2007 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-24-2007

Winer Family Trust v. Queen

Precedential or Non-Precedential: Precedential

Docket No. 05-3622

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http://digitalcommons.law.villanova.edu/thirdcircuit_2007/325
 PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 05-3622

THE WINER FAMILY TRUST, Individually

and on behalf of all others similarly situated,

Appellant

SEAN FITZPATRICK

(Intervenor in D.C.)

v.

MICHAEL QUEEN;

THOMAS McGREAL; JOSEPH W. LUTER, IV;

MICHAEL H. COLE; SMITHFIELD FOODS, INC.;

PENNEXX FOODS, INC.; SHOWCASE FOODS, INC.

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

D.C. Civil Action No. 03-cv-4318

(Honorable John R. Padova)
2

Argued November 9, 2006

Before: SCIRICA, Chief Judge,

McKEE and STAPLETON, Circuit Judges.

(Filed September 24, 2007)

KIMBERLY M. DONALDSON, ESQUIRE (ARGUED)

STEVEN A. SCHWARTZ, ESQUIRE

Chimicles & Tikellis LLP

One Haverford Centre

361 West Lancaster Avenue

Haverford, Pennsylvania 19041

AVI N. WAGNER, ESQUIRE

Glancy, Binkow & Goldberg LLP

1801 Avenue of the Stars, Suite 311

Los Angeles, California 90067

Attorneys for Appellant

RONALD J. MANN, ESQUIRE (ARGUED)

727 East Dean Keeton Street

Austin, Texas 78705

MAURICE R. MITTS, ESQUIRE

Mitts Milavec

1835 Market Street, Suite 1500

Philadelphia, Pennsylvania 19103
3

ERIC F. SPADE, ESQUIRE

748 South Fifteenth Street

Philadelphia, Pennsylvania 19128

Attorneys for Appellees,

Michael Queen, Thomas McGreal, Pennexx Foods, Inc.

TERENCE J. RASMUSSEN, ESQUIRE (ARGUED)

EDWARD J. FUHR, ESQUIRE

ERIC H. FEILER, ESQUIRE

JESSICA M. ERICKSON, ESQUIRE

MONICA S. CALL, ESQUIRE

Hunton & Williams LLP

Riverfront Plaza, East Tower, 13th Floor

951 East Byrd Street

Richmond, Virginia 23219

ALAN K. COTLER, ESQUIRE

MILIND M. SHAH, ESQUIRE

Reed Smith LLP

2500 One Liberty Place, 1650 Market Street

Philadelphia, Pennsylvania 19103-7301

Attorneys for Appellees,

Joseph W. Luter, IV, Michael H. Cole,

Smithfield Foods, Inc., Showcase Foods, Inc.
4

OPINION OF THE COURT

SCIRICA, Chief Judge.

At issue in this private securities fraud class action is

whether plaintiffs properly pleaded false and misleading

statements and material omissions on the company’s earnings

potential and stock value, in violation of the Securities and

Exchange Act of 1934. The District Court granted defendants’

motions to dismiss for failure to meet the pleading requirements

of the Private Securities Litigation Reform Act of 1995, 15

U.S.C. § 78u-4 et seq (“PSLRA”). While this appeal was

pending, the Supreme Court set forth the pleading standard for

the PSLRA. Tellabs, Inc. v. Makor Issues & Right, Ltd., 127 S.

Ct. 2499 (2007); Key Equity Investors, Inc. v. Sel-Leb

Marketing, Inc., No. 06-1052, 2007 WL 2510385 (3d Cir. Sept.

6, 2007). We will affirm.

I. Facts and Procedural History

Plaintiffs are former shareholders of Pennexx Foods, Inc.,

a Pennsylvania corporation that provides case-ready meat to

customers in the northeastern United States. Defendants are

Pennexx; Smithfield Foods, Inc., a Virginia corporation that

produces, processes, and markets a variety of meat products;

directors and officers of Pennexx and Smithfield Foods; and

Showcase Foods, Inc., a subsidiary of Smithfield Foods.
5

In June 2001, Pennexx entered into a stock purchase

agreement with Smithfield Foods. Smithfield Foods agreed to

purchase fifty percent of the outstanding shares of Pennexx for

$6 million and to extend Pennexx a revolving line of credit up

to $30 million, secured by Pennexx’s assets. Smithfield Foods

nominated two of its executives, defendants Joseph Luter IV and

Michael Cole, to Pennexx’s board of directors. In April 2002,

Pennexx purchased a meat processing facility in Philadelphia,

the Tabor Facility. In May 2002, with Smithfield Foods’s

assistance, Pennexx began renovating the building, and in July

2002 moved its operations into the Tabor Facility. Renovations

continued for the next several months.

Shortly thereafter, Pennexx defaulted on its repayment

obligations to Smithfield Foods. Over the objections of Luter

and Cole, Pennexx issued additional stock to raise capital. In

January 2003, Luter and Cole resigned as Pennexx directors.

Subsequently, Smithfield Foods demanded all delinquent

amounts under its credit agreement and pursued a replevin

action. On June 9, 2003, under a consent decree, Smithfield

Foods foreclosed on all of Pennexx’s real and personal property.

Showcase Foods then took over the Tabor Facility. 

This class litigation followed. The Winer Family Trust

had purchased 5000 shares of Pennexx stock on May 22, 2002.

Based on this purchase, Winer filed a class action complaint

against Pennexx, Smithfield Foods, executives and officers of

both companies, and Showcase Foods. Winer claimed Pennexx

had inflated the price of its stock through public statements and
6

earnings reports that omitted or misstated material facts. Winer

was appointed lead plaintiff in November 2003.

Winer’s suit alleged federal and state causes of action on

behalf of two separate classes. On behalf of public investors

who purchased Pennexx securities during the period from

February 8, 2002, until June 12, 2003, Winer alleged violations

of § 10(b) of the Securities and Exchange Act, as amended by

the Private Securities Litigation Reform Act of 1995, 15 U.S.C.

§§ 78j(b), 78t(a), and Rule 10b-5, see 17 C.F.R. § 240.10b-5,

against Pennexx and individual defendants Michael Queen,

President of Pennexx; Thomas McGreal, a director and Vice

President of Sales for Pennexx; and Smithfield Foods executives

Luter and Cole (“Individual Defendants”). Winer also alleged

violations of § 20(a) of the Securities and Exchange Act against

Smithfield Foods and the Individual Defendants. On behalf of

public investors who currently own Pennexx securities, Winer

asserted state law claims for breach of fiduciary duty against

Queen and Smithfield Foods, aiding and abetting claims against

Luter and Cole, and successor liability claims against Smithfield

Foods and Showcase Foods.

On September 27, 2004, the District Court granted

defendants’ motions to dismiss the Rule 10b-5 claims, except for

several claims against Pennexx and Queen based on the

challenged statements and omissions made after May 22, 2002,

the date Winer purchased its stock. The Court also granted the

motions to dismiss with respect to the breach of fiduciary duty

claims against Queen, Smithfield Foods, Luter, and Cole. The
7

Court denied defendants’ motions to dismiss the § 20(a) claims

and successor liability claims based on Rule 10b-5 for several

statements and omissions occurring after May 22, 2002.

Winer then sought leave to amend, purportedly curing

pleading deficiencies and amplifying previous allegations based

on new information. This new information came from

additional discovery permitted in July 2004 involving the June

2004 closing of the Tabor Facility. In an order dated January

18, 2005, the District Court denied Winer leave to file the

proposed amendments, finding them futile.

