                   United States Court of Appeals
                        FOR THE EIGHTH CIRCUIT
     ___________

     No. 08-1593
     ___________

Horizon Asset Management Inc.,        *
                                      *
      Plaintiff/Appellant,            *
                                      *
Michael Nettie; Iron Workers Local 16 *
Pension Fund; Feivel Gottlieb; Adele  *
Lebowitz; Phyllis J. Winters; Doris   *
Staehr; Raymond J. Kadigan;           *
Momentum Partners; Stephen T.         *
Hibbard,                              *
                                      *
             Plaintiffs,              *
                                      *
      v.                              *
                                      *
H&R Block, Inc.; Mark A. Ernst;       *
William L. Trubeck,                   *
                                      *
      Defendants/Appellees,           * Appeals from the United States
                                      * District Court for the
Frank J. Cotroneo: James W. Yabuki; * Western District of Missouri.
Bret G. Wilson; Thomas M. Bloch;      *
Donna R. Ecton; Henry F. Frigon;      *
Roger W. Hale; Louis W. Smith;        *
Rayford Wilkins, Jr.; David Bak,      *
                                      *
             Defendants.              *
      ___________

      No. 08-1670
      ___________

Horizon Asset Management Inc.;         *
Michael Nettie,                        *
                                       *
             Plaintiffs,               *
                                       *
Iron Workers Local 16 Pension Fund, *
                                       *
      Plaintiff/Appellant,             *
                                       *
Feivel Gottlieb; Adele Lebowitz;       *
Phyllis J. Winters; Doris Staehr;      *
Raymond J. Kadigian,                   *
                                       *
             Plaintiffs,               *
                                       *
Momentum Partners,                     *
                                       *
      Plaintiff/Appellant,             *
                                       *
Stephen T. Hibbard,                    *
                                       *
             Plaintiff,                *
                                       *
      v.                               *
                                       *
H&R Block, Inc.; Mark A. Ernst;        *
William L. Trubeck; Frank J. Cotroneo; *
James W. Yabuki; Bret G. Wilson;       *
Thomas M. Bloch; Donna R. Ecton;       *
Henry F. D. Seip; Jeffrey E. Nachbor; *
Melanie K. Coleman,                    *
                                       *
      Defendants/Appellees.            *

                                      -2-
                                    ___________

                              Submitted: October 16, 2008
                                 Filed: September 9, 2009 (Corrected 10/7/09)
                                  ___________

Before RILEY, BOWMAN, and COLLOTON, Circuit Judges.
                           ___________

COLLOTON, Circuit Judge.

       This case involves two appeals arising from the dismissal of a putative
consolidated class action against H&R Block, Inc. (“Block”), and individual
defendants who are corporate officers or directors of Block. First, Horizon Asset
Management Inc. (“Horizon”) appeals the merits of the dismissal, arguing that the
district court erred in concluding that Horizon failed adequately to plead scienter
under the heightened pleading requirements of the Private Securities Litigation
Reform Act of 1995 (“PSLRA”). Second, Momentum Partners and Iron Workers
Local 16 Pension Fund (“Iron Workers”) appeal the district court’s appointment of
Horizon as the sole lead plaintiff to pursue all claims against the defendants. Iron
Workers contends that the district court’s ruling prevented them from litigating the
merits of their derivative claims against the individual defendants, because Horizon
refused to include the derivative claims in its consolidated complaint, and the district
court subsequently dismissed the complaint and the entire case. We affirm in part,
reverse in part, and remand for further proceedings.

                                           I.

      Block is a publicly traded corporation that provides a diverse range of tax,
investment, mortgage, and business services and products. In June 2005, Block
announced that it would restate its financial results filed with the Securities and
Exchange Commission (“SEC”) for fiscal years 2003 and 2004 and the first three


                                          -3-
quarters of fiscal year 2005. The restatement corrected, among other things, errors in
the calculation of Block’s corporate income tax. In February 2006, Block announced
the need for a second restatement of its financial results for fiscal years 2004 and 2005
and the first two quarters of fiscal year 2006, which pertained primarily to errors in
determining Block’s state effective income tax rate. Also in early 2006, the Attorney
General of California commenced an action against Block, alleging that its Refund
Anticipation Loan program violated state and federal law, and the Attorney General
of New York filed suit asserting that Block fraudulently marketed its Express
Individual Retirement Account (“IRA”) program.

