In re: Pec Solutions, Incorporated Securities Litigation Matthew J. Ganey

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 In Re: PEC SOLUTIONS,
INCORPORATED SECURITIES LITIGATION
MATTHEW J. GANEY; MICHAEL GANZ;
STEVEN RIESSELMAN; PATRICK
SWEENEY,
Plaintiffs-Appellants,
and
JASON ADELMAN, Individually and on
behalf of all others similarly
situated; JOHN L. WALTERS, On
behalf of himself and all others No. 04-1257 similarly situated; BARRETT WINDISH,
On behalf of himself and all others
similarly situated; RAY JANISCH,
Individually and on behalf of all
others similarly situated; DIANE A.
LINDELL, Individually and on behalf
of all others similarly situated;
STEPHEN GOVENAR, Individually and
on behalf of all others similarly
situated; ERNEST GOTTDIENER,
Individually and on behalf of all
others similarly situated,
Plaintiffs, 

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 v.
PEC SOLUTIONS, INCORPORATED; PAUL
RICE; STUART LLOYD; DAVID
KARLGAARD; ALAN H. HARBITTER,  Defendants-Appellees,
and
CHRISTOS BRATIOTIS,
Defendant. 
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Gerald Bruce Lee, District Judge.
(CA-03-331-A; CA-03-415-A; CA-03-470-A; CA-03-559-A;
CA-03-589-A; CA-03-623-A; CA-03-760-A)
Argued: December 2, 2004
Decided: March 18, 2005
Before WIDENER, NIEMEYER, and GREGORY, Circuit Judges.
Affirmed by published opinion. Judge Gregory wrote the opinion, in
which Judge Widener and Judge Niemeyer joined.
COUNSEL
ARGUED: Samuel Howard Rudman, LERACH, COUGHLIN,
STOIA, GELLER, RUDMAN & ROBBINS, L.L.P., Melville, New
York, for Appellants. Lyle Roberts, WILSON, SONSINI, GOOD-
RICH & ROSATI, Reston, Virginia, for Appellees. ON BRIEF:
Donald J. Enright, FINKELSTEIN, THOMPSON & LOUGHRAN,
Washington, D.C.; Gregory M. Nespole, David L. Wales, WOLF,
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HALDENSTEIN, ADLER, FREEMAN & HERZ, L.L.P., New York,
New York; David A. Rosenfeld, LERACH, COUGHLIN, STOIA,
GELLER, RUDMAN & ROBBINS, L.L.P., Melville, New York;
Gregory M. Castaldo, SCHIFFRIN & BARROWAY, L.L.P., Bala
Cynwyd, Pennsylvania, for Appellants. Bruce G. Vanyo, WILSON,
SONSINI, GOODRICH & ROSATI, Palo Alto, California; Nicholas
I. Porritt, Gregory A. Harris, WILSON, SONSINI, GOODRICH &
ROSATI, Reston, Virginia, for Appellees.
OPINION
GREGORY, Circuit Judge:
In the wake of the terrorist attacks of September 11, 2001, the
Transportation Security Administration ("TSA") was charged with
securing the nation’s 429 commercial airports. In early 2002, TSA
contracted with Pearson Government Solutions, Inc. ("Pearson") to
recruit, evaluate, and hire a federal security workforce to screen air
travel passengers. Pearson, in turn, hired a number of subcontractors.
It delegated to PEC Solutions, Inc. ("PEC") the task of electronically
capturing and transferring to the appropriate authorities the appli-
cants’ fingerprints and biographical information. The Pearson subcon-
tract was significant to PEC: it generated $23.7 million, or thirteen
percent of PEC’s Fiscal Year 2002 revenues, making it PEC’s
second-largest contract at the time. PEC’s work on the Pearson sub-
contract was largely finished by September 30, 2002.
