Court Opinion

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Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

9-24-2007

Winer Family Trust v. Queen
Precedential or Non-Precedential: Precedential

Docket No. 05-3622

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                                      PRECEDENTIAL

    UNITED STATES COURT OF APPEALS
         FOR THE THIRD CIRCUIT

                   No. 05-3622

   THE WINER FAMILY TRUST, Individually
   and on behalf of all others similarly situated,
                                             Appellant

              SEAN FITZPATRICK
               (Intervenor in D.C.)

                         v.

             MICHAEL QUEEN;
  THOMAS McGREAL; JOSEPH W. LUTER, IV;
 MICHAEL H. COLE; SMITHFIELD FOODS, INC.;
PENNEXX FOODS, INC.; SHOWCASE FOODS, INC.

  On Appeal from the United States District Court
     for the Eastern District of Pennsylvania
        D.C. Civil Action No. 03-cv-4318
           (Honorable John R. Padova)
                 Argued November 9, 2006

            Before: SCIRICA, Chief Judge,
         McKEE and STAPLETON, Circuit Judges.

                (Filed September 24, 2007)

KIMBERLY M. DONALDSON, ESQUIRE (ARGUED)
STEVEN A. SCHWARTZ, ESQUIRE
Chimicles & Tikellis LLP
One Haverford Centre
361 West Lancaster Avenue
Haverford, Pennsylvania 19041

AVI N. WAGNER, ESQUIRE
Glancy, Binkow & Goldberg LLP
1801 Avenue of the Stars, Suite 311
Los Angeles, California 90067
      Attorneys for Appellant

RONALD J. MANN, ESQUIRE (ARGUED)
727 East Dean Keeton Street
Austin, Texas 78705

MAURICE R. MITTS, ESQUIRE
Mitts Milavec
1835 Market Street, Suite 1500
Philadelphia, Pennsylvania 19103

                             2
ERIC F. SPADE, ESQUIRE
748 South Fifteenth Street
Philadelphia, Pennsylvania 19128
      Attorneys for Appellees,
      Michael Queen, Thomas McGreal, Pennexx Foods, Inc.

TERENCE J. RASMUSSEN, ESQUIRE (ARGUED)
EDWARD J. FUHR, ESQUIRE
ERIC H. FEILER, ESQUIRE
JESSICA M. ERICKSON, ESQUIRE
MONICA S. CALL, ESQUIRE
Hunton & Williams LLP
Riverfront Plaza, East Tower, 13th Floor
951 East Byrd Street
Richmond, Virginia 23219

ALAN K. COTLER, ESQUIRE
MILIND M. SHAH, ESQUIRE
Reed Smith LLP
2500 One Liberty Place, 1650 Market Street
Philadelphia, Pennsylvania 19103-7301
      Attorneys for Appellees,
      Joseph W. Luter, IV, Michael H. Cole,
      Smithfield Foods, Inc., Showcase Foods, Inc.

                             3
                 OPINION OF THE COURT

SCIRICA, Chief Judge.
       At issue in this private securities fraud class action is
whether plaintiffs properly pleaded false and misleading
statements and material omissions on the company’s earnings
potential and stock value, in violation of the Securities and
Exchange Act of 1934. The District Court granted defendants’
motions to dismiss for failure to meet the pleading requirements
of the Private Securities Litigation Reform Act of 1995, 15
U.S.C. § 78u-4 et seq (“PSLRA”). While this appeal was
pending, the Supreme Court set forth the pleading standard for
the PSLRA. Tellabs, Inc. v. Makor Issues & Right, Ltd., 127 S.
Ct. 2499 (2007); Key Equity Investors, Inc. v. Sel-Leb
Marketing, Inc., No. 06-1052, 2007 WL 2510385 (3d Cir. Sept.
6, 2007). We will affirm.
              I. Facts and Procedural History
       Plaintiffs are former shareholders of Pennexx Foods, Inc.,
a Pennsylvania corporation that provides case-ready meat to
customers in the northeastern United States. Defendants are
Pennexx; Smithfield Foods, Inc., a Virginia corporation that
produces, processes, and markets a variety of meat products;
directors and officers of Pennexx and Smithfield Foods; and
Showcase Foods, Inc., a subsidiary of Smithfield Foods.

                               4
       In June 2001, Pennexx entered into a stock purchase
agreement with Smithfield Foods. Smithfield Foods agreed to
purchase fifty percent of the outstanding shares of Pennexx for
$6 million and to extend Pennexx a revolving line of credit up
to $30 million, secured by Pennexx’s assets. Smithfield Foods
nominated two of its executives, defendants Joseph Luter IV and
Michael Cole, to Pennexx’s board of directors. In April 2002,
Pennexx purchased a meat processing facility in Philadelphia,
the Tabor Facility. In May 2002, with Smithfield Foods’s
assistance, Pennexx began renovating the building, and in July
2002 moved its operations into the Tabor Facility. Renovations
continued for the next several months.
       Shortly thereafter, Pennexx defaulted on its repayment
obligations to Smithfield Foods. Over the objections of Luter
and Cole, Pennexx issued additional stock to raise capital. In
January 2003, Luter and Cole resigned as Pennexx directors.
Subsequently, Smithfield Foods demanded all delinquent
amounts under its credit agreement and pursued a replevin
action. On June 9, 2003, under a consent decree, Smithfield
Foods foreclosed on all of Pennexx’s real and personal property.
Showcase Foods then took over the Tabor Facility.
       This class litigation followed. The Winer Family Trust
had purchased 5000 shares of Pennexx stock on May 22, 2002.
Based on this purchase, Winer filed a class action complaint
against Pennexx, Smithfield Foods, executives and officers of
both companies, and Showcase Foods. Winer claimed Pennexx
had inflated the price of its stock through public statements and

                               5
earnings reports that omitted or misstated material facts. Winer
was appointed lead plaintiff in November 2003.
       Winer’s suit alleged federal and state causes of action on
behalf of two separate classes. On behalf of public investors
who purchased Pennexx securities during the period from
February 8, 2002, until June 12, 2003, Winer alleged violations
of § 10(b) of the Securities and Exchange Act, as amended by
the Private Securities Litigation Reform Act of 1995, 15 U.S.C.
§§ 78j(b), 78t(a), and Rule 10b-5, see 17 C.F.R. § 240.10b-5,
against Pennexx and individual defendants Michael Queen,
President of Pennexx; Thomas McGreal, a director and Vice
President of Sales for Pennexx; and Smithfield Foods executives
Luter and Cole (“Individual Defendants”). Winer also alleged
violations of § 20(a) of the Securities and Exchange Act against
Smithfield Foods and the Individual Defendants. On behalf of
public investors who currently own Pennexx securities, Winer
asserted state law claims for breach of fiduciary duty against
Queen and Smithfield Foods, aiding and abetting claims against
Luter and Cole, and successor liability claims against Smithfield
Foods and Showcase Foods.
       On September 27, 2004, the District Court granted
defendants’ motions to dismiss the Rule 10b-5 claims, except for
several claims against Pennexx and Queen based on the
challenged statements and omissions made after May 22, 2002,
the date Winer purchased its stock. The Court also granted the
motions to dismiss with respect to the breach of fiduciary duty
claims against Queen, Smithfield Foods, Luter, and Cole. The

