Gould v. Winstar Communications, Inc. , 692 F.3d 148 ( 2012 )

LOHIER, Circuit Judge:

Plaintiffs-Appellants appeal from a September 2010 judgment of the United States District Court for the Southern District of New York (Daniels, J.) granting the summary judgment motion of Defendant-Appellee Grant Thornton LLP (“GT”) and dismissing the Plaintiffs’ claims arising from GT’s audit of the financial statements of its client, Winstar Communications, Inc. (“Winstar”). The Plaintiffs claimed that GT committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the “Act” or the “Exchange Act”), and 17 C.F.R. § 240.10b-5, and made false and misleading statements in an audit opinion letter in violation of Section 18 of the Act, 15 U.S.C. § 78r. We conclude that genuine issues of material fact exist as to each of these claims. We therefore VACATE the District Court’s grant of summary judgment and REMAND for further proceedings.

BACKGROUND

1. Facts

Reviewing the District Court’s grant of summary judgment in favor of GT, “we construe the evidence in the light most favorable to the [Plaintiffs], drawing all reasonable inferences and resolving all ambiguities in [their] favor.”¹ In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 504 (2d Cir.2010) (quotation marks omitted).

Winstar was a broadband communications company whose core business was to provide wireless Internet connectivity to various businesses. GT served as Wins-tar’s independent auditor from 1994 until Winstar filed for bankruptcy in April 2001, and GT regarded Winstar as “one of [its] largest and most important clients.”²

In 1999, however, the relationship deteriorated. Winstar warned GT that it would likely terminate the relationship if GT’s performance on unrelated international tax planning and other accounting matters proved unsatisfactory. In March 1999 at least one member of Winstar’s board of directors openly urged during a board meeting that the GT partner overseeing the audit of Winstar be removed from the Winstar account. GT eventually re-staffed the Winstar account so that the 1999 audit was managed by a partner, Gary Goldman, and a senior manager, Patricia Cummings, neither of whom had previously reviewed or audited the financial records of a telecommunications company.

As relevant to this appeal, GT’s audit for 1999 included several “large account” transactions that Winstar consummated in an attempt to conceal a decrease in revenue associated with Winstar’s core business. Most of the large account transactions involved Lucent Technologies, Inc. (“Lucent”), Winstar’s strategic partner, and all of them were consummated at the end of Winstar’s fiscal quarters in 1999. Together, the transactions accounted for $114.5 million in revenue, or approximately 26 percent of Winstar’s reported 1999 operating revenues and 32 percent of its “core” revenues that year. At the time, GT considered these transactions to be “red flags,” warranting the accounting firm’s “heightened scrutiny.**³ However, GT ultimately approved Winstar’s recognition of revenue in connection with each of these transactions.

We discuss the evidence relating to each category of transaction in turn.

A. Questionable Sales

The first category of questionable transactions involved a series of six end-of-quarter and end-of-year transactions, primarily reported as equipment sales, for which there was little evidence that any goods or services were ordered and delivered. For example, for the third quarter of 1999 Winstar recognized $15 million in revenue for the sale of Lucent equipment to Anixter Brothers, Inc. (“Anixter”), a wire and cable distributor. There were several unusual aspects of this sale. First, Anixter ordinarily purchased equipment directly from Lucent, not Winstar. Second, equipment sales were not part of Winstar’s core business of creating and operating wireless networks. Third, during GT’s audit Cummings noted that the Anixter transaction was “apparently” completed on September 30, 1999, the last day of Winstar’s fiscal quarter, but GT’s work papers included no documents reflecting the sale’s completion beyond a purchase order from Winstar to Lucent and an invoice from Lucent to Winstar. Moreover, neither the' purchase order nor the invoice included an itemized list of the goods sold or indicated the shipping terms, even though the items were to be shipped on September 30, 1999, and delivered on October 4, 1999.⁴ Absent too was any document evidencing Anixter’s agreement to purchase the items. Lastly, not a single employee of Lucent, Winstar, or Anixter who was asked about the equipment sale could recall it.

