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


6-15-2004

In Re: Alpharma Inc
Precedential or Non-Precedential: Precedential

Docket No. 02-3348




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                  PRECEDENTIAL                  Joseph J. DePalma, Esquire
    UNITED STATES COURT OF                      Lite, Depalma, Greenberg & Rivas, LLC
            APPEALS                             Two Gateway Center, 12 th Floor
     FOR THE THIRD CIRCUIT                      Newark, New Jersey 07102
          ____________
                                                Marc I. Willner, Esquire (Argued)
             No: 02-3348                        David Kessler, Esquire
            _____________                       Three Bala Plaza East, Suite 400
                                                Bala Cynwyd, PA 19004
       IN RE: ALPHARMA INC.
      SECURITIES LITIGATION                            Counsel for Appellant

            Maverick Capital, Ltd.,             Anthony J. Marchetta, Esquire
                                                John P. Scordo, Esquire
                   Appellant                    Pitney, Hardin, Kipp & Szuch, LLP
                                                P.O. Box 1945
                                                Morristown, New Jersey 07962
     Appeal from the United States
              District Court                    William H. Pratt, Esquire
      for the District of New Jersey            Frank Holozubiec, Esquire
 (D.C. Civil Action Nos. 00-cv-05452,           Wendy E. Long, Esquire (Argued)
00-cv-05507, 00-cv-05508, 00-cv-05630,          Kirkland & Ellis
     00-cv-05657 and 00-cv-06267)               153 East 53rd Street
District Judge: Honorable Joel A. Pisano        New York, New York 10022
       ______________________
         Argued on June 16, 2003                       Counsel for Appellees

 Before: ALITO, ROTH, and HALL* ,                        __________________
            Circuit Judges
                                                              OPINION
    (Opinion filed June 15, 2004)                        __________________


                                                ROTH, Circuit Judge:
                                                       This case involves a proposed class
                                                action suit brought by investors who
      *The Hon. Cynthia H. Hall, Circuit        purchased shares of Alpharma, Inc.,
Judge for the United States Court of            common stock between April 1999 and
Appeals for the Ninth Circuit, sitting by       October 2000. Specifically, plaintiffs
designation.                                    allege that defendants made materially

                                            1
false or misleading statements by reporting         2000. They allege that the company and
and then commenting on inflated revenue,            four of its executives caused the issuance
net income, and earnings per share results          of materially false and m isleading
during the proposed class period. These             financial results during the proposed class
results are alleged to have artificially            period, thereby artificially inflating the
inflated the company’s stock price, thereby         value of the company’s common stock.
damaging members of the proposed class.             Plaintiffs further allege that these
                                                    misstatements were the result of improper
       The District Court, concluding that
                                                    accounting procedures which inflated the
plaintiffs failed to state a claim for relief
                                                    company’s reported revenue, net income,
under federal securities laws and that
                                                    and earnings per share.
granting leave to amend would be futile,
dismissed the Complaint with prejudice              B. Parties
pursuant to Federal Rule of Civil
                                                           As stated above, plaintiffs seek to
Procedure 12(b)(6). For the reasons set
                                                    represent a proposed class of investors
forth below, we will affirm the final
                                                    who purchased shares of Alpharma stock
judgment of the District Court.
                                                    during the class period.       Defendant
         I. Factual Background                      Alpharma, Inc., is a multinational
                                                    corporation that produces pharmaceuticals
A. Overview
                                                    for both animal and human use. Its
       This case began as six separate              domestic headquarters is located in Fort
proposed class actions, all of which were           Lee, New Jersey. At all times relevant to
brought by shareholders alleging they               the Complaint, the company’s common
suffered damages as a result of being               stock traded on the New York Stock
induced to purchase shares of Alpharma’s            Exchange (NYSE). Alpharma sold a total
common stock on the basis of false or               of $537 million of common stock to
misleading statements made by the                   underwriters during the class period.
company and its top executives. On
                                                           Defendant Einar Sissener is
March 27, 2001, the District Court
                                                    Alpharma’s Chairman. Sissener served as
consolidated these actions, appointed
                                                    Chief Executive Officer (CEO) between
Maverick Capital, Ltd., as lead plaintiff,
                                                    June 1994 and June 1999, and then as
and ordered the filing of a consolidated
                                                    Chairman of the Office of the Chief
amended complaint
                                                    Executive from June 1999 to December
       Plaintiffs filed the Consolidated            1999. He signed Alpharma’s Form 10-K
Amended Class Action Complaint (the                 annual report for 1999. The Complaint
“Complaint”) on June 8, 2001. In the                alleges that he, together with relatives,
Complaint, plaintiffs seek to represent             owns sufficient voting shares to effectively
investors who purchased Alpharma stock              control the company.
between April 28, 1999, and October 30,
                                                           Defendant Ingrid Wiik assumed the

                                                2
position of President and CEO in January              accounting irregularities which caused
2000 and became a director in February                Alpharma to report inflated revenue
2000. She too signed the company’s Form               figures. These revenue figures, in turn,
10-K annual report for 1999. Wiik sold                affected the accuracy of its net income and
forty-six percent of her shares in Alpharma           earnings per share calculations, thereby
for a total of $839,075 during a four day             fueling an increase in the value of the
period in the first week of August 2000               company’s stock during the class period.
when the value of Alpharma’s stock was
                                                              More specifically, plaintiffs allege
near its high point of $71 per share.
                                                      that the individual defendants violated
       Defendant Jeffrey Smith served as              both Generally Accepted Accounting
Alpharma’s Vice President and Chief                   Principles (GAAP) and Alpharma’s own
Financial Officer (CFO) at all times                  revenue recognition policy2 by recording
relevant to the Complaint. He signed the              AHD sales as revenue even though the
Form 10-K annual report for 1999, as well             products sold were not shipped to
as each of the Form 10-Q quarterly reports            customers until as long as six months after
issued during the proposed class period.              the purported sale. In practice, this meant
During the first week of August 2000,                 that AHD customers had agreed to
Smith sold twenty-six percent of his                  purchase Alpharma products but delayed
holdings in the company for a total of                receipt and payment until subsequent
$1,240,549.                                           quarters. The purchased products were
                                                      then put on “customer hold” and shipped
       Defendant Bruce Andrews served
                                                      to a warehouse until the customers were
as president of Alpharma’s Animal Health
                                                      ready to receive and pay for them. These
Division (AHD) during all times relevant
                                                      so-called “pre-sales” began when Andrews
to the Complaint. Andrews sold seventy-
                                                      became president of the AHD in May 1997
seven percent of his shares in the company
                                                      and had allegedly become part of
for a total of $1,658,965 during the first
                                                      Alpharma’s “corporate culture” by the
week of August 2000.1
                                                      beginning of the class period. As a result,
C. Substantive Allegations                            plaintiffs allege that defendants either
                                                      knew or recklessly disregarded the fact
        The primary basis for the proposed
                                                      that (1) instances would arise in which
class action is plaintiffs’ allegation that the
                                                      customers would later refuse to receive
financial results released by defendants
                                                      and pay for orders already recognized as
during the class period were the product of
                                                      revenue in previous quarters, (2) they had


   1                                                     2
    Adopting the language used in the                     Alpharma’s revenue recognition
Complaint, we will refer to Sissener,                 policy stated that revenue would not be
Wiik, Smith, and Andrews collectively as              recognized until its products were
the “individual defendants”.                          shipped to customers.

