Financial Acquisition Partners LP v. Blackwell

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT February 14, 2006

Charles R. Fulbruge III
Clerk
No. 04-11300

FINANCIAL ACQUISITION PARTNERS LP, on behalf of themselves and
all others similarly situated; JOHN D. MAY, on behalf of
themselves and all others similarly situated,

Plaintiffs-Appellants,

versus

L. KEITH BLACKWELL; JONATHAN S. PETTEE; RANDOLPH E. BROWN; RON B.
KIRKLAND; DELOITTE & TOUCHE LLP, a Delaware Limited Liability
Partnership,

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Texas

Before JOLLY, BEAM,* and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

In this putative class action for securities fraud, Financial

Acquisition Partners and John D. May (Plaintiffs) appeal the

Federal Rule of Civil Procedure 12(b)(6) dismissal of their second

amended complaint pursuant to the Private Securities Litigation

Reform Act (PSLRA), 15 U.S.C. § 78u-4. Plaintiffs’ claims arise

from their purchase of shares, and the bankruptcy shortly

thereafter, of Amresco Inc. Plaintiffs challenge the district

*
Senior Circuit Judge, United States Court of Appeals for the
Eighth Circuit, sitting by designation.
court’s: (1) holding implicitly that collateral estoppel did not

preclude the individual defendants’ raising certain defenses; (2)

striking opinions from an expert’s affidavit attached to the

complaint; (3) holding Plaintiffs failed to satisfy the PSLRA’s

pleading requirements; and (4) denying leave to amend their

complaint. AFFIRMED.

I.

The following factual recitation is based on the complaint at

issue and public filings, all of which may be considered in

deciding a Rule 12(b)(6) motion, as discussed infra.

Amresco was publicly traded. As a debtor in bankruptcy when

this action was initiated, it was subject to the automatic stay

provisions. 11 U.S.C. § 362.

Defendants L. Keith Blackwell, Jonathan Pettee, Randolph E.

Brown, and Ron B. Kirkland (Individual Defendants) are former

officers and directors of Amresco. Brown was chairman of the board

and CEO from November 2000 until Amresco’s bankruptcy filing;

Blackwell, its general counsel and president; Pettee, its chief

financial officer; and Kirkland, its senior vice president and

chief accounting officer. Defendant Deloitte & Touche LLP was

Amresco’s auditor.

Prior to its 2 July 2001 bankruptcy filing, Amresco was a

small and middle–market lending company with three main segments:

commercial finance, asset management, and home equity lending. Its

2
operations centered around its commercial finance line of business.

Commercial finance revenues were primarily earned from (1) interest

and fees on loans to small and middle–market business owners; (2)

accrued earnings on retained interests in securitizations; (3)

servicing fees on its loan portfolios; and (4) gains on the

securitization on sale of loans.

One of Amresco's significant divisions was a lender to

restaurants (including well-known national chains) and other small

to middle–market businesses. Amresco funded these loans through a

warehouse financing facility (revolving credit line) before

bundling them for sale to a third party. These bundled loans were

securitized - sold into a trust and then bonds backed by underlying

trust loans issued. Amresco retained an interest in the

securitized loans. Borrowers signed a note for an amount 5 to 10%

greater than the amount loaned and paid interest on that greater

amount (credit enhancement). The credit enhancement also served as

collateral for the loan; but, of course, if net losses in the

securitization pool exceeded 10%, Amresco's cash flow would

decrease. The premium was returned to borrowers if there were no

deficiencies within the pool; otherwise, they forfeited those

payments. If the loans became more than 105 to 360 days delinquent

(depending on the loan), payments to investors were accelerated;

Amresco's cash flow would decrease; and it would have to write-down

some of its subordinated interests.

3
 Because the anticipated payments on the retained interests

extended into the future, Amresco had to estimate, and report on

its financial statements, the present fair value of those payment

streams. The Form 10-K for the year 2000 (Y2000 10-K), signed on

30 March 2001 and filed on 2 April, noted that different

assumptions might materially affect the estimates.

