Opinion ID: 1029539
Heading Depth: 1
Heading Rank: 4

Heading: December 16, 2004, Form 8-K

Text: Plaintiffs also allege that the December 16, 2004, Form 8-K was misleading; it omitted to inform investors that BearingPoint had overstated net income during the first three quarters of 2004. But plaintiffs do not allege that defendants knew the amount of overstatements made in Forms 10-Q at the time the December 16, 2004, Form 8-K was issued. Indeed, the complaint recognizes that it took a great deal of time and resources to produce the restatement of that financial information. Moreover, the Form 8-K warned investors that Bearing-Point had internal control deficiencies that threatened its ability to record, process, summarize and report financial information. Current Report (Form 8-K), ex. 99.1, at 2 (Dec. 16, 2004). This disclosure suggests that defendants did not knowingly or recklessly fail to provide investors with complete information about prior misstatements. Blazer and Falcone had already resigned from BearingPoint by the time this December 16, 2004, statement was issued. Defendants thus question whether plaintiffs have adequately identified a corporate agent who acted with scienter in their allegations. We have held that allegations of corporate fraud must allege facts that support a strong inference of scienter with respect to at least one authorized agent of the corporation. Teachers', 477 F.3d at 184 (emphasis added). A complaint that alleges facts giving rise to a strong inference that at least one corporate agent acted with the required state of mind satisfies the PSLRA even if the complaint does not name the corporate agent as an individual defendant or otherwise identify the agent. Most often, the complaint and documents incorporated into the complaint by reference will identify a corporate agent who acted with scienter. See Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.2008). But the particularity demanded under the PSLRA requires only that a plaintiff allege sufficient particularized facts that support a strong inference of scienter with respect to at least one authorized agent of the corporation. Teachers', 477 F.3d at 184. As the Seventh Circuit has explained, [I]t is possible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud. Suppose General Motors announced that it had sold one million SUVs in 2006, and the actual number was zero. There would be a strong inference of corporate scienter, since so dramatic an announcement would have been approved by corporate officials sufficiently knowledgeable about the company to know that the announcement was false. Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710 (7th Cir.2008); see also Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 367 (5th Cir. 2004) (indicating that corporate scienter might be alleged by asserting that a corporate agent other than named individual defendants acted with scienter). When plaintiffs also name individual defendants, they must, of course, allege facts that support a `strong inference' that each [individual] defendant acted with at least recklessness in making the false statement. Teachers', 477 F.3d at 184 (emphasis in original); see also Makor Issues & Rights, 513 F.3d at 710 (distinguishing what is known as group pleading doctrine from possibility that plaintiffs might establish strong inference of corporate scienter without being able to name individuals who concocted the fraud).
Evaluating the facts alleged, taken collectively, we decline to conclude that a strong inference can be drawn that Blazer, Falcone, or any other corporate agent acted with scienter in issuing any of the challenged financial statements. For each of the financial statements, plausible non-culpable inferences are at least as likely as an inference that any defendant acted knowingly or recklessly with respect to the misstatements. We therefore agree with the district court's scienter conclusions with respect to these statements.