                                                  3
failed to disclose that pre-sales essentially       October 30, the stock traded at $56.50. By
sapped future demand for the company’s              the time the NYSE closed the following
products, and (3) the use of pre-sales              day, the value of Alpharma’s shares had
encouraged the creation of fictitious sales.        fallen to $38.81.
        Alpharma restated its results for the               In placing the blame for this drop in
full year 1999, each quarter during 1999,           share price on the individual defendants,
and the first two quarters of 2000                  plaintiffs allege in their complaint:
following the close of trading on the
                                                           Each of the Individual
NYSE on October 30, 2000. In its press
                                                           Defendants by virtue of his
release, the company placed the blame for
                                                           or her executive and
the overstatements on employees in the
                                                           managerial positions with
Brazil division of the AHD and noted that,
                                                           the Compa ny, directly
after a full investigation, it was convinced
                                                           participated in the daily
that the problem had not spread beyond
                                                           management of the
Brazil.3 Prior to the announcement on
                                                           Company, and was directly
                                                           involved in the day-to-day
   3                                                       operations of the Company
   In connection with the press release,
                                                           at the highest level, and was
Wiik stated as follows:
                                                           p ri v y t o c o n f i d e n t i a l
                                                           proprietary inform ation
       We are extremely
                                                           concerning the Company
       disappointed by the actions
                                                           and its business and
       of these employees who
                                                           operations, and revenue
       breached our established
                                                           recognition policies. The
       policies and controls and
                                                           Individual Defendants were
       who violated the trust we
                                                           involved or participated in
       placed in them. We have
                                                           d r a f t in g , prod ucin g ,
       removed the individuals
                                                           reviewing                and/or
       involved and appointed
                                                           disseminating the false and
       new management to run
                                                           m i s l e a d i n g s t a te m e n t s
       our Animal Health
                                                           alleged [in the Complaint].
       operations in Brazil. While
       we do not consider the net                   They further assert that the individual
       financial impact of this                     defendants “had a duty to promptly
       matter material to the                       dissem inate truthful and accurate
       period affected, we will                     information with respect to Alpharma and
       restate our financial results                to promptly correct any public statements
       because it is the right thing
       to do.


                                                4
issued by or on behalf of the Company that        reports and financial statements directly to
had become false or misleading.”                  Alpharma’s New Jersey headquarters,
Plaintiffs allege this duty was violated          which then entered the data into the BPCS.
when defendants knowingly or recklessly           Further, Michael Weaver, AHD’s vice
disregarded the fact that “the misleading         president of finance and one of Andrews’
statements and omissions would adversely          subordinates, made monthly trips to Brazil
affect the integrity of the market for the        to review sales records and audit
Company’s stock and would cause the               inventory. Based on these facts, plaintiffs
price of the Company’s common stock to            allege that personnel in Alpharma’s New
become artificially inflated.”                    Jersey headquarters were “aware of or
                                                  should have been aware of and able to
D. Details of AHD’s Pre-Sales
                                                  access sales results from its Brazilian
       A lpharma’s AHD           conducts         operations.”
business with its customers through a staff
                                                          Beginning when he became
of sales representatives. At all times
                                                  president of the AHD in May 1997,
relevant to the Complaint, these sales
                                                  Andrews is alleged to have engaged in a
representatives were supervised by
                                                  number of questionable practices,
regional sales managers.        The sales
                                                  including (1) telling AHD staff that he
managers reported to Randy Maclin,
                                                  would take whatever action was necessary
AHD’s vice president of sales and
                                                  to raise Alpharma’s stock price, (2) firing
marketing within the United States, and
                                                  AHD sales representatives and managers
Loren Williams, vice president of sales
                                                  and replacing them with former co-
and marketing for AHD in Latin America.
                                                  workers from his prior employer, and (3)
I n a t yp i c a l t r a nsaction , sale s
                                                  no longer seeking input from sales
representatives wo uld provide the
                                                  representatives as to appropriate yearly
company’s Customer Service Department
                                                  sales quotas. This last action was relevant,
(CSD) with the details of the purchase,
                                                  as year-end bonuses were tied to the staff’s
including whether the product was to be
                                                  ability to meet the sales goals set by
shipped, picked up, or placed on
                                                  Andrews. Plaintiffs allege that these
“customer hold.” The CSD would then
                                                  purportedly unrealistic sales targets caused
enter the transaction into the company’s
                                                  employees to engage in questionable
Business Planning and Control System
                                                  activities such as the pre-sales described
(BPCS), which allocated inventory for the
                                                  above. Because the number of products on
sale and created an invoice.         Each
                                                  customer hold could be determined from
warehouse would conduct a monthly
                                                  an examination of BPCS entries, plaintiffs
inventory, the results of which were
                                                  conclude that examination of such entries
submitted to Alpharma’s headquarters in
                                                  “did or could have alerted [defendants] to
New Jersey. However, the Brazil division
                                                  the fact that [AHD] was inflating its
of AHD did not use the BPCS. Instead, it
                                                  results by, essentially, shipping to itself.”
recorded sales by sending copies of sales

