           RECOMMENDED FOR FULL-TEXT PUBLICATION
                Pursuant to Sixth Circuit Rule 206                         2       Miller, et al. v. Champion                  No. 01-1955
        ELECTRONIC CITATION: 2003 FED App. 0359P (6th Cir.)                        Enterprises, et al.
                    File Name: 03a0359p.06
                                                                                                _________________
UNITED STATES COURT OF APPEALS                                                                       COUNSEL
                  FOR THE SIXTH CIRCUIT                                    ARGUED: Robin Howald, GLANCY & BINKOW, Los
                    _________________                                      Angeles, California, for Appellants. Donna L. McDevitt,
                                                                           SKADDEN, ARPS, SLATE, MEAGHER & FLOM,
 JOEL MILLER; GARY KISSIAH ; X                                             Chicago, Illinois, for Appellees. ON BRIEF: Robin
 SIMCHE MARGULIES,                   -                                     Howald, Lionel Z. Glancy, GLANCY & BINKOW, Los
 individually and on behalf of       -                                     Angeles, California, E. Powell Miller, MANTESE MILLER
                                     -  No. 01-1955                        & SHEA, Troy, Michigan, for Appellants. Donna L.
 all others similarly situated,      -                                     McDevitt, Timothy A. Nelsen, SKADDEN, ARPS, SLATE,
           Plaintiffs-Appellants, >                                        MEAGHER & FLOM, Chicago, Illinois, Andrew J.
                                     ,
                                     -                                     McGuinness, DYKEMA GOSSETT, Ann Arbor, Michigan,
              v.                     -                                     Carl H. Von Ende, MILLER, CANFIELD, PADDOCK &
                                     -                                     STONE, Detroit, Michigan, for Appellees.
 CHAMPION ENTERPRISES,               -                                                          _________________
 INC., a Michigan corporation;       -
                                     -                                                              OPINION
 WALTER YOUNG ,
                                     -                                                          _________________
          Defendants-Appellees. -
                                    N                                         ROGERS, Circuit Judge.          Plaintiff Joel Miller, a
        Appeal from the United States District Court                       shareholder of Champion Enterprises, Inc. (“Champion”),
       for the Eastern District of Michigan at Detroit.                    appeals from the dismissal of his complaint, referred to as the
        No. 99-74231—John Feikens, District Judge.                         “CAC,”1 pursuant to Rule 12(b)(6), Federal Rules of Civil
                                                                           Procedure, and the Private Securities Litigation Reform Act
                     Argued: June 20, 2003                                 (the “PSLRA”), 15 U.S.C. 78u-4 et seq. Plaintiff sued
                                                                           Champion and its Chief Executive Officer for securities fraud
              Decided and Filed: October 8, 2003                           under Sections 10(b) and 20(a) of the Securities and
                                                                           Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5
  Before: DAUGHTREY and ROGERS, Circuit Judges;                            promulgated thereunder by the Securities Exchange
              QUIST, District Judge.*                                      Commission (the “SEC”), alleging that the defendants made


                                                                               1
    *
                                                                                The dismissed complaint was styled “Consolidated and Amended
     The Honorable Gordon J. Quist, United States District Judge for the   Class Action Complaint,” and has generally been referred to as the
W estern District of Michigan, sitting by designation.                     “CA C.”

                                   1
No. 01-1955                      Miller, et al. v. Champion         3    4    Miller, et al. v. Champion                 No. 01-1955
                                          Enterprises, et al.                 Enterprises, et al.

various false or misleading statements related to the                    independent retailers. Parker Homes, headquartered in North
bankruptcy of its largest customer. The district court                   Carolina, was Champion’s largest independent retailer,
dismissed the CAC because (1) it failed to meet the                      accounting for 3.5 percent of the 70,000 homes sold by
heightened pleading requirements for scienter of the PSLRA,              Champion in 1998.
(2) a number of the alleged misleading statements qualified as
“forward-looking statements” protected by the PSLRA’s safe                  Prior to 1998, Champion, through two of its subsidiaries,
harbor provision, and (3) the CAC failed to give rise to a               entered into agreements with Parker Homes whereby Parker
strong inference that Champion or its CEO knowingly or                   Homes would receive substantial volume discounts for
recklessly misstated or omitted any material facts.                      inventory purchases (the “Bonus Program”). Parker Homes
                                                                         would also receive an additional $1,000 or $2,000 for each
  Plaintiff also appeals from the district court’s denial of             single-section or multi-section home purchased under the
leave to file a proposed amended complaint, referred to as the           Bonus Program. Parker Homes did not purchase the homes
“SASC.”2 The district court denied plaintiff’s leave to file             in its inventory directly. Instead, the homes were purchased
the SASC on two grounds: (1) the PSLRA restricts Rule 15                 through third-party finance companies, which charged Parker
of the Federal Rules of Civil Procedure, thereby barring                 Homes interest on the amount financed. When Parker Homes
repeated amendments to a complaint governed by the                       sold a home, it paid the finance company from the proceeds
PSLRA, and (2) the proposed amendments were futile. For                  of the sale. However, if a home remained unsold for 12 to 15
the following reasons, we AFFIRM the judgment of the                     months and if the retailer—Parker Homes—went bankrupt or
district court.                                                          defaulted, Champion was obligated by the finance company
                                                                         to repurchase the home. Champion recognized revenue once
                       I. BACKGROUND                                     financing was obtained, and Parker Homes received the
                                                                         advances under the Bonus Program at the same time. Parker
  Plaintiff brought this securities fraud action against                 Homes was required to repay these advances if Champion
Champion and Walter Young, President, Chairman of the                    repurchased the home. However, according to the plaintiff,
Board of Directors, and Chief Executive Officer of                       this contingency was unlikely because Champion would only
Champion, for making allegedly false or fraudulent                       repurchase the home if Parker Homes went bankrupt or
statements concerning Champion’s relationship with Ted                   otherwise defaulted, in which case Parker Homes would be
Parker Home Sales, Inc. (“Parker Homes”), and especially                 unable to repay the advances.
with regard to Parker Homes’s filing for bankruptcy on
July 22, 1999. Champion, headquartered in Michigan, is the                 Ted Parker was the original owner of Parker Homes. In
largest producer of manufactured housing in the nation, and              December of 1998 he sold a controlling interest of 60 percent
one of the largest retailers, although it sells the manufactured         in Parker Homes to two professional investors, GE
homes through both its own 280 retail stores and 3,500                   Investment Private Placement Partners II, L.P. (“GE
                                                                         Partners”), and Ardhouse, L.L.C. (“Ardhouse”). In the course
                                                                         of the transaction two holding companies (the “Holding
    2                                                                    Companies”) were created through which Ardhouse and GE
     The proposed amended complaint was styled “Second Amended and
Supplemental Conso lidated Class Action Comp laint,” and has generally
                                                                         Partners invested approximately $42 million in Parker
been referred to as the “SASC.”                                          Homes. Champion asserts in its brief that Ted Parker’s
No. 01-1955                   Miller, et al. v. Champion      5    6       Miller, et al. v. Champion                      No. 01-1955
                                       Enterprises, et al.                 Enterprises, et al.

purpose in undertaking this transaction was to provide             turnover had decreased from an adjusted turnover rate of 1.7
funding to Parker Homes for the opening of 26 new retail           on December 31, 1996, to 1.4 on June 30, 1998.3
centers.
                                                                     According to the plaintiff, Champion was aware or should
  Prior to this transaction between Parker Homes, GE               have been aware of the overstock of inventory by Parker
Partners, and Ardhouse, Champion and Parker Homes had              Homes in the first quarter of 1999. He refers to several
entered into agreements (the “revolving loan agreement”)           instances when the defendants stated that they had been
whereby Champion would lend Parker Homes $250,000 for              monitoring inventory levels, both as a general matter and
each new sales center that Parker Homes opened, and                specifically as to Parker Homes. The plaintiff also notes
Champion would credit $50,000 toward repayment of these            several statements by industry experts that speak of the excess
loans for each year a sales center purchased $5 million in         inventory in the manufactured home market.
inventory. These loans by Champion were unsecured and
could not exceed $8 million. These agreements were renewed            Plaintiff also argues that several other facts, not included in
on May 5, 1999, and also on that date, Champion agreed to          the CAC, but outlined in detail in the SASC, show that
advance to Parker Homes an additional $2.25 million                Champion knew that Parker Homes was both overstocked and
pursuant to these agreements.                                      in some financial danger during the first quarter of 1999. A
                                                                   former Parker Homes sales manager in North Carolina, John
   According to the plaintiff, beginning in the first quarter of   Trapaso, said that one of Champion’s local manufacturing
1999, Parker Homes’s inventory became significantly                plants “stayed in business because Ted [Parker] kept the
overstocked. He cites as evidence of the overstocked               excess inventory going.” Plaintiff also states that a former
inventory a statement in GE Partners and Ardhouse’s                Champion employee, unnamed, estimated that Champion sold
complaint in their lawsuit against Ted Parker and others for       $3 million to $4 million worth of unfinanced homes without
fraud with respect to the sale of the 60% controlling interest.    purchase orders to Parker Homes sometime around May
The statement alleges that Parker Homes’s “inventory build-        1999. This same employee went on to say that “[a]t the end,
up was so large that the Company was unable to fit all the         Parker did not order a ton of houses. We forced them down
homes it purchased on its sales sites and, as a result, had to     his throat to keep the plants running.” According to this
convert extra lots into storage centers.” The plaintiff also       employee, “everyone at the plant” was talking about this
points to a due diligence report that was undertaken by            situation, including upper management.
PricewaterhouseCoopers, L.L.P., on behalf of GE Partners
and Ardhouse prior to their purchase of the controlling               Plaintiff further asserts that Parker Homes’s sales and
interest in Parker Homes. This report showed that (1) Parker       storage facilities became so overstocked that Champion had
Homes’s inventory that was older than 15 months had                to store more than 200 homes at one of its wholly-owned
increased from 4.9% to 10% from December 31, 1997, to              subsidiary’s facilities. These homes were apparently visible
September 18, 1998; (2) the average value of the inventory at
each of Parker Homes’s sales centers had increased over the
18 months that ended June 30, 1998; and (3) inventory                  3
                                                                         GE Partners and Ardhouse still decided to go forward with the
                                                                   financing agreement despite having prior knowledge of these figures from
                                                                   the due diligen ce rep ort.
No. 01-1955                  Miller, et al. v. Champion     7    8     Miller, et al. v. Champion                   No. 01-1955
                                      Enterprises, et al.              Enterprises, et al.

