In Re Advanta Corp. Securities Litigation

Opinions of the United

1999 Decisions States Court of Appeals

for the Third Circuit

6-17-1999

In Re: Advanta Corp

Precedential or Non-Precedential:

Docket 98-1846

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Filed June 17, 1999

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 98-1846

IN RE: ADVANTA CORP. SECURITIES LITIGATION

Steven B. Shaiman; Richard Molison;

James Law; Saul A. Schwartz;* Diane Sklar;*

Theresa Wai; Stephen Wai; Claude Wells;*

Benjamin Axler; Marilyn Axler; Jerry Weinberg,

Appellants

* (Pursuant to F.R.A.P. 12(a))

On Appeal from the United States District Court

for the Eastern District of Pennsylvania

D.C. Civil Action No. 97-cv-04343

(Honorable Ronald L. Buckwalter)

Argued March 9, 1999

Before: MANSMANN, SCIRICA and NYGAARD,

Circuit Judges

(Filed June 17, 1999)

ARTHUR R. MILLER, ESQUIRE

(ARGUED)

1545 Massachusetts Avenue

Cambridge, Massachusetts 02138

DEBORAH R. GROSS, ESQUIRE

Law Offices of Bernard M. Gross

1500 Walnut Street, 6th Floor

Philadelphia, Pennsylvania 19102

JOSHUA H. VINIK, ESQUIRE

Milberg, Weiss, Bershad, Hynes &

Lerach

One Pennsylvania Plaza, 49th Floor

New York, New York 10119

Attorneys for Appellants

JEROME J. SHESTACK, ESQUIRE

(ARGUED)

JAY A. DUBOW, ESQUIRE

MATTHEW A. WHITE, ESQUIRE

LAURA E. KRABILL, ESQUIRE

Wolf, Block, Schorr & Solis-Cohen

Packard Building, 12th Floor

111 South 15th Street

Philadelphia, Pennsylvania 19102

Attorneys for Appellees,

Advanta Corp., Dennis J. Alter,

Alex Hart, William Rosoff, Gene S.

Schneyer and John J. Calamari

ARTHUR E. NEWBOLD, ESQUIRE

(ARGUED)

HOPE M. FREIWALD, ESQUIRE

MICHAEL E. BAUGHMAN, ESQUIRE

Dechert, Price & Rhoads

4000 Bell Atlantic Tower

1717 Arch Street

Philadelphia, Pennsylvania 19103

Attorneys for Appellees,

Robert A. Marshall and Richard A.

Greenawalt

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is a securities class action lawsuit brought by

shareholders of Advanta Corporation against the

corporation and several of its officers. Plaintiffs allege the

defendants made false and misleading statements and

2

material omissions regarding the company's earnings

potential and value of its stock, in violation of the Securities

and Exchange Act of 1934. The District Court granted

Advanta's motion to dismiss for failure to meet the pleading

requirements of Fed. R. Civ. P. 9(b) and the Private

Securities Litigation Reform Act of 1995, 15 U.S.C. S 78u-4

et seq. (West Supp. 1999) (the "Reform Act"). We will affirm.

BACKGROUND

Plaintiffs are former shareholders of Advanta Corporation

("Advanta"), a leading issuer of MasterCard and VISA credit

cards. Advanta forged its reputation in the credit card

industry by innovating the practice of attracting new

customers with unusually low introductory interest rates,

known as "teaser rates," which remain in effect for a limited

period of time, often six months. At the end of this period,

the interest rate returns to a higher, permanent level.

During the early and mid-1990s, Advanta used this

practice to achieve rapid growth and earn large profits.

The focus of this litigation concerns a $20 millionfirst-

quarter loss that Advanta announced on March 17, 1997.

According to plaintiffs' complaint, the loss was caused by

Advanta's decision to implement aggressive techniques to

attract new credit card customers. Specifically, plaintiffs

allege Advanta began issuing cards with lower teaser rates

and longer introductory periods than standard industry

practice, resulting in riskier customers and, ultimately, a

decrease in revenues as many of the new customers

defaulted on their repayment obligations. The increased

delinquency rates produced greater "charge-offs," which are

the costs incurred by the credit card company when a card

holder's balance becomes uncollectible.

Plaintiffs claim Advanta officers failed to disclose these

practices despite knowledge of the risks involved, even after

it became clear that losses were inevitable, and

simultaneously made various statements that allegedly

were false or materially misleading. Much of plaintiffs'

complaint focuses on a statement made by Janet Point,

Advanta's Vice President for Investor Relations, in a

September 12, 1996 Dow Jones article. The article reads in

3

part, "Over the next six months Advanta will experience a

large increase in revenues as it converts more than $5

billion in accounts that are now at teaser rates of about 7%

to its normal interest rate of about 17%, said Advanta

spokeswoman Janet Point." This statement ("the Point

statement") allegedly contradicts a subsequent statement

by Dennis Alter, Advanta's chairman and former CEO ("the

Alter statement"). In a June 1997 article entitled "House of

Cards" that appeared in Philadelphia Magazine, Alter was

quoted as saying: "[W]hat happened is when the

introductory period ended, we were probably not as

aggressive as we could have been [repricing our rates] . . . .

Instead of repricing to 18 percent we repriced closer to 13

or 14 percent in order to retain our image and the luster of

being a low-cost provider." Plaintiffs allege the Alter

statement proves the Point statement was false and

misleading, because the Point statement appears to

indicate that Advanta was planning to reprice its teaser

rates to 17 percent, yet the Alter statement apparently

reveals that Advanta repriced to only 13 or 14 percent.

In addition, plaintiffs identify various statements

portraying Advanta in what plaintiffs believe was an unduly

positive light. These "positive portrayals" include the

following statements, among others:

(1) Advanta's 1996 third-quarter report states in part:

"Our track record underscores our commitment to excel . . .

[Advanta is] a rapidly growing customer financial services

enterprise . . . . [D]espite challenging industry environment,

we are pleased to report that Advanta produced continued,

consistent earnings growth in the third quarter. . .. [F]or

the fifth consecutive year, return on equity has met or

exceeded the 25% level achieved this quarter."

(2) In a Form 10-Q filed on November 12, 1996, Advanta

stated: "The changes in the delinquency and charge-off

rates from year-to-year . . . reflect the trend in unsecured

credit quality which is being experienced throughout the

credit industry."

