Opinion ID: 2976605
Heading Depth: 3
Heading Rank: 4

Heading: UAHC’s Statements with respect to GAAP1

Text: Plaintiffs allege that statements made in their financial statements, including the Form 10-Ks and 10-Qs referred to above, were “materially false and misleading because the Company failed to either record or disclose the loss contingency associated with the repeated breaches of contract” as required by GAAP. Compl. ¶ 51. However, “[t]he failure to follow GAAP is, by itself, insufficient to state a securities fraud claim.” In re Comshare, 183 F.3d at 553. As in all other allegations of securities violation, Plaintiffs must show a strong inference of scienter regarding UAHC’s omissions or misrepresentations. See id. Prior to demonstrating scienter, Plaintiffs must show that UAHC violated GAAP and that such a violation was material. “GAAP, via FASB 5, requires that loss be accrued whenever it is probable a loss has been incurred or an asset impaired and the amount of the loss can be reasonably estimated. If the loss is at least reasonably possible, but no reasonable estimate can be made, the contingency at a minimum should be disclosed.” City of Monroe, 399 F.3d at 677-78 (internal quotations omitted). Thus, if a statement is issued and states that it is in accordance to GAAP, “[t]he unmistakable representation . . . [is] that if a loss or asset impairment was probable, the Annual Report reader would see a discussion of it in some form in the report. A fortiori then, the Report included the representation that if there were a substantial certainty of such an impairment, that contingency or risk would be disclosed.” Id. at 678. In City of Monroe, the Court ultimately concluded that, given the circumstances in which the reports were made, it was misleading to fail to disclose the emerging evidence that the tires were not safe, as well as the resulting lawsuits for injuries that were beginning to be filed. As in City of Monroe, the financial statements contained no reference to the impairment or likelihood of impairment to the contract. Plaintiffs here allege that the knowledge that employees had been fired as a result of their discussion of the Ford payments, and the knowledge that disclosure of the payments could result in investigations by Tennessee, gave rise to a duty to disclose potential losses that might occur as a result of the Ford payments. However, knowledge of the payments to Ford, the termination of an employee who subsequently filed a whistleblower action, and the potential for investigation does not give rise to a “probability” of impairment, the standard the GAAP uses when determining whether disclosure is necessary. In City of Monroe, there was such a finding of probability: by the time the financial statements were filed, the companies had received “thousands of claims for and complaints” concerning tire failures, the company was aware of “investigations and scrutiny” by the Arizona and Venezuelan governments, and the companies discussed “[t]hese claims, suits and payments . . . at least quarterly from 1997 to 1999” in meetings among company executives. 399 F.3d at 678-79. No such showing of probability has been made here, and the statements are therefore not actionable. 1 Plaintiffs argue that this issue is not properly before the Court, that UAHC waived the issue when it did not explicitly move for a motion to dismiss as to this claim, and that the district court erred when it did not act on Plaintiffs’ motion to strike or motion for leave to file a surreply. However, the GAAP claim is pleaded as a subset of the 10b-5 claim, and thus UAHC’s motion to dismiss encompassed the entirety of the claim. No. 07-1298 Zaluski, et al. v. United American Healthcare Corp., et al. Page 11