                           PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT


NORMAN OTTMANN,                       
              Plaintiff-Appellant,
                v.
HANGER ORTHOPEDIC GROUP,
INCORPORATED; IVAN R. SABEL;
RICHARD A. STEIN,                                No. 02-2283
              Defendants-Appellees,
                v.
DAVID CHOPKO; GARY BACKOUS,
               Movant-Appellants.
                                      
           Appeal from the United States District Court
            for the District of Maryland, at Greenbelt.
             Alexander Williams, Jr., District Judge.
                        (CA-00-3508-AW)

                     Argued: September 25, 2003

                     Decided: December 22, 2003

         Before WILKINS, Chief Judge, and WIDENER
                 and LUTTIG, Circuit Judges.



Affirmed by published opinion. Chief Judge Wilkins wrote the opin-
ion, in which Judge Widener and Judge Luttig joined.


                            COUNSEL

ARGUED: Andrew M. Schatz, SCHATZ & NOBEL, P.C., Hartford,
Connecticut, for Appellants. Glenn M. Kurtz, WHITE & CASE, New
2                OTTMANN v. HANGER ORTHOPEDIC GROUP
York, New York, for Appellees. ON BRIEF: Jeffrey S. Nobel,
SCHATZ & NOBEL, P.C., Hartford, Connecticut; Charles Juster
Piven, LAW OFFICE OF CHARLES J. PIVEN, Baltimore, Mary-
land, for Appellants.


                               OPINION

WILKINS, Chief Judge:

   Norman Ottmann, David Chopko, and Gary Backous (collectively,
"Appellants") appeal a district court order dismissing their securities
fraud suit against Hanger Orthopedic Group, Inc. (Hanger) and two
of its senior officers, Ivan R. Sabel and Richard A. Stein,1 pursuant
to Federal Rule of Civil Procedure 12(b)(6) and provisions of the Pri-
vate Securities Litigation Reform Act of 1995 (PSLRA), see 15
U.S.C.A. § 78u-4(b)(1), (2) (West 1997). Finding no reversible error,
we affirm.

                                    I.

   Hanger provides services to patients who require orthotic and pros-
thetic devices, such as artificial limbs. On July 1, 1999, Hanger
acquired NovaCare Orthotics & Prosthetics (NovaCare), another pro-
vider of orthotic and prosthetic devices. Through this acquisition,
Hanger acquired 369 patient care facilities operated by NovaCare, and
it hired former NovaCare personnel, including certified practitioners
qualified to fit orthotic and prosthetic devices. The NovaCare acquisi-
tion more than doubled the size of Hanger’s United States operations,
bringing Hanger’s total number of patient care facilities to 636, with
a total of 920 certified practitioners in 42 states and the District of
Columbia.

   On November 8, 1999, Hanger issued a press release reporting
financial results for the third quarter of 1999, which had ended on
September 30. This was the first quarter in which Hanger’s financial
results included the results of the new NovaCare division. The
    1
     We refer to Hanger, Sabel, and Stein collectively as "Appellees."
                OTTMANN v. HANGER ORTHOPEDIC GROUP                       3
November 8 press release reported third quarter revenue of $124.9
million and net income of $5.81 million, or $0.24 per share.

   Also on November 8, Sabel, Stein, and another Hanger officer held
a conference call with securities analysts and investors ("the Novem-
ber 8 call"). During this call, the officers reiterated the financial
results set forth in the press release and discussed in detail the integra-
tion of NovaCare into Hanger. While the officers made mostly posi-
tive comments regarding the integration, they explained that revenue
had been reduced by the departure of some former NovaCare practi-
tioners in connection with the acquisition.

   On January 6, 2000, Appellees announced in another press release
that they expected revenue and earnings for the fourth quarter of 1999
and the year 2000 to fall substantially below analysts’ expectations,
with estimated fourth quarter revenue of $115 million and a break-
even in earnings per share. The next morning, Sabel and Stein partici-
pated in another conference call with analysts and investors to discuss
these results ("the January 7 call"). During this call, Stein explained
that Hanger’s disappointing results were attributable to three factors:
(1) additional losses of former NovaCare practitioners, (2) a decision
to conform the revenue recognition practices of the NovaCare divi-
sion to Hanger’s practices, and (3) a reduction in referral business
from rehabilitation clinics due to the NovaCare acquisition. That same
day (the first trading day after Hanger’s negative financial news was
released), the price of Hanger common stock dropped from the previ-
ous day’s closing price of $9.375 per share to as low as $3.75—a
decline of 60 percent—before closing at $4.8125.

