NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

______________

Nos. 16-2436 & 16-3796

______________

RYAN FAIN, on behalf of himself and all others similarly situated,

Appellant

v.

USA TECHNOLOGIES, INC.; STEPHEN P. HERBERT; DAVID F. DEMEDIO; 

JAMES DUNCAN SMITH.

______________

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. No. 2-15-cv-05427)

District Judge: Honorable Mark A. Kearney

______________

Argued on March 28, 2017

Before: AMBRO, VANASKIE, and RESTREPO, Circuit Judges

(Opinion Filed: August 30, 2017)

Adam M. Apton [ARGUED]

Levi & Korinsky

1101 30th Street, N.W., Suite 115

Washington, DC 20007

Jacob A. Goldberg

Rosen Law Firm

101 Greenwood Avenue

Suite 440

Jenkintown, PA 19046

Counsel for Appellant
2

M. Norman Goldberger [ARGUED]

Laura E. Krabill

Ballard Spahr

1735 Market Street, 51st Floor

Philadelphia, PA 19103

Evan W. Krick

Ballard Spahr

919 North Market Street, 11th Floor

Wilmington, DE 19801

Counsel for Appellees

______________

OPINION*

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RESTREPO, Circuit Judge

In this securities class action appeal, Plaintiff-Appellant challenges two Orders of 

the District Court, the first dismissing his putative securities class action complaint for 

failure to plead scienter, and the second denying him relief from that order under Federal 

Rule of Civil Procedure 60(b). For the following reasons, we affirm.

I.

USA Technologies, Inc. (“USA Technologies”) provides wireless networking, 

cashless transaction devices, asset monitoring, and other services to companies in the 

self-service retail market. In his Amended Class Action Complaint (the “Complaint”), 

 

* This disposition is not an Opinion of the full Court and, pursuant to I.O.P. 5.7, does not 

constitute binding precedent.
3

Plaintiff Ryan Fain, on behalf of a putative class of investors, alleges that USA 

Technologies and its individual officers, Stephen P. Herbert, David F. DeMedio, and 

James Duncan Smith (collectively with USA Technologies, the “Defendants”) violated 

sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and their 

implementing provisions. Specifically, Plaintiff alleges Defendants made materially 

false and misleading statements about the number and value of certain uncollectible 

customer accounts on the balance sheets, and the adequacy of internal accounting 

controls and compliance policies concerning the reporting of that data. 

The basic factual allegations are straightforward. USA Technologies issued a 

press release on September 10, 2015 (the “September 10 Press Release”) reporting an 

allocated “bad debt expense” of $47,184 for the fourth quarter of fiscal year 2015 (“Q4 

FY2015”) and $649,528 for FY2015 at year-end (“FY2015 year-end”). “Bad debt” refers 

to the subset of accounts receivable that, for whatever reason, are no longer collectible 

and therefore have to be written off. By recording a “bad debt expense” allowance on its 

balance sheet for doubtful accounts, a company is able to report a more accurate picture 

of the profitability of its sales. Given these bad debt allowances, the September 10 Press 

Release indicated that USA Technologies would report a net income of $68,999 Q4 

FY2015 (although it would report a loss of $819,482 for FY2015 year-end).

Three weeks later, on September 29, 2015, USA Technologies filed a late filing 

notice indicating that it would have to delay the filing of its annual 2015 Form 10-K and 

amend its earlier September 10 Press Release because “management identified 
4

deficiencies in both the design and operating effectiveness of the Company’s internal 

control over financial reporting” (the “September 29 Late Filing Notice”). JA104 ¶ 94.

Specifically, the September 29 Late Filing Notice disclosed that “[t]he procedures in 

place did not identify a large number of small balance accounts that may be uncollectible 

and were not appropriately dispositioned, collected, remediated, reserved for and/or 

written-off.” JA104 ¶ 94. USA Technologies indicated, moreover, that it would amend 

its disclosures to include a $450,000 increase to its bad debt expense allocation.

