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Judge rules Moore Stephens not liable over Puda Coal audits

By Dena Aubin

NEW YORK (Reuters) - A federal judge has handed a victory to audit firm Moore Stephens, ruling it does not have to face claims that it violated securities laws by failing to uncover an accounting fraud at China-based Puda Coal.

In an opinion on Wednesday, U.S. District Judge Katherine Forrest in Manhattan ruled that U.S. investors suing over the fraud had not shown that the auditors committed negligence, let alone the egregious conduct needed to support their claims of securities violations.

Puda Coal raised hundreds of millions of dollars on U.S. exchanges before its shares collapsed in 2011 after a research report claimed that the company's main assets had been transferred to insiders.

The company's shares were delisted and its executives sued for fraud in 2012 by the U.S. Securities and Exchange Commission.

In her opinion, Forrest said the company's fraud involved an auditing firm's "worst nightmare," namely finding out that a company it audited had in fact disappeared because its operations had been transferred away.

Even so, plaintiffs had not met the legal standard for holding auditors liable for securities fraud, which requires showing that their conduct was so negligent as to constitute no audit at all, she ruled.

Named in the lawsuit were Moore Stephens Hong Kong, which audited Puda Coal, and U.S.-based Moore Stephens, P.C., which reviewed the audit. Both are affiliates of global audit firm Moore Stephens International.

"As the court stated, Moore Stephens presented expert evidence from an experienced and highly qualified expert that its audits complied with professional standards," said Brian Massengill, a lawyer for the auditors. "Plaintiffs were not able to confront that testimony."

Lawyers for the plaintiffs did not immediately respond to a request for comment.

The lawsuit was filed on behalf of investors who had bought Puda Coal stock between 2009 and 2011 and later found out their investments were worthless because the company's chairman had transferred its main asset, Shanxi Coal, to himself and an investment fund.

According to an amended complaint filed in April, Puda Coal concealed from investors that it no longer had any operating business or revenue until April 2011, when the fraud was revealed on the Alfred Little web site, which posts research on China-based firms.

The lawsuit said all of Puda Coal's financial statements since 2009's third quarter had been misleading because they included the operating results of Shanxi Coal.

The case is In Re Puda Coal Securities Inc, U.S. District Court, New York Southern District, No 11-cv-2598

(Editing by Kevin Drawbaugh and Leslie Adler)

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