Winer’s only remaining claims were based on statements

made by defendants after the date of Winer’s stock purchase.

As a result, Smithfield Foods filed a motion to dismiss

contending Winer lacked standing. On February 11, 2005, the

court entered an order that by agreement of the parties Winer

withdrew as lead plaintiff without prejudice to pursue an appeal

as former lead plaintiff. After plaintiffs failed in their attempt

to substitute other lead plaintiffs, the District Court, on June 29,

2005, dismissed the case for lack of prosecution. 

Winer timely appeals the September 27, 2004 Order

partially granting defendants’ motions to dismiss, the January

18, 2005 Order denying leave to file its proposed amendments,

the February 11, 2005 Order withdrawing Winer as lead

plaintiff, and the June 29, 2005 Order dismissing the action.

The focus of this appeal is Pennexx’s statements about its

business relationship with Smithfield Foods and the renovation
 1

Winer alleged additional misleading or incomplete

statements made by Pennexx after it bought its shares on May

8

of the Tabor Facility. Winer contends Smithfield Foods

“abused” Pennexx in a prior business deal, and that Pennexx

omitted material facts about this prior relationship in a February

8, 2002 press release. The February 8 press release credited

Smithfield Foods’s loan to Pennexx as a factor allowing

Pennexx to list its stock on the over the counter Bulletin Board.

The press release also referred favorably to Pennexx’s business

prospects and “growing demand.”

Winer also challenges statements and filings involving

renovations to the Tabor Facility. On February 20, 2002,

Pennexx announced its agreement to acquire the Tabor Facility,

stating it was “perfectly suited to our needs,” and required

“minimal improvements.” In a March 29, 2002 SEC filing,

Pennexx estimated the cost of purchasing, renovating, and

equipping the Tabor Facility to be between $10.5 million and

$15 million. Pennexx purchased the Tabor Facility on April 2

for $2 million and announced the acquisition on April 3. In an

April 17 filing, Pennexx’s revised estimates ranged from $8.5

million to $16 million total for purchasing, renovating, and

equipping the Tabor Facility. On May 15 Pennexx again revised

its cost estimate for purchasing, renovating, and equipping the

Tabor Facility to between $11.5 million and $16 million.

Pennexx began renovating the Tabor Facility with Smithfield

Foods’s assistance in May, and moved into the facility in July

2002.1
22, 2002, regarding the Smithfield Foods relationship, the Tabor

Facility, Pennexx’s second quarter 2002 financial losses, the

termination of CFO George Pearcy, Pennexx’s liquidity

problems and increasing defaults under its credit agreement with

Smithfield Foods, and Pennexx’s overall prospects for growth.

As discussed, Winer lacks standing to assert these claims

because they were made after its stock purchase.

9

As lead plaintiff, Winer also asserted state law claims for

breach of fiduciary duty. Winer contends Queen breached his

fiduciary duty by signing a forbearance agreement on May 29,

2003, which called for a broad release of claims that could have

been asserted against Smithfield Foods by Pennexx and its

shareholders. In the forbearance agreement, Pennexx agreed to

pay outstanding loan obligations and expenses totaling

approximately $13 million by June 9, 2003 and generally release

Smithfield Foods from all obligations and liabilities other than

those set forth in the agreement. Smithfield Foods agreed to

forbear from exercising its rights and remedies until June 18,

2003, provided Pennexx complied with its obligations, and to

assist Pennexx in its efforts to redomesticate itself in Delaware.

Winer maintains that Smithfield Foods, frustrated in its attempts

to purchase Pennexx outright, implemented a scheme to

undermine Pennexx’s ability to operate so that it could acquire

Pennexx’s assets and business opportunities at a discount and to

the detriment of Pennexx’s shareholders.

II. Jurisdiction and Standard of Review
10

Winer filed this securities class action under §§ 10(b) and

20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§

78j(b) and 78t(a). The District Court had jurisdiction under 28

U.S.C. § 1331 and supplemental and ancillary jurisdiction over

the state law breach of fiduciary duty claims. We have

jurisdiction to review the final judgment of the District Court

under 28 U.S.C. § 1291.

We exercise plenary review over the District Court’s

dismissal of a complaint for failure to state a claim under Fed.

R. Civ. P. 12(b)(6), Delaware Nation v. Pennsylvania, 446 F.3d

410, 415 (3d Cir. 2006), and over the District Court’s

interpretation of the applicable federal securities laws. Morrison

v. Madison Dearborn Capital Partners III L.P., 463 F.3d 312,

314 (3d Cir. 2006). We review the District Court’s denial of

Winer’s request for leave to amend for abuse of discretion.

Kanter v. Barella, 489 F.3d 170, 175 (3d Cir. 2007). 

III.

Winer contends the District Court erred in dismissing the

amended complaint for failure to state a claim upon which relief

may be granted and abused its discretion in failing to grant

Winer leave to amend.

A. Standing

Constitutional standing requires: (1) an injury-in-fact,

which is an invasion of a legally protected interest that is (a)

concrete and particularized, and (b) actual or imminent, not

conjectural or hypothetical; (2) a causal connection between the
11

injury and the conduct complained of; and (3) that it must be

likely, as opposed to merely speculative, that the injury will be

redressed by a favorable decision. Danvers Motor Co., Inc. v.

Ford Motor Co., 432 F.3d 286, 290–91 (3d Cir. 2005) (citing

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)).

Plaintiffs have the burden to establish standing. Id. at 291

(citing Storino v. Borough of Point Pleasant Beach, 322 F.3d

293, 296 (3d Cir. 2003)). Winer’s Rule 10b-5 claim is based on

its purchase of Pennexx securities on May 22, 2002. The

District Court dismissed all of Winer’s Rule 10b-5 claims that

were based on representations made after its purchase date.

The plaintiff class under Rule 10b-5 is limited

exclusively to actual sellers or purchasers of securities. See Blue

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754 (1975)

(holding plaintiff did not qualify as either a purchaser or seller

of stock and thus lacked standing to pursue a claim under Rule

10b-5). There is no private right of action under Rule 10b-5 for

mere holders of securities. Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Dabit, 547 U.S. 71, 80 (2006) (citing Blue Chip

Stamps, 421 U.S. at 739). Winer must be a purchaser or seller

to pursue its Rule 10b-5 claims, and accordingly only has

standing to assert claims based on activity prior to the date

Winer purchased its stock. 

In class action suits, Winer asserts, the lead plaintiff may

base claims on statements and omissions occurring after its date

of purchase. But it is still necessary for the lead plaintiff to

establish its own standing based on a purchase or sale of stock,
12

and not merely the decision to retain stock. See Fallick v.

Nationwide Mut. Ins. Co., 162 F.3d 410, 423 (6th Cir. 1998)

(citing Brown v. Sibley, 650 F.2d 760, 770 (5th Cir. 1981)) (“A

potential class representative must demonstrate individual

standing vis-as-vis [sic] the defendant; he cannot acquire such

standing merely by virtue of bringing a class action.”). The

initial inquiry in either case is whether the lead plaintiff

individually has standing, not whether or not other class

members have standing. Winer only has standing to pursue

fraudulent conduct on or before its May 22, 2002 purchase date.

B. Applicable Pleading Requirements

The amended complaint asserts Rule 10b-5 claims based

upon reckless or intentional misstatements and omissions

occurring on or before May 22, 2002. See 17 C.F.R. §

240.10b-5(b) (“It shall be unlawful for any person . . . [t]o make

any untrue statement of a material fact or to omit to state a

material fact necessary to make the statements made in light of

the circumstances under which they were made, not misleading

. . . in connection with the purchase or sale of any security.”).

