NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 13a0789n.06 No. 12-3951 UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
BRUCE E. RICKER, Plaintiff-Appellant,
v. ZOO ENTERTAINMENT, INC.; MARK SEREMET; DAVID FREMED, Defendants-Appellees. ) ) ) ) ) ) ) ) ) ) ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO

Before: NORRIS, COOK, and McKEAGUE; Circuit Judges.COOK, Circuit Judge. Plaintiff-appellant Bruce Ricker appeals the dismissal of a classaction securities complaint alleging that defendants-appellees Zoo Entertainment, Inc., Mark Seremet, and David Fremed (collectively, “Zoo”) published material financial statements with reckless disregard of their falsity in violation of § 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j (the “Act”), Rule 10b 5 promulgated thereunder, 17 C.F.R. § 240.10b 5, and § 20(a) of the Act, 15 U.S.C. § 78t(a). Because Ricker’s pleadings fail to support a “strong” inference that Zoo acted with scienter, we affirm.No. 12-3951

Ricke r v. Zoo Entm’t Inc.
I
. A. Fa ctual B ackground
Z oo develops, publishes, and distributes video g am e softwar e. Throug hout the proposed class period, Sereme t and Fr emed serve d as Z oo’s Chief Ex ecutive Offic er and Chief Financ ial Offic er, respe ctively
. David Rosenbaum serve d as President of Z oo Publis hing, a separ ate company controlled by Z oo. On J uly 7, 2010, the first day of the proposed class period, Z oo price d 1.6 milli on
s hare s of common stock for public offe ring and filed its final securities reg istration form with the SEC. Wit h its reg istration, Z oo provided its first-quar ter 2010 10-Q, which included the company ’s unaudited financ ial statements for that quarte r. Z oo filed its 10-Qs for the second and third quarte rs 1 of 2010 that August and Novembe r, re spectively
. On April 15, 2 0 1 1 , t h e cl ass period’s closing date, Z oo made three disclosures in a press
re l ease . First, despite rec ord reve nue in fiscal y ear 2010, Z oo’s y ear -end audit reve aled ear l i er “er rors in rec ording ce rt ain transac tions in the company ’s unaudited consolidated financ ial statements,” that led Z oo to “re state its u n audit ed consolidated financ ial statements for these periods.” In the acc ompanying For m 8-K (“the restate ment”), Z oo conclude d that its 10-Qs for the first, second, and third quarte rs of 2010 “should no longer b e relied upon.” Z oo attributed these

As a publicly trade d compa n y , Zoo filed a 10-Q afte r eac h of its fiscal y ear ’s first three 1 quarte rs. The 10-Q includes unaudited financ ial statements and public updates on Z oo’s financ ial position. See For

m 10-Q, available at

http:// www.se c.g ov/answer s/form10q.htm. - 2 -No. 12-3951

Ricker v. Zoo Entm’t Inc. errors, in part, to “errors in recording certain transactions.” Restating revenue for those quarters, thecompany decreased 2010 first-quarter revenue by 3% ($17.132 million to $16.662 million), secondquarter revenue by 6% ($10.47 million to $9.776 million), and third quarter revenue by 2% ($17.581 million to $17.253 million). The press release also disclosed that Zoo’s independent accountants issued an opinion raising “substantial doubt about [Zoo’s] ability to continue as a going concern.” The third and final announcement explained that weakness in the video game market led to lower-than-expected fourth quarter 2010 revenues typically Zoo’s highest revenue period. The next trading day, Monday, April 18, 2011, Zoo’s common stock price dropped 34.3%. Thereafter, Ricker sued, alleging that Zoo violated securities laws by filing 10-Qs “with . . . reckless disregard of their falsity at the time of such publication.” B. Allegations Supporting Scienter
1. Cokem & Witness 3 Ricker’s complaint primarily relies on information provided by Witness 3, a confidential witness and former employee in Zoo’s accounting department. Witness 3 alleged that problems 2 “While . . . anonymous sources are not altogether irrelevant to the scienter analysis,” 2 conclusory or vague allegations do not deserve much weight. Ley v. Visteon Corp. , 543 F.3d 801, 811 (6th Cir. 2008) (citation omitted), abrogated on other grounds by Matrixx Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309, 1323 25 (2011), as recognized in Frank v. Dana Corp. , 646 F.3d 954, - 3 -No. 12-3951

