                                                                            F I L E D
                                                                     United States Court of Appeals
                                                                             Tenth Circuit

                                                                             July 14, 2006
                         UNITED STATES COURT OF APPEALS
                                                                         Elisabeth A. Shumaker
                                      TENTH CIRCUIT                          Clerk of Court



 JON MCNAMARA; RICHARD
 LANDIN,

           Plaintiffs - Appellants,
                                                        Nos. 02-6110 & 02-6178
 v.

 PRE-PAID LEGAL SERVICES, INC.,
 HARLAND C. STONECIPHER;
 RANDY HARP; KATHLEEN S.
 PINSON; PETER K. GRUNEBAUM;
 DAVID A. SAVULA; DELOITTE &
 TOUCHE,

           Defendants - Appellees.



                                 ORDER AND JUDGMENT *


Before KELLY, LUCERO and O’BRIEN, Circuit Judges.




       Lead Plaintiffs Jon McNamara and Richard Landin (Plaintiffs), on behalf of all

people who purchased Pre-Paid Legal Services (Pre-Paid) stock from March 18, 1999,

through May 15, 2001, brought this securities fraud action against Pre-Paid, several of its




       *
        This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. The court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 36.3.
senior officers and directors, and Deloitte & Touche (Deloitte), Pre-Paid’s independent

auditor. The district court dismissed Plaintiffs’ complaint with prejudice pursuant to Rule

12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs appeal from the dismissal,

arguing the district court erred in concluding: (1) they had not sufficiently alleged

scienter, (2) their claims were barred by the statute of limitations and (3) the truth-on-the

market doctrine insulated Defendants from liability. Plaintiffs also assert the district

court abused its discretion in dismissing their case with prejudice, rather than providing

them an opportunity to amend their complaint to correct its pleading deficiencies.

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm, concluding the district court

properly dismissed Plaintiffs’ complaint with prejudice for failure to adequately plead

scienter.1

                                   I. Factual Background

       Formed in 1976, Pre-Paid is an Oklahoma corporation which designs, underwrites

and markets a variety of legal expense plans, called memberships, across North America.2

In exchange for a fixed premium, memberships entitle their holders to receive legal


       1
        The five volume record in this case consists of over 1,800 pages. W hile
each volume contains an index with page numbers for large pleadings such as Pre-
Paid Defendants’ M otion to Dismiss and Pre-Paid Defendants’ Request for
Judicial Notice, no page numbers or exhibit numbers are provided for the
numerous exhibits which were attached to these pleadings in the district court.
The parties’ failure to provide such page and/or exhibit numbers has made
deciding this case unnecessarily laborious.
       2
       Pre-Paid began trading its comm on stock on the New York Stock
Exchange in 1999. Prior to M ay 19, 1999, it traded its stock on the American
Stock Exchange.

                                              2
services (or reimbursement of legal fees incurred for such services) in a manner similar to

medical reimbursement plans or HMO’s.3 Memberships are automatically renewable but

may be cancelled at any time for fraud, non-payment of premiums or upon a membership

holder’s written request.

       Pre-Paid markets its memberships through a multi-level marketing program which

encourages Pre-Paid’s sales associates to sell memberships and recruit new associates.

Sales associates are considered independent contractors and are paid by commission.4 In

general, when an associate sells a membership, Pre-Paid advances that associate a

commission equal to three years worth of commissions.5 Pre-Paid recoups these

“commission advances” as premiums are collected, usually on a monthly basis.

       Should a membership lapse before three years, the associate is obligated to “repay”

any unearned portion of the commission advance. To re-capture 50% of any unearned

advance, Pre-Paid generates a “charge-back” to the associate’s account. This charge-back

is immediately deducted from any future commission advances payable to the associate

for the sale of new memberships. Pre-Paid recovers the remaining 50% by withholding




       3
        Pre-Paid has tw o types of memberships, open-panel and closed-panel.
Substantially all of the memberships are closed-panel, which require membership
holders to access legal services through a network of independent law firms under
contract with Pre-Paid.
       4
        Commissions are paid to the selling associate and any associate who
directly or indirectly recruited the selling associate.
       5
           Associates could choose to receive less than a three-year advance.

                                             3
future commissions due an associate on active/prior memberships.6 No additional

commission advances are paid to an associate until all previous advances have been

recovered. Pre-Paid carries a reserve for unrecoverable commission advances. Between

1997 and 1999, Pre-Paid increased this reserve from $3.7 million to $4.5 million.

      A. Reporting of Unearned Commission Advances as Assets

      Pre-Paid reports quarterly and annually to the Securities and Exchange

Commission (SEC) using Forms 10-Q and 10-K, respectively. In these forms, Pre-Paid

provides its financial statements. These statements are prepared according to Generally

Accepted Accounting Principles (GAAP) 7 and are audited by Pre-Paid’s independent

auditor. From September 1994 until August 2001, Deloitte served as Pre-Paid’s


      6
       Pre-Paid did not disclose this additional method of recovering unearned
commission advances until 2001. Com pare Pre-Paid’s Form 8-K dated January
25, 2001, at 5 (A pp. Vol. I at A-216) and Pre-Paid’s Original Form 10-K for year
ending December 31, 2000, at 22 (Supp. App. Vol. I at SA-30) with Pre-Paid’s
Form 10-K for year ending D ecember 31, 1998, at 16 (Supp. App. Vol. II at SA -
582) and Pre-Paid’s Form 10-K for year ending December 31, 1999, at 21 (Id. at
SA-663).
      7
       Generally Accepted Accounting Principles (GAAP) are a body of
pronouncements that govern the measurement and reporting of financial
information and related disclosure. See United States v. Arthur Young & Co., 465
U.S. 805, 811 n.7 (1984) (defining GAAP as "the conventions, rules, and
procedures that define accepted accounting practices"). Traditionally, accounting
standards have been set in the private sector, although the SEC has the power to
set such standards for publicly traded companies. W hile the American Institute of
Certified Public Accountants (AICPA ) has input into such standards, an
independent, private body, the Financial A ccounting Standards Board, is
primarily responsible for setting accounting standards. Id. GAAP includes broad
pronouncements as well as some very specific rules for certain transactions, and
whether a particular method of reporting is consistent with GAAP is often a
matter of professional judgment.

                                            4
independent auditor.

       From at least 1995 to 2000, Pre-Paid, based on its theory that it had a right to

receive unearned commission advances back from its associates (i.e., a receivable),

recorded unearned commission advances as assets.8 During this same period, Deloitte

audited Pre-Paid’s financial statements and issued unqualified opinions that they

conformed with GAAP and fairly represented Pre-Paid’s financial position.