Two key assumptions in that Y2000 10-K were the projected

credit loss and the discount. Amresco believed net losses would

not exceed the credit enhancement range, so that borrowers would

absorb the entire loss. Therefore, it estimated a net credit loss

of zero percent. Amresco stated that a 1.5% credit loss increase

would reduce the value of Amresco's retained interest by $27

million.

Amresco's Y2000 10-K, accompanied by Deloitte's audit,

reported assets of $715 million and shareholders' equity of $165

million. It also showed Amresco suffered losses of $69 million in

1998, $221 million in 1999, and $218 million in 2000. The Y2000

10-K stated Amresco no longer had access to its prior warehouse

financing. Therefore, Amresco needed to find a new lender; but,

the Y2000 10-K stated a new lender was not guaranteed and that,

until one was found, Amresco's ability to make new loans was

substantially impaired.

This action concerns shares of Amresco purchased from 29 March

2001 to 2 July 2001 by a claimed class. (Again, the Y2000 10-K

4
primarily at issue was signed on 30 March 2001 and filed on 2

April.) Plaintiffs claim fraud relating to (1) Amresco's financial

statements; (2) statements its officers made to certain

shareholders; and (3) other omissions. The allegations primarily

involve the following events: (1) in April 2000, Amresco agreed to

a material executive compensation plan for its officers, including

the Individual Defendants, that should have been, but was not,

disclosed immediately to the public; (2) on 12 March 2001, Amresco

retained Greenhill & Co. to explore restructuring options,

including, but not limited to, bankruptcy; (3) on 2 April 2001,

Amresco filed its Y2000 10-K, signed by Brown, Pettee, and Kirkland

(Plaintiffs allege numerous material misstatements and omissions

related to this filing, including Amresco's not disclosing the

potential for default, and eventually the default, of a $50 million

loan to Duke & Long); and (4) on 10 May 2001, Brown, Pettee, and

Blackwell met with shareholders in Oklahoma, allegedly telling them

Amresco would obtain new warehouse financing. (These alleged

statements were the subject of another action, discussed infra,

Prescott Group Aggressive Small Cap, L.P. v. Blackwell, et al., No.

02-CV-0517-EA (M) (N.D. Okla. 25 Aug. 2003) (unpublished).)

Plaintiffs’ complaint was filed in mid–2002. Approximately

six months later, by joint motion, Plaintiffs declared their

intention to file an amended complaint and Defendants agreed to

5
delay moving to dismiss until that complaint was filed. The motion

was granted.

The first amended complaint was filed in early 2003. After

Defendants moved to dismiss, Plaintiffs filed an opposed motion for

leave to amend (to file the second amended complaint at issue). In

July 2003, in granting leave to amend, the district court

cautioned: additional amendment “[would] not be granted absent

extraordinary circumstances”. Fin. Acquisition Partners, L.P. v.

Blackwell, No. 3:02-CV-1586-K (N.D. Tex. 28 July 2003)

(unpublished).

Accordingly, that month, Plaintiffs filed their second amended

complaint (SAC); Defendants moved to dismiss, including Deloitte’s

moving to strike Plaintiffs’ expert’s affidavit attached to the

SAC. Responding in opposition to the motions to dismiss,

Plaintiffs, inter alia, urged application of collateral estoppel,

from the above-referenced Oklahoma Prescott litigation, to certain

matters in dispute. In a detailed and comprehensive opinion that

exceeded the 50–page SAC by only a few pages, the district court

granted, in part, Deloitte’s motion to strike; granted the motions

to dismiss; and denied leave to amend the SAC (to file a fourth

complaint).

II.

Plaintiffs contest the district court’s: (1) implicitly

denying application of collateral estoppel; (2) striking part of

6
their expert’s affidavit; (3) holding the SAC failed to satisfy the

PSLRA’s pleading requirements; and (4) denying leave to amend the

SAC.

A.

In the Prescott litigation, plaintiffs alleged Blackwell,

Brown, Kirkland, and Pettee made misstatements in May 2001 (post-

filing of the Y2000 10-K that April) in connection with their

incentive compensation arrangements, Amresco’s ability to obtain a

warehouse line of credit, and the impairment of the Duke & Long

loan. That action was settled, but only after denial of the

Individual Defendants’ motion to dismiss regarding the compensation

and Duke & Long claims. Plaintiffs maintain such denial in

Prescott provides collateral estoppel for those claims in this

action.