                               6
Court denied defendants’ motions to dismiss the § 20(a) claims
and successor liability claims based on Rule 10b-5 for several
statements and omissions occurring after May 22, 2002.
       Winer then sought leave to amend, purportedly curing
pleading deficiencies and amplifying previous allegations based
on new information. This new information came from
additional discovery permitted in July 2004 involving the June
2004 closing of the Tabor Facility. In an order dated January
18, 2005, the District Court denied Winer leave to file the
proposed amendments, finding them futile.
       Winer’s only remaining claims were based on statements
made by defendants after the date of Winer’s stock purchase.
As a result, Smithfield Foods filed a motion to dismiss
contending Winer lacked standing. On February 11, 2005, the
court entered an order that by agreement of the parties Winer
withdrew as lead plaintiff without prejudice to pursue an appeal
as former lead plaintiff. After plaintiffs failed in their attempt
to substitute other lead plaintiffs, the District Court, on June 29,
2005, dismissed the case for lack of prosecution.
        Winer timely appeals the September 27, 2004 Order
partially granting defendants’ motions to dismiss, the January
18, 2005 Order denying leave to file its proposed amendments,
the February 11, 2005 Order withdrawing Winer as lead
plaintiff, and the June 29, 2005 Order dismissing the action.
      The focus of this appeal is Pennexx’s statements about its
business relationship with Smithfield Foods and the renovation

                                 7
of the Tabor Facility. Winer contends Smithfield Foods
“abused” Pennexx in a prior business deal, and that Pennexx
omitted material facts about this prior relationship in a February
8, 2002 press release. The February 8 press release credited
Smithfield Foods’s loan to Pennexx as a factor allowing
Pennexx to list its stock on the over the counter Bulletin Board.
The press release also referred favorably to Pennexx’s business
prospects and “growing demand.”
        Winer also challenges statements and filings involving
renovations to the Tabor Facility. On February 20, 2002,
Pennexx announced its agreement to acquire the Tabor Facility,
stating it was “perfectly suited to our needs,” and required
“minimal improvements.” In a March 29, 2002 SEC filing,
Pennexx estimated the cost of purchasing, renovating, and
equipping the Tabor Facility to be between $10.5 million and
$15 million. Pennexx purchased the Tabor Facility on April 2
for $2 million and announced the acquisition on April 3. In an
April 17 filing, Pennexx’s revised estimates ranged from $8.5
million to $16 million total for purchasing, renovating, and
equipping the Tabor Facility. On May 15 Pennexx again revised
its cost estimate for purchasing, renovating, and equipping the
Tabor Facility to between $11.5 million and $16 million.
Pennexx began renovating the Tabor Facility with Smithfield
Foods’s assistance in May, and moved into the facility in July
2002.1

       1
       Winer alleged additional misleading or incomplete
statements made by Pennexx after it bought its shares on May

                                8
        As lead plaintiff, Winer also asserted state law claims for
breach of fiduciary duty. Winer contends Queen breached his
fiduciary duty by signing a forbearance agreement on May 29,
2003, which called for a broad release of claims that could have
been asserted against Smithfield Foods by Pennexx and its
shareholders. In the forbearance agreement, Pennexx agreed to
pay outstanding loan obligations and expenses totaling
approximately $13 million by June 9, 2003 and generally release
Smithfield Foods from all obligations and liabilities other than
those set forth in the agreement. Smithfield Foods agreed to
forbear from exercising its rights and remedies until June 18,
2003, provided Pennexx complied with its obligations, and to
assist Pennexx in its efforts to redomesticate itself in Delaware.
Winer maintains that Smithfield Foods, frustrated in its attempts
to purchase Pennexx outright, implemented a scheme to
undermine Pennexx’s ability to operate so that it could acquire
Pennexx’s assets and business opportunities at a discount and to
the detriment of Pennexx’s shareholders.
          II. Jurisdiction and Standard of Review

22, 2002, regarding the Smithfield Foods relationship, the Tabor
Facility, Pennexx’s second quarter 2002 financial losses, the
termination of CFO George Pearcy, Pennexx’s liquidity
problems and increasing defaults under its credit agreement with
Smithfield Foods, and Pennexx’s overall prospects for growth.
As discussed, Winer lacks standing to assert these claims
because they were made after its stock purchase.

                                9
       Winer filed this securities class action under §§ 10(b) and
20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§
78j(b) and 78t(a). The District Court had jurisdiction under 28
U.S.C. § 1331 and supplemental and ancillary jurisdiction over
the state law breach of fiduciary duty claims. We have
jurisdiction to review the final judgment of the District Court
under 28 U.S.C. § 1291.
       We exercise plenary review over the District Court’s
dismissal of a complaint for failure to state a claim under Fed.
R. Civ. P. 12(b)(6), Delaware Nation v. Pennsylvania, 446 F.3d
410, 415 (3d Cir. 2006), and over the District Court’s
interpretation of the applicable federal securities laws. Morrison
v. Madison Dearborn Capital Partners III L.P., 463 F.3d 312,
314 (3d Cir. 2006). We review the District Court’s denial of
Winer’s request for leave to amend for abuse of discretion.
Kanter v. Barella, 489 F.3d 170, 175 (3d Cir. 2007).
                               III.
      Winer contends the District Court erred in dismissing the
amended complaint for failure to state a claim upon which relief
may be granted and abused its discretion in failing to grant
Winer leave to amend.
                          A. Standing
       Constitutional standing requires: (1) an injury-in-fact,
which is an invasion of a legally protected interest that is (a)
concrete and particularized, and (b) actual or imminent, not
conjectural or hypothetical; (2) a causal connection between the

                               10
injury and the conduct complained of; and (3) that it must be
likely, as opposed to merely speculative, that the injury will be
redressed by a favorable decision. Danvers Motor Co., Inc. v.
Ford Motor Co., 432 F.3d 286, 290–91 (3d Cir. 2005) (citing
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992)).
Plaintiffs have the burden to establish standing. Id. at 291
(citing Storino v. Borough of Point Pleasant Beach, 322 F.3d
293, 296 (3d Cir. 2003)). Winer’s Rule 10b-5 claim is based on
its purchase of Pennexx securities on May 22, 2002. The
District Court dismissed all of Winer’s Rule 10b-5 claims that
were based on representations made after its purchase date.
       The plaintiff class under Rule 10b-5 is limited
exclusively to actual sellers or purchasers of securities. See Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754 (1975)
(holding plaintiff did not qualify as either a purchaser or seller
of stock and thus lacked standing to pursue a claim under Rule
10b-5). There is no private right of action under Rule 10b-5 for
mere holders of securities. Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Dabit, 547 U.S. 71, 80 (2006) (citing Blue Chip
Stamps, 421 U.S. at 739). Winer must be a purchaser or seller
to pursue its Rule 10b-5 claims, and accordingly only has
standing to assert claims based on activity prior to the date
Winer purchased its stock.
       In class action suits, Winer asserts, the lead plaintiff may
base claims on statements and omissions occurring after its date
of purchase. But it is still necessary for the lead plaintiff to
establish its own standing based on a purchase or sale of stock,

                                11
and not merely the decision to retain stock. See Fallick v.
Nationwide Mut. Ins. Co., 162 F.3d 410, 423 (6th Cir. 1998)
(citing Brown v. Sibley, 650 F.2d 760, 770 (5th Cir. 1981)) (“A
potential class representative must demonstrate individual
standing vis-as-vis [sic] the defendant; he cannot acquire such
standing merely by virtue of bringing a class action.”). The
initial inquiry in either case is whether the lead plaintiff
individually has standing, not whether or not other class
members have standing. Winer only has standing to pursue
fraudulent conduct on or before its May 22, 2002 purchase date.
            B. Applicable Pleading Requirements
         The amended complaint asserts Rule 10b-5 claims based
upon reckless or intentional misstatements and omissions
occurring on or before May 22, 2002. See 17 C.F.R. §
240.10b-5(b) (“It shall be unlawful for any person . . . [t]o 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.”).
Plaintiffs must also allege defendants made a misstatement or an
omission of material fact with scienter in connection with the
purchase or the sale of a security upon which plaintiffs
reasonably relied and plaintiff’s reliance was the proximate
cause of their injury. Id.
       The Private Securities Litigation Reform Act of 1995
requires plaintiffs in a private securities action to specify each
allegedly misleading statement, why the statement was

