Eighth Circuit Affirms Dismissal After Tellabs Review

A fraud complaint did not meet the Tellabs standard for pleading scienter, concluded an 8th Circuit panel. In affirming a district court's pre-Tellabs dismissal of claims based on several accounting errors and resulting restatements by Ceridian Corp., an information services and human resources outsourcing firm, the court found that the non-culpable inferences of negligence and mistake raised by the allegations were more compelling than the inferences of fraud.

The class alleged that Ceridian's senior officers participated in a scheme to artificially inflate the company's financial results by exploiting a weak or corrupt system of internal controls to commit numerous violations of Generally Accepted Accounting Principles. Initially, the appellate panel agreed with the lower court finding that the sheer number and magnitude of the financial restatements, "an amalgam of unrelated GAAP violations," without more, did not raise a sufficient inference of scienter. "Without something more, the opposing inference of nonfraudulent intent-that these were mistakes by accounting personnel undetected because of faulty accounting controls-is simply more compelling," stated the court.

When viewed as a whole, the court found that the various obligations failed to meet the Tellabs standard. Of particular note was the court's holding on allegations that the officers must have known that their Sarbanes-Oxley certifications concerning the effectiveness of the company's internal controls were false, in light of the subsequent revelations of accounting errors and control deficiencies. "Allegations that accounting errors were discovered months and years later do not give rise to a strong inference that the certifications were knowingly false when made," stated the court, as the panel concluded that the complaint did not identify any specific factual basis for inferring that the officers knew their certifications were false. The court in effect observed that the plaintiffs' interpretation of the certification requirement would turn the provision into a strict liability measure, because scienter would be established in every case where there was an accounting error or auditing mistake.

Other allegations of insider trading and bonus awards were also not sufficiently suspicious. An ongoing SEC investigation which produced no adverse findings also did not show scienter, and a compelling inference that the senior officers knew of the series of GAAP violations could not be drawn from the dismissal of several mid-level accounting personnel. "The flaw in this argument," observed the court, "is that the opposing inferences-that the SEC investigation uncovered no evidence of fraud, and that accounting personnel and corporate officers responsible for the accounting function were fired or forced to depart for incompetence, not fraud-are more compelling in the absence of particular facts giving rise to a strong inference of fraud."

In re Ceridian Corp. Securities Litigation