Opinion ID: 785790
Heading Depth: 4
Heading Rank: 2

Heading: The Complaint Fails to Raise a Strong Inference of Scienter

Text: 42 Plaintiffs contend that the district court erred in concluding that the Complaint failed to allege facts raising a strong inference of the Individual Defendants' scienter. The gist of Plaintiffs' argument is that the district court mistakenly viewed the allegations of the Complaint in a piecemeal fashion, rather than considering the totality of the circumstances pled. As Plaintiffs correctly point out, this Court employs a totality of the circumstances analysis whereby the facts argued collectively must give rise to a strong inference of at least recklessness. See In re Telxon Corp. Secs. Litig., 133 F.Supp.2d 1010, 1026 (N.D.Ohio 2000) (Thus, the Sixth Circuit employs a form of `totality of the circumstances' analysis; this Court, accordingly, declines to examine plaintiffs' allegations in piecemeal fashion and, will instead, assess them collectively to determine what inferences may be drawn therefrom.) (citing Comshare, 183 F.3d 542 at 549-52). 43 Reading the Complaint in its entirety, Plaintiffs maintain, establishes a strong inference that throughout the class period the Individual Defendants knew of serious accounting improprieties at Intrenet and the effect such improprieties were having on the Company's financial condition, or were reckless in not knowing or in disregarding this information. Furthermore, Plaintiffs contend that after the outside consultant discovered the accounting improprieties, the inference of scienter is not merely strong, but virtually inescapable. Despite this awareness, Plaintiffs argue, the Individual Defendants continued to make materially false and misleading statements and omissions in Intrenet's financial statements and press releases. 44 Specifically, Plaintiffs argue that a strong inference of the Individual Defendants' scienter arises when viewing in totality the following allegations in the Complaint: the nature and magnitude of the accounting improprieties at Intrenet; other red flags signaling the accounting errors; the Individual Defendants' access to Intrenet's financial information by virtue of their positions at the Company; the fact that the accounting improprieties occurred in areas touted as the Company's key areas of focus; the Individual Defendants' motives and opportunities to commit fraud; the hiring of an outside consultant; and the outside consultant's discovery of internal control deficiencies and accounting irregularities. 45 Our examination of each of these clusters of allegations shows that, even viewed collectively, they fail to adequately plead scienter on the part of the Individual Defendants. To reiterate, we do not in this Opinion address whether, in light of the alleged accounting irregularities at Intrenet, the Company's financial statements and press releases materially misrepresented Intrenet's true state of financial affairs. The issue before us is limited to the scienter inquiry: that is, whether Plaintiffs have met their burden of pleading specific facts which, when viewed together, persuade us that the most plausible conclusion to draw is that the Individual Defendants must or should have known about the problems and nevertheless knowingly or recklessly made the allegedly misleading public statements. While the allegations no doubt merit drawing some inference of scienter, that is not enough. The PSLRA requires the Complaint to establish a strong inference — the most plausible of competing inferences — that the Individual Defendants acted at least recklessly, meaning that their states of mind were reflected in highly unreasonable conduct constituting an extreme departure from the standards of ordinary care so obvious that any reasonable person would have known of it. Here, the Complaint fails. 46 In the following discussion, we consider each allegation Plaintiffs offer in their effort to plead scienter. As we have noted before, recklessness in securities fraud is an untidy, case-by-case concept. Helwig, 251 F.3d at 551 (citing Mansbach, 598 F.2d at 1025). This necessarily involves a sifting of allegations in the complaint. Id. Accordingly, we sift Plaintiffs' allegations individually and then aggregate the nuggets of inference they generate, concluding in the end no strong inference arises. 47
