PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

_____________

No. 17-2200

_____________

In re: HERTZ GLOBAL HOLDINGS INC

SHEET METAL WORKERS LOCAL UNION 80 PENSION 

TRUST FUND; 

WESTCHESTER TEAMSTERS PENSION FUND,

 Appellants 

_____________

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 2-13-cv-07050)

District Judge: Hon. Madeline C. Arleo

_______________

Argued

June 12, 2018

Before: AMBRO, JORDAN, and HARDIMAN, Circuit 

Judges

(Filed September 20, 2018)
2

Evan J. Kaufman

Samuel H. Rudman

Robbins Geller Rudman & Dowd

58 S. Service Rd. – Ste. 200

Melville, NY 11747

Douglas S. Wilens [ARGUED]

Robbins Geller Rudman & Dowd

120 E. Palmetto Park Rd. – Ste. 500

Boca Raton, FL 33432

Peter S. Pearlman

Cohn Lifland Pearlman Hermann & Knopf

Park 80 West – Plaza One

250 Pehle Ave. – Ste. 401

Saddle Brook, NJ 07663

 Counsel for Appellants Sheet Metal Workers

 Local 80 Pension Trust Fund, and Westchester

 Teamsters Pension Fund

Ross B. Bricker

Howard S. Suskin

Jenner & Block

353 N. Clark St. – Ste. 4500

Chicago, IL 60654

Adam G. Unikowsky [ARGUED]

Jenner & Block

1099 New York Avenue – Ste. 900

Washington, DC 20001

 Counsel for Appellee

 Hertz Global Holdings Inc.
3

Kevin H. Marino

John D. Tortorella

Marino, Tortorella & Boyle

437 Southern Blvd.

Chatham, NJ 07928

 Counsel for Appellees

 Hertz Global Holdings Inc.

 and Elyse Douglas

David A. Kotler

Dechert

100 Overlook Center – 2

nd Fl.

Princeton, NJ 08540 

Andrew J. Levander

Dechert 

1095 Avenue of the Americas

New York, NY 10036

 Counsel for Appellee

 Mark P. Frissora

Elliott Greenfield

Maeve L. O’Connor

Edwin G. Schallert

Debevoise & Plimpton

919 Third Avenue

New York, NY 10022

 Counsel for Appellee

 Elyse Douglas
4

Gregory A. Markel [ARGUED]

Heather E. Murray

Seyfarth Shaw

620 Eighth Avenue

New York, NY 10018

 Counsel for Appellee

 Jatindar S. Kapur

_______________

OPINION OF THE COURT

_______________

JORDAN, Circuit Judge.

Sheet Metal Workers Local No. 80 Pension Trust Fund 

and Westchester Teamsters Pension Fund (“the Funds”) 

brought a putative securities fraud class action against Hertz 

Global Holdings, Inc. (“Hertz” or “the Company”) and 

several of its current and former executives for violating §§

10(b) and 20(a) of the Securities Exchange Act of 1934, as 

amended by the Private Securities Litigation Reform Act of 

1995 (“PSLRA”), and Rule 10b-5, 17 C.F.R. § 240.10b-5. 

The Funds appeal the District Court’s dismissal of their fourth 

amended complaint (“FAC”) for failure to plead a strong 

inference of scienter, as required by the PSLRA. We will 

affirm.
5

I. Background

A. Allegations in the FAC1

The Funds allege that Hertz, through its former Chief 

Executive Officer Mark Frissora, former Chief Financial 

Officer Elyse Douglas, and former Senior Vice President of 

Finance and Corporate Controller Jatindar Kapur 

(collectively, the “Individual Defendants”)2 violated the 

securities laws by making materially false and misleading 

statements concerning the Company’s financial results, 

internal controls, and future earnings projections. The Funds’ 

securities fraud allegations rely on a financial restatement 

Hertz issued with its fiscal year 2014 Form 10-K (“the 

Restatement”). In it the Company admitted that “an 

inconsistent and sometimes inappropriate tone at the top was 

present under the then existing senior management” and that 

the tone “resulted in an environment which in some instances 

may have led to inappropriate accounting decisions and the 

failure to disclose information critical to ... effective 

review[.]” (App. at 609.)

 

1 The facts contained in this section come from 

allegations in the FAC, documents the FAC referenced or 

relied upon, and matters of which we may take judicial 

notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 

308, 322 (2007).

2

 The FAC also named as defendants Hertz’s former 

interim CFO David Rosenberg and its current CFO Thomas 

Kennedy, but the Funds do not appeal the District Court’s 

dismissal of the claims against those defendants. 
6

The Restatement corrected material errors to Hertz’s 

2011, 2012, and 2013 financial statements that, cumulatively,

“[overstated] its pre-tax income ... by $215 million and its net 

income ... by $132 million.” (App. at 467.) Those errors

stemmed from misstatements relating to fifteen distinct 

accounting categories, causing Hertz to make twenty separate 

accounting adjustments to its previous financial statements. 