                               12
misleading, and, if an allegation is made on information and
belief, all facts supporting that belief with particularity. 15
U.S.C. § 78u-4(b)(1)(B). Importantly, the PSLRA requires the
applicable mental state be pleaded with particularity. See id.
(“[T]he 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.”). The District Court held that Winer
failed to adequately plead scienter.
        The Supreme Court has mandated a uniform construction
of the strong inference standard in light of the objectives of the
PSLRA. Tellabs, Inc. v. Makor Issues & Right, Ltd., 127 S. Ct.
2499, 2508 (2007); see Key Equity Investors, Inc. v. Sel-Leb
Marketing, Inc., No. 06-1052, 2007 WL 2510385 (3d Cir. Sept.
6, 2007) (applying the pleading standard laid out by Tellabs);
Globis Capital Partners, L.P. v. Stonepath Group, Inc., No. 06-
2560, 2007 WL 1977236, at *3 (3d Cir. July 10, 2007) (“The
Court’s Tellabs decision removes any doubt the PSLRA’s
scienter pleading requirement is a significant bar to litigation .
. . .”). The twin goals of the PSLRA are to “curb frivolous,
lawyer-driven litigation, while preserving the investors’ ability
to recover on meritorious claims.” Id. at 2509. One of the
purposes of the PSLRA’s heightened pleading requirements is
to limit abusive securities class-action suits. See Dabit, 547
U.S. at 81; 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) (noting the PSLRA is designed to limit: “(1) the
practice of filing lawsuits against issuers of securities in

                                13
response to any significant change in stock price, regardless of
defendants’ culpability; (2) targeting of ‘deep pocket’
defendants; (3) the abuse of the discovery process to coerce
settlement; and (4) manipulation of clients by class action
attorneys.”). As the Supreme Court has recognized in the
securities context, even class suits with little merit may have
disproportionate settlement value. See Tellabs, 127 S. Ct. at
2504 (citing Dabit, 547 U.S. at 81); Blue Chip Stamps, 421 U.S.
at 740–41.
        The Court prescribed a three-step process for considering
a motion to dismiss in a § 10(b) action: First, as with any Rule
12(b)(6) motion, courts must “accept all factual allegations in
the complaint as true.” Tellabs, 127 S. Ct. at 2509 (citing
Leatherman v. Tarrant County Narcotics Intelligence and
Coordination Unit, 507 U.S. 163, 164 (1993)). Second, “courts
must consider the complaint in its entirety.” Id. This includes
examining additional sources courts normally consider when
ruling on a motion to dismiss, “in particular, documents
incorporated into the complaint by reference, and matters of
which a court may take judicial notice.” Id. (citation omitted).
Courts must inquire “whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not
whether any individual allegation, scrutinized in isolation, meets
that standard.” Id. (emphasis in original) (citations omitted).
Third, to determine whether the pleaded facts meet the PSLRA’s
“strong inference” standard, courts “must take into account
plausible opposing inferences.” Id.

                               14
       In ruling that courts must consider plausible opposing
inferences in a motion to dismiss, the Court set forth a
reasonable person test, stating that the facts must give rise to a
“strong,” i.e., a powerful or cogent inference that is at least as
compelling as any opposing inference.
       But in [the PSLRA], Congress did not merely
       require plaintiffs to ‘provide a factual basis for
       [their] scienter allegations’ . . . .     Instead,
       Congress required plaintiffs to plead with
       particularity facts that give rise to a
       “strong”—i.e., a powerful or cogent—inference .
       ...
               The strength of an inference cannot be
       decided in a vacuum. The inquiry is inherently
       comparative . . . . [A] court must consider
       plausible nonculpable explanations for the
       defendant’s conduct, as well as inferences
       favoring the plaintiff. The inference that the
       defendant acted with scienter need not be
       irrefutable, i.e., of the ‘smoking-gun’ genre, or
       even the ‘most plausible of competing
       inferences,’ . . . . Yet the inference of scienter
       must be more than merely ‘reasonable’ or
       ‘permissible’—it must be cogent and compelling,
       thus strong in light of other explanations. A
       complaint will survive . . . only if a reasonable
       person would deem the inference of scienter
       cogent and at least as compelling as any opposing

                               15
       inference one could draw from the facts alleged.
Id. at 2510 (internal citations omitted).
                 C. Tabor Facility Statements
       Winer challenges Pennexx’s February 20, 2002 press
release, in which the company announced it had agreed to
purchase the Tabor Facility. In the press release, Queen,
Pennexx’s President, was quoted as stating:
       [The Tabor Facility] is perfectly suited to our
       needs, as it is strategically located in the central
       Northeast corridor and close to our customers.
       Since the new facility requires minimal
       improvement, we will be able to renovate and
       automate quickly and plan to be operational in
       this pristine facility by the second quarter of 2002.
Winer contends Queen’s statements were knowingly false and
misleading because they failed to disclose the facility needed a
major overhaul costing over $18 million and requiring expert
supervision. Winer maintains defendants never disclosed that
Smithfield Foods, not Pennexx, exclusively controlled the
purchase and renovation of the Tabor Facility, which resulted in
a facility not designed to meet Pennexx’s needs. Winer also
contends Pennexx’s press releases and SEC filings between
March 29 and May 22, 2002, were misleading because they
failed to disclose that, during a walking tour of the Tabor

                                16
Facility on or about March 28, 2002, Joseph Luter III2 advised
the Individual Defendants that Pennexx should spend whatever
was necessary to make the Tabor Facility a high-quality
operation.
        Pennexx acquired the Tabor Facility on April 2, 2002.
On April 17, 2002, Pennexx disclosed that the total estimated
cost for purchasing, renovating and equipping the Tabor Facility
would be between $8 million and $16 million. Pennexx later
revised this estimate in May 2002 to between $11.5 million and
$16 million.
        The District Court found the most plausible inference
from these events was that after the March 28, 2002 walking
tour, Pennexx realized that the cost of renovations would be
more extensive than previously estimated. This was disclosed
to investors in the April 17 filing. Accordingly, the District
Court held the amended complaint failed to allege facts giving
rise to a strong inference that, as of February 20, 2002, Queen
knew that the Tabor Facility would require anything more than
minimal improvements.
       On appeal, Winer contends the District Court erred in
dismissing these claims because the PSLRA’s “strong
inference” pleading standard does not permit the resolution of

   2
    Joseph Luter III is President of Smithfield Foods and is not
a defendant in this case. Joseph Luter IV is one of the
individual defendants in this case and is referred to as “Luter”
throughout the opinion.