48 Plaintiffs contend that the Complaint's allegations of Intrenet's improper accounting practices and internal control deficiencies comprise circumstantial evidence supporting a strong inference of the Individual Defendants' scienter. Plaintiffs suggest that none of these accounting maneuvers had any facially valid purpose and, therefore, they support the inference that the Individual Defendants harbored an intent to artificially inflate the Company's operating results. The alleged accounting improprieties include: failure to reconcile inter-company transactions; understatement of day-to-day operating expenses; accounting for uncollectible receivables and understatement of Intrenet's accounts receivable reserve; failure to record an impairment in the value of assets; failure to disclose significant risks and uncertainties; arbitrarily applying cash receipts against the oldest outstanding receivable; and recording journal entries in violation of the Foreign Corrupt Practices Act, without support or backup documentation. According to Plaintiffs, the nature and magnitude of the obvious, pervasive accounting problems at Intrenet support a strong inference that the Individual Defendants knew of or recklessly disregarded these problems when making statements to the investing public. 49 In Comshare, we held that [t]he failure to follow GAAP is, by itself, insufficient to state a securities fraud claim. 183 F.3d at 553 (internal citations omitted). A complaint alleging accounting irregularities fails to raise a strong inference of scienter if it allege[s] no facts to show that Defendants knew or could have known of the errors, or that their regular procedures should have alerted them to the errors sooner than they actually did. Id. We noted in Comshare that a strong inference of scienter cannot be drawn from speculative and conclusory allegations of GAAP violations. Id. However, as discussed below, some courts have recognized that an inference of knowledge or recklessness may be drawn from allegations of accounting violations that are so simple, basic, and pervasive in nature, and so great in magnitude, that they should have been obvious to a defendant. 50 Courts have described the type and scope of accounting errors that, in combination with other factors, support a strong inference of scienter. For example, Plaintiffs cite In re MicroStrategy, Incorporated Securities Litigation, 115 F.Supp.2d 620 (E.D.Va.2000) for the proposition that violations of simple accounting rules are obvious, and an inference of scienter becomes more probable as the violations become more obvious. The complaint in MicroStrategy alleged that accounting violations caused the company to report aggregate record net income of $18.9 million over three years, when in fact the company incurred a net loss for those years of more than $36 million. Id. at 636. In addition, the company overstated its revenues over the same period by a total of $66 million. Id. After reiterating the maxim that allegations of accounting violations standing alone can never lead to a strong inference of scienter, MicroStrategy nevertheless intimated that the nature of the misapplication of accounting principles — in terms of number, size, timing, frequency, and context — is relevant circumstantial evidence of a defendant's state of mind. Id. at 635. Turning to the facts before it, the court concluded that the magnitude, pervasiveness, and repetitiveness of the company's violations of simpl[e] accounting principles serve[d] to amplify the inference of scienter. Id. at 636. The court explained: 51 Indeed, common sense and logic dictate that the greater the magnitude of a restatement or violation of GAAP, the more likely it is that such a restatement or violation was made consciously or recklessly. This, of course, is a matter of degree, but it cannot be gainsaid that some violations of GAAP and some restatements of financials are so significant that they, at the very least, support the inference that conscious fraud or recklessness as to the danger of misleading the investing public was present. Cf. In re Oxford Health Plans, Inc. Sec. Litig., 51 F.Supp.2d 290, 294 (S.D.N.Y.1999) ([P]laintiffs allege `in your face facts,' that cry out, `how could [defendants] not have known that the financial statements were false.') In this case, the alleged GAAP violations and the subsequent restatements are of such a great magnitude — amounting to a night-and-day difference with regard to MicroStrategy's representations of profitability — as to compel an inference that fraud or recklessness was afoot. 52 Id. at 636-37 (footnotes omitted). 53 Other cases likewise indicate the drastic nature and magnitude necessary for accounting violations to support a strong inference of scienter. In Telxon, the court distinguished the far more egregious facts before it from those alleged in Comshare, where we held that the alleged accounting errors did not support a strong inference of scienter. 