Court Opinion

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Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-17-1999

In Re: Advanta Corp
Precedential or Non-Precedential:

Docket 98-1846

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Recommended Citation
"In Re: Advanta Corp" (1999). 1999 Decisions. Paper 156.
http://digitalcommons.law.villanova.edu/thirdcircuit_1999/156

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Filed June 17, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-1846

IN RE: ADVANTA CORP. SECURITIES LITIGATION

       Steven B. Shaiman; Richard Molison;
       James Law; Saul A. Schwartz;* Diane Sklar;*
       Theresa Wai; Stephen Wai; Claude Wells;*
       Benjamin Axler; Marilyn Axler; Jerry Weinberg,
       Appellants

* (Pursuant to F.R.A.P. 12(a))

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
D.C. Civil Action No. 97-cv-04343
(Honorable Ronald L. Buckwalter)

Argued March 9, 1999

Before: MANSMANN, SCIRICA and NYGAARD,
Circuit Judges

(Filed June 17, 1999)

       ARTHUR R. MILLER, ESQUIRE
        (ARGUED)
       1545 Massachusetts Avenue
       Cambridge, Massachusetts 02138

       DEBORAH R. GROSS, ESQUIRE
       Law Offices of Bernard M. Gross
       1500 Walnut Street, 6th Floor
       Philadelphia, Pennsylvania 19102
       JOSHUA H. VINIK, ESQUIRE
       Milberg, Weiss, Bershad, Hynes &
        Lerach
       One Pennsylvania Plaza, 49th Floor
       New York, New York 10119

        Attorneys for Appellants

       JEROME J. SHESTACK, ESQUIRE
        (ARGUED)
       JAY A. DUBOW, ESQUIRE
       MATTHEW A. WHITE, ESQUIRE
       LAURA E. KRABILL, ESQUIRE
       Wolf, Block, Schorr & Solis-Cohen
       Packard Building, 12th Floor
       111 South 15th Street
       Philadelphia, Pennsylvania 19102

        Attorneys for Appellees,
        Advanta Corp., Dennis J. Alter,
        Alex Hart, William Rosoff, Gene S.
        Schneyer and John J. Calamari

       ARTHUR E. NEWBOLD, ESQUIRE
        (ARGUED)
       HOPE M. FREIWALD, ESQUIRE
       MICHAEL E. BAUGHMAN, ESQUIRE
       Dechert, Price & Rhoads
       4000 Bell Atlantic Tower
       1717 Arch Street
       Philadelphia, Pennsylvania 19103

        Attorneys for Appellees,
        Robert A. Marshall and Richard A.
        Greenawalt

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is a securities class action lawsuit brought by
shareholders of Advanta Corporation against the
corporation and several of its officers. Plaintiffs allege the
defendants made false and misleading statements and

                               2
material omissions regarding the company's earnings
potential and value of its stock, in violation of the Securities
and Exchange Act of 1934. The District Court granted
Advanta's motion to dismiss for failure to meet the pleading
requirements of Fed. R. Civ. P. 9(b) and the Private
Securities Litigation Reform Act of 1995, 15 U.S.C. S 78u-4
et seq. (West Supp. 1999) (the "Reform Act"). We will affirm.

BACKGROUND

Plaintiffs are former shareholders of Advanta Corporation
("Advanta"), a leading issuer of MasterCard and VISA credit
cards. Advanta forged its reputation in the credit card
industry by innovating the practice of attracting new
customers with unusually low introductory interest rates,
known as "teaser rates," which remain in effect for a limited
period of time, often six months. At the end of this period,
the interest rate returns to a higher, permanent level.
During the early and mid-1990s, Advanta used this
practice to achieve rapid growth and earn large profits.

The focus of this litigation concerns a $20 millionfirst-
quarter loss that Advanta announced on March 17, 1997.
According to plaintiffs' complaint, the loss was caused by
Advanta's decision to implement aggressive techniques to
attract new credit card customers. Specifically, plaintiffs
allege Advanta began issuing cards with lower teaser rates
and longer introductory periods than standard industry
practice, resulting in riskier customers and, ultimately, a
decrease in revenues as many of the new customers
defaulted on their repayment obligations. The increased
delinquency rates produced greater "charge-offs," which are
the costs incurred by the credit card company when a card
holder's balance becomes uncollectible.

Plaintiffs claim Advanta officers failed to disclose these
practices despite knowledge of the risks involved, even after
it became clear that losses were inevitable, and
simultaneously made various statements that allegedly
were false or materially misleading. Much of plaintiffs'
complaint focuses on a statement made by Janet Point,
Advanta's Vice President for Investor Relations, in a
September 12, 1996 Dow Jones article. The article reads in

                               3
part, "Over the next six months Advanta will experience a
large increase in revenues as it converts more than $5
billion in accounts that are now at teaser rates of about 7%
to its normal interest rate of about 17%, said Advanta
spokeswoman Janet Point." This statement ("the Point
statement") allegedly contradicts a subsequent statement
by Dennis Alter, Advanta's chairman and former CEO ("the
Alter statement"). In a June 1997 article entitled "House of
Cards" that appeared in Philadelphia Magazine, Alter was
quoted as saying: "[W]hat happened is when the
introductory period ended, we were probably not as
aggressive as we could have been [repricing our rates] . . . .
Instead of repricing to 18 percent we repriced closer to 13
or 14 percent in order to retain our image and the luster of
being a low-cost provider." Plaintiffs allege the Alter
statement proves the Point statement was false and
misleading, because the Point statement appears to
indicate that Advanta was planning to reprice its teaser
rates to 17 percent, yet the Alter statement apparently
reveals that Advanta repriced to only 13 or 14 percent.

In addition, plaintiffs identify various statements
portraying Advanta in what plaintiffs believe was an unduly
positive light. These "positive portrayals" include the
following statements, among others:

(1) Advanta's 1996 third-quarter report states in part:
"Our track record underscores our commitment to excel . . .
[Advanta is] a rapidly growing customer financial services
enterprise . . . . [D]espite challenging industry environment,
we are pleased to report that Advanta produced continued,
consistent earnings growth in the third quarter. . .. [F]or
the fifth consecutive year, return on equity has met or
exceeded the 25% level achieved this quarter."

(2) In a Form 10-Q filed on November 12, 1996, Advanta
stated: "The changes in the delinquency and charge-off
rates from year-to-year . . . reflect the trend in unsecured
credit quality which is being experienced throughout the
credit industry."

