In Re: Alcatel

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 01-40645

ABC ARBITRAGE PLAINTIFFS GROUP; ET AL.,

Plaintiffs,

ALCATEL PLAINTIFFS GROUP,

Plaintiff-Appellant,

versus

SERJE TCHURUK; ET AL.,

Defendants,

SERJE TCHURUK; JEAN-PIERRE HALBRON; ALCATEL SA,

Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Texas

May 13, 2002

Before HIGGINBOTHAM, DeMOSS, and BENAVIDES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This appeal presents questions concerning the pleading

requirements under the Private Securities Litigation Reform Act of

1995, the PSLRA. The Alcatel Plaintiffs Group filed this putative

class action after a precipitous drop in the stock price of Alcatel

SA. The amended complaint alleged that Alcatel misrepresented its
financial condition by covering up problems associated with its

German subsidiary Alcatel SEL, intentional overstatements of its

1997 financial results, and contract losses in Southeast Asia and

Europe. Those were assertedly part of a series of financial set-

backs concealed in order to artificially inflate the price of

Alcatel American Depository Shares (“ADSs”) and to avoid

compromising a $4.4 billion stock-for-stock acquisition of DSC

Communications, a Texas company.

The district court held that the majority of allegations of

the amended complaint were not pleaded with sufficient

particularity to meet the requirements of the PSLRA. It further

concluded that the remaining alleged misrepresentations were

immaterial as a matter of law. Plaintiffs appeal, contending that

the standard applied by the district court was too onerous and that

its complaint should be reinstated. For the reasons stated herein,

we agree in part, but nevertheless conclude that the sufficiently

particular allegations do not state a claim.

I.

On September 24, 1998, a group later identified as the Alcatel

Plaintiffs Group filed their original complaint in the United

States District Court for the Southern District of New York. In

all, more than twenty separate actions were filed in four

jurisdictions against Alcatel and its officers and directors

immediately after a drop in the price of its stock. The Judicial

2
Panel on Multidistrict Litigation transferred all the cases to the

Eastern District of Texas pursuant to 28 U.S.C. § 1407.

The transferee court divided the group into two classes of

shareholders: (1) purchasers of Alcatel ADSs on the open market

during the class period, and (2) those persons who acquired Alcatel

ADSs as a result of the merger between Alcatel and DSC. The

Alcatel Plaintiffs Group were designated Lead Plaintiff and their

attorneys Lead Counsel pursuant to 15 U.S.C. § 78u-4(a)(3)(B) for

a putative class consisting of all purchasers, other than the

defendants, of Alcatel ADSs on the open market between June 8,

1998, and September 17, 1998.

On May 24, 1999, Plaintiffs filed their First Consolidated

Amended Complaint against Alcatel, Alcatel Chief Executive Officer

and Chairman Serge Tchuruk, and Alcatel senior Executive Vice

President and Alcatel Telecom Executive Committee member Jean-

Pierre Halbron (collectively “Alcatel”), alleging violations of

Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15

U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder,

17 C.F.R. § 240.10b-5.1

1
Another group of plaintiffs, the so-called DSC Plaintiffs,
represented by separate counsel, were appointed to represent the
class of former shareholders of DSC who acquired ADSs in exchange
for DSC common stock pursuant to the merger of DSC and Alcatel.
This group of plaintiffs filed a separate complaint, which was not
dismissed in its entirety, and has since settled with Alcatel,
without prejudice to the claims of the Alcatel Plaintiffs Group.
All references to “Plaintiffs” herein are to the appellants here,
the Alcatel Plaintiffs Group.

3
 Alcatel moved to dismiss. The district court granted the

motion without prejudice, holding that the amended complaint did

not meet the pleading standards of Federal Rule of Civil Procedure

9(b) and the PSLRA. Specifically, it held that Plaintiffs had

failed to plead facts demonstrating the falsity of Alcatel’s

alleged representations or that Alcatel knew they were false when

made, nor the sources of their allegations made on information and

belief.

With leave, Plaintiffs filed their Second Consolidated Amended

Complaint on January 31, 2000.2 Alcatel filed a motion to dismiss

this second amended complaint pursuant to Rule 12(b)(6). Although

this new complaint added significant information, the district

court dismissed with prejudice. Plaintiffs now appeal.3

II.

First we will summarize the facts alleged in the complaint,

which for purposes of a Rule 12(b)(6) motion are accepted as true

and construed in the light most favorable to Plaintiffs.4

2
References to the “complaint” herein are to the live
pleading at issue on this appeal, Plaintiffs’ Second Consolidated
Amended Complaint filed January 31, 2000.
3
Plaintiffs appealed this dismissal previously, but this
court, after hearing oral argument, held in an unpublished per
curiam opinion that it did not have jurisdiction because a final
judgment had not been properly entered. ABC Arbitrage Plaintiffs
Group v. Tchuruk, No. 00-40850 (5th Cir. May 2, 2001) (unpublished
per curiam). The district court then issued a final judgment, and
this appeal ensued.
4
See Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir.
2001).

4
 A.

Alcatel is a French telecommunications firm whose shares trade

on the New York Stock Exchange in the form of ADSs.5 Alcatel

employs approximately 190,000 people and has four principal product

lines: telecommunications, accounting for 44.3% of sales in 1997;

cable and related components, accounting for 22.8% of sales in

1997; energy and transport, accounting for 18.4% of sales in 1997;

and engineering and systems, accounting for 14.1% of sales in

1997.6

Tchuruk was at all relevant times Chief Executive Officer and

Chairman of the Board of Alcatel and also served on Alcatel’s

Telecom Executive Committee.7 Halbron was at all relevant times

senior Executive Vice President of Alcatel and also served on the

Telecom Executive Committee.8

Plaintiffs are a proposed class of those who (1) bought

Alcatel ADSs, (2) purchased Alcatel call options, or (3) sold

Alcatel put options during the class period of June 8, 1998 through

September 17, 1998.9

5
Second Consolidated Amended Class Action Complaint
(“Complaint”) at 6 ¶ 11.
6
Id.
7
Id. at 6 ¶ 12.
8
Id. at 7 ¶ 13.
9
Id. at 1 ¶ 1.

5
 During this proffered class period, Alcatel was simultaneously

dealing with the effects of the lingering Asian financial crisis,

European deregulation, and a pending merger with DSC.10 Under the

terms of the merger agreement, which involved a stock-for-stock

acquisition, DSC had the right to terminate the deal if the average

price of Alcatel ADSs for the twenty-day period before the closing

date fell below $37.11

B.

The complaint alleges that Alcatel made materially false and

misleading statements and omissions concerning Alcatel’s financial

condition and the future of Alcatel’s business, which statements

and omissions were contained in public statements in news reports,

press releases, Alcatel’s 1997 annual report, and the Registration

Statement and Joint Proxy/Prospectus disseminated in connection

with Alcatel’s merger with DSC.12 The alleged misrepresentations

began on June 8, 1998, when Tchuruk was paraphrased in an AFX News

article:

Tchuruk also said that Alcatel has the potential for
its sales to grow by 10-20 pct per year, outperforming
the telecommunications market as a whole which is seen
rising 8-10 pct in nominal terms.
Tchuruk also said that his company is better
protected than others from the fallout of the Asian

10
Id. at 11-12 ¶¶ 24-26.
11
Id. at 12 ¶¶ 25-26.
12
Id. at 1 ¶ 2.

6
 financial crisis, because cuts in investment in the
region are usually not aimed at telecommunications.13

The same day, a Bloomberg article paraphrased Tchuruk as saying

that sales at Alcatel SA “will grow between 10 and 20 percent a

year—faster than the 10 percent for the market as a whole.”14

On June 25, 1998, Alcatel filed its annual report on a Form

20-F with the SEC for the fiscal year ending December 31, 1997.

This report included the following sections quoted in the

complaint:

Income from operations increased by 175.6% to FF 8.0
billion in 1997 compared with FF 2.9 billion in 1996 and
including a FF 506 million provision for risks related to
the Southeast Asian crises ... the increase in that
income in operations was due to the improved performance
in all segments, in particular the improvement in Telecom
segment’s income from operations which increased to FF
3.1 billion in 1997 compared with the loss of FF 953
million in 1996.

TELECOM
Sales to Asia increased to FF 9.0 billion in 1997
compared to FF 6.0 billion in 1996 due principally to
sales growth in China. Net sales increased in all of the
Telecom segment divisions, with increases of more than
30% each in Transmission systems, Access Systems and
Mobile Communications.

Order bookings amounted to FF 85.4 billion in 1997 a 7.5
percent increase compared with FF 79.4 billion in 1996.
The substantial increase in order bookings that were
registered in the Transmission Systems, Access Systems,
Mobile Communications, and Submarine Networks were
partially offset by a decline in orders in the Switching
Systems division principally to the completion of

13
Id. at 19 ¶ 45; see also id. at 1-2 ¶¶ 3-4.
14
Id. at 19 ¶ 44; see also id. at 1-2 ¶¶ 3-4.

7
 Deutsche Telecom’s network digitalization program in
Germany.

....

