4th Circuit Tosses Securities Fraud Class Action Against Deloitte

Two days ago the Fourth Circuit rejected a securities fraud class action arising out of fraudulent accounting by Royal Ahold. The case is Public Employees' Retirement Assn. of Co. v. Deloitte & Touche LLP. The opinion was written by Judge Wilkinson, and it has the flavor of the opinion he issued two weeks ago rejecting another securities fraud action (on which we posted here). Both cases apply Tellabs, Inc. v. Makor Issues & Rights, Ltd. (U.S. 2007) to put some teeth into the Private Securities Litigation Reform Act (PSLRA).

Ahold settled for $1.1 billion (after the SEC filed an enforcement action). But the plaintiffs went after Ahold's accountant, Deloitte & Touche, under Rule 10b-5. Emphasizing the PSLRA's heightened pleading standard for 10b-5 claims, the Fourth Circuit held that plaintiffs failed to state claim. Applying Tellabs, the Court ruled that, despite the complaint's factual allegations of wrongdoing by Deloitte, the inference that Deloitte knowingly or recklessly perpetrated a fraud on Ahold's investors was less compelling than the inference that Deloitte acted innocently or negligently--i.e., that Deloitte lacked the necessary scienter. The "stronger and more plausible inference," the Court held, "is that [Deloitte was], like the plaintiffs, victims of Ahold's fraud rather than its enablers." The Court added this assessment:

"Seeing the forest as well as the trees is essential. With respect to both frauds, plaintiffs point to ways that defendants could have been more careful and perhaps discovered the frauds earlier. But plaintiffs cannot escape the fact that Ahold and [its subsidiary] went to considerable lengths to conceal the frauds from the accountants and that it was [Deloitte] that ultimately uncovered the frauds. The strong inference to be drawn from this fact is that Deloitte . . . lacked the requisite scienter and instead were deceived by Ahold and [its subsidiary]. That inference is significantly more plausible than the competing inference that defendants somehow knew that Ahold and [its subsidiary] were defrauding their investors. It is not an accountant's fault if its client actively conspires with others in order to deprive the accountant of accurate information about the client's finances. It would be wrong and counter to the purposes of the PSLRA to find an accountant liable in such an instance."