Those accounting errors were, in turn, a result of “four 

categories of material weaknesses in [Hertz’s] internal control 

over financial reporting”: control environment, risk 

assessment, information and communication, and monitoring. 

(App. at 609.)

As the Individual Defendants were overseeing Hertz’s

accounting department, which was having to deal with the 

“inappropriate tone” they set, the Company continued to 

report “record” financial results and publish optimistic 

anticipated future earnings. That information was 

disseminated through press releases; public statements made 

by Frissora and Douglas to analysts and investors during 

phone calls and industry conferences; and SEC filings. 

Moreover, Hertz’s SEC filings included Sarbanes-Oxley Act

(“SOX”) certifications signed by Company executives –

including the Individual Defendants – attesting to the 

accuracy of the information contained in the relevant filings

and to the sufficiency of the Company’s internal accounting 

controls. Throughout much of 2013 and early 2014, the 

defendants relied on Hertz’s financial results from fiscal years 

2012 and 2013 to tout the Company’s healthy financial 

position and to project a rosy financial outlook for the future. 

As the Restatement made clear, however, those financial 

results were materially inaccurate; Hertz’s projections of 
7

future earnings were misguided; and the Company’s internal 

controls throughout the relevant period were deficient.

The accounting problems permeating Hertz’s 

accounting department began incrementally coming to public 

attention in late 2013, culminating in the Restatement issued 

on July 16, 2015. Hertz began revealing its problems in 

September 2013, when it walked back its projected earnings 

for fiscal year 2013. That announcement came just days after 

Hertz abruptly announced Douglas’s resignation for “personal 

reasons[.]” (App. at 516.) Next, in March 2014, Hertz 

disclosed through an SEC filing that it would have to delay 

filing its fiscal year 2013 Form 10-K because “it [had] 

identified certain adjustments relating to prior periods which 

... require[d] the Company to revise certain of its previously 

issued financial statements.” (App. at 550.) Nonetheless, 

later that same month, the defendants continued to tout 

Hertz’s “record results” and to publish optimistic 

anticipations of future earnings. As Hertz continued to 

emphasize its “record results,” it also began to disclose that it 

had identified tens of millions of dollars in accounting errors 

relating to its 2011 and 2012 financial statements. In March 

2014, however, Hertz still publicly classified those errors as 

non-material misstatements. About one month after revealing

those errors, Hertz announced Kapur’s resignation for 

“personal reasons.” (App. at 517.)

By June 2014, Hertz had again delayed required SEC 

filings, publicly announced that the Company would have to 

restate its financial statements for 2011, and disclosed that it 

would also need to correct errors in its 2012 and 2013

financial statements that could potentially result in the need to 

issue restatements for those years as well. Hertz also initiated 
8

two internal investigations that month, one to review the 

Company’s “financial records for fiscal years 2011, 2012, and 

2013,” and the other to assess the internal controls the 

Company had in place during prior financial reporting 

periods. (App. at 608.) Hertz announced Frissora’s 

resignation for “personal reasons” several months later, in 

September 2014. (App. at 518.)

Hertz slowly revealed the findings of its internal

investigations to the public between August 2014 and July 

2015 through periodic SEC filings. Those filings discussed

Hertz’s withdrawal of its previously announced projections 

for future earnings and disclosed that the cumulative effect of

the identified accounting errors was material, requiring full 

restatements for fiscal years 2011, 2012, and 2013. Each 

subsequent SEC filing revised upward the magnitude of the 

accounting errors on Hertz’s prior financial statements. 

Based on Hertz’s financial disclosures, the Funds allege that

Hertz had overstated its net income and pre-tax income by, 

respectively, $28.7 million (17.19%) and $69.3 million 

(27.18%) in 2011; $59.1 million (32.12%) and $85.6 million 

(23.45%) in 2012; and $44.2 million (14.64%) and $60.1 

million (9.97%) in 2013. 