Ricker v. Zoo Entm’t Inc. with one of Zoo’s largest customers, Cokem, led Zoo to improperly recognize revenue. Witness 3 maintained that payments received from Cokem were always past due, and that she emailed Fremed and Rosenbaum, relaying that Cokem’s owner was “very difficult to deal with[,] . . . never paid on time and demanded rebates and discounts well beyond” those afforded to other companies. (R. 14, Am. Compl. ¶ 32.) Despite Witness 3’s attempts to prompt Cokem to pay its bills, she alleges that Rosenbaum cut deals with Cokem that forced Zoo to collect far less than Cokem owed. This prevented her from accurately projecting cashflow and hindered her ability to evaluate important billing and collection matters. Witness 3 further claims to have alerted Fremed and Seremet to the collection problems, emailing them daily “Year to Date Sales” reports that monitored what Zoo billed, the cash it received, and outstanding accounts receivable. Witness 3 stated that she told Fremed and Seremet about the inaccuracies in her cashflow projections, warning Seremet to “look closely at Rosenbaum and Cokem.” Also, “[d]uring the Class Period, Witness 3 remembers hearing discussions of Company employees, questioning whether sales to Cokem were final” and stretching to “mak[e] the numbers . . . [by] push[ing] product with unusual sales enhancements.” Even as Cokem’s share of Zoo’s net revenue grew from 14% in 2008 to 40% in 2010, Ricker alleges that Seremet and Fremed allowed Rosenbaum, the Cokem account’s primary contact and 960 62 (6th Cir. 2011). Here, Witness 3’s employment in Zoo’s accounting department positioned her to learn of the facts now alleged. The district court therefore credited Witness 3’s perceptions more than the anonymous source in Ley
. See also Halford v. AtriCure, Inc. , 2010 WL 8973625, at *3, *9 12 (S.D. Ohio Mar. 29, 2010) (crediting six confidential witnesses’ allegations after examining their job descriptions to ascertain whether any could have gained first-hand knowledge of the facts attributed to him or her). - 4 -No. 12-3951

Ricker v. Zoo Entm’t Inc. salesperson, to “maintain strict control over the relationship and contact with Cokem.” This delegation of control, Ricker reasons, coupled with Seremet and Fremed’s purported knowledge of problems with the Cokem account, demonstrates that Zoo “should have known that revenue numbers for Cokem were highly suspect.” When the time came to restate revenue, however, Witness 3 played no role; Zoo “excluded” her from its restatement process. 2. Atari Litigation Ricker next alleges that an Atari lawsuit filed against (and settled by) Zoo during the class period corroborates Zoo’s alleged revenue-recognition problems with Cokem and further supports scienter. Incorporating allegations from Atari’s complaint, Ricker explains that Zoo contracted with Atari to advance funds enabling Zoo to fulfill existing video-game purchase orders. In exchange, Zoo would remit payment for those purchase orders to Atari, including $1.6 million Cokem owed. Atari went unpaid and sued, claiming one of two things had occurred. Either Zoo received money for the purchase orders and kept it, or one or more of Zoo’s customers cancelled purchase orders covered by the Atari agreement and Zoo retained Atari’s advance. 3. Weak Internal Accounting Controls Ricker alleges that Zoo’s awareness of its weak internal controls particularly the lack of adequate finance staff supports a strong inference that it recklessly issued the 10-Qs. Zoo disclosed the following in its challenged 10-Qs:
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Ricke r v. Zoo Entm’t Inc.
Our manag ement has dete rm i n ed that we have a materia l weakness in our internal control over financ ial repor ting related to not having a sufficie nt number of personne l with the appropr iat e l evel of experience and technica l expertise to appropr iately resolve non-routine and complex acc ounting matters or to evaluate the impact of new and exis ting acc ounting pronounce ments on our consolidated financ ial stat ements while completing the financ ial statements close proce ss. We are committed to addre ssing this in 2010 and we will rea s s es s our acc ounting and financ e staffing levels to deter

