Securities and Exchange Commission v. Prager Metis CPAs, LLC

United States District Court

for the

Southern District of Florida

Securities and Exchange )

Commission, Plaintiff, )

)

Civil Action No. 23-23723-Civ-Scola

v. )

)

Prager Metis CPAs, LLC, and )

Prager Metis CPAs LLP Defendants. )

Order Denying Motion to Dismiss

The Securities and Exchange Commission (the “SEC” or the

“Commission”) complains that Defendants Prager Metis CPAs, LLC (“Prager

LLC”), and Prager Metis CPAs LLP (“Prager LLP”) (together, “Prager”), two

affiliated accounting and auditing firms, have repeatedly violated the SEC’s

auditor independence rule by including indemnification provisions in their

client engagement letters. (Compl., ECF No. 1.) The complaint sets forth eleven

claims: two for direct violations, one of Rule 2-02(b) of SEC Regulation S-X1

(count one, against both Defendants) and the other of Rule 17a-5(i) of the

Exchange Act (count nine, against just Prager LLC); and nine for aiding and

abetting certain clients in violating, variously, section 13(a) of the Exchange Act

(counts three, six, and seven, all against just Prager LLC, and count four,

against both Defendants), section 15(d) of the Exchange Act (counts five and

eight, against both Defendants), both section 13(a) and 15(d) together (count

two, against just Prager LLC), section 17(a) of the Exchange Act (count ten,

against just Prager LLC), and section 206(4) of the Advisers Act (count eleven,

against just Prager LLC). Prager now asks the Court to dismiss the complaint,

or a subset of its counts, arguing that (1) the SEC’s allegations fail to allege

that Prager lacked independence from its audit clients; (2) many of the SEC’s

claims are defective because they are based on engagement letters that

expressly exclude Prager’s own negligent acts; and (3) the SEC failed to

properly allege scienter with respect to its nine aiding-and-abetting claims.

(Defs.’ Mot., ECF No. 16.) The SEC has responded in opposition and Prager has

timely replied (Defs.’ Reply, ECF No. 28). After careful review, the Court denies

Prager’s motion to dismiss (ECF No. 16).

1 As the SEC explains, Regulation S-X is a consolidation, first assembled in 1940, of several

sets of accounting instructions from various forms into one regulation. (Pl.’s Resp., ECF No. 24,

10.)

1. Background2

Prager LLC and Prager LLP are both accounting and auditing firms, the

former headquartered in New York and the latter in California. (Compl. ¶¶ 9,

10.) Prager LLC has been registered with the Public Company Accounting

Oversight Board (“PCAOB”)3 since 2003 and has eighteen offices worldwide,

including two in Miami, Florida. (Id. ¶ 9.) Prager LLP has been registered with

the PCAOB since 2010 and has five offices, all in California. (Id. ¶ 10.)

In August 2018, Prager acquired a certified public accounting firm, that

had been based in New Jersey since 1981 and registered with the PCAOB since

2003. (Id. ¶¶ 12, 33.) After acquiring that firm, Prager began regularly auditing

public issuers—companies whose securities are registered with the SEC and

who trade in U.S. markets. (Id. ¶¶ 9, 33.) Prior to that, Prager’s audit work had

been limited to mostly private companies and investment advisors with only

one public-issuer client. (Id. ¶ 33.)

At issue in this case are over 87 engagement letters that Prager executed,

between December 2017 and October 2020, through which Prager earned over

$3 million in fees, with 62 clients: 54 public issuers, 4 broker dealers, and 4

investment advisors (the “SEC Registrant Clients”). (Id. ¶¶ 11, 34.) Those

engagement letters all contained indemnification provisions. (Id. ¶ 34.) One

version of that provision, appearing in 77 of the engagement letters, was as

follows:

In the event that we become obligated to pay any judgment, fine,

penalty, or similar award or sanction; agree to pay any amount in

settlement; and/or incur any costs including legal fees, as a result

of a claim, investigation, or other proceeding instituted by any

third party, including any governmental or quasi-governmental

body, and if such obligation is a direct or indirect result of any

inaccurate or incomplete information that you provide to us during

the course of this engagement, and not any failure on our part to

comply with professional standards, you agree to indemnify us,

and hold us harmless as against such obligations, agreement

and/or costs.