Five other transactions that were not part of Winstar’s core business were consummated at the end of one of Winstar’s fiscal quarters and were barely documented. Winstar nevertheless recognized a total of $49.7 million in revenue associated with these five transactions. First, Wins-tar recognized $5 million in revenue in the first quarter of 1999 for a “feasibility study” that Winstar was scheduled to conduct for Lucent, but which had not been delivered by at least 2000. Second, Wins-tar recognized $21.1 million in revenue in the first and second quarters of 1999 in connection with the sale of Lucent equipment to Williams Communications, Inc. (“Williams”). The equipment was shipped by Lucent, not Winstar, on the last business day of the first and second quarters (March 31, 1999 and June 30, 1999, respectively), with no written agreement. Third, Winstar recognized $9.1 million in revenue in the second quarter of 1999 in connection with the sale of Lucent equipment to VoCall Communications Corporation (“VoCall”) on June 30, 1999. Although the sale was referenced in a series of non-numbered purchase orders, it was not referenced in any executed, final agreement or shipping document. Fourth, Winstar recognized $4.5 million in revenue in the third quarter of 1999 in connection with the sale of unspecified “WinStar Equipment” to Cignal Global Communications (“Cignal”), which was contracted for on September 30, 1999, the last day of that quarter. However, GT was unable to produce a document evidencing that the equipment had been shipped to Cignal during that quarter. Fifth, Winstar recognized $10 million in revenue in the fourth quarter of 1999 in connection with the sale of wireless radio equipment (“radios”) to Lucent under an agreement dated December 30, 1999. GT endorsed the recognition of revenue even though its work papers included shipping documents with conflicting dates, no document specified the goods purchased, and Lucent, not Winstar, was in the business of manufacturing and selling radios. The same agreement also involved a $2 million “promotional credit” purchased by Lucent for services that had not yet been rendered by Winstar. Although GT specifically advised Winstar that recognizing and recording the amount of the credit as revenue was improper and in violation of generally accepted accounting principles (“GAAP”),⁵ Winstar nevertheless recognized the full $2 million in revenue.

Each of these transactions appears to have violated the provisions of Staff Accounting Bulletin No. 101 (“SAB 101”), issued by the Securities and Exchange Commission (“SEC”), which states that four conditions must be satisfied before revenue can be recognized: (1) “Persuasive evidence of an arrangement [for the sale of goods or services] exists,” (2) “Delivery has occurred or services have been rendered,” (3) “The seller’s price to the buyer is fixed or determinable,” and (4) “Collectibility is reasonably assured.” SAB 101 at 3.⁶

GT requested that Winstar’s counterparties provide additional documentary evidence of the relevant sales underlying each questionable transaction. By doing so, consistent with SAB 101, GT sought to obtain independent support for Winstar’s recognition of revenue for each transaction — in other words, support from documents that were not generated by Winstar itself. As of February 10, 2000, GT still had not received responsive documents from four of these customers. Nonetheless, it issued an audit opinion letter opining that Winstar’s 1999 financial statements accurately reflected its financial condition and complied with GAAP.

B. Bifurcated Accounting

In connection with at least three other transactions, Winstar employed a bifurcated accounting scheme that GT ultimately approved prior to its audit of Winstar’s financial statements. Two of these transactions involved leasing or subleasing fiber optic network capacity in units called indefeasible rights of use (“IRUs”). Winstar accounted for these IRUs using a dubious bifurcated accounting method, pursuant to which it recognized as much as 94 percent of the revenue from the leases upon execution of the lease, reflecting the cost of optical equipment (“optronics”) that transmitted data over fiber optic cable (“cable” or “fiber”). Winstar then would recognize the balance of the revenue in later quarters, as payments were received over the span of the lease, representing the customer’s actual use of the network. In other words, Winstar split the value of the leases so that the revenue associated with the optronics was reported separately from revenue associated with the cable. By employing this accounting method, Winstar was able to recognize $30.9 million in revenue up front in 1999.

During discovery, a forensic accountant retained by the Plaintiffs opined that the rules of the Financial Accounting Standards Board and interpretive rules of the SEC prohibited the division of leases for fiber optic networks because both the cable and the optronics were essential to the network. Winstar conceded that the fiber and the optronics were not separable, and that no other company previously had employed this bifurcated method in accounting for IRUs. Indeed, Winstar specifically advised GT that the bifurcated approach had been criticized by the accounting firm Deloitte & Touche LLP (“Deloitte”).

