[00:00:00] Speaker 02:
Mr. Porritt, right?

[00:00:02] Speaker 02:
Yes, Your Honor.

[00:00:03] Speaker 02:
Thank you.

[00:00:03] Speaker 05:
Good morning.

[00:00:04] Speaker 02:
Good morning, Your Honor.

[00:00:08] Speaker 02:
Your Honor, if I could reserve four minutes for rebuttal time.

[00:00:11] Speaker 05:
Keep your eye on the clock.

[00:00:12] Speaker 05:
We'll try to help you.

[00:00:13] Speaker 02:
Thank you.

[00:00:18] Speaker 02:
Chief Presiding Judge Smith, may it please the Court.

[00:00:21] Speaker 02:
This is an appeal from a dismissal of claims against Price Waterhouse Cooper's pursuant to Section 11 of the Securities Act of 1933.

[00:00:30] Speaker 02:
in connection with conceded misrepresentations and errors in the historical financial statements of a company, Bloom Energy.

[00:00:40] Speaker 04:
I'm not sure they were errors.

[00:00:43] Speaker 02:
They were conceded as errors, Your Honor.

[00:00:46] Speaker 04:
They were a misapplication of the principles involved with the leases involved, I would say that.

[00:00:59] Speaker 04:
Any revision of the financial statement, which is a restatement, is... Let's go to something else.

[00:01:06] Speaker 04:
My understanding that you were allowed to amend and you said you didn't want to amend.

[00:01:12] Speaker 02:
That is correct, Your Honor.

[00:01:14] Speaker 04:
And so, if you don't win here, we're done?

[00:01:17] Speaker 02:
Yes, Your Honor.

[00:01:18] Speaker 02:
I mean, I don't think... All right, I just wanted to make sure.

[00:01:21] Speaker 04:
Let me ask you a second question.

[00:01:23] Speaker 02:
Let me ask you a second question.

[00:01:25] Speaker 04:
Were the revisions made by BE required?

[00:01:30] Speaker 02:
Yes.

[00:01:31] Speaker 04:
Where?

[00:01:32] Speaker 02:
They were required under GAAP because they were a misapplication of GAAP.

[00:01:34] Speaker 04:
Where is that alleged in your complaint?

[00:01:37] Speaker 02:
They were alleged, the restatement is the correction of an error, Your Honor.

[00:01:39] Speaker 04:
Just a minute.

[00:01:41] Speaker 04:
Where in your complaint did you allege that these revisions were required?

[00:01:48] Speaker 04:
I looked all over to find it.

[00:01:50] Speaker 02:
If I may go back... If you can find it, tell me.

[00:01:55] Speaker 04:
In fact, the complaint says that the classification under GAP depended on the judgment about the length of the useful life of the sold item.

[00:02:07] Speaker 04:
That's what your complaint says.

[00:02:09] Speaker 02:
Your Honor, that's the relevant fact is that... That's the fact you alleged.

[00:02:14] Speaker 02:
The fact we alleged is that Bloom Energy conceded that the accounting, that the leases entered did not meet the requirement for operating leases and so their initial accounting was incorrect.

[00:02:24] Speaker 02:
And that therefore the revenue was misstated.

[00:02:26] Speaker 04:
Frankly, I didn't find any place where it was required, but I do find in your complaint that there was a classification under GAAP and that had all to do with the judgment about the length of the useful life of the sold item.

[00:02:41] Speaker 02:
It requires the categorization.

[00:02:42] Speaker 02:
There are four categories, and if you meet any one of them, you cannot categorize it properly.

[00:02:46] Speaker 04:
So we're really arguing, in this case, about the length of the actual useful life of an energy server, right?

[00:02:54] Speaker 02:
Well, we're arguing the misrepresentation is the misrepresentation of revenue for the 12 months into December 31, 2017.

[00:03:00] Speaker 02:
Well, I understand you're talking about revenue.

[00:03:02] Speaker 02:
But answer my question.

[00:03:04] Speaker 04:
Your idea about going to revenue is simply to avoid answering my question.

[00:03:09] Speaker 04:
The big question is, if we had a difference in the length of the actual useful life of the energy server, that's going to make a difference in revenue.

