PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

NORMAN OTTMANN, 

Plaintiff-Appellant,

v.

HANGER ORTHOPEDIC GROUP,

INCORPORATED; IVAN R. SABEL;

 No. 02-2283 RICHARD A. STEIN,

Defendants-Appellees,

v.

DAVID CHOPKO; GARY BACKOUS,

Movant-Appellants. 

Appeal from the United States District Court

for the District of Maryland, at Greenbelt.

Alexander Williams, Jr., District Judge.

(CA-00-3508-AW)

Argued: September 25, 2003

Decided: December 22, 2003

Before WILKINS, Chief Judge, and WIDENER

and LUTTIG, Circuit Judges.

Affirmed by published opinion. Chief Judge Wilkins wrote the opinion, in which Judge Widener and Judge Luttig joined. 

COUNSEL

ARGUED: Andrew M. Schatz, SCHATZ & NOBEL, P.C., Hartford,

Connecticut, for Appellants. Glenn M. Kurtz, WHITE & CASE, New
York, New York, for Appellees. ON BRIEF: Jeffrey S. Nobel,

SCHATZ & NOBEL, P.C., Hartford, Connecticut; Charles Juster

Piven, LAW OFFICE OF CHARLES J. PIVEN, Baltimore, Maryland, for Appellants. 

OPINION

WILKINS, Chief Judge: 

Norman Ottmann, David Chopko, and Gary Backous (collectively,

"Appellants") appeal a district court order dismissing their securities

fraud suit against Hanger Orthopedic Group, Inc. (Hanger) and two

of its senior officers, Ivan R. Sabel and Richard A. Stein,1 pursuant

to Federal Rule of Civil Procedure 12(b)(6) and provisions of the Private Securities Litigation Reform Act of 1995 (PSLRA), see 15

U.S.C.A. § 78u-4(b)(1), (2) (West 1997). Finding no reversible error,

we affirm. 

I.

Hanger provides services to patients who require orthotic and prosthetic devices, such as artificial limbs. On July 1, 1999, Hanger

acquired NovaCare Orthotics & Prosthetics (NovaCare), another provider of orthotic and prosthetic devices. Through this acquisition,

Hanger acquired 369 patient care facilities operated by NovaCare, and

it hired former NovaCare personnel, including certified practitioners

qualified to fit orthotic and prosthetic devices. The NovaCare acquisition more than doubled the size of Hanger’s United States operations,

bringing Hanger’s total number of patient care facilities to 636, with

a total of 920 certified practitioners in 42 states and the District of

Columbia. 

On November 8, 1999, Hanger issued a press release reporting

financial results for the third quarter of 1999, which had ended on

September 30. This was the first quarter in which Hanger’s financial

results included the results of the new NovaCare division. The

1We refer to Hanger, Sabel, and Stein collectively as "Appellees." 

2 OTTMANN v. HANGER ORTHOPEDIC GROUP
November 8 press release reported third quarter revenue of $124.9

million and net income of $5.81 million, or $0.24 per share. 

Also on November 8, Sabel, Stein, and another Hanger officer held

a conference call with securities analysts and investors ("the November 8 call"). During this call, the officers reiterated the financial

results set forth in the press release and discussed in detail the integration of NovaCare into Hanger. While the officers made mostly positive comments regarding the integration, they explained that revenue

had been reduced by the departure of some former NovaCare practitioners in connection with the acquisition. 

On January 6, 2000, Appellees announced in another press release

that they expected revenue and earnings for the fourth quarter of 1999

and the year 2000 to fall substantially below analysts’ expectations,

with estimated fourth quarter revenue of $115 million and a breakeven in earnings per share. The next morning, Sabel and Stein participated in another conference call with analysts and investors to discuss

these results ("the January 7 call"). During this call, Stein explained

that Hanger’s disappointing results were attributable to three factors:

(1) additional losses of former NovaCare practitioners, (2) a decision

to conform the revenue recognition practices of the NovaCare division to Hanger’s practices, and (3) a reduction in referral business

from rehabilitation clinics due to the NovaCare acquisition. That same

day (the first trading day after Hanger’s negative financial news was

released), the price of Hanger common stock dropped from the previous day’s closing price of $9.375 per share to as low as $3.75—a

decline of 60 percent—before closing at $4.8125. 

Appellants subsequently brought this proposed class action on

behalf of investors who purchased Hanger stock between November

8, 1999 and January 6, 2000. Appellants claimed that Appellees made

a series of oral and written misrepresentations and omissions of fact

in violation of section 10(b) of the Securities Exchange Act of 1934,

see 15 U.S.C.A. § 78j(b) (West Supp. 2003), and Rule 10b-5, see 17

C.F.R. § 240.10b-5 (2003).2 Appellants later amended their complaint. 

