     Case: 18-10998     Document: 00515082201      Page: 1    Date Filed: 08/19/2019




          IN THE UNITED STATES COURT OF APPEALS
                   FOR THE FIFTH CIRCUIT   United States Court of Appeals
                                                    Fifth Circuit

                                                                         FILED
                                                                     August 19, 2019
                                   No. 18-10998
                                                                      Lyle W. Cayce
                                                                           Clerk
MUNICIPAL EMPLOYEES’ RETIREMENT SYSTEM OF MICHIGAN,

              Plaintiff – Appellant,

v.

PIER 1 IMPORTS, INCORPORATED; ALEXANDER W. SMITH; CHARLES
H. TURNER,

              Defendants – Appellees.




                  Appeal from the United States District Court
                       for the Northern District of Texas


Before SMITH, WIENER, and ELROD, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
      “Fashion changes,” says Coco Chanel, “but style endures.” 1             In this
securities fraud case, a class of investors alleges, among other things, that Pier
1 Imports, Inc. is a “trend-based fashion retailer” whose inventory carried a
significant markdown risk that the company’s executives failed to disclose.
Because we conclude that Pier 1 operates largely in the sturdier business of
style and that the investors failed to adequately plead scienter, we AFFIRM.



      1   The world according to Coco Chanel, Harper’s Bazaar (Aug. 12, 2017),
https://www.harpersbazaar.com/uk/fashion/fashion-news/news/a31524/the-world-according-
to-coco-chanel/.
    Case: 18-10998    Document: 00515082201        Page: 2   Date Filed: 08/19/2019



                                    No. 18-10998
                                         I.
      Pier 1 Imports, Inc., is a Fort Worth-based retailer that sells home
furnishings at more than 1,000 stores in the United States and Canada and
through its website. In 2007, in the wake of seven consecutive quarterly losses
and total losses of $227 million for that fiscal year, Pier 1 tapped defendant
Alex Smith as its new CEO. Smith, working with defendant Charles Turner,
Pier 1’s CFO, had significantly improved the company’s financial position by
2009. At that point, however, Pier 1 faced new pressure to respond to consumer
demand for on-line shopping. To enter this market, in August 2012, Smith and
Turner launched an initiative called “1 Pier 1,” which would allow customers
to shop on-line and have their purchases either shipped to their homes or
picked up without shipping charges at Pier 1’s U.S. stores.
      The 1 Pier 1 initiative did not go as planned. Pier 1’s stock plummeted
from $18.57 on April 28, 2014, to $4.75 on December 17, 2015—a drop of almost
75 percent. Disappointed, a class of investors who had purchased Pier 1’s stock
between April 10, 2014, and December 17, 2015 (the “Class Period”), brought
this lawsuit, claiming that Pier 1, Smith, and Turner (collectively, “the
company”) illegally hid and misrepresented information that, once disclosed,
caused this stock-price tailspin.
      Specifically, the complaint alleges that, while carrying out the 1 Pier 1
initiative, the company failed to tell investors about significant “markdown
risk”—the risk that Pier 1 had so much inventory that it could get rid of it only
by lowering prices dramatically. According to the investors, this markdown
risk was exacerbated by the fact that Pier 1’s “seasonal” and “specialty fashion”
products are “subject to changing consumer tastes.” The investors allege that
Pier 1’s distribution channels were so severely “flooded with excess
merchandise” that the company had to employ outside labor and third parties
to manage it. To keep up, the investors note, Pier 1 made nondiscretionary,
                                         2
    Case: 18-10998     Document: 00515082201      Page: 3   Date Filed: 08/19/2019



