In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 17-2697

PENSION TRUST FUND FOR OPERATING ENGINEERS, et al.,

Plaintiffs-Appellants,

v.

KOHL’S CORPORATION, et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Eastern District of Wisconsin.

No. 13-CV-1159 — J. P. Stadtmueller, Judge.

____________________

ARGUED JANUARY 16, 2018 — DECIDED JULY 12, 2018

____________________

Before WOOD, Chief Judge, and ROVNER and HAMILTON,

Circuit Judges.

WOOD, Chief Judge. In September 2011, Kohl’s Corporation 

announced that it was correcting several years of its financial 

filings because of multiple lease accounting errors. Hard on 

the heels of that announcement came a putative class action 

complaint. The plaintiffs, led by the Pension Trust Fund for 

Operating Engineers, allege that Kohl’s and two of its executives defrauded investors by publishing false and misleading 
2 No. 17-2697

information in the lead-up to the corrections. (For ease of exposition, we refer to the putative class as the Pension Fund.)

The Pension Fund took the position that one can infer that the 

defendants knew that these statements were false or recklessly disregarded that possibility at the time they were made,

because Kohl’s recently had made similar lease accounting errors. Despite those earlier errors, it was pursuing aggressive 

investments in its leased properties, and at the same time, 

company insiders sold considerable amounts of stock.

The district court dismissed the complaint for failure to 

meet the enhanced pleading requirements for scienter imposed by the Private Securities Litigation Reform Act 

(PSLRA). The court entered that dismissal with prejudice, declining to give the Pension Fund even one opportunity to 

amend to cure the defects. The Pension Fund now appeals

both the dismissal of the complaint and the district court’s decision to enter it with prejudice. Because the first complaint 

fell short and the Pension Fund has not been able to suggest

how an amendment might help, we affirm.

I

Kohl’s runs over one thousand department stores across 

the United States. About 65 percent of those stores are 

leased—a fact that makes lease obligations a significant component of Kohl’s financial picture. The treatment of those 

leases has caused Kohl’s accountants and external auditors 

some trouble in recent years. The company was forced to adjust its accounting practices three times—in 2005, 2010, and 

2011—to bring its books in line with generally accepted accounting principles (“GAAP”). The first and third of these 

corrections were material and required the restatement of sev-
No. 17-2697 3

eral years’ worth of financial statements. The second was comparatively minor and required an adjustment to income in 

one quarter. The Pension Fund asserts that these recurring 

lease accounting errors show that Kohl’s, its CEO Kevin Mansell, and its CFO Wesley McDonald were at least reckless in 

overseeing the company’s lease accounting practices by the 

time of the second and third corrections. Specifically, the Pension Fund contends that purchasers of Kohl’s stock from February 26, 2009, to September 13, 2011 (the “class period”),

were defrauded by knowing or reckless false statements in 

Kohl’s financial reports. 

The Pension Fund advanced two theories of liability in the 

district court: securities fraud in violation of section 10(b) of 

the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and 

SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, against all defendants,

and “controlling person” liability under section 20(a) of the 

Securities Exchange Act, 15 U.S.C. § 78t(a), against Mansell 

and McDonald. We can limit our discussion to section 10(b) 

and Rule 10b-5, because a violation of those provisions is necessary to support a violation of section 20(a). Pugh v. Tribune 

Co., 521 F.3d 686, 693 (7th Cir. 2008). 

To state a claim under section 10(b), a plaintiff must plead 

“(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic 

loss; and (6) loss causation.” Id. We can narrow our focus even 

further, for the scienter element is the only point of dispute 

between the parties. We review the sufficiency of scienter

pleadings de novo. Id. at 692.
4 No. 17-2697

Scienter pleadings in securities fraud class actions must 

satisfy a heightened standard of plausibility. Through the 

PSLRA, Congress requires that plaintiffs “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). For a case under section 

10(b), that state of mind is “an intent to deceive, demonstrated 

by knowledge of the statement’s falsity or reckless disregard 

of a substantial risk that the statement is false.” Higginbotham 

v. Baxter Int’l, Inc., 495 F.3d 753, 756 (7th Cir. 2007).

The Supreme Court has told us that a complaint gives rise 

to a strong inference of scienter “only if a reasonable person 

would deem the inference of scienter cogent and at least as 

compelling as any opposing inference one could draw from 

the facts alleged.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 

U.S. 308, 324 (2007). In making this determination, the allegations in the complaint “are accepted as true and taken collectively.” Id. at 326. We must consider the relative probability of 

whether, taken as a whole, the false statements alleged here 

were “the result of merely careless mistakes at the management level based on false information fed it from below” or 

reflect “an intent to deceive or a reckless indifference to 

whether the statements were misleading.” Makor Issues & 

Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 709 (7th Cir. 2008). If

the latter inference is not at least as compelling as the former, 

dismissal is appropriate.

