sufficient allegations of fraudulent intent, purported GAAP violations do not support a securities fraud claim), aff'd, 101 F.3d 263 (2d Cir. 1996). Zucker's allegations refer simply to violations of basic auditing principles without reference as to how Ernst & Young's violations were the result of intentional deceit or how they rise to the level of recklessness. Therefore, Zucker's claims based on purported GAAP and GAAS violations must be dismissed.
II. Motion to dismiss pursuant to Rule 9(b)
The amended complaint must be dismissed for the additional reason that Zucker's allegations fail to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b). The amended complaint is subject to the pleading requirements of Rule 9(b) because securities fraud claims under Section 10(b) and Rule 10b-5 require proof of scienter. Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1127 (2d Cir. 1994). The first prong of Rule 9(b) requires that "the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Satisfaction of this element requires that the complaint (1) specify the allegedly fraudulent statements; (2) identify the speaker; (3) state where and when the statements were made; and (4) explain why the statements were fraudulent. Mills v. Polar Molecular Corp., 12 F.3d at 1175. The second prong of Rule 9(b) states that "malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed. R. Civ. P. 9(b). Courts in this Circuit have required a plaintiff to allege facts that give rise to a strong inference of fraudulent intent. Id. at 1128; Aquino v. Trupin, 833 F. Supp. 336, 341 (S.D.N.Y. 1993). There are two ways in which a plaintiff can satisfy this standard: (1) by alleging facts demonstrating a motive for committing fraud and a clear opportunity to do so; or (2) by identifying circumstances indicating conscious or reckless behavior by the defendant. San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d at 809.
Three recent Second Circuit decisions addressing the standard for pleading scienter in securities fraud actions have made clear that courts in this Circuit should "carefully scrutinize securities fraud complaints with regard to the sufficiency of allegations of scienter." In re 1993 Corning Sec. Litig., 1996 U.S. Dist. LEXIS 6601, No. 93 Civ. 7015, 1996 WL 257603, at *5 (S.D.N.Y. May 15, 1996).
Ernst & Young argues and this Court agrees that Zucker has failed to satisfy either prong of the aforementioned test. To allege motive and opportunity, Zucker must plead facts demonstrating that Ernst & Young had "the means and likely prospect of achieving concrete benefits by the means alleged." Shields v. Citytrust Bancorp, Inc., 25 F.3d at 1130. The amended complaint contains no allegations of motive and makes no suggestion that Ernst & Young received anything other than its usual fees for its work. The Court finds that mere receipt of compensation and the maintenance of a profitable professional business relationship for auditing services does not constitute a sufficient motive for purposes of pleading scienter. Duncan v. Pencer, 1996 U.S. Dist. LEXIS 401, No. 94 Civ. 321, 1996 WL 19043, at *9-*10 (S.D.N.Y. Jan. 18, 1996); Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F. Supp. 521, 532 (S.D.N.Y. 1990), aff'd, 927 F.2d 594 (2d Cir. 1991). To hold otherwise would "effectively abolish the requirement . . . of pleading facts which support a strong inference of scienter" against professional defendants. Duncan v. Pencer, 1996 WL 19043, at *9. Moreover, a contrary finding would require this Court to assume that Ernst & Young willingly condoned Cygne's fraud in order to preserve its fee, at the risk of jeopardizing its reputation and license as well as the possibility of damages in an amount much greater than its fee. Because this conduct would be economically irrational for Ernst & Young, the Court need not credit such allegations. See Shields v. Citytrust Bancorp. Inc., 25 F.3d at 1130.
In addition, Zucker has failed to allege facts that constitute evidence of recklessness on the part of Ernst & Young. To plead facts establishing a strong inference that defendants engaged in accounting fraud, a plaintiff must specify the improper transactions, explain why such procedures used were improper, and estimate the approximate amount by which the company's finances were misstated. Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 116 (2d Cir. 1982); Schick v. Ernst & Young, 808 F. Supp. 1097, 1102 (S.D.N.Y. 1992). Moreover, where motive is not alleged and plaintiff relies entirely on allegations of recklessness in asserting scienter, the evidence presented must be proportionally greater. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987) (plaintiff may plead scienter without motive by identifying circumstances indicating conscious behavior by the defendant, "though the strength of the circumstantial evidence must be correspondingly greater"), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988). Zucker fails to meet this standard.
Zucker claims that during the pre-purchase investigation of FWM's business, Ernst & Young learned that there were serious problems with FWM. Accordingly, Ernst & Young knew or had reason to know that the goodwill and amortization period associated with the FWM acquisition were materially misstated. As stated above, the only facts asserted in the amended complaint that support an inference of such knowledge or reckless disregard are that: (1) the agreement to acquire FWM was signed on or about September 28, 1993, more than six months prior to the completion of the acquisition and the issuance of Ernst & Young's Fiscal 1993 Report; and (2) as Cygne's auditors, Ernst & Young was often present at Cygne headquarters and had access to its confidential documents during the six month period between the signing of the agreement to acquire FWM and the completion of the acquisition.
Thus, Zucker's claim that Ernst & Young knew or recklessly disregarded adverse facts about FWM is, in essence, based solely on Ernst & Young's status as an auditor. As such, it is insufficient. Griffin v. McNiff, 744 F. Supp. 1237, 1248-49 n.11 (S.D.N.Y. 1990) (merely alleging that accounting firm qua auditor of company documents must have known or recklessly disregarded true facts is insufficient to support inference of scienter under Rule 9(b)), aff'd, 996 F.2d 303 (2d Cir. 1993); O'Brien v. Price Waterhouse, 740 F. Supp. at 281 (fact that an accounting firm acted as an auditor and financial forecaster to an allegedly fraudulent investment scheme insufficient to create inference of scienter).
Zucker proffers no specific facts as to how or when Ernst & Young learned of or recklessly disregarded FWM's problems and the negative consequences that would ensue from the acquisition. Zucker never states what alleged information was revealed to Ernst & Young, in what form the information was provided, at what point Ernst & Young became aware of it, and from whom Ernst & Young received this information. Accordingly, the claim is insufficient under the pleading requirements of Rule 9(b).
See The Limited, Inc. v. McCrory Corp., 683 F. Supp. 387, 394-95 (S.D.N.Y. 1988) (10b-5 claim dismissed where plaintiff gave no indication of how or when defendant accountant learned of facts that made the financial statements misleading); Fahlenbach v. Trans Pacific Capital (USA) Inc., 1996 U.S. Dist. LEXIS 385, No. 95 Civ. 8776, 1996 WL 22602, at *3 (S.D.N.Y. Jan. 16, 1996) (dismissing 10b-5 claim that contained no factual allegations demonstrating that defendant knew of company's problems); Griffin v. McNiff, 744 F. Supp. at 1250 (10b-5 claim dismissed where there was no factual support to infer that alleged fraud was known to accounting firm).
For the reasons set forth above, Ernst & Young's motion to dismiss the amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) is granted. Zucker's request for leave to file an amended complaint is denied.
SHIRLEY WOHL KRAM
UNITED STATES DISTRICT JUDGE
Dated: New York, New York
May 6, 1997