Full opinion text
DECISION AND ORDER MARRERO, District Judge. Page TABLE OF CONTENTS I. INTRODUCTION 383 II. THE PARTIES 385 A. PLAINTIFFS.385 B. DEFENDANTS.385 1. Inside Directors/Management Defendants.385 2. Outside Directors.386 3. Securities Sellers.387 4. Auditors .388 5.Nominal Defendants 388 6. Additional Rieger Action Defendants.388 III. LIVENT’S BACKGROUND AND DEMISE 389 PUBLIC FINANCINGS AND LOSSES.389 LIVENT’S FRAUD UNCOVERED.390 W LIVENT’S BANKRUPTCY.391 O THE INSTANT ACTIONS .392 1. The Noteholders’ Action.392 2. The Rieger Action.392 IV. THE ALLEGED FRAUD 393 FRAUDULENT “REVENUE-GENERATING” TRANSACTIONS .393 1. Pace Theatrical Group .393 2. American Artists.393 3. CIBC Wood Gundy.393 4. Dundee Realty Corporation.395 5. Pantages Theatre Naming Rights .396 6. Dewlim Investments Limited .397 FRAUDULENT MANIPULATION OF LIVENT’S BOOKS AND RECORDS.398 td THE UNDISCLOSED KICKBACKS.401 Q OTHER FRAUDULENT CONDUCT.401 1. Livent’s Fraudulent Ticket Purchases.401 2. Allegations Specific to Deloitte.402 V. DISCUSSION 403 LEGAL STANDARDS: MOTION TO DISMISS UNDER FED. R. CIV. P. 12(B)(6).404 THE SECURITIES LAWS.407 W 1. The 1933 Securities Act.408 a. Section 11.408 b. Section 12(a)(2).409 c. Section 15.409 2. The Securities Exchange Act.409 a. Section 10(b) and SEC rule 10b-5 .409 b. Section 20(a).413 3. The 1995 Reform Act.418 a. Pleading Standards.418 b. Policy and Procedural Objectives.422 VI. APPLICATION OF THE SECURITIES STATUTES TO PLAINTIFFS’ CLAIMS 426 A. THE NOTEHOLDERS’ACTION.426 1. Deloitte’s Motion: Section 10(b).426 a. The Revenue-Generating Transactions.426 (i) The Dundee Transaction .427 (ii) CIBC Wood Gundy Transaction.428 b. Livent’s Manipulation of Its Books and Records.428 2. Deloitte’s Motion: Section 11 Liability and Rule 9(b) Pleading Requirement .429 3. PaineWebber, Furman Selz, and CIBC Motion: Section 11 Claim.430 4. PaineWebber/Furman Selz Motion: Section 12 Claim.432 5. CIBC Wood Gundy and CIBC Oppenheimer’s Motion: Section 10(b) Claims.432 6. CIBC Motion: Section 12(a)(2) Claim.433 7. Outside Directors Motion to Dismiss: Section 10(b) Claim.433 8. Outside Directors’ Motion: Section 11 Claims.434 a. Rule 9(b).434 b. Standing.434 9. Outside Directors’Motion: §§ 12 and 15 Claims.436 10. Outside Directors’ Motion: § 20(a) Claims.436 B. THE RIEGER ACTION.437 1. Status of Plaintiff Rieger.438 2. Motion to Dismiss: § 10(b) Claims.438 a. Reliance.438 b. Forward Looking Statements and Safe Harbor Analysis.440 3. Motion to Dismiss: Claims Under Section 11 and 12(a)(2).441 4. Motion to Dismiss: Claims, Under Sections 15 and 20(a).441 a. State Claims and the Securities Litigation Uniform Standards Acts.442 b. Motion to Strike the Answer of DrabinskyyEkstein, and Gottlieb and for Judgment on the Pleadings.443 VII. ORDER 445 A. THE NOTEHOLDERS’ ACTION, 98 CIV. 7161.445 B. THE RIEGER ACTION, 99 CIV. 9425 . .445 Livent, Inc. (“Livent”) was once a well-known and seemingly successful producer of live theater on Broadway and around the world. Its credits include critically acclaimed musicals such as “Show Boat,” “Fosse,” “Phantom of the Opera,” and “Ragtime.” In November 1998, however, amid revelations of accounting fraud implicating its highest officers, Livent restated financial results for 1996, 1997, and the first quarter of 1998 by nearly $100 million. At the same time, the company declared bankruptcy in the United States and Canada. The litigation spawned by Livent’s demise includes two competing noteholders class actions now before this Court. The first, In re Livent, Inc. Noteholders Sec. Litig., No. 98 Civ. 7191 (the “Noteholders’ Action”), was brought on behalf of note-holders who purchased Livent 9%% Senior Notes Due 2004 (the “Notes”) from October 10, 1997 through August 10, 1998 (the “Class Period”). Rieger v. Drabinsky, No. 98 Civ. 9425 (the “Rieger Action”), was later brought on behalf of noteholders who purchased Notes “anytime after October 10, 1997.” Each charges various Livent officers, directors, auditors, and bankers with violations of: §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act” or the “1933 Act”), 15 U.S.C. §§ 77k, 77i(a)(2); §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act” or the “1934 Act”), 15 U.S.C. §§ 78j(b) and 78t; and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5. The actions gave rise to a series of motions brought pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), as well as under the Private Securities Litigation Reform Act of 1995 (the “PSLRA” or “1995 Reform Act”), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. §§ 77z-l-77z-2, 78u-4-78u-5). The motions assert that the complaints in both suits fail to state a claim upon which relief may be granted and to plead fraud with sufficient particularity. I. INTRODUCTION Einstein’s most celebrated theory not only altered our understanding of the physics of time and space, but added meaningfully to the language and to our conceptualization of social phenomena and principles. The popular maxim that “everything is relative” illustrates the point. And the controversy now before the Court is a case study, among other things, of the relativism the adage conveys, reflecting that much of the law, as is generally true of many other aspects of life, is built upon finely parsed matters of degree each dependent upon interrelated variables. Notions of right and wrong, participation and state of mind, culpability and corresponding penalties are all common legal concepts grounded on gradations of social behavior. These calibrations determine how far from the epicenter of a harmful event its shock waves and ripples may travel to fairly encompass within the rings of culpability and relief both the actions claimed to have set the effects in motion as well as the range of injuries suffered by victims in the aftermath. Plaintiffs in the related Livent actions comprise different classes of interests which vary by (1) the time of their securities purchases: before and after public disclosure of Livent’s disintegration; (2) the type of equity they held: stocks and notes differently dated; and (3) the theory of liability they claim: federal securities fraud under § 10(b) and “control person” liability under § 20(a) of the Exchange Act or misrepresentation under §§ 11 and 12 of the Securities Act. Defendants encompass individuals and institutions whose involvement in the underlying events ranges across a spectrum of conduct. Arranged concentrically by corporate structure, at the center are Li-vent’s chief management executives who masterminded