Third Circuit disposition — 02-3348

1
PRECEDENTIAL
UNITED STATES COURT OF
APPEALS
FOR THE THIRD CIRCUIT
____________
No: 02-3348
_____________
IN RE: ALPHARMA INC.
SECURITIES LITIGATION
Maverick Capital, Ltd.,
Appellant
Appeal from the United States
District Court
for the District of New Jersey
(D.C. Civil Action Nos. 00-cv-05452,
00-cv-05507, 00-cv-05508, 00-cv-05630,
00-cv-05657 and 00-cv-06267)
District Judge: Honorable Joel A. Pisano
______________________
Argued on June 16, 2003
Before: ALITO, ROTH, and HALL* ,
Circuit Judges
(Opinion filed June 15, 2004)
*The Hon. Cynthia H. Hall, Circuit
Judge for the United States Court of
Appeals for the Ninth Circuit, sitting by
designation.
Joseph J. DePalma, Esquire
Lite, Depalma, Greenberg & Rivas, LLC
Two Gateway Center, 12th Floor
Newark, New Jersey 07102
Marc I. Willner, Esquire (Argued)
David Kessler, Esquire
Three Bala Plaza East, Suite 400
Bala Cynwyd, PA 19004
Counsel for Appellant
Anthony J. Marchetta, Esquire
John P. Scordo, Esquire
Pitney, Hardin, Kipp & Szuch, LLP
P.O. Box 1945
Morristown, New Jersey 07962
William H. Pratt, Esquire
Frank Holozubiec, Esquire
Wendy E. Long, Esquire (Argued)
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Counsel for Appellees
__________________
OPINION
__________________
ROTH, Circuit Judge:
This case involves a proposed class
action suit brought by investors who
purchased shares of Alpharma, Inc.,
common stock between April 1999 and
October 2000. Specifically, plaintiffs
allege that defendants made materially

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false or misleading statements by reporting
and then commenting on inflated revenue,
net income, and earnings per share results
during the proposed class period. These
results are alleged to have artificially
inflated the company’s stock price, thereby
damaging members of the proposed class.
The District Court, concluding that
plaintiffs failed to state a claim for relief
under federal securities laws and that
granting leave to amend would be futile,
dismissed the Complaint with prejudice
pursuant to Federal Rule of Civil
Procedure 12(b)(6). For the reasons set
forth below, we will affirm the final
judgment of the District Court.
I. Factual Background
A. Overview
This case began as six separate
proposed class actions, all of which were
brought by shareholders alleging they
suffered damages as a result of being
induced to purchase shares of Alpharma’s
common stock on the basis of false or
misleading statements made by the
company and its top executives. On
March 27, 2001, the District Court
consolidated these actions, appointed
Maverick Capital, Ltd., as lead plaintiff,
and ordered the filing of a consolidated
amended complaint
Plaintiffs filed the Consolidated
Amended Class Action Complaint (the
“Complaint”) on June 8, 2001. In the
Complaint, plaintiffs seek to represent
investors who purchased Alpharma stock
between April 28, 1999, and October 30,
2000. They allege that the company and
four of its executives caused the issuance
of materially false and m isleading
financial results during the proposed class
period, thereby artificially inflating the
value of the company’s common stock.
Plaintiffs further allege that these
misstatements were the result of improper
accounting procedures which inflated the
company’s reported revenue, net income,
and earnings per share.
B. Parties
As stated above, plaintiffs seek to
represent a proposed class of investors
who purchased shares of Alpharma stock
during the class period. Defendant
Alpharma, Inc., is a multinational
corporation that produces pharmaceuticals
for both animal and human use. Its
domestic headquarters is located in Fort
Lee, New Jersey. At all times relevant to
the Complaint, the company’s common
stock traded on the New York Stock
Exchange (NYSE). Alpharma sold a total
of $537 million of common stock to
underwriters during the class period.
Defendant Einar Sissener is
Alpharma’s Chairman. Sissener served as
Chief Executive Officer (CEO) between
June 1994 and June 1999, and then as
Chairman of the Office of the Chief
Executive from June 1999 to December
1999. He signed Alpharma’s Form 10-K
annual report for 1999. The Complaint
alleges that he, together with relatives,
owns sufficient voting shares to effectively
control the company.
Defendant Ingrid Wiik assumed the

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position of President and CEO in January
2000 and became a director in February
2000. She too signed the company’s Form
10-K annual report for 1999. Wiik sold
forty-six percent of her shares in Alpharma
for a total of $839,075 during a four day
period in the first week of August 2000
when the value of Alpharma’s stock was
near its high point of $71 per share.
Defendant Jeffrey Smith served as
Alpharma’s Vice President and Chief
Financial Officer (CFO) at all times
relevant to the Complaint. He signed the
Form 10-K annual report for 1999, as well
as each of the Form 10-Q quarterly reports
issued during the proposed class period.
During the first week of August 2000,
Smith sold twenty-six percent of his
holdings in the company for a total of
$1,240,549.
Defendant Bruce Andrews served
as president of Alpharma’s Animal Health
Division (AHD) during all times relevant
to the Complaint. Andrews sold seventy-
seven percent of his shares in the company
for a total of $1,658,965 during the first
week of August 2000.1
C. Substantive Allegations
The primary basis for the proposed
class action is plaintiffs’ allegation that the
financial results released by defendants
during the class period were the product of
accounting irregularities which caused
Alpharma to report inflated revenue
figures. These revenue figures, in turn,
affected the accuracy of its net income and
earnings per share calculations, thereby
fueling an increase in the value of the
company’s stock during the class period.
More specifically, plaintiffs allege
that the individual defendants violated
both Generally Accepted Accounting
Principles (GAAP) and Alpharma’s own
revenue recognition policy2 by recording
AHD sales as revenue even though the
products sold were not shipped to
customers until as long as six months after
the purported sale. In practice, this meant
that AHD customers had agreed to
purchase Alpharma products but delayed
receipt and payment until subsequent
quarters. The purchased products were
then put on “customer hold” and shipped
to a warehouse until the customers were
ready to receive and pay for them. These
so-called “pre-sales” began when Andrews
became president of the AHD in May 1997
and had allegedly become part of
Alpharma’s “corporate culture” by the
beginning of the class period. As a result,
plaintiffs allege that defendants either
knew or recklessly disregarded the fact
that (1) instances would arise in which
customers would later refuse to receive
and pay for orders already recognized as
revenue in previous quarters, (2) they had
1Adopting the language used in the
Complaint, we will refer to Sissener,
Wiik, Smith, and Andrews collectively as
the “individual defendants”.
2Alpharma’s revenue recognition
policy stated that revenue would not be
recognized until its products were
shipped to customers.