The SAC was filed in July 2003; the Prescott dismissal order,

that August. Plaintiffs first urged application of collateral

estoppel in opposition to the motions to dismiss. In dismissing

the action at hand, the district court by implication rejected such

application. No authority need be cited for the rule that a

reviewing court will consider an issue properly presented to a

district court, even though not addressed by it.

Some opinions by our court hold review of a

collateral–estoppel decision is de novo, see, e.g., United States

v. Brackett, 113 F.3d 1396, 1398 (5th Cir.), cert. denied, 522 U.S.

7
934 (1997); others, for abuse of discretion, see, e.g., Aguillard

v. McGowen, 207 F.3d 226, 228 (5th Cir.), cert. denied, 531 U.S.

877 (2000). Because Plaintiffs’ collateral–estoppel contention

fails under either standard, we need not decide which to apply.

A judgment is preclusive in federal court if: (1) the prior

federal decision resulted in a judgment on the merits; (2) the same

fact issue was litigated in that court; and (3) the issue’s

disposition was necessary to the prior action’s outcome. Am. Home

Assur. Co. v. Chevron, USA, Inc., 400 F.3d 265, 272 (5th Cir.

2005). In addition, there must not be any special circumstances

making application of collateral estoppel unfair. Winters v.

Diamond Shamrock Chem. Co., 149 F.3d 387, 391 (5th Cir. 1998),

cert. denied, 526 U.S. 1034 (1999). Settlement agreements, like

consent judgments, are not given preclusive intent unless the

parties manifest their intent to give them such effect. Hughes v.

Santa Fe Int'l Corp., 847 F.2d 239, 241 (5th Cir. 1988). Finally,

collateral estoppel does not apply unless the facts and legal

standards used to assess those facts are the same in both

proceedings. Copeland v. Merrill Lynch & Co., 47 F.3d 1415, 1422

(5th Cir. 1995).

Concerning such legal standards, the Prescott court in part

based its motion-to–dismiss denial on the Tenth Circuit’s

permitting group pleading in PSLRA cases. Group pleading

8
 in its broadest form allows unattributed
corporate statements to be charged to one or
more individual defendants based solely on
their corporate titles. Under this doctrine,
the plaintiff need not allege any facts
demonstrating an individual defendant's
participation in the particular communication
containing the misstatement or omission where
the defendants are “insiders or affiliates” of
the company.

Southland Sec. Corp. v. INSpire Ins. Solutions., Inc., 365 F.3d

353, 363 (5th Cir. 2004). Unlike the Tenth Circuit, our circuit

does not permit such pleading. Id. at 363-65.

In their reply brief, Plaintiffs concede the Prescott

plaintiffs used group pleading, which, again, is not permitted for

PSLRA actions in our circuit. In addition, denial of a motion to

dismiss is not a final judgment on the merits because the action

continues after the denial. Falcon v. Transportes Aeros de

Coahuila, S.A., 169 F.3d 309, 312 (5th Cir. 1999). In sum, the

Prescott motion–to–dismiss denial cannot be given preclusive effect

in this action.

B.

Plaintiffs next challenge the district court’s granting, in

part, Deloitte’s motion to strike the expert’s affidavit attached

to the SAC. They claim the affidavit should be considered part of

the SAC, pursuant to Federal Rule of Civil Procedure 10 (exhibit

attached to the pleading considered part of it). In any event,

9
they claim the district court erred by not considering the entire

affidavit.

Plaintiffs contend this ruling should be reviewed de novo.

Instead, we review for abuse of discretion. See Pedraza v. Jones,

71 F.3d 194, 197 (5th Cir. 1995) (discussing whether to strike an

expert’s affidavit and stating decisions to do so are reviewed for

abuse of discretion).

Attached to the SAC is an affidavit by Plaintiffs’ accounting

expert to bolster their fraud claims. Although the district court

refused to consider the expert’s conclusions (opinions), it did

consider the affidavit’s “nonconclusory, factual portions”. Fin.

Acquisition Partners, L.P. v. Blackwell, 2004 WL 2203253, at *5

(N.D. Tex. 29 Sept. 2004) (unpublished).

