Ryan Fain v. USA Technologies Inc
707 F. App'x 91
| 3rd Cir. | 2017Background
- USA Technologies reported Q4 FY2015 bad-debt expense of $47,184 and FY2015 year-end $649,528 in a September 10, 2015 press release, implying net income for Q4.
- On September 29–30, 2015 the company disclosed material weaknesses in internal controls, restated bad-debt expense upward by ~$450,000, and reversed the Q4 profit to a loss.
- Plaintiff Fain sued under §§10(b) and 20(a), alleging defendants knowingly understated bad debt and misled investors about internal controls and net income.
- Defendants moved to dismiss for failure to plead scienter; the District Court granted the motion and denied leave to amend.
- Plaintiff sought Rule 60(b) relief based on purportedly new evidence from a separate Arizona action; the District Court denied that motion as untimely and not diligent.
- The Third Circuit affirmed, holding the complaint failed to plead a ‘‘strong inference’’ of scienter and that the denials of leave to amend and Rule 60(b) relief were not an abuse of discretion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether complaint adequately pleaded scienter under PSLRA/Tellabs | Fain: magnitude and simplicity of the bad-debt error, CFO departures, and remedial changes show recklessness or conscious intent | Defs: error reflects negligence or lower-level misclassification; prompt correction and context undercut any conscious misbehavior | Court: dismissal affirmed — allegations support at most negligence/mismanagement, not a strong inference of scienter |
| Whether district court abused discretion by denying leave to amend | Fain: could plead additional facts tying business-shift (Quickstart/Jumpstart) and rising bad-debt trend to motive to conceal | Defs: proposed facts would be futile and fail to plead particularized scienter or specific motive during gap between statements and restatement | Court: denial affirmed — amendment would be futile; proffered facts did not show particularized motive or incentives to conceal |
| Whether Rule 60(b) relief was warranted based on "new" evidence from Arizona action | Fain: later-filed pleadings in the Arizona suit revealed fraudulent device-count practices that support scienter here and were newly discovered | Defs: Arizona pleadings predated this suit or were publicly available; plaintiff failed to exercise reasonable diligence to find them | Court: denial affirmed — evidence was not ‘‘newly discovered’’ and plaintiff failed to show reasonable diligence |
| Whether Section 20(a) control-person claims survive | Fain: control-person liability follows if underlying §10(b) claims viable | Defs: underlying §10(b) claims fail, so control-person claims fail too | Court: affirmed dismissal of §20(a) claims as derivative of §10(b) dismissal |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for pleading a strong inference of scienter)
- In re Advanta Corp. Sec. Litig., 180 F.3d 525 (recklessness requires extreme departure from ordinary care)
- Rahman v. Kid Brands, Inc., 736 F.3d 237 (PSLRA heightened pleading discussed)
- In re Alpharma Inc. Sec. Litig., 372 F.3d 137 (difficulties of ‘‘they-must-have-known’’ inference)
- GSC Partners CDO Fund v. Washington, 368 F.3d 228 (recklessness/ scienter standards)
- Winer Family Trust v. Queen, 503 F.3d 319 (leave to amend may be denied as futile)
- Bohus v. Beloff, 950 F.2d 919 (Rule 60(b)(2) newly discovered evidence standard)