2Appellants also asserted a claim against Sabel and Stein as "controlling person[s]," see 15 U.S.C.A. § 78t(a) (West 1997). This claim

OTTMANN v. HANGER ORTHOPEDIC GROUP 3
Appellees moved to dismiss, arguing that Appellants had failed to

plead with particularity any false or misleading statements by Appellees, the materiality of such statements, or scienter. The district court

agreed and dismissed the amended complaint. The court expressed

"serious doubts as to whether [Appellants would] be able to meet the

threshold requirements for pleading with particularity in a securities

class action suit," J.A. 41, but nevertheless granted Appellants an

opportunity to amend their complaint. Further, the district court gave

Appellants specific guidance regarding how to redraft their complaint.

Appellants subsequently filed a second amended complaint, and

Appellees again moved to dismiss based on essentially the same

grounds asserted in their earlier motion. Emphasizing that it had previously given Appellants an opportunity to plead their claims with

greater particularity, the district court determined that Appellants’

new complaint contained the same defects as the earlier one. Thus,

based on its conclusion that Appellants had "not met the threshold

requirements for pleading with particularity in a securities class action

suit," id. at 332, the district court dismissed the complaint with prejudice. 

II.

To state a claim under section 10(b) and Rule 10b-5, a plaintiff

must allege that "(1) the defendant made a false statement or omission

of material fact (2) with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff’s damages." Phillips v. LCI Int’l, Inc., 190 F.3d 609, 613 (4th Cir. 1999) (internal

quotation marks omitted). At issue here is whether Appellants adequately pleaded the first two elements. We review the dismissal of a

complaint pursuant to Rule 12(b)(6) de novo. See Baird ex rel. Baird

v. Rose, 192 F.3d 462, 467 (4th Cir. 1999). 

requires an underlying violation of the securities fraud laws. See Longman v. Food Lion, Inc., 197 F.3d 675, 686 (4th Cir. 1999). Based on our

conclusion below that Appellants have not adequately pleaded their

claim under § 10(b) and Rule 10b-5, we also conclude that the district

court properly dismissed the "controlling persons" claim. 

4 OTTMANN v. HANGER ORTHOPEDIC GROUP
A. Standards for Material Misrepresentation or Omission

To allege a false statement or omission of material fact, a plaintiff

"must point to a factual statement or omission—that is, one that is

demonstrable as being true or false." Longman v. Food Lion, Inc., 197

F.3d 675, 682 (4th Cir. 1999). Additionally, the plaintiff must allege

that the statement is false or that the omitted fact renders a public

statement misleading. See id. And, "any statement or omission of fact

must be material," i.e., there must be "a substantial likelihood that a

reasonable purchaser or seller of a security (1) would consider the fact

important in deciding whether to buy or sell the security or (2) would

have viewed the total mix of information made available to be significantly altered by disclosure of the fact." Id. at 682-83. Under the

PSLRA, the complaint must "specify each statement alleged to have

been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made

on information and belief, . . . state with particularity all facts on

which that belief is formed." 15 U.S.C.A. § 78u-4(b)(1). 

B. Standards for Scienter

1. Substantive Standard

In a securities fraud action, "the term ‘scienter’ refers to a mental

state embracing intent to deceive, manipulate, or defraud." Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976); see Malone v.

Microdyne Corp., 26 F.3d 471, 478 (4th Cir. 1994). Mere negligence

will not suffice. See Phillips, 190 F.3d at 621. Additionally, every circuit that has considered the issue has held that scienter may also be

established by a showing of recklessness.3See Hudson v. Phillips

3Following the enactment of the PSLRA (which, as explained below,

heightened pleading requirements in securities fraud actions), questions

arose concerning the validity of pre-PSLRA decisions holding that

scienter could be established by a showing of recklessness. See Nathenson v. Zonagen Inc., 267 F.3d 400, 407 (5th Cir. 2001). We have concluded, however, that the PSLRA did not alter the substantive standard

for proving scienter in securities fraud actions. See Phillips, 190 F.3d at

620; see also, e.g., Nathenson, 267 F.3d at 407-08 (reaching same conclusion). But cf. Janas v. McCracken (In re Silicon Graphics Inc. Sec.

Litig.), 183 F.3d 970, 974 (9th Cir. 1999) (apparently concluding that

PSLRA raised scienter standard to "deliberate recklessness," requiring

plaintiffs to "state facts that come closer to demonstrating intent"). 

OTTMANN v. HANGER ORTHOPEDIC GROUP 5
Petroleum Co. (In re Phillips Petroleum Sec. Litig.), 881 F.2d 1236,

1244 (3d Cir. 1989); Van Dyke v. Coburn Enters., 873 F.2d 1094,

1100 (8th Cir. 1989); McDonald v. Alan Bush Brokerage Co., 863

F.2d 809, 814 (11th Cir. 1989); Hackbart v. Holmes, 675 F.2d 1114,

1117-18 (10th Cir. 1982); Broad v. Rockwell Int’l Corp., 642 F.2d

929, 961-62 (5th Cir. Apr. 1981) (en banc); Mansbach v. Prescott,

Ball & Turben, 598 F.2d 1017, 1023-25 (6th Cir. 1979); Sundstrand

Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir. 1977);

cf. Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 46 (2d Cir.

