Barrie v. Intervoice-Brite Inc

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
January 12, 2005
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
__________________________ Clerk
No. 03-11064
__________________________

BARRIE, et al.,
Plaintiffs - Appellants,

versus

INTERVOICE-BRITE, INC., et al.,

Defendants - Appellees.

___________________________________________________

Appeal from the United States District Court
For the Northern District of Texas
___________________________________________________

Before BENAVIDES, DENNIS, and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Plaintiffs appeal from the district court’s dismissal, pursuant to Fed. R. Civ. P. 9(b) and the

Private Securities Litigation Reform Act, of their securities fraud class action alleging violations of

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

Rule 10b-5. For the reasons that follow, we reverse in part and remand.

I. FACTS AND PROCEEDINGS

Intervoice-Brite, Inc. (“Intervoice” or “the Company”), the corporate defendant in this

securities fraud class action, develops and sells interactive voice software. Intervoice is

1
headquartered in Dallas and its stock is traded on the NASDAQ exchange. Intervoice was formed

in 1999 as the result of a merger between Intervoice, Inc. and Brite Voice Systems, Inc. Following

the merger, Intervoice represented that the merger was a success, citing impressive revenues and

projecting strong earnings. In June 2002, however, the Company announced that it would report a

loss and lower-than-projected revenues and earnings per share. This class action lawsuit followed.

On June 5, 2001, the plaintiffs, on behalf of themselves and everyone who purchased shares

of Intervoice between October 12, 1999 and June 6, 2000 (the “Class Period”), filed their original

complaint. They sued Intervoice and its chief officers (collectively “defendants”).1 The plaintiffs

alleged that the defendants committed securities fraud by making false and misleading statements

concerning the Company’s August 1999 merger, its fourth quarter of 2000 and fiscal year 2001

earnings and revenue projections, and its fiscal year 2000 year-end earnings and revenue results. The

plaintiffs argued that the misleading statements, based on improper accounting techniques, were made

in forward-looking statements, press releases, and other corporate documents, and relied upon by

analysts in their reports. The plaintiffs further alleged that the defendants made stock sales based on

insider information, and relied on these sales as evidence of scienter. The plaintiffs sought to recover

damages on behalf of all persons who acquired Intervoice stock during the Class Period.

This case was consolidated with substantially identical suits subsequently filed by other

plaintiffs on September 5, 2001. On November 16, 2001, the plaintiffs filed their Consolidated Class

1
The officers sued are: Daniel D. Hammond, Chairman of the Board of Intervoice, and
until June 6, 2000, Intervoice’s CEO; Rob Roy J. Graham, CFO of Intervoice; David W.
Brandenberg, Intervoice’s CEO since June 2000, a director of the Company, and President of the
Company prior to 1994; Gordon H. Givens, Senior Vice President of Business Systems; David
A. Berger, President and COO of Intervoice; Harold J. Brown, Vice President of Human
Resources; and M. Gregory Smith, Senior Vice President of Business Systems Sales and
Marketing Communications.

2
Action Amended Complaint. On January 14, 2002, the defendants filed a motion to dismiss that

complaint. On August 8, 2002, the district court granted the motion to dismiss without prejudice,

allowing the plaintiffs to file an amended complaint in compliance with the pleading requirements of

the Private Securities Litigation Reform Act (“PSLRA”) and Federal Rule of Civil Procedure 9(b).

The plaintiffs filed a First Amended Class Action Complaint (“Complaint”) on September 23, 2002.

On November 1, 2002, the defendants filed another motion to dismiss. On September 15, 2003, the

district court granted the defendants’ motion, dismissing the Complaint with prejudice. The plaintiffs

timely appealed on October 9, 2003.

II. STANDARD OF REVIEW

This Court exercises de novo review of a district court’s dismissal of a civil complaint.

