Opinion ID: 1434342
Heading Depth: 4
Heading Rank: 1

Heading: Defendants' access to financial information

Text: [F]raudulent intent cannot be inferred merely from the Individual Defendants' positions in the Company and alleged access to information. PR Diamonds, 364 F.3d at 688 (holding that the defendants' access to financial reports and control over public earnings statements were insufficient to support a finding of scienter absent more particular facts). The investors' complaint alleges access to information, but it lacks sufficiently detailed facts regarding the financial reports, how they were used, and their connection to the Defendants. There are no allegations, for example, as to whether the reports were used to produce the earnings press releases and SEC reports, whether they were ever compared to other reports that accurately reflected revenue, or whether the Defendants were the ones who created the reports. In the absence of greater particularity, we have no way of distinguishing the plaintiffs' allegations from the countless fishing expeditions which the PSLRA was designed to deter. Fischer v. Vantive Corp. (In re Vantive Corp. Secs. Litig.), 283 F.3d 1079, 1087 (9th Cir.2002) (alterations, citation, and internal quotation marks omitted). Generalized facts alleging that the Defendants had access to Diebold's financial information, in short, do not support a strong inference that the Defendants knew of or recklessly disregarded the falsity of Diebold's earnings statements and SEC certifications. See PR Diamonds, 364 F.3d at 688 (citing In re Peritus Software Servs., Inc. Secs. Litig., 52 F.Supp.2d 211, 228 (D.Mass.1999) (holding that general allegations that a defendant, through his executive position, had access to internal corporate information and therefore had actual knowledge of misstatements or reckless disregard for the truth were insufficient to support a strong inference of scienter)). The standard from Tellabs requires specific facts that those reports were known to Defendants and reflected the revenue-recognition scheme in such a way that it would have been obvious that Diebold was improperly inflating its revenue. See In re Peritus Software Servs., 52 F.Supp.2d at 228 (rejecting an allegation of scienter because it did not achieve the level of specificity required by the PSLRA). In their appellate brief, the investors suggest that they cannot compile this more detailed information because they have not yet engaged in discovery and that the district court incorrectly held Plaintiffs to the burden of alleging ... how these accounting reports specifically detailed the Company's revenue recognition schemes. The district court, however, was not asking for information that can be obtained only through discovery. For example, the exact amount of money reflected in the reports is not relevant at this stage. But what is relevant is the role of these reports in perpetuating the alleged accounting scheme and the role of these reports in the Defendants' decision-making process. Moreover, because the investors had confidential witnesses who provided generalized statements about the reports, one would reasonably expect those witnesses to be able to provide more details about the reports and to be able to specifically connect them to the Defendants. The Days Sales Outstanding (DSO) reports are the one type of relevant report for which the investors provided some detail in their complaint. These reports allegedly reflected the false service-invoice scheme because the accounts receivable would age and the DSO would therefore increase. The only connection between these reports and the Defendants, however, is that the Defendants allegedly monitored the high DSO. But this general allegation is not sufficient to support a strong inference of scienter. Other reports cited in the complaint are even less helpful to the investors in creating a strong inference of scienter. The complaint, for example, alleges that the Defendants had access to Scorecards in which sales and service employees were ranked based on the amount of revenue they brought in. But ranking employees based on the amount of revenue they produce is not relevant to whether the Defendants knew that Diebold was reporting false earnings unless these reports clearly reflected the revenue-recognition scheme, which is not alleged in the complaint. The investors also claim that, in addition to the financial reports, Diebold used real-time data software to track its sales and revenue. Again, however, the complaint fails to provide key information about this software. It does not, for example, explain what the software reflected and what would have been obvious to a reasonable person upon examining the software. Similarly, the complaint fails to connect this software to eight of the Defendants. As for the ninth Defendant, the complaint simply alleges that he used the software. The investors raise similar allegations regarding the Defendants' attendance at weekly and monthly finance meetings to discuss ... the Company's financial performance and results. But attendance at such meetings, without more, does not support a finding of scienter given that the complaint does not allege that the revenue-recognition scheme was discussed in the meetings. Moreover, the investors' allegations regarding the Defendants' access to financial materials and software, and their attendance at meetings, are based solely on two confidential witnesses (Confidential Witnesses # 3 and # 11). When confidential sources are used to support vague and conclusory allegations, the allegations are not accorded much weight. Ley v. Visteon Corp., 543 F.3d 801, 811 (6th Cir. 2008) (citing Higginbotham v. Baxter Int'l Inc., 495 F.3d 753, 757 (7th Cir.2007) (holding that allegations of confidential witnesses must be discounted and [u]sually that discount will be steep)). Bare-bones statements, such as the allegation that the Scorecards were of huge importance to the decision-making of the Company, are the type of vague and conclusory allegations from confidential witnesses that are properly discounted. Even less weight should be given to the Confidential Witnesses' allegations due to the lack of information about them. See Higginbotham, 495 F.3d at 757 ([A]nonymity conceals information that is essential to the sort of comparative evaluation required by Tellabs. To determine whether a `strong' inference of scienter has been established, the judiciary must evaluate what the complaint reveals and disregard what it conceals.). The complaint does not provide any details about most of the Confidential Witnesses, such as dates of employment, job description, employment location or sector, or which Defendants interacted with them. Given the general nature of the allegations and the absence of critical details, the fact that the Defendants received financial reports, had access to real-time financial software, and attended financial meetings is insufficient to support a strong inference that the Defendants had knowledge of, or a reckless disregard for, the falsity of Diebold's earnings information.