Court Opinion

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Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

2-23-2006

In Re: Suprema
Precedential or Non-Precedential: Precedential

Docket No. 04-3716

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Recommended Citation
"In Re: Suprema " (2006). 2006 Decisions. Paper 1498.
http://digitalcommons.law.villanova.edu/thirdcircuit_2006/1498

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                                               PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT

                  Nos. 04-3716 & 04-3755

          IN RE: SUPREMA SPECIALTIES, INC.
               SECURITIES LITIGATION

            Teachers’ Retirement System of Louisiana,
                                       Appellant in 04-3716

                Special Situations Fund, III, L.P.;
              Special Situations Cayman Fund, L.P.,
                                        Appellants in 04-3755

       On Appeal from the United States District Court
                for the District of New Jersey
           (D.C. Nos. 02-cv-00168, 02-cv-03099)
        District Judge: Honorable William H. Walls

                 Argued September 14, 2005

  Before: SLOVITER, BARRY, and SMITH, Circuit Judges.

                  (Filed: February 23, 2006)

Daniel L. Berger (Argued)
J. Erik Sandstedt
Bernstein, Litowitz, Berger & Grossman, LLP
New York, NY 10019

      Attorneys for Appellant Teachers’ Retirement System
      of Louisiana
Lawrence M. Rolnick (Argued)
Lowenstein Sandler P.C.
Roseland, NJ 07068

Marc B. Kramer (Argued)
Short Hills, NJ 07078

      Attorneys for Appellants Special Situations Fund, III,
      L.P. and Special Situations Cayman Fund, L.P.

Phillip A. Geraci (Argued)
Frederic W. Yerman
Kaye Scholer
New York, NY 10022

Diane J. O’Neil
Mendes & Mount
Newark, NJ 07102

Michael T. Conway
Lazare, Potter, Giacovas & Kranjac
New York, NY 10022

      Attorneys for Appellees Mark Cocchiola and Marco
      Cocchiola

Nancy E. Delaney (Argued)
T. Barry Kingham
Dora Straus
Curtis, Mallet-Prevost, Colt & Mosle, LLP
New York, NY 10178

      Attorneys for Appellee Steven Venechanos

William J. Snipes (Argued)
Sullivan & Cromwell, LLP
New York, NY 10004

Charles J. Benjamin, Jr.
McCarter & English, LLP
Newark, NJ 07102

                               2
      Attorneys for Appellees Rudolph Acosta, Paul DeSocia,
      and Barry Rutcofsky

Ira G. Greenberg (Argued)
Edwards, Angell, Palmer & Dodge
New York, NY 10022

      Attorney for Appellee BDO Seidman, LLP

Robert L. Hickok (Argued)
Pepper Hamilton LLP
Philadelphia, PA 19103

      Attorney for Appellees Roth Capital Partners, LLC,
      Janney Montgomery Scott, LLC, and Pacific Growth
      Equities, Inc.

Thomas B. Lewis
Stark & Stark
Princeton, NJ 08543

      Attorneys for Appellee Oberweis.net

Anthony P. La Rocco
Kirkpatrick & Lockhart Nicholson Graham LLP
Newark, NJ 07102

Keith A. Ketterling
Stoll Stoll Berne Lokting & Shlachter PC
Portland, OR 97204

      Attorneys for Appellee Paulson Investment Company,
      Inc.

Robert A. Assuncao
DLA Piper Rudnick Gray Cary US LLP
Edison, NJ 08837-2226

      Attorneys for Appellee Westminster Securities Corp.

Nooshin Namazi     (Argued)

                              3
Kevin J. O’Malley
Nicoletti Hornig Campise & Sweeney
New York, NY 10005

       Attorneys for Appellee Westport Resources Investment
       Services, Inc.

                    OPINION OF THE COURT

SLOVITER, Circuit Judge

Table of Contents

I.     A. The Rise and Fall of Suprema
       B. The Secondary Offerings
       C. Procedural History

II.    A. Section 11 and Section 12(a)(2) Claims
       B. Section 10(b) Claims
             1. The Officers
                    a) Motive and Opportunity
                    b) Circumstantial Evidence
                       of Misconduct
             2. The Auditor
             3. The Outside Directors
             4. The 2000 and 2001 Underwriters
       C. Section 18 Claims
       D. Section 15 and Section 20(a) Claims
       E. Pendent State law claims

III.   Conclusion

       At the center of this securities fraud action is Suprema
Specialties, Inc. (“Suprema”), a now-defunct company that
presented itself as a producer and distributor of all natural
gourmet Italian cheeses. Over a two-year period, Suprema

                                4
reported wildly successful growth in its sales and receivables,
thereby enticing lenders to increase its credit line and luring
investors to the purchase of its stock. In truth, Suprema had
fabricated millions of dollars in cheese sales and engaged in
other fraudulent schemes that ultimately led to the company’s
dissolution in bankruptcy. Government investigations resulted
in four individuals connected to Suprema’s schemes pleading
guilty to federal charges of, inter alia, conspiracy to commit
securities fraud. Those individuals have admitted that a number
of Suprema’s public statements regarding its finances and the
nature of its business were untrue.

        The plaintiffs-appellants here are two institutional
investors, Special Situations Fund, III, L.P., and Special
Situations Fund Cayman, L.P. (collectively, the “SSF
Plaintiffs”), and the Teachers’ Retirement System of Louisiana
(referred to as “Lead Class Plaintiff” because it held that status
in the consolidated class actions before the District Court). SSF
Plaintiffs and Lead Class Plaintiff brought separate actions for
damages against Suprema’s former officers and directors, its
auditor, and several investment firms that served as underwriters
in two public stock offerings through which plaintiffs claim to
have acquired Suprema stock. Plaintiffs asserted claims for
relief under Sections 11, 12(a)(2), and 15 of the Securities Act of
1933 (the “Securities Act”), and Sections 10(b), 18, and 20 of
the Securities and Exchange Act of 1934 (the “Exchange Act”),
along with fraud and misrepresentation claims under state law.
On defendants’ motions, the United States District Court for the
District of New Jersey dismissed all claims pursuant to Rules
9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, as
well as provisions of the Private Securities Litigation Reform
Act (“PSLRA”). Among the important issues presented on
appeal is whether the District Court properly applied the “sounds
in fraud” doctrine in dismissing the claims asserted under
Section 11 and Section 12(a)(2) despite plaintiffs’ efforts to
ground their Securities Act claims in negligence and to plead
them separately in the complaints from their fraud-based claims.
We will reverse the District Court’s orders dismissing the claims
under Sections 11, 12(a)(2), and 15 of the Securities Act and
Section 10(b) of the Exchange Act as to some of the defendants,
and we will affirm as to the dismissal of the remaining counts.

                                 5
We will remand as to the state law claims.

                                 I.

       In setting forth the underlying facts, we accept as true the
well-pleaded allegations in plaintiffs’ second amended
complaints and consider the documents incorporated by
reference therein. See Cal. Pub. Employees Ret. Sys. v. Chubb
Corp., 394 F.3d 126, 134 (3d Cir. 2004) (hereinafter
“CALPERS”).

A. The Rise and Fall of Suprema

       Suprema was founded as a New York non-public
corporation in 1983. It became a publicly traded company in
1991 and was listed on the NASDAQ (trading under the symbol
“CHEZ”) in 1993. Suprema had its corporate headquarters,
along with a processing plant, in Paterson, New Jersey, and it
operated three wholly-owned subsidiaries, at which it
manufactured and processed cheese, in Manteca, California;
Ogdensburg, New York; and Blackfoot, Idaho. Suprema’s
business was divided between two product lines: “hard cheese,”
which included imported and domestically produced parmesan
and romano, and “soft-cheese,” which included domestically
produced mozzarella, ricotta, and provolone.

        Defendant-Appellee Mark Cocchiola was a founder of
Suprema and acted as the company’s Executive Vice-President,
CEO, and Chairman of the Board of Directors. Defendant-
Appellee Steven Venechanos was the company’s CFO and
Secretary, and also a member of the Board of Directors during
the Class Period. (Cocchiola and Venechanos will be referred to
collectively as the “Officers.”) Defendants-Appellees Marco
Cocchiola (Mark Cocchiola’s father), Rudolph Acosta, Jr., Paul
DeSocio, and Barry Rutcofsky (collectively, the “Outside
Directors”) were members of the Board of Directors. (We will
refer to Mark Cocchiola simply as “Cocchiola” and to Marco
Cocchiola by his full name.) Marco Cocchiola was also
Suprema’s Operations Manager. Acosta, DeSocio, and
Rutcofsky were members of the Board’s Audit Committee.
Defendant-Appellee BDO Seidman, LLP (“BDO”) was

                                 6
Suprema’s auditor throughout the class period.

        In 2000 and 2001, Suprema reported dramatic growth in
sales and receivables, which it attributed primarily to growth in
sales of its domestically manufactured hard cheeses. Suprema’s
net sales for fiscal year 2000 increased to $278.4 million,
reflecting a 58% increase over fiscal year 1999, and for fiscal
year 2001, increased to $420.3 million, or 51% over fiscal year
2000. In its hard cheese business alone, Suprema reported 400%
growth in revenue between fiscal year 1999 and the end of fiscal
year 2001. Its receivables were reported to have grown from
$36 million at the end of fiscal year 1999 to $101.8 million by
the end of fiscal year 2001. During this same period, industry-
wide growth in sales was only approximately 9% per year. In
September 2001, FORTUNE MAGAZINE named Suprema the
twenty-third fastest growing small company in the United States,
and shortly thereafter FORBES MAGAZINE ranked it as the
twenty-second best small company. Between the fourth quarter
of 1998 and the fourth quarter of 2000, the company’s average
share price more than doubled.

        State and federal investigations subsequently revealed
that Suprema’s explosive growth was an illusion– the product of
a fraudulent scheme involving so-called round-trip sales or
circular transactions associated with the hard cheese side of its
business. The round-trip sales scheme was one in which
Suprema purportedly sold hard cheese products to entities posing
as customers, which then sold the fictitious products to entities
posing as suppliers. The “suppliers,” in turn, sold the products
back to Suprema. In most cases, the customer and the supplier
in these sales shared a common owner who would reap
commissions on the fictitious transactions. According to a civil
complaint filed by the Securities and Exchange Commission
(“SEC”) in 2004, fictitious sales accounted for approximately
30%, 65%, 85% and 87% of Suprema’s accounts receivable for
fiscal years 1998, 1999, 2000, and 2001.

