                              In the
 United States Court of Appeals
               For the Seventh Circuit
                           ____________

No. 05-4322
TRICONTINENTAL INDUSTRIES, LIMITED
and TRICONTINENTAL DISTRIBUTION, LIMITED,
                                               Plaintiffs-Appellants,
                                  v.


PRICEWATERHOUSECOOPERS, LLP,
                                                 Defendant-Appellee.
                          ____________
             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
               No. 01 C 5526—Elaine E. Bucklo, Judge.
                          ____________
      ARGUED JUNE 7, 2006—DECIDED JANUARY 17, 2007
                          ____________


 Before BAUER, RIPPLE and WOOD, Circuit Judges.
  RIPPLE, Circuit Judge. Tricontinental Industries Limited
and Tricontinental Distribution Limited (collectively
“Tricontinental”) instituted this action against
PricewaterhouseCoopers, LLP (“PwC”), for negligent
misrepresentation, common law fraud and securities
fraud. These allegations related to statements that PwC
had made regarding the financial worth of its client,
Anicom, Inc. (“Anicom”) during negotiations involving the
2                                                 No. 05-4322

sale of Tricontinental’s assets for Anicom stock. The district
court dismissed Tricontinental’s original, amended and
second amended complaints for failure to state a claim,
see Fed. R. Civ. P. 12(b)(6), and for failure to plead fraudu-
lent conduct with the specificity required by Federal Rule
of Civil Procedure 9(b). Tricontinental timely appealed. For
the reasons set forth in this opinion, we affirm the judg-
ment of the district court.


                               I
                      BACKGROUND
A. Facts
                              1.
  Because this is an appeal from a motion to dismiss, “[w]e
accept all the factual allegations in the complaint and draw
all reasonable inferences from these facts in favor of the
plaintiff.” Arazie v. Mullane, 2 F.3d 1456, 1465 (7th Cir. 1993)
(citation omitted).1
  Anicom, a wire distribution company, was founded in
the early 1990s. Soon thereafter, its stock became publicly
traded, and the company adopted a strategy to increase


1
  In the present case, there are two operative complaints from
which we draw the facts. The Amended Complaint, see R.117,
sets forth the operative facts with respect to Tricontinental’s
negligent misrepresentation claim and with respect to its claim
of common law fraud concerning PwC’s post-closing actions.
The Second Amended Complaint, see R.135, sets forth the
operative facts with respect to Tricontinental’s claim for com-
mon law fraud based on PwC’s pre-closing actions and with
respect to Tricontinental’s federal securities claim.
No. 05-4322                                                 3

market share and to expand its geographical scope of
operations. Between 1995 and 1997, Anicom acquired
twelve companies. Each of these transactions involved
some payment in the form of Anicom stock. During this
time, PwC rendered accounting, audit and various types
of consulting services to Anicom.
  In September 1998, Anicom entered into an Asset Pur-
chase Agreement (“Agreement”) to acquire the wire and
cable distribution assets of three companies—Texcan
Cables Ltd. (known now as Tricontinental Distribution
Limited), Texcan Cables, Inc. and Texcan Cables Inter-
national, Inc.2 According to the Agreement, Anicom
acquired those assets in exchange for cash and Anicom
stock.3
  After the transaction, Tricontinental Distribution and
Texcan Cables, Inc., transferred their stock to plaintiff
Tricontinental Industries, Ltd., who was not a party to
the Agreement.


                             2.
  According to the allegations of Tricontinental’s com-
plaint, which we must accept as true for purposes of this
appeal, in 1996, Anicom began engaging in improper
accounting procedures to enable it to report that it had
met sales and revenue goals. The procedures included


2
  Anicom had approached one or all of the Texcan entities in
both 1996 and 1997 concerning a possible merger, but nothing
came of those discussions.
3
  Texcan Cables International did not receive any Anicom stock
in the transaction.
4                                                 No. 05-4322

the use of fictitious sales orders or “prebill[s]” for goods
that were not ordered. R.135 at 9. PwC became aware of
these practices in July 1997 when it was asked to investi-
gate Anicom’s billing practices at Anicom’s Atlanta and
Tampa offices. After conducting its investigation, PwC
reported to Donald C. Welchco, Anicom’s then Vice
President and Chief Financial Officer, that improper
billing had occurred at Anicom branches and that, in the
absence of controls, the practice might arise at other
branches as well. See id. at 47.
  No mention of these irregularities was made in PwC’s
audits of Anicom’s 1998 and 1999 financial statements.
Indeed, PwC certified that Anicom’s financial statements
were accurate, complete and in conformity with Generally
Accepted Accounting Procedures (“GAAP”) and that its
audits were performed according to Generally Accepted
Accounting Standards (“GAAS”).
  On July 18, 2000, Anicom announced that it was investi-
gating possible accounting irregularities that could result
in revision of its 1998, 1999 and first quarter 2000 financial
statements by as much as $35 million. Accordingly,
Anicom announced that its 1998 and 1999 financial state-
ments should no longer be relied upon.
  After conducting an internal investigation, Anicom
further announced that, subject to audit, it believed that,
for the period from the first quarter 1998 to the first quarter
of 2000, the company had overstated revenue by approxi-
mately $39.6 million. None of the company’s announce-
ments or disclosures ever stated that full-year 1997 revenue
or net income had been materially misstated or that any
of Anicom’s prior financial results were inaccurate in any
way.
No. 05-4322                                                5

  On January 5, 2001, Anicom filed for bankruptcy protec-
tion. The plaintiffs allege that this bankruptcy decreased
the value of Anicom stock acquired in the September 1998
transaction, all of which was then owned by the plaintiff,
Tricontinental Industries.
  After Anicom’s disclosure of possible irregularities, both
the Securities and Exchange Commission (“SEC”) and the
Federal Bureau of Investigation (“FBI”) conducted investi-
gations. On May 6, 2002, the SEC instituted a civil action
against six Anicom officers and employees for violations
of the federal securities laws in connection with Anicom’s
1998, 1999 and 2000 statements. The SEC complaint alleged
that, to conceal this fraud, Anicom executives had lied to
PwC during its audits and reviews. Additionally, in
2003, a federal grand jury returned indictments against
several of Anicom’s executives for fraud and obstruction of
justice related to Anicom’s 1998, 1999 and 2000 reported
results.


B. District Court Proceedings
  On July 18, 2001, Tricontinental filed this action against
PwC and individual officers and directors of Anicom
asserting claims related to the September 1998 transaction.
The original complaint asserted that PwC had violated
Section 10(b) of the Securities Exchange Act for false
statements in filings before the SEC; it also asserted
common law fraud based on
    materially false and misleading statements . . . concern-
    ing the revenues, earnings, operations and financial
    condition of Anicom. These false and misleading
    statements were made to Plaintiffs in meetings and
    conversations in 1998 prior to September 21, 1998 and
6                                                No. 05-4322

    were contained in Defendants’ various public filings, in
    the representations and warranties made by Anicom
    in the Asset Purchase Agreement, and in other docu-
    ments prepared by Defendants in connection with the
    Asset Purchase Agreement.
R.1 at 28. Finally, the original complaint alleged a claim for
negligent misrepresentation against PwC based on “con-
sent letters it signed for Anicom’s” registration statements
for the first three quarters of 1998 and based on “its input
into the determination of the equity value of the preferred
shares,” which reflected inflated sales and earnings figures.
Id. at 29. PwC moved to dismiss these claims on several
grounds, and the district court granted that motion.4
  On January 28, 2003, the plaintiffs filed a motion for
reconsideration and also filed a motion for leave to file an
amended complaint. The court denied the motion to
reconsider, but granted the motion for leave to file an
amended complaint (“Amended Complaint”). In the
Amended Complaint, Tricontinental asserted two claims
against PwC:5 a negligent misrepresentation claim and a
claim for common law fraud. With respect to the negligent
misrepresentation claim, the complaint stated that
    [p]rior to the time that PwC conducted its 1997 audit,
    PwC had assisted Anicom in raising money for acquisi-