In addition to the allegations of financial reporting 

fraud, the Funds also allege that during the relevant class 

period – February 14, 2013, to July 16, 2015 – Douglas and 

Kapur sold large amounts of their Hertz stock holdings, that

those trades were out of line with those individuals’ prior 

trading practices, and that those trades resulted in Douglas 

and Kapur profiting in an amount in excess of their respective 

annual salaries. 
9

B. Procedural History

The Funds filed the FAC in March 2016, 

approximately seven-and-a-half months after Hertz issued the 

Restatement and over twenty-seven months after they first

initiated this lawsuit. The FAC contains numerous 

allegations based primarily on the admissions contained in the 

Restatement, which the District Court reviewed carefully. In 

the end, however, the Court concluded that the FAC failed to 

adequately plead a strong inference of scienter. The Court 

stated:

Even giving [the Funds] every reasonable 

inference, their allegations amount to the 

following: Hertz discovered serious accounting 

problems, traced those problems back to a 

corporate mismanagement (and possibly even 

negligent conduct), publicly disclosed those

problems, and updated the public every time it 

realized the problem was worse than previously 

disclosed. The FAC carefully explains how the 

accounting problems were caused by the 

Individual Defendants, but it never provides a 

cogent and compelling explanation how those 

defendants were aware that they caused those 

problems before Hertz discovered them. For 

those reasons, their claims fail.

(App. at 54.) That conclusion led to the dismissal of the 

FAC, and this appeal followed.
10

II. Discussion3

A. Legal Standard for Pleading Securities 

Fraud

To adequately allege a § 10(b) securities fraud claim, a 

plaintiff must plead “(1) a material misrepresentation or 

omission, (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.” City of Edinburgh 

Council v. Pfizer, Inc., 754 F.3d 159, 167 (3d Cir. 2014). A 

plaintiff must also meet the heightened pleading standards 

imposed by the PSLRA. Institutional Inv’rs Grp. v. Avaya, 

Inc., 564 F.3d 242, 252 (3d Cir. 2009).

To adequately plead scienter under the PSLRA, a 

plaintiff must “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), which we have 

described as one “embracing [an] intent to deceive, 

manipulate, or defraud,” either knowingly or recklessly. 

Avaya, Inc., 564 F.3d at 252 (citation omitted). A complaint 

adequately pleads a strong inference of scienter “only if a 

reasonable person would deem the inference of scienter 

 

3

 The District Court had jurisdiction under 28 U.S.C. 

§ 1331 and 15 U.S.C. § 78aa. We have jurisdiction pursuant 

to 28 U.S.C. § 1291. We exercise plenary review over a 

district court’s dismissal of a complaint for failure to meet the 

pleading requirements of the PSLRA and over a district 

court’s interpretation of the federal securities laws. Winer 

Family Tr. v. Queen, 503 F.3d 319, 325 (3d Cir. 2007).
11

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). But a

plaintiff does not need to come forward with “smoking-gun” 

evidence to meet the PSLRA’s pleading requirements. Id. 

Rather, in conducting the scienter analysis, courts must 

analyze the complaint holistically to determine whether its 

allegations, “taken collectively, give rise to a strong inference 

of scienter, not whether any individual allegation, scrutinized 

in isolation, meets that standard.” Id. at 323.

B. The District Court Applied Tellabs

Appropriately.

The Funds argue that the District Court erred when it 

concluded that the FAC’s allegations did not give rise to a 

strong inference of scienter. They contend that the Court 

failed to adhere to the interpretive framework for assessing 

scienter set forth by the Supreme Court in Tellabs, Inc. v. 

Makor Issues & Rights, Ltd, and that, when analyzed 

appropriately, the FAC’s allegations give an inference of 

scienter that is “at least as compelling as any opposing 

inference[.]” 551 U.S. at 324. More particularly, the Funds 

argue that the Court deviated from the Tellabs framework in 

three material ways: by failing to draw inferences favorable to 

them, by requiring “smoking-gun” evidence to adequately 

plead scienter, and by failing to consider the FAC’s 

allegations holistically. Those contentions do not persuade 

us.

First, the District Court did not stray from the Tellabs

framework by failing to make inferences only in the Funds’ 

favor. Rather, it adhered to Tellabs’s explicit instruction to 
12

conduct a comparative analysis by considering both 

inferences favorable to the Funds as well as “plausible, 

nonculpable explanations for the defendant’s conduct[.]” Id.

at 324. That the District Court disagreed with the Funds’ 

preferred inferences is not a violation of the Tellabs

framework.

Second, the Court did not effectively require the Funds 

to submit “smoking-gun” evidence to survive the defendants’

motions to dismiss. It simply emphasized that the FAC 

lacked allegations connecting the fact that Hertz had 

“accounting problems ... caused by the Individual 

Defendants” with an inference that “those defendants were 

aware that they caused those problems[.]” (App. at 54.) In 

other words, the Court only required the Funds to plead 

factual allegations supporting a cogent inference that the 

Individual Defendants knowingly made material 

misstatements, or that they made material misstatements with 

reckless disregard for the truth of those statements. That the 

Funds could not plead such allegations does not mean that the 

District Court effectively required them to submit “smokinggun” evidence.