GT was in any event aware that revenue associated with an IRU contract could be recognized only if the leased circuit was operational, or “lit,” in the language of the fiber optics field. In the third and fourth quarters of 1999, however, Winstar had failed to “light” many of its IRU circuits, a fact that should have precluded the company from recognizing revenue associated with those IRUs.

In the midst of GT’s audit, Winstar sent form letters dated December 30, 1999, and December 31, 1999, to the counterparties to the two IRU transactions, Wam!Net, Inc. and Cignal, respectively, to confirm that the IRU circuits had been “deliver[ed]” and “accept[ed].” A representative of Cignal signed a form letter confirming delivery and acceptance of the circuits. By contrast, Wam!Net’s Senior Vice President of Finance responded to a letter from Winstar as follows: “To our knowledge [the circuits] are not currently in place.” A subsequent amended letter from a different Wam!Net employee, which does not appear in the record but which Cummings referenced in an email, purported to “accept” the circuits but did not address the earlier letter response. After receiving the amended letter, GT did not further review whether the circuits were installed and operational. Even though it appears not to have received the amended letter until after February 11, 2000, GT approved Winstar’s recognition of revenue for the WamlNet IRU circuit sale on February 10, 2000.

While GT appears to have neglected to verify that WamlNet’s IRU circuits were operational, there was evidence that GT actually knew that the leased Cignal IRU circuits were inoperative. GT nevertheless approved Winstar’s recognition of revenue for the Cignal IRUs in the third quarter of 1999.

Winstar employed a similar bifurcated accounting method in the fourth quarter of 1999 for its sale of radios to Lucent. The agreement between the two companies provided for Winstar to install the radios, but Winstar recognized revenue for the transaction immediately, upon delivering them to Lucent.⁷ GT expressed doubt that the radios and installation services were separable,⁸ but it nevertheless approved of Winstar’s recognition of $10 million in revenue in connection with the transaction.

C. Round-Trip Transactions

Several of the transactions discussed above involved “round-trip” transactions with Cignal and WamlNet at a time when the two customers were struggling financially. “ ‘Round-tripping’ typically refers to reciprocal agreements, involving the same products or services, that lack economic substance but permit [both] parties to book revenue and improve their financial statements.” Teachers’ Ret. Sys. of LA v. Hunter, 477 F.3d 162, 169 (4th Cir.2007). The two principal round-trip transactions that were the focus of discovery involved a scheme pursuant to which Winstar overpaid both companies for purportedly unrelated goods and services in exchange for their purchase of IRUs, equipment, and services from Winstar by the end of Winstar’s third fiscal quarter of 1999 (Cignal), and the end of the fourth quarter of 1999 (WamlNet).

Both round-trip transactions were material to Winstar’s financial performance in 1999. In the larger of the two transactions, Winstar recognized approximately $39 million in revenue in the third and fourth quarters of 1999 in connection with sales to Cignal while it paid Cignal $29.5 million under a separate agreement during the same time period and an additional $4.8 million in the first quarter of 2000. Similarly, Winstar recognized $19.6 million in revenue in connection with sales to WamlNet in the fourth quarter of 1999, even as it paid WamlNet $25 million in the same quarter for “prepaid marketing” and the lease of a “data service center.” In February 2000 GT questioned the “[a]rms length nature of the [round-trip] transactions.” It later acknowledged that the transactions “raise[d] a concern” within GT “as to whether or not absent Winstar’s payment ... collectability was reasonably assured.” Nevertheless, GT approved Winstar’s recognition of the full amount of revenue for both transactions.

D. The Audit Opinion Letter

By letter dated February 10, 2000, GT issued an unqualified audit opinion letter stating that Winstar’s annual Form 10-K report for fiscal- year 1999 complied with GAAP and fairly represented Winstar’s financial condition at the end of that year:

We have audited the accompanying consolidated balance sheets of Winstar Communications, Inc. ...

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. ... We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all'material respects, the consolidated financial position of Winstar Communications, Inc. and Subsidiaries as of December 31, 1999 ... in conformity with accounting principles generally accepted in the United States.

