NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
______________
Nos. 16-2436 & 16-3796
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RYAN FAIN, on behalf of himself and all others similarly situated,
Appellant
v.
USA TECHNOLOGIES, INC.; STEPHEN P. HERBERT; DAVID F. DEMEDIO;
JAMES DUNCAN SMITH.
______________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-15-cv-05427)
District Judge: Honorable Mark A. Kearney
______________
Argued on March 28, 2017
Before: AMBRO, VANASKIE, and RESTREPO, Circuit Judges
(Opinion Filed: August 30, 2017)
Adam M. Apton [ARGUED]
Levi & Korinsky
1101 30th Street, N.W., Suite 115
Washington, DC 20007
Jacob A. Goldberg
Rosen Law Firm
101 Greenwood Avenue
Suite 440
Jenkintown, PA 19046
Counsel for Appellant
M. Norman Goldberger [ARGUED]
Laura E. Krabill
Ballard Spahr
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Evan W. Krick
Ballard Spahr
919 North Market Street, 11th Floor
Wilmington, DE 19801
Counsel for Appellees
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OPINION*
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RESTREPO, Circuit Judge
In this securities class action appeal, Plaintiff-Appellant challenges two Orders of
the District Court, the first dismissing his putative securities class action complaint for
failure to plead scienter, and the second denying him relief from that order under Federal
Rule of Civil Procedure 60(b). For the following reasons, we affirm.
I.
USA Technologies, Inc. (“USA Technologies”) provides wireless networking,
cashless transaction devices, asset monitoring, and other services to companies in the
self-service retail market. In his Amended Class Action Complaint (the “Complaint”),
*
This disposition is not an Opinion of the full Court and, pursuant to I.O.P. 5.7, does not
constitute binding precedent.
2
Plaintiff Ryan Fain, on behalf of a putative class of investors, alleges that USA
Technologies and its individual officers, Stephen P. Herbert, David F. DeMedio, and
James Duncan Smith (collectively with USA Technologies, the “Defendants”) violated
sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and their
implementing provisions. Specifically, Plaintiff alleges Defendants made materially
false and misleading statements about the number and value of certain uncollectible
customer accounts on the balance sheets, and the adequacy of internal accounting
controls and compliance policies concerning the reporting of that data.
The basic factual allegations are straightforward. USA Technologies issued a
press release on September 10, 2015 (the “September 10 Press Release”) reporting an
allocated “bad debt expense” of $47,184 for the fourth quarter of fiscal year 2015 (“Q4
FY2015”) and $649,528 for FY2015 at year-end (“FY2015 year-end”). “Bad debt” refers
to the subset of accounts receivable that, for whatever reason, are no longer collectible
and therefore have to be written off. By recording a “bad debt expense” allowance on its
balance sheet for doubtful accounts, a company is able to report a more accurate picture
of the profitability of its sales. Given these bad debt allowances, the September 10 Press
Release indicated that USA Technologies would report a net income of $68,999 Q4
FY2015 (although it would report a loss of $819,482 for FY2015 year-end).
Three weeks later, on September 29, 2015, USA Technologies filed a late filing
notice indicating that it would have to delay the filing of its annual 2015 Form 10-K and
amend its earlier September 10 Press Release because “management identified
3
deficiencies in both the design and operating effectiveness of the Company’s internal
control over financial reporting” (the “September 29 Late Filing Notice”). JA104 ¶ 94.
Specifically, the September 29 Late Filing Notice disclosed that “[t]he procedures in
place did not identify a large number of small balance accounts that may be uncollectible
and were not appropriately dispositioned, collected, remediated, reserved for and/or
written-off.” JA104 ¶ 94. USA Technologies indicated, moreover, that it would amend
its disclosures to include a $450,000 increase to its bad debt expense allocation.
On September 30, 2015, USA Technologies filed its annual Form 10-K
acknowledging “material weakness” in its accounting procedures and restating its bad
debt expense (the “September 30 Restatement”). JA104 ¶ 95–96. Per its disclosure the
day before, the September 30 Restatement reported $479,184 in bad debt expense for Q4
FY2015 and $1,099,528 FY2015 year-end. As a result, the September 30 Restatement
also adjusted downward its net income projections. In light of its increased bad debt
allocations, USA Technologies reported that it would book a $201,001 loss (as opposed
to a $68,999 profit) in Q4 FY2015 and a $1,089,482 loss (as opposed $819,482 loss) for
FY2015 year-end.1
On November 13, 2015, Defendants Herbert and Smith offered comments on the
September 30 Restatement during an earnings call to the effect that USA Technologies
1
After this disclosure, shares of USA Technologies fell $0.28 on Sept. 30, 2015,
and $0.11 on Oct. 1, 2015 (representing an approximately 14% loss over that 2-day
period).