(3) Announcing a shareholder dividend on November 13,

1996, Advanta released a statement reading in part,"[T]his

dividend increase reflects management's confidence in the

4

company's earnings momentum and Advanta's continuing

commitment to enhancing shareholder value."

(4) On January 21, 1997, Advanta chairman Dennis Alter

stated, "I am pleased to report that in 1996, Advanta

maintained the growth of its current businesses and

accelerated its expansion into new ventures."

According to plaintiffs, these statements were made with

knowledge that they were false and misleading, and

plaintiffs relied on them in deciding to buy (or not to sell)

Advanta stock. Consequently, the complaint alleges that the

positive portrayals constitute a violation of section 10(b) of

the Securities Exchange Act of 1934 ("Exchange Act") and

Rule 10b-5.

In addition, one of the plaintiffs, Jerry Weinberg, alleges

that two of the individual defendants, Richard Greenawalt

and Robert Marshall, traded large blocks of Advanta stock

contemporaneously with Weinberg while in possession of

material, nonpublic information, violating section 20(A) of

the Exchange Act. According to the complaint, Greenawalt

sold Class A and B stock on December 6, 1996; Marshall

sold Class A and B stock on December 9, 1996; and

Weinberg purchased Class A stock on December 9, 1996.

The complaint does not allege that either defendant traded

stock directly with Weinberg, only that the trading was

sufficiently contemporaneous to warrant relief under

section 20(A).

On December 17, 1997, plaintiffs filed a complaint

naming Advanta and seven of its present and former

officers and directors as defendants. Count I of the

complaint alleges the defendants are liable under Section

10(b) of the Exchange Act, 15 U.S.C.A. S 78j(b) (West Supp.

1999), and Rule 10b-5 promulgated thereunder, 17 C.F.R.

S 240.10b-5 (1998), for the Point statement and the positive

portrayals. Count II, based on the same factual allegations,

asserts the liability of the individual defendants under

section 20(a) of the Exchange Act. Count III asserts

Weinberg's section 20(A) claim of contemporaneous trading

against individual defendants Greenawalt and Marshall.

The District Court granted defendants' motions to

dismiss all three counts. See In re Advanta Corp. Sec. Litig.,

5

No. 97-CV-4343, mem. op. at 23-24 (E.D. Pa. July 9, 1998).

Specifically, the District Court held that Count I's claims

based on the Point statement and the positive portrayals

failed to meet the pleading requirements imposed by Fed.

R. Civ. P. 9(b) and the Reform Act. The court dismissed

these claims without prejudice and granted 30 days' leave

for plaintiffs to amend their complaint. The court also

dismissed without prejudice Counts II and III, holding that

they were derivative of Count I.1 Rather than amend their

complaint, plaintiffs elected to file a Notice of Intention to

Stand on the Complaint, which the District Court

construed as a request to dismiss the remaining claims

with prejudice. See Shapiro v. UJB Fin. Corp., 964 F.2d 272,

278 (3d Cir. 1992) ("[A] plaintiff can convert a dismissal

with leave to amend into a final order by electing to stand

upon the original complaint."). By an order entered

September 18, 1998, the District Court denied plaintiffs'

request and this appeal followed.

ANALYSIS

A. Applicable Pleading Requirements

At the outset, we must determine the effect of the Reform

Act on the pleading requirements governing securities fraud

lawsuits, particularly with respect to pleading scienter.

Plaintiffs argue the Reform Act codified the standard

developed by the Court of Appeals for the Second Circuit in

Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50

(2d Cir. 1987) and subsequent cases, and adopted by this

Court in In re Burlington Coat Factory Sec. Litig., 114 F.3d

1410, 1418 (3d Cir. 1997). Under the Second Circuit

standard, a plaintiff must plead facts supporting a "strong

inference" that the defendant acted with the requisite

scienter, by alleging either "facts establishing a motive to

commit fraud and an opportunity to do so" or"facts

constituting circumstantial evidence of either reckless or

conscious behavior." In re Time Warner Inc. Sec. Litig., 9

_________________________________________________________________

1. Count I also contained a claim based on statements regarding changes

to Advanta's charge-off policy. The District Court dismissed the claim

with prejudice under Fed. R. Civ. P. 12(b)(6). Plaintiffs do not appeal

this

part of the ruling.

6

F.3d 259, 269 (2d Cir. 1993). Defendants argue the Reform

Act establishes a pleading standard that is more stringent

than all previously existing standards, including the Second

Circuit's.

To date, two federal courts of appeals have concluded

without analysis that the Reform Act codified the Second

Circuit standard. See Press v. Chemical Inv. Servs. Corp.,

166 F.3d 529, 537-38 (2d Cir. 1999); Williams v. WMX

Techs., Inc., 112 F.3d 175, 178 (5th Cir. 1997). Numerous

district courts have considered the issue, with split results.

A majority have held the Reform Act essentially codified the

Second Circuit's approach.2 Others, including a district

court of this circuit, have held the Act imposes an even

more stringent pleading standard.3 The most notable case is

In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746

(N.D. Cal. 1997), in which the court conducted a detailed

examination of the legislative history and prior case law

before concluding that allegations of "[m]otive, opportunity,

and non-deliberate recklessness" are no longer"sufficient to

support scienter unless the totality of the evidence creates

a strong inference of fraud." See id. at 757.

The Reform Act requires a plaintiff alleging a Rule 10b-5

violation to

specify each statement alleged to have been misleading,

the reason or reasons why the statement is misleading,

and, if an allegation regarding the statement or

omission is made on information and belief, the

complaint shall state with particularity all facts on

which that belief is formed.

15 U.S.C.A. S 78u-4(b)(1) (West Supp. 1999). 4 Regarding

scienter, or knowledge, section 21D(b)(2) of the Reform Act

provides:

_________________________________________________________________

2. See Richard H. Walker & J. Gordon Seymour, Recent Judicial and

Legislative Developments Affecting the Private Securities Fraud Class

Action, 40 Ariz. L. Rev. 1003, 1025 n.124 & accompanying text (1998)

(citing and discussing cases).

3. See Voit v. Wonderware Corp., 977 F. Supp. 363, 374 (E.D. Pa. 1997).

4. Pub. L. No. 104-67, 109 Stat. 743, 758.

7

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.

Id. S 78u-4(b)(2). Failure to meet these requirements will

result in dismissal of the complaint. See id. S 78u-4(b)(3)(A).

