REVISED OCTOBER 15, 2001
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-20449
JAMES M. NATHENSON, on behalf of
himself and all others similarly situated;
DSAM GLOBAL VALUE FUND LTD; JONATHAN
MARGALIT; AMIT SANGHVI; JIANBO XIE;
JOHN DEROSA; ROBERT STRASSMAN;
DEAN HAGEN; ARNO HAUSMANN,
Plaintiffs-Appellants,
versus
ZONAGEN INC; ET AL,
Defendants,
ZONAGEN INC; JOSEPH PODOLSKI;
STEVEN BLASNIK; M SUTTER,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of Texas, Houston
September 25, 2001
Before GARWOOD, DeMOSS, and PARKER, Circuit Judges.
GARWOOD, Circuit Judge:
Plaintiffs-appellants James Nathenson and others (collectively, the
plaintiffs) filed this putative class action in the court below against
defendants-appellants Zonagen, Inc. (Zonagen), Zonagen chief executive
officer and director Joseph Podolski (Podolski) and Zonagen outside
directors and major shareholders Steven Blasnik (Blasnik) and Martin
Sutter (Sutter) (collectively, the defendants). In their complaint, the
plaintiffs sought class certification and alleged violations of sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (1934 Act) and
Rule 10b-5 of the Securities Exchange Commission (SEC). The defendants
moved to dismiss the complaint under FED. R. CIV. P. 12(b)(6). The
district court granted the motion in a memorandum opinion and in a
separate document rendered judgment that “this action is dismissed with
prejudice.” The plaintiffs now appeal. Finding sufficient merit in
one of plaintiffs’ complaints on appeal, we vacate and remand.
Facts and Proceedings Below
This is a private securities fraud action brought by nine
putative class representatives on behalf of purchasers of common
stock in Zonagen, a biopharmaceutical company based in The
Woodlands, Texas. The plaintiffs allege that during the class
period,1 February 7, 1996, through January 9, 1998, the
defendants–Zonagen, its president and CEO, Podolski, and two of its
outside directors and major shareholders, Blasnik and Sutter, the
latter being Chairman of the Board, engaged in a scheme to defraud
their shareholders by issuing a series of public misrepresentations
1
In their Consolidated Amended Complaint, the plaintiffs sought
class certification under FED. R. CIV. P. 23. However, the district
court granted the defendants’ motion to dismiss before ruling on the
certification issue. Despite the absence of certification, we will, for
clarity’s sake, refer to the time in question as the “class period.”
2
about two of Zonagen’s potential products in order to inflate
artificially the value of Zonagen’s stock and sell $67.5 million in
stock in July 1997 at an inflated price. The two potential
products in question are “Vasomax,” an oral treatment for male
erectile dysfunction (MED), and “Immumax,” an adjuvant2 for the
delivery of animal and human vaccines.
In order to market a drug in the United States, developers
must first obtain the approval of the Food and Drug Administration
(FDA). This approval process involves, among other things,
conducting a series of clinical trials to establish the safety and
efficacy of the drug. The maker of the drug then submits the
results of these trials to the FDA as part of its New Drug
Application (NDA). Phase I trials test the safety, dosage
tolerance, and other pharmacokinetic properties of the drug; they
also identify the primary side-effects, if any, that the drug may
cause. During Phase II trials, researchers test the drug in a
limited patient population to gather information about efficacy,
optimal dosage levels, adverse effects, and safety risks. Phase
III trials test the efficacy and safety of the drug in an expanded
patient population at geographically dispersed trial sites.
The broad contours of the events in question are as follows.
2
An adjuvant a is foreign substance that improves a given
immune response in the body by enhancing the effect of a particular
antigen, which is a substance that stimulates the production of
antibodies. See STEDMAN’S MEDICAL DICTIONARY 29 (Marjory Spraycar ed.,
26th ed. 1995).