the alleged wrongs, along with their inside accomplices, some willing and actively engaged, while others remained passive. Next in the hierarchy are the members of Livent’s Audit Committee, followed by other outside directors, divided in time by old and new Livent regimes in recognition of their varying roles in different episodes as Livent’s drama progressed. In the ring beyond are the company’s external auditors, securities sellers and financial advisors who rendered financial services in connection with the securities transactions here in question. From some Plaintiffs’ perspective, the involvement and liability of these actors in the losses Plaintiffs claim are practically undifferentiated. All stand accused of occupying the same culpable inner circle, and of having played substantial roles as knowing or reckless or as only careless participants whose conduct regarding the transactions at issue directly or indirectly caused Plaintiffs’ alleged injuries. In the Court’s construction of the-pleadings and of the parties’ submissions in favor of and against defendants’ multiple motions to dismiss the complaints, resolution of each dispute lies at a critical point on a continuum. That juncture occurs where the quantum of defendants’ knowledge of and sufficient involvement in the relevant transactions would support Plaintiffs’ theory of liability, or, conversely, where the extent of relevant matters objectively known to Plaintiffs at the time they purchased Livent securities would undermine their theory of recovery. For the reasons indicated, the Court concludes that some Plaintiffs in these actions plead facts sufficiently demonstrating that they cross the threshold entitling them to relief while others do not. Similarly, a fair reading of the pleadings demonstrates that the roles and states of mind of defendants vary. As to some, Plaintiffs assert facts that, if proven true, would be sufficient to constitute fraud or recklessness. As to other defendants, while the extent of scienter Plaintiffs allege may be inadequate to warrant a finding of extreme conduct satisfying the elements of fraud under § 10(b) of the Exchange Act, their participation in the events suffices to make out a case of misrepresentation under the Securities Act. Relative to yet another defendant group, the pleadings do not support any determination that the accusations fall within the bands of culpable conduct at all. Accordingly, defendants’ motions are granted in part and denied in part. II. THE PARTIES A. PLAINTIFFS Plaintiffs here are all purchasers of the Notes. The lead plaintiffs in the Note-holders’ Action, Dorian and Diane King (the “Kings”), purchased Livent Notes at the face amount of $100,000 for $102,750 during the Class Period. See Noteholders’ Action Second Amended Consolidated Class Action Complaint (“NH SAC”) ¶ 12. Plaintiffs to the Noteholders’ Action are referred to here as the “Noteholders.” The Rieger Action plaintiffs are (a) Cerberus Capital Management, L.P. (“Cerberus”), an institutional investment firm which purchased $15.75 million (U.S.) face value Notes for $8.93 million from September 2 to November 6, 1998, (b) Tri-Links Investment Trust (“Tri-Links”), which purchased $21.777 million face value Notes for $8.88 million from December 8, 1998 to April 2, 1999, and (c) Alice F. Rieger, added as a plaintiff in the first amended complaint, who purchased $25,000 in Li-vent Notes for $25,096 on July 21, 1998. See Rieger Action First Amended Class Action Complaint (“RC”) ¶¶ 11-13. Collectively, Tri-Links, Cerberus, and Rieger are referred to here as the “Rieger Note-holders.” The Noteholders and the Rieger Noteholders are referred to collectively as “Plaintiffs.” B. DEFENDANTS The various defendants, subdivided into several groups, are individuals who served as Livent officers or directors, and corporations and institutions that played a role in Livent’s financing or accounting. 1. Inside DirectorsIManagement Defendants Garth A. Drabinsky (“Drabinsky”) served as chair of Livent’s board of directors (the “Board”) and chief executive officer from December 1989 to June 1998, and then as vice chair and chief creative director until August 1998. On August 10, 1998, he was suspended, and on November 18, 1998, he was fired. NH SAC ¶ 13. Myron Gottlieb (“Gottlieb”) served on the Board from 1993 to 1998, and was Livent’s president and chief operating officer from December 1989 to June 1998, and executive vice-president of Canadian administration from June to August 1998. Along with Drabinsky, he was suspended on August 10, 1998 and fired on November 18, 1998. On January 13, 1999, both Dra-binsky and Gottlieb were indicted in this District for securities fraud, and the United States Securities and Exchange Commission (“SEC”) instituted a civil action against them for securities fraud. NH SAC ¶ 14. Gordon Eckstein (“Eckstein”) was Li-vent’s senior vice president of finance and administration from February 1990 until his resignation in July 1998. In January 1999, Eckstein pleaded guilty to one felony count of federal securities violations. NH SAC ¶ 15; RC ¶ 18. Robert Topol (“Topol”) was Livent’s executive vice president from 1989 until 1994, when he became senior executive vice president. He became chief operating officer in 1996 until his resignation in February 1998. Topol signed the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 16; RC ¶ 20. Collectively, Drabinsky, Gottlieb, Eck-stein, and Topol, along with the other Livent management defendants, are sometimes referred to here as the “Inside Directors”. Maria Messina (“Messina”), sued here by the Noteholders but not by the Rieger Noteholders, was vice president of finance and chief financial officer of Livent. Prior to joining Livent in 1996, Messina was the engagement partner from Deloitte & Touche, Chartered Accountants for the audit of Livent’s financial statements. Messina signed the Registration Statement filed with the SEC in the public offering of the Notes. On January 13, 1999, Messina was indicted in this District for securities fraud and pleaded guilty. NH SAC ¶ 17; RC ¶¶ 23-24. Daniel D. Brambilla (“Brambilla”) was first employed by Livent as a managing director in 1992 and was an executive vice president with Livent since 1993, and during the Class Period. Brambilla signed the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 21. Lynda Friendly (“Friendly”) was first employed by Livent as an executive vice president in December 1989 and became a director in May 1993. Friendly signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 22. Christopher Craib (“Craib”) was, during the relevant period, Livent’s senior controller. Craib joined Livent in June 1997 from Deloitte & Touche. During the Class Period, Craib prepared schedules comparing the actual and budgeted results, which quantified certain of the accounting irregularities that are a subject of this action. NH SAC ¶ 27. Diane J. Winkfein (“Winkfein”) was, during the relevant period, Livent’s senior corporate controller. During the Class Period, Winkfein made adjustments to various accounts in the balance sheet and income statement, including expense categories to achieve overall levels of adjustments as part of the scheme to inflate Livent’s profits. NH SAC ¶ 28; RC ¶24. D. Grant Malcolm (“Malcolm”) was, during the relevant period, Livent’s senior production controller. During the Class Period, Malcolm made adjustments to various accounts in the balance sheet and income statements, including expense categories to achieve overall levels of adjustments as part of the scheme to inflate Livent’s revenues. NH SAC ¶ 29. Tony Fiorino (“Fiorino”) was, during the relevant period, Livent’s theater controller. During the Class Period, Fiorino created dummy accounts to conceal costs that were fraudulently shifted from shows to theater cost accounts. His purpose was to inflate Livent’s profits by reducing recorded costs. He also inflated ticket sales for “Ragtime” and arranged for ticket purchases by vendors and handled payments to vendors. NH SAC ¶ 30; RC ¶¶ 29-30. 2. Outside Directors H. Garfield Emerson (“Emerson”) was a member of Livent’s Board and chaired the Audit Committee at all relevant times during the Class Period. NH SAC ¶ 18. Martin Goldfarb (“Goldfarb”) was a member of Livent’s Board and served on the Audit Committee at all relevant times during the Noteholders Class Period. NH SAC ¶ 19. A. Alfred Taubman (“Taubman”) was a member of Livent’s Board and served on the Audit Committee from April 1997 to August 1998. NH SAC ¶ 20. Emerson, Goldfarb and Taubman collectively are sometimes referred to here as the “Audit Committee”. Thomas H. Lee (“Lee”) became a director in February 1995 and served on Livent’s Compensation Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 23. James A. Pattison (“Pattison”) was a director of Livent and a member of its Compensation Committee from May 1997. On October 1, 1998 Pattison was added to Livent’s Audit Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 24. Joseph L. Rotman (“Rotman”) was a director of Livent from May 1995 and served on Livent’s Executive Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 25. Scott Sperling (“Sperling”) was a director and member of Livent’s Executive Committee from February 1995, when Thomas H. Lee Equity Partners, L.P. and THL-CCI Limited Partnership acquired $15 million of 8.95% Subordinated Convertible Notes due February 29, 2000, issued for 763,636 shares of Livent stock. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. NH SAC ¶ 26. Along with the three members of the Audit Committee defendants Lee, Patti-son, Rotman and Sperling collectively are sometimes referred to here as the “Outside Directors”. 3. Securities Sellers CIBC Wood Gundy Securities, Inc. (“CIBC Wood Gundy”) is a wholly-owned subsidiary of Canadian Imperial Bank of Commerce (“CIBC”), headquartered in Toronto, Canada and served as Livent’s principal banker. NH SAC ¶ 31. CIBC Oppenheimer Securities Corp. (“CIBC Oppenheimer”) (known until December 31, 1997 as CIBC Wood Gundy Securities Corp.) is a wholly-owned subsidiary of CIBC Wood Gundy and serves as its broker/dealer for securities transactions in the United States. NH SAC ¶ 32. Plaintiffs allege that CIBC Wood Gundy served as an underwriter of the Notes that were sold pursuant to the Registration Statement and Prospectus and that it sold those notes directly to investors in the United States, through its agent CIBC Oppenheimer, pursuant to the Prospectus. NH SAC ¶ 33. Furman Selz, Inc. (“Furman Selz”), an indirect wholly-owned subsidiary of ING Group, N.V., is an investment bank headquartered in New York. Plaintiffs allege that Furman Selz was an underwriter of the Notes and that it “offered and sold the Notes directly to the investing public, pursuant to the Prospectus contained in the Registration Statement.” NH SAC ¶ 34. PaineWebber Inc. (“PaineWebber”), a wholly-owned subsidiary of the Paine Web-ber Group Inc., has headquarters in this District. Plaintiffs allege that Paine-Webber was an underwriter of the Notes and that it offered and “sold the Notes directly to the investing public, pursuant to the Prospectus contained in the Registration Statement.” NH SAC ¶ 35. 4. Auditors Deloitte & Touche, Chartered Accountants (“D & T” or “Deloitte”) is a Canadian firm of certified public accountants, auditors and consultants, and is affiliated with Deloitte & Touche, LLP (“D & T U.S.”), a United States limited liability partnership, which offers similar services as its Canadian counterpart. Deloitte served as Li-vent’s outside auditor and accounting firm at all relevant times during the Class Period. Deloitte acted in that capacity pursuant to the terms of contracts it had with Livent which required Deloitte, among other things, to audit Livent’s financial statements in accordance with Generally Accepted Auditing Standards (“GAAS”) and to report the results of those audits to Livent and its Board. Deloitte consented to the inclusion of its Auditor’s Report in the Registration Statement and Prospectus for Livent’s Notes, which Plaintiffs contend falsely and/or misleadingly stated that the consolidated financial statements present fairly, in all material respects, the financial position of Livent. NH SAC ¶ 36. 5. Nominal Defendants Nominal defendant Livent is a Canadian corporation. On November 19, 1998, Li-vent filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Prior to liquidation of its primary assets, Livent owned and operated the Ford Theater in New York City and the Oriental Theater in Chicago, Illinois. NH SAC ¶ 37. Nominal defendants Livent (U.S.) Inc., Livent Capital, Inc., Livent Int’l, Inc., Li-vent Realty (New York), Inc., and Livent Realty (Chicago), Inc. (the “Livent Affiliates”) are wholly-owned subsidiaries of Li-vent. Each of the Livent Affiliates signed the Registration Statement and are Guarantors of the Notes. The Livent Affiliates filed for Chapter 11 protection concurrently with the bankruptcy filing of Livent in November 1998. NH SAC ¶ 38. 