MEMORANDUM & ORDER
This securities fraud action was originally brought against defendants Ikon Office Solutions, Inc., and several of its officers and directors by plaintiffs who had purchased Ikon stock. Several months after the original complaint was filed, the plaintiffs were granted leave to file an amended complaint that added Ernst & Young, Ikon’s accounting firm, as a defendant. Ernst & Young now moves for dismissal of the two counts in which it is named. 1
1. Background
Ikon supplies copiers, printing systems, and related services throughout the United States, Canada, and Europe. Its shares are actively traded on the New York Stock Exchange. Beginning in 1995 and continuing into 1998, Ikon purchased close to 200 independent companies, which Ikon then attempted to integrate into its own network. Ikon experienced a variety of problems associated with this “transformation program,” particularly with respect to its internal auditing procedures. After a “special review procedure” in the summer of 1998, on August 14, 1998, Ikon announced a $110 million charge to earnings — $94 million in the third fiscal quarter and $16 million against previously reported second fiscal quarter earnings. See Compl. ¶ 97. 2 Following this charge, Ikon’s stock dropped sharply.
The present motion centers on the role Ernst & Young (E
&
Y) may have played
II. Legal Standard
A motion to dismiss should be granted only if, accepting all facts pleaded as true and viewing them in the light most favorable to plaintiffs, plaintiffs are still not entitled to relief. In making this assessment, the court should not look to whether plaintiffs will “ultimately prevail”; it should only consider whether they are allowed to offer evidence in support of their claims.
In re Burlington Coat Factory Sec. Litig.,
III. Section 10(b) Claims
E & Y argues that the court must dismiss plaintiffs’ section 10(b) claims
A. Standards
Section 10(b) of the Securities Exchange Act makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security, ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe];.]” 15 U.S.C. § 78j(b). Rule 10b-5, in turn, states in relevant part that it is unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading];.]” 17 C.F.R. § 240.10b-5(b).
The Third Circuit explained the obligations of a plaintiff alleging violations of these requirements:
The first step for a Rule 10b-5 plaintiff is to establish that defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading. Next, plaintiff must establish that defendant acted with scienter and that plaintiffs reliance on defendant’s misstatement caused him or her injury. Finally, since the claim being asserted is a “fraud” claim, plaintiff must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b).
In re Burlington Coat Factory,
As plaintiffs have identified the statements in question and defendant has not challenged materiality, the court must look to the scienter and fraud pleadings. A plaintiff must plead facts giving rise to a “strong inference” that the defendant possessed the requisite scienter, that is, the intent to commit fraud. That strong inference of fraud may be established either “(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.”
In re Burlington Coat Factory,
The court also acknowledges the requirements of the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(1), which state:
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(2). The Reform Act does not materially change this court’s analysis.
See In re Advanta Corp. Sec. Litig.,
The third step is meeting the requirements of Rule 9(b). To do so, plaintiffs must plead “(1) a specific false representation of material fact, (2) knowledge of its falsity by the person who made it, (3) ignorance of its falsity by the person to whom it was made, (4) the maker’s intention that it should be acted upon, and (5) detrimental reliance by the plaintiff.”
In re Burlington Coat Factory,
B. Pleadings in this Case
1. Failure to Plead Identity
E & Y first argues that the complaint must be dismissed because plaintiffs have alleged wrongdoing by E & Y collectively rather than by naming particular individuals. The court agrees with plaintiffs that they have pleaded identity sufficiently, especially since no individual defendants are named. The statements in question were issued as representations of the corporation Ernst & Young, and it is untenable to suggest that a plaintiff must, at the pleading stage, be able to identify each individual accountant or researcher who may have worked on a particular project. To do so would make the pleading standard virtually impossible to meet. In many places, the plaintiffs have referred to particular memoranda, speakers, or work-papers when there is need for a more particularized allegation, and E & Y cannot argue that the complaint is vague or imprecise. See, e.g., Compl. ¶¶ 111, 113 (discussing various memoranda, workpa-pers). Nor do the cases cited by defendant stand for the broad proposition suggested. 6
2. Scienter
The heart of E & Y’s motion to dismiss is its claim that plaintiffs have failed to allege scienter with the requisite particularity, either by pleading motive and opportunity or by alleging facts that create a strong inference of recklessness or intentional wrongdoing.