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failed to disclose that pre-sales essentially
sapped future demand for the company’s
products, and (3) the use of pre-sales
encouraged the creation of fictitious sales.
Alpharma restated its results for the
full year 1999, each quarter during 1999,
and the first two quarters of 2000
following the close of trading on the
NYSE on October 30, 2000. In its press
release, the company placed the blame for
the overstatements on employees in the
Brazil division of the AHD and noted that,
after a full investigation, it was convinced
that the problem had not spread beyond
Brazil.3 Prior to the announcement on
October 30, the stock traded at $56.50. By
the time the NYSE closed the following
day, the value of Alpharma’s shares had
fallen to $38.81.
In placing the blame for this drop in
share price on the individual defendants,
plaintiffs allege in their complaint:
Each of the Individual
Defendants by virtue of his
or her executive and
managerial positions with
the Company, directly
participated in the daily
m a n a g e m e n t o f t h e
Company, and was directly
involved in the day-to-day
operations of the Company
at the highest level, and was
p ri v y t o c o n f i d e n t i a l
proprietary inform ation
concerning the Company
and its business and
operations, and revenue
recognition policies. The
Individual Defendants were
involved or participated in
d r a f t i n g , p r o d u c i n g ,
r e v i e w i n g a n d / o r
disseminating the false and
m i s l e a d i n g s t a te m e n t s
alleged [in the Complaint].
They further assert that the individual
defendants “had a duty to promptly
dissem inate truthful and accurate
information with respect to Alpharma and
to promptly correct any public statements
3In connection with the press release,
Wiik stated as follows:
We are extremely
disappointed by the actions
of these employees who
breached our established
policies and controls and
who violated the trust we
placed in them. We have
removed the individuals
involved and appointed
new management to run
our Animal Health
operations in Brazil. While
we do not consider the net
financial impact of this
matter material to the
period affected, we will
restate our financial results
because it is the right thing
to do.

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issued by or on behalf of the Company that
had become false or misleading.”
Plaintiffs allege this duty was violated
when defendants knowingly or recklessly
disregarded the fact that “the misleading
statements and omissions would adversely
affect the integrity of the market for the
Company’s stock and would cause the
price of the Company’s common stock to
become artificially inflated.”
D. Details of AHD’s Pre-Sales
A lpharma’s AHD conducts
business with its customers through a staff
of sales representatives. At all times
relevant to the Complaint, these sales
representatives were supervised by
regional sales managers. The sales
managers reported to Randy Maclin,
AHD’s vice president of sales and
marketing within the United States, and
Loren Williams, vice president of sales
and marketing for AHD in Latin America.
I n a t yp i c a l t r a nsaction , sale s
representatives wo uld provide the
company’s Customer Service Department
(CSD) with the details of the purchase,
including whether the product was to be
shipped, picked up, or placed on
“customer hold.” The CSD would then
enter the transaction into the company’s
Business Planning and Control System
(BPCS), which allocated inventory for the
sale and created an invoice. Each
warehouse would conduct a monthly
inventory, the results of which were
submitted to Alpharma’s headquarters in
New Jersey. However, the Brazil division
of AHD did not use the BPCS. Instead, it
recorded sales by sending copies of sales
reports and financial statements directly to
Alpharma’s New Jersey headquarters,
which then entered the data into the BPCS.
Further, Michael Weaver, AHD’s vice
president of finance and one of Andrews’
subordinates, made monthly trips to Brazil
to review sales records and audit
inventory. Based on these facts, plaintiffs
allege that personnel in Alpharma’s New
Jersey headquarters were “aware of or
should have been aware of and able to
access sales results from its Brazilian
operations.”
Beginning when he became
president of the AHD in May 1997,
Andrews is alleged to have engaged in a
number of questionable practices,
including (1) telling AHD staff that he
would take whatever action was necessary
to raise Alpharma’s stock price, (2) firing
AHD sales representatives and managers
and replacing them with former co-
workers from his prior employer, and (3)
no longer seeking input from sales
representatives as to appropriate yearly
sales quotas. This last action was relevant,
as year-end bonuses were tied to the staff’s
ability to meet the sales goals set by
Andrews. Plaintiffs allege that these
purportedly unrealistic sales targets caused
employees to engage in questionable
activities such as the pre-sales described
above. Because the number of products on
customer hold could be determined from
an examination of BPCS entries, plaintiffs
conclude that examination of such entries
“did or could have alerted [defendants] to
the fact that [AHD] was inflating its
results by, essentially, shipping to itself.”

