PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MATRIX CAPITAL MANAGEMENT
FUND, LP; MATRIX CAPITAL
MANAGEMENT FUND II, LP; MATRIX
CAPITAL MANAGEMENT FUND
(OFFSHORE), LIMITED,
Plaintiffs-Appellants,
and
KAREN GAUTREAU, Individually and
on behalf of all others similarly
situated; LOUISIANA SCHOOL
EMPLOYEE RETIREMENT SYSTEM;
RICHARD BEASLEY; TDH PARTNERS,
LLP; DANIEL SUTTON; BDM, LLC,
Individually and on behalf of all
No. 08-1035
others similarly situated;
DETECTIVES ENDOWMENT
ASSOCIATION ANNUITY FUND, On
behalf of itself and on behalf of
all others similarly situated,
Plaintiffs,
v.
BEARINGPOINT, INCORPORATED;
ROBERT S. FALCONE; RANDOLPH C.
BLAZER,
Defendants-Appellees,
2 MATRIX CAPITAL v. BEARINGPOINT
and
RODERICK C. MCGEARY;
PRICEWATERHOUSE COOPERS, LLP,
Defendants,
and
GENERAL RETIREMENT SYSTEM OF
THE CITY OF DETROIT; PENSION
TRUST FUND FOR OPERATING
ENGINEERS; MASSACHUSETTS
PENSION FUND GROUP; PUBLIC
EMPLOYEES’ RETIREMENT SYSTEM OF
MISSISSIPPI; SECURE TRADING
GROUP, INCORPORATED; MATRIX
CAPITAL MANAGEMENT, LP,
Movants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Liam O’Grady, District Judge.
(1:05-cv-00454-LO-TCB)
Argued: January 29, 2009
Decided: July 31, 2009
Before MICHAEL, KING, and AGEE, Circuit Judges.
Order reversed, judgment vacated, and case remanded by pub-
lished opinion. Judge Michael wrote the opinion, in which
Judge Agee joined. Judge King wrote a separate opinion con-
curring in the judgment.
MATRIX CAPITAL v. BEARINGPOINT 3
COUNSEL
ARGUED: Solomon B. Cera, GOLD, BENNETT, CERA &
SIDENER, L.L.P., San Francisco, California, for Appellants.
Richard Louis Brusca, SKADDEN, ARPS, SLATE,
MEAGHER & FLOM, L.L.P., Washington, D.C.; Robert A.
Van Kirk, WILLIAMS & CONNOLLY, L.L.P., Washington,
D.C., for Appellees. ON BRIEF: Pamela A. Markert, Ken-
neth A. Frost, GOLD, BENNETT, CERA & SIDENER,
L.L.P., San Francisco, California; Steven J. Toll, COHEN,
MILSTEIN, HAUSFELD & TOLL, P.L.L.C., Washington,
D.C., for Appellants. Jennifer L. Spaziano, SKADDEN,
ARPS, SLATE, MEAGHER & FLOM, L.L.P., Washington,
D.C., Charles Wm. McIntyre, MCGUIREWOODS, L.L.P.,
Washington, D.C., for Appellees BearingPoint, Inc., and Rob-
ert S. Falcone; Steven M. Pyser, WILLIAMS & CON-
NOLLY, L.L.P., Washington, D.C., for Appellee Randolph C.
Blazer.
OPINION
MICHAEL, Circuit Judge:
Matrix Capital Management Fund, LP, Matrix Capital
Management Fund II, LP, and Matrix Capital Management
Fund (Offshore), Ltd. (collectively, plaintiffs) represent the
class of persons or entities who bought or otherwise acquired
the securities of BearingPoint, Inc. between August 14, 2003,
and April 20, 2005, and who were damaged as a result. Plain-
tiffs brought this action against BearingPoint, Randolph
Blazer (BearingPoint’s former President, Chief Executive
Officer, and Chairman of the Board), and Robert Falcone
(BearingPoint’s former Executive Vice President and Chief
Financial Officer) (collectively, defendants). Plaintiffs allege
violations of §§ 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Securities and Exchange Commission (SEC)
Rule 10b-5.
4 MATRIX CAPITAL v. BEARINGPOINT
This appeal centers on the adequacy of plaintiffs’ allega-
tions under the Private Securities Litigation Reform Act of
1995 (PSLRA) § 101(b), 15 U.S.C. § 78u-4. The district court
concluded that plaintiffs failed to adequately plead scienter
under the PSLRA’s heightened pleading standard and dis-
missed the complaint with prejudice. The court later denied
plaintiffs’ Rule 59(e) motion to alter or amend the judgment
in which plaintiffs argued that, even if dismissal was appro-
priate, the court should have dismissed without prejudice and
granted plaintiffs leave to amend the complaint. Plaintiffs
appeal these determinations.
On March 6, 2009, after this appeal was argued, we
received notice that BearingPoint had filed a voluntary peti-
tion seeking relief under chapter 11 of the Bankruptcy Code,
11 U.S.C. § 1101 et seq., in the Southern District of New
York. Thereafter, on March 10, 2009, by reason of the auto-
matic stay provision of § 362(a) of the Bankruptcy Code, we
entered an order staying proceedings in this appeal. The bank-
ruptcy court modified the automatic stay on May 7, 2009, to
permit us to render our decision. We therefore lift our stay
and issue this decision.
We agree with the district court’s conclusion that plaintiffs
failed to adequately plead scienter under the PSLRA, but we
reverse the district court’s order denying plaintiffs’ Rule 59(e)
motion to alter or amend the judgment to permit amendment
of the complaint. Accordingly, we vacate the judgment. On
remand plaintiffs will have the opportunity to file an amended
complaint against the non-debtor defendants. In addition,
plaintiffs may take action, consistent with bankruptcy law and
procedure, with respect to their claims against BearingPoint,
a chapter 11 debtor.
I.
In reviewing the district court’s dismissal under Rule
12(b)(6), we "accept all factual allegations in the complaint as
MATRIX CAPITAL v. BEARINGPOINT 5
true," and we "consider the complaint in its entirety, as well
as other sources courts ordinarily examine when ruling on
Rule 12(b)(6) motions to dismiss, in particular, documents
incorporated into the complaint by reference." Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).
Formerly known as KPMG Consulting, LLC, BearingPoint
is a publicly traded management and technology consulting
company. It completed an initial public offering in February
2001 and thereafter grew rapidly, acquiring more than thirty
consulting businesses around the world in 2002. BearingPoint
struggled to integrate its acquisitions; many were foreign con-
cerns that had operated as private partnerships with no obliga-
tion to adhere to accounting standards applied to publicly held
companies. BearingPoint also lacked the information technol-
ogy infrastructure to manage its expanded business and keep
track of client accounts. In short, BearingPoint lacked internal
controls that were adequate to maintain reliable financial
reporting and ensure compliance with applicable laws and
regulations. BearingPoint has since acknowledged its failings
in this regard.
In 2004 BearingPoint introduced a new financial account-
ing system known as "OneGlobe."1 OneGlobe proved unreli-
able and aggravated BearingPoint’s problems with its internal
controls. BearingPoint personnel did not receive the training
necessary to operate the system. The lack of training led
employees to select the wrong billing categories, which in
turn led to inaccurate hourly billing rates. Employees manu-
ally bypassed the OneGlobe system on a routine basis, pre-
1
BearingPoint’s financial reports are somewhat ambiguous about the
precise timeline for OneGlobe’s implementation. See Quarterly Report
(Form 10-Q), at 33 (May 10, 2004) (indicating that company expects to
"further implement a new North American financial accounting system
during the second quarter of calendar year 2004"); Annual Report (Form
10-K), at 7 (Jan. 31, 2006) (indicating that OneGlobe system was
bypassed on numerous occasions in order to close the second quarter of
2004).
6 MATRIX CAPITAL v. BEARINGPOINT
sumably correcting some errors but also creating the risk of
human error and dishonesty.
Certain of BearingPoint’s foreign acquisitions created spe-
cial challenges that further strained its internal controls. In
2004 regional management of BearingPoint China and Japan
directed employees to inflate their utilization rates (the per-
centage of consultant time actually charged to customers) and
other financial data. Additionally, BearingPoint Australia
recorded revenue in 2004 for contracts that were not com-
pleted until 2005. Finally, the values of certain of Bearing-
Point’s foreign acquisitions decreased during the class period
(August 14, 2003, to April 20, 2005), causing the impairment
of goodwill.
BearingPoint filed annual and quarterly financial reports
with the SEC on SEC Forms 10-K and 10-Q and otherwise
made public its financial information during the class period.
At the end of each fiscal quarter BearingPoint typically issued
a press release and filed an SEC Form 8-K with anticipated
financial information. It would subsequently issue a Form 10-
K or 10-Q with complete financial information.2 Along with
each Form 10-K and 10-Q, the individual defendants signed
Sarbanes-Oxley certifications indicating that the reports did
2
The following Forms 10-K and 10-Q were filed during the class period
and are in the record: Annual Report (Form 10-K) (Sept. 29, 2003) (for
fiscal year ended June 30, 2003); Amended Quarterly Report (Form 10-
Q/A) (Oct. 6, 2003) (for quarterly period ended September 30, 2002);
Quarterly Report (Form 10-Q) (Nov. 14, 2003) (for quarterly period ended
September 30, 2003); Annual Report (Form 10-K) (Apr. 16, 2004) (for
transition period from July 1, 2003, to December 31, 2003); Quarterly
Report (Form 10-Q) (May 10, 2004) (for quarterly period ended March
31, 2004); Quarterly Report (Form 10-Q) (Aug. 6, 2004) (for quarterly
period ended June 30, 2004); Quarterly Report (Form 10-Q) (Nov. 8,
2004) (for quarterly period ended September 30, 2004); Amended Quar-
terly Report (Form 10-Q/A) (Nov. 18, 2004) (for quarterly period ended
September 30, 2004). In late 2003 BearingPoint changed its fiscal year
end from June 30 to December 31 and thus filed the transition report on
Form 10-K for the six-month period ending December 31, 2003.
MATRIX CAPITAL v. BEARINGPOINT 7
"not contain any untrue statements of a material fact or omit
to state a material fact necessary to make the statements
made." See, e.g., J.A. 372. Plaintiffs allege that the foregoing
financial statements were materially false and misleading
because, among other things, they misstated BearingPoint’s
revenues, net income, earnings per share, and goodwill.
