Opinion ID: 1434342
Heading Depth: 3
Heading Rank: 1

Heading: standard of review

Text: The investors allege that Diebold and the Defendants violated Section 10(b) of the Securities and Exchange Act of 1934 (the Act) and Rule 10b-5 promulgated thereunder, which prohibit fraudulent, material misstatements or omissions in connection with the sale or purchase of a security. See Morse v. McWhorter, 290 F.3d 795, 798 (6th Cir.2002). They also allege that the Defendants violated Section 20(a) of the Act, which imposes control-person liability on [e]very person who, directly or indirectly, controls any person liable under the Act and accompanying rules, unless the controlling person acted in good faith and did not directly or indirectly induce the illegal acts. See 15 U.S.C. § 78t(a). Such a control-liability claim is contingent upon the investors' ability to establish an underlying violation of Section 10(b) and Rule 10b-5. PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 696 (6th Cir.2004). The investors' lawsuit is thus a securities-fraud action, which falls under the requirement of Rule 9(b) of the Federal Rules of Civil Procedure that claims of fraud be plead with particularity. See PR Diamonds, 364 F.3d at 681. Moreover, the Private Securities Litigation Reform Act of 1995 (PSLRA) imposes additional and more `[e]xacting pleading requirements' for pleading scienter in a securities fraud case. Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir.2008) (alterations in original) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). Securities-fraud plaintiffs 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). To qualify as `strong' ..., an inference of scienter must be more than merely plausible or reasonableit must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. This at least as compelling standard replaced the old standard used by this court, which provided that plaintiffs are entitled only to the most plausible of competing inferences. See Helwig v. Vencor, Inc., 251 F.3d 540, 553 (6th Cir. 2001) (emphasis added). Negligence alone on the part of a defendant cannot support a finding of scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 200-01, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Recklessness, however, is a sufficiently culpable state of mind for liability under [section] 10(b) and Rule 10b-5. Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1023 (6th Cir.1979). This court has long defined recklessness as highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must at least be so obvious that any reasonable man would have known of it. Id. at 1025. The investors allege that the Defendants made fraudulent misstatements in Diebold's quarterly and annual press releases and conference calls from the third quarter of 2003 through the second quarter of 2005. In these press releases and conference calls, the Defendants touted the strength of Diebold and its record earnings and sales figures. These statements were allegedly false because the figures were not the result of Diebold's legitimate business operations, but were instead the result of the Defendants' scheme to prematurely recognize revenue. The investors also allege that the Defendants made fraudulent misstatements in Diebold's quarterly and annual Securities and Exchange Commission (SEC) filings during the Class Period. Each of these filings contained a certification that the reported earnings represented the actual financial condition of Diebold, that Diebold's internal disclosure controls were effective, and that Diebold's revenue-recognition policy and practice was to account for revenue according to the terms of the relevant contract and to recognize service revenue when it was actually earned. We must therefore analyze the investors' complaint to determine whether the facts alleged, taken as true, give rise to a strong inference that the Defendants were at least reckless as to the falsity of these statements and whether that inference is at least as compelling as any inference of nonfraudulent intent. Our analysis is de novo because the district court dismissed the investors' complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Biegas v. Quickway Carriers, Inc., 573 F.3d 365, 377 (6th Cir.2009).