              IN THE UNITED STATES COURT OF APPEALS

                       FOR THE FIFTH CIRCUIT




                            No. 89-1643



W.O. AKIN, ET AL.,
                                          Plaintiffs-Appellants,

                               versus

Q-L INVESTMENTS, INC., Etc., ET AL.,
                                          Defendants,

LAVENTHOL & HORWATH,
                                          Defendant-Appellee.




          Appeal From the United States District Court
               for the Northern District of Texas


                         (April 15, 1992)

Before KING, JOHNSON, and HIGGINBOTHAM, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

     This is a suit alleging violations of state and federal

securities laws and RICO by accountants who audited financial

statements included in private placement memoranda.       Plaintiffs

appeal a summary judgment and a sanction.   We reverse.

                                 I.

     Plaintiffs are 127 investors who invested in a number of tax-

oriented limited partnerships syndicated between 1973 and 1985 by

a group of companies known as the Quinn-L group.   The Quinn-L group

included four companies that served as general partners of these

limited partnerships: Quinn-L Investments, Inc., SML, Inc., Quinn-
L Corporation, and Quinn-L Equities, Inc.             The group also included

other   companies      that   performed       various    functions      for    the

partnerships    such    as    management      and    leasing   of   partnership

properties (Quinn-L Management Corp.), mortgage financing (Quinn-L

Mortgage Co.), lending of working capital funds (Quinn-L Capital

Co.), and construction of improvements on properties, (Braxton

Co.).   Virtually all of the companies in the Quinn-L group were

owned entirely by S. Mark Lovell.

     The defendant, Laventhol & Horwath, is a national accounting

firm retained by the Quinn-L group in connection with the sale of

thirteen of these limited partnerships in the early 1980's.                   L & H

furnished reports on financial statements, some of which were

included   in   the    Private    Placement     Memoranda      (PPMs)   used    in

marketing the partnership investments.              L & H prepared reports on

three kinds of financial statements included in the PPMs: (1)

Start-up Balance Sheets, showing initial capitalization of the

partnerships as either $100 or $1,000; (2) Historical Financials,

reporting prior period performance for two of the partnerships

being acquired by the Quinn-L Group; and (3) Corporate Balance

Sheets, reporting financial statements of some of the syndicating

companies.      Preparation      of   these   reports    was    L   &   H's   sole

involvement with the offerings.

     The partnerships were primarily involved in real estate--the

construction, ownership, and management of apartment complexes and

office buildings throughout the southeast. There was a common cash

management program among the various entities in the Quinn-L group


                                       2
through which the general partners borrowed money from individual

partnerships for use within the overall structure as needed.              The

partnerships were projected to have operating losses for the first

five   to   eight    years   of   operation,   which   would   generate   tax

deductions for the limited partners.           Profitable operation would

follow, if all went according to plan.         Success depended largely on

the general partners' ability to refinance the partnerships, sell

them for more than their debt, or resyndicate them.                 With the

passage of the Tax Reform Act of 1986 and the general collapse of

the real estate market in the late 1980s, approximately forty of

the forty-five limited partnerships ultimately went into bankruptcy

or had their properties foreclosed upon.

       In   1987    and   1988,   plaintiffs   filed   twenty-six   separate

lawsuits alleging violations of federal and state securities laws

and RICO in the sale of the limited partnerships.               L & H is a

defendant in thirteen of these suits.            The plaintiffs contended

that L & H aided and abetted the Quinn-L partnerships in securities

violations by omitting material facts from the financial reports

they prepared, thereby misleading investors as to the finances of

partnerships in which they were investing. The plaintiffs alleged:

(1) that L & H failed to disclose that the Quinn-L group had to

syndicate additional partnerships in order to survive; (2) that

L & H failed to disclose that the partnerships were "integrated" in

nature--that "affiliate" or "interrelated" transactions among the

individual partnerships were so numerous that the financial success

of each partnership depended on the others; (3) that L & H failed


                                       3
to disclose certain contingent liabilities and the uncollectability

of   certain     inter-company    receivables,    thereby   distorting    the

companies' true net worth; (4) that L & H falsely represented that

it complied with generally accepted accounting principles and

auditing standards; and (5) that L & H materially aided the Quinn-L

Group in the illegal sale of unregistered securities.

      The suits were consolidated for discovery and trial.            After

nearly two years of discovery, the district court granted L & H's

motions for summary judgment on the state and federal securities

and RICO claims and sanctioned plaintiffs' counsel for bad faith

submission of false and misleading form affidavits.

                                     II.

      We   ask     "if    the    pleadings,     depositions,   answers     to

interrogatories,      and    admissions    on   file,   together   with   the

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law."        Fed. R. Civ. P. 56(c).      This rule "mandates

the entry of summary judgment, after adequate time for discovery

and upon motion, against a party who fails to make a showing

sufficient to establish the existence of an element essential to

the party's case, and on which the party will bear the burden of

proof at trial."         Celotex Corp. v. Catrett, 477 U.S. 317, 322

(1986).

      A.   Federal Securities Claims

      Congress and the SEC have constructed an elaborate regimen for

the securities markets.         Its central premise of disclosure finds


                                      4
expression, in part, by defined roles for players in the complex

endeavor    of   issuing    new       securities,   including      underwriters,

lawyers, and accountants.             Rule 10b-5 was at its conception a

carefully    crafted    piece     for     the   disclosure      and   enforcement

apparatus.   Of course that limited assignment changed dramatically

with recognition that Rule 10b-5 was enforceable by a private right

of action.       The relevant point is that judicial acceptance of

private enforcement of Rule 10b-5 by an implied right of action

came when the courts were far more hospitable to such ventures.

This implied right brought with it an expansive judicial enterprise

of developing a supporting common law.

