                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-17-2004

GSC Partners CDO v. Washington
Precedential or Non-Precedential: Precedential

Docket No. 03-2347




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Recommended Citation
"GSC Partners CDO v. Washington" (2004). 2004 Decisions. Paper 660.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/660


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                 PRECEDENTIAL                  Before: ROTH, MCKEE and
   UNITED STATES COURT OF                      CUDAHY* , Circuit Judges
           APPEALS
    FOR THE THIRD CIRCUIT                     (Opinion filed May 17, 2004)
        ______________
                                         Howard J. Kaplan, Esquire (Argued)
           No: 03-2347                   Stanley S. Arkin, Esquire
         _______________                 590 Madison Avenue
                                         35 th Floor
   GSC PARTNERS CDO FUND;                New York, NY 10022
GSC PARTNERS CDO FUND II, LTD;
     GSC RECOVERY II, L.P.,              Bruce H. Snyder, Esquire
                                         Sheppard A. Guryan, Esquire
                 Appellants              Lasser Hochman
                                         75 Eisenhower Parkway
                  v.                     Roseland, NJ 07068

   DENNIS R. WASHINGTON;                        Counsel for Appellants
 STEVEN G. HANKS; THOMAS H.
           ZARGES;                       Shannon M. Kasley, Esquire
ANTHONY S. CLEBERG; DAVID H.             Beth Heiftz, Esquire (Argued)
        BATCHELDER;                      Adrian Wager-Zito, Esquire
 LEONARD R. JUDD; ROBERT S.              Megyn M. Kendall, Esquire
         MILLER, JR.;                    Jones Day
  DORN PARKINSON; TERRY W.               51 Louisiana Avenue, N.W.
           PAYNE;                        Washington, D.C. 20001
JOHN D. ROACH; CREDIT SUISSE
            FIRST                        Robinson B. Lacy, Esquire (Argued)
 BOSTON CORPORATION; JOHN                Sullivan & Cromwell LLP
     DOES I THROUGH X                    125 Broad Street
                                         New York, New York 10004

Appeal from the United States District   Anthony J. Marchetta
                Court                    Pitney, Hardin, Kipp & Szuch LLP
   for the District of New Jersey        P.O. Box 1945
(D.C. Civil Action No.01-CV-04905)       Morristown, New Jersey 07962
 District Judge: Honorable Anne E.
             Thompson                    ___________________

      _____________________              *The Hon.Richard D. Cudahy, Circuit
                                         Judge for the United States Court of
   Argued on December 19, 2003           Appeals for the Seventh Circuit, sitting
                                         by designation.
Christopher J. Carey, Esquire                         Partners CDO Fund, Ltd., GSC Partners
David Blackwell, Esquire                              CDO Fund, Ltd. II, LTD., and GSC
Graham, Curtin & Sheridan                             Recovery II, L.P. (the plaintiffs) appeal the
Four Headquarters Plaza, P.O. Box 1991                district court’s dismissal of their action
Morristown, New Jersey 07962-1991                     against individual officers and directors of
                                                      Washington Group International, Inc.
George T. Manning, Esquire                            (Washington) and Credit Suisse First
Jones Day                                             Boston Corporation (CSFB).                      The
1420 Peachtree Street, N.E.                           plaintiffs filed this action under section
Atlanta, Georgia 30309-3053                           10(b), Rule 10b-5 of the Securities
                                                      Exchange Act of 1934 (the Act), alleging
       Counsel for Appellees                          that their purchase from CSFB of $48.8
                                                      million in notes, which Washington used
                                                      to finance its acquisition of Raytheon
                                                      Engineers & Constructors International,
                                                      Inc. (REC), was carried out pursuant to
              OPINION                                 defendants’ allegedly false and misleading
                                                      offering circular. Because the plaintiffs
                                                      failed to meet the heightened pleading
CUDAHY, Circuit Judge                                 requirements of the Act, we affirm the
                                                      district court’s grant of defendants’ motion
        The background of this case is the            to dismiss.
classic corporate love story. Company A                                      I.
meets Company B. They are attracted to                        Washington is an international
each other and after a brief courtship, they          engineering and construction firm that, in
merge. Investor C, hoping that the two                2000, employed approximately 39,000
companies will be fruitful and multiply,              workers and brought in approximately $5
agrees to pay $50 million for the wedding.            billion in annual revenue.1 App. at 41, 77.
Nine months later, however, things begin              Defendants Dennis R. Washington, Hanks,
to fall apart and the combined entity                 Zarges, Cleberg, Batchelder, Judd, Miller,
declares bankruptcy. Investor C feels                 Parkinson, Payne, and Roach were officers
misled. He believes that Company A                    and/or directors of Washington during the
knew that there were problems with                    acquisition process. App. at 38-9 (Cplt. ¶
Company B but that it made the oft                    14-23).
repeated mistake of thinking that it would                    Washington         r e pr e s e n t a ti v es
be able to change Company B for the
better. Investor C files suit in the district         1
                                                       Washington was known as Morrison
court and after his complaint is dismissed,           Knudsen Corporation (sometimes referred to
we find ourselves here. It is an old story            as MK) before the note offering. App. at 41.
but it never fails to elicit a tear.                  The company filed for bankruptcy
        In this case, appellants GSC                  protection in May 2001, and was not named
                                                      as a defendant in this action.

                                                -2-
commenced negotiations during the                     Power Producer (IPP) market,” as well as
summer of 1999 for the acquisition of                 in the rail, power, chemicals, metals
REC, the engineering and construction                 pharmaceutical, pulp and paper, chemical
division of Raytheon Company. App. at                 demilitarization, refinery and heavy
42 (Cplt. ¶ 37). After conducting an initial          maintenance markets. App. at 320. The
e x am i n a t io n o f RE C’s f inanc ial            team also noted that the personnel it
information, Washington submitted a non-              worked with had been “cooperative and
binding offer of between $775 and $875                forthcoming.” Id. at 317.
million for the business operations of
REC, subject to its findings in due                          The due diligence team expressed
diligence. App. at 42 (Cplt. ¶ 39).                   some concerns as well. It cited as among
Raytheon accepted this offer in September             R E C ’s general w eakn esses it s
1999. Id. at ¶ 41. Before finalizing the              “aggressive” and “optimistic” plans for
deal, Washington began its due diligence              sales volume and profit growth in certain
process, which entailed thorough scrutiny             businesses, the volatility of the company’s
of REC’s financial statements and                     working capital, the possible lack of
projections. Id. In this process, it received         accounting integrity of its unaudited
assistance from Arthur Andersen, L.L.P.               financial statements and its “[u]nderstated
Id. at ¶ 41. Meanwhile, the parties began             or undisclosed liabilities.” Id. at 319. In
negotiating a definitive agreement for the            particular, the team calculated that the
acquisition. Id. at ¶ 40. To augment this             profit projections for some of the
process, Washington employed defendant                construction projects were inaccurate. For
CSFB to act as its financial advisor for the          example, the team revised estimated profit
REC purchase. Id. at ¶ 40. CSFB                       projections for the “Pine Bluff” project
conducted its own due diligence and had               from $20.2 million to $3.1 million, for the
access to all of Washington’s due                     “SADAF” project from $4.2 million to
diligence findings as well. Id. at ¶ 43.              $0.8 million and for the Hudson Bergen
Throughout the due diligence process, the             project from $61.1 million to $46.9
two companies communicated their                      million. Id. at 326. At the same time,
findings and concerns to each other. Id.              however, Washington noted, that “[w]ider
                                                      leverage of proprietary technology” could
      On October 27, 1999, after one                  impr ove some of the pr o jects ’
month of interviews, document reviews                 deterio r a t in g m a r g i n s , a n d t h a t
and project site visits, Washington’s                 “[o]perational synergies offer [an] upside
management reported to the Washington                 to a combined new company.” Id. at 346.
Board its findings regarding the accuracy
of REC’s financial information. App. at                      On November 3, defendant Zarges
44 (Cplt. ¶ 46), 317. The team was                    sent a memorandum to other members of
impressed with the “[s]trong, capable                 the Washington management, elaborating
management team in place” and with                    on some of the perceived inaccuracies in
REC’s “solid position in [the] Independent            the project profit estimates but projecting