3
In 1995, Zonagen completed its Phase I trials for Vasomax in
Ireland and reported the results of these trials in a Form 10-K
filed with the SEC that year. The company then initiated Phase II
trials in Germany; these trials concluded in March 1996. On
February 7, 1996, the first day of the class period, Zonagen shares
traded at $12 3/8. On February 7 and 14, 1996, before the
completion of the Phase II trials, two news items appeared in which
Podolski indicated that the “preliminary” results of the Phase II
trials were positive. Similar statements were made to analysts on
March 5 and in a March 14, 1996 press release (similar statements
were also made in Zonagen’s April 1, 1996 10K for the year ended
December 31, 1995). The stock traded at $16 a share on March 13,
1996. On May 9 and 16, 1996, Zonagen issued press releases that
described the Phase II results in positive terms, the May 9 release
unmistakably implying and the May 16 release expressly stating that
the Phase II trials produced statistically significant results. As
the district court noted, Zonagen shares after March 13, 1996 “fell
steadily until reaching . . . less than $10 per share in early
August.”
In press releases, as well as in its public filings with the
SEC, Zonagen represented not only that the Phase II trials had
positive results, but also that Zonagen had acquired the rights to
a “method of use” patent, known as the Zorgniotti patent, which
covered the administration of phentolamine, the active ingredient
4
in Vasomax. In addition, Zonagen used its press releases and
public filings of 1996-97 to state its belief that it had
“discovered” a “new” adjuvant, which it called Immumax.
In November 1996, Zonagen began Phase III trials for Vasomax
in the United States. Soon after, Zonagen began issuing press
releases discussing these trials and expressing its hope that the
results would enable Zonagen to file an NDA by June 1997. In its
public filings with the SEC, it made similar statements about the
Phase III trials in the United States. On November 14, 1996,
Zonagen filed a Form S-3 with the SEC in connection with the
proposed sale by some of its shareholders of Zonagen shares not
previously publicly offered. In the Form S-3, Zonagen disclosed
that the Phase II trials had not yielded statistically significant
results and that the other patent (the Lowrey patent) it had hoped
would cover Vasomax had been rejected in a non-final first office
action by the United States Patent and Trademark Office.
In 1997, Zonagen’s press releases and public filings noted the
positive results of the Phase III trials. On June 11, 1997,
Zonagen filed a Form S-3 with the SEC seeking registration of two
million shares of Zonagen stock for sale by the company. The Form
S-3 stated that the Phase III trials had yielded statistically
significant results, and also discussed the “discovery” of Immumax
and the Zorgniotti patent respecting Vasomax. On June 13, 1997,
Zonagen issued a press release announcing the successful completion
5
of its Phase III trials. On May 23, 1997, the last day of trading
before the announcement, the price per share of Zonagen stock was
$17d. On May 27, the day of the announcement, the price per share
rose to $24½. On July 18, 1997, after no further announcements,
Zonagen’s share price closed at $32¼. On July 22, 1997, Zonagen
filed a prospectus with the SEC which commenced its secondary
offering of common stock. In a press release issued that same day,
the company announced that it had raised $67.5 million in gross
proceeds from the sale of 2.25 million shares sold at a price of
$30 per share. Zonagen shares rendered a high of 44 3/8 on October
13, 1997. On January 12, 1998, the Monday following January 9,
1998, the last day of the class period, the stock closed at 13
15/16. The average closing price of Zonagen shares in the ninety
days following the last day of the class period (January 9, 1998
through April 10, 1998) was $20 1/5. On June 2, 1998, the stock
traded at $36 3/4 per share; by June 12, 1998, it had fallen to $24
3/4 per share.3
On June 19, 1998, the plaintiffs filed their Consolidated
Amended Complaint (complaint) seeking class certification and
3
The above stated information as to share prices comes from the
amended complaint and its attachments. Defendants also furnished the
district court with a list covering all trading days from March 25, 1993
through July 30, 1998 showing the Zonagen high ask, low bid and close
bid prices and volume each day. The accuracy of that information has
not been questioned.
6
alleging that the defendants had violated section 10(b)4 of the
1934 Act and Rule 10b-55 promulgated thereunder by the SEC (an
original complaint was filed March 9, 1998). The plaintiffs also
contended that the three individual defendants were liable as
“controlling persons” under section 20(a)6 of the 1934 Act. As
noted above, the complaint primarily charges that the defendants
made a series of misrepresentations about their Vasomax and Immumax
potential products in order to artificially inflate the company’s
share price, and then sold a large amount of stock at an inflated
4
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 [SEC] may prescribe as necessary or appropriate in the
public interest or for the protection of investors.” 15 U.S.C.
§ 78j(b).
5
Rule 10b-5 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.
