HARRIET GOLDSTEIN; ET AL Plаintiffs MICHAEL SABBIA; WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM; DAVID KLEIN; SIMMS FAMILY Plaintiffs - Appellants v. MCI WORLDCOM; BERNARD J EBBERS; SCOTT SULLIVAN Defendants - Appellees
No. 02-60322 Cons w/ 03-60248
United States Court of Appeals for the Fifth Circuit
REVISED AUGUST 25, 2003 FILED July 28, 2003
Before KING, Chief Judge, and REAVLEY and STEWART, Circuit Judges.
Appeals from the United States District Court for the Southern District of Mississippi
Shareholders of WorldCom Corporation (now known as MCI WorldCom) appeal from the dismissal with prejudice of their consolidated amended complaint pursuant to
I.
INTRODUCTION OF THE SINGLE CLAIM ON APPEAL
Now a global telecommunications company with operations in sixty-five countries, MCI WorldCom ( “WorldCom“) began as a small Mississippi company, Long Distance Discount Services, Inc., formed in 1983 and licensed from 1983 to 1985 to provide long distance services only to Mississippi businesses and residents. Beginning in 1984, under the direction of its chief executive officer, defendant Bernard J. Ebbers, this local long distance company acquired other tеlecommunications companies at a phenomenal pace, making over sixty acquisitions in just fifteen years. In line with a strategy of growth by acquisition, in September 1998, WorldCom purchased MCI Communications Corporation in what was then the
Further adverse developments ensued, and by late April 2002, the independent members of the board of directors had called for Ebbers’ resignation. Additionally, on June 25, 2002, WorldCom publicly disclosed that it had discovered substantial accounting irregularities that would require it to restate financial statements for 2001 and the first quarter of 2002. On this same date, WorldCom‘s board of directors also terminated its former chief financial officеr and then executive vice president, defendant Scott D. Sullivan. Approximately four weeks later, on July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.
This suit involves the alleged conduct of WorldCom, Ebbers and Sullivan during only a small (and somewhat early) period (the “class period“) in WorldCom‘s demise - February 10 to November 1, 2000 - when the plaintiffs purchased WorldCom stock. Further, on appeal, we are called upon to address only one claim of fraud - that Ebbers and Sullivan knowingly or with severe recklessness
II.
PROCEDURAL BACKGROUND
On October 26, 2000, WorldCom issued a press release reporting, for the first time, that due to bankruptcies by seventeen of its wholesale customers, WorldCom had decided to write off $685 million pre-tax ($405 million after-tax) in receivables - a write-off that plaintiffs allege was stalled fraudulently to inflate WorldCom‘s financials. The announcement resulted in a drop in the stock price from $25.25 (on trading volumes of approximately 40 million) to $21.75 (on trading volumes of nearly 67 million).
Following this announcement, on November 7, 2000, several lawsuits were filed in Mississippi, New York and Washington D.C. These actions were consolidated with this case (in Mississippi) on March 27, 2001. Lead plaintiffs were thereafter selected, notice to potential class claimants was provided, and on June 1, 2001, the lead plaintiffs filed the consolidated amended complaint (the
The 110-page, 285-paragraph complaint makes numerous allegations of corporate malfeasance on the part of WorldCom, Ebbers and Sullivan, together with violations of Section 10(b) of the 1934 Act, Securities and Exchange Commission (“SEC“) Rule 10b-5 promulgated thereunder (
Relevant for the purposes of this appeal are the allegations that WorldCom‘s uncollectible receivables “skyrocketed” during the сlass period, in part, because the defendants allowed over $500 million of “worthless” accounts receivable to remain on the books, and, consequently, to be inaccurately reflected in WorldCom‘s financials and public statements. This alleged modus operandi of failing to write off clearly uncollectible accounts receivable during the class period resulted from the defendants’ desire to avoid attracting negative attention while federal regulators considered the Sprint merger and to ensure that the stock-for-stock deal was completed on the most favorable terms possible to WorldCom.
