10-4028-cv LBIM Intermobiliare SGR v. Grant Thornton LLP 1 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 4 5…

10-4028-cv(L)
BIM Intermobiliare SGR v. Grant Thornton LLP
1
1
UNITED STATES COURT OF APPEALS 2
FOR THE SECOND CIRCUIT 3
4
5
August Term, 2011 6
7
Argued: November 2, 2011 Decided: July 19, 2012 Amended: August 29, 2012 8
9
Docket Nos. 10-4028-cv(L), 10-4280-cv(CON) 10
11
12
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X 13
14
SANFORD GOULD , Individually, and on behalf 15
of all others similarly situated, YAN SUN , 16
BULLDOG CAPITAL M ANAGEMENT LP, KEVIN 17
SHERMAN , M AX C. M ICHAELS , ROBIN 18
KWALBRUN , ELEANORE REZNICK , FRANK 19
ZAPPARIELLO , THEODORE S. GUTOWICZ , 20
DAVID RICH , RICHARD SULENTIC , ANDRES 21
RIOS , 22
23
Plaintiffs, 24
25
–and– 26
27
BIM I NTERMOBILIARE SGR, a wholly-owned 28
subsidiary of BANCA I NTERMOBILIARE DI 29
I NVESTIMENTI E GESTIONI SP A, ROBERT 30
AHEARN , DRYE CUSTOM PALLETS, 31
J EFFERSON I NSURANCE COMPANY OF NEW 32
YORK , ALLIANZ LIFE I NSURANCE COMPANY 33
OF NEW YORK , I NTERNATIONAL 34
REINSURANCE COMPANY , S.A., LIFE USA, 35
AGF AMÉRIQUE , AGF HOSPITALIERS , AGF 36
ASSET M ANAGEMENT , FIREMAN ’ S FUND 37
I NSURANCE COMPANY , THE NORTHERN TRUST 38
COMPANY as trustee of the FIREMAN ’ S FUND 39
I NSURANCE COMPANY M ASTER RETIREMENT 40
TRUST and as trustee of the FIREMAN ’ S FUND 41

-- 1 of 24 --

* The Clerk of the Court is respectfully directed to amend the official caption as set forth
above.
2
I NSURANCE COMPANY M ASTER RETIREMENT 1
SAVINGS TRUST , ALLIANZ I NSURANCE 2
COPMANY , ALLIANZ LIFE I NSURANCE 3
COMPANY OF NORTH AMERICA , ALLIANZ 4
ASSET M ANAGEMENT NORTH AMERICAN 5
EQUITY , US ALLIANZ DIVERSIFIED ANNUITY , 6
US ALLIANZ GROWTH ANNUITY , US ALLIANZ 7
VARIABLE I NSURANCE PRODUCTS TRUST , 8
AZOA GROWTH FUND , AZOA DIVERSIFIED 9
ASSETS FUND , ALLIANZ OF AMERICA , I NC ., 10
ALLIANZ CORNHILL I NSURANCE PLC, 11
CORNHILL PENSION NORTH AMERICAN 12
EQUITY FUND , CORNHILL LIFE I NSURANCE , 13
M ERCHANT I NVESTORS ASSURANCE 14
COMPANY LIMITED , and CORNHILL LIFE 15
NORTH AMERICAN EQUITY FUND , 16
17
Plaintiffs-Appellants, 18
19
v. 20
21
WINSTAR COMMUNICATIONS , I NC ., WILLIAM 22
J. ROUHANA , J R ., RICHARD J. UHL , NATHAN 23
KANTOR , ROBERT K. M C GUIRE , 24
25
Defendants, 26
27
–and– 28
29
GRANT THORNTON LLP, 30
31
Defendant-Appellee.*
32
33
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - X 34
35
36
37
38
39
40

-- 2 of 24 --

3
Before: SACK , HALL , and LOHIER , Circuit Judges. 1
2
Plaintiffs-Appellants appeal from a judgment of the United States District Court for the 3
Southern District of New York (Daniels, J.) granting the motion for summary judgment of 4
Defendant-Appellee Grant Thornton LLP (“GT”) and dismissing the Plaintiffs’ claims under 5
Sections 10(b) and 18 of the Securities Exchange Act of 1934. Those claims related to GT’s 6
auditing of the financial statements of Winstar Communications, Inc. (“Winstar”). Because 7
triable questions of fact exist as to (1) whether GT acted with scienter in making alleged 8
misrepresentations in its audit opinion letter, (2) whether the Plaintiffs purchased Winstar’s stock 9
in actual reliance on those representations, and (3) whether the Plaintiffs suffered losses as a 10
result, we VACATE the judgment of the District Court and REMAND for further proceedings. 11
12
J ONATHAN K. LEVINE , Girard Gibbs LLP, New 13
York, NY (Daniel C. Girard, Girard Gibbs LLP, 14
San Francisco, CA, on the brief), for Plaintiffs- 15
Appellants Jefferson Insurance Company of New 16
York, Allianz Life Insurance Company of New 17
York, International Reinsurance Company, S.A., 18
Life USA, AGF Amérique, AGF Hospitaliers, 19
Fireman’s Fund Insurance Company, The Northern 20
Trust Company as trustee of the Fireman’s Fund 21
Insurance Company Master Retirement Trust and as 22
trustee of the Fireman’s Fund Insurance Company 23
Master Retirement Savings Trust, Allianz Insurance 24
Company, Allianz Life Insurance Company of 25
North America, Allianz Asset Management North 26
American Equity, US Allianz Diversified Annuity, 27
US Allianz Growth Annuity, US Allianz Variable 28
Insurance Products Trust, AZOA Growth Fund, 29
AZOA Diversified Assets Fund, Allianz of 30
America, Inc., AGF Asset Management, Allianz 31
Cornhill Insurance PLC, Cornhill Pension North 32
American Equity Fund, Cornhill Life Insurance, 33
Merchant Investors Assurance Company Ltd., and 34
Cornhill Life North American Equity Fund. 35
36
PATRICK L. ROCCO (Lee S. Shalov, Susan Marlene 37
Davies, on the brief), Shalov Stone Bonner & 38
Rocco LLP, New York, NY, for Plaintiffs- 39
Appellants BIM Intermobiliare SGR, a wholly- 40
owned subsidiary of Banca Intermobiliare di 41
Investimenti E Gestioni SpA, Robert Ahearn, and 42
DRYE Custom Pallets. 43
44