Goldstein v. MCI Worldcom, 340 F.3d 238, 244 (5th Cir. 2003) (citing Abrams v. Baker Hughes,

Inc., 292 F.3d 424, 430 (5th Cir. 2002)). We accept the facts alleged in the plaintiffs’ complaint as

true and construe their allegations in the light most favorable to them. Id. We will not, however,

“‘strain to find inferences favorable to the plaintiffs.’” Id. (quoting Westfall v. Miller, 77 F.3d 868,

870 (5th Cir. 1996)). “Nor do we accept conclusory allegations, unwarranted deductions or legal

conclusions.” Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 361 (5th Cir. 2004)

(citing Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir. 2001)).

III. DISCUSSION

A. Allegations of fraudulent revenue recognition and fraudulent earnings projections

In their Complaint, the plaintiffs allege that Intervoice and its controlling directors violated

3
Section 10(b) of the Security Exchange Act of 19342 by making false statements regarding

Intervoice’s revenues and earnings.3 In dismissing the Complaint, the district court held that the

plaintiffs failed to plead in conformity with the pleading requirements of the PSLRA and Rule 9(b).

In 1995, Congress amended the 1934 Act by passing the PSLRA. The PSLRA sets out

heightened pleading standards for securities law class action complaints, stating that a plaintiff must

allege with specificity each fraudulent statement, who made the statement, why it was false, and that

2
Section 10(b) provides in relevant part:

It shall be unlawful for any person, directly or indirectly
...
(b) To use or employ, in connection with the purchase or sale of any security . . .
any manipulative or deceptive device or contrivance in contravention of such rules
and regulations as the [Securities and Exchange] Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b) (2000).

SEC Rule 10b-5, promulgated by the SEC under Section 10(b) of the 1934 Act, provides
in relevant part:

It shall be unlawful for any person, directly or indirectly
...
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading . . . in connection with
the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (2001).
3
The defendants also charge the individual defendants, as controlling persons of
Intervoice, with violation of § 20(a) of the Exchange Act.

4
the statement was made with the requisite state of mind.4 “To state a securities-fraud claim under

section 10(b), and Rule 10b-5, plaintiffs must plead (1) a misstatement or omission; (2) of a material

fact; (3) made with scienter; (4) on which the plaintiffs relied; and (5) that proximately caused the

plaintiffs’ injuries.” Southland Sec. Corp. v. INSpire Ins. Solutions Inc., 365 F.3d 353, 362 (5th Cir.

2004) (citing Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir. 1997)).

Federal Rule of Civil Procedure 9(b) also applies in securities fraud cases. See Goldstein v.

MCI Worldcom, 340 F.3d 238, 245 (5th Cir. 2003). Its requirements work in conjunction with those

4
The PSLRA provides, in relevant part:
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
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.
(2) Required state of mind
In any private action arising under this chapter in which the plaintiff may
recover money damages only on proof that the defendant acted with a
particular state of mind, the complaint shall, with respect to each act or
omission alleged to violate this chapter, state with particularity facts giving
rise to a strong inference that the defendant acted with the required state of
mind.
(3) Motion to dismiss; stay of discovery
(A) Dismissal for failure to meet pleading requirements

In any private action arising under this chapter, the court shall, on the
motion of any defendant, dismiss the complaint if the requirements of
paragraphs (1) and (2) are not met.

15 U.S.C. § 78u-4(b).

5
of the PSLRA.5 “To satisfy Rule 9(b)’s pleading requirements, the plaintiffs must ‘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.’” Southland, 365 F.3d at 362 (quoting

Williams, 112 F.3d at 177–78).

The plaintiffs now argue that the district court improperly applied these pleading requirements

to the claims of fraud in revenue recognition and earnings projections, which we discuss in turn.