The “motive and opportunity” test may be disposed of quickly. “Motive would entail concrete benefits that could be realized by one or more of the statements and wrongful disclosures alleged.”
In re Aetna Inc. Sec. Litig.,
Thus, the court must look to other means of pleading scienter. Plaintiffs may plead scienter in a securities fraud claim by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. Liability premised on recklessness is proper because it “promotes the policy objectives of discouraging deliberate ignorance and preventing defendants from escaping liability solely because of the difficulty of proving conscious intent to commit fraud.”
In re Advanta,
A reckless statement is one involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.
Id., quoting McLean v. Alexander,
Defendant raises several specific objections to plaintiffs’ effort to plead scienter, which, taken together, would require dismissal of the 10(b)-5 count against this defendant if accepted. The court, however, believes plaintiffs successfully allege, at least, recklessness.
Defendant first argues that plaintiffs cannot allege scienter in arguing that E & Y knew that one of Ikon’s officers, Kurt Dinkelacker, had been accused of doctoring accounts. Prior to the issuance of the May registration statement, plaintiffs allege that E & Y was informed at an Auditing Committee Meeting that Ikon’s CFO Dinkelacker was altering accounts and/or instructing others to do so. Plaintiffs claim that
E & Y was informed of Dinkelacker’s wrongful activities at least by April 1997. Handwritten notes contained in a file of E & Y workpapers relating to an April 30, 1997 meeting of the Audit Committee of the Ikon Board of Directors, state, “P Shoemaker to CEO— Kurt instructed everyone to cook the books.” On the next page, the same handwritten notes state that one of two “Major items” is that “Kurt is ‘cooking the books.’ ”
Id. ¶ 111. According to plaintiffs, E & Y thus placed its imprimatur on Dinkelacker’s supposed efforts to misstate financial accounts. See id. ¶¶ 112,156.
E & Y then more generally argues that none of the allegations pertaining to its knowledge of Ikon’s troubled finances demonstrate scienter. The court again disagrees: plaintiffs’ allegations regarding the failure of internal controls, doubtful accounts, and overstatement of subsidiary income are all pleaded with sufficient particularity to allege a claim for recklessness, if not conscious behavior. 9
Plaintiffs focus particularly on the failure of Ikon’s internal controls and E & Y’s knowledge thereof. 10 Plaintiffs allege that E & Y knew of these problems since at least January 1996 but nonetheless issued the unqualified audit in 1997 and permitted the incorporation of the earlier audit into the May 1997 registration statement. See id.
As is perhaps most important in alleging scienter, plaintiffs explain that E & Y could not have believed that Ikon’s financial statements were in conformity with GAAP because of its intimate awareness of pervasive economic problems throughout the company’s internal controls; accordingly, neither could E
&
Y claim that its own audit was in compliance with GAAS. Plaintiffs recount E & Y’s knowledge of problems during 1996, which ranged from
Plaintiffs further allege that E & Y knew that the 1996 problems with internal controls had not been remedied when it issued the 1997 audit and permitted the audit’s incorporation in public filings. See id. ¶ 122; see also id. attach. B (providing examples of internal control deficiencies in 1997). Plaintiffs describe a variety of internal memoranda expressing concern that the problems had not been corrected by the time of the September 30, 1997 audit, including a memorandum from Dinkelacker to the district and marketplace presidents on November 26, 1997, stating that there had been no improvements. See id. ¶ 123; see also id. ¶ 124 (citing memoranda issued throughout Ikon stating that E & Y had been made aware of pervasive problems in inter-company balance reconciliations); id. ¶ 125 (stating that E & Y knew as of March 1997 that financial data from a particular information system used in Northern California produced unreliable results); id. ¶¶ 126-27 (noting extensive inaccuracies in Los Angeles marketplace).