mine and seek the appropr iate acc ounting resour ces to be added to our staff to ha ndle the existi ngworkload. ( E.g. , R. 17-7, Z oo 2010 Q1 10-Q at 7.) Ricker alleg es that beca use reve nue rec og nition is “routine and non-complex,” th is d is closure should not shield Z oo’s reve nue-r ecognition err or; Z oo acte d with scienter by failing to also “ale rt investors that the most basic acc ounting matters wer e, themselves, suspect.” 4. Mag nitude of the Restate ment
Z oo restate d 3% of reve nue for the first quarte r of 2010, 6% for the second quarte r of 2010, and 2% for the third quarte r. The reduc ed reve nues neg atively aff ecte d diluted-net-income per share and dil uted-ne t-loss per share. The re s t at ement caused Zoo’ s diluted-net-income per share to fall from $0.10 to $0.01 for t h e fi rs t q u ar ter of 2010; diluted-net-loss per share to rise from $0.11 to $0.22 during the second quarte r of 2010; and diluted-net-income per share to fall from $0.04 to $0.01 during the t hird quarte r of 2010. Ricker acknow ledg es the modest level of these reve nue restate ments, but posits t h at t he “re latively small overstate ment of reve nue” cause d “a massive overstate ment of net income and
. . . [earning s per share ],” allowing Z oo the “ability to manipulate

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Ricke r v. Zoo Entm’t Inc.

reve nue numbers
. . . and repor t positive ear

nings.” This overstate ment of income and ear nings per share , Ricker a

rgues, supports a stronginfere nce of scienter
. 5. Reportingof F alse F inancial Statements
R i ck er alleg es that beca

use Z oo’s reve nue-r ecognition policy trac ked g ener ally acc ept ed
acc ounting principles (“G AAP”), Z oo’s manag ement knew how to proper ly rec og nize reve nue, and their fa ilure to do so here supports finding sc ienter. 6. Depa rture of Z oo Ex ecutives
To further support a strong infere nce of scienter , Ricker highlig hts the depar tures of three high- ranking Z oo officia ls afte r the restate ment. First, Wit ness 3 alleg ed th at Rosenbaum “lef t beca use he knew the Company was a bout to ask him to leave .” Second, director J ohn Be ndheim,
a former member of Z oo’s Audit Commi ttee, resig ned. And third, within three month s of the restate ment, Chief Oper atingOffic er Steve Buc hanan le ft Z oo Publis hing. 7. Motive to Raise Capital
Ricker’ s co m p l aint also includes financ ial information that, he argues, demonstrates that Z o o ’s “c ap i t al raise just happene d to coincide with the near exhaustion of Z oo’s cash on-hand.” Wit hout that capital, Z oo could not have funded the projec ts it outlined in the offe ring ’s prospec tus: $ 2 milli on to develop digital initiatives, $1.1 milli on to repa y an advanc e, and $4.8 mill i o n i n
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Ricker v. Zoo Entm’t Inc. working capital. Though not expressly alleged in his complaint, Ricker concludes that, considering this information, Zoo was “motivated to commit fraud.” (Appellant Br. at 40 41.) C. District Court Proceedings After evaluating Zoo’s complaint “holistically,” the court concluded that Ricker failed “to set forth a single allegation, let alone allegations leading to a strong inference of fraud, that the problems with the Cokem account had anything at all to do with the restatement.” Without information tying Witness 3’s allegations about Cokem to the need to restate revenue, Ricker’s complaint showed “at most[] that Zoo was financially mismanaged, not that Defendants fraudulently misled the public.” Ricker timely appeals the district court’s adverse scienter determination.
II. We review the district court’s dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) de novo, “‘constru[ing] the complaint in the light most favorable to the plaintiff’ and ‘accept[ing] all well-pleaded factual allegations as true.’” Ashland, Inc. v. Oppenheimer & Co., Inc. , 648 F.3d 461, 467 (6th Cir. 2011) (quoting La. Sch. Emps.’ Ret. Sys. v. Ernst & Young, LLP ( LSERS ), 622 F.3d 471, 477 78 (6th Cir. 2010)). To prevail on his § 10(b) and Rule 10b 5 claim, Ricker’s allegations must show “(1) a material misrepresentation or omission . . . ; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx
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Ricker v. Zoo Entm’t Inc. Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309, 1317 (2011). Recklessness satisfies § 10(b)’s scienter element if plaintiffs demonstrate that defendants engaged in “highly unreasonable conduct which is an extreme departure from the standards of ordinary care.” LSERS , 622 F.3d at 478 (quotation omitted, emphasis added). The Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u 4(b), imposes more exacting pleading requirements than Federal Rules of Civil Procedure 8(a) and 9(b). See Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 313 (2007); Frank v. Dana Corp. , 547 F.3d 564, 570 (6th Cir. 2008). Plaintiffs “shall, with respect to each act or omission alleged . . . , state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u 4(b)(2). A “strong” inference of scienter “must be more than merely plausible or reasonable it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. , 551 U.S. at 314. Before finding that a defendant acted recklessly, we “typically look for multiple, obvious red flags.” PR Diamonds, Inc. v. Chandler , 364 F.3d 671, 686 87 (6th Cir. 2004), abrogated on other grounds by Matrixx Initiatives, Inc. , 131 S. Ct. at 1309. That is, “warning signs that would have revealed the accounting errors prior to their inclusion in public statements.” Id. at 686 (emphasis added). Applied here, we review Ricker’s pleadings to determine if he alleges facts supporting a strong inference that Zoo recklessly issued the challenged 10-Qs. We must decide whether Zoo’s decision to publish the 10-Qs constituted highly unreasonable conduct that was an extreme departure from the standards of ordinary care.

