Ansfield v. Omnicare, Inc. (In Re Omicare, Inc. Securities Litigation)

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 14a0254p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

IN RE: OMNICARE, INC. SECURITIES LITIGATION. ┐
________________________________________ │
│
│ No. 13-5597
PAUL ANSFIELD et al. │
Plaintiffs, >
│
│
KBC ASSET MANAGEMENT N.V., │
Plaintiff-Appellant, │
│
│
v. │
OMNICARE, INC.; JOEL GEMUNDER; DAVID W. │
FROESEL, JR.; JOHN L. WORKMAN; CHERYL D. │
HODGES, │
Defendants-Appellees. │
│
┘
Appeal from the United States District Court
for the Eastern District of Kentucky at Covington.
No. 2:11-cv-00173—David L. Bunning, District Judge.
Argued: January 30, 2014
Decided and Filed: October 10, 2014

Before: BOGGS and MOORE, Circuit Judges; BARRETT, District Judge.*

_________________

COUNSEL

ARGUED: Andrew M. McNeela, KIRBY MCINERNEY LLP, New York, New York, for
Appellant. Richard W. Reinthaler, WINSTON & STRAWN LLP, New York, New York, for
Appellees. ON BRIEF: Andrew M. McNeela, Ira M. Press, J. Brandon Walker, KIRBY
MCINERNEY LLP, New York, New York, Gary J. Sergent, O’HARA, RUBERG, TAYLOR,

*
The Honorable Michael R. Barrett, United States District Judge for the Southern District of Ohio, sitting
by designation.

1
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 2

SLOAN & SERGENT, Crestview Hills, Kentucky for Appellant. Richard W. Reinthaler, John
E. Schreiber, WINSTON & STRAWN LLP, New York, New York, William T. Robinson III,
Michael E. Nitardy, FROST BROWN TODD LLC, Florence, Kentucky, Mark Alan Vander
Laan, Amanda P. Lenhart, DINSMORE & SHOHL, LLP, Cincinnati, Ohio, for Appellees.

_________________

OPINION
_________________

KAREN NELSON MOORE, Circuit Judge. On May 11, 2012, KBC Asset Management
N.V. (“KBC”) filed a Consolidated Amended Complaint (“Complaint”), on behalf of Paul
Ansfield and other similarly situated shareholders, against Omnicare, Inc. (“Omnicare”) and
several of its current and former officers (collectively, “the Individual Defendants”): Joel
Gemunder, former President and Chief Executive Officer; David W. Froesel, Jr., former Chief
Financial Officer; John L. Workman, current President and Chief Financial Officer; and Cheryl
D. Hodges, former Senior Vice President and Secretary. In the Complaint, KBC alleged that the
defendants had committed securities fraud in violation of § 10(b) of the Securities Exchange Act
of 1934 (“1934 Act”), codified at 15 U.S.C. §§ 78j(b) and 78t(a), as well as Securities and
Exchange Commission (“SEC”) Rule 10b-5, codified at 17 C.F.R. § 240.10b-5. Specifically,
KBC charged the defendants with making various material misrepresentations and omissions
between January 10, 2007 and August 5, 2010 (“the Class Period”) in public and in SEC filings
regarding Omnicare’s compliance with Medicare and Medicaid regulations. Omnicare moved to
dismiss the suit for failure to state a valid claim, and the district court granted Omnicare’s
motion. KBC now appeals.

The elephant-sized boulder blocking KBC’s suit is the Private Securities Litigation
Reform Act of 1995 (“PSLRA”), Pub. L. No. 104–67, 109 Stat. 737, codified at 15 U.S.C. § 78u-
4, which created heightened pleading standards for securities-fraud cases. To satisfy this
heavier, statutorily created burden, plaintiffs must identify each misleading or false statement
and explain how it is misleading. 15 U.S.C. § 78u-4(b)(1)(B). In addition, plaintiffs must “state
with particularity facts giving rise to a strong inference that the defendant[s] acted with the
required state of mind.” § 78u-4(b)(2)(A). These requirements are not easily satisfied. In this
case, we must answer whether plaintiffs have cleared these hurdles and what allegations can be
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 3

considered in making that determination. Our ultimate answers do not favor KBC, and thus, we
AFFIRM the dismissal of the Complaint.

I. BACKGROUND

The actors and allegations in the Complaint are many and muddled. By way of
clarification: KBC is an asset-management company, located in Brussels, Belgium, that bought
and held Omnicare stock during the Class Period. Its opponent, Omnicare, is the nation’s largest
provider of pharmaceutical care for the elderly, operating in forty-seven states, the District of
Columbia, and Canada.

Gemunder was the President, the CEO, and a director of Omnicare from May 20, 1981 to
August 2, 2010. He allegedly had responsibility for overseeing the company and making various
certifications to the SEC. R. 94 at 7–9 (Compl. at ¶ 11) (Page ID #831–33). Moreover, KBC
claimed that Gemunder had knowledge that Omnicare was not compliant with federal healthcare
regulations and misled investors to believe otherwise. Id.

Froesel was a Senior Vice President and the CFO of Omnicare from March 1996 to
November 2009. Id. at 9 ¶ 12 (Page ID #833). KBC alleged that he assisted in preparing various
SEC filings and approving their content, which materially misrepresented Omnicare’s
compliance with federal regulations. Id. at 9–10 ¶ 12 (Page ID #833–34).

Workman joined Omnicare in November 2009 as CFO and has been the President of the
company since February 2011. Id. at 10 ¶ 13 (Page ID #834). Similarly to Froesel, Workman
allegedly helped prepare and approved SEC filings, which KBC alleged contained material false
and misleading statements regarding Omnicare’s compliance with federal healthcare regulations.
Id.

Hodges was a Senior Vice President and the Secretary of the company from 1994 until
August 2, 2010. Id. at 10 ¶ 14 (Page ID #834). Beforehand, Hodges served as a director of
Omnicare. Id. KBC also alleged that she assisted in the preparation and certification of SEC
filings containing false information. Id. at 10–11 ¶ 14 (Page ID #834–35).
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 4

A. Allegations

Until December 2008, John Stone served as Omnicare’s Vice President of Internal Audit,
a position that required him to monitor and report on the company’s compliance with Medicare
and Medicaid regulations. As part of this job, Stone conducted an audit of Omnicare’s
“previously submitted Medicare and Medicaid claims for ‘ancillary services’” from 2000 to
2005, including the provision of durable medical equipment (“DME”). Id. at 18–19 ¶¶ 38–42
(Page ID #842–43). Completed in 2007, this audit was known internally as “the Wave I Audit.”
Id. at 19 ¶ 42 (Page ID #843). It examined eighteen of Omnicare’s pharmacy facilities that
provided ancillary services, and it looked into thirty-nine claims at each facility. Id. According
to the Complaint, the Wave I Audit revealed “pervasive fraud” at each of the facilities. Id.
Specifically, the Wave I Audit revealed that each of the Omnicare facilities submitted false
reimbursement claims to DME Regional Carriers and several states. Id. at 19–20 ¶ 43 (Page ID
#843–44). KBC alleged that Stone shared the results of this audit with Omnicare’s Internal
Audit and Corporate Compliance Committees. Id. at 21 ¶ 46 (Page ID #845). Additionally, the
Complaint stated that “[o]n information and belief, the information was immediately given to
defendants Gemunder, Froesel, and Hodges, and received by defendant Workman when he
started at [Omnicare] in November 2009.” Id.

In 2008, Omnicare’s Executive Vice President and Chief Operating Officer, Pat Keefe,
commissioned a second audit—known as “the Wave II Audit”—to show that the irregularities
found in the Wave I Audit were limited or non-existent. Id. at 21 ¶ 49 (Page ID #845). Again,
Stone conducted the audit using a limited sample: he examined thirty claims submitted in 2008
from each of fifteen pharmacies. Id. at 21–22 ¶ 49 (Page ID #845–46). The Wave II Audit
revealed that the examined facilities also had submitted numerous claims without the proper
documentation and that an Omnicare subsidiary had billed some Medicaid patients at a higher
rate than non-Medicaid patients. Id. at 22 ¶¶ 49–50 (Page ID #846). Again, KBC averred that
“[o]n information and belief, Stone presented the results of the Wave II [A]udit to Omnicare’s
Internal Audit and Corporate Compliance Committees and the results were immediately given to
defendants Gemunder, Froesel, and Hodges and received by defendant Workman when he
started at [Omnicare] in November 2009.” Id. at 22 ¶ 51 (Page ID #846). In response to these
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 5

audits, Stone claimed that Omnicare tried to conceal its fraud by repaying the DME Regional
Carriers for the false claims, leaving the state Medicaid claims unaddressed. Id. at 23 ¶ 52 (Page
ID #847).

After conducting the Wave I and Wave II Audits, Omnicare charged Stone with
conducting yet another audit, this time of the company’s newly acquired pharmacies. Id. at 24
¶ 55 (Page ID #848). Known as the “Pharmacy Audit,” this investigation sought to determine
whether the pharmacies complied with Medicare and Medicaid requirements. Id. Stone found
that they did not totally comply because of “order processing errors and control test failures.” Id.
The Complaint claims that “[a]ccording to Stone, Omnicare was ‘fully aware of the []
deficiencies and that their wholly owned, operated and controlled pharmacies were submitting
false and fraudulent Medicare and Medicaid claims.’” Id. at 24 ¶ 56 (Page ID #848) (second
alteration in original). In particular, KBC averred that “Stone shared with Gemunder the results
of the [Pharmacy] Audit . . . .” Id. at 87 ¶ 193 (Page ID #911). The Complaint also states that
“[o]n information and belief” these results were given to all of the Individual Defendants. Id. at
25 ¶ 61 (Page ID #849).