       Millions of dollars in company checks– some signed by
Cocchiola, some by Venechanos, and some by both– were
issued to ostensible “suppliers” during 2001. The apparent
increase in net sales and accounts receivable brought increases in

                                7
the company’s line of credit. Suprema’s credit line increased
from $35 million in 1998 to $140 million in 2001. The increased
credit line led to an expansion in the volume and value of
fictitious round-trip sales, which in turn led to further increases
in accounts receivable, thereby fueling the increased line of
credit. The ever-widening cycle produced the appearance, on
paper, of phenomenal growth.

        The invoices issued in connection with the circular
scheme generally did not correspond to any actual shipments.
Some of the “ship to” locations identified in invoices for huge
quantities of cheese were nothing more than postal boxes,
storefronts, or single-family residences. The shipments that
were actually made contained mislabeled or adulterated cheese
products that were generally unfit for human consumption.
Suprema purchased imitation cheeses and other non-cheese
products and relabeled them as higher-priced premium cheeses,
and it adulterated its “all natural” cheeses with fillers to reduce
costs and increase sales. Inventory impounded by the
government in connection with its investigations turned out to
have been grossly overvalued and was actually worth less than
$2 million, though Suprema had represented it in December
2001 as worth more than $60 million.

        On December 21, 2001, just six weeks after Suprema
conducted a substantial public stock offering (discussed below),
Venechanos and Suprema’s controller, Arthur Christensen,
resigned, and the company announced that it had initiated an
internal investigation into its previously reported financial
results. In response to this announcement, NASDAQ suspended
trading of Suprema’s stock. On January 25, 2002, the company
announced that it had engaged Deloitte & Touche, LLP to
continue the investigation.

       From that point, Suprema and the fraudulent scheme upon
which its apparent success had been founded unraveled quickly.
On February 4, 2002, federal authorities executed a search
warrant at Suprema’s headquarters and seized financial and
manufacturing records. Thereafter, Suprema revealed that it was
being criminally investigated by the FBI, the FDA, the SEC, and
the New Jersey Department of Agriculture. On February 18,

                                 8
2002, BDO resigned as Suprema’s auditor, citing, among other
reasons, an inability to determine whether the company had
adequate internal controls necessary to develop reliable financial
statements, whether Suprema’s prior financial statements
contained material inaccuracies, and whether it could rely on
management’s representations.

        On February 24, 2002, Suprema filed for Chapter 11
bankruptcy protection. On the same day, it announced that
Cocchiola had resigned as CEO and that NASDAQ would be de-
listing its stock as of March 1, 2002. On March 20, 2002, the
company’s Chapter 11 reorganization was converted into a
Chapter 7 liquidation, and a liquidation trustee was appointed.

        On January 7, 2004, four individuals associated with the
company– the former Operations Manager of the Paterson plant,
John Van Sickell,1 and the principals of three companies that had
been Suprema’s ostensible customers or suppliers, Lawrence
Fransen, George Vieira, and Robert Quattrone– pled guilty to
federal charges of, inter alia, conspiracy to commit securities
fraud, bank fraud, and mail fraud in connection with the round-
trip sales scheme. In their plea allocutions, all four individuals
admitted that their criminal actions, including participation in the
invoicing scheme and adulteration of products, were undertaken
at the direction and under the supervision of, or with the
knowledge of and in conjunction with, Suprema’s management.
The criminal informations filed by the United States Attorney in
the case alleged that $700 million of Suprema’s $1.2 billion in
net sales between 1996 and 2002 (87% of all sales made to the
companies controlled by Fransen, Vieira, and Quattrone) were
entirely fictitious.2

       1
        Van Sickell had worked as an assistant to the company’s
former Executive Vice-President, Paul Lauriero, who died in
August 2001. Following Lauriero’s death, Cocchiola assumed his
responsibilities, which included overseeing the company’s general
operations and its procurement of raw materials for production.
       2
       At the time the District Court decided the motions to
dismiss, neither Cocchiola nor Venechanos was under indictment.

                                 9
B. The Secondary Offerings

        Suprema conducted two public stock offerings relevant to
this action: the first was in August 2000 (the “2000 Offering”),
and the second was in November 2001 (the “2001 Offering”).
The 2000 Offering was for 1.2 million shares of common stock.
It was underwritten by, inter alia, defendants-appellees
Oberweis.net; Paulson Investment Co.; Westminster Securities
Corp.; and Westport Resources (collectively, the “2000
Underwriters”).3 On May 10, 2000, Suprema filed a registration
statement and prospectus on Form S-2 with the SEC announcing
the offering. Cocchiola, Venechanos, Marco Cocchiola, Acosta,
and DeSocio signed the Form S-2. The Form S-2 incorporated
by reference Suprema’s annual report on Form 10-K filed on
June 30, 1999, its quarterly reports on Form 10-Q filed on
September 30 and December 31, 1999, and its proxy statement

Pursuant to a motion to expand the record on appeal, which we
granted, SSF Plaintiffs submitted a Supplemental Appendix
containing a 38-count grand jury indictment of those individuals in
connection with their activities at Suprema. The indictment, which
was brought in the United States District Court for the District of
New Jersey, charges Cocchiola and Venechanos with, inter alia,
conspiracy, mail fraud, wire fraud, bank fraud, and making false
statements to the SEC. Because the indictments of Cocchiola and
Venechanos were not part of the record below, we do not consider
them for purposes of this appeal.
       3
         The 2000 Offering was also underwritten by Hobbs
Melville Securities Corp.; Auerbach, Pollak & Richardson, Inc.;
Girard Securities, Inc.; and Mercer Partners, Inc. These four
companies were named as defendants by the SSF Plaintiffs but
never entered appearances in the action. There is no indication on
the district court docket that the SSF Plaintiffs served process upon
them. Counsel for SSF Plaintiffs suggested at oral argument before
this court that “some” of these defendants “are being represented
by Oberweis.net,” but we find no indication that this is the case.
Tr. Oral Arg. at 55. Given the SSF Plaintiffs’ failure to brief any
issue concerning the non-appearance of these underwriters, we
conclude that any claims against them are not properly before us.

                                 10
filed on October 22, 1999.

       The 2001 Offering was for 4.05 million shares of
common stock. It was underwritten by defendants-appellees
Janney Montgomery Scott, LLC; Pacific Growth Equities, Inc.;
and Roth Capital Partners, LLC (collectively, the “2001
Underwriters”). Cocchiola, Venechanos, Marco Cocchiola,
Acosta, DeSocio, and Rutcofsky signed the Form S-2 filed with
the SEC in connection with the offering. The Form S-2
incorporated by reference Suprema’s annual report on Form 10-
K filed on September 28, 2001. By the close of the 2001
Offering, Suprema had sold 3.5 million shares for proceeds of
$41.5 million.

        BDO issued unqualified audit opinions in August 1999
and August 2001 regarding Suprema’s consolidated financial
statements for fiscal years 1999, 2000, and 2001. The audit
opinions were incorporated into the Form S-2s that Suprema
filed for the 2000 and 2001 Offerings. BDO stated that it had
performed its audits in accordance with Generally Accepted
Auditing Standards (“GAAS”)4 and that, in its opinion,
        the consolidated financial statements … present
        fairly, in all material respects, the financial
        position of [Suprema and its wholly owned
        subsidiaries] as of June 30, 2000 and 2001, and the
        results of their operations and their cash flows for
        each of the three years in the period ended June 30,
        2001, in conformity with generally accepted
        accounting principles.

App. at 195, 903.

      SSF Plaintiffs allege that they purchased 250,000 shares
of Suprema common stock in the 2000 Offering at a price of

      4
       GAAS are the standards established by the Auditing
Standards Board of the American Institute of Certified Public
Accountants for the conduct of auditors performing an
examination. See In re IKON Office Solutions, Inc. Sec. Litig.,
277 F.3d 658, 664 n.5 (3d Cir. 2002).

                              11
$8.00 per share, reflecting a total investment of $2,000,000. SSF
Plaintiffs allegedly made additional purchases of Suprema stock
at various prices throughout 2000 and 2001. SSF Plaintiffs then
allegedly purchased 13,000 shares, at $12.75 per share, from
underwriter Pacific Growth Equities, and averred in the
complaint that the shares were “traceable to” the 2001 Offering.
App. at 268. Lead Class Plaintiff, a public pension fund
organized for the benefit of current and retired public school
teachers of the State of Louisiana, alleges that it purchased
47,000 shares of Suprema stock, at $12.75 per share, from
underwriter Janney Montgomery Scott, LLC, on the date of the
2001 Offering. Lead Class Plaintiff makes no claim in this
action based on the 2000 Offering.

C. Procedural History

       Following the revelation in December 2001 that Suprema
was conducting an internal investigation, numerous putative
class action suits were filed, including Lead Class Plaintiff’s suit
on January 14, 2002. The District Court consolidated the cases,
pursuant to provisions of the PSLRA, and appointed Lead Class
Plaintiff to represent the class on July 1, 2002. See Smith v.
Suprema Specialities, Inc., 206 F. Supp. 2d 627 (D.N.J. 2002).
SSF Plaintiffs filed a separate, non-class complaint on June 27,
2002, raising similar claims against most of the same parties.

        Following its appointment, Lead Class Plaintiff filed an
amended class complaint on September 11, 2002. SSF Plaintiffs
filed an amended complaint on September 17, 2002. The
District Court consolidated the two cases for pre-trial
proceedings. Thereafter, the District Court granted defendants’
motions to dismiss all claims in the amended complaints,
concluding that “the complaints lack the factual specificity
demanded by the PSLRA and may not be so maintained.” App.
at 474. In its order, the District Court afforded plaintiffs leave to
file a motion to amend the complaints to cure, if possible, what it
identified as the defects in plaintiffs’ pleading of the claims.
Plaintiffs so moved, and defendants opposed the motion.

     On the day scheduled for oral argument on the motion to
amend, January 8, 2004, counsel for Lead Class Plaintiff

                                 12
informed the District Court that Van Sickell, Fransen, Vieira,
and Quattrone had entered their guilty pleas on the previous day.
In view of this new information, the parties agreed that plaintiffs
should be granted leave to file second amended complaints in
which they could incorporate newly discovered facts arising out
of the criminal informations and guilty pleas. Accordingly,
plaintiffs filed their respective second amended complaints on
January 30, 2004.