(1) Claims of fraud in revenue recognition

The plaintiffs allege that Intervoice’s strong FY00 revenue and earnings were the result of

recognizing revenue on sales of its software products in violation of Generally Accepted Accounting

Principles (“GAAP”) and American Institute of Certified Public Accountants (“AICPA”) Statement

of Position 97-2 (“SOP 97-2”). The plaintiffs claim that the Company based its reported revenues

for the fiscal year 2000 on this improper recognition of revenue. SOP 97-2, which addresses software

revenue recognition, was issued in January 1998 and applies to transactions entered into in fiscal

years beginning after December 15, 1997. It requires that before revenue is recognized for the sale

of software, the following four conditions must obtain: 1) persuasive evidence of a contractual

arrangement must exist; 2) delivery must have occurred; 3) the vendor’s fee must be fixed or

determinable; and 4) collectability is probable. In explaining how to determine “whether delivery has

occurred,” SOP 97-2 states that even “[a]fter delivery, if uncertainty exists about customer

5
“The PSLRA reinforces the particularity requirements of Rule 9(b), requiring the
plaintiffs to state not only the time, place, the identity of the speaker, and the content of the
alleged misrepresentation, but also to explain why the challenged statement or omission is false or
misleading.” Southland, 365 F.3d at 363 (citing Williams, 112 F.3d at 177).

6
acceptance of the software, license revenue should not be recognized until acceptance occurs.”

The plaintiffs alleged in the Complaint that Intervoice had recognized revenues at the time of

shipment, before delivery and acceptance by customers. In the fourth quarter of 2000, the Company

had been recognizing revenue on software sales prior to delivery, prior to acceptance by customers,

and prior to customization. The plaintiffs contend that their allegations that the defendants stated to

investors that Intervoice complied with a rule requiring revenue recognition on delivery and

acceptance—but instead recognized revenue on shipment— was sufficient to state a cl aim. The

Complaint also alleged that the Company admitted that it had improperly recognized $18.3 million

in its Form 10-Q report filed on July 14, 2000. The Complaint alleged the essential elements: the

existence of a rule requiring recognition on delivery and acceptance; Intervoice’s acceptance of that

rule; Intervoice’s publication of financial information in violation of that rule; and Intervoice’s

admission of that violation. These allegations, the plaintiffs argue, are more than sufficient to meet

the pleading requirements.

The defendants respond that their accounting methods were not improper and that they made

no false statements regarding earnings. On December 3, 1999, shortly after the merger, the Securities

and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”) to guide

companies in applying SEC Rules and GAAP to revenue recognition issues. SAB 101’s stated

purpose was to provide additional guidance in applying GAAP principles to revenue recognition in

financial statements. SAB 101 added a topic entitled “Revenue Recognition” that restated SOP 97-

2’s test for revenue recognition. A portion of SAB 101 addressed the impact of formal contract

accept ance provisions in determining whether to recognize revenue. It provided that, “when . . .

contractual customer acceptance provisions exist, the staff generally believes that the seller should

7
not recognize revenue until customer acceptance occurs or the acceptance provisions lapse.”

SAB 101 provided two procedures for registrants to adjust their revenue accounting.

Registrants who had not applied SAB 101’s formal contract acceptance criteria for delivery were

entitled to utilize a one-time, cumulative effect adjustment to report a change in accounting methods.

Registrants not previously in compliance with GAAP were required to restate prior financial

statements following the procedure for correction of an error. Intervoice responded to SAB 101 by

following the first procedure: reporting in its 1Q01 Form 10-Q that “effective March 1, 2000 the

Company now recognizes revenue upon consumer acceptance” for sales of all but its more complex

customized systems. The SEC never objected to Intervoice’s actions, and Intervoice argues that this

establishes an affirmative corporate assertion of compliance with GAAP.

We agree with the plaintiffs that the defendants’ argument is fact-based and is therefore

insufficient to support a motion to dismiss. The plaintiffs’ claim that the Company improperly

recognized unearned revenue in violation of SOP 97-2 is supported by sworn expert analysis. Dr.

Lesser, the plaintiffs’ expert, supported their accounting theory, stating: “Intervoice’s reversal of

revenue in the first quarter fiscal 2001 was not a result of SAB 101, but rather was required because

Intervoice’s prior revenue recognition practice did not comply with GAAP, specifically SOP 97-2.”