Plaintiffs rely on Barrie v. Intervoice-Brite, Inc., 397 F.3d

249, modified and reh’g denied, 409 F.3d 653 (5th Cir. 2005), for

the proposition that PSLRA plaintiffs can rely on expert affidavits

to defeat motions to dismiss. Barrie held dismissal of a PSLRA

action improper where the facts were in dispute. In doing so, it

noted the complaint was supported by “sworn expert analysis”. Id.

at 257. Barrie does not hold, however, that, in securities–fraud

actions, district courts must consider experts’ affidavits attached

to complaints. Apparently, the appropriateness vel non of

considering such an affidavit was not raised in Barrie. In any

event, the question was not decided by our court. E.g., Webster v.

10
Fall, 266 U.S. 507, 511 (1925) (ruling that questions neither

brought to the court’s attention nor ruled on are not precedent);

Thomas v. Tex. Dep’t of Crim. Justice, 297 F.3d 361, 370 n.11 (5th

Cir. 2002) (stating an opinion is not binding precedent for

questions not squarely before the court).

In its Rule 12(b)(6) dismissal, the district court held: the

affidavit was not a written instrument under Rule 10; and it was

not appropriate to consider the opinions in the affidavit. In

striking those parts of the affidavit, the district court cited,

and quoted from, DeMarco v. Depotech Corp., 149 F. Supp. 2d 1212,

1221 (S.D. Cal. 2001). As DeMarco noted, allowing plaintiffs to

rely on an expert’s opinion in order to state securities claims

requires a court to “confront a myriad of complex evidentiary

issues not generally capable of resolution at the pleading stage”.

Id. In addition, considering such opinions might require ruling on

the expert’s qualifications. Id. This would be inappropriate at

the pleading stage.

PSLRA complaints must allege specific facts demonstrating

material misstatements or omissions made with scienter. Even if

non-opinion portions of an expert’s affidavit constitute an

instrument pursuant to Rule 10, opinions cannot substitute for

facts under the PSLRA. Therefore, the district court did not abuse

its discretion in refusing to consider the opinions/conclusions in

the affidavit.

11
 C.

Plaintiffs claim the district court erred by holding they

failed to satisfy the falsity and scienter requirements of the

PSLRA and Federal Rule of Civil Procedure 9(b) (requiring pleading

fraud claims with particularity). We review de novo a complaint’s

being dismissed under Rule 12(b)(6) for failure to state a claim.

E.g., Lowrey v. Tex. A & M Univ. Sys., 117 F.3d 242, 246 (5th Cir.

1997).

Such motions are “viewed with disfavor and ... rarely

granted”. Id. at 247 (internal quotation omitted). They should be

granted only if it is evident the plaintiff cannot prove any set of

facts entitling them to relief. E.g., Blackburn v. City of

Marshall, 42 F.3d 925, 931 (5th Cir. 1995). Along this line, all

well-pleaded facts must be viewed in the light most favorable to

the plaintiff. E.g., Spivey v. Robertson, 197 F.3d 772, 774 (5th

Cir. 1999), cert. denied, 530 U.S. 1229 (2000). On the other hand,

as noted, the plaintiff must plead specific facts, not conclusory

allegations, to avoid dismissal. E.g., Guidry v. Bank of LaPlace,

954 F.2d 278, 281 (5th Cir. 1992).

In ruling on Rule 12(b)(6) motions, district courts generally

may rely only on the complaint and its proper attachments. E.g.,

Travis v. Irby, 326 F.3d 644, 648 (5th Cir. 2003). They are

permitted, however, to rely on matters of public record. Davis v.

Bayless, 70 F.3d 367, 372 n.3 (5th Cir. 1995). Moreover, in

12
securities actions, the court may, as did the district court here,

rely on “public disclosure documents required by law to be, and

that have been, filed with the SEC, and documents that the

plaintiffs either possessed or knew about and upon which they

relied in bringing the suit”, without, pursuant to Rule 12(b),

converting the motion into one for summary judgment. E.g., Rothman

v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (internal citations

omitted).

