That’s A Lot Of Underpants

Under the PSLRA, plaintiffs must plead facts creating a strong inference that the defendants acted with scienter (i.e., fraudulent intent) to survive a motion to dismiss. Several courts have found that the sheer size of an alleged financial fraud can support a finding of fraudulent intent. In a recent decision, however, the U.S. Court of Appeals for the Sixth Circuit has disagreed.

In Fidel v. Farley, 2004 WL 2901274 (6th Cir. Dec. 16, 2004), the plaintiffs argued that the magnitude of the financial fraud allegedly perpetrated by Fruit of the Loom, including a write-down of over $220 million of inventory in 1999, supported an inference that the company’s auditors had acted with scienter. The court found that “[a]llowing an inference of scienter based on the magnitude of fraud ‘would eviscerate the principle that accounting errors alone cannot justify a finding of scienter.'” Moreover, the fact that Fruit of the Loom took the write-offs in 1999, “in no way implied that [the auditors] acted with scienter while auditing the 1998 financial data.”

Holding: Dismissal affirmed.

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