Court Opinion

ID: 2655931
Source: CourtListenerOpinion
Date Created: 2014-03-07 20:03:18.405183+00
Date Added: 2024-06-11T11:08:54.723615
License: Public Domain

PUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                              No. 12-2496

ROBERT YATES, MJG−08−269; ALAN S. BARRY, MJG−08−269; DAVID
YOUNG,   MJG−08−269;   CARLO    HORNSBY;  ED  FRIEDLANDER,
MJG−08−269; PAUL ENGEL, individually and on behalf of all
others similarly situated MJG−08−292; WILLIAM D. FELIX;
DAVID KREMSER, on behalf of himself and on behalf of Elk
Meadow Investments, LLC; CHARLES W. DAMMEYER, on behalf of
himself and others similarly situated,

                Plaintiffs – Appellants,

          and

F. RICHARD MANSON, individually and on behalf of, all
others   similarly   situated   MJG−08−269;   GEETA    SHAILAM,
individually and on behalf of all others similarly situated
MJG−08−386; MICHAEL J. CIRRITO, individually and on behalf
of all others similarly situated MJG−08−476; JOHN J.
HUFNAGLE, individually and on behalf of all others
similarly    situated     MJG−08−579;     WILLIAM     JOHNSTON,
derivatively on behalf of Municipal Mortgage & Equity, LLC
MJG−08−670;   ROBERT   STAUB,   derivatively   on   behalf   of
Municipal Mortgage & Equity, LLC     MJG−08−802; THE MARY L.
KIESER TRUST, by Mary L. Kieser and Ralph F. Kieser,
Trustees, derivatively and on behalf of Nominal Defendant,
Municipal   Mortgage   &   Equity   LLC   MJG−08−805;    JUDITH
GREENBERG; JOSEPH S. GELMIS, individually and on behalf of
all others similarly situated MJG−08−2133; ARNOLD J. ROSS,
MJG−08−2133; TROY BROY; JULES ROTHAS, individually and on
behalf of all others similarly situated MJG−08−2134; NAOMI
RAPHAEL; FAFN/SLATER GROUP; KREMSER GROUP, MJG−08−269,

                Plaintiffs,

          v.

MUNICIPAL MORTGAGE & EQUITY, LLC; MELANIE M. LUNDQUIST;
MICHAEL L. FALCONE; MERRILL LYNCH PIERCE FENNER AND SMITH
INCORPORATED; RBC CAPITAL MARKETS, LLC.; MARK K. JOSEPH;
CHARLES C. BAUM; EDDIE C. BROWN; ROBERT S. HILLMAN; DOUGLAS
A. MCGREGOR; ARTHUR S. MEHLMAN; FRED N. PRATT, JR.; RICHARD
O. BERNDT; WILLIAM S. HARRISON; DAVID KAY; CHARLES M.
PINCKNEY,

                 Defendants – Appellees,

           and

GARY A. MENTESANA; BARBARA B. LUCAS; EARL W. COLE, III;
ANGELA B. BARONE,

                 Defendants.

Appeal from the United States District Court for the District of
Maryland, at Baltimore.     Marvin J. Garbis, Senior District
Judge. (1:08-md-01961-MJG)

Argued:   October 30, 2013                 Decided:   March 7, 2014

Before DIAZ and FLOYD, Circuit Judges, and Joseph F. ANDERSON,
Jr., United States District Judge for the District of South
Carolina, sitting by designation.

Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Floyd and Judge Anderson joined.

ARGUED: David A.P. Brower, BROWER PIVEN, New York, New York, for
Appellants.   Mark Holland, New York, New York, William M. Jay,
GOODWIN PROCTER LLP, Washington, D.C.; Jason J. Mendro, GIBSON,
DUNN & CRUTCHER LLP, Washington, D.C., for Appellees. ON BRIEF:
Charles J. Piven, Yelena Trepetin, BROWER PRIVEN, Stevenson,
Maryland; Sherrie R. Savett, Barbara A. Podell, Eric Lechtzin,
BERGER & MONTAGUE, P.C., Philadelphia, Pennsylvania; Kim E.
Miller, KAHN SWICK & FOTI, LLC, New York, New York; Susan K.
Alexander, Andrew S. Love, ROBBINS GELLER RUDMAN & DOWD LLP, San
Francisco, California, for Appellants.      Jonathan C. Dickey,
GIBSON, DUNN & CRUTCHER LLP, New York, New York, for Appellees
Merrill Lynch Pierce Fenner and Smith Incorporated, and RBC
Capital Markets, LLC.   Mary K. Dulka, GOODWIN PROCTER LLP, New
York, New York; Anthony Candido, CLIFFORD CHANCE LLP, New York,

                                  2
New York; Stephen A. Goldberg, Ward B. Coe III, GALLAGHER
EVELIUS & JONES LLP, Baltimore, Maryland, for Appellees
Municipal Mortgage & Equity, LLC, Mark K. Joseph, William S.
Harrison, Charles M. Pinckney, and David Kay.       William M.
Krulak, Jr., MILES & STOCKBRIDGE P.C., Baltimore, Maryland, for
Appellees Charles C. Baum, Richard O. Berndt, Eddie C. Brown,
Robert S. Hillman, Douglas A. McGregor, Arthur S. Mehlman, and
Fred N. Pratt, Jr.    Charles O. Monk, II, Geoffrey M. Gamble,
SAUL EWING LLP, Baltimore, Maryland, for Appellee Michael L.
Falcone.    David W.T. Daniels, RICHARDS KIBBE & ORBE LLP,
Washington, D.C., for Appellee Melanie Lundquist.

                               3
DIAZ, Circuit Judge:

     This case involves claims that Municipal Mortgage & Equity

(“MuniMae” or the “Company”), and certain of its officers and

directors          (collectively,            the   “MuniMae        defendants”),      violated

federal securities laws. 1                   Plaintiffs, both individually and as

class     representatives,               contend       that    the     MuniMae      defendants

committed securities fraud by (1) falsely representing that the

Company was in full compliance with a new accounting standard

enacted       in    2003;    and       (2)    concealing       the    substantial     cost   of

correcting the accounting error.                         Plaintiffs allege that they

relied on the integrity of the market price of the Company’s

stock,        and    that,       as    a     result     of     the    MuniMae    defendants’

fraudulent          conduct,      investors         paid      an     artificially    inflated

price for MuniMae shares during the class period.

        The     district         court       dismissed        plaintiffs’     claims      under

§§ 10(b)       and       20(a)    of    the    Securities          Exchange   Act    of   1934,

finding that the amended complaint failed to adequately plead

scienter, or wrongful intent.                       The court also dismissed claims

under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933

relating       to    a    secondary        public      offering      (“SPO”).       The   court

     1
       Plaintiffs also sued Merrill Lynch, Pierce, Fenner &
Smith, Inc. and RBC Capital Markets Corp., who served as lead
underwriters in a secondary public offering conducted by MuniMae
in 2005.

                                                   4
found the § 11 claim time-barred by the applicable statute of

repose,         and    that    plaintiffs   lacked    standing    to    bring   the

§ 12(a)(2)            claim.     It    dismissed     the   § 15   claim      because

plaintiffs failed to adequately plead a primary violation of the

Securities Act. 2

       For the reasons that follow, we affirm.

                                            I.

       In reviewing the district court's dismissal under Federal

Rule       of   Civil     Procedure     12(b)(6),    “we   ‘accept     all   factual

allegations in the complaint as true.’”                    Matrix Capital Mgmt.

Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir.

2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551

U.S. 308, 322, (2007)).               And as did the district court, we take

judicial notice of the content of relevant SEC filings and other

publicly available documents included in the record.                     See In re

PEC Solutions, Inc. Sec. Litig., 418 F.3d 379, 390 & n.10 (4th

Cir. 2005).

       2
       The district court refused to dismiss three other claims
alleging violations of the Securities Act.            After some
procedural skirmishing not relevant to this appeal, the parties
filed a joint motion requesting that the district court certify
the dismissed claims as final pursuant to Federal Rule of Civil
Procedure 54(b).   Finding no just reason for delay, the court
granted the motion.    We are satisfied that the district court
acted appropriately in certifying its order under Rule 54(b).
See Culosi v. Bullock, 596 F.3d 195, 203 (4th Cir. 2010).

                                            5
                                         A.

     The putative class period for this case spans from May 3,

2004, to January 29, 2008.             During that period, MuniMae was one

of the nation’s largest syndicators of low-income housing tax

credits     (“LIHTCs”).         Federal        tax     law    provides       LIHTCs     to

developers     of      low-income      rental        housing.          Because        most

developers    cannot     take    advantage      of     these      credits,    financial

services     companies,    like     MuniMae,         organize      LIHTC     investment

partnerships (“LIHTC Funds”) to pool and sell the credits to

investors.

     MuniMae usually acted as the general partner of its LIHTC

Funds during the class period, and it received syndication and

asset     management    fees     for   organizing           and   maintaining     them.

Although its ownership share was generally low, ranging from

0.1% to 1.0%, it was typically larger than that of any single

investor.     Prior to 2003, MuniMae primarily treated these LIHTC

Funds as off balance sheet entities.

     In 2003, the Financial Accounting Standards Board adopted

Financial     Accounting       Standards       Board       Interpretation      No.     46R

(“FIN      46R”),      which     addressed           the     financial        reporting

requirements of businesses with respect to off balance sheet

                                           6
activity. 3        FIN 46R defined a new category of entities called

Variable Interest Entities (“VIEs”).                    Under FIN 46R, a company

must consolidate onto its financial statements the assets and

liabilities        of     a   VIE     if    the     company      is        its        “primary

beneficiary,” that is, if the company absorbs the majority of

the   risks    and      rewards     associated     with   the    VIE.           Before       the

adoption of this revised standard, a company was generally only

required      to    consolidate       financial      statements            if    it    had     a

majority voting interest in the entity.