                                                -3-
that if the acquisition went through, even            bring them into compliance with Generally
taking into account the risks, the combined           Accepted Accounting Principles (GAAP).
entity could perform well in the                      Id. Hanks stipulated that in order to
engineering and construction industry.                remedy the discrepancies, it would be
App. at 362. Zarges first emphasized that             necessary to arrange for an increase in
the findings in the October 27 Board                  liabilities assumed by Raytheon of up to
presentation were not conclusive. Id. He              $100 million. Id.
wrote that, although the Umatilla and Pine
Bluff projects had been presented as                             The Washington Board met on
breakeven projects through 2001, they                 March 14, 2000 to consider the progress of
were at the time of the memo in “loss                 the due diligence team. App. at 548-88.
positions with deteriorating performance              The team again reported some concerns
trends.” App. at 364. The memorandum                  about REC’s financial health, but also
reiterated concerns about Raytheon’s                  expressed confidence that a partnership
aggressive plans and optimistic positions             with Washington would improve REC’s
on most projects, reporting inconsistencies           position, “having actually experienced
and shaky performance history. Id. at 365-            what it takes to turn a company around.”
66. Zarges concluded, however, that the               App. at 420, 422. The team reported risks
projected operating fee (i.e. profit) in 2000         involved in the acquisition of REC, citing
could, taking into account Washington’s               h i s to r i c a l pe r f or m a nc e t ha t w as
adjustments to REC’s calculations,                    characterized by large loss projects. Id. at
“provide an industry-leading margin of                554. The team revised the projected profit
3.8% on adjusted revenues.” App. at 362.              for the Umatilla project downward to
He added, “This . . . represents quite an             “22M loss, best case,” an adjustment of
improvement over recent performance                   $38 million from REC’s estimate. App. at
histories . . . [and] is no easy task.” Id.           559. It also adjusted the projected profit
                                                      for the Pine Bluff project from breakeven
         A month later, on December 2,                to a $20 million loss. Id. REC had
1 9 9 9 , d e f e ndan t Han ks sen t a               “[p]oor financial controls/accounting
memorandum to the Board on the progress               practices,” and the team suspected that
of the due diligence team. App. at 362.               there may have been inadequate
He reported that in order to address                  restructuring reserves in The Hague and in
Washington’s concerns about the accuracy              Houston. Id. at 554. The due diligence
of REC’s financial statements, Washington             team also revised REC’s projected
had hired PricewaterhouseCoopers L.L.P.,              EBITDA                (earnings before interest,
independent accountants, to audit the                 taxes, depreciation and amortization) for
financial statements for 1996, 1997, and              the year 2000, from $143 million to $115
1998, and to “review” the financial                   million, assuming that the combined
statement for 1999. App. at 207, 367.                 company would be indemnified by
These audited financial statements                    Raytheon against any downside from
required $350 million of adjustments to               Umatilla and Pine Bluff and that it “would

                                                -4-
incur 50% of the $60 million of                     Design and build services in the
vulnerabilities identified in the due               infrastructure market today.” Id. at 422.
diligence report.” Id. at 420-21, 567.              In addition, “[t]he combination of MK’s
                                                    industrial process unit with Raytheon’s
        In addition, the due diligence team         indu strial unit affords synerge tic
had encountered practical difficulties in           opportunities … and a greatly improved
completing the due diligence. Defendant             client base.” Id. at 422-23. He reported
Hanks recorded in his notes and reported            that the due diligence team was not in
to the board that “the due diligence and            complete agreement as to the value of
negotiation process has been a difficult            REC. Id. at 423. He highlighted some
one- Raytheon’s procedural rules limited            points on which they all agreed, however,
our opportunities for open and candid               including that “[t]he strengths of MK –
discussions with management, limited our            and the strengths of Raytheon are
ability to see company offices and projects         complementary” and that “the Markets that
… and Raytheon has not been cooperative             the combined MK/Raytheon will serve
with Washington Group’s attempts to                 going forward are the fastest growing
reconcile the [discrepancies between                segments of the industry.” Id. at 424. His
financial and operational reports and other         notes concluded by suggesting that
comparative data].” App. at 418, 552.               Washington should pursue the acquisition.
These limitations led Hanks to suspect that         Id.
Raytheon was “hiding serious business
issues and problems.” Id. The same                          Zarges’ April 3 memorandum was
concern had been recorded in the                    more positive about the team’s access to
November 3 memorandum, which noted                  data, reporting that the recent site visits
that the “team has been concerned about             were “more informative.” App. at 433.
the abrupt limits of the due diligence              Having been given more access to data,
process and data. With 2 ½ weeks to                 the team had been able to update its
evaluate data, the diligence was restricted         calculations about profit from operations.
to selected high-impact projects and                Its findings did confirm some losses. In
issues.” App. at 365.                               large part due to the lower profitability of
                                                    the Damshead Creek and San Roque
       Hanks also recorded in his                   projects, the team reduced its estimate of
presentation notes some high points                 REC’s 2000 operating fee from $63
disclosed by the due diligence process. He          million to $45 million. Id. at 433, 653,
wrote, “Raytheon’s Power Group is poised            655. A further memorandum dated July 6
to benefit greatly from the surge in                disclosed that for certain projects, the
demand for new power,” and expressed                “total MAC [material adverse changes]
confidence that “[t]he combination of               e s t i m a t e        –     p r o j e c t
MK’s contractors unit with Raytheon’s               deterioration/understated liabilities” was
Infrastructure business would create the            $73.5 million. App. at 657.
most experienced and powerful provider of                   It appears that throughout the due

