Goldstein v. MCI Worldcom

• Court: Court of Appeals for the Fifth Circuit
• Decided: August 25, 2003
• Docket: 02-60322
• Status: Published

Opinion

United States Court of Appeals Fifth Circuit F I L E D REVISED AUGUST 25, 2003 July 28, 2003 IN THE UNITED STATES COURT OF APPEALS Charles R. Fulbruge III Clerk FOR THE FIFTH CIRCUIT

_____________________

No. 02-60322 Cons w/ 03-60248 _____________________

HARRIET GOLDSTEIN; ET AL

Plaintiffs

MICHAEL SABBIA; WAYNE COUNTY EMPLOYEES RETIREMENT SYSTEM; DAVID KLEIN; SIMMS FAMILY

Plaintiffs - Appellants

v.

MCI WORLDCOM; BERNARD J EBBERS; SCOTT SULLIVAN

Defendants - Appellees

_________________________________________________________________

Appeals from the United States District Court for the Southern District of Mississippi _________________________________________________________________

Before KING, Chief Judge, and REAVLEY and STEWART, Circuit Judges.

KING, Chief Judge:

Shareholders of WorldCom Corporation (now known as MCI

WorldCom) appeal from the dismissal with prejudice of their

consolidated amended complaint pursuant to Federal Rule of Civil

Procedure 12(b)(6) and the Private Securities Litigation Reform

1 Act, 15 U.S.C. §§ 78u-4, and from the district court’s denial of

their Federal Rule of Civil Procedure 60(b) motion for relief from

judgment. We agree with the district court that the plaintiffs’

complaint against the defendants Bernard J. Ebbers and Scott D.

Sullivan does not adequately plead scienter in conformity with the

Reform Act, Rule 9(b) of the Federal Rules of Civil Procedure and

controlling case law interpreting each, and we affirm the district

court’s judgment insofar as it dismissed the complaint against

Ebbers and Sullivan. We also affirm the denial of the plaintiffs’

Rule 60(b) motion for relief from the judgment in favor of Ebbers

and Sullivan.

I.

INTRODUCTION OF THE SINGLE CLAIM ON APPEAL

Now a global telecommunications company with operations in

sixty-five countries, MCI WorldCom (“WorldCom”) began as a small

Mississippi company, Long Distance Discount Services, Inc., formed

in 1983 and licensed from 1983 to 1985 to provide long distance

services only to Mississippi businesses and residents. Beginning

in 1984, under the direction of its chief executive officer,

defendant Bernard J. Ebbers, this local long distance company

acquired other telecommunications companies at a phenomenal pace,

making over sixty acquisitions in just fifteen years. In line with

a strategy of growth by acquisition, in September 1998, WorldCom

purchased MCI Communications Corporation in what was then the

2 largest corporate merger ever, valued at approximately $40 billion.

With this acquisition, WorldCom became the second largest

telecommunications company in the world, behind only AT&T.

Relevant for the purposes of this controversy, in October 1999,

WorldCom announced its plan to enter into a stock-for-stock merger

with Sprint, then the third largest telecommunications company in

the United States, in a deal valued at $129 billion; however, on

July 13, 2000, WorldCom announced that federal regulators had

rejected the planned merger.

Further adverse developments ensued, and by late April 2002,

the independent members of the board of directors had called for

Ebbers’ resignation. Additionally, on June 25, 2002, WorldCom

publicly disclosed that it had discovered substantial accounting

irregularities that would require it to restate financial

statements for 2001 and the first quarter of 2002. On this same

date, WorldCom’s board of directors also terminated its former

chief financial officer and then executive vice president,

defendant Scott D. Sullivan. Approximately four weeks later, on

July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.

This suit involves the alleged conduct of WorldCom, Ebbers and

Sullivan during only a small (and somewhat early) period (the

“class period”) in WorldCom’s demise – February 10 to November 1,

2000 - when the plaintiffs purchased WorldCom stock. Further, on

appeal, we are called upon to address only one claim of fraud –

that Ebbers and Sullivan knowingly or with severe recklessness

3 failed to direct the write-off of millions of dollars worth of

uncollectible accounts, resulting in material misrepresentations

and omissions in WorldCom’s financial statements and communications

with shareholders and the investing public in violation of the

Securities Exchange Act of 1934 (the “1934 Act”), all in order to

inflate WorldCom’s stock price artificially for the pending Sprint

merger. Bearing this limited scope in mind, we briefly set forth

the procedural background to this case.

II.

PROCEDURAL BACKGROUND

On October 26, 2000, WorldCom issued a press release

reporting, for the first time, that due to bankruptcies by

seventeen of its wholesale customers, WorldCom had decided to write

off $685 million pre-tax ($405 million after-tax) in receivables –

a write-off that plaintiffs allege was stalled fraudulently to

inflate WorldCom’s financials. The announcement resulted in a drop

in the stock price from $25.25 (on trading volumes of approximately

40 million) to $21.75 (on trading volumes of nearly 67 million).

Following this announcement, on November 7, 2000, several

lawsuits were filed in Mississippi, New York and Washington D.C.

These actions were consolidated with this case (in Mississippi) on

March 27, 2001. Lead plaintiffs were thereafter selected, notice

to potential class claimants was provided, and on June 1, 2001, the

lead plaintiffs filed the consolidated amended complaint (the

4 “complaint”) on behalf of all persons who purchased or otherwise

acquired the securities of WorldCom during the class period, i.e.,

between February 10 and November 1, 2000.1

The 110-page, 285-paragraph complaint makes numerous

allegations of corporate malfeasance on the part of WorldCom,

Ebbers and Sullivan, together with violations of Section 10(b) of

the 1934 Act, Securities and Exchange Commission (“SEC”) Rule 10b-5

promulgated thereunder (17 C.F.R. § 240.10b-5), and Section 20(a)

of the 1934 Act.

Relevant for the purposes of this appeal are the allegations

that WorldCom’s uncollectible receivables “skyrocketed” during the

class period, in part, because the defendants allowed over $500

million of “worthless” accounts receivable to remain on the books,

and, consequently, to be inaccurately reflected in WorldCom’s

financials and public statements. This alleged modus operandi of

failing to write off clearly uncollectible accounts receivable

during the class period resulted from the defendants’ desire to

avoid attracting negative attention while federal regulators

considered the Sprint merger and to ensure that the stock-for-stock

deal was completed on the most favorable terms possible to

WorldCom.

On August 8, 2001, the defendants filed a motion to dismiss

the plaintiffs’ complaint. In their motion, the defendants argued

1 The class has not yet been certified.

5 that the plaintiffs’ “puzzle pleading” was insufficient to satisfy

the “rigorous” pleading requirements of the Private Securities

Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4 and

78u-5 (2000), as interpreted by this court. Although the

plaintiffs defended their complaint as compliant with applicable

pleading standards, they reflexively sought leave of the court to

amend their complaint to cure pleading deficiencies.