On August 8, 2001, the defendants filed a motion to dismiss the plaintiffs’ complaint. In their motion, the defendants argued
On March 29, 2002, the district court granted the defendants’ motion and dismissed the plaintiffs’ comрlaint with prejudice. On this same date, it entered final judgment in favor of the defendants. On April 5, 2002, the plaintiffs timely filed an appeal of the judgment to this court; however, while the appeal was pending, WorldCom, but not Ebbers and Sullivan, voluntarily filed for Chapter 11 bankruptcy protection. After receipt of a “suggestion of bankruptcy,” this court determined that the bankruptcy stay of proceedings (
In consideration of the bankruptcy filing and the events leading up to the bankruptcy filing, on August 23, 2002, the plaintiffs filed, in the district court, a motion for relief from judgment based on certain “newly discovered” evidence. On March 5, 2003, the district court denied the plaintiffs’
It bears emphasizing that because of the stay applicable to proceedings against WorldCom, these appeals proceed only as to claims against Ebbers and Sullivan.
III.
ANALYSIS OF THE PLAINTIFFS’ CLAIM
The only claim against Ebbers and Sullivan the plaintiffs seek to salvage on appeal is that claim related to misrepresentations and omissions in WorldCom‘s financial statements and other statements to the public resulting from Ebbers’ and Sullivan‘s alleged severe recklessness in failing to write off over $500 million of uncollectible accounts receivable. As to this claim, the district court ruled that the plaintiffs had not pleaded facts giving rise to a “strong inference of scienter” on the part of Ebbers and Sullivan.
We review the district court‘s dismissal de novo, Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002), accepting the facts alleged in the plaintiffs’ complaint as true and construing their allegations in the light most favorable to them. Id. However, we will not “strain to find inferences favorable to the plaintiff[s].” Westfall v. Miller, 77 F.3d 868, 870 (5th Cir. 1996).
Before delving into the specific allegations of scienter pleaded in the complaint here, we set forth the pleading standards
A. Section 10(b), Rule 10b-5 and Pleading Requirements under the PSLRA
In their complaint, the plaintiffs allege violations of section 10(b) of the 1934 Act and SEC Rule 10b-5 (promulgated by the SEC under section 10(b) of the 1934 Act).2 It is well-settled
In 1995, Congress amеnded the 1934 Act through the passage of the PSLRA. As we have stated, the PSLRA imposes procedural pleading requirements on plaintiffs pursuing private securities fraud actions. In relevant part, the PSLRA,
In any private action arising under this chapter in which the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
In ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336 (5th Cir. 2002), we coalesced the pleading requirements in the PSLRA and
To summarize, a plaintiff pleading a false or misleading statement or omission as the basis for a section 10(b) and Rule 10b-5 securities fraud claim must, to avoid dismissal pursuant to Rule 9(b) and 15 U.S.C. §§ 78u-4(b)(1) & 78u-4(b)(3)(A):
- specify the [sic] each statement alleged to have been misleading, i.e., contended to be fraudulent;
- identify the speaker;
- state when and where the statement was made;
- plead with particularity the contents of the false representations;
- plead with particularity what the person making the misrepresentation obtained thereby; and
- explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent.
This is the “who, what, when, where, and how” required under Rule 9(b) in our securities fraud jurisprudence and under the PSLRA.
B. Pleading Scienter under the PSLRA
Here, the central issue is whether the plaintiffs have pleaded the scienter element of their claims with requisite specificity.
We cautiously clarified, however, that “[i]t seems clear to us that the PSLRA has not generally altered the substantive scienter requirement for claims brought under section 10(b) and Rule 10b-5.” Id. at 408 (emphasis added). We therefore joined those courts of appeals concluding that “severe recklessness” still constitutes scienter for purposes of claims brought under section 10(b) and Rule 10b-5, as was the law in this circuit before the PSLRA amendments. Therefore, post-PSLRA, plaintiffs can demonstrate scienter by a showing of “severe recklessness” - defined as:
[L]imited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of
misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.
Id. (quoting Broad v. Rockwell, 642 F.2d 929, 961 (5th Cir. 1981) (en banc)). Thus our task here is to review the complaint with a view to determining whether the allegations of fraud contained in the complaint are sufficiently connected to Ebbers and Sullivan such that a strong inference of scienter on their part is appropriate.
