Full opinion text
DECISION AND ORDER MARRERO, District Judge. TABLE OF CONTENTS V. ORDER 373 This case is one of numerous securities class actions that arose out of the events surrounding the collapse of Livent, Inc. (“Livent”). The particular action now before the Court is brought on behalf of Livent stockholders who purchased or otherwise acquired Livent common stock between March 5, 1996 and August 7, 1998 (the “Class Period”) and has been the subject of a prior published decision of this Court, In re Livent Sec. Litig., 78 F.Supp.2d 194 (S.D.N.Y.1999) (Sweet, J.) (“Livent Shareholders I”), familiarity with which is assumed. I. BACKGROUND In August 1998, the first of many shareholder actions was brought against Livent and associated individuals and entities. In December 1998, Judge Sweet consolidated the pending actions and approved lead plaintiffs and counsel. In February 1999, plaintiffs herein (“the Shareholders”) filed an amended class action complaint against several groups of defendants: Livent’s two highest officers, Garth Drabinsky and Myron Gottlieb (the “Inside Directors”); three directors who served on Livent’s audit committee, H. Garfield Emerson, A. Alfred Taubman, and Martin Goldfarb (the “Outside Directors” or “Audit Committee”); and Livent’s accounting firm, De-loitte & Touche Chartered Accountants (“D & T”). The defendants moved to dismiss on various grounds. In December 1999, Judge Sweet held that: (1) dismissal of the action on forum non conveniens grounds was not warranted; (2) allegations of fraudulent conduct by Drabinsky and Gott-lieb were sufficiently particular to state securities fraud claims; (3) the magnitude of alleged accounting fraud was insufficient to infer scienter on the part of D & T; (4) the allegations that the Outside Directors, who as members of the Audit Committee failed to discover various fraudulent schemes by the Inside Directors, were insufficient to plead scienter; and (5) the fact that the Outside Directors were members of the Audit Committee was insufficient to establish that such directors had the control required to satisfy the criteria for “control person” liability under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (the “Exchange Act” or “1934 Act”). Judge Sweet granted leave to re-plead, and in February 2000, the Shareholders filed the Second Amended Consolidated Class Action Complaint (“SH SAC”) now before the Court. Among its changes, the SH SAC for the first time named Canadian Imperial Bank of Commerce (“CIBC”), a major Livent lender and investment banker, as a defendant. In three separate motions, D & T, CIBC, and the Outside Directors now move to dismiss the SH SAC under Fed. R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995, (the “PSLRA” or the “1995 Reform Act”), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77zl-77z2, 78u4-78u5), for failure to plead fraud with particularity and under Rule 12(b)(6) for failure to state a claim for which relief can be granted. For the reasons that follow, the motions are denied in part and granted in part. II. THE PARTICULARS OF THE ALLEGED FRAUD The circumstances upon which the Shareholders’ claims of fraud are grounded generally fall into two categories; first, certain transactions Livent executed, the accounting for which overstated, income; and second, manipulation of Livent’s books and records that understated expenses. Some of the claims target the roles of particular defendants in the underlying the events. A. FRAUDULENT “REVENUE-GENERATING” TRANSACTIONS 1. Pace Theatrical Group In 1996 and 1997, Livent purported to sell Pace Theatrical Group, Inc. (“Pace”), a Texas-based theatrical company, the exclusive rights to present “Show Boat” and “Ragtime” in various theaters in North America for fees totaling $11.2 million (U.S.). SH SAC ¶ 60. These agreements, contained in contracts or letters, were dated June 15, 1996 and August 8, 1997, with respect to “Show Boat,” and December 18, 1996 and August 8, 1997, with respect to “Ragtime.” SH SAC ¶ 50. In return for payment of the fees, Pace was to be reimbursed for all theater expenses to present the shows and was entitled to a limited percentage of adjusted gross ticket sales as profit participation. SH SAC ¶ 50. All of these agreements purported to make the fees nonrefundable, even if Livent never made the shows available to Pace. The Shareholders allege that pursuant to the terms of the agreements, Livent would not commence staging “Show Boat” until July 1997 and would be responsible for all production costs, running costs and moving costs throughout the tour. SH SAC ¶ 52. Similarly, according to the Shareholders, Livent assumed obligations with respect to the “Ragtime” agreement for substantial performance that would extend beyond 1996 and 1997. SH SAC ¶ 53. Nevertheless, on the basis of these agreements, and allegedly in violation of Generally Accepted Accounting Principles (“GAAP”), Livent recognized the present value of the fees as revenue in its financial statements in the amounts of $12.2 million for fiscal 1996 and $1.6 million for fiscal 1997. SH SAC ¶ 51. For purposes of Livent’s year-end 1996 reconciliation to U.S. GAAP, Livent deferred recognition of $6 million related to the sale of rights to “Ragtime.” SH SAC ¶ 51. Livent subsequently improperly recognized that amount in fiscal 1997. SH SAC ¶ 51. 2. American Artists In 1997, pursuant to an agreement dated September 9, 1997, Livent sold American Artists Limited Inc. (“American Artists”), a Massachusetts-based theater owner and operator, the right to present “Ragtime” in three theaters for a fee of $4.5 million (U.S.). SH SAC ¶ 86. The agreement purported to make the fee nonrefundable, regardless of whether Livent made “Ragtime” available to American Artists. SH SAC ¶ 86. The Shareholders allege that the American Artists contract contained terms which made it clear that Livent could not fulfill all significant obligations in 1997, so that the full amount of revenue should not have been recognized in 1997. SH SAC ¶ 86. 3. CIBC Wood Gundy Capital In December 1997, Gottlieb negotiated an agreement purporting to memorialize the sale of an interest in the production rights of “Show Boat” and “Ragtime” in the United Kingdom and other countries to CIBC Wood Gundy, an investment bank and subsidiary of CIBC, Livent’s principal banker. SH SAC ¶ 87. In return, CIBC Wood Gundy was entitled to certain royalty payments from the shows. SH SAC ¶ 87. Valued at $4.6 million (Can.) or £2 million, the agreement also gave Livent the right, until June 30, 1998, to repurchase the production rights. SH SAC ¶ 87. Based on this agreement, Livent recorded revenue of approximately $4.6 million (Can.) in its financial statements for fiscal 1997. SH ¶ 87. According to the Shareholders, the CIBC Wood Gundy contract was reviewed by D & T as part of its 1997 audit of Livent. Although fully aware that the contract required Livent to perform over a period of years, D & T allegedly acquiesced to Livent’s insistence that all revenue be booked in 1997 — so long as a corresponding amortization liability was also recorded. SH SAC ¶ 87. Thus, the transaction inflated revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), but not