NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                             File Name: 04a0095n.06
                            Filed: November 17, 2004

                                            No. 03-3904

                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT


Stambaugh, et al.,                                )
                                                  )
        Plaintiffs-Appellants,                    )
                                                  )
v.                                                )    ON APPEAL FROM THE UNITED
                                                  )    STATES DISTRICT COURT FOR THE
Corrpro Companies, et al.,                        )    NORTHERN DISTRICT OF OHIO
                                                  )
        Defendants-Appellees.                     )




        Before: Siler, Batchelder, and Rogers, Circuit Judges.




        Rogers, Circuit Judge.      Leviticus Partners, L.P. (“Leviticus”), representing a class of

similarly situated holders of common stock in Corrpro Companies, Inc. (“Corrpro”), appeals from

the district court’s dismissal of Leviticus’s complaint alleging that Corrpro and various Corrpro

executives committed securities fraud. Leviticus maintains that the district court erred in dismissing

the complaint because the totality of the allegations contained in the complaint gave rise to a strong

inference of scienter. Moreover, Leviticus contends that even if the complaint failed sufficiently to

create a strong inference of scienter, the district court should have granted Leviticus leave to amend

the complaint. Because we find the arguments of Leviticus unpersuasive, we affirm the judgment

of the district court.
No. 03-3904
Stambaugh v. Corrpro Companies




                                       I. BACKGROUND


       Corrpro, an Ohio corporation with its principal place of business in Medina, is an

engineering firm that provides services and materials related to corrosion control. Corrpro was

investigated by the SEC in the mid-1990s regarding accounting irregularities that occurred during

the 1995 fiscal year. That investigation resulted in the SEC’s issuance of two cease-and-desist

letters for failing to implement adequate accounting controls. Around the same time that the SEC

investigation was concluded, the EPA changed the regulations regarding corrosion protection for

underground storage tanks (“UST”). The new regulations caused Corrpro to experience losses in

a substantial portion of its business; therefore, in 1999 and 2000, Corrpro began to move to other

corrosion related pursuits and acquired interests in a number of foreign corrosion protection

companies. One of these companies was Corrpro Australia, which accounted for between 4.5% and

5% of Corrpro’s revenues during 2001 and 2002.


       During this period, Corrpro entered into two debt agreements worth a combined $110

million. Both debt agreements required Corrpro to comply with specific ratios of debt to earnings

before income taxes, depreciation, and amortization (“EBITDA”), in order to avoid default. Part

of the Corrpro debt carried variable rate interest so that Corrpro’s interest payments increased

substantially between 1999 and 2001. In 2001, Corrpro began to experience difficulties. First, the

New York Stock Exchange (“NYSE”) notified Corrpro that Corrpro had insufficient capitalization



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Stambaugh v. Corrpro Companies

and shareholder equity to remain listed on the exchange. Although Corrpro and the NYSE agreed

to a plan for Corrpro to comply with the listing requirements, Corrpro subsequently transferred to

the American Stock Exchange.


       In March 2002, Corrpro announced that it had discovered misconduct at Corrpro Australia

which resulted in accounting irregularities, and that Corrpro would reduce its pretax earnings by

between $5.3 million and $6.7 million for the fourth quarter ending March 31, 2002, to account for

an earlier overstatement of its pretax earnings. Corrpro’s EBITDA for fiscal year 2001, originally

reported at $10.8 million, dropped to $3.47 million after the revenue restatement. Corrpro’s reported

earnings for fiscal year 2002 were restated to a net loss of $54,000. Meanwhile, in Australia,

Corrpro Australia entered Voluntary Administrative Proceedings, which are the Australian

equivalent of bankruptcy reorganization.