Because the accounting questions in this case are disputed, dismissal was not appropriate. The

Complaint states a claim of fraud on the overstatement of revenue issue and does not rely on

“conclusory allegations, unwarranted deductions or legal conclusions,” as prohibited by this Court

in Southland, 365 F.3d at 361. The Court of Appeals for the Eight Circuit, holding that such fact-

bound defenses cannot succeed at the pleading stage, explained:

Undoubtedly, the accounting issues are complex; whether they were handled within

8
 the parameters of good faith decision-making or whether the decisions amounted to
recklessness will surely be the focus of any trial of this case. We will not prejudge
that issue. But neither the district court, nor we, can conduct a battle of experts on
a motion to dismiss. Rather, we must assume the truth of the allegations pleaded with
particularity in the complaint. The strong-inference pleading standard does not license
us to resolve disputed facts at this stage of the case.

Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 666 (8th Cir. 2001). Here, the

plaintiffs alleged with particularity that Intervoice’s accounting practices violated SOP 97-2, and this

allegation was adequately supported by expert opinion.

In dismissing the claims regarding false revenue recognition, the district court reasoned that

the claims were insufficient because the plaintiffs failed to plead why the statements were false when

made. The district court reasoned that the statements regarding earnings were “true when made, and

only became false later when the revenue was rest ated.” This conclusion ignored the plaintiffs’

contention that Intervoice was fraudulently recognizing revenue and thus was inappropriate at the

pleading stage.

The Complaint stated reasons why the financial reporting was false. The plaintiffs identified

witnesses who claim that defendant CFO Graham actually knew about the alleged fraud. Confidential

Witness (“CW”) 13, a former Project Manager for No rth American and Latin American Network

Sales, submitted an analysis to Graham of projects in which revenues were recognized by percentage

of completion. CW 13 gave this report to Graham in January 2000, and claims that Graham and the

Company used the analysis in deciding whether to fraudulently recognize the revenue and take a

“charge” later. On May 26, 2000, CEO Hammond, CFO Graham, and then-director Brandenberg

signed Intervoice’s 10K report and recognized the revenue. Intervoice argues in its brief that the

“obvious purpose of [Graham’s] request was to gather the information necessary to make the one-

9
time adjustment in accordance with, not in contravention of, GAAP.” The Complaint alleges to the

contrary, however, and even under the heightened requirements of the PSLRA, this Court must

accept the Complaint’s allegations as true at this stage in the proceedings.

The Iusacell Transaction

Although the district court erred in dismissing all of the revenue recognition claims, it

correctly dismissed the claims regarding the Iusacell transaction. In the Iusacell transaction,

Intervoice stated in a February 9, 2000 press release that it had “received an order valued at

approximately $8.7 million from a leading cellular service provider in Mexico, to expand the capacity

of its prepaid wireless system . . . . The majority of the shipments pursuant to the order are scheduled

for the Intervoice-Brite fiscal fourth quarter, which ends February 29, 2000.” This press release,

according to the plaintiffs, led investors to believe that the proceeds of the deal would be recognized

as revenue in the fourth quarter of 2000. But, the plaintiffs argue, under SOP 97-2, Intervoice was

not allowed to recognize revenue when software was shipped, but rather when it was actually earned.

Three witnesses, CW 14, CW 3, and CW 17, all state that Intervoice could not and did not earn the

$8.7 million in the fourth quarter.

Intervoice argues that its recognition of revenue was proper under the then-applicable

accounting principles. For the reasons discussed above, this fact-based argument fails at this stage

of the litigation. It then argues that none of the unnamed witnesses are alleged to have direct

knowledge of the act ual shipment schedule, the actual shipment date of the product, or when the

Company actually recognized revenue from the order. Furthermore, Intervoice argues that the

reliance on Project Activity Reports (“PARs”) as evidence is insufficient because they indicate the

amount of revenue “to be recognized,” not whether the revenue had been recognized.

