991 audit report in making their 1992 note purchases. See AUSA/E & Y Complaint, at ¶67. We therefore grant E & Ys motion for summary judgment dismissing that portion of the AUSA plaintiffs’ § 10(b) claim that is based on allegations that the 1991 audit report was false and misleading. b. Pendent State Claims E & Y has moved, in the event that we dismiss the AUSA plaintiffs’ § 10(b) claim in its entirety, for summary judgment dismissing their pendent common law claims. Because we have not done so, this portion of E & Y’s motion is denied. c. Negligent Misrepresentation The AUSA plaintiffs have asserted a claim against E & Y for negligent misrepresentation based on E & Ys representations in the 1987-1991 unqualified audit reports and in the no-default certificates issued between 1988 and 1992. Under New York law, the elements of a claim for negligent misrepresentation are: (1) carelessness in imparting words (2) upon which others were expected to rely and (3) upon which they acted or.failed to act (4) to their damage. Furthermore, (5) the author must express the words directly, with knowledge that they will be acted upon, to one to whom the author is bound by some relation of duty or care. See The Pits, Ltd. v. American Express Bank Int'l, 911 F.Supp. 710, 720 (S.D.N.Y.1996). The relationship between the parties need not rise to the level of actual privity, but it must be sufficiently close that it approaches privity. See Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 439-40, 483 N.E.2d 110, 113-15 (1985). Whether this special relationship exists is generally a question of fact. See Cewnick Fund v. Castle Harlan, Inc., 1993 WL 88243, at * 10 (S.D.N.Y. Mar. 24, 1993); Polycast Technology Corp. v. Uniroyal, Inc., 792 F.Supp. 244, 269 (S.D.N.Y.1992). If the underlying facts are not in dispute, however, the court may decide this issue as a matter of law. In this case, there is no dispute that E & Y was not in actual privity with the AUSA plaintiffs. E & Y contends that the AUSA plaintiffs have also failed to present evidence from which a reasonable jury could conclude that their relationship approached privity. The New York Court of Appeals has set forth a three-prong test for ascertaining when this “near privity” relationship is present: (1) the defendant must have been aware that its representation would be used for a particular purpose or purposes; (2) the defendant must have intended that a known party or parties would rely thereon in furtherance of that purpose; and (3) there must have been some conduct on the part of the defendant linking it to that party or parties, which evinces the defendant’s understanding of that party or parties’ reliance. Credit Alliance, 493 N.Y.S.2d at 443, 483 N.E.2d at 118. The AUSA plaintiffs’ negligent misrepresentation claim survived E & Y’s motion to dismiss because their complaint sets forth allegations that, taken as true, satisfy this standard. See AUSA/E & Y Complaint, at ¶ 144; Ex. 39, at 14-16 (opinion and order of Brieant, J.), attached to Perschetz Aff. Nevertheless, on a motion for summary judgment following the completion of discovery, we may consider the issue anew. With respect to the no-default certificates, the AUSA plaintiffs have identified undisputed facts from which a reasonable jury could conclude that a relationship approaching privity existed between E & Y and the AUSA plaintiffs. The no-default certificates themselves state that they are for the use of the AUSA plaintiffs. See Ex. 303, attached to Brown Steinberg Aff. It is clear from the face of the certificates that their purpose is to aid the AUSA plaintiffs in determining whether JWP has complied with its obligations under the note agreements. See id. Furthermore, by naming the AUSA plaintiffs in the certificates, see id., E & Y engaged in conduct evincing its awareness that the AUSA plaintiffs would rely on the no-default certificates. The Credit Alliance standard is therefore satisfied. E & Y argues that it is nevertheless entitled to summary judgment because there is no evidence that E & Y and the AUSA plaintiffs communicated directly with one another concerning the no-default certificates. Although a plaintiff must demonstrate that the defendant’s misrepresentation was “expressed directly” to the plaintiff, the New York courts have stopped short of establishing a per se rule requiring