Deloitte Argues for Dismissal of Securities Fraud Suit

IN RE
SILVER WHEATON CORP. SECURITIES LITIGATION

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

REPLY IN FURTHER SUPPORT OF DELOITTE LLP'S MOTION TO DISMISS THE SECOND AMENDED COMPLAINT

REDACTED VERSION OF DOCUMENT PROPOSED TO BE FILED UNDER SEAL

Date: August 20, 2018
Time: 10:00 a.m.
Judge: Christina A. Snyder
Ctrm: 8D

LEE G. DUNST (admitted pro hac vice)
ldunst@gibsondunn.com
BENJAMIN S. MISHKIN (admitted pro hac vice)
bmishkin@gibsondunn.com
GIBSON, DUNN & CRUTCHER LLP
200 Park Avenue
New York, NY 10166-0193
Telephone: 212.351.4000
Facsimile: 212.351.4035

ALEXANDER K. MIRCHEFF, SBN 245074
amircheff@gibsondunn.com
GREGORY S. BOK, SBN 298239
gbok@gibsondunn.com
GIBSON, DUNN & CRUTCHER LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Telephone: 213.229.7000
Facsimile: 213.229.7520

Attorneys for Defendant DELOITTE LLP

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TABLE OF CONTENTS

I. Introduction

II. Argument

III. Conclusion

TABLE OF AUTHORITIES

Cases

In re A-Power Energy Generation Sys. Ltd. Sec. Litig., 2012 WL 1983341 (C.D. Cal. May 31, 2012)

In re Adelphia Commc'ns Corp. Sec. & Derivative Litig., 2010 WL 11507022 (S.D.N.Y. Aug. 31, 2010)

Batwin v. Occam Networks, Inc., 2008 WL 2676364 (C.D. Cal. July 1, 2008)

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) 1

Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 2086607 (C.D. Cal. June 7, 2012) 19

Buttonwood Tree Value Partners, LP v. Sweeney, 910 F. Supp. 2d 1199 (C.D. Cal. 2012)

Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152 (9th Cir. 2012)

Deephaven Private Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168 (10th Cir. 2006)

In re Doral Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461 (S.D.N.Y. 2008)

Dronsejko v. Thornton, 632 F.3d 658 (10th Cir. 2011)

DSAM Glob. Value Fund v. Altris Software, Inc., 288 F.3d 385 (9th Cir. 2002)

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005)

In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319 (S.D.N.Y. 2004)

Hufnagle v. Rino Int'l Corp., 2013 WL 160223 (C.D. Cal. Jan. 14, 2013) 19

In re Ikon Office Sols., Inc., 277 F.3d 658 (3d Cir. 2002)

In re Imergent Sec. Litig., 2009 WL 3731965 (D. Utah Nov. 2, 2009)

Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135 (2011)

La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471 (6th Cir. 2010)

Luna v. Marvell Tech. Grp. Ltd., 2016 WL 5930655 (N.D. Cal. Oct. 12, 2016)

Marksman Partners, L.P. v. Chantal Pharm. Corp., 46 F. Supp. 2d 1042 (C.D. Cal. 1999)

McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105 (S.D.N.Y. 2013)

Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008)

Miller Inv. Tr. v. Morgan Stanley & Co., LLC, 308 F. Supp. 3d 411 (D. Mass. 2018)

Mineworkers' Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018)

Monroe v. Hughes, 860 F. Supp. 733 (D. Or. 1991)

N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089 (9th Cir. 2011)

In re New Century, 588 F. Supp. 2d 1206 (C.D. Cal. 2008)

In re Novatel Wireless Sec. Litig., 830 F. Supp. 2d 996 (S.D. Cal. 2011)

In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014)

Oaktree Capital Mgmt., L.P. v. KPMG, 963 F. Supp. 2d 1064 (D. Nev. 2013)

In re Petrobras Sec. Litig., 2016 WL 1533553 (S.D.N.Y. Feb. 19, 2016)

Reiger v. Altris Software, Inc., 1999 WL 540893 (S.D. Cal. Apr. 30, 1999)

Reiger v. Price Waterhouse Coopers LLP, 117 F. Supp. 2d 1003 (S.D. Cal. 2000)

Rubin v. Trimble, 1997 WL 227956 (N.D. Cal. Apr. 28, 1997)

S.E.C. v. Price Waterhouse, 797 F. Supp. 1217 (S.D.N.Y. 1992)

Schiller v. Physicians Res. Grp., Inc., 2002 WL 318441 (N.D. Tex. Feb. 26, 2002)

In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999)

In re Software Toolworks Inc., 50 F.3d 615 (9th Cir. 1994)

In re Software Toolworks, Inc. Sec. Litig., 1991 WL 319033 (N.D. Cal. June 17, 1991)

Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125 (C.D. Cal. 2011)

In Re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308 (M.D. Fla. 2002)

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)

United States v. Ritchie, 342 F.3d 903 (9th Cir. 2003)

In re Van Wagoner Funds, Inc. Sec. Litig., 382 F. Supp. 2d 1173 (N.D. Cal. 2004)

In re Washington Mut., Inc. Sec. Derivative & ERISA Litig., 694 F. Supp. 2d 1192 (W.D. Wash. 2009)

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994)

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009)

Other Authorities

CRA Information Circular 87-2R

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 I. Introduction

Plaintiffs are nothing if not zealous advocates. In their attempt to pursue claims against Deloitte LLP (“Deloitte”), they are confronted with the high bar for pleading a securities fraud claim against an outside auditor. Yet Plaintiffs' opposition brief jumps up and down on the most slender of reeds. They argue, for example, that * * *, and Deloitte's professional judgments at the time differ from Plaintiffs' theory of the case today. Opp. at 37-38, 42-45. Similarly, Plaintiffs assert that * * *. Opp. at 39-40.

