            RECOMMENDED FOR FULL-TEXT PUBLICATION
                 Pursuant to Sixth Circuit Rule 206                           2    PR Diamonds, et al. v. Chandler, et al.      No. 02-3921
         ELECTRONIC CITATION: 2004 FED App. 0116P (6th Cir.)
                     File Name: 04a0116p.06                                                       _________________
                                                                                                       COUNSEL
UNITED STATES COURT OF APPEALS
                                                                              ARGUED: William R. Jacobs, STRAUSS & TROY,
                   FOR THE SIXTH CIRCUIT                                      Cincinnati, Ohio, for Appellants. Robert A. Pitcairn, Jr.,
                     _________________                                        KATZ, TELLER, BRANT & HILD, Cincinnati, Ohio, Robert
                                                                              N. Hochman, SIDLEY, AUSTIN, BROWN & WOOD,
 PR DIAMONDS, INC., et al.,       X                                           Chicago, Illinois, for Appellees. ON BRIEF: Richard S.
          Plaintiffs-Appellants, -                                            Wayne, STRAUSS & TROY, Cincinnati, Ohio, for
                                   -                                          Appellants. Robert A. Pitcairn, Jr., KATZ, TELLER,
                                   -  No. 02-3921                             BRANT & HILD, Cincinnati, Ohio, Robert N. Hochman,
            v.                     -                                          Jeffrey R. Tone, Jeffrey C. Sharer, SIDLEY, AUSTIN,
                                    >                                         BROWN & WOOD, Chicago, Illinois, for Appellees.
                                   ,
 JOHN P. CHANDLER, et al.,         -
        Defendants-Appellees. -                                                                   _________________
                                  N                                                                   OPINION
      Appeal from the United States District Court                                                _________________
     for the Southern District of Ohio at Cincinnati.
   No. 01-00012—Sandra S. Beckwith, District Judge.                             GORDON J. QUIST, District Judge. Plaintiffs-appellants
                                                                              in this securities fraud case are investors in the stock of
                   Argued: December 12, 2003                                  Intrenet, Inc. ("Intrenet" and the "Company"). Defendants-
                                                                              appellees are two Intrenet officers (the "Individual
                Decided and Filed: March 3, 2004*                             Defendants") and Intrenet's outside auditor, Arthur Andersen
                                                                              LLP ("Andersen"). Plaintiffs' amended consolidated class
Before: COLE and CLAY, Circuit Judges; QUIST, District                        action complaint (the "Complaint") alleged that the Individual
                     Judge.**                                                 Defendants and Andersen committed securities fraud in
                                                                              violation of Section 10(b) of the Securities Exchange Act of
                                                                              1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated by the
                                                                              Securities and Exchange Commission (the "SEC"), 17 C.F.R.
                                                                              § 240.10b-5. In addition, Plaintiffs alleged that the Individual
                                                                              Defendants were liable as control persons under Section 20(a)
                                                                              of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).
    *                                                                         The district court dismissed the Section 10(b) and Rule 10b-5
      This decision was originally issued as an “unpublished decision”
filed on M arch 3 , 2004 . On M arch 29, 2004 , the court designated the      claims for lack of specific allegations giving rise to a strong
opinion as one recommend ed for full-text publication.                        inference of scienter, and later granted judgment on the
    **
                                                                              pleadings on the Section 20(a) claim for failure to state a
      The Honorab le Gordon J. Q uist, United States District Judge for the   predicate securities fraud claim against the Company.
W estern District of Michigan, sitting by designation.

                                    1
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      3    4    PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

Plaintiffs now appeal the district court's decisions. For the     financial statements and press releases over the course of the
reasons set forth below, we affirm.                               class period. The class period ends with Intrenet's press
                                                                  release dated October 13, 2000, in which the Company
                       I. Background                              announced that it was conducting a review of the accuracy of
                                                                  its financial statements, focusing on the Advanced
   Intrenet was an Indiana corporation with its executive         Distribution System ("ADS") subsidiary. The press release
offices and principal place of business in Milford, Ohio. The     stated that pending the completion of the review, Intrenet's
Company operated as a holding company for four truckload          1998 and 1999 year-end financial statements should not be
carrier subsidiaries (Roadrunner Trucking, Inc., Roadrunner       relied upon, and that the Company expected to reduce its net
Distribution Services, Inc., Eck Miller Transportation Corp.,     income by approximately $1.3 million. NASDAQ trading in
and Advanced Distribution System, Inc.) and a brokerage           Intrenet stock was halted on that same day, never to resume.
logistics operation (INET Logistics, Inc.).          Intrenet's   On October 18, 2000, Intrenet issued another press release
consolidated financial statements included all five of these      indicating that the internal audit showed $1.3 million in
subsidiaries. A publicly-held company, Intrenet was               unrecorded expenses at ADS which could result in
registered with the Securities Exchange Commission and its        restatements of Intrenet's 1998, 1999, and first and second
stock traded on the NASDAQ National Market System.                quarter 2000 financial statements. The press release also
Formed in 1983, Intrenet was once one of the largest public       stated that the individual believed to be responsible for the
flatbed carriers in North America.                                accounting issues was no longer with the Company.
  The two Individual Defendants, John P. Chandler and Eric           On January 2, 2001, Intrenet announced that effective
C. Jackson, were Intrenet officers and directors. Chandler        immediately it and its subsidiary trucking companies would
was President and Chief Executive Officer since June 12,          cease operations, lay off most employees, and direct the
2000. Prior to that time, Chandler was, at all relevant times,    liquidation of assets. Intrenet said that after a thorough
Executive Vice President and Chief Operating Officer of the       review of the Company's business, industry dynamics, and all
Company. Throughout the class period asserted in this             available options, it was determined that issues related to fuel
action, Chandler was also a director of Intrenet. Jackson was     prices, driver retention, and the unwillingness of many
Chairman of Intrenet's Board of Directors from June 12,           customers to accept higher rates would preclude the Company
2000, to December 19, 2000. Prior to his appointment as           from achieving operational profitability in the foreseeable
Chairman of the Board, Jackson was President and Chief            future. Also, Intrenet noted that it lacked adequate capital to
Executive Officer. Jackson was also a director of the             execute its business plan. CEO Chandler further stated that
Company since 1993. Defendant Arthur Andersen LLP                 the previously announced accounting issues relating to the
served as Intrenet's outside auditor. In that capacity,           ADS subsidiary had little impact on the decision to suspend
Andersen audited the Company's financial statements for the       operations and liquidate. On January 19, 2001, Intrenet filed
years ending December 31, 1998, and December 31, 1999.            for Chapter 11 bankruptcy protection.
  The alleged 20-month class period begins with an Intrenet         Intrenet stockholder Hirsch Seidman initiated this action in
press release issued on February 19, 1999, reporting the          January 2001 in the United States District Court for the
Company's financial results for the fourth quarter and year       Southern District of Ohio. Seidman sued both individually
ending December 31, 1998. Intrenet issued additional              and on behalf of all other similarly situated public investors
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.           5   6      PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

who purchased Intrenet common stock during the class period                 (c) the financial statements failed to account for
(February 19, 1999, through October 13, 2000) and incurred                uncollectible receivables and understated receivable
losses when the stock lost value as a result of the October 13,           reserves;
2000, press release and subsequent collapse of the Company.
In June 2001, the district court appointed P.R. Diamonds, Inc.              (d) the financial statements failed to record an
as lead plaintiff. Plaintiffs filed an amended consolidated               impairment in the value of Intrenet's assets; and
class action complaint (the "Complaint") on August 17, 2001,
to add Andersen as a defendant. Pursuant to this Complaint,                 (e) the financial statements failed to fully disclose the
Plaintiffs asserted claims under 15 U.S.C. § 78j(b) ("Section             significant risks and uncertainties associated with
10(b)") and 17 C.F.R. § 240.10b-5 ("Rule 10b-5") against the              deficiencies in the company's internal control and
Individual Defendants and Andersen, as well as claims of                  accounting system; and
"control person" liability under 15 U.S.C. § 78t(a) ("Section
20(a)") against the Individual Defendants.                                (3) Intrenet's financial statements, which incorporated the
                                                                          financial results of its five subsidiaries, artificially
   Plaintiffs' Complaint alleges that Intrenet's financial                inflated the net income and earnings of its ADS
statements and press releases during the asserted class period            subsidiary.
contained material misrepresentations and omissions masking
the Company's true financial condition, making them false                In addition to the aforementioned purported omissions and
and misleading. According to Plaintiffs, these fraudulent             misrepresentations, the Complaint alleges that Intrenet's
financial statements and press releases inflated the Company's        public statements included false and misleading language
financial results and growth, leading to artificial increases in      painting an unduly rosy picture of the Company's financial
its stock price. The district court accurately summarized the         situation. For example, Intrenet claimed it was making "solid
Complaint's allegations in the following manner:                      strides" and "positive progress" at the time when Plaintiffs
                                                                      allege losses were far in excess of those reported. Intrenet
  (1) Intrenet's financial results and growth were artificially       also announced a plan to increase productivity and eliminate
  inflated;                                                           expenses and liabilities when Plaintiffs allege it was
                                                                      artificially inflating its earnings.
  (2) Although Intrenet represented that its financial
  statements were prepared in compliance with generally                  With respect to the Individual Defendants, the Complaint
  accepted accounting principles ("GAAP"), they were not:             asserts that as top-level Intrenet executives and control
                                                                      persons, they knew of or recklessly disregarded the alleged
    (a) the financial statements failed to reconcile inter-           misrepresentations and omissions. With respect to Intrenet's
  company transactions among Intrenet's five subsidiaries;            outside auditor, the Complaint posits that Andersen issued
                                                                      false and misleading audit reports stating that Intrenet's
    (b) the financial statements failed to record day-to-day          financial statements fairly represented the Company's
  operating expenses;                                                 financial condition and complied with GAAP. Plaintiffs also
                                                                      allege that Andersen failed to conduct its audits in compliance
                                                                      with generally accepted auditing standards ("GAAS").
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.        7    8      PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

