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Keywords

plaintiffdefendantliabilityappealpleabankruptcy
plaintiffliabilityappealpleabankruptcy

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Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, Fed. Sec. L. Rep. P 94,150

Facts

Investors represented a putative class of individuals who purchased Warnaco common stock between August 15, 2000, and June 8, 2001. They alleged that Deloitte made numerous misstatements regarding Warnaco's financial condition and failed to correct previous misstatements, which concealed the risk of Warnaco's financial collapse. Warnaco filed for bankruptcy on June 11, 2001, after defaulting on credit agreements and experiencing a significant drop in stock price.

Investors represented a putative class of individuals who purchased Warnaco common stock between August 15, 2000, and June 8, 2001. They alleged that Deloitte made numerous misstatements regarding Warnaco's financial condition and failed to correct previous misstatements, which concealed the risk of Warnaco's financial collapse. Warnaco filed for bankruptcy on June 11, 2001, after defaulting on credit agreements and experiencing a significant drop in stock price.

Issue

Did Deloitte & Touche LLP make actionable misstatements or omissions under § 10(b) of the Securities Exchange Act of 1934, and did the investors adequately plead loss causation?

Did Deloitte & Touche LLP make actionable misstatements or omissions under § 10(b) of the Securities Exchange Act of 1934, and did the investors adequately plead loss causation?

Rule

To state a claim under § 10(b) and Rule 10b–5, plaintiffs must allege that the defendant made misstatements or omissions of material fact, with scienter, in connection with the purchase or sale of securities, upon which plaintiffs relied, and that their reliance was the proximate cause of their injury.

To state a claim under § 10(b) and Rule 10b–5, plaintiffs must allege that Deloitte “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.”

Analysis

The court found that Deloitte's audit opinion in the 1999 10-K was made before the class period and thus could not be the basis for liability. The quarterly statements filed during the class period were not audited by Deloitte and did not contain its opinion, meaning Deloitte could not be held liable for those statements. Furthermore, the court concluded that the investors failed to establish a sufficient causal link between Deloitte's alleged misstatements and their losses, as the risk of bankruptcy was not concealed by Deloitte's actions.

The court found that Deloitte's audit opinion in the 1999 10-K was made before the class period and thus could not be the basis for liability. The quarterly statements filed during the class period were not audited by Deloitte and did not contain its opinion, meaning Deloitte could not be held liable for those statements. Furthermore, the court concluded that the investors failed to establish a sufficient causal link between Deloitte's alleged misstatements and their losses, as the risk of bankruptcy was not concealed by Deloitte's actions.

Conclusion

The Court of Appeals affirmed the district court's dismissal of the investors' claims against Deloitte, concluding that the plaintiffs did not adequately plead actionable misstatements or loss causation.

The Court of Appeals affirmed the district court's dismissal of the investors' claims against Deloitte, concluding that the plaintiffs did not adequately plead actionable misstatements or loss causation.

Who won?

Deloitte & Touche LLP prevailed in the case because the court found that it was not liable for the misstatements in Warnaco's financial statements and that the investors failed to establish loss causation.

Deloitte & Touche LLP prevailed in the case because the court found that it was not liable for the misstatements in Warnaco's financial statements and that the investors failed to establish loss causation.

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