       As a result of these events, shareholders of Block filed nine separate actions in
state and federal court. The cases were consolidated in the district court, and the court
appointed Horizon the lead plaintiff. Horizon filed a consolidated class action
complaint bringing securities fraud claims under section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R.
§ 240.10b-5. The complaint alleged that Block and individual defendants, including
Mark A. Ernst, Block’s Chairman, President, and Chief Executive Officer, and
William L. Trubeck, Block’s Executive Vice President and Chief Financial Officer,
made false and misleading statements to public investors regarding Block’s financial
condition. Specifically, Horizon alleged that Block misled investors by (1) failing to
disclose the unlawful nature of its Refund Anticipation Loan and Express IRA
programs, which artificially inflated reported earnings; (2) failing to disclose its lack
of safeguards and procedural controls to ensure accurate financial statements; and (3)
misstating financial results due to errors in calculating its state effective income tax
rate, which resulted in Block’s filing restatements of its financial results. Horizon also
asserted an additional claim against the individual defendants, alleging liability of
“controlling persons” under section 20(a) of the Securities Exchange Act of 1934. See
15 U.S.C. § 78t(b).

      The district court granted Block’s motion to dismiss the case. The court found
that Horizon failed to plead adequately that Block had made any false statements, with

                                           -4-
the exception of the financial results that were based on the tax calculation errors. See
In re H&R Block Sec. Litig., 527 F. Supp. 2d 922, 926-28 (W.D. Mo. 2007). The
court concluded that Block admitted the falsity of the financial results by restating
them in a subsequent SEC filing, id. at 928, but dismissed the claims because Horizon
failed to plead scienter adequately. Id. at 930. Because the control-person claims
were predicated on the underlying securities fraud violations, the court determined
that those claims also failed. The court granted Horizon leave to amend its complaint,
but only with respect to the false statements of financial results. Id. at 931.

       Horizon filed an amended consolidated class action complaint that removed its
claims regarding the Refund Anticipation Loan and Express IRA programs and added
some additional detail to its other allegations. The district court again granted Block’s
motion to dismiss, concluding that Horizon still failed to plead scienter adequately.
See In re H&R Block Sec. Litig., No. 06-0236, 2008 WL 482403, at *6-7 (W.D. Mo.
Feb. 19, 2008). Horizon appeals the dismissal of the amended complaint.

                                           II.

       To state a private securities fraud claim under section 10(b) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must allege: “(1) a material
misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a
connection with the purchase or sale of a security; (4) reliance, often referred to in
cases involving public securities markets (fraud-on-the-market cases) as ‘transaction
causation’; (5) economic loss; and (6) ‘loss causation,’ i.e., a causal connection
between the material misrepresentation and the loss.” Dura Pharm., Inc. v. Broudo,
544 U.S. 336, 341-42 (2005) (internal citations omitted) (emphases omitted); see also
In re K-tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002). The district court
dismissed Horizon’s complaint for failing to plead adequately the element of scienter,
and that is the only issue on appeal. We review the district court’s dismissal de novo.
Elam v. Neidorff, 544 F.3d 921, 926 (8th Cir. 2008).


                                           -5-
       The PSLRA imposes heightened pleading requirements on private securities
actions “to curb perceived abuses” of such actions, including “nuisance filings,
targeting of deep-pocket defendants, vexatious discovery requests and manipulation
by class action lawyers.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
320 (2007) (internal quotation omitted). As relevant to the pleading of scienter, the
PSLRA instructs that “the complaint shall, with respect to each act or omission
alleged to violate this chapter, state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15 U.S.C.
§ 78u-4(b)(2). The required state of mind for private securities fraud actions is
“‘scienter, i.e., the defendant’s intention to deceive, manipulate, or defraud,’” or the
defendant’s “severe recklessness.” In re Ceridian Corp. Sec. Litig., 542 F.3d 240, 244
(8th Cir. 2008) (quoting Tellabs, 551 U.S. at 313).