Finally, the District Court conducted the holistic 

review of the FAC that Tellabs requires. Although the Court 

assessed each category of the Funds’ scienter allegations 

independently, it concluded its analysis in a separately headed 

sub-section – “Failure to Plead a Strong Inference of 

Scienter” – that stated in part:

In sum, [the Funds] have failed to plead a strong 

inference [of scienter.]

...
13

The strongest inference of scienter comes from 

the Restatement. However, the Restatement is 

not enough by itself, so Plaintiffs had to tip the 

inferential scale with the four other categories 

of allegations. But, as explained, those 

categories do not strengthen the inference of 

knowledge or recklessness.

(App. at 54.) We have explicitly approved of scienter 

analyses that assess individual categories of scienter 

allegations individually when it is clear, as it is here, that a

district court ultimately considered the allegations as a whole. 

See OFI Asset Mgmt. v. Cooper Tire & Rubber, 834 F.3d 481, 

493 (3d Cir. 2016) (concluding that just because a court is 

“thorough in explaining why it found scienter lacking as to 

each asserted misrepresentation does not suggest that it did 

not consider the allegations as a whole”). In fact, we have 

adopted that interpretive approach ourselves when conducting 

a scienter analysis pursuant to the PSLRA. See Avaya, Inc., 

564 F.3d at 280 (“Although we have discussed each of the 

alleged facts bearing on defendants’ scienter one at a time, we 

have heeded Tellabs’s command to evaluate [the plaintiffs’] 

allegations collectively rather than individually.”).

C. The FAC Does Not Plead a Strong Inference 

of Scienter.

The Funds argue that the Restatement’s admission that 

Frissora and other Hertz senior management maintained an 

“inappropriate tone at the top,” when viewed in conjunction 

with the FAC’s scienter allegations, provides an inference of 

scienter that is “at least as compelling as any opposing 

[nonculpable] inference[.]” Tellabs, 551 U.S. at 324. To 
14

make that argument, the Funds depend – as they did in the 

District Court – on five categories of scienter allegations: (1) 

the size and scope of the Restatement, (2) Hertz’s admission 

of material weaknesses in its internal controls, (3) signed 

SOX certifications accompanying materially false SEC 

filings, (4) Hertz’s replacement of upper management, and (5) 

insider trading activity by Douglas and Kapur. Like the 

District Court, we will assess each category of allegations 

individually before analyzing the FAC’s allegations as a 

whole. We ultimately agree with the District Court that the 

FAC’s allegations do not give rise to a strong inference of 

scienter.

1. Size and Scope of the Restatement

The size and scope of a company’s restatement of prior 

financial statements is one factor that courts consider when 

conducting a scienter analysis. PR Diamonds, Inc. v. 

Chandler, 364 F.3d 671, 685 (6th Cir. 2004); In re BISYS Sec. 

Litig., 397 F. Supp. 2d 430, 447 (S.D.N.Y. 2005); In re 

Stonepath Grp., Inc. Sec. Litig., 397 F. Supp. 2d 575, 587 

(E.D. Pa. 2005). A company’s admission even to significant 

accounting errors, however, “is insufficient by itself to give 

rise to a strong inference of scienter.” Podraza v. Whiting, 

790 F.3d 828, 838 (8th Cir. 2015).

The inferential force of a restatement is lessened when 

the plaintiff fails to plead particularized allegations of 

fraudulent intent. Id. at 837; see also Dobina v. Weatherford 

Int’l Ltd., 909 F. Supp. 2d 228, 251 (S.D.N.Y. 2012) 

(explaining that the magnitude of a restatement does not give 

rise to a strong inference of scienter if there are no allegations 

“that the ... defendants had any contemporaneous basis to 
15

believe that the information they related was incorrect”). As

the District Court observed, the FAC fails to sufficiently 

allege either that the Individual Defendants knowingly caused 

Hertz’s accounting personnel to engage in accounting fraud 

or that the accounting improprieties were so obvious that the 

Individual Defendants must have known about them when 

reporting Hertz’s financial results to the public. The Court 

logically concluded that, although the Restatement was 

substantial, any inference of scienter was “circumscribed by” 

the fact that the accounting errors were spread across myriad 

accounting categories. (App. at 39.)

Moreover, the size of the Restatement was not 

sufficiently drastic to give rise to a strong inference of 

scienter absent particularized allegations of fraudulent intent. 