6.Additional Rieger Action Defendants By reason of the overlap of time periods covered by the two actions, the Rieger Noteholders sued most of the defendants listed above, and added the following. Conrad Black (“Black”) was a member of the Livent Board beginning in 1993. Black, together with Rotman, Sperling, Lee, and Pattison, who are also named in the Noteholders Action, are referred to herein as the “Old Directors.” RC ¶ 39. Lynx Ventures, L.P. acquired 2.5 million common shares of Livent stock for $20 million on June 12, 1998. Lynx Ventures, L.L.C. is the general partner of Lynx Ventures, L.P. Lynx Ventures, L.P. and Lynx Ventures, L.L.C. are collectively referred to here as “Lynx.” RC ¶ 45-46. Michael S. Ovitz (“Ovitz”), a managing member of Lynx Ventures, L.L.C., served on Livent’s board from June 12, 1998. RC ¶ 47. Ronald Burkle (“Burkle”) is the managing partner of the Yuciapa Companies and served on the Livent Board starting on June 12, 1998 until his resignation on December 1,1998. RC ¶ 48. Robert M.D. Cross (“Cross”) is the chairman and CEO of Yorktown Securities, Inc. and served on the Livent Board starting on June 12,1998. RC ¶ 49. Quincy Jones (“Jones”), president of Quincy Jones Productions, served on the Livent Board from June 12, 1998 until his resignation on November 25, 1998. RC ¶ 50. Heather Munroe-Blum (“Munroe-Blum”), a professor at the University of Toronto, served on the Livent board from June 12, 1998 until her resignation on December 1, 1998. RC ¶ 51. Jerry Speyer (“Speyer”), president and CEO of Tishman Speyer Properties, Inc, served on the Livent Board from June 12, 1998 until his resignation on December 1, 1998. RC ¶ 52. Roy Furman (“Furman”) retired from Furman Selz in April 1998 to become chairman and CEO of Livent, serving from June 12,1998, until June 25,1999, when he resigned. RC ¶ 53. Ovitz, Burkle, Cross, Jones, Munroe-Blum, Speyer, and Furman are collectively referred to as the “New Directors.” III. LIVENT’S BACKGROUND AND DEMISE A. PUBLIC FINANCINGS AND LOSSES Livent was formed in 1989 as a partnership between Drabinsky and Gottlieb. In May 1993, Livent made an initial offering of stock in Canada. Two years later, in May 1995, Livent filed a registration statement with the SEC that sought to sell Livent common stock in the United States and to list that stock on the NASDAQ exchange. That application was accepted and, in August 1995, Livent’s stock began publicly trading in the United States. Li-vent often sought financing from U.S. and Canadian investors, sometimes by selling notes and debentures and sometimes with additional stock offerings. The public financing in contention here began in October 1997, when Livent issued an offering memorandum (the “Offering Memorandum”) for the sale of the Notes in the United States and Canada. On October 10, 1997, Livent formally announced that the debt offering had closed and had netted proceeds of $121 million (U.S.). On October 16, 1997, as contemplated in the Offering Memorandum, Livent entered into an Indenture, with Wilmington Trust Company as Trustee, to exchange the original Notes for publicly traded Notes to be issued in December 1997. On November 6, 1997, Livent filed a Registration Statement with the SEC regarding this exchange offer (the “Registration Statement”); and, on December 10, 1997, Li-vent filed its completed exchange offer Prospectus with the SEC (the “Prospectus”). NH SAC ¶ 2. On April 13, 1998, Livent announced that it had suffered a net loss in 1997 of $44.1 million. RC ¶ 244. Livent also announced a $27.5 million write-off of production costs and a $12.2 million charge consisting primarily of costs associated with the refinancing of Livent’s debt in the fourth quarter of fiscal year 1997. See Declaration of Peter J. Beshar (counsel to Deloitte) in support of motion to dismiss the RC, dated April 17, 2000 (“Beshar Deck”), Ex. C (Livent’s Form 6-K for the month of April, 1998, attaching Livent’s Press Release dated April 13,1998). During the same period Lynx conducted due diligence on Livent with the assistance of KPMG Investigation and Security, Inc. (“KPMG”). After KMPG completed its due diligence, Lynx agreed to invest $20 million in return for a 12% ownership stake in Livent. Robert Webster (“Webster”) was then appointed executive vice president of Livent. On May 29,1998, Livent disclosed a loss in the First Quarter of 1998 of $29.9 million. Livent also announced a further $23.6 million write-off of preproduction and other assets, of which $20.4 million related to “Show Boat”. Beshar Deck Ex. D (Li-vent’s Form 6-K for the three months ended March 31, 1998). As the Notehold-ers characterize it, at that time “Livent was losing money at an alarming rate.” NH SAC ¶ 126. B. LIVENT’S FRAUD UNCOVERED In early August 1998, Webster learned that Livent had entered into a “secret side agreement” with CIBC in connection with a particular transaction. NH SAC ¶ 131. On August 6, 1998, several Livent employees approached Webster and disclosed that there were substantial financial irregularities at Livent. NH SAC ¶ 132. On August 10, 1998, after conducting a brief investigation, Livent issued a press release (the “August 10 Press Release” or “Initial Press Release”) entitled “Investigation at Livent Inc. Reveals Accounting Irregularities.” RC ¶¶ 162-171, 388; Bes-har Decl., Ex. A (Livent’s Form 6-K, dated August 11, 1998, incorporating Livent’s August 10 Press Release). This release disclosed that significant financial irregularities had been uncovered and that a restatement of Livent’s 1996, 1997, and first quarter 1998 financial results would be necessary. Id. The Initial Press Release also announced that KPMG had been retained to conduct “a comprehensive review of [Livent’s] financial records” and that Drabinsky and Gottlieb had been suspended pending KPMG’s investigation. Id. The press release further stated that the accounting irregularities “are not expected to have a significant adverse effect on [Li-vent’s] current cash flow or its operations” and that “[Livent] expects shortly to engage investment advisors to assist in addressing these issues and believes that it should be possible to resolve these issues satisfactorily.” Id. at 3-4. At the same time, the Initial Press Release cautioned that the accounting irregularities “could give rise to an event of default or trigger obligations under [Li-vent’s] outstanding indebtedness and other agreements” and warned that the views expressed are subject to various known and unknown risks and uncertainties including, but not