operational deficiencies would cause USN to overstate incoming
There is evidence, however, that Deloitte took steps to ensure
the accuracy of the financial reports despite USN's operational
deficiencies. In fact, plaintiffs' expert, Berliner, testified
that Deloitte spent 1200 hours on the 1997 audit, and he
acknowledged that this was a great deal of time. Def. Resp. Ex. I
at 361. This alone defeats a claim of recklessness. This is not a
case where Deloitte simply ignored operational deficiencies.
Deloitte used sampling techniques to contact people and verify
that they were really USN customers. Pl. 56.1(b)(3)(A) at ¶ 48.
Deloitte also used these techniques to determine whether any
billing disputes existed between USN and its customers. Id.
Plaintiffs argue Deloitte should have focused on the existence of
the billed receivables rather than simply the existence of the
customer. Pl. Resp. at 102. They also contend Deloitte should
have focused on unbilled receivables rather than simply billed
receivables. Id. From these observations, Berliner concluded
Deloitte recklessly departed from professional standards. Def.
App. Ex. 19 at 7-9. The evidence does not support Berliner's
conclusion. Viewed in a light most favorable to plaintiffs, the
evidence might support a negligence claim, but it could not
convince a reasonable jury that Deloitte's behavior was reckless.
During the 1997 audit, Deloitte proposed to increase USN's
allowance for doubtful accounts by $2 million. Pl. 56.1(b)(3)(A)
at ¶ 53. Berliner concluded that Deloitte was deficient in
increasing the allowance. Def. App. Ex. 19 at 3. Berliner further
opined that the sensitivity analysis Deloitte conducted to
determine whether a going concern paragraph should be included in
the audit report was inadequate. Id. at 4. However, Berliner
conceded that he would not have included a going concern
paragraph if he had performed the audit. Def. Reply, Ex. I at
185-187. As Deloitte points out, "Procedures that lead to the
right conclusion are not reckless." Def. Reply at 12. Again,
plaintiffs' evidence supports negligence at most, not reckless
behavior. The record shows Deloitte took steps to ensure that the
financial statements were materially accurate. Furthermore,
Deloitte's expert, LeGrand Kirby, testified that the financial
statements were prepared in accordance with GAAP and GAAS.
Def.App. Ex. 23 at 3-4. When qualified experts disagree on
whether GAAP and GAAS procedures were properly followed, the
accounting procedures cannot be deemed reckless. S.E.C. v. Price
Waterhouse, 797 F. Supp. 1217, 1241 (S.D.N.Y. 1992).
Even without direct evidence of scienter, plaintiffs may
withstand a summary judgment motion if there is circumstantial
evidence to support a reasonable inference of the requisite
intent. Alra Laboratories, Inc., 1999 WL 160710, at *8. In
considering circumstantial evidence, courts focus on whether
defendants would benefit from the fraud. Courts ask, "Did they
gain by bilking the buyers of securities?" Robin v. Arthur Young
& Company 915 F.2d 1120, 1126 (7th Cir. 1990).
Plaintiffs claim Deloitte knowingly risked its reputation "in
order to eliminate the risk that USN would terminate the
lucrative consulting projects." Cmplt. ¶ 204. Deloitte collected
$2 million dollars from USN for its consulting and revenue
assurance work that began in 1996. Pl. App. Ex. 114. Furthermore,
Deloitte received over $50 million in fees from USN underwriters
in 1997. Pl.App. Ex. 8. Although this appears to be a lucrative
business dealing, this amount of money, even coupled with similar
future earnings, falls vastly below the potential loss of income
and good will that Deloitte would sustain if its reputation were
damaged by fraudulent business practices. It is not reasonable to
infer that Deloitte would be willing to risk its accounting
reputation for the sake of USN, one of its many clients. As the
court in Robin pointed out, "An accounting firm's greatest
asset is its reputation for honesty, followed closely by its
reputation for careful work. Fees [for an accounting
firm receives for its services] . . . could not approach the
losses [the firm] . . . would suffer from a perception that it
would muffle a client's fraud." Id. at 1127-28. Therefore, a
reasonable jury could not infer that a well-established
accounting firm would be willing to take the enormous risk of
engaging in fraud for the sake of a lucrative client. See
Goldberg v. Household Bank, F.S.B., 890 F.2d 965, 967 (7th Cir.
1989) (citations omitted) ("a plaintiff who imputes to a
defendant actions that `make no economic sense' needs solid proof
to survive a motion for summary judgment"). Furthermore, the fees
paid to an accounting firm cannot, as a matter of law, provide
sufficient support for Rule 10(b)(5)'s scienter requirement.
DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir. 1990).
There is insufficient direct and circumstantial evidence of
fraud to raise an issue of material fact as to Deloitte's
liability under Rule 10(b)(5). The purpose of summary judgment is
to eliminate cases in which one side has no realistic chance of
prevailing on the merits. This is not a case where the facts
viewed in a light most favorable to plaintiffs clearly suggest
fraud. Summary judgment is appropriate when the inferences
offered to prove fraud establish negligence at best. "Securities
litigation is expensive to the parties in money, and to the court
in time; it should be brought to a conclusion at the first
opportunity." Goldberg v. Household Bank, F.S.B., 890 F.2d 965,
967 (7th Cir. 1989).
The motion for summary judgment is granted.