II

Most of the Pension Fund’s complaint recounts the details 

of the accounting errors and Kohl’s financial restatements, but

both sides argue that we need not wade too deeply into those
No. 17-2697 5

details. The Pension Fund insists that because Kohl’s repeatedly made lease accounting errors, something is up—where 

there’s smoke, there’s fire. But this inference depends on how 

(dis)similar the errors are. Kohl’s counters that technical accounting errors such as these are well below the pay grade of 

its executives. But leases are a significant part of Kohl’s financial picture that cannot be expected to evade executive 

knowledge altogether. See S. Ferry LP, No. 2 v. Killinger, 542 

F.3d 776, 784 (9th Cir. 2008) (concluding that a “core-operations inference” can support scienter after Tellabs). We decline 

to take either simplistic approach. Tellabs’s repeated emphasis 

on looking at the facts “holistically” tells us that we must do 

more. 551 U.S. at 326. To apply the PSLRA meaningfully, we 

must dig deeper into the accounting and other allegations the 

Pension Fund has raised. After we have done this, we step 

back to look at what inferences can be drawn from the evidence as a whole.

A

As detailed in the complaint, all three sets of errors were 

announced through SEC filings accompanied by press releases and on at least one occasion, an investor conference call. 

The first restatement came on February 22, 2005. Kohl’s announced that it was adjusting the period over which its lease 

obligations were reported. GAAP does not allow firms simply 

to record lease obligations when they are paid; rather, firms 

must record start and end dates that reflect the economic reality of the lease. As part of the restatement, Kohl’s adjusted 

how it calculated both the start and the end of lease terms. 

Previously, Kohl’s had fixed the start of each lease term as the 

date when it began making payments; as revised, it would set 
6 No. 17-2697

the start as the earlier of the date of first payment or first possession of the building. Similarly, Kohl’s formerly set the end 

of the term at the conclusion of the initial non-cancelable lease 

term; as revised, it would recognize the lease through the expected term, including some cancelable option periods. These 

changes required Kohl’s to restate its financial statements 

from 1998 through the third quarter of 2004. 

Kohl’s next set of accounting adjustments came in the fall 

of 2010. The company first identified the errors in November, 

before publicizing its final adjustments in December. These 

adjustments concerned (again) the start dates of the lease

terms. It seems that Kohl’s may have overcorrected in 2005. 

Kohl’s had used the date of first possession as the start date 

for some leases even though the obligation to pay rent began 

earlier, contrary to its 2005 disclosures. Additionally, Kohl’s 

adjusted depreciation expenses across the terms of some 

leases and corrected miscategorized incentive payments from 

landlords. Together, these changes were not material to past 

financial statements, but they resulted in a $50 million adjustment to income in the third quarter of 2010. 

Finally, in August 2011 Kohl’s announced that it had discovered another round of accounting errors. These errors 

were of a different type. This time, Kohl’s had failed to reclassify many of its operating leases as capital leases after making 

significant investments in the affected stores. Operating leases 

have no impact on the balance sheet. Rental payments are expensed, the rented property is not counted as an asset, and 

future rent payments are not recognized as liability. By contrast, capital leases have a significant effect on the balance 

sheet. The leased property is recognized as an asset and future

rent obligations as liabilities. Rental payments are treated not 
No. 17-2697 7

as a rental expense, but instead as a combination of depreciation expense and interest expense.

These changes were significant—indeed, firms will often 

go to great lengths to keep their financial obligations off the 

balance sheet. See Paul B.W. Miller & Paul R. Bahnson, OffBalance-Sheet Financing: Holy Grail or Holey Pail?, ACCT.

TODAY (Oct. 11, 2010), https://www.accountingtoday.com/news/off-balance-sheet-financing-holy-grail-orholey-pail-AT55794 (“Managers strive after [off-balance-sheet 

financing] like the Holy Grail ... .”); but see Tom Petruno, Why 

Corporate Leasing Practices Deserve More Respect, UCLA

ANDERSON REV. (Apr. 4, 2018), https://www.anderson.ucla.edu/faculty-and-research/anderson-review/leasing

(arguing that reforms to operating lease rules “may be targeting an accounting abuse that is more imagined than real”).