The Restatement revealed that Hertz’s financial statements 

from 2011 to 2013 cumulatively overstated its net income by 

$132 million (20.23%) and its pre-tax income by $215 

million (17.58%). When broken down by year, the 

Restatement shows that Hertz overstated those income 

categories by between 9.97% and 32.12%. Courts that have 

looked to the magnitude of a financial restatement to 

strengthen the inference of scienter have been faced with 

restatements significantly more drastic than what we have 

here. See, e.g., Fresno Cty. Empl. Ret. Ass’nv. comScore, 

Inc., 268 F. Supp. 3d 526, 553 (S.D.N.Y. 2017) (inferring 

scienter when restatement wrote off 100% of an entire 

accounting category); In re Atlas Air Worldwide Holdings, 

Inc. Sec. Litig., 324 F. Supp. 2d 474, 489 (S.D.N.Y. 2004) 

(inferring scienter where restatement “transformed ... a 

company with retained earnings of approximately $185 

million to a company with an accumulated deficit of 

approximately $178 million”); In re MicroStrategy, Inc. Sec. 
16

Litig., 115 F. Supp. 2d 620, 635-36 (E.D. Va. 2000) (inferring 

scienter, in part, because a restatement revealed an issuer had 

erroneously been reporting net income instead of net losses); 

cf. Webb v. Solarcity Corp., 884 F.3d 844, 858 (9th Cir. 2018) 

(explaining that restatement disclosing that net income was 

overstated by 15% to 67% per quarter did not give rise to 

strong inference of scienter in the absence of other 

compelling allegations supporting scienter).

Accordingly, the size and scope of the changes 

highlighted in the Restatement provide at most some

inference of scienter but not a strong inference.

2. Hertz’s Admission of Material 

Weaknesses in Its Internal Controls

The Funds argue that the District Court erred by 

interpreting the Restatement’s admission of an “inappropriate 

tone at the top” to be an admission of “mismanagement,” as 

opposed to an admission of “misconduct.” (Opening Br. at 

28.) We agree with the District Court that the Restatement’s 

admissions are more plausibly interpreted as admissions of 

mismanagement, not of affirmative misconduct on the part of 

the Individual Defendants. We reach that conclusion for two 

reasons. First, the Restatement itself explicitly links the 

phrase “inappropriate tone at the top” to Frissora’s 

management style. For example, after first introducing that 

phrase, the Restatement continues, “[i]n particular, 

[Frissora’s] management style and temperament created a 

pressurized operating environment at the Company, where 

challenging targets were set and achieving those targets was a 

key performance expectation.” (App. at 609.) Second, the

more plausible inference from the Restatement’s use of the 
17

word “tone” is that the Restatement is referring to 

management style and not to misconduct. The word “tone,”

after all, means a “style or manner of expression in speaking 

or writing[.]” Tone, Merriam-Webster’s Collegiate 

Dictionary (10th ed. 2002).4

At most, then, the FAC has pleaded that the Individual 

Defendants presided over a poorly managed corporation and 

that the mismanagement created an environment in which

improper accounting practices flourished. But we have long 

held “that an allegation of mismanagement on the part of a 

 

4

 The United States Court of Appeals for the Fourth 

Circuit has similarly rejected an argument that an admission 

that a defendant company’s “former senior management was 

‘incompeten[t]’ and otherwise contributed to [a] deficient 

‘tone at the top’” essentially equated to an admission of “an 

environment which encourage[d] accounting fraud.” Matrix 

Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 

183 (4th Cir. 2009). It reasoned that admissions that a 

“deficient ‘tone at the top’” existed “fail[ed] to suggest that 

defendants intentionally created an environment conducive to 

accounting fraud” and explained that the company had 

“simply admit[ted] that such an environment existed,” which 

“fail[ed] to suggest that defendants acted with scienter[.]” Id. 

The Funds attempt to distinguish Matrix Capital by 

highlighting that the defendant company there admitted to 

“incompetence” whereas Hertz admitted to an “inappropriate 

tone.” We do not find that distinction meaningful. Matrix’s 

reasoning is sound – an admission that a high-pressure 

management style existed in the past is not sufficient to meet 

the PSLRA’s scienter requirement without accompanying 

allegations of fraudulent intent.
18

defendant will not alone support” a securities fraud claim. 

Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992). 

Allegations of mismanagement will only support a securities 

fraud claim if they are coupled with allegations that the 

defendants were aware, or recklessly disregarded, that their 

mismanagement created an environment in which fraud was 

occurring. See Webb, 884 F.3d at 856 (explaining that 

“allegations [that] paint a picture of a mismanaged 

organization in need of closer financial oversight” do not give 

rise to an inference of scienter absent a compelling inference 

that defendants knew they were committing a fraud when 

making the material misstatements or omissions); City of 

Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters 

Corp., 632 F.3d 751, 760 (1st Cir. 2011) (“Allegations of 

corporate mismanagement are not actionable under Rule 10b–

5.”); Hayes, 982 F.2d at 106 (explaining that allegations of 

mismanagement can support an inference of scienter if facts 

are alleged “that a defendant was aware that mismanagement 

had occurred and” lied about the existence of that 

mismanagement). The FAC simply lacks sufficient 

allegations to compellingly imply that the Individual 

Defendants knew or recklessly disregarded that their actions 

were resulting in improper accounting practices.