Complaints alleging securities fraud must also comply with

Rule 9(b), which provides: "In all averments of fraud or

mistake, the circumstances constituting fraud or mistake

shall be stated with particularity. Malice, intent, knowledge,

and other condition of mind of a person may be averred

generally." Fed. R. Civ. P. 9(b).5

Although the Reform Act's "strong inference" language

mirrors the Second Circuit's, the precise extent to which

Congress intended to adopt the Second Circuit standard is

not clear. The Reform Act's legislative history on this point

is ambiguous and even contradictory. The purpose of the

Act was to restrict abuses in securities class-action

litigation, including: (1) the practice of filing lawsuits

against issuers of securities in response to any significant

change in stock price, regardless of defendants' culpability;

(2) the targeting of "deep pocket" defendants; (3) the abuse

of the discovery process to coerce settlement; and (4)

manipulation of clients by class action attorneys. See H.R.

Conf. Rep. No. 104-369, at 28 (1995), reprinted in 1995

U.S.C.C.A.N. 679, 748.

The bill originally proposed in the House of

Representatives would have altered both the procedural

and the substantive requirements governing claims under

Rule 10b-5. Procedurally, House Bill 10 provided that a

complaint alleging securities fraud must plead "specific

facts" demonstrating that the defendant acted with the

_________________________________________________________________

5. Rule 9(b)'s provision allowing state of mind to be averred generally

conflicts with the Reform Act's requirement that plaintiffs "state with

particularity facts giving rise to a strong inference" of scienter. 15

U.S.C.A. S 78u-4(b)(2) (West Supp. 1999). In that sense, we believe the

Reform Act supersedes Rule 9(b) as it relates to Rule 10b-5 actions.

8

requisite scienter. H.R. 10, 104th Cong. S 204 (1995).

Substantively, the bill would have eliminated recklessness

as a basis for satisfying the scienter element in securities

fraud liability. See id. After hearings in the House

Subcommittee on Telecommunications and Finance,

however, House Bill 10 was revised to reinstate and define

recklessness as a basis for liability.6 The revised bill,

designated House Bill 1058, also contained a seemingly

more stringent pleading standard: It required the complaint

to "make specific allegations which, if true, would be

sufficient to establish scienter as to each defendant at the

time the alleged violation occurred." H.R. 1058, 104th

Cong. S 4 (1995). Rejecting a proposed amendment that

would have weakened the pleading requirement, the House

retained this language in the final version of the bill, which

was passed in March 1995.

Soon thereafter, the Senate passed its own version of the

Reform Act. The Senate bill required plaintiffs to allege

"specific facts demonstrating the state of mind of each

defendant at the time the alleged violation occurred." S.

240, 104th Cong. S 104 (1995). In its report of the bill to

the full Senate, the Senate Committee on Banking, Housing

and Urban Affairs described its pleading standard as

follows:

The Committee does not adopt a new and untested

_________________________________________________________________

6. The definition of recklessness was the subject of considerable debate

on the House floor. Ultimately, House Bill 1058 defined recklessness as

follows:

(4) Recklessness.--For purposes of paragraph (1), a defendant

makes a fraudulent statement recklessly if the defendant, in making

such statement, is guilty of highly unreasonable conduct that (A)

involves not merely simple or even gross negligence, but an extreme

departure from standards of ordinary care, and (B) presents a

danger of misleading buyers or sellers that was either known to the

defendant or so obvious that the defendant must have been

consciously aware of it. Deliberately refraining from taking steps

to

discover whether one's statements are false or misleading

constitutes recklessness, but if the failure to investigate was not

deliberate, such conduct shall not be considered reckless.

141 Cong. Rec. H2863-64 (daily ed. Mar. 8, 1995).

9

pleading standard that would generate additional

litigation. Instead, the Committee chose a uniform

standard modeled upon the pleading standard of the

Second Circuit. Regarded as the most stringent

pleading standard, the Second Circuit requires that the

plaintiff plead facts that give rise to a "strong inference"

of defendant's fraudulent intent. The Committee does

not intend to codify the Second Circuit's case law

interpreting this pleading standard, although courts

may find this body of law instructive.

S. Rep. No. 98, 104th Cong., 1st Sess., at 15 (1995). During

the subsequent floor debate, the Senate considered an

amendment closely tracking the language of the Second

Circuit pleading standard and case law. The amendment,

proposed by Senator Specter, provided:

For purposes of paragraph (1), a strong inference

that the defendant acted with the required state of

mind may be established either--

(A) by alleging facts to show that the defendant had

both motive and opportunity to commit fraud; or

(B) by alleging facts that constitute strong

circumstantial evidence of conscious misbehavior or

recklessness by the defendant.

141 Cong. Rec. S9170 (daily ed. June 27, 1995). Senator

Specter expressly noted that his amendment was based on

Second Circuit case law, particularly Beck v. Manufacturers

Hanover Trust Co., 820 F.2d 46 (2d Cir. 1987). See id. at

S9171 (statement of Sen. Specter). He further stated: "This

is just basic fundamental fairness that if you take the

Second Circuit standard, you ought to take the entire

standard . . . ." 141 Cong. Rec. S9200 (daily ed. June 28,

1995) (statement of Sen. Specter). The Specter amendment

was passed by a vote of 57 to 42, see id. at S9201, and

Senate Bill 240 was passed on June 28, 1995, see id. at

S9219.

The differences between the House and Senate versions

of the Reform Act were addressed by a Committee of

Conference, which released its report on November 28,

1995. The accompanying "Statement of Managers" recited

10

that the purpose of the Reform Act was to create uniformity

among the circuits and "establish . . . more stringent

pleading requirements to curtail the filing of meritless

lawsuits." H.R. Conf. Rep. No. 104-369, at 37 (1995). It

further stated:

Heightened pleading standard

. . .

The Conference Committee language is based in part

on the pleading standard of the Second Circuit. The

standard also is specifically written to conform the

language to Rule 9(b)'s notion of pleading "with

particularity."

Regarded as the most stringent pleading standard,

the Second Circuit requirement is that the plaintiff

state facts with particularity, and that these facts, in

turn, must give rise to a "strong inference" of the

defendant's fraudulent intent. Because the Conference

Committee intends to strengthen existing pleading

requirements, it does not intend to codify the Second

Circuit's case law interpreting this pleading standard.

Id. The accompanying footnote stated: "For this reason, the

Conference Report chose not to include in the pleading

standard certain language relating to motive, opportunity,

or recklessness," an apparent reference to Second Circuit

case law interpreting the pleading requirements for

scienter. Id. n.23; cf. Time Warner, 9 F.3d at 269 (holding

that a plaintiff must allege either "facts establishing a

motive to commit fraud and an opportunity to do so" or

"facts constituting circumstantial evidence of either reckless

or conscious behavior").

