Filed: Aug. 25, 2003
Latest Update: Feb. 21, 2020
Summary: United States Court of Appeals Fifth Circuit F I L E D REVISED AUGUST 25, 2003 July 28, 2003 IN THE UNITED STATES COURT OF APPEALS Charles R. Fulbruge III Clerk FOR THE FIFTH CIRCUIT _ No. 02-60322 Cons w/ 03-60248 _ HARRIET GOLDSTEIN; ET AL Plaintiffs MICHAEL SABBIA; WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM; DAVID KLEIN; SIMMS FAMILY Plaintiffs - Appellants v. MCI WORLDCOM; BERNARD J EBBERS; SCOTT SULLIVAN Defendants - Appellees _ Appeals from the United States District Court for the Southern D
Summary: United States Court of Appeals Fifth Circuit F I L E D REVISED AUGUST 25, 2003 July 28, 2003 IN THE UNITED STATES COURT OF APPEALS Charles R. Fulbruge III Clerk FOR THE FIFTH CIRCUIT _ No. 02-60322 Cons w/ 03-60248 _ HARRIET GOLDSTEIN; ET AL Plaintiffs MICHAEL SABBIA; WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM; DAVID KLEIN; SIMMS FAMILY Plaintiffs - Appellants v. MCI WORLDCOM; BERNARD J EBBERS; SCOTT SULLIVAN Defendants - Appellees _ Appeals from the United States District Court for the Southern Di..
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United States Court of Appeals
Fifth Circuit
F I L E D
REVISED AUGUST 25, 2003 July 28, 2003
IN THE UNITED STATES COURT OF APPEALS
Charles R. Fulbruge III
Clerk
FOR THE FIFTH CIRCUIT
_____________________
No. 02-60322
Cons w/ 03-60248
_____________________
HARRIET GOLDSTEIN; ET AL
Plaintiffs
MICHAEL SABBIA; WAYNE COUNTY EMPLOYEES RETIREMENT
SYSTEM; DAVID KLEIN; SIMMS FAMILY
Plaintiffs - Appellants
v.
MCI WORLDCOM; BERNARD J EBBERS; SCOTT SULLIVAN
Defendants - Appellees
_________________________________________________________________
Appeals from the United States District Court
for the Southern District of Mississippi
_________________________________________________________________
Before KING, Chief Judge, and REAVLEY and STEWART, Circuit
Judges.
KING, Chief Judge:
Shareholders of WorldCom Corporation (now known as MCI
WorldCom) appeal from the dismissal with prejudice of their
consolidated amended complaint pursuant to Federal Rule of Civil
Procedure 12(b)(6) and the Private Securities Litigation Reform
1
Act, 15 U.S.C. §§ 78u-4, and from the district court’s denial of
their Federal Rule of Civil Procedure 60(b) motion for relief from
judgment. We agree with the district court that the plaintiffs’
complaint against the defendants Bernard J. Ebbers and Scott D.
Sullivan does not adequately plead scienter in conformity with the
Reform Act, Rule 9(b) of the Federal Rules of Civil Procedure and
controlling case law interpreting each, and we affirm the district
court’s judgment insofar as it dismissed the complaint against
Ebbers and Sullivan. We also affirm the denial of the plaintiffs’
Rule 60(b) motion for relief from the judgment in favor of Ebbers
and Sullivan.
I.
INTRODUCTION OF THE SINGLE CLAIM ON APPEAL
Now a global telecommunications company with operations in
sixty-five countries, MCI WorldCom (“WorldCom”) began as a small
Mississippi company, Long Distance Discount Services, Inc., formed
in 1983 and licensed from 1983 to 1985 to provide long distance
services only to Mississippi businesses and residents. Beginning
in 1984, under the direction of its chief executive officer,
defendant Bernard J. Ebbers, this local long distance company
acquired other telecommunications companies at a phenomenal pace,
making over sixty acquisitions in just fifteen years. In line with
a strategy of growth by acquisition, in September 1998, WorldCom
purchased MCI Communications Corporation in what was then the
2
largest corporate merger ever, valued at approximately $40 billion.
With this acquisition, WorldCom became the second largest
telecommunications company in the world, behind only AT&T.
Relevant for the purposes of this controversy, in October 1999,
WorldCom announced its plan to enter into a stock-for-stock merger
with Sprint, then the third largest telecommunications company in
the United States, in a deal valued at $129 billion; however, on
July 13, 2000, WorldCom announced that federal regulators had
rejected the planned merger.
Further adverse developments ensued, and by late April 2002,
the independent members of the board of directors had called for
Ebbers’ resignation. Additionally, on June 25, 2002, WorldCom
publicly disclosed that it had discovered substantial accounting
irregularities that would require it to restate financial
statements for 2001 and the first quarter of 2002. On this same
date, WorldCom’s board of directors also terminated its former
chief financial officer and then executive vice president,
defendant Scott D. Sullivan. Approximately four weeks later, on
July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.
This suit involves the alleged conduct of WorldCom, Ebbers and
Sullivan during only a small (and somewhat early) period (the
“class period”) in WorldCom’s demise – February 10 to November 1,
2000 - when the plaintiffs purchased WorldCom stock. Further, on
appeal, we are called upon to address only one claim of fraud –
that Ebbers and Sullivan knowingly or with severe recklessness
3
failed to direct the write-off of millions of dollars worth of
uncollectible accounts, resulting in material misrepresentations
and omissions in WorldCom’s financial statements and communications
with shareholders and the investing public in violation of the
Securities Exchange Act of 1934 (the “1934 Act”), all in order to
inflate WorldCom’s stock price artificially for the pending Sprint
merger. Bearing this limited scope in mind, we briefly set forth
the procedural background to this case.
II.
PROCEDURAL BACKGROUND
On October 26, 2000, WorldCom issued a press release
reporting, for the first time, that due to bankruptcies by
seventeen of its wholesale customers, WorldCom had decided to write
off $685 million pre-tax ($405 million after-tax) in receivables –
a write-off that plaintiffs allege was stalled fraudulently to
inflate WorldCom’s financials. The announcement resulted in a drop
in the stock price from $25.25 (on trading volumes of approximately
40 million) to $21.75 (on trading volumes of nearly 67 million).
Following this announcement, on November 7, 2000, several
lawsuits were filed in Mississippi, New York and Washington D.C.
These actions were consolidated with this case (in Mississippi) on
March 27, 2001. Lead plaintiffs were thereafter selected, notice
to potential class claimants was provided, and on June 1, 2001, the
lead plaintiffs filed the consolidated amended complaint (the
4
“complaint”) on behalf of all persons who purchased or otherwise
acquired the securities of WorldCom during the class period, i.e.,
between February 10 and November 1, 2000.1
The 110-page, 285-paragraph complaint makes numerous
allegations of corporate malfeasance on the part of WorldCom,
Ebbers and Sullivan, together with violations of Section 10(b) of
the 1934 Act, Securities and Exchange Commission (“SEC”) Rule 10b-5
promulgated thereunder (17 C.F.R. § 240.10b-5), and Section 20(a)
of the 1934 Act.