                                  No. 18-10998
capital-improvement expenditures that were almost seven times higher than
the yearly average for the ten previous years.
      According to the investors’ amended complaint, Pier 1 did not start to
tell investors about the existence and magnitude of its markdown risk until
the company made a series of “partial corrective disclosures” in 2015. On
February 10, 2015, Pier 1 announced that it had higher costs because of
“unplanned supply chain expenses” and announced the departure of Turner as
CFO. In response to these disclosures, the price of Pier 1’s stock fell 25 percent
overnight—from $16.97 per share on February 10, 2015, to $12.84 per share
on February 11, 2015.
      The investors allege that, during the months that followed, Pier 1 made
additional misrepresentations and omissions, telling investors that Pier 1’s
inventory complexion was “clean,” “healthy,” and did “not pose a significant
immediate markdown risk.”         On September 24, 2015, however, Pier 1
announced that its inventory had caused “issues” within its supply chain, that
there were “inventory related inefficiencies within the Company’s distribution
center network,” and that it needed to turn to clearance activity to sell off the
extra inventory.       The investors allege that, in response to these
announcements, Pier 1’s stock price fell by more than 12 percent—from $8.67
per share on September 24, 2015, to $7.61 per share on September 25, 2015.
      The investors further allege that on December 16, 2015—the
penultimate day of the Class Period—Pier 1 announced that it would take at
least eighteen months before inventory levels would be in line with actual
demand. Pier 1’s interim CFO, Laura Coffey, also disclosed that only four of
the company’s six distribution centers were operating with “acceptable levels
of efficiencies.” The investors allege that, in response to these disclosures, Pier
1’s shares again plummeted by 20 percent in one day—from $5.95 per share on
December 16, 2015, to $4.75 on December 17, 2015.
                                        3
    Case: 18-10998     Document: 00515082201      Page: 4    Date Filed: 08/19/2019



                                  No. 18-10998
      The investors filed their complaint in the Northern District of Texas,
asserting that Pier 1 and its executives violated § 10(b) of the Securities
Exchange Act and SEC Rule 10b-5 by failing to disclose Pier 1’s significant
markdown risk. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Pier 1 moved to
dismiss under Federal Rule of Civil Procedure 12(b)(6). The district court
granted the motion, finding that the investors failed to plead facts that would
support a strong inference of scienter, the required mental state for these
claims. The court allowed the investors to amend their complaint to fix this
defect.
      After the investors filed an amended complaint, Pier 1 again moved to
dismiss.   This time, the district court dismissed the case with prejudice,
concluding that “[a]lthough [the investors] ha[d] made substantial changes to
[their] pleading in an attempt to cure the deficiencies identified in [the
previous] Order, . . . the Amended Complaint still fail[ed] to plead the requisite
strong inference of scienter.” The investors appealed.
                                        II.
      We review de novo a district court’s dismissal of a civil complaint. Barrie
v. Intervoice-Brite, Inc., 397 F.3d 249, 254 (5th Cir. 2005). To survive a Rule
12(b)(6) motion to dismiss, a plaintiff’s complaint must comply with the
familiar Twombly/Iqbal standard, which requires the complaint to contain
sufficient factual matter to state a claim for relief that is plausible on its face.
See Emps.’ Ret. Sys. v. Whole Foods Mkt., Inc., 905 F.3d 892, 899 (5th Cir.
2018). Because the investors allege securities fraud, their amended complaint
must also satisfy Federal Rule of Civil Procedure 9(b), which requires that a
plaintiff “state with particularity the circumstances constituting fraud or
mistake.” Under Rule 9(b), “a plaintiff must ‘identify the time, place, and
contents of the false representations, as well as the identity of the person
making the misrepresentation and what that person obtained thereby.’” Whole
                                         4
    Case: 18-10998     Document: 00515082201     Page: 5   Date Filed: 08/19/2019



                                  No. 18-10998
Foods, 905 F.3d at 899 (alteration omitted) (quoting Owens v. Jastrow, 789
F.3d 529, 535 (5th Cir. 2015)).
      To state a claim under § 10(b) of the Securities Exchange Act and SEC
Rule 10b-5, a plaintiff must allege: (1) a material misrepresentation or
omission; (2) scienter (a “wrongful state of mind”); (3) a connection with the
purchase or sale of a security; (4) reliance; (5) economic loss; and (6) a “causal
connection between the material misrepresentation and the loss.”            Dura
Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). To impute liability to
Smith and Turner—the alleged “control persons” of Pier 1 under § 20(a) of the
Securities Exchange Act—the investors had to show a “primary violation”
under § 10(b): If the § 10(b) claim is inadequate, then so is the § 20(a) claim.
Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 383 (5th Cir.
2004). Allegations under § 10(b) and Rule 10b-5 must comply with the Private
Securities Litigation Reform Act (PSLRA), which requires plaintiffs to “specify
each statement alleged to have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation regarding the statement or
omission is made on information and belief, . . . state with particularity all
facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). In pleading
scienter, plaintiffs must “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” Id. § 78u-
4(b)(2)(A).
                                       III.
      We agree with the district court that the investors have failed to plead a
“strong inference” of scienter. Scienter is a “mental state embracing intent to
deceive, manipulate, or defraud.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 319 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185,
193 n.12 (1976)).     Both intent and “severe recklessness” are sufficient.
Nathenson v. Zonagen, Inc., 267 F.3d 400, 408–09 (5th Cir. 2001). Plaintiffs
                                        5
    Case: 18-10998      Document: 00515082201     Page: 6    Date Filed: 08/19/2019



