2004 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

5-17-2004

GSC Partners CDO v. Washington

Precedential or Non-Precedential: Precedential

Docket No. 03-2347

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 PRECEDENTIAL

UNITED STATES COURT OF

APPEALS

FOR THE THIRD CIRCUIT

______________

No: 03-2347

_______________

GSC PARTNERS CDO FUND;

GSC PARTNERS CDO FUND II, LTD;

GSC RECOVERY II, L.P.,

 Appellants

 v.

DENNIS R. WASHINGTON;

STEVEN G. HANKS; THOMAS H.

ZARGES;

ANTHONY S. CLEBERG; DAVID H.

BATCHELDER;

LEONARD R. JUDD; ROBERT S.

MILLER, JR.;

DORN PARKINSON; TERRY W.

PAYNE;

JOHN D. ROACH; CREDIT SUISSE

FIRST

BOSTON CORPORATION; JOHN

DOES I THROUGH X

 

Appeal from the United States District

Court

for the District of New Jersey

(D.C. Civil Action No.01-CV-04905)

District Judge: Honorable Anne E.

Thompson

_____________________

Argued on December 19, 2003

Before: ROTH, MCKEE and

CUDAHY* , Circuit Judges

(Opinion filed May 17, 2004)

Howard J. Kaplan, Esquire (Argued)

Stanley S. Arkin, Esquire

590 Madison Avenue

35th Floor

New York, NY 10022

Bruce H. Snyder, Esquire

Sheppard A. Guryan, Esquire

Lasser Hochman

75 Eisenhower Parkway

Roseland, NJ 07068

Counsel for Appellants

Shannon M. Kasley, Esquire 

Beth Heiftz, Esquire (Argued)

Adrian Wager-Zito, Esquire

Megyn M. Kendall, Esquire

Jones Day

51 Louisiana Avenue, N.W. 

Washington, D.C. 20001

Robinson B. Lacy, Esquire (Argued)

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

Anthony J. Marchetta

Pitney, Hardin, Kipp & Szuch LLP

P.O. Box 1945

Morristown, New Jersey 07962

___________________

*The Hon.Richard D. Cudahy, Circuit

Judge for the United States Court of

Appeals for the Seventh Circuit, sitting

by designation.
-2-

Christopher J. Carey, Esquire

David Blackwell, Esquire

Graham, Curtin & Sheridan

Four Headquarters Plaza, P.O. Box 1991

Morristown, New Jersey 07962-1991

George T. Manning, Esquire

Jones Day

1420 Peachtree Street, N.E.

Atlanta, Georgia 30309-3053

Counsel for Appellees

 

O P I N I O N

 

CUDAHY, Circuit Judge

The background of this case is the

classic corporate love story. Company A

meets Company B. They are attracted to

each other and after a brief courtship, they

merge. Investor C, hoping that the two

companies will be fruitful and multiply,

agrees to pay $50 million for the wedding.

Nine months later, however, things begin

to fall apart and the combined entity

declares bankruptcy. Investor C feels

misled. He believes that Company A

knew that there were problems with

Company B but that it made the oft

repeated mistake of thinking that it would

be able to change Company B for the

better. Investor C files suit in the district

court and after his complaint is dismissed,

we find ourselves here. It is an old story

but it never fails to elicit a tear. 

In this case, appellants GSC

Partners CDO Fund, Ltd., GSC Partners

CDO Fund, Ltd. II, LTD., and GSC

Recovery II, L.P. (the plaintiffs) appeal the

district court’s dismissal of their action

against individual officers and directors of

Washington Group International, Inc.

(Washington) and Credit Suisse First

Boston Corporation (CSFB). The

plaintiffs filed this action under section

10(b), Rule 10b-5 of the Securities

Exchange Act of 1934 (the Act), alleging

that their purchase from CSFB of $48.8

million in notes, which Washington used

to finance its acquisition of Raytheon

Engineers & Constructors International,

Inc. (REC), was carried out pursuant to

defendants’ allegedly false and misleading

offering circular. Because the plaintiffs

failed to meet the heightened pleading

requirements of the Act, we affirm the

district court’s grant of defendants’ motion

to dismiss. 

I.

Washington is an international

engineering and construction firm that, in

2000, employed approximately 39,000

workers and brought in approximately $5

billion in annual revenue.1 App. at 41, 77.

Defendants Dennis R. Washington, Hanks,

Zarges, Cleberg, Batchelder, Judd, Miller,

Parkinson, Payne, and Roach were officers

and/or directors of Washington during the

acquisition process. App. at 38-9 (Cplt. ¶

14-23).

Washington repre sentatives

1

 Washington was known as Morrison

Knudsen Corporation (sometimes referred to

as MK) before the note offering. App. at 41. 

The company filed for bankruptcy

protection in May 2001, and was not named

as a defendant in this action. 
-3-

commenced negotiations during the

summer of 1999 for the acquisition of

REC, the engineering and construction

division of Raytheon Company. App. at

42 (Cplt. ¶ 37). After conducting an initial

examination of REC’s financ ial

information, Washington submitted a nonbinding offer of between $775 and $875

million for the business operations of

REC, subject to its findings in due

diligence. App. at 42 (Cplt. ¶ 39).

Raytheon accepted this offer in September

1999. Id. at ¶ 41. Before finalizing the

deal, Washington began its due diligence

process, which entailed thorough scrutiny

of REC’s financial statements and

projections. Id. In this process, it received

assistance from Arthur Andersen, L.L.P.

Id. at ¶ 41. Meanwhile, the parties began

negotiating a definitive agreement for the

acquisition. Id. at ¶ 40. To augment this

process, Washington employed defendant

CSFB to act as its financial advisor for the

REC purchase. Id. at ¶ 40. CSFB

conducted its own due diligence and had

access to all of Washington’s due

diligence findings as well. Id. at ¶ 43.

Throughout the due diligence process, the

two companies communicated their

findings and concerns to each other. Id.

On October 27, 1999, after one

month of interviews, document reviews

and project site visits, Washington’s

management reported to the Washington

Board its findings regarding the accuracy

of REC’s financial information. App. at

44 (Cplt. ¶ 46), 317. The team was

impressed with the “[s]trong, capable

management team in place” and with

REC’s “solid position in [the] Independent

Power Producer (IPP) market,” as well as

in the rail, power, chemicals, metals

pharmaceutical, pulp and paper, chemical

demilitarization, refinery and heavy

maintenance markets. App. at 320. The

team also noted that the personnel it

worked with had been “cooperative and

forthcoming.” Id. at 317.

