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Description Grant Thornton re-staffed the Winstar engagement team with a partner and senior manager before the 1999 audit but neither professional had ever audited a company in the telecommunication industry before.  Do you think that the auditors were adequately prepared for this engagement (use AICPA Attestation Standards and prior year documentation requirements to support your answers)? Is it problematic that the auditors weren’t experts in the telecommunication industry?  Is it inappropriate for auditors to be reassigned?  What are the requirements under SOX (Sarbanes-Oxley Act of 2002) to reassign auditors? Support your answer. (LO1, LO4) 2 attachmentsSlide 1 of 2attachment_1attachment_1attachment_2attachment_2.slider-slide > img { width: 100%; display: block; } .slider-slide > img:focus { margin: auto; } Unformatted Attachment Preview 148 692 FEDERAL REPORTER, 3d SERIES at 1247. Therefore, we hold that the district court erred in ordering appellant to forfeit funds that were never possessed or controlled by himself or others acting in concert with him, and remand to determine the proper forfeiture amount.4 CONCLUSION We have reviewed appellant’s other arguments and conclude that they are without merit. For the foregoing reasons, we affirm appellant’s conviction, but vacate the order of forfeiture and remand for further proceedings in accordance with this opinion. , Sanford GOULD, Individually, and on behalf of all others similarly situated, Yan Sun, Bulldog Capital Management LP, Kevin Sherman, Max C. Michaels, Robin Kwalbrun, Eleanore Reznick, Frank Zappariello, Theodore S. Gutowicz, David Rich, Richard Sulentic, Andres Rios, Plaintiffs, and Fund Insurance Company, The Northern Trust Company as trustee of the Fireman’s Fund Insurance Company Master Retirement Trust and as trustee of the Fireman’s Fund Insurance Company Master Retirement Savings Trust, Allianz Insurance Company, Allianz Life Insurance Company of North America, Allianz Asset Management North American Equity, US Allianz Diversified Annuity, US Allianz Growth Annuity, US Allianz Variable Insurance Products Trust, AZOA Growth Fund, AZOA Diversified Assets Fund, Allianz of America, Inc., Allianz Cornhill Insurance PLC, Cornhill Pension North American Equity Fund, Cornhill Life Insurance, Merchant Investors Assurance Company Limited, and Cornhill Life North American Equity Fund, Plaintiffs–Appellants, v. WINSTAR COMMUNICATIONS, INC., William J. Rouhana, Jr., Richard J. Uhl, Nathan Kantor, Robert K. McGuire, Defendants, and Grant Thornton LLP, Defendant– Appellee.* BIM Intermobiliare SGR, a whollyowned subsidiary of Banca Intermobiliare di Investimenti E Gestioni SpA, Robert Ahearn, DRYE Custom Pallets, Jefferson Insurance Company of New York, Allianz Life Insurance Company of New York, International Reinsurance Company, S.A., Life USA, AGF Amérique, AGF Hospitaliers, AGF Asset Management, Fireman’s 4. To what extent appellant’s interest in salaries, bonuses, dividends, or enhanced value of equity in the Fund can be said to be money ‘‘acquired’’ by the defendant ‘‘through the Docket Nos. 10–4028–cv(L), 10–4280–cv(CON). United States Court of Appeals, Second Circuit. Argued: Nov. 2, 2011. Decided: July 19, 2012. Amended: Aug. 29, 2012. Background: Shareholders filed putative class action under federal securities laws illegal transactions resulting in the forfeiture,’’ 18 U.S.C. § 981(a)(2)(B), we leave to the district court to decide on remand in a manner not inconsistent with this opinion. GOULD v. WINSTAR COMMUNICATIONS, INC. Cite as 692 F.3d 148 (2nd Cir. 2012) against corporation, its officers and directors, and auditor. The United States District Court for the Southern District of New York, George B. Daniels, J., 2010 WL 3910322, granted summary judgment for defendants. Plaintiffs appealed. Holdings: The Court of Appeals, Lohier, Circuit Judge, held that: (1) factual issue existed as to whether auditor had acted with scienter in making alleged misrepresentations in its audit opinion letter; (2) factual issue existed as to whether shareholders had purchased corporation’s stock in actual reliance on representations in audit opinion letter; and (3) factual issue existed as to whether causal link existed between corporation’s alleged misconduct and economic harm ultimately suffered by shareholders. Vacated and remanded. Opinion, 686 F.3d 108, amended and superseded. 