When is public company management held liable when it issues incorrect financial statements?

Enter the Second Circuit’s Monday decision in the Kandi Technologies Group case, wherein the US District Court in New York threw out an investor suit against Kandi management in a matter wherein Kandi was required to make a material restatement of prior financials.  Indeed, the Court might well have been quoting Sergeant Joe Friday by demanding not conclusions but “just the facts….”

There was no doubt that the original financials were materially wrong.  There was no doubt that the plaintiff shareholders alleged that management “knew, or were deliberately reckless in not knowing, that the adverse facts … had not been disclosed” which created an “opportunity to prevent” the incorrect issuance.  Not good enough; such statements are conclusions and not facts.  The officers owed a duty which is breached if there is some evidence of scienter (a legal term generally understood to infer willfulness or intent in some degree); error does not equal evil intent.  Error can be just that–error.

The resignation of the Kandi CFO at the time of restatement was not probative of scienter, either, absent explanation of how a resignation is proof or prior improper intent.

Note to lawyers reading this post: plaintiffs have a couple of weeks to amend their complaint if they have any facts to add.