133 F.Supp.2d at 1031. Telxon, allegedly, overstated its revenues for years, did so by over $20 million in a single quarter and reported profits when it should have been reporting losses over several different quarters. Id. (italics in original) In addition, the accounting errors appeared to be fortuitously timed, resulting in revenue increases at times when the company foretold that it would return to profitability, or when the company needed to show profits to justify rejecting a takeover bid and to win a proxy battle. Id. The Telxon court also noted the defendants' training, background, and access to information. Thus, the nature and number of the alleged accounting manipulations, coupled with the magnitude of the difference between the originally reported financial disclosures and their restatements, and the fact that the misstatements escalated dramatically in the face of the [competing offer and proxy battle], taken in conjunction with the remaining allegations in the complaint, convinced the court that the plaintiffs had adequately alleged scienter. Id. 54 In contrast to the aforementioned cases, the accounting irregularities Plaintiffs allege in this case are significantly less egregious in nature and magnitude and thus do not support a strong inference that nondisclosure of the correct numbers was the product of a deliberate or reckless effort by the Individual Defendants to defraud investors. Alleged inaccuracies stemming from GAAP violations at Intrenet include: (1) unreconciled and uneliminated inter-company transactions totaling $600,000 by the end of 1999 that, had they been properly accounted for, would have reduced Intrenet's 1999 pre-tax operating income of $750,000 to $150,000; (2) at least $200,000 in unrecorded expenses resulting from the ADS subsidiary's failure to record normal day-to-day operating expenses as they occurred; (3) $600,000 in underreported expenses due to failure to adequately reserve for uncollectible accounts receivable resulting in an amplified accounts receivable balance (e.g., during the year ending December 31, 1999, Intrenet's net accounts receivable increased by approximately $4.4 million, or 14%, but its operating revenues increased by only 8%); and (4) failure to record an impairment loss in the carrying value of machinery and equipment assets valued at $340,000 but in reality worth nowhere near the recorded amount. The Complaint notes the October 18, 2000, press release reporting a possible restatement to the tune of $1.3 million in unrecorded expenses at ADS and alleges that improper accounting practices caused Intrenet to report a pre-tax 1999 operating income of $750,000 when in fact it should have reported an operating loss of approximately $50,000. 55 These alleged accounting and reporting problems do not resemble the pervasive and egregious manipulations found to support a strong inference of scienter in other cases. Intrenet operated one of the largest trucking fleets in the country, with over $280 million in revenue and $75 million in total assets in 1999. Moreover, the Company did disclose that it lost over $4.8 million in 1999, compared with a gain of $2.8 million in 1998, and that its operating income fell from over $6.3 million in 1998 to less than $1 million in 1999 on higher revenues. Intrenet's press release announced a possible downward restatement of income of approximately $1.3 million, and Plaintiffs allege that the Company's accounting irregularities turned the Company's 1999 operating loss of $50,000 into a $750,000 profit. In the face of these figures, the errors Plaintiffs allege are not especially dramatic. Accepting Plaintiffs' allegations as true, Intrenet represented itself as a barely profitable company, when in fact it was a barely unprofitable company. It simply cannot be said that Intrenet's accounting improprieties, by virtue of their type and size, should have been obvious, Comshare, 183 F.3d at 554, to the Individual Defendants. These are not in your face facts that cry out scienter. Therefore, the alleged GAAP violations, standing alone, are insufficient to state a securities fraud claim, and when viewed in combination with the other allegations only weakly support an inference of scienter, if at all. 56