The due diligence team expressed

some concerns as well. It cited as among

REC’s gene ral w eakn esses its

“aggressive” and “optimistic” plans for

sales volume and profit growth in certain

businesses, the volatility of the company’s

working capital, the possible lack of

accounting integrity of its unaudited

financial statements and its “[u]nderstated

or undisclosed liabilities.” Id. at 319. In

particular, the team calculated that the

profit projections for some of the

construction projects were inaccurate. For

example, the team revised estimated profit

projections for the “Pine Bluff” project

from $20.2 million to $3.1 million, for the

“SADAF” project from $4.2 million to

$0.8 million and for the Hudson Bergen

project from $61.1 million to $46.9

million. Id. at 326. At the same time,

however, Washington noted, that “[w]ider

leverage of proprietary technology” could

improve some of the projects’

deterio rating marg ins, and that

“[o]perational synergies offer [an] upside

to a combined new company.” Id. at 346.

On November 3, defendant Zarges

sent a memorandum to other members of

the Washington management, elaborating

on some of the perceived inaccuracies in

the project profit estimates but projecting
-4-

that if the acquisition went through, even

taking into account the risks, the combined

entity could perform well in the

engineering and construction industry.

App. at 362. Zarges first emphasized that

the findings in the October 27 Board

presentation were not conclusive. Id. He

wrote that, although the Umatilla and Pine

Bluff projects had been presented as

breakeven projects through 2001, they

were at the time of the memo in “loss

positions with deteriorating performance

trends.” App. at 364. The memorandum

reiterated concerns about Raytheon’s

aggressive plans and optimistic positions

on most projects, reporting inconsistencies

and shaky performance history. Id. at 365-

66. Zarges concluded, however, that the

projected operating fee (i.e. profit) in 2000

could, taking into account Washington’s

adjustments to REC’s calculations,

“provide an industry-leading margin of

3.8% on adjusted revenues.” App. at 362.

He added, “This . . . represents quite an

improvement over recent performance

histories . . . [and] is no easy task.” Id.

A month later, on December 2,

1999, defendan t Han ks sen t a

memorandum to the Board on the progress

of the due diligence team. App. at 362.

He reported that in order to address

Washington’s concerns about the accuracy

of REC’s financialstatements, Washington

had hired PricewaterhouseCoopers L.L.P.,

independent accountants, to audit the

financial statements for 1996, 1997, and

1998, and to “review” the financial

statement for 1999. App. at 207, 367.

These audited financial statements

required $350 million of adjustments to

bring them into compliance with Generally

Accepted Accounting Principles (GAAP).

Id. Hanks stipulated that in order to

remedy the discrepancies, it would be

necessary to arrange for an increase in

liabilities assumed by Raytheon of up to

$100 million. Id. 

The Washington Board met on

March 14, 2000 to consider the progress of

the due diligence team. App. at 548-88.

The team again reported some concerns

about REC’s financial health, but also

expressed confidence that a partnership

with Washington would improve REC’s

position, “having actually experienced

what it takes to turn a company around.”

App. at 420, 422. The team reported risks

involved in the acquisition of REC, citing

historical performance that was

characterized by large loss projects. Id. at

554. The team revised the projected profit

for the Umatilla project downward to

“22M loss, best case,” an adjustment of

$38 million from REC’s estimate. App. at

559. It also adjusted the projected profit

for the Pine Bluff project from breakeven

to a $20 million loss. Id. REC had

“[p]oor financial controls/accounting

practices,” and the team suspected that

there may have been inadequate

restructuring reserves in The Hague and in

Houston. Id. at 554. The due diligence

team also revised REC’s projected

EBITDA (earnings before interest,

taxes, depreciation and amortization) for

the year 2000, from $143 million to $115

million, assuming that the combined

company would be indemnified by

Raytheon against any downside from

Umatilla and Pine Bluff and that it “would
-5-

incur 50% of the $60 million of

vulnerabilities identified in the due

diligence report.” Id. at 420-21, 567. 

In addition, the due diligence team

had encountered practical difficulties in

completing the due diligence. Defendant

Hanks recorded in his notes and reported

to the board that “the due diligence and

negotiation process has been a difficult

one- Raytheon’s procedural rules limited

our opportunities for open and candid

discussions with management, limited our

ability to see company offices and projects

... and Raytheon has not been cooperative

with Washington Group’s attempts to

reconcile the [discrepancies between

financial and operational reports and other

comparative data].” App. at 418, 552.

These limitations led Hanks to suspect that

Raytheon was “hiding serious business

issues and problems.” Id. The same

concern had been recorded in the

November 3 memorandum, which noted

that the “team has been concerned about

the abrupt limits of the due diligence

process and data. With 2 1⁄2 weeks to

evaluate data, the diligence was restricted

to selected high-impact projects and

issues.” App. at 365.

Hanks also recorded in his

presentation notes some high points

disclosed by the due diligence process. He

wrote, “Raytheon’s Power Group is poised

to benefit greatly from the surge in

demand for new power,” and expressed

confidence that “[t]he combination of

MK’s contractors unit with Raytheon’s

Infrastructure business would create the

most experienced and powerful provider of

Design and build services in the

infrastructure market today.” Id. at 422.

In addition, “[t]he combination of MK’s

industrial process unit with Raytheon’s

industrial unit affords synerge tic

opportunities ... and a greatly improved

client base.” Id. at 422-23. He reported

that the due diligence team was not in

complete agreement as to the value of

REC. Id. at 423. He highlighted some

points on which they all agreed, however,

including that “[t]he strengths of MK –

and the strengths of Raytheon are

complementary” and that “the Markets that

the combined MK/Raytheon will serve

going forward are the fastest growing

segments of the industry.” Id. at 424. His

notes concluded by suggesting that

Washington should pursue the acquisition.

Id. 

Zarges’ April 3 memorandum was

more positive about the team’s access to

data, reporting that the recent site visits

were “more informative.” App. at 433.

Having been given more access to data,

the team had been able to update its

calculations about profit from operations.

Its findings did confirm some losses. In

large part due to the lower profitability of

the Damshead Creek and San Roque

projects, the team reduced its estimate of

REC’s 2000 operating fee from $63

million to $45 million. Id. at 433, 653,

655. A further memorandum dated July 6

disclosed that for certain projects, the

“total MAC [material adverse changes]

e s timate – proj e c t

deterioration/understated liabilities” was

$73.5 million. App. at 657. 

It appears that throughout the due
-6-

diligence process, the due diligence team

and the Washington Board communicated

regularly and frankly about their

assessment of REC’s strengths and

weaknesses. At no point in this process

did the Washington management express

the conviction that the acquisition would

prove a failure. In fact, the management

team took steps to remedy the weaknesses

it pinpointed by renegotiating the purchase

so as to avoid acquisition of liabilities and

risky projects. App. at 81.