Impact of Economic Crises in Southeast Asia
The recent economic crises of certain countries in
Southeast Asia could have a negative impact on prices and
demand for certain of the Company’s products and
services, due particularly to the risk of a significant
decline in infrastructure investment in the region.
Management expects such impact to be relatively less
significant with respect to investments in
telecommunications infrastructure. Such development
could thereby affect the results of operations of certain
of the Company’s business segments. Based on current
information, management does not believe that the impact
of such economic crises will be material for Alcatel
Alsthom on a consolidated basis. Excluding sales by GEC
Alsthom and Cegelec, net sales recorded by Alcatel
Alsthom in 1997 from sales in Asia amounted to
approximately 4.4% of net sales.15

This annual report was also incorporated by reference into the

Joint Proxy/Prospectus included in a Form F-4 Registration

Statement filed on July 28, 1998 with the SEC in connection with

the DSC merger.16 In section 5.7 of the merger agreement attached

to the Form F-4, Alcatel certified that it had experienced no

“Material Adverse Effect” since December 31, 1997, defined in

section 5.1 as “a material adverse effect on the condition

(financial or otherwise), business, assets or results of operations

of Alcatel and its Subsidiaries, taken as a whole, that is not the

result of general changes in the economies in which such entities

15
Id. at 20-21 ¶¶ 48-49 (emphasis in original); see also id.
at 2 ¶ 4.
16
Id. at 29 ¶ 66.

8
operate,” and, in section 8.2, Alcatel certified as a condition of

closing that the representations in the merger agreement remained

true and correct.17

The same day, on July 28, 1998, Alcatel issued a press release

stating:

After double-digit growth in the first quarter for
the Group, both in sales and orders on a comparable
basis, the second quarter was adversely impacted by the
completion of the telecom digitalization program in
Germany and the non-recurrence of the strong second
quarter experienced in Southeast Asia during 1997.
However, current indications point to a continued double-
digit growth both in sales and orders for the full year
in the Telecom segment with the corresponding impact on
the Group’s overall performance.18

In conjunction with this statement, Alcatel reported a sales

increase of only 2.4 percent for the first half of 1998, which

caused Alcatel’s share price to decline approximately 4 percent.19

This press release was attached to a Report on Form 6-K (Report of

Foreign Issuer Pursuant to Rules 13a-16 or 15d-16 under the

Securities Exchange Act of 1934) filed by Alcatel on July 31,

1998.20

C.

The complaint alleges that at the time of these public

statements Alcatel was aware but did not disclose that:

17
Id. at 30 ¶ 68.
18
Id. at 27 ¶ 62; see also id. at 2 ¶ 4.
19
Id. at 27 ¶ 62.
20
Id. at 31 ¶ 72.

9
 (1) Alcatel “intentionally” overstated its financial
results for 1997 by at least 125 million French francs,
according to the Group Services Report, which states that
Alcatel improperly understated the costs of sales on
hundreds of contracts totaling 58 million French francs
and overstated inventory in the amount of 18 million
French francs, receivables amounting to 27 million French
francs, and revenue in the amount of 22 million French
francs, and also understated its provision of losses
associated with work in progress on contracts in
Thailand, Malaysia, Indonesia, and the Philippines by at
least 200 million French francs;21
(2) by February 1998 there was an “obvious” deteriorating
trend in Alcatel SEL’s orders and margins, according to
the Group Services Report;22
(3) Alcatel SEL was in a total state of disarray,
according to the Group Services Report;23
(4) a high ranking Alcatel SEL official personally
informed a member of the Alcatel Telecom Executive
Committee in July 1998 that Alcatel SEL was experiencing
significant losses and that these losses had reached
approximately 240 million French francs year-to-date, but
later increased dramatically to approximately 400 million
French francs by August 1998;24
(5) in early 1998 a contract for services to Borneo worth
9 trillion Rupiah (over 9 billion French francs) over a
five-year period was postponed for two years because
Alcatel was found to have paid a substantial bribe to a
high-ranking Indonesian telephone official;25
(6) by June 1998 Swiss Telecom’s orders for the year had
been completed and Alcatel’s 1998 sales to Swiss Telecom

21
Id. at 2 ¶ 4, 12 ¶ 27, 13 ¶ 28, 19 ¶ 46, 22-26 ¶¶ 50-59,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(a).
22
Id. at 2 ¶ 4, 12 ¶ 27, 15-16 ¶¶ 34-35, 19 ¶ 46, 26 ¶ 60,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(c).
23
Id. at 2 ¶ 4, 14-15 ¶¶ 30-32.
24
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 16-17 ¶¶ 36-38, 19 ¶ 46,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(b).
25
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 17 ¶¶ 39-40, 19 ¶ 46, 26
¶ 60, 28 ¶ 65, 29 ¶ 67, 37 ¶ 92(d).

10
 would be only 62 million Swiss Francs, little more than
half of the previous year’s level;26
(7) Alcatel had lost a major contract with Telefonica,
the Spanish telephone company, to Alcatel’s rival
Ericsson;27
(8) in early July 1998 Alcatel lost a contract worth $340
million over two years with Retevision, another Spanish
telephone company, to Ericsson;28
(9) in July 1998 a contract worth over 2 billion Baht
(over 251 million French francs) to supply high-speed
telephone wire in Thailand was cancelled;29
(10) Alcatel’s business with Deutsche Telecom had
declined substantially, after Deutsche Telecom completed
its network digitalization program;30 and
(11) Alcatel’s revenues, earnings and profitability had
been and were continuing to be drastically negatively
impacted by these events.31

The complaint alleges that the defendants had actual knowledge of

the falsity of their statements at the time the statements were

made because the defendants had received oral and written reports

concerning the true and undisclosed state of affairs at Alcatel,

including Monthly Management Reports (MMRs), i.e., “written reports

... prepared by the controller’s office of each Alcatel subsidiary

... which were transmitted to defendants Halbron and Tchuruk

26
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 42, 19 ¶ 46, 26 ¶ 60,
28 ¶ 65, 29 ¶ 67, 37 ¶ 92(e).
27
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 43, 29 ¶ 67, 37 ¶
92(g).
28
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 18 ¶ 43, 28 ¶ 65, 29 ¶ 67,
37 ¶ 92(g).
29
Id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27, 17 ¶ 41, 28 ¶ 65, 37 ¶
92(f).
30
Id. at 11 ¶ 24; see also id. at 32 ¶ 76.
31
Id. at 2 ¶ 4, 29 ¶ 67, 37 ¶ 92(h).

11
shortly after the close of each month” and which “concern[ed] the

Telecom sector at each of Alcatel’s subsidiaries” and “compar[ed]

actual results to budgeted numbers.”32

The complaint further alleges that, during the first half of

1998, Alcatel experienced only a 6.5% increase in sales and 4.7%

increase in orders in its Telecom segment, such that, in order to

achieve double-digit growth in sales and orders for 1998, Alcatel

would require at least 13.5% growth in sales and 15.3% in orders

for the Telecom segment for the second half of 1998.33 The

complaint alleges that, as a result, at the time of its public

statements, Alcatel was aware it could not achieve its predicted

double-digit growth in the Telecom sector for 1998 due to the

undisclosed adverse information described above.34

Specifically, the complaint alleges that Tchuruk’s June 8

statements were false or misleading because they failed to disclose

that Alcatel had intentionally overstated its 1997 financial

results, Alcatel SEL was experiencing significant losses, the

contract in Borneo was postponed, and sales to Swiss Telecom were

down.35 The statements in the annual report were false or

misleading because the report failed to disclose that Alcatel’s

32
Id. at 4 ¶ 5, 7 ¶ 15, 15 ¶ 33.
33
Id. at 27 ¶ 64.
34
Id. at 11 ¶ 24, 27 ¶ 64, 28 ¶ 65, 29 ¶ 67, 32 ¶ 74.
35
Id. at 19 ¶ 46.