2 This background is based on the allegations in the SEC’s complaint. For purposes of

evaluating Prager’s motion, the Court accepts the SEC’s factual allegations as true and

construes those allegations in the light most favorable to the SEC per Federal Rule of Civil

Procedure 12(b)(6).

3 The PCAOB was created by the Sarbanes-Oxley Act of 2002 to oversee, among other things,

accounting professionals who provide independent audit inspection reports for publicly traded

companies. (Id. ¶ 9 n. 1.)

(Id.) Another version, included in some of those 77 letters as well others,

read:

Because of the importance of management’s representations to an

effective audit [or examination], the Company agrees to release and

indemnify [Prager] and its personnel from any liability and costs

relating to our services under this agreement attributable to any

knowing misrepresentations by management.

(Id.) In conjunction with those 87 engagement letters, Prager conducted 62

audits, 11 examinations, and 144 reviews. (Id.) Along with those audits, exams,

and reviews, Prager also signed various accountant’s reports and certifications,

claiming to be independent, which its clients then filed with the SEC. (Id. ¶¶

36–43, 59; Ex. 1, ECF No. 1-1.)

Guidance from the SEC has long emphasized the paramount importance

of auditor independence in assuring investors that company financial

statements “have been subjected to a rigorous examination by an objective,

impartial, and skilled professional, and that investors, therefore, can rely on

them.” (Compl. ¶ 17 (quoting Revision of the Commission’s Auditor

Independence Requirements, Exchange Act Rel. No. 43602, 2000 WL 1726933,

at *2 (Nov. 21, 2000)).) Other SEC publications, of which other agencies have

taken note, have also criticized indemnification provisions as impairing auditor

independence. (Compl. ¶¶ 28, 30, 32.) And, internally, beginning in January

2019, two Prager partners raised concerns about the indemnification

provisions, specifically warning about the provisions’ impairing Prager’s

independence from its clients. (Id. ¶¶ 44–49). Undeterred, Prager continued to

include the provisions, not updating its engagement-letter template until

December 2019. (Id. ¶ 49.) Despite the circulation of the updated template,

however, Prager LLC nevertheless subsequently executed six new engagement

letters, the last in October 2020, that included indemnification provisions. (Id.

¶ 50.)

In the meantime, in September 2020, the PCAOB contacted Prager,

notifying it that two of its audit engagement letters, with two public issuer

clients, included indemnification provisions that the PCAOB flagged as

independence deficiencies. (Id. ¶ 55, 56.) A few weeks later, Prager responded

to the PCAOB, acknowledging that the indemnification provisions were in its

engagement letter templates and advising that, after consulting legal counsel in

November 2019, Prager had immediately circulated a revised template that

removed the indemnification provisions. (Id. ¶ 57.) What Prager neglected to tell

the PCAOB, however, is that, in addition to the two letters the PCAOB had

identified, Prager had been including such provisions in its engagement letters

since 2017. (Id.) Nor did Prager tell the PCAOB that two of its partners had

flagged the indemnity-provision issue beginning in January 2019. (Id.) Prager

further failed to notify the PCAOB that, even after circulating the new

engagement-letter template, it subsequently executed six more letters with the

indemnity provision, the last one issuing in October 2020, several weeks after

the PCAOB’s initial alert and over a month after Prager’s response to the alert.

(Id. ¶¶ 57, 58.) Ultimately, it was not until either late 2022 or early 2023 that

Prager implemented a quality control manual, proactively requiring the use of

an audit engagement letter template that does not include indemnification

provisions. (Id. ¶ 51.)

Moreover, apart from the engagement letters, Prager never advised its

clients of any impact the indemnity provisions might have on Prager’s

independence from them, their audit committees, or those charged with

governance of the clients. (Id. ¶ 54.) To the contrary, in some communications,

Prager affirmatively claimed that it was not aware of any relationships that may

reasonably be thought to bear on its independence, explicitly maintaining to

one client that Prager was “independent of the [client] in compliance with Rule

3520 and within the meaning of the federal securities laws administered by the

Securities and Exchange Commission.” (Id.) Prager also signed and issued

accountant’s reports to its clients (who, in turn, then included those reports or

incorporated them by reference into certain SEC filings) that stated Prager was

independent with respect to each client. (Id. ¶¶ 36–43, 59.)

