Girard Gibbs represents Jefferson Insurance Company and 24 other related institutional investors in a private action pending in the United States District Court for the Southern District of New York against the former officers and directors of Winstar Communications, Inc. and Winstar’s former auditors, Grant Thornton LLP, arising out of Winstar’s bankruptcy.
Plaintiffs allege that defendants violated the federal securities laws by making false and misleading statements of material fact about Winstar’s financial condition, operating results and relationship with Lucent Technologies, Inc. Plaintiffs allege that defendants engaged in a massive accounting fraud involving numerous end-of-quarter transactions with Lucent and other telecommunications companies which lacked economic substance, were designed solely to inflate Winstar’s financial results, and caused Winstar to recognized hundreds of millions of dollars in revenue in violation of generally accepted accounting principles. Plaintiffs allege that Grant Thornton participated in and enabled Winstar to perpetuate this scheme by issuing a false and misleading clean audit report on the company.
According to the complaint, as a result of defendants’ fraudulent conduct, the price of Winstar common stock was artificially inflated from the end of 1998 through Winstar’s bankruptcy filing in April 2001. When the company declared bankruptcy, plaintiffs lost more than $200 million on their investments in Winstar.
Current Case Status
Second Circuit Issues Favorable Ruling in Claims against Grant Thornton
On July 19, 2012, the Second Circuit Court of Appeals unanimously overturned the trial court’s summary judgment ruling in favor of Grant Thornton. In September 2010, the trial court had granted Grant Thornton’s motion for summary judgment and dismissed the case, concluding that no genuine dispute existed as to whether Grant Thornton had acted intentionally or recklessly when it falsely certified as accurate Winstar’s materially overstated 1999 financial results.
The Second Circuit, in vacating the trial court’s decision, held that “[t]here was admissible evidence that, in the course of its audit, Grant Thornton learned of and advised against the use of indisputably deceptive accounting schemes, but eventually acquiesced in the scheme and issued an unqualified audit opinion.” The case has been remanded back to the Southern District of New York for trial.
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