       B. Pre-Paid’s 1995, 1996, 1998 and 1999 Form 10-K’s

       In its 1995, 1996, 1998 and 1999 Form 10-K’s, Pre-Paid disclosed its commission

advance policy and the actions it takes to recoup its commission advances.9 It stated that

historically it had been able to immediately recover 50% of any unearned commission

advance through the use of the charge-back. However, Pre-Paid warned its commission

advance policy exposes it to the risk of uncollectible commission advances. Pre-Paid also

stated one of the major factors affecting its profitability and cash flow was its

membership persistency rate, which it represented as its ability to retain a membership

once it is written and therefore collect premiums. Pre-Paid reported its membership



       8
        In its 1995 and 1996 Form 10-K’s, Pre-Paid referred to the unearned
portion of commission advances as “Commission advances” on its balance sheet.
(App. Vol. II at A–471; Supp. App. Vol. I at SA-423.) In its 1998 and 1999 Form
10-K ’s, it referred to it as “M embership commission advances.” (Supp. App. Vol.
II at SA -595, SA -676.) Despite the name assigned, “Commission advances” and
“M embership commission advances” represented only the unearned portion of
comm ission advances. It was this unearned portion that Pre-Paid recorded as an
asset.
       9
           Pre-Paid’s 1997 Form 10-K is not in the record.

                                              5
persistency rate was 80.0% for 1995, 74.0% for 1996, 73.8% for 1998 and 73.4% for

1999. Between 1995 and 1999, Pre-Paid’s membership premiums increased from $31.2

million to $157.2 million. During this same time period, new membership sales rose

from 109,922 to 525,352. Total unearned commission advances also grew each year,

increasing from $12.5 million in 1995 to $120.6 million in 1999. Because Pre-Paid

recorded unearned commission advances as assets, as unearned commission advances

increased so did Pre-Paid’s total assets. By 1999, Pre-Paid’s unearned commission

advances represented 62.2% of Pre-Paid’s total assets ($193.8 million).

       C. Pre-Paid’s January 25, 2001 Form 8-K

       On January 25, 2001, in response to public discussion concerning its accounting

treatment of unearned commission advances, Pre-Paid filed a Form 8-K with the SEC “to

provide details regarding the accounting treatment of [] commission advances and

expenses . . . .” (R. App. Vol. I at A-213.) In this Form 8-K, Pre-Paid explained why it

believed its treatment of unearned commission advances as assets complied with GAAP.

Specifically, it stated that because its “commission advances relate directly to

memberships that represent a future economic benefit (a stream of future cash payments)

to be received by [Pre-Paid] as a result of a past transaction (the original membership

sale),” its commission advances conformed to GAAP’s definition of assets as “probable

future economic benefits obtained or controlled by a particular entity as a result of past

transactions or events.” (Id. at A-213-A-214 (quotations omitted).) Because the key

issue with respect to commission advances is recoverability, Pre-Paid then proceeded to

                                              6
discuss its membership retention rates, its actual commission advances, their

recoverability, membership growth and the expected lifetime value of a membership.

Notably, Pre-Paid disclosed that one year after purchasing a membership, only 53.37% of

membership holders remain as paying customers. After two years, this figure drops to

36.97%.

       D. Pre-Paid’s Original 2000 Form 10-K

       In its original Form 10-K for the year ending December 31, 2000 (filed with the

SEC on April 27, 2001), Pre-Paid again reported unearned commission advances as

assets, referring to them as “Membership commission advance receivables.” 10 (Supp.

App. Vol. I at SA-46.) Again, Deloitte issued an unqualified opinion that Pre-Paid’s

financial statements conformed with GAAP. However, for the first time, Pre-Paid began

writing off unearned commission advances of associates who no longer had any active

memberships. Also for the first time in a Form 10-K, Pre-Paid reported that two-years

after purchasing a membership, only 36.97% of membership holders remain as paying

customers. Nevertheless, when compared to 1999, Pre-Paid experienced an increase in

membership premiums and new memberships sold. However, it only reported an

additional 4,973 new associates and the amount of unearned commission advances grew

to $156.1 million, representing 63.1% of its total assets ($247.3 million). It also

substantially increased its reserve for uncollectible commission advances, increasing it



       10
         All of the Form 10-K’s filed during the class period (i.e., the Form 10-
K’s for 1998, 1999, and 2000) were signed by the individual defendants.

                                              7
from $4.5 million to $11.0 million.

       E. SEC Investigation

       In January and May 2001, the SEC’s Division of Corporation Finance (Division)

reviewed Pre-Paid’s Form 10-K’s for 1999 and 2000. On May 11, 2001, Pre-Paid

received a letter from the Division advising Pre-Paid that its accounting of unearned

commission advances as assets violated GAAP. The Division asserted commission

advances should be expensed when paid. On May 15, 2001, Pre-Paid announced the

Division’s decision. Following this announcement, Pre-Paid’s stock price dropped from

$19 per share to $14.10 per share. On May 16, 2001, Pre-Paid issued a press release,

stating it continued to believe its accounting was in compliance with GAAP and

announcing its plans to appeal to the SEC’s Office of the Chief Accountant (Chief

Accountant).

       Pre-Paid appealed to the Chief Accountant, who concurred with the Division’s

decision. On July 25, 2001, Pre-Paid publically announced the Chief Accountant’s

decision. In this press release, Randy Harp, Pre-Paid’s Chief Operating Officer, stated

the decision would have a material adverse effect on Pre-Paid’s balance sheet but it would

not change the cash economics of its business. On July 30, 2001, Pre-Paid decided not to

appeal the Chief Accountant’s decision and agreed to amend its previously filed SEC

reports and restate its financial statements to reflect the SEC’s conclusion.

       F. Pre-Paid’s Restated Financials

       On February 8, 2002, Pre-Paid filed an amended Form 10-K with the SEC for year

                                              8
ending December 31, 2000, which restated Pre-Paid’s financial statements for 1998

through 2000 in accordance with the SEC’s ruling. As a result of complying with the

SEC’s ruling, for the year ending December 31, 2000, Pre-Paid’s total assets, liabilities

and shareholders’ equity were reduced (in that order) from approximately $247 million,

$100 million and $147 million to $78 million, $36 million, and $42 million, respectively.

For year ending 1999, Pre-Paid’s total assets, liabilities and shareholders’ equity were

reduced from approximately $193 million, $79 million, and $114 million to $58 million,

$25 million and $33 million, respectively. The re-stated financial statements for year

ending 1998 experienced similar reductions.

       Because Deloitte disagreed with the SEC’s conclusion, it was unable to render an

unqualified opinion with respect to Pre-Paid’s restated financials. Thus, Pre-Paid and

Deloitte reached a mutual agreement to end their client-auditor relationship. Pre-Paid

retained Grant Thornton LLP to audit its restated financial statements. On January 30,

2002, Grant Thornton issued an unqualified opinion that the restated financial statements

fairly represented Pre-Paid’s financial condition and conformed with GAAP.

