FILED
                                                       United States Court of Appeals
                                                               Tenth Circuit

                                                            January 16, 2015
                                  PUBLISH
                                                          Elisabeth A. Shumaker
                                                              Clerk of Court
              UNITED STATES COURT OF APPEALS

                              TENTH CIRCUIT


 IN RE: GOLD RESOURCE
 CORPORATION SECURITIES
 LITIGATION.
 _______________________

 NITESH BANKER; SCOTT CANTOR;
 ROBERT D. RHODES, on behalf of
 themselves and all others similarly
 situated,
                                                     No. 13-1323
       Plaintiffs - Appellants,

 v.

 GOLD RESOURCE CORPORATION;
 JASON D. REID, WILLIAM W. REID,
 DAVID C. REID; BRADLEY J.
 BLACKETOR,

       Defendants - Appellees.


                 Appeal from the United States District Court
                         for the District of Colorado
                       (D.C. No. 1:12-CV-02832-RBJ)


John Michael DeStefano III of Hagens Berman Sobol Shapiro LLP, Phoenix,
Arizona (Steve W. Berman, Erin K. Flory and Karl P. Barth of Hagens Berman
Sobol Shapiro LLP, Seattle, Washington; Leif Garrison of Hagens Berman Sobol
Shapiro LLP, Colorado Springs, Colorado; Darren J. Robbins, Trig R. Smith and
Danielle S. Myers of Robbins Geller Rudman & Dowd LLP; and Kip B. Shuman
of The Shuman Law Firm, Boulder, Colorado, on the briefs), for Plaintiffs-
Appellants.
Peter A. Wald of Latham & Watkins LLP, San Francisco, California (Matthew
Rawlinson of Menlo Park, California; and Gregory J. Kerwin and Allison K.
Kostecka of Gibson, Dunn & Crutcher LLP, Denver, Colorado, with him on the
brief), for Defendants-Appellees.


Before BACHARACH, SEYMOUR, and MURPHY, Circuit Judges.


SEYMOUR, Circuit Judge.


      This appeal arises from a putative securities fraud class action brought by

lead plaintiff Nitesh Banker on behalf of all persons who purchased common

stock in Gold Resource Corporation (GRC) during the class period between

January 30, 2012, and November 8, 2012. Plaintiff alleges GRC and four of its

officers and directors committed securities fraud in violation of § 10(b) of the

Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and

Securities Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. § 240.10b.5. He

also asserts claims against individual defendants as “control persons” in violation

of § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). The district court dismissed

the complaint with prejudice pursuant to Fed. R. Civ. P. 12(b)(6), holding that

plaintiff failed to meet the heightened pleading standard for scienter required by

the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-

4(b)(1)-(2). 1 In re Gold Res. Corp. Sec. Litig., 

(D. Colo.


      1
          The PSLRA requires that:


                                        -2-
2013). Plaintiff appeals, and we affirm.



                                            I

      GRC, a Colorado corporation, is a publicly traded mining company engaged

in Mexico in the exploration and production of precious metals, including gold

and silver. During the relevant time period, GRC employed seven full-time

employees in the United States and over 300 Mexican nationals at six properties

in the Mexican State of Oaxaca. The individual defendants are four GRC officers

and directors: William C. Reid, co-founder, CEO, and Chairman; Jason D. Reid,

President and Director; David C. Reid, co-founder, Vice-President, Secretary, and

Treasurer; and Bradley J. Blacketor, CFO.

      The facts of this appeal arise out of commercial production at GRC’s El

Aguila property in Mexico. The El Aguila project consisted of an open-pit mine

and an underground mine at the La Arista vein system. Commercial production



      [T]he 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.

      [T]he complaint shall, with respect to each act or omission alleged to
      violate this chapter, state with particularity facts giving rise to a
      strong inference that the defendant acted with the required state of
      mind.

15 U.S.C. § 78u-4(b)(1)-(2).

                                           -3-
started in July 2010, initially by mining and processing ore from the open-pit

mine. GRC began developing underground mine access to the La Arista vein

system and actively started stockpiling ore from it by November 2010. Its

operations there included “stoping,” which involved “the removal of ore from an

underground mine, leaving behind an open space known as a stope,” and “long-

hole stoping,” a “stoping technique” that “can be the lowest cost method of

mining when large ore bodies are located in strong country rock.” Aplt. App. at

16. The company anticipated that all of its mining operations in 2011 and 2012

would take place at the La Arista vein system.

      GRC’s aggressive business plan called for a dramatic increase in mining

production during its initial years. It planned on increasing production from

70,000 ounces of AuEq 2 in its first year of mining to 100,000 in the second year

and to 120,000 in each of the following four years. The plan also included a

considerable dividend program for shareholders.

      Plaintiff alleges the El Aguila project experienced severe production

problems during the class period, and that defendants knew about these problems

but concealed them from investors. 