The SEC now seeks injunctive relief, disgorgement (including interest),

and civil monetary penalties, as a result of Prager’s alleged failure to be

independent. Its claims focus on not only Prager’s direct violations, but also

Prager’s aiding and abetting its clients’ violations of various securities laws.

2. Legal Standard

When considering a motion to dismiss under Federal Rule of Civil

Procedure 12(b)(6), the Court must accept all the complaint’s allegations as

true, construing them in the light most favorable to the plaintiff. Pielage v.

McConnell, 516 F.3d 1282, 1284 (11th Cir. 2008). A pleading need only contain

“a short and plain statement of the claim showing that the pleader is entitled to

relief.” Fed. R. Civ. P. 8(a)(2). “[T]he pleading standard Rule 8 announces does

not require detailed factual allegations, but it demands more than an

unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v.

Iqbal, 556 U.S. 662, 678 (2009) (quotation omitted). A plaintiff must articulate

“enough facts to state a claim to relief that is plausible on its face.” Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570 (2007).

“A claim has facial plausibility when the plaintiff pleads factual content

that allows the court to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “The plausibility

standard is not akin to a ‘probability requirement,’ but it asks for more than a

sheer possibility that a defendant has acted unlawfully.” Id. “Threadbare

recitals of the elements of a cause of action, supported by mere conclusory

statements, do not suffice.” Id. Thus, a pleading that offers mere “labels and

conclusions” or “a formulaic recitation of the elements of a cause of action” will

not survive dismissal. See Twombly, 550 U.S. at 555. “Rule 8 marks a notable

and generous departure from the hyper-technical, code-pleading regime of a

prior era, but it does not unlock the doors of discovery for a plaintiff armed

with nothing more than conclusions.” Iqbal, 556 U.S. at 679.

3. Analysis

The viability of the claims in the complaint hinge on whether the SEC

has alleged facts sufficient to imply that Prager’s independence as a public

accountant was impaired. According to the SEC, Prager’s independence was

impaired because it included certain indemnification provisions in its

engagement letters with its SEC Registrant Clients—for whom Prager

conducted, collectively, 62 audits, 11 exams, and 144 reviews (sometimes

collectively referred to generally as “audits” or “reviews”). In support of its

position, the SEC cites to certain policy statements and guidance, both from

within and without the SEC, that opine that indemnification provisions impair

auditor independence: (1) the SEC’s Codification of Financial Reporting Policies

(the “Codification”),4 § 602.02.f.i (Indemnification by Client); (2) the SEC’s Office

of the Chief Accountant: Application of the Commission’s Rules on Auditor

Independence Frequently Asked Questions (“OCA FAQs”), “A. General standard

of independence [2-01(b)]” (issued Dec. 13, 2004), available at:

https://www.sec.gov/info/ accountants/ocafaqaudind080607; and (3)

Interagency Advisory on the Unsafe and Unsound Use of Limitation of Liability

Provisions in External Audit Engagement Letters, available at: http://

www.federalreserve.gov/boarddocs/srletters/2006/sr0604a1.pdf (2006)

(discussing the Codification and the OCA FAQs). The SEC also includes

allegations that two Prager partners recognized the indemnification provisions

being included in Prager’s engagement letters as impairing independence,

advising other Prager partners of their concerns. (Compl. ¶¶ 44–46, 48.)

In urging dismissal, Prager maintains that the SEC’s “self-declared

proposition”—that the indemnification provisions impaired Prager

4 According to the SEC, “[t]he purpose of the codification is to provide one document which is

organized in a logical manner and which can be used as a reference for the [SEC]’s current

published positions on accounting and auditing matters relating to financial reporting.”