Following Stone’s presentation of the Pharmacy Audit’s results to the Internal Audit
Committee, Stone claimed that ‘“[a]s a direct and proximate cause of [his] presentation to
[Omnicare’s] Internal Audit Committee, [defendant Gemunder] effectively discharged [Stone]
by telling him to begin looking for other employment on or about December 1, 2008.’” Id. at 25
¶ 62 (Page ID #849) (final three alterations in original) (internal quotation marks omitted). Thus,
partially as a result of this adverse action, Stone filed a twenty-four-count qui tam action against
Omnicare under the False Claims Act, alleging that the company committed various kinds of
fraud and improperly terminated his employment. See United States ex rel. Stone v. Omnicare,
Inc., No. 09-C-4319, 2011 WL 2669659, at *1 (N.D. Ill. July 7, 2011). As evidence, Stone
recounted the above-mentioned audits and actions by Omnicare. On August 5, 2010, after the
United States declined to intervene, the existence of the Stone qui tam action and the audits
became public. R. 94 at 24 (Compl. at ¶ 58) (Page ID #848). Twice, the district court dismissed
Stone’s action without prejudice for failure to state a valid claim, and then on November 20,
2012, that court finally dismissed the fraud allegations in the action with prejudice, finding that
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 6

Stone had not pleaded actionable fraud under the False Claims Act. See United States ex rel.
Stone v. Omnicare, Inc., No. 09-C-4319, 2012 WL 5877544, at *1 (N.D. Ill. Nov. 20, 2012).

In the Complaint now before us, KBC also put forth several allegations made by
confidential witnesses that KBC claims corroborate Stone’s allegations. For instance, one
confidential witness—a Customer Service Manager at an Omnicare subsidiary—averred that the
subsidiary’s “Medicare reimbursement requests commonly lacked the records necessary for
compliance with federal and state law.” R. 94 at 26 (Compl. at ¶ 65) (Page ID #850). When the
confidential witness reported his findings to the general manager of the pharmacy, he was
allegedly told: ‘“It’s none of [your] f___ing business!’” Id. at 27 ¶ 66 (Page ID #851). A
second confidential witness, who worked as a billing manager, confirmed this subsidiary’s
problems with, and the knowledge of Omnicare’s supervisors of, non-compliance.

Most importantly, KBC put in the Complaint the allegations of William Fitzpatrick—
Omnicare’s former Chief Compliance Officer. See id. at 31 ¶ 82 (Page ID #855); see also
Appellant Br. at 9 (identifying “CW5” in the Complaint as Fitzpatrick). Fitzpatrick confirmed
the reports of the confidential witnesses and Stone that the Individual Defendants knew of
Omnicare’s failures to comply with pertinent regulations. R. 94 at 31 (Compl. at ¶ 82) (Page ID
#855). The Complaint reads: “Specifically, [Fitzpatrick] advised [KBC] counsel that ‘as you
were told by other people, I did my best to bring it to the head [i.e. Gemunder], but it didn’t
work.’ [Fitzpatrick] also stated that [he] ‘did what [he] was supposed to do as a Chief
Compliance Officer and a Corporate Officer and [he] threw up [his] arms, and said I’m retired
and I’m going home.’” Id. (third alteration in original).

At bottom, KBC claimed that Omnicare and the Individual Defendants knew of these
allegations of fraud or non-compliance and that, rather than confessing to the company’s failures
to comply with the regulations, Omnicare and its officers routinely made material
misrepresentations about “(1) its compliance with applicable laws, rules, and regulations; (2) its
financial results; (3) the accuracy of the statements contained in its Class Period Forms 10-K and
10-Q; and (4) the root causes of its financial performance.” Id. at 33 ¶ 86 (Page ID #857). KBC
averred that these misstatements started on January 10, 2007 when Gemunder stood before the
JP Morgan Healthcare Conference and stated that Omnicare’s “goal is to comply with all laws
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 7

and regulations” and that he was ‘“pleased to report that [Omnicare is] getting these matters
[prior regulatory violations] behind us.’” Id. at 34 ¶ 88 (Page ID #858) (emphasis deleted).
Gemunder made these statements, according to KBC, knowing that they were false, given
Omnicare’s previously acknowledged non-compliance.

KBC further claimed that Omnicare’s Form 10-Ks from 2007 to 2010 contained material
misrepresentations because they stated that “[Omnicare] believe[s] that [its] billing practices
materially comply with applicable state and federal requirements” and that “[Omnicare]
believe[s] that [it is] in compliance in all material respects with federal, state and local laws.” Id.
at 35 ¶ 91 (Page ID #859) (emphasis deleted). The Complaint also stated that Gemunder,
Froesel, and Workman signed these misleading forms. Id. at 35–37 ¶¶ 91–94 (Page ID #859–
61). In the alternative, KBC claimed that Omnicare failed in its duty to disclose the audit results
once it knew of them, creating an actionable omission.

In the Complaint, KBC also pleaded facts related to scienter, as it must. KBC alleged
that each of the Individual Defendants knew that their statements and those of the company,
which they personally prepared, were false and misleading. Id. at 84 ¶ 184 (Page ID #908).
KBC further stated that the Individual Defendants were privy to confidential information that
they had a duty to disclose, and by choosing not to do so, they acted with the requisite intent to
defraud. Id. at 84 ¶ 185 (Page ID #908). The personal acquisition of wealth drove the Individual
Defendants to commit fraud, according to KBC, and the defendants purportedly amassed wealth
by permitting fraudulent Medicare and Medicaid reimbursements—which allegedly accounted
for more than half of Omnicare’s business during the Class Period. Id. at 86 ¶ 191 (Page ID
#910).

B. Procedural History

On July 16, 2012, Omnicare and the Individual Defendants filed a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6), claiming that KBC had failed to meet the
heightened pleading standard under Rule 9(b) and the PSLRA. R. 106 (Mot. to Dismiss at
1) (Page ID #1018). The defendants made three main arguments: KBC failed (1) to identify an
actionable misstatement or omission; (2) to plead loss causation adequately; and (3) to allege
facts leading to a strong inference of scienter. R. 106-1 at 23–49 (Mot. to Dismiss Mem. at 14–
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 8

40) (Page ID #1042–68). At oral argument on this motion, Omnicare focused heavily on the
argument that the Complaint needed to allege that the Individual Defendants had actual
knowledge that their statements regarding compliance were false in order to plead adequately an
actionable misrepresentation under the PSLRA. See R. 135 (Feb. 14, 2013 Tr. at 20:15–22)
(Page ID #1617). KBC struggled to respond to this argument and quickly turned to an as-yet-
unmentioned line of argument: because Stone, himself, was a senior executive, his knowledge
and that of other non-defendant executives could be imputed to Omnicare. Id. at 47:14–23 (Page
ID #1644).

The district court rejected KBC’s arguments and granted the defendants’ motion to
dismiss for failure to state a claim. In its opinion, the district court found that Indiana State
District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc.
(“Omnicare I”), 583 F.3d 935 (6th Cir. 2009), governed this case. See In re Omnicare, Inc. Sec.
Litig., 2013 WL 1248243, at *7 (W.D. Ky. Mar. 27, 2013). Omnicare’s compliance-related
statements were ‘“soft’ information,” and therefore, KBC needed to plead facts demonstrating
that defendants had actual knowledge that their statements were false for a district court to find a
material misrepresentation. Id. The district court found that KBC failed to allege such facts; in
particular, it never connected one of the Individual Defendants to any specific knowledge of
fraudulent claims. Id. at *8–*10. Moreover, the district court found that KBC’s use of ‘“[o]n
information and belief”’ was insufficient under the plain language of the PSLRA. Id. at *10
(quoting R. 94 at 21, 22 (Compl. at ¶¶ 46, 51) (Page ID #845–46)) (emphasis deleted).
Additionally, the district court disagreed with KBC’s imputation argument because the cases
cited by KBC concerned proof of scienter, not actual knowledge for showing a material
misrepresentation of soft information. Id. at *11. The district court stated that the standards are
different. Moreover, even if the knowledge of non-defendant senior executives were imputed to
Omnicare, the district court decided that the relevant statements were not misrepresentations
because they were phrased in qualified terms or stated as opinions. Id. at *12–*13. Given these
findings, the district court granted the defendants’ motion to dismiss under Rule 12(b)(6) and
simultaneously rejected KBC’s informal request to amend the Complaint. Id. at *17–*18; see
also R. 137 at 5 (KBC Post-Hr’g Mem. at 4) (Page ID #1729) (“In the event that the Court
concludes that Plaintiff’s reliance, in part, on the knowledge of non-defendant Omnicare
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 9

executives and agents was not adequately pleaded, Plaintiff respectfully requests leave to replead
in light of the knowledge by senior personnel that was pleaded, and the case law discussed
above.”). KBC now appeals the overall dismissal of its suit, though not the district court’s
decision to deny KBC leave to amend the complaint.

While this appeal has been pending, KBC filed a motion for judicial notice, seeking to
have copies of Omnicare’s 2004 Charter of the Audit Committee of the Board of Directors, the
Corporate Integrity Agreement of 2009, Stone’s Response in Opposition to Omnicare’s Motion
to Dismiss Relator’s Complaint (“Stone Opposition”), and Stone’s Declaration filed in his qui
tam action recognized by this court. Appellant Mot. for Judicial Notice (“Appellant MJN”) at 2–
3. Omnicare opposes the motion.

In addition, Omnicare filed its own motion for judicial notice, asking us to admit into the
appellate record copies of Omnicare’s 2007, 2008, and 2009 versions of its Form 10-K, its Form
10-Q filed on August 5, 2010, and the original complaint in the Stone qui tam action. See
Appellee Mot. for Judicial Notice (“Appellee MJN”) at 1–2. The motion is not opposed.