¶ 49. He claims GRC’s aggressive


      2
        AuEq is “used by GRC to measure its production performance, and means
precious metal gold equivalent.” Aplt. App. at 16. This production measurement
is “determined by taking the silver payable metal ounces produced and
converting them to the dollar equivalent of gold by using the gold to silver
average price ratio. The gold and silver average prices used are the actual metal
prices realized from the sales of metals concentrate.” 

of underground mining operations created difficulties that lowered

production and required the company to mine lower grade zones of deposits. He

also alleges that “[s]ignificant operational efficiency improvements were

required,” the absence of which limited GRC’s “ability to mine higher grade

stopes,” and that “[d]ecreases in long-hole stoping . . . forc[ed] GRC to process

more diluted development and mine from areas of the deposit with lower metal

grades.” 

asserts, mining production measured by

metric tons of stoping as a percentage of milled ore decreased from fifty-five

percent during the first quarter of 2011 to fourteen percent during the second

quarter of 2012.

      Plaintiff further alleges GRC inflated its production statistics by improperly

“recognizing ‘sales’ that were not actual sales of product mined, but were part of

an overbilling scheme.” 

¶ 9. GRC had only two buyers to whom it sold

all of its concentrate – subsidiaries of the Trafigura Group. GRC would use

“provisional invoices” calculated from its own sampling and assaying results.

Each buyer paid 90 percent of the provisional invoice price, and “GRC

recognize[d] revenue based upon these provisional invoices.” 

¶ 51.

After delivery to the buyer’s facility, an additional “final sample” was taken, and

the price paid by the buyer was then adjusted to the final sample results. The

final sample set the actual sales price under the contract between GRC and




                                         -5-
Trafigura. 3 Plaintiff alleges defendants were aware of “significant” differences in

the provisional invoices and the buyer’s final sample assays by “February 2012,”

54, but continued to misstate revenues to investors until the fall. What

plaintiff characterizes as the “overbilling scheme” was not disclosed publicly by

GRC until November 8, 2012, when GRC announced it would have to restate its

financial results for the first two quarters of 2012.

      After denying plaintiff’s motion to strike or disregard portions of

defendants’ reply brief, the district court dismissed with prejudice plaintiff’s first

amended and consolidated complaint. It held that plaintiff failed to plead

sufficient factual information to establish a strong inference of scienter regarding

any of the alleged false or misleading statements, as required by the PSLRA. The

court therefore also dismissed plaintiff’s claim against the individual defendants

as “control persons” under § 20(a) of the Exchange Act. In re Gold Res. 

.



                                          II

      On appeal, plaintiff contends the district court erred in dismissing his

securities fraud claim, asserting the first amended complaint “contains a wealth of



      3
       “The contract . . . allow[ed] for a third-party or ‘umpire’ assay to be
obtained in the event of a material difference between GRC’s numbers and the
buyers’ numbers.” Aplt. App. at 31 ¶ 53.

                                          -6-
allegations establishing both the material false statements and Defendants’

scienter.” 4 Aplt. Br. at 19. We first set out the applicable standards.

      “We review de novo the district court’s dismissal under Fed. R. Civ. P.

12(b)(6) for failure to state a claim upon which relief can be granted.” Adams v.

Kinder-Morgan, Inc., 

, 1092 (10th Cir. 2003). In reviewing a Rule

12(b)(6) motion to dismiss a § 10(b) action, “we must accept all the well-pleaded

allegations of the complaint as true and must construe them in the light most

favorable to the plaintiff.” Grossman v. Novell, Inc., 

, 1118 (10th

Cir. 1997) (internal quotation marks omitted). Further, we “must consider the

complaint in its entirety, as well as other sources,” including “documents

incorporated into the complaint by reference, and matters of which a court may

take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

,

322 (2007).

      Section 10(b) of the Exchange Act prohibits the “use or employ[ment], in

connection with the purchase or sale of any security . . . [of] any manipulative or

deceptive device or contrivance in contravention of such rules and regulations as


      4
        Plaintiff also makes an argument on appeal based on Item 303 of
Regulation S-K. 17 C.F.R. 229.303; see also Slater v. A.G. Edwards & Sons,
Inc., 

, 1197 (10th Cir. 2013). While plaintiff’s complaint contains
this assertion, he failed to raise it in his memorandum in opposition to
defendants’ motion to dismiss. Accordingly, we decline to address it. See
Anixter v. Home-Stake Prod. Co., 

, 1228 (10th Cir. 1996) (“It is the
general rule, of course, that a federal appellate court does not consider an issue
not passed upon below.”).

                                         -7-
the Commission may prescribe.” 15 U.S.C. § 78j(b). SEC rule 10b-5 implements

§ 10(b) by making it unlawful 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 . . .

not misleading . . . in connection with the purchase or sale of any security.” 17

C.F.R. § 240.10b–5. Thus, § 10(b) “affords a right of action to purchasers or

sellers of securities injured by its violation.” 

.

      “A plaintiff suing under [§] 10(b), however, bears a heavy burden at the

pleading stage.” In re Level 3 Communications, Inc. Sec. Litig., 

,

1333 (10th Cir. 2012). To properly state a claim for securities fraud, a plaintiff’s

complaint must allege facts supporting the following:

      (1) the defendant made an untrue or misleading statement of material
      fact, or failed to state a material fact necessary to make statements
      not misleading; (2) the statement complained of was made in
      connection with the purchase or sale of securities; (3) the defendant
      acted with scienter, that is, with intent to defraud or recklessness; (4)
      the plaintiff relied on the misleading statements; and (5) the plaintiff
      suffered damages as a result of his reliance.