1978) (concluding that scienter may be established by recklessness

"in appropriate circumstances"). However, neither this circuit nor the

Supreme Court has addressed this particular question. See Ernst &

Ernst, 425 U.S. at 194 n.12; Phillips, 190 F.3d at 620 (noting that

scienter "may perhaps be shown by recklessness" (emphasis added)).

In Phillips, we defined "recklessness" as "an act so highly unreasonable and such an extreme departure from the standard of ordinary

care as to present a danger of misleading the plaintiff to the extent

that the danger was either known to the defendant or so obvious that

the defendant must have been aware of it." Phillips, 190 F.3d at 621

(internal quotation marks omitted); see, e.g., Nathenson v. Zonagen

Inc., 267 F.3d 400, 408 (5th Cir. 2001) (articulating same definition

of recklessness); City of Philadelphia v. Fleming Cos., 264 F.3d 1245,

1258 (10th Cir. 2001) (same); In re Advanta Corp. Sec. Litig., 180

F.3d 525, 535 (3d Cir. 1999) (same). Such "severe recklessness" is,

in essence, "a slightly lesser species of intentional misconduct."

Nathenson, 267 F.3d at 408 (internal quotation marks omitted). This

definition of recklessness comports with the observation of the

Supreme Court that "[t]he words ‘manipulative or deceptive’ used in

conjunction with ‘device or contrivance’ strongly suggest that § 10(b)

was intended to proscribe knowing or intentional misconduct." Ernst

& Ernst, 425 U.S. at 197. We therefore agree with our sister circuits

that a securities fraud plaintiff may allege scienter by pleading not

only intentional misconduct, but also recklessness. 

2. Pleading Standard

With this substantive standard in mind, we turn to the requirements

for pleading scienter in securities fraud cases. The PSLRA requires

that "the complaint shall, with respect to each act or omission alleged

6 OTTMANN v. HANGER ORTHOPEDIC GROUP
to violate this chapter, state with particularity facts giving rise to a

strong inference that the defendant acted with the required state of

mind." 15 U.S.C.A. § 78u-4(b)(2). Congress enacted this more stringent pleading standard "to curtail the filing of meritless lawsuits" and

to create a uniform pleading standard among the circuits. H.R. Conf.

Rep. No. 104-369, at 41 (1995), reprinted in 1995 U.S.C.C.A.N. 730,

740. 

The PSLRA thus "seek[s] to heighten the standard for pleading

scienter, and so changes what a plaintiff must plead in his complaint

in order to survive a motion to dismiss."4 Phillips, 190 F.3d at 620

(internal quotation marks & alteration omitted); see id. (noting that

the PSLRA "indisputably seeks to make pleading scienter more difficult for plaintiffs"). Other circuits have reached differing conclusions

regarding the proper interpretation of the requirements for pleading

scienter under the PSLRA. However, we have "not yet determined

which pleading standard best effectuates Congress’s intent." Id. at

621. 

Prior to the enactment of the PSLRA, the Second Circuit required

securities fraud plaintiffs "to allege facts that give rise to a strong

inference" of scienter. Shields v. Citytrust Bancorp, Inc., 25 F.3d

1124, 1128 (2d Cir. 1994). A "strong inference" could be demonstrated "either (a) by alleging facts to show that defendants had both

motive and opportunity to commit fraud, or (b) by alleging facts that

constitute strong circumstantial evidence of conscious misbehavior or

recklessness." Id.

In enacting the PSLRA, Congress adopted the "strong inference"

language used by the Second Circuit, which it regarded as the most

stringent pleading standard in the country. See S. Rep. No. 104-98, at

15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694. However, it is

not clear whether Congress also intended to adopt the Second Circuit

rule permitting plaintiffs to show a strong inference by alleging facts

4The heightened pleading requirements of the PSLRA supersede the

requirements of Federal Rule of Civil Procedure 9(b) in securities fraud

cases, at least with respect to scienter. See Lipton v. Pathogenesis Corp.,

284 F.3d 1027, 1034 n.12 (9th Cir. 2002); Advanta Corp., 180 F.3d at

531 n.5. 

OTTMANN v. HANGER ORTHOPEDIC GROUP 7
demonstrating motive and opportunity. Following enactment of the

PSLRA, the Second Circuit reaffirmed its pre-PSLRA standard. See

Press v. Chem. Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999)

(stating that the PSLRA "heightened the requirement for pleading

scienter to the level used by the Second Circuit"). And, the Third Circuit has held that the pleading standard of the PSLRA is essentially

that of the Second Circuit. See Advanta Corp., 180 F.3d at 533-34.

