                                                                  NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT
                               ________________

                                      No. 17-3303
                                   ________________

      JAMES MARTIN, individually and on behalf of all others similarly situated

                                            v.

    GNC HOLDINGS, INC.; JOSEPH M. FORTUNATO; MICHAEL M. NUZZO;
    ANDREW S. DREXLER; MICHAEL G. ARCHBOLD; TRICIA K. TOLIVAR;
                         PATRICK A. FORTUNE

                               KBC Asset Mangment NV,
                                                  Appellant

                                     ________________

                      Appeal from the United States District Court
                        for the Western District of Pennsylvania
                                (D.C. No. 2-15-cv-01522)
                       District Judge: Honorable Mark R. Hornak
                                   ________________

                       Submitted Under Third Circuit LAR 34.1(a)
                                    May 21, 2018

               Before: MCKEE, SHWARTZ, and COWEN, Circuit Judges

                           (Opinion filed: December 11, 2018)
                                  ________________

                                       OPINION*
                                   ________________



*
 This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not
constitute binding precedent.
McKEE, Circuit Judge

       KBC Asset Management NV appeals the district court’s dismissal of the class

action complaint it filed alleging securities fraud. The complaint alleged various

misrepresentations in violation of Section 10(b) of the Securities and Exchange Act of

19341 and Rule 10b-5 promulgated thereunder.2 For the reasons that follow, we will

affirm.3

                                             I.

       Seven statements made to investors by former GNC executives Archbold and

Fortunato are at issue in this appeal.4 The district court assumed that these statements

were misrepresentations as alleged. The court also assumed that each was “material”

because there was “a substantial likelihood that a reasonable shareholder would consider

[them] important in deciding how to [act].”5 The district court nevertheless found the

plaintiffs could not state a claim because they had not adequately pled the required

elements of scienter and loss causation. It therefore dismissed the complaint. This appeal

followed.

                                             II.


1
  15 U.S.C. § 78j(b).
2
  17 C.F.R. § 240.10b-5.
3
  The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction over
this appeal under 28 U.S.C. § 1291.
4
  The plaintiffs’ complaint alleged that several other statements made by defendants other
than Fortunato and Archbold were also actionable under § 10(b). The district court found
that the statements were either not material, or were exempt under the act’s safe harbor
provision. The plaintiffs did not appeal this determination.
5
  Martin v. GNC Holdings, Inc., No. 2:15-cv-01522, 2017 WL 3974002, at *10 (W.D. Pa.
2017) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
                                             2
       To make out a securities fraud claim under 15 U.S.C. § 78j(b), a plaintiff must

allege: (1) a material misrepresentation or omission; (2) scienter; (3) a connection

between the misrepresentation or omission and the purchase or sale of a security; (4)

reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss

causation.6 Only the elements of scienter and loss causation are at issue in this appeal.

Because we agree that plaintiffs failed to adequately plead scienter, we need not address

their arguments concerning loss causation.7

       “Scienter is a mental state embracing intent to deceive, manipulate, or defraud.”8

A plaintiff alleging scienter must assert facts giving rise to a strong inference of reckless

or conscious behavior.9 “A reckless statement is one involving not merely simple, or even

inexcusable negligence, but an extreme departure from the standards of ordinary care,

and which presents a danger of misleading buyers or sellers that is either known to the

defendant or is so obvious that the actor must have been aware of it.”10




6
  Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005).
7
  See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 789–90
(11th Cir. 2010) (“Because we agree with the district court’s conclusion about the
insufficient inference of scienter raised by the complaint, we need not address its
conclusion on loss causation.”).
8
  Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (quoting Ernst
& Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)).
9
  Id. at 267 (quoting In re Advanta Corp., 180 F.3d 525, 534–35 (3d Cir. 1999)).
10
   Id. at 267 n.42 (quoting Advanta, 180 F.3d at 535). Advanta noted that applying the
recklessness standard in the securities fraud context promotes the “policy objectives of
discouraging deliberate ignorance and preventing defendants from escaping liability solely
because of the difficulty of proving conscious intent to commit fraud.” Advanta, 180 F.3d
at 535.
                                              3
       To determine if allegations in a complaint satisfy the scienter requirement we