Whatever the firm’s preference, GAAP requires leases to be 

categorized as capital when the economic reality of the arrangement makes the lessee more like the owner. 

Simplifying the requirements somewhat, capital-lease

treatment is required if ownership transfers to the tenant at 

the end of the term, if the tenant has the right to purchase the 

property well below its value, or if the term of the lease or 

lease payments amount to a significant portion of the property’s value. In Kohl’s case, McDonald suggested that Kohl’s 

“strategies in negotiating leases and in renovating and constructing stores” created “ongoing financial interest[s]” in the 

leased buildings that warranted capital-lease treatment. “Material weaknesses” in its financial reporting “controls and procedures,” however, allowed these misclassifications to go unnoticed. The next month, Kohl’s restated its financial disclosures from 2006 through the second quarter of 2011, with 
8 No. 17-2697

large effects on Kohl’s balance sheet, but relatively minor effects elsewhere. According to the Pension Fund, Kohl’s had 

understated its liabilities from about 26 to 39 percent annually 

and its assets from about 9 to 12 percent annually as a result 

of these errors. 

The complaint supplements this chronology of accounting 

mistakes and corrections with some additional allegations 

supporting scienter. First, it alleges that Kohl’s leasing 

strategies should have put its executives on alert for potential 

lease accounting issues. By aggressively “renovating and 

constructing stores,” Kohl’s should have known that capitallease treatment was appropriate earlier on. Second, the 

Pension Fund finds highly suspicious a number of stock sales 

by Mansell, McDonald, and other company insiders. Mansell 

sold 138,000 shares for $7,676,400 in September 2009. 

McDonald sold 7,000 shares for $412,000 in September and 

October 2009, and 2,000 shares for $112,500 in November 

2010. Seven other insiders also sold significant numbers of 

shares during the class period. The Pension Fund argues that 

these sales underscore that Mansell and McDonald knew that 

Kohl’s financial statements were false or misleading when 

they were published.

B

Taking these facts together, the Pension Fund has made a

strong case that many of Kohl’s disclosures regarding its lease 

accounting practices turned out to be false. But that is not 

enough. The facts must also give rise to a strong inference of 

scienter. The complaint fails in this regard if it is more likely 

that the errors resulted from “careless mistakes at the management level” than from “an intent to deceive or a reckless 
No. 17-2697 9

indifference to whether the statements were misleading.” Makor Issues & Rights, 513 F.3d at 709. In contrast with the complaint’s exhaustive account of the facts of Kohl’s accounting 

mishaps, the Pension Fund gives us very few facts that would 

point either toward or away from scienter. This lack of connective tissue is determinative in this case. See Tellabs, 551 U.S. at 

326 (noting that “omissions and ambiguities count against inferring scienter”).

The Pension Fund argues that its strongest evidence of scienter is that Kohl’s made similar and significant accounting 

errors in 2005, 2010, and 2011 related to a core part of its business. But these errors are not as similar as the Pension Fund 

suggests. True, one error from 2005 recurred in 2010 (misstating the start date of the lease), but that error led to a relatively 

minor restatement. The errors leading to major restatements 

in 2011 were wholly unrelated to the problems of 2005. The 

classification of leases and the length of lease terms implicate 

different lease accounting rules and affect firms’ financial 

statements in very different ways. Shifting start or end dates 

moves expenses from one period to another, affecting net income across periods. The classification of leases, meanwhile, 

has its primary effect on the balance sheet. The impact and 

considerations are quite different, even if both involve leases.

The Pension Fund tries to overcome the differences between the 2005 and 2011 restatements by arguing that the 2010 

and 2011 restatements should be taken as one. The representations in October and November 2010 that the changes 

would not be material are false, they say, because the 2011 

problems were already known. The problem with this theory 

is that not only is the complaint devoid of evidence to support 

it—there is actually evidence in the complaint undermining 
10 No. 17-2697

it. On June 28, 2011, just over a month before the 2011 lease 

accounting errors were discovered, Kohl’s announced that it 

had secured a $1 billion credit agreement requiring a comprehensive review of its books. Without allegations of facts suggesting otherwise, the temporal proximity of these events 

suggests that an innocent explanation is more likely: the accounting errors were discovered during the comprehensive 

review mandated by contract. To the extent that making the 

same error again and again suggests recklessness, rather than 

negligence, the Pension Fund has failed to tell us why these 

errors are so alike as to make the recklessness inference at 

least as compelling as any other.