1. Securities Regulation O60.18 To sustain a claim under Section 10(b) of the Exchange Act and Rule 10b–5, plaintiffs must show: (1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance by the plaintiffs; (5) economic loss; and (6) loss causation. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5. * The Clerk of the Court is respectfully directed to amend the official caption as set forth 149 2. Securities Regulation O60.45(1) Federal securities fraud plaintiffs may satisfy the scienter requirement by producing evidence of conscious misbehavior or recklessness; scienter based on conscious misbehavior, in turn, requires a showing of deliberate illegal behavior, which is a standard met when it is clear that a scheme, viewed broadly, is necessarily going to injure. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5. 3. Securities Regulation O60.45(1) Under 10b–5, scienter based on recklessness may be demonstrated where a defendant has engaged in conduct that was highly unreasonable, representing an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it; recklessness may be established where a defendant failed to review or check information that it had a duty to monitor, or ignored obvious signs of fraud. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b– 5. 4. Federal Civil Procedure O2511 Genuine issue of material fact existed as to whether auditor had acted with scienter in making alleged misrepresentations in its audit opinion letter, precluding summary judgment on shareholders’ claims against auditor alleging fraud in violation above. 150 692 FEDERAL REPORTER, 3d SERIES of federal securities law. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5; Fed.Rules Civ.Proc.Rule 56(a), 28 U.S.C.A. 5. Securities Regulation O60.30 The number of hours spent on an audit cannot, standing alone, immunize an accountant from charges that it has violated the securities laws. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5. 6. Federal Civil Procedure O2511 Genuine issue of material fact existed as to whether shareholders had purchased corporation’s stock in actual reliance on representations in audit opinion letter, precluding summary judgment on shareholders’ claims against auditor alleging fraud in violation of federal securities law. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5; Fed.Rules Civ.Proc.Rule 56(a), 28 U.S.C.A. 7. Federal Civil Procedure O2511 Genuine issue of material fact existed as to whether causal link existed between corporation’s alleged misconduct and economic harm ultimately suffered by shareholders, precluding summary judgment on shareholders’ claims against auditor alleging fraud in violation of federal securities law. Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 C.F.R. § 240.10b–5; Fed.Rules Civ.Proc.Rule 56(a), 28 U.S.C.A. Life USA, AGF Amérique, AGF Hospitaliers, Fireman’s Fund Insurance Company, The Northern Trust Company as trustee of the Fireman’s Fund Insurance Company Master Retirement Trust and as trustee of the Fireman’s Fund Insurance Company Master Retirement Savings Trust, Allianz Insurance Company, Allianz Life Insurance Company of North America, Allianz Asset Management North American Equity, US Allianz Diversified Annuity, US Allianz Growth Annuity, US Allianz Variable Insurance Products Trust, AZOA Growth Fund, AZOA Diversified Assets Fund, Allianz of America, Inc., AGF Asset Management, Allianz Cornhill Insurance PLC, Cornhill Pension North American Equity Fund, Cornhill Life Insurance, Merchant Investors Assurance Company Ltd., and Cornhill Life North American Equity Fund. Patrick L. Rocco (Lee S. Shalov, Susan Marlene Davies, on the brief), Shalov Stone Bonner & Rocco LLP, New York, NY, for Plaintiffs–Appellants BIM Intermobiliare SGR, a wholly-owned subsidiary of Banca Intermobiliare di Investimenti E Gestioni SpA, Robert Ahearn, and DRYE Custom Pallets. James L. Bernard, Stroock & Stroock & Lavan LLP, New York, N.Y. (Larry K. Elliot, Cohen & Grigsby P.C., Pittsburgh, PA, on the brief), for Defendant–Appellee Grant Thornton LLP. Before: SACK, HALL, and LOHIER, Circuit Judges. LOHIER, Circuit Judge: Jonathan K. Levine, Girard Gibbs LLP, New York, N.Y. (Daniel C. Girard, Girard Gibbs LLP, San Francisco, CA, on the brief), for Plaintiffs–Appellants Jefferson Insurance Company of New York, Allianz Life Insurance Company of New York, International Reinsurance Company, S.A., Plaintiffs–Appellants appeal from a September 2010 judgment of the United States District Court for the Southern District of New York (Daniels, J.) granting the summary judgment motion of Defendant–Appellee Grant Thornton LLP (‘‘GT’’) and dismissing the Plaintiffs’ claims GOULD v. WINSTAR COMMUNICATIONS, INC. Cite as 692 F.3d 148 (2nd Cir. 2012) arising from GT’s audit of the financial statements of its client, Winstar Communications, Inc. (‘‘Winstar’’). The Plaintiffs claimed that GT committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the ‘‘Act’’ or the ‘‘Exchange Act’’), and 17 C.F.R. § 240.10b–5, and made false and misleading statements in an audit opinion letter in violation of Section 18 of the Act, 15 U.S.C. § 78r. We conclude that genuine issues of material fact exist as to each of these claims. We therefore VACATE the District Court’s grant of summary judgment and REMAND for further proceedings. BACKGROUND 1. Facts Reviewing the District Court’s grant of summary judgment in favor of GT, ‘‘we construe the evidence in the light most favorable to the [Plaintiffs], drawing all reasonable inferences and resolving all ambiguities in [their] favor.’’ 1 In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 504 (2d Cir.2010) (quotation marks omitted). Winstar was a broadband communications company whose core business was to provide wireless Internet connectivity to various businesses. GT served as Winstar’s independent auditor from 1994 until Winstar filed for bankruptcy in April 2001, and GT regarded Winstar as ‘‘one of [its] largest and most important clients.’’ 2 1. The Plaintiffs fall into two groups. BIM Intermobiliare SGR and other plaintiffs (collectively, the ‘‘Lead Plaintiffs’’) assert claims under Section 10(b) in a putative class action on behalf of investors who purchased Winstar common stock and bonds between March 10, 2000 and April 2, 2001. Jefferson Insurance Company of New York and twenty-four related entities (collectively, the ‘‘Jefferson Plaintiffs’’) purchased Winstar common stock from December 1998 to at least February 2001 and 151 In 1999, however, the relationship deteriorated. Winstar warned GT that it would likely terminate the relationship if GT’s performance on unrelated international tax planning and other accounting matters proved unsatisfactory. In March 1999 at least one member of Winstar’s board of directors openly urged during a board meeting that the GT partner overseeing the audit of Winstar be removed from the Winstar account. GT eventually re-staffed the Winstar account so that the 1999 audit was managed by a partner, Gary Goldman, and a senior manager, Patricia Cummings, neither of whom had previously reviewed or audited the financial records of a telecommunications company. As relevant to this appeal, GT’s audit for 1999 included several ‘‘large account’’ transactions that Winstar consummated in an attempt to conceal a decrease in revenue associated with Winstar’s core business. Most of the large account transactions involved Lucent Technologies, Inc. (‘‘Lucent’’), Winstar’s strategic partner, and all of them were consummated at the end of Winstar’s fiscal quarters in 1999. Together, the transactions accounted for $114.5 million in revenue, or approximately 26 percent of Winstar’s reported 1999 operating revenues and 32 percent of its ‘‘core’’ revenues that year. At the time, GT considered these transactions to be ‘‘red flags,’’ warranting the accounting firm’s ‘‘heightened scrutiny.’’ 3 However, bring claims under both Sections 10(b) and 18. 2. Most of the revenue that GT derived from Winstar was from consulting rather than auditing. In 1999, for example, GT earned $275,000 for its auditing work for Winstar, compared with over $2 million in consulting fees. 3. The Public Company Accounting Oversight Board has recognized that one risk factor 152 692 FEDERAL REPORTER, 3d SERIES GT ultimately approved Winstar’s recognition of revenue in connection with each of these transactions. We discuss the evidence relating to each category of transaction in turn. A. Questionable Sales The first category of questionable transactions involved a series of six end-ofquarter and end-of-year transactions, primarily reported as equipment sales, for which there was little evidence that any goods or services were ordered and delivered. For example, for the third quarter of 1999 Winstar recognized $15 million in revenue for the sale of Lucent equipment to Anixter Brothers, Inc. (‘‘Anixter’’), a wire and cable distributor. There were several unusual aspects of this sale. First, Anixter ordinarily purchased equipment directly from Lucent, not Winstar. Second, equipment sales were not part of Winstar’s core business of creating and operating wireless networks. Third, during GT’s audit Cummings noted that the Anixter transaction was ‘‘apparently’’ completed on September 30, 1999, the last day of Winstar’s fiscal quarter, but GT’s work papers included no documents reflecting the sale’s completion beyond a purchase order from Winstar to Lucent and an invoice from Lucent to Winstar. Moreover, neither the purchase order nor the invoice indicating potential fraud would be ‘‘[s]ignificant, unusual, or highly complex transactions, especially those close to year end, that pose difficult ‘substance over form’ questions.’’ Joint App. at 3619 (quoting Am. Inst. of Certified Pub. Accountants, Statement on Accounting Standards (‘‘AU’’) § 316.17 (alterations in original)). Similarly, GT acknowledged that large, end-of-quarter transactions would warrant heightened scrutiny during the audit process. 4. As stated by the Securities and Exchange Commission (‘‘SEC’’), ‘‘delivery generally is not considered to have occurred unless the included an itemized list of the goods sold or indicated the shipping terms, even though the items were to be shipped on September 30, 1999, and delivered on October 4, 1999.4 Absent too was any document evidencing Anixter’s agreement to purchase the items. Lastly, not a single employee of Lucent, Winstar, or Anixter who was asked about the equipment sale could recall it. Five other transactions that were not part of Winstar’s core business were consummated at the end of one of Winstar’s fiscal quarters and were barely documented. Winstar nevertheless recognized a total of $49.7 million in revenue associated with these five transactions. First, Winstar recognized $5 million in revenue in the first quarter of 1999 for a ‘‘feasibility study’’ that Winstar was scheduled to conduct for Lucent, but which had not been delivered by at least 2000. Second, Winstar recognized $21.1 million in revenue in the first and second quarters of 1999 in connection with the sale of Lucent equipment to Williams Communications, Inc. (‘‘Williams’’). The equipment was shipped by Lucent, not Winstar, on the last business day of the first and second quarters (March 31, 1999 and June 30, 1999, respectively), with no written agreement. Third, Winstar recognized $9.1 million in revenue in the second quarter of 1999 in connection with the sale of Lucent equipment to Vocustomer has taken title and assumed the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. Typically this occurs when a product is delivered to the customer’s delivery site (if the terms of the sale are ‘FOB destination’) or when a product is shipped to the customer (if the terms are ‘FOB shipping point’).’’ SEC Staff Accounting Bulletin No. 101: Revenue Recognition in Financial Statements, 17 C.F.R. Part 211, at 6 (Dec. 3, 1999) (‘‘SAB 101’’), available at http://www.sec.gov/ interps/account/sab101.htm (last visited June 28, 2012). GOULD v. WINSTAR COMMUNICATIONS, INC. Cite as 692 F.3d 148 (2nd Cir. 2012) Call Communications Corporation (‘‘VoCall’’) on June 30, 1999. Although the sale was referenced in a series of non-numbered purchase orders, it was not referenced in any executed, final agreement or shipping document. Fourth, Winstar recognized $4.5 million in revenue in the third quarter of 1999 in connection with the sale of unspecified ‘‘WinStar Equipment’’ to Cignal Global Communications (‘‘Cignal’’), which was contracted for on September 30, 1999, the last day of that quarter. However, GT was unable to produce a document evidencing that the equipment had been shipped to Cignal during that quarter. Fifth, Winstar recognized $10 million in revenue in the fourth quarter of 1999 in connection with the sale of wireless radio equipment (‘‘radios’’) to Lucent under an agreement dated December 30, 1999. GT endorsed the recognition of revenue even though its work papers included shipping documents with conflicting dates, no document specified the goods purchased, and Lucent, not Winstar, was in the business of manufacturing and selling radios. The 5. ‘‘GAAP [are] those principles recognized by the accounting profession as the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. [They are] established by the American Institute of Certified Public AccountantsTTTT’’ In re Global Crossing, Ltd. Sec. Litig., 322 F.Supp.2d 319, 325 n. 5 (S.D.N.Y.2004) (quotation marks and citations omitted). ‘‘[The] single unified purpose [of GAAP] TTT [is] to increase investor confidence by ensuring transparency and accuracy in financial reporting.’’ Id. at 339. 