II. MOTIONS FOR JUDICIAL NOTICE

Before evaluating whether KBC pleaded sufficient facts to survive Omnicare’s motion to
dismiss under Rule 12(b)(6), we first rule upon the parties’ motions for judicial notice.
According to the Federal Rules of Evidence, a “court may judicially notice a[n] [adjudicative]
fact that is not subject to reasonable dispute because it: (1) is generally known within the trial
court’s territorial jurisdiction; or (2) can be accurately and readily determined from sources
whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b). “This standard applies
to appellate courts taking judicial notice of facts supported by documents not included in the
record on appeal.” United States v. Ferguson, 681 F.3d 826, 834 (6th Cir. 2012). However,
“[j]udicial notice is only appropriate if ‘the matter [is] beyond reasonable controversy. . . . The
rule proceeds upon the theory that . . . dispensing with traditional methods of proof [should only
occur] in clear cases.” Id. (quoting Fed. R. Evid. 201(b) advisory committee’s note) (final two
alterations and ellipses in original). After all, judicial notice is not an alternative avenue for
amending the complaint after a district court dismisses the suit for failure to state a claim.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 10

A. KBC’s Motion for Judicial Notice

In its motion, KBC asks us to take notice of four documents: Omnicare’s Audit
Committee Charter, filed with the SEC in 2004; a version of Omnicare’s Corporate Integrity
Agreement; the Stone Opposition; and the Stone Declaration. KBC offers several different
arguments in support of its motion, but each of them is flawed. Therefore, we deny KBC’s
motion and take judicial notice of none of the documents.

First, KBC asks us to take judicial notice of Omnicare’s Audit Committee Charter, which
was attached to the company’s proxy statement filed with the SEC in 2004. KBC claims that
“this [c]ourt may consider ‘not only those documents referenced in the plaintiffs’ complaint, but
also documents filed with the SEC.’” Appellant MJN at 5 (quoting Helwig v. Vencor, 210 F.3d
612, 618 n.10 (6th Cir. 2000), rev’d on other grounds, 251 F.3d 540 (6th Cir. 2001) (en banc),
cert. denied, 536 U.S. 935 (2002)); see also id. at 5 n.2 (citing, inter alia, Kramer v. Time
Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991)). Because the Committee Charter was filed with
the SEC—and thus is a public record—KBC argues that “Defendants cannot challenge the
authenticity or admissibility of the [document].” Id. at 6. KBC, however, misunderstands the
permissible scope of judicial notice, and therefore, its argument founders for several reasons.

One, KBC misreads the panel decision in Helwig and the Second Circuit’s decision in
Kramer. Generally, at the motion-to-dismiss stage, a federal court may consider only the
plaintiff’s complaint. Weiner v. Klais & Co., Inc., 108 F.3d 86, 88–89 (6th Cir. 1997).
However, we have recognized that if a plaintiff references or quotes certain documents, or if
public records refute a plaintiff’s claim, a defendant may attach those documents to its motion to
dismiss, and a court can then consider them in resolving the Rule 12(b)(6) motion without
converting the motion to dismiss into a Rule 56 motion for summary judgment. Id. at 89.
Fairness and efficiency require this practice. As the Second Circuit explained in Kramer,
“[w]ere courts to refrain from considering such documents, complaints that quoted only selected
and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even
though they would be doomed to failure. Foreclosing resort to such documents might lead to
complaints filed solely to extract nuisance settlements.” 937 F.2d at 774. The question
presented in Kramer and to the panel in Helwig was whether the SEC filings were appropriate
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 11

“public records” to be considered at the motion-to-dismiss stage. In that context, this court and
the Second Circuit decided that the defendants could present SEC filings to rebut the complaint’s
misleading statements. See Helwig, 210 F.3d at 618 n.10; Kramer, 937 F.2d at 774.
Importantly, neither decision stated that a plaintiff could supplement the complaint on appeal
with SEC filings. Accordingly, neither the initial panel decision in Helwig nor the Second
Circuit decision in Kramer provides support for KBC’s application for judicial notice of the
Committee Charter.

Two, KBC cannot use its application for judicial notice as a vehicle to circumvent the
Federal Rules of Civil Procedure. As plaintiff, KBC is the master of its complaint, which means
that it can choose the forum in which to file and the law under which it wishes to seek relief.
See, e.g., Curry v. U.S. Bulk Trans., Inc., 462 F.3d 536, 543 (6th Cir. 2006). In addition to these
privileges, however, KBC also has the duty to put the defendants (and the court) on notice of the
claims and charges against the defendants. Fed. R. Civ. P. 8(a); Ashcroft v. Iqbal, 556 U.S. 662,
677–78 (2009); Conley v. Gibson, 355 U.S. 41, 47–48 (1957). Moreover, to maintain its suit,
KBC must put forth “either direct or inferential allegations [in the complaint] with respect to all
material elements necessary to sustain a recovery under some viable legal theory.” Weiner, 108
F.3d at 88 (citing Allard v. Weitzman (In re DeLorean Motor Co. Sec. Litig.), 991 F.2d 1236,
1240 (6th Cir. 1993)). Whether KBC could allege some facts to support a claim is not important;
what is paramount at the motion-to-dismiss stage is whether KBC did allege sufficient facts in
the Complaint. See Guzman v. United States Dep’t of Homeland Sec., 679 F.3d 425, 429 (6th
Cir. 2012). If KBC failed to carry that burden, it could have asked the district court for
permission to amend its complaint pursuant to Federal Rule of Civil Procedure 15; it would then
be within the district court’s discretion whether to allow amendment outside of twenty-one days.
See Hoover v. Langston Equip. Assocs., Inc., 958 F.2d 742, 745–46 (6th Cir. 1992). KBC does
not challenge the district court’s denial of KBC’s awkward request to amend the Complaint, and
thus, that issue is forfeited. See Demyanovich v. Cadon Plating & Coatings, LLC, 747 F.3d 419,
434 n.6 (6th Cir. 2014). KBC cannot circumvent this process by asking us to amend the
Complaint, effectively, through the vehicle of judicial notice.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 12

Three, taking judicial notice of the existence of Omnicare’s SEC filings would not save
KBC’s Complaint from the impact of Rule 12(b)(6). Importantly, Federal Rule of Evidence
201 allows a court to take notice of facts not subject to reasonable dispute. Under this standard,
we could take notice only of the fact that Omnicare filed the Audit Committee Charter and what
that filing said, but we could not consider the statements contained in the document for the truth
of the matter asserted, even at the motion-to-dismiss stage. See, e.g., Davis v. City of Clarksville,
492 F. App’x 572, 578 (6th Cir. 2012) (recognizing this distinction); Sigler v. Am. Honda Motor
Co., 532 F.3d 469, 476–77 (6th Cir. 2008) (same). The existence of the Audit Committee
Charter does not relate to the deficiencies in KBC’s complaint identified by the district court and
at issue here. Therefore, there is no reason to take judicial notice of the existence of the
document.

Second, KBC urges this court to take notice of a version of Omnicare’s Corporate
Integrity Agreement, which KBC claims was “incorporated by reference in the Complaint.”
Appellant MJN at 6 (referencing R. 94 at 28 (Compl. at ¶ 72) (Page ID #852)). In support, KBC
cites Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461, 467 (6th Cir. 2011), and Frank v.
Dana Corp., 646 F.3d 954, 959 (6th Cir. 2011), for the proposition that documents incorporated
by reference must be considered part of the complaint. Appellant MJN at 6. This proposition
finds further support in Federal Rule of Civil Procedure 10(c): “Adoption by Reference;
Exhibits. A statement in a pleading may be adopted by reference elsewhere in the same pleading
or in any other pleading or motion.” However, KBC has failed to incorporate this document
properly, failing in particular to place Omnicare or the court on notice of its contents. KBC
mentions the Corporate Integrity Agreement in only one sentence of the Complaint:
“C[onfidential] W[itness] 3 reported that problems surrounding Omnicare’s compliance with
federal and state laws governing this activity resulted in a five-year Corporate Integrity
Agreement . . . with the Office of the Inspector General . . . .” R. 94 at 28 (Compl. at ¶ 72) (Page
ID #852). This statement noting the document’s existence says nothing about its contents and
cannot fairly be read to refer Omnicare and the court to the contents of the agreement.
Accordingly, it is outside the Complaint. Moreover, this document helps KBC only if we can
consider the contents of the agreement for the truth of the matter. We cannot, as explained
above. Thus, there is no reason to take notice of its existence now.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 13

Third, KBC requests that this court take notice of the Stone Opposition and the Stone
Declaration because they are records from a related court proceeding. Appellant MJN at 6.
Appellate courts can take notice of the actions of other courts, see, e.g., Chase Bank USA, N.A. v.
City of Cleveland, 695 F.3d 548, 553 n.2 (6th Cir. 2012); Ferguson, 681 F.3d at 834, but
generally, a court will recognize only indisputable court actions, such as the entry of a guilty plea
or the dismissal of a civil action, see e.g., Ferguson, 681 F.3d at 834. Importantly, “a court
cannot notice pleadings or testimony as true simply because these statements are filed with the
court.” 21B Charles Alan Wright et al., Federal Practice and Procedure § 5106.4 (2d ed. 2005).
As a result, we could take notice only of the fact that Stone filed his opposition and declaration,
but the subject matter of those filings is the heart of the matter contested in this suit. Therefore,
this court cannot take notice of those filings for the truth of the matter asserted. And again, the
existence of the documents does not address the deficiencies in KBC’s complaint. Therefore,
there is little to be gained by taking judicial notice of either of these filings.

Fourth, KBC asks that this court take notice of the Stone Declaration because it was
incorporated by reference in a supplemental district-court filing. Appellant MJN at 7 n.4
(referencing R. 137 at 2 (KBC’s Post-Hr’g Mem. at 1) (Page ID #1726)). As noted above, KBC
needed either to incorporate the Stone Declaration into the Complaint by reference or amend the
Complaint so it contained the information in the document. KBC did not do so, and it cannot
now use judicial notice as a vehicle to wipe out its failure to follow proper procedure.