The administration of the TSA-Pearson contract became of concern
to the government; originally priced at $104 million, it somehow bal-
looned to over $700 million. The reason for the increase is disputed,1
but it is clear that at some point TSA audited Pearson and, as a result,
Pearson ultimately lost the contract.
1Appellees note that the contract called for hiring 30,000 screeners, but
"rapidly expanded to encompass qualifying, in less than a year, over
120,000 applicants for employment . . ." Appellees’ Br. at 1. Appellants
claim that the price increase was a result of mismanagement and wasteful
billing practices.
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A class of persons who bought PEC stock between October 23,
2002 and March 14, 2003 ("Appellants" or "the class") allege that
PEC, along with David Karlgaard, Paul Rice, Stuart Lloyd, and Alan
Harbitter, all officers and directors of PEC ("Individual Appellees,"
collectively with PEC, "Appellees"), fraudulently failed to disclose
material information about the Pearson subcontract in violation of
Sections 10(b) and 20(a) of the Securities and Exchange Commission
Act of 1934 and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The district
court dismissed the suit on the Appellee’s Fed. R. Civ. P. 12(b)(6)
motion. For the following reasons, we affirm.
I.
The claim of the class centers around public statements Appellees
made on October 22, 2002, November 14, 2002, and February 21,
2003. We review the statements in this order, assuming Appellants’
pleadings as true.
A. October 2002 Statements
After trading ended on October 22, 2002, PEC issued a press
release announcing its results for the third quarter of 2002 (ending
September 30, 2002) and held a conference call. PEC reported earn-
ings of $0.25 per share, exceeding analysts’ estimates of $0.17.
Appellee Lloyd, PEC’s Chief Financial Officer:
• predicted that PEC’s revenues would grow to between
$50 and $52 million in the fourth quarter of 2002, and
between $240 and $260 million in fiscal year 2003,
which constituted a 30-40% increase over the current
year. J.A. 53.
• announced that PEC’s "DSOs [Day Sales Outstanding]
for the quarter were 88 days, down from the last quar-
ter’s 91 days." Id. at 55.
Appellee Rice, PEC’s Chief Operating Officer, noted that:
• "PEC experienced significant acceleration in certain
engagements related to the federal government’s home-
land security mission," id.;
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• "significant incremental orders were received for PEC’s
transportable automated fingerprint capture and biomet-
ric identification (called PACIS)[,]" id. at 54; and
• Congress had not yet approved the Department of Home-
land Security bill but stated that he did not expect PEC
to be affected negatively by this governmental environ-
ment. Id. at 55.
• PEC’s "pipeline," or future business demand, was esti-
mated at $60 million ("unfactored") and $53 million
("factored") for the fourth quarter of 2002 and $317 mil-
lion ("unfactored") and $190 million ("factored") for the
full year 2003. Id. at 56.
Appellee Karlgaard, PEC’s Chief Executive Officer, recited favorable
financial information including that:
• "this was truly an exceptional quarter . . . partly because
of quick response orders for mobile biometric solutions
relating to homeland security[,]" id.;
• PEC’s year-to-year net income increased by nearly 100
percent, id. at 56-57;
• this growth positioned PEC to meet its revenue objec-
tives for the year and increase future earnings guidance,
id.; and
• PEC experienced "solid fundamental performance
throughout our company." Id. at 56.
These were not the only relevant statements made by Appellees. At
the beginning of the conference call John McNeilly, PEC’s Manager
of Media and Investor Relations, warned that,
we may make forward-looking statements that involve risks
and uncertainties. These risks and uncertainties could cause
PEC Solutions’ results to differ materially from manage-
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ment’s current expectations and adversely affect the finan-
cial condition of the Company.
J.A. 244. PEC’s 2001 10-K annual report (dated March 29, 2002),
which McNeilly incorporated by reference, see id. at 244, included a
long list of risk factors written in plain English. See id. at 282-89.