direct contact between the parties. See, e.g., Huang v. Sentinel Gov’t Securities, 709 F.Supp. 1290, 1298 (S.D.N.Y.1989) (denying motion to dismiss negligent misrepresentation claim despite absence of allegations of direct contact). Compare Security Pacific Business Credit, Inc. v. Peat Marwick Main & Co., 79 N.Y.2d 695, 586 N.Y.S.2d 87, 92, 597 N.E.2d 1080, 1085 (1992) (granting summary judgment despite evidence of one phone call between parties). Therefore, we conclude that the absence of direct contact is not, as a matter of law, fatal. By contrast, with respect to the portion of their negligent misrepresentation claim that is based on statements that E & Y made in its unqualified audit reports, the AUSA plaintiffs have not identified specific facts that support their allegations of near privity between themselves and E & Y. Unlike the no-default certificates, the unqualified audit reports were not issued primarily for the benefit of the AUSA plaintiffs. There is no evidence that E & Y was retained to conduct the audits for the particular purpose of inducing the AUSA plaintiffs to invest in JWP’s notes or of assuring the AUSA plaintiffs that JWP was in compliance with its obligations under the note agreements. In addition, there is no evidence that E & Y ever agreed with JWP to provide audit reports for the AUSA plaintiffs’ use. Neither E & Y’s unqualified audit reports nor the engagement letters under which it conducted its annual audits mentions the AUSA plaintiffs. See Ex. 302 (1987-91 unqualified audit reports), attached to Brown Steinberg Aff.; Ex. 49 (1988-90 engagement letters), attached to Perschetz Aff. E & Y clearly conducted its audits and provided JWP with its unqualified audit reports with the understanding that the audit reports could serve any number of JWP’s business purposes, including satisfaction of the SEC’s filing requirements and distribution to JWP’s shareholders. The New York Court of Appeals has held that in the absence of indications that an audit report was prepared for a particular purpose or for the benefit of a particular plaintiff, that plaintiff may not recover on a claim for negligent misrepresentation based on alleged misstatements contained in that audit report. See Security Pacific, 586 N.Y.S.2d at 93-94, 597 N.E.2d at 1086-88; Westpac Banking Corp. v. Deschamps, 66 N.Y.2d 16, 494 N.Y.S.2d 848, 850, 484 N.E.2d 1351, 1352-53 (1985); Credit Alliance, 493 N.Y.S.2d at 444-45, 483 N.E.2d at 118-20. Furthermore, the AUSA plaintiffs present no evidence of any direct communication between the parties that could supply the otherwise absent linking conduct. Therefore, we grant E & Y’s motion for summary judgment dismissing the AUSA plaintiffs’ negligent misrepresentation claim to the extent that this claim is based on statements that E & Y made in its unqualified audit reports. Finally, E & Y moves for summary judgment dismissing the AUSA plaintiffs’ negligent misrepresentation claim on the ground that it is barred by the statute of limitations. The applicable statute of limitations for a claim of negligent misrepresentation is six years if the claim sounds in fraud. See Toto v. McMahan, Brafman, Morgan & Co., 1995 WL 46691, at *11 (S.D.N.Y. Feb. 7, 1995); Lee v. Kim, 1994 WL 586486, at *7 (S.D.N.Y. Oct. 25, 1994); Schwartz v. Michaels, 1992 WL 184527, at *80 (S.D.N.Y. July 23, 1992); Milin Pharmacy, Inc. v. Cash Register Systems, Inc., 173 A.D.2d 686, 570 N.Y.S.2d 341, 341-42 (1991). The claim accrues when the misrepresentation is made. See Toto, 1995 WL 46691, at *11; Schwartz, 1992 WL 184527, at *30. The AUSA plaintiffs’ remaining negligent misrepresentation claim against E & Y clearly sounds in fraud, as they contend that although E & Y knew of or recklessly disregarded widespread accounting fraud at JWP, E & Y’s no-default certificates falsely stated that JWP was not in default of any covenants in the note agreements. The earliest no-default certificate at issue in this case was dated February 22, 1989. Under the tolling agreement signed by E & Y and the AUSA plaintiffs, this action is deemed to have been filed on September 23, 1993. Therefore, the AUSA plaintiffs’ negligent misrepresentation claim is based on statements that were made within six years of the filing date of the claims, and the claim is timely. B. Audit Committee Defendants’ Motion The audit committee