Opinion ID: 161559
Heading Depth: 3
Heading Rank: 3

Heading: Pleading Scienter Under the PSLRA

Text: 57 As stated earlier, the appropriate level of scienter in securities fraud cases is a mental state embracing intent to deceive, manipulate, or defraud, Ernst & Ernst, 425 U.S. at 193 n.12, which includes recklessness, see Anixter, 77 F.3d at 1232. Prior to the passage of the PSLRA, the Second Circuit had held that a strong inference of fraudulent intent in securities fraud cases could be established either by: (1) alleging facts constituting strong circumstantial evidence of conscious misbehavior or recklessness, or (2) alleging that Defendants had the motive and opportunity to commit securities fraud. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). As noted above, however, the PSLRA heightened the pleading requirements for securities fraud cases generally, and particularly in regard to the scienter element, and the legislative history suggests that Congress specifically intended a pleading standard stricter than the standard then prevailing in the Second Circuit. 58 Currently, six federal appellate courts but not the Tenth Circuit have issued published opinions interpreting the PSLRA to determine the appropriate pleading standard for scienter under that statute. With regard to the continued viability of recklessness as a substantive pleading standard for scienter under the PSLRA, five circuit courts agree that plaintiffs can adequately plead scienter by setting forth facts raising a strong inference of intentional or reckless misconduct. 18 See Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999); Press v. Chemical Investment Servs. Corp., 166 F.3d 529 (2d Cir. 1999); In re: Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999); Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) (en banc); Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999). We agree. The six circuits have, however, reached three different conclusions regarding the alternative motive and opportunity means of pleading scienter. Before we consider the continuing viability of the pre-PSLRA motive and opportunity method of pleading scienter, however, we turn briefly to the more direct pleading method of intentional fraud or recklessness. 59
60 Intentional misconduct is easily identified since it encompasses deliberate illegal behavior. See Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000), cert. denied, 531 U.S. 1012 (2000). Recklessness is much harder to define adequately. See Novak, 216 F.3d at 308. In Anixter, we stated both that recklessness satisfies the scienter requirement for a primary violation of 10(b) and that recklessness is defined as conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. 77 F.3d at 1232 (quotation marks omitted); see also San Juan County, 965 F.2d at 883; Hackbart v. Holmes, 675 F.2d 1114, 1117 (10th Cir. 1982). 61 Courts have been cautious about imposing liability for securities fraud based on reckless conduct, however. See Novak, at 309 ([W]e have identified several important limitations on the scope of liability for securities fraud based on reckless conduct.). Plaintiffs should not be allowed to proceed with allegations of fraud by hindsight, for example, because corporate officials should be liable for failing to reveal only those material facts reasonably available to them. See id. Thus, allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did do not suffice to make out a claim of securities fraud. Id. We explained our rejection of the fraud by hindsight method of pleading in securities fraud cases in Grossman, 120 F.3d at 1124, in which we stated: 62 What makes many securities fraud cases more complicated is that often there is no reason to assume that what is true at the moment plaintiff discovers it was also true at the moment of the alleged misrepresentation, and that therefore simply because the alleged misrepresentation conflicts with the current state of facts, the charged statement must have been false. Securities fraud cases often involve some more or less catastrophic event occurring between the time the complained-of statement was made and the time a more sobering truth is revealed (precipitating a drop in stock price). . . . In the face of such intervening events, a plaintiff must set forth, as part of the circumstances constituting fraud, an explanation as to why the disputed statement was untrue or misleading when made. 63 Id. (emphasis in original) (quoting In re GlenFed Sec. Litig., 42 F.3d 1541, 1548-49 (9th Cir. 1994) (en banc)). 