Software Toolworks, Inc. v. PaineWebber

Software Toolworks, Inc. (Software) produced software for personal computers, Nintendo systems, and original equipment manufacturers (OEMs). In July 1990, Software conducted a secondary public offering (SPO) of common stock. The SPO was underwritten by Montgomery Securities and PaineWebber, Inc. (together, PaineWebber) (defendants). Before the SPO, PaineWebber performed a due-diligence investigation of Software’s financial condition. PaineWebber reviewed the company’s financial statements, certified by Software’s accounting firm, Deloitte & Touche (Deloitte) (defendant). PaineWebber relied on Deloitte’s opinion that Software’s revenue-recognition practice relating to contingent OEM contracts was acceptable. PaineWebber also independently confirmed the existence of OEM contracts and contacted other accounting firms to verify Deloitte’s opinion. Software’s sales revenues for the quarter ending June 1990 (the June quarter) were unusual insofar as Software had experienced slumping Nintendo sales in the first two months of the quarter but then booked several large consignment sales in June, enabling the company to meet earnings projections. The June quarter was traditionally the slowest of the year for Software’s Nintendo sales, and the June bookings accounted for more sales than the cumulative two and a half months. PaineWebber believed Software’s assurance that the consignment sales were legitimate. After the SPO, Software’s share price dropped precipitously, and Software had to reverse the June consignment sales. Several investors (the investors) (plaintiffs) sued PaineWebber and Deloitte for violations of the Securities Act, alleging materially misstated financial statements. On summary judgment, the trial court mostly ruled in favor of PaineWebber and Deloitte. The investors appealed.