The Ninth Circuit, however, has concluded that Congress rejected the

Second Circuit "motive and opportunity" standard and therefore that

facts showing motive and opportunity cannot alone establish a strong

inference of scienter. See Janas v. McCracken (In re Silicon Graphics

Inc. Sec. Litig.), 183 F.3d 970, 977-79 (9th Cir. 1999). Similarly, the

Eleventh Circuit has held that the PSLRA did not codify the "motive

and opportunity" standard, and thus, allegations of motive and opportunity, without more, are insufficient to plead scienter. See Bryant v.

Avado Brands, Inc., 187 F.3d 1271, 1285-86 (11th Cir. 1999). 

However, a number of other circuits have concluded that, in enacting the PSLRA, Congress chose neither to adopt nor reject particular

methods of pleading scienter—such as alleging facts showing motive

and opportunity—but instead only required plaintiffs to plead facts

that together establish a strong inference of scienter. See Fla. State

Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 659-60 (8th

Cir. 2001); Nathenson, 267 F.3d at 411-12; Fleming Cos., 264 F.3d

at 1261-63; Helwig v. Vencor, Inc., 251 F.3d 540, 550-52 (6th Cir.

2001) (en banc); Greebel v. FTP Software, Inc., 194 F.3d 185, 195-96

(1st Cir. 1999). In addition to noting the absence of any language in

the PSLRA addressing particular methods of pleading, some of these

courts have observed that the legislative history regarding whether

Congress intended to adopt or reject the "motive and opportunity"

standard is conflicting and inconclusive. See Green Tree Fin. Corp.,

270 F.3d at 657-58; Nathenson, 267 F.3d at 411; Greebel, 194 F.3d

at 194-95. These courts have therefore adopted a case-specific

approach that examines the particular allegations in their entirety to

determine whether they provide the requisite strong inference, "without regard to whether those allegations fall into defined, formalistic

categories such as ‘motive and opportunity.’" Fleming Cos., 264 F.3d

at 1263. Still, these circuits generally agree that specific facts showing

a motive and opportunity to commit fraud (or the absence of such

facts) may be relevant in determining whether a plaintiff’s complaint

8 OTTMANN v. HANGER ORTHOPEDIC GROUP
demonstrates a strong inference of scienter. See, e.g., id.; Helwig, 251

F.3d at 550-51; Greebel, 194 F.3d at 197. 

We agree that a flexible, case-specific analysis is appropriate in

examining scienter pleadings. Both the absence of any statutory language addressing particular methods of pleading and the inconclusive

legislative history regarding the adoption of Second Circuit pleading

standards indicate that Congress ultimately chose not to specify particular types of facts that would or would not show a strong inference

of scienter. See Helwig, 251 F.3d at 551 ("In enacting the PSLRA,

Congress was concerned with the quantum, not type, of proof.");

Greebel, 194 F.3d at 195 ("The history and text [of the PSLRA] show

no agreement to restrict the types of evidence which may be used to

show a strong inference of scienter."). We therefore conclude that

courts should not restrict their scienter inquiry by focusing on specific

categories of facts, such as those relating to motive and opportunity,

but instead should examine all of the allegations in each case to determine whether they collectively establish a strong inference of

scienter. And, while particular facts demonstrating a motive and

opportunity to commit fraud (or lack of such facts) may be relevant

to the scienter inquiry, the weight accorded to those facts should

depend on the circumstances of each case. 

C. Application to Present Facts

Having set forth the applicable legal standards, we now examine

the allegations in Appellants’ complaint to determine whether Appellants have pleaded the disputed elements of their claims with sufficient particularity. Appellants allege that Appellees (1)

misrepresented the number of NovaCare practitioners that departed

after the NovaCare acquisition and the reason for their departures, (2)

failed to promptly disclose NovaCare’s different revenue recognition

method, and (3) failed to promptly disclose the reduction in referral

business due to the acquisition. Appellants also make a series of

"catch-all" allegations that purportedly demonstrate Appellees’

motives to misrepresent or conceal these facts. We consider each of

these allegations in turn. 

OTTMANN v. HANGER ORTHOPEDIC GROUP 9
1. Practitioner Departures

a. Number of Departures

Appellants claim that during the November 8 call, Appellees misrepresented the number of NovaCare practitioners that had left the

company after the acquisition closed on July 1, 1999. During that call,

Stein made the following statement regarding practitioner departures:

As a result of the acquisition and studying the historical

numbers of NovaCare and along with the merging of these

offices, we have realized that there [were] some practitioners that left NovaCare before the transaction took place—

approximately 10 folks. And there were about 10 folks that

left the organization. Some were terminated because they

weren’t producing. And there were a few that resigned. So

as a resulting total of 20 practitioners leaving the organization, there was a loss of business totaling about $8 million.