6. The SEC has elaborated upon the delivery requirement as follows: [D]elivery generally is not considered to have occurred unless the product has been delivered to the customer’s place of business or another site specified by the customerTTTT TTT A seller should substantially complete or fulfill the terms specified in the arrangement in order for delivery or performance to have occurred. When applying the substantially 153 same agreement also involved a $2 million ‘‘promotional credit’’ purchased by Lucent for services that had not yet been rendered by Winstar. Although GT specifically advised Winstar that recognizing and recording the amount of the credit as revenue was improper and in violation of generally accepted accounting principles (‘‘GAAP’’),5 Winstar nevertheless recognized the full $2 million in revenue. Each of these transactions appears to have violated the provisions of Staff Accounting Bulletin No. 101 (‘‘SAB 101’’), issued by the Securities and Exchange Commission (‘‘SEC’’), which states that four conditions must be satisfied before revenue can be recognized: (1) ‘‘Persuasive evidence of an arrangement [for the sale of goods or services] exists,’’ (2) ‘‘Delivery has occurred or services have been rendered,’’ (3) ‘‘The seller’s price to the buyer is fixed or determinable,’’ and (4) ‘‘Collectibility is reasonably assured.’’ SAB 101 at 3.6 complete notion, the staff believes that only inconsequential or perfunctory actions may remain incomplete such that the failure to complete the actions would not result in the customer receiving a refund or rejecting the delivered products or services performed to date. SAB 101 at 6 (footnotes omitted). In addition, revenue may be recognized in the absence of delivery only if a transaction meets seven requirements, including (1) that ‘‘[t]he risks of ownership TTT passed to the buyer’’; (2) that ‘‘the buyer, not the seller TTT request TTT that the transaction be on a bill and hold basis,’’ based on a ‘‘substantial business purpose’’ of the buyer; and (3) that the seller not retain ‘‘any specific performance obligations such that the earning process is not complete.’’ Id. (footnotes omitted). In its Form 10–K, Winstar stated, ‘‘Revenues from equipment sales are recognized when the equipment is delivered to the customer. Professional services revenues are recognized under the percentage of completion method.’’ Joint App. at 538. 154 692 FEDERAL REPORTER, 3d SERIES GT requested that Winstar’s counterparties provide additional documentary evidence of the relevant sales underlying each questionable transaction. By doing so, consistent with SAB 101, GT sought to obtain independent support for Winstar’s recognition of revenue for each transaction—in other words, support from documents that were not generated by Winstar itself. As of February 10, 2000, GT still had not received responsive documents from four of these customers. Nonetheless, it issued an audit opinion letter opining that Winstar’s 1999 financial statements accurately reflected its financial condition and complied with GAAP. B. Bifurcated Accounting In connection with at least three other transactions, Winstar employed a bifurcated accounting scheme that GT ultimately approved prior to its audit of Winstar’s financial statements. Two of these transactions involved leasing or subleasing fiber optic network capacity in units called indefeasible rights of use (‘‘IRUs’’). Winstar accounted for these IRUs using a dubious bifurcated accounting method, pursuant to which it recognized as much as 94 percent of the revenue from the leases upon execution of the lease, reflecting the cost of optical equipment (‘‘optronics’’) that transmitted data over fiber optic cable (‘‘cable’’ or ‘‘fiber’’). Winstar then would recognize the balance of the revenue in later quarters, as payments were received over the span of the lease, representing the customer’s actual use of the network. In other words, Winstar split the value of the leases so that the revenue associated with the optronics was reported separately from revenue associated with the cable. By employing this accounting method, Winstar was able to recognize $30.9 million in revenue up front in 1999. During discovery, a forensic accountant retained by the Plaintiffs opined that the rules of the Financial Accounting Standards Board and interpretive rules of the SEC prohibited the division of leases for fiber optic networks because both the cable and the optronics were essential to the network. Winstar conceded that the fiber and the optronics were not separable, and that no other company previously