Opinion ID: 214714
Heading Depth: 1
Heading Rank: 11

Heading: Plaintiffs' Remaining Scienter Allegations

Text: Plaintiffs also allege several other grounds that would support finding the necessary scienter with respect to EY. The Complaint claims EY knew there was insufficient documentation for nearly half of the $2.2 billion in backdated option grants in violation of GAAS; EY knew Broadcom's internal controls were weak and failed to expand the scope of its audit procedures as required under GAAS; and EY recklessly ignored a number of red flags that should have alerted it to the potential for material misstatements related to stock-based compensation. Each of these grounds include additional facts but also somewhat overlaps with the three major claims presented above. These remaining allegations support an inference that EY's actions fell far short of the standard expected of a public company auditor. For example, the Complaint recites that nearly half of the $2.2 billion Restatement resulted from option awards for which there was no contemporaneous documentation. While not explicitly required under GAAP and GAAS, the auditing standards do give strong guidance to auditors to dig deeper once there are questionable circumstances surrounding such material transactions. See e.g., PCAOB AU §§ 319.69, 333.02. While EY argues there was nothing technically incorrect at the time each of the questionable grants was audited individually, EY fails to explain how it could innocently overlook the number and magnitude of the aggregate amount of undocumented grants, particularly in light of GAAS and its knowledge of the 2003 corrective reforms. Considering the number, magnitude, and multi-year financial impacts of these grants, it is certainly reasonable to infer scienter just as strongly as an innocent inference. Finally, the Complaint lists a number of red flags that arguably should have alerted EY to Broadcom's wrongdoing and that EY allegedly would have had to purposely or recklessly overlook. These include elements of the 2000 option grants and the deceased member of the compensation committee, option grant dates that were sporadic, suspiciously long delays between the award of stock options and the UWC approving the grant, and option grant dates set at or near the low stock price for the quarter in which the options were granted followed by a typical price surge soon after the dates of the option awards. As other courts have noted, [a]t the pleading stage, courts have recognized that allegations of GAAS violations, coupled with allegations that significant `red flags' were ignored, can suffice to withstand a motion to dismiss. In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 279-80 (3d Cir.2006) (citing cases). However, [s]uch allegations . . . must be pled with particularity. It is insufficient, for example, for a plaintiff to cite GAAS standards without an explanation of how the defendant knowingly or recklessly violated those standards. Id. at 280 (citations omitted). Here, Plaintiffs have not simply cited GAAS standards in connection with vague claims that EY failed to comply with the standards. The Complaint is loaded with specific allegations of how and why EY should have investigated deficient or missing documentation. Even after being alerted to potential problems during the 2003 corrective reforms, EY's behavior, and perhaps more importantly, its unqualified audit opinions, did not change. These red flags further support a strong inference of scienter.