FI L ED U.S. COURT OF A P P E A LS E LE V EN T H C IR C U IT OCTOB ER 12, 2006 THOMAS K. KAH

N CL ERK [PUBLIS H] IN THE UN ITED STATES COURT OF APPEALS FO R T HE EL EV EN TH CIRC UI T

____ ____ ____ ____ ____ ____ N o. 05- 1476 5

____ ____ ____ ____ ____ ____ D. C. Docket N o. 04-00970 -CV -W SD -1 RO BE RT G A RF IE L D , ind ivi dua lly an d onbe ha lf

of a ll oth er s si m ilarl y

sit ua te d, THE DE KALB COUNTY PENSION PLAN , Pl ai nti ff s- Appe llants , ve rs us NDC HEALTH CORPORATION, WAL TE R M. HO FF, RANDOLPH L.M. HUT TO, CHA RL ES W . MI LL ER , DAVID H. SHEN K, JAME S W . F IT ZG IBBO NS , LEE AD REAN, ER NS T & YO UN G, LL P, D ef en dants -Appe lle es .

____ ____ ____ ____ ____ ____ Appeal f rom the United State s District Court fo r the N orthe rnD istri ct

of G eo rg ia

____ ____ ____ ____ ____ ____ _ (O ct ob er 12, 200 6)Honora ble Arthur L . Alarc ón, United States Circuit J udg e for the Ninth Circuit, sitt ing * by desig nation. 2 Be fo re E D MO N D SO N , Ch ie f Judg e, BI RC H and A L A RC Ó N , Ci rc uit Jud ge s. * AL ARC ÓN , C ircuit Judg e: L ea d P la int if

f D eK al b C ounty

P en sio n F und (“ D eK al b” ) ap pe al s f ro m the D istri ct Co urt’ s O rd er

dis m iss ing it s S ec ond A m en de d C om pla int f or f ai lur e to m eet the heightened requirem ents of Rule 9(b) and the Private Securities Litigation Reform

Ac t (“ PSL RA” ), 15 U. S. C. § 77z-1, 78u. W e af firm the District Co urt’ s O rd er

dis m iss ing the S ec ond A m en de d C om pla int and h old that D eK al b w ai ve d it s r igh t t o f

urthe r am en dm en t of

it s C om pla int by takin g th e ins tant ap pe al . I On April 07, 2004 Dekalb brough t a claim in the United States D istrict Co urt f or the N orthe rnD istri ct

of G eo rg iaf

or se curi tie s f

ra ud a s aput at ive c la ss action against NDC He alth Corporation (“ND C”), several of its officers (“ In di vi du al Defen da nt s” ), an d t he acco un ti ng firm Erns t an d Yo un g LLP (“ E&Y ”). D eK alb set forth two ca uses of action in its Sec ond Am ended Co m pla int : ( 1) se curi tie s f

ra ud p ur suant t o S ec tio n 10 (b ), 15 U . S. C. §78 j (b ) an d Ru le 10b -5 , 17 C FR

§ 24 0. 10b- 5; and ( 2) vio la tio n of S ec tio n 20 (a ) of

theChannel stuffingis a prac tice whe reby a compa ny floods distribution channels by 1 e mpl oyinginc e nti ve s to ind uc e c us tom e rs int o p ur c ha sin gthe ir pr od uc ts i n la rg e qu anti tie s, cre atinga short-te rm bump in revenue and excess supply in the distribution chain. Se ee .g. I n r e Scientific-Atlanta Inc., Se curities Liti gation, 239 F. Supp. 2d 1351, 1355 (N.D . Ga. 2002) (“‘ channe l stuffing ’ has the e ffe ct of shiftingear nings into ea

rlier qua rters to the de triment of ear nings in late r quar

ters.”) . 3 Exc ha ng e Act , 15 U.S.C. 78 t. T he gr av am enof

the S ec ond A m en de d C om pla int is that duri ng the c la ss pe ri od o f A ugus t 21 , 200 2 th ro ugh A ugus t 9, 200 4, N D C “ en ga ge d inavari ety of undi sc los ed

a cc ount ing m an ipu la tio ns and b usi ne ss p ra ct ic es w hic h c au se d th e Com pany ’ s financial results to be m aterially overstated.” De Ka lb alleges that N D C e nga ge d inc hanne l st uf fi ng; pr em at

ur el y r ec ogni ze d sa le s r ev enue ; di d no t 1 fo llo wG en er al ly

A cc ep te d A cc ount ing P ri nc ipl es ; an d m at er ia lly m iss ta te d th e va lue of af ai le d in ve stm en t i n ac om pany kno w n a s M edU nit e. E &Yis be ing sue d be ca use it se rv ed a s N D C’ s in de pe nde nt a udi tor and i ssu ed

audi t op ini ons on th e Co m pa ny’ s 2 00 3 a nd20 04 fin an ci al st at em en ts . ND C and E &Y filed m otion s to dis m iss DeK alb’ s Second Am ended Co m pla int on O ct obe r 13, 200 4. A ft er the opp osi tio n and r ep ly pa pe rs w er e fi le d, on J anuary

5, 200 5, N D C f

ile d aF orm

8- K and a F orm 12b -2 5 do cum en t w iththe SE C d isc los ing that i t w oul d r es ta te it s a cc ount s f or the pr ior pe ri od “be gin nin g with its fiscal y ear ended May 31, 2002 th rough th e first quarter of fiscal y earOn a mot ion to d ism iss fo r f

a ilure to s tate a

c la im u po n whic h r e lie f c an b e g ra nte d, if 2 “matter s outside the pleadingare prese nted to and not excluded by the cour t, the motion shall be tr e ate d a s o ne fo r s umm ary jud g me nt a

nd dis po se d o f a s p ro vid e d in Rul e 56 , a

nd a ll p art ie s sh a ll be g ive n r e a so na

ble op po rt

un ity to p re se nt a ll m ate ri a l ma de pe rt ine nt t o s uc h a mot ion by Rul e 56.” F ed. R. Civ. P. Rule 12(b). N ormally , “once the cour t decides to a cce pt matters outside the pleading , it mustconver

t the motion to di smiss i nto one for summar y judgme nt.” Prop e rty Mg mt. &In v ., In c ., v . Le wis , 7 5 2 F. 2 d 5 9 9 , 6 0 4 (1 1 thC i r. 1 9 8 5 ) ( ci t i n g Carter v. Stanton , 405 U.S. 669, 671 (1972)). H oweve r, in the conte x t of secur ities fraud, “ SEC documents [ may be treated] as public rec ords ca pable of beingjudicially

noticed at the motion to dismiss stag e.” Bryant v. Av ado Brands, Inc., 187 F.3d 1271, 1280 ( 11th Cir. 1999). By takingjudicial notice of SEC documents, the District Court did not t ransf orm Def endants’ motions to dismis s into a motion for summary

judgme nt. Id. 4 2005 e nde d Augus t 27 , 200 4. ” T he D istri ct Co urt t ook j udi ci al not ic e of the se doc um en ts. T he S ec ond A m en de d C om pla int c ont ai ns n o a lle ga tio n r eg ar din g 2 th e res ta te m en t o f acc ou nt s. T he D istri ct

Co urt di sm iss ed

Appe llant’ s S ec ond A m en de d C om pla int on July 27, 2005 with leave to am end. T he order states: “ Plaintiff shall file its T hird A m en de d C om

pla int w ith in thirty

( 30) day s of

e ntr y of thi s O rd er , and D ef

en dants shall file their m otion s to dis m iss within thi rty (30) day s of the filing of the Third Am endm ent.” In re N

DC Hea lth C

or p. In c., No. 1 :0 4- cv -0 97 0, s li p o p. at 53 (N.D. G a. Jul y 27, 200 5) . I nst ea d of

f ili ng a thi rd a m en de d c om

pla int , D eK al b f

ile d a N oti ce of Appe al on Augus t 26 , 200 5, the la st d ay of the pe ri od a llo tte d f

or f ili ng ana m en de d c om

pla int .5 II O n S ep te m

be r 13, 200 5, thi s C ourt i nqui re d nost ra s ponte w he the r the District Court’ s Or der of July 27, 2005 cons titutes a final appealable order. In re spon se , the part ie s a gr ee d th at “ [g ] en er al ly , an or de r dis m iss ing ac om pla int is not f ina l and a ppe al ab le unl es s th e or de r hol ds tha t i t di sm iss es the e nti re a ct ionor that the com

plaint cannot be saved by am endm ent.” V

an P oy ck v . Sin gle tar

y , 11 F. 3d 1 46, 148 ( 11th C ir . 199 4) ( ci tin g Cz er em ch a v . I nt' l A ss' n of M ac hin ist s an d Ae rosp ace W

orkers, A FL -CIO , 72 4 F .2d15 52 , 15 54 -5 5 (1 1t h C ir. 1 98 4) ).

