Dobina v. Weatherford International Ltd.
909 F. Supp. 2d 228
S.D.N.Y.2012Background
- AFME sues Weatherford International, its officers, and Ernst & Young for alleged 10b-5 violations arising from understated 2007–2010 tax expense and misstatements about internal controls.
- Weatherford restated roughly $500 million of tax expense for 2007–3Q2010 after uncovering a material weakness in tax-related internal controls.
- Duroc-Danner (CEO), Becnel (CFO), Geer (principal accounting officer), and Abarca (CAO) are Weatherford defendants; E&Y is alleged auditor.
- AC asserts two fraud theories: (i) understated tax expense; and (ii) improper maintenance of internal controls over financial reporting.
- Court analyzes motions to dismiss under Rule 12(b)(6) and AFME’s motion to supplement; E&Y dismissal granted; Weatherford dismissal largely granted with limited exceptions; supplement motion denied.
- Restatement showed internal-control deficiencies and a large restatement impact, influencing scienter analysis against Weatherford and Becnel.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scienter for Weatherford's internal-control statements | AFME argues Becnel signed control certifications with reckless disregard. | Weatherford argues certifications were subjective but not knowingly false. | Scienter adequately pled for Becnel regarding internal-control statements. |
| Scienter for Weatherford's tax-expense understatement | AFME contends restatement and focus on tax rate show recklessness/conscious misbehavior. | Weatherford argues magnitude alone insufficient; absence of explicit, contemporaneous knowledge of falsity. | Scienter not adequately pled for tax-expense understatement; nonculpable inference favored. |
| Ernst & Young's scienter re GAAP/GAAS/internal controls | AFME asserts red flags and COSO/GAAS failures show recklessness; close auditor scrutiny required. | E&Y argues high pleading standard; lack of specific red flags tied to 2007–2010 audits. | Court grants dismissal of E&Y claims; no sufficient scienter shown. |
| Section 20(a) control-person liability | AFME seeks control-person liability for Weatherford insiders. | Weatherford moves to limit 20(a) claims. | Section 20(a) survives for Becnel, Weatherford, Duroc-Danner, Abarca, Geer as appropriate control persons. |
| Motion to supplement the amended complaint | AFME seeks post-AC facts (2012 restatement, DOJ inquiry, Becnel removal) to bolster claims. | Supplement would cause delay/prejudice and is futile. | Supplement denied; post-AC facts deemed not probative of scienter. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter must be cogent and at least as compelling as any nonfraud inference)
- ERnst & Young v. Rothman, 220 F.3d 81 (2d Cir.2000) (recklessness standard for non-fiduciary accountants; not entitled to broad discovery of audits)
- South Cherry Street, LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir.2009) (contextual strong inference of scienter; not every allegation suffices)
- Ewing v. JPMorgan Chase & Co., 553 F.3d 187 (2d Cir.2009) (unique connection between fraud and acquisition; scienter standard guideposts)
- Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98 (2d Cir.2012) (core operations/ scienter theories and managerial knowledge)