       Lead Class Plaintiff’s second amended complaint asserted
violations of Section 11 of the Securities Act by all defendants;
Section 12(a)(2) of the Securities Act by the Officers and 2001
Underwriters; Section 15 of the Securities Act by the Officers;
Section 10(b) of the Exchange Act by the Officers and BDO;
and Section 20 of the Exchange Act by the Officers. Lead Class
Plaintiff brought suit on its own behalf and on behalf of all those
who acquired Suprema common stock in the 2001 Offering
pursuant to the registration statement, or acquired Suprema
common stock during the class period of September 27, 2000
through December 21, 2001, and sustained a loss as a result.

       SSF Plaintiffs’ second amended complaint asserted
violations of the following provisions: Section 11 by all
defendants; Section 12(a)(2) by the Officers and (non-appearing
defendant) Hobbs Melville; Section 15 by the Officers and the
Outside Directors; Section 18 of the Exchange Act by the
Officers, the Outside Directors, and BDO; Section 10(b) by all
defendants; Section 20 by the Officers and the Outside
Directors; and common law fraud and negligent
misrepresentation by all defendants.

        Although plaintiffs added a host of new allegations
arising out of the Suprema criminal investigations and
indictments, all defendants again moved to dismiss for failure to
state a claim. The District Court granted the motions and
dismissed the second amended complaints in their entirety. See
In re Suprema, 334 F. Supp. 2d 637 (D.N.J. 2004). The District
Court dismissed plaintiffs’ Section 11 and 12(a)(2) claims on the
ground that those claims “sounded in fraud” and failed to satisfy
the heightened pleading requirement of Federal Rule of Civil
Procedure 9(b) for averments of fraud. The District Court

                                13
dismissed plaintiffs’ Section 10(b) claims for failure adequately
to plead scienter; it dismissed SSF Plaintiffs’ Section 18 claims
for failure adequately to plead actual reliance on alleged material
misstatements; and it dismissed plaintiffs’ Section 15 and
Section 20(a) control-person claims for failure adequately to
plead underlying violations by the Officers. The District Court
declined to exercise supplemental jurisdiction over the SSF
Plaintiffs’ state law claims.

       Plaintiffs each timely filed a notice of appeal from the
dismissal of their respective second amended complaints. This
court consolidated the appeals for disposition. We have
jurisdiction under 28 U.S.C. § 1291. Our review of the grant of
a motion to dismiss is de novo. In re NAHC Sec. Litig., 306
F.3d 1314, 1322-23 (3d Cir. 2002). We must accept as true the
factual allegations in the second amended complaints and may
affirm the dismissals only if it appears certain that plaintiffs can
prove no set of facts that would entitle them to relief. See
Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988).

                                 II.

A. Section 11 and Section 12(a)(2) Claims

        The District Court dismissed plaintiffs’ Section 11 and
Section 12(a)(2) claims because it found, upon review of the
allegations in the second amended complaints, that the claims
“sound in fraud.” As a result, the District Court required
plaintiffs to meet the heightened pleading requirements of Rule
9(b) and held that plaintiffs failed to do so. We exercise plenary
review over the legal question whether the Section 11 or Section
12(a)(2) claims sound in fraud and are therefore subject to Rule
9(b). See CALPERS, 394 F.3d at 160.

       “The primary innovation of the [Securities] Act was the
creation of federal duties – for the most part, registration and
disclosure obligations – in connection with public offerings.”
Gustafson v. Alloyd Co., 513 U.S. 561, 571 (1995); see also In
re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 273 (3d Cir.
2004). As relevant here, Section 11 concerns material
misstatements or omissions in registration statements, while

                                 14
section 12(a)(2) concerns material misrepresentations in
prospectuses and other solicitation materials. Adams, 381 F.3d
at 273.

        Under Section 11, “a private action for damages may be
brought ‘by any person acquiring such security’ if a registration
statement, as of its effective date: (1) ‘contained an untrue
statement of material fact’; (2) ‘omitted to state a material fact
required to be stated therein’; or (3) omitted to state a material
fact ‘necessary to make the statements therein not misleading.’”
CALPERS, 394 F.3d at 167 (quoting 15 U.S.C. § 77k(a)). As
the Supreme Court has explained, Section 11 “was designed to
assure compliance with the disclosure provisions of the Act by
imposing a stringent standard of liability on the parties who play
a direct role in a registered offering.” Herman & MacLean v.
Huddleston, 459 U.S. 375, 381-82 (1983) (footnote omitted). A
Section 11 claim may be brought against the issuer of securities,
its directors or partners, underwriters, and accountants who
prepared or certified the registration statement. Id. at 382 n.13
(citing § 77k(a)). Section 11 is a “virtually absolute liability
provision[ ], which do[es] not require plaintiffs to allege that
defendants possessed any scienter.” In re Adams Golf, 381 F.3d
at 274 n.7. “If a plaintiff purchased a security issued pursuant to
a registration statement, he need only show a material
misstatement or omission to establish his prima facie case.”
Herman & MacLean, 459 U.S. at 382.

        Section 12(a)(2) provides for civil liability for anyone
who offers or sells a security “by means of a prospectus or oral
communication, which includes an untrue statement of material
fact or omits to state a material fact necessary in order to make
the statements, in light of the circumstances under which they
were made, not misleading. . . .” 15 U.S.C. § 77l(a)(2). Like
Section 11, Section 12(a)(2) is a “virtually absolute” liability
provision that does not require an allegation that defendants
possessed scienter. In re Adams Golf, 381 F.3d at 274 n.7. To
state a prima facie claim under Section 12(a)(2), the plaintiff
must allege the purchase of securities pursuant to a materially
false or misleading prospectus or oral communication. Id. at
273.

                                15
       Fraud, as noted above, is not a necessary element to
establish a prima facie claim under Section 11 or Section
12(a)(2). See Shapiro, 964 F.2d at 288. But claims under those
provisions can be, and often are, predicated on allegations of
fraud. See, e.g., CALPERS, 394 F.3d at 160. We have held that
where the plaintiff grounds these Securities Act claims in
allegations of fraud – and the claims thus “sound in fraud”– the
heightened pleading requirements of Rule 9(b) apply. Id. at 161-
63; Shapiro, 964 F.2d at 288-89.5 SSF Plaintiffs urge us “to do
away with the ‘sounds in fraud’ doctrine altogether,” SSF Br. at
19, but this panel is bound by prior precedential decisions of this
court. See 3d Cir. IOP Ch. 9.1.

       Rule 9(b) provides that “[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall be
stated with particularity.” Rule 9(b) serves to give defendants
“notice of the claims against them, provide[ ] an increased
measure of protection for their reputations, and reduce[ ] the
number of frivolous suits brought solely to extract settlements.”
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1418
(3d Cir. 1997). “Rule 9(b) requires a plaintiff to plead (1) a
specific false representation of material fact; (2) knowledge by
the person who made it of its falsity; (3) ignorance of its falsity
by the person to whom it was made; (4) the intention that it

       5
         Plaintiffs argue that applying Rule 9(b) to Section 11 and
Section 12(a)(2) claims impermissibly “create[s] new elements for
these statutory causes of action.” LP Br. at 24; accord SSF Br. at
26. We have previously rejected this argument:

       It does not logically flow from the fact that fraud is
       not a necessary element of a section 11 claim that a
       section 11 claim cannot hinge on an allegation of
       fraud. . . . Recognizing that neither fraud nor mistake
       is a necessary element of a cause of action under
       section 11, we nonetheless held in Shapiro that
       ‘when § 11 and § 12[(a)](2) claims are grounded in
       fraud rather than negligence, Rule 9(b) applies.’

CALPERS, 394 F.3d at 161.

                                 16
should be acted upon; and (5) that the plaintiff acted upon it to
his [or her] damage.” Shapiro, 964 F.2d at 284. Where a
plaintiff’s Section 11 or Section 12(a)(2) claims are not
grounded in allegations of fraud, the liberal notice pleading
requirements of Rule 8 apply. See In re Adams Golf, 381 F.3d
at 273 n.5 (“[C]laims under the 1933 Act that do not sound in
fraud are not held to the heightened pleading requirements of
[Rule] 9(b).”). Rule 8 pleading merely requires “a short and
plain statement of the claim showing that the pleader is entitled
to relief.” Fed. R. Civ. P. 8(a)(2). Whether a Securities Act
claim is subject to Rule 9(b) requires an assessment of the
particular claim to determine whether acts of fraud on the part of
the defendants form the basis for the claim against them. See
Shapiro, 964 F.2d at 288 (“Rule 9(b) refers to ‘averments’ of
fraud, and thus requires us to examine the factual allegations that
support a particular legal claim.”); see also CALPERS, 394 F.3d
at 160 (“[A]n examination of the factual allegations that support
Plaintiffs’ section 11 claims establishes that the claims are
indisputably immersed in unparticularized allegations of
fraud.”).

        Although, in its second amended complaint, Lead Class
Plaintiff described its suit as arising out of a “massive fraud” at
Suprema, stemming in particular from the allegedly material
misrepresentations in the registration statements that Suprema
filed in connection with the 2001 Offering, App. at 82, it
prefaced its Section 11 and Section 12(a)(2) counts with an
explicit disclaimer– “[t]his claim is not based on and does not
sound in fraud”– prior to setting forth the factual allegations that
support each claim for relief. App. at 93, 125. Lead Class
Plaintiff made it clear that its particular claims for relief under
the Securities Act

       are not based on any knowing or reckless
       misconduct on the part of the defendants– i.e., they
       do not allege, and do not sound in fraud. Rather,
       they are premised on the fact that there were
       material misrepresentations and omissions in the
       Registration Statement, and the defendants’
       negligence in failing to recognize this fact.
17
Ohio App. at 82. It expressly stated its cause of action as sounding in
negligence, claiming that “[h]ad they exercised reasonable care,
these defendants could have known of the material
misstatements and omissions alleged herein.” App. at 123.

        In similar fashion, SSF Plaintiffs asserted at the outset
that their suit arises out of “one of New Jersey’s most scandalous
accounting frauds,” App. at 260, but also stated clearly that
“[t]his action seeks to advance negligence claims against the
underwriters, auditor, and signatories of Suprema’s publicly-
filed documents.” App. at 261. SSF Plaintiffs prefaced the
Section 11 and Section 12(a)(2) counts of the second amended
complaint with the disclaimer that “[t]his claim is not based on
and does not sound in fraud, and Plaintiffs expressly disclaim
and exclude any allegation that could be construed as alleging
fraud or intentional or reckless misconduct.” App. at 324. The
preface to the Section 11 count further states that “this claim is
based . . . solely on claims of strict liability and/or negligence
under the Securities Act.” App. at 324. At the heart of the
claims was the allegation that the named defendants were
negligent in their failure to uncover the fraud at Suprema.

