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:

Plaintiff-Appellant Alaska Electrical Pension Fund (“the Fund”) is a

pension fund representing a class of investors. It claims that DefendantsAppellees Hanger, Inc. (“Hanger”) and three of its officers engaged in securities 

fraud. The Fund’s allegations are based predominantly on a report by Hanger’s 

Audit Committee after Hanger restated 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. For 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

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I. FACTS AND PROCEEDINGS

Hanger is the largest provider of orthotic and prosthetic patient care 

services in the United States.1 Hanger’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 samestore sales for every quarter since 2005.

Defendant Thomas Kirk was Hanger’s President from 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, Congress 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. 

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The Fund contends that, despite these problems, Hanger continued to 

claim success in its Medicare audits and maintained that it had sufficient 

internal controls to ensure that it passed audits. Consequently, 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 weaknesses in its 

inventory accounting. In its SEC filings, the individual defendants certified 

that these were 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 medium (e.g., SEC filing, press release, or conference call) for each 

statement. The allegedly false statements 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 

successful than they actually were; that its reserves estimates were adequate;

and that the Janus implementation caused minimal disruption. Third, the 

Fund claims that Hanger falsely assured investors that its internal controls 

were adequate. Finally, the Fund claims that even after Hanger began 

disclosing a series of problems—most prominently announcing in February 

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2015 that it would reissue financial statements for 2012 through the second 

quarter of 2014—Hanger 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. Hanger eventually admitted to 

overstating 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,”

although it did not identify those 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 released 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. 

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C. Proceedings

In February 2015, after 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 

Act5 and SEC Rule 10b-56 by all defendants and (2) violations of § 20(a) of the 

Securities and Exchange Act7 by the individual defendants (“control person 

claims”) on behalf of every 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. LEGAL STANDARDS

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) economic 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 jointly 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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with the primary actor of the underlying securities law violation.”9 “Control 

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 dismiss 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 circumstances constituting 

fraud.”12 The Private Securities Litigation Reform Act (PSLRA) adds two 

additional 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 “state with particularity all facts on 

which” allegations made on information and belief are 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. ANALYSIS

The district court dismissed the complaint for failing to allege scienter

adequately. The Fund maintains that this was error; the defendants contend 

that the district court’s dismissal was correct. The 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 

Preferred 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., 365 F.3d 353, 383 (5th Cir. 2004). 11 Spitzberg v. Hous. Am. Energy Corp., 758 F.3d 676, 683 (5th Cir. 2014). 12 FED. R. CIV. 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). 

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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 so obvious that the defendant must have been 

aware of it.”17

To determine whether the complaint states a strong inference of scienter, 

courts follow a three-step process. First, courts must take the complaint’s 

allegations as true.18 Second, “courts must consider 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 

notice.”19 In other words, courts 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, 292 F.3d at 430).

18 Tellabs, 551 U.S. at 322.

19 Id. (emphasis added). 

20 Owens, 789 F.3d at 536–37. 

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 

overall scienter determination, a permissible approach. 

22 Tellabs, 551 U.S. at 323.

23 Id. at 324.

24 Id.

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We follow the approach taken in prior cases, examining the scienter 

allegations to determine whether and to what extent they contribute to an 

inference of scienter. We 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 large 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 “The

significance of a large accounting error 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 paraphrase liberally from the June 8-K, so the district 

court considered it incorporated into the complaint. This was appropriate, 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 the 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 complaint. 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.

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The next set of allegations concerns motive. The Fund contends that the 

individual 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 transactions, and asserts that they sold much more of their 

stock during the Class Period 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

“‘Suspicious’ 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 scienter.”31

Defendants respond that these allegations do not support scienter

because there is a “plausible, nonculpable explanation[]”32 for the trades: The 

defendants sold the stock to cover tax expenses and pursuant to 10b5-1 trading 

plans. “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 Defendants support 

this alternate explanation 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, 292 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 (5th 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, 553 (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)).

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particular corporate insiders trade corporate stock. The district court took 

judicial notice of these forms, explaining that they 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 forms because 

they require an inappropriate factual determination.

This court has never explicitly stated whether we may look to a Form 4 

for plausible explanations of potentially suspicious trades at the pleading 

stage. Although district courts are divided on this issue,34 we may look to 

publically filed SEC documents implicitly incorporated into a complaint.35

Looking to Forms 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 Form 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) (“Because Plaintiffs relied on these documents and 

because they are integral to determining whether 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 the Supreme Court, in Tellabs, required weighing the 

plausibility of alternate explanations.

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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 

created any financial obligations,” and (2) “[the defendant] entered into the 

[10b5-1] Plan during the Class Period.”39 Central Laborers suggests that we 

may consider the Forms 4, but only in the course of weighing which 

explanation is more plausible. Selling shares to pay taxes weighs against a 

nefarious motive, but neither side has pointed to any information about when

the defendants entered into the 10b5-1 trading plans. We 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 defendant 

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 La. 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 stock 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 context of the 

allegations in those cases, so particular percentages do not help us. 

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Perhaps the most important of the scienter allegations are 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 management

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 former 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 Form 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 made those 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, the section 

describing the accounting practices 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: It 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 any defendant knew 

about this fabrication. 

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conclusive. Nor did witnesses interviewed by the Investigative 

Team acknowledge having made these adjustments for an 

improper 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 were 

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 undertaken 

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 or 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 allowed them to continue. These allegations 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 id. at 365.

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only statements about the state of mind of McHenry, Kirk, and others. These 

allegations do not concern the allegedly false statements made by these two 

defendants, nor do they attribute Hanger’s statements in the Audit Committee 

report to them.46 In fact, the Fund describes Kirk’s and McHenry’s allegedly

false statements individually in the complaint.47

As we understand it, the 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 Audit Committee allegations make this connection by 

providing a basis (the strength of which we discuss below) for inferring 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. IntervoiceBrite, 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 requires 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]cienter [must] be pleaded with regard 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; Owens, 789 F.3d at 538–46. 

