Case: 17-50162      Document: 00514911377         Page: 1    Date Filed: 04/10/2019




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT
                                                                          United States Court of Appeals
                                                                                   Fifth Circuit


                                      No. 17-50162
                                                                                 FILED
                                                                             April 10, 2019
                                                                            Lyle W. Cayce
ALASKA ELECTRICAL PENSION FUND,                                                  Clerk

              Plaintiff - Appellant

v.

VINIT K. ASAR; GEORGE MCHENRY; HANGER, INCORPORATED;
THOMAS F. KIRK,

              Defendants - Appellees




                   Appeal from the United States District Court
                        for the Western District of Texas
                             USDC No. 1:14-CV-1026


                         ON PETITION FOR REHEARING
Before WIENER, GRAVES, and HO, Circuit Judges.
JAMES E. GRAVES, JR., Circuit Judge:*
       Defendants’ Petition for Panel Rehearing is GRANTED IN PART.
       IT IS ORDERED that our prior panel decision, Alaska Electrical Pension
Fund v. Asar (Aug. 6, 2018), is WITHDRAWN, and the following is
SUBSTITUTED in its place.



       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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                                       No. 17-50162
       Plaintiff-Appellant Alaska Electrical Pension Fund (“the Fund”) is a
pension fund representing a class of investors. It claims that Defendants-
Appellees Hanger, Inc. (“Hanger”) and three of its officers engaged in securities
fraud. The Fund’s allegations are based predominantly on a report by Hanger’s
Audit Committee after Hanger restated its financial results. That report
indicates that some defendants set an inappropriate “tone at the top” and
engaged in improper accounting. The district court granted the defendants’
motions to dismiss, holding that the complaint did not adequately allege
scienter. For the reasons stated below, we affirm.
                              I. FACTS AND PROCEEDINGS
       Hanger is the largest provider of orthotic and prosthetic patient care
services in the United States. 1 Hanger’s principal sources of revenue are
reimbursements for its services and products from public and private insurers.
Federal programs, such as Medicare, Medicaid, and the Department of
Veterans Affairs, are also the source of a significant portion of Hanger’s
revenue. Before the period of time at issue, Hanger recorded positive growth
in same-store sales for every quarter since 2005.
       Defendant Thomas Kirk was Hanger’s President from March 2008 to
September 2011 and its CEO from March 2008 until he retired in May 2012. 2
Defendant Vinit Asar was Hanger’s President and COO from September 2011
to May 2012, when he became President and CEO. Defendant George McHenry
was Hanger’s CFO until he retired at the end of 2014. The Fund invested in
Hanger stock.




       1  These facts are taken from the Third Amended Complaint, which are taken as true
at the motion to dismiss stage. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

, 322
(2007).
        2 Kirk remained on the Board of Directors until 2014.

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                                 No. 17-50162
      In 2010, Congress expanded a Medicare audit program—one that
reviewed medical records in support of Medicare claims—to scrutinize the
medical necessity of the claimed services or devices. Hanger’s clinics did not
collect the required documentation in a timely manner, so after Medicare
scrutiny increased under the expanded program, Hanger began failing audits
more frequently. When Hanger failed an audit, it was required to return the
reimbursement it had collected, even though it had already recognized that
reimbursement as revenue. Hanger would then pursue recovery of those
reimbursements via a lengthy Medicare appeals process.
      The Fund contends that, despite these problems, Hanger continued to
claim success in its Medicare audits and maintained that it had sufficient
internal controls to ensure that it passed audits. Consequently, Hanger did not
increase its reserve for disallowed Medicare sales.
      At the same time, Hanger was implementing a new clinic data
management system called Janus. The Fund contends that the defendants told
investors that the Janus rollout caused only minimal disruptions when, in
reality, clinicians made fewer sales because they had to spend significant time
and resources transitioning patient data to the new system. In addition to
these documentation troubles, and the related failure to increase its audit
reserve, on April 4, 2014, Hanger identified three material weaknesses in its
inventory accounting. In its SEC filings, the individual defendants certified
that these were the only material weaknesses in Hanger’s internal controls.
   A. Alleged False and Misleading Statements
      The Fund identifies ninety-three allegedly false and misleading
statements by the defendants related to these issues. It states the speaker,
date, and medium (e.g., SEC filing, press release, or conference call) for each
statement. The allegedly false statements cover several categories. First, the
Fund claims that Hanger reported false financial metrics and falsely depicted
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                                           No. 17-50162
Hanger as having strong same-store sales. This resulted in reporting inflated
financial results for 2011, 2012, and 2013, and for all quarters from the second
quarter of 2011 to the second quarter of 2014. Second, the Fund claims that
Hanger falsely stated that its Medicare audits and appeals were more
successful than they actually were; that its reserves estimates were adequate;
and that the Janus implementation caused minimal disruption. Third, the
Fund claims that Hanger falsely assured investors that its internal controls
were adequate. Finally, the Fund claims that even after Hanger began
disclosing a series of problems—most prominently announcing in February
2015 that it would reissue financial statements for 2012 through the second
quarter of 2014—Hanger continued to falsely understate “the size and scope of
the restatement.”
   B. Alleged Corrective Disclosures
         Since the initial restatement announcement in February 2015, Hanger
has issued at least five updates. 3 It has also continued to announce material
weaknesses, ultimately acknowledging at least eleven. Hanger eventually
admitted to overstating its pre-tax income by $87 million.
On November 12, 2015, Hanger announced that its Audit Committee would
investigate the circumstances which led to the restatement. On February 26,
2016, Hanger disclosed preliminary findings of the investigation in a Form 8-
K (“February 8-K”) filed with the SEC, stating that “certain former officers and
employees . . . may have engaged in inappropriate activities,” although it did
not identify those individuals. The February 8-K revealed that Hanger had
overstated its accounts receivable and understated its reserves by
approximately $40 million. In June 2016, Hanger released a summary of the



