MEMORANDUM OPINION

LEWIS A. KAPLAN, District Judge.

This action arises out of statements regarding the internal controls and accounting practices of Weatherford International Ltd. ("Weatherford" or the "Company"), after Weatherford announced in 2011 that it had understated its tax expenses from 2007 through 2010 by over $500 million. Lead plaintiff American Federation of Musicians and Employer's Pension Fund ("AFME") alleges that Weatherford and certain of its officers, as well as its auditor Ernst & Young LLP ("Ernst & Young" or "E & Y"), violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act")1 and Rule 10b-5 thereunder2 by knowingly issuing materially false statements regarding the Company's tax accounting for the relevant time period and omitting to state facts necessary to make the statements that were made not misleading.

This matter is now before the Court on defendants' motions to dismiss the complaint for failure to state a claim and on AFME's motion for leave to supplement the amended complaint (the "AC").

Facts

I. Parties

A. Lead Plaintiff

AFME is "one of the largest pension funds in the entertainment industry," with "over $1 billion dollars in assets under management."3 It purchased Weatherford common stock during the class period.4

B. Defendants

The defendants are the Company, Ernst & Young, and several individuals associated with the Company (the "Individual Defendants").5

Weatherford is an "international provider of equipment and services used in the drilling, completion and production of oil and natural gas wells."6 Ernst & Young is a certified public accounting firm that Weatherford hired to provide independent audits, accounting and management consulting services, tax services, and review of Weatherford's SEC filings.7

The Individual Defendants are Ms. Jessica Abarca and Messrs. Bernard Duroc-Danner, Andrew Becnel, and Charles Geer, Jr.8 Duroc-Danner is Weatherford's chief executive officer, president, and chairman.9 Becnel was the Company's senior vice president and chief financial officer.10 Geer was Weatherford's vice president and principal accounting officer.11 Abarca was the Company's chief accounting officer and vice president of accounting.12

II. The Amended Complaint

The AC focuses on Weatherford's alleged understatement of tax expenses in its financial statements for the years 2007, 2008, 2009, and the first three quarters of 2010.13 It alleges that, through "a simple and crude tax accounting fraud," the Company's effective tax rate dropped "sharply" in 2007 and that the Company reported "artificially low and rapidly declining effective tax rates — one of the lowest, if not the lowest, in the industry" through the rest of the class period.14

According to the AC, the lower rate was of particular interest to analysts and investors. The Weatherford Defendants are alleged to have "closely monitored Weatherford's effective income tax rate, and specifically touted it in numerous SEC filings and analyst conference calls."15 For example, when asked during an April 2007 call about the surprisingly low tax rate, Becnel stated "`[y]es, that was good work from our tax group in terms of planning.'"16 The Company's 2008 and 2009 annual reports stated that "the decreases in the Company's effective tax rates were `due to benefits realized from the refinement of our international tax structure and changes in our geographic earnings mix.'"17 As a result of the lower tax rates, a number of analysts upgraded their earnings estimates for Weatherford, with one July 2007 report stating that its higher estimates were "`primarily a function of a lower effective tax rate.'"18

This apparently lower rate proved illusory. On March 1, 2011, the Company announced that it would restate its earnings for 2007 through the third quarter of 2010. It stated that it had identified in February 2011 a "`material weakness in internal control over financial reporting for income taxes.'"19 In particular, it said that the "Company's processes, procedures, and controls related to financial reporting were not effective to ensure that amounts related to current taxes payable, certain deferred tax assets and liabilities, reserves for uncertain tax positions, the current and deferred income tax expense and related footnote disclosures were accurate."20

According to the statement, the Company conducted additional testing after identifying the material weakness and, in the process, identified tax receivable balances for which, as the Company later explained to the SEC, "documentary support was not available."21 The Company stated that it subsequently determined that those receivables had been recorded in error due to "a tax benefit incorrectly being applied to the elimination of intercompany dividends."22 It said that the "error manifested itself in 2007 and went undetected in that year and each subsequent year."23 It clarified that it had not erred in its actual cash payment of taxes to the Internal Revenue Service, but rather in its accounting for tax expense in its financial statements.24 The Company ultimately concluded that it had understated its 2007-2010 tax expense by approximately $500 million — $460 million due to these intercompany transactions and $40 million relating to foreign tax assets.25 Thus, the Company's tax expense actually was $1.2 billion rather than the previously-reported $700 million.26 A March 8, 2011 annual report provided restated financial information and included an opinion by Ernst & Young, which stated that Weatherford had "`not maintained effective internal control over financial reporting as of December 31, 2010.'"27 The AC alleges that Weatherford's stock price declined nearly 11 percent on the day following the announcement, thereby eliminating $1.8 billion from Weatherford's market capitalization.28

The AC asserts claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder. It alleges that the Weatherford Defendants committed securities fraud through false statements and omissions falling into two principal categories: (1) those arising directly from the understatement of tax expense and (2) those pertaining to Weatherford's maintenance of internal controls over its financial reporting. In addition, the AC alleges that Ernst & Young committed securities fraud when it provided, throughout the class period, (1) its unqualified opinion regarding the fair presentation of Weatherford's financial position and its compliance with generally accepted accounting principles ("GAAP") (2) its unqualified opinion regarding the effectiveness of Weatherford's internal controls and (3) its statements that it complied with generally accepted auditing standards ("GAAS") in reaching these conclusions.