(1) Circumstantial Evidence
In this review, we are aided by severаl basic principles. First, “there does not appear to be any question that under the PSLRA circumstantial evidence can support a strong inference of scienter.” Nathenson, 267 F.3d at 410. Thus, factual settings like that confronted by the Second Circuit in Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), do not constitute an evidentiary floor under the PSLRA. There, the plaintiff investors pleaded facts demonstrating that certain management officials of the defendant retail store, Ann Taylor, acted intentionally and deliberately to inflate the company‘s reported financial results artificially by knowingly sanctioning fraudulent inventory management practices. Id. at 304. Specifically, the complaint particularized, through direct evidence, the individual defendants’ involvement in a “box and hold” cover-up scheme whereby out-of-date inventory that constituted as much as 34% of the total inventory was stored in
While this court has agreed that the direct evidence of intent particularized in the Novak complaint certainly meets the procedural prerequisites of the PSLRA, Abrams, 292 F.3d at 432-33, we have never required a plaintiff to present direct evidence of scienter in order to withstand dismissal of his securities claims. Allegations of circumstantial evidence justifying a strong inference of scienter will suffice. See, e.g., Nathenson, 267 F.3d at 424-25 (holding that “the necessary strong inference of scienter” was pleaded as to the president, chief executive officer, and director defendant, in part, because of his heavy involvement in the day-to-day operations of a small company); see also Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (concluding that “the magnitude of the write-off renders less credible the proposition that during the [] Class Period, [the defendant] believed it likely that it could recover those royalty advances through future sales“).
(2) Motive and Opportunity
Second, as to the status of whether allegations of motive and opportunity can create the necessary strong inference of scienter, a question which has notably divided the courts of appeals which have addressed it, we have concluded that “[a]ppropriate allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter,” but that allegations of
(3) Totality of the Circumstances
Finally, we consider all the facts and circumstances alleged to determine whether they, in toto, raise a requisite strong inference of sciеnter. Abrams, 292 F.3d at 430; Nathenson, 267 F.3d at 410. This rule is evident from our discussion in Nathenson. There, plaintiff shareholders brought a class action lawsuit against a Texas-based biopharmaceutical company, its CEO, and two outside directors alleging that these defendants made a series of misrepresentations about two of its potential products awaiting approval by the Food and Drug Administration in order to inflate the company‘s share price artificially. 267 F.3d at 405. The district court dismissed the plaintiffs’ complaint. Id. at 406. As to the majority of the plaintiffs’ claims, we agreed with the district court that dismissal was appropriate. Id. at 426. However, we found error in the district court‘s dismissal regarding the allegation that the defendant company and the defendant CEO represented that its newly acquired patent (known as the Zorgniotti patent) covered the company‘s use of Vasomax, a potential drug product going through the FDA approval process, when the totality of the circumstances, as alleged, provided a strong inference that these defendants knew otherwise but wanted to inflate their company‘s share price. In so doing, we stated:
[T]here are a number of special circumstances here which,
taken together, suffice to support a [strong inference of scienter]. To begin with, [the company] was essentially a one product company, and that рroduct was Vasomax. Thus . . . “the Company‘s future prospects [were] substantially dependent on” Vasomax . . . Further, the patent protection for Vasomax was obviously important . . . [The defendant CEO] is quoted as describing the approval of the Zorgniotti patent as a “crucial event[].” Additionally, the Company had acquired the Zorgniotti patent application in April 1994, so there was ample opportunity to become familiar with it prior to June 1996. In this connection, we also note that the Company is not large. As reflected by its 10K‘s filed April 1, 1996 and March 31, 1997, the Company had only thirty-two full time employees in January 1996 and only thirty-five in January 1997. Finally, the Company‘s June 24, 1996 and November 6, 1996 press releases, which describe the Zorgniotti patent, both quote [the CEO], and an article in the issue of Fortune distributed in mid-February 1998, states: “[i]n a recent interview, [the CEO] concedes, ‘You can say today no patent specifically covers Vasomax;’ he claims the company‘s issued patent ‘broadly covers’ the drug.” Taking all the above factors together we conclude that they suffice, if perhaps barely so, to support the necessary “strong inference” of scienter on the part of [the CEO] and [the company] with respect to the statements that the Zorgniotti patent covers [the company‘s] use of Vasomax.
Id. at 425 (internal footnotes omitted). Thus, as taught by Nathenson (and reaffirmed in Abrams), we must consider any evidence of scienter pleaded by the plaintiffs cumulatively.