[00:03:20] Speaker 04:
And so we're really arguing about, then, the length of the actual useful life of the server.

[00:03:26] Speaker 04:
That's what we're arguing about.

[00:03:28] Speaker 02:
Well, we're arguing about whether the revenue recognition was proper and whether financial statements were fairly stated.

[00:03:33] Speaker 02:
And that, in this question... When you don't answer my question, it says it's right.

[00:03:38] Speaker 02:
Well, if I may just answer your question completely.

[00:03:42] Speaker 04:
If you just answer it, I'll be glad.

[00:03:45] Speaker 02:
The question is the recognition of revenue, which in itself, in connection with this significant section of the Bloom Energy's business, depends upon the terms of the

[00:03:55] Speaker 02:
leases that are entered into with its financial partners.

[00:03:58] Speaker 02:
That is correct.

[00:03:59] Speaker 02:
Just as revenue of sales determines on the contracts of sale entered into with its customers, which drives revenue.

[00:04:06] Speaker 02:
Just as revenue in regards to, say, inventory depends upon the amount of those inventory, there are elements of judgment contained in almost every line of financial statements.

[00:04:19] Speaker 02:
And that was also true when this case decided in worlds of wonder, a case that the district court completely ignored even though it was cited to it, which involved incredibly complex accounting provisions and those were found to be misrepresentations of fact which gave rise for a claim under section 11 against the auditors of those financial statements.

[00:04:38] Speaker 05:
We're asking this court to... If I read your complaint adequately, you seem to be saying

[00:04:45] Speaker 05:
that PWC was certifying every representation of Bloom Energy's financial statements.

[00:04:51] Speaker 05:
And if that's correct, then basically you make them guarantors as to everything, which turns the whole accounting world upside down, does it not?

[00:04:59] Speaker 02:
No, it doesn't, Your Honor, and let me explain why.

[00:05:02] Speaker 02:
First of all, don't forget, first of all, that's in the statute.

[00:05:05] Speaker 02:
That's a decision that Congress has made, a policy decision,

[00:05:09] Speaker 02:
that a public accounting firm which certifies and all financial statements in a registration statement are required to be certified.

[00:05:17] Speaker 05:
Listen to me.

[00:05:18] Speaker 05:
It's a question of what they are certifying.

[00:05:21] Speaker 05:
Correct.

[00:05:21] Speaker 05:
And you seem to be saying that everything they say internally that the accountants are guarantors.

[00:05:29] Speaker 05:
I think every accountant in the country, the hair would stand up on their heads.

[00:05:33] Speaker 05:
That's not what this section has been interpreted to mean, is it?

[00:05:37] Speaker 02:
Yes, it is, Your Honour.

[00:05:39] Speaker 02:
But don't forget, it is guaranteed they have a defence, which is if they take judicial care, which this Court has interpreted to mean complying with gas, the general accepted auditing standards, then they have no liability.

[00:05:53] Speaker 02:
So it is all that is changing is that rather than having a plaintiff trying to prove negligence, Congress in 1933 decided that that liability, that burden, rested on the defendant accountant firm.

[00:06:06] Speaker 02:
So if they did their audit in accordance with professional standards, as they represented as the case in their audit opinion, then they have no liability here.

[00:06:14] Speaker 02:
So no, they're not guarantors.

[00:06:16] Speaker 02:
That would be incorrect.

[00:06:17] Speaker 04:
However, it seems to me that based on

[00:06:21] Speaker 04:
your interpretation of the statute on which you are relying, that you want to make it more like 11A1 and 11A3 than what it is in 11A4.

[00:06:32] Speaker 04:
11A4 has to do with the certification.

[00:06:36] Speaker 04:
11A1 says every person who signed the registration statement is subject to the liability with no limitations.

[00:06:46] Speaker 04:
11A3 says every person named in the statement

[00:06:50] Speaker 04:
as a director and a partner of the issuer is subject to a liability with no limitations as to scope.

[00:06:59] Speaker 04:
When I look at A4, it doesn't say it that way.

[00:07:02] Speaker 04:
It says it differently.

[00:07:03] Speaker 04:
And then if I look down at

[00:07:07] Speaker 04:
11 USC 77 KB 3 I It's a totally different thing for what?