                                II. Procedural Background

       On January 17, 2001, The Wall Street Journal published an article entitled “Pre-

Paid Legal Draws Criticism on Accounting for Commissions” in which it discussed the

potential problems with Pre-Paid’s accounting methodology for unearned commission

advances. (R. App. Vol. III at A-729.) It noted Pre-Paid’s unearned commission

advances were ballooning while its reserve for unrecoverable advances was unchanged at

                                              9
$4.5 million. It also expressed concern over Pre-Paid’s ability to recoup unearned

commission advances, noting Pre-Paid cannot recoup commission advances if an

associate stops selling memberships or does not have any memberships older than three

years. Lastly, it stated that over the past five years, Pre-Paid had not written off any

commission advances as unrecoverable despite Harp’s admission that some commission

advances would never be recovered through the use of the charge-back. As a result of

this article, Pre-Paid’s stock dropped from $22.6875 to $20.875.

       Five days later, the first of nineteen complaints was filed in the Western District of

Oklahoma against Pre-Paid, Harland C. Stonecipher (Chief Executive Officer and

Chairman of the Board), Harp (Chief Operating Officer and Board Director), Kathleen S.

Pinson (Chief Accounting Officer and Board Director), Peter K. Grunebaum (Board

Director and Chairman of its Audit Committee) and David A. Savula (Board Director)

[hereinafter collectively referred to as Pre-Paid Defendants] under the Securities and

Exchange Act of 1934 (Exchange Act). On May 15, 2001, the district court consolidated

the cases and appointed Jon McNamara, Richard Landin and Bricoleur Capital

Management as lead Plaintiffs. On June 14, 2001, the lead Plaintiffs filed a sixty-four

page consolidated amended class action complaint (Consolidated Complaint) on behalf of

all purchasers of Pre-Paid’s common stock from March 18, 1999, through May 15, 2001,

(the class period) against Pre-Paid Defendants and Deloitte, who had not been named as a

defendant in the individual complaints.

       The Consolidated Complaint alleged Pre-Paid Defendants “made false and

                                              10
misleading public statements in order to overstate Pre-Paid’s earnings and materially

falsify [its] financial condition in order to artificially inflate the price of Pre-Paid stock”

and Deloitte “knew or recklessly disregarded Pre-Paid’s true financial and operating

condition and failed to take steps to fully and fairly disclose them to the public.” (R. App.

Vol. I at A-17-A-18.) Count I, alleged against all the defendants, asserted a violation of §

10(b) of the Exchange Act, 15 U.S.C. § 78j(b),11 and Rule 10b-5 promulgated

thereunder.12 Count 2, alleged against the individual defendants only, claimed the


       11
            Section 10(b) states:

             It shall be unlawful for any person, directly or indirectly, by
       the use of any means or instrumentality of interstate commerce or of
       the mails, or of any facility of any national securities exchange—

                ...

              (b) To use or employ, in connection with the purchase or sale
       of any security registered on a national securities exchange or any
       security not so registered, . . . any manipulative or deceptive device
       or contrivance in contravention of such rules and regulations as the
       Commission may prescribe as necessary or appropriate in the public
       interest or for the protection of investors.
       12
            Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, provides:

             It shall be unlawful for any person, directly or indirectly, by
       the use of any means or instrumentality of interstate commerce, or of
       the mails or of any facility of any national securities exchange,

       (a) To employ any device, scheme, or artifice to defraud,

       (b) To make any untrue statement of a material fact or to omit to
       state a material fact necessary in order to make the statements made,
       in the light of the circumstances under which they were made, not
       misleading, or

                                               11
individual defendants were “controlling persons” of Pre-Paid and therefore were liable

under § 20(a) of the Exchange Act, 15 U.S.C. § 78t,13 for the alleged fraudulent conduct

of Pre-Paid. (App. Vol. I at A-78.)

       On July 24, 2001, Pre-Paid Defendants filed a motion to dismiss the Consolidated

Complaint arguing Plaintiffs had not and could not plead the requisite scienter. In the

alternative, they asserted the Consolidated Complaint failed because Pre-Paid’s

accounting methodology was fully disclosed to the market (the truth-on-the market

doctrine). On August 9, 2001, Deloitte also filed a motion to dismiss. In addition to

reiterating Pre-Paid Defendants’ lack of scienter argument, Deloitte contended Plaintiffs’

action was barred by the statute of limitations.

       On March 5, 2002, the district court granted both Pre-Paid Defendants’ and

Deloitte’s motions to dismiss with prejudice and entered judgment accordingly. On




       (c) To engage in any act, practice, or course of business which
       operates or would operate as a fraud or deceit upon any person, in
       connection with the purchase or sale of any security.
       13
            Section 20(a) states:

                Every person who, directly or indirectly, controls any
                person liable under any provision of this chapter or of
                any rule or regulation thereunder shall also be liable
                jointly and severally with and to the same extent as such
                controlled person to any person to whom such controlled
                person is liable, unless the controlling person acted in
                good faith and did not directly or indirectly induce the
                act or acts constituting the violation or cause of action.


                                             12
March 25, 2002, the district court issued an Order Nunc Pro Tunc correcting a mistake of

fact in its March 5, 2002 order but otherwise leaving its decision intact. On March 29,

2002, Plaintiffs filed a Rule 60(b) Motion, or in the alternative, a Motion for

Reconsideration. On April 2, 2002, they filed a notice of appeal, which was amended on

April 23, 2002, concerning the court’s March 5 and March 25, 2002 orders (Appeal No.

02-6110). On May 20, 2002, the district court concluded Plaintiffs’ Rule 60(b)

Motion/Motion for Reconsideration was moot in part as its Nunc Pro Tunc Order had

corrected Plaintiffs’ alleged mistake of fact. It denied the motion in all other respects.

On June 5, 2002, Plaintiffs filed a notice of appeal challenging the May 20, 2002 order

(Appeal No. 02-6178). Both appeals were consolidated.

       On August 9, 2002, Lead Plaintiff Bricoleur Management filed a motion with this

Court to dismiss it as an appellant, which was granted. During the course of this appeal,

Plaintiffs settled with Deloitte. Consequently, on February 6, 2004, this action was

partially remanded to the district court for the limited purpose of reviewing and approving

the settlement agreement. On December 10, 2004, the district court approved the

settlement. On March 18, 2005, we granted Plaintiffs and Deloitte’s stipulation to

dismiss with prejudice Deloitte as a party to this appeal. Consequently, only Pre-Paid

Defendants remain as appellees.

                                       III. Discussion

       Plaintiffs argue the district court erred in dismissing their Consolidated Complaint

because they adequately pled scienter, the complaint was timely and Pre-Paid Defendants

                                             13
cannot rely on the truth-on-the-market doctrine. In the alternative, they contend they

should have been afforded an opportunity to amend their complaint to correct any

pleading deficiencies.