In late 2003 BearingPoint reported problems, "primarily
[in] the Germanic region," with respect to its internal controls
over financial reporting. Annual Report (Form 10-K), at 85
(Sept. 29, 2003). In addition, the company’s Form 10-K for
the fiscal year ending June 30, 2003, disclosed that an inde-
pendent accountant reported material weaknesses in certain
aspects of its internal controls.3 It reiterated those warnings in
statements filed for periods ending September 30, 2003 (filed
November 14, 2003), and December 31, 2003 (filed April 16,
2004). BearingPoint nevertheless expressed its confidence in
the capability of its internal controls to provide for reliable
financial reporting and in the accuracy of all financial state-
ments previously reported. And the Form 10-K filed for the
period ending December 31, 2003 (filed April 16, 2004), indi-
cated that BearingPoint had "resolved the material weak-
nesses reported in its last Annual Report on Form 10-K. . . .
[T]hese are no longer material weaknesses, but are considered
to be reportable conditions." Annual Report (Form 10-K), at
100 (Apr. 16, 2004).
3
BearingPoint defined a material weakness in internal controls as "a
control deficiency, or combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected." Annual
Report (Form 10-K), at 173 (Jan. 31, 2006). In contrast, reportable condi-
tions are less serious deficiencies: "Reportable conditions are . . . signifi-
cant deficiencies in the design or operation of internal control, which
could adversely affect the organization’s ability to initiate, record, process,
and report financial data consistent with the assertions of management in
the financial statements." Current Report (Form 8-K), ex. 99.1, at 2 (Dec.
16, 2004).
8 MATRIX CAPITAL v. BEARINGPOINT
On November 8, 2004, BearingPoint filed financial infor-
mation for the quarter ending September 30, 2004. But shortly
thereafter BearingPoint management discovered that the Form
10-Q overstated its accounts receivable by $92.9 million.
BearingPoint corrected that error by filing a Form 10-Q/A on
November 18, 2004, that otherwise affirmed the financial
information reported in the original Form 10-Q. The Form 10-
Q/A acknowledged, however, that internal controls had failed
to timely identify the accounts receivable error and recog-
nized that this failure amounted to a material weakness. Bear-
ingPoint further acknowledged that the company’s internal
controls as of September 30, 2004, "were not effective to
ensure that information required to be disclosed" to the SEC
"is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms."
Amended Quarterly Report (Form 10-Q/A), at 48 (Nov. 18,
2004).
On November 10, 2004, Blazer stepped down as Chairman
of the Board of Directors and Chief Executive Officer of
BearingPoint. A few days later, on November 30, 2004, Fal-
cone stepped down as Executive Vice President and Chief
Financial Officer.
BearingPoint reiterated problems with its internal controls
in a December 16, 2004, Form 8-K, filed in connection with
a convertible debenture offering. The Form 8-K noted that
BearingPoint had not yet corrected the material weaknesses
and reportable conditions previously identified. It continued
to warn that those weaknesses might adversely affect Bearing-
Point’s ability to accurately report financial information. In
late December 2004 and early January 2005 BearingPoint
raised $450 million by issuing subordinated convertible
debentures.
BearingPoint was unable to file a timely Form 10-K for the
fiscal year ending December 31, 2004. This tardiness was
announced in a Form 8-K filed March 17, 2005, in which the
MATRIX CAPITAL v. BEARINGPOINT 9
company reiterated that it had identified material weaknesses
in internal controls and warned that it might discover addi-
tional material weaknesses. BearingPoint also disclosed that
recent downgrades in the company’s credit rating, changes in
senior management, and underperforming foreign operations
had caused the company to perform a goodwill impairment
test. The results of the test, the company said, would require
it to take a material impairment charge for the period ending
December 31, 2004. It declined to estimate the amount of the
charge.
On April 20, 2005, BearingPoint published a Form 8-K
warning that recent company financial statements were not
reliable. Specifically, BearingPoint warned that financial
statements filed with Forms 10-K for the periods ending June
30, 2003, and December 31, 2003, and Forms 10-Q for each
of the three quarters of 2004 were not reliable. BearingPoint
suggested that a restatement of its financial statements would
likely be necessary and that "the ultimate net adjustments
w[ould] be material." Current Report (Form 8-K), at 3 (Apr.
20, 2005). BearingPoint further revealed that it would likely
take a goodwill impairment charge of $250 million to $400
million in the fourth quarter of 2004. It did not offer an
expected date for the restatement of its financial data; indeed
it predicted further delay in the filing of its already tardy 2004
Form 10-K and delays in the filing of Forms 10-Q that would
be coming due in 2005. The April 20, 2005, Form 8-K also
disclosed that BearingPoint was the target of an informal SEC
investigation into its accounting and financial reporting and
that nine of twenty individuals in senior management posi-
tions had left BearingPoint or were in the process of leaving.
These disclosures resulted in an immediate thirty-two percent
drop in BearingPoint stock prices, from a close of $7.77 per
share on April 20, 2005, to a close of $5.28 per share on April
21, 2005. This drop occurred on a one-day trading volume of
more than forty-six times the stock’s average daily trading
volume for the year preceding the disclosures. In re Bearing-
10 MATRIX CAPITAL v. BEARINGPOINT
Point, Inc. Sec. Litig., 525 F. Supp. 2d 759, 763 (E.D. Va.
2007).
In the following weeks several securities fraud actions were
filed against BearingPoint and its officers in the Eastern Dis-
trict of Virginia. See In re BearingPoint, Inc. Sec. Litig., 232
F.R.D. 534, 537 (E.D. Va. 2006). These actions were consoli-
dated, and plaintiffs were selected as lead plaintiffs pursuant
to the PSLRA, 15 U.S.C. § 78u-4. The consolidated action
was initially assigned to Judge T.S. Ellis, III, who entered a
scheduling order that, among other things, required plaintiffs
to file an amended complaint by October 7, 2005, on the basis
of BearingPoint’s representation that it expected to file its
delinquent 2004 Form 10-K and a restatement of earlier finan-
cial information by September 21, 2005. When BearingPoint
was unable to meet the September 21, 2005, target, it
informed the district court that it anticipated being able to file
the form and restatement by late October. BearingPoint
requested that the scheduling order deadlines be postponed
accordingly. The district court refused to amend the schedul-
ing order, but indicated that it would permit plaintiffs to
amend their complaint when BearingPoint made SEC filings
with its 2004 financial statement and any restatement. In the
meantime, on October 7, 2005, plaintiffs filed a complaint
alleging that defendants knowingly or recklessly misrepre-
sented BearingPoint’s financial condition by overstating earn-
ings and assets in violation of federal securities laws. The
district court granted plaintiffs’ motion for class certification
on January 17, 2006.
BearingPoint ultimately filed its Form 10-K for the fiscal
year ending December 31, 2004, on January 31, 2006, after
spending more than $100 million to review 6,500 contracts
and other data. Included as part of the 2004 Form 10-K filing
was the company’s restatement of previous financial state-
ments (together, the 2004 Form 10-K and restatement). Much
of the company’s financial information published in SEC fil-
ings in 2003 proved inaccurate. For example, BearingPoint’s
MATRIX CAPITAL v. BEARINGPOINT 11
2003 Form 10-K had represented that net income for that year
was $41.3 million (or $0.22 per share), but the 2004 Form 10-
K and restatement revealed that it was actually $32.7 million
(or $0.18 per share). The Form 10-Q for the first quarter of
2004 had represented net income of $1.6 million ($0.01 per
share), but BearingPoint had actually incurred a net loss of
$17 million (($0.09) per share). The Forms 10-Q for the sec-
ond and third quarters of 2004 had similarly misstated (or
overstated) net income by $37.6 million and $7.4 million,
respectively. The 2004 Form 10-K and restatement further
disclosed that BearingPoint suffered goodwill impairment of
$397.1 million during 2004.
Plaintiffs moved to file a first amended complaint to incor-
porate the additional information provided in BearingPoint’s
2004 Form 10-K and restatement. The motion was granted,
and on March 10, 2006, plaintiffs filed the first amended com-
plaint, the operative complaint that we consider in this appeal.
Incorporating the restated financial information, plaintiffs
alleged that defendants knowingly or recklessly misstated
BearingPoint’s financial condition during the class period in
violation of §§ 10(b) and 20(a) of the Securities Exchange Act
of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5. After defendants filed a motion to dis-
miss pursuant to Rule 12(b)(6), the district court stayed the
action pending the Supreme Court’s decision in Tellabs, Inc.
v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), which
was expected to address the pleading standard for scienter
allegations under the PSLRA. Following the June 21, 2007,
decision in Tellabs, the district court lifted the stay and
directed the parties to submit briefs on the impact of the new
decision.
This action was reassigned to Judge Liam O’Grady on July
13, 2007. Thereafter, on September 12, 2007, the court
granted defendants’ motion to dismiss, concluding that plain-
tiffs’ complaint failed to meet the scienter pleading require-
ments of the PSLRA. The court also concluded that granting
12 MATRIX CAPITAL v. BEARINGPOINT
leave to amend the complaint would be futile. In re Bearing-
Point, 525 F. Supp. 2d at 761-62. The complaint was dis-
missed with prejudice.
Plaintiffs filed a Rule 59(e) motion to alter or amend the
judgment on September 26, 2007. They argued that the dis-
trict court had erred in dismissing the complaint and, alterna-
tively, in failing to grant leave to amend. Plaintiffs lodged a
proposed second amended complaint with the district court on
November 16, 2007. On November 19, 2007, the court denied
the Rule 59(e) motion, again concluding that the operative
complaint failed to adequately plead scienter. The court also
declined to permit post-judgment amendment of the com-
plaint. Plaintiffs appeal the September 12, 2007, order dis-
missing the complaint and the November 19, 2007, order
denying the Rule 59(e) motion to alter or amend the judg-
ment.
II.
We review de novo the district court’s decision to dismiss
under Rule 12(b)(6). In re PEC Solutions, Inc. Sec. Litig., 418
F.3d 379, 387 (4th Cir. 2005). "[T]o survive a motion to dis-
miss, private securities fraud actions must clear the hurdle of
the Private Securities Litigation Reform Act of 1995
(‘PSLRA’). 15 U.S.C. § 78u-4(b)." Id. The PSLRA imposes
a heightened pleading standard for private securities fraud
complaints. Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d
162, 172 (2007).
Plaintiffs allege violations of §§ 10(b) and 20(a) of the
Securities Exchange Act of 1934 and of SEC Rule 10b-5.
Section 10(b) forbids the "use or employ, in connection with
the purchase or sale of any security . . . [of] 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
MATRIX CAPITAL v. BEARINGPOINT 13
investors." 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements
§ 10(b) by making it unlawful:
(a) To employ any device, scheme, or artifice to
defraud,
(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 cir-
cumstances under which they were made, not mis-
leading, or
(c) To engage in any act, practice, or course of busi-
ness which operates or would operate as a fraud or
deceit upon any person, in connection with the pur-
chase or sale of any security.