                                              5
                                                       income, and earnings per share compared
                                                       to the first quarter of 1998. Because a
        The Complaint goes on to detail a
                                                       report issued by a Wall Street analyst
number of setbacks and expensive
                                                       following the announcement of first
acquisitions which purportedly weighed on
                                                       quarter results mentioned increased sales
the company and pressured executives to
                                                       in Latin America and Southeast Asia,
increase revenue in AHD. Plaintiffs allege
                                                       plaintiffs allege that defendants “were
that, as a result of these difficulties, the use
                                                       aware that the market was attributing
of pre-sales spread beyond AHD.
                                                       Alpha rma’s a ppa re n t s u c c e s s to
Specifically, they assert that Knut
                                                       international oper ations, in cludin g
Moksnes and Laritz Valderhaug, the
                                                       specifically Latin America.”
president and senior controller of the
Aquatic Animal Health Division (AAHD),                        The company filed its Form 10-Q
asked AAHD controllers to record                       for the first quarter of 1999 with the
unreceived cash as accounts receivable                 Securities and Exchange Commission
despite the fact that the products in                  (SEC) on May 12, 1999.4 This form,
question had not yet been shipped to the               signed by vice president and CFO Smith
customer. This resulted in the resignation             on behalf of himself and the company,
of one AAHD controller, who cited her                  contained the same inflated numbers as the
concerns during an exit interview, which,              April 28 press release. These numbers
she believes, was documented and placed                were revenue of $156,759,000, net income
in her personnel file at Alpharma’s New                of $7,436,000, and earnings per share of
Jersey headquarters.         The Complaint             twenty-seven cents. In its October 30,
further alleges that Loren Williams, who               2000, restatement, Alpharma lowered
served until October 2000 as AHD’s vice                revenue by $810,000, net income by
president of sales and marketing for Latin             $238,000, and earnings per share by one
Am eric a , r e s i g n e d o v e r s imila r          cent.
disagreements with management but that
                                                              (2) Second Quarter of 1999
Williams is unable to assist plaintiffs’
counsel due to a non-disclosure agreement.

                                                          4
                                                           Each of the 10-Q Forms filed by
E. Statements Made During the Class
                                                       Alpharma contained a notes section
Period
                                                       which stated, in part, that “[t]he
       (1) First Quarter of 1999                       accompanying consolidated condensed
                                                       financial statements include all
        The class period began on April 28,
                                                       adjustments (consisting only of normal
1999, when Alpharma announced results
                                                       recurring accruals) which are, in the
for the first quarter of 1999. The company
                                                       opinion of management, considered
issued a press release which highlighted
                                                       necessary for a fair presentation of the
the marked improvement in revenues, net
                                                       results for the periods presented.”

                                                   6
        Alpharma announced results for the             highlighted increases in revenue, net
second quarter of 1999 on July 28, 1999.               income, and earnings per share. The
Comparing results to the second quarter of             earnings per share number exceeded Wall
1998, the accompanying press release                   Street’s consensus estimate by two cents,
highlighted increases in revenue, net                  extending Alpharma’s streak of consensus-
income, and earnings per share. The                    beating quarters to eleven. The value of
earnings per share number exceeded Wall                the company’s stock increased by
Street’s consensus estimate by one cent,               approximately thirteen percent following
thereby continuing Alpharma’s streak of                the issuance of third quarter results.
ten consecutive quarters of exceeding
                                                               The company filed its Form 10-Q
analysts’ expectations. The value of the
                                                       for the third quarter of 1999 with the SEC
c o m p a n y ’ s s t o c k in c r e a s e d b y
                                                       on November 2, 1999. This form, signed
approximately twelve percent following
                                                       by Smith on behalf of himself and the
the issuance of second quarter results.
                                                       company, contained the same inflated
        The company filed its Form 10-Q                numbers as the October 25 press release.
for the second quarter of 1999 with the                These num bers w ere revenue of
SEC on August 9, 1999. This form, signed               $203,131,000, net income of $11,263,000,
by Smith on behalf of himself and the                  and earnings per share of thirty-eight
company, contained the same inflated                   cents. In its October 30, 2000 restatement,
numbers as the July 28 press release.                  Alpharma lowered revenue by $3,302,000,
These numbers were revenue of                          net income by $890,000, and earnings per
$163,839,000, net income of $7,772,000,                share by three cents. As with the second
and earnings per share of twenty-eight                 quarter, Alpharma would have missed
cents.      In the October 30, 2000,                   analysts’ earnings estimates absent the
restatement, Alpharma lowered revenue by               overstatement of revenue.
$1,622,000, net income by $404,000, and
                                                              (4) Fourth Quarter and Full Year
earnings per share by two cents. The
                                                       1999
consensus estimate for the second quarter
of 1999 had called for earnings per share                     The company’s fourth quarter and
of twenty-seven cents. Thus, Alpharma                  full year results for 1999 were issued on
would have missed this estimate by one                 February 23, 2000. The accompanying
cent had its results been reported correctly           press release highlighted both quarterly
in the first instance.                                 and yearly growth in revenue, net income,
                                                       and earnings per share. The earnings per
       (3) Third Quarter of 1999
                                                       share number exceeded expectations for
       Alpharma announced its third                    the twe lf th c o n s e cutive quar te r.
quarter results on October 25, 1999.                   Highlighting this fact, Sissener issued the
Comparing results to the third quarter of              following statement:
1998, the accompanying press release
                                                              Alpharma has now achieved

                                                   7
              12 conse cutive                     February 23 press release. The fourth
              quarters of growth                  quarter numbers were revenue of
              above the goals we                  $218,447,000, net income of $13,080,000,
              have set.       I am                and earnings per share of forty-one cents.
              pleased with these                  In its October 30, 2000, restatement,
              exceptional results,                Alpharma lowered fourth quarter revenue
              w hich I believe                    by $3,999,000, net income by $1,047,000,
              reflect the success of              and earnings per share by three cents. The
              the focused growth                  full year numbers for 1999 were similarly
              strategies we have                  lowered following restatement. Revenue
              established and of                  of $742,176,000, net income of
              the efforts of our                  $39,551,000, and earnings per share of
              employees all around                $1.34 were decreased by $9,733,000,
              the world.        The               $2,579,000, and nine cents, respectively.
              record results are                  The 10-K for 1999 further stated “that
              p art icu la rly                    ‘revenue is recognized upon shipment of
              gratifying because                  products to customers.’”
              they were achieved
                                                         (5) First Quarter of 2000
              as we continued to
              m a k e         a n d                       Alpharma announced results for the
              successfully absorb                 first quarter of 2000 on April 26, 2000. As
              significant strategic               before, the company highlighted increases
              acquisitions that are               in revenue, net income, and earnings per
              an integral part of                 share compared to the first quarter of
              our long-term growth                1999.        In connectio n w ith this
              strategy.                           announcement, Wiik stated that “[t]hese
                                                  record first quarter results reflect the
                                                  continued successful implementation of
Similarly, Wiik stated that “[c]learly,           our growth strategies to build the global
Alpharma’s established strategies for             Alpharma enterprise. We are experiencing
growth are working. By continuing to              strong top line growth due to both new
execute, we look for this profitable growth       product introductions and complimentary
to continue in 2000 and beyond.”                  acquisitions . . . we expect continued
                                                  strong revenue growth throughout 2000.”
       The company filed its Form 10-K
                                                  The earnings per share number exceeded
for the fourth quarter and full year 1999
                                                  Wall Street’s consensus estimate by two
with the SEC on M arch 29, 2000. This
                                                  cents, extending Alpharma’s streak of
form, signed by Smith, Sissener, and W iik
                                                  consensus-beating quarters to thirteen.
on behalf of themselves and the company,
                                                  Between April 25 and May 1, the value of
contained the same inflated numbers as the
                                                  Alpharma’s stock increased by nine