Relevant for the purposes of this appeal are the allegations
that WorldCom’s uncollectible receivables “skyrocketed” during the
class period, in part, because the defendants allowed over $500
million of “worthless” accounts receivable to remain on the books,
and, consequently, to be inaccurately reflected in WorldCom’s
financials and public statements. This alleged modus operandi of
failing to write off clearly uncollectible accounts receivable
during the class period resulted from the defendants’ desire to
avoid attracting negative attention while federal regulators
considered the Sprint merger and to ensure that the stock-for-stock
deal was completed on the most favorable terms possible to
WorldCom.
On August 8, 2001, the defendants filed a motion to dismiss
the plaintiffs’ complaint. In their motion, the defendants argued
1
The class has not yet been certified.
5
that the plaintiffs’ “puzzle pleading” was insufficient to satisfy
the “rigorous” pleading requirements of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4 and
78u-5 (2000), as interpreted by this court. Although the
plaintiffs defended their complaint as compliant with applicable
pleading standards, they reflexively sought leave of the court to
amend their complaint to cure pleading deficiencies.
On March 29, 2002, the district court granted the defendants’
motion and dismissed the plaintiffs’ complaint with prejudice. On
this same date, it entered final judgment in favor of the
defendants. On April 5, 2002, the plaintiffs timely filed an
appeal of the judgment to this court; however, while the appeal was
pending, WorldCom, but not Ebbers and Sullivan, voluntarily filed
for Chapter 11 bankruptcy protection. After receipt of a
“suggestion of bankruptcy,” this court determined that the
bankruptcy stay of proceedings (11 U.S.C. § 362) extended only to
WorldCom and not to Ebbers and Sullivan. Goldstein v. MCI
WorldCom, No. 02-60322, at *4 (5th Cir. October 28, 2002).
In consideration of the bankruptcy filing and the events
leading up to the bankruptcy filing, on August 23, 2002, the
plaintiffs filed, in the district court, a motion for relief from
judgment based on certain “newly discovered” evidence. On March 5,
2003, the district court denied the plaintiffs’ Rule 60(b) motion.
The plaintiffs thereafter timely appealed this denial. We granted
the plaintiffs’ motion to expedite this appeal and consolidated the
6
two WorldCom appeals pending before us.
It bears emphasizing that because of the stay applicable to
proceedings against WorldCom, these appeals proceed only as to
claims against Ebbers and Sullivan.
III.
ANALYSIS OF THE PLAINTIFFS’ CLAIM
The only claim against Ebbers and Sullivan the plaintiffs seek
to salvage on appeal is that claim related to misrepresentations
and omissions in WorldCom’s financial statements and other
statements to the public resulting from Ebbers’ and Sullivan’s
alleged severe recklessness in failing to write off over $500
million of uncollectible accounts receivable. As to this claim,
the district court ruled that the plaintiffs had not pleaded facts
giving rise to a “strong inference of scienter” on the part of
Ebbers and Sullivan.
We review the district court’s dismissal de novo, Abrams v.
Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002), accepting
the facts alleged in the plaintiffs’ complaint as true and
construing their allegations in the light most favorable to them.
Id. However, we will not “strain to find inferences favorable to
the plaintiff[s].” Westfall v. Miller,
77 F.3d 868, 870 (5th Cir.
1996).
Before delving into the specific allegations of scienter
pleaded in the complaint here, we set forth the pleading standards
7
required to withstand a motion for dismissal of a securities action
governed by the PSLRA.
A. Section 10(b), Rule 10b-5 and Pleading Requirements under
the PSLRA
In their complaint, the plaintiffs allege violations of
section 10(b) of the 1934 Act and SEC Rule 10b-5 (promulgated by
the SEC under section 10(b) of the 1934 Act).2 It is well-settled
2
Section 10(b) provides in relevant part:
It shall be unlawful for any person, directly or
indirectly . . .
(b) To use or employ, in connection with the purchase
or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of
such rules and regulations as the [SEC] may
prescribe as necessary or appropriate in the public
interest or for the protection of investors.
15 U.S.C. § 78j(b) (2000). Rule 10b-5 provides in relevant part:
It shall be unlawful for any person, directly or
indirectly . . .
(b) To make any untrue statement of a material
fact or to omit to state a material fact
necessary in order to make the statements
made, in the light of the circumstances under
which they were made, not misleading . . . in
connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b-5 (2001). The plaintiffs also sought relief
under section 20(a) of the 1934 Act. This section provides in
relevant part:
Every person who, directly or indirectly, controls any
person liable under any provision of this chapter . . .
shall also be liable jointly and severally with and to
the same extent as such controlled person.
8
that, “[i]n order to state a claim under section 10(b) of the 1934
Act and Rule 10b-5, a plaintiff must allege, in connection with the
purchase or sale of securities, ‘(1) a misstatement or an omission
(2) of material fact (3) made with scienter (4) on which the
plaintiff relied (5) that proximately caused [the plaintiff’s]
injury.’” Nathenson v. Zonagen, Inc., 267 F.3d 400, 406-07 (5th
Cir. 2001) (quoting Tuchman v. DSC Communications Corp.,
14 F.3d
1061, 1067 (5th Cir. 1994)).
In 1995, Congress amended the 1934 Act through the passage of
the PSLRA. As we have stated, the PSLRA imposes procedural
pleading requirements on plaintiffs pursuing private securities
fraud actions. In relevant part, the PSLRA, 15 U.S.C.
§ 78u-4(b)(1), provides that:
In any private action arising under this chapter in which
the plaintiff alleges that the defendant--
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order
to make the statements made, in the light of the
circumstances in which they were made, not
misleading;
the complaint shall specify each statement alleged to
have been misleading, the reason or reasons why the
statement is misleading, and, if an allegation regarding
the statement or omission is made on information and
belief, the complaint shall state with particularity all
facts on which that belief is formed.
15 U.S.C. § 78t(a). However, the plaintiffs did not specifically
appeal the dismissal of this count. We thus do not address it
here.
9
Additionally, Rule 9(b) of the Federal Rules of Civil Procedure,
which we have interpreted to apply to securities fraud claims,
Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997),
states that “[i]n all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with
particularity." FED. R. CIV. P. 9(b).
In ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336
(5th Cir. 2002), we coalesced the pleading requirements in the
PSLRA and Rule 9(b) into a succinct directive for litigants:
To summarize, a plaintiff pleading a false or misleading
statement or omission as the basis for a section 10(b)
and Rule 10b-5 securities fraud claim must, to avoid
dismissal pursuant to Rule 9(b) and 15 U.S.C. §§
78u-4(b)(1) & 78u-4(b)(3)(A):
(1) specify the [sic] each statement alleged to have
been misleading, i.e., contended to be fraudulent;
(2) identify the speaker;
(3) state when and where the statement was made;
(4) plead with particularity the contents of the false
representations;
(5) plead with particularity what the person making the
misrepresentation obtained thereby; and
(6) explain the reason or reasons why the statement is
misleading, i.e., why the statement is fraudulent.
This is the “who, what, when, where, and how” required
under Rule 9(b) in our securities fraud jurisprudence and
under the PSLRA.
Id. at 350.
B. Pleading Scienter under the PSLRA
Here, the central issue is whether the plaintiffs have pleaded
the scienter element of their claims with requisite specificity.
10
“Scienter” is “a mental state embracing intent to deceive,
manipulate, or defraud,” Ernst & Ernst v. Hochfelder, 425 U.S.
185, 193 n.12 (1976). Although scienter is not explicitly
mentioned in the text of Rule 10b-5 or section 10(b), it has been
interpreted to be an essential element of these claims.