57 Next, Plaintiffs contend that the Individual Defendants knowingly or recklessly disregarded red flags indicating Intrenet's improper accounting practices, GAAP violations, and internal control deficiencies. Specific factual allegations that a defendant ignored red flags, or warning signs that would have revealed the accounting errors prior to their inclusion in public statements, may support a strong inference of scienter. Comshare, 183 F.3d at 553-54. See also Miller v. Material Sciences Corp., 9 F.Supp.2d 925, 928-29 (N.D.Ill.1998) (Deliberately ignoring `red flags'... can constitute the sort of recklessness necessary to support § 10(b) liability.). On the other hand, ignoring red flags may indicate that a defendant was merely negligent, not reckless. Courts typically look for multiple, obvious red flags before drawing an inference that a defendant acted intentionally or recklessly. See, e.g., In re Health Mgmt., Inc. Secs. Litig., 970 F.Supp. 192, 203 (E.D.N.Y.1997) (citing In re Leslie Fay Cos., Inc., 871 F.Supp., 686, 699 (S.D.N.Y.1995)). 58 In Health Mgmt., the court inferred an auditor's fraudulent intent from numerous alleged red flags that should have led the auditor to question its audit opinion, including (i) the auditor's credulous acceptance of representations from the company that fairly obviously failed to reflect reality; (ii) the auditor's failure to follow up on an analyst letter alerting the auditor to artificially inflated accounts receivable levels; and (iii) the auditor's failure to exercise heightened scrutiny in response to the analyst letter and an SEC inquiry on the same subject. Id. at 203. The court concluded that the allegations implied that the auditor turned a blind eye to the wrongdoing. Id. Likewise, in Leslie Fay (a pre-PSLRA case), the court inferred scienter from allegations that the defendant deliberately chose to ignore multiple red flags that would be clearly evident to anyone in the defendant's position. 871 F.Supp. at 699. 59 Red flags in this case would be circumstances that would have put the Individual Defendants on notice that Intrenet's financial statements and press releases contained material misstatements or omissions, or at least would have given them reasons to question the veracity of the statements. Comshare, 183 F.3d at 553. The only purported red flag Plaintiffs specifically identify in their Complaint is the allegation that during the year ended December 31, 1999, Intrenet's net accounts receivable increased by approximately $4.4 million, or 14%, but its operating revenues increased by only approximately 8%. This supposed red flag, Plaintiffs maintain, should have alerted the Individual Defendants to Intrenet's failure to adequately reserve for uncollectible accounts receivable — a failure that resulted in $600,000 of unreported expenses in 1999. The Court disagrees that these circumstances constitute a red flag sufficiently blatant that fraudulent intent can be inferred. Perhaps the Individual Defendants' handling of the alleged accounts receivable situation suggests negligence on their part, but the Complaint's allegations do not resemble in severity or number the sort that courts consider indicative of knowledge or reckless disregard. 60
61 To buttress the argument that the Individual Defendants knew of or recklessly disregarded adverse information about Intrenet when making representations about the Company to the public, Plaintiffs point to their top-level positions within Company. During the putative class period, Chandler first served as Intrenet's Executive Vice President and Chief Operating Officer, and after June 12, 2000, was the Company's President and Chief Executive Officer until the end of the class period, all this time serving as a director as well. Meanwhile, Jackson was Intrenet's President and Chief Executive Officer from June 1999 to June 12, 2000, when he became Chairman of the Board of Directors. Jackson also served as a director throughout the putative class period. Plaintiffs maintain that by virtue of their positions within the Company, the Individual Defendants had access to all of Intrenet's financial information and controlled the content of all the Company's public statements and SEC filings. The Individual Defendants' access to Intrenet's financial information, Plaintiffs argue, works in favor of drawing a strong inference of scienter with respect to the alleged misrepresentations or omissions in the Company's public communications. 62 Contrary to Plaintiffs' assertions, fraudulent intent cannot be inferred merely from the Individual Defendants' positions in the Company and alleged access to information. As even the authorities which Plaintiffs cite indicate, the Complaint must allege specific facts or circumstances suggestive of their knowledge. Without more, Plaintiffs fail to meet the PSLRA requirement to state with particularity facts giving rise to a strong inference of scienter. See, e.g., In re Peritus Software Servs., Inc. Secs. Litig., 52 F.Supp.2d 211, 228 (D.Mass.1999) (general allegations that a defendant, through his board membership or executive position, had actual knowledge of false statements or reckless disregard for the truth are insufficient to raise strong inference