Brody v. Stone & Webster, Inc.

Citations: 414 F.3d 187; 2005 U.S. App. LEXIS 14325; 2005 WL 1654040Docket: No. 03-2429

Court: Court of Appeals for the First Circuit; July 14, 2005; Federal Appellate Court

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This appeal addresses the sufficiency of a securities fraud complaint under the Private Securities Litigation Reform Act (PSLRA). The U.S. District Court for the District of Massachusetts dismissed most claims due to insufficient allegations meeting PSLRA standards and granted summary judgment for the defendants on remaining claims, leading to a final judgment. The lead plaintiffs, Ram Trust Services, Inc. and Lens Investment Management, LLC, representing a class of Stone Webster Inc. (S.W.) securities purchasers from January 22, 1998, to May 8, 2000, brought a consolidated class action against S.W., its CEO H. Kerner Smith, CFO Thomas Langford, and auditor Pricewaterhouse-Coopers, LLP (PwC). Claims against S.W. were stayed due to its bankruptcy filing. The lengthy Amended Complaint alleges that S.W. and the other defendants issued fraudulent financial statements and press releases to hide the company's deteriorating financial condition, which began in 1998. The complaint's key allegations include: 1) S.W. underbid on over a billion dollars in contracts, reporting anticipatory profits on loss contracts; 2) fraudulent concealment of losses from a significant contract in Indonesia by misreporting revenues; and 3) misleading public statements regarding its liquidity and impending bankruptcy. These actions allegedly violated § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as well as § 18 and § 20(a) for control persons Smith and Langford. The court affirmed some claims while vacating others.

On March 28, 2003, the district court dismissed all claims against PwC and most claims against Smith and Langford, ruling that the Complaint did not meet the pleading standards of the PSLRA and Federal Rule of Civil Procedure 9(b) for securities fraud. Subsequently, on August 25, 2003, the court denied the plaintiffs' request to amend their complaint due to undue delay. On September 23, 2003, summary judgment was granted in favor of Smith and Langford regarding the remaining claims, leading to final judgment on September 24, 2003.

The plaintiffs’ claims under the Exchange Act are based on three statutory provisions: § 10(b) and Rule 10b-5, § 20(a), and § 18, each requiring different elements. Rule 10b-5 claims necessitate showing a material misrepresentation or omission, scienter (wrongful state of mind), a connection to the security transaction, reliance, economic loss, and loss causation. To establish scienter, plaintiffs must demonstrate intentional fraud or a high degree of recklessness.

Under § 18, plaintiffs must prove a false or misleading statement in a filed document, reliance on that statement, and resulting loss, without needing to show the defendant's state of mind, as the burden to rebut liability lies with the defendant to prove good faith.

§ 20(a) holds individuals liable for violations by controlled entities. The elements include an underlying violation by the controlled entity and evidence of control by the defendant. Similar to § 18, § 20(a) does not require the plaintiff to prove the defendant's scienter; instead, the defendant can defend against liability by proving good faith and lack of inducement in the violation.

Three critical provisions of the Private Securities Litigation Reform Act (PSLRA) are pertinent to this appeal. First, the PSLRA mandates a pleading requirement under 15 U.S.C. § 78u-4(b)(1), which requires that complaints alleging securities fraud must specify each misleading statement, the reasons for its misleading nature, and, if based on information and belief, detail the facts forming that belief. This is referred to as the "clarity-and-basis" requirement, necessitating factual support for claims of fraudulent statements or omissions, but not requiring the pleading of evidence.

Second, under 15 U.S.C. § 78u-4(b)(2), the PSLRA stipulates that if a private action requires proof of the defendant's particular state of mind to recover damages, the complaint must include facts that create a strong inference of that state of mind. This "strong-inference" requirement demands a "highly likely" inference rather than a mere reasonable one, although the inference does not need to be irrefutable.

Lastly, the PSLRA includes a statutory safe harbor for "forward-looking" statements under 15 U.S.C. § 78u-5, which protects certain predictive statements from liability if they are identified as such and accompanied by meaningful cautionary statements. The clarity-and-basis requirement applies to claims under Rule 10b-5, § 18, and § 20(a), but the application of the strong-inference requirement varies among these theories, as it specifically pertains only to private actions requiring proof of a particular state of mind for monetary recovery.