earnings, net interest, taxes, depreciation and amortization. SH SAC ¶ 87. Gottlieb purportedly negotiated a side letter with CIBC Wood Gundy. SH SAC ¶ 90. The side letter provided two mechanisms for CIBC Wood Gundy to recoup its fees and make significant profits. If Li-vent exercised the repurchase option, Li-vent would repay all fees, plus £112,500, plus any unpaid royalties; if Livent did not exercise the repurchase option, Livent would pay CIBC Wood Gundy an additional royalty equal to 10 percent of the adjusted gross weekly ticket sales of the Broadway production of “Ragtime.” SH SAC ¶ 90. Under this arrangement, CIBC Wood Gundy was guaranteed a minimum of an annualized 33 percent return on its original investment, regardless of which option Livent chose. SH SAC ¶ 90. The transaction was designed to provide Livent with “bridge” financing until it could sell the production rights to a U.K. investor after “Ragtime” opened on Broadway in early 1998. SH SAC ¶ 91. When it became clear in early August 1998 that Livent’s new management did not know about the side agreements, Gottlieb asked the managing director of CIBC Wood Gun-dy who negotiated the transaction not to disclose the side agreements to new management so that Gottlieb could cause Li-vent to repurchase the rights from CIBC Wood Gundy. SHSACf91. 4. Dundee Realty Corporation In May 1997, Livent acquired from the City of Toronto title to lands adjoining the Pantages Theater (the “Pantages Place Lands”). SH SAC ¶ 66. A portion of the Pantages Place Lands were to be used for a new theater, an underground parking garage, and retail space (collectively the “Pantages Place Project”). SH SAC ¶ 66. Drabinsky and Gottlieb advised the Board that at the end of the second quarter of 1997, Livent had sold the development rights over the land not used by the Pantages Place Project for $7.4 million (Can.) to a third-party, Dundee Realty Corporation (“Dundee”), a Canadian company. SH SAC ¶¶ 67-68. Gottlieb was a director and shareholder of Dundee’s parent corporation, Dundee Bancorp Inc. SH SAC ¶ 67. Livent faded, however, to disclose this agreement as a related party transaction in its fiscal 1997 annual report. SH SAC ¶ 67. The purpose of this sale was to enable Dundee to construct a hotel and condominium adjacent to the Pantages Place Project. SH SAC ¶ 67. Livent was also to receive a minority interest in the development company owned by Dundee that was to construct the hotel and condominium. SH SAC ¶ 67. Under the master agreement for the project, dated June 30, 1997, Livent and Dundee created a joint venture company. SH SAC ¶ 68. However, the parties entered into a related “Put” agreement (the “Put Agreement”) that entitled Dundee to withdraw from the project and cause the joint venture, and therefore Livent, to repay Dundee’s investment. SH SAC ¶ 68. In August 1997, the Audit Committee questioned Gottlieb about the timing of the transactions and whether revenue had been properly recognized for the second quarter of FY 1997. SH SAC ¶ 70. According to the Shareholders, under GAAP, the Put Agreement created a material contingency preventing recognition of the $7.4 million as income in 1997. SH SAC ¶ 77. Over Drabinsky’s objections, D & T was asked for an opinion with respect to revenue recognition. SH SAC ¶ 70. Peter Chant (“Chant”) of D & T reviewed the contract and opined that, because the contract contained a “put” agreement that would require Livent to buy back the same rights at Dundee’s request, the sale was not final and revenue should not be recognized. SH SAC ¶ 70. Gottlieb then represented to the Board and D & T that the Put Agreement had been cancelled. SH SAC ¶¶ 71, 77. On this basis, D & T informed Gottlieb that because the Put Agreement had been removed in August 1997, revenue should be recognized only in the third quarter. Gottlieb ignored this advice, and issued a press release stating revenue for the second quarter which included the development rights revenue. SH SAC ¶ 71. When Bob Wardell (“Wardell”) of D & T learned of the press release, he contacted Gottlieb and demanded a meeting with Livent’s Audit Committee. SH SAC ¶ 72. At the meeting, Gottlieb explained that in his opinion the Dundee contract had been finalized in the second quarter, and he would procure confirmation from Dundee and an opinion of counsel supporting his position. SH SAC ¶ 72. A few days later, at a second special meeting of the Audit Committee with D & T present, Gottlieb presented the legal opinion and purported confirmation from Dundee. SH SAC ¶ 73. Nonetheless, D & T initially refused to accept the accounting treatment and threatened to resign. The D & T representatives then stepped out of the room. SH SAC ¶ 73. Gottlieb then told the Audit Committee that D & T should resign. Goldfarb said that would be unacceptable and that D & T’s resignation would cause too much damage to Livent’s reputation. SH SAC ¶ 74. After further discussion, the Board members agreed that they would be willing to reverse the revenue recognition, provided some of the revenue could be made up for in the second quarter, and that a corrective press release could be issued in a manner that saved face. SH SAC ¶ 74. Chant and Wardell then came back in the room and the parties agreed that Li-vent would reverse the $6 million revenue line, but would also increase other revenue by $1.2 million, by reversing an assortment of accrued liabilities. SH SAC ¶ 75. Li-vent then issued a press release, which, according to the Shareholders, D & T “accepted,” and which stated in part that “Livent, Inc.... has adjusted its accounting treatment for non-theatre real estate transactions to be consistent with U.S. GAAP.” SH SAC ¶ 75. The Put Agreement issue rose again in discussion with the Audit Committee during the year-end audit in April 1998. SH SAC ¶ 77. On April 9, 1998, Gottlieb expressly stated to the Audit Committee that no such agreement or arrangement existed and provided a letter from the Chairman of Dundee as confirmation. SH SAC ¶ 78-79. However, in a letter dated April 6, 1998 to Dundee’s President, Drabinsky and Gottlieb confirmed to Dundee that the Put Agreement was in place and effective as between Livent and Dundee. SH SAC ¶ 79. The letter read in pertinent part as follows: “[W]e wish to confirm that notwithstanding [Dundee’s Chairman’s] letter to me of April 4, 1998, a copy of which is attached hereto, the “PUT” agreement referred to in [Dundee’s Chairman] letter is binding and effective and remains so in favor of Dundee ... as if it had never been cancelled.” SHSACfl79. The Shareholders allege that revenue recognition from this transaction violated GAAP. First, according to the Shareholders, any oral agreement to cancel the Put Agreement was contingent upon Gottlieb renegotiating the joint venture agreement to ensure to Dundee’s satisfaction that Dundee’s rights remained secure. SH SAC ¶ 80. Thus, even if the Put Agreement was cancelled, recognition of revenue was improper because the contract was not a final, consummated sale. Second, On May 27, 1998, Gottlieb and Dundee executed a new Put agreement. SH SAC ¶ 80. Gottlieb and Drabinsky’s April 6, 1998 letter “reinstating” the Put Agreement, and the new May 27, 1998 Put agreement confirm that Gottlieb and Drabinsky considered it to be binding on Livent. SH SAC ¶ 80. Accordingly, the existence of the Put Agreement made the transaction an investment that did not qualify for revenue recognition under GAAP. SH SAC ¶ 80. 