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United States Court of Appeals
Fifth Circuit
March 31, 2004
Charles R. Fulbruge III

No. 02-10558

on behalf of Itself and All Others
Similarly Situated; ET AL,


Appeal from the United States District Court
for the Northern District of Texas

Before GARWOOD, JOLLY, and HIGGINBOTHAM, Circuit Judges.
GARWOOD, Circuit Judge:

Plaintiffs Southland Securities Corporation, Jeffrey Fielkow,
Rick Taylor, William Wares, Ron Rumpler, and William White
(plaintiffs) appeal the district court's dismissal, pursuant to
Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform
Act (PSLRA), of their securities fraud complaint. We affirm in
part and reverse in part and remand.1
INSpire Insurance Solutions, Inc. ("INSpire"), the corporate
defendant in this case, provided policy and claims administration
to the property and casualty insurance industry and offered
outsourcing and software services. In this securities-fraud class
action, the defendants are INSpire; Millers Mutual Fire Insurance
1When this appeal was initially filed one of the appellees
was Millers Insurance Company, formerly known as Millers Mutual
Fire Insurance Company, a defendant below ("Millers"). Liability
against Millers was asserted solely as a "control person" under
20(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78t(a).
Millers was represented separately and had filed its own
appellee's brief in this case. Thereafter, a letter dated March
19, 2003, was received by the court from Millers's counsel,
advising of Millers's status as an "Impaired Insurer" under Texas
Ins. Code Art. 21.28-C. The 345th Judicial District Court of
Travis County found that Millers was insolvent and appointed the
Texas Commissioner of Insurance as its permanent receiver under
the Texas Insurance Code and issued a permanent injunction. The
receiver discharged Millers's counsel. The receiver has not
become, or sought to become, a party to this case, and no other
party to this case has sought to make the receiver a party. This
court in a June 27, 2003 order severed the appeal of plaintiffs-
appellants as against Millers from and out of the remainder of
this appeal and stayed the said severed out appeal against
Millers pending further order of this court, and said severance
and stay of said severed appeal remain in effect. This opinion
does not dispose of said severed out appeal as against Millers.

Company, allegedly the original parent corporation and largest
shareholder of INSpire (see note 1 above); F. George Dunham
(Dunham), the President, CEO and Chairman of the Board of INSpire
during the class period; Ronald O. Lynn (Lynn), Executive Vice
President and CIO during the class period; Terry G. Gaines
(Gaines), Executive Vice President, CFO, and Treasurer during the
class period; Robert K. Agazzi (Agazzi), Executive Vice President
of Software and Systems during the class period; Jeffrey W.
Robinson (Robinson), Executive Vice President of Outsourcing and
later President and COO during the class period; and William J.
Smith (Smith), President and COO from May 1, 1998 to January 7,
2000, (collectively defendants). INSpire was established in 1995
as a wholly owned subsidiary of Millers, and remained such until
August 1997 when Millers spun it off through an initial public
offering (IPO) of 8.25 million shares, Millers retaining 43.7
percent of INSpire's outstanding shares. Plaintiffs generally
contend that defendants engaged in a fraudulent scheme to deceive
investors about the company's performance for the purpose of
inflating the price of INSpire stock for their own financial
benefit. The proposed plaintiff class consisted of all those who
acquired INSpire common stock between January 28, 1998, and October
14, 1999.
The plaintiffs' Second Amended Complaint (Complaint), from the
dismissal of which this appeal is taken, alleges that the

defendants committed securities fraud by knowingly, or with severe
recklessness, touting INSpire's software products2 and contracts
despite the software's critical flaws; issuing inaccurate earnings
and revenue estimates; and violating Generally Accepted Accounting
Principles (GAAP) by failing to timely classify receivables as
uncollectible, improperly capitalizing software development costs,
and failing to write down goodwill associated with purchases of
software assets. The plaintiffs allege these misleading statements
were made in forward-looking statements, press releases, and other
corporate documents, and relied upon by analysts in their reports.
The plaintiffs further allege defendants made stock sales based on
insider information, pointing to these sales as evidence of
scienter. The plaintiffs seek to recover damages on behalf of all
persons who acquired Inspire stock between January 28, 1998 and
October 14, 1999.
On December 3, 1999, the plaintiffs, on behalf of themselves
and others similarly situated, filed their original complaint
against the defendants. This case was consolidated with
substantially identical suits subsequently filed by other
2INSpire's two principal software programs were EmPower and
Windows for Property Casualty (WPC). EmPower is an imaging and
workflow management application designed to allow the user to
create electronic images of insurance applications and forms that
can be routed and traced when used in conjunction with an
electronic policy and claims administration system. INSpire's
first policy and claims administration system was called Policy
and Claims Administration (PCA) and ran on the AS400 platform
while its successor WPC ran on a Windows platform.

plaintiffs. On June 7, 2000, the plaintiffs filed their
Consolidated Amended Complaint. On August 10, 2000, the defendants
filed motions to dismiss the plaintiffs' Consolidated Amended
Complaint, which motions were granted by the Court on March 12,
2001. In that Dismissal Order, the court found that, because the
plaintiffs' Consolidated Amended Complaint had failed to plead
fraud with particularity and improperly relied on the "group
pleading" doctrine in lodging allegations against the defendants
collectively, the plaintiffs did not meet the pleading requirements
established by Fed. R. Civ. P. 9(b) and the Private Securities
Litigation Reform Act (PSLRA). The court held that the plaintiffs
must plead with sufficient particularity wrongdoing and scienter as
to each defendant individually. The court also found the
plaintiffs failed to allege facts supporting an inference that the
forward-looking statements cited in the Consolidated Amended
Complaint were made with actual knowledge that they were false or
The court gave the plaintiffs an opportunity to amend their
Complaint. They filed their Second Amended Complaint3 on May 16,
2001. The defendants filed responsive motions to dismiss. The
plaintiffs asserted claims under section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
3Although the plaintiffs title this pleading "First Amended
Complaint" the district court correctly noted the it is actually
the Second Amended Complaint, the first amended pleading being
the Consolidated Amended Complaint filed on June 7, 2001.

Commission (SEC), as modified by the PSLRA, codified in relevant
part at 15 U.S.C. 78u-4 and 78u-5, against all of the defendants
except Millers. The plaintiffs also asserted claims under section
20(a) of the Securities Act, 15 U.S.C. 78t(a), which provides for
control-person liability, against INSpire, Millers, and Dunham.
Standard of Review
This court reviews the dismissal of a complaint for failure to
state a claim de novo, accepts "the facts alleged ... as true and
construe[s] the allegations in the light most favorable to the
plaintiff." Nathenson v. Zonagen Inc., 267 F.3d 400, 406 (5th Cir.
2001). However, we will not "strain to find inferences favorable
to the plaintiffs." Westfall v. Miller, 77 F.3d 868, 870 (5th
Cir. 1996). Nor do we accept conclusory allegations, unwarranted
deductions or legal conclusions. Nathenson, 267 F.3d at 406. A
dismissal for failure to plead fraud with particularity as required
by rule 9(b) is a dismissal on the pleadings for failure to state
a claim. Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.
Securities Exchange Act and PSLRA
Section 10(b) of the Securities Exchange Act 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
[Securities and Exchange] Commission 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 PSLRA speaks to the requirements of a securities law class
action complaint as follows:
"(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
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.
(2) Required state of mind
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.
(3) Motion to dismiss; stay of discovery
(A) Dismissal for failure to meet pleading
In any private action arising under this
chapter, the court shall, on the motion of any
defendant, dismiss the complaint if the
requirements of paragraphs (1) and (2) are not
met." 15 U.S.C. 78u-4(b).
Federal Rule of Civil Procedure 9(b) likewise requires the
plaintiffs in securities fraud causes to plead with particularity
the circumstances constituting the alleged fraud. To satisfy Rule
9(b)'s pleading requirements, the plaintiffs must "specify the
statements contended to be fraudulent, identify the speaker, state
when and where the statements were made, and explain why the
statements were fraudulent." Williams v. WMX Technologies, Inc.,
112 F.3d 175, 177-78 (5th Cir. 1997), cert. denied, 118 S. Ct. 412
(1997). To state a securities-fraud claim under section 10(b), and
Rule 10b-5, plaintiffs must plead (1) a misstatement or omission;

(2) of a material fact; (3) made with scienter; (4) on which the
plaintiffs relied; and (5) that proximately caused the plaintiffs'
injuries. Id. at 177. A fact is material if there is "a
substantial likelihood that, under all the circumstances, the
omitted fact would have assumed actual significance in the
deliberations of the reasonable shareholder." Grigsby v. CMI
Corp., 765 F.2d 1369, 1373 (9th Cir. 1985) (quoting TSC Industries,
Inc. v. Northway, Inc., 96 S. Ct. 2126, 2131 (1976)). Materiality
"depends on the significance the reasonable investor would place on
the withheld or misrepresented information." Basic Inc. v.
Levinson, 108 S. Ct. 978, 988 (1988).
"A complaint can be long-winded, even prolix, without pleading
with particularity. Indeed, such a garrulous style is not an
uncommon mask for an absence of detail." Williams, 112 F.3d at
178. This court has noted that "although the requirement for
particularity in pleading fraud does not lend itself to refinement,
and it need not in order to make sense, nevertheless, directly put,
the who, what, when, and where must be laid out before access to
the discovery process is granted." ABC Arbitrage Plaintiffs Group
v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002) (quotations
omitted). "In securities fraud suits, this heightened pleading
standard provides defendants with fair notice of the plaintiffs'
claims, protects defendants from harm to their reputation and
goodwill, reduces the number of strike suits, and prevents