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The Complaint goes on to detail a
number of setbacks and expensive
acquisitions which purportedly weighed on
the company and pressured executives to
increase revenue in AHD. Plaintiffs allege
that, as a result of these difficulties, the use
of pre-sales spread beyond AHD.
Specifically, they assert that Knut
Moksnes and Laritz Valderhaug, the
president and senior controller of the
Aquatic Animal Health Division (AAHD),
asked AAHD controllers to record
unreceived cash as accounts receivable
despite the fact that the products in
question had not yet been shipped to the
customer. This resulted in the resignation
of one AAHD controller, who cited her
concerns during an exit interview, which,
she believes, was documented and placed
in her personnel file at Alpharma’s New
Jersey headquarters. The Complaint
further alleges that Loren Williams, who
served until October 2000 as AHD’s vice
president of sales and marketing for Latin
Am eric a , r e s i g n e d o v e r s imila r
disagreements with management but that
Williams is unable to assist plaintiffs’
counsel due to a non-disclosure agreement.
E. Statements Made During the Class
Period
(1) First Quarter of 1999
The class period began on April 28,
1999, when Alpharma announced results
for the first quarter of 1999. The company
issued a press release which highlighted
the marked improvement in revenues, net
income, and earnings per share compared
to the first quarter of 1998. Because a
report issued by a Wall Street analyst
following the announcement of first
quarter results mentioned increased sales
in Latin America and Southeast Asia,
plaintiffs allege that defendants “were
aware that the market was attributing
Alpha rma’s appare n t s u c c e s s to
international oper ations, in cludin g
specifically Latin America.”
The company filed its Form 10-Q
for the first quarter of 1999 with the
Securities and Exchange Commission
(SEC) on May 12, 1999.4 This form,
signed by vice president and CFO Smith
on behalf of himself and the company,
contained the same inflated numbers as the
April 28 press release. These numbers
were revenue of $156,759,000, net income
of $7,436,000, and earnings per share of
twenty-seven cents. In its October 30,
2000, restatement, Alpharma lowered
revenue by $810,000, net income by
$238,000, and earnings per share by one
cent.
(2) Second Quarter of 1999
4Each of the 10-Q Forms filed by
Alpharma contained a notes section
which stated, in part, that “[t]he
accompanying consolidated condensed
financial statements include all
adjustments (consisting only of normal
recurring accruals) which are, in the
opinion of management, considered
necessary for a fair presentation of the
results for the periods presented.”

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Alpharma announced results for the
second quarter of 1999 on July 28, 1999.
Comparing results to the second quarter of
1998, the accompanying press release
highlighted increases in revenue, net
income, and earnings per share. The
earnings per share number exceeded Wall
Street’s consensus estimate by one cent,
thereby continuing Alpharma’s streak of
ten consecutive quarters of exceeding
analysts’ expectations. The value of the
c o m p a n y ’ s s t o c k in c r e a s e d b y
approximately twelve percent following
the issuance of second quarter results.
The company filed its Form 10-Q
for the second quarter of 1999 with the
SEC on August 9, 1999. This form, signed
by Smith on behalf of himself and the
company, contained the same inflated
numbers as the July 28 press release.
These numbers were revenue of
$163,839,000, net income of $7,772,000,
and earnings per share of twenty-eight
cents. In the October 30, 2000,
restatement, Alpharma lowered revenue by
$1,622,000, net income by $404,000, and
earnings per share by two cents. The
consensus estimate for the second quarter
of 1999 had called for earnings per share
of twenty-seven cents. Thus, Alpharma
would have missed this estimate by one
cent had its results been reported correctly
in the first instance.
(3) Third Quarter of 1999
Alpharma announced its third
quarter results on October 25, 1999.
Comparing results to the third quarter of
1998, the accompanying press release
highlighted increases in revenue, net
income, and earnings per share. The
earnings per share number exceeded Wall
Street’s consensus estimate by two cents,
extending Alpharma’s streak of consensus-
beating quarters to eleven. The value of
the company’s stock increased by
approximately thirteen percent following
the issuance of third quarter results.
The company filed its Form 10-Q
for the third quarter of 1999 with the SEC
on November 2, 1999. This form, signed
by Smith on behalf of himself and the
company, contained the same inflated
numbers as the October 25 press release.
These numbers were revenue of
$203,131,000, net income of $11,263,000,
and earnings per share of thirty-eight
cents. In its October 30, 2000 restatement,
Alpharma lowered revenue by $3,302,000,
net income by $890,000, and earnings per
share by three cents. As with the second
quarter, Alpharma would have missed
analysts’ earnings estimates absent the
overstatement of revenue.
(4) Fourth Quarter and Full Year
1999
The company’s fourth quarter and
full year results for 1999 were issued on
February 23, 2000. The accompanying
press release highlighted both quarterly
and yearly growth in revenue, net income,
and earnings per share. The earnings per
share number exceeded expectations for
the twelfth c o n s e cutive quarter.
Highlighting this fact, Sissener issued the
following statement:
Alpharma has now achieved

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1 2 c o n s e c u t i v e
quarters of growth
above the goals we
have set. I am
pleased with these
exceptional results,
w hich I believe
reflect the success of
the focused growth
strategies we have
established and of
the efforts of our
employees all around
the world. The
record results are
p a r t i c u l a r l y
gratifying because
they were achieved
as we continued to
m a k e a n d
successfully absorb
significant strategic
acquisitions that are
an integral part of
our long-term growth
strategy.
Similarly, Wiik stated that “[c]learly,
Alpharma’s established strategies for
growth are working. By continuing to
execute, we look for this profitable growth
to continue in 2000 and beyond.”
The company filed its Form 10-K
for the fourth quarter and full year 1999
with the SEC on March 29, 2000. This
form, signed by Smith, Sissener, and W iik
on behalf of themselves and the company,
contained the same inflated numbers as the
February 23 press release. The fourth
quarter numbers were revenue of
$218,447,000, net income of $13,080,000,
and earnings per share of forty-one cents.
In its October 30, 2000, restatement,
Alpharma lowered fourth quarter revenue
by $3,999,000, net income by $1,047,000,
and earnings per share by three cents. The
full year numbers for 1999 were similarly
lowered following restatement. Revenue
of $742,176,000, net income of
$39,551,000, and earnings per share of
$1.34 were decreased by $9,733,000,
$2,579,000, and nine cents, respectively.
The 10-K for 1999 further stated “that
‘revenue is recognized upon shipment of
products to customers.’”
(5) First Quarter of 2000
Alpharma announced results for the
first quarter of 2000 on April 26, 2000. As
before, the company highlighted increases
in revenue, net income, and earnings per
share compared to the first quarter of
1999. In connection w ith this
announcement, Wiik stated that “[t]hese
record first quarter results reflect the
continued successful implementation of
our growth strategies to build the global
Alpharma enterprise. We are experiencing
strong top line growth due to both new
product introductions and complimentary
acquisitions . . . we expect continued
strong revenue growth throughout 2000.”
The earnings per share number exceeded
Wall Street’s consensus estimate by two
cents, extending Alpharma’s streak of
consensus-beating quarters to thirteen.
Between April 25 and May 1, the value of
Alpharma’s stock increased by nine