                                              8
percent.                                               announcement on October 30. They
                                                       further claim that employees in the
       The company filed its Form 10-Q
                                                       company’s New Jersey headquarters were
for the first quarter of 2000 with the SEC
                                                       notified of incidents of improper
on May 8, 2000. This form, signed by
                                                       accounting by Paulo Andreoli, a technical
Smith on behalf of himself and the
                                                       sales manager in AHD’s Brazil division.
company, contained the same inflated
                                                       Andreoli allegedly was told that there
numbers as the April 26 press release.
                                                       would be no investigation into his
These numbers were revenue of
                                                       allegations. However, plaintiffs contend
$118,280,000, net income of $11,114,000,
                                                       that the information submitted by Andreoli
and earnings per share of thirty-five cents.
                                                       “was reviewed or available for review by
Following restatement, revenue was
                                                       all Defendants, and in particular,
lowered by $2,202,000, net income by
                                                       defendant Andrews, president of[AHD].”
$749,000, and earnings per share by two
                                                       As an example of the activities occurring
cents. As in previous quarters, Alpharma
                                                       at Alpharma, plaintiffs allege that the
would have missed analysts’ earnings
                                                       Brazil division’s December 1999 sales
estimates absent the overstatement of
                                                       report contained nineteen fraudulent sales,
revenue.
                                                       eighteen of which occurred three days
       (6) Second Quarter of 2000                      before the end of the quarter and reflected
                                                       sales activity that was “grossly out of line
       Alpharma announced its results for
                                                       with the sales made during the rest of the
the second quarter of 2000 on July 31,
                                                       month.”
2000. As before, the company highlighted
increases in revenue, net income, and                         Quoting 17 C.F.R. § 229.303(a)(1)-
earnings per share compared to the second              3(3) and Instruction 3, plaintiffs further
quarter of 1999. On August 1, the value of             allege that defendants had a duty under
Alpharma’s stock rose ten percent to                   applicable SEC regulations to “disclose in
$71.94, the highest close reached at any               periodic reports filed with the SEC ‘known
time during the class period.                          trends or a ny known de man d s ,
                                                       commitments, events or uncertainties’ that
F. The Discovery of the Accounting
                                                       are reasonably likely to have a material
Irregularities
                                                       impact on a company’s sales revenues,
           Plaintiffs assert that the internal         income or liquidity, or cause previously
i n v e s ti g a t io n o f the ac coun tin g          reported financial information not to be
irregularities described by Alpharma                   indicative of future operating results.”
would have taken a significant amount of               Ad ditionally, plaintiffs assert that
time to complete and that the company                  defendants had “a duty ‘to make full and
must therefore have been aware of the                  prompt announcements of material facts
accounting irregularities occurring in                 regarding the company’s financial
B r a z i l l o n g b e f o r e t h e pu b l i c


                                                   9
condition.’” 5 They allege that these duties        On May 20, 2002, the District Court,
were violated by defendants’ issuance of            concluding that plaintiffs failed to state a
financial results that violated both GAAP           claim under either Rule 10b-5 or Section
and Alpharma’s own revenue recognition              20(a), dismissed the Complaint with
policy. As noted by the District Court, this        prejudice pursuant to Federal Rule of Civil
section of the Complaint is followed by             Procedure 12(b)(6). Plaintiffs’ motion for
additional allegations of scienter which            reconsideration was denied by the District
add nothing of substance to the claims              Court on August 12, 2002, and this appeal
described above.                                    followed.
H. Plaintiffs’ Rule 10b-5 and Section                 III. Jurisdiction and Standard of
20(a) Claims                                        Review
The above-described allegations lay the                    Plaintiffs filed this proposed class
groundwork for the two counts asserted in           action pursuant to Sections 10(b) and 20(a)
                                                    of the Exchange Act, 15 U.S.C. §§ 78j(b)
the Complaint. Count I is brought against
                                                    and 78t(a). As such, the District Court
all defendants pursuant to Rule 10b-5. In
                                                    exercised jurisdiction over this case
broad terms, it asserts that defendants
                                                    pursuant to 28 U.S.C. § 1331. We have
acted both individually and collectively to
                                                    jurisdiction to review the final judgment of
defraud investors by making materially
                                                    the District Court pursuant to 28 U.S.C. §
false or misleading statements in
                                                    1291.
connection with the sale of the company’s
stock. Count II alleges that the individual                Our review of the District Court’s
defendants were “controlling persons” of            dismissal of the Complaint pursuant to
Alpharma, and thus violated Section 20(a)           Rule 12(b)(6) is plenary. Brown v. Philip
of the Securities Exchange Act of 1934, 15          Morris, Inc., 250 F.3d 789, 796 (3d Cir.
U.S.C. § 78, et seq. (the “Exchange Act”),          2001). As the District Court did, “[w]e
by causing the Section 10(b) violation              must accept as true all of the factual
described in Count I.                               allegations in the complaint as well as the
                                                    reasonable inferences that can be drawn
         II. Procedural History
                                                    from them,” and “may dismiss the
       As noted above, the Complaint was            complaint only if it is clear that no relief
filed on June 8, 2001, following                    could be granted under any set of facts that
consolidation of the six initial proposed           could be proved consistent with the
class actions pending against Alpharma.             allegations.” Id. We similarly exercise
                                                    plenary review over the District Court’s
                                                    interpretation of the applicable federal
   5
     Quoting SEC Release No. 34-8995,               securities laws. In re Rockefeller Center
3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at             Properties, Inc. Sec. Litig., 311 F.3d 198,
17,095, 17 C.F.R. § 241.8995 (October               215 (3d Cir. 2002). However, we review
15, 1970).