Whether this incredibly aggressive approach satisfies the requirements for plausible pleading is not the real question here (although Deloitte submits that the clear answer is “no”). See, e.g., Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007). Plaintiffs have claimed that Deloitte's audit opinions for fiscal years 2012, 2013, and 2014 amounted to securities fraud. See Second Amended Complaint (“SAC”) ¶¶ 432 n.38, 509-16. Thus, they must not only plead particularized factual allegations to show that Deloitte was somehow incorrect in its stated opinions — i.e., in concluding that Silver Wheaton's financial statements fairly addressed the ongoing CRA Audit (which the Company first disclosed on March 27, 2012). Rather, Plaintiffs must also show, based on all the facts and all the inferences available from the record, that there is a strong, cogent, and compelling inference of scienter — that Deloitte allegedly expressed those opinions with a mental state embracing intent to defraud Silver Wheaton's investors. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322-24 (2007) (“courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss,” to determine “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter,” “tak[ing] into account plausible opposing inferences”); Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1006 (9th Cir. 2009) (“when considering whether the complaint raises a strong inference of scienter,” courts must conduct a “holistic review” that “'take[s] into account plausible opposing inferences' that could weigh against a finding of scienter” (citation omitted)).

That is an extraordinarily rigorous standard — which Plaintiffs fail to meet in this case. It is designed to ensure that the pleading stage will be a meaningful safeguard, and that “opportunistic” plaintiffs cannot impose the excessive costs of discovery based on strained or speculative interpretations of the facts. E.g., In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 973, 977-78 (9th Cir. 1999) (citing H.R. Conf. Rep. 104-369, at 31, 41). The requirement of a “powerful or cogent” inference of fraud is not to be decided in the “vacuum” of plaintiffs' one-sided narrative. Tellabs, 551 U.S. at 323-24.

This exacting standard is particularly difficult to satisfy in the context of claims against an outside auditor (Deloitte) that has reached the same conclusions as another independent accounting firm (PwC). It is even more challenging when the accounting analysis turned on subjective assessments of predictions about how a fact-specific and complex regulatory inquiry — * * * — ultimately might be resolved. Those circumstances clearly demonstrate that Deloitte's opinions about Silver Wheaton's financial statements were a reasonable exercise of accounting judgment — and certainly not the kind of “extreme departure” from accounting standards necessary to create a cogent and compelling inference that Deloitte acted with an intent to defraud. DSAM Glob. Value Fund v. Altris Software, Inc., 288 F.3d 385, 390-91 (9th Cir. 2002) (Section 10(b) claim against outside auditor properly dismissed where plaintiffs “failed to allege any facts to establish that . . . the audit was such an extreme departure from reasonable accounting practice that [the auditor] knew or had to have known that its conclusions would mislead investors”).

Plaintiffs' multiple leaps of logic do not take them anywhere near the requisite strong inference of fraud. Rather, they only demonstrate just how weak the inferences Plaintiffs depend upon really are. The claims against Deloitte should be dismissed with prejudice.

II. Argument

A. Plaintiffs' opposition brief underscores the inadequacy of their falsity and scienter allegations.

1. Plaintiffs confirm that they simply disagree with Deloitte's professional judgments regarding the disclosures in Silver Wheaton's financial statements.

The opposition brief never squarely addresses the showing Plaintiffs must make to adequately plead that the statements they challenge were false and made with scienter. See Deloitte's MTD at 23-25. At bottom, Plaintiffs' theory is that Deloitte's judgments about the reasonableness of Silver Wheaton's conclusions — regarding the “remoteness” of the possibility that the Company would incur additional tax liability, and whether it was “practicable” to estimate that liability years in advance — were incorrect and indeed so facially erroneous that they could only be the product of fraud. The opposition brief confirms that this theory is fatally flawed.

a. Plaintiffs have not shown that Deloitte's judgments were an “extreme departure” from reasonable accounting practice.

To adequately state a fraud claim against Deloitte, Plaintiffs must plead particularized factual allegations to show “that the accounting practices were so deficient that the audit amounted to no audit at all, or an egregious refusal to see the obvious, or to investigate the doubtful, or that the accounting judgments which were made were such that no reasonable accountant would have made the same decisions if confronted with the same facts.” In re Software Toolworks Inc., 50 F.3d 615, 628 (9th Cir. 1994). Such a showing requires an “extreme departure from reasonable accounting practice.” DSAM, 288 F.3d at 391; see also Software Toolworks, 50 F.3d at 626.

The opposition brief largely ignores this standard. While Plaintiffs identify steps they believe Deloitte should have taken, they fail to offer any authority showing that the FY 2012-14 audits were so egregiously flawed that they “give rise to a 'cogent and compelling' inference” that Deloitte was “deliberately reckless in evaluating [Silver Wheaton's] financial condition.” Batwin v. Occam Networks, Inc., 2008 WL 2676364, at *18 (C.D. Cal. July 1, 2008) (Snyder, J.).

