2004 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit

5-17-2004 

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P r e c e de n t i al or N on-P r e c e de n t i al : P r e c e de n t i al

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UNIT ED STA TES C OURT OF

APPEALS FO R T HE TH IRD CIR CU IT

______________
No: 03-2347

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GSC PA RTNERS CDO FUND; GSC PA RTNERS CDO FUND I I, LTD; GS C R EC OV ER Y I I, L.P ., Ap pellan ts

v.

DENNI S R. WASHI NGTON; STEVE N G. HANKS; THOMAS H.

ZARGE S; ANTHONY S. CLEBE RG; DAVID H

.

BATCHELDER; LEONA RD R. JUDD; ROBER T S.

M ILL ER , JR .; DORN PAR KI NSO N; TE RRY W.

PAYNE; JOHN D. ROA CH; CREDIT SUISSE

FIRST BOSTON C ORPORAT ION; JOHN DOES ITHROUGH X

Appeal from the United State s District

Cou rt for the Dis tri ct of New Jersey (D.C. Civi l Action No. 01-CV-04905) Dist ri ctJudg e: Honor abl e Anne E. Thompson

_____________________ Argued on December 19, 2003 Before: ROTH, MC KEE and CU DA HY * , Circuit

Judges
(Opinion fi led May 17, 2004)
Howard J. Kaplan, Esquire (Argued) Stanley S. Arkin, E squire 590 Madison Avenue 35 th Floor New Y ork, NY 10022

Bruce H. Sn yder, Esquire Shepp ard A. G uryan, Esquire Lasser Hochman 75 Eisenhower Parkway Roseland, NJ 07068

Co unse l for A ppella nts
Shannon M. Kasley, Esquire Beth Heiftz, Esquire ( Argued) Adrian Wa ger-Zito, Esq uire Me gyn M. K endall, Esqu ire Jones Day 51 L oui sian a A ven ue, N .W

. Washington, D.C. 20001
Robinson B. Lacy , Esquire (Argued) Sul li van & Cr omwel l LLP 125 Broad Street New Y ork, New York 10004

An thon y J. Ma rchetta Pitney , Har din , Ki pp & Szuc h LLP P.O. Box 1945 Morristown, New Jersey 07962

___________________
*Th e H on.R ichard D. C udah y, Circuit Judge for the United States Court of Appeals for t

he Seventh Cir cuit, sitting by des ignati on.-2-

Christoph er J. Carey, Esquire Dav id Blackw ell, Esquire Graham, Curti n & Sheridan Four Headquarter s Plaza, P.O. Box 1991 Morristown, New Jersey 07962- 1991

Geo rge T. M anning, E squire Jones Day 1420 P eac htree St

ree t, N.E. Atlanta , Georgia 30309- 3053
Counsel for Appell ees

O P I N I O N

CU DA HY , Circuit

Judge

The b ackgr ound of this case is the clas sic co rp or ate lo ve sto ry. C om pa ny A

mee ts Co mp any B. T hey are a tt rac ted to each other and a fter abrief courts hip, they merge. In ve st orC, hop in g tha t t he two companies will be fru itf ul an d m ul tip ly, agrees to pay$50 mill ion forthe wedding. Nine mon ths later, howev er, things begin to fall apart and the combi ned entity declar es bank ruptcy. Inv estor C feels misled. He bel ie ve s th at C om pa ny A knew that the re w ere pro blem s with Com pany B but that

it made t

he oft repeat ed mistak e of th inking that it w ould be able t o change Compa ny B for the better. Inve stor C files su it in t he dist rict court and a fter his com plaint is dismis sed,

we find ours elves he re. It is an old story but it nev er fa ils to e licit a t ear. In this c a se, appel lant s GSC Partners CD O F und , Ltd., G SC Partn e rs CDO F und , Lt d. I I, LTD., an d GSC Reco very II, L.P. (the plaintiffs) appeal t he dist rict court’s dismissal of their a ction againstindividual off icers and directors of Washington Gro up In ternatio n al, Inc. (Washing ton ) and Credit Suisse First Bost on Corpor at io n ( CSFB) . Th e plaint iffs file d this acti on un der section 10(b), Rul e 10b-5 of the Securities Exchan ge Act of 1934 (the Act), al leging that their purchase fr om CS FB of $ 48.8 mill ion in notes , w h ic h Washington used to fina nce it s acquis iti on of Raytheon Engine ers & C onstru ctors In ternatio nal, Inc. (RE C), w as carr ied ou t pursu ant to defendants’ alle gedlyfalse and misleadi ng offering circul ar. Because the pl ainti ffs fail ed to meet t

he h eighte ned pleadi ng requ ireme nts of the Act, we affirm the dist rict court’s grant of defend ants’ m oti on to d ism iss. I. Washington is an i nterna t ional engin e ering and c onstru ction f irm tha t, in 200 0, employe d approximat ely39,000 work ers and brought i n approximat ely$5 bill ion in annual revenue. 1 App. at 41, 77. De fend ants De nn i s R

. Wa shington, Hank s, Zarges, Cleberg, Batchelder , Judd, Miller, Pa r kinson, Payne, and R oach w ere officers and/ordirectors of Washingt on during t he acquisi tion process. Ap p. at 3 8-9 (Cp lt. ¶ 14-23). Washington r epre sentat ive s

1 Washington was known as Morrison Knudsen C orporat

ion (some times ref erred t o as MK) before the note offering . App. at 41. The company f

iled for bankruptcy protection in May 2001, and w as not named as a defendant in this action.-3-

commenced nego tiations d urin g the

summer of 199 9 for the a cquisi tion of REC, the engi neering and construc tio n divis ion of Raytheon Company. App. at 42 (Cplt. ¶ 37). Afte r conducti ng an init ial

exa minati on of RE C’s f inanc ia l information, Washington submitted a nonbind in g o ffer of between $775 and $875 mill ion for the b usi ness operations of REC, s ubject

to it s findi ngs in due dili gence. App. at42 ( Cp lt. ¶ 39). Raythe on acce pted th is offer in September 1999. Id . a t ¶41. Be for e final izing t he deal, Washington began i ts due di ligenc e process, which entai led thorough scrutiny of REC’s financialstatements and projections. Id

. In this process, it received assis tance from Arthur Ander sen, L.L. P. Id. at ¶ 4 1. Mean wh ile, the part ies began negotiating a d efini tive a greement for the acquisi tio n. Id . at ¶ 40 . To a ugm ent this process, Washington employ ed defendant CSFB to act

as it s financi al advi sor for the REC pur cha se. Id . at ¶ 40. CSFB conducted its own due dilige nce and had

access to allof Washing t on’s due dili gence find ing s as w ell. Id . at¶ 43. Throughout the due diligence process, the two compa ni es commu nicat ed thei r find ing s an d co nce rns to eac h ot her

. Id

.
On October 27, 1999, after one
mo nth of

in te rv ie ws, doc ume ntre vi ews and project site visits, Washing ton’s management report ed t o the Washingt on Bo ard its findings regardi ng the accur acy of REC’s financialinfo rmat ion. App. at 44 (Cplt. ¶ 46), 317. The t eam was i mpr essed with the “[ s]trong , capa ble

ma nag ement team in plac e” an d w ith RE C’s “solid positio n in [the] I ndependent Power Pro duc er (IP P) m ark et,” as w ell as in the rai l, pow er, che mica ls, meta ls pharmaceuti cal, pulp and paper, c hemical demilitari zati on, refine ry and heav y maintenancemark et s. App. at320. Th e team also noted that

the pe r sonn el it work e d with had been “coope rati ve and forthcomi ng.” Id . at

317.

The due d i ligenc e team expres sed

som e concerns as well. It ci ted as among REC’ s gene ral w eakn esses it s “aggress ive” and “op ti misti c” plans f or sales volu me a nd p rofit gro wth in certa in businesses, the volatility of the compa ny’s working capita l, the possible la ck of accounti ng integrity

of its unaudite d financi al statem ents and its “[u]nders tate d

or und isclose d li a bili ties .” Id . at 319. In partic u lar, the te am calculated that the prof it pr oj ecti ons for some of the constructionprojects w ere inaccur ate. For example, the te am revised e sti mated prof it project ions for the “Pin e B luff” proj ect from $20.2 mil lion to $3.1 mil lion, for the “SADAF” project

from $4.2 mil lion to $0.8 mill ion and for t

he H uds on Bergen project fro m $ 61.1 millio n to $46 .9 mill ion

. Id . at

326. At the same time, how ever, Washington note d, that “[w]ide r levera ge of pr op rie tar y tec hn ol og y” could improve so me of the pro jects ’ deterio rati ng marg ins, and th a t “[o]perat ional syne rgies offer [a n] upside to a combinednew company.” Id

. at 346.