   Appellants subsequently brought this proposed class action on
behalf of investors who purchased Hanger stock between November
8, 1999 and January 6, 2000. Appellants claimed that Appellees made
a series of oral and written misrepresentations and omissions of fact
in violation of section 10(b) of the Securities Exchange Act of 1934,
see 15 U.S.C.A. § 78j(b) (West Supp. 2003), and Rule 10b-5, see 17
C.F.R. § 240.10b-5 (2003).2 Appellants later amended their com-
plaint.
  2
   Appellants also asserted a claim against Sabel and Stein as "control-
ling person[s]," see 15 U.S.C.A. § 78t(a) (West 1997). This claim
4               OTTMANN v. HANGER ORTHOPEDIC GROUP
   Appellees moved to dismiss, arguing that Appellants had failed to
plead with particularity any false or misleading statements by Appel-
lees, the materiality of such statements, or scienter. The district court
agreed and dismissed the amended complaint. The court expressed
"serious doubts as to whether [Appellants would] be able to meet the
threshold requirements for pleading with particularity in a securities
class action suit," J.A. 41, but nevertheless granted Appellants an
opportunity to amend their complaint. Further, the district court gave
Appellants specific guidance regarding how to redraft their complaint.

   Appellants subsequently filed a second amended complaint, and
Appellees again moved to dismiss based on essentially the same
grounds asserted in their earlier motion. Emphasizing that it had pre-
viously given Appellants an opportunity to plead their claims with
greater particularity, the district court determined that Appellants’
new complaint contained the same defects as the earlier one. Thus,
based on its conclusion that Appellants had "not met the threshold
requirements for pleading with particularity in a securities class action
suit," id. at 332, the district court dismissed the complaint with preju-
dice.

                                   II.

   To state a claim under section 10(b) and Rule 10b-5, a plaintiff
must allege that "(1) the defendant made a false statement or omission
of material fact (2) with scienter (3) upon which the plaintiff justifi-
ably relied (4) that proximately caused the plaintiff’s damages." Phil-
lips v. LCI Int’l, Inc., 190 F.3d 609, 613 (4th Cir. 1999) (internal
quotation marks omitted). At issue here is whether Appellants ade-
quately pleaded the first two elements. We review the dismissal of a
complaint pursuant to Rule 12(b)(6) de novo. See Baird ex rel. Baird
v. Rose, 192 F.3d 462, 467 (4th Cir. 1999).

requires an underlying violation of the securities fraud laws. See Long-
man v. Food Lion, Inc., 197 F.3d 675, 686 (4th Cir. 1999). Based on our
conclusion below that Appellants have not adequately pleaded their
claim under § 10(b) and Rule 10b-5, we also conclude that the district
court properly dismissed the "controlling persons" claim.
                OTTMANN v. HANGER ORTHOPEDIC GROUP                       5
      A. Standards for Material Misrepresentation or Omission

   To allege a false statement or omission of material fact, a plaintiff
"must point to a factual statement or omission—that is, one that is
demonstrable as being true or false." Longman v. Food Lion, Inc., 197
F.3d 675, 682 (4th Cir. 1999). Additionally, the plaintiff must allege
that the statement is false or that the omitted fact renders a public
statement misleading. See id. And, "any statement or omission of fact
must be material," i.e., there must be "a substantial likelihood that a
reasonable purchaser or seller of a security (1) would consider the fact
important in deciding whether to buy or sell the security or (2) would
have viewed the total mix of information made available to be signifi-
cantly altered by disclosure of the fact." Id. at 682-83. Under the
PSLRA, the complaint must "specify each statement alleged to have
been misleading, the reason or reasons why the statement is mislead-
ing, and, if an allegation regarding the statement or omission is made
on information and belief, . . . state with particularity all facts on
which that belief is formed." 15 U.S.C.A. § 78u-4(b)(1).

                      B. Standards for Scienter

                       1. Substantive Standard

   In a securities fraud action, "the term ‘scienter’ refers to a mental
state embracing intent to deceive, manipulate, or defraud." Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976); see Malone v.
Microdyne Corp., 26 F.3d 471, 478 (4th Cir. 1994). Mere negligence
will not suffice. See Phillips, 190 F.3d at 621. Additionally, every cir-
cuit that has considered the issue has held that scienter may also be
established by a showing of recklessness.3 See Hudson v. Phillips
  3
    Following the enactment of the PSLRA (which, as explained below,
heightened pleading requirements in securities fraud actions), questions
arose concerning the validity of pre-PSLRA decisions holding that
scienter could be established by a showing of recklessness. See Nathen-
son v. Zonagen Inc., 267 F.3d 400, 407 (5th Cir. 2001). We have con-
cluded, however, that the PSLRA did not alter the substantive standard
for proving scienter in securities fraud actions. See Phillips, 190 F.3d at
620; see also, e.g., Nathenson, 267 F.3d at 407-08 (reaching same con-
clusion). But cf. Janas v. McCracken (In re Silicon Graphics Inc. Sec.
Litig.), 183 F.3d 970, 974 (9th Cir. 1999) (apparently concluding that
PSLRA raised scienter standard to "deliberate recklessness," requiring
plaintiffs to "state facts that come closer to demonstrating intent").
6              OTTMANN v. HANGER ORTHOPEDIC GROUP
Petroleum Co. (In re Phillips Petroleum Sec. Litig.), 881 F.2d 1236,
1244 (3d Cir. 1989); Van Dyke v. Coburn Enters., 873 F.2d 1094,
1100 (8th Cir. 1989); McDonald v. Alan Bush Brokerage Co., 863
F.2d 809, 814 (11th Cir. 1989); Hackbart v. Holmes, 675 F.2d 1114,
1117-18 (10th Cir. 1982); Broad v. Rockwell Int’l Corp., 642 F.2d
929, 961-62 (5th Cir. Apr. 1981) (en banc); Mansbach v. Prescott,
Ball & Turben, 598 F.2d 1017, 1023-25 (6th Cir. 1979); Sundstrand
Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977);
cf. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.
1978) (concluding that scienter may be established by recklessness
"in appropriate circumstances"). However, neither this circuit nor the
Supreme Court has addressed this particular question. See Ernst &
Ernst, 425 U.S. at 194 n.12; Phillips, 190 F.3d at 620 (noting that
scienter "may perhaps be shown by recklessness" (emphasis added)).