6
Section 20(a) of the 1934 Act provides in relevant part:
“Every person who, directly or indirectly, controls any person
liable under any provision of this chapter . . . shall also be
liable jointly and severally with and to the same extent as
such controlled person.” 15 U.S.C. § 78t(a).
7
price. On August 3, 1998, the defendants moved to dismiss the
complaint pursuant to FED. R. CIV. P. 12(b)(6). On March 31, 1999,
the district court granted the motion and dismissed the “action”
with prejudice. The plaintiffs now appeal.
Discussion
On appeal, the plaintiffs maintain that the district court erred
in dismissing their complaint.
This Court reviews a district court’s dismissal under Rule 12(b)(6)
de novo. See Rubenstein v. Collins, 20 F.3d 160, 166 (5th Cir. 1994).
In doing so, we will accept the facts alleged in the complaint as true
and construe the allegations in the light most favorable to the
plaintiffs. See id. (citing Scheuer v. Rhodes, 94 S.Ct. 1683, 1686
(1974)).
I. Private Securities Litigation Reform Act
As a preliminary matter, we note that this case presents us
with the occasion to apply the Private Securities Litigation Reform
Act of 1995 (PSLRA), Pub. L. 104-67, 109 Stat. 737 (December 22,
1995), which Congress passed to prevent the abuse of federal
securities laws by private plaintiffs. The statute purports to
increase the pleading requirement for plaintiffs alleging section
10(b)/Rule 10b-5 claims.
A. “Strong” Inference of Scienter
In 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
8
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.”
Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.
1994) (quotation omitted). Before the passage of the PSLRA, the
Courts of Appeals had not reached a consensus regarding the nature
and content of the allegations of scienter that a plaintiff must
plead in order to survive a motion to dismiss. See Bryant v. Avado
Brands, Inc., 187 F.3d 1271, 1282 (11th Cir. 1999). Interpreting
FED. R. CIV. P. 9(b), which requires plaintiffs alleging fraud to
plead “with particularity” the circumstances supporting their
allegations, the Second Circuit held that securities fraud
plaintiffs must allege specific facts giving rise to a “strong
inference” of scienter, while the Ninth Circuit allowed plaintiffs
to plead scienter generally. See id. (citing cases). At that
time, the Second Circuit’s “strong inference” test was the most
stringent among the Courts of Appeals. This Court also required
plaintiffs to plead specific facts, but unlike the Second Circuit,
only mandated that the specific facts alleged “support an inference
of fraud.” See Tuchman, 14 F.3d at 1068.
Unsatisfied with the disagreement among the Circuits, as well
as the perceived inability of Rule 9(b) to prevent abusive,
frivolous strike suits, Congress in 1995 passed the PSLRA over the
President’s veto. See H.R. Conf. Rep. No. 104-369, at 41 (1995),
9
reprinted in 1995 U.S.C.C.A.N. 730, 740. The PSLRA amended the
1934 Act to provide in relevant part:
“In any private action arising under this chapter in
which the plaintiff may recover money damages 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.” 15
U.S.C. § 78u-4(b)(2).
The PSLRA also provides that if a plaintiff does not meet this
requirement, the district court “shall,” on defendant’s motion,
“dismiss the complaint.” See id. § 78u-4(b)(3).
The plain language of the statute makes clear that our
previous rule, which required that a plaintiff plead facts that
merely “support an inference of fraud,” has been supplanted by the
PSLRA’s “strong inference” requirement. We therefore find that in
order to survive a motion to dismiss, a plaintiff alleging a
section 10(b)/Rule 10b-5 claim must now plead specific facts giving
rise to a “strong inference” of scienter.
B. Severe Recklessness as a “Required State of Mind” Post-
PSLRA
The PSLRA leaves undefined, however, the content of the
scienter requirement, that is, “the required state of mind”
necessary to allege a private securities fraud claim. The absence
of direct guidance on this point, coupled with the statute’s stated
purpose of winnowing out meritless claims by imposing more
stringent pleading requirements on plaintiffs, has raised in the
10
minds of some the possibility that the PSLRA may have eliminated
the lesser mental state of recklessness as a basis for liability.
Based on the language of the statute, we conclude that the PSLRA
does not purport to, and does not, speak to or address the state of
mind generally required to impose liability under section 10(b) and
Rule 10b-5, and hence, with certain specific exceptions, does not
itself eliminate the possibility that recklessness may suffice.