                              17
disputed facts at summary judgment. The District Court
accepted the facts alleged by Winer as true. It viewed those
facts holistically in light of all additional facts alleged in the
complaint. But the District Court found that the most plausible
inference flowing from these facts was a non-culpable inference.
        A complaint will survive a motion to dismiss “only if a
reasonable person would deem the inference of scienter cogent
and at least as compelling as any opposing inference one could
draw from the facts alleged.” Tellabs, 127 S. Ct. at 2510. The
District Court found the most plausible inference from Winer’s
alleged sequence of facts was that Pennexx revised its
preliminary cost estimates as it learned more about the costs of
renovating the Tabor Facility. Stated differently, Winer’s
purported inference, that the February statements regarding the
Tabor Facility were knowingly false, was not as compelling or
as strong as the opposing interest cited by the District Court.
         In considering these inferences, the District Court
properly probed documents attached to defendants’ motion to
dismiss. This was appropriate because these documents were
integral to and/or were explicitly relied upon by the amended
complaint. See Tellabs, 127 S. Ct. at 2509 (“[C]ourts must
consider the complaint in its entirety, as well as other sources
courts ordinarily examine when ruling on Rule 12(b)(6) motions
to dismiss, in particular, documents incorporated into the
complaint by reference, and matters of which a court may take
judicial notice.”); In re Burlington Coat Factory, 114 F.3d at
1426 (holding a “‘document integral to or explicitly relied upon

                               18
in the complaint’ may be considered ‘without converting the
motion [to dismiss] into one for summary judgment’”) (quoting
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.
1996) (superseded on other grounds by the PSLRA, 15 U.S.C.
§ 78u-4(b)(1)–(2)); TMJ Implants, Inc. v. Aetna, Inc., Nos.
06-1020, 06-1146, 2007 WL 2372372, at *3 (10th Cir. Aug. 21,
2007) (“Although we ordinarily limit our review [on a motion
to dismiss] to the allegations in the complaint, we consider
documents ‘incorporated into the complaint by reference.’”)
(quoting Tellabs, 127 S. Ct. at 2509); see also Newton v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166–69 (3d
Cir. 2001) (“In reviewing a motion for class certification, a
preliminary inquiry into the merits is sometimes necessary to
determine whether the alleged claims can be properly resolved
as a class action.”). In considering competing inferences, courts
may find it necessary to probe the documents integral to the
complaint.
       Thus, Winer’s inference is neither cogent, nor
compelling, nor strong in light of competing inferences.3 A
reasonable person would not deem the inference of scienter
cogent and at least as compelling as any non-culpable inference.

   3
     As the Court of Appeals for the Seventh Circuit held, the
requirement that the inference be “at least as compelling” as any
competing inference, Tellabs, 127 S. Ct. at 2510, dictates a more
stringent standard than probable cause. Higginbotham v. Baxter
Intern., Inc., 06-1312, 2007 WL 2142298, at *3 (7th Cir. July
27, 2007) (citing Illinois v. Gates, 462 U.S. 213 (1983)).

                               19
See Tellabs, 127 S. Ct. at 2509–10; see also Higginbotham v.
Baxter Intern., Inc., 06-1312, 2007 WL 2142298, at *4–5 (7th
Cir. July 27, 2007) (holding an inference of scienter was
“neither compelling nor cogent”); Central Laborers' Pension
Fund v. Integrated Electrical Services, Inc., No. 06-20135, 2007
WL 2367776, at *5 (5th Cir. Aug. 21, 2007) (holding that when
examining officer trading as a factor suggesting a strong
inference of scienter, courts must consider both culpable and
nonculpable explanations) (citing Tellabs, 127 S. Ct. at 2510);
ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,
104 (2d Cir. 2007) (holding that where a “plausible nonculpable
explanation[]” is more likely than any guilty inference, plaintiffs
failed to establish scienter) (quoting Tellabs, 127 S. Ct. at 2510);
Belizan v. Hershon, No. 06-7104, 2007 WL 2141954, at *4
(D.C. Cir. July 27, 2007) (remanding to allow District Court to
determine whether the inference that defendants acted recklessly
was “at least as compelling as any opposing inference of
nonfraudulent intent”) (quoting Tellabs, 127 S. Ct. at 2505).
        Winer also contends the statements made between March
29, 2002 through May 22, 2002 were actionable because they
failed to disclose that Smithfield Foods’s staff was performing
the renovations of the Tabor Facility. The securities laws do not
require a defendant “provide the public with all material
information.” In re Burlington Coat Factory, 114 F.3d at 1432
(citing In re Time Warner, Inc. Sec. Litig., 9 F.3d 259, 267 (2d
Cir. 1993)). To impose liability for non-disclosure, a defendant
must be under a duty to disclose the omitted information. Oran
v. Stafford, 226 F.3d 275, 285 (3d Cir. 2000) (“Even

                                20
non-disclosure of material information will not give rise to
liability under Rule 10b-5 unless the defendant had an
affirmative duty to disclose that information.”); see also Basic,
Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (“Silence,
absent a duty to disclose, is not misleading under Rule 10b-5.”).
As a general matter, an affirmative duty arises only when there
is insider trading, a statute requiring disclosure, or an inaccurate,
incomplete, or misleading prior disclosure. Oran, 226 F.3d at
285–86. Pennexx points to no duty to disclose that Smithfield
Foods’s staff was renovating the Tabor Facility. The challenged
statements—Pennexx’s press releases and SEC
filings—purported only to provide an outline of Pennexx’s plans
and objectives regarding future renovations. The District Court
correctly held Pennexx had no duty to disclose that Smithfield
Foods’s staff was renovating the Tabor Facility. Taking the
facts pleaded as true and viewing them holistically, a reasonable
person would not deem the inference of scienter as cogent and
at least as compelling as any non-culpable inference based upon
the omitted facts. See Tellabs, 127 S. Ct. at 2509–10.
          D. Pennexx-Smithfield Foods Relationship
      Winer challenges statements made in Pennexx’s February
8, 2002 press release about the business relationship between
Pennexx and Smithfield Foods. Queen stated Pennexx’s
common stock registration resulted from “the $36 million
commitment that Smithfield Foods, Inc., the leading processor
and marketer of fresh pork and processed meats in the U.S.,
made to our company in June 2001.” Winer contends that a

                                 21
prior venture between Smithfield Foods and Pennexx had been
disastrous because Smithfield Foods had supplied Pennexx with
water-injected pork products. Winer maintains the failure to
disclose this prior venture in the February 2002 press release
was misleading.
        The District Court held defendants had no duty to
disclose the previous business relationship. Liability may exist
under Rule 10b-5 for misleading or untrue statements, but not
for statements that are simply incomplete. Brody v. Transitional
Hospitals Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (“Rule
10b-5 . . . prohibit[s] only misleading and untrue statements, not
statements that are incomplete . . . . Often, a statement will not
mislead even if it is incomplete or does not include all relevant
facts.”) (emphasis in original and internal citation omitted);
Blackman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en
banc) (“[The duty to disclose rule] does not mean that by
revealing one fact about a product, one must reveal all others
that, too, would be interesting, market-wise, but means only
such others, if any, that are needed so that what was revealed
would not be so ‘incomplete as to mislead.’”) (quoting SEC v.
Texas Gulf Sulfur Co., 401 F.2d 833, 862 (2d. Cir. 1968)).
Winer fails to specify why the assertion that the equity
investment made by Smithfield Foods helped facilitate
Pennexx’s registration of its common stock was misleading or
untrue.      Accordingly, the amended complaint did not
sufficiently allege facts giving rise to a strong inference that
Queen acted with scienter in making the statements at issue. See
15 U.S.C. § 78u-4(b)(2).