President Clinton vetoed the Reform Act on the grounds

that it imposed excessively stringent pleading requirements:

I believe that the pleading requirements of the

Conference Report with regard to a defendant's state of

mind impose an unacceptable procedural hurdle to

meritorious claims being heard in Federal courts. I am

prepared to support the high pleading standards of the

U.S. Court of Appeals for the Second Circuit -- the

highest pleading standard of any Federal circuit court.

11

But the conferees make crystal clear in the Statement

of Managers their intent to raise the standard even

beyond that level. I am not prepared to accept that.

141 Cong. Rec. H15214 (daily ed. Dec. 20, 1995) (veto

message of President Clinton). Subsequently, both houses

of Congress overrode the President's veto and the Reform

Act was enacted into law without changes to the pleading

standard.

Complicating matters further, Congress recently enacted

the Securities Litigation Uniform Standards Act of 1998,

Pub. L. No. 105-353 ("the Standards Act"). Though the

Standards Act does not modify or amend the text of the

Reform Act, its Conference Report states: "It is the clear

understanding of the managers that Congress did not, in

adopting the Reform Act, intend to alter the standards of

liability under the Exchange Act." H.R. Conf. Rep. No. 105-

803, at 13 (1998); see also S. Rep. No. 182, at 11 (1998)

("The managers understand . . . that certain Federal district

courts have interpreted the Reform Act as having altered

the scienter requirement. In that regard, the managers

again emphasize that the clear intent in 1995 and our

continuing intent in this legislation is that neither the

Reform Act nor [the Standards Act] in any way alters the

scienter standard in Federal securities fraud suits."). The

Senate Report reiterates that the Reform Act "establishes a

heightened uniform Federal standard on pleading

requirements based upon the pleading standard applied by

the Second Circuit Court of Appeals." Id. Despite these

statements, however, we do not believe the Standards Act

resolved the uncertainty. In both the House and Senate

floor debate on the Standards Act, legislators continued to

disagree whether the Reform Act codified the Second

Circuit standard.7 Furthermore, the Supreme Court has

_________________________________________________________________

7. The Federal Securities Law Reports observe:

Responding to confusion over the pleading standard imposed by the

Reform Act, proponents of the Uniform Standards Act took the

opportunity to restate and clarify what Congress intended in 1995.

The Managers' Statement on the Uniform Standards Act. . .

explained that the 1995 Act did not alter the standards of

liability

under the Exchange Act but that it did establish a heightened,

12

instructed that "the interpretation given by one Congress

(or a committee or Member thereof) to an earlier statute is

of little assistance in discerning the meaning of that

statute." Central Bank of Denver v. First Interstate Bank of

Denver, 511 U.S. 164, 185 (1994). Consequently, our

interpretation of the Reform Act is unaffected by the

legislative history of the Standards Act.

Ultimately, we believe there is little to gain in attempting

to reconcile the conflicting expressions of legislative intent,

including the President's veto statement. The legislative

history on this point is contradictory and inconclusive, and

we are reluctant to accord it much weight. Accordingly, we

direct our attention to the Reform Act's plain language,

which is the customary starting point in statutory

interpretation. The text of section 21D(b)(2) closely mirrors

language employed by the Second Circuit, particularly as it

requires the plaintiff to allege facts supporting a"strong

inference" of scienter. In fact, with the exception of the Act's

"state with particularity" requirement, the two standards

are virtually identical. Cf. 15 U.S.C.A. S 78u-4(b)(2) (plaintiff

must "state with particularity facts giving rise to a strong

inference that the defendant acted with the required state

of mind"); Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2d

Cir. 1995) ("Plaintiffs must also allege facts that give rise to

a strong inference of scienter."). We believe Congress's use

of the Second Circuit's language compels the conclusion

that the Reform Act establishes a pleading standard

approximately equal in stringency to that of the Second

Circuit. Because the Second Circuit standard was regarded

as the most restrictive prior the Reform Act, this

interpretation is consistent with Congress's stated intent of

_________________________________________________________________

uniform federal standard for pleading scienter based on the 2nd

U.S. Circuit Court of Appeals standard. The debates over the

earlier

House and Senate bills largely echoed this view and included

remarks that the Reform Act specifically adopted the 2nd Circuit

standard. Other remarks, however, suggested that Congress

intended a pleading standard higher than the 2nd Circuit's. Thus,

despite Congress' efforts to clarify its intent, some uncertainty

may

still persist.

1844 Federal Sec. L. Rep. 2 (Nov. 11, 1998).

13

strengthening pleading requirements and deterring frivolous

securities litigation. In many jurisdictions, adoption of a

"strong inference" standard will substantially heighten the

barriers to pleading scienter, a result Congress expressly

intended. Moreover, even in jurisdictions already employing

the Second Circuit standard, the additional requirement

that plaintiffs state facts "with particularity" represents a

heightening of the standard. This language echoes precisely

Fed. R. Civ. P. 9(b) and therefore requires plaintiffs to plead

"the who, what, when, where, and how: the first paragraph

of any newspaper story." DiLeo v. Ernst & Young, 901 F.2d

624, 627 (7th Cir. 1990) (quoted in Burlington Coat Factory,

114 F.3d at 1422).

Although the Reform Act established a uniform pleading

standard, it did not purport to alter the substantive

contours of scienter. Under the heading "Requirements for

securities fraud actions," the Act expressly characterizes

subsections 21D(b)(1) and (b)(2) as imposing "pleading

requirements." 15 U.S.C.A. S 78u-4(b)(3)(A) (West Supp.

1999). On this point, the legislative history is

uncontradicted and reinforces the view that these

provisions impose strictly procedural requirements. The

Statement of Managers notes "this legislation implements

needed procedural protections to discourage frivolous

litigation," an explicit reference to the procedural nature of

the Reform Act. H.R. Conf. Rep. No. 104-369 at 28 (1995).

It also states that section 21D(b)(2) imposes a"heightened

pleading standard" in response to disparate interpretations

of Fed. R. Civ. P. 9(b), a procedural rule. See id. at 37

("[Rule 9(b)] has not prevented abuse of the securities laws

by private litigants. Moreover, the courts of appeals have

interpreted Rule 9(b)'s requirement in conflicting ways,

creating distinctly different standards among the circuits.").

