                                       PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT
               ______________

                     No. 12-4257
                   ______________

                  SHAH RAHMAN,
              Individually and On Behalf
           of All Others Similarly Situated,
                                      Appellant

                          v.

      KID BRANDS, INC.; BRUCE G. CRAIN;
    GUY A. PAGLINCO; RAPHAEL BENAROYA
               ______________

    On Appeal from the United States District Court
            for the District of New Jersey
           (D.C. Civ. No. 2-11-cv-01624)
       Honorable Jose L. Linares, District Judge
                   ______________

      Submitted under Third Circuit LAR 34.1(a)
                  October 8, 2013

BEFORE: FUENTES, GREENBERG, and BARRY, Circuit
                   Judges
               (Filed: November 15, 2013)
                    ______________

David A.P. Brower
Brower Piven
475 Park Avenue South
33rd Floor
New York, NY 10022

Jeffrey W. Hermann
Cohn, Lifland, Pearlman, Herrman & Knopf
Park 80 West – Plaza One
250 Pehle Avenue, Suite 401
Saddle Brook, NJ 07663-0000

Lewis S. Kahn
206 Covington Street
Madisonville, LA 70447

Kim E. Miller
Kahn Swick & Foti
250 Park Avenue
Suite 2040
New York, NY 10177

  Attorneys for Appellant

Robert J. Del Tufo
Skadden, Arps, Slate, Meagher & Flom
One Newark Center
18th Floor

                            2
Newark, NJ 07102-0000

Jay B. Kasner
Christopher R. Gette
Rachel J. Barnett
Matthew S. Barkan
Andrew Muscato
Skadden, Arps, Slater, Meagher & Flom
4 Times Square
New York, NY 10036

  Attorneys for Appellees Kid
  Brands, Inc. and Raphael Benaroya

Eric B. Fisher
Dickstein Shapiro
1633 Broadway
New York, NY 10019

Jeffrey Rhodes
Dickstein Shapiro
1825 Eye Street, N.W.
Washington, DC 20006

Stefano V. Calogero
Wildels, Marx, Lane & Mittendorf
One Giralda Farms
Suite 380
Madison, NJ 07940
  Attorneys for Appellee
  Bruce G. Crain

                            3
Rebecca Brazzano
C. Dennis Southard, IV
David A. Wilson
Thompson Hine
1919 M Street, N.W.
Suite 700
Washington, DC 20036

   Attorneys for Appellee
   Guy A. Paglinco
                     ______________

                 OPINION OF THE COURT
                     ______________

GREENBERG, Circuit Judge.

                    I. INTRODUCTION

       Shah Rahman, now the appellant, brought this federal
securities class action on March 22, 2011, against defendant Kid
Brands, Inc., a New Jersey corporation, and against the
individual defendants, Bruce G. Crain, Guy A. Paglinco, and
Raphael Benaroya, officers of Kid Brands (collectively with Kid
Brands “appellees”). Kid Brands is in the business of importing
inexpensive infant furniture and products for the purpose of
ultimate resale to consumers. The complaint alleged that
defendants, now appellees, violated (1) Section 10(b) of the
Securities Exchange Act (the “Exchange Act”) and SEC Rule
10b-5 and (2) and Section 20(a) of the Exchange Act. In

                               4
particular, the complaint alleged that defendants misled
investors by artificially inflating Kid Brands stock price by
issuing deceptive public financial reports and press releases
dealing with Kid Brands’ compliance with customs laws and
overall financial performance. The putative class included
Rahman and all others similarly situated who purchased or
obtained Kid Brands common stock between March 26, 2010,
and August 16, 2011, inclusive (the “class period”).

       Subsequently, Rahman filed a first amended complaint
(“FAC”) which the District Court dismissed without prejudice
on defendants’ motion, on March 8, 2012, in an order that
permitted Rahman to file an amended complaint within 60 days.
 Rahman v. Kid Brands, Inc., Civ. No. 11-1624, 2012 WL
762311 (D.N.J. Mar. 8, 2012). On May 7, 2012, Rahman timely
filed a second amended complaint (“SAC”) alleging that, in
addition to customs violations, defendants failed to disclose
product recalls, safety violations, and illegal staffing practices
affecting Kid Brands. Nevertheless, Rahman’s brief focuses
almost exclusively on the customs violations and makes only
passing reference to the other issues. On October 17, 2012, on
defendants’ motion the District Court dismissed the SAC with
prejudice because it did not satisfy the heightened scienter
pleading standard required by the Private Securities Litigation
Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(2). In its opinion
the Court explained that “upon a holistic consideration of the re-
labeling allegations contained in the SAC, the Court finds that a
reasonable person would not deem the inference of scienter at
least as strong as any opposing inference.” J.A. at 28. On
November 14, 2012, Rahman filed a timely notice of appeal.