      The first quarter of 2004 was the first period for which

MuniMae    reported       compliance       with   FIN   46R.      The       Company       then

concluded that FIN 46R required it to consolidate some but not

all of its LIHTC Funds, which added a net $1.3 billion in assets

and   liabilities        to   the    Company’s     financial      statements.                The

remaining      unconsolidated          LIHTC      Funds    had        net       assets       of

approximately        $970.3    million      and   liabilities         of    approximately

$90.8 million.

      Through       mid-2006,       MuniMae       continued      to        represent         its

compliance with FIN 46R in financial reports filed with the SEC.

PricewaterhouseCoopers LLP (“PwC”), MuniMae’s independent public

accountant, certified that those reports had been prepared in

      3
       The Board initially adopted FIN 46 in January 2003. In
December 2003, it approved various amendments to FIN 46 and
released FIN 46R.

                                             7
accordance     with       generally       accepted       accounting       principles

(“GAAP”) for fiscal years 2004 and 2005.                 Between 2004 and 2006,

the Company also made a number of acquisitions and conducted

several offerings, including an SPO in February 2005.                           At the

end of 2005, Melanie Lundquist replaced William Harrison as the

Company’s CFO.

      On March 10, 2006, MuniMae announced that it was restating

its financial statements for the nine-month period ending on

September 30, 2005, as well as fiscal years 2002 through 2004.

The   restatement     corrected       certain    financial       reporting      errors

that were unrelated to FIN 46R.                  MuniMae issued the restated

financial statements in June 2006.

      In August, the Company disclosed that it had identified

“material     weaknesses         in   internal        controls    over     financial

reporting,” and that, as a result, it would be unable to “file

timely its second quarter 2006 Form 10-Q.”                       J.A. 65.        A few

months later, on September 13, 2006, MuniMae announced that it

was again restating its financial statements for fiscal years

2003 through 2005, and for the first quarter of 2006.                                The

Company initially informed investors that the second restatement

would   address       three      areas:         (1)     accounting       for    equity

commitments    related      to    affordable     housing     projects;         (2)   the

classification of cash flow from tax credit equity funds; and

(3)   accounting    for    syndication        fees.      About    a   month     later,

                                          8
however,   MuniMae     disclosed     that       it    had   “not   yet    reached      a

conclusion regarding the extent of the [second] restatement.”

J.A. 1120.

     On    October    26,    2006,    MuniMae         announced     that       it     was

replacing PwC as the Company’s independent public accountant.

The Company stated--and PwC agreed--that for fiscal years 2004

and 2005, and through October 2006, “there were no disagreements

with PwC on any matter of accounting principles or practices,

financial statement disclosure or audit scope or procedure which

disagreements if not resolved to the satisfaction of PwC would

have caused them to make reference thereto in their reports on

[MuniMae’s] financial statements.”              J.A. 1120.

      Three   months       later,    the        Company      reported     its        40th

consecutive increase in its quarterly dividend.                         In the same

announcement, the Company revealed that the second restatement

would address accounting errors with respect to FIN 46R, and

that the Company would “be required to consolidate substantially

all of the low income housing tax credit equity funds it has

interests in.”     J.A. 1373.

      On May 4, 2007, MuniMae disclosed that it would not be able

to   timely   file   its    10-K     for       2006   “[a]s    a   result      of    the

dedication    of     significant       management           resources     to        . . .

restatement efforts.”        J.A. 1129.          The Company noted that since

September 2006, it had identified additional material weaknesses

                                           9
in   its   internal        controls     over      financial     reporting,       including

with respect to its accounting of LIHTC Funds.

      On   July     10,     2007,      MuniMae     announced     that      it    had   hired

Navigant     Consulting         to   assist       its   internal     auditors       in   the

restatement.        A month later, it disclosed more details about the

scope of the effort, noting that “there are approximately 92

people     currently       working      on   the    restatement,”         including      “20

company employees and 72 consultants.”                       J.A. 1145.         Around the

same time, Lundquist resigned and Charles Pinckney replaced her

as CFO.

      MuniMae       held    a    teleconference         on     November     8,    2007    to

further update investors.                The Company stated that management

planned to ask the Board to continue the Company’s longstanding

policy of increasing the dividend distribution every quarter,

although it warned that “it is possible that the dividend payout

ratio for the full fiscal year 2007 may exceed 100% of the

Company’s     net    cash       from    operations       due    to   the    costs      being

incurred by the Company from the restatement.”                        J.A. 1155.         The

Company’s officers declined at that point to estimate the cost

of the second restatement, though they acknowledged the costs

were substantial.

      On January 28, 2008, MuniMae announced that it was cutting

its quarterly dividend by 37%, from $0.525 to $0.33 per share.

The Company attributed the cut to “the cost of the Company’s

                                             10
ongoing restatement of its financial statements, the decision

. . . to conserve capital . . . given the current volatility in

the    credit    and    capital      markets,    and    the    desire      to   dedicate

additional capital to the high-growth Renewable Energy Finance

business.”       J.A. 1171.          At the same time, the Company stated

that it did “not believe the results of the restatement w[ould]

materially change the previously recorded cash balances of the

Company and its subsidiaries.”                  Id.     Because the restatement

efforts were still ongoing, the Company also announced that it

anticipated      being    delisted      from    the    New    York   Stock      Exchange

because it could not meet a NYSE deadline for filing its 2006

Form 10-K.       The price of MuniMae shares dropped 46.57%, from

$17.20 per share on January 28, to $9.19 per share on January

29, on unusually heavy trading volume.

       MuniMae provided further details to investors regarding the

second restatement during a January 29 conference call.                             With

respect     to   FIN    46R,    the    Company    disclosed         that   it     had   to

consolidate 230 LIHTC Funds, which required it to review 6,000

separate    financial         statements.       Because       the    Company      had   no

automated process in place to review the accounting, this work

had to be done manually.              Acknowledging that these developments

were    a   result       of    the    Company’s        “mistakes      in    the    first

instance[,]”      CEO    Michael      Falcone    expressed     his    disappointment

and embarrassment over the “the amount of time and energy and

                                          11
effort[] it’s taking us to fix them.”                  J.A. 1196.       The price of

MuniMae   shares       dropped    an    additional        22.416%,   to     $7.13   per

share, on January 30, again on unusually heavy trading volume.

On April 9, 2008, MuniMae disclosed that it spent $54.1 million

to complete the second restatement.

                                            B.

       Shareholders      filed      multiple        lawsuits      against      MuniMae,

certain of its officers and directors, and the lead underwriters

in the 2005 SPO, alleging violations of federal securities laws.

The actions were consolidated in the District of Maryland for

pretrial proceedings.         See In re Mun. Mortg. & Equity, LLC, Sec.

&   Derivative    Litig.,     571      F.   Supp.    2d    1373   (J.P.M.L.     2008).

Plaintiffs filed the operative Consolidated Amended Class Action

Complaint on December 5, 2008.

       Applying the heightened pleading standards of the Private

Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4,

the district court held that plaintiffs’ Exchange Act claims

failed because the amended complaint did not adequately plead

scienter.        See    In   re   Mun.      Mortg.    &    Equity,      LLC,    Sec.   &

Derivative Litig., 876 F. Supp. 2d 616, 647 (D. Md. 2012).                          The

court   also   dismissed      plaintiffs’        Securities       Act    claims     with

respect to the SPO.          It found the § 11 claim time-barred by the

statute of repose in § 13 of the Securities Act.                          See id. at

657.    It also concluded that Charles Dammeyer, the only named

                                            12
plaintiff asserting Securities Act claims with respect to the

SPO, lacked standing to bring a § 12(a)(2) claim, see id. at

661, and that the amended complaint failed to adequately plead

that the underwriter defendants were immediate sellers, see id.

at 662.

      This appeal followed.

                                           II.

                                           A.

      We    first   consider         the    district       court’s      dismissal    of

plaintiffs’ claims under § 10(b) of the Securities Exchange Act

of   1934   and   SEC   Rule    10b-5      for   failing     to   adequately       plead

scienter.

      The   purpose     of     the    Exchange     Act     and    its    accompanying

regulations is to ensure that companies disclose the information

necessary for investors to make informed investment decisions.

See Taylor v. First Union Corp. of S.C., 857 F.2d 240, 246 (4th

Cir. 1988).       Section 10(b) of the Act prohibits the use of “any

manipulative or deceptive device or contrivance” in connection

with the sale of a security in violation of SEC rules.                         See 15

U.S.C. § 78j(b).        Rule 10b-5 implements § 10(b) by making it

unlawful, in connection with the sale of a security:

      (a) To employ          any     device,     scheme,    or    artifice    to
      defraud,

                                           13
      (b) To make any untrue statement of a material fact or
      to omit to state a material fact necessary in order to
      make the statements made, in the light of the
      circumstances  under   which   they  were   made,  not
      misleading, or

      (c) To engage in any act, practice, or course of
      business which operates or would operate as a fraud or
      deceit upon any person.

17 C.F.R. § 240.10b-5.              The Supreme Court has recognized that

§ 10(b) provides an implied right of action for purchasers or

sellers of securities who have been injured by violations of the

statute.      See Stoneridge Inv. Partners v. Scientific-Atlanta,

Inc., 552 U.S. 148, 157 (2008).

      In a typical § 10(b) action, a private plaintiff must prove

six elements:      “(1) a material misrepresentation or omission by

the   defendant;      (2)   scienter;           (3)    a     connection         between      the

misrepresentation      or     omission         and    the    purchase       or    sale      of    a

security; (4) reliance upon the misrepresentation or omission;

(5) economic loss; and (6) loss causation.”                        Id.

