“Investors Score Important Ruling Against Auditor Defendant Deloitte,” Shareholder Advocate Winter 2021
By Laura H. Posner and Jan E. Messerschmidt
Shareholders suing global Big Four auditing firm Deloitte & Touche, LLP cleared an important hurdle on November 17, 2020, when the U.S. District Court for the District of South Carolina denied Deloitte’s motion to dismiss the Class’ complaint in its entirety. This ruling is a significant victory for investors. Plaintiffs face a very high bar for finding auditors liable for securities fraud, making it particularly rare for auditor cases to withstand motions to dismiss.
The lawsuit accuses Deloitte of violating the Securities Exchange Act of 1934 by allowing SCANA Corporation, the former public utility company in South Carolina, to mislead investors about the true status of a massive nuclear energy expansion project at the Virgin C. Summer Nuclear Station in South Carolina. In the largest civil fraud in South Carolina history, SCANA repeatedly concealed delays in the $9 billion project. The eventual public abandonment and revelation of the true status of the failed project resulted in hundreds of millions of dollars in losses for SCANA’s investors.
For years, despite obvious and voluminous evidence to the contrary, Deloitte provided unqualified and“clean” audit opinions declaring that SCANA’s financial statements and internal controls over financial reporting were free from any material misstatements. Deloitte’s blessing of SCANA’s financial statements was a profound auditing failure, which facilitated SCANA’s concealment of evidence showing that the Nuclear Project was hopelessly behind schedule, was doomed to fail and would not be eligible for billions of tax credits.
SCANA’s eventual abandonment of the nuclear project in 2017 has been described as “one of the worst economic calamities in South Carolina,” leading to SCANA’s acquisition by Dominion Energy in the face of almost-certain bankruptcy. Following a $192.5 million settlement with SCANA’s shareholders, federal authorities brought both civil claims against the Company and criminal fraud charges against two of SCANA’s executives, who would later both plead guilty. Notably, neither the earlier private class action nor the federal authorities brought claims against Deloitte for its role in the fraud.
In her bench ruling following oral argument on defendants’ motion to dismiss, Judge Margaret B. Seymour ruled that “even under the heightened standards applicable” in auditor cases, the shareholders plausibly alleged that Deloitte “helped conceal the fraud from investors by blessing” SCANA’s financial statements which misrepresented the true status of the project and “continued to reassure investors that the project would be completed in time, even though they knew this information was false.” Judge Seymour further held that shareholders sufficiently alleged that Deloitte did so despite its obligations to review and understand significant internal and external reports that conflicted with SCANA’s representations to investors regarding the project, a failure which amounted “to basically no audit at all.”
Coming on the heels of the successful motion to dismiss and class certification decisions obtained by Cohen Milstein in a separate case pending against Big Four auditing firm KPMG, Judge Seymour’s ruling is a significant victory demonstrating that even under the high standards applicable to such cases, auditors can be held to account if they fail to adhere to their obligations to objectively and independently evaluate the accuracy of a public company’s financial statements.