                                              -5-
diligence process, the due diligence team                of $22 million. See Supp. App. (discussed
and the Washington Board communicated                    supra at n.1).
regularly and frankly about their
assessment of REC’s strengths and                                On July 7, 2000, Washington’s
weaknesses. At no point in this process                  acquisition of REC closed. App. at 52
did the Washington management express                    (Cplt. ¶ 82). The acquisition was primarily
the conviction that the acquisition would                financed through the $300 million note
prove a failure. In fact, the management                 offering, sold pursuant to a confidential
team took steps to remedy the weaknesses                 offering circular dated June 28, 2000. Id.
it pinpointed by renegotiating the purchase              at ¶¶ 86-7. The offering circular included
so as to avoid acquisition of liabilities and            certain audited financial statements as well
risky projects. App. at 81.                              as unaudited financial statements for the
                                                         first quarter of 1999 and the first quarter of
         On April 14, 2000, Washington                   2000. App. 286-96. Defendant CSFB was
entered into a Stock Purchase Agreement                  one of the lead underwriters and initial
with Raytheon and REC.              Id.     The          purchasers of the notes. App. at 53 (Cplt.
agreement specified that the purchase                    ¶ 88). It purchased $225 million in
price, which was to be based on the April                principal amount of the notes, then offered
30, 2000 balance sheet, would be                         and resold some of those notes to the
approximately $510 million—between                       petitioners, who purchased $48.8 million
$265 and $365 million less than                          face amount of notes. Id. (Cplt. ¶ 93).
Washington’s initial of fer.                 Id.
W a s h i n g to n w o u l d a c q u i r e t h e                 On October 23, 2000, Washington’s
enginee r i ng, design, procurement,                     Form 10-Q filing announced that as a
construction, operation and maintenance                  result of “a comprehensive review” of
business of REC, as well as the capital                  REC’s existing contracts, Washington
stock of certain REC subsidiaries. App. at               “reduced [REC’s] net assets relating to
51 (Cplt. ¶ 78). The purchase price                      long-term contracts in the preliminary
reflected the exclusion of the four most                 purchase price by approximately $325
significant REC loss projects, for which                 [million] . . . [and] had made reductions in
Raytheon had agreed to retain liability. Id.             net contract assets in the preliminary
at 51 (Cplt. ¶ 77), 81. Raytheon also                    purchase price allocation of approximately
agreed to “retain specified assets” of REC               $225 [million].” App. at 58-59 (Cplt. ¶
and to indemnify Washington for                          105). Washington also disclosed that it
“specified liabilities of REC and its                    had to record approximately $1.2 billion in
subsidiaries.”      App. at 81.           Later,         goodwill. Id. In a press release dated
Washington was able to get Raytheon to                   March 2, 2001, Washington disclosed that
retain partial liability for the Umatilla                “[s]everal [REC] projects had serious
project as well, which Washington had                    undisclosed problems and were in trouble”
predicted was in a position to show a loss               before it acquired REC. App. at 59 (Cplt.
                                                         ¶ 110). It noted that as of September 1,

                                                   -6-
2000, Washington had reduced REC’s                      Broselow v. Fisher, 319 F.3d 605, 607 (3d
assets and increased its liabilities by                 Cir. 2003). We also exercise plenary
approximately $700 million from the                     review over the district court’s
amounts originally estimated. App. at 60                interpretation of federal securities laws.
(Cplt. ¶ 111).      On March 8, 2001,                   See Oran v. Stafford, 226 F.3d 275, 281
Washington’s Form 8-K filing indicated                  n.2 (3d Cir. 2000); In re Westinghouse
that REC’s financial statements referred to             Sec. Litig., 90 F.3d 696, 706 (3d Cir.
in the circular should not be relied upon.              1996). We accept all allegations in the
Id. at ¶ 112.                                           plaintiffs’ complaint as true and draw all
                                                        reasonable inferences in favor of the non-
        On May 14, 2001, Washington and                 moving party. See Oran, 226 F.3d at 279.
some of its subsidiaries filed petitions in             A court may look beyond the complaint to
bankruptcy in the Bankruptcy Court in                   extrinsic documents when the plaintiffs’
Nevada for relief pursuant to Chapter 11 of             claims are based on those documents. See
the Bankruptcy Code. Id. at 61 (Cplt. ¶                 In re Burlington Coat Factory Sec. Litig.,
117). Washington also filed a complaint                 114 F.3d 1410, 1426 (3d Cir. 1997). A
in a Idaho state court against Raytheon                 court may not dismiss the complaint unless
alleging fraudulent inducement, fraud and               it appears beyond doubt that the plaintiffs
misrepresentation, requesting rescission or             can prove no set of facts in support of their
specific performance. App. at 455-81.                   claims that would entitle them to relief.
That suit was apparently settled in                     See In re Rockefeller Ctr. Props., Inc. Sec.
November 2001, and is under a                           Litig., 311 F.3d 198, 215-16 (3d Cir.
confidentiality restriction. Pl. Br. at 17              2002).
n.4. Plaintiffs commenced this action
alleging violation of federal and state                         The plaintiffs allege a violation
securities laws. Id. at 37-8. In January                under Section 10(b) of the 1934 Securities
2002, the defendants filed a motion to                  Exchange Act and Rule 10b-5 under it. In
dismiss plaintiffs’ amended complaint.                  order to state a claim under Rule 10b-5,
Although no formal discovery had taken                  plaintiffs must allege “with particularity”
place in the civil action, the plaintiffs were          that defendants (1) made a misstatement or
a b l e t o o b t a in a c c e s s t h ro u g h         omission of material fact (2) with scienter
Washington’s bankruptcy to documents                    (3) in connection with the purchase or the
discussed in the instant opinion. The                   sale of a security (4) upon which the
district court granted the defendants’                  plaintiffs reasonably relied and (5) the
motion, holding that the complaint failed               plaintiffs’ reliance was the proximate
to state a cause of action for securities               cause of their injury. Semerenko v. Cedant
fraud. App. at 1. This appeal followed.                 Corp., 223 F.3d 165, 174 (3d. Cir. 2000);
                      II.                               see also In re Westinghouse, 90 F.3d at
        We exercise plenary review over                 710.
the district court’s decision to grant the                      The plaintiffs’ securities fraud
defendants’ motions to dismiss. See                     claim is also subject to heightened