to the executives of the subsidiary when they were flying into     Prior to the execution of the letter of intent, on July 12, Ted
the nearby airport. Plaintiff contends that these facts were     Parker had sent Parker Homes notices of default on lease
confirmed by allegations made in a complaint filed by the        agreements for Parker Homes’s sales lots. Under these
Holding Companies against Ted Parker. Plaintiff alleges that     agreements, if Parker Homes did not pay Ted Parker the
John Trapaso, who originally worked for Parker Homes and         overdue rent on these leases by July 22, it would forfeit the
later worked for Champion, indicated that Parker Homes           sales lots. According to the plaintiff, the only means Parker
“always” had too much inventory and that Champion knew           Homes had to preserve the leases was to file for bankruptcy,
this because sales representatives from its wholly-owned         unless Ted Parker agreed to give Parker Homes more time.
subsidiary were “always going from one [Parker Homes] lot        The sales lots leases were Parker Homes’s only
to another.” Trapaso also stated that the manager from the       unencumbered asset. According to the plaintiff, as of 1:42
subsidiary told him in March 1999 that Parker Homes had too      a.m. on July 22, an agreement between Champion and Ted
much inventory and “was going to go bankrupt.” The same          Parker with respect to these leases was not yet finalized. An
manager told Trapaso, in late March 1999, that Champion          e-mail of 1:42 a.m. showed that the documents for an
could no longer deliver houses to Parker Homes because           agreement were close to final, and that Parker Homes’s Board
Parker Homes had exhausted its financing. Finally, according     would meet in the morning “to approve the Champion and
to a former employee of Parker Homes, Wayne Murchison,           Ted deals and ratify the recent working capital borrowings
when rumors began to circulate within Parker Homes in            from [GE Partners] and [Ardhouse].” Later that day GE
March 1999 that the company was in financial straits, two        Partners and Ardhouse filed for Chapter 11 bankruptcy for
Parker Homes managers, Kathy Parker and Bob Dowless, told        Parker Homes. Champion and Ted Parker were unaware that
the employees that “everything would be okay because             GE Partners and Ardhouse were going to take this action, and
Champion would take over the company soon.”                      did not learn of the Parker Homes bankruptcy filing until
                                                                 July 23, 1999.
  On June 28, 1999, the Holding Companies that owned
Parker Homes pursuant to GE Partners and Ardhouse’s                 As of the time of Parker Homes’s Chapter 11 bankruptcy
purchase of a controlling interest in Parker Homes filed a       filing, Parker Homes owed Champion about $10.4 million in
Chapter 11 bankruptcy petition. The board of directors of        discounts and cash reimbursements under the Bonus Program.
Parker Homes also approved the filing of a Chapter 11            Parker Homes also owed Champion an additional $7.2
petition for Parker Homes on June 28. By June 30, 1999,          million for loans extended when Parker Homes opened new
Champion was aware that the Holding Companies had filed          sales centers under the Revolving Loan Agreement.
for bankruptcy. Thereafter, Champion, Ted Parker, GE             Additionally, when Parker Homes filed for bankruptcy,
Partners, and Ardhouse began discussing plans to fund the        Champion became obligated to repurchase around $69
continuing operations of Parker Homes and avoid a                million of Parker Homes’s inventory under Champion’s
bankruptcy filing. Champion, GE Partners, and Ardhouse           repurchase agreements with the third-party finance
executed a letter of intent on July 15, 1999, whereby they       companies.
agreed to the creation of a senior secured credit facility to
meet Parker Homes’s funding needs. Pursuant to this letter of       The CAC also alleged that Champion had failed to disclose
intent, on July 16, 1999, Champion made an initial advance       its intent to purchase the assets of Parker Homes. According
to Parker Homes of $350,000 on an unsecured basis.               to the plaintiff, Champion had begun negotiating with Parker
No. 01-1955                  Miller, et al. v. Champion     9    10   Miller, et al. v. Champion                  No. 01-1955
                                      Enterprises, et al.             Enterprises, et al.

Homes to purchase all of Parker Homes’s assets sometime          Parker Homes had filed a Chapter 11 petition, and that
prior to the filing of the Holding Companies’ Chapter 11         Champion would take a pre-tax charge of $33.6 million
petitions. In a conference call on August 1, a Champion vice     related to its repurchase obligations for Parker Homes’s
president implied to employees at Parker Homes’s sales           inventory. Finally, on August 26, Champion announced that
centers that Champion would be taking over Parker Homes.         the bankruptcy court had approved its purchase of 37 of
In a bankruptcy filing on August 9, Parker Homes and the         Parker Homes’s sales center leases and all of Parker Homes’s
Holding Companies stated that “[c]ommencing prior to the         inventory, totaling about 1,850 homes. Also on August 26,
inception of Debtors’ [Parker Homes and the Holding              Champion stated that it expected that its earnings for the
Companies] cases, and continuing after their filings, the        second half of 1999 would be 40% lower than earnings for the
Debtors negotiated with Champion Enterprises, Inc. for the       second half of 1998 because of a greater than expected build-
sale of substantially all of their assets and post-petition      up of retail inventory in the market.
financing for working capital and the Debtors’ general
corporate requirements pending the closing on the sale.” On         On July 21, the day before Parker Homes filed for Chapter
August 13, Champion agreed, subject to bankruptcy court          11 relief, Champion’s stock price closed at around $18 per
approval, to: (1) repurchase all of the Parker Homes inventory   share. Champion’s stock price dropped to $13.50 per share
that was subject to a repurchase obligation, with a value of     on July 30, the day Champion announced the $33.6 million
$69 million; (2) repurchase other inventory not subject to a     pre-tax charge. On August 26, 1999, after announcing that it
repurchase obligation, with a value of $10 million;              expected earnings to be lower in the second half of 1999,
(3) provide Parker Homes with $1.15 million in post-petition     Champion’s stock price fell to $8.94 per share, having closed
financing; and (4) purchase the leases for 37 Parker Homes       at approximately $11.94 per share the day before.
sales centers for $1.25 million.
                                                                   Plaintiff Joel Miller filed a securities fraud action against
  From July 8 until August 26, 1999, Champion made               Champion and Young on August 26, 1999. Two other
numerous public disclosures in the form of press releases,       securities fraud class actions were also filed against
conference calls, and filings with the SEC. On July 8, Young     Champion and Young, and these actions were consolidated on
wrote a letter to the shareholders indicating that Champion      March 30, 2000. On May 15, 2000, plaintiff filed the CAC,
was comfortable with the earnings estimates for the second       charging Champion and Young with violations of Section
quarter of 1999. On July 21, Champion issued a press release     10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
indicating that the second quarter of 1999 had set records for   § 78j(b), and SEC Rule 10b-5 which was promulgated
revenues and earnings. Also on July 21, Champion held a          thereunder, 17 C.F.R. § 240.10b-5. Defendant Young was
conference call in which Young discussed retail inventory,       also alleged to have “controlling person” liability under
turn rates, repurchase obligations, and dealer bankruptcies.     Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The
On July 30, Champion again made a press release and held a       gravamen of the CAC was that Champion “violated the
conference call, in which Young discussed the circumstances      federal securities laws by inadequately disclosing and
and effects of Parker Homes’s Chapter 11 filing, as well as      accruing more than $38 million in losses stemming from
Champion’s relationship with Parker Homes. On August 9,          Champion’s undisclosed business dealings with its then-
Champion filed a Form 10-Q for the second quarter of 1999.       largest customer, Ted Parker Home Sales, Inc. [], a retailer of
In this Form 10-Q Champion disclosed in a footnote that
No. 01-1955                   Miller, et al. v. Champion      11    12    Miller, et al. v. Champion                   No. 01-1955
                                       Enterprises, et al.                Enterprises, et al.

manufactured homes that filed a Chapter 11 bankruptcy               B. General Legal Background
petition on July 22, 1999.”
                                                                      In his complaint, the plaintiff alleges violations by
   On June 30, 2000, defendants filed a motion to dismiss the       Champion and its CEO of Sections 10(b) and 20(a) of the
CAC. Plaintiff then filed a motion for leave to file the SASC       Exchange Act and Rule 10b-5 promulgated thereunder by the
on December 1, 2000, and renewed this motion on March 27,           SEC. Section 10(b) of the Exchange Act and Rule 10b-5
2001. The district court issued a Memorandum and Order on           prohibit “fraudulent, material misstatements or omissions in
April 9, 2001, stating that the CAC must be dismissed, but          connection with the sale or purchase of a security.” Morse,
stayed consideration of whether the dismissal should be with        290 F.3d at 798; see 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-
prejudice until after considering plaintiff’s motion to amend.      5. Section 20(a) of the Exchange Act makes a person liable
Then, on June 13, 2001, the district court issued an opinion        for violations of the Exchange Act when that person controls
denying plaintiff’s motion to file the SASC and dismissing          the person whose action caused the violation. See 15 U.S.C.
the case with prejudice.                                            § 78t(a). Defendant Young’s liability is therefore dependent
                                                                    on whether Champion’s statements at issue in this case
                       II. ANALYSIS                                 violated the Exchange Act.
A. Standard of Review                                                 In order to state a claim pursuant to Section 10(b) of the
                                                                    Exchange Act and Rule 10b-5, “a plaintiff must allege, in
   This appeal requires us to interpret the PSLRA, and              connection with the purchase or sale of securities, the
questions of statutory interpretation are reviewed de novo.         misstatement or omission of a material fact, made with
Hoffman v. Comshare, Inc. (In re Comshare Inc. Sec. Litig.),        scienter, upon which the plaintiff justifiably relied and which
183 F.3d 542, 547 (6th Cir. 1999). We also review a district        proximately caused the plaintiff’s injury.” Comshare, 183
court’s dismissal of a complaint under Rule 12(b)(6) de novo.       F.3d at 548. In the present case there is no dispute as to the
Id. The facts set forth in the complaint must be accepted as        purchase of securities, justifiable reliance, causation, or
true, so long as they are well pleaded. Id. However, the panel      damages. Therefore, this case centers on two issues:
“is not restricted to ruling on the district court's reasoning,     (1) whether the defendants misstated or omitted material
and may affirm a district court's grant of a motion to dismiss      facts; and (2) whether these misstatements or omissions were
on a basis not mentioned in the district court's opinion.” Id.      made with scienter.
at 548. Finally, a district court’s denial of leave to amend on
the ground of futility is reviewed de novo, Ziegler v. IBP Hog         In order to allege scienter in a private securities action for
Market, Inc., 249 F.3d 509, 518 (6th Cir. 2001), although           money damages, the PSLRA requires that “the complaint
generally we review a district court's denial of leave to amend     shall, with respect to each act or omission alleged to violate
for abuse of discretion, except in cases where the district court   this chapter, state with particularity facts giving rise to a
bases its decision on the legal conclusion that an amended          strong inference that the defendant acted with the required
complaint could not withstand a motion to dismiss. Morse v.         state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added).
McWhorter, 290 F.3d 795, 799 (6th Cir. 2002).                       There are three distinct scienter requirements for securities
                                                                    fraud actions, each of which depends on the type of statement
                                                                    that is being made, and, in the case of “forward-looking
No. 01-1955                         Miller, et al. v. Champion            13   14   Miller, et al. v. Champion                  No. 01-1955
                                             Enterprises, et al.                    Enterprises, et al.

