Case: 13-10928   Document: 00513076785     Page: 1   Date Filed: 06/12/2015




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

                                 No. 13-10928
                                                                            Fifth Circuit

                                                                          FILED
                                                                      June 12, 2015

BRUCE OWENS,                                                         Lyle W. Cayce
                                                                          Clerk
             Plaintiff - Appellant

v.

KENNETH M. JASTROW, II; KENNETH R. DUBUQUE; RONALD D.
MURFF; CRAIG E. GIFFORD,

             Defendants - Appellees




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


Before JOLLY, OWEN, and HIGGINSON, Circuit Judges.
STEPHEN A. HIGGINSON, Circuit Judge:
      This case arises out of one of the largest bank failures in United States
history. In August 2009, in the wake of the financial and housing crises,
Guaranty Bank’s parent company filed for bankruptcy. Plaintiffs represent a
putative class of former Guaranty stockholders whose equity interests were
wiped out when Guaranty failed. They bring federal securities law claims
against four former Guaranty executives, alleging that the executives made
materially false and misleading statements regarding Guaranty’s assets. The
district court dismissed the claims. For the following reasons, we AFFIRM.
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                                   No. 13-10928
                        FACTS AND PROCEEDINGS
      Temple-Inland, Inc. (“Temple”) was a holding company that operated a
packaging and manufacturing business and a financial services business,
Guaranty Financial Group Inc., (“GFG”) which, in turn, owned Guaranty Bank
(the “Bank”). 1 On November 29, 2007, Temple announced that its board of
directors had approved a spin-off transaction that would leave GFG as
independent owner of the Bank. According to plaintiffs, Temple decided to spin
off Guaranty because it was concerned about Guaranty’s solvency, and about
various cross-default covenants that would jeopardize Temple’s own solvency
if Guaranty became insolvent. Plaintiffs allege that Temple did not provide
Guaranty sufficient capital at the time of the spin-off.
      Temple’s concerns over Guaranty’s solvency stemmed from the
composition of Guaranty’s asset portfolio.            Guaranty had purchased
investments in residential mortgage-backed securities (“MBS”), which are
created by pooling mortgage loans into a trust. Guaranty’s portfolio contained
a significant amount of “non-agency” MBS—those issued by private
institutions rather than government-sponsored entities. Non-agency MBS are
generally understood to have higher returns and higher risks than their
government-sponsored counterparts. Plaintiffs allege that Guaranty’s non-
agency MBS portfolio always constituted at least 22% of Guaranty’s total
assets. Further, plaintiffs allege that a substantial portion of Guaranty’s MBS
was collateralized by risky adjustable rate mortgages. On the other hand, none
of Guaranty’s MBS contained subprime mortgages. Guaranty also did not
invest in the most junior tranches, or levels, of MBS, meaning that losses would
not affect Guaranty’s investments until investors in junior tranches lost their



      1 This opinion uses the general term “Guaranty” when no distinction between GFG
and the Bank is warranted.
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                                    No. 13-10928
entire investment.     Further, until June 2008, when certain MBS were
downgraded or placed on negative watch, all of Guaranty’s MBS were rated
the highest level—AAA—by the major credit rating agencies.
      Defendants Kenneth M. Jastrow, Kenneth R. Dubuque, Ronald D. Murff,
and Craig E. Gifford were all high-level executives in Guaranty and, in some
cases, Temple.     Plaintiffs claim that after the spin-off, Guaranty, led by
defendants, violated Generally Accepted Accounting Principles (“GAAP”) by
systematically overvaluing its MBS portfolio and undervaluing its losses.
Defendants allegedly compounded this problem by failing to properly record
Guaranty’s   losses   as   “other    than    temporary   impairment”      (“OTTI”).
Defendants reported these allegedly erroneous accounting figures in public
filings. Plaintiffs claim that defendants were motivated by the knowledge that,
absent fraud, Guaranty’s regulatory capital would have been inadequate and
Guaranty would not have had time to procure capital necessary to continue as
a going concern.
      For a time, Guaranty was successful in masking its financial difficulties;
it attracted capital infusions in 2008. But Guaranty’s health continued to
decline. In July 2009, Guaranty announced that, at the direction of the Office
of Thrift Supervision (“OTS”), Guaranty had amended its Thrift Financial
Report for the period ending March 31, 2009 and recorded a $1.62 billion
impairment on its MBS portfolio. Soon after, the OTS closed Guaranty and
the Federal Deposit Insurance Corporation (“FDIC”) was appointed as
receiver. GFG filed for bankruptcy protection on August 27, 2009.
      On August 22, 2011, Guaranty’s bankruptcy trustee, Kenneth L. Tepper,
sued Temple and various other defendants, including Jastrow and Dubuque,




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                                        No. 13-10928
alleging that they had raided over $1 billion in assets from Guaranty. 2 The
Tepper complaint alleged that Temple and the other defendants “fraudulently
strip[ped] [Guaranty] of assets beyond the point of solvency and adequate
capitalization.” In November 2012, the Tepper action settled for $80 million.
         Plaintiffs initially filed this putative class action on November 11, 2011.
They filed an amended class action complaint on April 19, 2012 on behalf of all
purchasers of GFG common stock between December 12, 2007 and August 24,
2009 (the “Class Period”), against Temple and the individual defendants.
Temple and the individual defendants moved to dismiss the amended
complaint.         The district court granted the motions on several grounds,
including the failure to adequately allege defendants’ scienter. The district
court granted plaintiffs leave to amend, however, and plaintiffs filed the
Second Amended Complaint (“SAC”), which alleged claims against the
individual defendants alone.            The individual defendants again moved to
dismiss. The district court found that the SAC did not adequately allege
scienter, and granted the motions, dismissing the case with prejudice.
Plaintiffs timely appealed.
                                       DISCUSSION
                                  I. Standard of Review
         The SAC alleges violations of Section 10(b) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17
C.F.R. § 240.10b-5. Plaintiffs also allege control person violations of Section
20(a) of the Exchange Act. 15 U.S.C. § 78t(a). The elements of a private
securities fraud claim based on Section 10(b) and Rule 10b-5 are “(1) a material
misrepresentation (or omission), (2) scienter, i.e., a wrongful state of mind, (3)