Codification of Fin. Reporting Policies, Release No. 1 (Apr. 15, 1982).

independence—“is contrary to law.” (Def.’s Mot. at 2.) In support, Prager points

out that the only binding regulation on which the SEC relies does not itself

mention anything about indemnification provisions. (Id.) Additionally, says

Prager, the SEC fails to allege any facts or circumstances that, as a result of

any of the indemnification provisions, show that Prager’s independence was

actually impaired; that Prager ever failed to properly discharge its professional

obligations; that Prager ever even invoked one of the indemnification

provisions; or that Prager conducted any of its audits without the objectivity

and impartiality demanded by binding SEC regulations. (Id.) As Prager views it,

the SEC, without any legal basis to do so, is attempting to improperly impose a

categorical ban on all indemnification provisions. (Id.) While the Court finds

there may be some merit to Prager’s position that there is a lack of support for

a categorical ban, the Court nonetheless disagrees that this case rests, as

Prager frames it, “entirely on [the SEC’s] own proposition that indemnification

provisions automatically impair an auditor’s independence.” (Def.’s Mot. at 2.)

To start, neither party disputes that Rule 2-01(b) of Regulation S-X sets

out the general standard for auditor independence. 17 C.F.R. § 210.2-01(b).

Under that rule:

The Commission will not recognize an accountant as independent,

with respect to an audit client, if the accountant is not, or a

reasonable investor with knowledge of all relevant facts and

circumstances would conclude that the accountant is not, capable

of exercising objective and impartial judgment on all issues

encompassed within the accountant’s engagement. In determining

whether an accountant is independent, the Commission will

consider all relevant circumstances, including all relationships

between the accountant and the audit client, and not just those

relating to reports filed with the Commission.

Id. (sometimes referred to as “Rule 2-01(b)”). In addition to applying to audits of

public-issuer clients, this provision also applies to audits of investment-advisor

clients through Rule 206(4)-2(d)(3) of the Advisors Act (17 C.F.R. § 275.206(4)-

2(d)(3)) and of broker-dealer clients through Rule 17a-5(f)(i) of the Exchange Act

(17 C.F.R. § 210.2-01). At issue here, then, is whether the Court can infer from

the facts and circumstances alleged in the complaint, assuming they are true,

that Prager’s independence was impaired—as defined by Rule 2-01(b).

A. Rule 2-01(b) need not specifically list indemnification provisions as

an impediment to auditor independence.

As a starting point, the Court disagrees with Prager’s argument that the

SEC cannot establish impaired independence based on the indemnification

provisions because indemnification provisions are not specifically identified as

a concern in Rule 2-01(b). Prager’s position is directly undercut by the

preamble to the rule, which explains that, while a handful of provisions of

section 210.2–01—paragraphs (c)(1) through (c)(5)— “reflect the application of

the general standard to particular circumstances,” Rule 2-01(b) itself supplies

only “the general standard of auditor independence” and does not in any way

“purport to . . . consider all circumstances that raise independence concerns.”

17 C.F.R. § 210.2-01 (emphasis added). Indeed, in conjunction with

introducing a list of specific circumstances that the regulation identifies as

“inconsistent with” Rule 2-01(b), the regulation pointedly advises that the list is

“non-exclusive.” 17 C.F.R. § 210.2-01(c) (sometimes referred to as “Rule 2-

01(c)”). Accordingly, the Court agrees with the SEC that indemnification

agreements need not be specifically identified or listed in order to form the

basis of an enforcement action under Rule 2-01(b).

B. The viability of the complaint does not hinge on a categorical rule

against all indemnity provisions.

Prager also complains about the SEC’s repeatedly claiming that Prager

“was not independent” when it conducted audits of its clients’ financial

statements “due to the indemnification provisions in the engagement letters.”

(Def.’s Mot. at 8 (citing Compl. ¶¶ 70–72, 78, 84–87, 92, 93, 98, 103, 108, 109,

118, 123).) As Prager sees it, all eleven counts of the complaint hinge entirely

on SEC’s position that the inclusion of any type of indemnification provision

alone will render an accountant’s independence impaired. (Def.’s Mot. at 9.)