Plaintiffs must also allege defendants made a misstatement or an

omission of material fact with scienter in connection with the

purchase or the sale of a security upon which plaintiffs

reasonably relied and plaintiff’s reliance was the proximate

cause of their injury. Id.

The Private Securities Litigation Reform Act of 1995

requires plaintiffs in a private securities action to specify each

allegedly misleading statement, why the statement was
13

misleading, and, if an allegation is made on information and

belief, all facts supporting that belief with particularity. 15

U.S.C. § 78u-4(b)(1)(B). Importantly, the PSLRA requires the

applicable mental state be pleaded with particularity. See id.

(“[T]he complaint shall, with respect to each act or omission

alleged to violate this chapter, state with particularity facts

giving rise to a strong inference that the defendant acted with the

required state of mind.”). The District Court held that Winer

failed to adequately plead scienter.

The Supreme Court has mandated a uniform construction

of the strong inference standard in light of the objectives of the

PSLRA. Tellabs, Inc. v. Makor Issues & Right, Ltd., 127 S. Ct.

2499, 2508 (2007); see Key Equity Investors, Inc. v. Sel-Leb

Marketing, Inc., No. 06-1052, 2007 WL 2510385 (3d Cir. Sept.

6, 2007) (applying the pleading standard laid out by Tellabs);

Globis Capital Partners, L.P. v. Stonepath Group, Inc., No. 06-

2560, 2007 WL 1977236, at *3 (3d Cir. July 10, 2007) (“The

Court’s Tellabs decision removes any doubt the PSLRA’s

scienter pleading requirement is a significant bar to litigation .

. . .”). The twin goals of the PSLRA are to “curb frivolous,

lawyer-driven litigation, while preserving the investors’ ability

to recover on meritorious claims.” Id. at 2509. One of the

purposes of the PSLRA’s heightened pleading requirements is

to limit abusive securities class-action suits. See Dabit, 547

U.S. at 81; In re Advanta, 180 F.3d at 531 (citing H.R. Conf.

Rep. No. 104-369, at 28 (1995), reprinted in 1995 U.S.C.C.A.N.

679, 748) (noting the PSLRA is designed to limit: “(1) the

practice of filing lawsuits against issuers of securities in
14

response to any significant change in stock price, regardless of

defendants’ culpability; (2) targeting of ‘deep pocket’

defendants; (3) the abuse of the discovery process to coerce

settlement; and (4) manipulation of clients by class action

attorneys.”). As the Supreme Court has recognized in the

securities context, even class suits with little merit may have

disproportionate settlement value. See Tellabs, 127 S. Ct. at

2504 (citing Dabit, 547 U.S. at 81); Blue Chip Stamps, 421 U.S.

at 740–41. 

The Court prescribed a three-step process for considering

a motion to dismiss in a § 10(b) action: First, as with any Rule

12(b)(6) motion, courts must “accept all factual allegations in

the complaint as true.” Tellabs, 127 S. Ct. at 2509 (citing

Leatherman v. Tarrant County Narcotics Intelligence and

Coordination Unit, 507 U.S. 163, 164 (1993)). Second, “courts

must consider the complaint in its entirety.” Id. This includes

examining additional sources courts normally consider when

ruling on a motion to dismiss, “in particular, documents

incorporated into the complaint by reference, and matters of

which a court may take judicial notice.” Id. (citation omitted).

Courts must inquire “whether all of the facts alleged, taken

collectively, give rise to a strong inference of scienter, not

whether any individual allegation, scrutinized in isolation, meets

that standard.” Id. (emphasis in original) (citations omitted).

Third, to determine whether the pleaded facts meet the PSLRA’s

“strong inference” standard, courts “must take into account

plausible opposing inferences.” Id.
15

In ruling that courts must consider plausible opposing

inferences in a motion to dismiss, the Court set forth a

reasonable person test, stating that the facts must give rise to a

“strong,” i.e., a powerful or cogent inference that is at least as

compelling as any opposing inference. 

But in [the PSLRA], Congress did not merely

require plaintiffs to ‘provide a factual basis for

[their] scienter allegations’ . . . . Instead,

Congress required plaintiffs to plead with

particularity facts that give rise to a

“strong”—i.e., a powerful or cogent—inference .

. . . 

The strength of an inference cannot be

decided in a vacuum. The inquiry is inherently

comparative . . . . [A] court must consider

plausible nonculpable explanations for the

defendant’s conduct, as well as inferences

favoring the plaintiff. The inference that the

defendant acted with scienter need not be

irrefutable, i.e., of the ‘smoking-gun’ genre, or

even the ‘most plausible of competing

inferences,’ . . . . Yet the inference of scienter

must be more than merely ‘reasonable’ or

‘permissible’—it must be cogent and compelling,

thus strong in light of other explanations. A

complaint will survive . . . only if a reasonable

person would deem the inference of scienter

cogent and at least as compelling as any opposing
16

inference one could draw from the facts alleged.

Id. at 2510 (internal citations omitted).

C. Tabor Facility Statements

Winer challenges Pennexx’s February 20, 2002 press

release, in which the company announced it had agreed to

purchase the Tabor Facility. In the press release, Queen,

Pennexx’s President, was quoted as stating:

[The Tabor Facility] is perfectly suited to our

needs, as it is strategically located in the central

Northeast corridor and close to our customers.

Since the new facility requires minimal

improvement, we will be able to renovate and

automate quickly and plan to be operational in

this pristine facility by the second quarter of 2002.

Winer contends Queen’s statements were knowingly false and

misleading because they failed to disclose the facility needed a

major overhaul costing over $18 million and requiring expert

supervision. Winer maintains defendants never disclosed that

Smithfield Foods, not Pennexx, exclusively controlled the

purchase and renovation of the Tabor Facility, which resulted in

a facility not designed to meet Pennexx’s needs. Winer also

contends Pennexx’s press releases and SEC filings between

March 29 and May 22, 2002, were misleading because they

failed to disclose that, during a walking tour of the Tabor
 2

Joseph Luter III is President of Smithfield Foods and is not

a defendant in this case. Joseph Luter IV is one of the

individual defendants in this case and is referred to as “Luter”

throughout the opinion.

17

Facility on or about March 28, 2002, Joseph Luter III2

 advised

the Individual Defendants that Pennexx should spend whatever

was necessary to make the Tabor Facility a high-quality

operation. 

Pennexx acquired the Tabor Facility on April 2, 2002.

On April 17, 2002, Pennexx disclosed that the total estimated

cost for purchasing, renovating and equipping the Tabor Facility

would be between $8 million and $16 million. Pennexx later

revised this estimate in May 2002 to between $11.5 million and

$16 million.

The District Court found the most plausible inference

from these events was that after the March 28, 2002 walking

tour, Pennexx realized that the cost of renovations would be

more extensive than previously estimated. This was disclosed

to investors in the April 17 filing. Accordingly, the District

Court held the amended complaint failed to allege facts giving

rise to a strong inference that, as of February 20, 2002, Queen

knew that the Tabor Facility would require anything more than

minimal improvements. 

On appeal, Winer contends the District Court erred in

dismissing these claims because the PSLRA’s “strong

inference” pleading standard does not permit the resolution of
18

disputed facts at summary judgment. The District Court

accepted the facts alleged by Winer as true. It viewed those

facts holistically in light of all additional facts alleged in the

complaint. But the District Court found that the most plausible

inference flowing from these facts was a non-culpable inference.