     The implication of such private rights of enforcement is no

longer favored.        Moreover, it is now apparent that open-ended

readings of the duty stated by Rule 10b-5 threaten to rearrange the

congressional     scheme.       The    added    layer    of   liability   not   for

directly violating Rule 10b-5 but for aiding and abetting such

violation is particularly problematic.                  Imposing liability upon

traditional participants in the securities markets by resort to

this theory presents greater risks of frustrating the congressional

scheme of securities regulation than direct enforcement of the

rule.   There is a powerful argument that these risks are such that

aider and abettor liability should not be enforceable by private

parties pursuing an implied right of action.                  We must accept the

law of this circuit acquiescing as it does in such suits.                   There

are formidable arguments, however, against recognizing this cause

of action--arguments that have grown with judicial insistence that


                                          5
Congress legislate; that is, with increasing judicial reluctance to

undertake legislative tasks.   We should be exacting in determining

whether aider and abettor liability can be demonstrated.

     Plaintiffs argue that L & H aided and abetted violation of

Rule 10b-51 by preparing false and misleading reports on financial

statements.   There are three routes by which an accountant may be

held liable under the rule.     First, an accountant is directly

liable for intentional or reckless2 misrepresentations if he knows

his statements will be communicated to third parties.   See, e.g.,

Fine v. American Solar King Corp., 919 F.2d 290, 298 (5th Cir.

     1
      "It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of
interstate commerce, or of the mails, . . . (1) to employ any
device, scheme or artifice to defraud, (2) to make any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made in light of the
circumstances under which they were made, not misleading, or (3)
engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security." 17 C.F.R.
§ 240.10b-5 (1991); 15 U.S.C. § 78j(b).
     2
      In Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976), the
Supreme Court held that scienter was a required element of the
implied cause of action under section 10(b) and Rule 10b-5. The
Court expressly left open the question whether reckless behavior
constitutes intentional conduct sufficient to impose civil
liability, but noted that "[i]n certain areas of the law
recklessness is considered to be a form of intentional conduct
for purposes of imposing liability for some acts." Id. at 193
n.12.
     Since Ernst & Ernst, this court has recognized that "severe
recklessness" can satisfy the scienter requirements for a primary
violation under Rule 10(b) in Broad v. Rockwell Int'l Corp., 642
F.2d 929, 961-62 (5th Cir.) (en banc), cert. denied, 454 U.S. 965
(1981); see also Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d
885, 889 (5th Cir. 1987). Although we used the modifier
"severe," our definition of severe recklessness is the same as
that used by other circuits to describe conduct they consider to
be reckless. See Woods v. Barnett Bank, 765 F.2d 1004, 1010 n.9
(11th Cir. 1985).

                                 6
1990); Admiralty Fund v. Hugh Johnson & Co., 677 F.2d 1301, 1312

(9th Cir. 1982); Chemical Bank v. Arthur Andersen & Co., 552 F.

Supp. 439, 454-55 (S.D.N.Y. 1982), rev'd on other grounds, 726 F.2d

930 (2d Cir. 1984).      Here the labels "aiding and abetting" and

"secondary liability" are really misnomers, since § 10(b) prohibits

any   person   from   making   false       or   misleading   statements    "in

connection with" the purchase or sale of a security, even if the

person plays an auxiliary role in the transaction.

      Second, an accountant may be held liable for knowingly joining

and substantially assisting in the misrepresentations of another,

regardless of whether he makes any false statements of his own.

Although the Supreme Court has twice reserved decision on liability

for aiding and abetting a violation of Rule 10b-5, see Herman &

MacLean v. Huddleston, 459 U.S. 375, 379 n.5 (1983); Ernst & Ernst

v. Hochfelder, 425 U.S. 185, 191-92 n.7 (1976), this Circuit, in

common with other courts of appeals, has consistently recognized

the validity of this theory.      Abell v. Potomac Insurance Co., 858

F.2d 1104, 1115 (5th Cir. 1988), vacated in part on other grounds

sub nom. Abell v. Wright, Lindsey & Jennings, 109 S. Ct. 3242

(1989); Bane v. Sigmundr Exploration Corp., 848 F.2d 579 (5th Cir.

1988); Woodward v. Metro Bank, 522 F.2d 84 (5th Cir. 1975).               Like

any conspiracy to defraud, this route generally requires knowledge

of the fraud and intent to join in it.

      This court has cleared a third path more circuitous than the

other two.     By this route, an accountant may be held liable for

recklessly aiding and abetting a primary violation regardless of


                                       7
whether he   has    made    misrepresentations       of    his   own,   when    his

assistance in the fraud is particularly substantial and unusual or

when he owes some special duty of disclosure.               Woodward, 522 F.2d

at 97;   Abell, 858 F.2d at 1127; see also Rolf v. Blyth, Eastman

Dillon & Co., 570 F.2d 38, 44-47 (2d Cir.), cert. denied, 439 U.S.

1039 (1978); Woods v. Barnett Bank, 765 F.2d 1004, 1010, 1011 (11th

Cir. 1985); Cleary v. Perfectune, Inc., 700 F.2d 774, 777 (1st Cir.

1983). This "theory" of liability is mushy and difficult to apply.

Were we writing on a clean slate, it would give us pause.               The path

has two serious overlapping problems.               First and foremost, the

source and scope of the accountant's duty to disclose is uncertain.

It does not directly rest on any textual provision of the federal

securities laws, but appears to be a specie of federal common law.

Its murky source infects efforts to define its scope.                    When an

accountant's duty is unfettered from the duty to prevent falsity as

proscribed   by    Rule    10b-5,   it   becomes    an    independent    duty    to

disclose information "material" to a reasonable investor's decision

akin to the duty owed by a fiduciary.              We are not persuaded that

the accountant's duty under 10b-5 is so open-ended.               As we see it,

this third path differs from conspiracy and the usual principles of

aiding and abetting insofar as it allows liability for reckless

disregard of facts indicating a client's fraud and the accountant's

assistance in it.         Fortunately, only a narrow band of cases can

travel this path--where an accountant has furnished substantial and

non-routine services but is not consciously furthering primary

violations by his client.


