In re Longtop Financial Technologies Ltd. Securities Litigation
910 F. Supp. 2d 561
S.D.N.Y.2012Background
- Lead Plaintiffs sue Longtop and auditors DTTC and Deloitte Limited for Rule 10b-5 claims related to Longtop’s alleged inflated margins during the Class Period.
- DTTC served as outside auditor, issued unqualified opinions, and consented to use of its reports in Longtop’s SEC filings and offerings.
- Alleged fraud involved off-balance sheet transfers to XLHRS, falsified bank records, and obstruction of the DTTC audit, leading to a resignation letter by DTTC.
- Citron and Bronte short-seller reports spurred market scrutiny; Longtop’s ADSs declined and trading halted in May 2011.
- Resignation Letter from DTTC describes serious defects discovered during follow-up bank confirmations and Longtop’s interference with audits.
- Court grants DTTC’s Rule 12(b)(6) motion to dismiss Count Three (a 10b-5 claim against the auditor) and allows leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the complaint plausibly pleads strong inference of scienter by DTTC | DTTC knew or was recklessly indifferent to Longtop fraud | Auditor acted diligently; no implausible inference of scienter | No strong inference of scienter; dismissal affirmed |
| Whether DTTC's GAAS/GAAP violations constitute material misstatement | GAAS/GAAP breaches render DTTC’s opinions false | Auditor opinions are opinions; no objective falsehood shown | Material misstatement not pleaded |
| Whether red flags alleged against XLHRS create a duty-based inference of fraud | Red flags should have put DTTC on notice | Red flags not sufficiently obvious; disclosure existed | Red flags insufficient to plead recklessness |
| Whether leave to amend should be granted or denied | Amendment could cure deficiencies | Amendment would be futile | Leave to amend granted with 30-day deadline |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (two-prong plausibility standard for Rule 12(b)(6))
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter requires holistically compelling evidence)
- Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) (circumstantial evidence of scienter and red flags framework)
- In re AOL Time Warner, Inc. Sec. Litig., 381 F. Supp. 2d 192 (S.D.N.Y. 2004) (red flags and GAAS/GAAP allegations in auditor cases)
- South Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) (appropriateness of pleading and reliance on due diligence)