C. The Plaintiffs’ Complaint - Public Statements by Ebbers and Sullivan
The complaint alleges that material statements and omissions were made by Ebbers and Sullivan allegedly in connection with the following financial statements and public statements: (1) WorldCom‘s fourth quarter 1999 and year-end results issued on
Regarding these numerous financial statements and public statements to the investing community, including analysts, the complaint maintains that Ebbers and Sullivan knew or were severely reckless in disregarding that a material amount of accounts was uncollectible when strong growth in revenue and profitability was reported by them in these statements. During the February 10, 2000 conference call, for example, Ebbers is alleged to have emphasized
[W]e earned a solid 42 cents from operations in the fourth quarter . . . [W]e produced solid dоuble-digit revenue growth in the fourth quarter . . . Based upon where we exited 1999 we feel every bit of confidence for 2000 analysts’ expectations, top to bottom. This was another solid quarter for MCI WorldCom. The Company posted another quarter of increased profitability resulting from effective merger synergy execution as well as strong double-digit revenue gains . . . Fourth quarter net income nearly tripled compared to fourth quarter of 1998, while operating income more than doubled. EBITDA margins expressed as a percentage of revenues jumped over 11 percentage points during the period to over 37% . . . We significantly increased our profitability and the quality of our earnings.
The falsity of these allegedly material statements and omissions is not at issue on appeal. We nevertheless briefly set forth the complaint‘s allegations that these statements were false.
D. Allegations that these Statements Were False
Assurances accompanied WorldCom financial statements to the effect that such statements were prepared in accordance with generally accepted accounting principles (“GAAP“) and that, in the opinion of management, the financial statements fairly representеd
Regulation S-X (
As did the district court, we assume as true the complaint‘s allegations of false statements or omissions stemming from the failure to write off uncollectible accounts receivable.
E. Scienter Allegations
Under the PSLRA, it is not enough to particularize false statements or fraudulent omissions made by a corporate defendant. Plaintiffs must also particularize intent allegations raising a “strong inference of scienter.” The critical issue in this case is whether the allegations of fraud contained in the plaintiffs’ complaint are sufficiently connected to Ebbers and Sullivan such that this strong inference of scienter on their part is appropriate. In the complaint, the plaintiffs state that as of February 10, 2000, Ebbers and Sullivan were aware of the existence of “no less than $685 million of grossly delinquent, disputed and uncollectible receivables” but “knowingly permitted the Company‘s balance sheets to reflect [these] grossly delinquent, disputed, and uncollectible receivables . . . and knowingly permitted the Company‘s income statements to fail to reflect a charge to earnings to reflect the write-off of these receivables.” In support of this allegation, the plaintiffs point to several pieces of
(1) Motive and Opportunity
First, the plaintiffs cite to what they characterize as “monumental” motive and opportunity evidence stemming from the Sprint merger, and, as to Ebbers individually, Ebbers’ compensation package. As alleged by the plaintiffs, the defendants initially sought to avoid taking a charge for uncollectible accounts receivable until the Sprint merger was approved by Sprint and WorldCom shareholders; then, once Sprint and WorldCom shareholders approved the merger, the defendants thereafter continued to issue artificially inflated results to ensure the deal was completed on terms most favorable to WorldCom.4 However, in September 2000, after thе Sprint merger was rejected by federal regulators (on July 13, 2000) and after alleged substitute merger plans with Intermedia were blocked by unexpected legal hurdles,5 the defendants allegedly
“could no longer hide” the uncollectible accounts receivable problem through a merger. Therefore, allegedly as a result of these circumstances, in September 2000, assistant controller Steven Rubio for the first time pushed WorldCom‘s legal group in Tulsa to write off the huge backlog of uncollectibles, stating “get [the] stuff off the books.” Ten weeks after this directive, WorldCom announced the write-off of $405 million (after tax) of uncollectible receivables.
The plaintiffs cite further motive evidence related specifically to Ebbers. As alleged, Ebbers’ compensation largely depended on WorldCom‘s reported financial results and stock price appreciation. More importantly for purposes of demonstrating a strong inference of scienter, the plaintiffs allege that if WorldCom‘s stock price dropped “significantly,” Ebbers stood to lose millions in compensation and, if Ebbers’ compensation underwent a “materially adverse” change, certain personal loans – which were secured by Ebbers’ shares of WorldCom stock – would immediately become due. For example, in the complaint, the plaintiffs cite to Ebbers’ personal obligations to Bank of America, including a $36 million loan and a $25 million loan, which would become due and payable upon an event of default, which included, among other things, any materially adverse change in Ebbers’ compensation package from WorldCom.