For these reasons, we deny in total KBC’s motion for judicial notice and confine our
inquiry to the facts alleged in the Complaint.

B. Omnicare’s Motion for Judicial Notice

In its motion for judicial notice, Omnicare asks us to admit five documents into the
record on appeal: (1) a copy of Omnicare’s 2007 Form 10-K; (2) a copy of Omnicare’s 2008
Form 10-K; (3) a copy of Omnicare’s 2009 Form 10-K; (4) a copy of Omnicare’s Form 10-Q
filed with the SEC on August 5, 2010; and (5) a copy of the original complaint in the Stone qui
tam action and the attached exhibits. See Appellee MJN at 1–2. Omnicare notes that the
Complaint references or quotes excerpts from these documents and asks us to consider those
quotations in their full context. Id. at 2–3. Importantly, it does not request that we consider the
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 14

documents for the truth of their content. By proceeding in this fashion, Omnicare follows the
well-worn path marked by cases such as Sigler, 532 F.3d at 476–77, and Ashland, 648 F.3d at
467. Therefore, we grant Omnicare’s motion and will consider the quotations in the Complaint
in the context of the full documents from which they were taken.

III. STANDARD OF REVIEW

We turn now to the heart of this appeal: whether the district court erred in dismissing
KBC’s complaint. We review de novo a district court’s decision to grant a motion to dismiss
pursuant to Federal Rule of Civil Procedure 12(b)(6). Watson Carpet & Floor Covering, Inc. v.
Mohawk Indus., Inc., 648 F.3d 452, 456 (6th Cir. 2011). On review, we accept plaintiff’s
allegations as true and construe the complaint in its favor, Kottmyer v. Maas, 436 F.3d 684, 688
(6th Cir. 2006), but the complaint’s “[f]actual allegations must be enough to raise a right to relief
above the speculative level,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
“[C]onclusory allegations or legal conclusions masquerading as factual allegations will not
suffice.” Watson Carpet, 648 F.3d at 457 (internal quotation marks omitted; alteration in
original). “Further, we may affirm the district court’s dismissal of [p]laintiffs’ claims on any
grounds, including those not relied on by the district court.” Zaluski v. United Am. Healthcare
Corp., 527 F.3d 564, 570 (6th Cir. 2008) (citing Hoffman v. Comshare, Inc. (In re Comshare,
Inc. Sec. Litig.), 183 F.3d 542, 548–49 (6th Cir. 1999)).

IV. LEGAL STANDARDS

For us to reverse the district court, KBC must show that it pleaded “enough facts [as to
each element of the cause of action] to state a claim to relief that is plausible on its face.”
Twombly, 550 U.S. at 570. There are six elements to a securities-fraud suit under § 10(b) of the
1934 Act and SEC Rule 10b-51: “(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

1
The United States Supreme Court has recognized that “[t]he scope of Rule 10b-5 is coextensive with the
coverage of § 10(b) . . . .” SEC v. Zandford, 535 U.S. 813, 816 n.1 (2002) (citing United States v. O’Hagan,
521 U.S. 642, 651 (1997); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976)). As a result, like the Supreme
Court, “we [will] use § 10(b) to refer to both the statutory provision and the Rule.” Id.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 15

causation.” Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011) (internal
quotation marks omitted). On appeal, the parties dispute two elements that are relevant for this
decision—Element One (a material misrepresentation or omission) and Element Two (scienter).
Our court has covered the standards for pleading these elements many times, and yet for all of
our efforts and many pronouncements, the precise requirements for sufficiently pleading them, at
least in this circuit, remain somewhat hazy and muddled. Therefore, before analyzing KBC’s
actual allegations, we will attempt to state the doctrine simply and in a straightforward manner in
the hope of clearing away any confusion.

A. Element One: Material Misrepresentation or Omission

Successfully pleading an actionable material misrepresentation or omission requires a
plaintiff to allege facts demonstrating two things: (1) that a defendant made a statement or
omission that was false or misleading; and (2) that this statement or omission concerned a
material fact. See, e.g., Matrixx, 131 S. Ct. at 1318. General allegations of these two
components, however, are not enough. Under Federal Rule of Civil Procedure 9(b) and the
PSLRA, a plaintiff’s complaint must also “allege the time, place, and content of the alleged
misrepresentation [or omission] on which he or she relied [and] the fraudulent scheme . . . .”
Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare,
Inc. (“Omnicare II”), 719 F.3d 498, 503 (6th Cir. 2013) (internal quotation marks omitted), cert.
granted, 2014 WL 801097 (Mar. 3, 2014) (No. 13-435). Unfortunately for all involved, reciting
these talismanic standards actually does little to clarify the doctrine because we have created and
conflated different tests and concepts in our prior decisions for evaluating this element.
Specifically, we have failed to recognize that we must apply a different analytical framework to
cases based on affirmative misrepresentations, as opposed to omissions, and that different rules
apply when the misrepresentation or omission concerns hard, as opposed to soft, information.

1. Actionable Misrepresentation

A misrepresentation is an affirmative statement that is misleading or false. When an
alleged misrepresentation concerns “hard information”—“typically historical information or
other factual information that is objectively verifiable”—it is actionable if a plaintiff pleads facts
showing that the statement concerned a material fact and that it was objectively false or
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 16

misleading. Murphy v. Sofamor Danek Grp., Inc. (In re Sofamor Danek Grp., Inc.), 123 F.3d
394, 401 (6th Cir. 1997) (internal quotation marks omitted); see City of Monroe Emps. Ret. Sys.
v. Bridgestone Corp., 399 F.3d 651, 669–70 (6th Cir. 2005). When an alleged misrepresentation
concerns “soft information,” which “includes predictions and matters of opinion,” id., a plaintiff
must additionally plead facts showing that the statement was “made with knowledge of its
falsity,” Omnicare I, 583 F.3d at 945–46.

It is this latter type of alleged misrepresentation that is at issue here and that has given us
and other courts such trouble because it adds a subjective inquiry to an otherwise objective
element, thus conflating two elements of the six-element cause of action—an actionable
misrepresentation and scienter. See, e.g., Brown v. Credit Suisse First Bos. LLC (In re Credit
Suisse First Bos. Corp. Sec. Litig.), 431 F.3d 36, 48 (1st Cir. 2005) (recognizing that “the
subjective aspect of the falsity requirement and the scienter requirement essentially merge”),
overruled on other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007);
In re Salomon Analyst AT&T Litig., 350 F. Supp. 2d 455, 466 (S.D.N.Y. 2004) (recognizing
same). Until now, we have ignored this merger of elements and analyzed whether a defendant
had actual knowledge under both Elements One and Two. See, e.g., Omnicare I, 583 F.3d at
945–47 (analyzing knowledge of falsity under the material-misrepresentation requirement);
Zaluski, 527 F.3d at 573 (same); City of Monroe, 399 F.3d at 670–76, 684–88 (analyzing
knowledge of falsity under both requirements). In doing so, we have muddled the analytical
framework, making it more difficult for lower courts and parties to evaluate whether a plaintiff
has sufficiently pleaded a cause of action.

In the end, we must choose one way or the other to analyze a defendant’s actual
knowledge. Whether courts choose to evaluate this subjective component as part of their
material-misrepresentation analysis or their scienter analysis makes little difference for the
parties. Under either approach, Plaintiffs will need to allege particular facts demonstrating that
defendants had actual knowledge that their statements concerning soft information were false or
misleading at the time that they were made. But for the sake of clarity, it makes the most sense
to adopt the First Circuit’s approach and conceive of this additional requirement as raising the
bar for alleging scienter. See In re Credit Suisse, 431 F.3d at 48–49; see also Wendy Gerwick
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 17

Couture, Opinions Actionable as Securities Fraud, 73 La. L. Rev. 381, 394–401 (2013). Doing
so would allow courts to evaluate materiality and whether the statement was misleading or
false—two objective inquiries—under the material-misrepresentation prong and then to save all
subjective inquiries for the scienter analysis. In addition, whether someone made a statement
with the knowledge that it was false is, at bottom, a question of someone’s state of mind—the
general subject of a scienter inquiry.

2. Actionable Omission

In lieu of targeting a defendant’s misleading or false statements, a plaintiff may focus on
a defendant’s omission—its failure to disclose information when it had a duty to do so. “A duty
to affirmatively disclose ‘may arise when there is insider trading, a statute requiring disclosure,’
or, as relevant in this case, ‘an inaccurate, incomplete[,] or misleading prior disclosure.’” City of
Monroe, 399 F.3d at 669 (quoting In re Digital Island Sec. Litig., 357 F.3d 322, 329 n.10 (3d
Cir. 2004)). To complicate matters further, when a person or corporation comes into possession
of information that makes a prior statement “inaccurate, incomplete, or misleading,” different
duties to disclose the new information arise, perhaps unsurprisingly, depending on whether the
new information is hard or soft. If the new information is hard, then a person or corporation has
a duty to disclose it if it renders a prior disclosure objectively inaccurate, incomplete, or
misleading. See Zaluski, 527 F.3d at 576 (citing City of Monroe, 399 F.3d at 673). If the new
information is soft, then a person or corporation has a duty to disclose it “‘only if [it is] virtually
as certain as hard facts’” and contradicts the prior statement. Sofamor Danek, 123 F.3d at 402
(quoting Starkman v. Marathon Oil Co., 772 F.2d 231, 241 (6th Cir. 1985)). In other words, the
new information must be so concrete that the defendant must have actually known that the new
information renders the prior statement misleading or false and still did not disclose it. Whether
newly acquired soft information is sufficiently concrete to trigger a duty to disclose will
undoubtedly depend upon the facts in a given case, and the nature of both the prior disclosure
and the new information will determine whether new information makes a prior disclose false or
misleading.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 18

3. Materiality

Regardless of whether a plaintiff chooses to proceed under a misrepresentation theory or
one based on an omission, he will have to allege facts that satisfy § 10(b)’s materiality
component. Unfortunately, the analytic approach for evaluating “materiality” is not much
clearer than the first part of this element.