Joint App. at 529.

E. Investment by the Jefferson Plaintiffs

From December 1998 to February 2001, the Jéfferson Plaintiffs purchased over $200 million worth of Winstar stock. The investment portfolios of most of the Jefferson Plaintiffs were managed by Ronald Clark, the Chief Investment Officer for Allianz of America (“Allianz”). The remaining entities deferred to Clark to select their investments in United States securities. Although Clark enjoyed ultimate authority for these investment decisions, he relied on recommendations from a team of analysts, including Livia Asher, who recommended that Allianz purchase Winstar stock. Based on Asher’s recommendation, Clark caused Allianz and the other Jefferson Plaintiffs to invest in Winstar.

Clark, it appears, did not personally review Winstar’s financial statements prior to making the decision to invest in Wins-tar. Instead, he relied on Asher to review the statements as part of her job. During discovery, however, Asher acknowledged that she was uncertain of the date of, or reason for, her recommendation that Allianz purchase Winstar stock. Nor could she specifically recall reading Winstar’s 1999 Form 10-K report. However, Asher testified that she “probably flipped through every single page” of the report, based on her practice. She explained, “I can’t imagine any reason why I would not have looked at this, ... given our position in the stock and given what I would normally do.” Asher added that she habitually read auditors’ opinion letters included in Forms 10-K to make sure that auditors believed that an issuer’s reports were “kosher,” but she did not specifically recall reviewing GT’s audit report.

F. Winstar’s Decline

Winstar’s stock reached a price per share of over $60 in March 2000. In May 2000 Lucent provided Winstar with financing in the form of a renewed credit facility in the aggregate amount of $2 billion. Almost a year later, however, in March 2001, Asensio & Company (“Asensio”), an investment firm, issued a press release criticizing Winstar’s ability to pay its debts and explaining that certain measurements of Winstar’s financial performance were “questionable” due in part to Winstar’s “revenue recognition from non-core businesses and sales of equipment and services to related parties.” Joint App. at 2412. The same press release warned that “[a]ny adjustment to Winstar’s aggressive revenue accounting and capitalization of cash expenditures would negatively and materially impact Winstar’s reported [earnings] and analyst’s [sic] opinions of its operations.” Id. at 2413. On March 19, 2001, Asensio issued another press release reporting on Winstar’s “debt collapse,” again criticizing its revenue accounting practices and noting, “Winstar has recognized revenues that created a slew of uncollected items.... Its revenues include sales to related parties and non-core items such as equipment sales and installation services.” Id. at 2414.

The Asensio press releases preceded a significant downgrade in Winstar’s credit rating on April 3, 2001. Moreover, on April 16, 2001, Winstar announced that Lucent was cancelling Winstar’s credit facility, that Winstar would delay filing its Form 10-K report for 2000, and that Wins-tar was considering a reorganization under Chapter 11 of the Bankruptcy Code.

By the time of the Asensio press releases, Winstar’s revenues and its stock price had decreased significantly during a marketwide decline in the prices of technology stocks. However, the press releases, coupled with the subsequent announcements of Winstar’s financial troubles, were followed almost immediately by an additional steep decline in Winstar’s stock price, from over $10 per share before March 2001 to $0.14 per share by mid-April 2001. On April 18, 2001, Winstar filed for bankruptcy.

During discovery, an economist retained by the Plaintiffs as an expert witness attributed the decline in Winstar’s stock price to, among other causes, the partial disclosure of Winstar’s alleged fraud by Asensio. The economist calculated that members of the putative class who had purchased Winstar common stock lost as much as $974 million, that class members who purchased Winstar notes lost up to $197 million, and that the Jefferson Plaintiffs lost over $96 million by investing in Winstar stock.

2. Procedural History

On April 10, 2001, the Lead Plaintiffs filed a putative class action complaint in the Southern District of New York against Winstar, GT, Lucent, and certain Winstar executives alleging securities fraud under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b). In December 2001 the Jefferson Plaintiffs filed a separate complaint in the District Court against GT, claiming violations of both Section 10(b) and Section 18 of the Exchange Act, 15 U.S.C. § 78r(a).⁹ As a result of various settlements among the parties, the claims against GT were all that remained by 2008. After discovery, GT moved for summary judgment to dismiss the Plaintiffs’ claims and also moved unsuccessfully to preclude the Plaintiffs’ expert loss causation analysis.