Plaintiffs claim violations of § 10(b) of the Securities

Exchange Act of 1934 (Exchange Act), as amended by the PSLRA, 15

U.S.C. § 78u-4(b)(1). Section 10(b) makes it illegal for a person

to use or employ, in connection with the purchase or sale of any

security, any manipulative or deceptive device or contrivance in

contravention of the SEC’s rules. Rule 10b-5 makes it unlawful for

anyone to make a false statement of material fact or to omit a

material fact necessary to make the statement not misleading. 17

C.F.R. § 240.10b-5. To state a claim under § 10(b) and Rule 10b-5,

“a plaintiff must allege, in connection with the purchase or sale

of securities[:] (1) a misstatement or an omission (2) of material

fact (3) made with scienter (4) on which plaintiff relied (5) that

proximately [injured him]”. E.g., ABC Arbitrage v. Tchuruk, 291

F.3d 336, 348 (5th Cir. 2002) (internal quotation omitted).

The PSLRA “was enacted in response to an increase in

securities fraud lawsuits perceived as frivolous”. Newby v. Enron

13
Corp., 338 F.3d 467, 471 (5th Cir. 2003). It requires the

complaint to specify each allegedly misleading statement and the

reason why it is misleading; if an allegation is made on

information and belief, the complaint must also state with

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

§ 78u-4(b)(1). Its pleading requirements incorporate Rule 9(b)’s

fraud–pleading standard. ABC Arbitrage, 291 F.3d at 349-50. That

Rule requires a plaintiff to specify the alleged fraudulent

statements, the speaker, when and where the statements were made,

and why they are fraudulent. Id.; see also FED. R. CIV. P. 9(b).

A district court must dismiss a securities–fraud claim failing to

satisfy either the PSLRA’s pleading requirements or those of Rule

9(b). ABC Arbitrage, 291 F.3d at 350.

As discussed, to survive a motion to dismiss a

securities–fraud action, plaintiffs must, inter alia, plead

specific facts establishing a strong inference of scienter.

Nathenson v. Zonagen, Inc., 267 F.3d 400, 407 (5th Cir. 2001).

Restated, pursuant to the PSLRA, failure to adequately plead

scienter requires dismissal of the complaint. 15 U.S.C. § 78u-

4(b)(3)(A). Scienter can be established by demonstrating the

intent to deceive, manipulate, or defraud. Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 193 n.12 (1976). For PSLRA purposes,

plaintiffs may establish scienter by demonstrating either intent or

severe recklessness. See Nathenson, 267 F.3d at 408 (defining

14
severe recklessness as highly unreasonable omissions or

misrepresentations demonstrating an extreme departure from

standards of ordinary care). Circumstantial evidence can support

a scienter inference. Id.

Plaintiffs fail to satisfy the PSLRA’s pleading requirements.

Accordingly, their complaint was properly dismissed.

1.

First, the district court correctly rejected group–pleading

allegations. Southland, 365 F.3d at 364-65 (holding PSLRA

abolished group–pleading doctrine). For the claimed fraud,

Plaintiffs must distinguish among defendants and allege the role of

each. Id. Corporate officers are not liable for acts solely

because they are officers, even where their day–to–day involvement

in the corporation is pleaded. Id. Corporate statements can be

tied to officers if plaintiffs allege they signed the documents on

which the statements were made or allege adequately their

involvement in creating the documents. Id.

The proscribed group–pleading involves the 10 May 2001

shareholder meeting that was the subject of the Oklahoma Prescott

litigation. Plaintiffs allege some of the Individual Defendants

made, with scienter, materially misleading statements at that

meeting by telling shareholders it was not a matter of whether

Amresco would obtain new warehouse funding, but a question of the

terms to which it would have to agree.

15
 Plaintiffs fail, however, to allege which Individual Defendant

made which statement at that meeting. Therefore, the district

court held this allegation failed to tie specifically any

Individual Defendant to the statements and thus failed under the

PSLRA's heightened–pleading standard. In addition, because neither

Financial nor May attended the meeting, they cannot claim to have

relied on any of the statements made at it.

