ACA Financial Guaranty Corp. v. Advest, Inc.

United States Court of Appeals
For the First Circuit

No. 07-1367

ACA FINANCIAL GUARANTY CORPORATION; DRYDEN NATIONAL MUNICIPALS
FUNDS, INC.; JOHN MOORE; LOIS MOORE; SMITH BARNEY INCOME
FUNDS/SMITH BARNEY MUNICIPAL HIGH INCOME FUND; T. ROWE PRICE TAX-
FREE HIGH YIELD FUND, INC.,

Plaintiffs, Appellants,

DENISE MCKEOWN; ROBERT LUTTS,

Plaintiffs,

v.

ADVEST, INC.; KAREN SUGHRUE; GARRY CRAGO; JEAN CHILDS; PAULA
EDWARDS COCHRAN; G. DAVIS STEVENS, JR.; JULIA DEMOSS; WILLIAM R.
DILL; LESLIE A. FERLAZZO; JOYCE SHAFFER FLEMING; ERIC W. HAYDEN;
CATHERINE CHAPIN KOBACHER; ANNE MARCUS; CELESTE REID; RICHARD J.
SHEEHAN, JR.; JOSEPH SHORT; GREGORY E. THOMAS; SUSAN K. TURBEN;
DONALD W. KISZKA,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Lynch, Circuit Judge,
Campbell and Selya, Senior Circuit Judges.

Michael Tabb with whom Greene & Hoffman, P.C. was on brief for
appellants.
Scott A. Roberts with whom Sullivan Weinstein & McQuay, P.C.
was on brief for Karen Sughrue, Garry Crago, Jean Childs, Paula
Edwards Cochran, G. Davis Stevens, Jr., Julia DeMoss, William R.
Dill, Leslie A. Ferlazzo, Joyce Shaffer Fleming, Eric W. Hayden,
Catherine Chapin Kobacher, Anne Marcus, Celeste Reid, Richard J.
Sheehan, Jr., Joseph Short, Gregory E. Thomas, Susan K. Turben, and
Donald W. Kiszka.
Jonathan L. Kotlier with whom Nutter McClennen & Fish LLP was
on brief for Advest, Inc.

January 10, 2008
 LYNCH, Circuit Judge. Bond purchasers brought suit

alleging violations of federal securities laws in the May 1998

offering of bonds of Bradford College in Massachusetts. In January

2000, the college defaulted on its bond obligations. This suit was

brought ten months later. The district court dismissed the amended

complaint for failure to meet the pleading standards in the Private

Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No.

104-67, 109 Stat. 737. McKeown v. Advest, Inc. (McKeown I), 2006

WL 2974154 (D. Mass. Sept. 30, 2006). The district court also

denied the plaintiffs' motion to vacate dismissal and plaintiffs'

post-dismissal motion for leave to amend the complaint to address

pleading deficiencies identified by the court. McKeown v. Advest,

Inc. (McKeown II), 2006 WL 3842132 (D. Mass. Dec. 29, 2006).

The plaintiffs,1 purchasers and an insurer of Bradford

bonds sold in May 1998, claim they were misled by the Official

Statement accompanying the offering, which allegedly concealed

Bradford's dire financial straits and inability to pay the bond

debt. The allegations are against three sets of defendants: Joseph

Short and Donald Kiszka, the former President and Vice President of

1
The plaintiffs are investment funds Dryden National
Municipals Funds, Inc., Smith Barney Income Funds/Smith Barney
Municipal High Income Fund, and T. Rowe Price Tax-Free High Yield
Fund, Inc.; individual purchasers John Moore, Lois Moore, Denise
McKeown, and Robert Lutts; and ACA Financial Guaranty Corporation,
the bonds' insurer. McKeown and Lutts do not participate in this
appeal. In addition, while ACA Financial is an appellant, it
alleges only state-law claims not at issue here.

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Administration and Finance of the College, respectively (the

"Officers"); sixteen members of the College's Board of Trustees2

(the "Trustees"; together with the Officers, collectively the

"Bradford defendants"); and Advest, Inc., the underwriter

investment banking firm.

This is our first occasion to apply the Supreme Court's

recent guidance regarding the standards for pleadings under the

PSLRA in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct.

2499 (2007). Under Tellabs, certain principles are clear. Tellabs

has altered this circuit's prior standard, as set forth in In re

Credit Suisse First Boston Corp., 431 F.3d 36 (1st Cir. 2005), for

determining the sufficiency of pleadings of scienter in securities

fraud cases under Rule 12(b)(6). Tellabs affirms our case law that

plaintiffs' inferences of scienter should be weighed against

competing inferences of non-culpable behavior. See, e.g., Greebel

v. FTP Software, Inc., 194 F.3d 185, 203 (1st Cir. 1999). Tellabs

also affirms our rule that the complaint is considered as a whole

rather than piecemeal. See, e.g., In re Cabletron Sys., Inc., 311

F.3d 11, 40 (1st Cir. 2002). Finally, we hold that under the

reasoning of Tellabs, the PSLRA does not alter the liberal

2
The Trustee defendants are Karen Sughrue, Garry Crago,
Jean Childs, Paula Edwards Cochran, G. Davis Stevens, Jr., Julia
DeMoss, William R. Dill, Leslie A. Ferlazzo, Joyce Shaffer Fleming,
Eric W. Hayden, Catherine Chapin Kobacher, Anne Marcus, Celeste
Reid, Richard J. Sheehan, Jr., Gregory E. Thomas, and Susan K.
Turben. Short, as President, was also an ex officio member of the
Board.

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amendment policy of Federal Rule of Civil Procedure 15. And we

stress again our disinclination to require allowance of amendment

of complaints when there has been undue delay.

We affirm the district court's denial of the plaintiffs'

post-dismissal motion to allow a belated second motion to amend the

complaint.

Confining our analysis of the motion to dismiss to the

amended complaint, we affirm dismissal. Although one of the

allegations presents an arguable claim of misrepresentation as to

the college's budget for financial aid spending in the 1998-1999

academic year, the pleadings are insufficient to establish the

requisite scienter.

I.

In reciting the facts as alleged, we draw all reasonable

inferences in the plaintiffs' favor. Bradford was established as

a coeducational academy in 1803. After going through incarnations

as a female academy and junior college, Bradford became a

coeducational college in 1971. By the 1990s, Bradford became mired

in persistent cash flow problems. In spite of increasing

enrollment and a growing operational budget, Bradford had operating

deficits every year from 1989 to 1997. Boosting enrollment became

a critical goal for the college because tuition, room, board, and

other student fees constituted the largest source by far of its

operating revenues. Bradford's administration invested in

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educational and physical improvements designed to attract more

students, raise revenues, and attain financial stability. Bradford

financed these improvements in part with a $1.5 million loan from

the United States Department of Education and a $5.4 million bond

offering in 1995.

There were indications in 1997 that Bradford's fortunes

might be on the upswing. In spite of admitting fewer students than

in years past, the matriculation rate rose from 25% in 1996 to 34%

in 1997, and the number of full-time enrolled students rose sharply

in the fall of 1997. Meanwhile, the combined value of Bradford's

endowment and investment portfolio increased 66% between June 1995

and June 1997.