         3   The full financial restatements had not been issued as of the time the district court
ruled.
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                                    No. 17-50162
final investigation results in another Form 8-K (“June 8-K”). Both Forms 8-K
stated that a former employee had fabricated inventory records. The June 8-K
also stated that (1) Kirk and McHenry had “set an inappropriate ‘tone at the
top’” by emphasizing “achieving certain financial targets,” which “may have”
contributed to inappropriate accounting decisions, and (2) McHenry and others
had “engaged in inappropriate historical accounting practices” and that
“particular adjustments . . . were undertaken for the purpose of enhancing
[Hanger’s] reported financial results.”
   C. Proceedings
      In February 2015, after the initial complaint was filed in November 2014
(before the first restatement announcement), the district court appointed the
Fund as lead plaintiff. 4 The Fund has since amended the complaint three
times. The current version, the Third Amended Complaint (“TAC”), was filed
in July 2016 and is the first complaint to name Kirk as a defendant and to
incorporate allegations based on the Audit Committee’s June 8-K findings.
      The TAC alleges (1) violations of § 10(b) of the Securities and Exchange
Act 5 and SEC Rule 10b-5 6 by all defendants and (2) violations of § 20(a) of the
Securities and Exchange Act 7 by the individual defendants (“control person
claims”) on behalf of every purchaser of Hanger stock between July 27, 2011
and February 26, 2016 (the “Class Period”). Each defendant filed a motion to
dismiss in September 2016. The district court granted the motions with
prejudice, and the Fund appeals.




      4  Plaintiffs City of Pontiac General Employees’ Retirement System, City of Pontiac
Policy and Fire Retirement System, and Lackawanna County Employees’ Retirement Fund
had all withdrawn their motions for appointment as lead plaintiff.
       5 15 U.S.C. § 78j(b).
       6 17 C.F.R. § 240.10b-5.
       7 15 U.S.C. § 78t(a).

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                                       No. 17-50162
                                  II. LEGAL STANDARDS
       To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege “(1)
a material misrepresentation (or omission), (2) scienter, i.e., a wrongful state
of mind, (3) a connection with the purchase or sale of a security, (4)
reliance . . . [,] (5) economic loss[,] and (6) ‘loss causation,’ i.e., a causal
connection between the material misrepresentation and the loss.” 8 “Under
Section 20(a), a person who exerts control over a person who violates any
provision of the Securities Exchange Act can be held jointly and severally liable
with the primary actor of the underlying securities law violation.” 9 “Control
person liability is secondary only and cannot exist in the absence of a primary
violation.” 10
       We review a district court’s analysis of a motion to dismiss de novo. 11 A
claim under § 10(b) is subject to the heightened pleading standard of Rule 9(b),
requiring a plaintiff to “state with particularity the circumstances constituting
fraud.” 12 The Private Securities Litigation Reform Act (PSLRA) adds two
additional pleading requirements. First, a plaintiff must “specify each
statement alleged to have been misleading, [and] the reason or reasons why
the statement is misleading,” and must “state with particularity all facts on
which” allegations made on information and belief are based. 13 Second, the
complaint must “state with particularity facts giving rise to a strong inference
that the defendant acted with the required state of mind.” 14



       8 Owens v. Jastrow, 

, 535 (5th Cir. 2015) (quoting Lormand v. U.S.
Unwired, Inc., 

, 238–39 (5th Cir. 2009)).
       9 Neiman v. Bulmahn, 

, 746 (5th Cir. 2017) (quoting Flaherty & Crumrine

Preferred Income Fund, Inc. v. TXU Corp., 

, 206 n.4 (5th Cir. 2009)).
       10 Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 

