Court Opinion

ID: 9880966
Source: CourtListenerOpinion
Date Created: 2023-09-29 01:00:31.960816+00
Date Added: 2024-06-11T13:58:47.667429
License: Public Domain

RECOMMENDED FOR PUBLICATION
                                  Pursuant to Sixth Circuit I.O.P. 32.1(b)
                                         File Name: 23a0219p.06

                     UNITED STATES COURT OF APPEALS
                                     FOR THE SIXTH CIRCUIT

                                                               ┐
 TEAMSTERS LOCAL 237 WELFARE FUND, individually
                                                               │
 and on behalf of all others similarly situated,
                                                               │
                                      Plaintiff-Appellant,     │
                                                                >        No. 22-5981
                                                               │
        v.                                                     │
                                                               │
 SERVICEMASTER GLOBAL HOLDINGS, INC.; NIKHIL M.                │
 VARTY; ANTHONY D. DILUCENTE,                                  │
                           Defendants-Appellees.               │
                                                               ┘

Appeal from the United States District Court for the Western District of Tennessee at Memphis.
                 No. 2:20-cv-02553—S. Thomas Anderson, District Judge.

                                       Argued: July 20, 2023

                              Decided and Filed: September 28, 2023

                   Before: GILMAN, LARSEN, and NALBANDIAN, Circuit Judges.

                                        _________________

                                              COUNSEL

ARGUED: Douglas Wilens, ROBBINS GELLER RUDMAN & DOWD, LLP, Boca Raton,
Florida, for Appellant. Timothy E. Hoeffner, MCDERMOTT, WILL & EMERY LLP, New
York, New York, for Appellees. ON BRIEF: Douglas Wilens, ROBBINS GELLER
RUDMAN & DOWD, LLP, Boca Raton, Florida, Christopher M. Wood, ROBBINS GELLER
RUDMAN & DOWD, LLP, Nashville, Tennessee, for Appellant. Timothy E. Hoeffner, Jason
D. Gerstein, MCDERMOTT, WILL & EMERY LLP, New York, New York, S. Keenan Carter,
BUTLER SNOW LLP, Memphis, Tennessee, for Appellees.
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                             ServiceMaster Glob. Holdings, Inc., et al.

                                       _________________

                                            OPINION
                                       _________________

       RONALD LEE GILMAN, Circuit Judge. Pest-control company Terminix faced a “super
termite” crisis from 2018 to 2019 that predominately affected homeowners in the Mobile,
Alabama area. Teamsters Local 237 Welfare Fund (the Fund) alleges that Terminix’s parent
company, ServiceMaster Global Holdings, Inc. (ServiceMaster), its then-CEO Nikhil Varty, and
its then-CFO Anthony DiLucente (collectively, the Defendants), violated the federal securities
laws through a series of misrepresentations and omissions that understated ServiceMaster’s
liability for the resulting termite-damage claims, concealed the risk of such claims from
investors, and falsely touted the company’s customer-retention and growth efforts while
strategically using price increases to cause affected customers to drop their service contracts in
an attempt to limit its future liability. The Fund also claims that these actions and omissions
constituted a scheme to defraud ServiceMaster’s investors by inflating the company’s reported
financial results relative to its true financial condition. All of this allegedly caused a financial
loss to the Fund as an investor in ServiceMaster’s stock.

       In response, the Defendants moved to dismiss the lawsuit for failure to state a claim. The
district court concluded that, although the Fund had alleged two potentially actionable
misstatements and omissions, it had failed to plead a strong inference that the Defendants had
acted with the scienter required by the Private Securities Litigation Reform Act of 1995
(PSLRA), 109 Stat. 737, Pub. L. No. 104-67. Accordingly, the court dismissed the case. For the
reasons set forth below, we AFFIRM the judgment of the district court.

                                       I. BACKGROUND

A.     Factual background

       This case concerns ServiceMaster’s response to a termite crisis and its disclosures and
public statements between February 26, 2019 and November 4, 2019 (the Class Period).
ServiceMaster’s largest and most important subsidiary, Terminix, provides residential and
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                              ServiceMaster Glob. Holdings, Inc., et al.

commercial pest-control services throughout the United States.         During the Class Period,
Terminix accounted for approximately 87% of ServiceMaster’s revenues and almost 80% of its
earnings before interest, taxes, depreciation, and amortization (EBITDA). (EBITDA is a
standardized measure of a company’s profitability.) The vast majority of Terminix’s revenue
comes from annual service contracts, under which Terminix regularly inspects its customers’
property for signs of a termite infestation. If termites are discovered, then Terminix’s service
contracts obligate the company to exterminate the termites, repair any damage to the property,
and provide further treatment.

          In the years preceding the Class Period, ServiceMaster’s revenue growth and EBITDA
had been declining. To turn things around, ServiceMaster hired new executive leadership in
2017, including the individual Defendants Varty and DiLucente. DiLucente acknowledged
ServiceMaster’s recent poor results at its Analyst Day, blaming the poor results on an over-
emphasis on “short-term profitability.” He announced a strategy to improve Terminix’s (and
therefore ServiceMaster’s) business results by emphasizing “long-term sustainable organic
growth through outstanding customer service” within Terminix.                In explaining how
ServiceMaster aimed to “deliver consistently strong revenue and earnings growth,” Varty
informed investors in a quarterly presentation that, “[a]t Terminix, we are taking a disciplined
approach to executing a series of systematic transformational activities to significantly upgrade
the customer experience, improve our customer retention rates and profitably grow our market
share.”

          Varty and DiLucente appeared to have Terminix heading in the right direction by the next
year.     During a presentation given to financial analysts, Varty and DiLucente described
Terminix’s “transformation efforts [as] on track” and “bearing fruit.” And DiLucente focused
attention on Terminix’s reported growth, commenting that “in the third quarter of 2018, we
delivered 7.8% growth in the residential pest control segment.” On the first day of the Class
Period, February 26, 2019, Varty told investors that Terminix’s transformation efforts had
resulted in “record revenue” and that the company was continuing to “tak[e] the necessary steps
to create a long-term sustainable business model that will [generate] consistent growth.”
ServiceMaster’s quarterly reporting of its financial and business results remained almost
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                             ServiceMaster Glob. Holdings, Inc., et al.

uniformly positive through the first two quarters of 2019 and reflected Varty’s and DiLucente’s
focus on transforming Terminix by emphasizing growth, sustainable business practices, and
customer service.