plaintiffs from filing baseless claims and then attempting to
discover unknown wrongs." Tuchman v. DSC Communications, 14 F.3d
1061, 1067 (5th Cir. 1994).
The PSLRA reinforces the particularity requirements of Rule
9(b), requiring the plaintiffs to state not only the time, place,
the identity of the speaker, and the content of the alleged
misrepresentation, but also to explain why the challenged statement
or omission is false or misleading. Williams, 112 F.3d at 177.4
The PSLRA also requires that the complaint "with respect to each
act or omission alleged" to be false or misleading "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) (emphasis added).
Group Pleading
This court has not heretofore considered whether to recognize
the "group pleading" or "group published" doctrine. This doctrine
"allows plaintiffs to `rely on a presumption that statements in
"prospectuses, registration statements, annual reports, press
4For purposes of the requirement of 78u-4(b)(1) that "if
an allegation regarding the statement or omission is made on
information or belief, the complaint shall state with
particularity all facts on which that belief is formed," an
allegation not made on the plaintiff's personal knowledge is
treated as made on information and belief "although not labeled
as such." Tchuruk, 291 F.3d at 351. However, the requirement
that "all" facts be plead is not literally applied; sufficient
particular facts is the intent of that requirement. Id. at 352-

releases, or other group-published information," are the collective
work of those individuals with direct involvement in the everyday
business of the company.'" In Re Oxford Health Plans, Inc., 187
F.R.D. 133, 142 (S.D.N.Y. 1999) (quoting In Re Stratosphere Corp.
Securities Litig., 1 F. Supp. 2d 1096, 1108 (D. Nev. 1998)); Danis
v. USN Communications, Inc., 73 F. Supp. 2d 923, 939 n.9 (N.D. Ill.
Where the misstatements appear in certain types of documents
that plaintiffs believe were written by groups, some courts have
allowed plaintiffs to link certain defendants to alleged
misrepresentations simply by pleading that the defendants were part
of the "group" that likely put the challenged documents together.
In re Solv-Ex Corp. Sec. Litig., 210 F. Supp. 2d 276, 283 (S.D.N.Y.
2000); In re Worlds of Wonder Sec. Litig., 721 F. Supp. 1140, 1143
(N.D. Cal. 1989). Instead of being required to plead that a
defendant actually made, authored or approved an offending
statement in a corporate communication, the "group pleading"
doctrine in its broadest form allows unattributed corporate
statements to be charged to one or more individual defendants based
solely on their corporate titles. Under this doctrine, the
plaintiff need not allege any facts demonstrating an individual
defendant's participation in the particular communication
containing the misstatement or omission where the defendants are
"insiders or affiliates" of the company. In re Solv-Ex Corp. Sec.

Litig., 210 F. Supp. 2d at 283. Therefore, the "group pleading"
doctrine as so applied would allow the plaintiff to plead the first
element of a section 10(b) case against an individual defendant
without citing particular facts connecting the defendant to the
alleged fraud.
Congress did not include "group pleading" in any provision of
the Securities Act. See William O. Fisher, Don't Call Me a
Securities Law Groupie: The Rise and Possible Demise of the "Group
Pleading" Protocol in 10b-5 Cases, 56 BUS. LAW. 991 (2001).5 The
Ninth and Second Circuits have largely pioneered this doctrine. In
Wool v. Tandem Computers Inc., 818 F.2d 1433 (9th Cir. 1987), the
Ninth Circuit fashioned the "group pleading" doctrine, holding:
"In cases of corporate fraud where the false
prospectuses, registration statements, annual
reports, press releases, or other 'group-published
information,' it is reasonable to presume that
these are the collective actions of the officers.
Under such circumstances, a plaintiff fulfills the
particularity requirement of Rule 9(b) by pleading
the misrepresentations with particularity and where
possible the roles of the individual defendants in
the misrepresentations." Id. at 1440 (citation
omitted) (emphasis added).6
5Fisher discusses the structure of modern corporations,
noting their often varying degrees of compartmentalization and
the fact that an individual's actual role in drafting and
approving particular documents and statements cannot, in many
cases, be reliably deduced from their title.
6The Wool court added, "The individual defendants are a
narrowly defined group of officers who had direct involvement not
only in the day-to-day affairs of Tandem in general but also in
Tandem's financial statements in particular." Id. Yet, this

Courts have differed as to whether the "group pleading"
doctrine, assuming its existence prior to the PSLRA, survives that
1995 legislation. The PSLRA requires first, that the complaint
must "specify" "each" statement alleged to have been misleading,
and the reason or reasons why that statement is misleading. 15
U.S.C. 78u-4(b)(1). Second, as to allegations made upon
information and belief, the complaint must "state with
particularity all facts" on which the belief is formed. Id.
Finally, as to "each" allegedly misleading statement, the complaint
must "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) (emphasis added).
Several courts have held that, largely because the PSLRA does
not explicitly make reference to the "group pleading" doctrine, it
does not abolish it. In re SmarTalk Teleservices, Inc. Sec.
Litig., 124 F. Supp. 2d 527, 545 (S.D. Ohio 2000); In re Baan Co.
Sec. Litig., 103 F. Supp. 2d 1, 17 (D.D.C. 2000); In re Oxford
Health Plans, Inc. Sec. Litig., 187 F.R.D. 133, 142 (S.D.N.Y.
1999); In re Sunbeam Sec. Litig., 89 F. Supp. 2d 1326, 1340-41
(S.D. Fla. 1999); In re BankAmerica Corp. Sec. Litig., 78 F. Supp.
2d 976, 987 (E.D. Mo. 1999); Zuckerman v. Foxmeyer Health Corp., 4
finding appeared unnecessary as a result of the Court's apparent
conclusion that such facts only need to be alleged "where

F. Supp. 2d 618, 627 n.4 (N.D. Tex. 1998); Robertson v. Strassner,
32 F. Supp. 2d 443, 446 (S.D. Tex. 1998). However, several other
courts have found that the PSLRA effectively abolished the "group
pleading" doctrine. P. Schoenfeld Asset Mgmt. LLC v. Cendant
Corp., 142 F. Supp.2d 589, 618-21 (D.N.J. 2001); Coates v.
Heartland Wireless Communs., Inc., 26 F. Supp.2d 910, 915-16 (N.D.
Tex. 1998); Allison v. Brooktree Corp., 999 F. Supp. 1342, 1350
(S.D. Cal. 1998); Chu v. Sabratek Corp., 100 F. Supp.2d 827, 835-37
(N.D. Ill. 2000).
Significantly, this court has never adopted the "group
pleading" doctrine, even before the PSLRA. While the PSLRA does
not explicitly abolish the doctrine, it was not necessary to do so
because Congress never made this judicial creation law to begin
with. Even prior to the PSLRA, section 10(b) and Rule 10b-5
required plaintiffs to identify the roles of the individual
defendants, and describe their involvement, if any, in preparing
the misleading statements. In re MDC Holdings Sec. Litig., 754 F.
Supp. 785, 795 (S.D. Cal. 1990). Even if this court were to
conclude that the "group pleading" doctrine existed in the absence
of the PSLRA, it cannot withstand the PSLRA's specific requirement
that the untrue statements or omissions be set forth with
particularity as to "the defendant" and that scienter be pleaded
with regard to "each act or omission" sufficient to give "rise to
a strong inference that the defendant acted with the required state

of mind." 15 U.S.C. 78u-4(b). These PSLRA references to "the
defendant" may only reasonably be understood to mean "each
defendant" in multiple defendant cases, as it is inconceivable that
Congress intended liability of any defendants to depend on whether
they were all sued in a single action or were each sued alone in
several separate actions. The court in Allison noted:
"[T]o permit a judicial presumption as to particularity
simply cannot be reconciled with the statutory mandate
that plaintiffs must plead specific facts as to each act
or omission by the defendant. The group published
doctrine permits an inference of wrongdoing not based on
defendant's conduct, but based solely on defendant's
status as an officer or director of a corporation."
Allison, 999 F. Supp. at 1350.
The "group pleading" doctrine conflicts with the scienter
requirement of the PSLRA because, even if a corporate officer's
position supports a reasonable inference that he likely would be
negligent in not being involved in the preparation of a document or
aware of its contents, the PSLRA state of mind requirement is
severe recklessness or actual knowledge.
Therefore, we agree with the district court that the PSLRA
requires the plaintiffs to "distinguish among those they sue and
enlighten each defendant as to his or her particular part in the
alleged fraud." As such, corporate officers may not be held
responsible for unattributed corporate statements solely on the
basis of their titles, even if their general level of day-to-day
involvement in the corporation's affairs is pleaded. However,
corporate documents that have no stated author or statements within

documents not attributed to any individual may be charged to one or
more corporate officers provided specific factual allegations link
the individual to the statement at issue. Such specific facts
tying a corporate officer to a statement would include a signature
on the document or particular factual allegations explaining the
individual's involvement in the formulation of either the entire
document, or that specific portion of the document, containing the
statement. Various unattributed statements within documents may be
charged to different individuals, and specific facts may tie more
than one individual to the same statement. And, the corporation
itself may be treated as making press releases and public
statements issued by authorized officers on its behalf, and
statements made by its authorized officers to further the interests
of the corporation.
Consistent with our rejection of the "group pleading"
doctrine, we do not construe allegations contained in the Complaint
against the "defendants" as a group as properly imputable to any
particular individual defendant unless the connection between the
individual defendant and the allegedly fraudulent statement is
specifically pleaded. While the plaintiffs aver in paragraph 21 of
the Complaint that the individual defendants "each controlled the
contents of and participated in writing INSpire's SEC filings,
reports and releases," this conclusory allegation fails to specify
which of these documents is attributable to each individual

defendant, let alone which portions or statements within these
documents are assignable to each individual defendant.
Corporate defendant
Respecting the potential section 10(b) liability of INSpire
itself, however, as all of the individual defendants were executive
officers of INSpire whose actions were intended to benefit INSpire,
we will treat as having been made by INSpire the particular
complained of statements in the SEC filings, reports and releases
issued in its name. Statements attributed to individual defendants
are also treated as having been made by INSpire, as all of them
appear from the face of the Complaint to have been made pursuant to
their positions of authority within the company.
Nevertheless, liability under Rule 10(b)(5) requires not only
that the party make a statement which contains an untrue statement
of material fact or omits a material fact necessary in order to
make the statement not misleading, but also that the party have
done so with "not merely simple or even inexcusable negligence" but
rather with "scienter" meaning an "intent to deceive, manipulate,
or defraud" or that "severe recklessness" in which the "danger of
misleading buyers or sellers . . . is either known to the defendant
or is so obvious that the defendant must have been aware of it."
Broad v. Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir. 1981)
(en banc). For purposes of determining whether a statement made by
the corporation was made by it with the requisite Rule 10(b)