Plaintiffs also challenge a Form 8-K filed March 17, 2005, which they allege was misleading with respect to the magnitude of goodwill impairment charges that BearingPoint would ultimately record for the quarter ending December 31, 2004 (reported January 31, 2006). Accounting standards consider goodwill impaired if the fair value of a reporting unit becomes lower than its carrying amount. [10] Goodwill and Other Intangible Assets, Statement of Fin. Accounting Standards No. 142, ¶ 19 (Fin. Accounting Standards Bd.2001) (J.A. 1992). Goodwill must be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit. This first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. Id. at Summary. Accounting standards further require goodwill impairment testing between annual tests if circumstances change that are likely to produce an impairment. BearingPoint announced in a March 17, 2005, Form 8-K that During the fourth quarter of fiscal year 2004, the Company determined that a triggering event had occurred, which caused the Company to perform a goodwill impairment test. Current Report (Form 8-K), at 3 (Mar. 17, 2005). It explained: As a result of the impairment test, on March 17, 2005, the Company determined that a material charge will be taken as of December 31, 2004 as a result of the impairment of its goodwill with respect to the operations in its Europe, the Middle East and Africa (EMEA) segment. . . . We are unable at this time to provide an estimate of the amount or range of amounts of the impairment charge. However, . . . the Company may include an impairment charge of up to $230 million [without affecting its credit line]. The actual amount of the impairment charge may be higher or lower than such amount. The Company does not expect that the impairment charge will result in future cash expenditures. Id. Plaintiffs allege that this statement is misleading with respect to the amount of the impairment charge. An April 20, 2005, Form 8-K later estimated that the impairment was $250 million to $400 million, and the 2004 Form 10-K and restatement ultimately recorded a goodwill impairment charge of $397.1 million. [11] The March 17, 2005, statement is only misleading in a material respect if BearingPoint agents had reason to know that the goodwill impairment charge would be in a range that would likely exceed $230 million. Plaintiffs submit that BearingPoint agents must have known that BearingPoint goodwill had been impaired by nearly $400 million because BearingPoint had admitted to conducting at least the first step of a goodwill impairment test prior to March 17, 2005. Plaintiffs read the language of the Form 8-K to go further to establish that the company had already completed both steps of the goodwill impairment test as of March 17, 2005. The Form 8-K stated that a triggering event caused the Company to perform a goodwill impairment test and implied that at least part of the impairment test was completed. Id. (As a result of the impairment test, on March 17, 2005, the Company determined that a material charge will be taken as of December 31, 2004.) This language, in context, does not state that both steps of the goodwill impairment test were necessarily completed, and plaintiffs have not otherwise alleged that BearingPoint completed the second step of an impairment test by March 17, 2005. But we agree with plaintiffs that the language of the Form 8-K suggests that BearingPoint had conducted at least the first step of the goodwill impairment test prior to March 17, 2005. Plaintiffs say that the first step of the test necessarily provides the range of any impairment, even if it fails to provide the exact amount of the impairment, which is calculated in the second step of the analysis. Plaintiffs ask us to infer that at least one BearingPoint agent thus acted with scienter in approving the March 17, 2005, Form 8-K. Defendants contend that the most reasonable inference based on the allegations and documents incorporated by reference is not that BearingPoint officials acted with scienter, but rather that they had insufficient information to disclose a range of impairment. Evaluating the allegations holistically, we conclude that plaintiffs failed to allege facts sufficient to give rise to a strong inference that any corporate agent acted with scienter in making the March 17, 2005, statement. Even if the first step of the impairment test yielded some sort of range as to the amount of the impairment charge, we decline to infer (based on the limited allegations and materials before us) that corporate agents in fact knew or that it was obvious to them that the goodwill impairment charge would be within a meaningfully narrow range and likely to exceed $230 million. Further, the company provided investors a range the following month on April 20, 2005. It is certainly not dispositive that BearingPoint eventually reported accurate information. But we do consider that plaintiffs' alleged motivethat BearingPoint was seeking to avoid a default on its credit agreements  is weakened by the fact that BearingPoint clarified the allegedly misleading statement one month later. The impairment charge was based on events occurring in 2004, and neither its range nor other relevant considerations were likely to change between March and April 2005. On these facts, the most likely inference is that corporate agents lacked sufficient information to report a range of impairment until the April disclosure. In any event, evaluating the complaint holistically, non-culpable inferences are more likely than any inference that BearingPoint agents knew that goodwill was impaired by more than $230 million or recklessly disregarded information indicating an impairment of that magnitude.
For the foregoing reasons we agree with the district court's conclusion, in its initial opinion and in its order denying relief under Rule 59(e), that plaintiffs failed in the operative complaint to adequately allege scienter under the PSLRA pleading requirements. The district court also dismissed plaintiffs' claims under § 20(a) of the Exchange Act, which imposes liability on each person who controls any person liable under any provision of this chapter. 15 U.S.C. § 78t(a). Because the complaint fails to withstand a Rule 12(b)(6) motion with respect to the predicate violation of § 10(b), it also fails with respect to the § 20(a) claims. Our agreement with the district court's analysis of the allegations in the operative complaint does not dispose of this case, however, as we demonstrate next.