   On October 10, 2001, the Individual Defendants filed a               (2) Whether Plaintiffs' Section 20(a) claims against the
motion to dismiss Plaintiffs' case under Federal Rules of Civil         Individual Defendants can proceed despite the absence of
Procedure 9(b) and 12(b)(6). Andersen filed its motion to               the Company as a defendant.
dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6)
on October 12, 2001. On November 21, 2001, Plaintiffs filed             (3) Whether the district court erred in dismissing
a consolidated memorandum opposing Defendants' motions                  Plaintiffs' Section 10(b) and Rule 10b-5 claims against
to dismiss and, in the alternative, requesting leave to amend           Defendant Arthur Andersen on the basis that Plaintiffs'
their Complaint. The district court issued an order on                  Complaint does not adequately allege that Andersen
February 26, 2002, dismissing Plaintiffs' claims under Section          acted with scienter.
10(b) and Rule 10b-5 against the Individual Defendants and
Andersen for lack of specific allegations giving rise to a              (4) Whether the district court erred in dismissing the case
strong inference of scienter as required by the Private                 without affording Plaintiffs the opportunity to amend
Securities Litigation Reform Act of 1995, as amended, 15                their Complaint.
U.S.C. § 78u-4 (the "PSLRA"). However, the district court
denied the motion to dismiss the Section 20(a) control person                           II. Standard of Review
claim against the Individual Defendants on the grounds then
asserted. On May 23, 2003, the Individual Defendants filed             This Court reviews de novo a district court's dismissal of a
a motion for judgment on the pleadings under Federal Rule of        complaint under Fed. R. Civ. P. 12(b)(6). See Valassis
Civil Procedure 12(c) on the remaining Section 20(a) claim.         Communications v. Aetna Cas. & Sur. Co., 97 F.3d 870, 873
The district court granted the motion on July 17, 2002,             (6th Cir. 1996). The same de novo standard applies to review
concluding that Plaintiffs failed to state an underlying            of a district court's judgment on the pleadings under Fed. R.
securities fraud claim against Intrenet as required by Section      Civ. P. 12(c). See Ziegler v. IBP Hog Market, Inc., 249 F.3d
20(a), denying as moot Plaintiffs' motion for class                 509, 511-12 (6th Cir. 2001). The Court must accept as true
certification, and ordering the action closed. In neither of its    "well-pleaded facts" set forth in the complaint. Morgan v.
opinions did the district court discuss granting Plaintiffs leave   Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987).
to amend. On August 4, 2002, Plaintiffs filed a timely notice       Construing the complaint in a light most favorable to the
of appeal with this Court.                                          plaintiffs, we must determine whether the plaintiffs
                                                                    undoubtedly can prove no set of facts in support of their
  In this appeal, Plaintiffs present the following issues for       claims that would entitle them to relief. Mayer v. Mylod, 988
review:                                                             F.2d 635, 637 (6th Cir. 1993). Finally, we review a district
                                                                    court's denial of leave to amend for abuse of discretion, Miller
  (1) Whether the district court erred in dismissing                v. Champion Enters., Inc., 346 F.3d 660, 671 (2003), except
  Plaintiffs' Section 10(b) and Rule 10b-5 claims against           in cases where the district court bases its decision on the legal
  the Individual Defendants on the basis that Plaintiffs'           conclusion that an amended complaint could not withstand a
  Complaint does not adequately allege that the Individual          motion to dismiss, where the review is de novo. Monette v.
  Defendants acted with scienter.                                   Elec. Data Sys. Corp., 90 F.3d 1173, 1188 (6th Cir. 1996).
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.        9    10        PR Diamonds, et al. v. Chandler, et al.              No. 02-3921

                       III. Discussion                                1.       Governing Law - Pleading Standards
A. Section 10(b) and Rule 10b-5 Claims Against the                    Section 10(b)1 of the Exchange Act and Rule 10b-52
   Individual Defendants                                            promulgated thereunder prohibit "fraudulent, material
                                                                    misstatements or omissions in connection with the sale or
   Plaintiffs first contend that the district court erred when it   purchase of a security." Morse v. McWhorter, 290 F.3d 795,
dismissed the Section 10(b) and Rule 10b-5 claims against the
Individual Defendants on the basis that the Complaint lacked
specific allegations giving rise to a strong inference of                1
scienter, as required under the PSLRA. Plaintiffs challenge                  Section 10 provides as follows:
the district court's holding, arguing that the allegations of the
                                                                         It shall be unlawful for any person, directly or indirectly, by the
Complaint, when considered in their totality, do in fact give            use of any m eans o r instrumentality of interstate commerce or of
rise to a strong inference that the Individual Defendants had            the mails, or of any facility of any national securities exchange -
either actual knowledge of, or at least recklessly disregarded,               ....
the alleged material misrepresentations and omissions                         (b) To use or emp loy, in connection with the purchase
contained in Intrenet's statements to the investing public. As                or sale of any security registered on a national
                                                                              securities exchange or any security not so registered,
we explain in the discussion that follows, we hold that                       any manipulative or deceptive device or contrivance in
Plaintiffs fail to meet the standards for pleading scienter on                contravention of such rules and regulations as the
the part of the Individual Defendants and, therefore, the                     Commission may prescribe as necessary or appropriate
Section 10(b) and Rule 10b-5 claims against them were                         in the public interest or for the pro tection of investors.
properly dismissed.
                                                                    15 U.S.C. §7 8j.

                                                                         2
                                                                          Rule 10b-5, prescribed by the SEC under Section 10(b), provides as
                                                                    follows:

                                                                         It shall be unlawful for any p erson , directly o r indirectly, by the
                                                                         use of any means or instrumentality of interstate commerce, or
                                                                         of the mails or of an y facility of any national securities
                                                                         exchange,

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

                                                                         (b) To make any untrue statem ent of a m aterial fact or to o mit to
                                                                         state a material fact necessary in order to make the statements
                                                                         made, in the light of the circumstances under which they were
                                                                         made, not misleading, or

                                                                         (c) To engage in any act, practice, or course of business which
                                                                         operates or would operate as a fraud or deceit upon any person,
                                                                         in connection with the p urchase or sa le of any se curity.

                                                                    17 C.F.R. § 240.10b-5.
No. 02-3921        PR Diamonds, et al. v. Chandler, et al.             11     12    PR Diamonds, et al. v. Chandler, et al.             No. 02-3921

798 (6th Cir. 2002). In order to state a claim pursuant to                    Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (en
Section 10(b) and Rule 10b-5, "a plaintiff must allege, in                    banc). Recklessness is defined as "highly unreasonable
connection with the purchase or sale of securities, the                       conduct which is an extreme departure from the standards of
misstatement or omission of a material fact, made with                        ordinary care. While the danger need not be known, it must
scienter, upon which the plaintiff justifiably relied and which               at least be so obvious that any reasonable man would have
proximately caused the plaintiff's injury. Hoffman v.                         known of it." Mansbach v. Prescott, Ball & Turben, 598 F.2d
Comshare, Inc. (In re Comshare, Inc. Secs. Litig.), 183 F.3d                  1017, 1025 (6th Cir. 1979) (quoted in Miller, 346 F.3d at
542, 548 (6th Cir. 1999). Adding to the Federal Rule of Civil                 672). Recklessness is "a mental state apart from negligence
Procedure 9(b) requirement that fraud allegations be stated                   and akin to conscious disregard." Comshare, 183 F.3d at 550.
with particularity, the PSLRA requires that the complaint                     See also Id. at 550 n.7 ("As we have observed, federal
"specify each statement alleged to have been misleading, the                  appellate courts have long held the view that, for the purposes
reason or reasons why the statement is misleading, and, if an                 of securities fraud, 'recklessness' that is far from negligence
allegation regarding the statement or omission is made on                     and closer to a 'lesser form of intent' constitutes scienter.")
information and belief, the complaint shall state with                        (quoting Sanders v. John Nuveen & Co., Inc., 554 F.2d 790,
particularity all facts on which that belief is formed."                      793 (7th Cir. 1977)).
15 U.S.C. § 78u-4(b)(1).
                                                                                 Next, we examine the special requirements for pleading
   The appeal before us centers on whether the Complaint                      scienter in federal securities fraud cases such as this. As with
adequately pleads the scienter element of a Section 10(b) and                 all fraud claims, Federal Rule of Civil Procedure 9(b) applies
Rule 10b-5 claim. In reviewing the district court's decision                  to pleading a defendant's state of mind, allowing that
dismissing the Complaint, we must first examine the meaning                   "[m]alice, intent, knowledge, and other condition of mind of
of "scienter" in the securities fraud setting. The Supreme                    a person may be averred generally." However, Congress
Court has defined "scienter" as "a mental state embracing                     amended the Securities Exchange Act of 1934 through
intent to deceive, manipulate, or defraud." Ernst & Ernst v.                  passage of the PSLRA, heightening the standard for pleading
Hochfelder, 425 U.S. 185, 193 n.12, 96 S. Ct. 1375, 1381                      scienter in a securities fraud case:
n.12 (1976). In securities fraud claims based on statements of
present or historical fact - such as the claims Plaintiffs bring                In any private action arising under this title in which the
in this case - scienter consists of knowledge or recklessness.3                 plaintiff may recover money damages only on proof that
                                                                                the defendant acted with a particular state of mind, the
                                                                                complaint shall, with respect to each act or omission
    3
                                                                                alleged to violate this title, state with particularity facts
      Plaintiffs in this case do not allege forward-looking stateme nts, to     giving rise to a strong inference that the defendant acted
which the PSL RA applies different scienter requirements pursuant to a          with the required state of mind.
safe harbor provision. Forward-looking statements include projections
and estimates of a company's future economic performance, including
statements related to revenues, earnings per share, income , dividends,
capital expenditures, capital structure, and other financial items.
15 U.S.C. § 78u-5(i)(1). As to fo rward -looking statem ents accompanied
by meaningful cautionary language, the P SLR A makes the state of mind
irrelevant. 15 U.S.C. § 78u-5(c)(1)(A). In the case of forward-looking        the required state of mind is actual knowledge of the statements' false or
statements that are not accompanied by meaningful cautionary language,        misleading nature. 15 U.S.C. § 78 u-5(c)(1)(B).
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.       13   14     PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