Plaintiffs mischaracterize the scienter standard as only requiring conduct akin to negligence. They assert, for example, that they can plead scienter without pointing to any “evidence that [Deloitte] did not believe it had complied with PCAOB Standards.” Opp. at 36. They even claim that Deloitte's “subjective belief” is irrelevant, and that all they need to allege is that Deloitte “had reason to have known” that investors purportedly would be misled. Id. at 36, 46. Plaintiffs are wrong. The standard is neither negligence or even recklessness, but rather “deliberate recklessness.” In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1053 (9th Cir. 2014). “[R]ecklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct.” Id. (emphasis added) (quoting Silicon Graphics, 183 F.3d at 977). Thus, Plaintiffs must plead facts showing that Deloitte knew, or was intentionally or consciously reckless in failing to see, that its audit opinions were false.

The opposition brief, like the SAC, confirms that Plaintiffs cannot meet this high standard by claiming that Deloitte's work “amounted to no audit at all.” As Plaintiffs admit in the SAC, * * *. SAC ¶¶ 357, 362; see also Ex. 23 at DEL0009484-85.¹ Moreover, both the opposition brief and the SAC concede that, among other things, * * *. See, e.g., Opp. at 37-38; SAC ¶¶ 352, 356-57, 363-64; Ex. 20 at DEL0008860, DEL0008863-64; Ex. 23 at DEL0009484-85; Ex. 25 at DEL0009559-64. As demonstrated by all of these undisputed facts, “[t]hese are not the actions of a firm conducting 'no audit at all.'” Buttonwood Tree Value Partners, LP v. Sweeney, 910 F. Supp. 2d 1199, 1207 (C.D. Cal. 2012).

Plaintiffs have therefore shifted course and now apparently argue that * * *. Opp. at 38. That is false, as shown by Exhibits 30 and 31 previously submitted in connection with Deloitte's Motion to Dismiss.² But even if Deloitte had not * * * Plaintiffs do not explain why that would amount to “an egregious refusal to see the obvious, or to investigate the doubtful,” consistent with an intent to mislead. Software Toolworks, 50 F.3d at 628.

Nor could they given PwC's extensive transfer pricing reports, which opined that Silver Wheaton's tax position was permissible, and which Deloitte received and reviewed in each of the relevant years. See Deloitte's MTD at 6-9. It is undisputed that the SAC incorporates the PwC reports, and therefore they are relevant to whether Plaintiffs' allegations give rise to a strong inference of scienter against Deloitte. See Tellabs, 551 U.S. at 322-23. The PwC reports further demonstrate that it was not an “extreme departure from reasonable accounting practice,” DSAM, 288 F.3d at 391, for Deloitte to conclude that Silver Wheaton reasonably believed there was only a “remote” possibility that the Company would ultimately incur additional tax liability. And contrary to Plaintiffs' suggestion (Opp. at 38-39, 48), the substance of the PwC reports — * * * — directly supports the disclosures in the Company's financial statements. See infra at 9-10, 17-18.

In addition, Plaintiffs do not seriously dispute Deloitte's point that * * * Opp. at 45. But * * * is critical. It bears directly on the key considerations under IAS 37 ¶ 86: the likelihood of an “outflow in settlement,” and, if more than “remote,” whether it was “practicable” to provide a best estimate of that potential outflow.

As Deloitte has explained, throughout the relevant time period, * * * before the CRA could even issue a proposal letter recommending recharacterization. See Deloitte's MTD at 32-33. At every step, there was a significant likelihood that the CRA Audit would conclude with a finding that recharacterization was not appropriate. Indeed, even after the CRA auditors made a formal referral to the TPRC in * * *, it was still likely that the TPRC would determine that recharacterization was inappropriate, since approximately two-thirds of such recharacterization referrals are denied. See id. at 32. For this reason, and because Deloitte had a well-supported belief that Silver Wheaton's tax position complied with CRA guidelines (based on extensive evidence, including the PwC transfer pricing reports), it was not an egregious departure from the accounting standards for Deloitte to conclude that the Company was reasonable in its view that it faced only a remote possibility of incurring additional tax liability. Deloitte's judgment on this point certainly does not give rise to an inference of fraud.

Similarly, * * * bears directly on practicability — that is, whether it was an extreme departure from accounting standards for Deloitte to find it was reasonable for Silver Wheaton to conclude that estimating the amount the Company might ultimately pay in settlement was not practicable. * * *, see Ex. 25 at DEL0009560-61; Ex. 6 at 149:20-150:1, 150:23-151:3 — it was not a violation of accounting standards (let alone an “egregious” one necessary to support a fraud claim) for Deloitte to conclude that the Company's position that it was not “practicable” to estimate its ultimate liability was reasonable.