 A complaint will survive a motion to dismiss “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, 127 S. Ct. at 2510. The

District Court found the most plausible inference from Winer’s

alleged sequence of facts was that Pennexx revised its

preliminary cost estimates as it learned more about the costs of

renovating the Tabor Facility. Stated differently, Winer’s

purported inference, that the February statements regarding the

Tabor Facility were knowingly false, was not as compelling or

as strong as the opposing interest cited by the District Court.

 In considering these inferences, the District Court

properly probed documents attached to defendants’ motion to

dismiss. This was appropriate because these documents were

integral to and/or were explicitly relied upon by the amended

complaint. See Tellabs, 127 S. Ct. at 2509 (“[C]ourts must

consider the complaint in its entirety, as well as other sources

courts ordinarily examine when ruling on Rule 12(b)(6) motions

to dismiss, in particular, documents incorporated into the

complaint by reference, and matters of which a court may take

judicial notice.”); In re Burlington Coat Factory, 114 F.3d at

1426 (holding a “‘document integral to or explicitly relied upon
 3

As the Court of Appeals for the Seventh Circuit held, the

requirement that the inference be “at least as compelling” as any

competing inference, Tellabs, 127 S. Ct. at 2510, dictates a more

stringent standard than probable cause. Higginbotham v. Baxter

Intern., Inc., 06-1312, 2007 WL 2142298, at *3 (7th Cir. July

27, 2007) (citing Illinois v. Gates, 462 U.S. 213 (1983)).

19

in the complaint’ may be considered ‘without converting the

motion [to dismiss] into one for summary judgment’”) (quoting

Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.

1996) (superseded on other grounds by the PSLRA, 15 U.S.C.

§ 78u-4(b)(1)–(2)); TMJ Implants, Inc. v. Aetna, Inc., Nos.

06-1020, 06-1146, 2007 WL 2372372, at *3 (10th Cir. Aug. 21,

2007) (“Although we ordinarily limit our review [on a motion

to dismiss] to the allegations in the complaint, we consider

documents ‘incorporated into the complaint by reference.’”)

(quoting Tellabs, 127 S. Ct. at 2509); see also Newton v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166–69 (3d

Cir. 2001) (“In reviewing a motion for class certification, a

preliminary inquiry into the merits is sometimes necessary to

determine whether the alleged claims can be properly resolved

as a class action.”). In considering competing inferences, courts

may find it necessary to probe the documents integral to the

complaint.

Thus, Winer’s inference is neither cogent, nor

compelling, nor strong in light of competing inferences.3

 A

reasonable person would not deem the inference of scienter

cogent and at least as compelling as any non-culpable inference.
20

See Tellabs, 127 S. Ct. at 2509–10; see also Higginbotham v.

Baxter Intern., Inc., 06-1312, 2007 WL 2142298, at *4–5 (7th

Cir. July 27, 2007) (holding an inference of scienter was

“neither compelling nor cogent”); Central Laborers' Pension

Fund v. Integrated Electrical Services, Inc., No. 06-20135, 2007

WL 2367776, at *5 (5th Cir. Aug. 21, 2007) (holding that when

examining officer trading as a factor suggesting a strong

inference of scienter, courts must consider both culpable and

nonculpable explanations) (citing Tellabs, 127 S. Ct. at 2510);

ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,

104 (2d Cir. 2007) (holding that where a “plausible nonculpable

explanation[]” is more likely than any guilty inference, plaintiffs

failed to establish scienter) (quoting Tellabs, 127 S. Ct. at 2510);

Belizan v. Hershon, No. 06-7104, 2007 WL 2141954, at *4

(D.C. Cir. July 27, 2007) (remanding to allow District Court to

determine whether the inference that defendants acted recklessly

was “at least as compelling as any opposing inference of

nonfraudulent intent”) (quoting Tellabs, 127 S. Ct. at 2505).

Winer also contends the statements made between March

29, 2002 through May 22, 2002 were actionable because they

failed to disclose that Smithfield Foods’s staff was performing

the renovations of the Tabor Facility. The securities laws do not

require a defendant “provide the public with all material

information.” In re Burlington Coat Factory, 114 F.3d at 1432

(citing In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 (2d

Cir. 1993)). To impose liability for non-disclosure, a defendant

must be under a duty to disclose the omitted information. Oran

v. Stafford, 226 F.3d 275, 285 (3d Cir. 2000) (“Even
21

non-disclosure of material information will not give rise to

liability under Rule 10b-5 unless the defendant had an

affirmative duty to disclose that information.”); see also Basic,

Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence,

absent a duty to disclose, is not misleading under Rule 10b-5.”).

As a general matter, an affirmative duty arises only when there

is insider trading, a statute requiring disclosure, or an inaccurate,

incomplete, or misleading prior disclosure. Oran, 226 F.3d at

285–86. Pennexx points to no duty to disclose that Smithfield

Foods’s staff was renovating the Tabor Facility. The challenged

statements—Pennexx’s press releases and SEC

filings—purported only to provide an outline of Pennexx’s plans

and objectives regarding future renovations. The District Court

correctly held Pennexx had no duty to disclose that Smithfield

Foods’s staff was renovating the Tabor Facility. Taking the

facts pleaded as true and viewing them holistically, a reasonable

person would not deem the inference of scienter as cogent and

at least as compelling as any non-culpable inference based upon

the omitted facts. See Tellabs, 127 S. Ct. at 2509–10.

D. Pennexx-Smithfield Foods Relationship

Winer challenges statements made in Pennexx’s February

8, 2002 press release about the business relationship between

Pennexx and Smithfield Foods. Queen stated Pennexx’s

common stock registration resulted from “the $36 million

commitment that Smithfield Foods, Inc., the leading processor

and marketer of fresh pork and processed meats in the U.S.,

made to our company in June 2001.” Winer contends that a
22

prior venture between Smithfield Foods and Pennexx had been

disastrous because Smithfield Foods had supplied Pennexx with

water-injected pork products. Winer maintains the failure to

disclose this prior venture in the February 2002 press release

was misleading.

The District Court held defendants had no duty to

disclose the previous business relationship. Liability may exist

under Rule 10b-5 for misleading or untrue statements, but not

for statements that are simply incomplete. Brody v. Transitional

Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“Rule

10b-5 . . . prohibit[s] only misleading and untrue statements, not

statements that are incomplete . . . . Often, a statement will not

mislead even if it is incomplete or does not include all relevant

facts.”) (emphasis in original and internal citation omitted);

Blackman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en

banc) (“[The duty to disclose rule] does not mean that by

revealing one fact about a product, one must reveal all others

that, too, would be interesting, market-wise, but means only

such others, if any, that are needed so that what was revealed

would not be so ‘incomplete as to mislead.’”) (quoting SEC v.

Texas Gulf Sulfur Co., 401 F.2d 833, 862 (2d. Cir. 1968)).

Winer fails to specify why the assertion that the equity

investment made by Smithfield Foods helped facilitate

Pennexx’s registration of its common stock was misleading or

untrue. Accordingly, the amended complaint did not

sufficiently allege facts giving rise to a strong inference that

Queen acted with scienter in making the statements at issue. See

15 U.S.C. § 78u-4(b)(2).
23

Moreover, Winer’s allegation that Queen made the

February 8, 2002 statement while cognizant of the prior

Smithfield Foods-Pennexx relationship does not satisfy the

scienter requirements because Queen’s statement does not give

rise to a strong inference that he acted with the required state of

mind. Queen stated the $36 million commitment made

Pennexx’s stock listing possible—a statement which was true.