15 U.S.C. § 78u-4(b)(2) (emphasis added). The PSLRA                  We have previously stated that the factors enumerated in
provides that if a plaintiff does not meet this requirement, a     the following list, while not exhaustive, are probative of
court may, on any defendant's motion, dismiss the complaint.       scienter in securities fraud actions:
See 15 U.S.C. § 78u-4(b)(3). "As courts have observed, the
PSLRA did not change the scienter that a plaintiff must prove        (1) insider trading at a suspicious time or in an unusual
to prevail in a securities fraud case but instead changed what       amount; (2) divergence between internal reports and
a plaintiff must plead in his complaint in order to survive a        external statements on the same subject; (3) closeness in
motion to dismiss." Comshare, 183 F.3d at 548-49 (citation           time of an allegedly fraudulent statement or omission and
omitted).                                                            the later disclosure of inconsistent information;
                                                                     (4) evidence of bribery by a top company official;
  As the foregoing authorities make clear, a plaintiff may           (5) existence of an ancillary lawsuit charging fraud by a
survive a motion to dismiss by pleading with particularity           company and the company's quick settlement of that suit;
facts giving rise to a strong inference that the defendant acted     (6) disregard of the most current factual information
with knowledge or recklessness. In other words, not only             before making statements; (7) disclosure of accounting
must the complaint make particular factual allegations, but          information in such a way that its negative implications
the inference of scienter which those allegations generate           could only be understood by someone with a high degree
must be strong. In Helwig, we provided a definitive                  of sophistication; (8) the personal interest of certain
explanation of the meaning of a "strong inference":                  directors in not informing disinterested directors of an
                                                                     impending sale of stock; and (9) the self-interested
  Inferences must be reasonable and strong - but not                 motivation of defendants in the form of saving their
  irrefutable. "Strong inferences" nonetheless involve               salaries or jobs.
  deductive reasoning; their strength depends on how
  closely a conclusion of misconduct follows from a                Helwig, 251 F.3d at 552 (citing Greebel v. FTP Software,
  plaintiff's proposition of fact. Plaintiffs need not             Inc., 194 F.3d 185, 196 (1st Cir. 1999)).
  foreclose all other characterizations of fact, as the task of
  weighing contrary accounts is reserved for the fact                2.    The Complaint Fails to Raise a Strong Inference of
  finder. Rather, the "strong inference" requirement means                 Scienter
  that plaintiffs are entitled only to the most plausible of
  competing inferences.                                               Plaintiffs contend that the district court erred in concluding
                                                                   that the Complaint failed to allege facts raising a strong
251 F.3d at 553. The PSLRA does not change the Rule                inference of the Individual Defendants' scienter. The gist of
12(b)(6) maxim that when an allegation is capable of more          Plaintiffs' argument is that the district court mistakenly
than one inference, it must be construed in the plaintiff's        viewed the allegations of the Complaint in a piecemeal
favor. Id. ("Our willingness to draw inferences in favor of the    fashion, rather than considering the totality of the
plaintiff remains unchanged by the PSLRA."). However, the          circumstances pled. As Plaintiffs correctly point out, this
"strong inference" requirement means that a plaintiff is           Court employs a totality of the circumstances analysis
entitled to only the most plausible of competing inferences.       whereby the facts argued collectively must give rise to a
Miller, 346 F.3d at 673.                                           strong inference of at least recklessness. See In re Telxon
                                                                   Corp. Secs. Litig., 133 F. Supp. 2d 1010, 1026 (N.D. Ohio
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      15    16    PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

2000) ("Thus, the Sixth Circuit employs a form of 'totality of     of the alleged accounting irregularities at Intrenet, the
the circumstances' analysis; this Court, accordingly, declines     Company's financial statements and press releases materially
to examine plaintiffs' allegations in piecemeal fashion and,       misrepresented Intrenet's true state of financial affairs. The
will instead, assess them collectively to determine what           issue before us is limited to the scienter inquiry: that is,
inferences may be drawn therefrom.") (citing Comshare, 183         whether Plaintiffs have met their burden of pleading specific
F.3d 542 at 549-52).                                               facts which, when viewed together, persuade us that the most
                                                                   plausible conclusion to draw is that the Individual Defendants
  Reading the Complaint in its entirety, Plaintiffs maintain,      must or should have known about the problems and
establishes a strong inference that throughout the class period    nevertheless knowingly or recklessly made the allegedly
the Individual Defendants knew of serious accounting               misleading public statements. While the allegations no doubt
improprieties at Intrenet and the effect such improprieties        merit drawing some inference of scienter, that is not enough.
were having on the Company's financial condition, or were          The PSLRA requires the Complaint to establish a strong
reckless in not knowing or in disregarding this information.       inference - the most plausible of competing inferences - that
Furthermore, Plaintiffs contend that after the outside             the Individual Defendants acted at least recklessly, meaning
consultant discovered the accounting improprieties, the            that their states of mind were reflected in highly unreasonable
inference of scienter is not merely strong, but virtually          conduct constituting an extreme departure from the standards
inescapable. Despite this awareness, Plaintiffs argue, the         of ordinary care so obvious that any reasonable person would
Individual Defendants continued to make materially false and       have known of it. Here, the Complaint fails.
misleading statements and omissions in Intrenet's financial
statements and press releases.                                        In the following discussion, we consider each allegation
                                                                   Plaintiffs offer in their effort to plead scienter. As we have
   Specifically, Plaintiffs argue that a strong inference of the   noted before, "recklessness in securities fraud is an untidy,
Individual Defendants' scienter arises when viewing in             case-by-case concept." Helwig, 251 F.3d at 551 (citing
totality the following allegations in the Complaint: the nature    Mansbach, 598 F.2d at 1025). "This necessarily involves a
and magnitude of the accounting improprieties at Intrenet;         sifting of allegations in the complaint." Id. Accordingly, we
other "red flags" signaling the accounting errors; the             sift Plaintiffs' allegations individually and then aggregate the
Individual Defendants' access to Intrenet's financial              nuggets of inference they generate, concluding in the end no
information by virtue of their positions at the Company; the       strong inference arises.
fact that the accounting improprieties occurred in areas touted
as the Company's key areas of focus; the Individual                     (a)   Accounting Improprieties
Defendants' motives and opportunities to commit fraud; the
hiring of an outside consultant; and the outside consultant's         Plaintiffs contend that the Complaint's allegations of
discovery of internal control deficiencies and accounting          Intrenet's improper accounting practices and internal control
irregularities.                                                    deficiencies comprise circumstantial evidence supporting a
                                                                   strong inference of the Individual Defendants' scienter.
  Our examination of each of these clusters of allegations         Plaintiffs suggest that none of these accounting "maneuvers"
shows that, even viewed collectively, they fail to adequately      had any facially valid purpose and, therefore, they support the
plead scienter on the part of the Individual Defendants. To        inference that the Individual Defendants harbored an intent to
reiterate, we do not in this Opinion address whether, in light     artificially inflate the Company's operating results. The
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      17    18   PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

alleged accounting improprieties include: failure to reconcile     alleged that accounting violations caused the company to
inter-company transactions; understatement of day-to-day           report aggregate "record" net income of $18.9 million over
operating expenses; accounting for uncollectible receivables       three years, when in fact the company incurred a net loss for
and understatement of Intrenet's accounts receivable reserve;      those years of more than $36 million. Id. at 636. In addition,
failure to record an impairment in the value of assets; failure    the company overstated its revenues over the same period by
to disclose significant risks and uncertainties; arbitrarily       a total of $66 million. Id. After reiterating the maxim that
applying cash receipts against the oldest outstanding              allegations of accounting violations standing alone can never
receivable; and recording journal entries in violation of the      lead to a strong inference of scienter, MicroStrategy
Foreign Corrupt Practices Act, without support or backup           nevertheless intimated that the nature of the misapplication of
documentation. According to Plaintiffs, the nature and             accounting principles - in terms of number, size, timing,
magnitude of the obvious, pervasive accounting problems at         frequency, and context - is relevant circumstantial evidence
Intrenet support a strong inference that the Individual            of a defendant's state of mind. Id. at 635. Turning to the facts
Defendants knew of or recklessly disregarded these problems        before it, the court concluded that the "magnitude,"
when making statements to the investing public.                    "pervasiveness," and "repetitiveness" of the company's
                                                                   violations of "simpl[e]" accounting principles "serve[d] to
   In Comshare, we held that "[t]he failure to follow GAAP is,     amplify the inference of scienter." Id. at 636. The court
by itself, insufficient to state a securities fraud claim." 183    explained:
F.3d at 553 (internal citations omitted). A complaint alleging
accounting irregularities fails to raise a strong inference of       Indeed, common sense and logic dictate that the greater
scienter if it "allege[s] no facts to show that Defendants knew      the magnitude of a restatement or violation of GAAP, the
or could have known of the errors, or that their regular             more likely it is that such a restatement or violation was
procedures should have alerted them to the errors sooner than        made consciously or recklessly. This, of course, is a
they actually did." Id. We noted in Comshare that a strong           matter of degree, but it cannot be gainsaid that some
inference of scienter cannot be drawn from speculative and           violations of GAAP and some restatements of financials
conclusory allegations of GAAP violations. Id. However, as           are so significant that they, at the very least, support the
discussed below, some courts have recognized that an                 inference that conscious fraud or recklessness as to the
inference of knowledge or recklessness may be drawn from             danger of misleading the investing public was present.
allegations of accounting violations that are so simple, basic,      Cf. In re Oxford Health Plans, Inc. Sec. Litig., 51 F.
and pervasive in nature, and so great in magnitude, that they        Supp. 2d 290, 294 (S.D.N.Y. 1999) ("[P]laintiffs allege
should have been obvious to a defendant.                             'in your face facts,' that cry out, 'how could [defendants]
                                                                     not have known that the financial statements were
  Courts have described the type and scope of accounting             false.'") In this case, the alleged GAAP violations and the
errors that, in combination with other factors, support a strong     subsequent restatements are of such a great magnitude –
inference of scienter. For example, Plaintiffs cite In re            amounting to a night-and-day difference with regard to
MicroStrategy, Incorporated Securities Litigation, 115 F.            MicroStrategy's representations of profitability – as to
Supp. 2d 620 (E.D. Va. 2000) for the proposition that                compel an inference that fraud or recklessness was afoot.
violations of simple accounting rules are obvious, and an
inference of scienter becomes more probable as the violations      Id. at 636-37 (footnotes omitted).
become more obvious. The complaint in MicroStrategy
No. 02-3921      PR Diamonds, et al. v. Chandler, et al.        19     20   PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