   In Phillips, we defined "recklessness" as "an act so highly unrea-
sonable and such an extreme departure from the standard of ordinary
care as to present a danger of misleading the plaintiff to the extent
that the danger was either known to the defendant or so obvious that
the defendant must have been aware of it." Phillips, 190 F.3d at 621
(internal quotation marks omitted); see, e.g., Nathenson v. Zonagen
Inc., 267 F.3d 400, 408 (5th Cir. 2001) (articulating same definition
of recklessness); City of Philadelphia v. Fleming Cos., 264 F.3d 1245,
1258 (10th Cir. 2001) (same); In re Advanta Corp. Sec. Litig., 180
F.3d 525, 535 (3d Cir. 1999) (same). Such "severe recklessness" is,
in essence, "a slightly lesser species of intentional misconduct."
Nathenson, 267 F.3d at 408 (internal quotation marks omitted). This
definition of recklessness comports with the observation of the
Supreme Court that "[t]he words ‘manipulative or deceptive’ used in
conjunction with ‘device or contrivance’ strongly suggest that § 10(b)
was intended to proscribe knowing or intentional misconduct." Ernst
& Ernst, 425 U.S. at 197. We therefore agree with our sister circuits
that a securities fraud plaintiff may allege scienter by pleading not
only intentional misconduct, but also recklessness.

                       2. Pleading Standard

   With this substantive standard in mind, we turn to the requirements
for pleading scienter in securities fraud cases. The PSLRA requires
that "the complaint shall, with respect to each act or omission alleged
                OTTMANN v. HANGER ORTHOPEDIC GROUP                       7
to violate this chapter, state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of
mind." 15 U.S.C.A. § 78u-4(b)(2). Congress enacted this more strin-
gent pleading standard "to curtail the filing of meritless lawsuits" and
to create a uniform pleading standard among the circuits. H.R. Conf.
Rep. No. 104-369, at 41 (1995), reprinted in 1995 U.S.C.C.A.N. 730,
740.

   The PSLRA thus "seek[s] to heighten the standard for pleading
scienter, and so changes what a plaintiff must plead in his complaint
in order to survive a motion to dismiss."4 Phillips, 190 F.3d at 620
(internal quotation marks & alteration omitted); see id. (noting that
the PSLRA "indisputably seeks to make pleading scienter more diffi-
cult for plaintiffs"). Other circuits have reached differing conclusions
regarding the proper interpretation of the requirements for pleading
scienter under the PSLRA. However, we have "not yet determined
which pleading standard best effectuates Congress’s intent." Id. at
621.

   Prior to the enactment of the PSLRA, the Second Circuit required
securities fraud plaintiffs "to allege facts that give rise to a strong
inference" of scienter. Shields v. Citytrust Bancorp, Inc., 25 F.3d
1124, 1128 (2d Cir. 1994). A "strong inference" could be demon-
strated "either (a) by alleging facts to show that defendants had both
motive and opportunity to commit fraud, or (b) by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior or
recklessness." Id.

   In enacting the PSLRA, Congress adopted the "strong inference"
language used by the Second Circuit, which it regarded as the most
stringent pleading standard in the country. See S. Rep. No. 104-98, at
15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694. However, it is
not clear whether Congress also intended to adopt the Second Circuit
rule permitting plaintiffs to show a strong inference by alleging facts
  4
   The heightened pleading requirements of the PSLRA supersede the
requirements of Federal Rule of Civil Procedure 9(b) in securities fraud
cases, at least with respect to scienter. See Lipton v. Pathogenesis Corp.,
284 F.3d 1027, 1034 n.12 (9th Cir. 2002); Advanta Corp., 180 F.3d at
531 n.5.
8               OTTMANN v. HANGER ORTHOPEDIC GROUP
demonstrating motive and opportunity. Following enactment of the
PSLRA, the Second Circuit reaffirmed its pre-PSLRA standard. See
Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999)
(stating that the PSLRA "heightened the requirement for pleading
scienter to the level used by the Second Circuit"). And, the Third Cir-
cuit has held that the pleading standard of the PSLRA is essentially
that of the Second Circuit. See Advanta Corp., 180 F.3d at 533-34.
The Ninth Circuit, however, has concluded that Congress rejected the
Second Circuit "motive and opportunity" standard and therefore that
facts showing motive and opportunity cannot alone establish a strong
inference of scienter. See Janas v. McCracken (In re Silicon Graphics
Inc. Sec. Litig.), 183 F.3d 970, 977-79 (9th Cir. 1999). Similarly, the
Eleventh Circuit has held that the PSLRA did not codify the "motive
and opportunity" standard, and thus, allegations of motive and oppor-
tunity, without more, are insufficient to plead scienter. See Bryant v.
Avado Brands, Inc., 187 F.3d 1271, 1285-86 (11th Cir. 1999).