64 Further, allegations that the defendant possessed knowledge of facts that are later determined by a court to have been material, without more, is not sufficient to demonstrate that the defendant intentionally withheld those facts from, or recklessly disregarded the importance of those facts to, a company's shareholders in order to deceive, manipulate, or defraud. As the Seventh Circuit explained in Schlifke v. Seafirst Corp., 866 F.2d 935 (7th Cir. 1989): 65 The plaintiffs submit that the Bank's actual knowledge of the facts withheld amply establishes the necessary degree of scienter; however, this argument misconstrues the relevant inquiry. The question is not merely whether the Bank had knowledge of the undisclosed facts; rather, it is the danger of misleading buyers that must be actually known or so obvious that any reasonable man would be legally bound as knowing. 66 Id. at 946 (emphasis in original). This reading of the statute and Rule comports with the Supreme Court's definition of scienter, i.e., intent to deceive, manipulate, or defraud and knowing or intentional misconduct. Thus, to establish scienter in a securities fraud case alleging non-disclosure of potentially material facts, the plaintiff must demonstrate: (1) the defendant knew of the potentially material fact, and (2) the defendant knew that failure to reveal the potentially material fact would likely mislead investors. The requirement of knowledge in this context may be satisfied under a recklessness standard by the defendant's knowledge of a fact that was so obviously material that the defendant must have been aware both of its materiality and that its non-disclosure would likely mislead investors. 67 Finally, allegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim. Novak, 216 F.3d at 309. Only where such allegations are coupled with evidence that the violations or irregularities were the result of the defendant's fraudulent intent to mislead investors may they be sufficient to state a claim. 68
69 Prior to the passage of the PSLRA, several circuit courts of appeals had held that scienter could be alleged through a showing of the defendant's motive and opportunity to commit securities fraud. Motive would entail concrete benefits that could be realized by one or more of the false statements and wrongful non-disclosures alleged. Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged. Novak, 216 F.3d at 307. To succeed in establishing scienter with a motive and opportunity pleading, plaintiffs had to allege that defendants benefitted in some concrete and personal way from the purported fraud, as when the defendants made material misrepresentations to maintain a high stock price and then sold their own shares at a profit. See id. at 307-08. 70 The circuit courts of appeals are currently split on the question of whether plaintiffs may still use motive and opportunity pleadings to demonstrate scienter under the heightened pleading requirements set forth in the PSLRA. Two circuits have held that evidence of motive and opportunity to commit securities fraud may still satisfy the requirements for pleading scienter under the PSLRA. See Press, 166 F.3d at 537-38 (upholding previous Second Circuit standard without analysis of the PSLRA); Advanta, 180 F.3d at 534-35 (analyzing the PSLRA and upholding Second Circuit standard). At least one circuit has held that motive and opportunity pleadings alone can never satisfy the scienter pleading requirements of the PSLRA. See In re Silicon Graphics, 183 F.3d at 979. And at least two, and arguably three, more circuits have adopted a middle ground between these two approaches, holding that motive and opportunity pleadings are relevant to a finding of scienter, but that they do not constitute a separate, alternative method of pleading scienter. See Greebel, 194 F.3d at 197; Helwig, 251 F.3d at 550-51; Bryant, 187 F.3d at 1285-86; see also In re Comshare Inc. Sec. Litig., 183 F.3d 542, 550-51 (6th Cir. 1999). 71 We agree with the middle ground chosen by the First and Sixth Circuits, and arguably by the Eleventh Circuit. 19 These circuits have determined that courts must look to the totality of the pleadings to determine whether the plaintiffs' allegations permit a strong inference of fraudulent intent. Allegations of motive and opportunity may be important to that totality, but are typically not sufficient in themselves to establish a strong inference of scienter. 72 In Greebel, for example, the First Circuit acknowledged that the PSLRA heightened the pleading requirements for scienter to require particularized and specific references to each alleged misrepresentation or omission, and to require that plaintiffs present factual allegations supporting a strong inference, 194 F.3d at 197, that adverse circumstances existed at the time of the offering, and were known and deliberately or recklessly disregarded by defendants, id. at 193-94. The Greebel court then stated: 73 Our view of the Act is thus close to that articulated by the Sixth Circuit. That court held that a plaintiff could survive a motion to dismiss by pleading facts that give rise to a strong inference of [scienter]. In re Comshare, Inc. Sec. Litig., 183 F.3d 542, 