       We review de novo a district court’s dismissal of a complaint under Rule 12(b)(6)

of the Federal Rules of Civil Procedure. City of Philadelphia v. Fleming Cos., 264 F.3d

1245, 1257 (10th Cir. 2001). In undertaking that review, we accept as true all well-

pleaded factual allegations in the complaint and view them in the light most favorable to

the non-moving party.14 Id. We review the denial of leave to amend for abuse of

discretion. Grossman v. Novell, Inc., 120 F.3d 1112, 1126 (10th Cir. 1997). However,

where that denial is based on the conclusion that amendment would be futile, we review

de novo. Watson ex rel. Watson v. Beckel, 242 F.3d 1237, 1239 (10th Cir. 2001).

       1. Scienter

       The elements of a private securities fraud action under § 10(b) and Rule 10b-5 are:

(1) the defendant made an untrue or misleading statement or omission of material fact, (2)

the statement or omission was made in connection with the purchase or sale of a security,



       14
          Here, in addition to Plaintiffs’ Consolidated Complaint, the district court
considered documents referred to in the complaint, in particular Pre-Paid’s filings
with the SEC. Consideration of such documents was proper because they were
central to Plaintiffs’ claims and none of the parties disputed their authenticity.
Jacobsen v. Deseret Book, Co., 287 F.3d 936, 941 (10th Cir. 2002); see also
Prager v. LaFaver, 180 F.3d 1185, 1189 (10th Cir. 1999) (holding such
consideration is discretionary). M oreover, such consideration did not require the
district court to convert Pre-Paid Defendants’ motion to dismiss into one for
summary judgment. GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d
1381, 1384-85 (10th Cir. 1997).

                                            14
(3) the defendant acted with the requisite scienter, (4) the plaintiff relied on the false or

misleading statements, and (5) the plaintiff suffered economic loss as a result of his

reliance.15 Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); Adams v. Kinder-

Morgan, Inc., 340 F.3d 1083, 1095 (10th Cir. 2003). The scienter element requires “a

mental state embracing intent to deceive, manipulate, or defraud.” Fleming Cos., 264

F.3d at 1258 (quotations omitted). It includes “knowing or intentional misconduct” and

recklessness, which is “conduct that is 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.” Id.

(quotations omitted). However, there are limitations on the recklessness standard. Id.

For instance, we will not allow allegations of “fraud by hindsight” (i.e., “allegations that

defendants should have anticipated future events and made certain disclosures earlier than

they actually did”) or allegations that the defendant failed to disclose knowledge of

material facts without a further showing that the defendant knew withholding such facts

would likely mislead investors. Id. at 1260 (quotations omitted). Moreover, “allegations

of GAAP violations or accounting irregularities, standing alone, are insufficient to state a

securities fraud claim”; such allegations must be “coupled with evidence that the

violations or irregularities were the result of the defendant’s fraudulent intent to mislead

investors . . . .” Id. at 1261.

       15
         Section 10(b) does not provide for private causes of action; such actions
are a judicial creation. Lam pf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
501 U.S. 350, 358 n.3 (1991).

                                              15
       Prior to 1995, a plaintiff pleading the elements of a securities fraud claim was

required to follow Rule 9 of the Federal Rules of Civil Procedure, which requires setting

forth fraud allegations with particularity but allows conditions of mind such as malice,

intent and knowledge to be averred generally.16 Adams, 340 F.3d at 1095. However, in

1995, in order to curb some of the abuses experienced in private securities lawsuits,

Congress enacted the Private Securities Litigation Reform Act (PSLRA).17 Id. at 1095.

The PSLRA heightened the pleading standard for the first and third elements. Id. at

1095-96. Relevant here is the PSLRA’s increased burden of pleading the third element,

scienter:

       In any private action arising under this chapter in which the plaintiff may
       recover money damages only on proof that the defendant acted with a
       particular state of mind, the complaint shall, with respect to each act or
       omission alleged to violate this chapter, state with particularity facts giving
       rise to a strong inference that the defendant acted with the required state of
       mind.



       16
            Rule 9(b) provides:

       (b) Fraud, M istake, Condition of the M ind. In all averments of
       fraud or mistake, the circumstances constituting fraud or mistake
       shall be stated with particularity. M alice, intent, knowledge, and
       other condition of mind of a person may be averred generally.
       17
         Examples of abuses the PSLRA sought to eliminate are (1) the routine
filing of lawsuits whenever an issuer’s stock price experiences a significant
change, (2) class action lawyers’ manipulation of the clients they represent, (3)
abuse of the discovery process to impose costs so burdensome that it is often
economical for the victimized party to settle, and (4) shareholder derivative
actions filed with the hope of winning large attorney fees or private settlements
with no intention of benefitting the corporation (i.e., “strike suits”). Fleming
Cos., 264 F.3d at 1258-59 & n.16.

                                              16
15 U.S.C. § 78u-4(b)(2).18

       To determine whether a plaintiff’s complaint meets this heavy burden, we must look

to the totality of the plaintiff’s allegations. Adams, 340 F.3d at 1105; Fleming Cos., 264

F.3d at 1262-63. Allegations of motive and opportunity are relevant in making this

determination. Fleming Cos., 264 F.3d at 1262-63. However, such allegations, standing

alone, are insufficient. Id. In sum, “[w]hen reviewing a plaintiff’s allegations of scienter

under the PSLRA, a court should [] examine the plaintiff’s allegations in their entirety,

without regard to whether those allegations fall into defined, formalistic categories such as

‘motive and opportunity,’ and determine whether the plaintiff[’s] allegations, taken as a

whole, give rise to a strong inference of scienter.” Id. at 1263.

       To determine whether Plaintiffs adequately pled scienter, we look to the

Consolidated Complaint. In it, Plaintiffs allege Pre-Paid Defendants improperly recorded

unearned commission advances as assets in violation of GAAP. They claim that by



       18
          In Pirraglia v. Novell, Inc., we resolved the tension between the
PSLRA’s strict pleading requirements and Rule 12(b)(6)’s deference to the
plaintiff. 339 F.3d 1182, 1187 (10th Cir. 2001). W e held that at the Rule
12(b)(6) stage of a securities fraud action, we evaluate the strength of the
plaintiff’s suggested inference in the context of other reasonable inferences that
may be drawn but do not weigh the plaintiff’s suggested inference against these
other inferences to determine which one will ultimately prevail. Id. at 1187-88.
In other words, we use other reasonable inferences to determine the strength of
the plaintiff’s suggested inference, i.e., whether it is a “strong” inference, but not
to determine whether plaintiff’s suggested inference is the correct one. Id. at
1187-88. At the end of the day, “[i]f a plaintiff pleads facts w ith particularity
that, in the overall context of the pleadings, including potentially negative
inferences, give rise to a strong inference of scienter, the scienter requirements of
the Reform Act is satisfied.” Id. at 1188.

                                               17
recording unearned commission advances as assets, Pre-Paid Defendants materially

overstated Pre-Paid’s financial condition. And, Plaintiffs contend Pre-Paid Defendants used

this overstatement to laud Pre-Paid’s financial success and artificially inflate Pre-Paid’s

stock price.