   Other cases likewise indicate the drastic nature and                day-to-day operating expenses as they occurred; (3) $600,000
magnitude necessary for accounting violations to support a             in underreported expenses due to failure to adequately reserve
strong inference of scienter.          In Telxon, the court            for uncollectible accounts receivable resulting in an amplified
distinguished the "far more egregious" facts before it from            accounts receivable balance (e.g., during the year ending
those alleged in Comshare, where we held that the alleged              December 31, 1999, Intrenet's net accounts receivable
accounting errors did not support a strong inference of                increased by approximately $4.4 million, or 14%, but its
scienter. 133 F. Supp. 2d at 1031. "Telxon, allegedly,                 operating revenues increased by only 8%); and (4) failure to
overstated its revenues for years, did so by over $20 million          record an impairment loss in the carrying value of machinery
in a single quarter and reported profits when it should have           and equipment assets valued at $340,000 but in reality worth
been reporting losses over several different quarters." Id.            nowhere near the recorded amount. The Complaint notes the
(italics in original) In addition, the accounting errors               October 18, 2000, press release reporting a possible
appeared to be fortuitously timed, resulting in revenue                restatement to the tune of $1.3 million in unrecorded expenses
increases at times when the company foretold that it would             at ADS and alleges that improper accounting practices caused
return to profitability, or when the company needed to show            Intrenet to report a pre-tax 1999 operating income of
profits to justify rejecting a takeover bid and to win a proxy         $750,000 when in fact it should have reported an operating
battle. Id. The Telxon court also noted the defendants'                loss of approximately $50,000.
training, background, and access to information. "Thus, the
nature and number of the alleged accounting manipulations,                These alleged accounting and reporting problems do not
coupled with the magnitude of the difference between the               resemble the pervasive and egregious manipulations found to
originally reported financial disclosures and their                    support a strong inference of scienter in other cases. Intrenet
restatements, and the fact that the misstatements escalated            operated one of the largest trucking fleets in the country, with
dramatically in the face of the [competing offer and proxy             over $280 million in revenue and $75 million in total assets
battle]," taken in conjunction with the remaining allegations          in 1999. Moreover, the Company did disclose that it lost over
in the complaint, convinced the court that the plaintiffs had          $4.8 million in 1999, compared with a gain of $2.8 million in
adequately alleged scienter. Id.                                       1998, and that its operating income fell from over $6.3
                                                                       million in 1998 to less than $1 million in 1999 on higher
   In contrast to the aforementioned cases, the accounting             revenues. Intrenet's press release announced a possible
irregularities Plaintiffs allege in this case are significantly less   downward restatement of income of approximately $1.3
egregious in nature and magnitude and thus do not support a            million, and Plaintiffs allege that the Company's accounting
strong inference that nondisclosure of the correct numbers             irregularities turned the Company's 1999 operating loss of
was the product of a deliberate or reckless effort by the              $50,000 into a $750,000 profit. In the face of these figures,
Individual Defendants to defraud investors.                Alleged     the errors Plaintiffs allege are not especially dramatic.
inaccuracies stemming from GAAP violations at Intrenet                 Accepting Plaintiffs' allegations as true, Intrenet represented
include: (1) unreconciled and uneliminated inter-company               itself as a barely profitable company, when in fact it was a
transactions totaling $600,000 by the end of 1999 that, had            barely unprofitable company. It simply cannot be said that
they been properly accounted for, would have reduced                   Intrenet's accounting improprieties, by virtue of their type and
Intrenet's 1999 pre-tax operating income of $750,000 to                size, "should have been obvious," Comshare, 183 F.3d at 554,
$150,000; (2) at least $200,000 in unrecorded expenses                 to the Individual Defendants. These are not "in your face
resulting from the ADS subsidiary's failure to record normal           facts" that "cry out" scienter. Therefore, the alleged GAAP
No. 02-3921      PR Diamonds, et al. v. Chandler, et al.       21    22    PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

violations, standing alone, are insufficient to state a securities   defendant deliberately chose to ignore multiple red flags that
fraud claim, and when viewed in combination with the other           would be "clearly evident" to anyone in the defendant's
allegations only weakly support an inference of scienter, if at      position. 871 F. Supp. at 699.
all.
                                                                        Red flags in this case would be circumstances that would
    (b)     Red Flags                                                have put the Individual Defendants on notice that Intrenet's
                                                                     financial statements and press releases contained material
   Next, Plaintiffs contend that the Individual Defendants           misstatements or omissions, or at least would have given
knowingly or recklessly disregarded "red flags" indicating           them reasons to question the veracity of the statements.
Intrenet's improper accounting practices, GAAP violations,           Comshare, 183 F.3d at 553. The only purported red flag
and internal control deficiencies. Specific factual allegations      Plaintiffs specifically identify in their Complaint is the
that a defendant ignored red flags, or warning signs that            allegation that during the year ended December 31, 1999,
would have revealed the accounting errors prior to their             Intrenet's net accounts receivable increased by approximately
inclusion in public statements, may support a strong inference       $4.4 million, or 14%, but its operating revenues increased by
of scienter. Comshare, 183 F.3d at 553-54. See also Miller           only approximately 8%. This supposed red flag, Plaintiffs
v. Material Sciences Corp., 9 F. Supp. 2d 925, 928-29 (N.D.          maintain, should have alerted the Individual Defendants to
Ill. 1998) ("Deliberately ignoring 'red flags'...can constitute      Intrenet's failure to adequately reserve for uncollectible
the sort of recklessness necessary to support § 10(b)                accounts receivable - a failure that resulted in $600,000 of
liability."). On the other hand, ignoring red flags may              unreported expenses in 1999. The Court disagrees that these
indicate that a defendant was merely negligent, not reckless.        circumstances constitute a red flag sufficiently blatant that
Courts typically look for multiple, obvious red flags before         fraudulent intent can be inferred. Perhaps the Individual
drawing an inference that a defendant acted intentionally or         Defendants' handling of the alleged accounts receivable
recklessly. See, e.g., In re Health Mgmt., Inc. Secs. Litig.,        situation suggests negligence on their part, but the
970 F. Supp. 192, 203 (E.D.N.Y. 1997) (citing In re Leslie           Complaint's allegations do not resemble in severity or number
Fay Cos., Inc., 871 F. Supp, 686, 699 (S.D.N.Y. 1995)).              the sort that courts consider indicative of knowledge or
                                                                     reckless disregard.
   In Health Mgmt., the court inferred an auditor's fraudulent
intent from numerous alleged red flags that should have led               (c)   Access to Information
the auditor to question its audit opinion, including (i) the
auditor's credulous acceptance of representations from the             To buttress the argument that the Individual Defendants
company that fairly obviously failed to reflect reality; (ii) the    knew of or recklessly disregarded adverse information about
auditor's failure to follow up on an analyst letter alerting the     Intrenet when making representations about the Company to
auditor to artificially inflated accounts receivable levels; and     the public, Plaintiffs point to their top-level positions within
(iii) the auditor's failure to exercise heightened scrutiny in       Company. During the putative class period, Chandler first
response to the analyst letter and an SEC inquiry on the same        served as Intrenet's Executive Vice President and Chief
subject. Id. at 203. The court concluded that the allegations        Operating Officer, and after June 12, 2000, was the
implied that the auditor "turned a blind eye" to the                 Company's President and Chief Executive Officer until the
wrongdoing. Id. Likewise, in Leslie Fay (a pre-PSLRA                 end of the class period, all this time serving as a director as
case), the court inferred scienter from allegations that the         well. Meanwhile, Jackson was Intrenet's President and Chief
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      23    24    PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

Executive Officer from June 1999 to June 12, 2000, when he         [the Individual Defendants] knew or could have known of the
became Chairman of the Board of Directors. Jackson also            errors, or that their regular procedures should have alerted
served as a director throughout the putative class period.         them to the errors sooner than they actually did." 183 F.3d at
Plaintiffs maintain that by virtue of their positions within the   553.
Company, the Individual Defendants had access to all of
Intrenet's financial information and controlled the content of          (d)   Areas of Focus
all the Company's public statements and SEC filings. The
Individual Defendants' access to Intrenet's financial                 Plaintiffs seek to draw additional support for a strong
information, Plaintiffs argue, works in favor of drawing a         inference of the Individual Defendants' scienter by claiming
strong inference of scienter with respect to the alleged           that Intrenet's accounting improprieties occurred in areas of
misrepresentations or omissions in the Company's public            the business that the Individual Defendants had specifically
communications.                                                    identified as targets of intense focus for the Company and
                                                                   where they were under pressure to show success. As a basis
   Contrary to Plaintiffs' assertions, fraudulent intent cannot    for this proposition, Plaintiffs cite Telxon, 133 F. Supp. at
be inferred merely from the Individual Defendants' positions       1029. In that case, the court considered a variety of
in the Company and alleged access to information. As even          circumstances relevant to reaching a strong inference of
the authorities which Plaintiffs cite indicate, the Complaint      scienter, including allegations of motive and opportunity,
must allege specific facts or circumstances suggestive of their    large restatements of the company's financial disclosures, and
knowledge. Without more, Plaintiffs fail to meet the PSLRA         accounting manipulations of "substantial magnitude." Id.
requirement to state with particularity facts giving rise to a     Another factor the court considered was "the fact that Telxon
strong inference of scienter. See, e.g., In re Peritus Software    and its officers were in a very difficult position, facing
Servs., Inc. Secs. Litig., 52 F. Supp. 2d 211, 228 (D. Mass.       unusual pressures to perform during the class period, and
1999) (general allegations that a defendant, through his board     stood to benefit substantially from a performance record
membership or executive position, had actual knowledge of          which matched the healthy ones [a company executive]
false statements or reckless disregard for the truth are           continually projected to the public." Id. The pressures to
insufficient to raise strong inference of scienter). While it is   make public statements reflecting profitable performance
true that high-level executives can be presumed to be aware        stemmed from "the need to stave off [another company's] take
of matters central to their business's operation, In re Complete   over efforts and ensuing proxy-battle." Id. at 1028.
Management, Incorporated Securities Litigation, 153 F.
Supp. 2d 314, 325-36 (S.D.N.Y. 2001), in this case it cannot          Here, Plaintiffs contend that Intrenet's press releases
be said that the alleged misrepresentations or omissions           announcing the Company's financial results touted the
pertained to central, day-to-day operational matters. Instead,     Individual Defendants' careful monitoring of the very areas in
they turn largely on accounting issues, predominantly at the       which Intrenet committed accounting violations. The press
ADS subsidiary, which the Court has already determined are         releases stated that "the Company has implemented a program
relatively arcane in nature and scope. While the Individual        to eliminate, where possible, expenses and liabilities that have
Defendants' positions are relevant to the analysis of whether      historically been a burden to profitable operations"; "[t]he
they are "control persons" for purposes of Section 20(a), on       new management team has been tireless in identifying and
their own they do not bear strongly on the scienter analysis.      eliminating unnecessary costs throughout the organization";
Here, as in Comshare, Plaintiffs "allege no facts to show that     "[t]he Company has made solid strides and positive progress
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.     25    26   PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