statements,”4 whether that statement was material and                          5(c)(1)(B); see also Helwig v. Vencor, Inc., 251 F.3d 540, 552
accompanied by meaningful cautionary statements. See 15                        (6th Cir. 2001) (en banc). Finally, for statements of present
U.S.C. 78u-5(c). First, for “forward-looking statements” that                  or historical fact, the state of mind required is recklessness.
are accompanied by meaningful cautionary language, the first                   Vencor, 251 F.3d at 552. Recklessness is defined as “highly
prong of the safe harbor provided for in the PSLRA makes the                   unreasonable conduct which is an extreme departure from the
state of mind irrelevant. See 15 U.S.C. § 78u-5(c)(1)(A); see                  standards of ordinary care. While the danger need not be
also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir. 1999).                 known, it must at least be so obvious that any reasonable man
In other words, if the statement qualifies as “forward-looking”                would have known of it.” Mansbach v. Prescott, Ball &
and is accompanied by sufficient cautionary language, a                        Turben, 598 F.2d 1017, 1025 (6th Cir. 1979).
defendant’s statement is protected regardless of the actual
state of mind. Second, under the second prong of the safe                        We have previously held that certain factors are usually
harbor provision of the PSLRA, in the case of “forward-                        relevant to scienter in securities fraud actions:
looking statements” that are not accompanied by meaningful
cautionary language, actual knowledge of their false or                          (1) insider trading at a suspicious time or in an unusual
misleading nature is required. See 15 U.S.C. § 78u-                              amount; (2) divergence between internal reports and
                                                                                 external statements on the same subject; (3) closeness in
                                                                                 time of an allegedly fraudulent statement or omission and
                                                                                 the later disclosure of inconsistent information;
    4
        Und er the PSLRA , a “forward-looking statement” is defined as:          (4) evidence of bribery by a top company official;
                                                                                 (5) existence of an ancillary lawsuit charging fraud by a
    (A) a statement containing a projection of revenues, income                  company and the company’s quick settlement of that
    (including income loss), earnings (including earnings loss) per
    share, capital expenditures, dividends, capital structure, or other
                                                                                 suit; (6) disregard of the most current factual information
    financial items;                                                             before making statements; (7) disclosure of accounting
    (B) a statement of the plans and objectives of management for                information in such a way that its negative implications
    future operations, including plans or objectives relating to the             could only be understood by someone with a high degree
    products or serv ices of the issuer;                                         of sophistication; (8) the personal interest of certain
    (C) a statement of future economic performance, including any
    such statement contained in a discussion and analysis of
                                                                                 directors in not informing disinterested directors of an
    financial condition by the management or in the results of                   impending sale of stock; and (9) the self-interested
    operations included pursuant to the rules and regulations of the             motivation of defendants in the form of saving their
    Commission;                                                                  salaries or jobs.
    (D) any statement of the assumptions underlying or relating to
    any statem ent described in sub paragraph (A), (B), o r (C);               Vencor, 251 F.3d at 552. In this appeal, factors one, two, and
    (E) any report issued by an outside reviewer retained by an
    issuer, to the extent that the report assesses a forward-looking           six are at issue.
    statement made by the issuer; or
    (F) a statement containing a projection or estimate of such other            As stated previously, a plaintiff must “state with
    items as may be specified by rule or regulation of the                     particularity facts giving rise to a strong inference that the
    Comm ission.                                                               defendant acted with the required state of mind.” 15 U.S.C.
15 U.S.C. § 78 u-5(i)(1).
No. 01-1955                   Miller, et al. v. Champion      15   16       Miller, et al. v. Champion                        No. 01-1955
                                       Enterprises, et al.                  Enterprises, et al.

§ 78u-4(b)(2). In Vencor, we provided a definitive                   The plaintiff takes issue with the district court’s finding that
explanation of the meaning of a “strong inference”:                he was unable to draft an adequate complaint. He argues that
                                                                   the district court erred in the method it used to analyze the
  Inferences must be reasonable and strong—but not                 CAC, characterizing the district court’s standard of review as
  irrefutable. “Strong inferences” nonetheless involve             requiring that each paragraph contain all the elements
  deductive reasoning; their strength depends on how               necessary to state a securities fraud claim. This standard,
  closely a conclusion of misconduct follows from a                plaintiff argues, is unsupported by either the PSLRA or the
  plaintiff’s proposition of fact. Plaintiffs need not             Federal Rules of Civil Procedure, and therefore the district
  foreclose all other characterizations of fact, as the task of    court’s judgment should be reversed.
  weighing contrary accounts is reserved for the fact
  finder. Rather, the “strong inference” requirement means           Plaintiff is correct in his contention that nothing in the
  that plaintiffs are entitled only to the most plausible of       PSLRA or the Federal Rules of Civil Procedure supports a
  competing inferences.                                            method of analysis that would require all the elements of a
                                                                   securities fraud claim to be stated in each paragraph of a
251 F.3d at 553. Thus, if certain factors are not met in the       complaint. However, nowhere in its 39-page opinion did the
complaint—factual particularity and the most plausible of          district court purport to be applying such a standard. We
competing inferences—“the court shall, on the motion of any        assume, therefore, that the plaintiff must be asserting that
defendant, dismiss the complaint.” 15 U.S.C. § 78u-                such a method, as a practical matter, was the one used by the
4(b)(3)(A).                                                        district court, not that the district court explicitly held that
                                                                   such a method was the one to be applied.
C. Scienter was Pleaded with Sufficiently Particular Facts
                                                                      There is some merit to this characterization of the district
   One factor on which the district court based its dismissal of   court’s opinion. The district court approached the CAC in a
the CAC was a failure by the plaintiff to plead scienter with      highly systematic—and somewhat rigid—manner and
sufficient particularity. Specifically, the district court went    overlooked some of plaintiff’s attempts to connect its factual
through the complaint paragraph by paragraph, analyzing            allegations and allegations of scienter. Plaintiff alleged some
each of the factual allegations and attempting to connect these    kind of scienter in paragraphs 4, 39-40, 47-48, 64, 66-67,5 69,
allegations with the allegations of scienter to determine if       70, 73-75, and 82.6 Many of these allegations were general
they were sufficiently well pleaded so as to satisfy the           and therefore insufficient to meet the particularity
requirements of the heightened pleading requirements of the
PSLRA. Ultimately, the district court concluded that the
plaintiff “‘failed to craft a Complaint in such a way that a
reader can, without undue effort, divine why each alleged
                                                                        5
statement was false or misleading.’” R.40, Opinion (April 9,             Plaintiff makes no argument that the allegations of scienter, or even
2001) (granting motion to dismiss consolidated amended             the underlying facts, alleged in paragraphs 64, 66, and 67 , are sufficient
class action complaint) (quoting Wenger v. Lumisys, Inc., 2 F.     to support a securities fraud claim, and we will not address them here.
Supp. 2d 1231, 1243 (N.D. Cal. 1998)).                                  6
                                                                        The content of these paragraphs will be set forth in the subsequent
                                                                   footnotes.
No. 01-1955                           Miller, et al. v. Champion              17     18       Miller, et al. v. Champion                           No. 01-1955
                                               Enterprises, et al.                            Enterprises, et al.

requirements of the PSLRA. See ¶¶ 69, 70, 73-75, 82.7                                loosely, tied to the alleged false or misleading statements or
Moreover, other allegations of scienter were not asserted in                         to omissions of material facts listed in the complaint. See
relation to a statement or omission of a material fact, but                          ¶¶ 4, 39-40, 47.9
rather with respect to Champion’s substantive actions
throughout the underlying situation, and thus do not allege
scienter sufficient as a basis for a securities fraud action. See
¶ 48.8 However, some of the allegations of scienter are, albeit                      conduct” by Parker Ho mes, b ut the plaintiff does not allege any facts to
                                                                                     support the inference that the defendants kne w of or recklessly
                                                                                     disregarded this conduct. Plaintiff alleges: “Plaintiffs are informed and
     7
                                                                                     believe that Champion knew of or recklessly disregarded other improper
       ¶ 69 alleges: “D efendants’ false representations and material                conduct in which Parker Homes engag ed in an effort to show false profits.
omissions were made with scienter [emphasis in original] in that                     . . . Champion knew or recklessly disregarded the likelihood that Parker
defendants knew or recklessly disregarded [emphasis added] that the                  Ho mes’s severe cash shortage co uld result in violations of its trust
pub lic documents and statements issued or disseminated by Champion                  agreements . . . . Champion knew or recklessly disregarded that Parker
were materially false or m isleading.”                                               Homes was ad ding additional costs to the invoice price of homes for non-
     ¶ 70 alleges: “defendants are liable fo r those false forward-looking           existent furniture . . .” (emphasis added).
statements because at the time each of those forward-loo king statements
was made, the particular speaker knew that the particular forward-looking                 9
                                                                                           ¶ 4 alleges: “Plaintiff’s contend that defendants ma terially
statement was false or misleading, and/or the forward-looking statement              overstated Champio n’s earnings, revenues, and p rospects by . . .
was authorized and/or approved by an executive officer of Champion who               (b) [k]now ingly or recklessly failing to accrue [an $1 8 million dollar loss
knew that those statements were false when made” (emphasis added).                   on money lent to Parker Homes] in light of the fact that Champion was
     ¶ 73 alleges: “they knowingly and/or recklessly mad e and /or failed to         fully aware [that the p arent comp anies o f Parker Home s filed for
correct public representations which were or had become materially false             bankruptcy, as shown by a statement that implies that Champion knew of
and misleading regarding Champion’s financial results and operations . . .           the parent companies’ financial difficulties] . . . (d)[k] now ingly or
the defendants caus[ed] Champion to publish public statements which                  recklessly failing to disclose that the anticipated loss upon resale of
they knew, or were reckless in not knowing, were materially false and                repurchased inventory was only one component of the $33.6 million
misleading” (emphasis added).                                                        charge aga inst earnings taken in the third quarter of 1999 [as shown by a
     ¶ 74 alleges: “D efendant Yo ung . . . control[led] the content of the          statement by Young that implies that 85 percent of the charge would be
aforesaid stateme nts . . . and/or . . . fail[ed] to corre ct those stateme nts in   the result of resale losses, while Champ ion’s 1999 Form 10-K shows that
a timely manner once he knew or was reckless in not knowing that those               more than 50 percent o f the charge was attributable to loans, advances,
statements were no longer true or accurate” (emphasis added).                        and discounts to Parker Homes] . . . (f) [k] now ingly or recklessly
     ¶ 75 alleges: “Defendant Young had actual knowledge of the facts                concealing that Parker H ome s was no t going to obtain deb tor-in-
making the material statements false and misleading, or acted with                   possession financing [as shown by two statements by officers of
reckless disregard for the truth in that he failed to ascertain and to               Champion stating that they were unaware of whether Parker Homes
disclose such facts, even though sam e were availab le to him” (emphasis             would obtain financing, while a later statement implied that Champion
added).                                                                              was nego tiating to buy Parker Homes during the time period the earlier
     ¶ 82 alleges: “Defendant Young’s position made him p rivy to and                statements were made]” (emphasis added).
provided him with actual knowledge of the material facts concealed from                   ¶ 39 alleges: “In light of the following facts known to defenda nts,
lead plaintiffs and the Class” (emphasis added).                                     [defendants earlier statements that they were monitoring inventory levels,
     8
                                                                                     did not vo luntarily rep urchase inven tory, and that only o ne or two of their
      ¶ 48 alleges: “As a result, Champion kno wing ly or recklessly                 dealers had gone bankrupt] were materially false, misleading and
increased its risk of being req uired to purchase overvalued , unsold                incomplete, [(1) because] Champion was awa re [that Parker Homes had
invento ry.” The other allegations of scienter in ¶ 48 are simply assertions         extreme amo unts of excess inventory] b ecause it was unable to ship [new
that the defendants knew of or re cklessly d isregarded other “improper              invento ry] to Parker Homes until additional financing was in place [as
No. 01-1955                          Miller, et al. v. Champion           19     20   Miller, et al. v. Champion                  No. 01-1955
                                              Enterprises, et al.                     Enterprises, et al.