17 C.F.R. § 240.10b-5. Section 10(b) affords, by implication,
a right of action to securities purchasers or sellers injured by
its violation. Tellabs, 551 U.S. at 318.
A plaintiff in a § 10(b) private action must typically prove:
"(1) a material misrepresentation or omission by the defen-
dant; (2) scienter; (3) a connection between the misrepresen-
tation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) eco-
nomic loss; and (6) loss causation" (that is, the economic loss
must be proximately caused by the misrepresentation or omis-
sion). Stoneridge Investment Partners, LLC v. Scientific-
Atlanta, Inc., 552 U.S. 148, 128 S. Ct. 761, 768 (2008)
(emphasis added).
Pleading recklessness is sufficient to satisfy the scienter
requirement. See Pub. Employees’ Ret. Ass’n of Colo. v.
Deloitte & Touche LLP, 551 F.3d 305, 313 (4th Cir. 2009).
"We have defined a reckless act in the § 10(b) context as one
‘so highly unreasonable and such an extreme departure from
the standard of ordinary care as to present a danger of mis-
14 MATRIX CAPITAL v. BEARINGPOINT
leading the plaintiff to the extent that the danger was either
known to the defendant or so obvious that the defendant must
have been aware of it.’" Id. (quoting Ottmann v. Hanger
Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003)).
In the present case the district court dismissed the operative
complaint under Rule 12(b)(6) because it concluded that
plaintiffs had failed to adequately plead scienter with respect
to any of the alleged misstatements. In re BearingPoint, 525
F. Supp. 2d at 761-62.
The PSLRA requires a plaintiff to "state with particularity
facts giving rise to a strong inference that the defendant acted
with the required state of mind." 15 U.S.C. § 78u-4(b)(2); Tel-
labs, 551 U.S. at 314. The plaintiff must "plead facts render-
ing an inference of scienter at least as likely as any plausible
opposing inference." Tellabs, 551 U.S. at 328 (emphasis in
original). According to Tellabs, a Rule 12(b)(6) motion to dis-
miss a § 10(b) action is to be analyzed as follows:
First, . . . courts must, as with any motion to dis-
miss for failure to plead a claim on which relief can
be granted, accept all factual allegations in the com-
plaint as true. . . .
Second, courts must consider the complaint in its
entirety, as well as other sources courts ordinarily
examine when ruling on Rule 12(b)(6) motions to
dismiss . . . . The inquiry . . . is whether all of the
facts alleged, taken collectively, give rise to a strong
inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets that stan-
dard.
Third, in determining whether the pleaded facts
give rise to a "strong" inference of scienter, the court
must take into account plausible opposing infer-
ences. . . . The strength of an inference cannot be
decided in a vacuum. The inquiry is inherently com-
MATRIX CAPITAL v. BEARINGPOINT 15
parative: How likely is it that one conclusion, as
compared to others, follows from the underlying
facts? . . . [T]he inference of scienter must be more
than merely "reasonable" or "permissible"—it must
be cogent and compelling, thus strong in light of
other explanations. A complaint will survive, we
hold, only if a reasonable person would deem the
inference of scienter cogent and at least as compel-
ling as any opposing inference one could draw from
the facts alleged.
Tellabs, 551 U.S. at 322-24. "In sum, the reviewing court
must ask: When the allegations are accepted as true and taken
collectively, would a reasonable person deem the inference of
scienter at least as strong as any opposing inference?" Id. at
326.
Moreover, "corporate liability derives from the actions of
its agents." Teachers’, 477 F.3d at 184. To the extent a plain-
tiff alleges corporate fraud, the plaintiff "must allege facts that
support a strong inference of scienter with respect to at least
one authorized agent of the corporation. Id. This court has not
yet discussed the extent to which a plaintiff must identify that
agent. See Makor Issues & Rights, Ltd. v. Tellabs Inc., 513
F.3d 702, 710 (7th Cir. 2008) (concluding that corporate
scienter requires that a corporate agent acted with scienter, but
that a plaintiff need not name the corporate agent who acted
with scienter). Additionally, to the extent a plaintiff alleges
fraud claims against individual defendants, the plaintiff must
allege facts supporting a strong inference of scienter as to
each defendant. Teachers’, 477 F.3d at 184.
III.
The operative complaint (the first amended complaint)
alleges that a number of BearingPoint statements made
throughout the class period were misleading, including Forms
8-K, 10-K, and 10-Q. Plaintiffs argue that these statements
16 MATRIX CAPITAL v. BEARINGPOINT
were misleading because they contained financial informa-
tion, including data about revenue, net income, and goodwill
charges, that BearingPoint has since acknowledged was erro-
neous. In re BearingPoint, 525 F. Supp. 2d at 768.4 Plaintiffs
allege that defendants acted intentionally or recklessly in
making misleading statements.
A.
Much of the financial information defendants published in
Forms 10-K and 10-Q during the class period was erroneous,
as acknowledged in the 2004 Form 10-K and restatement. A
Form 10-K filed April 16, 2004, stated, for example, that
BearingPoint had incurred a net loss of $165.8 million ($0.86
per share) during the six-month transition period ending
December 31, 2003. In fact, the company had suffered a
$176.6 million net loss ($0.91 per share). Similarly, Forms
10-Q overstated BearingPoint’s net income by $18.6 million
for the first quarter of 2004, $37.6 million for the second
quarter, and $7.4 million for the third quarter.5 Plaintiffs
allege that defendants acted knowingly or recklessly with
respect to the falsity of these financial statements.
To evaluate whether plaintiffs’ factual allegations give rise
to a strong inference of scienter, we first discuss whether they
permit an inference of scienter, and if so, the persuasiveness
of that inference. While we ultimately evaluate plaintiffs’
allegations of scienter holistically, we only afford their allega-
tions the inferential weight warranted by context and common
sense. See Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618,
625-26 (4th Cir. 2008) (explaining that courts should evaluate
4
The district court also considered possible misstatements and material
omissions concerning the adequacy of internal controls. Because plaintiffs
indicated in their brief to this court that they are not challenging the truth-
fulness of statements made during the class period about internal controls,
we do not review allegations of scienter as to those statements.
5
Annual Report (Form 10-K), at 168 (Jan. 31, 2006).
MATRIX CAPITAL v. BEARINGPOINT 17
allegations of scienter in context). Next, we will discuss
whether "a reasonable person would deem [any] 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.
1.
Plaintiffs point first to their allegations that BearingPoint
has admitted that its former senior management was "incom-
peten[t]" and otherwise contributed to the deficient "tone at
the top." J.A. 311-12 ¶¶ 50-52. Plaintiffs argue that the "tone
at the top" is a term of art that refers to "an environment
which encourages accounting fraud." Appellant’s Br. at 29.
They contend that admissions about the "tone at the top" sat-
isfy the scienter requirement because "[t]hey necessarily were
referring to fraud or, at a minimum, reckless conduct in . . .
implementing and maintaining adequate internal accounting
controls and the resulting financial reporting." Id. at 30.
Defendants’ state-of-mind with respect to the company’s
internal controls is a question distinct from the critical ques-
tion here, which is defendants’ state-of-mind with respect to
misstating or omitting material financial information in Bear-
ingPoint’s financial statements. Those questions may align
when a plaintiff alleges that corporate officers intentionally
created an environment to facilitate their own accounting
fraud. But in this case BearingPoint’s admissions fail to sug-
gest that defendants intentionally created an environment con-
ducive to accounting fraud; the company simply admits that
such an environment existed. Such an admission fails to sug-
gest that defendants acted with scienter when they issued
BearingPoint’s 2003 and 2004 financial statements.
Plaintiffs further allege that defendants were at least reck-
less as to the truthfulness of their financial statements because
there were a number of red flags that must have alerted them
to serious internal control deficiencies and the high risk that
18 MATRIX CAPITAL v. BEARINGPOINT
financial information derived under those internal controls
was erroneous. Plaintiffs primarily argue that it was widely
known that the OneGlobe financial reporting system responsi-
ble for tracking revenues, expenses, and employee time was
unreliable and failed to properly integrate accounting systems
used in foreign offices. "BearingPoint employees at all levels
and in all departments experienced significant problems with
the OneGlobe accounting system." J.A. 315 ¶ 61. Bearing-
Point employees manually bypassed the OneGlobe system,
correcting at least some of OneGlobe’s errors but also pre-
sumably creating the risk of human error and fraud. Plaintiffs
ask us to infer from the breadth and gravity of OneGlobe
problems that high level corporate agents (including Blazer
and Falcone) must have been aware of the problems and, con-
sequently, could not have believed their internal controls ade-
quate to produce reliable financial information. Moreover,
plaintiffs allege that Blazer in fact spoke with a then-
executive vice president on more than one occasion about
OneGlobe errors relating to her billing rate and the practice of
manually bypassing the system.
Plaintiffs do not include a timeline for their allegations or
otherwise allege facts that imply defendants were aware of
OneGlobe problems prior to making or approving financial
statements. And the financial reports submitted to the SEC
indicate that OneGlobe was still being implemented as of the
second quarter of 2004. Even if BearingPoint began introduc-
ing OneGlobe earlier, problems may not have become obvi-
ous until after the program was fully implemented and was
functional for some amount of time. Further, it is relevant that
defendants understood that BearingPoint employees were
manually correcting OneGlobe errors in some instances. We
nevertheless recognize that the allegations permit an inference
—although the weight of the inference is limited by the fac-
tors just mentioned—that OneGlobe deficiencies and other
internal control problems identified by the plaintiffs may have
become sufficiently severe at some point during 2004 to raise
MATRIX CAPITAL v. BEARINGPOINT 19
a red flag about the reliability of BearingPoint’s financial
information.
Plaintiffs also point to the magnitude of the restatement.
See In re Microstrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620,
635-36, 38 (E.D. Va. 2000) (noting that a strong inference of
scienter may arise from a dramatic misstatement). Bearing-
Point overstated net income and other financial data through-
out the class period by significant amounts. It reported net
income of $1.6 million for the first quarter of 2004, but it had
actually suffered a net loss of $17 million. It similarly indi-
cated net income of $15.2 million for the second quarter of
2004, but it had actually suffered a net loss of $22.4 million.
In total the 2004 Form 10-K and restatement extinguished
more than $97 million in reported profits. BearingPoint had
to pay more than $100 million (and review nearly 6,500 con-
tracts) to identify and correct these errors—an enterprise that
resulted in approximately 35,000 lines of adjustments to pre-
vious financial statements.