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Ricker v. Zoo Entm’t Inc. Pleadings falling short of the PSLRA’s heightened standard “shall” be dismissed. 15 U.S.C. § 78u-4(b)(3). In light of our duty to consider “plausible opposing inferences” and review the complaint’s allegations “holistically,” Tellabs, Inc. , 551 U.S. at 322 26; accord Matrixx Initiatives, Inc. , 131 S. Ct. at 1324 25, we “forgo [an] itemized claim analysis,” Ashland, Inc. , 648 F.3d at 469; accord Frank, 646 F.3d at 961. Upon fresh review, we conclude that Ricker’s allegations, considered together, do not give rise to a strong inference that Zoo acted with scienter. The inference that Zoo recklessly disregarded internal revenue-recognition problems to issue nine months’ worth of financial statements is not as strong as at least one opposing inference: Zoo, a small company with acknowledged deficiencies in its accounting department, miscalculated revenue from Rosenbaum’s account, precipitating the Atari litigation, this lawsuit, the restatement, and Rosenbaum’s departure from Zoo. And factoring in the auditors’ “going concern” opinion, the other two executives’ departures make more sense than Ricker’s securities-fraud alternative. Additionally, Ricker’s pleadings, which focused on problems surrounding one account, failed to allege the “multiple, obvious red flags” that we typically require before inferring recklessness. PR Diamonds , 364 F.3d at 686. Ricker’s amended complaint thus falls short of the PSLRA’s heightened pleading requirements. Although Ricker cobbles together a long list of alleged errors from Cokem, to the Atari litigation, to the departures of executives viewed “holistically,” they stop short of raising an inference at least as compelling as a nonfraudulent inference. LSERS , 622 F.3d at 478. We agree
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Ricker v. Zoo Entm’t Inc. with the district court. Ricker’s complaint showed “at most, that Zoo was financially mismanaged, not that Defendants fraudulently misled the public.” (R. 31, Op. & Order at 11.) Ricker presents an independent argument for reversal, arguing that because Zoo knew of alleged revenue-recognition problems “similar in nature and temporally proximate to the reasons for the restatement,” that alone raises “a strong inference that Defendants acted recklessly.” Ricker cites In re Goodyear Tire & Rubber Co. Securities Litigation , 436 F. Supp. 2d 873 (N.D. Ohio 2006), for the proposition that a plaintiff’s complaint should survive a motion to dismiss if it pleads “similarity and temporal proximity” between an earlier-known accounting irregularity and the accounting irregularity disclosed in the restatement. Elaborating at oral argument, Ricker’s counsel explained that, in his view, “the 40% of Cokem revenue need not have anything to do with what ultimately was restated for the defendants to have been aware of and willfully disregarded red flags.” (Oral Arg. at 29:59 30:10.) Because Witness 3 informed Zoo of revenue-recognition concerns, and the restatement owed in part to “errors in recording certain transactions,” Ricker’s complaint should survive Zoo’s motion-to-dismiss stage, so his argument goes. Goodyear , a district court opinion, never offered such a rule. The Goodyear court rejected the plaintiffs’ allegation that the company’s prior knowledge of an accounting irregularity supported scienter, because the earlier irregularity suffered a “total lack of similarity and temporal proximity” to the accounting irregularity later disclosed in Goodyear’s restatement. Id. at 894. But the Goodyear court did not stop there; it then considered the plaintiffs’ scienter allegations in their
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Ricker v. Zoo Entm’t Inc. entirety. See Goodyear , 463 F. Supp. 2d at 893 903 (evaluating, among other factors, admissions of accounting irregularities, deliberate acts of fraud, manipulation of internal systems and pension discount rates, motive and opportunity). Ultimately, the court concluded that plaintiffs failed to plead “specific facts, which, when viewed cumulatively, persuade the Court” that defendants “should have known about Goodyear’s problems.” Id. at 893. The timing and relatedness of the alleged 3 accounting errors formed only one part of the court’s scienter analysis. This makes sense. The PSLRA will not automatically allow a claim alleging, for example, irrelevant yet temporally and substantively similar conduct to proceed beyond the pleading stage. We must assess the entire complaint to determine whether its allegations give “rise to a strong inference” of scienter. 15 U.S.C. § 78u 4(b)(2)(A). The district court’s opinion did precisely this, holding that, “even if [Zoo] knew or should have known that the Cokem account was potentially problematic, . . . this simply does not reasonably lead and certainly does not strongly lead to the inference that [Zoo] knew or should have known that the original financial statements were false.” (R. 31, Op. & Order at 11.) We agree.