On March 29, 2002, the district court granted the defendants’

motion and dismissed the plaintiffs’ complaint with prejudice. On

this same date, it entered final judgment in favor of the

defendants. On April 5, 2002, the plaintiffs timely filed an

appeal of the judgment to this court; however, while the appeal was

pending, WorldCom, but not Ebbers and Sullivan, voluntarily filed

for Chapter 11 bankruptcy protection. After receipt of a

“suggestion of bankruptcy,” this court determined that the

bankruptcy stay of proceedings (11 U.S.C. § 362) extended only to

WorldCom and not to Ebbers and Sullivan. Goldstein v. MCI

WorldCom, No. 02-60322, at *4 (5th Cir. October 28, 2002).

In consideration of the bankruptcy filing and the events

leading up to the bankruptcy filing, on August 23, 2002, the

plaintiffs filed, in the district court, a motion for relief from

judgment based on certain “newly discovered” evidence. On March 5,

2003, the district court denied the plaintiffs’ Rule 60(b) motion.

The plaintiffs thereafter timely appealed this denial. We granted

the plaintiffs’ motion to expedite this appeal and consolidated the

6 two WorldCom appeals pending before us.

It bears emphasizing that because of the stay applicable to

proceedings against WorldCom, these appeals proceed only as to

claims against Ebbers and Sullivan.

III.

ANALYSIS OF THE PLAINTIFFS’ CLAIM

The only claim against Ebbers and Sullivan the plaintiffs seek

to salvage on appeal is that claim related to misrepresentations

and omissions in WorldCom’s financial statements and other

statements to the public resulting from Ebbers’ and Sullivan’s

alleged severe recklessness in failing to write off over $500

million of uncollectible accounts receivable. As to this claim,

the district court ruled that the plaintiffs had not pleaded facts

giving rise to a “strong inference of scienter” on the part of

Ebbers and Sullivan.

We review the district court’s dismissal de novo, Abrams v.

Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002), accepting

the facts alleged in the plaintiffs’ complaint as true and

construing their allegations in the light most favorable to them.

Id. However, we will not “strain to find inferences favorable to

the plaintiff[s].” Westfall v. Miller, 77 F.3d 868, 870 (5th Cir.

1996).

Before delving into the specific allegations of scienter

pleaded in the complaint here, we set forth the pleading standards

7 required to withstand a motion for dismissal of a securities action

governed by the PSLRA.

A. Section 10(b), Rule 10b-5 and Pleading Requirements under the PSLRA

In their complaint, the plaintiffs allege violations of

section 10(b) of the 1934 Act and SEC Rule 10b-5 (promulgated by

the SEC under section 10(b) of the 1934 Act).2 It is well-settled

2 Section 10(b) provides in relevant part:

It shall be unlawful for any person, directly or indirectly . . .

(b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b) (2000). Rule 10b-5 provides in relevant part:

It shall be unlawful for any person, directly or indirectly . . .

(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 . . . in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5 (2001). The plaintiffs also sought relief under section 20(a) of the 1934 Act. This section provides in relevant part:

Every person who, directly or indirectly, controls any person liable under any provision of this chapter . . . shall also be liable jointly and severally with and to the same extent as such controlled person.

8 that, “[i]n order to state a claim under section 10(b) of the 1934

Act and Rule 10b-5, a plaintiff must allege, in connection with the

purchase or sale of securities, ‘(1) a misstatement or an omission

(2) of material fact (3) made with scienter (4) on which the

plaintiff relied (5) that proximately caused [the plaintiff’s]

injury.’” Nathenson v. Zonagen, Inc., 267 F.3d 400, 406-07 (5th

Cir. 2001) (quoting Tuchman v. DSC Communications Corp., 14 F.3d

1061, 1067 (5th Cir. 1994)).

In 1995, Congress amended the 1934 Act through the passage of

the PSLRA. As we have stated, the PSLRA imposes procedural

pleading requirements on plaintiffs pursuing private securities

fraud actions. In relevant part, the PSLRA, 15 U.S.C.

§ 78u-4(b)(1), provides that:

In any private action arising under this chapter in which the plaintiff alleges that the defendant--

(A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

15 U.S.C. § 78t(a). However, the plaintiffs did not specifically appeal the dismissal of this count. We thus do not address it here. 9 Additionally, Rule 9(b) of the Federal Rules of Civil Procedure,

which we have interpreted to apply to securities fraud claims,

Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997),

states that “[i]n all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with

particularity." FED. R. CIV. P. 9(b).

In ABC Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336

(5th Cir. 2002), we coalesced the pleading requirements in the

PSLRA and Rule 9(b) into a succinct directive for litigants:

To summarize, a plaintiff pleading a false or misleading statement or omission as the basis for a section 10(b) and Rule 10b-5 securities fraud claim must, to avoid dismissal pursuant to Rule 9(b) and 15 U.S.C. §§ 78u-4(b)(1) & 78u-4(b)(3)(A):

(1) specify the [sic] each statement alleged to have been misleading, i.e., contended to be fraudulent; (2) identify the speaker; (3) state when and where the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent.

This is the “who, what, when, where, and how” required under Rule 9(b) in our securities fraud jurisprudence and under the PSLRA.

Id. at 350.

B. Pleading Scienter under the PSLRA

Here, the central issue is whether the plaintiffs have pleaded

the scienter element of their claims with requisite specificity.

10 “Scienter” is “a mental state embracing intent to deceive,

manipulate, or defraud,” Ernst & Ernst v. Hochfelder, 425 U.S.

185, 193 n.12 (1976). Although scienter is not explicitly

mentioned in the text of Rule 10b-5 or section 10(b), it has been

interpreted to be an essential element of these claims. Id. In

Nathenson, we stated that the plain language of the PSLRA makes

clear that our previous rule, which required that a plaintiff plead

facts that merely “support an inference of fraud,” had been

supplanted by the PSLRA’s “strong inference” requirement. 267 F.3d

at 407. We therefore held that “in order to survive a motion to

dismiss, a plaintiff alleging a section 10(b)/Rule 10b-5 claim must

now plead specific facts giving rise to a ‘strong inference’ of

scienter.” Id.

We cautiously clarified, however, that “[i]t seems clear to us

that the PSLRA has not generally altered the substantive scienter

requirement for claims brought under section 10(b) and Rule 10b-5.”

Id. at 408 (emphasis added). We therefore joined those courts of

appeals concluding that “severe recklessness” still constitutes

scienter for purposes of claims brought under section 10(b) and

Rule 10b-5, as was the law in this circuit before the PSLRA

amendments. Therefore, post-PSLRA, plaintiffs can demonstrate

scienter by a showing of “severe recklessness” – defined as:

[L]imited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of

11 misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.

Id. (quoting Broad v. Rockwell, 642 F.2d 929, 961 (5th Cir. 1981)

(en banc)). Thus our task here is to review the complaint with a

view to determining whether the allegations of fraud contained in

the complaint are sufficiently connected to Ebbers and Sullivan

such that a strong inference of scienter on their part is

appropriate.