Plaintiffs provide two alternate theories under which they

contend Brown, Pettee, and Blackwell are liable for these

statements: (1) under Barrie, the primary speaker is liable for

the false statement made with scienter, and the silent witnesses

are liable for an omission; and (2) pursuant to control–person

liability under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a)

(stating anyone “who, directly or indirectly, controls any person

liable [for Exchange Act violations] shall also be liable ... to

the same extent as such controlled person”).

In Barrie, while recognizing the group–pleading ban in our

circuit under Southland, 397 F.3d at 261, plaintiff was allowed to

avoid that ban by alleging one defendant made a statement, and the

other, knowing it was false, remained silent, id. at 263.

Plaintiffs’ complaint fails under Southland and Barrie because it

only alleged a group of defendants made statements; in other words,

it did not identify which defendant(s) made a statement and who

remained silent. Moreover, to the extent Barrie might be read to

16
conflict with Southland and permit group pleading, Southland

controls. E.g., Boyd v. Puckett, 905 F.2d 895, 897 (5th Cir.)

(stating where holdings in two cases conflict, the earlier case

controls and is binding precedent), cert. denied, 498 U.S. 988

(1990).

In any event, Plaintiffs also failed to plead with specificity

reliance on those statements, that they were false or misleading

when made, or that a Defendant knew they were false or misleading.

Because Plaintiffs fail to establish primary securities–fraud

violations under § 10(b) or Rule 10b-5, they necessarily fail to

establish control–person liability. ABC Arbitrage, 291 F.3d at 362

n.123.

The district court correctly dismissed the claims relying on

group pleading. Although such pleading does not bar all of the

claims, those remaining fail to establish securities–law violations

by any Defendant. Those against the Individual Defendants are

addressed first.

2.

Plaintiffs claim: the Individual Defendants made several

material misrepresentations and omissions; and they have

control–person liability. Because the SAC fails to plead fraud

with sufficient particularity, these claims were properly

dismissed.

17
 a.

Again, an Individual Defendant is not liable for an Amresco

business filing unless he either signed it or was involved in its

creation. Southland, 365 F.3d at 365. Plaintiffs provide no

specific facts either tying any of the Individual Defendants to

such filings they did not sign or demonstrating scienter for any

filings they did sign.

i.

Plaintiffs allege Amresco’s Y2000 10-K was false and

misleading because it significantly overstated assets, including

the retained interest in securitizations. They also allege

Amresco’s Y1999 10-K, “signed by Defendant Kirkland among others”,

significantly overvalued the company’s assets. As noted, Brown,

Pettee, and Kirkland signed the Y2000 10-K. Plaintiffs contend it

used improper discount rates for Amresco’s loans and underestimated

the past-due rate of loans within Amresco’s conventional lending

portfolio.

The facts Plaintiffs use to support their claims were

disclosed, however, in the Y2000 10-K. For example, as the

district court noted, Amresco disclosed that a different discount

rate might have a material effect on the estimated fair–value

amounts. Essentially, as the court also stated, what Amresco

warned might happen, did indeed happen.

18
 Amresco’s financial statements explained outside investors

absorbed the first 5 to 10% of losses from Amresco’s loans. Thus,

as the district court stated, it was reasonable to assume a loss

rate of 0% for those loans. Plaintiffs fail to plead facts

supporting an allegation that any Defendant knew the value of

Amresco’s assets was overstated, or that it was fraudulent in using

its discount rate or credit–loss assumption.

ii.

Plaintiffs also claim the Individual Defendants fraudulently

omitted from SEC filings any mention of the $50 million Duke & Long

loan (and that Deloitte permitted them to do so), which Amresco had

to write down after Duke & Long’s parent company filed for

bankruptcy. But Plaintiffs allege nothing suggesting the

Individual Defendants acted fraudulently in this transaction, and

the SAC does not adequately discuss any of the loan’s details, such

as how it was treated in bankruptcy or how it affected Amresco.

Plaintiffs allege only that one of the Individual Defendants

discussed the implosion of a $50 million loan.

Mere conclusory statements are insufficient to defeat

dismissal under the PSLRA’s heightened–pleading requirements. See

ABC Arbitrage, 291 F.3d at 348. Because Plaintiffs fail to allege

with specificity any details regarding the Duke & Long loan, the

allegation does not satisfy that requirement.

19
 iii.