       “To determine whether the plaintiff has alleged facts that give rise to the
requisite ‘strong inference’ of scienter,” we must weigh “plausible nonculpable
explanations for the defendant’s conduct” against inferences favoring the plaintiff’s
allegation of scienter. Tellabs, 551 U.S. at 323-24. Although the inference of scienter
need not be “the most plausible of competing inferences,” it “must be more than
merely reasonable or plausible – it must be cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” Id. at 324 (internal
quotation omitted); see also Ceridian, 542 F.3d at 244. In conducting this
comparison, we “accept all factual allegations in the complaint as true,” Tellabs, 551
U.S. at 322, and may take judicial notice of Block’s public SEC filings. See Fla. State
Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 663 (8th Cir. 2001); United
States v. Eagleboy, 200 F.3d 1137, 1140 (8th Cir. 1999).1

       While we assess Horizon’s factual allegations “holistically” and “collectively”
rather than “in isolation,” Tellabs, 551 U.S. at 326, Horizon must nevertheless raise

      1
      We therefore grant Horizon’s motion that we take judicial notice of Block’s
Form 8-K filed with the SEC on June 8, 2005.

                                          -6-
a strong inference of scienter for each defendant and with respect to each alleged
misrepresentation. See Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1018 (11th
Cir. 2004) (citing 15 U.S.C. § 78u-4(b)(2)); see also K-Tel, 300 F.3d at 896 (“taking
each defendant individually” when analyzing the pleading of scienter); cf. Kushner v.
Beverly Enters., Inc., 317 F.3d 820, 827 (8th Cir. 2003) (finding no strong inference
of scienter when, inter alia, the “complaint makes no particular assertion of which
defendant was responsible for which statement or omission or how any defendant
participated in the alleged scheme”). Thus, we must consider the allegations against
each defendant – Ernst, Trubeck, and Block – separately. Because Horizon’s
arguments against Ernst and Trubeck are substantially similar, however, we will
discuss both individual defendants together before turning to Block.

                                          A.

       The only false statements that Horizon alleges were made by Ernst and Trubeck
are the financial results misstated in nine of Block’s SEC filings from March 16, 2004
to December 12, 2005. See H&R Block, 527 F. Supp. 2d at 926-28. Specifically,
Horizon cites false financial results that were later restated in Block’s second
restatement on March 31, 2006. Although the exact dollar amounts varied, all nine
filings included errors in the reporting of state income tax expense, deferred income
tax assets, accrued income taxes, and other accounts in Block’s statement of income
and balance sheets that are calculated from these figures. As Block explained in its
second restatement of financial results, these misstatements were caused by “errors
in determining the Company’s state effective income tax rate, including errors in
identifying changes in state apportionment, expiring state net operating losses and
related factors, for the fiscal years ended April 30, 2005 and 2004, and the related
fiscal quarters.”

      The nine SEC filings that contained the false financial results restated in the
second restatement can be grouped into three relevant time periods. The first period
includes just one statement, and covers the time until the internal control failures in

                                         -7-
corporate tax were allegedly discovered by senior management in April 2004. The
second period lasts from when senior management allegedly became aware of internal
control failures until Block announced the need for the first restatement of financial
results on June 8, 2005, and includes five statements. The final period runs from
when Block announced the first restatement until it announced the second restatement,
and it includes the last three statements.

                                          1.

      The first false statement was made on March 16, 2004. Because Trubeck did
not begin his employment with Block until October 4, 2004, Horizon cannot state a
claim against him based on this first statement. There is also a time problem with
respect to Ernst. Horizon alleges that Ernst knew of accounting problems “[n]o later
than April 2004,” that is, no later than a month after the first false statement.

       Horizon does allege that Tim Mertz, Block’s vice president for corporate tax,
told a confidential witness in 2001 or 2002 that “there were always problems with not
reconciling tax accruals and tax liabilities on the state level. This was common
knowledge in the accounting department.” This allegation, however, tells us nothing
about Ernst’s state of mind because he was not a part of the accounting department.
Horizon contends, based on the statements of a confidential witness, that “whatever
knowledge Mertz had about the Company, he shared with Ernst,” but such a general,
conclusory statement provides only weak support, if any, for an inference of Ernst’s
scienter. That Mertz at times reported directly to Ernst, also does not provide a basis
to infer that Ernst knew everything that Mertz did. See Kushner, 317 F.3d at 828
(“[T]he assertion that someone who may have been involved in the scheme ‘reported’
to [the defendant] is not specific enough to support a strong inference that he knew of
or participated in the fraudulent practice while it was occurring.”).