On September 30, 2015, USA Technologies filed its annual Form 10-K 

acknowledging “material weakness” in its accounting procedures and restating its bad 

debt expense (the “September 30 Restatement”). JA104 ¶ 95–96. Per its disclosure the 

day before, the September 30 Restatement reported $479,184 in bad debt expense for Q4 

FY2015 and $1,099,528 FY2015 year-end. As a result, the September 30 Restatement 

also adjusted downward its net income projections. In light of its increased bad debt 

allocations, USA Technologies reported that it would book a $201,001 loss (as opposed

to a $68,999 profit) in Q4 FY2015 and a $1,089,482 loss (as opposed $819,482 loss) for 

FY2015 year-end.1

On November 13, 2015, Defendants Herbert and Smith offered comments on the 

September 30 Restatement during an earnings call to the effect that USA Technologies 

 

1 After this disclosure, shares of USA Technologies fell $0.28 on Sept. 30, 2015, 

and $0.11 on Oct. 1, 2015 (representing an approximately 14% loss over that 2-day 

period).
5

had “addressed and remediated the significant deficiency related to the amount of bad 

debt reserve attributable to the uncollected customer accounts.” JA107 ¶ 101. Smith 

added that as a result USA Technologies planned on “changing the balance sheet 

classification in these uncollected accounts” moving forward such that the “[t]he 

uncollected customer accounts and the related allowance [would] no longer [be] reflected 

in accounts payable, where they [had] been reflected on consistent basis in all prior 

periods[, but would now be] reflected in accounts receivable.” JA107-08 ¶ 102. This 

change in accounting practices was warranted because its uncollected accounts had “been 

outstanding for longer time periods and are larger in the aggregate that was anticipated in 

the accounting process [that] was established many years ago.” JA107-08 ¶ 102.

Plaintiff then filed suit claiming that the September 10 Press Release was false and 

misleading in violation of the securities laws.2 Plaintiff’s claim is premised on two 

central allegations. First, he alleges that Defendants misled investors about the existence 

of “significant deficiencies” in USA Technologies’ internal auditing and financial 

reporting procedures. JA70 ¶ 3. Second, he alleges that, as a result, Defendants misled 

investors about USA Technologies’ reported net income by failing to identify and write 

off a “large number of uncollectible small-balance accounts.” JA70 ¶ 3. Taken together, 

 

2 Although he focuses on the September 10 Press Release, we note that Plaintiff

also alleges that other financial statements in USA Technologies’ SEC filings, press 

releases and earnings calls from FY2015 were materially false and misleading because 

“[USA Technologies] was not accounting properly for its bad debt expenses.” JA86 ¶ 51.

Because these allegations hinge on the central claim that the September 10 Press Release 

was misleading, we too focus solely on that statement for purposes of this appeal.
6

the essence of his claim is that Defendants fraudulently understated the amount of “bad 

debt” on USA Technologies’ balance sheets in order to artificially prop up USA 

Technologies’ perceived financial health.

Defendants moved to dismiss the Complaint, and the District Court granted the 

motion on the ground that the Complaint failed to adequately plead scienter. To support 

his scienter claim, Plaintiff focused on three issues before the District Court: (1) the 

simplicity and size of the accounting error, and, relatedly, that the error violated a clear 

rule of the Generally Accepted Accounting Principles (“GAAP”); (2) the resignation of 

DeMedio and Smith, the company’s CFOs; (3) and the remedial actions taken by USA 

Technologies after the September 30 Restatement. After thoroughly weighing these 

allegations, the District Court concluded that they amounted to little more than 

allegations of corporate mismanagement or possible negligence and therefore fell short of 

pleading a “strong inference” of scienter that is “at least” as cogent or compelling as 

Defendants’ non-culpable explanation.

Two other procedural rulings are relevant to this appeal. First, the District Court 

denied leave to amend the Complaint in its opinion dismissing the Complaint. At oral 

argument, Plaintiff offered to plead additional facts that Defendants were motivated to 

conceal their bad debt because of a rising trend in bad debt as well as USA Technologies’ 

business decision to shift its focus from one of its programs, called Jumpstart, to another 

program, called Quickstart. Noting that these factual allegations were for the most part 

already pled in the operative pleading, the District Court found these facts still failed to 
7

show, with particularity, why defendants would purposefully disregard mistakes in USA 

Technologies’ identification and accounting of bad debt only to admit their error shortly 

after in the September 30 Restatement.

Second, Plaintiff moved for relief from this Order and for leave to file a Second 

Amended Class Action Complaint under Federal Rule of Civil Procedure 60(b)(2) and 

60(b)(6). He claimed to have found “new evidence” that supported scienter, but the 

District Court denied relief, finding that this evidence was far from new and that Plaintiff 

had not demonstrated “reasonable diligence” in pursuing it. This timely appeal followed.

II.3

Plaintiff raises challenges to each of the above rulings. We address them in turn.

A. Motion to Dismiss4

First, Plaintiff asserts the District Court improperly ruled that Plaintiff failed to 

plead scienter.

1. 

