Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.


March 23, 2004.


The opinion of the court was delivered by: GERARD E. LYNCH, District Judge


This consolidated class action arises from alleged accounting improprieties at the telecommunications firm Global Crossing, Ltd. ("GC"), during the period between February 1, 1999, and January 28, 2002, the "class period," that artificially inflated the company's stock price. According to the Consolidated Class Action Complaint, "[d]uring the Class Period, insiders sold over $1.5 billion in artificially inflated Global Crossing stock while in possession of material, non-public information and the outside advisor defendants reaped hundreds of millions of dollars in fees and profits. But the Company and its purported multi-billion dollar revenues and strong, substantial cash flow were a complete sham." (Compl. ¶ 1.) In addition to suing GC, its individual directors and officers, and numerous financial institutions, *fn1 plaintiffs have named Page 2 as defendants Arthur Andersen LLP ("Andersen"),*fn2 GC's outside auditor, as well as several of its officers, board members, and employees ("the individual Andersen defendants").*fn3 Plaintiffs later amended their Complaint to assert claims against a GC subsidiary, Asia Global Crossing, Ltd. ("AGC"), and against Andersen in its role as AGC's outside auditor.*fn4 Plaintiffs assert these claims under sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. § 77k, 77o, and sections 10(b), 14, and 20(a) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), 78n, 78t-1(a), as well as Rule 10b-5 promulgated thereunder by the Securities Exchange Commission ("SEC"), Page 3 17 C.F.R. § 240.10b-5.

  On April 4, 2003, Andersen and the individual Andersen defendants moved to dismiss all claims asserted against them in the original Complaint; on October 10, 2003, they further moved to dismiss all claims relating to AGC. Because both motions implicate similar legal issues, they will be decided together. For the reasons set forth below, Andersen's motions will be granted in part and denied in part.


  The facts underlying the Complaint in this case were briefly set forth in this Court's December 18 Opinion, but will be outlined in more detail here. The claims against Andersen in particular center around allegedly fraudulent misstatements of GC's and AGC's assets, obligations, and cash revenues, arising from the manner in which the two companies accounted for certain transactions involving "indefeasible rights of use" ("IRUs"). In its role as independent auditor for both GC and AGC ("the Companies"), Andersen is alleged to have perpetrated a fraud on investors by dictating incorrect and misleading accounting systems for these transactions and by structuring them so as to inflate the Companies' reported earnings, in violation of Generally Accepted Accounting Practices ("GAAP") and Generally Accepted Accounting Standards ("GAAS").*fn5 Page 4

  An IRU is the "right to use a specified capacity, or bandwidth, over a designated communications cable owned by a telecommunications company for a set period of time." (¶ 150.) Income from IRU transactions represented a large portion of the Companies' revenues during the class periods and therefore played a substantial role in determining the market value of their shares. Plaintiffs claim that the Companies, in order to meet performance expectations and thereby boost the value of their securities, (1) reported as immediate cash revenue income that should have been booked over the 25-year term of each IRU, while amortizing the related costs over the entire term; and (2) similarly reported income from unneeded reciprocal "swaps" with other carriers of such capacity, notwithstanding that, where cash actually changed hands, it was "round-tripped" in the return half of the swap, thereby yielding no actual revenue. They further assert that the Companies overstated the value of their assets by failing to mark down the value of the ERUs received in the swaps, which had been booked at or above their "fair market value," even as the market price for capacity plummeted due to the glut on the market. (¶ 718.)

  Exchanges of capacity were common in the telecommunications industry from its inception. However, "[u]ntil the late 1990s . . . telecom companies did not treat these exchanges as sales and usually did not record revenue from the trades." (¶ 210.) GC alone among these companies booked immediate revenue from these sales. (¶ 211.) Plaintiffs allege that the practice of booking IRU revenue up front violated Financial Accounting Standards Board ("FASB") Statement No. 13, which restricts the circumstances under which a company may report as immediate revenue the total lease payments due under a multiyear lease agreement. Indeed, effective July 1, 1999, the FASB issued "FASB Interpretation No. 43" ("FIN 43"), a clarification of FASB 13 that clearly prevented GC from continuing to book the IRU payments as Page 5 immediate cash income. Following the issuance of FIN 43, GC changed its accounting to come into compliance with its requirements, although AGC continued to book revenue for leases of subsea (as opposed to terrestrial) cable as immediate revenue until mid-2000. (¶ 157.)