  The SASC did not remedy any of the shortcomings of the                         CAC does. In fact, the SASC simply reiterates the scienter
CAC with respect to pleading scienter with sufficient                            allegations of the CAC.
particularity. The SASC adds more facts, but it does not link
these facts with the allegations of scienter any more than the                      Although we understand the district court’s frustration with
                                                                                 the complaint, as the CAC does not link the factual
                                                                                 allegations with defendant’s purported scienter in a
                                                                                 particularly cogent manner, we nevertheless find that the
shown by a statement in Ted Parker’s complaint in another lawsuit, as            complaint is not so inadequate in this respect that it merits
well as other submissions in that lawsuit], [(2) because Parker Homes            dismissal. The plaintiff did not simply make “conclusory
parent companies had alread y declared bankrup tcy before these                  allegations of recklessness, intention, or misconduct.” Burns
statements were made, a fact which Champion must have be en aware of,
and (3) because Champion had lent Parker H omes $2.25 million and
                                                                                 v. Prudential Sec., 116 F. Supp. 2d 917, 925 (N.D. Ohio
$350,000 as working ca pital in order to save it from bankruptcy, and were       2000). However, as indicated below, we further conclude that
in negotiations to purchase all of Parker Ho mes’s assets, as shown by           the district court was correct in holding that the CAC did not
statements in Ted Parker’s complaint in another lawsuit and other                contain allegations sufficient to state a claim under the
documents]” (emphasis added).                                                    heightened pleading requirements of the PSLRA.
     ¶ 40 alleges: “Champion knew both that Holding Com panies and
Parker Homes had filed Ch apter 11 p etitions an d that C hampion would
soon purchase substantially all of the assets of Parker Homes [as shown          D. The CAC Did Not Contain Allegations Sufficient to
in the above paragraphs, but Champion still failed to accrue an $18                 State a Claim
million loss in their second quarter financial statements as required by
GAA P]” (emphasis added).                                                           In order for a complaint to be adequate, it must contain
     ¶ 47 alleges: “In light of the following facts known to Champion,           allegations sufficient to state a claim. Under the PSLRA and
[Champion’s representations (1) that its second quarter was ‘ano ther all-       our prior caselaw, these allegations must give rise to a strong
time record quarter,’ (2) that it had a ‘strong balance sheet’ and ‘superior
returns on shareholder equity,’ (3) that it had record sales perfo rmance in     inference—the most probable of competing inferences—that
the first half of 1999, (4) that Parker Homes bankruptcy was                     the defendants made false or misleading statements with the
‘unanticipated ,’ (5) that it hoped that Parker Home s could ‘con tinue to       required state of mind. See 15 U.S.C. § 78u-4(b)(2); Vencor,
ope rate through Chapter 11 and eventua lly come out o f it,’ (6) that it kept   251 F.3d at 553.              Plaintiff alleged six separate
‘close tabs on the contingent liability’ it has with each of its retailers and   communications that he contends were false or misleading:
had been ‘watching Parker Homes inventory turn,’ (7) that it didn’t know
if Parker H ome s would ob tain debtor in possession financing, and (8) that     (1) Young’s letter to Champion shareholders on July 8, 1999;
the charge it would take because of Parker Homes’s bankruptcy was                (2) Champion’s press release on July 21, 1999;
primarily ‘for the discounting that is anticipated in the reselling of the       (3) Champion’s conference call on July 21, 1999;
homes and for the removal and reloc ation costs associated with the              (4) Champion’s press release on July 30, 1999;
repurchase of the homes’] were materially false, misleading and                  (5) Champion’s conference call on July 30, 1999; and
incom plete [as shown by (1) the notes of counsel in another lawsuit that
Champion aware that Parker Homes was in severe financial difficulty and          (6) Champion’s second quarter Form 10-Q which was filed
might need to file for Chapter 11, (2) submissions in the bankruptcy             with the SEC on August 9, 1999. Some of these
proceeding that Champion wo uld rep urchase all of P arker Ho mes’s              communications fall within the safe harbor for “forward-
invento ry, including that which they were not obligated to repurchase, and      looking statements” provided by the PSLRA, while the others
provide post-b ankruptcy-petition financing to Parker H ome s, and               do not give rise to a strong inference that Champion or Young
(3) agreements between Champion and Parker Homes which gave Parker
Hom es strong incentives to have excess inventory]” (emphasis added).
                                                                                 acted with sufficient scienter to survive a Rule 12(b)(6)
No. 01-1955                  Miller, et al. v. Champion     21    22    Miller, et al. v. Champion                        No. 01-1955
                                      Enterprises, et al.               Enterprises, et al.

motion dismiss under the heightened pleading requirements         bankruptcy which would adversely impact Champion.
of the PSLRA.                                                     Plaintiff further alleges that the statements are not subject to
                                                                  the PSLRA’s safe harbor provision, because they are not
1. The July 8, 1999, Letter to Shareholders                       forward-looking and lack meaningful cautionary language.
                                                                  Specifically, plaintiff argues that the word “continuation”
   The July 8, 1999, Letter to Shareholders was forward-          refers to the present state of affairs, and that cautionary
looking and fell within the safe harbor provision because it      language referring to business downturns and possible
was accompanied by meaningful cautionary language. The            inventory excesses is insufficient disclosure since Champion
letter, written by Young to Champion’s shareholders, stated       did not disclose the nature of its loans to Parker Homes. He
in pertinent part:                                                also contends that the district court misapplied the holding in
                                                                  Ivax in finding that the statements were forward-looking.
    As we start the second half of the year, we know that
  you are as concerned as we are regarding the                       In Ivax, the plaintiff sued Ivax Corporation for securities
  performance of Champion Enterprises stock compared              fraud and alleged that Ivax had made false or misleading
  with the overall market. Housing stocks in general have         statements concerning its financial outlook. 182 F.3d at 802.
  under performed the markets in 1999, and we are no              Ivax moved to dismiss the claims based on the safe harbor
  exception. Given the continuation of outstanding                provision and heightened pleading requirements of the
  earnings growth and the successful implementation of            PSLRA. Id. The district court dismissed the action, and on
  our retail strategy, we challenge ourselves as to what we       appeal the Eleventh Circuit affirmed the judgment of the
  can do to enhance our stock value in a market dominated         district court. Id. at 802, 808. In reaching this conclusion, the
  by Internet and the Dow Jones Nifty 50 stocks . . . .           Eleventh Circuit held that in certain situations, mixed
                                                                  statements of present fact and future prediction must be
    Some of our competitors have reported problems with           treated as wholly forward-looking. Id. at 805-07.
  meeting earnings estimates.       Champion recently
  announced that we were comfortable with consensus                 We find plaintiff’s arguments with regard to the July 8,
  earnings estimates of $0.59 per share for the second            1999, Letter to Shareholders to be unpersuasive. The
  quarter, which would be a 13 percent increase compared          statements by Walter Young in his letter to Champion
  to last year.                                                   shareholders appear to be classically forward-looking. The
                                                                  statements speak of earnings “estimates,” of “challenging”
J.A. at 1045-46. The district court found that these statements   themselves to “enhance” their stock value. These are all
were forward-looking and accompanied by sufficient                statements that imply projections or objectives, falling
cautionary language, and therefore protected under the safe       squarely within the definition of “forward-looking
harbor provisions of the PSLRA.                                   statements” found in 15 U.S.C. § 78u-5(i)(1).10 The phrase
  Plaintiff alleges that the statements with regard to
Champion’s earnings estimates were materially misleading
                                                                       10
given that Champion and Walter Young knew of Parker                      In addition, we note that Champion did actually have earnings of
Homes’s poor financial condition and the probability of its       $0.59 per share in the second quarter as announced on July 21, 1999,
                                                                  therefore undermining the notion that these statements were either false
No. 01-1955                         Miller, et al. v. Champion           23     24   Miller, et al. v. Champion                   No. 01-1955
                                             Enterprises, et al.                     Enterprises, et al.

“given the continuation of outstanding earnings growth and                      underperformed the markets in 1999,” and that “in certain
the successful implementation of our retail strategy,” although                 regions we see too many retail locations, suggesting an over
certainly implying some present circumstances, also is the                      supply of retail inventory of homes in that region.” Plaintiff
basis for the later “forward-looking statements,” thus                          argues that Champion should also have disclosed the nature
qualifying as an “assumption underlying” a “forward-looking                     of their loans to Parker Homes. This goes too far. Champion
statement” found in 15 U.S.C. § 78u-5(i)(1)(D).11 See Ivax,                     disclosed the exact risk that occurred in this situation: excess
182 F.3d at 804-805 (the phrase “[r]eorders are expected to                     retailer inventory that could lead to negative economic effects
improve as customer inventories are depleted” was found to                      on Champion. Champion is not required to detail every facet
be a “forward-looking statement” under the “assumptions                         or extent of that risk to have adequately disclosed the nature
underlying” definition in 15 U.S.C. § 78u-5(i)(1)(D)).                          of the risk.
Furthermore, the July 8 letter does not contain a mixed
statement of present fact and future prediction similar to that                   Accordingly, since we conclude that the statements in
discussed in Ivax, and therefore we do not need to address                      Walter Young’s July 8 Letter to Shareholders were both
plaintiff’s argument in this regard. Given these facts, we                      forward-looking within the meaning of the PSLRA, and that
conclude that the statements are forward-looking for the                        they were accompanied by meaningful cautionary language,
purposes of the PSLRA.                                                          the statements are subject to the safe harbor provisions of the
                                                                                PSLRA and are therefore not actionable. No investigation of
   However, in order to be protected by the safe harbor                         defendant’s state of mind is required. See 15 U.S.C. § 78u-
provisions of the PSLRA, these statements must also have                        5(c)(1)(A); see also Ivax, 182 F.3d at 803.
been accompanied by meaningful cautionary langauge. We
conclude, as did the district court, that the statements were                   2. The July 21, 1999, Press Release
accompanied by meaningful cautionary language. The July 8
letter cited Champion’s risk disclosures in its 1998 Form 10-                      The July 21, 1999, press release was not a forward-looking
K, which included a risk related to inventory levels of                         statement and was therefore not protected under the safe
manufactured housing retailers. Additionally, the letter itself                 harbor provisions of the PSLRA. We nevertheless hold that
contained warnings that “housing stocks in general have                         the plaintiff failed to state a claim regarding the July 21,
                                                                                1999, press release. The press release in question announced
                                                                                that Champion’s second quarter “earnings per share [] grew
                                                                                13 percent to $0.59 from $0.52 last year.” In the CAC,
or misleading. Plaintiff argues that these earnings were nevertheless           plaintiff quoted nearly all of the July 21 press release, much
misleading because Champ ion actually should have taken a loss during
the second quarter d ue to P arker Ho mes’s probab le bankruptcy. This w ill
                                                                                of which consists of statements that would qualify as forward-
be discussed in greater length later in this opinion.                           looking under the PSLRA. The district court, applying a test
                                                                                found in Ivax for mixed statements of present fact and future
    11                                                                          prediction, found the whole press release to be forward-
       Plaintiff’s reliance on In re B oeing Sec. Lit., 40 F. Supp. 2d 1160,
1169 (W .D. W ash. 19 98) is unavailing. The portion of that opinion            looking. It also found that the July 21 press release was
quoted by the plaintiff relates back to statements by the defendant in that     accompanied by meaningful cautionary language, and
case that are almost exclusively statements of present or historical fact and   therefore concluded that the statements fit into the statutory
certainly do not provide the basis for any future projections, unlike the
statements at issue here.
                                                                                safe harbor of the PSLRA and were not actionable.
No. 01-1955                      Miller, et al. v. Champion        25    26   Miller, et al. v. Champion                    No. 01-1955
                                          Enterprises, et al.                 Enterprises, et al.