On February 6, 1998, the Trustees voted to approve

issuing another series of bonds both to help settle its debt and to

finance a project designed to increase Bradford's residential

capacity and, in turn, accommodate even higher levels of

enrollment. The Trustees approved the sale of $17.9 million worth

of bonds, which the college's underwriter Advest determined to be

the college's maximum bonding capacity. The bonds would be secured

solely by a lien on tuition receipts. By entering into the bond

transaction, Bradford committed to paying over $1.2 million a year

in debt service through 2028.

The Massachusetts Industrial Finance Agency ("MIFA")

issued the bonds rather than the college. The offering was on May

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1, 1998; the offering closed when the transaction documents were

executed twelve days later. An Official Statement, prepared by

Advest, Short, and Kiszka, and dated May 1, accompanied the

offering. The Official Statement outlined the mechanics of the

transaction and contained various qualifications and disclaimers.

For instance, under the heading "Bondowners' Risks," the Statement

provided that the college would be the sole source of repayment for

the bonds, and disclaimed any assurance "that revenues will be

realized by [Bradford] in the amount necessary to make payments .

. . sufficient to pay the debt service on the [bonds]." The

Statement noted specific risks to bondholders, including that the

college's failure to meet self-proclaimed future enrollment targets

could jeopardize its ability to support the debt. The Statement

also noted as risk factors the college's ability to control

"expenses, competition, costs, [and] the amount of financial aid

awarded to students." Both the cover sheet and the main text of

the Statement disclosed that Standard & Poor's had assigned a "BBB-

" rating to the bonds -- indicating the highest level of risk short

of junk bond status.

The Official Statement also incorporated a series of

appendices, the first of which was a document, signed by Short and

Kiszka, containing information about Bradford's operations. The

document specified that the college would use a portion of the

proceeds from the 1998 bonds to refund the 1995 bonds. Most of the

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remainder of the proceeds would be used to pay for renovations to

existing residence halls and construction of new residence

facilities. The renovations and construction were projected to

require two years and cost almost $15 million.

In addition to providing details about the proposed

project, this appendix also presented selected statistics

illustrating recent trends in enrollment, financial aid, the growth

of Bradford's endowment and investments, and fund-raising. A

section entitled "Accounting Matters" set out the college's

analysis of some of those numbers as well as targets for future

enrollment and financial aid levels. Significantly, the Official

Statement expressly advised that the college was not certifying the

accuracy of any "projections and opinions" in the Statement.

The next appendix contained Bradford's audited financial

statements for fiscal years 1994 to 1997. The remaining appendices

comprised various transaction documents including opinion letters

and a continuing disclosure agreement. The Official Statement

(including its appendices) is discussed in further detail below.

Bradford College failed to reach its benchmarks for

increased student enrollment and reduced financial aid awards for

the 1998-1999 school year, despite the promising numbers from 1997.

A revenue shortfall forced the college to rely on donations and

over $1.5 million from the endowment. In spite of the deficit, the

college granted financial aid to 90% of students in 1998-1999.

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Because Bradford itself funded about half of all financial aid,

such high aid levels represented a significant drain on the

college's cash flow.

Bradford College never recovered. President Short

resigned in the summer of 1998, to be followed by Kiszka a year

later. In November 1999, the college announced that it would cease

operations after the 1999-2000 school year. The 1998 bonds were

declared in default in January 2000.

II.

The plaintiffs brought suit in November 2000, alleging

federal securities law violations and various state-law claims.

The plaintiffs initially voluntarily dismissed the case without

prejudice under tolling agreements. In the interim, the college

went through bankruptcy proceedings.

The plaintiffs then filed the current action in July 2004

and amended their complaint in January 2005. The motion to dismiss

was addressed to this amended complaint.

The first count of the amended complaint alleges

violations of section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78j(b), and the concomitant Rule 10b-5, 17 C.F.R.

§ 240.10b-5, for material omissions and misrepresentations in the

Official Statement. Four of the allegations in the amended

complaint are pressed on appeal: that the Official Statement was

deceptive (1) by avoiding reference to Bradford's high rate of

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student attrition; (2) by misrepresenting projected enrollment

levels; (3) by falsely stating that the college intended to

contribute $1 million of its own funds toward completion of the

construction and renovation project; and (4) by including false

statements regarding projected financial aid levels for the 1997-

1998 and 1998-1999 academic years.3

The sequence of proceedings proves important to the legal

argument about further amendment of the complaint. Advest filed a

motion to dismiss the amended complaint in February 2005; the

Bradford defendants followed suit in March. The plaintiffs filed

their opposition on May 2, 2005, and the district court heard oral

argument on October 11, 2005. Almost a year after the hearing, on

September 30, 2006, the district court granted the motions to

dismiss the federal claims and declined to exercise supplemental

jurisdiction over the remaining state-law claims. McKeown I, 2006

WL 2974154, at *1, *7.

The plaintiffs did not immediately appeal, instead filing

simultaneous motions with the district court asking it to vacate

dismissal under Federal Rule of Civil Procedure 59(e) and to grant

plaintiffs leave to further amend the complaint under Rule 15(a).

3
Count two alleged that the Bradford defendants, as
controlling persons of the college, violated section 20(a) of the
Securities Exchange Act, 15 U.S.C. § 78t(a). A third count alleged
a violation by Advest of section 12(a)(2) of the Securities Act of
1933, 15 U.S.C. § 77l. Finally, the amended complaint included
various securities and tort claims under Massachusetts law.

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A Proposed Second Amended Complaint was attached to the Rule 15(a)

motion. The plaintiffs argued that the district court erred in

dismissing without granting leave to amend the complaint to cure

pleading deficiencies pointed out by the district court. In

addition, they claimed that the dismissal should be vacated on the

basis of new evidence uncovered during a document review conducted

by plaintiffs' counsel in June 2005.

The district court denied the post-dismissal motions on

December 29, 2006. McKeown II, 2006 WL 3842132, at *1. The court

disagreed that evidence discovered in June 2005 could qualify as

new evidence warranting vacation of the judgment.4 Id. The court

pointed out that the plaintiffs made no effort to amend their

complaint after uncovering the "new" evidence and during the long

pendency of the motions to dismiss. Id. at *1 & n.3. Lastly, the

district court held that entry of judgment precluded jurisdiction

to consider the Proposed Second Amended Complaint. Id. at *1.

III.

The plaintiffs argue that the district court erred by

failing to apply the liberal amendment policy of Federal Rule of

Civil Procedure 15(a).

4
The plaintiffs on appeal have not argued that the
materials discovered in June 2005 constitute newly discovered
evidence justifying a grant of their Rule 59(e) motion. The
argument is thus waived. See United States v. Sacko, 247 F.3d 21,
24 (1st Cir. 2001).