When Goodyear

was decided, a plaintiff needed to show the inference of scienter was the 3 “most plausible” inference. Helwig v. Vencor, Inc. , 251 F.3d 540, 553 (6th Cir. 2001)

. But Tellabs, Inc. v. Makor Issues & Rights, Ltd. overruled Helwig on this point, and now an inference of scienter must be “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” 551 U.S. 308, 314 (2007) (emphasis added). - 12 -No. 12-3951

Ricke r v. Zoo Entm’t Inc.
I I I
. Alternatively , Ricker argues that the district court abused its discretion by g ra n t i n g Zoo’s motion to dismiss and closing the case without addre ssing Ricker’ s “re quest to amend the Complaint to attempt to cure whateve r def ect the district c ourt perc eived in the Complaint.” Although Z oo’s motion to dismiss put Ricke r on notice of the alleg ed scienter defic iencies in his amende d complaint, he never moved for a second leave to amend. Yet he now invokes Rule 15(a) ’s liberality to argue that he should have another chanc e. “[T] he PSL RA restric ts the scope of Rule 15(a) in the context of secur itie s litigation such that plaintiffs have more limit ed ability to amend their complaint s . ” L S E R S , 622 F.3d at 486. “[I ]n the post-judgme nt context, we must be particula rly mindf u l o f n ot only potential prejudice to the non-movant, but also the movant’s explanation for failing to seek leave to amend prior to entry of judgme nt.” Id. (quotation omitted).
Ricker explains that he failed to file a pre- dismiss al m otion to amend beca use he “wa s
unawa re of what defe cts, if any , the Court would perc eive in the Complaint,” and first deser ved “the opportunity to analy

ze the supposed defic iencies in the Complaint to deter mine whether he [could]
cure them.” Plaintiffs, howeve r, “‘[are ] not entitled to an advisory opinion from the Court informing them of the defic iencies of the complaint and then an opportunity to cure th o s e d eficiencies.’ ” W inget v. JP Morgan Chase Bank, N.A. , 537 F.3d 565, 573 (6th Cir. 2008) (quoting PR Diamonds, 364 F.3d at 699). The c ourt ac ted within its di scre tion in denying le ave to amend.

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Ricker v. Zoo Entm’t Inc. This conclusion maintains even if we take judicial notice of Zoo’s 2011 Form 10-K (which, we note, Ricker failed to bring to the district court’s attention despite ample time to do so). That report discloses that Cokem accounted for less than 11% of Zoo’s gross revenue in 2011 down from 40% in 2010. This decline, Ricker argues, supports an inference that Zoo acted recklessly by issuing the 2010 10-Qs despite Witness 3’s revenue-recognition warnings. Although it could have been that Rosenbaum’s control over Cokem caused Zoo to improperly recognize 2011 revenue, it could as likely have been that the ending of Rosenbaum’s relationship with Cokem or the general decline of the economy caused a 2011 sales drop. Nevertheless, the 2011 10-K fails to bolster Ricker’s claim. Ricker has simply failed to state facts giving rise to a strong inference of recklessness.
IV.
We AFFIRM.

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