550 (6th Cir. 1999) (internal quotation marks omitted). The Sixth Circuit found that evidence of motive and opportunity to commit fraud did not, of itself, constitute scienter for purposes of section 10(b) and Rule 10b-5. See id. at 551. Indeed, those courts addressing motive and opportunity in Securities Act cases have held only that facts showing a motive and opportunity may adequately allege scienter, not that the existence of motive and opportunity may support, as scienter itself, liability under 10b or Rule 10b-5. Id. The court held that evidence of motive and opportunity was relevant to pleading facts that could establish scienter, and, on occasion, could rise to the level of creating a strong inference of reckless or knowing conduct. Id. Nevertheless, such evidence, standing alone, could not constitute the pleading of a strong inference of scienter. Id.; accord Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1282-83 (11th Cir. 1999). 74 Greebel, 194 F.3d at 197. 75 In Helwig, the most recent circuit court opinion on the issue, the en banc Sixth Circuit stated: 76 While it is true that motive and opportunity are not substitutes for a showing of recklessness, they can be catalysts to fraud and so serve as external markers to the required state of mind. Comshare made this distinction by refusing to equate motive and opportunity with scienter but yet recognizing that facts showing each may support a strong inference of recklessness. We reaffirm that plaintiffs cannot simply plead motive and opportunity as a mantra for recovery under the Reform Act. The Act requires plaintiffs to 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, the complaint shall state with particularity all facts on which the belief is formed. 15 U.S.C. 78u-4(b)(1). In this wash of allegations, motive and opportunity are simply recurring patterns of evidence. We decide cases on facts, not labels. Whether the facts can be said to establish motive, opportunity, or neither, we are directed only to consider whether they produce a strong inference that the defendant acted at least recklessly. This necessarily involves a sifting of allegations in the complaint. As we have noted, recklessness in securities fraud is an untidy, case-by-case concept. Accordingly, facts presenting motive and opportunity may be of enough weight to state a claim under the PSLRA, whereas pleading conclusory labels of motive and opportunity will not suffice. 77 251 F.3d at 550-51 (some citations omitted). The Sixth Circuit further concluded that this type of fact-specific inquiry, which is bound not by labels or magic words but by the totality of the facts presented in the complaint, best reflects the intent of Congress [in passing the PSLRA, because] . . . Congress was concerned with the quantum, not type, of proof. Id. at 551. 78 We believe the most reasonable reading of the PSLRA in regard to motive and opportunity pleadings is the view adopted by the First Circuit in Greebel and the Sixth Circuit in Helwig. The PSLRA was obviously intended to eliminate frivolous securities litigation through its heightened scienter pleading requirements. Allegations of motive and opportunity, with nothing more, could allow potentially frivolous lawsuits to go forward with only minimal allegations of scienter. But evidence of motive and opportunity may be relevant to a finding of scienter, and thus may be considered as part of the mix of information that can come together to create the strong inference of scienter required by the PSLRA. When reviewing a plaintiff's allegations of scienter under the PSLRA, a court should therefore examine the plaintiff's allegations in their entirety, without regard to whether those allegations fall into defined, formalistic categories such as motive and opportunity, and determine whether the plaintiffs' allegations, taken as a whole, give rise to a strong inference of scienter. 79 2) Plaintiffs' Allegations Fail to Raise a Strong Inference of Scienter as Required by the PSLRA 80 Reviewing Plaintiffs' complaint under the standards set forth above, we conclude that Plaintiffs have not sufficiently and with particularity pled facts giving rise to a strong inference that Defendants engaged in either knowing or reckless misconduct when they failed to disclose the David's Litigation prior to March 14, 1996. 