   However, a number of other circuits have concluded that, in enact-
ing the PSLRA, Congress chose neither to adopt nor reject particular
methods of pleading scienter—such as alleging facts showing motive
and opportunity—but instead only required plaintiffs to plead facts
that together establish a strong inference of scienter. See Fla. State
Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 659-60 (8th
Cir. 2001); Nathenson, 267 F.3d at 411-12; Fleming Cos., 264 F.3d
at 1261-63; Helwig v. Vencor, Inc., 251 F.3d 540, 550-52 (6th Cir.
2001) (en banc); Greebel v. FTP Software, Inc., 194 F.3d 185, 195-96
(1st Cir. 1999). In addition to noting the absence of any language in
the PSLRA addressing particular methods of pleading, some of these
courts have observed that the legislative history regarding whether
Congress intended to adopt or reject the "motive and opportunity"
standard is conflicting and inconclusive. See Green Tree Fin. Corp.,
270 F.3d at 657-58; Nathenson, 267 F.3d at 411; Greebel, 194 F.3d
at 194-95. These courts have therefore adopted a case-specific
approach that examines the particular allegations in their entirety to
determine whether they provide the requisite strong inference, "with-
out regard to whether those allegations fall into defined, formalistic
categories such as ‘motive and opportunity.’" Fleming Cos., 264 F.3d
at 1263. Still, these circuits generally agree that specific facts showing
a motive and opportunity to commit fraud (or the absence of such
facts) may be relevant in determining whether a plaintiff’s complaint
                OTTMANN v. HANGER ORTHOPEDIC GROUP                     9
demonstrates a strong inference of scienter. See, e.g., id.; Helwig, 251
F.3d at 550-51; Greebel, 194 F.3d at 197.

   We agree that a flexible, case-specific analysis is appropriate in
examining scienter pleadings. Both the absence of any statutory lan-
guage addressing particular methods of pleading and the inconclusive
legislative history regarding the adoption of Second Circuit pleading
standards indicate that Congress ultimately chose not to specify par-
ticular types of facts that would or would not show a strong inference
of scienter. See Helwig, 251 F.3d at 551 ("In enacting the PSLRA,
Congress was concerned with the quantum, not type, of proof.");
Greebel, 194 F.3d at 195 ("The history and text [of the PSLRA] show
no agreement to restrict the types of evidence which may be used to
show a strong inference of scienter."). We therefore conclude that
courts should not restrict their scienter inquiry by focusing on specific
categories of facts, such as those relating to motive and opportunity,
but instead should examine all of the allegations in each case to deter-
mine whether they collectively establish a strong inference of
scienter. And, while particular facts demonstrating a motive and
opportunity to commit fraud (or lack of such facts) may be relevant
to the scienter inquiry, the weight accorded to those facts should
depend on the circumstances of each case.

                  C. Application to Present Facts

   Having set forth the applicable legal standards, we now examine
the allegations in Appellants’ complaint to determine whether Appel-
lants have pleaded the disputed elements of their claims with suffi-
cient particularity. Appellants allege that Appellees (1)
misrepresented the number of NovaCare practitioners that departed
after the NovaCare acquisition and the reason for their departures, (2)
failed to promptly disclose NovaCare’s different revenue recognition
method, and (3) failed to promptly disclose the reduction in referral
business due to the acquisition. Appellants also make a series of
"catch-all" allegations that purportedly demonstrate Appellees’
motives to misrepresent or conceal these facts. We consider each of
these allegations in turn.
10                OTTMANN v. HANGER ORTHOPEDIC GROUP
                       1. Practitioner Departures

                        a. Number of Departures

   Appellants claim that during the November 8 call, Appellees mis-
represented the number of NovaCare practitioners that had left the
company after the acquisition closed on July 1, 1999. During that call,
Stein made the following statement regarding practitioner departures:

       As a result of the acquisition and studying the historical
       numbers of NovaCare and along with the merging of these
       offices, we have realized that there [were] some practition-
       ers that left NovaCare before the transaction took place—
       approximately 10 folks. And there were about 10 folks that
       left the organization. Some were terminated because they
       weren’t producing. And there were a few that resigned. So
       as a resulting total of 20 practitioners leaving the organiza-
       tion, there was a loss of business totaling about $8 million.