engage in a three part analysis.11 First, we accept all factual allegations in the complaint

as true.12 Next, we determine “whether all of the facts alleged, taken collectively, give

rise to a strong inference of scienter, not whether any individual allegation, scrutinized in

isolation, meets that standard.”13 Finally, to determine whether the allegations give rise

to a “strong” inference of scienter, we “take into account plausible opposing

inferences.”14 That is, we must consider “plausible, nonculpable explanations for the

defendant’s conduct, as well as inferences favoring the plaintiff.”15 An inference that a

defendant acted with scienter need not be irrefutable.16 However, it must be more than

merely “reasonable or permissible—it must be cogent and compelling.”17 A securities

fraud complaint will therefore only survive a 12(b)(6) motion to dismiss if “a reasonable

person would deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.”18

       Having applied this analysis, we agree with the district court’s determination that

the plaintiffs did not adequately plead scienter. The complaint contains no allegations that

Fortunato or Archbold knew that GNC’s DMAA-replacement products may have

contained ingredients banned by the FDA, or that they received any report that banned


11
   Tellabs Inc. v. Major Issues and Rights, Ltd., 551 U.S. 308, 322–23 (2007).
12
   Id. at 322.
13
   Id. at 322–23.
14
   Id. at 323.
15
   Id. at 324.
16
   Id.
17
   Id.
18
   Id.
                                              4
substances may be included in replacement supplements. Rather, the complaint vaguely

alleges that the reports “stimulated significant concern and discussion within GNC” and

that they were “widely distributed throughout GNC headquarters.”19 At bottom, the

plaintiffs did not “state with particularity facts giving rise to a strong inference that the

defendant[s] acted with the required state of mind.”20

       For the same reasons, we cannot divine scienter from the information provided by

confidential witnesses. The district court correctly applied the particularity requirement by

evaluating the “‘detail provided by the confidential sources, the sources’ basis of

knowledge . . . [and] the corroborative nature of other facts alleged.”21 In short, the

plaintiffs did not explain how the confidential witnesses obtained the information included

in the complaint. Nor did the confidential witnesses provide specific facts about Fortunato

and Archbold learning of the potentially tainted products prior to making the actionable

statements.

       Similarly, we reject the plaintiffs’ argument that they satisfied the “core operations”

doctrine. Under that theory, a plaintiff may be entitled to a “core operations inference” if

the complaint alleges that a defendant made misstatements concerning the “core matters”

of central importance to a company.22 We agree with the district court’s assessment that

the core operation doctrine does not support a finding of scienter here, “absent some



19
   App. 101, 103.
20
   15 U.S.C. § 78u-4(b)(2)(A).
21
   Avaya, 564 F.3d at 263 (quoting Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394
F.3d 126, 147 (3d Cir. 2004)).
22
   Id. at 268.
                                              5
additional allegation of specific information conveyed to management and related to the

fraud.”23

       Finally, we hold that certain stock sales were not indicative of scienter.24 Only two

of the six defendants sold stock during the relevant time period, and only one of them made

a statement that is the subject of this appeal. The plaintiffs failed to plead specific facts to

demonstrate that the circumstances surrounding the sale of stock by Fortunato were

“unusual in scope or timing.”2526

                                              III.

       For the foregoing reasons, we will affirm the judgment of the district court and the

court’s analysis as explained in its very well-reasoned and thorough opinion.27




23
   Id. at 270 (quoting Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1068
(9th Cir. 2008)).
24
   We need not decide whether the “corporate” or “collective” scienter doctrine is a viable
theory because the allegations in the complaint are insufficient to establish GNC's
scienter.
25
   In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 277 (3d Cir. 2006).
26
   Because the district court correctly dismissed the 10b-5 claim, the derivative § 20(a)
claim necessarily fails.
27
   See Martin v. GNC Holdings, Inc., No. 2:15-cv-01522, 2017 WL 3974002, at *11–18
(W.D. Pa. 2017).
                                               6
