Auditors’ Duty to Implement Subsequent Events Procedures for Stock Registration Statements: A Case Study of In Re Pareteum Securities Litigation

Abstract

This is a case study of In re Pareteum Securities Litigation, a federal class action lawsuit filed in New York City on February 26, 2020. The plaintiffs consist of the group of stockholders who purchased Pareteum Corporation’s (Pareteum) stock during the period of December 14, 2017 through October 21, 2019. During this period, Pareteum significantly overstated its revenue but Pareteum’s auditor, Squar Milner (auditor), issued unqualified opinions on Pareteum’s financial statements. The defendants are: Pareteum Corporation, several of Pareteum’s top managers, and Pareteum’s auditor. The case is ongoing and a final judgment has not been entered in this litigation. After the case was filed, the defendants filed motions to dismiss. The court denied the motions to dismiss the case, and the court meticulously explained why the defendants’ motions were denied. The specific issues addressed include: (a) the elements of several types of securities fraud pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934; (b) the heightened pleading standards for securities fraud claims created by the Private Securities Litigation Reform Act; (c) in a Securities Act claim against an auditor, whether scienter is required to be proven; (d) whether an auditor’s opinion may be construed as a guarantee; (e) whether an auditor’s unqualified opinion of the fairness of the financial statements, coupled with the subsequent discovery of fraud, may be actionable against the auditor; (f) the inconsistency of an auditor’s issuance of an unqualified opinion on financial statements while simultaneously issuing an adverse opinion on internal control; (g) the auditor’s duty to adhere to Auditing Standard 4101, which mandates an auditor to carry out subsequent event procedures; and (h) implications for auditors emanating from this case.