scienter we believe it appropriate to look to the state of mind of
the individual corporate official or officials who make or issue
the statement (or order or approve it or its making or issuance, or
who furnish information or language for inclusion therein, or the
like) rather than generally to the collective knowledge of all the
corporation's officers and employees acquired in the course of
their employment.7 See, e.g., Nordstrom, Inc. v. Chubb & Son,
Inc., 54 F.3d 1424, 1435 (9th Cir. 1995) ("there is no case law
supporting an independent `collective scienter' theory"); In Re
Apple Computer, Inc. Securities Litigation, 243 F. Supp.2d 1012,
1023 (N.D. Cal. 2002) ("It is not enough to establish fraud on the
part of a corporation that one corporate officer makes a false
statement that another knows to be false. A defendant corporation
is deemed to have the requisite scienter for fraud only if the
individual corporate officer making the statement has the requisite
level of scienter, i.e., knows that the statement is false, or is
at least deliberately reckless as to its falsity, at the time he or
she makes the statement," citing Nordstrom).8 This is consistent
7We are, of course, speaking here of 10(b) liability, not
liability under 20(a) of the Securities Act, 15 U.S.C.
8Cf. In Re Warner Communications Securities Litigation, 618
F. Supp. 735, 752 (S.D.N.Y. 1985), aff'd 798 F.2d 35 (2d Cir.
1986) ("As to Warner, plaintiffs arguably need only show either
that one or more members of top management knew of material
information indicating an earnings decline, but failed to stop
the issuance of misleading statements or to correct prior
statements that had become misleading, or that Warner management

with the general common law rule that where, as in fraud, an
essentially subjective state of mind is an element of a cause of
action also involving some sort of conduct, such as a
misrepresentation, the required state of mind must actually exist
in the individual making (or being a cause of the making of) the
misrepresentation, and may not simply be imputed to that individual
on general principles of agency.9 See Restatement (2nd), Agency
275, comment b; 268 comment d. See, also, e.g., Woodmont, Inc.
v. Daniels, 274 F.2d 132, 137 (10th Cir. 1959) ("while in some
cases, a corporation may be held constructively responsible for the
composite knowledge of all of its agents, whether acting in unison
or not . . . [citations] we are unwilling to apply the rule to fix
liability where, as here, intent is an essential ingredient of tort
liability as for deceit. See Restatement, Agency 2d, 275,
comment b"); Gutter v. E.I. DuPont de Nemours, 124 F. Supp. 2d
1291, 1311 (S.D. Fla. 2000) ("The knowledge necessary to form the
requisite fraudulent intent must be possessed by at least one agent
and cannot be inferred and imputed to a corporation based on
disconnected facts known by different agents," citing, inter alia,
had recklessly failed to set up a procedure that insured the
dissemination of correct information to the marketplace;"
(emphasis added)).
9Although if the agent, with the requisite actual state of
mind, makes or causes to be made a misrepresentation, the
principal's vicarious liability will be determined under general
rules of agency. See Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111,
1118 (5th Cir. 1980).

Woodmont Inc.); First Equity Corp. v. Standard & Poor's Corp., 690
F. Supp. 256, 260 (S.D.N.Y. 1988), aff'd, 869 F.2d 175 (2d Cir.
1989) ("While . . . a corporation may be charged with the
collective knowledge of its employees, it does not follow that the
corporation may be deemed to have a culpable state of mind when
that state of mind is possessed by no single employee. A
corporation can be held to have a particular state of mind only
when that state of mind is possessed by a single individual");
United States v. LBS Bank-New York, Inc., 757 F. Supp. 496, 501 n.7
(E.D. Pa. 1990) ("Although . . . a corporate defendant is
considered to have acquired the collective knowledge of its
employees . . . [citations], specific intent cannot be aggregated
similarly," citing First Equity Corp., and its last above quoted
The Complaint does not assert that any particular individual
INSpire director, officer or employee, other than the named
individual defendants, acted with scienter in or respecting the
making or issuing of any of the complained of statements (or in
ordering or approving any of such statements or furnishing
information or language for inclusion therein or omission
therefrom, or the like) or indeed in any other respect.
Accordingly, for purposes of evaluating whether the Complaint
states with particularity facts giving rise to a strong inference
that INSpire had the requisite scienter namely an intent to

deceive, manipulate or defraud or equivalent severe recklessness
respecting any of the complained of statements, it is only
necessary for us to address the allegations claimed to adequately
show such state of mind on the part of the individual defendants.
Insider Sales
As supportive of their scienter claims, plaintiffs allege
diverse INSpire stock sales by the individual defendants, stating
that together they sold over 1.5 million shares of INSpire stock
during the entire class period for proceeds totaling approximately
$9.6 million.10 Complaint, 143-145. With respect to the
10The total is nearly $34 million including some $24.8
million sales by Millers (representing 20.56% of its holdings).
For the first time on appeal, the plaintiffs, relying on
United States v. O'Hagan, 117 S.Ct. 2199, 2206-07 (1997), further
assert that these insider stock sales themselves are actionable
as deceptive devices or acts under the securities laws,
irrespective of whether the defendants made any misleading
statements. This contention presents no ground for reversal. In
an implied private action under 10(b) and Rule 10(b)(5) the
plaintiff must allege reliance and causation. Nathenson, 267
F.3d at 413-15. See also 15 U.S.C. 78u-4(b)(4) & 78u-
4(e)(1). Where, as here, the suit is cast as a class action,
reliance necessarily means fraud on the market. Id. Here the
class is alleged to consist merely of those who acquired INSpire
common stock between January 28, 1998, and October 14, 1999, and
thus necessarily depends on the theory that the complained of
conduct artificially inflated the price of the stock, and indeed
that is what the Complaint pleads, stating "Plaintiffs and the
Class would not have purchased or acquired INSpire stock at the
prices they paid, or at all, if they had been aware that the
market prices had been artificially and falsely inflated by
defendants' misleading statements." Complaint, 155. Yet
plaintiffs do not allege that any of the sales by the individual
defendants were not known to the market or were not timely and
properly publically reported (as, indeed, defendants' SEC filings
submitted below, which the district court could properly
consider, see, e.g., Lovelace v. Software Spectrum, 78 F.3d 1015,

requirement that particular facts be pled which give rise to a
strong inference of scienter, allegations of insider trading are
essentially a form of motive and opportunity allegations. See,
e.g., In Re Comshare Inc. Securities Litigation, 183 F.3d 542, 553
(6th Cir. 1999) (allegations "that the individual Defendants did
profit by selling many of their shares at artificially inflated
prices during the class period. . . . largely tend to illustrate
that Defendants had the motive and opportunity to commit securities
fraud"). And, we have stated that "our court requires more than
allegations of motive and opportunity to withstand dismissal."
Goldstein v. MCI Worldcom, 340 F.3d 238, 250-51 (5th Cir. 2003).
Nevertheless, we have also recognized that "appropriate allegations
of motive and opportunity may meaningfully enhance the strength of
the inference of scienter." Nathenson, 267 F.3d at 412. However,
this is true of insider trading "only" when "in suspicious amounts
or at suspicious times." Abrams v. Baker Hughes, Inc., 292 F.3d
424, 435 (5th Cir. 2002). See also In Re Silicon Graphics Inc.
Securities Litigation, 183 F.2d 970, 987 (9th Cir. 1999) ("insider
trading is suspicious only when dramatically out of line with prior
1018 (5th Cir. 1998), reflect that they were, which plaintiffs
have never disputed). While the Complaint alleges that the
individual defendants' stock sales were illegal insider trading
because based on an unspecified non-public information, nowhere
does the Complaint ever infer the wholly implausible conclusion
that any of the sales by the individual defendants in fact did,
or would tend to, inflate the market price (nor is it alleged
that any of the class purchased from any individual defendant or
relied on their stock sales).

trading practices at times calculated to maximize the personal
benefit from undisclosed inside information," internal quotation
marks and citation omitted).
Based on their January 1998 holdings, the plaintiffs allege
that during the entire class period Agazzi sold 32.13 percent of
his shares, Dunham 41.14 percent, Gaines 14.87 percent, Lynn 41.70
percent, and Robinson 48.80 percent. Complaint, 145. The
plaintiffs allege three periods of insider sales: March 26, July
27-August 5, and November 3-9, 1998. Plaintiffs do not expressly
allege in the Complaint that the sales were suspicious in timing or
amount and therefore suggestive of scienter, although they do
allege that the defendants "profit[ed] from the artificial
inflation of INSpire's stock price their violation of law had
created before INSpire's stock price crashed . . . ." Complaint,
The March sales occurred during the company's secondary public
offering. On March 26, 1998, INSpire filed its prospectus and
registration statement and made its secondary public offering
covering 1,500,000 shares owned by it and 800,000 shares owned by
then selling shareholders. On March 26, Dunham sold 157,500
11After listing the defendants' stock sales during the entire
class period, the Complaint notes, "In contrast, from the time of
INSpire's IPO [August 1997] until the beginning of the Class
Period [January 1998], defendants sold no stock." Complaint,
145. However, the brevity of the period addressed by this
allegation (and the fact that it commences with INSpire's ceasing
to be a wholly owned Millers' subsidiary) largely dissipates any
significance it might otherwise have.

