NextCard Execs Can't Blame Auditor

Looks like the NextCard securities class action is going to be around for a while. If you hadn’t heard, the case was thrown out at the motion to dismiss stage back in February 2005, but Plaintiff were allowed to try again, and that’s exactly what they did. This time, they fared much better, with Judge Jeremy Fogel (N.D. Cal.) concluding that he was "not persuaded by Defendants' argument that the certification of the company's financials by its outside auditor, Ernst & Young, LLP ("E&Y"), negates or weakens the inference of scienter. Plaintiffs originally named E&Y as a defendant in this action based upon allegations that E&Y was a knowing participant in a scheme to defraud the market and in colluded in accounting improprieties. E&Y has settled with Plaintiffs. Under these circumstances, the fact that E&Y certified the financials does not raise an inference that the financials were appropriate or that Defendants were entitled to rely upon E&Y's certification."

Result? Plaintiffs allegations are upheld against 4 of the 5 individual defendants.

You can read In re NextCard, issued March 20, 2006, at 2006 U.S. Dist. LEXIS 16156.

Nugget: "While allegations that Defendants were involved in a "scheme" are relevant to paint a picture of what was going on at the company during the class period, and may be relevant to the question of scienter, the Court's focus must be on the alleged misrepresentations and omissions made by Defendants."