The accounting decisions at issue here — regarding what was “remote” and “practicable” — inherently call for the exercise of professional judgment. Plaintiffs claim that the rules are “simple and obvious.” Opp. at 48-49. But they tellingly do not cite any authority explaining what the terms “remote” and “practicable” mean in the accounting context. They do not explain how likely it must be that an event will come to pass before it must be disclosed under the relevant rules, much less define the bounds of an auditor's permissible judgment on that matter. They simply assert that, in their after-the-fact judgment in a litigation context, the likelihood of an additional tax liability was not “remote.” But pointing to a “difference of professional opinion [regarding] Deloitte's judgment . . . fails to satisfy a claim for securities fraud.” Monroe v. Hughes, 860 F. Supp. 733, 740 (D. Or. 1991), aff'd, 31 F.3d 772 (9th Cir. 1994); see also, e.g., Reiger v. Price Waterhouse Coopers LLP, 117 F. Supp. 2d 1003, 1008 (S.D. Cal. 2000) (“Using different initial assumptions and approaches, different sampling techniques, and the wisdom of 20-20 hindsight, few CPA audits [are] immune from criticism.”), aff'd, DSAM, 288 F.3d 385; S.E.C. v. Price Waterhouse, 797 F. Supp. 1217, 1241 (S.D.N.Y. 1992) (where “reasonable accountants could reach different conclusions,” “no finding of fraud or recklessness can rationally be made”).

So, too, with respect to whether further disclosures by the Company were “practicable.” Plaintiffs apparently construe that term to require disclosure whenever it is theoretically possible to calculate the maximum amount of liability a company might incur. See Opp. at 43-45. That construction is plainly wrong — IAS 37 asks for “the best estimate of the expenditure required to settle the present obligation at the end of the reporting period,” taking into account, among other things, “all possible outcomes [and] their associated probabilities,” “[t]he entity's past experience and future expectations,” “risks and uncertainties,” and “[f]uture events that may affect the amount required to settle an obligation . . . where there is sufficient objective evidence that they will occur.” See IAS 37 ¶¶ 36-52 (emphasis added). Plaintiffs do not address this guidance.

Because Plaintiffs cannot offer a well-founded definition of the accounting terms they claim are “simple and obvious,” they cannot possibly satisfy their obligation to “set forth facts explaining why the [allegedly fraudulent accounting decision] is not merely the difference between two permissible judgments, but rather the result of a falsehood.” Luna v. Marvell Tech. Grp. Ltd., 2016 WL 5930655, at *5 (N.D. Cal. Oct. 12, 2016); accord Rubin v. Trimble, 1997 WL 227956, at *17 (N.D. Cal. Apr. 28, 1997) (same); cf. also In re Ikon Office Sols., Inc., 277 F.3d 658, 675 (3d Cir. 2002) (“[A]uditing estimated reserves for doubtful accounts is a highly imperfect undertaking that requires an assessment of the risk that accounts may be defaulted on. As there is no evidence to suggest that [the auditor]'s method of predicting collectibilty [sic] was unreasonable or grossly inconsistent with acceptable accounting practices, there is no basis to conclude that [it] fraudulently certified that the reserve for doubtful accounts in [the] consolidated financial statements comported with GAAP.”); In re Novatel Wireless Sec. Litig., 830 F. Supp. 2d 996, 1013 (S.D. Cal. 2011) (“Accounting principles are subject to good faith disagreement, and therefore to prove falsity in financial statements, Plaintiffs must prove that the company's accounting treatment was wholly outside the zone of reasonable disagreement.”).

b. Plaintiffs still have not pointed to any evidence that Deloitte did not believe in its audit opinions.

Like the SAC, the opposition brief does not “point to any specific evidence, such as contemporaneous reports or statements of others,” showing that Deloitte believed its audit opinions were false or misleading. In re Van Wagoner Funds, Inc. Sec. Litig., 382 F. Supp. 2d 1173, 1187 (N.D. Cal. 2004) (citation omitted). Nor do Plaintiffs make any meaningful attempt to plead facts showing that Deloitte did not conduct proper audits, as opposed to merely disagreeing with Deloitte's professional judgments.

Instead, Plaintiffs seize upon * * * (prepared more than six years before the first Deloitte audit opinion at issue here) * * *. Ex. 17 at DEL0000036. Plaintiffs suggest * * *. See Opp. at 38-39, 46. Of course that is all wrong.³ As the SAC concedes, * * *. See SAC ¶¶ 216-18. Deloitte reviewed the PwC reports every year and agreed with PwC's determination that Silver Wheaton's tax position was reasonable in each audit year, including fiscal years 2012, 2013, and 2014 (the sole audit years for which Plaintiffs are pursuing claims against Deloitte). See Deloitte's MTD at 8-9.

Plaintiffs try to brush aside the obvious comfort Deloitte properly drew from PwC's extensive expert analysis by arguing that the transfer pricing reports were * * * Opp. at 38. That too is false. Each of the PwC transfer pricing reports * * *. See, e.g., Ex. 14 at SLW0095685-92. * * * consistent with OECD Guidelines endorsed by the CRA, which explain that “the application of the arm's length principle is generally based on a comparison of the prices, or margins, used or obtained by non-arm's length parties with those used or obtained by arm's length parties engaged in similar transactions.” CRA Information Circular 87-2R at 4, https://bit.ly/2J9lhCH. Each of the PwC reports also * * *.⁴ Thus, because the CRA “generally accepts business transactions as they are structured by the parties,” and will not recharacterize transactions that comply with the arm's length principle, CRA Information Circular 87-2R at 5, PwC's analysis supported Deloitte's good-faith belief in the reasonableness of Silver Wheaton's position that the likelihood of recharacterization was “remote.”

c. The “red flag” doctrine is irrelevant here because there is no dispute that Deloitte analyzed Silver Wheaton's tax position and the adequacy of its disclosures.