      To   establish    scienter,          a    plaintiff         must    prove    that      the

defendant     acted    with        “a    mental       state       embracing       intent         to

deceive,    manipulate,       or    defraud.”             Tellabs,       551    U.S.   at    319

(internal    quotation      marks        omitted).          At    the     pleading       stage,

alleging    either     intentional         or       severely      reckless       conduct         is

sufficient.      See    Matrix          Capital,      576    F.3d    at    181.        In    the

§ 10(b)    context,    a    reckless        act      is     one   that     is    “so     highly

unreasonable and such an extreme departure from the standard of

                                               14
ordinary care as to present a danger of misleading the plaintiff

to the extent that the danger was either known to the defendant

or so obvious that the defendant must have been aware of it.”

Id. (internal quotation marks omitted).

       The PSLRA imposes a heightened pleading standard on fraud

allegations      in    private      securities       complaints.          See    Teachers’

Ret. Sys. of La. v. Hunter, 477 F.3d 162, 171-72 (4th Cir.

2007).         The   complaint       must    “state       with     particularity        facts

giving rise to a strong inference that the defendant acted with

the    required      state     of   mind”     with      respect     to   each    act    that

allegedly violated the statute.                   15 U.S.C. § 78u-4(b)(2).              “[T]o

the extent a plaintiff alleges corporate fraud, the plaintiff

must allege facts that support a strong inference of scienter

with     respect      to      at    least     one       authorized       agent     of       the

corporation.”           Matrix       Capital,       576    F.3d     at   182     (internal

quotation marks omitted).                 To allege fraud against an individual

defendant, the plaintiff must allege facts supporting a strong

inference of scienter as to that person.                     See id.

       Evaluating the strength of an inference is necessarily a

comparative inquiry.               See Tellabs, 551 U.S. at 326-27.                     “[A]n

inference       of   scienter       can    only    be     strong    . . .   when       it    is

weighed against the opposing inferences that may be drawn from

the    facts    in    their    entirety.”          Cozzarelli       v.   Inspire    Pharm.

Inc., 549 F.3d 618, 624 (4th Cir. 2008).                         “A court must compare

                                             15
the malicious and innocent inferences cognizable from the facts

pled in the complaint, and only allow the complaint to survive a

motion to dismiss if the malicious inference is at least as

compelling as any opposing innocent inference.”                   Zucco Partners,

LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009).

       As applied here, “the question is whether the allegations

in the complaint, viewed in their totality and in light of all

the evidence in the record, allow us to draw a strong inference,

at   least    as   compelling   as    any    opposing     inference,”     that   the

MuniMae      defendants   either      knowingly      or   recklessly      defrauded

investors by (1) issuing false financial statements as to the

Company’s compliance with FIN 46R, and (2) concealing the cost

of correctly consolidating LIHTC Funds in accordance with that

standard.       See Pub. Emps.’ Ret. Ass’n of Co. v. Deloitte &

Touche LLP, 551 F.3d 305, 313 (4th Cir. 2009).                    “If we find the

inference that defendants acted innocently, or even negligently,

more   compelling     than   the     inference     that   they    acted   with   the

requisite scienter, we must affirm.”               Id.

                                        B.

                                        1.

       We begin by considering whether the facts alleged in the

amended complaint give rise to an inference of scienter and, if

so, the strength of that inference.                  Although “we ultimately

evaluate plaintiffs’         allegations      of   scienter      holistically,    we

                                        16
only afford their allegations the inferential weight warranted

by context and common sense.”                 Matrix Capital, 576 F.3d at 183.

Plaintiffs     rely    on       four     categories       of     allegations         as    to

scienter, to which we now turn.

                   a. Confidential Witness Statements

     The    amended        complaint      incorporates         information         obtained

from three confidential witness (“CW”) statements.                             “When the

complaint    chooses       to    rely    on    facts   provided        by    confidential

sources,     it    must         describe       the     sources        with     sufficient

particularity to support the probability that a person in the

position occupied by the source would possess the information

alleged or in the alternative provide some other evidence to

support their allegations.”                   Teachers’ Ret., 477 F.3d at 174

(internal      quotation         marks        omitted).              “[O]missions         and

ambiguities count against” an inference of scienter because a

complaint’s       factual         allegations          must      be         stated        with

particularity.      Tellabs, 551 U.S. at 326; see also Institutional

Investors Grp. v. Avaya, Inc., 564 F.3d 242, 263 (3d Cir. 2009)

(noting    that   courts        should    steeply      discount       allegations         from

confidential       sources         that        lack     sufficient           indicia       of

reliability).         We    present       the      allegations       of     each     of   the

confidential      witnesses       before       assessing       the    strength       of    the

scienter inferences they support.

                                              17
                           i.       Confidential Witness 3

      CW3    served       as    a   staff    accountant      and    later   a    project

manager      in    MuniMae’s        Internal      Accounting       Department.        CW3

attended     accounting         meetings     with    several    of    the   individual

defendants.         According        to   CW3,    MuniMae    executives     considered

restating the Company’s financial statements for months prior to

the announcement of the first restatement, in March 2006.                             CW3

also asserts that, at some point prior to the first restatement,

a PwC partner advised MuniMae to consolidate the remaining LIHTC

Funds,      but    certain       MuniMae     executives      disagreed      with      that

recommendation.           Specifically, “CW3’s bosses . . . argued with

PwC about how to classify the tax credit equity funds and how to

determine the percentage of ownership MuniMae held on each one.”

J.A. 84. 4

      CW3 also states that the Company was “‘always’” in a state

of “‘some confusion and chaos’” as a result of MuniMae’s rapid

expansion.        J.A. 68.       As CW3 describes, the Company’s accounting

and   legal       staff    was      “bombarded      with    documentation”       as   the

Company expanded but lacked sufficient personnel to handle the

paper flow.         J.A. 68-69.             According to CW3, “the staff was

      4
       According to CW3, the PwC partner assigned to the MuniMae
account considered the Company’s audits to be “exceedingly
challenging” because MuniMae was a “‘high level, complex
company’ that required a sophisticated external auditing process
in order to comply with FIN 46.” J.A. 84.

                                             18
unprepared      professionally         for      the   complex       nature    of     the

accounting needed, particularly compliance with FIN 46R.”                          J.A.

69.

                          ii.   Confidential Witness 2

      CW2 served as an in-house certified public accountant from

late 2005 to April 2007.                CW2 reported directly to then-CFO

Lundquist    and   MuniMae’s       Chief      Accounting    Officer,       Greg    Thor.

CW2 asserts that by early 2006, Lundquist and Thor had concluded

that there were widespread problems with the accounting done

under former CFO Harrison.               The problems led Thor to review,

among   other      things,      the     Company’s      LIHTC    Fund      accounting.

According     to   CW2,    by    mid-2006       (at   the    time    of    the     first

restatement),      Lundquist       knew       that    the    primary      beneficiary

determinations for most LIHTC Funds were incorrect and that the

Funds should have been consolidated under FIN 46R.                           CW2 also

asserts that Lundquist and Falcone were heavily involved in the

restatement     effort,     with      Falcone    receiving     “updates      regarding

the restatement at least on a weekly basis and sometimes on a

daily basis.”      J.A. 82.

                          iii. Confidential Witness 1

      Finally, CW1 was the administrative assistant to MuniMae’s

head of Internal Audit, Angela Barone, from June 2004 to June

2007.    In     that   capacity,        CW1     attended    regular       meetings   to

discuss progress on ongoing audit work.                     According to CW1, at

                                           19
some point, frustration with the progress of FIN 46R accounting

became      a   regular       subject        of   discussion        at     the   meetings,       and

Barone communicated that frustration to Lundquist and Falcone. 5

CW1 recounts that Falcone sent a memo to all MuniMae employees

in   Fall       2006       emphasizing        that       the   auditing      staff       would    be

focusing all of its energies on the second restatement.                                          The

memo made clear that the related audit work “should be made a

priority        and        excuses        regarding        delays    providing       the    Audit

Department with information would not be tolerated.”                                J.A. 81.

                       iv.     Inferences from the CW Evidence

       We conclude that the confidential witness statements permit

an inference that the MuniMae defendants knew, perhaps as early

as mid-2006, that the Company was not in compliance with FIN

46R,       despite         their     representations           to    the     contrary.           The

allegations are also consistent with the inference that these

defendants        knew--or           at     least        suspected--by       Fall    2006       that

consolidating the LIHTC Funds in accordance with FIN 46R would

be a difficult and costly undertaking.

       Nonetheless, we agree with the district court that these

allegations           do    not    support        a      strong     inference       of   wrongful

intent.          To    begin       with,      the     confidential         witnesses       do    not

       5
        However, CW1 does not describe the nature of the
accountants’ frustration, nor is it clear precisely when these
discussions took place.

                                                    20
expressly assert that the MuniMae defendants intentionally or

recklessly      failed      to   comply     with     GAAP    or    their   own    internal

accounting policies during the class period.                        The statements are

also    generally          vague     and     conclusory       as     to    the     MuniMae

defendants’ state of mind.

       As even the amended complaint concedes, MuniMae struggled

throughout the class period with what its own former accountant

described as difficult and complex accounting.                         This complexity

was not helped by an accounting system that was in a constant

state of “‘confusion and chaos,’” J.A. 85, in no small part due

to the Company’s rapid expansion and inadequate staffing.                               The

MuniMae defendants may well have been negligent in failing to

properly apply FIN 46R to their business in the first instance,

and    then    by    allowing      the     Company    to    be    overwhelmed      by   the

resulting accounting tsunami.                    But plaintiffs’ allegations do

not    support      a    powerful    and     compelling       inference     that     these

defendants acted with wrongful intent or severe recklessness.