                                                  -7-
pleading requirements. Under Federal Rule            Advanta Corp. Sec. Litig., 180 F.3d 525,
of Civil Procedure 9(b), “[i]n all averments         531 n.5 (3d Cir. 1999)).
of fraud . . . , the circumstances
constituting fraud . . .shall be stated with                 The plaintiffs may establish a
particularity. Malice, intent, knowledge,            “strong inference” that the defendants
and other condition of mind of a person              acted with “scienter” “either (a) by
may be averred generally.” Fed. R. Civ. P.           alleging facts to show that defendants had
9(b). This particularity requirement is              both motive and opportunity to commit
“rigorously applied in securities fraud              fraud, or (b) by alleging facts that
cases.” Burlington, 114 F.3d at 1417. The            constitute strong circumstantial evidence
Private Securities Litigation Reform Act             of conscious misbehavior or recklessness.”
(PSLRA), 15 U.S.C. § 78u, “imposes                   In re Burlington, 114 F.3d at 1418
another layer of factual particularity to            (quoting Acito v. IMCERA Group, Inc., 47
allegations of securities fraud.” In re              F.3d 47, 53 (2d Cir. 1995)); see also In re
Rockefeller, 311 F.3d at 217.           If a         Advanta, 180 F.3d at 534-35; Oran, 226
complaint fails to comply with the                   F.3d at 288-89.
PSLRA’s pleading requirements, dismissal             A.      Motive and opportunity
is mandatory. 15 U.S.C. § 78u-4(b)(3)(A).                    Motive must be supported by facts
The PSLRA requires the complaint to                  stated “with particularity,” and must give
specify “each statement alleged to have              rise to a “strong inference” of scienter. In
been misleading, the reason or reasons               re Advanta, 180 F.3d at 535; 15 U.S.C. §
why the statement is misleading, and, if an          78u-4(b)(2). “Blanket assertions of motive
allegation regarding the statement or                and opportunity” will not suffice, and
omission is made on information and                  “catch-all allegations that defendants stood
belief, the complaint shall state with               to benefit from wrongdoing and had the
particularity all facts on which that belief         opportunity to implement a fraudulent
is formed.” 15 U.S.C. § 78u-4(b)(1).                 scheme are no longer sufficient, because
                                                     they do not state facts with particularity or
        With regard to the “scienter”                give rise to a strong inference of scienter.”
component of the 10b-5 claim, the critical           In re Advanta, 180 F.3d at 535. Moreover,
issue before this Court, the PSLRA further           “[m]otives that are generally possessed by
requires the plaintiffs, “with respect to            most corporate directors and officers do
each act or omission,” to “state with                not suffice; instead, plaintiffs must assert
particularity facts giving rise to a strong          a concrete and personal benefit to the
inference that the defendant acted with the          individual defendants resulting from this
required state of mind.” 15 U.S.C. § 78u-            fraud.” Kalnit v. Eichler, 264 F.3d 131,
4(b)(2). This particularity requirement              139 (2d Cir. 2001) (citation omitted).
supersedes Rule 9(b)’s provision allowing
state of mind to be averred generally. See                   In their amended complaint, the
In re NAHC, Inc. Sec. Litig., 306 F.3d               plaintiffs allege that the defendants’
1314, 1328 (3d Cir. 2002) (citing In re              motive to commit fraud was that

                                               -8-
Washington “would not have been able to               Morris Cos., 75 F.3d 801, 813-14 (2d Cir.
acquire REC without the successful                    1996) (finding that a “company's desire to
issuance of the Notes,” and would not                 maintain a high bond or credit rating”
have been able to sell any of the notes at or         insufficient motive for fraud because such
near the price sought “had the true                   motive could be imputed to any company);
financial condition of the REC been                   Tuchman v. DSC Communications Corp.,
revealed in the Circular.” Pl. Br. at 32;             14 F.3d 1061, 1068 (5th Cir. 1994)
App. at 37, 53 (Cplt. ¶¶ 7, 86, 89).                  (“[I]ncentive compensation can hardly be
Further, the complaint suggests that                  the basis on which an allegation of fraud is
because defendant Dennis Washington                   predicated.”) (citation omitted); Herzog v.
received stock options in 1999 after                  GT Interactive Software Corp., 98 Civ.
Washington acquired Westinghouse, it can              0085, 1999 WL 1072500, at *9 (S.D.N.Y.
be inferred that he would receive stock               Nov. 29, 1999) (holding that a defendant's
options after the present merger. See App.            “‘desire to consummate [a] corporate
at 41, (Cplt. ¶ 36). Plaintiffs argue that            transaction does not constitute a motive for
these alleged stock options provided                  securities fraud’”); Leventhal v. Tow, 48
Washington with an additional motive to               F. Supp. 2d 104, 115 (D. Conn. 1999)
commit fraud. These allegations are                   (“[T]he allegation that the defendants
insufficient.                                         artificially inflated Citizens’ stock price in
                                                      order to ‘protect and enhance their
         In every corporate transaction, the          executive positions’ and ‘negotiate as
corporation and its officers have a desire to         favorable a deal as possible’ on a pending
complete the transaction, and officers will           employment contract also fail[s] to give
usually reap financial benefits from a                rise to a strong inference of scienter. This
successful transaction. Such allegations              motive has been rejected routinely.”);
alone cannot give rise to a “strong                   Thacker v. Medaphis Corp., 97 Civ. 2849,
inference” of fraudulent intent. See In re            1998 WL 684595, at *3 (S.D.N.Y . Sept.
Burlington, 114 F.3d at 1424; see also                30, 1998) (finding plaintiff’s claim that
Phillips v. LCI Int'l, Inc., 190 F.3d 609,            defendant was motivated by a desire to
623 (4th Cir. 1999) (“Similar situations              eliminate competitors and to acquire
arise in every merger; thus, allowing a               related companies insufficient to plead
plaintiff to prove a motive to defraud by             scienter because such motive could be
simply alleging a corporate defendant's               imputed to any corporate officer).
desire to retain his position with its
attendant salary, or realize gains on                        Although the allegation is not
company stock, would force the directors              apparent from the complaint, plaintiffs
of virtually every company to defend                  now argue that CSFB had a motive to
securities fraud actions every time that              commit fraud because it stood to receive
c o m p a n y effected a m erger o r                  underwriting and financial advisory fees.
acquisition.”); San Leandro Emergency                 This allegation is undoubtedly true but
Med. Group Profit Sharing Plan v. Philip              equally unavailing. See M elder v. Morris,