From these allegations, plaintiffs conclude that E & Y
knew or recklessly disregarded numerous red flags evidencing that the Company’s internal controls were grossly deficient and that the financial data being generated by its financial reporting mechanism was so pervasively inaccurate and unreliable that reliance on that information for financial statement purposes was precluded by GAAP and GAAS. Nevertheless, E & Y improperly issued an unqualified audit opinion on the fiscal 1997 financial statements of IKON, falsely representing, inter alia, that those financial statements had been prepared in accordance with GAAP and audited in accordance with GAAS.
Id. ¶ 128.
While E
&
Y claims that allegations regarding flawed internal controls do not show scienter, even the cases cited by defendant acknowledge that internal policies are relevant to scienter to the extent that they correspond to violations of GAAP and GAAS or that they indicate an auditor’s awareness of problems in corporate finances. The court agrees that “there can be no claim of fraud based merely on a company’s deviation from its own undisclosed internal accounting policies,”
In re Cirrus Logic Sec. Litig.,
Plaintiffs’ complaint makes just such allegations. The complaint properly compares Ikon’s own practices to GAAP, and notes that, while some complied with GAAP,
see
Compl. ¶ 113; others did not.
See id.
¶ 114 & n. 2. The complaint also alleges that GAAS requires an auditor to make a study of existing internal controls to determine if reliance upon them is appropriate.
See
Compl. ¶¶ 171-72;
see also Jacobs v. Coopers & Lybrand,
No. 97-civ-3374,
E & Y also maintains that plaintiffs’ allegations regarding allowances for doubtful accounts receivable, lease default reserves, and the overstatement of subsidiary income do not properly plead scienter as they merely show changed circumstance rather than fraud. The court disagrees, as, in each case, the plaintiffs explain in great detail why E & Y knew the charges should have been taken in 1997 rather than in 1998. 12
As to the allowance for doubtful accounts, plaintiffs allege that E & Y knew or recklessly disregarded that Ikon’s allowance for doubtful accounts receivable was understated by at least $24 million in the fiscal 1997 financial statement, in violation of Ikon’s internal policy. According to plaintiffs, E & Y was aware of this problem because of its visits to various sites; plaintiffs also refer to schedules prepared by district presidents and CFOs in spring 1998 showing noncompliance of $24 million based on September 80, 1997, information. See id. ¶¶ 129-32. Plaintiffs argue that these errors were a particularly significant “red flag” because E & Y acknowledged that Ikon’s reserve policy was designed to comply with GAAP. See id. ¶ 113.
Similarly, plaintiffs allege that E & Y should have taken the charge for lease default reserves at least as of September 30, 1997. According to plaintiffs, although E & Y’s September 30 workpapers explained that the actual default rate was over 4.8% of outstanding portfolio balance, E & Y acquiesced in a reserve equivalent of only 3.2% based upon unsupported claims by Ikon personnel that contradicted E & Y’s own findings. See id. ¶ 133. Plaintiffs allege that if the reserve had been taken based on actual charge-offs experienced, the reserve would have been increased significantly, with a corresponding reduction in pre-tax income. See id. ¶ 135. Ikon’s internal policy required at least $10 million more in stated reserves and thus should have been another particularly telling red flag. See id. ¶ 136.
Finally, plaintiffs discuss the charges taken in 1998 regarding one of Ikon’s subsidiaries, Integra Technology International Corporation, focusing particularly on why E
&
Y should have known of the need to take charges well prior to 1998. E & Y’s workpapers from August 1997 show that Integra had lost $645,000 instead of producing $1.3 million in projected profit; In-tegra also had approximately $8.5 million less in sales than predicted.
See id.
¶ 142. Although E & Y’s audit stated accounting standards did not require an impairment write-down under GAAP,
see id.
¶ 143, E & Y’s workpapers contain a memorandum setting forth indications of impairment, including operating losses and a lack of profitability.
See id.
Plaintiffs allege that E & Y knew that Ikon was required by GAAP to perform an updated discounted cash flow estimate to see if the asset had
In short, as to each of these problem areas, plaintiffs explain in detail why E & Y should have known that charges needed to be taken long before August 1998. The court agrees that Rule 10b-5 liability does not attach “merely because ‘at one time the firm bathes itself in a favorable light’ but ‘later the firm discloses that things are less rosy.’ ”
In re Advanta,
Finally, defendants allege that plaintiffs do not identify how E & Y failed to comply with GAAS and GAAP. Defendant is correct that plaintiffs may not merely allege violations of GAAP and GAAS; rather, plaintiffs must “state what the unreasonable practices were and how they distorted the disclosed data.”