Plaintiffs' circumstantial theory of scienter now rests largely on the “red flag” doctrine. See Opp. at 36, 46. But that doctrine does not apply here. “'Red flags' are those facts which come to the attention of an auditor which would place a reasonable auditor on notice that the audited company was engaged in wrongdoing to the detriment of its investors.” Batwin, 2008 WL 2676364, at *17 n.13 (quoting In Re Sunterra Corp. Sec. Litig., 199 F. Supp. 2d 1308, 1333 (M.D. Fla. 2002)). Thus, for example, in Plaintiffs' primary case, the issue was whether an auditor knew of, or was deliberately reckless in disregarding, the client's “fraudulent $2.2 billion stock options backdating scheme.” N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1092 (9th Cir. 2011). The SAC alleges no such “scheme” to be discovered here. Instead, Plaintiffs appear to suggest that * * *. See Opp. at 37-38. That makes no sense, not least because is not a fact “suggest[ing] the possibility that fraud was afoot.” Batwin, 2008 WL 2676364, at *17. Silver Wheaton's tax position also was meticulously analyzed in PwC's transfer pricing reports, which Plaintiffs do not dispute Deloitte reviewed and are indisputably incorporated by reference into the SAC. And, as Plaintiffs acknowledge, the CRA Audit was disclosed by the Company in each of the relevant audit years for their claims against Deloitte. See Opp. at 34. Plaintiffs' claims against Deloitte center on the narrow question of whether Deloitte subjectively believed that additional disclosures were required under the relevant accounting rules. As explained above, Plaintiffs cannot make that showing because “even 'allegations of a seriously botched audit' are insufficient to establish the inherently deceptive state of mind necessary to create a strong inference of scienter.” Buttonwood, 910 F. Supp. 2d at 1208 (quoting DSAM, 288 F.3d at 387).

Moreover, Plaintiffs' own description of their scienter theory shows that Deloitte did not ignore any red flags. Plaintiffs erroneously claim that * * * Opp. at 38. Plaintiffs' silly suggestion that * * * is implausible on its face and contradicted by the multiple documents that Plaintiffs reference in the SAC. See infra at 12-14. As numerous courts — including this one — have recognized, the fact that an auditor identified potential risks gives rise to a “strong inference” that it did not ignore those risks. Buttonwood, 910 F. Supp. 2d at 1207; Batwin, 2008 WL 2676364, at *18 (“[P]laintiff's contention that the Auditor defendants 'turned a blind eye' to the accounting problems at [the company], is belied by allegations in the complaint that [the auditors] identified and informed . . . management of internal control deficiencies.”).

2. Plaintiffs' treatment of the record is not tenable, much less cogent and compelling.

a. Plaintiffs ignore the parts of Deloitte's audit working papers that undermine their claims.

Deloitte's audit working papers for fiscal years 2012, 2013, and 2014, the entirety of which are incorporated by reference into the SAC (see Deloitte's Request for Judicial Notice at 6-10; Deloitte's Opp. to Pls.' Cross-Motion to Strike at 5-6),⁵ show that Deloitte conducted thorough audits and carefully evaluated Silver Wheaton's disclosures in its financial statements relating to the CRA Audit. See Deloitte's MTD at 11-16. Plaintiffs therefore cannot establish that Deloitte performed “no audit at all” or “egregious[ly] refus[ed] to see the obvious, or to investigate the doubtful.” Software Toolworks, 50 F.3d at 628; see also Deloitte's MTD at 27-30; supra at 4-5, 10-11.

Faced with this undisputed reality, Plaintiffs depict a parallel universe in which parts of Deloitte's audit working papers that disprove their claims simply do not exist. They assert that Deloitte * * *. Opp. at 38. But Deloitte * * * (see Ex. 30; Ex. 31), which are cross-referenced in documents cited in the SAC and were produced to Plaintiffs. See Deloitte's Request for Judicial Notice at 9.⁶ * * * Opp. At 38-39, * * *. See SAC ¶ 351 * * * Ex. 21 (DEL0008877-78). Plaintiffs similarly contend that Deloitte * * *. Opp. at 38. But again, Deloitte. See Ex. 30; Ex. 31.

Plaintiffs also wrongly claim that * * * Opp. at 39. The documents demonstrate otherwise. For example, the FY 2012 audit working papers make clear that, among other things, Deloitte:

• * * * (Ex. 20 at DEL0008860; Ex. 30 at DEL0010217;

• * * * (Ex. 30 at DEL0010217; Ex. 36 at DEL0008871);

• * * * (Ex. 21 at DEL0008878; Ex. 30 at DEL0010215-16);

• * * * (Ex. 21 at DEL0008877; Ex. 30 at DEL0010216-17);

• * * * (Ex. 21 at DEL0008877-78; Ex. 30 at DEL0010216-17); and

• * * * (Ex. 30 at DEL0010207-10).

