A federal district court denied a motion to dismiss class action claims filed against a gambling equipment company, its CEO and its CFO for violations of, among other things, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiffs asserted that the defendant company improperly recognized revenue from inter-company transactions, engaged in improper accounting practices, failed to correct flawed internal controls and made material misrepresentations in its public filings. Defendants moved to dismiss, asserting that the complaint failed to sufficiently allege scienter.
Analyzing plaintiffs’ allegations under the Supreme Court’s Tellabs v. Makor Issues & Rights, Ltd. standard, the Court denied defendants’ motion. Alththe Court found that many of plaintiffs' allegations did not independently demonstrate the requisite level of scienter, it ruled that “the totality of the specific circumstances . . . all demonstrate an inference of scienter that is at least as compelling as an compelling as an opposing inference of nonfradulent intend."
The Court emphasized that the company was forced to restate earnings from a subsidiary company one year after restating earnings from the same subsidiaand making public assurances that it had reevaluated its internal controls to ensure that no future errors would occur. The court ruled that the subsequenrestatement in conjunction with its magnitude—without which the defendantcompany would not have met consensus earnings estimates—“len[t] to an overall inference of scienter.” The Court similarly found the defendancertifications—which stated that defendants had properly designed, implemented and supervised adequate internal controls—constituted “sufficient reason to infer that defendants acted with reckless disregard in failing to rectify [the company's] past internal deficiencies.” (Stocke v. Shuffle Master, Inc., 2009 WL 798927 (D. Nev. Mar, 2009)).