Opinion ID: 1434342
Heading Depth: 3
Heading Rank: 4

Heading: Investors' arguments on appeal

Text: In their complaint, the investors primarily relied upon the two sets of facts discussed above to establish scienter. On appeal, the investors argue that the complaint alleges at least seven additional facts that support a strong inference of scienter. Each allegation is addressed in turn below.
The first additional fact relied on by the investors is that the alleged accounting violations were so basic, pervasive and calculated to mislead investors... that they could not be missed unless the Company's executives were engaged in knowing or reckless conduct. But the failure to follow GAAP is, by itself, insufficient to state a securities fraud claim. Hoffman v. Comshare, Inc. (In re Comshare, Inc. Secs. Litig.), 183 F.3d 542, 553 (6th Cir.1999). Despite this general rule, common sense and logic dictate that the greater the magnitude of a restatement or violation of GAAP, the more likely it is that such a restatement or violation was made consciously or recklessly. PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 685 (6th Cir.2004) (quoting In re MicroStrategy, Inc. Secs. Litig., 115 F.Supp.2d 620, 636 (E.D.Va.2000)). One cannot determine from the complaint whether the magnitude of Diebold's alleged accounting violations are the type of extreme in your face facts that cry out scienter. See id. at 686. The complaint does not specify the total amount of revenue that Diebold allegedly overstated. Nonetheless, Diebold is a multi-billion-dollar company and, as such, the amount of improperly recognized revenue would have to be significant in order to support a finding of scienter. No such significant figures are alleged. The investors do not contend, for example, that Diebold reported profits when it should have been reporting losses over several different quarters. See In re Telxon Corp. Secs. Litig., 133 F.Supp.2d 1010, 1031 (N.D.Ohio 2000) (holding that the investors' complaint adequately plead scienter, based in part on the magnitude of the accounting errors) (emphasis in original). Aside from the uncertainty regarding the amount of the purportedly overstated revenue, the alleged revenue-recognition scheme is not the type of conduct from which scienter can be strongly inferred by the magnitude of the errors alone. The alleged scheme involved different product lines, and the revenue came from three very different sources: uncertified voting-machines sales, software bundling, and false service invoices. Even if the amount of revenue prematurely recognized was significant, it would have been spread out among these different sources and therefore would not likely have served to put the Defendants on notice of the misstated revenue.