shares, accounting for 26.40 percent of his January 1998 holdings.
On March 26, Lynn also sold 30,000 shares, representing 26.62
percent of his 1998 holdings, while Robinson sold 37,500 shares,
which amounts to 33.27 percent of his 1998 holdings. While not
insubstantial, these sales do not raise a strong inference of
scienter for several reasons. First, the plaintiffs do not allege
that officer or director sales during a secondary public offering
are unusual. The price of INSpire stock on March 26, 1998, was
$21, significantly less than its eventual high of over $35 reached
in November 1988 (it traded at $30 or above from November 3 through
November 10). Furthermore, following the allegedly misleading
February 24 Sul America contract announcement, INSpire stock rose
from $17.917 (on February 23) to $19.833 (on February 25) (it had
been as high as $19 on February 9; it traded as low as $17.50 in
early March and over $21.00 from March 16 through March 24) but the
defendants sold their stock at approximately this same price after
over a month had passed. Moreover, the stock generally continued
to climb until the revelations of December 11, 1998, suggesting the
timing of the March sales was not unusually prescient. The fact
that defendants Agazzi, Gaines, and Smith did not sell in or around
March 1998 also undermines an inference of scienter (indeed, Smith
did not sell INSpire stock at any time during the entire class
period). The fact that other defendants did not sell their shares
during the relevant class period undermines plaintiffs' claim that

defendants delayed notifying the public so that they could sell
their stock at a huge profit. Acito v. IMCERA Group, 47 F.3d 47,
54 (2d Cir. 1995).
The July-August sales are also not inherently suspicious.
First, Agazzi, Lynn, and Smith did not sell at this time.
Combining his sales on July 27 and 28, Dunham sold only 4.27
percent of his shares. Combining his sales on July 30 and August
5, Robinson sold 9.97 percent of his shares. Several weeks later,
on August 18, 19, and 20, Agazzi sold 32.13 percent of his shares.
Additionally, the price of INSpire stock was not unusually volatile
during the July-August interval in which these sales occurred, as
it was $24.375 on July 27 and $26.625 on August 20. The low
between July 27 and August 20 was $22.167 on July 21 while the high
was $26.625 on August 20.
The plaintiffs' strongest argument concerns sales made in
November 1998. Dunham, Gaines, Lynn, and Robinson made sales
between November 3 and November 9. On November 4 and 5, Dunham
sold 69,150 shares, 16.45 percent of his holdings. On November 3,
Gaines sold 10,000 shares, 14.87 percent of his shares. On
November 4, Lynn sold 17,000 shares, 20.55 percent of his holdings.
On November 9, Robinson sold 10,000 shares, 14.77 percent of his
holdings. These sales of INSpire stock at between $30 and $31 were
not perfectly timed, as INSpire stock would hit a high of 35.25 on
November 23, 1998. However, these sales occurred only slightly

more than a month before INSpire stock fell precipitously from
$30.813 on December 10, 1998, to $17.625 on December 11, 1998, the
day INSpire issued a release revising downward its 1999 earning
estimates. INSpire stock would never reach 22 again. The November
sales also closely followed INSpire's announcement of its Arrowhead
outsourcing contract on November 1, 1998 and the favorable analyst
reports it spawned on November 2 and 3. INSpire stock rose from
$22.750 on October 27, 1998, to $31.438 on November 5, a 27.64
percent increase in the share price in a span of ten days.12
Alleged misstatements
The plaintiffs' allegations of fraud against the defendants
essentially relate to: 1) misstatements relating to the
functionality and capacity of INSpire's software programs; 2)
misstatements relating to INSpire's past, present, and projected
economic performance; and 3) misstatements in financial reports
consisting of violations of generally accepted accounting
principles (GAAP) pertaining to classification of receivables,
12The defendants also point to their numerous alleged stock
purchases during the entire class period, but the plaintiffs
compellingly argue that these acquisitions were through options
enabling them to purchase INSpire stock at far below the market
price. For example, the plaintiffs aver that Dunham exercised
100,981 options on December 24, 1998, and March 26, 1999, paying
only 87 cents per option when the open-market price of INSpire
shares was $16 and $17 respectively. In any event, the effect of
such purchases was not addressed in the district court's opinion
and would be more appropriately addressed at trial or on summary
judgment than in a dismissal on the pleadings.

software development costs, and goodwill. The plaintiffs
allegations relating to INSpire's software and those relating to
its stated fiscal performance are intertwined to the extent that
much of the Complaint argues that the inadequacies of INSpire's
software caused the company to be unable to deliver on its software
contracts, resulting in subpar performance and INSpire's ultimate
The plaintiffs' allegations are divided into five time sub
periods within the overall January 28, 1998, to October 14, 1999,
class period.
January 28, 1998 - April 2, 1998
We first examine the period of January 28, 1998, to April 2,
1998. The Complaint alleges INSpire issued results for the fourth
quarter of 1997 and the year ended 1997, listing Dunham and Gaines
as contact persons. Complaint, 39. The plaintiffs allege this
statement and all of the statements set forth in the Complaint made
during this sub period were false when issued and that each such
statement failed to disclose information about adverse conditions
in and then impacting INSpire's business, disclosure of which was
required to make the statements made not misleading, and which
information was "then known only to the defendants due to their
access to internal INSpire data." Complaint, 57. The plaintiffs
further allege that INSpire's reported revenues and earnings during
this class period were materially overstated due to improper

revenue recognition, failure to write off uncollectible
receivables, improper capitalization of software development costs,
and failure to write down goodwill from INSpire's purchase of
Strategic Data Systems (SDS) in violation of GAAP. 57 (k).
The plaintiffs' allegation that the defendants committed fraud
by reporting the company's results for the fourth quarter of 1997
and year end 1997 fails to meet the pleading requirements outlined
above because the plaintiffs fail to explain how or in what
particulars the reported earnings and revenues figures were
inaccurate, and their conclusory allegation that the defendants
knew the figures were false relies on "group pleading" and fails to
plead facts with the requisite specificity to generate a strong
inference of scienter. An unsupported general claim of the
existence of company reports reflecting contrary information 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." Abrams, 292 F.3d
at 432 (emphasis added). See also Goldstein v. MCI Worldcom, 340
F.3d 238, 253 (5th Cir. 2003) (following Abrams and noting that
there the allegations "that the individual defendants (the CEO and
CFO) received daily, weekly, and monthly financial reports that
appraised them of the company's true financial status" were
insufficient and overly general); Tchuruk, 291 F.3d at 358
(allegations concerning `regular reports' from specified subsidiary

to parent and to parent's CEO and named member of executive
committee insufficient because "any such `regular reports' are
insufficiently identified as to who prepared them and how
frequently they were prepared"); id. at 356 ("a plaintiff needs to
specify the internal reports, who prepared them and when, how firm
the numbers were or which company officers reviewed them;" internal
quotations and citation omitted).
Next, the plaintiffs allege that "INSpire held a telephonic
conference call for" securities analysts, money and portfolio
managers, institutional investors, large shareholders, brokers and
stock traders subsequent to the release of the fourth quarter 1997
results in which they announced seven new contracts, and that
"Dunham and Gaines . . . [d]uring the call and in follow-up
conversations with participants" made generally positive
statements about demand for INSpire's products and services,
predicted $46 million in revenues for 1998, and earnings per share
of $.60 and $.86 in 1998 and 1999, respectively. 40. The
plaintiffs cite a January 30, 1998, Raymond James & Associates
report on INSpire that relied on the new contracts and forecasted
earnings outlined in the conference call and in follow up
conversations "with Dunham and/or Gaines." 42.
The defendants argue that these alleged false statements in
paragraph 40 and many others in the Complaint constitute "forward-
looking statements" protected by the PSLRA's safe harbor

provision.13 15 U.S.C. 78u-5(c)(1)(A). A "forward-looking
statement," which can be either written or oral, is defined under
15 U.S.C. 77z-2(i)(1) as:
"(A) a statement containing a projection of
revenues, income (including income loss), earnings
(including earnings loss) per share, capital
expenditures, dividends, capital structure or other
financial items'
(B) a statement of the plans and objectives of
management for future operations, including plans
or objectives relating to the products or services
of the issuer;
(C) a statement of future economic performance,
including any statement contained in a discussion
and analysis of financial condition by the
management or in the results of operations included
pursuant to the rules and regulations of the
Commission . . ."
To avoid the safe harbor, plaintiffs must plead facts demonstrating
that the statement was made with actual knowledge of its falsity.
Id. at 78u-5(c)(1)(B); Nathenson, 267 F.3d at 409. The safe
harbor has two independent prongs: one focusing on the defendant's
cautionary statements and the other on the defendant's state of
mind. 15 U.S.C. 77z-2(c)(1)(A), 78u-5(c)(1)(A) (1996); 15
U.S.C. 77z-2(c)(1)(B), 78u-5(c)(1)(B) (1996). Under the first
prong, there is no liability if, and to the extent that, the
forward-looking statement is: (i) "identified as a forward-looking
statement, and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
13Defendants refer the court to 40, 42-45, 56, 59, 67, 76-
79, 88, 99, 101-103, and 105.