                                      II. THE COMPLAINT


       On December 19, 2000, Leviticus filed a two-count complaint on behalf of the class in the

district court. Leviticus maintained that “Defendants intentionally, or recklessly, failed to ensure

that the financial results purportedly achieved by [Corrpro’s] newly-acquired entities were reliable

and accurate, in order to minimize the adverse effects of [Corrpro’s] declining business, including

the affect [sic] on its various credit agreements.” Complaint ¶ 8. As a result, Leviticus alleged,

Corrpro “materially overstated revenues and understated expenses in its Australian subsidiary” in




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Stambaugh v. Corrpro Companies

order “to minimize the adverse impact of [Corrpro’s] declining business on Corrpro’s ability to

satisfy its financial requirements under” its debt agreements. Complaint ¶ 11.


       Leviticus identified a number of public statements issued by Corrpro or the individual

defendants that Leviticus alleged were intentionally or recklessly false and misleading. Leviticus’s

complaint appears to maintain that Corrpro’s internal accounting problems from the mid-1990s and

the resulting SEC enforcement action should have placed Corrpro on notice that it needed “to

institute adequate internal accounting controls to ensure that the financial results reported by its

recently-acquired entities, including Corrpro Australia, were reliable and accurate.” Complaint ¶

61. Instead, according to the complaint, Corrpro Australia’s internal controls broke down entirely,

allowing the subsidiary to report results for fiscal year 2001 that were overstated by $10 million

Australian. Complaint ¶¶ 62-63. Consequently, Leviticus alleged, Corrpro overstated its own

results, at least recklessly ignoring the lack of accounting controls at Corrpro Australia.


       Leviticus alleged that Corrpro and the individual defendants were motivated to defraud

investors by two considerations. First, Corrpro was under heavy pressure from its creditors to

maintain the debt-to-earnings ratios provided in the debt agreements. Complaint ¶ 45. As Corrpro’s

business declined and the company struggled to remain profitable, according to Leviticus, Corrpro’s

creditors increased the pressure by amending the terms of the debt agreements when Corrpro was

unable to comply. Complaint ¶¶ 47-55. In order to avoid the unpleasant consequences of continued

defaults under the debt agreements, Corrpro and the individual defendants allegedly lied about

Corrpro’s earnings. Complaint ¶¶ 56, 151. Second, Leviticus alleged that Corrpro and the

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Stambaugh v. Corrpro Companies

defendants were motivated to defraud investors “by the specter of delisting by the NYSE.”

Complaint ¶ 152.


       The primary front on which Corrpro allegedly executed the scheme to defraud investors was

through its quarterly earnings reports. Leviticus alleged that each of Corrpro’s formal and informal

earnings reports during fiscal years 2001 and 2002 substantially overstated EBIDTA, net income,

earnings per share and stockholder equity. After each of these “false and misleading” earnings

statements, Leviticus identified a concomitant increase in the price of Corrpro’s common stock. See,

e.g., Complaint ¶ 68. Corrpro allegedly produced these erroneous earnings statements by violating

generally accepted accounting principles, specifically Financial Accounting Concept No. 5, which

provides:


       Revenues and gains of an enterprise during a period are generally measured by the

       exchange values of the assets (goods or services) or liabilities involved, and

       recognition involves consideration of two factors (a) being realized or realizable and

       (b) being earned, with sometimes one and sometimes the other being the more

       important consideration.


Statement of Financial Accounting Concepts No. 5 (quoted in Complaint ¶ 143). Leviticus did not

specify how Corrpro’s accounting practices violated this particular accounting principle.


       The complaint asserted that Corrpro and the individual defendants acted with scienter in

knowingly or recklessly disseminating false financial information. Complaint ¶ 145. First,

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Stambaugh v. Corrpro Companies

Leviticus maintained that the defendants acted with scienter because the prior SEC enforcement

action alerted them to the inadequacy of internal accounting controls at Corrpro. Complaint ¶ 146.

Second, the complaint alleged that the defendants were at least reckless because they failed to

identify the accounting irregularities at Corrpro Australia for twenty months. Complaint ¶ 147.

Third, Leviticus alleged that the defendants knowingly or recklessly released misleading financial

data because Corrpro was required to make monthly reports to its creditors. Complaint ¶ 148.