.

      In addition, the PSLRA created a heightened pleading standard applicable

to the first and third of these elements. 

Under the PSLRA, in

order to overcome a motion to dismiss, the complaint must “specify each

statement alleged to have been misleading, the 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

                                          -8-
which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). With respect to the

scienter requirement – “a mental state embracing intent to deceive, manipulate, or

defraud,” Ernst & Ernst v. Hochfelder, 

, 193 n.12 (1976) – it is not

sufficient “for a plaintiff to allege generally that the defendant acted with

scienter, as permitted under Fed. R. Civ. P. 9(b).” Level 

; see

also City of Philadelphia v. Fleming Cos., Inc., 

, 1258 (10th Cir.

2001) (“Before the passage of the PSLRA, the pleading requirements for scienter

in the securities context were governed by [Fed. R. Civ. P.] 9(b), which dictates

that ‘averments of fraud . . . be stated with particularity.’”). Rather, the plaintiff

must, “with respect to each act or omission alleged to violate this chapter, state

with particularity facts giving rise to a strong inference that the defendant acted

with the required state of mind.” 15 U.S.C. § 78u–4(b)(2)(A). “The inquiry . . .

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

inference of scienter, not whether any individual allegation, scrutinized in

isolation, meets that standard.” 

. Moreover,

      [t]he strength of an inference cannot be decided in a vacuum. The
      inquiry is inherently comparative: How likely is it that one
      conclusion, as compared to others, follows from the underlying facts?
      To determine whether the plaintiff has alleged facts that give rise to
      the requisite “strong inference” of scienter, a court must consider
      plausible, nonculpable explanations for the defendant’s conduct, as
      well as inferences favoring the plaintiff.

Furthermore, “[a] complaint will survive . . . only if a reasonable

person would deem the inference of scienter cogent and at least as compelling as

                                          -9-
any opposing inference one could draw from the facts alleged.” 

           A. Alleged false and misleading statements during the class period

      The class period in this case spans from January 30 to November 8, 2012.

GRC’s stock traded at $26.26 per share on the final day of trading before the class

period. Plaintiff claims that all of the statements set forth below were materially

false and misleading because defendants were aware of serious production

problems at the El Aguila mine as well as the overbilling scheme but failed to

disclose these problems to investors.

      On January 30, 2012, GRC issued a press release announcing “record”

results with a production of 66,125 ounces of AuEq in 2011. 5 The press release

was attached to GRC’s Form 8-K filed with the SEC on the same day. It

predicted the El Aguila mill would produce 120,000 to 140,000 ounces of AuEq

in 2012. Jason Reid stated: “We look forward to achieving our 2012 target as we

continue on our trajectory for aggressive production and growth.” Aplt. App. at

33 ¶ 62.

      GRC issued a press release on February 29, 2012, announcing its final

results for 2011, as a “record” production of 66,169 ounces of AuEq. On that

same day, GRC filed its 2011 Form 10-K annual report with the SEC, stating



      5
        We note that the press releases issued by defendants during the class
period contained cautionary language advising investors of significant risks in the
mining business.

                                         -10-
“management concluded that we maintained effective internal control over

financial reporting as of December 31, 2011.” 

¶ 66. The 2011 Form

10-K also included a sworn certification by William Reid pursuant to § 302 of the

Sarbanes–Oxley Act of 2002 (SOX) representing that he had overseen the

company’s systems of internal control and that the financial information

contained in the 10-K was true in all material respects.

      On March 1, 2012, William and Jason Reid held a conference call with

investors to discuss the 2011 “record” results as well as current development at

La Arista mine. William stated that “at this point in time, we feel comfortable

that we will be able to achieve our 900 tons per day.” 

¶ 70.

      GRC issued a press release on April 9, 2012, announcing its preliminary

first quarter production results of 30,500 ounces of AuEq at an average of 825

tons per day, which the company stated was “in line with its 2012 Outlook”

because of “increased long-hole stoping.” 

¶ 75. Jason Reid explained:

“First quarter record production sets a firm base from which to continue our

growth trajectory of producing more low cost ounces.” 

¶ 76. On April

30, 2012, GRC issued a press release quoting Jason Reid as stating: “With record

first quarter production, the increased April dividend to six cents per common

share per month speaks to the positive outlook we have for the continued success

and production of the Aguila Project.” 

¶ 78.

      GRC issued a similar press release on May 10, 2012, announcing record

                                        -11-
first quarter results for 2012. Jason Reid noted that “[t]he first quarter set a

strong base for the Company with record production, record revenues, and

dividends of 7.9 million while focusing on aggressive growth.” 

¶ 80.

The same day, GRC filed its Form 10-Q quarterly report with the SEC for the first

quarter of 2012, explaining that “[t]here was no change in our internal control

over financial reporting.” 

¶ 82. In addition, Jason Reid stated during a

conference call on May 11, 2012, that GRC was “transitioning into more long-

hole open stoping” which would result in “greater tonnages.” 

¶ 84.

        On July 19, 2012, GRC first announced production problems at the El

Aguila mine, admitting that its “second quarter production was lower than

expected” due to several factors. 

¶ 89. It revised its 2012 production

outlook downward by fifteen percent. This caused GRC’s stock to drop by more

than thirty percent on the next day of trading.