Cf. Zucco Partners, 552 F.3d at 1007 (“Although the allegations

in this case are legion . . . the facts alleged . . . point

towards       the       conclusion       that     [the      defendant]      was     simply

overwhelmed         with   integrating       a    large     new    division      into   its

existing business.”).

       That MuniMae’s officers and outside auditor debated how to

account for the LIHTC Funds in light of FIN 46R does not compel

                                             21
an inference of wrongful intent.                The more plausible inference

is   that     there    was    an    honest    disagreement         over   the   proper

application of a challenging new accounting standard.                       That the

MuniMae     defendants       were   ultimately       wrong    is    not   enough    to

support an inference of scienter.              Cf. DSAM Global Value Fund v.

Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002) (“[T]he

mere publication of inaccurate accounting figures, or a failure

to   follow    GAAP,    without     more,     does   not     establish     scienter.”

(quoting In re Software Toolworks, Inc., 50 F.3d 615, 627 (9th

Cir. 1994))).

      As for CW2’s allegations regarding Lundquist’s knowledge of

the FIN 46R issues, they too fail to support a strong inference

that she--or anyone else--acted with fraudulent purpose.                          Even

if, as plaintiffs allege, Lundquist began to suspect a problem

with the FIN 46R accounting at the time the first restatement

began in March 2006, we are not persuaded that she then hatched

a plot to defraud the investing public.

      To the contrary, we are skeptical that Lundquist would sign

off on the first restatement in June 2006 without addressing FIN

46R issues, thus subjecting herself to SEC sanctions, if she

firmly believed then that the accounting was wrong.                             A more

logical and compelling inference is that Lundquist and the other

MuniMae defendants were continuing to assess the scope of the

problem before deciding on an appropriate course of action.                         We

                                         22
also find it significant that it was MuniMae’s management--and

not   some    outside       entity--that    ultimately     disclosed          that    the

Company would have to consolidate the remaining LIHTC Funds in

January 2007 (thus conceding the Company’s earlier error).                             In

our   view,   this    disclosure      supports      a   strong    “inference         that

defendants     were       not   acting   with      scienter      but    rather       were

endeavoring in good faith to inform [the investing public].”

Matrix Capital, 576 F.3d at 189.

      Finally,       we     recognize      that     the    Fall        2006    Falcone

memorandum, which noted that that the auditing staff intended to

focus all of its energies on the second restatement, supports an

inference that the MuniMae defendants could have more promptly

anticipated the substantial costs of addressing the Company’s

myriad accounting issues.            But that is a far cry from concluding

that Falcone and his fellow defendants resolved then to defraud

plaintiffs by hiding the true costs.

      In our view, management’s subsequent disclosures tend to

negate an inference of fraudulent purpose.                    In July and August

2007, the Company (1) announced the hiring of an independent

consultant to assist with the work of the second restatement,

(2) identified        the    large   number   of    personnel     working       on    the

accounting issues, and (3) expressed uncertainty as to the costs

of the effort going forward.               Although these disclosures were

perhaps not as timely or as fulsome as plaintiffs would have

                                         23
liked, they give rise to a more compelling inference that the

MuniMae defendants were attempting--even if imperfectly--to keep

the   investing    public   informed,       while   working    strenuously      to

correct the accounting errors they had discovered.

                                  b. Red Flags

      Plaintiffs contend that there were numerous red flags that

should    have   alerted    the    MuniMae    defendants      to   the   FIN   46R

accounting problems, and that their failure to timely identify

the problems demonstrates a reckless disregard for the accuracy

of the Company’s financial statements.              Specifically, they point

to:   (1) the need for and magnitude of multiple restatements,

which involved revising several years’ financial statements and

multiple accounting problems; (2) the frequency of accounting

meetings involving FIN 46R issues; (3) the high turnover of CFOs

during the class period; and (4) the firing of PwC.

      Additionally,    plaintiffs         emphasize    that    the   individual

defendants were the Company’s most senior executives, and that

the LIHTC Funds represented a core operation of the Company.

Because    these   defendants      were     directly   responsible       for   the

Company’s financial statements--and many were heavily involved

in the second restatement--they must have known, or recklessly

failed to realize, that the Company was not in compliance with

FIN 46R.

                                       24
      The presence of “red flags,” coupled with the “breadth and

gravity”      of    a     company’s           problems,         may    provide       “substantial

weight” to an inference that high level corporate agents “must

have been aware of the problems.”                          See Matrix Capital, 576 F.3d

at 183-85.          The more significant the error the stronger the

inference it supports.                  See id. at 184-85; see also In re Atlas

Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 488-

89 (S.D.N.Y. 2004) (“When a company is forced to restate its

previously issued financial statements, the mere fact that the

company     had     to    make      a    large     correction         is     some    evidence    of

scienter.”).

      While       the    red       flags      alleged       in     the      complaint    are    not

insubstantial, they do not give rise to a strong inference of

scienter.          Fundamentally, the FIN 46R accounting error itself

was   not     especially           obvious,        at      least      with    respect     to    the

Company’s financial bottom-line.                          In that regard, we note, as

did the district court, that MuniMae’s ownership interest in the

unconsolidated           LIHTC      Funds       was       one    percent      or     less.      The

cumulative         economic          impact          of     all       of     the      restatement

adjustments--including                  but    not        limited      to     the    LIHTC     Fund

consolidation--was             a    loss      of   approximately             $44.9    million    in

                                                   25
shareholders’ equity for fiscal year 2005. 6          For the same year,

MuniMae’s adjusted shareholders’ equity was approximately $723

million.     Thus, while the effort to complete the restatement

proved costly, the practical effect of proper consolidation on

the Company’s financial statements was relatively small.

      The other potential warning signs also lend themselves to

benign interpretations.         We view the frequency of accounting

meetings   as   a   sign   of   diligence   rather   than   evidence   of    a

nefarious purpose.     Cf. Zucco Partners, 552 F.3d at 1000 (noting

that an allegation that top executives attended several meetings

to discuss the company’s financial affairs was not the kind of

particular evidence required to support a strong inference of

scienter).

      A high turnover in CFOs can certainly raise suspicion, but

the facts alleged here mitigate any concern.              Harrison left the

Company in late 2005, well before any officer is alleged to have

known about the FIN 46R issues.             Lundquist resigned in July

2007, after the Company was required to perform two restatements

under her watch, the second of which entailed numerous delays

and   snowballing     costs.       While    Lundquist’s     resignation     is

      6
       The loss in shareholders’ equity specifically attributable
to consolidating the LIHTC Funds was $78.3 million, but gains in
other areas as a result of the restatement reduced the overall
impact of consolidation on the Company’s financial bottom-line.

                                     26
evidence of the substantial accounting challenges the Company

then faced, it does not compel an inference that she and the

other individual defendants were bent on committing fraud.                                See

id. at     1002    (“Where       a    resignation        occurs   slightly       before    or

after    the      defendant          corporation     issues       a    restatement,         a

plaintiff must plead facts refuting the reasonable assumption

that the resignation occurred as a result of [the] restatement’s

issuance    itself     in    order       for   a    resignation       to    be    strongly

indicative of scienter.”).

      Nor is PwC’s October 2006 departure particularly telling.

The   dismissal       of    an   accounting        firm     around    the    time    of     a

restatement is not surprising.                     Cf. id. (concluding that the

resignation of the defendant’s independent public accountant did

not support a strong inference of scienter because the firm “had

just been partially responsible for the corporation’s failure to

adequately     control       its       accounting         procedures”).           This     is

especially     true    on    these      facts,      as    MuniMae     was   required       to

execute two restatements while PwC was serving as its auditor.

The fact that PwC alerted the Company to one of the many issues

the restatements ultimately addressed does not mean that the

MuniMae defendants were not justifiably dissatisfied with PwC’s

services generally.          Any inference of wrongful intent is further

weakened by the fact that PwC made clear in a letter to the SEC

that it had no disagreements with the Company on any matter of

                                            27
accounting   principle         or   practice    that       it   felt    obligated    to

report. 7

      Finally,    and     in   accordance      with    several        of   our    sister

circuits, we reject plaintiffs’ contention that the individual

defendants   must       have   acted   intentionally            or   recklessly    with

respect to the FIN 46R accounting merely because (1) they were

senior executives, and (2) the LIHTC Funds represented a core

business of the Company.            See, e.g., In re Suprema Specialties,

Inc. Sec. Litig., 438 F.3d 256, 282 (3d Cir. 2006) (“A pleading

of scienter . . . 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.”

(internal quotation marks omitted)), abrogated on other grounds

by Tellabs, 551 U.S. at 322-23; Zucco Partners, 552 F.3d at 1000

(finding that “bare allegations” that officers must have have

had   knowledge    of    key   facts   relating       to    the      business’s   “core

operations” are rarely enough to support a strong inference of

scienter).       To be sure, such allegations are relevant to the

court’s holistic analysis of scienter.                     But without additional

      7
       SEC regulations required MuniMae to file a statement
disclosing information about its dismissal of PwC as its
independent public accountant.   See 17 C.F.R. § 229.304(a)(1)-
(2). The regulations also required PwC to file a letter stating
whether MuniMae’s disclosures regarding the circumstances of its
dismissal were true. See id. § 229.304(a)(3).

                                        28
detailed      allegations          establishing           the     defendants’      actual

exposure to the accounting problem, the complaint falls short of

of the PSLRA’s particularity requirements.

                                  c. Insider Trading

       Plaintiffs also say that Company insiders were motivated to

conceal MuniMae’s accounting problems to improperly benefit from

insider trading.            Allegations of “personal financial gain may

weigh heavily in favor of a scienter inference.”                          Tellabs, 551

U.S.   at    325.         However,    the    inferential        weight    that     may   be

attributed to any claim of motive must be evaluated in context.