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 The plaintiffs tie the Rule 59(e) issue to the denial of

the motion to amend. Review of the denial of the Rule 59(e) motion

is for "manifest abuse of discretion." Council of Ins. Agents &

Brokers v. Juarbe-Jiménez, 443 F.3d 103, 111 (1st Cir. 2006)

(quoting Binkley Co. v. E. Tank, Inc., 831 F.2d 333, 337 (1st Cir.

1987)) (internal quotation marks omitted); see also Venegas-

Hernandez v. Sonolux Records, 370 F.3d 183, 190 (1st Cir. 2004).

Rule 59(e), while it authorizes post-judgment motions to alter a

judgment, does not state what grounds would justify such an

alteration. See Fed. R. Civ. P. 59(e); 11 Wright, Miller & Kane,

Federal Practice and Procedure § 2810.1 (2d ed. 1995). District

courts enjoy considerable discretion in deciding Rule 59(e)

motions, subject to circumstances developed in the case law.

Venegas-Hernandez, 370 F.3d at 190. Correction of a clearly

established "manifest error of law" is among the grounds for a

valid Rule 59(e) motion. FDIC v. World Univ. Inc., 978 F.2d 10, 16

(1st Cir. 1992). A Rule 59(e) motion should not, however, "raise

arguments which could, and should, have been made before judgment

issued." Id. (quoting Harley-Davidson Motor Co. v. Bank of New

England, 897 F.2d 611, 616 (1st Cir. 1990)) (internal quotation

marks omitted). The "manifest error" that the plaintiffs allege

consists of the district court's dismissal of the amended complaint

without leave to amend. We turn to the motion to amend.

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 Rule 15(a) provides that a party may amend its pleading

with "the court's leave," and that "[t]he court should freely give

leave when justice so requires." Fed. R. Civ. P. 15(a). The rule

reflects a liberal amendment policy, O'Connell v. Hyatt Hotels of

P.R., 357 F.3d 152, 154 (1st Cir. 2004), but even so, the district

court enjoys significant latitude in deciding whether to grant

leave to amend. We defer to the district court's decision "if any

adequate reason for the denial is apparent on the record." LaRocca

v. Borden, Inc., 276 F.3d 22, 32 n.9 (1st Cir. 2002) (quoting Grant

v. News Group Boston, Inc., 55 F.3d 1, 5 (1st Cir. 1995)) (internal

quotation marks omitted). Grounds for denial include "undue delay,

bad faith or dilatory motive . . . repeated failure to cure

deficiencies by amendments previously allowed, undue prejudice to

the opposing party . . . [and] futility of amendment." Foman v.

Davis, 371 U.S. 178, 182 (1962).

Plaintiffs argue that these liberal standards remain

unaffected by the PSLRA. Defendant Advest posits that allowing

belated amendments would be "particularly inappropriate" in cases

governed by the PSLRA, citing In re Bristol-Myers Squibb Securities

Litigation, 228 F.R.D. 221, 229 (D.N.J. 2005), and In re Champion

Enterprises, Inc. Securities Litigation, 145 F. Supp. 2d 871, 872

(E.D. Mich. 2001). The circuit courts have expressed different

views, and we have not addressed the issue before. Compare Miller

v. Champion Enters., Inc., 346 F.3d 660, 692 (6th Cir. 2003)

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("[T]he purpose of the PSLRA would be frustrated if district courts

were required to allow repeated amendments to complaints filed

under the PSLRA."), with Belizan v. Hershon, 434 F.3d 579, 583-84

(D.C. Cir. 2006) (holding PSLRA does not alter operation of Rule

15(a)), and Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048,

1052 (9th Cir. 2003) (per curiam) (same).

We hold that the PSLRA does not itself modify the liberal

amendment policy of Rule 15(a).5 We agree with the D.C. Circuit

that "had the Congress wished to make dismissal with prejudice the

norm, and to that extent supercede the ordinary application of Rule

15(a), we would expect the text of the PSLRA so to provide."

Belizan, 434 F.3d at 584. The text of the Act neither purports to

affect Rule 15(a), nor does it require that all dismissals be with

prejudice. See, e.g., 15 U.S.C. § 78u-4(b)(3)(A) (requiring

dismissal for failure to meet the Act's pleading requirements, but

not specifying dismissal with prejudice). In the absence of a

legislative directive to the contrary, Rule 15 applies as in the

normal course. That is one of the lessons of Tellabs. Cf.

Tellabs, 127 S. Ct. at 2509 (applying Rule 12(b)(6) standard that

all factual allegations in a complaint must be accepted as true in

the securities fraud context "as with any motion to dismiss");

5
The PSLRA does impose a heightened pleading standard.
See 15 U.S.C. § 78u-4(b); Tellabs, 127 S. Ct. at 2504. This means
it overrides the general notice pleading requirement of Federal
Rule of Civil Procedure 8(a)(2). Credit Suisse, 431 F.3d at 46.

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Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002)

(applying usual Rule 12(b)(6) standard in PSLRA context).

Interpreting the PSLRA as constricting the operation of

Rule 15(a) would be contrary to the purposes of the Act. The PSLRA

serves "twin goals: to curb frivolous, lawyer-driven litigation,

while preserving investors' ability to recover on meritorious

claims." Tellabs, 127 S. Ct. at 2509. The heightened pleading

standard furthers the goal of deterring frivolous litigation by

erecting a significant hurdle for a plaintiff to clear before her

complaint can survive a motion to dismiss. A blanket rule that the

PSLRA modifies Rule 15(a) would tip the scales too far,

compromising plaintiffs' ability to have meritorious claims

presented in court. Cf. Eminence Capital, 316 F.3d at 1052

(holding that liberal amendment policy of Rule 15(a) should be

adhered to precisely because the PSLRA requires "an unprecedented

degree of specificity and detail"). To read the PSLRA to constrict

Rule 15(a) would disturb the legislative balance struck by the Act.

The number and nature of prior amendments to a complaint is

relevant as to any motion for leave to amend. To the extent that

Miller may embody a rule that the PSLRA modifies the operation of

Rule 15(a), however, we disagree.

The parties dispute whether the more restrictive standard

for post-judgment motions to amend under James v. Watt, 716 F.2d

71, 77-78 (1st Cir. 1983) (Breyer, J.), applies, or the usual Rule

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15(a) standard. Here, the formal motion was not made until after

dismissal. But the plaintiffs' opposition to the motions to

dismiss did at least conditionally request an opportunity to amend

"[i]n the event . . . that the [c]ourt does agree that the

Plaintiffs have stumbled over some of the pleading intricacies in

a federal securities action."

That does not win the day for the plaintiffs. Each case

will turn on its own circumstances. The district court had

abundant reason to deny the motion, however the request to amend is

characterized. This suit was originally filed six years before the

court's dismissal order and dismissed by the plaintiffs without

prejudice. The complaint was re-filed in July 2004 and amended in

January 2005. The defendants moved to dismiss in early 2005,

identifying deficiencies in the amended complaint. The plaintiffs

could have moved to amend then, but did not. Nor did they move to

amend in June 2005, after plaintiffs' counsel claimed they had

uncovered "new" evidence in a document review related to the

college's bankruptcy proceedings.6 To continue the litany, the

plaintiffs did not move to amend at oral argument on October 11,

6
The "new" evidence was a letter written by one of the
Trustee defendants that inspired plaintiffs' counsel "to review all
the records we possessed regarding the May 1998 Trustee's meeting
and the budget cuts enacted as a result of that meeting in a new
light." This review of materials already in the plaintiffs'
possession provided the basis for additional allegations in the
Proposed Second Amended Complaint. Even if this material were new,
it still would not justify the delay.