To sufficiently plead scienter under the heightened pleading rules of the Private 

Securities Litigation Reform Act (“PSLRA”), a complaint must state with particularity 

facts giving rise to a “strong inference” that the defendants acted with intent to deceive, 

manipulate, or defraud. 15 U.S.C. § 78u-4(b)(2)(A); see Rahman v. Kid Brands, Inc., 

 

3 The District Court had jurisdiction under 28 U.S.C. §§ 1331, 1337. We have 

jurisdiction under 28 U.S.C § 1291.

4 We exercise plenary review over the District Court’s Order to grant a Rule 

12(b)(6) motion to dismiss. See In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 277 (3d Cir. 

2010).
8

736 F.3d 237, 241–42 (3d Cir. 2013) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

551 U.S. 308, 313 (2007)). A “strong inference” of scienter exists “only if a reasonable 

person would deem the inference of scienter cogent and at least as compelling as any 

opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324. To 

support the inference, Plaintiff may rely on facts that show motive and opportunity to 

commit fraud, or otherwise, “facts constituting circumstantial evidence of either reckless 

or conscious behavior.” In re Advanta Corp. Sec. Litig., 180 F.3d 525, 530 (3d Cir. 

1999) (quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir. 1993)). 

Because Plaintiff attempts to show scienter via the latter prong, we bear in mind 

that recklessness in the securities context requires proof of conduct “involving not merely 

simple, or even inexcusable negligence, but an extreme departure from the standards of 

ordinary care.” In re Advanta, 180 F.3d at 535 (quoting McLean v. Alexander, 599 F.2d 

1190, 1197 (3d Cir. 1979)); GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239 

(3d Cir. 2004). The defendant’s conduct—the false or misleading statements made—

must “present[] a danger of misleading buyers or sellers that is either known to the 

defendant or is so obvious that the actor must have been aware of it.” In re Advanta, 180 

F.3d at 535 (quoting McLean, 599 F.2d at 1197). In analyzing scienter, moreover, we 

consider “not only inferences urged by the plaintiff . . . but also competing inferences 

rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. With these principles 

in mind, we turn to Plaintiff’s arguments on appeal.

2.
9

Plaintiff relies almost entirely on the same allegations presented to the District 

Court in support of scienter.5 Defendants counter on appeal that the failure to properly 

identify and account for bad debt at most was the result of negligence. After reviewing 

the entire Complaint and record, we concur with the judgment of the District Court that, 

even when taken together, Plaintiff’s allegations do not establish a “strong inference” that 

Defendants intended to deceive or manipulate investors.

Plaintiff’s scienter arguments boil down to the assertion that Defendants must

have known about the unreported and misclassified bad debt and thus knowingly 

published the false September 10 Press Release, given their position at the company, the 

obvious nature of the error, and the subsequent actions to remediate. We have noted 

before the difficulty of establishing a “they-must-have-known” type inference such as 

this. See In re Advanta, 180 F.3d at 539; see also In re Alpharma Inc. Sec. Litig., 372 

F.3d 137, 153 (3d Cir. 2004). That Defendants were in top positions at USA 

Technologies, alone, is not enough. See In re Advanta, 180 F.3d at 539 (“Generalized 

imputations of knowledge do not suffice, regardless of the defendants’ positions within 

 

5 Specifically, Plaintiff highlights, in support: (1) Defendants’ failure to write off 

an untold number of collectible accounts; (2) that the write-offs occurred in the fourth 

quarter only; (3) that Defendants’ initial presentation of the bad debt expense was 

understated by over 900% relative to past estimates; (4) that Defendants had access to the 

underlying bad debt expense data for roughly two and a half months before announcing it 

publicly; (5) that the underlying bad expense data was “critically important” to 

Defendants given efforts to transition company business back to Quick Start accounts; 

and (6) both DeMedio and Smith, former CFOs, “resigned within weeks of the 

restatement.” Appellant Br. 28.
10

the company.”). Instead, in the context of recklessness, Plaintiff’s facts must add up to a 

“cogent” inference that the danger of misleading investors was either actually “known” 

by Defendants or “so obvious that [they] must have been aware of it.” Id. (emphasis 

added). The facts adduced do not.

We begin by noting that the Complaint is devoid of any allegations that suggest 

Defendants regularly dealt with bad debt or otherwise had reason to audit small-balance 

customer accounts. Plaintiff emphasizes the size and simplicity of the error, namely that 

the September 10 Press Release understated the actual value of bad debt by 900%.6 An 

error of this magnitude, they imply, could not possibly have escaped Defendants’ notice. 