See id. at 324.            Insider trading allegations will only support

an   inference       of    scienter     “if       the    timing    and    amount    of    a

defendant’s        trading    were    unusual       or    suspicious.”        Teachers’

Ret., 477 F.3d at 184 (internal quotation marks omitted).                                To

determine whether an insider’s sales were “unusual in scope” we

consider factors such as “the amount of profit made, the amount

of   stock   traded,        the    portion     of   stockholdings        sold,     or    the

number of insiders involved.”                  In re Suprema Specialties, 438

F.3d at 277 (internal quotation marks omitted).

       In   this    case,    the     overall      value    of   MuniMae    shares       sold

during the class period was higher than in previous years.                               Six

Company insiders sold 470,210 shares for a total of $12,004,901

in gross proceeds during the class period, as compared to the

sale of 298,002 shares and $7,139,835 in gross proceeds between

                                             29
June 1998 and the beginning of the class period.                    These numbers

are certainly consistent with an inference that the insiders who

traded during the class period had a motive to commit fraud.

     Nonetheless, the inference that the trades were innocent is

stronger.     The number of insiders who traded during the class

period is relatively small, and plaintiffs do not allege that

the insiders timed the sales to take advantage of any particular

disclosure.       Cf.    Teachers’     Ret.,    477   F.3d    at    184    (finding

deficient    a    complaint    that,    among    other    things,        failed    to

“allege that defendants timed their sales to profit from any

particular disclosures”).

     Nor is the extent of any insiders’ divestiture particularly

alarming.     Former CFO Harrison sold 78% of his shares in early

December 2004, but that was well before plaintiffs say that any

officer of the Company knew that the FIN 46R accounting was

flawed.     Board Chairman Mark Joseph sold approximately 37% of

his shares between late April 2005 and early June 2006.                     Some of

these     sales   coincided     with    the     lead-up      to    the    Company’s

announcement      of   the   first   restatement.         However,        the   sales

occurred at fairly regular intervals and amounts compared to

earlier periods.        CEO Falcone sold just over 28% of his holdings

during the class period, with the bulk of the sales occurring in

2004 and mid-2005.        Falcone sold shares twice in early 2006, but

the volume of the trades was not unusual.              In short, none of the

                                       30
defendants’ trading strikes us as suspicious.                               Cf. id. at 185

(finding        insider    sales    of    92%,      100%,     and   82%     of    defendants’

holdings “unremarkable” in context).

       The      fact    that    Falcone    and       Joseph    traded       MuniMae     shares

under non-discretionary Rule 10b5-1 plans further weakens any

inference of fraudulent purpose.                      Under Rule 10b5-1, corporate

insiders can set up trading plans to sell company shares at

predetermined times and amounts to avoid accusations of illegal

insider trading.           See 17 C.F.R. § 240.10b5-1(c) (stating that it

is    an    affirmative        defense    in    insider       trading       cases   that         the

defendant’s purchases or sales were made pursuant to a “written

plan for trading securities”); see also Cent. Laborers’ Pension

Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 554 n.4 (5th

Cir. 2007) (explaining that a 10b5-1 trading plan can give rise

to    an    inference      that    the    sales      were     not   suspicious);            In    re

Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir.

1994) (same).

       Joseph’s         Rule   10b5-1    plan       does    less    to   shield     him      from

suspicion because he instituted the plan in March 2005, after

the start of the class period.                  By contrast, Falcone created his

plan       in   2003.      Nonetheless,        Joseph       entered      the     plan   a    year

before the complaint alleges that any officer at MuniMae knew

the FIN 46R accounting was wrong, and the amended complaint does

not    allege      that    Joseph    traded         outside    of     the      plan.        Thus,

                                               31
although    the    Rule   10b5-1      plan    does   not   completely    immunize

Joseph     from    suspicion,    it    does     mitigate    any   inference      of

improper motive surrounding his sales.

     An    additional      problem     with    the   allegations    of   insider

trading relates to the length of the putative class period.                   The

plaintiffs have chosen an inordinately long period of 44 months.

See Teachers’ Ret., 477 F.3d at 185 (describing a 46-month class

period as “exceedingly long”); see also In re Vantive Corp. Sec.

Litig., 283 F.3d 1079, 1092 (9th Cir. 2002) (characterizing a

class period of 15 months as “unusually long”), abrogation on

other grounds recognized by South Ferry LP, No. 2 v. Killinger,

542 F.3d 776, 784 (9th Cir. 2008).              In our view, alleging such a

lengthy class period makes it difficult to infer intent from the

mere fact of a stock sale, as it is not unusual for insiders to

trade at some point during their tenure with a company.                       See

Teachers’ Ret., 477 F.3d at 185.

                      d. Other Allegations of Motive

     Plaintiffs proffer a number of general business motivations

from which they would have us infer fraud.                   They contend that

MuniMae wanted to artificially inflate the price of its shares

to   attract      investors,    fund    corporate      acquisitions,     avoid    a

default on loan covenants, and obtain favorable loan terms.                      We

decline,    however,      to   infer   fraud    from    financial   motivations

common to every company.         See Ottmann v. Hanger Orthopedic Grp.,

                                         32
Inc.,   353    F.3d    338,     352     (4th     Cir.    2003)     (“[C]ourts     have

repeatedly    rejected       these    types     of   generalized     motives--which

are shared by all companies--as insufficient to plead scienter

under the PSLRA.”).

      Although     MuniMae           conducted       numerous      offerings       and

acquisitions     during      the     class     period,    very     little    of   this

activity occurred after any officer is alleged to have known

that the FIN 46R accounting was flawed.                    It is true that the

Company was aware that consolidating LIHTC Funds could affect

its debt covenants, as the initial consolidation in 2004 would

have caused it to default on at least two debt covenants.                          But

MuniMae disclosed that fact, and it was also able to negotiate

waivers on each covenant to avoid default.                       In short, nothing

about   the    specific       facts     alleged      render      MuniMae’s    general

business motivations particularly suspicious.

                           e. Class Period Disclosures

      For their part, the MuniMae defendants assert that their

class period disclosures rebut any inference of scienter.                          “It

is   appropriate      to    consider     such    disclosures,       which    in   some

contexts will indicate that the defendants were acting in good

faith, but in other contexts will indicate that the defendants

had knowledge of operational risks (suggesting a lack of good

faith).”   Matrix Capital, 576 F.3d at 185.

                                          33
       We believe MuniMae made several relevant disclosures during

the class period.        In announcing its first restatement on March

10, 2006, MuniMae also alerted investors to the fact that the

Company     suffered     from     “material     weaknesses        related    to     the

financial reporting process.”              J.A. 821.        Although only a few

material    weaknesses     were    then    identified,      the    Company     warned

that management might “identify additional material weaknesses”

as part of the restatement.          Id.

       Over the next two years, the Company repeatedly disclosed

newly   discovered     material     weaknesses,      and    reiterated       that    it

might     identify     additional     problems       that    would    render        its

remedial efforts ineffective.              The fact that MuniMae continued

to update investors about newly discovered weaknesses tends to

negate an inference that the defendants acted with an intent to

defraud.      Cf. Matrix Capital, 187 F.3d at 187 (“A disclosure

that meaningfully alerts investors to the risk that financial

information is not accurate may suggest that the individuals

responsible for the disclosure did not knowingly (or perhaps not

even       recklessly)      misstate           the     underlying           financial

information.”).

       MuniMae also attempted to update investors regarding the

escalating cost of the second restatement.                  Although the initial

announcement in September 2006 identified only a few areas for

restatement, the Company announced in October that it had not

                                          34
yet   determined      its     full    scope.           In    May   2007,     the     Company

disclosed that it was unable to timely file its annual Form 10-K

for fiscal year 2006 because of the “dedication of significant

management resources to these restatement efforts.”                             J.A. 1129.

On July 10, 2007, the Company announced that it had retained

Navigant Consulting to assist in the restatement efforts.                                 In a

telephone    conference       with     investors         the    following      month,      the

Company noted that, given the scope of the restatement, it had

to “bring new and unbudgeted resources online quickly.”                                   J.A.

1145.      Finally,    at     a    November       8    teleconference,         the   Company

informed    investors       that     both     the      magnitude       and   cost    of    the

restatement would be “very significant.”                       J.A. 1157.

        To be sure, the import of some of MuniMae’s disclosures was

moderated     by     the      fact     that       it     occasionally          buried      the

information     in    press       releases    headlined         with    favorable       news.

Nonetheless, MuniMae repeatedly noted the need to restate its

financials, the deficiency in its internal controls, and the

fact that the restatement would require the Company to commit

resources far greater than initially anticipated.

      Not only do these disclosures bolster the inference that

the   MuniMae      defendants        acted    in      good     faith,    but    they      also

strengthen the inference that these defendants only realized the

FIN 46R accounting problems--and the cost of fixing them--over

time.

                                             35
                                            2.

       After evaluating the inferential weight owed to plaintiffs’

allegations of corporate fraud in light of context and common

sense,    we     must   consider        “whether    a    reasonable      person    would

regard    the    inference       that    defendants      knowingly      or   recklessly

misstated or omitted material information at least as strong as

the     inference       that     [the     MuniMae       defendants]      were     merely

negligent with respect to those statements.”                           Matrix Capital,

576 F.3d at 187.          To that end, we must evaluate the complaint

holistically,       recognizing         that   “allegations       of    scienter    that

would not independently create a strong inference of scienter

might    compliment      [sic]    each     other    to   create    an    inference    of

sufficient strength to satisfy the PSLRA.”                  Id. at 187-88.