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2005, or before the court's ruling on September 30, 2006.

Plaintiffs took no action to add new allegations even though they

knew what they would add if they amended.

The plaintiffs argue that in the end, they were entitled

to wait and see if their amended complaint was rejected by the

district court before being put to the costs of filing a second

amended complaint. They claim this would promote efficiency in the

judicial system. Plaintiffs have it exactly backwards -- their

methodology would lead to delays, inefficiencies, and wasted work.

The plaintiffs do not get leisurely repeated bites at the apple,

forcing a district judge to decide whether each successive

complaint was adequate under the PSLRA. Plaintiffs may not, having

the needed information, deliberately wait in the wings for a year

and a half with another amendment to a complaint should the court

hold the first amended complaint was insufficient. Such an

approach would impose unnecessary costs and inefficiencies on both

the courts and party opponents. This court expressly disapproved

a similar tactic in James, and we do so again. See id. at 78

("Such a practice would dramatically undermine the ordinary rules

governing the finality of judicial decisions, and should not be

sanctioned in the absence of compelling circumstances." (citing 6

Wright & Miller, Federal Practice and Procedure § 1489 (1971))).

It is black-letter law that "[r]egardless of the context,

the longer a plaintiff delays, the more likely [a] motion to amend

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will be denied, as protracted delay, with its attendant burdens on

the opponent and the court, is itself a sufficient reason for the

court to withhold permission to amend." Steir v. Girl Scouts of

the USA, 383 F.3d 7, 12 (1st Cir. 2004) (citing Acosta-Mestre v.

Hilton Int'l of P.R., Inc., 156 F.3d 49, 52-53 (1st Cir. 1998));

see also Palmer v. Champion Mortgage, 465 F.3d 24, 30-31 (1st Cir.

2006) (approving rejection of request for leave to amend made

fifteen months after commencement of action on the basis of

previously available information). There was no error.

IV.

A. PSLRA Pleading Requirements

We evaluate de novo whether the first amended complaint

meets the pleading requirements imposed by the PSLRA. Aldridge,

284 F.3d at 78. We may affirm "on any independently sufficient

ground." Ezra Charitable Trust v. Tyco Int'l, Inc., 466 F.3d 1, 6

(1st Cir. 2006) (quoting Badillo-Santiago v. Naveira-Merly, 378

F.3d 1, 5 (1st Cir. 2004)) (internal quotation marks omitted).

Under the PSLRA, as with any motion to dismiss under Rule

12(b)(6), we accept well-pleaded factual allegations in the

complaint as true and view all reasonable inferences in the

plaintiffs' favor. Aldridge, 284 F.3d at 78; Greebel, 194 F.3d at

195-96; see also Tellabs, 127 S. Ct. at 2509. The Supreme Court

has recently altered the Rule 12(b)(6) standard in a manner which

gives it more heft. In order to survive a motion to dismiss, a

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complaint must allege "a plausible entitlement to relief." Bell

Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1967-69 (2007); Rodríguez-

Ortiz v. Margo Caribe, Inc., 490 F.3d 92, 95 (1st Cir. 2007). The

Court's formulation revised language from Conley v. Gibson, 355

U.S. 41 (1957), that a complaint should not be dismissed unless "it

appears beyond doubt that the plaintiff can prove no set of facts"

entitling him to relief. Id. at 45-46. Of course, plaintiffs

alleging securities fraud must also meet the Rule 9(b) standard for

pleading fraud with particularity.7

For a complaint to state a claim for securities fraud

under section 10(b) and Rule 10b-5, it must plead six elements:

(1) a material misrepresentation or omission; (2) scienter, or a

wrongful state of mind; (3) a connection with the purchase or sale

of a security; (4) reliance; (5) economic loss; and (6) loss

causation. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42

(2005).

The PSLRA requires plaintiffs' complaint to "specify each

statement alleged to have been misleading [and] the reason or

reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1).

Further, "if an allegation regarding the statement or omission is

7
The PSLRA is consistent with this circuit's prior
application of Federal Rule of Civil Procedure 9(b) to securities
fraud actions, a standard which is "notably strict and rigorous."
Greebel, 194 F.3d at 193. Rule 9(b) requires, in relevant part,
that "a party must state with particularity the circumstances
constituting fraud or mistake." Fed. R. Civ. P. 9(b).

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made on information and belief, the complaint shall state with

particularity all facts on which that belief is formed." Id.

The PSLRA also separately imposes a rigorous pleading

standard on allegations of scienter. Scienter is "a mental state

embracing intent to deceive, manipulate, or defraud." Ernst &

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

In this circuit, a plaintiff may satisfy the scienter

requirement with a showing of either conscious intent to defraud or

"a high degree of recklessness." Aldridge, 284 F.3d at 82 (citing

Greebel, 194 F.3d at 198-201). A complaint alleging securities

fraud "shall, with respect to each [alleged] act or omission . . .

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) (emphasis added). "While under Rule 12(b)(6)

all inferences must be drawn in plaintiffs' favor, inferences of

scienter do not survive if they are merely reasonable, as is true

when pleadings for other causes of action are tested by motion to

dismiss under Rule 12(b)(6)." Greebel, 194 F.3d at 195.

Further, Tellabs confirms this court's existing rule from

Cabletron, 311 F.3d at 40, that scienter should be evaluated with

reference to the complaint as a whole rather than to piecemeal

allegations. Tellabs, 127 S. Ct. at 2509 ("The inquiry . . . is

whether all of the facts alleged, taken collectively, give rise to

a strong inference of scienter . . . ."). Tellabs also affirms our

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view, see, e.g., Ezra Charitable Trust, 466 F.3d at 11, that

competing inferences should be weighed against plaintiffs'

preferred interpretation of the facts. Tellabs, 127 S. Ct. at 2504

(holding that a court "must engage in a comparative evaluation; it

must consider, not only inferences urged by the plaintiff . . . but

also competing inferences rationally drawn from the facts

alleged"). While it may be unusual for courts to weigh competing

inferences from facts, Congress mandated this review in the PSLRA.

However, Tellabs has overruled one aspect of the rule

this court stated in Credit Suisse. Credit Suisse held that where

there were equally strong inferences for and against scienter, this

resulted in a win for the defendant. 431 F.3d at 49 ("Scienter

allegations do not pass the 'strong inference' test when, viewed in

light of the complaint as a whole, there are legitimate

explanations for the behavior that are equally convincing."). This

is no longer the law.

Tellabs held that a "strong inference" of scienter "must

be more than merely plausible or reasonable -- it must be cogent

and at least as compelling as any opposing inference of

nonfraudulent intent." 127 S. Ct. at 2504-05 (emphasis added). In

other words, where there are equally strong inferences for and

against scienter, Tellabs now awards the draw to the plaintiff.