On April 14, 2000, Washington

entered into a Stock Purchase Agreement

with Raytheon and REC. Id. The

agreement specified that the purchase

price, which was to be based on the April

30, 2000 balance sheet, would be

approximately $510 million—between

$265 and $365 million less than

Washington’s initial offer. Id.

Washingto n wo uld ac quire th e

engineering, design, procurement,

construction, operation and maintenance

business of REC, as well as the capital

stock of certain REC subsidiaries. App. at

51 (Cplt. ¶ 78). The purchase price

reflected the exclusion of the four most

significant REC loss projects, for which

Raytheon had agreed to retain liability. Id.

at 51 (Cplt. ¶ 77), 81. Raytheon also

agreed to “retain specified assets” of REC

and to indemnify Washington for

“specified liabilities of REC and its

subsidiaries.” App. at 81. Later,

Washington was able to get Raytheon to

retain partial liability for the Umatilla

project as well, which Washington had

predicted was in a position to show a loss

of $22 million. See Supp. App. (discussed

supra at n.1). 

On July 7, 2000, Washington’s

acquisition of REC closed. App. at 52

(Cplt. ¶ 82). The acquisition was primarily

financed through the $300 million note

offering, sold pursuant to a confidential

offering circular dated June 28, 2000. Id.

at ¶¶ 86-7. The offering circular included

certain audited financial statements as well

as unaudited financial statements for the

first quarter of 1999 and the first quarter of

2000. App. 286-96. Defendant CSFB was

one of the lead underwriters and initial

purchasers of the notes. App. at 53 (Cplt.

¶ 88). It purchased $225 million in

principal amount of the notes, then offered

and resold some of those notes to the

petitioners, who purchased $48.8 million

face amount of notes. Id. (Cplt. ¶ 93). 

On October 23, 2000, Washington’s

Form 10-Q filing announced that as a

result of “a comprehensive review” of

REC’s existing contracts, Washington

“reduced [REC’s] net assets relating to

long-term contracts in the preliminary

purchase price by approximately $325

[million] . . . [and] had made reductions in

net contract assets in the preliminary

purchase price allocation of approximately

$225 [million].” App. at 58-59 (Cplt. ¶

105). Washington also disclosed that it

had to record approximately $1.2 billion in

goodwill. Id. In a press release dated

March 2, 2001, Washington disclosed that

“[s]everal [REC] projects had serious

undisclosed problems and were in trouble”

before it acquired REC. App. at 59 (Cplt.

¶ 110). It noted that as of September 1,
-7-

2000, Washington had reduced REC’s

assets and increased its liabilities by

approximately $700 million from the

amounts originally estimated. App. at 60

(Cplt. ¶ 111). On March 8, 2001,

Washington’s Form 8-K filing indicated

that REC’s financial statements referred to

in the circular should not be relied upon.

Id. at ¶ 112. 

On May 14, 2001, Washington and

some of its subsidiaries filed petitions in

bankruptcy in the Bankruptcy Court in

Nevada for relief pursuant to Chapter 11 of

the Bankruptcy Code. Id. at 61 (Cplt. ¶

117). Washington also filed a complaint

in a Idaho state court against Raytheon

alleging fraudulent inducement, fraud and

misrepresentation, requesting rescission or

specific performance. App. at 455-81.

That suit was apparently settled in

November 2001, and is under a

confidentiality restriction. Pl. Br. at 17

n.4. Plaintiffs commenced this action

alleging violation of federal and state

securities laws. Id. at 37-8. In January

2002, the defendants filed a motion to

dismiss plaintiffs’ amended complaint.

Although no formal discovery had taken

place in the civil action, the plaintiffs were

able to obtain ac cess through

Washington’s bankruptcy to documents

discussed in the instant opinion. The

district court granted the defendants’

motion, holding that the complaint failed

to state a cause of action for securities

fraud. App. at 1. This appeal followed. 

II.

We exercise plenary review over

the district court’s decision to grant the

defendants’ motions to dismiss. See

Broselow v. Fisher, 319 F.3d 605, 607 (3d

Cir. 2003). We also exercise plenary

review over the district court’s

interpretation of federal securities laws.

See Oran v. Stafford, 226 F.3d 275, 281

n.2 (3d Cir. 2000); In re Westinghouse

Sec. Litig., 90 F.3d 696, 706 (3d Cir.

1996). We accept all allegations in the

plaintiffs’ complaint as true and draw all

reasonable inferences in favor of the nonmoving party. See Oran, 226 F.3d at 279.

A court may look beyond the complaint to

extrinsic documents when the plaintiffs’

claims are based on those documents. See

In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410, 1426 (3d Cir. 1997). A

court may not dismiss the complaint unless

it appears beyond doubt that the plaintiffs

can prove no set of facts in support of their

claims that would entitle them to relief.

See In re Rockefeller Ctr. Props., Inc. Sec.

Litig., 311 F.3d 198, 215-16 (3d Cir.

2002). 

The plaintiffs allege a violation

under Section 10(b) of the 1934 Securities

Exchange Act and Rule 10b-5 under it. In

order to state a claim under Rule 10b-5,

plaintiffs must allege “with particularity”

that defendants (1) made a misstatement or

omission of material fact (2) with scienter

(3) in connection with the purchase or the

sale of a security (4) upon which the

plaintiffs reasonably relied and (5) the

plaintiffs’ reliance was the proximate

cause of their injury. Semerenko v. Cedant

Corp., 223 F.3d 165, 174 (3d. Cir. 2000);

see also In re Westinghouse, 90 F.3d at

710. 

The plaintiffs’ securities fraud

claim is also subject to heightened
-8-

pleading requirements. Under FederalRule

of Civil Procedure 9(b), “[i]n all averments

of fraud . . . , the circumstances

constituting fraud . . .shall be stated with

particularity. Malice, intent, knowledge,

and other condition of mind of a person

may be averred generally.” Fed. R. Civ. P.

9(b). This particularity requirement is

“rigorously applied in securities fraud

cases.” Burlington, 114 F.3d at 1417. The

Private Securities Litigation Reform Act

(PSLRA), 15 U.S.C. § 78u, “imposes

another layer of factual particularity to

allegations of securities fraud.” In re

Rockefeller, 311 F.3d at 217. If a

complaint fails to comply with the

PSLRA’s pleading requirements, dismissal

is mandatory. 15 U.S.C. § 78u-4(b)(3)(A).

The PSLRA requires the complaint to

specify “each statement alleged to have

been misleading, the reason or reasons

why the statement is misleading, and, if an

allegation regarding the statement or

omission is made on information and

belief, the complaint shall state with

particularity all facts on which that belief

is formed.” 15 U.S.C. § 78u-4(b)(1). 

