Faris et al v. Longtop Financial Technologies Limited et al
Filing
115
OPINION AND ORDER: For the foregoing reasons, defendant Deloitte Touche Tohmatsu CPA Ltd's motion to dismiss is granted. It is hereby Ordered that defendant Deloitte Touche Tohmatsu CPA Ltd. is to be dismissed from this action. It is further Ordered that Lead Plaintiffs are granted leave to replead within thirty days of the date of this Order. The Clerk of Court is directed to close this motion (Docket No.101). (Signed by Judge Shira A. Scheindlin on 11/14/2012) (js)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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)(
IN RE LONGTOP FINANCIAL
TECHNOLOGIES LIMITED
SECURITIES LITIGATION
OPINION AND ORDER
11 Civ. 3658
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)(
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
Lead plaintiffs Danske Invest Management A/S and Pension Funds of
Local No. One (collectively, "Lead Plaintiffs") bring this action on behalf of
themselves and others similarly situated against Longtop Financial Technologies,
Ltd. ("Longtop"), several of its officers, its auditor Deloitte Touche Tohmatsu CPA
Ltd. ("DTTC"), and its auditor's parent company Deloitte Touche Tohmatsu
Limited. The Class consists of all persons and entities who purchased American
Depositary Shares ("ADSs") of Longtop Financial Technologies, Ltd. on the New
York Stock Exchange ("NYSE") during the period June 29, 2009 through and
including May 17, 20 11 (the "Class Period") and who were allegedly damaged
1
thereby. Lead Plaintiffs assert four causes of action for: violation of Section 10(b)
of the Exchange Act and Rule 10b-5 promulgated thereunder against Longtop and
the Individual Defendants (Count One); violation of Exchange Act Section 20(a)
against the Individual Defendants (Count Two); violations of Rule 10b-5 against
DTTC (Count Three); and violation of Section 20(a) against Deloitte Limited
(Count Four). Pursuant to Federal Rule of Civil Procedure 12(b)(6), DTTC now
moves to dismiss Count Three. For the following reasons, DTTC’s motion is
granted.
II.
BACKGROUND1
Longtop is a Cayman Islands corporation with principal offices in
Hong Kong and Xiamen, China,2 which has described itself as a “leading provider”
of information technology services to China’s financial sector.3 Throughout the
Class Period, Longtop reported strong financial growth: from fiscal year 2008 to
1
The facts set forth below are drawn from the Consolidated Class Action
Complaint (“Compl.”), and are presumed to be correct for the purposes of this
motion unless otherwise designated. This Court has previously described the
allegations in this case. See In re Longtop Fin. Tech. Ltd. Secs. Litig., No. 11 Civ.
3658, 2012 WL 2512280, at *1 (S.D.N.Y. June 29, 2012). To avoid needless
duplication, only the facts necessary to resolve DTTC’s motion to dismiss are
described below.
2
See Compl. ¶ 2.
3
Id. ¶ 3.
2
fiscal year 2010,4 Longtop’s total revenues grew from $65.9 million to $161.9
million, and its net income grew from $2.9 million to $59 million.5 Longtop
attributed this success to its extremely high gross and operating margins.6 For
example, in fiscal year 2010, Longtop’s reported gross and operating margins were
62.5% and 35.8%, respectively, while its peer companies’ gross and operating
margins were, respectively, between 15-50% and 10-25%.7 On the strength of
these figures, Longtop availed itself of the United States capital markets through an
initial public offering (“IPO”) on October 25, 2007 and a secondary offering on
November 23, 2009.8
Longtop’s access to the capital markets was aided by DTTC.9 DTTC
served as Longtop’s outside auditor, in which capacity it issued unqualified audit
opinions on Longtop’s Class Period financial statements, and consented to the use
of its audit reports in Longtop’s registration statements filed with the United States
4
Longtop’s fiscal year ends on March 31. See id. ¶ 4.
5
See id.
6
See id. ¶ 38.
7
See id.
8
See id. ¶ 6.
9
See id. ¶ 8.
3
Securities and Exchange Commission (“SEC”) in connection with the IPO and the
Secondary Offering.10 Specifically, DTTC permitted Longtop to reproduce its
audit report in the 2009 20-F it filed with the SEC.11 DTTC also permitted
Longtop, in connection with its Secondary Offering, to incorporate this audit report
on a Form F-3 and in a prospectus filed with the SEC.12 DTTC also allowed
Longtop to attach its unqualified audit report to Longtop to its 2010 20-F.13 The
audit reports state that DTTC’s audits were performed in “accordance with the
standards of the Public Company Accounting Oversight Board [(“PCAOB”)],” that
Longtop’s internal controls were adequate, and that DTTC “expressed an
unqualified opinion” that Longtop’s audited financial statements “present[ed]
fairly, in all material respects, the financial position of Longtop . . . .”14
The Complaint alleges that Longtop’s above-market operating and
gross margins were the result of various fraudulent actions taken by Longtop,
including disguising its true cost of revenue and employee-related expenses
10
See id.
11
See id. ¶ 77.
12
See id. ¶¶ 77-78.
13
See id. ¶ 89.
14
Id. ¶ 181.
4
through a series of off-balance sheet transfers to a wholly owned entity, Xiamen
Longtop Human Resources (“XLHRS”); falsifying its cash position and bank loan
balances by manipulating and lying about its bank records; and interfering with
DTTC’s audits.15 Longtop’s alleged fraud began to unravel on April 26, 2011,
when Citron Research issued a report questioning Longtop’s high margins and
whether XHLRS was properly deemed an unrelated entity.16 The next day, Bronte
Capital issued a report questioning Longtop’s need for the Secondary Offering,
given that, relative to expenses, Longtop then had six times more cash than
Microsoft.17
In the wake of these reports, Longtop’s share price declined by
approximately 26.4%.18 To staunch the bleeding, Longtop held a conference call
with investors on April 28, 2011, during which Longtop’s Chief Financial Officer
Derek Palaschuk denied any wrongdoing, and emphasized his close working
15
See id. ¶ 59.
16
See id. ¶¶ 44-45.
17
See id. ¶ 48.
18
See id. ¶¶ 47, 49.