differ materially from those in the forward-looking statement," or
(ii) "immaterial." Id. at 77z-2(c)(1)(A), 78u-5(c)(1)(A).
Under the second prong, there is no liability if the plaintiff
fails to prove that the statement (i) if made by a natural person,
was made with actual knowledge that the statement was false or
misleading, or (ii) if made by a business entity, was made by or
with the approval of an executive officer of that entity with
actual knowledge by that officer that the statement was false or
misleading. Id. at 77z-2(c)(1)(B), 78u-5(c)(1)(B). The
requirement for "meaningful" cautions calls for "substantive"
company-specific warnings based on a realistic description of the
risks applicable to the particular circumstances, not merely a
boilerplate litany of generally applicable risk factors. H.R.
CONF. REP. NO. 369, 104th Cong., 1st Sess. 31, 44 (1995). Oral
statements can qualify for the safe harbor if (i) the statement is
accompanied by a cautionary statement that the "particular" oral
statement is forward-looking and that actual results could differ
materially (essentially a formality as to the form of the
statement); (ii) the statement is accompanied by an oral statement
that additional information that could cause actual results to
differ materially is contained in a readily-available written
document; (iii) the statement identifies the document or portion
thereof containing the additional information; and (iv) the
identified document itself contains appropriate cautionary

language. 15 U.S.C. 77z-2(c)(2), 78u-5(c)(2) (1996). Readily
available written documents for this purpose include documents
filed with the SEC or generally disseminated. Id. at
77z-2(c)(3), 78u-5(c)(3).
With regard to the five alleged misstatements cited in
paragraph 40, the predictions of future earnings and revenues in
these statements meet the PSLRA's definition of a forward-looking
statement. 15 U.S.C. 78u-5(i)(1)(A). However, the defendants
have not shown that these statements were identified as forward-
looking statements. Accordingly, the plaintiffs may properly
allege a claim based on these statements if they were made with
actual knowledge that they were false or misleading. However, the
second and third statements of the five in paragraph 40 are non-
actionable puffery, as they are "of the vague and optimistic type
that cannot support a securities fraud action . . . and contain no
concrete factual or material misrepresentation." Lain v. Evans,
123 F. Supp. 2d 344, 348 (N.D. Tex. 2000) (citation omitted).
Because analysts "rely on facts in determining the value of a
security," these statements "are certainly not specific enough to
perpetrate a fraud on the market." Raab v. Gen. Physics Corp., 4
F.3d 286, 290 (4th Cir. 1993); Rosenzweig v. Azurix Corp., 332 F.3d
854, 869 (5th Cir. 2003). The generalized, positive statements
about the company's competitive strengths, experienced management,
and future prospects are not actionable because they are

immaterial. Rosenzweig, 332 F.3d at 869.
It is arguable whether the plaintiffs adequately allege when
this conference call, and therefore these statements, took place.
Although the Complaint does not date the conference call, it states
that it occurred after INSpire released its December 31, 1997,
results and, because paragraph 41 of the Complaint alleges
INSpire's stock price rose following this call between January 27
and 29, the implication is that the call occurred between January
25 or 26 and January 27, or at least between January 1 and January
27. Although Rule 9(b) does not require that a specific date and
time always be alleged as to each misrepresentation, several courts
have held that simply "outlin[ing] a four-month window during which
all of the misrepresentations occurred . . . does not satisfy the
pleading standard of rule 9(b)." Skylon Corp. v. Guilford Mills,
Inc., No. 93 5581, 1997 U.S. Dist. LEXIS 2104, *6 (S.D.N.Y. Mar. 3,
1997); accord Doehla v. Wathne Ltd., Inc., 1999 U.S. Dist. LEXIS
11787, No. 98 6087 (S.D.N.Y. Aug. 3, 1999) (holding that an
allegation that statements were made over the course of a
four-month period is insufficient for Rule 9(b) purposes). However,
given the context we will assume arguendo that this allegation
provides sufficient notice to the defendants to meet the "when"
requirement under Rule 9(b).
We agree with the district court that the alleged statements
contained in paragraph 40 are not supported by sufficient

particular facts to give rise to a strong inference of knowing
falsity. Several of the statements, as noted above, are so general
as to constitute puffing. And, the "Dunham or Gaines" allegations
( 42) insufficiently charge either one. Further, the plaintiffs
fail to provide sufficient facts to raise a strong inference of
scienter as to the falsity of the revenue and earnings projections
when made. The closest the plaintiffs come is in paragraph 57(k)
of the Complaint where they allege "INSpire's reported revenues and
earnings were materially overstated due to improper revenue
recognition, failure to write off uncollectible receivables,
improper capitalization of software development costs and failure
to write down SDS goodwill in violation of Generally Accepted
Accounting Principles." The plaintiffs, however, fail to plead
facts demonstrating that any of the individual defendants actually
knew ,or were severely reckless in not knowing, of these alleged
infirmities. The plaintiffs' Complaint pleads more facts relating
to scienter as to the flaws in INSpire's software that formed the
basis of the contracts underlying these estimates, but the alleged
shortcomings of INSpire's software do not adequately show scienter
on the part of any particular individual defendant respecting
projected revenues and earnings that assume the terms of INSpire's
contracts will sufficiently be met.
Paragraphs 40 through 42 concern statements made by analysts
and brokers in reports on INSpire. Generally, securities issuers

are not liable for statements or forecasts disseminated by
securities analysts or third parties unless they have "sufficiently
entangled [themselves] with the analysts' forecasts [so as] to
render those predictions 'attributable to [the issuers].'" Elkind
v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980); In re
Navarre Corp. Sec. Litig., 299 F.3d 735, 743 (8th Cir. 2002). In
order to attribute third-party statements to the defendants, the
investors must demonstrate that the statements were adopted by the
defendants or attributable to the defendants in some way, such as
when officials of a company "have, by their activity, made an
implied representation that the information they have reviewed is
true or at least in accordance with the company's views." Elkind,
635 F.2d at 163; Navarre, 299 F.3d at 743. The investors could
also allege that the defendants used the analysts as a conduit,
making false and misleading statements to securities analysts with
the intent that the analysts communicate those statements to the
market. Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1997);
Navarre, 299 F.3d at 743. The plaintiff must plead with
particularity how these exceptions apply, including who supplied
the information to the analyst, how the analyst received the
information, and how the defendant was entangled with or
manipulated the information and the analyst. Navarre, 299 F.3d at
743; Raab v. General Physics Corp., 4 F.3d 286, 288 (4th Cir.
1993). Since the allegation of entanglement is central to the

overall allegation of securities fraud, it must be pleaded with the
required degree of specificity. In re Caere Corporate Sec. Litig.,
837 F. Supp. 1054, 1059 (N.D. Cal. 1993). The pleading should (1)
identify the specific forecasts and name the insider who adopted
them; (2) point to specific interactions between the insider and
the analyst which allegedly gave rise to the entanglement; and (3)
state the dates on which the acts which allegedly gave rise to the
entanglement occurred. Wool v. Tandem Computers, Inc., 818 F.2d
1433, 1439 (9th Cir. 1987). However, analysts' statements that
reflect their own opinions or forecasts may not be charged to the
defendants because the plaintiffs have not sufficiently alleged
entanglement and the adoption of such statements by the defendants.
The analysts' statements in paragraphs 42 through 44 consist
primarily of forward-looking statements for which the plaintiffs do
not allege facts sufficient to create a strong inference of
scienter on the part of defendants and statements of analysts' own
opinions for which the defendants are not liable. Also, the
plaintiffs fail to explain how these statements were false or
misleading due to material omissions when they were made.
The statements in paragraph 45 allegedly made by Dunham to
Investor's Business Daily are mere puffery, with the exception of
his statement that revenue from outsourcing will increase from its
current rate. The plaintiffs do not plead facts sufficient to
raise a strong inference that Dunham had the requisite scienter

respecting the falsity of their latter statement.
Paragraph 46 quotes statements from a February 24, 1998
INSpire press release announcing INSpire's contract with Brazilian
insurer Sul America to provide a software system "for all of its
non-auto business that will automate the processing of one-half
billion dollars worth of policies," that INSpire "will install its
PC-based software system, Windows into Property and Casualty System
(WPC), in 16 Sul America branch locations throughout Brazil over a
12 month period," that "[t]he majority of the installation process
will be coordinated by INSpire's branch office in Columbia, S.C.,
and Sul America's home office in Rio de Janeiro" and that "[t]he
joint installation team will work closely with INSpire's in-house
software development team."14
In paragraph 48, the plaintiffs allege that "defendants" (not
otherwise identified) omitted material details about the Sul
America contract from the February 24 press release by failing to
disclose that INSpire was required to purchase a performance bond
in the amount of $3.7 million and that the contract was segregated
into three phases. Which, if any, of the individual defendants
knew of those provisions is not alleged. The plaintiffs also
allege therein that "defendants [not otherwise identified] knew
that the volume at large companies was simply too much for the WPC
14Because the February 24 press release contains no
identification of statements as forward looking and does not
include any cautionary language, it does not fall within the
first prong of the forward looking statement safe harbor.

system to handle;" that unidentified "Senior installers told
defendants that what INSpire was attempting with WPC at Sul America
was an impossibility;" that unidentified INSpire "IT personnel"
told "INSpire management repeatedly that it was, in effect,
installing nothing more than a test product at Sul America;" and
that "defendants thus knew that Sul America would be dissatisfied
and that the completion of all phases of the contract would not
materialize." These allegations improperly rely on group pleading
and fail to identify any individuals made aware of the software's
purported inadequacies; the allegations likewise fail to identify
any individuals who made the statements about the software or Sul
America, or where, when or on what occasion(s) the statements were
made and whether they were oral or written or both. These
allegations are hence insufficient to give rise to a strong
inference of scienter on the part of any one individual.15
Paragraph 51 reproduces statements from an analyst's report
discussing the analyst's assessment of the insurance claims
administration market and INSpire's general strategy, none of which
contain any alleged misstatements. Paragraphs 52 through 54
address INSpire's March 23, 1998 filing of SEC Form 10-K and its
15The allegations concerning failure to mention the surety
bond and contract phasing provisions are also deficient in that
the factual allegations of the Complaint do not reflect, and it
does not otherwise appear, that the omission of these details
from the press release rendered it misleading. Moreover, a copy
of the Sul America contract was filed with the SEC in connection
with the March 1998 secondary offering, all without any apparent
adverse effect on the market price of INSpire stock.