Prager claims this to be fatal to the SEC’s complaint for two principal reasons:

(1) there is no legal support for a categorical rule that the inclusion of any

indemnity provision automatically impairs an accountant’s independence; and

(2) imposing such a categorical rule runs afoul of Rule 2-01(b)’s directive that

“all relevant facts and circumstances” be taken into consideration when

evaluating an accountant’s independence (or impairment thereof). (Id. at 9–14

(quoting 17 C.F.R. § 210.2-01(b)).) And, as to the second point, Prager argues

that the complaint is devoid of any factual allegations that Prager’s

independent judgment was in any way affected by the indemnification

provisions.

As to both points, the Court finds Prager’s arguments miss their marks.

While there are some indications in the complaint and in briefing that the

SEC’s position is indeed that any indemnification provision may impair

independence, the SEC’s actual allegations venture well beyond the mere

existence of indemnification provisions. First, as set forth above, the SEC

reproduces, verbatim, the indemnification provisions at issue here. (Compl. ¶

34.) One version of the provision was included in 77 engagement letters and

another in 14 letters. (Id.) In the version included in 77 letters, the client agrees

to indemnify Prager for any liability arising from the client’s own provision of

“any inaccurate or incomplete information” so long as Prager has complied with

unspecified “professional standards.” (Id.) In the other version, Prager is

indemnified for any liability as to any “knowing misrepresentations” made by

the client’s management, regardless of whether Prager otherwise complied with

professional standards. (Id.)

The complaint also recites language from two publications issued by the

SEC wherein the SEC has long condemned the use of indemnity agreements,

concluding that they impair, or frequently impair, auditor independence. (Id. ¶

28 (citing § 602.02.f.i of the Codification); ¶ 30 (citing the OCA FAQs).)5

Additionally, the SEC supplies allegations that a number of other agencies (the

Department of the Treasury, the Federal Reserve System, the Federal Deposit

Insurance Corporation, the National Credit Union Administration, the Office of

the Comptroller of the Currency, and the Office of Thrift Supervision) have also

published guidance “recognizing the [SEC’s] position that auditors that include

indemnification provisions in engagement letters are not independent.” (Compl.

¶ 32.) Furthermore, the complaint alleges several facts from which the Court

can readily infer that Prager was aware that the indemnification agreements

impaired its independence. For example, the complaint provides that two

Prager partners themselves voiced concerns to other Prager partners that the

indemnification provisions impaired auditor independence. (Id. ¶¶ 44–49.)

Additionally, the PCAOB notified Prager that indemnification provisions in two

of its audit engagement letters, with two public issuer clients, were flagged as

independence deficiencies. (Id. ¶¶ 55, 56.) Despite these warnings, Prager

continued including indemnification provisions in a handful of new

engagement letters, one even following the alert from the PCAOB. (Id. ¶ 50.)

From just the above-referenced allegations, assuming they are all true and

reading them in the light most favorable to the SEC, the Court can infer that

Prager’s indemnity agreements plausibly ran afoul of Rule 2-01(b).6

5 Prager complains that the SEC improperly relies on these two publications, and these two

publications alone, to establish Prager’s impaired independence. (Def.’s Mot. at 9–11.) The

Court disagrees with Prager’s premise: the SEC relies on Rule 2-01(b) in alleging Prager’s

impaired independence and references the publications only as support for its theory. Whether

the SEC could properly rely on only those two publications alone to support its claims, then, is

irrelevant and need not be determined—at least at this point in the litigation.

6 As Prager acknowledges in reply, the complaint need not allege that Prager’s independence

was actually impaired. (Def.’s Reply at 7 n. 4.) Instead, as noted in the preamble to Rule 2-01:

“Section 210.2-01 is designed to ensure that auditors are qualified and independent of their

audit clients both in fact and in appearance.” 17 C.F.R. § 210.2-01; cf. U.S. v. Arthur Young &

C. Prager fails to convince that eliminating immunity where an auditor

has been negligent does not necessarily remove an indemnity

provision’s independence impairment.

Prager also argues that the vast majority of the offending engagement

letters did not provide for indemnification if Prager acted negligently and,

therefore, its independence could not have been impaired under those

provisions. (Def.’s Mot. at 14–17.) In support, Prager points to section 602.02.f.i

of the Codification and the OCA FAQs, both of which the SEC cites in its

complaint. (Id. at 14.) Prager maintains that these two SEC publications show

that independence concerns are triggered only when an indemnification

provision immunizes accountants for their own negligence. (Id. at 14–15.)