“ [W ] he re an or de r dis m iss es ac om pla int w ithle av e to am en d w ith in a s p e c i f i e dp e r i o d , th e o r d e r

b e c o me s f

i n a l ( an dth e r e f

o r e ap p e a l ab l e ) w h e nth e t i me period allowed for am endm ent expires.” Bri eh le r v. Mi ami , 926 F . 2d 1 001, 100 2 (1 1thCi r. 199 1) . H ow ev er , “ the pla int if f ne ed not w ai t un til the e xpi ratio n of the state d ti m e in o rd er

to tr eat the dis m iss al a s f ina l, but m ay appe al pr ior

to the expiration of the stated tim e period.” Sc hu ur man v. Mot or Vess el “Bett y K V,” 798 F.2d 442 , 445 (11th Cir. 1986). Ac cordingly , this Court has j urisdictio n over thi s ti m el y

f ile d a ppe al pur suant t o 28 U . S. C. § 12 91. B y f ili ng an a ppe al in thi s m anne r, how ev er , D eK al b e le ct ed to stand o n it s S ec ond A m en de d C om pla int and waiv edit s ri gh t t o fu rth er am en dm en t. Sc huurm an, 798 F . 2d at 44 5 ( “ O nc e the pla int if f ch oose s to appe al be fo re the e xpi ratio n of ti m e al low ed

f or a m en dm en t,6

how ev er , the pla int if

f w ai ve s th e ri ght

to la te r am en d th e co m

pla int , e ve n if

the tim e to am end has noty et expired.” ). III De Ka lb argues the District Court er red in dism issin g its Second Am ended Co m pla int be ca use , in de te rm ini ng tha t D eK al b di d no t pl ea d f ac ts s uf fi ci en t t o give rise to a strong inference of scie nter, “ [t] he District C ourt failed to consid er al l of the f ac ts p le d and a lso f

ai le d to vie wthe a lle ga tio ns i n ali ght m ost f av or ab le to Appellant.” (Appellant’s Br . 34. ) D eK alb also argues that “ the District Court er re d inde te rm ini ng tha t Appe llant f ai le d to ple ad

the r ea sons f

or the f al sity of the al le ge d m iss ta te m en ts and o m iss ion s w ithr equis ite spe ci fi ci ty . ” F ina lly , D ek al b as sig ns e rr or

to the D istri ct

Co urt f or “ im pr ope rl y im pos[ ing ] c ondi tio ns o n Appellant’ s right to am end its com plaint.”

“ At the m otion to dism iss stage, all w ell-pleaded fac ts are a ccepted as true, an d th e re as ona

ble inf er en ce s th er ef

ro m are c onstru ed

in the li ght

m ost f av or ab le to the plaint iff. ” Bryant v. Av ado Brand s, I nc. , 187 F. 3d 12 71, 1273 n .1 (11th Cir. 1999 ). T he “ co urt r ev ie w s de novo the dis m iss al of ac om pla int pur suant t o R

ule 12(b)(6).” O

xf ord A sse t M

gm t. v . J ahar is , 29 7 F .3d11 82 , 11 87 (11 th Cir . 20 02 ). Se ct ion10( b) and R

ule 10b- 5 m ak e it unl aw fu l f or any ind ivi dua l t o e m

plo y a m an ipu la tiv e or

de ce pti ve de vic e in c onne ct ionw iththe pur ch as e or sa le of anySe ct ion10( b) , 15 U . S. C. S. § 78 j , pr ovi de s: 3 T o us e or e m plo y , in co nne ct ionw iththe pur ch as e or sa le of any se curi ty r eg ist er ed

on a na tio na l se curi tie s e xc hange or any se curi ty not so registered, or any

securities-based swa

p agreem ent (as defined in s ec tio n 20 6B of

the G ram

m -L ea ch -B lil ey

A ct [ 15 U SC S § 78 c not e] ), any

m an ipu la tiv e or

de ce pti ve de vic e or

c ontri vanc e in contravention of such rules and regulations as the Com m issio n m ay pr es cr ibe a s ne ce ssary

or appr opr ia te in the pub lic int er es t or f or the pr ot ect io n o f in ve st or s. Ru le 10b -5 , 17 C . F. R. § 24 0. 10b- 5, w as pr om ulg at ed und er S ec tio n 10 (b ) an d pr ovi de s: It sha ll be unl aw fu l f

or any pe rs on, dir ec tly

or ind ir ec tly , by

the use of any m eans o r ins tr

um en ta lity

of int er state c om

m er ce , or of the m ai ls or of any f ac ili ty of any na tio na l se curi tie s e xc hange , ( a) T o e m plo y any de vic e, sc he m e, or

art if ic e to d ef ra ud, ( b) T o m ak e any

untru e statem ent of a m aterial f

act or to om it to state a m aterial f act ne ce ssary in or de r to m ak e the state m en ts m ad e, in the li ght of the ci rcu m st an ces un de r whi ch th ey were m ad e, no t m is le ad in g, o r (c) To en ga ge in any

a ct , pr ac tic e, or

c our se of bus ine ss whic h op er at es or w oul d op er at e as af

ra ud o r de ce it uponany

pe rs on, in co nne ct ion w i th th e p u r c h a s e o r

s a l e o f an y s e c u r i ty. 7 security . “ To allege securities fra ud un der Rule 10b-5, a

plaintiff m

ust sh ow: 1) a 3 m isstatem ent or om issio n, 2) of a m aterial f act, 3) m ade w ith scienter, 4) on which plaintiff relied, 5) that proxim ately caused his injury .” B ry ant , 18 7 F .3dat 1 28 1. Se ct ion20( a) of

the E xc hange A ct

pr ovi de s f

or li ab ili ty of “ co ntr oll ing persons” who aid and abet “ any person liable und er any

provisio n of this chapter or of any rule or r egulation thereunder. ” 15 U. S. C. 78t. D ekalb’ s claim s under8

Se ct ion20( a) are a lle ge d a ga ins t the I ndi vid ua l D ef en dants , and p re dic at ed

upo n th e sa m e al le ge d u nl awfu l co nd uc t re le va nt to it s cl ai m s u nd er Se ct io n 1 0b . (C om pl. ¶ 186 . ) A cc or din gly , the suc ce ss o f D eK al b’ s se ct ion20( a) c la im tur ns on th e res ol ut io n o f it s cl ai m s u nd er Se ct io n 1 0b an d R ul e 1 0b -5 . A Ch anne l st

uf fi ng i s no t f

ra udul en t per se. Gree bel v. FT P Software, I

nc. , 194 F. 3d 1 85, 202 ( 1st

Ci r. 199 9) ( “ T he re is nothin g inhe re ntl y im pr ope r in pr es sin g f or sa le s to be m ad e earl ie r than inthe nor m al c our se . ”) . I n Gre eb el , the Fi rs t C ir cu it co m

m en te d th at

in the c ont ex t of

a lle ge d im

pr ope r re ve nue re co gni tio n, “ ch anne l st

uf fi ng e vid en ce ha s so m e pr obativ e va lue . B ut tha t va lue is weak.” Id. at

203 ; but se e In re Ca ble tro n Sy

s. , 311 F . 3d 1 1, 26 ( 1st

Ci r. 200 2) (a lle ga tio ns o f im

pr ope r re ve nue r ec ogni tio n, inc lud ing f ic tit iou s sa le s, and ch anne l st

uf fi ng, w er e supp orte d by

a ve rm en ts o f te sti m oni al e vid en ce f ro m ins ide rs and p le d w itha de quate spe ci fi ci ty to sur viv e a m oti on t o di sm iss ). T he Se ve nthCi rc uit

de te rm ine d in Makor Issues & Rights, L td., et al., v. Tellabs, Inc. , 437 F. 3d 5 88 ( 7thCi r. 200 6) that “ [w ] hil e the re m ay be le git im at e re as ons fo r atte m pti ng t o a ch ie ve sa le s e ar lie r via c hanne l st

uf fi ng, pr ovi din g e xc es s su ppl y to dis tr ibu tor s inor de r to c re at e a m isl ea din g im pr es sio n inthe m ar

ke t of the com pany ’ s financial health is not o ne of them .” Id . a t 59 8. W e ag re e w iththeRule 9(b) states: “ In all aver ments of fra

ud or mistake, the c ircumstance s constituting 4 fra ud or mistake shall be state d with particular ity . Malice, intent, knowle dg e, and othe r condition of mind of a pe rson may

be ave rre d g ener ally .” F ed. R. Civ. P. Rule 9(b).