                                  No. 18-10998
properly plead scienter when they allege that a company knowingly or
recklessly made statements to the market while aware of facts that, if not
disclosed, would render those statements misleading. See Plotkin v. IP Axess
Inc., 407 F.3d 690, 696–97 (5th Cir. 2005).
      The investors raise two challenges to the district court’s dismissal of
their original and amended complaints: (1) that in dismissing their original
complaint, the district court improperly analyzed their scienter allegations;
and (2) that the scienter allegations in their amended complaint were sufficient
to state a securities fraud claim. Neither argument persuades us that the
district court erred.
                                        A.
      We have explained that a district court “may best make sense of scienter
allegations by first looking to the contribution of each individual allegation to
a strong inference of scienter, especially in a complicated case[.]” Owens, 789
F.3d at 537.    If any “single allegation, standing alone, create[s] a strong
inference of scienter,” then the court may stop there. Id. If it does not, then
the district court must take “a holistic look at all the scienter allegations.” Id.
      The investors contend that, in evaluating their original complaint, the
district court failed to follow this analysis and instead analyzed all of their
allegations collectively under Diodes, which holds that, in four “special
circumstances,” a defendant’s corporate title coupled with a severe problem
within the company sufficiently alleges scienter.           Local 731 I.B. of T.
Excavators & Pavers Pension Tr. Fund v. Diodes, Inc., 810 F.3d 951, 959 (5th
Cir. 2016). This was error, the investors argue, because Diodes does not apply
here. They also complain that the district court failed to correct this error
when it dismissed their amended complaint. We disagree.
      The district court’s order dismissing the original complaint first
concluded that the investors failed to allege scienter because, inter alia,
                                        6
    Case: 18-10998     Document: 00515082201      Page: 7   Date Filed: 08/19/2019



                                  No. 18-10998
(1) Smith and Turner lacked a motive to commit fraud; (2) Pier 1 “repeatedly
disclosed . . . [its] increasing inventory, disappointing sales, and the risk of
markdowns”; and (3) the investors’ proffered “general accounts from
confidential witnesses” did not support their scienter allegations.          After
undertaking this evaluation of the investors’ allegations, the district court then
assessed whether Diodes applied and found that it did not because none of the
four “special circumstances” were present here. This analysis did not run afoul
of our directives in Owens.
                                        B.
      We turn next to the investors’ amended complaint.            The investors’
scienter theory relies on three categories of allegations: (1) allegations of
motive; (2) allegations that Smith and Turner knew Pier 1 had high inventory;
and (3) allegations that Smith and Turner knew Pier 1 had significant
markdown risk. Each set of allegations falls short of creating the “strong
inference” of scienter required under the PSLRA.
                                        1.
      “To demonstrate motive, plaintiffs must show ‘concrete benefits that
could be realized by one or more of the false statements and wrongful
nondisclosures alleged.’” Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw
Grp., Inc., 537 F.3d 527, 543 (5th Cir. 2008) (quoting Phillips v. LCI Int’l, Inc.,
190 F.3d 609, 621 (4th Cir. 1999)). Motive is a critical—though not essential—
aspect of a successful claim for securities fraud: “[A]llegations of motive . . .
may enhance an inference of scienter[.]” Abrams v. Baker Hughes Inc., 292
F.3d 424, 434 (5th Cir. 2002). A failure to show motive means that “the
strength of the circumstantial evidence of scienter must be correspondingly
greater.” Neiman v. Bulmahn, 854 F.3d 741, 748 (5th Cir. 2017) (alteration
omitted) (quoting R2 Invs. LDC v. Phillips, 401 F.3d 638, 644 (5th Cir. 2005)).