       Meanwhile, however, a serious termite infestation had taken hold in parts of the
southeastern United States. The Formosan “super termite” thrives in the warm, humid climates
found on the Gulf Coast. They infest properties by constructing both above-ground nests inside
buildings and large subterranean nests. Formosan termites are aggressive, reproduce quickly,
and can cause extensive damage.

       The Fund alleges that Terminix’s monitoring and treatment of Formosan termite activity
was inadequate. Before and during the Class Period, Terminix purportedly did not perform
adequate termite inspections, undertreated properties that showed signs of infestation, and failed
to conduct appropriate follow-up inspections or retreatment, allowing Formosan infestations to
take hold and spread unabated. The hardest hit area was Mobile, Alabama. A number of
Terminix customers in that area experienced substantial property damage and brought claims
under their service contracts.

       According to the Fund, “Terminix took a hard line in resolving [the resulting] termite
damage claims, routinely refusing to pay valid claims, making lowball settlement offers, and
otherwise forcing customers to pursue legal remedies to obtain relief for their termite-damaged
homes.” Terminix found itself on the losing end of a series of termite-damage-claim disputes
and, “from 2018 to 2020, Terminix was routinely ordered to pay millions of dollars to its
customers after being found liable in recurring private arbitrations.” The Fund points to several
arbitration awards against Terminix during this time period that exceed $1 million, the largest of
which totaled about $3.8 million.

       In addition to refusing to pay meritorious claims, Terminix took other steps purportedly
aimed at insulating itself from financial exposure to the Formosan termite crisis. The company
allegedly attempted to cause existing at-risk customers to abandon their annual contracts by
raising premiums in 2018, in some cases by more than 1,000%. For those customers who did
renew their contracts, Terminix restricted the coverage and benefits that they received. The Fund
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                             ServiceMaster Glob. Holdings, Inc., et al.

also claims that Terminix adopted a policy to appeal any arbitration award over $1 million,
regardless of the merits, in order to delay payment.

       State regulators took notice and, in February 2019, the Attorney General of Alabama
commenced an investigation into Terminix’s business practices. The investigation ultimately
found that Terminix had “failed to deliver or provide the termite protection services” promised
to Alabama customers, and concluded that Terminix’s “exorbitantly high annual renewal
increases of up to 1,000 percent,” were “intended to force customers to cancel their lifetime
protection contracts or to accept new Terminix contracts that provided less benefits than
consumers’ existing lifetime contracts.” Terminix ultimately settled with the Attorney General
for $60 million, although this settlement was not reached until November 5, 2020, a full year
after the end of the Class Period.

       ServiceMaster made periodic disclosures throughout the Class Period regarding its
financial exposure to Formosan termite-damage claims. On February 26, 2019, the first day of
the Class Period, ServiceMaster reported its financial results for the fourth quarter of 2018.
DiLucente acknowledged that, among the “other cost drivers in the [fourth] quarter [of 2018],”
was a “$2 million . . . damage claims expense increase, predominantly related to activity in a
section of the Gulf Coast.” On August 6, 2019, while reporting its financial results for the
second quarter of 2019, ServiceMaster disclosed another $2 million “in increased damage claims
expense primarily due to activity in the Gulf Coast region.” Across the same time period,
however, ServiceMaster’s quarterly and annual SEC filings, which provided information
regarding ServiceMaster’s accounting for termite-damage-claim accruals, stated that there were
“no changes in the significant areas that require estimates or in the underlying methodologies
used in determining the amounts of these associated estimates.” The company’s annual 10-K
filing on March 1, 2019 and its quarterly 10-Q filings on May 8, 2019 and August 6, 2019 all
contained the following statement:

       Termite damage claim accruals in the Terminix business are recorded based on
       both the historical rates of claims incurred within a contract year and the cost per
       claim. Current activity could differ causing a change in estimates. We have
       certain liabilities with respect to existing or potential claims, lawsuits, and other
       proceedings. We accrue for these liabilities when it is probable that future costs
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                              ServiceMaster Glob. Holdings, Inc., et al.

       will be incurred and such costs can be reasonably estimated. Any resulting
       adjustments, which could be material, are recorded in the period the adjustments
       are identified.

       The true scope of the termite-damage claims came into focus when ServiceMaster
released its financial results for the third quarter of 2019. On October 22, 2019, ServiceMaster
announced that it had generated a net income of only $25 million during the third quarter of
2019, 65% less than in the previous year. ServiceMaster also revised its projected full-year
EBITDA range to $415–$425 million, a downward adjustment of $20 million that included a
“$10 million reduction from the impact of termite damage claims” and “$10 million from
targeted revenue reductions principally in the Mobile, Alabama area.”        The October 2019
announcement blamed the poor results on “termite damage claims arising primarily from
Formosan termite activity,” and explained that

       [t]ermite damage claims can take years to fully settle, and timing can be difficult
       to forecast. Assuming the continuation of recent trends, the company expects
       higher claims costs to continue in the short-term due to increased claims activity.
       Formosan termite activity has been increasing over the last few years, however
       due to a number of climatic and environmental factors it remains largely
       concentrated in the Mobile, Alabama area of the country, which represents less
       than one percent of Terminix revenue. Starting in 2018, the company initiated
       mitigating actions to limit our future exposure, including third party claims
       management, reinforcement of effective processes, improved documentation, and
       a change in pricing structure.

       ServiceMaster published its final report of third-quarter results on November 5, 2019, and
held a conference call to discuss this “challenging quarter” with investors and analysts. During
the call, Varty elaborated that,

       [i]n the past few years, we have seen an increase in the number and average cost
       of termite damage claims in the Mobile, Alabama area related to Formosan
       termite activity. We also have seen an increase in the number of termite damage
       claims in that region that involve litigation. These [two] trends have increased
       our termite damage claims cost as a percentage of termite revenue to between 7%
       and 8%.