March 26, 1998 Prospectus/Registration Statement pursuant to its
stock offering. None of the statements in the Prospectus cited by
the plaintiffs are attributed to any of the individual defendants.
The plaintiffs also fail to explain how the general plans outlined
in the Prospectus were false when made. Finally, while the
plaintiffs identify omissions such as the surety bond and the
alleged limitations of INSpire's software, they do not plead facts
that give rise to a strong inference of scienter as to these
omissions, because they do not aver when any individual defendant
either became aware of the software problems or acted with severe
recklessness in being unaware of them. Paragraph 55 cites forward-
looking statements in a broker's report for which the defendants
are not accountable because they represent the analyst's own
opinion as to INSpire's future performance, as indicated by the
fact that they are prefaced with the words "[w]e believe."
Paragraph 56 quotes comments by Dunham in his letter accompanying
INSpire's Annual Report to Shareholders that consist of factual
statements about INSpire's business strategy and recent
developments, including statements such as an allusion to the Sul
America contract, and puffing, including statements such as "We
enter 1998 with a great deal of momentum."
Paragraph 57 recites alleged omissions that were necessary to
make the statements cited earlier not misleading and attempts to
plead scienter. The plaintiffs, however, critically fail to plead
with particularity facts that would give rise to a strong inference

of scienter on the part of any individual defendant.
In paragraph 57(a), note 3, plaintiffs allege that WPC "was
first developed solely as an administrative system for personal
lines of homeowners auto insurance. . . . Although defendants sold
WPC as a complete solution for the administration of both personal
and commercial lines, WPC only been designed for personal auto
insurance and was not yet capable of processing commercial lines."16
Plaintiffs also allege the inability of WPC and EmPower to run
simultaneously and interface with each other, that EmPower
originally could not correctly scan typewriting or handwriting,
that it was fixed as to typewriting but INSpire could not fix it
for handwriting, though most applications were handwritten.
57(e). It is also alleged that "Defendants knew EmPower did not
work when INSpire bought it" in May 1997 and that "[t]he original
designer and developer of EmPower, SDS, designed the product for
small networks only. INSpire therefore knew before the purchase of
the EmPower system that EmPower was not designed for high volume
networks." 57(f). Plaintiffs also allege that INSpire
programmers, despite ongoing efforts to do so, were never able to
successfully modify these software programs to process the volume
and complexity of policies maintained by Sul America and other
unspecified clients with whom INSpire contracted. They further
allege that "INSpire insiders, including, but not limited to,
16Paragraph 57 also essentially repeats the allegations of
paragraph 48, herein above discussed and held insufficient.

defendants Lynn, Robinson, and Dunham, were repeatedly told by
INSpire programmers and developers that EmPower would never work as
defendants had represented it to work." 57(f). This allegation,
however, is insufficient because it fails to state when, where or
on what occasion or occasions this occurred, fails to in any way
identify the INSpire programmers and developers involved, and does
not indicate whether their statements were oral or written or given
any meaningful particulars as to what was stated.
The Complaint alleges that "at least one" INSpire officer
directed the faking of a demonstration, but does not specify which
officer did so, when he did it, or where. Complaint, 57(d).
Similarly, the Complaint also fails to specify when (other than
"throughout the Class Period"), where, to whom, whether orally or
in writing, in what context or setting, and in reference to what
particular products or aspects thereof, the "smoke and mirrors"
remarks were made by unidentified "employees in the IT department,"
unidentified "managers" and "even Defendant Gaines" to refer to
INSpire's "software products." Complaint, 57(b). The plaintiffs
likewise fail to specify when and where defendant Lynn made his
alleged comments that EmPower, one of INSpire's software programs,
"did not work." Complaint, 57(f). No date more specific than the
class period is provided for these remarks and "meetings with upper
management" is too vague of an indication of where or to whom the
alleged comment was made. Complaint, 57(f). Nor is any
indication given as to what particular function of the program Lynn

was addressing. The plaintiffs also cite Robinson's alleged
statements to unidentified INSpire IT personnel who questioned the
functionality of the company's software programs to "get with the
program or get out the door." Complaint, 57(b). While this
statement may suggest Robinson harbored an intent to deceive, the
plaintiffs fail to identify when and where Robinson made this
statement, or what particular function of what program was being
addressed, and therefore do not meet the particularity requirement
for pleading facts giving rise to a strong inference of scienter on
Robinson's part. The plaintiffs also allege that unidentified
"INSpire engineers regularly read" unidentified INSpire "press
releases" and joked to one another, "I didn't know it could do
that" as to unidentified claims made about the capabilities of
INSpire's software. Complaint, 57(c). In addition to the fact
that this statement is suggestive of the state of mind of the
engineers rather than of any other individuals, the plaintiffs
again fail to identify the elements of "who, when, and where"
needed to plead scienter with particularity. It is also alleged
that the defendants "knew that EmPower was incapable of interfacing
with other vendors' systems or insurers' proprietary systems" even
while the software was marketed as an integrated, turnkey solution.
Complaint, 57(g). This allegation fails as to the individual
defendants, however, because it relies on "group pleading" and does
not set forth with particularity how and when any of the individual
defendants became aware of this alleged problem with EmPower. The

plaintiffs further allege that INSpire "was manipulating the
amounts charged to Millers to improve INSpire's reported results,"
but they fail to plead when, where, and at who's direction this
occurred. Complaint, 57(h). The remaining allegations
enumerated in paragraph 57 rely on "group pleading" and fail to
allege with sufficient specificity the "when and where" elements
needed to meet the requirement of pleading facts with particularity
to show scienter.
April 22, 1998 August 14, 1998
With paragraph 58, the plaintiffs move to the second sub
period, April 22, 1998, to August 14, 1998. Paragraphs 58 through
68 recount statements by INSpire and its executives in corporate
documents and a newspaper article, as well as statements by brokers
and analysts. The statements address earnings and revenue
estimates, the Paragon acquisition, and contracts INSpire entered
into with Sul America, Kemper Insurance, Atlantic Preferred
Insurance Company, Harbor Insurance, Orion Capital Companies, and
Patterson Insurance Company to provide claims administration
software. Many of the statements in these paragraphs are forward-
looking and large portions of the analysts' reports consist of the
opinions and forecasts of the analysts themselves, unaccompanied by
any allegation of entanglement or ratification by any defendant.
Furthermore, many of the statements allegedly made by an identified
defendant in these paragraphs are mere puffery, such as Dunham's
statement that "[t]he first quarter of 1998 was extremely

significant for INSpire Insurance Solutions." 58. With regard
to each of the statements alleged by the plaintiffs in these
paragraphs, the plaintiffs fail to plead at least one of the
following elements with particularity: when the statements were
made, where they were made, and sufficient allegations for charging
any individual defendant with them. As with the allegations
concerning the first sub period, the plaintiffs do not explain in
connection with or closely following the allegations concerning the
making or issuance of the statements alleged in this section how
the statement was false or misleading, or how and when any
identified individual defendants knew, or was severely reckless in
not knowing, the inaccuracy of the statement. To the extent why a
particular statement is false or misleading is explained and
scienter is pleaded, this occurs in paragraph 69.
Paragraph 69, like paragraph 57, is where the plaintiffs
attempt to plead scienter as to the facts alleged during this sub
period. Paragraph 69 simply repeats many of the allegations
contained in paragraph 57, adding only:
"(n) INSpire had taken an excessive charge for
purchased research and development in connection
with its acquisition of Paragon, writing off $2
million rather than the $400,000 which should have
been recognized. Thus, INSpire was understating
the goodwill amortization charge which should have
been expensed in every quarter after the
(o) As a result of the aforementioned factors, the
defendants actually knew that their forecasts of
40% earnings growth in 1999 to $0.86 where in fact
unreasonable and false."

These allegations fail to plead with particularity facts giving
rise to a strong inference of scienter because they rely on "group
pleading" insofar as they fail to identify which of the individual
defendants knew that the forecasted earnings growth was false. The
above allegations also fail to allege which defendants, if any,
were aware of the specific factors mentioned in 69(n) that form
the basis of the allegation in 69(o), which would be merely
conclusory absent scienter as to the facts in (n). Moreover, these
allegations also fail because they do not explain how any defendant
knew, or was severely reckless in not knowing, the proper way to
expense the goodwill amortization charge for the Paragon
acquisition, or that the forward-looking earning statements were
false when made. The remainder of paragraph 68 suffers from the
same fatal "group pleading" and lack of particularity defects
explained above in reference to the essentially identical
allegations set forth in paragraph 57.
September 28, 1998 November 16, 1998
With paragraph 70, the plaintiffs begin their recitation of
allegations concerning the sub period running from September 28,
1998, to November 16, 1998. Paragraphs 70 through 79 recount
INSpire's September 28 announcement of two software sales
contracts, its October 21 press release addressing its third
quarter 1998 results, and its November 1, 1998 announcement of a
10-year outsourcing agreement with Arrowhead General Insurance
Agency to use INSpire's software and personnel to process their

claims. The Complaint also recites INSpire's discussions with
analysts during this time and the subsequent favorable reports
released by these analysts. Complaint, 76-79. The Complaint
charges that, during this time, Durham and other individual
defendants took advantage of the alleged inflation of INSpire's
stock price, which had increased to $35 3/8 a share, by selling
106,150 shares of their stock for $3.2 million. Complaint, 80.
INSpire shares had traded between $22 and $25 from October 22
through October 30, 1998. Before October 30, INSpire had traded as
high as $27 on only two days ($27.75 on September 16 and $27.125 on
September 15, 1998). From November 3, 1998, through December 10,
1998, INSpire did not trade below $30 per share, and for several
days traded at or above $33, reaching its high of $35.25 on
November 23, 1998. On December 11, INSpire issued a press release
reducing its estimate of 1999 earnings from $0.90 to $0.84 per
share "due to lower than expected margins" on the Arrowhead
contract "as well as a decrease in anticipated revenues from
another outsourcing contract." Complaint 82. The price of
INSpire stock fell from $30.813 on December 10 to $17.625 the next
day. It remained below $20.00 until the latter part of April 1999,
and after December 10, 1998, never traded as high as $22.00.
Many of the complained of statements alleged in these
paragraphs are forward-looking, represent the opinions of analysts
as to which facts are not alleged showing any defendant to bear
liability, or consist of mere puffery. Except as below noted, with

regard to each of the statements alleged by the plaintiffs in these
paragraphs, the plaintiffs fail to plead at least one of the
following elements with particularity: when the statements were
made, where they were made, and sufficient allegations for charging
any individual defendant with them. As in the earlier two sub
periods, the plaintiffs largely fail to explain in connection with
or shortly after the allegations concerning the making of the
statements alleged in this period how that statement was false or
misleading, or how and when any individual defendant knew or was
reckless in not knowing the inaccuracy of the statement. Instead,
to the extent the false or misleading nature of a particular
statement is explained and scienter pleaded at all, this is
generally saved for paragraph 81.
Paragraph 81 largely replicates the allegations contained in
paragraphs 51 and 69, adding only the following new averments:
"(o) The Arrowhead deal would require a major
infusion of money to make it profitable and would
not provide earnings to INSpire for at least a
(p) Arrowhead was not servicing enough policies to
generate anywhere close to $35 million in revenue
in year one under the contract. There were
approximately 20,000 policies involved with the
Arrowhead deal and this number of policies could
not possibly generate $35 million in revenue for
(q) INSpire was completely unprepared to handle a
project as large as Arrowhead. INSpire did not
have employees qualified to install a product for a
company such as Arrowhead. Furthermore, the
products sold to Arrowhead were not designed to
service a company of Arrowhead's size.
(r) Ultimately, INSpire was forced to lay off close
to 10% of its workers due to INSpire's need to

