because of the improper accounting for the seven point seven million dollar blue cross blue shield of the jersey receivable pricewaterhouse coopers acknowledged internally that that very same accounting was improper nonetheless they issued an unqualified opinion on ph d s in fiscal year ninety seven financial statements this is not an issue over which reasonable accounts could differ the particularized allegation with allegations which we have supported with contemporaneous documents raise a strong inference that first peter if you see actually knew or with deliberate recklessness disregard that pete h p t improperly recorded that received full which had no economic intangible asset and the effect of that was to allow p h p to amortize it off the books so that it did not have to take an immediate charge to income which is exactly what happened upon the restatement when the s e c uncovered what was going on this whole accounting till game began to unravel when the f c c just ask a very simple question they asked p h p why did you report one purchase price for the blue cross blue shield of a who profits you out of your jersey facilities began to unravel the response by p h p which peter if you see a review because the f c c comment letters were critical matters as was the blue cross blue shield of new jersey accounting on that it was neither prompt nor complete the fact that honor all these allegations raised a strong inference of science or with respect to this transaction and i might add that the defendants make one argument with respect that if they try to claim or argue that the seven point seven million what it actually states in that form ten k is that there were immaterial adjustments to revenue in fiscal year ninety seven which we don't dispute revenue was not adjusted and discrete and i said it was the intangible assets th same particularized allegations that we have pled with respect to the blue cross blue shield the jersey transaction can span three fiscal years are supported by contemporaneous documents with respect to the d to much earlier had issued a report of a conditional letter questioning management's accounting decision making process rather than act as an independent skeptical auditor pricewaterhouse coopers said and i quote if they were in their proposal to  they would use their intimate familiarity with district officials to negotiate advocate and maximize collectability of these very receivables that they were charged with auditing in the end that's right from the beginning in their higher rate which is what key h p recorded it's resealable say and it's important to note that this is not just an issue over the cover our study as we played a character after one fifty of our complaint p h p not only employees unilaterally t the district would not pay but they employed an inflation factor that they themselves determined on top of it about plus a few if you will furthermore christ want to housekeeper's did not just say that these resealable as we recorded properly under jack they went one step further they certified in the notes to the consolidated financial statements which are part of the audit and part of what they opine that these we see rules were conservatively estimate which is in of itself a false statement so it not only did they say that these were sealed were proper under gap they took one step further your honor and said if he were conservative all the while knowing that there was a rate differential between a lower rate that the district said they would pay and a higher rate which p h p continued to record these receivables which were never collected the vast majority of west it's important in price waterhouse coopers argument as to why it was reasonable for the accounts to say these receivable for proper underground take taking a sign that they were conservative which is a different issue because they clearly were not pricewaterhouse coopers makes three arguments and they're very they say first that the district they argue that the  p h p stated that the district paid other h m o s in fiscal years ninety four ninety five and ninety six ninety five and ninety six are completely left out of the final statement submit your on that because that is a critical factor their defense that the absence of that fact further supports our inference of c enter in addition to the fact that this is a clear allegation where p h p w near allegations that gaffe was not followed are insufficient by themselves to be to enter the ticket arised out they have some wonderful concept is good whether it's death you tour or regulatory anyway it's the standard by which the accounting at the time that they were stating that they were properly recorded on the graph and further qualifying them that they were conservatively estimated the feet of u c there's not just  they actually knew that before they completed their fist figure and so it's on that there was no disclosure of that and it's important i wanted to look at the fast five requirements for research impairment to receivables and disclosure because the two different issues and fast five has been reported in its entirety by a few of you see at their c s d r three seventy one and the specific page that i'm referring to are three seventy four three seventy five is what and they don't dispute that they knew that what is interesting is that we can also show that they actually knew that race replete evidence with particular prior to the fiscal year ninety six part if you look at our excerpts of the record three o seven that is a letter from p h p to mr paul offner who was the head of the d c health and human services paul office also identified as the point of contact on that regulation and i just cited that letter as of july third that teach peace protesters that's an accidental off at at our excerpts of the record we introduced a letter from coopers in my brain which later became p have you see you after the merger that was going on between p h p and the district about the plum study in the rates that were going on that this was not discuss rise allegations that the plum study was what the district was going to pay and long before that it certainly did not come without warning we've also put evidence in the into the record and refer to our complaint  was a big deal to analysts and we actually let a specific analyst report that was issued two days after the district see if i rejected the settlement saying well the one time collection of this receivable is important what is really important ar which p h p has been recording revenues he knew nothing of this dispute and we don't find out about this dispute until after the f c c gets a hold of it and forces disclosure of it and three seventy two or three seventy five it's pacifically states that in terms of impairment that the speaker and impairment will be disclosed if