4
had “addressed and remediated the significant deficiency related to the amount of bad
debt reserve attributable to the uncollected customer accounts.” JA107 ¶ 101. Smith
added that as a result USA Technologies planned on “changing the balance sheet
classification in these uncollected accounts” moving forward such that the “[t]he
uncollected customer accounts and the related allowance [would] no longer [be] reflected
in accounts payable, where they [had] been reflected on consistent basis in all prior
periods[, but would now be] reflected in accounts receivable.” JA107-08 ¶ 102. This
change in accounting practices was warranted because its uncollected accounts had “been
outstanding for longer time periods and are larger in the aggregate that was anticipated in
the accounting process [that] was established many years ago.” JA107-08 ¶ 102.
Plaintiff then filed suit claiming that the September 10 Press Release was false and
misleading in violation of the securities laws.2 Plaintiff’s claim is premised on two
central allegations. First, he alleges that Defendants misled investors about the existence
of “significant deficiencies” in USA Technologies’ internal auditing and financial
reporting procedures. JA70 ¶ 3. Second, he alleges that, as a result, Defendants misled
investors about USA Technologies’ reported net income by failing to identify and write
off a “large number of uncollectible small-balance accounts.” JA70 ¶ 3. Taken together,
2
Although he focuses on the September 10 Press Release, we note that Plaintiff
also alleges that other financial statements in USA Technologies’ SEC filings, press
releases and earnings calls from FY2015 were materially false and misleading because
“[USA Technologies] was not accounting properly for its bad debt expenses.” JA86 ¶ 51.
Because these allegations hinge on the central claim that the September 10 Press Release
was misleading, we too focus solely on that statement for purposes of this appeal.
5
the essence of his claim is that Defendants fraudulently understated the amount of “bad
debt” on USA Technologies’ balance sheets in order to artificially prop up USA
Technologies’ perceived financial health.
Defendants moved to dismiss the Complaint, and the District Court granted the
motion on the ground that the Complaint failed to adequately plead scienter. To support
his scienter claim, Plaintiff focused on three issues before the District Court: (1) the
simplicity and size of the accounting error, and, relatedly, that the error violated a clear
rule of the Generally Accepted Accounting Principles (“GAAP”); (2) the resignation of
DeMedio and Smith, the company’s CFOs; (3) and the remedial actions taken by USA
Technologies after the September 30 Restatement. After thoroughly weighing these
allegations, the District Court concluded that they amounted to little more than
allegations of corporate mismanagement or possible negligence and therefore fell short of
pleading a “strong inference” of scienter that is “at least” as cogent or compelling as
Defendants’ non-culpable explanation.
Two other procedural rulings are relevant to this appeal. First, the District Court
denied leave to amend the Complaint in its opinion dismissing the Complaint. At oral
argument, Plaintiff offered to plead additional facts that Defendants were motivated to
conceal their bad debt because of a rising trend in bad debt as well as USA Technologies’
business decision to shift its focus from one of its programs, called Jumpstart, to another
program, called Quickstart. Noting that these factual allegations were for the most part
already pled in the operative pleading, the District Court found these facts still failed to
6
show, with particularity, why defendants would purposefully disregard mistakes in USA
Technologies’ identification and accounting of bad debt only to admit their error shortly
after in the September 30 Restatement.
Second, Plaintiff moved for relief from this Order and for leave to file a Second
Amended Class Action Complaint under Federal Rule of Civil Procedure 60(b)(2) and
60(b)(6). He claimed to have found “new evidence” that supported scienter, but the
District Court denied relief, finding that this evidence was far from new and that Plaintiff
had not demonstrated “reasonable diligence” in pursuing it. This timely appeal followed.
II.3
Plaintiff raises challenges to each of the above rulings. We address them in turn.
A. Motion to Dismiss4
First, Plaintiff asserts the District Court improperly ruled that Plaintiff failed to
plead scienter.
1.