Included in this discussion were the facts that any weakened relation-
ships with the federal government or prime contractors could harm
PEC’s business, Id. at 282, 284, and that PEC’s revenues could be
negatively affected by government contract audits, which were rou-
tine. Id. at 286. Additionally, an unidentified company representative
also specifically hedged predictions for future revenues based on the
Pearson subcontract, explaining that, because the contract was largely
complete, "we have to start speculating more as we talk about the
future and what other elements of it they’re going to engage us on."
Id. at 263. The next day PEC’s stock price rose to $31.11 from $26.83
per share.
B. November 2002 Statements
PEC filed its form 10-Q for the third quarter of 2002 on November
14, 2002. The report reiterated the Company’s earnings as released on
October 22, noted that "[p]ayments to the Company on contracts with
agencies and departments of the U.S. Government are subject to
adjustment upon audit by the U.S. Government[,]" J.A. 58. It also
stated that "management believes the effect of audit adjustments, if
any, on periods not yet audited, will not have a material effect on the
financial statements." Id. The report explained, inter alia, that, "[i]n
the opinion of management, all adjustments consisting of normally
recurring accruals, considered necessary for a fair presentation, have
been included." Id.
C. February 2003 Statements
On February 11, 2003, PEC announced its results for the fourth
quarter and fiscal year 2002 through a press release and a conference
call. Appellee Karlgaard stated that 2002 was "a record year in
growth and profitability for the company" and that PEC "has grown
at a 5-year compound annual growth rate of 45 percent for revenue
and 50 percent for net income. We think these numbers demonstrate
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a strong, consistent record of performance . . . ." J.A. 59. Annual
earnings-per-share were announced at 20 cents, which was at the top
of the predicted range of 18 to 20 cents, and total fiscal year 2002 rev-
enues were $48.3 million, just missing the projected range of $50 to
$52 million. Id. Appellee Lloyd slightly lowered PEC’s guidance for
fiscal year 2003’s annual revenue from $240-260 million to $240-255
million, which still constituted a 30-40 % rate of growth in revenue.
Id. at 60.
PEC also stated that there was a "temporary discontinuity" in the
Pearson subcontract.2 Id. Appellee Rice noted that:
• the contract was largely completed and that PEC’s reve-
nue shortfall was "largely related to [our] biometrics pro-
gram and sort of spinning one phase of that effort down
and not spinning up the next phase of that effort in the
manner that we expected." Id.
• PEC believed its homeland security and public safety
technology assistance programs had a "strong possibility
of contributing substantial sort of [sic] growth revenue"
and could "ramp quickly." Id. at 60.
• PEC was adversely affected by the delay in passing the
2003 federal budget, but that "we’re being pretty conser-
vative with our expectations regarding the budget." Id.
An unidentified PEC representative also said that the first phase of the
biometrics contract was largely complete and that the contract’s "con-
tinuing resolution" was the "fundamental reason it’s not spinning up
as quickly as we anticipated." Id. at 354. PEC’s stock fell to $18.48
from $28.80 on heavy trading the next day.
2The Pearson contract was not referred to by name at the time because
PEC evidently was contractually obligated not to discuss the details of
the deal.
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D. March 2003 Statements
Finally, for our purposes, PEC issued a press release on March 14,
2003. In it, Appellee Lloyd again revised PEC’s financial projections
downward for both the first quarter (from $48-49 million to $43-44
million) and the full fiscal year 2003 (from $240-250 million to $200-
220 million). This downshift was owed to "anticipated delays in new
government awards stemming from the unusually late passing of the
2003 Federal civilian agency budgets" as well as "a discontinuity in
certain engagements related to application of biometric identification
technologies" that "extended longer than previously expected." J.A.
63. The release then attributed to Appellee Karlgaard the statement
that:
We have considerable new business in our pipeline, but at
this time we are unsure of the timing of several new activi-
ties. We have maintained staff availability relating to key
anticipated programs in order to be able to immediately
mobilize to near-term requirements, and expect a strong sec-
ond half of the year as the Government moves to implement
new programs funded by the recently released 2003 appro-
priations.