of scienter). While it is true that high-level executives can be presumed to be aware of matters central to their business's operation, In re Complete Management, Incorporated Securities Litigation, 153 F.Supp.2d 314, 325-36 (S.D.N.Y.2001), in this case it cannot be said that the alleged misrepresentations or omissions pertained to central, day-to-day operational matters. Instead, they turn largely on accounting issues, predominantly at the ADS subsidiary, which the Court has already determined are relatively arcane in nature and scope. While the Individual Defendants' positions are relevant to the analysis of whether they are control persons for purposes of Section 20(a), on their own they do not bear strongly on the scienter analysis. Here, as in Comshare, Plaintiffs allege no facts to show that [the Individual Defendants] knew or could have known of the errors, or that their regular procedures should have alerted them to the errors sooner than they actually did. 183 F.3d at 553. 63
64 Plaintiffs seek to draw additional support for a strong inference of the Individual Defendants' scienter by claiming that Intrenet's accounting improprieties occurred in areas of the business that the Individual Defendants had specifically identified as targets of intense focus for the Company and where they were under pressure to show success. As a basis for this proposition, Plaintiffs cite Telxon, 133 F.Supp.2d at 1029. In that case, the court considered a variety of circumstances relevant to reaching a strong inference of scienter, including allegations of motive and opportunity, large restatements of the company's financial disclosures, and accounting manipulations of substantial magnitude. Id. Another factor the court considered was the fact that Telxon and its officers were in a very difficult position, facing unusual pressures to perform during the class period, and stood to benefit substantially from a performance record which matched the healthy ones [a company executive] continually projected to the public. Id. The pressures to make public statements reflecting profitable performance stemmed from the need to stave off [another company's] take over efforts and ensuing proxy-battle. Id. at 1028. 65 Here, Plaintiffs contend that Intrenet's press releases announcing the Company's financial results touted the Individual Defendants' careful monitoring of the very areas in which Intrenet committed accounting violations. The press releases stated that the Company has implemented a program to eliminate, where possible, expenses and liabilities that have historically been a burden to profitable operations; [t]he new management team has been tireless in identifying and eliminating unnecessary costs throughout the organization; [t]he Company has made solid strides and positive progress during what, otherwise, has been a challenging year; and that the Company would be late in filing its 1999 10-K to analyze the impact of recent operational trends, primarily extraordinary increases in fuel prices, on the Company's ability to meet financial covenants in its bank loan agreements. 66 The Court is not persuaded that the aforementioned statements in Intrenet's press releases do much to support an inference that the Individual Defendants knew or should have known about the specific accounting problems alleged in the Complaint. These are little more than statements of broad operational plans or goals — eliminating costs, reducing liabilities, improving profits, etc. These statements do not show knowledge or reckless disregard of the discrete and particularized alleged GAAP violations and control deficiencies concentrated in the ADS subsidiary. 67
68 Next, Plaintiffs argue that the Complaint alleges that the Individual Defendants had motives and opportunities to defraud investors. These allegations, Plaintiffs maintain, when considered together with the other allegations in the Complaint, support a strong inference of knowledge or reckless disregard on the part of the Individual Defendants. The Complaint's motive allegations include: (1) the improper accounting practices helped to mask the Company's deteriorating operating results and forestall its impending default under certain financial covenants of its bank loan agreement; (2) the Individual Defendants sought to reduce the impact of a spike in fuel costs in the first quarter of 2000 by reporting consolidated financial statements that incorporated artificially inflated net income and earnings of the ADS subsidiary; (3) the Company was motivated to inflate the value of its accounts receivable because borrowings under its $32 million credit facility, which the Company obtained in February 2000, were determined