9 Se ve nthCi rc uit

that c hanne l st

uf fi ng m ay a m ount to fr au dul en t c ondu ct

w he n it is done to m isl ea d in ve sto rs , but the a lle ga tio ns o f ch anne l st uf fi ng i n th e ins tant cas e were n ot pl edwit h s uf fic ie nt de ta il to ov erco m e th e PSLRA’s s ci en te r hu rd le . Ru le 9( b) pr ovi de s th at

“ [i ] n a ll av er

m en ts o f fr au d or

m ist ak e, the ci rcu m st an ces co ns ti tu ti ng frau d o r m is ta ke sh al l b e st at edwit h p art ic ul ari ty.” 4 Fe d. R. Ci v. P . Ru le 9( b) . “ Ru le 9( b) is sa tis fi ed if the c om pla int se ts f orth ‘ (1 ) pr ec ise ly w ha t st at em en ts w er e m ad e in wha t do cum en ts o r or al r ep re se ntatio ns o r w ha t om iss ion s w er e m ad e, and ( 2) the ti m e an d pl ac e of e ac h su chstate m en t and the person respons ible for m aking (or, in the case of om issio ns, not m aking) sam e, an d ( 3) the c ont en t of

suc h st at em en ts and the m anne r in whic h th ey m isl ed the plaintiff, and (4) what the def endants ob tained as a consequence of the fr aud.’ ” Ziem ba v. Cascade Int'l, Inc. , 256 F . 3d 1 194, 120 2 ( 11th C ir . 200 1) ( quot ing Brooks v. Blue C

ross a nd Blue Shield of Florida , I nc. , 116 F . 3d 1 364, 137 1 ( 11th Ci r. 199 7) ). “ Asuf

fi ci en t l ev el of

f ac tua l su ppor t f or a[ 10b] c la im

m ay be f ound w he re the c ir cum stanc es of the f ra ud are ple d inde ta il. ‘ T his m eans the w ho, what, when where, and how: the first para graph of any newspaper story .’ ” G ros s v. Med ap his C or p., 977 F. S upp. 146 3, 147 0 (N . D . G a. 199 7) ( quot ing DiLe o v.Se c tio n 7 7u -4 (b ) p ro vid e s: 5 (1) Misleadingstatements and omissions In any private a ction arisingunder this cha pter in which the plaintiff alleg es that the def endant- - (A) ma de an untr

ue stateme nt of a mate rial fa ct; or (B ) o mitte d to state a

mate ri a l f

a c t ne c e ssa

ry in o rd e r t o ma

ke the state me nts m ad e, i nth e l i gh to f t h e c i rc um s t an ce s i nwh i ch th ey we re m ad e, n o tm i s l ea d i n g; the complaint shall specif y eac h statement alleg ed to have been mislea ding, the rea son or re asons why

the statement is misleading , and, if a n alleg ation reg arding the state me nt o r o mis sio n is ma de on inf or matio n a nd be lie f, the c omp la int

sh a ll state with particula

rity all fac ts on which that belief is for med. 10 Ern st & Y ou ng , 90 1 F .2d62 4, 6 27 (7t h C ir. 1 99 0) ). F o r c l a i ms b r o u g h tu n d e r

th e E x c h an g e A c t , i n c l u d i n g Ap p e l l an t s ’ c l a i ms unde r Se ct ion10b and S ec tio n 20 a, the c om pla int m ust “ spe ci fy e ac h st at em en t al le ge d to have be enm isl ea din g, the r ea son or r ea sons w hy

the state m en t i s m isl ea din g, and, if

an a lle ga tio n r eg ar din g th e state m en t or om iss ionis m ad e on inf orm at ionand b el ie f, the c om pla int sha ll state w ithpart ic ulari ty a ll fa ct s on which that belief is form ed.” 15 U. S. C. § 78u -4(b)(1). 5 D eK al b arg ue s th at

it se t f orth a c la im sa tis fy ing the r equir em en ts o f Ru le 9( b) and the P SL RAw he n it a lle ge d th at

N D C unde rs ta te d e xpe nse s invio la tio n of G A A P in thr ee w ay s: “ (1 ) it be gan to c ap ita liz e co sts w el l be fo re it s de ve lop m en t pr oj ec ts r ea ch ed ‘ te ch nol ogi ca l f

ea sib ili ty ;’ ( 2) it

a m ortiz ed

c ost s ove r pe ri ods m

uc h gr eate r than th e ec onom ic li fe of it s so ft w ar e as se ts; and ( 3) it ap pli ed an e xc es siv e bur de n f

ac tor to its c ap ita liz ed

c ost s, the re by

e xpe nsi ng l es s11

than necessary

in the present term .” In discounti ng thi s argum ent, the D istrict Co urt st at ed

“ Pl ai nti ff

’ s a lle ga tio ns are thi n, and are ba se d a lm ost e nti re ly on statem ents by

an undisclo sed form er e xecutive in the Phy sician Services G roup.” In Re NDC Hea lth C

or p. In c., N o. 1:0 4- cv -0 970, sli p op . a t 44 . T he D istri ct

Co urt di d no t e rr

be ca use D ek al b’ s a lle ga tio ns r eg ar din g am ortization and capitalization are vague and difficult to evaluate. F or exam ple, the S ec ond A m en de d C om pla int doe s no t sp ec if

y w he n th e im

pr ope r ac co unt ing oc curr ed . I t a lso f

ai ls t o a lle ge howand wha t pr oduc ts w er e im pr ope rl y cap it al iz edor a m or ti zed . De Ka l b al s o ar g u es th at th e D i s tri ct Co u rterre di nh o l d i n g th at De Ka l b ’s allegations regarding m aterial m isstatem ent in ND C’ s financial statem ents wer e ove rl y spe cu la tiv e an d am ount

to nothin g m or e than “ non- ac tio nable c or por at e m ism anagem ent.” The District Court deter m ined that “ the financial reporting was its el f ac curate ” an d th e re ports “ ac curate ly r ef le ct ed the pe rf orm an ce of

the Co m pany . ” A t the ti m e the D istri ct Co urt i ssu ed

it s op ini on, N D C h ad

a lr ea dy de cl ar ed it s in te nti on t o r es ta te it s a cc ount s. O n January 05, 200 5, N D C f

ile d a dis cl osur e w iththe S E C s ta tin g th at it “ ide nti fi ed

c er ta in p ra ct ic es r eg ar din g th e exchange of phy sician software invento ry held by the Com pany ’ s value-added res el le rs th atwere i nc on si st en t wi th Co m pa ny po li ci es .” Acco rd in gl y , NDC12

announ ce d th at

“ af te r dis cu ssi on w iththe Co m pany ’ s in de pe nde nt a cc ount an ts, on January 4, 200 5, the Audi t C om

m itt ee of the Bo ar d of

D ir ec tor s de te rm ine d it

is appropriate to restate prior- period results begin ning with its fiscal y ear ended May 32, 2002 th rough th e first quarter of fiscal y ear 2005 ended August 27 , 2004.” ND C also noted that “ [t] he restatem ent will also include other identified ad j ustm en ts f

ro m pr ior pe ri ods. ” I t f

oll ow s th at

N D Cs pr ior

f inanc ia l r ep ortin g m ay not have be ena cc ur at e an d m ay not have r ef le ct ed the pe rf orm an ce of

the co m pa ny. De Ka l b el ec t edt o s t an do ni t s Se co n dAm en d edCo m p l ai n t . ND C’s in te nt io n t o re st at e it s ac co un ts is no t al le ge d i n t he Seco ndAm en de d C om pl ai nt . Be ca use D eK al b w ai ve d it s r igh t t o f ile athi rd a m en de d c om

pla int , w e lim ite d our re vie wto the f

ac ts s et f orth i n th e Se co nd A m en de d C om pla int ins te ad of speculating whether