   Plaintiff contends that he took issue solely with the                   here is that the list as a whole misleads anyone reading
earnings figure included in the July 21 press release, and                 it for an explanation of Ivax’s projections, because the
therefore argues that this is not a “forward-looking statement”            list omits the expectation of a goodwill writedown. If the
protected by the PSLRA’s safe harbor provision.                            allegation is that the whole list is misleading, then it
Specifically, he argues that the district court misapplied Ivax            makes no sense to slice the list into separate sentences.
in concluding that the entire press release should be treated as           Rather, the list becomes a “statement” in the statutory
a “forward-looking statement.” Plaintiff avers that the                    sense, and a basis of liability, as a unit. It must therefore
earnings figure given in the July 21 press release (and                    be either forward-looking or not forward-looking in its
repeated in the August 9, 1999, Form 10-Q filed with the                   entirety.
SEC) was recklessly misstated, because, under generally
accepted accounting principles (“GAAP”), Champion was                    182 F.3d at 806. The court in Ivax concluded that a list must
required to accrue a loss of approximately $18 million12 in              be treated as a whole when the allegation was that the list
the second quarter of 1999 due to the probability of Parker              itself misled investors by omitting certain relevant factors.
Homes’s bankruptcy, about which the defendants knew or                   The statement at issue here is not a list, nor is the argument
should have known.                                                       that the earnings figure is misleading based on an omission
                                                                         from a list. The earnings figure is easily separable from the
   We agree with the plaintiff that the earnings figure                  “forward-looking statements” contained in the press release,
statement in the July 21 press release is a statement of present         and is not given merely as an “assumption underlying” future
or historical fact, and therefore not subject to the safe harbor         projections. It therefore is not protected under the safe harbor
provision of the PSLRA. We also agree with the plaintiff that            provisions of the PSLRA, and the district court erred in so
the mixed scenario described in Ivax does not apply to this              holding.
situation, and therefore that the district court erred in so
holding. The mixed statement discussed in Ivax was a list of               The question still remains whether the earnings figure was
factors that would influence Ivax’s third quarter results. The           fraudulently misstated, which is dependent on whether the
court there held that:                                                   defendants recklessly failed to accrue an $18 million loss
                                                                         because of the possibility of Parker Homes’s bankruptcy. For
  The mixed nature of this statement raises the question                 the reasons given below in discussing Champion’s identical
  whether the safe harbor benefits the entire statement or               earning figure given in the August 9, 1999, Form 10-Q,there
  only parts of it. Of course, if any of the individual                  was no such reckless failure, and the plaintiff therefore failed
  sentences describing known facts (such as the customer’s               to state a claim regarding the July 21, 1999, press release.
  bankruptcy) were allegedly false, we could easily
  conclude that that smaller, non-forward-looking                        3. The July 21, 1999, Conference Call
  statement falls outside the safe harbor. But the allegation
                                                                           The July 21, 1999, conference call contained a number of
                                                                         statements, some of which were forward-looking and some
    12                                                                   that were not, but because we find that none of the statements
        This figure is made up of $10.4 million in discounts under the   were made with sufficient scienter to amount to recklessness,
Bonus Program and $ 7.2 million in outstanding loans to Parker Homes     we hold that the plaintiff failed to state a claim regarding
unde r the Revolving Lo an Agreem ent.
No. 01-1955                   Miller, et al. v. Champion     27    28    Miller, et al. v. Champion                        No. 01-1955
                                       Enterprises, et al.               Enterprises, et al.

these statements. Champion held a conference call following          with some. There’s plus or minus on that. So, the turn
the July 21, 1999, press release. Plaintiff asserts that several     appears—and it changes because of the seasonal time of
statements—or groups of statements on the same                       year. The industry turn has dropped below 2.5 time
topic—made during this conference call were misleading to            turns, from everything that we can see. So, it has gone
investors and were made with either recklessness or actual           down. That’s why we think there may be a month of
knowledge of their falsity. The first statement he cites is          inventory, which would be about 20,000 homes in the
identical to one found in the July 21 press release:                 industry, that should be excess and should be flushed
                                                                     through. Now, our inventory turns from our own
  While our retail traffic remains healthy and we continue           organization . . . are somewhere a little under three times
  to keep our inventory levels under tight control, the              turn. . . . Our independents are about at the industry
  biggest short-term challenge we face is to improve the             number, the best we can see, overall, that[’s] the 3,500
  industry’s retail inventory excesses. Even though we               independent retailers we sell to.
  anticipate that our retail sales should be strong for the
  remainder of the year, we expect that industry wholesale         Id. at 400. Plaintiff argues that, given that Champion knew of
  shipments could be down until this temporary adjustment          Parker Homes’s excess inventory, these statements were false
  is completed.                                                    because Champion was not actually keeping inventory under
                                                                   “tight control.” He cites as evidence of the falsity of Young’s
J.A. at 54. Plaintiff also cites some statements by Walter         statement three facts: “(1) [Champion’s] forcing [Parker
Young during the conference call, in which Young stated that       Homes] to take more inventory than it needed; (2) 100 other
Champion was “watching” and “managing” the inventory of            retailers supplied by Champion went bankrupt in 1999; and
its independent retailers. The final statements on this topic      (3) Young’s admissions that there was too much industry
that plaintiff alleges were misleading are as follows:             expansion because manufacturers got “carried away” when
                                                                   “greed overcame logic.”13 Pl. Br. at 41. Additionally,
  The overall industry outlook, the overall retail demand          plaintiff contends that the statements are not forward-looking.
  seems to be holding up very well. The positive impact of
  this overall demand impact is somewhat dissipated due              The district court found that the statements were forward-
  to the growth in the number of retail outlets in the             looking, in part because of its overly broad interpretation of
  industry, which has outpaced the overall industry growth,        mixed statements of present or historical fact and future
  over the last year or so. Therefore, total industry              projection under Ivax. The district court also held that the
  inventory has probably increased maybe a month or so,            statements lacked meaningful cautionary language, and
  somewhere around 20,000 homes, industry wide.                    therefore were not protected under the first prong of the
                                                                   PSLRA’s safe harbor provision, where scienter is not even
J.A. at 397. The above statement was given by Walter Young         considered. Nevertheless, because the statements were
at the opening of the conference call, and in response to a
follow-up question on the topic, Young answered as follows:
                                                                        13
  Again, there aren’t any industry numbers as to turns that                The phrase “greed overcame logic” was only alleged in the SASC,
  are really valid. So, it’s—the Census Bureau comes out           as is the evidence that Champion “forced” Parker Homes to take more
                                                                   inventory than needed.
No. 01-1955                         Miller, et al. v. Champion           29     30    Miller, et al. v. Champion                    No. 01-1955
                                             Enterprises, et al.                      Enterprises, et al.

forward-looking, under the second prong the PSLRA’s safe                        was speaking with such reckless disregard for the truth that
harbor provision they would only be actionable if they were                     his statements amount to “highly unreasonable conduct which
made with actual knowledge as to their falsity. The district                    is an extreme departure from the standards of ordinary care.”
court did not reach this question, however, because it found                    Mansbach, 598 F.2d at 1025. Young admitted in the
that the plaintiff had not sufficiently alleged scienter with                   statements themselves that there was excess inventory in the
regard to any of the allegedly false statements in the CAC.                     market. The fact that he underestimated the true extent of the
As discussed earlier, the district court erred in so finding.                   excess—which it is doubtful that he knew or should have
                                                                                been aware of—does not mean that he was reckless when he
  We are not persuaded by the plaintiff’s arguments with                        stated that there was an inventory excess or when he said that
respect to these statements. The statements are forward-                        they were “managing” and “watching” the inventory.
looking in some respects, but they also contain numerous
statements of present or historical fact, not all of which are                    The next statement that the plaintiff says was misleading
simply assumptions underlying future projections. But even                      from the July 21, 1999, conference call was Young’s response
under a recklessness standard, Walter Young and Champion                        to a question of whether Champion was voluntarily
were not misleading. Certainly Champion and Walter Young                        repurchasing inventory from weaker retail dealers. As
professed to be monitoring inventory levels, both for their                     plaintiff alleged in paragraph 38 of the CAC, “CEO Young
own retail stores and for their independent retailers.14                        responded that he could not be ‘adamant enough’ that
However, Young also explicitly stated that there was excess                     Champion made no voluntary repurchases and that
inventory in the market, partially due to the growth of                         repurchases were limited to Champion’s repurchase
retailers in the industry outpacing that of the overall industry                obligations to third party floor finance lenders when a retailer
growth. In other words, Champion and Young acknowledged                         when bankrupt.” When asked if any of the dealers had gone
that there was excess inventory in the market, and that there                   bankrupt, Young responded: “I think one or two out of 3,500
was an excess of retailers in the market as well.                               across the country. There have been some. But . . . under the
                                                                                repurchase obligation . . . out of 70,000 homes that we build
  The evidence that the plaintiff cites to support his                          a year, I think we took back 100-110 homes last year . . . .”
contentions is unavailing. He asserts that Champion was                         Id.
“forcing [Parker Homes] to take more inventory than it
needed.” Pl. Br. at 41. We first note that the only real                          The plaintiff, defendants, and the district court all agree that
evidence of this is found in SASC, which, for reasons that                      these are statements of present or historical fact, and therefore
will be discussed later in this opinion, the district court                     not entitled to protection under the safe harbor provision of
properly denied plaintiff’s motion to file. But even if we                      the PSLRA. The district court did not discuss these
were to consider this evidence, it does not show that Young                     statements further, however, finding that they were not
                                                                                sufficiently linked to allegations of scienter. Plaintiff
                                                                                contends that these statements were reckless and misleading
    14                                                                          given that in August, Champion chose to repurchase an
        The first quoted section (from the press release) seems to state that   additional $10 million of Parker Homes inventory beyond the
Champion was keeping its own inventory under tight control, as opposed
to that of independent retailers who would be the probable recipients of
                                                                                $69 million which it was obligated to purchase, that the day
“industry wholesale shipme nts.”                                                after the conference call Parker Homes filed for bankruptcy,
No. 01-1955                   Miller, et al. v. Champion     31    32    Miller, et al. v. Champion                   No. 01-1955
                                       Enterprises, et al.               Enterprises, et al.

