Dronsejko v. Thornton
632 F.3d 658
| 10th Cir. | 2011Background
- iMergent is an e-services company that sold licenses including Extended Payment Term Arrangements (EPTAs) where 24 months were payable; revenue from EPTAs was recognized at delivery with only about half ultimately collected.
- In 2002 SEC inquired about iMergent’s revenue-recognition practices; iMergent, after consulting Grant Thornton, stated a 70% collection rate for EPTAs, which reflected executory contracts rather than terminal collection.
- In 2005 the SEC again inquired; iMergent claimed EPTA collection rates exceeded 50% and were probably collectible under SOP 97-2, prompting scrutiny of the
- Aplt.App. 89.
- Grant Thornton issued unqualified opinions on iMergent’s 2002–2004 financial statements; plaintiffs claim GT knew or was reckless in not knowing SOP 97-2’s standard for “probable collectibility.”
- iMergent restated its 2002–2004 financial statements in August 2005 after GT withdrew its audit opinions, significantly reducing revenues and turning profits into losses; stock price fell.
- The district court dismissed the SAC for failure to plead a strong inference of scienter under the PSLRA; on appeal the court affirmed the dismissal and held Rule 60(b) relief not warranted.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Prima facie scienter under PSLRA | G. Thompson era (Plaintiffs) contends GT acted recklessly by applying SOP 97-2 to a 53% collection rate. | Grant Thornton argues the complaint does not show an extreme departure from ordinary care; SOP 97-2 permits interpretation, not recklessness. | Dismissed; no cogent inference of scienter; allegations fail to show extreme departure or actual intent. |
| Rule 60(b) relief based on PCAOB orders | PCAOB orders show GT knowingly or Recklessly ignored data, warranting relief to file an amended complaint. | PCAOB evidence is not probative of the SAC’s theory and was not diligently discovered; not likely to change outcome. | Denied; PCAOB orders do not remedy the SAC deficiencies and movants failed diligence. |
| Appropriate standard for auditor liability | Complaint pleads recklessness under outside-auditor standard; GT acted with little or no support for 53% collectibility. | The district court correctly applied a heightened recklessness standard; the complaint fails under either auditor-specific or general standard. | Affirmed; no strong inference of recklessness; GAAP violation alone insufficient without fraudulent intent. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (U.S. 2007) (strength of inference required by PSLRA must be cogent and as compelling as nonfraudulent inferences)
- City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001) (factors for pleading securities fraud under PSLRA; similar framework used here)
- In re Williams Sec. litig.-WCG Subclass, 558 F.3d 1130 (10th Cir. 2009) (reliance on Tellabs; heightened pleading standard applied to securities claims)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 552 U.S. 128 (U.S. 2008) (limits on liability for secondary actors; strict scienter standard context maintained)
- PR Diamonds, Inc. v. Chandler, 364 F.3d 671 (6th Cir. 2004) (recklessness standard for auditors; elevated mental state required)
- Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994) (early articulation of recklessness concept in securities fraud context)
- Deephaven Private Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168 (10th Cir. 2006) (auditor liability standards and GAAP/GAAS interplay)