"Seeing Gordon Gekko where others might see the Keystone Cops"
In dismissing a federal securities class action against Ceridian Corp. and three of its former officers, United District Court Judge Patrick Schiltz found that the hundreds of alleged accounting errors by numerous employees over many years, which led to repeated restatements of the company’s financials, simply did not amount to securities fraud under Rule 10b-5. (In re: Ceridian Corporation Securities Litigation, Case No. 04-CV-3704 (D. Minn., June 5, 2007.)
Using the colorful language he is becoming known for, Judge Schiltz states that in making their securities fraud allegations, the plaintiffs were “[s]eeing fraud where others might see incompetence—seeing Gordon Gekko where others might see the Keystone Cops.” Id. at 1. The Court here clearly saw only incompetence:Judge Davis concluded that the plaintiffs’ original consolidated complaint did not adequately allege scienter. His conclusion is hardly surprising: Given the course of conduct described in the original consolidated complaint and the first amended complaint—a course of conduct involving dozens of employees committing hundreds of unrelated accounting errors of many different types over many different years—it seems almost inconceivable that there could have been any unifying intent behind the errors, much less an intent to defraud. The allegations in the complaint reek of incompetence, not fraud. At bottom, the plaintiffs’ allegations amount to little more than allegations that lots of accountants committed lots of GAAP violations. Id. at 20-21.
The Court noted:
“The 1934 Act does not prohibit accounting malpractice; it prohibits fraud.” Id. at 22.
The Court concluded:
In short, far from painting a picture of a masterful high-level plot to overstate the company’s performance, plaintiffs’ allegations instead portray a company that was riddled with incompetence among its financial managers and accountants. Barely supported conspiracy theories may make for interesting magazine articles or blog entries, but, under the Reform Act, they are not sufficient to "giv[e] rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Id. at 23.