                                               10
the District Court’s denial of plaintiffs’          Solutions, Inc., 277 F.3d 658, 666 (3d Cir.
alternative request for leave to amend the          2002) (quoting 15 U.S.C. § 78j(b)).
Complaint for abuse of discretion. See In           Section 10(b) is enforced through Rule
re NAHC, Inc. Sec. Litig., 306 F.3d 1314,           10b-5, which creates a private cause of
1323 (3d Cir. 2002); In re Burlington Coat          action for investors harmed by materially
Factory Sec. Litig., 114 F.3d 1410, 1434            false or misleading statements. In re
(3d Cir. 1997).                                     Advanta Corp. Sec. Litig., 180 F.3d 525,
                                                    535 (3d Cir. 1999). Specifically, Rule
             IV. Discussion
                                                    10b-5 “makes it unlawful for any person
Plaintiffs’ argument is straightforward.            ‘[t]o make any untrue statement of a
They contend that the District Court erred          material fact or to omit to state a material
                                                    fact necessary to make the statements
in dismissing the Complaint for failure to
                                                    made in light of the circumstances under
state a claim upon which relief may be
                                                    which they were made, not misleading . . .
granted and, in the alternative, that the
                                                    in connection with the purchase or sale of
court abused its discretion in failing to
                                                    any security.’” In re Ikon, 277 F.3d at 666
grant them leave to amend. We begin our
                                                    (quoting 17 C.F.R. § 240.10b-5(b)).
analysis with an overview of the relevant
pleading requirements and then address in                  In order to state a claim pursuant to
turn each of plaintiffs’ assignments of             Rule 10b-5, plaintiffs must allege that
error.                                              defendants “(1) made a misstatement or an
                                                    omission of a material fact (2) with
A. Overview
                                                    scienter
       The gravamen of the Complaint is
                                                    (3) in connection with the purchase or the
the Rule 10b-5 claim asserted against all
                                                    sale of a security (4) upon which
defendants in Count I.6 Thus, we begin by
                                                    [plaintiffs] reasonably relied and (5) that
noting that “Section 10(b) prohibits the
                                                    [plaintiffs’] reliance was the proximate
‘use or employ, in connection with the
                                                    cause of [their] injury.” Id. In so doing,
purchase or sale of any security, . . . [of]
                                                    the Private Securities Litigation Reform
any manipulative or deceptive device or
                                                    Act (PSLRA), 15 U.S.C. § 78u-4 et seq.,
contrivance in contravention of such rules
                                                    requires plaintiffs to “specify each
and regulations as the Commission may
                                                    statement alleged to have been misleading,
prescribe . . ..’” In re Ikon Office
                                                    the reason or reasons why the statement is
                                                    misleading, and, if an allegation regarding
   6                                                the statement or omission is made on
    As discussed in greater detail below,
                                                    information and belief, the complaint shall
the viability of Count II, which alleges
                                                    state with particularity all facts on which
controlling person liability pursuant to
                                                    that belief is formed.” 15 U.S.C. § 78u-
Section 20(a) of the Exchange Act
against the individual defendants, is
contingent upon the success of Count I.

                                               11
4(b)(1)(B). 7 Of particular significance           ‘strong inference’ of fraud may be
here, the PSLRA also requires that the             established either (a) by alleging facts to
applicable mental state be pled with               show that defendants had both motive and
particularity. In re Advanta, 180 F.3d at          opportunity to commit fraud, or (b) by
530. Specifically, it states, in relevant          alleging facts that constitute strong
part, as follows:                                  circumstantial evidence of conscious
                                                   misbehavior or recklessness.”        In re
       In any private action arising
                                                   Burlington Coat Factory, 114 F.4d at 1418.
       under this chapter in which
                                                   The appropriate sanction for complaints
       the plaintiff may recover
                                                   which fail to meet these requirements is
       money damages only on
                                                   dismissal. In re Advanta, 180 F.3d at 531
       proof that the defendant
                                                   (citing 15 U.S.C. § 78u-4(b)(3)(A)).
       acted with a particular state
       of mind, the complaint shall,                       In addition to the requirements
       with respect to each act or                 contained in the PSLRA, Plaintiffs also
       omission alleged to violate                 must comply with those set forth in
       this chapter, state with                    Federal Rule of Civil Procedure 9(b). Id.
       particularity facts giving rise             Rule 9(b) provides, in relevant part, that
       to a strong inference that the              plaintiffs alleging fraud must state “the
       defendant acted with the                    circumstances constituting fraud or
       required state of mind.                     mistake . . . with particularity.” Fed. R.
                                                   Civ. P. 9(b). However, plaintiffs may
15 U.S.C. § 78u-4(b)(2). “The requisite
                                                   generally alleg e “[m]a lice, intent,
                                                   knowledge, and other condition of mind of
                                                   a person.” Id. As applied to Rule 10b-5
   7
    The purpose of the heightened                  claims, “Rule 9(b) requires a plaintiff to
pleading requirements contained in the             plead (1) a specific false representation [or
PSLRA is “to restrict abuses in securities         omission] of material fact; (2) knowledge
class-action litigation, including: (1) the        by the person who made it of its falsity; (3)
practice of filing lawsuits against issuers        ignorance of its falsity by the person to
of securities in response to any                   whom it was made; (4) the intention that it
significant change in stock price,                 should be acted upon; and (5) that the
regardless of defendants’ culpability; (2)         plaintiff acted upon it to his damage.” In
targeting of ‘deep pocket’ defendants; (3)         re Rockefeller Center Properties, 311 F.3d
the abuse of the discovery process to              at 216 (citation and internal quotations
coerce settlement; and (4) manipulation            omitted); GSC Partners CDO Fund v.
of clients by class action attorneys.” In          Washington, F.3d [14](3d Cir. 2004).
re Advanta, 180 F.3d at 531 (citing H.R.           Further, “Rule 9(b) requires plaintiffs to
Conf. Rep. No. 104-369, at 28 (1995),              identify the source of the allegedly
reprinted in 1995 U.S.C.C.A.N. 679,                fraudulent misrepresentation or omission.”
748).