(3) Announcing a shareholder dividend on November 13,
1996, Advanta released a statement reading in part,"[T]his
dividend increase reflects management's confidence in the

                                4
company's earnings momentum and Advanta's continuing
commitment to enhancing shareholder value."

(4) On January 21, 1997, Advanta chairman Dennis Alter
stated, "I am pleased to report that in 1996, Advanta
maintained the growth of its current businesses and
accelerated its expansion into new ventures."

According to plaintiffs, these statements were made with
knowledge that they were false and misleading, and
plaintiffs relied on them in deciding to buy (or not to sell)
Advanta stock. Consequently, the complaint alleges that the
positive portrayals constitute a violation of section 10(b) of
the Securities Exchange Act of 1934 ("Exchange Act") and
Rule 10b-5.

In addition, one of the plaintiffs, Jerry Weinberg, alleges
that two of the individual defendants, Richard Greenawalt
and Robert Marshall, traded large blocks of Advanta stock
contemporaneously with Weinberg while in possession of
material, nonpublic information, violating section 20(A) of
the Exchange Act. According to the complaint, Greenawalt
sold Class A and B stock on December 6, 1996; Marshall
sold Class A and B stock on December 9, 1996; and
Weinberg purchased Class A stock on December 9, 1996.
The complaint does not allege that either defendant traded
stock directly with Weinberg, only that the trading was
sufficiently contemporaneous to warrant relief under
section 20(A).

On December 17, 1997, plaintiffs filed a complaint
naming Advanta and seven of its present and former
officers and directors as defendants. Count I of the
complaint alleges the defendants are liable under Section
10(b) of the Exchange Act, 15 U.S.C.A. S 78j(b) (West Supp.
1999), and Rule 10b-5 promulgated thereunder, 17 C.F.R.
S 240.10b-5 (1998), for the Point statement and the positive
portrayals. Count II, based on the same factual allegations,
asserts the liability of the individual defendants under
section 20(a) of the Exchange Act. Count III asserts
Weinberg's section 20(A) claim of contemporaneous trading
against individual defendants Greenawalt and Marshall.

The District Court granted defendants' motions to
dismiss all three counts. See In re Advanta Corp. Sec. Litig.,

                               5
No. 97-CV-4343, mem. op. at 23-24 (E.D. Pa. July 9, 1998).
Specifically, the District Court held that Count I's claims
based on the Point statement and the positive portrayals
failed to meet the pleading requirements imposed by Fed.
R. Civ. P. 9(b) and the Reform Act. The court dismissed
these claims without prejudice and granted 30 days' leave
for plaintiffs to amend their complaint. The court also
dismissed without prejudice Counts II and III, holding that
they were derivative of Count I.1 Rather than amend their
complaint, plaintiffs elected to file a Notice of Intention to
Stand on the Complaint, which the District Court
construed as a request to dismiss the remaining claims
with prejudice. See Shapiro v. UJB Fin. Corp., 964 F.2d 272,
278 (3d Cir. 1992) ("[A] plaintiff can convert a dismissal
with leave to amend into a final order by electing to stand
upon the original complaint."). By an order entered
September 18, 1998, the District Court denied plaintiffs'
request and this appeal followed.

ANALYSIS

A. Applicable Pleading Requirements

At the outset, we must determine the effect of the Reform
Act on the pleading requirements governing securities fraud
lawsuits, particularly with respect to pleading scienter.
Plaintiffs argue the Reform Act codified the standard
developed by the Court of Appeals for the Second Circuit in
Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50
(2d Cir. 1987) and subsequent cases, and adopted by this
Court in In re Burlington Coat Factory Sec. Litig., 114 F.3d
1410, 1418 (3d Cir. 1997). Under the Second Circuit
standard, a plaintiff must plead facts supporting a "strong
inference" that the defendant acted with the requisite
scienter, by alleging either "facts establishing a motive to
commit fraud and an opportunity to do so" or"facts
constituting circumstantial evidence of either reckless or
conscious behavior." In re Time Warner Inc. Sec. Litig., 9
_________________________________________________________________

1. Count I also contained a claim based on statements regarding changes
to Advanta's charge-off policy. The District Court dismissed the claim
with prejudice under Fed. R. Civ. P. 12(b)(6). Plaintiffs do not appeal
this
part of the ruling.

                               6
F.3d 259, 269 (2d Cir. 1993). Defendants argue the Reform
Act establishes a pleading standard that is more stringent
than all previously existing standards, including the Second
Circuit's.

To date, two federal courts of appeals have concluded
without analysis that the Reform Act codified the Second
Circuit standard. See Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529, 537-38 (2d Cir. 1999); Williams v. WMX
Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). Numerous
district courts have considered the issue, with split results.
A majority have held the Reform Act essentially codified the
Second Circuit's approach.2 Others, including a district
court of this circuit, have held the Act imposes an even
more stringent pleading standard.3 The most notable case is
In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746
(N.D. Cal. 1997), in which the court conducted a detailed
examination of the legislative history and prior case law
before concluding that allegations of "[m]otive, opportunity,
and non-deliberate recklessness" are no longer"sufficient to
support scienter unless the totality of the evidence creates
a strong inference of fraud." See id. at 757.

The Reform Act requires a plaintiff alleging a Rule 10b-5
violation to

       specify each statement alleged to have been misleading,
       the reason or reasons why the statement is misleading,
       and, if an allegation regarding the statement or
       omission is made on information and belief, the
       complaint shall state with particularity all facts on
       which that belief is formed.

15 U.S.C.A. S 78u-4(b)(1) (West Supp. 1999). 4 Regarding
scienter, or knowledge, section 21D(b)(2) of the Reform Act
provides:
_________________________________________________________________

2. See Richard H. Walker & J. Gordon Seymour, Recent Judicial and
Legislative Developments Affecting the Private Securities Fraud Class
Action, 40 Ariz. L. Rev. 1003, 1025 n.124 & accompanying text (1998)
(citing and discussing cases).

3. See Voit v. Wonderware Corp., 977 F. Supp. 363, 374 (E.D. Pa. 1997).

4. Pub. L. No. 104-67, 109 Stat. 743, 758.

                               7
        In any private action arising under this chapter in
       which the plaintiff may recover money damages only on
       proof that the defendant acted with a particular state
       of mind, the complaint shall, with respect to each act
       or omission alleged to violate this chapter, state with
       particularity facts giving rise to a strong inference that
       the defendant acted with the required state of mind.