On November 3, defendantZarges senta memorand um t o other members of the Washington management, elaborating

on som e of th e perc eived inacc uracie s in the project

profit esti mates but projecting-4-

t hat if the acquisi tion went t hrough, eve n taking into ac count the risks , the combined entity cou ld p erfor m w ell in th e engineering an d c on str uc tio n i nd us try. App. at 362. Zarges fi rst e mphasized that the findin gs in the Octob er 27 B oard pre sen tatio n w ere n ot co nclu sive

. Id . H e
wro te that, althoughthe Umatil la and Pine Bluff projects had been prese nted as breakeven project s through 2001, they

were at the time of t

he memo i n “los s positions with dete rior ating pe rformance tren ds.” App. at 364 . The memorandum reiterate d concern s about R aytheon’s aggressi ve pl ans and opti misti c positions

on most proj ects, reporting incons ist encies and sh ak y pe rf or m an ce hi sto ry. Id . at 365- 66. Zarges concl ude d, however, that t he projected operati ng fee (i.e. prof it) in 2000 could
, taking into acc ount W ashington’s adjus tmen ts to RE C’s c alcula ti ons ,
“ pro vide an indust

ry -leadi ng margin of 3.8% on adjusted revenues. ” App. at 362. He added, “This

. . . repres ents qui te an improvementover re ce nt performance hist ories

. . . [and] is no easy task. ” Id

.

A month lat er, on Dece m ber 2, 1999, defe ndan t Han ks sen t a memorandum to the Bo ard on the progress of the du e dilige nce te am. A pp. at 362

. He reported that i n order to address Wa shington’s concerns about the accur acy of RE C’s financi al st at eme nts, Washing to n had hire d P ricew aterh ous eC oop ers L .L.P ., i ndependentacco untan ts, to aud it th e financi al statements fo r 1996, 1997, and 1998, and to “re view” the f i nancial statement for 1999. App. at 207, 367. These audite d financi al st atement s
re qui red $35 0 m illion of adjus tmen ts to br ing them int o compliance wit h General l y Accepted Acco unting Princ iples (GA AP ). Id

. Ha nks s tipulated that in o rder to

re medy the dis crepanci es, i t would be

n ecessary to arr ange for an i ncrease i n liabi lities assum ed by R aytheon of u p to $10 0 m illion

. Id

.
The Wash in gt on Bo ar d me t on March 14, 2000 to c onsider the progress of the du e di ligenc e team. App. at 548-88. T he team again reported s ome conce rn s about REC ’s financial heal th, but als o expresse d conf idenc e that a pa rtnersh ip

w ith Wash in gt on wo ul d i mpr ove REC’ s position, “having act

ually experie nced what it ta ke s to tu rn a c om pa ny a roun d.” App. at 420, 422. The team reported risks involved i n the acquisi tion of REC, ci ting hist orical perform an ce th at wa s charact erize d by large loss project s. Id . at 554. The team revise d the p rojecte d pro fit for the Um atilla pro

jectdow nw ard to “22M loss, best cas e,” an adj ustment of $38 millio n fr om RE C’s estim ate. App. at 559. It also adjusted th e pro jected prof it for the Pi ne Bluff proj ect fr om breakeven to a $2 0 m illion loss

. Id . R EC h ad “[p ]o or finan cial co ntrols/ac coun tin g pra ctice s,” and the t eam suspe ct ed that ther e may have been i nadeq uat e restructuring reserv es in T he H ague and in Houston. Id . a t 55 4. Th e due d ili gence team also r evised REC ’s proj ected EBI TDA (earnin gs be fore in terest, taxes, de p reciation and amortization) for the y ear 2000, f

rom $143 mill ion to $115 mill ion, assuming that the combined company wo u ld be inde mnified by Raythe on again st any do wn sid e from Um atilla and Pine Bluf f and that it “w ould-5-

incu r 50% of the $60 milli on o f vulnerabi lities ide nti fied i n the due dili gence report.” Id . at 42 0-2 1, 56 7.

In addition, t

he due dil igence team had enco untere d pra ctical dif ficultie s in

com pleti ng the due di ligenc e. Defendant Hanks recorded i n his not es and reported to the board t

hat “the due di ligenc e and negotiation process h as b een a diffic ult

one- Raythe on’s proce dural r ules l imit ed

our opp ortun ities for o pen a nd ca ndid discuss ions with management, l imit ed our ability to see companyoffices and p rojects

... and Raytheon has not been cooperative with Wa shing ton G roup ’s attem pts to

recon cile the [di sc repanci es between financi al and operati onal report s and other comparat i ve data]. ” App. at 418, 552. These limi tati ons led Hanks t o suspect that Raythe on wa s “hid i ng serious business issues and problems. ” Id

. The sa me
concern had been recor ded in the November 3 memor and um, which noted that the “t eam has been concerned abou t the abrupt l imit s of the due di ligenc e pr o cess and d ata. W ith 2 1⁄2 we eks to evaluat e data, the dil igence was re stri cted to selected high-i mpact proj ects an d issues .” App. at

365.

Hanks also r ec orde d in h is p resent ationnotes som e high poin ts discl osed by the due dili gence process. He wrote, “Ra ytheon’s Pow er G roup is poised to ben efit greatly from the su rge in demand for new power,” and expr essed confidence that “ [t]he c ombinati on of M K’s contractors un it with Raytheon ’s Infrastructure busin ess w ould create the most exp erienc ed and pow e rful pr ovider of Design an d build serv ices i n the infrastructure market t oday. ” Id . at 422. In additi on, “[t ]he com bina tion of M K’s indust rialprocess uni t with R ayt heon’s indu stria l unit affords synerge ti c opportuni ties ... and agr eatlyimp rov ed clie nt base.” Id . at 42 2-2 3. H e repor ted that the du e dil igenc e team wa s not in

com plete agreement as to the va l ue of REC. Id . at

423. He highl ighted s om e points on which theyall a greed, how ever, includi ng th at “ [t ]h e s tren gths of MK – and the str eng ths of R aytheon are

co m pl em en tar y” an d that “the Markets that the combined MK/Raytheon wil l serve going forward are t

he faste st growing segm ents of the i ndustry .” Id . at 424 . His notes con clu ded by s uggesti ng that Washington should purs ue the acqui sition. Id.
Zarges’ Ap ril 3 me morandum was

more positiv e abo ut th e team ’s acce ss to data, reporting that

the rec e nt site visits

were “mor e informative. ” App. at 433. Having been giv en m ore acces s to dat a, the team had b een able to upd ate its calcul ations about profit from operations. It s find ing s did con firm som e los ses. I n large part due to thelower profi tabil ity of the Damshead Creek and San Roque projects, the tea m red uced its estim ate of RE C’s 2000 operati ng fee f rom $63 millio n to $45 millio n. Id . at 433, 653, 655. A furthermemorandum da ted Ju ly 6 dis closedthat f or c ertai n pr ojec ts, t h e “t ot al MA C [material adverse changes]

e s timate – proj e c t deteri orati on/unders tate d liabi lities” was $73 .5 m illion . Ap p. at 6 57. It appears t

hat throughout the due-6-

dili gence process, the due di ligenc e team and the Washington Board communicated regu larly an d frankly about the i r
assess ment of REC’s strengt hs and weaknesses. At no point i n this proces s di d the Washingt on management expres s the conviction that

the acqui sition wou l d pr ove a fail ure. I n fact, the managemen t team took st eps to r emedy the weaknesses it pinpointed by r enegoti ating t he purchase

so as to avoi d acquisi tion of liabi lities and risky project s. App. at

81.