127 S. Ct. at 2510 ("A complaint will survive . . . if . . . the

-21-
inference of scienter [is] cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.").

B. Application to the Factual Allegations

We apply these principles to the amended complaint's

allegations about four categories of misleading statements and

omissions in the Official Statement.

The amended complaint alleges that the Official Statement

was issued within the context of a serious financial crisis at

Bradford, and the defendants had motivation to conceal the crisis

so that they could continue to finance their operations. For

instance, the amended complaint alleges defendants were well aware

of the college's financial instability. The amended complaint

describes a meeting of the Board of Trustees on February 6, 1997,

a year before the Board approved the bond offering. At that

meeting, the Chair of the Board stated that the then-current cash

flow model "indicates that the College may be able to survive for

five more years. To stem cash bleeding, however, which would occur

in that period would be devastating to the faculty and staff in

terms of no salary increases and other cost cutting measures."

Kiszka, the college's chief financial officer, apparently rejoined

that this was too optimistic: "[T]here is a possibility of the

College surviving five years assuming more layoffs and no salary

increases, but [Kiszka] felt that it would be more like two or

three years. Looking at the bigger picture, layoffs and cutbacks

-22-
would be very disruptive and send a bad message." The amended

complaint alleged that the college took no steps to lay off

personnel or freeze salaries, which were necessary "[t]o stem cash

bleeding," because that would be "disruptive and send a bad

message." The amended complaint alleges that this reluctance to

"send a bad message" extended to the representations in the

Official Statement.

The amended complaint alleges that one trustee resigned

when the Board of Trustees initially voted in 1996 to approve

construction of new dormitories because he concluded that student

enrollment could not support the expansion.

Despite having implemented no widespread cost-cutting

measures and after a decade of budget deficits, the Bradford

defendants approved the issuance of the bonds. This in turn

obligated the college to incur an additional cash flow drain of

over $1.2 million annually through the year 2028. At the time, the

college's annual operating budget, excluding financial aid, was

$11.7 million. The amended complaint alleges that the ability to

meet this additional obligation was "dependent primarily upon two

factors: the College's level of student enrollment, and the degree

to which the College discounted its tuition revenues by funding

financial aid awards to students."

The plaintiffs' lead theory of misrepresentation was that

the college's ability to pay the bonds depended upon the school's

-23-
meeting its increased enrollment targets, which would substantially

increase the size of the student body. The Official Statement,

they allege, had several flaws: It was too optimistic when it said

the college believed it could meet its goals. It failed to

disclose available information suggesting that the college was

unlikely to meet its goals. And it fudged on the level of the

college's equity contribution to the project.

The plaintiffs' secondary theory was that even if the

college could increase its enrollment, this would not improve the

college's financial condition if it gave high financial aid to

reach this result. The plaintiffs concede the Official Statement

informed investors of this connection between enrollment and high

financial aid. The Statement contained the college's projections

that it would reduce financial aid, and said that its financial

plan called for reducing aid in the upcoming 1998-1999 academic

year to 28.8% of student income. The plaintiffs argue that the

district court erred in rejecting as immaterial the difference

between the projections in the Official Statement, what was in the

school's budget, and what actually happened.

We start with the allegations relevant to increased

enrollment targets.

-24-
 1. Attrition Rate

The amended complaint alleges that the Official Statement

misled investors by failing to refer to Bradford’s "severe,

long-standing problem with student attrition." The short answer is

that the Statement warned that the college’s ability to pay debt

service was "highly dependent upon tuition and fee revenues from

students," and that a failure "to attract and retain students in

sufficient numbers . . . could adversely affect the ability of [the

college] to make required payments on the Series 1998 Bonds." The

Official Statement also presented enough information to notify

investors that student attrition factored into the risk associated

with the bonds.

Tables in the Statement containing enrollment and

admissions statistics covering academic years 1993 to 1997 revealed

that the college enrolled new students each fall in numbers far

exceeding one-quarter of total enrollment.8 While some portion of

the additional number of incoming students might be attributable to

fluctuations in the number of transfer students and others not

enrolled in a traditional four-year program at the college, these

tables gave notice that some portion of the discrepancy would be

due to attrition.

8
The tables disclosed that in 1997, of the 584 full-time-
equivalent students at Bradford, 234 were new enrollees. The
percentage of incoming students to total students was thus roughly
40%. That ratio was 36% in 1996, 40% in 1995, 42% in 1994, and 38%
in 1993.

-25-
 The attrition rate at Bradford had, according to the

amended complaint, been "an extraordinary 60%" since 1989. The

amended complaint alleges that omitting that figure from the

Official Statement concealed the college’s inability to repay its

bond debt. The defense argues those figures may be derived from

the information provided. The plaintiffs argue that it is

impossible to calculate from the tables the alleged 60% attrition

rate. This may be true, but it is insufficient to make the other

statements misleading. The amended complaint does not explain why

omitting information about the precise attrition rate at Bradford

would mislead investors when more pertinent measures of the

college’s financial health are presented forthrightly in the

Statement.9

The Statement alerts investors that repayment of the bond

debt depended entirely on Bradford's revenues, and that like most

colleges, Bradford was "highly dependent upon tuition and fee

revenues from students." Student-generated revenue is, at any

given time, a function of total enrollment levels, not of

attrition. The Statement provided information about past and

current enrollment levels, and the amended complaint never disputes

9
An accrediting agency's evaluation of Bradford College
conducted in November 1998 produced the observation that
"[a]ttrition is of course a pre-eminent financial fact" at
Bradford. However, this observation was made long after the May
1998 date of the bond offering and proves nothing.

-26-
the accuracy of those numbers.10 Furthermore, the Statement

contained information on admissions trends that would allow a

potential investor to evaluate whether the college's enrollment

level was sustainable.

The college did not have a duty to disclose in the

Statement every possible material fact about its operations and

finances, so long as the disclosures that were made satisfied the

statute. Cf. Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.

1996) ("[A] corporation does not commit securities fraud merely by

failing to disclose all nonpublic material information in its

possession." (citing Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26

(1st Cir. 1987))). The Official Statement needed only disclose

enough accurate information and not omit pertinent information to

allow investors to make an informed decision about whether to

invest. It did so.

10
The amended complaint alleges that the Statement
concealed attrition over the course of each academic year by only
providing enrollment numbers for fall semesters. This is not true.
The Statement says that "Bradford College had 602 full- and part-
time students enrolled as of September 30, 1997. Spring 1998 full-
and part-time enrollment was 566 and full-time equivalent
enrollment was 547" (whereas full-time equivalent enrollment in
Fall 1997 was 584).

-27-
 2. Enrollment Projections

Again, on the theory that accurate enrollment projections

were key,11 the plaintiffs find fault with this passage from the

Official Statement:

As of April 3, 1998, applications received by
the College to date total 879, an increase of
more than 18% from April 3, 1997. The total
of 879 exceeds total applications received for
the fall 1997. The majority of increases have
been the traditional freshman application
pool.
Based on this increase in applications,
historic rates for conversion of applications
into enrollments, the number of applications
from freshmen and deposits received to date,
the College believes that it can reach its
goal of enrolling 225 new students for the
fall of 1998 . . . .