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percent.
The company filed its Form 10-Q
for the first quarter of 2000 with the SEC
on May 8, 2000. This form, signed by
Smith on behalf of himself and the
company, contained the same inflated
numbers as the April 26 press release.
These numbers were revenue of
$118,280,000, net income of $11,114,000,
and earnings per share of thirty-five cents.
Following restatement, revenue was
lowered by $2,202,000, net income by
$749,000, and earnings per share by two
cents. As in previous quarters, Alpharma
would have missed analysts’ earnings
estimates absent the overstatement of
revenue.
(6) Second Quarter of 2000
Alpharma announced its results for
the second quarter of 2000 on July 31,
2000. As before, the company highlighted
increases in revenue, net income, and
earnings per share compared to the second
quarter of 1999. On August 1, the value of
Alpharma’s stock rose ten percent to
$71.94, the highest close reached at any
time during the class period.
F. The Discovery of the Accounting
Irregularities
Plaintiffs assert that the internal
i n v e s ti g a t io n o f the ac coun tin g
irregularities described by Alpharma
would have taken a significant amount of
time to complete and that the company
must therefore have been aware of the
accounting irregularities occurring in
B r a z i l l o n g b e f o r e t h e pu b l i c
announcement on October 30. They
further claim that employees in the
company’s New Jersey headquarters were
notified of incidents of improper
accounting by Paulo Andreoli, a technical
sales manager in AHD’s Brazil division.
Andreoli allegedly was told that there
would be no investigation into his
allegations. However, plaintiffs contend
that the information submitted by Andreoli
“was reviewed or available for review by
all Defendants, and in particular,
defendant Andrews, president of[AHD].”
As an example of the activities occurring
at Alpharma, plaintiffs allege that the
Brazil division’s December 1999 sales
report contained nineteen fraudulent sales,
eighteen of which occurred three days
before the end of the quarter and reflected
sales activity that was “grossly out of line
with the sales made during the rest of the
month.”
Quoting 17 C.F.R. § 229.303(a)(1)-
3(3) and Instruction 3, plaintiffs further
allege that defendants had a duty under
applicable SEC regulations to “disclose in
periodic reports filed with the SEC ‘known
trends or any known demands ,
commitments, events or uncertainties’ that
are reasonably likely to have a material
impact on a company’s sales revenues,
income or liquidity, or cause previously
reported financial information not to be
indicative of future operating results.”
Ad ditionally, plaintiffs assert that
defendants had “a duty ‘to make full and
prompt announcements of material facts
regarding the company’s financial

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condition.’”5 They allege that these duties
were violated by defendants’ issuance of
financial results that violated both GAAP
and Alpharma’s own revenue recognition
policy. As noted by the District Court, this
section of the Complaint is followed by
additional allegations of scienter which
add nothing of substance to the claims
described above.
H. Plaintiffs’ Rule 10b-5 and Section
20(a) Claims
The above-described allegations lay the
groundwork for the two counts asserted in
the Complaint. Count I is brought against
all defendants pursuant to Rule 10b-5. In
broad terms, it asserts that defendants
acted both individually and collectively to
defraud investors by making materially
false or misleading statements in
connection with the sale of the company’s
stock. Count II alleges that the individual
defendants were “controlling persons” of
Alpharma, and thus violated Section 20(a)
of the Securities Exchange Act of 1934, 15
U.S.C. § 78, et seq. (the “Exchange Act”),
by causing the Section 10(b) violation
described in Count I.
II. Procedural History
As noted above, the Complaint was
filed on June 8, 2001, following
consolidation of the six initial proposed
class actions pending against Alpharma.
On May 20, 2002, the District Court,
concluding that plaintiffs failed to state a
claim under either Rule 10b-5 or Section
20(a), dismissed the Complaint with
prejudice pursuant to Federal Rule of Civil
Procedure 12(b)(6). Plaintiffs’ motion for
reconsideration was denied by the District
Court on August 12, 2002, and this appeal
followed.
III. Jurisdiction and Standard of
Review
Plaintiffs filed this proposed class
action pursuant to Sections 10(b) and 20(a)
of the Exchange Act, 15 U.S.C. §§ 78j(b)
and 78t(a). As such, the District Court
exercised jurisdiction over this case
pursuant to 28 U.S.C. § 1331. We have
jurisdiction to review the final judgment of
the District Court pursuant to 28 U.S.C. §
1291.
Our review of the District Court’s
dismissal of the Complaint pursuant to
Rule 12(b)(6) is plenary. Brown v. Philip
Morris, Inc., 250 F.3d 789, 796 (3d Cir.
2001). As the District Court did, “[w]e
must accept as true all of the factual
allegations in the complaint as well as the
reasonable inferences that can be drawn
from them,” and “may dismiss the
complaint only if it is clear that no relief
could be granted under any set of facts that
could be proved consistent with the
allegations.” Id. We similarly exercise
plenary review over the District Court’s
interpretation of the applicable federal
securities laws. In re Rockefeller Center
Properties, Inc. Sec. Litig., 311 F.3d 198,
215 (3d Cir. 2002). However, we review
5 Quoting SEC Release No. 34-8995,
3 Fed. Sec. L. Rep. (CCH) ¶ 23,120A, at
17,095, 17 C.F.R. § 241.8995 (October
15, 1970).