Likewise, the floor debate and committee reports in both

houses of Congress, as well as the President's veto

statement, all describe the Reform Act as imposing new

"pleading requirements." In view of the statutory language

and supporting legislative history, we believe section

21D(b)(2) was intended to modify procedural requirements

while leaving substantive law undisturbed.8

_________________________________________________________________

8. As noted, the Silicon Graphics court interpreted the Reform Act to

eliminate allegations of motive, opportunity, and non-deliberate

14

Accordingly, we hold that it remains sufficient for

plaintiffs plead scienter by alleging facts "establishing a

motive and an opportunity to commit fraud, or by setting

forth facts that constitute circumstantial evidence of either

reckless or conscious behavior." Weiner v. Quaker Oats Co.,

129 F.3d 310, 318 n.8 (3d Cir. 1997); accord Press, 166

F.3d at 538 (same). Motive and opportunity, like all other

allegations of scienter (intentional, conscious, or reckless

behavior), must now be supported by facts stated "with

particularity" and must give rise to a "strong inference" of

scienter. 15 U.S.C.A. S 78u-4(b)(2) (West Supp. 1999).

These heightened pleading requirements address the

previous ease of alleging motive and opportunity on the

part of corporate officers to commit securities fraud.

Permitting blanket assertions of motive and opportunity to

serve as a basis for liability under the Exchange Act would

undermine the more rigorous pleading standard Congress

has established. After the Reform Act, catch-all allegations

that defendants stood to benefit from wrongdoing and had

the opportunity to implement a fraudulent scheme are no

longer sufficient, because they do not state facts with

particularity or give rise to a strong inference of scienter.

As for recklessness, we reiterate our previous holding

that it remains a sufficient basis for liability. See Burlington

Coat Factory, 114 F.3d at 1418. Retaining recklessness not

only is consistent with the Reform Act's expressly

_________________________________________________________________

recklessness as independent bases for scienter. See 746 F. Supp. at 757

("Motive, opportunity, and non-deliberate recklessness may provide some

evidence of intentional wrongdoing, but are not alone sufficient to

support scienter unless the totality of the evidence creates a strong

inference of fraud."). The court relied largely on the Act's legislative

history, particularly the Conference Committee's deletion of the Specter

amendment. See H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995

U.S.C.C.A.N. 730, at 41 n.23 ("For this reason, the Conference Report

chose not to include in the pleading standard certain language relating

to motive, opportunity, or recklessness."). But if Congress had desired to

eliminate motive and opportunity or recklessness as a basis for scienter,

it could have done so expressly in the text of the Reform Act. In our

view, the fact that Congress considered inserting language directly

addressing this line of cases, but ultimately chose not to, suggests that

it intended to leave the matter to judicial interpretation.

15

procedural language, but also promotes the policy

objectives of discouraging deliberate ignorance and

preventing defendants from escaping liability solely because

of the difficulty of proving conscious intent to commit

fraud. A reckless statement is one " `involving not merely

simple, or even inexcusable negligence, but an extreme

departure from the standards of ordinary care, and which

presents a danger of misleading buyers or sellers that is

either known to the defendant or is so obvious that the

actor must have been aware of it.' " McLean v. Alexander,

599 F.2d 1190, 1197 (3d Cir. 1979) (quoting Sunstrand

Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.

1977)). We also note that scienter may be alleged by stating

with particularity facts giving rise to a strong inference of

conscious wrongdoing, such as intentional fraud or other

deliberate illegal behavior.

We now turn to the particulars of plaintiffs' complaint.

B. The Point Statement

Plaintiffs contend the Point statement subjects Advanta

to liability under section 10(b) of the Exchange Act, which

makes it unlawful for any person 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

Commission may prescribe." 15 U.S.C.A. S 78j(b) (West

Supp. 1999). Rule 10b-5, in turn, makes it unlawful 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.

S 240.10b-5(b) (1998). These provisions create a private

right of action for plaintiffs to recover damages for "false or

misleading statements or omissions of material fact that

affect trading on the secondary market." Burlington Coat

Factory, 114 F.3d at 1417; see also In re Craftmatic Sec.

Litig., 890 F.2d 628, 639 (3d Cir. 1989) (federal securities

law recognizes a right of action for omitting material facts

that would assume significance in the deliberations of a

reasonable shareholder).

16

The Reform Act establishes a safe harbor protecting

certain "forward-looking" statements from Rule 10b-5

liability. See 15 U.S.C.A. S 78u-5 (West Supp. 1999).

Regarding statements made by natural persons (as opposed

to business entities), the Act provides that a forward-

looking statement is shielded by the safe-harbor provision

unless the plaintiff proves it was made with "actual

knowledge . . . that the statement was false or misleading."

Id. S 78u-5(c)(1)(B)(i). The District Court held the Point

statement was forward-looking and qualified for protection

under the Act because "[p]laintiffs' catch-all allegation that

all speakers knew their statements were false when made is

too broad and Alter's comments indicate nothing more than

Advanta's failure to follow through exactly as planned on its

proposed interest increase, rather than purposeful intent to

fool the public." Advanta, mem. op. at 23. The Advanta

shareholders contend that the Point statement was not

forward-looking, and that even if it was, it was made with

actual knowledge of its false and misleading nature and

therefore does not qualify for protection.

Under the Reform Act, a statement is forward-looking if,

inter alia, it is "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." 15

U.S.C.A. S 78u-5(i)(1)(A) (West Supp. 1999). The first portion

of the Point statement reads, "Over the next six months

Advanta will experience a large increase in revenues. . . ."

In our view, this portion of the statement clearly qualifies

as "a projection of revenues" and therefore is forward-

looking. The remaining portion of the statement,"as

[Advanta] converts more than $5 billion in accounts that

are now at teaser rates of about 7% to its normal interest

rate of about 17%," is a statement of Advanta's plan to

reprice its teaser-rate accounts to a rate of about 17%. We

believe this part of the statement is forward-looking as well,

because it is "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."

Id. S 78u-5(i)(1)(B). Consequently, we hold that the entire

Point statement is "forward-looking" within the meaning of

the Act.

17

Nonetheless, the safe harbor will not apply if the

statement was made with "actual knowledge" that the

statement was false or misleading. Id. S 78u-5(c)(1)(B)(i).