(1) Circumstantial Evidence

In this review, we are aided by several basic principles.

First, “there does not appear to be any question that under the

PSLRA circumstantial evidence can support a strong inference of

scienter.” Nathenson, 267 F.3d at 410. Thus, factual settings

like that confronted by the Second Circuit in Novak v. Kasaks, 216

F.3d 300 (2d Cir. 2000), do not constitute an evidentiary floor

under the PSLRA. There, the plaintiff investors pleaded facts

demonstrating that certain management officials of the defendant

retail store, Ann Taylor, acted intentionally and deliberately to

inflate the company’s reported financial results artificially by

knowingly sanctioning fraudulent inventory management practices.

Id. at 304. Specifically, the complaint particularized, through

direct evidence, the individual defendants’ involvement in a “box

and hold” cover-up scheme whereby out-of-date inventory that

constituted as much as 34% of the total inventory was stored in

12 several warehouses during the class period deliberately to avoid

markdowns. Id.

While this court has agreed that the direct evidence of intent

particularized in the Novak complaint certainly meets the

procedural prerequisites of the PSLRA, Abrams, 292 F.3d at 432-33,

we have never required a plaintiff to present direct evidence of

scienter in order to withstand dismissal of his securities claims.

Allegations of circumstantial evidence justifying a strong

inference of scienter will suffice. See, e.g., Nathenson, 267 F.

3d at 424-25 (holding that “the necessary strong inference of

scienter” was pleaded as to the president, chief executive officer,

and director defendant, in part, because of his heavy involvement

in the day-to-day operations of a small company); see also Rothman

v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (concluding that “the

magnitude of the write-off renders less credible the proposition

that during the [] Class Period, [the defendant] believed it likely

that it could recover those royalty advances through future

sales”).

(2) Motive and Opportunity

Second, as to the status of whether allegations of motive and

opportunity can create the necessary strong inference of scienter,

a question which has notably divided the courts of appeals which

have addressed it, we have concluded that “[a]ppropriate

allegations of motive and opportunity may meaningfully enhance the

strength of the inference of scienter,” but that allegations of 13 motive and opportunity, without more, will not fulfill the pleading

requirements of the PSLRA. Nathenson, 267 F.3d at 412.

(3) Totality of the Circumstances

Finally, we consider all the facts and circumstances alleged

to determine whether they, in toto, raise a requisite strong

inference of scienter. Abrams, 292 F.3d at 430; Nathenson, 267

F.3d at 410. This rule is evident from our discussion in

Nathenson. There, plaintiff shareholders brought a class action

lawsuit against a Texas-based biopharmaceutical company, its CEO,

and two outside directors alleging that these defendants made a

series of misrepresentations about two of its potential products

awaiting approval by the Food and Drug Administration in order to

inflate the company’s share price artificially. 267 F.3d at 405.

The district court dismissed the plaintiffs’ complaint. Id. at

406. As to the majority of the plaintiffs’ claims, we agreed with

the district court that dismissal was appropriate. Id. at 426.

However, we found error in the district court’s dismissal regarding

the allegation that the defendant company and the defendant CEO

represented that its newly acquired patent (known as the Zorgniotti

patent) covered the company’s use of Vasomax, a potential drug

product going through the FDA approval process, when the totality

of the circumstances, as alleged, provided a strong inference that

these defendants knew otherwise but wanted to inflate their

company’s share price. In so doing, we stated:

[T]here are a number of special circumstances here which, 14 taken together, suffice to support a [strong inference of scienter]. To begin with, [the company] was essentially a one product company, and that product was Vasomax. Thus . . . “the Company’s future prospects [were] substantially dependent on” Vasomax . . . Further, the patent protection for Vasomax was obviously important . . . [The defendant CEO] is quoted as describing the approval of the Zorgniotti patent as a “crucial event[].” Additionally, the Company had acquired the Zorgniotti patent application in April 1994, so there was ample opportunity to become familiar with it prior to June 1996. In this connection, we also note that the Company is not large. As reflected by its 10K’s filed April 1, 1996 and March 31, 1997, the Company had only thirty-two full time employees in January 1996 and only thirty-five in January 1997. Finally, the Company’s June 24, 1996 and November 6, 1996 press releases, which describe the Zorgniotti patent, both quote [the CEO], and an article in the issue of Fortune distributed in mid-February 1998, states: “[i]n a recent interview, [the CEO] concedes, ‘You can say today no patent specifically covers Vasomax;’ he claims the company’s issued patent ‘broadly covers’ the drug.” Taking all the above factors together we conclude that they suffice, if perhaps barely so, to support the necessary “strong inference” of scienter on the part of [the CEO] and [the company] with respect to the statements that the Zorgniotti patent covers [the company’s] use of Vasomax.

Id. at 425 (internal footnotes omitted). Thus, as taught by

Nathenson (and reaffirmed in Abrams), we must consider any evidence

of scienter pleaded by the plaintiffs cumulatively.

C. The Plaintiffs’ Complaint – Public Statements by Ebbers and Sullivan

The complaint alleges that material statements and omissions

were made by Ebbers and Sullivan allegedly in connection with the

following financial statements and public statements: (1)

WorldCom’s fourth quarter 1999 and year-end results issued on

15 February 10, 2000, the press release reporting these results, and

the conference call for the investing community, including

analysts, held by WorldCom on this same date; (2) WorldCom’s Annual

Report, sent to shareholders in March 2000, the letter from Ebbers

included in this report, and WorldCom’s Annual Report on Form 10-K

for fiscal year 1999, filed on March 30, 2000; (3) WorldCom’s press

release reporting financial results for the first quarter of fiscal

year 2000, the quarter ended March 31, 2000, which was issued on

April 27, 2000, and the conference call for the investing

community, including analysts, held by WorldCom on this same date;

(4) WorldCom’s quarterly report on Form 10-Q, for the period ended

March 31, 2000, filed on May 15, 2000; (5) WorldCom’s Prospectus,

alleged to have been filed on May 22, 2000; (6) WorldCom’s press

release announcing results for the second quarter of fiscal year

2000, the period ended June 30, 2000, issued on July 27, 2000, and

analysts, held on this same date; and (7) WorldCom’s quarterly

report on Form 10-Q, for the period ended June 30, 2000.

Regarding these numerous financial statements and public

statements to the investing community, including analysts, the

complaint maintains that Ebbers and Sullivan knew or were severely

reckless in disregarding that a material amount of accounts was

uncollectible when strong growth in revenue and profitability was

reported by them in these statements. During the February 10, 2000

conference call, for example, Ebbers is alleged to have emphasized

16 WorldCom’s success in 1999 by stating that “[f]or five quarters

we’ve delivered the synergies ahead of schedule,” that “EBITDA

margins improved by 52% to 35.5% of revenues and added $2.6 billion

of net income in 1999,” and that “[c]ash earnings grew to $5.1

billion or $1.73 per share, and we accomplished that exceptional

growth in profitability while adding nearly $4.7 billion of

incremental revenue.” During this same conference call, Sullivan

is likewise alleged to have stated that:

[W]e earned a solid 42 cents from operations in the fourth quarter . . . [W]e produced solid double-digit revenue growth in the fourth quarter . . . Based upon where we exited 1999 we feel every bit of confidence for 2000 analysts’ expectations, top to bottom. This was another solid quarter for MCI WorldCom. The Company posted another quarter of increased profitability resulting from effective merger synergy execution as well as strong double-digit revenue gains . . . Fourth quarter net income nearly tripled compared to fourth quarter of 1998, while operating income more than doubled. EBITDA margins expressed as a percentage of revenues jumped over 11 percentage points during the period to over 37% . . . We significantly increased our profitability and the quality of our earnings.