discontinue its efforts to develop licensed
software packages. The Company's software services
and licensing business deteriorated until this
layoff became necessary.
(s) As a result of the aforementioned factors, the
defendants actually knew that their forecasts of
40% earnings growth in 1999 to $0.86 and in 2000 to
$1.20+ were in fact unreasonable and false."
These allegations are plagued by the same defects as those in the
previous class periods. First, the averments in 81(o) through
(s) rely on "group pleading", as they fail to identify any
individual. Second, these averments do not themselves allege when,
where, and how any individual knew, or was severely reckless in not
knowing, that INSpire was incapable of performing the Arrowhead
contract. Nor do the plaintiffs explain how or when any individual
actually knew the forward-looking estimate in (s) was false when
made. As such, these allegations by themselves fail to allege with
particularity facts that, absent additional evidence, would give
rise to a strong inference of scienter on the part of any
Paragraph 76 alleges that "[i]n connection with the [November
1, 1998] release announcing the [Arrowhead] agreement . . . Dunham
and Smith spoke to securities analysis" and "[d]uring these
conversations with analysts, Dunham and Smith directly disseminated
important information into the market, stating: [t]he deal would
add $0.05 per share to 1999 earnings and beyond that so that the
Company would be on track to report EPS of $1.20 in 2000" and
"[t]he cost to INSpire . . . would be $28 million in cash and stock

options" and the deal "would generate $35 million in year one
revenues." While this is a forward looking statement, it cannot be
ascertained from the record whether it was accompanied by
meaningful cautionary language; hence, it is actionable if made
with actual knowledge of its false or misleading character. A
little more than a month after these statements, on December 11,
1998, INSpire revised downward its 1999 earnings forecast, citing
lower than anticipated margins on the Arrowhead contract. Nothing
in the record suggests any knowledge INSpire or Dunham had in this
respect on December 11 that they lacked in early November. The day
following the December 11 announcement, INSpire stock fell by about
42 percent of its value the preceding day. On November 4 and 5,
only a few days after the November 1 Arrowhead announcement and
Dunham's comments in that respect, Dunham sold 69,150 shares of
INSpire, 16.56% of his holdings, for total proceeds in excess of $2
million. His average price per share was over $30, well above what
the stock had been trading for before November 1, and likewise more
than 30% higher than what it would ever trade at after December 10.
We conclude that these Dunham sales and this sequence of
events, considered in light of all the other facts and
circumstances alleged, including Dunham's position as CEO, which he
had held ever since INSpire was spun off, his total sales
throughout the class period of over 40 percent of his INSpire
stock, and his personal involvement in promoting the Arrowhead
contract and touting the increased revenues and earnings it would

produce, suffice, albeit only barely so, to create a strong
inference of the requisite scienter on Dunham's part in regard to
his early November statements in connection with the Arrowhead
announcement.17 Because it is alleged that Dunham, with the
requisite scienter, made these statements as INSpire's CEO and on
its behalf, and in the course of his INSpire employment, INSpire's
respondent superior liability for those statements is also
adequately alleged. Paul F. Newton & Co. v. Texas Commerce Bank,
630 F.2d 1111, 1118 (5th Cir. 1980).
December 11, 1998 August 16, 1999
Beginning in paragraph 82, the plaintiffs outline their
allegations relating to the fourth sub period, which runs from
December 11, 1998, to August 16, 1999. In December 1998, INSpire
revealed a decline in earnings growth and disclosed that the
Arrowhead contract would not generate earnings previously forecast,
causing the price of INSpire stock to decline from $30 to $17.
17It is alleged that Smith also made such statements, but
Smith made no stock sales at any time during the class period.
While Robinson, Gaines and Lynn sold shares in early November
1998 they each sold significantly less than Dunham then sold
(Robinson and Gaines less than one sixth of what Dunham then
sold, Lynn less than a fourth; Robinson and Gaines then sold a
smaller percentage of their shares than did Dunham, Lynn sold a
slightly larger percentage of his), and, more importantly, they
are not identified in connection with any statements between
October 22 and December 12, 1998, or concerning the Arrowhead
We do not hold that the establishment (on summary judgment
or at trial) of context facts not addressed in the Complaint
could not preclude a finding of actual knowledge against Dunham;
this appeal addresses only the sufficiency of the Complaint.

Complaint, 82. On January 26, 1999, INSpire released its fourth
quarter 1998 and 1998 results, followed by its SEC 10-Q and 10-K
filings on March 24 and 25. Complaint, 87, 92, 93. On March 29,
INSpire announced a 10-year contract with auto insurer Robert Plan
Corp. to provide claims administration using INSpire's WPC
software. This contract was highlighted in the company's April 21
release of its first quarter 1999 results. Complaint, 94, 99.
On May 14, INSpire filed its 10-Q for the 1999 first quarter.
Complaint, 104. On June 17, INSpire announced its 10-year
contract with Island Insurance for claims administration, stating
that it "will produce many positive results." Complaint, 105.
Many of the statements in these paragraphs are forward-
looking, represent the opinions of analysts as to which defendants
do not bear liability, or consist of mere puffery. Apart from the
SEC filings, plaintiffs fail to plead with particularity when the
statements in these paragraphs were made or where they were made.
As with the previous sub periods, the plaintiffs fail to explain in
connection with or shortly after the allegations concerning the
making of statements alleged in this section how that particular
statement was false or misleading, or how and when any individual
defendant knew, or was severely reckless in not knowing, the
inaccuracy of the statement. To the extent misstatements or
omissions are identified and scienter is pleaded, that is done in
paragraph 109.

Paragraph 109 repeats numerous allegations contained in
paragraphs 51, 69, and 81, adding the following averments relating
primarily to the Robert Plan and Island Insurance contracts:
"(g) When negotiations began with The Robert
Plan Corporation to use the new EmPower program
with their outsourcing, EmPower still was not close
functioning. The workflow processing
capabilities were not working and many of the
outlined above remained.
INSpire programmers had many conversations with
defendants Robinson and Lynn, telling them
explicitly that EmPower was not ready to be used
with the Robert Plan contract.
(h) Also, as occurred with Sul America, WPC was not
designed to handle processing for large insurance
companies such as Robert Plan. WPC was designed
approximately $20-$80 million in policies per year
as opposed to the Robert Plan which processed more
than $100 million in policies per year. Because
WPC was designed for smaller insurance companies,
it had limited processing power and speed. WPC was
designed to run a processing cycle each night.
During that cycle, the system goes through all of
the policies. Because of its design, WPC could
only process a limited number of policies a night.
Because RPC had so many policies, however, WPC did
not have the capability to process all of Robert
Plan's policies every night. Although the contract
between INSpire and Robert Plan called for full
implementation of WPC within a twelve-month period,
defendants knew that this was totally unrealistic.
Defendants knew that it would take a year just to
perform a requirements study and to test the
(i) In a June 2000 meeting, defendant Robinson
told attendees at the InsPIRE Senior Staff Meeting
that INSpire knew when it signed the Robert Plan
contract that it could not meet the implementation
schedule, but that INSpire signed the contract
anyway to "get the business."
(j) In a January 7, 2001 article in The Fort
Worth Star-Telegram, John Pergande, the new CEO of
INSpire, admitted that in 1999 revenue failed to
materialize and projects lagged `largely because
the company didn't have the resources to execute

the contracts it signed.' In a January 14, 2001
article in the Sheboygan Press, authored by Martha
H. Shad, Pergande discussed the INSpire business
model and Pergande admitted, `I believe that in the
past when a customer said they wanted something by
a certain date, it was promised whether it was
feasible or not. We're not going to do that
anymore . . . ."
(k) After all the failures enumerated above,
INSpire then tried to make EmPower work with WPC.
INSpire first tried this with customer Arrowhead
Insurance, then at Island Insurance and Robert
Plan. Although INSpire was promising workflow
solutions to these clients, EmPower was not even
close to functioning with WPC.
(l) Defendants told Island Insurance that WPC
could be used for policy and claims administration
of both their personal and business lines of
insurance. However, WPC was not functional on
administration of business lines of insurance. The
inability of WPC to handle commercial processing is
the reason that Island Insurance terminated their
contract with INSpire. Jim Strickland, Vice
President of Sales and Marketing, at the
instruction of Dunham, told Island Insurance that
WPC could rate commercial properties. This promise
was made even though WPC was not in fact capable of
rating commercial lines and was not designed to
rate commercial lines and Dunham knew it."
The allegation in (g) that, when negotiations began with
Robert Plan, the EmPower was not close to functioning does not
allege particular facts giving rise to a strong inference of
scienter on the part of any of particular individual. In addition,
the subsequent allegation concerning conversations between
unidentified INSpire programmers and Robinson and Lynn fails to
indicate when or where such conversations occurred. The
allegations set forth in (h) suffer from the "group pleading"
defect, as they fail to delineate among the individual defendants
as to their state of mind with respect to the alleged unsuitability