        The District Court held that both complaints sound in
fraud, mainly because “‘the wording and imputations of the
complaint[s] are classically associated with fraud.’” App. at 14
(quoting Rombach, 355 F.3d at 172). Among other things, the
District Court noted that Lead Class Plaintiff alleged that the
action arose from a “massive fraud” and that SSF Plaintiffs had
identified several specific false representations of material fact in
the 2000 and 2001 Registration Statements upon which they
claimed to have relied. Thus, although the District Court
acknowledged that plaintiffs pleaded their claims as negligence-
based, it held that the Section 11 and Section 12(a)(2) claims
sound in fraud as to all defendants. Applying the heightened
pleading standard of Rule 9(b), the District Court determined
that the claims must fail because plaintiffs did not allege that any
of the defendants knew of the falsity of their statements and
intended for the statements to be acted upon.

      Lead Class Plaintiff argues that the District Court erred
because (1) the second amended complaint set forth no

                                 18
allegations of fraud with regard to the 2001 Underwriters and
Directors, and (2) it was careful to separately plead the
fraudulent conduct of the Officers and BDO in connection with
the Section 10(b) claims from the conduct that supported the
Section 11 and Section 12(a)(2) claims. On that basis, and on
the basis that the Section 11 and Section 12(a)(2) claims were
expressly pled as negligence claims, Lead Class Plaintiff
contends that its Section 11 and Section 12(a)(2) claims should
not have been held to sound in fraud. SSF Plaintiffs likewise
contend that their claims were based solely on the defendants’
negligent failure to carry out their respective responsibilities and
not fraud on their part.

        For their part, defendants principally rely upon our
decision in CALPERS, where we held that the heightened
pleading of Rule 9(b) applied to a Section 11 claim despite the
plaintiffs’ express disavowal of fraud because “the claims [were]
indisputably immersed in unparticularized allegations of fraud,”
and “a core theory of fraud permeate[d] the entire Second
Amended Complaint.” CALPERS, 394 F.3d at 160. We
concluded that “[t]he one-sentence disavowment of fraud
contained within Plaintiffs’ section 11 Count . . . does not
require us to infer that the claims are strict liability or negligence
claims, and in this case is insufficient to divorce the claims from
their fraudulent underpinnings.” Id.

        Although defendants are correct to observe that this case
resembles CALPERS inasmuch as a core theory of fraud
permeates the action, we find this case easily distinguishable
from CALPERS with respect to the manner in which plaintiffs
have pled their Section 11 and Section 12(a)(2) claims. Unlike
the plaintiffs in CALPERS, plaintiffs in this case do not merely
disavow already-pled allegations of fraud in connection with
their Section 11 and Section 12(a)(2) claims, leaving the court to
“sift through [those] allegations . . . in search of some ‘lesser
included’ claim of strict liability.” CALPERS, 394 F.3d at 162
(quoting Lone Star Ladies Inv. Club v. Schlotzky’s, Inc., 238
F.3d 363 (5th Cir. 2001)). Rather, both plaintiffs have expressly
pled negligence in connection with their Section 11 and 12(a)(2)
claims. We regard this difference in pleading as dispositive.

                                 19
        In CALPERS, we subjected the plaintiff’s pleading to the
strictures of Rule 9(b) because the complaint was “completely
devoid of any allegations that Defendants acted negligently.”
CALPERS, 394 F.3d at 161. Similarly, in Shapiro, we held that
Rule 9(b) applied to Section 11 and Section 12(a)(2) claims
because there was “not a hint in the allegations that defendants
were negligent in violating §§ 11 and 12[(a)](2).” Shapiro, 964
F.2d at 287-88. Both CALPERS and Shapiro thus presented
complaints containing allegations of fraud exclusively; no
allegations of negligence were pled in support of the Securities
Act claims. See, e.g., Shapiro, 964 F.2d at 288 (“[W]e are not
presented with a mixture of allegations of negligence [and]
fraud.”) (citation and quotation marks omitted). We observed in
Shapiro that “[i]t would be unreasonable to infer a negligence
cause of action from [nothing more than a] fleeting and obscure
reference [in the complaint] to ‘gross negligence.’” Id. at 288
n.18.

       Other courts of appeals presented with Section 11 or
12(a)(2) claims premised exclusively on allegations of fraud have
followed our approach in Shapiro and declined to infer
negligence where it has not been expressly pled. See, e.g., In re
Daou Sys., 411 F.3d 1006, 1028 (9th Cir. 2005); Rombach, 355
F.3d at 172; Melder v. Morris, 27 F.3d 1097, 1100 n. 6 (5th Cir.
1994). Conversely, where the claims are expressly premised on
negligence rather than fraud, Rule 9(b) has been held
inapplicable. See Schwartz v. Celestial Seasonings, Inc., 124
F.3d 1246, 1251-52 (10th Cir. 1997) (assuming arguendo that
the approach in Shapiro is correct and holding that Section 11
claim not premised on fraud did not trigger Rule 9(b) scrutiny).

       We now hold that where, as here, individual defendants
are accused in separate claims of the same complaint of having
violated Section 11, Section 12(a)(2), and Section 10(b), the
Securities Act claims do not sound in fraud if ordinary
negligence is expressly pled in connection with those claims. In
such a case, the fraud allegations cannot be said to
“contaminate” the Section 11 and Section 12(a)(2) claims if the
allegations are pled separately. We applied Rule 9(b) to the
Section 11 and Section 12(a)(2) claims in Shapiro because
“plaintiffs did not allege ordinary negligence” and we could “see

                               20
no way to construct a negligence cause of action.” Shapiro, 964
F.2d at 288. Here, ordinary negligence is alleged in the Section
11 and Section 12(a)(2) claims, and those claims are pled
separately from the Section 10(b) fraud claims against the same
defendants. That is enough to avoid triggering Rule 9(b). A
contrary result would effectively preclude plaintiffs from filing
suit under Section 11 and Section 12(a)(2) as well as Section
10(b)(5). There is no suggestion that Congress intended such an
incongruous approach.

        To be sure, the “sounds in fraud” determination for
Securities Act claims will not always be clear cut in cases where
the plaintiff simultaneously raises claims against the same
defendants under a provision that requires a showing of scienter,
like Section 10(b). But where the plaintiff has exercised care in
differentiating asserted negligence claims from fraud claims and
in delineating the allegations that support the negligence cause
of action as distinct from the fraud, the determination is
straightforward.

        Lead Class Plaintiff carefully segregated its allegations of
negligence against the Officers and BDO from its allegations of
fraud against those defendants. It did so by pleading its Section
11 and Section 12(a)(2) claims in negligence before– and wholly
apart from– pleading its fraud-based Section 10(b) claims. This
manner of pleading makes for a clear conceptual separation in
the complaint between claims sounding in negligence and those
sounding in fraud. And while Lead Class Plaintiff prefaced its
complaint with a general statement that its suit “arises out of the
massive fraud that was perpetrated at Suprema,” App. at 82, it
was careful in that introductory discussion not to accuse any
particular defendant of acting with fraudulent intent. As to its
claims against the Outside Directors and Underwriters in
particular, there are no allegations of fraud or reckless
misconduct whatsoever in any count of Lead Class Plaintiff’s
second amended complaint; ordinary negligence is all that is
pled.

        SSF Plaintiffs were less artful in their pleading, with the
result that allegations of negligence and allegations of fraud
against the defendants are somewhat commingled in the second

                                 21
amended complaint. Although we view this lapse in pleading as
inexpert, we do not regard it as fatal under the circumstances.
The Section 11 and Section 12(a)(2) claims were expressly pled
in, and limited to, negligence, with preceding allegations of
fraud expressly disavowed in the context of those claims.6
While not as “clean” as the pleading style adopted by Lead Class
Plaintiff, the SSF Plaintiffs’ allegations as set forth were
sufficient to give notice to the defendants of the claims against
them.

        In holding that Rule 9(b) does not apply to Section 11 or
Section 12(a)(2) claims that are expressly pled in negligence
even when Section 10(b) claims against some of the same
defendants are pled separately in the same complaint, we adopt a
position that is consistent with our holdings in Shapiro and
CALPERS, and one that has already been adopted by a number
of district courts within our circuit. See, e.g., In re Ravisent
Tech, Inc. Sec. Litig., No. CIV.A. 00-CV-1014, 2004 WL
1563024, at *13 (E.D. Pa. July 13, 2004) (“It appears that
Plaintiffs’ counsel were aware of Shapiro when drafting the
complaint, and were careful to plead negligence sufficiently to
avoid the heightened pleading requirements.”); In re Cendant
Corp. Litig., 60 F. Supp. 2d 354, 364 (D.N.J. 1999) (“Unlike the

       6
        See, e.g., App. at 324:

       Plaintiffs repeat and reallege each and every
       allegation above as if set forth fully herein…[but]
       Plaintiffs expressly disclaim and exclude any
       allegation that could be construed as alleging fraud
       or intentional or reckless misconduct, as this claim is
       based on solely on [sic] claims of strict liability
       and/or negligence under the Securities Act.

Although we frowned upon this style of pleading in CALPERS,
394 F.3d at 162, SSF Plaintiffs, unlike the plaintiff in CALPERS,
expressly pled negligence in their complaint, so the burden on a
court to “sift through” allegations of fraud to identify the facts that
support the Section 11 and Section 12 claims is lessened
substantially.

                                  22
complaint in Shapiro, this complaint does not incorporate
allegations of scienter and fraud into the § 11 claim. Rather, here
the § 11 claim is [pled] before any of the other claims. Although
the plaintiffs have [pled] that certain defendants acted
fraudulently in violation of § 10(b), the § 11 claim is limited to
negligence.”); Resolution Trust Corp. v. del Re Castellett, No.
CIV.A.92-4635(AMW), 1993 WL 719764, at *2 (D.N.J. Sept. 7,
1993) (holding that Rule 9(b) did not apply to plaintiff’s Section
11 count because that count sounded in negligence and did not
incorporate allegations of fraud from a Section 10(b) count).