Accordingly, says Prager, all the counts that rest only on the indemnification

provisions that specifically exclude immunity where Prager has not complied

with “professional standards”—that is, counts one through eight—should be

dismissed. The Court is not persuaded.

To begin with, Prager points to no legal authority supporting its

contention that only those types of indemnity provisions specifically identified

in SEC published guidance can impair independence. Further, by its own

terms, the Codification itself provides, in introducing section 602.02, that “the

guidelines and illustrations presented in this section cannot be, nor are they

intended to be, definitive answers on any aspect of this subject,” and further

explains that they “are designed to apprise the practitioners of typical

situations which have involved loss of independence, whether in appearance or

in fact, and by so doing to place them on notice of these and similar potential

threats to their independence.” (Pl.’s Resp., Ex. B, § 602.02.a. of the

Codification.) Further, Prager neglects to reference that part of the OCA FAQs

that states, without qualification, that “including in engagement letters a

clause that an issuer would release, indemnify or hold harmless from any

liability and costs resulting from knowing misrepresentations by management

would also impair the firm’s independence.” OCA FAQs. In sum, the Court

finds Prager’s position, that an accountant’s independence can’t possibly

diminished where it is not immunized for its own negligence, unconvincing.

That is, even though an auditor is not shielded where it has been negligent, its

independence may nonetheless be diminished where its incentive to conduct

an exhaustive investigation as to its client’s representations is weakened. C.f.

In the Matter of Am. Terminals and Transit Co., 1 S.E.C. 701 (SEC Release No.

Co., 465 U.S. 805, 819 n. 15 (1984) (“It is therefore not enough that financial statements be

accurate; the public must also perceive them as being accurate.”) (“Public faith in the reliability

of a corporation's financial statements depends upon the public perception of the outside

auditor as an independent professional.”).

Sept. 29, 1936) (SEC order noting that the protection of investors requires

independent auditors to “be free of the entangling alliances which relational

and contractual connections with registrants frequently engender [and to]

approach their task with complete objectivity—critical of the practices and

procedures of registrants”).

D. Aiding and Abetting

Finally, Prager argues that, even if Prager’s independence was found to

be impaired, the complaint nonetheless fails to allege the scienter element of

the aiding-and-abetting claims set forth in counts two through eight and

counts ten and eleven. (Def.’s Mot. at 17–20.) According to Prager the

allegations establish, at most, only that “Prager should have known that the

indemnification provisions would impair the firm’s independence.” (Id. at 19

(emphasis in original).) The Court is not persuaded.

To state a claim for aiding and abetting a securities law violation, a

complaint must allege “(1) a primary violation by another party; (2) a general

awareness by the accused aider-abettor that his role was part of an overall

activity that is improper; and (3) that the accused aider-abettor must have

knowingly and substantially assisted the violation.” S.E.C. v. Big Apple

Consulting USA, Inc., 783 F.3d 786, 800 (11th Cir. 2015) (cleaned up). As the

parties agree, the SEC can satisfy the scienter requirement, set forth in the

second and third prongs, by alleging facts establishing either “actual

knowledge” or, at a minimum, “severe recklessness.” Id. at 799–800. Severe

recklessness, in turn, can be established through allegations of “severe,

reckless disregard for the truth.” Id. at 805.

At a minimum, the Court finds the facts set forth in the complaint, when

read in the light most favorable to the SEC, sufficiently allow the Court to infer