12
financial statements contained therein for the year ended December

31, 1997 overstated its results of operations by material amounts

for the Telecom segment in violation of Generally Accepted

Accounting Principles, falsely represented that Alcatel’s business

remained strong and would not be materially impacted by the Asian

financial crisis because Alcatel had already created reserves to

provide for the crisis, and failed to disclose problems at Alcatel

SEL, the contract postponement in Borneo, and reduced sales to

Swiss Telecom.36

The July 28 press release was false or misleading because it

failed to disclose that Alcatel had intentionally overstated its

1997 financial results, there were problems and mounting losses at

Alcatel SEL, the contract in Borneo was postponed, sales to Swiss

Telecom were down, a contract in Spain was lost to rival Ericsson,

and the contract in Thailand was cancelled.37

Finally, the merger registration statement was false or

misleading because it failed to disclose Alcatel’s intentional

overstatement of its 1997 financial results, problems and mounting

losses at Alcatel SEL, the contract postponement in Borneo, reduced

sales to Swiss Telecom, the loss of two contracts in Spain to rival

Ericsson, and the cancelled contract in Thailand, as well as the

fact that Alcatel’s revenues, earnings and profitability had been

36
Id. at 20 ¶ 48, 22-27 ¶¶ 50-61.
37
Id. at 28 ¶ 65.

13
and were continuing to be negatively impacted, and because it

falsely certified that Alcatel had not had experienced or was not

likely to experience a “Material Adverse Effect.”38

The complaint also alleges that the July 28 press release and

merger registration statement were false or misleading because they

failed to disclose that Alcatel’s management was aware that Alcatel

would not meet predictions of “continued double-digit growth both

in sales and orders for the full year in the Telecom segment” made

by Alcatel on July 28, 1998, the day the Proxy/Prospectus was

disseminated.39 The complaint further alleges that at no time prior

to the closing of the DSC merger—which became final on September 8,

1998—did Alcatel disclose that it had experienced or was likely to

experience a “Material Adverse Effect” as required by the merger

agreement, although material adverse effects had occurred.40

The complaint alleges that the defendants did not disclose

these material facts because they had agreed to merge with DSC and

knew these facts would depress the price of Alcatel ADSs and

thereby increase dramatically the number of shares Alcatel would

have to pay to acquire DSC and might even trigger DSC shareholders’

right to terminate the merger.41 The complaint alleges that later

38
Id. at 12 ¶ 27, 29 ¶ 67, 31 ¶ 73.
39
Id. at 28 ¶ 65, 29 ¶ 67, 31 ¶ 74.
40
Id. at 31 ¶ 73.
41
Id. at 4 ¶ 6, 8 ¶ 19, 12 ¶¶ 26-27, 20 ¶ 47, 31 ¶ 70, 31 ¶
74; see also id. at 30 ¶ 69.

14
news reports indicated that Alcatel knew of expected disappointing

profits and “Deutsche Telecom cuts” in July but failed to disclose

this information to Plaintiffs until after the DSC merger closed.42

The complaint also alleges that the Proxy/Prospectus included in

the merger registration statement deliberately did not disclose the

material adverse information listed above, because the defendants

planned to release this information only after DSC’s right to

terminate the merger had expired and the merger had closed.43 The

complaint further alleges that the defendants rushed the merger

through to closing in September rather than October 1998 in order

to prevent DSC from exercising its right to terminate the merger.44

Further, according to the complaint, Alcatel not only withheld

the material information listed above but also embarked on a scheme

commencing on or about June 8, 1998 to artificially inflate the

price of Alcatel ADSs by issuing a series of false and misleading

statements, designed to mislead Alcatel Plaintiff class members

into believing that (1) Alcatel, unlike its competitors, was not

experiencing a slowdown in demand for its products and (2)

Alcatel’s Telecom segment would report double-digit sales and order

growth for full-year 1998.45

42
Id. at 33 ¶¶ 78-79.
43
Id. at 29 ¶ 66.
44
Id. at 31 ¶ 74, 38 ¶ 94.
45
Id. at 4 ¶ 6, 8 ¶ 19.

15
 D.

The complaint alleges that the material omissions and false

representations in Alcatel’s annual report “had the desired

effect,” because, “[o]n July 16, 1998, Alcatel ADS’s hit a Class

Period and 1998 high of $47 1/16 per ADS, up from $40 7/8 per share

at the start of the Class Period.”46 The complaint also cites

comments of analysts from J.P. Morgan and Salomon Smith Barney as

support for the positive effect of the reassuring comments in the

July 28, 1998 press release made to assuage analysts’ concerns

about the below-expectations sales growth announced in July 1998.47

The complaint alleges that, because of this nondisclosure, the

price of Alcatel’s ADSs remained artificially inflated until after

September 17, 1998.48

The complaint alleges that the true financial and operating

condition of Alcatel, although known to Alcatel throughout the

class period, remained concealed from Plaintiffs until September

17, 1998, a few days after the DSC merger closed, when Alcatel

stunned investors by revealing that Alcatel’s Telecom segment’s

income would “be adversely impacted by the sharp investment cuts

recently decided by some traditional operators and the deepening of

the Southeast Asian and Russian crisis” and that, as a result,

46
Id. at 27 ¶ 61.
47
Id. at 27 ¶ 63.
48
Id. at 32 ¶ 75.

16
Alcatel’s “operating performance” would “not meet expectations.”49

This announcement led to a decline in the price of Alcatel ADSs of

more than 30 percent to $19-1/4.50

E.

In sum, the complaint alleges that the defendants made false

and misleading statements and omissions contemporaneous with the

agreement to merge with DSC, which statements and omissions

included (1) Tchuruk’s statements on June 8, 1998 that Alcatel’s

sales would grow between 10 and 20 percent per year and that

Alcatel was “better protected than others” from the Asian financial

crisis, (2) the statements in Alcatel’s 1997 annual report that

Alcatel had sufficient reserves to meet the Asian financial crisis

and that the impact of the crisis will be immaterial for Alcatel on

a consolidated basis, (3) a statement in a press release on July

28, 1998 that Alcatel’s Telecom segment would continue to report

“double-digit growth” in both sales and orders for the full year

1998, and (4) the certification in the merger agreement attached to

the Form F-4 merger registration statement that Alcatel had not

experienced and was not likely to experience a “Material Adverse

Effect.”51 These statements and omissions were false because the

defendants knew at the time of the statements and omissions (or

49
Id. 1 ¶ 3, 32 ¶ 76.
50
Id. 1 ¶ 3, 33 ¶ 80.
51
Id. at 19-32 ¶¶ 44-75.

17
acted with recklessness if they did not know) but did not disclose

that: (1) Alcatel SEL was having undisclosed problems and

experiencing significant and mounting losses, (2) Alcatel

intentionally overstated its financial results for 1997 by at least

325 million French francs, (3) Alcatel lost or had postponed major

contracts in Borneo and Thailand and with two Spanish telephone

companies and had substantially reduced sales to Swiss Telecom and

reduced business with Deutsche Telecom, and (4) as a result,

Alcatel’s revenues, earnings and profitability had been and were

continuing to be negatively impacted. According to the complaint,

the defendants’ knowledge of this undisclosed adverse information

and the timing of the release of this information gives rise to a

strong inference of scienter, that is, defendants acted with at

least reckless disregard for the truth of their statements and

omissions of material facts.52 The complaint also alleges that

these materially false or misleading statements and omissions were

made to support the artificial price of Alcatel ADSs and to sustain

the DSC agreement until the merger closed and DSC’s right to

terminate the merger had expired.53

III.

52
Id. at 37-38 ¶¶ 92-94.
53
Id. at 4 ¶ 6, 8 ¶ 19, 20 ¶ 47, 31 ¶ 70, 31 ¶ 74.

18
 We review a district court’s dismissal under Rule 12(b)(6) de

novo.54 A Rule 12(b)(6) motion should be granted only if it appears

beyond doubt that the plaintiff can prove no set of facts in

support of his claim which would entitle him to relief.55 On the

other hand, we have noted that conclusory allegations or legal

conclusions masquerading as factual conclusions will not suffice to

prevent dismissal under Rule 12(b)(6).56

It is well-settled that, “[i]n order to state a claim under

section 10(b) of the 1934 Act and Rule 10b-5, a plaintiff must

allege, in connection with the purchase or sale of securities, ‘(1)

a misstatement or an omission (2) of material fact (3) made with

scienter (4) on which plaintiff relied (5) that proximately caused

[the plaintiffs’] injury.’”57 We address, as necessary, the

adequacy of Plaintiffs’ complaint as to the elements on which

54
Nathenson, 267 F.3d at 406.
55
Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720,
725 (5th Cir. 2002).
56
S. Christian Leadership Conference v. Supreme Court of
State of La., 252 F.3d 781, 786 (5th Cir.), cert. denied, 122 S.
Ct. 464 (2001).
57
Nathenson, 267 F.3d at 406-07 (quoting Tuchman v. DSC
Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994)). The
complaint also alleges that the two individual defendants are
liable as “controlling persons” under section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). “‘Control
person’ liability is, however, derivative, i.e., such liability is
predicated on the existence of an independent violation of the
securities laws.” Rubinstein v. Collins, 20 F.3d 160, 166 n.15
(5th Cir. 1994); see also Lovelace v. Software Spectrum Inc., 78
F.3d 1015, 1021 n.8 (5th Cir. 1996).

19
Alcatel challenges Plaintiffs’ allegations: materiality, scienter,

and loss causation. We turn first, however, to the adequacy of

Plaintiffs’ allegations of misstatements and omissions,

particularly those made upon information or belief.

A.

The district court held that, although Plaintiffs adequately

pleaded the who, what, where, and when elements of their securities

fraud claim, they failed to meet the pleading standard regarding

why the particular statements were misleading. In particular, the

district court faulted Plaintiffs for not sufficiently identifying

the source of the information about the contract losses. The

district court held that Plaintiffs’ paragraph generally describing

the source of their allegations as based on the investigation of

counsel was insufficient to satisfy the PSLRA requirements for

information and belief pleading. Regarding the MMRs and the “Kom-

Aktuell” internal Alcatel newsletter, the district court held that

Plaintiffs’ reliance on these documents was no different from vague

assertions about “internal documents” that had been deemed

insufficient by other courts. It noted that Plaintiffs did not

provide sufficient detail regarding the origins of Plaintiffs’

allegations or particulars such as direct quotes from the documents

and the name of the author of the “Kom-Aktuell” newsletter, “what

was known or when,” or who had access to the information.