10
 Regarding confidential witnesses, this Court has 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 the defendants' statements or omissions
were false or misleading;

(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 . . . .

ABC Arbitrage v. Tchuruk, 291 F.3d 336, 353 (5th Cir. 2002). The Complaint’s allegations are

sufficient to allege the reliability of the reports. The Complaint states that CW 3 reviewed the PARs

for the relevant time period and that the report showed that Intervoice “recognized all of the $8.7

million in revenue from the transaction prior to shipment in [the fourth quarter of 2000].” CW 17,

a Sales Manager, confirmed that the components needed to fill the order were not even requested by

the end of the fourth quarter. CW 14, the Project Manager for Network Sales in North America and

Latin America, corroborated CW 3’s statements.

Intervoice finally argues that the allegations regarding the Iusacell transaction “fail to

sufficiently plead scienter, materiality, or reliance” because “there are no specific facts alleged

identifying a particular corporate official was [sic] responsible for the recognition of revenue from

the order.” The plaintiffs reply that this Court should consider the Complaint in toto when deciding

whether it pleads facts showing that Intervoice and its officers made false and misleading statements

to investors. In support of this proposition, they cite this Court’s decision in Goldstein, 340 F.3d at

247. Goldstein, however, held that an in toto analysis was appro priate for determining whether a

11
complaint alleges scienter, not whether it alleges false statements. “[W]e consider all the facts and

circumstances alleged to determine whether they, in toto, raise a requisite strong inference of

scienter.” Id. at 246.

Intervoice is correct in this argument, and the specific claims regarding the Iusacell transaction

must fail because the Complaint does not adequately identify a particular corporate officer who

improperly recognized revenue from the Iusacell transaction. Nevertheless, the district court erred

in dismissing all of the claims regarding improper revenue recognition, because the allegedly false

statement concerning the Iusacell transaction was but one specific example of the alleged accounting

fraud perpetrated by Intervoice and the Complaint sufficiently pleads improper revenue recognition,

as discussed above.

(2) Allegations of fraudulent earnings projections

The complaint identifies twenty-three allegedly fraudulent statements of earnings projections,

but only twelve of these are attributed to Intervoice or one of the individual defendants. The

remaining eleven statements are attributed to third-party analysts.

As a preliminary matter, the plaintiffs argue t hat the district court improperly dismissed its

claims of false statements about the merger because it read the allegations in isolation rather than

viewing the complaint in toto. This argument, as discussed above, fails. While this Court will view

a complaint in toto when considering whether a complaint has adequately plead scienter, see

Goldstein, 340 F.3d at 246, each allegation of fraud must individually meet the particularity

requirements of the PSLRA. See, e.g., Greenberg v. Crossroads Sys., 364 F.3d 657 (5th Cir. 2004)

(analyzing each allegedly fraudulent statement independently).

a. Statements attributed to defendants

12
 The complaint identifies three statements made by Chairman Hammond and one by Senior

Vice President Smith. Complaint at ¶¶ 37, 51, 56, and 58. The district court found t hat all four

statements were not alleged to have been false when made.

Hammond’s first statement, in paragraph 37, was: “We continued to focus on maintaining

our sales momentum and are ahead of plan in implementing our synergy savings goals, as

demonstrated by our better than expected earnings.” Complaint at ¶ 37. The Complaint alleges that

this statement was false because sales were slowing, the sales forces were decreasing, and there was

high turnover in sales positions. Complaint at ¶¶ 41–42. The district court was correct in ruling that

these allegations fail to show why the statement was false when made. That there were reductions

in the sales force does not mean that the Company was not “focusing on maintaining sales

momentum.” The complaint does not allege what the “synergy savings goals” were. Additionally,

Intervoice argues persuasively that the elimination of some of the sales force may have been, in fact,

a part of meeting those goals.

In paragraph 56, the Complaint alleges that Hammond made the following statement in a press

release: “[W]e are encouraged by the pipeline of sales opportunities for Business Systems.”