J.A. 84. Stein also stated that "as a result of eliminating some of these
branches that were not profitable businesses and the loss of some of
these practitioners—and in some cases we terminated the practitioners
—our margins are running better than expected, but our top line is a
little bit less than what we initially forecasted." Id. at 85. Further, in
response to an analyst’s question regarding the departures, Sabel
stated:

       I think we’re very confident that there are certainly no indi-
       cations of any kind of major defection. Keep in mind that
       out of the number of practitioner[s] that we lost the current
       number that we currently employ are 977 practitioners. And
       that’s a pretty formidable number of practitioners. And, in
       fact, pre and post we’ve lost about 20 practitioners out of
       that group. So it’s certainly not any kind of a trend that we
       see.

Id. at 93.

     Appellants contend that the actual net number of practitioners that
                 OTTMANN v. HANGER ORTHOPEDIC GROUP                     11
departed after the July 1 closing but before the November 8 call was
at least 18 (and possibly 19), not 10.5 This allegation is based on com-
ments by Stein during the January 7 call:

      I want to explain to you or share with you the trend that has
      taken place over the last six months since we’ve owned
      NovaCare. The net resignations in the company on a practi-
      tioner basis was seven in July. In August it was one. In Sep-
      tember it was seven. In October it dropped to three. And in
      November it dropped to one, and then in December it
      dropped to seven—or it went back up to seven.

      And so you can see as of the end of November this trend—
      it was trending down. We thought this phenomenon was
      over. It bounced back in December, and we realized that we
      were starting to see this problem occur again.

      When you translate the loss of these practitioners into reve-
      nues, we’ve experienced a shortfall here in the fourth quar-
      ter of $2.25 million in revenue, or 9 cents per share, and on
      an annualized basis, just for the loss of the practitioners, it
      was $9 million or 17 cents per share for year 2000.

Id. at 102-03. Later in the call, Sabel explained that "what we’ve had
is a small number of practitioners that have defected and have
inflicted serious damage. I’m not trying to diminish the damage that
they’ve inflicted, but we have almost 950 practitioners still within this
system." Id. at 112.

  Appellants further claim that Appellees’ misrepresentations regard-
  5
   Appellants suggest that the 10 post-acquisition departures that Appel-
lees mentioned in the November 8 call ostensibly included all departures
up to the time of that call, not just those during the third quarter ending
on September 30. Appellants also claim the 18 or 19 post-acquisition
departures were in addition to the approximately 10 practitioners that
Appellees indicated had left NovaCare before the acquisition closed.
Because the limited record is not conclusive on these points, and because
we must draw all reasonable factual inferences in Appellants’ favor, we
accept these allegations as true for purposes of this appeal.
12              OTTMANN v. HANGER ORTHOPEDIC GROUP
ing the number of practitioner departures were material, based on a
statement by Stein during the January 7 call that a practitioner’s refer-
ral business "could be a half a million dollars" and that "a good por-
tion of that just drops through to [earnings]." Id. at 109. Appellants
also point to Sabel’s statement during the January 7 call that the prac-
titioner departures had "inflicted serious damage." Id. at 112.

   Appellees’ statements during the November 8 call regarding the
number of practitioner departures were factual statements that were
demonstrably true or false, and Appellants have adequately alleged
that they were false. Appellees claim that these statements were not
material because although Appellees may have misstated the number
of practitioners that had departed, they disclosed the financial effect
of those departures by explaining that the departures had caused "a
loss of business totaling about $8 million." Id. at 84. Appellants
acknowledge that this $8 million figure accurately represented the
revenue that had been lost during the third quarter of 1999 as a result
of the pre- and post acquisition practitioner departures.6 Appellants
contend, however, that this figure did not include much of the lost
revenue attributable to the eight or nine departures that Appellants
failed to disclose because the financial impact of those departures
would be primarily felt in later quarters.

   We believe there is at least a factual issue regarding whether
Appellees’ disclosure of the $8 million in third quarter revenue losses
due to practitioner departures adequately remedied the misstatement
of the number of departures. Viewing the alleged facts in the light
most favorable to Appellants, a reasonable investor could have been
misled by the misstatement of the number of departures, despite the
disclosure of the $8 million in third quarter lost revenue. Although
most of the undisclosed departures apparently took place during the
third quarter, many of those departures could have occurred during
the latter part of that quarter and thus would have had a relatively
modest effect on third quarter revenue and a correspondingly greater
effect on fourth quarter revenue. Thus, despite knowing that the
  6
    While the record is not clear regarding the exact time period during
which this $8 million of revenue was lost, Appellants’ contention that
this figure represented third quarter losses is a reasonable interpretation
of the record, and we will therefore accept it for purposes of this appeal.
                OTTMANN v. HANGER ORTHOPEDIC GROUP                       13
departures had collectively caused $8 million in revenue losses during
the third quarter, a reasonable investor could have underestimated the
continuing future effects of the departures, based on the false under-
standing that there had only been 10 post-acquisition departures, as
opposed to 18 or 19. We therefore conclude that Appellants have suf-
ficiently pleaded that Appellees’ misstatements concerning the num-
ber of practitioner departures were material.