A claim under Rule 10b-5 requires the plaintiff to demonstrate that the defendant acted with scienter, necessitating a strong inference of scienter as mandated by the PSLRA. In contrast, sections 18 and 20(a) do not impose a similar requirement for proving the defendant's state of mind, meaning the PSLRA's strong-inference standard does not apply to these claims. 

The document also addresses accounting standards relevant to long-term construction contracts, highlighting their financial reporting complexities. Contractors may experience significant fluctuations in profit and loss statements due to the timing of revenues and expenditures, which can misrepresent their financial stability. To mitigate these misleading appearances, GAAP includes methods that smooth reported operating results.

The complaint references three key accounting documents: SOP 81-1, ARB 45, and FAS 5, which guide the accounting treatment of long-term contracts. The preferred method is "percentage-of-completion" accounting, where contractors recognize future revenues and profits as work progresses, regardless of payment receipt. This approach is deemed to reflect the economic reality of transactions, provided certain conditions are met, including the expectation of buyer compliance and the ability to make reliable estimates related to contract progress, revenues, and costs. Current recognition of expected profits assumes that the contract is likely to be profitable.

The completed-contract method of accounting recognizes income only upon the completion or substantial completion of a contract, with billings and costs accumulating on the balance sheet until then. This method is preferred when reliable estimates cannot be made due to inherent hazards in contract conditions, but it has the drawback of not reflecting current performance across accounting periods, which can lead to irregular income recognition. In contrast, a zero-profit-margin approach can be used when estimating final outcomes is impractical, allowing a company to recognize revenues equal to incurred costs during the period until more precise estimates are available. This approach shares similarities with both the completed-contract and percentage-of-completion methods, as it does not recognize estimated future profits during the project. However, it does indicate business volume in the income statement, unlike the completed-contract method.

Anticipated losses are treated differently from profits under all methods. A provision for the entire loss must be recorded when current estimates indicate a loss, with the charge against income made in the period the loss becomes evident. If the loss amount is not reasonably estimable, disclosures regarding the nature and potential range of the loss should be made. Similarly, if there is only a reasonable possibility of a loss, no accrual is necessary, and disclosure is sufficient. The term "probable" is defined as "likely to occur." 

The document also addresses allegations in a complaint against Smith and Langford, focusing on claims that S.W. underbid projects and fraudulently reported expected profits, which were actually anticipated losses. The district court dismissed these claims for failing to meet the PSLRA’s clarity and basis requirement, although some claims did satisfy this requirement.

The PSLRA's clarity-and-basis requirement is addressed, with the Complaint deemed not a vague fishing expedition. It cites internal sources alleging that S.W. intentionally underbid ten contracts, totaling over $1.4 billion, anticipating losses of 10% to 40%. The Complaint critiques the Company’s use of percentage-of-completion accounting, which improperly recognized future profits despite expected losses, referencing SOP 81-1 and FAS 5, which mandate immediate loss recognition. It precisely identifies allegedly false statements, particularly S.W.’s earnings figures during the fraud period, and provides a clear account of the alleged fraud, fulfilling the PSLRA’s clarity and basis criteria, as well as Rule 9(b) requirements. It emphasizes that the PSLRA does not require plaintiffs to plead evidence, aimed instead at preventing baseless suits. While the district court's dismissal for failing to meet clarity-and-basis standards is contested, some claims regarding contract underbidding are also deemed flawed for other reasons. The Complaint's requirement for a strong inference of scienter is highlighted; claims under Rule 10b-5 necessitate specific facts indicating defendants' knowing or reckless behavior. The Complaint is found deficient in establishing this scienter.

The Complaint lacks evidence that either Smith or Langford directly engaged in the accounting of the ten contracts or was aware of their alleged inaccuracies. While Langford's role as Chief Financial Officer suggests potential supervisory involvement, it does not imply knowledge of the improper accounting practices regarding future profits on underbid contracts. The assertion that significant accounting distortions necessitate complicity or recklessness from top executives is undermined by the absence of information on the magnitude of the alleged profit overstatement. 