4
  In addition to these counts, the original complaint also al-
leged several claims against individual employees of Anicom.
Neither the claims against Anicom individuals nor the claims
against PwC that were contained in the original complaint are
before this court.
5
  The Amended Complaint contained additional claims against
individuals at Anicom. Those are not before the court.
No. 05-4322                                                7

      tions and finding acquisition candidates. And, in 1997,
      PwC well knew that Anicom was seeking to complete
      additional acquisitions. Indeed, in December 1997,
      PwC proposed to provide Anicom with ongoing
      assistance and advice on acquisitions and acquisi-
      tion candidates.
R.117 at 63. Additionally, Tricontinental maintained that
PwC knew that Tricontinental was relying on Anicom’s
audited financial statement for 1997 and, specifically, was
relying on PwC’s representation “that the audit was
performed in a manner consistent with GAAS and that
Anicom’s financial statements conformed with GAAP.” Id.
at 64-65. These statements, Tricontinental alleged, “were
materially false, misleading and without reasonable basis.”
Id. at 65. Additionally, Tricontinental claimed that
      Anicom’s financial statements and Form 10-Qs for
      the First and Second Quarters of 1998 contained
      statements that were materially false and misleading.
      PwC had the responsibility of reviewing those state-
      ments and reports before they were released or filed,
      and PwC did in fact review and provide assurance
      regarding them. The misstatements in Anicom’s
      financial reports were so blatant that PwC could not
      have missed them in the course of any reasonable
      review procedure appropriate to the circumstances
      known by PwC to exist at the time . . . . Nonetheless,
      PwC did not withdraw or modify its 1997 audit opin-
      ion, but instead PwC let Plaintiffs rely upon that
      opinion.
Id.
 The Amended Complaint also included a claim against
PwC for common law fraud “Based Upon Actions Taken
8                                              No. 05-4322

After September 21, 1998, To Conceal the Fraud in the
Asset Purchase Agreement.” Id. at 66. Among the allega-
tions against PwC, Tricontinental stated that
    [d]uring this period, each of these Defendants partici-
    pated in a fraudulent scheme to conceal the fraud in
    the acquisition of Texcan. This scheme consisted of a
    series of fraudulent activities, including the issuance
    of fraudulent and misleading audits of Anicom’s
    financial results for the years 1998 and 1999.
      ...
      175. Although Plaintiffs did not know that they
    had a factual basis for rescission, the Principal In-
    dividual Defendants and PwC all knew that Plaintiffs
    had a basis for rescission. PwC and the Principal
    Individual Defendants also knew that, if the plaintiffs
    rescinded the Asset Purchase Agreement, the conse-
    quences would have been disastrous for all of them.
    PwC, therefore, joined with the Principal Individual
    Defendants in a cover-up—a fraudulent scheme
    designed to ensure that nothing would be made public
    after the acquisition that would alert Plaintiffs, or
    anyone else, to the accounting fraud that had occurred
    at Anicom before the Texcan transaction.
Id. at 66-67.
  PwC moved to dismiss the Amended Complaint as well.
With regard to the negligent misrepresentation claim, PwC
argued that the Illinois Public Accounting Act (“IPAA”)
“limit[ed] the liability of public accountants to persons,”
who were “not in privity of contract with them.” R.116
at 6. Consequently, because Tricontinental neither had
alleged that they “were in privity of contract with PwC at
or before the date of the Texcan transaction,” nor had
No. 05-4322                                                9

alleged that Anicom’s “primary intent” in securing PwC’s
services was to benefit Tricontinental, Tricontinental had
failed to state a claim for negligent misrepresentation
consistent with the IPAA. Id. at 6-7. With respect to the
common law fraud claim, PwC argued that Tricontinental
had failed to set forth “ ‘the who, what, when, where, and
how’ of the alleged fraud” as required by DiLeo v. Ernst &
Young, 901 F.2d 624, 627 (7th Cir. 1990):
   Plaintiffs allege no facts showing that PwC became
   aware of material misstatements in the 1997 year-end
   financial statements. Nor do they allege how or when
   PwC supposedly became aware that its opinion on the
   1997 financial statements was false. Similarly, plaintiffs
   allege no facts showing who at PwC and Anicom
   entered into a “scheme” to conceal from plaintiffs that
   they had a claim to rescind the Texcan transaction, or
   when PwC entered into such a scheme with Anicom.
   Finally, plaintiffs allege no plausible motive for PwC
   to commit the fraud alleged in Count V.
R.116 at 11-12 (emphasis in original).
  After briefing had closed on PwC’s motion to dismiss
the Amended Complaint, Tricontinental sought to file a
second Amended Complaint to add additional claims
against PwC. The plaintiffs’ counsel represented to the
court that Tricontinental did not intend to change any of
the claims that had been set forth in the Amended Com-
plaint. See Tr.Vol.III at 8. On September 26, 2003, the
district court allowed Tricontinental to file the Second
Amended Complaint, but stated that it would decide
PwC’s pending motion to dismiss the claims contained in
the Amended Complaint. See id. at 8, 13.
  The Second Amended Complaint included two new
claims against PwC: a federal securities fraud claim and a
10                                             No. 05-4322

common law fraud claim against PwC both based on
allegedly deceptive and untrue statements contained in
Anicom’s 1997 audit statements. The Second Amended
Complaint stated additional allegations against PwC
with respect to claims set forth in the Amended Com-
plaint, namely the negligent misrepresentation claim and
the common law fraud claim directed at PwC’s post-
closing actions.
  PwC moved to dismiss the new claims contained in the
Second Amended Complaint. PwC maintained that the
federal securities fraud and common law fraud claims
failed to allege “loss causation,” a necessary element of
both causes of action. PwC also argued that the common
law fraud claim was deficient because Tricontinental failed
to allege any intent on behalf of PwC to defraud.
  On January 29, 2004, the district court dismissed the
negligent misrepresentation and fraudulent concealment
claims set forth in the Amended Complaint. With respect
to the negligent misrepresentation claim, the court held
that Tricontinental had failed to allege that PwC owed
them any duty in connection with the 1997 audit state-
ment. Turning to the common law fraud claim, the court
held that Tricontinental had failed to allege any action-
able misrepresentation by PwC after the closing of the
September 1998 transaction, that PwC did not have a
duty to disclose false or misleading statements by Anicom
and that Tricontinental had failed to allege fraudulent
intent by PwC.
  On February 12, 2004, Tricontinental moved for recon-
sideration of this order in part because the district court
had failed to consider additional allegations contained in
the Second Amended Complaint that supported the
negligent misrepresentation and post-closing fraud claims.
No. 05-4322                                                11