      Horizon further alleges that by the time of the first false statement, other
problems were developing in the corporate tax department, including a decision by

                                         -8-
Mertz to outsource corporate tax staffing in 2001, Mertz’s dismissals of three to four
staff members, and the department’s failure to properly maintain and upgrade the tax
accounting software. Horizon fails to allege, however, that Ernst even knew about
these issues. The one alleged problem that we can readily infer Ernst would have
known about is Block’s operation without a chief financial officer for eleven months,
a period which included the date when this first false statement was made. But a
vacancy in a corporate office does not suggest an intent to deceive or severe
recklessness on the part of Ernst. Such a vacancy is equally consistent, if not more so,
with the normal course of business operations, including the process of finding a
replacement officer. Therefore, considering all of the allegations regarding Ernst’s
state of mind when making the first false statement, we conclude that Horizon has
failed to raise a strong inference of scienter.

                                           2.

       The second set of false statements were made after April 2004, when, according
to Horizon, “the internal controls in Corporate Tax were known to be ineffective by
the Company’s senior management, including defendants Trubeck and Ernst as well
as the Manager of Corporate Tax, Timothy Mertz.” Horizon based this assertion on
a statement made by Brad Campbell, Block’s Assistant Vice President for Internal
Audit, alleging that the discovery of the control failures, specifically the tax
accounting errors, occurred during the process of Block’s efforts to comply with
section 404 of the Sarbanes-Oxley Act of 2002. See 15 U.S.C. § 7262. The complaint
is unclear about whether Horizon had direct knowledge of Campbell’s statement or
whether Horizon is relying on the second-hand reporting of a confidential witness to
whom Campbell made the statement. In any event, the allegation does not
significantly support Horizon’s efforts to plead scienter.

      The allegation is inaccurate in one important respect: It contends that Trubeck
had knowledge of the accounting problems in April 2004, six months before he began
working for Block. Thus, the allegation does not support an inference of scienter with

                                          -9-
respect to Trubeck, and the credibility of the statement is weakened with respect to its
allegations against Ernst. It also reveals another fault in the complaint: Horizon has
not alleged how Campbell discovered that Ernst was aware of the control failures or
how Campbell would have a basis to know what Ernst knew. See In re Hutchinson
Tech., Inc. Sec. Litig., 536 F.3d 952, 959-60 (8th Cir. 2008) (discussing the need to
plead the basis of a witness’s knowledge in order to have the witness’s allegations
meet the standard of the PSLRA). Moreover, even if we were to assume that the
allegation were true and that Ernst knew about the accounting problems, Horizon does
not allege that Ernst knew that the financial results released in the five SEC filings
were false or that he intended to deceive the public.

       According to Horizon, the inference that Ernst and Trubeck made these five
false statements – or, with respect to Trubeck, at least the last three statements made
while he was employed by Block – is further strengthened by the slow pace of the
internal investigation once the accounting errors were discovered. We disagree. The
facts pled in Horizon’s complaint demonstrate that as soon as the accounting errors
were discovered in April 2004, Mertz directed that an internal investigation begin, and
that the issue was then researched “intensively” by two different employees. At some
point prior to announcing its first restatement of financial results on June 8, 2005,
Block also consulted with its independent auditors to conclude that a restatement was
necessary. This was a prudent course of action that weakens rather than strengthens
an inference of scienter. See Higginbotham v. Baxter Int’l Inc., 495 F.3d 753, 761
(7th Cir. 2007) (“Taking the time necessary to get things right is both proper and
lawful. Managers cannot tell lies but are entitled to investigate for a reasonable time,
until they have a full story to reveal.”).

       Throughout the period that Block investigated its internal control failures, and
as soon as Block’s senior management allegedly became aware of the problems, Block
repeatedly disclosed its corporate accounting control weaknesses. In its Form 10-K
filed on July 2, 2004, it stated:


                                         -10-
      [W]e identified a series of control weaknesses related to our corporate
      tax accounting function. These weaknesses relate specifically to the
      reconciliation and level of detailed support of both current and deferred
      income tax accounts. We also determined an acceleration of taxable
      income was warranted in one of our segments, however, there was no
      change to our total income tax provision. Upon identification of these
      control weaknesses, immediate corrective action was undertaken. Our
      efforts to strengthen financial and internal controls continue. We expect
      these efforts to be completed by the end of fiscal year 2005.