, 383 (5th Cir. 2004).
       11 Spitzberg v. Hous. Am. Energy Corp., 

, 683 (5th Cir. 2014).
       12 FED. R. CIV. P. 9(b); see 

.
       13 15 U.S.C. § 78u-4(b)(1).
       14 

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                                     No. 17-50162
                                     III. ANALYSIS
      The district court dismissed the complaint for failing to allege scienter
adequately. The Fund maintains that this was error; the defendants contend
that the district court’s dismissal was correct. The defendants also assert in
the alternative that the complaint does not adequately plead loss causation.
   A. Scienter
      In a securities fraud case, scienter connotes “an intent to deceive,
manipulate, [or] defraud,” or “severe recklessness.” 15 “Severe recklessness is
limited to those highly unreasonable omissions or misrepresentations that
involve not merely simple or even inexcusable negligence, but an extreme
departure from the standard of ordinary care[.]” 16 Severe recklessness is
present when there is “a danger of misleading buyers or sellers which is either
known to the defendant or is so obvious that the defendant must have been
aware of it.” 17
      To determine whether the complaint states a strong inference of scienter,
courts follow a three-step process. First, courts must take the complaint’s
allegations as true. 18 Second, “courts must consider the complaint in its
entirety, as well as other sources courts ordinarily examine when ruling on
Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into
the complaint by reference, and matters of which a court may take judicial
notice.” 19 In other words, courts evaluate scienter allegations holistically. 20
When doing so, “[a] district court may best make sense of scienter allegations
by first looking to the contribution of each individual allegation to a strong



      15 

(quoting 

).
      16 

v. Baker Hughes Inc., 

, 430 (5th Cir. 2002)).
      17 

, 292 F.3d at 430).
      18 

.
      19 

      20 

–37.

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                                       No. 17-50162
inference of scienter, especially in a complicated case[.]” 21 Third, “the court
must take into account plausible opposing inferences.” 22 To pass muster, “the
inference of scienter must be more than merely ‘reasonable’ or ‘permissible’—
it must be cogent and compelling, thus strong in light of other explanations.” 23
“[A] reasonable person [must] deem the inference of scienter . . . at least as
compelling as any opposing inference one could draw from the facts alleged.” 24
       We follow the approach taken in prior cases, examining the scienter
allegations to determine whether and to what extent they contribute to an
inference of scienter. We then examine those contributions holistically to
determine whether that inference is strong. The Fund contends that the court
can strongly infer scienter from allegations related to the following: (1) the
magnitude of the restatement and the long period of time that it covers, (2) the
individual defendants’ stock transactions, (3) the Audit Committee’s
findings, 25 and (4) the defendants’ certifications of Hanger’s SEC filings under
the Sarbanes-Oxley Act of 2002 (“SOX”), (5) in spite of the red flags they
ignored.




       21   

complains that the district court only examined the allegations
individually, but the district court explicitly stated that it considered the allegations
holistically, and merely examined first the contribution of individual allegations to the
overall scienter determination, a permissible approach.
        22 

.
        23 

        24 

allegations quote and paraphrase liberally from the June 8-K, so the district

court considered it incorporated into the complaint. This was appropriate, because “[w]hen
deciding a motion to dismiss a claim for securities fraud on the pleadings, a court may
consider the contents of relevant public disclosure documents which (1) are required to be
filed with the SEC, and (2) are actually filed with the SEC,” but “only for the purpose of
determining what statements the documents contain.” Lovelace v. Software Spectrum Inc.,

, 1018 (5th Cir. 1996). Further, a court must consider documents incorporated
by reference into a securities fraud complaint. 

. The Fund has not
contested that it implicitly incorporated the June 8-K into its complaint, and thus forfeited
any objection on those grounds.
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                                        No. 17-50162


       1. Magnitude and Time Period of Restatement
       The most straightforward allegations of scienter point to the large size
of the accounting restatement—$87 million—and the fact that it occurred over
a significant period of time. These allegations provide some basis to infer
scienter, but they cannot support a strong inference on their own. 26 “The
significance of a large accounting error depends on the circumstances,” 27 so we
must assess the extent of the support in the context of the other allegations.
       2. Stock Sales (Motive)
       The next set of allegations concerns motive. The Fund contends that the
individual defendants intended to inflate the price of Hanger’s stock so that
they could sell their own stock at a high price. The TAC lists the individual
defendants’ stock transactions, and asserts that they sold much more of their
stock during the Class Period than before.
       “[A]ppropriate allegations of motive and opportunity may meaningfully
enhance the strength of the inference of scienter.” 28 “However, this is true of
insider trading ‘only’ when ‘in suspicious amounts or at suspicious times.’” 29
“‘Suspicious’ in this context generally means that the ‘sales are out of line with
prior trading practices or at times calculated to maximize personal profit.’” 30




       26  See Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 

, 552
(5th Cir. 2007); Fine v. Am. Solar King Corp., 

, 297 (5th Cir. 1990) (“[P]ublication
of inaccurate accounting figures, or a failure to follow [Generally Accepted Accounting
Principles], without more, does not establish scienter.”).
        27 

.
        28 

(quoting Nathenson v. Zonagen Inc., 

, 412

(5th Cir. 2001)).
        29 

, 292 F.3d at 435); see also Cent. 