The purpose of “the materiality requirement is not to ‘attribute to investors a child-like
simplicity, an inability to grasp the probabilistic significance of [opinion statements],’ but to
filter out essentially useless information that a reasonable investor would not consider
significant, even as part of a larger ‘mix’ of factors to consider in making his investment
decision.” Basic, Inc. v. Levinson, 485 U.S. 224, 234 (1988) (quoting Flamm v. Eberstadt,
814 F.2d 1169, 1175 (7th Cir. 1987)). To this end, we have said before that “[m]isrepresented or
omitted facts are material only if a reasonable investor would have viewed the misrepresentation
or omission as ‘having significantly altered the total mix of information made available.’”
Sofamor Danek, 123 F.3d 394, 400 (6th Cir. 1997) (quoting Basic, Inc., 485 U.S. at 232). Put
another way, a “‘fact is material if there is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote.’” Basic, Inc., 485 U.S. at 231 (quoting TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “‘Immaterial statements include
vague, soft, puffing statements or obvious hyperbole’ upon which a reasonable investor would
not rely.” Public Sch. Teachers’ Pension & Ret. Fund of Chi. v. Ford Motor Co. (In re Ford
Motor Co. Sec. Litig.), 381 F.3d 563, 570 (6th Cir. 2004) (quoting In re K-tel Int’l, Inc. Sec.
Litig., 300 F.3d 881, 897 (8th Cir. 2002)).

This standard and these examples, however, are vague and provide little guidance in
close cases. At first glance, this doctrine might appear “both clever and intuitively sensible,” but
it has the potential to “look more like a heuristic rather than an entirely legitimate doctrine” when
used too often “at the motion to dismiss stage (where materiality, being a fact question, typically
should not be decided) . . . .” Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges
Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities
Fraud Opinions, 51 Emory L.J. 83, 115 (2002). In general, the federal judiciary has a limited
understanding of investor behavior and the actual economic consequences of certain statements.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 19

Thus, we must tread lightly at the motion-to-dismiss stage, engaging carefully with the facts of a
given case and considering them in their full context. See Jennifer O’Hare, The Resurrection of
the Dodo: The Unfortunate Re-emergence of the Puffery Defense in Private Securities Fraud
Actions, 59 Ohio St. L.J. 1697, 1727–1731 (1998) (illuminating the importance of context to
materiality determinations). Otherwise, we risk prematurely dismissing suits on the basis of our
intuition.

B. Element Two: Scienter

To satisfy Element Two, plaintiffs must plead facts showing that defendants had a
“‘mental state embracing intent to deceive, manipulate or defraud.’” In re Comshare, 183 F.3d
at 548 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 (1976)). In the past, we have
read this language to require plaintiffs to allege facts showing that defendants acted with at least
recklessness. Helwig v. Vencor, Inc., 251 F.3d 540, 550 (6th Cir. 2001) (en banc). However,
when plaintiffs accuse defendants of misrepresenting or omitting soft information, as KBC does
in this case, plaintiffs must plead facts showing that the defendants knowingly misrepresented or
omitted facts to deceive, manipulate, or defraud the public. Omnicare II, 719 F.3d at 505;
Omnicare I, 583 F.3d at 945–46.

In run-of-the-mill fraud cases, KBC could allege this mental state “generally,” Rule 9(b),
but in securities-fraud actions, Congress has imposed a higher standard, requiring plaintiffs to
“state with particularity facts giving rise to a strong inference that the defendant acted with the
required state of mind,” 15 U.S.C. § 78u-4(b)(2). Interpreting this language, the Supreme Court
has created a three-part test for lower courts to apply in assessing the sufficiency of a plaintiff’s
scienter allegations. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322–23
(2007). First, a court must “accept all factual allegations in the complaint as true.” Id. at 322.
Second, a court “must consider the complaint in its entirety” and decide “whether all of the facts
alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets that standard.” Id. at 322–23. Third, assuming that
plaintiff’s allegations create a “powerful or cogent” inference of scienter, id. at 323, a court must
compare this inference with other competing possibilities, allowing the complaint to go forward
“only if a reasonable person would deem the inference of scienter cogent and at least as
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 20

compelling as any opposing inference one could draw from the facts alleged,” id. at 324. See
also Frank v. Dana Corp., 547 F.3d 564, 570–71 (6th Cir. 2008) (adopting this approach).

When the defendant is an individual, we examine the facts and apply this test in a rather
straightforward manner, considering factors such as whether there was:

(1) insider trading at a suspicious time or in an unusual amount; (2) divergence
between internal reports and external statements on the same subject;
(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, 251 F.3d at 552. The more of these factors that are present, the stronger the inference
that the defendant made his statement with the requisite state of mind.

This analysis can become much more complicated when the defendant is a corporation
because there is the additional question of whose knowledge and state of mind matters. For
liability to attach to the corporation, must the person misrepresenting a material fact in the name
of the corporation have also done so with scienter, or is it enough that some person in the
corporate structure had the requisite state of mind? If the latter conception is correct, how high
in the hierarchy of the corporation must the person with scienter be, and what must his
relationship be to the statement? Our sister circuits have answered these questions differently;
scholars disagree; and we have been less than precise in our prior pronouncements. Therefore,
we try once more to survey the terrain and explain where we stand on the doctrine of collective
corporate scienter.

1. The Lay of the Land

In 2004, the Fifth and Eleventh Circuits adopted a narrow view in keeping with common-
law-fraud principles, allowing scienter to be imputed to the corporation only under a theory of
respondeat superior. These circuits “look to the state of mind of the individual corporate official
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 21

or officials who make or issue the statement (or order or approve it or its making or issuance, or
who furnish information or language for inclusion therein, or the like) rather than generally to the
collective knowledge of all of the corporation’s officers and employees acquired in the course of
their employment.” Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th
Cir. 2004); see also Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1018–19 (11th Cir. 2004)
(implicitly adopting this approach). For support, these circuits cite general common-law fraud
principles and cases from other circuits noting that “‘there is no case law [as of 2004] supporting
an independent collective scienter theory.’” Southland, 365 F.3d at 366 (quoting Nordstrom, Inc.
v. Chubb & Son, Inc., 54 F.3d 1424, 1435 (9th Cir. 1995)).

A year later, a panel of this court took a very different approach, allowing the knowledge
of a corporate officer to be imputed to the corporation even though that officer did not issue the
false or misleading statement. See City of Monroe, 399 F.3d at 688–90. In that case, the
plaintiffs alleged that the corporation made several material misrepresentations in its annual
report, and we held that these statements were actionable. Id. at 680–81. Plaintiffs also alleged
that the CEO had actual knowledge that these statements were false or misleading, and we held
that this knowledge could be attributed to the corporation, even though the complaint failed to
link the CEO to the issuance of the statements. Id. at 688–89. As a result, we decided that the
plaintiffs’ suit could go forward against the corporation, our having concluded that plaintiffs
adequately pleaded Element One and Element Two. Id. at 689. Importantly, because the
plaintiffs did not claim that the CEO issued the misrepresentations, we dismissed the suit against
the CEO in his personal capacity. Id. at 690. In adopting this more expansive view of collective
corporate scienter, we cited a securities-regulation treatise and analogized from a Tenth Circuit
case. See id. at 688 (citing 2 Thomas Lee Hazen, Treatise on the Law of Securities Regulation
§ 12.8[4], at 444 (4th ed. 2002); Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106 (10th Cir.
2003)).

Several years later, the Second, Seventh, and Ninth Circuits weighed in, though none of
these circuits sided fully with either camp in this circuit split. The Seventh Circuit recognized
that “it is possible to draw a strong inference of corporate scienter without being able to name the
individuals who concocted and disseminated the fraud.” Makor Issues & Rights, Ltd. v. Tellabs
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 22

Inc., 513 F.3d 702, 710 (7th Cir. 2008). The court reasoned: “Suppose General Motors
announced that it had sold one million SUVs in 2006, and the actual number was zero. There
would be a strong inference of corporate scienter, since so dramatic an announcement would
have been approved by corporate officials sufficiently knowledgeable about the company to
know that the announcement was false.” Id. In this case, however, it was unnecessary to rely
upon an expansive view of collective corporate scienter because the court held that the plaintiffs
adequately pleaded that the CEO knowingly misrepresented material facts with the intent to
defraud and that his individual liability could be imputed to the corporation. Id. at 711.

Somewhat similarly, the Second Circuit agreed that plaintiffs could plead collective
corporate scienter, at least in some cases, and overcome the PSLRA’s requirements. The court
stated: “we do not believe that [Congress] imposed the rule . . . that in no case can corporate
scienter be pleaded in the absence of successfully pleading scienter as to an expressly named
officer.” Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190,
196 (2d Cir. 2008). That said, the court concluded that the plaintiffs “fail[ed] to allege the
existence of information that would demonstrate that the statements made to investors were
misleading” and, thus, that the plaintiffs failed to state a valid claim. Id. at 197.