Accordingly, and apart from those below noted specific instances
where the matter is addressed by the PSLRA, whether recklessness
suffices for such purpose is governed by our pre-PSLRA
jurisprudence.
In Ernst & Ernst v. Hochfelder, 96 S.Ct. 1375, 1381 n.12
(1976), the Supreme Court defined scienter for purposes of
securities fraud cases as “a mental state embracing intent to
deceive, manipulate, or defraud.” The Court left open the question
whether scienter included recklessness. See id.7 Since that
time, and prior to the PSLRA, the Courts of Appeals, including this
Court, have held that recklessness does satisfy the scienter
requirement. See Hollinger v. Titan Capital Corp., 914 F.2d 1564,
1569-70 (9th Cir. 1990); In re Phillips Petroleum Sec. Litig., 881
F.2d 1236, 1244 (3d Cir. 1989); Van Dyke v. Coburn Enter. Inc., 873
F.2d 1094, 1100 (8th Cir. 1989); McDonald v. Alan Bush Brokerage
7
The Court made it clear, however, that negligence alone is
insufficient to support liability. See id. at 1384.
11
Co., 863 F.2d 809, 814 (11th Cir. 1989); Hackbart v. Holmes, 675
F.2d 1114, 1117-18 (10th Cir. 1982); Broad v. Rockwell, 642 F.2d
929, 961-62 (5th Cir. 1981) (en banc); Mansbach v. Prescott, Ball
& Turben, 598 F.2d 1017, 1023-24 (6th Cir. 1979); Rolf v. Blyth,
Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978); Sundstrand
Corp. v. Sun Chem Corp., 553 F.2d 1033, 1044 (7th Cir. 1977).
Adopting the definition first announced in Sundstrand, this
Court and other Courts of Appeals have conceived of recklessness in
this context as “severe recklessness,” which, “properly defined and
adequately distinguished from mere negligence,” resembles a
slightly lesser species of intentional misconduct. See Broad, 642
F.2d at 961. This Court defined recklessness as “limited to those
highly unreasonable omissions or misrepresentations that involve
not merely simple or even inexcusable negligence, but an extreme
departure from the standards of ordinary care, and that present a
danger of misleading buyers or sellers which is either known to the
defendant or is so obvious that the defendant must have been aware
of it.” Id. at 961-62.
It seems clear to us that the PSLRA has not generally altered
the substantive scienter requirement for claims brought under
section 10(b) and Rule 10b-5, and therefore severe recklessness, as
defined in Broad, remains a basis for such liability. The First,
Third, Sixth, and Eleventh Circuits have all explicitly reached
similar conclusions. See Greebel v. FTP Software, Inc., 194 F.3d
12
185, 198-201 (1st Cir. 1999); In re Advanta Corp. Sec. Litig., 180
F.3d 525, 534 (3d Cir. 1999); In re Comshare, Inc. Sec. Litig.,
183 F.3d 542, 548-49 (6th Cir. 1999); Bryant, 187 F.3d at 1283-84.8
The Second Circuit has implicitly so concluded as well. See Novak
v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) (observing that the
scienter requirement for securities fraud claims, which includes
recklessness, “has been firmly established for at least a
generation” and that the PSLRA altered the “procedural”
requirements for bringing such a claim); see also Rothman v.
Gregor, 220 F.3d 81, 90 (2d Cir. 2000) (describing substantive
recklessness standard). The Ninth Circuit has reached the slightly
different conclusion that, at least under the PSLRA, recklessness
suffices to meet the substantive scienter requirement only if it
rises to the level of “deliberate recklessness.” See In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 975-77 (9th Cir.), reh’g
and reh’g en banc denied, 195 F.3d 521 (9th Cir. 1999).
As the Third Circuit has pointed out, the PSLRA characterizes
the requirements of section 78u-4(b)(2) as a “pleading
requirement,” not as a change to the substantive scienter
requirement. See Advanta, 180 F.3d at 534 (citing section 87u-
8
The Fourth Circuit has also apparently reached this
conclusion, however obliquely. See Phillips v. LCI Int’l, Inc.,
190 F.3d 609, 620 (4th Cir. 1999) (“Thus, to establish scienter, a
plaintiff must still prove the defendant acted intentionally, which
may perhaps be shown by recklessness.”).