had employed this bifurcated method in accounting for IRUs. Indeed, Winstar specifically advised GT that the bifurcated approach had been criticized by the accounting firm Deloitte & Touche LLP (‘‘Deloitte’’). GT was in any event aware that revenue associated with an IRU contract could be recognized only if the leased circuit was operational, or ‘‘lit,’’ in the language of the fiber optics field. In the third and fourth quarters of 1999, however, Winstar had failed to ‘‘light’’ many of its IRU circuits, a fact that should have precluded the company from recognizing revenue associated with those IRUs. In the midst of GT’s audit, Winstar sent form letters dated December 30, 1999, and December 31, 1999, to the counterparties to the two IRU transactions, Wam!Net, Inc. and Cignal, respectively, to confirm that the IRU circuits had been ‘‘deliver[ed]’’ and ‘‘accept[ed].’’ A representative of Cignal signed a form letter confirming delivery and acceptance of the circuits. By contrast, Wam!Net’s Senior Vice President of Finance responded to a letter from Winstar as follows: ‘‘To our knowledge [the circuits] are not currently in place.’’ A subsequent amended letter from a different Wam!Net employee, which does not appear in the record but which Cummings referenced in an email, purported to ‘‘accept’’ the circuits but did not address the earlier letter response. After receiving the amended letter, GT did not further review whether the circuits were installed GOULD v. WINSTAR COMMUNICATIONS, INC. Cite as 692 F.3d 148 (2nd Cir. 2012) and operational. Even though it appears not to have received the amended letter until after February 11, 2000, GT approved Winstar’s recognition of revenue for the Wam!Net IRU circuit sale on February 10, 2000. While GT appears to have neglected to verify that Wam!Net’s IRU circuits were operational, there was evidence that GT actually knew that the leased Cignal IRU circuits were inoperative. GT nevertheless approved Winstar’s recognition of revenue for the Cignal IRUs in the third quarter of 1999. Winstar employed a similar bifurcated accounting method in the fourth quarter of 1999 for its sale of radios to Lucent. The agreement between the two companies provided for Winstar to install the radios, but Winstar recognized revenue for the transaction immediately, upon delivering them to Lucent.7 GT expressed doubt that the radios and installation services were separable,8 but it nevertheless approved of Winstar’s recognition of $10 million in revenue in connection with the transaction. C. Round–Trip Transactions 155 2007). The two principal round-trip transactions that were the focus of discovery involved a scheme pursuant to which Winstar overpaid both companies for purportedly unrelated goods and services in exchange for their purchase of IRUs, equipment, and services from Winstar by the end of Winstar’s third fiscal quarter of 1999 (Cignal), and the end of the fourth quarter of 1999 (Wam!Net). Both round-trip transactions were material to Winstar’s financial performance in 1999. In the larger of the two transactions, Winstar recognized approximately $39 million in revenue in the third and fourth quarters of 1999 in connection with sales to Cignal while it paid Cignal $29.5 million under a separate agreement during the same time period and an additional $4.8 million in the first quarter of 2000. Similarly, Winstar recognized $19.6 million in revenue in connection with sales to Wam!Net in the fourth quarter of 1999, even as it paid Wam!Net $25 million in the same quarter for ‘‘prepaid marketing’’ and the lease of a ‘‘data service center.’’ In February 2000 GT questioned the ‘‘[a]rms length nature of the [round-trip] transactions.’’ It later acknowledged that the transactions ‘‘raise[d] a concern’’ within GT ‘‘as to whether or not absent Winstar’s payment TTT collectability was reasonably assured.’’ Nevertheless, GT approved Winstar’s recognition of the full amount of revenue for both transactions. Several of the transactions discussed above involved ‘‘round-trip’’ transactions with Cignal and Wam!Net at a time when the two customers were struggling financially. ‘‘ ‘Round-tripping’ typically refers to reciprocal agreements, involving the same products or services, that lack economic substance but permit [both] parties to book revenue and improve their financial statements.’’ Teachers’ Ret. Sys. of LA v. Hunter, 477 F.3d 162, 169 (4th Cir. By letter dated February 10, 2000, GT issued an unqualified audit opinion letter 7. 