De Ka lb couldhave filed a third am ended com plaint th at wou ldha ve m etth e p le ad in g re qu ire m en ts of t he PSLRA an d R ul e 9 (b ). T ur nin g to the a lle ga tio ns s et f orth i n th e Se co nd A m en de d C om pla int , D eK al b m ai nta ins that i t a lle ge d im pr ope r re ve nue r ec ogni tio n w itha de quate spe ci fi ci ty

by statin g th at

in Marc h of

200 4, “ a m an ag em en t l ev el e m plo y ee in the Ph y sic ian S er

vic es uni t” not if

ie d E &Yof

a“ dir e sit

ua tio n f ac ing that bu sin es s se gm en t – that a cc ount s r ec ei vable w er e ve ry hig h a s ar es ult

of a ggr es siv e13

ch anne l- stu ff

ing pr ac tic es , w hic h r en de re d th e uni t’ s r ep orte d r ev enue s hi ghl y susp ect. ” (C om

pl. ¶ 61. ) A ccording to DeK alb, N DC “ determ ined that approxim ately

$25 m illion of inventory wa s in the channel as of March 31, 2004 .” ( Id . at ¶ 63. ) T he Second Am ended Com plaint go es on to state that, afte r m an ag em en t l earn ed

of thi s in fo rm at ion , N D C d ec ide d to “ de lay it s e ar nin g relea se pending a re view of its re venue recognition practice s in the Phy sician Service s Unit.” (

Id . ) I n sum , D eK alb alleged that ND C issued erroneous financial statem ents that contain ed subst antial m isstatem ents due to th e im proper reco gn it io n o f rev en ue an d c ha nn el stuf fin g i n t he Ph y si ci an Serv ic es Uni t. De Ka lb also alleged that “ De fendants sou ght to conceal their im proper re ve nue r ec ogni tio n by

inc re as ing r es er

ve s and t ak ing larg e, y ear- en d c harg es f or uncollected receivables, without explanatio n.” Absent from these allegations are an y de ta il edall eg at io ns of s ci en te r wit h re sp ectto th e al le ge d m is rep res en ta ti on s. B D eK al b arg ue s it

w as pla in e rr or

f or the D istri ct

Co urt t o c onc lud e “ that the Com plaint do es not contain allegations su fficient to give rise to a strong inference of sc ie nte r w ithr es pe ct

to Appe lle es [. ] ” Ac om

pla int m ust “ state w ith part ic ulari ty

f ac ts g ivi ng r ise to a str ong inf er en ce that the de fe ndant a ct ed w ithSe c tio n 7 7u -4 (b )( 2) pr ov ide s: 6 (2) Require d state of mind In any private a ction arisingunder this cha pter in which the plaintiff may rec over money damag es only

on proof that the de fenda nt acted w ith a particula

r state of min d, the c omp la int

sh a ll, wi th r e sp e c t to e a c h a c t or omi ssi on a lle g e d to vio late this chapter, state with particula rity fac ts givingrise to a stronginfere nce that the defe ndant ac ted with the re quired state of mind. 14 th e r e qu i r e ds t a t e o f

mi n d . ” 1 5 U. S . C . § 7 8 u - 4 ( b ) ( 2 ) . “ Th i s [ s t a tu t o ry] 6 requirem ent alters the usual contou rs of a R ule 12(b)(6) ruling because, while a court continu es to give all reasonable inference s to plaint iffs, those inferences supp orting scienter m

ust be strong ones.” In re Ca ble tro n Sy s. , 311 F . 3d at 28 (c iti ng Gree bel , 194 F . 3d 1 85, 201 ( 1st Ci r. 199 9) ). “ [F ] ac tua l a lle ga tio ns m ay be aggregated to infer scienter and m ust be inferred for

each def endant with respect to each violation .” Phillips v. Scientific-A tlant a, Inc. , 374 F . 3d 1 015, 101 6 ( 11th Ci r. 20 04 ). De kalb contend s “ the District Court f ail[ed] to properly

consider all scienter al le gatio ns i n th e ag gr eg at e, [ an d] the Co urt pate ntl y f ai le d to int er

pr et the allegations in a light m ost favorable to Appellant.” “ [A ] securities fr aud plainti ff m ust ple ad sc ie nte r w ithpart ic ular fa ct s th at giv e ri se to a str ong inf

er en ce that the defendant acted in a sever ely rec kless m anner. ” B ry ant , 18 7 F .3dat 1 28 7.

“ ‘ Se ve re r ec kle ssn es s is li m ite d to tho se hig hly unr ea sona

ble om iss ion s or m isrepresentations that in volv e not m erely sim ple or even inexcusable neglig ence,In it s Se c on d A me nd e d Co mpl a int , D e Ka lb a ve rs : 7 Acc ordingto the former

senior executive, De fenda nts Mill er a

nd Hoff of

ten discussed the diff

icult tension betwee n the risingacc ounts rece ivable and the ag g ressive discountingand extended cr edit terms beingg iven to VARs on the one hand, and the need f

or the Company

to “make its numbers,” on the other. The senior executive r elated that Hoff a nd Miller rema

rked that the Company

was 15 but an e xtr em e de part

ur e fr om the standard s of

or din ar y c ar e, and tha t pr es en t a dange r of m isl ea din g buy er s or

se lle rs w hic h is e ith er

kno w n to the de fe ndant o r is so obv ious th at the defendant m ust have been awar e of it. ’ ” Id . a t 12 82 n . 18 (quot ing M

cD onal d v . A lan B ush B rok

erage Co . , 863 F. 2d 80 9, 814 (11th Cir. 19 89 )). T ur nin g to the sa lie nt a lle ga tio ns o f sc ie nte r se t f orth i n th e Se co nd Am ended Com

plaint, De Ka lb alleged that Def endants Hoff and Miller attended m onth ly operations m eetings in Arizona and “ every aspect of the Phy sician Service s busi ness was discussed in detail, includin g the aggressive channel stu ff ing and m ount ing pr obl em s w itha cc ount s r ec ev ab le ( sic ). ” ( Co m pl . ¶ 56.) In the Second Am ended Com plaint, De Ka lb alleged that testim onial evidence providedby

a “ form er senior exec utive” would sho w D efendants Miller and H off kne wthe re w as apr obl em w ith“ m ount ing a cc ount s r ec ei vable ” but de ci de d to continu e w ith “ aggressive discou nting and credit term s” because the com pany had to “ m ak e it s n um

be rs .” 7‘quar ter drive n,’ and that the need to sustain re ported re venue growth outweighed the nee d to properly

addre ss the mounting ac counts rec eivable a nd the attenda

nt questionable re venue r ecognition. I nstead of a ddressingg rowingconce rns of manag ers in the unit that the ag g ressive discounting , channe l-stuffing , and extended cre dit terms. . . were cre atingserious re alizabilit y (sic) c oncer

ns . . . De fe nd ants Ho ff

and Mil le r d ir e c te d th e un it t o f or g e ahe a d a

nd c ontin ue to ag g ressively

stuff the c hannel in orde r to g ive the appe ara nce of robust reve nue g rowth. (Com pl. ¶ 57. ) 16 Abse nt f ro m the se a lle ga tio ns are any part ic ulari ze d ave rm en ts o f fr au d or sc ie nte r. I n Th eo haro us v . F ong , 256 F. 3d 12 19 (11th Cir. 2001 ), thi s C ourt he ld that sc ie nte r w as not

ple d w itha de quate spe ci fi ci ty “be ca use the pla int if

fs did not allege the contex t in which Fong m ade this statem ent, [ and] it does not appear fr om the f ac e of the c om pla int that F ong m

ust have kno w n th at

the state m en t presented a danger of m isleading b uy ers or seller s.” Id. at 122 5. A s in F

ong, D eK al b’ s br oa d c la im

of te sti m oni al e vid en ce is not se t f orth w ithr equis ite de ta il be ca use D eK al b f

ai le d to a lle ge w ha t w as sa id at the m ee tin g, to w hom it w as sa id, or in what context. Ac cordingly , the averm ent lacks the requisite particularity . It is w el l e sta

bli she d th at

“ cl ai m s of

se curi tie s f

ra ud c annot r es t ‘ on s pe cu la tio n and concluso ry

allegations.’ ” H

off m an v . Co m shar e, I

nc . (In re C

omshare Inc. Sec. Li ti g.) , 183 F . 3d 5 42, 553 ( 6thCi r. 199 9) ( quot ing San Le andr o E m er ge nc y M ed . P lan v . Phil ip M

orr is C o. , 75 F . 3d 8 01, 813 ( 2d C ir . 199 6) . Age ne ra l a lle ga tio n that Individ ual Def

endants prom oted channel stu ffing at a ser ies of m eetings does17

not establis h scienter. D eK al b a lso a ve rs that the I ndi vid ua l D ef en dants , Ms sr s. H of

f, H utt o and Miller, m ade a P owerPoint presentation in Atlanta on Marc h 1, 2004 th at