       The price of ServiceMaster’s stock dropped by almost 40% from its trading high during
the Class Period following these disclosures. Varty resigned two months later and, in December
2020, Terminix announced that DiLucente would retire.
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                               ServiceMaster Glob. Holdings, Inc., et al.

B.      The complaint

        After the initial complaint was filed, the district court appointed the Fund as the lead
plaintiff and gave it the opportunity to amend its complaint. The operative Amended Complaint
alleges securities-fraud claims “on behalf of all purchasers of ServiceMaster . . . common stock
between February 26, 2019 and November 4, 2019.” Count I alleges that ServiceMaster violated
Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b),
and Rule 10b-5, 17 C.F.R. § 240.10b-5, by engaging in a series of misrepresentations and
omissions that (1) falsely touted efforts to improve Terminix’s growth and profitability, while in
reality customers were being strategically pushed away; (2) understated accruals associated with
ServiceMaster’s liability for termite-damage claims; and (3) concealed the risk of future
liabilities for such claims.

        In addition to these claims of misrepresentation and omission under Rule 10b-5(b), the
Fund alleges in Count I that the Defendants violated Rule 10b-5(a) and (c) by engaging in a
fraudulent scheme to mislead investors about the true state of Terminix’s business, understating
the accruals associated with termite-damage claims, and overstating ServiceMaster’s earnings.
Count II, on the other hand, alleges that the individual Defendants Varty and DiLucente are
liable as “control persons” pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

C.      Procedural history

        The Defendants moved to dismiss the Amended Complaint under Rule 12(b)(6) of the
Federal Rules of Civil Procedure. In considering the Defendants’ motion, the district court noted
that a significant portion of the Amended Complaint was devoted to contrasting ServiceMaster’s
public statements that reported increased revenues and emphasized its efforts to transform
Terminix by “[i]mprov[ing] customer retention and price realization [to drive] growth” with the
alleged reality that Terminix faced enormous potential liability associated with termite-damage
claims and was actively seeking to drive its at-risk customers away in an attempt to limit its
liability. The court concluded that such statements were not actionable because they were
“generalized statements of optimism that are not capable of objective verification.” Nor had the
Fund alleged, according to the court, “how any of the hard information [in these statements], for
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                              ServiceMaster Glob. Holdings, Inc., et al.

example, the company’s calculated growth rate for the quarter or the growth reported for Q4
2018 relative to the company’s growth in recent quarters, was misleading.” Because the Fund
does not dispute these rulings on appeal, we have no reason to further discuss the challenged
statements that fall into this category.

        The district court found, however, that two statements could potentially form the basis of
a Rule 10b-5(b) misrepresentation-or-omission claim:         (1) the nondisclosure of increasing
liability for termite-damage claims in SEC filings, and (2) DiLucente’s attribution during a May
7, 2019 earnings conference call of ServiceMaster’s increasing pest-control pricing to favorable
market conditions, which allegedly was actually due a strategic effort to cause affected
customers to drop their service contracts.

        According to the district court, ServiceMaster’s reports in 2019 “that ‘there were no
changes in the significant areas that require estimates[,]’ including termite damage claims, even
though Defendants had known or should have known about the unfavorable trend of growing
legal liabilities by that time,” “omitted facts [that] would have been material to a reasonable
investor reviewing the disclosures during the Class Period.” Moreover, the court held that this
omission violated Item 303 of the SEC’s disclosure rules, 17 C.F.R. § 229.303, which mandates
that issuers discuss material adverse trends that will negatively impact net sales or income from
continuing operations. The court also considered DiLucente’s comment about price increases
plausibly misleading because “he likely had additional information about the reasons for the
price increases.”

        Notwithstanding the district court’s conclusion that the Fund had alleged two potentially
actionable misstatements, the court went on to find that the Fund had failed to plead a strong
inference of scienter because the Fund’s allegations were “just as consistent with [a] more
plausible, non-culpable inference.” The court therefore dismissed the Fund’s Rule 10b-5(b)
misrepresentation-and-omission claims. But because the Defendants had not addressed scheme
liability in their motion to dismiss, the court declined at that juncture to extend its ruling to the
Fund’s Rule 10b-5(a) and (c) scheme-liability claims.
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                              ServiceMaster Glob. Holdings, Inc., et al.

       The Defendants subsequently moved for judgment on the pleadings under Rule 12(c) of
the Federal Rules of Civil Procedure to dismiss the remaining claims. Because the district court
concluded that the Fund’s scheme-liability claim relied on the same allegations and factual
circumstances underlying its misrepresentation-and-omission claims, it found “no reason to
deviate from its previous order holding that the Amended Complaint [had] failed to satisfy the
PSLRA’s heightened” scienter pleading requirements.

       Judgment was entered in favor of ServiceMaster after all of the Fund’s claims had been
dismissed. This timely appeal followed. On appeal, the only question raised is whether the
district court correctly determined that the Fund failed to allege a strong inference of scienter.

                                          II. ANALYSIS

A.     Standard of review

       We review de novo the district court’s dismissal of a complaint for failure to state a claim
under Rule 12(b)(6) of the Federal Rules of Civil Procedure. City of Taylor Gen. Emps. Ret. Sys.
v. Astec Indus., Inc., 29 F.4th 802, 809 (6th Cir. 2022). All allegations of material fact are
accepted as true and construed in the light most favorable to the nonmoving party. Id. Likewise,
“[t]he district court’s decision regarding a motion for judgment on the pleadings pursuant to
Federal Rule of Civil Procedure 12(c) is analyzed using the same de novo standard of review
employed for a motion to dismiss under Rule 12(b)(6).” Tucker v. Middleburg-Legacy Place,
LLC, 539 F.3d 545, 549 (6th Cir. 2008). “For purposes of a motion for judgment on the
pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be
taken as true, and the motion may be granted only if the moving party is nevertheless clearly
entitled to judgment.” Id. (quoting JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581
(6th Cir. 2007)).