  Following the issuance of FIN 43, GC announced that compliance with its terms "would not have a material impact on the Company's financial position or results of operations." (¶ 220 (quoting unattributed source).) But plaintiffs allege that compliance with FIN 43 would, in fact, have been devastating had GC not found a new source of illusory revenue: reciprocal "swap" transactions with other telecommunications companies. According to the Complaint, Joseph Perrone, a senior partner in Andersen's media and communications practice, devised a "roadmap" whereby telecom companies, and GC in particular, could structure trades of capacity to create the appearance of revenue, with the purpose of avoiding the strictures of GAAP. (¶¶ 216-224.) In particular, the transactions were structured to circumvent Accounting Principles Board Opinion No. 29 ("APB 29"), "Accounting for Nonmonetary Transactions," which specifies that no revenue or expense should be recorded for transactions that involve an exchange of like assets. Andersen's scheme, which was embodied in a document that came to be known as the "White Paper," advised that telecom clients could book revenue from IRU sales between companies if the transactions had separate contracts and separate cash settlements, and if the contracts were at least sixty days apart. (¶ 217.) Thereafter, the Companies followed these guidelines to structure their exchanges of capacity such that they could book revenue from the transactions.

  When revenue from IRU sales could no longer be reported immediately as cash revenue under GAAP, GC claimed that its own measures of revenue, styled by GC as "pro forma Page 6 disclosures," "Earnings Before Interest, Taxes, Depreciation, and Amortization" ("EBIDTA"), and "Adjusted EBIDTA," were better measures of its financial health than financial statements according to GAAP. These financial statements, which were publicly disseminated to investors, reported as immediate revenue what they termed the "cash portion" of "deferred revenue": in effect, these disclosures allowed GC to further circumvent the requirements of FIN 43 and APB 29, and to continue to represent as immediate revenue the up-front payments they received for IRU sales. Additionally, AGC created the terms "Proportionate Cash Revenue" and "Proportionate Adjusted EBITDA," which purportedly reflected "the sum of our ownership percentage" of cash revenue and adjusted EBITDA of various GC affiliates with whom ACG participated in joint ventures. (¶¶ 240, 241.) The Companies' tactics succeeded, plaintiffs claim, in inflating the value of their stock, resulting in steep losses for shareholders in 2002 when the house of cards collapsed and the Companies inevitably went bankrupt.

  Plaintiffs allege that Andersen, as independent auditor for both GC and AGC, played a central role in devising and implementing the accounting schemes in question. According to the Complaint, Andersen "created a web of interrelated transactions between [its] clients that had no economic substance but which were used to fool investors into believing that the industry and these companies were growing much faster than the reality." (¶ 146.) In addition to issuing clean audit opinions on the Companies' annual 10-K reports filed with the SEC, Andersen allegedly also had direct knowledge of the Companies' unaudited pro forma reports (¶ 732(h)), and was responsible through defendants Perrone and, later, Mark Fagan, Andersen's senior partner in charge of the GC account after Perrone was hired by GC, for overseeing all of GC's public statements (¶ 77.) Plaintiffs accordingly seek to hold Andersen liable under section 10(b) Page 7 and Rule 10b-5 for the financial statements it audited for GC in 1998, 1999, and 2000, and for AGC in 2000, claiming that they included materially false or misleading information in their treatment of IRUs and swap transactions. They also seek to hold Andersen liable for GC's and AGC's unaudited press releases and "pro forma" disclosures, which included falsely optimistic statements of income and misleading statements of "EBIDTA." (Counts I, XIX.) As a corollary to the allegations of false and misleading statements in plaintiffs' section 10(b) claims, they further assert that Andersen is liable under section 11 for including the allegedly misleading audited financial statements in registration statements filed in connection with various stock offerings (Counts VIII-XIV, XX), and under section 14 for consenting to the inclusion of the false audited financial statements in a proxy statement issued in connection with GC's merger with Frontier Corporation ("Frontier") in 1999 (Count II). Finally, they assert claims under sections 20(a) and 15 against Andersen as an entity, as well as against the individual Andersen defendants, for controlling the persons who engaged in these illegal activities. (Counts IV, XVI).