Inferential weight may be attributed to the magnitude of
these errors but only in the context of BearingPoint’s financial
position. BearingPoint is a global corporation that produced
revenues of $823.7 million to $888.6 million for each of the
first three quarters of 2004. As a general matter, courts should
be wary when defendants focus on the size of revenues in an
effort to minimize the materiality of misstatements of income
or to suggest the defendant lacked motive to misstate income.
See Crowell v. Ionics, Inc., 343 F. Supp. 2d 1, 18 (D. Mass.
2004) (characterizing the "focus on revenue" as "an old chest-
nut that securities fraud defendants frequently try on judges
and juries"). But the size of BearingPoint’s revenue stream
does bear on whether the misstatements of net income were
of a size that BearingPoint officers must have known about
them. In other words, an individual is more likely to realize
that she is missing $10 if she has $50 in her bank account than
if she has $50,000 in her bank account.
20 MATRIX CAPITAL v. BEARINGPOINT
Plaintiffs further argue that the breadth of BearingPoint’s
financial reporting problems ought to have alerted Blazer and
Falcone to inaccuracies in the company’s financial reporting
and other statements. See In re Microstrategy, 115 F. Supp.
2d at 637-38 (noting that "inference of scienter becomes more
probable as the violations [of accounting rules] become more
obvious"). BearingPoint over-billed and under-billed clients
and violated contract terms, including agreed upon rates and
charges. A consultant who helped review BearingPoint’s
accounting reported that "every single contract that he
reviewed, 20-30 contracts, were [sic] incorrect with regard to
revenue recognition in some material way." J.A. 322 ¶ 78. We
afford these allegations substantial weight, although we note
that the company was in the middle of integrating the finan-
cial accounting information for thirty newly acquired consult-
ing components worldwide.
Plaintiffs also highlight accounting fraud within the Asia
Pacific region throughout 2004. BearingPoint Australia fraud-
ulently recorded $8.8 million in revenue in 2004 that should
not have been recorded until 2005. And senior regional man-
agement in China and Japan units directed employees to fal-
sify utilization rates. However, there are no allegations that
Blazer, Falcone, or other senior officers at BearingPoint head-
quarters directed the accounting fraud that occurred in the
Asia Pacific region. Instead, plaintiffs ask us to infer that
senior officials like Blazer and Falcone would have known of
the fraud and falsification.
Plaintiffs also ask us to infer scienter from the fact that
BearingPoint announced in its April 20, 2005, disclosure that
nine out of twenty of its high-level officers had left or were
leaving the company. Plaintiffs further note that the SEC is
formally investigating and has subpoenaed information about
BearingPoint. But see Cozzarelli, 549 F.3d at 628 n.2 (indicat-
ing that allegation that SEC is investigating defendants is "too
speculative to add much, if anything, to an inference of
scienter"). Finally, plaintiffs argue that BearingPoint had a
MATRIX CAPITAL v. BEARINGPOINT 21
motive for falsifying information because it was able to issue
$450 million in subordinated convertible debentures in late
December 2004 and early January 2005. Plaintiffs allege that
BearingPoint sought to suppress information about its actual
financial information and internal control problems in order to
complete these private offerings. But see id. at 627 (noting
that "the motivations to raise capital . . . are common to every
company and thus add little to an inference of fraud").
Defendants, for their part, point to BearingPoint’s disclo-
sures concerning its internal controls during the class period,
arguing that those disclosures weigh against an inference of
scienter. It is appropriate to consider such disclosures, which
in some contexts will indicate that the defendants were acting
in good faith, but in other contexts will indicate that the
defendants had knowledge of operational risks (suggesting a
lack of good faith). BearingPoint made several relevant dis-
closures during the class period. The Form 10-K filed for the
fiscal year ending June 30, 2003 (filed September 29, 2003),
disclosed material weaknesses and reportable conditions in
BearingPoint’s internal controls, but only in seven limited
areas.6 Importantly, the Form 10-K moderated the weight of
6
Specifically, the Form 10-K stated as follows:
Management and PricewaterhouseCoopers LLP ("PwC"), our
independent accountants, have reported to our Audit Committee
certain matters involving internal controls that PwC considers to
be material weaknesses or reportable conditions under standards
established by the American Institute of Certified Public Accoun-
tants. The identified material weaknesses relate to financial
review and analysis at the corporate/consolidation and certain
local reporting levels, primarily with respect to the Germanic
region. The identified reportable conditions relate to protocol and
documentation for reviewing and assessing contract revenue rec-
ognition; monitoring of unusual Work in Process activity; lack of
a formal documented policy relating to evidence of a contractual
arrangement with respect to revenue recognition based on local
legal requirements; cross-training of employees for key finance
and accounting positions; and documentation for certain critical,
significant and judgmental accounting areas.
J.A. 589.
22 MATRIX CAPITAL v. BEARINGPOINT
that disclosure by suggesting that BearingPoint had already
put in place measures to correct identified weaknesses and by
stating its confidence in the accuracy of financial statements
contained in the Form 10-K notwithstanding internal control
deficiencies. The Form 10-Q for the period ending September
30, 2003 (filed November 14, 2003), similarly mentioned and
then moderated the import of certain limited internal control
deficiencies. And the Form 10-K filed for the six-month tran-
sition period ending December 31, 2003, represented that
BearingPoint had "resolved" all previously reported material
weaknesses (although the underlying conditions were still
considered reportable conditions) and most of the deficiencies
previously considered reportable conditions. Annual Report
(Form 10-K), at 100 (Apr. 16, 2004). It did identify one new
material weakness.7
The Forms 10-Q filed during the first three quarters of 2004
represented that aside from the several remaining reportable
conditions and the single material weakness discussed in the
December 31, 2003 Form 10-K, "the Company’s disclosure
controls and procedures are adequately designed to timely
notify [the Chief Executive Officer and Chief Financial Offi-
cer] of material information relating to the Company required
to be disclosed in the Company’s SEC filings." See, e.g.,
Quarterly Report (Form 10-Q), at 37 (May 10, 2004).
It was not until BearingPoint amended its Form 10-K for
the period ending September 30, 2004, in a Form 10-Q/A
filed November 18, 2004, that the company disclosed that
internal control deficiencies might compromise the reliability
of financial reporting. Specifically, the Form 10-Q/A stated
that:
the Company’s internal controls relating to overall
7
The Form 10-K indicates that PwC "identified, as of December 31,
2003, a material weakness relating to the timely accrual of certain costs
associated with subcontractors." Id.
MATRIX CAPITAL v. BEARINGPOINT 23
financial review and analysis in the context of the
closing process did not identify the error [overstating
accounts receivable] in time to preclude a misstate-
ment of the balance sheet items referred to above
and related cash flow statement items. The Company
believes that this weakness in its internal controls
relating to overall financial review and analysis in
the context of the closing process is a material weak-
ness. The Company is evaluating the steps that must
be taken to improve its procedures and controls in
this area.
. . . [T]he Chief Executive Officer and the Chief
Financial Officer have concluded that as a result of
the material weakness discussed above and certain
reportable conditions that were disclosed in our
Transition Report on Form 10-K for the six months
ended December 31, 2003, the Company’s disclo-
sure controls and procedures as of September 30,
2004 were not effective to ensure that information
required to be disclosed by the Company in the
reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, pro-
cessed, summarized and reported within the time
periods specified in the SEC’s rules and forms.
Amended Quarterly Report (Form 10-Q/A), at 48 (Nov. 18,
2004). This disclosure more meaningfully calls into question
the reliability of financial information "recorded, processed,
summarized and reported" under internal controls in place as
of September 30, 2004. Id. A subsequently filed December
16, 2004, Form 8-K included similar disclosures.8
8
The Form 8-K first described material weaknesses and reportable con-
ditions previously disclosed to investors in prior financial statements. It
then added that:
as of September 30, 2004, our disclosure controls were not effec-
tive to ensure that information required to be disclosed by us in
24 MATRIX CAPITAL v. BEARINGPOINT
A disclosure that meaningfully alerts investors to the risk
that financial information is not accurate may suggest that the
individuals responsible for the disclosure did not knowingly
(or perhaps not even recklessly) misstate the underlying finan-
cial information. But BearingPoint disclosures made prior to
November 18, 2004, continued to represent the reliability of
BearingPoint’s financial information notwithstanding internal
control problems. Those pre-November 18 disclosures do not
lend themselves to any inferences one way or the other relat-
ing to scienter. Later disclosures that timely raised questions
about the reliability of financial information (such as the
November 18, 2004, disclosure) lend weight to an inference
that contemporaneous financial statements were made in good
faith. Such disclosures might normally suggest that earlier
misstatements were likewise good faith mistakes, but there
were changes at BearingPoint between November 8 and
November 18, 2004, that limit that inference. In particular,
Blazer departed BearingPoint effective November 10, 2004.
2.
Having discussed the relevant allegations of scienter and
whether common sense or context diminish the inferential
the reports that we file or submit [to the SEC] is timely recorded,
processed, summarized and reported.
We are in the process of implementing changes to address each
of the material weaknesses and reportable conditions that we and
our independent registered public accounting firm have previ-
ously identified. If we are unable to correct these weaknesses in
internal controls in a timely manner, or if additional weaknesses
are identified that are not corrected in a timely manner, our abil-
ity to record, process, summarize and report financial information
will be adversely affected. This failure could materially and
adversely impact our business, our financial condition and the
market value of our securities and expose us to litigation and
scrutiny from private litigants or the Securities and Exchange
Commission.
Current Report (Form 8-K), ex. 99.1, at 2 (Dec. 16, 2004).
MATRIX CAPITAL v. BEARINGPOINT 25
weight owed them, we proceed to evaluate whether a reason-
able person would regard the inference that defendants know-
ingly or recklessly misstated or omitted material information
at least as strong as the inference that BearingPoint officers
were merely negligent with respect to those statements. See
Tellabs, 551 U.S. at 326. We evaluate these allegations holis-
tically, recognizing that allegations of scienter that would not
independently create a strong inference of scienter might
compliment each other to create an inference of sufficient
strength to satisfy the PSLRA.
2003 and First Quarter 2004 Financial Statements
A strong inference of scienter might arise when there are
sufficient red flags to alert senior officers to the unreliability
of statements about internal controls and financial informa-
tion. See Ottmann, 353 F.3d at 351. The red flags alleged in
this case—including major internal control problems and
large-scale misstatements of income—give rise to a possible
inference of scienter for statements made in 2003 and for the
first quarter of 2004. But it is also possible to infer that defen-
dants were only acting negligently with respect to the accu-
racy of the contested statements. During 2003 and 2004
BearingPoint was struggling to integrate thirty world-wide
acquisitions that included using a new firm-wide financial
reporting system, OneGlobe. Further, BearingPoint officers
may not have had reason to know that OneGlobe problems
and other internal control deficiencies existed and were suffi-
ciently severe so as to threaten the reliability of financial
reporting. To the extent the record speaks to the timeline, it
suggests that BearingPoint was still putting OneGlobe into
operation during the second quarter of 2004, which ended
June 30, 2004. Absent additional allegations that Bearing-
Point officials had reason to know that the company’s finan-
cial information was inaccurate, we conclude that the
inference of scienter is not as compelling as competing non-
culpable inferences for financial statements made during 2003
and for the first quarter of 2004.