We turn finally to the district court's dismissal of the operative complaint with prejudice and its treatment of plaintiffs' efforts to file a second amended complaint. Plaintiffs argue that the district court erred by dismissing their complaint with prejudice rather than granting leave to amend. Alternatively, they argue that the district court erred when it did not grant their Rule 59(e) motion to alter or amend the judgment in order to allow them to file a second amended complaint. We review both determinations for abuse of discretion. See Laber v. Harvey, 438 F.3d 404, 428 (4th Cir.2006) (en banc); In re PEC Solutions, 418 F.3d at 387. In challenging the dismissal with prejudice, plaintiffs argue that they filed an adequate motion for leave to amend their complaint prior to dismissal by (1) requesting permission to amend in a footnote in their memorandum opposing the motions to dismiss, and (2) indicating in oral argument that they were in a position to significantly bolster [their] allegation [of scienter], J.A.2008. Plaintiffs also argue that, irrespective of whether they properly moved to amend their complaint, the district court erred in granting a dismissal with prejudice because the court failed to make a necessary determination: a dismissal that operates with prejudice is warranted only when the trial court determines that the allegation of other facts consistent with the challenged pleading could not possibly cure the deficiency.' Belizan v. Hershon, 434 F.3d 579, 583 (D.C.Cir.2006) (quoting Firestone v. Firestone, 76 F.3d 1205, 1209 (D.C.Cir.1996)); see also Ostrzenski v. Seigel, 177 F.3d 245, 252-53 (4th Cir.1999) (noting that a plaintiff should have every opportunity to cure a formal defect in [a] pleading); Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir.2003) (suggesting that these principles hold special force in the context of the PSLRA). Because we conclude that the district court should have granted plaintiffs' motion to vacate the judgment and allowed them to amend their complaint, we decline to decide whether the court erred in refusing to allow an amendment earlier in the proceedings. After the district court dismissed their claims with prejudice, plaintiffs filed a motion to alter or amend the judgment in order to allow them to amend their complaint. Thereafter, plaintiffs lodged a proposed second amended complaint with the district court, indicating they were prepared to immediately file this pleading in the event the Court permits the filing of an amended complaint. J.A. 2240. The district court denied plaintiffs' motion to alter or amend the judgment, thereby refusing to allow amendment of the complaint. The court also struck the proposed second amended complaint from the docket. In Laber v. Harvey, 438 F.3d 404 (4th Cir.2006), our en banc court outlined the framework and standards for considering a post-judgment motion to amend a complaint. To begin with, we noted that [t]here is one difference between a pre-and a post-judgment motion to amend: the district court may not grant the post-judgment motion unless the judgment is vacated pursuant to Rule 59(e) or [Rule] 60(b). Id. at 427. A conclusion that the district court abused its discretion in denying a motion to amend, however, is sufficient grounds on which to reverse the district court's denial of a Rule 59(e) motion. Id. at 428. We made clear in Laber that a post-judgment motion to amend is evaluated under the same legal standard grounded on Rule 15(a)as a similar motion filed before judgment was entered. Id. Rule 15(a) directs that leave to amend shall be freely given when justice so requires. Fed.R.Civ.P. 15(a). This directive gives effect to the federal policy in favor of resolving cases on their merits instead of disposing of them on technicalities. Laber, 438 F.3d at 426. Our court therefore reads Rule 15(a) to mean that leave to amend should be denied only when the amendment would be prejudicial to the opposing party, there has been bad faith on the part of the moving party, or amendment would be futile. Id. In Laber we offered guidance for evaluating these factors. First, [w]hether an amendment is prejudicial will often be determined by the nature of the amendment and its timing. Id. at 427. Second, delay alone is an insufficient reason to deny a motion to amend; however, when a post-judgment motion to amend is made, the further the case progressed before judgment was entered, the more likely it is that the amendment will prejudice the defendant or that a court will find bad faith on the plaintiff's part. Id. Nothing in the PSLRA affects the standards governing either the pre- or post-judgment amendment of pleadings. See Belizan, 434 F.3d at 583-84. In denying plaintiffs leave to amend, the district court merely repeated the reasons it had previously offered for dismissing the operative complaint. The district court made no determinations about prejudice, bad faith, or futility with respect to the proposed second amended complaint. That alone may constitute an abuse of discretion. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) ([T]he grant or denial of an opportunity to amend is within the discretion of the District Court, but outright refusal to grant the leave without any justifying reason appearing for the denial is not an exercise of discretion; it is merely abuse of that discretion and inconsistent with the spirit of the Federal Rules). Of course, a district court's failure to articulate [its] reasons [for denying leave to amend] does not amount to an abuse of discretion so long as its reasons are apparent. In re PEC Solutions, 418 F.3d at 391. Here, however, the only reasons mentioned by the district courtthose reasons the court had previously given for dismissing the operative complaint with prejudicedid not justify denying plaintiffs post-judgment leave to amend. The district court's reiterated reasons largely appear to be related to the bad faith factor. It expressed concern that [t]his case was filed nearly two and one half years ago, and [plaintiffs have] had more than ample opportunity to plead [their] allegations with sufficiency. J.A. 2347. Plaintiffs, however, were not responsible for any delay, and certain circumstances worked to their disadvantage as they attempted to conclude their work on a complaint. After the district court appointed plaintiffs as lead plaintiffs on July 26, 2005, the court ordered them to file an amended complaint by October 7, 2005, based on BearingPoint's representation that it expected to file its delinquent 2004 Form 10-K and restatement by September 21, 2005. When BearingPoint realized that it would be unable to meet the September 2005 target, it asked the district court to extend the scheduling deadlines. The court refused, and plaintiffs were required to file their amended complaint on October 7, 2005, without the benefit of critical information not yet disclosed by BearingPoint. See In re BearingPoint, 525 F.Supp.2d at 764 (describing 2004 Form 10-K and restatement as long overdue). After BearingPoint filed its 2004 Form 10-K and restatement on January 31, 2006, plaintiffs, with leave of court, promptly filed a first amended complaint on March 10, 2006. BearingPoint and the individual defendants filed motions to dismiss on March 31, 2006, and the parties filed supporting briefs in accordance with a schedule set by the court. The motions to dismiss were under consideration by the district court until March 23, 2007, when the court, on its own initiative, stayed the case pending the Supreme Court's decision in Tellabs. After the Tellabs decision in late June 2007, the district court lifted the stay, ordered and received briefing on the impact of Tellabs on the motions to dismiss, heard oral argument, and dismissed the operative complaint on September 12, 2007. Thus, the case had only been reactivated for a little over two months when the district court dismissed it with prejudice. Nothing in the case history suggests that plaintiffs were responsible for any of the delay or wasted any opportunity to plead with the required specificity. The district court also faulted plaintiffs for failing to file a formal motion to amend and said that plaintiffs did not identify additional allegations of scienter at oral argument on the motions to dismiss. Here, the district court's rationale does not take into account that the controlling decision, Tellabs, was both new and challenging. Tellabs was meant to resolve the disagreement among the circuits about how competing inferences should be evaluated in deciding whether allegations give rise to a strong inference of scienter. Tellabs, of course, provided instruction, but when the motions in this case were argued, lawyers and courts alike were just beginning to explore how to follow Tellabs ' instructions  instructions that do not generate easy conclusions. See Tellabs, 551 U.S. at 322-24, 127 S.Ct. 2499. Against this backdrop, the district court, near the beginning of oral argument on the motions to dismiss, asked plaintiffs' counsel whether he would offer additional allegations with respect to scienter if the court said at the end of the hearing, You don't have it. J.A.2006. Plaintiffs' counsel replied that he would proceed to explain why he believed the current allegations were sufficient, but that he was in a position to significantly bolster the allegations. J.A.2008. Also, in