–53

(“Insider trading can be a strong indicator of scienter if the trading occurs at suspicious times
or in suspicious amounts.”).
        30 Cent. 

(quoting 

).

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                                        No. 17-50162
But, as with accounting restatements, “[i]nsider trading alone cannot create a
strong inference of scienter.” 31
       Defendants respond that these allegations do not support scienter
because there is a “plausible, nonculpable explanation[]” 32 for the trades: The
defendants sold the stock to cover tax expenses and pursuant to 10b5-1 trading
plans. “A 10b5–1 plan is an agreement ‘which allows corporate insiders to set
a schedule by which to sell shares’ over time, and which can ‘raise an inference
that the sales were pre-scheduled and not suspicious.’” 33 Defendants support
this alternate explanation with SEC Forms 4, the disclosures required when
particular corporate insiders trade corporate stock. The district court took
judicial notice of these forms, explaining that they were the only possible
source of the stock sales data in the TAC. The forms state that these
transactions were made to cover taxes and pursuant to 10b5-1 trading plans.
But the Fund argues that the court should not consider these forms because
they require an inappropriate factual determination.
       This court has never explicitly stated whether we may look to a Form 4
for plausible explanations of potentially suspicious trades at the pleading
stage. Although district courts are divided on this issue, 34 we may look to



       31  Id.; see Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v. Diodes, Inc.,

, 957 (5th Cir. 2016) (“[M]otive and opportunity standing alone will not suffice
[to allege scienter.]” (quoting Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw Grp., Inc.,

, 553 (5th Cir. 2008)).
        32 

.
        33 Cent. 

n.4 (5th Cir. 2007) (quoting Wietschner v. Monterey

Pasta Co., 

, 1117 (N.D. Cal. 2003)).
        34 Compare In re ArthroCare Corp. Sec. Litig., 

, 722 (W.D. Tex.

2010) (“[W]hether or not the stocks in this case were sold pursuant to a 10b5–1 trading plan
is irrelevant at this stage in the proceedings, as the existence of such a plan is an affirmative
defense[.]”), and Freudenberg v. E*Trade Fin. Corp., 

, 200 (S.D.N.Y. 2010)
(“A Rule 10b5–l trading plan may give rise to an inference of scienter because a clever insider
might maximize their gain from knowledge of an impending price drop over an extended
amount of time, and seek to disguise their conduct with a 10b5–1 plan.” (citation and internal
quotation marks omitted)), with Hopson v. MetroPCS Commc’ns, Inc., No. 3:09-CV-2392-G,
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                                         No. 17-50162
publically filed SEC documents implicitly incorporated into a complaint. 35
Looking to Forms 4 also seems congruent with the requirement that we
consider plausible nonculpable explanations for the defendants’ conduct. 36
       In Central Laborers’ Pension Fund v. Integrated Electrical Services Inc.,
the defendant offered a divorce decree and a 10b5-1 trading plan to explain
suspicious trades. 37 The court explained that the decree was properly
considered at the motion to dismiss stage because “the document’s written
terms themselves indicate the reason [the defendant] had for selling the
shares.” 38 But ultimately, neither document made another explanation more
plausible because (1) it was “unclear whether the divorce decree actually
created any financial obligations,” and (2) “[the defendant] entered into the
[10b5-1] Plan during the Class Period.” 39 Central Laborers suggests that we
may consider the Forms 4, but only in the course of weighing which
explanation is more plausible. Selling shares to pay taxes weighs against a
nefarious motive, but neither side has pointed to any information about when
the defendants entered into the 10b5-1 trading plans. We therefore cannot say

, at *14 n.14 (N.D. Tex. Mar. 25, 2011) (“[T]he court may properly consider
[the 10b5-1 trading] plans, and the relevant Form 4s, when weighing the competing
inferences regarding the insider sales.”), and In re Sec. Litig. BMC Software, Inc., 183 F.
Supp. 2d 860, 884 (S.D. Tex. 2001) (“Because Plaintiffs relied on these documents and
because they are integral to determining whether Plaintiffs allegations give rise to a strong
inference of scienter, they are incorporated by reference even though they are not mentioned
in the amended complaint.”).
        35 See 

.
        36 The Fund cites to Rubinstein v. Collins, in which this court declined to consider an

argument that suspicious sales “were made in response to tax considerations,” because such
a contention had no place at the pleading stage. 

, 169 n.38 (5th Cir. 1994). But
Rubenstein was decided before the Supreme Court, in Tellabs, required weighing the
plausibility of alternate explanations.
        

.
        38 

see also Ind. 