“ contained several statem ents identify ing prob lem s with the VA R channel.” T he pr es en ta tio n in cl ude d di sc uss ionof the f oll ow ing top ic s: “ H eavy

pr om oti on discoun ting to drive VA R sales, ” and “ Change ordering/bu y ing behavi or of V ars fr om Q /E pr om oti on d isc ount

buy ing to pul l thr oughde m an d buy ing and a dd ad dit ion al V A Rs ”. D eK al b a lso a lle ge s: “ Id en tif ie d a s ‘ Co ndi tio ns f

or Su cc es s/R isk s’ ( sic ) w er e ‘ V A R a cc ount s r ec ei vable c oll ec tio ns’ and ‘ V isi bil ity into VAR invento ry

levels and outb oundprogram s/assist ance to m ove invent ory phy sic ian pr ac tic es ( pul l thr oughsa le s) . ’ ” D eK al b m ai nta ins that the se a lle ga tio ns es tabl is h ast ro ng in fere nc e o f sc ie nt er o n t he pa rt o f th e in di vi du al de fen da nt s. W e d is ag ree. V ie w ing the se c onf

usi ng s ta te m en ts i n th e be st p oss ibl e lig ht, it is poss ibl e to surm ise that the Individ ual Def endants m ight h ave been aw are of im proper re ve nue r ec ogni tio n inthe V A R c hanne l and a lso kne wthat the y ne ed ed to inc re as e ac tua l sa le s r athe r than “pr om ot[ e] dis co unt buy ing . ” But tha t c onc lus ion is ba se d o n m

ul ti pl e in fere nc es an d d rawn fro m so m ewh atba ffl in g l an gu ag e. D e K a l b f a i l e dt o a l l e g e wh a twa s a c tu a l l y d i s c u s s e da tth e mee t i n g . Ac c o r d i n g l y,18

the a lle ga tio n r eg ar din g th e m ee tin g of Marc h 1, 200 4, doe s no t gi ve r ise to a st ro ng in fere nc e o f sc ie nt er. D eK al b a lso arg ue s th at

the pe rs ona l c er

tif ic at ion s r equir ed

by the Sarb an es -O xle y

A ct and s ign ed

by se nio r ex ec uti ve s “ ar e ind ic iaof D ef en dants ’ sc ie nte r. ” D ek al b c ont en ds tha t by sig nin g th e ce rt if

ic at ion , D ef

en dants re pr es en te d to the ge ne ra l pu bli c that: “ (1 ) the y

r ev ie w ed the f ili ng b ei ng c er

tif ie d; (2 ) the r ep ort di d no t c ont ai n any untru e state m en t of

m at er ia l f

ac t . . . ; ( 3) the report fa irly

presented the financial condition of the com pany ; and (4) they designedthe disclosu re c ontrols and procedures to ensure that m aterial inf orm at ionr el at ing to the Co m pany w as dis cl ose d to the m

f or the pe ri od i n questio n.” The plain m eaning of the language contain ed in Sarbanes-O xley , 18 U .S .C. § 13 50, doe s no t i ndi cate any int en t t o c hange the r equir em en ts f or ple ad ing scienter set forth in th e PS LR A, 15 U. S. C. § 78u -4(2). Sar banes-Oxley

requires that the c hie f ex ec uti ve of fi ce r an d c hie f fi nanc ia l of fi ce r ce rt if

y “ [e ] ac h pe ri odi c re port c ont ai nin g f

inanc ia l st at em en ts f

ile d by an is sue r w iththe S ec ur iti es and E xc hange Co m

m iss ion. . . ” 18 U . S. C. § 13 50( a) . T he statut e al so p ro vid es f or im pr iso nm en t of

up t o 10 y ears or

af ine of $1, 000, 000 fo r any

pe rs on who

“ certifie s a periodic financial statem ent . . . knowing th at the periodic report19

ac co m pany ing the state m en t do es not c om port w itha ll the r equir em en ts s et f orth in [section 13(a) or 15(d) of the Se curities Exchange A ct of 1934 (15 U.S .C. 78m (a ) or 78o (d )) ] . . . ” 18 U . S. C. § 13 50( c) . A n in div idu al w ho “ w ill fu lly ce rt if ie s” suc h astate m en t i s su bj ec t t o apr iso n te rm

of 20 y ears and a

f ine of up to $ 5, 000, 000. N ow he re in the statut e is the re any m en tio n of

c ivi l l ia bil ity or pl ead in g re qu ire m en ts forsci en te r in civ il act io ns bro ug ht forsec ur it ie s fr au d.

“ Af undam en ta l c an on o f statut or y c onstru ct ionis that, unl es s othe rw ise de fi ne d, w or ds w ill be int er pr et ed a s takin g th ei r or din ar

y , c ont em por ar y , c om m on m eaning.” P errin v . U

nit ed Sta tes, 444 U . S. 37, 42 ( 1979 ) (c iti ng B urns v . A lc ala , 420 U . S. 575 , 580 -8 1 ( 1975 )) . Whe n c onstru ing the m eanin g of astatut e, “ the be gin nin g po int

m ust be the langua ge of

the statut e, and whe n astatut e spe ak s w ithc lari ty

to aniss ue j udi ci al inquir y int o th e statut e' s m eanin g, in al l bu t the m ost extraordinary

circum stance, is finished.” E sta te of Co wa rt v . Ni ck

los D ril lin g C

o. , 505 U . S. 469 , 475 ( 1992 ) (c iti ng De marest v. Manspeaker , 498 U. S. 184, 190 ( 1991 )) . I n th e ins tant c as e, the statut e doe s no t sp eak to the iss ue of ple ad ing sc ie nte r. T he pla in l an gua ge of S ar bane s- O xle y

e vid en ce s no co ngr es sio na l i nte nt t o a lte r the ple ad ing r equir em en ts s et f orth i n th e PS L RA . 18 U.S.C. § 1 35 0. D eK al b’ s in te rp re ta tio n of S ar bane s- O xle y

c onf lic ts w iththe pla in l an gua ge20

of the P SL RA . “ ‘ [W ] he n tw o st at ute s are c ap ab le of

c oe xis te nc e, it

is the duty

of the c ourts, abse nt a

c le ar ly e xpr es se d c ongr es sio na l i nte nti on t o th e co ntr ar y , to regard e ach as ef

fective. ’ ” J. E. M. Ag Supply v. Pioneer H i-B red Int'l , 534 U. S. 124, 143 -4 4 ( 2001 ) (quot ing M orton v . M

anc ari , 41 7 U.S. 5 35 , 55 1 (1 97 4) ). If we we re to ac cept De Ka lb’ s proffer ed interpretation of Sar banes-Oxley , scie nter w oul d be e sta

bli she d ine ve ry

c as e w he re the re w as an a cc ount ing e rr or or au dit ing m ist ak e m ad e by apub lic ly

tr ad ed c om pany , the re by

e vis ce ratin g th e ple ad ing r equir em en ts f

or sc ie nte r se t f

orth i n th e PS L RA . W e de cl ine to ad opt su ch an in te rp ret at io n. In ste ad , w e hol d th at

aS ar bane s- O xle y

c er tif ic at ionis onl y

pr obativ e of sc ie nte r if the pe rs on s ign ing the c er tif ic at ionw as se ve re ly

r ec kle ss i n c er

tif y ing the a cc ur ac y

of the f inanc ia l st at em en ts. T his r equir em en t i s satis fi ed if the pe rs on sig nin g th e ce rt if

ic at ionha d r ea son to k

now , or sho uld have sus pe ct ed , due to the presence of glar ing accountin g irregularities or other “ red flags, ” that the financial statem ents contained m aterial m isstatem ents or om issio ns. In the instant case, the re are no a lle ga tio ns i n th e Se co nd A m en de d C om pla int that i ndi cate the pr es en ce o f su ch “ redfla gs ” in th e co m pa ny’ s fi na nc ia l s ta te m en ts . The S econd Am ended Com plaint states th at “ the Phy sician Services ac co unt s r ec ei vable gr ewf ro m $20 0, 000 to a lm ost