                                        7
    Case: 18-10998    Document: 00515082201          Page: 8   Date Filed: 08/19/2019



                                No. 18-10998
      The investors allege that Smith and Turner had two motives for
concealing Pier 1’s markdown risk: (1) they “staked their careers” on 1 Pier 1,
which drove them to overstate the success of that initiative; and (2) their
employment contracts promised them cash bonuses based on Pier 1’s earnings
before interest, tax, depreciation, and amortization.          Neither motive finds
support in our precedent.
      First, in Abrams, we held that a desire “to protect [one’s job in an]
executive position[]” was not “the type[] of motive that support[s] a strong
inference of scienter.” 292 F.3d at 434 (citing Melder v. URCARCO, 27 F.3d
1097, 1102 (5th Cir. 1994)).        In the absence of “an allegation that the
defendants profited from” the alleged fraud, an allegation of motive based on
career prospects is insufficient.    Id.       Therefore, the investors’ reliance on
Smith’s and Turner’s instincts for career survival fails to overcome the
pleading hurdle.
      As for the second motive allegation, we have held that “incentive
compensation ‘can hardly be the basis on which an allegation of fraud is
predicated’” because “the vast majority of corporate executives” receive this
type of compensation. Ind. Elec. Workers, 537 F.3d at 544 (quoting Tuchman
v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)). However, in a
limited set of circumstances—when the potential bonus is extremely high and
other allegations support an inference of scienter—performance-based
compensation can establish motive. See Barrie, 397 F.3d at 261. In Barrie, the
defendant received a performance-based bonus that was 175 percent of his base
salary, and we held that his compensation package contributed to a strong
inference of scienter. Id.
      But Barrie is not this case. Here, even the lowest possible performance-
based bonuses that Smith and Turner could receive—which were only 11.5
percent and 8 percent of their respective base salaries—proved to be well out
                                           8
    Case: 18-10998    Document: 00515082201      Page: 9   Date Filed: 08/19/2019



                                 No. 18-10998
of reach: Pier 1’s Fiscal Year 2015 earnings before interest, tax, depreciation,
and amortization were $60 million lower than the lowest target number in
their employment contracts. Although these contracts also included potential
bonuses as high as 288 percent and 200 percent of Smith’s and Turner’s base
salaries, Pier 1’s earnings were $125 million shy of the target number for those
bonuses. Accordingly, because the likelihood that Smith and Turner would
actually receive these high-level bonuses was quite small, Barrie does not
apply here.   We reject the investors’ motive allegations as creating any
inference of scienter, much less a strong one.
                                       2.
      The investors make the following allegations related to Smith’s and
Turner’s knowledge that Pier 1’s inventory was high:
      (1) Smith made comments at an employee “town hall” meeting in
          March 2014 admitting that the company overbought inventory;
      (2) Smith knew of the company’s failure to meet its sales goals and
          the resultant decision not to pay bonuses;
      (3) Smith knew about the company’s “inventory problems” and, in
          2013, directed the company to end the use of temporary storage
          at stores;
      (4) Smith had a conversation with another executive regarding a
          1,000-container backlog at Pier 1’s Baltimore distribution
          center;
      (5) The company received regular contemporaneous reports on
          sales figures, inventory, and purchases;
      (6) Pier 1 had large inventory backlogs at its stores and
          distribution centers; and
      (7) Smith and Turner made Sarbanes-Oxley certifications of SEC
          filings that stated that the company made “conservative
          inventory purchases.”

      We note at the outset that, even if we were to assume that all of these
allegations satisfy the requisite pleading standards, they would not, standing