J.A. 84. Stein also stated that "as a result of eliminating some of these

branches that were not profitable businesses and the loss of some of

these practitioners—and in some cases we terminated the practitioners

—our margins are running better than expected, but our top line is a

little bit less than what we initially forecasted." Id. at 85. Further, in

response to an analyst’s question regarding the departures, Sabel

stated:

I think we’re very confident that there are certainly no indications of any kind of major defection. Keep in mind that

out of the number of practitioner[s] that we lost the current

number that we currently employ are 977 practitioners. And

that’s a pretty formidable number of practitioners. And, in

fact, pre and post we’ve lost about 20 practitioners out of

that group. So it’s certainly not any kind of a trend that we

see.

Id. at 93. 

Appellants contend that the actual net number of practitioners that

10 OTTMANN v. HANGER ORTHOPEDIC GROUP
departed after the July 1 closing but before the November 8 call was

at least 18 (and possibly 19), not 10.5 This allegation is based on comments by Stein during the January 7 call:

I want to explain to you or share with you the trend that has

taken place over the last six months since we’ve owned

NovaCare. The net resignations in the company on a practitioner basis was seven in July. In August it was one. In September it was seven. In October it dropped to three. And in

November it dropped to one, and then in December it

dropped to seven—or it went back up to seven. 

And so you can see as of the end of November this trend—

it was trending down. We thought this phenomenon was

over. It bounced back in December, and we realized that we

were starting to see this problem occur again. 

When you translate the loss of these practitioners into revenues, we’ve experienced a shortfall here in the fourth quarter of $2.25 million in revenue, or 9 cents per share, and on

an annualized basis, just for the loss of the practitioners, it

was $9 million or 17 cents per share for year 2000. 

Id. at 102-03. Later in the call, Sabel explained that "what we’ve had

is a small number of practitioners that have defected and have

inflicted serious damage. I’m not trying to diminish the damage that

they’ve inflicted, but we have almost 950 practitioners still within this

system." Id. at 112. 

Appellants further claim that Appellees’ misrepresentations regard5Appellants suggest that the 10 post-acquisition departures that Appellees mentioned in the November 8 call ostensibly included all departures

up to the time of that call, not just those during the third quarter ending

on September 30. Appellants also claim the 18 or 19 post-acquisition

departures were in addition to the approximately 10 practitioners that

Appellees indicated had left NovaCare before the acquisition closed.

Because the limited record is not conclusive on these points, and because

we must draw all reasonable factual inferences in Appellants’ favor, we

accept these allegations as true for purposes of this appeal. 

OTTMANN v. HANGER ORTHOPEDIC GROUP 11
ing the number of practitioner departures were material, based on a

statement by Stein during the January 7 call that a practitioner’s referral business "could be a half a million dollars" and that "a good portion of that just drops through to [earnings]." Id. at 109. Appellants

also point to Sabel’s statement during the January 7 call that the practitioner departures had "inflicted serious damage." Id. at 112. 

Appellees’ statements during the November 8 call regarding the

number of practitioner departures were factual statements that were

demonstrably true or false, and Appellants have adequately alleged

that they were false. Appellees claim that these statements were not

material because although Appellees may have misstated the number

of practitioners that had departed, they disclosed the financial effect

of those departures by explaining that the departures had caused "a

loss of business totaling about $8 million." Id. at 84. Appellants

acknowledge that this $8 million figure accurately represented the

revenue that had been lost during the third quarter of 1999 as a result

of the pre- and post acquisition practitioner departures.6 Appellants

contend, however, that this figure did not include much of the lost

revenue attributable to the eight or nine departures that Appellants

failed to disclose because the financial impact of those departures

would be primarily felt in later quarters. 

We believe there is at least a factual issue regarding whether

Appellees’ disclosure of the $8 million in third quarter revenue losses

due to practitioner departures adequately remedied the misstatement

of the number of departures. Viewing the alleged facts in the light

most favorable to Appellants, a reasonable investor could have been

misled by the misstatement of the number of departures, despite the

disclosure of the $8 million in third quarter lost revenue. Although

most of the undisclosed departures apparently took place during the

third quarter, many of those departures could have occurred during

the latter part of that quarter and thus would have had a relatively

modest effect on third quarter revenue and a correspondingly greater

effect on fourth quarter revenue. Thus, despite knowing that the

6While the record is not clear regarding the exact time period during

which this $8 million of revenue was lost, Appellants’ contention that

this figure represented third quarter losses is a reasonable interpretation

of the record, and we will therefore accept it for purposes of this appeal.

12 OTTMANN v. HANGER ORTHOPEDIC GROUP
departures had collectively caused $8 million in revenue losses during

the third quarter, a reasonable investor could have underestimated the

continuing future effects of the departures, based on the false understanding that there had only been 10 post-acquisition departures, as

opposed to 18 or 19. We therefore conclude that Appellants have sufficiently pleaded that Appellees’ misstatements concerning the number of practitioner departures were material. 