         2   Complaint, Tepper v. Temple-Inland, Inc., No. 3:11-cv-02088 (N.D. Tex. Aug. 22,
2011).
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                                  No. 13-10928
a connection with the purchase or sale of a security, (4) reliance, often referred
to in cases involving public securities markets (fraud-on-the-market cases) as
‘transaction causation’; (5) economic loss; and (6) ‘loss causation,’ i.e., a causal
connection between the material misrepresentation and the loss.” Lormand v.
US Unwired, Inc., 

, 238–39 (5th Cir. 2009) (quoting Dura Pharm.,
Inc. v. Broudo, 

, 341–42 (2005)). Defendants argue that the SAC
fails to adequately allege the material misrepresentation, scienter, and loss
causation elements.
      We review a district court’s dismissal of federal securities law claims
under Rule 12(b)(6) de novo. Flaherty & Crumrine Preferred Income Fund, Inc.
v. TXU Corp., 

, 206 (5th Cir. 2009). We accept “all well-pleaded
facts as true and view[] those facts in the light most favorable to the plaintiffs.”
Moffett v. Bryant, 

, 325 (5th Cir. 2014) (internal quotation marks
and citation omitted). “To survive a Rule 12(b)(6) motion, the plaintiff must
plead enough facts to state a claim to relief that is plausible on its face.”

(internal quotation marks and citation omitted).
      Pursuant to Federal Rule of Civil Procedure 9(b), plaintiffs must state
all allegations of fraud with particularity by identifying the “time, place, and
contents of the false representations, as well as the identity of the person
making the misrepresentation and what that person obtained thereby.”
Tuchman v. DSC Commc’ns Corp., 

, 1068 (5th Cir. 1994) (internal
citation and alterations omitted). Securities fraud claims brought by private
litigants are also subject to the pleading requirements imposed by the Private
Securities Litigation Reform Act (“PSLRA”). “[T]he PSLRA requires a plaintiff
to identify each allegedly misleading statement with particularity and explain
why it is misleading.” 

(citing 15 U.S.C. § 78u–(b)(1)).
At a minimum, the PSLRA pleading standard incorporates the “who, what,


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                                  No. 13-10928
when, where, and how” requirements of Rule 9(b). ABC Arbitrage Plantiffs
Grp. v. Tchuruk, 

, 349–50 (5th Cir. 2002).
      Plaintiffs allege that defendants made an array of materially false and
misleading statements in SEC filings and public comments throughout the
Class Period.   Defendants allegedly violated GAAP and SEC rules by (1)
reporting overstated MBS values, and understated losses, stemming from the
use of flawed internal asset pricing models; and (2) failing to timely record
OTTI in the portfolio.
                                   II. Scienter
      The central issue in this case is whether the SAC contains sufficient facts
to allege scienter as to each defendant. The district court dismissed the SAC
on the ground that it did not.
      The PSLRA imposes heightened pleading standards on private plaintiffs
bringing actions pursuant to Section 10(b) and Rule 10b-5. See 15 U.S.C.
§ 78u–4; Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

, 321 (2007).
To demonstrate scienter, the PSLRA requires a plaintiff to “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). In this circuit, “[t]he
required state of mind [for scienter] is an intent to deceive, manipulate,
defraud or severe recklessness.” 

(internal quotation
marks and citation omitted). This appeal primarily focuses on whether the
SAC states with particularity facts giving rise to a strong inference that each
defendant was severely reckless.
      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, and that present 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.

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                                  No. 13-10928
Abrams v. Baker Hughes Inc., 

, 430 (5th Cir. 2002) (internal
quotation marks and citation omitted).
      To withstand a 12(b)(6) motion to dismiss, the required “strong
inference” of severe recklessness must be “more than merely ‘reasonable’ or
‘permissible’—it must be cogent and compelling, thus strong in light of other
explanations.” 

. A reviewing court therefore must
“take into account plausible inferences opposing as well as supporting a strong
inference of scienter.” Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw
Grp., Inc., 

, 533 (5th Cir. 2008) (citing 

).
A complaint will survive only if the inference of scienter is “at least as
compelling as any opposing inference one could draw from the facts alleged.”

. “[A] tie favors the plaintiff.” 

(citing 

).
                              A. Threshold issues
      Plaintiffs and defendants each raise one issue that they contend
warrants reversal or affirmance, respectively, without requiring consideration
of the specific scienter allegations.
                               i. Holistic review
      Plaintiffs contend that the district court’s scienter analysis was flawed
because the district court evaluated the scienter allegations individually
rather than collectively. When analyzing a complaint for scienter, a court must
“assess all the allegations holistically,” not in isolation. 