Id. In
Nathenson, we stated that the plain language of the PSLRA makes
clear that our previous rule, which required that a plaintiff plead
facts that merely “support an inference of fraud,” had been
supplanted by the PSLRA’s “strong inference”
requirement. 267 F.3d
at 407. We therefore held that “in order to survive a motion to
dismiss, a plaintiff alleging a section 10(b)/Rule 10b-5 claim must
now plead specific facts giving rise to a ‘strong inference’ of
scienter.”
Id.
We cautiously clarified, however, that “[i]t seems clear to us
that the PSLRA has not generally altered the substantive scienter
requirement for claims brought under section 10(b) and Rule 10b-5.”
Id. at 408 (emphasis added). We therefore joined those courts of
appeals concluding that “severe recklessness” still constitutes
scienter for purposes of claims brought under section 10(b) and
Rule 10b-5, as was the law in this circuit before the PSLRA
amendments. Therefore, post-PSLRA, plaintiffs can demonstrate
scienter by a showing of “severe recklessness” – defined as:
[L]imited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even
inexcusable negligence, but an extreme departure from the
standards of ordinary care, and that present a danger of
11
misleading buyers or sellers which is either known to the
defendant or is so obvious that the defendant must have
been aware of it.
Id. (quoting Broad v. Rockwell,
642 F.2d 929, 961 (5th Cir. 1981)
(en banc)). Thus our task here is to review the complaint with a
view to determining whether the allegations of fraud contained in
the complaint are sufficiently connected to Ebbers and Sullivan
such that a strong inference of scienter on their part is
appropriate.
(1) Circumstantial Evidence
In this review, we are aided by several basic principles.
First, “there does not appear to be any question that under the
PSLRA circumstantial evidence can support a strong inference of
scienter.” Nathenson, 267 F.3d at 410. Thus, factual settings
like that confronted by the Second Circuit in Novak v. Kasaks,
216
F.3d 300 (2d Cir. 2000), do not constitute an evidentiary floor
under the PSLRA. There, the plaintiff investors pleaded facts
demonstrating that certain management officials of the defendant
retail store, Ann Taylor, acted intentionally and deliberately to
inflate the company’s reported financial results artificially by
knowingly sanctioning fraudulent inventory management practices.
Id. at 304. Specifically, the complaint particularized, through
direct evidence, the individual defendants’ involvement in a “box
and hold” cover-up scheme whereby out-of-date inventory that
constituted as much as 34% of the total inventory was stored in
12
several warehouses during the class period deliberately to avoid
markdowns. Id.
While this court has agreed that the direct evidence of intent
particularized in the Novak complaint certainly meets the
procedural prerequisites of the PSLRA,
Abrams, 292 F.3d at 432-33,
we have never required a plaintiff to present direct evidence of
scienter in order to withstand dismissal of his securities claims.
Allegations of circumstantial evidence justifying a strong
inference of scienter will suffice. See, e.g., Nathenson,
267 F.
3d at 424-25 (holding that “the necessary strong inference of
scienter” was pleaded as to the president, chief executive officer,
and director defendant, in part, because of his heavy involvement
in the day-to-day operations of a small company); see also Rothman
v. Gregor,
220 F.3d 81, 92 (2d Cir. 2000) (concluding that “the
magnitude of the write-off renders less credible the proposition
that during the [] Class Period, [the defendant] believed it likely
that it could recover those royalty advances through future
sales”).
(2) Motive and Opportunity
Second, as to the status of whether allegations of motive and
opportunity can create the necessary strong inference of scienter,
a question which has notably divided the courts of appeals which
have addressed it, we have concluded that “[a]ppropriate
allegations of motive and opportunity may meaningfully enhance the
strength of the inference of scienter,” but that allegations of
13
motive and opportunity, without more, will not fulfill the pleading
requirements of the PSLRA. Nathenson, 267 F.3d at 412.
(3) Totality of the Circumstances
Finally, we consider all the facts and circumstances alleged
to determine whether they, in toto, raise a requisite strong
inference of scienter. Abrams, 292 F.3d at 430;
Nathenson, 267
F.3d at 410. This rule is evident from our discussion in
Nathenson. There, plaintiff shareholders brought a class action
lawsuit against a Texas-based biopharmaceutical company, its CEO,
and two outside directors alleging that these defendants made a
series of misrepresentations about two of its potential products
awaiting approval by the Food and Drug Administration in order to
inflate the company’s share price
artificially. 267 F.3d at 405.
The district court dismissed the plaintiffs’ complaint.
Id. at
406. As to the majority of the plaintiffs’ claims, we agreed with
the district court that dismissal was appropriate.
Id. at 426.
However, we found error in the district court’s dismissal regarding
the allegation that the defendant company and the defendant CEO
represented that its newly acquired patent (known as the Zorgniotti
patent) covered the company’s use of Vasomax, a potential drug
product going through the FDA approval process, when the totality
of the circumstances, as alleged, provided a strong inference that
these defendants knew otherwise but wanted to inflate their
company’s share price. In so doing, we stated:
[T]here are a number of special circumstances here which,
14
taken together, suffice to support a [strong inference of
scienter]. To begin with, [the company] was essentially
a one product company, and that product was Vasomax.
Thus . . . “the Company’s future prospects [were]
substantially dependent on” Vasomax . . . Further, the
patent protection for Vasomax was obviously important .
. . [The defendant CEO] is quoted as describing the
approval of the Zorgniotti patent as a “crucial event[].”
Additionally, the Company had acquired the Zorgniotti
patent application in April 1994, so there was ample
opportunity to become familiar with it prior to June
1996. In this connection, we also note that the Company
is not large. As reflected by its 10K’s filed April 1,
1996 and March 31, 1997, the Company had only thirty-two
full time employees in January 1996 and only thirty-five
in January 1997. Finally, the Company’s June 24, 1996
and November 6, 1996 press releases, which describe the
Zorgniotti patent, both quote [the CEO], and an article
in the issue of Fortune distributed in mid-February 1998,
states: “[i]n a recent interview, [the CEO] concedes,
‘You can say today no patent specifically covers
Vasomax;’ he claims the company’s issued patent ‘broadly
covers’ the drug.” Taking all the above factors together
we conclude that they suffice, if perhaps barely so, to
support the necessary “strong inference” of scienter on
the part of [the CEO] and [the company] with respect to
the statements that the Zorgniotti patent covers [the
company’s] use of Vasomax.
Id. at 425 (internal footnotes omitted). Thus, as taught by
Nathenson (and reaffirmed in Abrams), we must consider any evidence
of scienter pleaded by the plaintiffs cumulatively.
C. The Plaintiffs’ Complaint – Public Statements by Ebbers
and Sullivan
The complaint alleges that material statements and omissions
were made by Ebbers and Sullivan allegedly in connection with the
following financial statements and public statements: (1)
WorldCom’s fourth quarter 1999 and year-end results issued on
15
February 10, 2000, the press release reporting these results, and
the conference call for the investing community, including
analysts, held by WorldCom on this same date; (2) WorldCom’s Annual
Report, sent to shareholders in March 2000, the letter from Ebbers
included in this report, and WorldCom’s Annual Report on Form 10-K
for fiscal year 1999, filed on March 30, 2000; (3) WorldCom’s press
release reporting financial results for the first quarter of fiscal
year 2000, the quarter ended March 31, 2000, which was issued on
April 27, 2000, and the conference call for the investing
community, including analysts, held by WorldCom on this same date;
(4) WorldCom’s quarterly report on Form 10-Q, for the period ended
March 31, 2000, filed on May 15, 2000; (5) WorldCom’s Prospectus,
alleged to have been filed on May 22, 2000; (6) WorldCom’s press
release announcing results for the second quarter of fiscal year
2000, the period ended June 30, 2000, issued on July 27, 2000, and
the conference call for the investing community, including
analysts, held on this same date; and (7) WorldCom’s quarterly
report on Form 10-Q, for the period ended June 30, 2000.