  On a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins., 32 F.3d 697, 699-700 (2d Cir. 1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998) (citations omitted); see also Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996) (when adjudicating motion to dismiss under Fed.R.Civ.P. 12(b)(6), the "issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims" (citations omitted)). When deciding a motion to dismiss pursuant to Rule Page 8 12(b)(6), the Court may consider documents attached to the complaint as exhibits or incorporated in it by reference. Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993) ("[T]he complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference."). In addition to facts alleged in the complaint, the Court may take judicial notice of public disclosure documents filed with the SEC. Kramer v. Time Warner Inc., 937 F.2d 767, 774 (2d Cir. 1991). All reasonable inferences are to be drawn in the plaintiffs' favor, which often makes it "difficult to resolve [certain questions] as a matter of law." In re Indep. Energy Holdings PLC, 154 F. Supp.2d 741, 747 (S.D.N.Y. 2001).

 I. Section 10(b) Claims

  A. Legal Standard

  Section 10(b) protects investors by making it unlawful "[t]o 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 regulations as the [Securities and Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). Pursuant to SEC Rule 10b-5, it is unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to 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, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. The purpose of section 10(b) was "to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business Page 9 ethics in the securities industry." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151 (1972), citing SEC v. Capital Gains Research Bureau. Inc., 375 U.S. 180, 186 (1963). To better achieve this end, the Exchange Act is "to be construed not technically and restrictively, but flexibly to effectuate its remedial purposes." Id.

  The majority of securities fraud claims under section 10(b) are brought pursuant to Rule 10b-5(b) for false or misleading statements or omissions. In order for a claim under this provision to survive a motion to dismiss, a plaintiff must allege that the defendant, "in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). A statement or omission is material if it "would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." TSC Industries Inc. v. Northway. Inc., 426 U.S. 438, 449 (1976).

  Plaintiffs here bring their claims not only under Rule 10b-5(b), but also under the more general provisions of Rule 10b-5(a) and (c), which prohibit the use of "any device, scheme, or artifice to defraud" or the participation "in any act, practice, or course of business" that would perpetrate fraud on investors. While claims brought under Rule 10b-5(b) require plaintiffs to allege a false or misleading statement (or omission), "[t]he first and third subparagraphs [of Rule 10b-5] are not so restricted." Affiliated Ute, 406 U.S. at 153. Rather, in order for such a claim to survive a motion to dismiss, plaintiffs must allege that "(1) they were injured; (2) in connection with the purchase or sale of securities; (3) by relying on a market for securities; (4) controlled or artificially affected by defendant's deceptive or manipulative conduct; and (5) the defendants Page 10 engaged in the manipulative conduct with scienter." In re Initial Public Offering Sec. Litig., 241 F. Supp.2d 281, 385 (S.D.N.Y. 2003), citing In re Blech Sec. Litig, 961 F. Supp. 569, 582 (S.D.N.Y. 1997): see also SEC. v. Zanford, 535 U.S. 813, 824-25 (2002) (holding that broker's actions in establishing phony escrow accounts and using the proceeds for his own purposes was an unlawful scheme "in connection with the purchase or sale of securities" within the meaning of § 10(b), where his "fraudulent intent deprived the [plaintiffs] of the benefit of the sale").

  Finally, the pleading standard is stiffened by the requirements that plaintiffs plead the element of scienter, defined as "a mental state embracing intent to deceive, manipulate, or defraud," which is a necessary element of any claim brought under section 10(b). Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12, 213-14 (1976). The burden of pleading scienter is intensified by the requirement of Rule 9(b) that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R. Civ. P. 9(b). Although Rule 9(b) allows the pleading party to aver scienter generally, the Second Circuit warns that "the relaxation of Rule 9(b)'s specificity requirement regarding condition of mind [must not be mistaken] for a license to base claims of fraud on speculation and conclusory allegations." Chill v. General Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996) (citations omitted). Rather, plaintiffs must allege facts that "give rise to a strong inference of fraudulent intent." Id. (citations omitted; emphasis in original). This requirement is further reinforced by the Private Securities Litigation Reform Act ("PSLRA"), which requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Page 11 15 U.S.C. § 78u-4(b)(2).*fn6

  In addition, the PSLRA requires that where material misstatements or omissions are alleged, plaintiffs 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, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). In cases where it is not a statement or omission that is alleged, but rather, a fraudulent scheme to affect the price of stocks, it is sufficient to specify "what manipulative acts were performed, which defendants performed them, when the manipulative acts were performed, and what effect the scheme had on the market for the securities at issue."*fn7 Blech, 961 F. Supp. at 580 (internal citation omitted).