5
relationship with DTTC.19 The price of Longtop’s ADSs rose nearly 11% by
market’s close that day.20
This rally was short-lived, as market analysts continued to publish
reports (collectively with the Citron and Bronte reports, the “Short Seller Reports”)
speculating that Longtop was using the purportedly unrelated XLHRS to hide its
losses and inflate its gross margins.21 On May 27, 2011, the NYSE halted trading
in Longtop’s ADSs, citing “undisclosed material corporate developments . . . .”22
In the face of these developments, and a continued decline in Longtop’s ADSs,
Palaschuk resigned on May 19, 2011.23 On May 23, 2011, Longtop announced that
DTTC had resigned as its outside auditor.24 That same day, DTTC released to the
public a letter (the “Resignation Letter”) detailing the circumstances leading to its
resignation.25
19
See id. ¶¶ 50-52.
20
See id. ¶ 53.
21
See id. ¶ 54.
22
Id. ¶ 61.
23
See id. ¶¶ 55-56.
24
See id. ¶ 57.
25
See id. ¶ 58.
6
The Resignation Letter relates the following narrative. DTTC
determined that follow-up visits to certain Longtop banks were warranted in order
to complete Longtop’s 2011 audit.26 When DTTC followed up with the banks it
identified serious defects with Longtop’s financials, including falsified bank
confirmation replies, statements by bank officials that they had no record of certain
transactions, significant discrepancies between bank balances and bank
confirmations previously received by DTTC (and memorialized in the books and
records of Longtop), and significant bank borrowing not identified in previously
received confirmations.27 In light of these defects, DTTC initiated a “formal
second round of bank confirmation[s]” on May 17, 2011.28 This inquiry was soon
halted by Longtop’s obstructionist behavior, including calls to banks by Longtop
asserting that DTTC was not their auditor, the seizure of documents on bank
premises by Longtop agents, and refusals by Longtop to allow DTTC’s staff to
leave Longtop’s premises unless they relinquished audit files.29 On May 20,
Longtop’s Chairman, Ka Xiao Gong (“Ka”), called DTTC’s Eastern Region
26
See id.
27
See id.
28
Id.
29
See id.
7
Managing Partner, Paul Sin, and informed him that Longtop had recorded fake
revenues in the past, which they had offset with false cash.30 Ka also stated that
“senior management” was involved.31 The letter further states that DTTC resigned
as Longtop’s auditor due to the falsity of Longtop’s financial records, the
deliberate interference by Longtop with the audit process, and the unlawful
detention of DTTC’s audit files.32 The letter concludes by urging Longtop to make
its required 8-K filing informing the public not to place reliance on DTTC’s earlier
audit reports, and by reminding Longtop of its obligations under the Securities
Exchange Act of 1934.33
The NYSE began delisting proceedings against Longtop on July 22,
2011, and delisted Longtop on August 29, 2011.34 On November 10, 2011, the
SEC charged Longtop with failing to comply with SEC reporting requirements,
based on Longtop’s failure to file an annual report in fiscal year 2011, and based
on DTTC’s statement that the financial statements contained in Longtop’s annual
30
See id.
31
Id.
32
See id.
33
See id.
34
See id. ¶¶ 61-62.
8
reports in 2008, 2009 and 2010 were no longer reliable.35 The complaint in that
action alleges that DTTC has thus far failed to comply with the SEC’s
investigation, “including producing documents in response to a subpoena. . . .”36
However, it appears that DTTC’s failure to produce documents is the result of
inconsistencies between the regulatory regimes of the United States and China,
pending the resolution of which the SEC has moved for, and been granted, a stay
of its enforcement action against Longtop.37
A.
Alleged Violations of Generally Accepted Auditing Standards
(“GAAS”)
The Complaint alleges that DTTC violated a variety of accounting
rules and principles found in the interpretive Statements on Auditing Standards
35
See id. ¶ 63.
36
Id. ¶ 64.
37
See Civil Docket for Case #: 1:11-mc-00512-GK-DAR (“SEC Docket”), Ex.
F to Declaration of Gary Bendinger in Support of Defendant Deloitte Touche
Tohmatsu CPA Ltd.'s Motion to Dismiss (“Bendinger Decl.”), at 6 (revealing that
the SEC made an unopposed motion for a stay, which was granted); Respondent
DTTC’s Statement of Points and Authorities Opposing the SEC’s Application for
Order to Show Cause and Order Requiring Compliance with a Subpoena (“DTTC
Subpoena Mem.”), Ex. G to Bendinger Decl., at 21-22 (describing DTTC’s efforts
to comply with the SEC’s subpoena and alleging that DTTC needed Chinese
regulatory permission to produce documents to the SEC); Unopposed Motion for
Stay of this Action (“SEC Stay Mot.”), Ex. H to Bendinger Decl., at 3 (describing
the SEC’s efforts to negotiate with Chinese regulators and seeking a six month stay
of the enforcement action).
9
(“AU”) that are alleged to form a part of the GAAS.38 The Complaint further
alleges that Longtop’s Class Period financial statements violated provisions of the
Generally Accepted Accounting Principles (“GAAP”) mandating the disclosure of
certain material related-party transactions and requiring that financial statements
fairly and completely represent an enterprise’s economic resources and financial
performance in a way that is useful to the investing public.39 Consequently, DTTC
statements that its audits were conducted in accordance with PCAOB standards
and that Longtop’s financial statements were GAAP compliant are alleged to be
materially false.40
The Complaint alleges that DTTC failed to exercise the “[d]ue
professional care” and “professional skepticism” required by the GAAS.41
Specifically, the Complaint alleges that DTTC was reckless and fell short of GAAS
standards because it failed to undertake any meaningful investigation of Longtop’s
38
See Compl. ¶¶ 123-126; 130-136.
39
See id. ¶¶ 107-110 (citing Federal Accounting Standards Board (“FASB”)
Statement of Concepts No. 1 ¶¶ 34, 40, 42; FASB No. 2 ¶¶ 58-59, 79; Statement of
Financial Concepts No. 57).
40
See id. ¶ 107.
41
See id. ¶ 123 (citing AU §§ 230, 230.02, 230.07, 230.09).
10
bank and loan balances over the Class Period.42 Similarly, the Complaint alleges
that DTTC was reckless and violated GAAS standards because it failed to detect
that Longtop was covertly transferring costs to XLHRS, despite the warning
provided by Longtop’s above market margins.43
B.