Id. at 64. Another immediate decline in PEC’s stock price followed,
this time from $15.80 per share to $9.81 per share.
E. The Lawsuit
Within days, seven lawsuits were filed against PEC. The suits were
consolidated into one class-action lawsuit on June 13, 2003 and the
class-action complaint ("CAC") was filed on July 24, 2003. Boiled
down to its essence, the CAC contends that PEC misled investors by
making favorable statements about the company and the Pearson sub-
contract while not disclosing (1) that "Pearson was being investigated
and audited in connection with a government review of the TSA con-
tract and that PEC Solutions, as a subcontractor on that contract, was
also being audited . . ." J.A. 54 and (2) that TSA stopped paying Pear-
son and, in turn, that Pearson stopped paying PEC "by no later than
August through October 2002." Id. The CAC alleges that because of
these two alleged omissions,
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• PEC’s earnings guidance were artificially inflated,
• the Appellees’ positive statements about the biometrics
(Pearson) contract and the financial health of the com-
pany were materially misleading,
• the financial reports violated Generally Accepted
Accounting Procedures ("GAAP") because they failed
"to maintain a proper reserve for uncollectible receiv-
ables[,]" id. at 55; and failed "to disclose the contingent
liabilities and risks and uncertainties associated with the
Pearson subcontract." Id. at 59, see also id. at 64-65.
Moreover, the CAC asserts that the Individual Appellees all sold
stock during the class period "while in the possession of material non-
public information concerning the Pearson Subcontract and the prob-
lems with that contract," id. at 52, and that this helps establish Appel-
lees’ scienter. Id. at 64-69.
On September 8, 2003, Appellees moved to dismiss the CAC. The
district court granted the motion, finding that Appellees’ statements
were protected forward-looking statements, and that the CAC failed
to plead with particularity facts establishing falsity and scienter.
Appellants sought to amend the CAC, but the district court denied the
motion to amend as futile. This appeal followed.
II.
To establish liability under Section 10(b) of the Exchange Act3 and
3Section 10(b) provides that
It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce or of
the mails or of any facility of any national securities exchange—
(b) To use or employ, in connection with the purchase or sale of
any security registered on a national securities exchange or any
security not so registered, any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as
the Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.
15 U.S.C. § 78j (2000).
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S.E.C. Rule 10b-54 "a plaintiff must prove: (1) the defendant made a
false statement or omission of material fact (2) with scienter (3) upon
which the plaintiff justifiably relied (4) that proximately caused the
plaintiff’s damages." Hillson Partners Ltd. P’ship v. Adage, Inc., 42
F.3d 204, 208 (4th Cir. 1994).5 A fact is material "if there is a sub-
stantial likelihood that a reasonable purchaser or seller of a security
(1) would consider the fact important in deciding whether to buy or
sell the security or (2) would have viewed the total mix of information
made available to be significantly altered by disclosure of the fact."
Longman v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir. 1999), cert.
denied, 529 U.S. 1067 (2000) (citations omitted). Scienter may be
proven by either intentional misconduct or recklessness, but not mere
negligence. See Ottman v. Hanger Orthopedic Group, Inc., 353 F.3d
338, 343-44 (4th Cir. 2003). To establish reliance under a "fraud on
the market" theory, as Appellants do here, a plaintiff needs only to
show the means of dissemination and the materiality of the misrepre-
sentation, not "direct" reliance. Basic, Inc. v. Levinson, 485 U.S. 224,
243-47 (1988). Finally, to show loss causation, a securities-fraud
plaintiff must demonstrate that the "defendant’s misrepresentation
was a substantial cause of the loss by showing a direct or proximate
relationship between the loss and the misrepresentation." Miller v.