                                              12
Id. In sum, “Rule 9(b) requires, at a              must “alleg[e] facts ‘establishing a motive
minimum, that plaintiffs support their             and an opportunity to commit fraud, or . .
allegations of securities fraud with all of        . set[] forth facts that constitute
the essential factual background that              circumstantial evidence of either reckless
would accompany ‘the first paragraph of            or conscious behavior.’” In re Advanta,
any newspaper story’ — that is, the ‘who,          180 F.3d at 534-35 (quoting Weiner v.
what, when, where and how’ of the events           Quaker Oats Co., 129 F.3d 310, 318 n.8
at issue.” Id. at 217 (quoting In re               (3d Cir. 1997)); In re Digital Island
Burlington Coat Factory, 114 F.3d at               Securities Litigation, 357 F.3d 322, 328-29
1422); GSC Partners at [20]. Importantly,          (3d Cir. 2004). In so doing, plaintiffs
to the extent that Rule 9(b)’s allowance of        “must allege facts that could give rise to a
general pleading with respect to mental            ‘strong’ inference of scienter”; general
state conflicts with the PSLRA’s                   allegations that defendants knew or
requirement that plaintiffs “state with            recklessly disregarded the false nature of
particularity facts giving rise to a strong        the statements at issue are insufficient. In
inference that the defendant acted with the        re Burlington Coat Factory, 114 F.3d at
required state of mind,” 15 U.S.C. § 78u-          1422.
4(b)(2), the PSLRA “supersedes Rule 9(b)
                                                           Plaintiffs pleading scienter through
as it relates to Rule 10b-5 actions.” In re
                                                   motive and opportunity must support their
Advanta, 180 F.3d at 531 n.5.
                                                   allegations with “facts stated ‘with
       Here, the primary basis for the             particularity’” that “give rise to a ‘strong
District Court’s dismissal of the Complaint        inference’ of scienter.” In re Advanta, 180
was plaintiffs’ failure to adequately plead        F.3d at 535 (quoting 15 U.S.C. § 78u-
the essential element of scienter. We have         4(b)(2)). Thus, under the PSLRA, “catch-
previously defined “scienter” in the               all allegations that defendants stood to
context of securities fraud as “a mental           benefit from wrongdoing and had the
state embracing intent to deceive,                 opportunity to implement a fraudulent
manipulate or defraud, or, at a minimum,           scheme are no longer sufficient, because
highly unreasonable (conduct), involving           they do not state facts with particularity or
not merely simple, or even excusable               give rise to a strong inference of scienter.”
negligence, but an extreme departure from          Id.; GSC Partners, F3d at [15-16].
the standards of ordinary care, . . . which        Plaintiffs attempting to satisfy their burden
presents a danger of misleading buyers or          of pleading scienter by alleging facts
sellers that is either known to the                establishing recklessness must allege a
defendant or is so obvious that the actor          statement “involving not merely simple, or
must have been aware of it.” In re Ikon,           even inexcusable negligence, but an
277 F.3d at 667 (citations and internal            extreme departure from the standards of
quotations omitted). In order to properly          ordinary care, and which presents a danger
plead scienter under the PSLRA, plaintiffs         of misleading buyers or sellers that is


                                              13
either known to the defendant or is so                 They argue that motive and opportunity
obvious that the actor must have been                  are established by their allegations
aware of it.” In re Advanta, 180 F.3d at               regarding the defendants’ sale of stock
535 (citation and internal quotations                  during the class period.
omitted). It is against this backdrop that
                                                               We disagree. Turning first to the
we examine the Complaint at issue here.
                                                       issue of recklessness, we concur with the
B. Dismissal of the Complaint                          District Court’s conclusion that, at bottom,
                                                       plaintiffs’ allegations rest primarily upon
       (1) Plaintiffs’ Rule 10b-5 Claim
                                                       the premise that the individual defendants
        As noted above, the District Court             are liable simply by virtue of the positions
held that plaintiffs failed to adequately              they hold within the company.            We
plead the essential element of scienter, and           recently rejected similar allegations in In
thus failed to state a claim under the                 re Advanta, holding that “[g]eneralized
federal securities laws. In particular, the            imputations of knowledge” do not satisfy
court concluded that the allegations                   the scienter requirement “regardless of the
contained in the Complaint failed to satisfy           defe ndan ts’ positio ns w ithin the
the strict pleading requirements of Rule               company.” 180 F.3d at 539. Rather,
9(b) and the PSLRA. In reaching this                   plaintiffs must allege “an extreme
conclusion, the District Court noted that              departure from the standards of ordinary
the Complaint merely imputes scienter to               care,” in order to establish recklessness.
the individual defendants as a result of               Id. at 535. As explained below, they fail to
their positions within the company, and                do so here with respect to any of the four
thus fails to establish that either they or, by        individual defendants.
extension, the corporation were involved
                                                              The Complaint fails to allege that
with the accoun ting irreg ularities
                                                       Sissener, Wiik, or Smith were involved in
occurring in AHD’s Brazil division.
                                                       any way with the violations of GAAP and
       On appeal, plaintiffs assert that the           Alpharma’s revenue recognition policy
Complaint adequately pleads scienter by                occurring in Brazil.     The allegations
alleging both recklessness and motive.                 against Andrews similarly fail.       As
More specifically, they contend they have              defendants note, the Complaint fails to
demonstrated recklessness by alleging that             identify any pre-sales made pursuant to
(1) defendants violated GAAP as well as                Andrews’ instruction. Rather, plaintiffs
Alpharma’s internal revenue recognition                simply allege that Andrews set “lofty”
policy, and (2) that “whistleblowers”                  quarterly sales goals and then pressured
within AHD’s Brazil division reported the              sales representatives to meet them.8 We
use of pre-sales and questionable
accounting practices to Alpharma’s New
Jersey headquarters where it could be                     8
                                                          Paragraphs 53 and 55 of the
accessed by the individual defendants.
                                                       Complaint allege the following:

                                                  14
hold that such conclusory allegations are        rather, “Plaintiffs must accompany their
insufficient to state a claim under the          legal theory with factual allegations that
applicable pleading requirements. See In         make their theoretically viable claim
re Burlington Coat Factory, 114 F.3d at          plausible”) (emphasis deleted); see also
1418 (holding that “even under a relaxed         Kushner v. Beverly Enterprises, Inc., 317
application of Rule 9(b), boilerplate and        F.3d 820, 827-28 (8th Cir. 2003) (holding
conclusory allegations will not suffice”;        that allegations that defendants “designed
                                                 and implemented” improper accounting
                                                 policies failed to state a claim for
                                                 securities fraud in the absence of
      [I]n order to move volumes
                                                 “ a l l e g a t i o n s o f p a r t ic u l a r fa c ts
      of products necessary to
                                                 demonstrating how the defendants knew of
      meet the lofty quarter-end
                                                 the scheme at the time they made their
      numbers set by defendant
                                                 statements of compliance, that they knew
      Andrews, sales
                                                 the financial statements overrepresented
      representatives were
                                                 the company’s true earnings, or that they
      instructed to offer
                                                 were aware of a GAAP violation and
      customers incentives and
                                                 disregarded it . . .. Rote allegations that
      special sales terms in order
                                                 the defendants knowingly made false
      to get the customers to buy
                                                 statements of material fact fail to satisfy
      product they already had in
                                                 the heightened pleading standard of the
      stock. To this end, sales
                                                 Reform Act.”) (citation and internal
      representatives were
                                                 quotations omitted). Further, allegations
      instructed to extend the
                                                 that Williams, Andrews’ subordinate,
      payment and shipping
                                                 knew of the irregularities occurring in
      period from 30 days to as
                                                 Brazil provide an insufficient basis upon
      much as 180 days.
                                                 which to impute knowledge to Andrews.
                                                 See Kushner, 317 F.3d at 828 (holding that
***
                                                 an allegation that someone involved in the
                                                 relevant scheme reported to one of the
      [I]n response to defendant
                                                 named defendants was “not specific
      Andrews’ directive, sales
                                                 enough to support a strong inference that
      invoices were issued and
                                                 [the defendant] knew of or participated in
      sales were immediately
                                                 the fraudulent practice while it was
      recorded on Alpharma’s
                                                 occurring”).
      books and identified as
      accounts receivable, even if                       Indeed, “[w]hile under Rule
      the product was not paid for               12(b)(6) all inferences must be drawn in
      and shipped out to the                     plaintiffs’ favor, inferences of scienter do
      c u s t o m e r f o r s e v e ra l         not survive if they are merely reasonable .
      months.