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the District Court’s denial of plaintiffs’
alternative request for leave to amend the
Complaint for abuse of discretion. See In
re NAHC, Inc. Sec. Litig., 306 F.3d 1314,
1323 (3d Cir. 2002); In re Burlington Coat
Factory Sec. Litig., 114 F.3d 1410, 1434
(3d Cir. 1997).
IV. Discussion
Plaintiffs’ argument is straightforward.
They contend that the District Court erred
in dismissing the Complaint for failure to
state a claim upon which relief may be
granted and, in the alternative, that the
court abused its discretion in failing to
grant them leave to amend. We begin our
analysis with an overview of the relevant
pleading requirements and then address in
turn each of plaintiffs’ assignments of
error.
A. Overview
The gravamen of the Complaint is
the Rule 10b-5 claim asserted against all
defendants in Count I.6 Thus, we begin by
noting that “Section 10(b) prohibits the
‘use or employ, in connection with the
purchase or sale of any security, . . . [of]
any manipulative or deceptive device or
contrivance in contravention of such rules
and regulations as the Commission may
prescribe . . ..’” In re Ikon Office
Solutions, Inc., 277 F.3d 658, 666 (3d Cir.
2002) (quoting 15 U.S.C. § 78j(b)).
Section 10(b) is enforced through Rule
10b-5, which creates a private cause of
action for investors harmed by materially
false or misleading statements. In re
Advanta Corp. Sec. Litig., 180 F.3d 525,
535 (3d Cir. 1999). Specifically, Rule
10b-5 “makes it unlawful for any person
‘[t]o make any untrue statement of a
material fact or to omit to state a material
fact necessary to make the statements
made in light of the circumstances under
which they were made, not misleading . . .
in connection with the purchase or sale of
any security.’” In re Ikon, 277 F.3d at 666
(quoting 17 C.F.R. § 240.10b-5(b)).
In order to state a claim pursuant to
Rule 10b-5, plaintiffs must allege that
defendants “(1) made a misstatement or an
omission of a material fact (2) with
scienter
(3) in connection with the purchase or the
sale of a security (4) upon which
[plaintiffs] reasonably relied and (5) that
[plaintiffs’] reliance was the proximate
cause of [their] injury.” Id. In so doing,
the Private Securities Litigation Reform
Act (PSLRA), 15 U.S.C. § 78u-4 et seq.,
requires plaintiffs to “specify each
statement alleged to have been misleading,
the reason or reasons why the statement is
misleading, and, if an allegation regarding
the statement or omission is made on
information and belief, the complaint shall
state with particularity all facts on which
that belief is formed.” 15 U.S.C. § 78u-
6As discussed in greater detail below,
the viability of Count II, which alleges
controlling person liability pursuant to
Section 20(a) of the Exchange Act
against the individual defendants, is
contingent upon the success of Count I.

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12
4(b)(1)(B).7 Of particular significance
here, the PSLRA also requires that the
applicable mental state be pled with
particularity. In re Advanta, 180 F.3d at
530. Specifically, it states, in relevant
part, as follows:
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 requisite
‘strong inference’ of fraud may be
established either (a) by alleging facts to
show that defendants had both motive and
opportunity to commit fraud, or (b) by
alleging facts that constitute strong
circumstantial evidence of conscious
misbehavior or recklessness.” In re
Burlington Coat Factory, 114 F.4d at 1418.
The appropriate sanction for complaints
which fail to meet these requirements is
dismissal. In re Advanta, 180 F.3d at 531
(citing 15 U.S.C. § 78u-4(b)(3)(A)).
In addition to the requirements
contained in the PSLRA, Plaintiffs also
must comply with those set forth in
Federal Rule of Civil Procedure 9(b). Id.
Rule 9(b) provides, in relevant part, that
plaintiffs alleging fraud must state “the
circumstances constituting fraud or
mistake . . . with particularity.” Fed. R.
Civ. P. 9(b). However, plaintiffs may
generally alleg e “[m]a lice, intent,
knowledge, and other condition of mind of
a person.” Id. As applied to Rule 10b-5
claims, “Rule 9(b) requires a plaintiff to
plead (1) a specific false representation [or
omission] of material fact; (2) knowledge
by the person who made it of its falsity; (3)
ignorance of its falsity by the person to
whom it was made; (4) the intention that it
should be acted upon; and (5) that the
plaintiff acted upon it to his damage.” In
re Rockefeller Center Properties, 311 F.3d
at 216 (citation and internal quotations
omitted); GSC Partners CDO Fund v.
Washington, F.3d [14](3d Cir. 2004).
Further, “Rule 9(b) requires plaintiffs to
identify the source of the allegedly
fraudulent misrepresentation or omission.”
7The purpose of the heightened
pleading requirements contained in the
PSLRA is “to restrict abuses in securities
class-action litigation, including: (1) the
practice of filing lawsuits against issuers
of securities in response to any
significant change in stock price,
regardless of defendants’ culpability; (2)
targeting of ‘deep pocket’ defendants; (3)
the abuse of the discovery process to
coerce settlement; and (4) manipulation
of clients by class action attorneys.” In
re Advanta, 180 F.3d at 531 (citing H.R.
Conf. Rep. No. 104-369, at 28 (1995),
reprinted in 1995 U.S.C.C.A.N. 679,
748).

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13
Id. In sum, “Rule 9(b) requires, at a
minimum, that plaintiffs support their
allegations of securities fraud with all of
the essential factual background that
would accompany ‘the first paragraph of
any newspaper story’ — that is, the ‘who,
what, when, where and how’ of the events
at issue.” Id. at 217 (quoting In re
Burlington Coat Factory, 114 F.3d at
1422); GSC Partners at [20]. Importantly,
to the extent that Rule 9(b)’s allowance of
general pleading with respect to mental
state conflicts with the PSLRA’s
requirement that plaintiffs “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 PSLRA “supersedes Rule 9(b)
as it relates to Rule 10b-5 actions.” In re
Advanta, 180 F.3d at 531 n.5.
Here, the primary basis for the
District Court’s dismissal of the Complaint
was plaintiffs’ failure to adequately plead
the essential element of scienter. We have
previously defined “scienter” in the
context of securities fraud as “a mental
state embracing intent to deceive,
manipulate or defraud, or, at a minimum,
highly unreasonable (conduct), involving
not merely simple, or even excusable
negligence, but an extreme departure from
the standards of ordinary care, . . . which
presents a danger of misleading buyers or
sellers that is either known to the
defendant or is so obvious that the actor
must have been aware of it.” In re Ikon,
277 F.3d at 667 (citations and internal
quotations omitted). In order to properly
plead scienter under the PSLRA, plaintiffs
must “alleg[e] facts ‘establishing a motive
and an opportunity to commit fraud, or . .
. set[] forth facts that constitute
circumstantial evidence of either reckless
or conscious behavior.’” In re Advanta,
180 F.3d at 534-35 (quoting Weiner v.
Quaker Oats Co., 129 F.3d 310, 318 n.8
(3d Cir. 1997)); In re Digital Island
Securities Litigation, 357 F.3d 322, 328-29
(3d Cir. 2004). In so doing, plaintiffs
“must allege facts that could give rise to a
‘strong’ inference of scienter”; general
allegations that defendants knew or
recklessly disregarded the false nature of
the statements at issue are insufficient. In
re Burlington Coat Factory, 114 F.3d at
1422.
Plaintiffs pleading scienter through
motive and opportunity must support their
allegations with “facts stated ‘with
particularity’” that “give rise to a ‘strong
inference’ of scienter.” In re Advanta, 180
F.3d at 535 (quoting 15 U.S.C. § 78u-
4(b)(2)). Thus, under the PSLRA, “catch-
all allegations that defendants stood to
benefit from wrongdoing and had the
opportunity to implement a fraudulent
scheme are no longer sufficient, because
they do not state facts with particularity or
give rise to a strong inference of scienter.”
Id.; GSC Partners, F3d at [15-16].
Plaintiffs attempting to satisfy their burden
of pleading scienter by alleging facts
establishing recklessness must allege a
statement “involving not merely simple, or
even inexcusable negligence, but an
extreme departure from the standards of
ordinary care, and which presents a danger
of misleading buyers or sellers that is