Discussion

I. Legal Standard

In deciding a motion to dismiss under Rule 12(b)(6), a court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor.29 In order to survive such a motion, the complaint "`must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'"30 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."31

To state a claim under Section 10(b) of the Exchange Act, a plaintiff must allege facts sufficient "to establish that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff's reliance on the defendant's action caused injury to the plaintiff."32

A complaint asserting a Section 10(b) claim must satisfy also the heightened pleading standards of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA").33 Under Rule 9(b), "averments of fraud [must] be stated with particularity" and a plaintiff must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."34

In addition, the PSLRA requires a complaint to "state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind."35 The requisite state of mind is an intent to "`deceive, manipulate, or defraud.'"36 In this circuit, allegations of recklessness — "an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it" — are sufficient.37

In evaluating whether a complaint alleges facts giving rise to a "strong inference of scienter," courts must consider all the facts alleged, inferences favoring plaintiffs rationally drawn from the facts, and "plausible, nonculpable explanations for the defendant's conduct."38 The "inference of scienter must be `more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.'"39 Generally, the plaintiffs must allege facts sufficient to show that each defendant "personally knew of, or participated in, the fraud."40 That is, the plaintiff must allege that each defendant had the requisite scienter.41

A complaint may satisfy the scienter requirement "by alleging facts to show either (1) that defendants had the motive and opportunity to commit the fraud, or (2) strong circumstantial evidence of conscious misbehavior or recklessness."42

In order sufficiently to allege "motive and opportunity," plaintiffs must allege that defendants "benefitted in some concrete and personal way from the purported fraud."43 Our Circuit has made clear that goals "possessed by virtually all corporate insiders, are insufficient to allege motive for Section 10(b) purposes.44 Such common goals include "the desire to maintain a high credit rating for the corporation or otherwise sustain the appearance of corporate profitability or the success of an investment, or the desire to maintain a high stock price in order to increase executive compensation."45

If plaintiffs have not alleged motive and opportunity sufficiently, they may rely upon the "strong circumstantial evidence" prong, "though the strength of the circumstantial allegations must be correspondingly greater if there is no motive."46 A complaint alleges strong circumstantial evidence of scienter when it alleges that defendants (1) "benefitted in a concrete and personal way from the purported fraud," (2) "engaged in deliberately illegal behavior," (3) "knew facts or had access to information suggesting that their public statements were not accurate," or (4) "failed to check information they had a duty to monitor."47

II. Analysis

A. Weatherford Defendants

1. Motive and Opportunity

AFME contends that the AC adequately pleads that the Weatherford Defendants had both a motive and the opportunity to commit fraud. The contention is unavailing.

The AC points first to the Individual Defendants' discretionary bonuses tied to performance targets and their large compensation packages.48 Such motives, however, are "possessed by virtually all corporate insiders" and thus are insufficient to give rise to the requisite strong inference of scienter.49 Similarly unavailing are the AC's allegations that the fraud helped the Company meet earnings targets or sustain the appearance of profitability.50

The Second Circuit has recognized that individual stock sales by corporate insiders will provide the requisite motive.51 But the AC fails to allege that any such sales occurred here. It states only that certain of the individual defendants — Duroc-Danner and Becnel — "delivered tens of thousands of their personally-held Weatherford shares back to Weatherford" one day before the Company announced that it would be issuing the financial restatement.52 It noticeably does not state, however, that either Duroc-Danner or Becnel actually sold stock at that time. The inadequacy of the pleading is highlighted by the defendants' assertion that these were "shareholder-approved[] tax withholding transactions in which the executives surrendered a portion of their stock grants (but retained [and acquired] a much larger part) on the dates those grants vested in order to cover their withholding obligations."53 AFME's briefing does not earnestly contest defendants' assertion and states only that resolving this argument would be "improvident at this early stage."54 But the Court need not determine whether defendants' proffered explanation is correct or accurate. The basic point is that plaintiff has failed adequately to allege that these deliveries were sales of stock, that they resulted in profits or avoided losses, or even that they had the net effect of reducing defendants' overall holdings in Weatherford stock. The lack of such allegations precludes any strong inference of scienter based on these deliveries.