Block included similar disclosures in all of its SEC filings until it filed its first
restatement of financial results on July 29, 2005. These statements do not support an
inference that Ernst and Trubeck intended to deceive the public or acted with severe
recklessness. Rather, they portray managers who disclosed known accounting
problems and warned that work on their internal controls was continuing. Therefore,
considering all of Horizon’s allegations relating to the second set of false statements,
we conclude that Horizon has failed to raise a strong inference that Ernst or Trubeck
acted with scienter.

                                           3.

       Turning to the third and final set of false statements – those made after the need
for the first restatement was announced on June 8, 2005 – Horizon’s central argument
is that Ernst and Trubeck acted with scienter in continuing to state false financial
results when they knew that the first restatement did not correct all of the false
financial results and that a second restatement would be necessary. Horizon’s
strongest allegation to support this argument is a statement by a confidential witness
that he

      was directly informed by his manager Brad Campbell and also Jeff
      Brown, who worked in accounting, that senior management, including
      Ernst and Trubeck, knew and had spoken of the fact, as of September or
      October of 2005, that a further restatement of the Company’s financial

                                          -11-
      statements with respect to the misstated tax accruals would be necessary,
      although they did not yet know the exact amount.

       Assuming that the confidential witness was told this information at the
beginning of September, the allegation would be relevant to whether the last two false
statements in this time period were made with scienter. The allegation is not strong
and compelling, however, because it does not provide the sources’ basis of
knowledge. See Hutchinson, 536 F.3d at 959-60; Cornelia I. Crowell GST Trust v.
Possis Med., Inc., 519 F.3d 778, 783 (8th Cir. 2008). The allegation does not state
whether Campbell and Brown spoke directly with Ernst and Trubeck or whether they
merely conveyed hearsay information that was passed along by others. Any inference
of scienter is further weakened by the fact that, elsewhere in Horizon’s complaint, this
same confidential witness inaccurately alleged that Trubeck had knowledge of
accounting errors at a time when he was not even employed by Block.

        Block’s continued disclosures of its control problems in all three of the filings
that contained false financial results during this period also weaken the inference that
Ernst and Trubeck acted with scienter. In Block’s SEC filing that included the first
restatement of financial results on July 29, 2005, it explained that “as of the end of the
period covered by this Annual Report on Form 10-K,” Block’s “Disclosure Controls
and procedures were not effective.” Block then described the specific deficiencies
discovered in its accounting for income tax and stated that the “deficiencies resulted
in errors in the Company’s accounting for income taxes” that “were corrected prior
to the issuance of the” restated financial results. Block continued, however, to explain
that:

      In the aggregate, these deficiencies represent a material weakness in
      internal control over financial reporting on the basis that there is a more
      than remote likelihood that a material misstatement of the Company’s
      annual or interim financial statements will not be prevented or detected
      by its internal control over financial reporting. Because of this material
      weakness in internal control over financial reporting, management

                                          -12-
      concluded that, as of April 30, 2005, the Company’s internal control over
      financial reporting was not effective . . . .

       Although Block described the efforts it took to improve internal controls, and
stated that it “believes it has established appropriate controls and procedures and
created the appropriate tax account analysis and support subsequent to April 30,
2005,” it also disclosed that:

      In addition to the above actions, management will conduct a
      comprehensive evaluation of the corporate tax function, including
      resource requirements, during the current fiscal year to identify and
      implement additional improvements to ensure compliance with the
      controls and procedures that have been put in place to remediate
      deficiencies previously identified.

Similar disclosures discussing the ongoing review, the hiring of a third-party firm to
assist in the review, and additional improvements to controls were made in the
subsequent two SEC filings. Horizon argues that certain statements, such as Block’s
statement that it corrected the errors caused by the deficiencies and its belief that it
had established appropriate controls after April 2005, suggest that Ernst and Trubeck
deceptively made it appear that all of Block’s accounting problems were corrected.
But Horizon takes those statements out of context. Looking at Block’s disclosures
quoted above and in its other filings, it is apparent that Block disclosed an ongoing
process to remediate complex accounting problems.