                                         8
9
       (1) Start-Up Balance Sheets

       Six PPMs contained start-up balance sheets indicating the

initial capitalization of the limited partnerships as $100 or

$1,000.      The       balance      sheet   of     the    Timber   Ridge--Fort   Worth

partnership, for example, stated simply that the assets of the

partnership consisted of $100 cash and that the general partner's

equity investment was $100.             L & H reported that this balance sheet

fairly represented the financial position of the partnership at its

inception,       in     conformity      with       generally    accepted    accounting

principles.        The start-up balance sheet also included a brief

statement that the partnership intended to acquire a 206-unit

apartment complex and offer 35 limited partnership interests to no

more than 35 limited partners.                     The district court found that,

given the narrow purpose of such a balance sheet, it had virtually

no potential for misleading investors about the nature of the

partnership. This conclusion, however, rests on L & H's version of

what    should        have   been     included       in   the   balance    sheets   and

accompanying footnotes.

       Plaintiffs' experts disagreed with L & H as to what generally

accepted accounting principles required to be disclosed on the

start-up     balance         sheets     and      their     accompanying     footnotes.

According to Bailey, the facial anemia of the balance sheets and

footnotes imposed on L & H the obligation to disclose in its

reports certain material facts omitted from the footnotes.                          The

balance sheets and footnotes largely omitted discussion of related

party transactions.           Had L & H met its professional standards of


                                              10
investigation and disclosure, according to Bailey, it would have

noted the absence of the following from the start-up balance

sheets:

       (1)       Quinn-L's primary source of financial support came
                 from continued offerings.

       (2)       In order to keep the companies and partnerships
                 solvent, Quinn-L had to continue to offer new deals
                 and sell projects.

       (3)       Seldom did any prior syndications ever meet their
                 optimistic projections.

       (4)       Quinn-L commingled the funds of each partnership
                 with the funds of every other partnership. Cash
                 was used wherever needed, according to Quinn-L's
                 Cash Control Manager. Thus, funds raised in a new
                 offering automatically went to support prior losing
                 ventures.

According to Bailey, L & H knew of the related party relationships,

was aware of the cash management system and commingling of funds,

and should have reported the omission of these material matters

from       the    balance   sheets   and    footnotes   to   avoid   misleading

investors.         A reasonable trier of fact could conclude from this

evidence that L & H was intentionally or recklessly deceiving the

users of these balance sheets by failing to disclose these facts.3

       3
      I am scribe for the panel but I do not agree that summary
judgment should be reversed with respect to the start-up balance
sheets. In my view, these brief and accurate statements about
the de minimis capitalization of the partnership could not have
misled investors in any way. The amorphous "facts" which
plaintiffs' experts alleged were omitted are a far cry from the
specific distortions alleged in the corporate balance sheets.
Violation of accounting principles is relevant to a determination
of whether an auditor has committed securities fraud, but it does
not reduce plaintiffs' responsibility to show that they were
misled. Rule 10b-5 prohibits the use of manipulative or
deceptive devices, not the violation of accounting principles.
The two are not coextensive. I would affirm with respect to the
start-up balance sheets.

                                           11
     (2)    Historical Financials

     Two PPMs contained historical financials reporting on the

prior period performance of particular limited partnerships that

were being resyndicated.        Plaintiffs have not alleged that these

reports misrepresented or omitted any material facts.            Hence, they

cannot form the basis of a securities violation.

     (3)    Corporate Balance Sheets

     Five PPMs contained corporate balance sheets reporting on the

financial statements of Quinn-L Investments, Inc.             Each corporate

balance sheet included a statement of assets, liabilities, and

shareholders'   equity,     a   statement   of    revenue,    expenses,   and

retained earnings, and a statement of source and application of

funds, along with extensive notes.              L & H asserted that these

corporate balance sheets were examined in accordance with generally

accepted auditing standards (GAAS) and fairly represented the

financial   position   of    Quinn-L    Investments   in     accordance   with

generally accepted accounting principles (GAAP).

     Plaintiffs    contend      that    these    reports   contain   several

misrepresentations regarding affiliate transactions--loans, sales

and other business dealings between Quinn-L Investments and other

entities in the Quinn-L Group.          For example, plaintiffs' expert

stated that it was improper for L & H to characterize a note

receivable from Braxton Co. for more than $7 million as an asset of

Quinn-L Investments in the 1984 report. Without this related-party

transaction, Quinn-L Investments would have had a minimal or

negative net worth.         Plaintiffs' expert asserted that Quinn-L


                                       12
Investments' treatment of the note receivable was a clear violation

of   GAAP,    since    both   companies   participated   in   a   common   cash

management system in which funds were freely transferred between

companies having excess cash and those in need of it.             According to

this expert, the transaction was not in substance a sale but part

of a scheme to create inflated and fictitious values.             L & H failed

to qualify its report to reflect this violation as required by

GAAS.

      Similarly, plaintiffs' expert stated that including another $5

million note receivable as an asset on the 1983 report artificially

inflated the net worth of the company since the receivable was from

an affiliated partnership.         Although Quinn-L's previous accountant

had apparently not included this receivable on the 1982 statement,

L & H "reclassified" it in 1983.             The expert asserts that this

"reclassification" materially distorted the financial position of

the company.         GAAS, he continues, required L & H to discuss any

restatement of accounts with the previous accountant and disclose

the nature of these discussions in its report, so that investors

would know what had taken place.            L & H failed to do so.

      Plaintiffs' expert observes that Quinn-L Investments obligated

itself   to    pay    affiliated   partnerships    $37   million    in   rental

payments for various commercial properties over the course of

several years.         The company then assigned its obligations under

these leases to another affiliate, Nashville Feature & Music, Inc.,

but remained obligated.         Because Nashville was financially unable




                                       13
to honor this obligation, the expert asserts that GAAS required

L & H to disclose its contingent liability.   L & H did not do so.

     Although L & H disclosed that Quinn-L Investments was one of

several companies under common control, and therefore was a member

of a common cash management program for the benefit of the group,

plaintiffs' experts provide at least some evidence from which a

jury might infer that L & H intentionally or recklessly misled

investors about the true financial position of Quinn-L Investments.