                               22
        Moreover, Winer’s allegation that Queen made the
February 8, 2002 statement while cognizant of the prior
Smithfield Foods-Pennexx relationship does not satisfy the
scienter requirements because Queen’s statement does not give
rise to a strong inference that he acted with the required state of
mind. Queen stated the $36 million commitment made
Pennexx’s stock listing possible—a statement which was true.
Winer fails to sufficiently allege facts supporting a strong
inference that Queen knew or recklessly disregarded the
possibility that his statement was misleading. The District Court
properly held Winer failed to adequately plead scienter for the
February 8, 2002 statement.
                       E. Leave to Amend
       Winer contends the District Court improperly denied it
leave to amend. Although leave should be “freely given when
justice so requires,” Fed. R. Civ. P. 15(a), we have held “‘a
District Court may deny leave to amend on the grounds that
amendment would cause undue delay or prejudice, or that
amendment would be futile.’” In re Alpharma, Inc. Sec. Litig.,
372 F.3d 137, 153 (3d Cir. 2004) (quoting Oran 226 F.3d at
291). The decision to grant a motion for leave to amend is
within the sound discretion of the District Court. Cureton v.
Nat’l Collegiate Athletic Ass’n., 252 F.3d 267, 272 (3d Cir.
2001). The District Court determines futility by taking all
pleaded allegations as true and viewing them in a light most
favorable to the plaintiff. See In re Alpharma, 372 F.3d at
153–154. We review for abuse of discretion. See Cal. Pub.

                                23
Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126, 163 (3d Cir.
2004). The District Court held Winer’s proposed amendments
would be futile and denied leave to amend.
                   1. Tabor Facility Claims
        Winer contends new information alleged in the proposed
amendments establishes scienter for Queen’s February 20, 2002
optimistic statements about the renovation of the Tabor Facility
and Pennexx’s March 29 and April 17, 2002 SEC filings
estimating the cost of the Tabor Facility. Winer’s proffered new
information comes from: (1) the July 20, 2004 deposition of
Mike Timmons, a Smithfield Foods engineer and a project
leader for the renovations who stated the Tabor Facility was in
“relatively poor shape”; (2) Queen’s comments during a walking
tour of the Tabor Facility on July 23, 2004; and (3) a budget
estimate prepared by Robert McClain, a Smithfield Foods
engineer and a project leader for the Tabor Facility renovations.
Winer contends these sources portray the Tabor Facility as being
in disarray prior to renovations and that Pennexx understated the
magnitude of the renovations required.
       Winer challenges Queen’s assertion on February 20,
2002, that the Tabor Facility required “minimal improvement.”
Winer cites Queen’s statements in 2004 that there had been a
problem with the lighting in one area of the Tabor Facility and
a “major issue[] in the plant that started to happen right away
was that the floor was coming up.” The District Court found the
proposed amendments futile because Winer did not plead that
any defendant knew any statement was false or misleading when

                               24
made. In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330 (3d
Cir. 2002) (“To be actionable, a statement or omission must
have been misleading at the time it was made; liability cannot be
imposed on the basis of subsequent events.”); Cal. Pub.
Employees, 394 F.3d at 158 (“We have long rejected attempts to
plead fraud by hindsight.”); see also Tellabs, 127 S. Ct. at 2508
(“The ‘strong inference’ formulation was appropriate, the
Second Circuit said, to ward off allegations of ‘fraud by
hindsight.’”) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d
1124, 1129 (2d Cir. 1994) (quoting Denny v. Barber, 576 F.2d
465, 470 (2d Cir. 1978) (Friendly, J.))). Queen’s February 20,
2002 statements were made in the early stages of a complex,
evolving real estate transaction. Within weeks of announcing its
decision to purchase the Tabor Facility and before the
acquisition was final, Pennexx released preliminary estimates
that purchasing, renovating, and equipping the new facility
would require substantial expenditures. The District Court
noted the most plausible inference was that Pennexx revised its
cost estimates in response to new information and to
negotiations during the intervening time period. In this context,
the District Court noted, the pleaded facts failed to support the
requisite strong inference of reckless conduct, much less
intentional conduct. Stated differently, Winer’s purported
inference, that the statements regarding the Tabor Facility were
knowingly false, was not as compelling or as strong as the
opposing inference cited by the District Court. Thus, Winer’s
inference is neither cogent, nor compelling, nor strong in light
of competing inferences. A reasonable person would not deem

                               25
the inference of scienter cogent and at least as compelling as any
non-culpable inference. See Tellabs, 127 S. Ct. at 2509–10.
       Winer also relies on Timmons’s deposition and
McClain’s preliminary budget estimate to contradict Queen’s
February 20, 2002 statement. As the District Court noted,
Timmons had not begun working at the Tabor Facility until
weeks after Queen’s challenged statements. Accordingly, the
District Court found this was an impermissible attempt to prove
fraud by hindsight. We agree.
       McClain’s higher estimate for purchasing, repairing and
equipping the Tabor Facility was dated January 29, 2002. But
the District Court noted that the version of McClain’s
preliminary budget estimate cited in the proposed amendments
was attached to an email sent to Queen on March 1, a week after
Queen made the challenged statements. But even assuming
Queen had seen the McClain estimate prior to his February 20,
2002 statement, the District Court held that it failed to correct
the scienter deficiencies. As noted, Queen’s statement was
made in the early stages of a “complex, evolving real estate
transaction.” In subsequent filings, Pennexx disclosed the Tabor
Facility project would cost more than originally expected. The
District Court found “the collective allegations of the [second
amended complaint]” failed to give rise to a strong inference
that Queen made the February 20, 2002 statement with scienter.
We agree. A reasonable person would not deem the inference
of scienter cogent and at least as compelling as any non-culpable
inference. See Tellabs, 127 S. Ct. at 2509–10.

                               26
        The District Court also found the McClain estimate did
not cure the scienter deficiencies for allegations based on the
March 29 and April 17 SEC filings. The District Court noted
that McClain’s estimate was “based on the information currently
in hand” as of March 1, 2002, only nine days after Pennexx had
entered into a preliminary agreement to purchase the Tabor
Facility and over one month before Pennexx finalized the
acquisition of the Tabor Facility. The District Court found the
lower-end cost estimates contained in the challenged SEC
filings corresponded to the limited principal advances permitted
by Smithfield Foods under the parties’ credit agreement as of
March 29, 2002. McClain’s higher cost estimates did not appear
to consider the significant constraints on Pennexx’s ability to
finance the Tabor Facility project. The District Court found the
most plausible inference was that Pennexx revised its cost
estimates in response to new information and ongoing financial
negotiations. Stated differently, Winer’s purported inference
was not as compelling or as strong as the opposing interest cited
by the District Court. Thus, the inference is neither cogent, nor
compelling, nor strong in light of competing inferences. A
reasonable person would not deem the inference of scienter
cogent and at least as compelling as any non-culpable inference.
See Tellabs, 127 S. Ct. at 2509–10.
       Moreover, the District Court found that Timmons’s
opinion could not give rise to a strong inference that Queen
acted with scienter. Winer did not allege that Timmons
conveyed his opinions on renovation and budgeting to Queen
prior to his February 2002 statement or that Queen adopted