The FY 2013 and FY 2014 audit working papers do the same, see, e.g., Ex. 23; Ex. 25; Ex. 31; Ex. 37 at DEL0009492, and further show that Deloitte:

• * * * (Ex. 23 at DEL0009484; accord Ex. 25 at DEL0009563);

• * * * (Ex. 23 at DEL0009484-85);

• * * * (Ex. 31 at DEL0010538-39); and

• * * * (Ex. 25 at DEL0009563).

Far from there being * * * (as Plaintiffs suggest half-heartedly), Opp. at 39, Deloitte's audit working papers for fiscal years 2012, 2013, and 2014 are rife with extensive detail supporting Deloitte's professional judgments.⁷

b. Plaintiffs mischaracterize key documents.

Plaintiffs also mischaracterize documents that negate any inference of scienter.

Deloitte's Transfer Pricing Memoranda. The detailed memoranda * * * demonstrate that Deloitte undertook exhaustive efforts during the relevant audit years to evaluate Silver Wheaton's accounting and disclosures pertaining to the CRA Audit. See Ex. 30; Ex. 31. For that reason, Plaintiffs try to twist the contents of the memoranda to attack Deloitte's judgments and fit their false narrative.

Most egregiously, Plaintiffs argue that the memoranda show that * * * Opp. at 41-42. This argument fails on multiple levels. As an initial matter, the memoranda indicate that * * * Ex. 30 at DEL0010212; Ex. 31 at DEL0010547. And contrary to Plaintiffs' suggestion (Opp. at 41), it is not surprising that * * *

Moreover, * * * Ex. 30 at DEL0010205; Ex. 31 at DEL0010540. * * * Ex. 30 at DEL0010212-13; Ex. 31 at DEL0010547-48. * * *

Plaintiffs also oddly claim that the memoranda * * * Opp. at 45, * * *. See Ex. 30 at DEL0010201-02 * * * Ex. 31 at DEL0010534-35 (same).

Plaintiffs otherwise resort to after-the-fact second-guessing of findings in the * * * memoranda with conclusory allegations and blatant mischaracterizations. Plaintiffs proclaim that the memoranda * * * but they offer no support for this accusation. Opp. at 47. They acknowledge Deloitte's determination that * * * Ex. 30 at DEL0010213; Ex. 31 at DEL0010548, * * * simply because it contradicts their preferred litigation narrative. Opp. at 42. And they admit that the Deloitte memoranda * * *, Ex. 30 at DEL0010213; Ex. 31 at DEL0010548, but maintain that, in their opinion today in a litigation context, * * * Opp. at 43 n.14. Although Plaintiffs may disagree today with Deloitte's professional judgments at the time (as well as those by PwC), that in no way demonstrates that Deloitte was “willfully blind.”

* * * Id. at 42. * * * Horne Decl. Ex. 3, Dkt. 314-3 at 76:15-20 (emphasis added). * * * Ex. 9 at SLW0003266-67. In addition, Plaintiffs' contention that * * * Opp. at 43, is yet another distortion of the record — * * *. See Ex. 33 * * *) at DEL0000619-20 * * * Ex. 45 at PWC0001603. And, in any event, * * * See supra at 15-16.

PwC's Transfer Pricing Reports. Plaintiffs take a similar approach with respect to PwC's annual transfer pricing reports, which comprehensively examined Silver Wheaton's tax position. During its year-end audits, Deloitte closely reviewed PwC's analysis and determined that it provided adequate support for Silver Wheaton's transfer pricing policy. See Deloitte's MTD at 6-9. These undisputed facts also weigh strongly against any inference of scienter against Deloitte, see Marksman Partners, L.P. v. Chantal Pharm. Corp., 46 F. Supp. 2d 1042, 1050 (C.D. Cal. 1999) (the fact that a second outside accounting firm made similar findings “certainly provide[s] . . . support for the notion that [the] auditing decisions were reasonable as a matter of law”), not least because they undermine any suggestion the accounting judgments were such “extreme departure[s]” from reasonable accounting practice that “no reasonable accountant would have made the same decisions if confronted with the same facts,” DSAM, 288 F.3d at 390-91; Software Toolworks, 50 F.3d at 626, 628. It is undisputed that two major accounting firms — PwC and Deloitte — were “confronted with the same facts” and reached the same “accounting judgments” about Silver Wheaton's transfer pricing policy.

Recognizing this fatal flaw in their claims against Deloitte, Plaintiffs take pains to minimize the significance of the PwC transfer pricing reports by claiming that they are * * * Opp. at 38, 48. Not so. The reports * * * Ex. 9 at SLW0003269, as Plaintiffs themselves concede elsewhere in their opposition brief, see, e.g., Opp. at 14-15. Moreover, * * * Ex. 9 at SLW0003262. The PwC reports * * *. Id. at SLW0003275. Thus, the PwC transfer pricing reports * * * See Ex. 30 at DEL0010213 * * * Ex. 31 at DEL0010548 (same).⁸

3. The opposition brief abandons any “independence” argument and further shows that Plaintiffs' allegations relating to compliance with Canadian GAAS and PCAOB standards are not viable.