In re Burlington Coat Factory,
Plaintiffs have met this burden. Each of plaintiffs’ allegations of violations of GAAP or GAAS refer back to the specific claims regarding E & Y’s knowledge of problems. Plaintiffs describe the GAAP requirements for recognition of revenue in the proper period, see Compl. ¶ 159; sections pertaining to recognition of loss contingencies and asset impairment, see id. ¶¶ 161-63; the need to assess internal controls, see id. ¶ 164; and the need to restate conclusions in light of changed circumstances. See id. ¶ 165. Similarly, plaintiffs describe GAAS provisions requiring independence of the auditor, see id. ¶ 168; the requirement of due professional care, including the need to verify employee representations, see id. ¶¶ 169-70; the need to evaluate internal controls, see id. ¶¶ 171— 72; the need to consider computer processing effects on financial statements subject to audit, see id. ¶ 173; and the need to perform audit procedures to confirm estimates provided by a client. See id. ¶ 174. While the complaint is not necessarily structured in the most organized manner, it identifies the offending financial practices and explains how those practices violated GAAP and/or GAAS. 13
C. Conclusion
The court finds that plaintiffs have properly pleaded at least recklessness. As the court in In re Health Management ruled,
the plaintiffs have alleged that the violation of auditing principles resulted in material misstatements of fact in the financials, and that [the defendant] failed to follow proper audit procedures. These allegations, combined with the allegations of [defendant’s] ignorance of numerous “red flags” are adequate to suggest that [defendant] turned a blind eye to ... fraudulent activities, thus creating a “strong inference” of [defendant’s] recklessness.
IV. Section 11 Claims
E & Y argues that plaintiffs’ section 11 claims in Count One of the Second Amended Complaint must be dismissed because they also fail to plead fraud with particularity and because the plaintiffs have failed to comply with the pleading requirements regarding the statute of limitations.
A. Failure to Plead Fraud with Particularity
Section 11 creates a cause of action for “cases in which a registration statement either contains an untrue statement of material fact or omits a material fact that is required or necessary to make the other statements therein not misleading.”
Klein v. GNC, Inc.,
The court agrees with defendant that these allegations sound in fraud and that plaintiffs must therefore comply with Rule 9(b).
See Shapiro v. UJB Fin. Corp.,
Count One attempts to exclude those allegations that sound in fraud,
see
Compl. ¶ 177, but the court must look behind plaintiffs’ own designations to the underlying claims.
See Shapiro,
However, plaintiffs have adequately pleaded fraud even under the standards required by Rule 9. “The purpose of Rule 9(b) ... is ‘to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior.’ ”
In re U.S. Healthcare, Inc. Sec. Litig.,
The gist of the section 11 claim is that E & Y behaved recklessly in permitting the incorporation of its audit into the 1997 registration statement when E
&
Y was aware of the pervasive financial problems plaguing Ikon. As described more completely in the previous section, plaintiffs allege that Ikon’s 1996 audit revealed “numerous breakdowns in Ikon’s internal control systems at various Ikon subsidiaries,” Compl. ¶ 118, and that these breakdowns “caused widespread errors in Ikon’s accounting records and impaired the ability of Ikon to prepare financial statements in conformity with GAAP.”
Id.; see also id.
attach A (detailing problems identified in 1996 audit). Count One explains that AU § 711 prohibits an independent auditor from consenting to the incorporation of a report without performing a subsequent events review to “see whether material developments have occurred subsequent to preparation of the report being incorporated by reference.”
Id.
¶ 155. If such material events have occurred, under GAAS, the “auditor must investigate the impact such events may have had on the opinion incorporated by reference.”
Id.