Plaintiffs argue the falsity of the Point statement is proved

by Dennis Alter's subsequent comment that "we were

probably not as aggressive as we could have been[repricing

our rates] . . . . Instead of repricing to 18 percent we

repriced closer to 13 or 14 percent in order to retain our

image and the luster of being a low-cost provider." Because

Point was Advanta's spokesperson, plaintiffs argue, she

must have possessed actual knowledge that Advanta was

not repricing to 17 percent, but only 13 or 14 percent, at

the time the statement was made. Plaintiffs further contend

that even if Point did not possess actual knowledge, the

failure of Advanta's executives to repudiate the statement

constituted a ratification of it.

The complaint does not plead any specific facts to

support an inference that Point, or anyone else at Advanta,

had actual knowledge of her statement's falsity. The

complaint's only specific factual allegation regarding the

falsity of the Point statement is the existence of the Alter

statement some nine months later. But the Point statement

and the Alter statement are not inconsistent: Point stated

in September 1996 that Advanta planned to reprice its

teaser rates to 17%; nine months later, Alter expressed

regret that Advanta did not reprice to that level. Even

assuming the two statements referred to precisely the same

accounts, it does not follow that Point's statement was

false: Advanta may have intended to reprice the accounts to

17 percent at the time of the Point statement and

subsequently changed its business strategy. As the

defendants point out, Advanta owed no duty to update the

Point statement. See 15 U.S.C.A. S 78u-5(d) (West Supp.

1999) ("Nothing in this section shall impose upon any

person a duty to update a forward-looking statement.");

Burlington Coat Factory, 114 F.3d at 1433 ("[T]he voluntary

disclosure of an ordinary earnings forecast does not trigger

any duty to update.).9 At best, comparison of the Point and

_________________________________________________________________

9. We also reject plaintiffs' argument that the Alter statement, along

with

proposed corrective measures announced by Advanta in the wake of the

$20 million loss, constitute "admissions" of securities fraud liability.

If

this were so, all companies that suffer losses and then publicly discuss

how they plan to improve earnings in the future would be guilty of

admissions that they defrauded investors.

18

Alter statements suggests that Advanta made a series of

unwise business decisions in its attempt to attract new

customers. But section 10(b) does not " `regulate

transactions which constitute no more than internal

corporate mismanagement.' " Santa Fe Indus., Inc. v. Green,

430 U.S. 462, 479 (1977) (quoting Superintendent of Ins. v.

Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971)).

Plaintiffs' complaint fails to plead any other facts

supporting an inference that the Point statement was made

with "actual knowledge" of its falsity. Accordingly, we

believe the statement was protected by the safe-harbor

provision for forward-looking statements.

C. The "Positive Portrayals"

Next, we consider whether plaintiffs adequately pleaded a

cause of action relating to the "positive portrayals" made by

Advanta and its officers. To state a securities fraud claim

under section 10(b) and rule 10b-5, a private plaintiff must

plead the following elements: "(1) that the defendant made

a misrepresentation or omission of (2) a material (3) fact; (4)

that the defendant acted with knowledge or recklessness

and (5) that the plaintiff reasonably relied on the

misrepresentation or omission and (6) consequently

suffered damage." In re Westinghouse Sec. Litig., 90 F.3d

696, 710 (3d Cir. 1996).

Plaintiffs' amended complaint identifies a number of

representations alleged to satisfy these criteria. In addition

to those set forth above (upon which the District Court

focused its analysis), the complaint identifies the following

statements:

(1) An April 1996 letter to shareholders, signed by

defendants Hart, Alter, Greenawalt and Rosoff, stated:

Advanta's credit quality continues to be among the best

in the industry. Our emphasis on gold cards -- and

targeting of high quality customer prospects with great

potential for profitability -- sets us apart from other

credit card issuers.

* * *

The Company is among the most efficient producers in

the credit card industry. Our superior cost structure

19

for delivering and servicing financial products allows us

to achieve outstanding returns with highly competitive

pricing and flexibility.

(Pls.' Am. Compl. P 35.) The letter also touted Advanta's

strengths, including "an experienced management team,

technological expertise . . . and expanding distribution

channels." (Id.)

(2) Advanta's 1995 Annual Report included the following

representations regarding the quality of its credit portfolio:

While we added substantially to our account base, our

credit quality remained excellent.

* * *

Our emphasis on gold cards -- and targeting of better

quality customers -- helps us maintain an enviable

credit quality profile. Gold cards made up 82% of our

credit card balances in 1995, nearly double the

industry average.

(Id. P 36.) The 1995 Annual Report also referred to

Advanta's "risk-adjusted pricing strategy" in which "credit

cards are issued with lower rates to customers whose credit

quality is expected to result in a lower rate of credit losses."

(Id.)

(3) A July 18, 1996 letter to shareholders, again signed

by defendants Alter, Hart, Greenawalt and Rosoff, stated

that "[d]espite industry-wide pressure on credit card asset

quality, Advanta continued to produce better-than-industry

credit measures, and achieved excellent growth and returns

throughout our core businesses." (Id.P 37.)

(4) A Form 8-K filed with the SEC on October 17, 1996

and signed by defendant Schneyer stated, "The Company's

credit card asset quality statistics continue to be better

than industry averages." (Id. P 50.)

According to plaintiffs, these statements (as well as those

set forth supra, Part I) were materially false and misleading

because they failed to disclose the deterioration in credit

quality allegedly caused by Advanta's aggressive efforts to

attract new customers. The District Court held the

statements do not prove Advanta intentionally misled or

20

defrauded investors, but only that profits failed to live up to

expectations. See Advanta, mem. op. at 19. Consequently,

the court rejected plaintiffs' arguments as "attempts to

plead fraud by hindsight." Id.

Rule 10b-5 liability does not attach merely because "[a]t

one time the firm bathes itself in a favorable light" but

"[l]ater the firm discloses that things are less rosy." DiLeo,

901 F.2d at 627. Rather, the plaintiff must demonstrate

that the loss was attributable to the defendant's fraudulent

conduct. As noted, the Reform Act requires plaintiffs to

"specify each statement alleged to have been misleading,

the reason or reasons why the statement is misleading,

and, if an allegation regarding the statement or omission is

made on information and belief, the complaint shall state

with particularity all facts on which that belief is formed."

15 U.S.C.A. S 78u-4(b)(1) (West Supp. 1999). Furthermore,

the complaint must "state with particularity facts giving

rise to a strong inference that the defendant acted with the

required state of mind." Id. S 78u-4(b)(2) (West Supp. 1999).