The falsity of these allegedly material statements and omissions is

not at issue on appeal. We nevertheless briefly set forth the

complaint’s allegations that these statements were false.

D. Allegations that these Statements Were False

Assurances accompanied WorldCom financial statements to the

effect that such statements were prepared in accordance with

generally accepted accounting principles (“GAAP”) and that, in the

opinion of management, the financial statements fairly represented

17 WorldCom’s financial position and results. GAAP (FASB Statement

No. 5, par. 3) state that an estimated loss from a loss contingency

“shall be accrued by a charge to income” if (i) information

available prior to issuance of the financial statements indicated

that it is probable that an asset had been impaired or a liability

had been incurred at the date of the financial statements and (ii)

the amount of the loss can be reasonably estimated.3 The

plaintiffs allege that when each of the cited statements touting

the growth in revenues and income of WorldCom was made, WorldCom’s

revenue growth was experiencing a negative downturn and financial

results were being falsely inflated by failing to establish proper

and timely reserves for accounts receivable that were clearly

uncollectible and “estimable.”

Regulation S-X (17 C.F.R. § 210.4-01(a)(1)), cited in the

plaintiffs’ complaint, states that financial statements that are

not prepared in conformity with GAAP are presumed to be misleading

and inaccurate. The plaintiffs point to this in support of their

contention that the above listed statements were false and

3 Included in the complaint is a citation to APB Opinion No. 28, Interim Financial Reporting, which states that this GAAP requirement also applies to interim financial statements:

The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Examples of such items include . . . allowance for uncollectible accounts. 18 misleading at the time they were made. In further support, the

complaint itemizes eleven large accounts receivable and four

smaller accounts receivable that, as allegedly detailed in monthly

WorldCom reports, had been uncollectible for years when the

earliest of these statements were made.

As did the district court, we assume as true the complaint’s

allegations of false statements or omissions stemming from the

failure to write off uncollectible accounts receivable.

E. Scienter Allegations

Under the PSLRA, it is not enough to particularize false

statements or fraudulent omissions made by a corporate defendant.

Plaintiffs must also particularize intent allegations raising a

“strong inference of scienter.” The critical issue in this case is

whether the allegations of fraud contained in the plaintiffs’

complaint are sufficiently connected to Ebbers and Sullivan such

that this strong inference of scienter on their part is

appropriate. In the complaint, the plaintiffs state that as of

February 10, 2000, Ebbers and Sullivan were aware of the existence

of “no less than $685 million of grossly delinquent, disputed and

uncollectible receivables” but “knowingly permitted the Company’s

balance sheets to reflect [these] grossly delinquent, disputed, and

uncollectible receivables . . . and knowingly permitted the

Company’s income statements to fail to reflect a charge to earnings

to reflect the write-off of these receivables.” In support of this

allegation, the plaintiffs point to several pieces of 19 circumstantial evidence that they claim, together, sufficiently

meet the “strong inference of scienter” requirement. However, as

discussed in detail below, the plaintiffs’ motive allegations,

without more than is found in this complaint, are insufficient to

satisfy the “strong inference of scienter” requirement.

(1) Motive and Opportunity

First, the plaintiffs cite to what they characterize as

“monumental” motive and opportunity evidence stemming from the

Sprint merger, and, as to Ebbers individually, Ebbers’ compensation

package. As alleged by the plaintiffs, the defendants initially

sought to avoid taking a charge for uncollectible accounts

receivable until the Sprint merger was approved by Sprint and

WorldCom shareholders; then, once Sprint and WorldCom shareholders

approved the merger, the defendants thereafter continued to issue

artificially inflated results to ensure the deal was completed on

terms most favorable to WorldCom.4 However, in September 2000,

after the Sprint merger was rejected by federal regulators (on July

13, 2000) and after alleged substitute merger plans with Intermedia

were blocked by unexpected legal hurdles,5 the defendants allegedly

4 As alleged in the plaintiffs’ complaint, the “Sprint deal involved a stock swap based on an average closing price for WorldCom stock. Accordingly, the higher WorldCom’s stock price, the less dilution would be generated from the merger – eliminating a material, negative impact on the Company’s earnings per share.” 5 Intermedia is an Internet-services company. On September 5, 2000, WorldCom announced its intent to merge with Intermedia. As with the Sprint merger, WorldCom is alleged to 20 “could no longer hide” the uncollectible accounts receivable

problem through a merger. Therefore, allegedly as a result of

these circumstances, in September 2000, assistant controller Steven

Rubio for the first time pushed WorldCom’s legal group in Tulsa to

write off the huge backlog of uncollectibles, stating “get [the]

stuff off the books.” Ten weeks after this directive, WorldCom

announced the write-off of $405 million (after tax) of

uncollectible receivables.

The plaintiffs cite further motive evidence related

specifically to Ebbers. As alleged, Ebbers’ compensation largely

depended on WorldCom’s reported financial results and stock price

appreciation. More importantly for purposes of demonstrating a

strong inference of scienter, the plaintiffs allege that if

WorldCom’s stock price dropped “significantly,” Ebbers stood to

lose millions in compensation and, if Ebbers’ compensation

underwent a “materially adverse” change, certain personal loans –

which were secured by Ebbers’ shares of WorldCom stock – would

immediately become due. For example, in the complaint, the

plaintiffs cite to Ebbers’ personal obligations to Bank of America,

including a $36 million loan and a $25 million loan, which would

become due and payable upon an event of default, which included,

among other things, any materially adverse change in Ebbers’

compensation package from WorldCom.

have intended to complete the deal using its own stock as currency. 21 The defendants strive vigorously to characterize the Sprint

merger as a “routine corporate event.” However, like the

dependence of the future prospects of the company in Nathenson on

the success of the potential drug Vasomax, the allegations here

sufficiently demonstrate the importance of the Sprint merger to

WorldCom. While WorldCom characteristically engaged in numerous

mergers and reverse-mergers, there was little “routine” about the

Sprint merger. Ebbers himself promoted the Sprint merger as a

“crucial event” for the future of WorldCom.