13
4(b)(3)). The legislative history confirms this point and
demonstrates that the floor debates, the committee reports from
both houses of Congress, and the President’s veto statement all
describe the PSLRA as imposing “pleading” or “procedural”
requirements. See id.; see also Greebel, 194 F.3d at 200 (noting
that neither the legislative history nor the language of the PSLRA
evinces an intent to change the generally applicable substantive
definition of scienter). Further, as noted above, the PSLRA does
not define the generally “required state of mind” for private
securities fraud cases, but rather requires that a plaintiff plead
facts giving rise to a “strong inference” of “the required” state
of mind.
Moreover, Congress specified a substantive state of mind
requirement elsewhere in the statute, in the statutory safe harbor
provisions for “forward-looking statements” and joint and several
liability. See 15 U.S.C. § 78u-5(c)(1)(B) (creating safe harbor
for such statements if plaintiff cannot demonstrate that they were
made with “actual knowledge” that the statements were false or
misleading at the time they were made); id. § 78u-4(f)(2)(A)
(limiting joint and several liability to defendants whose action
has been found to be “knowing”). “If Congress desired to require
some other state of mind [for purposes of section 78u-4(b)(2)],
that is, other than the reckless state of mind then uniformly held
sufficient by the federal courts . . . Congress [could] have done
14
so in explicit terms” as it did with these provisions. Bryant, 187
F.3d at 1284; see also Greebel, 194 F.3d at 200 (“Congress, having
explicitly eliminated recklessness as a basis for imposing joint
and several liability, should not be taken as implicitly having
eliminated recklessness as a basis for any liability.”).
Accordingly, we join the First, Third, Sixth, and Eleventh
Circuits and conclude that recklessness, the “severe recklessness”
defined in Broad, still constitutes scienter for purposes of claims
brought under section 10(b) and Rule 10b-5 (except as otherwise
provided in the noted statutory safe harbor provisions respecting
forward looking statements and joint and several liability).
C. Pleading Requirement for Scienter Under the PSLRA
The next inquiry is what effect the PSLRA has on the patterns
of facts that may be pleaded in order to create the “strong
inference” of either intentional misconduct or severe recklessness.
Before Congress passed the PSLRA, the Second Circuit announced two
means by which a plaintiff could plead facts that would create a
strong inference of scienter: the plaintiff could either (1) allege
facts to show that a defendant had both motive and opportunity to
commit fraud, or (2) allege facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness.
See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.
1994). This Court apparently adopted these two formulations as
well, although for the former, we indicated that a plaintiff could
15
satisfy the scienter requirement at the pleading stage “by alleging
facts that show a defendant’s motive to commit securities fraud.”
Tuchman, 14 F.3d at 1068. During the passage of the PSLRA, there
was considerable debate in Congress over whether the PSLRA
effectively incorporated the prior Second Circuit methods for
proving scienter or prohibits at least the use of the motive and
opportunity method. See Greebel, 194 F.3d at 194. The parties
address this debate as well, with the plaintiffs, and the SEC as
amicus, arguing that the motive and opportunity method survived the
passage of the PSLRA, and the defendants urging a more restrictive
view. The district court did not decide this question because it
concluded that the plaintiffs could not meet either method of
pleading scienter.
There does not appear to be any question that under the PSLRA
circumstantial evidence can support a strong inference of scienter.
As the First Circuit has pointed out, “Congress plainly
contemplated that scienter could be proven by inference, thus
acknowledging the role of indirect and circumstantial evidence.”
Greebel, 194 F.3d at 195. The Courts of Appeals are divided,
however, over the status of the motive and opportunity method. In
Silicon Graphics, for example, the Ninth Circuit held that
allegations of motive and opportunity could not create a strong
inference of scienter sufficient to survive, at the pleadings
state, a motion to dismiss. Silicon Graphics, 183 F.3d at 977-79.
16
The Second and Third Circuits have held that under the PSLRA a
strong inference of scienter can be alleged by showing motive and
opportunity, or circumstantial evidence of severe recklessness or
conscious misconduct. See Advanta, 180 F.3d at 534-35; Press v.
