NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ________________
No. 17-3303 ________________
JAMES MARTIN, individually and on behalf of all others similarly situated
v.
GNC HOLDINGS, INC.; JOSEPH M. FORTUNATO; MICHAEL M. NUZZO; ANDREW S. DREXLER; MICHAEL G. ARCHBOLD; TRICIA K. TOLIVAR; PATRICK A. FORTUNE
KBC Asset Mangment NV, Appellant
________________
Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 2-15-cv-01522) District Judge: Honorable Mark R. Hornak ________________
Submitted Under Third Circuit LAR 34.1(a) May 21, 2018
Before: MCKEE, SHWARTZ, and COWEN, Circuit Judges
(Opinion filed: December 11, 2018) ________________
OPINION* ________________
* This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not constitute binding precedent. McKEE, Circuit Judge
KBC Asset Management NV appeals the district court’s dismissal of the class
action complaint it filed alleging securities fraud. The complaint alleged various
misrepresentations in violation of Section 10(b) of the Securities and Exchange Act of
19341 and Rule 10b-5 promulgated thereunder.2 For the reasons that follow, we will
affirm.3
I.
Seven statements made to investors by former GNC executives Archbold and
Fortunato are at issue in this appeal.4 The district court assumed that these statements
were misrepresentations as alleged. The court also assumed that each was “material”
because there was “a substantial likelihood that a reasonable shareholder would consider
[them] important in deciding how to [act].”5 The district court nevertheless found the
plaintiffs could not state a claim because they had not adequately pled the required
elements of scienter and loss causation. It therefore dismissed the complaint. This appeal
followed.
II.
1 15 U.S.C. § 78j(b). 2 17 C.F.R. § 240.10b-5. 3 The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction over this appeal under 28 U.S.C. § 1291. 4 The plaintiffs’ complaint alleged that several other statements made by defendants other than Fortunato and Archbold were also actionable under § 10(b). The district court found that the statements were either not material, or were exempt under the act’s safe harbor provision. The plaintiffs did not appeal this determination. 5 Martin v. GNC Holdings, Inc., No. 2:15-cv-01522, 2017 WL 3974002, at *10 (W.D. Pa. 2017) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 2 To make out a securities fraud claim under 15 U.S.C. § 78j(b), a plaintiff must
allege: (1) a material misrepresentation or omission; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss
causation.6 Only the elements of scienter and loss causation are at issue in this appeal.
Because we agree that plaintiffs failed to adequately plead scienter, we need not address
their arguments concerning loss causation.7
“Scienter is a mental state embracing intent to deceive, manipulate, or defraud.”8
A plaintiff alleging scienter must assert facts giving rise to a strong inference of reckless
or conscious behavior.9 “A reckless statement is one 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 either known to the
defendant or is so obvious that the actor must have been aware of it.”10
6 Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). 7 See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 789–90 (11th Cir. 2010) (“Because we agree with the district court’s conclusion about the insufficient inference of scienter raised by the complaint, we need not address its conclusion on loss causation.”). 8 Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). 9 Id. at 267 (quoting In re Advanta Corp., 180 F.3d 525, 534–35 (3d Cir. 1999)). 10 Id. at 267 n.42 (quoting Advanta, 180 F.3d at 535). Advanta noted that applying the recklessness standard in the securities fraud context promotes the “policy objectives of discouraging deliberate ignorance and preventing defendants from escaping liability solely because of the difficulty of proving conscious intent to commit fraud.” Advanta, 180 F.3d at 535. 3 To determine if allegations in a complaint satisfy the scienter requirement we
engage in a three part analysis.11 First, we accept all factual allegations in the complaint
as true.12 Next, we determine “whether all of the facts alleged, taken collectively, give
rise to a strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.”13 Finally, to determine whether the allegations give rise
to a “strong” inference of scienter, we “take into account plausible opposing
inferences.”14 That is, we must consider “plausible, nonculpable explanations for the
defendant’s conduct, as well as inferences favoring the plaintiff.”15 An inference that a
defendant acted with scienter need not be irrefutable.16 However, it must be more than
merely “reasonable or permissible—it must be cogent and compelling.”17 A securities
fraud complaint will therefore only survive a 12(b)(6) motion to dismiss if “a reasonable
person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.”18
Having applied this analysis, we agree with the district court’s determination that
the plaintiffs did not adequately plead scienter. The complaint contains no allegations that
Fortunato or Archbold knew that GNC’s DMAA-replacement products may have
contained ingredients banned by the FDA, or that they received any report that banned
11 Tellabs Inc. v. Major Issues and Rights, Ltd., 551 U.S. 308, 322–23 (2007). 12 Id. at 322. 13 Id. at 322–23. 14 Id. at 323. 15 Id. at 324. 16 Id. 17 Id. 18 Id. 4 substances may be included in replacement supplements. Rather, the complaint vaguely
alleges that the reports “stimulated significant concern and discussion within GNC” and
that they were “widely distributed throughout GNC headquarters.”19 At bottom, the
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ________________
No. 17-3303 ________________
JAMES MARTIN, individually and on behalf of all others similarly situated
v.