On Ap ril 14 , 200 0, W ashingt on
en t ered into a Stock Purchase Agreement

w ith Ra ytheo n an d R EC

. Id . The ag reementspecified that t he purchase price, which w a s to be base d on the A pril 30, 2000 balance s heet , w ould be appr oxim ately $510 mill ion—b e tween $265 and $365 mill ion less t han Washington’ s init ial of fer. Id

. Washingt o n wo uld ac quire th e engine ering, design, procurement , construction, operati on and maintenanc e busine ss of

REC, as well as t

he capit al stockof ce rtain REC subsidiari es. App. at 51 (Cplt. ¶ 78). The pur chase pri ce refle cted the excl usion of the four most signi ficant

REC loss project s, for which Raythe on had a greed to re tai n l iab ilit y. Id

. at 51 (C plt. ¶ 77 ), 81. R ayth e on also agreed to “retain speci fied ass ets” of REC and to inde mn ify Washing ton fo r “specif ied liabilities of RE C an d its sub sidia ries.” App . at 81. Later, Washing ton wa s able to get R aytheon to ret ain partial liab ility for the U matilla p r oject as well, which Washington had predicted wa s in a position to show a loss of $22 millio n. See Supp. App. (di scussed supra at n.1 ).

On July 7, 2000, W ashington’s acquisi tion of REC clos e d. App. at 52 (Cp lt. ¶ 82). The acqui sition wa s prim arily financ e d throu gh th e $30 0 m illion no te offering
, sold purs uant to a confidential offering c ircul ar dated June 28, 2000. Id

. at ¶¶ 86-7. The offering circular include d certain audite d fina ncial st atem ents as we ll

as unaudite d fi nancialstatements for t he first quarter of 1999 and the fi rst quarter of 2000. App. 286-96. Defendant CSFB w as
one of the lead u nderw ri ters and init ial pur cha sers of th e no tes. Ap p. at 53 (Cp lt. ¶ 88). It pu rchas ed $2 25 m il lio n in princi pal amount of

the notes, then offer ed and resol d some of

thos e notes to the petiti one rs, who purchased $48.8 mi lli on fac e am oun t of n otes

. Id. (Cp lt. ¶ 93 ).

On October 23, 2000, Wa shin gton’s Form 10-Q filing announced that as a result of “a com preh ensiv e review” of RE C’s existing contr acts, Washing t on “reduced [RE C’s] n et asse ts relating to long-term contrac ts i n the prel imina r y purchase pr ice by appr oximatel y $325 [mill ion]

. . . [and] had m ade re ductio ns in net contract assets in the p re li minary purchase price a llocation of approxi m ately $225 [mill ion]. ” App. at58- 59 ( Cp lt. ¶ 105). Wa shing ton also disclo sed that it had to record appr oxim ately $1.2 b illion in g ood will. Id. In a pres s rel ease dat e d March 2, 2001, Washi ngton discl osed that “[s]ever al [REC ] project s had seri ous undiscl osed problems and were i n troubl e” before it ac quiredRE C. A pp. at 5 9 (C plt. ¶ 110). I t notedt hat as of September 1,-7-

2000, Was hi ngton h ad reduc ed RE C’s assets and incre ased it s li abili ties by approximat ely $700 mill ion from the

amo unts origi nally

esti mated. App . at 60 (Cp lt. ¶ 111). On March 8, 2001, Wa shington’s Form 8- K fi ling i ndicat ed that RE C’s f inanc ial statem ents referred to in the ci rcular

should not

be reli ed upon. Id. at ¶ 1 12.

On May 14, 2001, Washington and

som e of i ts subs idiaries f iled pe titions in bankruptcy

in the B ankr uptcy C ourt in Nevada for rel ief

pursuant to Chapter

11 of the Bankrup tcy Co de. Id . at 61 (Cp lt. ¶ 117). W ashi ngton als o file d a complaint in a Idaho st ate cou rt agai nst Ray theon alle ging fraudule nt induce ment, fr aud and misre prese ntatio n, reques ting rescis sion or spec ific performan c e. App. at 455-81. That suit w as a ppar ently settled in November 200 1, and is und er a confidentia lity restriction . Pl. Br. a t 1 7 n.4. Plaintiffs commenced this action

a llegi ng violat

ion of feder al and st at e
sec urit ies law s. Id . at 37-8. In Janua ry 2002, the defend an ts filed a mo tion to dismiss plaint

iffs’ amende d com plaint. Alt hough no formal di scoveryhad take n place in the c ivilacti on, the plaintiffs we re able to obtai n ac ce ss thr oug h Wa shington’s b ankr uptcy to d ocum ents dis cus sed in the i nstant opinion. The dist rict cour t granted the defendants’ motion, hold ing tha t the co mp laint faile d to s tate a cause of action for s ecurit ies frau d. A pp. a t 1. T his a ppe al fo llow ed.

II. We exerci se plenar

y review over the dist rict court’ s decis ion to gr ant the defendants’ mo tio ns t o di sm iss. See Broselow v. Fis her , 319 F.3d605, 607 (3d Cir. 2003) . W e also exercise p lenary

re view over the di stri ct cou rt’ s inter pretat ion of federalsecuri ties laws. See Oran v. Stafford , 226 F.3d 275, 28 1 n.2 (3d Cir. 200 0); In re Westing h ouse Sec. L iti g. , 90 F.3d 6 96, 706 (3 d Cir. 1996). We accept allalle gation s i n the plaintiffs’ complaint

as true and draw all reasonabl e infer ences in f avor of the nonmoving par ty. See Oran , 226 F.3dat 279. A court maylook beyond the co mp laint to extrins ic docum ent s when the plaintiffs’ cl ai ms are b ase d on tho se d ocu me nts. See In re Burl ington Coat Factory Sec. Litig. , 114 F.3d 1410, 1426 ( 3d Cir . 1 997 ). A court may not dismiss the complaint unles s it appe ars bey ond doubt that the plainti ffs

can prov e no s et of f acts in support of their cl ai ms that would e ntitle them to rel ief. See In re Rockefeller Ctr. Pro ps., Inc. Sec

. Litig. , 311 F.3d 198, 21 5-16 (3d Cir. 200 2).

The plaint

iffs al lege av iolat

ion under Section 10( b) of

the 1934 Securities Exchange Ac t and R ule 10 b-5 u nder it. In

or d er to st ate a cl aim under Rule 10b- 5, plaint iffs m us t al leg e “ w ith pa rtic ul ar ity” that defe ndan ts (1) made a misst atement or omissi on of materi al fact (2) with scienter (3) in connecti on with the purchase or the sale of a securi ty (4) up on which the plaint iffs reasonabl y r elie d and (5) the plaintiffs’ reli ance was the pr oxi m ate

cause of the ir inju ry. Semerenko v. Cedant Corp. , 223 F. 3d 165 , 174 (3d. C ir. 2000);

see also In r e Westinghouse , 90 F.3d at 710

. The plaint

iffs’ securi ties fraud claim is also su bject to heightened-8-

pleadi ng require ments. U nder F ederal Rul e of Civil Pr ocedur e 9(b ), “[i]n a ll averm ents of fraud . . . , t

he circu mstances

co nstitu ting fraud . . .shall be s tated w ith pa rtic ul ar ity. Malice, i ntent, kno wle dge, and other co nd iti on of mind of a pers on may be aver

red ge neral ly .” Fe d. R. Civ. P. 9(b). This par ticularity requ ireme nt is “rigor ously applie d in securiti es fraud

cas es.” Burlingt

on , 114 F.3d at

1417. The Priva te Securities Lit

igati on Reform Act (PSL RA ), 15 U. S. C. § 78u, “i mposes another la yer of fa ctual p articular ity to alle gations of securi ties fraud.” In r e Roc kefel ler
, 311 F.3d at 217. If a
com pla int fail s to comply with the P SLR A’s plead ing requirements, dismissa l is ma nda tory. 15 U.S.C . § 78u-4(b )(3)(A). The PSL R A re quires the co mp laint to

s pecify“each st atement al leged t o have been misleadi ng, the reason o r r easons why the statement is mis leadi ng, and, if an alle gat i on regardi ng the st atement or

o missi on is made on inf ormation an d belie f, the co mp laint sha ll state wit h particu larity all f

acts on which t

hat bel ief is fo rme d.” 1 5 U .S.C . § 78 u-4 (b)(1 ).