Plaintiffs fail to point to any allegations suggesting that Deloitte did not believe it had followed Canadian GAAS and PCAOB standards. See Deloitte's MTD at 17-18. Instead, Plaintiffs are left arguing that they need not make such a showing. That position has been rejected by multiple cases from this district. See Hufnagle v. Rino Int'l Corp., 2013 WL 160223, at *2 (C.D. Cal. Jan. 14, 2013) (“Absent any [allegation that the outside auditor's opinion regarding compliance with PCAOB standards was subjectively false], Plaintiff cannot satisfy the misrepresentation element of a securities fraud claim, and the complaint must be dismissed.”); Buttonwood Tree Value Partners, LP v. Sweeney, 2012 WL 2086607, at *2 (C.D. Cal. June 7, 2012) (dismissing Section 10(b) claim against outside auditor where complaint failed to “sufficiently allege” that auditor “did not believe” its opinion “that it complied with GAAS”). Moreover, one of those cases expressly considered and rejected the primary case Plaintiffs rely upon. See Hufnagle, 2013 WL 160223, at *2 (discussing In re Washington Mut., Inc. Sec. Derivative & ERISA Litig., 694 F. Supp. 2d 1192 (W.D. Wash. 2009)).⁹ The other cases Plaintiffs cite as supposed support for their position either do not address whether an auditor's statement of compliance with GAAS and/or PCAOB standards is an opinion, see N.M. State Inv. Council, 641 F.3d 1089, or are from outside the Ninth Circuit, see Deephaven Private Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168 (10th Cir. 2006);¹⁰ Miller Inv. Tr. v. Morgan Stanley & Co., LLC, 308 F. Supp. 3d 411 (D. Mass. 2018), or both, see In re Petrobras Sec. Litig., 2016 WL 1533553 (S.D.N.Y. Feb. 19, 2016); McIntire v. China MediaExpress Holdings, Inc., 927 F. Supp. 2d 105 (S.D.N.Y. 2013). Thus, the Court should find — consistent with Hufnagle, Buttonwood, and the vast majority of courts that have reached the issue — that an auditor's statement of compliance with GAAS and PCAOB standards is an opinion and, as such, Plaintiffs have failed to adequately plead that this statement in Deloitte's FY 2012-14 audit reports was false.

In any event, Plaintiffs' opposition brief appears to abandon virtually all of the SAC's allegations regarding why Deloitte's statement of compliance with Canadian GAAS and PCAOB standards supposedly was objectively incorrect. See SAC ¶¶ 442, 451, 460.¹¹ In arguing that “[t]he Complaint Adequately Alleges [a] PCAOB Standards Violation,” Plaintiffs merely suggest that * * * Opp. at 37-39. This appears to be shorthand for Plaintiffs' incorrect contentions about alleged “red flags,” discussed above. See supra at 10-11.

Notably, Plaintiffs do not respond in any way to Deloitte's argument that none of their allegations show that Deloitte failed to maintain its professional independence at any point in time. See Deloitte's MTD at 19-21.¹² Plaintiffs' silence suggests that even they know their independence allegations are unfounded. Any argument that those allegations support the falsity allegations is therefore waived. See, e.g., Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125, 1132 (C.D. Cal. 2011) (“[I]n most circumstances, failure to respond in an opposition brief to an argument put forward in an opening brief constitutes waiver or abandonment in regard to the uncontested issue.” (collecting cases)).

Plaintiffs thus abandon any unique argument about GAAS and PCAOB standards (based on independence or otherwise), and leave Defendants and the Court guessing as to which PCAOB standards Deloitte allegedly violated and how. That further weighs in favor of dismissal. Cf. Oaktree Capital Mgmt., L.P. v. KPMG, 963 F. Supp. 2d 1064, 1088 (D. Nev. 2013) (finding failure to adequately plead falsity as to outside auditor's statement of GAAS compliance where complaint “fail[ed] to allege a GAAS rule stating that [the purportedly deficient work] should have been [performed] during an audit”).

4. Plaintiffs' motive allegations remain implausible.

Plaintiffs ask the Court to disregard longstanding precedent holding that “an independent accounting firm's desire to maintain [client] fees . . . is not a sufficient 'motive' to raise a strong inference of scienter.” Reiger v. Altris Software, Inc., 1999 WL 540893, at *3 (S.D. Cal. Apr. 30, 1999); see also In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427 n.7 (9th Cir. 1994) (“It is highly improbable that an accountant would risk surrendering a valuable reputation for honesty and careful work by participating in a fraud merely to obtain increased fees.” (citation omitted)). They suggest that the Court should do so simply because the cases cited in Deloitte's opening brief “date from the 1990's.” Opp. at 47 n.19. However, this well-established concept — that it would be irrational for an accounting firm to commit fraud merely to maintain a client relationship — has been reaffirmed repeatedly in recent years, including by courts in this district.¹³

Plaintiffs also attempt to distinguish this precedent by claiming that it applies only to audit fees, rather than other types of fees. Opp. at 47 n.19. But the cited cases make no such distinction, and subsequent cases squarely refute Plaintiffs' position. See, e.g., In re Adelphia Commc'ns Corp. Sec. & Derivative Litig., 2010 WL 11507022, at *3 (S.D.N.Y. Aug. 31, 2010) (finding allegations that accounting firm “was motivated by the desire to continue to receive lucrative non-audit fees” inadequate to plead scienter and rejecting plaintiff's argument that “where the motive of an auditor is an alleged desire to increase its non-audit practice, such motive satisfies the scienter requirement”); In re Doral Fin. Corp. Sec. Litig., 563 F. Supp. 2d 461, 465 n.1 (S.D.N.Y. 2008) (allegation that accounting firm “received fees from [company] for auditing, consulting, and tax services and wished to continue to receive fees . . . is insufficient to plead motive”), aff'd sub nom. W. Va. Inv. Mgmt. Bd. v. Doral Fin. Corp., 344 F. App'x 717 (2d Cir. 2009); Schiller v. Physicians Res. Grp., Inc., 2002 WL 318441, at *9 (N.D. Tex. Feb. 26, 2002) (similar), aff'd, 342 F.3d 563 (5th Cir. 2003).