Chemical Inv. Serv. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999).9
The most sensible approach appears to us to be the one first
generally articulated by the Sixth Circuit in Comshare. The
Comshare Court held that scienter can be alleged by pleading facts
giving rise to a strong inference of recklessness or conscious
9
We do not believe that our examination of this question is to any
extent foreclosed by our opinion in Williams v. WMX Technologics, Inc.,
112 F.3d 175 (5th Cir. 1997). That was a case filed before, and not
governed by, the PSLRA, in which we held that “the amended complaint
failed to allege fraud with particularity.” Id. at 176. The only
reference to the PSLRA occurs at the end of the following paragraph,
viz:
“As the Second Circuit has noted, 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. Mills v. Polar
Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993). We agree
with the Second Circuit’s approach. This suit was the Second
Circuit’s approach. This suit was filed prior to the
effective date of the Private Securities Litigation Reform
Act, and while its provisions do not apply, the Act adopted
the same standard we apply today. See H.R. Conf. Rep. No.
369, 104th Cong., 1st Sess. 41 (1995); 15 U.S.C. § 78u-4(b).”
Id. at 177-78.
The statement that the PSLRA “adopted the same standards we apply today”
is not only mere passing dicta but, in context, clearly is directed to
the particularity requirement, with respect to specifying the allegedly
misleading statements and what is misleading about them, which the PSLRA
addresses in § 78u-4(b)(1), and not so much to the question of what
circumstances can give rise to the necessary “strong” inference of the
required state of mind as provided in § 78u-4(b)(2). The Williams
opinion discusses only the lack of particularity in the pleading, and
does not refer to motive and opportunity.
17
misconduct, but declined to hold that allegations of motive and
opportunity, “standing alone,” meet the pleading requirement. See
Comshare, 183 F.3d at 551. The Court made the entirely accurate
observation that “evidence of a defendant’s motive and opportunity
to commit securities fraud does not constitute ‘scienter’ for the
purposes of [section] 10b or Rule 10b-5 liability.” Id. Instead,
the Court stated that motive and opportunity could be “relevant” to
pleading scienter and “may, on occasion, rise to the level of
creating a strong inference of reckless or knowing conduct.” Id.
The Eleventh Circuit in Bryant noted its agreement with “the
reasoning of the Sixth Circuit” in Comshare, and went on to state
that “[w]hile allegations of motive and opportunity may be relevant
to a showing of severe recklessness, we hold that such allegations,
without more, are not sufficient to demonstrate the requisite
scienter. . . . although motive and opportunity to commit fraud may
under some circumstances contribute to an inference fo severe
recklessness, we decline to conclude that they, standing alone, are
its equivalent. . . . motive and opportunity are specific kinds of
evidence, which, along with other evidence might contribute to an
inference of recklessness or willfulness.” Bryant at 1285-86. See
also id. at 1287 (“. . . a showing of mere motive and opportunity
is insufficient to plead scienter”). In Greebel the First Circuit
stated that its “view of the” PSLRA was “close to that articulated
by the Sixth Circuit” in Comshare. Greebel at 197. The First
18
Circuit went on to say “[w]ithout adopting any pleading litany of
motive and opportunity, we reject defendants’ argument that facts
showing motive and opportunity can never be enough to permit the
drawing of a strong inference of scienter. But . . . merely
pleading motive and opportunity, regardless of the strength of the
inference to be drawn of scienter, is not enough.” Id. More
recently, the Second Circuit reached what it described as “a middle
ground” in Novak, in which it concluded that Congress’s “failure to
include language about motive and opportunity suggests that we need
not be wedded to these concepts in articulating the prevailing
standard” for demonstrating the required strong inference of
scienter. Novak at 310.
The PSLRA neither mandated nor prohibited any particular
method of establishing a strong inference of scienter. See
Greebel, 194 F.3d at 195. The statute is silent on the question.
While there was much debate in Congress over whether the PSLRA
incorporated the motive and opportunity method, the “legislative
history on this point is ambiguous and even contradictory.”
Advanta, 180 F.3d at 531. The only special standard that Congress
established was raising the pleading requirement to a “strong”
inference of scienter. See Greebel, 194 F.3d at 195-96. This
standard may only be met on the basis of “facts” which are
“state[d] with particularity” in the pleading. By otherwise
leaving open the manner in which a plaintiff may raise a strong
19
inference of scienter, and not codifying the motive and opportunity
method, Congress may be presumed to have to some extent left the
matter to the courts. See id. at 195; cf. Novak at 311 (“Although
litigants and lower courts need and should not employ or rely on
magic words such as