                               27
Timmons’s opinions. As the District Court noted, the proposed
amendments never alleged that Timmons informed Queen of the
poor condition of the Tabor Facility. Winer failed to adequately
plead scienter by failing to link the declarant of the challenged
statement with facts that might contradict his statement. See 15
U.S.C. § 78u-4(b)(2) (requiring plaintiffs to plead facts giving
rise to a “strong inference” that “the defendant . . . acted with
the required state of mind”); see also Alpharma, 372 F.3d at 150
(“[A]llegations that Williams, [a] subordinate [of an individual
defendant], knew of the irregularities occurring in Brazil provide
an insufficient basis upon which to impute knowledge to [that
individual defendant].”); Nolte v. Capital One Fin. Corp., 390
F.3d 311, 316 (4th Cir. 2004) (affirming dismissal where
plaintiffs failed to plead that the speaking defendants “adopted
[an employee’s] opinion [that Capital One was undercapitalized]
but then publicly declared that Capital One was maintaining
sufficient capital”).
       Citing Nursing Home Pension Fund Local 144 v. Oracle
Corp., 380 F.3d 1226, 1233 (9th Cir. 2004), Winer contends
Timmons’s testimony provides a “substantial window” into the
state of the Tabor facility at the time of Queen’s February 20
statement.4 But Oracle Corp. is easily distinguishable on the

   4
     In Oracle, the Court found the statements of a former vice-
president of finance and other employees in conjunction with
large stock sales by the CEO and CFO, the loss of a large
number of deals, and improper revenue accounting records as
critical in finding a strong inference of scienter. See Oracle

                               28
facts.
       Winer also contends Timmons’s statements prove
scienter for prior optimistic statements. But Winer relies on
statements made at the beginning of the renovation of the Tabor
Facility. Timmons had not even started working at the Tabor
Facility at the time of Queen’s February 20, 2002 statement.
The underlying facts, when viewed in the context of the
complex renovation, fail to support a strong inference of
scienter. A reasonable person would not deem the inference of
scienter cogent and at least as compelling as any non-culpable
inference. The District Court did not abuse its discretion in
finding that the proffered amendments failed to cure the scienter
deficiencies of the original complaint.
               2. Pennexx’s Financial Condition
        Winer contends the District Court abused its discretion
by failing to grant leave to add allegations regarding Pennexx’s
financial condition. Winer challenges the statements in

Corp., 380 F.3d at 1231–33 (“A former vice president of finance
stated that, on the basis of the information available to them, the
defendants would have known at least six weeks prior to the end
of the third quarter that the applications sales growth would miss
projections by at least 50%.”). The court held that “together, the
false representations, both as to current facts and future
estimated profits and sales, as well as the improper revenue
adjustment and unusual stock sales” were sufficient to support
a cause of action. Id. at 1234.

                                29
Pennexx’s SEC filings on April 9, 2002, and May 15, 2002, that
“all adjustments, including normal recurring adjustments,
necessary to present fairly the financial position of the Company
. . . and the results of its operations and cash flows . . . have been
included.” In support, Winer cites: (1) a report by Bart Ellis,
Vice President for Operations at Smithfield Foods, dated August
2, 2002; (2) a memorandum by Jeffrey Deel, a Smithfield Foods
employee, dated July 24, 2002; and (3) comments by Queen
during the tour of the Tabor Facility in July 2004. According to
Winer, these sources demonstrate Pennexx did not fairly present
its financial condition accurately on a timely basis in reports to
the SEC.
        As the District Court noted, a complaint is actionable if
it alleges that a defendant “was aware that mismanagement had
occurred and made a material public statement about the state of
corporate affairs inconsistent with the existence of the
mismanagement.” Hayes v. Gross, 982 F.2d 104, 106 (3d Cir.
1992) (discussing the holding in Shapiro v. UJB Fin. Corp., 964
F.2d 272, 282 (3d Cir. 1992)). The District Court found none of
Winer’s newly asserted facts gave rise to a strong inference that
defendants acted with scienter. The Ellis Report recounts
Pennexx’s problems in reporting financial results to Smithfield
Foods on a weekly and monthly basis. But the District Court
noted the Ellis Report did not demonstrate that Pennexx failed
to “fairly present” its financial condition in its quarterly and
annual SEC reports.          Stating that Pennexx’s “income
statement[s] and balance sheet[s] are only published on a
quarterly basis on the schedule demanded by SEC 10Q

                                 30
requirements,” the Ellis Report suggests Pennexx was filing
timely reports with the SEC but not with Smithfield Foods. The
District Court found the Deel Memorandum merely suggested
methods for Pennexx to improve production and minimize
losses. Queen’s 2004 statements suffer from the defects already
discussed regarding pleading fraud by hindsight. In these
statements, Queen addressed the ability of Pennexx to calculate
yield on a monthly basis, specifically referencing a failure to do
so in February 2003. The District Court found these proposed
amendments failed to support a strong inference that defendants
knew or recklessly disregarded facts indicating Pennexx’s lack
of the internal controls necessary to file accurate financial
statements in April and May 2002.
       Citing In re Ikon Office Solutions, Inc. Sec. Litig., 66 F.
Supp. 2d 622 (E.D. Pa. 1999), Winer contends that Pennexx’s
history of failed internal controls demonstrates Pennexx could
not accurately disclose its financial condition. But the
allegations in In re Ikon were explicit and stronger,
demonstrating “that the Company’s internal controls were
grossly deficient and that the financial data . . . was so
pervasively inaccurate and unreliable that reliance on that
information for financial statement purposes was precluded by
GAAP and GAAS.” Id. at 631. The District Court found none
of Winer’s proposed amendments supported a conclusion that
the challenged statements were false or misleading—at most
they suggested Pennexx was not timely in reporting to
Smithfield Foods.

                               31
        Moreover, the District Court found the proposed
amendments devoid of allegations that defendants consciously
or recklessly failed to improve the company’s financial
disclosure controls and procedures in response to the
observations and recommendations made in the Ellis Report and
Deel Memorandum. Even in the context of Winer’s other
allegations, the Ellis and Deel documents did not give rise to a
strong inference of scienter for the pre-May 22, 2002 statements
because they were created long after the challenged filings on
April 9, 2002 and May 15, 2002. Neither document
demonstrated the statements concerning Pennexx’s ability to
generate accurate financial information were false or
misleading. Accordingly, the District Court held the proposed
amendments failed to suggest defendants acted with scienter or
that the challenged statements were false or misleading when
made. The District Court did not abuse its discretion in finding
futility.
                              IV.
                 A. Group Pleading Doctrine
       Assuming Winer can properly plead violations of Rule
10b-5, it contends the Individual Defendants are liable for
misrepresentations and omissions based upon the group pleading
doctrine. “Smithfield [Foods] and the Individual Defendants
were responsible for the accuracy of the public reports and
releases detailed herein as ‘group published’ information, and
are therefore responsible and liable for the representations
contained therein.” Specifically, Winer asserts liability on the

                              32
basis of the Individual Defendants’ access to, control over, and
ability to edit and withhold dissemination of Pennexx’s press
releases and SEC filings. In rejecting this argument, the District
Court held the group pleading doctrine did not survive the
specific pleading requirements of the PSLRA. We agree.
        The group pleading doctrine is a judicial presumption
that statements in group-published documents including annual
reports and press releases are attributable to officers and
directors who have day-to-day control or involvement in regular
company operations. Under the doctrine, where defendants are
insiders with such control or involvement, their specific
connection to fraudulent statements in group-published
documents is unnecessary. See Wool v. Tandem Computers,
Inc., 818 F.2d 1433, 1440 (9th Cir. 1987) (“In cases of corporate
fraud where the false or misleading information is conveyed in
prospectuses, registration statements, annual reports, press
releases, or other ‘group-published information,’ it is reasonable
to presume that these are the collective actions of the officers.”).
 Accordingly, the group pleading doctrine allows a plaintiff to
plead that defendants made a misstatement or omission of a
material fact without pleading particular facts associating the
defendants to the alleged fraud. See 3 Thomas Lee Hazen,
Treatise on the Law of Securities Regulation § 12.13 (5th ed.
2006) (citing cases).
       Consistent with the purposes behind the PSLRA,
Congress expressly intended to substantially heighten the
pleading requirements to reduce abuses in securities class action