Winer fails to sufficiently allege facts supporting a strong

inference that Queen knew or recklessly disregarded the

possibility that his statement was misleading. The District Court

properly held Winer failed to adequately plead scienter for the

February 8, 2002 statement.

E. Leave to Amend

Winer contends the District Court improperly denied it

leave to amend. Although leave should be “freely given when

justice so requires,” Fed. R. Civ. P. 15(a), we have held “‘a

District Court may deny leave to amend on the grounds that

amendment would cause undue delay or prejudice, or that

amendment would be futile.’” In re Alpharma, Inc. Sec. Litig.,

372 F.3d 137, 153 (3d Cir. 2004) (quoting Oran 226 F.3d at

291). The decision to grant a motion for leave to amend is

within the sound discretion of the District Court. Cureton v.

Nat’l Collegiate Athletic Ass’n., 252 F.3d 267, 272 (3d Cir.

2001). The District Court determines futility by taking all

pleaded allegations as true and viewing them in a light most

favorable to the plaintiff. See In re Alpharma, 372 F.3d at

153–154. We review for abuse of discretion. See Cal. Pub.
24

Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126, 163 (3d Cir.

2004). The District Court held Winer’s proposed amendments

would be futile and denied leave to amend.

1. Tabor Facility Claims

Winer contends new information alleged in the proposed

amendments establishes scienter for Queen’s February 20, 2002

optimistic statements about the renovation of the Tabor Facility

and Pennexx’s March 29 and April 17, 2002 SEC filings

estimating the cost of the Tabor Facility. Winer’s proffered new

information comes from: (1) the July 20, 2004 deposition of

Mike Timmons, a Smithfield Foods engineer and a project

leader for the renovations who stated the Tabor Facility was in

“relatively poor shape”; (2) Queen’s comments during a walking

tour of the Tabor Facility on July 23, 2004; and (3) a budget

estimate prepared by Robert McClain, a Smithfield Foods

engineer and a project leader for the Tabor Facility renovations.

Winer contends these sources portray the Tabor Facility as being

in disarray prior to renovations and that Pennexx understated the

magnitude of the renovations required.

Winer challenges Queen’s assertion on February 20,

2002, that the Tabor Facility required “minimal improvement.”

Winer cites Queen’s statements in 2004 that there had been a

problem with the lighting in one area of the Tabor Facility and

a “major issue[] in the plant that started to happen right away

was that the floor was coming up.” The District Court found the

proposed amendments futile because Winer did not plead that

any defendant knew any statement was false or misleading when
25

made. In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d

Cir. 2002) (“To be actionable, a statement or omission must

have been misleading at the time it was made; liability cannot be

imposed on the basis of subsequent events.”); Cal. Pub.

Employees, 394 F.3d at 158 (“We have long rejected attempts to

plead fraud by hindsight.”); see also Tellabs, 127 S. Ct. at 2508

(“The ‘strong inference’ formulation was appropriate, the

Second Circuit said, to ward off allegations of ‘fraud by

hindsight.’”) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d

1124, 1129 (2d Cir. 1994) (quoting Denny v. Barber, 576 F.2d

465, 470 (2d Cir. 1978) (Friendly, J.))). Queen’s February 20,

2002 statements were made in the early stages of a complex,

evolving real estate transaction. Within weeks of announcing its

decision to purchase the Tabor Facility and before the

acquisition was final, Pennexx released preliminary estimates

that purchasing, renovating, and equipping the new facility

would require substantial expenditures. The District Court

noted the most plausible inference was that Pennexx revised its

cost estimates in response to new information and to

negotiations during the intervening time period. In this context,

the District Court noted, the pleaded facts failed to support the

requisite strong inference of reckless conduct, much less

intentional conduct. Stated differently, Winer’s purported

inference, that the statements regarding the Tabor Facility were

knowingly false, was not as compelling or as strong as the

opposing inference cited by the District Court. Thus, Winer’s

inference is neither cogent, nor compelling, nor strong in light

of competing inferences. A reasonable person would not deem
26

the inference of scienter cogent and at least as compelling as any

non-culpable inference. See Tellabs, 127 S. Ct. at 2509–10.

Winer also relies on Timmons’s deposition and

McClain’s preliminary budget estimate to contradict Queen’s

February 20, 2002 statement. As the District Court noted,

Timmons had not begun working at the Tabor Facility until

weeks after Queen’s challenged statements. Accordingly, the

District Court found this was an impermissible attempt to prove

fraud by hindsight. We agree.

McClain’s higher estimate for purchasing, repairing and

equipping the Tabor Facility was dated January 29, 2002. But

the District Court noted that the version of McClain’s

preliminary budget estimate cited in the proposed amendments

was attached to an email sent to Queen on March 1, a week after

Queen made the challenged statements. But even assuming

Queen had seen the McClain estimate prior to his February 20,

2002 statement, the District Court held that it failed to correct

the scienter deficiencies. As noted, Queen’s statement was

made in the early stages of a “complex, evolving real estate

transaction.” In subsequent filings, Pennexx disclosed the Tabor

Facility project would cost more than originally expected. The

District Court found “the collective allegations of the [second

amended complaint]” failed to give rise to a strong inference

that Queen made the February 20, 2002 statement with scienter.

We agree. A reasonable person would not deem the inference

of scienter cogent and at least as compelling as any non-culpable

inference. See Tellabs, 127 S. Ct. at 2509–10.
27

The District Court also found the McClain estimate did

not cure the scienter deficiencies for allegations based on the

March 29 and April 17 SEC filings. The District Court noted

that McClain’s estimate was “based on the information currently

in hand” as of March 1, 2002, only nine days after Pennexx had

entered into a preliminary agreement to purchase the Tabor

Facility and over one month before Pennexx finalized the

acquisition of the Tabor Facility. The District Court found the

lower-end cost estimates contained in the challenged SEC

filings corresponded to the limited principal advances permitted

by Smithfield Foods under the parties’ credit agreement as of

March 29, 2002. McClain’s higher cost estimates did not appear

to consider the significant constraints on Pennexx’s ability to

finance the Tabor Facility project. The District Court found the

most plausible inference was that Pennexx revised its cost

estimates in response to new information and ongoing financial

negotiations. Stated differently, Winer’s purported inference

was not as compelling or as strong as the opposing interest cited

by the District Court. Thus, the inference is neither cogent, nor

compelling, nor strong in light of competing inferences. A

reasonable person would not deem the inference of scienter

cogent and at least as compelling as any non-culpable inference.

See Tellabs, 127 S. Ct. at 2509–10.

Moreover, the District Court found that Timmons’s

opinion could not give rise to a strong inference that Queen

acted with scienter. Winer did not allege that Timmons

conveyed his opinions on renovation and budgeting to Queen

prior to his February 2002 statement or that Queen adopted
 4

In Oracle, the Court found the statements of a former vicepresident of finance and other employees in conjunction with

large stock sales by the CEO and CFO, the loss of a large

number of deals, and improper revenue accounting records as

critical in finding a strong inference of scienter. See Oracle

28

Timmons’s opinions. As the District Court noted, the proposed

amendments never alleged that Timmons informed Queen of the

poor condition of the Tabor Facility. Winer failed to adequately

plead scienter by failing to link the declarant of the challenged

statement with facts that might contradict his statement. See 15

U.S.C. § 78u-4(b)(2) (requiring plaintiffs to plead facts giving

rise to a “strong inference” that “the defendant . . . acted with

the required state of mind”); see also Alpharma, 372 F.3d at 150

(“[A]llegations that Williams, [a] subordinate [of an individual

defendant], knew of the irregularities occurring in Brazil provide

an insufficient basis upon which to impute knowledge to [that

individual defendant].”); Nolte v. Capital One Fin. Corp., 390

F.3d 311, 316 (4th Cir. 2004) (affirming dismissal where

plaintiffs failed to plead that the speaking defendants “adopted

[an employee’s] opinion [that Capital One was undercapitalized]

but then publicly declared that Capital One was maintaining

sufficient capital”).