(finding it “quite plausible” that a defendant

would sell stock days after the expiration of a “lock-up” agreement to not sell shares for a
period of time).
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                                        No. 17-50162
that the trading plans mitigate a suggestion of motive, even though that
suggestion may be mitigated by a lengthy Class Period. 40 Thus, the trades
contribute only slightly to an inference of scienter. 41 We emphasize that, even
though we must weigh the plausibility of different explanations for the trades,
we make no factual conclusions at this stage.
       3. Audit Committee Findings
       Perhaps the most important of the scienter allegations are those
concerning the Audit Committee findings as reported in the June 8-K. 42 The
TAC relies primarily on two of the Audit Committee’s conclusions. 43 The first
specifically identifies Kirk and McHenry:
       [T]he former Chief Executive Officer [Kirk], former Chief Financial
       Officer [McHenry], and former Chief Accounting Officer (but not
       any current executive officers) set an inappropriate “tone at the
       top.” Specifically, emphasis placed by former executive management
       on meeting or beating consensus EPS and achieving certain
       financial targets, may have resulted in certain inappropriate
       accounting decisions and entries.
       The second major conclusion also identifies McHenry: “[I]t is more likely
than not that former employees and officers, including in some instances the
former Chief Financial Officer [McHenry] and former Chief Accounting Officer,



       40  

(noting a Fourth Circuit case that “labeled a
class period of 46 months ‘exceedingly long’ and declared ‘such a lengthy class period weakens
any inference of scienter that could be drawn from the timing of defendants’ trades.’” (quoting
Teachers’ Ret. Sys. of La. v. Hunter, 

, 185 (4th Cir. 2007))).
        41 The parties also cite to several cases in which courts held that different percentages

of the stock sold did or did not significantly contribute to a strong inference of scienter. But
these percentages contribute to a strong inference of scienter only in a holistic context of the
allegations in those cases, so particular percentages do not help us.
        42 The February 8-K contains some of the same conclusions as the June 8-K, but its

conclusions are more general: It identifies only “former officers and employees,” as opposed
to the officers identified by title in the June 8-K. The June 8-K is essentially a more detailed
version of the February 8-K, and this analysis is therefore confined to the June 8-K.
        43 As noted above, the Audit Committee also concluded that a former employee had

intentionally fabricated records. There is no allegation, however, that any defendant knew
about this fabrication.
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                                 No. 17-50162
engaged in inappropriate historical accounting practices relating to
management estimates and certain accruals.” The Form 8-K discusses these
inappropriate accounting practices and concludes that whoever made
particular accounting decisions did so for the purpose of achieving financial
targets. But these findings are written in the passive voice and do not identify
who made those adjustments with such intent: For example, “management’s
estimate of quarterly cost of materials was inappropriately reduced with the
objective of attaining financial targets for those periods[.]” Also, the section
describing the accounting practices concludes:
      The evidence of the actual purpose of these adjustments of
      management estimates and other accruals was neither direct nor
      conclusive. Nor did witnesses interviewed by the Investigative
      Team acknowledge having made these adjustments for an
      improper purpose. Nevertheless, based on the evidence uncovered
      in the Investigation, the Audit Committee has determined that it
      is more likely than not that in certain interim fiscal periods of 2011
      particular adjustments to particular management estimates were
      undertaken for the purpose of enhancing the Company’s reported
      financial results. Based on the evidence uncovered in the
      Investigation, the Audit Committee has also determined that it is
      more likely than not that in the years 2010 through 2012, the
      accrual and release of the “contingency reserve” was undertaken
      for the purpose of inappropriately enhancing the Company’s
      reported financial results.
The question, then, is whether the June 8-K constitutes particular facts
supporting a strong inference of scienter.
            a. Group Pleading
      As an initial matter, both major findings implicate more than one person.
The defendants insist that these allegations are thus “group pleading.” “[T]he
‘group pleading’ doctrine in its broadest form allows unattributed corporate
statements [such as press releases] to be charged to one or more individual



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                                        No. 17-50162
defendants based solely on their corporate titles.” 44 This court does not
consider group pleading allegations. 45 Nor does this court allow group pleading
allegations to establish scienter. 46 The Audit Committee-based allegations
against Asar are that he must have known about the issues identified in the
report and allowed them to continue. These allegations are based on his role
as CEO, but the Audit Committee report specifically states that it makes no
finding as to his role in the accounting problems. These allegations thus do not
support Asar’s scienter.
       Kirk and McHenry are identified by title in the Audit Committee report.
These allegations do not concern the allegedly false statements made by these
two defendants, nor do they attribute Hanger’s statements in the Audit
Committee report to them. 47 In fact, the Fund describes Kirk’s and McHenry’s
allegedly false statements individually in the complaint. 48
       As we understand it, the defendants contend that these allegations are
group pleading because they are general allegations of scienter, and they are
not linked to specific statements in the complaint. For reasons discussed below,
we agree that some of the scienter allegations against McHenry are based on


       44  

.
       45  See 

        46 See Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v. Diodes, Inc., 

, 957 (5th Cir. 2016) (citing Indiana Elec. Workers’ Pension Tr. Fund IBEW v. Shaw
Grp., Inc., 