The plaintiffs do not challenge the facial accuracy of the

college's contemporaneous figures, but allege that the use of the

number of applications for the fall of 1998 was misleading for

several reasons.

The plaintiffs argue that because Bradford had begun

accepting standardized applications submitted over the internet,

11
We decline to adopt the defendants' argument that any
representations as to the college's "plans," "goals," and beliefs
about the future are not actionable as forward-looking optimistic
opinions. See Cabletron, 311 F.3d at 36. As we noted in Credit
Suisse, a statement of opinion may be considered factual in at
least two respects: "as a statement that the speaker actually
holds the opinion expressed and as a statement about the subject
matter underlying the opinion." 431 F.3d at 47 (citing Va.
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1095 (1991)).
Depending on circumstances, some statements of opinions or
estimates may qualify as false or misleading statements of fact.
Id.

-28-
this "artificially inflated the applications numbers." The goal of

225 new students in fall 1998 was allegedly unrealistic because

ultimately, the acceptance rate dropped and Bradford "had fewer

actual acceptances" for fall 1998 than the previous year. Finally,

the plaintiffs allege that by the date of the Official Statement,

the defendants knew that the number of students who had placed

deposits for fall 1998 "had declined by almost 20%."

These allegations fall short of establishing that the

enrollment projections were materially misleading at the time of

the Statement. A plaintiff may not plead "fraud by hindsight";

i.e., a complaint "may not simply contrast a defendant's past

optimism with less favorable actual results" in support of a claim

of securities fraud. Shaw v. Digital Equip. Corp., 82 F.3d 1194,

1223 (1st Cir. 1996). There is nothing in the amended complaint to

establish that the defendants were aware of facts, at the time they

made their predictions, that would have made those predictions

unreasonable, if they were unreasonable.

Even now there is no basis to conclude, from the

plaintiffs' premises, that the predictions were unreasonable. It

has not been demonstrated that accepting applications by internet

for the fall of 1998 would inflate the college's application

numbers or somehow lead to lower matriculation rates, or that the

defendants had any reason to think this. Similarly, while the

amended complaint, without giving specific numbers, quotes the

-29-
actual acceptance rate for fall 1998 and claims that Bradford "had

fewer actual acceptances [in fall 1998] than it had for Fall 1997,"

it does not allege in any detail how the defendants could have

forecast that outcome in May 1998.

The allegation regarding the drop in actual deposits, as

opposed to projected deposits, comes closer, but it does not allege

enough detail to satisfy the pleading standards of the PSLRA. The

amended complaint alleges there was a 20% year-over-year drop in

actual deposits as of May 1998, but does not "state with

particularity all facts on which that belief is formed." 15 U.S.C.

§ 78u-4(b)(1). The plaintiffs have not included details about how

they were able to identify the 20% figure, much less whether this

information was known to the defendants at the relevant time.

Standing alone, this is insufficient for an allegation of

securities fraud. It is true, as the plaintiffs argue, that the

PSLRA does not require plaintiffs to plead evidence. See

Cabletron, 311 F.3d at 33 (citing Cooperman v. Individual Inc., 171

F.3d 43, 48-49 (1st Cir. 1999); Shaw, 82 F.3d at 1225. But more

meat was needed on these bones.

3. Equity Contribution

The amended complaint alleges that the Official Statement

also skewed the school's future financial health by misrepresenting

Bradford's intentions regarding a planned equity contribution to

the construction and renovation project. The Statement, under the

-30-
heading of "Estimated Sources and Uses of Funds," said that a $1

million contribution of the college's own funds would be used for

the construction and renovation project.

The amended complaint alleges that at a February 5, 1998

meeting of two committees of the Board of Trustees, those

committees determined that the bond issue would not cover the

entire cost of the project and resolved to recommend to the full

Board that

[t]he College will have to review the project
and attempt to reduce the final two phases to
correspond with the bond financing or the
College will have to include an equity
contribution to fund a portion of the
construction. It was agreed that the bond
financing would proceed as recommended with
Advest and that the College would make every
effort to reduce its construction costs or
make an equity contribution at the end in the
final phase of the project.

(Emphases added in amended complaint.) The plaintiffs interpret

this as revealing the Bradford defendants' intention not to

contribute any funds to the project, but rather "to cut corners on

the project in an effort to bring project costs down to the level

of the bond financing." The Official Statement was allegedly

misleading because it failed to disclose the "contingent and

delayed nature of the College's putative 'equity' contribution."

Even accepting the allegations as true, and adopting the

plaintiffs' preferred inference that the committees' recommendation

was implemented by the full Board prior to the bond offering, the

-31-
allegations simply do not establish any misrepresentation. The

Official Statement does not speak in any way to the timing of

Bradford's expected contribution. By like token, the committees'

statement from the February 5, 1998 meeting does not at all

foreclose the college from making an equity contribution; in fact,

it clearly states an intention that the college would contribute

should the cost of completing the project so require.

4. Financial Aid Projections

We turn to the plaintiffs' second tier of arguments --

that the financial condition of the college would be adversely

affected even if enrollment increased unless financial aid did not

increase, and that the statements on this point were misleading.

The amended complaint alleges that projections in the

Official Statement for financial aid levels in the 1997-1998 and

1998-1999 academic years were false and misleading when made. The

Official Statement acknowledges that "there has been a substantial

increase in financial aid funded by the College" between 1989 and

1997. However, the plaintiffs point to the Statement's

projections:

[D]uring the 1997-98 academic year, the
College estimates that financial aid will be
reduced to 29.9% of student income versus
30.3% the previous year. This expected
reduction is a result of a change in
methodology of aiding students with college-
funded support versus additional loans funded
by students and/or parents. The College's
financial plan currently calls for a further
reduction of financial aid spending for [the]

-32-
 1998-1999 academic year to 28.8% of student
income.

The amended complaint alleges that these statements were untrue --

that the actual percentage of financial aid awarded in 1997-1998

was over 35% of student income. The plaintiffs also allege that

the 1998-1999 budget, as of the date of the Official Statement,

contemplated that financial aid would be 31.3% of student income,

not 28.8%.

a. 1997-1998

Again, the allegations concerning the discrepancies

between the actual percentage for the 1997-1998 academic year and

the estimated ones in the Official Statement come from hindsight.12

The amended complaint obtained the 35% figure from Bradford's

audited financials for the year, which were not produced until

after the close of the fiscal year in June 1998, after the date of

the Official Statement.

No facts are pled to support the general allegation that

"[a]t the time the Official Statement was distributed, the College

possessed, and the Defendants had access to, the data that proved

the 1997-98 'estimate' was substantially incorrect." These

allegations do not "state with particularity facts giving rise to

12
We do not decide whether the financial aid figures in the
Official Statement as to the 1997-1998 academic year were material.
Also, the statements as to the 1997-1998 year themselves say that
they are just estimates about reductions vis-à-vis student income.