       Horizon attempts to overcome this deficiency by pointing to statements of
securities analysts who misinterpreted Block’s disclosures. One analyst, for example,
opined that “this blemish has been rectified and that it will not be an issue for
investors going forward.” Statements made by third-party securities analysts,
however, are insufficient to raise a strong inference of scienter where, as here, there
are no allegations that the defendants adopted the statements, represented that they
were true, used the analysts as conduits by providing them false information, or

                                         -13-
otherwise became “‘entangled’” with the analysts. In re Navarre Corp. Sec. Litig.,
299 F.3d 735, 743 (8th Cir. 2002) (quoting Elkind v. Liggett & Myers, Inc., 635 F.2d
156, 163 (2d Cir. 1980)); see also Raab v. Gen. Physics Corp., 4 F.3d 286, 288-89
(4th Cir. 1993). We conclude, therefore, that these allegations with respect to the last
three false statements do not raise a strong inference that Ernst and Trubeck made the
statements with the requisite scienter.

                                            4.

       Horizon alleges that an inference that Ernst and Trubeck acted with scienter
also arises from their signing of certifications. Horizon argues that because Ernst and
Trubeck signed certifications pursuant to sections 302 and 906 of the Sarbanes-Oxley
Act of 2002, 15 U.S.C. § 7241; 18 U.S.C. § 1350, verifying that Block’s internal
controls were sufficient when the tax accounting controls were, in fact, inadequate,
there is a strong inference of scienter. This court rejected a comparable argument in
Ceridian, explaining that “if an allegation that a mandatory Sarbanes-Oxley
certification was later proven to be inaccurate is sufficient to give rise to the requisite
strong inference, ‘scienter would be established in every case where there was an
accounting error or auditing mistake by a publicly traded company, thereby
eviscerating the pleading requirements for scienter set forth in the PSLRA.’”
Ceridian, 542 F.3d at 248 (quoting Cent. Laborers’ Pension Fund v. Integrated Elec.
Servs. Inc., 497 F.3d 546, 555 (5th Cir. 2007)).

      Horizon also alleges that an inference of scienter is strengthened by the fact that
Trubeck had motive to commit fraud because of his desire to receive almost $258,000
in bonuses under Block’s Short Term Incentive Program, which awarded bonuses
based upon corporate performance. “Motive can be a relevant consideration, and
personal financial gain may weigh heavily in favor of a scienter interference,” Tellabs,
551 U.S. at 325, but merely pleading “‘that a defendant’s compensation depends on
corporate value or earnings does not, by itself, establish motive to fraudulently
misrepresent corporate value or earnings.’” Kushner, 317 F.3d at 830 (quoting Green

                                           -14-
Tree, 270 F.3d at 661). A complaint must show “that the benefit to an individual
defendant is unusual,” for example, that the benefit is of an “overwhelming
magnitude” and received under “suspicious circumstances.” In re Cerner Corp. Sec.
Litig., 425 F.3d 1079, 1085 (8th Cir. 2005). We have held that bonuses as high as
$630,000 and $355,000 paid to a corporate officer under a performance plan were not
unusual. See id.; Kushner, 317 F.3d at 830. Thus, Trubeck’s bonuses over two years
totaling approximately $258,000, where there are no allegations of suspicious timing,
are insufficient. See Ceridian, 542 F.3d at 247.

       Horizon makes a similar allegation that Ernst and Trubeck had motive to
commit fraud because they wanted to ensure a subsidiary’s success in issuing $400
million in promissory notes, and Block’s profitability was important to that success.
This assertion is also unavailing. “The desire to make a company seem more
profitable is a desire universally held among corporations and their executives,” and
thus insufficient to support an inference of scienter, even when tied to a debt offering.
Cerner, 425 F.3d at 1085 (internal quotation omitted). Therefore, we find that
Horizon’s motive allegations do not support a strong inference of scienter.

        Finally, Horizon contends that even if its complaint does not raise a strong
inference of intent “to deceive, manipulate, or defraud,” Tellabs, 551 U.S. at 313, it
at least raises a strong inference that Ernst and Trubeck acted with severe recklessness.
Proof of severe recklessness may establish the requisite scienter. Ceridian, 542 F.3d
at 244. To demonstrate severe recklessness, a plaintiff must allege “highly
unreasonable omissions or misrepresentations amounting to an extreme departure
from the standards of ordinary care, and that present a danger of misleading buyers
or sellers which is either known to the defendant or is so obvious that the defendant
must have been aware of it.” Kushner, 317 F.3d at 828. A plaintiff must allege more
than “incompetence” or corporate mismanagement before a claim of negligence rises
to the level of securities fraud. Ceridian, 542 F.3d at 249. None of the allegations
discussed above, with respect to any of the nine false statements, amounts to highly
unreasonable conduct or an extreme departure from the standards of ordinary care.