In light of the inadequacy of these grounds for motive, AFME focuses principally on its theory that the fraud inflated Weatherford's stock price and thus permitted it to fund its "aggressive growth strategy" while avoiding becoming an acquisition target in its own right.55 The AC points to a "sampling" of seven acquisitions Weatherford conducted from 2007 through 2009 and further refers to Weatherford's 2009 annual report, which stated that the Company funded its 2008 and 2009 acquisitions through the issuance of $287 million in stock.56

The theory is rejected easily with regard to the Individual Defendants because plaintiff "nowhere allege[s] that defendants engaged in these transactions to secure personal gain" as opposed to carrying out their "financial responsibilities to the Company."57 Moreover, "[e]ven if the complaint is read to say that defendants artificially inflated [Weatherford's] stock price to increase their personal compensation (by undertaking the cited transactions or otherwise), the complaint would still fail to allege the requisite motive" because such an incentive is common to all insiders.58

More challenging is the question of whether the corporate defendant — Weatherford itself — may be inferred to have had the requisite motive due to its interest in acquiring other companies. While "artificial inflation of stock prices in order to acquire another company ... `in some circumstances' [may] be sufficient for scienter,"59 the "desire to achieve the most lucrative acquisition proposal can be attributed to virtually every company seeking to be acquired or to acquire another" and therefore generally is insufficient.60 Whether an interest in acquisitions is sufficient is an "extremely contextual" inquiry that demands an allegation of a "unique connection between the fraud and the acquisition."61

The Circuit has provided little guidance as to what this "unique connection" must be, but has suggested that it is sufficient when the "misstatements directly relat[e] to the acquisition."62 The Court concludes that this requirement demands more than alleging simply that the Company acquired companies during the class period with the use of stock.63

There is an important reason to apply exacting scrutiny to any claim of motive through company acquisitions. A plaintiff who alleges motive and opportunity necessarily has satisfied the pleading requirements for scienter, even without any allegation that a statement that later proved to have been false was made with an indication of knowledge or recklessness.64 This helps explain why our Circuit refuses to consider allegations of even lavish executive compensation as sufficiently alleging motive despite the fact that one certainly could imagine that a number of executives might commit fraud in order to maintain their positions and therefore their considerable annual pay packages. The point is not whether such pay packages provide, in at least some sense of the word, "motive" to commit fraud, but rather, whether the mere fact that an executive is paid well provides a motive sufficient to permit a case to go to discovery without any further allegations that would support an inference of scienter. Our Circuit has concluded, and the PSLRA has reinforced, that relying on such motives "possessed by virtually all corporate insiders"65 would be improper because it would require "virtually every company in the United States that experiences a downturn in stock price ... to defend securities fraud actions."66

Likewise, while an acquisition program funded by stock issuances in a certain sense might provide a "motive" to inflate the stock price, it is not sufficient to allege scienter. Accepting AFME's position would allow a plaintiff to proceed to discovery whenever it can allege that a company that is growing through the issuance of equity made a statement that ultimately proved to have been materially false but helped to raise the company's share price. That conclusion is inconsistent with the PSLRA and our Circuit's requirements of a "unique connection" between the fraud and the acquisition, and this Court declines to accept it.67

2. Circumstantial Evidence of Recklessness

As discussed above, plaintiff alleges two different kinds of false statements by the Weatherford Defendants: (1) those relating to the quality of Weatherford's internal controls and (2) those relating to the understated tax expense.68

a. Internal Controls

In every Form 10-Q and 10-K filed during the class period, certain defendants made statements regarding the effectiveness of Weatherford's internal controls. In particular, Duroc-Danner and Becnel individually certified that they were "`responsible for establishing and maintaining disclosure controls and procedures ... and internal control for financial reporting'" for Weatherford and have, among other things, "`[d]esigned such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles'" and "`disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors ... [a]ll significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information.'"69 These attestations continued quarterly as late as November 1, 2010, in Weatherford's 10-Q for the third quarter of 2010.70

By contrast, the Company's March 2011 restatement identifying the "material weakness" detailed significant gaps in its internal controls as follows:

Although the March 2011 restatement specifically stated only that Weatherford's internal control over financial reporting for income taxes was not effective "as of December 31, 2010"72 (i.e., the end of that particular reporting period), in light of the Company's attestations through the class period that its internal controls had not changed73 and the fact that the $500 million tax expense understatement persisted from 2007 through 2010, one reasonably may infer that Weatherford's internal controls in fact were inadequate throughout the class period.