Finally, the Ninth Circuit added to this middle position, stating that it “had at that time
[2002] not categorically rejected the concept of ‘collective scienter’” and that “there could be
circumstances in which a company’s public statements were so important and so dramatically
false that they would create a strong inference that at least some corporate officials knew of the
falsity upon publication.” Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736, 744 (9th Cir.
2008) (citing Makor Issues, 513 F.3d at 710). Importantly, the Ninth Circuit pared back
Nordstrom, which the Fifth Circuit had relied upon, writing that “Nordstrom does not foreclose
the possibility that, in certain circumstances, some form of collective scienter pleading might be
appropriate.” Id. The court nevertheless concluded that Glazer Capital was not such a case and
required the plaintiff “to plead scienter with respect to those individuals who actually made the
false statements . . . .” Id. at 745. Surprisingly, none of the 2008 decisions cited or discussed
City of Monroe.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 23

2. Merits of the Approaches

Since Southland and City of Monroe were decided, courts and commentators have
debated the merits of the two approaches. Most agree that neither—when taken to the extreme—
is ideal, though there is no consensus about how to calibrate the middle ground. Slanting too far
toward the Fifth Circuit’s approach risks running counter to the goals and purposes of the
1934 Act—which include fostering “an attitude of full disclosure by publicly traded
corporations, rather than a philosophy of caveat emptor for securities buyers.” Heather F. Crow,
Riding the Fence on Collective Scienter: Allowing Plaintiffs to Clear the PSLRA Pleading
Hurdle, 71 La. L. Rev. 313, 317 (2010) (citing SEC v. Capital Gains Research Bureau, Inc.,
375 U.S. 180, 186 (1963)). For instance, “in situations where a corporate policy, procedure, or
sub rosa encouragement of illegal or tortious behavior results in the commission of an offense,
but there is no single identifiable culpable actor, [the Fifth Circuit’s approach] would not place
the requisite culpability on the corporation.” Patricia S. Abril & Ann Morales Olazábal, The
Locus of Corporate Scienter, 2006 Colum. Bus. L. Rev. 81, 113–14 (2006); see also Craig L.
Griffin, Note, Corporate Scienter Under the Securities Exchange Act of 1934, 1989 BYU L.
Rev. 1227, 1244 (“A requirement that corporate liability may lie only where all culpable
knowledge exists in a single individual would allow a corporation to engage freely in conscious
ignorance by keeping lines of communication between different departments closed.”).

In contrast, reading our decision in City of Monroe too broadly could expose corporations
to liability far beyond what Congress has authorized. In that case, we stated that “‘knowledge of
a corporate officer or agent acting within the scope of [his] authority is attributable to the
corporation.’” City of Monroe, 399 F.3d at 688 (quoting 2 Thomas Lee Hazen, Treatise on the
Law of Securities Regulation § 12.8[4], at 444 (4th ed. 2002)) (alteration in original; emphasis
added). If the scienter of any agent can be imputed to the corporation, then it is possible that a
company could be liable for a statement made regarding a product so long as a low-level
employee, perhaps in another country, knew something to the contrary. See Kevin O’Riordan,
Note, Clear Support or Cause for Suspicion? A Critique of Collective Scienter in Securities
Litigation, 91 Minn. L. Rev. 1596, 1613–14 (2007) (citing cases). Such a result runs contrary to
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 24

the PSLRA, which increased the scienter pleading requirements to prevent strike suits. Id. at
1614.

3. Our Standard

Given that neither approach is ideal, a middle ground is necessary. In addition, our prior
decision in City of Monroe, if read in an overly broad manner, potentially supports a theory of
scienter at odds with the PSLRA. Therefore, going forward, we adopt the following formulation
of the rule:

The 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 . . . .

Abril & Olazábal, Locus, supra, at 135 (emphasis deleted).2 We think that this clarification of
the rule not only remains true to our prior statements, but also goes a long way toward solving
the flaws of the two approaches discussed above.

First, this rule is consistent with our prior pronouncement in City of Monroe, though it
qualifies some of that opinion’s overly broad language. We recognize that “‘[a] panel of this
Court cannot overrule the decision of another panel. The prior decision remains controlling
authority unless an inconsistent decision of the United States Supreme Court requires
modification of the decision or this Court sitting en banc overrules the prior decision.’” Darrah
v. City of Oak Park, 255 F.3d 301, 309 (6th Cir. 2001) (quoting Salmi v. Sec’y of Health &
Human Servs., 774 F.2d 685, 689 (6th Cir. 1985)). Admittedly, some of the language in City of

2
Abril and Olazábal append another prong to this test—the corporation itself. See Abril & Olazábal, Locus,
supra, at 135. At this point, we see no need to expand our rule to include this highly theoretical portion of their test.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 25

Monroe suggests that the knowledge of any agent of the company could be imputed to the
corporation, but that case turned on the CEO’s knowledge, a person included in Part C of our
rule. See City of Monroe, 399 F.3d at 688. The broader language of the opinion is not necessary
to arrive at that panel’s conclusion and is, thus, dicta. See United States v. Wells, 473 F.3d 640,
647–48 n.5 (6th Cir. 2007) (rephrasing a prior panel’s statement when it used overly broad
language to decide a narrower point). Moreover, the result of that case would not change under
our clarification of the standard. The CEO’s knowledge, after all, would be imputed to the
corporation under our formulation of the standard. Therefore, under these conditions, our
precedents and procedures justify our formulation of this circuit’s collective-scienter standard.

Second, this formulation of the rule largely prevents corporations from evading liability
through tacit encouragement and willful ignorance, as they potentially could under a strict
respondeat superior approach. Under our formulation of the rule, a corporation is not insulated
if lower-level employees, contributing to the misstatement, knowingly provide false information
to their superiors with the intent to defraud the public. As a result, corporations that willfully
permit or encourage the shielding of bad news from management will potentially be liable. And
therefore, the ultimate purpose of the 1934 Act will be served.

Third, our formulation protects corporations from liability—or strike suits—when one
individual unknowingly makes a false statement that another individual, unrelated to the
preparation or issuance of the statement, knew to be false or misleading. By allowing courts to
examine only the states of mind of lower-level employees connected to the statements, our
formulation prevents plaintiffs from abusing the broad dicta in City of Monroe and running afoul
of the PSLRA.

V. APPLICATION

A. Element One: Material Misrepresentation

For KBC to defeat Omnicare’s motion to dismiss its securities-fraud action, KBC must
first show that its Complaint contained allegations that Omnicare or an Individual Defendant
made an actionable material misrepresentation or omission. On appeal, KBC focuses our
attention on one set of statements and one omission: (1) Omnicare’s 2007–2010 SEC filings in
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 26

which Omnicare stated that it believed it was complying with federal, state, and local law3; and
(2) Omnicare’s failure to report its non-compliance with the regulations after receiving the
results of Stone’s audits, respectively. The district court found that none of these allegations
were sufficient to state a valid claim. We address each contention and its relation to the
Individual Defendants and Omnicare in turn.

1. Affirmative Statements

As noted above, KBC first focuses our attention on statements that Omnicare made in
filing its 2007 to 2010 versions of Form 10-K. In those filings, Gemunder, Froesel, and
Workman—on behalf of Omnicare—certified:

Medicare and Medicaid providers and suppliers are subject to inquiries or audits
to evaluate their compliance with requirements and standards set forth under these
government-sponsored programs. These audits and inquiries, as well as our own
internal compliance program, from time-to-time have identified overpayments
and other billing errors resulting in repayment or self-reporting to the applicable
agency. We believe that our billing practices materially comply with applicable
state and federal requirements. However, the requirements may be interpreted in
the future in a manner inconsistent with our interpretation and application. . . .
Although we believe that we are in compliance in all material respects with
federal, state and local laws, failure to comply could subject us to denial of the
right to conduct business, fines, criminal penalties and other enforcement actions.

R. 94 at 35–37 (Compl. at ¶¶ 91–94) (Page ID #859–61). KBC alleged in the Complaint that the
italicized text above constituted a material misrepresentation. Id. at 37 ¶ 95 (Page ID #861). On
appeal, KBC admits that these statements concern soft information, which triggers a higher
scienter requirement that is addressed below. For this element, however, KBC must show that it
alleged facts that, if proven, would support findings that these statements (a) concerned a
material fact; and (b) were objectively false or misleading.

3
Defendants argue that KBC is changing its allegations on appeal, moving away from allegations that
Omnicare and the Individual Defendants covered up a fraudulent scheme to claims that the defendants professed
material compliance while knowing that Omnicare was not following reimbursement regulations. See Appellee Br.
at 28–29. While KBC has adopted a more restrained tone in its briefing than found in the Complaint, it did plead
that “Defendants knew, but failed to disclose, . . . that Omnicare was not complying with Medicare and Medicaid
reimbursement regulations” and that “Defendants had no good faith basis to assert that Omnicare’s billing practices
were in compliance with applicable state and federal regulations or that Omnicare was in compliance in all material
respects with applicable federal, state, and local laws and regulations.” R. 94 at 37–38 (Compl. at ¶ 95) (Page ID
#861–62). The Complaint may not be artfully drafted, but if construed in favor of the non-moving party, KBC, the
Complaint contains the seeds of the arguments pushed by KBC on appeal. That is enough.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 27

a. Materiality

In this case, one might be skeptical of whether a reasonable investor would put much
stock in Omnicare’s statements regarding legal compliance cited by KBC. According to the
Complaint, Omnicare used the same boilerplate language in each Form 10-K over several years.
See id. at 35–37 ¶¶ 91–94 (Page ID #859–61). Moreover, it is vague language that leaves
Omnicare a great amount of wiggle room, and it appeared in only two paragraphs in each
document, each of which spanned roughly two hundred pages. See, e.g., Appellee MJN at Ex. A.
Looking just at these documents, it is difficult to believe that a somewhat-competent investor—
let alone one we would trust with our own money—would change her behavior if she knew the
precise results of the individual audits. However, as we have said and the Supreme Court has
made clear, context matters when analyzing materiality. See, e.g., Matrixx, 131 S. Ct. at 1321;
City of Monroe, 399 F.3d at 672. Here, we must consider—as KBC points out in the
Complaint—that Omnicare had a recent history of legal problems surrounding non-compliance.
See R. 94 at 31–33 (Compl. at ¶¶ 83–85) (Page ID #855–57). The company paid the government
$98 million to settle a prior case. Id. at 31 ¶ 83 (Page ID #855). And in light of this past history,
we conclude that a reasonable jury could find that any information showing compliance
problems for Omnicare—arguably in conflict with Omnicare’s statements in the Form 10-K
submissions—would change an investor’s mind about whether to buy or sell stock in Omnicare.
Accordingly, we hold that Omnicare’s material-compliance statements in the Form 10-Ks
concern material facts.

b. Objective Falsity

We must next determine whether KBC alleged facts demonstrating that Omnicare’s
compliance-related statements were objectively false or misleading in light of the information
now known. This, too, is a difficult question given the nature of the statements involved, and we
must pull the individual statements apart to determine whether a reasonable jury could find them
false or misleading. See Zaluski, 527 F.3d at 573; City of Monroe, 399 F.3d at 674.