81 First, Plaintiffs argue that the individual Defendants should be charged with knowledge of the materiality of the David's Litigation because all four occupied senior positions at Fleming both prior to and during the class period. In regard to Defendants Devening and Twomey, Plaintiffs have provided no particular facts from which this court could plausibly infer their knowledge of the David's Litigation, the underlying business practices at issue in that case, or the potential materiality of the lawsuit. And even with regard to Defendants Stauth and Eyler, who either submitted affidavits or were deposed in the David's Litigation, Plaintiffs rest primarily on conclusory allegations that these men occupied senior positions in the company, knew of the David's Litigation no later than early 1995, and were aware of their general obligation to disclose pending material litigation. As the Third Circuit noted in Advanta, 180 F.3d at 539, allegations that a securities fraud defendant, because of his position within the company, 'must have known' a statement was false or misleading are 'precisely the types of inferences which [courts], on numerous occasions, have determined to be inadequate to withstand Rule 9(b) scrutiny.' Generalized imputations of knowledge do not suffice, regardless of defendants' positions within the company. (quoting Maldonado v. Dominguez, 137 F.3d 1, 10 (1st Cir. 1998). Thus, the mere fact that the individual Defendants occupied senior positions in the company, and that two of them knew of the litigation at least by early 1995, is not sufficient to imply knowledge of the specific fact of materiality. Plaintiffs' conclusory allegations both that Defendants Devening and Twomey had actual knowledge of the David's litigation or [were] recklessly indifferent to it and that they were actually aware or recklessly indifferent to the fraudulent business practices underlying the litigation are completely unsupported by any particularized facts that might give rise to a strong inference that they acted with scienter in failing to disclose the David's Litigation. Similarly, in regard to Defendants Stauth and Eyler, Plaintiffs' allegations that they knew of the litigation no later than early 1995 and were aware of their duty to disclose pending material litigation are exactly the type of conclusory assertions of liability that the PSLRA was designed to prevent. Finally, even if we were to accept as true Plaintiffs' unsupported statements that all the individual Defendants, by virtue of their positions and responsibilities within the company, must have known both about the David's Litigation and about the fraudulent business practices forming the basis of that lawsuit, the important issue in this case is not whether Defendants knew the underlying facts, but whether Defendants knew that not disclosing the David's Litigation posed substantial likelihood of misleading a reasonable investor. See Schlifke, 866 F.2d at 946 ([I]t is the danger of misleading buyers that must be actually known or so obvious that any reasonable man would be legally bound as knowing.); cf. Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977) ([the] danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it . . . .). None of Plaintiffs' allegations regarding Defendants' positions in the company and awareness of their general obligation to disclose material pending litigation establish a strong inference that Defendants knew the David's Litigation was material and thus that buyers would be misled if the lawsuit was not explicitly disclosed. 82 Second, Plaintiffs argue that Defendants must have actually known or recklessly disregarded the importance of the David's Litigation to potential and current investors because of the large damages claim in that lawsuit and because the lawsuit challenged a widespread company policy which, if the lawsuit were successful, could have generated additional similar lawsuits. According to the complaint, at the time the David's Litigation was filed in August 1993, the damages claim of $ 110 million represented approximately 3.5% of Fleming's total assets. Throughout 1994 and early 1995, the damages claim represented approximately 2.4% of Fleming's total assets. After that point in time, the David's Litigation complaint was amended to include even higher damages claims of approximately $ 250 million on or about September 19, 1995, and of $ 445,101,000 on or about February 9, 1996. Plaintiffs have provided no financial data for Fleming during the 1995 fiscal year, however, so we do not know what percentage of Fleming's assets the revised damages claims represented at the time of amendment. Plaintiffs also ask that we consider, when evaluating the extent of Defendants' alleged recklessness in this case, the total potential liability to Fleming if it lost the David's Litigation and Fleming's other cost-plus customers subsequently decided to file similar lawsuits. Plaintiffs did not, however, plead specifics of other lawsuits to which Fleming could have been subjected after an adverse verdict in the David's Litigation. 20 83 The standard for recklessness in the securities context, as discussed above, is conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Novak, 216 F.3d at 308. We cannot conclude from Plaintiffs' complaint that the potential negative impact of the David's Litigation was so obvious that the defendant[s] must have been aware both of the potential impact and that failure to disclose it posed an obvious danger of misleading buyers that Defendants recklessly ignored. 