The Complaint fails to specify the expected future losses or the improperly anticipated profits that contributed to this overstatement, relying instead on vague descriptions of the underbidding strategy, which suggests contracts were bid near breakeven rather than with an anticipated loss. Although the Complaint claims the contracts were bid at a loss, it does not clarify the expected size of those losses or how they relate to the company's overall financial figures. 

It notes that underbidding ranged from 10% to 40%, but does not quantify the resultant losses or provide context regarding typical profit margins. Consequently, the Complaint does not demonstrate that the accounting for these contracts would significantly impact the company's overall financial results. Without evidence indicating substantial discrepancies in the accounting figures, it is unlikely that the CEO and CFO were aware of any failures to adhere to accounting standards.

Irregular financial statements with minor overestimations do not imply that the CEO or CFO intended to defraud or acted recklessly. The determination of profit or loss in accounting is based on estimations rather than concrete facts. The Complaint lacks specific allegations that would support a reasonable conclusion that only losses were foreseeable for the ten underbid contracts. Consequently, the claims of fraud related to improper profit recognition under Rule 10b-5 fail to meet the PSLRA's requirement for a strong inference of scienter. The district court's dismissal of these claims is affirmed.

In contrast, claims under § 20(a) and § 18 do not require proof of the defendant's state of mind, thus the PSLRA's strong-inference standard is inapplicable. Under § 20(a), a plaintiff must demonstrate that a controlled entity violated securities laws, while § 18 shifts the burden to the defendant to prove good faith. Therefore, the district court's reasons for dismissing the § 20(a) and § 18 claims based on improper profit recognition are not valid, leading to a vacating of the dismissal judgment, with remand for further proceedings.

Regarding the inclusion of underbid contracts in S.W.'s "backlog," the court upheld the district court’s dismissal of claims under Rule 10b-5, § 20(a), and § 18, as plaintiffs did not adequately plead false statements concerning the backlog. The backlog, defined as the company's committed but unexpended contractual work, was neither false nor misleading.

The TPPI Project claims involve allegations of fraud regarding a canceled construction contract in Indonesia. The Complaint states that S.W., aware of the project's indefinite suspension, reported anticipated future payments as current revenues, leading to an overstatement of current revenues and the concealment of a significant expected loss as per GAAP principles. In 1996, S.W. received a $710 million contract from TPPI for a $2.3 billion chemical complex and procured $332 million in materials. The project was suspended in 1997 due to funding issues, prompting TPPI to suggest S.W. renegotiate vendor contracts. By August 1998, S.W. began reselling equipment at substantial losses, and by January 1999, it was clear the project would not resume. A Board meeting confirmed ongoing financial issues tied to the TPPI project.

The Complaint alleges S.W. created "phantom revenue" to mitigate the negative impact of the project's suspension on financial statements, recording $86.9 million in 1998 and $53 million in 1999. This manipulation altered reported losses, showing a loss of $49.3 million instead of $108.7 million for 1998 and a gain of $20.5 million instead of a loss for 1999. Additionally, under FAS 5, S.W. was required to recognize the expected loss from the project's cancellation, which was not adequately reflected in financial disclosures. The notes misleadingly suggested a low probability of cancellation and significantly understated the potential loss. The Complaint identifies two main GAAP violations: the overstatement of revenues through phantom accounting and the inappropriate use of percentage-of-completion accounting without a reasonable expectation of revenue realization.

The Complaint alleges that S.W. obscured significant current losses on its project by offsetting actual losses with projected revenues that were unlikely to materialize. It claims that S.W. failed to properly recognize an expected loss either as a charge to income or as an accurately reported loss contingency, leading to materially overstated financial results in the Company’s 10-K and 10-Q filings and other public disclosures. The Complaint also states that S.W. misled investors by including the TPPI project in its backlog, despite its termination or uncertainty of restart, and provided a materially understated estimate of losses associated with a potential cancellation of the project.

The allegations are deemed sufficiently detailed to meet the PSLRA’s clarity-and-basis requirement. They specify the allegedly false and misleading statements and explain their inaccuracies, including that unreceived payments should not be reported as current revenue without a reasonable expectation of payment. It is asserted that TPPI, having lost funding and suspended work indefinitely, could not be expected to fulfill its payment obligations. The Complaint claims that S.W. did not account for anticipated losses, which should have been recognized as a charge to income, and that existing notes on contingencies misrepresented the likelihood of cancellation as “unlikely” while downplaying the potential loss size.