That the defendants were employing aggressive investment strategies in their leased properties is similarly of no 

help to the Pension Fund. Perhaps a reasonable person should 

have realized that the number of capital leases on Kohl’s balance sheet should have increased as these investments were 

made. But the allegations do nothing to show why it was reckless, rather than just negligent, that Kohl’s executives did not

realize that something was amiss. Perhaps the executives had 

a motive to pretend nothing was amiss (though even that does 

not seem beyond dispute, as they might equally have wanted 

the most accurate financial picture possible), but a generalized motive common to all corporate executives is not enough

to establish scienter. Otherwise, “virtually every company in 

the United States that experiences a downturn in stock price 

could be forced to defend securities fraud actions.” Zucco 

Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1005 (9th Cir. 

2009) (quoting Lipton v. Pathogenesis Corp., 284 F.3d 1027, 1038 

(9th Cir. 2002)). It is quite possible that Kohl’s accountants or 

external auditors knew they were pushing the boundaries of 

GAAP to keep leases off the balance sheet, but their 
No. 17-2697 11

knowledge is immaterial to the scienter of those making the 

statements. See Makor Issues & Rights, 513 F.3d at 708–09. 

Without more, we cannot say that Kohl’s pursuit of aggressive 

leasehold improvements counsels for or against scienter.

Perhaps suspicious stock sales could tip the balance, but 

the insider trading allegations in this case do not. “[B]ecause 

executives sell stock all the time, stock sales must generally be 

unusual or suspicious to constitute circumstantial evidence of 

scienter.” Pugh, 521 F.3d at 695. The plaintiffs argue that the 

sales in this case are suspicious because Mansell and McDonald made no sales at all in the year before the class period or 

in 2011. But that the individual defendants made sales in 2009 

and 2010 but not in 2008 or 2011 is not enough to render the 

sales unusual. See Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 

162, 185 (4th Cir. 2007) (“[T]he complaint does not provide defendants’ trading patterns outside the class period to permit 

comparison with their trades within the class period.”); Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir. 2001) (finding graphs 

showing trading seven months before and twelve months after the class period insufficient to show trades were suspicious or unusual). Once again, the Pension Fund has given us 

little to go on. The complaint tells us the date of sale, number 

of shares, and sale price for each trade, but nothing else. We 

do not know whether these sales were a high percentage of 

the individual defendants’ holding; we do not know whether 

the individual defendants sold more shares than they typically would; we do not know if they bought more shares to 

offset their sales; we have no sense of the typical trading volume of Kohl’s shares; and we do not know how Kohl’s stock 

price fluctuated around these sales.
12 No. 17-2697

Perhaps we could overlook the complaint’s lack of context 

if the stock sales resembled a smoking gun, but the probative 

value of stock sales depends greatly on timing. The most significant insider sales in this case were made in September 

2009, 14 months before the 2010 corrections were announced

and 23 months before the 2011 corrections were announced. 

These periods are more than long enough for any inference of 

suspicion to dissipate, at least in the absence of concrete facts

suggesting otherwise. See In re Harley-Davidson, Inc. Sec. Litig., 

660 F. Supp. 2d 969, 1002 (E.D. Wis. 2009); In re Party City Sec. 

Litig., 147 F. Supp. 2d 282, 313 (D.N.J. 2001) (“A broad temporal distance between stock sales and a disclosure of bad 

news defeats any inference of scienter.”). With nothing to indicate that these stock sales were unusual or suspicious, they 

cannot support an inference of scienter. 

We have addressed these issues with the complaint one at 

a time, but we recognize that we need to look at the allegations as a whole. Unfortunately for the Pension Fund, this 

does not help. Each allegation in the complaint is advanced 

without any sense of how the dots connect. Tellabs requires 

that a complaint give rise to a “cogent and compelling” inference of scienter. 551 U.S. at 324. The Pension Fund tells us that

Kohl’s made similar, but not identical, lease accounting errors; 

that it did so while management was pursuing an aggressive 

store-improvement strategy; and that insiders sold stock during the same period. This could suggest wrongdoing, but it 

more plausibly suggests negligent oversight of overzealous

accounting staff or some other breakdown lower in the corporate hierarchy. The Pension Fund has not taken the extra step 

to show why these allegations give rise to a strong inference 

of scienter, even considered collectively.
No. 17-2697 13

III

Although we agree with the district court that the complaint fell short of the PSLRA’s requirements, that court was 

so unimpressed that it entered a dismissal with prejudice 

without further ado and refused to entertain an amended 

complaint. We repeatedly have said that “a plaintiff whose 

original complaint has been dismissed under Rule 12(b)(6) 

