In re Software Toolworks, Inc.

Software Toolworks, Inc. (Toolworks) (defendant) was a software company that conducted a secondary public offering of its stock. Toolworks, its auditor Deloitte & Touche (Deloitte) (defendant), and its underwriters Montgomery Securities and PaineWebber, Inc. (defendants) issued a registration statement and prospectus in connection with the offering, which contained, among other things, Toolworks’ financial information based on its financial statements. Deloitte certified that the financial information contained in the prospectus and the underlying financial statements was accurate, and the underwriters relied on Deloitte’s certification. Following the offering, Toolworks’ stock value steadily declined, and Toolworks announced substantial losses. A group of investors (plaintiffs) filed a class-action suit alleging, in part, that Toolworks, Deloitte, and the underwriters had issued a false and misleading registration statement and prospectus in violation of §§ 11 and 12(2). [Editor’s Note: predecessor to § 12(a)(2)] of the Securities Act of 1933, which, in part, impose liability on underwriters if a prospectus contains an untrue statement or an omission of material fact.] Among other things, the investors specifically alleged that the underwriters had failed to reasonably investigate Toolworks’ financial information and thus had failed to identify improperly recognized revenue. The underwriters argued, in part, that they had reasonably relied on Deloitte’s certification of the financial information and therefore that the underwriters were entitled to a due-diligence defense regarding any false or misleading statements contained in the prospectus. The district court granted summary judgment in favor of the underwriters, and the investors appealed.