Magazine article The CPA Journal

Recklessness in Securities Law Claims

Magazine article The CPA Journal

Recklessness in Securities Law Claims

Article excerpt

In an important decision in the Leslie Fay Companies, Inc. securities litigation, Judge Conner has apparently scrapped the last vestiges of protection from the Hochfelder case--at least in cases involving large-scale fraud on the part of the company. In a decision reported this past winter, (SDNY, October 27, 1993, CCH Fed. Sec. L. Rep. Sec. 98,031), Judge Conner concluded that recklessness sufficient to sustain a claim under Rule 10b-5 can be inferred when the misstatement of financial results is large enough, even when no other evidence of scienter is present.

Beginning with a comprehensive review of the Second Circuit's treatment of the recklessness standard under Rule 10b-5, Judge Conner concludes that in allegations against auditors the degree of recklessness pleaded must be the kind "that is equivalent to willful fraud:" circumstances where deliberate avoidance of knowledge can be inferred. While that standard would appear to favor the accountants in most cases, Judge Conner concludes that the combination of two circumstances in the Leslie Fay case was sufficient to establish, at least for pleading purposes, a sufficient allegation of scienter:

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