   Regarding scienter, Appellants claim that Appellees’ statements
during the January 7 call demonstrate that (1) they viewed the reten-
tion of practitioners as the most important factor in revenue growth,
(2) they had been monitoring the departure numbers on a monthly
basis, and (3) they had recognized prior to the November 8 call that
the departures reflected a negative trend. These allegations do provide
some indication that Appellees misstated the number of practitioner
departures at least recklessly. On balance, however, other factors
show that the requisite strong inference of scienter is lacking.

   First, although Appellees clearly understated the number of post-
acquisition departures during the November 8 call, their statements
indicate that they were attempting to give a rough approximation of
the number of pre- and post-acquisition departures, rather than a pre-
cise number. See id. (stating that "approximately 10" practitioners left
before the acquisition); id. (indicating that "about 10" practitioners
left after the acquisition); id. at 93 (stating that "pre and post [acquisi-
tion] we’ve lost about 20 practitioners"). Second, although the lost
revenue attributable to each departure was substantial, the absolute
number of the undisclosed net departures (8 or 9) was small in com-
parison to the overall number of practitioners employed by Hanger;
given that Hanger was in the midst of a complex nationwide integra-
tion of NovaCare, there is a distinct possibility that, at the time of the
November 8 call, Appellees had simply undercounted the number of
practitioners across the country who had departed. Third, while the
disclosure of the $8 million in third quarter revenue losses due to the
departures may not have been adequate to correct the misstatement of
the number of departures, it nonetheless militates against a finding
that Appellees acted with a culpable state of mind. Fourth, Appellants
do not allege a long-term effort by Appellees to conceal the number
of practitioner departures; to the contrary, only two months after the
alleged misstatements, Appellees clearly disclosed the correct number
14              OTTMANN v. HANGER ORTHOPEDIC GROUP
of post-acquisition departures. Fifth, Appellants do not allege that
Appellees had any personal motives to misrepresent the number of
departures for a total of two months, such as to facilitate personal
sales of Hanger stock.7 See Phillips, 190 F.3d at 622-23. Finally,
although Appellees’ characterization of the practitioner departures
was more positive during the November 8 call, see id. at 93 (stating
that "it’s certainly not any kind of a trend that we see"), Appellees
plausibly explained during the January 7 call that, around the time of
the November 8 call, they believed the departures were abating.

   Given these circumstances, Appellees’ misstatement of the number
of post-acquisition departures is more consistent with negligence than
with recklessness or intent. We therefore conclude that Appellants’
allegations regarding the number of practitioner departures do not
establish the strong inference of scienter required by the PSLRA.

                      b. Reason for Departures

    Appellants also claim that during the November 8 call, Appellees
misrepresented the reason for the practitioner departures by stating
that "[s]ome" of the former practitioners "were terminated because
they weren’t producing," "[a]nd there were a few that resigned." Id.
at 84; see id. at 85 (stating that "in some cases we terminated the prac-
titioners"). By contrast, during the January 7 call, Appellees described
the post-acquisition departures as "net resignations," id. at 102, never
specifically stating that any practitioners had been terminated. Appel-
lants further allege that the reason for the practitioners’ departures
was material because the firing of unprofitable practitioners would be
viewed by investors as a positive financial move for the company,
while practitioner resignations would be viewed as a negative devel-
opment.

  We question whether Appellants have adequately pleaded that
Appellees’ November 8 statements regarding practitioner termina-
  7
   As discussed below in Section II.C.4, while Appellants’ complaint
includes allegations purportedly showing Appellees’ motives to commit
fraud, those allegations involve generalized corporate motives that courts
have repeatedly found insufficient to establish a strong inference of
scienter.
               OTTMANN v. HANGER ORTHOPEDIC GROUP                    15
tions were false. To begin with, Appellees’ discussion of practitioner
departures during the January 7 call was limited to post-acquisition
departures, while the discussion during the November 8 call also
included pre-acquisition departures. Although Appellees’ statements
during the November 8 call are not clear on this point, it is possible
that at least some of the terminations Appellees referred to during that
call took place before the acquisition. Further, even assuming that all
of the terminations Appellees mentioned during the November 8 call
purportedly occurred after the acquisition, it seems unlikely that
Appellees would completely fabricate this fact during the Novem-
ber 8 call and then retreat from it during the January 7 call. An
equally likely explanation is that during the January 7 call, Appellees
were describing the loss of practitioners generally as "net resigna-
tions" and did not specifically repeat that some of the former practi-
tioners had been terminated. And, to the extent Appellants claim that
Stein’s statement during the November 8 call that "a few" practition-
ers had resigned was false, the word "few" in this context is subjec-
tive, particularly given Appellees’ other indefinite statements that
"some" of the practitioners were terminated. Nonetheless, we will
assume for purposes of discussion that Appellants have properly
pleaded that Appellees’ statements concerning the reason for the prac-
titioner departures were false.