Complaint at ¶ 56. The Complaint alleges that this was false because sales were declining. Id. at ¶

64. Intervoice persuasively argues that the allegations of declining sales are tied to sales in Network

Systems, not Business Systems, and the two are completely different areas of Intervoice’s business.

Thus, the district court correctly dismissed this allegation.

Hammond’s third statement, in paragraph 58 of the complaint, was also dismissed because

the district court found it was not alleged to have been false when made: “It’s becoming very clear

that we’ve combined two good companies to make a stronger, more competitive one. Our

13
management team has met the challenges of the past nine months as we worked the merger plan and

as a result, achieved our financial and operational goals.” Complaint at ¶ 58. The district court

properly held that the complaint’s reliance on allegations of weak sales and layoffs of sales staff failed

to sufficient ly allege falsehood. The plaintiffs also argue, however, that the goals referred to by

Hammond were financial goals and that the earnings reports fraudulently stated earnings. As

discussed above, the financial statements were alleged to have been fraudulent. The plaintiffs

therefore do allege that Hammond’s statement regarding financial goals was false when made,

because this allegation is based on their allegations of fraudulent accounting methods. The district

court improperly dismissed this claim. Intervoice claims that the Complaint fails to allege scienter

as to this statement. This argument fails, however. As noted above, courts may review a complaint

in toto to determine whether scienter has been alleged. The Complaint alleges that Hammond had

a motive for the revenue fraud: his bonus received for achieving targeted revenues. Id. at ¶ 13.

Hammond received $597,870—175% of his annual salary—as a reward “for achieving the

Company’s targeted revenues and earnings.” Id.

In paragraph 51, the Complaint alleges that Smith made a statement in response to investor

concerns over insider stock sales, to the effect that insiders were selling because they were allowed

more latitude by the Company. Complaint at ¶ 13. The plaintiffs allege that the explanation for the

boost in sales was due to what the confidential witnesses stated: that the merger was a disaster and

sales were suffering due to staff attrition. Id. at ¶ 52. This amounts to unacceptable “conclusory

allegations” and “unwarranted deductions.” See Southland, 365 F.3d at 361.

Six of the statements fail to adequately identify the speaker. Complaint at ¶¶ 29, 38, 44, 56,

59, and 68. Paragraphs 44 and 56 are press releases and contain no specific allegation as to who

14
made the statement. Id. at ¶¶ 44, 56. In Southland, this Court affirmed the proposition that:

the PSLRA requires the plaintiffs to “distinguish among those they sue and enlighten
each defendant as to his or her particular part in the alleged fraud.” As such,
corporate officers may not be held responsible for unattributed corporate statements
solely on the basis of their titles, even if their general level of day-to-day involvement
in the corporation’s affairs is pleaded.

365 F.3d at 365 (emphasis in original) (quoting Southland Sec. Corp. v. Inspire Ins. Solutions, Inc.,

No. 4:00-CV-355-Y, 2002 U.S. Dist. LEXIS 26659, at *20-21 (N.D. Tex. April 2, 2002)). Although

this Court stated that “corporate documents that have no stated author or statements within

documents not attributed to any individual may be charged to one or more corporate officers

provided specific factual allegations link the individual to the statement at issue,” id., there are no

such factual allegations here linking the individual defendants to the statements in the press releases.

Consequently, these allegations were properly dismissed. Paragraph 29 attributes false and

misleading statements to “management.” Complaint at ¶ 29. Again, this fails on Southland’s

rejection of the group pleading doctrine. Paragraphs 38, 59, and 68 attribute statements to

“Hammond and Graham.” Id. at ¶¶ 38, 59, and 68. The district court correctly held that “the

allegation that ‘Hammond and Graham’ made a statement does not identify the speaker; it merely

narrows the range of possible speakers down to two people.” “[T]he PSLRA requires the plaintiffs

to distinguish among those they sue and enlighten each defendant as to his or her particular part in

the alleged fraud.” Southland, 365 F.3d at 365 (emphasis in original, citation omitted). These claims

were properly dismissed.