       Plaintiffs also claim Pre-Paid Defendants violated GAAP by continuing to report

unearned commission advances as assets, even when it was clear they were unrecoverable,

due to either a membership lapsing before three years or the associate owing the advance

becoming inactive. They assert Pre-Paid Defendants should have written-off these

unrecoverable commission advances and by failing to do so, gave investors the false

impression that Pre-Paid could recover them under its charge-back policy. They also allege

Pre-Paid Defendants misled investors by pooling unrecoverable commission advances with

potentially recoverable advances thereby preventing an investor from determining the true

extent of Pre-Paid’s risk.

       Plaintiffs further allege Pre-Paid Defendants misled investors by representing that

Pre-Paid’s membership persistency rate reflected its ability to retain a membership and

therefore receive premiums once a membership was written. They contend Pre-Paid

Defendants claimed in their 1998 and 1999 Form 10K’s that Pre-Paid’s persistency rate was

73.8% and 73.4%, respectively, but until 2001 failed to disclose that only 53.37% of

membership holders were still paying one year after purchasing a membership, only 36.97%




                                               18
were still paying after two years19 and only 28.66% after three years.

       Plaintiffs also assert Pre-Paid Defendants misled investors concerning Pre-Paid’s

ability to recover unearned commission advances from its associates. Specifically, they

claim Pre-Paid Defendants failed to disclose: (1) Pre-Paid historically had not attempted to

collect unearned commission advances from associates who left the company, (2) Pre-Paid

allowed associates to abandon accounts with high unearned commission advances and start

a new account without penalty, (3) Pre-Paid’s cancellation rates on memberships were

increasing, (4) Pre-Paid’s membership growth was slowing and (5) an increasing number of

associates were not making new sales. Plaintiffs allege that despite knowing these facts

(which reduced the likelihood of recovering unearned commission advances), Pre-Paid

Defendants did not substantially increase Pre-Paid’s reserve for uncollectible commission

advances.

       As to Pre-Paid Defendants’ motive to commit fraud, Plaintiffs allege:

       1. Defendants Harp and Pinson had bonus compensation agreements directly tied to
       meeting certain earnings per share criteria;

       2. On November 21, 1997, Pre-Paid established an Associate Investment Stock Club
       Purchase Plan which was designed to induce its associates to purchase Pre-Paid stock
       at market price. Pre-Paid acquired the shares to distribute to its associates through
       this Plan from Defendant Stonecipher’s personal holdings. Thus, Defendant
       Stonecipher established an outlet to regularly dispose of his shares and was motivated
       to maintain an artificially inflated stock price;

       19
         On pages tw elve and twenty-one of the Consolidated Complaint,
Plaintiffs state that less than 47% of membership holders remain as paying
customers two years after purchasing a membership. On pages fifteen and
twenty-eight, they refer to this figure as 36.97% . The latter figure is consistent
with Pre-Paid’s own disclosures.

                                              19
       3. Defendant Grunebaum, who was a Director and the Chairman of the Board of
       Director’s Audit Committee, dumped 23,000 shares of his stock between April 24,
       2000, and November 28, 2000, reducing his total holdings to only 4,000 shares; and

       4. Defendant Savula, who was a Director and Pre-Paid’s most senior sales associate,
       dumped 15,000 shares (37% of his holdings) on October 23, 2000, obtaining a net
       profit of over $500,000.

       The district court concluded these allegations, taken in their totality, did not raise

requisite strong inference of scienter. It concluded Plaintiffs’ allegations supported an

inference that Pre-Paid Defendants “at least” violated GAAP. (R. App. Vol. III at A-740.)

Because GAAP violations alone are insufficient to sustain a securities fraud action, the court

next examined Plaintiffs’ allegations of Pre-Paid Defendants’ motive to commit fraud,

finding them lacking. Also compelling to the court was Pre-Paid’s repurchase of over two

million of its own shares, concluding it is “patently absurd” for a company to fraudulently

inflate the price of its stock only to then purchase the stock at such inflated prices without

any financial benefit. (Id. at A-741.) Lastly, the district court found convincing the fact that

Pre-Paid Defendants had operated under what they considered to be a proper interpretation

of GAAP for seven years, that they had reported unearned commission advances as assets in

Pre-Paid’s SEC filings, that they had disclosed in these same filings that they considered

their commission advance policy a risk should they not be collected or offset and that when

Pre-Paid complied with the SEC’s ruling, its after-tax income for 2000 and the first quarter

of 2001 was reduced by a mere 8.5%, “hardly a precipitous reduction.” (Id. at A-743.).20

       20
        In its initial order of dismissal on M arch 5, 2001, the district court
erroneously stated that as a result of the change of accounting for unearned
comm ission advances, Pre-Paid’s net income for 2000 and the first quarter of

                                               20
       This case may be a close call, but it is difficult to tell because the complaint is so rich

in sweeping, generalized and sometimes conclusory allegations. Pleading precision could

have better informed the debate and aided the critical analysis necessary to resolve a motion

to dismiss. In the face of a somewhat chaotic complaint the district court understandably cut

to the chase. Although the district court listed the numerous alleged GAAP violations, it

appears the court distilled the Consolidated Complaint to the single GAAP violation

concerning the recording of unearned commission advances as assets. When so limited, the

Consolidated Complaint fails to adequately allege scienter because there is no evidence that

this alleged GAAP violation was the result of Pre-Paid Defendants’ fraudulent intent to

mislead investors. The district court noted Pre-Paid’s SEC filings 21 disclosed it recorded

unearned commission advances as assets on its balance sheets and warned it might not be

able to recoup unearned commission advances. If Pre-Paid Defendants intended to deceive

investors, it makes little sense for them to overtly disclose their scheme to the SEC and


2001 was only reduced by 8.5% . Pre-Paid Defendants brought this error to the
attention of the district court, which in turn acknowledged its error in its M arch
25, 2001 Order Nunc Pro Tunc, stating this error did not affect its dismissal of
Plaintiffs’ Consolidated Complaint. In its order denying Plaintiffs’ Rule 60(b)
M otion/M otion for Reconsideration, the court again emphasized it was aware of
the magnitude of Pre-Paid’s restatements but still concluded, based on a totality
of the circumstances, that Plaintiffs had failed to adequately plead scienter.
       21
          W e believe the district court gave too much weight to the fact that the
SEC never challenged Pre-Paid’s accounting methodology for seven years. W hile
Pre-Paid did disclose its accounting of unearned commission advances in its SEC
filings, there is no indication in the record concerning the frequency or
thoroughness of the SEC’s review of a corporation’s quarterly and annual reports.
Absent such information, the SEC’s silence for seven years m ay merely indicate
that it never audited Pre-Paid’s reports during that period.

                                               21
public. But, charitably regarded, the complaint alleges more subtle means and purposes.