                                33
lawsuits. See 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). To plead fraud in a private suit for damages,
plaintiffs must specify each statement alleged to be misleading
and specify the reasons the statement is misleading. 15 U.S.C.
§ 78u-4(b)(1). For allegations based on information or belief,
the PSLRA requires plaintiffs to “state with particularity all
facts” forming the basis of the belief. Id. Each untrue statement
or omission must be set forth with particularity as to “the
defendant” and scienter must be pleaded in regards to “each act
or omission” sufficient to support a strong inference that “the
defendant” acted with the required state of mind. 15 U.S.C. §
78u-4(b)(2).
       The PSLRA does not address group pleading, nor have
we explicitly addressed the doctrine. In Tellabs the Supreme
Court recognized the disagreement among the courts of appeals
as to whether the group pleading doctrine survived the PSLRA.
Tellabs, 127 S. Ct. at 2511 n.6. Because the issue was not
before it, the Court did not disturb the Court of Appeals for the
Seventh Circuit’s holding that the group pleading doctrine did
not survive the enactment of the PSLRA. Id.
       Winer contends it is untenable to require a plaintiff, at the
pleading stage, to identify each individual involved in preparing
public statements. But the PSLRA changed the pleading
requirements in private securities actions. A presumption of
particularity is inconsistent with the PSLRA’s requirement that
scienter be pleaded with respect to “each act or omission” by

                                34
“the defendant.”
       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 PSLRA requires plaintiffs to
specify the role of each defendant, demonstrating each
defendant’s involvement in misstatements and omissions.5

  5
    Before the PSLRA, only the Courts of Appeals for the First,
Ninth, and Tenth Circuits explicitly recognized a group pleading
exception to the pleading-with-particularity requirements of
Rule 9(b). The Court of Appeals for the First Circuit recognized
a limited version of the group pleading doctrine for securities
fraud, which, although characterized as “group pleading,” in
essence, required specific indicia of defendant’s direct
participation in making the alleged offending statement. See
Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 367–68
(1st Cir. 1994) (“The acceptance of responsibility for the
contents of the Annual Report, demonstrated by defendants’
signatures, combined with specific allegations that they knew of
conflicting conditions, establishes a sufficient link between the
defendants and the alleged fraud to satisfy Rule 9(b)’s

                               35
particularity requirement.”). As noted, the Court of Appeals for
the Ninth Circuit held: “[i]n cases of corporate fraud where the
false or misleading information is conveyed in prospectuses,
registration statements, annual reports, press releases, or other
‘group-published information,’ it is reasonable to presume that
these are the collective actions of the officers.” Wool, 818 F.2d
at 1440. The Court of Appeals for the Tenth Circuit cited Wool
to hold: “[i]dentifying the individual sources of statements is
unnecessary when the fraud allegations arise from misstatements
or omissions in group-published documents such as annual
reports, which presumably involve collective actions of
corporate directors or officers.” Schwartz v. Celestial
Seasonings, Inc., 124 F.3d 1246, 1254 (10th Cir. 1997). Also,
the Court of Appeals for the Second Circuit has allowed group
pleading, although it has not explicitly used the phrase “group
pleading” in any precedential opinions. See DiVittorio v.
Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir.
1987) (quoting Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.
1986)) (“‘[N]o specific connection between fraudulent
representations in [an] Offering Memorandum and particular
defendants is necessary where, as here, defendants are insiders
or affiliates participating in the offer of the securities in
question.’”). The district courts within the Second Circuit have
suggested the group pleading doctrine survives the enactment of
the PSLRA. See, e.g., In re Van Der Moolen Holding N.V. Sec.
Litig., 405 F. Supp. 2d 388, 399 (S.D.N.Y. 2005) (“The majority
rule in this district is that the group pleading doctrine has

                               36
       The only courts of appeals to have directly addressed the
survival of the group pleading doctrine post-PSLRA have

survived the PSLRA.”). The Courts of Appeals for the Ninth
and Tenth Circuits have continued to allow the group pleading
doctrine without explicitly discussing whether it survives the
PSLRA. See Howard v. Everex Sys., Inc., 228 F.3d 1057,
1061–63 (9th Cir. 2000); Schwartz, 124 F.3d at 1254.
        The Courts of Appeals for the First and Sixth Circuits
have recognized the issue but have not decided whether group
pleading survives the PSLRA. The Court of Appeals for the
First Circuit questioned the viability of group pleading after the
PSLRA but has thus far declined to decide the issue. In In re
Carleton Sys., Inc., 311 F.3d 11, 40 (1st Cir. 2002), the court
held it would not consider the group pleading doctrine in
determining whether the complaint stated a claim against each
defendant and found liability existed for all but one defendant.
Id. For that defendant, the court stated even under the group
pleading presumption, the result would likely be the same,
because the complaint did not allege the defendant’s
participation in the production of any group published
documents such as SEC filings. Id. at 41. Similarly, the Court
of Appeals for the Sixth Circuit noted the disagreement
regarding the viability of group pleading. City of Monroe
Employees Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 689–90
(6th Cir. 2005). In that case the plaintiff failed to allege facts
sufficient to qualify under even the group pleading doctrine. Id.
at 690.

                               37
abolished the doctrine. See Fin. Acquisition Partners L.P. v.
Blackwell, 440 F.3d 278, 287 (5th Cir. 2006) (citing Southland
Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 364 (5th
Cir. 2004); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437
F.3d 588, 602–03 (7th Cir. 2006) rev’d on other grounds, 127
S. Ct. 2499 (2007). Also, the Court of Appeals for the Eleventh
Circuit has suggested the group pleading doctrine does not
survive the enactment of the PSLRA, although it has not
abolished the doctrine. Phillips v. Scientific-Atlanta, Inc., 374
F.3d 1015, 1018 (11th Cir. 2004) (acknowledging “the most
plausible reading in light of congressional intent is that a
plaintiff, to proceed beyond the pleading stage, must allege facts
sufficiently demonstrating each defendant’s state of mind
regarding his or her alleged violations”).
        The decision of the Court of Appeals for the Fifth Circuit
to abolish group pleading was predicated on the PSLRA’s
requirements that allegations be set forth with particularity
concerning “the defendant” and scienter be pleaded for “each act
or omission” sufficient to give “rise to a strong inference that the
defendant acted with the required state of mind.” Southland,
365 F.3d at 364. The Court of Appeals for the Seventh Circuit,
citing Southland and Phillips, also held the group pleading
doctrine is inconsistent with the PSLRA. Makor, 437 F.3d at
603 (“While we will aggregate the allegations in the complaint
to determine whether it creates a strong inference of scienter,
plaintiffs must create this inference with respect to each

                                38
individual defendant in multiple defendant cases.”).6
       We agree and hold the group pleading doctrine is no
longer viable in private securities actions after the enactment of
the PSLRA.7 If a private securities case proceeds past the