       Considered holistically, we conclude that plaintiffs have

not satisfied their burden under the PSLRA.                       We accept as fact

that management regularly discussed FIN 46R compliance issues,

even    before    the    first    restatement,      and    that    by    mid-2006,    at

least Lundquist had determined that the Company’s LIHTC Fund

accounting was flawed.             We know that PwC recommended that the

Company reconsider its LIHTC Fund accounting prior to the first

restatement, but that at least some MuniMae officers disagreed.

We acknowledge that in the fall of 2006, the Company recognized

that correcting various accounting errors would be a management

focus for some time.           We accept that the MuniMae defendants had

                                            36
financial           motivations--albeit         universal        ones--to         avoid

disclosing the need to consolidate the LIHTC Funds.                       And we know

that MuniMae suffered from material weaknesses in its internal

controls that, among other things, could have alerted management

to problems with the FIN 46R accounting.

       While this mosaic supports an inference of scienter, we

find more compelling the inference that the MuniMae defendants

were,   at    most,     negligent.       In    2004,   MuniMae      was   faced   with

applying a challenging new accounting standard to its rapidly

expanding business, requiring the Company to determine whether

and how to consolidate a number of LIHTC Funds that previously

were    not    on    the     Company’s   financial     statements.          MuniMae's

management mistakenly--and perhaps negligently--failed to have

sufficient accounting controls and processes in place to meet

this    challenge,      which,    together     with    other   accounting      errors

over the course of 2004 and 2005, required the Company to twice

restate      its    financial    accounting     statements     at    a    substantial

cost.     In our view, the facts alleged point more convincingly to

an inference that MuniMae was simply in over its head.

       Although      some    officers    may   have    believed     that    MuniMae’s

accounting was flawed by mid-2006, the evidence suggests that

others, at least initially, disagreed.                 This makes it difficult

to   infer    that     the    MuniMae    defendants    intentionally,        or   even

recklessly, misrepresented the state of the Company’s financial

                                          37
affairs.     See Metzler Inv. GMBH v. Corinthian Colls., Inc., 540

F.3d    1049,     1069    (9th     Cir.        2008)     (finding       insufficient

allegations that “point only to disagreement and questioning”

within the Company about a particular accounting practice).                         And

even if some senior officers had concluded by mid-2006 that the

FIN 46R accounting was wrong, that does not establish that they

acted   with    fraudulent      purpose    to    conceal    the    problems       until

January 2007.

       The strength of the inference with respect to MuniMae’s

knowledge of the costs of the second restatement is even weaker

on the facts alleged.            We think it more plausible that the

Company simply had not reached a conclusion with respect to FIN

46R until after it began the second restatement, and that the

MuniMae defendants only gradually became aware of the expense as

it was incurred.

       The   Company’s     successive      disclosures          suggest    that    its

officers     attempted    to   keep   investors         updated   about     MuniMae’s

internal weaknesses.           The pattern of disclosures also suggests

that management only gradually awakened to the magnitude of the

Company’s accounting problems and the cost of fixing them.                        That

the Company’s accounting department during the early part of the

class    period    was    chronically          understaffed       and,     at     least

initially,      professionally        unprepared          for     the      accounting

challenge      before    it,    strengthens       the     inference       that    final

                                          38
decisions regarding the FIN 46R accounting remained unresolved

until late 2006.

      On       the    facts    alleged,      the     inference      that   the   MuniMae

defendants were negligent in discharging their duties may well

be compelling.           But that is not enough to survive a motion to

dismiss in this context.                 See Pub. Emps.’ Ret., 551 F.3d at 313.

We hold that the district court correctly dismissed plaintiffs

claims under the PSLRA for failing to adequately plead scienter. 8

                                             III.

      We turn next to plaintiffs’ Securities Act claims.                             The

“basic purpose” of the Securities Act of 1933 is “to provide

greater        protection      to    purchasers      of    registered      securities.”

Herman     &    MacLean       v.    Huddleston,      459     U.S.   375,   383   (1983).

Sections 11 and 12(a)(2) prohibit the use of materially false or

misleading       statements         or   omissions    in     registration    statements

and   prospectuses,           respectively.            See     15   U.S.C.   § 77k(a);

77l(a)(2).           In contrast to Exchange Act requirements, “scienter

      8
       The district court also dismissed the plaintiffs’ claims
against the MuniMae officers under § 20(a) of the Exchange Act.
That provision imposes liability on each person who “controls
any person liable under any provision of this chapter or of any
rule or regulation thereunder.”    15 U.S.C. § 78t(a).  Section
20(a) liability is derivative of § 10(b). Because the complaint
is legally insufficient with respect to the § 10(b) claim, the
§ 20(a) claim must also fail.    See, e.g., Matrix Capital, 576
F.3d at 192.

                                              39
is not an element of a violation” of either section.                       Newcome v.

Esrey, 862 F.2d 1099, 1106 (4th Cir. 1988) (en banc).

       The       amended   complaint        alleges    that   certain      defendants 9

violated §§ 11 and 12(a)(2) because the registration statement

and    prospectus       for   the     2005    SPO     incorporated    by    reference

materially misleading statements and omissions.                         For example,

the    registration         statement        incorporated      by    reference      the

Company’s quarterly reports from the second and third quarters

of 2004, which represented that MuniMae was in compliance with

FIN 46R.          See J.A. 1461.            The February 2, 2005, prospectus

supplement expressly represented that MuniMae was in compliance

with       FIN   46R.      However,    it    also     noted   that   “[d]ue    to   the

complexity of FIN 46R . . . we cannot assure you that further

changes in our financial statements will not be required with

respect to the application of FIN 46R.”                  J.A. 1578.

       The district court found the § 11 claim time-barred by the

Securities Act’s statute of repose and dismissed the § 12(a)(2)

claim for lack of standing.            We address each issue in turn.

       9
        The § 11 SPO claim is                     brought against the MuniMae
defendants and the underwriter                    defendants.   The § 12(a)(2)
claims is alleged against the                     Company and the underwriter
defendants.

                                             40
                                       A.

                                       1.

     Section    13   of    the   Securities    Act    contains     a   three-year

statute of repose.        See 15 U.S.C. § 77m.        It provides:

     In no event shall any such action be brought to
     enforce a liability created under [§ 11 or § 12(a)(1)]
     of this title more than three years after the security
     was bona fide offered to the public . . . .

15 U.S.C. § 77m.

     The statute does not define the term “bona fide offered to

the public,” and neither the Supreme Court nor this circuit has

determined    the    meaning     of   the   phrase.        The   district   court

applied the rule accepted by the majority of courts and found

that the statute of repose began to run on the date the SEC

declared     MuniMae’s     registration       statement      effective,     i.e.,

January 14, 2005.      Because the original complaint in this action

was not filed until February 1, 2008, the court concluded that

the § 11 claim was two-weeks late.                See In re Mun. Mortg. &

Equity, 576 F.2d at 655-57.

     On    appeal,   plaintiffs’      arguments      are   threefold.       First,

applying a combination of dictionary and statutory definitions,

they say that a bona fide offering occurs only when securities

are offered “for value” in a manner capable of acceptance, and

in a way that is open and visible.              Under this interpretation,

the repose period began to run, at the earliest, on February 2,

                                       41
2005,   that        is,    when       MuniMae    issued    a    prospectus         supplement

pricing       the    securities,          or     on    February       3,    when       the   SPO

commenced.          Alternatively,          plaintiffs         suggest     the     securities

were not bona fide offered until February 8, the last date of

the SPO.       Finally, plaintiffs argue that, even if the general

rule    is    that        the   statute     of    repose       begins      to    run    on   the

effective      date       of    the    registration       statement,        we    should     not

apply that rule in this case because there was a significant

delay between the effective date and the commencement of the

offering.

       Both the MuniMae and underwriter defendants respond that

the effective date of the SPO registration statement constituted

the bona fide offering date because it is the date on which all

barriers to sale were removed.                        They also emphasize that most

case    law     defines         the      effective      date     of     the      registration

statement as the bona fide offering.

                                                2.

       The meaning of “bona fide offered to the public” in § 13’s

statute of repose is a question of statutory interpretation that

we review de novo.              See P. Stolz Family P’ship L.P. v. Daum, 355

F.3d 92, 98 (2d Cir. 2004).

       We begin by considering whether the language at issue has a

plain and unambiguous meaning.                        See United States v. Ashford,

718    F.3d    377,       382     (4th    Cir.    2013).        At    first       blush,     the

                                                42
plaintiffs’ principal position is appealing.                     In ordinary usage,

“bona fide” often means (as plaintiffs urge) “genuine.”                              See

Random House Webster’s Unabridged Dictionary 237 (2d ed. 2001);

see also Black’s Law Dictionary 199 (9th ed. 2009) (“Sincere;

genuine”).         But it can also mean “made . . . in good faith” and

“without deception or fraud.”                 Random House Webster’s Unabridged

Dictionary 237; see also Black’s Law Dictionary 199 (“Made in

good faith; without fraud or deceit”).                        To the extent other

courts    and      authorities      have      considered   the    meaning    of   “bona

fide”    in   context,       they    have      concluded   that     Congress      simply

intended      to    distinguish      a     true    offering      from   a   “simulated

offering.”         See P. Stolz, 355 F.3d at 99; see also 1 Louis Loss,

Joel    Seligman      &   Troy      Paredes,       Securities     Regulation      § 2-B-

6(g)(i), at 773 & n.355 (4th ed. 2006) (discussing the dealer

exemption under § 4(3)(A) of the Securities Act, which also uses

the term “bona fide offered to the public”).