The question, of course, is whether the AC adequately pleads that Becnel and Duroc-Danner made their certifications either knowing they were false or with reckless disregard for their truth.74 The Court is mindful of the fact that the certifications involve a certain amount of subjectivity, e.g., regarding whether Weatherford's internal controls provide "`reasonable assurance'" about the reliability of financial reporting.75 This Court previously has recognized how the subjectivity of statements in the securities fraud context bears on whether a plaintiff adequately has alleged scienter.76 But subjectivity will not completely immunize a statement from review under Section 10(b). Indeed, a plaintiff can plead a claim adequately based even on a statement of opinion if it alleges facts sufficient to "permit a conclusion that [the defendant] either did not in fact hold that opinion or knew that it had no reasonable basis for it."77

The Court concludes that AFME has alleged scienter adequately with regard to Becnel's statements about internal controls. In reaching this conclusion, the Court relies on several key factors.

First, the personal participation of Becnel in designing and evaluating the internal controls is relevant to the inquiry. The certifications state that Becnel, along with Duroc-Danner, was "`responsible for establishing and maintaining'" those controls and "`designed'" or caused such controls to be designed under his supervision.78 Moreover, Becnel participated in and supervised each of the Company's quarterly evaluations of its internal controls.79 Where a statement is made repeatedly regarding an issue of specific personal interest to the officers, the allegations will more readily give rise to the requisite strong inference of scienter.80

Second, the discrepancies between the admissions of the March 2011 restatement and the repeated certifications that continued from the beginning of the class period until as late as November 2010 are stark. In March 2011, the Company admitted "inadequate staffing and technical expertise," "ineffective review and approval practices," "inadequate processes to effectively reconcile income tax accounts" and "inadequate controls over the preparation of quarterly tax provisions."81 Given Becnel's personal participation in designing and evaluating the internal controls, he presumably had extensive knowledge about precisely these matters. The inference that he lacked a reasonable basis for his certifications is plausible in the circumstances.

Third, the AC alleges that Becnel was aware of at least some problems with internal controls in the tax department during the class period. The AC refers to CW2, a "senior-level audit executive" who worked in Weatherford's internal audit department from approximately 2000 to 2010.82 CW2 allegedly states that taxes "were `always an area of concern'" and a "`constant' issue." CW2 reported that taxes were the only department with unexplained audit delays that "`genuinely concerned'" CW2. He or she allegedly informed Abarca and Becnel about these delays, but they are said to have believed "`that is just the nature of taxes and the Tax Department.'" Moreover, "[a]ccording to CW2, on several occasions, Tax Department audits turned up multiple control deficiencies, including at least one `significant deficiency' in 2009, that were expressly raised with Becnel, Abarca, and the Audit Committee."83 All deficiencies were entered into "Exception Logs" which were summarized and presented in Audit Committee meetings that Becnel and Abarca regularly attended.84 CW2 stated that one of the reasons for his/her departure from Weatherford was increasing concern that "the Tax Department issues were not being addressed," and CW2 was "not surprised to learn of Weatherford's Restatement."85

Finally, to the extent the Tax Department posed unique issues, the fact that taxes were "key to measuring [Weatherford's] financial performance and [were] a subject about which investors and analysts often inquired" further "reinforces the inference of scienter."86

Defendants' opening brief paid almost no attention to the internal controls statements, contending principally that the alleged statements of CW2 regarding internal audit delays are not relevant. The Court is unpersuaded. Given that part of Weatherford's challenged statements regarded the effectiveness of internal controls to allow "timely"87 decisions regarding disclosure and that part of the ultimately revealed problem was that Weatherford's "processes and procedures were not designed to provide for adequate and timely identification and review,"88 one reasonably may infer that Becnel's certifications were recklessly made in light of the audit delays raised by CW2 and dismissed by Becnel. Moreover, the defendants' awareness of delays that might have been indicative of the "inadequate staffing and technical expertise" and dismissal of issues that pertained solely to the Tax Department may be also indicative of recklessness.

Defendants challenge also CW2's alleged statements about control deficiencies on the ground that the AC does not allege that those deficiencies related in any way to the $500 million restatement. But that is entirely beside the point when determining whether Becnel's general statements regarding internal controls — which were separate from its understatement of tax expense — were made recklessly. The AC's allegations permit the conclusion that Becnel knew about but failed to resolve meaningful control deficiencies at times when Becnel was certifying that the internal controls were effective. While discovery ultimately may undermine the probative value of the supposed deficiencies referenced by CW2, the complaint is sufficient in this respect to survive a motion to dismiss.