                                            15
. .. Rather, inferences of scienter survive         required state of mind.” 15 U.S.C. § 78u-
a motion to dismiss only if they are both           4(b)(2). Looked at as a whole, plaintiffs’
reasonable and ‘strong’ inferences.” In re          allegations rest on nothing more than a
Navarre Corp. Sec. Litig., 299 F.3d 735,            “series of inferences . . . too tenuous to
741 (8th Cir. 2002) (citation and internal          amount to one of those highly
quotations omitted). Such clearly cannot            unreasonable           omissions        or
be said here. Thus, the District Court              misrepresentations that involve not merely
correctly concluded that the Complaint              simple or even inexcusable negligence, but
fails to “link Alpharma’s executives or any         an extreme departure from the standards of
of the named Individual Defendants to the           ordinary care.” Ziemba v. Cascade Int’l,
Brazil incidents.”                                  Inc., 256 F.3d 1194, 1210 (11th Cir. 2001).
        Plaintiffs’           so-called
“whistleblower” allegations — which                               Moreover, we note that the
assert that Alpharma’s New Jersey                   Complaint is devoid of any allegations
headquarters was alerted to the violation of        which would establish that AHD’s Brazil
the company’s revenue recognition policy            division was so central to Alpharma’s
by employees within AHD’s Brazil                    business that its increased revenue figures
division and that the individual defendants         should have received particular attention
therefore had access to this information —          from company executives. Indeed, the
fare little better. As defendants note, the         Brazil division’s total revenue accounted
Complaint simply alleges that a sales               for only slightly more than one half of one
manager in AHD’s Brazil division notified           percent of the company’s total revenue in
employees in New Jersey of the                      1999. In view of this, it strains credulity to
accounting irregularities in Brazil. There          assert that company executives must have
was no investigation of these allegations,          known that a spike in the Brazil division’s
nor does the Complaint allege that the              sales was the result of violations of GAAP
allegations of improper accounting were             and of the company’s revenue recognition
ever passed up the chain of command to              policies rather than a normal increase in
Sissener, Wiik, or Smith. In addition,              business. See In re Advanta, 180 F.3d at
plaintiffs’ allegation that Andrews knew of         539 (noting that “[i]t is well established
this information is wholly conclusory and           that a pleading of scienter may not rest on
thus cannot survive a motion to dismiss.            a bare inference that a defendant must
See In re Burlington Coat Factory, 114              have had knowledge of the facts.”)
F.3d at 1418. Moreover, the mere fact that          (citation and internal quotations omitted);
the information was sent to Alpharma’s              see also Kushner, 317 F.3d at 829 (noting
headquarters and therefore was available            that “‘the failure of a parent company to
for review by the individual defendants is          i n t e rp r e t e x t r a or d i n a rily positiv e
insufficient to “giv[e] rise to a strong            performance by its subsidiary . . . as a sign
inference that [defendants] acted with the          of problems and thus to investigate further


                                               16
does not amount to recklessness under the              claims premised on recklessness.
securities laws’”) (quoting Novak v.
                                                               We turn next to plaintiffs’
Kasaks, 216 F.3d 300, 309 (2d Cir. 2000));
                                                       allegations as to motive and opportunity.
Chill v. General Elec. Co., 101 F.3d 263,
                                                       To summarize, plaintiffs assert that the
270 (2d Cir. 1996) (holding that, “[g]iven
                                                       existence of scienter is established by the
the significant burden on the plaintiff in
                                                       fact that (1) both the company and three of
stating a fraud claim based on
                                                       the four individual defendants sold shares
recklessness, the success, even the
                                                       of common stock at inflated prices during
extraordinary success, of a subsidiary will
                                                       the class period, and (2) that all defendants
not suffice in itself to state a claim that the
                                                       thus benefitted from the alleged fraud at
parent was reckless in failing to further
                                                       the expense of investors. The District
investigate. Fraud cannot be inferred
                                                       Court rejected these allegations, noting
simply because [the parent corporation]
                                                       that (1) Sissener, Alpharma’s largest
might have been more curious or
                                                       shareholder, and thus the one who stood
concerned about the activity at [its
                                                       gain the most from the alleged fraud, sold
subsidiary].”); In re Comshare, Inc. Sec.
                                                       no stock during the class period and
Litig., 183 F.3d 542, 554 (6th Cir. 1999)
                                                       therefore failed to benefit from the
(citing Chill for the proposition that courts
                                                       fraudulent scheme of which he is alleged
“should not presume recklessness or
                                                       to have been a major participant; and (2)
intentional misconduct from a parent
                                                       the Complaint fails to allege how much
corporation’s reliance on it subsidiary’s
                                                       stock the individual defendants received as
internal controls”).         At worst, the
                                                       a portion of their regular compensation.
Complaint alleges little more than
mismanagement. As we have previously                           Having carefully reviewed the
held, such claims “are not cognizable                  Complaint we similarly reject plaintiffs’
under federal law.” In re Advanta, 180                 arguments. In so doing, we note, as the
F.3d at 540 (citations and internal                    District Court did, that “‘[a] large number
quotations omitted); In re Digital Island,             of today’s corporate executives are
357 F.3d at 332.                                       compensated in terms of stock and stock
                                                       options.’” In re Advanta, 180 F.3d at 541
       Thus, we conclude that plaintiffs’
                                                       (quoting In re Burlington Coat Factory,
allegations as stated that (1) defendants
                                                       114 F.3d at 1424). Thus, “‘[i]t follows . .
violated GAAP and Alpharma’s revenue
                                                       . that these individuals will trade those
recognition policy, and (2) that employees
                                                       securities in the normal course of events.’”
within the Brazil division reported these
                                                       Id. Although we have recognized that an
violations to the company’s headquarters
                                                       inference of scienter may be created when
in New Jersey do not amount to “an
                                                       plaintiffs demonstrate that sales are
extreme departure from the standards of
                                                       “unusual in scope or timing,” id. at 540,
ordinary care,” In re Advanta, 180 F.3d at
                                                       we concluded that the plaintiffs in both In
535, and therefore fail to state Rule 10b-5
                                                       re Burlington Coat Factory and In re