and that approximately 100 other retailers supplied by             back up the next day), or not disclosing the Parker Homes
Champion also declared bankruptcy sometime in 1999.                situation, which, if it blew up in their faces (as it did), could
                                                                   lead to significant negative consequences, as well as open
  The evidence does not support a strong inference that            them up to suits. Given the circumstances, it is difficult to
Young’s statements with regard to repurchases were                 say that the defendants’ statements were “an extreme
recklessly made. Simply because Champion later made a              departure from the standards of ordinary care.” Mansbach,
business judgment that it should voluntarily repurchase            598 F.2d at 1025. Faced with a tough decision, defendants
inventory does not make it reckless to state that Champion         made a choice that ultimately proved to be erroneous, but
does not make such repurchases as a general matter. Even if        there is no “strong inference” of recklessness.
the negotiations to purchase Parker Homes inventory were
ongoing at this point, the plaintiff has not asserted facts that     Plaintiff’s claim regarding 100 other retailers that allegedly
show Champion knew or should have known that the end               went bankrupt in 1999 does not make these statements
result of such negotiations was that Champion would                reckless. There is no indication that any of these other dealers
voluntarily repurchase inventory it was not obligated to. It is    had gone bankrupt as of July 21, 1999; if anything, the facts
plausible to argue as the plaintiff does, but these facts do not   asserted seem to imply the opposite. What this allegation
give rise to a strong inference of recklessness by Young or        does seem to show is that 100 other businesses in the
Champion.                                                          manufactured housing industry also had not yet realized the
                                                                   extent to which retail inventory had outpaced industry and
  The statements with regard to bankruptcies raise a more          market growth. Champion and Parker Homes, along with 100
difficult question. There is no contention by the plaintiff that   other dealers, seem to have been caught off guard by an
the actual statement made by Young was materially                  unexpected decline in the manufactured homes market. This
inaccurate when made. Rather, plaintiff asserts that               does not support a strong inference of recklessness by the
defendants recklessly minimized the risk of potential              defendants in making these statements.
bankruptcies by referring to statistics from 1998. We agree
with the plaintiff that it was somewhat disingenuous of the           Plaintiff, citing Vencor, also alleges that defendants, since
defendants to refer to the previous year’s statistics given the    they chose to issue a press release and hold a conference call
possibility that Parker Homes would go bankrupt the next           on July 21, were obligated to tell the truth about Parker
day, resulting in a far larger negative impact on Champion         Homes’s possible bankruptcy and give full disclosure. In
than that referred to from the 1998 figures. Nevertheless,         Vencor, this court stated that “with regard to future events,
many of the plaintiff’s allegations also show that Champion        uncertain figures, and other so-called soft information, a
was under the impression that it had reached a deal that would     company may choose silence or speech elaborated by the
keep Parker Homes out of bankruptcy. Champion and Young            factual basis as then known—but it may not choose
were placed in the difficult position of either disclosing that    half-truths.” 251 F.3d at 561. The plaintiff’s assertion goes
Parker Homes might go bankrupt the next day, which would           beyond the Vencor requirement. Just because defendants
lead to a significant drop in Champion’s stock price that day      issued a press release and held a conference call to discuss
and potentially harm their ability to finalize the deal to keep    their second quarter earnings does not mean that they chose
Parker Homes out of bankruptcy (and if they did keep Parker        to speak on any situation that could possibly affect their
Homes out of bankruptcy, have Champion’s stock price shoot         financial condition. Such a rule would require almost
No. 01-1955                   Miller, et al. v. Champion     33    34   Miller, et al. v. Champion                  No. 01-1955
                                       Enterprises, et al.              Enterprises, et al.

unlimited disclosure on any conceivable topic related to an          can continue to operate through Chapter 11 and
issuer’s financial condition whenever an issuer released any         eventually come out of it.
kind of financial data. Additionally, the other topics
discussed during the conference call were not things that          J.A. at 62-63, 429-30. Following these statements Young
defendants chose to discuss. They were asked questions by          went on to describe Champion’s plans to use its own retail
investors about repurchase obligations and bankruptcies,           organization to move into the void left by Parker Homes’s
which it appears they endeavored to answer truthfully as to        bankruptcy, as well as to sell the inventory that it would be
the current state of affairs. Furthermore, they studiously         obligated to repurchase. Among the numerous questions
avoided speaking about future events. Vencor does not              during the teleconference, one questioner asked whether
require more disclosure in such a situation.                       Champion could explain the kind of financial information that
                                                                   Champion received regularly from large independent retailers,
  In short, we find that these asserted facts do not imply         including Parker Homes, to which Champion responded:
reckless conduct on the part of Champion or Walter Young.
They may not have been as careful as they could have been,           [Chief Financial Officer Stegmayer:] [T]hat information
but the asserted facts do not give rise to a strong inference        varies depending on the relationship and retailer. . . .
that the defendants, in making these statements, displayed           Financial information does not necessarily have to be
highly unreasonable conduct which is an extreme departure            provided by them, and then there’s always the question
from the standards of ordinary care. See 15 U.S.C. § 78u-            of reliability on private financial statements. What we
4(b)(2); Mansbach, 598 F.2d at 1025.                                 do, instead, is we try to track inventory to inventory
                                                                     turns, and monitor our liability with our retailer in that
4. The July 30, 1999, Press Release and Conference Call              form, and we keep close tabs on the contingent liability
                                                                     we have with each of our retailers . . . .
   The July 30, 1999, press release and conference call
contained a number of statements, all of which were                  [Young:] . . . We had all impression the financials were
statements of present or historical fact, but since we find that     going well. You know, we don’t have an operational
none of the statements were made with sufficient scienter to         understanding here, but this organization continued to
amount to recklessness, we hold that the plaintiff failed to         grow and expand, and with its new ownership here we
state a claim regarding these statements. Champion issued a          had all impressions that it was valid regardless of the
press release on July 30, 1999, in which it stated that the          financial statements . . . .
Parker Homes bankruptcy was “not anticipated.” Young
reiterated this point in a conference call later that day:         J.A. at 432-33.

  We are the virtual exclusive supplier to Ted Parker                Walter Young and another Champion employee also
  Homes. This Chapter 11 filing, which we totally—was              responded to a question dealing with the circumstances
  unanticipated by us . . . . [W]e are certainly supporting        leading up to Parker Homes’s bankruptcy:
  Ted Parker Home Sales in its Chapter 11 situation that it
  has taken on, we will support it as a supplier and as a            [Young:] We have been working with Ted Parker over
  creditor where we are, and we certainly hope that they             the years and part of his expansion working with him,
No. 01-1955                        Miller, et al. v. Champion          35    36    Miller, et al. v. Champion                   No. 01-1955
                                            Enterprises, et al.                    Enterprises, et al.

  and positive [sic]. But we never—I mean, we have not                       might be preparing, we’re not inside on that track. I mean,
  really been getting operating statements or the financial                  we’re sitting here as outside creditors as any other creditor
  aspects, so let me—we have been watching their                             would be, so we really don’t know.”
  inventory turn which is, with their unique operation,15
  always [unintelligible]. We have, over the, you know,                        In response to a later question asking whether Champion
  over the last few—with the change of management it                         had any plans to buy Parker Homes out of bankruptcy, Young
  [sic] . . . .                                                              answered that

  [Chief Operating Officer Surles:] . . . [W]e had obviously                   we’ve considered all options as far as the way to do it
  been watching their inventories, and they have been a                        that led us to this announcement today. And, you know,
  high expansion company, but as recent as a couple of                         we’ve bought many good retailers . . . but when it went
  months, the management had come to us and informed us                        to Chapter 11 it changes the nature of things, okay? . . .
  that they were going into an inventory reduction mode                        Now I have to say in going forward, you know, if Ted
  and it might affect some of our plants, and so we                            Parker Sales goes to another—we’ll always consider all
  suddenly reduced production at our Maxton, North                             options at all time[s] . . . okay?
  Carolina, plant to compensate for that, and even though
  we’re not—weren’t excited about the profits and loss                       J.A. at 436. Finally, when asked whether Champion’s plan
  there, we were excited about their attitude in reducing                    with respect to Parker Homes might change if Parker Homes
  inventories, and so we felt comfortable.                                   filed a Chapter 7 petition, Young responded:

J.A. at 440. When asked if this occurred in approximately                      Well, that’s some of the issue. It is in Chapter 11, and
May or April, Young responded: “Mmm–hmm. And so that’s                         we do not know, so we’re flying blind too. That’s why
why it so surprised us of the decision to go Chapter 11.” Id.                  the nature of this thing and rather than—you know, we’ll
Young was then asked about Champion’s discussions with                         be flexible whatever happens. . . . And as you say, there
Parker Homes since the Chapter 11 filing, to which Young                       is a difference as to having Chapter 11 or the various
responded: “With the decision to go Chapter 11 we’ve had                       chapters, but we’re flexible to react to whatever
ongoing discussions and to add the color background to them                    accordingly.
I don’t think would be productive, probably not legal . . . .”
Id.                                                                          J.A. at 446.

  Another Champion employee, when asked about Parker                            The district court found that the statement in the July 30,
Homes’s future and Chapter 11, answered: “[W]e can’t speak                   1999, press release that Parker Homes’s bankruptcy was “not
for them and [debtor-in-possession] financing, whatever, they                anticipated” was a statement of present or historical fact, and
                                                                             therefore that the scienter required was recklessness. The
                                                                             district also found, applying Ivax, that the general import of
                                                                             the July 30, 1999, conference call was forward-looking,
    15
        To another question, Young explained that “it was a unique retail    although there was not meaningful cautionary language, and
mod el. [Parker H ome s] believed in high inventories and selling . . . .”   therefore all the statements in that conference call required the
J.A. at 441.
No. 01-1955                   Miller, et al. v. Champion     37    38   Miller, et al. v. Champion                   No. 01-1955
                                       Enterprises, et al.              Enterprises, et al.

scienter of actual knowledge. The district court did not look         As to the statements with regard to Parker Homes’s
further into the issue, however, as it found that scienter was     financial situation, they also are statements of present or
not sufficiently alleged in the CAC. As stated previously, the     historical fact, and therefore recklessness is the state of mind
district court erred both in its application of Ivax and in        required. These statements could also be somewhat
concluding that scienter was not sufficiently alleged in the       misleading, but they are not so obviously misleading as to be
CAC.                                                               reckless. The asserted facts are apparently consistent with the
                                                                   defendants’ belief that Parker Homes was financially sound,
   Plaintiff alleges that these statements were at least           at least up until a few months before the bankruptcy.
recklessly false or misleading in several ways. First, plaintiff   Ostensibly, the defendants thought that although Parker
contends that the statements characterized Parker Homes’s          Homes had a unique business plan that called for higher
bankruptcy filing as unanticipated and indicated that              inventory, it was still in decent shape financially, especially
Champion was unaware of Parker Homes’s financial                   considering that it had just recently been purchased by new
situation, when in fact Champion had been making strenuous         owners that invested heavily in the company. A potential
efforts to save Parker Homes from bankruptcy. He also              investor in Champion could have, however, interpreted these
claims that these statements were at least recklessly              statements to mean that the defendants believed that Parker
misleading in that they imply that Champion was uninformed         Homes’s financial situation was good all the way up to the
about Parker Homes’s reorganization plans, when Champion           bankruptcy declaration, when the defendants knew that Parker
was in fact engaged in discussions with Parker Homes and the       Homes was, at a minimum, suffering some financial
bankruptcy court to buy out Parker Homes. Lastly, plaintiff        difficulties such that it needed some emergency funding, even
asserts that these statements rejected suggestions that            if only temporarily.          Although this is a plausible
Champion purchase a large number of Parker Homes’s sales           understanding of those statements, it is no more compelling
lots, when in fact it had plans to do so and in fact did later     than the previous interpretation advanced above. Therefore,
purchase them.                                                     plaintiff’s allegations with regard to those statements do not
                                                                   raise the strong inference of recklessness required by the
   Once again, we find these arguments, although plausible, to     PSLRA.
be insufficient to support a strong inference of recklessness by
the defendants. Young’s statements about Parker Homes’s              Plaintiff also does not adequately assert that the defendants
bankruptcy were statements of present or historical fact, and      were knowingly or recklessly misleading in their statements
therefore recklessness with respect to their misleading nature     concerning their present contacts and future plans with Parker
is required. These comments were perhaps misleading, but           Homes in bankruptcy. Some of these statements are of
the evidence does not support a strong inference of                present or historical fact, while other are forward-looking, and
recklessness by the defendants with regard to their misleading     therefore different standards apply. Plaintiff’s argument is
nature.     The bankruptcy certainly was not entirely              unconvincing regardless of the standard applied, as the
unanticipated, yet there is also a fairly strong indication that   evidence does not show that the statements were made even
Champion thought it had struck a deal to prevent the Chapter       recklessly. Young explicitly stated in the conference call that
11 filing. This will be discussed more in the next section.        Champion was engaging in ongoing discussions with Parker
                                                                   Homes now that it was in Chapter 11. Admittedly, Young
                                                                   and another Champion employee also stated that Champion
No. 01-1955                  Miller, et al. v. Champion     39    40   Miller, et al. v. Champion                    No. 01-1955
                                      Enterprises, et al.              Enterprises, et al.

was “not inside on that track” and “flying blind,” but these        with potential retailers of what those prices might be and
statements must be taken in light of the other comments             it can only be worse. But that’s, by far, the majority of
confirming that they were engaging in discussions with              this charge . . . . The other piece of it, the plant closing,
Parker Homes since the Chapter 11 filing. Additionally,             is some of the costs of the opening of our retail, some of
although Champion employees had stated that Champion                the actual physical moving is—you know, the physical
currently had other plans for how it was going to relate to         moving of relocating these homes and, again, since
Parker Homes and how it was going to handle the                     they’re environmental, but that’s probably less than 15
repurchased inventory, the employees also stated very               percent of this total charge.
explicitly that they were “flexible” and would consider “all
options” with respect to Parker Homes. However, the               J.A. at 431. Plaintiff argues that this statement was recklessly
employees didn’t want to say too much because they were           misleading because it represents that the majority of the
unsure of how the Chapter 11 filing would affect all these        charge was related to future discounts necessary to resell the
issues. These statements by the defendants are not                homes, when defendants actually knew that a large percentage
significantly misleading, much less made with a reckless          of the charge was to write-off secret loans and undisclosed
disregard for the truth.                                          discounts.