5. Pantages Theatre Naming Rights Livent sought to recognize as revenue $12.5 million for a purported sale of naming rights to the Pantages Theatre to AT & T for the third quarter of fiscal 1997. SH SAC ¶ 81. Livent purportedly sold AT & T the right to add its name on two theaters, one of which had not yet been built. SH SAC ¶ 81. Although there had not been any firm contract by the end of the third quarter, Livent wanted to record the revenue immediately based on its plans to allow the name change to the Pantages. SH SAC ¶ 81. In October 1997, Livent vice-president Maria Messina (“Messina”) discussed the transaction with D & T’s Wardell and Chant, and all three agreed that the revenue could not be recognized in the third quarter of 1997. Gottlieb, an accountant by profession, retained Ernst & Young (“E & Y”) for the purpose of receiving an independent opinion on the naming revenue. SH SAC ¶ 82. While E & Y would not opine that the revenue could be recognized in the third quarter of 1997, it did state that the transaction could be considered within the third quarter. SH SAC ¶ 83. Gottlieb provided D & T with E & Y’s opinion regarding the transaction and asked that it be included in the accounting for the third quarter. SH SAC ¶ 83. D & T retained another accounting firm, Price Waterhouse, for another professional opinion. Price Waterhouse met with Gott-lieb and AT & T and concluded that an oral contract could be considered to have occurred in the third quarter of 1997. SH SAC ¶ 84. Price Waterhouse did not opine on the specific issue of revenue recognition with respect to the oral contract. SH SAC ¶ 84. After receiving this information, D & T acquiesced to recording the naming revenue in the third quarter. SH SAC ¶ 85. The written contract for the name change was thereafter signed in November 1997. SH SAC ¶ 85. 6. Dewlim Investments Limited In 1996, Gottlieb negotiated the sale of an interest in the production rights to “Show Boat” in Australia and New Zea-land to Dewlim Investments Limited (“Dewlim”), a British Virgin Islands company, for $4.5 million. SH SAC ¶ 54. The original agreement was dated October 21, 1996, and revised by agreement dated November 3,1997. SH SAC ¶ 54. In October 1996, Gottlieb and Drabinsky orally promised Dewlim’s then owner, Andrew Sarlos, that Livent would repay the fee Dewlim advanced for the production rights, plus 10 percent interest. SH SAC ¶ 55. This arrangement is memorialized in a June 9, 1998 memo from Gottlieb to Drabinsky. SH SAC ¶ 55. It states that as “an inducement” for the “Show Boat” transaction, “we committed to Dewlim on behalf of Livent that Dewlim would recoup by December 31, 2000 all capital together with interest accrued monthly at the rate of 10% per annum.” SH SAC ¶ 55. As a result of this concealed arrangement, Li-vent improperly recorded as revenue the present value of the fee, $4.2 million, in fiscal 1996; no revenue was recorded under U.S. GAAP in fiscal 1996 or 1997. SH SAC ¶ 55. This was a related party transaction in two respects. First, at the time of the transaction, Sarlos was a director of Livent and chairman of Livent’s Audit Committee. SH SAC ¶ 56. Additionally, in October 1996, Gottlieb had pledged his personal Livent stock to Dewlim as security for the $4.5 million loan. SH SAC ¶ 56. Neither of these related party transactions was disclosed in Livent’s annual report for fiscal 1996 or 1997. SH SAC ¶ 56. According to the Shareholders, even a cursory examination of the Dewlim agreement — even without the side agreement— raised red flags that Livent could not complete its terms of the agreement to justify the recognition of $4.2 million in 1996. The Audit Committee reviewed the contents of the Dewlim and Pace agreements. SH SAC ¶ 59. During one Audit Committee meeting Goldfarb and Emerson stated that the revenue recognition in the agreements was improper, and some revenues should be amortized over several years. SH SAC ¶ 59. However, based on a report by D & T and representations of management, they agreed that the revenue could be recognized in 1996. SH SAC ¶ 59. D & T also reviewed the terms of the Dewlim and Pace agreements, and knew that Messina opposed recognizing all the revenue on the agreements. SH SAC ¶ 60. D & T’s United States affiliate initially refused to permit D & T to file its Audit Opinion on Livent’s 1996 U.S. GAAP financial statement with the SEC, because it agreed with Messina that revenue recognition had been improper with respect to those transactions. SH SAC ¶ 60. A meeting was held in New York in early 1998 to consider the proper accounting. Livent was represented by Drabinsky, Gottlieb, and Livent vice-presidents Robert Topol (“Topol”), Gordon Eckstein (“Eckstein”), and Messina and D & T Canada was represented by Wardell and Chant. SH SAC ¶ 61. D & T New York was represented by four partners. SH SAC ¶ 61. At the meeting, the parties once again reviewed the agreements. SH SAC ¶ 62. A compromise was reached whereby the U.S. GAAP financial statements would recognize all of the revenue from the Pace “Show Boat” agreement at the time of signing, but could not recognize the revenue from the Pace “Ragtime” transaction until 1997. SH SAC ¶ 62. The revenue from the Dewlim agreement would not be recognized on U.S. GAAP financial statements. SH SAC ¶ 62. D & T based this decision on the fact that pre-production had begun for the Pace “Show Boat” production, but had not begun for “Ragtime” or for the Dewlim “Show Boat” production. SH SAC ¶ 62. The Canadian GAAP filings would not be restated or amended. SH SAC ¶ 62. B. FRAUDULENT MANIPULATION OF LIVENT’S BOOKS AND RECORDS The Shareholders allege that beginning in 1994 and continuing through the first quarter of 1998, Drabinsky and Gottlieb and several of the other Livent officials engaged in a deliberate manipulation of Livent’s books and records, thereby understating expenses in each fiscal quarter in order to inflate earnings, and violating GAAP. By redacting expenses on losing shows, Drabinsky and Gottlieb were able to portray the productions and Livent as financially successful. SH SAC ¶ 105. In quarterly periods, this enabled Drabinsky, Gottlieb and Topol to meet the earnings and operating projections provided to Wall Street analysts. SH SAC ¶ 105. Specifically, the Shareholders claim that Livent’s managers engaged in three manipulative devices to falsify Livent’s books: (a) transferring preproduction costs for shows to fixed asset accounts, which materially understated expenses; (b) physically erasing expense and liability entries from the Company’s general ledger; and (c) transferring costs from a currently running show to another show with a longer amortization period, which again materially understated expenses. SH SAC ¶¶ 96-114. Livent transferred preproduction costs for shows to fixed asset accounts. SH SAC ¶ 96. Preproduction costs, such as costs for advertising, sets and costumes, were incurred prior to the opening of a production. SH SAC ¶ 