26 MATRIX CAPITAL v. BEARINGPOINT
Second and Third Quarter 2004 Financial Statements
There is a stronger case for an inference of scienter for the
Form 10-Q filed for the second quarter of 2004 (filed August
6, 2004), because the record suggests that OneGlobe problems
could have manifested themselves by August 2004, and
because the financial report issued for that period misstated
net income by a particularly large amount ($37.6 million).
Nevertheless, the allegations fail to establish that it is as likely
as not that the alleged misstatements and omissions were
obvious on August 6, 2004, to BearingPoint officials strug-
gling to integrate recent worldwide acquisitions, manage
thousands of employees, and account for billions in revenue.
See Zucco Partners v. Digimarc Corp., 552 F.3d 981, 1007
(9th Cir. 2009) ("Although the allegations in this case are
legion, even together they are not as cogent or compelling as
a plausible alternative inference—namely, that although Digi-
marc was experiencing problems controlling and updating its
accounting and inventory tracking practices, there was no spe-
cific intent to fabricate the accounting misstatements at issue
here. Instead, the facts alleged by Zucco point towards the
conclusion that Digimarc was simply overwhelmed with inte-
grating a large new division into its existing business."); see
also In re BearingPoint, 525 F. Supp. 2d at 762 (noting that
as of December 31, 2004, BearingPoint had about 16,800 full-
time employees worldwide and $3.3 billion in revenue).
Absent additional allegations suggesting that BearingPoint
officials knew that OneGlobe problems jeopardized the accu-
racy of their second quarter financial statements, the inference
of scienter is not as compelling as competing inferences. The
same analysis applies to the Form 10-Q for the third quarter
of 2004, filed on November 8, 2004.
November 18, 2004, Form 8-K
Soon after filing the November 8 Form 10-Q, BearingPoint
management discovered that the form had overstated its
accounts receivable by $92.9 million and understated unbilled
MATRIX CAPITAL v. BEARINGPOINT 27
revenue by the same amount. The company filed a Form 10-
Q/A on November 18, 2004, to correct that error but other-
wise affirmed the November 8, 2004, announcement that the
company had net income of $11.9 million. BearingPoint’s net
income that quarter was actually $4.5 million, and plaintiffs
allege that defendants either knew or were reckless with
respect to the financial information in the amended third quar-
ter financial form.9
While the recently discovered large error lends some addi-
tional weight to an inference of scienter, the Form 10-Q/A
also contained a disclosure indicating that BearingPoint offi-
cials suspected additional, serious internal control deficien-
cies. Specifically, BearingPoint’s disclosure called into
question its ability to timely record, process, summarize, and
report financial information given internal controls in place as
of September 30, 2004. As discussed above, under these cir-
cumstances, the disclosure made about internal control defi-
ciencies lends some weight to the inference that defendants
were not acting with scienter but rather were endeavoring in
good faith to inform investors of their internal control and
financial reporting problems. We decline to conclude that the
inference of recklessness is at least as likely as the inference
that BearingPoint agents (including Falcone) were negligent
or otherwise non-culpable with respect to the accuracy of the
net income reported.
December 16, 2004, Form 8-K
Plaintiffs also allege that the December 16, 2004, Form 8-
K was misleading; it omitted to inform investors that Bearing-
Point had overstated net income during the first three quarters
of 2004. But plaintiffs do not allege that defendants knew the
9
Defendant Falcone was still Executive Vice President and Chief Finan-
cial Officer as of November 18, 2004, and authorized the Form 10-Q/A
at issue (along with Roderick McGeary, who was appointed to serve as
Chairman of the Board and Chief Executive Officer on an interim basis).
28 MATRIX CAPITAL v. BEARINGPOINT
amount of overstatements made in Forms 10-Q at the time the
December 16, 2004, Form 8-K was issued. Indeed, the com-
plaint recognizes that it took a great deal of time and
resources to produce the restatement of that financial informa-
tion. Moreover, the Form 8-K warned investors that Bearing-
Point had internal control deficiencies that threatened its
ability to "record, process, summarize and report financial
information." Current Report (Form 8-K), ex. 99.1, at 2 (Dec.
16, 2004). This disclosure suggests that defendants did not
knowingly or recklessly fail to provide investors with com-
plete information about prior misstatements.
Blazer and Falcone had already resigned from BearingPoint
by the time this December 16, 2004, statement was issued.
Defendants thus question whether plaintiffs have adequately
identified a corporate agent who acted with scienter in their
allegations. We have held that allegations of corporate fraud
"must allege facts that support a strong inference of scienter
with respect to at least one authorized agent of the corpora-
tion." Teachers’, 477 F.3d at 184 (emphasis added). A com-
plaint that alleges facts giving rise to a strong inference that
at least one corporate agent acted with the required state of
mind satisfies the PSLRA even if the complaint does not
name the corporate agent as an individual defendant or other-
wise identify the agent. Most often, the complaint and docu-
ments incorporated into the complaint by reference will
identify a corporate agent who acted with scienter. See Team-
sters Local 445 Freight Div. Pension Fund v. Dynex Capital
Inc., 531 F.3d 190, 195 (2d Cir. 2008). But the particularity
demanded under the PSLRA requires only that a plaintiff
allege sufficient particularized facts "that support a strong
inference of scienter with respect to at least one authorized
agent of the corporation." Teachers’, 477 F.3d at 184. As the
Seventh Circuit has explained,
[I]t is possible to draw a strong inference of corpo-
rate scienter without being able to name the individ-
uals who concocted and disseminated the fraud.
MATRIX CAPITAL v. BEARINGPOINT 29
Suppose General Motors announced that it had sold
one million SUVs in 2006, and the actual number
was zero. There would be a strong inference of cor-
porate scienter, since so dramatic an announcement
would have been approved by corporate officials
sufficiently knowledgeable about the company to
know that the announcement was false.
Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710
(7th Cir. 2008); see also Southland Sec. Corp. v. INSpire Ins.
Solutions Inc., 365 F.3d 353, 367 (5th Cir. 2004) (indicating
that corporate scienter might be alleged by asserting that a
corporate agent other than named individual defendants acted
with scienter). When plaintiffs also name individual defen-
dants, they must, of course, "allege facts that support a ‘strong
inference’ that each [individual] defendant acted with at least
recklessness in making the false statement." Teachers’, 477
F.3d at 184 (emphasis in original); see also Makor Issues &
Rights, 513 F.3d at 710 (distinguishing what is known as
"group pleading doctrine" from possibility that plaintiffs
might establish strong inference of corporate scienter without
being able to name individuals who concocted the fraud).
3.
Evaluating the "facts alleged, taken collectively," we
decline to conclude that a strong inference can be drawn that
Blazer, Falcone, or any other corporate agent acted with
scienter in issuing any of the challenged financial statements.
For each of the financial statements, plausible non-culpable
inferences are at least as likely as an inference that any defen-
dant acted knowingly or recklessly with respect to the mis-
statements. We therefore agree with the district court’s
scienter conclusions with respect to these statements.
30 MATRIX CAPITAL v. BEARINGPOINT
B.
Plaintiffs also challenge a Form 8-K filed March 17, 2005,
which they allege was misleading with respect to the magni-
tude of goodwill impairment charges that BearingPoint would
ultimately record for the quarter ending December 31, 2004
(reported January 31, 2006). Accounting standards consider
goodwill impaired if the fair value of a reporting unit becomes
lower than its carrying amount.10 Goodwill and Other Intangi-
ble Assets, Statement of Fin. Accounting Standards No. 142,
¶ 19 (Fin. Accounting Standards Bd. 2001) (J.A. 1992).
Goodwill must "be tested for impairment at least annually
using a two-step process that begins with an estimation of the
fair value of a reporting unit. This first step is a screen for
potential impairment, and the second step measures the
amount of impairment, if any." Id. at Summary. Accounting
standards further require goodwill impairment testing between
annual tests if circumstances change that are likely to produce
an impairment.
BearingPoint announced in a March 17, 2005, Form 8-K
that "During the fourth quarter of fiscal year 2004, the Com-
pany determined that a triggering event had occurred, which
caused the Company to perform a goodwill impairment test."
Current Report (Form 8-K), at 3 (Mar. 17, 2005). It explained:
As a result of the impairment test, on March 17,
2005, the Company determined that a material
charge will be taken as of December 31, 2004 as a
result of the impairment of its goodwill with respect
to the operations in its Europe, the Middle East and
Africa ("EMEA") segment. . . . We are unable at this
10
"The fair value of an asset (or liability) is the amount at which that
asset (or liability) could be bought (or incurred) or sold (or settled) in a
current transaction between willing parties." Goodwill and Other Intangi-
ble Assets, Statement of Fin. Accounting Standards No. 142, ¶ 23 (Fin.
Accounting Standards Bd. 2001).
MATRIX CAPITAL v. BEARINGPOINT 31
time to provide an estimate of the amount or range
of amounts of the impairment charge. However, . . .
the Company may include an impairment charge of
up to $230 million [without affecting its credit line].
The actual amount of the impairment charge may be
higher or lower than such amount. The Company
does not expect that the impairment charge will
result in future cash expenditures.
Id. Plaintiffs allege that this statement is misleading with
respect to the amount of the impairment charge. An April 20,
2005, Form 8-K later estimated that the impairment was $250
million to $400 million, and the 2004 Form 10-K and restate-
ment ultimately recorded a goodwill impairment charge of
$397.1 million.11 The March 17, 2005, statement is only mis-
leading in a material respect if BearingPoint agents had rea-
son to know that the goodwill impairment charge would be in
a range that would likely exceed $230 million.
Plaintiffs submit that BearingPoint agents must have
known that BearingPoint goodwill had been impaired by
nearly $400 million because BearingPoint had admitted to
conducting at least the first step of a goodwill impairment test
prior to March 17, 2005. Plaintiffs read the language of the
Form 8-K to go further to establish that the company had
already completed both steps of the goodwill impairment test
as of March 17, 2005. The Form 8-K stated that a triggering
event "caused the Company to perform a goodwill impair-
ment test" and implied that at least part of the impairment test
was completed. Id. ("As a result of the impairment test, on
March 17, 2005, the Company determined that a material
charge will be taken as of December 31, 2004.") This lan-
guage, in context, does not state that both steps of the good-
will impairment test were necessarily completed, and
11
This impairment charge is distinct from a separate $127.3 million
impairment charge taken during the six-month transition period ending
December 31, 2003.