84 Assuming Defendants actually knew about the David's Litigation, a fact which Plaintiffs have not pled with particularity except in regard to Stauth and Eyler and then only in regard to early 1995 onward, the question of whether Defendants recklessly failed to disclose the David's Litigation is, of course, intimately bound up with whether Defendants either actually knew or recklessly ignored that the David's Litigation was material and nevertheless failed to disclose it. In evaluating the materiality of an event that is 'contingent or speculative in nature,' [Basic, Inc. v. Levinson, 485 U.S. 224 (1988)] provides that 'materiality will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.' SEC v. Fehn, 97 F.3d 1276, 1291 (9th Cir. 1996) (citing Basic, 485 U.S. at 238 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) (en banc))). Further, [a] statement or omission is only material if a reasonable investor would consider it important in determining whether to buy or sell stock, and if it would have significantly altered the total mix of information available to current and potential investors. See Grossman, 120 F.3d at 1119. 85 Other than reciting the contents of a few internal memoranda generally referencing inflated prices and customer complaints, Plaintiffs have alleged no particular facts on which this court could conclude that Defendants must have known the David's Litigation was meritorious, or that the damage award would be substantial, at the time Defendants decided not to explicitly disclose the lawsuits in its SEC filings and Annual Reports. Plaintiffs' general, conclusory assertions to the contrary are not sufficient to satisfy the PSLRA's requirement of particularized facts. 86 Assuming for the sake of argument, however, that Defendants knew they might lose the David's Litigation, we cannot say at this juncture that the likelihood of [the] potential event, i.e., having a large money judgment entered against the company, was so significant that Defendants were reckless in not disclosing the litigation. For guidance on this question, we look to 17 C.F.R. 229.103, which requires companies to report pending litigation meeting certain criteria relating to materiality. The regulation states: 87 Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. 88 17 C.F.R. 229.103. Instruction number 2 to this regulation states: No information need be given with respect to any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis. See 17 C.F.R. 229.103, Instruction 2 (emphasis added). Assuming without deciding that the David's Litigation was not ordinary routine litigation incidental to the business, Plaintiffs fail to allege that Fleming was required by federal regulation to disclose the David's Litigation because the initial damages claim exceeded the 10% of current assets materiality threshold of 229.103. Indeed, Plaintiffs have provided no information whatsoever regarding Fleming's current assets at the time the David's Litigation commenced. And while the damages claims in the David's Litigation were significantly increased in September 1995 and February 1996, Plaintiffs have not pled facts establishing that the individual Defendants were actually aware that the damages figures had been amended, nor have they included in their complaint any financial data from which we could calculate the percentage of Fleming's current assets that the increased claims represented at the time of amendment. Further, the first amended damages claim ($ 250 million) existed for only the last 6 months of the 28-month class period, and the second amended damages claim ($ 445,101,000) existed for only the last month of the 28-month class period; once the final damages claim of $ 445,101,000 was asserted in the David's Litigation, Defendants explicitly disclosed the David's Litigation in Fleming's very next public disclosure filing, the 1995 Annual Report. 89 For these reasons, we could not impute knowledge of the higher damages claims to Defendants for the majority of the class period, and, in any event, we could not determine the potential materiality under 229.103 of the David's Litigation because Plaintiffs have not provided the financial information necessary to make that determination. Using 229.103 as a guidepost, cf. General Elec. Co. v. Cathcart, 980 F.2d 927, 937 (3d Cir. 1992) (Although not determinative, Schedule 14A is persuasive authority as to the required scope of disclosure in proxy materials, as the regulation provides 'us with the [SEC's] expert view of the types of involvement in legal proceedings that are most likely to be matters of concern to shareholders in a proxy contest.' (quoting GAF Corp. v. Heyman, 724 F.2d 727, 739 (2d Cir.1983)); TSC Indus., Inc. v. Northway, 426 U.S. 438, 449 n.10 ([T]he SEC's view of the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability is entitled to consideration.), we cannot conclude that Plaintiffs have alleged adequately that Defendants were reckless in failing to disclose the David's Litigation prior to March 14, 1996. 