during what, otherwise, has been a challenging year"; and that    credit agreement. In addition, Plaintiffs allege that the
the Company would be late in filing its 1999 10-K to analyze      Individual Defendants had other motives to artificially inflate
the impact of "recent operational trends," primarily              Intrenet's stock price, including: (1) to protect themselves and
extraordinary increases in fuel prices, on the Company's          their investment in the Company; (2) to protect and enhance
ability to meet financial covenants in its bank loan              their executive positions and the substantial compensation
agreements.                                                       and prestige obtained thereby; and (3) to allow Jackson to
                                                                  engage in self-dealing transactions from which he reaped
   The Court is not persuaded that the aforementioned             profits, wherein Intrenet leased tractor trailers from a leasing
statements in Intrenet's press releases do much to support an     company that purchased the trucks from a dealership
inference that the Individual Defendants knew or should have      affiliated with Jackson. Also, the Complaint alleges that
known about the specific accounting problems alleged in the       Chandler was motivated to disseminate materially false and
Complaint. These are little more than statements of broad         misleading financial statements in order to receive a bonus
operational plans or goals - eliminating costs, reducing          based on a percentage of net income before taxes, up to a
liabilities, improving profits, etc. These statements do not      maximum of $500,000. Finally, the Complaint alleges that
show knowledge or reckless disregard of the discrete and          the Individual Defendants had opportunities to participate in
particularized alleged GAAP violations and control                fraud due to their positions as the highest ranking officers of
deficiencies concentrated in the ADS subsidiary.                  Intrenet who controlled the content of the Company's press
                                                                  releases and public filings.
    (e)    Motive and Opportunity
                                                                     "[T]he bare pleading of motive and opportunity does not,
  Next, Plaintiffs argue that the Complaint alleges that the      standing alone, constitute the pleading of a strong inference
Individual Defendants had motives and opportunities to            of scienter." Comshare, 183 F.3d at 551. However, "[w]hile
defraud investors. These allegations, Plaintiffs maintain,        it is true that motive and opportunity are not substitutes for a
when considered together with the other allegations in the        showing of recklessness, they can be catalysts to fraud and so
Complaint, support a strong inference of knowledge or             serve as external markers to the required state of mind."
reckless disregard on the part of the Individual Defendants.      Helwig, 251 F.3d at 550. "[F]acts regarding motive and
The Complaint's motive allegations include: (1) the improper      opportunity may be relevant to pleading circumstances from
accounting practices helped to mask the Company's                 which a strong inference of fraudulent scienter may be
deteriorating operating results and forestall its impending       inferred, and may, on occasion, rise to the level of creating a
default under certain financial covenants of its bank loan        strong inference of reckless or knowing conduct." Comshare,
agreement; (2) the Individual Defendants sought to reduce the     183 F.3d at 551 (internal quotation and citation omitted).
impact of a spike in fuel costs in the first quarter of 2000 by   While bare allegations of motive and opportunity, without
reporting consolidated financial statements that incorporated     more, are insufficient to establish scienter, the Court must
artificially inflated net income and earnings of the ADS          assess whether such allegations, considered in conjunction
subsidiary; (3) the Company was motivated to inflate the          with the remainder of Plaintiff's allegations, on the whole
value of its accounts receivable because borrowings under its     raise an inference of recklessness or knowing disregard.
$32 million credit facility, which the Company obtained in        Telxon, 133 F. Supp. 2d at 1028.
February 2000, were determined by a formula tied to the
Company's eligible accounts receivable as defined in the
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      27    28    PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

  Opportunity to commit fraud "entail[s] the means and likely      Jackson's alleged self-dealing transactions suggest no more
prospect of achieving concrete benefits by the means alleged."     than a general motive for Intrenet's success, not fraud;
In re Criimi Mae, Inc. Secs. Litig., 94 F. Supp. 2d 652, 660       moreover, the allegedly fraudulent SEC filings to which
(D. Md. 2000) (internal quotations and citations omitted).         Plaintiffs refer expressly disclosed these transactions.
With respect to the Individual Defendants' opportunities to
engage in fraud, there can be little doubt that they could have,      However, the allegations that the Individual Defendants
had they wanted to, committed such acts. See, e.g., San            were motivated to engage in fraud in order to forestall
Leandro Emergency Med. Group Profit Sharing Plan v.                Intrenet's default of its bank loan agreement and to preserve
Philip Morris Cos., Inc., 75 F.3d 801, 813 (2d Cir. 1996)          the Company's ability to borrow pursuant to its credit facility
("There is no doubt that defendants as a group had the             warrant closer scrutiny. These more particularized sorts of
opportunity [to manipulate stock prices]....[because they] held    motive allegations are more probative of scienter. For
the highest positions of power and authority within the            example, as part of the mix of factors contributing to an
company.").                                                        inference of scienter, the Ninth Circuit has considered a
                                                                   defendant's motivation to overstate a company's reported net
   The more important question in this case is whether the         value so as not to violate loan covenants with its lender and
Complaint alleges motives on the part of the Individual            to improve the prospects of increasing its credit line. Howard
Defendants from which the Court could infer a knowing or           v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000).
reckless state of mind. In order to demonstrate motive, a          We view the motive allegations concerning the bank loan and
plaintiff must show concrete benefits that could be realized by    credit facility as suggestive of scienter, although standing
one or more of the false statements and wrongful                   alone they do not establish a strong inference. Accordingly,
nondisclosures alleged. Phillips v. LCI Int'l, Inc., 190 F.3d      we will consider these allegations, along with all others, in the
609, 621 (4th Cir. 1999). Our review of the cases cited by the     totality of the circumstances analysis. See Helwig, 251 F.3d
parties shows that courts distinguish motives common to            at 551 (allegations of motive and opportunity are evaluated in
corporations and executives generally from motives to              the same manner as other circumstantial allegations to
commit fraud. All corporate managers share a desire for their      determine whether they produce a strong inference that the
companies to appear successful. That desire does not               defendant acted at least recklessly).
comprise a motive for fraud. See Chill v. Gen. Elec. Co., 101
F.3d 263, 268 (2d Cir. 1996) ("such a generalized motive, one           (f) Absence of Inside Sales
which could be imputed to any publicly-owned, for-profit
endeavor, is not sufficiently concrete for purposes of inferring      The Complaint includes no allegations that the Individual
scienter"). Neither does an executive's desire to protect his      Defendants ever took advantage of Intrenet's purportedly
position within a company or increase his compensation. See        inflated stock prices by selling shares during the class period.
Kalnit v. Eichler, 264 F.3d 131, 140 (2d Cir. 2001) ("an           The Individual Defendants point out that the allegations of
allegation that defendants were motivated by a desire to           fraudulent motive which courts most often recognize as
maintain or increase executive compensation is insufficient        support for a strong inference of scienter are allegations that
because such a desire can be imputed to all corporate              insiders sold stock. Indeed, we mentioned in Helwig that
officers"); Criimi Mae, 94 F. Supp. 2d at 660 (allegations that    "insider trading at a suspicious time or in an unusual amount"
defendants sought to "protect their executive positions,"          comprises one of the "fixed constellations of facts that courts
standing alone, are inadequate to plead motive). Finally,          have found probative of securities fraud." 251 F.3d at 552.
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.       29    30    PR Diamonds, et al. v. Chandler, et al.        No. 02-3921

