Overview
Last week, Judge Rakoff granted Pricewaterhouse Coopers' motion to dismiss Section 10(b) claims brought as part of the ongoing class action over an alleged bribery and kickback scheme at Brazilian oil giant Petrobras. PwC's Brazilian member firm had served as Petrobras' independent auditor. PwC argued that the fourth amended complaint had failed to properly allege scienter, and Judge Rakoff agreed, noting that "mere receipt of compensation and the maintenance of a profitable professional business relationship for auditing services does not constitute a sufficient motive for purposes of pleading scienter." Plaintiffs also failed to allege any facts connecting PwC's auditing services to "red flags" of fraud at Petrobras.
Judge Rakoff denied the motion as to PwC's Section 11 claim, rejecting PwC's argument that the claim had to be dismissed pursuant to the U.S. Supreme Court's decision in Omnicare because PwC's audit opinions were statements of opinion and not fact. Judge Rakoff declined to adopted PwC's contention that financial statements generally were unactionable opinions:
PwC also argues that plaintiffs' Section 11 claim fails regardless of whether the underlying financial statements are considered embedded or omitted, because the financial statements are themselves statements of opinion . . . . But a fact-based estimate is different than a subjective opinion. Issuers like Petrobras are required to submit financial statements under the Securities Act, and the Act does not call for an issuer to submit its opinion of what it thinks an asset might be worth. Instead, it requires issuers to make factual statements about their financial health and imposes strict liability with respect to errors and omissions in such statements to promote full and fair disclosure of material information. The supposition that financial statements are nonactionable opinions flies in the face of the statutory language of Section 11.Judge Rakoff found that Omnicare provided two avenues for the Rule 11 claims to survive: first, the plaintiffs alleged that the opinions contained "embedded statements of fact" that were untrue; and second, material omissions (the alleged bribery and kickback scheme) rendered the opinion statements misleading.