GNC HOLDINGS, INC.; JOSEPH M. FORTUNATO; MICHAEL M. NUZZO; ANDREW S. DREXLER; MICHAEL G. ARCHBOLD; TRICIA K. TOLIVAR; PATRICK A. FORTUNE
KBC Asset Mangment NV, Appellant
________________
Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 2-15-cv-01522) District Judge: Honorable Mark R. Hornak ________________
Submitted Under Third Circuit LAR 34.1(a) May 21, 2018
Before: MCKEE, SHWARTZ, and COWEN, Circuit Judges
(Opinion filed: December 11, 2018) ________________
OPINION* ________________
* This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not constitute binding precedent. McKEE, Circuit Judge
KBC Asset Management NV appeals the district court’s dismissal of the class
action complaint it filed alleging securities fraud. The complaint alleged various
misrepresentations in violation of Section 10(b) of the Securities and Exchange Act of
19341 and Rule 10b-5 promulgated thereunder.2 For the reasons that follow, we will
affirm.3
I.
Seven statements made to investors by former GNC executives Archbold and
Fortunato are at issue in this appeal.4 The district court assumed that these statements
were misrepresentations as alleged. The court also assumed that each was “material”
because there was “a substantial likelihood that a reasonable shareholder would consider
[them] important in deciding how to [act].”5 The district court nevertheless found the
plaintiffs could not state a claim because they had not adequately pled the required
elements of scienter and loss causation. It therefore dismissed the complaint. This appeal
followed.
II.
1 15 U.S.C. § 78j(b). 2 17 C.F.R. § 240.10b-5. 3 The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction over this appeal under 28 U.S.C. § 1291. 4 The plaintiffs’ complaint alleged that several other statements made by defendants other than Fortunato and Archbold were also actionable under § 10(b). The district court found that the statements were either not material, or were exempt under the act’s safe harbor provision. The plaintiffs did not appeal this determination. 5 Martin v. GNC Holdings, Inc., No. 2:15-cv-01522, 2017 WL 3974002, at *10 (W.D. Pa. 2017) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 2 To make out a securities fraud claim under 15 U.S.C. § 78j(b), a plaintiff must
allege: (1) a material misrepresentation or omission; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss
causation.6 Only the elements of scienter and loss causation are at issue in this appeal.
