Fourth Circuit Affirms District Court Decision in Shareholder Litigation in Favor of Deloitte

Davis Polk has been representing Deloitte & Touche LLP since 2003 in connection with a shareholder litigation arising from a significant restatement by Royal Ahold, N.V., the Dutch grocer and former owner of US Foodservice, that was prompted by the discovery of two large-scale frauds. Deloitte & Touche Netherlands was Ahold’s auditor and Deloitte US was USF’s auditor during the relevant period. In December of 2004, Judge Catherine Blake of the US District Court of Maryland dismissed federal securities fraud claims against Deloitte US and Deloitte Netherlands, with prejudice.

The case continued against the remaining defendants, including Ahold and the responsible executives. In late 2005, the plaintiffs and Ahold reached a $1.1 billion settlement, and thereafter, plaintiffs moved for leave to amend their complaint against Deloitte US and Deloitte Netherlands. In June 2007, the district court denied the motion to amend on the ground that the proposed complaint would not survive a motion to dismiss and was therefore futile. In July 2008, the civil suit against Deloitte was dismissed with prejudice and plaintiffs appealed the denial of motion for leave to amend.

On January 5, in one of its first opinions applying Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), the US Court of Appeals for the Fourth Circuit affirmed the district court judgment on the ground that plaintiffs failed to allege a “strong inference” of scienter as required under the Private Securities Litigation Reform Act (PSLRA). Judge Wilkinson authored the opinion for a unanimous panel, which carefully examined and weighed plaintiffs’ allegations and inferences against the opposing non-culpable inferences put forward by Deloitte US, and determined that “in this case, the stronger and more plausible inference is that the Deloittes were, like the plaintiffs, victims of Ahold’s fraud rather than its enablers.” In reaching that conclusion, the court focused on the extensive efforts to which those at the company went in order to deceive the auditors. Those efforts raised the strong inference that the auditors were neither part of the fraud nor reckless. The court also observed that the case is “the paradigm situation to which the PSLRA and Tellabs were meant to apply.”

The Davis Polk litigation team consisted of partners Daniel F. Kolb, who argued the case, and Sharon Katz, counsel Gina Caruso, associates Jane Alexandra Small and Joshua D. Liston, former associate Alexis G. Stone and legal assistant Kimberly Marie Brown. All members of the Davis Polk team are based in the New York office.

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