; see also 

(“The inquiry is whether all of the facts
alleged, taken collectively, give rise to a strong plausible inference of scienter,
not whether any individual allegation, scrutinized in isolation, meets that
standard.”).    The district court methodically analyzed the allegations,
determining whether each did or did not contribute to a strong inference of
scienter.   Then, for each defendant, the district court concluded that the
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                                  No. 13-10928
various allegations, taken together, did not raise a strong inference of scienter
that was at least as compelling as the opposing inference that the defendant
did not know of the fraud or was merely negligent.
      Plaintiffs raise two points in support of their argument. First, plaintiffs
contend that the district court’s two-step method of first assessing the
allegations individually, before weighing them collectively, violates Tellabs’s
prescription. In support, they cite the Sixth Circuit’s decision in Frank v. Dana
Corp., 

, 961 (6th Cir. 2011). Frank criticized the method the
district court employed in this case:
      Our former method of reviewing each allegation individually
      before reviewing them holistically risks losing the forest for the
      trees. Furthermore, after Tellabs, conducting an individual review
      of myriad allegations is an unnecessary inefficiency.
      Consequently, we will address the Plaintiffs’ claims holistically.

plaintiffs’ suggestion, Frank does not stand for the proposition
that Tellabs forbids the method of first reviewing each allegation individually;
rather, Frank advises against such a method because, in the view of that court,
it is “an unnecessary inefficiency.” 

court, after Tellabs, has
endorsed the district court’s two-step method. See Central Laborers’ Pension
Fund v. Inegrated Elec. Servs. Inc., 

, 552–55 (5th Cir. 2007)
(employing two-step method); see also In re VeriFone Holdings, Inc. Sec. Litig.,

, 703 (9th Cir. 2012) (“[A] dual analysis remains permissible so
long as it does not unduly focus on the weakness of individual allegations to
the exclusion of the whole picture.”). A district court may best make sense of
scienter allegations by first looking to the contribution of each individual
allegation to a strong inference of scienter, especially in a complicated case
such as this one. Of course, the court must follow this initial step with a holistic
look at all the scienter allegations.



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                                  No. 13-10928
      Second, plaintiffs argue that, even if the two-step method is permissible,
the district court did not, as it said, view “the [SAC’s] allegations as a whole.”
Plaintiffs point to numerous instances where the district court stated that a
particular allegation did not “alone” contribute to a strong inference of scienter.
The district court did not err in stating, throughout its inquiry, that various
allegations, standing alone, did not constitute a strong inference of scienter.
As a matter of efficiency, if any single allegation, standing alone, created a
strong inference of scienter, the court would not need to consider additional
allegations of scienter. After analyzing each allegation alone, the district court
properly proceeded to the second step and determined that the allegations, as
a whole, did not raise a strong inference of scienter as to each defendant. See

–41 (concluding, after analysis of individual allegations,
that together, they did not raise a strong inference that defendant was severely
reckless); Central 

(concluding, without detailed
analysis, that the plaintiff’s “allegations read in toto do not permit a strong
inference of scienter”). In any event, our de novo review will assess holistically
the SAC’s scienter allegations.
                              ii. Group pleading
      Defendants complain that the SAC contains impermissible group
pleading. This court has rejected the group pleading doctrine. See 

(“[T]he PSLRA requires the plaintiffs to distinguish among
those they sue and enlighten each defendant as to his or her particular part in
the alleged fraud.”) (internal quotation marks omitted). Accordingly, “we do
not construe allegations contained in the [SAC] against the ‘defendants’ as a
group as properly imputable to any particular defendant unless the connection
between the individual defendant and the allegedly fraudulent statement is
specifically pleaded.” 

that the SAC violates these
rules by repeatedly using general terms like “Individual Defendants” and
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                                     No. 13-10928
“Bank executives.” We agree that some allegations are not tied to a particular
defendant. See Fin. Acquisition Partners LP v. Blackwell, 

, 287
(5th Cir. 2006).
      Defendants disagree among themselves about the proper remedy for this
deficiency in the SAC. Defendants Jastrow and Dubuque contend that group
pleading and the related problem of puzzle pleading—where a court must wade
through a complaint and pick out properly pleaded segments—warrants
dismissal of the entire SAC.            Defendants Murff and Gifford propose
disregarding group-pleaded allegations and considering only those that
identify each defendant. It is appropriate to disregard the group-pleaded
allegations and determine whether the remaining, properly pleaded
allegations raise a strong inference of scienter. See 

(“The district
court correctly dismissed the claims relying on group pleading.”); 

(disregarding the allegations against “defendants” as a group).
Although we do not commend plaintiffs’ inclusion of group-pleaded allegations
interspersed with defendant-specific allegations, in this case we are able to
“separat[e] the wheat from the chaff,” and outright dismissal is unwarranted.
See In re Enron Corp. Secs, Derivative & ERISA Litig., 

,
611 (S.D. Tex. 2003). This is not a situation where “[n]o attempt is made to
isolate statements and particularize their falsity.” Williams v. WMX Techs.,
Inc., 

, 180 (5th Cir. 1997). 3 Accordingly, we disregard the group-
pleaded allegations and discern whether the remaining allegations state a
claim for relief as to each defendant.




      3  We are also wary that a strict rule requiring outright dismissal for any group or
puzzle pleading could cause future plaintiffs to omit from complaints helpful information
about the activities of a non-party or contextual statements about defendants that may not
be able to be particularized.
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                                        No. 13-10928
            B. Allegations common to more than one defendant
       We now discuss the allegations that, according to plaintiffs, lead to a
strong inference of scienter. First, we look at the various allegations that apply
to more than one defendant and discuss the appropriate inference, if any, to be
drawn from them. 4 Then we proceed, defendant by defendant, adding any
allegations unique to that defendant, to comprehensively determine if
plaintiffs have alleged facts that give rise to a strong inference of scienter as to
any defendant. The SAC contains no direct allegations of fraudulent conduct;
rather, plaintiffs rely on circumstantial allegations. See 

.
               i. Knowledge of undercapitalization and motive
       One of plaintiffs’ primary allegations is that defendants had knowledge
of Guaranty’s undercapitalization 5 and, as officers and directors, wanted to
raise capital necessary for the continued operation of the business. This,
plaintiffs say, created a motive for defendants to overstate the value of
Guaranty’s MBS portfolio; if Guaranty appeared to be a healthy company, it
could more easily attract much-needed capital.
       The SAC pleads with particularity that defendants Jastrow, Dubuque,
and Murff—but not Gifford—knew of Guaranty’s undercapitalization. The
SAC alleges that Dubuque met with Temple’s management before the spin-off
and suggested that Guaranty needed $200 million in additional capital.