While the Complaint adequately asserts that the expected loss could be reasonably estimated, claims of fraud regarding the inclusion of the TPPI contract in S.W.’s backlog were dismissed. The backlog, as defined, included committed but unexpended contractual work, and the inclusion of the TPPI project, regardless of its likelihood to restart, did not constitute misleading statements under Rule 10b-5. Thus, those claims do not support liability. The Complaint also draws a strong inference of scienter, indicating intentional wrongdoing.

Recovery for the plaintiffs hinges on demonstrating that the defendants acted with a specific state of mind, necessitating the Complaint to present facts that create a "strong inference" of such intent, as per 15 U.S.C. 78u-4(b)(2)(i) related to Rule 10b-5 claims. The allegations against Smith and Langford regarding TPPI do not meet this threshold. The primary claim asserts that the defendants reported "phantom revenue" and neglected to disclose an anticipated loss. However, even when interpreting the allegations favorably for the plaintiffs, there is insufficient evidence to establish a strong inference of scienter for Smith and Langford. While the Complaint outlines potentially misleading accounting practices, the allegations do not compellingly demonstrate their culpable involvement. The accusation of reporting "phantom revenue" does not inherently indicate wrongdoing, as such anticipatory revenue recognition is standard in percentage-of-completion accounting, considered appropriate in construction contexts, including cases with zero-profit margins under GAAP guidelines.

The crux of the Complaint revolves around whether it was suitable to apply percentage-of-completion accounting based on TPPI's expected fulfillment of its obligations. The vague assertions regarding communications from TPPI expressing uncertainty about the project's continuation and suggestions to terminate vendor contracts are inadequate to infer knowledge or recklessness on Smith and Langford's part. Additionally, claims that S. W. obtained permission to sell project materials lack specificity about the sale's extent or senior management's awareness. Although the Complaint suggests that Smith and Langford were aware of the materials being sold at a loss and the project’s likely discontinuation, these are generalized statements that fail to provide the necessary factual basis for a strong inference of scienter as mandated by the Private Securities Litigation Reform Act (PSLRA).

Conclusive assertions regarding the defendant's knowledge of the fraudulent nature of a company’s financial reports do not meet the PSLRA's requirement for a strong inference of scienter. Merely claiming that the defendant knew of the falsity is insufficient for pleading. The district court's dismissal of claims against Smith and Langford under Rule 10b-5 is affirmed. In contrast, claims under sections 20(a) and 18 related to TPPI do not fall under the PSLRA's stringent inference standard, leading to a rejection of the district court's dismissal reasoning. Consequently, these claims are vacated and remanded for further proceedings.

The complaint also highlights S.W.'s alleged concealment of its financial decline, asserting that misleading statements were made to reassure investors about the company's viability during a period of financial turmoil, ultimately leading to bankruptcy. Specifically, it is noted that by mid-1998, S.W. was aware of its cash flow issues, struggling to pay vendors on the Tiverton project, which resulted in some vendors halting material deliveries. Internal financial reports indicated a significantly deteriorating financial outlook compared to public disclosures. A confidential source indicated that internal financial data contradicted the quarterly reports, suggesting a disconnect between reported and actual financial conditions. The company faced increasing financial pressure throughout 1999, including unpaid vendor claims, reliance on credit cards for purchases, and internal advisories about a lack of funds to pay vendors. Vendors, facing non-payment, began to directly contact Smith to resolve payment issues, with those persistent in their follow-up often being prioritized for payment.

By summer 1999, S. W had a list of overdue accounts payable, with some accounts being 600-700 days overdue, leading to work stoppages, slowdowns, and lien filings by vendors and subcontractors. Despite obtaining a credit agreement in July 1999, S. W was already in material default due to unpaid debts. In October, facing cash shortages, S. W announced plans to sell its headquarters and cold storage business, but by December recognized that the sale would not resolve its financial issues, necessitating emergency adjustments to lending arrangements for survival. In November, S. W learned it was in material breach of a $250-million contract due to non-payment to subcontractors, prompting senior executives to attempt to avert project termination.