Under the PSLRA, 15 U.S.C. § 78u-4(b)(1) provides:

20
 In any private action arising under this chapter in which
the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in
order to make the statements made, in the light of
the circumstances in which they were made, not
misleading;
the complaint shall 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.

Rule 9(b), which applies to securities fraud claims,58 states that

“[i]n all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with particularity.”59

We have held that, pursuant to Rule 9(b), “articulating the

elements of fraud with particularity requires a plaintiff to

specify the statements contended to be fraudulent, identify the

speaker, state when and where the statements were made, and explain

why the statements were fraudulent,”60 which is, as we have stated

in dicta, “the same standard” required by the PSLRA under 15 U.S.C.

58
Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir.
1997).
59
FED. R. CIV. P. 9(b)
60
Williams, 112 F.3d at 177; cf. Tuchman, 14 F.3d at 1067
(“In securities fraud suits, this heightened pleading standard
provides defendants with fair notice of the plaintiffs’ claims,
protects defendants from harm to their reputation and goodwill,
reduces the number of strike suits, and prevents plaintiffs from
filing baseless claims and then attempting to discover unknown
wrongs.”).

21
§ 78u-4(b)(1).61 Put another way, “[p]leading fraud with

particularity in this circuit requires ‘time, place and contents of

the false representations, as well as the identity of the person

making the misrepresentation and what [that person] obtained

thereby.’”62 We have thus noted that, although “the requirement for

particularity in pleading fraud does not lend itself to refinement,

and it need not in order to make sense,” nevertheless, “[d]irectly

put, the who, what, when, and where must be laid out before access

to the discovery process is granted.”63

Likewise, “the PSLRA also requires the plaintiff to identify

specifically the alleged misrepresentations and/or misleading

omissions” under 15 U.S.C. § 78u-4(b)(1).64 Synthesizing these

standards, we have observed that “[t]he effect of the PSLRA in this

respect is to, at a minimum, incorporate the standard for pleading

fraud under Fed. R. Civ. P. 9(b).”65 That is, section § 78u-4(b)(1)

“appears to comport with this Court’s relatively strict

interpretation of Rule 9(b), which requires a plaintiff ‘to specify

the statements contended to be fraudulent, identify the speaker,

61
See Nathenson, 267 F.3d at 410 n.9; Williams, 112 F.3d at
178.
62
Williams, 112 F.3d at 177 (quoting Tuchman, 14 F.3d at
1068).
63
Id. at 178.
64
Nathenson, 267 F.3d at 412.
65
Id.

22
state when and where the statements were made, and explain why the

statements were fraudulent.’”66 Additionally, the PSLRA

specifically provides in 15 U.S.C. § 78u-4(b)(1) as to pleading

allegations on information and belief that, “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.”67 If a complaint fails to meet the

pleading requirements of the PSLRA or Rule 9(b), the complaint must

be dismissed.68

To summarize, a plaintiff pleading a false or misleading

statement or omission as the basis for a section 10(b) and Rule

66
Id. (quoting Williams, 112 F.3d at 177).
67
Cf. United States ex rel. Thompson v. Columbia/HCA
Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997) (“At a minimum,
Rule 9(b) requires that a plaintiff set forth the ‘who, what, when,
where, and how’ of the alleged fraud. Williams v. WMX Tech., Inc.,
112 F.3d 175, 179 (5th Cir. 1997). Thompson argues, however, that
the pleading requirements of Rule 9(b) are relaxed where, as here,
the facts relating to the alleged fraud are peculiarly within the
perpetrator’s knowledge. Although we have held that fraud may be
pleaded on information and belief under such circumstances, we have
also warned that this exception ‘must not be mistaken for license
to base claims of fraud on speculation and conclusory allegations.’
See Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th
Cir. 1994). In addition, even where allegations are based on
information and belief, the complaint must set forth a factual
basis for such belief. Kowal v. MCI Communications Corp., 16 F.3d
1271, 1279 n.3 (D.C. Cir. 1994); Neubronner v. Milken, 6 F.3d 666,
672 (9th Cir. 1993).”).
68
15 U.S.C. § 78u-4(b)(3)(A); Nathenson, 267 F.3d at 412-13;
Keith v. Stoelting, Inc., 915 F.2d 996, 1000 (5th Cir. 1990) (per
curiam).

23
10b-5 securities fraud claim must, to avoid dismissal pursuant to

Rule 9(b) and 15 U.S.C. §§ 78u-4(b)(1) & 78u-4(b)(3)(A):

(1) specify the each statement alleged to have been
misleading, i.e., contended to be fraudulent;
(2) identify the speaker;
(3) state when and where the statement was made;
(4) plead with particularity the contents of the false
representations;
(5) plead with particularity what the person making the
misrepresentation obtained thereby; and
(6) explain the reason or reasons why the statement is
misleading, i.e., why the statement is fraudulent.

This is the “who, what, when, where, and how” required under Rule

9(b) in our securities fraud jurisprudence and under the PSLRA.

Additionally, under 15 U.S.C. § 78u-4(b)(1), for allegations made

on information and belief, the plaintiff must:

(7) state with particularity all facts on which that
belief is formed, i.e., set forth a factual basis
for such belief.

The dimensions of this last requirement—that, “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”—are a matter of first impression in

this circuit.

Plaintiffs argued for the first time at oral argument that the

complaint’s challenged allegations are not made on information and

belief but rather simply state facts and so the information and

belief pleading requirements of 15 U.S.C. § 78u-4(b)(1) do not

apply. Because it was not raised in the briefs, we need not

24
consider this argument.69 Nevertheless, this argument is without

merit because the allegations in the complaint are not based upon

Plaintiffs’ personal knowledge and are therefore necessarily

pleaded on “information and belief,” although not labeled as such.70

Turning, then, to the standard governing the information and

belief pleading requirements under section 78u-4(b)(1), we find

69
Comsat Corp. v. FCC, 250 F.3d 931, 936 n.5 (5th Cir. 2001).
70
See 5 Charles Alan Wright & Arthur R. Miller, Federal
Practice & Procedure Civil § 1224 at 205-06 (2d ed. 1990); cf.
Isquith for & on Behalf of Isquith v. Middle S. Utils., Inc., 847
F.2d 186, 194 (5th Cir. 1988) (“There is no question, since most of
the allegations in plaintiffs’ complaint are explicitly based on
‘information and belief’ and not personal knowledge, that the
complaint’s allegations do not meet Rule 56(e)’s stringent
standards.”). Other courts have reached the contrary conclusion,
holding, for instance, that “[t]he logical result of th[e]
proposition [that where plaintiffs do not have personal knowledge,
the complaint must be based on information and belief] would be
that a plaintiff would have to plead all his evidence in the
complaint.” In re Honeywell Int’l, Inc. Sec. Litig., 182 F. Supp.
2d 414, 426 (D.N.J. 2002); cf. Fla. State Bd. of Governors v. Green
Tree Fin. Corp., 270 F.3d 645, 668 (8th Cir. 2001). This is not
so, of course, outside the PSLRA and Rule 9(b) context, where a
plaintiff may simply plead the allegations on information and
belief without stating the facts on which the belief is founded,
but the special requirements of Rule 9(b) required even before the
enactment of the PSLRA that more be pleaded in the context of
securities fraud claims. See Thompson, 125 F.3d at 903; 5 Wright
& Miller, supra, § 1224 at 206; cf. Williams, 112 F.3d at 177-78.
However, even when the requirements of Rule 9(b) are combined with
the requirements of 15 U.S.C. § 78u-4(b)(1) under the PSLRA, the
plaintiff need not plead “all his evidence” related to a securities
fraud claim, as we hold herein. Cf. Williams, 112 F.3d at 178
(Rule 9(b) does “not reflect a subscription to fact pleading.”).
We also agree with those courts which have held that allegations
made on “investigation of counsel” are equivalent to those made on
“information and belief” for purposes of the heightened pleading
requirements under 15 U.S.C. § 78u-4(b)(1). E.g., In re Sec.
Litig. BMC Software, Inc., 183 F. Supp. 2d 860, 885 n.33 (S.D. Tex.
2001).