        In short, the reputational concerns that animate Rule 9(b)
with respect to a defendant accused of fraud are not implicated
when a defendant stands accused of nothing more than
negligence. Cf. Leatherman v. Tarrant County Narcotics
Intelligence & Coordination Unit, 507 U.S. 163, 168 (1993)
(discussing the limited applicability of Rule 9(b)). Because the
Section 11 and Section 12(a)(2) claims of the plaintiffs here
were expressly negligence-based and pled distinctly in the
complaint from the fraud-based claims, it was error for the
District Court to hold that they sound in fraud. Accordingly, we
will vacate the dismissal of these claims.7

       7
         The 2001 Underwriters and the Cocchiolas argue in the
alternative that plaintiffs’ Section 11 and Section 12(a)(2) claims
should have been dismissed for lack of standing because plaintiffs
did not allege that their “purchases of Suprema stock were part of
or, in the case of § 11, were directly traceable to, public offerings
under the challenged registration statements.” Cocchiola Br. at 14.
According to these appellees, standing for Section 11 and Section
12(a)(2) claims “applies only to purchasers in initial stock
offerings, not to open or secondary market purchases.” Id. at 24.
The District Court held that plaintiffs adequately alleged standing:
“Because Plaintiffs have alleged that they have purchased ‘in’ or
‘traceable to’ the 2000 and 2001 secondary offerings, Plaintiffs
have pled standing sufficiently at this motion to dismiss stage.”
App. at 13.

      “For the purposes of determining standing, the court must
accept as true all material allegations set forth in plaintiffs’

                                 23
complaint and must construe those facts in favor of the plaintiffs.”
Mariana v. Fisher, 338 F.3d 189, 205 (3d Cir. 2003) (citation
omitted). SSF Plaintiffs alleged in their second amended complaint
that on August 25, 2000, they purchased 250,000 shares of “newly-
issued Suprema common stock in the 2000 Offering.” App. at 265
(emphasis added). They also alleged that on November 14, 2001,
which was the last day of the 2001 Offering, they “purchased
13,000 shares of Suprema stock which are traceable to the shares
newly-issued in the [2001 Offering].” App. at 266 (emphasis
added). Lead Class Plaintiff alleged that on November 8, 2001, it
purchased 47,000 shares of Suprema common stock “in” the 2001
Offering, making the purchase from underwriter Janney
Montgomery. App. at 84 (emphasis added). As noted, Lead Class
Plaintiff asserts Section 11 violations by all defendants and Section
12(a)(2) violations by the Officers and the 2001 Underwriters. SSF
Plaintiffs assert Section 11 violations by all defendants and Section
12(a)(2) violations by the Officers and Hobbs Melville (one of the
non-appearing underwriters, see supra note 3).

        We agree with the District Court that plaintiffs’ allegations
regarding the purchases were sufficient to survive the motions to
dismiss. By its terms, Section 11 provides that “any person
acquiring” a security issued pursuant to a materially false
registration statement may sue (unless the purchaser knew about
the false statement). 15 U.S.C. § 77k(a) (emphasis added). As the
Court of Appeals for the Second Circuit has observed, “[w]e can
find no reason why ‘any’ as used in § 11 should not be read as the
equivalent of ‘every’ such that every person who acquires a
security issued pursuant to an allegedly defective registration
statement has standing to sue under § 11.” DeMaria v. Andersen,
318 F.3d 170, 176 (2d Cir. 2003); accord Lee v. Ernst & Young,
LLP, 294 F.3d 969, 976-77 (8th Cir. 2002); Joseph v. Wiles, 223
F.3d 1155, 1159 (10th Cir. 2000). We agree with this view and
hold that plaintiffs’ assertions of purchases “in” and “traceable to”
the Suprema stock offerings were sufficient at the pleading stage.
Indeed, we recognized as much in Shapiro, where plaintiffs alleged
that they purchased stock “pursuant to” a registration statement.
This court concluded that while “plaintiffs need not prove their
shares are traceable to a false or misleading registration statement

                                 24
B. Section 10(b) Claims

         Section 10(b) of the Exchange Act prohibits the “‘use or
employ, in connection with the purchase or sale of any security, .
. . [of] any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission
may prescribe . . . .’” In re IKON, 277 F.3d at 666 (quoting 15
U.S.C. § 78j(b)). Pursuant to this statutory authority, the
Commission promulgated Rule 10b-5, which creates a private
cause of action for investors harmed by materially false or
misleading statements. In re Advanta, 180 F.3d 525, 535 (3d
Cir. 1999). Rule 10b-5 “makes it unlawful for any person ‘[t]o

at this early stage of the litigation, they must allege it.” Shapiro,
964 F.2d at 286. We found that plaintiffs had sufficiently alleged
their Section 11 standing, adding that “[b]efore discovery takes
place [ ] it is impossible for plaintiffs to know whether their shares
were newly issued or were purchased in the secondary market.” Id.
The question here is likewise a factual one, to be resolved through
discovery, as to whether plaintiffs can demonstrate that the shares
they allegedly purchased are in fact traceable to the registration
statement alleged to be false and misleading. See Lee, 294 F.3d at
978; Joseph, 223 F.3d at 1159-60. If, as appellees suggest,
plaintiffs have misrepresented the circumstances of their stock
purchases and do not in fact have standing, appellees can raise that
matter at the summary judgment stage after discovery.

        Similarly, Section 12(a)(2) claims concern the purchase of
securities pursuant to a materially false or misleading prospectus
or oral communication. We have recognized that the language of
Section 12(a)(2) “should not be expanded to aftermarket trading.”
Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 689 (3d
Cir. 1991). At the pleading stage, however, we accept as true
plaintiffs’ allegations that they made their stock purchases in or
traceable to the Suprema public offerings. “If defendants were
eventually to prove that the shares came from the secondary
market, § 12[(a)](2) would not apply, and judgment would be
entered for them.” Shapiro, 964 F.2d at 287 n.16 (citation
omitted).

                                 25
make any untrue statement of a material fact or to omit to state a
material fact necessary to make the statements made[,] in light of
the circumstances under which they were made, not misleading .
. . in connection with the purchase or sale of any security.’” 17
C.F.R. § 240.10b-5(b); see In re IKON, 277 F.3d at 666.

       The Supreme Court has recently set forth the elements of
a Section 10(b) claim. See Dura Pharm., Inc. v. Broudo, __ U.S.
__, 125 S. Ct. 1627, 1631 (2005). They are

       (1) a material misrepresentation (or omission); (2)
       scienter, i.e., a wrongful state of mind; (3) a
       connection with the purchase or sale of a security;
       (4) reliance, often referred to in cases involving
       public securities markets (fraud-on-the-market
       cases) as “transaction causation;” (5) economic
       loss; and (6) “loss causation,” i.e., a causal
       connection between the material misrepresentation
       and the loss.

Id. (citations omitted). The PSLRA provides that a Section
10(b) claim must “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or
omission is made on information and belief, the complaint shall
state with particularity all facts on which that belief is formed.”
15 U.S.C. § 78u-4(b)(1)(B).8

       The PSLRA also requires that plaintiffs plead the required

       8
        The purpose of the heightened pleading requirements
contained in the PSLRA is “to restrict abuses in securities class-
action litigation, including: (1) the practice of filing lawsuits
against issuers of securities in response to any significant change
in stock price, regardless of defendants' culpability; (2) the
targeting of ‘deep pocket’ defendants; (3) the abuse of the
discovery process to coerce settlement; and (4) manipulation of
clients by class action attorneys.” In re Advanta, 180 F.3d at 531
(citing H.R. Conf. Rep. No. 104-369, at 28 (1995), reprinted in
1995 U.S.C.C.A.N. 679, 748).

                                 26
state of mind with particularity. GSC Partners CDO Fund v.
Washington, 368 F.3d 228, 237 (3d Cir. 2004); In re Advanta,
180 F.3d at 530. Specifically, the PSLRA states in relevant part:

       In any private action arising under this chapter in
       which the plaintiff may recover money damages
       only on proof that the defendant acted with a
       particular state of mind, the complaint shall, with
       respect to each act or omission alleged to violate
       this chapter, 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).

       “‘The requisite “strong inference” of fraud may be
established either (a) by alleging facts to show that defendants
had both motive and opportunity to commit fraud, or (b) by
alleging facts that constitute strong circumstantial evidence of
conscious misbehavior or recklessness.’” In re Burlington Coat
Factory, 114 F.3d at 1418 (citations omitted). We have defined
“recklessness” to include

       “[h]ighly unreasonable (conduct), involving not
       merely simple, or even inexcusable negligence, but
       an extreme departure from the standards of
       ordinary care, . . . which presents a danger of
       misleading buyers or sellers that is either known to
       the defendant or is so obvious that the actor must
       have been aware of it.”

SEC v. Infinity Group Co., 212 F.3d 180, 192 (3d Cir. 2000)
(quoting McLean v. Alexander, 599 F.2d 1190, 1197 (3d Cir.
1979)).

        In addition to the PSLRA requirements, plaintiffs alleging
fraud under the Exchange Act must also comply with the
heightened pleading requirement of Rule 9(b). GSC, 368 F.3d at
236. As applied to Section 10(b) claims, “Rule 9(b) requires a
plaintiff to plead (1) a specific false representation [or omission]
of material fact; (2) knowledge by the person who made it of its

                                27
falsity; (3) ignorance of its falsity by the person to whom it was
made; (4) the intention that it should be acted upon; and (5) that
the plaintiff acted upon it to his damage.” In re Rockefeller
Center Prop. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002)
(internal quotation marks and citation omitted). Moreover,
“Rule 9(b) requires plaintiffs to identify the source of the
allegedly fraudulent misrepresentation or omission.” Id.
(citation omitted). In sum, “Rule 9(b) requires, at a minimum,
that plaintiffs support their allegations of securities fraud with all
of the essential factual background that would accompany ‘the
first paragraph of any newspaper story’ – that is, the ‘who, what,
when, where and how’ of the events at issue.” Id. at 217
(quoting In re Burlington Coat Factory, 114 F.3d at 1422). To
the extent that Rule 9(b)’s allowance of general pleading with
respect to mental state conflicts with the PSLRA's requirement
that plaintiffs state with particularity facts giving rise to a strong
inference that the defendant acted with scienter, 15 U.S.C. §
78u-4(b)(2), the PSLRA “supersedes Rule 9(b) as it relates to
Rule 10b-5 actions.” In re Advanta, 180 F.3d at 531 n.5.