                                                -9-
27 F.3d 1097, 1104 (5th Cir. 1994)                    (quoting Beck v. Mfrs. Hanover Trust Co.,
(declining to find scienter where plaintiffs          820 F.2d 46, 50 (2d Cir. 1987)).
alleged that underwriters’ motive in
participating in fraud was to collect fees);                 A reckless statement is a material
Schnell v. Conseco, Inc., 43 F. Supp. 2d              misrepresentation or omission “‘involving
438, 449 (S.D.N.Y. 1999) (“[A]n                       not merely simple, or even inexcusable
underwriter's alleged motive to earn its              negligence, but an extreme departure from
underwriting fees is not alone sufficient to          the standards of ordinary care, and which
sustain a strong inference of fraudulent              presents a danger of misleading buyers or
intent. If it were, every underwriter, law            sellers that is either known to the
firm, accountant, and investment advisor              defendant or is so obvious that the actor
whose compensation or commission                      must have been aware of it.’” In re
depended on the completion of an initial              Advanta, 180 F.3d at 535 (quoting McLean
public offering would have a motive to                v. Alexander, 599 F.2d 1190, 1197 (3d Cir.
commit fraud, which would make Rule                   1979)).
9(b) wholly meaningless.”) (quoting
Fisher v. Offerman & Co., Inc., No. 95                       The plaintiffs argue that they
Civ. 2566, 1996 WL 563141 at *6                       “alleged specific information transmitted
(S.D.N.Y. Oct. 2, 1996)). Therefore,                  to Defendants prior to issuance of the
plaintiffs have failed to meet the scienter           Offering Circular and sale of the Notes
requirement by pleading motive and                    that contradicted representations made in
opportunity to commit fraud on the part of            t h e C i r c u l a r , id e n t i f y i n g w h o
any of the defendants.                                communicated them to whom, when, and
                                                      how.” Pl. Br. at 23. In other words, it is
B.     Recklessness or conscious                      the plaintiffs’ position that the defendants
       misbehavior                                    had actual knowledge of the falsity of their
                                                      statements in the circular at the time they
       Because the plaintiffs have not                were made. It is certainly true that “in a
adequately pleaded that the defendants had            non-disclosure situation, any required
both motive and opportunity to commit                 element of scienter is satisfied where . . .
fraud, their complaint will survive the               the defendant had actual knowledge of the
motion to dismiss only if they allege                 material information.” Fenstermacher v.
specific facts that constitute “strong                Phila. Nat’l Bank, 493 F.2d 333, 340 (3d
circumstantial evidence of conscious                  Cir. 1974); see also In re Advanta, 180
misbehavior or recklessness.” Oran, 226               F.3d at 535.
F.3d at 288-289; Kalnit, 264 F.3d at 142
(“Where motive is not apparent, it is still                   Of course, it is not enough for
possible to plead scienter by identifying             plaintiffs to merely allege that defendants
circumstances indicating conscious                    “knew” their statements were fraudulent or
behavior by the defendant, though the                 that defendants “must have known” their
strength of the circumstantial allegations            statements were false. See In re Digital
must be correspondingly greater.”)                    Island Sec. Litig., 357 F.3d 322, 328-29
                                               -10-
(3d Cir. 2004); Rombach v. Chang, 355                         The plaintiffs allege a number of
F.3d 164, 176 (2d Cir. 2004) (finding no             different affirmative misstatements that
scienter where plaintiffs did “not allege            form the basis of their 10b-5 claim. First,
facts and circumstances that would support           the plaintiffs argue that the circular was
an inference that defendants knew of                 misleading in including REC’s financials
specific facts that are contrary to their            for the 2000 stub period which indicated
public statements”); Bovee v. Coopers &              “that as of April 2, 2000, REC had
Lybrand C.P.A., 272 F.3d 356, 361 (6th               liabilities of $1,279,333.” Reply Br. at 6;
Cir. 2001) (“Plaintiffs may not simply rely          Pl. Br. at 26-7; App. at 288. To establish
on the proposition that Defendants must              that Washington had actual knowledge to
have known or should have known of, and              the contrary, plaintiffs refer to a comment
participated in, the fraud.”). Plaintiffs            in Washington’s October 27, 1999
must plead allegations of scienter with              presentation which indicated that REC had
particularity. See 15 U.S.C. § 78u-4(b)(2).          “understated or undisclosed liabilities.”
They must support their allegations with             See App. at 44 (Cplt. ¶ 48), App. at 319.
the essential factual background that                However, this comment could not have
would accompany “the first paragraph of              been made in reference to the financial
any newspaper story”—that is, the “who,              statements for the stub period between
what, when, where and how” of the events             January and April 2000, since those
at issue. In re Burlington, 114 F.3d at              statements would not have been available
1422 (citing DiLeo v. Ernst & Young, 901             in October of 1999. See App. at 47 (Cplt.
F.2d 624, 627 (7th Cir.1990)).                       ¶ 59-60) (noting that as of December 2,
                                                     1999 “Washington Group had ‘requested
        Although the plaintiffs argue that           “audited” financials for RE&C for years
they have demonstrated that the defendants           1996, 1997, and 1998 and “reviewed”
had “actual knowledge” that their public             financial statements for the stub period
statements were false and misleading at              from January 1 to September 30, 1999.’”).
the time in which they were made, the                Moreo ver, in the Oc tobe r 27th
plaintiffs have failed to plead with                 presentation, Washington was referring to
particularity facts that so demonstrate.             understated liabilities in REC’s unaudited
The plaintiffs point to many statements              financial statements.        App. at 319
that the individual defendants made during           (referring to “[a]ccounting integrity of
the due diligence period as evidence that            financial statements (unaudited) provided
they had actual knowledge that their                 to date”). These statements were later
circular statements were false and                   audited and adjusted to comply with
misleading. However, these statements                GAAP before they were incorporated into
made during the due diligence period                 the circular. App. at 367. Plaintiffs
cannot be connected directly to any                  present no evidence that Washington had
misleading statement in the offering                 actual knowledge that the audited
circular.                                            statements were inaccurate during the
        1.     Liabilities                           relevant time period.