The district court denied the motion with respect to those
counts, specifically rejecting Tricontinental’s argument
that additional allegations in the Second Amended Com-
plaint helped bolster those claims. The district court stated:
      The plaintiffs exhibit some confusion about which
    version of the complaint is under consideration.
    Plaintiffs did not seek leave of court to re-plead Counts
    IV and V with the support of a sturdier set of alleged
    facts. They sought leave only to add two supplemental
    claims, Counts VI and VII. Plaintiffs’ counsel assured
    me in open court that Counts IV and V [negligent
    misrepresentation and post-closing fraud, respectively]
    appeared in the Second Amended Complaint “exactly
    as they were” in the Amended Complaint, and that the
    proposed amendment presented no obstacle to the
    then-pending motions to dismiss. Now that those
    counts have been dismissed, plaintiffs argue that in
    fact, Counts IV and V are new and improved in the
    Second Amended Complaint. Contrary to plaintiffs’
    argument, this court did not fail “to take into account
    the relationship between the Amended Complaint and
    the Second Amended Complaint,” because the Second
    Amended Complaint did not “supersede the Amended
    Complaint” as to Counts IV and V. The new and
    improved Counts IV and V simply are not before me,
    because I never permitted them to be changed. Thus,
    in evaluating Counts IV and V, I evaluate only the
    versions set forth in the original Amended Complaint.
R.186 at 2-3.
  On the same day that the district court denied the
plaintiffs’ motion to reconsider the dismissal of the claims
against PwC contained in the Amended Complaint, the
district court also granted PwC’s motion to dismiss the
claims against it set forth in the Second Amended Com-
12                                                  No. 05-4322

plaint. The court held that Tricontinental’s securities fraud
claim failed because Tricontinental had not alleged loss
causation. See R.185 at 3. The court further explained that
the common law fraud claim failed because “the plain-
tiffs do not allege that PwC intended to induce action on
the part of plaintiffs or anyone else. . . . Here, PwC is not
alleged to have intended to mislead anyone at all; the
complaint only states that PwC acted ‘knowingly.’ This
is too vague to meet the high pleading standards of Rule
9.” Id. at 4.
  Nearly one year later, Tricontinental filed a motion to
vacate the dismissal of the Second Amended Complaint
and to replead claims against PwC. The stated rationale
for the motion was two-fold. First, Tricontinental pointed
to a settlement entered into between PwC partner Gary
Seidelman and the SEC; the settlement related to PwC’s
audit procedures for its 1999 audit of Anicom and its
interim review of Anicom’s first quarter 2000 financial
statements. Second, Tricontinental claimed that an Illinois
Appellate Court opinion, Freeman, Freeman & Salzman, P.C.
v. Lipper, 812 N.E.2d 562 (Ill. App. Ct. 2004), “clarified
and, in the concurring opinion altered, the pleading
standard governing third party claims against accountants
such as those asserted here.” R.235 at 2.
  The court denied the motion. It held that the informa-
tion contained in the consent decree neither was new nor
did anything “to solve Tricontinental’s ongoing failure to
plead a viable claim against PwC.” R.250 at 4.6 Further



6
    Specifically, the court stated:
      The central issue here is whether PwC had a duty to
      Tricontinental during the 1998 negotiations that led to the
                                                   (continued...)
No. 05-4322                                                     13

more, the district court believed that the recent Illinois
Appellate Court decision was “consistent with earlier
and subsequent Illinois cases,” id. at 5; the court con-
cluded that “the argument that Freeman . . . requires giv-
ing Tricontinental yet another opportunity to replead not
only comes too late, it is wrong,” id. at 6. The district
court therefore entered final judgment as to PwC on
October 14, 2005. Tricontinental timely appealed.


                                 II
                          DISCUSSION
A. Standard of Review
  We review a district court’s dismissal, whether based on
Federal Rule of Civil Procedure 12(b)(6) or Rule 9(b), de
novo. See Arazie, 2 F.3d at 1464-65. In reviewing dismissals,
“[w]e accept all the factual allegations in the complaint
and draw all reasonable inferences from these facts in
favor of the plaintiff.” Id. at 1465 (citation omitted). In
doing so, however, “[w]e are not required . . . to ignore
any facts alleged in the complaint that undermine the



6
    (...continued)
       sale of the Anicom securities to speak up concerning
       accounting irregularities PwC may have discovered during
       its audit of Anicom’s 1997 financial statements. I have
       repeatedly held that it did not. The consent decree does not
       address any problems encountered in PwC’s audit of the
       1997 Anicom statement. It does not even mention that
       statement, but is concerned only with PwC’s involvement in
       financial statements that were generated after the sale.
R.250 at 4 (emphasis in original).
14                                                  No. 05-4322

plaintiff’s claim.” Id. (citation omitted). Although we
employ the same standard of review for dismissal under
Rule 9(b),
     [t]he federal rules impose more stringent pleading
     requirements upon complaints charging fraud than
     on complaints charging other types of misconduct. Fed.
     R. Civ. P. 9(b). We outlined these requirements in DiLeo
     v. Ernst & Young, 901 F.2d 624, 626 (7th Cir.), cert.
     denied, 498 U.S. 941 (1990). In DiLeo, we held that
     plaintiffs must plead the circumstances constituting
     fraud in detail—the “who, what, when, where, and
     how . . . .” Id. at 626.
Arazie, 2 F.3d at 1465 (parallel citations omitted). This
heightened pleading requirement does not extend to
“states of mind” which “may be pleaded generally” under
Rule 9(b), see Robin v. Arthur Young & Co., 915 F.2d 1120,
1127 (7th Cir. 1990); nevertheless, the complaint “ ‘must
still afford a basis for believing that plaintiffs could prove
scienter,’ ” id. (quoting DiLeo v. Ernst & Young, 901 F.2d 624,
629 (7th Cir. 1990)).7 Finally, we note that we may affirm


7
   In 1995, Congress enacted the Private Securities Litigation
Reform Act (“PSLRA”) Pub. L. No. 104-67, 109 Stat. 737 (1995)
(codified at 15 U.S.C. § 78u-4), which placed an even greater
burden on the plaintiff with respect to pleading federal securi-
ties claims. See 15 U.S.C. § 78u-4(a)(1) (stating that the provi-
sions contained in “this subsection shall apply in each private
action arising under this chapter,” specifically Chapter 2B of
Title 15 of the United States Code). The PSLRA affected the
manner in which a plaintiff must plead facts related to an
allegedly untrue or misleading statement, see 15 U.S.C. § 78u-
4(b)(1), and related to the defendant’s scienter, see 15 U.S.C.
                                                    (continued...)
No. 05-4322                                                 15

the judgment of the district court on any ground sup-
ported by the record. See Vargas-Harrison v. Racine Unified
Sch. Dist., 272 F.3d 964, 974 (7th Cir. 2001).


B. Negligent Misrepresentation
  Tricontinental first maintains that the district court erred
in dismissing its negligent misrepresentation claim on the
ground that it “lacked privity with PwC and that PwC
made no direct representation to Tricontinental.” Appel-
lants’ Br. at 26. In Tricontinental’s view, neither of the
elements mentioned by the district court are necessary
to state a claim under Illinois law. We therefore must
examine the necessary elements of a negligent misrepresen-
tation claim under Illinois law. This claim is not governed
by the heightened pleading standard of Rule 9(b).


                              1.
  In order to state a claim for negligent misrepresenta-
tion under Illinois law, a party must allege:
    (1) a false statement of material fact; (2) carelessness or
    negligence in ascertaining the truth of the statement
    by the party making it; (3) an intention to induce the
    other party to act; (4) action by the other party in
    reliance on the truth of the statement; (5) damage to the
    other party resulting from such reliance; and (6) a duty