                                       9
    Case: 18-10998      Document: 00515082201     Page: 10   Date Filed: 08/19/2019



                                   No. 18-10998
alone, create a strong inference of scienter. After all, the investors do not allege
that Smith and Turner misrepresented Pier 1’s inventory. To the contrary, the
above allegations include several public disclosures of Pier 1’s high-inventory
problem. Instead, the investors’ theory of the case is that Smith and Turner
misled the public about Pier 1’s ability to offload that excessive inventory
without significant markdown risk: Their amended complaint alleges that
“Pier 1 repeatedly assured investors that . . . its increasing inventory was
‘clean’ and did not present ‘immediate,’ ‘significant,’ or ‘substantial’ markdown
risk.”
         Knowledge of high inventory does not necessarily equate to knowledge
of significant markdown risk—an equally plausible inference is that Smith and
Turner reasonably believed they could fix the excessive inventory problem
without resorting to markdowns. See Abrams, 292 F.3d at 433 (“[I]nventory
write downs . . . can easily arise from negligence, oversight or simple
mismanagement, none of which rise to the standard necessary to support a
securities fraud action.”). Thus, even if they have adequately alleged that
Smith and Turner knew about Pier 1’s high inventory, the investors must still
allege facts demonstrating an “intent to deceive” or at least “severe
recklessness” relating to Smith’s and Turner’s failure to disclose Pier 1’s
markdown risk. See Tellabs, 551 U.S. at 319; Nathenson, 267 F.3d at 409.
         The “high inventory” allegations also suffer from other defects that cast
doubt on their sufficiency to create a strong inference of scienter under the
PSLRA. We briefly address each allegation in turn.
         First, the investors point to Smith’s comments at an employee town-hall
meeting in March 2014—before the Class Period. At this meeting, Smith
showed a PowerPoint slide with the phrase, “[w]e became victims of our own
ambition.”     The investors cite meeting attendees who said that this slide
referred to overbuying inventory and that Smith admitted that this was a
                                         10
   Case: 18-10998     Document: 00515082201      Page: 11   Date Filed: 08/19/2019



                                  No. 18-10998
mistake and that it was his “fault.” The investors rely on In re Dynegy, Inc.
Securities Litigation, where a district court found a strong inference of scienter
when the defendant allegedly “held an all-hands meeting” and falsely told
employees that trades at issue were made as stress tests of a new energy
trading platform. 339 F. Supp. 2d 804, 901 (S.D. Tex. 2004).
      This allegation pertains to backward-looking statements about events
that took place outside of the Class Period, which cannot establish scienter.
See Southland, 365 F.3d at 383 (“[F]raud cannot be proved by hindsight.”). In
addition, as Pier 1 notes, the information Smith shared was apparently
distributed to—not concealed from—the investors before and after the
meeting. Moreover, In re Dynegy is distinguishable because the investors do
not allege that Smith’s statements at the meeting were false. Cf. 339 F. Supp.
2d at 901.
      Second, the investors allege that Smith saw that the company failed to
meet sales goals and, as a result, did not authorize any employee bonuses at
any point during the Class Period. According to the investors, Smith himself
signed at least one letter informing employees that no bonuses would be paid.
However, this bonus information was repeatedly disclosed to the public and
therefore does not reveal any “secret” information that Smith and Turner were
trying to hide.
      Third, the investors allege that a confidential witness reported that
“[d]uring at least one inventory review meeting in mid-2014, Smith
acknowledged that inventory problems were pervasive.” The investors allege
that Smith knew that the problem was pervasive because he knew that Pier 1
was resorting to temporary storage units at hundreds of stores. Smith knew
about these temporary units, the investors allege, because Smith himself
ordered Pier 1 to stop using the temporary storage units in late 2013.


                                       11
    Case: 18-10998    Document: 00515082201       Page: 12   Date Filed: 08/19/2019



                                  No. 18-10998
      We note first that “courts must discount allegations from confidential
sources.” Ind. Elec. Workers, 537 F.3d at 535. Also, Smith’s 2013 directive to
stop using temporary storage units was made well before the Class Period,
which began in April 2014. This allegation is also vague: it shows only that
there were amorphous “inventory problems” and does not explain what those
problems were.
      Fourth, the investors allege that Pier 1’s former Director of Distribution
and Transportation reported that Smith asked him about almost 1,000 trailers
full of inventory parked outside Pier 1’s Baltimore distribution center. The
investors assert that these containers housed old inventory not available for
sale and Pier 1 failed to process the inventory into its distribution network.
The investors analogize to City of Pontiac General Employees’ Retirement
System v. Dell Inc., 2016 WL 6075540 (W.D. Tex. Sept. 16, 2016), in which the
court found that scienter was adequately pleaded because the plaintiffs alleged
that the defendant’s company had “ballooning inventories and operations
deficiencies within its sales divisions . . . resulting in stagnant growth, stalling
shipments, and stockpiling inventories[.]” Id. at *4. Just as in that case, the
investors argue, their complaint alleged that Smith was aware of excessive
inventory that was not getting sold quickly enough.
      We disagree that City of Pontiac applies here. In that case, the plaintiffs
alleged that the defendants “were aware of undisclosed facts that would
undermine the accuracy of their forward-looking statements.”             Id. at *3
(emphasis added). But mere knowledge of an inventory backlog would have
been known to anyone who looked at Pier 1’s earning statements. As we have
explained, the investors do not allege that Pier 1 misstated the amount of its
inventory, its costs, or its sales figures. Moreover, this Baltimore-specific
allegation says nothing about inventory problems across Pier 1’s other five
distribution centers and thousands of stores.
                                        12
   Case: 18-10998      Document: 00515082201      Page: 13   Date Filed: 08/19/2019



