### IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 17

- 50162

ALASKA ELECTRICAL PENSION FUND,

Plaintiff

- Appellant

v. VINIT K. ASAR; GEORGE MCHENRY; HANGER, INCORPORATED; THOMAS F. KIRK,

Defendants

- Appellees

Appeal from the United States District Court for the Western District of Texas

Before WIENER, GRAVES, and HO, Circuit Judges

. WIENER, Circuit Judge:
P laintiff

- Appellant Alaska Electrical Pension Fund (“the Fund”) is a pension fund re presenting a class of investors. It claims that Defendants

Appellees Hanger, Inc. (“Hanger”) and three of its offic ers engaged in securities fraud. T he Fund’s allegations are based predominantly on a report by Hanger ’ s Audit Committee after Hanger resta ted its financial results. That report indicates that some defendants set an inappropriate “ tone at the top ” and engaged in improper accounting. The district court granted the defendants ’ motions to dismiss, holding that the complaint did not adequately allege scienter. F or the reasons stated below, we affirm in part and reverse in part. United States Court of Appeals Fifth Circuit 

### FILED August 6, 2018 Lyle W. Cayce Clerk Case: 17-50162 Document: 00514587918 Page: 1 Date Filed: 08/06/2018No. 17

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2 I. F ACTS AND P ROCEEDINGS Hanger is the largest provider of orthotic and prosthetic patient care services in the United States. 1 Ha nger ’ s principal sources of revenue are reimbursements for its services and products from public and private insurers.
Federal programs, such as Medicare, Medicaid, and the Department of Veterans Affairs, are the source of a significant portion of Hanger ’ s revenue

. Before the period of time at issue, Hanger recorded positive growth in same

store sales for every quarter since 2005. Defendant Thomas Kirk was Hanger ’ s President fr om March 2008 to September 2011 and its CEO from March 2008 until he retired in May 2012. 2 Defendant Vinit Asar was Hanger’s President and COO from September 2011 to May 2012, when he became President and CEO. Defendant George McHenry

was Hanger’s CFO until he retired at the end of 2014. The Fund invested in Hanger stock

. In 2010, Co ngress expanded a Medicare audit program

— one that reviewed medical records in support of Medicare claims

— to scrutinize the medical necessity of the claimed services or devices. Hanger ’ s clinics did not collect the required documentation in a timely manner, so after Medicare scrutiny increased due to the expanded program , Hanger began failing audits more frequently. When Hanger failed an audit , it was required to return the reimbursement it had collected, even though it had already recognized that reimbursement as revenue. Hanger would then pursue recovery of those reimbursements via a lengthy Medicare appeals process.

1 These facts are taken from the Third Amended Complaint, which are taken as true at the motion to dismiss stage. Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322 (2007).
2 Kirk remained on the Board of Directors until 2014. Case: 17-50162 Document: 00514587918 Page: 2 Date Filed: 08/06/2018No. 17

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3 The Fund contends that , despite these problems, Hanger continued to
claim success in its Medicare audits and mainta ined that it had sufficient
internal controls to ensure that it passed audits . C onsequently, Hanger did not increase its reserve for disallowed Medicare sales. At the same time, Hanger was implementing a new clinic data management system called Janus. The Fund contends that the defendants told investors that the Janus rollout caused only minimal disruptions when , in reality, clinicians made fewer sales because they had to spend significant time and resources transitioning patient data to the new system. In addition to these documentation troubles, and the related failure to increase its audit reserve, on April 4, 2014, Hanger identified three material weakness es in its inventory accounting. In its SEC filings, the individual defendants certified
that these w ere the only material weaknesses in Hanger’s internal controls.
A. Alleged False and Misleading Statements The Fund identifies ninety

- three allegedly false and misleading statements by the defendants related to these issues. It states the speaker, date , and m edium ( e.g. , SEC filing, pr ess release, or conference call) for each
statement. The alleged ly false stat ements cover several categories. First, the Fund claims that Hanger reported false financial metrics and falsely depicted Hanger as having strong same

- store sales. This resulted in reporting inflated financial results for 2011, 2012, and 2013, and for all quarters from the second quarter of 2011 to the second quarter of 2014

. Second, the Fund claims that Hanger falsely stated that its Medicare audits and appeals were more

suc cessful than they actually were; that its r eserves estimates were adequate;
and that the Janus implementation caused minimal disruption. Third, the Fund claims that Hanger falsely assured investors that it s internal controls were adequate. Finally, the Fund claims that even after Hanger began disclosing a series of problems

— most prominently announcing in February Case: 17-50162 Document: 00514587918 Page: 3 Date Filed: 08/06/2018No. 17

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4 2015 that it would reissue financial statements for 2012 thr ou gh the second quarter of 2014

— Han ger continued to falsely understate “ the size and scope of
the restatement. ”
B. Alleged Corrective Disclosures Since the initial restatement announcement in February 2015, Hanger
has issued five updates. 3 It has also continued to announce material weaknesses , ultimately acknowledging eleven. Han ger eventually admitted to

over stating its pre

- tax income by $87 million. On November 12, 2015, Hanger announced that its Audit Committee would investigate the circumstances which led to the restatement. On February 26 , 2016, Hanger disclosed preliminary findings of the investigation
in a Form 8

- K ( “ February 8

- K ” ) filed with the SEC, stating that “ certain former officers and employees

. . . may have engaged in inappropriate activities, ”
al though it did not identify thos e individuals. The February 8

- K revealed that Hanger had overstated its accounts receivable and understated its reserves by approximately $40 million. In June 2016, Hanger release d a summary of the final investigation results in another Form 8

- K ( “ June 8

- K ” )

. Both Forms 8

- K stated that a former employee had fabricated inventory records. The June 8

- K also stated that (1) Kirk and McHenry had “ set an inappropriate ‘ tone at the top ’” by emphasizing “ achieving certain financial targets, ” which “ may have ” contributed to inappropriate accounting decisions , and (2) McHenry and others
had “ engaged in inappropriate historical accounting practices ” and that

“ particular adjustments

. . . were undertaken for the purpose of enhancing [Hanger ’ s] reported financial results. ”

3 The full financial restatements had not been issued as of the time the district court ruled. Case: 17-50162 Document: 00514587918 Page: 4 Date Filed: 08/06/2018No. 17

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5 C. Proceedings In February 2015, a fter the initial complaint was filed in November 2014 (before the first restatement announcement), the district court appointed the Fund as lead plaintiff. 4 The Fund has since amended the complaint three
times. The current version, the Third Amended Complaint (“TAC”), was filed in July 2016 and is the first complaint to name Kirk as a defendant and to incorporate allegations based on the Audit Committee ’ s June 8