Red Flags
The Complaint additionally alleges that even a “perfunctory” review
by DTTC of the relationship between Longtop and XLHRS would have revealed
the following six “red flags”: (1) that XLHRS was formed shortly before
Longtop’s IPO;44 (2) that although XLHRS was Longtop’s largest line-item
expenditure, it was not mentioned in Longtop filings until its 2009 Form 20-F;45
(3) that XLHRS shared the same building with Longtop;46 (4) that “Longtop”
appears in XLHRS’s name;47 (5) that XLHRS lacked a website and had no
42
See id. ¶¶ 124-129 (citing AU §§ 230.10, 311.03, 311.06, 312.16, 312.17,
329.01, 329.02, 329.03).
43
See id. ¶¶ 130-135 (citations omitted)
44
See id. ¶ 135.
45
See id.
46
See id.
47
See id.
11
customers other than Longtop;48 and (6) that XLHRS had placed job postings with
a reply-to email address at longtop.com, raising questions about whether it shared
an email server with Longtop.49
III.
STANDARD OF REVIEW AND PLEADING STANDARD
A.
Rule 12(b)(6) Motion to Dismiss
A pleading must contain “a short and plain statement of the claim
showing that the pleader is entitled to relief.”50 “Such a statement must [] ‘give the
defendant fair notice of what the plaintiff’s claim is and the grounds upon which it
rests.’”51 In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court
“must accept all non-conclusory factual allegations as true and draw all reasonable
inferences in the plaintiff’s favor.”52 For the purposes of such motion, “. . . a
district court may consider the facts alleged in the complaint, documents attached
to the complaint as exhibits, and documents incorporated by reference in the
48
See id.
49
See id.
50
Fed. R. Civ. P. 8(a)(2).
51
See Swierkiewicz v. Sorema N. A., 534 U.S. 506, 512 (2002) (quoting Conley
v. Gibson, 355 U.S. 41, 47 (1957), overruled in part on other grounds by Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 561-563 (2007)).
52
Simms v. City of New York, No. 11 Civ. 4568, 2012 WL 1701356, at *1 (2d
Cir. May 16, 2012) (citing Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir. 2008)).
12
complaint.”53 However, the court may also consider a document that is not
incorporated by reference, “where the complaint ‘relies heavily upon its terms and
effect,’ thereby rendering the document ‘integral’ to the complaint.”54
The court evaluates the sufficiency of the complaint under the “twopronged approach” suggested by the Supreme Court in Ashcroft v. Iqbal.55 Under
the first prong, a court “‘can . . . identify[] pleadings that, because they are no more
than conclusions, are not entitled to the assumption of truth.’”56 Thus,
“[t]hreadbare recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice” to withstand a motion to dismiss.57 Under
the second prong of Iqbal, “[w]hen there are well-pleaded factual allegations, a
court should assume their veracity and then determine whether they plausibly give
53
DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010) (citing
Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)).
54
Id. (quoting Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir. 2006)).
Accord Global Network Commc’ns, Inc. v. City of N.Y., 458 F.3d 150, 156 (2d Cir.
2006).
55
556 U.S. 662, 678-679 (2009).
56
Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal, 556
U.S. at 679). Accord Ruston v. Town Bd. for Town of Skaneateles, 610 F.3d 55, 59
(2d Cir. 2010).
57
Iqbal, 556 U.S. at 663 (citing Twombly, 550 U.S. at 555).
13
rise to an entitlement for relief.”58 A claim is plausible “when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.”59 Plausibility “is not akin to a
probability requirement;” rather, plausibility requires “more than a sheer
possibility that a defendant has acted unlawfully.”60
B.
Heightened Pleading Standard under Rule 9(b) and the PSLRA
Private securities fraud claims are subject to a heightened pleading
standard.61 First, Rule 9(b) requires that the circumstances constituting fraud be
alleged with particularity, although “[m]alice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.”
Second, the Private Securities Litigation Reform Act of 1995
(“PSLRA”) further heightens the pleading standard for the plaintiff in a private
securities fraud case. The PSLRA provides that:
[i]n any private action arising under this chapter in which
the plaintiff may recover money damages only on proof
58
Id. at 679. Accord Kiobel v. Royal Dutch Petroleum Co., 621 F.3d 111, 124
(2d Cir. 2010).
59
Iqbal, 556 U.S. at 678 (quotation marks omitted).
60
Id. (quotation marks omitted).
61
See Meridian Horizon Fund, LP v. KPMG (Cayman), Nos. 11–3311–cv,
11–3725–cv, 2012 WL 2754933, at *2 (2d Cir. July 10, 2012).
14
that the defendant acted with a particular state of mind, the
complaint shall, with respect to each act or omission
alleged to violate this chapter, state with particularity facts
giving rise to a strong inference that the defendant acted
with the required state of mind.62
A plaintiff has alleged facts giving rise to a “strong inference” of scienter “only if a
reasonable person would deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts alleged.”63 In
deciding whether the plaintiff has alleged facts showing a strong inference of
scienter, “a court must consider plausible, nonculpable explanations for the
defendant’s conduct, as well as inferences favoring the plaintiff.”64 The inquiry is
holistic, i.e. the allegations going to scienter are to be evaluated collectively.65 The
PSLRA further provides that the complaint in a private securities fraud case must:
specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if
an allegation regarding the statement or omission is made
on information and belief, . . . state with particularity all
facts on which that belief is formed.66
C.
Leave to Amend
62
15 U.S.C. § 74u-4(b)(2).
63
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007).
64
Meridian Horizon Fund, LP, 2012 WL 2754933, at *2 (quoting Tellabs, 551
U.S. at 323-24).
65
See Tellabs, 551 U.S. at 326.
66
15 U.S.C. § 78u-4(b)(1)(B).
15
Whether to permit a plaintiff to amend its complaint is a matter
committed to a court’s “sound discretion.”67 Rule 15(a) provides that leave to
amend a complaint “shall be freely given when justice so requires.” “When a
motion to dismiss is granted, the usual practice is to grant leave to amend the
complaint.”68 In particular, it is the usual practice to grant at least one chance to
plead fraud with greater specificity when a complaint is dismissed under Rule
9(b).69 Leave to amend should be denied, however, where the proposed
amendment would be futile.70
IV.
APPLICABLE LAW
A.
Section 10(b) and Rule 10b-5 of the Securities Exchange Act
Section 10(b) of the Securities Exchange Act of 1934 makes it illegal
to “use or employ, in connection with the purchase or sale of any security . . . any
manipulative or deceptive device or contrivance in contravention of such rules and
67
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007).
68
Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir. 1999).
69
See ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d
Cir. 2007).
70
See Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d
83, 87 (2d Cir. 2002).