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14
either known to the defendant or is so
obvious that the actor must have been
aware of it.” In re Advanta, 180 F.3d at
535 (citation and internal quotations
omitted). It is against this backdrop that
we examine the Complaint at issue here.
B. Dismissal of the Complaint
(1) Plaintiffs’ Rule 10b-5 Claim
As noted above, the District Court
held that plaintiffs failed to adequately
plead the essential element of scienter, and
thus failed to state a claim under the
federal securities laws. In particular, the
court concluded that the allegations
contained in the Complaint failed to satisfy
the strict pleading requirements of Rule
9(b) and the PSLRA. In reaching this
conclusion, the District Court noted that
the Complaint merely imputes scienter to
the individual defendants as a result of
their positions within the company, and
thus fails to establish that either they or, by
extension, the corporation were involved
with the accounting irreg ularities
occurring in AHD’s Brazil division.
On appeal, plaintiffs assert that the
Complaint adequately pleads scienter by
alleging both recklessness and motive.
More specifically, they contend they have
demonstrated recklessness by alleging that
(1) defendants violated GAAP as well as
Alpharma’s internal revenue recognition
policy, and (2) that “whistleblowers”
within AHD’s Brazil division reported the
use of pre-sales and questionable
accounting practices to Alpharma’s New
Jersey headquarters where it could be
accessed by the individual defendants.
They argue that motive and opportunity
are established by their allegations
regarding the defendants’ sale of stock
during the class period.
We disagree. Turning first to the
issue of recklessness, we concur with the
District Court’s conclusion that, at bottom,
plaintiffs’ allegations rest primarily upon
the premise that the individual defendants
are liable simply by virtue of the positions
they hold within the company. We
recently rejected similar allegations in In
re Advanta, holding that “[g]eneralized
imputations of knowledge” do not satisfy
the scienter requirement “regardless of the
defe ndan ts’ positio ns w ithin the
company.” 180 F.3d at 539. Rather,
plaintiffs must allege “an extreme
departure from the standards of ordinary
care,” in order to establish recklessness.
Id. at 535. As explained below, they fail to
do so here with respect to any of the four
individual defendants.
The Complaint fails to allege that
Sissener, Wiik, or Smith were involved in
any way with the violations of GAAP and
Alpharma’s revenue recognition policy
occurring in Brazil. The allegations
against Andrews similarly fail. As
defendants note, the Complaint fails to
identify any pre-sales made pursuant to
Andrews’ instruction. Rather, plaintiffs
simply allege that Andrews set “lofty”
quarterly sales goals and then pressured
sales representatives to meet them.8 We
8Paragraphs 53 and 55 of the
Complaint allege the following:

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15
hold that such conclusory allegations are
insufficient to state a claim under the
applicable pleading requirements. See In
re Burlington Coat Factory, 114 F.3d at
1418 (holding that “even under a relaxed
application of Rule 9(b), boilerplate and
conclusory allegations will not suffice”;
rather, “Plaintiffs must accompany their
legal theory with factual allegations that
make their theoretically viable claim
plausible”) (emphasis deleted); see also
Kushner v. Beverly Enterprises, Inc., 317
F.3d 820, 827-28 (8th Cir. 2003) (holding
that allegations that defendants “designed
and implemented” improper accounting
policies failed to state a claim for
securities fraud in the absence of
“ a l l e g a t i o n s o f p a r t ic u l a r fa c ts
demonstrating how the defendants knew of
the scheme at the time they made their
statements of compliance, that they knew
the financial statements overrepresented
the company’s true earnings, or that they
were aware of a GAAP violation and
disregarded it . . .. Rote allegations that
the defendants knowingly made false
statements of material fact fail to satisfy
the heightened pleading standard of the
Reform Act.”) (citation and internal
quotations omitted). Further, allegations
that Williams, Andrews’ subordinate,
knew of the irregularities occurring in
Brazil provide an insufficient basis upon
which to impute knowledge to Andrews.
See Kushner, 317 F.3d at 828 (holding that
an allegation that someone involved in the
relevant scheme reported to one of the
named defendants was “not specific
enough to support a strong inference that
[the defendant] knew of or participated in
the fraudulent practice while it was
occurring”).
Indeed, “[w]hile under Rule
12(b)(6) all inferences must be drawn in
plaintiffs’ favor, inferences of scienter do
not survive if they are merely reasonable .
[I]n order to move volumes
of products necessary to
meet the lofty quarter-end
numbers set by defendant
Andrews, sales
representatives were
instructed to offer
customers incentives and
special sales terms in order
to get the customers to buy
product they already had in
stock. To this end, sales
representatives were
instructed to extend the
payment and shipping
period from 30 days to as
much as 180 days.
* * *
[I]n response to defendant
Andrews’ directive, sales
invoices were issued and
sales were immediately
recorded on Alpharma’s
books and identified as
accounts receivable, even if
the product was not paid for
and shipped out to the
c u s t o m e r f o r s e v e ra l
months.