8. Winstar also employed a bifurcated accounting method when it recognized $16.5 million in revenue in connection with a sale of radios to Wam!Net in the fourth quarter of 1999. As with the IRU accounting, it did so contrary to Deloitte’s advice but with GT’s approval. D. The Audit Opinion Letter GT also expressed serious doubts about whether Lucent had assumed the risks and rewards of ownership of the radios, given the generous terms of a warranty Winstar extended to Lucent. 156 692 FEDERAL REPORTER, 3d SERIES stating that Winstar’s annual Form 10–K report for fiscal year 1999 complied with GAAP and fairly represented Winstar’s financial condition at the end of that year: We have audited the accompanying consolidated balance sheets of Winstar Communications, Inc. TTT We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatementTTTT We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Winstar Communications, Inc. and Subsidiaries as of December 31, 1999 TTT in conformity with accounting principles generally accepted in the United States. Joint App. at 529. E. Investment by the Jefferson Plaintiffs From December 1998 to February 2001, the Jefferson Plaintiffs purchased over $200 million worth of Winstar stock. The investment portfolios of most of the Jefferson Plaintiffs were managed by Ronald Clark, the Chief Investment Officer for Allianz of America (‘‘Allianz’’). The remaining entities deferred to Clark to select their investments in United States securities. Although Clark enjoyed ultimate authority for these investment decisions, he relied on recommendations from a team of analysts, including Livia Asher, who recommended that Allianz purchase Winstar stock. Based on Asher’s recommendation, Clark caused Allianz and the other Jefferson Plaintiffs to invest in Winstar. Clark, it appears, did not personally review Winstar’s financial statements prior to making the decision to invest in Winstar. Instead, he relied on Asher to review the statements as part of her job. During discovery, however, Asher acknowledged that she was uncertain of the date of, or reason for, her recommendation that Allianz purchase Winstar stock. Nor could she specifically recall reading Winstar’s 1999 Form 10–K report. However, Asher testified that she ‘‘probably flipped through every single page’’ of the report, based on her practice. She explained, ‘‘I can’t imagine any reason why I would not have looked at this, TTT given our position in the stock and given what I would normally do.’’ Asher added that she habitually read auditors’ opinion letters included in Forms 10–K to make sure that auditors believed that an issuer’s reports were ‘‘kosher,’’ but she did not specifically recall reviewing GT’s audit report. F. Winstar’s Decline Winstar’s stock reached a price per share of over $60 in March 2000. In May 2000 Lucent provided Winstar with financing in the form of a renewed credit facility in the aggregate amount of $2 billion. Almost a year later, however, in March 2001, Asensio & Company (‘‘Asensio’’), an investment firm, issued a press release criticizing Winstar’s ability to pay its debts and explaining that certain measurements of Winstar’s financial performance were ‘‘questionable’’ due in part to Winstar’s ‘‘revenue recognition from non-core businesses and sales of equipment and services to related parties.’’ Joint App. at 2412. The same press release warned that ‘‘[a]ny adjustment to Winstar’s aggressive revenue accounting and capitalization of cash expenditures would negatively and materially impact Winstar’s reported [earnings] and analyst’s [sic] opinions of its opera- GOULD v. WINSTAR COMMUNICATIONS, INC. Cite as 692 F.3d 148 (2nd Cir. 2012) tions.’’ Id. at 2413. On March 19, 2001, Asensio issued another press release reporting on Winstar’s ‘‘debt collapse,’’ again criticizing its revenue accounting practices and noting, ‘‘Winstar has recognized revenues that created a slew of uncollected itemsTTTT Its revenues include sales to related parties and non-core items such as equipment sales and installation services.’’ Id. at 2414. The Asensio press releases preceded a significant downgrade in Winstar’s credit rating on April 3, 2001. Moreover, on April 16, 2001, Winstar announced that Lucent was cancelling Winstar’s credit facility, that Winstar would delay filing its Form 10–K report for 2000, and that Winstar was considering a reorganization under Chapter 11 of the Bankruptcy Code. By the time of the Asensio press releases, Winstar’s revenues and its stock price had
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