July 20, 2012

When Working Hard Is Not Enough

The U.S. Court of Appeals for the Second Circuit has reversed a summary judgment grant in favor of Grant Thornton (outside auditor) in a securities class action related to the collapse of Winstar Communications. The case was originally filed in 2001 and, due to intervening settlements, Grant Thornton is the sole remaining defendant. The district court found that Grant Thornton had engaged in "dubious accounting practices" and had "failed to uncover the accounting fraud" being perpetrated by Winstar. Nevertheless, the district court concluded that there was no genuine issue of material fact as to whether Grant Thornton had acted intentionally or recklessly (i.e., with scienter) in issuing its unqualified audit opinion for FY1999.

The Second Circuit disagreed. In Gould v. Winstar Communications, Inc., 2012 WL 2924254 (2d Cir. July 19, 2012), the court held that at least some evidence existed to support the plaintiffs' assertion "that in the course of its audit GT learned of and advised against the use of indisputably deceptive accounting schemes, but eventually acquiesced in the schemes by issuing an unqualified audit opinion." While the district court had placed "particular emphasis on the magnitude of GT's audit work, both in time spent and documents reviewed" in granting summary judgment, the court noted that "[t]he number of hours spent on an audit cannot, standing alone, immunize an accountant from charges it has violated the securities laws." In regard to two other issues raised on appeal - reliance by certain plaintiffs who brought a Section 18 claim and loss causation - the court found that there was sufficient evidence to allow a jury to reasonably infer that those elements were satisfied.

Holding: Grant of summary judgment vacated and case remanded.

Posted by Lyle Roberts at July 20, 2012 3:50 PM | TrackBack
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