32 MATRIX CAPITAL v. BEARINGPOINT
plaintiffs have not otherwise alleged that BearingPoint com-
pleted the second step of an impairment test by March 17,
2005.
But we agree with plaintiffs that the language of the Form
8-K suggests that BearingPoint had conducted at least the first
step of the goodwill impairment test prior to March 17, 2005.
Plaintiffs say that the first step of the test necessarily provides
the range of any impairment, even if it fails to provide the
exact amount of the impairment, which is calculated in the
second step of the analysis. Plaintiffs ask us to infer that at
least one BearingPoint agent thus acted with scienter in
approving the March 17, 2005, Form 8-K.
Defendants contend that the most reasonable inference
based on the allegations and documents incorporated by refer-
ence is not that BearingPoint officials acted with scienter, but
rather that they had insufficient information to disclose a
range of impairment.
Evaluating the allegations holistically, we conclude that
plaintiffs failed to allege facts sufficient to give rise to a
strong inference that any corporate agent acted with scienter
in making the March 17, 2005, statement. Even if the first
step of the impairment test yielded some sort of range as to
the amount of the impairment charge, we decline to infer
(based on the limited allegations and materials before us) that
corporate agents in fact knew or that it was obvious to them
that the goodwill impairment charge would be within a mean-
ingfully narrow range and likely to exceed $230 million. Fur-
ther, the company provided investors a range the following
month on April 20, 2005. It is certainly not dispositive that
BearingPoint eventually reported accurate information. But
we do consider that plaintiffs’ alleged motive—that Bearing-
Point was seeking to avoid a default on its credit agreements
—is weakened by the fact that BearingPoint clarified the
allegedly misleading statement one month later. The impair-
ment charge was based on events occurring in 2004, and nei-
MATRIX CAPITAL v. BEARINGPOINT 33
ther its range nor other relevant considerations were likely to
change between March and April 2005. On these facts, the
most likely inference is that corporate agents lacked sufficient
information to report a range of impairment until the April
disclosure. In any event, evaluating the complaint holistically,
non-culpable inferences are more likely than any inference
that BearingPoint agents knew that goodwill was impaired by
more than $230 million or recklessly disregarded information
indicating an impairment of that magnitude.
C.
For the foregoing reasons we agree with the district court’s
conclusion, in its initial opinion and in its order denying relief
under Rule 59(e), that plaintiffs failed in the operative com-
plaint to adequately allege scienter under the PSLRA pleading
requirements. The district court also dismissed plaintiffs’
claims under § 20(a) of the Exchange Act, which imposes lia-
bility on each person who "controls any person liable under
any provision of this chapter." 15 U.S.C. § 78t(a). Because the
complaint fails to withstand a Rule 12(b)(6) motion with
respect to the predicate violation of § 10(b), it also fails with
respect to the § 20(a) claims. Our agreement with the district
court’s analysis of the allegations in the operative complaint
does not dispose of this case, however, as we demonstrate
next.
IV.
We turn finally to the district court’s dismissal of the opera-
tive complaint with prejudice and its treatment of plaintiffs’
efforts to file a second amended complaint. Plaintiffs argue
that the district court erred by dismissing their complaint with
prejudice rather than granting leave to amend. Alternatively,
they argue that the district court erred when it did not grant
their Rule 59(e) motion to alter or amend the judgment in
order to allow them to file a second amended complaint. We
review both determinations for abuse of discretion. See Laber
34 MATRIX CAPITAL v. BEARINGPOINT
v. Harvey, 438 F.3d 404, 428 (4th Cir. 2006) (en banc); In re
PEC Solutions, 418 F.3d at 387.
In challenging the dismissal with prejudice, plaintiffs argue
that they filed an adequate motion for leave to amend their
complaint prior to dismissal by (1) requesting permission to
amend in a footnote in their memorandum opposing the
motions to dismiss, and (2) indicating in oral argument that
they were in a position to "significantly bolster [their] allega-
tion [of scienter]," J.A. 2008. Plaintiffs also argue that, irre-
spective of whether they properly moved to amend their
complaint, the district court erred in granting a dismissal with
prejudice because the court failed to make a necessary deter-
mination: a dismissal that operates with prejudice is warranted
only when the trial court determines that "the allegation of
other facts consistent with the challenged pleading could not
possibly cure the deficiency.’" Belizan v. Hershon, 434 F.3d
579, 583 (D.C. Cir. 2006) (quoting Firestone v. Firestone, 76
F.3d 1205, 1209 (D.C. Cir. 1996)); see also Ostrzenski v. Sei-
gel, 177 F.3d 245, 252-53 (4th Cir. 1999) (noting that a plain-
tiff should have "every opportunity to cure a formal defect in
[a] pleading"); Eminence Capital, LLC v. Aspeon, Inc., 316
F.3d 1048, 1052 (9th Cir. 2003) (suggesting that these princi-
ples hold special force in the context of the PSLRA). Because
we conclude that the district court should have granted plain-
tiffs’ motion to vacate the judgment and allowed them to
amend their complaint, we decline to decide whether the court
erred in refusing to allow an amendment earlier in the pro-
ceedings.
After the district court dismissed their claims with preju-
dice, plaintiffs filed a motion to alter or amend the judgment
in order to allow them to amend their complaint. Thereafter,
plaintiffs lodged a proposed second amended complaint with
the district court, indicating they were "prepared to immedi-
ately file this pleading in the event the Court permits the filing
of an amended complaint." J.A. 2240. The district court
denied plaintiffs’ motion to alter or amend the judgment,
MATRIX CAPITAL v. BEARINGPOINT 35
thereby refusing to allow amendment of the complaint. The
court also struck the proposed second amended complaint
from the docket.
In Laber v. Harvey, 438 F.3d 404 (4th Cir. 2006), our en
banc court outlined the framework and standards for consider-
ing a post-judgment motion to amend a complaint. To begin
with, we noted that "[t]here is one difference between a pre-
and a post-judgment motion to amend: the district court may
not grant the post-judgment motion unless the judgment is
vacated pursuant to Rule 59(e) or [Rule] 60(b)." Id. at 427. "A
conclusion that the district court abused its discretion in deny-
ing a motion to amend, however, is sufficient grounds on
which to reverse the district court’s denial of a Rule 59(e)
motion." Id. at 428.
We made clear in Laber that "a post-judgment motion to
amend is evaluated under the same legal standard"—grounded
on Rule 15(a)—"as a similar motion filed before judgment
was entered." Id. Rule 15(a) directs that leave to amend shall
be freely given when justice so requires. Fed. R. Civ. P. 15(a).
This directive "gives effect to the federal policy in favor of
resolving cases on their merits instead of disposing of them on
technicalities." Laber, 438 F.3d at 426. Our court therefore
reads Rule 15(a) to mean that leave to amend should be
denied only when the amendment would be prejudicial to the
opposing party, there has been bad faith on the part of the
moving party, or amendment would be futile. Id. In Laber we
offered guidance for evaluating these factors. First, "[w]hether
an amendment is prejudicial will often be determined by the
nature of the amendment and its timing." Id. at 427. Second,
delay alone is an insufficient reason to deny a motion to
amend; however, when a post-judgment motion to amend is
made, "the further the case progressed before judgment was
entered, the more likely it is that the amendment will preju-
dice the defendant or that a court will find bad faith on the
plaintiff’s part." Id. Nothing in the PSLRA affects the stan-
36 MATRIX CAPITAL v. BEARINGPOINT
dards governing either the pre- or post-judgment amendment
of pleadings. See Belizan, 434 F.3d at 583-84.
In denying plaintiffs leave to amend, the district court
merely repeated the reasons it had previously offered for dis-
missing the operative complaint. The district court made no
determinations about prejudice, bad faith, or futility with
respect to the proposed second amended complaint. That
alone may constitute an abuse of discretion. See Foman v.
Davis, 371 U.S. 178, 182 (1962) ("[T]he grant or denial of an
opportunity to amend is within the discretion of the District
Court, but outright refusal to grant the leave without any justi-
fying reason appearing for the denial is not an exercise of dis-
cretion; it is merely abuse of that discretion and inconsistent
with the spirit of the Federal Rules"). Of course, a district
court’s "failure to articulate [its] reasons [for denying leave to
amend] does not amount to an abuse of discretion" so long as
its reasons "are apparent." In re PEC Solutions, 418 F.3d at
391. Here, however, the only reasons mentioned by the dis-
trict court—those reasons the court had previously given for
dismissing the operative complaint with prejudice—did not
justify denying plaintiffs post-judgment leave to amend.
The district court’s reiterated reasons largely appear to be
related to the bad faith factor. It expressed concern that "[t]his
case was filed nearly two and one half years ago, and [plain-
tiffs have] had more than ample opportunity to plead [their]
allegations with sufficiency." J.A. 2347. Plaintiffs, however,
were not responsible for any delay, and certain circumstances
worked to their disadvantage as they attempted to conclude
their work on a complaint. After the district court appointed
plaintiffs as lead plaintiffs on July 26, 2005, the court ordered
them to file an amended complaint by October 7, 2005, based
on BearingPoint’s representation that it expected to file its
delinquent 2004 Form 10-K and restatement by September
21, 2005. When BearingPoint realized that it would be unable
to meet the September 2005 target, it asked the district court
to extend the scheduling deadlines. The court refused, and
MATRIX CAPITAL v. BEARINGPOINT 37
plaintiffs were required to file their amended complaint on
October 7, 2005, without the benefit of critical information
not yet disclosed by BearingPoint. See In re BearingPoint,
525 F. Supp. 2d at 764 (describing 2004 Form 10-K and
restatement as "long overdue"). After BearingPoint filed its
2004 Form 10-K and restatement on January 31, 2006, plain-
tiffs, with leave of court, promptly filed a first amended com-
plaint on March 10, 2006. BearingPoint and the individual
defendants filed motions to dismiss on March 31, 2006, and
the parties filed supporting briefs in accordance with a sched-
ule set by the court. The motions to dismiss were under con-
sideration by the district court until March 23, 2007, when the
court, on its own initiative, stayed the case pending the
Supreme Court’s decision in Tellabs.
After the Tellabs decision in late June 2007, the district
court lifted the stay, ordered and received briefing on the
impact of Tellabs on the motions to dismiss, heard oral argu-
ment, and dismissed the operative complaint on September
12, 2007. Thus, the case had only been reactivated for a little
over two months when the district court dismissed it with
prejudice. Nothing in the case history suggests that plaintiffs
were responsible for any of the delay or wasted any opportu-
nity to plead with the required specificity.