But in context, as the District Court aptly noted, “the size of the bad debt expense 

increase is less than 4% and 2% of quarterly and year-end revenue amounts, 

respectively.” JA13. While we do not suggest this change was insignificant—indeed it 

put USA Technologies, already operating on a thin margin, into the red for Q4 FY2015—

we nonetheless agree that “the size of the violation, when compared to the complete 

financial picture of the Company . . . , represents a relatively small expense,” and is 

therefore less indicative of scienter than Plaintiff suggests. JA13, 15. 

Similarly, with respect to the error’s supposed simplicity, we perceive nothing in 

the record that would suggest this error should have come to Defendants’ attention. 

There were no allegations, for example, that the classification or accounting procedures 

 

6 On appeal, Plaintiff does not press the specific nature of the alleged GAAP 

violation as separately indicative of scienter.
11

had previously caused misstatements requiring correction. On this record, the more 

likely inference, given the small-balance nature of the accounts, is that lower staffers 

simply misclassified these bad debts or otherwise failed to deem them uncollectible, not 

that Defendants were aware of and were recklessly disregarding them. This is 

particularly so given the short timespan between misstatement and correction—a mere 

three weeks. Despite Plaintiff’s arguments to the contrary, we see this allegation as 

supporting Defendants’ non-culpable inference that Defendants realized the aggregate 

magnitude of the understatement in preparation for their annual SEC filings.

Plaintiff also argues that DeMedio’s and Smith’s terminations support a “cogent” 

inference of scienter. Resignations or terminations might form a “piece to the scienter 

puzzle,” as the District Court noted, if, for example, a relatively contemporaneous and 

public firing is accompanied by extreme corporate punishment such as the denial of 

previously accrued benefits. See Abrams v. Baker Hughes Inc., 292 F.3d 424, 434 (5th 

Cir. 2002); In re Intelligroup Sec. Litig., 527 F. Supp.2d 262, 347 (D. N.J. 2007). But 

DeMedio received a significant severance package and USA Technologies retained him 

for some time after his departure as a consultant. See JA17–18. Further, in stressing that 

Smith resigned “within weeks of the restatement” (it was actually four months) with 

relatively little severance, Plaintiff’s argument fails to account for the fact that Smith had 

only been employed for ten days before the September 10 Press Release. Appellant Br. 

28. While he did not receive as many benefits as DeMedio—probably due to his short 

tenure—USA Technologies still paid Smith’s health insurance for a period of time after 
12

his employment as well as his attorney’s fees for negotiating his exit. See JA332-33. 

These departures from the company, far from suspicious, add little to the scienter 

inference.

Finally, we also agree with the District Court that USA Technologies’ unprompted 

admission of error in the September 30 Restatement and its later efforts to reformulate its 

accounting practices do not nudge the Complaint any closer to adequately pleading 

scienter. To the contrary, Defendants’ speedy response suggests their actions were at 

worst negligent. When Defendants became aware of the error in preparing the annual 

Form 10-K, they acted immediately to rectify it.7 Plaintiff’s facts add up to corporate 

mismanagement, as Defendants have maintained, see e.g., JA107 ¶ 101 (“The material 

weakness was identified late in the process of finalizing our 10-K.”), but nothing more. 

We will therefore affirm the District Court’s dismissal of the Complaint on this ground.8

B. Leave to Amend

Second, Plaintiff contends the District Court improperly denied leave to amend. 

Although leave should be freely given “when justice so requires,” see Fed. R. Civ. P. 

 

7 We similarly reject Plaintiff’s argument that the District Court “fundamentally 

misunderstood the facts of the case” by failing to grasp that the alleged fraud was not just 

an accounting classification error but a wholesale obfuscation of the true scope of the bad 

debt on USA Technologies’ books. Appellant Br. 34. The District Court, contrary to this 

characterization of its opinion, explicitly acknowledged Defendants had changed the 

company’s “bad debt expense” from $47,184 to $479,184 in the September 30 

Restatement, JA6, and understood the implication of this restatement to mean an 

“increase” in acknowledged bad debt, JA13. 

8 Consequently, we also affirm the District Court’s dismissal of Plaintiff’s Section 

20(a) control-person claims.
13

15(a), “a District Court may deny leave to amend on the grounds that amendment would . 

. . be futile,” see Winer Family Trust v. Queen, 503 F.3d 319, 330–31 (3d Cir. 2007) 

(quoting In re Alpharma, 372 F.3d at 153). We review a decision to deny leave to amend 

under the PSLRA for abuse of discretion. See Cal. Pub. Employees’ Ret. Sys. v. Chubb 

Corp., 394 F.3d 126, 163 (3d Cir. 2004).