       4  These allegations do not constitute group pleading because they are sufficiently
particularized. However, because they apply to more than one defendant, they are most
easily discussed together.
        5 The SAC’s use of the term “undercapitalized” likely refers to the industry-specific

definition of regulatory capital, see 12 C.F.R. § 325.103 (defining the risk-based capital ratios
that constitute a bank’s undercapitalization), and not the colloquial definition, see Black’s
Law Dictionary 251 (10th ed. 2014) (defining “undercapitalization” as “[t]he financial
condition of a firm that does not have enough capital to carry on its business”). Regardless,
this distinction is not significant for our discussion of scienter.
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                                      No. 13-10928
Dubuque is also alleged to have had discussions after the spin-off in which he
expressed the desire for $100 million in additional capital. Dubuque and Murff
are alleged to have led a meeting in the spring of 2008 concerning Guaranty’s
capital position. The SAC also derives knowledge of undercapitalization—and
motive—from the Tepper complaint. 6               The Tepper complaint alleged that
Jastrow, Dubuque, and Murff knew of Guaranty’s undercapitalization before
the spin-off. These allegations adequately state that Jastrow, Dubuque, and
Murff were aware of Guaranty’s need for capital during the Class Period. 7
       The resulting question is whether any inference of scienter should be
drawn from defendants’ knowledge of Guaranty’s undercapitalization. The
desire to raise capital in the normal course of business does not support a
strong inference of scienter because virtually all corporate insiders share this
goal. See 

(holding that a desire to raise capital,
receive incentive compensation, and sell stock at inflated prices did not support
a strong inference of scienter). Plaintiffs contend that the inference of scienter
here is much greater because capital infusions were not merely desirable, but
necessary for the ongoing operation of Guaranty.
       “[A]ppropriate allegations of motive and opportunity may meaningfully
enhance the strength of the inference of scienter, but . . . allegations of motive
and opportunity, without more, will not fulfill the pleading requirements of the
PSLRA.” Goldstein v. MCI WorldCom, 

, 246 (5th Cir. 2003). In


       6The parties do not dispute that we should consider the Tepper complaint’s allegations
regarding knowledge of undercapitalization because they were expressly incorporated by the
SAC. See Stratte-McClure v. Morgan Stanley, 

, 100 (2d Cir. 2015) (considering, in
deciding a motion to dismiss, the complaint as well as “any statements or documents
incorporated in [the complaint] by reference”).
       7 Plaintiffs argue that the SAC alleges Gifford’s knowledge of undercapitalization

because, due to his position as Guaranty’s Principal Accounting Officer, he “cannot credibly
claim ignorance of [Guaranty’s] financial situation.” This allegation is not contained within
the SAC and, in any event, is not pled with particularity. We therefore decline to infer that
Gifford had knowledge of Guaranty’s undercapitalization.
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                                  No. 13-10928
Goldstein, WorldCom’s CEO was alleged to have avoided taking an accounting
charge for delinquent receivables in order to artificially inflate results and
ensure a merger was completed. See 

Plaintiffs alleged that the
CEO’s motive contributed greatly to scienter, not only because the CEO would
lose millions in compensation if the stock price dropped, but also because such
a drop would accelerate payment on his personal loans. See 

We
found that the merger was important and more than routine, and supported a
“strong and unique incentive” for the CEO to commit fraud. 

this
strong motive evidence was insufficient, on its own, to raise a strong inference
of scienter, and, after considering other allegations of scienter, we affirmed the
district court’s dismissal of the complaint. See 

      Plaintiffs maintain that this case is similar to Nathenson v. Zonagen Inc.,

(5th Cir. 2001). This court, in Nathenson, held that plaintiffs
“barely” pled a strong inference of scienter as to a defendant who was
President, CEO, and a director of a “one product company” and was alleged to
have made misstatements regarding a patent’s applicability to that single
product. See 

Nathenson suggested, in dicta, that the rare case
might establish a strong inference of scienter solely from motive and
opportunity allegations. See 

(“[I]t would seem to be a rare set of
circumstances indeed where [motive and opportunity] allegations alone are
both sufficiently persuasive to give rise to a scienter inference of the necessary
strength and yet at the same time there is no basis for further allegations also
supportive of that inference.”). This is not such a case, even if one could exist
after Goldstein’s pronouncement seemingly foreclosing the possibility.
Defendants’ alleged misstatement of the MBS portfolio valuation was not as
crucial to the continuing operation of Guaranty as were the misstatements
regarding the patent’s applicability in Nathenson. Although Guaranty’s non-
agency MBS portfolio was undeniably a large and important business asset, it
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                                       No. 13-10928
is not alleged to have been Guaranty’s single product, instead comprising at all
relevant times no more than 22% of Guaranty’s total assets. See 

(Parker, J., concurring) (concluding that defendants’ recklessness
could not be inferred when the source of accounting irregularities accounted
for 20% of the company’s revenues).
       The motive allegations contribute to a finding of scienter as to Jastrow,
Dubuque, and Murff, but must be considered together with other allegations
to determine if they rise to a strong inference of scienter. 8 See 