$11 m ill ionin ap pr oxi m at el y21

ei gh te en m on th s b eg in ni ng in lat e 2 00 2.” By way of c om pa ris on , NDC announ ce d th at

it s r ev enue f

or the thi rd quart er of 200 3 w as $11 6. 1 m ill ionand net incom e w as only

$9.3 m illion . De Ka lb alleged that “ [i] n the fourth quarter (e nde d M ay

30, 200 3 . . . ) , N D C i nc re as ed it s a llo w an ce f

or doubtf ul a cc ount s by $4.26 m illion , nearly

seven tim es the avera ge for the three previous qu arter s.” (Com pl. ¶ 68. ) T hose num

bers are som ew hat alarm ing because they indicate a re la tiv el y larg e am ount

of r ev enue that m igh t ne ve r be r ea liz ed . B ut those st at em en ts th em se lv es do no t ap pe ar t o b e u nt ru e o r m is le ad in g. V ie w ing the a lle ga tio ns i ndi vid ua lly and i n a ggr eg at e, the f

ac ts s et f orth i n th e Sec on d Am en de d C om pl ai nt do no t cr eat e a “ st ro ng in fere nc e” o f sc ie nt er. See 15 U. S. C. § 78u -4(b)(2) (m andating “ strong in fere nce that the defendant acted w iththe r equir ed

state of m ind . ”) A cc or din gly , the D istri ct Co urt di d no t e rr

in di sm is si ng DeKalb ’s Seco ndAm en de d C om pl ai nt . C N D C arg ue s th at

D ek al b di d no t have standi ng t o br ing ac la im r eg ar din g the state d va lue of

Me dU nit e be ca

use D eK al b di d no t purc ha se any sto ck unt il af te r the a lle ge d f

ra udul en t c ondu ct

oc curr ed . D ek al b a lle ge d th at the im pa ct of the sa le of

Me dU nit e w as r ea liz ed

on M ar ch19, 200 3. ( Co m pl. ¶ 75. ) But D ek al bGene rally Acc epted Ac countingPrinciples (" GAAP" ) ar e the “ basic postulates a nd broad 8 principles” that guide business acc ounting. SE C v . Pric eW ate rh ou se , 797 F. Supp. 1217, 1222-23 n17 (S.D.N.Y. 1992) (cited in Ziemba , 256 F.3d at 1200. GAAP is approved by the Auditing Standar ds Boa

rd of the America

n Institut e of Cer

tified Public Accounta

nts ("A I CPA"). Id. Gene rally

Acc epted AuditingStandards (" GAAS" ) ar e the standa rds pre scribed by

the AI CPA for the conduc t of auditors in the per formanc e of a n examination. Id. GAAP and GAAS establish guidelines for me asuring , rec ording , and cla ssifying a business entity ' s transac tions. Id. 22 did not buy sto ck unt il Marc h 10 and 1 1, 200 4. A cc or din gly D ek al b di d no t have standi ng t o br ing thi s c la im be ca use the y did not buy the sto ck unt il lon g a ft er

the im pa ctof t he sal e was real iz ed . Se e M ars h v . A rm ada Co rp. , 533 F . 2d 9 78, 981 - 82 ( 6thCi r. 197 6) ( “ St an din g is e sta bli she d by

a lle ga tio ns tha t pl ai nti ff

s bo ught or sol d sh ar es of

the sto ck in que sti on w ith in a

r ea sona ble pe ri od o f tim e af

te r the al le ge dly f ra udul en t c ondu ct

oc curr ed to supp ort an in fe re nc e of r el ianc e. ”) ; see also Blue Chip Sta mps v. Manor Drug Stor es , 421 U . S. 723 , 730 ( 1975 ) (h old ing that “ the pla int if

f cl as s f or pur pose s of apr ivate dam ag e ac tio n un de r § 10 (b ) an d Rule 10b-5 [i] s lim ited to actual purchasers and sellers of secur ities.”) . IV D eK al b arg ue s th at

the D istri ct

Co urt e rr ed

in dis m iss ing it s C om

pla int ag ai nst E &Ybe ca

use E &Yc er

tif ie d N D C’ s f

inanc ia l a cc ount s e ve n th oughthe ir practices did not com

port with Ge nerally

Ac cepted Ac ount ing Principles (“ G A A P” ) an d G en er al ly A cc ep te d Audi tin g S tandard s ( “ G A A S” ). D eK al b 8 al le ge d th at

E &Yign or ed

“ re d f la gs” w he n it

iss ue d un qua lif

ie d audi ts and23

financial statem ents in 20 03 and 20 04. (C om pl. ¶¶ 151-54.) A D eK al b arg ue s th at

anom al ous inc re as es in N D C’ s r es er ve f or doubtf ul accounts put E& Y “ on no tice of the other D efendant’ s fraudulent schem e. ” Dr astic overstatem ent of acc ount s, or other r ed flags, c om bined with alleged violatio ns of GA AS or G AA P m ay be enough to establish th e re quisi te level sc ie nt er. In r e Eag le Bld

g. Te ch . Inc ., Sec . Lit ig ., 319 F. S upp. 2d 1 318, 132 8 (S . D . F la . 200 4) ( fi ndi ng s uf fi ci en t part ic ulari ty

w he re f ra udul en t c ontra ct s m ad e up 7 4% of

the c om pany ’ s bu sin es s, f

inanc ia l st at em en ts h ad

60 o ut o f 75 l ine ite m s r es ta te d, and r ed

f la gs i nc lud ed in te r a li a, pur ch as e or de r dis cr ep an ci es in the hund reds of thousand s, delivery discrepancies of 50% of good s, and post-dated lic en se a gr ee m en ts) ; se e a ls o In re Fr ie dma n’ s, In c., Se c. Li ti

g., 385 F. S upp. 2d 1345 , 1365-66 (N. D. Ga . 2005) (finding a strong in fere nce of scienter wher e auditin g firm

“ had contin uous argum ents” with com pany m anagem ent over allowance for uncollected acc ount s, the f irm “ knew that” the com

pany wa s underreser ved, the fir

m discussed d oubt ful accounts every quarter, and the firm co m m itt ed num er ous G A A P an d G A A S vio la tio ns) ; In re Ha mil to n Ba nk co rp ., In c. , Se c. L iti

g. , 194 F . S upp. 2d 1 353 (S . D . F la . 200 2) ( fi ndi ng s uf fi ci en t pa rti cu la rit y

wher e au di ti ng firm

co m m it te d n um ero us GAAP andGAAS24

vio la tio ns and i gnor ed

an in ve sti ga tio n by

the O ff ic e of the Co m ptr oll er of the Curr en cy , the sim

ult an eo us s al e an d purc ha se of ove rp ri ce d lo an s or

se curi tie s to av oi d wri te do wn o n i ts bo ok s, an d t he co rp or at io n’s fa il ur e to ad he re t o S EC req ui rem en ts ). Red flags ar e “ those facts which com e to the attention of an audito r which would place a r easonable auditor on notice that the audited com pany wa s engaged in wrongdoin g to the detrim ent of its investo rs.” In re Sun te rra Co rp. Se c. L iti g. , 199 F. S upp. 2d 1 308, 133 4 ( M. D . F la200 2) . “ It is es ta bli she d, how ev er , that the purported red flags cannot sim ply ‘ re-hash’ the alleged GA AP violatio ns.” In re Sp ea r & Ja cks on Se c. Li ti g., 399 F . S upp. 2d 1 350, 136 3 ( S. D . F la . 200 5) ( ci tin g Holm es v. Bake r , 16 6 F . Sup p. 2 d 1 36 2, 1 37 9 (S .D. Fla. 2 00 1) ). De Ka l b al l eg edth at E& Y wa s p u to nn o t i ce o f f ra u du l en tac t i v i ty b y NDC ’s inc re as ed a llo w an ce f

or “ doub tf ul a cc ount s” in the f

ourth quart er

of 200 3 and 2004 . ( Co m

pl. ¶ 67) . D eK al b a lso c la im ed that “ [a ] n ana ly sis of

N D C’ s r es er

ve fo r doub tf

ul a cc ount s and r el at ed

c harg e- of

fs and r ec ove ri es f

or f isc al y ear 2003 an d f isc al y ear 2004 r ev ea ls a

pa tte rnstr ongl y

sug ge sti ng tha t D ef

en dants co n ce al edo v er s t at edre v en u es fo r f i s ca l y ea r 2 0 0 3 an d2 0 0 4 b y i n cr ea s i n g NDC ’s pr ovi sio n inthe f

