Claims Against Auditor and All Others Dismissed in $40M Securities Class Action
Case Study

Claims Against Auditor and All Others Dismissed in $40M Securities Class Action

June 22, 2015

Goldberg Segalla’s Professional Liability Practice Group secured the dismissal of a $40 million securities class action complaint filed against a bank, its securities underwriters, and its outside auditor in the U.S. District Court for the Middle District of Pennsylvania. Jonathan S. Ziss and Seth L. Laver represented the bank’s outside SEC auditor — a large CPA firm — in this matter and argued the motion to dismiss.

Following the bank’s disclosure in 2012 that it had failed to “maintain effective internal control over the process to prepare and report information related to loan ratings and its impact on the allowance for loan losses,” its stock price dropped precipitously. The suit alleged that the bank and its underwriters had made false and misleading statements in connection with a public offering in March 2010, in violation of Section 10(b) of the Exchange Act and Section 11 of the Securities Act, and that the bank had thereafter continued to issue false statements to the investing public.

With respect to the Section 11 claim, the plaintiff alleged that the auditors issued false, misleading, and unreasonable statements in its year-end audit reports. Relying in large part upon the U.S. Supreme Court’s 2015 decision in Omnicare v. Laborers District Council Construction Industry Pension Fund, which advanced the distinction between statements of fact and statements of opinion, the district court held that the auditor’s reports represented statements of opinion which, under Omnicare, are only actionable if (1) the opinion is not sincerely held, or (2) the opinion contains an embedded statement of untrue material facts.

Regarding Section 10(b), the plaintiff alleged that the auditor had “perpetuated the bank’s deceit” by issuing “clean auditor reports” that “falsely represented to investors” that the bank was in sound financial condition.  In dismissing this claim, the court found that the class action complaint lacked the required element of scienter — “a mental state embracing intent to deceive, manipulate, or defraud.” The court was unpersuaded by the plaintiff’s claim that the auditor’s “accounting judgments … were such that no reasonable accountant would have made the same decisions if confronted with the same facts.”

The court’s decision, issued June 22, closely followed a March 2015 victory by Jonathan and Seth for an auditor defendant in a case of first impression before the Delaware Court of Chancery that set important and favorable precedent for the defense of accounting firms and other third parties when they become implicated in cases alleging corporate wrongdoing on the part of other defendants.