96. According to Livent’s accounting policies, preproduction costs were amortized, and thus expensed, once a production begins and only for a period not to exceed five years. SH SAC ¶ 96. Fixed assets, in contrast, were depreciated over their useful life, not to exceed forty years. SH SAC ¶ 96. As a result, Livent significantly decreased expenses, and thus inflated its reported income, by improperly depreciating prepro-duction costs over a much longer period of time. SH SAC ¶ 96. For example, in 1997 Livent transferred preproduction costs and certain show operating expenses totaling $15 million, representing six different shows in 30 different locations, to three different fixed asset accounts. SH SAC ¶ 96. By this manipulation, Livent violated GAAP and its own accounting policy. SH SAC ¶ 96. Livent also physically erased expense and liability entries from its general ledger, moving these entries from the current quarter to future periods. SH SAC ¶ 97. Livent maintained a separate set of books, called the “Expense Roll,” that internally tracked the amount of these eliminated entries. SH SAC ¶ 98. This manipulation allowed Livent to falsely report significant reductions in show expenses, with attendant increases in profits. SH SAC ¶ 98. For example, expenses rolled from the first to the second quarter of fiscal 1997 totaled $6.5 million. SH SAC ¶ 98. Livent also manipulated its financial statements by transferring costs from a currently running show to one that had either not yet opened or that had a longer amortization period. SH SAC ¶ 99. This accounting manipulation increased profits in one quarter by reducing the amortization of preproduction costs, an expense item. SH SAC ¶ 99. Under GAAP and Livent’s own accounting policy, amortization of preproduction costs is only appropriate once a production has begun. SH SAC ¶ 99. In 1996 and 1997, approximately $12 million relating to seven different shows performed at 27 different locations were transferred to the accounts of 31 different future locations and ten other shows then in progress. SH SAC ¶ 99. According to the Shareholders’ theory, any auditor or Audit Committee member who reviewed Livent’s production schedule, or even read the trade publications or Variety magazine, would have noticed clear red flags of this accounting manipulation. The Shareholders maintain that: D & T and the Audit Committee surely were aware of Livent’s announced policy that costs of cancelled shows would be expended at the time of cancellation; the fact that particular shows had ended their runs was well known; and absence of any writedown at the time of the show’s end necessarily meant that Livent was not following its own stated accounting policy, let alone complying with GAAP. SH SAC ¶100. As had been done with the “Expense Rolls,” Livent maintained a separate sets of books called the “Amortization Roll,” to internally track the amount of amortization moved from current to future periods. SH SAC ¶ 101. The cumulative impact of these accounting irregularities caused Livent to understate expenses by $3.5 million in fiscal year 1995, $18 million in fiscal year 1996, and $8.5 million in fiscal year 1997, and to overstate expenses by $2.7 million in the first quarter of fiscal year 1998. SH SAC ¶ 102. The Shareholders assert that each of the manipulations described above was carried out by Livent’s senior management and accounting department personnel. SH SAC 11104. On a quarterly basis, Diane Winkfein (“Winkfein”) and D. Grant Malcolm (“Malcolm”) — Livent senior controllers — produced a general ledger showing quarterly financial results to Eckstein and Christopher Craib (“Craib”), another senior controller who had joined Livent from D & T in June 1997. Craib then placed this information into summary format for Drabinsky, Gottlieb, Eckstein, and Topol. SH SAC ¶ 105. This group, along with Messina, then met to review the results. SH SAC ¶ 105. During these meetings, Drabinsky, Gott-lieb, Eckstein, Topol, and Messina agreed on the quantity of top-line adjustments to be made to Livent’s books to achieve the results they desired. SH SAC ¶ 102. Generally, Drabinsky directed that certain adjustments be made. SH SAC ¶ 106. Eckstein noted the desired adjustments, and communicated the adjustments to Winkfein and Malcolm, instructing them to make the adjustments in such a way as to give the appearance that they were original entries. SH SAC ¶ 106. Beginning in 1996, Malcolm communicated the transfers to fixed asset accounts to Tony Fiorino (“Fiorino”), Livent’s theater controller, who recorded the adjustments in dummy theater cost accounts. SH SAC ¶ 106. Once the top-line adjustments were made, Winkfein or Malcolm provided Eck-stein with an adjusted general ledger containing the accounting manipulations. SH SAC ¶ 107. Drabinsky, Gottlieb, Topol, and Eckstein then met to review the manipulated results. SH SAC ¶ 107. Dra-binsky directed that further adjustments be made, which Winkfein or Malcolm processed in Livent’s accounting system, under Eckstein’s direction. SH SAC ¶ 107. After a final review by senior management, the manipulated numbers were presented to Livent’s Audit Committee, D & T and investors, and were eventually incorporated into Livent’s public filings with the SEC. SH SAC ¶ 107. Due to the sheer magnitude of the manipulations, it was necessary to track results both before and after the top-line adjustments were made. SH SAC ¶ 108. At Eckstein’s direction, Malcolm maintained computer files of the adjustments that tracked details of expense capitalization, expense rolls, and show-to-show cost transfers from 1995 to the first quarter of 1998. SH SAC ¶ 108. Fiorino also separately tracked the expenses that had been improperly transferred to theater construction accounts by creating a range of accounts in the general ledger and thereby measuring the true costs of Livent’s theater construction program. SH SAC ¶ 108. To make the adjustments, Malcolm identified individual invoices to alter. SH SAC ¶ 111. Then, on an invoice-by-invoice basis, he and Winkfein changed the distribution dates or account codes of these invoices, deleting the original entries from Livent’s general ledgers and reposting fraudulent information. SH SAC ¶ 111. This process had the effect of making the adjusted entries appear as original transaction figures. SH SAC ¶ 111. Beginning in mid-1997, Eckstein directed Craib to prepare quarterly schedules containing a comparison of actual and budgeted results. SH SAC ¶ 109. These schedules, which contained the “Expense Roll” and the “Amortization Roll,” quantified certain of the accounting manipulations. SH SAC ¶ 109. Drabinsky, Gott-lieb, Topol, Eckstein, and Messina met to review these schedules. SH SAC ¶ 109. Beginning by at least October 1997, Messi-na prepared pre- and post-adjustment charts reflecting transferred amounts in detail, which she distributed to Drabinsky, Gottlieb, Topol, and Eckstein. SH SAC ¶ 109. After these meetings, Winkfein, Malcolm and Fiorino made adjustments to various accounts in the balance sheet and income statement, including expense categories, specific shows and fixed asset accounts. SH SAC ¶ 110. The amount and magnitude of the adjustments eventually grew