defendants are Innis C. O’Rourke, Jr., a member of JWP’s audit committee from 1988 through 1992; Edmund S. Twining, Jr., a member from 1988 through 1991; Craig C. Perry, a member from 1990 through 1992; and George M. Duff, Jr., a member from 1987 to 1988 and from 1991 to 1992. According to JWP’s proxy statements, the audit committee defendants were responsible for recommending to JWP’s Board of Directors the engagement and discharge of JWP’s independent auditor, analyzing the auditor’s reports and making appropriate reports and recommendations to the Board. See Ex. 84 (1987-91 proxy statements), attached to Brown Steinberg Aff. Beginning with the 1992 proxy statement, JWP also stated that the audit committee was responsible for meeting with JWP’s internal auditor and consulting with the outside auditor concerning matters relating to internal financial controls. See id. (1992 proxy statement). The class plaintiffs, the Aronoff plaintiffs and the AUSA plaintiffs contend that the audit committee defendants failed to fulfill then-duties, recklessly disregarded a number of red flags that should have alerted them to JWP’s fraudulent accounting and consequently made materially false or misleading representations about JWP’s financial situation. The class plaintiffs, the Aronoff plaintiffs and the AUSA plaintiffs have asserted claims against the audit committee defendants under §§ 10(b) and 20 and for common law fraud. The Aronoff plaintiffs and the AUSA plaintiffs each add a claim for negligent misrepresentation, and the AUSA plaintiffs also assert claims under § 12(2) and § 15 and for tortious interference with contract. The audit committee defendants seek summary judgment dismissing each of the claims. 1. Section 10(b) A1 three sets of plaintiffs have asserted claims against the audit committee defendants under § 10(b). The audit committee defendants advance three arguments in favor of their motion for summary judgment: 1) they did not make many of the alleged misrepresentations, 2) the plaintiffs have failed to demonstrate the existence of a question of fact regarding whether the audit committee defendants acted with scienter, and 3) the AUSA plaintiffs’ claims are barred by the applicable statute of limitations. i. Existence of Misrepresentations The audit committee defendants contend that they cannot be held liable under § 10(b) because they did not make a number of the alleged misrepresentations. They argue that the plaintiffs have alleged, at most, that they aided and abetted violations of § 10(b). In Central Bank of Denver, N.A v. First Interstate Bank of Denver, N.A, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), the Supreme Court overruled several decades of case law in this and other circuits that recognized a cause of action for aiding and abetting liability under § 10(b). Central Bank has generated some confusion among the lower courts over where to draw the line separating claims for primary violations from aiding and abetting claims. A number of courts have held that a defendant may not be held primarily liable unless it has actually made a misrepresentation. See Anixter v. Home-Stake Prod. Co., 11 F.3d 1215, 1225-27 (10th Cir.1996); In re MTC Elec. Technologies Shareholders Litigation, 898 F.Supp. 974, 985-87 (E.D.N.Y.1995); In re Kendall Square Research Corp. Securities Litigation, 868 F.Supp. 26, 28 (D.Mass.1994). These courts have focused on the Supreme Court’s holding that § 10(b) “prohibits only the making of a material misstatement (or omission) or the commission of a manipulative act---- The proscription does not include giving aid to a person who commits a manipulative or deceptive act.” Central Bank, 511 U.S. at-, 114 S.Ct. at 1448. Certain courts in the Ninth Circuit, however, have held that a defendant’s substantial participation or intricate involvement in the preparation of misrepresentations that are actually made by someone else are sufficient to ground primary liability under § 10(b). See In re Software Toolworks Inc. Securities Litigation, 50 F.3d 615, 628-29 & n. 3 (9th Cir.1994), cert. denied, — U.S. —, 116 S.Ct. 274, 133 L.Ed.2d 195 (1995); Adam v. Silicon Valley Bancshares, 884 F.Supp. 1398, 1401 (N.D.Cal.1995); In re ZZZZ Best Securities Litigation, 864 F.Supp. 960, 968-72 (C.D.Cal.1994). We agree with the Tenth Circuit’s recent determination that: To the extent that