In September 2010 the District Court granted GT’s motion for summary judgment, concluding that (1) the Plaintiffs had failed to demonstrate that a genuine dispute of material fact existed as to whether GT acted intentionally or recklessly, as required under Section 10(b) of the Exchange Act, and (2) the Jefferson Plaintiffs had failed to demonstrate that such a dispute existed as to whether they actually relied on GT’s audit opinion letter, as required under Section 18 of the Exchange Act. In re Winstar Commc’ns Sec. Litig., No. 01 CV 11522(GBD), 2010 WL 3910322, at *5-6 (S.D.N.Y. Sept. 29, 2010).

This appeal followed.

DISCUSSION

We review a district court’s grant of summary judgment de novo, viewing the evidence in the light most favorable to the non-moving party and drawing all reasonable inferences and resolving all ambiguities in its favor. E.g., Grain Traders, Inc. v. Citibank, N.A., 160 F.3d 97, 100 (2d Cir.1998). We will affirm the judgment “only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “There is no genuine issue of material fact where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party.” Durakovic v. Bldg. Serv. 32 BJ Pension Fund, 609 F.3d 133, 137 (2d Cir.2010) (quotation marks and brackets omitted). Put another way, “[a]n issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Omnicom, 597 F.3d at 509 (quotation marks omitted).

To sustain a claim under Section 10(b) of the Exchange Act and Rule 10b-5, the Plaintiffs must show “(i) a material misrepresentation or omission; (ii) scienter; (iii) ‘a connection with the purchase or sale of a security!;]’ (iv) reliance by the plaintiffs); (v) economic loss; and (vi) loss causation.” Id. (alteration in original) (quoting Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005)).

1. Scienter

Plaintiffs may satisfy the scienter requirement by producing “evidence of conscious misbehavior or recklessness.” See ECA Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir.2009). Scienter based on conscious misbehavior, in turn, requires a showing of “deliberate illegal behavior,” Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.2000), a standard met “when it is clear that a scheme, viewed broadly, is necessarily going to injure,” AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 221 (2d Cir.2000) (alterations omitted).

In AUSA Life, we applied this standard to representations by the accounting firm Ernst & Young (“E & Y”), which, as plaintiffs allege with respect to GT, “consistently noticed, protested, and then acquiesced in” the financial misrepresentations of an audit client under pressure from the client’s management. Id. at 205. We held that by issuing an unqualified audit report despite its knowledge of accounting improprieties by the client, E & Y “intentionally engaged in manipulative conduct,” id. at 221 (quotation marks omitted), in violation of Section 10(b). We explained that

E & Y is not an accounting dilettante. It knows well that its opinions and certifications are afforded great weight, and it must have known that its financial certifications with regard to [its client] would be compelling to the investors .... [I]t is sufficient [for the purposes of showing scienter] for a plaintiff to allege and prove that a defendant could have foreseen the consequences of his actions but forged ahead nonetheless ....

Id.; see also SEC v. KPMG LLP, 412 F.Supp.2d 349, 379 (S.D.N.Y.2006) (triable issue as to conscious fraud existed when accountant was “[a]ware of [the client’s] earnings pressures” but allowed aggressive accounting policies “without any serious study to determine that these unusual, indeed unique, accounting treatments would result in financial statements that fairly represented [the client’s] financial condition”).

Scienter based on recklessness may be demonstrated where a defendant has engaged in conduct that was “highly unreasonable, representing an extreme departure from the standards of ordinary care ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir.2000) (quotation marks omitted). Recklessness may be established where a defendant “failed to review or check information that [it] had a duty to monitor, or ignored obvious signs of fraud.” Novak, 216 F.3d at 308.