-33-
a strong inference that the defendant acted with [scienter]." 15

U.S.C. § 78u-4(b)(2).

The plaintiffs do point to information which they say was

available at the time of the Official Statement about the 1997-1998

academic year. They allege the college knew that enrollment for

the spring term in 1998 was lower than in the budget and knew what

its financial aid commitments were. They also say the defendants

knew the financial aid commitments were almost $250,000 more than

budgeted. Those two pieces of data, however, do not, without more,

tell one of the actual percentage of financial aid as against

student income, either as of May 1, 1998, or as of the end of that

academic year.

b. 1998-1999

The most troublesome issue in the case is presented by

the allegations regarding the Official Statement's description of

the financial plan for the 1998-1999 school year's financial aid

levels. These are not mere optimistic projections because the

statement is that "[t]he College's financial plan currently calls

for a further reduction of financial aid spending for [the] 1998-

1999 academic year to 28.8% of student income." (Emphasis added.)

This sentence would misrepresent the facts if the defendants, as of

May 1, 1998, had actually decided to budget a significantly greater

amount of the college's funds for student aid.

-34-
 The amended complaint alleges that Bradford's 1998-1999

budget was originally submitted to the Trustees on April 29, 1998,

and reviewed by the Finance Committee of the Board on May 8, 1998.

The allegation is that the budget was revised at a meeting of

college administrators later in May. The finalized budget pegged

financial aid spending for 1998-1999 at 31.3% of student income.

According to the amended complaint, that amount was $280,000

greater than the sum referred to in the Official Statement issued

on May 1. There is no allegation as to the budgeted figures in the

April 29 draft budget. The plaintiffs draw the inference that the

final figure of 31.3% was in the initial draft budget of April 29.

The claim is that the makers of the statement about the 1998-1999

budget had actual knowledge that the statement was false or

misleading, thus removing it from the safe harbor provisions of the

PSLRA. See 15 U.S.C. §§ 77z-2, 78u-5; Greebel, 194 F.3d at 201.

We cannot say that the discrepancy between the 28.8%

figure in the Statement and the 31.3% figure alleged in the amended

complaint is immaterial as a matter of law, as defendants argue.

Materiality is usually a matter for the trier of fact. Shaw, 82

F.3d at 1217 (citing Basic Inc. v. Levinson, 485 U.S. 224, 236

(1988)). Although $280,000 represents only a small portion of the

college's operating revenues, which exceeded $13 million in fiscal

year 1997, it amounts to about 7% of the amount Bradford spent on

student aid that year. Put another way, $280,000 would cover about

-35-
a third of the debt service due on the bonds in 1999. The 31.3%

figure could indicate a trend of rising financial aid

contributions, not the anticipated downward trend portrayed in the

Statement. The Statement named the amount of financial aid awards

as a risk factor in the college's ability to repay the bonds.

Even assuming materiality, the amended complaint provides

no information on what proposed budget figures were known to the

Bradford defendants before the Official Statement was completed.

One might infer that at least President Short, as an ex officio

member of the Board of Trustees, knew that financial aid was

budgeted to be 31.3% at the time he helped draft the Statement.

But few specifics are given to support the inference that the

defendants knew the representation about the budget was wrong when

made.

We must assess whether the plaintiffs have pleaded

sufficient facts to give rise to a strong inference that the

defendants wrote that passage in the Official Statement with

"intent to deceive, manipulate, or defraud." Ernst & Ernst, 425

U.S. at 193 n.12. More than mere proof that the defendants made a

particular false or misleading statement is required to show

scienter. Aldridge, 284 F.3d at 83; see also Geffon v. Micrion

Corp., 249 F.3d 29, 36 (1st Cir. 2001). But the fact that a

defendant knowingly made a false statement is "classic evidence" of

scienter. Aldridge, 284 F.3d at 83.

-36-
 One inference, urged by plaintiffs, is that the

defendants -- or at least Short and the Trustees -- were in

possession of a budget that clearly contradicted the numbers they

planned to quote in the Official Statement. The argument is that

they feared that portraying an upward trend in financial aid

expenditures would warn off investors, so they opted instead to

spin the numbers to suggest that Bradford was heading for a

turnaround.

According to the amended complaint, the Bradford

defendants determined "to operate the College at all costs rather

than preserve its assets for the benefit of creditors." The

defendants, on this theory, saw the 1998 bond offering as a means

of continuing operations, even though the defendants knew it could

not save Bradford from insolvency. With that in mind, the

plaintiffs allege, the defendants were willing to misrepresent the

amount of the funds they had earmarked for student aid in order to

shade the college's operational health and induce hapless investors

to purchase bonds to finance an already doomed project.

But there are other inferences, which in our view are

stronger. After years of budget deficits, the Bradford defendants

realized by early 1997 that the college would have to cease

operations within five years unless they could implement a plan to

stabilize its budget. Still, within a year, the college had

experienced a spike in its matriculation rate and the number of

-37-
incoming students, leading the defendants to believe that demand

would support an increase in the college's enrollment capacity.

The Bradford defendants thus settled on an expansion plan to be

funded by the 1998 bonds, and they expected that expansion would

save the school.

The defendants considered a draft budget for the 1998-

1999 school year just a matter of days before the bond offering.

That budget may or may not, at that time, have matched the

defendants' sanguine financial aid projections in the Official

Statement. However, the defendants would know that the draft

budget would yet be revised, as the amended complaint confirms.

In addition, the defendants may have been operating under

a different set of assumptions. For instance, the Statement

indicates that phase one of the project, to be financed by the

bonds that had not yet been issued as of the time of the draft

budget, would be completed by fall 1998. The resulting addition of

"new, townhouse-style dormitories" could increase enrollment

capacity and Bradford's attractiveness to current and prospective

students. Given the defendants' enrollment targets for the 1998-

1999 school year and their assumption that the expansion project

would be financed and underway by that time, it would be reasonable

to infer that they believed the 28.8% figure to be achievable.

There is no set pattern of facts that will establish

scienter; it is a case-by-case inquiry. Greebel, 194 F.3d at 196.

-38-
There are several reasons why the plaintiffs' inference of scienter

is not at least equally as strong. First, the Official Statement

as a whole candidly laid out the sorry financial history of the

college and, for most of its estimates and projections as to a

happier future, it provided accurate and non-misleading

information, as we discussed. The Official Statement fully

disclosed that despite the college's enrollment growth, the college

had (a) incurred operating deficits every year since 1989 and (b)

done so with a substantial increase in financial aid funded by the

college. It was careful to say it could only estimate that for the

1997-1998 academic year, there would be a reduction in financial

aid as a proportion of student income, and that it would be a

modest four-tenths of a percentage point. It explained the basis

for the estimate. As to the 1998-1999 academic year, the Statement

was careful to say that the college's financial plan "currently"

called for a reduction of one and a tenth percentage points in

financial aid over its estimates for the prior year. The Official

Statement fully disclosed that some 80% of full-time students

received Bradford-funded aid. And the Statement said that based on

four factors, the college believed it could reach its enrollment

goals and "reduc[e] slightly the average amount of financial aid

awards . . . from College funds." Conversely, the Statement said,

failure to meet these goals could "adversely affect the College's

ability to reach Financial Equilibrium."

