In re AMTRUST FINANCIAL SERVICES, INC. SECURITIES LITIGATIONREPLY MEMORANDUM OF LAW in Support re: 142 MOTION to Dismiss the Consolidated Second Amended Complaint. . DocumentS.D.N.Y.January 23, 2019 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------------- X : : In re AMTRUST FINANCIAL SERVICES, : INC. SECURITIES LITIGATION : : : -------------------------------------------------------------- : : : This Document Applies To: : : All Cases : : : -------------------------------------------------------------- X No. 17-cv-01545 (LAK) CLASS ACTION REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF DEFENDANT BDO USA, LLP’S MOTION TO DISMISS THE CONSOLIDATED SECOND AMENDED COMPLAINT Dated: New York, New York January 23, 2018 MCDERMOTT WILL & EMERY LLP Timothy E. Hoeffner Jason D. Gerstein Gary D. Adamson 340 Madison Avenue New York, New York 10173 Attorneys for Defendant BDO USA, LLP Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 1 of 15 i TABLE OF CONTENTS PRELIMINARY STATEMENT .....................................................................................................1 ARGUMENT ...................................................................................................................................1 I. THE SECTION 11 CLAIM FAILS .....................................................................................1 II. THE SECTION 10(b) CLAIM FAILS ................................................................................6 CONCLUSION ..............................................................................................................................11 Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 2 of 15 ii TABLE OF AUTHORITIES Page(s) Cases Afra v. Mecox Lane Ltd., No. 10-cv-9053, 2012 WL 697155 (S.D.N.Y. Mar. 5, 2012), aff’d, 504 F. App’x 14 (2d Cir. 2012).............................................................................................................2 Anwar v. Fairfield Greenwich Ltd., 728 F. Supp.2d 372 (S.D.N.Y 2010) ..........................................................................................7 Barrett v. PJT Partners Inc., 2017 WL 3995606 (S.D.N.Y. Sept. 8, 2017) .............................................................................9 Caldwell v. Berlind, 543 F. App’x 37 (2d Cir. 2013) .................................................................................................6 In re Crude Oil Commodity Litig., 2007 WL 1946553 (S.D.N.Y. June 28, 2007) ...........................................................................2 In re DNTW Chartered Accountants Sec. Litig., 172 F. Supp. 3d 675 (S.D.N.Y. 2016) ....................................................................................8, 9 Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228 (S.D.N.Y. 2012) ........................................................................................8 In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp. 2d 249 (S.D.N.Y. 2004) ........................................................................................2 Glaser v. The9, Ltd., 772 F. Supp. 2d 573 (S.D.N.Y. 2011) ........................................................................................3 In re IndyMac Mort. – Backed Sec. Litig., 718 F. Supp. 2d 495 (S.D.N.Y. 2010) (Kaplan, J.) ....................................................................2 In re Metropolitan Sec. Litig., 532 F. Supp. 2d 1260 (E.D. Wash. 2007) ..................................................................................7 Montoya v. Mamma.Com Inc., 2006 WL 770573 (S.D.N.Y. Mar. 28, 2006) .............................................................................3 In re Moody’s Corp. Sec. Litig., 599 F. Supp. 2d 493 (S.D.N.Y. 2009) ........................................................................................9 New Jersey and its Div. of Inv. v. Sprint Corp., 314 F. Supp. 2d 1119 (D. Kan. 2004) ........................................................................................7 Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 3 of 15 iii Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015) ..................................................................................................... passim In re Oprins, Admin. File No. 3-13797, 2010 WL 5376531 (ALJ Dec. 28, 2010) .........................................3 In re OSG Sec. Litig., 12 F. Supp. 3d 619 (S.D.N.Y. 2014) ..........................................................................................3 