Opinion ID: 31529
Heading Depth: 3
Heading Rank: 3

Heading: Plaintiffs failed to adequately plead scienter

Text: 68 Plaintiffs argue that the complaint adequately pleads scienter, and that the district court applied the wrong standard to their complaint. They emphasize that circumstantial evidence can support a strong inference of scienter, Nathenson, 267 F.3d at 410, and argue that the district court improperly assumed the role of fact finder in weighing the evidence, instead of construing the allegations in plaintiffs' favor. 69 First, plaintiffs point to the Wasserstein report as evidence that defendants had actual knowledge of the true prospects for Azurix's success— i.e., that its cost of capital was too high and that the Buenos Aires concession was plagued with problems. Second, plaintiffs argue Azurix had motive to inflate its stock price because, as the complaint alleges, Azurix used stock to raise capital. Third, plaintiffs point out the failure of Azurix's core business — water privatization projects — supports the inference that defendants knew, or recklessly disregarded, Azurix's true prospects for success. Fourth, plaintiffs re-assert that Azurix's executive compensation was tied to share price. Fifth, plaintiffs point to the executive resignations as supporting the inference that those executives were fleeing from their improprieties. According to plaintiffs, the district court's contrary inference — that the struggling company no longer had faith in its executives, 198 F.Supp.2d at 891 — was improper fact finding. Finally, plaintiffs argue that the district court failed to address its assertion that raising IPO funds was a motive to commit fraud. 70 Plaintiffs acknowledge that mere motive and opportunity do not meet the PSLRA's requirements, but contend that they have pleaded more. And, they assert that the district court erred in considering these factors in isolation, rather than considering the totality of the circumstances. 71 We agree with the district court that the plaintiffs' allegations are insufficient under the PSLRA's rigorous pleading standards. Although plaintiffs complain the district court improperly weighed the facts, the PSLRA's pleading standards explicitly contemplate such weighing by requiring the district court to determine whether or not the facts support a  strong inference of scienter. That is, the district court must engage in some weighing of the allegations to determine whether the inferences toward scienter are strong or weak. We agree with the district court that the inferences of scienter are weak. 72 It is well established that bare allegations of motive and opportunity will not suffice to demonstrate scienter because, to hold otherwise, would effectively eliminate the state of mind requirement as to all corporate officers and defendants. Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.1994); see also Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002). To the extent that plaintiffs rely on the mere facts of motive and opportunity, those allegations are insufficient. We note additionally that there is no allegation that defendants sold their Azurix shares, calling into question the alleged motive to artificially inflate the stock price. See Abrams, 292 F.3d at 434-35. Moreover, the successive resignations of key officials, as the district court stated, is more likely probative only of the fact that the company was failing. 73 Plaintiffs rely on the Wasserstein report as specific evidence that defendants had actual knowledge of Azurix's gloomy prospects and undisclosed problems. The Wasserstein report is dated December 4, 2000 — well after the alleged misrepresentations and omissions — and is plainly a hindsight assessment of Azurix's brief stint as a public company. Nevertheless, plaintiffs cling to the following sentence as evidence that management knew of the problems all along: The Buenos Aires concession, the company's second largest asset, faced numerous problems since the acquisition including incomplete customer accounts, difficulties in account receivable collection, water quality issues and disputes over tariffs. (emphasis added). Emphasizing that we should construe the complaint in their favor, plaintiffs would have us read the sentence to mean that management knew when it acquired the concession that it was inheriting these problems. 8 74 Even if we were to accept such a reading, the allegations are not sufficiently particular. The report describes the problems with Azurix in generalized terms, and, more importantly, it fails to identify exactly who supplied the information or when they knew the information. See id. at 432 (A pleading of scienter may not rest on the inference that defendants must have been aware of the misstatement based on their positions within the company.). These statements fall far short of the `who, what, when, where, and how' required under 9(b) and [the Court's] securities fraud jurisprudence under the PSLRA. Tchuruk, 291 F.3d at 350. 75 The plaintiffs' allegations that defendants did not have the financial wherewithal to succeed because of their cost of capital or debts to Enron are also hindsight. Importantly, plaintiffs do not allege that Azurix falsely represented its capital structure, or its debts to Enron, in the prospectus. 9 It is difficult to form a strong inference of scienter from the alleged undercapitalization of a company when plaintiffs appear to concede that the company accurately disclosed its capital structure and financial obligations in its prospectus. 76