Prager’s “severe recklessness.” As the allegations relay, published SEC

guidance, since as early as 1982, has clearly telegraphed the SEC’s concerns

that indemnity provisions impair public-auditor independence. (Compl. ¶¶ 28,

30, 32.) Further, in January 2019, one Prager partner emailed other partners

notifying them that another partner included an indemnity provision in an

engagement letter which the notifying partner “thought impaired [Prager’s]

independence.” (Id. ¶ 45.) The notifying partner further pointed out that he

himself had taken the provision out his engagement letters. (Id. ¶¶ 45, 46.) The

notifying partner even quoted guidance language affirmatively advising that an

“engagement letter should not include an indemnification clause” or even

“language of that nature.”7 (Id. ¶ 46.) Six months later, another Prager partner

emailed other partners notifying them that there is “an indemnity clause in [an]

engagement letter” and said, as that other partner recalled, “an indemnity

clause may be a problem with the PCAOB/SEC.” (Id. ¶ 48.) Finally, even after a

Pager partner (who was in charge of Prager’s public company audit practice)

circulated an email attaching a “revised audit engagement letter” template,

eliminating the indemnification provision, Prager LLC sent out six additional

engagement letters that included the provision. (Id. ¶ 49, 50.)

These allegations are enough. They establish much more than “merely

simple or even inexcusable negligence.” Woods v. Barnett Bank of Ft.

Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1985). Nor do these allegations, as

Prager urges, amount to simply “red flags” that at most, may have only “put the

defendants on notice that some impropriety may have been taking place,”

without creating “a strong inference of actual knowledge of wrongdoing.” (Def.’s

Mot. at 19 (cleaned up) (emphasis added) (quoting Wiand v. Wells Fargo Bank,

N.A., 938 F. Supp. 2d 1238, 1245 (M.D. Fla. 2013)).) Instead, the allegations

show that at least two partners within the firm were well aware that, because of

the indemnification provisions, the SEC would not consider the firm

independent. The allegations also establish that those two partners

communicated their independence-impairment concerns to senior

management, including partners who, variously, were in charge of Prager’s

public company audit practice; oversaw non-public company engagements;

oversaw quality controls; and were designated as a co-managing partner. (¶ 14,

15, 44, 48.) And, the allegations show that, even after Prager proactively

eliminated the indemnity provision from its engagement templates, six

additional engagement letters were executed that continued to include

indemnity provisions. From these facts, assuming they are true and construing

them in the light most favorable to the SEC, the Court can infer that the

impairment of Prager’s independence due to the indemnity provisions was “so

obvious that the defendant must have been aware of it” and that to ignore or

reject the information amounted to “an extreme departure from the standards

of ordinary care.” Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004,

1010 (11th Cir. 1985). Accordingly, the Court finds the complaint sufficiently

establishes Prager’s scienter with respect to the aiding and abetting claims.

7 In a footnote, Prager complains that, at the very least, any claims of aiding-and-abetting

liability for violations that occurred before these January 2019 communications cannot be

supported. (Def.’s Mot. at 18 n. 7.) Accordingly, it says “[t]hose claims therefore must be

dismissed.” (Id.) Prager doesn’t specify which claims its theory applies to nor does it provide

any more depth to its argument. Without more, the Court declines to undertake the analysis.

4. Conclusion

For the reasons set forth above, the Court denies Prager’s motion to

dismiss (ECF No. 16).° Accordingly, the Court orders Prager to answer the

complaint on or before June 5, 2024.

Done and ordered, in Miami, Florida, on May 29, 2024.

Robert N. Scola, Jr.

United States District Judge

8 Prager also briefly submits, in a footnote in its motion, that the “Court should dismiss Prager

Metis CPAs LLP as a party and all claims against Prager Metis CPAs LLP for improper venue.”

(Def.’s Mot. at 8 n. 4.) Other than citing Federal Rule of Civil Procedure 12(b)(3) and reciting a

phrase from 28 U.S.C. § 1391(b), regarding venue in general, Prager supplies no real analysis

in its motion. Nor does Prager engage with the allegations in the complaint that say, for

example, Prager LLP “transacted business in this judicial district where certain of the acts,

practices, and courses of conduct constituting the violations alleged in this Complaint

occurred.” (Compl. 7.) Because of these defects in Prager’s presentation of its venue

argument, the Court declines to evaluate it. See Hamilton v. Southland Christian Sch., Inc., 680

F.3d 1316, 1319 (11th Cir. 2012) (“A passing reference to an issue in a brief is not enough, and

the failure to make arguments and cite authorities in support of an issue waives it.”); United

States v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990) (“It is not enough merely to mention a possible

argument in the most skeletal way, leaving the court to do counsel’s work, create the ossature

for the argument, and put flesh on its bones.”).