558 F. App'x 138
2d Cir.2014Background
- IPERS sued Deloitte & Touche LLP (D&T), alleging D&T's audits of WG Trading Company Ltd. Partnership (WGTC) were so deficient they amounted to fraud, in violation of §10(b) and Rule 10b-5.
- WGTC was a registered broker-dealer involved in a fraudulent investment scheme; related entity WG Trading Investors, L.P. (WGTI) participated in the scheme.
- IPERS alleged red flags: shared management between WGTC and WGTI, inter-entity transfers of investor funds, employee advances charged to WGTI, and allocation of losses to WGTI while WGTC allocated income elsewhere.
- IPERS argued D&T recklessly failed to investigate WGTI and thus should have uncovered a Ponzi-like scheme.
- The district court dismissed the complaint for failure to plead securities fraud with the PSLRA/Rule 9(b) particularity and scienter, and denied reconsideration and leave to amend as futile.
- The Second Circuit affirmed dismissal and denial of leave to amend, finding allegations supported negligence at most and failed to plead a strong inference of scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IPERS pleaded securities fraud under §10(b)/Rule 10b-5 with PSLRA/Rule 9(b) particularity | Deloitte’s audits ignored obvious red flags and were so deficient as to be reckless; D&T must have known about WGTC/WGTI commingling and fraud | Allegations show at most negligent audit shortcomings and do not raise a strong inference of conscious misbehavior or recklessness required for scienter | Dismissed: allegations could support negligence but not the heightened scienter required for securities fraud; complaint fails PSLRA/9(b) standards |
| Whether failure to investigate WGTI suffices to plead scienter | Failure to examine WGTI despite red flags demonstrates recklessness | Lack of specific facts showing motive/opportunity or strong circumstantial evidence of conscious misbehavior; omission insufficient | Held: failure to investigate WGTI did not meet pleading standard for scienter |
| Whether district court abused discretion in denying reconsideration under Local Rule 6.3 | Reconsideration and proposed amendments would cure pleading defects | District court correctly exercised discretion; proposed amendments still insufficient | Denial affirmed: no abuse of discretion |
| Whether leave to amend was properly denied as futile | Proposed amendments would add facts showing D&T ignored red flags and plead scienter | Proposed amendments still failed to plausibly show scienter; amendment would be futile | Denied: leave to amend would have been futile; dismissal affirmed |
Key Cases Cited
- Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010) (standard for reviewing Rule 12(b)(6) dismissal and PSLRA/Rule 9(b) pleading requirements)
- ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (PSLRA requirement to specify misleading statements and facts giving rise to a strong inference of scienter)
- ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (methods to plead scienter: motive and opportunity or strong circumstantial evidence of conscious misbehavior or recklessness)
- Johnson v. Univ. of Rochester Med. Ctr., 642 F.3d 121 (2d Cir. 2011) (standard of review for denial of reconsideration)
- Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479 (2d Cir. 2011) (de novo review for denial of leave to amend on futility grounds)
- In re U.S. Wireless Data, Inc., 547 F.3d 484 (2d Cir. 2008) (appellate waiver where appellant does not brief an issue)