This is so despite disclosure of the broader relationship between

the partnerships.   That disclosure certainly blunted the deceptive

effect of any inflated figures, but it did not eliminate it.     The

repeated violation of accounting principles reinforces the evidence

of deception.   Fine, 919 F.2d at 297.    A reasonable jury could

infer from the evidence in this case that L & H was intentionally

or recklessly deceiving the users of its statements by distorting

the net worth of Quinn-L Investments.

     L & H contends that it did not know that its reports would be

included in the various PPMs used in selling the partnerships.    An

accountant must know that its statements are to be communicated to

investors before it can violate Rule 10b-5.   See SEC v. Texas Gulf

Sulphur, 401 F.2d 833, 862 (2d Cir. 1968) ("Rule 10b-5 is violated

whenever assertions are made, as here, in a manner reasonably

calculated to influence the investing public."); Zoelsch v. Arthur

Andersen & Co., 824 F.2d 27, 34-35 (D.C. Cir. 1987); Mendelsohn v.

Capital Underwriters, Inc., 490 F. Supp. 1069, 1085 (N.D. Cal.

1979).   Otherwise, it cannot be said that the statements are made


                                 14
"in connection with" the purchase or sale of securities.                    See

Zoelsch, 824 F.2d at 35.

     In support of its contention, L & H filed an affidavit of

Christopher Mayzner, the L & H partner in charge of the Quinn-L

audit, stating that L & H was ignorant of the intended use of most

of its reports, and had no reason to believe that they would be

used in the PPMs.         However, in its memorandum in support of its

partial summary judgment motion, L & H admitted that it was aware

that some of its reports would be included in the PPMs.4             Further,

the value of Mayzner's testimony is limited by the fact that he did

not consult with anyone else at L & H in formulating his opinion

regarding   L   &   H's   knowledge.        Finally,   plaintiffs   have   also

introduced evidence contradicting Mayzner.              Plaintiffs filed an

affidavit from Lovell, swearing that L & H knew that its reports

would appear in the PPMs.          Plaintiffs also offered the expert

testimony of Edmund W. Bailey, a certified public accountant, who

stated that L & H must have known that financial statements it

audited would be included in the PPMs.           Another expert, Daniel L.

Jackson, a certified public accountant, opined with regard to "The

Woodlands -1983 Limited Partnership," that L & H must have known

that its reports would be included in that PPM.5            This evidence is

     4
      L & H stated as follows: "In some instances, L & H was
aware that these reports were intended for use in PPMs. In other
instances L & H was not."
     5
      As evidence of L & H's knowledge, Jackson cites L&H's
engagement letters for the audit of "The Woodlands - 1983 Limited
Partnership," which stated as follows: "You have agreed to
provide us [L&H], prior to filing, proofs of the entire offering
circular and all other accompanying materials within which such

                                       15
sufficient to create a genuine issue of material fact with respect

to L & H's knowledge that its reports would be used in connection

with the sale of securities.

      L & H also argues that plaintiffs failed to prove that they

relied on L & H's reports.     While materiality can be established

for all the plaintiffs as a group, reliance is a matter of

individual proof.   Abell, 858 F.2d at 1118 (citing Huddleston v.

Herman & MacLean, 640 F.2d 534, 549 (5th Cir. Unit A Mar. 1981),

rev'd in part on other grounds, 459 U.S. 375 (1983)).    Plaintiffs

argue first that they were not required to show reliance.      They

contend that they are entitled to the presumption established by

the Supreme Court in Affiliated Ute Citizens v. United States, 406

U.S. 128 (1972), presuming reliance of plaintiffs who base their

10b-5 claims on omissions.

      The Ute presumption, however, operates only in omissions

cases, not where plaintiffs assert positive misrepresentations of

material information.   Finkel v. Docutel/Olivetti Corp., 817 F.2d

356, 359 (5th Cir. 1987).    The distinction between the two is not

always clear. In each case, a court must decide whether plaintiffs

are claiming that defendants omitted information or misrepresented

it.   It is not enough that a claim has aspects of omission--at a

sufficiently high level of generality, they all do.     Ute itself

involved "primarily a failure to disclose."      406 U.S. 128, 153

(emphasis supplied).    Rather, we remain mindful that the Ute


financial statements are to appear." Jackson also notes that the
audit programs for that limited partnership had signed slips,
indicating that someone at L & H had reviewed the PPM.

                                 16
presumption is a practical solution of the conceptual puzzle of

relying on undisclosed facts.

     With respect to the start-up balance sheets, we agree that

plaintiffs are entitled to Ute's presumption of reliance.           The

claim here is essentially that L & H failed to disclose material

information that should have been included to present a complete

picture of the financial status of the partnerships.        The claims

relating to the corporate balance sheets, however, are claims of

misrepresentation, not omission.       L & H disclosed considerable

information about the relationship between Quinn-L Investments and

other entities in the Quinn-L group.     Any wrong lies in ignoring

accounting principles and distorting the numbers underlying the net

worth    of   Quinn-L   Investments.      This   is   the   stuff   of

misrepresentation and does not entitle plaintiffs to the Ute

presumption.6   We make this judgment, which is a legal call for the

judge, by reaching past its peripheral aspects and probing for the

gravamen, the core of the claim.

     Plaintiffs offer 127 form affidavits, nearly all of which are

identical, as evidence that they relied on L & H's reports. The

district court struck these affidavits because they failed to

conform with Federal Rule of Civil Procedure 56(e).         This rule

provides that when affidavits are used to support or oppose a

summary judgment motion, they "shall be made on personal knowledge,

shall set forth such facts as would be admissible in evidence, and


     6
      We do not address the fraud-on-the-market theory of
reliance here since it was not raised below.

                                 17
shall show affirmatively that the affiant is competent to testify

as to the matters stated therein."        A district court is entitled to

strike   affidavits   that    do   not    comply     with   this   rule.     CMS

Industries, Inc. v. L.P.S. Int'l, Ltd., 643 F.2d 289, 295 (5th Cir.