18
As plaintiffs explain, the May' 1997 registration
E & Y argues that plaintiffs cannot base a fraud claim on subsequent events, but the cases it cites for this proposition are either distinguishable or actually support plaintiffs position. For example, one case relied upon by defendant,
Ingenito v. Bermec Coloration,
B. Statute of Limitations
Defendant argues that plaintiffs’ section 11 claims against it are time-barred. To be timely, actions must be “brought within one year after the discovery of the untrue statement or omission or after such discovery should have been made by the exercise of reasonable care, and in no event ‘more than three years after the sale.’ ”
Brantley v. E.F. Hutton & Co., Inc.,
Plaintiffs have met their burden, even assuming the action was filed outside of one year. In addition to the paragraph stating that the plaintiffs could not have known earlier of the fraudulent statements and that they exercised due diligence,
see
Compl. ¶ 185, the remainder of the complaint makes it clear that the plaintiffs only began investigating the behavior of
V. Procedural Arguments
A. The Addition of Ernst & Young as a Party
In a letter memorandum dated June 22, 1999, plaintiffs asked the court for permission to file an amended complaint, and the court granted permission.
See
Order of June 24, 1999. Defendants now maintain that the court never explicitly granted permission to add E
&
Y.
20
The court disagrees: plaintiffs’ memoranda clearly explained that they wished to file an amended complaint to add E
&
Y as a defendant, and, in support of this request, plaintiffs explained what new information had come to light. The response from Ikon argued against this action. That is, both parties clearly understood that plaintiffs were asking permission to amend the complaint to add a new party, a practice that has been followed in this circuit.
See, e.g., Cahill v. Carroll,
Defendant then argues, in the alternative, that the court should dismiss E
&
Y. While acknowledging that addition of a party is within the discretion of the trial court,
see, e.g., Arch v. American Tobacco Co., Inc.,
B. Service Issues
E & Y argues finally that this court should dismiss the claim against it for plaintiffs’ failure to comply with the court’s order regarding the date of service. The court declines to do so, as the same factors militating against separate actions discussed in the previous section apply equally here. 21
The court finds that the plaintiffs have pleaded their allegations with sufficient specificity to meet the requirements of Third Circuit case law and the Reform Act. Plaintiffs allege with great detail the particular aspects of Ikon’s finances that made E & Y’s statements “reckless” and have also alleged particular bases for stating that E & Y knew of these problems. Moreover, the court finds that the need to litigate this case in one action weighs heavily against dismissing the claim for any of the procedural reasons raised by defendant.
An appropriate Order follows.
ORDER
AND NOW, this 14th day of September 1999, upon consideration of Defendant Ernst & Young’s Motion to Dismiss the First Amended Complaint, Defendant Ernst & Young’s Motion to Dismiss the Second Amended Complaint, and the responses and replies thereto, it is hereby ORDERED that the Motions are DENIED.
Notes
. The present memorandum and order discuss two motions to dismiss. The first motion to dismiss addresses the First Amended Complaint, which named Ernst & Young as a defendant in only one count. While that motion was pending, the court granted plaintiffs leave to file a Second Amended Complaint that named E & Y as a defendant in another count (plaintiffs had apparently intended to name Ernst & Young in two counts in the First Amended Complaint but inadvertently failed to do so). The second motion to dismiss addresses the additional count included in the Second Amended Complaint.
. Unless otherwise noted, all citations to the complaint are to the Second Amended Complaint.
. GAAP are the "basic postulates and broad principles of accounting pertaining to business enterprises, approved by the Financial Accounting Standards Board of the American Institute of Certified Public Accounts (“AIC-PA”). These principles establish guidelines for measuring, recording, and classifying the transactions of a business entity.”
SEC v. Price Waterhouse,
. The relevant portions of that unqualified audit opinion, dated October 15 and 27, 1997, state:
We have audited the accompanying consolidated balance sheets of IKON Office Solutions, Inc-and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997....
We conducted our audits in accordance with general accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of IKON Office Solutions, Inc., and subsidiaries at September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles.
Id. ¶ 109.
. The court declines E & Y's invitation to apply the Ninth Circuit's more stringent standards to actions brought under the Reform Act. The holding in
Advanta
simply does not permit such a result: "We believe Congress's use of the Second Circuit’s language compels the conclusion that the Reform Act establishes a pleading standard approximately equal in stringency to that of the Second Circuit.”