Regarding these numerous financial statements and public
statements to the investing community, including analysts, the
complaint maintains that Ebbers and Sullivan knew or were severely
reckless in disregarding that a material amount of accounts was
uncollectible when strong growth in revenue and profitability was
reported by them in these statements. During the February 10, 2000
conference call, for example, Ebbers is alleged to have emphasized
16
WorldCom’s success in 1999 by stating that “[f]or five quarters
we’ve delivered the synergies ahead of schedule,” that “EBITDA
margins improved by 52% to 35.5% of revenues and added $2.6 billion
of net income in 1999,” and that “[c]ash earnings grew to $5.1
billion or $1.73 per share, and we accomplished that exceptional
growth in profitability while adding nearly $4.7 billion of
incremental revenue.” During this same conference call, Sullivan
is likewise alleged to have stated that:
[W]e earned a solid 42 cents from operations in the
fourth quarter . . . [W]e produced solid double-digit
revenue growth in the fourth quarter . . . Based upon
where we exited 1999 we feel every bit of confidence for
2000 analysts’ expectations, top to bottom. This was
another solid quarter for MCI WorldCom. The Company
posted another quarter of increased profitability
resulting from effective merger synergy execution as well
as strong double-digit revenue gains . . . Fourth quarter
net income nearly tripled compared to fourth quarter of
1998, while operating income more than doubled. EBITDA
margins expressed as a percentage of revenues jumped over
11 percentage points during the period to over 37% . . .
We significantly increased our profitability and the
quality of our earnings.
The falsity of these allegedly material statements and omissions is
not at issue on appeal. We nevertheless briefly set forth the
complaint’s allegations that these statements were false.
D. Allegations that these Statements Were False
Assurances accompanied WorldCom financial statements to the
effect that such statements were prepared in accordance with
generally accepted accounting principles (“GAAP”) and that, in the
opinion of management, the financial statements fairly represented
17
WorldCom’s financial position and results. GAAP (FASB Statement
No. 5, par. 3) state that an estimated loss from a loss contingency
“shall be accrued by a charge to income” if (i) information
available prior to issuance of the financial statements indicated
that it is probable that an asset had been impaired or a liability
had been incurred at the date of the financial statements and (ii)
the amount of the loss can be reasonably estimated.3 The
plaintiffs allege that when each of the cited statements touting
the growth in revenues and income of WorldCom was made, WorldCom’s
revenue growth was experiencing a negative downturn and financial
results were being falsely inflated by failing to establish proper
and timely reserves for accounts receivable that were clearly
uncollectible and “estimable.”
Regulation S-X (17 C.F.R. § 210.4-01(a)(1)), cited in the
plaintiffs’ complaint, states that financial statements that are
not prepared in conformity with GAAP are presumed to be misleading
and inaccurate. The plaintiffs point to this in support of their
contention that the above listed statements were false and
3
Included in the complaint is a citation to APB Opinion
No. 28, Interim Financial Reporting, which states that this GAAP
requirement also applies to interim financial statements:
The amounts of certain costs and expenses are frequently
subjected to year-end adjustments even though they can be
reasonably approximated at interim dates. To the extent
possible such adjustments should be estimated and the
estimated costs and expenses assigned to interim periods
so that the interim periods bear a reasonable portion of
the anticipated annual amount. Examples of such items
include . . . allowance for uncollectible accounts.
18
misleading at the time they were made. In further support, the
complaint itemizes eleven large accounts receivable and four
smaller accounts receivable that, as allegedly detailed in monthly
WorldCom reports, had been uncollectible for years when the
earliest of these statements were made.
As did the district court, we assume as true the complaint’s
allegations of false statements or omissions stemming from the
failure to write off uncollectible accounts receivable.
E. Scienter Allegations
Under the PSLRA, it is not enough to particularize false
statements or fraudulent omissions made by a corporate defendant.
Plaintiffs must also particularize intent allegations raising a
“strong inference of scienter.” The critical issue in this case is
whether the allegations of fraud contained in the plaintiffs’
complaint are sufficiently connected to Ebbers and Sullivan such
that this strong inference of scienter on their part is
appropriate. In the complaint, the plaintiffs state that as of
February 10, 2000, Ebbers and Sullivan were aware of the existence
of “no less than $685 million of grossly delinquent, disputed and
uncollectible receivables” but “knowingly permitted the Company’s
balance sheets to reflect [these] grossly delinquent, disputed, and
uncollectible receivables . . . and knowingly permitted the
Company’s income statements to fail to reflect a charge to earnings
to reflect the write-off of these receivables.” In support of this
allegation, the plaintiffs point to several pieces of
19
circumstantial evidence that they claim, together, sufficiently
meet the “strong inference of scienter” requirement. However, as
discussed in detail below, the plaintiffs’ motive allegations,
without more than is found in this complaint, are insufficient to
satisfy the “strong inference of scienter” requirement.
(1) Motive and Opportunity
First, the plaintiffs cite to what they characterize as
“monumental” motive and opportunity evidence stemming from the
Sprint merger, and, as to Ebbers individually, Ebbers’ compensation
package. As alleged by the plaintiffs, the defendants initially
sought to avoid taking a charge for uncollectible accounts
receivable until the Sprint merger was approved by Sprint and
WorldCom shareholders; then, once Sprint and WorldCom shareholders
approved the merger, the defendants thereafter continued to issue
artificially inflated results to ensure the deal was completed on
terms most favorable to WorldCom.4 However, in September 2000,
after the Sprint merger was rejected by federal regulators (on July
13, 2000) and after alleged substitute merger plans with Intermedia
were blocked by unexpected legal hurdles,5 the defendants allegedly
4
As alleged in the plaintiffs’ complaint, the “Sprint
deal involved a stock swap based on an average closing price for
WorldCom stock. Accordingly, the higher WorldCom’s stock price,
the less dilution would be generated from the merger –
eliminating a material, negative impact on the Company’s earnings
per share.”
5
Intermedia is an Internet-services company. On
September 5, 2000, WorldCom announced its intent to merge with
Intermedia. As with the Sprint merger, WorldCom is alleged to
20
“could no longer hide” the uncollectible accounts receivable
problem through a merger. Therefore, allegedly as a result of
these circumstances, in September 2000, assistant controller Steven
Rubio for the first time pushed WorldCom’s legal group in Tulsa to
write off the huge backlog of uncollectibles, stating “get [the]
stuff off the books.” Ten weeks after this directive, WorldCom
announced the write-off of $405 million (after tax) of
uncollectible receivables.