Accordingly, the Restatement’s admissions of material 

weaknesses in Hertz’s internal controls, including its 

admission of an “inappropriate tone at the top,” do not weigh 

in favor of inferring scienter.
19

3. SOX Certifications Accompanying False 

SEC Filings

An allegation that a defendant signed a SOX 

certification attesting to the accuracy of an SEC filing that 

turned out to be materially false does not add to the scienter 

puzzle in the absence of any allegation that the defendant 

knew he was signing a false SEC filing or recklessly 

disregarded inaccuracies contained in an SEC filing. In re 

Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1205 (10th Cir. 2015); 

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1003-

04 (9th Cir. 2009). As discussed above, the FAC fails to 

plead facts that could plausibly lead to such an inference.

4. Replacement of Upper Management

The Funds argue that the Individual Defendants’ 

resignations show scienter because they each resigned in 

close proximity to the public release of “bad news,” the 

Restatement blamed the accounting irregularities on an 

“inappropriate tone at the top,” and the Restatement explained 

that part of Hertz’s remedial measures included hiring a new 

senior management team. We agree with the District Court, 

however, that the Individual Defendants’ resignations do not 

materially add to an inference of scienter because the FAC 

lacks allegations that those resignations were a result of the 

Individual Defendants’ involvement in a systemic fraud. 

The departure of corporate executive defendants is a 

factor that can strengthen the inference of scienter. See City 

of Dearborn Heights Act 345 Police & Fire Retirement Sys. v. 

Align Tech., Inc., 856 F.3d 605, 622 (9th Cir. 2017) 

(explaining that, in certain circumstances, “an employee’s 
20

resignation supports an inference of scienter”); Brophy v. 

Jiangbo Pharm. Inc., 781 F.3d 1296, 1305 (11th Cir. 2015) 

(“Various courts have recognized that an executive officer’s 

resignation can strengthen an inference of scienter when it 

occurs around the same time as an investigation.”). However, 

while resignations causally related to a restatement’s issuance 

can provide “evidence of the substantial accounting 

challenges [a] [c]ompany ... faced, [they] do[] not compel an 

inference that [the individuals who resigned] were bent on 

committing fraud.” Yates v. Mun. Mortg. & Equity, LLC, 744 

F.3d 874, 889 (4th Cir. 2014). For a resignation to add to an 

inference of scienter, a pleading must set forth allegations 

suggesting a compelling inference that the resignation was the 

result of something other than “the reasonable assumption 

that the resignation occurred as a result of” the release of bad 

news. Zucco Partners, 552 F.3d at 1002. In other words, for 

corporate departures to strengthen an inference of scienter, 

there must be particularized allegations connecting the 

departures to the alleged fraud.

Here, Douglas’s resignation was announced just days 

before Hertz publicly released bad news stemming from the 

Company’s accounting problems, and Frissora’s and Kapur’s 

resignations were announced within about two months of 

Hertz releasing similar news. Hertz freely acknowledged that 

it replaced executive- and management-level employees as a 

remedial measure to “change[] and enhance[] leadership in 

the business units associated with the restatement matters.” 

(App. at 611.) As the District Court noted, the FAC’s 

allegations make clear that “the resignations ... were causally 

related to the bad news” ultimately resulting in the 

Restatement. (App. at 47).
21

But pleading scienter requires more than pleading a 

link between bad news and an executive’s resignation. 

Changes in leadership are only to be expected when 

leadership fails. That is not, in itself, a symbol of fraud. 

Corporate resignations do not strengthen an inference of 

scienter, when, as here, the allegations do not cogently

suggest that the resignations resulted from the relevant 

executives’ knowing or reckless involvement in a fraud.

5. Insider Trading Activity

Demonstrating that a defendant had a motive, such as 

personal financial gain, to commit a securities fraud violation 

is a “relevant consideration” that “may weigh heavily in favor 

of a scienter inference[.]” Tellabs, 551 U.S. at 325; see also 

Rahman v. Kid Brands, Inc., 736 F.3d 237, 246 (3d Cir. 2013) 

(“Though it is not necessary to plead motive to establish that 

a defendant acted with scienter, its presence can be persuasive 

when concluding a holistic review of the evidence.”). 

Alleging insider trading is one way to plead motive. In re 

Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 277 (3d 

Cir. 2006). The mere fact that an insider sold corporate stock, 

however, is not enough to give rise to an inference of scienter. 