16
regulations as the Commission may prescribe . . . .”71 Under Rule 10b-5 one may
not “make any untrue statement of a material fact or [] omit to state a material fact
necessary in order to make the statements made, in the light of the circumstances
under which they were made, not misleading . . . in connection with the purchase
or sale of any security.”72 “To sustain a private claim for securities fraud under
Section 10(b), ‘a plaintiff must prove (1) a material misrepresentation or omission
by the defendant; (2) scienter; (3) a connection between the misrepresentation or
omission and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and (6) loss causation.’”73 There
is no secondary liability under Section 10(b),74 but “secondary actors like
accountants may be held liable as primary violators if all the requirements for
primary liability are met . . . .”75
71
15 U.S.C. § 78j(b).
72
17 C.F.R. § 240.10b-5.
73
Ashland Inc. v. Morgan Stanley & Co., Inc., 652 F.3d 333, 337 (2d Cir.
2011) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S.
148, 157 (2008)). Accord Erica P. John Fund, Inc. v. Halliburton Co., — U.S. — ,
131 S.Ct. 2179, 2184 (2011).
74
See Central Bank of Denver N.A. v. First Interstate Bank of Denver, N.A.,
511 U.S. 164, 191 (1994).
75
Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998) (quoting
Central Bank, 511 U.S. at 191).
17
1.
Misstatements or Omissions of Material Fact
In order to satisfactorily allege misstatements or omissions of material
fact, a complaint must “state with particularity the specific facts in support of
[plaintiffs’] belief that [defendants’] statements were false when made.”76 “For the
purposes of Rule 10b-5, the maker of a statement is the person or entity with
ultimate authority over the statement, including its content and whether and how to
communicate it.”77
“‘[A] fact is to be considered material if there is a substantial
likelihood that a reasonable person would consider it important in deciding
whether to buy or sell shares [of stock].’”78 In situations “‘[w]here plaintiffs
contend defendants had access to contrary facts, they must specifically identify the
reports or statements containing this information.’”79 Mere “allegations that
76
Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004) (quotation marks
omitted).
77
Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. 2296, 2302
(2011).
78
Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC,
595 F.3d 86, 92–93 (2d Cir. 2010) (quoting Azrielli v. Cohen Law Offices, 21 F.3d
512, 518 (2d Cir. 1994)).
79
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531
F.3d 190, 197 (2d Cir. 2008) (quoting Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir.
2000)).
18
defendants should have anticipated future events and made certain disclosures
earlier than they actually did[,] do not suffice to make out a claim of securities
fraud.”80 “[A]n omission is actionable when the failure to disclose renders a
statement misleading.”81
2.
Scienter
A plaintiff may plead scienter by “alleging facts (1) showing that the
defendants had both motive and opportunity to commit the fraud or (2) constituting
strong circumstantial evidence of conscious misbehavior or recklessness.”82
“‘Sufficient motive allegations entail concrete benefits that could be realized by
one or more of the false statements and wrongful nondisclosures alleged.’”83
“Motives that are generally possessed by most corporate directors and officers do
80
Id. Accord Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).
81
In re Alstom SA, 406 F. Supp. 2d 433, 453 (S.D.N.Y. 2005) (citing In re
Time Warner Inc. Secs. Litig., 9 F.3d 259, 268 (2d Cir. 1993)).
82
ATSI, 493 F.3d at 99 (citing Ganino v. Citizens Utils. Co., 228 F.3d 154,
168–69 (2d Cir. 2000)). Accord Dandong v. Pinnacle Performance Ltd., No. 10
Civ. 8086, 2011 WL 5170293, at *11 (S.D.N.Y. Oct. 31, 2011) (quoting Lerner v.
Fleet Bank, N.A., 459 F.3d 273, 290-91 (2d Cir. 2006)).
83
Campo v. Sears Holdings Corp., 371 Fed. App’x 212, 215 (2d Cir. 2010)
(quoting Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001)).
19
not suffice; instead, plaintiffs must assert a concrete and personal benefit to the
individual defendants resulting from the fraud.”84
However, “‘[w]here motive is not apparent, it is still possible to plead
scienter by identifying circumstances indicating conscious behavior by the
defendant, though the strength of the circumstantial allegations must be
correspondingly greater.’”85 Under this theory of scienter, a plaintiff must show
that the defendant’s conduct is “at the least . . . highly unreasonable and []
represents an extreme departure from the standards of ordinary care to the extent
that the danger was either known to the defendant or so obvious that the defendant
must have been aware of it.”86 “To state a claim based on recklessness, plaintiffs
may either specifically allege defendants’ knowledge of facts or access to
84
Kalnit, 264 F.3d at 139. Accord ECA & Local 134 IBEW Joint Pension
Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).
85
Kalnit, 264 F.3d at 142 (quoting Beck v. Manufacturers Hanover Trust Co.,
820 F.2d 46, 50 (2d Cir. 1987)). Accord South Cherry St., LLC v. Hennessee Grp.
LLC, 573 F.3d 98, 109 (2d Cir. 2009); In re Novagold Res. Inc. Secs. Litig., 629 F.
Supp. 2d 272, 297 (S.D.N.Y. 2009) (quoting ECA, 553 F.3d at 198–99).
86
South Cherry St., 573 F.3d at 109 (quotation marks and emphasis omitted).
Accord ECA, 553 F.3d at 203.
20
information contradicting defendants’ public statements, or allege that defendants
failed to check information they had a duty to monitor.”87
An outside auditor will typically not have an apparent motive to
commit fraud. Consequently, “‘[f]or recklessness on the part of a non-fiduciary
accountant to satisfy securities fraud scienter, such recklessness must be conduct
that is highly unreasonable, representing an extreme departure from the standards
of ordinary care.’”88 In a common formulation, such recklessness must
“‘approximate an actual intent to aid in the fraud being perpetrated by the audited
company.’”89 Recklessness has been adequately alleged if it appears from the
complaint that “[t]he accounting practices were so deficient that the audit
amounted to no audit at all, or an egregious refusal to see the obvious, or
investigate the doubtful, or that the accounting judgments which were made were
such that no reasonable accountant would have made the same decisions if
confronted with the same facts.”90 “A complaint might reach [the] ‘no audit at all’
87
In re Gildan Activewear, Inc. Secs. Litig., 636 F. Supp. 2d 261, 272
(S.D.N.Y. 2009) (quotation marks and citation omitted).