B.     Pleading standard

       Ordinarily, “a complaint must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’ A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the defendant is
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                              ServiceMaster Glob. Holdings, Inc., et al.

liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citation
omitted) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570 (2007)).

       The PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure, however, impose a
heightened pleading standard on the Fund’s securities-fraud claims.           Congress enacted the
PSLRA as a check against abusive litigation that can impose “substantial costs on companies and
individuals whose conduct conforms to the law.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 313 (2007). The PSLRA requires plaintiffs to “‘specify each statement alleged to
have been misleading’ along with ‘the reason or reasons why the statement is misleading,’” and
to “state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind.” Dougherty v. Esperion Therapeutics, Inc., 905 F.3d 971, 978 (6th Cir.
2018) (quoting Ind. State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund
v. Omnicare, Inc., 583 F.3d 935, 942 (6th Cir. 2009)); accord Astec, 29 F.4th at 810. Rule 9(b)
also requires a plaintiff to “state with particularity the circumstances constituting fraud or
mistake.” Fed. R. Civ. P. 9(b). To satisfy Rule 9(b), “a plaintiff’s complaint must ‘(1) specify
the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where
and when the statements were made, and (4) explain why the statements were fraudulent.’”
Astec, 29 F.4th at 810 (quoting La. Sch. Emps. Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471,
478 (6th Cir. 2010)).

C.     Exchange Act § 10(b) and SEC Rule 10b-5 claims

       Section 10(b) of the Exchange Act makes it unlawful for “any person . . . [t]o use or
employ, in connection with the purchase or sale of any security registered on a national securities
exchange . . . , any manipulative or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.” 15 U.S.C. § 78j(b). “SEC Rule 10b-5 implements
this provision by making it unlawful to, among other things, ‘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
light of the circumstances under which they were made, not misleading.’” Matrixx Initiatives,
Inc. v. Siracusano, 563 U.S. 27, 37 (2011) (quoting 17 C.F.R. § 240.10b-5(b)). To state a claim
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                             ServiceMaster Glob. Holdings, Inc., et al.

under § 10(b), a plaintiff must plead with particularity 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.” Stoneridge Inv.
Partners, LLC v. Sci-Atlanta, Inc., 552 U.S. 148, 157 (2008); accord In re Omnicare, Inc. Sec.
Litig., 769 F.3d 455, 469 (6th Cir 2014).

D.     Scheme-liability claims

       Rule 10b-5 also prohibits any person from “employ[ing] any device, scheme, or artifice
to defraud” or “engag[ing] in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase or sale of any
security.” 17 C.F.R. § 240.10b-5(a), (c). “Rules 10b–5(a) and (c) encompass conduct beyond
disclosure violations.” Benzon v. Morgan Stanley Distribs., Inc., 420 F.3d 598, 610 (6th Cir.
2005). A scheme-liability claim is therefore different and separate from a nondisclosure claim.
SEC v. Rio Tinto PLC, 41 F.4th 47, 49, 53 (2d Cir. 2022); but see Lorenzo v. SEC, 139 S. Ct.
1094, 1102 (2019) (recognizing the “considerable overlap among the subsections of [Rule 10b-5]
and related provisions of the securities laws”).

       Our court has not defined the elements required to state a claim for scheme liability under
Rules 10b-5(a) and (c). See Benzon, 420 F.3d at 611 (noting that “there is very little case law
explaining more specifically what types of claims are actionable under these provisions”). But
the Second Circuit has: “To state a scheme liability claim, a plaintiff must show: ‘(1) that the
defendant committed a deceptive or manipulative act, (2) in furtherance of the alleged scheme to
defraud, (3) with scienter, and (4) reliance.’” Plumber & Steamfitters Local 773 Pension Fund
v. Danske Bank A/S, 11 F.4th 90, 105 (2d Cir. 2021) (quoting In re Mindbody, Inc. Sec. Litig.,
489 F. Supp. 3d 188, 216 (S.D.N.Y. 2020)).

E.     Scienter

       Scienter is the only disputed element in this appeal, and it is a required element for all of
the Fund’s claims. The PSLRA requires that plaintiffs “state with particularity facts giving rise
to a strong inference that the defendant acted with the required state of mind.” Tellabs, Inc.
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                               ServiceMaster Glob. Holdings, Inc., et al.

v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007) (emphasis added) (quoting 15 U.S.C.
§ 78u-4(b)(2)). The Supreme Court has made clear that “the inference of scienter must be more
than merely ‘reasonable’ or ‘permissible’—it must be cogent and compelling, [and] thus strong
in light of other explanations.” Id. at 324. Therefore, to determine “whether the pleaded facts
give rise to a ‘strong’ inference of scienter, the court must take into account plausible opposing
inferences.” Id. at 323. To pass muster, the inference of scienter must be “at least as compelling
as any opposing inference of nonfraudulent intent.” Doshi v. Gen. Cable Corp., 823 F.3d 1032,
1039 (6th Cir. 2016) (quoting Tellabs, 551 U.S. at 314).

        “[S]cienter can be established by either demonstrating a ‘knowing and deliberate intent to
manipulate, deceive, or defraud’ or ‘recklessness.’” City of Taylor Gen. Emps. Ret. Sys. v. Astec
Indus., Inc., 29 F.4th 802, 812 (6th Cir. 2022) (quoting Doshi, 823 F.3d at 1039). “Recklessness
is . . . highly unreasonable conduct which is an extreme departure from the standards of ordinary
care,” where the “danger . . . must at least be so obvious that any reasonable man would have
known of it.” Frank v. Dana Corp., 646 F.3d 954, 959 (6th Cir. 2011) (internal citations and
quotation marks omitted). It requires something more than negligence and is “akin to conscious
disregard,” and “typically require[s] multiple, obvious red flags, demonstrating an egregious
refusal to see the obvious, or to investigate the doubtful.” Doshi, 823 F. 3d at 1039 (internal
citations and quotation marks omitted).