                                5
       Kid Brands operates through four wholly owned
subsidiaries: Kids Line, LLC, Sassy, Inc., LaJobi, Inc., and
CoCaLo, Inc.1 Kid Brands primarily imports the inexpensive
furniture in which it deals from China for ultimate resale to the
public. Kid Brands is a substantial business as its net sales in
2010 were $276,000,000. Under “anti-dumping” laws, Kid
Brands is subject to duties that the United States imposes
beyond those ordinarily assessed to discourage the importation
of some products at very low cost. During the class period,
Crain was the president and chief executive officer of Kid
Brands and served on its board of directors, and Paglinco was its
vice president and chief financial officer. Paglinco retained
both positions after the close of the class period. In September
2011, after the close of the class period, Benaroya, previously an
outside director, was appointed interim chief executive officer.

        The SAC alleges that Kid Brands obscured the origin of
its Chinese-manufactured products to reduce import duties and
increase profits, and then made misleading statements regarding
its financial health. Rahman supported the SAC with statements
from six confidential witnesses who had been employees of Kid
Brands or its subsidiaries.2 Rahman believes that the statements

1
 We take the facts primarily from the SAC, Rahman’s brief, and
the District Court’s opinion dismissing Rahman’s FAC without
prejudice. We note that the District Court’s opinions set forth
the facts in greater detail than we do.

2
 Notwithstanding the reference to the employees as confidential
witnesses, it is difficult to understand how given the details of
the witnesses’ employment that Rahman set forth in the SAC,

                                6
support his contention that defendants engaged in repeated
violations of customs laws. He described the witnesses in the
SAC as follows:

•       CW1: A former LaJobi employee who worked in the
outbound shipping department from March 2010–March 2012
and dealt with the products entering and exiting the distribution
center.

•     CW2: A former LaJobi employee who worked in the
recovering and shipping department from June 2011–January
2012 and dealt with inbound and outbound shipments of
products.

•      CW3: A former LaJobi distribution manager who worked
for the company from May 2000–November 2010. CW3
oversaw safety and security at a Cranbury, New Jersey,
warehouse and dealt with the packing slips.

•      CW4: A former Kid Brands employee who worked in the
internal auditing department as a Sarbanes Oxley consultant
from March 2004–August 2009 and reviewed the internal
financial information for Kid Brands and its subsidiaries.

•      CW5: A former LaJobi sales and forecast demand
manager who worked at the company from March 2010–April
2011. CW5 had personal knowledge and familiarity with the
subsidiary’s operations, database and inventory tools.

•      CW6: A former Kids Line employee who worked in

that Kid Brands could not be aware of their identities.

                               7
packaging design from June 2011–March 2012 and whose
statements relate to his discharge from that employment.

         The immediate event that led to this litigation occurred in
December 2010, when U.S. Customs and Border Protection
informed Kid Brands that it was conducting a “Focused
Assessment” of its import practices and procedures. Following
this notification, Kid Brands’ board of directors initiated an
investigation of Kid Brands’ practices and, for that purpose,
hired the outside law firm of Skadden, Arps, Slate, Meagher &
Flom. Kid Brands, however, did not publicly disclose that it
was subject to the Focused Assessment or that it had hired the
law firm until after it received a report from the firm.
Eventually on March 15, 2011, Kid Brands revealed that LaJobi
had violated United States law by misidentifying the
manufacturer and shipper of certain products, that it had
discharged two LaJobi employees, and that it anticipated
needing to pay $7 million in fines and charges to resolve issues
largely arising from the Focused Assessment. As might be
expected, this information had a negative impact on Kid Brands’
stock price. Thus, at the end of the day on March 15, 2011, Kid
Brands’ stock closed at $6.91 a share, a large drop from its prior
day closing price of $9.24. Five months later, on August 15,
2011, Kid Brands filed a federal Form 10-Q for the quarter
ending June 30, 2011, in which it indicated that CoCaLo and
Kids Line also had evaded custom duties. The next day, August
16, 2011, Kid Brands issued a Form 8-K that estimated its total
liabilities to be in excess of $10 million for wrongful practices
extending over a period of nearly five years. Kid Brands’ stock
closed at $4.49 per share on August 15, 2011, at $3.65 the
following day, and at $2.97 on August 22, 2011.