1. The Officers

       Plaintiffs pled the required scienter on the part of
Cocchiola and Venechanos (the “Officers”) by alleging both
motive and opportunity (with respect to insider stock sales) and
strong circumstantial evidence of conscious misbehavior or
recklessness (with respect to the round-trip sales scheme). The
District Court held that the alleged facts did not give rise to a
strong inference of the Officers’ scienter and dismissed the
Section 10(b) claims. We conclude that plaintiffs’ allegations
were sufficient to survive a motion to dismiss.

a) Motive and Opportunity

        Plaintiffs allege that Cocchiola and Venechanos sold
substantial portions of their stock in the 2001 Offering and
therefore had the motive and opportunity to inflate the price of
their stock. Although we have stated that “[w]e will not infer
fraudulent intent from the mere fact that some officers sold
stock,” we also stated that sales of company stock by insiders
that are “unusual in scope or timing . . . may support an

                                 28
inference of scienter.” In re Advanta, 180 F.3d at 540 (citations
and quotation marks omitted). Whether a sale is “unusual in
scope” depends on factors such as “the amount of profit made,
the amount of stock traded, the portion of stockholdings sold, or
the number of insiders involved.” Wilson v. Bernstock, 195 F.
Supp. 2d 619, 635 (D.N.J. 2002) (citation omitted). Other
factors relevant to scope and timing are whether the sales were
“normal and routine,” and whether the profits were substantial
relative to the seller’s ordinary compensation. In re Burlington
Coat Factory, 114 F.3d at 1423.

       The second amended complaints differ as to precisely
how many shares Cocchiola sold in the 2001 Offering. Lead
Class Plaintiff alleges that Cocchiola sold 31% of his total
holdings (193,423 shares) for proceeds of just over $2 million,
and that he sold another 81,577 shares in the over-allotment, for
nearly $1 million in further proceeds.9 SSF Plaintiffs allege that
Cocchiola sold 347,809 shares for proceeds of over $4 million.
They further allege that Cocchiola pledged another 200,000
shares as collateral for a $600,000 personal loan. Both plaintiffs
agree that Venechanos sold 38% of his total holdings (52,937
shares) in the 2001 Offering for proceeds of nearly $628,000.

       Plaintiffs claim that these insider sales were suspicious in
timing because they came at a time when the price of Suprema’s
stock was artificially inflated as a result of the round-trip sales
scheme, just six weeks before Venechanos and Christensen
resigned. Furthermore, they allege that the sales were suspicious
in scope because Cocchiola had sold only 50,000 shares before
the 2001 Offering and Venechanos had sold none. Cocchiola
sold over five times the number of shares in the 2001 Offering
than he had sold prior to that time. With respect to the ratio of

       9
        According to Lead Class Plaintiff, Cocchiola was the
largest holder of Suprema common stock when Suprema filed its
2001 Form 10-K statement, exercising ownership or control over
1.1 million shares representing approximately 17.4% of the stock
issued and outstanding. Venechanos at that time allegedly
exercised ownership or control over 138,000 shares, or
approximately 2.4% of the common stock.

                                29
profits to compensation, SSF Plaintiffs allege that Cocchiola’s
profits from the stock sale nearly doubled in one day the total
amount of money that he had made over the previous three years
combined. The sales Venechanos made netted him over four
times his annual salary.

        Citing our decision in In re Advanta, 180 F.3d 525, the
District Court held that the sales made in the 2001 Offering were
not unusual because “both Cocchiola and Venechanos retained
large stock holdings after the sales, 49% and 62%, respectively.”
App. at 27-28. We conclude, however, that the stock sales here
differ substantially from the sales in In re Advanta. In that case,
the defendants traded only small percentages of their holdings,
with two of the defendants selling seven and five percent,
respectively. In re Advanta, 180 F.3d at 540. Here, each Officer
is alleged to have sold over 30 percent of his holdings. Plaintiffs
have plausibly alleged that the sales were not normal or routine
for these Officers, and that the profits from the trades were
substantial in comparison to their overall compensation. Indeed,
Lead Class Plaintiff alleges that Cocchiola realized over $2.3
million in profit from the sale of his shares, and Venechanos
$627,832. The timing of the sales was also suspect in that they
occurred just six weeks before Venechanos and Christensen
resigned. We conclude that plaintiffs’ allegations regarding the
stock sales are sufficient at this stage to support a strong
inference that Cocchiola and Venechanos had a motive and
opportunity to inflate the value of their stock artificially by
reporting fictitious sales and by falsely inflating the value of
their inventory in public statements.

b) Circumstantial Evidence of Misconduct

        Plaintiffs alleged numerous facts that they argue
constitute strong circumstantial evidence that the Officers knew
of or recklessly disregarded the falsity of Suprema’s registration
statements and prospectuses with respect to reported financial
performance. Among other things, plaintiffs cite the following:
Cocchiola and Venechanos were the leaders of a very small
senior management team at Suprema which boasted a “hands-
on” relationship with key accounts and customers, App. at 128;
three of these key customers pled guilty to fraud charges in

                                30
connection with the round-trip sales scheme and admitted in
their plea allocutions that they had created false invoices, falsely
labeled cheese, and adulterated cheese “at the direction and with
the participation of Suprema’s management,” App. at 133;10
fictitious transactions with these customers constituted “more
than two-thirds of the company’s revenue and nearly all of its
growth” during the class period, App. at 187; Cocchiola and
Venechanos signed millions of dollars in company checks during
the class period, payable in large part to entities controlled by
these customers; Venechanos controlled all of the bookkeeping
connected with these accounts and he and Cocchiola prevented
Suprema’s accounting staff from having any contact with the
accounts or with BDO concerning the accounts; Cocchiola and
Venechanos instructed Suprema employees not to be involved in
the hard cheese portion of the business; and Cocchiola prevented
Suprema employees from having contact with BDO concerning
the accounts.

        We thus conclude that plaintiffs’ allegations against the
Officers are detailed as to each and are sufficient to give rise to
the requisite strong inference that these defendants knew that the
statements they made in connection with the 2000 and 2001
Offerings were materially false and misleading. We reject
defendants’ contention that plaintiffs have merely pled “fraud by
title.” On the contrary, plaintiffs have attributed to each of the
Officers specific knowledge and conduct. Moreover, even if
plaintiffs’ allegations with respect to the Officers’ insider stock
sales were insufficient to support a strong inference that they
acted with scienter, the allegations concerning the Officers’
respective roles in the round-trip sales scheme would be enough
to survive a motion to dismiss. On this record, we will vacate
the District Court’s dismissal of plaintiffs’ 10(b) claims against
the Officers.

       10
         Lead Class Plaintiff specifically alleged that “Cocchiola,
Venechanos, and Lauriero (when he was alive) . . . collectively
constituted the ‘management’ of Suprema throughout the Class
Period[.]” App. at 135. Further, as counsel for Lead Class Plaintiff
emphasized at argument before this court, Suprema “was a small
company, this was not IBM[.]” Tr. of Oral Argument at 13.

                                31
2. The Auditor

        The District Court dismissed plaintiffs’ claims against
BDO for failure adequately to allege scienter. The court rejected
plaintiffs’ allegations that BDO acted recklessly by failing to
take numerous steps required by GAAS, and that BDO failed to
heed “red flags” indicating that something was grossly amiss
with Suprema’s accounting. The District Court found that the
“purported ‘red flags’ were normal aspects of a healthy
business,”and it credited BDO’s argument that it had a good
faith belief that its audits were accurate. App. at 32. The
District Court added that BDO “was in effect a victim of the
fraud” and had done all it was required to do. Id. Ultimately,
the District Court concluded that “given the information
available to BDO at the time of the audit it can not be said that
BDO did not have an honest belief that the statements made by it
were true.” Id.

       When a professional opinion is issued to the investing
public by those in a position to know more than the public, there
is an obligation to disclose data indicating that the opinion may
be doubtful. Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.
1985). When that opinion is

       based on underlying materials which on their face or under the
       circumstances suggest that they cannot be relied on without
       further inquiry, then the failure to investigate further may
       “support[ ] an inference that when [the defendant] expressed
       the opinion it had no genuine belief that it had the information
       on which it could predicate that opinion.”

Id. (quoting McLean v. Alexander, 559 F.2d 1190, 1198 (3d Cir.
1979)). A showing that an auditor either lacked a genuine belief
that its representations were supported by adequate information
or engaged in auditing practices so shoddy that they amounted at
best to a “pretended audit” has traditionally supported a finding
of liability, even in the face of assertions of good faith. McLean,
599 F.2d at 1198. But as our case law makes clear,

       the mere second-guessing of calculations will not suffice;
       appellants must show that [the auditor]’s judgment– at the

                                   32
       moment exercised– was sufficiently egregious such that a
       reasonable accountant reviewing the facts and figures should
       have concluded that [the company]’s financial statements were
       misstated and that as a result the public was likely to be misled.

In re IKON, 277 F.3d at 673.

       At the pleading stage, courts have recognized that
allegations of GAAS violations, coupled with allegations that
significant “red flags” were ignored, can suffice to withstand a
motion to dismiss. See, e.g., In re Daou, 411 F.3d at 1016;
Greebel v. FTP Software, Inc., 194 F.3d 185, 203 (1st Cir.
1999); Malone v. Microdyne Corp., 26 F.3d 471, 479 (4th Cir.
1994). Such allegations, of course, must be pled with
particularity. In re Daou, 411 F.3d at 1016. It is insufficient, for
example, for a plaintiff to cite GAAS standards without an
explanation of how the defendant knowingly or recklessly
violated those standards. In re Westinghouse Sec. Litig., 90 F.3d
696, 712 (3d Cir. 1996).

        Plaintiffs here have alleged that BDO failed to comply
with specific GAAS standards, including, among others, the
requirement to exercise due care and professional skepticism in
the conduct of an audit; the requirement adequately to plan, staff,
and supervise an audit; the requirement adequately to assess the
nature of the audited business; and the requirement to recognize
enumerated risk factors or red flags that may have alerted the
auditor to the existence of fraud. Moreover, plaintiffs explain in
detail in the second amended complaints how BDO’s alleged
GAAS violations led it to overlook numerous red flags. Thirty
such red flags are cited as having been present in this case,
including the following: (1) Suprema’s 2001 Form 10-K made
no mention that Suprema was engaged in the purchase and resale
of bulk cheese from domestic suppliers when even a cursory
review of the company’s check register, vendor invoices, and
purchasing records would have revealed that fully two-thirds of
company revenue for that year was derived from such sales; (2)
Suprema’s cash flows from operations were negative and grew
dramatically worse over time, even though Suprema was
reporting astronomical growth in net sales, gross margin, and net
earnings, including a 400% increase in hard-cheese revenue

                                33
during just a two-year period; (3) Suprema posted growth that
was radically disproportionate with growth in the cheese
industry as a whole; (4) although Suprema was reporting rapid
growth in production, it did not report corresponding increases in
its labor force and the utilization of its production facilities; (5)
Suprema restricted BDO’s access to key accounting personnel,
including the accounts receivable and accounts payable
supervisors, which represented a material limitation of the scope
of the audit; (6) all of Suprema’s significant hard-cheese
customers had accounts that were well past due; and (7)
Suprema had weak internal controls, a fact that BDO essentially
admitted in its letter of resignation, and one that should have led
BDO to investigate further before issuing unqualified audit
opinions.