City of Edinburgh, 754 F.3d at 176; In re Suprema, 438 F.3d 

at 277.

Insider trading will strengthen an inference of scienter 

when the “sales of company stock by insiders ... are ‘unusual 

in scope or timing[.]’” In re Suprema, 438 F.3d at 277

(citation omitted). We have weighed a number of 

considerations when determining whether insider trading 

activity was “unusual in scope or timing,” including “the 

amount of profit made, the amount of stock traded, the 
22

portion of stockholdings sold, ... the number of insiders 

involved[, and] ... whether the profits were substantial 

relative to the seller’s ordinary compensation.” Id. (citations 

and quotation marks omitted). 

Two considerations from the FAC’s insider trading 

allegations add to the inference of scienter. First, the FAC 

alleges that both Douglas’s and Kapur’s insider trading 

activities were unusual when compared to their trading 

history. For example, Douglas sold Hertz stock on four 

occasions during the class period but had not sold any Hertz 

stock in the three years prior to those trades. Similarly, Kapur 

sold Hertz stock on five occasions during the class period but 

had only traded in Hertz stock one other time in the three 

preceding years. Those allegations support an inference of 

scienter. Id. at 278. Second, the FAC alleges that Douglas 

earned a net profit of approximately $4 million on her insider 

trades, which exceeded her 2013 salary of $3 million. 

Although the FAC does not identify Kapur’s salary, it alleges 

that the approximately $3.1 million in profit he earned from 

his trading activities likely exceeded his annual 

compensation, given that he was Douglas’s subordinate. 

Compare id. (inferring scienter when profits from trading 

activities “nearly doubled in one day the total amount of 

money” a defendant had earned “over the previous three years 

combined”), with Cent. Laborers’ Pension Fund v. Integrated 

Elec. Servs. Inc., 497 F.3d 546, 553 (5th Cir. 2007) 

(concluding that inference of scienter not strengthened by 

allegation that insider stock sale netted a defendant a profit 

equivalent to 43% of that defendant’s salary).

Three other considerations, however, lessen the 

strength of the scienter inference to be drawn from the FAC’s 
23

insider trading allegations. First, the timing of the insider 

trades is not particularly suspicious. Douglas and Kapur sold 

their shares when Hertz stock was trading between $21.23 

and $28.00, with the vast majority of sales occurring at a 

price at or below $26.14. The overall class period high, in 

contrast, was $31.56 on August 19, 2014. See Greebel v.

FTP Software, Inc., 194 F.3d 185, 206 (1st Cir. 1999) 

(finding timing of insider trades to be not “very suspicious” 

because the insiders did not sell at “high points of the stock”). 

The allegations do not plausibly suggest that Douglas or

Kapur timed their trades to improperly benefit from any 

particular disclosure. The lack of any temporally suspicious 

trades weighs against inferring scienter from the trading 

activity. See Yates, 744 F.3d at 890 (inference that trading 

activity was innocent strengthened by fact that “plaintiffs do 

not allege that the insiders timed the sales to take advantage 

of any particular disclosure”); In re Advanta Corp. Sec. Litig., 

180 F.3d 525, 540 (3d Cir. 1999) (declining to infer scienter 

when insider trading took place three months before negative 

news publicly announced).

Second, the twenty-nine-month class period alleged by 

the Funds cautions against inferring scienter from the alleged 

insider trading. “[A]lleging ... a lengthy class period makes 

it difficult to infer intent from the mere fact of a stock sale, as 

it is not unusual for insiders to trade at some point during 

their tenure with a company.” Yates, 744 F.3d at 891. Courts 

have regularly concluded that an inference of scienter from 

insider trading is lessened when, as here, the class period is 

well over a year. See id. (concluding that forty-four month 

period was “inordinately long” and weighed against inferring 

scienter); In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1092 

(9th Cir. 2002) (inference of scienter lessened due to 
24

“unusually long class period of sixty-three weeks [fifteen

months]”).

Third, the fact that the FAC named five individuals as 

defendants, but alleged insider trading only as to Douglas and 

Kapur, decreases the strength of the scienter inference. See In 

re Advanta, 180 F.3d at 540 (explaining that a lack of insider 

trading allegations against a majority of insider defendants 

“rais[es] doubt [about] whether the sales were motivated by 

an intent to profit from inflated stock prices”). 

A final consideration – the percentage of pre-class 

Hertz holdings Douglas and Kapur sold off during the class 

period – does not materially move the scienter needle. 

Douglas and Kapur sold off, respectively, 24.7% and 62.3% 

of their Hertz holdings.