Pub Employees’ Ret. Sys. Of Mississippi v. Merrill Lynch & Co., 714 F. Supp. 2d 475 (S.D.N.Y. 2010) ........................................................................................6 In re Puda Coal Sec. Litig., 30 F. Supp. 3d 230 (S.D.N.Y. 2014), aff’d sub nom. Querub, 649 F. App’x 55 (2d Cir. 2016) .............................................................................................................................5 Querub v. Moore Stephens Hong Kong, 649 Fed. App’x. 55 (2d Cir. 2016) ........................................................................................4, 5 In re Ramp Corp. Sec. Litig., 2006 WL 2037913 (S.D.N.Y. July 21, 2006) ............................................................................7 Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179 (S.D.N.Y. 2000) ..........................................................................................3 Scott v. Gen. Motors. Co., 46 F. Supp. 3d 387 (S.D.N.Y. 2014), aff’d, 605 F. App’x 52 (2d Cir. 2015) ............................4 Statutes Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k .................................................... passim Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j ............................... passim Section 4C of the Securities Exchange Act of 1934, 15 U.S.C. § 78d-3(a)(2) ................................9 Other Authorities AS No. 7 ........................................................................................................................................10 AS No. 10 ......................................................................................................................................10 AU § 390 .......................................................................................................................................10 Acuitas, Inc.’s Survey of Fair Value Audit Deficiencies ...............................................................10 Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 4 of 15 1 PRELIMINARY STATEMENT Plaintiffs’ opposition brief fails entirely to explain away the numerous and independent fatal deficiencies in their CSAC. The CSAC did not amend Plaintiffs’ previously asserted Section 11 claim against BDO, and the Form 10-K that is the subject of the SEC Order was not incorporated into the registration statements at issue here. Consequently, Plaintiffs have largely rehashed their response to BDO’s motion to dismiss the First Amended Complaint. (ECF No. 108) What was true then is still true now: allegations premised on unsubstantiated and anonymous statements quoted in a news article are insufficient to state a claim as a matter of law. And Plaintiffs still have not satisfied their burden under Omnicare to allege that BDO’s statements of opinion were subjectively false, contained false “embedded facts,” or omitted material facts. The opposition fares no better for Plaintiffs’ new Section 10(b) claim. Remarkably, Plaintiffs admit that BDO’s alleged violations of professional standards have no nexus to any error in AmTrust’s financial statements—an admission that renders the Section 10(b) claim dead on arrival. Plaintiffs also fail to plead a strong inference of scienter, because the audit manager’s adverse acts against BDO mean that his conduct may not be imputed or attributed to the firm. While Plaintiffs invent a “duty to disclose” the additional work the BDO audit team undertook once it learned that certain procedures had not been completed, there is no such duty under either the law or applicable professional standards. The claim fails. ARGUMENT I. THE SECTION 11 CLAIM FAILS Plaintiffs’ Section 11 claim fails for several independent reasons: First, Plaintiffs still stand on a single news article, which relies on unverified hearsay statements of a single anonymous source who stated, e.g., “BDO ‘tried to bury poor practices in its AmTrust audits,” was “often rushed during its audits’” and did not complete “‘some important Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 5 of 15 2 checks.’” (Opp. at 10 (quoting CSAC ¶¶ 219-20).) Plaintiffs do not identify the anonymous source, nor do they link any of the article’s statements to the audits, registration statements, or restatement at issue in the CSAC. As BDO demonstrated in its opening brief, this is fatal to Plaintiffs’ Section 11 claim. (See Mov. Br. at 20-26.)1 Knowing this, Plaintiffs suggest that the SEC Order relating to BDO’s 2013 