[00:07:15] Speaker 04:
Accountants have to do in their certification because 11 33 or 77 B 3 I says

[00:07:25] Speaker 04:
The auditor has a reasonable ground to believe and did believe at the time each part of the registration statement became effective, that the statements therein were true and that there was no omission to state of material fact required to be stated therein or necessary to make the statements therein not misleading.

[00:07:46] Speaker 04:
It seems to me you're trying to make out of A4 a different thing than you want to make it like A1 and A3 in your argument here.

[00:07:58] Speaker 02:
With respect, I don't think that's a correct characterization of our argument.

[00:08:03] Speaker 02:
What the difference with A4 is is that it is limited to the portion of the registration statement that is either prepared by or certified by the accountant.

[00:08:11] Speaker 02:
Correct.

[00:08:11] Speaker 04:
That is the... But in the... And if it isn't prepared by or certified, and the only way you get here is because even you argue that they didn't prepare these statements, they certified these statements.

[00:08:27] Speaker 04:
And so then the district court went off on the idea that under Omnicare, this is an opinion and therefore you don't have a case.

[00:08:35] Speaker 04:
You've changed your argument now and you're saying the statute itself says what it says and Omnicare does not even have anything to do with it.

[00:08:43] Speaker 02:
Well, with respect, we were completely consistent with our argument before the district court and before this court.

[00:08:48] Speaker 02:
We've always, and it's in the complaint, is that the liability stems from the certification.

[00:08:54] Speaker 02:
The certification is of the financial statements, the balance sheet, income statement, statement of cash flows and the notes there too.

[00:09:01] Speaker 02:
Those are subject to the opinion.

[00:09:02] Speaker 02:
That opinion under SEC rule in which defendants concede is a certification.

[00:09:07] Speaker 02:
So the statements that are certified by PricewaterhouseCoopers in that Bloom Energy Registration Statement are the December 31, 2017 financial statements, balance sheet, income statement.

[00:09:19] Speaker 02:
The balance sheet and that income statement contain

[00:09:22] Speaker 02:
we allege misrepresentation.

[00:09:38] Speaker 02:
if we're alleging under Section 11 that the opinion that the financial statements of Bloom Energy are properly stated in accordance with GAAP was false.

[00:09:46] Speaker 02:
But we're not alleging a claim based on that.

[00:09:48] Speaker 02:
We never alleged a Section 11 claim on that.

[00:09:50] Speaker 02:
We alleged a Section 10b claim that's not a part of this appeal.

[00:09:54] Speaker 02:
The relevant statement is what they certify, which is the statement in a financial statement, which was Bloom Energy's statement certified by PricewaterhouseCoopers.

[00:10:03] Speaker 02:
They argue, and the district court found that the fact that the certification takes the form of, it's actually a statement of fact and a statement of opinion, but contains a partial statement of opinion.

[00:10:15] Speaker 02:
Therefore, Omnicare applies to every aspect of PricewaterhouseCoopers' potential liability for misrepresentations in

[00:10:23] Speaker 02:
the financial statements.

[00:10:24] Speaker 02:
That is false.

[00:10:26] Speaker 02:
That is not what Omnicare says.

[00:10:28] Speaker 02:
I don't think that's not a reasonable reading of Omnicare.

[00:10:31] Speaker 02:
Omnicare didn't involve accountants.

[00:10:33] Speaker 02:
Omnicare didn't involve this section of the Securities Act.

[00:10:35] Speaker 02:
Omnicare didn't involve financial statements.

[00:10:37] Speaker 02:
So that would be a radical departure.

[00:10:40] Speaker 02:
And again, completely contrary to this court's decision in Worlds of Wonder, which is still good law.

[00:10:44] Speaker 05:
With respect, the argument that you're making, has it found traction in any other circuit?

[00:10:51] Speaker 02:
It found traction in this circuit, in Worlds of Wonder.

[00:10:54] Speaker 02:
So in fact, in Worlds of Wonder, the auditor, which was Deloitte in that case, was the only party found

[00:11:02] Speaker 02:
for which the plaintiff could proceed from misrepresentations in the financial statements of the issuer of Worlds of Wonder in that case.

[00:11:08] Speaker 05:
You may want to think about it.