- K findings. The TAC alleges (1) violations of § 10(b) of the Securities and Exchange Act 5 and SEC Rule 10b

- 5 6 by all defendants and (2) violations of § 20(a) of the Securities and Exchange Act 7 by the individual defendants ( “ control person
claims ” ) on behalf of ever y purchaser of Hanger stock between July 27, 2011 and February 26, 2016 (the “ Class Period ” ). Each defendant filed a motion to dismiss in September 2016. The district court granted the motions with prejudice, and the Fund appeals.
II

. L EGAL S TANDARDS To state a claim under § 10(b) and Rule 10b

- 5, a plaintiff must allege “ (1) a material misrepresentation (or omission), (2) scienter, i.e., a wrongful state of mind, (3) a connection with the purchase or sale of a security, (4)
reliance

. . . [,] (5) econo mic loss[,] and (6) ‘ loss causation, ’ i.e., a causal connection between the material misrepresentation and the loss. ” 8 “ Under Section 20(a), a person who exerts control over a person who violates any provision of the Securities Exchange Act can be held joi ntly and severally liable

4 Plaintiffs City of Pontiac General Employees’ Retirement System, City of Pontiac Policy and Fire Retirement System, and Lackawanna County Employees’ Retirement Fund had all withdrawn their motions for appointment as lead plaintiff.
5 15 U.S.C. § 78j(b).
6 17 C.F.R. § 240.10b

- 5.
7 15 U.S.C. § 78t(a).
8 Owens v. Jastrow , 789 F.3d 529, 535 (5th Cir. 2015) (quoting Lormand v. U.S. Unwired, Inc. , 565 F.3d 228, 238

– 39 (5th Cir. 2009))

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6 with the primary actor of the underlying securities law violation. ” 9 “ C ontrol person liability is secondary only and cannot exist in the absence of a primary
violation. ” 10 We review a district court ’ s analysis of a motion to dismi ss de novo. 11 A claim under § 10(b) is subject to the heightened pleading standard of Rule 9(b), requiring a plaintiff to “ state with particularity the circumstanc es constituting fraud

. ” 12 The Private Securities Litigation Reform Act (PSLRA) adds two
additio nal pleading requirements. First, a plaintiff must “ specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading, ” and must “ stat e with particularity all facts on which ” allegations made on information and belief a re based

. 13 Second, the complaint must “ state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. ” 14
III. A NALYSIS The district court dismissed the complaint for failing to allege scienter adequately . The Fund maintains that this was error; t he defendants contend
that the district court ’ s dismissal w as correct. T he defendants also assert in the alternative that the complaint does not adequately plead loss causation.
A. Scienter In a securities fraud case, scienter connotes “ an intent to deceive, manipulate, [or] defraud ,” or “ severe recklessness. ” 15 “ Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that

9 Neiman v. Bulmahn , 854 F.3d 741, 746 (5th Cir. 2017) (quoting Flaherty & Crumrine Pre ferred Income Fund, Inc. v. TXU Corp. , 565 F.3d 200, 206 n.4 (5th Cir. 2009)).
10 Southland Sec. Corp. v. INSpire Ins. Sols., Inc. , 36 5 F.3d 353, 383 (5th Cir. 2004)

. 11 Spitzberg v. Hous. Am. Energy Corp. , 758 F.3d 676, 683 (5th Cir. 2014)

. 12 F ED

. R. C IV

. P. 9(b); see Owens, 789 F.3d at 535

. 13 15 U.S.C. § 78u

- 4 (b)(1).
14 Id. § 78u

- 4 (b)(2) (A)

. 15 Owens , 789 F.3d at 536 (quoting Lormand , 565 F.3d at 251 ). Case: 17-50162 Document: 00514587918 Page: 6 Date Filed: 08/06/2018No. 17

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7 involve not merely simple or even inexcusable negligence, but an extreme departure from the standard of ordinary care[.] ” 16 Severe recklessness is present when there is “ a danger of misleading buyers or sellers which is either known to the defendant or is s o obvious that the defendant must have been aware of it. ” 17 To determine whether the complaint states a strong inference of scienter,
court s follow a three

- step process. First, courts must take the complaint ’ s allegations as true. 18 Second, “ courts must cons ider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial

no tice. ” 19 In other words, court s evaluate scienter allegations holistically. 20 When doing so, “ [a] district court may best make sense of scienter allegations by first looking to the contribution of each individual allegation to a strong inference of scienter, especially in a complicated case[.] ” 21 Third, “ the court must take into account plausible opposing inferences. ” 22 To pass muster, “ the inference of scienter must be more than merely ‘ reasonable ’ or ‘ permissible ’

— it must be cogent and compelling, thus strong in light of other explanations. ” 23

“ [A] reasonable person [must] deem the inference of scienter

. . . at least as compelling as any opposing inference one could draw from the facts alleged. ” 24

16 Id. (quoting Abrams v. Baker Hughes Inc. , 292 F.3d 424, 430 (5th Cir. 2002)).
17 Id. (quoting Abrams , 2 92 F.3d at 430).
18 Tellabs , 551 U.S. at 322.
19 Id. (emphasis added).
20 Owens , 789 F.3d at 53 6

– 3 7.
21 Id. The Fund complains that the district court only examined the allegations individually, but the district court explicitly stated that it considered the allegations holistically, and merely examined first the contribution of individual allegations to the

ov erall scienter determination, a pe rmissible approach.
22 Tellabs , 551 U.S. at 323.
23 Id. at 324.
24 Id

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8 We follow the approach taken in prior cases, examining the scien ter allegations to determine whether and to what extent the y contrib ute to an inference of scienter. W e then examine those contributions holistically to determine whether that inference is strong. The Fund contends that the court can strongly infer scienter from allegations related to the following: (1) the magnitude of the restatement and the long period of time that it covers, (2) the individual defendants ’ stock transactions, (3) the Audit Committee ’ s findings, 25 and (4 ) the defendants ’ certifications of Hanger’s SEC filings under
the Sarbanes

- Oxley Act of 2002 ( “ SOX ” ), (5) in spite of the red flags they ignored.
1. Magnitude and Time Period of Restatement The most straightforward allegations of scienter point to the larg e size of the accounting restatement

— $87 million

— and the fact that it occurred over a significant period of time. These allegations provide some basis to infer scienter, but they cannot support a strong inference on their own. 26 “ T he significance of a large accounting err or depends on the circumstances, ” 27 so we must assess the extent of the support in the context of the other allegations.
2. Stock Sales (Motive)