Id. S 78u-4(b)(2). Failure to meet these requirements will
result in dismissal of the complaint. See id. S 78u-4(b)(3)(A).
Complaints alleging securities fraud must also comply with
Rule 9(b), which provides: "In all averments of fraud or
mistake, the circumstances constituting fraud or mistake
shall be stated with particularity. Malice, intent, knowledge,
and other condition of mind of a person may be averred
generally." Fed. R. Civ. P. 9(b).5

Although the Reform Act's "strong inference" language
mirrors the Second Circuit's, the precise extent to which
Congress intended to adopt the Second Circuit standard is
not clear. The Reform Act's legislative history on this point
is ambiguous and even contradictory. The purpose of the
Act was to restrict abuses in securities class-action
litigation, including: (1) the practice of filing lawsuits
against issuers of securities in response to any significant
change in stock price, regardless of defendants' culpability;
(2) the targeting of "deep pocket" defendants; (3) the abuse
of the discovery process to coerce settlement; and (4)
manipulation of clients by class action attorneys. See H.R.
Conf. Rep. No. 104-369, at 28 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 748.

The bill originally proposed in the House of
Representatives would have altered both the procedural
and the substantive requirements governing claims under
Rule 10b-5. Procedurally, House Bill 10 provided that a
complaint alleging securities fraud must plead "specific
facts" demonstrating that the defendant acted with the
_________________________________________________________________

5. Rule 9(b)'s provision allowing state of mind to be averred generally
conflicts with the Reform Act's requirement that plaintiffs "state with
particularity facts giving rise to a strong inference" of scienter. 15
U.S.C.A. S 78u-4(b)(2) (West Supp. 1999). In that sense, we believe the
Reform Act supersedes Rule 9(b) as it relates to Rule 10b-5 actions.

                               8
requisite scienter. H.R. 10, 104th Cong. S 204 (1995).
Substantively, the bill would have eliminated recklessness
as a basis for satisfying the scienter element in securities
fraud liability. See id. After hearings in the House
Subcommittee on Telecommunications and Finance,
however, House Bill 10 was revised to reinstate and define
recklessness as a basis for liability.6 The revised bill,
designated House Bill 1058, also contained a seemingly
more stringent pleading standard: It required the complaint
to "make specific allegations which, if true, would be
sufficient to establish scienter as to each defendant at the
time the alleged violation occurred." H.R. 1058, 104th
Cong. S 4 (1995). Rejecting a proposed amendment that
would have weakened the pleading requirement, the House
retained this language in the final version of the bill, which
was passed in March 1995.

Soon thereafter, the Senate passed its own version of the
Reform Act. The Senate bill required plaintiffs to allege
"specific facts demonstrating the state of mind of each
defendant at the time the alleged violation occurred." S.
240, 104th Cong. S 104 (1995). In its report of the bill to
the full Senate, the Senate Committee on Banking, Housing
and Urban Affairs described its pleading standard as
follows:

       The Committee does not adopt a new and untested
_________________________________________________________________

6. The definition of recklessness was the subject of considerable debate
on the House floor. Ultimately, House Bill 1058 defined recklessness as
follows:

        (4) Recklessness.--For purposes of paragraph (1), a defendant
       makes a fraudulent statement recklessly if the defendant, in making
       such statement, is guilty of highly unreasonable conduct that (A)
       involves not merely simple or even gross negligence, but an extreme
       departure from standards of ordinary care, and (B) presents a
       danger of misleading buyers or sellers that was either known to the
       defendant or so obvious that the defendant must have been
       consciously aware of it. Deliberately refraining from taking steps
to
       discover whether one's statements are false or misleading
       constitutes recklessness, but if the failure to investigate was not
       deliberate, such conduct shall not be considered reckless.

141 Cong. Rec. H2863-64 (daily ed. Mar. 8, 1995).

                               9
       pleading standard that would generate additional
       litigation. Instead, the Committee chose a uniform
       standard modeled upon the pleading standard of the
       Second Circuit. Regarded as the most stringent
       pleading standard, the Second Circuit requires that the
       plaintiff plead facts that give rise to a "strong inference"
       of defendant's fraudulent intent. The Committee does
       not intend to codify the Second Circuit's case law
       interpreting this pleading standard, although courts
       may find this body of law instructive.

S. Rep. No. 98, 104th Cong., 1st Sess.,   at 15 (1995). During
the subsequent floor debate, the Senate   considered an
amendment closely tracking the language   of the Second
Circuit pleading standard and case law.   The amendment,
proposed by Senator Specter, provided:

        For purposes of paragraph (1), a strong inference
       that the defendant acted with the required state of
       mind may be established either--

        (A) by alleging facts to show that the defendant had
       both motive and opportunity to commit fraud; or

        (B) by alleging facts that constitute strong
       circumstantial evidence of conscious misbehavior or
       recklessness by the defendant.

141 Cong. Rec. S9170 (daily ed. June 27, 1995). Senator
Specter expressly noted that his amendment was based on
Second Circuit case law, particularly Beck v. Manufacturers
Hanover Trust Co., 820 F.2d 46 (2d Cir. 1987). See id. at
S9171 (statement of Sen. Specter). He further stated: "This
is just basic fundamental fairness that if you take the
Second Circuit standard, you ought to take the entire
standard . . . ." 141 Cong. Rec. S9200 (daily ed. June 28,
1995) (statement of Sen. Specter). The Specter amendment
was passed by a vote of 57 to 42, see id. at S9201, and
Senate Bill 240 was passed on June 28, 1995, see id. at
S9219.

The differences between the House and Senate versions
of the Reform Act were addressed by a Committee of
Conference, which released its report on November 28,
1995. The accompanying "Statement of Managers" recited

                               10
that the purpose of the Reform Act was to create uniformity
among the circuits and "establish . . . more stringent
pleading requirements to curtail the filing of meritless
lawsuits." H.R. Conf. Rep. No. 104-369, at 37 (1995). It
further stated:

       Heightened pleading standard

       . . .

        The Conference Committee language is based in part
       on the pleading standard of the Second Circuit. The
       standard also is specifically written to conform the
       language to Rule 9(b)'s notion of pleading "with
       particularity."

        Regarded as the most stringent pleading standard,
       the Second Circuit requirement is that the plaintiff
       state facts with particularity, and that these facts, in
       turn, must give rise to a "strong inference" of the
       defendant's fraudulent intent. Because the Conference
       Committee intends to strengthen existing pleading
       requirements, it does not intend to codify the Second
       Circuit's case law interpreting this pleading standard.