The motive evidence related to Ebbers individually is likewise

not “without merit.” Since Ebbers’ loans from outside lenders,

such as the Bank of America loans, were collateralized by his

WorldCom stock, if the value of the stock declined such that his

compensation package (including bonuses dependent on the

appreciation of WorldCom stock) underwent a materially adverse

change, Ebbers would have to sell his WorldCom stock immediately to

repay these obligations. As alleged, this forced sale situation

would have a substantial negative impact on the value of Ebbers’

WorldCom stock and thus served as a strong and unique incentive for

Ebbers to “inflate” WorldCom’s stock price artificially.

While, at least as to Ebbers individually, we find these

allegations of motive and opportunity sufficiently particularized,

as we stated in Abrams, our court requires more than allegations of

motive and opportunity to withstand dismissal. To this end, we

discuss the plaintiffs’ allegations of other circumstantial

22 evidence of scienter below.

(2) Other Circumstantial Evidence of Scienter

In addition to allegations of motive and opportunity, the

plaintiffs also point to allegations of circumstantial evidence

claimed to support a “strong inference of scienter.” These

allegations relate to: (1) the timing of the write-off, which

indisputably occurred after the failed Sprint merger and the failed

substitute Intermedia merger; (2) the magnitude of the write-off,

which was, pre-tax, 62% of the total reserves balance and 28% of

the net income for the third quarter of fiscal 2000; (3) Ebbers’

close involvement in the day-to-day operation and management of

WorldCom; and (4) Ebbers’ and Sullivan’s positions in WorldCom,

including their alleged decision-making roles in writing off

uncollectible accounts.

Upon review, we agree with the district court’s assessment of

the allegations of circumstantial evidence here. The allegations

fall short of meeting the “strong inference of scienter”

requirement as to Ebbers and Sullivan.

As to the timing of the write-off, the plaintiffs’ complaint

fails to connect Ebbers or Sullivan to the statement by Rubio in

September 2000 (approximately three months after the Sprint merger

failed) to “get [the] stuff off the books.” Thus, the plaintiffs’

argument that the timing of Rubio’s instruction is circumstantial

evidence that Ebbers and Sullivan were motivated by the Sprint

merger to avoid making necessary write-offs is not supported by 23 their allegations. Moreover, as to the magnitude of the write-

off, the plaintiffs simply ignore evidence that WorldCom frequently

took large write-offs, and that, indeed, a $768 million write-off

had been taken in 1999. Bare conclusory allegations that Ebbers

and Sullivan must have known about the accounts receivable problem

simply because a large write-off was made, at least in the case of

a company of this magnitude, will not suffice under the PSLRA.

Similarly, the plaintiffs’ general allegation that Ebbers was a

“hands-on” CEO and therefore must have been aware of the accounts

receivable situation simply lacks the requisite specificity.

The plaintiffs primarily focus on the last category of

circumstantial evidence claimed to demonstrate scienter on the part

of Ebbers and Sullivan – that Ebbers’ and Sullivan’s decision-

making roles in the write-off process demonstrate, at the very

least, that with severe recklessness they disregarded the accounts

receivable problem. However, regarding this allegation, the

complaint describes a confusing procedure for writing off

delinquent accounts and completely fails to connect Ebbers or

Sullivan to the write-off procedure in a manner that demonstrates

involvement in the initiation of write-offs. We see these

shortcomings in the complaint as critical regarding the ability of

the complaint to survive dismissal.

As alleged, the legal department in Tulsa (consisting of six

employees) frequently prepared a list of delinquent accounts. A

copy of this list was sent each month to certain financial

24 officers, including: Steven Rubio, the assistant controller based

in Atlanta, Georgia; David Myers, the company controller based in

Clinton, Mississippi; and John Krummel, president of wholesale

services, based in Tulsa, Oklahoma. These lists allegedly

contained the duration of an account’s delinquency, the size of the

account, and the circumstances surrounding the delinquency (such as

whether the company was in litigation or bankruptcy or had

undergone a merger). In an effort to show an awareness on the part

of Ebbers and Sullivan regarding the existence of delinquent

accounts, the complaint alleges that David Myers, who was on the

distribution list for this monthly report, reported directly to

Ebbers and Sullivan. Other than this single allegation, however,

the complaint does not connect Ebbers or Sullivan to the reports.

For example, the plaintiffs do not allege that Myers ever presented

or discussed these reports with Ebbers or Sullivan. We agree with

the district court that the PSLRA standards, as interpreted by this

court, do not entitle the plaintiffs to make a conclusory

assumption that simply because a monthly report was generated and

distributed to an individual who reported to Ebbers and Sullivan,

Ebbers or Sullivan had knowledge of certain delinquent account

information which may appear in monthly reports.

The complaint’s presentation of WorldCom’s confusing system of

writing off delinquent accounts further convinces us that the

allegations here do not support a “strong inference of scienter” on

the part of Ebbers or Sullivan. As set forth in the plaintiffs’

25 complaint, management approval was an express requirement for the

completion of any write-off – Bob Vetera was designated to approve

write-offs up to two million dollars, David Myers was designated to

approve most other write-offs in excess of two million dollars, and

Ebbers was designated to approve write-offs in excess of fifteen or

twenty million dollars. However, as further alleged, management

could only approve a write-off after the legal department completed

the separate process of documenting why a write-off was necessary

and then requesting write-off approval from the officer

specifically designated to approve the write-off. Thus, in

contrast to the plaintiffs’ arguments on appeal, their complaint

clearly describes a structure where write-offs are initiated by the

legal department, not management, much less Ebbers and Sullivan

individually.

Moreover, the complaint itself characterizes the write-off

process as “cumbersome” and states that it was often ignored in the

legal department, not because of some overarching directive by the

defendants, but because of the unwieldy process. For example, the

complaint states that:

In order to complete a write-off, an employee had to go into the billing platform, fill out specific forms, write a memorandum to management explaining why the write-off was necessary, and seek express management approval. Although monthly reports were prepared informing management of accounts in litigation and bankruptcy, actual write-offs were not done in a timely fashion because the process was cumbersome. According to the Supervising Paralegal, the legal group would generally “put the accounts back on the shelf somewhere and say

26 when we have some time we’ll do them.”

With a complaint specifically describing a process that was

difficult to follow (and admittedly much easier to ignore) and a

system that allegedly called for write-offs to be initiated from

the legal department rather than upper management, much less Ebbers

or Sullivan, we cannot agree that this complaint specifically

alleges facts demonstrating a “strong inference of scienter” as to

Ebbers and Sullivan. For example, the complaint fails to allege

that Ebbers ever actually received a write-off request, delayed

responding to a write-off request, or rejected a request to write-

off a delinquent account.

Additionally, after discussing the centralized legal group in

Tulsa as controlling the information on all delinquent accounts and

initiating any write-off of a delinquent account, the complaint

confusingly switches gears to refer to four receivable centers

(located in Dallas, San Antonio, Denver, and Atlanta) that are

apparently charged with managing the collection of account

receivables for key business accounts. However, the complaint does

not differentiate between the accounts handled by these centers and

those handled by the legal group in Tulsa, nor does it inform us

whether the accounts handled by these receivable centers are

included in the monthly reports generated by the legal department.