limited to, the outcome of the investigation referred to herein: the profitability of [Livent’s] present and planned productions and other projects; competition in [Livent’s] existing and potential future lines of business; [Li-vent’s] ability to address its financing requirements in light of its existing debt obligations; [Livent’s] ability to attract and retain key executive and creative personnel; and other factors. These and other factors and assumptions not identified above could cause actual results to differ materially from those projected. Id. at 4. Following the August 10 Press Release, NASDAQ and the Toronto Stock Exchange halted all trading in Livent stock. On August 18, 1998, Livent issued another press release, entitled “Livent Outlines Current Status of Investigation and Ongoing Business Operations” (the “August 18 Press Release” or “Second Press Release”). Beshar Deck, Ex. B (Livent’s Form 6-K, dated August 20,1998, incorporating Livent’s August 18 Press Release). This Second Press Release reported that Livent was targeting late October to restate its financials, and warned that the adjustments “will be material in the aggregate for 1996, 1997, and for the first quarter of 1998” and that “earlier years might be affected” as well. Id. at 1. The August 18 Press Release provided more information about the accounting irregularities: It still appears that the irregularities generally involve two areas: (1) expense recognition issues involving the failure to record expenses in proper periods due to improper capitalization of costs and other means, and (2) improper recognition of revenue. % H* % % * Livent believes that the majority of the restatements will involve expenses that had been shifted among prior reporting periods. These items do not appear to have an effect on Livent’s recorded equity as of March 31, 1998. [Livent] cautioned that the remaining minority of expense-related restatements is likely to reduce significantly shareholders’ equity .... It is too early to quantify the magnitude of any of these expense-related restatements. ‡ ‡ ‡ ‡ ‡ ‡ Livent also said that the restatement of revenue recognition appears principally to involve one of its three categories or revenues: ‘other,’ which includes, among other things, sponsorships, theater naming rights, the sale of rights in Livent shows to third parties, and the sale of exclusive booking rights to shows. These ‘other’ revenues accounted for approximately 11% and 13% of [Livent’s] reported net revenue in 1996 and 1997, respectively.... It is still too early to quantify either the total amount of affected ‘other’ revenues or how much of this affected ‘other’ revenues may actually be reversed in its restatement of results. sj< * * * H* [Livent’s] two other revenue sources are from performances, which includes ticket sales to its shows at either Livent-owned venues or third-party venues, and are by far its most significant source of revenues, and from merchandising. Only a few instances of irregularities have been uncovered affecting previously reported performance and merchandising revenues. [Livent] emphasized, however, the investigation is continuing. Id. at 1-6. Meanwhile, several class action suits were filed against Livent, including twelve in the month of August 1998 alone. Some related to Livent transactions involving the sale of Livent stock and others to the Notes at issue here. The August 1998 complaints referenced Livent’s August 10 Press Release and generally alleged that Livent’s financial statements for 1996, 1997, and the first quarter of 1998 materially overstated Livent’s income by improperly recognizing revenue, improperly deferring expenses that should have been recorded, and improperly deferring expenses from shows that were currently running to shows with a longer amortization period. C. LIVENT’S BANKRUPTCY On November 18, 1998, Livent filed for Chapter 11 bankruptcy protection in the United States and released its restated financial results 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. NH SAC ¶ 136. That same day, Livent terminated Drabin-sky and Gottlieb and sued them for fraud and breach of fiduciary duty. NH SAC ¶ 137. Trading in Livent common stock resumed following Livent’s restatement, and the price immediately dropped from $6.75 to approximately $0.28 per share. D. THE INSTANT ACTIONS 1. The Noteholders ’ Action In October 1998, the Kings filed their first class action complaint and moved to be appointed as lead plaintiffs. On February 17, 1999, Judge Sweet denied the Kings’ motion because of their failure to publish the notice required under the PSLRA. See King v. Livent, 36 F.Supp.2d 187, 190 (S.D.N.Y.1999). In March 1999, the Kings filed a second complaint, published the notice mandated by the PSLRA, and again moved to be appointed lead plaintiffs. In June 1999, Judge Sweet consolidated the pending Noteholders class actions and appointed the Kings lead plaintiffs with regard to Livent Notes issued for the period of October 10, 1997 through August 10, 1998. Judge Sweet also laid out procedures for consolidating later filed related cases: Each new case that arises out of the same subject matter of the [Noteholders Action] which is filed in this Court or transferred to this Court, shall be consolidated with the [Noteholders Action] and this Order shall apply thereto, unless a party objects to consolidation, as provided for herein, or any provision of this Order, within 10 days after the date upon which a copy of this Order is served on counsel for such party, by filing an application for relief, and this Court grants such application. In re Livent, Inc. Noteholders Secs. Litig., No. 98 Civ. 7161 (S.D.N.Y. June 18, 1999). In August 1999, the Kings filed a third complaint. In December 1999, in connection with the action brought by principal Livent shareholders, Judge Sweet granted the motion of D & T and certain Outside Directors to dismiss the complaint, with leave to replead certain aspects of the claims. See In re Livent Sec. Litig., 78 F.Supp.2d 194, 218 (S.D.N.Y.1999). In a separate ruling on February 14, 2000, Judge Sweet dismissed with prejudice a Securities Act § 11 claim by Livent shareholders against D & T and others related to Livent’s March 1996 equity offering. See Griffin v. PaineWebber, 84 F.Supp.2d 508, 511-12 (S.D.N.Y.2000). In the wake of these two dismissals, the Noteholders filed the instant complaint— the Second Amended Consolidated Class Action Complaint — on March 13, 2000. 