        GRC also announced disappointing second quarter results in a press release

on August 9, 2012, with production equivalent to half of the first quarter. Jason

Reid stated: “The second quarter was a challenge as infrastructure requirements

slowed the development and stoping of high-grade ore zones at La Arista.” 

¶ 96. GRC’s Form 10-Q second quarter report to the SEC reiterated that

“there was no change in our internal control over financial reporting.” 

¶ 98.

        William and Jason Reid tried to reassure investors during a conference call

                                         -12-
on August 10, asserting that production problems were now behind them and that

“production is going to be more of what we expect.” 

¶ 104. William

explained when asked by an investor that the fifty-five percent production from

long-hole stoping reported for the first quarter was actually the high point for the

quarter, not an average. The average for the first quarter was actually forty

percent, dropping to twenty percent in the second quarter.

      GRC announced its third quarter results on October 17, 2012, notifying

investors that production was still lower than expected at 22,300 AuEq ounces. It

revised its 2012 outlook to between 85,000 to 100,000 ounces of AuEq from the

original target of 120,000 to 140,000 ounces. The press release also notified

investors of an unresolved billing dispute with GRC’s buyer, stating: “A dispute

arose during the third quarter with the buyer of the Company’s metal concentrates

that involves the buyer’s handling, control and sampling of those concentrates at

the buyer’s warehouse, and the resulting assays the buyer obtained from those

samples.” It explained: “The buyer is claiming net adjustments (reductions) to

the Company’s provisional invoices of approximately 2,300 AuEq ounces.” 

¶ 112. The following day GRC’s stock dropped ten percent.

      On the last day of the class period, November 8, 2012, GRC issued a press

release announcing that settlement of the billing dispute required restatement of

the financial results it had previously reported. It submitted a Form 8-K to the

SEC explaining that during the third quarter of 2012, executive management

                                         -13-
became aware of “large variances between the results of the Company’s

preliminary assays used for determining the provisional sales price for its

concentrate sales when compared to the assays obtained from samples after

shipment to the buyer used to determine final pricing.” 

¶ 116. It

further explained that GRC had settled the billing dispute, which required GRC to

recognize the buyer’s final sample assays taken in February and March 2012 for

purposes of final invoice and payment. As a consequence, GRC restated “its first

and second quarter 2012 financial statements to reflect a net reduction to revenues

of approximately $3.7 million for the six months ended June 30, 2012, of which

$3.0 million represents the cash settlement with the buyer and $0.7 million

represents a non-cash derivative adjustment.” 

¶ 116.

      GRC also stated in its Form 8-K:

      The Company concluded that there was an internal control deficiency
      in its concentrate sales process that did not prevent or detect on a
      timely basis the material variance between the preliminary assay
      samples of the concentrates taken at the time at the mine site with
      those assay samples taken at the buyer’s warehouse. This deficiency
      constitutes a material weakness in the Company’s control over
      financial reporting. Management took immediate action to institute a
      remediation plan to correct the internal control and deficiency. As of
      September 30, 2012, management believes the internal control
      deficiency has been remediated.

-58 ¶ 116. Plaintiff alleges this statement proves “that, by at least

September 30, 2012, the Company was not only aware that material problems

existed with its systems of internal accounting control, but that it had already


                                         -14-
taken remedial steps and allegedly had corrected the problems.” 

¶ 117.

The following day GRC’s stock dropped $.50 per share to $16.48.

      Plaintiff further contends GRC’s first and second quarter 2012 financial

statements were materially false and misleading because defendants improperly

recognized revenue resulting from what plaintiff calls the overbilling scheme.

Plaintiff claims defendants were aware of significant variances in the February

assays within a month or two. Accordingly, he contends, four of defendants’

statements in the first and second quarters of 2012 concerning the current state of

GRC’s financial outlook recognized false revenue. 6

      Plaintiff also asserts that GRC’s failure to disclose production related

problems at the El Aguila mine made several of defendants’ statements materially

misleading because GRC had a duty to disclose its “mounting production

problems.” Aplt. Br. at 24. In particular, plaintiff asserts that two statements

made in the January 30, 2012, press release were materially misleading. First, he

claims Jason Reid’s statement concerning GRC’s “record” production in 2011 was

materially misleading because defendants were aware of serious production

problems and had a duty to disclose them. Additionally, he claims Jason Reid’s

statement to investors that GRC was “continu[ing] on our trajectory for


      6
       Plaintiff alleges the following financial statements recognized false
revenue: “The Q1 2012 Form 10-Q filed on May 10, 2012”; “The May 11, 2012
conference call”; “The Q2 2012 Form 10-Q filed August 9, 2012”; and the
“August 10, 2012 conference call.” Aplt. App. at 70 ¶ 150.

                                        -15-
aggressive production growth” materially misled investors because “[i]t did not

warn investors that GRC achieved this record production by rushing its mining

operations while deferring critical infrastructure improvements.” Aplt. Br. at 27.