                                              -11-
        Plaintiffs also rely on their                   Washington indicated its belief that several
complaint allegation that “[a]s of January              of REC’s many contracts were overvalued.
4, 2000, Wash ington Group and                          Id. (citing App. 45-51 (Cplt. ¶¶ 50, 54, 72-
Defendants knew that REC’s financial                    76)). Again, in some of these documents,
statements of September 30, 1999                        Washington was referring to REC's
overstated assets by approximately $275                 unaudited statements which were later
million and understated liabilities by $145             audited before inclusion in the circular and
million.” Reply Br. at 6; App. at 47-48                 the other documents focused on projects
(Cplt. ¶ 62). The plaintiffs, however, do               for which Washington was later
not provide any source to connect this                  indemnified.2     Moreover, there is no
accusation to record evidence. In other
words, plaintiffs have failed to plead with                2
                                                              Appellees filed a Motion for Leave
particularity. See In re Party City Sec.
                                                        to File a Supplemental Appendix
Litig., 147 F. Supp. 2d 282, 300 (D.N.J.
                                                        containing an Ancillary Letter
2001) (“Simply referring to a series of
                                                        Agreement revealing that Washington
public statements and then alleging, in a
                                                        was partially indemnified against loss
general and conclusory manner, that those
                                                        regarding one of REC’s projects.
disclosures were false or misleading is
                                                        Appellants oppose this motion. “We
insufficient.”). Plaintiffs do not even
                                                        decide on a case-by-case basis whether
mention whether, in this paragraph, they
                                                        an appellate record should be
are referring to REC’s audited or
                                                        supplemented. Even when the added
unaudited statements. Moreover, any
                                                        material will not conclusively resolve an
knowledge Washington may have had
                                                        issue on appeal, we may allow
regarding the accuracy of the 1999
                                                        supplementation in the aid of making an
financial statements is of little relevance in
                                                        informed decision.” Schwartz v. Million
determining whether Washington had
                                                        Air, Inc., 341 F.3d 1220, 1225 n.4 (11th
actual knowledge that the statements from
                                                        Cir. 2003). The Ancillary Letter
the later stub period were inaccurate.
                                                        Agreement, while not crucial to the
                                                        instant decision, helps explain
       2.Contracts in progress
                                                        Washington’s motive for not discussing
                                                        its concerns with respect to this particular
        Similarly, the plaintiffs argue that
                                                        project in the circular. Therefore, we
the circular was misleading in that REC’s
                                                        find that the agreement will aid the Court
unaudited financials for the 2000 stub
                                                        in making an informed decision.
period indicated “that as of April 2, 2000,
                                                        Appellants do not question the validity or
REC’s ‘contracts in process’ had a value
                                                        authenticity of the agreement nor do they
of $638,881,000.” Reply Br. at 6; GSC
                                                        argue that they would be prejudiced in
Br. at 26; App. at 288. To show that
                                                        any way by our consideration of the
Washington knew this statement was
                                                        agreement. Appellants do not even argue
misleading, plaintiffs refer us to various
                                                        that they are unfamiliar with the
documents Washington produced during
                                                        agreement. See, e.g., Kalimian v. Liberty
its due diligence period, in which
                                                        Mutual Fire Ins. Co., 300 F.2d 547, 549
                                                 -12-
indication that any of Washington’s                            3 .F o u r p r o j e c ts d evia te
documents referred to the April 2000 stub              significantly
period or to any other value appearing in                      The plaintiffs also take issue with a
the circular, and in none of these                     statement in the circular indicating that
documents does Washington provide an                   four projects for which REC retained
estimate of the total value of REC’s                   liability “deviate significantly and are not
contracts in progress. For both of these               representative of other contracts being
reasons, there is no way to know whether               acquired.” Pl. Br. at 29, quoting App. at
Washington would have disagreed with                   126. Plaintiffs argue that this statement
REC’s April valuation at the time the                  was misleading because defendants knew
circular was issued.                                   “that numerous other projects were also
                                                       misestimated, likely to incur costly
        In any case, Washington made it                overruns that were uncollectible and were
plain in the circular that REC’s accounting            losing money.” Id. First, a fair reading of
for these contracts was aggressive, when it            this excerpt from the circular is that these
warned that “REC revenue recognition                   four projects deviated significantly
policies are significantly different from              because of (a) the extent of loss already
those used by MK on certain contracts                  incurred on each project; (b) “the reversal
where significant components are procured              of previously-recognized profit”; and (c)
in advance of installation. . . . REC’s                “the establishment of reserves for future
revenue recognition policy on such                     losses.” Id.; In re Burlington, 114 F.3d at
contracts generally result in more revenue             1426 (noting that if plaintiffs rely on
recognition in the early stages of a                   extrinsic documents in their complaint, the
contract.” App. at 126. It also suggested              documents must be understood in their
that this difference could be critical when            entirety). Plaintiffs have failed to identify
it noted that "[t]he loss of one or more               any evidence suggesting that Washington
major contracts, or our inability to perform           believed that other contracts equally met
profitably under one or more major                     these three criteria. To the contrary,
contracts . . . could have a material adverse          plaintiffs concede in their complaint that
effect on our businesses, financial                    these projects are distinguishable, referring
condition, results of operation and cash               to them as “the four most significant loss
flows." App. at 94.                                    projects.” App. at 51 (Cplt. ¶ 77). Finally,
                                                       because Raytheon ultimately retained
                                                       liability for at least one additional project
                                                       that plaintiffs alle ge “ de via te[d]
(2d Cir. 1962) (“[T]his court is free to
                                                       significantly,” any misleading statements
consider facts which have been admitted
                                                       based on that project is immaterial as a
in argument and in the briefs on appeal . .
                                                       matter of law. See In re NAHC, Inc. Sec.
. .”). To the contrary, appellants argue
                                                       Litig., 306 F.3d 1314, 1330 (3d Cir. 2002)
that the agreement actually supports their
                                                       (“If the disclosure of certain information
case. Reply Br. at 5-6. For these
                                                       has no effect on stock prices, it follows
reasons, we grant appellees’ motion to
file their supplemental appendix.
                                                -13-
that the information disclosed              was            difficult to predict the extent of the loss”).
immaterial as a matter of law.”).
                                                                   On top of this, the circular
        4.Collection is probable                           statement was qualified through the use of
                                                           the word “probable” and was accompanied
          The plaintiffs also argue that the               by cautionary language, which indicated
circular was misleading in stating that                    that “[t]he settlement of these amounts
“[u]napproved change orders and claims .                   depends on individual circumstances and
. . are included in contracts in process at                negotiations with the coun terparty;
their estimated realizable value. [REC]                    accordingly, the timing of the collection
has a contractual or legal basis for                       will vary and approximately $235 million
pursuing recovery of these unapproved                      of collections are expected to extend
change orders and claims and has                           beyond one year.” App. at 277. Any
determined that collection is probable.”                   reasonable reading of this statement,
Pl. Br. at 28 (quoting App. at 277, 293);                  would make one skeptical about the
see also Pl. Br. at 7. Plaintiffs suggests                 recovery of the full $235 million.
that Washington knew this statement was                    Similarly, as noted supra, the circular
false, because in a March 27, 2000                         emphasized that REC took an aggressive
memorandum it indicated that it believed                   approach to revenue recognition. App. at
the recovery percentage for one particular                 126. When viewed in this context, we do
project would be “poor” and that                           not believe that the plaintiffs have
attempted recovery could result in a loss of               adequately alleged that any knowing
between $22 and $60 million. App. at                       misstatement Washington may have made
429. It should be noted, however, that the                 in print here was material. This is
circular refers to a total of $581 million                 especially true given that Washington was
worth of change orders and claims. App.                    at least partially indemnified by Raytheon
at 276. Therefore, plaintiffs’ argument                    for losses associated with the very project
comes down to the fact that Washington                     discussed in the March 27th memorandum.
actually believed that between 3.8 and 10                  See Supp. App.
percent of these contracts were not                                In any case, because the statement
recoverable.             As far as we know,                about collectability is a prediction of the
Washington believed collection was                         likelihood of collection on change orders
probable for at least 90-96 percent of these               and claims, it is a classic forward-looking
change orders. Moreover, far from having                   statement.        See 15 U .S.C . 78u-
actual knowledge that between $22 and                      5c(4)(I)(1)(A) (defining a forward-looking
$60 million of change orders would be                      statement, in part, as “a statement
u n c o l l ec t i b le , t h e M a r c h 2 7 t h          containing a projection of revenues,
memorandum suggests a lack of certainty                    income (including income loss), earnings
or confidence in W ashington’s predictions.                (including earnings loss) per share, capital
App. at 428 (“[P]rojects results are                       expenditures, dividends, capital structure,
difficult to quantify”); Id. at 429 (“[I]t is              or other financial items”); see also In re
                                                           Kindred Healthcare, Inc. Sec. Litig., No.