(“Appropriate allegations of motive and opportunity may
meaningfully enhance the strength of the inference of scienter.”).
            ii. Knowledge of red flags regarding MBS valuation
       Plaintiffs allege that Guaranty’s MBS valuation and its decision not to
recognize losses as “other than temporary” violated GAAP.                     Because the
question of whether the statements actually violated GAAP is fact-dependent,
it is not properly addressed on a motion to dismiss. See Barrie v. Intervoice-
Brite, Inc., 

, 257 (5th Cir. 2005). The issue, for the scienter
analysis, is whether, assuming the statements violated GAAP, the allegations
give rise to a strong inference that individual defendants were severely
reckless in valuing the securities.
       Plaintiffs contend that several “red flags” included in the SAC should
have alerted each defendant that the MBS valuation was materially incorrect.
The red flags include (1) a 250% increase in the average delinquency rate on
Guaranty’s non-agency MBS portfolio in the nine-month period ending June



       8We decline to draw additional inferences of scienter from the Tepper action. Because
the Tepper complaint covers only events before the Class Period, it does not directly address
the misstatements at the heart of this case. For this reason, and because the persuasive force
of the Tepper action’s settlement is disputed, we limit the contribution to scienter of the
Tepper complaint to Jastrow’s, Dubuque’s, and Murff’s knowledge of Guaranty’s
undercapitalization.
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                                 No. 13-10928
30, 2008; (2) a decrease in the value of the non-agency MBS portfolio to 60% of
its cost by June 30, 2008; and (3) the downgrading or placing on negative watch
of ten securities in Guaranty’s portfolio in June and July 2008.
      The “red flags” add little inference of scienter. Each “red flag” is alleged
to have become knowable only in June 2008, whereas many of the alleged
misrepresentations occurred before June 2008.         Even as to those alleged
misstatements that occurred after the “red flags” were apparent, the red flags
were disclosed to the public, which negates the inference that defendants acted
with scienter. See Fire & Police Pension Ass’n of Colo. v. Simon, 

,
244 (1st Cir. 2015) (holding that a company’s disclosures of red flags “undercut
any inference of scienter”); Ziemba v. Cascade Int’l, Inc., 

, 1211
(11th Cir. 2001) (noting that various disclosures of red flags “undermine[d] any
hint of fraud”). Plaintiffs dispute whether and to what extent the red flags
were disclosed. However, documents referenced in the SAC and attached to
defendants’ motion to dismiss confirm that the alleged red flags, or at least the
inputs that would allow the public to easily calculate them, were disclosed
promptly by Guaranty. See 

(holding that, on a Rule
12(b)(6) motion, a court must consider “documents incorporated into the
complaint by reference”).
      Additional transparency, not disputed by plaintiffs, further negates the
inference of scienter. Defendants disclosed that Guaranty’s MBS valuation
was based on internal models, not market prices, and Guaranty disclosed the
inputs it used in its models. Guaranty provided investors with additional
explanatory and cautionary information from which they could judge the
accuracy of the models and Guaranty’s decision not to recognize losses as other
than temporary.     Guaranty’s filings further disclosed that valuation was
“difficult,” and that the valuation estimates involved a “high degree of
uncertainty” and might “prove to be materially incorrect.” As the Supreme
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                                  No. 13-10928
Court recently recognized, “an investor reads each statement within [an SEC
document], whether of fact or of opinion, in light of all its surrounding text,
including hedges, disclaimers, and apparently conflicting information.”
Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S.
Ct. 1318, 1330 (2015).
      We distinguish this case from Spitzberg v. Houston American Energy
Corporation, 

(5th Cir. 2014). In Spitzberg, an energy company
made public statements estimating billions of barrels of oil reserves even
though the company had done no geological testing. 

684. We held
that defendants were severely reckless because using the term “reserves”—an
industry-specific term indicating that production or testing had occurred—
would present an obvious danger of misleading investors as to the value of the
company’s assets. 

684. Here, in contrast, defendants’ disclosures
conveyed to investors that its MBS valuations were far from certain.
      Defendants’ disclosure of the “red flags” and candidness about the
uncertainty underlying its models neutralize any scienter inference from “red
flags.”
                 iii. Magnitude of alleged misstatements
      Plaintiffs contend that the magnitude of the valuation errors contributes
to a strong inference of scienter. The significance of a large accounting error
depends on the circumstances. In Goldstein, we held that a $685 million write-
off did not create a strong inference of scienter because the company was large
and frequently took similarly-sized 

. Here, the
magnitude was undoubtedly large; the OTS directed Guaranty to restate its
March 31, 2009 Thrift Financial Report and recognize a $1.62 billion OTTI,
representing an overvaluation of the MBS portfolio of 100%. But, as we discuss
in Section II.C.i, infra, the magnitude’s contribution to an inference of scienter


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                                         No. 13-10928
is small, because the valuation involved subjective accounting concepts that
can yield a wide range of reasonable results. See 

. 9
                               C. Individual defendants
       Having discussed the underpinnings and merits of the common
allegations regarding scienter, we proceed to a holistic review, for each
defendant, of all scienter allegations applicable to that defendant.
                                 i. Dubuque and Murff 10
       Dubuque was President, CEO, and a director of Guaranty until his
resignation on November 19, 2008. He was also Guaranty’s Chairman from
August 26, 2008 until his resignation.                Murff was Senior Executive Vice
President and Chief Financial Officer of Guaranty until his resignation on July
10, 2009.      From October 27, 2008 until his resignation, Murff was also
Guaranty’s Principal Accounting Officer. Plaintiffs seek to hold Dubuque and
Murff liable for their conduct throughout the Class Period, including
statements made in Guaranty’s 2007 10-K, 2008 10-Qs, and several other
statements made between February 2008 and November 2008.
       As 