      Plaintiff alleges that two statements from April 2012 were similarly

misleading. On April 9, 2012, Jason Reid stated that “[f]irst quarter record

production sets a firm base from which to continue our growth trajectory of

producing more low cost ounces,” which plaintiff claims was misleading because

defendants did not simultaneously disclose the results were achieved by

“unsustainable methods.” Aplt. Br. at 27-28; Aplt. App. at 39 ¶ 76. Plaintiff

asserts that GRC’s press release on April 30, 2012, was misleading for the same

reasons, when Jason Reid stated: “With record first quarter production, the

increased April dividend to six cents per common share per month speaks to the

positive outlook we have for the continued success and production trajectory of

the Aguila Project.” Aplt. Br. at 28; Aplt. App. at 40 ¶ 78.

      Finally, plaintiff claims two statements concerning long-hole stoping were

misleading. He challenges William Reid’s statements from a conference call on

March 1, 2012, in which he said GRC had a “new long-hole drill” that “is really

going to help with the tonnage mined,” aplt. br. at 29; aplt. app. at 37 ¶ 70, and

Jason Reid’s statement from a May 11, 2012, conference call, where he said GRC

was “transitioning into more long-hole open stoping.” Aplt. Br. at 29; Aplt. App.

at 44-45 ¶ 84.

                                         -16-
      While defendants contest on appeal whether many of the alleged statements

were misleading, we need not reach that issue. Even assuming plaintiff has met

the high standard of the PSLRA for pleading with particularity the existence of

some materially misleading statements or omissions, his complaint must be

dismissed unless plaintiff has also pled with particularity facts giving rise to a

strong inference “that the defendants acted with scienter, which we define as ‘a

mental state embracing intent to deceive, manipulate, or defraud, or

recklessness.’” Level 

(quoting 

).

Accordingly, we turn to the issue of scienter.

                                     B. Scienter

1. Financial restatement

      We first address the alleged overbilling scheme and the statements made by

GRC regarding its profits in the first and second quarters, which had to be

restated after GRC settled the dispute with its buyer. Plaintiff must allege facts

sufficient to raise a strong inference that defendants’ representations were

intentionally false or at least recklessly made. “Recklessness” under § 10(b) is

“conduct that is an extreme departure from the standards of ordinary care, and

which presents a danger of misleading buyers or sellers that is either known to the

defendant or is so obvious that the actor must have been aware of it.” 

(internal quotation marks omitted). Negligence, even gross

negligence, is not sufficient; something similar to “conscious disregard” is

                                         -17-
required. Level 

n.12 (citations omitted).

      Plaintiff sets forth eleven factors he claims collectively create a strong

inference that defendants acted with scienter when it made financial statements

that were materially false. These include:

      (i) Defendants’ admission of knowing that the reported financial
      information was false, (ii) the violated accounting rules’ simplicity,
      (iii) the accounting misconduct concerned revenue recognition, (iv)
      GRC’s actual accounting policies differed from its stated policies, (v)
      the accounting error’s magnitude, (vi) the accounting misconduct
      required GRC to restate its financial statements, (vii) defendants’
      Sarbanes-Oxley certifications, (viii) senior management’s role in the
      accounting misconduct, (ix) the accounting issue related to GRC’s
      “core operations,” (x) GRC’s small number of employees, and (xi) an
      ancillary dispute’s quick settlement.

Aplt. Br. at 36.

      “Companies must adhere to generally accepted accounting principles

(‘GAAP’) when recognizing revenue in their publicly disclosed financial

statements.” Dronsejko v. Thornton, 

, 662 (10th Cir. 2011). The

first six factors that plaintiff contends show a strong inference of scienter relate

essentially to the same GAAP violation, the material overstatement of revenues.

We have held that “allegations of GAAP violations or accounting irregularities,

standing alone, are insufficient to state a securities fraud claim.” 

(internal quotation marks omitted). Thus, “[o]nly where such

allegations are coupled with evidence that the violations or irregularities were the

result of the defendant’s fraudulent intent to mislead investors may they be


                                         -18-
sufficient to state a claim.” 

340 F.3d at 1106, for example, we held that the allegations in the

complaint when considered as a whole gave rise to a strong inference of scienter

with respect to some of the defendants. We found it persuasive that “the alleged

GAAP violations come on top of other particularized facts indicating that a key

operation of the company was losing money, [the CFO] knew that fact, and he

falsely reported profit for it.” 

“The alleged GAAP violations

in this case strengthen the inference that [the CFO] signed financial statements

with intent to deceive, particularly in light of the detail with which the alleged

GAAP violations are stated, . . . and the fact that the Company’s financial reports

declared that Kinder-Morgan’s financial statements were prepared in accordance

with GAAP.” 

present case, however, we agree with the district court that “unlike in

Adams where the court relied on other facts evincing knowledge of the defendant

executive, the GAAP violations here do not ‘come on top of other particularized

facts indicating that a key operation of the company was losing money, [the

defendant executives] knew that fact, and [they] falsely reported a profit for it.’”

In re Gold Res. 

(alteration in original) (quoting

). As the district court noted, “[p]laintiff’s arguments

seem to misunderstand the need for other particularized facts showing fraudulent

intent.” 