Fourth, Leviticus claimed that Corrpro’s recklessness in its financial reporting is demonstrated by

the fact that Corrpro had a high turnover in the chief financial officer (“CFO”) position. Complaint

¶ 149.


                              III. THE DISTRICT COURT OPINION


         Corrpro responded to the complaint with a motion to dismiss, arguing that Leviticus’s

allegations failed to satisfy the heightened pleading standard of the Private Securities Litigation

Reform Act, P.L. 104-67, December 22, 1995, 109 Stat. 737 (codified as amended in scattered

sections of 15 U.S.C.) (“PSLRA”), in that it failed to plead scienter with an adequate level of

particularity. The district court agreed and dismissed the complaint.


         With regard to the misstatements of income and the length of time over which Corrpro

allegedly disregarded accounting irregularities at the Australian subsidiary, the district court

concluded that there were no “red flags” indicating that Corrpro or the individual defendants

willfully or recklessly disregarded the existence of accounting irregularities that gave rise to a strong



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Stambaugh v. Corrpro Companies

inference of scienter. In re Corrpro Securities Litigation, No. 1:02CV1198, 

,

at *4 (N.D. Ohio May 27, 2003). The district court further reasoned that Leviticus failed to establish

an inference of scienter from the prior SEC enforcement action because the complaint contained no

allegation “establishing that current officers should have reason to know of accounting irregularities

occurring at an Australian subsidiary.” 

       Moreover, the district court concluded that the resignations of officers were immaterial

because the complaint failed to “establish any connection between the job turnover and the problems

at Corrpro Australia” and because two of the identified employees were hired on an interim basis

only. 

The district court further noted that the issuance of the inaccurate financial data did

not lead to the conclusion that the defendants were aware that Corrpro Australia’s accounting was

irregular and incorrect. 

court rejected Leviticus’s contention that the scienter requirement may be

satisfied by alleging motive and opportunity to commit fraud alone. While recognizing that motive

and opportunity are relevant, the district court held that Leviticus’s allegations of motive and

opportunity amounted to “an unsupported assertion that the defendants’ covenants could have

motivated their alleged misconduct,” lacking any showing that the defendants knew or should have

known of the inaccuracies in its financial reports. 

Moreover, the district court reasoned,

Leviticus failed to show that Corrpro or any of the individual defendants benefitted from, or stood

to benefit from, the alleged fraud. 

03-3904
Stambaugh v. Corrpro Companies

        The district court further concluded that the complaint failed to satisfy the Rule 9(b) standard

for pleading claims of fraud with particularity. 

In so doing, the district court explained that

the complaint “alleges no facts showing that the defendants knew or could have known of Corrpro

Australia’s errors or that the regular procedures should have alerted them to Corrpro Australia’s

misconduct earlier than they actually did.” 

in the view of the district court,

“[t]here is no reason why these defendants, who were not the persons being investigated, should

know of improprieties of a new subsidiary from a prior investigation nor are there any other

documents showing that the defendants knew of the problems at Corrpro Australia.” 

        Before addressing Leviticus’s arguments that the district court erred in dismissing its

complaint, this court must first address an argument made by Corrpro that the district court judgment

must be summarily affirmed because Leviticus failed to appeal an “alternate” ground of that

decision. As discussed above, the district court ruled both that Leviticus had failed to allege

particularized facts giving rise to a strong inference of scienter, as required by the PSLRA, and that

Leviticus failed to plead fraud with particularity as required by Fed. R. Civ. P. 9(b). Corrpro now

argues that Leviticus, in its appellants’ brief, failed to dispute the district court’s decision with

respect to Fed. R. Civ. P 9(b), that this constitutes a waiver of any argument that the Rule 9(b) ruling

was incorrect, and that therefore the district court’s decision should be summarily affirmed because

one basis of that decision has not been appealed.