To sufficiently plead scienter under the heightened pleading rules of the Private
Securities Litigation Reform Act (“PSLRA”), a complaint must state with particularity
facts giving rise to a “strong inference” that the defendants acted with intent to deceive,
manipulate, or defraud. 15 U.S.C. § 78u-4(b)(2)(A); see Rahman v. Kid Brands, Inc.,
3
The District Court had jurisdiction under 28 U.S.C. §§ 1331, 1337. We have
jurisdiction under 28 U.S.C § 1291.
4
We exercise plenary review over the District Court’s Order to grant a Rule
12(b)(6) motion to dismiss. See In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 277 (3d Cir.
2010).
7
736 F.3d 237, 241–42 (3d Cir. 2013) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 313 (2007)). A “strong inference” of scienter exists “only if a reasonable
person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324. To
support the inference, Plaintiff may rely on facts that show motive and opportunity to
commit fraud, or otherwise, “facts constituting circumstantial evidence of either reckless
or conscious behavior.” In re Advanta Corp. Sec. Litig., 180 F.3d 525, 530 (3d Cir.
1999) (quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 269 (2d Cir. 1993)).
Because Plaintiff attempts to show scienter via the latter prong, we bear in mind
that recklessness in the securities context requires proof of conduct “involving not merely
simple, or even inexcusable negligence, but an extreme departure from the standards of
ordinary care.” In re Advanta, 180 F.3d at 535 (quoting McLean v. Alexander, 599 F.2d
1190, 1197 (3d Cir. 1979)); GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239
(3d Cir. 2004). The defendant’s conduct—the false or misleading statements made—
must “present[] a danger of misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of it.” In re Advanta, 180
F.3d at 535 (quoting McLean, 599 F.2d at 1197). In analyzing scienter, moreover, we
consider “not only inferences urged by the plaintiff . . . but also competing inferences
rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. With these principles
in mind, we turn to Plaintiff’s arguments on appeal.
2.
8
Plaintiff relies almost entirely on the same allegations presented to the District
Court in support of scienter.5 Defendants counter on appeal that the failure to properly
identify and account for bad debt at most was the result of negligence. After reviewing
the entire Complaint and record, we concur with the judgment of the District Court that,
even when taken together, Plaintiff’s allegations do not establish a “strong inference” that
Defendants intended to deceive or manipulate investors.
Plaintiff’s scienter arguments boil down to the assertion that Defendants must
have known about the unreported and misclassified bad debt and thus knowingly
published the false September 10 Press Release, given their position at the company, the
obvious nature of the error, and the subsequent actions to remediate. We have noted
before the difficulty of establishing a “they-must-have-known” type inference such as
this. See In re Advanta, 180 F.3d at 539; see also In re Alpharma Inc. Sec. Litig., 372
F.3d 137, 153 (3d Cir. 2004). That Defendants were in top positions at USA
Technologies, alone, is not enough. See In re Advanta, 180 F.3d at 539 (“Generalized
imputations of knowledge do not suffice, regardless of the defendants’ positions within
5
Specifically, Plaintiff highlights, in support: (1) Defendants’ failure to write off
an untold number of collectible accounts; (2) that the write-offs occurred in the fourth
quarter only; (3) that Defendants’ initial presentation of the bad debt expense was
understated by over 900% relative to past estimates; (4) that Defendants had access to the
underlying bad debt expense data for roughly two and a half months before announcing it
publicly; (5) that the underlying bad expense data was “critically important” to
Defendants given efforts to transition company business back to Quick Start accounts;
and (6) both DeMedio and Smith, former CFOs, “resigned within weeks of the
restatement.” Appellant Br. 28.
9
the company.”). Instead, in the context of recklessness, Plaintiff’s facts must add up to a
“cogent” inference that the danger of misleading investors was either actually “known”
by Defendants or “so obvious that [they] must have been aware of it.” Id. (emphasis
added). The facts adduced do not.
We begin by noting that the Complaint is devoid of any allegations that suggest
Defendants regularly dealt with bad debt or otherwise had reason to audit small-balance
customer accounts. Plaintiff emphasizes the size and simplicity of the error, namely that
the September 10 Press Release understated the actual value of bad debt by 900%.6 An
error of this magnitude, they imply, could not possibly have escaped Defendants’ notice.
But in context, as the District Court aptly noted, “the size of the bad debt expense
increase is less than 4% and 2% of quarterly and year-end revenue amounts,
respectively.” JA13. While we do not suggest this change was insignificant—indeed it
put USA Technologies, already operating on a thin margin, into the red for Q4 FY2015—
we nonetheless agree that “the size of the violation, when compared to the complete
financial picture of the Company . . . , represents a relatively small expense,” and is
therefore less indicative of scienter than Plaintiff suggests. JA13, 15.