Id. The accompanying footnote stated: "For this reason, the
Conference Report chose not to include in the pleading
standard certain language relating to motive, opportunity,
or recklessness," an apparent reference to Second Circuit
case law interpreting the pleading requirements for
scienter. Id. n.23; cf. Time Warner, 9 F.3d at 269 (holding
that a plaintiff must allege either "facts establishing a
motive to commit fraud and an opportunity to do so" or
"facts constituting circumstantial evidence of either reckless
or conscious behavior").

President Clinton vetoed the Reform Act on the grounds
that it imposed excessively stringent pleading requirements:

       I believe that the pleading requirements of the
       Conference Report with regard to a defendant's state of
       mind impose an unacceptable procedural hurdle to
       meritorious claims being heard in Federal courts. I am
       prepared to support the high pleading standards of the
       U.S. Court of Appeals for the Second Circuit -- the
       highest pleading standard of any Federal circuit court.

                               11
       But the conferees make crystal clear in the Statement
       of Managers their intent to raise the standard even
       beyond that level. I am not prepared to accept that.

141 Cong. Rec. H15214 (daily ed. Dec. 20, 1995) (veto
message of President Clinton). Subsequently, both houses
of Congress overrode the President's veto and the Reform
Act was enacted into law without changes to the pleading
standard.

Complicating matters further, Congress recently enacted
the Securities Litigation Uniform Standards Act of 1998,
Pub. L. No. 105-353 ("the Standards Act"). Though the
Standards Act does not modify or amend the text of the
Reform Act, its Conference Report states: "It is the clear
understanding of the managers that Congress did not, in
adopting the Reform Act, intend to alter the standards of
liability under the Exchange Act." H.R. Conf. Rep. No. 105-
803, at 13 (1998); see also S. Rep. No. 182, at 11 (1998)
("The managers understand . . . that certain Federal district
courts have interpreted the Reform Act as having altered
the scienter requirement. In that regard, the managers
again emphasize that the clear intent in 1995 and our
continuing intent in this legislation is that neither the
Reform Act nor [the Standards Act] in any way alters the
scienter standard in Federal securities fraud suits."). The
Senate Report reiterates that the Reform Act "establishes a
heightened uniform Federal standard on pleading
requirements based upon the pleading standard applied by
the Second Circuit Court of Appeals." Id. Despite these
statements, however, we do not believe the Standards Act
resolved the uncertainty. In both the House and Senate
floor debate on the Standards Act, legislators continued to
disagree whether the Reform Act codified the Second
Circuit standard.7 Furthermore, the Supreme Court has
_________________________________________________________________

7. The Federal Securities Law Reports observe:

       Responding to confusion over the pleading standard imposed by the
       Reform Act, proponents of the Uniform Standards Act took the
       opportunity to restate and clarify what Congress intended in 1995.
       The Managers' Statement on the Uniform Standards Act. . .
       explained that the 1995 Act did not alter the standards of
liability
       under the Exchange Act but that it did establish a heightened,

                               12
instructed that "the interpretation given by one Congress
(or a committee or Member thereof) to an earlier statute is
of little assistance in discerning the meaning of that
statute." Central Bank of Denver v. First Interstate Bank of
Denver, 511 U.S. 164, 185 (1994). Consequently, our
interpretation of the Reform Act is unaffected by the
legislative history of the Standards Act.

Ultimately, we believe there is little to gain in attempting
to reconcile the conflicting expressions of legislative intent,
including the President's veto statement. The legislative
history on this point is contradictory and inconclusive, and
we are reluctant to accord it much weight. Accordingly, we
direct our attention to the Reform Act's plain language,
which is the customary starting point in statutory
interpretation. The text of section 21D(b)(2) closely mirrors
language employed by the Second Circuit, particularly as it
requires the plaintiff to allege facts supporting a"strong
inference" of scienter. In fact, with the exception of the Act's
"state with particularity" requirement, the two standards
are virtually identical. Cf. 15 U.S.C.A. S 78u-4(b)(2) (plaintiff
must "state with particularity facts giving rise to a strong
inference that the defendant acted with the required state
of mind"); Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d
Cir. 1995) ("Plaintiffs must also allege facts that give rise to
a strong inference of scienter."). We believe Congress's use
of the Second Circuit's language compels the conclusion
that the Reform Act establishes a pleading standard
approximately equal in stringency to that of the Second
Circuit. Because the Second Circuit standard was regarded
as the most restrictive prior the Reform Act, this
interpretation is consistent with Congress's stated intent of
_________________________________________________________________

       uniform federal standard for pleading scienter based on the 2nd
       U.S. Circuit Court of Appeals standard. The debates over the
earlier
       House and Senate bills largely echoed this view and included
       remarks that the Reform Act specifically adopted the 2nd Circuit
       standard. Other remarks, however, suggested that Congress
       intended a pleading standard higher than the 2nd Circuit's. Thus,
       despite Congress' efforts to clarify its intent, some uncertainty
may
       still persist.

1844 Federal Sec. L. Rep. 2 (Nov. 11, 1998).

                               13
strengthening pleading requirements and deterring frivolous
securities litigation. In many jurisdictions, adoption of a
"strong inference" standard will substantially heighten the
barriers to pleading scienter, a result Congress expressly
intended. Moreover, even in jurisdictions already employing
the Second Circuit standard, the additional requirement
that plaintiffs state facts "with particularity" represents a
heightening of the standard. This language echoes precisely
Fed. R. Civ. P. 9(b) and therefore requires plaintiffs to plead
"the who, what, when, where, and how: the first paragraph
of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d
624, 627 (7th Cir. 1990) (quoted in Burlington Coat Factory,
114 F.3d at 1422).

Although the Reform Act established a uniform pleading
standard, it did not purport to alter the substantive
contours of scienter. Under the heading "Requirements for
securities fraud actions," the Act expressly characterizes
subsections 21D(b)(1) and (b)(2) as imposing "pleading
requirements." 15 U.S.C.A. S 78u-4(b)(3)(A) (West Supp.
1999). On this point, the legislative history is
uncontradicted and reinforces the view that these
provisions impose strictly procedural requirements. The
Statement of Managers notes "this legislation implements
needed procedural protections to discourage frivolous
litigation," an explicit reference to the procedural nature of
the Reform Act. H.R. Conf. Rep. No. 104-369 at 28 (1995).
It also states that section 21D(b)(2) imposes a"heightened
pleading standard" in response to disparate interpretations
of Fed. R. Civ. P. 9(b), a procedural rule. See id. at 37
("[Rule 9(b)] has not prevented abuse of the securities laws
by private litigants. Moreover, the courts of appeals have
interpreted Rule 9(b)'s requirement in conflicting ways,
creating distinctly different standards among the circuits.").
Likewise, the floor debate and committee reports in both
houses of Congress, as well as the President's veto
statement, all describe the Reform Act as imposing new
"pleading requirements." In view of the statutory language
and supporting legislative history, we believe section
21D(b)(2) was intended to modify procedural requirements
while leaving substantive law undisturbed.8
_________________________________________________________________