With regard t o the “scienter” component of the 10 b-5 clai m, the critical issue before this Court, t he PSLRA further requires the plainti ffs, “with resp e ct to each act or omi ssion, ” to “st at e wi th particu larity facts g iving ris e to a strong infere nce that t

he defendant acted with the

r equiredstate of mind.” 15 U.S. C. § 78u4(b)(2). This particul a rity r equirement supersede s Rule 9(b)’ s provis ion all owing state of mind to be ave rred gen erall y. See In re NAHC , Inc. Sec. Li tig. , 306 F.3d 13 14, 1328 (3d Cir. 2002) (ci ting In re Adv anta Corp. Sec. Litig. , 180 F.3d 525, 531 n.5 ( 3d C ir. 19 99) ).

The plaint

iffs mayestabl ish a “str ong infere nce” that the defe ndan ts acted with “scien ter” “e ith er ( a) by alle ging facts to show thatdefendants had both mo tive an d op portu nity to com mit fraud
, or (b) byalle ging fact s that

cons titute s trong ci rcumstantial e vidence of consciou s misbeh avior o r recklessness .” In re Burli ngton , 114 F.3d at 1418 (quoti ng Acito v. IMCER A Group , Inc. , 47 F.3d 47, 53 (2d Cir. 19 95)); see also In re Adv anta , 180 F .3d at 534 -35; Oran , 226 F.3 d at 2 88- 89. A. M otive a nd o ppo rtunity Motive mu s t be su ppo rted by fa cts stated “with p ar ticul arity, ” and must give rise to a “strong inf erence” o f scienter. In

re Adv anta , 18 0 F .3d a t 53 5; 1 5 U .S.C . § 78u-4(b )(2). “Blanket as sertions of m otiv e and opportuni ty ” will not suffice, and “catch -all alle g ations that defenda nts stood to be nefit from wrongdoing and had the

o pp ortun ity to impl ement a fraudul ent

s che me are no longe r suffi cient , becau s e theydo not st ate fact s with particul arity or give rise to a str ong infere nce of scie nter .” In re Ad vanta , 180 F.3 d at 5 35. Mo reover, “[m]oti ves that

are general ly possesse d by most corporate direc tors and officer s do not suffice; instead, plainti ffs must assert

a concret e and personalbene fit to the indivi du a l defe ndan ts resultin g fro m this frau d.” Kalnit v. Eichler, 264 F.3d 13 1 , 139 (2d Cir. 2001 ) (citation omitted).

I n their amended complaint , the plaint iffs al lege that the defendants’ motive to commit fr aud was that-9-

Washington “would not have been able to acquire REC without the success ful issuanc e of the Notes, ” and w ould not have been able to sell any of t he notes at or

near the pri ce sought “ha d the tr ue financi al conditi on of the REC be e n reveal ed in th e C ircu lar.” P l. B r. at 32; App. at 37 , 53 ( Cplt. ¶¶ 7, 86, 89 ). Further, the complai nt suggest s that because defendant Dennis Washington recei ved stock options i n 1999 after Washington acquire d Westinghou se, itcan be inferred that

he would recei ve stock options after

the pres ent me rge r. See App. at 41, ( Cpl t. ¶ 36) . Plai ntiff s argue that these alle ged stock options provi ded Washington with an ad ditiona l motiv e to

c om mit fraud. These allegations ar e insu ffic ient.

In everycorporate trans acti on, the corporation and its officers have a des ire to

com plete the transaction, and officers will

usua lly re ap f

in anc ia l b ene fi ts fr om a successf u l trans acti on. Such al legations alone cannot gi ve ris e to a “st rong infere nce” of f rau dul ent in tent. See In re Burlingt on , 114 F.3d at 142 4; see also Ph ill ips v. LC I Int'l, In c., 190 F.3d 609
, 623 (4th Cir. 1999 ) (“Similar s it uations arise in every

merger; t

hus, al lowing a plaint iff to prove a motive to de fr a ud by simp ly alle ging a co rp or ate de fe nd an t's desire to retain his po sition w ith its atte ndant salary, or rea lize gains on company stock, wo uld force the directors of vi rtual lyeve rycomp any to defend securi ties fraud actions ev er y time that compan y effe cted a m erger o r acq uisition.”); San Leandro Emergency M ed. G roup Pro

fit Shar ing P lan v. P hilip M orris Co s., 75 F.3d 801, 813-14 ( 2d Cir. 1996) (findi ng that a “com pany's de sire to

ma i ntain a high bond or credit r ating” insuffi cient

motive for

fraud because such motive could be imputed t o any comp any); Tuchman v. DSC Comm unicati ons Corp. , 14 F.3d 1061, 1068 ( 5th Cir. 1994) (“[I] ncenti ve compensati on can h a rdlybe the basis o n w hich a n alleg ation o f frau d is predicated. ”) (cit ationomitted); Herzog v. GT Inter ac tiv e So

ftwa re C orp ., 98 Civ. 0085, 1999 WL 1072500, at *9 (S .D .N .Y

. Nov. 29, 199 9) (ho lding th at a de fe nd an t's “‘desire to con s um mate [a] co rpora te trans acti on does not cons tit ute a moti ve for securi ties fraud’” ); L eve nthal v. Tow, 48 F. Supp. 2d 104, 115 ( D. Conn

. 1999) (“[T]he a llegation that the defe ndan ts artificially inflated Citi zens’ stock price in orderto ‘pr otect

and enha nce their

e xe cutivepositions’ and ‘negoti ate as favo rable a deal as possi ble’ on a pending employment

contra ct als o fail [s] t o give rise to a st

rong inference o f scienter. This

mo tiv e h as been rej ected routine ly.”); Thackerv. M eda phi s C orp ., 97 Civ. 2849, 1998 W L 6 845 95, a t *3 (S.D .N.Y

. Sep t. 30, 1998) (fi nding plai ntiff ’s cl aim that defendantwa s mo tivated by a des ire to elimin ate comp etitors and to acqu ire related companies i nsuffici ent to pl ea d scienter be cause such moti ve could be imputed to any corporate o fficer).
Although the al legation is not apparent from the complai nt, pl ainti ffs

now argu e th at CS FB had a mo tive to

com mit fraud because it s tood to receive underwriting and financial advisoryfees. This allega tion is u ndo ubte dl y t rue but equa lly una vaili ng. See M elder v . Mo rris ,-10-

27 F.3d 1 097 , 1104 (5t h Cir. 1994) (decli ning to find scienter w here plaint iffs al l eged that un derw riters’ m otive in parti cipating in fraudwas to c ollect fees); Schn ell v. C ons eco , Inc
., 43 F . Su pp. 2 d 4 38, 449 (S .D .N .Y . 1 999 ) ( “[ A] n
un de rw rite r's alle ged motive t o earn its underwriting fees is not alone suff icient to sustain a str ong inference of fr audulent intent. Ifit w er e, e ve ry u nderw riter, l aw fi rm, accountant , and i nve s tment advi sor whose compensati on or commissi on depended on the completion of an i niti al pub lic off

er in g wou ld hav e a mo tive to

com mit fraud, whic h would mak e Ru le 9(b) wh olly mea nin g less. ”) (quoting Fisher v. O fferm an & Co
., Inc
., No. 95 Civ. 25 6 6, 1996 WL 563141 at *6 (S .D .N .Y

. Oc t. 2, 1 996 )). Ther efore, plaint iffs have fail ed to meet t he scienter requirement by pl ead ing moti ve and opp ortun ity to com mit fraud on the part of any of the defendants.

B

. Reckless ness or cons cious misbehavior

Be ca use the plainti ffs have not adeq uately pleaded that the defendants had both mo tive an d op portu nity to com mit fraud
, their

complaint

will s urvive t

he motion to dismiss only if the y al lege spe ci fic facts t

hat constitute “str ong circumst antia l evidence of cons cious misbehavior

or reckl essness .” Oran , 22 6 F.3d at 288 -289 ; Kalnit , 264 F.3d at 142 (“Wh ere motive i s notap paren t, it is still poss ible to plea d scienter by identi fyi ng circumst ances indicating consc iou s behavior by th e de fendant, though the streng th of t

he c ir cums ta ntialalle gations

mu st be corre spo ndi ngl y grea ter.” ) (quoti ng Beck v. Mfrs. Hanover Trust Co. , 820 F.2 d 46 , 50 ( 2d C ir. 19 87) ).