Similarly, with respect to the error’s supposed simplicity, we perceive nothing in
the record that would suggest this error should have come to Defendants’ attention.
There were no allegations, for example, that the classification or accounting procedures
6
On appeal, Plaintiff does not press the specific nature of the alleged GAAP
violation as separately indicative of scienter.
10
had previously caused misstatements requiring correction. On this record, the more
likely inference, given the small-balance nature of the accounts, is that lower staffers
simply misclassified these bad debts or otherwise failed to deem them uncollectible, not
that Defendants were aware of and were recklessly disregarding them. This is
particularly so given the short timespan between misstatement and correction—a mere
three weeks. Despite Plaintiff’s arguments to the contrary, we see this allegation as
supporting Defendants’ non-culpable inference that Defendants realized the aggregate
magnitude of the understatement in preparation for their annual SEC filings.
Plaintiff also argues that DeMedio’s and Smith’s terminations support a “cogent”
inference of scienter. Resignations or terminations might form a “piece to the scienter
puzzle,” as the District Court noted, if, for example, a relatively contemporaneous and
public firing is accompanied by extreme corporate punishment such as the denial of
previously accrued benefits. See Abrams v. Baker Hughes Inc., 292 F.3d 424, 434 (5th
Cir. 2002); In re Intelligroup Sec. Litig., 527 F. Supp.2d 262, 347 (D. N.J. 2007). But
DeMedio received a significant severance package and USA Technologies retained him
for some time after his departure as a consultant. See JA17–18. Further, in stressing that
Smith resigned “within weeks of the restatement” (it was actually four months) with
relatively little severance, Plaintiff’s argument fails to account for the fact that Smith had
only been employed for ten days before the September 10 Press Release. Appellant Br.
28. While he did not receive as many benefits as DeMedio—probably due to his short
tenure—USA Technologies still paid Smith’s health insurance for a period of time after
11
his employment as well as his attorney’s fees for negotiating his exit. See JA332-33.
These departures from the company, far from suspicious, add little to the scienter
inference.
Finally, we also agree with the District Court that USA Technologies’ unprompted
admission of error in the September 30 Restatement and its later efforts to reformulate its
accounting practices do not nudge the Complaint any closer to adequately pleading
scienter. To the contrary, Defendants’ speedy response suggests their actions were at
worst negligent. When Defendants became aware of the error in preparing the annual
Form 10-K, they acted immediately to rectify it.7 Plaintiff’s facts add up to corporate
mismanagement, as Defendants have maintained, see e.g., JA107 ¶ 101 (“The material
weakness was identified late in the process of finalizing our 10-K.”), but nothing more.
We will therefore affirm the District Court’s dismissal of the Complaint on this ground.8
B. Leave to Amend
Second, Plaintiff contends the District Court improperly denied leave to amend.
Although leave should be freely given “when justice so requires,” see Fed. R. Civ. P.
7
We similarly reject Plaintiff’s argument that the District Court “fundamentally
misunderstood the facts of the case” by failing to grasp that the alleged fraud was not just
an accounting classification error but a wholesale obfuscation of the true scope of the bad
debt on USA Technologies’ books. Appellant Br. 34. The District Court, contrary to this
characterization of its opinion, explicitly acknowledged Defendants had changed the
company’s “bad debt expense” from $47,184 to $479,184 in the September 30
Restatement, JA6, and understood the implication of this restatement to mean an
“increase” in acknowledged bad debt, JA13.
8
Consequently, we also affirm the District Court’s dismissal of Plaintiff’s Section
20(a) control-person claims.
12
15(a), “a District Court may deny leave to amend on the grounds that amendment would .
. . be futile,” see Winer Family Trust v. Queen, 503 F.3d 319, 330–31 (3d Cir. 2007)
(quoting In re Alpharma, 372 F.3d at 153). We review a decision to deny leave to amend
under the PSLRA for abuse of discretion. See Cal. Pub. Employees’ Ret. Sys. v. Chubb
Corp., 394 F.3d 126, 163 (3d Cir. 2004).