7
  (...continued)
§ 78u-4(b)(2). Although applicable to Tricontinental’s federal
securities claim, the PSLRA does not affect directly any of the
issues raised in this appeal.
16                                              No. 05-4322

     on the party making the statement to communicate
     accurate information.
First Midwest Bank, N.A. v. Stewart Title Guar. Co., 843
N.E.2d 327, 334-35 (Ill. 2006).
   The Illinois courts have considered, on several occasions,
the application of these requirements, specifically, the
element of duty, as it applies to public accountants. The
Illinois Appellate Court first spoke to this issue in Brumley
v. Touche, Ross & Co., 463 N.E.2d 195 (Ill. App. Ct. 1984)
(“Brumley I”). In that case, the court reviewed the various
approaches that courts around the country had adopted
for accountant liability to third parties: (1) the standard
set forth in Ultramares Corp. v. Touche, 174 N.E. 441 (N.Y.
1931), which held that public accountants could not be
liable in negligence to third parties absent privity, see
Brumley I, 463 N.E.2d at 198; (2) a reasonable foreseeability
standard; and (3) a more limited foreseeability rule “that
public accountants may be liable to plaintiffs, who are not
exactly identifiable, but who belong to a limited class of
persons whose reliance on the accountant’s representa-
tions is specifically foreseen,” id. at 199. After reviewing
these options, the court also looked to the circumstances
under which the Supreme Court of Illinois had held other
professionals, specifically surveyors and attorneys, respon-
sible to third parties. See Rozny v. Marnul, 250 N.E.2d 656
(Ill. 1969) (surveyors); Pelham v. Griesheimer, 440 N.E.2d 96
(Ill. 1982) (attorneys). The court stated:
       In Rozny v. Marnul the court extended a duty to a
     surveyor premised upon the pleadings and proof of an
     absolute guarantee of accuracy made by the surveyor
     on the inaccurate plat; defendant’s knowledge that
     the plat would be used and relied upon by others than
     the person ordering it, including plaintiff; that poten-
No. 05-4322                                                 17

    tial liability in the case was restricted to a small group;
    and, that permitting recovery by a reliant user
    whose use of the plat was foreseeable will promote
    caution by surveyors. In that case, the surveyor’s
    guarantee of accuracy was absolute and the intended
    reliance upon the plat by the third-party was known
    to him.
Brumley I, 463 N.E.2d at 200. Turning to the holding of the
state supreme court with respect to attorney liability, the
appellate court recounted that, in Pelham,
    the court determined there could be a duty owed by
    an attorney to a third-party who was not his client,
    thus providing a broader scope of liability in a negli-
    gence action than privity. There, the test of the scope of
    an attorney’s duty to a third-party was whether the
    attorney was acting at the direction of or on behalf of
    his client to benefit or influence a third-party. . . .
Id. The appellate court concluded that “a similar rule” to
the rule applied to attorney liability “[wa]s appropriate”
for determining “the duty owed to third-parties by an
accountant.” Id. Applying the Pelham rule, the appellate
court held that the plaintiff’s complaint was “insufficient to
set forth a duty on the part of defendant to plaintiff”
because “[t]he complaint d[id] not allege Touche Ross
knew of plaintiff or that the report was to be used by
KPK to influence plaintiff’s purchase decision nor does it
allege that was the primary purpose and intent of the prepara-
tion of the report by Touche Ross for KPK.” Id. (emphasis
added).
  In Brumley v. Touche, Ross & Company, 487 N.E.2d 641 (Ill.
App. Ct. 1985) (“Brumley II”), the court revisited this
standard. In Brumley II, the plaintiff had argued that the
18                                                 No. 05-4322

Supreme Court of Illinois had altered the standard for
liability for attorneys, which necessitated a change by the
appellate court with respect to accountant liability. The
appellate court rejected this argument:
     Plaintiff contends, however, that our supreme court
     has modified the Pelham view in such cases, citing
     Ogle v. Fuiten (1984), 102 Ill.2d 356, 80 Ill. Dec. 772, 466
     N.E.2d 224, and argues that the “intent to directly
     benefit” standard as to attorneys applies only in
     adversarial representation matters, as in Pelham, and
     not where the matter is nonadversarial, as in the
     drafting of wills in Fuiten. Plaintiff suggests that as the
     relationship between accountant and client does not
     relate to adversarial matters, that a less direct stan-
     dard would also apply here. . . .
       We do not agree the supreme court has rejected or
     modified the “primary intent” rule stated in Pelham to
     be essential to establish a duty on the part of an attor-
     ney towards a nonclient for professional negligence.
     In Fuiten, plaintiffs alleged, inter alia, that the ser-
     vices of the defendant attorney employed by testators
     to draft their wills was obtained for the benefit of
     plaintiffs as the intended beneficiaries of the wills. It
     is thus apparent that the standard applicable to the
     attorney-client-third-party relationship remains as
     stated in Pelham.
        If, as we have held, a similar standard should apply
     in a tort action by a third party against an accountant,
     it is apparent that to be sufficient plaintiff’s complaint
     must allege facts showing that the purpose and intent
     of the accountant-client relationship was to benefit or
     influence the third-party plaintiff. Plaintiff has al-
     leged that at the time he was preparing to make an
No. 05-4322                                              19

    offer to purchase the stock, representatives of KPK
    Corporation furnished to him auditing reports earlier
    prepared for KPK by defendant Touche, Ross. Plaintiff
    also alleged that he advised Touche, Ross of his inter-
    est in acquiring KPK stock and that the reports pre-
    pared by defendant had been submitted to plaintiff
    for the purpose of influencing his stock purchase
    decision. The complaint further alleged Touche, Ross
    knew he was using the reports to formulate an offer
    for the stock and that defendant confirmed to plain-
    tiff that its auditing report accurately reflected the
    financial position of its client KPK.
487 N.E.2d at 644-45 (citations omitted; emphasis added).
  Shortly after Brumley II, the Illinois legislature enacted
the Illinois Public Accounting Act, 225 ILCS 450/30.1,
which provides:
    No person, partnership, corporation, or other entity
    licensed or authorized to practice under this Act . . .
    shall be liable to persons not in privity of contract
    with such person, partnership, corporation, or other
    entity for civil damages resulting from acts, omissions,
    decisions or other conduct in connection with profes-
    sional services performed by such person, partnership,
    corporation, or other entity, except for:
    (1) such acts, omissions, decisions or conduct that
    constitute fraud or intentional misrepresentations, or
    (2) such other acts, omissions, decisions or conduct, if
    such person, partnership or corporation was aware
    that a primary intent of the client was for the profes-
    sional services to benefit or influence the particular
    person bringing the action; provided, however, for the
    purposes of this subparagraph (2), if such person,
20                                                No. 05-4322

     partnership, corporation, or other entity (i) identifies
     in writing to the client those persons who are in-
     tended to rely on the services, and (ii) sends a copy of
     such writing or similar statement to those persons
     identified in the writing or statement, then such per-
     son, partnership, corporation, or other entity or any of
     its employees, partners, members, officers or share-
     holders may be held liable only to such persons in-
     tended to so rely, in addition to those persons in privity
     of contract with such person, partnership, corporation,
     or other entity.
225 ILCS 450/30.1. Following IPAA’s passage, there was
some question regarding the effect of the IPAA on accoun-
tant liability. One commentator read the IPAA, specifically
the proviso in subsection 2 (“provided, however, for the
purposes of this subparagraph (2) . . .”) as making “it
effectively impossible for any person not in privity of
contract to sue the public accountant for negligent mis-
representation.” Michael J. Polelle, Accountants’ Privity
Shield: An Illinois Mistake, 38 DePaul L. Rev. 685, 686 (1989).
A district court in this circuit, after consulting the legisla-
tive history of the provision, construed the statute as
permitting an accountant not in privity with the third
party to be liable to that third party for negligent misrepre-
sentation only when the accountant had given written
notice to the party. See Robin v. Falbo, 1992 WL 188429 (N.D.
Ill. 1992). We are obliged, however, to follow the interpreta-
tion given the language by the state appellate courts,
and the interpretation given in Robin was rejected by the
Illinois Appellate Court in Chestnut Corp. v. Pestine, Brinati,
Gamer, Ltd., 667 N.E.2d 543, 546-47 (Ill. App. Ct. 1996). The
Illinois court took the view that the first clause of sub-
paragraph (2) states the general rule of accountant liability
No. 05-4322                                                  21