The complaint here alleges that during the time period in

which Advanta issued the positive portrayals, the company

implemented policies relaxing its underwriting and

monitoring procedures and "superior credit risk customers

were switching to other credit card companies at rates that

would have a materially negative impact on the Company's

reported earnings." (Pls. Am. Compl. P 46.) Elsewhere, it

alleges that Advanta changed its methodology for

computing bankruptcy charge-offs without promptly

disclosing this change to the marketplace, see id. PP 46, 48,

50; that Advanta repriced its teaser rates to 13 or 14

percent rather than its normal rate of 17 percent, causing

a substantial decline in revenues, id. P 47; and that

Advanta lacked adequate collection capability to support

the expansion in its customer base, id.P 52. According to

plaintiffs, the juxtaposition of these alleged facts against

the positive portrayals shows that the statements were

materially misleading when made.

We disagree. Even assuming plaintiffs' allegations are

true, the positive portrayals do not contradict any of

defendants' other statements but merely report previous

successes and express confidence in Advanta's prospects

21

for future growth. Factual recitations of past earnings, so

long as they are accurate, do not create liability under

Section 10(b). See Serabian v. Amoskeag Bank Shares, Inc.,

24 F.3d 357, 361 (1st Cir. 1994) ("[D]efendants may not be

held liable under the securities laws for accurate reports of

past successes, even if present circumstances are less

rosy.") Similarly, vague and general statements of optimism

"constitute no more than `puffery' and are understood by

reasonable investors as such." Burlington Coat Factory, 114

F.3d at 1428 n.14; see also San Leandro Emergency Med.

Plan v. Phillip Morris Co., 75 F.3d 801, 811 (2d Cir. 1996);

Shapiro, 964 F.2d at 283 n.12. Such statements, even if

arguably misleading, do not give rise to a federal securities

claim because they are not material: there is no

"substantial likelihood that the disclosure of the omitted

fact would have been viewed by the reasonable investor as

having significantly altered the `total mix' of information

made available." TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438, 449 (1976); see also Craftmatic, 890 F.2d at 642

(holding that "statements of subjective analysis or

extrapolation, such as opinions, motives, and intentions"

are "soft information" and hence immaterial for purposes of

Rule 10b-5). The representations identified by plaintiffs fall

entirely into these categories: accurate reports of past

earnings, and non-actionable expressions of optimism for

the future. We are skeptical that plaintiffs or any other

reasonable investors would make investment decisions

based on the positive portrayals.

Even if the positive portrayals were materially misleading,

we believe the complaint suffers a more fundamental defect

in that it fails to satisfy the Reform Act's requirements for

pleading scienter. Rather than state with particularity facts

supporting a strong inference that defendants possessed

the requisite scienter, plaintiffs offer conclusory assertions

that the defendants acted "knowingly," Pls. Am. Compl.

PP 22, 42, 51, as well as blanket statements that

defendants must have been aware of the impending losses

by virtue of their positions within the company, see id.

PP 19, 22, 23. It is well established that a pleading of

scienter "may not rest on a bare inference that a defendant

`must have had' knowledge of the facts." Greenstone v.

Cambex Corp., 975 F.2d 22, 26 (1st Cir. 1992) (Breyer, J.)

22

(quoting Barker v. Henderson, Franklin, Starnes & Holt, 797

F.2d 490, 497 (7th Cir.1986)). Likewise, allegations that a

securities-fraud defendant, because of his position within

the company, "must have known" a statement was false or

misleading are "precisely the types of inferences which

[courts], on numerous occasions, have determined to be

inadequate to withstand Rule 9(b) scrutiny." Maldonado v.

Dominguez, 137 F.3d 1, 10 (1st Cir. 1998). Generalized

imputations of knowledge do not suffice, regardless of the

defendants' positions within the company. See Rosenbloom

v. Adams, Scott & Conway, Inc., 552 F.2d 1336, 1338-39

(7th Cir. 1977) ("A director, officer, or even the president of

a corporation often has superior knowledge and

information, but neither the knowledge nor the information

necessarily attaches to those positions."). In re Ancor

Communications, Inc. Sec. Litig., 22 F. Supp. 2d 999 (D.

Minn. 1998), relied upon by plaintiffs, does not suggest

otherwise. There the court inferred that key officers were

aware their product would likely prove incompatible with

the products of another company with whom Ancor had

entered into a supply contract. The court expressly based

its holding on the facts that the contract "was undeniably

the most significant contract in Ancor's history," thus

supporting an unusually strong inference of scienter, and

that plaintiffs' complaint also cited extrinsic evidence such

as discussions among officers regarding product

incompatibility and an escape clause in the supply

agreement governing this contingency. Id. at 1005. Such

considerations are not present here.

Plaintiffs also argue that even if defendants did not

intentionally mislead investors, they recklessly disregarded

negative trends in the credit card industry and in Advanta's

customer base, and therefore possessed the requisite

scienter. In particular, plaintiffs contend the positive

portrayals were reckless in light of industry-wide increases

in personal bankruptcies and charge-offs, especially as

exacerbated by Advanta's alleged decisions to reprice

introductory rates to only 13 or 14 percent and to relax

underwriting and monitoring practices. We disagree. For

purposes of the scienter requirement of Section 10(b) and

Rule 10b-5, we have adopted Sunstrand's definition of a

reckless statement as one " `involving not merely simple, or

23

even inexcusable negligence, but an extreme departure

from the standards of ordinary care, and which presents a

danger of misleading buyers or sellers that is either known

to the defendant or is so obvious that the actor must have

been aware of it.' " McLean, 599 F.2d at 1197 (quoting

Sunstrand, 553 F.2d at 1045); accord In re Phillips

Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989).

Plaintiffs' allegations, even if true, would not demonstrate

an "extreme departure" from the standards of ordinary

care. At most, the complaint demonstrates that Advanta

embarked on a business strategy of aggressively recruiting

new customers without adequately accounting for the

increased risk this endeavor posed. None of the facts in the

complaint suggests this strategy represented an egregious

departure from the range of reasonable business decisions,

as opposed to simple mismanagement. But "claims

essentially grounded on corporate mismanagement are not

cognizable under federal law." Craftmatic, 890 F.2d at 638-

39. Accordingly, we find that the positive portrayals do not

support a strong inference of recklessness.

The complaint's remaining allegation regarding scienter is

that several of the individual defendants -- most

prominently, Richard Greenawalt, Dennis Alter, Robert

Marshall, and Gene Schneyer -- sold large blocks of their

Advanta stock during November and December 1996,

approximately three months before the $20 million loss was

announced to the marketplace. (See Pls. Am. Compl. P 69.)