   With respect to materiality, Appellants are correct that, in the
abstract, a reasonable investor might have found it important to know
that Hanger was losing practitioners involuntarily rather than by its
own strategic decisions. Viewing Appellees’ statements in context,
however, we question whether there is a substantial likelihood that a
reasonable investor would have considered the reason for the depar-
tures to be significant. Again, the alleged misstatements related to a
small number of departing practitioners when compared to the overall
number of practitioners employed by Hanger. And, Appellees did dis-
close that some of the departing practitioners had resigned. While it
is a close question, we will assume that Appellants have adequately
pleaded that Appellees’ alleged misstatements regarding the reason
for the practitioner departures were material.

   However, as with Appellees’ statements regarding the number of
departing practitioners, Appellants’ complaint does not establish a
strong inference that Appellees knowingly or recklessly misstated the
16              OTTMANN v. HANGER ORTHOPEDIC GROUP
reason for the departures. As explained above, any inconsistency in
the language used to describe the departures was just as likely the
result of an overgeneralization as it was the product of intentional
deception or recklessness. Further, given the small number of practi-
tioners involved and the disclosure that some of them resigned, we
cannot conclude that Appellants’ allegations present a strong infer-
ence of reckless conduct, much less intentional conduct.

                       2. Revenue Recognition

   Appellants further allege that Appellees artificially inflated Hang-
er’s 1999 third quarter revenue and earnings by failing to disclose cer-
tain issues concerning revenue recognition by NovaCare. Stein
explained during the January 7 call that Appellees had discovered in
late December 1999 that NovaCare was using a method for recogniz-
ing revenue that was different from, and less conservative than, Hang-
er’s publicly stated policy. While Hanger did not record revenues
until after orthotic or prosthetic devices were accepted by patients,
NovaCare recorded revenues for devices that had been completed but
had not yet been delivered to patients. Stein further explained that this
different method for revenue recognition at NovaCare arose from ver-
bal communications among NovaCare field managers rather than a
written policy, and that he had recently discovered this practice
through a conversation with some of NovaCare’s regional managers.
According to Stein, once Appellees learned of this differing method
of revenue recognition, they conformed NovaCare’s practice to Hang-
er’s. Stein reported that this change, which took effect during the
fourth quarter of 1999, reduced revenue for that quarter by $4 million
and earnings per share by $0.13, and that it would reduce projected
2000 revenue by $4 million.

  Appellants allege that Appellees represented in public filings that
Hanger was using its stated revenue recognition policy for all cus-
tomer transactions during the third quarter of 1999, when in fact it
was not. Thus, Appellants have adequately pleaded that Appellees
made false statements or omissions.8 Further, while the precise finan-
  8
   We disagree with the district court that Appellants were required to
"allege particular transactions where revenues were improperly recorded,
                OTTMANN v. HANGER ORTHOPEDIC GROUP                       17
cial impact of the discrepancy in revenue recognition methods during
the third quarter is unclear, the significant effect of reconciling these
methods on Hanger’s subsequent financial results suggests that the
alleged misrepresentations and omissions were material.

   Once again, however, Appellants have failed to allege particular
facts that provide a strong inference that Appellees made these state-
ments and omissions intentionally or recklessly. In their complaint,
Appellants set forth a variety of facts that they claim demonstrate
Appellees’ scienter. For example, Appellants allege that certain Nova-
Care executives were employed by Hanger after the acquisition and
that Appellees had access to NovaCare documents. But Appellants do
not explain how those former NovaCare employees necessarily would
have recognized the difference in revenue recognition systems any
more quickly than Appellees did. Nor do Appellants explain how the
particular NovaCare documents possessed by Hanger would have
revealed the discrepancy—especially given Stein’s statement during
the January 7 call that NovaCare’s revenue recognition practices were
derived from verbal communications among managers rather than any
written policy.

   Appellants also point to the fact that NovaCare accounted for over
half the facilities and revenue of the combined company. However,
this fact alone does not demonstrate that the relatively subtle differ-
ence in revenue recognition practices was so obvious that Appellees

including the names of customers, the terms of specific transactions,
when the transactions occurred, and the approximate amount of the
fraudulent transactions." J.A. 332. Appellants’ claim is that Appellees’
failure to disclose NovaCare’s differing revenue recognition method
affected revenue and earnings in the aggregate—a claim that is generally
supported by the effect on Hanger’s financial results of conforming the
two companies’ practices. It is inappropriate at the pleading stage, before
any discovery, to require Appellants to cite specific transactions for
which the NovaCare recognition method was used. See Mesko v.
Cabletron Sys., Inc. (In re Cabletron Sys., Inc.), 311 F.3d 11, 32-33 (1st
Cir. 2002) (indicating that although securities plaintiffs must plead fraud-
ulent conduct with particularity, they need not allege all of the precise
details underlying that conduct, especially when there has been no dis-
covery).
18              OTTMANN v. HANGER ORTHOPEDIC GROUP
must have been aware of it, especially in the midst of a complex
nationwide integration of the two businesses.

   In addition, Appellants allege that the same outside accounting firm
performed audits of financial statements for both Hanger and Nova-
Care during 1999. This allegation, however, does not show that the
accounting firm recognized—in the course of these apparently sepa-
rate audits—that the two companies used different methods for recog-
nizing revenue, much less that the firm brought the issue to
Appellees’ attention.