25 These allegations quote and para phrase liberally from the June 8

- K, so t he district court considered it incorporated into the complaint. This was appro priate, because “ [w]hen deciding a motion to dismiss a claim for securities fraud on the pleadings, a court may consider the contents of relevant public disclosure documents which (1) are required to be filed with the SEC, and (2) are actually filed with t he SEC, ” but “ only for the purpose of determining what statements the documents contain. ” Lovelace v. Software Spectrum Inc. , 78 F.3d 1015, 1018 (5th Cir. 1996). Further, a court must consider documents incorporated by reference into a securities fraud com plaint. Tellabs , 551 U.S. at 322. The Fund has not contested that it implicitly incorporated the June 8

- K into its complaint, and thus forfeited any objection on those grounds

. 26 See Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc. , 497 F.3d 546, 552 (5th Cir. 2007) ; Fine v. Am. Solar King Corp. , 919 F.2d 290, 297 (5th Cir. 1990) (“[P] ublication of inaccurate accounting figures, or a failure to follow [Generally Accepted Accounting Principles] , without more, does not establish scienter .”).
27 Owens , 789 F.3d at 541. Case: 17-50162 Document: 00514587918 Page: 8 Date Filed: 08/06/2018No. 17

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9 The next set of allegations concerns motive. T he Fund contends that the
i ndividual defendants intended to inflate the price of Hanger ’ s stock so that they could sell their own stock at a high price. The TAC lists the individual defendants ’ stock tran sactions , and asserts that they sold much more of their stock during the Class P eriod than before.

“ [A]ppropriate allegations of motive and opportunity may meaningfully enhance the strength of the inference of scienter. ” 28 “ However, this is true of insider trading ‘ only ’ when ‘ in suspicious amounts or at suspicious times. ’” 29

“‘ Suspi cious ’ in this context generally means that the ‘ sales are out of line with prior trading practices or at times calculated to maximize personal profit. ’” 30
But , as with accounting restatements, “ [i]nsider trading alone cannot create a strong inference of sc ienter. ” 31 Defendants respond that these alle gations do not support scienter because there is a “ plausible, nonculpable explanation[] ” 32 for the trades: T he defendants sold the stock to cove r tax expenses and pursuant to 10b5

- 1 trading plan s

. “ A 10b5

– 1 plan is an agreement ‘ which allows corporate insiders to set a schedule by which to sell shares ’ over time, and which can ‘ raise an inference that the sales were pre

- scheduled and not suspicious. ’” 33 D efendants support this alternate explanat ion with SEC Forms 4, the disclosures required when

28 Southland , 365 F.3d at 368 (quoting Nathenson v. Zonagen Inc. , 267 F.3d 400, 412 (5th Cir. 2001) )

. 29 Id. (quoting Abrams , 292 F.3d at 435 ); see also Cent. Laborers , 497 F.3d at 552

– 53 ( “ Insider trading can be a strong indicator of scienter if the trading occurs at suspicious times or in suspicious amounts. ” ).
30 Cent. Laborers , 497 F.3d at 553 (quoting Abrams , 29 2 F.3d at 435).
31 Id. ; see Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v. Diodes, Inc. , 810 F.3d 951, 957 (5 th Cir. 2016) ( “ [ M] otive and opportunity standing alone will not suffice [to allege scienter.] ” (quoting Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc. , 537 F.3d 527, 55 3 (5th Cir. 2008) ).
32 Tellabs , 551 U.S. at 324.
33 Cent. Laborers , 497 F. 3d at 554 n.4 (5th Cir. 2007) (quoting Wietschner v. Monterey Pasta Co. , 294 F. Supp. 2d 1102, 1117 (N.D. Cal. 2003)). Case: 17-50162 Document: 00514587918 Page: 9 Date Filed: 08/06/2018No. 17

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10 particular corporate insiders trade corporate stock. The district court took judicial notice of these forms, explaining that the y were the only possible source of the stock sales data in the TAC. The forms state that these transactions were made to cover taxes and pursuant to 10b5

- 1 trading plans. But the Fund argues that the court should not consider these form s because they require an inappropriate factual determination. This court has never explicitly stated whether we ma y look to a Form 4 for plausible explanations of potentially suspicious trades at the pleading stage. Alt hough district courts are divided on this issue, 34 we may look to publically filed SEC documents implicitly incorporated into a complaint. 35 Looking to F orms 4 also seems congruent with the requirement that we consider plausible nonculpable explanations for the defendants ’ conduct. 36
In Central Laborers ’ Pension Fund v. Integrated Electrical Services Inc

. , the defendant offered a divorce decree and a 10b5

- 1 trading plan to explain

34 Compare In re ArthroCare Corp. Sec. Litig. , 726 F. Supp. 2d 696, 722 (W.D. Tex. 2010) ( “ [W]hether or not the stocks in this case were sold pursuant to a 10b5

– 1 trading plan is irrelevant at this stage in the proceedings, as the existence of such a plan is an affirmative defense[.] ” ) , and Freudenberg v. E*Trade Fin. Corp. , 712 F. Supp. 2d 171, 200 (S.D .N.Y. 2010) ( “ A Rule 10b5

– l trading plan may give rise to an inference of scienter because a clever insider might maximize their gain from knowledge of an impending price drop over an extended amount of time, and seek to disguise their conduct with a 10b5

– 1 plan. ” (citation and internal quotation marks omitted)) , with Hopson v. MetroPCS Commc ’ ns, Inc. , No. 3:09

- CV

- 2392

- G, 2011 WL 1119727, at *14 n.14 (N.D. Tex. Mar. 25, 2011) (“[T] he court may properly consider [the 10b5

- 1 trading] plans, and the relevant F orm 4s, when weighing the competing inferences regarding the insider sales. ”) , and In re Sec. Litig. BMC Software, Inc. , 183 F. Supp. 2d 860, 884 (S.D. Tex. 2001) (“B ecause Plaintiffs relied on these documents and because they are integral to determining w hether Plaintiffs allegations give rise to a strong inference of scienter, they are incorporated by reference even though they are not mentioned in the amended complaint. ”)

. 35 See Lovelace , 78 F.3d at 1018.
36 The Fund cites to Rubinstein v. Collins , in which this court declined to consider an argument that suspicious sales “ were made in response to tax considerations, ” because such a contention had no place at the pleading stage

. 20 F.3d 160, 169 n.38 (5th Cir. 1994). But Rubenstein was decided before th e Supreme Court, in Tellabs , required weighing the plausibility of alternate explanations. Case: 17-50162 Document: 00514587918 Page: 10 Date Filed: 08/06/2018No. 17

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11 suspicious trades. 37 The court explained that the decree was properly
considered at the motion to dismiss stage because “ the document ’ s written terms themselves indicate the reason [the defendant] had for selling the
shares. ” 38 But ultimately, neither document made another explanation more plausible because (1) it was “ unclear whether the divorce decree actually

cr eated any financial obligations , ” and (2) “ [the defendant] entered into the [10b5

