Gould v. Winstar Communications, Inc.
2012 U.S. App. LEXIS 18426
| 2d Cir. | 2012Background
- GT served as Winstar's independent auditor from 1994 until Winstar's 2001 bankruptcy, with GT perceiving Winstar as a major client.
- Winstar's 1999 audit involved several large end-of-quarter transactions intended to conceal revenue declines, totaling about $114.5 million.
- Categories included questionable sales, bifurcated accounting for IRUs and radios, and round-trip transactions, all with limited documentation and delivery evidence.
- GT approved Winstar's 1999 revenue recognition despite red flags, even after seeking additional documentation and noting SAB 101 requirements.
- An unqualified audit opinion letter dated February 10, 2000 stated that Winstar's 1999 financial statements complied with GAAP.
- Jefferson Plaintiffs contended that GT's audit letter and findings contributed to their investments in Winstar stock and bonds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did GT act with scienter under Section 10(b)? | GT consciously ignored fraud in approving revenue. | GT performed auditing duties and cannot be shown to have conscious misbehavior. | Genuine issue on scienter exists. |
| Was GT's audit opinion letter a basis for Section 10(b) liability? | Opinion letter concealed or enabled fraud. | GT's opinion letter alone does not establish liability for private action. | Issue remains for trial; not foreclosed. |
| Did Jefferson Plaintiffs rely on GT's audit letter under Section 18? | Asher relied on audit letters in selecting investments. | Eyeball reliance not proven; reliance absent. | Summary judgment inappropriate; reliance could be proven. |
| Is there a loss causation link between alleged misconduct and investor losses? | Disclosures and Asensio press releases linked to stock decline. | Market-wide declines and Lucent facility issues break causation. | A jury could find loss causation exists. |
| Do the challenged 1999 transactions raise a triable issue of fraud given GAAP/GAAS standards? | GT ignored red flags and approved dubious accounting. | Auditing standards satisfied; no accountable misrepresentation proven. | Triable issues exist as to GT's conduct and scienter. |
Key Cases Cited
- AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202 (2d Cir. 2000) (conscious misbehavior standard in scienter analysis)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (recklessness as basis for scienter)
- Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000) (recklessness extreme departure from ordinary care)
- Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (2d Cir. 2003) (loss causation and market-wide effects considerations)
- Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968) (actual reliance requirement under Section 18)
- SEC v. KPMG LLP, 412 F. Supp. 2d 349 (S.D.N.Y. 2006) (context of auditor accountability and control risks)