Scott Graham is a senior writer covering the California appellate courts for The Recorder, an American Lawyer affiliate.

Pleading standards for securities fraud cases may be high, but they’re not insurmountable, the U.S. Court of Appeals for the Ninth Circuit declared Friday, reviving a $1.8 billion shareholder action against VeriFone Holdings.

Despite the SEC’s decision not to charge VeriFone CEO Douglas Bergeron and CFO Barry Zwarenstein, shareholders sufficiently pleaded that the two pressured middle management to meet unrealistic earnings targets, then turned a blind eye when a controller fabricated inventory to make the numbers, Judge M. Margaret McKeown wrote for a unanimous panel in In re VeriFone Holdings Securities Litigation. When the fabrications were discovered in December 2007, the stock price dropped nearly by half in a single day, representing a loss of $1.8 billion in market cap.

McKeown conceded that none of the evidence standing alone may have proven the executives had actual knowledge the books were being cooked. But viewed “holistically, as the Supreme Court directed in Matrixx Initiatives v. Siracusano,” the allegations “give rise to a strong inference that Bergeron, Zwarenstein and VeriFone were deliberately reckless to the truth or falsity of their statements regarding VeriFone’s financial results.”

Judges William Fletcher and Michael Daly Hawkins concurred.

The decision provided holiday cheer for Robbins Geller Rudman & Dowd partner Sanford Svetcov, who said he ran into a hallway and yelled “Yippee!” as loud as he could upon reading it.

Svetcov was especially pleased that the U.S. Court of Appeals for the Ninth Circuit said it would draw no inference from the SEC’s charging decision, and that U.S. District Judge Marilyn Hall Patel had erred by taking it into account. “We made the very important point that the SEC’s charging decision does not necessarily reveal the SEC’s judgment about the strength of a case,” Svetcov said, reasoning that the agency could just as likely be influenced by availability of resources or other factors.

VeriFone announced Dec. 3, 2007, that it would restate three quarters of earnings due to accounting errors. Robbins Geller’s shareholder complaint alleged that VeriFone executives had been upset by flash reports from regional business units showing that gross margins were running substantially below projections.

“We need to get to 36.5 cents [in earnings]. Figure it out,” CEO Bergeron emailed CFO Zwarenstein at one point, according to the Ninth Circuit. When Zwarenstein replied, “Can I speak to you?” Bergeron responded, “You should wait until I cool down, use the time to figure out how we get to 36.5 cents.”

Zwarenstein in turn emailed supply chain controller Paul Periolat, “we are still off by $10,784,000 versus the forecasting. Is there an error in there somewhere?”

Periolat subsequently made a $10 million adjustment to inventory figures, bringing reported earnings to Bergeron’s precise target. But neither Bergeron nor Zwarenstein ever questioned how Periolat found the $10 million. Later in 2007, Periolat made an additional $10 million adjustment based on inventory supposedly in transit from the corporation’s Israel division, even though inventory was never shipped from Israel.

VeriFone, Bergeron and Zwarenstein argued that Periolat was acting on his own and that they were distracted by a just concluded international merger. The SEC laid the blame on Periolat and Judge Patel dismissed the shareholder suit.

But the Ninth Circuit sounded troubled when it heard the case in May, and on Friday McKeown suggested Judge Patel had looked at the evidence too narrowly. “This case invokes the old adage that the sum is greater than the parts,” McKeown wrote.

“It defies common sense that for three straight quarters following a merger, when preliminary reports came in substantially below expectations and the acquired company had lower margins, the correct ‘adjustments’ to flash reports also happened to be the precise amounts Zwarenstein and Bergeron had identified as necessary to hit earnings targets,” Judge she wrote. “In the face of repeated such adjustments, the company cannot simply close its eyes with a sigh of relief.”

Svetcov argued for shareholder National Elevator Industry Pension Fund. Sullivan & Cromwell’s Brendan Cullen argued for VeriFone and Bergeron. Morrison & Foerster partner Jordan Eth argued for Zwarenstein.