The Chapter 11 filing also came one month after the investment firm Asensio & Co questioned Winstar's accounting.
Writing for a three-judge appeals court panel, Circuit Judge Raymond Lohier said that despite identifying "red flags" while spending 1,928 hours on the audit and assembling 3,000 pages of "working papers," Grant Thornton "repeatedly failed to scrutinize serious signs of fraud by an important client."
The judge said these signs included questionable timings of large transactions, which concealed declining core revenue, and Winstar's repeated failure to provide requested documents.
"A jury reasonably could determine that the audit was so deficient as to be highly unreasonable, representing an extreme departure from the standards of ordinary care," Lohier wrote.
The judge also said a jury could find that the steep decline in Winstar's share price in 2001, to 14 cents from more than $60 a year earlier, was attributable in part to the alleged fraud.
Jonathan Levine, a partner at Girard Gibbs representing Allianz and some other plaintiffs, said the case will return to the district court for a possible trial.
"We're obviously very pleased," he said. "You can't look at the quantity of the audit, but the quality."
Lucent is now part of France's Alcatel Lucent SA.
The case is Gould et al v. Grant Thornton LLP, 2nd U.S. Circuit Court of Appeals, No. 10-4028.
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