With regard to the “scienter”

component of the 10b-5 claim, the critical

issue before this Court, the PSLRA further

requires the plaintiffs, “with respect to

each act or omission,” to “state with

particularity facts giving rise to a strong

inference that the defendant acted with the

required state of mind.” 15 U.S.C. § 78u4(b)(2). This particularity requirement

supersedes Rule 9(b)’s provision allowing

state of mind to be averred generally. See

In re NAHC, Inc. Sec. Litig., 306 F.3d

1314, 1328 (3d Cir. 2002) (citing In re

Advanta Corp. Sec. Litig., 180 F.3d 525,

531 n.5 (3d Cir. 1999)). 

The plaintiffs may establish a

“strong inference” that the defendants

acted with “scienter” “either (a) by

alleging facts to show that defendants had

both motive and opportunity to commit

fraud, or (b) by alleging facts that

constitute strong circumstantial evidence

of conscious misbehavior or recklessness.”

In re Burlington, 114 F.3d at 1418

(quoting Acito v. IMCERA Group, Inc., 47

F.3d 47, 53 (2d Cir. 1995)); see also In re

Advanta, 180 F.3d at 534-35; Oran, 226

F.3d at 288-89. 

A. Motive and opportunity

Motive must be supported by facts

stated “with particularity,” and must give

rise to a “strong inference” of scienter. In

re Advanta, 180 F.3d at 535; 15 U.S.C. §

78u-4(b)(2). “Blanket assertions of motive

and opportunity” will not suffice, and

“catch-all allegationsthat defendants stood

to benefit from wrongdoing and had the

opportunity to implement a fraudulent

scheme are no longer sufficient, because

they do not state facts with particularity or

give rise to a strong inference of scienter.”

In re Advanta, 180 F.3d at 535. Moreover,

“[m]otives that are generally possessed by

most corporate directors and officers do

not suffice; instead, plaintiffs must assert

a concrete and personal benefit to the

individual defendants resulting from this

fraud.” Kalnit v. Eichler, 264 F.3d 131,

139 (2d Cir. 2001) (citation omitted).

In their amended complaint, the

plaintiffs allege that the defendants’

motive to commit fraud was that
-9-

Washington “would not have been able to

acquire REC without the successful

issuance of the Notes,” and would not

have been able to sell any of the notes at or

near the price sought “had the true

financial condition of the REC been

revealed in the Circular.” Pl. Br. at 32;

App. at 37, 53 (Cplt. ¶¶ 7, 86, 89).

Further, the complaint suggests that

because defendant Dennis Washington

received stock options in 1999 after

Washington acquired Westinghouse, it can

be inferred that he would receive stock

options after the present merger. See App.

at 41, (Cplt. ¶ 36). Plaintiffs argue that

these alleged stock options provided

Washington with an additional motive to

commit fraud. These allegations are

insufficient. 

In every corporate transaction, the

corporation and its officers have a desire to

complete the transaction, and officers will

usually reap financial benefits from a

successful transaction. Such allegations

alone cannot give rise to a “strong

inference” of fraudulent intent. See In re

Burlington, 114 F.3d at 1424; see also

Phillips v. LCI Int'l, Inc., 190 F.3d 609,

623 (4th Cir. 1999) (“Similar situations

arise in every merger; thus, allowing a

plaintiff to prove a motive to defraud by

simply alleging a corporate defendant's

desire to retain his position with its

attendant salary, or realize gains on

company stock, would force the directors

of virtually every company to defend

securities fraud actions every time that

company effected a merger o r

acquisition.”); San Leandro Emergency

Med. Group Profit Sharing Plan v. Philip

Morris Cos., 75 F.3d 801, 813-14 (2d Cir.

1996) (finding that a “company's desire to

maintain a high bond or credit rating”

insufficient motive for fraud because such

motive could be imputed to any company);

Tuchman v. DSC Communications Corp.,

14 F.3d 1061, 1068 (5th Cir. 1994)

(“[I]ncentive compensation can hardly be

the basis on which an allegation of fraud is

predicated.”) (citation omitted); Herzog v.

GT Interactive Software Corp., 98 Civ.

0085, 1999 WL 1072500, at *9 (S.D.N.Y.

Nov. 29, 1999) (holding that a defendant's

“‘desire to consummate [a] corporate

transaction does not constitute a motive for

securities fraud’”); Leventhal v. Tow, 48

F. Supp. 2d 104, 115 (D. Conn. 1999)

(“[T]he allegation that the defendants

artificially inflated Citizens’ stock price in

order to ‘protect and enhance their

executive positions’ and ‘negotiate as

favorable a deal as possible’ on a pending

employment contract also fail[s] to give

rise to a strong inference of scienter. This

motive has been rejected routinely.”); 

Thacker v. Medaphis Corp., 97 Civ. 2849,

1998 WL 684595, at *3 (S.D.N.Y. Sept.

30, 1998) (finding plaintiff’s claim that

defendant was motivated by a desire to

eliminate competitors and to acquire

related companies insufficient to plead

scienter because such motive could be

imputed to any corporate officer).

Although the allegation is not

apparent from the complaint, plaintiffs

now argue that CSFB had a motive to

commit fraud because it stood to receive

underwriting and financial advisory fees.

This allegation is undoubtedly true but

equally unavailing. See Melder v. Morris,
-10-

27 F.3d 1097, 1104 (5th Cir. 1994)

(declining to find scienter where plaintiffs

alleged that underwriters’ motive in

participating in fraud was to collect fees);

Schnell v. Conseco, Inc., 43 F. Supp. 2d

438, 449 (S.D.N.Y. 1999) (“[A]n

underwriter's alleged motive to earn its

underwriting fees is not alone sufficient to

sustain a strong inference of fraudulent

intent. If it were, every underwriter, law

firm, accountant, and investment advisor

whose compensation or commission

depended on the completion of an initial

public offering would have a motive to

commit fraud, which would make Rule

9(b) wholly meaningless.”) (quoting

Fisher v. Offerman & Co., Inc., No. 95

Civ. 2566, 1996 WL 563141 at *6

(S.D.N.Y. Oct. 2, 1996)). Therefore,

plaintiffs have failed to meet the scienter

requirement by pleading motive and

opportunity to commit fraud on the part of

any of the defendants.

B. Recklessness or conscious

misbehavior

Because the plaintiffs have not

adequately pleaded that the defendants had

both motive and opportunity to commit

fraud, their complaint will survive the

motion to dismiss only if they allege

specific facts that constitute “strong

circumstantial evidence of conscious

misbehavior or recklessness.” Oran, 226

F.3d at 288-289; Kalnit, 264 F.3d at 142

(“Where motive is not apparent, it is still

possible to plead scienter by identifying

circumstances indicating conscious

behavior by the defendant, though the

strength of the circumstantial allegations

must be correspondingly greater.”)