The district court also faulted plaintiffs for failing to file a
formal motion to amend and said that plaintiffs did not iden-
tify additional allegations of scienter at oral argument on the
motions to dismiss. Here, the district court’s rationale does
not take into account that the controlling decision, Tellabs,
was both new and challenging. Tellabs was meant to resolve
the disagreement among the circuits about how competing
inferences should be evaluated in deciding whether allega-
tions give rise to a strong inference of scienter. Tellabs, of
course, provided instruction, but when the motions in this
case were argued, lawyers and courts alike were just begin-
ning to explore how to follow Tellabs’ instructions—
38 MATRIX CAPITAL v. BEARINGPOINT
instructions that do not generate easy conclusions. See Tel-
labs, 551 U.S. at 322-24.
Against this backdrop, the district court, near the beginning
of oral argument on the motions to dismiss, asked plaintiffs’
counsel whether he would offer additional allegations with
respect to scienter if the court said at the end of the hearing,
"You don’t have it." J.A. 2006. Plaintiffs’ counsel replied that
he would proceed to explain why he believed the current alle-
gations were sufficient, but that he was in a position to "sig-
nificantly bolster" the allegations. J.A. 2008. Also, in their
memorandum that was before the district court, plaintiffs had
asked that amendment be permitted if the court concluded that
the complaint was insufficient. Plaintiffs’ counsel’s strategy
of not submitting a formal motion to amend and instead argu-
ing that the operative complaint was adequate can, of course,
be questioned. Nevertheless, the strategy does not in any way
amount to bad faith, and it did not provide the district court
with a basis for declining to examine the additional allega-
tions offered in connection with the Rule 59(e) motion to set
aside the judgment to permit an amended pleading.
The district court did not consider whether defendants
would be prejudiced if plaintiffs were granted leave to amend,
and we see no basis for a finding of prejudice. Plaintiffs sim-
ply seek to add specificity to scienter allegations in a situation
where defendants are aware of the circumstances giving rise
to the action. Edwards v. City of Goldsboro, 178 F.3d 231,
243 (4th Cir. 1999) (noting that merely adding specificity to
allegations generally does not cause prejudice to the opposing
party); Laber, 438 F.3d at 427; see also Davis v. Piper Air-
craft Corp., 615 F.2d 606, 613 (4th Cir. 1980) ("Because
defendant was from the outset made fully aware of the events
giving rise to the action, an allowance of the amendment
could not in any way prejudice the preparation of defendant’s
case."). Moreover, in this case the amendment would occur
while discovery is stayed pursuant to the PSLRA, 15 U.S.C.
§ 78u-4(b)(3)(B).
MATRIX CAPITAL v. BEARINGPOINT 39
The district court also failed to examine whether amend-
ment of the operative complaint would have been futile.
While we reach no conclusion as to whether the proposed sec-
ond amended complaint satisfies the scienter pleading
requirements, we believe that the allegations added to that
complaint "changed the analysis [that ought to have been]
conducted by the district court." See Steinburg v. Chesterfield
County Planning Comm’n, 527 F.3d 377, 390 (4th Cir. 2008).
Specifically, the proposed amended complaint added alle-
gations relating to the time frame in which red flags became
obvious to Blazer and Falcone; it alleges that OneGlobe prob-
lems "were well known and frequently discussed by the Com-
pany’s senior accounting and executive staff beginning in
early 2004. Defendant Blazer, in particular, was a party to
those discussions." J.A. 2278 (emphasis added). Moreover,
senior employees, including the communications and content
group leader and the public services group leader, refused to
sign off on financial statements for their respective segments
during the second and third quarters of 2004 "because it was
known that the financial data was not accurate due to the
problems associated with OneGlobe." J.A. 2279. Blazer and
Falcone approved financial reports for those quarters notwith-
standing that senior employees had refused to sign off on the
same statements—refusals that allegedly alerted Blazer and
Falcone to concerns about the accuracy of the statements.
These additional allegations, which the district court did
not consider, appear to weigh in favor of an inference that
Blazer and Falcone (and thus BearingPoint) acted with
scienter. The allegations, as well as others added by plaintiffs
to the proposed amended complaint, could therefore affect the
analysis of whether plaintiffs can satisfy the heightened plead-
ing requirements for scienter under the PSLRA.12
12
We recognize that the allegations added to any amended complaint
filed on remand will, in the event of a motion to dismiss, require a fresh
look at whether all of the complaint’s allegations, viewed holistically,
establish a strong inference of scienter. None of the analysis in part III of
this opinion will preclude this fresh look.
40 MATRIX CAPITAL v. BEARINGPOINT
Because (1) plaintiffs did not act in bad faith, (2) their fil-
ing of an amended complaint would not prejudice defendants,
and (3) amendment would not be futile, the district court
abused its discretion in denying plaintiffs’ Rule 59(e) motion
to alter the judgment in order to allow an amended complaint.
We emphasize that our decision today is not in any way
meant to detract from the district court’s conscientious and
thorough work in this case.
V.
For the reasons stated, we agree with the district court’s
determination that the allegations in the operative complaint
do not give rise to a strong inference of scienter. We neverthe-
less reverse the district court’s November 19, 2007, order
denying plaintiffs’ Rule 59(e) motion to alter or amend the
judgment for the purpose of allowing plaintiffs leave to file an
amended complaint. The judgment is vacated, and the case is
remanded. After remand the district court will allow plaintiffs
to file an amended complaint against the non-debtor defen-
dants within a reasonable time to be determined by the district
court. In addition, plaintiffs may after remand take action,
consistent with bankruptcy law and procedure, with respect to
their claims against BearingPoint, now a chapter 11 debtor.
ORDER REVERSED,
JUDGMENT VACATED,
AND CASE REMANDED
KING, Circuit Judge, concurring in the judgment:
Although I commend my good friend Judge Michael for his
carefully crafted opinion in this case, I write separately to
explain my concurrence in the judgment. His opinion for the
panel majority reverses the district court’s denial of the plain-
tiffs’ request to alter or amend its judgment dismissing their
first amended complaint (the "FAC"). As a result, the major-
MATRIX CAPITAL v. BEARINGPOINT 41
ity today vacates the court’s Rule 12(b)(6) dismissal for fail-
ure to plead scienter, and remands so that the plaintiffs can
amend the FAC. In my view, the FAC sufficiently alleges
scienter, and I would reverse the district court on that basis.
Although I would remand for further proceedings on the FAC,
I concur in the judgment.
I.
A.
The FAC alleges two claims against the defendants: first,
a violation of § 10(b) of the Securities Exchange Act of 1934
(the "Act"), 15 U.S.C. § 78j(b), as well as SEC Rule 10b-5,
17 C.F.R. § 240.10b-5 (the "§ 10(b) claim"); and second, a
violation of § 20(a) of the Act, 15 U.S.C. § 78t(a) (the
"§ 20(a) claim"). To be legally sufficient, a § 10(b) claim
must allege, inter alia, scienter. See Stoneridge Investment
Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S.
Ct. 761, 768 (2008). As the panel majority explains, the reso-
lution of this appeal turns on the scienter element.*
Significantly, the Private Securities Litigation Reform Act
of 1995 (the "PSLRA") "impose[d] heightened pleading
requirements" for scienter in § 10(b) actions. Merrill Lynch,
Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006).
Pursuant thereto, a plaintiff is obliged to "state with particu-
larity facts giving rise to a strong inference that the defendant
acted with the required state of mind." 15 U.S.C. § 78u-
*Section 10(b) of the Act and SEC Rule 10b-5 together serve "to pro-
tect the integrity of the market in securities and prohibit fraud in connec-
tion with the purchase or sale of a security." Cozzarelli v. Inspire Pharms.,
Inc., 549 F.3d 618, 623 (4th Cir. 2008). Section 20(a) imposes liability on
a person who "controls any person liable under any provision of this chap-
ter." 15 U.S.C. § 78t(a). Because a plaintiff must successfully allege a
predicate violation of the Act in order to proceed under § 20(a), failure of
the scienter allegations of the § 10(b) claim is fatal to both claims of the
FAC.
42 MATRIX CAPITAL v. BEARINGPOINT
4(b)(2). The Supreme Court has further refined that standard,
requiring a § 10(b) claim to allege facts giving rise to a "co-
gent and compelling" inference of scienter that is "strong in
light of other explanations." Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 324 (2007). Like the district court,
the majority concludes that, under Tellabs, the FAC failed to
sufficiently allege scienter in the § 10(b) claim, rendering
both of the plaintiffs’ claims legally insufficient. As explained
below, I disagree.
B.
1.
In evaluating whether a § 10(b) claim should be dismissed
under Federal Rule of Civil Procedure 12(b)(6) for failure to
sufficiently plead scienter, we proceed according to the fol-
lowing analysis: first, as with any Rule 12(b)(6) motion, we
accept the factual allegations of the complaint as true; second,
we assess the complaint "in its entirety," including any exhib-
its incorporated by reference; and third, we take into account
any "plausible opposing inferences." Tellabs, 551 U.S. at 322-
23; see also Pub. Employees Ret. Ass’n v. Deloitte & Touche
LLP, 551 F.3d 305, 312 (4th Cir. 2009). We are further
obliged, in the words of the Supreme Court, to "assess all the
allegations holistically," which requires us to "take[ ] collec-
tively" the allegations in the complaint and refrain from "scru-
tiniz[ing] each allegation in isolation." Tellabs, 551 U.S. at
326.
After carefully weighing the plausible inferences that flow
from the allegations of the § 10(b) claim, we may only reverse
the dismissal thereof if "a reasonable person would deem the
inference of scienter cogent and at least as compelling as any
opposing inferences one could draw from the facts alleged."
Tellabs, 551 U.S. at 324. The inference that the defendants
acted with scienter "need not be irrefutable, i.e., of the
smoking-gun genre, or even the most plausible of competing
MATRIX CAPITAL v. BEARINGPOINT 43
inferences." Id. (internal quotation marks omitted). Rather, an
inference of scienter need only be "cogent and compelling,
thus strong in light of other explanations." Id. In my view, a
reasonable person would readily conclude that the allegations
of the § 10(b) claim, viewed holistically, create an inference
of scienter at least as compelling as any opposing inferences
— including the possibility that the defendants were "merely
negligent." Ante at 25.
2.
As the Supreme Court has explained, "scienter" is the "in-
tention ‘to deceive, manipulate, or defraud.’" Tellabs, 551
U.S. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S.
