## Facts

- Ivan N. Schatz and Joann B. Schatz sold an 80% interest in two closely held companies (VAMCO and ABC) to MER Enterprises, Inc., a holding company formed by Mark E. Rosenberg.
- The sellers received $1.5 million in promissory notes issued by MER, personally guaranteed by Rosenberg.
- The sellers alleged they relied on a March 31, 1986 financial statement and an update letter delivered at the December 31, 1986 closing representing Rosenberg’s net worth exceeded $7 million.
- The sellers alleged the financial information contained misrepresentations that concealed a significant deterioration in Rosenberg’s finances during 1986.
- Rosenberg’s largest company filed for bankruptcy in September 1987; Rosenberg later filed for personal bankruptcy; the promissory notes allegedly were not paid.
- Weinberg & Green served as transactional counsel for Rosenberg and his entities in the stock sale.
- The sellers alleged additional harms, including a $150,000 bridge loan loss, diversion of operating capital from VAMCO and ABC, and payment of Weinberg & Green’s fees from those companies’ cash reserves.
- The district court dismissed several counts under Rule 12(b)(6); on appeal, the sellers challenged only the dismissal of three counts against Weinberg & Green (primary Rule 10b-5, aiding-and-abetting securities fraud, and Maryland common-law misrepresentation).

## Issues

1. Whether counsel for a transaction participant can be primarily liable under § 10(b) and Rule 10b-5 for alleged misrepresentations or omissions where the firm did not have a fiduciary or similar relationship with the opposing party.
2. Whether the complaint adequately alleged aiding-and-abetting securities fraud by the law firm through scienter and substantial assistance.
3. Whether Maryland common-law misrepresentation can be based on the law firm’s nondisclosure absent a legal duty to disclose to non-clients.
4. Whether state rules of professional conduct can create or expand a civil duty owed by attorneys to non-clients in an arm’s-length transaction.

## Decision

- The Fourth Circuit affirmed dismissal under Rule 12(b)(6) of the § 10(b)/Rule 10b-5 claim against Weinberg & Green.
- The court affirmed dismissal of the federal aiding-and-abetting securities fraud claim for failure to plead scienter and substantial assistance.
- The court affirmed dismissal of the Maryland common-law misrepresentation claim because the firm owed no duty to disclose to the sellers.
- The court rejected reliance on professional-conduct rules as a basis for imposing civil liability to non-clients.
- The court denied a motion to supplement the appellate record with evidence developed after the district court’s ruling.

## Legal Principles

- A Rule 10b-5 omission claim generally requires a duty to disclose arising from a fiduciary, confidential, or similar relationship; transactional counsel for the opposing party ordinarily owes no such duty to the other side.
- Routine legal services (e.g., drafting documents and handling a closing) do not, without more, constitute actionable misrepresentation by counsel or transform counsel into a primary securities-law violator.
- Aiding-and-abetting securities fraud requires pleading (1) a primary violation, (2) the aider’s scienter (knowledge/intent), and (3) substantial assistance; conclusory allegations and ordinary representation are insufficient.
- Under Maryland misrepresentation law, nondisclosure is actionable only where the defendant had a duty to disclose; an attorney’s duties normally run to the client, not an adverse non-client in a business deal.
- Professional-ethics rules may regulate attorney conduct but do not themselves create a private cause of action or an independent disclosure duty to non-clients.

## Conclusion

The Fourth Circuit held that the buyer’s law firm could not be liable to the seller-counterparties under federal securities law or Maryland misrepresentation law because the complaint did not establish a duty to disclose, did not plead scienter and substantial assistance for aiding-and-abetting, and could not convert professional-conduct rules into civil liability to non-clients.


Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991)