, 533 (5th Cir. 2008)).
        47 Cf., e.g., Fin. Acquisition Partners LP v. Blackwell, 

, 287 (5th Cir. 2006)

(rejecting allegations as group pleading when “Plaintiffs fail . . . to allege which Individual
Defendant made which statement at that meeting” (emphasis added)); Barrie v. Intervoice-
Brite, Inc., 

, 261 (5th Cir.), opinion modified on denial of reh’g, 

(5th
Cir. 2005) (upholding dismissal when plaintiff attributed statements to “management,” but
not individuals). McHenry cites various district court cases, but does not explain why our
case law requires more of a connection than the June 8-K provides.
        48 To the extent that the Audit Committee report states that “officers” or

“management” made certain statements, allegations based on those statements would indeed
be group pleading. But we consider the Audit Committee report only in the context of whether
the defendants have adequately pleaded scienter with respect to the specifically pleaded false
statements elsewhere in the complaint.
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                                       No. 17-50162
group pleading. We have never required different sets of scienter allegations
for each statement, 49 but a plaintiff must allege a connection between a
defendant’s scienter and the allegedly false statements. 50 The fact that these
allegations pertain to more than one person does not make them group
pleading. 51 The allegations against Kirk and McHenry are not categorically
barred as group pleading.
              b. “Tone at the Top”
       The Fund contends that we may infer Kirk and McHenry’s scienter from
the Committee’s conclusion that those two set an “inappropriate tone at the
top” by emphasizing their desire to achieve financial targets. The only court of
appeals to have addressed similar allegations concluded that they did not
support an inference of scienter. 52 In that case, the Fourth Circuit explained
that such admissions “fail to suggest that defendants intentionally created an
environment conducive to accounting fraud; the company simply admits that
such an environment existed.” 53




       49 See, e.g., 

–61; 

–46.
       50 

(“[S]cienter [must] be pleaded with regard to ‘each act
or omission’ sufficient to give ‘rise to a strong inference that the defendant acted with the
required state of mind.’” (quoting 15 U.S.C. § 78u-4(b))); cf. 

(“[W]e do not construe
allegations contained in the Complaint against the ‘defendants’ as a group as properly
imputable to any particular individual defendant unless the connection between the
individual defendant and the allegedly fraudulent statement is specifically pleaded.”).
       51 Cf. 

n.4 (“These allegations [common to more than one

defendant] do not constitute group pleading because they are sufficiently particularized.”).
       52 Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 

, 183 (4th Cir.

2009).
       53 Id.; see also In re Hertz Glob. Holdings, Inc. Sec. Litig., No. 13-7050, 

, at *16 (D.N.J. Apr. 27, 2017) (describing a company’s restatement admitting there
was an inappropriate tone at the top and concluding “although the Restatement admits to
mismanagement and admits that the mismanagement impacted company accounting
decisions, that by itself is not actionable”). Matrix also rejected the same argument that the
Fund raises here, that “tone at the top” is a term of art critical to strong internal controls.
See 

. Even if that is true, it does not suggest that McHenry and Kirk
intended to create that tone or were consciously doing so.
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                                    No. 17-50162
      Some district courts have inferred scienter from a company’s admissions
of an inappropriate tone at the top. In Luna v. Marvell Technology Group, the
plaintiff alleged that the inappropriate tone at the top “applied pressure to
meet revenue targets not only on sales personnel (who, presumably, could work
harder to generate more revenue), but also on finance personnel (who could
only work with the transactions they were given).” 54 But the Luna court also
relied on the fact that the company terminated its CEO shortly after
commencing the internal investigation, without terminating any senior or
lower-level employees, which further supported an inference of the CEO’s
misconduct in creating the “tone.” 55 Another district court determined that a
company’s disclosure that it had “concerns about tone at the top,” made it
“more plausible . . . that the fraud flowed from the top[ ]down.” 56
      We conclude that the instant allegations based on the Audit Committee’s
finding of an inappropriate tone at the top do not strongly support an inference
of scienter. The allegation that Kirk and McHenry set an inappropriate tone at
the top gives no information about how they did so. The Fund must plead the
requisite scienter “with respect to each act or omission.” 57 Without knowing
what Kirk and McHenry said or did, it is equally credible that they realized
that the tone at the top was inappropriate only with hindsight. 58 All we know
about this tone is that Kirk and McHenry emphasized “meeting or beating
consensus EPS and achieving certain financial targets.” This court has




      54  No. C 15-05447 WHA, 

, at *4 (N.D. Cal. May 17, 2017).
      55  See 

       56 Fresno Cty. Emps.’ Ret. Ass’n v. comScore, Inc., 

, 551–52

(S.D.N.Y. 2017).
       57 15 U.S.C. § 78u-4(b)(2)(A).
       58 Much like accounting errors and restatements “can easily arise from negligence,

oversight or simple mismanagement,” 