The plaintiffs cite further motive evidence related
specifically to Ebbers. As alleged, Ebbers’ compensation largely
depended on WorldCom’s reported financial results and stock price
appreciation. More importantly for purposes of demonstrating a
strong inference of scienter, the plaintiffs allege that if
WorldCom’s stock price dropped “significantly,” Ebbers stood to
lose millions in compensation and, if Ebbers’ compensation
underwent a “materially adverse” change, certain personal loans –
which were secured by Ebbers’ shares of WorldCom stock – would
immediately become due. For example, in the complaint, the
plaintiffs cite to Ebbers’ personal obligations to Bank of America,
including a $36 million loan and a $25 million loan, which would
become due and payable upon an event of default, which included,
among other things, any materially adverse change in Ebbers’
compensation package from WorldCom.
have intended to complete the deal using its own stock as
currency.
21
The defendants strive vigorously to characterize the Sprint
merger as a “routine corporate event.” However, like the
dependence of the future prospects of the company in Nathenson on
the success of the potential drug Vasomax, the allegations here
sufficiently demonstrate the importance of the Sprint merger to
WorldCom. While WorldCom characteristically engaged in numerous
mergers and reverse-mergers, there was little “routine” about the
Sprint merger. Ebbers himself promoted the Sprint merger as a
“crucial event” for the future of WorldCom.
The motive evidence related to Ebbers individually is likewise
not “without merit.” Since Ebbers’ loans from outside lenders,
such as the Bank of America loans, were collateralized by his
WorldCom stock, if the value of the stock declined such that his
compensation package (including bonuses dependent on the
appreciation of WorldCom stock) underwent a materially adverse
change, Ebbers would have to sell his WorldCom stock immediately to
repay these obligations. As alleged, this forced sale situation
would have a substantial negative impact on the value of Ebbers’
WorldCom stock and thus served as a strong and unique incentive for
Ebbers to “inflate” WorldCom’s stock price artificially.
While, at least as to Ebbers individually, we find these
allegations of motive and opportunity sufficiently particularized,
as we stated in Abrams, our court requires more than allegations of
motive and opportunity to withstand dismissal. To this end, we
discuss the plaintiffs’ allegations of other circumstantial
22
evidence of scienter below.
(2) Other Circumstantial Evidence of Scienter
In addition to allegations of motive and opportunity, the
plaintiffs also point to allegations of circumstantial evidence
claimed to support a “strong inference of scienter.” These
allegations relate to: (1) the timing of the write-off, which
indisputably occurred after the failed Sprint merger and the failed
substitute Intermedia merger; (2) the magnitude of the write-off,
which was, pre-tax, 62% of the total reserves balance and 28% of
the net income for the third quarter of fiscal 2000; (3) Ebbers’
close involvement in the day-to-day operation and management of
WorldCom; and (4) Ebbers’ and Sullivan’s positions in WorldCom,
including their alleged decision-making roles in writing off
uncollectible accounts.
Upon review, we agree with the district court’s assessment of
the allegations of circumstantial evidence here. The allegations
fall short of meeting the “strong inference of scienter”
requirement as to Ebbers and Sullivan.
As to the timing of the write-off, the plaintiffs’ complaint
fails to connect Ebbers or Sullivan to the statement by Rubio in
September 2000 (approximately three months after the Sprint merger
failed) to “get [the] stuff off the books.” Thus, the plaintiffs’
argument that the timing of Rubio’s instruction is circumstantial
evidence that Ebbers and Sullivan were motivated by the Sprint
merger to avoid making necessary write-offs is not supported by
23
their allegations. Moreover, as to the magnitude of the write-
off, the plaintiffs simply ignore evidence that WorldCom frequently
took large write-offs, and that, indeed, a $768 million write-off
had been taken in 1999. Bare conclusory allegations that Ebbers
and Sullivan must have known about the accounts receivable problem
simply because a large write-off was made, at least in the case of
a company of this magnitude, will not suffice under the PSLRA.
Similarly, the plaintiffs’ general allegation that Ebbers was a
“hands-on” CEO and therefore must have been aware of the accounts
receivable situation simply lacks the requisite specificity.
The plaintiffs primarily focus on the last category of
circumstantial evidence claimed to demonstrate scienter on the part
of Ebbers and Sullivan – that Ebbers’ and Sullivan’s decision-
making roles in the write-off process demonstrate, at the very
least, that with severe recklessness they disregarded the accounts
receivable problem. However, regarding this allegation, the
complaint describes a confusing procedure for writing off
delinquent accounts and completely fails to connect Ebbers or
Sullivan to the write-off procedure in a manner that demonstrates
involvement in the initiation of write-offs. We see these
shortcomings in the complaint as critical regarding the ability of
the complaint to survive dismissal.
As alleged, the legal department in Tulsa (consisting of six
employees) frequently prepared a list of delinquent accounts. A
copy of this list was sent each month to certain financial
24
officers, including: Steven Rubio, the assistant controller based
in Atlanta, Georgia; David Myers, the company controller based in
Clinton, Mississippi; and John Krummel, president of wholesale
services, based in Tulsa, Oklahoma. These lists allegedly
contained the duration of an account’s delinquency, the size of the
account, and the circumstances surrounding the delinquency (such as
whether the company was in litigation or bankruptcy or had
undergone a merger). In an effort to show an awareness on the part
of Ebbers and Sullivan regarding the existence of delinquent
accounts, the complaint alleges that David Myers, who was on the
distribution list for this monthly report, reported directly to
Ebbers and Sullivan. Other than this single allegation, however,
the complaint does not connect Ebbers or Sullivan to the reports.
For example, the plaintiffs do not allege that Myers ever presented
or discussed these reports with Ebbers or Sullivan. We agree with
the district court that the PSLRA standards, as interpreted by this
court, do not entitle the plaintiffs to make a conclusory
assumption that simply because a monthly report was generated and
distributed to an individual who reported to Ebbers and Sullivan,
Ebbers or Sullivan had knowledge of certain delinquent account
information which may appear in monthly reports.
The complaint’s presentation of WorldCom’s confusing system of
writing off delinquent accounts further convinces us that the
allegations here do not support a “strong inference of scienter” on
the part of Ebbers or Sullivan. As set forth in the plaintiffs’
25
complaint, management approval was an express requirement for the
completion of any write-off – Bob Vetera was designated to approve
write-offs up to two million dollars, David Myers was designated to
approve most other write-offs in excess of two million dollars, and
Ebbers was designated to approve write-offs in excess of fifteen or
twenty million dollars. However, as further alleged, management
could only approve a write-off after the legal department completed
the separate process of documenting why a write-off was necessary
and then requesting write-off approval from the officer
specifically designated to approve the write-off. Thus, in
contrast to the plaintiffs’ arguments on appeal, their complaint
clearly describes a structure where write-offs are initiated by the
legal department, not management, much less Ebbers and Sullivan
individually.
Moreover, the complaint itself characterizes the write-off
process as “cumbersome” and states that it was often ignored in the
legal department, not because of some overarching directive by the
defendants, but because of the unwieldy process. For example, the
complaint states that:
In order to complete a write-off, an employee had to go
into the billing platform, fill out specific forms, write
a memorandum to management explaining why the write-off
was necessary, and seek express management approval.
Although monthly reports were prepared informing
management of accounts in litigation and bankruptcy,
actual write-offs were not done in a timely fashion
because the process was cumbersome. According to the
Supervising Paralegal, the legal group would generally
“put the accounts back on the shelf somewhere and say
26
when we have some time we’ll do them.”