       The Consolidated Complaint is not limited merely to the improper recording of

unearned commission advances as assets. Plaintiffs also have alleged that Pre-Paid

Defendants improperly maintained unrecoverable unearned commission advances as assets.

In other words, even assuming Pre-Paid could properly record unearned commission

advances as assets, Plaintiffs allege it was improper for Pre-Paid Defendants to maintain

such assets without an adequate reserve and disclosure. An adequate reserve and disclosure

were necessary to inform financial statement users that a material amount of these

commission advances were uncollectible. When Plaintiffs' Consolidated Complaint is

viewed in this context, Pre-Paid's disclosures during the class period do not shield Pre-Paid

Defendants from liability. Indeed, by continuing to maintain these commission advances as

assets without an adequate reserve and disclosure, Pre-Paid Defendants gave investors the

false impression that Pre-Paid could recoup, and in fact was recouping, such unearned

commissions.

       A comparison of Pre-Paid’s 1996, 1998 and 1999 Form 10-K’s with its January 25,

2001 Form 8-K and original 2000 Form 10-K, which was filed in April 2001, is most telling.

In its earlier filings, Pre-Paid stated that historically it had been successful in collecting half

of its unearned commission advances through the use of the charge-back. It also stated its

membership persistency rate was approximately 73-74% between 1996 and 1999.22 In these

       22
       Pre-Paid stated the following concerning its persistency rate in its 1999
Form 10-K:


                                                22
earlier filings, Pre-Paid never wrote off any unearned commission advances and only

increased its reserve by $300,000 to $500,000 per year. However, in its 2001 filings (which

were filed after the SEC began its investigation and after Pre-Paid’s accounting

methodology and its ability to recoup unearned commission advances was publically

criticized), Pre-Paid no longer claimed historical success in collecting unearned commission

advances through the use of the charge-back. Instead, it disclosed for the first time that in

addition to the use of the charge-back, it recovered unearned commission advances by

docking commissions owed to an associate on prior memberships.23 Pre-Paid also disclosed

for the first time that only 53.37% of membership holders were still paying one year after



              One of the major factors affecting [Pre-Paid’s] profitability
       and cash flow is M embership persistency, which represents the
       ability of [Pre-Paid] to retain a M embership, and therefore receive
       fees, once it has been written. . . . [Pre-Paid’s] M embership
       persistency rate measures the number of M emberships in force at the
       end of a year as a percentage of the total of (i) M emberships in force
       at the beginning of such year, plus (ii) new M emberships sold during
       such year. . . . [Pre-Paid’s] overall M embership persistency rate
       could become lower when the M emberships in force include a higher
       proportion of newer M emberships.

(R. Supp. App. Vol. II at SA-664.) Despite this description, it is unclear exactly
how Pre-Paid calculates its membership persistency rate. But, needless to say,
because it includes memberships already in force, it appears to tell little of Pre-
Paid’s ability to retain a membership once it is written.
       23
         Pre-Paid also disclosed it has the contractual right to require associates to
repay unearned commission advances upon their termination or w hen it is
determined that their earned commission advances are insufficient to repay their
unearned advances. However, it conceded it has not exercised this right due to
the costs associated with collection efforts and to avoid disrupting its relationship
with its associates.

                                              23
purchasing a membership and only 36.97% after two years. These figures stand in stark

contrast to Pre-Paid’s claimed 73-74% persistency rate. Further, for the first time, Pre-Paid

wrote off $7.3 million in unearned commission advances and substantially increased its

reserve by approximately $6.5 million. Based on the above, it can be inferred that Pre-

Paid’s disclosures prior to 2001 were misleading, in particular, that it was recovering its

unearned commission advances, when in fact, it was including clearly unrecoverable

commission advances as assets.

       The foregoing discusses possibly material misstatements or omissions, but that does

not end the discussion. The Consolidated Complaint is lacking in terms of Pre-Paid

Defendants’ motive to commit fraud. As Plaintiffs have alleged, Pre-Paid’s Proxy

Statement for the year 2001 reveals that Defendants Harp and Pinson received bonuses if

Pre-Paid achieved its earnings per share goals.24 Standing alone, receipt of such bonuses is

an insufficient motive as it is a generalized motive shared by all company executives. See

Fleming Cos., 264 F.3d at 1269-70 (allegations that a defendant desired to protect his own

position with the company, his executive compensation, or the value of his own stock are

insufficient motives as they are shared by all company executives) (citing Novak v. Kasaks,

997 F.Supp. 425, 430 n.5 (S.D.N.Y. 1998)). That is not to say an executive compensation

package is never suspect. The analysis is fact specific and should at least consider whether

incentive payments reward good management or simply reward stock performance

       24
        This proxy statement indicates Harp received a $40,000 bonus in 1998,
1999 and 2000 and Pinson received a $9,000 bonus in 2000 and a $6,000 bonus in
1999 and 1998.

                                              24
irrespective of the company’s financial health.

       With regard to the Associate Investment Stock Club Purchase Plan, there is no

indication in the record that Pre-Paid obtained any of Defendant Stonecipher’s personal

stock holdings to fund this plan. However, Pre-Paid Defendants have also not adequately

refuted this allegation.25

       Plaintiffs’ allegations concerning the outside directors are more compelling, in

particular, their allegations regarding Defendant Savula. According to the record, Savula

sold 15,000 shares on October 23, 2000, at approximately $38 per share. He also sold

another 3,000 shares on November 6, 2000, at $46.5 a share, which was a mere $2.25 less

than the class period high. These sales amounted to 45% of Savula’s total holdings and

earned him over $700,000. Meanwhile, he purchased no shares during the class period. As

to Defendant Grunebaum, he sold 19,800 shares and bought 16,500 shares during the class

period. However, his sales were all at $30-$34 a share, while all of his purchases were

made pursuant to stock options which allowed him to purchase shares at $8 to $16 per share.

Nevertheless, his stock activity during this time period appears consistent with his stock

activity prior to the class period. He appears to routinely acquire stock through the exercise




       25
         Pre-Paid Defendants assert that the fact Defendant Stonecipher did not
sell any shares during the class period demonstrates that he did not sell any shares
to this plan. However, as stated below, Pre-Paid Defendants’ assertion that
Stonecipher did not sell any shares during the class period is belied by the record.
Therefore, without further evidence, we decline to give credence to Pre-Paid
Defendants’ contention that Defendant Stonecipher did not sell any of his shares
to the plan.

                                              25
of stock options and sell it at a profit.26 Thus, Grunebaum’s trading during the class period

was not “dramatically out of line” with his prior trading practices.27 See In re Apple

Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir. 1989) (concluding insider trading may

support a finding of bad faith if such trading is conducted in amounts “dramatically out of

line with prior trading practices at times calculated to maximize personal benefit from

undisclosed inside information”).

