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 2014-04

Michael Coady v. Ernst & Young ( 2014 )


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  •                                                                               FILED
NOT FOR PUBLICATION                               APR 24 2014
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS                          U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL B. COADY and ROBERT                      No. 12-56216
HAKIMIAN,
D.C. No. 2:08-cv-03812-GW-
Plaintiffs - Appellants,           VBK
v.
MEMORANDUM*
INDYMAC BANCORP, INC.; et al.,
Defendants,
and
ERNST & YOUNG LLP,
Defendant - Appellee.
Appeal from the United States District Court
for the Central District of California
George H. Wu, District Judge, Presiding
Argued and Submitted April 9, 2014
Pasadena, California
Before: FERNANDEZ, N.R. SMITH, and MURGUIA, Circuit Judges.
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Plaintiff Michael Coady appeals the district court’s dismissal of his
complaint alleging securities fraud violations against Ernst & Young (EY). “We
review de novo a district court's grant of a motion to dismiss for failure to state a
claim under Federal Rule of Civil Procedure 12(b)(6) and for failure to allege fraud
with particularity under Federal Rule of Civil Procedure 9(b).” WPP Luxembourg
Gamma Three Sarl v. Spot Runner, Inc.,
    655 F.3d 1039
    , 1047 (9th Cir. 2011). We
have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.
Under Rule 9(b), claims alleging fraud are subject to a heightened pleading
requirement, which requires that a party “state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The “more exacting pleading
requirements” of the Private Securities Litigation Reform Act of 1995 (PSLRA)
§ 101(b), 15 U.S.C. § 78u-4, “require that a complaint plead with particularity both
falsity and scienter.” Zucco Partners, LLC v. Digimarc Corp.,
    552 F.3d 981
    , 990
(9th Cir. 2009) (internal quotation marks omitted).
1.    Coady first claims that EY issued unqualified opinions on IndyMac’s 2006
Form 10-K and 2007 Form 10-K, fraudulently certifying that IndyMac’s internal
controls over financial reporting were effective in all material respects. However,
Coady failed to “state with particularity” how any of IndyMac’s internal control
problems rose to the level of a material weakness. See Fed. R. Civ. P. 9(b).
-2-
“[A]lleged false statements, unaccompanied by the pleading of specific facts
indicating why those statements were false, do[] not meet [the PSLRA’s]
standard.” Metzler Inv. GMBH v. Corinthian Colls., Inc.,
    540 F.3d 1049
    , 1070 (9th
Cir. 2008).
2.    Coady next claims that EY fraudulently stated that IndyMac had adequate
loan loss reserves in 2006 and 2007. Coady’s unparticularized allegations that EY
violated generally accepted auditing standards (GAAS) by ignoring indications
from the market, “without an explanation of how the defendant knowingly or
recklessly violated those standards,” are insufficient. See N.M. State Inv. Council
v. Ernst & Young LLP,
    641 F.3d 1089
    , 1102 (9th Cir. 2011) (internal quotation
marks omitted).
3.    Finally, Coady claims that EY fraudulently omitted a going-concern
qualification from its 2007 audit opinion. Coady alleges that IndyMac met all five
GAAS criteria for a going-concern qualification at the time EY issued its opinion.
However, “[a]lleging a poor audit is not equivalent to alleging an intent to
deceive.”
    Id. at 1098 
    (alteration in original) (internal quotation marks omitted).
Moreover, given that the Office of Thrift Supervision found that “[f]ailure appears
unlikely . . . given the overall strength and financial capacity of [IndyMac]” around
the same time EY issued its opinion, the inference of scienter is not “cogent and at
-3-
least as compelling as any opposing inference one could draw from the facts
alleged.” See Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
    551 U.S. 308
    , 324
(2007).
4.    Even a holistic review of Coady’s allegations fails to save Coady’s claims.
See Zucco
    Partners, 552 F.3d at 1006
    . Securities fraud complaints against outside
auditors that have survived the PSLRA’s exacting pleading requirements have
pleaded deviations from GAAS with more specificity than Coady has here. See,
e.g., N.M. State Inv.
    Council, 641 F.3d at 1098 
    (relying on “specific email
exchanges recited in the Complaint” and the fact that EY “never received or
reviewed any documents”); In re Daou Sys., Inc.,
    411 F.3d 1006
    , 1018 (9th Cir.
2005) (“The complaint alleges myriad observations of accounting misfeasance
(e.g., alleged manipulation of the books) . . . .”).
AFFIRMED.
-4-