(quoting Beck v. Mfrs. Hanover Trust Co.,

820 F.2d 46, 50 (2d Cir. 1987)). 

A reckless statement is a material

misrepresentation or omission “‘involving

not merely simple, or even inexcusable

negligence, but an extreme departure from

the standards of ordinary care, and which

presents a danger of misleading buyers or

sellers that is either known to the

defendant or is so obvious that the actor

must have been aware of it.’” In re

Advanta, 180 F.3d at 535 (quoting McLean

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

1979)). 

The plaintiffs argue that they

“alleged specific information transmitted

to Defendants prior to issuance of the

Offering Circular and sale of the Notes

that contradicted representations made in

the Circu lar, id e n ti fyi ng wh o

communicated them to whom, when, and

how.” Pl. Br. at 23. In other words, it is

the plaintiffs’ position that the defendants

had actual knowledge of the falsity of their

statements in the circular at the time they

were made. It is certainly true that “in a

non-disclosure situation, any required

element of scienter is satisfied where . . .

the defendant had actual knowledge of the

material information.” Fenstermacher v.

Phila. Nat’l Bank, 493 F.2d 333, 340 (3d

Cir. 1974); see also In re Advanta, 180

F.3d at 535.

Of course, it is not enough for

plaintiffs to merely allege that defendants

“knew” their statements were fraudulent or

that defendants “must have known” their

statements were false. See In re Digital

Island Sec. Litig., 357 F.3d 322, 328-29
-11-

(3d Cir. 2004); Rombach v. Chang, 355

F.3d 164, 176 (2d Cir. 2004) (finding no

scienter where plaintiffs did “not allege

facts and circumstances that would support

an inference that defendants knew of

specific facts that are contrary to their

public statements”); Bovee v. Coopers &

Lybrand C.P.A., 272 F.3d 356, 361 (6th

Cir. 2001) (“Plaintiffs may not simply rely

on the proposition that Defendants must

have known or should have known of, and

participated in, the fraud.”). Plaintiffs

must plead allegations of scienter with

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

They must support their allegations with

the essential factual background that

would accompany “the first paragraph of

any newspaper story”—that is, the “who,

what, when, where and how” of the events

at issue. In re Burlington, 114 F.3d at

1422 (citing DiLeo v. Ernst & Young, 901

F.2d 624, 627 (7th Cir.1990)).

Although the plaintiffs argue that

they have demonstrated that the defendants

had “actual knowledge” that their public

statements were false and misleading at

the time in which they were made, the

plaintiffs have failed to plead with

particularity facts that so demonstrate.

The plaintiffs point to many statements

that the individual defendants made during

the due diligence period as evidence that

they had actual knowledge that their

circular statements were false and

misleading. However, these statements

made during the due diligence period

cannot be connected directly to any

misleading statement in the offering

circular.

1. Liabilities

The plaintiffs allege a number of

different affirmative misstatements that

form the basis of their 10b-5 claim. First,

the plaintiffs argue that the circular was

misleading in including REC’s financials

for the 2000 stub period which indicated

“that as of April 2, 2000, REC had

liabilities of $1,279,333.” Reply Br. at 6;

Pl. Br. at 26-7; App. at 288. To establish

that Washington had actual knowledge to

the contrary, plaintiffs refer to a comment

in Washington’s October 27, 1999

presentation which indicated that REC had

“understated or undisclosed liabilities.”

See App. at 44 (Cplt. ¶ 48), App. at 319.

However, this comment could not have

been made in reference to the financial

statements for the stub period between

January and April 2000, since those

statements would not have been available

in October of 1999. See App. at 47 (Cplt.

¶ 59-60) (noting that as of December 2,

1999 “Washington Group had ‘requested

“audited” financials for RE&C for years

1996, 1997, and 1998 and “reviewed”

financial statements for the stub period

from January 1 to September 30, 1999.’”).

Moreover, in the October 27th

presentation, Washington was referring to

understated liabilities in REC’s unaudited

financial statements. App. at 319

(referring to “[a]ccounting integrity of

financial statements (unaudited) provided

to date”). These statements were later

audited and adjusted to comply with

GAAP before they were incorporated into

the circular. App. at 367. Plaintiffs

present no evidence that Washington had

actual knowledge that the audited

statements were inaccurate during the

relevant time period. 
-12-

Plaintiffs also rely on their

complaint allegation that “[a]s of January

4, 2000, Washington Group and

Defendants knew that REC’s financial

statements of September 30, 1999

overstated assets by approximately $275

million and understated liabilities by $145

million.” Reply Br. at 6; App. at 47-48

(Cplt. ¶ 62). The plaintiffs, however, do

not provide any source to connect this

accusation to record evidence. In other

words, plaintiffs have failed to plead with

particularity. See In re Party City Sec.

Litig., 147 F. Supp. 2d 282, 300 (D.N.J.

2001) (“Simply referring to a series of

public statements and then alleging, in a

general and conclusory manner, that those

disclosures were false or misleading is

insufficient.”). Plaintiffs do not even

mention whether, in this paragraph, they

are referring to REC’s audited or

unaudited statements. Moreover, any

knowledge Washington may have had

regarding the accuracy of the 1999

financial statements is of little relevance in

determining whether Washington had

actual knowledge that the statements from

the later stub period were inaccurate.

2.Contracts in progress 

Similarly, the plaintiffs argue that

the circular was misleading in that REC’s

unaudited financials for the 2000 stub

period indicated “that as of April 2, 2000,

REC’s ‘contracts in process’ had a value

of $638,881,000.” Reply Br. at 6; GSC

Br. at 26; App. at 288. To show that

Washington knew this statement was

misleading, plaintiffs refer us to various

documents Washington produced during

its due diligence period, in which

Washington indicated its belief that several

of REC’s many contracts were overvalued.

Id. (citing App. 45-51 (Cplt. ¶¶ 50, 54, 72-

76)). Again, in some of these documents,

Washington was referring to REC's

unaudited statements which were later

audited before inclusion in the circular and

the other documents focused on projects

for which Washington was later

indemnified.2 Moreover, there is no

 

2

 Appellees filed a Motion for Leave

to File a Supplemental Appendix

containing an Ancillary Letter

Agreement revealing that Washington

was partially indemnified against loss

regarding one of REC’s projects. 