       The meaning of the word “offer” is no more certain.                           As

commonly used, “offer” can mean both “to present for acceptance

or     rejection”      and    also       to    “propose    or     put   forward     for

consideration.”              See     Random        House   Webster’s        Unabridged

Dictionary 1344.          Section 2(a)(3) of the Securities Act defines

“offer” to “include every attempt or offer to dispose of, or

solicitation of an offer to buy, a security or interest in a

security, for value.”              15 U.S.C. § 77b(a)(3).           But we think it

                                              43
unlikely    that    Congress        intended      the      meaning      of    “bona   fide

offered”    in    § 13   to    be    coterminous          with    the       definition    of

“offer” in § 2(a)(3).            See Morse v. Peat, Marwick, Mitchell &

Co., 445 F. Supp. 619, 622 (S.D.N.Y 1977) (“The term ‘bona fide

offered to the public’ is a term of art and one not necessarily

synonymous       with    the     full      breadth        of     the    statutory     term

‘offer.’”).

      Because we believe the statutory language is susceptible to

more than one meaning, we look beyond the statute for guidance.

The   Second     Circuit’s       opinion     in      P.    Stolz       is    the    leading

authority on the term “bona fide offered to the public” in § 13.

The question in that case was the meaning of that phrase in the

context of unregistered securities.                     But the court examined a

number of cases involving registered securities and determined

that “the date of registration has been treated as the date that

starts the running of the repose period.”                      P. Stolz, 355 F.3d at

99.

      A majority of courts have followed the P. Stolz guidance,

see, e.g., Armstrong v. Am. Pallet Leasing Inc., 678 F. Supp. 2d

827, 868 (N.D. Iowa 2009); In re Metro. Sec. Litig., 2010 WL

537740, at *1 (E.D. Wash. Feb. 8, 2010); In re Countrywide Fin.

Corp. Sec. Litig., 2009 WL 943271, at *6 (C.D. Cal. Apr. 6,

2009),     and     we    agree      that     this         approach      best       reflects

congressional       purpose.            Section 11          is     violated        when    a

                                            44
registration statement containing misleading information becomes

effective.          See 15 U.S.C. § 77k(a); 17 J. William Hicks, Civil

Liabilities: Enforcement & Litigation Under the 1933 Act § 4:57

(2013).       Using the effective date of the registration statement

as   the     bona    fide   offering         date       logically     links   a    putative

defendant’s         liability    to    the        statutory     violation.        See     Fed.

Hous. Fin. Agency v. UBS Ams., Inc., 2012 WL 2400263, at *2

(S.D.N.Y. June 26, 2012) (recognizing that courts have accepted

the effective date as the repose trigger on the ground that “the

registration statement includes the information upon which the

Section 11 claim is predicated--the alleged falsehood”).

       Using    the     effective          date    is    also    consistent       with    the

purpose of statutes of repose generally.                        Such statutes provide

“a fixed date readily determinable by the defendant . . . rather

than   a     date    determined       by    the     personal     circumstances       of   the

plaintiff.”         Caviness v. Derand Res. Corp., 983 F.2d 1295, 1300

n.7 (4th Cir. 1993); see also City of Pontiac Gen. Emps.’ Ret.

Sys.    v.     MBIA,     Inc.,    637        F.3d       169,    176     (2d   Cir.       2011)

(contrasting a statute of repose, which “begins to run from the

defendant’s         violation,”   with        a    statute      of    limitations,       which

“cannot begin to run until the plaintiff’s claim has accrued”). 10

       10
        Although we do not rely on the legislative history, we
note that it is not inconsistent with our conclusion. In 1954,
Congress amended numerous provisions of the federal securities
(Continued)
                                              45
       Plaintiffs object to this view of the statute, pointing to

§ 4(3) of the Securities Act, which also uses the term “bona

fide    offered     to    the    public.”         See    15    U.S.C.    § 77d(a)(3)(B).

That    provision        exempts    certain       dealer       transactions      from   the

prospectus delivery requirement, and it applies “prior to the

expiration     of    forty       days     after    the    effective       date    of    such

registration statement or prior to the expiration of forty days

after    the   first      date     upon   which     the       security   was     bona   fide

offered to the public.”              See id. (emphasis added).                 Plaintiffs

say that this language demonstrates that “the date on which a

security is ‘bona fide offered to the public’ can be entirely

distinct    from     the    date    on    which     a    registration      statement      is

declared effective.”            Appellants’ Br. at 24.

laws, including the Investment Company Act of 1940. See Act of
August 10, 1954, ch. 667, tit. IV, § 402, 68 Stat. 683, 689
(codified as amended at 15 U.S.C. § 80a-24).    Congress amended
the Investment Company Act, 15 U.S.C. § 80a-1 et seq., among
other things, to permit investment companies engaged in
continuous offerings to file amendments to existing registration
statements instead of filing a new one.    See S. Rep. No. 83-
1037, at 21 (1954).

     Both the House and Senate Reports accompanying the
amendments equate the effective date of the registration
statement with the bona fide offering.     See H.R. Rep. No. 83-
1542, at 30 (1954) (“[A] dealer . . . need not use a prospectus
in connection with a transaction in a security after the
expiration of 1 year from the first date on which the security
was bona fide offered to the public, which, in most cases, means
approximately   1  year   after   the  effective   date  of   the
registration statement.”); S. Rep. No. 83-1037, at 20 (same).

                                            46
      But    the    fact    that    a   different    section         of   the    statute

provides     that    the    bona    fide    offer   and    registration          can    be

distinct events does not inexorably mean that they always will

be.     Cf. In re Lehman Bros. Sec. & ERISA Litig., 903 F. Supp. 2d

152, 171 (S.D.N.Y. 2012) (“To be sure, the phrase bona fide

offered      to     the    public,      recognizes      that         there      will    be

circumstances        in     which       stock    covered        by      an   effective

registration statement has not genuinely been offered to the

public, in which case the commencement of the repose period may

begin      later    than    the     effective    date      of     the     registration

statement.” (internal quotation marks omitted)).

      In “the vast majority of offerings” the bona fide offering

to the public “will be the effective date of the registration

statement.”         17    Hicks,    Civil    Liabilities        § 4:77.         The    only

exceptions would arise in the context of delayed or continuous

offerings in which information that is fundamental to assessing

the value of a particular offering is not disclosed until after

the registration statement becomes effective.                     See id.; see also

UBS Ams., Inc., 2012 WL 2400263, at *2. 11

      11
       At the time of the 2005 SPO, the SEC did not consider the
pricing information MuniMae filed in its prospectus supplement
the kind of fundamental information that would merit exceptional
treatment.   See 17 C.F.R. § 229.512(a)(1)(2004); In re Lehman
Bros. Sec. & ERISA Litig., 903 F. Supp. 2d at 171.

                                            47
       Plaintiffs       argue    nonetheless        that    we    should    not     accept

registration as the triggering event here, even if, as a general

rule, the two coincide.              They say that using the effective date

of the registration statement is only appropriate in cases where

there     is    virtually       no   delay        between   registration       and    the

commencement of the public offering.                   By contrast, the 2005 SPO

was a shelf offering, and there was a two-week delay between the

effective date and the commencement of the offering.                               MuniMae

did     not    file   a    prospectus        supplement      announcing       that    the

registration statement was effective until February 1, and it

only    priced    the     securities    on    February       2.     On     these    facts,

plaintiffs argue, the securities were not genuinely offered to

the public on January 14.

       We disagree.        The general rule that the statute of repose

begins to run on the effective date has been repeatedly applied

in the context of delayed offerings.                   See, e.g., In re Adelphia

Commc'ns Corp. Sec. & Derivative Litig., 2005 WL 1679540, at *6

(S.D.N.Y. July 18, 2005) (“Even where registered securities are

offered       pursuant     to    a   less     typical       delayed      offering,    the

limitations period runs from the date of either the registration

statement or the [post-effective] amendment . . . .”), adhered

to on reconsideration, 2005 WL 1882281 (S.D.N.Y. Aug. 9, 2005);

see also UBS Ams., Inc., 2012 WL 2400263, at *2-3 (recognizing

that that the general rule will apply in shelf offerings when

                                             48
the registration statement contains the misleading information

on which the § 11 claim is predicated).

      This    is    not    the     unusual     case       in   which    a    post-effective

disclosure--rather           than      the    registration        statement--contained

the   allegedly         false    or    misleading         information.            The    amended

complaint         directly       avers       that    the       registration         statement

declared effective on January 14 contained or incorporated by

reference the misleading statements to which plaintiffs object. 12

Under these circumstances, we are comfortable concluding that

MuniMae’s exposure began on the effective date.

      The    two-week        gap      between       the    effective        date        and   the

commencement of the SPO does not alter our analysis.                                    The fact

that plaintiffs did not know that the registration statement was

effective as of January 14 is of no consequence for statute of

repose purposes.           See Caviness, 983 F.2d at 1300 (“[Section] 13

allows      for    no     qualification         emanating        from       the    claimant’s

circumstances.”);          see        also    P.    Stolz,      355     F.3d       at     102-03

(explaining that a statute of repose begins to run “even if the

plaintiff has not yet, or could not yet have, discovered that

she has a cause of action”).                  Moreover, the SEC has sanctioned a

      12
       By contrast, the prospectus supplement filed on February
2, which priced the securities, contained a rather unambiguous
warning that MuniMae’s FIN 46R accounting might be incorrect.
See J.A. 1578.

                                               49
delay of up to fifteen business days between registration and

the    commencement       of     sale     in       the    context       of     non-delayed

offerings.      See 17 C.F.R. §§ 230.430A(a)(3), 229.512(a).                            Thus,

the thirteen-day gap here hardly strikes us as abusive.

       In sum, we hold that securities will generally be bona fide

offered    to     the    public     on    the      date    the     SEC       declares    the

registration      statement       effective.         Applying       this      holding,     we

conclude that MuniMae bona fide offered securities to the public

on    January     14,   2005.       Plaintiffs’          amended       complaint,       which

relates    back    to   the     original      complaint        filed    on    February     1,

2008, is thus time-barred under § 13’s statute of repose.