, the SAC alleges that Dubuque and Murff knew of
Guaranty’s undercapitalization and had a motive to falsify the MBS valuation
to raise additional capital. However, because knowledge and motive alone are
insufficient to raise a “strong inference” of scienter, 

,



       9 Before the district court, plaintiffs argued that the timing of each defendant’s
resignation suggested scienter. The district court concluded that Guaranty’s overall decline,
rather than securities fraud, was likely the impetus for the resignations. The district court
also concluded that defendants’ signatures on Sarbanes-Oxley certifications did not lead to
scienter absent the signer’s knowledge of the underlying falsity or severe recklessness in
recognizing it. See Garfield v. NDC Health Corp., 

, 1266 (11th Cir. 2006). On
appeal, plaintiffs do not brief or argue either of these issues, so we do not include these factors
in our analysis. See United States v. Whitfield, 

, 346 (5th Cir. 2009) (“[A] party
waives any argument that it fails to brief on appeal.”) (citing Fed. R. App. P. 28(a)(9)(A)).
       10 We discuss Dubuque and Murff together because the allegations involving each

largely overlap.
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                                      No. 13-10928
we consider whether additional scienter allegations raise the required
inference.
       In addition to the knowledge allegations, the SAC alleges that Dubuque
and Murff were aware of internal warnings regarding the MBS valuation.
These allegations revolve around a confidential witness, designated in the SAC
as CW1, who was responsible for purchasing MBS as Guaranty’s Senior Vice
President of Investments and Secretary of the Asset Liability Committee
(“ALCO”). 11 The SAC alleges that, in January 2007, CW1 sent an email to
Dubuque and Murff identifying several deficiencies in Guaranty’s internal
MBS pricing model, including (1) Guaranty’s use of outdated parameters to
value MBS and assess MBS losses; (2) its failure to independently verify the
cash flows used in valuing MBS; (3) the elimination of liquidity factors from its
valuation; (4) inadequate accounting of interest rate changes on adjustable
rate mortgages; and (5) inadequate modeling of credit risk. 12 The SAC further
alleges that CW1 repeated his or her concerns about the model’s deficiencies
at ALCO meetings attended by Dubuque and Murff. The SAC also alleges that
CW5, the Chief Lending Officer and Chief Administrative Officer of Guaranty,
attended ALCO meetings along with Dubuque and Murff, in which potential
MBS write-downs were discussed. 13 The SAC alleges that Dubuque and Murff
knew or recklessly ignored that the models were flawed, and continued to use


       11 In cases under the PSLRA, plaintiffs may rely on confidential witnesses “provided
they are described in the complaint with sufficient particularity to support the probability
that a person in the position occupied by the source would possess the information alleged.”
Tchuruk, 

, 352 (5th Cir. 2002). Here, plaintiffs describe the confidential
witnesses’ job positions with sufficient particularity.
       12 The district court discounted CW1’s email because it occurred before the Class

Period. Knowledge gained before the Class Period may be retained months later and there
is no indication that Guaranty drastically changed its valuation model after CW1’s email.
Thus, the email is relevant to scienter.
       13 The SAC does not plead with particularity the dates of the ALCO meetings or the

substance of the conversations, alleging only that they began in the fourth quarter of 2007
and continued into 2008. Therefore, we do not draw any inferences from this allegation.
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                                      No. 13-10928
the models and report the resulting GAAP-noncompliant figures throughout
the Class Period.
          Dubuque’s and Murff’s continued reliance on Guaranty’s internal
valuation model and unchanged OTTI determinations, after CW1’s warnings,
does not lead to a strong inference of scienter.         That the reported figures are
alleged to have violated GAAP is not, by itself, actionable. See 

(“[A] failure to follow GAAP, without more, does not establish scienter.”);

(“[F]ailure to follow accounting standards, without
more, does not establish scienter.”). Plaintiffs must also plead facts leading to
a strong inference that each defendant knew the numbers violated GAAP or
was severely reckless in disregarding the concerns. See 

. 14
          An inference of severe recklessness is more likely when a statement
violates an objective rule than when GAAP permits a range of acceptable
outcomes. See In re MicroStrategy, Inc. Sec. Litig., 

, 638
(E.D. Va. 2000) (“[I]f the GAAP rules . . . Defendants are alleged to have
violated are relatively simple, it is more likely that the Defendants were aware
of the violations and consciously or intentionally implemented or supported
them, or were reckless in this regard.”).             Applying GAAP often involves
subjective determinations. See Fine v. Am. Solar King Corp., 

,
297 (5th Cir. 1990) (“GAAP tolerates a wide range of acceptable




          Defendants propose a more difficult standard for pleading scienter related to
          14

accounting estimates. They suggest that plaintiffs must plead the opinions were both (1)
false and (2) not honestly believed by the defendant when made, a standard adopted by the
Second and Ninth Circuits. See Fait v. Regions Fin. Corp., 

, 113 (2nd Cir. 2011);
Rubke v. Capitol Bancorp Ltd., 

, 1162 (9th Cir. 2009). Requiring a plaintiff to
allege that a defendant did not honestly believe a statement when made is inconsistent with
the standard in this circuit, which permits scienter to be shown either by knowledge a
defendant is publishing materially false information or by severe recklessness in publishing
such information. See 

.
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                                      No. 13-10928
procedures . . . .”); Thor Power Tool Co. v. C. I. R., 