In re Advanta,
. For example, defendant quotes
In re Inter-neuron Pharmaceuticals Litigation,
. The court understands plaintiffs’ response to concede this argument.
.On this point, it is unclear to the court whether plaintiffs intend to plead a separate section 10(b) violation against E & Y with respect to its role in Ikon's May 1997 registration statement. While the plaintiff's response to the motions to dismiss suggested that these claims were meant to stand on their own, the complaint's structure and language leads the court to believe that the plaintiffs intended these allegations only as additional indications of scienter with respect to the 1997 audit opinion.
It is unnecessary to resolve this claim, however, as the court also believes that even if the May 1997 registration statement is taken as an independent 10(b) claim, the allegations regarding Mr. Dinkelacker, combined with the additional allegations of known financial problems throughout Ikon (which are discussed subsequently), demonstrate scienter for the reasons described in the text: assuming the allegations to be true, E & Y’s statement that the financial statements complied with GAAP and GAAS were misleading. The court also finds that the allegations are particular enough to meet the requirements of Rule 9.The plaintiffs state that the financial statement asserted compliance with GAAP, and plaintiffs then specifically allege that a failure to investigate the allegations against Dinke-lacker prior to permitting the incorporation of its opinion into the registration statement was a violation of GAAS and GAAP. See Compl. ¶¶ 154-56.
. The plaintiffs also raise a variety of other allegations pertaining to scienter. The court does not rule on these allegations, however, as it rejects defendant’s particularized claims regarding the allegations described in the text.
. The special charges taken in August 1998 included a $16 million restatement of fiscal year second-quarter earnings and a $19 million charge to third-quarter earnings, both related to internal controls. See Compl. ¶ 115.
. "Plaintiffs more than just allege that the [accounting firm] failed to adhere to GAAS in
. The 1998 charge included a $20 million increase in the allowance for doubtful accounts, a $28 million charge reflecting an increase in the reserve for lease defaults, and a $20 million charge for asset impairment with respect to one of its subsidiaries, Integra Technology International Corporation. See Compl. ¶¶ 132, 135, 138.
. Defendant’s remaining allegations argue that the plaintiffs have made conclusory allegations in paragraphs J.24, 125, 127, and 138. However, defendants’ objections seek an excessive level of detail.
. As is relevant to the present case, section 11 states:
In case any part of the registration statement, when such part became effective, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue ... every accountant ... or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report, or valuation, which purports to have been prepared or certified by him[.]
15 U.S.C. § 77k(a)(4).
. If the allegations sound in negligence, Rule 9 has been held not to apply.
See In re Chambers Dev. Sec. Litig.,
. There, plaintiff argued that the allegations pertaining to the May 1997 registration statement and the 1996 audit report supported a finding of intentional or reckless deception by E & Y. See Resp. at 17, 19-20, 29-31.
. The court does not believe that defendant has argued in favor of applying the strict standards of the Reform Act to this count, and the court looks only to the Rule 9 standards that have previously governed section 11 claims.
.Thus, this case is distinguishable from those in which the complaint was dismissed because the plaintiffs failed to specify the accounting or auditing principle at issue.
See, e.g., Christidis v. First Pa. Mortgage Trust,
. While plaintiffs suggest that Alfaro is irrelevant as it addressed a section 12 claim rather than a section 11 claim, 15 U.S.C. § 77m applies equally to both causes of action.
. E & Y relies on Rule 21 of the Federal Rules of Civil Procedure but acknowledges that many courts have applied Rule 15 in these circumstances.
. Defendant argues strenuously that this court must dismiss the action against it. However, although defendant moves for dismissal pursuant to Federal Rule of Civil Procedure 41(b), which permits dismissal for failure to comply with court order, most of the cases cited rely on Federal Rule of Civil Procedure 4. While the court acknowledges that the Third Circuit has often applied Rule 4 strictly, even that the provisions of that Rule may be affected by the need for extensions or for good cause.
See, e.g., In re City of Phila