ourth quart er

of both y ears and t ak ing alarg e, anom al ous ch ar ge for uncollectible accounts receivable. . . . ” ( Id . ) T he Com

plaint alleged25

the f ir st thr ee quart er s of

f isc al y ear 2003 N D C p ro vis ion ed a t a m ode st r at e an d a ct

ua lly r ep orte d ne t r ec ove ri es on a cc ount s rece ivable previous ly

wr itten off . . . [ but] in the f ourth qu arter

(ended M ay 3 0 , 2 0 0 3 , a n di n ci d en t al l y, th e q u ar t eri nwh i ch NDC ’s ind ep en de nt a

udi tor s be gan to r ev ie wthe Co m pany ’ s f inanc ia ls i n pr ep ar at ionf

or the f ili ng o f the F orm

10- K ), N D C i nc re as ed

it s allowance for doubtful accounts by $4.26 m illion , nearly

seven tim es the a ve ra ge f

or the thr ee pr ev iou s qu ar

te rs . (C om pl. ¶ 68. ) D eK al b a lso a lle ge d th at “N D C c harg ed -o ff

ove r $6. 1 m ill ionin uncollectibl e acc ount s rece ivable.” ( Id . ) T he Second Am ended Com plaint states that “ [i ] n f

isc al , 200 4, in spi te of

N D C’ s sp ec ia l r ev ie wof it s r ev enue r ec ogni tio n pr ac tic es and r es er

ve s pr ior to the iss uanc e of

it s th ir d qu ar

te r re sul ts, the Co m pany onc e ag ai n to ok an anom al ous ch ar ge a ga ins t i ts r es er ve of ap pr oxi m at el y

$6. 7 m ill ion , or

78% of it s r es er ve [ an d] f ai le d to giv e any explanation for these y ear- end results[.] ” ( Id . ) D eK al b a lle ge d th at

thi s c harg e wa s “ high ly

irregular given th at N DC had purpo rtedly experienced net r ecoveries fo r the f ir st thr ee quart er s of

f isc al y ear 2003 and m ode st p ro vis ion ing and c harg e offs for the f

irst three quarter s of fiscal 2004.” ( Id . ) D eK al b ha s no t a lle ge d any f ac ts tha t sh owE &Yw as a ct ua lly aw ar e or shou ld have kno wn that N DC recklessly “ concealed overstated re venues.” See B ry ant , 187 F . 3d at 12 87 ( ad opt ing the r ec kle ssn es s st an dard ). D eK al b do es not allege fa cts that show that such increased allowance s wer e so irregular a s to put an26

au di ti ng co m

pa ny onno ti ce fo r frau d. Se e Zi em ba, 256 F . 3d at 12 10 ( dis m iss ing a com plaint where a

uditi ng firm

wa s not “ tipped o ff”) . The S econd Am ended Com plaint states NDC chose the fourth quarter to start increa sing th e allowances fo r doub tf

ul a cc ount s “ inc ide nta lly ” at the sam e tim e E &Y“be gan to r ev ie wthe Co m pany ’ s f inanc ia ls. ” S inc e D eK al b ha s no t a lle ge d th at E &Ykne wabout

the al le ge d r ea son fo r the inc re as ed “ ir re gul ar ” al low an ce f

or doubtf ul a cc ount s, or shou ld h av e known a

bout N D C’ s im

pr ope r re ve nue r ec ogni tio n, D eK al b f ai le d to pl eadfact s g iv in g ri se to a st ro ng in fere nc e o f sc ie nt er. B D e K a l b a l l e g e dth a t“ du r i n g M ar c h 2 0 0 4 , E& Y wa s n o t i f i e db y a m an ag em en t l ev el e m

plo y ee in the P hy sic ian S er vic es uni t of

the dir e sit

ua tio n fa ci ng tha t bu sin es s se gm en t – that a cc ount s r ec ei vable w er e ve ry hig h a s ar es ult of aggressive channel-stuffing practices, which re ndered the unit’s r eported re ve nue s hi ghl y

sus pe ct . ” ( Co m

pl. ¶ 61. ) A s ar es ult

of thi s no tif ic at ion , “ the Com pany and Def endants were force d to begin addressing th e problem .” ( Id . ) T he S ec ond A m en de d C om pla int doe s no t a sse rt

that E &Yha d kn ow le dge of wr ongd oing before M arch of 2004 and does no t allege fa cts dem onstrating that E&Y act edwit h re ck le ss di sr eg ardaft er E&Y was in fo rm edof t he pro bl em . On th e co nt rary, D eKal b a ll eg edth atwhen E&Y was “ no ti fie d” of a“ di re s itua ti on ,”27

E &Ytoo k a ct ion . D eK al b ha s no t pl ed f ac ts tha t i ndi cate E &Y ’ s r es pons e to the not ic e w as hig hly

unr ea sona

ble or an e xtr em e de part

ur e fr om the standard s of or di na ry care . C DeKal b’s re m ai ni ng all eg at io ns pe rta in to vi ol at io ns of GAAP o r GAAS.

“ A lle ga tio ns o f G A A S or G A A P, standi ng a lon e, do n ot s at isf y the part ic ulari ty requirem ent of Rule 9(b). ” Zi em ba, 256 F . 3d at 12 08. S uc h a lle ga tio ns d o no t create a strong inference of rec klessness because “ [t] hey m erely suggest that either m anagem ent or the accountant m issed som ething, and m ay have failed to prepar e or r ev ie wthe f

inanc ia l st at em en ts i n a cc or danc e w ithan a cc ep te d st an dard of reasonable car e. ” Re iger v. Price W aterhou se Coopers LLP , 117 F . S upp. 2d 10 03 , 10 10 (S.D. Cal . 20 00 ), aff’d sub nom . D SA M

G lob al V alu e F und v. A ltr is So ftwa re , Inc ., 28 8 F .3d38 5 (9 th Cir . 20 02 ). In the Sec ond Am ended Com plaint, De Ka lb alleged that E&Y ’ s audit report o f J u l y 2 1 , 2 0 0 3 “ fa l s el y re p re s en t edth at E& Y h adco n du ct edi t s au d i tfo r N DC ’s yearen d2 0 0 3 fi n an ci al s t at emen t s i nac co rd an ce wi th GAA S, an dth at NDC ’s financial statem ents conform ed with G AA P. ” (C om pl. ¶ 151.) D eK alb alleged that E &Yvio la te d G A A S by f ai lin g e xe rc ise due pr of

es sio na l c ar e, f

ai lin g to de sig n pr ope r au dit

pr oc ed ur es , and b y

“ fa ili ng t o e xpand o r oth er w ise pr ope rl y28

co nduc t i ts a

udi t t o de te ct

the und er state m en t i n th e al low an ce f or doubtf ul accounts. . . .” (Com

pl. ¶¶ 156, 165, 168.) D eK alb also alleged that “ E&Yfailed to o bta in s uf

fi ci en t c om

pe te nt e vid en tia l m atte r” w ithr eg ar ds t o w ri te -o ff s, softwar e capitalization, and im proper revenue r ecognitio n. ( Com pl. ¶ 166.) De Ka l b g o es o nt o al l eg e t h at th es e G AAS v i o l at i o n s we re ca u s edb y “ E& Y’s failure to qualify , m odify or abstain from

issuin g its audit opini ons, when it knew or r ec kle ssl y

tur ne d abli nd e y e to N D C’ s a cc ount ing m an ipu la tio ns. . . . ” ( Co m pl. ¶ 158.) Whil e the D eK al b br oa dly c la im s th at