Another insufficient allegation involves Amresco’s retention

of a restructuring specialist. Greenhill & Co. was retained on 12

March 2001 to help Amresco pursue any recapitalization or

restructuring.

Plaintiffs contend the Individual Defendants made a material

omission by failing to disclose that retention. They claim

retaining Greenhill demonstrates statements about Amresco’s

recovery plan were fraudulent. They base this partially on

Amresco’s having previously heard a presentation from Wasserstein

Perella & Company, dedicated solely to pursuing bankruptcy.

First, the district court could not have considered any

contention regarding Amresco’s dealings with Wasserstein because

the SAC does not mention any restructuring firm other than

Greenhill. Needless to say, in reviewing a Rule 12(b)(6)

dismissal, we review only the well-pleaded facts in the complaint.

This new allegation may not be considered. The claim otherwise

fails.

iv.

Plaintiffs also allege the Individual Defendants failed to

timely disclose a material executive–compensation plan (adopted in

April 2000), with bonuses potentially worth more than Amresco’s

market capitalization. Plaintiffs fail, however, to demonstrate

which Defendant(s) had the duty to disclose this plan, including

20
when. They also fail to plead any facts supporting their claim as

to the plan’s value. Moreover, with one possible exception (30

March 2001 purchase), Financial purchased its shares after Amresco

disclosed the plan (in the Y2000 10-K, signed on the day of the

first purchase (30 March) and filed on 2 April). Therefore, it

cannot claim it would not have done so had it known about the plan.

b.

Finally, Plaintiffs fail to adequately plead scienter for any

Individual Defendant because the SAC makes only general allegations

and conclusory statements, such as stating they knew, or were

reckless in failing to disclose, adverse material. See ABC

Arbitrage, 291 F.3d at 348. Along this line, Plaintiffs’ mere

allegation that the Individual Defendants were motivated by a

desire to retain their jobs does not satisfy the scienter

requirement. See Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.

1994) (holding scienter required for fraud claim not established

merely by alleging defendants were motivated by job–retention

goal).

Because Plaintiffs fail to plead material misstatements or

omissions, as well as scienter, the claims against the Individual

Defendants were properly dismissed. Those against Deloitte follow.

3.

Plaintiffs allege Deloitte misled the public to believe

Amresco’s financial statements accorded with Generally Accepted

21
Accounting Principles and Generally Accepted Accounting Standards.

The expert’s affidavit primarily addressed these allegations.

a.

As noted, Plaintiffs contest some of Amresco’s assumptions for

valuing its retained interests in the securitized loans, including

the credit–risk rate of 0%. Amresco explained why it chose that

rate. It also noted delinquencies in excess of 5 to 10% would

likely result in additional write-downs. In fact, as the district

court stated, Amresco provided those explanations in the same

document, the Y2000 10-K, that stated the assumptions. Plaintiffs

do not allege facts suggesting Amresco failed to use the best

available estimates to choose its discount rates, as required by

the Financial Accounting Standards Board (FASB). The SAC makes

only a conclusory allegation that Amresco failed to follow FASB

regulations. In any event, failure to follow accounting standards,

without more, does not establish scienter; this claim fails. See

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

cert. dismissed, 502 U.S. 976 (1991).

b.

Plaintiffs also allege Deloitte improperly failed to issue a

going–concern qualification in the light of Amresco’s dire

financial situation. The American Institute of Certified Public

Accountants Code of Professional Standards § 341.06 (AU) requires

that qualification if one of the following conditions exist: (1)

22
negative trends, such as recurring operating losses; (2) other

indications of potential financial difficulties, such as the need

to seek new sources of outside funding; (3) internal matters; and

(4) external matters, such as legal issues that might jeopardize

the company’s ability to operate.

Although Plaintiffs’ expert opined no reasonable auditor in

Deloitte’s position would have failed to issue the qualification,

the district court properly refused to consider that opinion. Even

without it, however, for Rule 12(b)(6) purposes, at least two of

the above four factors existed: recurring losses and the need to

obtain new financing.

Nevertheless, Plaintiffs did not plead sufficiently

particularized facts demonstrating Deloitte was, inter alia,

severely reckless in failing to issue the qualification, as

required to sufficiently plead with particularity under the PSLRA.