88
Meridian Horizon Fund, LP, 2012 WL 2754933, at *3 (quoting Rothman,
220 F.3d at 98).
89
Id.
90
In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 385 (S.D.N.Y.
2007) (quoting In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d 611, 657 (S.D.N.Y.
21
threshold by alleging that the auditor disregarded specific ‘red flags’ that ‘would
place a reasonable auditor on notice that the audited company was engaged in
wrongdoing to the detriment of its investors.’”91 “However, . . . merely alleging
that the auditor had access to the information by which it could have discovered the
fraud is not sufficient.”92
3.
Causation
Causation (i.e. reliance and loss causation) is not at issue in this
motion. Therefore, I will not address it here.
V.
DISCUSSION
The gravamen of the claim against DTTC is that DTTC’s audit
opinions were material misstatements that, in light of Longtop’s high gross
margins and the alleged red flags, DTTC issued recklessly. The instant motion
contends that the Complaint fails to adequately allege scienter, and that DTTC did
not make a material misrepresentation because DTTC’s auditor statements were
opinions, which DTTC reasonably believed at the time they were made.
A.
Scienter
2007)).
91
In re IMAX Sec. Litig., 587 F. Supp. 2d 471, 483 (S.D.N.Y. 2008) (quoting
In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d at 385).
92
Id.
22
For the purposes of this motion, the appropriate standard for
evaluating the allegations of scienter is whether, viewed holistically, the facts
alleged give rise to a strong inference that DTTC was reckless to a point
approximating an actual intent to aid Longtop’s deception. Such inference must be
at least as compelling as any competing inference.93 The Complaint does not meet
this standard. The Complaint’s deficiency is that it insufficiently alleges facts that
would have put DTTC on notice that Longtop was engaged in fraud during the
Class Period. At its core the Complaint alleges that, had DTTC performed a better
audit, it would have uncovered Longtop’s fraud.94 At most this describes
negligence by DTTC, not the recklessness approaching actual intent required by
the PSLRA.
1.
The Alleged Accounting Standards Violations
The alleged GAAS violations are mostly pitched at such a high level
of generality that, even if credited, they could not support a compelling inference
of scienter.95 The strongest inference from even the most specifically alleged
93
Tellabs, 551 U.S. at 324.
94
See Compl. ¶¶ 129, 134-137, 183.
95
See, e.g., id. ¶¶ 124 (“In conducting the audit, the auditor must obtain
‘reasonable assurance that the financial statements are free from material
misstatements, whether caused by error or fraud.”) (citing AU § 230.10); 125 (“In
considering audit risk, “the auditor should specifically assess the risk of material
23
“violations” is that DTTC was duped by Longtop, not that DTTC conducted no
audit.96 The GAAS cautions that even a well-planned audit may be ineffective in
the face of fraud.97 And the Complaint amply alleges that Longtop went to great
lengths to conceal its fraud from DTTC, e.g. by falsifying bank confirmations.98 In
the end, the Complaint’s laundry list of auditing standards boils down to the
assertion that “[h]ad DTT[C] exercised even the most cursory of audit procedures”
during its audits, “it would have discovered [the] serious defects in Longtop’s
misstatement of the financial statements due to fraud.”) (citing AU § 312.16); 126127 (stating that DTTC “failed to adequately plan its audit of Longtop and use
appropriate analytical procedures[,]” because it did not discover Longtop’s fraud
prior to the Short Seller Reports) (citing AU §§ 329.01-329.03).
96
Compare id. ¶¶ 133-134 (citing AU §§ 334.07-334.09) (describing an
auditor’s obligation under PCAOB standards to “apply the procedures he considers
necessary to obtain satisfaction concerning the purpose” of large or unusual
transactions in order to ascertain the relationship between the parties, and charging
DTTC with failing to implement these procedures, as evidenced by their failure to
ascertain that DTTC had “transferred the majority of its cost structure off-balance
sheet to XLHRS”); with id. ¶ 58 (describing, inter alia, the lengths to which
Longtop went to conceal its fraud as it began to unravel).
97
See AU § 230 (“[b]ecause of the characteristics of fraud, a properly planned
and performed audit may not detect a material misstatement”); id. § 316.12
(“absolute assurance [that financial statements are free of material misstatement
due to fraud or error] is not attainable and thus even a properly planned and
performed audit may not detect a material misstatement resulting from fraud . . .”).
98
See Compl. ¶ 58.
24
financial records” detailed in the Resignation Letter.99 Without supporting
allegations suggesting that DTTC failed to perform even a “cursory” audit, this
generalized assertion fails to adequately allege scienter under the PSLRA.
2.
Red Flags
Bare allegations of disregarded auditing standards are insufficient to
plead scienter against an outside auditor for the purposes of Section 10(b).100
“Only where such allegations are coupled with evidence of ‘corresponding
fraudulent intent,’ might they be sufficient.”101 A complaint may show this
“corresponding fraudulent intent” through allegations that the auditor disregarded
red flags.102 The Complaint alleges that DTTC was reckless in failing to pay heed
99
Id. ¶ 128.
100
See In re Merkin, 817 F. Supp. 2d 346, 358 (S.D.N.Y. 2011) (stating that
“allegations of GAAP or GAAS violations, standing alone, are insufficient to state
a claim for relief against an accountant under the federal securities laws.”).
101
Novak, 216 F.3d at 309.
102
See In re AOL Time Warner, 381 F. Supp. 2d 192, 240 (S.D.N.Y. 2004)
(“Allegations of ‘red flags,’ when coupled with allegations of GAAP and GAAS
violations, are sufficient to support a strong inference of scienter.”) (holding, inter
alia, allegation that auditor ignored the fact that large amounts of advertising
revenue regularly came in at the end of quarter, fortuitously allowing the audited
company to hit their earnings targets, was a red flag supporting a pleading of
scienter for the purposes of a motion to dismiss).
25
to the six red flags enumerated above.103 However, the Complaint does not allege
that DTTC was actually aware of the putative red flags.104 Instead, the argument is
that had DTTC conducted a better audit, it would have become aware of the red
flags, and the red flags would have pointed the way to Longtop’s wrongdoing. The
problem with this argument is that it does not appear that the alleged circumstances
would have put a reasonable auditor on inquiry notice of fraud.105
In order for a complaint founded on the theory that an auditor should
have uncovered red flags to survive a motion to dismiss, the red flags must be “so
obvious that knowledge of them by the auditor can be presumed.”106 Of the six
alleged red flags, only three are obvious enough to warrant the presumption that
103
See Compl. ¶ 183 (“Had DTT[C] conducted its audit in accordance with the
PCAOB, it would have reacted to the numerous, obvious ‘red flags’ set forth above
and, in so doing, would have discovered the truth about Longtop’s operations.”)
