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the establishment of scienter. In AFC Enterprises, however, the court rejected the

same argument being made by plaintiff here. The plaintiff in AFC Enterprises argued

that the scope and nature of a financial restatement suggested that the GAAP violations

were large enough and egregious enough to presume the Defendants’ constructive

knowledge of these violations. However, the court disagreed, explaining in part

the facts alleged . . . counsel against such a presumption. The size of the restatements, although substantial when gauged as against operating income and net income, is less overwhelming when placed in the context of AFC’s entire business operations. The accounting errors identified, although GAAP violations to be sure, were errors in accrual of income and expenses, not attempts to fabricate revenue or to conceal expenses. Neither the size nor the type of errors discovered in the restatements entitle the Plaintiffs or encourage the Court to infer fraud based on the GAAP violations alone. As to these Defendants, allegations of specific additional facts suggesting knowledge of the fraud are required to permit a strong inference of scienter.

Id. at 1372-1373.

The Court is required to weigh the competing inferences to be drawn from the

allegations of the CAC and may find proper pleading of scienter “only if a reasonable

person would deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.

No reasonable person could conclude that the Paisola E-mail gives rise to a “cogent”

inference that the Whitney Defendants knowingly or recklessly misrepresented its

deferred revenue, especially when an “opposing inference” can be drawn from the

Company’s evidenced willingness to promptly report discovered accounting issues

during the Class Period. As such, the CAC fails to properly plead scienter with respect

to plaintiff’s deferred revenues theory.

2. The Chargebacks Theory

24

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