-- 3 of 24 --

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 bring claims under both Sections 10(b) and 18.
4
J AMES L. BERNARD , Stroock & Stroock & Lavan 1
LLP, New York, NY (Larry K. Elliot, Cohen & 2
Grigsby P.C., Pittsburgh, PA, on the brief), for 3
Defendant-Appellee Grant Thornton LLP. 4
5
LOHIER, Circuit Judge: 6
7
Plaintiffs-Appellants appeal from a September 2010 judgment of the United States 8
District Court for the Southern District of New York (Daniels, J.) granting the summary 9
judgment motion of Defendant-Appellee Grant Thornton LLP (“GT”) and dismissing the 10
Plaintiffs’ claims arising from GT’s audit of the financial statements of its client, Winstar 11
Communications, Inc. (“Winstar”). The Plaintiffs claimed that GT committed securities fraud in 12
violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Act” 13
or the “Exchange Act”), and 17 C.F.R. § 240.10b-5, and made false and misleading statements in 14
an audit opinion letter in violation of Section 18 of the Act, 15 U.S.C. § 78r. We conclude that 15
genuine issues of material fact exist as to each of these claims. We therefore VACATE the 16
District Court’s grant of summary judgment and REMAND for further proceedings. 17
BACKGROUND 18
1. Facts 19
Reviewing the District Court’s grant of summary judgment in favor of GT, “we construe 20
the evidence in the light most favorable to the [Plaintiffs], drawing all reasonable inferences and 21
resolving all ambiguities in [their] favor.” 1 In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 22
504 (2d Cir. 2010) (quotation marks omitted). 23

-- 4 of 24 --

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.
5
Winstar was a broadband communications company whose core business was to provide 1
wireless Internet connectivity to various businesses. GT served as Winstar’s independent auditor 2
from 1994 until Winstar filed for bankruptcy in April 2001, and GT regarded Winstar as “one of 3
[its] largest and most important clients.”2
4
In 1999, however, the relationship deteriorated. Winstar warned GT that it would likely 5
terminate the relationship if GT’s performance on unrelated international tax planning and other 6
accounting matters proved unsatisfactory. In March 1999 at least one member of Winstar’s 7
board of directors openly urged during a board meeting that the GT partner overseeing the audit 8
of Winstar be removed from the Winstar account. GT eventually re-staffed the Winstar account 9
so that the 1999 audit was managed by a partner, Gary Goldman, and a senior manager, Patricia 10
Cummings, neither of whom had previously reviewed or audited the financial records of a 11
telecommunications company. 12
As relevant to this appeal, GT’s audit for 1999 included several “large account” 13
transactions that Winstar consummated in an attempt to conceal a decrease in revenue associated 14
with Winstar’s core business. Most of the large account transactions involved Lucent 15
Technologies, Inc. (“Lucent”), Winstar’s strategic partner, and all of them were consummated at 16
the end of Winstar’s fiscal quarters in 1999. Together, the transactions accounted for $114.5 17
million in revenue, or approximately 26 percent of Winstar’s reported 1999 operating revenues 18
and 32 percent of its “core” revenues that year. At the time, GT considered these transactions to 19

-- 5 of 24 --

3 The Public Company Accounting Oversight Board has recognized that one risk factor
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.
6
be “red flags,” warranting the accounting firm’s “heightened scrutiny.”3 However, GT 1
ultimately approved Winstar’s recognition of revenue in connection with each of these 2
transactions. 3
We discuss the evidence relating to each category of transaction in turn. 4
A. Questionable Sales 5
The first category of questionable transactions involved a series of six end-of-quarter and 6
end-of-year transactions, primarily reported as equipment sales, for which there was little 7
evidence that any goods or services were ordered and delivered. For example, for the third 8
quarter of 1999 Winstar recognized $15 million in revenue for the sale of Lucent equipment to 9
Anixter Brothers, Inc. (“Anixter”), a wire and cable distributor. There were several unusual 10
aspects of this sale. First, Anixter ordinarily purchased equipment directly from Lucent, not 11
Winstar. Second, equipment sales were not part of Winstar’s core business of creating and 12
operating wireless networks. Third, during GT’s audit Cummings noted that the Anixter 13
transaction was “apparently” completed on September 30, 1999, the last day of Winstar’s fiscal 14
quarter, but GT’s work papers included no documents reflecting the sale’s completion beyond a 15
purchase order from Winstar to Lucent and an invoice from Lucent to Winstar. Moreover, 16
neither the purchase order nor the invoice included an itemized list of the goods sold or indicated 17
the shipping terms, even though the items were to be shipped on September 30, 1999, and 18