as set out in Brumley while the second clause creates a
legislative exception to the general rule. Continued the
court:
    [T]o adopt the defendants’ interpretation of the statute
    would require us to hold, as a matter of law, that
    accountants are never liable to third parties, absent
    fraud or intentional misrepresentation, unless they
    agree in writing to expose themselves to liability. The
    law in Illinois would have come full circle then and
    returned to the rational [sic] of Ultramares in 1931.
    Absent a clear signal from the legislature or the su-
    preme court that such a return is intended, we
    believe the observation of the trial court and the
    evolution of the law since Ultramares provides a useful
    background as one measures the statute’s meaning.
Id. at 547.
  Although the Supreme Court of Illinois has not spoken to
the issue, Illinois Appellate Courts seem to agree that the
IPAA embodies the rule as first set forth in Pelham and as
applied to accountants in Brumley II: The plaintiff must
show that a primary purpose and intent of the accountant-
client relationship was to benefit or influence the third-
party plaintiff. See Chestnut Corp., 667 N.E.2d at 547;
Brumley II, 487 N.E.2d at 645.
  The primary intent rule, however, has proven to be
somewhat difficult to define in practical terms. For in-
stance, disputes have arisen regarding whether the
“primary intent” of the client must be contemporaneous
with the accountant’s work product on which the third
party relies. With respect to this issue, the Illinois Appellate
Court has stated:
22                                                No. 05-4322

     In terms of timing, we do not read the statute to strictly
     require that an accountant be made aware of his
     client’s intention to influence or benefit a third party
     only at the time the work product was created as
     defendant contends.
       The standard announced in Pelham requires that a
     plaintiff “prove that the primary purpose and intent of
     the client . . . was to benefit or influence the third
     party.” . . . In Brumley II, we held that the plaintiff in
     that case met the Pelham standard because he alleged
     that the defendant knew of the plaintiff’s reliance on
     the defendant’s reports and that the defendant had
     subsequently verified its accuracy. We do not, how-
     ever, read Brumley II as per se requiring independent
     verification in order to meet the standard in Pelham.
     Other conduct may be sufficient to satisfy Pelham.
Builders Bank v. Barry Finkel & Assocs., 790 N.E.2d 30, 37 (Ill.
App. Ct. 2003) (emphasis added).
   Further, although Illinois case law has established that
“independent verification” is not a per se requirement,
Illinois courts have not set forth in detail what “other
conduct,” id., may satisfy the “primary intent” standard.
The cases, however, do establish that some affirmative
action on behalf of the defendant-accountant is necessary.
For instance, in Builders Bank, the record indicated
     that Finkel [the accountant] was told by Urkov [the
     company owner] that UMC was applying for a loan
     and requested that financial statements be furnished
     to plaintiff. The record further establishes that Finkel
     personally met with plaintiff on two occasions to
     discuss issues related to the loan. In at least one meet-
     ing, UMC was seeking an increase of $200,000 on a
No. 05-4322                                                23

    loan that had already been approved. In our view, it
    is reasonable to infer that Finkel played an active role
    in securing the loan or increasing the loan amount for
    UMC. From this evidence, a finder of fact could con-
    clude, pursuant to the statute, that defendant knew
    its work was being used to influence plaintiff at least
    at the time of the second meeting and that defendant,
    at minimum, presented its work as accurate.
Id. Similarly, in Freeman, Freeman & Salzman, P.C. v. Lipper,
812 N.E.2d 562 (Ill. App. Ct. 2004), the court held that the
standard had been met by the allegation that the accoun-
tant to an investment fund had “issued clean audit opin-
ions on each investment partner’s capital accounts for
those years”; had “addressed and sent its clean audit
opinions to the partners who invested in those funds,
including plaintiffs”; and had “prepared federal income tax
Schedules K-1 for plaintiffs and the limited partners each
year.” Id. at 566-67. Furthermore, “each Schedule K-1
purported to reflect each partner’s proportionate share
of the partnership’s net income for the year, as well as
each partner’s capital account balance at the beginning
and end of each year.” Id. at 567. Finally, in Chestnut Corp.,
the court held that the plaintiffs had stated a claim for
negligent misrepresentation by alleging that the plaintiff’s
representatives had gone to the offices of the defendant-
accountants to discuss their possible investment in the
client company and to review its financial condition. In
response to specific inquiries by the plaintiff’s representa-
tives, the defendants “stated that the audit was accurately
performed according to generally accepted auditing
standards.” Chestnut Corp., 667 N.E.2d at 545.
  In sum, the duty owed by a professional accountant to
non-client third-parties is the standard articulated in
24                                                   No. 05-4322

Brumley II and codified in the IPAA. The IPAA provides
that an individual accountant, partnership or firm will
be liable to a third party for negligence only “if such
person, partnership or corporation was aware that a
primary intent of the client was for the professional
services to benefit or influence the particular person.” This
“primary intent” may be demonstrated by “independent
verification” or by other affirmative actions taken by the
accountant and directed to the third party. See Builders
Bank, 790 N.E.2d at 37.


                                2.
  With this standard in mind, we turn to the allegations
set forth in the Amended Complaint to determine
whether they state a claim for relief.8 With respect to the


8
   In its brief, Tricontinental asks this court to consider allega-
tions contained in the Second Amended Complaint, as well as
those contained in the Amended Complaint, in determining
whether it has stated a viable claim for negligent misrepresenta-
tion. See Appellants’ Br. at 28-29. Tricontinental acknowledges
that, “[b]ecause the district court dismissed this count as al-
leged in the Amended Complaint, the argument herein relies
on citations to allegations contained in the Amended Com-
plaint.” Id. at 28. However, Tricontinental also states that “the
allegations in the Second Amended Complaint prove even
more specificity on the threshold issues of PwC’s knowledge.”
Id.
  We do not believe that the allegations contained in the Second
Amended Complaint may be considered with respect to the
negligent misrepresentation claim. The district court never
granted Tricontinental leave to amend any part of the negligent
                                                  (continued...)
No. 05-4322                                                     25

negligence claim, we must measure the adequacy of the
pleading against the standard set forth in Rule 8 of the
Federal Rules of Civil Procedure. That standard, unlike
the Illinois standard, is designed simply to give the de-
fendants adequate notice of the allegation made against
them. The plaintiffs must set forth “a short plain state-
ment of the claim showing that the pleader is entitled to
relief.” Fed. R. Civ. P. 8.
  With respect to the negligent misrepresentation claim,
Tricontinental alleged as follows:
    163. Prior to the time that PwC conducted its 1997
    audit, PwC had assisted Anicom in raising money for
    acquisitions and finding acquisition candidates. And,
    in 1997, PwC well knew that Anicom was seeking
    to complete additional acquisitions. . . . PwC most
    certainly knew that acquisition candidates, such as
    Plaintiffs, would rely on the 1997 Form 10-K in making
    their decisions on whether to invest in Anicom’s
    securities.
    164. PwC knew prior to the closing of the Texcan
    transaction that Plaintiffs were negotiating to sell
    significant assets to Anicom in exchange in part for


8
   (...continued)
misrepresentation claim. A district court’s decision whether to
allow a party to amend its complaint is reviewed for an abuse of
discretion. See, e.g., Trustmark Ins. Co. v. Gen. & Cologne Life Re
of America, 424 F.3d 542, 553 (7th Cir. 2005). Tricontinental does
not claim that the district court abused its discretion in failing
to allow it to amend its negligent misrepresentation claim.
Consequently, we evaluate the allegations contained in the
Amended Complaint to determine whether the negligent
misrepresentation claim survives PwC’s Rule 12(b)(6) challenge.
26                                               No. 05-4322