2. The Rieger Action In September 1999, Cerberus and TriLinks filed a putative class action complaint also related to the Livent Notes. The proposed class period covered purchases of the Notes anytime after August 10, 1998. In March 2000, Cerberus and Tri-Links filed an amended class action complaint adding Rieger as a plaintiff, naming additional defendants, and broadening the class period to cover from October 10, 1997 to the present. The Rieger Noteholders published a notice of pen-dency advising Livent Noteholders who purchased their securities “anytime after October 10, 1997,” that they could move to be appointed lead plaintiff for the class. In May 2000, Rieger, Cerberus, and TriLinks moved to be appointed lead plaintiffs. The Kings, meanwhile, as lead plaintiffs in the Noteholders Action, moved to enjoin the Rieger Action. Both the Noteholders and the Rieger Noteholders base their claims on substantially the same allegations described below. Tri-links and Cerberus, however, base some of their claims in part on Livent’s August 10 and 18 Press Releases and subsequent activities as discussed below. IV. THE ALLEGED FRAUD A. FRAUDULENT “REVENUE-GENERATING” TRANSACTIONS 1. Pace Theatrical Group In 1996 and 1997, Livent purported to sell to 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.). NH SAC ¶ 67; RC ¶233. 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”. NH SAC ¶ 67; RC ¶ 234. 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. NH SAC ¶ 67; RC ¶ 238. All of these agreements purported to make the fees nonrefundable, even if Livent never made the shows available to Pace. NH SAC ¶ 67; RC ¶ 238. Nevertheless, on the basis of these agreements, and allegedly in violation of Generally Acceptable 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. NH SAC ¶ 68; RC ¶ 242. 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”. NH SAC ¶ 68; RC ¶ 243. Livent subsequently improperly recognized that amount in fiscal 1997. NH SAC ¶ 68; RC ¶ 243. According to the Rieger Noteholders, however, the agreements did not actually require any irrevocable payments by Pace. Pace required side letters to these agreements that granted Pace the right to recoup its fees, plus earn additional profit, as the shows were performed. RC ¶¶ 239-41. 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.). NH SAC ¶ 92; RC ¶247. The agreement purported to make the fee nonrefundable, regardless of whether Livent made “Ragtime” available to American Artists. NH SAC ¶ 92; RC ¶ 247. Two side letters, dated September 29 and November 15, 1997, signed by Topol and by American Artists, permitted American Artists to recoup its fees in two ways: through fixed weekly amounts when the shows were performed, and through “consulting fees” for the services of American Artists’ president, Jon Platt. NH SAC ¶ 92; RC ¶ 248. Livent recognized approximately $5.8 million (Can.), the present value of the fee, in its financial statements for the third quarter of 1997 and fiscal 1997. NH SAC ¶ 92; RC ¶248. 3. CIBC Wood Gundy In December 1997, Gottlieb negotiated an agreement (the “CIBC Wood Gundy 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. NH SAC ¶ 94; RC ¶ 252. In return, CIBC Wood Gundy was entitled to certain royalty payments from the shows. NH SAC ¶ 94; RC ¶ 254. The Rieger Noteholders allege that the royalty would be received if, and only if, “Show Boat” or “Ragtime” was actually produced by Livent in the European territories specified in the agreement. Valued at $4.6 million (Can.), the agreement also gave Livent the right, until June 30, 1998, to repurchase the production rights. NH SAC ¶ 94; RC ¶ 253-54. Under the agreement, the fee from CIBC Wood Gun-dy was non-refundable, NH SAC ¶ 94; RC ¶253, and Livent had no obligation to stage the plays or to exercise its repurchase option, RC ¶254. Based on this agreement, Livent recorded revenue of approximately $4.6 million (Can.) in its financial statements for fiscal 1997. NH SAC ¶ 94; RC ¶ 264. According to the Noteholders, the CIBC Wood Gundy Agreement 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] acquiesced to Livent’s insistence that all revenue be booked in 1997 — so long as a corresponding amortization liability was also recorded.” NH SAC ¶ 94. Thus, the transaction inflated revenue and earnings before interest, taxes, depreciation and amortization (EBIT-DA), but not earnings, net interest, taxes, depreciation and amortization. NH SAC ¶ 94. However, Gottlieb purportedly negotiated a secret side letter-agreement with CIBC Wood Gundy. NH SAC ¶ 96; RC ¶ 257. The side letter provided two mechanisms for CIBC Wood Gundy to recoup its fees and make significant profits. If Livent exercised the repurchase option, Livent would repay all fees, plus £112,-500.00, plus any unpaid royalties; if Li-vent 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”. NH SAC ¶ 96; RC ¶259. 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. NH SAC ¶96; RC ¶259. The purported “royalty purchase” was thus in fact a loan. NH SAC ¶ 97. 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. NH SAC ¶99. 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 Gundy who negotiated the transaction not to disclose the side agreements to new management so that Gottlieb could cause Livent to repurchase the rights from CIBC Wood Gundy. NHSAC1Í99. Plaintiffs assert that the false terms of the CIBC Wood Gundy Agreement were used to mislead the investing public into believing that CIBC Wood Gundy had confidence in the future performance of the European productions that were the subject of the agreement, and confidence in its longstanding client, Livent. In truth, as revealed by the secret terms of the agreement, CIBC Wood Gundy had no confidence in the value of the contemplated European productions or in Livent’s ability to repay CIBC Wood Gundy’s $4.6 million loan. NH SAC ¶ 100; RC ¶ 255-56. 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”). RC ¶ 268; NH SAC ¶78. 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”). RC ¶ 268; NHSACT78. 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. NH SAC ¶ 78; RC ¶269. Gottlieb was a director and shareholder of Dundee’s parent corporation, Dundee Bancorp Inc. RC ¶ 269; NH SAC ¶78. Livent failed, however, to disclose this agreement as a related party transaction in its fiscal 1997 annual report. NH SAC ¶ 78. The purpose of this sale was to enable Dundee to construct a hotel and condominium adjacent to the Pantages Place Project. RC ¶ 270; NH SAC ¶ 78. Livent was also to receive a minority interest in the development company owned by Dundee that was to construct the hotel and condominium. NH SAC ¶ 78. Under the master agreement for the project, dated June 30, 1997, Livent and Dundee created a joint venture company. RC ¶ 269; NH SAC ¶ 79. 