- 1] Plan during the Class Period. ” 39 Cent ral Laborers suggest s that we may consider the Forms 4, but only in the course of weighing which explanation is more plausible. S elling shares to pay taxes weighs against a nefarious motive , but n either side has pointed to any information about when the defendants entered into the 10b5

- 1 trading plans. W e therefore cannot say that the trading plans mitigate a suggestion of motive, even though that suggestion may be mitigated by a lengthy Class Period. 40 Thus, the trades contribute only slightly to an inference of scienter. 41 We emphasize that , even though we must weigh the plausibility of different explanations for the trades,

we make no factual conclusions at this stage

. 3. Audit Committee Findings

37 497 F.3d at 554

. 38 Id.
39 Id. ; see also Ind. Elec. , 537 F.3d at 543 (finding it “ quite plausible ” that a d efendant would sell stock days after the expiration of a “ lock

- up ” agreement to not sell shares for a period of time).
40 ArthroCare , 726 F. Supp. 2d at 723 ( noting a Fourth Circuit case that “ labeled a class period of 46 months ‘ exceedingly long ’ and declared ‘ such a lengthy class period weakens any inference of scienter that could be drawn from the timing of defendants ’ trades. ’” ( quoting Teachers ’ Ret. Sys. of L a

. v. Hunter , 477 F.3d 162, 185 (4th Cir. 2007)) )

. 41 The parties also cite to several cases in which courts held that different percentages of the sto ck sold did or did not significantly contribute to a strong inference of scienter. But these percentages contribute to a strong inference of scienter only in a holistic c ontext of the allegations in those cases, so particular percentages do not help us

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12 Perhaps the most important of the scienter allegations ar e those concerning the Audit Committee findings as reported in the June 8

- K. 42 The TAC relies primarily on two of the Audit Committee ’ s conclusions. 43 The first specifically identifies Kirk and McHenry: [T]he former Chief Executive Officer [Kirk], former Chief Financial Officer [McHenry], and former Chief Accounting Officer (but not any current executive officers) set an inappropriate “ tone at the top. ” Specifically, emphasis placed by former executive ma nagement on meeting or beating consensus EPS and achieving certain financial targets, may have resulted in certain inappropriate accounting decisions and entries. The second major conclusion also identifies McHenry: “ [I]t is more likely than not that form er employees and officers, including in some instances the former Chief Financial Officer [McHenry] and former Chief Accounting Officer, engaged in inappropriate historical accounting practices relating to management estimates and certain accruals. ” The Fo rm 8

- K discusses these inappropriate accounting practices and concludes that whoever made particular accounting decisions did so for the purpose of achieving financial targets. But these findings are written in the passive voice and do not identify
who mad e tho se adjustments with such intent : For example, “ management ’ s estimate of quarterly cost of materials was inappropriately reduced with the objective of attaining financial targets for those periods[.] ” Also, t he section describing the accountin g practic es concludes : The evidence of the actual purpose of these adjustments of management estimates and other accruals was neither direct nor

42 The February 8

- K contains some of the same conclusions as the June 8

- K, but its conclusions are more general: I t identifies only “ former officers and employees ,” as opposed to the officers identified by title in the June 8

- K

. The June 8

- K is essentially a more detailed version of the February 8

- K, and this analysis is therefore confined to the June 8

- K.
43 As noted above, the Audit Committee also concluded that a former employee had intentionally fabricated records. There is no allegation , however, that an y defendant knew about this fabrication. Case: 17-50162 Document: 00514587918 Page: 12 Date Filed: 08/06/2018No. 17

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13 conclusive. Nor did witnesses interviewed by the Investigative Team acknowledge having made these adjust ments for an imp roper purpose. Nevertheless, based on the evidence uncovered in the Investigation, the Audit Committee has determined that it is more likely than not that in certain interim fiscal periods of 2011 particular adjustments to particular management estimates w ere undertaken for the purpose of enhancing the Company ’ s reported financial results. Based on the evidence uncovered in the Investigation, the Audit Committee has also determined that it is more likely than not that in the years 2010 through 2012, the accrual and release of the “ contingency reserve ” was undert aken for the purpose of inappropriately enhancing the Company ’ s reported financial results.
The question, then, is whether the June 8

- K constitutes particular facts supporting a strong inference of scienter.

a. Group Pleading As an initial matter, both major findings implicate more than one person. The defendants insist that these allegations are thus “ group pleading

. ” “ [T] he

‘ group pleading ’ doctrine in its broadest form allows unattributed corporate
statements [such as press releases] to be charged to one o r more individual defendants based solely on their corporate titles. ” 44 This court does not consider group pleading allegations. 45 The Audit Committee

- based allegations against Asar are that he must have known about the issues identified in the report and al lowed them to continue. These allegatio ns are based on his role as CEO, but the Audit Committee report specifically states that it makes no finding as to his role in the accounting problems. These allegations thus do not support Asar ’ s scienter. Kirk and McHenry are identified by title in the Audit Committee report. These allegations are not group pleading, however, because the report concerns

44 Southland , 365 F.3d at 363.
45 See i d. at 365

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14 only statements about the state of mind of McHenry, Kirk, and others. These allegations do not concern th e allegedly false statements made by these two defendants, nor do they attribute Hanger ’ s statements in the Audit Committee report to them. 46 I n fact , t he Fund describes Kirk ’s and McHenry ’ s alleged ly false statements individually in the complaint

. 47 As we understand it, t he defendants contend that these allegations are

group pleading because they are general allegations of scienter , and they are
not linked to specific statements in the complaint. A plaintiff must allege a
connection between a defendant ’ s scienter and the allegedly false statements, 48
but we have never required different sets of scienter allegations for each
statement. 49 The A udit Committee allegations make this connection by providing a basis (the strength of which we discuss below) for inf er ring Kirk ’s and McHenry ’ s scienter with respect to their accounting decisions , which logically connects to their statements about those accounting decisions. These are not allegations that “ fail[] to specify ” which statements are “ attributable to

46 Cf. , e.g. , Fin. Acquisition Partners LP v. Blackwell , 440 F.3d 278, 287 (5th Cir. 2006) (rejecting allegations as group pleading when “Plaintiffs fail

. . . to allege which Individual Defendant made which statement at that meeting” (emphasis added)); Barrie v. Intervoice

Brite, Inc. , 397 F.3d 249, 261 (5th Cir.), opinion modified on denial of reh’g , 409 F.3d 653 (5th Cir. 2005) (upholding dismissal when plaintiff attributed statements to “management,” but not individuals). McHenry cites various district court cases, but does not explain why our case law requ ires more of a connection than the June 8