                                   No. 18-10998
        Fifth, the investors allege that the company received “numerous daily,
weekly, and monthly reports on sales figures, inventory figures, and purchases
that would increase inventory.”       The investors cite employees who either
drafted, sent, or saw these reports. The reports allegedly “showed the current
sales plan and the actual results every quarter, compared inventory to sales,”
and demonstrated that “extremely aggressive sales goals could not be met” in
2014.
        Internal corporate reports can support a strong inference of scienter only
when they meet two requirements: (1) the complaint has corroborating details
of the reports’ contents, authors, and recipients; and (2) the reports are
connected to the speaking executive in a persuasive way. Neiman, 854 F.3d at
748. As the district court concluded, the first element is not satisfied in this
case because the investors do not allege that any of these reports revealed the
information that is relevant here: the existence of significant markdown risk
(as opposed to merely high inventory).
        Sixth, the investors argue broadly that Pier 1 had a lot of inventory
backlogs at stores and distribution centers. For example, the investors allege
that Pier 1 “distribution centers were bursting at the seams with inventory,”
that (before the Class Period) “stores began telling headquarters that they
could not take more inventory,” and that “2014 Christmas merchandise could
not reach stores in time because of inventory backlogs.”          However, these
statements are all from confidential witnesses who do not relate any
interaction with Smith or Turner, so we must discount them. See Ind. Elec.
Workers, 537 F.3d at 535.        In addition, the investors “fail to tie these
statements” to the alleged fraud: like in Indiana Electric Workers, the fact that
Pier 1 had high inventory “does not necessarily lead to the conclusion that” the
company intentionally concealed that fact or otherwise failed to disclose
significant markdown risk. Id. at 537.
                                        13
    Case: 18-10998    Document: 00515082201      Page: 14    Date Filed: 08/19/2019



                                  No. 18-10998
      Seventh, the investors allege that Smith’s and Turner’s Sarbanes-Oxley
certifications of SEC filings support a strong inference of scienter. Sarbanes-
Oxley certifications support scienter only if there are “facts establishing that
the officer who signed the certification had a ‘reason to know, or should have
suspected, due to the presence of glaring accounting irregularities or other “red
flags,” that the financial statements contained material misstatements or
omissions.’” Id. at 545 (quoting Garfield v. NDC Health Corp., 466 F.3d 1255,
1266 (11th Cir. 2006)). As the district court observed, the investors have not
alleged these essential facts.
      Having evaluated the investors’ “high inventory” allegations de novo, we
conclude that they fall far short of establishing a strong inference of scienter,
either individually or taken together.
                                         3.
      We move on to consider the final category of allegations the investors
offer: allegations that Smith and Turner knew that Pier 1 faced significant
markdown risk. The company argues that the investors have not created a
strong inference of scienter because there is an equally plausible inference to
be drawn from Smith’s and Turner’s knowledge of Pier 1’s high inventory: that
Smith and Turner genuinely and reasonably believed that they could get rid of
that excessive inventory by buying less new inventory and selling the existing
inventory gradually at market prices.         The company suggests that this
alternative explanation is more compelling because Pier 1 kept ordering
inventory, which would be reasonable if Smith and Turner believed they could
sell it fairly quickly, but unreasonable if they knew they could not.
      As we explained, to establish scienter, the investors must allege that
Smith and Turner knew of significant markdown risk and either intentionally
or severely recklessly failed to disclose it to investors. See Plotkin, 407 F.3d at
696–97. Accordingly, this final category of allegations attempts to disprove the
                                         14
    Case: 18-10998       Document: 00515082201         Page: 15     Date Filed: 08/19/2019