                                         -19-
      Plaintiff argues that we must view the allegations holistically, rather than

individually, and that the nature of the accounting violations when read

collectively with the five other factors creates a strong inference that defendants

made the misleading revenue statements with scienter. He points out that the

GAAP procedure requiring delivery of the product before recognizing revenue

was straightforward and simple, the accounting misstatements amounted to more

than sixteen percent of net income for the first quarter of 2012, and they were

made by management. He argues that these facts coupled with the SOX

miscertifications, the quick settlement made with the sole buyer, and the small

size of the one-product company together create a strong inference that

defendants, as the executives, “must have known” of the revenue misstatements at

the time they occurred.

      But plaintiff’s view of the situation fails to take account of other plausible

inferences arising from the facts stated in the amended complaint and the

documents referred to therein. For example, as defendants made clear in the

November conference call, employees in Oaxaca did not immediately tell

executives in Denver when they became aware of the variances showing up

between their weighing of concentrate compared to the buyer’s weighing because

they thought the buyers’ figures were wrong. 7 As William Reid explained:


      7
       Plaintiff referred to the transcript of this conference call in the amended
complaint but then ignored most of its content. The district court took judicial

                                        -20-
      Our relationship with the buyer from July of 2010 to January of 2012
      was one where there were no significant variances between what we
      said the concentrates contain versus what the warehouse sample said
      they contain, with exception of 1 month in late 2011. A confidence
      based on 19 months of experience had developed regarding our
      statement of what the concentrates contain and what the buyer’s
      sample contained. Essentially, no issue or significant problems
      existed 18 out of 19 initial months of our business relationship up to
      February of 2012.

      One other thing I want to explain is that the assays of these samples
      for final invoice, even when just normal variations occur and an
      umpire assay is required, it can take 3 to 5 months to determine and
      finalize. We had no problem with January 2012 concentrate
      shipments, and they were closed out with a final payment as usual.
      Because of our good history with the buyer and our knowledge of
      what we actually send to the buyer, when our project people in
      Oaxaca first saw significant variances in the February numbers, they
      immediately felt there was a definite mistake in those numbers. They
      then proceeded with the umpire assays, which required additional
      time, in the belief that this would demonstrate an error. So
      management in Denver was not notified of these issues regarding
      significant variances for February and later months until the third
      quarter when the umpire assay results had come back, and we could
      see that a pattern of large variances had developed. Though some of
      our people in Oaxaca were aware of the variances within a month or
      2 following shipment, they didn’t communicate that up the ladder to
      us at the time as they were proceeding with the view that those
      numbers were wrong and would ultimately be corrected through the
      umpire assay process.

Supp. App at 162 (emphasis added). He further explained:

      Once our people did communicate to us that we were consistently
      experiencing significant variances between the preliminary samples
      we were obtaining and samples being provided at the warehouse,
      management conducted an investigation to determine the cause of the
      discrepancies and disputed any payment adjustments that were due



notice of the entire transcript.

                                       -21-
      from the final invoices where these large variances have been
      identified.

certainly plausible that a prudent executive would want to investigate

and confirm a claimed discrepancy before disclosing it publicly. In a similar

case, Higginbotham v. Baxter Int’l, Inc., 

, 755 (7th Cir. 2007), the

company was required to restate the preceding three years’ earnings in order to

correct errors due to fraud at its Brazilian subsidiary. Although an executive at

headquarters learned of the fraud in May, he did not publicly disclose it until July

22. 

Upholding dismissal of the complaint with prejudice, the court

stated:

      The most one can say is that, sometime during May 2004, Baxter
      learned enough to lead a reasonable person to conduct an
      investigation. That is exactly what Baxter did during the next two
      months, demonstrating a pursuit of truth rather than reckless
      indifference to the truth. Knowing enough to launch an investigation
      (Baxter could not simply assume that the initial report of bad news
      was accurate) is a very great distance from convincing proof of intent
      to deceive.

is true in this case.

      As William Reid further explained in the November conference call:

      The results of the investigation showed us that there were significant
      issues and deficiencies with controls and security at the buyer’s
      concentrate yard that we believe could have compromised and
      affected various concentrate samples. To make a long story short, a
      critical mass of information built up in the third quarter that
      convinced us that the buyer had issues with its yard and the handling
      and sampling of our concentrates in their possession. The buyer,

                                        -22-
      however, took the position that even though we may know what we
      shipped from our site, we could not know what arrived at the yard.
      In other words, the concentrates could have been compromised in
      transit. Although we did not believe that to be the case, it was a
      possibility. Consequently, we could not recover the entire amount.
      Our alternative was to take legal action, but we made the decision to
      settle. Our settlement with the buyer requires the buyer to accept
      our provisional invoices for April, May and June, but we must accept
      their assays for February and March, which translates to a $3
      million reduction in what our provisional invoice stated or
      approximately 1,800 gold equivalent less ounces for our sales. We
      have been working with our buyer to mitigate any potential future
      issues with the sampling and assaying process of our concentrate
      shipments. The buyer has demonstrated to us that it has improved its
      controls concerning security, handling and sampling of our
      concentrates. And we have also instituted additional security
      measures by having our own representatives of the company remain
      with the shipment until samples of concentrate are obtained at the
      warehouse. Since implementing these additional measures, we have
      had no variances between our preliminary assays and the buyer’s
      final assays for August and September. Reconciliation of October is
      not yet calculated.

Supp. App. at 162 (emphasis added). Notably, GRC’s settlement with the buyer

resulted in GRC having to recognize a reduction of 1,800 gold equivalent ounces

in the amount sold rather than the 2,300 ounces initially claimed by the buyer.