- K provides.
47 To the extent that the Audit Committee report states that “officers” or “management” made certain statements, allegations based on those statements would indeed be group pleading. But we consider the Audit Committee report only in the context of whether the defendants have adequately pleaded scienter with respect to the specifically pleaded false statements elsewhere in the complaint.
48 Southland , 365 F.3d at 364 (“[S]c i enter [must] be pleaded with re gard to ‘each act or omission’ sufficient to give ‘rise to a strong inference that the defendant acted with the required state of mind.’” (quoting 15 U.S.C. § 78u

- 4(b))); cf. id. at 365 (“[W]e do not construe allegations contained in the Complaint against the ‘defendants’ as a group as properly imputable to any particular individual defendant unless the connection between the individual defendant and the allegedly fraudulent statement is specifically pleaded.”).
49 See, e.g. , Diodes , 810 F.3d at 957

– 61; Owen s , 789 F.3d at 538

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15 each in dividual defendant. ” 50 The fact that the se allegations pertain to more than one person does not make them group pleading. 51 The allegations against Kirk and McHenry are not categorically barred as group pleading. b. “ Tone at the Top ”
The Fund also contends that we can infer Kirk and McHenry ’ s scienter from the Committee ’ s conclusion that those two set an “ inappropriate tone at the top ” by emphasizing their desire to achieve financial targets. The only court of appeals to have addressed similar allegations concluded that the y did not support an inference of scienter

. 52 In that case, t he Fourth Circuit explained that such admissions “ fail to suggest that defendants intentionally created an environment conducive to accounting fraud; the company simp ly admits that such an environment existed. ” 53 Some district courts have inferred scienter from a company ’ s admissions of an inappropriate tone at the top. In Luna v. Marvell Technology Group , the plaintiff alleged that the inappropriate tone at the top “ a pplied pressure to meet revenue targets not only on sales personnel (who, presumably, could work harder to generate more revenue), but also on finance personnel (who could only work with the transactions they were given). ” 54 But the Luna court also
relied on the fac t that the company terminated its CEO shortly after

50 Southland , 365 F.3d at 365.
51 Cf. Owens , 789 F.3d at 538 n.4 (“These allegations [common to more than one defendant] do not constitute group pleading because they are sufficiently particularized.”).
52 Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc. , 576 F.3d 172, 183 (4th Cir. 2009).
53 Id. ; see also In re Hertz Glob. Holdings, Inc. Sec. Litig. , No. 13

- 7050, 2017 WL 1536223, at *16 (D.N.J. Apr. 27, 2017) ( describing a company’s restatement admitting there was an inappropriate tone at the top and concluding “ although the Restatement admits to mismanagement and admits that the mismanagement impacted company accounting decisions, that b y itself is not actionable” ). Matrix also rejected the same argument that the Fund raises here, that “ tone at the top ” is a term of art critical to strong internal controls. See Matrix , 576 F.3d at 183. Even if that is true, it does not suggest that McHenry and Kirk intended to create that tone or were consciously doing so.
54 No. C 15

- 05447 WHA, 20 17 WL 2171273, at *4 (N.D. Cal. May 17, 2017)

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16 commencing the internal investigation, without terminating any senior or
lower

- level employees, which further supported an inference of the CEO ’ s misconduct in creating the “ tone. ” 55 A nother dist rict court determined that a

company ’ s disclosure that it had “ concerns about tone at the top, ” made it

“ more plausible

. . . tha t the fraud flowed from the top[ ] down. ” 56
We conclude that the instant allegations based on the Audit Committee ’ s finding of an inappropriate tone at the top do not strongly support an inference of scienter. The allegation that Kirk and McHenry set an inappropriate tone at the top gives no information about how they did so. The Fund must plead the requisite scienter “ with respect to each act or omission. ” 57 W ithout knowing what Kirk and McHenry said or did, it is equally credible that they realized that the tone at the top was inappropriate only with hindsight. 58 All we know
about this tone is that Kirk and McHenry emphasized “ meetin g or beating consensus EPS and achieving certain financial targets. ” This court has declined to find a strong inference of scienter in goal s that “ virtually all corporate insiders share. ” 59 These allegations also contrast with Luna in two key ways. First, there is no indication that Kirk and McHenry applied direct pressure to finance personnel. The Audit Committee concludes only that their emphasis on financial targets “ may have ” resulted in inappropriate accounting decisions. Second, it is undisputed in th is case that a former lower

- level employee
orchestrated a large part of the fraud. This makes even more likely the

55 See id. at *5.
56 Fresno Cty. Emp s .’ Ret. Ass ’ n v. comScore, Inc. , 268 F. Supp. 3d 526, 55 1

– 5 2 (S.D.N.Y. 2017)

. 57 15 U.S.C. § 78u

- 4(b)(2)(A)

. 58 Much like accounting errors and restatements “ can easily arise from negligence, oversight or simple mismanagement, ” Abrams , 292 F.3d at 433, so too can “ tones ” become “inappropriate” through negligence.
59 Owens , 789 F.3d at 539. Case: 17-50162 Document: 00514587918 Page: 16 Date Filed: 08/06/2018No. 17

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17 alternative that the fraud flowed from the “ bottom[ ] up ” than from the

“ top[ ] down. ” 60 These deta ils also make it less probable that the corporate officers directed the fraud or acted with severe recklessness. W e emphasize, however, that we are not say ing that allegations based on a company ’ s finding of an “ inappropriate tone at the top ” can never support a strong inference of
scienter. Rat her , we conclude only that the instant allegations contribute minimally to that inference.

c. “ Inappropriate Historical Accounting Practices ” The complaint also alleges, based on the June 8

- K, that McHenr y and at least one other person “ engaged in inappropriate historical accounting practices relating to management estimates and certain accruals. ” This accounting related to (1) inventory valuation, (2) adjustments to estimates and
accruals “ without timely or appropriate analysis, ” 61 and (3) accrual a nd release of a contingency reserve in a manner inconsistent with Generally Accepted Accounting Principles (GAAP) . The Audit Committee also concluded that these practices “ were undertaken for the purpose of enhancing the Company ’ s reported financial result s. ” The Audit Committee ’ s report states that a group (including McHenry) engaged in the improper accounting , and that a subgroup (perhaps as large as the whole group) did so with the requisite scienter. Two aspects of these allegations dampen an inference of McHenry’s scienter. First, the June 8

- K does not identify McHenry’s particular inappropriate pr actices, stating only that he engaged in inappropriate accounting “ in some instances. ” Second, the

repor t is replete with passive voice: I t makes no referenc e to McHenry ’ s objective, only that “ particular adjustments to particular management

60 Cf. comScore , 268 F. Supp. 3d at 552.
61 Specifically, recording adjustments before ana lysis was complete, or modifying analysis to obtain a desired result