Regarding scienter, Appellants claim that Appellees’ statements

during the January 7 call demonstrate that (1) they viewed the retention of practitioners as the most important factor in revenue growth,

(2) they had been monitoring the departure numbers on a monthly

basis, and (3) they had recognized prior to the November 8 call that

the departures reflected a negative trend. These allegations do provide

some indication that Appellees misstated the number of practitioner

departures at least recklessly. On balance, however, other factors

show that the requisite strong inference of scienter is lacking. 

First, although Appellees clearly understated the number of postacquisition departures during the November 8 call, their statements

indicate that they were attempting to give a rough approximation of

the number of pre- and post-acquisition departures, rather than a precise number. See id. (stating that "approximately 10" practitioners left

before the acquisition); id. (indicating that "about 10" practitioners

left after the acquisition); id. at 93 (stating that "pre and post [acquisition] we’ve lost about 20 practitioners"). Second, although the lost

revenue attributable to each departure was substantial, the absolute

number of the undisclosed net departures (8 or 9) was small in comparison to the overall number of practitioners employed by Hanger;

given that Hanger was in the midst of a complex nationwide integration of NovaCare, there is a distinct possibility that, at the time of the

November 8 call, Appellees had simply undercounted the number of

practitioners across the country who had departed. Third, while the

disclosure of the $8 million in third quarter revenue losses due to the

departures may not have been adequate to correct the misstatement of

the number of departures, it nonetheless militates against a finding

that Appellees acted with a culpable state of mind. Fourth, Appellants

do not allege a long-term effort by Appellees to conceal the number

of practitioner departures; to the contrary, only two months after the

alleged misstatements, Appellees clearly disclosed the correct number

OTTMANN v. HANGER ORTHOPEDIC GROUP 13
of post-acquisition departures. Fifth, Appellants do not allege that

Appellees had any personal motives to misrepresent the number of

departures for a total of two months, such as to facilitate personal

sales of Hanger stock.7See Phillips, 190 F.3d at 622-23. Finally,

although Appellees’ characterization of the practitioner departures

was more positive during the November 8 call, see id. at 93 (stating

that "it’s certainly not any kind of a trend that we see"), Appellees

plausibly explained during the January 7 call that, around the time of

the November 8 call, they believed the departures were abating. 

Given these circumstances, Appellees’ misstatement of the number

of post-acquisition departures is more consistent with negligence than

with recklessness or intent. We therefore conclude that Appellants’

allegations regarding the number of practitioner departures do not

establish the strong inference of scienter required by the PSLRA. 

b. Reason for Departures

Appellants also claim that during the November 8 call, Appellees

misrepresented the reason for the practitioner departures by stating

that "[s]ome" of the former practitioners "were terminated because

they weren’t producing," "[a]nd there were a few that resigned." Id.

at 84; see id. at 85 (stating that "in some cases we terminated the practitioners"). By contrast, during the January 7 call, Appellees described

the post-acquisition departures as "net resignations," id. at 102, never

specifically stating that any practitioners had been terminated. Appellants further allege that the reason for the practitioners’ departures

was material because the firing of unprofitable practitioners would be

viewed by investors as a positive financial move for the company,

while practitioner resignations would be viewed as a negative development. 

We question whether Appellants have adequately pleaded that

Appellees’ November 8 statements regarding practitioner termina7As discussed below in Section II.C.4, while Appellants’ complaint

includes allegations purportedly showing Appellees’ motives to commit

fraud, those allegations involve generalized corporate motives that courts

have repeatedly found insufficient to establish a strong inference of

scienter. 

14 OTTMANN v. HANGER ORTHOPEDIC GROUP
tions were false. To begin with, Appellees’ discussion of practitioner

departures during the January 7 call was limited to post-acquisition

departures, while the discussion during the November 8 call also

included pre-acquisition departures. Although Appellees’ statements

during the November 8 call are not clear on this point, it is possible

that at least some of the terminations Appellees referred to during that

call took place before the acquisition. Further, even assuming that all

of the terminations Appellees mentioned during the November 8 call

purportedly occurred after the acquisition, it seems unlikely that

Appellees would completely fabricate this fact during the November 8 call and then retreat from it during the January 7 call. An

equally likely explanation is that during the January 7 call, Appellees

were describing the loss of practitioners generally as "net resignations" and did not specifically repeat that some of the former practitioners had been terminated. And, to the extent Appellants claim that

Stein’s statement during the November 8 call that "a few" practitioners had resigned was false, the word "few" in this context is subjective, particularly given Appellees’ other indefinite statements that

"some" of the practitioners were terminated. Nonetheless, we will

assume for purposes of discussion that Appellants have properly

pleaded that Appellees’ statements concerning the reason for the practitioner departures were false. 

With respect to materiality, Appellants are correct that, in the

abstract, a reasonable investor might have found it important to know

that Hanger was losing practitioners involuntarily rather than by its

own strategic decisions. Viewing Appellees’ statements in context,

however, we question whether there is a substantial likelihood that a

reasonable investor would have considered the reason for the departures to be significant. Again, the alleged misstatements related to a

small number of departing practitioners when compared to the overall

number of practitioners employed by Hanger. And, Appellees did disclose that some of the departing practitioners had resigned. While it

is a close question, we will assume that Appellants have adequately

pleaded that Appellees’ alleged misstatements regarding the reason

for the practitioner departures were material. 