5

 As a pure percentage of stock 

holdings sold, those percentages are supportive of an 

inference of scienter. Compare In re Suprema, 438 F.3d at 

278 (inferring scienter, in part, because defendants sold off 

 

5

 Kapur contests the 62.3% figure by arguing that that 

figure includes the exercise of options that he never 

technically owned. However, “[i]n calculating the percent of 

holdings sold, ... it is appropriate to consider not only the 

shares of stock that [a defendant] held prior to [his] sales, but 

also the shares that [he] could have sold through the exercise 

of options[.]” Waters Corp., 632 F.3d at 760; see also In re 

Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986-87 (9th 

Cir. 1999) (“Actual stock shares plus exercisable stock 

options represent the owner’s trading potential more 

accurately than the stock shares alone.”). Accordingly, we

accept the Funds’ allegation that Kapur sold 62.3% of his 

holdings for purposes of this motion to dismiss.
25

over 30% of holdings), with Avaya, Inc., 564 F.3d at 279 (not 

inferring scienter when defendants sold 17% or less), and In 

re Advanta, 180 F.3d at 540-41 (same with regard to selling 

off of 5% to 7% of holdings). But the pure percentage of 

holdings sold tells only part of the story. Courts have 

routinely found that even large percentages of holdings sold 

at first blush appearing suspicious are not sufficient to infer 

scienter when other factors, such as the timing of the relevant 

sales, weigh against that inference. See, e.g., Yates, 744 F.3d 

at 890-91 (selling 28% of holdings did not strengthen 

inference of scienter when not all defendants sold stock and 

the timing of the trades were not suspicious); Ronconi v. 

Larkin, 253 F.3d 423, 435 (9th Cir. 2001) (selling 69% of 

holdings did not strengthen inference of scienter when there 

was no allegation that the trades were timed to take advantage 

of alleged non-public information). Here, as described above, 

the considerations weighing against inferring scienter limit

the strength of the scienter inference that can be made from 

the percentage of pre-class holdings sold by Douglas and 

Kapur.

The FAC’s insider-trading allegations thus add only 

minimal weight to the inference of scienter. 

6. Holistic Review

The Funds urge us to conclude that a holistic review of 

the FAC’s allegations leads only to one plausible string of

inferences – that the Individual Defendants recklessly 

disregarded that their “tone” would lead lower-level 

employees to engage in inappropriate accounting to placate 

their demands, then recklessly disregarded that those 

irregularities would lead to overstated and inaccurate 
26

financial statements, and, consequently, recklessly disclosed 

materially false information through SEC filings, press 

releases, and public announcements. The problem the Funds 

face is that the inferences they propose are simply not as 

compelling as the opposing one drawn by the District Court:

that corporate mismanagement resulted in accounting 

irregularities and, at most, negligent misstatements. 

The FAC and Restatement make clear that the 

problems plaguing Hertz and its accounting department were 

significant, that Frissora and other members of senior 

management created a pressurized environment that 

contributed to those problems, and that those problems 

resulted in material misstatements regarding the Company’s 

financial condition. But the allegations that the Individual 

Defendants resigned as Hertz discovered those problems, and 

that Douglas and Kapur sold portions of their Hertz stock 

holdings while those problems were ongoing, do not

necessarily suggest that Hertz or its senior management were 

engaged in a systemic fraud. More plausible is the suggestion

that the Individual Defendants were just bad leaders. The 

FAC’s allegations do not give rise to a cogent inference that 

the Individual Defendants were aware that their actions were 

improper, that they consciously disregarded that their “tone” 

was causing employees to engage in erroneous accounting, or 

that Hertz’s accounting errors were so obvious that only an 

attitude of reckless disregard on the part of the Individual 

Defendants can explain what they said and did.

6

 

6

 The Funds argue in the alternative that we should 

adopt the doctrine of corporate scienter to hold Hertz liable 

even if the FAC does not plead a strong inference of scienter 

as to any of the Individual Defendants. That doctrine allows 
27

III. Conclusion

For the foregoing reasons, we will affirm the District 

Court’s dismissal of the FAC.

 

a plaintiff “to plead an inference of scienter against a 

corporate defendant without raising the same inferences 

required to attribute scienter to an individual defendant.” 

Rahman, 736 F.3d at 246. We have neither accepted nor 

rejected that doctrine and decline to do so here because the 

FAC’s allegations would not give rise to corporate scienter 

under any recognized theory of that doctrine. See In re 

Omnicare, Inc. Sec. Litig., 769 F.3d 455, 473-77 (6th Cir. 

2014) (discussing different approaches to the doctrine of 

corporate scienter).

Furthermore, because we have affirmed the District 

Court’s dismissal of the FAC’s Section 10(b) claim, we need 

not address the Section 20(a) claim, which is dependent on a 

Section 10(b) violation. City of Edinburgh, 754 F.3d at 177.