-- 6 of 24 --

4 As stated by the Securities and Exchange Commission (“SEC”), “delivery generally is
not considered to have occurred unless the customer 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).
7
delivered on October 4, 1999.4 Absent too was any document evidencing Anixter’s agreement to 1
purchase the items. Lastly, not a single employee of Lucent, Winstar, or Anixter who was asked 2
about the equipment sale could recall it. 3
Five other transactions that were not part of Winstar’s core business were consummated 4
at the end of one of Winstar’s fiscal quarters and were barely documented. Winstar nevertheless 5
recognized a total of $49.7 million in revenue associated with these five transactions. First, 6
Winstar recognized $5 million in revenue in the first quarter of 1999 for a “feasibility study” that 7
Winstar was scheduled to conduct for Lucent, but which had not been delivered by at least 2000. 8
Second, Winstar recognized $21.1 million in revenue in the first and second quarters of 1999 in 9
connection with the sale of Lucent equipment to Williams Communications, Inc. (“Williams”). 10
The equipment was shipped by Lucent, not Winstar, on the last business day of the first and 11
second quarters (March 31, 1999 and June 30, 1999, respectively), with no written agreement. 12
Third, Winstar recognized $9.1 million in revenue in the second quarter of 1999 in connection 13
with the sale of Lucent equipment to VoCall Communications Corporation (“VoCall”) on June 14
30, 1999. Although the sale was referenced in a series of non-numbered purchase orders, it was 15
not referenced in any executed, final agreement or shipping document. Fourth, Winstar 16
recognized $4.5 million in revenue in the third quarter of 1999 in connection with the sale of 17
unspecified “WinStar Equipment” to Cignal Global Communications (“Cignal”), which was 18

-- 7 of 24 --

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 Accountants
. . . .” 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] . . . [is] to
increase investor confidence by ensuring transparency and accuracy in financial reporting.” Id.
at 339.
8
contracted for on September 30, 1999, the last day of that quarter. However, GT was unable to 1
produce a document evidencing that the equipment had been shipped to Cignal during that 2
quarter. Fifth, Winstar recognized $10 million in revenue in the fourth quarter of 1999 in 3
connection with the sale of wireless radio equipment (“radios”) to Lucent under an agreement 4
dated December 30, 1999. GT endorsed the recognition of revenue even though its work papers 5
included shipping documents with conflicting dates, no document specified the goods purchased, 6
and Lucent, not Winstar, was in the business of manufacturing and selling radios. The same 7
agreement also involved a $2 million “promotional credit” purchased by Lucent for services that 8
had not yet been rendered by Winstar. Although GT specifically advised Winstar that 9
recognizing and recording the amount of the credit as revenue was improper and in violation of 10
generally accepted accounting principles (“GAAP”), 5 Winstar nevertheless recognized the full 11
$2 million in revenue. 12
Each of these transactions appears to have violated the provisions of Staff Accounting 13
Bulletin No. 101 (“SAB 101”), issued by the Securities and Exchange Commission (“SEC”), 14
which states that four conditions must be satisfied before revenue can be recognized: (1) 15
“Persuasive evidence of an arrangement [for the sale of goods or services] exists,” (2) “Delivery 16

-- 8 of 24 --

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 customer. . . .
. . .
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 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 . . . passed to the buyer”; (2) that “the buyer, not the seller . . . request . . . 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.
9
has occurred or services have been rendered,” (3) “The seller’s price to the buyer is fixed or 1
determinable,” and (4) “Collectibility is reasonably assured.” SAB 101 at 3.6
2
GT requested that Winstar’s counterparties provide additional documentary evidence of 3
the relevant sales underlying each questionable transaction. By doing so, consistent with SAB 4
101, GT sought to obtain independent support for Winstar’s recognition of revenue for each 5
transaction – in other words, support from documents that were not generated by Winstar itself. 6
As of February 10, 2000, GT still had not received responsive documents from four of these 7
customers. Nonetheless, it issued an audit opinion letter opining that Winstar’s 1999 financial 8
statements accurately reflected its financial condition and complied with GAAP. 9