[00:11:09] Speaker 05:
You said you wanted to save four minutes.

[00:11:11] Speaker 05:
It's up to you.

[00:11:12] Speaker 03:
I had a couple of questions I wanted to ask.

[00:11:15] Speaker 03:
Let me ask you, what did it do for Price Waterhouse's audit opinion to classify the MSAs as operating leases instead of capital leases?

[00:11:24] Speaker 03:
Did it artificially inflate the value?

[00:11:27] Speaker 02:
So the effect is in the financial statements prepared by Bloom Energy, the subject that were audited and subject to the certification by PricewaterhouseCoopers adopting the Securities Act's terms.

[00:11:37] Speaker 02:
And the effect of the mischaracterization, the misapplication of GAAP, increased revenue, decreased net loss by, we allege, I think properly, a material amount under the

[00:11:49] Speaker 02:
by material amount of the financial statements.

[00:11:51] Speaker 02:
That was an error.

[00:11:52] Speaker 02:
That was then included in the registration statement and which gives rise to a cause of action.

[00:11:56] Speaker 03:
What information did Price Waterhouse need that would have allowed it to determine whether the leases were capital or operating leases?

[00:12:04] Speaker 02:
Well, it would look at the terms of the leases which it had access to, but that's not the relevant inquiry because there's no CNTA requirement in Section 11.

[00:12:11] Speaker 02:
So that is another issue with applying this

[00:12:14] Speaker 02:
over expansive application of Omnicare.

[00:12:16] Speaker 02:
Omnicare applied to pure statements of opinion, pure statements of opinion, which were framed and understood to be pure statements of opinion.

[00:12:24] Speaker 02:
So they are framed as we believe, I think, et cetera.

[00:12:27] Speaker 02:
It did not apply to every statement contained that might contain some element of judgment.

[00:12:33] Speaker 02:
And I realize I'm out of money out of time.

[00:12:35] Speaker 03:
Was that information available to Pricewaterhouse when it prepared the audit?

[00:12:40] Speaker 02:
It should have been.

[00:12:41] Speaker 02:
But again, I don't think it's not relevant because their state of mind is not relevant.

[00:12:44] Speaker 02:
But as part of the audit procedures, they absolutely would have access to the financial records of their audit client, Bloom Energy here.

[00:12:51] Speaker 03:
Was classifying the MSAs in this situation as operating leases, was that done in accordance with gas?

[00:12:59] Speaker 02:
Gas or gap?

[00:13:00] Speaker 03:
Gap or gas?

[00:13:02] Speaker 02:
Well, I don't know whether their audit work complied with gas.

[00:13:06] Speaker 02:
It is conceded by Bloom Energy and by PricewaterhouseCoopers that the categorization of the MSAs as operating leases was not in accordance with gap.

[00:13:16] Speaker 03:
Okay, thanks.

[00:13:17] Speaker 05:
Very well.

[00:13:18] Speaker 05:
Save the balance of your time.

[00:13:19] Speaker 05:
Let's hear now from Mr. Rosenkrantz.

[00:13:26] Speaker 01:
Good morning, Your Honors.

[00:13:26] Speaker 01:
May it please the Court, Josh Rosencrantz representing PWC.

[00:13:31] Speaker 01:
Your Honors, there are three issues in this case.

[00:13:33] Speaker 01:
Plaintiffs have the unenviable task of having to defeat all three.

[00:13:38] Speaker 01:
Let me start where Judge N.R.

[00:13:40] Speaker 01:
Smith started with the very first question, which is that these line items, as the District Court found, depend upon

[00:13:48] Speaker 01:
supremely inherently subjective determinations and also that the district court found the issue to be forfeited.

[00:14:02] Speaker 01:
Now, to Judge Enar Smith's point, just look at why plaintiffs are saying that the line item was wrong.

[00:14:11] Speaker 01:
It was a highly subjective projection

[00:14:15] Speaker 01:
of the useful life of a new generation of hardware that Bloom Energy had just revamped to increase its lifespan.

[00:14:27] Speaker 01:
Just look, if you look at no other page in the registration statement, look at page 117.

[00:14:32] Speaker 01:
It is the risk factors about that estimation.

