Opinion ID: 201697
Heading Depth: 3
Heading Rank: 2

Heading: Strong Inference of State of Mind

Text: 127 Even while some allegations survive the clarity-and-basis test, they still must meet the strong-inference requirement with respect to any claim demanding proof of scienter. 128 (a) Claims under Rule 10b-5. As for the claims under Rule 10b-5, which requires proof of scienter, the claims based on both GAAP and GAAS fail completely to allege particularized facts supporting a strong inference of scienter on PwC's part. Plaintiffs point to four types of allegations which they contend are sufficient to pass the test. We disagree. 129 First, the Complaint makes the conclusory assertion that PwC auditors were aware of the true facts, which were inaccurately presented in S & W's financials. ¶ 341. As noted above, a plaintiff does not satisfy the PSLRA's requirement of particularized facts supporting a strong inference of scienter by a conclusory assertion that the defendant knew the true facts, or knew that the challenged statement was false. What is needed is the allegation of particularized facts which give strong support to that conclusion. 130 Second, the Complaint alleges that PwC missed red flags. ¶¶ 341, 351. However, the mere fact that an auditor missed what a plaintiff labels warning signs gives little support on its own to the conclusion that an auditor was reckless, much less wilfully blind, with respect to the falsity of information in a financial statement. Here the so-called red flags were so described without particularized allegations supporting the recklessness of PwC in missing them when conducting its audits. 131 Third, plaintiffs point to allegations relating to the improper use of percentage-of-completion accounting on the TPPI project. See, e.g., ¶ 67. But, as noted above, the alleged impropriety under GAAP of using the percentage-of-completion method, with a zero profit assumption, depends on the perception that the project was terminated, as opposed to delayed, and that it would result in a loss. We noted above that these allegations were insufficient to support a strong inference of scienter on the part of Smith and Langford. The case with respect to PwC is a fortiori, as PwC had less reason than Smith and Langford to know that TPPI would fail to obtain financing to continue the project. 132 The final allegations on which plaintiffs rely is PwC's motivation to overlook S & W's concealment of losses in order to protect its own source of lucrative accounting and consulting fees. We do not doubt that such a profit motive could contribute to an auditor's decision to turn[] a bind eye, see ¶ 347, to a corporation's misleading accounting. See generally Sarbanes-Oxley Act of 2002, tit. II, Pub.L. No. 107-204, 116 Stat. 745 (codified in various sections of 15 U.S.C.) (addressing concerns raised about auditor independence). Such allegations can thus strengthen an inference of scienter predicated on other facts, possibly adding sufficient strength to satisfy the strong-inference requirement of PSLRA. On the other hand, absent truly extraordinary circumstances, an auditor's motivation to continue a profitable business relationship is not sufficient by itself to support a strong inference of scienter. And here there was virtually nothing else. 133 We affirm the district court's dismissal of the Rule 10b-5 claims against PwC. The allegations of the Complaint, whether viewed separately or cumulatively, do not rest on particularized facts supporting a strong inference of scienter. 134 (b) Claims under § 18. Because the PSLRA's strong-inference requirement does not apply to claims under § 18, we vacate the district court's judgment dismissing the claims under § 18 alleging that PwC falsely asserted conformity with GAAP in the accounting for TPPI and the allegedly underbid projects and with GAAS in PwC's audits relating to that accounting. Once again, we express no view as to whether these claims may be subject to dismissal on other grounds on which the district court did not rule.