Generally Accepted Accounting Principles (Securities Law Series)

THIS CASEBOOK contains a selection of 92 U. S. Court of Appeals decisions that analyze and discuss issues raised by alleged violations of generally accepted accounting principles. The selection of decisions spans from 2003 to the date of publication.

"Companies must adhere to generally accepted accounting principles ('GAAP') when recognizing revenue in their publicly disclosed financial statements." Dronsejko v. Thornton, 632 F.3d 658, 662 (10th Cir. 2011) In Re Gold Resource Corporation Securities Litigation, (10th Cir. 2015).

Rule 4-01 of Regulation S-X, governs the manner in which a fund reports its deferred tax liability on its financial statements. Under that rule, "[f]inancial statements filed with the [Securities and Exchange] Commission which are not prepared in accordance with generally accepted accounting principles [GAAP] will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided." 17 C.F.R. § 210.4-01(a)(1); see 15 U.S.C. §§ 80a-8, 80a-29. Copley Fund, Inc. v. Securities and Exchange Commission, (DC Cir. 2015).

"[A]llegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim." Fleming, 264 F.3d at 1261 (internal quotation marks omitted). Thus, "[o]nly where such allegations are coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors may they be sufficient to state a claim." Id. In Re Gold Resource Corporation Securities Litigation, ibid.

"Section 10(b) and Rule 10b-5 prohibit fraud, not accounting malpractice." Ceridian, 542 F.3d at 246. Thus "[a]llegations of GAAP violations are insufficient to state a securities fraud claim unless coupled with evidence of corresponding fraudulent intent." Kushner v. Beverly Enters., Inc., 317 F.3d 820, 831 (8th Cir. 2003); see also Ceridian, 542 F.3d at 246 ("Because GAAP is an 'elaborate hierarchy' of sources that accountants consult, rather than a 'canonical set of rules,' pleading an amalgam of unrelated GAAP violations, without more, does not give rise to a strong inference of scienter." (citation omitted) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 890 (8th Cir. 2002))). The fact that GAAP violations are allegedly significant does not change this rule and is insufficient by itself to give rise to a strong inference of scienter. See Fidel v. Farley, 392 F.3d 220, 231 (6th Cir. 2004) ("Allowing an inference of scienter based on the magnitude of fraud 'would eviscerate the principle that accounting errors alone cannot justify a finding of scienter.' It would also allow the court to engage in speculation and hindsight, both of which are counter to the PSLRA's mandates." (citation omitted) (quoting In re SCB Computer Tech., Inc. Sec. Litig., 149 F. Supp. 2d 334, 359 (W.D. Tenn. 2001))) overruled on other grounds by Tellabs, 551 U.S. 308 (2007). Podraza v. Whiting, (8th Cir. 2015).

That [ ] reported figures are alleged to have violated GAAP is not, by itself, actionable. See Shaw, 537 F.3d at 534 ("[A] failure to follow GAAP, without more, does not establish scienter."); Blackwell, 440 F.3d at 290 ("[F]ailure to follow accounting standards, without more, does not establish scienter."). Plaintiffs must also plead facts leading to a strong inference that each defendant knew the numbers violated GAAP or was severely reckless in disregarding the concerns. See Abrams, 292 F.3d at 432. Owens v. Jastrow, (5th Cir. 2015).

. . .