Opinion ID: 196921
Heading Depth: 3
Heading Rank: 4

Heading: Overstatement of Revenue

Text: 35 Gross also claims that Summa Four's statements regarding its revenue and earnings during the class period were materially misleading because, contrary to GAAP, Summa Four recognized revenue upon receipt of orders rather than on shipment of products. Gross claims that this premature recognition of income allowed Summa Four to overstate significantly its revenues and earnings during the class period. 36 To support this claim, Gross alleges that, although Summa Four typically requires twelve to twenty weeks to ship its switches following the placement of an order, Fiedler stated at a June 14 board meeting that the company could generate up to $4.7 million in new revenues through the receipt of new orders in the two weeks remaining before the end of the quarter. Gross contends that, given the time it takes Summa Four to fill orders, the statement is inexplicable unless the company was recognizing revenue upon receipt of orders instead of upon shipment. Gross finds further corroboration for this claim in Summa Four's May 1994 board meeting minutes where it is recorded that the company's chief financial officer was working on a new revenue recognition policy that was to be more formalized and somewhat more restrictive than its previous policy. 37 Though these contentions give us some pause, we nonetheless agree with the district court that Gross failed to plead this claim with sufficient particularity for purposes of Rule 9(b). As we have noted, a general allegation that the practices at issue resulted in a false report of company earnings is not a sufficiently particular claim of misrepresentation [to satisfy Rule 9(b) ]. Serabian, 24 F.3d at 362 n. 5. In this case, Gross has failed to allege any particulars to support his general allegation of inflated earnings through the use of improper accounting methods. Specifically, he has not alleged the amount of the putative overstatement or the net effect it had on the company's earnings. See Shushany v. Allwaste, Inc., 992 F.2d 517, 522 (5th Cir.1993) (allegation that company had adjusted the accounting of its inventory to inflate revenues and earnings does not sufficiently plead fraud where complaint does not explain, inter alia, how the adjustments affected the company's financial statements and whether they were material in light of the company's overall financial position); Roots Partnership, 965 F.2d at 1419 (allegation that company failed to establish adequate reserves for its excessive and outdated inventory does not satisfy Rule 9(b) where investor does not allege what the reserves were or suggest how great the reserves should have been); Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 116 (2d Cir.1982) (allegation that company's failure to write down value of obsolete equipment does not sufficiently plead fraud where plaintiff did not allege amounts at which equipment was carried--or should have been carried--on company's books); Schick v. Ernst & Young, 141 F.R.D. 23, 27 (S.D.N.Y.1992) (allegations that accountants significantly overstated assets of company in prospectus did not adequately particularize the alleged misrepresentations and omissions where plaintiff failed to allege the amount of the purported overstatement); cf. Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir.1994) (fraud pleaded with sufficient particularity by setting out representations made, what financial figures they were given, and what they alleged to be the true financial figures). 38 Moreover, the single statement by Fiedler during the minutes of the June 14 board meeting is far too tenuous a foundation (at least for Rule 9(b) purposes) to support Gross's claim that Summa Four had fraudulently overstated its revenue. Arguably, the statement supports a reasonable inference that the company, or at least Fiedler, may have contemplated booking revenue upon the receipt of orders rather than shipment for the quarter ending on June 30, 1994; however, we do not think that the statement, by itself, is sufficient to indicate that the company had actually booked as revenue sales instead of shipments in any previous quarter. 8 Moreover, we do not think the ambiguous statements taken from the minutes of the May 1994 board meeting concerning review of the company's accounting system corroborate Fiedler's June 14 statement sufficiently to overcome the deficiencies in Gross's pleadings. 9 III.