Thus, GRC would have been imprudent had it publicly disclosed the amount

initially claimed by the buyer.

      In addition, although plaintiff claims that GRC was at least reckless in

recognizing as income the ninety percent it received from the buyer provisionally,

that is exactly what the buyer contracted to pay. Rather than creating an

inference of recklessness, this accounting practice was acceptable to the buyer


                                        -23-
and in accordance with the contract.

      Plaintiff contends the defendants’ § 302 SOX certifications show a strong

inference of scienter because “[a]ssuming William Reid and Blacketor’s sworn

SOX certifications were true, ‘significant variances’ in the measurement of metals

sold to GRC’s only customer could not have occurred without GRC’s CEO and

CFO’s knowledge.” Aplt. Br. at 42. This argument is at best an assertion that

defendants were negligent: it offers no particularized facts to support an inference

that defendants knew their sworn SOX statements were false at the time they were

made. The “bare allegation” that defendants lied when they certified GRC’s

financial statements pursuant to SOX adds “nothing substantial to the scienter

calculus.” Zucco Partners, LLC v. Digimarc Corp., 

, 1000, 1003-04

(9th Cir. 2009) (citing cases).

      The remaining factors plaintiff relies on to show a strong inference of

scienter with respect to the revenue GRC recognized provisionally are equally

insufficient. Most of them rest on what appears to be a negligence theory. The

assertion that because the company was small, produced only one product, and

had only one buyer, and that therefore defendants “must have known” of the

misleading nature of the financial statements in the first and second quarter is

simply insufficient under the heightened pleading requirements to establish a

strong inference of scienter in the circumstances of this case. As the district court

pointed out, “the relevant personnel are separated by nearly 2,000 miles and

                                         -24-
international borders.” In re Gold Res. 

.

Defendants’ explanation regarding the delay in their receiving notice of the

variances, particularly given the several months it took until the umpire assays

were finalized, states a plausible, opposing inference. Defendants had every

reason not to disclose the disputed variance before the dispute was investigated

and settled.

2. Production problems

      With respect to the production problems GRC faced, plaintiff alleges that in

the first quarter of 2012 defendants intentionally “deferr[ed] critical mine

infrastructure [including upgrading electric power, expanding ventilation

requirements, and handling of increased water flow] to speed Q1 mining

production and ‘generate cash on an accelerated basis.’” Aplt. Reply Br. at 7-8.

This deferral of critical infrastructure, he alleges, “was on its face unsustainable

and reduced Q2 production.” 

Plaintiff contends that the following facts

create a strong inference of scienter: “(i) the production problems’ obvious

nature, (ii) the El Aguila mine was GRC’s ‘core operation,’ (iii) Defendants’ role

as GRC’s officers, and (iv) the small number of GRC employees.” Aplt. Br. at

49. Referring to the August 10, 2012, conference call GRC held, plaintiff alleges

defendant William Reid admitted “it is axiomatic that as we go deeper, we’re

going to get more and more water,” aplt. app. at 52 ¶ 104, contending that this

admission shows that the nature of the production problems GRC encountered

                                         -25-
were obvious. Plaintiff contends the facts that the El Aguila project was GRC’s

only mining activity and defendants are highly experienced in mining adds to the

inference that “they must have been aware that GRC’s unsustainable 1Q 2012

tactics were causing massive undisclosed production problems.” Aplt. Br. at 50.

       “But in the context of scienter, we must consider plausible opposing

inferences as well.” Level 

. Doing so paints a different

picture of the mining business, one in which it is not always possible to anticipate

what miners will face as they dig deeper. For example, in the August conference

call William Reid explained that the “increased ventilation, increased power

distribution and handling of increased water flow” were issues that “took on

unexpected and above average proportion of effort, as this also impacted the

safety of our miners and our employees.” Supp. App. 148. He stated: “Safety

will always come first and foremost before pushing for production. Because of

this situation, we mined [in the second quarter] some areas of the La Arista

deposit that were known to be low-grade zones but were safer areas of the mine,

while we diligently worked to bring our high-grade stopes into production

safely.” 

He also pointed out that CO 2 gas was sometimes an

additional problem with increased water flow, requiring more ventilation. 

       Defendants addressed the water, ventilation, and electrical power issues in

the November conference call as well, explaining that in the second quarter they

                                        -26-
had “encountered stronger-than-expected watercourses not previously encountered

by our exploration drilling.” 

Jason Reid noted that they had also

faced unusually high “dilution” problems, explaining that “[d]ilution is a waste

rock, a non-ore bearing rock that gets included during the mining process which

dilutes and lowers the head grade of the ore when it is processed in the mill.” 

He added that they had finally been able to attract a number of new and

more experienced employees who were better equipped to address these problems.

In the question and answer period of that conference call, William

Reid stated: “[T]his is the mining business, and we will always have issues to

solve as we constantly open up new areas underground that could and will, at

times, hold surprises, some good and some not so good . . . to be clear, we will

always have challenges with water being underground.” 