The lone case that Plaintiffs affirmatively cite is also easily distinguishable. There, the complaint alleged, among other things, that the accounting firm's non-audit work generated “nearly six times what [the firm] received in auditing fees,” and that the firm was “aggressive[ly] marketing” a document that “all but bragged of the firm's willingness to take aggressive accounting positions,” and “emphasiz[ing] . . . 'creative' means of finding revenues to boost growth,” which were “ultimately revealed as a sham.” In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 346-47 (S.D.N.Y. 2004) (emphasis added). There are no comparable allegations here, and Plaintiffs admit that historically Deloitte's audit fees from Silver Wheaton far exceeded its “tax consulting” fees. SAC ¶ 220. Moreover, in the Ninth Circuit, “motive pleading” is never “adequate,” Global Crossing, 322 F. Supp. 2d at 345, to make the requisite showing of scienter. Silicon Graphics, 183 F.3d at 979 (“[P]laintiffs proceeding under the PSLRA [cannot] aver intent in general terms of mere 'motive and opportunity' or 'recklessness,' but rather, must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent.”).

The SAC simply sets forth generic allegations of a financial motive, which are insufficient to “overcome the presumption that [Deloitte] acted in an economically rational manner.” In re Software Toolworks, Inc. Sec. Litig., 1991 WL 319033, at *4 (N.D. Cal. June 17, 1991). Accordingly, Plaintiffs' assertion that Deloitte had a financial motive to commit fraud in order to keep Silver Wheaton as a client remains far too implausible to credit.

B. Plaintiffs have not pleaded loss causation.

Plaintiffs' theory is that their alleged losses were caused when Silver Wheaton issued a press release disclosing the CRA's proposal letter. SAC ¶¶ 461-62. But that disclosure did not suggest that Deloitte's audit opinions were incorrect, and thus Plaintiffs have failed to plead loss causation against Deloitte. Deloitte's MTD at 34-35.

Plaintiffs argue that “[c]ourts regularly find that an auditor's reckless audit allowing false statements to exist in a client's financial statements causes losses that follow disclosure of the false statements.” Opp. at 50. They are plainly wrong. The primary case Plaintiffs cite for that proposition explicitly declined to address loss causation. See N.M. State Inv. Council, 641 F.3d at 1092 n.1. And the Ninth Circuit's decision in In re Worlds of Wonder Securities Litigation is inapposite on the loss causation issue because it involved claims under Section 11, not Section 10(b) (which is the sole basis for Plaintiffs' purported claims against Deloitte). 35 F.3d at 1422. In Section 11 cases, auditors may be held liable for misrepresentations in certified financial statements that are incorporated into registration statements, and loss causation is not an element of the plaintiff's case but rather an affirmative defense. Id. Thus, it was enough for the Worlds of Wonder plaintiffs to allege that “errors [in the financial statements] 'touched upon' the reasons for the decline in the value of [the] debentures” at issue. Id. More importantly, Worlds of Wonder also predated by more than a decade the Supreme Court's seminal loss causation decision in Dura Pharmaceuticals, Inc. v. Broudo, which held that “[t]o 'touch upon' a loss is not to cause a loss, and it is the latter that the law requires” in Section 10(b) cases. 544 U.S. 336, 343 (2005) (emphasis in original).¹⁴

Here, by contrast, it is undisputed that Deloitte did not “make” Silver Wheaton's financial statements. See Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (“For purposes of Rule 10b–5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”). Rather, as to Deloitte, the SAC focuses on two specific purported misstatements in Deloitte's audit opinions.¹⁵ Therefore, Plaintiffs must adequately plead that these misstatements — the purportedly fraudulent conduct that is the sole basis of their claims against Deloitte — were the “proximate cause” of their losses. Mineworkers' Pension Scheme v. First Solar Inc., 881 F.3d 750, 753 (9th Cir. 2018). Where, as here, “plaintiffs plead a causation theory based on market revelation of the fraud,” a court must “evaluate[ ] whether plaintiffs have pleaded . . . the facts relevant to their theory” — that is, that the market learned that the statements at issue were fraudulent. Id. at 754; see also, e.g., Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1059, 1063 (9th Cir. 2008). As explained in Deloitte's opening brief, the SAC is entirely devoid of any allegation that the market ever learned of Deloitte's supposed PCAOB violations (which did not occur), much less that such disclosures caused Plaintiffs' losses (which they did not).

III. Conclusion

For the above reasons, as well as those set forth in Deloitte LLP's opening brief, Deloitte LLP's Motion to Dismiss the Second Amended Complaint should be granted with prejudice.

Dated: August 6, 2018

GIBSON, DUNN & CRUTCHER LLP
By: Lee G. Dunst
Attorneys for Defendant
Deloitte LLP