                                      No. 18-10998
company’s alternative explanation by demonstrating that Smith and Turner
affirmatively knew that they could not sell Pier 1’s high inventory without
marking it down significantly. Specifically, the investors allege the following:
       (1) Pier 1’s products are all subject to immediate markdown risk
           because of their seasonal nature;
       (2) Pier 1 held clearance sales events beginning in May 2015;
       (3) Various other “red flags” put Smith and Turner on notice of
           Pier 1’s markdown risk; and
       (4) Item 303 of Regulation S-K required Smith and Turner to
           disclose “reasonably expect[ed]” markdown risk.

We will address each in turn.
       First, the investors allege that “Pier 1’s products are particularly subject
to markdown risk because Pier 1 is a trend-based fashion retailer” that is
subject to the whims of “consumer trends.” Once the fashion changes, the
investors’ theory goes, any inventory that Pier 1 still has can no longer be sold
without significantly marking down the price. This logic finds support in the
Second Circuit’s decision in Novak v. Kasaks, which found scienter when the
plaintiffs alleged that women’s apparel retailer Ann Taylor sat on years of out-
of-style clothing without marking down its inventory value. 216 F.3d 300, 311–
12 (2d Cir. 2000). The investors cite the company’s own statements in support
of this allegation. For example, they emphasize that in December 2016, Smith
said that Pier 1’s “products reflect current fashion trends.” They also highlight
the following statement in the company’s SEC filings: “The success of the
Company’s specialty retail business depends largely upon its ability to predict
trends in home furnishings consistently and to provide merchandise that
satisfies customer demand in a timely manner.” 2



       2The investors also rely on an expert report that was attached to their amended
complaint. However, the district court struck the report, so we do not consider it. See Munoz
                                             15
    Case: 18-10998       Document: 00515082201         Page: 16     Date Filed: 08/19/2019



                                      No. 18-10998
       Pier 1 responds by criticizing this characterization of its business.
Specifically, Pier 1 contends that it never describes itself as a “trend-based
fashion retailer” subject to markdown risk. Instead, while some of the products
are designed to be predictive of trends in home décor, a large percentage of its
inventory is, as the district court noted, comprised of “long-standing
collections” of “products that do well for [Pier 1] day in and day out.” For
example, Pier 1 emphasized in its brief and at oral argument that
approximately 50 percent of its inventory during the Class Period was “rebuy”
goods, such as the company’s well-known papasan chair. Pier 1 points out that
the investors even acknowledge in their complaint that Pier 1’s inventory
includes “durable or ‘regular rebuy’” inventory.
       We are persuaded by Pier 1’s arguments: The investors’ allegations do
not create a “strong inference” that all (or even most) of Pier 1’s inventory is so
trend driven that it could not be sold without significant markdowns. First,
the investors’ general allegation that Pier 1 is a “trend-based fashion retailer”
is conclusory. Even at the pleading stage, we need not take such statements
as true. See Cent. Laborers Pension Fund v. Integrated Elec. Servs., Inc., 497
F.3d 546, 550 (5th Cir. 2007) (“[W]e do not accept as true conclusory
allegations, unwarranted factual inferences, or legal conclusions.”). Turning
to the specific, non-conclusory facts that the investors offer, Smith’s 2016
statement was made outside the Class Period, and the statement in the SEC
filings is too vague—it does not say whether all inventory must be sold timely
or precisely how timely the inventory needs to be sold.                  Ultimately, the
investors’ argument is self-defeating: they must allege both that Pier 1 said
that all of its inventory is subject to markdown risk if not sold quickly (to



v. Orr, 200 F.3d 291, 303 (5th Cir. 2000) (declining to consider evidence that was struck and
therefore “not before the district court”).
                                             16
    Case: 18-10998     Document: 00515082201     Page: 17   Date Filed: 08/19/2019