1981).

     The affidavits stated in relevant part

          6.   Since investing in the Quinn-L partnership(s)
     and, in particular, since becoming involved in this
     litigation, I have learned, through the investigation of
     my counsel, that my partnership(s), and indeed the entire
     Quinn-L Group of companies, including Lovell, were not as
     represented to me at the time I made my investment
     decision. I have learned a number of facts that, had I
     known them at the time I was deciding to invest in Quinn-
     L, I would not have invested. . . .

          10. I also have learned that the true net worth of
     the general partner in the Quinn-L partnerships was not
     as represented in the offering materials and elsewhere.
     For example, I understand that the major asset of Quinn-L
     Investments, Inc., general partner, was an unsecured
     inter-company receivable that had no real prospects for
     payment.   Had I known that the true net worth of the
     general partner was negative, at the time I made my
     investment decision, I would not have invested.

     The district court concluded that these statements were not

based on personal knowledge and were inadmissible hearsay.                 Here,

the statements were offered only to show plaintiffs' reliance on

L & H's misrepresentations, not the truth of the misrepresented

facts.     These   portions   of   the    affidavits    were   therefore     not

hearsay.     Furthermore,     certainly    as   to    reliance,    plaintiffs'

statements were based on personal knowledge of their individual

investment decisions.        Indeed, reliance is an issue about which

only plaintiffs themselves are likely to have personal knowledge.




                                     18
     The    district   court   also   rejected   plaintiffs'   affidavits

because they were submitted in bad faith.         L & H showed that the

affidavits were replete with false statements and that plaintiffs'

counsel had not undertaken reasonable efforts to ensure their

accuracy.    In fact, many plaintiffs admitted that they could not

swear that they had even reviewed a PPM before investing.            The

district court's decision to grant summary judgment against these

plaintiffs was entirely appropriate since they will be unable to

show actual reliance on L & H's misrepresentations.             Although

plaintiffs are entitled to a presumption of reliance with respect

to the omissions in the start-up balance sheets, this presumption

can be rebutted by a showing that plaintiff's investment decision

would not have been affected even if defendant had disclosed the

omitted facts.   Rifkin v. Crow, 574 F.2d 256, 262 (5th Cir. 1978).

     Nevertheless, all plaintiffs should not have been dismissed en

masse because many of them admitted to making false statements in

their affidavits.       Reliance at this juncture is a matter of

individual proof.      Even those plaintiffs who admitted to other

inconsistencies in their affidavits may still be able to show that

they read L & H's reports and would not have invested had they

known the true state of affairs.       On a motion for summary judgment,

the district court should disregard only those portions of an

affidavit that are inadequate and consider the rest.              Lee v.

National Life Assurance Co., 632 F.2d 524, 529 (5th Cir. 1980).

The district court erred in striking all the affidavits in their




                                      19
entirety.     At least some of the affidavits may provide valid

summary judgment evidence of reliance.

     With respect to the theory of direct liability, our task is

complete.    Although the evidence of fraud is hardly overwhelming,

it is sufficient to create a jury question.                We now proceed to

examine plaintiff's theory that L & H aided and abetted a Rule 10b-

5 violation by Quinn-L. Plaintiffs must show that Quinn-L violated

the rule, that L & H had a general awareness of its role in the

violation, and that L & H knowingly rendered substantial assistance

to the violation.       Abell, 858 F.2d at 1126.

     Defendant has not argued that specific elements of a primary

violation by Quinn-L are lacking. Rather, it asserts that there is

no evidence that any of the allegedly omitted or misrepresented

facts are true.      This contention is belied by the affidavits of

Quinn-L    employees.      Plaintiffs      introduced,     for   example,   the

affidavit of Arlan Kent Bishop, a vice president and director of

Quinn-L Corporation and Quinn-L Investments, who stated that the

negative cash flow on particular projects could only be serviced by

the continuing syndication of new projects.           Therefore, when some

Quinn-L partnerships began to fail, it was inevitable that they all

fail.     The partnerships were all financially dependent on each

other and on continuing syndication. Furthermore, each partnership

was so highly leveraged that it could not be sold, except when

Quinn-L     could   orchestrate   a   sale     from   an    earlier   limited

partnership to a newer one.




                                      20
     Bishop related several material facts about the partnership

investments which were omitted from the PPMs.        Had the investors

known of these facts, they may well have decided not to purchase

the limited partnership interests.      Although an investor may have

thought   he   was   investing   in    single,   independently   viable

partnerships, there is at least some evidence that their money was

going to a shaky network of partnerships that was ultimately bound

to collapse.   We think this is sufficient evidence of a primary

rule 10b-5 violation.    Despite L & H's arguments that these facts

were simply not true, whether there was a primary violation, and

whether L & H assisted it by preparing misleading reports, are

factual issues for a jury to determine.

     Plaintiffs must also prove that L & H had the requisite level

of scienter in assisting Quinn-L.         As we have explained, the

standard is conscious intent unless the character and degree of the

assistance is unusual, or unless there is some special duty, in

which case recklessness will suffice.       Woodward, 522 F.2d at 97.

The plaintiffs have put forth a great deal of evidence      of L & H's

assistance to the Quinn-L entities.      The district court found that

these were "financial services . . . and no more."         While many,

perhaps most of these services, individually considered, were

routine, a reasonable jury could conclude that the overall level of

involvement by L & H with the Quinn-L entities over a long period

of time constituted particularly substantial or unusual assistance.

If so, a recklessness standard would be appropriate.