With a complaint specifically describing a process that was
difficult to follow (and admittedly much easier to ignore) and a
system that allegedly called for write-offs to be initiated from
the legal department rather than upper management, much less Ebbers
or Sullivan, we cannot agree that this complaint specifically
alleges facts demonstrating a “strong inference of scienter” as to
Ebbers and Sullivan. For example, the complaint fails to allege
that Ebbers ever actually received a write-off request, delayed
responding to a write-off request, or rejected a request to write-
off a delinquent account.
Additionally, after discussing the centralized legal group in
Tulsa as controlling the information on all delinquent accounts and
initiating any write-off of a delinquent account, the complaint
confusingly switches gears to refer to four receivable centers
(located in Dallas, San Antonio, Denver, and Atlanta) that are
apparently charged with managing the collection of account
receivables for key business accounts. However, the complaint does
not differentiate between the accounts handled by these centers and
those handled by the legal group in Tulsa, nor does it inform us
whether the accounts handled by these receivable centers are
included in the monthly reports generated by the legal department.
In sum, the complaint’s description of the process for handling
delinquent accounts depicts a mismanaged accounts receivable
27
situation handled by many far-flung departments that frequently,
without direction from upper management, simply ignored initiating
the write-off of delinquent accounts receivable. These allegations
are insufficient to meet the PSLRA’s strict requirements for
pleading scienter on the part of Ebbers and Sullivan.
The plaintiffs claim that Ebbers and Sullivan made statements
to the public regarding the financial growth of WorldCom when they
knew or recklessly disregarded that millions of dollars’ worth of
uncollectible accounts receivable were being kept on the books. In
order to particularize their complaint to demonstrate a strong
inference of scienter as to this kind of claim, the plaintiffs must
tie Ebbers and Sullivan to the allegedly delinquent and
uncollectible accounts. The complaint fails to include allegations
of this nature.
Our decision in Abrams guides this determination. There, the
plaintiff shareholders brought suit against a Houston-based oil and
gas services company, the company’s chief operating officer and its
chief financial officer, contending that the defendants inflated
the stock price of the company artificially by failing to write-off
millions-of-dollars’ worth of uncollectible accounts receivable,
make necessary inventory write-downs, and account for certain
employee compensation. Abrams, 292 F.3d at 427, 429. The
plaintiffs’ allegations were based on circumstantial evidence of
scienter, including: (1) that the individual defendants (the CEO
and CFO) received daily, weekly, and monthly financial reports that
28
apprised them of the company’s true financial status; (2) that the
defendants violated GAAP and the company’s own accounting and
operating procedures; (3) that the defendants were motivated by a
need to raise additional capital, a desire to protect their
incentive compensation, and insider stock sales; and (4) the timing
of the resignation of key accounting officials. Id. at 431-32.
The district court granted the defendants’ motion to dismiss and we
affirmed.
Id. at 435. In so doing, we found the plaintiffs’
pleading insufficient to demonstrate a strong inference of
scienter:
[T]he[] allegations fail to reach the required standard.
Plaintiffs point to no allegations that the defendants
knew about the internal control problems, only that they
should have known based on their corporate positions
within the company . . . The plaintiffs’ allegations
regarding non-specific internal reports are also
inadequate. An unsupported general claim about the
existence of confidential corporate reports that reveal
information contrary to reported accounts is insufficient
to survive a motion to dismiss. Such allegations must
have corroborating details regarding the contents of
allegedly contrary reports, their authors and recipients.
Also the mere publication of inaccurate accounting
figures or failure to follow GAAP, without more, does not
establish scienter. The party must know that it is
publishing materially false information, or must be
severely reckless in publishing such information. The
plaintiffs point to no specific internal or external
report available at the time of the alleged misstatements
that would contradict them.
Id. at 432 (internal footnotes omitted).
As in Abrams, because the complaint here presents what could
best be described as allegations of mismanagement of WorldCom’s
29
accounts receivable situation, perhaps even gross mismanagement, by
several individuals in charge of handling the accounts rather than
severe recklessness by Ebbers and Sullivan individually, we uphold
the dismissal of the complaint by the district court.
IV.
ANALYSIS OF THE PLAINTIFFS’ REQUEST TO AMEND
At the end of their responsive briefing to the defendants’
motion to dismiss, the plaintiffs requested leave of the district
court to amend their complaint. In full, this general request
states:
Should this Court find that the Complaint is insufficient
in any way, however, plaintiffs respectfully request
leave to amend.
The Fifth Circuit recognizes that leave to amend shall be
freely given when justice so requires. Moreover,
“although the decision whether to grant leave rests
within the sound discretion of the district court,” the
federal rules strongly favor granting leave to amend.
Indeed virtually all of the cases relied on by defendants
allowed plaintiffs to amend following a 12(b)(6)
dismissal.
(internal citations and footnote omitted). Finding that the
request was “not well taken” and that the plaintiffs “have had
ample opportunity to plead their case,” the district court denied
the plaintiffs’ request. We uphold this denial.
In discussing a district court’s discretion to deny a litigant
leave to amend under Federal Rule of Civil Procedure 15(a), we have
concluded that this “discretion is limited because Rule 15 evinces
30
a bias in favor of granting leave to amend.” S. Constructors
Group, Inc. v. Dynalectric Co., 2 F.3d 606, 611 (5th Cir. 1993);
Little v. Liquid Air Corp.,
952 F.2d 841, 846 (5th Cir. 1992).
However, we have also stated that leave to amend under Rule 15 is
by no means automatic. S.
Constructors, 2 F.3d at 612. Indeed, we
have upheld the denial of leave to amend when the moving party
engaged in undue delay,
Little, 952 F.2d at 846, or attempted to
present theories of recovery seriatim to the district court. S.
Constructors, 2 F.3d at 612. Additionally, the Supreme Court has
sanctioned bad faith or dilatory motive on the part of the movant,
repeated failure to cure deficiencies by amendments previously
allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, or futility of the amendment as
plausible reasons for a district court to deny a party’s request
for leave to amend. Foman v. Davis,
371 U.S. 178, 182 (1962); see
also 6 CHARLES ALAN WRIGHT, FEDERAL PRACTICE & PROCEDURE, § 1489 (2d ed.
1990) (stating that “if a complaint as amended could not withstand
a motion to dismiss, then the amendment should be denied as
futile”).
Here, as pointed out by the district court, in addition to
being poorly drafted and repetitive, the 110-page complaint is rich
in legal deficiencies. Yet, almost as an afterthought, the
plaintiffs tacked on a general curative amendment request to the
end of their response in opposition to the defendants’ motion to
dismiss. The plaintiffs were certainly aware of the defendants’
31
objections to their complaint as written (because the objections
appeared in the defendants’ principal motion). Despite this
awareness, the plaintiffs did not demonstrate to the court how they
would replead scienter more specifically if given the opportunity,
did not proffer a proposed second amended complaint to the district
court, and did not suggest in their responsive pleading any
additional facts not initially pled that could, if necessary, cure
the pleading defects raised by the defendants. We cannot, in these
circumstances, hold that the district court abused its discretion.6
See McKinney v. Irving Indep. Sch. Dist., 309 F.3d 308, 315 (5th
Cir. 2002) (finding no abuse of discretion in the district court’s
denial of leave to amend where the plaintiffs failed to file an
amended complaint as a matter of right or submit a proposed amended
complaint in a request for leave of the court and the plaintiffs
failed to alert the court as to the substance of any proposed
amendment).