The District Court concluded that Winstar engaged in “dubious accounting practices,” that “[m]uch of the supporting documentation that Winstar supplied to GT was a mere contrivance meant to paper the transactions and create the appearance of legitimacy,” and that GT “failed to uncover the accounting fraud being perpetuated by the Winstar defendants.” Wins-tar, 2010 WL 3910322, at *3, *5. GT does not seriously dispute these conclusions, which are-in any event supported by the record before us. The District Court concluded, however, that the evidence demonstrated only that GT was “performing its role as [Winstar’s] independent auditor” and fell short of demonstrating scienter in the form of either conscious misbehavior or recklessness. Id. at *3. We disagree.

Some evidence supports the Plaintiffs’ contention that GT consciously ignored Winstar’s fraud when it approved Wins-tar’s recognition of revenue for the suspicious 1999 transactions. This evidence goes beyond a mere failure to uncover the accounting fraud and, in general, relates to (1) Winstar’s recognition of revenue for the sale of equipment or services without sufficient indicia of delivery, (2) its recognition of all revenue associated with the incompíete sale of telecommunications systems, and (3) its recognition of revenue for sales of IRUs, equipment, and services to financially unstable companies to whom Winstar paid back large sums under separate contractual obligations.

There is also evidence that GT failed to confirm Winstar’s representations regarding these transactions or to retain and review documents evidencing each transaction. Indeed, an expert forensic accountant retained by the Plaintiffs testified that GT’s failure to exercise due professional care, gather reliable documents, and issue an adverse opinion in this regard represented a violation of Generally Accepted Auditing Standards (“GAAS”)¹⁰ with regard to all of the challenged transactions. Furthermore, the record evidence supports a conclusion that GT knew, even under the terms of Winstar’s bifurcated accounting method — a method that had been criticized by Deloitte but reviewed and approved, with skepticism, by GT— that revenue could not be properly recognized for IRUs unless the leased circuits were operational. During discovery, Cummings acknowledged that GT knew the circuits for the Cignal IRUs were not operational. Under these circumstances, GT’s approval of Winstar’s recognition of revenue for the nonfunctional circuits presents a genuine issue of material fact as to whether GT acted with the requisite scienter under Section 10(b).

We point to the IRU transactions only as one example of a transaction that suggests that GT acted with scienter. Triable issues regarding GT’s scienter exist for the other questionable transactions as well. Broadly speaking, there was admissible evidence that in the course of its audit GT learned of and advised against the use of indisputably deceptive accounting schemes, but eventually acquiesced in the schemes by issuing an unqualified audit opinion. See AUSA Life, 206 F.3d at 221. Based on this record, we cannot conclude that this and the other evidence adduced by the Plaintiffs was insufficient to raise a genuine issue of material fact about whether, in issuing an unqualified audit opinion letter, GT “agreed to [Winstar’s] accounting abuses, knowing ... that [investors] and others would be receiving and relying upon the manipulated financial reports.” Id,'. At this stage, the Plaintiffs have proffered enough facts constituting evidence of conscious misbehavior or recklessness to survive summary judgment.

We note that in granting summary judgment in GT’s favor, the District Court placed particular emphasis on the magnitude of GT’s audit work, both in time spent and documents reviewed. For example, it noted that GT “spent 1,928 hours of professional time,” assembled working papers spanning 3,000 pages, and reviewed “copies of contracts, Winstar business plan[s], press releases, board minutes,” and memos prepared by Winstar and GT addressing accounting issues. Winstar, 2010 WL 3910322, at *2. The number of hours spent on an audit cannot, standing alone, immunize an accountant- from charges that it has violated the securities laws. Here, the Plaintiffs adduced evidence that, notwithstanding the magnitude of its audit, GT repeatedly failed to scrutinize serious signs of fraud by an important client, including: (1) significant end-of-quarter transactions;¹¹ (2) the absence of documents confirming the goods or services ordered by Winstar customers, the fact of delivery, or the existence of an underlying agreement; (3) the repeated failure of Winstar or its clients timely to provide supporting documentation requested by GT; (4) Winstar’s transactions outside its core business; and (5) round-trip transactions in which revenues were subsequently offset by Winstar’s payments to financially unstable customers under unrelated contractual obligations.