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18 estimates were undertaken ” for improper purposes. Nevertheless, t hese allegations support the inference that McHenry shared the objectives of improperly enhancing Hanger ’ s financial results, or that he at least knew that others were doing so. The Audit Committee’s report contributes to an inference of scienter. 62
4. SOX Certifications Several of the false statements that form the basis of the Fund ’ s claims are Hanger ’ s SOX c ertifications. Such certifications require a corporate officer to certify that he or she (1) is “ responsible for establishing and maintaining
internal controls ” and (2) has “ evaluated the effectiveness of the issuer ’ s internal controls. ” 63 According to the Fund, these certifications support scienter because the individual defendants signed them “ [i]n spite of the[] massive accounting problems and falsity. ” We have adopted the Eleventh Circuit ’ s approach to SOX certifications:

“‘ [A] Sarbanes

– Oxley certification is only probative of scienter if ’

. . . . [there are] facts establishing that the officer who signed the certification had a ‘ reason to know, or should have suspected, due to the presence of glaring accounting irregularities o r other “ red flags, ” that the financial statements contained
material misstatements or omissions. ’” 64 Alt hough the Fund does not tie any specific red flags to the SOX certifications, it repeatedly points to the accounting problems and concludes that the ind ividual defendants must have been aware of them. As explained above, the fact that there were accounting

62 McHenry ’ s other arguments contesting t his conclusion are unavailing: H e notes that he is not the subject of a criminal in vestigation; that he was not terminated from Hang er; and that accounting affords a wide latitude for judgment. C f. Owens , 789 F.3d at 544 (explaining that “ it is improper to engage in detailed discussion of GAAP rules, ” including those involving subjective standards, at the motion to dismiss stage).
63 15 U.S.C. § 72 41 (a)(4).
64 Ind. Elec. , 537 F.3d at 545 (quoting Garfield v. NDC Health Corp. , 466 F.3d 1255, 1266 (11th Cir. 2006) ). Case: 17-50162 Document: 00514587918 Page: 18 Date Filed: 08/06/2018No. 17

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19 problems does not necessarily mean that the defendants were aware of these

“ red flags. ” The only other allegations that any defendant was on notice of the accounting problems are those which state that Asar and McHenry “ knew that Hanger ’ s accounting department was overwhelmed and unreliable given the Company ’ s history of accounting and internal control problems, ” and cite (1) prior instances when Hanger delayed financial results, (2) “ material weaknesses in inventory, ” and (3) previously

- announced misstatements. These might be the kind of issues that would give an officer concern, but they do not rise to the level of “ glaring accounting irregularities ” 65 such that it would be

severe ly reckless to ignore them. These issues apparently were public knowledge. T he Fund effectively alleges that the defendants should have known about the accounting irregularities because of their positions in Hanger, but that do es not support the requisite inference. 66 The fact that accounting irregularities existed does not mean that the def endants were necessarily aware of them.
5. Medicare Audits/Janus Implementation The only other potential red flags alleged are Hanger ’ s problems with
Medicare audits and its implementation of Janus

. The Fund contends that Asar and , to a lesser extent, McHenry knew of the problems with Medicare audits, which were heightened by the Janus rollout. The Fund thus contends
that we may infer that Asar and McHenry would have known that Hanger ’ s Medicare claim reserve was inadequate and that they were severely reckless stating otherwise.

65 Ind. Elec. , 537 F.3d at 545.
66 Owens , 789 F.3d at 546 ( “A pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company. ” (quoting Abrams , 292 F.3d at 432) )

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20 The Fund alleges that Asar and McHenry were on notice of the slowdown
in Medicare audit success because (1) Asar and McHenry “ paid close attention to Medicare reimbursements, as demonstrated by their regular discussions with investors about the Company ’ s performance in Medicare audits; ” 67 and (2 ) Medicare reimbursement was critical ly important to Hanger ’ s business. As ex plained above, “ [a] pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company. ” 68 But an exception to this rule exists in cases with “special circumstances”:
The “ special circumstances ” cases exhibit some combination of four considerations that might tip the scales in favor of an inference of scienter. First, the smaller the company the more likely it is that corporate executives would be familiar with the intricaci es of day to day operations. Second, the transaction at issue may have been critical to the company ’ s continued vitality. Third, the misrepresented or omitted information at issue would have been readily apparent to the speaker. Fourth, the defendant ’ s statements were internally inconsistent with one another. 69 Recently, in Neiman v. Bulmahn , this court held that a company with over 60 employees was too large to implicate the first consideration, and an oil well that was “ projected to produce 22.5% of [t he company ’ s] total output ” did not implicate the second consideration. 70 Hanger operated more than 740 clinics

“ with ov er 1,300 clinical practitioners. ” Although Medicare represented 29% of Hanger ’ s sales, that is only slightl y larger than the 22.5% in Nei man , and a far cry from Nathenson v. Zonagen, Inc. , in which “ [s]ubstantially all ” of the

67 Specifically, McHenry told investors “ we are watching [the aud its] very closely, ” and Asar told investors “ [w]e continue to monitor and adapt to the changing reimbursement environment driven by the volume of Medicare audits and delayed appeals process. ”
68 Owens , 789 F.3d at 546 (quoting Abrams , 292 F.3d at 432).
69 D iodes , 810 F.3d at 959 (citations omitted).
70 Neiman , 854 F.3d 741, 750 (5th Cir. 2017)

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21 company ’ s sales depended on one patented product. 71 Further, none of the officers ’ statements were internally inconsistent. T his is n ot a special

circumstances case

. As for Asar ’ s and McHenry ’ s statements that they followed the Medicare
audit s closely , we have held that a CEO ’ s puffery that “ there is nothing in this company that I don ’ t know ” could not support a strong inference of scienter. 72 Such a boast was not suffi ciently specific about what the CEO might have
known. 73 Here, the allegations of what Asar and McHenry knew are more specific, but they use d variations of the phrase “ we are monitoring, ” not “ I am monitoring. ” T hese statements could support knowledge of the Medicare problems, but it is equally possible that they merely mean that Hanger as a
company monitored the audits. The Fund also notes that Asar and McHenry were likely to notice problems related to Medicare because they were aware of the other problems in the accounting department. But , as noted above, these problems were not so glaring as to make Asar and McHenry severely reckless. Knowing that the accounting department was having problems is different from knowing what each of those specific problems were. Asar ’ s and McHenry ’ s
statements thus contribute only slightly to the inference of scienter.
6. Summary As t he allegations pertaining to Kirk an d Asar contribute only slight ly to an inference of scienter, taking them holistically does not allow us to strongly infer scienter as to those two defendants. As to McHenry, however, we conclude that the allegations do support a strong inference of sciente r. From the Audit Committee ’ s report , we can infer that McHenry intended to enhance Hanger ’ s financial results