       6
       Winer contends the Court of Appeals for the Seventh
Circuit’s decision to abolish the group pleading doctrine in
Makor should be read narrowly as only abolishing group
pleading for purposes of inferring scienter. Winer agrees that
group pleading cannot be used to prove scienter, but contends it
can be used to attribute statements to Individual Defendants.
This argument is illogical. See, e.g., D.E. & J Ltd. P’ship v.
Conaway, 284 F. Supp. 2d 719, 731 (E.D. Mich. 2003) (“Where
individual defendants are the target of the fraud allegations, it
would be nonsensical to require that a plaintiff specifically
allege facts regarding scienter as to each defendant, but to allow
him to rely on group pleading in asserting that ‘the defendant’
made the statement or omission.”). If Winer could plead
scienter with the specificity required by the PSLRA, it would
not need to resort to the group pleading doctrine in the first
place.
   7
    Most of the district courts in this circuit to address the issue
have reached the same conclusion. See In re Bio-Technology
Gen. Corp. Sec. Litig. 380 F. Supp. 2d 574, 584 (D.N.J. 2005)
(“[T]he prevailing authority within this District counsels that
group pleading has been abolished.”) (citing cases); see also
Majer v. Sonex Research, Inc., Civ. No. 05606, 2006 WL
39
pleadings stage against a corporation and discovery reveals
individual culpability, a plaintiff may seek permission to amend
the complaint to assert claims against individual defendants.
See Fed. R. Civ. P. 15. But any such claims must be pleaded
with the specificity required by the PSLRA with respect to each
defendant. See 15 U.S.C. § 78u-4(b)(2).
       As a result, we hold Winer’s claims based on the group
pleading doctrine fail. All Rule 10b-5 claims against Luter,
Cole, and McGreal were properly dismissed, as only the group
pleading allegation in paragraph 26 of the amended complaint
connects Luter, Cole, and McGreal to the alleged
misstatements.8

2038604, at *9 (E.D. Pa. July 19, 2006); In re Am. Bus. Fin.
Servs., Inc. Sec. Litig., 413 F. Supp. 2d 378, 394 (E.D. Pa.
2005); P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F.
Supp. 2d 589, 619–20 (D.N.J. 2001); In re Digital Island Sec.
Litig., 223 F. Supp. 2d 546, 553 (D. Del. 2002), aff’d, 357 F.3d
322 (3d Cir. 2004). At least two district courts in this circuit
have assumed the PSLRA did not necessarily abolish the group
pleading doctrine in all cases. See, e.g., In re Rent-Way Sec.
Litig., 209 F. Supp. 2d 493, 518 (W.D. Pa. 2002) (“We see no
reason to find that group pled allegations per se cannot meet the
heightened pleading standards of Rule 9(b) or the PSLRA, and
rather will consider the allegations individually.”).
    8
    Winer’s claims against Queen did not rely solely on the
group pleading doctrine because the amended complaint directly

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                     B. State Law Claims
        Winer contends the District Court erred by dismissing its
state law claims against Luter, Cole, Queen, and Smithfield
Foods. As Pennexx was incorporated in Pennsylvania,
Pennsylvania law applies to Winer’s breach of fiduciary duty
claims. Resolution Trust Corp. v. Cityfed Fin. Corp., 57 F.3d
1231, 1236 n.5 (3d Cir. 1995), vacated on other grounds sub
nom. Atherton v. FDIC, 519 U.S. 213 (1997) (“[T]he applicable
law governing the liability of officers and directors for their
stewardship of the corporation i[s] the law of the jurisdiction of
incorporation.”). Under Pennsylvania law, corporate directors
owe fiduciary duties of care, diligence, and good faith “solely to
the business corporation and may be enforced directly by the
corporation or may be enforced by a shareholder, as such, by an
action in the right of the corporation and may not be enforced
directly by a shareholder or by any other person or group.” 15
Pa. Cons. Stat. § 1717. The District Court properly dismissed
the fiduciary duty claims against Queen.
       Winer’s fiduciary claims against Smithfield Foods are
derivative of harm to Pennexx and cannot be brought in a direct

attributed misstatements and omissions of material fact to
Queen, who was regularly quoted in Pennexx’s press releases.
Winer also asserted that Cole dictated the contents of Pennexx’s
November 25, 2002 press release. But Winer lacks standing to
assert this claim. Accordingly, there is no valid claim against
Cole.

                               41
shareholder action. See Kauffman v. Dreyfus Fund, Inc., 434
F.2d 727, 732 (3d Cir. 1970) (“A stockholder of a corporation
does not acquire standing to maintain an action in his own right
. . . when the alleged injury is inflicted upon the corporation and
the only injury to the shareholder is the indirect harm which
consists in the diminution in value of his corporate shares . . .
.”). The essence of Winer’s claim is that Smithfield Foods
engaged in self-dealing at the direct expense of Pennexx, which
ultimately resulted in a diminution in value of Pennexx stock.
That injury, if proved, belongs to Pennexx, and Pennexx alone
has standing to sue as a corporation.
        Nonetheless, Winer maintains it may assert direct claims
against Smithfield Foods as a majority stockholder rather than
derivative claims of Pennexx, because as a controlling
shareholder of Pennexx, Smithfield Foods breached its fiduciary
duties to the non-controlling/minority shareholders. Winer
relies on Bohler-Uddeholm America, Inc. v. Ellwood Group,
Inc., 247 F.3d 79 (3d Cir. 2001) for the proposition that non-
controlling shareholders may bring direct actions for breach of
fiduciary duty. But Bohler involved a breach of fiduciary duty
between two corporations who entered into a joint venture. The
joint venture consisted of only two shareholders. There is no
joint venture here. A direct claim may only be brought where
the injury is to the shareholder individually. Davis v. United
States Gypsum Co., 451 F.2d 659, 662 (3d Cir. 1971). In Bohler
the one minority shareholder sued the one majority shareholder.
Where, as here, the claims asserted are “for the benefit of
stockholders qua stockholders in a corporation,” only a

                                42
derivative claim may be brought. Id. at 662.
        Winer also contends that even if its breach of fiduciary
duty claim against Smithfield Foods should have been brought
derivatively, a direct action is permissible where all of the
parties to the dispute are before the court and the corporation is
no longer operating as a going concern. Winer relies on an
unpublished Delaware Chancery Court decision: “In the
partnership context, the distinction between direct and derivative
claims becomes irrelevant . . . where a partnership is in
liquidation and all non-defendant partners in the resulting
litigation constitute a uniform class of limited partners.” In re
Cencom Cable Income Partnerships L.P. Litig., Civ. No. 14634,
2000 WL 130629, at *3 (Del. Ch. Jan. 27, 2000). But Cencom
involved a partnership and not a corporation. The court noted
that “in the corporate context, the Court of Chancery is well
served by a highly developed body of common law explaining
principles that govern the resolution of these disputes [where
investors sue the entity controlling the affairs of an enterprise
for alleged breaches of duties owed to investors].” Id. at *2.
Accordingly, the District Court properly dismissed the fiduciary
duty claims against Smithfield Foods and the aiding and abetting
claims against Luter and Cole.
       Winer asserts the District Court erred in not allowing it
leave to amend its state law breach of fiduciary duty claims. But
the District Court found Winer suffered no injuries that were
separate and distinct from those suffered by Pennexx.
Therefore, any amendment to the breach of fiduciary duty claim

                               43
against Smithfield Foods would have been futile. The District
Court acted well within its sound discretion to make this
determination.
                       V. Conclusion
       The District Court properly dismissed Winer’s breach of
fiduciary duty claims and all claims based upon statements or
omissions made prior to May 22, 2002. After plaintiffs’
attempts to substitute a new lead plaintiff failed, the District
Court properly dismissed the case for lack of prosecution.
       For the reasons set forth, we will affirm the judgment of
the District Court.

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