so great that it was not possible to make individual changes to Livent’s general ledger. SH SAC ¶ 112. Eckstein directed Malcolm to instruct Livent’s information services department to write a computer program that would allow the accounting staff to override Livent’s accounting system. SH SAC ¶ 112. Livent’s information services manager wrote computer programs to enable the accounting staff to execute adjustments on a batch basis. SH SAC ¶ 112. With respect to the transferral of expenses from one show to another, Livent’s policy was to expense costs of canceled shows at the time of cancellation, and it was well known when a particular show had ended its run. SH SAC ¶ 100. That no writedown was taken at the end of a show’s run meant, the Shareholders contend, that Livent was not following its own accounting policy, and that D & T either knew it or was reckless in failing to recognize it. SH SAC ¶ 100. With respect to all of the accounting manipulations, the magnitude of the top-end adjustments was so great, and the existence of red flags so clear, that the misconduct should have been detected through independent confirmation procedures carried out in an audit conducted in accordance with Generally Accepted Auditing Standards (“GAAS”). SH SAC ¶ 114. Yet, D & T failed to examine evidence necessary to opine as to the appropriateness of Livent’s accounting treatment of these transactions. SH SAC ¶ 114. The cumulative impact of these accounting irregularities caused Livent to materially understate expenses by approximately $3.5 million in fiscal 1995, $18 million in fiscal 1996, and $8.5 million in fiscal 1997, and to overstate expenses in the first quarter of 1998 by $2.7 million. SH SAC ¶ 102. C. OTHER FRAUDULENT CONDUCT 1. The Undisclosed Kickbacks Beginning in 1990 and continuing through 1994, Drabinsky and Gottlieb allegedly operated a kickback scheme with two Livent vendors. SH SAC ¶ 128. Dra-binsky and Gottlieb directed Eckstein to improperly capitalize the payments to the vendors, approximately $4 million, into preproduction costs. SH SAC ¶ 129. As a result, Livent’s fiscal 1994, 1995 and 1996 financial statements, which reported pre-production costs of $28 million, $55.4 million and $75.6 million, respectively, were overstated by approximately $4 million in each year. SH SAC ¶ 129. 2. Materially False and Misleading Statements to Analysts Commencing by at least the second quarter of 1995, Drabinsky, Gottlieb, and Topol regularly provided false financial information to Wall Street analysts, including projections of future performance predicated on false data. SH SAC ¶ 130. Livent also engaged in quarterly conference calls with analysts and other interested parties, in which Drabinsky, Gottlieb, and Topol were the main speakers and made materially false and misleading representations concerning Livent’s financial results. SH SAC ¶ 130. On the basis of these representations, and Livent’s reported financial results, the investment firm of Furman Selz issued buy recommendations for Livent stock in 1997 and 1998, and Cowen & Co. issued strong buy recommendations in 1996, 1997 and 1998. SH SAC ¶ 130. Also based on Livent’s reported financials, PaineWebber Inc. issued buy recommendations in 1996, 1997 and 1998. SH SAC ¶ 130. 3.Fraudulent Ticket Purchases From September through December 1997, Livent senior management arranged for Peter Kofman (“Kofman”) and Roy Wayment (“Wayment”) (the two vendors involved in the kickback scheme) to purchase tickets for Livent’s Los Angeles production of “Ragtime” in order to inflate ticket sales reported to Variety magazine. SH SAC ¶ 131. This fraud was significant because if weekly ticket sales fell below $500,000, Livent’s Los Angeles landlord, the Schubert Theater, could evict Livent pursuant to a clause in their lease contract. SH SAC ¶ 131. Since Livent planned to open “Ragtime” on Broadway in January 1998, poor sales in Los Angeles would have undermined its planned opening, and an eviction would have been devastating. SH SAC ¶ 131. Since management was counting on “Ragtime” to turn the financial fortunes of Livent around, it was imperative to portray the Los Angeles production of “Ragtime” as financially successful. SH SAC ¶ 131. From September 30, 1997 to December 31, 1997, Kofman purchased tickets totaling U.S. $381,015 from the box office at the Schubert Theater in Los Angeles. SH SAC ¶ 132. Kofman made these purchases using his personal credit card or through personal checks or checks issued from one of his companies. SH SAC ¶ 132. Livent then reimbursed Kofman or his companies. SH SAC ¶ 132. In November 1997, Eckstein also enlisted Wayment to purchase tickets to the Los Ange-les production of “Ragtime”. SH SAC f 132. Eckstein instructed Wayment to write checks to the Schubert Theater for tickets. SH SAC ¶ 132. Livent then reimbursed Wayment’s construction company, Execway. SH SAC ¶ 132. Eckstein directed the Livent accounting staff to improperly capitalize these ticket purchases in Livent’s fixed asset accounts. SH SAC ¶ 133. As a result, Livent’s fixed asset accounts were false and misleading. SH SAC ¶ 133. Moreover, the box office numbers reported by Livent to Variety magazine were materially false and misleading, designed to convey the false impression that “Ragtime” was a successful engagement in Los Angeles. SH SAC ¶ 133. D. ALLEGATIONS OF MISCONDUCT SPECIFIC TO D&T In connection with the foregoing transactions, the Shareholders allege numerous failures and omissions on the part of D & T. They complain that in the year-end 1996 audit, D&T “acquiesced in Livent’s improper revenue recognition for the Pace/ ’Show Boat’ and Dewlim contracts, accepted an unprincipled compromise with respect to the Pace/’Ragtime’ contract, and on the cost side, permitted continued capitalization of costs of a canceled loan.” SH SAC ¶¶ 50-55, 57-65, 220. In the second quarter of 1997, D&T allegedly “approved of publication of a materially false press release, which it had reviewed, purporting to describe why Livent was revising its most recent quarterly results.” SH SAC ¶¶ 66-73, 220. In the third quarter of 1997, D&T allegedly acquiesced in the improper recognition of revenue with respect to the AT & T Pantages Place naming rights transactions. SH SAC ¶¶ 81-85, 200. In the year-end 1997 audit, D&T discovered it had been lied to with respect to the Put Agreement connected to the Dundee/Pantages air rights transaction, but nonetheless permitted immediate revenue recognition on that contract. SH SAC ¶¶ 77-84, 220. It also accepted improper revenue recognition with respect to the Pace/“Ragtime”, American Artists, CIBC Wood Gundy, and AMEX exclusivity transactions. SH SAC ¶¶ 86-94, 220. Additionally, the Shareholders claim that D & T found approximately $500,000 worth of fraudulent accounting entries for advertising costs — twenty five percent of the total — but did nothing except reclassify the entries into the proper fiscal year and never expanded its sampling. SH SAC ¶¶ 115-117, 119, 122, 220. D & T was aware that no backup documentation had been provided despite numerous requests for several fixed asset account journal entries. SH SAC ¶ 118, 220. D & T permitted Livent to continue capitalizing loan