In short, regardless of the hours GT spent or the number of documents it reviewed in the course of its 1999 audit of Winstar, a jury reasonably could determine that the audit was so deficient as to be “highly unreasonable, representing an extreme departure from the standards of ordinary care ... to the extent that the danger was either known to [GT] or so obvious that [GT] must have been aware of it.” Rothman, 220 F.3d at 90 (quotation marks omitted).

2. Reliance

Section 18 of the Exchange Act, 15 U.S.C. § 78r(a), requires actual rather than constructive reliance upon a materially false or misleading statement by one who has purchased or sold a security. Heit v. Weitzen, 402 F.2d 909, 916 (2d Cir.1968). The District Court concluded that the Jefferson Plaintiffs failed to show reliance because they could not demonstrate that they or their representatives “actually saw Winstar’s 1999 Form 10-K filing, much less read the included independent accountant report of GT.” Winstar, 2010 WL 3910322, at *6. Even assuming that such “eyeball” reliance is the sort of actual reliance required by our precedents, the District Court’s conclusion somewhat understates the record evidence on this score. Ronald Clark and Livia Asher worked on behalf of the Jefferson Plaintiffs. Although Asher was unable to recall specifically that she reviewed GT’s audit opinion letter, there was evidence that she actively reviewed such letters as a matter of practice in deciding whether to recommend certain stocks. At this stage of the proceedings, Asher’s testimony is enough; from that evidence, a jury reasonably could infer that she actually reviewed and relied on the relevant statements in the documents. See, e.g., Fed.R.Evid. 406. Accordingly, we conclude that the District Court erred in granting summary judgment in GT’s favor on the Jefferson Plaintiffs’ Section 18 claims.

3. Causation

GT argues in the alternative that the District Court’s grant of summary judgment should be affirmed because the Plaintiffs failed to show loss causation. We have described loss causation as “the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.” Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 197 (2d Cir.2003). Among other things, the misconduct must be a “substantial factor in the sequence of responsible causation.” AUSA Life, 206 F.3d at 215 (quotation marks omitted). With these principles in mind, however, we have also warned that “if the loss was caused by an intervening event, like a general fall in the price of Internet stocks, the chain of causation will not have been established!, b]ut such is a matter of proof at trial.” Emergent Capital, 343 F.3d at 197; see also AUSA Life, 206 F.3d at 214-15 (“[W]hen the plaintiffs loss coincides with a market-wide phenomenon causing comparable losses to other investors, the prospect that the plaintiffs loss was caused by the fraud decreases.”).

Relying largely on the deposition testimony of an expert witness economist, the Plaintiffs argue that they have adduced proof of loss causation in the form of the press releases from Asensio and Winstar’s April 2001 announcements, which publicly exposed Winstar’s substantial financial weaknesses and together suggested for the first time that Winstar had engaged in improper revenue recognition practices for a period of time that included 1999. Although a much closer call, a jury could reasonably infer based on the expert testimony and other evidence that the precipitous decline in Winstar’s stock price in 2001 was attributable in part to the alleged fraud.

GT counters that any decline in Wins-tar’s stock price that was not caused by broader market trends resulted not from the alleged fraud but from Lucent’s cancellation of its credit facility. This may be true for a portion of the collapse in Wins-tar’s stock price. There is support as well for the argument that the downgrade in Winstar’s credit rating resulted in a substantial decline in the stock price. But these facts, if established, hardly foreclose the reasonable inference that some part of the decline was substantially caused by the disclosures about the fraud itself. We therefore conclude that a jury reasonably could find the requisite “causal link between [Winstar’s] alleged misconduct and the economic harm ultimately suffered” by the Plaintiffs. See Emergent Capital, 343 F.3d at 197.

CONCLUSION

We have considered GT’s other arguments, and we conclude that they are without merit. For the foregoing reasons, we VACATE the District Court’s grant of summary judgment, and we REMAND for further proceedings.

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.

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.

3 . The Public Company Accounting Oversight Board has recognized that one risk factor indicating pqjential 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.

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/sablOl.htm (last visited June 28, 2012).

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.

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.

7 . Winstar also employed a bifurcated accounting method when it recognized $16.5 million in revenue in connection with a sale of radios to WamlNet 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.

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.

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. [Pjrofessional 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-OS).

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, 114 S.Ct. 1439, 128 L.Ed.2d 119 (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.