-- 9 of 24 --

10
B. Bifurcated Accounting 1
In connection with at least three other transactions, Winstar employed a bifurcated 2
accounting scheme that GT ultimately approved prior to its audit of Winstar’s financial 3
statements. Two of these transactions involved leasing or subleasing fiber optic network 4
capacity in units called indefeasible rights of use (“IRUs”). Winstar accounted for these IRUs 5
using a dubious bifurcated accounting method, pursuant to which it recognized as much as 94 6
percent of the revenue from the leases upon execution of the lease, reflecting the cost of optical 7
equipment (“optronics”) that transmitted data over fiber optic cable (“cable” or “fiber”). Winstar 8
then would recognize the balance of the revenue in later quarters, as payments were received 9
over the span of the lease, representing the customer’s actual use of the network. In other words, 10
Winstar split the value of the leases so that the revenue associated with the optronics was 11
reported separately from revenue associated with the cable. By employing this accounting 12
method, Winstar was able to recognize $30.9 million in revenue up front in 1999. 13
During discovery, a forensic accountant retained by the Plaintiffs opined that the rules of 14
the Financial Accounting Standards Board and interpretive rules of the SEC prohibited the 15
division of leases for fiber optic networks because both the cable and the optronics were 16
essential to the network. Winstar conceded that the fiber and the optronics were not separable, 17
and that no other company previously had employed this bifurcated method in accounting for 18
IRUs. Indeed, Winstar specifically advised GT that the bifurcated approach had been criticized 19
by the accounting firm Deloitte & Touche LLP (“Deloitte”). 20
GT was in any event aware that revenue associated with an IRU contract could be 21
recognized only if the leased circuit was operational, or “lit,” in the language of the fiber optics 22
field. In the third and fourth quarters of 1999, however, Winstar had failed to “light” many of its 23

-- 10 of 24 --

11
IRU circuits, a fact that should have precluded the company from recognizing revenue associated 1
with those IRUs. 2
In the midst of GT’s audit, Winstar sent form letters dated December 30, 1999, and 3
December 31, 1999, to the counterparties to the two IRU transactions, Wam!Net, Inc. and 4
Cignal, respectively, to confirm that the IRU circuits had been “deliver[ed]” and “accept[ed].” A 5
representative of Cignal signed a form letter confirming delivery and acceptance of the circuits. 6
By contrast, Wam!Net’s Senior Vice President of Finance responded to a letter from Winstar as 7
follows: “To our knowledge [the circuits] are not currently in place.” A subsequent amended 8
letter from a different Wam!Net employee, which does not appear in the record but which 9
Cummings referenced in an email, purported to “accept” the circuits but did not address the 10
earlier letter response. After receiving the amended letter, GT did not further review whether the 11
circuits were installed and operational. Even though it appears not to have received the amended 12
letter until after February 11, 2000, GT approved Winstar’s recognition of revenue for the 13
Wam!Net IRU circuit sale on February 10, 2000. 14
While GT appears to have neglected to verify that Wam!Net’s IRU circuits were 15
operational, there was evidence that GT actually knew that the leased Cignal IRU circuits were 16
inoperative. GT nevertheless approved Winstar’s recognition of revenue for the Cignal IRUs in 17
the third quarter of 1999. 18
Winstar employed a similar bifurcated accounting method in the fourth quarter of 1999 19
for its sale of radios to Lucent. The agreement between the two companies provided for Winstar 20
to install the radios, but Winstar recognized revenue for the transaction immediately, upon 21

-- 11 of 24 --

7 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.
8 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.
12
delivering them to Lucent.7 GT expressed doubt that the radios and installation services were 1
separable,8 but it nevertheless approved of Winstar’s recognition of $10 million in revenue in 2
connection with the transaction. 3
C. Round-Trip Transactions 4
Several of the transactions discussed above involved “round-trip” transactions with 5
Cignal and Wam!Net at a time when the two customers were struggling financially. “‘Round- 6
tripping’ typically refers to reciprocal agreements, involving the same products or services, that 7
lack economic substance but permit [both] parties to book revenue and improve their financial 8
statements.” Teachers’ Ret. Sys. of LA v. Hunter, 477 F.3d 162, 169 (7th Cir. 2007). The two 9
principal round-trip transactions that were the focus of discovery involved a scheme pursuant to 10
which Winstar overpaid both companies for purportedly unrelated goods and services in 11
exchange for their purchase of IRUs, equipment, and services from Winstar by the end of 12
Winstar’s third fiscal quarter of 1999 (Cignal), and the end of the fourth quarter of 1999 13
(Wam!Net). 14
Both round-trip transactions were material to Winstar’s financial performance in 1999. 15
In the larger of the two transactions, Winstar recognized approximately $39 million in revenue in 16
the third and fourth quarters of 1999 in connection with sales to Cignal while it paid Cignal 17
$29.5 million under a separate agreement during the same time period and an additional $4.8 18
million in the first quarter of 2000. Similarly, Winstar recognized $19.6 million in revenue in 19
connection with sales to Wam!Net in the fourth quarter of 1999, even as it paid Wam!Net $25 20