Appellants oppose this motion. “We

decide on a case-by-case basis whether

an appellate record should be

supplemented. Even when the added

material will not conclusively resolve an

issue on appeal, we may allow

supplementation in the aid of making an

informed decision.” Schwartz v. Million

Air, Inc., 341 F.3d 1220, 1225 n.4 (11th

Cir. 2003). The Ancillary Letter

Agreement, while not crucial to the

instant decision, helps explain

Washington’s motive for not discussing

its concerns with respect to this particular

project in the circular. Therefore, we

find that the agreement will aid the Court

in making an informed decision. 

Appellants do not question the validity or

authenticity of the agreement nor do they

argue that they would be prejudiced in

any way by our consideration of the

agreement. Appellants do not even argue

that they are unfamiliar with the

agreement. See, e.g., Kalimian v. Liberty

Mutual Fire Ins. Co., 300 F.2d 547, 549
-13-

indication that any of Washington’s

documents referred to the April 2000 stub

period or to any other value appearing in

the circular, and in none of these

documents does Washington provide an

estimate of the total value of REC’s

contracts in progress. For both of these

reasons, there is no way to know whether

Washington would have disagreed with

REC’s April valuation at the time the

circular was issued.

In any case, Washington made it

plain in the circular that REC’s accounting

for these contracts was aggressive, when it

warned that “REC revenue recognition

policies are significantly different from

those used by MK on certain contracts

where significant components are procured

in advance of installation. . . . REC’s

revenue recognition policy on such

contracts generally result in more revenue

recognition in the early stages of a

contract.” App. at 126. It also suggested

that this difference could be critical when

it noted that "[t]he loss of one or more

major contracts, or our inability to perform

profitably under one or more major

contracts . . . could have a material adverse

effect on our businesses, financial

condition, results of operation and cash

flows." App. at 94. 

3 . Four projects de via t e

significantly

The plaintiffs also take issue with a

statement in the circular indicating that

four projects for which REC retained

liability “deviate significantly and are not

representative of other contracts being

acquired.” Pl. Br. at 29, quoting App. at

126. Plaintiffs argue that this statement

was misleading because defendants knew

“that numerous other projects were also

misestimated, likely to incur costly

overruns that were uncollectible and were

losing money.” Id. First, a fair reading of

this excerpt from the circular is that these

four projects deviated significantly

because of (a) the extent of loss already

incurred on each project; (b) “the reversal

of previously-recognized profit”; and (c)

“the establishment of reserves for future

losses.” Id.; In re Burlington, 114 F.3d at

1426 (noting that if plaintiffs rely on

extrinsic documents in their complaint, the

documents must be understood in their

entirety). Plaintiffs have failed to identify

any evidence suggesting that Washington

believed that other contracts equally met

these three criteria. To the contrary,

plaintiffs concede in their complaint that

these projects are distinguishable, referring

to them as “the four most significant loss

projects.” App. at 51 (Cplt. ¶ 77). Finally,

because Raytheon ultimately retained

liability for at least one additional project

that plaintiffs allege “deviate[d]

significantly,” any misleading statements

based on that project is immaterial as a

matter of law. See In re NAHC, Inc. Sec.

Litig., 306 F.3d 1314, 1330 (3d Cir. 2002)

(“If the disclosure of certain information

has no effect on stock prices, it follows

(2d Cir. 1962) (“[T]his court is free to

consider facts which have been admitted

in argument and in the briefs on appeal . .

. .”). To the contrary, appellants argue

that the agreement actually supports their

case. Reply Br. at 5-6. For these

reasons, we grant appellees’ motion to

file their supplemental appendix. 
-14-

that the information disclosed was

immaterial as a matter of law.”).

4.Collection is probable

The plaintiffs also argue that the

circular was misleading in stating that

“[u]napproved change orders and claims .

. . are included in contracts in process at

their estimated realizable value. [REC]

has a contractual or legal basis for

pursuing recovery of these unapproved

change orders and claims and has

determined that collection is probable.”

Pl. Br. at 28 (quoting App. at 277, 293);

see also Pl. Br. at 7. Plaintiffs suggests

that Washington knew this statement was

false, because in a March 27, 2000

memorandum it indicated that it believed

the recovery percentage for one particular

project would be “poor” and that

attempted recovery could result in a loss of

between $22 and $60 million. App. at

429. It should be noted, however, that the

circular refers to a total of $581 million

worth of change orders and claims. App.

at 276. Therefore, plaintiffs’ argument

comes down to the fact that Washington

actually believed that between 3.8 and 10

percent of these contracts were not

recoverable. As far as we know,

Washington believed collection was

probable for at least 90-96 percent of these

change orders. Moreover, far from having

actual knowledge that between $22 and

$60 million of change orders would be

uncollectible , th e March 27t h

memorandum suggests a lack of certainty

or confidence in Washington’s predictions.

App. at 428 (“[P]rojects results are

difficult to quantify”); Id. at 429 (“[I]t is

difficult to predict the extent of the loss”).

On top of this, the circular

statement was qualified through the use of

the word “probable” and was accompanied

by cautionary language, which indicated

that “[t]he settlement of these amounts

depends on individual circumstances and

negotiations with the counterparty;

accordingly, the timing of the collection

will vary and approximately $235 million

of collections are expected to extend

beyond one year.” App. at 277. Any

reasonable reading of this statement,

would make one skeptical about the

recovery of the full $235 million.

Similarly, as noted supra, the circular

emphasized that REC took an aggressive

approach to revenue recognition. App. at

126. When viewed in this context, we do

not believe that the plaintiffs have

adequately alleged that any knowing

misstatement Washington may have made

in print here was material. This is

especially true given that Washington was

at least partially indemnified by Raytheon

for losses associated with the very project

discussed in the March 27th memorandum.

See Supp. App.

In any case, because the statement

about collectability is a prediction of the

likelihood of collection on change orders

and claims, it is a classic forward-looking

statement. See 15 U.S.C. 78u5c(4)(I)(1)(A) (defining a forward-looking

statement, in part, as “a statement

containing a projection of revenues,

income (including income loss), earnings

(including earnings loss) per share, capital

expenditures, dividends, capital structure,

or other financial items”); see also In re

Kindred Healthcare, Inc. Sec. Litig., No.
-15-

02CV-600-H, 2004 WL 77850 at *9 (W.D.

Ky. 2004) (“The amount Kindred keeps in

reserves to cover liability claims is

necessarily a prediction about its future

claims experience . . . [which] could only

be verified when liability claims were

actually filed, litigated to conclusion, or

settled. It would seem rather beyond

argument that such projections . . . are

forward-looking within the meaning of the

PSLRA.”); In re Smith-Gardner Sec.

Litig., 214 F. Supp. 2d 1291, 1296 (S.D.