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16
. .. Rather, inferences of scienter survive
a motion to dismiss only if they are both
reasonable and ‘strong’ inferences.” In re
Navarre Corp. Sec. Litig., 299 F.3d 735,
741 (8th Cir. 2002) (citation and internal
quotations omitted). Such clearly cannot
be said here. Thus, the District Court
correctly concluded that the Complaint
fails to “link Alpharma’s executives or any
of the named Individual Defendants to the
Brazil incidents.”
P l a i n t i f f s ’ s o - c a l l e d
“whistleblower” allegations — which
assert that Alpharma’s New Jersey
headquarters was alerted to the violation of
the company’s revenue recognition policy
by employees within AHD’s Brazil
division and that the individual defendants
therefore had access to this information —
fare little better. As defendants note, the
Complaint simply alleges that a sales
manager in AHD’s Brazil division notified
employees in New Jersey of the
accounting irregularities in Brazil. There
was no investigation of these allegations,
nor does the Complaint allege that the
allegations of improper accounting were
ever passed up the chain of command to
Sissener, Wiik, or Smith. In addition,
plaintiffs’ allegation that Andrews knew of
this information is wholly conclusory and
thus cannot survive a motion to dismiss.
See In re Burlington Coat Factory, 114
F.3d at 1418. Moreover, the mere fact that
the information was sent to Alpharma’s
headquarters and therefore was available
for review by the individual defendants is
insufficient to “giv[e] rise to a strong
inference that [defendants] acted with the
required state of mind.” 15 U.S.C. § 78u-
4(b)(2). Looked at as a whole, plaintiffs’
allegations rest on nothing more than a
“series of inferences . . . too tenuous to
amount to one of those highly
u n r e a s o n a b l e o m i s s i o n s o r
misrepresentations that involve not merely
simple or even inexcusable negligence, but
an extreme departure from the standards of
ordinary care.” Ziemba v. Cascade Int’l,
Inc., 256 F.3d 1194, 1210 (11th Cir. 2001).
Moreover, we note that the
Complaint is devoid of any allegations
which would establish that AHD’s Brazil
division was so central to Alpharma’s
business that its increased revenue figures
should have received particular attention
from company executives. Indeed, the
Brazil division’s total revenue accounted
for only slightly more than one half of one
percent of the company’s total revenue in
1999. In view of this, it strains credulity to
assert that company executives must have
known that a spike in the Brazil division’s
sales was the result of violations of GAAP
and of the company’s revenue recognition
policies rather than a normal increase in
business. See In re Advanta, 180 F.3d at
539 (noting that “[i]t is well established
that a pleading of scienter may not rest on
a bare inference that a defendant must
have had knowledge of the facts.”)
(citation and internal quotations omitted);
see also Kushner, 317 F.3d at 829 (noting
that “‘the failure of a parent company to
i n t e rp r e t e x t r a or d i n a rily positiv e
performance by its subsidiary . . . as a sign
of problems and thus to investigate further

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17
does not amount to recklessness under the
securities laws’”) (quoting Novak v.
Kasaks, 216 F.3d 300, 309 (2d Cir. 2000));
Chill v. General Elec. Co., 101 F.3d 263,
270 (2d Cir. 1996) (holding that, “[g]iven
the significant burden on the plaintiff in
stating a fraud claim based on
recklessness, the success, even the
extraordinary success, of a subsidiary will
not suffice in itself to state a claim that the
parent was reckless in failing to further
investigate. Fraud cannot be inferred
simply because [the parent corporation]
might have been more curious or
concerned about the activity at [its
subsidiary].”); In re Comshare, Inc. Sec.
Litig., 183 F.3d 542, 554 (6th Cir. 1999)
(citing Chill for the proposition that courts
“should not presume recklessness or
intentional misconduct from a parent
corporation’s reliance on it subsidiary’s
internal controls”). At worst, the
Complaint alleges little more than
mismanagement. As we have previously
held, such claims “are not cognizable
under federal law.” In re Advanta, 180
F.3d at 540 (citations and internal
quotations omitted); In re Digital Island,
357 F.3d at 332.
Thus, we conclude that plaintiffs’
allegations as stated that (1) defendants
violated GAAP and Alpharma’s revenue
recognition policy, and (2) that employees
within the Brazil division reported these
violations to the company’s headquarters
in New Jersey do not amount to “an
extreme departure from the standards of
ordinary care,” In re Advanta, 180 F.3d at
535, and therefore fail to state Rule 10b-5
claims premised on recklessness.
We turn next to plaintiffs’
allegations as to motive and opportunity.
To summarize, plaintiffs assert that the
existence of scienter is established by the
fact that (1) both the company and three of
the four individual defendants sold shares
of common stock at inflated prices during
the class period, and (2) that all defendants
thus benefitted from the alleged fraud at
the expense of investors. The District
Court rejected these allegations, noting
that (1) Sissener, Alpharma’s largest
shareholder, and thus the one who stood
gain the most from the alleged fraud, sold
no stock during the class period and
therefore failed to benefit from the
fraudulent scheme of which he is alleged
to have been a major participant; and (2)
the Complaint fails to allege how much
stock the individual defendants received as
a portion of their regular compensation.
Having carefully reviewed the
Complaint we similarly reject plaintiffs’
arguments. In so doing, we note, as the
District Court did, that “‘[a] large number
of today’s corporate executives are
compensated in terms of stock and stock
options.’” In re Advanta, 180 F.3d at 541
(quoting In re Burlington Coat Factory,
114 F.3d at 1424). Thus, “‘[i]t follows . .
. that these individuals will trade those
securities in the normal course of events.’”
Id. Although we have recognized that an
inference of scienter may be created when
plaintiffs demonstrate that sales are
“unusual in scope or timing,” id. at 540,
we concluded that the plaintiffs in both In
re Burlington Coat Factory and In re

