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| 2001 News and Press Releases |
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HEADLINE ARCHIVED:
Financial Fraud Lawsuits: The Case For Stricter Judicial Scrutiny
By: Shiri Fabri Weiss and David Priebe
Derivatives Litigation Reporter. October 9, 2001
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Excerpt: The securities class action plaintiffs' bar has long touted cases based on allegations of financial fraud. Asserting that a company "cooked the books" by improperly recognizing revenue, deferring expenses, or using other accounting "tricks" has a patina of legitimacy absent from cases brought simply because a company missed Wall Street estimates. The apparent attractiveness of these cases to plaintiffs has increased because financial statements are not covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), which allow companies to protect most forward-looking statements (such as earnings projections) from liability.1 The plaintiffs' bar also has cited a few well-publicized cases such as Cendant2 to assert that financial fraud is on the upswing. The seduction of financial fraud cases will wane if courts devote the same careful, strict scrutiny to this type of case as they often do to other types of securities fraud cases. The Ninth Circuit's recent affirmance of dismissal in Zeid v. Kimberley, No. 00-16089, 2001 WL 357526 (9th Cir. Apr. 19, 2001) (hereinafter " Firefox") demonstrates that financial fraud allegations, like other securities fraud allegations, must be dismissed if they are not pleaded with factual particularity or if plaintiffs do not plead all facts underlying their allegations. While Firefox (to the authors' knowledge) is the first appellate court decision to affirm the dismissal of financial fraud allegations on these grounds, its approach is not unique: district courts have dismissed financial fraud allegations, particularly (but not exclusively) where no "restatement" -- alteration and republication of the company's financial statement -- is involved. The Firefox experience should serve as a model to all courts, as the Reform Act requires judges to apply this type of strict scrutiny to all securities cases.
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