Opinion ID: 3025920
Heading Depth: 3
Heading Rank: 2

Heading: Pennexx’s Financial Condition

Text: Winer contends the District Court abused its discretion by failing to grant leave to add allegations regarding Pennexx’s financial condition. Winer challenges the statements in Corp., 380 F.3d at 1231–33 (“A former vice president of finance stated that, on the basis of the information available to them, the defendants would have known at least six weeks prior to the end of the third quarter that the applications sales growth would miss projections by at least 50%.”). The court held that “together, the false representations, both as to current facts and future estimated profits and sales, as well as the improper revenue adjustment and unusual stock sales” were sufficient to support a cause of action. Id. at 1234. 29 Pennexx’s SEC filings on April 9, 2002, and May 15, 2002, that “all adjustments, including normal recurring adjustments, necessary to present fairly the financial position of the Company . . . and the results of its operations and cash flows . . . have been included.” In support, Winer cites: (1) a report by Bart Ellis, Vice President for Operations at Smithfield Foods, dated August 2, 2002; (2) a memorandum by Jeffrey Deel, a Smithfield Foods employee, dated July 24, 2002; and (3) comments by Queen during the tour of the Tabor Facility in July 2004. According to Winer, these sources demonstrate Pennexx did not fairly present its financial condition accurately on a timely basis in reports to the SEC. As the District Court noted, a complaint is actionable if it alleges that a defendant “was aware that mismanagement had occurred and made a material public statement about the state of corporate affairs inconsistent with the existence of the mismanagement.” Hayes v. Gross, 982 F.2d 104, 106 (3d Cir. 1992) (discussing the holding in Shapiro v. UJB Fin. Corp., 964 F.2d 272, 282 (3d Cir. 1992)). The District Court found none of Winer’s newly asserted facts gave rise to a strong inference that defendants acted with scienter. The Ellis Report recounts Pennexx’s problems in reporting financial results to Smithfield Foods on a weekly and monthly basis. But the District Court noted the Ellis Report did not demonstrate that Pennexx failed to “fairly present” its financial condition in its quarterly and annual SEC reports. Stating that Pennexx’s “income statement[s] and balance sheet[s] are only published on a quarterly basis on the schedule demanded by SEC 10Q 30 requirements,” the Ellis Report suggests Pennexx was filing timely reports with the SEC but not with Smithfield Foods. The District Court found the Deel Memorandum merely suggested methods for Pennexx to improve production and minimize losses. Queen’s 2004 statements suffer from the defects already discussed regarding pleading fraud by hindsight. In these statements, Queen addressed the ability of Pennexx to calculate yield on a monthly basis, specifically referencing a failure to do so in February 2003. The District Court found these proposed amendments failed to support a strong inference that defendants knew or recklessly disregarded facts indicating Pennexx’s lack of the internal controls necessary to file accurate financial statements in April and May 2002. Citing In re Ikon Office Solutions, Inc. Sec. Litig., 66 F. Supp. 2d 622 (E.D. Pa. 1999), Winer contends that Pennexx’s history of failed internal controls demonstrates Pennexx could not accurately disclose its financial condition. But the allegations in In re Ikon were explicit and stronger, demonstrating “that the Company’s internal controls were grossly deficient and that the financial data . . . was so pervasively inaccurate and unreliable that reliance on that information for financial statement purposes was precluded by GAAP and GAAS.” Id. at 631. The District Court found none of Winer’s proposed amendments supported a conclusion that the challenged statements were false or misleading—at most they suggested Pennexx was not timely in reporting to Smithfield Foods. 31 Moreover, the District Court found the proposed amendments devoid of allegations that defendants consciously or recklessly failed to improve the company’s financial disclosure controls and procedures in response to the observations and recommendations made in the Ellis Report and Deel Memorandum. Even in the context of Winer’s other allegations, the Ellis and Deel documents did not give rise to a strong inference of scienter for the pre-May 22, 2002 statements because they were created long after the challenged filings on April 9, 2002 and May 15, 2002. Neither document demonstrated the statements concerning Pennexx’s ability to generate accurate financial information were false or misleading. Accordingly, the District Court held the proposed amendments failed to suggest defendants acted with scienter or that the challenged statements were false or misleading when made. The District Court did not abuse its discretion in finding futility.