-39-
 In addition, the Bradford College defendants have

different characteristics than are typical in securities fraud

cases, characteristics which make it more difficult to infer a high

degree of recklessness or an intent to defraud. They are unlike

the paradigmatic securities fraud defendant, who is likely to be a

corporate insider standing to profit from the sale of artificially

inflated securities. Here, the defendants are Officers and

Trustees of a non-profit educational institution.13 There are no

allegations that the proceeds from the Bradford bonds would be

spent on anything that would personally enrich any of the Bradford

defendants. There is no allegation that they are particularly

sophisticated in securities transactions.

Of course "the self-interested motivation of defendants

in the form of saving their salaries or jobs" is relevant -- though

not necessarily sufficient -- to a showing of scienter. Greebel,

194 F.3d at 196. There is no reason to credit the inference that

the Official Statement was made in order to save Short's job as

President, as he resigned a few months later, by July 1998.

Short's resignation had long been anticipated, as the Official

Statement itself referred to his expected resignation on June 30,

1998. In this case there is no allegation of any additional motive

13
The parties have not cited, nor have we been able to
locate, any reported cases presenting non-frivolous securities
fraud claims against administrators or trustees of a non-profit
educational institution.

-40-
other than the defendants' desire to keep the college operating and

to deprive creditors of their due in an inevitable bankruptcy

proceeding. These are shaky grounds for leaping to the conclusion

that there is a strong inference that the defendants intentionally

or recklessly disregarded the facts available to them when quoting

financial aid figures in an offering statement accompanying a

multi-million dollar bond offering.

We hold that the plaintiffs' allegations regarding

planned financial aid expenditures for the 1998-1999 school year

fail to establish an inference of scienter that is cogent and at

least as compelling as available competing inferences of non-

fraudulent conduct.14 The dismissal of the section 10(b) and Rule

10b-5 claims against all of the Bradford defendants was

appropriate.15

C. Section 20(a) Claim Against the Bradford Defendants

In addition to their claims under section 10(b) and Rule

10b-5, the plaintiffs pleaded a claim under section 20(a) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78t, against the

Officer and Trustee defendants. Section 20(a) imposes joint and

14
The flaws in the plaintiffs' amended complaint on this
point are not cured by the claim that the Official Statement
omitted the fact that the college's percentage of aid was high
relative to peer institutions.
15
We do not address the issue of whether allegations of
scienter against an individual defendant can be imputed to other
individual defendants. See Tellabs, 127 S. Ct. at 2511 n.6.

-41-
several liability on "[e]very person who, directly or indirectly,

controls any person liable" for a securities fraud violation. Id.

§ 78t(a). The plaintiffs correctly point out that they need not

plead scienter according to the rigorous standards of the PSLRA in

order to state a claim under section 20(a). See In re Stone &

Webster, Inc. Sec. Litig. (Stone & Webster I), 414 F.3d 187, 194

(1st Cir. 2005).

However, it does not follow that the control-person claim

against the Bradford defendants should be allowed to proceed if, as

the plaintiffs phrase it, we find that the plaintiffs would have

stated a claim for securities fraud "but for their failure to plead

scienter sufficiently on the part of individual defendants." The

plain terms of section 20(a) indicate that it only creates

liability derivative of an underlying securities violation. 15

U.S.C. § 78t(a); see also In re Stone & Webster Sec. Litig. (Stone

& Webster II), 424 F.3d 24, 27 (1st Cir. 2005) ("[I]t is an

essential element of the § 20(a) controlling person claims in

question that plaintiffs show a Rule 10b-5 violation by the

controlled entity."). Here, there was no underlying 10b-5

violation. The section 20(a) claim must fail.

D. Section 12(a)(2) Claim Against Advest

The amended complaint also includes a claim against

Advest under section 12(a)(2) of the Securities Act of 1933, 15

U.S.C. § 77l. That section penalizes the sale of a security by

-42-
means of a misleading prospectus. Id. As an underwriter, Advest

was under a duty to exercise "reasonable care" as to the offering.

Id. § 78l(a)(2).

Advest argues that it may not be reached under section 12

because the actual issuer of the bond was a state agency, MIFA, and

section 12 liability does not attach to securities issued by a

state government entity. See 15 U.S.C. § 77c(a)(2). We do not

need to address that argument, nor the plaintiffs' argument that

they state a section 12(a)(2) claim because the bond is solely

payable by a covered private entity.

We take a different approach. We have assumed arguendo

that the allegations about financial aid for the 1998-1999 academic

year could be found to be material against the Bradford defendants,

but that there is no strong inference of scienter on the part of

those defendants. There are no allegations that Advest knew of

these proposed budgetary materials. There is no basis to assume

that the budget materials made available to the Bradford defendants

two days before the Official Statement issued were known to Advest,

so that Advest knew at the time the budget materials were at

variance (if they were) with the Statement. Indeed, all of the

allegations in the complaint go to facts allegedly known to the

Bradford defendants. The essence of the claim against Advest is

fraud, and the pleading fails to meet the Rule 9(b) standard for

pleading allegations of fraud with specificity. Where section

-43-
12(a)(2) claims are grounded in fraud, Rule 9(b) applies. See

Shaw, 82 F.3d at 1223 ("[I]f a plaintiff were to attempt to

establish violations of Sections 11 and [12(a)(2)] as well as the

anti-fraud provisions of the Exchange Act through allegations in a

single complaint of a unified course of fraudulent conduct . . .

Rule 9(b) would probably apply to the Section 11, [12(a)(2)], and

Rule 10b-5 claims alike."); see also Wagner v. First Horizon Pharm.

Corp., 464 F.3d 1273, 1275 (11th Cir. 2006) ("[E]ven securities

claims without a fraud element must be pled with particularity

pursuant to [Rule 9(b)] when that nonfraud securities claim is

alleged to be part of a defendant's fraudulent conduct."); Melder

v. Morris, 27 F.3d 1097, 1100 n.6 (5th Cir. 1994) (applying Rule

9(b) to section 12 claim "grounded in fraud"); Shapiro v. UJB Fin.

Corp., 964 F.2d 272, 287 (3d Cir. 1992) (same); Sears v. Likens,

912 F.2d 889, 892-93 (7th Cir. 1990) (same). But see In re

NationsMart Corp. Secs. Litig., 130 F.3d 309, 315-16 (8th Cir.

1997) (declining to apply Rule 9(b) to non-fraud securities

claims).

Although the amended complaint fails to plead any federal

claims upon which relief can be granted,16 we express no views on

the plaintiffs' state-law claims, which are currently pending in a

stayed state court proceeding.

16
We do not reach the defendants' argument that the
plaintiffs have failed to prove loss causation under 15 U.S.C.
§ 78u-4(b)(4).

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The judgment of the district court is affirmed.

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