A re ckl es s s ta te ment

is a ma ter ial misrepr esentat

ion or omissi on “‘invol ving not merelysimple, or even ine xcu sab le neglige nce, but an extreme departure from the stan dards of ordinary care, and which prese nts a dangerof mislead ing buyers or sellers that i s eit

her known to the defendantor is s o obvious that theactor must have been aware of i t.’ ” In re Adv anta , 180 F.3d at 535 ( quoting McLean

v. Alexander , 599 F.2d 1190, 1197 (3 d Cir. 197 9)).

The plaintiff s argu e th at they “all eged specifi c information tr ansmitted to De fend ants p rio r to issuanc e of the Offering Circular and sal e of the No tes that contra dicted repres enta t ions m ade in the Circu lar , i d e n t i f y i n g wh o communicated them to who m, when, and how .” Pl. Br. at 23. In othe r w ord s, it is the plaint

iffs’ position that

the defe ndan ts had actualknowledge of the falsity of th eir statem ents in th e cir cular at the t ime they

were ma de. It i s cert ainly true t hat “i n a non-disclosu re situation, any required elementof sc ie nter i s sati sfie d w her e . . . the defendant hadactualknowledge of the materi al information

. ” Fenstermacher v. Phila. Nat’l Bank , 493 F. 2d 333 , 340 (3d Cir. 197 4); see als o In re A dv anta , 180 F.3d at 535.

Of course, it i s not enough fo r plaint iffs to mere ly allege that de fend ants “k ne w” th ei r s tate men ts we re fraudu lent or that defendants “must have kno wn ” their statem ents we re fa lse. Se e In re Digi tal Island Sec . Litig
., 357 F .3d 322, 328-29-11-

(3d Cir

. 2004 ); Rombach v. Chang
, 355 F.3d 164, 176 (2d Cir . 20 04) ( finding no scienter where plai ntiff s did “no t alle ge fac ts and circ umstances t hat would s uppor t

an in fe re nc e tha t d ef en da nt s k ne w o f spec ific facts t

hat are contrary t o t h eir pub lic s t atem ents”) ; Bovee v. Coope rs & LybrandC.P. A. , 272 F.3d 356 , 361 ( 6th Cir. 200 1) (“P laintiffs may no t simp ly rely

on the proposition that Defendants must have kno wn o r s hou ldha ve kno wn of, and parti cipat ed in, t

he fraud. ”). Pl ainti ffs must plead allega tions o f scien ter w ith pa rtic ul ar ity. See 15 U .S.C. § 78u -4(b)(2). They mu st supp ort their a llegation s with the essen tial factu al b a ckground that

wo uld ac co m pa ny “ the firs t paragr aph of any newspaper st ory ”—tha t is, the “who, wh at, when, where and how” of the ev ents at issu e. In re Burl ington, 114 F.3d at 1422 (citing DiLeo v. Ernst& Young, 901 F.2d 62 4, 627 (7th C ir.1990)).
Although t he plaint

iffs ar gue that they have demonst rated th at the d efen dants had “actu al k n ow ledge ” that th eir pub lic statem ents wer e f alse and mi sleadi ng at t he time i n which theywere made, the p laint iffs have failed to plea d w it h particu larity facts t

hat so dem on strate. The p lai ntiffs p oint to m any statem ents that the indivi dual defendant s made during the due dili gence peri od as evidenc e that theyhad actu al kno wled ge tha t their circu larstatements were f alse an d misleadi ng. Ho we ver, the se statem ents made during t

he due dil igence period cannotbe co nnec ted dire ctl y t o any misleadi ng statement in t he offeri ng circular. 1. Liabil iti es The p lain tiff s all ege a number of diffe re nt affirmative miss tate ments that form the ba sis of the ir 10b -5 claim . First, the plaint

iffs argue that

the ci rcul ar w as misleadi ng in inclu di ng R EC ’s fina ncials for the 20 00 stu b per io d whi ch indic ated

“ that as of April2, 2000, REC had liabi lities o f $1 ,279 ,333 .” Reply Br. at 6; Pl. Br. at 26- 7; App. at 288. To establish that Wa shing ton h ad ac tual kn ow ledge to the contrary, plaint

iffs referto a comment in W ashingt on’s October 27, 1999 present ationwhich indicated that REC had “underst ated or u ndi sclo sed liabi lities.” See App. at 44 (Cpl t. ¶ 48), App. at 319. How ever, thi s co mment could not ha ve been made i n reference t o the fi nancial statem ents for the s tub peri od between January and April 2000, since those statem ents w ould not h ave b een a vailab le in October of 1999. See Ap p. at 47 (Cp lt. ¶ 59-60) (not ing that

as of December 2, 1999 “Washington G roup had ‘request e d “audit ed” financi als for R E& C for years 1996, 1997, and 199 8 an d “revie wed” financi al statements for t he stub period from January 1 to Septem ber 30, 19 99.’”). Moreo ver, in the Oct ober 27t h present ation, Washington was referring to underst ated liabil ities in REC ’s unaudited financi al statements. App. at 319 (refer ring to “[a] ccounti ng integrity of financi al statements (unaudi ted) pr ovided to date” ). The se sta te me nts were l ater audite d and a djusted to com ply with GAAP before they were incorp orated into the c ircula r. App. at 367. Plai ntiff

s present no e vi dence that

Washington had actualknowled ge thatthe aud ite d state m ents were inaccur ate duri ng the relev ant ti me per iod

.-12-

Pla int iffs also r ely on thei r complaint

alle gation t

hat “[a] s of Janu a ry 4, 2000, Wash ington Group an d De fend ants knew that REC’s financ ial st at eme nts of Sep tember 30, 1999 overst ated a sse ts byapproximat ely$275 mill ion and underst ated l iabil iti es by $145 millio n.” R epl y Br . at 6; App. at

47-48 (Cp lt. ¶ 62). The pl ainti ffs , h owe ver, do not provide any

source to c onn ect this accusation to record evide nce . In ot her words, plaintiff s hav e failed to plea d w ith parti cu larity

. See In re Part y City Sec. Lit ig. , 147 F. S upp . 2d 2 82, 3 00 ( D.N .J

. 20 01 ) (“Simply

referring to a s eries of pub lic statemen ts and t hen all eging, in a general and conclusory manner, that t hose discl osures we re false or m isleadin g is insufficient.”). Plaintiffs do not even mention whether, i n this paragraph, they

a re referrin g to R EC ’s aud ite d o r unaudite d statements. M ore ov er, any knowledge Wash ing ton may ha ve had regardi ng the ac cura cy of t he 1999 financi al statements is of lit tle relevance in determi ning whether Washing to n had actualknowledge that

the statem ents from the later s tub peri od were inaccur ate.

2. Contracts in progress

Si m ila rly, the plainti ff s argue that the ci rcular

was misleadi ng in that

RE C’s unaudite d fin anc ials for the 2000 s tub periodindicated “that

as of April 2, 2000, RE C’s ‘contr acts i n process’ had a value of $638 ,881, 000.” ReplyBr. a t 6; GSC Br. at 26 ; Ap p. a t 28 8. To show that Washington knew this st atement was misleadi ng, plaint

iffs r efer us t o various docu men ts Washing to n produced duri ng its due dili gence peri od, in whic h Washington in dicated its beli ef that several of RE C’ s many cont

racts were overval ued. Id. (citing App. 45-51 (Cplt. ¶¶ 50, 54, 72- 76) ). Again, in some of these documents, Washi n gton w as re fe rri ng to R EC 's unaudited

statements which wer e lat er audite d before i nclusi on in the ci rcular and the other documents f oc used on p rojects for which Washing ton was l ate r indemnifi ed. 2 Moreover, the re is no

2 Appellees f

iled a Motion for Leave to File a Sup plem ental A ppen dix contai ning an Ancil laryLetter Agreement reveal ing that Washington was partiallyindemnified against loss reg ard ing one of R EC ’s pr ojec ts. Ap pe l l an t s o pp os e t

hi s m oti on

. “We decide on a ca se-by -case bas is whether an appell ate re cord shoul d be supplemente d. Even when the added materi al willnot concl usivel y r esolve an issue on appeal, we may all ow supplementation i n the ai d of making an informed deci sion. ” Schwartz v. Milli on Air , Inc
., 341 F.3d 122 0, 122 5 n.4 ( 11th Cir. 2003) . The Ancill ary Letter Agreement, whil e not cruc ial to the instant d ecision , helps e xplain Washington’s motive for not dis cussing its concerns wit

h respect to thi s particular pr oj ec t i n the ci rc ul ar . T he re fo re , w e find that the ag reemen t will aid the Co urt in m akin g an info rme d de cisio n. Appellant s do not quest ion the va lidi ty or authenticit

y of t he agreement nor

do they argu e that th ey wo uld b e preju diced in any wayby our

consider ation of

the agreement. Appellant s do not even argue that t hey are unfamili ar with t he agr eem ent. See, e .g., Ka limian v. Libe rty Mutual Fire I

ns. Co. , 300 F.2d 547, 549-13-

indicatio n that any of W ashington’s docu men ts referred to the April 2000 st ub periodor to an y other va lue ap pearin g in the circ ul ar, and in none of these d ocum ents does Washington pr ovide a n estima te of the tota l value of R EC ’s contra cts in progr ess. For bot h of t hese
reasons, the r e is no way to know whether Washington wou ld have d isagre ed with RE C’s Ap ril valu a tion at the ti me the circul ar was iss ued.