        BDO argues some of the proffered red flags, such as late
or missing invoices, delayed compliance with document
requests, and payment of stock options and large bonuses to
management, are not obvious or strong indicators of fraud.
However, even if we discount these weaker indicators, the much
stronger indicators noted above remain, and those factors are
sufficient to raise serious questions about the integrity of the
audits.

       Indeed, accepting plaintiffs’ allegations as true, the
evidence of Suprema’s financial foul play was hiding in plain
sight. Suprema management was a small group, and the
company had only five “customers” that accounted for more than
80% of its business in 2001. Its largest customer that year,
Tricon, and its largest supplier, Noram, were both owned and
controlled by one individual, Paul Zambas. Even a cursory
inquiry would have disclosed that the address for Tricon in
Suprema’s business records was not the same as Tricon’s
address available in public records; the address to which
Suprema sent checks to Noram was a gift shop in a mall; and,
most tellingly, checks from Tricon to Suprema came from the
same bank account into which Suprema’s checks to Noram were
deposited. Similarly, the tens of millions of dollars in checks
that Suprema wrote to another supplier, CMM, were also
deposited into the same account from which a purported
customer, WCC, wrote checks back to Suprema. The checks

                                 34
were an obvious and readily available indicator of fraud.
Moreover, plaintiffs have offered a detailed set of allegations as
to how BDO violated specific GAAS standards in its audit of
Suprema, and they have identified numerous substantive
indicators of fraud that were allegedly ignored altogether in the
auditing process. “[I]n many cases the most plausible means to
prevail on a section 10(b) claim against an auditor– without that
ever-elusive ‘smoking gun’ document or admission– will be to
show how specific and not insignificant accounting violations
collectively raise an inference of scienter.” In re IKON, 277
F.3d at 677 n.26; see also PR Diamonds, Inc. v. Chandler, 364
F.3d 671, 694 (6th Cir. 2004) (“[W]hen the alleged accounting
errors are sufficiently basic and large, their existence, in
combination with other factors, may support the requisite
scienter inference.”) (citation omitted). The accounting
violations set forth here surpass an inference of ordinary
negligence; they reasonably suggest that BDO either knew of, or
willfully turned a blind eye to, the fraud at Suprema.

        We have not overlooked BDO’s protestations that it, too,
was a victim of the fraud at Suprema, that the fraud conspirators
hid information from and lied to BDO about Suprema’s finances,
and that BDO performed its audits in good faith under the
circumstances. We are not suggesting that plaintiffs’ Section
10(b) claim will necessarily survive a properly supported
summary judgment motion after BDO marshals its evidence. At
the pleading stage, however, plaintiffs are entitled to the benefit
of all reasonable inferences based on the detailed and specific
allegations in their complaints. In the face of the numerous and
not insignificant alleged accounting violations, we cannot rule
out, as a matter of law, a strong and reasonable inference of
BDO’s scienter. Consequently, we will vacate the District
Court’s dismissal of the Section 10(b) claims against BDO.

3. The Outside Directors

       The District Court dismissed SSF Plaintiffs’ Section
10(b) claim against the Outside Directors, holding that the
allegations supporting the claim were conclusory and lacking in

                                35
detail.11 SSF Plaintiffs premise their allegations of recklessness
against the Outside Directors essentially on the following facts:
(1) revenue was wrongfully recognized; (2) the Outside
Directors had access to Suprema’s business records; and (3) the
Outside Directors were charged, as members of the audit
committee, with reviewing and monitoring the company’s
financial reporting, external audits, internal control functions,
and compliance with applicable rules and regulations.

       Significantly, while the SSF Plaintiffs alleged specifically
what the audit committee’s duties were, they did not allege
which duties were violated, by whom they were violated, or how
they were violated. Indeed, whereas the allegations concerning
BDO’s recklessness span more than forty pages of the SSF
Plaintiffs’ second amended complaint, the corresponding
allegations against the four Outside Directors are scant,
comprising fewer than two pages. Recklessness is pled against
the Outside Directors as a group, based on their position, without
any attempt to link specific individuals to specific instances of
reckless conduct. We have held that such “catch-all” or
“blanket” assertions do not satisfy the particularity requirements
of Rule 9(b) and the PSLRA, and must be disregarded.
CALPERS, 394 F.3d at 145.

        A pleading of scienter sufficient to satisfy Rule 9(b) “may
not rest on a bare inference that a defendant ‘must have had’
knowledge of the facts” or “must have known” of the fraud
given his or her position in the company. In re Advanta, 180
F.3d at 539 (citations omitted). As we have stated,
“[g]eneralized imputations of knowledge do not suffice,
regardless of the defendants’ positions within the company.” Id.
(citation omitted). The allegation that the Outside Directors, qua
directors and members of the audit committee, had access to
unspecified business records and a duty to review them does not
give rise to a strong inference that the Outside Directors
individually knew of or recklessly disregarded particular

       11
         As noted, Lead Class Plaintiff did not file a Section 10(b)
claim against the Outside Directors, nor did it file such a claim
against the Underwriters.

                                36
wrongful recognitions of revenue. We will, therefore, affirm the
District Court’s dismissal of SSF Plaintiffs’ Section 10(b) claims
against the Outside Directors.

4. The 2000 and 2001 Underwriters

        The District Court also dismissed SSF Plaintiffs’ Section
10(b) claim against the Underwriters, holding that the allegations
suggested negligence only and did not reach the threshold for
scienter. In the second amended complaint, SSF Plaintiffs
alleged that the Underwriters collectively “failed to adequately
review Suprema’s internal financial forecasts, contracts, and
other documents, make a physical inspection of Suprema’s major
facilities, employ analysts having expertise in the cheese
business, conduct interviews with Suprema’s senior and middle
management, or interview Suprema’s major customers, outside
quality consultants, auditors, and legal counsel.” App. at 381-
82. SSF Plaintiffs also alleged that the Underwriters earned
significant fees for services rendered in connection with the
public offerings.

        “A securities professional has an obligation to investigate
the securities he or she offers to customers.” SEC v. GLT Dain
Rauscher, Inc., 254 F.3d 852, 857 (9th Cir. 2001). The
investigation must be adequate to provide the professional “with
a reasonable basis for a belief that the key representations in the
statements provided to . . . investors [a]re truthful and complete.”
Id. at 858 (citations omitted). Whereas a reckless failure to
investigate an issuer of securities can give rise to liability under
Section 10(b), simple negligence, even inexcusable negligence,
is not enough. Infinity, 212 F.3d at 192. Nor is an allegation
that an underwriter had a motive to commit fraud simply because
it stood to collect underwriting fees. GSC, 368 F.3d at 238.

       Our review of the SSF Plaintiffs’ allegations confirms the
District Court’s conclusion that they failed adequately to allege
scienter. The breaches alleged are, at best, negligent breaches of
the duty to investigate. The fact that the Underwriters earned
fees for their services does not establish that they acted with any
culpable intent. Moreover, plaintiffs’ manner of pleading their
claim collectively, through blanket allegations against numerous

                                37
different defendants, runs afoul of the particularity requirements
of the PSLRA and Rule 9(b). See CALPERS, 394 F.3d at 145.
Plaintiffs accuse all of the Underwriters of having breached
various aspects of the duty to investigate, but they fail to allege
any specific derogation of duty on the part of any specific
defendant. Given the lack of particularity in their pleading, and
given that they have alleged a mental state amounting to no more
than negligence, SSF Plaintiffs have failed to state a Section
10(b) claim. We will affirm the dismissal of the Section 10(b)
claim against the Underwriters.

C. Section 18 Claims

        SSF Plaintiffs asserted a claim for relief under Section 18
of the Exchange Act against the Officers, Outside Directors, and
BDO for their alleged negligence in connection with the false
statements purportedly made in documents that Suprema filed
with the SEC. Section 18 creates a private remedy for damages
resulting from the purchase or sale of a security in reliance upon
a false or misleading statement contained in any document or
report filed with the SEC pursuant to the Exchange Act.
15 U.S.C. § 78r(a).12 SSF Plaintiffs concede that to state their

       12
            Section 78r(a) provides in relevant part:

                Any person who shall make or cause
                to be made any statement in any
                application, report, or document filed
                pursuant to this chapter or any rule or
                regulation thereunder or any
                undertaking contained in a registration
                statement as provided in subsection
                (d) of section 78o of this title, which
                statement was at the time and in the
                light of the circumstances under which
                it was made false or misleading with
                respect to any material fact, shall be
                liable to any person (not knowing that
                such statement was false or
                misleading) who, in reliance upon

                                   38
claim under Section 18, they were required to plead actual, as
opposed to presumed, reliance upon a false or misleading
statement. See SSF Br. at 44 (citing Heit v. Weitzen, 402 F.2d
909, 916 (2d Cir. 1968)); see also Howard v. Everex Sys., 228
F.3d 1057, 1063 (9th Cir. 2000) (noting that “courts have
required a purchaser’s actual reliance on the fraudulent statement
under § 18(a), as opposed to the constructive reliance, or
fraud-on-the-market, theory available under § 10(b)”) (citation
omitted). A Section 18 plaintiff, however, bears no burden of
proving that the defendant acted with scienter or any particular
state of mind. In re Stone & Webster, Inc., Sec. Litig., 414 F.3d
187, 193 (1st Cir. 2005); see Magna Inv. Corp. v. John Does
One Through Two Hundred, 931 F.2d 38, 39-40 (11th Cir.
1991). Thus, unlike a Section 10(b) claim, liability under
Section 18 requires proof of reliance but does not require proof
of scienter. See McGann v. Ernst & Young, 102 F.3d 390, 395
(9th Cir. 1996).13

       SSF Plaintiffs contend that they sufficiently pled actual
reliance under Section 18 because they alleged that they read and
relied upon each “document” that contained a misstatement or
omission. The District Court determined that, although SSF
Plaintiffs stated for each document at issue that they “relied
upon” the document, they “merely allege[d] that they relied [on
the] documents that contained misstatements. They did not

              such statement, shall have purchased
              or sold a security at a price which was
              affected by such statement, for
              damages caused by such reliance,
              unless the person sued shall prove that
              he acted in good faith and had no
              knowledge that such statement was
              false or misleading.

