767 F. Supp. 2d 467
S.D.N.Y.2011Background
- SEC sues Morales and former StarMedia executives for accounting fraud under Exchange Act provisions.
- Allegations involve base book, incremental revenue, and contingent transactions; StarMedia restated in 2001.
- Morales served as Controller and VP Finance (1998–2001).
- Amended complaint added ETIF 99-17 guidance and alleged control failures over contracts and documentation.
- Morales moved for judgment on the pleadings; the motion was denied, proceeding to merits.
- SEC alleges Morales aided and abetted overstatements and made misleading auditor communications.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| scienter for aiding and abetting 13(a) claims | SEC pleads Morales knew overstated revenue and aided the primary violation. | Morales argues amended complaint eliminates barter theory and lacks proper scienter. | Plaintiff proven; Morales had knowledge and substantial assistance. |
| record-keeping violations under 13(b)(2)(A) | SEC alleges Morales knew improper reporting of incremental revenue would mislead. | Morales contends no explicit knowledge of fraud in records. | Sufficient recklessness shown; liability established. |
| false statements to auditors under 13b2-2 | Morales made/caused misleading statements to auditor about disclosures and receivables. | Argues lack of scienter is required for 13b2-2, or that misstatements were not known to be false. | Sufficiently alleged unreasonableness and misleading representations. |
Key Cases Cited
- DiBella v. SEC, 587 F.3d 553 (2d Cir. 2009) (aiding-and-abetting requires knowledge and substantial assistance)
- Acito v. IMCERA Group, 47 F.3d 47 (2d Cir. 1995) (strong inference of fraudulent intent required for Rule 9(b))
- SEC v. McNulty, 137 F.3d 732 (2d Cir. 1998) (recklessness standard for Rule 13b2-1 liability)
- Harris v. Mills, 572 F.3d 66 (2d Cir. 2009) (timeline and pleading standards in securities actions)
- United States v. Williams, 553 U.S. 285 (2008) (context on factual impossibility not defense to attempt)