-- 12 of 24 --

13
million in the same quarter for “prepaid marketing” and the lease of a “data service center.” In 1
February 2000 GT questioned the “[a]rms length nature of the [round-trip] transactions.” It later 2
acknowledged that the transactions “raise[d] a concern” within GT “as to whether or not absent 3
Winstar’s payment . . . collectability was reasonably assured.” Nevertheless, GT approved 4
Winstar’s recognition of the full amount of revenue for both transactions. 5
D. The Audit Opinion Letter 6
By letter dated February 10, 2000, GT issued an unqualified audit opinion letter stating 7
that Winstar’s annual Form 10-K report for fiscal year 1999 complied with GAAP and fairly 8
represented Winstar’s financial condition at the end of that year: 9
We have audited the accompanying consolidated balance 10
sheets of Winstar Communications, Inc. . . . 11
We conducted our audits in accordance with auditing 12
standards generally accepted in the United States. Those standards 13
require that we plan and perform the audit to obtain reasonable 14
assurance about whether the financial statements are free of material 15
misstatement. . . . We believe that our audits provide a reasonable 16
basis for our opinion. 17
In our opinion, the consolidated financial statements referred 18
to above present fairly, in all material respects, the consolidated 19
financial position of Winstar Communications, Inc. and Subsidiaries 20
as of December 31, 1999 . . . in conformity with accounting 21
principles generally accepted in the United States. 22
23
Joint App. at 529. 24
E. Investment by the Jefferson Plaintiffs 25
From December 1998 to February 2001, the Jefferson Plaintiffs purchased over $200 26
million worth of Winstar stock. The investment portfolios of most of the Jefferson Plaintiffs 27
were managed by Ronald Clark, the Chief Investment Officer for Allianz of America 28
(“Allianz”). The remaining entities deferred to Clark to select their investments in United States 29
securities. Although Clark enjoyed ultimate authority for these investment decisions, he relied 30

-- 13 of 24 --

14
on recommendations from a team of analysts, including Livia Asher, who recommended that 1
Allianz purchase Winstar stock. Based on Asher’s recommendation, Clark caused Allianz and 2
the other Jefferson Plaintiffs to invest in Winstar. 3
Clark, it appears, did not personally review Winstar’s financial statements prior to 4
making the decision to invest in Winstar. Instead, he relied on Asher to review the statements as 5
part of her job. During discovery, however, Asher acknowledged that she was uncertain of the 6
date of, or reason for, her recommendation that Allianz purchase Winstar stock. Nor could she 7
specifically recall reading Winstar’s 1999 Form 10-K report. However, Asher testified that she 8
“probably flipped through every single page” of the report, based on her practice. She explained, 9
“I can’t imagine any reason why I would not have looked at this, . . . given our position in the 10
stock and given what I would normally do.” Asher added that she habitually read auditors’ 11
opinion letters included in Forms 10-K to make sure that auditors believed that an issuer’s 12
reports were “kosher,” but she did not specifically recall reviewing GT’s audit report. 13
F. Winstar’s Decline 14
Winstar’s stock reached a price per share of over $60 in March 2000. In May 2000 15
Lucent provided Winstar with financing in the form of a renewed credit facility in the aggregate 16
amount of $2 billion. Almost a year later, however, in March 2001, Asensio & Company 17
(“Asensio”), an investment firm, issued a press release criticizing Winstar’s ability to pay its 18
debts and explaining that certain measurements of Winstar’s financial performance were 19
“questionable” due in part to Winstar’s “revenue recognition from non-core businesses and sales 20
of equipment and services to related parties.” Joint App. at 2412. The same press release 21
warned that “[a]ny adjustment to Winstar’s aggressive revenue accounting and capitalization of 22
cash expenditures would negatively and materially impact Winstar’s reported [earnings] and 23

-- 14 of 24 --

15
analyst’s [sic] opinions of its operations.” Id. at 2413. On March 19, 2001, Asensio issued 1
another press release reporting on Winstar’s “debt collapse,” again criticizing its revenue 2
accounting practices and noting, “Winstar has recognized revenues that created a slew of 3
uncollected items . . . . Its revenues include sales to related parties and non-core items such as 4
equipment sales and installation services.” Id. at 2414. 5
The Asensio press releases preceded a significant downgrade in Winstar’s credit rating 6
on April 3, 2001. Moreover, on April 16, 2001, Winstar announced that Lucent was cancelling 7
Winstar’s credit facility, that Winstar would delay filing its Form 10-K report for 2000, and that 8
Winstar was considering a reorganization under Chapter 11 of the Bankruptcy Code. 9
By the time of the Asensio press releases, Winstar’s revenues and its stock price had 10
decreased significantly during a marketwide decline in the prices of technology stocks. 11
However, the press releases, coupled with the subsequent announcements of Winstar’s financial 12
troubles, were followed almost immediately by an additional steep decline in Winstar’s stock 13
price, from over $10 per share before March 2001 to $0.14 per share by mid-April 2001. On 14
April 18, 2001, Winstar filed for bankruptcy. 15
During discovery, an economist retained by the Plaintiffs as an expert witness attributed 16
the decline in Winstar’s stock price to, among other causes, the partial disclosure of Winstar’s 17
alleged fraud by Asensio. The economist calculated that members of the putative class who had 18
purchased Winstar common stock lost as much as $974 million, that class members who 19
purchased Winstar notes lost up to $197 million, and that the Jefferson Plaintiffs lost over $96 20
million by investing in Winstar stock. 21
22
23

