## Facts

- On August 26, 1970, Gail Baron and Joel Baron sold all outstanding stock of two children’s clothing companies (Scotties by Cromwell, Inc. and Cromwell Manufacturing Co.) to Nathaniel Berkowitz, Edward Yaste, and Howard Hoffman.
- In deciding to buy, the purchasers reviewed (and claimed to rely on) the companies’ financial statement for the fiscal year ending April 30, 1970, which was prepared with the involvement of the Barons’ accounting firm, Benjamin S. Markowe & Company.
- The purchasers later contended that the financial statement was misleading because it classified shipping expenses (about $53,000) as part of manufacturing overhead, which their proof said departed from generally accepted accounting principles (GAAP).
- The companies were experiencing business difficulty, and after the sale the purchasers were unable to revive or maintain operations.
- The purchasers closed the manufacturing plant on October 23, 1970.
- The purchasers sued the Barons and Markowe under Exchange Act § 10(b), SEC Rule 10b-5, and New York common-law fraud, seeking to recover large losses they attributed to alleged misstatements and omissions in connection with the stock purchase.
- At trial, the evidence also included a specific item: a $550 receivable that Hoffman claimed was represented to him as collectible when it was not.
- The Barons asserted counterclaims against the purchasers, alleging misconduct connected to the post-sale operation of the businesses.

## Issues

1. Did the defendants make a materially false or misleading statement (including the classification of shipping costs as manufacturing overhead) in connection with the stock sale that supports liability under § 10(b) and Rule 10b-5?
2. Did the evidence show scienter—an intent to deceive, manipulate, or defraud—by the Barons or by Markowe sufficient for federal securities-fraud or common-law fraud liability?
3. Did each purchaser prove actual reliance on the challenged representations, including the alleged GAAP misclassification and any other specific statements?
4. Did the purchasers prove loss causation and recoverable damages attributable to any proven misrepresentation, as opposed to losses caused by the companies’ independent business problems and the purchasers’ decision to shut down operations?
5. Were the Barons entitled to relief on their counterclaims against the purchasers?

## Decision

- The court entered judgment for plaintiff Howard Hoffman and against Gail Baron, Joel Baron, and Benjamin S. Markowe & Company for $550.
- The court dismissed with prejudice the claims of plaintiffs Nathaniel Berkowitz and Edward Yaste.
- The court dismissed with prejudice the Barons’ counterclaims.

## Legal Principles

- A private claim under § 10(b) and Rule 10b-5 requires proof of a material misstatement or omission in connection with the purchase or sale of a security, scienter, reliance, causation, and damages.
- A departure from GAAP may be evidence relevant to whether a financial statement is misleading, but a plaintiff must still prove materiality and that the misstatement actually mattered to the purchase decision.
- Each plaintiff must prove actual reliance; a generalized claim that “the buyers” relied is not enough when the evidence shows reliance differed among purchasers.
- Securities-fraud damages must be tied to losses caused by the proven misrepresentation; plaintiffs cannot recover for losses attributable to business decline, operating decisions, or other factors unrelated to the misstatement.
- Fraud-based claims against an accountant require proof beyond mere error; the plaintiff must show knowing (or similarly blameworthy) misrepresentation with an intent to deceive.
- Counterclaims for post-sale wrongdoing require supporting proof of the alleged breach or misconduct and resulting damages; conclusory accusations do not support recovery.

## Conclusion

After a bench trial over alleged misstatements in financial information used to sell two clothing companies, the court found that the purchasers failed to prove that the GAAP-related shipping-cost classification (or other asserted problems) materially induced their purchase decisions or caused their claimed business losses, and it also found no adequate showing of fraudulent intent by the sellers’ accountant on the broader theories; the court awarded only $550 to Hoffman based on his proven reliance on a specific misrepresentation about a receivable, dismissed Berkowitz’s and Yaste’s claims with prejudice, and rejected the Barons’ counterclaims for lack of proof.


Berkowitz v. Baron, 428 F. Supp. 1190 (1977)