V.
ANALYSIS OF THE PLAINTIFFS’ RULE 60(b)(2) REQUEST
6
We also note that the law firm representing the
plaintiffs has apparently been previously warned by at least one
circuit court against this kind of “wait and see” approach to
requesting leave to amend. See, e.g., Morse v. McWhorter, 290
F.3d 795, 800 (6th Cir. 2002) (“As to the district court’s
characterization of plaintiffs’ maneuvering, we share the
district court’s frustration with the plaintiffs’ apparent ‘cat
and mouse’ class action gamesmanship. And [] we agree that a
district court’s responsibilities do not include instructing
ostensibly sophisticated securities class action counsel how to
plead an actionable complaint . . . .”).
32
After the district court’s order of dismissal and while this
appeal was pending, the plaintiffs filed a Federal Rule of Civil
Procedure Rule 60(b)(2) motion for relief from the judgment in
favor of Ebbers and Sullivan based on newly discovered evidence.
Because the district court interpreted the PSLRA (and our case law
analyzing this statute) to bar automatically the consideration of
newly discovered evidence of securities fraud found after the
filing of the plaintiffs’ initial complaint, the district court
denied the plaintiffs’ motion without specifically considering the
evidence before it in accordance with the standard applicable to a
Rule 60(b)(2) motion. As discussed below, we find no support in
our case law for such a blanket rule; however, because the
plaintiffs have not met their burden under Rule 60(b)(2), we
ultimately agree with the district court that denial of the
plaintiffs’ motion is proper.
A. Substance of the Plaintiffs’ Motion
In their motion, the plaintiffs asked the district court “to
reopen this matter and allow Plaintiffs to file a Second Amended
Complaint” due to “crucial, newly discovered evidence that, if
presented in this matter, would likely change the result of
dismissing this case with prejudice.” Although the complaint
contained allegations of misstatements and omissions resulting from
a wide variety of financial irregularities, the Rule 60(b)(2)
motion focuses, as does this appeal, on the claim of fraud related
to the uncollectible accounts. Regarding the specific “newly
33
discovered” evidence, the plaintiffs cited to and attached as
exhibits hundreds of pages of evidence, including: (1) WorldCom’s
report on Form 8-K, filed with the SEC on June 25, 2002, in which
WorldCom states that it plans to restate its financial statements
for 2001 and the first quarter of 2002, and WorldCom’s report on
Form 8-K, filed with the SEC on August 8, 2002, in which WorldCom
reveals that its financial statements for fiscal year 2000 and,
possibly, 1999 would require restatement and included over $3
billion in additional accounting errors; (2) the transcript from
the September 26, 2002, guilty plea of David Myers, WorldCom’s
former Controller, in the Southern District of New York;
(3) numerous internal memoranda and e-mails from WorldCom, in which
certain employees identify Sullivan as the decision-maker regarding
certain improper line cost accruals and prepaid capacity entries
and in which (in the copy of the minutes from WorldCom’s audit
committee meeting on March 6, 2002) Sullivan is cited as indicating
that Ebbers sought to cut WorldCom’s internal audit budget by 50%
during the period when an internal audit investigating WorldCom’s
accounting fraud was underway; (4) various court pleadings,
including the government’s indictment of Sullivan and the SEC’s
complaint against WorldCom, both filed in the Southern District of
New York; (5) various congressional documents, including the
complete transcript from a hearing of the House of Representatives’
Financial Services Committee in which both Sullivan and Ebbers
invoke their Fifth Amendment right against self-incrimination; and
34
(6) three news releases discussing accounting irregularities and
internal fraud plaguing WorldCom.
In their post-judgment briefing, the plaintiffs maintained
that this material supports their contentions that the defendants
intentionally made false statements during the class period. The
plaintiffs generally stated that WorldCom’s report on Form 8-K,
filed with the SEC on August 8, 2002, is “crucial” in that it
reveals that WorldCom’s 1999 and 2000 financial statements would
require restatement and included over $3 billion in additional
accounting errors. However, other than this general statement, the
only portion of the attached evidence specifically referenced by
the plaintiffs in their post-judgment briefing is a portion of the
transcript from the guilty plea of David Myers who, as alleged,
reported directly to Ebbers and Sullivan as upper management. The
cited portion of the transcript provides:
From at least October 2000 through June 2002, internal
financial reports at WorldCom consistently reflected that
WorldCom’s expenses as a percentage of revenue were too
high to meet analysts’ expectations and management’s
guidance to professional securities analysts and the
investing public. As a result, I was instructed on a
quarterly basis by senior management to ensure that
entries were made to falsify WorldCom’s books to reduce
WorldCom’s reported actual costs and therefore to
increase WorldCom’s reported earnings. Along with
others, who worked under my supervision and at the
direction of WorldCom senior management, such accounting
adjustments were made for which I knew that there was no
justification or documentation and which I knew were not
in accordance with Generally Accepted Accounting
Principles.
35
B. The District Court’s Ruling
The district court denied the plaintiffs’ motion. The court
recognized that “[s]ince the Opinion and Order of this Court of
March 29, 2002, the near collapse and bankruptcy of WorldCom and
its firing of Ebbers and Sullivan have been national news and
WorldCom has made public admissions of financial irregularities .
. . [and] [t]hus it would appear that as of the time of filing
their Amended Class Action Complaint . . . serious financial
misstatement and perhaps securities fraud had occurred.” However,
without addressing the Rule 60(b) standard, the district court
concluded that, as a matter of law, the new evidence could not form
a basis for the relief sought by the plaintiffs. In so finding, it
explicitly relied on our Nathenson opinion to state, as the
district court described it, that “[t]he strong inference of
scienter must arise from facts stated with particularity in the
complaint and those facts must now present a strong inference of
scienter.” (emphasis in district court’s opinion). The district
court went on to further explicate its ruling:
The Complaint was dismissed partly because of a failure
to plead scienter. The discovery of this new evidence
does not change the fact that scienter was not pled with
particularity in the Complaint. The Plaintiffs are not
entitled to amend their complaint in order to replead
with particularity an element such as scienter that
should have been properly pled in the beginning.
Plaintiffs complain that they were unable to discover
this information because they were prohibited from taking
formal discovery by the PSLRA. This is precisely the
purpose of the pleading requirement of the PSLRA, for the
36
plaintiff to lay out the who, what, when, and where in
the pleadings before access to the discovery process is
granted, to prevent abusive, frivolous strike suits.
(emphasis added). Below, we discuss tension we perceive between
language in this order and our case law.
C. Rule 60(b) Standards and the PSLRA
The only issues on appeal of a Rule 60(b) motion are “the
propriety of the denial of relief . . . and whether the court
abused its discretion in denying relief.” Provident Life &
Accidental Ins. Co. v. Goel, 274 F.3d 984, 999 (5th Cir. 2001);
Halicki v. La. Casino Cruises, Inc.,
151 F.3d 465, 471 (5th Cir.
1998) (stating that abuse of discretion standard applies to our
review of the denial of a Rule 60(b) motion).
The basis of the district court’s order is that, Rule 60(b)
standards aside, our prior case law reads into the PSLRA a
requirement that plaintiffs pursuing a securities action must
always plead facts with the requisite particularity and specificity
in the “beginning.” We have never endorsed this proposition so
broadly cast.