In short, in light of the personal involvement of Becnel in designing and evaluating Weatherford's internal controls, the stark realities about the inadequacies of the internal controls that were revealed in the March 2011 restatement, the audit delays and control deficiencies expressly raised to him during the class period, and the fact that the Tax Department uniquely was experiencing problems even while he knew that its functions were of specific importance to the Company, the AC sufficiently alleges scienter with regard to his statements.89 The inference that his certifications were made with reckless disregard for the truth is at least as compelling as any opposing, nonculpable inference.90

The Court concludes further that the AC adequately alleges scienter with regard to Weatherford.91 While the above allegations are sufficient to give rise to the requisite strong inference of scienter as to Becnel, the Court concludes that the AC does not sufficiently allege scienter with respect to any of the other individual defendants. Although Abarca was present also at the Audit Committee meetings, the AC does not allege with particularity her role in designing the internal controls. The AC is insufficient also with respect to Duroc-Danner because it fails to allege that he was aware of any issues with internal controls at all during the class period. The AC contains no allegations about Geer on this issue whatsoever.

b. Understatement of Tax Expense

Next, the AC alleges false statements that relate specifically to the understatement of tax expense, including the Company's reports on Forms 10-K and 10-Q. It alleges that these reports "materially overstated the Company's net income, net earnings, effective income tax rate and purported growth."92 Relatedly, because the company's accounting for the tax receivables, which resulted in the understatement of tax expense, did not conform to GAAP, the AC alleges that the Weatherford defendants falsely asserted that the Company's financial results were prepared in accordance with GAAP.93 This category of false statements finally includes numerous statements made in conference calls by the Weatherford defendants indicating that their positive financial results were due to successful strategies and competitive tax advantages rather than "improper manipulation of the Company's income tax expense."94

To the extent plaintiff appears to allege an intentional scheme whereby defendants "crudely manipulated the Company's effective tax rate expense by a few percentage points each quarter and fiscal year to generate enough earnings to meet or beat the Company's targets in key periods," its allegations are insufficient.95 The complaint is entirely devoid of factual allegations that could make plausible, let alone compelling, the inference that defendants actively manipulated the tax receivable asset in order to beat Wall Street estimates or otherwise inflate earnings by a desired amount. Nor does the AC provide a sufficient basis to support even its allegations that the fictitious tax asset was intentionally introduced by defendants onto Weatherford's books.96

But that is not the end of the story. Plaintiff need not make such grandiose allegations to plead scienter adequately. Rather, plaintiff needs to allege facts plausibly giving rise to an inference of recklessness, "an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it."97

Plaintiff puts forward several bases on which to found such an inference of recklessness, including (1) the magnitude of the restatement, (2) the focus of defendants and investors on the effective tax rate, (3) the quality of internal controls, and (4) access to information.98

The Court is not persuaded by the AC's attempt to allege scienter regarding the understatement of tax expense based on an access to information theory.99 Our Circuit has held that "`where plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information.'"100 The allegations of the AC do not go beyond a "broad reference to raw data" that the Circuit has concluded is insufficient to allege access to information as a basis for scienter.101 Although AFME points to the assertions of CW3 that Weatherford maintained a monthly spreadsheet detailing intercompany receivables and payables, the AC notably stops short of actually alleging that the spreadsheet contained sufficient information to demonstrate that the tax expenses were in error.102 Nor does the AC allege that any of the defendants actually were provided this spreadsheet.103

Similarly unpersuasive is the alleged lack of internal controls. While Weatherford's poor internal controls may give rise to liability with respect to the defendants' statements about internal controls, the weak internal controls provide little if any circumstantial support that the statements that the understated tax expense were made with scienter. Simply put, "[w]eak accounting controls may pave the way for fraud. They do not themselves constitute fraud."104

This leaves plaintiff's central points — that the magnitude of the understatement and the defendants' and investors' considerable focus on Weatherford's tax rates demonstrate that the defendants were at least reckless with regard to the truth of their statements.

The Second Circuit has held that the magnitude, at least in certain circumstances, can be relevant to the scienter inquiry.105 To the extent that the invalid tax assets created a large footprint on Weatherford's finances without any supporting documentation, the size of the error may provide some support for scienter.106 Moreover, these assets reduced Weatherford's stated tax expense enormously — Weatherford's stated expense from 2007-2010 was 21 percent, but after the restatement it proved actually to have been 34 percent.107 How substantial that understatement was to Weatherford's prospects and outlook is highlighted by the many analyst conference calls and SEC filings in which defendants touted their lower tax rates. As the AC alleges, analysts showed considerable interest to defendants in even a few percentage point change in the effective tax rate.108 Moreover, the defendants often provided specific guidance about the effective tax rate they expected to achieve, down to the percentage point, in analyst calls along with their reasons behind that belief, generally owing to "`tax planning'" and the Company's "`geographic earnings mix.'"109 The AC further notes that the difference between the reported tax rate and the actual tax rate would often be even more significant in specific quarters. For example, in the third quarter of 2010, the Company reported a 5 percent tax rate, which ultimately was restated to 35 percent.110 Other quarters saw significant tax benefits, when the restated tax rate was a meaningful net cost.111