Conversely, courts have explained that the absence of inside             (g)    Consultant
sales dulls allegations of fraudulent motive. See, e.g., In re K-
tel Int'l, Inc. Secs. Litig., 300 F.3d 881, 894 (8th Cir. 2002)        The Complaint alleges that in early 2000, Intrenet hired an
("evidence that the individual defendants abstained from            outside consultant to investigate problems in the Company's
trading may undercut allegations of motive"); In re Northern        accounting and internal control systems. The consultant
Telecom Ltd. Secs. Litig., 116 F. Supp. 2d 446, 462 (S.D.N.Y.       allegedly discovered improprieties, ultimately leading to the
2000) ("The absence of stock sales by insiders, or any other        October 13, 2000, press release that initiated Intrenet's
evidence of pecuniary gain by company insiders at                   collapse. Plaintiffs maintain that after the consultant was
shareholders' expense, is inconsistent with an intent to            hired and discovered the problems, a strong inference that the
defraud shareholders....Even where company insiders sell            Individual Defendants knew of or recklessly disregarded the
stock during the class period, scienter is not necessarily          problems is inescapable.
inferred.") (citing Kalnit, 99 F. Supp. 2d at 337 and San
Leandro Emergency Med. Group Profit Sharing Plan, 75                   First of all, the Court is not willing to infer fraudulent intent
F.3d at 814).                                                       from the fact that the Company hired a consultant to examine
                                                                    its accounting systems. If anything, this fact counters an
   However, we have never held that the absence of insider          inference that the Individual Defendants were trying to keep
trading defeats an inference of scienter. Cf. Hanon v.              the alleged accounting problems hidden from view. Next, the
Dataproducts. Corp., 976 F.2d 597, 507 (9th Cir. 1992)              thrust of Plaintiff's argument seems to be that the outside
(scienter can be established even if officers who made              consultant "readily discovered" the accounting improprieties
misleading statements did not sell stock during the class           in a "short time period," and yet the Individual Defendants
period). What is more, Plaintiffs' motive allegations in this       continued to issue materially false and misleading financial
case are not based on a claim that the Individual Defendants        statements and press releases, and did not ultimately publicize
sought to personally enrich themselves through sales of their       the deficiencies to the investing public until "many months"
own stock. See In re Nuko Info. Sys., Inc. Secs. Litig., 199        later, on October 13, 2000. In the intervening time, Plaintiffs
F.R.D. 338, 344-45 (N.D. Cal. 2000) (when the complaint did         maintain, the Individual Defendants must have known or at
not assert claims of insider trading, the absence of defendants'    best recklessly disregarded the truths the consultant
selling or trading has little bearing on determining whether        unearthed. See Danis v. USN Communications, Inc., 73 F.
plaintiffs have adequately pleaded scienter). We also reject        Supp. 2d 923, 939 (N.D. Ill. 1999) ("Problems readily
the Individual Defendants' contention that their purchase of        recognized by an outsider can be presumed to be known to a
shares during the class period refutes any inference that they      company's management and directors."). Therefore, Plaintiffs
knowingly or recklessly misled the market to increase the           urge, a strong inference of scienter is especially warranted
stock's price. Plaintiffs allege, and Intrenet's 1999 10-K          after the consultant arrived.
suggests, that the Individual Defendants bought the stock to
infuse cash to the Company as a condition precedent to                 The allegations regarding the consultant fail to support a
obtaining a new bank agreement. For these reasons, the              strong inference of the Individual Defendants' scienter
absence of stock sales by the Individual Defendants works           because they wholly lack factual particularity. The Complaint
against but does not conclusively defeat an inference of            offers the conclusory assertion that the consultant "swiftly"
scienter.                                                           uncovered the accounting irregularities, but nowhere does it
                                                                    provide any meaningful information regarding when or in
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.     31    32   PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

what manner the consultant made his discoveries. The                 In Helwig, this Court set forth a non-exhaustive list of
relevant issue in determining scienter is not when the            "factors usually relevant to scienter." 251 F.3d at 552. Few
accounting improprieties occurred, but rather whether and         of these factors emerge in this case. First, there are no
when the Individual Defendants knew about them. There is no       allegations of insider trading at a suspicious time or in an
basis in the Complaint's allegations concerning the consultant    unusual amount. Second, there are no specific allegations of
from which the Court could conclude that the Individual           a divergence between internal reports and external statements
Defendants knew anything about the problems prior to the          on the same subject. The allegations regarding the outside
October 13, 2000, press release. Moreover, Plaintiffs fail to     consultant lack any detail about when or to whom the
specify what the consultant learned and how he learned it,        consultant reported the information he allegedly discovered.
other than offering the conclusory allegation that the            Third, there is little temporal proximity between the allegedly
consultant "discovered" Intrenet's alleged accounting             fraudulent statements and the later disclosure of inconsistent
improprieties. Claims of securities fraud cannot rest on          information in October of 2000. Fourth, there are no
speculation and conclusory allegations. Comshare, 183 F.3d        allegations of bribery by a top company official. Fifth, there
at 553-54.                                                        is no ancillary lawsuit charging fraud by the Company and the
                                                                  Company's quick settlement of the suit. Sixth, allegations
    (h) Summary of Scienter Allegations Against                   that the Individual Defendants disregarded the most current
        Individual Defendants                                     factual information before making statements lack specific
                                                                  facts concerning how or when any accounting improprieties
   Plaintiffs have accumulated numerous circumstantial            became known to them. Once again, the activities of the
allegations from which they ask the Court to draw the strong      consultant are so vaguely described as to offer little insight
inference of scienter required for this case to move forward.     into what the Individual Defendants knew or when they knew
In the foregoing discussion, we noted that, while some of         it. Seventh, the Complaint contains no allegations that
these allegations suggest little about the Individual             accounting information was disclosed in such a way that its
Defendants' states of mind, other allegations favor the           negative implications could only be understood by someone
implication that they may have known, or were reckless in not     with a high degree of sophistication. Eighth, there are no
knowing, of the accounting problems at Intrenet and its true      allegations of certain directors holding a personal interest in
financial condition. See MicroStrategy, 115 F. Supp. 2d at        not informing disinterested directors of a sale of stock.
649 ("Just as otherwise-unremarkable individual points of         Finally, allegations of the Individual Defendants' self-
colored paint in the aggregate become a Seurat painting, so,      interested motivation in the form of saving their salaries or
too, do the individual allegations in this case - which, when     jobs only mildly suggest scienter.
viewed in isolation may or may not by themselves give rise
to a 'strong inference' of scienter - collectively paint an         For all these reasons, the Section 10(b) and Rule 10b-5
equally compelling picture of scienter."). However, "[a] mere     claims against the Individual Defendants were properly
reasonable inference is insufficient to survive a motion to       dismissed pursuant to Fed. R. Civ. P. 12(b)(6).
dismiss." Greebel v. FTP Software, Inc., 194 F.3d 185, 196
(1st Cir. 1999). Even when added up and viewed in their
entirety, the ultimate inference of scienter the allegations in
this case raise is not strong - that is, the most plausible of
competing inferences.
No. 02-3921      PR Diamonds, et al. v. Chandler, et al.        33    34   PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

B. Section 10(b) and Rule 10b-5 Claims Against                        form of intent (to deceive) than merely a greater degree of
   Andersen                                                           ordinary negligence") (internal quotations omitted). Scienter
                                                                      "requires more than a misapplication of accounting principles.
   Plaintiffs argue that the district court erred in dismissing the   The [plaintiff] must prove that the accounting practices were
Section 10(b) and Rule 10b-5 claims against Andersen on the           so deficient that the audit amounted to no audit at all, or an
basis that the Complaint failed to adequately allege that             egregious refusal to see the obvious, or to investigate the
Andersen acted with scienter. In Plaintiffs' view, the                doubtful, or that the accounting judgments which were made
Complaint alleges facts showing that Andersen was alerted to          were such that no reasonable accountant would have made the
Intrenet's internal control deficiencies and accounting errors,       same decisions if confronted with the same facts." In re
and thus knew of or recklessly disregarded the falsity of its         Worlds of Wonder Secs. Litig., 35 F.3d 1407, 1426 (9th Cir.
certifications that its audit was performed in accordance with        1994) (quoting SEC v. Price Waterhouse, 797 F. Supp. 1217,
GAAS and that Intrenet's 1998 and 1999 financial statements           1240 (S.D.N.Y. 1992)).
were presented in conformity with GAAP. Specifically,
Plaintiffs claim that Intrenet's financial statements were               "When the standard of recklessness for an auditor is
admittedly false, the accounting improprieties were obvious           overlaid with the pleading requirements of the PSLRA, a
in nature and large in magnitude, numerous red flags arose to         simple rule emerges: to allege that an independent accountant
indicate the improprieties, and Andersen had access to                or auditor acted with scienter, the complaint must allege
Intrenet's confidential information. Moreover, the outside            specific facts showing that the deficiencies in the audit were
consultant allegedly quickly identified the problems once he          so severe that they strongly suggest that the auditor must have
came on board. Taken as a whole, Plaintiffs maintain, these           been aware of the corporation's fraud." SmarTalk, 124 F.
allegations are sufficient to raise a strong inference of             Supp. 2d at 514 (citing Hollinger v. Titan Capital Corp., 914
Andersen's scienter but the district court mistakenly                 F.2d 1564, 1570 (9th Cir. 1990) and In re Software
scrutinized each allegation in piecemeal fashion to reach its         Toolworks, Inc., 50 F.3d 615, 628 (9th Cir. 1994)). "[T]o
erroneous conclusion.                                                 allege that an independent accountant or auditor acted with
                                                                      scienter, the complaint must identify specific, highly
  The same PSLRA pleading standards we set forth in our               suspicious facts and circumstances available to the auditor at
discussion of the Section 10(b) and Rule 10b-5 allegations            the time of the audit and allege that these facts were ignored,
against the Individual Defendants apply to the allegations            either deliberately or recklessly." SmarTalk, 124 F. Supp. 2d
against Andersen. However, the meaning of recklessness in             at 515.
securities fraud cases is especially stringent when the claim is
brought against an outside auditor. In re SmarTalk                       Once again, we examine Plaintiffs' allegations collectively
Teleservices, Inc. Secs. Litig., 124 F. Supp. 2d 505, 514 (S.D.       to determine whether the totality of the specific facts alleged
Ohio 2000). Recklessness on the part of an independent                create a strong inference of scienter. Telxon, 133 F. Supp. 2d
auditor entails a mental state so culpable that it                    at 1026. The relevant allegations include that Andersen:
"approximate[s] an actual intent to aid in the fraud being            (1) was aware of internal control deficiencies at Intrenet;
perpetrated by the audited company." Decker v. Massey-                (2) committed numerous GAAP and GAAS violations;
Ferguson, Ltd., 681 F.2d 111, 121 (2d Cir. 1982); Pegasus             (3) disregarded certain red flags; and (4) had access to
Fund, Inc. v. Laraneta, 617 F.2d 1335, 1341 (9th Cir. 1980)           Intrenet's confidential information.        Addressing these
(auditor's recklessness "must come closer to being a lesser           allegations in turn and collectively, we conclude that the
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      35    36     PR Diamonds, et al. v. Chandler, et al.     No. 02-3921

