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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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)

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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

https://www.onlinefreelancersnetwork.com/wp-content/uploads/2020/08/logoOFN.png 0 0 online_admin https://www.onlinefreelancersnetwork.com/wp-content/uploads/2020/08/logoOFN.png online_admin2023-06-14 10:12:402023-06-14 10:12:40Description 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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