Nevertheless, "it is clear that the size of the fraud alone does not create an inference of scienter,"112 and what is noticeably missing from the AC is any allegation that the Weatherford defendants had any contemporaneous basis to believe that the information they related was incorrect that would be sufficient to allege the requisite "conscious recklessness."113 In an attempt to bridge the gap in this regard, plaintiff relies considerably on the "core operations" theory adopted by several courts in this district. That theory states that "[k]nowledge of the falsity of a company's financial statements can be imputed to key officers who should have known of facts relating to the core operations of their company that would have led them to the realization that the company's financial statements were false when issued."114 The theory finds its roots in Cosmas v. Hassett, a case in which knowledge about new Chinese import restrictions was imputed to corporate officers when sales to China constituted a "significant part of [the company's] business."115 As a number of courts have noted, however, it remains an open question whether the theory has survived the passage of the PSLRA.116

That debate need not be settled here. The Court assumes, in light of the importance of tax rates to Weatherford's financials, that the proper determination of these rates constituted "core operations" that would have permitted a plausible inference that the defendants knew about the falsity or knew facts that made the risk of such falsity obvious.

But the fact that the Court may make such an inference does not mean that such an inference necessarily would be the most compelling under Tellabs. The Court is required to consider "plausible, nonculpable explanations for the defendant's conduct" and, in order to sustain the complaint, must conclude that the inference of scienter is "at least as compelling as any opposing inference one could draw from the facts alleged."117 Here, the allegations of the AC support the plausible inference that the Company made an error in its tax accounting treatment in 2007 that persisted on its books, compounding over time, and leading to incorrect financial reporting that propagated up to management. That is, it is a plausible inference that management's statements about the Company's tax expense were "the result of merely careless mistakes at the management level based on false information fed it from below."118 In the absence of any allegations of suspicious circumstances or of knowledge of facts that made the risk of such error obvious, the Court concludes that this nonculpable inference is more compelling than the inference proffered by AFME. Thus, the AC fails adequately to allege scienter with regard to the understatement of tax expense.

B. Ernst & Young

AFME challenges three categories of statements made by Ernst & Young in reports appended to each of Weatherford's annual 10-K reports for 2007, 2008, and 2009: (1) its statements regarding the effectiveness of Weatherford's internal controls,119 (2) its statements regarding Weatherford's compliance with GAAP,120 and (3) its statements regarding its own compliance with the auditing standards of the PCAOB, which has adopted GAAS, in arriving at its opinions about Weatherford's internal controls121 and GAAP compliance.122

With regard to the third category, E & Y's statements about GAAS compliance, the AC points to several General Standards ("GS"), interpretive Statements on Auditing Standards ("AU"), and Standards of Fieldwork that allegedly are part of GAAS and that E & Y allegedly violated.123 AFME focuses particularly on GAAS standards regarding the gathering of sufficient evidential matter. In particular, AU Section 326 provides that the auditor "`should be thorough in his or her search for evidential matter,'"124 and AU Section 110 states that "`[s]ufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.'"125

AFME contends that each of these three categories of statements was false and that E & Y made such false statements with the requisite scienter.

1. Motive and Opportunity

Plaintiff first posits that it sufficiently has alleged facts giving rise to a strong inference of scienter under the motive and opportunity approach on three types of allegations. The first regard the fees that Ernst & Young received from Weatherford.126 The second are based on supposed close ties between the two entities — the AC focuses particularly on former employees of Ernst & Young who later worked for Weatherford, including individual defendant Abarca.127 The third set of allegations focus on administrative sanctions and discipline that Ernst & Young and its employees have faced in other, independent circumstances.128 None of these allegations suffices.

The AC alleges only that Ernst & Young "generated over $30 million in aggregate fees" from Weatherford during the class period.129 It nowhere alleges that these fees were not commensurate with work performed or otherwise were paid inappropriately. This does not sufficiently allege motive, as "[i]t would defy common sense to hold that the motive element ... would be satisfied merely by alleging the receipt of normal compensation for professional services rendered."130

The "revolving door" allegations are similarly unsuccessful. The Court assumes for present purposes that there was, in fact, a "steady stream" of Weatherford employees and executives with "close personal ties" to Ernst & Young.131 Even so, the AC fails to allege why this gave Ernst & Young a motive to commit the alleged fraud. The Weatherford employees whose departure dates from Ernst & Young are given are alleged to have left the auditor in 1996 and 2000,132 some seven years before the class period. In any event, the AC fails to allege why the fact that certain Weatherford employees once worked for Ernst & Young has any bearing on either party's motive or opportunity to commit the fraud alleged in this case. Simply listing common employees of both companies, without more, is not enough.133

Finally, the AC provides two paragraphs of allegations of prior wrongs it asserts Ernst & Young committed.134 These prior sanctions and disciplinary measures — which occurred in circumstances entirely independent of the circumstances of this case — have no bearing on whether Ernst & Young had a motive to perpetuate fraud in this case.