25
persuasive the Second Circuit’s interpretation of these

requirements in Novak v. Kasaks.71 In Novak, “the complaint [did]

not state with particularity every fact upon which this belief was

based, since it [was] apparent that there were also personal

sources who were not specifically identified.”72 Novak held that

“plaintiffs who rely on confidential sources are not always

required to name those sources, even when they make allegations on

information and belief concerning false or misleading statements,

as here.”73 Novak rejected the contrary conclusion of a California

district court in In re Silicon Graphics, Inc. Securities

Litigation,74 which relied on dubious legislative history as support

for the proposition that “the PSLRA generally requires plaintiffs

to include the names of their confidential sources,” because the

Second Circuit noted, “the applicable provision of the law as

ultimately enacted requires plaintiffs to plead only facts and

makes no mention of the sources of these facts.”75 It then held:

71
216 F.3d 300 (2d Cir.), cert. denied, 531 U.S. 1012 (2000).
72
Id. at 313.
73
Id.
74
970 F. Supp. 746, 763-64 (N.D. Cal. 1997).
75
Novak, 216 F.3d at 313 (citing Silicon Graphics, 970 F.
Supp. at 763, and 15 U.S.C. § 78u-4(b)(1)); cf. Green Tree, 270
F.3d at 667-68 (“Whether pleading with particularity requires the
identification of the speaker whose words are relied on is not
apparent from the face of the statute. Some opponents of the
Reform Act argued in the House of Representatives that the House
version of the Reform Act would require pleading names of

26
 More fundamentally, our reading of the PSLRA rejects
any notion that confidential sources must be named as a
general matter. In our view, notwithstanding the use of
the word “all,” paragraph (b)(1) does not require that
plaintiffs plead with particularity every single fact
upon which their beliefs concerning false or misleading
statements are based. Rather, plaintiffs need only plead
with particularity sufficient facts to support those
beliefs. Accordingly, where plaintiffs rely on
confidential personal sources but also on other facts,
they need not name their sources as long as the latter
facts provide an adequate basis for believing that the
defendants’ statements were false. Moreover, even if
personal sources must be identified, there is no
requirement that they be named, provided they are
described in the complaint with sufficient particularity
to support the probability that a person in the position
occupied by the source would possess the information
alleged. In both of these situations, the plaintiffs
will have pleaded enough facts to support their belief,
even though some arguably relevant facts have been left
out. Accordingly, a complaint can meet the new pleading
requirement imposed by paragraph (b)(1) by providing
documentary evidence and/or a sufficient general
description of the personal sources of the plaintiffs’
beliefs.76

Novak further observed in a footnote:

Paragraph (b)(1) is strangely drafted. Reading “all”
literally would produce illogical results that Congress
cannot have intended. Contrary to the clearly expressed
purpose of the PSLRA, it would allow complaints to
survive dismissal where “all” the facts supporting the
plaintiff’s information and belief were pled, but those
facts were patently insufficient to support that belief.
Equally peculiarly, it would require dismissal where the

confidential informants. See, e.g., 141 Cong. Rec. H2849 (March 8,
1995) (statement of Rep. Dingell). The Second Circuit sensibly
refused to give weight to these ‘hyperbolic statements of
legislators attempting (unsuccessfully) to amend the proposed act
to lighten plaintiffs’ pleading burden.’ Novak v. Kasaks, 216 F.3d
300, 313 (2d Cir.), cert. denied, 531 U.S. 1012, 121 S. Ct. 567,
148 L. Ed. 2d 486 (2000).”).
76
Novak, 216 F.3d at 313-14 (footnote omitted).

27
 complaint pled facts fully sufficient to support a
convincing inference if any known facts were omitted.
Our reading of the provision focuses on whether the facts
alleged are sufficient to support a reasonable belief as
to the misleading nature of the statement or omission.77

The court concluded that “we find no requirement in existing law

that, in the ordinary course, complaints in securities fraud cases

must name confidential sources, and we see no reason to impose such

a requirement under the circumstances of this case,” noting that

the purpose of Rule 9(b) and the PSLRA “can be served without

requiring plaintiffs to name their confidential sources as long as

they supply sufficient specific facts to support their

allegations.”78 The court also observed that “[i]mposing a general

requirement of disclosure of confidential sources serves no

legitimate pleading purpose while it could deter informants from

providing critical information to investigators in meritorious

cases or invite retaliation against them.”79

The district court here relied upon the district court’s

analysis in Silicon Graphics, but we find the reasoning of that

case unpersuasive. As noted in Novak, the Silicon Graphics

district court’s reading of the PSLRA’s legislative history to

require pleading of confidential sources is fatally flawed.80

77
Id. at 314 n.1.
78
Id. at 314.
79
Id.
80
See id. at 313.

28
Moreover, as the Second Circuit aptly observed, contrary to the

Silicon Graphics conclusion, the language requiring that “the

complaint shall state with particularity all facts on which that

belief is formed” in 15 U.S.C. § 78u-4(b)(1) “requires plaintiffs

to plead only facts and makes no mention of the sources of these

facts.”81

We align this circuit with the Second Circuit and adopt the

reasoning and holding of Novak, rejecting the rule of Silicon

Graphics. Under the interpretation of section 78u-4(b)(1) we adopt

today, a plaintiff must “plead with particularity sufficient facts

to support” their allegations of false or misleading statements

made on information and belief.82 In determining whether this

requirement has been met we see no reason to embroider the multi-

step analysis of the Second Circuit and accept it as stated:

(1) if plaintiffs rely on confidential personal sources
and other facts, their sources need not be named in the
complaint so long as the other facts, i.e., documentary
evidence, provide an adequate basis for believing that

81
Id.
82
Id. at 313-14; see also In re Scholastic Corp. Sec. Litig.,
252 F.3d 63, 75 (2d Cir.), cert. denied sub nom., Scholastic Corp.
v. Truncellito, 122 S. Ct. 678 (2001); cf. United States ex rel.
Russell v. Epic Healthcare Mgmt. Group, 193 F.3d 304, 308 (5th Cir.
1999) (“We have held that when the facts relating to the alleged
fraud are peculiarly within the perpetrator’s knowledge, the Rule
9(b) standard is relaxed, and fraud may be pled on information and
belief, provided the plaintiff sets forth the factual basis for his
belief.”).

29
 the defendants’ statements or omissions were false or
misleading;83
(2) if the other facts, i.e., documentary evidence, do
not provide an adequate basis for believing that the
defendants’ statements or omissions were false, the
complaint need not name the personal sources so long as
they are identified through general descriptions in the
complaint with sufficient particularity to support the
probability that a person in the position occupied by the
source as described would possess the information pleaded
to support the allegations of false or misleading
statements made on information and belief;
(3) if the other facts, i.e., documentary evidence, do
not provide an adequate basis for believing that the
defendants’ statements or omissions were false and the
descriptions of the personal sources are not sufficiently
particular to support the probability that a person in
the position occupied by the source would possess the
information pleaded to support the allegations of false
or misleading statements made on information and belief,
the complaint must name the personal sources.

Accordingly, in some circumstances, pleading allegations on

information and belief sufficient to satisfy 15 U.S.C. § 78u-

4(b)(1) may require the naming of confidential sources. However,

this interpretation of the requirements of section 78u-4(b)(1)

avoids a general requirement of naming confidential sources which

may, as Plaintiffs here argue and as Novak found, make impossible

the adequate pleading of meritorious securities fraud cases in

circumstances in which informants do not wish to be exposed too

early but in which the PSLRA’s stay of discovery under 15 U.S.C. §

78u-4(b)(3)(B) prevents the acquisition of other sources for

83
As this rule demonstrates, Plaintiffs are incorrect that
allegations relying on documentary evidence are necessarily not
pleaded on information and belief—rather, documentary evidence may
be pleaded as the source or factual basis for the plaintiff’s
belief underlying his allegations.

30
allegations which the plaintiffs have no choice but to make on

information and belief.

The PSLRA was enacted, in part, to compensate for “the

perceived inability of Rule 9(b) to prevent abusive, frivolous

strike suits.”84 It was not enacted to raise the pleading burdens

under Rule 9(b) and section 78u-4(b)(1) to such a level that

facially valid claims, which are not brought for nuisance value or

as leverage to obtain a favorable or inflated settlement, must be

routinely dismissed on Rule 9(b) and 12(b)(6) motions.85 As one

district court in this circuit has recently noted, “the plaintiffs

need not allege ‘all’ facts that may be ‘related’ to their claims,”

since “[s]uch a requirement is impossible at the pleading stage

because, in nearly every securities fraud case, only the defendants

84
Nathenson, 267 F.3d at 407; cf. In re BankAmerica Corp.
Sec. Litig., 263 F.3d 795, 800 n.2 (8th Cir. 2001) (“A ‘strike
suit’ is defined as ‘[a] suit (esp. a derivative action) often
based on no valid claim, brought either for nuisance value or as
leverage to obtain a favorable or inflated settlement.’ (quoting
Black’s Law Dictionary 1448 (7th ed. 1999))), cert. denied sub
nom., Desmond v. BankAmerica Corp., 122 S. Ct. 1437 (2002). Other
circuits are in agreement as to this proposition. See City of
Philadelphia v. Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir.
2001); BankAmerica, 263 F.3d at 800; Helwig v. Vencor, Inc., 251
F.3d 540, 547 (6th Cir. 2001); Lander v. Hartford Life & Annuity
Ins. Co., 251 F.3d 101, 107 (2d Cir. 2000); Novak, 216 F.3d at 306;
Greebel v. FTP Software, Inc., 194 F.3d 185, 191 (1st Cir. 1999).
85
Cf. In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d
574, 595 (D.N.J. 2001) (observing that the Novak standard comports
with “the PSLRA’s goal of flushing out suits which are built on
mere speculation and conclusory allegations and which aim to use
discovery as a fishing expedition to substantiate frivolous
claims”).