these cases allow liability to attach without requiring a representation to be made by defendant, and reformulate the “substantial assistance” element of aiding and abetting liability into primary liability, they do not comport with Central Bank of Denver. Anixter, 77 F.3d at 1226 n. 10; see also MTC, 898 F.Supp. at 987 (“I conclude that if Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, ... no matter how substantial that aid may be....”). The alleged misrepresentations that the audit committee defendants actually made include statements made in JWP’s annual Forms 10-K, which were signed by the audit committee defendants. See, e.g., Ex. 82 (1987 Form 10-K), attached to Brown Stein-berg Aff.; Ex. 20-23 (1988-91 Forms 10-K), attached to Steinberg Aff. They also include statements that were directly authorized by the Board of Directors — for example, statements found in the note agreements and in JWP’s proxy statements. See, e.g., Ex. 7-11 (note agreements), attached to Brown Stein-berg Aff.; Ex. 87, 89, 91, 93 (Board of Directors’ resolutions approving note issues), attached to Brown Steinberg Aff.; Ex. 84 (JWP’s 1987-92 proxy statements), attached to Brown Steinberg Aff. They do not include press releases issued by JWP’s management or other statements that were not expressly authorized by the Board of Directors. Therefore, the audit committee defendants are entitled to summary judgment dismissing the plaintiffs’ § 10(b) claims to the extent that those claims are based on alleged misrepresentations that the audit committee defendants did not make. ii. Scienter The audit committee defendants contend that they are entitled to summary judgment dismissing the plaintiffs’ § 10(b) claims because there is no evidence that they acted with scienter. As we have previously held, § 10(b) “proscribes only behavior which is either deliberate or so reckless that an inference of fraudulent intent might be drawn by a reasonable finder of fact.” In re Leslie Fay Cos., Inc. Securities Litigation, 835 F.Supp. 167, 173 (S.D.N.Y.1993). Fraudulent intent may be inferred where there is evidence that the defendant remained willfully blind to the truth. See In re Fischbach Corp. Securities Litigation, 1992 WL 8715, at *5-*6 (S.D.N.Y. Jan. 15, 1992). It is typically inappropriate to decide issues of intent and motive on summary judgment, unless the nonmovant has failed to adduce any evidence from which a reasonable jury could infer that the defendants acted with scienter. See Wechsler v. Steinberg, 733 F.2d 1054, 1058-59 (2d Cir.1984); McMahan & Co. v. Wherehouse Entertainment, Inc., 859 F.Supp. 743, 753 (S.D.N.Y.1994), rev’d on other grounds, 65 F.3d 1044 (2d Cir.1995), cert. denied, — U.S. —, 116 S.Ct. 1678, 134 L.Ed.2d 781 (1996). We find that the plaintiffs have produced evidence from which a reasonable jury could conclude that the audit committee defendants acted with sufficient recklessness that the jury could infer fraudulent intent. In the interest of brevity, we do not attempt to set forth a comprehensive list of the items of evidence that could, taken together, support an inference of scienter. We simply note a few. As early as 1987, E & Y issued letters to JWP’s audit committee that indicated that JWP’s internal audit department was an area of concern. Each year’s letter stated that some improvement had been made, but that E & Y recommended further strengthening of the internal audit function. Nevertheless, the audit committee did not become actively involved in improving JWP’s internal audit process. Furthermore, JWP’s internal auditor did not attend audit committee meetings before September 1992, and the audit committee defendants did not read a report from the internal auditor until June 1992. See Ex. 123 (1987-91 “management letters” from E & Y to audit committee), attached to Brown Steinberg Aff.; O’Rourke Dep., at 64-65, 78-79, 148-49, attached as Ex. 102 to Affidavit of Robert I. Harwood, dated Feb. 15, 1996; Perry Dep., at 23, 30, 78-82, attached as Ex. 108 to Harwood Aff.; Twining Dep., at 43-45, 77, 188-89, attached as Ex. 131 to Harwood Aff. Through June 1992, Ernest Grendi attended every audit committee meeting. Furthermore, until that time, Ernest Grendi apparently drafted the minutes of those meetings. See Perry Dep., at 35, attached as Ex. 108 to Harwood Aff.; Ex. 104 (collection of audit committee