90 It is true that Instruction 2 to 229.103 further states: [I]f any proceeding presents in large degree the same legal and factual issues as other proceedings pending or known to be contemplated, the amount involved in such other proceedings shall be included in computing such [10%] percentage. 17 C.F.R. 229.103, Instruction 2. Plaintiffs assert that, when considering the potential liability in the David's Litigation, Defendants should have considered the possibility of other lawsuits being filed against the company alleging substantially the same claims and, in failing to do so, Defendants recklessly ignored an obvious risk to the company. Instruction Two does not compel such a finding, however. Plaintiffs have given us no specifics with which to weigh the possibility of additional lawsuits being filed following a potential adverse verdict in the David's Litigation. For example, we do not know how many Fleming customers had entered into cost-plus contracts with the company, the approximate volume of business in which Fleming's other cost-plus customers engaged under those contracts, or the amount of damages that might have been claimed in any other potential lawsuits against Fleming. More important, Plaintiffs have not alleged that any additional lawsuits were, in fact, pending or known to be contemplated, and thus they have alleged no reason why Defendants should have aggregated potential risks when deciding whether to disclose the David's Litigation under 229.103. Wide authority establishes that while pending litigation may be material under certain circumstances, the mere possibility of litigation is not. Cathcart, 980 F.2d at 935; see also, e.g., Prettner v. Aston, 339 F. Supp. 273, 287 (D. Del. 1972) (any statement regarding the possibility of litigation other than a pending or threatened legal proceeding would have been wholly speculative and was not required). But cf. Fehn, 97 F.3d at 1291 (finding defendant liable for not disclosing past securities law violations, even where no lawsuits had yet been filed based upon those violations, because those violations could have spawned lawsuits that would have represented a potentially large financial loss for the company). We therefore conclude that Defendants cannot be held responsible for the failure to consider the cumulative effect of other, similar lawsuits that had not been filed and, as far as the pleadings establish, were not even threatened, at the time Defendants decided not to disclose the David's Litigation. 91 Plaintiffs correctly argue that it is possible for securities fraud defendants to comply technically with SEC reporting requirements such as 229.103 and yet still be omitting information that is material and should therefore be disclosed. Cf. Zell v. Intercapital Income Sec., Inc., 675 F.2d 1041, 1044 (9th Cir. 1982) (noting that the defendant's compliance with the technical requirements of Schedule 14A in drafting its proxy statement did not necessarily mean that a proxy statement satisfies the materiality test set forth by the Supreme Court in TSC Indus., Inc. v. Northway, 426 U.S. 438 (1976)). In TSC, the Supreme Court stated that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. 426 U.S. at 449 (addressing materiality in the context of proxy statements); see also Grossman, 120 F.3d at 1119 ([A] statement or omission is only material if a reasonable investor would consider it important in determining whether to buy or sell stock, and if it would have significantly altered the total mix of information available to current and potential investors). The existence of the David's Litigation might have been deemed important by a reasonable investor, but we cannot conclude that this possibility was either known to [Defendants] or . . . so obvious that [Defendants] must have been aware of it. Anixter, 77 F.3d at 1232. While the damages claims were certainly substantial, for the majority of the class period the damages claims totaled only 2.4%-3.5% of Fleming's total assets and approximately 10% of Fleming's total net worth. Because damages claims are often inflated by plaintiffs overestimating their chances of success at trial or hoping to force a settlement, we cannot find Defendants liable under the Act for failing to anticipate the full extent of their potential exposure in the David's Litigation. Finally, within one month from the time the damages claim was amended to $ 445,101,000, Defendants disclosed the litigation, stating: Management is unable to predict a potential range of monetary exposure, if any, to the company, but believes the claims asserted are without merit and that a material adverse effect of the company's consolidated financial position is less than probable. However, based upon the large recovery sought, an unfavorable result could have a material adverse effect on the company. (See Complaint 40, Pl. App. at 179-80.) Under these circumstances, Plaintiffs have not alleged that Defendants engaged in conduct constituting an extreme departure from the standards of ordinary care or recklessly ignored a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Anixter, 77 F.3d at 1232 (quotation marks omitted). 