b. Statements attributed to analysts

Eleven of the twenty-three allegedly false statements in the Complaint were made by third-

party analysts. Complaint at ¶¶ 30, 31, 34, 39, 40, 53, 60, 61, 75, 76, and 77. The di strict court

15
correctly held that “the plaintiff must plead facts from which the court could infer that the defendant

exercised the kind of control over the analysts’ reports that would render the defendant liable for the

statements made therein.” The plaintiffs argue that the analysts were “conduits” for statements made

by the defendants during conference calls. In Southland, this Court explained that to satisfy the

pleading requirements on such a “conduit” theory, a complaint must specify: “who supplied the

information to the analyst, how the analyst received the information, and how the defendant was

entangled with or manipulated the information and the analyst.” 365 F.3d at 373. The district court

was correct that the Complaint does not meet this standard. The Complaint does not identify with

particularity who provided the information to the analysts.

Southland also provided that:

[s]ince the allegation of entanglement [between defendants and analysts] is central
to the overall allegation of securities fraud, it must be pleaded with the required
degree of specificity. The pleading should (1) identify the specific forecasts and name
the insider who adopted them; (2) point to specific interactions between the insider
and the analyst which allegedly gave rise to the entanglement; and (3) state the dates
on which the acts which allegedly gave rise to the entanglement occurred.

365 F.3d at 373–74. The Complaint also plainly fails to meet these standards necessary to allege

entanglement and a conduit theory.

The plaintiffs also argue that the allegations are sufficient because Intervoice itself is a

defendant and may be liable for the false statements of its officers. While a defendant corporation

may be liable for the false statements of its officers, however, this does not change the PSLRA’s

pleading requirements. False statements must still be alleged with particularity. Intervoice correctly

argues that if particularit y could be met as urged by the plaintiffs, the requirement to particularly

allege who made the false statement would be eviscerated.

16
 The plaintiffs also argue that defendants who silently listened as others made statements that

they knew were false are liable for their omission in failing to correct a falsehood. They argue that

whether a particular statement during a conference call or a road show was uttered by Hammond or

Graham, both are liable: one for the utterance, and the other for the omission in failing to correct the

falsehood.

As one district court held, “a high ranking company official cannot sit quietly at a conference

with analysts, knowing that another official is making false statements and hope to escape liability for

those statements. If nothing else, the former official is at fault for a material omission in failing to

correct such statements in that context.” In re SmarTalk Teleservices, Inc. Sec. Litig., 124 F. Supp.

2d 527, 543 (D. Ohio 2000).

The defendants argue that this reasoning is inapplicable in this case, because the Complaint

did not specify whether Hammond spoke and Graham failed to correct, or vice versa. They assert

that the allegations concerning Hammond and Graham fail under this Court’s rejection of the group

pleading doctrine in Southland.

Here, the defendants’ argument fails. In a case where it is pled with specificity that one

defendant knowingly uttered a false statement and the other defendant knowingly failed to correct

it, even if it is not alleged which defendant spoke and which defendant failed to speak, the fraud is

sufficiently pleaded as to each defendant. This is not inconsistent with the plain language of

subsect ion (1) of 15 U.S.C. § 78u-4(b), and accords with common sense and the policy

considerations underlying the heightened pleading requirements. The Southland Court explained:

“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

17
 baseless claims and then attempting to discover unknown wrongs.”

365 F.3d at 363 (quoting Tuchman v. DSC Communications, 14 F.3d 1061, 1067 (5th Cir. 1994)).

In this case, where the Complaint alleges that false statements were made by Hammond or Graham,

and the other knowingly failed to correct the falsehood, both Hammond and Graham are on fair

notice of the claims against them. The district court erred in dismissing the claims attributed to

Hammond and Graham, when one was alleged to have spoken the fraudulent statement, and the other

was alleged to have failed to correct it.