audit somehow bolsters the credibility of the anonymous news article. (Opp. at 30 n. 27; id. at 35 n. 31.) This is easily disposed of: there is no evidence that the statements in the news article referred to the 2013 audit, and the CSAC does not allege—or incorporate—any facts to support that suggestion. (See CSAC ¶ 234.) To the contrary, as Plaintiffs’ opposition admits, AmTrust’s 2013 Form 10-K—which contains BDO’s 2013 audit opinion, the subject of the SEC Order—is not incorporated into the offering materials or the other public documents giving rise to their Section 11 claim. (Opp. at 6-7.) In short, the CSAC does not connect the SEC Order to the WSJ article or the audits at issue in this claim. Second, BDO established that Plaintiffs’ allegations are too conclusory to state a claim (see Mov. Br. at 23-25), and the Court will not have the opportunity to gauge the credibility of the unidentifiable anonymous media source. Plaintiffs respond by simply proclaiming their 1 See also, e.g., Afra v. Mecox Lane Ltd., No. 10-cv-9053, 2012 WL 697155, at *12 (S.D.N.Y. Mar. 5, 2012), (dismissing Section 11 claim where “the [confidential] witness’ factual contentions [did] not establish the untrue or misleading nature of any of the portions of the registration statement” at issue), aff’d, 504 F. App’x 14 (2d Cir. 2012); In re Flag Telecom Holdings, Ltd. Sec. Litig., 308 F. Supp. 2d 249, 261 (S.D.N.Y. 2004) (former Director’s statements that he “‘questioned . . . the ethical boundaries’” of financial transactions insufficient where “the Complaint does not identify the specific transactions to which the former director was referring”). Additionally, Plaintiffs’ argument that they may rely on hearsay statements in the news article is misplaced. See In re Crude Oil Commodity Litig., 2007 WL 1946553, at *8 (S.D.N.Y. June 28, 2007) (dismissing 10(b) claim where allegations relied solely on news and other public information, because “[t]he hearsay nature of these recitals underscores [that] they are an insufficient substitute for factual allegations” and “[p]laintiffs cannot be permitted to free ride off the press” in alleging such claims). But hearsay or not, the CSAC’s allegations are insufficient because they are generic and unverifiable. In re IndyMac Mort. – Backed Sec. Litig., 718 F. Supp. 2d 495, 511-12 (S.D.N.Y. 2010) (Kaplan, J.). Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 6 of 15 3 allegations are “particularized” (Opp. at 35), but courts routinely dismiss claims predicated on similarly conclusory and generalized allegations copied from the media. See, e.g., Rapoport v. Asia Elecs. Holding Co., 88 F. Supp. 2d 179, 184 (S.D.N.Y. 2010) (dismissing claim based “entirely” on a news article because the “complaint does not identify any portion of Chinese law that Defendants have transgressed or even articulate a basic description of how Plaintiffs allegedly committed the violation”).2 Third, Plaintiffs claim that the Court may not make credibility determinations at this stage (Opp. at 36), but they miss the point. Plaintiffs have relied on a single, uncorroborated and anonymous account reported in a single news article. Plaintiffs have no way to identify or produce the source of the statements, so this Court will not have the opportunity to gauge his/her credibility or flesh out the allegations. This is enough to warrant dismissal. Cf. Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 596 (S.D.N.Y. 2011) (“[T]he Court cannot credit CW4’s allegations as CW4 is not described in sufficient detail to convince the Court that he would possess the information alleged.”). * * * Without the unverified hearsay statements of the news article, Plaintiffs are left to mischaracterize the text of the opinions offered by BDO, arguing that the mere fact of AmTrust’s restatement renders those opinions false or misleading. (See Opp. at 28, 32 n. 29.) This is insufficient to state a claim under the controlling law of Omnicare and Querub. 2 The cases Plaintiffs cite are distinguishable and unavailing. See Montoya v. Mamma.Com Inc., 2006 WL 770573, at *4 (S.D.N.Y. Mar. 28, 2006) (dismissing some news statements as “unduly vague” while crediting others as “sufficiently specific” because they expressly linked defendant’s wrongful conduct to the specific transaction at issue); In re OSG Sec. Litig., 12 F. Supp. 3d 619, 622 (S.D.N.Y. 2014) (plaintiffs were allowed to rely on another pleading because plaintiffs “provide[d] a statement of facts” independently verifying the foundation of their allegations). Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 7 of 15 4 First, BDO established that its audit opinions contained three statements of opinion—one relating to AmTrust’s financial statements, one relating to AmTrust’s internal controls, and one relating to BDO’s performance of its audit in accordance with PCAOB standards. Plaintiffs do not contest that BDO’s opinion as to GAAP compliance and internal controls are statements of opinion subject to the Omnicare standard, but argue that BDO’s statement regarding its compliance with PCAOB standards is a “fact” because it was not “couch[ed] . . . as an opinion.” (Opp. at 31.) This argument, which Plaintiffs also made in response to BDO’s earlier motion to dismiss, is a complete mischaracterization. The paragraph of the audit opinion describing compliance with PCAOB standards plainly states, “[w]e believe that our audits provide a reasonable basis for our opinion.” CSAC ¶¶ 203-204 (emphasis added).3 Second, BDO has shown that the mere fact of a restatement by a company subsequent to BDO’s service as auditor is insufficient as a matter of law to establish Section 11 liability. (Mov. Br. at 17-18.) Liability by hindsight analysis is legally insufficient to state a Section 11 claim. See, e.g., Scott v. Gen. Motors. Co., 46 F. Supp. 3d 387, 396 (S.D.N.Y. 2014), aff’d, 605 F. App’x 52 (2d Cir. 2015). Importantly, Plaintiffs do not even claim that BDO knew its audit opinions to be false at the time it made them—nor can they, since their disclaimer of fraud and scienter (CSAC ¶ 234) forecloses allegations of subjective falsity. Omnicare, Inc. v. Laborers Dist. Council Const. 3 As Plaintiffs acknowledge, this Court has held that statements in an audit opinion regarding GAAS compliance are “opinion[s] that the audit complied with these broadly stated standards[.]” (Mov. Br. at 21 (quoting In re Lehman Bros. Sec. & Erisa Litig., 799 F. Supp. 2d 258, 300-1 (S.D.N.Y. 2011) (Kaplan, J.).) Relying on two out-of-jurisdiction cases, Plaintiffs argue that conclusory allegations about a “failure to conduct ‘important checks’” transforms BDO’s statement of opinion into a statement of fact. (Opp. at 32 (citing CSAC ¶¶ 13, 219, 220).) These allegations are derived entirely from the anonymous statements made in the WSJ news article, which, for the reasons discussed above and in BDO’s moving brief, are entirely ineffectual. Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 8 of 15 5 Indus. Pension Fund, 135 S. Ct. 1318, 1327 (2015). Rather, as before, Plaintiffs argue only that BDO made “omissions of material fact . . . and untrue embedded facts.” (Opp. at 29, 31 n. 28.) With respect to “embedded facts,” as BDO’s opening brief explained, this Court has correctly suggested that the holding in Petrobras was inconsistent with Omnicare because it would make “the auditor the guarantor of the accuracy of every single figure” in an issuer’s financial statements. (Mov. Br. at 19 n. 5 (citing ECF No. 118 at 45).) Indeed, since Petrobras, the Second Circuit has clarified that an auditor’s reliance on financial statements does not transform its audit opinion into a statement of fact, even when the underlying financials are misstated. (See Mov. Br. at 19 (citing Querub v. Moore Stephens Hong Kong, 649 Fed. App’x. 55 (2d Cir. 2016) (Summary Order).) Plaintiffs cannot distinguish Querub by claiming that the case turned “on a factual evaluation of the conflicting testimony of expert witnesses.” (Opp. at 31 n. 28.) Querub did not turn on this distinction. The trial court dismissed the 10b-5 claim after striking plaintiffs’ expert. See Querub, 649 F. App’x at 57-58. The Second Circuit dismissed the Section 11 claim because “plaintiffs-appellants failed to proffer any evidence that [the auditor] issued subjectively false opinions.” Id at 57. The Second Circuit affirmed dismissal on these grounds, holding that “[a]udit reports” involved “considerable subjective judgment” and were “statements of opinion subject to the Omnicare standard for Section 11 claims.” Id at 58. This was so even though the underlying financial statements contained a material misstatement of fact: “Puda no longer owned Shanxi Coal, and yet claimed it did.” In re Puda Coal Sec. Litig., 30 F. Supp. 3d 230, 258 (S.D.N.Y. 2014), aff’d sub nom. Querub, 649 F. App’x 55 (2d Cir. 2016). Third, BDO showed that Plaintiffs’ allegations are too generalized and conclusory to