                                          -15-
At best, Horizon may have alleged facts showing that Ernst was negligent in not
discovering problems in the corporate tax department sooner than he did.

      In sum, after evaluating all of Horizon’s allegations with respect to each of the
nine false statements, and considering the competing inference that the statements
were made mistakenly due to corporate tax accounting problems, we conclude that
Horizon has not raised a strong inference that Ernst or Trubeck made any of the
statements with the requisite scienter. Therefore, the district court did not err in
dismissing Horizon’s claims against Ernst and Trubeck.

                                          B.

       Horizon argues that even if its complaint has not raised a strong inference with
respect to Ernst and Trubeck, it still sufficiently pleads scienter as to Block. The
appropriate standard for considering the pleading of corporate scienter under the
PSLRA appears to be an open question in this circuit. Horizon contends that Block’s
scienter can be imputed from the allegations of the scienter of Block corporate officer
Mertz, who was not named as a defendant in this action. Horizon argues that Mertz
need not be named as a defendant in order to impute his state of mind to Block, see
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190,
196 (2d Cir. 2008), and that Mertz’s intent can be imputed to Block because Mertz
had “a senior position within the Company.”

       Assuming for the sake of argument that Mertz’s state of mind can be imputed
to the corporation, either on Horizon’s theory or on a narrower basis, see, e.g.,
Southland Secs. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 365-66 (5th Cir.
2004), we conclude that Horizon’s complaint does not raise a strong inference that
Mertz acted with scienter. Many of the allegations regarding Mertz’s state of mind
– such as his knowledge in April 2004 that internal controls in corporate tax were
ineffective and the slow pace of the investigation – are identical to Horizon’s
insufficient allegations against Ernst and Trubeck.

                                         -16-
       The primary additional allegation is that Mertz told a confidential witness in
2001 or 2002 that “there were always problems with not reconciling tax accruals and
tax liabilities on the state level. This was common knowledge in the accounting
department.” Accepting the allegation as true, Mertz knew about the accounting
problems at the time of the first false statement on March 16, 2004, and before Block
announced its discovery of control weaknesses in corporate tax. Even so, however,
Horizon does not allege that Mertz knew or was severely reckless in not knowing that
the problems were causing materially false financial results. Horizon does not allege
that the problems of which Mertz was aware caused the false statements that were
corrected in the second restatement, rather than those statements that were corrected
in the first restatement. Horizon has thus failed to allege facts that raise a strong
inference that Mertz acted with scienter with respect to the false statements alleged in
the complaint.

       For these reasons, Horizon has failed to plead scienter adequately with respect
to Block or the individual defendants. Because the control-person claims under
section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(b), are
predicated on some underlying primary violation, Horizon also has failed to state a
claim under section 20(a). See Hutchinson, 536 F.3d at 961-62. Therefore, the district
court did not err in dismissing the consolidated complaint.

                                          II.

       Momentum Partners and Iron Workers Local 16 Pension Fund each brought an
action in the district court asserting derivative claims on behalf of Block against its
directors. These claims alleged breaches of fiduciary duties relating to Block’s
allegedly wrongful business practices, including the sales of Refund Anticipation
Loans, Peace of Mind guarantees, and Express IRAs, as well as other illegal and
unethical practices. Seven other actions were also brought against Block in state and
federal court. Three of the actions asserted federal securities fraud claims against
Block and the individual defendants arising out of Block’s two successive

                                         -17-
restatements of financial results and Block’s alleged misrepresentations regarding its
Refund Anticipation Loan and Express IRA programs. Four of the actions – including
three state actions that were removed to federal court – asserted derivative claims on
behalf of Block against members of Block’s board of directors, alleging breaches of
their fiduciary duties, including claims arising out of violations of federal securities
laws.