       In addition to arguing that Plaintiffs’ alleged motives are insufficient, Pre-Paid

Defendants argue other evidence demonstrates their complete lack of motive to commit

fraud. First, they assert Pre-Paid purchased millions of dollars of its own stock, thereby

making Pre-Paid the biggest victim of its own alleged fraud. Second, they claim Defendants

Stonecipher, Harp and Pinson did not sell any stock during the class period and in fact

purchased stock, with Harp borrowing a large sum of money to do so. Pre-Paid Defendants

argue Plaintiffs’ assertion that they fraudulently inflated the price of Pre-Paid’s stock defies

economic reason, as it makes no sense for Pre-Paid and these individual defendants to

purchase stock they knew to be artificially inflated.



       26
         For instance, in June and July of 1996, he exercised his stock options and
purchased 22,500 shares at approximately $1-$2 a share. In those same months,
he sold 9,000 shares at approximately $20-$24 per share.
       27
         Based on our limited record, Grunebaum’s “prior trading practices” are
confined to the period June 1996 through February 1999. However, we doubt the
value of comparing pre- and post- class period trading in this case. Correlative
trading behavior is informative only if the comparitor occurred in an untainted
time frame. Here, Pre-Paid was accounting for unearned commission advances as
assets for at least three years prior to the class period.

                                               26
       Pre-Paid Defendants correctly assert that Defendants Stonecipher, Harp and Pinson

bought shares during the class period. The record reveals Stonecipher, Harp and Pinson

purchased 10,000, 47,000 and 3,300 shares, respectively. However, Pre-Paid Defendants

incorrectly state that none of these individuals sold shares during the class period. Indeed,

Stonecipher sold 28,400 shares, Harp sold 14,284 shares and Pinson sold 600 shares. While

Pinson’s sales represented only a small portion of her total shares at that time

(approximately 35,000 shares), she sold the 600 shares at approximately $33 a share.

Although she purchased 3,300 shares during the class period, she did so one month before

the class period ended and paid only approximately $15 per share. Moreover, in 1998, she

acquired 15,000 shares, paying a mere $.375 per share. Therefore, her stock sales during the

class period were not necessarily consistent with her pre-class period sales.

       As to Defendant Harp, although he purchased 47,000 shares during the class period,

he did so by exercising options, paying $9.25 per share. Meanwhile, he sold 14,284 shares

at approximately $26.00 a share.28 While Defendant Stonecipher sold only a small

       28
        Pre-Paid D efendants state Harp borrowed money to purchase these
shares. They point to a promissory note attached to Pre-Paid’s original 2000
Form 10-K. Although this note shows Harp borrowed approximately $330,000
from Pre-Paid, nothing in this note indicates that he borrowed this money to
purchase stock. This is the second time Pre-Paid Defendants have asked us to
infer something the record does not support. They also stated the SEC performed
a review of Pre-Paid’s accounting in 1994 and while it required Pre-Paid to
remove deferred acquisition costs as assets, it left intact Pre-Paid’s recording of
commission advances (referred to in 1994 as “Associates’ balances”) as assets.
(Supp. App. Vol. I at SA -291.) W hile Pre-Paid did change its accounting of
deferred acquisition costs, there is no indication in the record that the SEC
required this change. In fact, the record expressly states Pre-Paid changed its
accounting of deferred acquisition costs to reflect the changes in its business to

                                              27
percentage of his one million shares during the class period, he sold even a smaller portion

(18,000 shares) prior to the class period. Of the shares he sold during the class period, 4,500

shares were sold at $30.25 a share and 100 shares at $26.88.29 As with Defendant Pinson,

Defendant Stonecipher’s one purchase during the class period came one month before the

class period ended, paying close to $18 per share. And while he purchased 10,000 shares

during the class period, before the class period he purchased over 100,000 shares at roughly

$2-$3 a share. Based on the above, while these defendants purchased shares during the class

period, superficially defying economic reason, they did so at low prices, which might

change the equation. Defendants Pinson and Stonecipher made stock purchases during the

class period but at substantially lower volume than their purchasing activity prior to the

class period. Nevertheless, none of them appear to have dumped their shares.

       More compelling are Pre-Paid Defendants’ arguments concerning Pre-Paid’s

repurchase of its own stock. The record shows that on April 6, 1999, Pre-Paid announced a

stock repurchase program authorizing management to reacquire up to 500,000 shares of its

own stock. During subsequent board meetings, Pre-Paid’s board of directors increased such

authorization to 3,000,000 shares.30 As of March 31, 2001, Pre-Paid had repurchased




predominately closed-panel memberships.
       29
        The record does not reveal the price for which he acquired the remaining
23,800 shares he sold during the class period.
       30
        Pre-Paid’s Amended Form 10-K for year ending December 31, 2000,
which is dated February 1, 2002, states the board of directors increased the
authorization to 4,000,000 shares.

                                              28
2,456,991 shares under this program for a total consideration of $56.4 million, an average

price of $22.94 per share.31 There is no allegation that Pre-Paid later sold these shares for a

profit. The district court thought it “patently absurd” and contrary to economic sense for a

corporation to artificially inflate the price of its stock only to then purchase the stock at such

inflated prices. (R. App. Vol. III at A-741.) Plaintiffs disagree, asserting Pre-Paid’s

repurchase of its own stock at artificially inflated prices is only absurd if Pre-Paid expected

to get caught. Moreover, they assert there may have been other reasons for Pre-Paid’s

repurchase program including to aid in the recruitment of new associates, to avoid the

discontentment of its 200,000 member sales force who were investing monthly in Pre-Paid

stock via the Associate Investment Stock Club Purchase Plan, or to more easily manipulate




       31
         Pre-Paid Defendants assert in their brief that Pre-Paid bought $62.5
million worth of shares. They cite to the district court’s M arch 5, 2002 order.
However, in its order, the district court refers to the $56.4 million figure. It is
only after review ing Pre-Paid D efendants’ motion to dismiss in the district court
that we see how they arrived at this figure. According to their original Form 10-
K for 2000 and their Form 10-Q for the quarterly period ending M arch 31, 2001,
Pre-Paid repurchased $29.4 million worth of shares in 1999, $17.3 million worth
of shares in 2000, and $12.8 million worth of shares in the first quarter of 2001,
for a total of $59.5 million. According to its M ay 16, 2001 press release, Pre-
Paid purchased another $3 million worth of shares in the second quarter of 2001
for a total of $62.5 million worth of shares. W e derived the $56.4 million figure
from Pre-Paid’s Form 10-Q for the quarterly period ending M arch 31, 2001,
which of course did not include the $3 million worth of shares purchased in the
second quarter of 2001. However, there still remains a discrepancy of $3.1
million ($62.5 - ($56.4 + $3)). Apparently, not all of the shares repurchased in
1999 were the result of the April 1999 stock repurchase program. W hile this
difference is not material, we point it out to note that once again Pre-Paid
Defendants’ record citation in their brief does not support the proposition for
which it is cited.