make out a material omission claim. (Mov. Br. at 23-25.) Plaintiffs’ generic allegations, again based entirely on the WSJ article (see Opp. at 30 (citing CSAC ¶¶ 219-20)), (1) do not state what practices Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 9 of 15 6 were buried, how, when, or by whom; (2) do not state which checks were not performed or how the audits were impacted; (3) do not state which procedures were incomplete; and (4) do not connect the allegations to either of the audits at issue. (Id. at ¶¶ 219-227.) These glaring deficiencies are fatal and mandate dismissal. Caldwell v. Berlind, 543 F. App’x 37, 41 (2d Cir. 2013); Pub Employees’ Ret. Sys. Of Mississippi v. Merrill Lynch & Co., 714 F. Supp. 2d 475, 483 (S.D.N.Y. 2010). II. THE SECTION 10(b) CLAIM FAILS BDO’s opening brief demonstrated that the SEC order against two former BDO partners (Bertuglia and Green) and one former employee (Nagdimov) does not support a Section 10(b) claim, because (1) there is no connection between the alleged misstatement and AmTrust’s financial statements; (2) Plaintiffs otherwise failed to satisfy Omnicare’s requirements for alleging an actionable misstatement; and (3) the employee’s knowledge and conduct, which he affirmatively concealed from those responsible for the audit opinion, does not give rise to a strong inference of BDO’s scienter. None of the arguments in Plaintiffs’ opposition save their claim. Plaintiffs fail to allege a material misstatement. Plaintiffs admit that their “§10(b) claim against BDO relates specifically to its misrepresentations about its own conduct – its purported performance of the AmTrust audits in compliance with PCAOB standards, and its possession of a reasonable basis for its opinions – irrespective of any connection between those misrepresentations and AmTrust’s later restated financial results.” (Opp. at 70 (emphasis added).) This concession, which is consistent with Plaintiffs’ failure to allege any such connection to AmTrust’s financial statements (see Mov. Br. at 28), is fatal to their claim. Plaintiffs do not, and cannot, cite any case permitting a claim to proceed alleging deficiencies in auditing procedures without an accompanying financial statement error. Alleged violations of auditing standards, standing alone, are insufficient to state a claim against an auditor. Anwar v. Fairfield Greenwich Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 10 of 15 7 Ltd., 728 F. Supp. 2d 372, 450 (S.D.N.Y 2010). And an alleged misstatement that is not connected to an error in the audited company’s financial statements is by definition not “material,” and not actionable.4 Additionally, Plaintiffs mistakenly conclude that they are not required to satisfy Omnicare’s requirements for pleading false statements of opinion because the SEC Order alleges that BDO failed to complete required audit procedures and obtain sufficient audit evidence. (Opp. at 65-68.) As discussed above, this is not the law. (See Section I, supra.) Under Omnicare, Plaintiffs must allege that BDO subjectively disbelieved—at the time of the audit opinion—that its audit had not complied with PCAOB standards or that BDO omitted material facts. Plaintiffs have failed to do so. While selectively citing to the SEC Order, Plaintiffs ignore its findings that “Nagdimov assured Bertuglia and Green that all necessary audit work for the Consolidated Audit was complete” (SEC Order ¶ 23),5 and that Bertuglia and Green “did not know the audit team failed to complete necessary audit procedures and obtain sufficient audit evidence, to support the report.” (SEC Order ¶ 4 (emphasis added).) This undercuts any suggestion that BDO’s 4 See In re Ramp Corp. Sec. Litig., 2006 WL 2037913, at *8 (S.D.N.Y. July 21, 2006) (an auditor’s “compliance with GAAS is relevant only insofar as it provides the investing public with a level of assurance that the financial statements accurately reflect the company's financial position when measured against [GAAP].”); New Jersey and its Div. of Inv. v. Sprint Corp., 314 F. Supp. 2d 1119, 1147 (D. Kan. 2004) (“[E]ven assuming that [the auditor’s] statement that it conducted the audits in accordance with GAAS was untrue … the court would still grant [the auditor's] motion to dismiss the section 10(b) and section 11 claims on the grounds that such a misstatement is simply not material.”); In re Metropolitan Sec. Litig., 532 F. Supp. 2d 1260, 1294 (E.D. Wash. 2007) (“[A] false certification of GAAS compliance is only material under Section 11 to the extent that the misrepresentation renders the financial statements inaccurate.”). 