Citing Nursing Home Pension Fund Local 144 v. Oracle

Corp., 380 F.3d 1226, 1233 (9th Cir. 2004), Winer contends

Timmons’s testimony provides a “substantial window” into the

state of the Tabor facility at the time of Queen’s February 20

statement.4

 But Oracle Corp. is easily distinguishable on the
Corp., 380 F.3d at 1231–33 (“A former vice president of finance

stated that, on the basis of the information available to them, the

defendants would have known at least six weeks prior to the end

of the third quarter that the applications sales growth would miss

projections by at least 50%.”). The court held that “together, the

false representations, both as to current facts and future

estimated profits and sales, as well as the improper revenue

adjustment and unusual stock sales” were sufficient to support

a cause of action. Id. at 1234.

29

facts. 

Winer also contends Timmons’s statements prove

scienter for prior optimistic statements. But Winer relies on

statements made at the beginning of the renovation of the Tabor

Facility. Timmons had not even started working at the Tabor

Facility at the time of Queen’s February 20, 2002 statement.

The underlying facts, when viewed in the context of the

complex renovation, fail to support a strong inference of

scienter. A reasonable person would not deem the inference of

scienter cogent and at least as compelling as any non-culpable

inference. The District Court did not abuse its discretion in

finding that the proffered amendments failed to cure the scienter

deficiencies of the original complaint.

2. Pennexx’s Financial Condition

Winer contends the District Court abused its discretion

by failing to grant leave to add allegations regarding Pennexx’s

financial condition. Winer challenges the statements in
30

Pennexx’s SEC filings on April 9, 2002, and May 15, 2002, that

“all adjustments, including normal recurring adjustments,

necessary to present fairly the financial position of the Company

. . . and the results of its operations and cash flows . . . have been

included.” In support, Winer cites: (1) a report by Bart Ellis,

Vice President for Operations at Smithfield Foods, dated August

2, 2002; (2) a memorandum by Jeffrey Deel, a Smithfield Foods

employee, dated July 24, 2002; and (3) comments by Queen

during the tour of the Tabor Facility in July 2004. According to

Winer, these sources demonstrate Pennexx did not fairly present

its financial condition accurately on a timely basis in reports to

the SEC.

As the District Court noted, a complaint is actionable if

it alleges that a defendant “was aware that mismanagement had

occurred and made a material public statement about the state of

corporate affairs inconsistent with the existence of the

mismanagement.” Hayes v. Gross, 982 F.2d 104, 106 (3d Cir.

1992) (discussing the holding in Shapiro v. UJB Fin. Corp., 964

F.2d 272, 282 (3d Cir. 1992)). The District Court found none of

Winer’s newly asserted facts gave rise to a strong inference that

defendants acted with scienter. The Ellis Report recounts

Pennexx’s problems in reporting financial results to Smithfield

Foods on a weekly and monthly basis. But the District Court

noted the Ellis Report did not demonstrate that Pennexx failed

to “fairly present” its financial condition in its quarterly and

annual SEC reports. Stating that Pennexx’s “income

statement[s] and balance sheet[s] are only published on a

quarterly basis on the schedule demanded by SEC 10Q
31

requirements,” the Ellis Report suggests Pennexx was filing

timely reports with the SEC but not with Smithfield Foods. The

District Court found the Deel Memorandum merely suggested

methods for Pennexx to improve production and minimize

losses. Queen’s 2004 statements suffer from the defects already

discussed regarding pleading fraud by hindsight. In these

statements, Queen addressed the ability of Pennexx to calculate

yield on a monthly basis, specifically referencing a failure to do

so in February 2003. The District Court found these proposed

amendments failed to support a strong inference that defendants

knew or recklessly disregarded facts indicating Pennexx’s lack

of the internal controls necessary to file accurate financial

statements in April and May 2002.

Citing In re Ikon Office Solutions, Inc. Sec. Litig., 66 F.

Supp. 2d 622 (E.D. Pa. 1999), Winer contends that Pennexx’s

history of failed internal controls demonstrates Pennexx could

not accurately disclose its financial condition. But the

allegations in In re Ikon were explicit and stronger,

demonstrating “that the Company’s internal controls were

grossly deficient and that the financial data . . . was so

pervasively inaccurate and unreliable that reliance on that

information for financial statement purposes was precluded by

GAAP and GAAS.” Id. at 631. The District Court found none

of Winer’s proposed amendments supported a conclusion that

the challenged statements were false or misleading—at most

they suggested Pennexx was not timely in reporting to

Smithfield Foods. 
32

Moreover, the District Court found the proposed

amendments devoid of allegations that defendants consciously

or recklessly failed to improve the company’s financial

disclosure controls and procedures in response to the

observations and recommendations made in the Ellis Report and

Deel Memorandum. Even in the context of Winer’s other

allegations, the Ellis and Deel documents did not give rise to a

strong inference of scienter for the pre-May 22, 2002 statements

because they were created long after the challenged filings on

April 9, 2002 and May 15, 2002. Neither document

demonstrated the statements concerning Pennexx’s ability to

generate accurate financial information were false or

misleading. Accordingly, the District Court held the proposed

amendments failed to suggest defendants acted with scienter or

that the challenged statements were false or misleading when

made. The District Court did not abuse its discretion in finding

futility.

IV.

A. Group Pleading Doctrine

Assuming Winer can properly plead violations of Rule

10b-5, it contends the Individual Defendants are liable for

misrepresentations and omissions based upon the group pleading

doctrine. “Smithfield [Foods] and the Individual Defendants

were responsible for the accuracy of the public reports and

releases detailed herein as ‘group published’ information, and

are therefore responsible and liable for the representations

contained therein.” Specifically, Winer asserts liability on the
33

basis of the Individual Defendants’ access to, control over, and

ability to edit and withhold dissemination of Pennexx’s press

releases and SEC filings. In rejecting this argument, the District

Court held the group pleading doctrine did not survive the

specific pleading requirements of the PSLRA. We agree.

The group pleading doctrine is a judicial presumption

that statements in group-published documents including annual

reports and press releases are attributable to officers and

directors who have day-to-day control or involvement in regular

company operations. Under the doctrine, where defendants are

insiders with such control or involvement, their specific

connection to fraudulent statements in group-published

documents is unnecessary. See Wool v. Tandem Computers,

Inc., 818 F.2d 1433, 1440 (9th Cir. 1987) (“In cases of corporate

fraud where the false or misleading information is conveyed in

prospectuses, registration statements, annual reports, press

releases, or other ‘group-published information,’ it is reasonable

to presume that these are the collective actions of the officers.”).

Accordingly, the group pleading doctrine allows a plaintiff to

plead that defendants made a misstatement or omission of a

material fact without pleading particular facts associating the

defendants to the alleged fraud. See 3 Thomas Lee Hazen,

Treatise on the Law of Securities Regulation § 12.13 (5th ed.