[00:14:38] Speaker 01:
It emphasizes that an incorrect statement

[00:14:42] Speaker 01:
is a major risk factor.

[00:14:43] Speaker 01:
It says, quote, we do not have a long history with this product, and our estimates may prove incorrect.

[00:14:50] Speaker 01:
It says, if our estimates of useful life for our energy servers are inaccurate, our business and financial results could be harmed.

[00:15:01] Speaker 01:
It notes that early generations of our server did not have the useful life we expected.

[00:15:08] Speaker 01:
That is supremely subjective.

[00:15:11] Speaker 01:
Now, this court does not even have to address whether these line items were subjective or not or depended upon subjective judgments, because the district court correctly found that this whole argument was forfeited multiple times over.

[00:15:27] Speaker 01:
The district court pointed out that plaintiff's opposition to the motion to dismiss never even cited the critical gap provision

[00:15:37] Speaker 01:
that they are now relying on.

[00:15:39] Speaker 01:
That's at 16.

[00:15:40] Speaker 01:
That is ASC 84010251.

[00:15:44] Speaker 01:
That's where the 75% line comes from.

[00:15:48] Speaker 01:
Much less, the district court continued, did it, quote, explain why the application of this provision does not require an exercise of judgment.

[00:16:00] Speaker 01:
The district court also found that, quote, in the complaint.

[00:16:03] Speaker 04:
But it's in the complaint, right?

[00:16:06] Speaker 04:
The 84010251 gap provision, the complaint says that's a clear line.

[00:16:15] Speaker 04:
It's just that they didn't really argue that in the district court.

[00:16:18] Speaker 01:
That is correct.

[00:16:19] Speaker 04:
And not only that, they didn't even cite it in the opposition to the motion.

[00:16:22] Speaker 01:
That is correct, Your Honor.

[00:16:23] Speaker 01:
And saying it's in the complaint doesn't get them anywhere.

[00:16:26] Speaker 01:
That was their answer to our forfeiture argument.

[00:16:29] Speaker 01:
Doesn't get them anywhere if they don't mention it in the complaint.

[00:16:32] Speaker 01:
The district court also found that in the complaint, I'm quoting here at 17, quote, in the complaint, plaintiffs do not specify the economic life of an energy server.

[00:16:44] Speaker 01:
But that's the key input that goes into that 75% number.

[00:16:49] Speaker 01:
Now let me turn to the second issue that we led with in our brief.

[00:16:55] Speaker 01:
Judge Milan Smith's question goes right to the heart of the matter.

[00:17:00] Speaker 01:
plaintiff's reading of section 11 is not just wrong, it turns the role of an auditor upside down.

[00:17:08] Speaker 04:
By the way, that's Judge Smith.

[00:17:10] Speaker 04:
It's Milan Smith, not Milan.

[00:17:13] Speaker 01:
Oh, I'm so sorry, Your Honor.

[00:17:14] Speaker 04:
That's quite all right.

[00:17:15] Speaker 04:
Milan's a nice place.

[00:17:19] Speaker 01:
I should have said.

[00:17:20] Speaker 04:
Well, not only that, Milan is a good name.

[00:17:23] Speaker 04:
There you go.

[00:17:23] Speaker 04:
But I'm just telling you, I didn't want you to get that wrong again.

[00:17:28] Speaker 04:
He's the Smith.

[00:17:29] Speaker 04:
I'm just the Yehook.

[00:17:31] Speaker 01:
OK.

[00:17:31] Speaker 01:
Thank you, Your Honor.

[00:17:32] Speaker 01:
Apologies.

[00:17:33] Speaker 01:
That's what I get for drawing two Smiths.

[00:17:35] Speaker 01:
Don't lose any sleep over it, OK?

[00:17:39] Speaker 01:
So as Your Honor pointed out, this turns the entire Section 11 scheme upside down.

[00:17:47] Speaker 01:
When an accountant certifies a financial statement, it does not just vouch for the accuracy of every line item.

[00:17:56] Speaker 01:
He expresses an opinion about the financial condition of the company as a whole.

[00:18:02] Speaker 01:
The accountant can be liable for that opinion and for any fact

[00:18:09] Speaker 01:
that the accountant embeds in the opinion.