                                              B.

                                              1.

       We turn finally to the amended complaint’s § 12(a)(2) claim

against MuniMae and the underwriter defendants with respect to

the 2005 SPO.           Section 12(a)(2) provides that any person who

“offers or sells a security . . . by means of a prospectus or

oral communication” containing a materially false statement or

material     omission      “shall        be     liable     . . .        to    the   person

purchasing such security from him.”                  15 U.S.C. § 77l(a)(2).

       The amended complaint alleges that named plaintiff Dammeyer

“purchased MuniMae’s common stock pursuant and/or traceable to

the SPO Registration Statement and Prospectus dated February 2,

2005.”      J.A.    89.        It   incorporates          by    reference       Dammeyer’s

                                              50
confirmation slip for the shares.             The slip shows that Dammeyer

purchased 600 shares of MuniMae stock at $26.32 per share on

February 3, 2005, and that he received those shares on February

8, 2005.       The slip also bears the logo of RBC Dain Rauscher and

includes the phrase “PROS UNDER SEP COVER.”                 J.A. 1606.

       The     district       court   found   the      amended    complaint       and

confirmation          slip     insufficient      to     establish        Dammeyer’s

standing.       It found Dammeyer’s claim that he purchased stock

“pursuant and/or traceable to” the SPO documents conclusory, and

the confirmation slip lacking in “supporting details to make a

plausible claim that Dammeyer purchased directly in the SPO.”

In re Mun. Mortg. & Equity, LLC, 876 F. Supp. 2d at 660.

       On    appeal,     plaintiffs    contend      that    the   district      court

improperly failed to consider the confirmation slip referenced

in the complaint, and that the slip, when properly considered,

supplies the necessary details to support a plausible allegation

of standing.       Defendants respond that Dammeyer would have said

that he purchased his shares directly in the SPO if he actually

did.    Moreover, they claim that the details of the confirmation

slip    show     that     Dammeyer    purchased       his   securities     on    the

secondary market and not in the SPO.

                                         2.

       We    review     the    plausibility   of      the   amended   complaint’s

standing allegations de novo under the pleading requirements of

                                         51
Rule 8(a).       See In re Century Aluminum Co. Sec. Litig., 729 F.3d

1104, 1107-09 (9th Cir. 2013) (reviewing the plausibility of a

complaint’s standing allegations with respect to a § 11 claim).

It is not enough for the amended complaint to allege facts,

which,       accepted      as   true,    are       merely        consistent      with     the

possibility         that   Dammeyer     purchased         shares     in    the     SPO;   the

allegations         must   also    render         such    a     conclusion       plausible.

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

       To establish standing under § 12(a)(2), a plaintiff must

allege       that    he    purchased     shares          from     “[a]ny    person”       who

“offer[ed] or s[old] a security . . . by means of a prospectus.”

15 U.S.C. § 77l(a)(2).            In Gustafson v. Alloyd Co., 513 U.S. 561

(1995), the Supreme Court interpreted the prospectus requirement

of § 12(a)(2), and concluded that, because “prospectus” is a

term    of    art    referring     to    a   specific           document    in     a   public

offering, sales made pursuant to private contracts are not made

by means of a prospectus.               See id. at 580-84.            Thus, § 12(a)(2)

liability is “limited to public offerings,” and purchasers in

the secondary market may not sue.                    Id. at 578; see also In re

CitiGroup Inc. Bond Litig., 723 F. Supp. 2d 568, 585 (S.D.N.Y.

2010)    (“[A]       plaintiff     seeking        redress        pursuant     to       Section

12(a)(2) must establish that it purchased the security directly

from defendants through the public offering at issue.”).

                                             52
       A    number      of     district      courts       have        concluded    that    the

“pursuant and/or traceable to” language employed in the amended

complaint is insufficient to establish standing for § 12(a)(2)

purposes.         See, e.g., Pub. Emps.’ Ret. Sys. of Miss. v. Merrill

Lynch & Co., 714 F. Supp. 2d 475, 484 (S.D.N.Y. 2010); In re

Wells Fargo Mortg.-Backed Certificate Litig., 712 F. Supp. 2d

958, 966 (N.D. Cal. 2010); In re Sterling Foster & Co., Inc.,

Sec. Litig., 222 F. Supp. 2d 216, 245-46 (E.D.N.Y. 2002).                                  The

general tenor of these opinions is that plaintiffs should plead

that       they     directly        purchased       securities          in   the    relevant

offering,         and   that    a     failure       to    do     so     implies    that    the

securities were in fact purchased on the secondary market.                                See,

e.g., In re Sterling Foster, 222 F. Supp. 2d at 245.

       The First Circuit has held that alleging that a plaintiff

purchased         securities     “pursuant       and/or        traceable     to”    a    public

offering can be sufficient if coupled with additional supportive

facts.      See Plumbers’ Union Local No. 12 Pension Fund v. Nomura

Asset      Acceptance        Corp.,    632     F.3d      762,    776     (1st     Cir.    2011)

(finding          the    terminology           sufficient         when       coupled      with

allegations that plaintiffs “‘acquired’” securities “‘from’” the

defendants and that the defendants “‘promoted and sold’” the

securities to the plaintiffs).

       We    agree      that   using     the    “pursuant        and/or      traceable     to”

language--coupled            with     sufficient         supporting       facts--can       give

                                               53
rise    to     a      plausible          inference       of     standing       in     certain

circumstances.            Here, however, we find the amended complaint and

confirmation slip insufficient to make plaintiffs’ allegations

of standing plausible.                  Though not dispositive, the plaintiffs’

coy choice of words gives us some pause.                        And we do not find the

additional supporting facts sufficient to push the claim into

the realm of plausibility.

       To be sure, the amended complaint alleges a number of facts

consistent         with    the     possibility       that     Dammeyer      purchased      his

shares directly in the SPO.                    For example, the complaint alleges

that Dammeyer purchased 600 common shares of MuniMae stock on

February 3, 2005, and, according to the amended complaint, the

SPO    occurred       “[o]n       or    about    February       2,    2005,”       J.A.    233.

Although these dates of purchase are close, they do not directly

coincide.

       More    helpful       to    plaintiffs,       the      confirmation     slip       shows

that the settlement date for Dammeyer’s securities was February

8, see J.A. 1606, which coincides with the date the prospectus

supplement         states        that    SPO    shares      would     be   available       for

delivery,      see        J.A.    1557.        These     supporting        facts    are    not

irrelevant, but they are also not sufficient.                         Cf. In re Century

Aluminum, 729 F.3d at 1107-08 (finding similar evidence about

pricing      and    sale     dates      insufficient       in   the   context       of    § 11,

where standing requirements are more relaxed).

                                                54
      Plaintiffs emphasize the fact that the confirmation slip

bears      the    notation       “PROS     UNDER        SEP       COVER,”        which       means

prospectus       under    separate       cover.            See    J.A.        1606;    see     also

Gustafson,       513     U.S.     at     571        (“[T]he      liability           imposed    by

[§ 12(a)(2)]       cannot       attach    unless       there       is    an     obligation      to

distribute       the    prospectus       . . . .”).              However,       as    defendants

note, RBC is both a registered broker-dealer and an underwriter,

and   under      SEC     regulations,          it    may    have        had    to     deliver    a

prospectus       to    Dammeyer     in    either        capacity.              See    15   U.S.C.

§§ 77d(a)(3),          77e(b)     (prospectus          delivery          requirement);          17

C.F.R. § 230.174 (obligations of broker-dealers to comply with

prospectus delivery requirements).                     Without more, that notation

is merely consistent with the claim that Dammeyer purchased his

shares directly in the SPO. 13

      The    plausibility         of     the    claim       against       the        underwriter

defendants is even weaker.                 The confirmation slip provides no

support for the contention that Dammeyer purchased his shares

from Merrill Lynch.              With respect to RBC, the allegations are

not much better.          The attached confirmation slip bears the logo

      13
        We also note that the complaint alleges that the SPO
offered shares “priced at $26.51.”  J.A. 111.   But Dammeyer’s
purchase price was $26.32 per share.     J.A. 1606.   And, in
contrast to Plumbers’ Union, there are no allegations that
defendants specifically promoted the securities or solicited
Dammeyer’s purchase.

                                               55
of “RBC Dain Rauscher.”            However, RBC Capital Markets Corp. was

the     designated       underwriter   for       the    SPO.       See     J.A.     1590.

Dammeyer does not allege that these were the same entity as of

2005,      or   that   they   should   be    treated     as    such   for       liability

purposes.

      At best, the allegations are merely consistent with the

possibility that Dammeyer purchased his securities in the SPO.

The “pursuant and/or traceable to” language of the complaint is

conclusory,        and    the     confirmation         slip    does       not     provide

sufficient       “factual       enhancement”      to     support      a    “reasonable

inference that the defendant[s are] liable for the misconduct

alleged.”        See Iqbal, 556 U.S. at 678 (internal quotation marks

omitted).        In this circumstance, the complaint “stops short of

the line between possibility and plausibility.”                       See Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 556 (2007).                        Accordingly, we

agree with the district court that Dammeyer did not adequately

allege standing to bring a § 12(a)(2) claim. 14

      14
       Dammeyer also brings an SPO-based claim under § 15 of the
Securities Act, which imposes derivative liability on certain
“control persons” for primary violations of the Act.      See 15
U.S.C. § 77o.   We dismiss the § 15 claim because the complaint
fails to state a claim under the predicate Securities Act
provisions. See Greenhouse v. MCG Capital Corp., 392 F.3d 650,
656 n.7 (4th Cir. 2004).

                                            56
                             IV.

     For the foregoing reasons, we affirm the judgment of the

district court.

                                                     AFFIRMED

                             57