their memorandum that was before the district court, plaintiffs had asked that amendment be permitted if the court concluded that the complaint was insufficient. Plaintiffs' counsel's strategy of not submitting a formal motion to amend and instead arguing that the operative complaint was adequate can, of course, be questioned. Nevertheless, the strategy does not in any way amount to bad faith, and it did not provide the district court with a basis for declining to examine the additional allegations offered in connection with the Rule 59(e) motion to set aside the judgment to permit an amended pleading. The district court did not consider whether defendants would be prejudiced if plaintiffs were granted leave to amend, and we see no basis for a finding of prejudice. Plaintiffs simply seek to add specificity to scienter allegations in a situation where defendants are aware of the circumstances giving rise to the action. Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir.1999) (noting that merely adding specificity to allegations generally does not cause prejudice to the opposing party); Laber, 438 F.3d at 427; see also Davis v. Piper Aircraft Corp., 615 F.2d 606, 613 (4th Cir.1980) (Because defendant was from the outset made fully aware of the events giving rise to the action, an allowance of the amendment could not in any way prejudice the preparation of defendant's case.). Moreover, in this case the amendment would occur while discovery is stayed pursuant to the PSLRA, 15 U.S.C. § 78u-4(b)(3)(B). The district court also failed to examine whether amendment of the operative complaint would have been futile. While we reach no conclusion as to whether the proposed second amended complaint satisfies the scienter pleading requirements, we believe that the allegations added to that complaint changed the analysis [that ought to have been] conducted by the district court. See Steinburg v. Chesterfield County Planning Comm'n, 527 F.3d 377, 390 (4th Cir.2008). Specifically, the proposed amended complaint added allegations relating to the time frame in which red flags became obvious to Blazer and Falcone; it alleges that OneGlobe problems were well known and frequently discussed by the Company's senior accounting and executive staff beginning in early 2004. Defendant Blazer, in particular, was a party to those discussions. J.A. 2278 (emphasis added). Moreover, senior employees, including the communications and content group leader and the public services group leader, refused to sign off on financial statements for their respective segments during the second and third quarters of 2004 because it was known that the financial data was not accurate due to the problems associated with OneGlobe. J.A. 2279. Blazer and Falcone approved financial reports for those quarters notwithstanding that senior employees had refused to sign off on the same statementsrefusals that allegedly alerted Blazer and Falcone to concerns about the accuracy of the statements. These additional allegations, which the district court did not consider, appear to weigh in favor of an inference that Blazer and Falcone (and thus BearingPoint) acted with scienter. The allegations, as well as others added by plaintiffs to the proposed amended complaint, could therefore affect the analysis of whether plaintiffs can satisfy the heightened pleading requirements for scienter under the PSLRA. [12] Because (1) plaintiffs did not act in bad faith, (2) their filing of an amended complaint would not prejudice defendants, and (3) amendment would not be futile, the district court abused its discretion in denying plaintiffs' Rule 59(e) motion to alter the judgment in order to allow an amended complaint. We emphasize that our decision today is not in any way meant to detract from the district court's conscientious and thorough work in this case.
For the reasons stated, we agree with the district court's determination that the allegations in the operative complaint do not give rise to a strong inference of scienter. We nevertheless reverse the district court's November 19, 2007, order denying plaintiffs' Rule 59(e) motion to alter or amend the judgment for the purpose of allowing plaintiffs leave to file an amended complaint. The judgment is vacated, and the case is remanded. After remand the district court will allow plaintiffs to file an amended complaint against the non-debtor defendants within a reasonable time to be determined by the district court. In addition, plaintiffs may after remand take action, consistent with bankruptcy law and procedure, with respect to their claims against BearingPoint, now a chapter 11 debtor. ORDER REVERSED, JUDGMENT VACATED, AND CASE REMANDED