                                                    -14-
02CV-600-H, 2004 WL 77850 at *9 (W.D.                        Therefore, this statement is
Ky. 2004) (“The amount Kindred keeps in
reserves to cover liability claims is                         protected by the statutory safe-
necessarily a prediction about its future             harbor. See 15 U.S.C. 78u-5c.
claims experience . . . [which] could only
be verified when liability claims were                       5.Goodwill
actually filed, litigated to conclusion, or
settled. It would seem rather beyond                          Plaintiffs also raise the statement in
argument that such projections . . . are              the circular that: “[a]djustments to the
forward-looking within the meaning of the             purchase price . . . are expected to have no
PSLRA.”); In re Smith-Gardner Sec.                    effect on goodwill.” Pl. Br. at 28; App. at
Litig., 214 F. Supp. 2d 1291, 1296 (S.D.              111. Plaintiffs argue that this statement is
Fla. 2002) (finding that defendant’s                  false because “[d]efendants already knew
statement was protected as forward-                   that the true value of REC was
looking where “[p]laintiffs . . . allege[d]           significantly lower than the purchase price,
that Defendants either knew or were                   which would require further allocation of
severely reckless in disregarding that                goodwill.” Id. Regardless of this alleged
Smith Gardner would not receive full                  knowledge, howe ver, the circula r
payment from [a customer], based on the               statement would only be false or
unpaid receivable balance of $1.5                     misleading if Washington knew at the time
million.”).     Moreover, we find the
accompanying cautionary language to be
                                                      the safe harbor provision, protects
sufficient in this case.          See EP
                                                      forward-looking statements that are
Medsystems, Inc. v. EchoCath, Inc., 235
                                                      accompanied by meaningful cautionary
F.3d 865 , 873 (3d Cir . 2000)
                                                      statements from liability). Cautionary
("[C]autionary language, if sufficient,
                                                      language must be “extensive and
renders the alleged omissions or
                                                      specific.” Semerenko v. Cendant Corp.,
misrepresentations immaterial as a matter
                                                      223 F.3d 165, 182 (3d Cir. 2000)
of law.") (quoting In re Donald J. Trump
                                                      (quoting In re Trump, 7 F.3d at 369.
Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir.
                                                      This Court in In re Trump explained:
1993)). 3
                                                      “[A] vague or blanket (boilerplate)
3
  The PSLRA requires forward-looking                  disclaimer which merely warns the
statements to be accompanied by                       reader that the investment has risks will
“meaningful cautionary statements” in                 ordinarily be inadequate to prevent
order for safe harbor protection to apply.            misinformation. To suffice, the
The cautionary language should be                     cautionary statements must be
“directly related to the alleged                      substantive and tailored to the specific
misrepresentations,” but it does not have             future projections, estimates or opinions
to “actually accompany the alleged                    in the prospectus which the plaintiffs
misrepresentation.” EP Medsystems, Inc.,              challenge.” Id. at 182 (quoting In re
235 F.3d at 874 (referring to the                     Trump, 7 F.3d at 371-72).
“bespeaks caution” doctrine which, like
                                               -15-
it made the statement (a) that it was going            “[d]efendants had already discovered
to make adjustments to the purchase price              significant additional liabilities.” Pl. Br. at
in the future and (b) that those adjustments           28-29; App. at 93. This argument is
would not track the value of REC.                      frivolous. First, this statement in the
Plaintiffs have neither alleged nor have               circular is included in a long discussion of
they presented any evidence of such                    risks associated with the company, and in
knowledge.       Moreover, none of the                 that context, it is true and not misleading.
documents relied upon by plaintiffs                    Moreover, none of the documents upon
suggests that Washington even had actual               which the plaintiffs rely suggests that
knowledge that additional goodwill would               Washington had actual knowledge that
ultimately have to be recorded.4 The mere              there were significant additional liabilities
fact that the amount of additional goodwill            which were not already reflected in the
that later had to be recorded was                      circular, or for which Washington had not
substantial is not enough, on its own, to              been indemnified. App. at 93 (noting in
infer either actual knowledge or                       the circular that Washington “generally
recklessness. See Kushner v. Beverly                   seek[s] to minimize the impact of . . .
Enters., 317 F.3d 820, 829 (8th Cir. 2003).            liabilities by obtaining indemnities and
Additionally, this is another forward-                 warranties from the seller.”)
looking statement accompanied by
meaningful cautionary language, and is                        7.Due diligence
therefore protected by the statutory safe-
harbor. See, e.g., App. at 93 (warning that                    Finally, plaintiffs raise various
acquisitions “may involve risk of                      omissions wh ich fa ll within two
undisclosed liabilities”).                             categories. First, plaintiffs allege that
                                                       Washington failed to disclose that its due
       6.Undiscovered liabilities                      diligence had been obstructed. While it is
                                                       clear that REC initially obstructed
       The plaintiffs argue that the circular          Washington’s due diligence, it seems that
was misleading in stating that “[t]here may            by the issuance of the circular, Washington
be liabilities of acquired companies,                  believed, perhaps mistakenly, that it had
including REC, that we fail or are unable              been given adequate access. See, e.g., Due
to discover during our due diligence                   Diligence Memorandum of April 3, 2000,
investigation” because as plaintiffs allege,           App. at 653 (noting that “[i]n most cases
                                                       the first visits were not conclusive because
4
                                                       site performance info rmatio n was
  Similarly, none of the documents relied              restricted. The recent update visits were
upon by plaintiffs suggest that                        more informative.”). Although we do not
Washington had actual knowledge                        mean to suggest approval of the practice,
contradicting its statement that “[t]he                we note that it is not uncommon for a
acquisition of REC will double                         target to be somewhat uncooperative with
[Washington’s] size in terms of revenues               respect to due diligence requests from a
and backlog.” Pl. Br. at 27; App. at 117.              potential acquirer.        See, e.g., Larry
                                                -16-
Schnapf, Cost Effective Due Diligence In               unaudited financial statements for the first
Corporate Mergers and Acquisitions, 15                 quarter of 2000 should not be relied on.”
Nat. Resources & Env't 80 at 83 (2000)                 Reply Br. at 7. First, we reiterate our
(noting that even in a friendly takeover,              earlier finding that plaintiffs have
the target company may be reluctant to                 presented no evidence that Washington
share information that may cause a party to            had actual knowledge that the unaudited
back out of a deal, renegotiate the price or           financial statements for the 2000 stub
that may end up having repercussions if                period were unreliable. The plaintiffs’
the transaction collapses). Often this                 argument appears to be, however, that
tendency towards secrecy relates to a                  Washington was reckless in disclosing
concern, that if the deal falls through, the           REC’s unaudited financial statements
acquirer might use the target’s secrets to             knowing that its earlier unaudited
better compete with it, or that the target             statements evidenced poor accounting.
will be otherwise disadvantaged. Id. In                This argument is not without some
such situations, as here, the target will              support.
often become more cooperative and candid
the closer the deal gets to becoming a                         In In re Lucent Tech., Inc. Sec.
reality. We see no evidence in this case,              Litig., 217 F. Supp. 2d 529 (D.N.J. 2002),
however, that Washington believed its due              the court found recklessness under similar
diligence had been materially obstructed at            circumstances. In Lucent, plaintiffs argued
the time of the circular, nor do we believe            that “Lucent management was already
that Washington would have gone through                aware that revenues had been inflated in
with this acquisition had it believed this to          previous quarters, and that they learned of
be the case.5 There is simply nothing to               these earlier accounting improprieties, at
suggest that Washington was on a suicide               the latest, during the third quarter.” Id. at
mission in this acquisition.                           554 (citations omitted). As here, plaintiffs
                                                       in Lucent claimed that “Defendants would
       8.Poor financial accounting                     have been at least reckless in reporting
                                                       financial results for the third quarter
      Plaintiffs allege that Washington                without first determining whether those
“knew, but did not disclose, that Raytheon             results were also inflated.” Id. The
and REC had poor financial accounting,                 district court agreed, finding that “[i]f
which necessarily entailed that the                    Defendants were aware that accounting
                                                       manipulations occurred during the first
   5                                                   two quarters of 2000, then, conceivably,
     In fact, we doubt that we would be
                                                       they may have been reckless in blindly
able to uncover any offering circular
                                                       reporting results for the following quarter,
which cautioned that due diligence had
                                                       and proof of recklessness is enough.” Id.
been materially obstructed by the target
and that this issue was still unresolved,
                                                              While such a scenario may very
given that it seems unlikely that any
                                                       well constitute recklessness under the facts
acquirer would proceed with an
                                                       of Lucent, we do not believe that
acquisition under such circumstances.
                                                -17-
Washington’s conduct here rises to the                    substituted different financial statements.
“extreme departure from the standards of                  At most, it could have included an
ordinary care” which is required for a                    additional cautionary note. While the
finding of recklessness. In re Advanta,                   inclusion of such a note may have been a
180 F.3d at 535 (quoting McLean, 599                      good idea, we do not believe its omission
F.2d at 1197). First, the circular contained              rises to the level of recklessness required
both audited and unaudited financial                      under the PSLRA.
statements for some overlapping periods as
well as for periods closely linked in time.                         In conclusion, plaintiffs have failed
See, e.g., App. at 126, 288. Therefore, to                to plead with particularity the required
the extent that the unaudited statements                  e l e m e n t o f s c i e nt e r , e i t h er b y
were out of line with the audited                         demonstrating motive and opportunity,
statements, this deviation could be                       conscious misbehavior or recklessness.
deduced from the circular itself, obviating               Therefore, the district court properly
the need for a special note.                              granted Washington's motion to dismiss.