We have little in the record to aid our analysis of Plaintiff’s curative factual
allegations because Plaintiff never filed a proposed amended complaint. Instead, at oral
argument he proffered that, if allowed to amend, he would generally “explain the
relationship between Quickstart [and Jumpstart] and [a trend in] rising bad-debt
expense,” JA409, in order to show that Defendants were motived to conceal their
accounting errors to obtain a “clean audit opinion.” Appellant Br. 38. Even after
Plaintiff’s lengthy briefing of the issue on appeal, we still do not see how this pleads,
with particularity, an inference of scienter. For one, he does not allege facts that explain
why this change in business focus would have alerted Defendants to the existence of
previously undiscovered uncollectible customer accounts, let alone that its procedures
were deficient in doing so in the ordinary course. Second, even if he did, Plaintiff does
not persuasively explain why a motivation to secure a “clean audit opinion” would lead
Defendants to knowingly misstate their bad debt figures on September 10 but then correct
them nineteen days later. Absent some specific incentive to downplay the amount of
uncollectible debt in the interim before the September 30 Restatement—such as the
accruing of a performance-based stock option or a pending corporate transaction—these
13
facts do not plead scienter given this futility. The District Court did not abuse its
discretion in denying leave to amend on these grounds.9
C. Rule 60(b) Motion
Finally, Plaintiff argues that the District Court improperly denied him Rule 60(b)
relief. He claims, under Rule 60(b)(2) in particular, to have found newly discovered
evidence from pleadings in a pending action by a customer of USA Technologies against
the company itself (the “Arizona Action”). Those pleadings contained allegations that
Defendants fraudulently inflated the number of devices connected to their network by
asking customers to install duplicate devices at points of sale, facts which Plaintiff now
argues also support scienter in his case. He focuses on one particular allegation drawn
from a third amended complaint filed a few weeks after the dismissal, which he asserts
renders this evidence new.
But a single factual allegation appearing after dismissal does not render this
material new within the meaning of Rule 60(b)(2). See Bohus v. Beloff, 950 F.2d 919,
9
Plaintiff also complains, the merits of his factual allegations notwithstanding, that
it was an abuse of discretion to give him only one “attempt” at pleading scienter in a
written complaint. Appellant Br. 37. We disagree. Plaintiff actually had two such
attempts: he filed his initial complaint in Oct. 2015 and an Amended Class Action
Complaint in Jan. 2016. He still then had three more months before oral argument to file
a proposed amended complaint, but he did not do so. In any event, the District Court
considered Plaintiff’s additional assertions after thoroughly probing them at oral
argument, and, giving them every “benefit of [its] deference at this stage,” rejected them
on the merits. JA20. It was not an abuse of discretion to deny leave, even without the
benefit of an additional written complaint, particularly given Plaintiff’s somewhat
contradictory position at oral argument that these facts were already pled in his Amended
Class Action Complaint.
14
930 (3d Cir. 1991) (quoting United States v. 27.93 Acres of Land, 924 F.2d 506, 516 (3d
Cir. 1991)) (“The term ‘newly discovered evidence’ refers to ‘evidence of facts in
existence at the time of trial of which the aggrieved party was excusably ignorant.’”).
The Arizona Action was filed in January 2015, and amended in April 2015, both well
before this action was even filed. Those pleadings were sufficient in terms of their theory
of fraud and level of detail to have put Plaintiff on notice as to the existence of facts that
may have helped his case.
His argument fails for an even more fundamental reason. To prevail under Rule
60(b)(2), Plaintiff had to show that his newly identified material “could not have been
discovered prior to trial through the exercise of reasonable diligence.” Id. (citing
Stridiron v. Stridiron, 698 F.2d 204, 207 (3d Cir.1983)); see also id. (quoting Plisco v.
Union R. Co., 379 F.2d 15, 16, 17 (3d Cir. 1967)) (“The movant under Rule 60(b) ‘bears
a heavy burden,’ which requires ‘more than a showing of the potential significance of the
new evidence.’”). Here, Plaintiff failed to provide any evidence detailing his efforts to
ascertain facts underlying the Arizona Action at any time during this litigation—no
public record searches, no legal database searches, nothing. Had he exercised a modicum
of effort, we think he would have discovered this publicly filed Arizona action in time to
develop these points in discovery in this matter. Instead, the record shows that Plaintiff
rushed to file his Complaint, now only to regret the consequences of doing so. It was not
an abuse of discretion to deny Rule 60(b) relief on this ground.
III.
15
For the foregoing reasons, we affirm.
16