Opinion ID: 2789180
Heading Depth: 2
Heading Rank: 2

Heading: Frazer

Text: The only basis for the investors’ claim against Frazer is one unqualified audit opinion dated September 28, 2010 and included in Jiangbo’s report on fiscal year 2010, ending June 30, 2010. That opinion found Jiangbo to be in conformity with proper accounting principles for the years 2008, 2009, and 2010. The investors argue that Frazer should have disclosed any overstatements of cash balances and material related-party transactions in this report. The arguments in support of an inference of scienter on Frazer’s part are similar to those levied against Ms. Sung: (1) as auditor, Frazer would have had direct knowledge of cash balances and internal control problems; (2) the SEC launched a formal investigation; and (3) Frazer withdrew from consideration for reappointment around the same time as Ms. Sung resigned and the SEC investigation began. We note, however, that the timing of Frazer’s opinion precludes some of the inferences that the investors seek to draw against Ms. Sung because many of the alleged red flags in this case appeared later in 2010 and then in 2011, after the opinion was issued. 21 Case: 14-10213 Date Filed: 03/25/2015 Page: 22 of 24 The district court employed the following standard for evaluating an inference of scienter as to an external auditor: “[Plaintiffs] must prove that the accounting practices were so deficient that the audit amounted to no audit at all, or an egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting judgments which were made were such that no reasonable accountant would have made the same decisions if confronted with the same facts.” In re Worlds of Wonder Secs. Litig., 35 F.3d 1407, 1426 (9th Cir. 1994) (quoting SEC v. Price Waterhouse, 797 F. Supp. 1217, 1240 (S.D.N.Y. 1992)). We think this standard satisfactorily clarifies the plaintiff’s obligation in such cases, and so we also employ it. Of course, the complaint must give rise to a strong inference that the auditor is responsible for such ineptitude or misconduct. If the inference of scienter against Ms. Sung is tenuous, then the corresponding inference against Frazer is even more attenuated. As an external auditor, Frazer was a step more removed than Ms. Sung from any alleged indicators of the fraud. See Reiger v. PricewaterhouseCoopers LLP, 117 F. Supp. 2d 1003, 1007-08 (S.D. Cal. 2000) (“[B]ecause an independent accountant often depends on its client to provide the information base for the audit, it is almost always more difficult to establish scienter on the part of the accountant than on the part of its client.”). Moreover, the investors’ allegations of Frazer’s suspicious behavior are unavailing. Although the investors assert that Frazer resigned, more accurately, Frazer did not stand for reappointment for the following year. The 22 Case: 14-10213 Date Filed: 03/25/2015 Page: 23 of 24 separation in time between Frazer’s unqualified opinion and its withdrawal from consideration for reappointment further mitigates any inference of scienter that might arise from the firm’s withdrawal. Ultimately, the investors’ allegations against Frazer suffer from the same overarching deficiency as those against Ms. Sung: they fail to articulate a theory of the fraud with any particularity. The complaint does not set out in what ways Frazer’s audit was deficient, there is no allegation that Frazer had extensive involvement with the company beyond what was required to conduct a single audit, and there is no connection between the fact of an SEC investigation and Frazer’s state of mind that a reviewing court may reasonably draw on the face of the complaint. The complaint might make a strong case for negligence—but again, negligence is not enough to establish a strong inference of scienter. See Bryant, 187 F.3d at 1281-82. The investors fail to satisfy the heightened pleading standard as to Frazer.