185, 194 & n.12 (1976)). Importantly, scienter may "be estab-
lished by a showing of recklessness." Ottmann v. Hanger
Orthopedic Group, Inc., 353 F.3d 338, 343 (4th Cir. 2003). In
the context of a § 10(b) claim, we have defined recklessness
as behavior that is
so highly unreasonable and such an extreme depar-
ture from the standard of ordinary care as to present
a danger of misleading the plaintiff to the extent that
the danger was either known to the defendant or so
obvious that the defendant must have been aware of
it.
Id. (internal quotation marks omitted); see also Deloitte &
Touche, 551 F.3d at 313.
The FAC paints a clear picture of deceit, manipulation,
fraudulent behavior, and recklessness, by alleging, inter alia,
the following:
• "[T]he defendants employed devices, schemes
and artifices to defraud," and engaged in prac-
tices that "operated as a fraud and deceit upon the
44 MATRIX CAPITAL v. BEARINGPOINT
purchasers of BearingPoint’s securities," J.A. 396
¶ 147 (emphasis added);
• "The accounting improprieties were not the result
of simple malfeasance or negligence" but "of, at
a minimum, gross recklessness," id. at 291 ¶ 6
(emphasis added);
• By placing employees with "no competence or
experience" into management positions, Bearing-
Point’s conduct, "at a minimum, constitute[d]
gross recklessness," id. at 294 ¶ 8 (emphasis
added);
• BearingPoint’s "utter lack of accounting controls
also emboldened other acts of deliberate fraud,"
including, inter alia, false billings, id. at 297 ¶ 14
(emphasis added); and
• "At least fifteen former senior managers . . . were
terminated as a result of the accounting fraud,"
id. at 297 ¶ 15 (emphasis added).
Under the heading "Scienter Allegations," the FAC further
particularizes its allegations of fraud, manipulation, deceit,
and recklessness, inter alia, as follows:
• BearingPoint made substantial restatements and,
due to a massive write-down in goodwill, "went
from initially reporting a profit in 2004 to report-
ing a half-billion [dollar] loss, a staggering
financial reversal," J.A. 307 ¶ 40-41;
• "[T]he defendants knew that the Company’s sys-
tems of internal control were essentially non-
existent or, at a minimum, dysfunctional," such
that financial reports were neither accurate nor
reliable, id. at 307 ¶ 42;
MATRIX CAPITAL v. BEARINGPOINT 45
• BearingPoint officials "acknowledged pervasive
and severe defects in its internal accounting con-
trol systems," due to inadequate communication,
training, and management controls, id. at 310
¶ 45;
• An investigation confirmed that BearingPoint
"was plagued with corrupt management and lax
internal controls," which provided "a perfect
springboard" for false financial reporting, id. at
310 ¶ 46;
• The defendants "knew, or recklessly disre-
garded," that deficiencies in internal controls
would lead to materially misstated financial
reports, because OneGlobe problems "permeated
[its] entire business," id. at 311-12 ¶¶ 53;
• An improper "tone at the top" regarding financial
reporting matters cultivated a "corrupt culture" at
BearingPoint, id. at 317 ¶ 67; and
• Consultants "discovered gross accounting
abuses," with one consultant reporting that "every
single contract that he reviewed . . . w[as] [mate-
rially] incorrect with regard to revenue recogni-
tion," id. at 322 ¶ 78.
Considering the allegations of the FAC holistically, a com-
pelling inference emerges: the defendants acted fraudulently,
or at least recklessly. Viewed in the proper light, the FAC
demonstrates that BearingPoint was plagued with corrupt
management and lax internal controls, which allowed for the
cultivation of fraudulent and reckless conduct. The FAC
alleges that senior management perpetrated fraud by placing
"tremendous pressure" on its employees to attain certain
reporting goals, and it "actively encouraged" them to falsify
data to achieve these goals. J.A. 310 ¶ 47. More specifically,
46 MATRIX CAPITAL v. BEARINGPOINT
BearingPoint senior managers "directed the falsification of
utilization rates [a key metric used by investors in assessing
growth] so that internal reporting goals could be met," which
was readily accomplished by overriding BearingPoint’s
"weak (and largely non-functioning) internal controls." Id. at
311 ¶ 49. These allegations are bolstered by specific examples
of fraudulent misrepresentations in BearingPoint’s monthly,
quarterly, and annual reports; the termination or resignation of
several management-level officials, including former CEO
Blazer and former CFO Falcone, "as a result of the accounting
fraud," id. at 297 ¶ 15; and an investigation of BearingPoint
by the SEC. Furthermore, despite BearingPoint’s specializa-
tion in systems integration, its own accounting system inte-
gration was a spectacular failure. Viewed holistically, the
inferences of fraud and recklessness that flow from the FAC
are compelling.
Furthermore, as the Supreme Court recognized in Tellabs,
"motive can be a relevant consideration" with respect to the
scienter inquiry, and "personal financial gain may weigh
heavily in favor of a scienter inference," depending on "the
entirety of the complaint." 551 U.S. at 325. The FAC speci-
fied the motive for the BearingPoint officials’ conduct, alleg-
ing that, during the relevant period, the company
"complete[d] substantial private offerings of BearingPoint
securities of at least $450 million." J.A. 323 ¶ 79. Indeed,
"[h]ad the fraud alleged herein been timely and fully dis-
closed[,] BearingPoint would not have been able to complete
these offerings." Id. Although "motivations to raise capital . . .
are common to every company," Cozzarelli v. Inspire
Pharms., Inc., 549 F.3d 618, 627 (4th Cir. 2008), in our holis-
tic analysis of the FAC, the motive of personal financial gain
renders the inference of scienter even more compelling.
C.
1.
The majority predicates its ruling, in part, on its view that
the FAC fails to create a sufficiently compelling inference
MATRIX CAPITAL v. BEARINGPOINT 47
that the defendants knew or must have been aware of the mis-
statements and reporting inaccuracies. For example, the
majority observes that the inferential weight attributable to the
2004 reporting errors can only support an allegation of
scienter "in the context of BearingPoint’s financial position,"
implying that its revenue stream was so substantial that its
officials neither knew nor were aware of the misstatements of
income. Ante at 19. Put simply, however, I believe that Bear-
ingPoint’s reporting discrepancies deserve greater weight than
my good colleagues allow. BearingPoint initially reported net
income of around $28.7 million for the first three quarters of
2004, when in fact it had experienced a net loss during those
quarters of almost $35 million, as disclosed by its April 20,
2005 Form 8-K restatement. Even measured against Bearing-
Point’s revenues of more than $800 million, an overstatement
of $63.7 million — specifically when it turns profits into
losses — is hardly a trivial sum. Such a discrepancy creates
a compelling inference that BearingPoint officials knew or
must have been aware of the alleged reporting errors. Cf.
Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (conclud-
ing that magnitude of write-offs supported "strong inference
of recklessness," and therefore scienter).
Notwithstanding the significant discrepancies of the restate-
ments, the FAC yet adequately alleges that BearingPoint offi-
cials, including Blazer and Falcone, knew or must have been
aware of the inaccurate financial reporting and the sheer enor-
mity of the company’s internal failures. See, e.g., J.A. 396
¶ 147 (indicating that "[e]ach of the defendants employed
devices, schemes and artifices to defraud, while in possession
of material adverse non-public information and each of them
engaged in acts, practices, and a course of conduct . . . to
assure investors of BearingPoint’s value and performance and
continued substantial growth" (emphasis added)); id. at 313
¶ 56 (alleging that errors appeared in BearingPoint’s monthly,
quarterly, and annual reports, which were "reviewed by
[Blazer and Falcone]"); id. at 314 ¶ 58 (indicating that Blazer
had spoken to a former executive vice president and thus "was
48 MATRIX CAPITAL v. BEARINGPOINT
well aware of the material accounting errors"); id. at 317 ¶ 66
(alleging that a former BearingPoint managing director indi-
cated that OneGlobe problems were "openly discussed"
among management); id. at 315 ¶ 59 (explaining that "[e]ach
of the defendants had . . . contemporaneous knowledge or
recklessly disregarded, that the goodwill associated with
[BearingPoint’s] acquisitions were materially misstated"
(emphasis added)).
Indeed, I am unable to conclude that the absence of a spe-
cific timeline or similar allegations renders the inference of
scienter any less compelling than other possible inferences.
See Institutional Investors Group v. Avaya, Inc., 564 F.3d
242, 269 (3d Cir. 2009) (concluding that Tellabs analysis
"will ultimately rest not on the presence or absence of certain
types of allegations but on practical judgment about whether,
accepting the whole factual picture painted by the Complaint,
it is at least as likely as not that defendants acted with
scienter"); see also South Ferry LP v. Killinger, 542 F.3d 776,
784 (9th Cir. 2008) ("Tellabs counsels us to consider the total-
ity of the circumstances, rather than to develop separately
rules of thumb for each type of scienter allegation.").
2.
Finally, the defendants’ state of mind with respect to the
lack of appropriate internal controls bolsters the § 10(b)
claim’s allegation of recklessness resulting in a significant
misstatement of financial status. See Tellabs, 551 U.S. at 319
n.3 ("Every Court of Appeals that has considered the issue has
held that a plaintiff may meet the scienter requirement by
showing that the defendant acted intentionally or recklessly
. . . ." (emphasis added)). In this case, the plaintiffs have
alleged substantially more than internal mismanagement or
"merely that [the defendants’] statements turned out to be
wrong." Avaya, 564 F.3d at 269. Indeed, the § 10(b) claim
"proffer[s] an array of circumstantial evidence [that gives]
rise to a strong inference" that BearingPoint’s public misstate-
MATRIX CAPITAL v. BEARINGPOINT 49
ments and internal conduct were fraudulent, or were "at least
reckless, which is enough to survive a motion to dismiss
under the PSLRA." Id.; cf. Miss. Pub. Emples. Ret. Sys. v.
Boston Sci. Corp., 523 F.3d 75, 87 (1st Cir. 2009) ("[T]he fact
that the defendants published statements when they knew
facts suggesting the statements were inaccurate or mislead-
ingly incomplete is classic evidence of scienter." (internal
quotation marks omitted)).
II.
The PSLRA was designed to curb perceived abuses of the
§ 10(b) private action — "nuisance filings, targeting of deep-
pocket defendants, vexatious discovery requests, and manipu-
lation by class action lawyers." Merrill Lynch, Pierce, Fenner
& Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006) (internal quota-
tion marks omitted). Simply put, however, the FAC was not
in any context a nuisance filing, and this case is not character-
ized by any of the abuses enumerated above. In these circum-
stances, I would reverse the district court’s Rule 12(b)(6)
dismissal and remand for further proceedings on the FAC.
That said, I concur in the judgment.