of the WPC software for performing the Robert Plan contract. These
allegations also fail to explain when and how any particular
individual defendant came to know, or was severely reckless in not
knowing, of the asserted mismatch between the capabilities of the
WPC software and the demands of the Robert Plan contract. The
allegation in (i) that Robinson told attendees at "a June 2000
meeting" of INSpire senior staff that "INSpire knew when it signed
the Robert Plan contract [in March 1999] that it could not meet the
implementation schedule," is insufficient because, in addition to
its overly vague identification of the meeting, it contains no
information suggesting such knowledge on the part of any identified
individual nor any indication of any basis on which (or when)
Robinson reached the general conclusion he allegedly expressed.
The allegations set forth in (j) concerning January 2001 statements
lack particularity because they refer only vaguely to the company's
conduct and state of mind "in the past," which is overly vague.
The allegation in (k) that after diverse failures "INSpire then
tried to make EmPower work with WPC" for customers Arrowhead,
Island and Robert Plan, but "EmPower was not even close to
functioning with WPC," does not allege facts giving rise to a
strong inference of scienter as to any individual. In (l) the
allegation that Strickland, at Dunham's instruction, "told Island
Insurance that WPC could rate commercial lines" even though it
could not "and Dunham knew it," is likewise insufficient in that no
facts are stated as to how or when that was known by Dunham, nor

when, where, how or to what person Strickland so informed Island.
October 15, 1999 March 31, 2000
On October 15, 1999, INSpire announced large write-offs and
disappointing third quarter 1999 results. Complaint, 110. After
negative reports by analysts reacting to this news, INSpire's stock
price dropped below $4 per share. 111-113. The Complaint
describes how a number of INSpire's clients terminated contracts
with the company and, in some cases, sued INSpire for breach of
contract. Complaint, 114-116. In January 2000, INSpire reported
its financial results for the fourth quarter and year ended
December 31, 1999, all of which showed substantial net losses.
Complaint, 118. The Complaint alleges that, subsequent to
December 31, 1999, INSpire's stock price dropped below $1 per
share. Complaint, 118. Lastly, the Complaint avers that
INSpire's then President, Smith, resigned effective January 7,
2000, CFO Kenneth Meister resigned effective March 31, 2000,
executive Eric Yerina resigned, and defendant Robinson was fired
and sued INSpire. Complaint, 119. The foregoing paragraphs
summarizing INSpire's decline do not identify alleged misstatements
or omissions, nor do they address any individual's scienter. We
agree with the district court that, because fraud cannot be proved
by hindsight, subsequent lawsuits are unpersuasive of scienter, as
they do not show what any particular individual knew, or was
severely reckless in not knowing, at the time the contracts were
entered into. The subsequent resignations of INSpire executives is

similarly unavailing as proof of the commission of fraud by these
or other individuals.
Financial Reporting
The next section of the Complaint concerns INSpire's allegedly
false financial reporting throughout the overall class period. The
plaintiffs allege that the defendants reported inflated revenues
and earnings, improperly recognized revenues, improperly accounted
for goodwill, improperly capitalized software development costs,
and failed to record losses for uncollectible receivables. The
plaintiffs contend that all of these INSpire practices violated
GAAP. This section relies largely on "group pleading" and fails to
plead facts with sufficient particularity to generate a strong
inference of scienter as to any individual. The only reference to
any individual defendant in this section is in paragraph 121 where
plaintiffs allege:
"In fact, during 1998, Dunham once threw a financial
report back at Gaines because Dunham did not like the
numbers reflected in that report. Gaines informed an
employee who had witnessed the incident that when Dunham
did not like the numbers reflected in a financial report,
Dunham would insist that Gaines change those numbers.
Referring to George Dunham, Gaines told one INSpire
employee, "He wants me to write down numbers that don't
exist." Dunham also instructed financial reporting
managers to back-date contracts in order to inflate
INSpire revenues for specified periods."
While these allegations bear upon Dunham's general state of
mind, they are not stated with sufficient particularity, as they
fail to state when, other than sometime during 1998, and where
Dunham allegedly acted in this manner, and there is an entire

failure to relate or connect the matters set out in the above
quoted allegations to any particular alleged misstatement or
omission in any of INSpire's financial reports (or, indeed, to any
particular such report).
Conclusion as to primary violations
In conclusion, we hold that the Complaint fails to properly
plead any section 10(b) or Rule 10(b)(5) violations except on the
part of Dunham with respect only to his November 1998 statements
made in connection with the Arrowhead contract announcement, and on
the part of INSpire, with respect to those same Dunham statements,
as having respondeat superior liability for those violations by
Section 20(a) control person liability
The Complaint seeks to also impose control person liability
under section 20(a) of the Securities Exchange Act, 15 U.S.C.
78t(a), but only as to Dunham and INSpire.18 Control person
liability is secondary only and cannot exist in the absence of a
primary violation. Lovelace v. Software Spectrum Inc., 78 F.3d
1015, 1021 n.8 (5th Cir. 1996). Accordingly, the district court,
having determined that the Complaint alleged no primary violation,
also dismissed the section 20(a) claims. We have concluded that
18Control person liability was also sought to be imposed on
Millers, but the appeal as to Millers has been severed out into a
separate case (see note 1 above) and we do not consider any
matter as to Millers.

the Complaint alleges no primary violations on the part of any
defendant except only as to Dunham respecting only his November
1998 statements in connection with the Arrowhead contract
announcement and as to INSpire, on the basis of respondeat
superior, respecting those same statements by Dunham. Dunham
obviously can have no section 20(a) liability for his own
statements. INSpire can have section 20(a) liability for a primary
violation by its employee Dunham, see Martin v. Shearson Lehman
Hutton, Inc., 986 F.2d 242, 244 (8th Cir. 1993), but INSpire would
in any event have respondeat superior liability for the referenced
primary violations by Dunham. Paul F. Newton & Co., 630 F.2d at
1118.19 Accordingly, our holding renders the section 20(a) claims
against Dunham and INSpire either invalid, as based on no properly
alleged primary violation, or essentially immaterial.
Failure to grant leave to amend
Plaintiffs complain that the district court failed to grant
them leave to amend the Complaint.
At the very end of their lengthy response to defendants'
motion to dismiss the Complaint, plaintiffs stated:
"For the foregoing reasons, plaintiffs respectfully
request that defendants' motion be denied. If, however,
the Court dismisses the Complaint, plaintiffs request
leave to replead. Federal Rule of Civil Procedure 15(a)
directs that leave to amend `shall be freely given when
19Section 20(a) liability is generally subject to the
affirmative defense of lack of participation and good faith. See
Abbott v. Equity Group, 2 F.3d 613, 619 (5th Cir. 1993).

justice so requires.'"
So far as the record reflects, this is the entirety of what
plaintiffs communicated to the district court concerning amendment
to the Complaint. Plaintiffs never at any time either tendered a
further amended Complaint or advised the district court of how or
in what manner they would amend the Complaint or what allegations
would be added or deleted if allowed to do so.20 Nor have
plaintiffs at any time suggested they have relevant information
they were unaware of when the Complaint was filed (or that the
defendants' motion to dismiss did not adequately inform them of the
asserted deficiencies in the Complaint).
Moreover, the district court's prior order of dismissal
specifically found that "Plaintiffs should have one more
opportunity to amend their pleadings in accordance with the
requirements of Rule 9(b) and the PSLRA" (emphasis added) and
granted the plaintiffs until "April 16 [subsequently extended to
May 16], 2001 to file an amended complaint that complies with this
order" (emphasis added). That earlier order specifically noted
that "the PSLRA requires that securities-fraud claimants allege
particular facts demonstrating the required state of mind," and
that the consolidated complaint failed to meet this standard. The
20On appeal plaintiffs only inform us that "plaintiffs could
bolster an already compelling case of fraud, by pleading
additional facts corroborating the Complaint's present
allegations" and "plaintiffs have material that could be added to
an amended complaint (while preserving, of course, their
counsel's work-product privilege)."

earlier order also stated that the consolidated complaint "contains
numerous allegations against the defendants collectively or against
several defendants in the alternative" and was hence defective
"because of its reliance on group pleading," which was "wholly
inconsistent with the strict-pleading requirement of the PSLRA"
under which plaintiffs "`must properly plead wrongdoing and
scienter as to each individual defendant.'" Further, that order
noted that contrary to the requirements of the PSLRA, the
consolidated complaint "wholly fails to allege facts supporting an
inference the forward-looking statements to which they refer were
made with actual knowledge that they are false or misleading."
In its subsequent order dismissing the Second Amended
Complaint and denying further opportunity to amend, the district
court specifically noted these holdings of its prior dismissal
order and that it had allowed plaintiffs "one more opportunity to
amend." That order goes on to correctly observe that "Plaintiffs
have persisted in their reliance on the group-pleading doctrine
despite this Court's previous Dismissal Order finding such method
of pleading inadequate," that "[t]he Second Amended Complaint is
replete with instances of group pleading," that (except for
jurisdictional and class action/party identification allegations
and quotations from press releases and analyst reports) "virtually
every paragraph in the Second Amended Complaint to some degree
relies on group pleading," and that these allegations are hence
inadequate. This order likewise notes (correctly) that "Plaintiffs

have also continued to rely heavily on forward-looking statements."
We further note that the district court correctly characterizes the
Second Amended Complaint as "a `labyrinth'" which makes "it highly
difficult for the Court to assess" its sufficiency "under Rule 9(b)
and the PSLRA."
Under these circumstances it is clear that the district court
acted well within its discretion in concluding that plaintiffs
should not be afforded yet another opportunity to replead. See,
e.g., Goldstein, 340 F.3d at 254-55; Tchuruk, 291 F.3d at 362. See
also, e.g., US Ex Rel Doe v. Dow Chemical Co., 343 F.3d 325, 331
(5th Cir. 2003); Rosenzweig, 332 F.3d at 864-65.
We hold that the district court erred in dismissing so much of
the Complaint as charges Dunham with a section 10 and Rule 10(b)
violation in respect to his early November 1998 statements in
connection with the Arrowhead contract announcement and erred in
dismissing so much of the Complaint as charges INSpire with
respondeat superior liability under section 10 and Rule 10(b)
respecting those same statements. We also hold that the district
court did not err in dismissing all other claims of section 10 and
Rule 10(b) primary violations and all section 20(a) control person
liability claims in respect to such properly dismissed primary
violations. Finally, we hold that the district court did not abuse
its discretion in failing to afford plaintiffs the opportunity to

further amend.
The judgment of the district court is accordingly AFFIRMED in
part; REVERSED in part; and REMANDED for further proceedings not
inconsistent herewith.

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