To raise cash in December, Smith and Langford directed the S. W Employee Retirement Plan Trust to purchase 1 million shares of common stock, generating over $15 million. By year-end, Smith's gasoline credit card was canceled, and delivery services were halted at S. W's building, while trash accumulated at the Tiverton project site due to unpaid bills to the hauler. In 2000, the owner of the Tiverton project notified S. W of contract defaults linked to liens, which S. W could not remedy, with cost overruns exceeding $27 million. S. W filed for bankruptcy in June 2000.

Amid these developments, the Complaint alleges that S. W issued false and misleading statements in press releases and SEC filings, suggesting it had sufficient cash and failing to adequately disclose its financial troubles. The Company claimed in various filings that it maintained a strong financial condition and had sufficient funds for operational needs. Although S. W later made some disclosures about its financial difficulties, plaintiffs argue these were insufficient to reveal the extent of the impending financial collapse. The allegations raise two main legal questions: whether the disclosures in fall 1999 adequately informed investors of the financial issues, thus rendering prior misleading statements immaterial, and whether the Complaint meets the clarity and basis requirements of the PSLRA and Rule 9(b).

The excerpt addresses whether the Complaint meets the Private Securities Litigation Reform Act (PSLRA) requirement for a “strong inference” of scienter concerning defendants Smith and Langford, and whether some statements made in SEC filings qualify as “forward-looking” and thus protected by the PSLRA’s safe harbor. The district court initially ruled that while some statements made before autumn 1999 were potentially actionable, none from after that time were actionable as the company had fully disclosed its financial difficulties. The court granted summary judgment on all claims, reasoning that: (1) none of the named plaintiffs purchased securities before autumn 1999, (2) any prior false statements had been corrected by the later disclosures, and (3) the named plaintiffs could not assert claims on behalf of the class for statements made prior to that time. The court must determine whether the disclosures in fall 1999 sufficiently revealed the company's financial issues to correct any previous misleading statements. It concluded that the disclosures did not adequately inform investors, and thus the earlier statements remained materially misleading. The defendants' argument that the fall 1999 statements cured previous inaccuracies relied on an October 27 press release and a November 15 10-Q filing, which indicated severe liquidity issues and operational challenges, including the need for additional funding and the omission of the quarterly dividend.

As of the end of the third quarter of 1999, the Company had fully utilized its credit facility, and its past due trade payables had increased, causing some vendors and subcontractors to delay work. The determination of whether a statement is false and materially misleading is for the jury to decide, as established in case law. A court may only rule a statement as not false or not materially false if no reasonable jury could find otherwise based on the presented evidence. The disclosures made by the Company at that time did not sufficiently inform investors of the material aspects of its financial condition, especially if earlier statements had previously misrepresented its situation. Potential investors would likely consider both recent and earlier statements, and if prior statements were misleading, they could still affect investment decisions unless adequately corrected. While the autumn 1999 disclosures revealed some deterioration in financial conditions, they did not fully clarify the misleading narrative cultivated by earlier communications. The Company had previously assured investors of its strong financial position and sufficient funding, which, if inaccurate, could be deemed materially misleading. The Complaint alleges that the Company was facing severe financial distress, nearing bankruptcy, unable to meet payment obligations, and suffering from halted work by vendors and subcontractors.

The information disclosed by the Company in autumn 1999 did not sufficiently correct prior misleading statements, leading to the possibility that a jury could find the total mix of information still materially misleading due to false statements and significant omissions. The PSLRA's standards for clarity and basis are met, as the Complaint provides a detailed description of the Company's deteriorating financial situation, supported by factual evidence and specific allegations of misleading statements. Furthermore, the Complaint also satisfies the PSLRA's strong-inference requirement regarding the state of mind of the Company’s executives. Claims under Rule 10b-5 necessitate proof of scienter, and the Complaint alleges sufficient facts to support a strong inference of scienter for executives Smith and Langford as early as January 1999. Notably, it is mentioned that they were aware of serious overdue accounts and exercised strict control over payments. Additionally, allegations indicate that Smith received demands for payment from vendors, which bolsters the inference of recklessness or actual knowledge of falsity regarding the Company’s financial health. The executives' awareness of the Company's financial condition is underscored by regular internal financial reports circulated among top management, emphasizing the critical nature of financial strength in their business operations.