                                  21
     Furthermore, plaintiffs may be able to establish that L & H

owed a special duty to investors which justifies a recklessness

standard.    Courts have held that depending on the circumstances,

accountants may have a duty to disclose information to investors

when they make affirmative statements on which they know the

investors will rely.     Compare Arthur Young & Co. v. Reves, 937 F.2d

1310, 1330-31 (8th Cir. 1991); Roberts v. Peat Marwick, Mitchell &

Co., 857 F.2d 646, 653 (9th Cir. 1988); Rudolph v. Arthur Andersen

& Co., 800 F.2d 1040, 1045 (11th Cir. 1986); Sharp v. Coopers &

Lybrand, 649 F.2d 175, 180-84 (3rd Cir. 1981) (circumstances may

support duty of disclosure) with Schatz v. Rosenberg, 943 F.2d 485,

496-97 (4th Cir. 1991); Zoelsch v. Arthur Andersen & Co., 824 F.2d

27, 35-36 (D.C. Cir. 1987); Barker v. Henderson, Franklin, Starnes

& Holt, 797 F.2d 490, 496-97 (7th Cir. 1986); Windon Third Oil &

Gas Drilling Partnership v. FDIC, 805 F.2d 342, 347 (10th Cir.

1986)   (circumstances    did   not        support   duty   of   disclosure).

Plaintiffs have produced some evidence that L & H knew that its

reports would be included in the PPMs that were given to investors.

They may be able to prove that L & H owed a duty and that a

recklessness standard for aider and abettor liability is therefore

warranted.

     We accordingly reverse the summary judgment granted defendant

on the federal securities claims.            We do not foreclose fu2rther

pretrial proceedings calculated to further shape and winnow these

claims or reduce the number of plaintiffs who may go forward.             The

district court has the full range of its management powers and we


                                      22
do not intend to limit those in any way.           We have also attached

some sample jury instructions on the aider and abettor theory of

liability to assist the district court in formulating its charge.

Our purpose is not to prepare a charge for this able district

court.    Rather, we use this means of explaining our ruling.      We do

not restrict the district court's wide discretion in submitting any

claim that may ultimately go to a jury.

     (4)    Unregistered Securities

     Plaintiffs contend that L & H violated Rule 10b-5 by aiding

and abetting Quinn-L's violation of § 12 of the Securities Act of

1933, 15 U.S.C. § 77l, and § 33A(1) of the Texas Securities Act,

Tex. Rev. Civ. Stat. Ann. art. 581-33 (Vernon Supp. 1992).           The

argument is that L & H should have disclosed that the partnerships

were not registered as securities.         Plaintiffs have not, however,

introduced any evidence that the limited partnership interests were

subject to the state or federal registration requirements, and have

therefore   failed   to   prove   a   primary   violation.   Moreover,   a

"seller" clearly bears the burden of proving an exemption from

registration.    See SEC v. Ralston Purina Co., 346 U.S. 119, 126

(1953).    The district court has correctly found that L & H was not

a "seller," and there is no authority for imposing on an alleged

aider and abettor the burden of establishing eligibility for an

exemption from registration. Summary judgment as to this issue was

therefore appropriate.




                                      23
      B.    State Securities Claims

      Plaintiffs also assert claims under Section 33(F)(2) of the

Texas Securities Act.     Tex. Rev. Civ. Stat. Ann. Article 581-

33(F)(2).    This section imposes joint and several liability on

those persons who directly or indirectly, with intent to deceive or

defraud or with reckless disregard for the truth or the law,

materially aid a seller of securities who misrepresents material

facts or omits material facts in connection with the sale.       See

Tex. Rev. Civ. Stat. Ann. Article 581-33(A)(2).       There are few

Texas decisions construing § 33(F)(2).    We take some comfort from

the fact that Texas courts generally look to decisions of the

federal courts to interpret the Texas Securities Act because of

obvious similarities between the state and federal laws.       Star

Supply Co. v. Jones, 665 S.W.2d 194,196 (Tex. App. 4 Dist. 1984).

Of course, the language of the Texas provision differs in some

respects from its federal counterpart.      We think that they are

sufficiently parallel in relevant ways that, on our facts, the

state securities claims stand or fall with the federal claims.

      The Texas Securities Act recognizes on its face, however, that

recklessness satisfies the scienter requirements for aider and

abettor liability. Section 33F(2) holds liable any person, jointly

and severally with the buyer, seller, or issuer, who "materially

aids" with "reckless disregard" a violation of Sections 33A, B, or

C.   Tex. Rev. Civ. Stat. Ann. art. 581-33F(2) (Vernon Supp. 1992).

We reverse the summary judgment on the state claims and remand for

further proceedings parallel to the federal claims.


                                 24
     C.   RICO Claims

     Next we consider plaintiffs' arguments that L & H violated the

Racketeering Influenced and Corrupt Organizations Act (RICO), 18

U.S.C. § 1961 et. seq.      To establish a RICO violation, plaintiffs

had to establish (1) conduct (2) of an enterprise (3) through a

pattern (4) of racketeering activity.        Sedima, S.P.R.L. v. Imrex

Co., 473 U.S. 479 (1985).

     Plaintiffs     argue    that   they   have   shown    many   acts   of

racketeering, that L & H's allegedly fraudulent materials were

repeatedly sent through the federal mails and therefore constituted

mail fraud.   18 U.S.C. § 1341.     Plaintiffs' problems of proof with

respect to securities fraud do not necessarily haunt their claim of

mail fraud since reliance is not an element of mail fraud.          Abell,

858 F.2d at 1129.     Proof of mail fraud requires only a scheme to

defraud which involves the use of the mails for the purpose of

executing the scheme.       United States v. McClelland, 868 F.2d 704,

706 (5th Cir. 1989).    Each separate use of the mails in furtherance

of the scheme constitutes a separate offense.        Id.

     We have already determined that there are genuine issues of

material fact regarding the adequacy of the start-up balance sheets

and the corporate balance sheets, including intent to defraud.           It

is undisputed that these materials were repeatedly mailed to

facilitate the sale of the limited partnerships.          L & H argues that

it did not know that the balance sheets would be included in the

PPMs; plaintiffs have produced contrary evidence.          Plaintiffs need




                                    25
only show that it was reasonably foreseeable that the mails would

be used.    Id. at 707.

     Whether these acts constituted a pattern is a separate issue.