[00:18:11] Speaker 04:
In what case do we have that says what that term certification really means?

[00:18:19] Speaker 04:
I mean, we have the certification is not defined by the act.

[00:18:27] Speaker 04:
We have 17 CFR 230405, which defines certification as examined and reported upon with an opinion expressed by an independent and certified public account.

[00:18:42] Speaker 04:
The SEC defines certified as examined and reported upon with an opinion.

[00:18:48] Speaker 04:
And the PCA OB says the auditor's responsibility is to express an opinion on the financial statements they audit.

[00:18:59] Speaker 04:
So what do we have besides Omnicare to apply to this certification?

[00:19:05] Speaker 01:
Well, Your Honor, first, those regulations are pretty important.

[00:19:09] Speaker 01:
One of them dates back, that is, in particular, the one that defines certified.

[00:19:14] Speaker 04:
The one 17S CFR?

[00:19:17] Speaker 01:
Yes, but I'm actually talking about Regulation SX, which goes back to 1941.

[00:19:22] Speaker 01:
It's identical.

[00:19:24] Speaker 01:
I mean, the wording is exactly the same.

[00:19:26] Speaker 01:
It goes back to 1941.

[00:19:28] Speaker 01:
The SEC understood what Congress meant when it used the word certified, and it defined it as examined and reported on in an opinion.

[00:19:38] Speaker 01:
Your Honor asked what cases interpret that.

[00:19:42] Speaker 01:
Arthur Young from the Supreme Court in 1984 says an auditor, quote, issues an opinion as to whether the corporation's financial statements taken as a whole fairly present the financial position of the company.

[00:19:56] Speaker 01:
And then more directly on this topic, there's Charles Schwab from the Northern District of California.

[00:20:02] Speaker 01:
There's Icon.

[00:20:02] Speaker 04:
Well, I mean, the reason I ask you that question straightforward is we have a case that was done by Judge

[00:20:12] Speaker 04:
I forget Judge England.

[00:20:15] Speaker 04:
He doesn't seem to think that what certification means is the same as it's the Special Situations Fund versus my own bio innovations.

[00:20:27] Speaker 01:
Yes, Your Honor.

[00:20:28] Speaker 01:
So so that is plaintiffs only post Omnicare case.

[00:20:33] Speaker 01:
It is just plain wrong.

[00:20:35] Speaker 01:
It says that a judge that it says that an auditor's job when it certifies

[00:20:41] Speaker 01:
is to confirm the accuracy.

[00:20:43] Speaker 01:
And as Your Honor said, that would turn the entire audit profession upside down.

[00:20:48] Speaker 01:
I would also add to this.

[00:20:50] Speaker 03:
Doesn't the standard of care with what the auditor is doing and what he's certifying depend on what kind of audit he's doing?

[00:21:01] Speaker 01:
Not really, Your Honor.

[00:21:02] Speaker 01:
I'm sorry.

[00:21:03] Speaker 01:
Let me say it this way.

[00:21:05] Speaker 01:
What the auditor does is to exercise judgment that may vary from one audit to the next.

[00:21:11] Speaker 01:
But the basic definition... Well, there are different levels of auditing, though, aren't there?

[00:21:16] Speaker 03:
Yes.

[00:21:16] Speaker 03:
Would they actually go in and check the inventory and make sure what they're claiming is there is there?

[00:21:22] Speaker 03:
So isn't the type of audit, doesn't that have some bearing on what the standard of care would be for the auditor?

[00:21:28] Speaker 01:
I think... So the type of audit could have a bearing, but here this is just

[00:21:34] Speaker 01:
the standard audit with an audit letter that is prescribed by the PCAOB and Judge Smith read from PCAOB regulations, some of them say very clearly that the division of labor is between the management which prepares the statement and the auditor which certifies the statement with an opinion and says

[00:21:56] Speaker 01:
that the auditor could not possibly provide anything more than reasonable assurance, which is what the opinion says the auditor provides, cannot possibly provide absolute assurance.

[00:22:09] Speaker 05:
I gather your position is that if you look at the risk factor that you referred to when you first spoke, it makes very clear that the useful life of this relatively new asset, it's a big deal.

[00:22:27] Speaker 05:
That's right in the risk factors.