Internal reports indicated the Company's financial condition was deteriorating, with accounts payable to vendors and subcontractors becoming significantly overdue—600-700 days past due by summer 1999 and 400-500 days overdue by January 1999. These findings were regularly communicated to executives Smith and Langford. A confidential source from S.W.'s Development Corporation suggested that discrepancies between internal reports and public quarterly statements signed by Smith raised questions about Smith's honesty. The allegations imply that both Smith and Langford were either aware of the misleading nature of these reports or acted recklessly regarding their accuracy by January 1999. Consequently, the court vacated the district court's judgment concerning claims under Rule 10b-5 against Smith and Langford related to false statements about the Company's liquidity and financial condition.

Regarding claims under sections 20(a) and 18, the court similarly vacated the district court's judgment and remanded the case for further proceedings. The district court had previously ruled that some statements made by the defendants, which were deemed misleading about the Company's financial status, fell under the PSLRA's safe harbor for forward-looking statements. However, the court disagreed, asserting that the statements, which claimed the Company had adequate funds for operational needs, were not necessarily protected. The PSLRA provides that issuers are not liable for misleading forward-looking statements if such statements are identified as forward-looking and accompanied by cautionary statements. However, liability could still be established if it is proven that an executive officer made the statement with actual knowledge of its falsity or misleading nature.

The statute allows makers of knowingly false and willfully fraudulent forward-looking statements, intended to deceive investors, to avoid liability if the statements are labeled as forward-looking and include meaningful cautionary statements about factors that could cause actual results to differ from projections. Forward-looking statements encompass projections of financial items, management’s future plans, economic performance, and related assumptions. In this case, a statement asserting the Company’s sufficient funds for anticipated needs was deemed forward-looking by the district court, as it involved projections of capital needs. However, the interpretation of the statute suggests it primarily protects issuers from liability for inaccurate projections and predictions about future performance, as indicated by legislative history aimed at promoting market efficiency by encouraging forward-looking disclosures. The challenge arises in distinguishing between present facts and future projections within a statement. Here, the assertion about current access to funds (a present fact) conflicts with allegations of fraud, which claim the Company was in a severe liquidity crisis. For a court to apply the safe harbor protection, it must analyze which parts of the statement are contested as false; merely including future projections does not suffice if the falsehood pertains to current factual assertions.

The safe harbor provision is intended to protect only against allegations of falsehood regarding the forward-looking aspects of statements. It is not applicable when a statement includes a false representation of a present fact. For example, if a company claims it has obtained liability insurance when it has not, the falsehood pertains to a present fact, not a future projection, thus falling outside the safe harbor. In this case, the alleged falsehood involved the company claiming access to sufficient cash during a cash shortage, which similarly does not qualify for safe harbor protection.

The document also addresses claims against PwC, the auditor for S.W.’s financial statements. The complaint alleges that PwC issued unqualified audit opinions for the years 1997, 1998, and 1999, which were misleading in two ways: they asserted that S.W.'s financial statements complied with GAAP and that PwC's audits adhered to Generally Accepted Auditing Standards (GAAS). The claims focus on the accounting for underbid contracts and the TPPI project. Similar allegations against other parties were previously determined to meet the PSLRA's clarity and basis requirements, leading to the conclusion that the claims against PwC also satisfy these requirements.

Claims against PwC include assertions that its audits conformed to Generally Accepted Auditing Standards (GAAS). Some claims related to PwC's failure to identify deviations from Generally Accepted Accounting Principles (GAAP) concerning underbid contracts and the TPPI project are deemed sufficient under the clarity-and-basis test. However, other GAAS claims consist solely of vague allegations lacking concrete detail, particularly regarding missed "red flags" during audits. Beyond the claims associated with GAAP violations, the remaining GAAS claims do not meet the clarity-and-basis standard set by the Private Securities Litigation Reform Act (PSLRA).