In sum, the complaint’s description of the process for handling

delinquent accounts depicts a mismanaged accounts receivable

27 situation handled by many far-flung departments that frequently,

without direction from upper management, simply ignored initiating

the write-off of delinquent accounts receivable. These allegations

are insufficient to meet the PSLRA’s strict requirements for

pleading scienter on the part of Ebbers and Sullivan.

The plaintiffs claim that Ebbers and Sullivan made statements

to the public regarding the financial growth of WorldCom when they

knew or recklessly disregarded that millions of dollars’ worth of

uncollectible accounts receivable were being kept on the books. In

order to particularize their complaint to demonstrate a strong

inference of scienter as to this kind of claim, the plaintiffs must

tie Ebbers and Sullivan to the allegedly delinquent and

uncollectible accounts. The complaint fails to include allegations

of this nature.

Our decision in Abrams guides this determination. There, the

plaintiff shareholders brought suit against a Houston-based oil and

gas services company, the company’s chief operating officer and its

chief financial officer, contending that the defendants inflated

the stock price of the company artificially by failing to write-off

millions-of-dollars’ worth of uncollectible accounts receivable,

make necessary inventory write-downs, and account for certain

employee compensation. Abrams, 292 F.3d at 427, 429. The

plaintiffs’ allegations were based on circumstantial evidence of

scienter, including: (1) that the individual defendants (the CEO

and CFO) received daily, weekly, and monthly financial reports that

28 apprised them of the company’s true financial status; (2) that the

defendants violated GAAP and the company’s own accounting and

operating procedures; (3) that the defendants were motivated by a

need to raise additional capital, a desire to protect their

incentive compensation, and insider stock sales; and (4) the timing

of the resignation of key accounting officials. Id. at 431-32.

The district court granted the defendants’ motion to dismiss and we

affirmed. Id. at 435. In so doing, we found the plaintiffs’

pleading insufficient to demonstrate a strong inference of

scienter:

[T]he[] allegations fail to reach the required standard. Plaintiffs point to no allegations that the defendants knew about the internal control problems, only that they should have known based on their corporate positions within the company . . . The plaintiffs’ allegations regarding non-specific internal reports are also inadequate. An unsupported general claim about the existence of confidential corporate reports that reveal information contrary to reported accounts is insufficient to survive a motion to dismiss. Such allegations must have corroborating details regarding the contents of allegedly contrary reports, their authors and recipients. Also the mere publication of inaccurate accounting figures or failure to follow GAAP, without more, does not establish scienter. The party must know that it is publishing materially false information, or must be severely reckless in publishing such information. The plaintiffs point to no specific internal or external report available at the time of the alleged misstatements that would contradict them.

Id. at 432 (internal footnotes omitted).

As in Abrams, because the complaint here presents what could

best be described as allegations of mismanagement of WorldCom’s

29 accounts receivable situation, perhaps even gross mismanagement, by

several individuals in charge of handling the accounts rather than

severe recklessness by Ebbers and Sullivan individually, we uphold

the dismissal of the complaint by the district court.

IV.

ANALYSIS OF THE PLAINTIFFS’ REQUEST TO AMEND

At the end of their responsive briefing to the defendants’

motion to dismiss, the plaintiffs requested leave of the district

court to amend their complaint. In full, this general request

states:

Should this Court find that the Complaint is insufficient in any way, however, plaintiffs respectfully request leave to amend.

The Fifth Circuit recognizes that leave to amend shall be freely given when justice so requires. Moreover, “although the decision whether to grant leave rests within the sound discretion of the district court,” the federal rules strongly favor granting leave to amend. Indeed virtually all of the cases relied on by defendants allowed plaintiffs to amend following a 12(b)(6) dismissal.

(internal citations and footnote omitted). Finding that the

request was “not well taken” and that the plaintiffs “have had

ample opportunity to plead their case,” the district court denied

the plaintiffs’ request. We uphold this denial.

In discussing a district court’s discretion to deny a litigant

leave to amend under Federal Rule of Civil Procedure 15(a), we have

concluded that this “discretion is limited because Rule 15 evinces

30 a bias in favor of granting leave to amend.” S. Constructors

Group, Inc. v. Dynalectric Co., 2 F.3d 606, 611 (5th Cir. 1993);

Little v. Liquid Air Corp., 952 F.2d 841, 846 (5th Cir. 1992).

However, we have also stated that leave to amend under Rule 15 is

by no means automatic. S. Constructors, 2 F.3d at 612. Indeed, we

have upheld the denial of leave to amend when the moving party

engaged in undue delay, Little, 952 F.2d at 846, or attempted to

present theories of recovery seriatim to the district court. S.

Constructors, 2 F.3d at 612. Additionally, the Supreme Court has

sanctioned bad faith or dilatory motive on the part of the movant,

repeated failure to cure deficiencies by amendments previously

allowed, undue prejudice to the opposing party by virtue of

allowance of the amendment, or futility of the amendment as

plausible reasons for a district court to deny a party’s request

for leave to amend. Foman v. Davis, 371 U.S. 178, 182 (1962); see

also 6 CHARLES ALAN WRIGHT, FEDERAL PRACTICE & PROCEDURE, § 1489 (2d ed.

1990) (stating that “if a complaint as amended could not withstand

a motion to dismiss, then the amendment should be denied as

futile”).

Here, as pointed out by the district court, in addition to

being poorly drafted and repetitive, the 110-page complaint is rich

in legal deficiencies. Yet, almost as an afterthought, the

plaintiffs tacked on a general curative amendment request to the

end of their response in opposition to the defendants’ motion to

dismiss. The plaintiffs were certainly aware of the defendants’

31 objections to their complaint as written (because the objections

appeared in the defendants’ principal motion). Despite this

awareness, the plaintiffs did not demonstrate to the court how they

would replead scienter more specifically if given the opportunity,

did not proffer a proposed second amended complaint to the district

court, and did not suggest in their responsive pleading any

additional facts not initially pled that could, if necessary, cure

the pleading defects raised by the defendants. We cannot, in these

circumstances, hold that the district court abused its discretion.6

See McKinney v. Irving Indep. Sch. Dist., 309 F.3d 308, 315 (5th

Cir. 2002) (finding no abuse of discretion in the district court’s

denial of leave to amend where the plaintiffs failed to file an

amended complaint as a matter of right or submit a proposed amended

complaint in a request for leave of the court and the plaintiffs

failed to alert the court as to the substance of any proposed

amendment).

ANALYSIS OF THE PLAINTIFFS’ RULE 60(b)(2) REQUEST

6 We also note that the law firm representing the plaintiffs has apparently been previously warned by at least one circuit court against this kind of “wait and see” approach to requesting leave to amend. See, e.g., Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002) (“As to the district court’s characterization of plaintiffs’ maneuvering, we share the district court’s frustration with the plaintiffs’ apparent ‘cat and mouse’ class action gamesmanship. And [] we agree that a district court’s responsibilities do not include instructing ostensibly sophisticated securities class action counsel how to plead an actionable complaint . . . .”). 32 After the district court’s order of dismissal and while this

appeal was pending, the plaintiffs filed a Federal Rule of Civil

Procedure Rule 60(b)(2) motion for relief from the judgment in

favor of Ebbers and Sullivan based on newly discovered evidence.

