| NEW YORK, June 19
NEW YORK, June 19 A federal judge has handed a
victory to audit firm Moore Stephens, ruling it does not have to
face claims that it violated securities laws by failing to
uncover an accounting fraud at China-based Puda Coal.
In an opinion on Wednesday, U.S. District Judge Katherine
Forrest in Manhattan ruled that U.S. investors suing over the
fraud had not shown that the auditors committed negligence, let
alone the egregious conduct needed to support their claims of
Puda Coal raised hundreds of millions of dollars on U.S.
exchanges before its shares collapsed in 2011 after a research
report claimed that the company's main assets had been
transferred to insiders.
The company's shares were delisted and its executives sued
for fraud in 2012 by the U.S. Securities and Exchange
In her opinion, Forrest said the company's fraud involved an
auditing firm's "worst nightmare," namely finding out that a
company it audited had in fact disappeared because its
operations had been transferred away.
Even so, plaintiffs had not met the legal standard for
holding auditors liable for securities fraud, which requires
showing that their conduct was so negligent as to constitute no
audit at all, she ruled.
Named in the lawsuit were Moore Stephens Hong Kong, which
audited Puda Coal, and U.S.-based Moore Stephens, P.C., which
reviewed the audit. Both are affiliates of global audit firm
Moore Stephens International.
"As the court stated, Moore Stephens presented expert
evidence from an experienced and highly qualified expert that
its audits complied with professional standards," said Brian
Massengill, a lawyer for the auditors. "Plaintiffs were not able
to confront that testimony."
Lawyers for the plaintiffs did not immediately respond to a
request for comment.
The lawsuit was filed on behalf of investors who had bought
Puda Coal stock between 2009 and 2011 and later found out their
investments were worthless because the company's chairman had
transferred its main asset, Shanxi Coal, to himself and an
According to an amended complaint filed in April, Puda Coal
concealed from investors that it no longer had any operating
business or revenue until April 2011, when the fraud was
revealed on the Alfred Little web site, which posts research on
The lawsuit said all of Puda Coal's financial statements
since 2009's third quarter had been misleading because they
included the operating results of Shanxi Coal.
The case is In Re Puda Coal Securities Inc, U.S. District
Court, New York Southern District, No 11-cv-2598
(Editing by Kevin Drawbaugh and Leslie Adler)