Complaint lacks allegations of specific, highly suspicious            Plaintiffs point out that under APB No. 20, a restatement is
facts and circumstances that would lead us to reach a strong       an admission that financial statements were materially false
inference that Andersen acted with scienter when it certified      at the time they were made; therefore, Plaintiffs argue, the
Intrenet's financial statements.                                   alleged accounting errors were material and Andersen's
                                                                   knowledge or reckless disregard of such errors can be
  1.   Internal Control Deficiencies                               inferred. This line of reasoning misapprehends the nature of
                                                                   the scienter inquiry. To support an inference of fraudulent
   Plaintiffs argue that Andersen turned a blind eye to            scienter, allegations of GAAP and GAAS violations must
numerous internal control deficiencies at Intrenet, which          extend in nature and magnitude beyond merely the materiality
allowed accounting improprieties to continue unchecked.            threshold. We reject Plaintiffs' contention that Intrenet's $1.3
Yet, Plaintiffs offer no "specific, highly suspicious facts and    million in underreported expenses allegedly resulting from
circumstances" to support an inference that Andersen was           Andersen's auditing failures "belies any conclusion that
aware of these deficiencies or recklessly disregarded them,        Andersen acted merely negligently."            Likewise, the
other than the assertions that Andersen had access to Intrenet's   allegations regarding the failure to reserve against accounts
confidential information and that the consultant quickly           receivable do not "cry out" scienter. MicroStrategy, 115 F.
discovered the deficiencies. The allegations concerning the        Supp. 2d at 636-37. Taking the allegations as true, as we
consultant are insufficiently specific to satisfy the PSLRA's      must, Andersen's alleged failures were not so grievous as to
requirements for pleading scienter. Nowhere does the               suggest that their work was "no audit at all." Worlds of
Complaint allege facts identifying, for example, the               Wonder, 35 F.3d at 1426. These are not the sort of "in your
consultant's level of access to Intrenet's financial records or    face" accounting violations that, without additional "specific,
how long the consultant took to reach conclusions. The Court       highly suspicious facts and circumstances," support a strong
would be remiss to infer Andersen's scienter based on the          inference of scienter. See MicroStrategy, 115 F. Supp. 2d at
conclusory assertion that what the consultant ultimately found     637; SmarTalk, 124 F. Supp. 2d at 515.
out, Andersen must have known or recklessly disregarded.
                                                                     Once again, Plaintiffs point to the fact that Intrenet hired an
  2.   GAAP and GAAS Violations                                    outside consultant in early 2000 as proof that Intrenet and its
                                                                   auditor were aware of the alleged accounting improprieties for
   Next, Plaintiffs contend that the Complaint alleges             an extended period of time before they revealed them to
violations of GAAS and failure to detect violations of GAAP        investors. As we have already stated, the Complaint is largely
of such simple and obvious nature and large magnitude so as        devoid of any factual detail regarding how, when, and what
to support a strong inference of Andersen's scienter. It is        the consultant discovered. An inference of scienter on this
well-settled that violations of GAAP and GAAS, standing            basis would be unwarranted.
alone, do not create an inference of scienter, much less a
strong one. See Comshare, 183 F.3d at 553 (citing cases).            3.    Red Flags
However, when the alleged accounting errors are sufficiently
basic and large, their existence, in combination with other           Next, Plaintiffs allege that Andersen disregarded numerous
factors, may support the requisite scienter inference. Telxon,     red flags that alerted it to the accounting improprieties,
133 F. Supp. 2d at 1031.                                           suggesting Andersen harbored scienter. A red flag creating a
                                                                   strong inference of scienter consists of "[a]n egregious refusal
No. 02-3921      PR Diamonds, et al. v. Chandler, et al.       37    38    PR Diamonds, et al. v. Chandler, et al.       No. 02-3921

to see the obvious, or to investigate the doubtful." Novak v.        sufficient..., it might make every auditor liable in cases of
Kasaks, 216 F.3d 300, 308 (2d Cir. 2000) (citation and               securities fraud."). However, while the mere fact that an
internal quotation marks omitted). Two of the purported red          auditor has access to a company does not necessary mean that
flags simply repeat the alleged GAAP improprieties, namely,          it was aware of alleged fraud at the company, the greater the
that Intrenet lacked internal controls (which the outside            auditor's "access to and involvement with" the company's
consultant discovered in very little time), and that the             operations, the more support an inference of scienter takes on.
accounting problems turned Intrenet's losses into profits. The       MicroStrategy, 115 F. Supp. 2d at 653.
only genuine red flag consists of the allegation that during the
year ended December 31, 1999, although Intrenet's net                   Accordingly, the Court takes into account Andersen's
accounts receivable increased by approximately $4.4 million          access to Intrenet's information, but even so doing, no strong
during that year, or approximately 14%,while its operating           inference of Andersen's scienter arises. Viewing in totality
revenues increased by only 8%. Plaintiffs contend that these         Andersen's access, along with the allegations of internal
circumstances should have put Andersen on notice that                control deficiencies, GAAP and GAAS violations, and red
Intrenet's accounts receivable reserve was understated.              flags, we do not believe that the most plausible inference to
                                                                     draw in these circumstances is that Andersen knew of or
  This supposed red flag fails to support a strong inference of      recklessly disregarded the alleged material misstatements and
scienter because Plaintiffs make no specific allegation that         omissions in Intrenet's financial statements. Plaintiffs
Andersen knew that certain accounts were not collectible and         repeatedly attempt to bolster their allegations by pointing out
knowingly participated in a scheme to hide that fact from            that the outside consultant quickly discovered the accounting
investors. In our judgment, a single year's difference in the        irregularities, yet they offer almost no specific factual details
ratio of the increase of receivables to operating revenues does      regarding the consultant's work. For these reasons, the
not make it "obvious" to an outside auditor that Intrenet's          Section 10(b) and Rule 10b-5 claims against Andersen are
receivables reserve was understated.                                 properly dismissed.
  4.   Access to Confidential Information                            C. Section 20(a) Control Person Liability Claims Against
                                                                        the Individual Defendants
   Finally, Plaintiffs allege that Andersen's access to Intrenet's
confidential information supports a strong inference of                 Plaintiffs contend that the district court erred in granting the
scienter. According to the Complaint, Andersen's personnel           Individual Defendants' motion for judgment on the pleadings
were regularly present at Intrenet's corporate headquarters          pursuant to Federal Rule of Civil Procedure 12(c) on the
throughout the class period and had continual access to, and         Section 20(a) claims. In Plaintiffs' view, the Section 20(a)
knowledge of, Intrenet's confidential financial and business         claims should proceed despite the absence of the Company as
information. These allegations, by themselves, are not               a defendant. We conclude that the Section 20(a) claims were
enough to raise a strong inference of scienter because such          properly adjudicated on the pleadings in the Individual
allegations are insufficiently concrete to support such an           Defendants' favor because the Complaint fails to plead a
inference. See, e.g., Kennilworth Partners L.P. v. Cendant           required predicate violation of Section 10(b) or Rule 10b-5 by
Corp., 59 F. Supp. 2d 417, 429 (D.N.J. 1999) ("[S]tatement[s         the Company, its employees, or the Individual Defendants.
that] could be made in relation to the auditor of every
corporation" are insufficient to plead scienter, for "[i]f it were
No. 02-3921      PR Diamonds, et al. v. Chandler, et al.       39    40       PR Diamonds, et al. v. Chandler, et al.             No. 02-3921

  Section 20(a) of the Exchange Act creates a cause of action        course, is not a named party in this case because it is
for "control person" liability, stating as follows:                  bankrupt. However, Plaintiffs contend that a company's
                                                                     controlling persons do not escape liability when the
  Every person who, directly or indirectly, controls any             company's primary liability cannot be adjudicated due to its
  person liable under any provision of this title or of any          unavailability.   Second, with respect to the control
  rule or regulation thereunder shall also be liable jointly         requirement, Plaintiffs argue that the Individual Defendants
  and severally with and to the same extent as such                  are controlling persons because by virtue of their top-level
  controlled person to any person to whom such controlled            positions at Intrenet they had the power to control the
  person is liable, unless the controlling person acted in           Company's general business affairs and the specific activities
  good faith and did not directly or indirectly induce that          upon which the alleged primary violations were predicated.
  act or acts constituting the violation or cause of action.
                                                                        As extensively discussed above, we have reviewed the
15 U.S.C. § 78t(a). Section 20(a) thus establishes two               Complaint de novo and determined that Plaintiffs have not
requirements for a finding of control person liability. First,       stated claims against the Individual Defendants under Section
the "controlled person" must have committed an underlying            10(b) and Rule 10b-5 because the Complaint fails to
violation of the securities laws or the rules and regulations        adequately plead scienter. For the same reasons that the
promulgated thereunder. Second, the "controlling person"             Section 10(b) and Rule 10b-5 claims against the Individual
defendant in a Section 20(a) claim must have directly or             Defendants are properly dismissed as a matter of law, those
indirectly controlled the person liable for the securities law       allegations cannot serve as predicates for Section 20(a)
violation. "Control" is defined as "the possession, direct or        liability. We therefore need not further examine Plaintiffs'
indirect, of the power to direct or cause the direction of the       theory, which would impute the Individual Defendants'
management and policies of a person, whether through the             purported violations to the Company in order to establish the
ownership of voting securities, by contract, or otherwise."          requisite predicate liability of the controlled person, and then
17 C.F.R. § 230.405.                                                 double-back the liability onto the Individual Defendants as
                                                                     controlling persons under Section 20(a).4
  In this case, Plaintiffs' Complaint alleges that the Individual
Defendants are liable under Section 20(a) as controlling
persons of Intrenet. First, with respect to the requirement for           4
an underlying primary violation, Plaintiffs maintain that both              W ithout deciding the question, we note that some authority suggests
                                                                     that a plaintiff may not be ab le simultaneously to asse rt both Section 10(b)
the Individual Defendants and the Company violated Section           and Rule 10b-5 claims and Section 20(a) claims against the same
10(b) and Rule 10b-5. As for the Individual Defendants,              defendant. "Arguab ly, a § 20 (a) claim canno t be asserted against a
Plaintiffs argue that any Section 10(b) and Rule 10b-5               defendant who is also cha rged with primary violation of § 10(b) and Rule
violations they committed should be imputed to Intrenet,             10b-5; that is, secondary liab ility under § 20(a) is an alternative, not a
thereby establishing a primary violation on the Company's            supp lement, to primary liability under § 10(b) and Rule 10b-5." Lemmer
                                                                     v. Nu-Kote Holding, Inc., No. CIV. A. 398CV0161L, 2001 WL 1112577,
part as a controlled person. In other words, the Individual          at *12 (N.D. Tex., Sept. 6, 2001), citing Kalnit v. Eichler, 85 F. Supp. 2d
Defendants' violations are the Company's violations; if the          232, 246 (S.D.N .Y. 1999) (suggesting that plaintiffs could not allege
Individual Defendants are liable, so too is Intrenet. As for the     primary liability against the directors of a corporation and at the same
Company, Plaintiffs claim that the Complaint includes                time allege con trol person liab ility against the d irectors). See also In re
securities fraud allegations against Intrenet itself. Intrenet, of   Capstead Mo rtg. Corp. Secs. Litig., 258 F. Supp. 2d 53 3, 566 (N.D . Tex.
                                                                     2003) (quoting the aforementioned passage from Lemmer); 183 A.L.R.
No. 02-3921         PR Diamonds, et al. v. Chandler, et al.               41     42    PR Diamonds, et al. v. Chandler, et al.      No. 02-3921