92 Our inquiry does not end there, however, because Plaintiffs also pled five possible motives for Defendants' conduct: (1) to facilitate notes offerings on December 8, 1994; (2) to avoid jeopardizing the success of the FFMP; (3) to minimize the possibility of future lawsuits alleging similar claims; (4) to protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby; and (5) to enhance the value of their own Fleming stock. Because we have concluded that allegations of motive and opportunity are relevant to securities fraud plaintiffs' allegations of scienter, we now review Plaintiffs' allegations of motive to determine whether the allegations of scienter, taken as a whole, are sufficient under the PSLRA. 93 The only alleged motive that arguably supports Plaintiffs' scienter allegations is alleged motive (2), that Defendants failed to disclose the David's Litigation because they feared jeopardizing the FFMP. While the desire not to jeopardize a company's business plan is a motive shared by most companies and thus would not ordinarily support an inference of fraudulent intent, see, e.g., Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994), this alleged motive for Defendants' non-disclosure of the David's Litigation is specifically and directly related to the underlying facts of the David's Litigation and is therefore at least somewhat probative of Defendants' motivations in this case. 94 Specifically, Plaintiffs alleged that Fleming started the FFMP because, by late 1993, it was apparent to Fleming that changes in the way grocery manufacturers conducted business were eliminating . . . many of the opportunities for discount buying that had made Fleming's pricing practices so profitable. According to Plaintiffs, Fleming responded to these changes by creating the FFMP, which sought to convert all of Fleming's customers to cost-plus contracts. Acceptance of the FFMP, which depended on customers believing that Fleming would actually pass through all discounts to its customers, was therefore important to Fleming's continued profitability. Plaintiffs assert that, because Defendants feared undermining the success of the FFMP by highlighting to potential customers Fleming's alleged past failure to pass through discounts to its cost-plus customers, Defendants deliberately failed to disclose the David's Litigation. 95 While we find this alleged motive relevant to a finding of scienter, it does not, even when viewed in the context of Plaintiffs' other allegations, ultimately convince us that Plaintiffs' scienter allegations are sufficient to satisfy the PSLRA. Plaintiffs' allegations fail to state with particularity that Defendants were aware of the David's Litigation throughout the class period (or, indeed, at any point prior to early 1995), aware of the amended damages claims which greatly increased Fleming's potential liability in the case, or aware that any other lawsuits might result from Fleming's alleged failure previously to pass through all discounts to its customers. Furthermore, Plaintiffs' allegations establish that, as early as 1989, Fleming's customers were aware that Fleming was not passing through certain discounts (such as cash discounts and discounts for forward-buying). Given the alleged history of customer complaints on this issue, it seems Fleming had little reason to fear that publication of one more customer's complaint, in the form of the David's Litigation, would likely result in substantial injury to the success of the FFMP. Under these circumstances, and viewing this allegation of motive in context of the entire pleadings in this case, we do not find that Fleming's desire for the FFMP to succeed was a sufficient motive for Defendants intentionally to fail to disclose the David's Litigation in a manner evidencing recklessness or intent to defraud. 