Plaintiffs allege these transactions suggest defendants knew

of the impending first-quarter loss or at least had the

motive and opportunity to commit fraud. The complaint

sets forth the dates, numbers of shares, and proceeds of

the sales. (See id.)

We have held that "[w]e will not infer fraudulent intent

from the mere fact that some officers sold stock." Burlington

Coat Factory, 114 F.3d at 1424; accord San Leandro, 75

F.3d at 814 ("[T]he sale of stock by one company executive

does not give rise to a strong inference of the company's

fraudulent intent . . . ."); Shaw v. Digital Equip. Corp., 82

F.3d 1194, 1224 (1st Cir. 1996) ("[T]he mere fact that

insider stock sales occurred does not suffice to establish

scienter."). But if the stock sales were unusual in scope or

24

timing, they may support an inference of scienter. See

Burlington Coat Factory, 114 F.3d at 1424; Shaw, 82 F.3d

at 1224 ("[A]llegations of `insider trading in suspicious

amounts or at suspicious times' may permit an inference

that the trader -- and by further inference, the company --

possessed material nonpublic information at the time.")

(quoting Greenstone, 975 F.2d at 26). In Burlington Coat

Factory, we found the stock sales did not permit an

inference of scienter because only three of thefive

defendants sold stock, plaintiffs provided information on

the total stock holdings of only one defendant who had

traded only 0.5 percent of his holdings, and plaintiffs failed

to plead facts indicating whether such trades were"normal

and routine" for the defendants and whether the trading

profits were substantial in comparison to their overall

compensation. See 114 F.3d at 1423.

Here, three of the individual defendants sold no stock at

all during the class period, raising doubt whether the sales

were motivated by an intent to profit from inflated stock

prices before the upcoming losses were reported. See Acito,

47 F.3d at 54 (holding that lack of sales by several

defendants "undermines plaintiffs' claim that defendants

delayed notifying the public so that they could sell their

stock at a huge profit") (internal quotation marks omitted).

In addition, although the complaint fails to provide

information on the percentage of total holdings sold by the

defendants, it appears the defendants who did trade stock

during the class period sold only small percentages of their

holdings. According to Form 4s that were filed with the SEC

and attached to Advanta's motion to dismiss, Schneyer and

Alter sold only 7 percent and 5 percent, respectively, of

their total holdings.10 Alter, in particular, continued to hold

a sizable percentage of Advanta's outstanding stock even

after the 1996 sales. Far from supporting a "strong

inference" that defendants had a motive to capitalize on

artificially inflated stock prices, these facts suggest they

had every incentive to keep Advanta profitable. See

_________________________________________________________________

10. Although similar information is not available with regard to the other

individual defendants, Advanta has no duty to provide it; rather, the

burden is on the plaintiffs to plead facts supporting an inference of

scienter.

25

Burlington Coat Factory, 114 F.3d at 1422 n.12 (finding no

motive and opportunity because plaintiffs failed to explain

"how a temporary inflation of . . . stock price would help

management increase its compensation or preserve its

jobs"); Wallace v. Systems & Computer Tech. Corp., No. 95-

CV-6303, 1997 WL 602808, at *17 (E.D. Pa. Sept. 23,

1997) (same).

Nor were the sales at issue particularly large in

comparison to the individual defendants' previous trading

practices. The complaint alleges that Greenawalt, Alter,

Marshall, and Schneyer sold a total of 1,023,766 shares

during the eight-month class period, as compared to

580,814 during the previous 28 months. It makes no

reference to the previous trading practices of the other

individual defendants. Although the profits realized by the

defendants were significant relative to their base salaries,

these proceeds were the result of accumulated stock

options and were an intended part of their overall

compensation package. (See Pls. Am. Compl.PP 11-16.) As

we recognized in Burlington Coat Factory, "[a] large number

of today's corporate executives are compensated in terms of

stock and stock options. It follows then that these

individuals will trade those securities in the normal course

of events." 114 F.3d at 1424 (citation omitted).

Thus, we hold that the allegations concerning defendants'

stock transactions do not permit a strong inference of

scienter, as required by the Reform Act.11 Nor have

plaintiffs alleged other specific facts supporting such an

inference. Consequently, we believe the claims relating to

positive portrayals fail to comply with statutory pleading

requirements and were correctly dismissed.

D. Contemporaneous Trading

One of the individual plaintiffs, Jerry Weinberg, alleges

that two of the individual defendants, Greenawalt and

Marshall, traded large blocks of Advanta stock

contemporaneously with Weinberg while in possession of

_________________________________________________________________

11. Because the complaint fails to meet the pleading requirements of the

Reform Act, we need not address whether it also fails to meet the

requirements of Fed. R. Civ. P. 9(b).

26

material, nonpublic information, violating section 20(A) of

the Exchange Act. According to the complaint, Greenawalt

sold Class A and B stock on December 6, 1996; Marshall

sold Class A and B stock on December 9, 1996; and

Weinberg purchased Class A stock on December 9, 1996.

Section 20(A) of the Exchange Act provides that an

insider who trades stock "while in possession of material,

nonpublic information" is liable to any person who traded

contemporaneously with the insider. 15 U.S.C.A.S 78t-1(a)

(West Supp. 1999). Liability under section 20(A) is

predicated upon an independent violation of "this chapter

or the rules or regulations thereunder." Id. Hence, claims

under section 20(A) are derivative, requiring proof of a

separate underlying violation of the Exchange Act. See

Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d

697, 703 (2d Cir. 1994) ("[T]o state a claim under S 20A, a

plaintiff must plead a predicate violation of the '34 Act or

its rules and regulations."); In re Verifone Sec. Litig., 11

F.3d 865, 872 (9th Cir. 1993) (noting that if plaintiffs "have

failed to allege an actionable independent underlying

violation of the '34 Act, they similarly cannot maintain a

claim under S 20A"). Because plaintiffs have failed to plead

a predicate violation of Section 10(b) or Rule 10b-5, the

section 20(A) claim must also be dismissed.

CONCLUSION

The District Court correctly dismissed plaintiffs' claim

based upon the Point statement because the statement was

protected by the Reform Act's safe-harbor provision. The

remaining claims in Count I failed to comply with the

pleading requirements of the Reform Act, and the section

20(A) claim is derivative of Count I. Accordingly, these

claims were properly dismissed as well.

We will affirm the judgment of the District Court.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

27