origination costs after the loan was can-celled. SH SAC ¶¶ 123-126, 220. And finally, D&T dropped its request that Messina, Livent’s Chief Financial Officer, and Jerald Banks (“Banks”), the General Counsel, sign representation letters attesting to the accuracy of Livent’s accounting practices without inquiring as to why neither Messina nor Banks was willing to sign those standard representation letters. SH SAC ¶ 127, 220. E. ALLEGATIONS OF MISCONDUCT SPECIFIC TO CIBC The Shareholders allege that between 1993 and 1998, CIBC had been Livent’s primary lending institution. SH SAC ¶ 251. By late 1997, CIBC’s financial services to Livent included a line of credit for $50 million, and a $125 million (U.S.) note offering arranged by CIBC Wood Gundy. To protect its interests, vis-a-vis the credit line, CIBC negotiated a secured interest in all of Livent’s property. SH SAC ¶ 253. According to the Shareholders, the amount of cash which Livent borrowed from CIBC increased precipitously from 1995 onward. In 1998, in particular, as Livent’s financial condition rapidly deteriorated, its borrowings from CIBC approached the $50 million credit limit. SH SAC ¶ 254. As a result, according to the Shareholders, in June 1998 Livent issued roughly 4.5 million shares at $8 per share for aggregate net proceeds of $47.2 million. These proceeds were used to repay CIBC. SH SAC ¶ 254. Livent was still losing a substantial amount of money by the end of the first quarter of 1998, so Drabinsky approached Lynx Ventures (“Lynx”), an entity controlled by Michael Ovitz, about an equity investment in Livent. SH SAC ¶ 265. According to the Shareholders, Drabinsky or Gottlieb promised CIBC that Gottlieb would sign an undertaking on behalf of Livent to issue stock “to Michael Ovitz (or an entity controlled by him) for net proceeds of not less than U.S. $20,000,000 ... and promptly on receipt thereof to pay such net proceeds to CIBC ....” SH SAC ¶ 266. Before Livent, and thus CIBC, could receive Lynx’s $20 million investment, however, Livent had to obtain a certification from D & T that Livent’s financial statements for 1997 were prepared in accordance with GAAP. SH SAC ¶ 267. Gottlieb requested that CIBC “confirm” the terms of their royalty agreement in a letter that could be provided to D & T. SH SAC ¶ 267. Additionally, CIBC Wood Gundy was retained by Livent to opine on the fairness of the transaction. By letter dated April 24, 1998 and distributed to Livent’s shareholders in the United States and elsewhere, CIBC Wood Gundy Securities provided its opinion (the “Fairness Opinion”) that the proposed Lynx investment was fair, from a financial point of view, to Livent and its shareholders. SH SAC ¶ 271. The Fairness Opinion was attached to Livent’s Form 6-K annual proxy circular (the “Circular”) filed with the SEC on or about May 18, 1998, and attached to Livent’s Form 40-F filed with the SEC on or about June 80,1998. CIBC Wood Gundy also explicitly consented to having the Fairness Opinion attached to the Circular and publicly filed with all Canadian regulatory authorities. SH SAC ¶ 271. According to the Shareholders, the Fairness Opinion misstated and failed to disclose material information. SH SAC ¶ 271. For example, according to the Shareholders, CIBC Wood Gundy stated in rendering its opinion that it had relied on Livent’s audited financial statements, including those for the fiscal year ended December 31, 1997. However, it failed to disclose that: those financial statements were materially false and misleading as evidenced by the secret side agreement entered into between Livent and CIBC Wood Gundy; the financial statements had not been prepared in accordance with GAAP; the revenue and earnings per share amounts were materially overstated; and, Livent had falsified records. SH SAC ¶¶ 271-76. The Shareholders contend that CIBC Wood Gundy also failed to disclose that it and CIBC had extracted from Livent the promise to pay over the $20 million in proceeds from the Lynx transaction promptly to CIBC in order to pay down Livent’s credit balance with CIBC, thus failing to disclose that it and CIBC were interested parties in the Lynx transaction. SH SAC ¶¶ 271-76. F. LIVENT’S BANKRUPTCY On November 18, 1998, Livent released its restated financial statements for 1996, 1997 and the first quarter of 1998, disclosed that investigations had revealed “ ‘massive, systematic, accounting irregularities that permeated the Company’ ” and further announced, as a result, that D & T had withdrawn its audit opinions of the 1995, 1996, and 1997 financial statements and had issued new audit opinions on the restated 1996 and 1997 financial results. SH SAC ¶ 150. On the same day, Livent terminated Drabinsky and Gottlieb and sued them for fraud and breach of fiduciary duty. SH SAC ¶ 152. Trading in Livent common stock resumed following Livent’s restatement, and the price dropped from $6.75 to approximately $0.28 per share. See Livent Shareholders I, 78 F.Supp.2d at 202. On January 6, 1999, NASDAQ delisted Livent. Id. III. THE SECURITIES LAWS The Shareholders contend that the acts and omissions of the various defendants involved in the Livent transactions described above, and in Livent’s resulting downfall, violated §§ 10(b) and 20(a) of the Exchange Act. Specifically they argue that, given the magnitude and duration of the Livent Inside Directors’ frauds, the supporting roles the Outside Directors, auditors and underwriters played in causing or not discovering the misconduct sooner, rendered them sufficiently culpable to fall within the scope of the statute. Thus, the Shareholders assert that the various defendants’ involvement may be held to evidence fraudulent intent or recklessness for the purposes of recovery under § 10(b) and 20(a). Defendants counter that the SH SAC does not plead facts with the particularity required to support a strong inference of fraud, and are therefore insufficient under Fed.R.Civ.P. 9(b) and the heightened pleading standards imposed by the PSLRA. In any event, according to defendants, the Shareholders’ claims are insufficient to make out the elements required for liability under the § 10(b) theories of recovery the Shareholders assert. Resolution of these disputes requires a review of the statutory framework embodied in the Exchange Act, and the effects of the PSLRA. A. SECTION 10(b) AND SEC RULE 10b-5 Section 10(b) of the Exchange Act provides in pertinent part that: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange — (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). Rule 10b-5 “more specifically delineates what constitutes a manipulative or deceptive device or contrivance.” Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 534 (2d Cir.1999). Under Rule 10b-5, [i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security- 17 C.F.R. 240.10b-5 (1999). To state a claim for relief under § 10(b) and Rule 10b-5, plaintiffs must allege that each defendant “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs’ reliance was the proximate cause of their injury.” In re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir.1998). The Exchange Act enlarged the scope of liability for violations of the securities laws in some ways. It encompassed the wrongful acts not only of issuers and sellers and their principals but a wider range of actors: not just the corporation’s officers, managers and directors, as well as the underwriters, but the accountants and other professional service providers who typically play substantial roles in the preparation of documents upon which securities transactions and their ongoing value depend. At the same time, in defining liability under § 10(b), Congress made the standard narrower and stricter. Its measure of culpability, while not expressly stated in the form of conduct Rule 10b-5 proscribes, has been limited to behavior demonstrating scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In Hochfelder, the Supreme Court, holding that a private cause of action under § 10(b) and Rule 10b-5 cannot be maintained without any allegation of scienter, defined the term as “a mental state embracing intent to deceive, manipulate or defraud”. Id. at 194, n. 12, 96 S.Ct. 1375. This requirement derives from analogy of Rule 10b-5 deception to the common law action for fraud, the elements of which mandate a showing of scienter. See id. at 197, 96 S.Ct. 1375; see generally W. Page Keeton, et al., Prosser and Keeton on Torts § 107 (5th ed.1984) (herein “Prosser ”). In enunciating the scienter standard, the Hochfelder Court did not address some questions regarding how far the continuum of § 10(b) culpability extended. Among the issues left unresolved were some which have arisen in the case now before this Court: the applicability of Rule 10b-5 to actions brought against alleged aiders and abettors of securities violations and whether the scienter requirement can be satisfied by a showing of conduct which does not demonstrate actual knowledge or intent but which is alleged to be reckless. The aider and abettor question was settled by the Supreme Court in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), where the Court ruled that no such right of action exists under § 10(b). The issue of recklessness as a measure of scienter, absent a clear mandate from the Supreme Court, has remained guided by doctrine developed by Circuit Court case law. Similarly extending common law principles governing the action for deceit, the lower courts generally have imposed on Rule 10b-5 actions a requirement that plaintiffs plead facts tending to demonstrate that defendants’ conduct entailed reckless disregard for the truth or the utterance of a statement or omission known to be untrue. See generally 2 Thomas Lee Hazen, The Law of Securities Regulation § 13.4 at 498 (3rd ed.1995) (herein “Hazen ”) (citing cases). The Second Circuit Court of Appeals, even prior to Hochfelder, had advanced the proposition that a scienter standard which mirrored the common law formulation was a prerequisite for liability in Rule 10b-5 actions. See Lanza v. Drexel & Co., 479 F.2d 1277, 1301 (2d Cir.1973) (era banc) (“Other cases in this circuit clearly indicate that facts amounting to scienter, intent to defraud, reckless disregard for the truth, or knowing use of advice, scheme or artifice to defraud are essential to the imposition of liability”) (quoting Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 445 (2d Cir.1971)). The Circuit Court, in later specifically holding that reckless conduct could suffice to satisfy the scienter requirement under § 10(b) and Rule lob-5, defined the term as: at the least, conduct which is “highly unreasonable” and which represents an extreme departure from the standards of ordinary cases ... to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47 (2d Cir.1978)(quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir.1977)) (ellipsis in original); see also Chill v. General Elec. Co., 101 F.3d 263, 269 (2d Cir.1996) (noting that in some cases “[a]n egregious refusal to see the obvious, or to investigate the doubtful” may give rise to an inference of recklessness)(quoting Goldman v. McMahan, Brafman, Morgan & Co., 706 F.Supp. 256, 259 (S.D.N.Y.1989)). The concept of recklessness necessarily introduces imprecision and matters of degree into measures of culpability in actions brought under Rule 10b-5. See Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.2000) (“Recklessness is harder to identify with such precision and consistency.”) Recognizing that the term eludes more precise articulation and defies categorical tests, courts which have struggled with its formulation and application have essayed only that a finding of recklessness demands conduct that exceeds negligence but does not cross the threshold of intentional misconduct. See Sanders 554 F.2d at 793 (“We believe ‘reckless’ in these circumstances comes closer to being a lesser form of intent than merely a greater degree of ordinary negligence. We perceive it to be not just a difference in degree, but also in kind.”). What the term encompasses has been variously portrayed as an approximation that borders on actual intent, or, as characterized by the Seventh Circuit, as “the functional equivalent of intent.” Sundstrand, 553 F.2d at 1045; see also Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 120-21 (2d Cir.1982) (Reckless conduct “must, in fact, approximate an actual intent to aid in the fraud being perpetrated...”); In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir.1999) (describing recklessness as being “apart from negligence and akin to conscious disregard”). Accordingly, as the Sundstrand standard explicitly mandates, simple or even inexcusable negligence will not suffice to satisfy the § 10(b) scienter requirement. See Sundstrand, 553 F.2d at 1044-45; National Union Fire Ins. Co. v. Wilkins-Lowe & Co., 29 F.3d 337 (7th Cir.1994); see also Hazen § 13.4 at 499 (“It is clear that in order to establish scienter, the defendant must have had more than a tangential connection to both the transactions and the statements under scrutiny.”) Further elaboration on what conduct may suffice to state a securities claim alleging recklessness was recently supplied by the Second Circuit in Novak. The Court of Appeals there surveyed the Circuit’s prior decisions articulating the circumstances it had upheld as sufficient to plead scienter in securities fraud cases. See Novak, 216 F.3d at 307-08 (citing cases). Specifically, the court identified standards requiring allegations of facts demonstrating that defendants: (1) bene-fitted in some concrete and personal way from the fraudulent conduct plaintiffs asserted, or (2) engaged in intentional misconduct (easily defined as deliberate illegal behavior) or recklessness. See id. Turning to recklessness, the Court of Appeals acknowledged that the various general standards propounded by the courts “offer little insight into precisely what actions and behaviors constitute recklessness sufficient for § 10(b) liability.” Novak, 216 F.3d at 308. For concrete guidance the Circuit Court instead referred in the first instance and by way of example to the “actual facts” of the Circuit’s securities fraud cases decided prior to the enactment of the 1995 Reform Act. The court specifically highlighted cases entailing allegations of facts demonstrating that defendants:(l)possessed knowledge of facts or access to information contradicting their public statements, (citing