E &Yf ai le d to de sig n and i m

ple m en t pr op er au di ti ng pro cedur es , DeKalb ne ve r de sc rib es ho w E&Y fail edto do so . Fo r ex am ple , D eK al b r ef

er s to the A m er ic anI nst itu te of Ce rt if ie d P ubl ic Ac countants ’ Codification of Statem ent on Auditin g Standards, but De Ka lb does not a lle ge howE &Yvio la te d e ac h se ct ion . D eK al b a lle ge d th at if E &Yha d no t vi ol at edGAAP andGAAS th e su pp os edfrau d wo ul d n ot ha ve tak en pl ace. (C om pl. ¶ 158 ) H ow ev er , D eK al b m ay not “ es ta bli sh s ci en te r by

a lle gin g th at

the auditor would have dis covered the fr aud had it no t violated GAA S. ” In re Spe ar & Ja cks on Se c. Li ti

g., 399 F . S upp. 2d at 13 63 ( ci tin g In r e Eag le Bld g. Te ch . Inc ., Se c. L iti g. , 31 9 F . Sup p. 2 d a t 1 32 8) . This is m erel y an all eg at io n o f ne gl ig en ce. De Ka lb states that E&Y“ recklessly turned a blind ey e” to the problem s atRul e 15 (a ) p ro vid e s, in p e rt ine nt p art : 9 A p art y may ame nd the pa rt y ’s ple a din gon c e a s a

matte r o f c ours e at any

tim e befor e a r esponsive plea ding is ser ved, or, if the pleadingis one to which no responsive ple adingis permitted and the a ction has not bee n place d upon the trial cale ndar, the party

may so amend it at any

time within 20 day s after it is served. Otherw ise a pa

rty may amend the pa

rty ’s pleadingonly

by leave of cour

t or by written conse nt of the adve rse pa rty ; and leave shall be g iven fre ely when justice so require s . 29 N D C. B ut m er el y

a lle gin g sc ie nte r in g en er al , c onc lus or y te rm s do es not

m ee t the particularity

requirem ent. 15 U .S .C. § 78u-4(b)(2). The D istrict Court did no t err in gra nt in g E&Y’s m ot io n t o d is m is s. V D eK al b w ai ve d it s r igh t t o f ile athi rd a m en de d c om

pla int by f ili ng the ins tant a ppe al . B ut tha t do es not

m oot the iss ue be ca

use aque sti on r em ai ns a s to whether the restrictions on further am endm ent wer e overly burdensom e. Feder al Ru le of Ci vil P ro ce dur e Ru le 15( a) state s th at le av e to am en d “ sha ll be f re el y giv enw he n j ust ic e so r equir es . ” D en ia l of le av e to am en d is r ev ie w ed f or abuse 9 of di sc ret io n. Bae

z v. Ba nc One L ea si ng

Co rp ., 348 F.3d 972, 973 (11t h Cir. 2003 ). I n F

om an v . D av is , 371 U. S. 178 (196 2) the Suprem e Court declar ed that tr ia l c ourts h av e br oa d di sc re tio n inpe rm itt ing or r ef usi ng t o gr an t l eave to am en d. Id . a t 18 2. “ Inthe abse nc e of any appare nt o r de cl ar ed

r ea son -- suc h a s un due de lay , ba d f

ai th o r dil at or

y m oti ve on the part

of the m ovant, r ep eate d f

ai lur e to30

cure de fi ci en ci es by

a m en dm en ts p re vio usl y

a llo w ed , und

ue pr ej udi ce to the oppo sin g party

by vir tue of a llo w an ce of

the a m en dm en t, f

uti lity of a m en dm en t, etc. -- the leave sought shoul d, as the r ules require, be ‘ free ly

given.’ ” Id

. D eK al b arg ue s th e D istri ct Co urt e rr ed

in pla ci ng r es tr ic tio ns u

pon its r igh t to f urthe r am en d it s C om

pla int be ca use the D istri ct

Co urt i nc or

re ct ly pr em ise d th e restrictions on “ the interest of fair ness and to m anage this litig ation effec tively .” D eK al b a lso arg ue s th at

the D istri ct

Co urt di d no t a dhe re to the f ac tor s in F

om an v. D av is, 371 U . S. 178 , 182 ( 1962 ). D eK al b’ s arg um en t l ac ks m er it be ca use the D istri ct Co urt di d no t de ny

D eK al b le av e to am en d. T he D istri ct Co urt e xpl ic itl y considered at least two of the F om an factors in fa shion ing th e re strictions p laced on DeKalb ’s rig ht to fur th er am en dm en t o f it s C om pl ai nt . Indis cu ssi ng the iss ue of le av e to am en d, the D istri ct Co urt m ad e the following comm ents: “ The E leventh Circuit requires leave to am end be granted wher e a m ore carefully

drafted c om

plaint m ight st ate a c laim . He re, the Court wa s inclined to deny

Plaintiff’ s request for leave to am end the Second Am ended Com plaint.” In re N

DCHea lth C

or p., In c. Se cu ri ti es Lit ig at io n, N o. 1:0 4- cv -0 970, sli p op . a t 50 . T he D istri ct Co urt no te d th at

“ Pl ai nti ff pr ev iou sly

ha s am en de d it s com plaint twice. ” T he D istri ct

Co urt gave D eK al b le av e to am en d be ca use N D C’ s no tic e to31

the S E C r eg ar din g th e re state m en t of it s a cc ount s “ m ay

a t l ea st b e ge rm an e to the claim s asserted.” In re N DCHea lth C

or p., In c. Se cu ri ti es Lit ig at io n, N o. 1:0 4- cv 0970 , sli p op . a t 51 n. 23. H ow ev er , the D istri ct Co urt pl ac ed

r es tr ic tio ns o n Appe llant’ s r igh t t o am en d: “ Pl ai nti ff m ay a m en d it s c om

pla int but the a m en dm en t is l im ite d to a lle ga tio ns ( i) ba se d oninf orm at ionnot

a va ila ble to Pl ai nti ff

w he n th e Se co nd A m en de d C om

pla int w as f ile d and ( ii) w hic h be ar

onl y on c la im s a lr ea dy asserted. ” Id

. at 5 2.

“ [I ] n th e ex er ci se of

sound d isc re tio n, the gr an tin g of le av e to am en d c anbe conditi oned in o rder to avoid prej udice to the opp osing party .” A lli ed I ndus . W ork er s v . G en . E le c. Co . , 471 F . 2d 7 51, 756 ( 6thCi r. ) (quot ing Strickler v. Pfister A ssoc. G rowers, Inc. , 31 9 F .2d78 8, 7 91 (6t h C ir. 1 96 3) ), cer t den ie d, 414 U . S. 822 ( 1973 ). B ut the c ondi tio ns p la ce d onapla int if f’ s r igh t t o am en d it s Co m pl ai nt m us t b e rea so nabl e. Se e id. (h old ing the “ re qui re m en t tha t the am en dm en t be f

ile d by aspe ci fi ed

da te or that the part

y a m en din g be ar

aportio n of the a ddi tio na l c ost

to the opp osi ng p ar

ty w oul d, in pr ope r ci rc um stanc es , be re as ona ble c ondi tio ns. ”) ; se e als o A nde rbe rg v . M ason iteCo rp. , 176 F . R. D . 682 , 687 (N . D . G a. 199 7) ( “ the c ourt m ay und er Ru le 15( a) , im

pose c ost s a s ac ondi tio n of gr an tin g le av e to am en d inor de r to c om pe nsate D ef

en dant and avoi d any pr ej udi ce c au se d by

the a m en dm en t. ”) ; G en . Sig nal v . M CI T el ec om m . Co rp . , 6632

F. 3d 1 500, 151 4 ( 9thCi r. 199 5) ( sam e) ; Chicago Pneumatic Tool Co. v. Hughes To ol C o. , 192 F . 2d 6 20, 631 ( 10th C ir . 195 1) ( hol din g “ it lay w el l w ith in the r an ge of sound j udi ci al dis cr et ionof the c ourt t o a llo wthe a m en dm en t i n to to, to de ny it al to ge th er, o r to pe rm ititwit h re as on ab le co nd it io ns an d l im it at io ns .”).

Inthe ins tant c as e, the c ondi tio ns p la ce d up on D eK al b’ s r igh t t o am en d w er e re la tiv el y

m ode st. T he D istri ct

Co urt m er el y

r equir ed that D eK al b li m it its am endm ent to the legal theories already asserted, and perm itted DeK alb to assert any ne wf ac ts t o st at e a cl ai m . D eK al b ha s f ai le d to de m onstrate that the se re str ic tio ns w er e unr ea sona ble . B ec au se D eK al b a lr ea dy ha d am ple opp ortun ity

to fi le an am en de d c om

pla int that m ee ts the he igh te ne d pl ea din g r equir em en ts o f Ru le 9( b) and the P SL RA , the D istri ct Co urt di d no t a

buse it s di sc re tio n by pl aci ng th os e res tri ct io ns on DeKalb ’s rig ht to fur th er am en dm en t.

AFFIRMED.