Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 1 of 32

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Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 24 of 32allegation must also be rejected. See, e.g., In re Verifone Sec. Litig., 11 F.3d 865, 868-869 (9thCir. 1993)(rejecting securities fraud allegations based on failures to make a forecast of futureevents).B. Plaintiff Failed to Adequately Plead a Section 1 OCb) Claim for AccountingFraud. 62Plaintiff alleges that Defendants are liable under Section 1 O(b) because LPHI issued aRestatement regarding a variety of accounting issues, including revenue recognition. 63 However,Plaintiff has failed to adequately allege scienter, necessitating dismissal of this claim. This isespecially true with respect to Defendants Pardo and Peden who are not alleged to beaccountants or to have any accounting expertise sufficient to challenge the treatment given to anyparticular transaction. See In re Novatel Wireless Sec. Litig., No. 08cv1689 AJB RBB, 2011U.S. Dist. LEXIS 135602, at *41 (S.D. Cal. Nov. 23,2011). Furthermore, even as to DefendantMartin, who was the CFO for only part of the time the SEC alleges Defendants engaged inaccounting fraud, Plaintiff makes no allegations that he was aware of any wrongdoing or directedany improper activity. Accordingly, the "accounting fraud" claims must be dismissed.1. Plaintiff Failed to Plead Scienter with Respect to Revenue Recognition."[T]o give rise to section 1 O(b) liability for fraud, the mere second-guessing ofcalculations will not suffice; the [SEC] must show that defendants' judgment - at the momentexercised - was sufficiently egregious that a reasonable accountant reviewing the facts andfigures should have concluded that the company's financial statements were misstated and thatas a result the public was likely to be misled." SEC v. Guenther, 395 F. Supp. 2d 835, 845 (D.62 Although Plaintiff asserts Section 10(b) claims against Defendants "through November 2011," Plaintiff does notspecify what statements made by Defendants in 2011 are false. While the Form 10-K that contained therestatements at issue was filed in November 2011, Plaintiff does not assert that any of the financial data wasinaccurate. On its face, then, this claim fails to satisfy Rule 9(b).63 See CompI., ~~64-137, 152.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 18
Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 25 of 32Neb. 2005). The Complaint fails to adequately allege that any of Defendants Pardo, Peden orMartin (1) knew that revenue was not being properly recorded; (2) knew that the disclosedrevenue recognition policy was not being followed; or (3) knew that any backdating ofdocuments was occurring that could impact revenue recognition. 64Indeed, based upon theComplaint's allegations, it appears that the backdating of documents occurred throughout theyear, and that such backdating did not occur only at quarter or year end in a concerted effort toalter revenue. Further, the fact that restated revenues for fiscal years 2007-2010 and the firstthree quarters of 2011 showed that, for some periods, revenue was understated, as opposed tooverstated, evidences a lack of intent to systematically overstate revenues. Absent allegations ofknowledge, participation or motive, Plaintiffs claims in this regard must be dismissed.Strikingly similar claims made by Plaintiff in another case were rejected due to the samedeficiencies. In SEC v. Cohen, the SEC sued the CFO of a public company that issued anaccounting restatement as a result of improper revenue recognition. 65The SEC alleged that, asthe CFO, defendant knew that the company was prematurely recording revenue and, further, thatthe CFO was motivated to manipulate the revenues in order to inflate the company's revenuesand earnings, facilitate the company's secondary offering, and derive personal gain from annualbonuses and stock sales. 66After a bench trial, the court found that the SEC had failed to provescienter because (1) there was "no evidence that defendant knew the various managers assignedto properly report the revenue were not performing their jobs correctly," and (2) there was "noevidence that the managers were pressured by defendant to accelerate revenue.,,67Further,because the restatement of revenues resulted in both over- and understatements, the court found64 See CompI., ~~69-118, 159.65 No. 4:05CV371-DJS, 2007 U.S. Dist. LEXIS 28934, at *3, 25-27 (E.D. Mo. April 19, 2007).66Id. at *48-53.67Id. at *48-49.DEFENDANTS LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN'S MOTION TO DISMISSAND BRIEF IN SUPPORT - Page 19
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Case 1:12-cv-00033-JRN Document 12 Filed 02/29/12 Page 1 of 32

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