  Under the heightened pleading requirements of the PSLRA,          We begin our analysis with whether this statement qualifies
only allegations that give rise to strong inference of scienter   for protection under the safe harbor provision of the PSLRA.
will survive a motion to dismiss. 15 U.S.C. § 78u-4(b)(2).        This statement is not forward-looking, as it is describing the
The allegations advanced by the plaintiff in this case do not     components of a present charge that Champion has decided to
give a sufficiently strong inference of recklessness with         take due to Parker Homes’s bankruptcy. Even if some of the
regard to the July 30, 1999, statements discussed above to        components are somewhat uncertain and dependent on future
survive such a motion.                                            events, it nevertheless describes Champion’s present
                                                                  calculation. Therefore, the scienter required with regard to
  Plaintiff also asserts that defendants were recklessly          this statement is recklessness.
misleading in the July 30 conference call when they made
statements about the nature of the $33.6 million charge             Plaintiff’s argument with respect to the statement about the
Champion planned to take during the third quarter of 1999.        $33.6 million charge is unavailing. Although Vencor requires
Specifically, plaintiff takes issue with the following            that when an issuer reveals information it has no duty to
statement:                                                        disclose, it cannot give half-truths, in this case Walter Young
                                                                  explicitly and repeatedly stated that he was not revealing all
  On the component question, the pre-tax is 33.6 million.         the details of the charge. In other words, Young’s statement
  And in there—here, I’m not going to break it apart for          was not recklessly misleading, because he told the investors
  you and I’ll tell you why. Primarily it’s because of the        that he was not “going to break it apart” and he didn’t “want
  discounting when we’re required to take the homes back,         to say any percentage,” but instead only gave them a rough
  what we may have to sell them for, and I don’t want to          sketch. Although the statement might have been somewhat
  say any percentage. We had to make that assumption              misleading, it was not so obviously so as to be reckless.
  obviously, what that is, because I don’t want to negotiate      Accordingly, we find that these facts do not give rise to the
No. 01-1955                   Miller, et al. v. Champion     41    42     Miller, et al. v. Champion                             No. 01-1955
                                       Enterprises, et al.                Enterprises, et al.

strong inference of recklessness that the PSLRA requires. See      given the probability of Parker Homes’s bankruptcy and
15 U.S.C. § 78u-4(b)(2).                                           defendants’ knowledge thereof prior to July 3, 1999,
                                                                   Champion was required to accrue at least $18 million in
5. The August 9, 1999, Form 10-Q                                   probable losses due to Parker Homes’s bankruptcy on its
                                                                   second quarter Form 10-Q released on August 9, 1999.
  The August 9, 1999, Form 10-Q did not recklessly violate
generally accepted accounting principles (“GAAP”), and                In order for us to judge the merits of the plaintiff’s claim,
therefore we hold that the plaintiff failed to state a claim       we need to be able to answer two questions with regard to
regarding this filing. The plaintiff contends that Champion’s      “probability.” First, we need to know what the word
second quarter Form 10-Q recklessly violated GAAP because          “probable” means in FAS No. 5. In other words, we need to
Champion was required by those accounting principles to            know how probable the contingency needs to be for a
accrue at least $18 million as a loss on the outstanding loans     company to be required to accrue a loss in the financial
and volume discounts owed by Parker Homes to Champion.             statements. There is no guidance in the record on how to
He further avers that the footnote disclosure that Champion        answer this question. Second, we need to know how probable
did make was insufficient under GAAP. The district court           Parker Homes’s bankruptcy actually was, a contingency that
dismissed this claim because it insufficiently alleged scienter,   is hard to assess after the fact.16
because the court found that Champion was not required to
accrue the loss in the second quarter, and because the footnote      It is difficult now, in retrospect, to assert that these
disclosure satisfied GAAP.                                         probabilities were such that it was reckless for the defendants
                                                                   to decide not to disclose more information or to accrue the
  Plaintiff bases his argument on Financial Accounting             $18 million loss in the second quarter of 1999. It is certainly
Standard (“FAS”) No. 5, which requires a company to accrue         a plausible inference that it was reckless. But the opposite is
an estimated loss if two conditions are met:                       also a plausible inference—that defendants thought they had
                                                                   avoided the bankruptcy, were not sure if they would be able
  a.   Information available prior to the issuance of the          to purchase Parker Homes’s assets in the bankruptcy
       financial statements indicates that it is probable that
       an asset had been impaired or a liability had been
       incurred at the date of the financial statements. It is          16
                                                                           In fact, muc h of the p laintiff’s argum ent in this case depends upon
       implicit in this condition that it must be probable         probab ility: the pro bab ility of the bankrup tcy, as well as the probability,
       that one or more future events will occur confirming        after the bankruptcy, that Champion would be able to buy all of Parker
       the fact of the loss.                                       Ho mes’s assets during the bankruptcy proceedings. The plaintiff is aided
                                                                   by hindsight, which reveals that the probability of both these events was
  b.   The amount of the loss can be reasonably estimated.         high, but this was not nearly as certain in advance. In substance,
                                                                   therefore, the plaintiff wishes for the court to accept that Champ ion’s
                                                                   attemp ts to prevent Parker Homes from having to enter into Chapter 11
J.A. at 60. The “date of the financial statements” is the last     were almost certainly doomed to fail, while likewise asserting that
day of the accounting period for which the financial               Champion’s negotiation with Parker Homes to purchase its assets in the
statements are presented, which in this case was the end of the    bankruptcy court proceedings were a fait accom pli. Thus, according to the
second quarter: July 3, 1999. Plaintiff’s argument is that,        plaintiff, defendants were reckless because they did not properly weigh
                                                                   the probability that these things would occur.
No. 01-1955                         Miller, et al. v. Champion           43     44    Miller, et al. v. Champion                    No. 01-1955
                                             Enterprises, et al.                      Enterprises, et al.

proceedings, and in general were not aware of the economic                         Additionally, when it did become clear that the loans and
downturn that was about to hit the manufactured housing                         discount money were impaired—after Parker Homes was put
market. After the Holding Companies declared bankruptcy                         into bankruptcy—Champion did take the proper steps under
on June 28, 1999, Champion engaged in discussions with GE                       GAAP. Since the bankruptcy occurred after the closing of the
Partners and Ardhouse to continue to provide funding to                         second quarter on July 3, 1999, and the defendants ostensibly
Parker Homes. These discussions resulted in a Letter of                         had good reasons to think—at least until after July 3—that
Intent on July 15, 1999, in which GE Partners and Champion                      they would be able to prevent Parker Homes’s bankruptcy,
agreed to provide the funding. Pursuant to this Letter of                       they were arguably not required to accrue the loss during the
Intent, Champion made an unsecured loan of $350,000 to                          second quarter. Instead, Champion followed the instructions
Parker Homes on July 16, 1999. Furthermore, as Ted Parker                       in GAAP and FAS No. 5 which provide that, if information
alleged in his complaint against GE Partners and Ardhouse,                      becomes available indicating that it is probable that an asset
                                                                                became impaired after the date of the financial
  At the time such bankruptcy proceedings were filed, T.                        statements—July 3, 1999—but before the statements were
  Parker had conducted telephone negotiations with senior                       filed on August 9, 1999, the financial statements should
  management at GE [Partners] to help structure a                               disclose the nature and estimated amount of the loss, but the
  continued operating plan for [Parker Homes]. T. Parker                        loss should not be accrued in those financial statements. This
  had agree to transfer . . . a significant portion of his stock                is what Champion did in its August 9, 1999, Form 10-Q,
  in [Parker Homes] to the Defendants and Champion for                          footnote 11.
  their input of additional capital into [Parker Homes],
  which would have allowed the continued operation of                              Both outcomes in this situation—bankruptcy or avoidance
  [Parker Homes]. T. Parker and Champion believed that                          of bankruptcy—appear to be somewhat probable, and FAS
  such an agreement was in place and then learned the next                      No. 5 does not specify the level of probability required to
  day that the Defendants had unnecessarily and with                            accrue a loss. Given two fairly plausible explanations of the
  improper motivation placed [Parker Homes] into                                facts, we find it difficult to say that plaintiff’s facts give rise
  bankruptcy.                                                                   to a strong inference of scienter, that plaintiff’s explanation
                                                                                is the “most plausible of competing inferences.” Vencor, 251
J.A. at 106. It is at least plausible based on these facts that                 F.3d at 553. We also find it difficult to say that, given the
the defendants had good reason to believe that the loans to                     level of knowledge that defendants had of Parker Homes’s
Parker Homes were not impaired because they had come to an                      financial situation, Champion’s actions in not accruing the
agreement whereby Parker Homes would be able to avoid                           $18 million loss in the second quarter of 1999 were an
Chapter 11. It also appears implausible that defendants would                   “extreme departure from the standards of ordinary care.”
have continued to advance unsecured loans of $2.25 million17                    Mansbach, 598 F.2d at 1025.
and $350,000 to Parker Homes if they had known that Parker
Homes was going to file a Chapter 11 petition.                                    Plaintiff’s reliance on the similarities between the passage
                                                                                of the Balanced Budget Act in Vencor and Parker Homes’s
                                                                                bankruptcy in this case is misplaced. In Vencor, the passage
   17
        The detailed allegations surroun ding this loan are found only in the
                                                                                of the Balanced Budget Act was a contingency outside the
SASC.                                                                           defendants’ control that was virtually certain to have a
No. 01-1955                    Miller, et al. v. Champion       45    46    Miller, et al. v. Champion                   No. 01-1955
                                        Enterprises, et al.                 Enterprises, et al.