Rule 60(b) provides, in relevant part, that: “On motion and
upon such terms as are just, the court may relieve a party . . .
for the following reasons . . . (2) newly discovered evidence which
by due diligence could not have been discovered in time to move for
a new trial under Rule 59(b).” FED. R. CIV. P. 60(b)(2). To
succeed on a motion for relief from judgment based on newly
37
discovered evidence, our law provides that a movant must
demonstrate: (1) that it exercised due diligence in obtaining the
information; and (2) that the evidence is material and controlling
and clearly would have produced a different result if present
before the original judgment. See Provident Life & Accidental Ins.
Co., 274 F.3d at 999. As the defendants note, we have also
“described as self evident the requirements that newly discovered
evidence be both admissible and credible.”
Id. at 984 (internal
quotation omitted).
Here, the district court interpreted our PSLRA case law to bar
a plaintiff from utilizing evidence discovered after his or her
initial complaint was filed. It thus did not cite to, discuss or
analyze the plaintiffs’ new evidence under the applicable Rule
60(b) standard. However, our Nathenson opinion did not address a
Rule 60(b)(2) motion and therefore was not intended to augment the
PSLRA with the limitation that a plaintiff be precluded from ever
utilizing new evidence discovered after the filing of his or her
initial complaint.
The “now” in the portion of the Nathenson opinion cited by the
district court in support of its conclusion that new evidence
cannot, as a matter of law, ever be the basis of a Rule 60 motion
in the context of a PSLRA case was not intended to be interpreted
in this manner. Rather, in discussing the impact of the PSLRA on
pre-PSLRA case law analyzing motive and opportunity in the context
of scienter, we quoted the First Circuit’s Greebel v. FTP Software,
38
Inc., 194 F.3d 185 (1st Cir. 1999), opinion in stating that
“whatever characteristic pattern of facts alleged, those facts must
now present a strong inference of scienter.”
Id. at 196 (emphasis
in original). The “now” (which, in contrast to the district
court’s order, was not emphasized in the original opinion) was
simply meant to contrast the intent requirement pre-PSLRA with the
“strong inference of scienter” requirement post-PSLRA. Our
reference to the word “now” as quoted in Greebel should not be
taken out of context to preclude, in every instance, a plaintiff
from utilizing new evidence discovered after the filing of his or
her initial securities fraud complaint.
Ultimately, we need not decide whether or to what extent new
evidence, discovered after the dismissal of a complaint based on
the plaintiff’s failure to satisfy the requirements of the PSLRA,
can form a basis for the granting of a Rule 60(b)(2) motion.7 We
need only decide that in such a situation, at a minimum, the
7
We are unaware of any circuit endorsing a blanket rule
disallowing the consideration of newly discovered evidence in the
context of a PSLRA case. To the contrary, two circuits have
authorized the granting of a Rule 60(b)(2) motion based on newly
discovered evidence in these circumstances. See Werner v.
Werner, 267 F.3d 288, 296-97 (3d Cir. 2001) (remanding a case
governed by the PSLRA with instructions to allow the plaintiffs
to amend their complaint based on newly discovered corporate
board minutes because the court “will not add to the strict
discovery restrictions in the [PSLRA]” by augmenting the “high
burdens the PSLRA placed on plaintiffs [already]”); Alpern v.
UtiliCorp United, Inc.,
84 F.3d 1525, 1533-34 (8th Cir. 1996)
(reversing the district court’s denial of a Rule 60(b)(2) motion
based on a newly discovered internal corporate memorandum
detailing illegal conduct).
39
primary Rule 60(b) inquiry – whether the evidence clearly would
have produced a different result if present before the original
judgment – would have to be analyzed through the prism of PSLRA
particularity standards (which are, of course, more stringent than
general notice pleading standards). Abrams, 292 F.3d at 432.
Here, the lack of evidence of particularized pleading in this
case persuades us to uphold the district court’s denial of the
plaintiffs’ Rule 60(b) motion.
Even if we assume for the sake of this appeal that the newly
discovered evidence submitted by the plaintiffs is admissible and
credible, two issues the defendants vehemently dispute, the
plaintiffs’ Rule 60(b) motion is insufficient as a matter of law to
merit the “extraordinary” remedy they seek. Pease v. Pakhoed, 980
F.2d 995, 998 (5th Cir. 1993) (“Courts are disinclined to disturb
judgments under the aegis of Rule 60(b).”); Longden v. Sunderman,
979 F.2d 1095, 1102 (5th Cir. 1992) (stating that relief under
60(b) is “extraordinary . . . and the requirements of the rule must
be strictly met”). As they did in crafting their complaint, the
plaintiffs here simply inundated the district court with an
avalanche of material in the hopes that the court would, on its
own, connect the dots between any bad act found in the material and
allegations related to the single claim against Ebbers and Sullivan
in this case. This is not the court’s burden. Rather, if a Rule
60(b)(2) motion were to succeed, it would be the plaintiffs’ heavy
burden to demonstrate to the district court how this newly
40
discovered evidence is “material and controlling and clearly would
have produced a different result if presented before the original
judgment.” N. H. Ins. Co. v. Martech USA, Inc., 993 F.2d 1195,
1201 (5th Cir. 1993) (quotation omitted and emphasis added). Here,
the plaintiffs’ four-page motion for relief from judgment (appended
to hundreds of pages of evidence) simply does not cut it. It is
not enough to state, in a conclusory fashion, that “[t]his newly
discovered evidence is highly probative of defendants’ fraudulent
intent during the Class Period and should change the outcome of
this case.” Provident Life & Accidental Ins.
Co., 274 F.3d at 999.
This tells the district court nothing regarding whether the
evidence submitted is relevant, material and controlling regarding
the narrow sliver of fraudulent conduct alleged in the plaintiffs’
complaint to have occurred and does not demonstrate how the
plaintiffs would have pleaded their complaint differently had this
evidence been available to them prior to the judgment being entered
against them.
The PSLRA sets forth a pleading standard, not an evidentiary
standard, and charges the plaintiffs with the duty of connecting
their proffered evidence to particularized allegations of scienter
in their pleading. Here, the lion’s share of the evidence appended
to the plaintiffs’ Rule 60(b) motion relates to the improper
capitalization of certain line item costs (that, as operating
expenses, should have been deducted from WorldCom’s revenues and
should not have been subject to depreciation) and improper
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accounting treatment of certain reserve accounts. Neither the
reserve for uncollectible accounts nor uncollectible accounts
generally are mentioned, a fatal problem when the only remaining
claim in this case focuses on both.
As with the plaintiffs’ request for leave to amend, the
plaintiffs did not submit a proposed second amended complaint with
their Rule 60(b) motion, nor have they demonstrated in their
original motion or their reply memorandum how they would have
pleaded this case differently had this evidence been available to
them. This complete lack of effort regarding the Rule 60(b)
standard compels us to uphold the denial of the plaintiffs’ Rule
60(b) motion.
VI.
CONCLUSION
In No. 02-60322, we AFFIRM the judgment of the district court
only insofar as it dismissed with prejudice the plaintiffs’
complaint against Ebbers and Sullivan; we retain jurisdiction of
the pending appeal as to WorldCom. In No. 03-60248, we AFFIRM the
district court’s post-judgment order denying the plaintiffs’ Rule
60(b) motion for relief from judgment in favor of Ebbers and
Sullivan. All pending motions are DENIED as moot.
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