A panel of the Court of Appeals for the District of Columbia Circuit agreed that the Affiliated Ute Citizens of Utah v. U.S. (1971-72 CCH Dec. ¶93,443) reliance presumption was inapplicable. Under the Affiliated Ute presumption, plaintiffs need not show reliance when their fraud claims are grounded in material omissions by the defendants. The appellate court also affirmed the district court's denial of a motion for leave to amend.

The complaint alleged that investors had relied on materially false misrepresentations and omissions made by a company's auditor. The auditor had stated that the company's balance sheets were accurate and in conformity with GAAP, but, in fact, the auditor had failed to comply with either GAAP or GAAS. As a result, the investors were not informed of the company's related-party transfers, conduct which the complaint characterized as a Ponzi scheme.

The district court denied the investors' motion for leave to amend after finding that the proposed amended complaint failed to cure the deficiencies identified in previous pleadings, specifically by failing to adequately plead the reliance element of a securities fraud claim. The investors argued that the district court erred in not applying the Affiliated Ute presumption of reliance and asserted that if the presumption had been applied, the amended complaint would have properly pleaded a cause of action for securities fraud. The district court found that the Affiliated Ute presumption, which is limited to cases of omission, did not apply because the affirmative statements made by the auditor were so central to the allegations that the investors did not face the problem of demonstrating reliance on a non-disclosure and could have alleged actual reliance based on the auditor's positive statements.

The panel agreed that the Affiliated Ute presumption was inapplicable to this case. The panel observed that "no court of appeals has applied the Affiliated Ute presumption in a case involving a claim that primarily alleges affirmative misrepresentations." The investors, the panel continued, "concede that they would not be entitled to a presumption of reliance in a case in which they merely alleged that the defendants did not disclose that their affirmative misrepresentations were false." In this case, the gravamen of the complaint was affirmative misrepresentations made by the auditor when certifying the company's materially false financial statements. First, the auditor's failure to disclose the alleged Ponzi scheme was not an omission because the financial statements misrepresented the company's financial position, and the auditor affirmatively stated that the statements fairly presented the company's financial position. The panel then fond that the auditor's express attestations regarding the accuracy of the financial statements were affirmative misrepresentations encompassing the alleged omissions. The Affiliated Ute presumption was therefore inapplicable.

□ In re Interbank Funding Corp. Securities Litigation (DofCCir) will be published in a forthcoming Report.