7 inherently subjective accounting rules.2 In hindsight, it is easy to use labels such as “round-tripping” to suggest that a transaction had no proper purpose, even though “[t]he mere existence of reciprocal dealing does not suggest ‘roundtripping.’ Indeed, it is a common, legitimate, and perhaps useful business practice . . . .” Teachers Ret. Sys. v. Hunter, 477 F.3d 162, 178 (4th Cir. 2007). See also Tellabs, 127 S. Ct. at 2511 (noting distinction between legitimate and illegitimate forms of “channel stuffing”).3 Unlike a company’s own securities disclosures, even large commercial transactions may often be negotiated by personnel who are not versed in accounting principles. See Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424, 1435-36 (9th Cir. 1995) (distinguishing between “directors and officers, who – unlike the public relations or personnel departments – are necessarily aware of the requirements of SEC regulations and state law and the ‘danger[s] of misleading buyers and sellers’”). Requiring a business to monitor its counterparty’s accounting in every commercial transaction will greatly expand costs and litigation risk. “‘The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.’” Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 748 (1975) (quoting Ultramares Corp. v. Touche, 174 N.E. 441, 444 (N.Y. 1931) (Cardozo, J.)). As Treasury Secretary Paulson testified, private civil “scheme” liability “would create a very uncertain legal environment for all the individuals and all the public 2
“GAAP is not a set of rigid rules ensuring identical treatment of identical transactions, but rather characterizes the range of reasonable alternatives that management can use.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1421 n.10 (3d Cir. 1997) (Alito, J.). 3
Similarly, “certain contracts may be legitimately backdated.” SEC v. Solucorp Indus., Ltd., 197 F. Supp. 2d 4, 11 (S.D.N.Y. 2002).