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18
Advanta failed to establish such an
inference based in part on the fact that
some key insiders sold no stock during the
class period. See In re Burlington Coat
Factory, 114 F.3d at 1423; In re Advanta,
180 F.3d at 540-41.
Here, in addition to the fact that the
company’s controlling shareholder did not
engage in any sales during the class period,
we note that the Complaint fails to allege
that the sales of the remaining three
individual defendants were unusual in
scope (e.g., compared to their total level of
compensation or the size of previous sales)
or timing (e.g., compared to the timing of
past trades).9 The allegations therefore fail
to give rise to a strong inference of
scienter. Thus, we will affirm the District
Court’s refusal to impute knowledge of the
false accounting practices to the individual
defendants based solely upon their stock
sales.
We reach a similar conclusion with
respect to the motive allegations leveled
against the company, which, as defendants
note, could be made against virtually any
for-profit entity. See In re K-Tel Int’l, Inc.
Sec. Litig., 300 F.3d 881, 895 (8th Cir.
2002) (holding that “general allegations of
a desire to increase stock prices, increase
officer compensation or maintain
continued employment are too generalized
and are insufficient” to establish scienter);
Chill, 101 F.3d at 268 (holding that
general motives that can “be imputed to
any publicly-owned, for-profit endeavor,
[are] not sufficiently concrete for purposes
of inferring scienter”); see also In re The
Vantive Corp. Sec. Litig., 283 F.3d 1079,
1097 (9th Cir. 2002) (concluding that a
corporation’s desire to increase its stock
value as part of an acquisition strategy is
an insufficient basis upon which to
maintain a claim for violation of federal
securities laws); In re Nice Systems, Ltd.
Sec. Litig., 135 F. Supp.2d 551, 583-84
(D.N.J. 2001) (same); In re Cendant Corp.
Sec. Litig., 76 F. Supp.2d 539, 548 (D.N.J.
1999) (same) (citing Chill, 101 F.3d at
267). Thus, we conclude that plaintiffs
9Even plaintiffs’ assertion that these
defendants had not sold any stock during
the preceding fifteen months, standing
alone, is insufficient. Defendants assert
that they were precluded from doing so
as a result of a “blackout period” during
which insiders were prohibited from
engaging in such transactions. While we
cannot credit defendants’ explanations at
this stage of the litigation, we note their
argument that the existence of such a
blackout period may be inferred from the
Complaint, which alleges a series of
corporate acquisitions during the class
period. Because the individual
defendants are alleged to have known
about these acquisitions, and thus
possessed material non-public
information, they would have been
prohibited by law from trading during
much of the class period. Moreover,
plaintiffs failed to allege the absence of a
blackout period or other facts which
would demonstrate that the fifteen month
period of inactivity was in any way
unusual.

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19
have similarly failed to allege facts giving
rise to a strong inference of scienter as to
the corporation. We therefore will affirm
the District Court’s dismissal of Count I
for failure to state a claim.
(ii) Plaintiffs’ Section 20(a) Claim
As we have previously noted,
“Section 20(a) imposes joint and several
liability on any person who ‘controls a
person liable under any provision of’ the
[Exchange Act].” Shapiro v. UJB
Financial Corp., 964 F.2d 272, 279 (3d
Cir. 1992). Accordingly, under the plain
language of the statute, plaintiffs must
“prove not only that one person controlled
another person, but also that the
‘controlled person’ is liable under the Act.
If no controlled person is liable, there can
be no controlling person liability.” Id.
Here, the alleged “controlled person” is
Alpharma. Thus, because plaintiffs failed
to state a Rule 10b-5 claim against the
company, its Section 20(a) claim against
the Individual Defendants fails as well.
See Shapiro, 964 F.2d at 279; In re Digital
Island, 357 F.3d at 337. Thus, we also will
affirm the District Court’s dismissal of
Count II for failure to state a claim.
C. Denial of Leave to Amend
Having concluded that the District
Court properly granted defendants’ motion
to dismiss as to both counts, we must now
determine whether the court abused its
discretion by failing to grant plaintiffs
leave to amend the Complaint. Although
Federal Rule of Civil Procedure 15 states
that leave to amend “shall be freely given
when justice so requires,” we have held
that “a District Court may deny leave to
amend on the grounds that amendment
would cause undue delay or prejudice, or
that amendment would be futile.” Oran v.
Stafford, 226 F.3d 275, 291 (3d Cir.
2000); In re Digital Island, 357 F.3d at
337; GSC Partners, F.3d at [34].
Here, the District Court cited
futility, the “significant extensions of
time” already provided to plaintiffs, and
the aim of the PSLRA to filter out weak
claims at the early stages of litigation as
the bases for its denial of leave to amend
and dismissal of the Complaint with
prejudice. Focusing in particular on
futility, the District Court noted that
plaintiffs failed to proffer any proposed
amendment, let alone one that would
satisfy the stringent pleading requirements
which govern Rule 10b-5 claims.
Following careful review of the
record, we conclude that this was not an
abuse of discretion. As we have
previously held, “‘[f]utility’ means that the
complaint, as amended, would fail to state
a claim upon which relief could be
granted.” In re Burlington Coat Factory,
114 F.3d at 1434. Thus, “[i]n assessing
‘futility,’ the district court applies the same
standard of legal sufficiency as applies
under Rule 12(b)(6).” Id.
Had plaintiffs satisfied the
requirements of the PSLRA and merely
failed to allege facts with sufficient
particularity under Federal Rule of Civil
Procedure 9(b) we would be presented
with a closer issue. See id. at 1435.
However, because plaintiffs (1) failed to

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20
satisfy the stringent pleading requirements
of the PSLRA, and thus failed to state a
claim under federal securities law, and (2)
failed to propose an amendment that
would satisfy these requirements, we agree
that leave to amend would be futile.
Moreover, we note, as the District Court
did, that its denial of leave to amend is
further supported by the fact that plaintiffs
(1) had already filed previous complaints
and (2) were given an extension of time to
assemble the amended consolidated
complaint currently at issue. See id. Thus,
we will affirm the District Court’s denial
of leave to amend and dismissal of the
Complaint with prejudice.
V. Conclusion
For the reasons stated above, we
will affirm the final judgment of the
District Court.

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