We have little in the record to aid our analysis of Plaintiff’s curative factual 

allegations because Plaintiff never filed a proposed amended complaint. Instead, at oral 

argument he proffered that, if allowed to amend, he would generally “explain the 

relationship between Quickstart [and Jumpstart] and [a trend in] rising bad-debt 

expense,” JA409, in order to show that Defendants were motived to conceal their 

accounting errors to obtain a “clean audit opinion.” Appellant Br. 38. Even after 

Plaintiff’s lengthy briefing of the issue on appeal, we still do not see how this pleads, 

with particularity, an inference of scienter. For one, he does not allege facts that explain 

why this change in business focus would have alerted Defendants to the existence of 

previously undiscovered uncollectible customer accounts, let alone that its procedures 

were deficient in doing so in the ordinary course. Second, even if he did, Plaintiff does 

not persuasively explain why a motivation to secure a “clean audit opinion” would lead 

Defendants to knowingly misstate their bad debt figures on September 10 but then correct 

them nineteen days later. Absent some specific incentive to downplay the amount of 

uncollectible debt in the interim before the September 30 Restatement—such as the 

accruing of a performance-based stock option or a pending corporate transaction—these 
14

facts do not plead scienter given this futility. The District Court did not abuse its 

discretion in denying leave to amend on these grounds.9

C. Rule 60(b) Motion

Finally, Plaintiff argues that the District Court improperly denied him Rule 60(b) 

relief. He claims, under Rule 60(b)(2) in particular, to have found newly discovered 

evidence from pleadings in a pending action by a customer of USA Technologies against 

the company itself (the “Arizona Action”). Those pleadings contained allegations that 

Defendants fraudulently inflated the number of devices connected to their network by 

asking customers to install duplicate devices at points of sale, facts which Plaintiff now 

argues also support scienter in his case. He focuses on one particular allegation drawn 

from a third amended complaint filed a few weeks after the dismissal, which he asserts 

renders this evidence new. 

But a single factual allegation appearing after dismissal does not render this 

material new within the meaning of Rule 60(b)(2). See Bohus v. Beloff, 950 F.2d 919, 

 

9 Plaintiff also complains, the merits of his factual allegations notwithstanding, that 

it was an abuse of discretion to give him only one “attempt” at pleading scienter in a 

written complaint. Appellant Br. 37. We disagree. Plaintiff actually had two such 

attempts: he filed his initial complaint in Oct. 2015 and an Amended Class Action 

Complaint in Jan. 2016. He still then had three more months before oral argument to file 

a proposed amended complaint, but he did not do so. In any event, the District Court 

considered Plaintiff’s additional assertions after thoroughly probing them at oral 

argument, and, giving them every “benefit of [its] deference at this stage,” rejected them 

on the merits. JA20. It was not an abuse of discretion to deny leave, even without the 

benefit of an additional written complaint, particularly given Plaintiff’s somewhat 

contradictory position at oral argument that these facts were already pled in his Amended 

Class Action Complaint. 
15

930 (3d Cir. 1991) (quoting United States v. 27.93 Acres of Land, 924 F.2d 506, 516 (3d 

Cir. 1991)) (“The term ‘newly discovered evidence’ refers to ‘evidence of facts in 

existence at the time of trial of which the aggrieved party was excusably ignorant.’”). 

The Arizona Action was filed in January 2015, and amended in April 2015, both well 

before this action was even filed. Those pleadings were sufficient in terms of their theory

of fraud and level of detail to have put Plaintiff on notice as to the existence of facts that 

may have helped his case.

His argument fails for an even more fundamental reason. To prevail under Rule 

60(b)(2), Plaintiff had to show that his newly identified material “could not have been 

discovered prior to trial through the exercise of reasonable diligence.” Id. (citing 

Stridiron v. Stridiron, 698 F.2d 204, 207 (3d Cir.1983)); see also id. (quoting Plisco v. 

Union R. Co., 379 F.2d 15, 16, 17 (3d Cir. 1967)) (“The movant under Rule 60(b) ‘bears 

a heavy burden,’ which requires ‘more than a showing of the potential significance of the 

new evidence.’”). Here, Plaintiff failed to provide any evidence detailing his efforts to 

ascertain facts underlying the Arizona Action at any time during this litigation—no 

public record searches, no legal database searches, nothing. Had he exercised a modicum 

of effort, we think he would have discovered this publicly filed Arizona action in time to 

develop these points in discovery in this matter. Instead, the record shows that Plaintiff 

rushed to file his Complaint, now only to regret the consequences of doing so. It was not 

an abuse of discretion to deny Rule 60(b) relief on this ground. 

III.
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For the foregoing reasons, we affirm.