8. As noted, the Silicon Graphics court interpreted the Reform Act to
eliminate allegations of motive, opportunity, and non-deliberate

                               14
Accordingly, we hold that it remains sufficient for
plaintiffs plead scienter by alleging facts "establishing a
motive and an opportunity to commit fraud, or by setting
forth facts that constitute circumstantial evidence of either
reckless or conscious behavior." Weiner v. Quaker Oats Co.,
129 F.3d 310, 318 n.8 (3d Cir. 1997); accord Press, 166
F.3d at 538 (same). Motive and opportunity, like all other
allegations of scienter (intentional, conscious, or reckless
behavior), must now be supported by facts stated "with
particularity" and must give rise to a "strong inference" of
scienter. 15 U.S.C.A. S 78u-4(b)(2) (West Supp. 1999).
These heightened pleading requirements address the
previous ease of alleging motive and opportunity on the
part of corporate officers to commit securities fraud.
Permitting blanket assertions of motive and opportunity to
serve as a basis for liability under the Exchange Act would
undermine the more rigorous pleading standard Congress
has established. After the Reform Act, catch-all allegations
that defendants stood to benefit from wrongdoing and had
the opportunity to implement a fraudulent scheme are no
longer sufficient, because they do not state facts with
particularity or give rise to a strong inference of scienter.

As for recklessness, we reiterate our previous holding
that it remains a sufficient basis for liability. See Burlington
Coat Factory, 114 F.3d at 1418. Retaining recklessness not
only is consistent with the Reform Act's expressly
_________________________________________________________________

recklessness as independent bases for scienter. See 746 F. Supp. at 757
("Motive, opportunity, and non-deliberate recklessness may provide some
evidence of intentional wrongdoing, but are not alone sufficient to
support scienter unless the totality of the evidence creates a strong
inference of fraud."). The court relied largely on the Act's legislative
history, particularly the Conference Committee's deletion of the Specter
amendment. See H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995
U.S.C.C.A.N. 730, at 41 n.23 ("For this reason, the Conference Report
chose not to include in the pleading standard certain language relating
to motive, opportunity, or recklessness."). But if Congress had desired to
eliminate motive and opportunity or recklessness as a basis for scienter,
it could have done so expressly in the text of the Reform Act. In our
view, the fact that Congress considered inserting language directly
addressing this line of cases, but ultimately chose not to, suggests that
it intended to leave the matter to judicial interpretation.

                               15
procedural language, but also promotes the policy
objectives of discouraging deliberate ignorance and
preventing defendants from escaping liability solely because
of the difficulty of proving conscious intent to commit
fraud. A reckless statement is one " `involving not merely
simple, or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and which
presents a danger of misleading buyers or sellers that is
either known to the defendant or is so obvious that the
actor must have been aware of it.' " McLean v. Alexander,
599 F.2d 1190, 1197 (3d Cir. 1979) (quoting Sunstrand
Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.
1977)). We also note that scienter may be alleged by stating
with particularity facts giving rise to a strong inference of
conscious wrongdoing, such as intentional fraud or other
deliberate illegal behavior.

We now turn to the particulars of plaintiffs' complaint.

B. The Point Statement

Plaintiffs contend the Point statement subjects Advanta
to liability under section 10(b) of the Exchange Act, which
makes it unlawful for any person to "use or employ, in
connection with the purchase or sale of any security, . . .
any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
Commission may prescribe." 15 U.S.C.A. S 78j(b) (West
Supp. 1999). Rule 10b-5, in turn, makes it unlawful 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 . . . in connection
with the purchase or sale of any security." 17 C.F.R.
S 240.10b-5(b) (1998). These provisions create a private
right of action for plaintiffs to recover damages for "false or
misleading statements or omissions of material fact that
affect trading on the secondary market." Burlington Coat
Factory, 114 F.3d at 1417; see also In re Craftmatic Sec.
Litig., 890 F.2d 628, 639 (3d Cir. 1989) (federal securities
law recognizes a right of action for omitting material facts
that would assume significance in the deliberations of a
reasonable shareholder).

                               16
The Reform Act establishes a safe harbor protecting
certain "forward-looking" statements from Rule 10b-5
liability. See 15 U.S.C.A. S 78u-5 (West Supp. 1999).
Regarding statements made by natural persons (as opposed
to business entities), the Act provides that a forward-
looking statement is shielded by the safe-harbor provision
unless the plaintiff proves it was made with "actual
knowledge . . . that the statement was false or misleading."
Id. S 78u-5(c)(1)(B)(i). The District Court held the Point
statement was forward-looking and qualified for protection
under the Act because "[p]laintiffs' catch-all allegation that
all speakers knew their statements were false when made is
too broad and Alter's comments indicate nothing more than
Advanta's failure to follow through exactly as planned on its
proposed interest increase, rather than purposeful intent to
fool the public." Advanta, mem. op. at 23. The Advanta
shareholders contend that the Point statement was not
forward-looking, and that even if it was, it was made with
actual knowledge of its false and misleading nature and
therefore does not qualify for protection.

Under the Reform Act, a statement is forward-looking if,
inter alia, it is "a statement containing a projection of
revenues, income (including income loss), earnings
(including earnings loss) per share, capital expenditures,
dividends, capital structure, or other financial items." 15
U.S.C.A. S 78u-5(i)(1)(A) (West Supp. 1999). The first portion
of the Point statement reads, "Over the next six months
Advanta will experience a large increase in revenues. . . ."
In our view, this portion of the statement clearly qualifies
as "a projection of revenues" and therefore is forward-
looking. The remaining portion of the statement,"as
[Advanta] converts more than $5 billion in accounts that
are now at teaser rates of about 7% to its normal interest
rate of about 17%," is a statement of Advanta's plan to
reprice its teaser-rate accounts to a rate of about 17%. We
believe this part of the statement is forward-looking as well,
because it is "a statement of the plans and objectives of
management for future operations, including plans or
objectives relating to the products or services of the issuer."
Id. S 78u-5(i)(1)(B). Consequently, we hold that the entire
Point statement is "forward-looking" within the meaning of
the Act.