                                 8
    II. JURISDICTION AND STANDARD OF REVIEW

       The District Court had jurisdiction pursuant to 28 U.S.C.
§ 1331 and 15 U.S.C. § 78aa and we have jurisdiction pursuant
to 28 U.S.C. § 1291. We exercise plenary review of the District
Court’s order of dismissal pursuant to Fed. R. Civ. P. 12(b)(6).
In conducting that review, we accept Rahman’s allegations in
the SAC as true and review the complaint in its entirety. See
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322,
127 S.Ct. 2499, 2509 (2007). But in this process we recognize
that, when alleging a securities fraud cause of action, a plaintiff
“must satisfy the heightened pleading rules codified in the
PSLRA.” Institutional Investors Grp. v. Avaya, Inc., 564 F.3d
242, 252 (3d Cir. 2009).



                       III. DISCUSSION

       The PSLRA established heightened pleading
requirements for a plaintiff to meet in order to plead a cause of
action successfully in class actions alleging securities fraud.
Thus, it requires that a complaint “‘state with particularity both
the facts constituting the alleged violation, and the facts
evidencing scienter, i.e., the defendant’s intention ‘to deceive,
manipulate, or defraud.’”3 Tellabs, 551 U.S. at 313, 127 S.Ct. at

3
  The PSLRA replaced Fed. R. Civ. P. 9(b) as the applicable
pleading standard in private securities class actions. See Avaya,

                                9
2504. To satisfy the latter requirement, a plaintiff must ‘“state
with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.”’ Id. at 314,
127 S.Ct. at 2504 (emphasis added) (quoting 15 U.S.C. § 78u-
4(b)(2)). In Tellabs, in holding that the investors bringing a
securities fraud class action had failed to meet that standard, the
Supreme Court explained: “[t]o qualify as ‘strong’ within the
intendment of [15 U.S.C. § 78u-4(b)(2)] . . . an inference of
scienter must be more than merely plausible or reasonable–it
must be cogent and at least as compelling as any opposing
inference of nonfraudulent intent.” Id. at 314, 127 S.Ct. at
2504-05.

      Pursuant to its authority under Section 10(b) of the
Exchange Act, the SEC issued Rule 10b-5, which renders it
unlawful for any person:

       (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 . . . not misleading, or

       (c) To engage in any act, practice, or course of business


564 F.3d at 253. Nonetheless, “Rule 9(b)’s particularity
requirement is comparable to and effectively subsumed by the
requirements of [15 U.S.C. § 78u-4(b)(1) of] the PSLRA.” Id.
(citations and internal quotation marks omitted). “The PSLRA’s
requirement for pleading scienter, on the other hand, marks a
sharp break with Rule 9(b).” Id.

                                10
       which operates or would operate as a fraud or deceit
       upon any person, in connection with the purchase or sale
       of any security.

17 C.F.R. § 240.10b-5.

        The Supreme Court long has construed the rule to
provide a basis for individuals to bring private securities fraud
actions on behalf of putative classes. Tellabs, 551 U.S. at 318,
172 S.Ct. at 2507. To state a Rule 10(b) claim, plaintiffs “must
‘allege defendants made a misstatement or an omission of
material fact with scienter in connection with the purchase or the
sale of a security upon which plaintiffs reasonably relied and
plaintiff[s’] reliance was the proximate cause of their injury.”’
Avaya, 564 F.3d at 251 (quoting Winer Family Trust v. Queen,
503 F.3d 319, 326 (3d Cir. 2007)). Under the PSLRA’s
heightened pleading standard, a private securities complaint
involving an allegedly “false or misleading statement must: (1)
‘specify each statement alleged to have been misleading [and]
the reason or reasons why the statement is misleading,’ 15
U.S.C. § 78u-4(b)(1), and (2) ‘state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind,’ § 78u-4(b)(2).” Tellabs, 551 U.S. at
321, 127 S.Ct. at 2508. The required state of mind is “scienter,”
which the Supreme Court has defined as ‘“a mental state
embracing intent to deceive, manipulate, or defraud.”’4 Tellabs,