you don't meet the requirements for actually taking a charge of impairment which is probable an estimate of when it will be disclosed when one or both of those requirements are not met and assessments if it were if it's not probable it will be disclosed if it's reasonably possible reasonably possible is defined as more than a remote less than likely so even though you don't necessarily have a a violation where the receivable has to be written off you have to disclose the dispute in those situations and given the wealth of our ally ations it certainly was more ever became public third amended complaint that means that there were four separate complaints that were filed before we got here today and that the district court in reviewing the various complaints and most recently the third of many complaints issued not in shorts minute order incorporating by reference our arguments but rather a twenty plus page opinion analyzing in detail what the court found deficient in this case and we embrace now what's typical in these motion to dismiss cases under the p s l r a is that there has been no discovery because there's a statutory prohibition on conducting discovery in tellers the complaint on file but what's unique about or unusual i guess i should say about this case is that the plaintiffs here had access to the documents and evidence which most plaintiffs are not given access to in these kinds of cases because p h p was bankrupt and they settled with plaintiffs and got presumably as a result of that a lot of information and paragraph one in their complaint says that they have conducted an extensive analysis this of i think it's thousands of pages of internal p h p k p m g n somehow  and the district court has found more than once and most recently on the motion to dismiss the third and then a complaint lacks a sufficient allocation of science or let me talk a little bit about the legal framework in the science or requirement a required element of this pleading and that means that the plaintiffs have to allege with particularity facts raising a strong inference of either consciously and well of intentional misconduct or deliberate reckless it i think controls the outcome of this case it says and i'll quote our definition of recklessness as taken from the sun strand case that's a seventh circuit case strongly suggest that we continue to view it as a form of intentional or knowing misconduct we used the words known and must have been aware which suggests consciousness or deliberateness indeed we expressly acknowledged our own prior statement that recklessness is a form of intent rather than a greater degree of negligence and the supreme court's statement that recklessness in the context of tenby is a form of intentional conduct now that means of course that that allegations of negligence are not enough to state a claim under section ten b that the allegations of gross negligence are not enough that allegations of excusable negligence is not enough and indeed if this had been a jury trial with a burden of proof beyond a reasonable doubt and a finding that there had been gross and inexcusable negligence if that had been a conclusion that would not be enough to impose liability under section ten the to stated ten b five claim the plaintiffs have to allege that facts which raise a strong inference intentional or knowing this conduct as i said they had several chances to do so and came up short now another very significant aspect of this case is the fact that this is a case against the auditor pricewaterhouse accounting with sassoon we did improper accounting maybe he presented the financial statements the company presented its financial statements improperly let's say that the company booked its revenues improperly and let's say that it made disclosures which were improper now you see as the auditor made only the statements about its audience and its review that are required under the professional standards price waterhouse cooper said the financial statements present fairly immaterial respects the financial position of p h p in accordance with gaff that opinion is based on an audit that pricewaterhouse coopers did in accordance with generally accepted auditing standards so the issue here absolutely and that is the express holding of what i think is the most on point case the d c m case from the ninth circuit which says just paraphrase a couple sentences i think is directly responsive to your question judge  ruled in that case that said the issue in this case was whether the allegations of a seriously botched audit are sufficient to bleed scienter under the heightened pleading requirements of the p s l are a and silicon graphics and it goes on to say we hold that the complaint sets out a compelling case of negligence perhaps even gross negligence but does not give rise to a strong inference that the auditor acted with an intent to fraud conscious misconduct or deliberate recklessness as is required in a securities fraud case so i don't want to be understood for a minute suggesting that i believe that there was anything botched or seriously botched about pricewaterhouse coopers conduct in this particular case but i will say even initial lawsuit was filed against p h p and some insiders not pete of you see then p h p went bankrupt and there was an automatic stay in effect p v c was added to the complaint we moved to stay pending the outcome of the g work paper suggested that there were some problems and they say take a look at those will if you go and look at our supplemental excerpts of the record you will see what it is that we're talking about here we're talking about an auditor that said we have a concern after issue to clean a lot of opinion about the decision making process of the timeliness of reporting we do not have a concern about the accounting that was done and we stand by our audit opinions and p h p said contracts that produce the issue of the seven million dollars civil and then the d c charge at receivables which is the other issue the council mentioned let me talk about both of them i should say i think that these are complicated matters and i'll do my best to address them in the time that i have but frankly i think they're almost better suited to a written presentation and both mr olson and i have done our best i think an extensive priest to go through all that any sort of summary fashion let me say that with respect to the the contracts that were combined for revenue recognition purposes what we're talking about there are two contracts one to build a series of health care centers and the second to manage those health care centers p h p had a what it called its integrated care system of care i think it was called which oversaw the development and provision of health care services and because of that business plan p h p was involved in a lot of different things having