                               17
Nonetheless, the safe harbor will not apply if the
statement was made with "actual knowledge" that the
statement was false or misleading. Id. S 78u-5(c)(1)(B)(i).
Plaintiffs argue the falsity of the Point statement is proved
by Dennis Alter's subsequent comment that "we were
probably not as aggressive as we could have been[repricing
our rates] . . . . Instead of repricing to 18 percent we
repriced closer to 13 or 14 percent in order to retain our
image and the luster of being a low-cost provider." Because
Point was Advanta's spokesperson, plaintiffs argue, she
must have possessed actual knowledge that Advanta was
not repricing to 17 percent, but only 13 or 14 percent, at
the time the statement was made. Plaintiffs further contend
that even if Point did not possess actual knowledge, the
failure of Advanta's executives to repudiate the statement
constituted a ratification of it.

The complaint does not plead any specific facts to
support an inference that Point, or anyone else at Advanta,
had actual knowledge of her statement's falsity. The
complaint's only specific factual allegation regarding the
falsity of the Point statement is the existence of the Alter
statement some nine months later. But the Point statement
and the Alter statement are not inconsistent: Point stated
in September 1996 that Advanta planned to reprice its
teaser rates to 17%; nine months later, Alter expressed
regret that Advanta did not reprice to that level. Even
assuming the two statements referred to precisely the same
accounts, it does not follow that Point's statement was
false: Advanta may have intended to reprice the accounts to
17 percent at the time of the Point statement and
subsequently changed its business strategy. As the
defendants point out, Advanta owed no duty to update the
Point statement. See 15 U.S.C.A. S 78u-5(d) (West Supp.
1999) ("Nothing in this section shall impose upon any
person a duty to update a forward-looking statement.");
Burlington Coat Factory, 114 F.3d at 1433 ("[T]he voluntary
disclosure of an ordinary earnings forecast does not trigger
any duty to update.).9 At best, comparison of the Point and
_________________________________________________________________

9. We also reject plaintiffs' argument that the Alter statement, along
with
proposed corrective measures announced by Advanta in the wake of the
$20 million loss, constitute "admissions" of securities fraud liability.
If
this were so, all companies that suffer losses and then publicly discuss
how they plan to improve earnings in the future would be guilty of
admissions that they defrauded investors.

                               18
Alter statements suggests that Advanta made a series of
unwise business decisions in its attempt to attract new
customers. But section 10(b) does not " `regulate
transactions which constitute no more than internal
corporate mismanagement.' " Santa Fe Indus., Inc. v. Green,
430 U.S. 462, 479 (1977) (quoting Superintendent of Ins. v.
Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971)).

Plaintiffs' complaint fails to plead any other facts
supporting an inference that the Point statement was made
with "actual knowledge" of its falsity. Accordingly, we
believe the statement was protected by the safe-harbor
provision for forward-looking statements.

C. The "Positive Portrayals"

Next, we consider whether plaintiffs adequately pleaded a
cause of action relating to the "positive portrayals" made by
Advanta and its officers. To state a securities fraud claim
under section 10(b) and rule 10b-5, a private plaintiff must
plead the following elements: "(1) that the defendant made
a misrepresentation or omission of (2) a material (3) fact; (4)
that the defendant acted with knowledge or recklessness
and (5) that the plaintiff reasonably relied on the
misrepresentation or omission and (6) consequently
suffered damage." In re Westinghouse Sec. Litig., 90 F.3d
696, 710 (3d Cir. 1996).

Plaintiffs' amended complaint identifies a number of
representations alleged to satisfy these criteria. In addition
to those set forth above (upon which the District Court
focused its analysis), the complaint identifies the following
statements:

(1) An April 1996 letter to shareholders, signed by
defendants Hart, Alter, Greenawalt and Rosoff, stated:

       Advanta's credit quality continues to be among the best
       in the industry. Our emphasis on gold cards -- and
       targeting of high quality customer prospects with great
       potential for profitability -- sets us apart from other
       credit card issuers.

       * * *

       The Company is among the most efficient producers in
       the credit card industry. Our superior cost structure

                               19
       for delivering and servicing financial products allows us
       to achieve outstanding returns with highly competitive
       pricing and flexibility.

(Pls.' Am. Compl. P 35.) The letter also touted Advanta's
strengths, including "an experienced management team,
technological expertise . . . and expanding distribution
channels." (Id.)

(2) Advanta's 1995 Annual Report included the following
representations regarding the quality of its credit portfolio:

       While we added substantially to our account base, our
       credit quality remained excellent.

       * * *

       Our emphasis on gold cards -- and targeting of better
       quality customers -- helps us maintain an enviable
       credit quality profile. Gold cards made up 82% of our
       credit card balances in 1995, nearly double the
       industry average.

(Id. P 36.) The 1995 Annual Report also referred to
Advanta's "risk-adjusted pricing strategy" in which "credit
cards are issued with lower rates to customers whose credit
quality is expected to result in a lower rate of credit losses."
(Id.)

(3) A July 18, 1996 letter to shareholders, again signed
by defendants Alter, Hart, Greenawalt and Rosoff, stated
that "[d]espite industry-wide pressure on credit card asset
quality, Advanta continued to produce better-than-industry
credit measures, and achieved excellent growth and returns
throughout our core businesses." (Id.P 37.)

(4) A Form 8-K filed with the SEC on October 17, 1996
and signed by defendant Schneyer stated, "The Company's
credit card asset quality statistics continue to be better
than industry averages." (Id. P 50.)

According to plaintiffs, these statements (as well as those
set forth supra, Part I) were materially false and misleading
because they failed to disclose the deterioration in credit
quality allegedly caused by Advanta's aggressive efforts to
attract new customers. The District Court held the
statements do not prove Advanta intentionally misled or

                                20
defrauded investors, but only that profits failed to live up to
expectations. See Advanta, mem. op. at 19. Consequently,
the court rejected plaintiffs' arguments as "attempts to
plead fraud by hindsight." Id.

Rule 10b-5 liability does not attach merely because "[a]t
one time the firm bathes itself in a favorable light" but
"[l]ater the firm discloses that things are less rosy." DiLeo,
901 F.2d at 627. Rather, the plaintiff must demonstrate
that the loss was attributable to the defendant's fraudulent
conduct. As noted, the Reform Act requires plaintiffs to
"specify each statement alleged to have been misleading,
the reason or reasons why the statement is misleading,
and, if an allegation regarding the statement or omission is
made on information and belief, the complaint shall state
with particularity all facts on which that belief is formed."
15 U.S.C.A. S 78u-4(b)(1) (West Supp. 1999). Furthermore,
the complaint must "state with particularity facts giving
rise to a strong inference that the defendant acted with the
required state of mind." Id. S 78u-4(b)(2) (West Supp. 1999).

