Opinion ID: 2655931
Heading Depth: 4
Heading Rank: 5

Heading: Class Period Disclosures

Text: For their part, the MuniMae defendants assert that their class period disclosures rebut any inference of scienter. “It is appropriate to consider such disclosures, which in some contexts will indicate that the defendants were acting in good faith, but in other contexts will indicate that the defendants had knowledge of operational risks (suggesting a lack of good faith).” Matrix Capital, 576 F.3d at 185. 33 We believe MuniMae made several relevant disclosures during the class period. In announcing its first restatement on March 10, 2006, MuniMae also alerted investors to the fact that the Company suffered from “material weaknesses related to the financial reporting process.” J.A. 821. Although only a few material weaknesses were then identified, the Company warned that management might “identify additional material weaknesses” as part of the restatement. Id. Over the next two years, the Company repeatedly disclosed newly discovered material weaknesses, and reiterated that it might identify additional problems that would render its remedial efforts ineffective. The fact that MuniMae continued to update investors about newly discovered weaknesses tends to negate an inference that the defendants acted with an intent to defraud. Cf. Matrix Capital, 187 F.3d at 187 (“A disclosure that meaningfully alerts investors to the risk that financial information is not accurate may suggest that the individuals responsible for the disclosure did not knowingly (or perhaps not even recklessly) misstate the underlying financial information.”). MuniMae also attempted to update investors regarding the escalating cost of the second restatement. Although the initial announcement in September 2006 identified only a few areas for restatement, the Company announced in October that it had not 34 yet determined its full scope. In May 2007, the Company disclosed that it was unable to timely file its annual Form 10-K for fiscal year 2006 because of the “dedication of significant management resources to these restatement efforts.” J.A. 1129. On July 10, 2007, the Company announced that it had retained Navigant Consulting to assist in the restatement efforts. In a telephone conference with investors the following month, the Company noted that, given the scope of the restatement, it had to “bring new and unbudgeted resources online quickly.” J.A. 1145. Finally, at a November 8 teleconference, the Company informed investors that both the magnitude and cost of the restatement would be “very significant.” J.A. 1157. To be sure, the import of some of MuniMae’s disclosures was moderated by the fact that it occasionally buried the information in press releases headlined with favorable news. Nonetheless, MuniMae repeatedly noted the need to restate its financials, the deficiency in its internal controls, and the fact that the restatement would require the Company to commit resources far greater than initially anticipated. Not only do these disclosures bolster the inference that the MuniMae defendants acted in good faith, but they also strengthen the inference that these defendants only realized the FIN 46R accounting problems--and the cost of fixing them--over time. 35