2. Circumstantial Evidence of Recklessness

Alternatively, AFME contends that it has alleged the requisite scienter through sufficient circumstantial evidence of conscious misbehavior or recklessness.

In conducting this inquiry, the Court is mindful of the "demanding" standard imposed by this Circuit to plead auditor scienter in a securities fraud case.135 In particular, for "recklessness on the part of a non-fiduciary accountant to satisfy securities fraud scienter, such recklessness must be conduct that is highly unreasonable, representing an extreme departure from the standards of ordinary care" and "approximat[ing] an actual intent to aid in the fraud being perpetrated by the audited company."136 Moreover, our Circuit has said 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."137

Typically, auditor scienter in this Circuit turns on alleging that the auditor "repeatedly failed to scrutinize serious signs of fraud."138 Such allegations of "red flags," when coupled with allegations of accounting violations, may permit a complaint to survive a motion to dismiss.139 But "an unseen red flag cannot be heeded" and "flags are not red merely because the plaintiff calls them red."140 Rather, the red flags, taken collectively, must demonstrate "obvious signs of fraud, or that the danger of fraud was so obvious that [the defendant] must have been aware of it."141

Moreover, where, as here, statements by an auditor are couched as opinions, this Court has previously recognized that the bar is raised even higher to allege the requisite scienter. In particular, to allege that an opinion is false (and a fortiori, to allege that it is false with scienter), the complaint must "set forth facts sufficient to warrant a finding that the auditor did not actually hold the opinion it expressed or that it knew that it had no reasonable basis for holding it."142

The Court takes each category of alleged misstatements in turn.

a. GAAP Compliance

AFME relies on what it characterizes as nine red flags to support an inference of scienter regarding E & Y's opinions about Weatherford's GAAP compliance: (1) the sudden drop in Weatherford's tax rate in 2007, (2) the magnitude of the error as ultimately revealed in 2010, (3) the frequency and consistency of the tax entries, (4) the fact that Weatherford's apparent tax rate was much lower than that of its rivals and permitted Weatherford to beat earnings forecasts, (5) the fact that E & Y received fees for "non-U.S. tax compliance, planning and U.S./non-U.S. tax related consultation," (6) Weatherford's prior history of accounting improprieties, (7) the discrepancy between Weatherford's cash tax rate and reported tax rate, (8) E & Y's access to a spreadsheet containing intercompany reconciliations and (9) the discrepancy between E & Y's representations about internal controls and Weatherford's March 2011 admissions.143 The Court is not persuaded that these allegations are sufficient to satisfy the demanding standard for pleading scienter as against an auditor.

First, several of these were not red flags at all. That E & Y received fees from Weatherford for U.S. "tax related consultation" says substantially nothing about what E & Y would have known from 2007-2010 about this particular aspect of Weatherford's taxes beyond its general role as auditor. Nor is Weatherford's March 2011 revelation of its poor internal controls a red flag that would have been seen by E & Y in 2007-2010.

Second, at least one of these purported red flags is insufficiently connected to E & Y. The AC fails to allege that E & Y knew about Weatherford's competitors' tax rates or that the tax rates were responsible for beating earnings forecasts.

Third, some of these red flags just are not sufficiently colorful. As discussed previously, the AC fails to explain with particularity whether and how the spreadsheet providing "intercompany reconciliations" would have revealed the understatement of tax expense.144 Nor does Weatherford's general history of one-time accounting charges provide any meaningful grounds to contend that E & Y was reckless for failing to uncover this particular misstatement.

Finally, to the extent that the supposed red flag merely constituted better performance by Weatherford, the Circuit has rejected the notion that a rapid increase in profitability is a sign of fraud sufficient to plead scienter.145

The remaining purported red flags amount not so much to any meaningful contemporaneous knowledge that E & Y had showing the existence of any misstatements, but rather that the size and nature of the fraud was such that E & Y should have found it. That is, the AC is "replete with allegations that [E & Y] would have learned the truth as to those aspects of [Weatherford's taxes] if [E & Y] had performed the due diligence it promised."146 This is not enough.

b. Internal Controls

The allegations regarding internal controls fare no better. The only purported red flag that AFME alleges regarding internal controls is the tension between E & Y's opinion that the internal controls were effective and Weatherford's subsequent conclusion that they were not. But that is not a red flag because Weatherford's conclusion was made known only after E & Y's representations. Unlike in the case of Becnel, the AC contains no allegations suggesting that E & Y ever had been made aware of issues with internal tax controls.