2006) (citing cases). 

Consistent with the purposes behind the PSLRA,

Congress expressly intended to substantially heighten the

pleading requirements to reduce abuses in securities class action
34

lawsuits. See In re Advanta, 180 F.3d at 531 (citing H.R. Conf.

Rep. No. 104-369, at 28 (1995), reprinted in 1995 U.S.C.C.A.N.

679, 748). To plead fraud in a private suit for damages,

plaintiffs must specify each statement alleged to be misleading

and specify the reasons the statement is misleading. 15 U.S.C.

§ 78u-4(b)(1). For allegations based on information or belief,

the PSLRA requires plaintiffs to “state with particularity all

facts” forming the basis of the belief. Id. Each untrue statement

or omission must be set forth with particularity as to “the

defendant” and scienter must be pleaded in regards to “each act

or omission” sufficient to support a strong inference that “the

defendant” acted with the required state of mind. 15 U.S.C. §

78u-4(b)(2).

The PSLRA does not address group pleading, nor have

we explicitly addressed the doctrine. In Tellabs the Supreme

Court recognized the disagreement among the courts of appeals

as to whether the group pleading doctrine survived the PSLRA.

Tellabs, 127 S. Ct. at 2511 n.6. Because the issue was not

before it, the Court did not disturb the Court of Appeals for the

Seventh Circuit’s holding that the group pleading doctrine did

not survive the enactment of the PSLRA. Id. 

Winer contends it is untenable to require a plaintiff, at the

pleading stage, to identify each individual involved in preparing

public statements. But the PSLRA changed the pleading

requirements in private securities actions. A presumption of

particularity is inconsistent with the PSLRA’s requirement that

scienter be pleaded with respect to “each act or omission” by
 5

Before the PSLRA, only the Courts of Appeals for the First,

Ninth, and Tenth Circuits explicitly recognized a group pleading

exception to the pleading-with-particularity requirements of

Rule 9(b). The Court of Appeals for the First Circuit recognized

a limited version of the group pleading doctrine for securities

fraud, which, although characterized as “group pleading,” in

essence, required specific indicia of defendant’s direct

participation in making the alleged offending statement. See

Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 367–68

(1st Cir. 1994) (“The acceptance of responsibility for the

contents of the Annual Report, demonstrated by defendants’

signatures, combined with specific allegations that they knew of

conflicting conditions, establishes a sufficient link between the

defendants and the alleged fraud to satisfy Rule 9(b)’s

35

“the defendant.”

In any private action arising under this chapter in

which the 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 alleged to violate

this chapter, 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). The PSLRA requires plaintiffs to

specify the role of each defendant, demonstrating each

defendant’s involvement in misstatements and omissions.5
particularity requirement.”). As noted, the Court of Appeals for

the Ninth Circuit held: “[i]n cases of corporate fraud where the

false or misleading information is conveyed in prospectuses,

registration statements, annual reports, press releases, or other

‘group-published information,’ it is reasonable to presume that

these are the collective actions of the officers.” Wool, 818 F.2d

at 1440. The Court of Appeals for the Tenth Circuit cited Wool

to hold: “[i]dentifying the individual sources of statements is

unnecessary when the fraud allegations arise from misstatements

or omissions in group-published documents such as annual

reports, which presumably involve collective actions of

corporate directors or officers.” Schwartz v. Celestial

Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). Also,

the Court of Appeals for the Second Circuit has allowed group

pleading, although it has not explicitly used the phrase “group

pleading” in any precedential opinions. See DiVittorio v.

Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir.

1987) (quoting Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.

1986)) (“‘[N]o specific connection between fraudulent

representations in [an] Offering Memorandum and particular

defendants is necessary where, as here, defendants are insiders

or affiliates participating in the offer of the securities in

question.’”). The district courts within the Second Circuit have

suggested the group pleading doctrine survives the enactment of

the PSLRA. See, e.g., In re Van Der Moolen Holding N.V. Sec.

Litig., 405 F. Supp. 2d 388, 399 (S.D.N.Y. 2005) (“The majority

rule in this district is that the group pleading doctrine has

36
survived the PSLRA.”). The Courts of Appeals for the Ninth

and Tenth Circuits have continued to allow the group pleading

doctrine without explicitly discussing whether it survives the

PSLRA. See Howard v. Everex Sys., Inc., 228 F.3d 1057,

1061–63 (9th Cir. 2000); Schwartz, 124 F.3d at 1254.

The Courts of Appeals for the First and Sixth Circuits

have recognized the issue but have not decided whether group

pleading survives the PSLRA. The Court of Appeals for the

First Circuit questioned the viability of group pleading after the

PSLRA but has thus far declined to decide the issue. In In re

Carleton Sys., Inc., 311 F.3d 11, 40 (1st Cir. 2002), the court

held it would not consider the group pleading doctrine in

determining whether the complaint stated a claim against each

defendant and found liability existed for all but one defendant.

Id. For that defendant, the court stated even under the group

pleading presumption, the result would likely be the same,

because the complaint did not allege the defendant’s

participation in the production of any group published

documents such as SEC filings. Id. at 41. Similarly, the Court

of Appeals for the Sixth Circuit noted the disagreement

regarding the viability of group pleading. City of Monroe

Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 689–90

(6th Cir. 2005). In that case the plaintiff failed to allege facts

sufficient to qualify under even the group pleading doctrine. Id.

at 690.

37

 The only courts of appeals to have directly addressed the

survival of the group pleading doctrine post-PSLRA have
38

abolished the doctrine. See Fin. Acquisition Partners L.P. v.

Blackwell, 440 F.3d 278, 287 (5th Cir. 2006) (citing Southland

Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 364 (5th

Cir. 2004); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437

F.3d 588, 602–03 (7th Cir. 2006) rev’d on other grounds, 127

S. Ct. 2499 (2007). Also, the Court of Appeals for the Eleventh

Circuit has suggested the group pleading doctrine does not

survive the enactment of the PSLRA, although it has not

abolished the doctrine. Phillips v. Scientific-Atlanta, Inc., 374

F.3d 1015, 1018 (11th Cir. 2004) (acknowledging “the most

plausible reading in light of congressional intent is that a

plaintiff, to proceed beyond the pleading stage, must allege facts

sufficiently demonstrating each defendant’s state of mind

regarding his or her alleged violations”).

The decision of the Court of Appeals for the Fifth Circuit

to abolish group pleading was predicated on the PSLRA’s

requirements that allegations be set forth with particularity

concerning “the defendant” and scienter be pleaded for “each act

or omission” sufficient to give “rise to a strong inference that the

defendant acted with the required state of mind.” Southland,

365 F.3d at 364. The Court of Appeals for the Seventh Circuit,

citing Southland and Phillips, also held the group pleading

doctrine is inconsistent with the PSLRA. Makor, 437 F.3d at

603 (“While we will aggregate the allegations in the complaint

to determine whether it creates a strong inference of scienter,

plaintiffs must create this inference with respect to each
 6

Winer contends the Court of Appeals for the Seventh

Circuit’s decision to abolish the group pleading doctrine in

Makor should be read narrowly as only abolishing group

pleading for purposes of inferring scienter. Winer agrees that

group pleading cannot be used to prove scienter, but contends it

can be used to attribute statements to Individual Defendants.

This argument is illogical. See, e.g., D.E. & J Ltd. P’ship v.