31
know ‘all’ the facts related to the alleged fraud.”86 In this

sense, “[t]he PSLRA may have changed federal securities law; it did

not eliminate it.”87

To the extent, then, that the district court dismissed the

allegations in the complaint for failure to adhere to a strict per

se rule requiring the pleading of the names of confidential

sources, Plaintiffs are correct that the standard applied by the

district court was too onerous. However, we turn to the

application of the Novak standard, considering each allegation for

its particularization of fraud in compliance with the requirements

of Rule 9(b) and section 78u-4(b)(1).88

Neither the district court nor Alcatel contend that the

pleading of the so-called Group Services Report89—an Alcatel

86
In re NetSolve, Inc. Sec. Litig., 185 F. Supp. 2d 684, 696
n.10 (W.D. Tex. 2001).
87
Id.
88
See Williams, 112 F.3d at 178.
89
The Group Services Report is provided as the source for
Plaintiffs’ allegations regarding the intentional overstatement of
Alcatel SEL’s 1997 results by at least 125 million French francs
and an October 23, 1998 conversation between the former head of
Alcatel SEL’s Business Systems Division with Dr. Gottfried Dutine,
the chairman of the Managing Board of Alcatel SEL, regarding the
fact that “cost of several hundred contracts were not booked in
1997,” in which conversation was mentioned the word “fraud.”
Complaint at 2 ¶ 4, 13-14 ¶¶ 28-29, 22 ¶ 50. It is also provided
as the source for the allegations of the total state of disarray at
Alcatel SEL due to a pervasive lack of internal controls and of the
“obvious” deteriorating trend in Alcatel order intake and margins
by February 1998. Id. at 2 ¶ 4, 14 ¶¶ 30-31, 15 ¶ 32, 15 ¶ 34.

32
internal report prepared by Alcatel’s Group Audit Services

department and dated November 12, 1998 which quotes extensively

from a report authored by Arthur Andersen—or an article in

Stuttgarter Zeitung on October 14, 199890 was insufficient to

support the complaint’s corresponding allegations on information

and belief, and with good reason: Plaintiffs provided a date for

the Stuttgarter Zeitung article, which is available to the general

public, and Alcatel itself appended the Group Services Report as a

document supporting its motion to dismiss. As such, this

documentary evidence provides an adequate basis for believing that

Alcatel’s corresponding statements and omissions were false or

misleading.

Alcatel argues, however, that the complaint, outside of its

allegations based on the Group Services Report and the Stuttgarter

Zeitung article, fails to meet the pleading requirements of section

78u-4(b)(1) even under the Novak standard. Alcatel contends that

Plaintiffs failed to link the source of each allegation of falsity

to the allegation itself so as to allow the court to evaluate the

reliability of the allegations to determine whether an inference of

fraud may fairly be drawn.

90
The complaint cites this article as stating that during the
first six months of 1998, Alcatel SEL had “slipped into losses due
to the operating results of one of its holdings with a deficit of
DM 28.4 million,” whereas “[i]n the previous year a profit of DM
104.4 million had been achieved.” Id. at 16 ¶ 35.

33
 Alcatel further argues, with regard to the allegations relying

on documentary evidence rather than personal sources, that by Novak

the sufficiently particular facts necessary to support an

allegation on information and belief must include identification of

the source of Plaintiffs’ knowledge of the documentary evidence

offered as the basis for the belief. Alcatel, as the district

court did, relies on the district court’s decision in Coates v.

Heartland Wireless Communications, Inc.91 Coates followed Silicon

Graphics, holding that “plaintiffs must provide more details about

the alleged negative internal reports, such as report titles, when

they were prepared, who prepared them, to whom they were directed,

their content, and the sources from which plaintiffs obtained this

information.”92 We decline to adopt this standard as a threshold

requirement in every case. At the same time, we do not disagree

with the Second Circuit’s statement in San Leandro Emergency

91
26 F. Supp. 2d 910 (N.D. Tex. 1998).
92
Id. at 921; see also In re Silicon Graphics Inc. Sec.
Litig., 183 F.3d 970, 985 (9th Cir. 1999) (“It is not sufficient
for a plaintiff’s pleadings to set forth a belief that certain
unspecified sources will reveal, after appropriate discovery, facts
that will validate her claim. In this case, Brody’s complaint does
not include adequate corroborating details. She does not mention,
for instance, the sources of her information with respect to the
reports, how she learned of the reports, who drafted them, or which
officers received them. Nor does she include an adequate
description of their contents.... We would expect that a proper
complaint which purports to rely on the existence of internal
reports would contain at least some specifics from those reports as
well as such facts as may indicate their reliability.”).

34
Medical Group Profit Sharing Plan v. Philip Morris Cos., Inc.,93

that an “unsupported general claim of the existence of confidential

company sales reports that revealed the larger decline in sales is

insufficient to survive a motion to dismiss.”94

Nevertheless, we find more helpful the Second Circuit’s post-

Novak decision in In re Scholastic Corp. Securities Litigation.95

Scholastic explained that San Leandro required that “a plaintiff

needs to specify the internal reports, who prepared them and when,

how firm the numbers were or which company officers reviewed them”

and that the Scholastic plaintiffs “satisfied this standard by

specifying who prepared internal company reports, how frequently

the reports were prepared and who reviewed them.”96 This is a

sensible standard, because “[e]ven with the heightened pleading

standard under Rule 9(b) and the Securities Reform Act we do not

require the pleading of detailed evidentiary matter in securities

litigation.”97

Here, the complaint alleges that, in an October 22, 1998

internal Alcatel newsletter entitled “Kom-Aktuell,” Dr. Gottfried

93
75 F.3d 801 (2d Cir. 1996).
94
Id. at 812.
95
252 F.3d 63 (2d Cir.), cert. denied sub nom., Scholastic
Corp. v. Truncellito, 122 S. Ct. 678 (2001).
96
Id. at 72, 73.
97
Id. at 72.

35
Dutine, Chairman of the Alcatel SEL Managing Board, confirmed that

the significant problems at Alcatel SEL were known as of the middle

of 1998.98 The complaint also offers the MMRs as the source for

defendants’ awareness by June 1998 that Alcatel SEL had experienced

a dramatic decline in its profitability and was losing money and

that this decline was continuing.99 The complaint further alleges,

without specifically citing a source, that in July 1998 “a top

executive of Alcatel SEL flew to Paris and reported the losses [of

60 million DM (or approximately 240 million French francs) for the

year-to-date] directly to Jacques Dunoge, Executive Vise President,

Alcatel’s Director of Marketing and Business Development, and one

of the members of Alcatel’s Telecom Executive Committee” and that

this executive lacked confidence in the accountants at Alcatel SEL

and asked Dunoge to send auditors to Alcatel SEL from Alcatel’s

headquarters.100 The complaint also alleges without citing a source

that the losses at Alcatel SEL continued to grow and by August 1998

the year-to-date losses had grown to 100 million DM (approximately

400 million French francs), which was reported to Alcatel, Halbron,

98
Complaint at 16 ¶ 37.
99
Id. at 15 ¶ 33, 16 ¶ 36, 28 ¶ 65; see also id. at 4 ¶ 5,
6 ¶ 12, 7 ¶ 13, 7 ¶ 15.
100
Id. at 16 ¶ 37; see also id. at 2 ¶ 4 (“In July 1998, a
high ranking Alcatel SEL official personally informed a member of
this committee that: (i) Alcatel’s German subsidiary was
experiencing significant losses; (ii) these losses had reached
approximately 240 million French francs year-to-date....”).