       S e c o n d , a s n o t e d ea r l ie r ,          C.      Credit Suisse First Boston
Washington disclosed in the circular that
REC’s accounting was aggressive. App. at                          The plaintiffs allege that CSFB
126. This would give any reasonable                       conducted its own due diligence, had
investor pause before relying on REC’s                    access to Washington’s due diligence and
unaudited statements. Third, plaintiffs                   communicated with Washington about due
have shown at most that Washington                        diligence findings. They further allege
believed REC had “poor” accounting                        that, because CSFB had access to and
practices. App. at 554 (March 14, 2000                    shared information with Washington,
presentation) (noting that REC had “[p]oor                CSFB “knew and/or recklessly disregarded
financial controls/accounting practices”).                all of the information known by
In contrast, in Lucent, plaintiffs alleged                Washington Group and the other
that before it reported its earnings for the              Defendants.” App. at 43, 53 (Cplt. ¶¶ 43,
fourth quarter, Lucent already knew that it               85). This a bare bones allegation, and the
“had improperly booked hundreds of                        plaintiffs fail to specify which statements
millions of dollars of revenue on sales to                CSFB knew were false or misleading.
customers in situations where customers                   Furthermore, as noted supra, an allegation
had not ordered products”— clearly a more                 that CSFB “must have known,” because of
egregious allegation. In re Lucent Tech.,                 its relationship with Washington, that a
217 F. Supp. 2d at 538. Finally, in Lucent,               statement was false or misleading, is
the alleged manipulations were in the                     insufficient to raise a “strong inference”
company’s own balance sheet, rather than                  that CSFB acted recklessly or with
on the balance sheet of the company to be                 conscious misbehavior. See In re Advanta,
acquired, as in this case. Therefore, unlike              180 F.3d at 539. The plaintiffs cannot
Lucent, Washington realistically could not                satisfy the scienter requirement by
have revised REC’s financial statements or                grouping CSFB with the Washington
                                                   -18-
defendants. Oran, 226 F.3d at 290; In re                 D.     Dismissal with prejudice
Advanta, 180 F.3d at 539 (“Generalized
imputations of knowledge do not suffice .                        The plaintiffs ask that the case be
. .”). Regardless, since the plaintiffs have             remanded with instructions to allow them
failed to show scienter with respect even to             to replead, yet they “do not specify what
Washington, the plaintiffs certainly cannot              additional facts, if any, they would plead if
establish scienter with respect to CSFB,                 given another opportunity to amend their
since the plaintiffs have made no                        Complaint.” In re NAHC, 306 F.3d at 1332
allegation unique to CSFB.                               (holding that amendment of the complaint
                                                         would be futile). One of Congress’
         Finally, the plaintiffs have failed to          objectives in enacting the PSLRA was “‘to
attribute any false statement or omission to             provide a filter at the earliest stage (the
CSFB. The plaintiffs rely on Gabriel                     pleading stage) to screen out lawsuits that
Capital, L.P. v. NatWest Fin., Inc., 94 F.               have no factual basis.” Id. (quoting In re
Supp. 2d 491 (S.D.N.Y. 2000), for their                  Champion Enters., Inc., Sec. Litig., 145 F.
argument that CSFB can be held liable as                 Supp. 2d 871, 874 (E.D. Mich. 2001).
an initial purchaser for a Rule 10b-5                    This objective would be frustrated where
violation. The district court correctly                  “there is a stark absence of any suggestion
noted that Gabriel is distinguishable on its             by the plaintiffs that they have developed
facts. In Gabriel, the plaintiffs alleged that           any facts since the action was commenced
the defendants, in addition to being the                 which would, if true, cure the defects in
initial purchasers, also drafted the offering            the pleadings under the heightened
memorandum as well as distributed it                     requirements of the PSLRA.” Id. at 1333.
during sales pitches. Id. at 502. The                    Because the plaintiffs have offered no
plaintiffs here do not allege that CSFB                  additional facts that would cure their
drafted or distributed the circular.                     amended complaint, we decline the
Therefore, the holding of Gabriel is not                 plaintiffs' request for permission to replead
applicable here.6                                        and for the foregoing reasons, we affirm
       6                                                 the district court's grant of defendants’
          Gabriel is distinguishable for
                                                         motion to dismiss.
another reason. In Gabriel, the
disclaimer in the offering memorandum
stated only that the initial purchasers
made “no warranty” as to the statements
contained therein. Id. Here, in contrast,
the offering circular states that the initial            circular is, or shall be relied upon as, a
purchasers made “no representations” at                  promise or representation by the initial
all. App. at 74 (“No representations or                  purchasers.”) While this subtle
warranty, express or implied, is made by                 difference in language is hardly
the initial purchasers as to the accuracy                dispositive, it adds to our conclusion that
or completeness of the information                       Gabriel does not apply and that CSFB
contained in this offering circular.                     did not make any actionable statement.
Nothing contained in this offering
                                                  -19-