AFME's stronger argument is that, in light of the considerable deficiencies in internal controls revealed by the Company, any reasonable audit following the criteria that E & Y affirmed that it had used would have revealed the deficiencies. But the AC's allegations in this regard are only conclusory, providing no factual detail as to how application of the criteria would necessarily have uncovered the problems with internal controls.147 The Court thus concludes that the more compelling inference is that the audit was no more than negligent, if indeed it was that, in failing to identify the problems.148

c. GAAS Compliance

Finally, E & Y's statements regarding its compliance with GAAS is disposed easily. Whether in alleging that E & Y violated its duties of "due professional care," "professional skepticism," or gathering sufficient evidential matter, or otherwise, the claims fall for essentially the same reasons as described above. Indeed, the burden is doubly high in this context; not only must AFME allege that E & Y failed to do an adequate audit, but it must allege also that E & Y was at least reckless in believing that its audit was adequate. There is nothing in the AC that even begins to suggest anything about E & Y's state of mind with regard to how it conducted the audit, and thus the claim fails.

C. Section 20(a)

Section 20(a) of the Exchange Act makes liable those who directly or indirectly control a person who is liable for a primary violation of the statute.149 As this Court previously has held, a plaintiff need not plead culpable participation by the control person in order to state a legally sufficient claim.150 Nor need the allegations of control be pleaded with particularity.151

The Court concludes that in addition to stating a claim against Becnel and Weatherford as primary violators, the AC states a claim against Duroc-Danner, Abarca, and Geer under Section 20(a). As chief executive officer, Duroc-Danner clearly had "the power to direct or cause the direction of the management and policies" of Weatherford.152 The same is true for Abarca and Geer, who were Weatherford's chief accounting officer and principal accounting officer, respectively, and signed some of the statements at issue.153

D. Motion to Supplement

AFME moves to supplement the complaint to add factual content that purportedly came to light only after the filing of the amended complaint.

A motion to supplement a complaint pursuant to Rule 15(d) is governed by the same standard as a motion to amend under Rule 15(a).154 It differs only in that it refers to a request to add allegations about an event or events that occurred after the original pleading was filed, as compared to a motion to amend, which covers events that occurred before the filing of the pleading but which were not included in the complaint.155

A motion to supplement generally should be "permitted when the supplemental facts connect it to the original pleading."156 Such a motion should not be granted, however, where it would cause "undue delay, ... undue prejudice to the party to be served with the proposed pleading, or [would be] futil[e]."157

At a hearing before this Court on January 17, 2012, counsel for lead plaintiff AFME indicated that they preferred to "go forward"158 with the amended complaint as drafted, and declined the opportunity offered by this Court to amend their complaint. Lead Plaintiff has twice attempted to add to the allegations of the AC since this date, first requesting to amend and then filing a motion to supplement it, both in spite of the fact that they are seeking to alter the very complaint on which they unequivocally elected to stand.159

Be that as it may, AFME asserts that its present motion to supplement the AC should be granted because events have occurred after the date the AC was filed that add substantively to the allegations asserted therein.160 AFME seeks to supplement with allegations regarding (1) the "remov[al]" of Becnel, as well as the Company's vice president of tax, (2) a U.S. Department of Justice investigation that was announced on March 15, 2012, and which the motion asserts is looking "into the facts alleged in the [AC]," and (3) a second financial restatement issued by the Company in 2012, which "admitted tax misstatements ... [of] another $185 million."161 In addition, AFME asks the Court to take judicial notice of related materials.

The motion is denied as futile. None of the proposed additions in any way affects the resolution of this case. First, that Becnel and another executive were removed well over a year after a restatement in which the Company was forced to acknowledge, at a minimum, a $500 million mistake, is not probative of scienter.162 Second, while the existence of government investigations may sometimes be probative of scienter with regard to post-investigation conduct, there is no basis to conclude that a DOJ investigation initiated over a year after the events in question is probative of anything.163 Finally, the 2012 restatement appears to have increased the size of the losses, but changes nothing of substance with regard to the claims in this case.

Conclusion

Accordingly, Ernst & Young's motion to dismiss the AC [DI 63] is granted. The Weatherford Defendants' motion to dismiss the AC [DI 67] is granted in all respects, except that it is denied with respect to (1) the Section 10(b) claims against Becnel and Weatherford regarding statements about the quality of internal controls and (2) corresponding Section 20(a) claims against Duroc-Danner, Abarca, and Geer. AFME's motion for leave to supplement the complaint [DI 90] is denied, and its requests for judicial notice [DI 90; DI 101] are denied as moot.

SO ORDERED.