        We consider “all the allegations holistically.” Tellabs, 551 U.S. at 322–23, 326 (“The
inquiry . . . is whether all of the facts alleged, taken collectively, give rise to a strong inference of
scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.”
(emphasis in original)). We do, however, “analyze scienter on a defendant-by-defendant basis.”
Astec, 29 F.4th at 813.       “As part of that analysis, we consult a non-exhaustive list of
considerations known as the Helwig factors,” factors that are “probative of securities fraud.”
Helwig, 251 F.3d at 552 (citing Doshi, 823 F.3d at 1039). They are as follows:

        (1) insider trading at a suspicious time or in an unusual amount;
        (2) divergence between internal reports and external statements on the same
            subject;
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                             ServiceMaster Glob. Holdings, Inc., et al.

       (3) closeness in time of an allegedly fraudulent statement or omission and the
           later disclosure of inconsistent information;
       (4) evidence of bribery by a top company official;
       (5) existence of an ancillary lawsuit charging fraud by a company and the
           company’s quick settlement of that suit;
       (6) disregard of the most current factual information before making statements;
       (7) disclosure of accounting information in such a way that its negative
           implications could only be understood by someone with a high degree of
           sophistication;
       (8) the personal interest of certain directors in not informing disinterested
           directors of an impending sale of stock; and
       (9) the self-interested motivation of defendants in the form of saving their salaries
           or jobs.

Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (en banc), abrogated on other grounds
by Tellabs, 551 U.S. at 317–18, 322–23. “The more of these factors that are present, the stronger
the inference that the defendant [acted] with the requisite state of mind.” In re Omnicare, Inc.
Sec. Litig., 769 F.3d 455, 473 (6th Cir. 2014).

F.     The district court correctly held that the Fund failed to plead a “strong inference of
       scienter”
       Considering all of the allegations holistically and applying the Helwig factors, we
conclude that the Amended Complaint fails to support a strong inference that the Defendants
acted with scienter.   Although the Fund has alleged a plausible inference of scienter, the
allegations are also consistent with a more plausible nonculpable inference. Accordingly, the
district court did not err by dismissing the Amended Complaint.

       1. Allegations relating to scienter

       The Amended Complaint’s basic proposition concerning scienter is that “[b]ecause of
their positions with the Company and their access to material nonpublic information available to
them but not to the public, [Varty and DiLucente] knew that the adverse facts [alleged in the
Amended Complaint] had not been disclosed to and were being concealed from the public and
that the positive representations being made were . . . materially false and misleading.” In
support of this basic proposition, the Amended Complaint’s key allegations can be summarized
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                             ServiceMaster Glob. Holdings, Inc., et al.

as follows:

       (1) The Defendants allegedly knew that Terminix was under-treating its
           customers’ properties, and that this would lead to an increased risk of termite
           damage.
       (2) The Defendants allegedly knew of Terminix’s growing liability for termite-
           damage claims because the company was involved in extensive litigation and
           was repeatedly subject to large arbitration awards for wrongfully denied
           claims. Moreover, Terminix’s attempts to delay payment of these claims and
           awards indicates awareness of the significant adverse impact they would have
           on the company.
       (3) According to the Fund, Terminix’s strategy to drive affected customers out of
           their service contracts further evinces that the Defendants were aware of the
           adverse financial liability represented by claims under the contracts.
       (4) The Formosan termite crisis and Terminix’s pricing strategy was purportedly
           discussed at steering-committee meetings attended by Varty (and presumably
           DiLucente, although the Amended Complaint does not specifically so allege).
       (5) The Fund points to the resignation of Varty shortly after the adverse
           disclosures as evidence of his scienter.

       In large part, the Fund bases its scienter allegations on the proffered testimony of four
confidential witnesses (referred to in the Amended Complaint as CWs 1–4). The information
provided in the Fund’s allegations concerning the jobs of each of these witnesses is sparse, and
the Fund does not attach to the Amended Complaint any affidavits or declarations from the
witnesses that would provide more detail or context to their proffered testimony. The sum total
of the Fund’s confidential-witness allegations is as follows:

       CW1: CW1 “worked at Terminix between 2017 and 2019 analyzing sales trends and
setting pricing,” including “analyzing customer claims for Formosan termite damage.” This
witness proffered that:

       (1) Terminix representatives “did a poor job of inspecting [] its customers’ homes
           and businesses.”
       (2) “[I]mmediately prior to the Class Period, Defendant Varty participated in
           weekly [Steering Committee] meetings” and other “‘leadership team’
           meetings” with other ServiceMaster executives, “during which the topics of
           Formosan termite damage claims and the [c]ompany’s mitigation efforts were
           routinely discussed.”
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                               ServiceMaster Glob. Holdings, Inc., et al.

       (3) Terminix “utilized . . . price increases in an effort to run its own customers off
           before the customers uncovered any Formosan damage and to cover the
           increasing litigation costs [that] the [c]ompany was incurring.” “Terminix
           anticipated that their price g[o]uging would lead more than 90% of at-risk
           customers to cancel their lifetime guarantee contracts.”
       (4) Termite-related “litigation claims were so overwhelming in Alabama that
           Terminix’s outside counsel had to work out a scheduling agreement limiting
           counsel to trying 26 cases a year so that it would have at least one week for
           preparation between trials.”

       CW2: CW2 “worked at ServiceMaster and Terminix between 2005 and 2019 in various
positions relating to customer marketing and retention.” This witness proffered that:

       (1) Prior to the Class Period, “Terminix’s problems with the Formosan termite
           were routinely discussed” at Steering Committee meetings, which CW2
           attended.
       (2) Terminix “utilized . . . price increases in an effort to run its own customers off
           before the customers uncovered any Formosan damage and to cover the
           increasing litigation costs [that] the Company was incurring.”
       (3) The president of Terminix Residential, Matt Stevenson, “reviewed and signed
           off on all the marketing materials associated with the price changes.”