Because the district court interpreted the PSLRA (and our case law

analyzing this statute) to bar automatically the consideration of

newly discovered evidence of securities fraud found after the

filing of the plaintiffs’ initial complaint, the district court

denied the plaintiffs’ motion without specifically considering the

evidence before it in accordance with the standard applicable to a

Rule 60(b)(2) motion. As discussed below, we find no support in

our case law for such a blanket rule; however, because the

plaintiffs have not met their burden under Rule 60(b)(2), we

ultimately agree with the district court that denial of the

plaintiffs’ motion is proper.

A. Substance of the Plaintiffs’ Motion

In their motion, the plaintiffs asked the district court “to

reopen this matter and allow Plaintiffs to file a Second Amended

Complaint” due to “crucial, newly discovered evidence that, if

presented in this matter, would likely change the result of

dismissing this case with prejudice.” Although the complaint

contained allegations of misstatements and omissions resulting from

a wide variety of financial irregularities, the Rule 60(b)(2)

motion focuses, as does this appeal, on the claim of fraud related

to the uncollectible accounts. Regarding the specific “newly 33 discovered” evidence, the plaintiffs cited to and attached as

exhibits hundreds of pages of evidence, including: (1) WorldCom’s

report on Form 8-K, filed with the SEC on June 25, 2002, in which

WorldCom states that it plans to restate its financial statements

for 2001 and the first quarter of 2002, and WorldCom’s report on

Form 8-K, filed with the SEC on August 8, 2002, in which WorldCom

reveals that its financial statements for fiscal year 2000 and,

possibly, 1999 would require restatement and included over $3

billion in additional accounting errors; (2) the transcript from

the September 26, 2002, guilty plea of David Myers, WorldCom’s

former Controller, in the Southern District of New York;

(3) numerous internal memoranda and e-mails from WorldCom, in which

certain employees identify Sullivan as the decision-maker regarding

certain improper line cost accruals and prepaid capacity entries

and in which (in the copy of the minutes from WorldCom’s audit

committee meeting on March 6, 2002) Sullivan is cited as indicating

that Ebbers sought to cut WorldCom’s internal audit budget by 50%

during the period when an internal audit investigating WorldCom’s

accounting fraud was underway; (4) various court pleadings,

including the government’s indictment of Sullivan and the SEC’s

complaint against WorldCom, both filed in the Southern District of

New York; (5) various congressional documents, including the

complete transcript from a hearing of the House of Representatives’

Financial Services Committee in which both Sullivan and Ebbers

invoke their Fifth Amendment right against self-incrimination; and

34 (6) three news releases discussing accounting irregularities and

internal fraud plaguing WorldCom.

In their post-judgment briefing, the plaintiffs maintained

that this material supports their contentions that the defendants

intentionally made false statements during the class period. The

plaintiffs generally stated that WorldCom’s report on Form 8-K,

filed with the SEC on August 8, 2002, is “crucial” in that it

reveals that WorldCom’s 1999 and 2000 financial statements would

require restatement and included over $3 billion in additional

accounting errors. However, other than this general statement, the

only portion of the attached evidence specifically referenced by

the plaintiffs in their post-judgment briefing is a portion of the

transcript from the guilty plea of David Myers who, as alleged,

reported directly to Ebbers and Sullivan as upper management. The

cited portion of the transcript provides:

From at least October 2000 through June 2002, internal financial reports at WorldCom consistently reflected that WorldCom’s expenses as a percentage of revenue were too high to meet analysts’ expectations and management’s guidance to professional securities analysts and the investing public. As a result, I was instructed on a quarterly basis by senior management to ensure that entries were made to falsify WorldCom’s books to reduce WorldCom’s reported actual costs and therefore to increase WorldCom’s reported earnings. Along with others, who worked under my supervision and at the direction of WorldCom senior management, such accounting adjustments were made for which I knew that there was no justification or documentation and which I knew were not in accordance with Generally Accepted Accounting Principles.

35 B. The District Court’s Ruling

The district court denied the plaintiffs’ motion. The court

recognized that “[s]ince the Opinion and Order of this Court of

March 29, 2002, the near collapse and bankruptcy of WorldCom and

its firing of Ebbers and Sullivan have been national news and

WorldCom has made public admissions of financial irregularities .

. . [and] [t]hus it would appear that as of the time of filing

their Amended Class Action Complaint . . . serious financial

misstatement and perhaps securities fraud had occurred.” However,

without addressing the Rule 60(b) standard, the district court

concluded that, as a matter of law, the new evidence could not form

a basis for the relief sought by the plaintiffs. In so finding, it

explicitly relied on our Nathenson opinion to state, as the

district court described it, that “[t]he strong inference of

scienter must arise from facts stated with particularity in the

complaint and those facts must now present a strong inference of

scienter.” (emphasis in district court’s opinion). The district

court went on to further explicate its ruling:

The Complaint was dismissed partly because of a failure to plead scienter. The discovery of this new evidence does not change the fact that scienter was not pled with particularity in the Complaint. The Plaintiffs are not entitled to amend their complaint in order to replead with particularity an element such as scienter that should have been properly pled in the beginning. Plaintiffs complain that they were unable to discover this information because they were prohibited from taking formal discovery by the PSLRA. This is precisely the purpose of the pleading requirement of the PSLRA, for the

36 plaintiff to lay out the who, what, when, and where in the pleadings before access to the discovery process is granted, to prevent abusive, frivolous strike suits.

(emphasis added). Below, we discuss tension we perceive between

language in this order and our case law.

C. Rule 60(b) Standards and the PSLRA

The only issues on appeal of a Rule 60(b) motion are “the

propriety of the denial of relief . . . and whether the court

abused its discretion in denying relief.” Provident Life &

Accidental Ins. Co. v. Goel, 274 F.3d 984, 999 (5th Cir. 2001);

Halicki v. La. Casino Cruises, Inc., 151 F.3d 465, 471 (5th Cir.

1998) (stating that abuse of discretion standard applies to our

review of the denial of a Rule 60(b) motion).

The basis of the district court’s order is that, Rule 60(b)

standards aside, our prior case law reads into the PSLRA a

requirement that plaintiffs pursuing a securities action must

always plead facts with the requisite particularity and specificity

in the “beginning.” We have never endorsed this proposition so

broadly cast.

Rule 60(b) provides, in relevant part, that: “On motion and

upon such terms as are just, the court may relieve a party . . .

for the following reasons . . . (2) newly discovered evidence which

by due diligence could not have been discovered in time to move for

a new trial under Rule 59(b).” FED. R. CIV. P. 60(b)(2). To

succeed on a motion for relief from judgment based on newly

37 discovered evidence, our law provides that a movant must

demonstrate: (1) that it exercised due diligence in obtaining the

information; and (2) that the evidence is material and controlling

and clearly would have produced a different result if present

before the original judgment. See Provident Life & Accidental Ins.