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Stambaugh v. Corrpro Companies

       If a party does not raise an issue in its appellant’s brief, then that issue is waived. Ewolski

v. City of Brunswick, 

, 516 (6th Cir. 2002). The appellant’s brief must include both a

statement of the issue and arguments on the issue. 

see also Fed. R. App. P. 28(a).

Leviticus’s appellant’s brief did state that the Rule 9(b) dismissal was an issue being appealed. See

Brief of Plaintiffs-Appellants at 1-2. However, Leviticus did not separately argue that its complaint

satisfied Rule 9(b); rather, Leviticus only argued that the complaint had adequately pled scienter,

as required by the PSLRA.


       In this case, although the issue is close, Leviticus’s arguments regarding scienter are

sufficient to preserve its appeal of the Rule 9(b) dismissal. We do not generally condone making

arguments by inference. In this case, the district court’s ruling that the complaint failed to satisfy

Fed. R. Civ. P. 9(b) revolved entirely around the requirement that a plaintiff allege fraudulent intent.

In re Corrpro Securities Litigation, 

, at *8. The district court’s explanation of

how the complaint failed to allege fraudulent intent mirrors its explanation of how the complaint

failed to plead scienter as required by the PSLRA. Therefore, if Leviticus is correct that the

complaint satisfies the PSLRA’s pleading standard, then the complaint would also satisfy Rule 9(b).

The inference that Appellants also challenge the district court’s alternative ground is thus

sufficiently clear, and this court can consider the merits of Leviticus’s appeal.


       Turning to Leviticus’s appeal, we find that the district court correctly dismissed the

complaint because it failed to plead facts giving rise to a strong inference of scienter. The standard

of review is de novo. In re Comshare Inc. Sec. Litig., 

, 547(6th Cir. 1999). In order

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Stambaugh v. Corrpro Companies

to survive a Rule 12(b)(6) motion in a securities fraud action, the plaintiffs must plead sufficient

facts to raise a strong inference of scienter. The PSLRA provides that


         In any private action arising under this chapter in which the plaintiff may recover

         money damages only on proof that the defendant acted with a particular state of

         mind, the 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)(2). The required state of mind has been referred to as the knowing and

deliberate intent to manipulate, deceive, or defraud, but recklessness may also constitute scienter.

In re Comshare Inc. Sec. 

.


         There has always been a higher level of particularity required in pleading claims for fraud,

which trumps the generally accepted rule that the district court must deny a motion to dismiss the

complaint unless “the plaintiff can prove no set of facts in support of his claim which would entitle

him to relief.” Achterhof v. Selvaggio, 

, 831 (6th Cir. 1989); see Fed. R. Civ. P. 9(b).

In the PSLRA, however, Congress raised the bar even higher, requiring plaintiffs in securities fraud

cases to plead their claims with particularity that creates the strong inference that the defendant

acted with the required state of mind. Helwig v. Vencor, Inc., 

, 548 (6th Cir. 2001) (en

banc).




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        Leviticus identifies six factual circumstances alleged in its complaint that it contends give

rise to a strong inference of scienter: (1) the magnitude of the restatement of earnings; (2) the failure

to implement adequate accounting controls; (3) the duration of the fraudulent activity; (4) the

suspicious resignations of executives from Corrpro and Corrpro Australia, particularly the

resignations of five CFOs from Corrpro within an eighteen month period; (5) that Corrpro’s foreign

holdings comprised a “material component of [Corrpro’s] business following the regulatory change

in the U.S., which caused the demise of Corrpro’s UST business;” and (6) amendments to Corrpro’s

debt agreements requiring it to submit monthly financial reports to its lenders. Appellants’ Br. at

12. As the district court recognized, under the PSLRA, “the ‘strong inference’ requirement means

that plaintiffs are entitled only to the most plausible of competing inferences.” 