     Anicom securities. PwC was on the circulation lists for
     drafts of the Asset Purchase Agreement and PwC
     conducted due diligence of Texcan for Anicom. . . .
     PwC knew that Plaintiffs had received and were
     relying on Anicom’s Form 10-K for 1997 and, in partic-
     ular, PwC’s unqualified audit report, and that Anicom
     intended that Plaintiffs rely on the 10-K and PwC’s
     audit report in assessing an investment in Anicom . . . .
     Despite its awareness of these facts, and despite its
     knowledge from its own investigation and its involve-
     ment in the business of Anicom that Anicom was
     engaged in improper accounting practices and lacked
     adequate controls to prevent these irregular practices,
     PwC intentionally or recklessly failed to withdraw
     its audit opinion on the 1997 financial statements.
     Instead, PwC allowed Plaintiffs to rely on the false
     and misleading information contained in Anicom’s
     Form 10-K for 1997.
R.117 at 63-64.
  As noted by the district court, these allegations do not
demonstrate any “independent verification” provided by
PwC to Tricontinental. Builders Bank, 790 N.E.2d at 37.
However, such verification to the third party is not a per se
requirement. See id. “Other conduct” by PwC directed to
Tricontinental also may satisfy the “primary intent”
requirement of the IPAA. See id. Tricontinental alleges that
PwC knew of its reliance on the 1997 audit opinion, knew
of the misrepresentation contained in the statement and
“allowed plaintiffs to rely on the false and misleading
information.” R.117 at 64. However, Illinois cases, fairly
read, make clear that the IPAA requires more. In order
to state a claim under the IPAA, Tricontinental must
allege that it was a primary purpose “of the accountant-
No. 05-4322                                                     27

client relationship . . . to benefit or influence”
Tricontinental. None of the allegations contained in the
above-recited paragraphs support such an inference.
Indeed, the opposite appears to be the case. The actions
taken by PwC—assisting Anicom in raising money for
acquisitions, conducting due diligence “for Anicom” and
being included on the circulation lists during the transac-
tion—are examples of Anicom’s use of PwC’s services
for its own benefit, not that of Tricontinental. Conse-
quently, although we agree with Tricontinental that
neither privity nor independent verification need to be
asserted or shown in order to state a claim, Tricontinental
must set forth “a short and plain statement of the claim
showing that [it] is entitled to relief.” Fed. R. Civ. P. 8(b).
Absent an allegation that fairly states that Anicom’s
primary intent in retaining and utilizing PwC’s services
and work product during the transaction was to influence
Tricontinental, or absent factual allegations that sup-
port such an inference, Tricontinental has not stated a
claim for negligent misrepresentation under Illinois law.9
We, therefore, affirm the district court’s dismissal of this
claim.10


9
  We do not believe that the vague, conclusory allegation that
PwC “participated in the negotiations” between Tricontinental
and Anicom is a sufficient allegation that PwC made a suffi-
cient representation to Tricontinental to satisfy this requirement.
10
   PwC also argues that Tricontinental’s negligent misrepresenta-
tion claim should fail for another reason: Tricontinental did not
plead adequately loss causation. As noted above, however,
Tricontinental’s negligent misrepresentation claim must be
evaluated according to the pleading requirements of Rule 8,
not the heightened pleading requirements of Rule 9. Evaluated
                                                    (continued...)
28                                                       No. 05-4322



10
  (...continued)
according to this less stringent standard, we believe that
Tricontinental’s allegations that it relied on the 1997 statement
to its detriment, that the statement allegedly failed to reveal an
historic overstatement of income (a practice which allegedly
continued through 1998 and 1999), and that Anicom’s stock was
delisted in 2000 after deficiencies in the 1998 and 1999 financial
statements were revealed, adequately allege loss caused by
PwC’s purported negligence with respect to the 1997 financial
statement.
     PwC also maintains that
      the Amended Complaint does not allege that Tricontinental
      Distribution suffered any loss at all since it transferred all of
      its Anicom stock to Tricontinental Industries in November
      1998, long before the stock declined in value. As for
      Tricontinental Industries, it was not a party to the [Agree-
      ment] and thus could not have relied on PwC’s 1997 opinion
      in deciding “to enter into” that agreement.
Appellee’s Br. at 25.
  We agree with PwC that, if Tricontinental Industries had
compensated fully Tricontinental Distribution for its Anicom
stock prior to the time that Anicom made its disclosure in July
2000, then Tricontinental Distribution likely did not suffer
any loss based on its own reliance on the 1997 audit opinion.
Furthermore, if the facts establish that Tricontinental Industries
was not involved in the merger negotiations and did not rely
on PwC’s audit statement in making its own corporate restruc-
turing decisions, then, again, it is not entitled to recovery.
However, under Rule 8, “[a] claim may be dismissed only if ‘it
appears beyond doubt that the plaintiff can prove no set of facts
in support of his claim which would entitle him to relief.’ ”
Antonelli v. Sheahan, 81 F.3d 1422, 1427 (7th Cir. 1996) (quoting
Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). Here, if the facts
                                                    (continued...)
No. 05-4322                                                    29

C. Post-Closing Common Law Fraud
  Tricontinental also maintains that the district court erred
in dismissing Count V of the Amended Complaint, entitled
“For Common Law Fraud, Based Upon Actions Taken
After September 21, 1998, To Conceal the Fraud in the
Asset Purchase Agreement.” R.117 at 66. This count al-
leges that, during the period after the sale and until July 18,
2000, “each of these Defendants participated in a fraudu-
lent scheme to conceal the fraud in the acquisition of
Texcan. This scheme consisted of a series of fraudulent
activities, including the issuance of fraudulent and mis-
leading audits of Anicom’s financial results for the years
1998 and 1999.” Id. Tricontinental also alleges that
     [b]ecause these irregularities were deliberately and
     knowingly hidden from Plaintiffs in September of 1998,
     Plaintiffs were fraudulently induced to enter into the
     Asset Purchase Agreement. Because their sale of
     valuable assets was the result of fraud, Plaintiffs
     were entitled to rescind the Asset Purchase Agree-
     ment under both the common law of Illinois and
     under the Illinois Securities Act, 815 ILCS 5/13, et seq.,
     and would have done so, but for the Defendant’s post-
     closing fraudulent conduct and concealment.
Id. at 67. Finally, Tricontinental avers that


10
  (...continued)
show, as explained by Tricontinental, that “[t]he intra-company
stock transfer was not a separate transaction, but the final step
of the overall transaction, in which Tricontinental Industries
was involved at every step,” Reply Br. at 4, then, we believe,
Tricontinental may be entitled to relief. Consequently, we
cannot uphold the district court’s dismissal of the negligent mis-
representation claim on this basis.
30                                                 No. 05-4322

     [b]ecause of the Defendants’ material misrepresenta-
     tions in connection with the 1998 and 1999 audits, and
     because of Plaintiffs’ reliance upon those misrepresen-
     tations, Plaintiffs did not discover that they had been
     fraudulently induced to enter into the Asset Purchase
     Agreement until July of 2000, at which time recission of
     the Texcan transaction would not have prevented the
     losses that Plaintiffs suffered from Defendants’ fraud.
Id. at 68.11
  The district court treated Tricontinental’s claim as a
claim for “fraudulent concealment” and held that Tri-
continental had not met the heightened pleading require-
ment of Rule 9(b):
     To satisfy this requirement, Tricontinental must plead
     the “who, what, when, where, and how” involved in
     the alleged fraud. DiLeo v. Ernst & Young, 901 F.2d 624,
     627 (7th Cir. 1990). Tricontinental does not meet this
     burden. Nothing in the pleadings before me alleges
     with this degree of particularity the representations
     made by PwC after Tricontinental’s stock purchase.
     Tricontinental does allege omissions on the part of
     PwC. However, as discussed in my previous memoran-
     dum opinion . . ., PwC had no duty to reveal mislead-
     ing statements on the part of its clients.
R.169 at 3-4. The district court also determined that
Tricontinental had not pleaded adequately the scienter
requirement. Id.