First, Omnicare admitted that it conducts audits and that those audits reveal incidents of
non-compliance. See, e.g., R. 94 at 35 (Compl. at ¶ 91) (Page ID #859). In its briefing and at
oral argument, Omnicare asserted that this disclosure alone means that KBC cannot carry its
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 28

burden of alleging facts that would allow a reasonable juror to conclude that Omnicare made a
statement that was false or misleading. See Appellee Br. at 36–37; see also Kuyat v. BioMetric
Therapeutics, Inc., 747 F.3d 435, 443 (6th Cir. 2014) (recognizing that “[o]ther courts have
concluded that disclosing adverse information to the public negates an inference of scienter”).
The problem is that KBC never alleged that Omnicare needed to disclose that the audits
happened; KBC faults Omnicare for claiming that it was in material compliance after learning
the results of the audits, and no one contends that Omnicare disclosed the results of the audits.
Thus, Omnicare’s argument fails.

Second, Omnicare stated that it “believe[d] that [its] billing practices materially
compl[ied] with applicable state and federal requirements,” but that the government might
interpret the regulations differently. R. 94 at 35 (Compl. at ¶ 91) (Page ID #859) (emphasis
deleted). By appending “we believe” to the beginning of the sentence and recognizing that the
government might have a different view, Omnicare made it extremely difficult for a plaintiff to
disprove the literal import of the company’s statements. Any reliance, however, on this
hypertextualist argument is for naught. In passing the 1934 Act, Congress did not intend to
allow corporations or their officers to insulate themselves by simply attaching throat-clearing
language to their public utterances. See Basic, Inc., 485 U.S. at 230 (recognizing that the goal of
the 1934 Act was to ensure full and fair disclosure of information). Therefore, we examine the
substance of Omnicare’s statement—that it was in material compliance with federal, state, and
local laws. We must answer whether a reasonable jury could find that the results of the Wave I,
Wave II, or Pharmacy Audits render Omnicare’s material-compliance statement false or
misleading. See Zaluski, 527 F.3d at 573.

The answer, at this stage of the litigation, is that KBC has pleaded sufficient facts
regarding the Wave II Audit and the Pharmacy Audit that, if proven true, could support a finding
of objective falsity.4 According to the Complaint, the Wave II Audit revealed “substantial
fraud,” R. 94 at 21 (Compl. at ¶ 49) (Page ID #845), and billing irregularities, id. at 22 ¶ 50

4
The Wave I Audit results have little relevance to this question because they pertain to Omnicare’s
compliance with applicable regulations from 2000 to 2005—well before the Class Period. See R. 94 at 19 (Compl.
at ¶ 42) (Page ID #843).
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 29

(Page ID #846). The Pharmacy Audit5 apparently showed “that Omnicare’s pharmacies were in
violation of numerous statutory and regulatory requirements” and that those pharmacies “were
submitting false and fraudulent Medicare and Medicaid claims.” Id. at 24 ¶¶ 55, 56 (Page ID
#848) (internal quotation marks omitted). In its briefing, Omnicare asserts that the pharmacies
and services audited constituted a tiny percentage of Omnicare’s overall business assets, and
therefore, even if the audits painted an accurate picture, they could not show that Omnicare—as
a whole—was not in material compliance with the law. See Appellee Br. at 8. This argument,
however, is one for the summary-judgment stage and irrelevant at this point in the litigation. We
look only to the Complaint and the documents attached to it. Kottmyer, 436 F.3d at 688.
Considering only these documents and accepting their allegations as true, we conclude that a
reasonable jury could find that the results of the Wave II Audit and the Pharmacy Audit make
Omnicare’s material-compliance statements objectively false or misleading.6 Thus, we hold that
KBC’s complaint sufficiently pleaded Element One with regard to these affirmative statements.

2. Omissions

We turn next to KBC’s alternative theory that the defendants had a duty to disclose the
results of Stone’s audits and committed an actionable, material omission by failing to do so.
KBC basically claims that once Omnicare learned the results of the Stone audits, it had a duty to
correct its statement that it was in material compliance with laws and regulations. The district
court rejected this argument, finding that Omnicare’s compliance statements constituted soft
information that did not need to be corrected because only third parties could determine whether
Omnicare was in material compliance. In re Omnicare, Inc., 2013 WL 1248243, at *13. For
support, the district court cited our decision in Omnicare I. Id. We disagree and hold that KBC

5
At oral argument, Omnicare claimed that the Complaint never alleged facts indicating whether the
Pharmacy Audit examined these pharmacies’ submissions before or after coming under the control of Omnicare.
The language in the Complaint is ambiguous; the use of the past tense does not settle when in the past the
noncompliance happened. Furthermore, the Complaint states that “[t]he Pharmacy Audit revealed pervasive
ongoing fraud . . . .” R. 94 at 24 (Compl. at ¶ 57) (Page ID #848). Given that this sentence would indicate that the
irregularities continued up to the time that Omnicare’s auditors discovered them, it would seem that they happened
under Omnicare’s watch. As a result, drawing all inferences in favor of the non-moving party, we conclude that the
Pharmacy Audit could be discussing the pharmacies’ practices under Omnicare.
6
KBC does not need to recite in the Complaint the specific results of the audits, including the percentage of
Omnicare claims audited or the non-compliance rate. Under the PSLRA, it is enough to identify the
misrepresentations (the Form 10-K statements) and explain how they are false or misleading (they conflict with the
results of the audits, which show billing irregularities). 15 U.S.C. § 78u-4(b)(1)(B).
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 30

has sufficiently pleaded Element One under an omission theory as well, meaning that a
reasonable jury could find that the audit results were material facts7 and that Omnicare had a
duty to disclose those results.

Our analysis of materiality and duty to disclose largely mirrors our analysis above in Part
V.A.1, except for two points. One, we reject the notion that a third party’s actions have any
bearing on whether Omnicare’s statements in the Form 10-Ks needed to be updated and
corrected. As noted above, in the Form 10-Ks, Omnicare stated that it “believe[d] that [its]
billing practices materially comply with applicable state and federal requirements.” R. 94 at 37
(Compl. at ¶ 94) (Page ID #861) (emphasis deleted). This statement neither states nor implies
that Omnicare is predicting the actions of a third party. And certainly, a company could have
enough internal information to know that it had severe compliance issues. See City of Monroe,
399 F.3d at 672. Thus, we have difficulty understanding why the district court focused on
whether a government entity would adjudge Omnicare non-compliant. In this case, the actions
of the government are irrelevant.

Two, we note that if a reasonable jury could find that Omnicare’s Form 10-K statements
were objectively false, then the same jury could find that Omnicare had a duty to disclose the
results of the audits after issuing its material-compliance statements in those SEC forms. The
analysis is largely the same, though the chronology is reversed. In the misrepresentation
analysis, a defendant has the information—in this case, the audit results—and then makes an
affirmative statement to the contrary. In this instance, the defendant allegedly made a statement,
learned that it was false, and chose to remain quiet. At this point in the analysis, though, the jury
needs to find only that the information and the statement conflict, and if a reasonable jury could
find a statement of soft information objectively false, then the contrary information must be
“virtually as certain as hard facts.” Sofamor Danek, 123 F.3d at 402 (internal quotation marks
omitted). It makes little difference which piece came first, and thus, for the reasons stated in Part
V.A.1.b, we conclude that KBC has also met its burden for proving Element One under an
omission theory.

7
For the reasons explained above, we hold that a reasonable jury could find that the disclosure of the audit
results would have caused a reasonable investor to alter his decision to buy or sell Omnicare stock.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 31

B. Scienter

To survive Omnicare’s motion to dismiss, KBC must also have pleaded particular facts
giving rise to a strong inference of scienter, meaning that KBC alleged facts showing that
Omnicare or the Individual Defendants filed the Form 10-K statements, knowing they were false,
with the intent to defraud the public, or that they knowingly failed to correct them with the same
intent. On this point, KBC maintains that the Complaint contains allegations showing that
(1) the Individual Defendants knowingly acted to defraud the public, a state of mind that can
then be imputed to Omnicare; and (2) Omnicare is liable under a theory of collective scienter.
Neither argument succeeds, and therefore we affirm the district court’s dismissal of KBC’s
complaint.

1. Scienter of Individual Defendants

We agree with the district court that the Complaint does not sufficiently tie Gemunder (or
any of the Individual Defendants) to the Stone audits, and thus, KBC has failed to plead
sufficient facts showing that Gemunder or the other Individual Defendants had actual knowledge
that the Form 10-K statements were false. Because the statements at issue concerned soft
information, this lack of knowledge is fatal to KBC’s claims against the Individual Defendants.

The Complaint states that “Stone presented the results of the Wave I [A]udit to
Omnicare’s Internal Audit and Corporate Compliance Committees,” but it never states with
particularity who sat on those committees or what the committee members’ responsibilities were
in the corporate structure.8 R. 94 at 21 (Compl. at ¶ 46) (Page ID #845). Moreover, as noted
above, the Wave I Audit concerned submissions from 2000 to 2005 and sheds little light on
whether the Form 10-K statements regarding practices in 2007 and later were made with actual
knowledge of their falsity.