For the same reason, Smith is properly liable for his alleged omission to correct Hammond

and Graham’s alleged misrepresentation in the conference call described in paragraph 38 of the

Complaint. Although the Complaint does not allege whether Hammond or Graham uttered the

alleged falsehood, it does allege with sufficient particularity that Smith failed to correct it.

B. Plaintiffs’ allegations of suspicious stock sales as an independent basis of liability

The plaintiffs allege that their assertions of suspicious stock sales are an independent basis of

liability. Because they failed to raise this argument before the district court, it is waived. Greenberg

v. Crossroads Sys., 364 F.3d 657, 669 (5th Cir. 2004). Even if it had been raised below, however,

this argument lacks merit. There are no allegations that the insider sales were not properly disclosed,

and there can thus be no basis for liability. See Southland Sec. Corp. v. INSpire Ins. Solutions Inc.,

365 F.3d 353, 367–69 (5th Cir. 2004).

C. Scienter

We now turn to whether the Complaint adequately pleads scienter. The district court’s

opinion did not reach this question, but because the district court erred in holding that the Complaint

did not adequately plead false statements, we must now consider whether the Complaint adequately

18
pleads scienter. “While the normal procedure where the lower court has not considered a pertinent

issue is to remand the case, considerations of judicial economy can dictate otherwise in circumstances

such as these, where the issue is a purely legal question subject to plenary review by this court.”

United States v. Southland Mgmt. Corp., 288 F.3d 665, 688 (5th Cir. 2002).

The PSLRA requires that plaintiffs must plead with particularity facts giving rise to a strong

inference that defendants acted with scienter, which is “‘a mental state embracing intent to deceive,

manipulate, or defraud.’” Rosenzweig v. Azurix Corp., 332 F.3d 854, 866 (5th Cir. 2003) (quoting

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)).

The plaintiffs argue that the Complaint pleads scienter with respect to the revenue recognition

and the earnings projections. As discussed above, we must look to the Complaint in toto in deciding

whether it adequately pleads scienter. Goldstein v. MCI Worldcom, 340 F.3d 238, 246–47 (5th Cir.

2003).

Regarding the revenue recognition, the Complaint pleads that Graham, as CFO, knew or

should have known that the company was using improper methods. The defendants, however, argue

that allegations of a GAAP violation are not sufficient to establish scienter. Allegations of motive and

opportunity, standing alone, cannot meet the pleading requirement. Nathenson v. Zonagen Inc., 267

F.3d 400, 410 (5th Cir. 2001). “The mere publication of inaccurate accounting figures, or a failure

to follow GAAP, without more, does not establish scienter. The party must know that it is publishing

materially false information, or the party must be severely reckless in publishing such information.”

Fine v. Am. Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990).

The Complaint, however, does not rest with allegations of GAAP violations and the

defendants’ knowledge of them. The Complaint identifies a particular witness directed by Graham

19
to investigate what plaintiffs allege is fraudulent accounting. Complaint at ¶ 95. The Complaint

alleges that the defendants persisted in the incorrect accounting after receiving the report. Id.

The Complaint also adequately pleads scienter as to the statements (or omissions) of

Hammond, Graham, and Smith. The allegations are supported by the reports of the confidential

witnesses alleging the defendants’ knowledge and severe recklessness when making the statements.

Moreover, the allegations of knowledge and severe recklessness must be considered in conjunction

with the defendants’ bonuses and stock sales profits. Considering all of these allegations

cumulatively, Goldstein, 340 F.3d at 246–47, the Complaint adequately alleged scienter as to the

statements that survive dismissal.

IV. CONCLUSION

The judgment of the district court is REVERSED IN PART insofar as it dismisses: (1) the

claims alleging Intervoice’s fraudulent accounting; (2) the claim that Hammond made a false

statement regarding financial goals; (3) the claims alleging that Hammond or Graham made a false

statement and the other failed to correct it; and (4) the claim that Smith failed to correct a statement

made by Hammond or Graham. We also hold that the Complaint adequately alleged scienter, and

foreclose further litigation below on that issue. The case is REMANDED for further proceedings.

20