What guidance do recent legal cases give about red flags?
The WorldCom decision (WorldCom, 2005 U.S. Dist. LEXIS 4193), which focused mainly on public offering disclosure claims, said that directors “may not fend off liability by claiming reliance [on experts] where ‘red flags’ regarding the reliability of an audited financial statement, or any other expertised statement, emerge.” An earlier decision in the case had expounded on the concept of red flags, concluding that in a Section 11 case, “[a]ny information that strips a defendant of his confidence in the accuracy of those portions of a registration statement premised on audited financial statements is a red flag, whether or not it relates to accounting fraud or an audit failure.” (In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 673 (S.D.N.Y. 2004)). In the 2005 case, the court also said director liability in such a situation is a “fact-intensive inquiry that depends upon the circumstances surrounding a particular issuer, the alleged misstatements, and the role of the Section 11 def