Regarding the more-relevant Wave II Audit, the Complaint claims “[o]n information and
belief” that the results were given to the Individual Defendants. Id. at 19 ¶ 51 (Page ID #846).

8
KBC attempts to remedy this deficiency by asking this court to take judicial notice of the Audit
Committee Charter. See Appellant MJN at 2. However, for the reasons recited above in Part II, we reject KBC’s
motion, and as a result, we look only to the Complaint in determining whether KBC alleged sufficient facts that tie
Gemunder and the other Individual Defendants to the Stone audits.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 32

However, the PSLRA states that “if an allegation regarding the [fraudulent] statement or
omission is made on information and belief, the complaint shall state with particularity all facts
on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Here, KBC never alleged any specific
facts to explain the basis for its belief that the results of the Wave II Audit were communicated to
the Individual Defendants beyond the conclusory statement that the results must have been given
to them. Thus, under the PSLRA, KBC has failed to link the Individual Defendants to the Wave
II Audit.

KBC gets more mileage out of its allegations concerning Gemunder and the Pharmacy
Audit, but it still falls short of showing adequately pleaded scienter. In the Complaint, KBC
claimed that “Stone shared with Gemunder the results of the [Pharmacy] Audit . . . .” R. 94 at 87
(Compl. at ¶ 193) (Page ID #911). KBC, however, never alleges specifically what those results
were. At one point, the Complaint reads: “The Pharmacy Audit revealed pervasive ongoing
fraud that had not been disclosed to the investing public . . . .” Id. at 24 ¶ 57 (Page ID #848).
But the Complaint never offers concrete details, other than to say generally that the audit
revealed fraud and compliance issues, that would allow us to determine whether Gemunder knew
that the Form 10-K statements were false. Instead, KBC points us to Paragraph 193 of the
Complaint, in which KBC alleges that Gemunder told Stone to “‘begin looking for other
employment’” directly after Stone informed Gemunder of the Pharmacy Audit results. Id. at 87
¶ 193 (Page ID #911). KBC reasons that, whatever Stone told Gemunder, it would have been
enough to give Gemunder actual knowledge that the Form 10-K statements were false. See
Appellant Br. at 27. Otherwise, KBC posits, there would be no reason for Gemunder to
terminate Stone’s employment. Id.

Unfortunately for KBC, this speculative reasoning—however persuasive its logic—is not
able to overcome the high pleading standards erected by Rule 9(b) and the PSLRA. As the
district court stated, “[KBC] has not alleged with particularity what the specific results of the
[P]harmacy [A]udit demonstrated or what was communicated to Gemunder, i.e.[,] how many
pharmacies were involved, what specific irregularities were found, how many actual claims were
involved, or how, or what, information was actually communicated.” In re Omnicare, Inc.,
2013 WL 1248243, at *10. KBC merely makes general statements and heaps inference upon
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 33

inference; the Complaint never alleges that Person A did Act B at Time C, which is required by
the PSLRA. Accordingly, we do not agree with KBC that the Complaint alleges sufficient facts
showing that Stone directly gave any of the Individual Defendants actual knowledge that the
Form 10-K statements were false.

In a last effort to show that the Individual Defendants had actual knowledge of
Omnicare’s non-compliance, KBC directs us to Paragraph 82, which describes the statements
and allegations of Confidential Witness 5—William Fitzpatrick—Omnicare’s former Chief
Compliance Officer. This attempt fails to pass muster as well. In relevant part, the Complaint
states: “[Fitzpatrick] confirmed the reports of the other confidential witnesses detailed above,
and qui tam relator Stone, stating that [he] had brought compliance related concerns to the
attention of defendant Gemunder and other Omnicare executives.” R. 94 at 31 (Compl. at ¶ 82)
(Page ID #855) (emphasis added). These concerns supposedly included the results of Stone’s
audits and other examples of non-compliance. Id. While the district court rightly recognized
that this allegation came closest to pleading actual knowledge, the district court ultimately
rejected the argument because KBC failed to elaborate—at all—upon the nature of the concerns
that Fitzpatrick relayed to Gemunder. More importantly, the district court found that the
Complaint failed to provide any specifics regarding the timing of this conversation between
Fitzpatrick and Gemunder. In re Omnicare, Inc., 2013 WL 1248243, at *9–*10.

We agree that there are not enough particulars in this eight-line paragraph to meet Rule
9(b)’s and the PSLRA’s standards. Because KBC has failed to allege adequate facts
demonstrating that the Individual Defendants had actual knowledge that the Form-10K
statements were false when filed, we affirm the district court’s dismissal of the suit against the
Individual Defendants.

2. Corporate Scienter

Finally, we must determine whether the Complaint contains sufficient allegations to
demonstrate that, collectively, Omnicare possessed actual knowledge that the Form 10-K
statements were false and that Omnicare, nevertheless, made its Form 10-K statements (or failed
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 34

to correct them)9 to defraud the public. In support of its argument, KBC points to Stone,
Fitzpatrick, and Keefe, Omnicare’s Chief Operating Officer, who ordered the Wave II Audit, and
claims that they had actual knowledge of the audit results. Moreover, KBC claims that knowing
this, Omnicare nevertheless filed the Form 10-claims to defraud the public. While we agree with
KBC that the knowledge of Stone can be imputed to Omnicare, we conclude that this claim must
be dismissed because KBC pleads too few facts to give rise to a strong inference of fraudulent
intent. The countervailing inferences, at least on the facts alleged, are too strong.

First, under our formulation of collective corporate scienter, the knowledge of Stone can
be imputed to Omnicare, though not the knowledge of Fitzpatrick and Keefe. Stone’s knowledge
can be considered because he was both an “individual agent who. . . [allegedly] furnished
information for, . . . [and] reviewed . . . the statement in which the misrepresentation was made
before its utterance or issuance” and potentially a “high managerial agent . . . who ratified . . . or
tolerated the misrepresentation after its utterance or issuance . . . .” Abril & Olazábal, Locus,
supra, at 135; see also R. 94 at 18, 19, 21, 24 (Compl. at ¶¶ 38, 42, 49, 55) (Page ID #842, 843,
845, 848) (noting that Stone was a Vice President at Omnicare and conducted the audits). In
contrast, Fitzpatrick’s knowledge cannot be imputed to Omnicare, because the Complaint states
that Fitzpatrick served as Chief Compliance Officer only “through 2008,” meaning that he could
have left the company before Stone conducted the Pharmacy Audit. Id. at 31 ¶ 82 (Page ID
#855). Furthermore, it is unclear when the Wave II Audit was completed, and the Complaint
never alleges that Stone shared the results of the Wave II Audit with Fitzpatrick. Id. Likewise,
Keefe’s knowledge is out of bounds under our conception of collective scienter because there are
no allegations that Keefe played any role in formulating the Form 10-K statements or that he
knew of the results of the Wave II Audit and the Pharmacy Audit. See id. at 21 ¶ 49 (Page ID
#845). Absent one of those allegations, Keefe’s knowledge, like Fitzpatrick’s, cannot be
imputed to Omnicare.

Second, even though Stone’s knowledge of the audit results can be imputed to the
corporation, KBC fails to plead sufficient facts that would give rise to a strong inference that

9
Because the analysis of scienter is relatively the same for the alleged misrepresentations and omissions,
for the sake of clarity, we will refer only to the misstatements.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 35

Omnicare acted to defraud the public. As noted above, in Helwig, this court identified nine, non-
exhaustive factors that can help determine scienter. See 251 F.3d at 552. Among the relevant
considerations were: “divergence between internal reports and external statements on the same
subject”; “closeness in time of an allegedly fraudulent statement or omission and the later
disclosure of inconsistent information”; “existence of an ancillary lawsuit charging fraud by a
company and the company’s quick settlement of that suit”; and “the self-interested motivation of
defendants in the form of saving their salaries or jobs.”10 Id. In this case, the totality of these
considerations cuts against finding a strong inference of scienter, and thus, we affirm the
dismissal of the Complaint.

Regarding the first relevant factor, KBC has alleged enough facts to show that a
reasonable jury could find a divergence between internal reports (the audits) and external
statements (the Form 10-K statements). This factor favors KBC, but perhaps not as strongly as
KBC believes that it does. There is a disparity between the levels of generality at which the
internal reports and external statements are framed. While this disparity is more relevant to the
jury’s inquiry into whether the misstatements were objectively false, it also plays some role in
the scienter analysis. Importantly, in cases where we have found scienter to be sufficiently
pleaded, this disparity did not exist. See City of Monroe, 399 F.3d at 684.

The other relevant factors do not favor KBC. One, there was a large time lapse between
Omnicare’s legal-compliance statements and the disclosure of the Stone qui tam action,
suggesting a lack of scienter. Again in City of Monroe, this court put considerable weight on the
fact that only a week separated Firestone’s misleading statement and the disclosure to the market
because this short turnaround made it less likely that the corporation did not know that its
statement was misleading. Two, unlike City of Monroe—cited repeatedly by KBC—Omnicare’s
Form 10-K statements were not made in the shadow of ongoing litigation. Furthermore, when
Stone filed his qui tam action, Omnicare did not settle but vigorously defended itself. And three,
KBC alleged no facts, other than the Individual Defendants’ general interest in being paid, that
lead to an inference that the Individual Defendants or Omnicare fraudulently misled the public to
save their jobs or salaries. If a well-pleaded complaint can allege only that a corporation
10
The other factors relate to conflicts of interest, which no party raises in this court.
No. 13-5597 Ansfield et al. v. Omnicare et al. Page 36

intended to defraud based on a desire to continue earning money, without showing a particular
link between the actual statement and a specific payment, then the heightened pleading standard
for scienter has no bite. Accordingly, each of these factors cuts against finding an inference of
scienter—let alone, a strong one—and thus, we affirm the district court on this basis.

VI. CONCLUSION

For the foregoing reasons, we AFFIRM the district court’s dismissal of KBC’s
complaint.