  B. Primary Liability versus Aiding and Abetting*fn8

  Andersen's chief argument is that plaintiffs' claims run afoul of the Supreme Court's mandate in Central Bank of Denver. N.A. v. First Interstate Bank of Denver. N.A., 511 U.S. 164 (1994), which held that there is no private cause of action against mere aiders and abettors of section 10(b) violations. Andersen argues that plaintiffs' allegations amount to nothing more Page 12 than a claim that it aided and abetted the Companies' violations, and that such a claim is prohibited under Central Bank and the Second Circuit's case law interpreting it.

  At the outset, the Supreme Court's ruling in Central Bank does not amount to a categorical prohibition on claims against secondary actors such as accountants. To the contrary, the Court explicitly emphasized that secondary actors such as accountants and lawyers may still be held liable where they commit a primary violation of securities laws:
Any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met. . . . In any complex securities fraud . . . there are likely to be multiple violators.
Central Bank, 511 U.S. at 191 (emphasis in original). Nonetheless, the requirement of a primary violation is a precondition for liability: to allow otherwise, the Court held, would circumvent a necessary element of every section 10(b) claim by subjecting defendants to liability "without any showing that the plaintiff relied upon the aider and abettor's statements or actions." Id. at 180. Interpreting this mandate, the Second Circuit has clarified that in cases brought under Rule 10b-5(b), defendants can only be held liable for statements that are publicly attributed to them. See Wright v. Ernst & Young. LLP, 152 F.3d 169 (2d Cir. 1998).*fn9 Thus, in order for a defendant to be held liable for a claim brought under Rule 10b-5, a plaintiff must allege that that defendant made a false or misleading statement or omission that was attributed to him or her, or that s/he Page 13 "participated in [a] fraudulent scheme or other activity proscribed by the securities laws." SEC v. U.S. Environmental. Inc., 155 F.3d 107, 111 (2d Cir. 1998) (citations omitted).*fn10
1. Andersen's Liability for False Statements in GC's and A GC's Unaudited Financial Statements
  The crux of Andersen's argument is that it is shielded from liability under Central Bank and Wright because its only publicly attributed statements were the Companies' audited financial reports, and these were not materially false or misleading. Andersen does not dispute that it is responsible for the statements in its audit reports on GC's annual 10-Ks for 1998, 1999, and 2000 and on AGC's 10-K for 2000. But most of the allegedly misleading "swap" transactions occurred in FY 2001, a year for which Anderson did not audit the financials of either GC or AGC. The bulk of plaintiffs' Complaint concerns public statements regarding these swaps that were issued in various press releases, unaudited quarterly statements, and "pro forma" financials. Leaving aside, for the moment, the materiality and falsehood of the audited statements (see Part I.C. infra), the issue is thus whether Andersen can be held liable for GC's and AGC's other unaudited public statements and disclosures.*fn11 Andersen argues that it cannot be because these statements were made not by Andersen, but by AGC or GC, and were never publicly attributed to Andersen. According to Andersen, claims that it reviewed and approved these statements, or assisted the Companies in making them, would amount to nothing more than impermissible Page 14 aiding and abetting claims. Plaintiffs respond that Andersen played so central a role in the creation and perpetration of the allegedly false accounting schemes, and its role as auditor was so well-known to investors, that it should be subject to liability as a primary violator for these statements under Central Bank.

  The Second Circuit's initial interpretation of Central Bank appeared to be clear that in order for liability to attach to a defendant, the misrepresentation had to be "attributed to that specific actor at the time of public dissemination, that is, in advance of the investment decision." Wright, 152 F.3d at 175. This seemed to leave little doubt that the rule limiting liability to a defendant's own publicly attributed statements was absolute. Indeed, Wright explicitly rejected liability on the part of an auditor for statements made by a public company on a theory that the defendant accounting firm had "reviewed and approved" the allegedly false and misleading statements. However, in a recent decision, the Second Circuit upheld a ruling that a company vice president could be liable for misstatements not specifically attributed to him, where he "was primarily responsible" for communications with investors and analysts and was "involved in the drafting, producing, reviewing and/or disseminating of the false and misleading statements." In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 75-76 (2d Cir. 2001). Plaintiffs thus appear to be correct that, in this Circuit, "[a] defendant may be held liable for fraudulent statements under Section 10(b) where a plaintiff alleges sufficient facts that demonstrate that a defendant was personally responsible for making those statements, even if he or she is not identified as the speaker." (P. Opp. GC 24-25, emphasis added.) However, Scholastic did not explicitly overrule Wright — in fact, it failed to cite either Wright or Central Bank — and it gave scant explanation of its holding. See 252 F.3d at 75-76. While Scholastic might indicate some relaxation of Page 15 Wright's requirement, then, it does not provide any guidance as to when a statement not attributed to a defendant might cross the line into a primary violation.*fn12