The motive evidence related to Ebbers individually is likewise not “without merit.” Since Ebbers’ loans from outside lenders, such as the Bank of America loans, were collateralized by his WorldCom stock, if the value of the stock declined such that his compensation package (including bonuses dependent on the appreciation of WorldCom stock) underwent a materially adverse change, Ebbers would have to sell his WorldCom stock immediately to repay these obligations. As alleged, this forced sale situation would have a substantial negative impact on the value of Ebbers’ WorldCom stock and thus served as a strong and unique incentive for Ebbers to “inflate” WorldCom‘s stock price artificially.
While, at least as to Ebbers individually, we find these allegations of motive and opportunity sufficiently particularized, as we stated in Abrams, our court requires more than allegations of motive and opportunity to withstand dismissal. To this end, we discuss the plaintiffs’ allegations of other circumstantial
(2) Other Circumstantial Evidence of Scienter
In addition to allegations of motive and opportunity, the plaintiffs also point to allegations of circumstantial evidence claimed to support a “strong inference of scienter.” These allegations relate to: (1) the timing of the write-off, which indisputably occurred after the failed Sprint merger and the failed substitute Intermedia merger; (2) the magnitude of the write-off, which was, pre-tax, 62% of the total reserves balance and 28% of the net income for the third quarter of fiscal 2000; (3) Ebbers’ close involvement in the day-to-day operation and management of WorldCom; and (4) Ebbers’ and Sullivan‘s positions in WorldCom, including their alleged decision-making roles in writing off uncollectible accounts.
Upon review, we agree with the district court‘s assessment of the allegations of circumstantial evidence here. The allegations fall short of meeting the “strong inference of scienter” requirement as to Ebbers and Sullivan.
As to the timing of the write-off, the plaintiffs’ complaint fails to connect Ebbers or Sullivan to the statement by Rubio in September 2000 (approximately three months after the Sprint merger failed) to “get [the] stuff off the books.” Thus, the plaintiffs’ argument that the timing of Rubio‘s instruction is circumstantial evidence that Ebbers and Sullivan were motivated by the Sprint merger to avoid making necessary write-offs is not supported by
The plaintiffs primarily focus on the last category of circumstantial evidence claimed to demonstrate scienter on the part of Ebbers and Sullivan – that Ebbers’ and Sullivan‘s decision-making roles in the write-off process demonstrate, at the very least, that with severe recklessness they disregarded the accounts receivable problem. However, regarding this allegation, the complaint describes a confusing procedure for writing off delinquent accounts and completely fails to connect Ebbers or Sullivan to the write-off procedure in a manner that demonstrates involvement in the initiation of write-offs. We see these shortcomings in the complaint as critical regarding the ability of the complaint to survive dismissal.
As alleged, the legal department in Tulsa (consisting of six employees) frequеntly prepared a list of delinquent accounts. A copy of this list was sent each month to certain financial
The complaint‘s presentation of WorldCom‘s confusing system of writing off delinquent accounts further convinces us that the allegations here do not support a “strong inference of scienter” on the part of Ebbers or Sullivan. As set forth in the plaintiffs’
Moreover, the complaint itself characterizes the write-off process as “cumbersome” and states that it was often ignored in the legal department, not because of some overarching directive by the defendants, but because of the unwieldy process. For example, the complaint states that:
In order to complete a write-off, an employee had to go into the billing platform, fill out specific forms, write a memorandum to management explaining why the write-off was necessary, and seek express management approval. Although monthly reports were prepared informing management of accounts in litigation and bankruptcy, actual write-offs were not done in a timely fashion because the process was cumbersome. According to the Supervising Paralegal, the legal group would generally “put the accounts back on the shelf somewhere and say
when we have some time we‘ll do them.”
With a complaint specifically describing a process that was difficult to follow (аnd admittedly much easier to ignore) and a system that allegedly called for write-offs to be initiated from the legal department rather than upper management, much less Ebbers or Sullivan, we cannot agree that this complaint specifically alleges facts demonstrating a “strong inference of scienter” as to Ebbers and Sullivan. For example, the complaint fails to allege that Ebbers ever actually received a write-off request, delayed responding to a write-off request, or rejected a request to write off a delinquent account.