                                                  17
Advanta failed to establish such an                   to give rise to a strong inference of
inference based in part on the fact that              scienter. Thus, we will affirm the District
some key insiders sold no stock during the            Court’s refusal to impute knowledge of the
class period. See In re Burlington Coat               false accounting practices to the individual
Factory, 114 F.3d at 1423; In re Advanta,             defendants based solely upon their stock
180 F.3d at 540-41.                                   sales.
        Here, in addition to the fact that the               We reach a similar conclusion with
company’s controlling shareholder did not             respect to the motive allegations leveled
engage in any sales during the class period,          against the company, which, as defendants
we note that the Complaint fails to allege            note, could be made against virtually any
that the sales of the remaining three                 for-profit entity. See In re K-Tel Int’l, Inc.
individual defendants were unusual in                 Sec. Litig., 300 F.3d 881, 895 (8th Cir.
scope (e.g., compared to their total level of         2002) (holding that “general allegations of
compensation or the size of previous sales)           a desire to increase stock prices, increase
or timing (e.g., compared to the timing of            officer compensation or maintain
past trades).9 The allegations therefore fail         continued employment are too generalized
                                                      and are insufficient” to establish scienter);
                                                      Chill, 101 F.3d at 268 (holding that
   9
     Even plaintiffs’ assertion that these            general motives that can “be imputed to
defendants had not sold any stock during              any publicly-owned, for-profit endeavor,
the preceding fifteen months, standing                [are] not sufficiently concrete for purposes
alone, is insufficient. Defendants assert             of inferring scienter”); see also In re The
that they were precluded from doing so                Vantive Corp. Sec. Litig., 283 F.3d 1079,
as a result of a “blackout period” during             1097 (9th Cir. 2002) (concluding that a
which insiders were prohibited from                   corporation’s desire to increase its stock
engaging in such transactions. While we               value as part of an acquisition strategy is
cannot credit defendants’ explanations at             an insufficient basis upon which to
this stage of the litigation, we note their           maintain a claim for violation of federal
argument that the existence of such a                 securities laws); In re Nice Systems, Ltd.
blackout period may be inferred from the              Sec. Litig., 135 F. Supp.2d 551, 583-84
Complaint, which alleges a series of                  (D.N.J. 2001) (same); In re Cendant Corp.
corporate acquisitions during the class               Sec. Litig., 76 F. Supp.2d 539, 548 (D.N.J.
period. Because the individual                        1999) (same) (citing Chill, 101 F.3d at
defendants are alleged to have known                  267). Thus, we conclude that plaintiffs
about these acquisitions, and thus
possessed material non-public
information, they would have been                     blackout period or other facts which
prohibited by law from trading during                 would demonstrate that the fifteen month
much of the class period. Moreover,                   period of inactivity was in any way
plaintiffs failed to allege the absence of a          unusual.

                                                 18
have similarly failed to allege facts giving        that “a District Court may deny leave to
rise to a strong inference of scienter as to        amend on the grounds that amendment
the corporation. We therefore will affirm           would cause undue delay or prejudice, or
the District Court’s dismissal of Count I           that amendment would be futile.” Oran v.
for failure to state a claim.                       Stafford, 226 F.3d 275, 291 (3d Cir.
                                                    2000); In re Digital Island, 357 F.3d at
       (ii) Plaintiffs’ Section 20(a) Claim
                                                    337; GSC Partners, F.3d at [34].
        As we have previously noted,
                                                            Here, the District Court cited
“Section 20(a) imposes joint and several
                                                    futility, the “significant extensions of
liability on any person who ‘controls a
                                                    time” already provided to plaintiffs, and
person liable under any provision of’ the
                                                    the aim of the PSLRA to filter out weak
[Exchange Act].”         Shapiro v. UJB
                                                    claims at the early stages of litigation as
Financial Corp., 964 F.2d 272, 279 (3d
                                                    the bases for its denial of leave to amend
Cir. 1992). Accordingly, under the plain
                                                    and dismissal of the Complaint with
language of the statute, plaintiffs must
                                                    prejudice. Focusing in particular on
“prove not only that one person controlled
                                                    futility, the District Court noted that
another person, but also that the
                                                    plaintiffs failed to proffer any proposed
‘controlled person’ is liable under the Act.
                                                    amendment, let alone one that would
If no controlled person is liable, there can
                                                    satisfy the stringent pleading requirements
be no controlling person liability.” Id.
                                                    which govern Rule 10b-5 claims.
Here, the alleged “controlled person” is
Alpharma. Thus, because plaintiffs failed                   Following careful review of the
to state a Rule 10b-5 claim against the             record, we conclude that this was not an
company, its Section 20(a) claim against            abuse of discretion.            As we have
the Individual Defendants fails as well.            previously held, “‘[f]utility’ means that the
See Shapiro, 964 F.2d at 279; In re Digital         complaint, as amended, would fail to state
Island, 357 F.3d at 337. Thus, we also will         a claim upon which relief could be
affirm the District Court’s dismissal of            granted.” In re Burlington Coat Factory,
Count II for failure to state a claim.              114 F.3d at 1434. Thus, “[i]n assessing
                                                    ‘futility,’ the district court applies the same
C. Denial of Leave to Amend
                                                    standard of legal sufficiency as applies
        Having concluded that the District          under Rule 12(b)(6).” Id.
Court properly granted defendants’ motion
                                                           Had plaintiffs satisfied the
to dismiss as to both counts, we must now
                                                    requirements of the PSLRA and merely
determine whether the court abused its
                                                    failed to allege facts with sufficient
discretion by failing to grant plaintiffs
                                                    particularity under Federal Rule of Civil
leave to amend the Complaint. Although
                                                    Procedure 9(b) we would be presented
Federal Rule of Civil Procedure 15 states
                                                    with a closer issue. See id. at 1435.
that leave to amend “shall be freely given
                                                    However, because plaintiffs (1) failed to
when justice so requires,” we have held

                                               19
satisfy the stringent pleading requirements
of the PSLRA, and thus failed to state a
claim under federal securities law, and (2)
failed to propose an amendment that
would satisfy these requirements, we agree
that leave to amend would be futile.
Moreover, we note, as the District Court
did, that its denial of leave to amend is
further supported by the fact that plaintiffs
(1) had already filed previous complaints
and (2) were given an extension of time to
assemble the amended consolidated
complaint currently at issue. See id. Thus,
we will affirm the District Court’s denial
of leave to amend and dismissal of the
Complaint with prejudice.
              V. Conclusion
       For the reasons stated above, we
will affirm the final judgment of the
District Court.




                                                20