The Supreme Court has recently explained the concept of a pattern

of racketeering activity. H.J. Inc. v. Northwestern Bell Telephone

Co., 492 U.S. 229 (1989).          A plaintiff must show two or more

predicate acts of racketeering which are related and which amount

to or pose a threat of continued criminal activity.              Id. at 239.

The element of relatedness is satisfied if the criminal conduct

embraces criminal acts "that have the same purposes, results,

participants, victims, or methods of commission, or otherwise are

interrelated by distinguishing characteristics and are not isolated

events."    Continuity may be established, inter alia, by a showing

that the predicates "are a regular way of conducting defendant's

ongoing legitimate business, or of conducting or participating in

an ongoing RICO enterprise."

     Here, we have little trouble in concluding that the various

acts of mail fraud, if proved, would constitute a pattern of

racketeering activity.         PPMs were consistently sent through the

mails in an effort to sell limited partnership interests for which

Quinn-L    companies   would    serve    as   the   general   partner.   The

provision of the balance sheets was L & H's regular way of

participating in an ongoing and allegedly fraudulent course of

conduct by the Quinn-L group.       This is enough to make out a pattern

of racketeering under the RICO statute.               See Abell v. Potomac

Insurance Co., Slip Op. No. 90-4737 (5th Cir. Nov. 13, 1991).


                                        26
     Finally, we must determine whether there was an enterprise in

which L & H was participating.       Plaintiffs assert that the RICO

enterprise   here   was   Quinn-L   Corporation.7     Under   18    U.S.C.

§ 1961(4), an "enterprise" can include a corporation or other legal

entity.   The enterprise must be an entity separate and apart from

the pattern of activity in which it engages.        Manax v. McNamara,

842 F.2d 808, 811 (5th Cir. 1988).        Furthermore, before we can

conclude that   a   defendant   participates   in   the   conduct   of   an

enterprise's affairs, there must be a nexus between the defendant,

the enterprise, and the racketeering activity.        In this Circuit,

this nexus is established by proof that the defendant has in fact

committed the racketeering acts alleged, that the defendant's

association with the enterprise facilitated the commission of the

acts, and that the acts had some effect on the enterprise.          United

States v. Carlock, 806 F.2d 535, 546 (5th Cir. 1986); United States

v. Cauble, 706 F.2d 1322, 1333 (5th Cir. 1983).8




     7
      It is unclear to us from the briefs and the record which
partnerships involved Quinn-L Corporation and which ones involved
Quinn-L Investments or other Quinn-L entities. In any event, in
light of our disposition of this case, we think plaintiffs should
be allowed to amend their pleadings on remand to clarify which
Quinn-L entities are targeted as RICO enterprises.
     8
      We note that Circuit courts have taken different views
regarding "participation in the conduct" of an enterprise. See
Yellow Bus Lines v. Local Union 639, 913 F.2d 948, 952-53 (D.C.
Cir. 1990) (en banc) (discussing the kaleidoscope of views on
this issue). The Supreme Court has recently granted certiorari
to consider an Eighth Circuit case on this topic. See Arthur
Young & Co. v. Reves, 937 F.2d 1310, 1325 (8th Cir. 1991), cert.
granted, __ U.S. __ (1992). Until the Supreme Court speaks, we
continue to apply the standard set forth in Cauble.

                                    27
       Quinn-L Corporation meets the definition of an "enterprise."

It was an ongoing corporation that engaged in activities other than

the allegedly fraudulent sales of partnership interests.          L & H is

a separate entity employed by Quinn-L Corporation and accused of

participating in its scheme to defraud investors by distorting

financial statements.         L & H's association with Quinn-L provided

not only the means of committing the fraud but also the motive.

The effect on the enterprise was to aid in the sale of partnerships

from    which   it   reaped    substantial     income.    Plaintiffs   have

established the requisite nexus.

       In sum, we are persuaded that the district court erred in

granting summary judgment on plaintiffs' RICO claims.             We have

found that the start-up and corporate balance sheets raise a

genuine issue of fact as to whether L & H intended to deceive

plaintiffs about the financial position of the partnerships and the

net worth of Quinn-L Investments.           On this record, plaintiffs are

therefore entitled to take their RICO case to a jury.

                                     III.

       Finally, plaintiffs and their attorneys object to the Rule 11

sanctions imposed for submitting affidavits not well grounded in

fact and the truth of which the attorneys had not adequately

investigated.        Rule 11 provides in relevant part that "[t]he

signature of an attorney or party constitutes a certificate by the

signer that the signer has read the pleading, motion, or other

paper; that to the best of the signer's knowledge, information, and

belief formed after reasonable inquiry it is well grounded in fact.


                                      28
. . . and that it is not interposed for any improper purpose."

F.R.C.P. 11.     Violation of Rule 11 justifies the imposition of

sanctions.    Robinson v. National Cash Register Co., 808 F.2d 1119,

1130 (5th Cir. 1987).      We review the court's award of sanctions for

an abuse of discretion. Thomas v. Capital Security Services, Inc.,

836 F.2d 866, 872 (5th Cir. 1988).

     In preparing their response to defendant's motion for summary

judgment, plaintiffs' attorneys mailed 127 form affidavits to their

clients.     The plaintiffs read the affidavits, signed them, and

returned them, and their attorneys then filed the affidavits in the

district court with a signed pleading attached.              When defendant

questioned    plaintiffs    about    these    affidavits     in    their   oral

deposition, many of them admitted that many of the statements

contained in the affidavits were simply not true.                 Furthermore,

they confessed that they had not spoken with their attorneys about

the affidavits or their contents--they had received the affidavits

in the mail and sent them back, relying on their attorneys to

verify the facts to which they were attesting.           On these grounds,

defendant    moved   to   strike   the    affidavits   and   requested     that

sanctions be imposed on the plaintiffs and their attorneys.                While

this motion was pending in the district court, the plaintiffs

resubmitted the affidavits with a later pleading.                 The district

court concluded that plaintiffs' attorneys had failed to make a

reasonable inquiry as to the truth of the matters asserted in the

affidavits and assessed sanctions in the amount of $31,017.50.