by a formula tied to the Company's eligible accounts receivable as defined in the credit agreement. In addition, Plaintiffs allege that the Individual Defendants had other motives to artificially inflate Intrenet's stock price, including: (1) to protect themselves and their investment in the Company; (2) to protect and enhance their executive positions and the substantial compensation and prestige obtained thereby; and (3) to allow Jackson to engage in self-dealing transactions from which he reaped profits, wherein Intrenet leased tractor trailers from a leasing company that purchased the trucks from a dealership affiliated with Jackson. Also, the Complaint alleges that Chandler was motivated to disseminate materially false and misleading financial statements in order to receive a bonus based on a percentage of net income before taxes, up to a maximum of $500,000. Finally, the Complaint alleges that the Individual Defendants had opportunities to participate in fraud due to their positions as the highest ranking officers of Intrenet who controlled the content of the Company's press releases and public filings. 69 [T]he bare pleading of motive and opportunity does not, standing alone, constitute the pleading of a strong inference of scienter. Comshare, 183 F.3d at 551. However, [w]hile 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. Helwig, 251 F.3d at 550. [F]acts regarding motive and opportunity may be relevant to pleading circumstances from which a strong inference of fraudulent scienter may be inferred, and may, on occasion, rise to the level of creating a strong inference of reckless or knowing conduct. Comshare, 183 F.3d at 551 (internal quotation and citation omitted). While bare allegations of motive and opportunity, without more, are insufficient to establish scienter, the Court must assess whether such allegations, considered in conjunction with the remainder of Plaintiff's allegations, on the whole raise an inference of recklessness or knowing disregard. Telxon, 133 F.Supp.2d at 1028. 70 Opportunity to commit fraud entail[s] the means and likely prospect of achieving concrete benefits by the means alleged. In re Criimi Mae, Inc. Secs. Litig., 94 F.Supp.2d 652, 660 (D.Md.2000) (internal quotations and citations omitted). With respect to the Individual Defendants' opportunities to engage in fraud, there can be little doubt that they could have, had they wanted to, committed such acts. See, e.g., San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 813 (2d Cir.1996) (There is no doubt that defendants as a group had the opportunity [to manipulate stock prices] ....[because they] held the highest positions of power and authority within the company.). 71 The more important question in this case is whether the Complaint alleges motives on the part of the Individual Defendants from which the Court could infer a knowing or reckless state of mind. In order to demonstrate motive, a plaintiff must show concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Phillips v. LCI Int'l, Inc., 190 F.3d 609, 621 (4th Cir.1999). Our review of the cases cited by the parties shows that courts distinguish motives common to corporations and executives generally from motives to commit fraud. All corporate managers share a desire for their companies to appear successful. That desire does not comprise a motive for fraud. See Chill v. Gen. Elec. Co., 101 F.3d 263, 268 (2d Cir.1996) (such a generalized motive, one which could be imputed to any publicly-owned, for-profit endeavor, is not sufficiently concrete for purposes of inferring scienter). Neither does an executive's desire to protect his position within a company or increase his compensation. See Kalnit v. Eichler, 264 F.3d 131, 140 (2d Cir.2001) (an allegation that defendants were motivated by a desire to maintain or increase executive compensation is insufficient because such a desire can be imputed to all corporate officers); Criimi Mae, 94 F.Supp.2d at 660 (allegations that defendants sought to protect their executive positions, standing alone, are inadequate to plead motive). Finally, Jackson's alleged self-dealing transactions suggest no more than a general motive for Intrenet's success, not fraud; moreover, the allegedly fraudulent SEC filings to which Plaintiffs refer expressly disclosed these transactions. 72 However, the allegations that the Individual Defendants were motivated to engage in fraud in order to forestall Intrenet's default of its bank loan agreement and to preserve the Company's ability to borrow pursuant to its credit facility warrant closer scrutiny. These more particularized sorts of motive allegations are more probative of scienter. For example, as part of the mix of factors contributing to an inference of scienter, the Ninth Circuit has considered a defendant's motivation to overstate a company's reported net value so as not to violate loan covenants with its lender and to improve the prospects of increasing its credit line. Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir.2000). We view the motive allegations concerning the bank loan and credit facility as suggestive of scienter, although standing alone they do not establish a strong inference. Accordingly, we will consider these allegations, along with all others, in the totality of the circumstances analysis. See Helwig, 251 F.3d at 551 (allegations of motive and opportunity are evaluated in the same manner as other circumstantial allegations to determine whether they produce a strong inference that the defendant acted at least recklessly). 73
74 The Complaint includes no allegations that the Individual Defendants ever took advantage of Intrenet's purportedly inflated stock prices by selling shares during the class period. The Individual Defendants point out that the allegations of fraudulent motive which courts most often recognize as support for a strong inference of scienter are allegations that insiders sold stock. Indeed, we mentioned in Helwig that insider trading at a suspicious time or in an unusual amount comprises one of the fixed constellations of facts that courts have found probative of securities fraud. 251 F.3d at 552. Conversely, courts have explained that the absence of inside sales dulls allegations of fraudulent motive. See, e.g., In re K-tel Int'l, Inc. Secs. Litig., 300 F.3d 881, 894 (8th Cir.2002) (evidence that the individual defendants abstained from trading may undercut allegations of motive); In re Northern Telecom Ltd. Secs. Litig., 116 F.Supp.2d 446, 462 (S.D.N.Y.2000) (The absence of stock sales by insiders, or any other evidence of pecuniary gain by company insiders at shareholders' expense, is inconsistent with an intent to defraud shareholders....Even where company insiders sell stock during the class period, scienter is not necessarily inferred.) (citing Kalnit, 99 F.Supp.2d at 337 and San Leandro Emergency Med. Group Profit Sharing Plan, 75 F.3d at 814). 75 However, we have never held that the absence of insider trading defeats an inference of scienter. Cf. Hanon v. Dataproducts Corp., 976 F.2d 497, 507 (9th Cir.1992) (scienter can be established even if officers who made misleading statements did not sell stock during the class period). What is more, Plaintiffs' motive allegations in this case are not based on a claim that the Individual Defendants sought to personally enrich themselves through sales of their own stock. See In re Nuko Info. Sys., Inc. Secs. Litig., 199 F.R.D. 338, 344-45 (N.D.Cal.2000) (when the complaint did not assert claims of insider trading, the absence of defendants' selling or trading has little bearing on determining whether plaintiffs have adequately pleaded scienter). We also reject the Individual Defendants' contention that their purchase of shares during the class period refutes any inference that they knowingly or recklessly misled the market to increase the stock's price. Plaintiffs allege, and Intrenet's 1999 10-K suggests, that the Individual Defendants bought the stock to infuse cash to the Company as a condition precedent to obtaining a new bank agreement. For these reasons, the absence of stock sales by the Individual Defendants works against but does not conclusively defeat an inference of scienter. 76
77 The Complaint alleges that in early 2000, Intrenet hired an outside consultant to investigate problems in the Company's accounting and internal control systems. The consultant allegedly discovered improprieties, ultimately leading to the October 13, 2000, press release that initiated Intrenet's collapse. Plaintiffs maintain that after the consultant was hired and discovered the problems, a strong inference that the Individual Defendants knew of or recklessly disregarded the problems is inescapable. 78 First of all, the Court is not willing to infer fraudulent intent from the fact that the Company hired a consultant to examine its accounting systems. If anything, this fact counters an inference that the Individual Defendants were trying to keep the alleged accounting problems hidden from view. Next, the thrust of Plaintiff's argument seems to be that the outside consultant readily discovered the accounting improprieties in a short time period, and yet the Individual Defendants continued to issue materially false and misleading financial statements and press releases, and did not ultimately publicize the deficiencies to the investing public until many months later, on October 13, 2000. In the intervening time, Plaintiffs maintain, the Individual Defendants must have known or at best recklessly disregarded the truths the consultant unearthed. See Danis v. USN Communications, Inc., 73 F.Supp.2d 923, 939 (N.D.Ill.1999) (Problems readily recognized by an outsider can be presumed to be known to a company's management and directors.). Therefore, Plaintiffs urge, a strong inference of scienter is especially warranted after the consultant arrived. 