, so too can “tones” become
“inappropriate” through negligence.
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                                    No. 17-50162
declined to find a strong inference of scienter in goals that “virtually all
corporate insiders share.” 59
      These allegations also contrast with Luna in two key ways. First, there
is no indication that Kirk and McHenry applied direct pressure to finance
personnel. The Audit Committee concludes only that their emphasis on
financial targets “may have” resulted in inappropriate accounting decisions.
Second, it is undisputed in this case that a former lower-level employee
orchestrated a large part of the fraud. This makes even more likely the
alternative that the fraud flowed from the “bottom[ ]up” than from the
“top[ ]down.” 60 These details also make it less probable that the corporate
officers directed the fraud or acted with severe recklessness. We emphasize,
however, that we are not saying that allegations based on a company’s finding
of an “inappropriate tone at the top” can never support a strong inference of
scienter. Rather, we conclude only that the instant allegations contribute
minimally to that inference.
             c. “Inappropriate Historical Accounting Practices”
      The complaint also alleges, based on the June 8-K, that McHenry and at
least one other person “engaged in inappropriate historical accounting
practices relating to management estimates and certain accruals.” This
accounting related to (1) inventory valuation, (2) adjustments to estimates and
accruals “without timely or appropriate analysis,” 61 and (3) accrual and release
of a contingency reserve in a manner inconsistent with Generally Accepted
Accounting Principles (GAAP). The Audit Committee also concluded that these




      59  

.
      60  Cf. 

.
       61 Specifically, recording adjustments before analysis was complete, or modifying

analysis to obtain a desired result.
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                                     No. 17-50162
practices “were undertaken for the purpose of enhancing the Company’s
reported financial results.”
      The Audit Committee’s report states that a group (including McHenry)
engaged in the improper accounting, and that a subgroup (perhaps as large as
the whole group) did so with the requisite scienter. Two aspects of these
allegations dampen an inference of McHenry’s scienter. First, the June 8-K
does not identify McHenry’s particular inappropriate practices, stating only
that he engaged in inappropriate accounting “in some instances.” Second, the
report is replete with passive voice: It makes no reference to McHenry’s
objective, only that “particular adjustments to particular management
estimates were undertaken” for improper purposes.
      These allegations are group pleading of scienter and do not adequately
address McHenry’s individual state of mind. 62 The allegations say nothing
about McHenry’s individual intent. Moreover, McHenry’s scienter cannot be
inferred from a conclusion about the intent of a subgroup of Hanger employees
that might not have included McHenry himself. Absent facts demonstrating
that McHenry was part of the subgroup that acted with the requisite scienter,
the allegations are group pleading. 63 The allegations in the Audit Committee’s
report contribute minimally to an inference of scienter.
      4. SOX Certifications
      Several of the false statements that form the basis of the Fund’s claims
are Hanger’s SOX certifications. Such certifications require a corporate officer
to certify that he or she (1) is “responsible for establishing and maintaining



      62 See Indiana Elec. 

(citing 

).
      63 McHenry’s other arguments contesting this conclusion are unavailing: He notes that
he is not the subject of a criminal investigation; that he was not terminated from Hanger;
and that accounting affords a wide latitude for judgment. Cf. 

(explaining that “it is improper to engage in detailed discussion of GAAP rules,” including
those involving subjective standards, at the motion to dismiss stage).
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                                     No. 17-50162
internal controls” and (2) has “evaluated the effectiveness of the issuer’s
internal controls.” 64 According to the Fund, these certifications support
scienter because the individual defendants signed them “[i]n spite of the[]
massive accounting problems and falsity.”
       We have adopted the Eleventh Circuit’s approach to SOX certifications:
“‘[A] Sarbanes–Oxley certification is only probative of scienter if’ . . . . [there
are] facts establishing that the officer who signed the certification had a ‘reason
to know, or should have suspected, due to the presence of glaring accounting
irregularities or other “red flags,” that the financial statements contained
material misstatements or omissions.’” 65 Although the Fund does not tie any
specific red flags to the SOX certifications, it repeatedly points to the
accounting problems and concludes that the individual defendants must have
been aware of them. As explained above, the fact that there were accounting
problems does not necessarily mean that the defendants were aware of these
“red flags.”
       The only other allegations that any defendant was on notice of the
accounting problems are those which state that Asar and McHenry “knew that
Hanger’s accounting department was overwhelmed and unreliable given the
Company’s history of accounting and internal control problems,” and cite
(1) prior instances when Hanger delayed financial results, (2) “material
weaknesses in inventory,” and (3) previously-announced misstatements. These
might be the kind of issues that would give an officer concern, but they do not
rise to the level of “glaring accounting irregularities” 66 such that it would be
severely reckless to ignore them. These issues apparently were public



       64 15 U.S.C. § 7241(a)(4).
       65 Ind. 

(quoting Garfield v. NDC Health Corp., 

,
1266 (11th Cir. 2006)).
       66 Ind. 

.