The complaint here alleges that during the time period in
which Advanta issued the positive portrayals, the company
implemented policies relaxing its underwriting and
monitoring procedures and "superior credit risk customers
were switching to other credit card companies at rates that
would have a materially negative impact on the Company's
reported earnings." (Pls. Am. Compl. P 46.) Elsewhere, it
alleges that Advanta changed its methodology for
computing bankruptcy charge-offs without promptly
disclosing this change to the marketplace, see id. PP 46, 48,
50; that Advanta repriced its teaser rates to 13 or 14
percent rather than its normal rate of 17 percent, causing
a substantial decline in revenues, id. P 47; and that
Advanta lacked adequate collection capability to support
the expansion in its customer base, id.P 52. According to
plaintiffs, the juxtaposition of these alleged facts against
the positive portrayals shows that the statements were
materially misleading when made.

We disagree. Even assuming plaintiffs' allegations are
true, the positive portrayals do not contradict any of
defendants' other statements but merely report previous
successes and express confidence in Advanta's prospects

                               21
for future growth. Factual recitations of past earnings, so
long as they are accurate, do not create liability under
Section 10(b). See Serabian v. Amoskeag Bank Shares, Inc.,
24 F.3d 357, 361 (1st Cir. 1994) ("[D]efendants may not be
held liable under the securities laws for accurate reports of
past successes, even if present circumstances are less
rosy.") Similarly, vague and general statements of optimism
"constitute no more than `puffery' and are understood by
reasonable investors as such." Burlington Coat Factory, 114
F.3d at 1428 n.14; see also San Leandro Emergency Med.
Plan v. Phillip Morris Co., 75 F.3d 801, 811 (2d Cir. 1996);
Shapiro, 964 F.2d at 283 n.12. Such statements, even if
arguably misleading, do not give rise to a federal securities
claim because they are not material: there is no
"substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as
having significantly altered the `total mix' of information
made available." TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 449 (1976); see also Craftmatic, 890 F.2d at 642
(holding that "statements of subjective analysis or
extrapolation, such as opinions, motives, and intentions"
are "soft information" and hence immaterial for purposes of
Rule 10b-5). The representations identified by plaintiffs fall
entirely into these categories: accurate reports of past
earnings, and non-actionable expressions of optimism for
the future. We are skeptical that plaintiffs or any other
reasonable investors would make investment decisions
based on the positive portrayals.

Even if the positive portrayals were materially misleading,
we believe the complaint suffers a more fundamental defect
in that it fails to satisfy the Reform Act's requirements for
pleading scienter. Rather than state with particularity facts
supporting a strong inference that defendants possessed
the requisite scienter, plaintiffs offer conclusory assertions
that the defendants acted "knowingly," Pls. Am. Compl.
PP 22, 42, 51, as well as blanket statements that
defendants must have been aware of the impending losses
by virtue of their positions within the company, see id.
PP 19, 22, 23. It is well established that a pleading of
scienter "may not rest on a bare inference that a defendant
`must have had' knowledge of the facts." Greenstone v.
Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992) (Breyer, J.)

                               22
(quoting Barker v. Henderson, Franklin, Starnes & Holt, 797
F.2d 490, 497 (7th Cir.1986)). Likewise, allegations that a
securities-fraud defendant, because of his position within
the company, "must have known" a statement was false or
misleading are "precisely the types of inferences which
[courts], on numerous occasions, have determined to be
inadequate to withstand Rule 9(b) scrutiny." Maldonado v.
Dominguez, 137 F.3d 1, 10 (1st Cir. 1998). Generalized
imputations of knowledge do not suffice, regardless of the
defendants' positions within the company. See Rosenbloom
v. Adams, Scott & Conway, Inc., 552 F.2d 1336, 1338-39
(7th Cir. 1977) ("A director, officer, or even the president of
a corporation often has superior knowledge and
information, but neither the knowledge nor the information
necessarily attaches to those positions."). In re Ancor
Communications, Inc. Sec. Litig., 22 F. Supp. 2d 999 (D.
Minn. 1998), relied upon by plaintiffs, does not suggest
otherwise. There the court inferred that key officers were
aware their product would likely prove incompatible with
the products of another company with whom Ancor had
entered into a supply contract. The court expressly based
its holding on the facts that the contract "was undeniably
the most significant contract in Ancor's history," thus
supporting an unusually strong inference of scienter, and
that plaintiffs' complaint also cited extrinsic evidence such
as discussions among officers regarding product
incompatibility and an escape clause in the supply
agreement governing this contingency. Id. at 1005. Such
considerations are not present here.

Plaintiffs also argue that even if defendants did not
intentionally mislead investors, they recklessly disregarded
negative trends in the credit card industry and in Advanta's
customer base, and therefore possessed the requisite
scienter. In particular, plaintiffs contend the positive
portrayals were reckless in light of industry-wide increases
in personal bankruptcies and charge-offs, especially as
exacerbated by Advanta's alleged decisions to reprice
introductory rates to only 13 or 14 percent and to relax
underwriting and monitoring practices. We disagree. For
purposes of the scienter requirement of Section 10(b) and
Rule 10b-5, we have adopted Sunstrand's definition of a
reckless statement as one " `involving not merely simple, or

                               23
even inexcusable negligence, but an extreme departure
from the standards of ordinary care, and which presents a
danger of misleading buyers or sellers that is either known
to the defendant or is so obvious that the actor must have
been aware of it.' " McLean, 599 F.2d at 1197 (quoting
Sunstrand, 553 F.2d at 1045); accord In re Phillips
Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989).
Plaintiffs' allegations, even if true, would not demonstrate
an "extreme departure" from the standards of ordinary
care. At most, the complaint demonstrates that Advanta
embarked on a business strategy of aggressively recruiting
new customers without adequately accounting for the
increased risk this endeavor posed. None of the facts in the
complaint suggests this strategy represented an egregious
departure from the range of reasonable business decisions,
as opposed to simple mismanagement. But "claims
essentially grounded on corporate mismanagement are not
cognizable under federal law." Craftmatic, 890 F.2d at 638-
39. Accordingly, we find that the positive portrayals do not
support a strong inference of recklessness.