79 The allegations regarding the consultant fail to support a strong inference of the Individual Defendants' scienter because they wholly lack factual particularity. The Complaint offers the conclusory assertion that the consultant swiftly uncovered the accounting irregularities, but nowhere does it provide any meaningful information regarding when or in what manner the consultant made his discoveries. The relevant issue in determining scienter is not when the accounting improprieties occurred, but rather whether and when the Individual Defendants knew about them. There is no basis in the Complaint's allegations concerning the consultant from which the Court could conclude that the Individual Defendants knew anything about the problems prior to the October 13, 2000, press release. Moreover, Plaintiffs fail to specify what the consultant learned and how he learned it, other than offering the conclusory allegation that the consultant discovered Intrenet's alleged accounting improprieties. Claims of securities fraud cannot rest on speculation and conclusory allegations. Comshare, 183 F.3d at 553-54. 80
81 Plaintiffs have accumulated numerous circumstantial allegations from which they ask the Court to draw the strong inference of scienter required for this case to move forward. In the foregoing discussion, we noted that, while some of these allegations suggest little about the Individual Defendants' states of mind, other allegations favor the implication that they may have known, or were reckless in not knowing, of the accounting problems at Intrenet and its true financial condition. See MicroStrategy, 115 F.Supp.2d at 649 (Just as otherwise-unremarkable individual points of colored paint in the aggregate become a Seurat painting, so, too, do the individual allegations in this case — which, when viewed in isolation may or may not by themselves give rise to a `strong inference' of scienter — collectively paint an equally compelling picture of scienter.). However, [a] mere reasonable inference is insufficient to survive a motion to dismiss. Greebel v. FTP Software, Inc., 194 F.3d 185, 196 (1st Cir.1999). Even when added up and viewed in their entirety, the ultimate inference of scienter the allegations in this case raise is not strong — that is, the most plausible of competing inferences. 82 In Helwig, this Court set forth a non-exhaustive list of factors usually relevant to scienter. 251 F.3d at 552. Few of these factors emerge in this case. First, there are no allegations of insider trading at a suspicious time or in an unusual amount. Second, there are no specific allegations of a divergence between internal reports and external statements on the same subject. The allegations regarding the outside consultant lack any detail about when or to whom the consultant reported the information he allegedly discovered. Third, there is little temporal proximity between the allegedly fraudulent statements and the later disclosure of inconsistent information in October of 2000. Fourth, there are no allegations of bribery by a top company official. Fifth, there is no ancillary lawsuit charging fraud by the Company and the Company's quick settlement of the suit. Sixth, allegations that the Individual Defendants disregarded the most current factual information before making statements lack specific facts concerning how or when any accounting improprieties became known to them. Once again, the activities of the consultant are so vaguely described as to offer little insight into what the Individual Defendants knew or when they knew it. Seventh, the Complaint contains no allegations that accounting information was disclosed in such a way that its negative implications could only be understood by someone with a high degree of sophistication. Eighth, there are no allegations of certain directors holding a personal interest in not informing disinterested directors of a sale of stock. Finally, allegations of the Individual Defendants' self-interested motivation in the form of saving their salaries or jobs only mildly suggest scienter. 83 For all these reasons, the Section 10(b) and Rule 10b-5 claims against the Individual Defendants were properly dismissed pursuant to Fed.R.Civ.P. 12(b)(6). 84