Additionally, after discussing the centralized legal group in Tulsa as controlling the information on all delinquent accounts and initiating any write-off of a delinquent account, the complaint confusingly switches gears to refer to four receivable centers (located in Dallas, San Antonio, Denver, and Atlanta) that are apparently charged with managing the collection of account receivables for key business accounts. However, the complaint does not differentiate between the accounts handled by these centers and those handled by the legal group in Tulsa, nor does it inform us whether the accounts handled by these receivable centers are included in the monthly reports generated by the legal department. In sum, the complaint‘s description of the process for handling delinquent accounts depicts a mismanaged accounts receivable
The plaintiffs claim that Ebbers and Sullivan made statements to the public regarding the financial growth of WorldCom when they knew or recklessly disregarded that millions of dollars’ worth of uncollectible accounts receivable were being kept on the books. In order to particularize their complaint to demonstrate a strong inference of scienter as to this kind of claim, the plaintiffs must tie Ebbers and Sullivan to the allegedly delinquent and uncollectible accounts. The complaint fails to include allegations of this nature.
Our decision in Abrams guides this determination. There, the plaintiff shareholders brought suit against a Houston-based oil and gas services company, the company‘s chief operating officer and its chief financial officer, contending that the defendants inflated the stock price of the company artificially by failing to write-off millions-of-dollars’ worth of uncollectible accounts receivable, make necessary inventory write-downs, and account for certain employee compensation. Abrams, 292 F.3d at 427, 429. The plaintiffs’ allegations were based on circumstantial evidence of scienter, including: (1) that the individual defendants (the CEO and CFO) received daily, weekly, and monthly financial reports that
[T]he[] allegations fail to reach the required standard. Plаintiffs point to no allegations that the defendants knew about the internal control problems, only that they should have known based on their corporate positions within the company . . . The plaintiffs’ allegations regarding non-specific internal reports are also inadequate. An unsupported general claim about the existence of confidential corporate reports that reveal information contrary to reported accounts is insufficient to survive a motion to dismiss. Such allegations must have corroborating details regarding the contents of allegedly contrary reports, their authors and recipients. Also the mere publication of inaccurate accounting figures or failure to follow GAAP, without more, does not establish scienter. The party must know that it is publishing materially false information, or must be severely reckless in publishing such information. The plaintiffs point to no specific internal or external report available at the time of the alleged misstatements that would contradict them.
Id. at 432 (internal footnotes omitted).
As in Abrams, because the complaint here presents what could best be described as allegations of mismanagement of WorldCom‘s
IV. ANALYSIS OF THE PLAINTIFFS’ REQUEST TO AMEND
At the end of their responsive briefing to the defendants’ motion to dismiss, the plaintiffs requested leave of the district court to amend their complaint. In full, this general request states:
Should this Court find that the Complaint is insufficient in any way, however, plaintiffs respectfully request leave to amend.
The Fifth Circuit recognizes that leave to amend shall be freely given when justice so requires. Moreover, “although the decision whether to grant leave rests within the sound discretion of the district court,” the federal rules strongly favor granting leave to amend. Indeed virtually all of the cases relied on by defendants allowed plaintiffs to amend following a 12(b)(6) dismissal.
(internal citations and footnote omitted). Finding that the request was “not well taken” and that the plaintiffs “have had ample opportunity to plead their case,” the district court denied the plaintiffs’ request. We uphold this denial.
In discussing a district court‘s discretion to deny a litigant leave to amend under
Here, as pointed out by the district court, in addition to being poorly drafted and repetitive, the 110-page complaint is rich in legal deficiencies. Yet, almost as an afterthought, the plaintiffs tacked on a general curative amendment request to the end of their response in opposition to the defendants’ motion to dismiss. The plaintiffs were certainly aware of the defendants’
See McKinney v. Irving Indep. Sch. Dist., 309 F.3d 308, 315 (5th Cir. 2002) (finding no abuse of discretion in the district court‘s denial of leave to amend where the plaintiffs failed to file an amended complaint as a matter of right or submit a proposed amended complaint in a request for leave of the court and the plaintiffs failed to alert the court as to the substance of any proposed amendment).