; see In re Corrpro Securities Litigation, 

, at *2. For the reasons given

by the district court, none of the factual circumstances alleged by Leviticus give rise to a strong

inference of scienter. However, Leviticus also contends that the district court erroneously

considered each of these factual circumstances in a piecemeal fashion rather than in the aggregate,

and had it not considered the facts individually, it would have derived a strong inference of scienter.


        We are not convinced that the district court failed to consider the factual allegations in the

aggregate; but in any case, as the standard of review is de novo, see In re Comshare Inc. Sec. 

, we proceed to determine whether the allegations in the aggregate give rise to a

strong inference of scienter. The inescapable inference from the allegations in the complaint is that

Corrpro was a poorly-run business and that Corrpro executives in the United States failed to monitor



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Stambaugh v. Corrpro Companies

closely the accounting controls of its foreign subsidiaries. Unfortunately for Leviticus, that

inference does not suggest the minimum required state of mind of recklessness, strongly or

otherwise. Even taking for granted Leviticus’s assumption that Corrpro had inadequate accounting

controls in place and failed responsibly to monitor the accounting controls at Corrpro Australia, the

strongest inference created by the complaint’s allegations is that Corrpro’s managers were

negligent. Several of the individual allegations do not create any inference of scienter at all;

therefore, even in combination, they cannot make the inference of scienter “strong.” For example,

it is hard to see how the fact that the alleged misstatements were made over a period of twenty

months, when considered in conjunction with the fact that a number of CFOs resigned, creates a

stronger inference of scienter than either fact considered separately. Rather, the more plausible

explanation is that the long period of mismanagement caused Corrpro to go through more CFOs than

it would have if the period of mismanagement were short.


       In sum, the district court correctly dismissed this complaint because Leviticus’s allegations,

even considered in their totality, do not create a strong inference of scienter.


       Finally, we turn to the issue of whether the district court erred in “failing” to grant Leviticus

leave to amend its complaint. The district court did not err in dismissing the complaint with

prejudice nor in failing to grant leave to amend because Leviticus never sought leave to amend the

complaint, and because even if they had sought leave, it should have been denied in this case. The

standard of review is abuse of discretion. PR Diamonds, Inc. v. Chandler, 

, 698 (6th

Cir. 2004)

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Stambaugh v. Corrpro Companies

       This case is analogous to our recent decision in PR Diamonds, Inc. v. Chandler, 

(6th Cir. 2004). In that case, the plaintiffs failed to follow the proper procedure for filing a

motion for leave to amend, choosing rather to include a bare statement requesting leave to amend

in their brief in opposition to the defendants’ motion to dismiss. 

This court held that the

district court did not abuse its discretion in refusing to grant leave to amend the complaint. 

did not even include such a bare statement requesting leave to amend, and so it was

clearly within the district court’s discretion not to grant leave to amend. “[A] district court does not

abuse its discretion in failing to grant a party leave to amend where such leave is not sought.” Sinay

v. Lamson & Sessions Co., 

, 1042 (6th Cir. 1991).


       Additionally, although the general rule is that leave to amend is freely given in the interests

of justice, the PSLRA restricts the availability of amendments in the securities fraud context. PR

Diamonds, 

(citing Miller v. Champion Enters. Inc., 

, 692 (6th

Cir. 2003)). The PSLRA’s heightened pleading standards reflect a legislative goal to eliminate

securities fraud suits lacking a factual basis at the pleading stage. See 

Moreover,

Leviticus has not offered any indication of the allegations that would be contained in an amended

complaint. Even under the comparatively relaxed standards of Rule 15(a), a plaintiff must still offer

some additional information so that the district court may determine whether the interests of justice

indeed require a granting of leave to amend. See Roskam Baking Co., Inc. v. Lanham Machinery

Co., Inc., 

, 906-07 (6th Cir. 2002). The PSLRA undeniably increases the standard. See




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Stambaugh v. Corrpro Companies

. Therefore, even if Leviticus had sought leave to amend, it would have been

within the district court’s discretion to withhold granting that leave.


       Accordingly, the judgment of the district court is AFFIRMED.




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