Jason Reid

commented further: “We tripped in the second quarter dealing with real world

issues that were not anticipated but are part and parcel of the mining business.”

of the second quarter production problems are as

plausible as plaintiff’s inference that defendants intentionally ignored or

“consciously disregarded” problems that should have been anticipated in

advance. 8 The risks of the mining business were fully set out for investors in the


      8
        We note that defendants hold eighteen percent of the stock of GRC and
that there is no allegation they sold any of it during the class period. While

                                        -27-
cautionary statements issued to them. 9

3. Conclusion

       Having assessed plaintiff’s complaint holistically, setting out the alleged

material misrepresentations and omissions and evaluating plaintiff’s plausible

inferences against the opposing inferences plausibly drawn from the explanations

defendants gave in the conference calls it had with investors, we are not


“motive can be a relevant consideration in making the scienter determination, and
personal financial gain may weigh heavily in favor of a scienter inference,” Level

(internal quotation marks and citation omitted), the absence
of any allegation of a financial benefit from the alleged fraud cuts the other way.
       9
        For example, in GRC’s 2011 Form 10-K annual report, Item 1A clearly
sets forth risk factors associated with mining, including the fact that GRC
“incurred substantial losses in the past,” and that investors may lose all or part of
their investment as a result of “[u]nexpected interruptions” in the mining
business. Supp. App. at 42. Specifically, GRC explained:

       Our underground mining operations are subject to unique risks. The
       exploration for minerals and the development and production of
       mining operations from an underground mine involve a high level of
       risk and are often affected by hazards outside of our control. Some
       of these risks include, but are not limited to, underground fires or
       floods, fall-of-ground accidents, seismic activity and unexpected
       geological formations or conditions including noxious fumes or
       gases. The occurrence of one or more of these events in connection
       with our exploration, development, or production activities may
       result in the death of, or personal injury to, our employees, other
       personnel or third parties, the loss of mining equipment, damage to
       or destruction of mineral properties or production facilities, monetary
       losses, deferral or unanticipated fluctuations in production,
       environmental damage and potential legal liabilities, all of which
       may adversely affect our reputation, business, prospects, results of
       operations and financial position.

                                          -28-
persuaded a reasonable person would deem an inference of scienter more cogent

or compelling than an opposing inference of nonfraudulent intent with respect to

the misrepresentations plaintiff alleges.



                                            III

      Plaintiff also argues that the district court erred by dismissing his claim

against individual defendants for violating § 20(a) of the Exchange Act. “[T]o

state a prima facie case of control person liability, the plaintiff must establish (1)

a primary violation of the securities laws and (2) control over the primary violator

by the alleged controlling person.” 

(alteration in

original) (internal quotation marks omitted). Because the district court properly

dismissed plaintiff’s claims relating to primary violations of the securities laws,

plaintiff’s § 20(a) claim necessarily also fails.



                                            IV

      Plaintiff contends the district court abused its discretion when it dismissed

the first amended complaint with prejudice because it denied him the opportunity

to amend it without providing any explanation. We review for abuse of discretion

a district court’s failure to grant leave to amend. 

.

      As defendants point out, however, the district court was not required to

give an explanation for dismissing the complaint with prejudice when plaintiff’s

                                            -29-
request for leave to amend amounted to a single sentence at the end of his

memorandum in opposition to the motion for summary judgment. Defendants

rely on Calderon v. Kansas Department of Social & Rehabilitation Services, 

, 1187 (10th Cir. 1999), where we declined to reverse a district court’s

failure to grant leave to amend because “Ms. Calderon’s single sentence, lacking

a statement for the grounds for amendment and dangling at the end of her

memorandum, did not rise to the level of a motion for leave to amend.” We

concluded “that a request for leave to amend must give adequate notice to the

district court and to the opposing party of the basis of the proposed amendment

before the court is required to recognize that a motion for leave to amend is

before it.” 

      This case is similar. The district court did not abuse its discretion in

dismissing the complaint with prejudice where plaintiff’s memorandum contained

only one sentence at the very end of his brief alternatively requesting leave to

amend in the event the district court should decide to dismiss his complaint.



                                          V

      Finally, plaintiff asserts the district court erred in denying his motion to

strike or disregard portions of defendants’ reply in support of their motion to

dismiss. Essentially, plaintiff contends defendants advanced new arguments for

the first time in their reply brief. While it is true that we generally do not “review

                                        -30-
issues raised for the first time in a reply brief, we make an exception when the

new issue argued in the reply brief is offered in response to an argument raised in

the [plaintiff’s] brief.” Beaudry v. Corr. Corp. of Am., 

, 1166 n.3

(10th Cir. 2003) (internal quotation marks and citation omitted). Citing Beaudry,

the district court explained that defendants were replying to arguments plaintiff

raised in its response brief. We are not persuaded the court erred in so

concluding. Accordingly, we cannot say the court abused its discretion in

denying plaintiff’s motion to strike or disregard portions of defendants’ reply.

Moreover, our review of the district court’s dismissal of the complaint is de novo,

and plaintiff has had a full opportunity to make all his arguments on appeal.



                                           VI

      In sum, we affirm the district court’s decision to dismiss plaintiff’s first

amended and consolidated complaint with prejudice. In so doing, we conclude

the district court did not abuse its discretion in failing to grant plaintiff leave to

amend, or in denying plaintiff’s motion to strike or disregard portions of

defendants’ reply.




                                          -31-