For claims under Rule 10b-5, which necessitate proof of scienter, the allegations against PwC fail to provide sufficient particularized facts. Plaintiffs argue that PwC auditors were aware of inaccuracies in financial statements and that their failure to recognize "red flags" indicates recklessness. However, these assertions do not satisfy the PSLRA's requirement for particularized facts supporting a strong inference of scienter. Additionally, allegations regarding the improper use of percentage-of-completion accounting do not substantiate a strong inference of PwC's knowledge of potential project failures. Lastly, while plaintiffs suggest that PwC had a profit motive to ignore misleading accounting practices, this alone does not establish the necessary evidence of recklessness or willful blindness.

Allegations can enhance the inference of scienter when combined with other facts, potentially meeting the strong-inference standard of the Private Securities Litigation Reform Act (PSLRA). However, an auditor's motivation to maintain a profitable relationship alone does not suffice to establish a strong inference of scienter, and in this case, no additional supporting facts were present. Therefore, the district court's dismissal of the Rule 10b-5 claims against PwC is affirmed. 

In regard to claims under §18, the PSLRA's strong-inference requirement does not apply, leading to the vacation of the district court's dismissal of these claims alleging that PwC falsely asserted compliance with Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). The court does not express a view on potential dismissals on other grounds not ruled upon by the district court.

The plaintiffs' appeal regarding the district court's denial of their motion for leave to amend the Complaint is also addressed. The court finds no abuse of discretion in the denial based on undue delay, but since the judgment is vacated and the case is remanded for further proceedings, the plaintiffs may file a renewed motion to amend. The court refrains from providing guidance on how to handle such a motion in the ongoing action.

In conclusion, the judgment is partially affirmed and partially vacated, with costs awarded to the appellants. Under §18, plaintiffs must demonstrate specific reliance on misleading statements, rather than relying on a fraud-on-the-market presumption applicable to Rule 10b-5 cases.

No party has challenged the district court's ruling regarding the Complaint, which the court interpreted as alleging reliance solely by the named plaintiffs, excluding class plaintiffs from pursuing claims. Although the appellate court is skeptical of this interpretation, it will not comment further since it was not part of the appeal and will likely be reconsidered on remand. The court confirms that only statements made in the annual T0-K filings with the SEC are deemed "filed" according to the district court's ruling, which remains unchallenged in this appeal. 

Section 20(a) of the Securities Exchange Act states that any person controlling another liable under the Act can also be held jointly and severally liable unless they acted in good faith and did not induce the violation. Some courts require proof of "culpable participation" by the controlling person, but this Circuit has not taken a definitive stance on this requirement. The district court did not address this issue in the current case, and it was not discussed by the parties. 

The excerpt also references the Private Securities Litigation Reform Act (PSLRA), which mandates that a complaint in private actions must specify misleading statements and the reasons for their misleading nature. The appellate court has not made a determination on whether "culpable participation" is necessary to establish a claim under Section 20(a) and assumes for the purpose of this opinion that it is not required. As claims under Section 20(a) are being remanded, the district court will address whether "culpable participation" is applicable, should it be raised.

If the district court concludes that "culpable participation" is necessary for a claim under Section 20(a) and applies the strong-inference requirement of the PSLRA, it may lead to the dismissal of previously remanded claims. Due to the similarities between claims under Sections 20(a) and 18, the district court's rulings on Section 18 could render the question of "culpable participation" moot. The document critiques the district court's handling of a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), noting that the court did not interpret the Complaint favorably for the plaintiff and disregarded reasonable inferences. It emphasizes that alternative pleading by the plaintiff does not invalidate the complaint and that the stronger allegations must be favored. Additionally, the PSLRA’s strong-inference requirement mandates that courts draw reasonable inferences in favor of the plaintiff when assessing sufficiency. 

The document agrees with the district court that specific agreements did not indicate a strong motive for fraud. It acknowledges that the PSLRA allows secondary liability claims to proceed even if primary liability claims are dismissed, but refrains from discussing broader interpretations of the PSLRA as no such arguments were presented. The plaintiffs did not challenge the district court's view that summary judgment would be appropriate if prior disclosures sufficiently informed investors. The court did not resolve all allegations of fraud and instructs the district court to revisit the motion to dismiss in light of its discussions. A motion from appellees for a supplemental memorandum is denied, noting that loss causation issues should initially be addressed by the district court, with all other pending motions deemed moot.