Asensio & Co., 364 F.3d 223, 232 (4th Cir. 2004) (citations omitted).
4Rule 10b-5, promulgated under Section 10(b), states that:
It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce, or
of the mails or of any facility of any national securities
exchange, (a) To employ any device, scheme, or artifice to
defraud, (b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they were made, not misleading, or (c) To engage in any act,
practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the pur-
chase or sale of any security.
17 C.F.R. § 240.10b-5 (2005).
5Joint and several control-person liability cannot exist under Sec-
tion 20(a), 15 U.S.C. § 78t(a), unless facts exist to support securities
fraud for the controlled entity (here, PEC) under Section 10(b) or Rule
10b-5. See Longman, 197 F.3d at 686.
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While on a motion to dismiss we assume all the well-pled allega-
tions of plaintiffs as true and draw reasonable inferences in their
favor, Chisolm v. TranSouth Fin. Corp., 95 F.3d 331, 334 (4th Cir.
1996), to survive a motion to dismiss, private securities fraud actions
must clear the hurdle of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). 15 U.S.C. § 78u-4(b); cf. Phillips v. LCI Int’l
Inc., 190 F.3d 609, 620-22 (4th Cir. 1999). The complaint must "spec-
ify each statement alleged to have been misleading, the reason or rea-
sons why the statement is misleading, and if an allegation regarding
the statement or omission is made on information and belief, the com-
plaint shall state with particularity all facts on which that belief is
formed." 15 U.S.C. § 78u-4(b)(1). Most significantly for this lawsuit,
under the PSLRA the complaint must "state with particularity facts
giving rise to a strong inference that defendant acted with the
required state of mind." Id. § 78u-4(b)(2) (emphasis added); see Ott-
man, 353 F.3d at 344-45 (in deciding whether a complaint pleads suf-
ficient facts to establish a strong inference of scienter under the
PSLRA courts should not focus on specific categories of facts, but
rather should utilize "a flexible, case-specific analysis"). If the com-
plaint is insufficient for either of the above reasons, on the motion of
a defendant the court "shall" dismiss the complaint. Id. § 78u-4(b)(3).
III.
We review dismissals under Fed. R. Civ. P. 12(b)(6) de novo,
Mylan Labs, Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993), but
denial of leave to amend a complaint for abuse of discretion. Edwards
v. City of Goldsboro, 178 F.3d 231, 242 (4th Cir. 1999). We hold that
the district court correctly held that the CAC fails to satisfy the
PSLRA’s pleading requirements and did not abuse its discretion by
denying Appellants’ motion for leave to amend.
A.
Appellants’ theory of the case is that all the Appellees’ positive
statements are misleading because Appellees knew, but failed to dis-
close, that: (1) the government was auditing Pearson and PEC for gra-
tuitous overbilling and, as a result, (2) Pearson withheld payment to
PEC. The CAC fails the PSLRA’s two-pronged test, however,
because it never "state[s] with particularity facts giving rise to a
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strong inference that defendant acted with the required state of mind."
15 U.S.C. § 78u-4(b)(2).6
The CAC relies on the June 3, 2003 congressional testimony of
Pearson’s President and CEO, Mac Curtis, that some of Pearson’s
subcontractors were audited by the government "‘starting in August-
September [2002] time frame, but I don’t have specifics of —’" J.A.
48 (interrupted ending in complaint). The CAC also quotes the Febru-
ary 5, 2003 congressional testimony of Kenneth M. Mead, Inspector
General of the Department of Transportation, for the proposition that
"‘TSA review of an [sic] NCS Pearson subcontractor with $18 million
in expenses determined that between $6 million and $9 million of
these expenses appear to be attributed to wasteful and abusive spend-
ing practices.’" Id. at 49. The CAC also makes other allegations about
the Pearson contract’s substantial cost overruns, none of which much
help in establishing a strong inference of scienter.