See Nathenson, 267 F.3d at 408. The AU requires an auditor to

issue the qualification only if there is substantial doubt the

entity will continue, and only after determining the company’s plan

to deal with its problems would be ineffective. Again, Plaintiffs

plead no facts demonstrating Deloitte was severely reckless in this

regard.

Plaintiffs never pleaded with specificity how, or why,

Deloitte was unreasonable in failing to determine Amresco did not

have a reasonable turnaround plan. In addition, as the district

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court stated, general allegations that Deloitte was somehow

involved in the Duke & Long loan do not establish Deloitte’s

liability, just as the allegations fail to establish liability for

the Individual Defendants.

D.

Finally, Plaintiffs maintain that, even if their SAC was

properly dismissed, they should have been granted leave to amend

(to permit a fourth try). The district court did not abuse its

discretion in not permitting another amended complaint.

Leave to amend should be freely granted when justice requires.

FED. R. CIV. P. 15(a). District courts, however, have discretion to

manage their docket. Schiller v. Physicians Res. Group, Inc., 342

F.3d 563, 566 (5th Cir. 2003) (holding no abuse of discretion after

plaintiff had three opportunities to correct any deficiencies in

its complaint). Accordingly, although a district court’s

discretion to deny leave to amend is limited, leave to amend is not

automatic. Goldstein v. MCI Worldcom, 340 F.3d 238, 254-55 (5th

Cir. 2003) (holding no abuse of discretion where plaintiffs failed

multiple times to correct deficiencies in complaint, and failed to

show court how they would correct them in a future filing).

Nevertheless, there is a strong presumption in favor of granting

leave to amend; to this end, a district court may be reversed for

failing to provide an adequate explanation for denying it. Mayeaux

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v. La. Health Serv. & Indem. Co., 376 F.3d 420, 426 (5th Cir.

2004).

Plaintiffs’ leave–to–amend request appeared only in the

conclusion of their response in opposition to the motions to

dismiss (opposition). After urging denial of those motions,

Plaintiffs stated: “In the alternative Plaintiffs request leave to

amend to allege the additional facts asserted herein as well as

additional facts they may discover through investigation”.

(Emphasis added.) (Along this line, Plaintiffs’ opposition had

earlier presented (improperly) facts not in the SAC, such as: (1)

emails and an internal company memorandum questioning Amresco’s

underwriting policies; (2) Amresco’s discussions with the

Wasserstein restructuring firm; and (3) an allegation Deloitte

provided the appraisals for the properties in Amresco’s loan

portfolio.)

In its opinion dismissing the complaint, in denying the

cursory leave–to–amend request, the district court stated only that

Plaintiffs failed to demonstrate “extraordinary circumstances”

warranting leave to amend. Fin. Acquisition Partners, L.P., 2004

WL 2203253, at *24. This language tracked the court’s earlier-

discussed caution in permitting filing the SAC. Plaintiffs urge

such “extraordinary circumstances” language demonstrates the court

used the wrong legal standard in denying leave to amend yet again.

We disagree.

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 Although the court could have avoided confusion by employing

different language in denying leave to amend, nothing in the record

demonstrates it acted inflexibly. Plaintiffs had three attempts to

produce a sufficient complaint. The court dismissed the complaint

and denied leave to amend only after the third insufficient

attempt.

In seeking to avoid dismissal, Plaintiffs’ opposition employed

facts claimed unavailable when filing the SAC. Although they had

three prior opportunities to produce this information, and although

they claimed the facts were previously unavailable and that others

might become known, Plaintiffs did not explain why they were unable

to obtain the information before filing the SAC. In other words,

they never explained this to the district court as a basis for

being allowed leave to file a fourth complaint. In short,

Plaintiffs never provided the requisite specificity for leave to

file a fourth complaint. Goldstein, 340 F.3d at 254-55. Moreover,

none of the “previously unavailable” facts improperly included in

the opposition sufficiently pleaded scienter. There was no abuse

of discretion. See ABC Arbitrage, 291 F.3d at 362 (holding no

“abuse of discretion to deny ... a third chance to offer more

details”).

III.

For the foregoing reasons, the judgment is

AFFIRMED.

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