4
  Although we read the SAC primarily to be based on a claim
that defendants engaged in actual wrongdoing, it does allege that
they had been reckless and, in Rahman’s brief, he states that
during the class period defendants “knew or recklessly

                               11
551 U.S. at 319, 127 S.Ct. at 2507 (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193-94 & n.12, 96 S.Ct. 1375, 1381
& n.12 (1976)).

       The District Court found that some, but not all, of
defendants’ statements satisfied the first, i.e., materiality prong
of the PSLRA’s heightened pleading requirements. An
allegation of materiality is crucial because “[t]he first
requirement under the PSLRA obliges a plaintiff to specify each
allegedly misleading statement, the reason or reasons why the
statement is misleading, and, if an allegation is made on
information and belief, all facts supporting that belief with
particularity.” Avaya, 564 F.3d at 259 (citations omitted).5 An

disregarded” the circumstance that statements that Kid Brands
published “were materially false and misleading . . . .”
Appellant’s br. at 9. Thus, this case to some degree can be
viewed as a recklessness case. In order to state a Rule 10b-5
claim, ‘“[a] reckless statement is one involving not merely
simple, or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers that is either
known to the defendant or is so obvious that the actor must have
been aware of it.”’ Belmont v. MB Inv. Partners, Inc., 708 F.3d
470, 493 (3d Cir. 2013) (quoting Avaya, 564 F.3d at 267 n.42).
But even though our opinion essentially addresses allegations
that defendants intended to act wrongfully, to the extent that
Rahman based the SAC on a recklessness theory our result is the
same.

5
    Fraudulent statements by employees sometime can be imputed

                                12
allegation that a defendant uttered an immaterial statement will
not satisfy the requirement that the complaint include a “false or
misleading statement.”6

        In considering the SAC, the District Court indicated that
it did not believe that a jury could find fault with Kid Brands’
delay in the disclosure of the information regarding LaJobi’s
misidentification of the manufacturer and shipper of its products
until March 15, 2011. The Court reached this conclusion taking
into account “[d]efendants’ efforts to investigate the matter
through an independent law firm and the practical
considerations regarding the timing of the disclosures.” J.A. at
9. On the other hand, the Court held that the delayed August
2011 disclosure regarding the other subsidiaries’ violations “was
sufficiently misleading and [as] such could be found material by
a jury.” Id.

        Though we are inclined to agree with the District Court’s
latter but not former conclusion, we do not make a definitive
holding on the point as we have no need to do so. We think that
Rahman makes a strong argument when he contends that a jury
reasonably could have found fault under Rule 10b-5 with Kid

to their employers “because [a] corporation is liable for
statements by employees who have apparent authority to make
them.” Avaya, 564 F.3d at 252 (internal quotation marks
omitted).

6
 Appellees do not contend that any statements in issue in this
case were forward-looking and therefore protected by the
PSLRA’s safe harbor provision. See Avaya, 564 F.3d at 254.

                               13
Brands’ failure to disclose the Focused Assessment and the
resultant internal investigation prior to March 15, 2011,
inasmuch as this information was available to Kid Brands before
that date and surely was negative. Of course, we recognize that
in explaining its conclusion the District Court referenced Kid
Brands’ “practical considerations” for delaying the
announcement. Yet the Court did not detail these considerations
beyond indicating the need for Kid Brands to investigate the
matter to give out accurate information. Id.7 Arguably Kid
Brands should have released information with respect to the
Focused Assessment and internal investigation on a tentative
basis before March 15, 2011.

       But our possible partial disagreement with the District
Court ultimately does not matter because we agree with it that
Rahman failed to plead scienter with sufficient particularity.
We explained in Avaya that “under the PSLRA’s ‘[e]xacting’
pleading standard for scienter, ‘any private securities complaint
alleging that the defendant made a false or misleading statement
must . . . state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of
mind.’” 564 F.3d at 253 (quoting Tellabs, 551 U.S. at 313, 320,
127 S.Ct. at 2504, 2508 (internal quotation marks omitted)).
Rahman relied on the evidence from the confidential witnesses
that we have described to plead scienter in the SAC.8 In

7
 In its conclusions in its October 17, 2012 opinion the District
Court incorporated some conclusions from its March 8, 2012
opinion.