to do with the construction and the oversight  management of these operations pricewaterhouse or start p h p itself believed under the statement of position eighty one dash one that we've talked about that it was appropriate because these contracts were related so interrelated with one another to combine them for purposes of accounting and we've laid out in in great detail in the briefs why that position was taken and the justifications for it pricewaterhouse in doing the audit point because the both contracts had not yet run there was a need to figure out how to deal with the fact there was still another substantial receivable coming here and it was treated as additional non cash consideration of goodwill which is i think the same discussion we heard about and in the prior argument it is absolutely the right accounting to treat it in that fashion even if it were the wrong accounting however there is no basis where they were told that these contracts were in fact not related but they should be doctored they should be changed in some fashion in a freshwater house you know game a wink and a nod and said well that's ok you know we'll just go and proceed even though we know this is not a correct statement i wouldn't be standing here defending the case but what happened is there is a professional judgment disagreement between p h p and beat of u c and plaintiff's counsel about whether or not that should have been done all of the issues were disclosed the fact that these contracts were combined was disclosed its all in the year after year disclosure documents that are in the in the record and ultimately the decision to restate them was compelled by the f c c because of a disagreement over the accounting right or wrong it doesn't show any kind of mental state embracing an intent to defraud the  other principal issue which counsel has identified as the relates to the receivables from d c chartered and what we heard about that was that there should have been a disclosure about the fact that they had  impaired because of a study that came out in i think it was nine hundred ninety seven what is clear from the submissions that we made is the fact that p h p had a contractual arrangement with the district of columbia to reimburse it at a certain rate based on a study that had been commissioned by the district of columbia and had been in place for years as the only study and indeed was the one which was used to pay all of the dollars ph people have it was do eighty million dollars that it looked conservatively nine million dollars and had an agreement with the district of columbia to pay eighteen million dollars so when they said it was conservatively reported it was to the tune of about nine or ten million dollars now what happened is there was a political change in the district of columbia you know it happens from time to time and a new fiscal officer came in and said that he was going to impose new rules and that he wasn't going to pay in accordance with the previously agreed amounts but rather a different amount well p h p didn't agree with that and in fact they filed a lawsuit it was a disputed issue and there was never a restatement over the amount of the receivables and to this day it is not even clear in the record whether or not there was ever a penny paid less than ph p h p was demanding that situation ok counsel is saying is that p h p should have disclosed the fact of a estimable was it probable that it was going to be a last you know those are issues around which reasonable people certainly can differ what i think is very revealing in this case is that there was never  restatement in any way shape or form regarding the amount the only thing that ever happened was that p h p was required to come back and say by the way there's a dispute now how that shows pricewaterhouse coopers was somehow  didn't argue but it's in the brief has to do with the going concern opinion that that they are saying that because p h p went bankrupt in november of one thousand nine hundred eight and because there was an audit opinion issued in august of hundred eight that price waterhouse cooper somehow should have known must have known did know i guess that that the company was going to go bankrupt four months into the future and that they should have therefore issued what's called a going concern qualification that it's not that there are some reservations about the ability of the company to continue but as the district court pointed out in the opinion as we've argued in the briefs the intervening event after august  ninety eight and before november of ninety eight was that the company's new jersey operations were taken over by regulators which cut off a flow of i think it was around twenty million dollars a month to the company and it was the result of that intervening unforeseen event that the company went bankrupt so that can hardly be a basis for finding c enter the one last comment i'd like to make in going back to the to the legal issues is that  four on a motion to dismiss like this one under the p s l re the normal legal rules of indulging the reasonable inference that can be drawn from the plaintiff's complaint rule that only inferences in favor of playing to speed are on does not apply and instead all reasonable inferences be they favorable or unfavorable to the plaintiff or the defendant should be considered and that i think applies directly in this case when we look at a situation and say what is really going on here how can we get in the head of the party who's being charged with these wrongs i mean and in one case i hear you know the prior case pricewaterhouse is a whistleblower and in this case it's a coconspirator because people come up with these different allegations to try to put a spin on what really happened but what we need to do is to look at what is really your very quickly our first of all in terms of the documents that we got through the bankruptcy process we did not get any discovery from pricewaterhouse coopers what happened was this two weeks before our many complaint was due the trustee granted us access demonstrates actual knowledge that it was improper to treat that seven point seven million dollars receivable from blue cross blue shield of new jersey as an intangible assets and the f c c later forced the company to restate that on the same principle demonstrate how neither is fast five fast five it's very simple longstanding and i would conclude with this statement in terms of feet of the sea state of mind and this is from their proposal to serve as ph peace part of her and it its business objectives while at the same time providing the independent perspective necessary to support your decision making process that was the same decision making process to keep the energy issue or affordable condition butter and refused to out of further and you can see that all