Conaway, 284 F. Supp. 2d 719, 731 (E.D. Mich. 2003) (“Where

individual defendants are the target of the fraud allegations, it

would be nonsensical to require that a plaintiff specifically

allege facts regarding scienter as to each defendant, but to allow

him to rely on group pleading in asserting that ‘the defendant’

made the statement or omission.”). If Winer could plead

scienter with the specificity required by the PSLRA, it would

not need to resort to the group pleading doctrine in the first

place.

 7

Most of the district courts in this circuit to address the issue

have reached the same conclusion. See In re Bio-Technology

Gen. Corp. Sec. Litig. 380 F. Supp. 2d 574, 584 (D.N.J. 2005)

(“[T]he prevailing authority within this District counsels that

group pleading has been abolished.”) (citing cases); see also

Majer v. Sonex Research, Inc., Civ. No. 05606, 2006 WL

39

individual defendant in multiple defendant cases.”).6

We agree and hold the group pleading doctrine is no

longer viable in private securities actions after the enactment of

the PSLRA.7

 If a private securities case proceeds past the
2038604, at *9 (E.D. Pa. July 19, 2006); In re Am. Bus. Fin.

Servs., Inc. Sec. Litig., 413 F. Supp. 2d 378, 394 (E.D. Pa.

2005); P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F.

Supp. 2d 589, 619–20 (D.N.J. 2001); In re Digital Island Sec.

Litig., 223 F. Supp. 2d 546, 553 (D. Del. 2002), aff’d, 357 F.3d

322 (3d Cir. 2004). At least two district courts in this circuit

have assumed the PSLRA did not necessarily abolish the group

pleading doctrine in all cases. See, e.g., In re Rent-Way Sec.

Litig., 209 F. Supp. 2d 493, 518 (W.D. Pa. 2002) (“We see no

reason to find that group pled allegations per se cannot meet the

heightened pleading standards of Rule 9(b) or the PSLRA, and

rather will consider the allegations individually.”).

 8

Winer’s claims against Queen did not rely solely on the

group pleading doctrine because the amended complaint directly

40

pleadings stage against a corporation and discovery reveals

individual culpability, a plaintiff may seek permission to amend

the complaint to assert claims against individual defendants.

See Fed. R. Civ. P. 15. But any such claims must be pleaded

with the specificity required by the PSLRA with respect to each

defendant. See 15 U.S.C. § 78u-4(b)(2).

As a result, we hold Winer’s claims based on the group

pleading doctrine fail. All Rule 10b-5 claims against Luter,

Cole, and McGreal were properly dismissed, as only the group

pleading allegation in paragraph 26 of the amended complaint

connects Luter, Cole, and McGreal to the alleged

misstatements.8
attributed misstatements and omissions of material fact to

Queen, who was regularly quoted in Pennexx’s press releases.

Winer also asserted that Cole dictated the contents of Pennexx’s

November 25, 2002 press release. But Winer lacks standing to

assert this claim. Accordingly, there is no valid claim against

Cole.

41

B. State Law Claims

Winer contends the District Court erred by dismissing its

state law claims against Luter, Cole, Queen, and Smithfield

Foods. As Pennexx was incorporated in Pennsylvania,

Pennsylvania law applies to Winer’s breach of fiduciary duty

claims. Resolution Trust Corp. v. Cityfed Fin. Corp., 57 F.3d

1231, 1236 n.5 (3d Cir. 1995), vacated on other grounds sub

nom. Atherton v. FDIC, 519 U.S. 213 (1997) (“[T]he applicable

law governing the liability of officers and directors for their

stewardship of the corporation i[s] the law of the jurisdiction of

incorporation.”). Under Pennsylvania law, corporate directors

owe fiduciary duties of care, diligence, and good faith “solely to

the business corporation and may be enforced directly by the

corporation or may be enforced by a shareholder, as such, by an

action in the right of the corporation and may not be enforced

directly by a shareholder or by any other person or group.” 15

Pa. Cons. Stat. § 1717. The District Court properly dismissed

the fiduciary duty claims against Queen.

Winer’s fiduciary claims against Smithfield Foods are

derivative of harm to Pennexx and cannot be brought in a direct
42

shareholder action. See Kauffman v. Dreyfus Fund, Inc., 434

F.2d 727, 732 (3d Cir. 1970) (“A stockholder of a corporation

does not acquire standing to maintain an action in his own right

. . . when the alleged injury is inflicted upon the corporation and

the only injury to the shareholder is the indirect harm which

consists in the diminution in value of his corporate shares . . .

.”). The essence of Winer’s claim is that Smithfield Foods

engaged in self-dealing at the direct expense of Pennexx, which

ultimately resulted in a diminution in value of Pennexx stock.

That injury, if proved, belongs to Pennexx, and Pennexx alone

has standing to sue as a corporation.

Nonetheless, Winer maintains it may assert direct claims

against Smithfield Foods as a majority stockholder rather than

derivative claims of Pennexx, because as a controlling

shareholder of Pennexx, Smithfield Foods breached its fiduciary

duties to the non-controlling/minority shareholders. Winer

relies on Bohler-Uddeholm America, Inc. v. Ellwood Group,

Inc., 247 F.3d 79 (3d Cir. 2001) for the proposition that noncontrolling shareholders may bring direct actions for breach of

fiduciary duty. But Bohler involved a breach of fiduciary duty

between two corporations who entered into a joint venture. The

joint venture consisted of only two shareholders. There is no

joint venture here. A direct claim may only be brought where

the injury is to the shareholder individually. Davis v. United

States Gypsum Co., 451 F.2d 659, 662 (3d Cir. 1971). In Bohler

the one minority shareholder sued the one majority shareholder.

Where, as here, the claims asserted are “for the benefit of

stockholders qua stockholders in a corporation,” only a
43

derivative claim may be brought. Id. at 662. 

Winer also contends that even if its breach of fiduciary

duty claim against Smithfield Foods should have been brought

derivatively, a direct action is permissible where all of the

parties to the dispute are before the court and the corporation is

no longer operating as a going concern. Winer relies on an

unpublished Delaware Chancery Court decision: “In the

partnership context, the distinction between direct and derivative

claims becomes irrelevant . . . where a partnership is in

liquidation and all non-defendant partners in the resulting

litigation constitute a uniform class of limited partners.” In re

Cencom Cable Income Partnerships L.P. Litig., Civ. No. 14634,

2000 WL 130629, at *3 (Del. Ch. Jan. 27, 2000). But Cencom

involved a partnership and not a corporation. The court noted

that “in the corporate context, the Court of Chancery is well

served by a highly developed body of common law explaining

principles that govern the resolution of these disputes [where

investors sue the entity controlling the affairs of an enterprise

for alleged breaches of duties owed to investors].” Id. at *2.

Accordingly, the District Court properly dismissed the fiduciary

duty claims against Smithfield Foods and the aiding and abetting

claims against Luter and Cole. 

Winer asserts the District Court erred in not allowing it

leave to amend its state law breach of fiduciary duty claims. But

the District Court found Winer suffered no injuries that were

separate and distinct from those suffered by Pennexx.

Therefore, any amendment to the breach of fiduciary duty claim
44

against Smithfield Foods would have been futile. The District

Court acted well within its sound discretion to make this

determination.

V. Conclusion

The District Court properly dismissed Winer’s breach of

fiduciary duty claims and all claims based upon statements or

omissions made prior to May 22, 2002. After plaintiffs’

attempts to substitute a new lead plaintiff failed, the District

Court properly dismissed the case for lack of prosecution.

For the reasons set forth, we will affirm the judgment of

the District Court.