       CW3: CW3 was “a former Terminix [] sales manager working in Mobile, Alabama.”
This witness proffered that:

       (1) “Stevenson had to approve every claim over $50,000. . . . [N]early 100% of
           the claims for $50,000 or more were coming out of Mobile, Alabama.”

       CW4: CW4 was “a Mobile, Alabama branch manager from 2009 to 2018.” This witness
proffered that:

       (1) “[A] random sample of customer contracts in CW4’s branch revealed that
           40% of properties had not been treated properly or at all in the years leading
           up to the Class Period.”
       (2) “Terminix consistently undertreated properties in Mobile, Alabama. For
           example, if a property should have been treated with 600 gallons of pesticide,
           Terminix cut costs and may have only used 100 gallons.”

       The gravamen of all these allegations, according to the Fund, is that the “Defendants
were aware or reckless in not knowing that their positive statements during the Class Period
regarding the purported success of ServiceMaster’s Terminix transformation, and operational
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                             ServiceMaster Glob. Holdings, Inc., et al.

and financial results and trends as a result of the ‘transformation’ efforts, were misleading and/or
lacked a reasonable basis.” Furthermore, the Fund argues that “Defendants were aware or
reckless in not knowing that their reported EBITDA was inflated as they materially understated
the accrual associated with the actual claims that had been made by customers due to the
Formosan scheme, and the risk of future claims related to it.”

       2. The Fund’s scienter allegations do not support an inference of scienter that
          is at least as compelling as any opposing inference of nonfraudulent intent
       The Fund argues that “the district court erred by failing to consider the Amended
Complaint’s scienter allegations ‘collectively’ and ‘holistically.’”       But the district court’s
evaluation of the competing inferences that can be drawn from the Fund’s allegations of scienter
belies this contention. The court conceded that the Fund’s “allegations can be read to plausibly
suggest that Defendants knew they had a problem in Alabama and then misled investors about
the extent of the problem, touting their plans for a transformation of the Terminix business as a
shield to hide the Formosan termite issues.” As recognized by the court, however, the opposing
inference is more plausible: namely, that the “Defendants had developed what they thought was
a solution to larger problems at Terminix, problems that manifested themselves in the Formosan
termite claims in Alabama, and that Defendants disclosed the existence of the problem once it
was confronted with significant arbitration awards with reasonable promptness.” See In re Gen.
Elec. Sec. Litig., 844 F. App’x 385, 389 (2d Cir. 2021) (“[T]he allegations . . . are consistent with
the more plausible, non-culpable inference that, before [serious problems arose, the company]
had developed what it believed was a workable solution to the . . . issue—a solution that would
not adversely affect the [company’s] finances in a material way, and that [the company] revised
its assessment of the issue and its solution when confronted with [serious problems], and
disclosed the financial consequences with reasonable promptness.”) We find the district court’s
assessment persuasive.

           a. Nondisclosure of the upward trend in termite-damage claims

       The Fund’s allegations do not support a strong inference of scienter regarding the alleged
omission of an upward trend in termite-damage claims in ServiceMaster’s SEC filings.
Crucially, as the district court recognized, the company “acknowledged the existence of termite
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                             ServiceMaster Glob. Holdings, Inc., et al.

damage claims, though in a general way and without specific reference to any particular hot
spot.” ServiceMaster disclosed a total of $4 million in increased liability for termite-damage
claims in two different quarterly reports issued over the eight-month-long Class Period. The
court further noted that, “[e]ven though the full extent of the termite damage claims did not come
to light until October 2019, the[se] disclosures made at earlier times during the Class Period
acknowledged the existence of termite damage claims and the steps the company was
taking through accruals to prepare for possible liabilities.” See In re Gen. Elec., 844 F. App’x at
388–89 (“[E]ven assuming that some of [the company’s] statements were misleading, these
statements did not amount to a ‘sufficiently extreme departure from the standards of ordinary
care’ to support an inference of recklessness,” especially because “[t]he challenged statements
were made in the context of [the company’s] ongoing disclosures about the . . . problem.”
(quoting Setzer v. Omega Healthcare Invs., 968 F.3d 204, 215 (2d Cir. 2020)).

       And unlike the defendant CEO in City of Taylor General Employees Retirement System
v. Astec Industries, Inc, 29 F.4th 802 (6th Cir. 2022), whom this court found acted with scienter
because the allegations established that he publicly contradicted the most current information
available to him, including two specific internal reports, ServiceMaster’s disclosures of
increasing liability for termite-damage claims were not flatly contradictory to the true state of
affairs at the company. See id. at 813–14. The Fund, moreover, has not alleged any details
about ServiceMaster’s internal assessment of the financial impact of the termite crisis beyond the
basic fact that the crisis and a response were discussed. And even if ServiceMaster’s disclosures
misstated the extent of its liability, nothing in the Amended Complaint explains how (if at all)
the company assessed what effect the termite crisis in Mobile, Alabama would have on the
overall financial condition of ServiceMaster. See Doshi v. Gen. Cable Corp., 823 F.3d 1032,
1042 (6th Cir. 2016) (discounting the importance of internal data pertaining to “only a part” of a
company that contradicted a company’s public statements of “its firm-wide financial data,”
(emphasis in original) (citing Omnicare, 769 F.3d at 484, as “determining that the disparity
between the levels of generality at which the internal reports and external statements were
framed” lessened the importance of the divergence for the purposes of scienter (internal
quotation marks omitted)).
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                             ServiceMaster Glob. Holdings, Inc., et al.

       The Fund relies heavily on the idea that the high volume of litigation faced by
ServiceMaster should have alerted the Defendants to the need to disclose more about the
financial risks posed by the termite-damage claims. But the Amended Complaint provides little
detail about when these awards became final, or how the disclosures about termite-claim liability
that the Defendants did make were not adequate at the time that they were made.                  The
Defendants correctly point out that the Fund’s attempt to remedy this deficiency with a
declaration submitted to the district court in opposition to the Defendants’ motion for judgment
on the pleadings is improper. See Bates v. Green Farms Condo. Ass’n, 958 F.3d 470, 483 (6th
Cir. 2020) (“Plaintiffs cannot . . . amend their complaint in an opposition brief or ask the court to
consider new allegations (or evidence) not contained in the complaint.”).

