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Public company executives who are squeamish about Sarbanes-Oxley Act rules requiring them to personally certify complex financial documents can breathe a little easier thanks to a recent federal appeals court decision. The 11th U.S. Circuit Court of Appeals ruled on Oct. 12 that plaintiffs have to show that the executives acted with intent to deceive or were severely reckless. Robert Garfield v. NDCHealth Corp., No. 05-14765 (11th Cir. Oct. 12, 2006). Lower courts are split on whether executives are culpable for accounting misstatements or omissions on company filings with the Securities and Exchange Commission, but Garfield sheds some light on executives’ liability, said Jerome Hirsch of Skadden, Arps, Slate, Meagher & Flom in New York, who represented the executives and the company in the case. “We think the 11th Circuit decision might go a long way in creating uniformity, and uniformity in the right way,” Hirsch said. The ruling clarifies how Sarbanes-Oxley requirements dovetail with the Private Securities Litigation Reform Act of 1995, which details pleading burdens for securities lawsuits, he added. A 2004 stock drop Investor Robert Garfield brought the case in a Georgia federal court as a class action against NDC Health Corp. (which has since been acquired by medical software company Per-Se Technologies Inc. of Alpharetta, Ga.), six individual executives and New York-based accounting firm Ernst & Young. The DeKalb County pension plan was eventually named the lead plaintiff. The plaintiffs said the company and its executives should be liable for securities fraud for accounting manipulations, which eventually led to a stock drop following the April 2004 news that the company would delay the release of quarterly financials. The 11th Circuit, which said the plaintiffs did not give enough specific information to prove that the executives acted fraudulently or recklessly, upheld the lower court’s dismissal and said the appeal waived the plaintiffs’ right to amend the lower court complaint. “If we were to accept DeKalb’s proffered interpretation of Sarbanes-Oxley, scienter would be established in every case where there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the [Private Securities Litigation Reform Act]. We decline to adopt such an interpretation.” The plaintiffs’ attorney, John Harnes of the Great Neck, N.Y., office of Chitwood Harley Harnes, declined to comment.

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