   In short, as the Sixth Circuit concluded in affirming the dismissal
of another case involving allegations of improper revenue recogni-
tion, Appellants "have failed to plead facts that show that the revenue
recognition errors at [NovaCare] should have been obvious to [Appel-
lees] or that [Appellees] consciously disregarded ‘red flags’ that
would have revealed the errors prior to their inclusion in public state-
ments." Hoffman v. Comshare, Inc. (In re Comshare, Inc. Sec. Litig.),
183 F.3d 542, 554 (6th Cir. 1999); see also Novak v. Kasaks, 216
F.3d 300, 309 (2d Cir. 2000) (explaining that without facts showing
"corresponding fraudulent intent," "allegations of . . . accounting
irregularities, standing alone, are insufficient to state a securities fraud
claim" (internal quotation marks omitted)).

                         3. Referral Business

   Appellants also claim that Appellees failed to disclose the reduc-
tion in referral business from rehabilitation clinics due to the combi-
nation of Hanger and NovaCare into a single company. Stein
explained during the January 7 call that because the two companies
were now viewed as one, rehabilitation clinics were referring a smal-
ler percentage of patients to company practitioners on a rotating basis,
based on rules established by the clinics. Before the acquisition,
Hanger and NovaCare practitioners each received one-third of patient
referrals (for a combined total of two-thirds), with independent practi-
tioners receiving the remaining third. But after the two companies
were combined, company practitioners only received one-half of the
referral business. According to Stein, the independent "mom and pop"
practitioners, using these rules "as a tool," had "been out in the faces
of these rehab systems telling them Hanger and NovaCare is one
                 OTTMANN v. HANGER ORTHOPEDIC GROUP                        19
company now so they should only get one out of two patients." J.A.
111. Stein explained that this decline in referral business reduced
fourth quarter revenue by $750,000 and earnings by $0.03 per share,
and that it would reduce projected 2000 revenue by $2 million and
projected earnings by $0.05 per share.

   Appellants do not allege any specific misrepresentations by Appel-
lees concerning referral business. Rather, Appellants claim that
because Appellees made positive comments during the November 8
call regarding the integration of the two businesses, Appellees had a
duty to disclose the lower percentage of patient referrals. These alle-
gations sufficiently plead that Appellees made a misleading omission
concerning referral business. And, given the effect of the loss of refer-
ral business on Hanger’s financial results, this omission was likely
material.

   Again, however, Appellants’ allegations do not establish the strong
inference of scienter required by the PSLRA. Appellants point to a
statement by Stein during the January 7 call, in reference to the refer-
ral business issue, that "[s]ome of this we spoke to you folks about
in the third quarter, and there’s a little bit of this left here in the fourth
quarter." Id. at 101. Appellants contend this statement shows that
Appellees knew about the referral issue before the November 8 call.
While this may be true, Stein’s statement also indicates that Appellees
had previously disclosed the referral issue to analysts, undercutting
Appellants’ claim that Appellees concealed the issue until the January
7 call.

   Appellants further contend that Stein’s comments regarding the
independent practitioners lobbying the rehabilitation clinics to treat
Hanger and NovaCare as one company indicate that Appellees knew
that the clinics’ rules could lead to reduced referral business, but that
Appellees tried to conceal this issue to prevent the independent practi-
tioners from learning of the acquisition. This allegation, however,
overlooks that the independent practitioners could have easily learned
about the acquisition through a variety of other sources.

                  4. Additional Scienter Allegations

  Finally, Appellants make a series of allegations that they claim
demonstrate Appellees’ scienter. All of these allegations relate to pos-
20              OTTMANN v. HANGER ORTHOPEDIC GROUP
sible financial motives to misrepresent Hanger’s financial situation,
such as maintaining positive relationships with creditors, avoiding
additional interest payments, and promoting future acquisitions. How-
ever, courts have repeatedly rejected these types of generalized
motives—which are shared by all companies—as insufficient to plead
scienter under the PSLRA. See, e.g., Fleming Cos., 264 F.3d at 1269;
see also Mesko v. Cabletron Sys., Inc. (In re Cabletron Sys., Inc.),
311 F.3d 11, 39 (1st Cir. 2002) ("‘[C]atch-all allegations’ which
merely assert motive and opportunity, without something more, fail
to satisfy the PSLRA."). As we explained in Phillips, "[i]n order to
demonstrate motive, a plaintiff must show concrete benefits that could
be realized by one or more of the false statements and wrongful non-
disclosures alleged. Merely alleging facts that lead to a strained and
tenuous inference of motive is insufficient to satisfy the pleading
requirement." Phillips, 190 F.3d at 621 (citation & internal quotation
marks omitted).

                                  III.

   In sum, Appellants’ allegations fail to provide the strong inference
of scienter required by the PSLRA. Even when viewed collectively,
these allegations tend to establish, at most, a pattern of negligent con-
duct by Appellees, rather than the reckless or intentional conduct
required to support liability. Accordingly, we affirm the dismissal of
Appellants’ complaint.

                                                            AFFIRMED