However, as with Appellees’ statements regarding the number of

departing practitioners, Appellants’ complaint does not establish a

strong inference that Appellees knowingly or recklessly misstated the

OTTMANN v. HANGER ORTHOPEDIC GROUP 15
reason for the departures. As explained above, any inconsistency in

the language used to describe the departures was just as likely the

result of an overgeneralization as it was the product of intentional

deception or recklessness. Further, given the small number of practitioners involved and the disclosure that some of them resigned, we

cannot conclude that Appellants’ allegations present a strong inference of reckless conduct, much less intentional conduct. 

2. Revenue Recognition

Appellants further allege that Appellees artificially inflated Hanger’s 1999 third quarter revenue and earnings by failing to disclose certain issues concerning revenue recognition by NovaCare. Stein

explained during the January 7 call that Appellees had discovered in

late December 1999 that NovaCare was using a method for recognizing revenue that was different from, and less conservative than, Hanger’s publicly stated policy. While Hanger did not record revenues

until after orthotic or prosthetic devices were accepted by patients,

NovaCare recorded revenues for devices that had been completed but

had not yet been delivered to patients. Stein further explained that this

different method for revenue recognition at NovaCare arose from verbal communications among NovaCare field managers rather than a

written policy, and that he had recently discovered this practice

through a conversation with some of NovaCare’s regional managers.

According to Stein, once Appellees learned of this differing method

of revenue recognition, they conformed NovaCare’s practice to Hanger’s. Stein reported that this change, which took effect during the

fourth quarter of 1999, reduced revenue for that quarter by $4 million

and earnings per share by $0.13, and that it would reduce projected

2000 revenue by $4 million. 

Appellants allege that Appellees represented in public filings that

Hanger was using its stated revenue recognition policy for all customer transactions during the third quarter of 1999, when in fact it

was not. Thus, Appellants have adequately pleaded that Appellees

made false statements or omissions.8 Further, while the precise finan8We disagree with the district court that Appellants were required to

"allege particular transactions where revenues were improperly recorded,

16 OTTMANN v. HANGER ORTHOPEDIC GROUP
cial impact of the discrepancy in revenue recognition methods during

the third quarter is unclear, the significant effect of reconciling these

methods on Hanger’s subsequent financial results suggests that the

alleged misrepresentations and omissions were material. 

Once again, however, Appellants have failed to allege particular

facts that provide a strong inference that Appellees made these statements and omissions intentionally or recklessly. In their complaint,

Appellants set forth a variety of facts that they claim demonstrate

Appellees’ scienter. For example, Appellants allege that certain NovaCare executives were employed by Hanger after the acquisition and

that Appellees had access to NovaCare documents. But Appellants do

not explain how those former NovaCare employees necessarily would

have recognized the difference in revenue recognition systems any

more quickly than Appellees did. Nor do Appellants explain how the

particular NovaCare documents possessed by Hanger would have

revealed the discrepancy—especially given Stein’s statement during

the January 7 call that NovaCare’s revenue recognition practices were

derived from verbal communications among managers rather than any

written policy. 

Appellants also point to the fact that NovaCare accounted for over

half the facilities and revenue of the combined company. However,

this fact alone does not demonstrate that the relatively subtle difference in revenue recognition practices was so obvious that Appellees

including the names of customers, the terms of specific transactions,

when the transactions occurred, and the approximate amount of the

fraudulent transactions." J.A. 332. Appellants’ claim is that Appellees’

failure to disclose NovaCare’s differing revenue recognition method

affected revenue and earnings in the aggregate—a claim that is generally

supported by the effect on Hanger’s financial results of conforming the

two companies’ practices. It is inappropriate at the pleading stage, before

any discovery, to require Appellants to cite specific transactions for

which the NovaCare recognition method was used. See Mesko v.

Cabletron Sys., Inc. (In re Cabletron Sys., Inc.), 311 F.3d 11, 32-33 (1st

Cir. 2002) (indicating that although securities plaintiffs must plead fraudulent conduct with particularity, they need not allege all of the precise

details underlying that conduct, especially when there has been no discovery). 

OTTMANN v. HANGER ORTHOPEDIC GROUP 17
must have been aware of it, especially in the midst of a complex

nationwide integration of the two businesses.

In addition, Appellants allege that the same outside accounting firm

performed audits of financial statements for both Hanger and NovaCare during 1999. This allegation, however, does not show that the

accounting firm recognized—in the course of these apparently separate audits—that the two companies used different methods for recognizing revenue, much less that the firm brought the issue to

Appellees’ attention. 

