Ninth Circuit Reverses Dismissal of Securities Fraud Class Action Where Complaint was "Loaded with Specific Allegations" to Support a Strong Inference of Scienter


In New Mexico State Investment Council v. Ernst & Young LLP, 2011 WL 1419642 (9th Cir. Apr. 14, 2011), the United States Court of Appeals for the Ninth Circuit reversed the dismissal of securities fraud claims against an independent accountant, holding that the complaint pleaded particularized facts giving rise to a strong inference that the auditor acted with scienter when it certified the financial statements of its client, Broadcom Corporation ("Broadcom"). In doing so, the Ninth Circuit declined to apply a "rule of thumb" that a plaintiff bears a "heavier burden" in pleading a strong inference of scienter against an independent accountant than it would in a similar securities fraud action against in issuer or its executives.

This class action was filed in October 2008 naming Broadcom and its auditor in connection with alleged stock option backdating. Plaintiffs alleged that between 2000 and 2006, Broadcom understated its income expenses by more than $2.2 billion, "largely due to improper backdating." Broadcom agreed to pay a civil penalty of $12 million to the Securities and Exchange Commission in connection with these allegations.

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