                                     29
     We begin by noting that large attorneys' fees awards under

Rule 11 often can be coercive, even debilitating, sanctions.         The

sheer size of some awards--tens and even hundreds of thousands of

dollars--can     produce   "devastating    professional   and   financial

consequences."     Cochran, "Rule 11:       The Road to Amendment," 61

Miss. L.J. 5, 6 (1991); see also Johnson, Contois & Keeling, "The

Proposed Amendments to Rule 11:           Urgent Problems and Suggested

Solutions," 43 Baylor L. Rev. 647, 650 (1991).

     It is axiomatic that, in assessing Rule 11 sanctions, the

district court must impose the "least severe sanction adequate" to

accomplish the purposes of Rule 11.          Thomas v. Capital Security

Serv., Inc., 836 F.2d 866, 878 (5th Cir. 1988) (en banc).          While

the district court has broad discretion to fashion an appropriate

sanction, this court on appeal must ensure that the district court

discharged its duty to impose the least severe sanction adequate.

In cases in which "the sanctions imposed are substantial in amount,

type, or effect," appellate review of the sanctions is particularly

rigorous.    Id.    In such cases, the district court must enter

specific factual findings to assist the appellate court in its

review of the Rule 11 sanctions.

     Despite the substantial size of the Rule 11 sanctions in the

instant case, the district court did not enter specific factual

findings.   The court did not indicate in the record the factors it

considered in choosing a $31,017.50 sanction.       It did not state in

the record which alternative sanctions, if any, it also considered.




                                   30
Above all, it did not explain why the sanction it imposed was the

least severe sanction adequate to serve the purposes of Rule 11.

     The   least   severe   sanction    adequate   requirement    serves   a

critical function:     it ensures that Rule 11 does not degenerate

into nothing more than a docket control device that the district

courts use to punish unsuccessful litigants who dare to raise their

claims or defenses in federal court.        The $31,017.50 sanction in

this case may well be an appropriate Rule 11 sanction.           Because of

its substantial size, however, this court may not affirm the

sanction until the district court has entered specific factual

findings determining whether the sanction is the least severe

adequate to serve the purposes of Rule 11.

     We vacate the sanction and remand to the district court for

specific factual     findings.    We    reverse    the   grant   of   summary

judgment and remand for further proceedings consistent with this

opinion.




                                   31
                               APPENDIX

             Instruction:   Aiding and Abetting Liability

                 under Section 10(b) and Rule 10-b-5

                                  I.

     The plaintiff claims that the defendant aided and abetted a

violation of the federal securities law.      A person who aids and

abets a violation of Section 10(b) and Rule 10b-5 may be held

liable for the violation.

     Plaintiff must prove by a preponderance of the evidence:

     1.     That someone other than the defendant committed the

            securities law violation charged in the complaint.

            Answer:________________________________________________
                   Plaintiff did prove or plaintiff did not prove

     If you have answered question 1 plaintiff did prove, then

answer question 2, otherwise do not answer further questions in

this set.

     2.     That the defendant substantially assisted the securities

            violation as found by you in question 1.

            Answer:________________________________________________
                   Plaintiff did prove or plaintiff did not prove

     If you have answered question 2 plaintiff did prove, then

answer question 3, otherwise do not answer further questions in

this set.

     3.     That the defendant intended to assist the securities

            violation as found by you in your answer to question 2.9

     9
       As suggested by Woodward v. Metro Bank of Dallas, 522 F.2d
84, 96 (5th Cir. 1975); Abell v. Potomac Ins. Co., 858 F.2d 1104,
1127 (5th Cir. 1988), vacated in part on other grounds sub nom.

                                   i
            Answer:________________________________________________
                   Plaintiff did prove or plaintiff did not prove


     As to the first element, there can be no aiding and abetting

liability unless someone violated the securities laws.

     As to the second element, the plaintiff must prove that the

assistance rendered by the defendant was substantial.10 Whether the

assistance was substantial must be considered in light of all the

surrounding circumstances.

     As to the third element, the plaintiff must show that the

defendant consciously intended11 to assist the securities violation.

Conscious assistance has two aspects.12   First, the plaintiff must

prove that the defendant had knowledge of the existence of the

securities violation and generally understood how its actions aided

in promoting the success of the securities violation.13 Second, the

plaintiff must prove that the defendant intended to further the

securities violation.14




Fryer v. Abell, 492 U.S. 914 (1989).
     10
       Abell, 848 F.2d at 1127; Woodward, 522 F.2d at 97 ("In
any case, the assistance must be substantial before liability can
be imposed under 10b-5.").
     11
          Woodward, 522 F.2d at 97.
     12
          Abell, 858 F.2d at 1127.
     13
          Id.
     14
       Id. ("The second element of scienter -- commitment --
would be met where evidence shows that the abettor acts from a
desire to help the fraud succeed.").

                                     ii
                                       II.

     [In cases where a duty to disclose is alleged and proved, or

where the performance of services atypical of the defendants'

business is alleged and proved, or where particularly substantial

assistance    is   alleged     and   proved,   a   fourth     question     must   be

answered.    Of course, these may themselves present fact issues for

separate submission to the jury.]

     If you have answered question 3 plaintiff did not prove, then

answer question 4, otherwise do not answer further questions in

this set.

     4.     That the defendant acted in reckless disregard of the

            fact that he assisted the securities violation as found

            by you in your answer to question 2.

            Answer:________________________________________________
                   Plaintiff did prove or plaintiff did not prove

     Reckless      disregard    as   used    in    question    4   means    highly

unreasonable conduct, not merely ordinary mistake or inadvertence.

It is an extreme departure from reasonable conduct.                      Reckless

assistance has two aspects.            First, plaintiff must prove that

defendant acted in reckless disregard of the securities violation

found by you in your answer to question 1.            Second, plaintiff must

prove that defendant acted in reckless disregard of the fact of his

assistance.




                                       iii