Fla. 2002) (finding that defendant’s

statement was protected as forwardlooking where “[p]laintiffs . . . allege[d]

that Defendants either knew or were

severely reckless in disregarding that

Smith Gardner would not receive full

payment from [a customer], based on the

unpaid receivable balance of $1.5

million.”). Moreover, we find the

accompanying cautionary language to be

sufficient in this case. See EP

Medsystems, Inc. v. EchoCath, Inc., 235

F.3d 865 , 873 (3d Cir. 2000)

("[C]autionary language, if sufficient,

renders the alleged omissions or

misrepresentations immaterial as a matter

of law.") (quoting In re Donald J. Trump

Casino Sec. Litig., 7 F.3d 357, 371 (3d Cir.

1993)).3 

Therefore, this statement is

 protected by the statutory safeharbor. See 15 U.S.C. 78u-5c.

5.Goodwill 

 Plaintiffs also raise the statement in

the circular that: “[a]djustments to the

purchase price . . . are expected to have no

effect on goodwill.” Pl. Br. at 28; App. at

111. Plaintiffs argue that this statement is

false because “[d]efendants already knew

that the true value of REC was

significantly lower than the purchase price,

which would require further allocation of

goodwill.” Id. Regardless of this alleged

knowledge, however, the circular

statement would only be false or

misleading if Washington knew at the time

3 The PSLRA requires forward-looking

statements to be accompanied by

“meaningful cautionary statements” in

order for safe harbor protection to apply. 

The cautionary language should be

“directly related to the alleged

misrepresentations,” but it does not have

to “actually accompany the alleged

misrepresentation.” EP Medsystems, Inc.,

235 F.3d at 874 (referring to the

“bespeaks caution” doctrine which, like

the safe harbor provision, protects

forward-looking statements that are

accompanied by meaningful cautionary

statements from liability). Cautionary

language must be “extensive and

specific.” Semerenko v. Cendant Corp.,

223 F.3d 165, 182 (3d Cir. 2000)

(quoting In re Trump, 7 F.3d at 369. 

This Court in In re Trump explained:

“[A] vague or blanket (boilerplate)

disclaimer which merely warns the

reader that the investment has risks will

ordinarily be inadequate to prevent

misinformation. To suffice, the

cautionary statements must be

substantive and tailored to the specific

future projections, estimates or opinions

in the prospectus which the plaintiffs

challenge.” Id. at 182 (quoting In re

Trump, 7 F.3d at 371-72).
-16-

it made the statement (a) that it was going

to make adjustments to the purchase price

in the future and (b) that those adjustments

would not track the value of REC.

Plaintiffs have neither alleged nor have

they presented any evidence of such

knowledge. Moreover, none of the

documents relied upon by plaintiffs

suggests that Washington even had actual

knowledge that additional goodwill would

ultimately have to be recorded.4 The mere

fact that the amount of additional goodwill

that later had to be recorded was

substantial is not enough, on its own, to

infer either actual knowledge or

recklessness. See Kushner v. Beverly

Enters., 317 F.3d 820, 829 (8th Cir. 2003).

Additionally, this is another forwardlooking statement accompanied by

meaningful cautionary language, and is

therefore protected by the statutory safeharbor. See, e.g., App. at 93 (warning that

acquisitions “may involve risk of

undisclosed liabilities”). 

6.Undiscovered liabilities

The plaintiffs argue that the circular

was misleading in stating that “[t]here may

be liabilities of acquired companies,

including REC, that we fail or are unable

to discover during our due diligence

investigation” because as plaintiffs allege,

“[d]efendants had already discovered

significant additional liabilities.” Pl. Br. at

28-29; App. at 93. This argument is

frivolous. First, this statement in the

circular is included in a long discussion of

risks associated with the company, and in

that context, it is true and not misleading.

Moreover, none of the documents upon

which the plaintiffs rely suggests that

Washington had actual knowledge that

there were significant additional liabilities

which were not already reflected in the

circular, or for which Washington had not

been indemnified. App. at 93 (noting in

the circular that Washington “generally

seek[s] to minimize the impact of . . .

liabilities by obtaining indemnities and

warranties from the seller.”) 

7.Due diligence

Finally, plaintiffs raise various

omissions which fall within two

categories. First, plaintiffs allege that

Washington failed to disclose that its due

diligence had been obstructed. While it is

clear that REC initially obstructed

Washington’s due diligence, it seems that

by the issuance of the circular, Washington

believed, perhaps mistakenly, that it had

been given adequate access. See, e.g., Due

Diligence Memorandum of April 3, 2000,

App. at 653 (noting that “[i]n most cases

the first visits were not conclusive because

site performance information was

restricted. The recent update visits were

more informative.”). Although we do not

mean to suggest approval of the practice,

we note that it is not uncommon for a

target to be somewhat uncooperative with

respect to due diligence requests from a

potential acquirer. See, e.g., Larry

4

 Similarly, none of the documents relied

upon by plaintiffs suggest that

Washington had actual knowledge

contradicting its statement that “[t]he

acquisition of REC will double

[Washington’s] size in terms of revenues

and backlog.” Pl. Br. at 27; App. at 117. 
-17-

Schnapf, Cost Effective Due Diligence In

Corporate Mergers and Acquisitions, 15

Nat. Resources & Env't 80 at 83 (2000)

(noting that even in a friendly takeover,

the target company may be reluctant to

share information that may cause a party to

back out of a deal, renegotiate the price or

that may end up having repercussions if

the transaction collapses). Often this

tendency towards secrecy relates to a

concern, that if the deal falls through, the

acquirer might use the target’s secrets to

better compete with it, or that the target

will be otherwise disadvantaged. Id. In

such situations, as here, the target will

often becomemore cooperative and candid

the closer the deal gets to becoming a

reality. We see no evidence in this case,

however, that Washington believed its due

diligence had been materially obstructed at

the time of the circular, nor do we believe

that Washington would have gone through

with this acquisition had it believed this to

be the case.

5

 There is simply nothing to

suggest that Washington was on a suicide

mission in this acquisition.

8.Poor financial accounting 

Plaintiffs allege that Washington

“knew, but did not disclose, that Raytheon

and REC had poor financial accounting,

which necessarily entailed that the

unaudited financial statements for the first

quarter of 2000 should not be relied on.”

Reply Br. at 7. First, we reiterate our

earlier finding that plaintiffs have

presented no evidence that Washington

had actual knowledge that the unaudited

financial statements for the 2000 stub

period were unreliable. The plaintiffs’

argument appears to be, however, that

Washington was reckless in disclosing

REC’s unaudited financial statements

knowing that its earlier unaudited

statements evidenced poor accounting.

This argument is not without some

support. 

In In re Lucent Tech., Inc. Sec.