104
See, e.g. id. ¶ 135 (“Indeed, a perfunctory review of the relationship
[between XLHRS and Longtop] would have exposed the following [red flags]”)
(emphasis added). Cf. Stephenson v. PricewaterhouseCoopers, LLP, Civ No.
11–1204–cv, 2012 WL 1764191, at *3 (2d Cir. May 18, 2012) (“[P]leading the
existence of red flags does not establish that a defendant was aware of those
warning signals.”) (affirming dismissal of 10(b) claim when the complaint did not
sufficiently allege that the auditor defendant was aware of the red flags alleged).
105
See South Cherry St., 573 F.3d at 112-15 (affirming dismissal of section
10(b) claim grounded on allegations that investment advisor would have uncovered
fraud if it had conducted due diligence).
106
Stephenson v. Citco Group Ltd., 700 F. Supp. 2d 599, 623 (S.D.N.Y. 2010).
26
DTTC was aware of them: (1) the allegation that XLHRS was formed shortly
before Longtop’s IPO; (2) the allegation that XLHRS was not mentioned in
Longtop’s audited financials until its 2009 Form 20-F;107 and (3) the allegation that
XLHRS has “Longtop” in its name.
DTTC’s failure to uncover Longtop’s fraud on the basis of these facts
does not suggest that its performance amounted to “no audit” of Longtop.108 In
fact, the three facts listed above are not “red flags” at all. “A ‘red flag’ is a sign
consciously disregarded by the auditor that ‘would place a reasonable auditor on
notice that the audited company was engaged in wrongdoing to the detriment of its
investors.’”109 The fact that XLHRS was formed shortly before Longtop’s IPO,
and that it had “Longtop” in its name, would not lead a reasonable auditor to
suspect wrongdoing, given that this sort of staffing arrangement is common.
Moreover, Longtop disclosed in its 2008 Form 20-F that it entered into a staffing
107
The Complaint states that “[a]lthough XLHRS is Longtop's largest line item
expenditure by far, it is never mentioned in Longtop filings until the 2009 20-F. . .
.” Compl. ¶ 135. This assertion is mistaken. Longtop’s 2008 20-F discloses that
Longtop entered into a staffing arrangement with XLHRS on May 18, 2007. See
2008 20-F, Ex. E to Bendinger Decl., at 93, Ex. 4.29.
108
In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d at 657.
109
Advanced Battery Tech., No. 11 Civ. 2279, 2012 WL 3758085, at *16
(S.D.N.Y. Aug. 29, 2012) (quoting In re IMAX Sec. Litig., 587 F. Supp. 2d at
483-84).
27
contract with XLHRS in May 2007.110 This disclosure included, inter alia, an
account of the relationship that Longtop had with XLHRS, the number of
employees provided by XLHRS, and a copy of XLHR’s contract with Longtop.111
Despite this disclosure, which included XLHRS’s full name, neither the SEC nor
the investing public recognized Longtop’s alleged fraud. This raises the inference
that these purported red flags are in fact red herrings.112 Like the SEC and the
investing public, DTTC could have reasonably concluded that XLHRS was
precisely what Longtop presented it as: a fully-disclosed independent staffing
agency.
3.
The Short Seller Reports
The allegations relating to the Short Seller Reports do not provide the
basis for an adequate pleading of scienter. As an initial observation, short sellers
operate by speculating that the price of a security will decrease. They can perform
a useful function by bringing information that securities are overvalued to the
110
See 2008 20-F, Ex. E to Bendinger Decl., at 93, Ex. 4.29.
111
See Compl. ¶ 67.
112
See Meridian Horizon Fund, LP, 2012 WL 2754933, at *3 (affirming
dismissal of 10(b) claim against independent auditor, and holding that alleged red
flags that were disclosed to the investing public could not support an inference of
scienter).
28
market. However, they have an obvious motive to exaggerate the infirmities of the
securities in which they speculate.
The Complaint argues that the Short Seller reports provide proof of
scienter because “[i]t was not until after [the Short Seller Reports] questioned the
legitimacy of Longtop’s financial results that DTT[C] began to specifically assess
the risk of material misstatement of Longtop’s financial statements due to
fraud.”113 The narrative told by the Resignation Letter, though, shows that DTTC
had performed its prior audits with diligence, and further was diligent enough to go
back and check its work in the face of the Short Seller Reports, despite the obvious
temptation to discount them.114 And when, less than a month after the first shortseller’s report, DTTC had verified that there were problems at Longtop, it noisily
resigned.115
To the extent that the argument is that DTTC must have acted
recklessly because Longtop’s fraud was uncovered by short-sellers, not DTTC,
such argument also fails. If an auditor were liable every time a short seller issued a
report prior to a fraud being uncovered, then the scope of auditor liability would
113
Compl. ¶ 127.
114
See id. ¶ 58 (describing the “second round of bank confirmations” performed
by DTTC).
115
See id.
29
extend well beyond that contemplated by the PSLRA. Once more, the most
compelling inference is that DTTC performed its duties with reasonable diligence,
not that it conducted “no audit.”
4.
Additional Scienter Theories
In their opposition brief, Lead Plaintiffs put forward two additional
theories of scienter.116 The first is that the size of Longtop’s fraud indicates that
DTTC was reckless.117 The second is that the rapidity with which DTTC
uncovered the fraud once it began to unravel indicates that DTTC was reckless.118
These theories, too, fail the Tellabs pleading standard.
Naturally, failing to detect a fraud of large magnitude provides some
circumstantial evidence of scienter, just as failing to detect a large boulder in front
of your face qualifies as circumstantial evidence of blindness.119 As DTTC rightly
points out, though, the size of Longtop’s fraud was never quantified, due to
116
See Lead Plaintiffs’ Amended Memorandum of Law in Opposition to
Deloitte Touche Tohmatsu CPA Limited’s Motion to Dismiss Plaintiffs’
Consolidated Class Action Complaint (“Opp. Mem.”) at 17-18.
117
Id. at 17.
118
Id. at 17-18.
