Opinion ID: 4301416
Heading Depth: 3
Heading Rank: 4

Heading: SOX Certifications

Text: Several of the false statements that form the basis of the Fund’s claims are Hanger’s SOX certifications. Such certifications require a corporate officer to certify that he or she (1) is “responsible for establishing and maintaining internal controls” and (2) has “evaluated the effectiveness of the issuer’s internal controls.” 63 According to the Fund, these certifications support scienter because the individual defendants signed them “[i]n spite of the[] massive accounting problems and falsity.” We have adopted the Eleventh Circuit’s approach to SOX certifications: “‘[A] Sarbanes–Oxley certification is only probative of scienter if’ . . . . [there are] facts establishing that the officer who signed the certification had a ‘reason to know, or should have suspected, due to the presence of glaring accounting irregularities or other “red flags,” that the financial statements contained material misstatements or omissions.’” 64 Although the Fund does not tie any specific red flags to the SOX certifications, it repeatedly points to the accounting problems and concludes that the individual defendants must have been aware of them. As explained above, the fact that there were accounting 62 McHenry’s other arguments contesting this conclusion are unavailing: He notes that he is not the subject of a criminal investigation; that he was not terminated from Hanger; and that accounting affords a wide latitude for judgment. Cf. Owens, 789 F.3d at 544 (explaining that “it is improper to engage in detailed discussion of GAAP rules,” including those involving subjective standards, at the motion to dismiss stage). 63 15 U.S.C. § 7241(a)(4). 64 Ind. Elec., 537 F.3d at 545 (quoting Garfield v. NDC Health Corp., 466 F.3d 1255, 1266 (11th Cir. 2006)). 18 Case: 17-50162 Document: 00514587918 Page: 19 Date Filed: 08/06/2018 No. 17-50162 problems does not necessarily mean that the defendants were aware of these “red flags.” The only other allegations that any defendant was on notice of the accounting problems are those which state that Asar and McHenry “knew that Hanger’s accounting department was overwhelmed and unreliable given the Company’s history of accounting and internal control problems,” and cite (1) prior instances when Hanger delayed financial results, (2) “material weaknesses in inventory,” and (3) previously-announced misstatements. These might be the kind of issues that would give an officer concern, but they do not rise to the level of “glaring accounting irregularities” 65 such that it would be severely reckless to ignore them. These issues apparently were public knowledge. The Fund effectively alleges that the defendants should have known about the accounting irregularities because of their positions in Hanger, but that does not support the requisite inference. 66 The fact that accounting irregularities existed does not mean that the defendants were necessarily aware of them.