                                  No. 18-10998
characterize Pier 1 as a trend-driven business) and, in the same breath, that
Pier 1 did not say that (to make an allegation of fraud). The investors cannot
have it both ways. And the investors have not explained why Pier 1 executives
kept ordering more inventory when they supposedly knew deep down that they
would not be able to sell it.
      Second, the investors allege that Smith and Turner must have known
about looming markdown risk because the company published ads announcing
“extraordinary markdowns (up to 50% and 70%)” in clearance sales starting in
May 2015. However, the investors first referenced these ads in their response
to the motion to dismiss their amended complaint—they did not plead these
facts. See Lohr v. Gilman, 248 F. Supp. 3d 796, 810 (N.D. Tex. 2017) (“A
plaintiff may not amend [its] complaint in [its] response to a motion to
dismiss.”). In addition, as Pier 1 points out, the investors’ reliance on these
sales is merely a temporal-proximity argument: the allegation asserts only that
Pier 1 said in April 2015 that there was not much markdown risk and then had
a sale in May 2015. Temporal proximity is weak circumstantial evidence of
fraud. See Coates v. Heartland Wireless Commc’ns, Inc., 55 F. Supp. 2d 628,
641 n.18 (N.D. Tex. 1999).
      Third, the investors point to an array of “red flags” that they allege
should have put Smith and Turner on notice of looming markdown risk.
Because these “red flags” were set out in an expert report that the district court
struck, we cannot consider them. See Munoz, 200 F.3d at 303 (declining to
consider evidence that was struck and therefore “not before the district court”).
      Fourth, the investors allege that Pier 1 had a duty to disclose markdown
risk under Item 303 of Regulation S-K, which directs companies, when filing
with the SEC, to “[d]escribe any known trends or uncertainties . . . that the
registrant reasonably expects will have a material . . . unfavorable impact
on . . . revenues.” 17 C.F.R. § 229.303(a)(3)(ii). We have never held that Item
                                       17
   Case: 18-10998     Document: 00515082201      Page: 18   Date Filed: 08/19/2019



                                  No. 18-10998
303 creates a duty to disclose under the Securities Exchange Act, and other
circuits are split. Compare Stratte-McClure v. Morgan Stanley, 776 F.3d 94,
102 (2d Cir. 2015) (“Item 303 imposes the type of duty to speak that can, in
appropriate cases, give rise to liability under Section 10(b).”), with In re
NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1056 (9th Cir. 2014) (“Item 303 does
not create a duty to disclose for purposes of Section 10(b) and Rule 10b-5.”).
      In any event, we need not address this issue because the investors’
argument assumes its conclusion: that Smith and Turner “reasonably
expect[ed]” that the high inventory ran the risk of significant markdowns.
Moreover, as the district court noted, Pier 1 did disclose these facts when it
announced in December 2015—at the end of the Class Period—that it would
take eighteen months to clear Pier 1’s inventory. The investors need other,
independent allegations showing that Smith or Turner reasonably expected
that excess inventory levels would have a material unfavorable impact on
revenues at some point prior to the December announcement.
      In summary, we conclude that the investors’ allegations that Smith and
Turner knew that Pier 1 had significant markdown risk fail to create a strong
inference of scienter. The investors’ scienter theory suffers from defects similar
to the appellants’ theory in Diodes. As in that case, rather than concealing its
inventory problem, Pier 1 “repeatedly alerted investors” that the problem
“would affect the company’s output” throughout the Class Period. See Diodes,
810 F.3d at 960. Moreover, like in Diodes, Smith’s and Turner’s conduct belied
any attempt to conceal the impact of that problem: were Pier 1 “attempting to
conceal” significant markdown risk, continuing to order inventory “would be
counterproductive.”   See id. at 960.    Thus, because none of the investors’




                                        18
    Case: 18-10998       Document: 00515082201        Page: 19     Date Filed: 08/19/2019



                                      No. 18-10998
scienter allegations satisfy the pleading standards of Rule 9(b) and the PSLRA,
we hold that they have not adequately alleged a securities fraud claim. 3
                                            IV.
       For the reasons described, we AFFIRM the district court’s judgment of
dismissal.




       3  Pier 1 also argues that the amended complaint fails to allege actionable
misrepresentations, another element of a § 10(b) claim. Dura Pharm., 544 U.S. at 341–42.
Because we conclude that the investors’ scienter allegations are inadequate, we do not reach
this issue.
                                            19