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 Li-vent, to repay Dundee’s investment. RC ¶ 271; NH SAC ¶ 79. 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. NH SAC ¶ 80; RC ¶ 272. According to Plaintiffs, under GAAP, the Put Agreement created a material contingency preventing recognition of the $7.4 million as income in 1997. NH SAC ¶ 88; RC ¶ 278. Over Drabinsky’s objections, D & T was asked for an opinion with respect to revenue recognition. Peter Chant of Deloitte 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. NH SAC ¶ 81. Gottlieb then represented to the Board and D & T that the Put Agreement had been cancelled. NH SAC ¶ 82; RC ¶ 273-74. D & T then 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. When Bob Wardell (‘Wardell”) of D & T learned of the press release, he contacted Gottlieb and demanded a meeting with Livent’s Aqdit Committee. At the meeting, Gottlieb explained that in his opinion the Dundee contract had been finalized in the second quarter, and that he would procure confirmation from Dundee and an opinion of counsel supporting his position. NH SAC ¶ 83. 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. NH SAC ¶ 84. Nonetheless, D & T initially refused to accept the accounting treatment and threatened to resign. NH SAC ¶84. Gottlieb told the Audit Committee that D & T should resign. NH SAC ¶ 85. Goldfarb said that would be unacceptable and that D & T’s resignation would cause too much damage to Livent’s reputation. NH SAC ¶ 85. With D & T representatives absent from the room, the Board members agreed that they would be willing to reverse the revenue recognition, provided some of the revenue could be made up in the second quarter, and that a corrective press release be issued. NH SAC ¶ 85. Eventually, D & T and the Audit Committee agreed that Livent would reverse the $6 million revenue line, but would also increase other revenue by $1.2 million by reversing an assortment of accrued liabilities. In this connection, Livent issued a press release 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.” NH SAC ¶ 86. The Put Agreement issue rose again in discussion with the Audit Committee during the year-end audit in April 1998. NH SAC ¶ 82; RC ¶ 273-74. On April 9, 1998, Gottlieb expressly stated to the Audit Committee that no such put agreement or arrangement existed and provided a letter from the Chairman of Dundee as confirmation. NH SAC ¶ 89-90; RC ¶274. However, in a letter dated April 6, 1998 to Dundee’s President, Drabinsky and Gott-lieb confirmed to Dundee that the Put Agreement was in place and effective as between Livent and Dundee. NH SAC ¶ 90; RC ¶ 276. The letter read in pertinent part as follows: “[W]e wish to confirm that notwithstanding [Dundee’s Chairman] 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.” NH SAC ¶ 90; RC ¶276. Plaintiffs allege that revenue recognition from this transaction violated GAAP. First, according to Plaintiffs, 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. NH SAC ¶ 91. 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. NH. SAC ¶91; RC ¶277. Gottlieb’s 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. NH SAC ¶ 91. Accordingly, the existence of the Put Agreement made the transaction an investment that did not qualify for revenue recognition under GAAP. NH SAC ¶ 91; RC ¶ 278. 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. NH SAC ¶ 101. Livent purportedly sold AT & T the right to add its name on two theaters, one of which had not yet been built. NH SAC ¶101. 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. NH SAC ¶ 101. In October, 1997, Messina discussed the Pantages naming “transaction” with D & T’s Wardell and Chant, and all three agreed that the revenue could not be recognized in the third quarter. Gottlieb, an accountant by profession, retained Ernst & Young (“E & Y”) for the purpose of receiving an independent opinion on the naming revenue. NH SAC ¶ 102. While E & Y would not opine that the revenue could be recognized in the third quarter, it did state that the transaction could be considered within the third quarter. NH SAC ¶ 102. Gottlieb provided Deloitte with E & Y’s opinion regarding the transaction and asked that it be included in the accounting for the third quarter. NH SAC ¶ 102. D & T retained another accounting firm, Price Waterhouse, to render another professional opinion. Price Waterhouse met with Gottlieb and AT & T and concluded that an oral contract could be considered to have occurred in the third quarter. NH SAC ¶ 103. Price Waterhouse did not opine on the specific issue of revenue recognition with respect to the oral contract. NH SAC ¶ 103. After receiving this information, D & T acquiesced to recording the naming revenue in the third quarter. NH SAC ¶ 104. The written contract for the name change was thereafter signed in November 1997. NH SAC ¶ 104. 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. NH SAC ¶ 71; RC ¶ 284. The original agreement was dated October 21, 1996, and revised by agreement dated November 3, 1997. NH SAC ¶ 71; RC ¶ 284. As with the other rights sales, the sale agreement made the fee non-refundable. NH ¶ 71; RC ¶ 284. Plaintiffs allege that 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. NH SAC ¶ 71; RC ¶ 284. This arrangement is memorialized in a June 9, 1998 memo from Gottlieb to Drabinsky. NH SAC ¶ 71; RC ¶286. 