should be given at least one opportunity to try to amend her 

complaint before the entire action is dismissed.” Runnion ex 

rel. Runnion v. Girl Scouts of Greater Chi. & Nw. Ind., 786 F.3d 

510, 519 (7th Cir. 2015). This admonition carries special weight

in securities fraud cases because “[i]n this technical and demanding corner of the law, the drafting of a cognizable complaint can be a matter of trial and error.” Eminence Capital, LLC 

v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003). Our final

task is to determine whether the district court abused its discretion through its unusual departure from the standard procedure. Foster v. DeLuca, 545 F.3d 582, 583 (7th Cir. 2008).

The district court justified dismissal with prejudice because it thought that the court’s prior rulings “put the plaintiffs on notice of weaknesses in the amended complaint ... .” 

The district court was right that its prior rulings (which were 

issued by a different presiding judge) identified weaknesses 

with the complaint, but those weaknesses were unrelated to 

the reasons for which the complaint was later dismissed. In 

its order denying the defendants’ first motion to dismiss without prejudice for relying too heavily on exhibits, the district 

court noted “ongoing concerns about the prolixity of the 

Amended Complaint—sixty-one pages, with 173 numbered 

paragraphs.” Whatever the merits of the district court’s criti-
14 No. 17-2697

cism, concerns about the complaint’s length could not possibly alert the plaintiffs to problems with their scienter allegations. If anything, they reasonably might have thought that

more length was necessary to meet the PSLRA’s demanding 

standards for pleading scienter. The district court’s earlier criticism thus does not help support the abrupt end of the case.

The defendants argue that the Pension Fund could not 

have been taken by surprise, because defendants had alerted 

the plaintiffs to the weaknesses of the complaint. This argument is a non-starter. If briefing in opposition to a motion to 

dismiss were sufficient basis to deny leave to amend after that 

motion were granted, there would be little left to the general 

rule we have just discussed. The only case the defendants cite 

to the contrary involved denial of leave to amend for the fifth 

time, when the defects had been identified by the motion to 

dismiss the second amended complaint. Huon v. Denton, 841 

F.3d 733, 745–46 (7th Cir. 2016). In other words, the plaintiffs 

in Huon had already amended twice with full knowledge of 

what the defendants would argue. In the usual case, we look 

only to decisions of the court to determine whether the plaintiffs knew of faults with their complaint. See Gonzalez-Koeneke 

v. West, 791 F.3d 801, 806 (7th Cir. 2015) (pointing to “the deficiencies identified in the court’s order granting the motion to 

dismiss”); Bausch v. Stryker Corp., 630 F.3d 546, 562 (7th Cir. 

2010) (“But a formal motion for leave to amend was not necessary at the Rule 12(b)(6) stage, and the plaintiff was entitled 

to wait and see if any pleading problems the court might find 

could be corrected.”). A litigant need not take the opposing 

side’s legal position as gospel; indeed, it frequently would be 

unwise to do so. 
No. 17-2697 15

Although there are problems with the district court’s decision, and better practice might have been to allow one amendment, we find no reversible error here. At bottom, the district 

court was concerned that amendment would be futile, and the 

plaintiffs have done nothing before this court to dispel that 

notion. “[A] district court does not abuse its discretion by 

denying a motion for leave to amend when the plaintiff fails 

to establish that the proposed amendment would cure the deficiencies identified in the earlier complaint.” GonzalezKoeneke, 791 F.3d at 807. While the plaintiffs did not have the 

opportunity to show what they would add before the district 

court dismissed with prejudice, they have had several opportunities since. They could have moved under Federal Rule of 

Civil Procedure 59(e) or 60(b) for another opportunity in the 

district court, see Runnion, 786 F.3d at 521, or they could have 

told us what more they would plead in their briefing. They 

took neither step. We asked at oral argument what the plaintiffs hoped to add if given the opportunity. Again, we were 

given no indication of what new material the plaintiffs could 

provide. Reversal is inappropriate if the plaintiff cannot identify how it would cure defects in its complaint. Arlin-Golf, LLC 

v. Vill. of Arlington Heights, 631 F.3d 818, 823 (7th Cir. 2011).

The Pension Fund made no such showing in the district court 

or on appeal and is not entitled to another chance to do so.

IV

The Pension Fund failed adequately to plead scienter and 

has not suggested how it would amend its pleadings to cure 

this defect. As a result, the judgment of the district court is 

AFFIRMED.