-- 15 of 24 --

9 Although the Defendants filed motions to dismiss in June 2002, the District Court did
not rule on them. Similarly, a motion for class certification was filed but never resolved by the
District Court.
16
2. Procedural History 1
On April 10, 2001, the Lead Plaintiffs filed a putative class action complaint in the 2
Southern District of New York against Winstar, GT, Lucent, and certain Winstar executives 3
alleging securities fraud under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b). In 4
December 2001 the Jefferson Plaintiffs filed a separate complaint in the District Court against 5
GT, claiming violations of both Section 10(b) and Section 18 of the Exchange Act, 15 U.S.C. § 6
78r(a).9 As a result of various settlements among the parties, the claims against GT were all that 7
remained by 2008. After discovery, GT moved for summary judgment to dismiss the Plaintiffs’ 8
claims and also moved unsuccessfully to preclude the Plaintiffs’ expert loss causation analysis. 9
In September 2010 the District Court granted GT’s motion for summary judgment, 10
concluding that (1) the Plaintiffs had failed to demonstrate that a genuine dispute of material fact 11
existed as to whether GT acted intentionally or recklessly, as required under Section 10(b) of the 12
Exchange Act, and (2) the Jefferson Plaintiffs had failed to demonstrate that such a dispute 13
existed as to whether they actually relied on GT’s audit opinion letter, as required under Section 14
18 of the Exchange Act. In re Winstar Commc’ns Sec. Litig., No. 01 CV 11522 (GBD), 2010 15
WL 3910322, at *5-6 (S.D.N.Y. Sept. 29, 2010). 16
This appeal followed. 17
DISCUSSION 18
We review a district court’s grant of summary judgment de novo, viewing the evidence in 19
the light most favorable to the non-moving party and drawing all reasonable inferences and 20
resolving all ambiguities in its favor. E.g., Grain Traders, Inc. v. Citibank, N.A., 160 F.3d 97, 21
100 (2d Cir. 1998). We will affirm the judgment “only if there is no genuine dispute as to any 22

-- 16 of 24 --

17
material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). 1
“There is no genuine issue of material fact where the record taken as a whole could not lead a 2
rational trier of fact to find for the non-moving party.” Durakovic v. Bldg. Servs. 32 BJ Pension 3
Fund, 609 F.3d 133, 137 (2d Cir. 2010) (quotation marks and brackets omitted). Put another 4
way, “[a]n issue of fact is genuine if the evidence is such that a reasonable jury could return a 5
verdict for the nonmoving party.” Omnicom, 597 F.3d at 509 (quotation marks omitted). 6
To sustain a claim under Section 10(b) of the Exchange Act and Rule 10b-5, the 7
Plaintiffs must show “(i) a material misrepresentation or omission; (ii) scienter; (iii) ‘a 8
connection with the purchase or sale of a security[;]’ (iv) reliance by the plaintiff(s); (v) 9
economic loss; and (vi) loss causation.” Id. (alteration in original) (quoting Dura Pharms., Inc. 10
v. Broudo, 544 U.S. 336, 341-42 (2005)). 11
1. Scienter 12
Plaintiffs may satisfy the scienter requirement by producing “evidence of conscious 13
misbehavior or recklessness.” See ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP 14
Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009). Scienter based on conscious misbehavior, 15
in turn, requires a showing of “deliberate illegal behavior,” Novak v. Kasaks, 216 F.3d 300, 308 16
(2d Cir. 2000), a standard met “when it is clear that a scheme, viewed broadly, is necessarily 17
going to injure,” AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 221 (2d Cir. 2000) 18
(alterations omitted). 19
In AUSA Life, we applied this standard to representations by the accounting firm Ernst 20
& Young (“E & Y”), which, as plaintiffs allege with respect to GT, “consistently noticed, 21
protested, and then acquiesced in” the financial misrepresentations of an audit client under 22

-- 17 of 24 --

18
pressure from the client’s management. Id. at 205. We held that by issuing an unqualified audit 1
report despite its knowledge of accounting improprieties by the client, E & Y “intentionally 2
engaged in manipulative conduct,” id. at 221 (quotation marks omitted), in violation of Section 3
10(b). We explained that 4
E & Y is not an accounting dilettante. It knows well that its opinions 5
and certifications are afforded great weight, and it must have known 6
that its financial certifications with regard to [its client] would be 7
compelling to the investors. . . . [I]t is sufficient [for the purposes of 8
showing scienter] for a plaintiff to allege and prove that a defendant 9
could have foreseen the consequences of his actions but forged ahead 10
nonetheless . . . . 11
12
Id.; see also SEC v. KPMG LLP, 412 F. Supp. 2d 349, 379 (S.D.N.Y. 2006) (triable issue as to 13
conscious fraud existed when accountant was “[a]ware of [the client’s] earnings pressures” but 14
allowed aggressive accounting policies “without any serious study to determine that these 15
unusual, indeed unique, accounting treatments would result in financial statements that fairly 16
represented [the client’s] financial condition”). 17
Scienter based on recklessness may be demonstrated where a defendant has engaged in 18
conduct that was “highly unreasonable, representing an extreme departure from the standards of 19
ordinary care . . . to the extent that the danger was either known to the defendant or so obvious 20
that the defendant must have been aware of it.” Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 21
2000) (quotation marks omitted). Recklessness may be established where a defendant “failed to 22
review or check information that [it] had a duty to monitor, or ignored obvious signs of fraud.” 23
Novak, 216 F.3d at 308. 24
The District Court concluded that Winstar engaged in “dubious accounting practices,” 25
that “[m]uch of the supporting documentation that Winstar supplied to GT was a mere 26