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each individual defendant.”50 The fact that these 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 they did not 

support an inference of scienter.52 In that case, the Fourth Circuit explained 

that such admissions “fail to suggest that defendants intentionally created an 

environment conducive to accounting fraud; the company simply 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 “applied 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 fact 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 by 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, 2017 WL 2171273, at *4 (N.D. Cal. May 17, 2017).

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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 Another district court determined that a 

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

“more plausible . . . that 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 Without 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 “meeting or beating 

consensus EPS and achieving certain financial targets.” This court has 

declined to find a strong inference of scienter in goals 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 this 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. Emps.’ Ret. Ass’n v. comScore, Inc., 268 F. Supp. 3d 526, 551–52 

(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. 

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

“top[ ]down.”60 These details also make it less probable that the corporate 

officers directed the fraud or acted with severe recklessness. We emphasize, 

however, that we are not saying that allegations based on a company’s finding 

of an “inappropriate tone at the top” can never support a strong inference of 

scienter. Rather, 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 McHenry 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 and 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 results.”

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 practices, stating only 

that he engaged in inappropriate accounting “in some instances.” Second, the 

report is replete with passive voice: It makes no reference 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 analysis was complete, or modifying 

analysis to obtain a desired result.

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estimates were undertaken” for improper purposes. Nevertheless, these 

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 certifications. 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 or other “red flags,” that the financial statements contained 

material misstatements or omissions.’”64 Although the Fund does not tie any 

specific red flags to the SOX certifications, it repeatedly points to the 

accounting problems and concludes that the individual defendants must have 

been aware of them. As explained above, the fact that there were accounting 

 

62 McHenry’s other arguments contesting this conclusion are unavailing: He notes that 

he is not the subject of a criminal investigation; that he was not terminated from Hanger;

and that accounting affords a wide latitude for judgment. Cf. 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. § 7241(a)(4).

64 Ind. Elec., 537 F.3d at 545 (quoting Garfield v. NDC Health Corp., 466 F.3d 1255, 

1266 (11th Cir. 2006)). 

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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 

severely reckless to ignore them. These issues apparently were public 

knowledge. The Fund effectively alleges that the defendants should have 

known about the accounting irregularities because of their positions in Hanger, 

but that does not support the requisite inference.66 The fact that accounting 

irregularities existed does not mean that the defendants 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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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 critically important to Hanger’s business. 

As explained 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 intricacies 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 [the company’s] total output” did not 

implicate the second consideration.70 Hanger operated more than 740 clinics 

“with over 1,300 clinical practitioners.” Although Medicare represented 29% of 

Hanger’s sales, that is only slightly larger than the 22.5% in Neiman, 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 audits] 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 Diodes, 810 F.3d at 959 (citations omitted). 

70 Neiman, 854 F.3d 741, 750 (5th Cir. 2017).

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company’s sales depended on one patented product.71 Further, none of the 

officers’ statements were internally inconsistent. This is not a specialcircumstances case.

As for Asar’s and McHenry’s statements that they followed the Medicare 

audits 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 sufficiently specific about what the CEO might have 

known.73 Here, the allegations of what Asar and McHenry knew are more 

specific, but they used variations of the phrase “we are monitoring,” not “I am 

monitoring.” These 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 the allegations pertaining to Kirk and Asar contribute only slightly

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 scienter. 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. 

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having had the requisite state of mind is “cogent” and “at least as compelling”74

as the alternate 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 adequately 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, the 

negative truthful information (“corrective disclosures”) must not have already 

been known to the market: If 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 allege the truth that emerged was 

‘related to’ or ‘relevant to’ the defendants’ 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. Crossroads 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) standard. 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, 550 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. See Jacobs v. Nat’l 

Drug Intelligence Ctr., 548 F.3d 375, 378 (5th Cir. 2008).

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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, on 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, on November 

6, 2014, Hanger announced that it would delay releasing its financial 

statements for the third quarter of 2014 to complete accounting reviews and 

internal control assessments. After that announcement, Hanger’s stock price 

dropped almost 18%. Third, in the February 8-K, Hanger announced the Audit 

Committee’s preliminary findings. After 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 court’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 

officers), (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 together 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 322–24.

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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 

circumstances that bear upon the loss[,] . . . such that Plaintiffs 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 

requirement “in the absence of any other 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 Medicare audits 

and internal controls. The 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 period. 

Coupled with the immediate drops in stock price, and “in the absence of any 

other 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.

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C. Control Person Claims

Because the complaint states a claim against McHenry, it also states a 

claim against Hanger with respect to McHenry’s allegedly false statements.88

As a result, the individual defendants could be 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. CONCLUSION

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).

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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 plaintiff 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 

amended complaint that give rise to a strong inference of scienter on the part 

of the defendants.”); Ind. Elec. Workers’ 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 with 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 overenforcement—some unmeritorious cases could lead to in terrorem settlements 

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if they are permitted to survive the pleading stage. See, e.g., Merrill 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 abusive 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 requisite 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 inappropriate accounting practices McHenry engaged in. See 

Op. 17–18 (“[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 

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are written in the passive voice and do not identify who made those 

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 complaint 

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 Committee 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 “support[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. § 78u–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 is unclear what 

meaningfully contributes to a strong inference of scienter other than the Audit 

Committee Report—in fact, the majority concludes that the other allegations 

of scienter contribute 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.”).

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* * *

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 forth in the PSLRA. Accordingly, the judgment of the district 

court should be affirmed in full. I respectfully dissent.

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