V. ANALYSIS OF THE PLAINTIFFS’ RULE 60(b)(2) REQUEST
A. Substance of the Plaintiffs’ Motion
In their motion, the plaintiffs asked the district court “to reopen this matter and allow Plaintiffs to file a Second Amended Complaint” due to “crucial, newly discovered evidence that, if presented in this matter, would likely change the result of dismissing this case with prejudice.” Although the complaint contained allegations of misstatements and omissions resulting from a wide variety of financial irregularities, the
In their post-judgment briefing, the plaintiffs maintained that this material supports their contentions that the defendants intentionally made false statements during the class period. The plaintiffs generally stated that WorldCom‘s report on Form 8-K, filed with the SEC on August 8, 2002, is “crucial” in that it reveals that WorldCom‘s 1999 and 2000 financial statements would require restatement and included over $3 billion in additional accounting errors. However, other than this general statement, the only portion of the attached evidence specifically referenced by the plaintiffs in their post-judgment briefing is a portion of the transcript from the guilty plea of David Myers who, as alleged, reported directly to Ebbers and Sullivan as upper management. The cited portion of the transcript provides:
From at least October 2000 through June 2002, internal financial reports at WorldCom consistently reflected that WorldCom‘s expenses as a percentage of revenue were too high to meet analysts’ expectations and management‘s guidance to professional securities analysts and the investing public. As a result, I was instructed on a quarterly basis by senior management to ensure that entries were made to falsify WorldCom‘s books to reduce WorldCom‘s reported actual costs and therefore to increase WorldCom‘s reported earnings. Along with others, who worked under my supervision and at the direction of WorldCom senior management, such accounting adjustments were made for which I knew that there was no justification or documentation and which I knew were not in accordance with Generally Accepted Accounting Principles.
The district court denied the plaintiffs’ motion. The court recognized that “[s]ince the Opinion and Order of this Court of March 29, 2002, the near collapse and bankruptcy of WorldCom and its firing of Ebbers and Sullivan have been national news and WorldCom has made public admissions of financial irregularities . . . [and] [t]hus it would appear that as of the time of filing their Amended Class Action Complaint . . . serious financial misstatement and perhaps securities fraud had occurred.” However, without addressing the
The Complaint was dismissed partly because of a failure to plead scienter. The discovery of this new evidence does not change the fact that scienter was not pled with particularity in the Complaint. The Plaintiffs are not entitled to amend their complaint in order to replead with particularity an element such as scienter that should have been properly pled in the beginning. Plaintiffs complain that they were unable to discover this information because they were prohibited from taking formal discovery by the PSLRA. This is precisely the purpose of the pleading requirement of the PSLRA, for the
plaintiff to lay out the who, what, when, and where in the pleadings before access to the discovery process is granted, to prevent abusive, frivolous strike suits.
(emphasis added). Below, we discuss tension we perceive between language in this order and our cаse law.
C. Rule 60(b) Standards and the PSLRA
The only issues on appeal of a
The basis of the district court‘s order is that,
Here, the district court interpreted our
The “now” in the portion of the Nathenson opinion cited by the district court in support of its conclusion that new evidence cannot, as a matter of law, ever be the basis of a
Ultimately, we need not decide whether or to what extent new evidence, discovered after the dismissal of a complaint based on the plaintiff‘s failure to satisfy the requirements of the
Here, the lack of evidence of particularized pleading in this case persuades us to uphold the district court‘s denial of the plaintiffs’
Even if we assume for the sake of this appeal that the newly discovered evidence submitted by the plaintiffs is admissible and credible, two issues the defendants vehemently dispute, the plaintiffs’
The
As with the plaintiffs’ request for leave to amend, the plaintiffs did not submit a proposed second amended complaint with their
VI. CONCLUSION
In No. 02-60322, we AFFIRM the judgment of the district court only insofar as it dismissed with prejudice the plaintiffs’ complaint against Ebbers and Sullivan; we retain jurisdiction of the pending appeal as to WorldCom. In No. 03-60248, we AFFIRM the district court‘s post-judgment order denying the plaintiffs’
Notes
Section 10(b) provides in relevant part:
It shall be unlawful for any person, directly or indirectly . . .
(b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.
It shall be unlawful for any person, directly or indirectly . . .
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security.
Every person who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extent as such controlled person.
Included in the complaint is a citation to APB Opinion No. 28, Interim Financial Reporting, which states that this GAAP requirement also applies to interim financial statements:
The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Examples of such items include . . . allowance for uncollectible accounts.