5 Bertuglia’s reliance on Nagdimov’s representations is consistent with PCAOB auditing standards. AS 10, Supervision of the Audit Engagement, permits an engagement partner to “seek assistance from appropriate engagement team members in fulfilling his or her responsibilities pursuant to this standard.” See also In re Oprins, Admin File No. 3-13797, 210 WL 5376531 (ALJ Dec. 28, 2010) (dismissing charges against auditor who was misinformed by staff that a procedure was complete.) Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 11 of 15 8 opinions “falsely describe[d] [the speaker’s] state of mind,” or “omit material facts,” 135 S. Ct. at 1326-27, 1332, because Bertuglia—the engagement partner—was the only BDO person vested with authority to sign the audit opinion on behalf of BDO. (See Mov. Br. at 27-28.) BDO may not be charged with Nagdimov’s knowledge or belief, where Nagdimov concealed his conduct from Bertuglia and the firm. (See p. 9, infra.) Plaintiffs fail to allege scienter. For similar reasons, because Nagdimov affirmatively misled Bertuglia and Green, they (and BDO) did not know that the audit team had failed to conduct required procedures. Consequently, there can be no inference that BDO “did not actually hold the opinion [BDO] expressed or that it knew that it had no reasonable basis for holding it.” Dobina v. Weatherford Int’l Ltd., 909 F. Supp. 2d 228, 255 (S.D.N.Y. 2012) (quoting Lehman I, 799 F. Supp. 2d at 303).6 At most, Bertuglia and Green oversaw a “shoddy audit,” which is not enough to support a strong inference of scienter. See In re DNTW Chartered Accountants Sec. Litig., 172 F. Supp. 3d 675, 691 (S.D.N.Y. 2016) (holding under similar circumstances that an inference of scienter was less plausible than that the auditor “was itself fooled, or that it simply performed shoddy, negligent audits.”). As Plaintiffs acknowledge, the SEC found that Bertuglia and Green 6 The cases cited by Plaintiffs in opposition are inapposite. In Deloitte Touche Tohmatsu CPA, Ltd., 96 F. Supp. 3d 325 (S.D.N.Y. 2015), Judge Ramos held that allegations concerning efforts by an auditor to “cover up fraud” by the company were insufficient to plead scienter because Deloitte’s refusal to cooperate with plaintiffs, which constituted cautiousness regarding the litigation, “cannot be stretched to imply any effort to conceal Deloitte’s involvement with the [] fraud.” Similarly, the engagement team’s failure to document post-issuance procedures under AU § 390 in non-public work papers cannot be stretched to imply any effort to conceal misconduct from investors. Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 12 of 15 9 were merely negligent. (Opp. at 71-73.)7 Negligence is not “conscious misbehavior or recklessness,” and does not create a strong inference of scienter. DNTW, 172 F. Supp. at 690-91. Plaintiff argues in the alternative that Nagdimov’s conduct is imputed to BDO and establishes corporate scienter (Opp. at 73-76), but this is not the law. Plaintiffs’ allegations and the substance of the SEC Order make clear that Nagdimov acted adversely to BDO by concealing the omitted procedures from Bertuglia and Green in an attempt to cover up his own misconduct. (SEC Order ¶ 23.) Courts in this District have refused similar allegations. In Barrett v. PJT Partners Inc., 2017 WL 3995606 (S.D.N.Y. Sept. 8, 2017), Judge Caproni dismissed a Section 10(b) claim where—like here—an employee, who made no statements to the market, concealed his fraud from his employer. Id. at *8. Despite the employee’s intentional fraud, the plaintiff in Barrett argued that the employee’s knowledge should be imputed to the company because the fraud committed by the employee “operated as a fraud on the market because omitting those facts caused [defendant] to make misleading statements to the market.” Id. The court, however, held that extending imputation “to instances in which an agent makes no statements to the market directly would make the adverse-interest exception a dead letter in securities cases involving fraud against the company because an employee’s failure to disclose his own wrongdoing will almost always indirectly affect the company’s public disclosures.” Id.8 7 Specifically, the SEC found that Bertuglia’s and Green’s conduct did not support intentional or reckless misconduct, but only the lowest actionable level of negligent misconduct under SEC rules, “repeated instances of unreasonable conduct.” See Exchange Act Section 4C(b)(1)-(2). 