36
and Tchuruk through regular reports from Alcatel SEL.101 The

allegations regarding the postponement of a contract for services

to Borneo, the cancellation or loss of the Thailand contract and

the two Spanish telephone company contracts, and the lower sales to

Swiss Telecom and reduced business with Deutsche Telecom, as well

as the defendants’ awareness of these facts, are likewise not

accompanied by citation to any specific sources.102 Plaintiffs

admit that the only source of these allegations regarding the lost

or postponed contracts and reduced sales and business is the

paragraph entitled “Basis of Allegations,” which generally states:

Plaintiffs have alleged the foregoing based upon the
investigation of its counsel, which included, among other
things, a review of Alcatel’s SEC filings, securities
analysts’ reports, and advisories about the Company,
press releases issued by the Company, media reports
regarding Alcatel, internal Alcatel documents, and
consultations and interviews with various entities and
individuals including employees of Deutsche Telecom and
other Alcatel customers throughout the world, German,
French, Swiss, Thai, and Indonesian business journalists,
former employees of Alcatel, trade union officials, and
Telecom analysts. Plaintiffs believe that substantial
evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for
discovery.103

101
Id. at 17 ¶ 38; see also id. at 2 ¶ 4, 11 ¶ 24, 12 ¶ 27,
37 ¶ 92(b).
102
Id. at 11 ¶ 24, 17-18 ¶¶ 39-43.
103
Id. at 40 ¶ 101; see also id. at 1 (“Plaintiffs,
individually and on behalf of all other persons similarly situated,
by their undersigned counsel, allege upon personal knowledge as to
their own acts and upon an investigation undertaken by plaintiffs’
counsel, which included, among other things, a review of the press
releases issued by defendants, Alcatel SA’s (‘Alcatel’ or the
‘Company’) filings with the Securities and Exchange Commission

37
 Looking to each pleaded source or unsupported allegation in

turn, we first conclude that, under the first step of the Novak

analysis, the allegations based on the “Kom-Aktuell” newsletter are

pleaded with sufficient particularity to obviate the need for

identifying personal sources as the basis for the allegations that

the significant problems at Alcatel SEL were known as of the middle

of 1998. The complaint provides the name of this documentary

evidence, its date, and the name and position of the person who

made the statement quoted, whom, by virtue of his position, would

possess the information pleaded, and so provides an adequate basis

for believing that Alcatel’s statements and omissions, in light of

its knowledge in the middle of 1998 of the significant problems at

Alcatel SEL, were false or misleading.

Likewise, the MMRs are sufficiently identified to stand as

other facts that provide an adequate basis for Plaintiffs’ belief

that Alcatel’s statements and omissions were false or misleading

due to Alcatel’s awareness by June 1998 that Alcatel SEL had

experienced a dramatic decline in its profitability and was losing

money and that this decline was continuing. The complaint

identifies the MMRs as being prepared monthly by each subsidiary’s

(‘SEC’), securities analysts’ reports about the Company, media
reports regarding Alcatel, internal Alcatel documents, and
consultations and interviews with various entities and individuals
including employees of Deutsche Telecom and other Alcatel customers
throughout the world, German, French, Swiss, Thai, and Indonesian
business journalists, former employees of Alcatel, trade union
officials, and Telecom analysts.”).

38
controller’s office and transmitted to Halbron and Tchuruk at the

beginning of each month to convey information about the Telecom

sector at each subsidiary by comparing actual results to budgeted

numbers. This pleading satisfies the Scholastic standard.

Likewise, the allegations concerning the conversation between

“a high ranking Alcatel SEL official” who was “a top executive of

Alcatel SEL” and Dunoge are pleaded with sufficient particularity

to meet the Novak standard for pleadings on information and belief.

This executive, and his conversation with Dunoge, is described with

sufficient particularity to support the probability that a person

in such a position would possess the information pleaded and that,

to the extent it is necessary, construing the allegations in the

light most favorable to Plaintiffs, this executive was himself

Plaintiffs’ source for this information.104

104
See Campbell Soup, 145 F. Supp. 2d at 595-96 (“Moreover,
in addition to the numerous documents cited, the Amended Complaint
specifies discussions, phone conversations, and memoranda
addressing the basis of Plaintiffs’ factual allegations and
identifies numerous individuals who participated in those
communications, as well as their positions in the Company. This
specificity strongly suggests that Plaintiffs, without the benefit
of discovery, have adequately investigated and substantiated their
allegations and, as a result, have allayed the PSLRA’s concerns
about frivolous and abusive fraud suits.”); cf. Kowal v. MCI
Communications Corp., 16 F.3d 1271, 1278, 1279 n.3 (D.C. Cir. 1994)
(holding that the Rule 12(b)(6) construed-in-the-light-most-
favorable standard applies even to the review of dismissals under
Rule 9(b), although pleadings of fraud on information and belief
“must also be accompanied by a statement of the facts upon which
the allegations are based”).

39
 However, no citation to documentary evidence or personal

sources, named or simply identified with a general description, is

provided for the further allegation that, by August 1998, Alcatel

SEL’s losses had increased to approximately 400 million French

francs year-to-date, other than unidentified “regular reports from

Alcatel SEL” to Alcatel, Halbron, and Tchuruk. Any such “regular

reports” are insufficiently identified as to who prepared them and

how frequently they were prepared. Moreover, Plaintiffs may not

avail themselves of reliance on an inferred allegation of a

personal source because the top Alcatel SEL executive clearly did

not convey this information regarding losses through August 1998 to

Dunoge in a July 1998 conversation. The complaint therefore does

not provide an adequate basis for believing that Alcatel’s

statements and omissions were false or misleading based on this

allegation.

Additionally, no source is provided, documentary or personal,

for the allegation that Tchuruk and Halbron caused Alcatel to

materially understate its provision of losses associated with work

in progress on contracts in Thailand, Malaysia, Indonesia, and the

Philippines by at least 200 million French francs, which allegedly

rendered false or misleading Alcatel’s statements in its 1997

annual report regarding the adequacy of its reserves set aside for

the Asian financial crisis. Likewise, in support of the

allegations of lost or postponed contracts in Europe and Southeast

Asia and reduced sales and business with Deutsche Telecom and Swiss

40
Telecom, no other facts are alleged to provide an adequate basis

for believing that Alcatel’s statements and omissions were false or

misleading on the basis of this information. Rather, Plaintiffs

rely on their general allegation of consultations and interviews

with “Swiss, Thai, and Indonesian business journalists,” “employees

of Deutsche Telecom and other Alcatel customers throughout the

world,” “trade union officials, and Telecom analysts” in the course

of the investigation of counsel as the source of these allegations.

Under the Novak standard, however, unlike the allegations based on

the conversation between the top Alcatel SEL executive and Dunoge,

these personal sources are not identified with sufficient

particularity to support the probability that a person in the

position occupied by the source as described would possess the

information pleaded to support the allegations of false or

misleading statements made on information and belief.105

Accordingly, we conclude that Plaintiffs’ allegations relying

on the Group Services Report, the Stuttgarter Zeitung article, the

MMRs, and the “Kom-Aktuell” newsletter, as well as the allegations

based on a July 1998 conversation between a top Alcatel executive

and Dunoge, survive dismissal under section 78u-4(b)(1) of the

PSLRA. However, the district court correctly concluded that the

allegations of lost or postponed contracts and reduced sales and

105
Compare In re McKesson HBOC, Inc. Sec. Litig., 126 F.
Supp. 2d 1248, 1254-57 (N.D. Cal. 2000).

41
business, as well as the allegations that, by August 1998, Alcatel

SEL’s losses had increased to approximately 400 million French

francs year-to-date and that Alcatel understated its provision of

losses associated with work in progress on contracts in Thailand,

Malaysia, Indonesia, and the Philippines by at least 200 million

French francs do not meet the Novak standard for adequately pleaded

allegations on information and belief under section 78u-4(b)(1).

B.

Plaintiffs’ complaint must also adequately plead materiality,

on which score Alcatel contends Plaintiffs’ claims fail. We have

recently explained that “[m]ateriality is determined by evaluating

whether there is ‘[a] substantial likelihood that’ the false or

misleading statement ‘would have been viewed by the reasonable

investor as having altered the ‘total mix’ of information made

available.’”106 Put another way, “[a] statement or omitted fact is

‘material’ if there is a substantial likelihood that a reasonable

investor would consider the information important in making a

decision to invest.”107

At the same time, “projections of future performance not

worded as guarantees are generally not actionable under the federal

106
Nathenson, 267 F.3d at 418 (quoting Basic Inc. v.
Levinson, 485 U.S. 224, 231-32 (1988)).
107
R&W Technical Servs. Ltd. v. Commodity Futures Trading
Comm’n, 205 F.3d 165, 169 (5th Cir.), cert. denied, 531 U.S. 817
(2000).

42
securities laws” as a matter of law.108 Additionally, “it is well-

established that generalized positive statements about a company’s

progress are not a basis for liability.”109 As such, “[s]tatements

that are predictive in nature are actionable only if they were

false when made.”110 However, “the materiality of predictions is

analyzed on a case-by-case basis.”111

Plaintiffs argue that it is improper for a court deciding a

Rule 12(b)(6) motion to dismiss a complaint on the basis of

materiality. We cannot agree with this assertion, so broadly cast.

It is well-established that, “[b]ecause materiality is a mixed

question of law and fact, it is usually left for the jury.”112 At

the same time, as we have recently affirmed, a court can determine

statements to be immaterial as a matter of law on a motion to

dismiss.113

108
Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th
Cir. 1993).
109
Nathenson, 267 F.3d at 419.
110
Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.
1993).
111
Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 547 (5th
Cir. 2001).
112
United States v. Peterson, 101 F.3d 375, 380 (5th Cir.
1996) (citing, inter alia, TSC Indus., Inc. v. Northway, Inc., 426
U.S. 438, 450 (1976)).
113
See Nathenson, 267 F.3d at 422; see also Shushany, 992
F.2d at 521-25.