11
  As with its negligent misrepresentation claim, Tricontinental
invites this court’s attention to allegations contained in the
Second Amended Complaint as well as in the Amended Com-
plaint. For the reasons set forth supra note 8, we shall consider
only those allegations set forth in the Amended Complaint.
No. 05-4322                                                31

  Tricontinental takes issue with these conclusions. Al-
though acknowledging that PwC had no independent duty
to reveal any fraud contained in the 1997 audit state-
ment—Tricontinental nevertheless maintains that PwC
did have an independent duty to conduct the 1998 and
1999 audits with care and to be truthful in those audit
statements. Its failure to do so, Tricontinental maintains,
constituted fraud. Turning to the scienter requirement,
Tricontinental alleges that PwC was aware of substantial
billing improprieties during 1998 and 1999, and yet gave
no indication of these problems in the 1998 and 1999
financial statements and audits. Tricontinental further
alleges that PwC’s failure to reveal these problems was
fueled by its desire to maintain a good business relation-
ship with Anicom. Taken together, Tricontinental believes
that these allegations suffice to establish intent to defraud.
  Generally speaking, a claim for fraud must include the
following elements: “(1) a false statement of material fact;
(2) defendant’s knowledge that the statement was false; (3)
defendant’s intent that the statement induce the plaintiff
to act; (4) plaintiff’s reliance upon the truth of the state-
ment; and (5) plaintiff’s damages resulting from reliance
on the statement.” Connick v. Suzuki Motor Co., Ltd., 675
N.E.2d 584, 591 (Ill. 1996). Here, the critical element is
whether the facts alleged in the Amended Complaint, and
the reasonable inferences taken from those facts, permit
the conclusion that PwC’s allegedly false statements in
1998 and 1999 were made with the intent to induce
Tricontinental not to seek rescission.
  We do not believe that Tricontinental has met this
pleading requirement. This court has stated that, with
respect to allegations of scienter in cases of fraud against
accountants, the complaint should identify what the
32                                                No. 05-4322

accountant had to gain by covering up (or being complicit
in) the fraud of their clients. DiLeo v. Ernst & Young, 901
F.2d 624, 629 (7th Cir. 1990). Typically, an accountant’s
interest in fees, standing alone, will not suffice to establish
fraudulent intent. See id. (“An accountant’s greatest asset
is its reputation for honesty, followed closely by its reputa-
tion for careful work. Fees for two years’ audits could not
approach the losses E & W would suffer from a perception
that it would muffle a client’s fraud.”); see also GSC Partners
CDO Fund v. Washington, 368 F.3d 228, 238 (3d Cir. 2003)
(“[P]laintiffs now argue that CSFB had a motive to
commit fraud because it stood to receive underwriting
and financial advisory fees. This allegation is undoubtedly
true but equally unavailing.”); Fisher v. Offerman & Co.,
1996 WL563141, at *7 (S.D.N.Y. 1996) (“[A]n underwriter’s
alleged motive to earn its underwriting fees is not alone
sufficient to sustain a strong inference of fraudulent intent.
If it were, every underwriter, law firm, accountant, and
investment advisor whose compensation or commission
depended on the completion of an initial public offering
would have a motive to commit fraud, which would
make Rule 9(b) wholly meaningless.”). PwC’s alleged
interest in generating fees, however, is the crux of
Tricontinental’s scienter argument.
  Additionally, we are troubled by the tenuous relationship
between the alleged motivation for the inducement—the
desire for continued fees—and the action that PwC alleg-
edly was trying to induce—Tricontinental not seeking
rescission. Essentially, Tricontinental argues as follows: If
PwC’s statements had revealed Anicom’s allegedly fraudu-
lent billings, Tricontinental would have sought rescission
No. 05-4322                                                   33

against Anicom.12 Upset by this action, Anicom, in turn,
would have terminated its relationship with PwC. As a
result of Anicom’s displeasure, PwC would have lost
the fees generated by its relationship with Anicom. We
believe that this theory of motive involves too many
assumptions and too much speculation to support a
reasonable inference that PwC made false statements
with respect to the 1998 and 1999 financial statements for
the purpose of inducing Tricontinental not to seek rescission.
Consequently, we affirm the judgment of the district
court with respect to Tricontinental’s common law fraud
claim based on PwC’s post-closing statements.


D. Securities Fraud
  Tricontinental further argues that the district court erred
in dismissing Count VI of the Second Amended Complaint,
which set forth a federal securities claim against PwC.
Specifically, Tricontinental alleged that PwC violated
15 U.S.C. § 78j(b) and implementing Rule 10b-5 when
PwC made material misrepresentations in the 1997 audit
statement which induced Tricontinental to purchase
Anicom stock as part of the Agreement.
  In order to state a claim for a private cause of action
under Rule 10b-5, a plaintiff must allege: “(1) the defendant
made a false statement or omission (2) of material fact (3)
with scienter (4) in connection with the purchase or sale
of securities (5) upon which the plaintiff justifiably relied
(6) and that the false statement proximately caused the
plaintiff’s damages.” Caremark, Inc. v. Coram Healthcare


12
  There is no question that Tricontinental does not have a direct
right of rescission against PwC.
34                                               No. 05-4322

Corp., 113 F.3d 645, 648 (7th Cir. 1997). With respect to 10b-
5 causes of action, causation has two necessary compo-
nents: “transaction causation” and “loss causation.” Id. “To
plead transaction causation, the plaintiff must allege that
it would not have invested in the instrument if the de-
fendant had stated truthfully the material facts at the
time of the sale.” Id. “To plead loss causation, the plaintiff
must allege that it was the very facts about which the
defendant lied which caused its injuries.” Id.
  The district court determined that Tricontinental had
not pleaded adequately loss causation because the drop in
Anicom’s stock followed “the public revelation of mis-
statements in Anicom’s 1998 and later financial statements
and its subsequent bankruptcy filing,” and “not by public
exposure of the 1997 fraud,” which induced the transac-
tion. R.185 at 3. According to Tricontinental, this conclusion
ignores the fact that the 1997 fraud was part of an on-going
scheme to overrepresent revenue and that the 1998 audit
relied in part on historic information. Consequently,
Tricontinental submits, the public revelation of the 1998
fraud which caused the reduction in stock price suffices
to allege loss causation.
  We do not believe that Tricontinental’s position can be
reconciled with the Supreme Court’s recent decision in
Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). In
Dura, the plaintiffs alleged that, in reliance on the
integrity of the market, they had purchased securities,
the price of which had been inflated artificially due to
“false statements concerning Dura’s drug profits and
future Food and Drug Administration (FDA) approval of
a new asthmatic spray device.” Id. at 339. The Supreme
Court held that this allegation did not plead adequately
the plaintiffs’ loss for purposes of 10b-5. The Court ob-
No. 05-4322                                                  35

