* Pursuant to 5 T H C IR

. R. 47.5, the court has determined that

this opinion should not be published and is not precedent except

under the limited circumstances set forth in 5 TH C IR

. R. 47.5.4. United States Court of Appeals

Fifth Circuit



## FILED

August 4, 2003

Charles R. Fulbruge III

Clerk IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 02-10120

ALLAN ZISHKA, Etc; ET AL,

Plaintiffs,

GERALD R DAILEY, On behalf of themselves and all others similarly

situated; ROGER NORTON; PRISCILLA KNIGHT; DAVID W LEFFLER and FRED

E RYALS,

Plaintiffs-Appellants,

versus

AMERICAN PAD & PAPER CO; ET AL,

Defendants,

BAIN CAPITAL INC; BAIN VENTURE CAPITAL; GREGORY M BENSON; JONATHAN

S LAVINE; R USSELL M GARD; MARC B WOLPOW; CHARLES G HANSON, III;

ROBERT C GAY and KEVIN W MCALEER,

Defendants-Appellees.

Appeal from the United States District Court

For the Northern District of Texas

(98-CV-1072)

Before HIGGINBOTHAM, EMILIO M. GARZA, and DENNIS, Circuit Judges.

PER CURIAM: *

Plaintiffs-appellants appeal the dismissal with prejudice of

their federal securities fraud clai ms which were brought as a2

putative class action under Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934 and Rule 10b-5 of the SEC.

Plaintiffs alleged that defendants made numerous false and

misleading statements regarding the success of American Pad & Paper

Company (Ampad) in order to deceive investors and maintain company

stock prices. Specifically, plaintiffs alleged that defendants

misrepresented the success of Ampad’s strategy of acquiring other

paper products companies and integrating them into Ampad to achieve

efficiencies and higher profits; that defendants misrepresented the

success of their pricing st rategy to insulate profits from

fluctuations in the price of raw materials (paper) by passing on

the increased costs to customers; and, that defendants manipulated

their Last In First Out (LIFO) accounting reserves to maintain

false earnings stateme nts. Plaintiffs alleged that these

misstatements were made by defendants at numerous times in earnings

reports, prospectus, SEC filings, and through analysts who relied

on statements made to them by the defendants. Plaintiffs also

alleged that Bain Capital Inc., Bain Venture Capital, as well as

the directors of Ampad nominated by Bain

- Wolpow, Gay, and Lavine

- were liable as control persons pursuant to Section 20(a).

The defen dants moved to dismiss, and the district court

dismissed all claims wi th leave to amend, finding that the

plaintiffs had failed to adequately allege scienter and had not

pled with sufficient particularity to state a claim. Plaintiffs

filed their First Amended Complaint, and the defendants again moved1 267 F.3d 400 (5th Cir. 2001).

2 See Nathenson , 267 F.3d at 406.

3 Id.

4 See ABC Arbitrage Plaintiffs Group v. Tchuruk

, 291 F.3d 336,

348 (5th Cir. 2002).

5 Id.

3 to dismiss. The district court granted their motions in part, and

denied them in part. On defendants’ motion to reconsider following

the publishing of this court’s deci sion in N athenson v. Zonagen

Inc.

, 1 the district court dismissed the remaining c laims with

prejudice. Plaintiffs timely appealed. We affirm, essentially for

the reasons stated by the district court.

I

We review a district court’s dismissal under Rule 12(b)(6) de

novo

. 2 In doing so, we accept the facts alleged in the complaint

as true and construe the allegations in the light most favorable to

the plaintiffs. 3 A Rule 12(b)(6) motion should be granted only if

it appears beyond doubt that the plaintiffs can prove no set of

facts in support of their claim which would entitle them to

relief. 4 On the other hand, conclusory allegations or legal

conclusions masquerading as factual conclusions will not suffice to

prevent dismissal under Rule 12(b)(6). 5

We find that appellants have failed to sufficiently plead the

element of scienter with respect to the individ ual defendants,6 I n order to state a claim under section 10(b) of the

Securities and Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff

must allege, in connection with the purchase or sale of securities,

(1) a misstatement or an om ission (2) of material fact (3) made

with scienter (4) on which plaintif f relied (5) that proximately

caused the plaintiffs' injury. See Nathenson , 267 F.3d at 406-7.

7 Id. at 420-21.

8 Id. at 424.

4 Benson, McAleer, Hanson, and Gard. 6 A “strong inference” of

fraudulent intent is not supported by the alleged insider trading

by Hanson and Gard. Insider trading “must be unusual to have

meaningful probative value,” and here the timing and amount of the

trade is not unusual. 7 The plaintiffs’ other allegations, for the

most part, amount to nothing more than the unsupported assumption

that because of their positions in the company, the defendants had

knowledge that the company’s statements were false or misleading.

The defendants’ positions within the company are not sufficient to

presume knowledge of the company’s difficulties and manipulation of

the LIFO reserve. 8 While the appellants do not rely solely on the

alleged insider trading and the defendant s’ position within the

company, taking all of the allegations together, we find them

insufficient to create a strong inference of scienter. We

therefore affirm the dismissal of the claims against defendants

Benson, McAleer, Hanson, and Gard.

We also affirm the dismissal of the claims against the Bain

defendants

- Bain Capital Inc., Bain Venture Capital, and

defendants Wolpow, Gay, and Lavine - as there can be no control9 See ABC Plaintiffs Group , 291 F.3d at 362 n.123.

5 person liability where the appellants have failed to plead the

predicate securities fraud claims. 9

II

For the reasons stated, we AFFIRM the d istrict court’s

dismissal of all claims with prejudice.