meeting minutes), attached as Ex. 105 to Brown Steinberg Aff.; Perry Dep., at 392-93, attached as Ex. 105 to Brown Steinberg Aff. Although they knew that Ernest Grendi was a former partner at E & Y and that he and John LaBarca, the E & Y engagement partner, were social friends and former colleagues, see Perry Dep., at 42-45, attached as Ex. 110 to Brown Steinberg Aff., the audit committee defendants never questioned E & Y’s independence or challenged the fact that LaBarca remained the engagement partner from the inception of JWP’s relationship with E & Y through 1992. A reasonable jury could infer from this evidence that the audit committee defendants, in essence, abdicated their responsibilities and permitted Ernest Grendi free rein. Plaintiffs also allege that the audit committee defendants were aware of a laundry list of dubious accounting practices that should have caused them to investigate and to uncover the massive fraud at JWP. We will not review these allegations or the evidence that plaintiffs cite in support thereof in any detail. Suffice it to say that reasonable minds could differ on the inferences to be drawn from that evidence. While we cannot say what a jury will make of these allegations, it is clear that evidence exists from which a reasonable jury could infer that the audit committee defendants acted with scienter. The audit committee defendants contend, however, that the plaintiffs’ evidence of scienter is insufficient because there is no evidence that the audit committee defendants had any motive to shut their eyes to the truth. They point out that each audit committee member held stock in JWP when it collapsed and lost substantial amounts of money. Motive is not an essential component of scienter, however. See Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1128 (2d Cir.1994). Plaintiffs have satisfactorily demonstrated the existence of a question of fact on this issue by presenting evidence of the audit committee defendants’ acts, or failures to act, from which a jury could infer fraudulent intent. The audit committee defendants also contend that as a matter of law, the evidence presented by plaintiffs is insufficient to defeat a motion for summary judgment when it is considered in conjunction with evidence that E & Y repeatedly assured the audit committee defendants that JWP’s financial affairs were in order and that JWP was, if anything, conservative in its accounting practices in certain crucial areas. The audit committee defendants are correct, of course, that one must take into account the totality of the circumstances in determining whether they acted with scienter. See Fischbach, 1992 WL 8715, at *3. In Fischbach, however, the court found that the plaintiff had submitted no evidence that would support an inference of fraudulent intent and that other circumstances demonstrated that such an inference was unwarranted. See id. Here, by contrast, we are confronted with some evidence that could support an inference of fraudulent intent and some evidence that counsels against drawing that inference. This, of course, means that there is a question of fact that should be resolved by a jury. iii. . Statute of Limitations The audit committee defendants also move for summary judgment dismissing the AUSA plaintiffs’ § 10(b) claim, as well as their other federal securities claims, on the ground that those claims are time-barred. The complaint in AUSA v. Dwyer was filed on September 30, 1993. The audit committee defendants join E & Y in arguing that the AUSA plaintiffs were on inquiry notice of their claims by some time in August 1992, more than one year earlier. As we determined above, the AUSA plaintiffs were clearly on inquiry notice of their claims against E & Y by August 14, 1992. Our reasoning also holds true for the AUSA plaintiffs’ claims against the audit committee defendants. An issue of fact exists, however, concerning whether the AUSA plaintiffs conducted a reasonably diligent inquiry under the circumstances and therefore tolled the limitations period. This issue of fact precludes us from granting summary judgment on this ground. 