In any case , Wa shing ton m ade it plain in the c ircul ar that

REC’s accounting for these c ontrac ts wa s agg ressive , wh en it warned that “ REC revenue recognition polici es are si gnific antly differe nt from those used by MK on ce rtain co ntracts

w here signi fican t com pon ents are procure d in advan ce of installation. . . . REC ’s

revenue recog niti o n policy on such contra cts gene rally resul t in more revenue recog nit io n in the e arlystages of a

c ont ract.” App. at 126. It also su gges te d that this diff erenc e cou ld be crit ical when it noted that "[ t]he loss of on e or mo re majorcontracts, or our inability to perform prof it ably under one or more maj or contra cts

. . . could have a material adverse effecton o ur bus inesse s, fi nancial conditi on, resul ts of oper ation and c ash flow s." A pp. a t 94

. 3 . Four project s de via t e significa ntly The plaintiffs al so take i ssue with a st at ement in the c ircul ar indi cati ng that four projec ts for which REC retai ned liability “deviate sig nific antly and are not repres entative of

other cont

racts being acq uire d.” Pl. B r. at 2 9, quo tin g App. at 126. Plaintif fs arg ue tha t t hi s statement

w as misleadi ng because defendant s kne w “that n umerous other projects were also misestimated, like l y to incur c ostly

overruns that were uncolle ctibl e and were losi ng money. ” Id. Firs t, a fair reading of this exce rpt fro m the circula r is that t he se four project s dev iated sig nifica ntl y because of (a) t

he ext ent of loss a lready incurred on each proj ect; (b) “the revers al of previous ly -recogni zed pro fit” ; and (c) “the establishment of rese r ves for fu ture loss es.” Id. ; In re Burli ngton , 114 F.3d at 1426 (noti ng that i f plai ntiff s rel y on extrins ic docu men ts in their complai nt, t he docu men ts mu st be u nder stood in their entirety). Plaintif fs ha ve fa iled to identi fy

an y evidence s uggesti ng that Washi ngton b elie ved that oth er con tracts eq ually me t these three cri ter ia. To th e c on tra ry, pla inti ffs concede in t

heir compl aint t

ha t these project s are distin gui sha ble, referrin g to them as “the fou r mo st signif icant los s pro jects .” Ap p. at 5 1 (C plt. ¶ 77 ). F in all y, becau s e Raythe on ulti matelyretai ned liability for at le ast on e add itional p roject that plaint iffs al lege “devi at e[d ] signi fica n tly,” any misle ading statem ents based on that project i s immaterial as a matter of la w. See In re NAHC, Inc. Se c. Litig. , 306 F.3d 1314, 1330 ( 3d Cir. 2002) (“If the dis closur e of c ert ain inf ormation has no e ff

ec t o n s to ckpr ic es , i t f ol lo ws (2d C ir. 1962 ) (“[T ]his co urt is fre e to consider facts whic h have been admitted in ar gum ent a nd i n th e br iefs on a ppe al . . . .” ). To the contrary , appel lants argue that the agree men t actua lly suppo rts their case. Reply Br. at

5-6. For these

reaso ns, w e gran t appe llees’ m otion to file th eir su ppl em enta l app end ix.-14-

that the in formati on discl osed was imma terial as a matter of law .”).

4. Co llection is prob able

The plaint

iff s also ar gue that

the circul ar was misleadi ng in st ating t hat “[u]napprovedchang e orders and claims .

. . are i ncluded i n contrac ts i n process at their es ti mat ed r eal iz abl e va lu e. [REC] has a contra ctual or legalbasi s for pursuing recovery

of these unapproved change orde rs and clai ms and has d etermi ned that c ollec tion i s probabl e. ” Pl. Br. at 28 (qu oting A pp. at 277, 29 3);

see also Pl. Br. a t 7. Plain tiffs sug gests that Washington k n ew this st atement was false, beca use in a M a rch 27, 2000 memorandum it indicate d th at it belie ved the recovery percent age forone parti cular project would b e “poor” and that atte mpted recov ery could result i n a loss of between $ 22 and $60 mill ion. App. at 429. It shoul d be noted, however, that the circu l ar refers to a tot al of $581 mil lion

wo rth of chan g e orders and clai ms. App. at 276. Th erefore , pl ainti ffs’ ar gument

comes down to the fact tha t Washington actua lly belie ved that

between 3.8 and 10 percent of t hese contr acts were not

recoverable. As fa r a s we kno w, Washington belie ved coll ec t ion was prob able for at l east 90- 96 percent of these change orders. M oreover, far from having actual knowledge that

be tween $22 and $60 mill ion of change or ders would be uncolle ctibl e , th e March 27t h memorandum suggest s a lack o f certa inty

or con fiden ce in W ashin gto n’s predict ions

. App

. at 428 (“[P ]rojects results are diffic ult to qu antify”); I d. a t 429 (“[I]t is diffic ult to predict the exten t of the loss”).

On top of this , the circul ar statement was qualif

ied through the use of the wo rd “p roba ble” a nd w as acc om panie d by cau t ionarylanguage, which indic ated that “[t]he se ttle men t of the se am oun ts depends on indivi dual circumst ances and negot iati ons with the coun terparty ;
acco rding ly
, th e timi ng of the col lection will vary and approximately$235 mill ion

o f colle ctions are expected to ext en d beyondone year.” App. at 277. Any

reaso nable readin g of th is statem ent,

wo uld make one skepti cal about the

r ecovery of the full $2 35 m illio n

. Si m ila rly, as noted supra , the circul ar emphasi zed that REC took an aggr essive approach to revenue recognit ion. App. at 126. Wh en vie we d in this conte xt, we do not belie ve that

the plainti ffs have adeq uately alle ged that any kn ow ing misst atementWashington may have made in print he re w as m aterial. T his is espe cially true gi ven that Washi ngton was at least parti ally indemnifi ed by Raythe on for los ses ass ociat ed with the ve ry project discuss ed in th e March 27 th memor and um. See Supp. App. I n any ca se, because the s tate ment

a bout colle ctabi lit

y i s a predi ction of

t h e lik e lihoodof collection o n chan ge orders and claim s, it is a class ic forward-l ooking stat ement

. See 15 U .S.C . 78u

5c(4) (I )( 1) (A) (d ef

in in g a fo rward-loo kin g statem ent, in part, as “a statement contai ning a projection of revenues, in come ( includi ng income loss ), earnings (incl uding earnings loss) per shar e, capi tal expenditures, dividends , capi tal s truct ure,
or other fi nancialitem s”); see also In re Kindred Healthcare , In c. Se c. Li tig., No.-15-

02C V-6 0 0- H, 200 4 WL 7 785 0 a t * 9 ( W.D. K y. 2004) (“The amount Kin dred keep s in

reserves to cov er liability claim s is

nece ssarily a pred iction a bou t its future cl ai ms experie nce . . . [which] c ou l d on ly be verifie d w hen lia bil ity claims w ere actua lly file d, li tigated t o conclusi on, or settled. It would se em ra t her bey ond argumentthat s uc h pr ojections . . . are forward-l ooking with in the meaning of the PSL RA .”); In re Smit h-Gar dn er Sec. Litig. , 214 F. S upp . 2d 1 291 , 1296 (S .D