, 544 (1979)
(“Accountants long have recognized that generally accepted accounting
principles are far from being a canonical set of rules that will ensure identical
accounting treatment of identical transactions. Generally accepted accounting
principles, rather, tolerate a range of reasonable treatments, leaving the choice
among alternatives to management.”) (internal quotation marks omitted).
       While recognizing that some GAAP concepts may allow for subjective
judgments, plaintiffs argue that defendants’ MBS valuation and decision not
to recognize an OTTI were governed by objective standards.                    Specifically,
plaintiffs argue that defendants violated an objective GAAP directive requiring
that OTTI be assessed “at the individual security level” by failing to “drill
down” and assess OTTI at the individual loan level. Plaintiffs misapprehend
this GAAP requirement. In determining whether to recognize an OTTI, GAAP
does not require a company to assess the likelihood of repayment of each of
thousands of loans in each security. 15 Because plaintiffs do not allege that
defendants failed to value each security, they have not plausibly alleged a
violation of an objective GAAP component.
       Even at this early stage of the proceedings—where it is improper to
engage in detailed discussion of GAAP rules—it is undeniable that there is
some subjectivity present in Guaranty’s decision to continue using its internal
models and to delay recognizing impairments as other than temporary. See
FASB Staff Position No. EITF 99-20-1, at 1 (permitting “the use of reasonable
management judgment of the probability that the holder will be unable to
collect all amounts due”); 

(listing multiple factors that influence an
OTTI determination); 

(“[J]udgment is required in determining whether


       15 It is doubtful that Guaranty, as an investor in MBS, was even provided ongoing
updates on the performance of each loan within the securities such that it could have engaged
in a loan-by-loan valuation.
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                                   No. 13-10928
factors exist that indicate that an impairment loss has been incurred at the
end of the reporting period. These judgments are based on subjective as well
as objective factors.”). 16 Therefore, plaintiffs must show that Dubuque’s and
Murff’s decision to disregard CW1’s warnings and to continue to use the
internal model and OTTI recognition procedures was unreasonable even in
light of the subjective nature of the GAAP requirements. See 

.
       Although plaintiffs argue that Dubuque and Murff were “repeatedly”
made aware of the deficiencies in Guaranty’s models, the email from CW1 is
the only warning alleged to have been conveyed to Dubuque and Murff. CW1’s
warnings did not mention GAAP and do not seem to suggest that any issues
were so severe that they could lead to a large overvaluation of the MBS
portfolio.
       Dubuque and Murff relied on outside ratings agencies, which rated all of
Guaranty’s MBS AAA until June 2008. We find that reliance on AAA ratings,
when CW1 did not caution that reliance on major outside ratings agencies was
unwarranted, was not severely reckless. FASB guidance explicitly instructs
companies to consider a security’s credit rating when deciding whether to
recognize a loss as other than temporary. Moreover, defendants were not alone
in relying on AAA ratings in the face of potential red flags. OTS, Guaranty’s
regulator, similarly failed to recognize risks associated with Guaranty’s MBS
portfolio “primarily because the nonagency MBSs that Guaranty bought were
graded AAA by credit rating agencies.” OTS’s report on Guaranty’s demise
found that: “From 2004 through 2007, both [Guaranty] and OTS relied on the
AAA ratings and considered the risk of purchasing AAA-rated nonagency



       16We may consider these documents in our review because the SAC refers to them
and they are in the record. See 

.
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                                       No. 13-10928
MBSs to be minimal.” At the time of CW1’s warnings in 2007, both Guaranty
and its federal regulator viewed the AAA ratings to be a crucial factor in the
MBS portfolio’s valuation.
       We find persuasive the Second Circuit’s discussion of very similar
allegations in City of Pontiac Policemen’s and Firemen’s Retirement System v.
UBS AG, 

, 187 (2d Cir. 2014). There, plaintiffs alleged that UBS’s
investment bank “disregarded . . . observable market inputs and red flags
demonstrating that [its] mortgage-related asset portfolio was materially
impaired” when it declined to write down its assets. 

Circuit
held that UBS was not reckless in relying on the assets’ AAA rating in the face
of internal and external uncertainty and disagreement about the valuation of
mortgage-related assets. See 

concluded:
       While the collapse in the entire subprime market revealed UBS’s
       failure to recognize the vulnerability of all its mortgage-related
       assets to have been poor judgment, poor business judgment—even
       if attributable to monetary incentives—does not establish an
       inference of recklessness that is cogent and compelling [and] thus
       strong in light of other explanations. We do not recognize
       allegations of fraud by hindsight.

(internal quotation marks and citations omitted).                         Here,
plaintiffs’ allegations similarly combine poor business judgment with financial
motive. See 

(noting that failure to follow GAAP “can
easily arise from negligence, oversight or simple mismanagement, none of
which rise to the standard necessary to support a securities fraud action”). 17
       Considered holistically, plaintiffs’ allegations of knowledge of Guaranty’s
undercapitalization, a large misstatement, red flags, and ignorance of internal
warnings, do not raise a strong inference of severe recklessness that is equally



        We do not foreclose the possibility of finding a strong inference of scienter based on
       17

a GAAP violation in future cases should the totality of the allegations warrant such a finding.
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                                     No. 13-10928
as likely as the competing inference that Dubuque and Murff negligently relied
on the AAA ratings and believed that Guaranty’s internal models were
accurate. Plaintiffs come closest to alleging scienter by noting that Dubuque
and Murff continued to use the internal models even after the ratings agencies
downgraded or placed some of Guaranty’s MBS on negative watch. But the
SAC contains no particularized allegations of renewed warnings to Dubuque
and Murff in the 18 months between CW1’s January 2007 email and the
earliest downgrades in June 2008. It is also undisputed that Guaranty never
purchased the most junior tranche of MBS, meaning that there was a buffer
before losses would begin to affect its portfolio. See 