8
    We note that “[w]here, as here, plaintiffs lack documentary

                               14
California Public Employees Retirement System v. Chubb
Corp., 394 F.3d 126, 146 (3d Cir. 2004), which we decided prior
to Tellabs, we adopted the following standard dealing with such
evidence from Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.
2000):

       [W]here plaintiffs rely on confidential personal
       sources but also on other facts, they need not
       name their sources as long as the latter facts
       provide an adequate basis for believing that the
       defendants’ statements were false. Moreover,
       even if personal sources must be identified, there
       is no requirement that they be named, provided
       they are described in the complaint with sufficient
       particularity to support the probability that a
       person in the position occupied by the source
       would possess the information alleged.

       We have continued to apply this standard even after the
Supreme Court’s decision in Tellabs. In Avaya, we explained
that when dealing with confidential witnesses, courts should
assess the ‘“detail provided by the confidential sources, the
sources’ basis of knowledge, the reliability of the sources, the

evidence such as internal memoranda, ‘reliance on confidential
sources to supply the requisite particularity for their fraud claims
. . . assumes a heightened importance.”’ Avaya, 564 F.3d at 261
(quoting California Pub. Emps. Ret. Sys. v. Chubb Corp., 394
F.3d 126, 148 (3d Cir. 2004)). Documentary evidence is not
required, but it could bolster the accounts of the confidential
witnesses.

                                15
corroborative nature of other facts alleged, including from other
sources, the coherence and plausibility of the allegations, and
similar indicia.’”9 Avaya, 564 F.3d at 261 (quoting Chubb, 394
F.3d at 147). If, after that assessment, “anonymous source
allegations are found wanting with respect to these criteria . . .
[courts] must discount them steeply.” Id. at 263. We explained
in Avaya that such a discount “is consistent with Tellabs’s
teaching that omissions and ambiguities count against inferring
scienter under the PSLRA’s particularity requirements,” but if
“a complaint’s confidential witness allegations are adequately
particularized, we will not dismiss them simply on account of
their anonymity.” Id. (footnote omitted) (internal quotation
marks omitted). We concur with the District Court’s conclusion
that such discounting is necessary in this case.

       Regarding the customs duty violations, CW1 stated that
he was in charge of re-labeling furniture from China with
stickers containing a different country of origin, and CW2
confirmed his account. According to both witnesses, director of
operations Myles McGrath demonstrated how to apply the new
labels, and another manager (referred to only as “Brenda”)
provided the labels.10 According to CW2, this practice “was a

9
  “Of course, confidential witness allegations may score highly
on the Chubb test yet fail either to establish the falsity of a
statement, or to give rise to a strong inference of scienter.
Nonetheless, for analytical purposes, it is important to
distinguish deficiencies relating to the content of allegations
from those relating to their form.” Avaya, 564 F.3d at 263 n.33.
10
     “LaJobi employees would take boxes off a pallet, and put on

                                16
normal process the whole time [he] was there,” and the Kid
Brands CEO and CFO toured LaJobi and met with the
management team bimonthly. J.A. at 207 (SAC ¶ 39). CW2
alleged that LaJobi management conferred with the Kid Brands
leadership in McGrath’s office about the protocol for altering
the country of origin labels, and that Brenda moved the labels
from her office into McGrath’s office for the meetings. But the
problem with CW2’s allegations is that CW2 did not begin
working for LaJobi until June 2011, so CW2 cannot have
personal knowledge regarding the pre-investigation violations.11
 Moreover, as far as we can ascertain, neither CW2 nor CW1
had any way of knowing what was discussed in those closed-
door meetings between the LaJobi and Kid Brands leadership.
Furthermore, the witnesses do not provide any dates for the

new yellow and white labels (white labels on two sides and a
yellow on the short side), which would obscure the ‘Made in
China’ labels.” J.A. at 207 (SAC ¶ 39). We are uncertain
whether the new labels revealed different countries of origin or
different locations/manufacturers within China.
11
  Nonetheless, we recognize that in Avaya we approvingly cited
to our earlier opinion in In re Merck & Co., Inc. Securities
Litigation in which we noted: “[B]oth post-class-period data and
pre-class data could be used to confirm what a defendant should
have known during the class period because [a]ny information
that sheds light on whether class period statements were false or
materially misleading is relevant.” Avaya, 564 F.3d at 249 n.13
(quoting Merck, 432 F.3d 261, 272 (3d Cir. 2005) (internal
quotation marks and citation omitted)).