The inference Appellants would have us draw from all this is that
PEC was one of the audited subcontractors and that Appellees knew
the audit was going badly when making their statements. But such an
inference is not a reasonable one on these sparse facts. Neither the
statement of Mr. Curtis nor Inspector Mead ever named PEC nor does
the CAC provide any further facts which establish that PEC was the
subject of an audit, that the audit was non-routine, and that Appellees
knew the results of the audit at any relevant time. Indeed, Inspector
Mead’s statement actually states that the initial audit of Pearson did
not take place until October 2002.7 Thus, aside from being vague and
6This reason for dismissal is sufficient but not necessarily exclusive.
Some of Appellees’ challenged statements are simply true (even fully
granting Appellants’ allegations), some would not create a duty to dis-
close the alleged issues, and others are probably protected by the
PSLRA’s forward-looking statement safe harbor. See 15 U.S.C. § 78u-
5(c)(1)(A)(i). Since the complaint’s failure to meet the PSLRA’s height-
ened scienter-pleading requirement kills the whole claim, however, we
rely on this alone and refrain from full statement-by-statement analysis.
7Inspector Mead’s testimony was precisely this: "By September 2002
TSA was concerned by the rising cost of the contract, and in October
2002, it initiated a preliminary review of NCS Pearson’s financial man-
agement of subcontractor expenses." J.A. 338 (emphasis added). We note
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conclusory, these statements are internally contradictory: it is less
than reasonable to infer that Pearson stopped payment in August or
September 2002 based on a TSA audit that, according to the TSA’s
Inspector General’s written statement, had not yet occurred. Rather
than establish a strong inference of scienter, this all leaves in doubt
whether the Appellees ever had any knowledge of any non-routine
audit.
A non-payment allegation is likely more material than an audit
alone because Pearson’s non-payment could signal not only that an
audit occurred, but that the audit’s outcome was bad, that PEC would
lose revenue, and that a key relationship with a prime contractor
(and/or the government) was potentially damaged. But the CAC leads
to no strong inference that Appellees knew of any such non-payment
at the time their statements were made. Rather, with the exception of
confidential witnesses "CW-1" (not a director or officer of PEC) who
left PEC in October 2002 but "was advised" — the passive voice is
notable — "that Pearson ceased paying PEC Solutions," see, e.g., J.A.
50, it offers only improperly generalized allegations that Pearson "had
stopped paying PEC" "[a]s a result" of the audit.8
Notably, Pearson did pay PEC a substantial amount of the subcon-
tract during the class period. Even granting that such payment was late,9
here that we are not strictly limited to the four corners of the complaint
when examining this complaint: since it relies upon a public document
a court may as well without converting the motion to dismiss into a
motion for summary judgment. See, e.g., Greenhouse v. MCG Capital
Corp., 392 F.3d 650, 655 n.1 (4th Cir. 2004); Ganino v. Citizens Utils.
Co., 228 F.3d 154, 167 n.8 (2d Cir. 2000); In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997). Because the CAC relied
on Mead’s public testimony it is proper to consider the full text of the
testimony.
8A second confidential witness, called "CW-2," is mentioned, J.A. 52,
but also does not help establish scienter.
9Understandably, given the confidentiality of the contract, the CAC
notes nothing about the deal’s payment terms. Yet this leaves the CAC’s
readers to guess at whether, and if so how, the contract was breached and
whether, if breached, Pearson assured PEC that payment would be forth-
coming.
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slow payment is not non-payment. By reading the CAC alone, one
learns from PEC’s 2002 Form 10-K that Pearson paid $10 million of
the $15.6 million remaining to be paid in early 2003 and that by Feb-
ruary PEC was "in discussions" to collect the remainder. J.A. 66.
Thus, even if Pearson had not fully paid during the October and
November statements by PEC, the $10 million payment supports that
PEC’s expectation of payment was reasonable both before and after
early 2003. These facts leave us not with a strong inference of PEC’s
expectation of Pearson’s non-payment; rather, they are equally con-
sistent with PEC’s expectation of payment.