. Taking the allegations holistically , McHenry ’ s

71 Nathenson , 267 F.3d at 425 (alteration in original)

. 72 Ind. Elec. , 537 F.3d at 535.
73 Id. Case: 17-50162 Document: 00514587918 Page: 21 Date Filed: 08/06/2018No. 17

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22 having had the requisite state of mind is “ cogent ” and “ at least as compelling ” 74 as the alternat e explanations. McHenry ’ s scienter can be imputed to Hanger, but only as to his allegedly false statements. 75
B. Loss Causation The defendants argue that we can nevertheless affirm because the complaint does not a dequately allege loss causation, viz. , the “ causal connection between the material misrepresentation and the [economic] loss suffered by investors

. ” 76 For a plaintiff to plead loss causation adequately , t he negative truthful information ( “ corrective disclosures ” ) must not have already
been known to the market: I f it were , the stock price would have incorporated that information, and its disclosure could not have caused a loss. 77 At the pleading stage, “ plaintiffs are required to all ege the truth that emerged was

‘ related to ’ or ‘ relevant to ’ the defen dants ’ fraud and earlier misstatements

. ” 78 We have explained that “ [t] he test for relevant truth simply means that the truth disclosed must make the existence of the actionable fraud more probable than it would be without that alleged fact, taken as true. ” 79 “ [T] he corrective

74 Tellabs , 551 U.S. at 324.
75 Southland , 365 F.3d at 366.
76 Erica P. John Fund, Inc. v. Halliburton Co. , 563 U.S. 804, 808 (2011) (alteration in original) (citation and internal quotation marks omitted).
77 See Alaska Elec. Pension Fund v. Flowserve Corp. , 572 F.3d 221, 228 (5th Cir. 2009) (per curiam); Greenberg v. Crossro ads Sys., Inc. , 364 F.3d 657, 663 (5th Cir. 2004).
78 Pub. Emps. Ret. Sys. of Miss. v. Amedisys, Inc. , 769 F.3d 313, 321 (5th Cir. 2014)

. 79 Id. The Supreme Court has not addressed whether loss causation must be pleaded under the Rule 8(a) or Rule 9(b) stan dard

. See Dura Pharm., Inc. v. Broudo , 544 U.S. 336, 346 (2005). We have held that a plaintiff need only meet the Rule 8(a) standard when pleading loss causation. See Amedisys, 769 F.3d at 320. To meet the Rule 8(a) pleading standard, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’” Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly , 5 50 U.S. 544, 570 (2007)). The defendants urge us to subject loss causation allegations to the Rule 9(b) standard, but they acknowledge our rule of orderliness and seek only to preserve this argument for further review. S ee Jacobs v. Nat ’ l Drug Intelligence Ctr. , 548 F.3d 375, 378 (5th Cir. 2008). Case: 17-50162 Document: 00514587918 Page: 22 Date Filed: 08/06/2018No. 17

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23 disclosure [need not] be a single disclosure; rather, the truth can be gradually perceived in the marketplace through a series of partial disclosures. ” 80 The Fund has alleged three corrective disclosures. First, o n August 7, 2014, Hanger announced 1.5% decline in the growth of same

- store sales, which Hanger attributed to “ a slowdown in authorizations from payors, ” specifically from Medicare audits, “ amplified ” by the Janus transition. After this disclosure, Hanger ’ s stock price dropped by nearly 25%. Second, o n November 6, 2014, Hanger announced that it would delay releasing its financial statements for the third quarter of 2014 to complete accounting reviews and
in ternal control assessments. A fter that announcement , Hanger ’ s stock price dropped almost 18%. Third, in the February 8

- K , Hanger announced the Audit Committee ’ s preliminary findings. A fter that announcement, Hanger ’ s stock price fell by more than 80%. 81 This announcement included the facts that (1) a former employee had fabricated records, (2) an investigation was in progress and officers “ may have ” engaged in improper activities, and (3) Hanger had overstated its accounts receivable and understated its reserves by approximately $40 million.
This cou rt’s recent decision in Public Employees Retirement System of Mississippi v. Amedisys is instructive. The partial corrective disclosures in that case included (1) a disappointing announcement ( resignation of corporate offi c ers ), (2) disappointing financial results, and (3) the commencement of the SEC ’ s investigation into the company ’ s billing practices. 82 Although, on their

own, these announcements did not amount to corrective disclosures, the court explained that “ when this series of events is viewed togeth er and within the

80 Amedisys , 769 F.3d at 322 (citing Lormand , 565 F.3d at 261).
81 The Fund expressly rejects that the announcement of the results of the Audit Committee ’ s investigation was a corrective disclosure.
82 Amedisys , 769 F.3d at 322

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24 context of Amedisys ’ s poor second quarter 2010 earnings, it is plausible that
the market

. . . had become aware of the fraud and incorporated that information into the price of Amedisys ’ s stock

. ” 83 The court in Amedisys emphasized that a complaint need not show that that the prior statements

were “ actually false, ” 84 but “ need only allege facts that support an inference that the Defendants ’ misstatements and omissions concealed the circum stances that bear upon the loss[,]

. . . such that Pl a intiffs would have been spared

. . . an ascertainable portion of that loss absent the fraud. ” 85 Because the partial corrective disclosures were closely followed by a fall in the

company ’ s stock price, the allegations satisfied the loss causation pleading

re quirement “ in the absence of any oth er contravening negative event. ” 86 The three corrective disclosures here similarly build on one another. The
Fund has alleged that , in falsely overstating Hanger ’ s Medicare audit success and without sufficient internal controls, the defendants did not adequately reserve for the audit failures in Hanger ’ s accounts receivable, which reflected this expected revenue. The disclosures about decreased growth in same
- store sales and delaying financial results revealed problems with Medica re audits and internal controls. T he February 8

- K also revealed that these problems were likely not isolated , plausibly indicating that they had caused significant overstatements of Hanger ’ s accounts receivables over a prolonged time pe riod. Coupled with the immediate drops in stock price, and “ in the absence of any
oth er contravening negative event, ” 87 the Fund has adequately pleaded loss causation.

