(CN) - A federal appeals court reversed a ruling in favor of Grant Thornton LLP, reviving claims that the auditing firm intentionally overlooked evidence of fraud in the financial statements of the defunct broadband services company Winstar Communications Inc.
Several Winstar bondholders filed a class action complaint claiming that Grant Thornton defrauded investors by ignoring red flags in Winstar's 1999 financial reports. When Winstar went belly up and filed for bankruptcy, investors suffered $1.1 billion in losses, the class alleged.
Grant Thornton was New York-based Winstar's independent auditor from 1994 until it filed for bankruptcy in the Spring of 2001, the 2nd Circuit opinion states. In March 2001 Asensio & Co. criticized Winstar's accounting and a month later Winstar filed for bankruptcy, initially pinning the blame for its collapse on partner Lucent Technologies.
The 2nd Circuit in Manhattan ruled that there was "triable questions of fact" as to whether Grant Thornton had issued an audit opinion letter which investors had relied upon to buy Winstar stock.
In the court's unanimous 25-page opinion, Circuit Judge Raymond Lohier wrote that investors had alleged facts to support claims that Grant Thornton "consciously ignored Winstar's fraud when it approved Winstar's recognition of revenue" for "suspicious" 1999 transactions, including questionable sales, improper accounting and financial agreements.
"There is also evidence that GT [Grant Thornton] failed to confirm Winstar's representations regarding these transactions or to retain and review documents evidencing each transaction," Lohier wrote for the three-judge panel.
The judge also noted that though the lower court had "placed particular emphasis on the magnitude of GT's audit work, both in time spent and documents reviewed" that did not "immunize" the auditor from claims that it defrauded investors or that its accounting was "deficient."
The court also found a "reasonable inference" that a decline in Winstar stock was "substantially caused by the disclosures about the fraud itself."
"We therefore conclude that a jury reasonably could find the requisite 'causal link between [Winstar's] alleged misconduct and the economic harm ultimately suffered' by the plaintiffs," Lohier wrote, vacating the district court's judgment.
Senior Judge Robert Sack and Judge Peter Hall joined Lohier's opinion.