Appellants also allege that Appellees violated GAAP by not report-
ing a charge to income (in the form of a reserve against accounts
receivable) when it was "probable (e.g., a likely chance) that an asset
has been impaired or a liability has been incurred; and the amount of
such loss can be reasonably estimated." J.A. 65 (citing SFAS No. 5,
¶ 8; see J.A. 402). "As a rule, ‘general allegations of GAAP and
GAAS violations fail to satisfy the scienter requirements of Section
10(b) and Rule 10b-5. The mere misapplication of accounting princi-
ples by an independent auditor does not establish scienter.’" In re
MicroStrategy, Inc. Sec. Litig. 115 F. Supp. 2d 620, 651 (E.D. Va.
2000) (quoting Pucker v. Seasick, 963 F. Supp. 301, 307 (S.D.N.Y.
1997)). However, under this Circuit’s flexible, case-by-case analysis
of scienter, see Ottman, 353 F.3d at 344-45, it is certainly possible
that some egregious GAAP violations may help support an inference
of scienter for pleading purposes. See id. ("a plaintiff must also allege
facts tending to show that . . . ‘no reasonable accountant would have
made the same decisions if confronted with the same facts.’ . . . In
other words . . . a plaintiff must allege other facts indicating that the
nature of those violations was such that scienter is properly
inferred.") (citation omitted)).
But this alleged GAAP violation adds nothing new; rather, it sim-
ply rides around in circles on the inadequate coattails of the scienter
pleading. For if PEC was to take a reserve only when it believed non-
payment was "probable" (defined by SFAS 5.03 as when a future
event is "likely to occur," see J.A. 401 (emphasis added)) and that
"the amount of loss can be reasonably estimated," J.A. 403, we are
brought back to Appellants’ previous problem that they have not pled
facts that give rise to a strong inference that PEC ever believed it
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would not get paid by Pearson while making the public statements
that the CAC challenges.
Finally, Appellants argue that the Individual Appellees’ sales of
PEC stock during the class period establish scienter. We disagree.
While insider trading may also support an inference of scienter by
revealing a motive and opportunity for profiting from the fraud, it
only will do so if the timing and amount of the sale(s) are "unusual
or suspicious." In re Microstrategy, Inc. Sec. Litig., 115 F. Supp. 2d
620, 643 (E.D. Va. 2000) (citing Greebel v. FTP Software, Inc., 194
F.3d 185, 198 (1st Cir. 1999). But the CAC pleads no facts establish-
ing that these sales were unusual or suspicious. Indeed, in context, it
seems that they were nearly de minimis: Appellees Karlgaard, Rice,
Harbitter and Lloyd sold, respectively, 1.17%, 1.47%, 1.79%, and
13.0% of their holdings of PEC stock during the class period. J.A.
109-110, 426.10 This is insufficient to raise a strong inference of
scienter under the PSLRA. Cf. MicroStrategy, 115 F. Supp. 2d at 644-
46. Further, the Individual Appellants actually exercised — but did
not sell — stock options during the class period. Finally, Appellees
note that the Individual Appellees actually lost over $471 million dol-
lars in collective stock value during the class period. J.A. 110. If this
all gives rise to a "strong inference" of anything, it is that no scienter
exists. See, e.g., In re First Union Corp. Sec. Litig., 128 F. Supp. 2d
871, 898 (W.D.N.C. 2001) (CEO and other key corporate officer’s
sale of less than 5% of total holdings while actually increasing stock
amount of stock owned by exercising options was "such a trivial
amount of trading" that it "affirmatively demonstrates the absence of
scienter."). In sum, the CAC does not plead facts raising a strong
inference that Appellees acted with fraudulent intent when making the
public statements cited in the CAC.
B.
Appellants also challenge the district court’s denial of their motion
for leave to amend the CAC and wish to submit new information.