119
See Katz v. Image Innovations Holdings, Inc., 542 F. Supp. 2d 269, 273
(S.D.N.Y. 2008) (citing In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d at 394
& n. 174) (“[t]he magnitude of the alleged fraud provides some additional
circumstantial evidence of scienter”).
30
Longtop’s interference with DTTC’s audit.120 And there are no allegations that the
scale of the fraud was sufficiently great, as a percentage of Longtop’s business,
that DTTC was reckless in not catching it earlier.121 Moreover, a fraud’s large size,
standing alone, is insufficient to show recklessness.122
Nor does the rapidity with which Longtop’s fraud unraveled give rise
to a strong inference of scienter. The nub of this theory, which is factually
grounded in the Resignation Letter, is that because DTTC was driven to disavow
its previous opinions after performing follow-up confirmations with Longtop’s
banks, it was reckless in not doing so earlier.123 The most compelling inference to
120
See Defendant Deloitte Touche Tohmatsu CPA Ltd.’s Reply Memorandum
in Further Support of Its Motion to Dismiss the Consolidated Class Action
Complaint at 5-6.
121
See, e.g. In re Bear Stearns Cos., Inc. Secs, Derivative, and ERISA Litig.,
763 F. Supp. 2d 423, 497, 517 (S.D.N.Y. 2011) (finding that an auditor’s failure to
catch a $1.3 billion writedown provided evidence of recklessness); Katz, 542 F.
Supp. 2d at 273 (finding evidence of scienter when accountant booked six million
dollars worth of largely non-existent sales).
122
See Pennsylvania Public School Employees’ Retirement System v. Bank of
America Corp., No. 11 Civ. 733, 2012 WL 2847732, at *18 (S.D.N.Y. July 11,
2012) (dismissing 10(b) claim on the basis that magnitude of fraud is insufficient
to state a claim unless coupled with other “convincing allegations”).
123
See Opp. Mem. at 17-18 (“the speed and ease with which the fraud was
‘identified’ [after the follow up visits to Longtop’s banks] further supports a
finding of scienter”).
31
be drawn from the Resignation Letter, though, is that Longtop had been hiding its
fraud from DTTC, but was forced to reveal it under enhanced scrutiny.124
Finally, to the extent that the Complaint alleges that Longtop’s abovemarket gross margins functioned as a red flag,125 this allegation also fails to satisfy
the pleading standard. If superior performance were a self-sufficient cause to
suspect fraud, then the entire Fortune 500 is in dire need of a thorough forensic
accounting. DTTC’s failure – along with the SEC and the market – to suspect
Longtop on the basis of its high gross margins is too thin a reed on which to hang a
finding of recklessness.126
At bottom, the Complaint alleges fraud by hindsight, a claim that is
accorded the same respect in this Circuit today as it was when Judge Friendly gave
it a name.127 Fraud is always obvious in retrospect, but it is not reckless to lack
124
See Compl. ¶ 58.
125
See id. ¶¶ 4-5, 45-46.
126
See Chill v. General Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996) (“The fact
that GE did not automatically equate record profits with misconduct cannot be said
to be reckless.”). See also Novak, 216 F.3d at 309 (“the failure . . . to interpret
extraordinarily positive performance . . . as a sign of problems and thus to
investigate further does not amount to recklessness”).
127
See Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (giving the name
“fraud by hindsight” to complaint where “plaintiff [] simply seized upon
disclosures made in later annual reports and alleged that they should have been
made in earlier ones”).
32
clairvoyance. Apart from its exhaustive recitation of auditing standards and
purported red flags, the Complaint does little more than allege that, had DTTC
performed a better audit, Longtop’s fraud would have been uncovered sooner.
Considering the allegations in the Complaint as a whole, the strongest inference is
that DTTC was duped by Longtop, not that it recklessly enabled them.
Accordingly, the Complaint fails to adequately plead scienter.128
B.
Material Misrepresentations
DTTC contends that an auditor’s statement of GAAS compliance is a
statement of opinion and therefore not a material misstatement unless subjectively
false at the time it was made.129 Lead Plaintiffs counter that if the Complaint
adequately alleged a violation of GAAP by Longtop, it must follow that DTTC
made a material misrepresentation.130
128
Lead Plaintiffs’ argument that DTTC’s failure to comply with the SEC’s
subpoena provides proof of scienter is also baseless. See Compl. ¶¶ 12, 64. It
appears that DTTC’s delay was caused by conflicting demands from Chinese
regulators, and that the SEC has moved for (and received) a stay pending the
resolution of these issues. See “SEC Docket”, Ex. F to Bendinger Decl., at 6;
DTTC Subpoena Mem., Ex. G to Bendinger Decl., at 21-22; SEC Stay Mot., Ex. H
to Bendinger Decl., at 3.
129
See Defendant Deloitte Touche Tohmatsu CPA Ltd.’s Memorandum in
Support of Its Motion to Dismiss the Consolidated Class Action Complaint at 22.
130
See Opp. Mem. at 12 (citing In Re Longtop, 2012 WL 2512280, at *10).
33
These contentions raise the issue of the boundary between fact and
opinion. In broad outline, this issue is not unfamiliar to the law.131 In the last case
in this Circuit to examine this precise issue in detail, the court in In re Lehman
Bros. Securities and Erisa Litigation held that auditor reports of GAAS
compliance are “inherently . . . one[s] of opinion.”132 Consequently, the Lehman
court held, “[plaintiff must] allege facts that, if true, would permit a conclusion that
[the auditor] either did not in fact hold that opinion or knew that it had no
reasonable basis for it.”133 I also adopt this sensible approach. Under this standard,
131
See, e.g. Gertz v. Robert Welch, Inc., 418 U.S. 323, 339-40 (1974)
(discussing the fact-opinion distinction in the libel context); Vulcan Metals Co. v.
Simmons Mfg. Co., 248 F. 853, 856 (2d Cir. 1918) (stating in the context of a
dispute over allegedly fraudulent sales representations that “[a]n opinion is a fact,
and it may be a very relevant fact; the expression of an opinion is the assertion of a
belief, and any rule which condones the expression of a consciously false opinion
condones a consciously false statement of fact.”).