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.” NH SAC ¶ 71; RC ¶ 286. As a result of this concealed arrangement, Livent 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. NH SAC ¶ 71; RC ¶ 287. This understanding was a related party transaction in two respects. First, at the time of the agreement, Sarlos was a director of Livent and chairman of Livent’s Audit Committee. NH SAC ¶ 72; RC ¶ 285. Additionally, in October 1996, Gott-lieb had pledged his personal Livent stock to Dewlim as security for the $4.5 million loan. NH SAC ¶72; RC ¶¶284, 288. Neither of these related party transactions was disclosed in Livent’s annual report for fiscal 1996 or 1997. NH SAC ¶ 72; RC ¶ 288. According to the Noteholders, 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, as well as the Pace, agreements. NH SAC ¶ 74. During one Audit Committee meeting, Goldfarb and Emerson stated that the revenue recognition in the agreements was improper, and that some revenues should be amortized over several years. NH SAC ¶ 74. However, based on a report by D & T and representations of management, they agreed that the revenue could be recognized in 1996. NH SAC ¶ 74. D & T also reviewed the terms of the Dewlim and Pace agreements, and knew that Messina opposed recognizing all the revenue on the agreements. NH SAC ¶ 75. D & T’s United States affiliate initially refused to permit Deloitte 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. NH SAC ¶76. A meeting was held in New York in early 1998 to consider the proper accounting. Livent was represented by Drabinsky, Gottlieb, Topol, Messina, and Eckstein, and D & T Canada was represented by Wardell and Chant. NH SAC ¶ 76. D & T U.S. was represented by four partners. NH SAC ¶ 76. At the meeting, the parties once again reviewed the two agreements. NH SAC ¶77. A compromise was then 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. NH SAC ¶ 77. The revenue from the Dewlim agreement would not be recognized on U.S. GAAP financial statements. NH SAC ¶ 77. De-loitte 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. NH SAC ¶ 77. The Canadian GAAP filings would not be restated or amended. NH SAC ¶ 77. B. FRAUDULENT MANIPULATION OF LIVENT’S BOOKS AND RECORDS Beginning in 1994 and continuing through the first quarter of 1998, Drabin-sky and Gottlieb and several of the other individual management defendants engaged in deliberate manipulation of Li-vent’s books and records, thereby understating expenses in each fiscal quarter in order to inflate earnings, and violating GAAP. NH SAC ¶ 95; RC ¶ 802. By redacting expenses on losing shows, Drabin-sky and Gottlieb were able to portray the productions and Livent as financially successful. NH SAC ¶ 95; RC ¶302. In quarterly periods, this practice enabled Drabinsky, Gottlieb and Topol to meet the earnings and operating projections provided to Wall Street analysts. NH SAC ¶ 95; RC ¶ 302. The Inside Directors 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. NH SAC ¶¶ 106-20; RC ¶¶ 303-28. Livent transferred preproduction costs for shows to fixed asset accounts. NH SAC ¶ 106; RC ¶ 303. Preproduction costs, such as costs for advertising, sets and costumes, are incurred prior to the opening of a production. NH SAC ¶ 107; RC ¶ 315. According to Livent’s accounting policies, preproduction costs were to be amortized, and thus expensed, once a production began and only for a period not to exceed five years. NH SAC ¶ 107; RC ¶ 315. Fixed assets, in contrast, were depreciated over their useful life, not to exceed forty years. NH SAC ¶ 107; RC ¶ 315. As a result, Livent significantly decreased expenses, and thus inflated its reported income, by improperly depreciating preproduction costs over a much longer period of time. NH SAC ¶ 107; RC ¶ 316. 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. NH SAC ¶ 107. By this manipulation, Livent violated GAAP and its own accounting policy. NH SAC ¶ 107. Livent also physically erased expense and liability entries from its general ledger, moving these entries from the current quarter to future periods. NH SAC ¶ 108; RC ¶¶ 318, 321. Livent maintained a separate set of books, called the “Expense Roll,” that internally tracked the amount of these eliminated entries. NH SAC ¶ 108; RC ¶ 319. This manipulation allowed Livent to falsely report significant reductions in show expenses, with attendant increases in profits. NH SAC ¶ 108; RC ¶ 320. For example, expenses rolled from the first to the second quarter of fiscal 1997 totaled $6.5 million. NH SAC ¶ 108; RC ¶ 320. 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. NH SAC ¶ 109; RC ¶ 323. This accounting manipulation increased profits in one quarter by reducing the amortization of preproduction costs, an expense item. NH SAC ¶ 109; RC ¶ 323. Under GAAP and Livent’s own accounting policy, amortization of preproduction costs is only appropriate once a production has begun. NH SAC ¶109; RC ¶324. 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. NH SAC ¶ 109; RC ¶ 324. According to Plaintiffs’ 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. Plaintiffs contend that D & T and the Audit Committee must have been aware of Livent’s announced policy that costs of cancelled shows would be expensed at the time of cancellation. NH SAC ¶ 110. Plaintiffs contend that it was well known that particular shows had ended their runs. The 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. NH SAC ¶ 110; RC ¶328. As had been done with the “Expense Rolls,” Livent maintained a separate set of books called the “Amortization Roll,” to internally track the amount of amortization moved from current to future periods. NH SAC ¶ 111; RC ¶ 324. 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. NH SAC ¶ 112. Each of the manipulations described above was carried out by Livent’s senior management and accounting department personnel. NH SAC ¶ 113. On a quarterly basis, Winkfein and Malcolm — Livent senior controllers — produced a general ledger showing quarterly financial results to Eckstein, and to Craib, another senior controller who then placed this information into summary format for Drabinsky, Gott-lieb, Eckstein, and Topol. NH SAC ¶ 115; RC ¶ 305. This group, along with Messina, then met to review the results. NH SAC ¶ 113; RC ¶ 307. 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. NH SAC ¶ 112. Generally, Drabinsky directed that certain adjustments be made. NH SAC ¶ 114; RC ¶ 309. 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. NH SAC ¶ 114; RC ¶309. Beginning in 1996, Malcolm communicated the transfers to fixed asset accounts to Fiorino, who recorded the adjustments in dummy theater cost accounts. NH SAC ¶ 114; RC ¶ 310. Once the top-line adjustments were made, Winkfein or Malcolm provided Eck-stein with an adjusted general ledger containing the accounting manipulations. NH SAC ¶ 115; RC ¶ 311. Drabinsky, Gott-lieb, Topol, and Eckstein then met to review the manipulated results. NH SAC ¶ 115; RC ¶ 311. Drabinsky directed that further adjustments be made, which Wink-fein or Malcolm processed in Livent’s accounting system, under Eckstein’s direction. NH SAC ¶ 115. After a final review by senior management, the manipulated numbers were presented to Livent’s Audit Committee, Deloitte and investors, and were eventually incorporated into Li-vent’s public filings with the SEC. NH SAC ¶ 115; RC ¶ 309. Due to the sheer magnitude of the manipulations, it was necessary for the Inside Directors to track results both before and after the top-line adj