2. Common Law Fraud The class plaintiffs, the AUSA plaintiffs and the Aronoff plaintiffs have asserted claims for common law fraud against the audit committee defendants. In order to recover for common law fraud, the plaintiffs must establish: 1) the misrepresentation of a material fact, 2) made intentionally or recklessly in order to deceive the defrauded party, 3) justifiable reliance on the misrepresentation by the defrauded party, 4) causation and 5) damages. See Citibank, N.A v. K-H Corp., 968 F.2d 1489, 1496 (2d Cir.1992); Morse v. Weingarten, 777 F.Supp. 312, 319 (S.D.N.Y.1991). The audit committee defendants seek summary judgment on the plaintiffs’ claims for common law fraud on the ground that “[defendants owe plaintiffs no greater duty under New York common law than they do under § 10(b).” In re Time Warner, Inc. Securities Litigation, 794 F.Supp. 1252, 1264 (S.D.N.Y.1992), rev’d on other grounds, 9 F.3d 259 (2d Cir.1993), cert. denied, — U.S. —, 114 S.Ct. 1397, 128 L.Ed.2d 70 (1994). Therefore, they contend that we should dismiss plaintiffs’ common law fraud claims for the same reasons that we should dismiss their § 10(b) claims. This argument is, for the most part, doomed to failure, as the audit committee defendants did not persuade us that they were entitled to summary judgment on the plaintiffs’ § 10(b) claims, except to the extent that those claims were based on alleged misrepresentations that the audit committee defendants did not make. Even with respect to that aspect of the plaintiffs’ common law fraud claims, however, the audit committee defendants are not entitled to summary judgment. Under New York law, a defendant may be held liable for aiding and abetting common law fraud. See Dep’t of Economic Dev. v. Arthur Andersen & Co., 924 F.Supp. 449, 482-83 (S.D.N.Y.1996). To recover on such a claim, the plaintiffs must demonstrate (1) the existence of a fraud, (2) the audit committee defendants’ knowledge of the fraud and (3) their knowing rendition of substantial assistance thereto. See In re Investors Funding Corp. of N.Y. Securities Litigation, 523 F.Supp. 533, 545 (S.D.N.Y.1980) (Conner, J.). The plaintiffs have asserted claims against the audit committee defendants for aiding and abetting common law fraud. The audit committee defendants argue that there is no evidence that they knew of the fraud or that they substantially assisted anyone else in making the alleged misrepresentations. As we held above, however, plaintiffs have demonstrated the existence of a question of fact regarding whether the audit committee defendants acted with scienter. Genuine questions of material fact also exist concerning whether the audit committee defendants’ alleged failure to fulfill their obligations and to discover the accounting fraud substantially assisted JWP’s management in making the alleged misrepresentations. 3. Section 12(2) The AUSA plaintiffs have asserted a claim against the audit committee defendants under § 12(2) based on alleged misrepresentations contained in the offering materials for each issue of JWP’s debt securities. Section 12(2) imposes liability on any person who offers or sells a security “by means of a prospectus or oral communication” that contains a false or misleading statement or omission of a material fact. See 15 U.S.C. § 771(2). In Gustafson v. Alloyd Co., — U.S. —, —, 115 S.Ct. 1061, 1073-74, 131 L.Ed.2d 1 (1995), the Supreme Court recently held that the term “prospectus” refers to a “document that describes a public offering of securities by an issuer or controlling shareholder.” The audit committee defendants argue that they are entitled to summary judgment dismissing the AUSA plaintiffs’ claim under § 12(2) because the offering documents at issue in this case do not satisfy this definition of “prospectus.” We agree. The difficulty in satisfying the standard established in Gustafson lies in the fact that JWP’s offering documents did not describe public offerings. Instead, the pertinent information concerning JWP’s offerings was set forth in private placement memoranda, pursuant to § 4(2) of the 1933 Act, 15 U.S.C. § 77d(2), which exempts from the 1933 Act’s registration requirements “transactions by an issuer not involving any public offering.” The AUSA plaintiffs’ complaint acknowledges that JWP’s notes were issued privately. See AUSA/Dwyer Complaint, at ¶¶43, 46(1), 49. Furthermore, JWP represents in the 1992 note agreements that it has provided the note purchasers with copies of the private placement memoranda prepared by the underwriters. See Ex. 11, at ¶ 8B(ii), attached to Brown Steinberg Aff. Hence, there