   Next, the Complaint fails to state a predicate Section 10(b)                  D. Leave to Amend the Complaint
or Rule 10b-5 claim against Intrenet itself because it fails -
indeed, hardly attempts - to plead scienter on the Company's                        Finally, Plaintiffs argue that the district court erred in
part. So far as the Court can discern, the Complaint contains                    dismissing the case without affording them an opportunity to
only a few sparse references to allegations against Intrenet as                  amend their Complaint. We recognize that when a motion to
a Company or its employees other than the Individual                             dismiss a complaint is granted, courts typically permit the
Defendants. Paragraph 36 of the Complaint states that                            losing party leave to amend.             However, given the
"Intrenet employees repeatedly recorded journal entries in                       circumstances of this case, leave to amend should be denied.
violation of FCPA, without support or documentation, which                       Plaintiffs failed to follow the proper procedure for requesting
the Defendants knew, or recklessly disregarded." This                            leave to amend, and even had they done so, denial would have
allegation, standing alone, comes nowhere near to making out                     been appropriate so as to avoid "frustrat[ing] the purposes of
a claim for violation of Section 10(b) or Rule 10b-5 on the                      the PSLRA." See Miller, 346 F.3d at 690.
part of the unidentified "Intrenet employees." Next, a single
paragraph of the Complaint, paragraph 96, pertains to the                           Generally, the review of a district court's denial of a motion
Company's knowledge, rather than that of the Individual                          for leave to amend a complaint is governed by an abuse of
Defendants. That paragraph precisely restates the purported                      discretion standard. See Crawford v. Roane, 53 F.3d 750, 753
misrepresentations and omissions making Intrenet's press                         (6th Cir. 1995); United States v. Midwest Suspension &
releases and financial statements materially false and                           Brake, 49 F.3d 1197, 1202 (6th Cir. 1995). Review, however,
misleading that Plaintiffs allege against the Individual                         is de novo where the reason for the district court's denial is
Defendants, but this time claims "the Company knew of the                        because the amended pleading would not withstand a motion
improper accounting practices...[and] knew or reasonably                         to dismiss. Ziegler, 249 F.3d at 518. In this case, the district
should have known" of the misleading statements. This bare                       court did not discuss or state why it declined to offer
assertion fails to raise a strong inference of the Company's                     Plaintiffs an opportunity to amend their Complaint. In fact,
scienter and thus fails to state a claim.                                        as the following discussion explains, there was no "motion"
                                                                                 to deny. Accordingly, we will review the district court's
  Because the Complaint fails to state an underlying                             actions for abuse of discretion.
securities law violation by a controlled person, we need not
address the subsequent question of whether the Individual                          When a motion to dismiss is granted in a case not involving
Defendants possessed an adequate degree of control to                            the PSLRA, the usual practice is to grant plaintiffs leave to
support a Section 20(a) claim. The district court correctly                      amend the complaint. Generally, leave to amend is "freely
granted the Individual Defendants' motion for judgment on                        given when justice so requires." Morse, 290 F.3d at 799 (6th
the pleadings pursuant to Fed. R. Civ. P. 12(c) on the Section                   Cir. 2002) (quoting Fed. R. Civ. P. 15(a)). However, the
20(a) claims.                                                                    Supreme Court has instructed that leave to amend is properly
                                                                                 denied where there is "undue delay, bad faith or dilatory
                                                                                 motive on the part of the movant, repeated failure to cure
                                                                                 deficiencies by amendments previously allowed, undue
Fed. 141 §2[b] (2003) ("It is a freq uent practice to plead in the alternative   prejudice to the opposing party by virtue of allowance of the
that a defendant is both a primary violator and a controlling person of          amendment, futility of the amendment, etc." Foman v. Davis,
primary violators, although, as som e courts have no ted, one cannot             371 U.S. 178, 182, 83 S. Ct. 227, 230 (1962). And while
simultaneously be both.").
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.       43    44    PR Diamonds, et al. v. Chandler, et al.       No. 02-3921

Rule 15 plainly embodies a liberal amendment policy, in the           Court would have considered the motions to dismiss in
post-judgment setting we must also take into consideration            light of the proposed amendments to the
the competing interest of protecting the finality of judgments        complaint....Absent such a motion, however, Defendant
and the expeditious termination of litigation. Morse, 290             was entitled to a review of the complaint as filed
F.3d at 800. "Thus, in the post-judgment context, we must be          pursuant to Rule 12(b)(6). Plaintiffs were not entitled to
particularly mindful of not only potential prejudice to the           an advisory opinion from the Court informing them of
non-movant, but also the movant's explanation for failing to          the deficiencies of the complaint and then an opportunity
seek leave to amend prior to the entry of judgment." Id.              to cure those deficiencies.
   In this case, Plaintiffs failed to follow the proper procedure   214 F.3d at 784 (emphasis in original).
for requesting leave to amend. They did not actually file a
motion to amend along with an accompanying brief, as                   The Complaint had already been amended once. The
required by the local rules governing practice before the           district court granted in part and denied in part the Individual
district court. Instead, they simply included the following         Defendants' and Andersen's motion to dismiss on February
request in their brief opposing the Defendants' motions to          26, 2002. However, final judgment was not entered until
dismiss: "Alternatively, in the event the Court grants any part     nearly five months later, when the district court granted the
of the Defendants' motions to dismiss, plaintiffs respectfully      Individual Defendants' motion for judgment on the pleadings.
request leave to amend their Complaint." As the D.C. Circuit        During the intervening time, Plaintiffs made no attempt to
has found, "a bare request in an opposition to a motion to          obtain leave to amend their Complaint. Moreover, Plaintiffs
dismiss – without any indication of the particular grounds on       never sought to alter, set aside, or vacate the district court's
which amendment is sought, cf. Federal Rule of Civil                judgment pursuant to Fed. R. Civ. P. 59 or 60. See Morse,
Procedure 7(b) – does not constitute a motion within the            290 F.3d at 799 ("Following entry of final judgment, a party
contemplation of Rule 15(a)." Confederate Mem'l Ass'n v.            may not seek to amend their complaint without first moving
Hines, 995 F.2d 295, 299 (D.C. Cir. 1993), quoted in D.E.&J.        to alter, set aside or vacate judgment pursuant to either Rule
Ltd. P'ship v. Conaway, 284 F. Supp. 2d 719, 751 (E.D.              59 or Rule 60 of the Federal Rules of Civil Procedure."). In
Mich. 2003). This Court's disfavor of such a bare request in        light of these procedural failings, the district court was within
lieu of a properly filed motion for leave to amend was made         its discretion to withhold granting Plaintiffs an opportunity to
clear in Begala v. PNC Bank, Ohio, N.A., 214 F.3d 776, 784          amend the pleadings.
(6th Cir. 2000): "What plaintiffs may have stated, almost as
an aside to the district court in a memorandum in opposition          Our recent decision in Miller set forth a rule that would
to the defendant's motion to dismiss is also not a motion to        warrant denying Plaintiffs leave to amend even if they had
amend." As the Begala decision reasoned in affirming the            followed the correct procedure. 346 F.3d 660. In that case,
district court's dismissal of the plaintiffs' complaint with        we held that "allowing repeated filing of amended complaints
prejudice in that case,                                             would frustrate the purpose of the PSLRA." Id. at 690. We
                                                                    considered the tension between Rule 15(a) of the Federal
  Had plaintiffs filed a motion to amend the complaint              Rules of Civil Procedure and the PSLRA, which states that
  prior to th[e] Court's consideration of the motions to            "[i]n any private action arising under this title, the court shall,
  dismiss and accompanied that motion with a                        on the motion of any defendant, dismiss the complaint if the
  memorandum identifying the proposed amendments, the               [pleading] requirements...are not met." 15 U.S.C. § 78u-
No. 02-3921     PR Diamonds, et al. v. Chandler, et al.      45

4(b)(3)(A). We resolved the tension in favor of the PSLRA,
concluding that in light of that statute's requirements, "we
think it is correct to interpret the PSLRA as restricting the
ability of plaintiffs to amend their complaint, and thus as
limiting the scope of Rule 15(a) of the Federal Rules of Civil
Procedure." Id. at 692. Moreover, "the purpose of the
PSLRA would be frustrated if district courts were required to
allow repeated amendments to complaints filed under the
PSLRA." Id. The "purpose" of the PSLRA is to screen out
lawsuits having no factual basis, to prevent harassing strike
suits, and to encourage attorneys to use greater care in
drafting their complaints. See In re Champion Enters., Inc.
Secs. Litig., 145 F. Supp. 2d 871, 873-74 (E.D. Mich. 2001),
aff'd 346 F.3d 660 (6th Cir. 2003). Therefore, we affirmed
the district court's decision to dismiss the complaint with
prejudice for failing to meet the pleading requirements.
Champion, 346 F.3d at 690.
  In light of our holding in Champion and Plaintiffs'
procedural shortcomings, we hold that Plaintiffs should not be
given yet another opportunity to amend their Complaint, and
we affirm the district court's entry of final judgment against
Plaintiffs.
                       IV. Conclusion
  For the reasons stated above, the district court properly
dismissed Plaintiffs' Section 10(b) and Rule 10b-5 claims
against the Individual Defendants and Andersen. The district
court also properly granted judgment on the pleadings in
favor of the Individual Defendants on Plaintiffs' Section 20(a)
claims. Finally, the district court did not abuse its discretion
in not inviting Plaintiffs to amend their Complaint.
  For the foregoing reasons, the judgments of the district
court are AFFIRMED.