       Block moved for the consolidation of the six direct and derivative securities
actions, and Momentum Partners and Iron Workers moved to consolidate their two
actions. The district court consolidated all nine cases together under Federal Rule of
Civil Procedure 42(a), and stated its intention to “appoint one institutional co-lead
plaintiff and one individual co-lead plaintiff,” who would together “file an amended
complaint asserting all claims against Defendants.” The district court also ordered
prospective lead plaintiffs “to provide the Court with the pertinent information
necessary to determine which two Plaintiffs will adequately represent each of the two
established classes of claims.”

        On November 3, 2006, after reviewing requests to be appointed lead plaintiff
by Iron Workers, Horizon, and two individual plaintiffs in the securities derivative
actions, the district court appointed Horizon as the sole lead plaintiff. (R. Doc. 48, at
1). The court stated that it was departing from its initial plan to appoint one
institutional and one individual lead plaintiff, because only Horizon had complied
with its order to provide the pertinent information to determine the most adequate
plaintiff. (Id.). Iron Workers and Momentum Partners moved for reconsideration,
arguing that Iron Workers had provided the necessary information, and that Horizon
was not an adequate representative because it had admitted that it would not assert
derivative fiduciary claims. Alternatively, Iron Workers and Momentum Partners
asked for certification to file an interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
The district court denied the motion, determining that the claims asserted by Iron
Workers and Momentum Partners “are not really derivative claims,” and concluding
that it was therefore irrelevant whether Horizon failed to assert derivative claims.

                                          -18-
       Horizon subsequently filed a consolidated complaint that asserted no derivative
claims. The district court eventually dismissed the consolidated amended complaint
for failure to state a claim, and entered a final judgment dismissing the case. See In
re H&R Block Sec. Litig., No. 06-0236, 2008 WL 482403, at *6-7 (W.D. Mo. Feb. 19,
2008). Iron Workers and Momentum Partners appeal, arguing that the district court
abused its discretion by appointing Horizon as the sole plaintiff.

       The district court’s consolidation of the nine securities and derivative actions
against Block under Federal Rule of Civil Procedure 42(a) was not an abuse of
discretion. The actions involved common parties, overlapping legal issues, and
related factual scenarios, and the consolidation itself did not cause unfair prejudice.
But the district court’s decision to appoint Horizon as the sole lead plaintiff for all
claims against Block, including the derivative claims, is problematic. The district
court determined that the claims asserted by Iron Workers and Momentum Partners
“are not really derivative claims,” but provided little explanation for its conclusion.
Having reviewed Momentum Partners’ amended complaint, filed on August 24, 2006,
and Iron Workers’ complaint filed on June 8, 2006, we conclude that the complaints
allege derivative claims that are not predicated on violations of federal securities laws.

       It may be debatable whether a conflict of interest necessarily prevents a single
plaintiff, such as Horizon, from bringing both direct claims against a corporation and
derivative claims on the corporation’s behalf. See, e.g., ShoreGood Water Co., Inc.
v. U.S. Bottling Co., No. 08-2470, 2009 WL 2461689, at *4-6 (D. Md. Aug. 10,
2009); Ryan v. Aetna Life Ins. Co., 765 F. Supp. 133, 135-37 (S.D.N.Y. 1991); First
Am. Bank & Trust v. Frogel, 726 F. Supp. 1292, 1298 (S.D. Fla. 1989). In this case,
however, Iron Workers presented the court with evidence that Horizon would not
assert its derivative claims, and asked the court to reconsider its appointment based
on the conflict of interest. A consolidated case “retain[s] its independent status,” and
plaintiffs in a consolidated action, like Iron Workers, are still “entitled to a decision
on the merits of their claims.” DeGraffenreid v. Gen. Motors Assembly Div., St.
Louis, 558 F.2d 480, 486 (8th Cir. 1977). Once it was clear that Horizon would not

                                          -19-
pursue the derivative claims, it was error for the district court to abide by its decision
to appoint Horizon as the sole lead plaintiff to prosecute a single consolidated
complaint.

       Accordingly, we reverse the district court’s order of November 3, 2006, insofar
as it designates Horizon the lead plaintiff for the derivative claims brought by Iron
Workers and Momentum Partners and requires a single consolidated complaint. On
remand, the separate complaints filed by Iron Workers and Momentum Partners shall
be reinstated.

                                    *       *       *

      For the foregoing reasons, the judgment of the district court is affirmed in part,
reversed in part, and the case is remanded for further proceedings consistent with this
opinion.
                         ______________________________




                                          -20-