served that, because 10b-5 actions rested largely on com-
mon law causes of action for misrepresentation and deceit,
damage proximately following from the deception is an
important element. See id. at 343-44. Relying in part on the
Restatement (Second) of Torts, the Court noted that liabil-
ity only attaches when “a person who ‘misrepresents the
financial condition of a corporation in order to sell its stock’
becomes liable to a relying purchaser ‘for the loss’ the
purchaser sustains ‘when the facts . . . become generally
known’ and ‘as a result’ share value ‘depreciate[s].’ ” Id. at
344 (quoting Restatement (Second) of Torts § 548, cmt. b).
The allegations of the complaint, as well, must set forth
“the economic loss and proximate cause” for which the
plaintiff seeks recovery:
    The statute insists that securities fraud complaints
    “specify” each misleading statement; that they set
    forth the facts “on which [a] belief” that a statement
    is misleading was “formed”; and that they “state with
    particularity facts giving rise to a strong inference
    that the defendant acted with the required state of
    mind.” 15 U.S.C. §§ 78u-4(b)(1), (2). And the statute
    expressly imposes on the plaintiffs “the burden of
    proving” that the defendant’s misrepresentations
    “caused the loss for which the plaintiff seeks to re-
    cover.” § 78a-4(u)(4).
      The statute thereby makes clear Congress’ intent to
    permit private securities fraud actions for recovery
    where, but only where, plaintiffs adequately allege
    and prove the traditional elements of causation and
    loss.
Dura, 544 U.S. at 345.
 Tricontinental acknowledges the holding of Dura, but
maintains that Dura does not require the precision in
36                                              No. 05-4322

pleading required by the district court: “Nowhere in Dura
does the Supreme Court require that the precise fraud
that resulted in the underlying transaction be the subject of
a later corrective disclosure in order to satisfy loss causa-
tion. And nowhere does Dura require any allegation
about the market’s thought process in responding to a
corrective disclosure.” Reply Br. at 20.
  We cannot accept this rendition of Dura’s requirements.
Dura stresses that the complaint must “ ‘specify’ each
misleading statement,” Dura, 544 U.S. at 345, and that
there must be “a causal connection between the material
misrepresentation and the loss,” id. at 342, not simply that
the misrepresentation “ ‘touches upon’ a later economic
loss,” id. at 343.
   In the present case, therefore, Tricontinental had to
allege that PwC’s 1997 audit contained a material mis-
representation which caused Tricontinental to suffer a
loss when that material misrepresentation “became gener-
ally known.” Tricontinental, however, has not identified
any statements by Anicom or PwC that made “generally
known” any problems or irregularities in the 1997 audited
financial statement. The only statement identified by
Tricontinental was Anicom’s statement in 2000 concerning
its 1998 and 1999 financial statements. Tricontinental
maintains that Anicom’s additional revelation in July
2000—that it was investigating certain “accounting
irregularities”—suggested that Anicom’s 1997 financial
statement also was questionable. However, it is clear that
the reference to “accounting irregularities,” as used in
Anicom’s statement in July 2000 and recounted in the
Second Amended Complaint, was limited to Anicom’s 1998
and 1999 financial statements. R.135 at 43.
No. 05-4322                                                 37

  Tricontinental has alleged only that it experienced loss as
a result of the exposure of misrepresentations contained
in Anicom’s 1998 and 1999 financial statements, state-
ments issued after the Agreement was signed. These
allegations are not sufficient to state a claim under 10b-5 for
losses suffered as a result of alleged misrepresentations in
the 1997 audited financial statement. Consequently, the
district court did not err in dismissing Tricontinental’s 10b-
5 claim.


E. Pre-Closing Common Law Fraud
  Finally, Tricontinental maintains that the district court
erred in dismissing its claim for common law fraud based
on misrepresentations made by PwC in its audit opinion
related to Anicom’s 1997 financial statement. Although
we agree with the district court that Tricontinental’s
scienter allegations are problematic, we believe that
Tricontinental’s claim for pre-closing fraud suffers from
a more fundamental infirmity. As we explained in DiLeo,
Rule 9(b) “requires the plaintiff to state ‘with particularity’
any ‘circumstances constituting fraud.’ . . . This means the
who, what, when, where, and how . . . .” 901 F.2d at 627.
Here, Tricontinental’s claim falls short with respect to the
last requirement: Tricontinental does not allege how PwC’s
fraud caused its losses.
  The Supreme Court of Illinois has stated that Illinois law
is “similar to the analysis used by these Federal courts
which require both transaction causation and loss causa-
tion in order to recover for misrepresentation in securities
cases.” Martin v. Heinold Commodities, Inc., 643 N.E.2d 734,
747 (Ill. 1994). The plaintiff, the court noted, is required
to show that “ ‘the untruth was in some reasonably direct,
38                                                   No. 05-4322

or proximate, way responsible for his loss.’ ” Id. (quoting
Huddleston v. Herman & MacLean, 640 F.2d 534, 549 (5th Cir.
1981). However, one could not reasonably infer from
Tricontinental’s pre-closing claim that the losses it suffered
after Anicom’s statement in July 2000 were caused by the
alleged misrepresentation in the 1997 audit statement.
Tricontinental’s loss followed Anicom’s revelation that it
was investigating irregularities in its 1998 and 1999 finan-
cial statements. However, Tricontinental has not set forth
any facts showing that the losses it suffered are proxi-
mately linked to the alleged misstatements in the 1997
financial statement.
   Tricontinental’s allegations focus on its detrimental
reliance on the 1997 statement, which is at the heart of
transaction causation. However, both transaction and loss
causation are elements of fraud under Illinois law. Because
Tricontinental did not plead adequately loss causation,
its pre-closing fraud claim must fail.13


13
   Additionally, as noted above, we agree with the district court
that Tricontinental’s allegations with respect to scienter also
fall short of the mark. Before this court, Tricontinental main-
tains that the district court required it to plead elements of
scienter and intent with particularity—elements which, even
under Rule 9(b), may be pleaded generally. Tricontinental
submits that, if the district court had applied the proper
standard in evaluating the allegations in the Second Amended
Complaint, namely whether the complaint affords a basis for
believing that the plaintiff could establish scienter, the district
court would have concluded that the allegations provide a
basis for believing that PwC acted with scienter in issuing
its 1997 audit opinion. See Appellant’s Br. at 34.
  PwC contends, however, that the district court’s dismissal of
this count was proper because Tricontinental failed to allege
                                                 (continued...)
No. 05-4322                                                      39




13
   (...continued)
that it was PwC’s “intent that the statement induce the plain-
tiff to act” that dooms the claim. See Appellee’s Br. at 43-46.
According to PwC, the plaintiffs “did not allege that PwC issued
its 1997 audit opinion with the intent to induce the Texcan
Entities to enter into that transaction, nor did plaintiffs allege
that PwC issued its opinion with the intent to induce
Tricontinental Industries to acquire Anicom stock from Texcan
Entities in some later corporate transactions.” Id. at 44.
   Tricontinental argues in reply that it “satisfied its pleading
obligation by alleging that PwC had a reason to expect that
its audit report would be communicated to companies targeted
by Anicom.” Reply Br. at 15-16. Tricontinental points to the
Restatement (Second) of Torts § 533, comment g, as support for
its position. Comment g states that “ ’if a firm of accountants
employed to audit the books of a corporation gives a certificate
fraudulently overstating its assets, knowing that the corpora-
tion intends to make use of it to obtain a loan, it is immaterial
that the identity of the prospective lender is not know [sic] to the
accountants.’ ” Id. at 16 (quoting Restatement (Second) of Torts
§ 533, cmt. g).
   We believe Tricontinental’s reliance on the Restatement is
misplaced. Tricontinental has not shown that Illinois follows
the Restatement with respect to this requirement. Indeed,
Tricontinental’s argument seems to run afoul of the state
supreme court’s articulation of the elements of common law
fraud found in Connick v. Suzuki Motor Co., 675 N.E.2d 584, 591
(Ill. 1996), one of which is “defendant’s intent that the state-
ment induce the plaintiff to act.” (emphasis added). In the
absence of some evidence that Illinois courts would abandon
this requirement in favor of the Restatement position, we
must reject Tricontinental’s argument.
40                                           No. 05-4322

                     Conclusion
  For the reasons set forth above, the judgment of the
district court is affirmed.
                                               AFFIRMED
A true Copy:
      Teste:

                       _____________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                 USCA-02-C-0072—1-17-07