  Some district courts, in this Circuit and others, have allowed claims to survive the pleading stage even where the defendant was not alleged to have actually made the allegedly false statement. See, e.g., In re Vivendi Univ. S.A. Sec. Litig., 02 Civ. 5571 (HB), 2003 WL 22489764, at *25 (S.D.N.Y. Nov. 3, 2003) (refusing to dismiss claim against CFO for public statements made by company but not specifically attributed to him); In re Lernout & Hauspie Sec. Litig., 230 F. Supp.2d 152, 166-67 (D. Mass. 2002) (refusing to dismiss claims against auditor where auditor's role was widely disseminated to the public and it was "appropriate to infer that . . . investors reasonably attributed the statements" to the auditor); In re Livent Inc. Noteholders Sec. Litig., 174 F. Supp.2d 144 (S.D.N.Y. 2001) (holding broker potentially liable for "structuring and keeping secret the misrepresented [relationship]" between the underwriter and the company). However, as Andersen correctly points out, in many if not most of these cases, either the defendant was a corporate insider, rather than a secondary actor, or the complaint alleged that s/he had actually made a false or misleading statement or omission, thus stating a claim for a primary violation. For example, in Scholastic and Vivendi, defendants were Page 16 both CFOs of the respective defendant companies.*fn13 In Livent, the defendant underwriter had also served as a broker and had solicited and executed sales of company's stock. 174 F. Supp.2d at 154-55.

  Among the cases cited above, the district court decision in Lernout & Hauspie, 230 F. Supp.2d 152, provides the most support for plaintiffs' position. In that case, plaintiffs sued various corporate affiliates of Lernout & Hauspie's outside auditor, KPMG, for having overseen and prepared unaudited financial reports submitted to shareholders. The court allowed certain claims to survive a motion to dismiss on grounds that plaintiffs had alleged that the KPMG affiliate had actually "made" the false statements through its active role in preparing them. With respect to the public attribution rule, the court distinguished Wright, noting that the necessary element of reliance had not been sufficiently pled in that case because the statements in question had specifically noted that the reports were unaudited, and because it had been made "without a whisper of [the defendant's] involvement." Id. at 162, citing Wright, 152 F.3d at 175-76 (alteration in original). Applying that principle, the court held that the plaintiffs had failed to state a claim against KPMG's Singapore based affiliate where it had not directly participated in issuing any of the reports in question, but rather, had communicated its "clean" audit opinion to its Belgian affiliate responsible for issuing Lernout & Hauspie's audit reports. Id. at 171. By contrast, the involvement of KPMG's United States affiliate had been widely disseminated to investors in annual reports. Thus, even if the statements themselves were not publicly attributed to KPMG U.S., it was "appropriate to infer that . . . investors reasonably attributed the Page 17 statements" to KPMG U.S. Id. at 166-67. Put another way, the rule espoused in Lernout & Hauspie is that a plaintiff may state a claim for primary liability under section 10(b) for a false statement (or omission), even where the statement is not publicly attributed to the defendant, where the defendant's participation is substantial enough that s/he may be deemed to have made the statement, and where investors are sufficiently aware of defendant's participation that they may be found to have relied on it as if the statement had been attributed to the defendant.

  Although Lernout & Hauspie is not controlling here, its reasoning is persuasive. Its analysis reconciles the Second Circuit's ruling in Scholastic with the focus on reliance that was central to its holding in Wright.*fn14 It also comports with the broad preventative purpose of the Exchange Act. A strict requirement of public attribution would allow those primarily responsible for making false statements to avoid liability by remaining anonymous, and thus "would place a premium on concealment and subterfuge rather than on compliance with the federal securities laws." In re Enron Corp. Sec., Deriv. & ERISA Litig, 235 F. Supp.2d 549, 587 (S.D. Tex. 2003) (adopting SEC position). As the Massachusetts district court noted in Lernout & Hauspie, "[a]bsolving an auditor who prepares, edits, and drafts a fraudulent financial statement knowing it will be publicly disseminated simply because [it was signed by another, affiliated auditor] would stretch Central Bank's holding too far." 230 F. Supp.2d at 168. Page 18