(finding no scienter, in part because outside investors absorbed the first 5 to
10% of losses). 18 We find that plaintiffs have not sufficiently alleged scienter
as to Dubuque or Murff.
                                      ii. Jastrow
       Jastrow was the CEO and Chairman of the Board of Directors of Temple
until the spin-off, and was Chairman of the Board of Directors of Guaranty
until his resignation on August 26, 2008. Plaintiffs seek to hold Jastrow liable
for wrongful conduct from the beginning of the Class Period through his
resignation. Plaintiffs identify two alleged misstatements made by Jastrow.
First, Jastrow signed a cover letter to a Form 8-K filed with the SEC in
December 2007, just prior to the spin-off. The Form 8-K contained a statement



       18  Dubuque, alone among defendants, presents a potential mitigating factor against
inferring scienter. In August 2008, he purchased over $700,000 worth of Guaranty shares.
According to Dubuque, the purchase of Guaranty stock during the Class Period “suggest[s]
the absence of any nefarious motives.” Plumbers & Steamfitters Local 773 Pension Fund v.
Canadian Imperial Bank of Commerce, 

, 299 (S.D.N.Y. 2010). We place
little value on Dubuque’s stock purchases. While the record reflects Dubuque’s purchases of
stock, it is devoid of facts showing whether Dubuque kept his holdings through the price
drop—which would be some evidence of lack of scienter—or sold them at an inflated price
before any corrective disclosure—which would not be inconsistent with fraudulent intent.
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                                    No. 13-10928
that financial disclosures were based on GAAP. Second, Jastrow signed a
Form 10-K issued by Guaranty on February 29, 2008. Plaintiffs contend that
the 10-K’s statement that its financial statements conformed with GAAP was
materially false.
      The SAC did not allege that Jastrow was ever informed of internal
disagreements or warnings regarding Guaranty’s MBS valuation. Plaintiffs
do not allege that he received any communications from any of the confidential
witnesses. The “red flags” highlighted in the SAC are not alleged to have
alerted anyone to problems in the MBS portfolio until June 2008, several
months after Jastrow’s last alleged misstatement. As 

, the
SAC’s invocation of the Tepper complaint alleges that Jastrow had knowledge
of Guaranty’s undercapitalization during the Class Period. This constitutes a
possible motive and creates a slight inference of scienter, but does not rise to
the required “strong inference.”
      The only additional allegation as to Jastrow does not provide the missing
piece. The SAC alleges that, at a Temple board meeting, Jastrow stated that
the California real estate markets were deteriorating because adjustable rate
mortgages were being reset. 19          Plaintiffs contend that this observation
contributes to an inference of scienter because the mortgages underlying
Guaranty’s MBS portfolio comprised a high concentration of California
adjustable rate loans.         Together, Jastrow’s knowledge of Guaranty’s
undercapitalization and awareness of the decline of the California real estate
market do not rise to the level of a “strong inference” of scienter that is at least
as likely as the alternative inference that Jastrow was merely negligent in




      19  Plaintiffs do not plead with particularity when Jastrow made this comment, only
alleging that it occurred “before the Spin-Off.”
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                                No. 13-10928
believing that any decline was temporary and would not affect Guaranty’s
AAA-rated securities.
                                 iii. Gifford
      Gifford was Guaranty’s Controller until December 2007 and was
Guaranty’s Executive Vice President and Principal Accounting Officer from
December 2007 until his resignation on October 27, 2008. Plaintiffs seek to
hold Gifford liable for wrongful conduct from the beginning of the Class Period
through his resignation. Plaintiffs identify three alleged misstatements made
by Gifford. Gifford signed Guaranty’s 2007 10-K and two 10-Qs, filed on April
29, 2008 and August 11, 2008, all of which allegedly included the
misrepresentation that the financial statements contained therein complied
with GAAP.
      The case for Gifford’s scienter is the weakest of any defendant. Gifford
was not a party to the Tepper action, nor are there any other allegations that
he was aware of Guaranty’s undercapitalization at any point during the Class
Period. The SAC does not allege that Gifford was privy to any concerns about
deficiencies in Guaranty’s internal valuation models.
      Essentially, the SAC alleges only that Gifford held the position of
Principal Accounting Officer at the time a large misstatement was made, and
that red flags existed. We have already discussed why the magnitude of the
misstatement and red flags do not create a strong inference of scienter, and
Gifford’s position within Guaranty does not support a strong inference of
scienter. “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.” 

; see also 

(concluding that the allegation that defendant was a “hands-on” CEO and
therefore must have been aware of accounting error was not specific enough to


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                                 No. 13-10928
support an inference of scienter). Viewed holistically, the allegations against
Gifford do not create a strong inference of scienter.
                               III. Other issues
      Because of our conclusion that plaintiffs have not raised a strong
inference of scienter as to any defendant that is “at least as compelling as any
opposing inference of nonfraudulent intent,” 

, we need
not reach the issue of loss causation. Nor do we decide if Jastrow, as an outside
director, was a “maker” of the alleged misstatements, only noting that this
court has held that allegations that a corporate officer made statements are
sufficient to state a claim that the officer is a “maker” of the statements.

; see also Janus Capital Grp., Inc. v. First Derivative
Traders, 

, 2304–05 (2011) (“[A]ttribution within a statement or
implicit from surrounding circumstances is strong evidence that a statement
was made by . . . the party to whom it is attributed.”). We also affirm the
district court’s dismissal of plaintiffs’ control person claim under 15 U.S.C.
§ 78t because that claim “cannot proceed in the absence of a primary violation
of the securities laws.” 

n.1.
                                CONCLUSION
      Our holistic review of the Second Amended Complaint confirms that
plaintiffs have failed to adequately plead facts that raise a strong inference of
scienter. Accordingly, we AFFIRM the district court’s dismissal of this action.




                                       26