negative impact on the defendants. See 251 F.3d at 556-58.            First, the district court held that the amendments provided in
Therefore, we held that there was a strong inference that             the SASC were futile. Second, the district court held that
defendants were reckless when they released favorable                 allowing the repeated filing of amended complaints would
earnings projections after they knew that the Balanced Budget         frustrate the purpose of the PSLRA.
Act was going to have a negative impact on those earnings,
and did not give adequate disclaimers about the possible                As a general matter, leave to amend “should be freely given
effects of the Act. Id. at 566. In this case, the contingency         when justice so requires.” Fed. R. Civ. P. 15(a). And “[i]n
that could have a negative impact on defendants was not               the securities litigation context, leave to amend is particularly
outside defendants’ control, and it appears at least plausible        appropriate where the complaint does not allege fraud with
that defendants reasonably believed that they had prevented           particularity.” Morse, 290 F.3d at 800. Denial of leave to
that contingency from taking place. Vencor is also                    amend may nonetheless be appropriate “where there is ‘undue
distinguishable from the present case in that there is no             delay, bad faith or dilatory motive on the part of the movant,
indication in the present case that the defendants profited           repeated failure to cure deficiencies by amendments
from their allegedly misleading statements. Unlike the                previously allowed, undue prejudice to the opposing party by
defendants in Vencor, there is no allegation in the present case      virtue of allowance of the amendment, futility of the
that the defendants undertook any insider trading—or any              amendment, etc.’” Id. (quoting Foman v. Davis, 371 U.S.
other means to profit—that might have led them to attempt to          178, 182 (1962)).
conceal Parker Homes’s bankruptcy during this period. Cf.
Vencor, 251 F.3d at 558.                                                 The district court held that amendment of the CAC with the
                                                                      SASC would be futile because the SASC did not better link
  In short, we do not believe that the plaintiff has pleaded          the allegations of scienter with any specific misstatements or
sufficient facts to give rise to the strong inference of scienter     omissions. We have already stated that the district court erred
that is required under the PSLRA. See 15 U.S.C. § 78u-                in so holding. As we stated in Morse, “[i]n the securities
4(b)(2). The evidence does not show that defendants acted             litigation context, leave to amend is particularly appropriate
with an extreme disregard for the standard of ordinary care in        where the complaint does not allege fraud with particularity.”
making these statements. See Mansbach, 598 F.2d at 1025.              290 F.3d at 800. However, we nonetheless agree with the
                                                                      district court that the facts alleged in the SASC do not give
E. The District Court Did Not Err in Denying Plaintiff’s              rise to the strong inference of scienter required under the
   Motion for Leave to File the SASC18                                PSLRA, and therefore are futile. See Morse, 290 F.3d at 800.
                                                                      The additional facts alleged in the SASC strengthen the
  The district court moreover did not err in denying the              inference that the defendants had some indication that Parker
plaintiff’s motion for leave to file the SASC. The district           Homes had surplus inventory and was going through some
court denied plaintiff leave to file the SASC on two grounds.         financial difficulties in the spring of 1999. The SASC also
                                                                      alleges that the defendants knew that Parker Homes’s
                                                                      bankruptcy was likely because Ted Parker had sent out
    18                                                                notices of default on Parker Homes’s sales lot lease
      This motion has been variously described as a motion to amend
and as motion for leave to file an amended compla int. They are in
                                                                      agreements, which were Parker Homes’s only unencumbered
substance the same motion.                                            asset. However, as the plaintiff also alleged, the defendants
No. 01-1955                    Miller, et al. v. Champion      47    48    Miller, et al. v. Champion                   No. 01-1955
                                        Enterprises, et al.                Enterprises, et al.

expressly disclosed that they believed there was excess              F. Supp. 2d 622 (E.D. Tex. 2001) (fourth amended
inventory in the market as well as their knowledge that Parker       complaint); Chu v. Sabratek Corp., 100 F. Supp. 2d 827, 844
Homes had excess inventory, which the defendants believed            & n.14 (N.D. Ill. 2000) (sixth amended complaint); In re
to be due to Parker Homes’s unique business plan. As the             Southern Pac. Funding Corp. Sec. Lit., 83 F. Supp. 2d 1172,
facts alleged by the plaintiff also imply, there is at least a       1174 (D. Or. 1999) (fourth amended complaint). He also
plausible inference that the defendants believed they had            cites a Third Circuit case that allowed amendment despite the
averted the Parker Homes bankruptcy. The additional                  PSLRA, even after the final judgment:
allegations in the SASC thus do not give rise to the strong
inference of recklessness required under the PSLRA, and are            Although we are reluctant to allow amendment of a
therefore futile.                                                      pleading at this stage of the proceedings, the plaintiffs
                                                                       were precluded from engaging in discovery in the
   The district court also correctly held that allowing repeated       District Court. Without discovery, plaintiffs had no way
filing of amended complaints would frustrate the purpose of            to obtain the meeting minutes other than by
the PSLRA. To come to this conclusion, the district court              happenstance. We will not add to the strict discovery
first had to decide whether the PSLRA restricts Rule 15(a) of          restrictions in the Private Securities Litigation Reform
the Federal Rules of Civil Procedure. Rule 15(a) provides              Act (“PSLRA”) by narrowly construing Rule 15 in this
that “[a] party may amend the party’s pleading only by leave           case, even at this late stage in the litigation. Given the
of court or by written consent of the adverse party; and leave         high burdens the PSLRA placed on plaintiffs, justice and
should be freely given when justice so requires.” The                  fairness require that the plaintiffs before us be allowed an
PSLRA, on the other hand, states that “[i]n any private action         opportunity to amend their complaint to include
arising under this chapter, the court shall, on the motion of          allegations relating to the newly discovered Board
any defendant, dismiss the complaint if the [pleading]                 meeting minutes.
requirements . . . are not met.” 15 U.S.C. § 78u-4(b)(3)(A).
The district court found that the purpose of the PSLRA’s             Werner v. Werner, 267 F.3d 288, 297 (3d Cir. 2001). Werner
heightened pleading requirements and stay of discovery were          is the most persuasive authority for requiring the district court
to prevent “harassing strike suits filed the moment a                to allow an amended pleading.
company’s stock price falls,” and concluded that the PSLRA
“could not achieve this purpose if plaintiffs were allowed to          While the Werner opinion had not been issued at the time
amend and amend until they got it right.” Since the plaintiff        of the district court’s denial of the motion to permit an
failed to meet the pleading requirements, the district court         amended complaint, the district court nonetheless responded
concluded that in order to enforce the purpose of the PSLRA,         to a similar argument by plaintiff:
it must dismiss the CAC with prejudice.
                                                                       In this case, it appears that plaintiffs are contending that
  Plaintiff cites several district court opinions that allowed for     since discovery procedures are not available to them, that
repeated amendments to complaints despite motions to                   a court must be lenient in allowing amendments to
dismiss by the defendants. See In re Livent, Inc. Noteholders          pleadings. Contending that Rule 15 permits this, they
Sec. Lit., 174 F. Supp. 2d 144, 148 (S.D.N.Y. 2001) (third             purposely seek to circumvent the [PSLRA’s] strict
amended complaint); McNamara v. Bre-X Minerals, Ltd., 197              requirements preventing discovery. But this is precisely
No. 01-1955                   Miller, et al. v. Champion     49   50    Miller, et al. v. Champion                        No. 01-1955
                                       Enterprises, et al.              Enterprises, et al.

  the device that Congress intended to be used, i.e., to            plaintiffs were liberally permitted leave to amend again;
  prevent suits in which a foundation for the suit can not be       this is particularly true where, as here, there is a stark
  pleaded.                                                          absence of any suggestion by the plaintiffs that they have
                                                                    developed any facts since the action was commenced
  The stay of discovery and the heightened pleading                 which would, if true, cure the defects in the pleadings
  standards are separate and distinct, yet complimentary            under the heightened requirements of the PSLRA.
  mechanisms. The stay of discovery operates to prevent
  plaintiffs with baseless claims from squeezing a nuisance       In re Nahc, Inc. Sec. Litig., 306 F.3d 1314, 1332-333 (3d Cir.
  settlement from an innocent defendant. The pleading             2002) (quoting In re Nahc, Inc. Sec. Litig., No. 00-4020, 2001
  requirement is more than simply a line the plaintiffs must      U.S. Dist. LEXIS 16754, at *81-82 (E.D. Pa. Oct. 17, 2001)).
  cross to set to discovery; it is the heart of the [PSLRA].      While it is true that the Third Circuit was reviewing its
  This stringent requirement operates to discourage               district court’s decision only for abuse of discretion,19 it is
  baseless suits altogether.         It evinces Congress’s        clear that it was giving its approval to the district court’s legal
  acknowledgment of the burden an allegation of securities        interpretation of the PSLRA, an interpretation that is subject
  fraud places on the innocent defendant even without             to de novo review.
  discovery. The [PSLRA] requires a uniform pleading
  standard; this standard is meaningless if judges on a case-       Plaintiff also contended during oral argument that our
  by-case basis grant leave to amend numerous times.              recent holding in Morse, 290 F.3d 795, requires a reversal of
                                                                  the district court’s decision denying plaintiff further leave to
Since Werner was decided, the Third Circuit has specifically      amend his complaint. In Morse we held that, despite the
endorsed this reasoning, quoting with approval District Judge     plaintiffs’ “gamesmanship” in failing to amend their
Reed’s reliance upon the district court’s opinion in this case:   complaint, the plaintiffs’ actions did not amount to bad faith
                                                                  and the delay alone did not justify denial of leave to amend.
  The PSLRA’s stay of discovery procedures was intended           290 F.3d at 800. Additionally, in that case it did not appear
  by Congress to protect innocent defendants from having          that the defendants would be prejudiced by allowing further
  to pay nuisance settlements in securities fraud actions in      amendment. Id. at 800-01. Notably however, in Morse there
  which a foundation for the suit cannot be pleaded; rather       was no discussion of the heightened pleading requirements of
  than lead to the conclusion that plaintiffs should receive      the PSLRA, or even of the PSLRA generally. In light of
  more leniency in amending their pleadings, the stay of          those requirements, we think it is correct to interpret the
  discovery procedures adopted in conjunction with the            PSLRA as restricting the ability of plaintiffs to amend their
  heightened pleading standards under the PSLRA is a              complaint, and thus as limiting the scope of Rule 15(a) of the
  reflection of the objective of Congress “to provide a filter    Federal Rules of Civil Procedure.             Morse is also
  at the earliest stage (the pleading stage) to screen out        distinguishable from the present case in that there was no
  lawsuits that have no factual basis.” [Champion Enters.,
  145 F.Supp.2d] at 874 (quoting Selected Bill Provisions
  of the Conference Report to H.R. 1058/§ 240, 141 Cong.               19
  Rec. § 19152 (daily ed. Dec. 22, 1995)). This objective                This appears to be due to some discrepancy on the standard of
                                                                  review applied to the denial of a motion to amend between the Third and
  would be thwarted if, considering the history of this case,     the Sixth Circuits.
No. 01-1955                    Miller, et al. v. Champion      51
                                        Enterprises, et al.

finding in that case that amendment would be futile, while in
this case allowing the plaintiff to file the SASC would not
overcome the inadequacies of the CAC. We therefore find
that our holding in Morse does not dispose of the issue at
hand.
   We agree with the district court that the purpose of the
PSLRA would be frustrated if district courts were required to
allow repeated amendments to complaints filed under the
PSLRA. We also agree, although on other grounds, that the
proposed amendments in the SASC would be futile. The
district court was within its discretion in refusing the plaintiff
leave to file the SASC, and in light of our holding that filing
of the SASC would be futile—although on alternative
grounds than those found by the district court—we AFFIRM
the judgment of the district court dismissing this case.
                       CONCLUSION
  For the foregoing reasons, we AFFIRM the judgment of the
district court dismissing this case.