. Fla. 2002) (fi nding that d efenda nt’s statement was protected as forwardlooking wh ere “ [p] laint iffs

. . . alle g e[d] that Defe ndants either k new or were
seve rely reckless in disre garding t hat S mith Gardner would not receive f ul l payment from [a cust omer], ba sed on the unp aid recei vable bal an ce o f $1 .5 million.”). Moreover, we find t he

a c companyi ng cauti onary language t o be suff icie nt in t his c ase

. See EP Medsystem s, Inc . v. E cho Ca th, Inc

. , 235 F.3d 865 , 873 (3d Cir

. 2000 ) ("[C]au tionary langu age, if s uffic ient, renders the al lege d omissi ons o r misrepr esentat

ions immateri al as a matter of law.") (quoti ng In re Do nal d J . T ru mp Casino Sec. Litig. , 7 F.3d 357, 371 (3d Cir. 1993)). 3 The refor e, this state men t is

protected by t

he stat utorysafehar bor

. See 15 U.S.C. 78u-5c

.
5. Go odw ill

Plaintif f s also ra ise the s tatem ent in th e circul ar that : “[a] djustments to th e purchase price . . . are expect ed to have no effecton goo dw ill.” Pl. Br. at 28; App. at 111. Plaintiffs ar gue that this sta teme nt is false because “ [d ]efendant s alr eady kne w that the true value of REC was signif icantly lower than t he purchase price
, which would require fur ther al location of goodwill. ” Id

. Regardless of this alle ged kno wledge, ho we ver, the circula r statement w ould only be false or misleadi ng if Washingt on knew at th e t ime

3 The PSLRA requires forward-l ooking statements to beaccompanied by “me aning ful ca utiona ry stateme nts” in ord er fo r saf e ha rbo r pro tectio n to app ly. The cautionary language shoul d be “direc tly related to the alle ged misrepr esentat

ions, ” but it

does not have to “actually

accompany t

he all eged misrepr esentat

ion.” EP M edsystems, Inc. , 235 F.3d at 874 ( referring to t he “bespeaks caution” doc tri ne which, l ike the saf e harb or pro vision , protec ts forw ard-looking statements that are

accom panied b y meaningf ul cautionary statements fro m liability). Caution ary language must

be “extens ive and specifi c.” Semerenko v. Cendant Corp.
, 223 F.3d 165, 182 ( 3d Cir. 2000) (quoti ng In re Tr ump , 7 F .3d a t 36 9. This Court i n In re Tr ump explai ned: “[A] vague or blanket (boi lerpl ate) discl aimer which merel y warns t he reade r that the inves tmen t has risk s will ordinarily

be inadequate to preve nt misinformation. To suffice, the cauti onary statements must be subs tantive and ta ilored to the sp ecific future projections, esti mates or opi nions in the prospectus which the pl ainti ffs chall enge.” Id. at 182 (quoting In re Tr ump , 7 F.3d at 37 1-72).-16-

it made the st atement ( a) that it was going to make adjus tmen ts to the purcha se pri ce in the future and (b) that those adjus tmen ts

wo uld not track th e valu e of REC

. Pl ainti ffs have neither all eged nor hav e t hey presented any evidence of su c h kn owl edge. Moreover, none of t he do cu men ts reli ed upon by pl ainti ffs suggests that Washi ngton even had actual knowledge that

additio nal go odw ill wo uld ultima tely have to be recorded. 4 The m ere factthat the am oun t of ad ditiona l goo dw ill that late r had to be recorded was substant ial is not en oug h, on its o wn , to infe r eithe r actua l knowledge o r recklessness. See Kush nerv. Bev erly Enters. , 317 F.3d 820, 829 (8th Cir. 2003 ). A dd itio na lly, th is is an othe r f or wa rd

looking statem ent a cco mpanied b y meaningful cauti on ar y langua ge, an d is therefore p rote cted bythe st atutor y sa feharbor. See , e.g., App. at 93 (warni ng that acquisi tions “ may invol ve r isk o f und isclo sed liabi lities” ).

6. Undiscovered l iabil iti es

The plaintiff s argu e that the c ircul ar
was misleadi ng in stating that “[t]here may be liabi lities of ac quired c ompanies, includi ng RE C, that we fail or are u nable to discover du ring our due dili gence investigati on” because as plai ntiff s all ege, “[d]e fend ants had alrea dy di scovered

signi ficant

additi onal liabi lities. ” Pl. Br. at 28-29; App. at 93. Thi s arg um ent is frivolous. First , thi s statement in t he circul ar is i ncluded i n a long dis cussion of risks assoc iated w ith the c om pany, an d in that context , i t is true and not misleadi ng. Mo reover, none of the do c uments upon which the plainti ffs rel y sug gest s that Washington had actual knowledge that there were signi ficant

additi onal liabi lities which were n ot alrea dy r eflected in the circular, or forwhich Washington had not been indem nified . Ap p. at 93 (noting in the circula r that W ashin gton “gen erally

see k[s] t o m inim ize th e im pac t of . . . liabi lities by obtain ing ind emn it ie s and

warran ties from the se ller.”)

7. Due dilige nce

Fi na lly, pla i ntiff

s rai se vari ous omissi ons wh ich fa ll within tw o catego rie s. First , plainti ffs all ege that Washington fail ed to dis close t hat it s due dili gence had been obstr ucted. Wh ile it is clear that R EC initiall y o bstruc ted Washington’s due dili gence, it se ems that by the is suance of the circ ular, Washington b elie ved, perhaps mis takenl y, that i t had been given adequate access. See , e.g., Due Diligenc e M emo rand um of A pril 3, 2000, App. at 653 (noting that “[i]n most

cases the first visits were not conclusive because site performance i nfo rmatio n wa s restricted. The recen t upd ate vi sits were

more in fo rmati ve .” ). Alt hou gh w e do not

mean to sugg est approval of the prac tice
, we note that

it is not unc omm on fo r a target to be somewhat uncooperative with respect to due di li gen ce requ es ts fr om a potenti al acq uire r. See , e.g., Larr y 4 Similarly , none of the documents re lied upon by pl ainti ffs suggest that Washington had act

ual knowledge contradi cting i ts st atement t hat “[t ]he acqu isition of RE C w ill doub le [Washington’s ] siz e in te rms of revenues and bac klo g.” P l. Br . at 27 ; Ap p. at 1 17.-17-

Schnapf, Co st Effec ti ve Due Diligence In Co rpor ate Mergers a n d Acquisitions , 15 Na t. Res ourc es & Env 't 80 at 8 3 (2 000) (noti ng that ev en in a friend ly ta keove r, the target

co mp any ma y be reluc tant to share information that may cause a party to back out of a deal , renegot iate the price or that may end up havi ng repe rcu ssions if the trans acti on collapses). Often th is tendencytowards secrecy relates to a concern, that i f the dealfall s throug h, th e acquire r might use t

he t a rget’s se crets to bette r compete with i t, or that t he targe t will be otherw ise d isad van tage d. Id. In such situation s, as he re, the targ et will often be come mor e coo perativ e and cand id the closer the deal gets to becoming a

re ali ty. We se e no evidence i n this case, how ever, that Washi ngton belie ved its due dili gence h ad been ma teri ally obstruc ted at the ti me o f the ci rc ul ar , n ordo w e belie ve that Washington would have gone through with this acqu isition ha d it believ ed this to be the case

. 5 The re is si mp ly nothing to suggest t hat Washingt on was on a suici de missi on in thi s acquis iti on.

8. Poor financial account ing

Plaintiffs alle ge that

Washing to n “k ne w, but d id not dis close, that Raythe on and REC had poor financialaccounti ng, whi ch necessarily

entai led that the unaudite d financi al statements for the fir st quart er of 2000 should not be reli ed on. ” Rep ly Br. at 7. Fir st, we reite rate our earli er finding that pl ainti ff s hav e presented no e vid ence that Washington had ac tu al knowledge that theunaudite d financ i al statements for t he 2000 stub periodwe re un reliable. T he pla inti ffs’ argumentappears t o be, however , th at Washing t on was reckles s in di sclosi ng RE C’s unau dited f inanc ial statem ents k nowing th at its earlier u naud ite d statem ents e videnced poor accounti ng. Thi s ar gume ntis not withou t s ome sup por t.