                               17
meetings, explain how they would know that the labels were
moved from one office to another, or claim to have attended any
of the meetings or even entered any of the management offices.

        CW5 offers general information regarding meetings
between the Kid Brands and LaJobi leadership including the Kid
Brands CEO. Yet the fact that a CEO visited a subsidiary’s
premises to meet with its president will not establish that the
CEO had knowledge of illegal activities at the subsidiary. After
all, it would be expected that the CEO would visit his
company’s subsidiaries in the course of conducting legitimate
business. CW3 provides even more abstract commentary,
suggesting that he and his coworkers in the LaJobi distribution
center “ha[d] a feeling something suspicious was going on.”12
J.A. at 208 (SAC ¶ 42). CW6, the only confidential witness
from Kids Line, was enmeshed in an employment dispute that
had no bearing on the customs violations in question. Of all the
confidential witnesses, the statements of CW4 were the most
plausible and he was in a position to have what was potentially
the most damaging information. Yet even CW4, who allegedly
spent more than five years reviewing Kid Brands’ internal
financial information, offers little more than generalized
allegations with few specifics and even less concrete support.


12
   The SAC actually states: “CW3 noted that at all times during
his/her tenure at LaJobi ‘there were rumors that things weren’t
on the up and up.’ CW3 had ‘a strange feeling that things
weren’t right’ with regard to the Company’s customs practices.”
 J.A. at 208 (SAC ¶ 42).


                              18
        It also is significant that Rahman did not demonstrate that
the individual defendants had a motive for their wrongful
conduct. Though it is not necessary to plead motive to establish
that a defendant acted with scienter, its presence can be
persuasive when conducting a holistic review of the evidence.
See Tellabs, 551 U.S. at 325-26, 127 S.Ct. at 2511. Of course,
“[m]otives that are generally possessed by most corporate
directors and officers do not suffice; instead, plaintiffs must
assert a concrete and personal benefit to the individual
defendants resulting from this fraud.”13 Avaya, 564 F.3d at 278
(alteration in original) (internal quotation marks omitted). Here,
Rahman has failed to plead facts to support an assertion that the
individual defendants had a motive to engage in wrongful
conduct.

       In considering the adequacy of the SAC under the
PSLRA, we must address the doctrine of “corporate scienter,”
alternatively referred to as “collective scienter.” A plaintiff can
use corporate or collective scienter to plead an inference of
scienter against a corporate defendant without raising the same
inferences required to attribute scienter to an individual
defendant. See Glazer Capital Mgmt., LP v. Magistri, 549 F.3d
736, 743 (9th Cir. 2008).14 We, however, neither have accepted

13
   “Corporate officers always have an incentive to improve the
lot of their companies, but this is not, absent unusual
circumstances, a motive to commit fraud.” Avaya, 564 F.3d at
279.

14
 See also Teamsters Local 445 Freight Div. Pension Fund v.
Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008) (“In most

                                19
nor rejected the doctrine of corporate scienter in securities fraud
actions, and we do not do so now because the allegations in the
SAC cannot support the existence of corporate or collective
scienter. For comparison, we refer to City of Monroe
Employees Retirement System v. Bridgestone Corp., 399 F.3d
651 (6th Cir. 2005), a case that does recognize the adequacy of a
claim of corporate scienter. In Bridgestone, the plaintiff alleged
that a corporate subsidiary of the defendant engaged in a
massive cover-up to hide the fact that tires it manufactured were
rupturing and causing a high number of accidents. Id. at 656-59.
 But in this case, there is no credible evidence to suggest that
Kid Brands covered up the customs violations at its subsidiaries.
 Quite to the contrary, when U.S. Customs notified Kid Brands
of the Focused Assessment, Kid Brands hired an outside law
firm to conduct an internal investigation and, when it received a
report from the firm, it publicly disclosed both the existence of
the Focused Assessment and the remedial steps it had taken.
Thus, even if we recognize the doctrine of corporate scienter,
this case would not come within the doctrine and the SAC
would not survive the motion to dismiss.