The complaint's remaining allegation regarding scienter is
that several of the individual defendants -- most
prominently, Richard Greenawalt, Dennis Alter, Robert
Marshall, and Gene Schneyer -- sold large blocks of their
Advanta stock during November and December 1996,
approximately three months before the $20 million loss was
announced to the marketplace. (See Pls. Am. Compl. P 69.)
Plaintiffs allege these transactions suggest defendants knew
of the impending first-quarter loss or at least had the
motive and opportunity to commit fraud. The complaint
sets forth the dates, numbers of shares, and proceeds of
the sales. (See id.)

We have held that "[w]e will not infer fraudulent intent
from the mere fact that some officers sold stock." Burlington
Coat Factory, 114 F.3d at 1424; accord San Leandro, 75
F.3d at 814 ("[T]he sale of stock by one company executive
does not give rise to a strong inference of the company's
fraudulent intent . . . ."); Shaw v. Digital Equip. Corp., 82
F.3d 1194, 1224 (1st Cir. 1996) ("[T]he mere fact that
insider stock sales occurred does not suffice to establish
scienter."). But if the stock sales were unusual in scope or

                               24
timing, they may support an inference of scienter. See
Burlington Coat Factory, 114 F.3d at 1424; Shaw, 82 F.3d
at 1224 ("[A]llegations of `insider trading in suspicious
amounts or at suspicious times' may permit an inference
that the trader -- and by further inference, the company --
possessed material nonpublic information at the time.")
(quoting Greenstone, 975 F.2d at 26). In Burlington Coat
Factory, we found the stock sales did not permit an
inference of scienter because only three of thefive
defendants sold stock, plaintiffs provided information on
the total stock holdings of only one defendant who had
traded only 0.5 percent of his holdings, and plaintiffs failed
to plead facts indicating whether such trades were"normal
and routine" for the defendants and whether the trading
profits were substantial in comparison to their overall
compensation. See 114 F.3d at 1423.

Here, three of the individual defendants sold no stock at
all during the class period, raising doubt whether the sales
were motivated by an intent to profit from inflated stock
prices before the upcoming losses were reported. See Acito,
47 F.3d at 54 (holding that lack of sales by several
defendants "undermines plaintiffs' claim that defendants
delayed notifying the public so that they could sell their
stock at a huge profit") (internal quotation marks omitted).
In addition, although the complaint fails to provide
information on the percentage of total holdings sold by the
defendants, it appears the defendants who did trade stock
during the class period sold only small percentages of their
holdings. According to Form 4s that were filed with the SEC
and attached to Advanta's motion to dismiss, Schneyer and
Alter sold only 7 percent and 5 percent, respectively, of
their total holdings.10 Alter, in particular, continued to hold
a sizable percentage of Advanta's outstanding stock even
after the 1996 sales. Far from supporting a "strong
inference" that defendants had a motive to capitalize on
artificially inflated stock prices, these facts suggest they
had every incentive to keep Advanta profitable. See
_________________________________________________________________

10. Although similar information is not available with regard to the other
individual defendants, Advanta has no duty to provide it; rather, the
burden is on the plaintiffs to plead facts supporting an inference of
scienter.

                               25
Burlington Coat Factory, 114 F.3d at 1422 n.12 (finding no
motive and opportunity because plaintiffs failed to explain
"how a temporary inflation of . . . stock price would help
management increase its compensation or preserve its
jobs"); Wallace v. Systems & Computer Tech. Corp., No. 95-
CV-6303, 1997 WL 602808, at *17 (E.D. Pa. Sept. 23,
1997) (same).

Nor were the sales at issue particularly large in
comparison to the individual defendants' previous trading
practices. The complaint alleges that Greenawalt, Alter,
Marshall, and Schneyer sold a total of 1,023,766 shares
during the eight-month class period, as compared to
580,814 during the previous 28 months. It makes no
reference to the previous trading practices of the other
individual defendants. Although the profits realized by the
defendants were significant relative to their base salaries,
these proceeds were the result of accumulated stock
options and were an intended part of their overall
compensation package. (See Pls. Am. Compl.PP 11-16.) As
we recognized in Burlington Coat Factory, "[a] large number
of today's corporate executives are compensated in terms of
stock and stock options. It follows then that these
individuals will trade those securities in the normal course
of events." 114 F.3d at 1424 (citation omitted).

Thus, we hold that the allegations concerning defendants'
stock transactions do not permit a strong inference of
scienter, as required by the Reform Act.11 Nor have
plaintiffs alleged other specific facts supporting such an
inference. Consequently, we believe the claims relating to
positive portrayals fail to comply with statutory pleading
requirements and were correctly dismissed.

D. Contemporaneous Trading

One of the individual plaintiffs, Jerry Weinberg, alleges
that two of the individual defendants, Greenawalt and
Marshall, traded large blocks of Advanta stock
contemporaneously with Weinberg while in possession of
_________________________________________________________________

11. Because the complaint fails to meet the pleading requirements of the
Reform Act, we need not address whether it also fails to meet the
requirements of Fed. R. Civ. P. 9(b).

                                26
material, nonpublic information, violating section 20(A) of
the Exchange Act. According to the complaint, Greenawalt
sold Class A and B stock on December 6, 1996; Marshall
sold Class A and B stock on December 9, 1996; and
Weinberg purchased Class A stock on December 9, 1996.

Section 20(A) of the Exchange Act provides that an
insider who trades stock "while in possession of material,
nonpublic information" is liable to any person who traded
contemporaneously with the insider. 15 U.S.C.A.S 78t-1(a)
(West Supp. 1999). Liability under section 20(A) is
predicated upon an independent violation of "this chapter
or the rules or regulations thereunder." Id. Hence, claims
under section 20(A) are derivative, requiring proof of a
separate underlying violation of the Exchange Act. See
Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d
697, 703 (2d Cir. 1994) ("[T]o state a claim under S 20A, a
plaintiff must plead a predicate violation of the '34 Act or
its rules and regulations."); In re Verifone Sec. Litig., 11
F.3d 865, 872 (9th Cir. 1993) (noting that if plaintiffs "have
failed to allege an actionable independent underlying
violation of the '34 Act, they similarly cannot maintain a
claim under S 20A"). Because plaintiffs have failed to plead
a predicate violation of Section 10(b) or Rule 10b-5, the
section 20(A) claim must also be dismissed.

CONCLUSION

The District Court correctly dismissed plaintiffs' claim
based upon the Point statement because the statement was
protected by the Reform Act's safe-harbor provision. The
remaining claims in Count I failed to comply with the
pleading requirements of the Reform Act, and the section
20(A) claim is derivative of Count I. Accordingly, these
claims were properly dismissed as well.

We will affirm the judgment of the District Court.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               27