                                                29
the stock.32 They claim without discovery there is no way to know Pre-Paid Defendants’

true motivation. However, none of these arguments appear as allegations in the

Consolidated Complaint.

       Based on the above, we conclude Plaintiffs’ Consolidated Complaint insufficiently

pleads scienter. However, unlike the district court, we do not believe Plaintiffs’ fraud theory

is “patently absurd.” The Consolidated Complaint raises some serious “red flags”

concerning Pre-Paid Defendants’ long term recording of unrecoverable unearned

commission advances as assets and the credibility of their pre-2001 SEC disclosures.

Nevertheless, it is lacking in allegations demonstrating Pre-Paid Defendants’ alleged fraud

was economically logical in light of Pre-Paid’s repurchase of its own stock at allegedly

inflated prices. It also fails to adequately allege Pre-Paid’s GAAP violation was the result

of an intent to mislead investors. Therefore, dismissal was appropriate. We now turn to

whether Plaintiffs should have been provided an opportunity to amend their complaint.

       2. Amendment of Complaint

       In their opposition to Pre-Paid Defendants’ motion to dismiss, Plaintiffs obliquely

requested leave to amend the Consolidated Complaint in the event the court determined it

was deficient. In its order granting Pre-Paid Defendants’ and Deloitte’s motions to dismiss,

the district court did not expressly deny, or even acknowledge, Plaintiffs’ request for leave

       32
         W e also note Pre-Paid’s directors and executives, several of them named
as defendants, could have initiated the stock repurchase program in order to
increase Pre-Paid’s stock price by decreasing the supply of its stock. In other
words, these directors and executives could have sacrificed the company for their
own personal gain.

                                              30
to amend. However, in its conclusion, the court stated: “Because it does not appear that any

amendment would be successful in overcoming the pleading deficiencies, this action is

dismissed with prejudice, and a judgment will enter.” (R. App. Vol. III at A-749.)

       Plaintiffs argue the district court abused its discretion in denying them leave to

amend. They assert the district court denied their request for leave to amend because

amendment would be futile. However, they contend the district court provided no

explanation as to why amendment would be futile. Plaintiffs also argue that under the

circumstances of this case leave to amend should have been “freely given” because they

made a timely request for amendment, they were not previously given any opportunity to

amend 33 and Pre-Paid Defendants would not be prejudiced. Fed. R. Civ. P. 15(a). This is

especially true, they assert, in a securities fraud action, where the pleading requirements are

so rigorous.

       Although Plaintiffs contend the district court erred in denying their request for leave

to amend, no such request was properly before the court. “[A] request for leave to amend

must give adequate notice to the district court and to the opposing party of the basis of the

proposed amendment before the court is required to recognize that a motion for leave to

amend is before it.” Calderon v. Kansas Dep’t of Soc. & Rehab. Servs., 181 F.3d 1180,

1186-87 (10th Cir. 1999). This notice requirement assures that we do not “require district

courts to engage in independent research or read the minds of litigants to determine if

       33
       W hile Plaintiffs’ complaint was titled “Consolidated Amended
Complaint,” it was in fact the first complaint they filed as a prospective class. (R.
App. Vol. I at A-17.)

                                               31
information justifying an amendment exists.” Id. at 1187 (quotations omitted). Here,

Plaintiffs made only a cursory request for leave to amend at the conclusion of their response

to Pre-Paid Defendants’ motion to dismiss. Not only did they not provide a proposed

amended complaint, they also failed to proffer what additional evidence they would plead or

how such additional evidence would remedy the Consolidated Complaint’s deficiencies.

They merely argued in a single paragraph that it is improper to deny leave to amend

(especially in cases dismissed for failure to adequately allege fraud) when the plaintiff does

not act in bad faith and defendant would not be prejudiced. In essence, they placed the

district court in the untenable position of making their case for them. Such a request is

insufficient.

       Calderon is instructive. There, the plaintiff concluded her memorandum in

opposition to the defendants’ motion to dismiss with a single sentence requesting leave to

amend her complaint to cure any defects. Calderon, 181 F.3d at 1185. The district court

did not address the plaintiff’s request and dismissed the case with prejudice. Id. at 1183,

1185. On appeal, the plaintiff argued the district court abused its discretion in failing to

grant her leave to amend. Id. at 1185. We rejected the plaintiff’s argument, concluding the

plaintiff’s “single sentence, lacking a statement for the grounds for amendment and dangling

at the end of her memorandum, did not rise to the level of a motion for leave to amend.

Because a motion for leave to amend was never properly before it, the district court did not

abuse its discretion in failing to address [the plaintiff’s] request for leave to cure deficiencies

in her pleadings.” Id. at 1187. See also Glenn v. First Nat’l Bank in Grand Junction, 868

                                                32
F.2d 368, 370 (10th Cir. 1989) (concluding that the district court did not err in failing to

address the plaintiffs’ request for leave to amend, which was made in their response to the

defendants’ motion to dismiss, because the request did not rise to the status of a motion and

failed to set forth any grounds for the request). The same is true here.

       We also note that even after the district court granted Pre-Paid Defendants’ motion to

dismiss and outlined the alleged deficiencies of the Consolidated Complaint, Plaintiffs failed

to request leave to amend. In their Rule 60(b) motion, Plaintiffs argued the district court

misunderstood the facts and erred on the merits. However, they never suggested

amendment of the complaint. On appeal, Plaintiffs continue to fail to provide any

explanation as to how amendment would cure the deficiencies of the Consolidated

Complaint. They merely argue: “Indeed, as numerous additional facts (including,

significantly, Pre-Paid’s actual restatement of financial results) came to light following

Plaintiffs’ filing of the [Consolidated] Complaint, and were not therefore part of the record,

the District Court was in no position to conclude that such subsequently discovered

information would necessarily fail to cure the perceived deficiencies.” 34 (Appellants’

Opening Br. at 58-59.) Yet, Plaintiffs never proffered this additional information to the

district court and to this day, they do not indicate what information they would include in an



       34
         Although Pre-Paid’s restated financial statements were filed after the
Consolidated Complaint, the C onsolidated Complaint contained Pre-Paid’s
estimates for the restatement, which were similar in magnitude to the actual
restated financial statements. [App. Vol. III at A-759] Additionally, the district
court was aware of the magnitude of Pre-Paid’s restated financial statements
when it ruled on Plaintiffs’ Rule 60(b) motion. [Id. at A-919]

                                               33
amended complaint to satisfy the scienter requirement.

       Plaintiffs failed to adequately request amendment and to support that request.

Consequently, the district court did not err in dismissing this case without leave to amend.

Because our conclusion that the district court properly dismissed this case with prejudice for

failure to adequately plead scienter disposes of this appeal, we need not address the

timeliness of Plaintiffs’ complaint or the truth-on-the-market doctrine.

       AFFIRMED.

                                                         Entered for the Court




                                                         Terrence L. O’Brien
                                                         Circuit Judge




                                              34