Because we agree that plaintiffs failed to adequately plead scienter, we need not address
their arguments concerning loss causation.7
“Scienter is a mental state embracing intent to deceive, manipulate, or defraud.”8
A plaintiff alleging scienter must assert facts giving rise to a strong inference of reckless
or conscious behavior.9 “A reckless statement is one 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 either known to the
defendant or is so obvious that the actor must have been aware of it.”10
6 Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). 7 See Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 594 F.3d 783, 789–90 (11th Cir. 2010) (“Because we agree with the district court’s conclusion about the insufficient inference of scienter raised by the complaint, we need not address its conclusion on loss causation.”). 8 Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). 9 Id. at 267 (quoting In re Advanta Corp., 180 F.3d 525, 534–35 (3d Cir. 1999)). 10 Id. at 267 n.42 (quoting Advanta, 180 F.3d at 535). Advanta noted that applying the recklessness standard in the securities fraud context promotes the “policy objectives of discouraging deliberate ignorance and preventing defendants from escaping liability solely because of the difficulty of proving conscious intent to commit fraud.” Advanta, 180 F.3d at 535. 3 To determine if allegations in a complaint satisfy the scienter requirement we
engage in a three part analysis.11 First, we accept all factual allegations in the complaint
as true.12 Next, we determine “whether all of the facts alleged, taken collectively, give
rise to a strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.”13 Finally, to determine whether the allegations give rise
to a “strong” inference of scienter, we “take into account plausible opposing
inferences.”14 That is, we must consider “plausible, nonculpable explanations for the
defendant’s conduct, as well as inferences favoring the plaintiff.”15 An inference that a
defendant acted with scienter need not be irrefutable.16 However, it must be more than
merely “reasonable or permissible—it must be cogent and compelling.”17 A securities
fraud complaint will therefore only survive a 12(b)(6) motion to dismiss if “a reasonable
person would deem the inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.”18
Having applied this analysis, we agree with the district court’s determination that
the plaintiffs did not adequately plead scienter. The complaint contains no allegations that
Fortunato or Archbold knew that GNC’s DMAA-replacement products may have
contained ingredients banned by the FDA, or that they received any report that banned
11 Tellabs Inc. v. Major Issues and Rights, Ltd., 551 U.S. 308, 322–23 (2007). 12 Id. at 322. 13 Id. at 322–23. 14 Id. at 323. 15 Id. at 324. 16 Id. 17 Id. 18 Id. 4 substances may be included in replacement supplements. Rather, the complaint vaguely
alleges that the reports “stimulated significant concern and discussion within GNC” and
that they were “widely distributed throughout GNC headquarters.”19 At bottom, the
plaintiffs did not “state with particularity facts giving rise to a strong inference that the
defendant[s] acted with the required state of mind.”20
For the same reasons, we cannot divine scienter from the information provided by
confidential witnesses. The district court correctly applied the particularity requirement by
evaluating the “‘detail provided by the confidential sources, the sources’ basis of
knowledge . . . [and] the corroborative nature of other facts alleged.”21 In short, the
plaintiffs did not explain how the confidential witnesses obtained the information included
in the complaint. Nor did the confidential witnesses provide specific facts about Fortunato
and Archbold learning of the potentially tainted products prior to making the actionable
statements.
Similarly, we reject the plaintiffs’ argument that they satisfied the “core operations”
doctrine. Under that theory, a plaintiff may be entitled to a “core operations inference” if
the complaint alleges that a defendant made misstatements concerning the “core matters”
of central importance to a company.22 We agree with the district court’s assessment that
the core operation doctrine does not support a finding of scienter here, “absent some
19 App. 101, 103. 20 15 U.S.C. § 78u-4(b)(2)(A). 21 Avaya, 564 F.3d at 263 (quoting Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 147 (3d Cir. 2004)). 22 Id. at 268. 5 additional allegation of specific information conveyed to management and related to the
fraud.”23
Finally, we hold that certain stock sales were not indicative of scienter.24 Only two
of the six defendants sold stock during the relevant time period, and only one of them made
a statement that is the subject of this appeal. The plaintiffs failed to plead specific facts to
demonstrate that the circumstances surrounding the sale of stock by Fortunato were
“unusual in scope or timing.”2526
III.
For the foregoing reasons, we will affirm the judgment of the district court and the
court’s analysis as explained in its very well-reasoned and thorough opinion.27
23 Id. at 270 (quoting Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1068 (9th Cir. 2008)). 24 We need not decide whether the “corporate” or “collective” scienter doctrine is a viable theory because the allegations in the complaint are insufficient to establish GNC's scienter. 25 In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 277 (3d Cir. 2006). 26 Because the district court correctly dismissed the 10b-5 claim, the derivative § 20(a) claim necessarily fails. 27 See Martin v. GNC Holdings, Inc., No. 2:15-cv-01522, 2017 WL 3974002, at *11–18 (W.D. Pa. 2017). 6