Litig., 217 F. Supp. 2d 529 (D.N.J. 2002),

the court found recklessness under similar

circumstances. In Lucent, plaintiffs argued

that “Lucent management was already

aware that revenues had been inflated in

previous quarters, and that they learned of

these earlier accounting improprieties, at

the latest, during the third quarter.” Id. at

554 (citations omitted). As here, plaintiffs

in Lucent claimed that “Defendants would

have been at least reckless in reporting

financial results for the third quarter

without first determining whether those

results were also inflated.” Id. The

district court agreed, finding that “[i]f

Defendants were aware that accounting

manipulations occurred during the first

two quarters of 2000, then, conceivably,

they may have been reckless in blindly

reporting results for the following quarter,

and proof of recklessness is enough.” Id.

While such a scenario may very

well constitute recklessness under the facts

of Lucent, we do not believe that

 

5

 In fact, we doubt that we would be

able to uncover any offering circular

which cautioned that due diligence had

been materially obstructed by the target

and that this issue was still unresolved,

given that it seems unlikely that any

acquirer would proceed with an

acquisition under such circumstances. 
-18-

Washington’s conduct here rises to the

“extreme departure from the standards of

ordinary care” which is required for a

finding of recklessness. In re Advanta,

180 F.3d at 535 (quoting McLean, 599

F.2d at 1197). First, the circular contained

both audited and unaudited financial

statements for some overlapping periods as

well as for periods closely linked in time.

See, e.g., App. at 126, 288. Therefore, to

the extent that the unaudited statements

were out of line with the audited

statements, this deviation could be

deduced from the circular itself, obviating

the need for a special note. 

Second, as noted earlie r,

Washington disclosed in the circular that

REC’s accounting was aggressive. App. at

126. This would give any reasonable

investor pause before relying on REC’s

unaudited statements. Third, plaintiffs

have shown at most that Washington

believed REC had “poor” accounting

practices. App. at 554 (March 14, 2000

presentation) (noting that REC had “[p]oor

financial controls/accounting practices”).

In contrast, in Lucent, plaintiffs alleged

that before it reported its earnings for the

fourth quarter, Lucent already knew that it

“had improperly booked hundreds of

millions of dollars of revenue on sales to

customers in situations where customers

had not ordered products”—clearly a more

egregious allegation. In re Lucent Tech.,

217 F. Supp. 2d at 538. Finally, in Lucent,

the alleged manipulations were in the

company’s own balance sheet, rather than

on the balance sheet of the company to be

acquired, as in this case. Therefore, unlike

Lucent, Washington realistically could not

have revised REC’s financialstatements or

substituted different financial statements.

At most, it could have included an

additional cautionary note. While the

inclusion of such a note may have been a

good idea, we do not believe its omission

rises to the level of recklessness required

under the PSLRA. 

 

In conclusion, plaintiffs have failed

to plead with particularity the required

element of scienter, either by

demonstrating motive and opportunity,

conscious misbehavior or recklessness.

Therefore, the district court properly

granted Washington's motion to dismiss.

 

C. Credit Suisse First Boston

The plaintiffs allege that CSFB

conducted its own due diligence, had

access to Washington’s due diligence and

communicated with Washington about due

diligence findings. They further allege

that, because CSFB had access to and

shared information with Washington,

CSFB “knew and/or recklessly disregarded

all of the information known by

Washington Group and the other

Defendants.” App. at 43, 53 (Cplt. ¶¶ 43,

85). This a bare bones allegation, and the

plaintiffs fail to specify which statements

CSFB knew were false or misleading.

Furthermore, as noted supra, an allegation

that CSFB “must have known,” because of

its relationship with Washington, that a

statement was false or misleading, is

insufficient to raise a “strong inference”

that CSFB acted recklessly or with

conscious misbehavior. See In re Advanta,

180 F.3d at 539. The plaintiffs cannot

satisfy the scienter requirement by

grouping CSFB with the Washington
-19-

defendants. Oran, 226 F.3d at 290; In re

Advanta, 180 F.3d at 539 (“Generalized

imputations of knowledge do not suffice .

. .”). Regardless, since the plaintiffs have

failed to show scienter with respect even to

Washington, the plaintiffs certainly cannot

establish scienter with respect to CSFB,

since the plaintiffs have made no

allegation unique to CSFB.

Finally, the plaintiffs have failed to

attribute any false statement or omission to

CSFB. The plaintiffs rely on Gabriel

Capital, L.P. v. NatWest Fin., Inc., 94 F.

Supp. 2d 491 (S.D.N.Y. 2000), for their

argument that CSFB can be held liable as

an initial purchaser for a Rule 10b-5

violation. The district court correctly

noted that Gabriel is distinguishable on its

facts. In Gabriel, the plaintiffs alleged that

the defendants, in addition to being the

initial purchasers, also drafted the offering

memorandum as well as distributed it

during sales pitches. Id. at 502. The

plaintiffs here do not allege that CSFB

drafted or distributed the circular.

Therefore, the holding of Gabriel is not

applicable here.6 

D. Dismissal with prejudice

The plaintiffs ask that the case be

remanded with instructions to allow them

to replead, yet they “do not specify what

additional facts, if any, they would plead if

given another opportunity to amend their

Complaint.” In re NAHC, 306 F.3d at 1332

(holding that amendment of the complaint

would be futile). One of Congress’

objectives in enacting the PSLRA was “‘to

provide a filter at the earliest stage (the

pleading stage) to screen out lawsuits that

have no factual basis.” Id. (quoting In re

Champion Enters., Inc., Sec. Litig., 145 F.

Supp. 2d 871, 874 (E.D. Mich. 2001).

This objective would be frustrated where

“there is a stark absence of any suggestion

by the plaintiffs that they have developed

any facts since the action was commenced

which would, if true, cure the defects in

the pleadings under the heightened

requirements of the PSLRA.” Id. at 1333.

Because the plaintiffs have offered no

additional facts that would cure their

amended complaint, we decline the

plaintiffs' request for permission to replead

and for the foregoing reasons, we affirm

the district court's grant of defendants’

motion to dismiss. 

6

 Gabriel is distinguishable for

another reason. In Gabriel, the

disclaimer in the offering memorandum

stated only that the initial purchasers

made “no warranty” as to the statements

contained therein. Id. Here, in contrast,

the offering circular states that the initial

purchasers made “no representations” at

all. App. at 74 (“No representations or

warranty, express or implied, is made by

the initial purchasers as to the accuracy

or completeness of the information

contained in this offering circular. 

Nothing contained in this offering

circular is, or shall be relied upon as, a

promise or representation by the initial

purchasers.”) While this subtle

difference in language is hardly

dispositive, it adds to our conclusion that

Gabriel does not apply and that CSFB

did not make any actionable statement.