-- 18 of 24 --

10 Under GAAS, a central “‘objective of the independent auditor’s engagement is to
obtain sufficient competent evidential matter to provide him with a reasonable basis for forming
an opinion.’” Joint App. at 3604 (quoting AU § 9326). “‘Gathering and objectively evaluating
audit evidence requires the auditor to consider the competency and sufficiency of the evidence. .
19
contrivance meant to paper the transactions and create the appearance of legitimacy,” and that 1
GT “failed to uncover the accounting fraud being perpetuated by the Winstar defendants.” 2
Winstar, 2010 WL 3910322, at *3, *5. GT does not seriously dispute these conclusions, which 3
are in any event supported by the record before us. The District Court concluded, however, that 4
the evidence demonstrated only that GT was “performing its role as [Winstar’s] independent 5
auditor” and fell short of demonstrating scienter in the form of either conscious misbehavior or 6
recklessness. Id. at *3. We disagree. 7
Some evidence supports the Plaintiffs’ contention that GT consciously ignored Winstar’s 8
fraud when it approved Winstar’s recognition of revenue for the suspicious 1999 transactions. 9
This evidence goes beyond a mere failure to uncover the accounting fraud and, in general, relates 10
to (1) Winstar’s recognition of revenue for the sale of equipment or services without sufficient 11
indicia of delivery, (2) its recognition of all revenue associated with the incomplete sale of 12
telecommunications systems, and (3) its recognition of revenue for sales of IRUs, equipment, 13
and services to financially unstable companies to whom Winstar paid back large sums under 14
separate contractual obligations. 15
There is also evidence that GT failed to confirm Winstar’s representations regarding 16
these transactions or to retain and review documents evidencing each transaction. Indeed, an 17
expert forensic accountant retained by the Plaintiffs testified that GT’s failure to exercise due 18
professional care, gather reliable documents, and issue an adverse opinion in this regard 19
represented a violation of Generally Accepted Auditing Standards (“GAAS”)10 with regard to all 20

-- 19 of 24 --

. . [P]rofessional skepticism should be exercised throughout the audit process,’” and requires the
employment of “‘a questioning mind’” in the “‘gathering and objective evaluation of evidence,’”
including with regard to representations by management. Id. at 3589-90 (quoting AU §§ 230.07-
08).
20
of the challenged transactions. Furthermore, the record evidence supports a conclusion that GT 1
knew, even under the terms of Winstar’s bifurcated accounting method – a method that had been 2
criticized by Deloitte but reviewed and approved, with skepticism, by GT – that revenue could 3
not be properly recognized for IRUs unless the leased circuits were operational. During 4
discovery, Cummings acknowledged that GT knew the circuits for the Cignal IRUs were not 5
operational. Under these circumstances, GT’s approval of Winstar’s recognition of revenue for 6
the nonfunctional circuits presents a genuine issue of material fact as to whether GT acted with 7
the requisite scienter under Section 10(b). 8
We point to the IRU transactions only as one example of a transaction that suggests that 9
GT acted with scienter. Triable issues regarding GT’s scienter exist for the other questionable 10
transactions as well. Broadly speaking, there was admissible evidence that in the course of its 11
audit GT learned of and advised against the use of indisputably deceptive accounting schemes, 12
but eventually acquiesced in the schemes by issuing an unqualified audit opinion. See AUSA 13
Life, 206 F.3d at 221. Based on this record, we cannot conclude that this and the other evidence 14
adduced by the Plaintiffs was insufficient to raise a genuine issue of material fact about whether, 15
in issuing an unqualified audit opinion letter, GT “agreed to [Winstar’s] accounting abuses, 16
knowing . . . that [investors] and others would be receiving and relying upon the manipulated 17
financial reports.” Id. At this stage, the Plaintiffs have proffered enough facts constituting 18
evidence of conscious misbehavior or recklessness to survive summary judgment. 19
We note that in granting summary judgment in GT’s favor, the District Court placed 20
particular emphasis on the magnitude of GT’s audit work, both in time spent and documents 21

-- 20 of 24 --

11 Here, only GT’s February 10, 2000 audit opinion letter regarding Winstar’s Form 10-K
for fiscal year 1999 forms the basis for its liability under Section 10(b). Winstar’s quarterly
financial reports for 1999, no matter how involved GT was in their formulation, cannot serve as
independent grounds for Section 10(b) liability for GT because, unlike with the Form 10-K, GT
never made any public statements vouching for their accuracy. See McAdams v. McCord, 584
F.3d 1111, 1114 & n.2 (8th Cir. 2009). That GT was involved in their formulation at best would
give rise to aiding and abetting liability under Section 10(b), as to which there is no private cause
of action. See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S.
164, 177 (1994). The end-of-quarter transactions are nevertheless relevant to the issue of GT’s
scienter because they should have raised red flags for GT as to whether they were genuine and
could be reported on Winstar’s end-of-year filing for fiscal year 1999. Indeed, evidence in the
record, including email communications between GT employees, suggests that GT remained
troubled by many of these transactions around the time it filed its audit opinion letter.
21
reviewed. For example, it noted that GT “spent 1,928 hours of professional time,” assembled 1
working papers spanning 3,000 pages, and reviewed “copies of contracts, Winstar business 2
plan[s], press releases, board minutes,” and memos prepared by Winstar and GT addressing 3
accounting issues. Winstar, 2010 WL 3910322, at *2. The number of hours spent on an audit 4
cannot, standing alone, immunize an accountant from charges that it has violated the securities 5
laws. Here, the Plaintiffs adduced evidence that, notwithstanding the magnitude of its audit, GT 6
repeatedly failed to scrutinize serious signs of fraud by an important client, including: (1) 7
significant end-of-quarter transactions;11 (2) the absence of documents confirming the goods or 8
services ordered by Winstar customers, the fact of delivery, or the existence of an underlying 9
agreement; (3) the repeated failure of Winstar or its clients timely to provide supporting 10
documentation requested by GT; (4) Winstar’s transactions outside its core business; and (5) 11
round-trip transactions in which revenues were subsequently offset by Winstar’s payments to 12
financially unstable customers under unrelated contractual obligations. 13
In short, regardless of the hours GT spent or the number of documents it reviewed in the 14
course of its 1999 audit of Winstar, a jury reasonably could determine that the audit was so 15
deficient as to be “highly unreasonable, representing an extreme departure from the standards of 16