       Rahman also relies on Avaya, in which we recognized a
core operations doctrine in a case in which the CEO and CFO of
a communications company affirmatively denied the existence
of intense price competition at a time when the company

cases, the most straightforward way to raise such an inference
for a corporate defendant will be to plead it for an individual
defendant. But it is possible to raise the required inference with
regard to a corporate defendant without doing so with regard to
a specific individual defendant.”).

                                20
actively was granting steep price discounts. We acknowledged
the shareholders’ contention “that since competition, pricing
policies, and pricing concessions [were] ‘core matters’ of central
importance to Avaya and its principal executives, a ‘core
operations inference’ supports scienter.” Avaya, 564 F.3d at
268 (emphasis added). But reliance on Avaya is unavailing in
this case because in Avaya the individuals who denied that there
was intense competition were responding to pointed inquiries
from analysts during multiple conference calls that addressed
pricing problems. No such circumstances are present here.

       Moreover, even aside from its factual differences, Avaya
has limited precedential value in this case because in Avaya we
cited approvingly to an opinion of the Court of Appeals for the
Ninth Circuit in Metzler Investment GMBA v. Corinthian
Colleges. Inc., 540 F.3d 1049, 1068 (9th Cir. 2008). Metzler
recited that ‘“corporate management’s general awareness of the
day-to-day workings of the company’s business does not
establish scienter–at least absent some additional allegations of
specific information conveyed to management and related to
fraud.”’ Id. at 270. We also point out that the core operations
doctrine cannot apply because, in spite of customs violations at
three of the four Kid Brands subsidiaries, the $10 million in
anticipated liabilities covering wrongful conduct over a nearly
five-year span cannot be regarded as affecting the “core
operations” of a company that had hundreds of millions of
dollars in annual net sales.

       In reaching our result we recognize that in Tellabs the
Supreme Court described a scienter inquiry as addressing the
question of “whether all of the facts alleged, taken collectively,

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give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that
standard.” Tellabs, 551 U.S. at 323, 127 S.Ct. at 2509
(emphasis in original). In conducting this inquiry, a court must
weigh “plausible opposing inferences” by comparing competing
conclusions that can be drawn from the facts.15 Id. at 323, 127
S.Ct. at 2509. Yet the Supreme Court warned that “[t]he
inference that the defendant acted with scienter need not be
irrefutable, i.e., of the ‘smoking-gun’ genre, or even the ‘most
plausible of competing inferences.’” Id. at 324, 127 S.Ct. at
2510 (citation omitted). Nonetheless, we find that the District
Court properly reviewed the complaint in its entirety and
rightfully found that the SAC failed to meet the heightened
pleading requirements of the PSLRA.

        Finally, Rahman asserts a claim for controlling person
liability against the individual defendants under 20(a) of the
Exchange Act, 15 U.S.C. § 78t(a). But, as we explained in
Avaya, such liability “is derivative of an underlying violation of
Section 10(b) by the controlled person.” Avaya, 564 F.3d at
252. Inasmuch as there cannot be Section 10(b) liability here,

15
  “The strength of an inference cannot be decided in a vacuum.
 The inquiry is inherently comparative: How likely is it that one
conclusion, as compared to others, follows from the underlying
facts?” Tellabs, 551 U.S. at 323, 127 S.Ct. at 2510. The
Supreme Court added: “[T]he inference of scienter must be
more than merely ‘reasonable’ or ‘permissible’– it must be
cogent and compelling, thus strong in light of other
explanations.” Id., 127 S.Ct. at 2510.


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the individual defendants cannot be liable under Section 20(b).16



IV. CONCLUSION

       For the reasons set forth above, we will affirm the
District Court’s order of October 17, 2012, dismissing
Rahman’s second amended complaint with prejudice.




16
  Appellees contend that we can affirm because Rahman did not
plead loss causation adequately. We, however, do not address
this point as we are affirming the District Court order dismissing
the SAC on scienter grounds.

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