132
799 F. Supp. 2d 258, 302 (S.D.N.Y. 2011).
133
Id. The Lehman court’s approach is supported by Virginia Bankshares, Inc.
v. Sandberg, in which the Supreme Court held that a director’s fairness opinion in
connection with a freeze out merger must be both objectively and subjectively false
in order to qualify as a material misstatement under section 14(a) of the Exchange
Act. See 501 U.S. 1083, 1093-98 (1991). See also Bond Opportunity v. Unilab,
No. 99 Civ. 11074, 2003 WL 21058251, at *5 (S.D.N.Y. May 9, 2003) (applying
Virginia Bankshares). Cf. Abu Dhabi Commercial Bank v. Morgan Stanley & Co.
Inc., No. 08 Civ. 7508, 2012 WL 3584278, at *11 (S.D.N.Y. 2012) (holding that a
jury could find that Triple-A rating of securities constituted a material
misstatement, despite the fact that such ratings are opinions, because there was
ample evidence of subjective falsehood.)
34
to allege that an auditor opinion is a misrepresentation, a complaint must show that
the statement in question is grounded on a specific factual premise that is false, and
that the speaker did not “genuinely or reasonably believe” it.134
Naturally, the weight of the showing needed to plausibly allege a
material misstatement varies with the underlying auditing defect. In some cases,
the problems with the audit will be so egregious that issuing an unqualified opinion
will qualify as a false statement without additional allegations of subjective
falsehood. In other cases, the underlying alleged auditing standard violations will
be inherently subjective, requiring strong circumstantial evidence of subjective
falsehood in order to survive a motion to dismiss.135
134
In re International Business Machines Corporate Secs. Litig., 163 F.3d 102,
107 (2d Cir. 1998). Analogously, a statement that is explicitly labeled an opinion
may be actionable in defamation if it implies a false or unreasonable statement of
fact. See Milkovich v. Lorain Journal Co., 497 U.S. 1, 18-19 (1990) (“If a speaker
says, ‘In my opinion John Jones is a liar,’ he implies a knowledge of facts which
lead to the conclusion that Jones told an untruth. Even if the speaker states the
facts upon which he bases his opinion, if those facts are either incorrect or
incomplete, or if his assessment of them is erroneous, the statement may still imply
a false assertion of fact.”).
135
See Fait v. Regions Fin. Corp., 655 F.3d 105, 110 (2d Cir. 2011) (stating
that a statement concerning the impairment of goodwill is inherently subjective,
because it depends on a series of assumptions about the “fair value” of an asset).
See also City of Omaha, Neb. Civilian Employees’ Retirement Sys. v. CBS Corp.,
679 F.3d 64, 68-69 (2d Cir. 2012) (affirming dismissal under Fait when securities
fraud complaint lacked allegations that company did not believe its goodwill
estimate at the time it was made). Presently there is no need to decide whether, in
35
Here, the alleged material misstatements are that DTTC stated that its
audits had been performed in accordance with PCAOB standards and that
Longtop’s financials were fairly presented.136 The allegation that these opinions
were misstatements fails for the same reason as the allegation that DTTC acted
with scienter. At base, Lead Plaintiffs’ argument is that DTTC’s audit reports
contained material misstatements because they erroneously certified that Longtop’s
financials were prepared in accordance with GAAP.137 No facts alleged show that
DTTC was aware, or should have been aware, of wrongdoing on Longtop’s part at
the time DTTC issued the audit reports. Instead, the allegations in the Complaint
lead to the compelling and stronger inference that DTTC performed a diligent
the 10(b) context, a statement of opinion could be “materially false” because it
does not express the speaker’s true opinion. Cf. Virginia Bankshares, Inc., 501
U.S. at 1096 (quoting Stedman v. Storer, 308 F. Supp. 881, 887 (S.D.N.Y. 1969))
(“to recognize liability on mere disbelief or undisclosed motive without any
demonstration that the proxy statement was false or misleading about its subject
would authorize § 14(a) litigation confined solely to what one skeptical court
spoke of as the “impurities” of a director’s “unclean heart.”).
136
See Compl. ¶¶ 181-182.
137
See Opp. Mem. at 9-13.
36
audit, only to be duped by Longtop’s fraud.138 Accordingly, Lead Plaintiffs have
failed to plead a material misstatement.
C.
Leave to Amend
Lead Plaintiffs seek leave to amend the Complaint. Although a court
“should freely give leave” to amend “when justice so requires,”139 there is cause for
suspicion that amendment here would be futile. Namely, Lead Plaintiffs have
fallen far short of showing that DTTC made a material misrepresentation with
scienter, instead relying on general recitations of accounting standards, post-hoc
reasoning, and conclusory allegations. Nonetheless, I grant Lead Plaintiffs leave to
amend, but only if they can correct the deficiencies noted in this Opinion in
compliance with their obligations under Rule 11. Any repleading must be made
within thirty days of the date of this Order.
V.
CONCLUSION
138
See Compl. ¶ 58. In their opposition brief, Lead Plaintiffs argue that the
Resignation Letter indicates that DTTC did not “independently verify Longtop’s
bank balances and borrowing until May 2011 . . . .” Opp. Mem. at 16. This
contention is contradicted by the text of the Resignation Letter, which refers to
“confirmations” of replies “previously received,” “follow up visits,” etc. Compl. ¶
58.
139
Fed. R. Civ. P. 15(a)(2).
37
For the foregoing reasons, defendant Deloitte Touche Tohmatsu CPA
Ltd.’s motion to dismiss is granted. It is hereby Ordered that defendant Deloitte
Touche Tohmatsu CPA Ltd. is to be dismissed from this action. It is further
Ordered that Lead Plaintiffs are granted leave to replead within thirty days of the
date of this Order. The Clerk of Court is directed to close this motion (Docket No.
101).
38
SO ORDERED:
Shira A. Scheindlin
U.S.DJ.
Dated:
New York, New York
November 14,2012
39
-Appearances-
Counsel for Plaintiffs:
Kimberly A. Justice, Esq.
John A. Kehoe, Esq.
John J. Gross, Esq.
Kessler Topaz Meltzer & Check, LLP (PA)
280 King of Prussia Road
Radnor, Pennsylvania 19087
(610) 667-7706
Daniel L. Berger, Esq.
Jeff A. Almeida, Esq.
Deborah A. Elman, Esq.
Reena S. Liebling, Esq.
Grant & Eisenhofer, P.A. (NY)
485 Lexington Avenue
29th Floor
New York, New York, 10017
(646) 722-8500
Counsel for Defendants:
Gary F. Bendinger, Esq.
Gazeena K. Soni, Esq.
Sidley Austin LLP
787 Seventh Avenue
New York, New York, 10019
(212) 839-5300
40
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