83 Id. at 325

. 84 Id. at 324 n.5.
85 Id. at 325

. 86 Id. at 325

– 26.
87 Amedisys , 769 F.3d at 326. Case: 17-50162 Document: 00514587918 Page: 24 Date Filed: 08/06/2018No. 17

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25 C. Control Person Claims
B ecause the complaint states a claim against McHenry, it also sta tes a claim against Hanger with respect to McHenry ’ s allegedly false statements. 88 As a result, the individual defendants could b e subject to the § 20(a) claims,
which make a “ controlling person ” jointly and severally liable with the corporation

. 89 The briefing contains only a cursory argument about whether Asar, Kirk, or McHenry were “ controlling persons. ” Accordingly, we remand to
the district court for it to consider in the first instance whether to dismiss the § 20(a) claims. 90
IV. C ONCLUSION For the reasons stated above, we hold that the district court did not err in dismissing the § 10(b) claims against Asar and Kirk, but did err in dismissing the § 10(b) claims against McHenry and Hanger (with respect to McHenry ’ s statements only). We therefore AFFIRM the district court’s judgment in part, REVERSE it in part, and REMAND for further proceedings consistent with this opinion.

88 Cf. Southland , 365 F.3d at 366.
89 15 U.S.C. § 78t(a); Southland , 365 F.3d at 383.
90 See Nathenson , 267 F.3d at 426 n.29 (noting that the district court should consider on remand whether the complaint stated a § 20(a) claim against directors whose § 10(b) claims were dismissed while the claims against the company and CEO survived). Case: 17-50162 Document: 00514587918 Page: 25 Date Filed: 08/06/2018No. 17

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26 JAMES C. HO, Circuit Judge, dissenting in part: Congress requires plaintiffs in federal securities fraud cases to plead with great specificity. Under the Private Securities Litigation Reform Act of 1995 (PSLRA), a complaint must, “ with respect to each act or omission, ” “ state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind. ” 15 U.S.C. § 78u

– 4(b)(2)(A). Accordingly, for a securities fraud plaintiff to survive a motion to dismiss, it is not enough to simply assert that a defendant made a false statement with the requisite state of mind. Rather, the pl aintiff must plead specific facts that support a strong inference that the defendant made a false statement with the requisite state of mind. See , e.g. , Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v. Diodes, Inc. , 810 F.3d 951, 961 (5th Cir. 2016) (“ Whether viewing the above three classes of allegations individually or as a whole, [plaintiff] has inadequately pled facts in its
amende d complaint that give rise to a strong inference of scienter on the part of the defendants. ”); Ind. Elec. Worke rs’ Pension Tr. Fund IBEW v. Shaw Grp.,
Inc. , 537 F.3d 527, 533 (5th Cir. 2008) (“[F]or ‘each act or omission alleged’ to be false or misleading, plaintiffs must ‘state with particularity facts giving rise to a strong inference that the defendant acted wit h the required state of
mind. ’” ); Horizon Asset Mgmt. Inc. v. H& R Block, Inc. , 580 F.3d 755, 761 (8th Cir. 2009) (“ [Plaintiff] must nevertheless raise a strong inference of scienter for each defendant and with respect to each alleged misrepresentation.”)

. In crafting this strict pleading requirement, Congress balanced competing concerns. On the one hand, an overly stringent pleading standard
could result in under

- enforcement of the securities laws

— some meritorious cases might be dismissed on the pleadings. On the other hand, applying the ordinary pleading standard in the securities fraud context could result in over

enforcement

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27 if they are permitted to survive the pleading stage. See , e.g. , Me rrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit , 547 U.S. 71, 81 (2006). By enacting the PSLRA, Congress made the policy judgment that the societal value lost from dismissing certain meritorious suits is outweighed by the societal cost of permitting abu sive securities fraud claims to survive the pleading stage. See
id. at 81

– 82. In this case, the operative complaint alleges that false statements were made. But it fails to connect those false statements to a particular person who acted with the requisit e intent. The majority focuses on the allegedly false statements made by Hanger’s CFO, George McHenry. It does so based almost entirely on findings made by Hanger’s Audit Committee. As the majority recounts, the Audit Committee Report explains that “[i]t is more likely than not” that “former employees and officers”

— a group that includes, but is not limited to, McHenry

— “engaged in inappropriate historical accounting practices relating to management estimates and certain accruals.” Op. 12. It also states that “management’s estimate of quarterly cost of materials was inappropriately reduced with the objective of attaining financial targets” for certain periods. Op. 12. But the majority acknowledges that the Audit Committee Report does
not tell us which ina ppropriate accounting practices McHenry engaged in. See Op. 1 7

– 18 (“[T]he June 8

- K does not identify McHenry’s particular inappropriate practices.

. . . [The Report] makes no reference to McHenry’s objective.”). It tells us that someone may have engaged in inappropriate accounting practices with the requisite scienter. But it does not tell us whether McHenry or any other specific person did so. There is no indication of the size of group that likely engaged in inappropriate accounting, no indication that the individuals in that group worked together or actively coordinated, and no indication as to McHenry’s particular state of mind. See Op. 12 (“But [the Report’s] findings Case: 17-50162 Document: 00514587918 Page: 27 Date Filed: 08/06/2018No. 17

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28 are written in the passive voice and do not identify who made t hose adjustments with such intent.”). Instead, the complaint broadly alleges that the Audit Committee Report “prove[s] that Defendants were fraudulently manipulating Hanger’s financial results and deliberately intended to defraud investors .” But the compl aint makes no effort to demonstrate which portions of the Report show that McHenry, or any other defendant, had the requisite scienter. As a result, the complaint falls short of PSLRA’s stringent pleading standard. The majority concludes that the Audit Co mmittee Report “support[s] the inference” that McHenry “shared the objectives of improperly enhancing Hanger’s financial results, or that he at least knew that others were doing so,” and therefore possessed the requisite scienter. Op. 18. But merely “supp ort[ing]” or “contribut[ing] to” an inference of scienter is not enough. Op. 18. The PSLRA requires plaintiffs 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. § 78 u

– 4(b)(2)(A) (emphasis added). “To qualify as ‘strong’ .

. . an inference of scienter must be more than merely plausible or reasonable

— it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 314 (2007). To be sure, the majority takes the allegations “ holistically” before concluding that the pleadings give rise to a strong inference of scienter as to McHenry. Op. 21

– 22. But it i s unclear what meaningfull y contributes to a strong inference of scienter other than the Audit Committee Report

— in fact, the majority concludes that the other allegations of scienter contribut e only slightly or not at all. See Op. 21

– 22 (“ From the Audit Committee’s report, we can infer that McHenry intended to enhance Hanger’s financial results. ”). Case: 17-50162 Document: 00514587918 Page: 28 Date Filed: 08/06/2018No. 17

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29 * * * Our role as judges is to faithfully interpret the text of the statutes passed by Congress. The plaintiffs in this suit failed to satisfy the stringent pleading requirements set fo rth in the PSLRA. Accordingly, the judgment of the district court should be affirmed in full. I respectfully dissent. Case: 17-50162 Document: 00514587918 Page: 29 Date Filed: 08/06/2018