On August 31, 2010, Judge Lawrence M. McKenna of the U.S. District Court for the Southern District of New York granted Deloitte & Touche LLP's motion to dismiss a lawsuit alleging that Deloitte issued a misleading report on the financial health of Adelphia Communications Corp. The suit was filed by plaintiff C. Philip Rainwater, who received nearly 700,000 shares of Adelphia when he and other shareholders sold their interests in Benchmark Media, Inc. to Adelphia in March 2001. At that time, Adelphia shares were valued at $45 per share, but became virtually worthless by the summer of 2002 when Adelphia filed for bankruptcy. Rainwater alleges that he received and relied upon a number of Adelphia's SEC filings in deciding whether to enter into the sale of Benchmark to Adelphia and further relied upon an audit opinion issued by Deloitte that he alleged "constituted a knowing or reckless misrepresentation by Deloitte of a material fact."
Judge McKenna granted Deloitte's motion to dismiss the Section 10(b) claim on two grounds. First, the court found that allegations that Deloitte was motivated to increase its non-audit business did not suffice to plead scienter under Section 10(b). Second, the court found that plaintiff failed to plead loss causation because he did not identify the specific misrepresentations that resulted in his alleged loss. The court also dismissed a claim under Section 18 of the Exchange Act, holding that the plaintiff had failed to identify specific statements on which he allegedly relied. Finally, the court dismissed various state-law claims under the Securities Litigation Uniform Standards Act. The court gave Rainwater 20 days to replead the claims under Sections 10(b) and 18. Order.