A Minnesota district court dismissed a securities fraud claim brought by a class of investors against a corporation that was forced to restate its financial results multiple times over a two-year period due to “dozens, if not hundreds, of accounting errors.” The complaint alleged that the sheer volume of accounting errors, when combined with the sale of personal holdings of stock by some officers of the corporation, indicated a scheme to defraud the investors during the class period.

The court pointed out that even though the management of the corporation may have been incompetent, the securities laws were designed to prevent securities fraud, not accounting malpractice. Therefore, the court found that instead of demonstrating that the scheme was a “high-level plot to overstate the company’s performance,” the allegations merely “portray[ed] a company that was riddled with incompetence among its financial managers and accountants.”

Plaintiffs also asserted scienter should be inferred when the timing of defendants’ sales of personal stock is considered alongside the accounting errors. The court rejected this theory, pointing out that the defendants did not sell their stock when the price was at its highest. In fact, after the defendants sold their stock, the price of the stock reached a much higher level that it maintained for some period of time and defendants never sold additional stock at this higher price. (In re Ceridian Corporation Securities Litigation, 2007 WL 1620788 (D. Minn. June 5, 2007))