  Under this standard, plaintiffs' allegations against Andersen with respect to its role in the fraudulent statements made by Global Crossing are sufficient to survive a motion to dismiss, but fail to meet that threshold with respect to its role in the statements made by Asia Global Crossing. Plaintiffs' most general allegations about Andersen's role in preparing the Companies' financial statements are insufficient to establish a primary violation. Plaintiffs have alleged that Andersen not only "reviewed [and] approved" GC's financial statements, but also that it "prepared and directed the production of financial statements, reports, and releases" issued by the Companies. (¶¶ 73-74.) However, the Complaint never specifies which of the Companies' public statements Andersen "prepared and directed" and which it merely "reviewed and approved." This blanket allegation is vague and conclusory, and, without more, would not sustain a claim for primary liability under section 10(b). Similarly, as regards the unaudited "pro forma" financial reports, plaintiffs allege that "Andersen was instrumental in helping Global Crossing and Asia Global Crossing create these `pro forma' numbers." (¶¶ 242.) But allegations that an auditor "help[ed] create" financial documents, alone, have been held insufficient to sustain 10(b) liability. See Vosgerichian v. Commodore Int'l, 862 F. Supp. 1371, 1378 (E.D. Pa. 1994) (dismissing as claims of aiding and abetting allegations that the audited company "consulted with Andersen" and that Andersen "advised or concurred with" the company's accounting practices); In re Kendall Square Research Corp. Sec. Litig., 868 F. Supp. 26, 28 (D. Mass. 1994) ("[B]ecause [defendant] did not actually engage in the reporting of the financial statements . . . but merely reviewed and approved them, the statements are not attributable to [defendant] and thus [defendant] cannot be found liable for making a material misstatement."). Page 19

  Plaintiffs' specific allegations regarding Andersen's role in GC's statements, however, are more fully developed. The Complaint alleges that Andersen served as "the primary accomplice in perpetuating the fraud that ultimately caused the downfall of the Company." (¶ 712.) It points to testimony of former GC executives before Congress that Andersen "reviewed every public filing, earnings release, and quarterly financial report released by [GC]." (Id. ¶ 714, emphasis in original.) It also alleges that Fagan "materially assisted in the preparation of all public financial disclosures, including public filings, statements to the press and investing public, earnings releases, and press releases relating to financial issues of GC." (Id. ¶ 78.) Allegations that Andersen "prepared, directed or controlled," "helped create" or "materially assisted in" preparing false statements issued by Global Crossing place its involvement well beyond the realm of "aiding and abetting" liability precluded by Central Bank.

  With respect to the issue of attribution, it is undisputed, as a matter of public record, that Andersen's audit reports were included in all of GC's registration statements and annual reports from 1998 to 2000, and that they were widely available to shareholders during the class period. Andersen's role as GC's auditor was thus well known to investors, who could easily have relied on the accounting firm's involvement in making any public financial reports, even where a particular statement was not publicly attributed to it. Moreover, Andersen's aggressive marketing of the novel accounting strategies promoted in the White Paper, which allegedly "became a `must read' in the telecom industry" (¶ 225), raises an inference that sophisticated investors would have known of Andersen's role in creating the reporting practices behind GC's false statements. These allegations are sufficient to raise a reasonable inference not only that Andersen was one of the "makers" of the statements, but also that investors viewed it as such. Page 20

  However, where the rest of the Amended Complaint carefully adds AGC to most of its allegations, the Complaint significantly lacks any specific allegations that Andersen made or participated in making any of AGC's public statements or unaudited financials. (See (¶¶ 573-629.) While the Complaint states that "Andersen . . . audited Global Crossing's and Asia Global Crossing's materially false and misleading financial statements," it states only that "Andersen reviewed, prepared, directed, and controlled all public financial disclosures . . . relating to financial issues of Global Crossing made by the Company during the class period," and asserts no parallel claim with respect to AGC. (¶ 77.) Similarly, plaintiffs' claims with respect to Fagan relate entirely to his participation in the false statements made by GC, not AGC (¶ 78), and the Complaint fails to raise any comparable allegation with respect to the involvement any other individual Andersen defendant at AGC. ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.