43
 We turn to consider whether the complaint adequately alleges

materially false or misleading statements and omissions in the June

8 newspaper articles, Alcatel’s July 28 press release, Alcatel’s

1997 annual report, and Alcatel’s merger registration statement,

specifically the certification that Alcatel had not experienced or

was not likely to experience a “Material Adverse Effect,” on the

basis of Plaintiffs’ surviving allegations, to wit: (1) Alcatel’s

intentional overstatement of its financial results for 1997 by at

least 125 million French francs in violation of GAAP due to

accounting problems at Alcatel SEL and (2) the obvious

deteriorating trend in Alcatel SEL’s orders and margins and its

losses of approximately 240 million French francs year-to-date in

July 1998.114

First, the allegations of overstated financials. We need not

venture into whether Alcatel’s alleged overstatement of 125

millions French francs in its 1997 financial results, while a large

absolute sum, is nonetheless insufficient as a matter of law to

materially affect Alcatel on a consolidated basis. The

overstatements alleged in the complaint on the basis of the Group

Services Report concern only Alcatel’s German subsidiary, Alcatel

114
We initially reject Alcatel’s argument that quoted
statements by Tchuruk in a newspaper article are per se not
actionable under section 10(b)/Rule 10b-5. The statements
Plaintiffs cite are directly attributed to Tchuruk and may
therefore form the basis for a securities fraud claim. Compare
Williams, 112 F.3d at 179-80.

44
SEL, from which Plaintiffs seek to infer through conclusory

assertions that Alcatel’s financials on a consolidated basis were

overstated by 125 million French francs. We have previously

rejected similar allegations as insufficiently pleaded under Rule

9(b) in Shushany v. Allwaste, Inc.:115

We find the deficiencies in the complaint
particularly troubling because the alleged fraudulent
acts occurred at AAA, an Allwaste subsidiary. Although
it is foreseeable that misstatements in AAA’s ledgers
could materially skew the accuracy of Allwaste’s
financial reports, such an inference standing alone is
obviously insufficient to support a securities fraud
claim against Allwaste and Nelson. The complaint
provides only conclusory allegations to support any
connection between the alleged fraudulent accounting
practices at AAA and Allwaste’s financial reports, which
do not satisfy the requirements of Rule 9(b).116

We are persuaded that Plaintiffs failed to allege material

misstatements or omissions in Alcatel’s statements in June and July

1998 projecting “continued double-digit growth both in sales and

orders for the full year” 1998 and the potential for sales growth

of 10 to 20 percent per year or its annual report and merger

registration statement on the basis of the alleged overstatements

in Alcatel’s 1997 financial results.

As for the failure to disclose Alcatel SEL’s alleged

operational problems and losses of 240 million French francs,

Plaintiffs have failed to plead why Alcatel’s awareness of these

losses and problems renders Alcatel’s growth predictions for

115
992 F.2d 517 (5th Cir. 1993).
116
Id. at 523-24 (footnote omitted).

45
Alcatel’s business on a consolidated basis false when made. We

have recently observed that “ordinarily a reasonable investor may

deem a significant decrease in projected income material to its

decision to invest in an entity.”117 However, Plaintiffs do not

plead the existence of any internal projections at Alcatel of

reduced sales and order growth or income produced between June and

September 1998 that would undermine the reasonableness of Alcatel’s

announced growth predictions in June and July 1998. Indeed, the

September 17, 1998 press release projected order and sales growth

of 10 percent for the full year 1998, in line with the range

predicted in Alcatel’s June and July 1998 public statements.

Moreover, Plaintiffs do not plead that these June and July 1998

growth predictions did not account for known problems and losses at

Alcatel SEL. Consequently, there is no substantial likelihood that

a reasonable investor would consider the omission of information

about alleged problems and losses at Alcatel SEL to have

significantly altered the total mix of information about investing

in Alcatel SA, not simply Alcatel SEL, such that these alleged

omissions regarding Alcatel SEL were immaterial as a matter of

law.118

117
Mercury Air, 237 F.3d at 547.
118
This conclusion applies equally to the allegations that
Alcatel’s certification that it had not experienced and was not
likely to experience a “Material Adverse Effect” and Alcatel’s
statement that it had created adequate reserves to provide for the
Asian financial crisis were false or misleading on the basis of
problems and losses at Alcatel SEL.

46
 At oral argument, Plaintiffs urged the court to apply common

sense in conducting its materiality analysis.119 This is an

appropriate suggestion, and we note in particular that the

complaint alleges that the market reacted severely to Alcatel’s

September 17 announcement that Alcatel’s “Telecom segment’s income

from operations, while growing over 1997, will be adversely

impacted by the sharp investment cuts recently decided by some

traditional operators and the deepening of the Southeast Asian and

Russian crisis” and that, as a result, “[a]fter reviewing the

accounts and the currently available forecasts, Alcatel anticipates

that 1998 will not meet expectations in regards to the Group’s

operating performance.” Plaintiffs’ best argument, then, may be

that the complaint alleges that Alcatel SEL’s problems and losses

and the 1997 financial overstatements contributed to this announced

failure to meet expectations and so there is a substantial

likelihood that a reasonable investor would consider the omission

of this information to have significantly altered the total mix of

information about Alcatel, as revealed by the sharp decline in

Alcatel’s share price following the September 17 announcement.

The Third Circuit has recently held, applying a rule it

developed in In re Burlington Coat Factory Securities Litigation,120

119
See Peterson, 101 F.3d at 380 (“We believe that common
sense alone suggests that the Duenas lawsuit was highly significant
information which would have likely altered the ‘’total mix’ of
information.’” (quoting Basic, 485 U.S. at 232)).
120
114 F.3d 1410 (3d Cir. 1997).

47
that, “when a stock is traded in an efficient market, the

materiality of disclosed information may be measured post hoc by

looking to the movement, in the period immediately following

disclosure, of the price of the firm’s stock.”121 We, in turn,

recently approved of the Burlington decision’s “requirement, in

cases depending on the fraud-on-the-market theory, that the

complained of misrepresentation or omission have actually affected

the market price of the stock,” although “we conclude[d] that it is

more appropriate in such cases to relate this requirement to

reliance rather than to materiality.”122 However, even if we were

to apply this efficient market theory rule to materiality, as the

Third Circuit has, Plaintiffs’ allegations of materially false or

misleading statements and omissions would not be saved. Alcatel

did not disclose the alleged financial overstatements or problems

and losses at Alcatel SEL in its September 17 statement, or any

alleged public statement thereafter, and so the sharp price decline

of Alcatel ADSs’ share price does not support the sufficiency of

the allegation of the materiality of this alleged omitted

information.

121
Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000).
122
Nathenson, 267 F.3d at 415. We also agreed with
Burlington that, “although there is generally a presumption that
potentially significant publicly disseminated information is
reflected in the price of stock traded on an efficient market, the
presumption is rebuttable.” Id.

48
 Accordingly, we conclude that, even as to those allegations in

the complaint that survive dismissal under the PSLRA’s pleading

requirements, Plaintiffs have failed to allege materially false or

misleading statements and omissions sufficient to state securities

fraud claims under section 10(b) and Rule 10b-5 upon which relief

can be granted. We need not, therefore, address Alcatel’s

arguments regarding the complaint’s deficiencies with regard to

scienter or loss causation.123

IV.

Plaintiffs alternatively argue that the district court erred

in dismissing their complaint with prejudice and should have

granted them leave to replead. They note that they offered to

provide the names of the confidential informants to the district

court in camera, which offer the district court did not accept, and

that the district court did not hold a hearing on Alcatel’s second

motion to dismiss.124

A district court’s denial of leave to amend the complaint is

reviewed only for abuse of discretion.125 We find no abuse of

discretion here. The district court noted in support of its

123
Plaintiffs’ section 20(a) control-person liability claims
against Tchuruk and Halbron were also properly dismissed based on
Plaintiffs’ failure to plead predicate securities fraud claims
under section 10(b) and Rule 10b-5 against Alcatel upon which
relief can be granted. See Lovelace, 78 F.3d at 1021 n.8.
124
The district court did hold a hearing on Alcatel’s motion
to dismiss Plaintiffs’ First Consolidated Amended Complaint.
125
Lewis v. Fresne, 252 F.3d 352, 356 (5th Cir. 2001).

49
decision that it had given Plaintiffs almost two years to

investigate and substantiate their claims. Moreover, when

dismissing Plaintiffs’s First Consolidated Amended Complaint, the

court offered Plaintiffs a chance to replead in order to provide

more details about why Alcatel’s statements and omissions were

false or misleading, to sufficiently plead that Alcatel knew they

were false when made, and to identify the sources of their

allegations pleaded on information and belief. Having offered

Plaintiffs this second chance, it was not an abuse of discretion to

deny them a third chance to offer more details, either in camera or

in an amended complaint.126

V.

For the foregoing reasons, the district court’s judgment

dismissing Plaintiffs’ complaint is AFFIRMED.

126
Cf. Southmark Corp. v. Schulte Roth & Zabel (In re
Southmark Corp.), 88 F.3d 311, 316 (5th Cir. 1996) (noting that “we
have indicated that, in exercising its discretion to deny leave to
amend a complaint, a trial court may properly consider ... whether
the facts underlying the amended complaint were known to the party
when the original complaint was filed”).

50