[00:22:30] Speaker 05:
And whatever the auditor said here would, of course, include that by definition, which means they cannot possibly be saying that we guarantee that it has a useful life of X, because the company itself has already said this is what we think it is, but if we're wrong, it's going to make a difference.

[00:22:51] Speaker 01:
Is that right?

[00:22:51] Speaker 01:
That's absolutely right, Your Honor, as to the subjectivity

[00:22:56] Speaker 04:
The line items, but it also makes let's go further Isn't it the company who decides this yes?

[00:23:04] Speaker 04:
And the auditor is just coming through to make sure that what the company decided, they making the decision as to the useful life and as to how it ought to be classified, is not against general accounting practices and is a reasonable financial estimation of what's done, even if it could be done some other way.

[00:23:28] Speaker 04:
That's all they're doing, isn't it?

[00:23:29] Speaker 01:
Yes, Your Honor, and that makes a very important point about 1184 and that division of labor.

[00:23:36] Speaker 01:
Think about what plaintiffs are saying an auditor has to do.

[00:23:40] Speaker 01:
The auditor doesn't run the business.

[00:23:42] Speaker 01:
It has no idea, no independent notion of what the useful estimated life of a piece of hardware is that's never even lasted 15 years because it's a brand new generation.

[00:23:53] Speaker 01:
All the accountant does and all it can do is provide

[00:23:58] Speaker 01:
the reasonable assurances about the financial condition.

[00:24:02] Speaker 01:
Auditors do not perform.

[00:24:04] Speaker 01:
They don't even redo the gap calculation.

[00:24:09] Speaker 01:
All they do after the issuer prepares those initial gap determinations and finalizes them in a financial statement is they conduct testing and sampling to verify

[00:24:24] Speaker 01:
as Your Honor just said, that there is a reasonable estimation here, a reasonable assurance that this adequately represents the financial condition of the company.

[00:24:39] Speaker 05:
Let me ask you this.

[00:24:40] Speaker 05:
Are there circumstances where accountants could be found liable under Section 11 for portions of registration statements that they audited?

[00:24:48] Speaker 01:
Yes.

[00:24:49] Speaker 05:
Can you give us an example of when that might occur?

[00:24:51] Speaker 01:
Yes, Your Honor.

[00:24:52] Speaker 01:
There's plenty of liability for accountants.

[00:24:54] Speaker 01:
Example number one, increasingly these days after regulations that were passed by PCOB in 2019, auditors have to put in what are called CAMs, which are critical audit matters.

[00:25:10] Speaker 01:
They're just full of facts about how the company accounted for difficult or highly subjective determinations and what the auditor did in order to test or sample on those propositions.

[00:25:24] Speaker 01:
That is the main example of where.

[00:25:29] Speaker 04:
And isn't that exactly what happened here?

[00:25:31] Speaker 04:
Because the sale lease back arrangements accounting was put right in the statement.

[00:25:37] Speaker 04:
The sale was subject to operating leases done this way in 2016 and 17.

[00:25:45] Speaker 04:
But it said that the arrangement could be accounted for as a capital lease instead of an operating lease.

[00:25:52] Speaker 04:
Right in the statement.

[00:25:53] Speaker 01:
Right in the statement.

[00:25:55] Speaker 01:
So it achieved exactly what a financial statement is designed to achieve.

[00:26:01] Speaker 01:
It identified the risk.

[00:26:03] Speaker 01:
It explained what the calculation was.

[00:26:06] Speaker 01:
It explained the effect of a wrong conclusion on that calculation.

[00:26:11] Speaker 01:
And on the same page that I believe your honor is looking at, it also cites the relevant ASC, which is 840.

[00:26:19] Speaker 04:
840.

[00:26:24] Speaker 01:
One last word, Your Honors, on worlds of wonder.

[00:26:28] Speaker 01:
The only issue in worlds of wonder, that's the Ninth Circuit case that plaintiffs are emphasizing, was whether the district court properly granted summary judgment to the accountant on loss causation.

[00:26:41] Speaker 01:
The court did not decide anything about the legal effect of a certification under section 11A.

[00:26:50] Speaker 01:
Let me just close with this.

[00:26:51] Speaker 01:
As is evident from the course of this litigation, this sprawling case was never really about PWC.