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                                       No. 17-50162
knowledge. The Fund effectively alleges that the defendants should have
known about the accounting irregularities because of their positions in Hanger,
but that does not support the requisite inference. 67 The fact that accounting
irregularities existed does not mean that the defendants were necessarily
aware of them.
       5. Medicare Audits/Janus Implementation
       The only other potential red flags alleged are Hanger’s problems with
Medicare audits and its implementation of Janus. The Fund contends that
Asar and, to a lesser extent, McHenry knew of the problems with Medicare
audits, which were heightened by the Janus rollout. The Fund thus contends
that we may infer that Asar and McHenry would have known that Hanger’s
Medicare claim reserve was inadequate and that they were severely reckless
stating otherwise.
       The Fund alleges that Asar and McHenry were on notice of the slowdown
in Medicare audit success because (1) Asar and McHenry “paid close attention
to Medicare reimbursements, as demonstrated by their regular discussions
with investors about the Company’s performance in Medicare audits;” 68 and
(2) Medicare reimbursement was critically important to Hanger’s business.
       As explained above, “[a] pleading of scienter may not rest on the
inference that defendants must have been aware of the misstatement based on
their positions within the company.” 69 But an exception to this rule exists in
cases with “special circumstances”:




       67 

(“A pleading of scienter may not rest on the inference that
defendants must have been aware of the misstatement based on their positions within the
company.” (quoting 

)).
       68 Specifically, McHenry told investors “we are watching [the audits] very closely,” and

Asar told investors “[w]e continue to monitor and adapt to the changing reimbursement
environment driven by the volume of Medicare audits and delayed appeals process.”
       69 

(quoting 

).

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                                      No. 17-50162
      The “special circumstances” cases exhibit some combination of four
      considerations that might tip the scales in favor of an inference of
      scienter. First, the smaller the company the more likely it is that
      corporate executives would be familiar with the intricacies of day
      to day operations. Second, the transaction at issue may have been
      critical to the company’s continued vitality. Third, the
      misrepresented or omitted information at issue would have been
      readily apparent to the speaker. Fourth, the defendant’s
      statements were internally inconsistent with one another. 70
Recently, in Neiman v. Bulmahn, this court held that a company with over 60
employees was too large to implicate the first consideration, and an oil well
that was “projected to produce 22.5% of [the company’s] total output” did not
implicate the second consideration. 71 Hanger operated more than 740 clinics
“with over 1,300 clinical practitioners.” Although Medicare represented 29% of
Hanger’s sales, that is only slightly larger than the 22.5% in Neiman, and a far
cry from Nathenson v. Zonagen, Inc., in which “[s]ubstantially all” of the
company’s sales depended on one patented product. 72 Further, none of the
officers’ statements were internally inconsistent. This is not a special-
circumstances case.
      As for Asar’s and McHenry’s statements that they followed the Medicare
audits closely, we have held that a CEO’s puffery that “there is nothing in this
company that I don’t know” could not support a strong inference of scienter. 73
Such a boast was not sufficiently specific about what the CEO might have
known. 74 Here, the allegations of what Asar and McHenry knew are more
specific, but they used variations of the phrase “we are monitoring,” not “I am
monitoring.” These statements could support knowledge of the Medicare



      70 

(citations omitted).
      71 Neiman, 

, 750 (5th Cir. 2017).
      72 

(alteration in original).
      73 Ind. 

.
      74 

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                                       No. 17-50162
problems, but it is equally possible that they merely mean that Hanger as a
company monitored the audits. The Fund also notes that Asar and McHenry
were likely to notice problems related to Medicare because they were aware of
the other problems in the accounting department. But, as noted above, these
problems were not so glaring as to make Asar and McHenry severely reckless.
Knowing that the accounting department was having problems is different
from knowing what each of those specific problems were. Asar’s and McHenry’s
statements thus contribute only slightly to the inference of scienter.
       6. Summary
       As the allegations pertaining to McHenry, Kirk and Asar contribute only
slightly to an inference of scienter, taking them holistically does not allow us
to strongly infer scienter as to those three defendants. Thus, there is no strong
inference of scienter that can be imputed to Hanger. 75
   B. Control Person Claims
       The complaint does not state a claim against the individual defendants
or Hanger with respect to any of the allegedly false statements. 76 Therefore,
the individual defendants could not be subject to the § 20(a) claims, which
make a “controlling person” jointly and severally liable with the corporation. 77
                                     IV. CONCLUSION
       For the reasons stated above, we AFFIRM the district court’s judgment.




       75 

. The defendants argue that we can affirm because the
complaint does not adequately allege loss causation, viz., the “causal connection between the
material misrepresentation and the [economic] loss suffered by investors.” Erica P. John
Fund, Inc. v. Halliburton Co., 

, 808 (2011) (alteration in original) (citation and
internal quotation marks omitted). Because we conclude that the complaint does not
adequately allege scienter, we need not address this argument.
       76 Cf. 

.
       77 15 U.S.C. § 78t(a); 

.

                                             22