       Nor is the existence of a pending government investigation sufficient to give rise to a
strong inference of scienter. See Konkol v. Diebold, Inc., 590 F.3d 390, 402 (6th Cir. 2009),
abrogated on other grounds by Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48–49
(2011). The Alabama Attorney General’s investigation had begun during the Class Period, but it
was far from over even by the end of the Class Period.

       The Fund’s allegations concerning the “mitigating efforts” that ServiceMaster took to
insulate itself from financial exposure—namely its plan to drive customers to cancel their
contracts   by   significantly   raising   premiums—provide       the   strongest    evidence    that
ServiceMaster’s executive leadership knew that the volume of termite-damage claims in Mobile,
Alabama would be large enough to negatively impact the company, at least if nothing was done
to soften the blow. But even these allegations do not make the inference that the Defendants
acted with scienter as strong as the competing nonfraudulent explanation that the Defendants
thought that their mitigation efforts would help Terminix limit the damage.            After all, as
recognized by the Fund itself, Terminix thought that it could get “more than 90% of at-risk
customers to cancel their lifetime guarantee contracts.”

       Far fewer customers ultimately cancelled their contracts than the Defendants had hoped,
but their belief that the strategy would be more effective helps to explain why their disclosures
through the first three quarters of 2019 did not warn of increasing claims. See In re Gen. Elec.
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                             ServiceMaster Glob. Holdings, Inc., et al.

Sec. Litig., 844 F. App’x 385, 388–89 (2d Cir. 2021) (holding that there was not a strong
inference of scienter when allegedly misleading disclosures came in the midst of the company’s
ongoing efforts to fix a problem). Perhaps such disclosures would have been prudent, but the
decision not to make them is hardly an “extreme departure from the standards of ordinary care.”
See Frank v. Dana Corp., 646 F.3d 954, 959 (6th Cir. 2011) (quoting PR Diamonds, Inc.
v. Chandler, 364 F.3d 671, 681 (6th Cir. 2004)).

       None of the Fund’s other allegations help to establish a strong inference of scienter. To
the extent that allegations claiming that a named defendant was “intimately aware” of
information underlying misleading disclosures can support a strong inference of scienter, see,
e.g., City of Taylor Gen. Emps. Ret. Sys. v. Astec Indus., Inc., 29 F.4th 802, 813 (6th Cir. 2022),
there is little in the way of comparable allegations here. Scienter is not to be inferred simply by
virtue of Varty’s and DiLucente’s senior positions within ServiceMaster; instead, the Fund “must
allege specific facts or circumstances suggestive of their knowledge.” See PR Diamonds, 364
F.3d at 687–88, 693–94, abrogated in part on other grounds by Frank, 646 F.3d at 961.

       Nor does the Amended Complaint offer anything more than vague assertions that issues
relating to the Formosan termite crisis were discussed amongst ServiceMaster executives.
Completely absent is any detail about exactly what was discussed, whether or not the extent of
the problem or liability for possible claims were discussed, whether the possible impact on
ServiceMaster’s financial results was raised, or specifically when the alleged discussions
occurred (apart from the vague timeframe of “before the Class Period”).                Without this
information, the “mere attendance at meetings” where the Formosan termite crisis was discussed
does little to establish the kind of “red flags” necessary to support a strong inference of scienter.
See Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1239–43, 1246 (10th Cir.
2016) (“[G]eneralized descriptions of internal meetings . . . do not contribute to a cogent,
compelling inference of scienter,” especially where the “plaintiffs do not identify any
particularized account showing [what] executives knew during the class period.”). Furthermore,
“the fact that executives are intimately familiar with a core component of their business does
little to suggest fraudulent intent.” Pittman v. Unum Grp., 861 F. App’x 51, 55 (6th Cir. 2021).
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                              ServiceMaster Glob. Holdings, Inc., et al.

        This court’s decision in City of Taylor General Employees Retirement System v. Astec
Industries, Inc., 29 F.4th 802 (6th Cir. 2022), is instructive. To paraphrase the ruling in that
case, “[a]lthough [Varty and DiLucente] likely could have done more to verify the [information
that ServiceMaster released], that failure indicates negligence at most” for the reasons expressed
above. See id. at 816 (citing Doshi v. Gen. Cable Corp., 823 F.3d 1032, 1039 (6th Cir. 2016)).
Nor does the timing of their departures support a strong inference of scienter. See Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 1002 (9th Cir. 2009) (holding that “[m]ere
conclusory allegations” about the resignations of company executives did not, without more,
give rise to a strong inference of scienter).

        The Fund has likewise failed to plead a strong inference of scienter against ServiceMaster
itself. In this circuit,

        [t]he state(s) of mind of any of the following are probative for purposes of
        determining whether a misrepresentation made by a corporation was made by it
        with the requisite scienter under Section 10(b):
        a. The individual agent who uttered or issued the misrepresentation;
        b. Any individual agent who authorized, requested, commanded, furnished
           information for, prepared (including suggesting or contributing language for
           inclusion therein or omission therefrom), reviewed, or approved the statement
           in which the misrepresentation was made before its utterance or issuance;
        c. Any high managerial agent or member of the board of directors who ratified,
           recklessly disregarded, or tolerated the misrepresentation after its utterance or
           issuance . . . .

In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 476 (6th Cir. 2014) (alteration omitted) (citation
omitted).    Varty and DiLucente lack scienter for the reasons articulated above.         And the
Amended Complaint features almost no allegations about anyone else who played a role in
formulating the disclosures at issue in this case, let alone that they knew anything about their
truthfulness. See id. at 483 (holding that any purported knowledge on the part of executives not
alleged to have participated in formulating the challenged statements cannot support scienter).