Co., 274 F.3d at 999. As the defendants note, we have also

“described as self evident the requirements that newly discovered

evidence be both admissible and credible.” Id. at 984 (internal

quotation omitted).

Here, the district court interpreted our PSLRA case law to bar

a plaintiff from utilizing evidence discovered after his or her

initial complaint was filed. It thus did not cite to, discuss or

analyze the plaintiffs’ new evidence under the applicable Rule

60(b) standard. However, our Nathenson opinion did not address a

Rule 60(b)(2) motion and therefore was not intended to augment the

PSLRA with the limitation that a plaintiff be precluded from ever

utilizing new evidence discovered after the filing of his or her

initial complaint.

The “now” in the portion of the Nathenson opinion cited by the

district court in support of its conclusion that new evidence

cannot, as a matter of law, ever be the basis of a Rule 60 motion

in the context of a PSLRA case was not intended to be interpreted

in this manner. Rather, in discussing the impact of the PSLRA on

pre-PSLRA case law analyzing motive and opportunity in the context

of scienter, we quoted the First Circuit’s Greebel v. FTP Software,

38 Inc., 194 F.3d 185 (1st Cir. 1999), opinion in stating that

“whatever characteristic pattern of facts alleged, those facts must

now present a strong inference of scienter.” Id. at 196 (emphasis

in original). The “now” (which, in contrast to the district

court’s order, was not emphasized in the original opinion) was

simply meant to contrast the intent requirement pre-PSLRA with the

“strong inference of scienter” requirement post-PSLRA. Our

reference to the word “now” as quoted in Greebel should not be

taken out of context to preclude, in every instance, a plaintiff

from utilizing new evidence discovered after the filing of his or

her initial securities fraud complaint.

Ultimately, we need not decide whether or to what extent new

evidence, discovered after the dismissal of a complaint based on

the plaintiff’s failure to satisfy the requirements of the PSLRA,

can form a basis for the granting of a Rule 60(b)(2) motion.7 We

need only decide that in such a situation, at a minimum, the

7 We are unaware of any circuit endorsing a blanket rule disallowing the consideration of newly discovered evidence in the context of a PSLRA case. To the contrary, two circuits have authorized the granting of a Rule 60(b)(2) motion based on newly discovered evidence in these circumstances. See Werner v. Werner, 267 F.3d 288, 296-97 (3d Cir. 2001) (remanding a case governed by the PSLRA with instructions to allow the plaintiffs to amend their complaint based on newly discovered corporate board minutes because the court “will not add to the strict discovery restrictions in the [PSLRA]” by augmenting the “high burdens the PSLRA placed on plaintiffs [already]”); Alpern v. UtiliCorp United, Inc., 84 F.3d 1525, 1533-34 (8th Cir. 1996) (reversing the district court’s denial of a Rule 60(b)(2) motion based on a newly discovered internal corporate memorandum detailing illegal conduct). 39 primary Rule 60(b) inquiry – whether the evidence clearly would

have produced a different result if present before the original

judgment – would have to be analyzed through the prism of PSLRA

particularity standards (which are, of course, more stringent than

general notice pleading standards). Abrams, 292 F.3d at 432.

Here, the lack of evidence of particularized pleading in this

case persuades us to uphold the district court’s denial of the

plaintiffs’ Rule 60(b) motion.

Even if we assume for the sake of this appeal that the newly

discovered evidence submitted by the plaintiffs is admissible and

credible, two issues the defendants vehemently dispute, the

plaintiffs’ Rule 60(b) motion is insufficient as a matter of law to

merit the “extraordinary” remedy they seek. Pease v. Pakhoed, 980

F.2d 995, 998 (5th Cir. 1993) (“Courts are disinclined to disturb

judgments under the aegis of Rule 60(b).”); Longden v. Sunderman,

979 F.2d 1095, 1102 (5th Cir. 1992) (stating that relief under

60(b) is “extraordinary . . . and the requirements of the rule must

be strictly met”). As they did in crafting their complaint, the

plaintiffs here simply inundated the district court with an

avalanche of material in the hopes that the court would, on its

own, connect the dots between any bad act found in the material and

allegations related to the single claim against Ebbers and Sullivan

in this case. This is not the court’s burden. Rather, if a Rule

60(b)(2) motion were to succeed, it would be the plaintiffs’ heavy

burden to demonstrate to the district court how this newly

40 discovered evidence is “material and controlling and clearly would

have produced a different result if presented before the original

judgment.” N. H. Ins. Co. v. Martech USA, Inc., 993 F.2d 1195,

1201 (5th Cir. 1993) (quotation omitted and emphasis added). Here,

the plaintiffs’ four-page motion for relief from judgment (appended

to hundreds of pages of evidence) simply does not cut it. It is

not enough to state, in a conclusory fashion, that “[t]his newly

discovered evidence is highly probative of defendants’ fraudulent

intent during the Class Period and should change the outcome of

this case.” Provident Life & Accidental Ins. Co., 274 F.3d at 999.

This tells the district court nothing regarding whether the

evidence submitted is relevant, material and controlling regarding

the narrow sliver of fraudulent conduct alleged in the plaintiffs’

complaint to have occurred and does not demonstrate how the

plaintiffs would have pleaded their complaint differently had this

evidence been available to them prior to the judgment being entered

against them.

The PSLRA sets forth a pleading standard, not an evidentiary

standard, and charges the plaintiffs with the duty of connecting

their proffered evidence to particularized allegations of scienter

in their pleading. Here, the lion’s share of the evidence appended

to the plaintiffs’ Rule 60(b) motion relates to the improper

capitalization of certain line item costs (that, as operating

expenses, should have been deducted from WorldCom’s revenues and

should not have been subject to depreciation) and improper

41 accounting treatment of certain reserve accounts. Neither the

reserve for uncollectible accounts nor uncollectible accounts

generally are mentioned, a fatal problem when the only remaining

claim in this case focuses on both.

As with the plaintiffs’ request for leave to amend, the

plaintiffs did not submit a proposed second amended complaint with

their Rule 60(b) motion, nor have they demonstrated in their

original motion or their reply memorandum how they would have

pleaded this case differently had this evidence been available to

them. This complete lack of effort regarding the Rule 60(b)

standard compels us to uphold the denial of the plaintiffs’ Rule

60(b) motion.

VI.

CONCLUSION

In No. 02-60322, we AFFIRM the judgment of the district court

only insofar as it dismissed with prejudice the plaintiffs’

complaint against Ebbers and Sullivan; we retain jurisdiction of

the pending appeal as to WorldCom. In No. 03-60248, we AFFIRM the

district court’s post-judgment order denying the plaintiffs’ Rule

60(b) motion for relief from judgment in favor of Ebbers and

Sullivan. All pending motions are DENIED as moot.