is no doubt that JWP’s notes were sold in private offerings. Courts in this district have held that under Gustafson, private placement memoranda like those at issue are not “prospectuses” for the purposes of a claim under § 12(2). See ESI Montgomery County, Inc. v. Montenay Int’l Corp., 899 F.Supp. 1061, 1064-65 (S.D.N.Y.1995); Glamorgan Coal Corp. v. Ratner’s Group PLC, 1995 WL 406167, at *2-*3 (S.D.N.Y. July 10, 1995). We see no reason to disagree with these sound decisions, and we grant the audit committee defendants’ motion for summary judgment dismissing the AUSA plaintiffs’ § 12(2) claim. The AUSA plaintiffs attempt to resurrect their § 12(2) claim by contending that JWP’s private placement memoranda were so permeated by fraud that the exemption to registration under § 4(2) did not apply and the notes should have been sold in a registered offering. If the AUSA plaintiffs wish to contend that the note offerings should have been registered, however, the appropriate basis for that claim would be § 12(1), 15 U.S.C. § 77Z(1), which provides for rescission of sales of securities improperly accomplished without registration. The AUSA plaintiffs have not asserted a claim under that provision. 4. Control Person Liability All three sets of plaintiffs have asserted claims against the audit committee defendants under § 20 of the 1934 Act seeking to hold the audit committee defendants liable as control persons for the § 10(b) violations of others. See 15 U.S.C. § 78t. The audit committee members have moved for summary judgment dismissing these claims. We must engage in a two-part inquiry to determine whether control person liability should be imposed: First, the court must ascertain whether the nature of the relationship between the purported controller and controllee is such that the defendant possesses the actual authority to influence and direct the activities of the primary wrongdoer. Second, even if the defendant has such authority, a defendant is not liable unless he is also a culpable participant in the fraud. Travelers Insur. Co. v. Lewis, 756 F.Supp. 172, 177 (S.D.N.Y.1991) (citing Lanza v. Drexel & Co., 479 F.2d 1277, 1299 (2d Cir.1973)). “Actual control means the ‘practical ability to direct the actions of [the controlled person].’ ” Epstein v. Haas Securities Corp., 731 F.Supp. 1166, 1175 n. 5 (S.D.N.Y.1990) (internal citation omitted). The defendant need not have “actively exercised the control in the transaction in question.” Id. The burden is on the defendant to demonstrate, as an affirmative defense, that it acted in good faith and therefore was not a culpable participant in the fraud. See Food & Allied Serv. Trades Dep’t, AFL-CIO v. Millfeld Trading Co., 841 F.Supp. 1386, 1390 (S.D.N.Y.1994) (citing Marburg Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980)). Plaintiffs have presented evidence from which a reasonable jury could conclude that the audit committee defendants had the authority to direct the actions of JWP and those persons involved in its financial reporting. The role of the audit committee, as described in JWP’s 1987-91 proxy statements, was to oversee the independent auditor. In JWP’s 1992 proxy statement, the description of the audit committee’s duties was supplemented to include oversight of JWP’s internal auditor and consultation with the independent auditor on matters relating to internal financial controls. The audit committee was also responsible for making appropriate reports and recommendations to the Board of Directors. Defendant Twining has stated that the audit committee’s job “was to see that there was no monkey business going on and nothing was wrong -with the accounting of the company, and that it was done in a proper businesslike and correct fashion.” See Twining Dep., at 24, attached as Ex. 211 to Brown Steinberg Aff. Defendants O’Rourke, Duff and Perry have stated, respectively, that it was their responsibility to be “on watch,” to see that the company “complie[d] with all laws, securities laws, other laws,” and to “sound the alarm.” See O’Rourke Dep., at 91; Duff Dep., at 26; Perry Dep., at 153; all attached as Ex. 211 to Brown Steinberg Aff. From this information, a reasonable jury could perhaps conclude that JWP’s audit committee performed an advisory function and that only the full Board of Directors, of which the audit committee defendants formed