They proposed to make two amendments to the CAC. First, Appel-
10The percentages are derived from the CAC and documents publicly
filed by each Appellee with the SEC, of which this court can take judicial
notice. See supra n.7.
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lants asserted that PEC’s Form 10-Q for the quarter ending September
30, 2003 notes that, as of September 30, 2002, PEC had an outstand-
ing account receivable of $14.4 million on the Pearson subcontract,
and that this was 80% of what it had billed by that time. The sugges-
tion is that this shows that Pearson had "largely stopped paying PEC"
by this time because of a governmental audit of PEC that revealed
overbilling. Second, they sought to add an allegation from Pearson’s
answer to PEC’s lawsuit against Pearson in the District of Minnesota,
in which Pearson claims that it withheld money from PEC because
the government had challenged $6-9 million of PEC’s billings.
Appellants contend that these amendments, when added to the
other allegations, cure any scienter problems. They do not. The mere
existence of an accounts receivable balance does not indicate that
PEC could not reasonably expect payment. Likewise, the proposed
amendments still fail to adequately address when any audit was com-
pleted or anyone withheld payment. This all leaves less than a "strong
inference" of scienter in our minds. Leave to amend need not be given
when amendment would be futile. See Foman v. Davis, 371 U.S. 178,
182 (1962); Davis v. Piper Aircraft Corp., 615 F.2d 606, 613-14 (4th
Cir. 1980). The district court held that leave to amend would be futile
"for the reasons stated above [in the opinion]." J.A. 940-41. As we
have held, "As long as a district court’s reasons for denying leave to
amend are apparent, its failure to articulate those reasons does not
amount to an abuse of discretion." Edwards v. City of Goldsboro, 178
F.3d 231, 242 (4th Cir. 1999). Therefore, the district court did not
abuse its discretion.11
11Finally, two days before oral argument, Appellants filed a "Motion
for the Court to Take Judicial Notice" of a November 4, 2004 order from
PEC’s lawsuit against Pearson for unpaid funds, PEC Solutions, Inc. v.
NCS Pearson, Inc., Civil No. 03-5214 (DSD/JSM) (D. Minn.). It is not
at all clear that this motion is proper under any Federal Rule of Appellate
Procedure. But, to the extent that we look to it at all, it only confirms our
conclusion that Appellants fail to establish a strong inference of scienter.
The order states, in pertinent part:
• "The parties agree that [Pearson] paid all PEC invoices
through July 3, 2002. However, since August 2002, [Pearson]
has failed to pay over $6.3 million in PEC invoices. In all,
[Pearson] has paid PEC $18.1 million for invoices totaling
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IV.
For the foregoing reasons, the Appellants fail to state a claim upon
which relief may be granted. Thus, the district court’s decision to dis-
miss the case and deny leave to amend is
AFFIRMED.
over $24.4 million. [Pearson] never rejected any PEC
invoices." Id. at slip op. 4 (emphasis added).
• It was not until December 2003 that Pearson formally submit-
ted the invoices for PEC’s costs to the TSA and TSA for-
mally rejected those invoices. Id. at 7.
• Pearson submitted rebuttal to TSA’s finding that costs attrib-
utable to PEC were unjustified. See Id. at 6.
• "On February 13, 2003, TSA informally told [Pearson] that
the subcontractor referred to in the congressional testimony
was PEC. [Pearson] subsequently informed PEC about TSA’s
informal position that PEC’s costs may be excessive." Id. at
4 (emphasis added).
• Not until June 2003 did TSA send Pearson a report detailing
TSA’s concerns about costs incurred on the PEC subcontract.
Id. at 4.
Thus, according to this court, Pearson has paid 75% of PEC’s invoices
and apparently did not know of the results of the audit until Feb. 13,
2003, two days after the last actionable statement by Appellants. It then
did not relay this to PEC until sometime later.
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