8 Plaintiffs assert that because Nagdimov held the title “Senior Manager” on the AmTrust audits, he was a “management level employee” and his scienter may be imputed to BDO. (Opp. at 74 (citing In re Moody's Corp. Sec. Litig., 599 F. Supp. 2d 493, 515-16 (S.D.N.Y. 2009); Patel, 2016 WL 1629325, at *12, *14 (S.D.N.Y. Apr. 21, 2016)). Both cases cited by Plaintiffs are readily distinguishable. Patel involved intentional misconduct by four (not one) individuals who “engaged in intentional wrongdoing vis-à-vis the accounting misstatements.” 2016 WL 1629325 at *14. Moody’s likewise involved “specific statements” by “various top officials.” 599 F. Supp. 2d at 516. Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 13 of 15 10 Finally, Plaintiffs’ allegations concerning BDO’s conduct following the issuance of the audit report also fail to establish scienter. Plaintiffs make much out of the fact that BDO took one month to complete all open audit procedures,9 but do not contest that BDO correctly applied AU § 390, the applicable standard where audit procedures had not been completed, and that those procedures did not indicate any misstatement in the financial statements. Plaintiffs claim that BDO violated a “duty to correct” by not withdrawing its opinion, but do not address—because it is incontestable—the fact that AU § 390 does not require an auditor to withdraw his opinion or notify the public that audit procedures were omitted. (Opp. at 77-78.) Indeed, the creation of a disclosure duty in these circumstances would have dangerous consequences. PCAOB statistics make clear that even if BDO’s audit was deficient, it would not be unusual: audit deficiencies relating to insufficient audit evidence were identified in 43% of the audits inspected in 2013.10 Certainly, no case law or auditing standard has required disclosure of the remediation of those deficiencies, absent some other financial statement impact—which, Plaintiffs concede, is not present here. Instead, Plaintiffs simply mischaracterize AU § 390, arguing without support that it applies only where a “limited number” of auditing procedures are inadvertently omitted. Id. The standard says no such thing. To the contrary, AU § 390 explicitly states that it applies where “one or more” auditing procedures were omitted. Consequently, under AU § 390, BDO was not required to withdraw its opinion or notify the public that audit procedures were omitted.11 9 Plaintiffs repeatedly state that Bertuglia and Green failed to review thousands of work papers; however, this assertion mischaracterizes the SEC Order and misconstrues the relevant auditing standards. The relevant standards do not require engagement and engagement quality review partners to review a specific number of work papers, but rather require that they use professional judgment to determine an appropriate level of review. See AS Nos. 7 and 10. 10 Acuitas, Inc.’s Survey of Fair Value Audit Deficiencies, available at http://www.acuitasinc.com /documents/2017 _PCAOB_Fair_Value_Audit_Deficiencies_Survey-FINAL.pdf. 11 The SEC’s finding that Bertuglia and Green failed to properly document that work was performed after the issuance of the audit opinion and their assessment under AU § 390 is Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 14 of 15 11 CONCLUSION For all of the foregoing reasons and those stated in BDO’s Motion to Dismiss, BDO respectfully requests that the Court dismiss Plaintiffs’ Consolidated Second Amended Complaint with prejudice. Dated: New York, New York January 23, 2018 Respectfully submitted, MCDERMOTT WILL & EMERY LLP By:/s/ Timothy E. Hoeffner Timothy E. Hoeffner thoeffner@mwe.com Jason D. Gerstein jgerstein@mwe.com Gary D. Adamson gadamson@mwe.com 340 Madison Avenue New York, New York 10173 Tel. (212) 547-5400 Attorneys for Defendant BDO USA, LLP insufficient to establish scienter. (Opp. at 69.) Audit documentation is never disclosed to the investing public. See AS 3.3. In any event, Plaintiffs have conceded that their claim is made “irrespective” of any effect the alleged misconduct had on AmTrust’s financial statements. (Opp. at 70-71.) Therefore, whether BDO disclosed that it performed post-opinion procedures pursuant to AU § 390 makes no difference and has no bearing on Plaintiffs’ flawed claim. Case 1:17-cv-01545-LAK Document 155 Filed 01/23/19 Page 15 of 15