The Ninth Circuit recently ruled that an accounting firm could not be held liable under Section 10(b) of the Securities Exchange Act of 1934 where the plaintiff was unable to show that the defendant participated in any “deceptive acts” that were communicated to the public. In In re Peregrine Systems, Inc. Securities Litigation, No. 06-55197, 2009 WL 186165 (9th Cir. Jan. 23, 2009), the Court of Appeals affirmed the dismissal of a securities fraud suit against KPMG and certain of its affiliates based on their alleged participation in a scheme with business partner Peregrine Systems, Inc. involving so-called “parking” transactions. The court held that the Supreme Court’s decision in Stoneridge Investment Partners v. Scientific-Atlanta, 128 S. Ct. 761 (2008), prohibited the plaintiff from holding these non-speaking defendants liable as primary violators of Section 10(b).
The plaintiff in Peregrine Systems alleged that the KPMG defendants enabled Peregrine to improperly recognize $32.1 million in revenue by agreeing to purchase software at the end of fiscal quarters when Peregrine could not complete legitimate sales to end users in time to properly recognize the revenue and that, in exchange, KPMG received service contracts with the end users to whom the software would later be sold. 2009 WL 186165, at *1. The plaintiff further asserted that these “parking” transactions allowed Peregrine to meet its quarterly revenue projections. Id. Noting the similarity of the allegations to those in Stoneridge, the court held that, pursuant to that case, the parking transactions could not form the basis of a Section 10(b) claim unless a member of the investing public had knowledge of the KPMG defendants’ deceptive acts sufficient to demonstrate reliance upon those acts. Id. (quoting Stoneridge, 128 S. Ct. at 769).
The plaintiff attempted to invoke the fraud-on-the-market presumption to demonstrate reliance based on certain press releases referencing the partnership between Peregrine and KPMG. Id. at *2. The Ninth Circuit, however, noted that the press releases at issue contained only non-misleading statements regarding the partnership between the companies and did not communicate any information regarding the allegedly misleading “parking” transactions. Id. “Notably, not one of the press releases announce[d] a specific transaction between KPMG and Peregrine.” Id. Accordingly, the court concluded that, as in Stoneridge, “it was Peregrine, not the KMPG Defendants, ‘that misled its auditor and filed fraudulent financial statements; nothing [the KPMG Defendants] did made it necessary or inevitable for [Peregrine] to record the transactions as it did.’” Id. (quoting Stoneridge, 128 S. Ct. at 770). Ultimately, “the press releases did not communicate the KPMG Defendants’ allegedly deceptive acts and, therefore, do not trigger a presumption of reliance.” Id. at *2.
The Ninth Circuit also rejected the plaintiff’s request to amend the complaint to add references to the press releases and similar documents. Id. The court affirmed the district court’s dismissal with prejudice because it was clear that “the press releases and other similar information [the plaintiff] seeks to incorporate into a newly amended complaint cannot save the [complaint].” Id.