[00:27:00] Speaker 01:
The case predated these revisions.

[00:27:04] Speaker 01:
The reclassification had a far greater impact on the years that PWC did not audit as part of the registration statement.

[00:27:12] Speaker 01:
The operative complaint, as we've discussed, barely mentions PWC.

[00:27:17] Speaker 01:
And when it does, it just jumbles PWC in with, quote unquote, Section 11 defendants.

[00:27:23] Speaker 01:
Plaintiffs did not care enough about PWC to even mention their novel 11A4 theory in their complaint or to spell out why classification was objective or why the revisions were material, an issue that we did not talk about today.

[00:27:40] Speaker 01:
And then when given the chance to amend the complaint,

[00:27:44] Speaker 01:
As to PWC, plaintiffs declined saying that it would be, quote, futile.

[00:27:50] Speaker 01:
Plaintiffs got their pound of flesh in connection with the far more significant allegations.

[00:27:56] Speaker 01:
It's time to put this straggling remnant to rest.

[00:28:00] Speaker 01:
If there are no further questions, we respect them.

[00:28:03] Speaker 05:
I think not.

[00:28:04] Speaker 01:
We request that the court affirm.

[00:28:06] Speaker 01:
Thank you.

[00:28:06] Speaker 01:
Very well.

[00:28:07] Speaker 05:
Thank you.

[00:28:09] Speaker 05:
Mr. Purit, you have a little time.

[00:28:19] Speaker 02:
Thank you, Your Honor.

[00:28:20] Speaker 02:
And I'll just very quickly, the question of waiver, which I think was, we strongly disagree with respect to the district court's decision on that.

[00:28:32] Speaker 05:
Let me just, what's sticking in my mind is the risk factor.

[00:28:36] Speaker 05:
How do you deal with that?

[00:28:38] Speaker 05:
The risk factor.

[00:28:41] Speaker 05:
Right at the very beginning it says, if we're wrong about this, it's going to make a big difference.

[00:28:45] Speaker 05:
Doesn't that overlay anything that you would be saying?

[00:28:49] Speaker 02:
Well, I mean, that's not really, there wasn't an issue in the district court, that's really not the district, that would be determining that this issue was, that's really a question of going to the materiality, that speaks caution.

[00:29:00] Speaker 02:
Risk factors, there is no safe harbor under the PSLRA for an IPO.

[00:29:04] Speaker 05:
You're saying that they've certified the financial statements

[00:29:09] Speaker 05:
And the risk factor is clearly included, is it not?

[00:29:12] Speaker 02:
I don't think the risk factors are included in the financial statements.

[00:29:15] Speaker 02:
The audit opinion applies to the financial statements and the notes to the financial statements, which the risk factors aren't a part of.

[00:29:20] Speaker 02:
So you may want to argue that there would be a fact-based argument as to whether, after the restatement was announced, how a reasonable investor would interpret that correction of the error in light of the risk factor.

[00:29:34] Speaker 02:
That's a very fact-intensive inquiry that you would need proper evidence on.

[00:29:40] Speaker 02:
As we pleaded, my friend just said that we didn't plead materiality in the complaint.

[00:29:45] Speaker 02:
That's incorrect.

[00:29:46] Speaker 02:
We pleaded, and we pleaded in the complaint, the decline in the stock price immediately following the announcements of these restatements, and there was a material, you know, significant 20% decline in the stock price, which is evidence of the materiality of the statements that were restated.

[00:30:02] Speaker 02:
So I don't think those factors are not dispositive here, Your Honor.

[00:30:06] Speaker 02:
It certainly wasn't that was not the basis for the district court's opinion, which is the reason why we did not amend, because he felt that the

[00:30:12] Speaker 02:
district court held that this was a matter of an opinion and we felt strongly that it was a matter of a fact.

[00:30:17] Speaker 05:
Your time is up.

[00:30:18] Speaker 05:
Let me ask my colleagues whether either has additional questions.

[00:30:21] Speaker 05:
I think not.

[00:30:22] Speaker 05:
So we thank all counsel for your argument in this case.

[00:30:25] Speaker 05:
The case of Hunt versus PricewaterhouseCoopers is submitted.