In In re Lucent

Tech., Inc. Sec

. Litig. , 217 F. Supp. 2d 529 (D.N .J. 2002), the court foundrecklessness under si milar ci rcumstances. In L ucent , plainti ffs argued that “Lucen t management was alre ady

aware that reve nues had b een in flated in previous quarter s, andthat theylearne d of these earli er accounting improprieti es, at t he late st, during t

he third quarter .” Id. a t 554 (cita tion s om itted ). As here, pl ainti ffs in Lucentclai med that“D efen dants wo uld have been at l east reckless in reporting financi al resul ts for

the third quarter withoutfirs t dete rmining whethe r those results were also i nflat ed.” Id

. The dist rict court agreed , finding that “[i]f De fend ants were aware tha t accounting manipulations occurre d during the first two quarter s of 2000, t hen, concei va bl y, theym ay h ave b een re ckless in blind ly reporting resul ts for

the following quarter, and proof of rec klessne ss is enough.” Id.

Wh ile such a sce nario ma y very
we ll consti tute reckl ess ness u nder the fa cts of Lucent , we do not bel ie ve that 5 In fact , we doubt that we would be able t o uncover anyoffering c ircul ar which cauti oned that

due dili gence had been material ly obstruc ted bythe target and that this issue was s til l unres olved, given that it

seems unli kelythat any acquire r would proceed wit h an acq uisitio n un der suc h cir cum stan ces

.-18-

Wa shing to n’s conduct her e ris es to t he “ex tr eme dep ar tu re fr om th e standards of ordinary care” wh ich is req uir ed for a finding of r eck lessn ess. In re Ad vant a , 180 F.3d at 535 ( quoting McLean , 599 F.2d at 119 7). First, the circul ar contained both audite d and unaudit ed finan c ial stateme nts for so me o verlap pin g periods a s
we ll as for period s closel y l inked in t ime. See, e.g., Ap p . at 126 , 288. T heref ore, to the extent

that t he unaudi ted statem ents

wer e out of li ne with the audi te d statements, this deviation cou ld be deduced from the ci rcular its elf, obviati ng the n eed for a sp ecia l no te.

Second, as noted e arli e r , Washington dis clos ed in the circul ar that RE C’s accounti ng was aggressi ve. App. at 126. This wo uld g ive an y reason able invest or pause b efore relying on R EC ’s unaudite d statem ents. T hird, pla in t iffs have shown at mo st that Wash ingt on belie ved REC had “poor” accounting practices. App. at 554 (March 14, 200 0 pre sen tati on) (noti ng that REC had “[p]oor financi al controls/accou nting practices”). In contras t, i n Lucent , pla inti ffs all eged that before i t reported it s earni ng s fo r the fou rth quarter , Lucent alreadyknew that it “had im properl y booked hundr eds of mill ions of dollars of revenue on sa les to custome rs in situations wh ere custom ers had not or de re d p ro du cts ”— cle ar ly a more egregious alleg ation

. In re Luc entTech.
, 217 F. Supp. 2d at 53 8. Finall y, in Lucent , the alle ged man ipulat ions were i n the comp any’s own balance sheet, rather than

on the balance s heet of the company t o be acquire d, as in this case. Therefore, unlike Luc ent, Washington reali sti call y coul d not have revis ed REC’s fi nancial s tate ments or subs t ituted different financialstatements. At most, i t could ha ve incl uded an ad di tionalcauti onary note. While the inclus ion of s uch a note may have been a good idea, we do not beli eve it s omissi on rise s to the level of re ckles sness r equired und er th e PS LR A.

In conclusi on, plainti ffs have fai led t o p lead with parti culari ty the required element of scien ter, eithe r b y demonstrating motive and opportuni ty , conscious misb ehav ior or re ckle s sness. The r efore, the distric t court p rope rly granted Washington's motion to dismiss.

C. Credit Sui sse Firs t Boston

The plai nti ffs al lege that CSFB conduc ted its own due dilige nce, had

acce ss to Washington’s due dili gence and

com mu nicate d with Wa shingt on about due dili gence findings . They further alle ge tha t, because CSFB had access t o and shared information w ith Washington, CSFB “knew and/ or recklessly disr egarde d all of the i nformati on k nown by Washington G rou p and the ot he r Defen dan ts.” App. at 43, 53 (Cplt. ¶¶ 43 , 85). This a bare bones al legation, and the plaint iffs fail to sp ecify w hich s tatem ents CSFB knew were fa lse or misleadi ng. Furthermore, as noted supra , an al legation that CSFB “m ust have known,” because of its relat ion ship wit h W ash ing ton , tha t a statement was f

al se ormi sl eadin g, is insuffi cient

to raise a “stro n g infere nce” that CS FB acted reckle ssly or w ith conscious misbeha vior. See In re Ad vanta , 180 F.3d at 539. The plaintiffs cannot sati sfy the scie nt er requi rement by grouping CSFB w ith t he W a shingt on-19-

defendants. Oran , 226 F.3d at 2 90; In re Adv anta , 180 F.3d at 539 ( “Generali zed imputations of

knowledge do not suffi ce . . .”). Regardless , si nce the pl ainti ffs have fail ed to sho w sc ienter w ith resp ect ev en to Washington, the plainti ffs certain ly cannot establis h s ci enterwith r es pec t t o CSFB, since the plainti ffs have m ade no al le gatio n un iq ue t o CSFB.

Fi na lly, the plaintiff s hav e failed to attribute any false statem ent or o missio n to CSFB. The plaintiff s re ly on Gabriel Ca pital, L.P. v. NatWest Fin. , Inc. , 94 F. Su pp. 2 d 49 1 (S.D .N.Y . 2000 ), for the ir argumentth at CSFB can be held li able as

an in itial purchaser for a R ule 10b-5 violat ion. The d ist rict cou rt correc tly noted that Gabrielis disting uisha ble on its facts. In Gabriel , the plaint iffs alle ged that the defendants , in a dditi on to be ing the initial purchaser s, al so draft ed the offering memorandum as w ell as distrib uted it during sale s pitc hes

. Id. at 502 . T he pla inti ffs here d o not a ll ege that CSF B drafte d or di stributed the circular. Therefore, the hol d ing of Ga briel is not applic able her e. 6 D. Dismissal with prej udice

The plaint

iffs as k that t

he ca se b e remanded with ins tructions t o allow the m to replea d, y et the y “do not specify what additi onal fa cts , ifan y, they wo uld plead if given anoth er op portu nity to ame nd th eir Co mp laint .” In re NAHC , 306 F.3d at 1332 (holdi ng that

amendment of the complai nt

wo uld b e futile). One of C ongress’ objectives in ena cting th e PS LR A w as “‘to pro vide a fil ter at

the earlies t st age ( th e pleadi ng stage) to scr een out l awsuits t hat have no f actua l basis

. ” Id . (quoting In re Champion Enters. , Inc. , Sec. Litig. , 145 F. Supp. 2d 871 , 874 (E.D . Mich. 20 01). This objec tive w ould be fru strate d whe re “there is a star

k absence of any s uggesti on by the pla inti ffs that t

hey have developed any facts s ince the action was commenced which would, if t

rue, cure t he defe cts in the plead ings u nder the he ighte ne d requirements of the PSLRA .” Id . at 1333. Because the plainti ffs have offer ed no addit io nal facts th at wo uld cu re their amended comp lai nt, we decl ine the plaintiffs'request for per mi ssion to replea d and for the fore going reas ons, we affirm t he district co urt's gran t of de fend ants ’

mo tion to d ism iss. 6 Gabrielis di sti nguishabl e for another reason. I n Gabriel , the discl aimer i n the offering memorandum stated only that the initial purchasers mad e “no wa rranty” as to the state men ts

con taine d th erein

. Id . Here , in con trast, the offering circular s tate s that the ini tial purchaser s made “no repre sentations” at all. App. at 74 (“No representat ions or warranty , expres s or impl ied, is made by the ini tialpurchaser s as to t he accuracy or complet eness of the information

con taine d in this o ffe ring circu lar. Nothing contained in t

his offering circu lar is, o r sha ll be r elied upo n as , a promise or

repres entation by the ini tial purc hase rs.”) W hile this su btle diffe rence in lang uage is hard ly disposi tive, it adds to our conclusion that Gabrieldoes no t app lyand that CSFB did not ma ke a ny ac tion able state me nt.