## Facts

- Several investors participated in a 1982 yacht sale and management program promoted by Ocean Limited.
- A law firm and its partners served as legal counsel to Ocean and drafted substantial portions of the program’s offering memorandum.
- Investors alleged the offering memorandum was misleading by omitting Ocean’s insolvency and inability to meet future obligations under the management plan.
- The law firm did not represent the investors, and the investors did not base their claims on insider trading, a prior affirmative misstatement by the law firm, or a specific statutory disclosure obligation.
- The defendants moved for summary judgment on the ground that they owed no duty of disclosure or duty of care to the investors.

## Issues

1. Whether issuer’s counsel owed a duty to disclose the issuer’s insolvency to investors sufficient to support primary liability for omissions under § 10(b)/Rule 10b-5 and Massachusetts common-law fraud/deceit.
2. Whether issuer’s counsel could be liable for aiding and abetting securities fraud or common-law fraud without proof of a duty to disclose, actual knowledge of wrongdoing, and substantial assistance.
3. Whether issuer’s counsel owed investors a duty of care supporting negligence and negligent misrepresentation claims.

## Decision

- Summary judgment was granted for the defendants on all remaining claims.
- The court held the defendants owed no duty to disclose Ocean’s financial condition to the plaintiff investors on these facts.
- Without a disclosure duty, the omission-based federal securities and common-law fraud claims failed as a matter of law.
- The aiding-and-abetting claims failed for lack of an independent duty and insufficient evidence of the requisite knowledge and substantial assistance.
- The negligence and negligent misrepresentation claims failed because the defendants owed no duty of care to the non-client investors.

## Legal Principles

- An omission is actionable under Rule 10b-5 only if the defendant had a preexisting duty to disclose the omitted information.
- Under Massachusetts law, attorneys generally owe no duty to non-clients absent an attorney–client relationship or circumstances showing the attorney’s actual knowledge of specific third-party reliance sufficient to create a duty.
- Drafting or contributing to offering materials for a client, without more, does not itself establish a disclosure duty owed by issuer’s counsel to investors.
- Aiding-and-abetting liability requires, at minimum, an underlying primary violation plus the aider’s knowledge and substantial assistance; ordinary legal services, without the requisite scienter and assistance, are insufficient.
- Negligence and negligent misrepresentation require a duty of care owed to the claimant; absent such a duty, the claims cannot proceed.

## Conclusion

The court dismissed the investors’ remaining securities, fraud, and tort claims because issuer’s counsel had no duty to disclose the issuer’s insolvency or otherwise act for the benefit of non-client investors, and the record did not support the elements needed for aiding-and-abetting liability.


Austin v. Bradley, Barry & Tarlow, P.C., 836 F. Supp. 36 (D. Mass. 1993)