Opinion ID: 763323
Heading Depth: 2
Heading Rank: 1

Heading: Conscious Misbehavior or Recklessness

Text: 17 Stevelman argues that Alias's disregarding of GAAP and industry standards in its financial reporting is itself strong circumstantial evidence of conscious misbehavior or recklessness. But this may not, in itself, be sufficient: Allegations of a violation of GAAP provisions or SEC regulations, without corresponding fraudulent intent, are not sufficient to state a securities fraud claim. Chill, 101 F.3d at 270; see also SEC v. Price Waterhouse, 797 F.Supp. 1217, 1240 (S.D.N.Y.1992) (noting that recklessness standard in securities fraud action requires more than a misapplication of accounting principles). 3 Although Stevelman argues that Alias's subsequent revelation of its accounting policy change and retroactive announcement of lowered earnings should be probative of conscious misbehavior or recklessness, this Court has expressly held, Mere allegations that statements in one report should have been made in earlier reports do not make out a claim of securities fraud. Acito, 47 F.3d at 53 (citing Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978)). But cf. Sirota v. Solitron Devices, Inc., 673 F.2d 566, 573 (2d Cir.1982) (upholding sufficiency of evidence of scienter in restatement of earnings case and stating, The jury could properly infer intent from subsequent admissions of misrepresentations, coupled with the defendants' continuous intimate knowledge of company affairs.). 18 Stevelman argues that the repeated misrepresentations, in at least seven separate public filings and press releases, provide further evidence of conscious misbehavior or recklessness. The District Court ruled that these misrepresentations indicated only mismanagement, not fraud. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 479, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977) (allegations of corporate mismanagement are not actionable under Rule 10b-5). Management's optimism that is shown only after the fact to have been unwarranted does not, by itself, give rise to an inference of fraud. See Shields, 25 F.3d at 1129-30; see also Chill, 101 F.3d at 268. Overall, Stevelman's arguments with regard to Alias's accounting irregularities and overly optimistic disclosures, by themselves, appear to amount to allegations of fraud by hindsight, which this Court has rejected as a basis for a securities fraud complaint. See Shields, 25 F.3d at 1129 (quoting Denny, 576 F.2d at 470).