In short, as the Sixth Circuit concluded in affirming the dismissal

of another case involving allegations of improper revenue recognition, Appellants "have failed to plead facts that show that the revenue

recognition errors at [NovaCare] should have been obvious to [Appellees] or that [Appellees] consciously disregarded ‘red flags’ that

would have revealed the errors prior to their inclusion in public statements." Hoffman v. Comshare, Inc. (In re Comshare, Inc. Sec. Litig.),

183 F.3d 542, 554 (6th Cir. 1999); see also Novak v. Kasaks, 216

F.3d 300, 309 (2d Cir. 2000) (explaining that without facts showing

"corresponding fraudulent intent," "allegations of . . . accounting

irregularities, standing alone, are insufficient to state a securities fraud

claim" (internal quotation marks omitted)). 

3. Referral Business

Appellants also claim that Appellees failed to disclose the reduction in referral business from rehabilitation clinics due to the combination of Hanger and NovaCare into a single company. Stein

explained during the January 7 call that because the two companies

were now viewed as one, rehabilitation clinics were referring a smaller percentage of patients to company practitioners on a rotating basis,

based on rules established by the clinics. Before the acquisition,

Hanger and NovaCare practitioners each received one-third of patient

referrals (for a combined total of two-thirds), with independent practitioners receiving the remaining third. But after the two companies

were combined, company practitioners only received one-half of the

referral business. According to Stein, the independent "mom and pop"

practitioners, using these rules "as a tool," had "been out in the faces

of these rehab systems telling them Hanger and NovaCare is one

18 OTTMANN v. HANGER ORTHOPEDIC GROUP
company now so they should only get one out of two patients." J.A.

111. Stein explained that this decline in referral business reduced

fourth quarter revenue by $750,000 and earnings by $0.03 per share,

and that it would reduce projected 2000 revenue by $2 million and

projected earnings by $0.05 per share. 

Appellants do not allege any specific misrepresentations by Appellees concerning referral business. Rather, Appellants claim that

because Appellees made positive comments during the November 8

call regarding the integration of the two businesses, Appellees had a

duty to disclose the lower percentage of patient referrals. These allegations sufficiently plead that Appellees made a misleading omission

concerning referral business. And, given the effect of the loss of referral business on Hanger’s financial results, this omission was likely

material. 

Again, however, Appellants’ allegations do not establish the strong

inference of scienter required by the PSLRA. Appellants point to a

statement by Stein during the January 7 call, in reference to the referral business issue, that "[s]ome of this we spoke to you folks about

in the third quarter, and there’s a little bit of this left here in the fourth

quarter." Id. at 101. Appellants contend this statement shows that

Appellees knew about the referral issue before the November 8 call.

While this may be true, Stein’s statement also indicates that Appellees

had previously disclosed the referral issue to analysts, undercutting

Appellants’ claim that Appellees concealed the issue until the January

7 call. 

Appellants further contend that Stein’s comments regarding the

independent practitioners lobbying the rehabilitation clinics to treat

Hanger and NovaCare as one company indicate that Appellees knew

that the clinics’ rules could lead to reduced referral business, but that

Appellees tried to conceal this issue to prevent the independent practitioners from learning of the acquisition. This allegation, however,

overlooks that the independent practitioners could have easily learned

about the acquisition through a variety of other sources. 

4. Additional Scienter Allegations

Finally, Appellants make a series of allegations that they claim

demonstrate Appellees’ scienter. All of these allegations relate to posOTTMANN v. HANGER ORTHOPEDIC GROUP 19
sible financial motives to misrepresent Hanger’s financial situation,

such as maintaining positive relationships with creditors, avoiding

additional interest payments, and promoting future acquisitions. However, courts have repeatedly rejected these types of generalized

motives—which are shared by all companies—as insufficient to plead

scienter under the PSLRA. See, e.g., Fleming Cos., 264 F.3d at 1269;

see also Mesko v. Cabletron Sys., Inc. (In re Cabletron Sys., Inc.),

311 F.3d 11, 39 (1st Cir. 2002) ("‘[C]atch-all allegations’ which

merely assert motive and opportunity, without something more, fail

to satisfy the PSLRA."). As we explained in Phillips, "[i]n order to

demonstrate motive, a plaintiff must show concrete benefits that could

be realized by one or more of the false statements and wrongful nondisclosures alleged. Merely alleging facts that lead to a strained and

tenuous inference of motive is insufficient to satisfy the pleading

requirement." Phillips, 190 F.3d at 621 (citation & internal quotation

marks omitted). 

III.

In sum, Appellants’ allegations fail to provide the strong inference

of scienter required by the PSLRA. Even when viewed collectively,

these allegations tend to establish, at most, a pattern of negligent conduct by Appellees, rather than the reckless or intentional conduct

required to support liability. Accordingly, we affirm the dismissal of

Appellants’ complaint.

AFFIRMED

20 OTTMANN v. HANGER ORTHOPEDIC GROUP