        When considered holistically, the “facts in this case are more consistent with a company
playing ‘a constant game of catch-up than with fraud.’”           See Pittman, 861 F. App’x at
57 (quoting Sjunde AP-Fonden v. Gen. Elec. Co., 417 F. Supp. 3d 379, 399 (S.D.N.Y. 2019)).
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                             ServiceMaster Glob. Holdings, Inc., et al.

Varty’s and DiLucente’s strategy to insulate ServiceMaster from excessive exposure to
termite-damage claims was not as effective as they had hoped it would be. But during the class
period, they disclosed that ServiceMaster faced millions in liability for termite-damage claims
and told investors that the company’s accounting practice was to accrue liability for termite-
damage claims “when it is probable that future costs will be incurred and such costs can be
reasonably estimated.” Without more information about what the ServiceMaster executives
knew and when they knew it, the Fund has not supported an inference of scienter that is at least
as strong as this nonfraudulent inference.

           b. DiLucente’s comments on Terminix’s increased pricing

       Nor has the Fund alleged a strong inference of scienter with regard to DiLucente’s
comments attributing Terminix’s increased pricing to improvements in the market. During a
conference call discussing ServiceMaster’s financial results for the first quarter of 2019, an
analyst posed the following question to DiLucente:

       [I]n your prepared remarks, I heard you mention termite pricing a couple of times
       being better. That’s consistent with some of the survey work that we’ve done
       recently on the pest control market. Can you just talk about what’s driving the
       better pricing? Is that just Terminix kind of going out and getting what it feels it
       deserves, where it’s been lacking? Or do you feel just like the market is
       supportive of better pricing? Could you just sort of frame what’s driving the
       better pricing? Because that’s something that we’re definitely seeing in our
       survey work.

DiLucente replied, in relevant part:

       I think the latter explanation you gave is really the best answer. The market can
       support relatively modest price increases year in, year out, and we typically
       have done that historically, and we did that this year as well. So if you think
       about – we bill out for these termite services, the increases per customer [are]
       relatively small and could be absorbed fairly easily.

       As the district court pointed out, DiLucente’s answer could be considered misleading
given what he knew about Terminix’s substantial price increases in Mobile, Alabama. But the
context of the question and answer makes an innocent inference of DiLucente’s motivation for
making the statement far more likely. The analyst’s question inquired about general, nationwide
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                              ServiceMaster Glob. Holdings, Inc., et al.

trends, and even suggested that his own data indicated that the market supported price increases.
DiLucente answered in equally general terms, speaking to a nationwide trend. And nothing in
the Fund’s allegations suggests that Terminix’s reported pricing improvements that quarter were
due solely to the substantial increases in Mobile, Alabama.

            c. The alleged fraudulent scheme

         The same analysis applies to the element of scienter for the Fund’s scheme-liability
claim.    Although scheme-liability claims under Rule 10b-5(a) and (c) are separate from
misrepresentation-and-omission claims under Rule 10b-5(b), the Fund relies on the same factual
circumstances to make out both claims in this case. The Fund’s showing of scienter is therefore
no stronger with respect to the scheme-liability claim than it is for the Rule 10b-5 claim.

         3. Analysis of the Helwig factors does not support an inference of scienter

         Moreover, only three of the so-called Helwig factors are implicated by the allegations in
this case. See Helwig v. Vencor, Inc., 251 F.3d 540, 552 (6th Cir. 2001) (en banc), abrogated on
other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 317–18, 322–23
(2007). The Fund’s allegations relating to the “divergence between internal reports and external
statements on the same subject,” the second Helwig factor, do not provide support for a strong
inference of scienter. See id. Notably absent from the Amended Complaint is even a single
mention of any internal reports by ServiceMaster or Terminix (let alone internal reports
concerning the Formosan termite crisis). The closest the Fund comes to alleging anything
relevant to this factor is the confidential-witness testimony that Formosan termite-damage claims
and Terminix’s mitigation efforts were discussed at Steering Committee meetings where Varty
and DiLucente were present. Although “the contents of meetings at which senior corporate
officers were present [are considered] ‘internal reports,’” Dougherty v. Esperion Therapeutics,
Inc., 905 F.3d 971, 981 (6th Cir. 2018) (quoting City of Monroe Emps. Ret. Sys. v. Bridgestone
Corp., 399 F.3d 651, 688 (6th Cir. 2005)), the Amended Complaint offers no detail that allows
an assessment of whether ServiceMaster’s disclosures differed in any significant way from those
internal discussions.

         Nor does the Amended Complaint show “closeness in time of an allegedly fraudulent
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                             ServiceMaster Glob. Holdings, Inc., et al.

statement or omission and the later disclosure of inconsistent information,” the third Helwig
factor. See Helwig, 251 F.3d at 552. A “short turnaround ma[kes] it less likely that the
corporation did not know that its statement was misleading.” In re Omnicare, Inc. Sec. Litig.,
769 F.3d 455, 484 (6th Cir. 2014). Here, the allegedly inadequate disclosures occurred months
apart and followed ServiceMaster’s regular quarterly reporting schedule. See City of Monroe
Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 684, 688 (6th Cir. 2005) (finding
a one-week span between an allegedly fraudulent statement and a subsequent inconsistent
disclosure probative of scienter, but rejecting the same inference when confronted with a gap of
more than four months).

       The only other relevant Helwig factor is “disregard of the most current factual
information before making statements,” the sixth factor. See Helwig, 251 F.3d at 552. But for
the reasons discussed above, the factual information that the Defendants purportedly disregarded
is insufficient to make the inference of scienter more compelling than the competing
nonfraudulent explanation. The tenuous application of the second, third, and sixth Helwig
factors, together with the complete absence of the rest, supports the conclusion that the Fund
has not alleged a strong inference of scienter. See Doshi v. Gen. Cable Corp., 823 F.3d 1032,
1041–42 (6th Cir. 2016) (holding that there was no strong inference of scienter where seven
Helwig factors “favor[ed] rejecting a scienter inference” and only “[t]wo Helwig factors
support[ed] inferring scienter”).

                                      III. CONCLUSION

       For all of the reasons set forth above, we AFFIRM the judgment of the district court.