-- 21 of 24 --

22
ordinary care . . . to the extent that the danger was either known to [GT] or so obvious that [GT] 1
must have been aware of it.” Rothman, 220 F.3d at 90 (quotation marks omitted). 2
2. Reliance 3
Section 18 of the Exchange Act, 15 U.S.C. § 78r(a), requires actual rather than 4
constructive reliance upon a materially false or misleading statement by one who has purchased 5
or sold a security. Heit v. Weitzen, 402 F.2d 909, 916 (2d Cir. 1968). The District Court 6
concluded that the Jefferson Plaintiffs failed to show reliance because they could not 7
demonstrate that they or their representatives “actually saw Winstar’s 1999 Form 10-K filing, 8
much less read the included independent accountant report of GT.” Winstar, 2010 WL 3910322, 9
at *6. Even assuming that such “eyeball” reliance is the sort of actual reliance required by our 10
precedents, the District Court’s conclusion somewhat understates the record evidence on this 11
score. Ronald Clark and Livia Asher worked on behalf of the Jefferson Plaintiffs. Although 12
Asher was unable to recall specifically that she reviewed GT’s audit opinion letter, there was 13
evidence that she actively reviewed such letters as a matter of practice in deciding whether to 14
recommend certain stocks. At this stage of the proceedings, Asher’s testimony is enough; from 15
that evidence, a jury reasonably could infer that she actually reviewed and relied on the relevant 16
statements in the documents. See, e.g., Fed. R. Evid. 406. Accordingly, we conclude that the 17
District Court erred in granting summary judgment in GT’s favor on the Jefferson Plaintiffs’ 18
Section 18 claims. 19
3. Causation 20
GT argues in the alternative that the District Court’s grant of summary judgment should 21
be affirmed because the Plaintiffs failed to show loss causation. We have described loss 22
causation as “the causal link between the alleged misconduct and the economic harm ultimately 23

-- 22 of 24 --

23
suffered by the plaintiff.” Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 1
189, 197 (2d Cir. 2003). Among other things, the misconduct must be a “substantial factor in the 2
sequence of responsible causation.” AUSA Life, 206 F.3d at 215 (quotation marks omitted). 3
With these principles in mind, however, we have also warned that “if the loss was caused by an 4
intervening event, like a general fall in the price of Internet stocks, the chain of causation will 5
not have been established[, b]ut such is a matter of proof at trial.” Emergent Capital, 343 F.3d at 6
197; see also AUSA Life, 206 F.3d at 214-15 (“[W]hen the plaintiff’s loss coincides with a 7
marketwide phenomenon causing comparable losses to other investors, the prospect that the 8
plaintiff’s loss was caused by the fraud decreases.”). 9
Relying largely on the deposition testimony of an expert witness economist, the Plaintiffs 10
argue that they have adduced proof of loss causation in the form of the press releases from 11
Asensio and Winstar’s April 2001 announcements, which publicly exposed Winstar’s substantial 12
financial weaknesses and together suggested for the first time that Winstar had engaged in 13
improper revenue recognition practices for a period of time that included 1999. Although a 14
much closer call, a jury could reasonably infer based on the expert testimony and other evidence 15
that the precipitous decline in Winstar’s stock price in 2001 was attributable in part to the 16
alleged fraud. 17
GT counters that any decline in Winstar’s stock price that was not caused by broader 18
market trends resulted not from the alleged fraud but from Lucent’s cancellation of its credit 19
facility. This may be true for a portion of the collapse in Winstar’s stock price. There is support 20
as well for the argument that the downgrade in Winstar’s credit rating resulted in a substantial 21
decline in the stock price. But these facts, if established, hardly foreclose the reasonable 22
inference that some part of the decline was substantially caused by the disclosures about the 23

-- 23 of 24 --

24
fraud itself. We therefore conclude that a jury reasonably could find the requisite “causal link 1
between [Winstar’s] alleged misconduct and the economic harm ultimately suffered” by the 2
Plaintiffs. See Emergent Capital, 343 F.3d at 197. 3
CONCLUSION 4
We have considered GT’s other arguments, and we conclude that they are without merit. 5
For the foregoing reasons, we VACATE the District Court’s grant of summary judgment, and we 6
REMAND for further proceedings. 7

-- 24 of 24 --