Cosmas v. Hassett, 886 F.2d 8, 12 (2d Cir.1989)); Goldman v. Belden, 754 F.2d 1059, 1063 (2d Cir.1985); or (2) “failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud.” Novak, 216 F.3d at 308 (citing Rolf, 570 F.2d at 47-48); SECv. McNulty, 137 F.3d 732, 741 (2d Cir.1998). The Second Circuit cautioned, however, that its jurisprudence concerning securities fraud based on reckless conduct encompasses certain important limitations on the scope of liability. First, the court has refused to allow plaintiffs to proceed with allegations of “fraud by hindsight.” Novak, 216 F.3d at 309 (citing Stevelman v. Alias Research Inc., 174 F.3d 79, 85 (2d Cir.1999); Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978); Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d Cir.1995) (allegations that defendants should have anticipated future events and made earlier disclosures did not suffice to make out a claim of fraud)). Second, the court noted cases holding that corporate managers are not obligated to portray their business’ performance and prospects in unduly cautious or gloomy terms in public pronouncements, so long as their representations are consistent with reasonably available data. See Novak, 216 F.3d at 309 (citing Stevelman, 174 F.3d at 85; Shields v. Citytrust Bancorp, Inc. 25 F.3d 1124, 1129-30 (2d Cir.1994)). Third, the court recognized that it had established limits on the scope of liability for failure to monitor alleged fraudulent conduct of third persons. See Novak, 216 F.3d at 309. Relevant to the facts in the case now before this Court, the Second Circuit specifically observed that “the failure of a non-fiduciary accounting firm to identify problems with the defendant-company’s internal controls and accounting practices does not constitute reckless conduct sufficient for § 10(b) liability.” Id. (citing Decker, 681 F.2d at 120); Chill, 101 F.3d at 269-70 (the failure of a parent company to regard the extraordinary profitability of its subsidiary’s particular form of trading as signaling problems compelling further investigation does not constitute adequate grounds for a finding of recklessness sufficient for liability under § 10(b)). Finally, and also particularly pertinent to the case at hand, the Court of Appeals referred to its prior rulings that allegations of GAAP violations or accounting irregularities, standing alone, do not suffice to state a securities fraud claim. See Novak, 216 F.3d at 309 (citing Stevelman, 174 F.3d at 84; Chill, 101 F.3d at 270). In this connection, such allegations may be sufficient only when coupled with evidence of “corresponding fraudulent intent”. See Novak, 216 F.3d at 309 (quoting Chill, 101 F.3d at 270). This analytic framework reflects the Supreme Court’s interpretation of Congressional intent embodied in § 10(b). In several rulings demarcating the bounds of the conduct to which the statutory scheme of § 10(b) extends, the Supreme Court could not be more emphatic in stressing that Congress manifested a purpose to draw the line at knowing, intentional or extreme behavior, and to distinguish fraudulent actions from lesser wrongs. In Hochfelder, the Supreme Court stressed that in choosing the words “manipulative or deceptive device or contrivance”, Congress did not intend the prohibition of § 10(b) to encompass alleged violations that constitute mere negligence. See Hochfelder, 425 U.S. at 197, 96 S.Ct. 1375. Based on similar reasoning, the Supreme Court held in Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), that § 10(b) did not reach breaches of fiduciary duties by majority shareholders where there was no showing of conduct involving manipulation or deception. The principle was reinforced in Chiarella v. United States, 445 U.S. 222, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980), where the Supreme Court determined that § 10(b) is not violated when a trader transacts in securities without disclosing inside information which he had no independent duty to disclose. Most recently, in Central Bank of Denver, 511 U.S. at 177, 114 S.Ct. 1439, the Court, overturning 25 years of circuit court precedents to the contrary, ruled that the 1934 Act does not establish a cause of action of aiding and abetting a § 10(b) securities violation. Articulating its reading of the will of Congress, the Supreme Court reaffirms and underscores in these cases that § 10(b) was designed to capture the higher grade of wrongful conduct associated with conscious or egregious actions, incorporating within the contours of the statute a standard of culpability that reflects not just matters of shades or degrees, but of fundamental substance. As the Supreme Court noted, “not every instance of financial unfairness constitutes fraudulent activity under § 10(b).” Chiarella, 445 U.S. at 232, 100 S.Ct. 1108. Thus, while § 10(b) has been described and may have been contemplated as a “catchall” provision, “what it catches must be fraud”. Id. at 234-35, 100 S.Ct. 1108. B. SECTION 20(a) Section 20(a) of the 1934 Act states that [ejvery person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. § 78t(a). Courts within the Second Circuit have been divided on whether a complaint must contain pleadings of scienter or culpable participation for a plaintiff to state a claim for § 20(a) liability. In Marbury Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.1980), the Second Circuit, ruling that respondeat superior theory of liability is not precluded by § 20(a), remarked that [wjhile the precise standard of supervision required of broker-dealers to make good the good faith defense of section 20(a) is uncertain, where, as in the present case, the erring salesman completes the transactions through the employing brokerage house and the brokerage house receives a commission on the transactions, the burden of proving good faith is shifted to the brokerage house, and requires it to show at least that it has not been negligent in supervision, and that it has maintained and enforced a reasonable and proper system of supervision and internal control over sales personnel. Many district courts have focused on this language in holding that neither scien-ter nor culpable participation are required to make out a prima facie case of control person liability — rather, all that is required is an allegation of control status. See, e.g., Borden v. Spoor Behrins Campbell & Young, Inc., 735 F.Supp. 587, 588 (S.D.N.Y.1990) (ruling that question has been “resolved authoritatively”); In re Citisource, Inc. Sec. Litig., 694 F.Supp. 1069, 1076 (S.D.N.Y.1988) (stating that “it has long been held that once a defendant has been shown to be a controlling person, the burden shifts to that defendant to establish his good faith”); Polycast Technology Corp. v. Uniroyal, No. 87 Civ. 3297, Fed. Sec. L. Rep. (CCH) ¶ 94,005, 1988 WL 96586, *7 (S.D.N.Y. Aug. 31, 1988) (same); Terra Resources I v. Burgin, 664 F.Supp. 82, 88 (S.D.N.Y.1987) (same); Savino v. E.F. Hutton & Co., 507 F.Supp. 1225, 1243 (S.D.N.Y.1981) (same). A separate line of cases, relying on the Second Circuit’s decisions in Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir.1973) and Gordon v. Burr, 506 F.2d 1080 (2d Cir.1974), requires the pleading of something more than con