A brief excerpt from the memorandum and order by United States Circuit Judges Bruce M. Selya, Kermit V. Lipez, and Jeffrey R. Howard:

Plaintiffs assert that these releases contained four fraudulent misstatements by the Tyco defendants:
(1) that Tyco's accounting had been corrected;
(2) that the financial statements fairly presented Tyco's status; (3) that all material accounting issues, particularly those involving ADT, had been corrected; and
(4) that ADT would receive a $320.9 million revenue stream over the next ten years.
Plaintiffs maintain that these representations were false because there were still major problems in ADT's books, notably that the income recognized from dealer "connection fees" to ADT was "imaginary," and that the contracts acquired were being recorded at an artificially inflated cost. Plaintiffs assert that the defendants corrected only a technical, inconsequential error -- that the "imaginary" income was being recognized too quickly (immediately rather than over the life of the contract) -- in their initial restatement, but knowingly permitted more significant errors -- the improper recognition of income and the inflation of asset value -- to remain unaltered. Plaintiffs also allege that PwC, knowing of the errors in ADT's books, nonetheless wrongfully issued a "clean" audit opinion.
Plaintiffs allege that the fraud was brought to light in March 2003, when Tyco essentially admitted the fraud in a press release and subsequent Form 10-Q. In a March 12, 2003 press release, Tyco stated that, pursuant to ongoing discussions with the SEC, it expected "to take non-cash, pre-tax charges between $265 million and $325 million for issues identified primarily in [ADT]." Tyco also announced that the president of ADT, Jerry Boggess, and other senior ADT managers, had been fired. Tyco stock dropped significantly on the news. Plaintiffs say that defendants acknowledged in their 3/31/03 Form 10-Q that they had been in ongoing discussions with the SEC about their accounting for the dealer fees and were changing their accounting for the nonrefundable dealer charges to treat them properly as a reduction in ADT's costs in acquiring the contracts.
Plaintiffs also allege that Tyco falsely attributed the March 2003 accounting corrections to a then-recently issued accounting requirement from the Financial Accounting Standards Board's Emerging Issues Task Force ("EITF") -- EITF 02-16 -- which had nothing to do with the relevant accounting issue. Plaintiffs assert that the proper accounting principle is and was located in Accounting Research Bulletin ("ARB") 43, which has been in effect since 1953.
Plaintiffs also emphasize the actions of PwC's audit engagement partner for Tyco, Richard Scalzo. The SEC, in an Accounting and Auditing Enforcement Action dated August 13, 2003, barred Scalzo from practicing accounting before it based on its finding that Scalzo had violated Section 10(b) and Rule 10b-5 and committed improper professional conduct in connection with his audits of Tyco for fiscal years 1997-2001. See 2003 WL 21938985 (SEC Release No. 1839). Essentially, the SEC concluded that Scalzo was on notice of prior management's misconduct, failed to take the necessary steps required by Generally Accepted Auditing Standards ("GAAS"), and recklessly permitted PwC to issue audit reports stating that Tyco's books had been audited according to GAAS.
Plaintiffs assert that the Tyco defendants had two basic motivations for the alleged fraud. First, they wished to keep Tyco viable as a going concern. Plaintiffs allege that Tyco had over four billion dollars in debt coming due in early 2003, and faced imminent bankruptcy if it failed to meet these obligations. Their theory is that management misstated ADT's accounting to give the false impression that Tyco had a $320.9 million revenue stream, which permitted Tyco to obtain crucial financing.4 Second, they wanted to preserve their own lucrative positions, which included large salaries, bonuses, and stock options. Plaintiffs allege that the Tyco defendants highlighted their deceit by providing false explanations for the belated correction.
As to PwC, plaintiffs allege that PwC's audit opinion was fraudulent because PwC knowingly failed to comply with GAAS and was aware that Tyco's accounting was not in compliance with GAAP. Plaintiffs state that PwC's motive was straightforward. PwC looked the other way on Tyco's new fraud, just as it allegedly had with past frauds, to preserve its lucrative business relationship with Tyco.
The district court dismissed the complaint, concluding that scienter was inadequately alleged. As to Breen and Fitzpatrick, the court concluded that their financial stake in Tyco's continued viability was inadequate, standing alone, to create a strong inference of scienter, and that the balance of the allegations amounted to nothing more than "fraud by hindsight," as there was no basis for concluding that Breen and Fitzgerald knew the disputed representations were false when made. The court also held that, because Tyco's liability was solely derivative of Breen's and Fitzpatrick's, the claims against the corporate entity should be dismissed. Finally, the court concluded that PwC's financial stake in its continued business relationship with Tyco was inadequate to create a strong inference of scienter, and that the remaining allegations were either too vague or pertained only to conduct outside the class period.

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Further, this case is different from those relied upon by the plaintiffs. Here, the defendants were not acting to conceal their own errors or justify their past strategic decisions. Compare Cabletron, 311 F.3d at 38-39; Aldridge, 284 F.3d at 83-84. In addition, the defendants' compensation appears to be largely "up-front" or otherwise guaranteed, perhaps as an acknowledgment of risk. As to their stock options, it is not at all clear why defendants would prefer postponing profit reducing and stock price reducing write-downs to future years (when their options would have vested) to swallowing the entire bitter pill in 2002.
The dueling inferences, taken as wholes, break down as follows. Did the defendants, brought in to clean up a massive and well-publicized fraud and actively scrutinized by the SEC, financial media, and bar, fraudulently commit an accounting violation (and fully document their fraud in Tyco's SEC filings) to briefly delay recognition of an additional write-down in the ADT books and present the illusion of a limited9 additional revenue stream to obtain needed financing, only to reveal their wrongdoing to all concerned (including their new creditors) in a subsequent filing to the SEC shortly thereafter? Or did the new management, having been advised by an internal investigation of errors in ADT's accounting that required a 320 million dollar adjustment, believe their job was done as to that subsidiary (one of approximately 2300), only to subsequently discover (with the SEC's assistance) that ADT's books had more mischief to address than first realized?