96 The remaining alleged motives, which are generalized motives shared by all companies and which are not specifically and uniquely related to Fleming in particular, are unavailing. Alleged motive (1), that Defendants failed to disclose the David's Litigation in order to facilitate the notes offering in December 1994, is the epitome of a shared business motive and thus cannot by itself sustain a claim of securities fraud. As one court has stated: We do not agree that a company's desire to maintain a high bond or credit rating qualifies as a sufficient motive for fraud in these circumstances, because if scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions. San Leandro Emergency Med. Group Profit Sharing Plan v. Phillip Morris Co., Inc., 75 F.3d 801, 814 (2d Cir. 1996) (quotations and citations omitted); see also, e.g., Novak v. Kasaks, 997 F. Supp. 425, 430 n.5 (S.D.N.Y. 1998) (alleged motive to raise capital insufficient as a matter of law to allege scienter). Further, the desire to decrease the number of potential lawsuits against Fleming by its customers is another shared business motive. Cf. In re Crystal Brands Sec. Litig., 862 F. Supp. 745, 749 (D. Conn. 1994) (protection of customer relations is a shared business motive). Accordingly, alleged motive (3) is not particularly helpful in establishing that Defendants engaged in intentional or reckless conduct when failing to disclose the David's Litigation. Finally, alleged motives (4) and (5), that Defendants desired to protect their own positions with the company and the value of their own Fleming stock, are also insufficient, as again they are motives shared by all company executives. See Novak, 216 F.3d at 307 (stating that allegations of motive are insufficient where plaintiff pled only that the Defendants desire[d] to maintain a high stock price in order to increase executive compensation or prolong the benefits of holding corporate office) (quotations and citations omitted). As the Fourth Circuit explained in Phillips v. LCI Int'l, Inc., 190 F.3d 609 (4th Cir. 1999): 97 Allegations that merely charge that executives aim to prolong the benefits they hold are, standing alone, insufficient to demonstrate the necessary strong inference of scienter. For this reason assertions that a corporate officer or director committed fraud in order to retain an executive position . . . simply do not, in themselves, adequately plead motive. Similarly insufficient are allegations that corporate officers were motivated to defraud the public because an inflated stock price would increase their compensation. To support a claim of motive based on the benefit a defendant derives from an increase in the value of his holdings, a plaintiff must demonstrate some sale of personally-held stock or insider trading by the defendant. 98 190 F.3d at 622 (citations omitted) (citing inter alia Shields, 25 F.3d at 1130; Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994)). Here, Plaintiffs do not plead facts giving rise to an inference that Defendants misrepresented to the public material facts about the corporations's performance or prospects in order to keep the stock price artificially high while they sold their own shares at a profit. Novak, 216 F.3d at 307. To the contrary, Plaintiffs make no concrete allegations that any of the Defendants sold Fleming stock at an inappropriately inflated price, or that they in any other way benefitted in some concrete and personal manner from making the alleged misrepresentations and/or omissions. For these reasons, we find that Plaintiffs' alleged motives (4) and (5) are insufficient to raise a strong inference of scienter. 99 Even when reviewing Plaintiffs' allegations as a whole, considering both Plaintiffs' direct allegations of scienter and Plaintiffs' allegations of motive and opportunity, we cannot conclude that Plaintiffs have state[d] with particularity facts giving rise to a strong inference that [Defendants] acted with the required state of mind, as required under the PSLRA. 100 3) The District Court Properly Dismissed Plaintiffs' Claims of Controlling Person Liability 101 Plaintiffs' claims of controlling person liability were dismissed based upon the district court's dismissal of Plaintiffs' primary claim that Defendants violated 10(b) of the Exchange Act and Rule 10b-5. (See City of Philadelphia v. Fleming Co., No. CIV-96-853-M, slip op. at 17 (W.D. Okla. Feb. 4, 2000) (unpublished order) (Pl. App. at 225)). The controlling person liability claims were brought pursuant to section 20(a) of the Act, 15 U.S.C. 78t, which states: 102 Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 103 15 U.S.C. 78t(a). [T]o state a prima facie case of control person liability, the plaintiff must establish (1) a primary violation of the securities laws and (2) 'control' over the primary violator by the alleged controlling person. Maher v. Durango Metals, Inc., 144 F.3d 1302, 1305 (10th Cir. 1998). Because we find that the district court properly dismissed Plaintiffs' claims relating to primary violations of the Act, we conclude that Plaintiffs' controlling person liability claims were properly dismissed, as well. See First Interstate Bank of Denver v. Pring, 969 F.2d 891, 897 (10th Cir. 1992), rev'd on other grounds sub nom., Central Bank of Denver v. First Interstate Bank, 511 U.S. 164 (1994).