15 U.S.C. § 78r(a).
       13
         This court has yet to determine when or if the heightened
pleading requirements of Rule 9(b) apply to a Section 18 claim, but
we see no need to reach that question on this appeal.

                                39
allege actual reliance on the specific misrepresentations
themselves.” App. at 35. The District Court held that, absent
allegations of reliance on specific statements, the claims were
inadequately pled.

        We agree that plaintiffs were required to plead actual
reliance on specific statements contained in the SEC filings at
issue. Section 18 plainly refers to reliance upon any materially
false “statement.” See 15 U.S.C. § 78r(a) (“Any person who
shall make . . . any statement in any application, report, or
document[,] . . . which statement was [materially false,] . . . shall
be liable to any person . . . who, in reliance upon such statement,
shall have purchased or sold a security at a price which was
affected by such statement.”) (emphasis added). In Cramer v.
General Tel. & Electronics Corp., 582 F.2d 259 (3d Cir. 1978),
this court, applying this natural reading of the statutory
language, stated that a plaintiff seeking to bring a claim under
Section 18 must allege a causal nexus between the sale of a
security and “reliance upon a false statement” in a report filed
with the SEC. Id. at 269 (emphasis added).

        SSF Plaintiffs alleged cursorily that they “received,
reviewed, actually read, and relied upon” various Form 10-Q
filings and the 2000 and 2001 Form 10-K filings. For example,
regarding the September 28, 2001, Form 10-K, they allege that
they “obtained this document at or about the it [sic] was publicly
filed with the SEC, and actually read and relied upon it in
making their decisions to invest in Suprema common stock.”
App. at 367. SSF Plaintiffs failed, however, to plead facts
probative of their actual reliance on any specific false statements
contained in those filings. Given the lack of allegations to show
the requisite causal nexus between their purchase of securities
and specific statements contained in the SEC filings, we will
affirm the District Court’s dismissal of SSF Plaintiffs’ Section
18 claims.

D. Section 15 and Section 20(a) Claims

       Section 15 of the Securities Act provides for joint and
several liability on the part of one who controls a violator of
Section 11 or Section 12. 15 U.S.C. § 77o; see In re Adams

                                 40
Golf, 381 F.3d at 273 n. 3.14 Section 20(a) of the Exchange Act
imposes joint and several liability upon one who controls a
violator of Section 10(b). 15 U.S.C. § 78t(a); see In re Alpharma
Inc. Sec. Litig., 372 F.3d 137, 153 (3d Cir. 2004); Sharp v.
Coopers & Lybrand, 649 F.2d 175, 185 (3d Cir. 1981).15 Under

      14
           Section 15 provides:

               Every person who, by or through stock
               ownership, agency, or otherwise, or
               who, pursuant to or in connection with
               an agreement or understanding with
               one or more other persons by or
               through stock ownership, agency, or
               otherwise, controls any person liable
               under sections 77k or 77l of this title,
               shall also be liable jointly and
               severally with and to the same extent
               as such controlled person to any
               person to whom such controlled
               person is liable, unless the controlling
               person had no knowledge of or
               reasonable ground to believe in the
               existence of the facts by reason of
               which the liability of the controlled
               person is alleged to exist.

15 U.S.C. § 77o.
      15
        Section 20(a) provides:

               Every person who, directly or
               indirectly, controls any person liable
               under any provision of this chapter or
               of any rule or regulation thereunder
               shall also be liable jointly and
               severally with and to the same extent
               as such controlled person to any
               person to whom such controlled
               person is liable, unless the controlling

                                  41
both provisions, the plaintiff must prove that one person
controlled another person or entity and that the controlled person
or entity committed a primary violation of the securities laws.
See Klein v. Gen. Nutrition Companies, 186 F.3d 338, 344 (3d
Cir. 1999) (Section 15); In re Alpharma, 372 F.3d at 153
(Section 20(a)).16

       Both plaintiffs asserted Section 15 and Section 20(a)
claims against the Officers, i.e., Cocchiola and Venechanos. The
District Court dismissed these claims on the ground that the
Officers’ underlying violations of the securities laws were
inadequately pled, and thus the control-person claims must fail,
as well. We have concluded, however, that plaintiffs did
adequately plead their Section 11, Section 12(a)(2), and Section
10(b) claims against the Officers.

       Plaintiffs contend, moreover, that the District Court
misconstrued the nature of their control-person claims. They
note that their Section 15 and Section 20(a) counts were
premised upon underlying violations by Suprema itself, even
though Suprema is not named as a defendant because it is
bankrupt. Plaintiffs contend that while the Officers were alleged
to have committed primary violations in other counts of the
second amended complaints, Suprema was the alleged primary
violator for purposes of the control-person claims.

              person acted in good faith and did not
              directly or indirectly induce the act or
              acts constituting the violation or cause
              of action.

15 U.S.C. § 78t(a).
       16
         We also have held that “secondary liability cannot be
found under Section 20(a) unless it can be shown that the
defendant was a culpable participant in the fraud.” Rochez Bros.,
Inc. v. Rhoades, 527 F.2d 880, 890 (3d Cir. 1975); see also Sharp,
649 F.2d at 185 (“One element of any case imposing liability under
§ 20(a) is ‘culpable participation’ in the securities violation.”).

                                42
       The record reveals that plaintiffs did expressly name the
corporation itself as the primary violator in their Section 15 and
Section 20(a) counts. Both plaintiffs also asserted that they
would have named Suprema as a defendant to the suits were it
not for its status as a bankrupt. Essentially, plaintiffs argue that
Suprema’s controlling persons should not escape liability under
Section 15 and Section 20(a) merely because Suprema’s
underlying liability cannot be formally adjudicated due to its
insolvency. We agree.

       As noted, Section 15 imposes joint and several liability
for any person who controls a person liable under the Securities
Act, while Section 20(a) imposes similar control liability for an
underlying violator of the Exchange Act. With regard to Section
20(a), we have observed that “[t]he text of the statute plainly
requires the plaintiff to prove not only that one person controlled
another person, but also that the ‘controlled person’ is liable
under the Act. If no controlled person is liable, there can be no
controlling person liability.” Shapiro, 964 F.2d at 279 (citation
omitted). The same holds true for claims brought under Section
15. See, e.g., Cooperman v. Individual, Inc., 171 F.3d 43, 52
(1st Cir. 1999). Thus, establishing the liability of the controlled
person or entity is plainly an element of a claim for relief under
both Section 15 and Section 20(a).

        But there is no requirement in the language of either
statute that the controlled person be named as a defendant as a
predicate to imposing liability upon the controlling individual
defendants. A plaintiff need only establish the controlled
person’s liability. See In re Hayes Lemmerz Intern., Inc., 271 F.
Supp. 2d 1007, 1022 n. 11 (E.D. Mich. 2003) (“[I]f the
complaint states a primary violation by the Company, even if the
Company is not named in the complaint as a defendant, then a §
20 claim can stand if the individuals were controlling persons.”);
In re CitiSource, Inc. Sec. Litig., 694 F. Supp. 1069, 1077
(S.D.N.Y. 1988) (holding that “liability of the primary violator is
simply an element of proof of a section 20(a) claim,” and that
“liability need not be actually visited upon the primary violator
before a controlling person may be held liable for the primary
violator’s wrong”). As one district court has cogently observed,
“it would be inconsistent with the broad remedial purposes of the

                                 43
securities laws to permit senior executives of a bankrupt
corporation– whose actions allegedly contributed to the
bankruptcy– to avoid liability by relying on the corporation’s
bankruptcy.” Schleicher v. Wendt, No. 1:02CV1332DFHTAB,
2005 WL 1656871, at *6 (S.D. Ind. July 14, 2005).

        Plaintiffs here adequately alleged primary violations of
the Securities Act and the Exchange Act by Suprema. Lead
Class Plaintiff set forth in detail the specific allegations of
Suprema’s misstatements and omissions in its Registration
Statement and Prospectus, and it expressly asserted that Suprema
should be primarily liable as a result under Section 15. Lead
Class Plaintiff also detailed the allegations of materially false
and misleading statements and omissions in SEC filings and
asserted that Suprema should be held primarily liable under
Section 20(a). SSF Plaintiffs set forth similar and equally
sufficient allegations. The complaints also detailed the manner
in which Cocchiola and Venechanos are alleged to have tightly
controlled Suprema’s business and operations and acted as
culpable participants in the fraud, as discussed in connection
with plaintiffs’ Section 10(b) claims against those defendants.
For these reasons, we will vacate the dismissal of plaintiffs’
Section 15 and Section 20(a) claims against the Officers.17

E. Pendent State law claims

       After dismissing all claims brought under federal law, the

       17
         SSF Plaintiffs also asserted Section 15 and Section 20(a)
claims against the Outside Directors. In their opening brief,
however, SSF Plaintiffs devote a mere one paragraph to their
control-person claims, and that paragraph makes no mention of the
Outside Directors per se and provides no substantive discussion of
the claims against those defendants. Although SSF Plaintiffs argue
the claim at length in their reply brief, it is well-settled in this court
that “an appellant's failure to identify or argue an issue in his
opening brief constitutes waiver of that issue on appeal.” United
States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005). Consequently,
we deem SSF Plaintiffs’ control-person claims against the Outside
Directors waived.

                                   44
District Court declined to exercise supplemental jurisdiction
under 28 U.S.C. § 1367(c)(3) over the SSF Plaintiffs’ state-law
claims based on common law fraud and negligent
misrepresentation. The District Court did not address the merits
of the state law claims. Given our conclusion that many of the
federal claims were improperly dismissed at this preliminary
stage, and that the District Court therefore retains jurisdiction
over the federal claims, we will vacate the dismissal of the state-
law claims for reconsideration by the District Court.

                                III.

        We will affirm the District Court’s dismissal of both
plaintiffs’ Section 10(b) claims against the Outside Directors and
the Underwriters, as well as the dismissal of the Section 18
claims in their entirety. We will reverse the dismissal of
plaintiffs’ Section 11 and 12(a)(2) claims against all defendants,
the Section 10(b) claims against the Officers and BDO, the
Section 15 and 20(a) claims as to the Officers, and the dismissal
of the SSF Plaintiffs’ claims under state law. We will remand
the matter to the District Court for further proceedings on the
remaining claims in accordance with this opinion.
____________________________

                                45