ABAT was a Delaware corporation operating in Chinathat designed and manufactured lithium batteries for use in consumer products. Because its stock was listed on a U.S. stock exchange, ABAT was required to file financial statements with both the U.S. Securities and Exchange Commission (SEC) and China’s State Administration of Industry and Commerce (AIC).

For four years, ABAT’s SEC filings reported increased revenues and profits while, at the same time, its AIC filings showed significant losses. For example, at the same time that ABAT told the SEC that it had revenues of $39.1 million and a profit of $10.2 million, it reported to AIC revenues of $145,000 and a loss of $1 million. (Differences between U.S. and Chinese reporting requirements could not explain the discrepancies: If anything, Chinese accounting rules permit more generous revenue recognition than GAAP in the United States.)

When financial websites reported these discrepancies, the price of ABAT shares plunged by almost half. Ruble Sanderson and other ABAT shareholders sued the company’s auditors, Bagell, Josephs, Levine & Co., because the firm had issued clean audit opinions under GAAP. The trial court granted Bagell’s motion to dismiss Sanderson’s complaint because it did not allege conduct that was reckless or intentional enough to constitute scienter. Sanderson appealed.

Questions:

1. Did Bagell commit securities fraud? Did it act with scienter?

2. What was the key issue in this case?

3. How would you define scienter? 

4. Was that proven in this case? 

5. What did Sanderson argue Bagell should have done?

6. Does the fact that they did not seek the Chinese filings or the data underlying it represent scienter? 

7. Was that prove here?