Glazer Capital v. Magistri ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GLAZER CAPITAL MANAGEMENT, LP; 
GLAZER OFFSHORE FUND LTD. “The
Glazer Funds,”
Plaintiffs-Appellants, No. 06-16899
v.
 D.C. No.
CV-04-02181-MJJ
SERGIO MAGISTRI; ROSS
MULHOLLAND; INVISION OPINION
TECHNOLOGIES INC. SECURITIES
LITIGATION,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of California
Martin J. Jenkins, District Judge, Presiding
Argued and Submitted
June 13, 2008—San Francisco, California
Filed November 26, 2008
Before: J. Clifford Wallace and Susan P. Graber,
Circuit Judges, and George P. Schiavelli,* District Judge.
Opinion by Judge Wallace
*The Honorable George P. Schiavelli, United States District Judge for
the Central District of California, sitting by designation.
15761
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15765
COUNSEL
Jeffrey S. Abraham, Abraham Fruchter & Twersky LLP, New
York, New York, for the plaintiffs-appellants.
Susan S. Muck, Fenwick & West LLP, San Francisco, Cali-
fornia, for the defendants-appellees.
OPINION
WALLACE, Senior Circuit Judge:
Glazer Capital Management, LP and Glazer Offshore Fund
Ltd. (Glazer) appeal from the district court’s August 31, 2006
judgment of dismissal. Glazer’s claims arose after InVision
Technologies, Inc. (InVision) announced, in March 2004, that
15766 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
it had entered into a merger agreement with General Electric
(GE). Several months later, in July 2004, InVision issued a
press release, casting doubt on the merger because of the dis-
covery of potential violations of the Foreign Corrupt Practices
Act of 1997(FCPA), 15 U.S.C. § 17dd-1. Although the pro-
posed merger ultimately was consummated, the July 2004
announcement resulted in an immediate drop in InVision’s
share price. A class action complaint was filed by InVision
shareholders and Glazer was appointed lead plaintiff.
To support the shareholders’ claim, Glazer focused on three
alleged misstatements in the sixty-page merger agreement,
which InVision had included as an attachment to its Form 10-
K filed pursuant to section 13 of the Securities Exchange Act
of 1934 (Exchange Act), 15 U.S.C. § 78m. Those alleged mis-
statements appeared in the “representations and warranties”
section of the merger agreement. The district court concluded
that Glazer had not adequately pled either falsity or scienter
with respect to these alleged misstatements and dismissed
Glazer’s action. We have jurisdiction pursuant to 28 U.S.C.
§ 1291, and we affirm.
I.
Prior to 2004, InVision was a publicly traded company
engaged in the manufacture and sale of explosives detection
systems (EDS). InVision sold EDS to airports for use in
screening checked baggage. From the company’s inception in
1990 through 2003, it shipped more than 1000 EDS to cus-
tomers in the United States and abroad. Approximately 80%
of InVision’s sales were made domestically, while 20% were
made to foreign clients in many parts of the world. For sales
outside the United States, InVision marketed its products
through the use of authorized foreign agents and distributors.
InVision’s business grew steadily during the company’s
first decade. After September 11, 2001, however, demand for
EDS increased dramatically worldwide. In 2003, InVision
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15767
entered into discussions regarding a possible merger with GE.
On March 15, 2004, InVision formally announced that it
would be acquired by GE in a cash transaction for $50 per
share. The press release announcing the merger stated that the
“acquisition is subject to normal closing conditions, including
customary regulatory approval.” That same day, the company
filed a Form 10-K and attached a copy of its merger agree-
ment. The merger agreement was signed by Sergio Magistri,
InVision’s President and Chief Executive Officer (CEO), and
Donald Mattson, its Chief Operating Officer (COO).
Several months later, on July 30, 2004, InVision issued a
press release stating that an internal investigation had revealed
possible violations of the FCPA in connection with certain
foreign sales transactions. InVision announced that it had vol-
untarily reported the activities to the Securities and Exchange
Commission (SEC) and the Department of Justice (DOJ), but
warned that subsequent investigations could potentially delay
or terminate the merger. Following the announcement, the
price of InVision stock dropped by more than six dollars per
share.
A few days after InVision’s announcement, shareholders
filed a class action complaint in the Northern District of Cali-
fornia. Glazer was appointed lead plaintiff, representing a
putative class of investors who purchased InVision stock
between March 15, 2004, when InVision announced the
merger, and July 30, 2004, when it announced the potential
FCPA violations.
On December 6, 2004, InVision announced that it had
entered into a non-prosecution agreement with the DOJ and
had agreed to pay a fine of $800,000. The announcement also
reported that InVision had submitted an offer of settlement to
the SEC, which the SEC staff had agreed to recommend. That
same day, GE consummated the merger.
On February 14, 2005, the SEC issued a cease-and-desist
order formally accepting InVision’s settlement offer. The
15768 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
SEC’s order gave specific details about InVision’s FCPA vio-
lations, including that it authorized payments to foreign sales
agents in China, the Philippines, and Thailand, despite know-
ing the “high probability” that those funds would be used to
make improper payments to local government officials. The
SEC also faulted InVision for failing to maintain proper inter-
nal controls and for failing to train its foreign distributors and
sales agents adequately.
Following the SEC’s announcement, Glazer filed an
Amended Consolidated Complaint with citations to the FCPA
settlements. On January 24, 2006, the district court granted
InVision’s motion to dismiss the complaint, but allowed
Glazer leave to amend. Glazer filed a Second Amended Con-
solidated Complaint on February 22, 2006. InVision again
moved to dismiss, and the district court heard arguments. A
few weeks later, the SEC announced that it had settled
charges against InVision’s former senior vice president for
sales and marketing, David M. Pillor, for his role in the com-
pany’s FCPA violations. Ten days later, Glazer sought leave
to amend its complaint for a third time, in order to add allega-
tions against Pillor. The district court denied Glazer’s request
to amend its complaint, dismissed the Second Amended Con-
solidated Complaint, and entered a judgment dismissing the
action. The present appeal followed.
II.
[1] Glazer alleges that InVision, along with its CEO and
Chief Financial Officer (CFO), violated section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder. 15
U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. To state a claim
under Rule 10b-5, a plaintiff must demonstrate “(1) a material
misrepresentation or omission of fact, (2) scienter, (3) a con-
nection with the purchase or sale of a security, (4) transaction
and loss causation, and (5) economic loss.” Sparling v. Daou
(In re Daou Sys., Inc.), 411 F.3d 1006, 1014 (9th Cir. 2005).
Under the heightened pleading standard of the Private Securi-
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15769
ties Litigation Reform Act of 1995 (PSLRA), 15 U.S.C.
§ 78u-4(b)(1), complaints alleging misrepresentations or
omissions under 10b-5 must “specify each statement alleged
to have been misleading, the reason or reasons why the state-
ment is misleading, and, if an allegation regarding the state-
ment or omission is made on information and belief, the
complaint shall state with particularity all facts on which that
belief is formed.”
A.
We first consider InVision’s argument that the mere con-
text of the three alleged misstatements renders them legally
incapable of supporting a securities fraud claim, and that we
need go no further. InVision contends that because the state-
ments appeared in the representations and warranties section
of a private merger agreement directed solely to GE, the state-
ments could not reasonably have been interpreted as factual
communications to investors. To support this argument, InVi-
sion refers to a passage in the merger agreement which pro-
vides that the agreement was “not intended to . . . confer upon
any [p]erson other than the parties hereto any rights or reme-
dies hereunder.” InVision also refers to a separate section of
the merger agreement, which rendered the entire agreement
expressly subject to a disclosure schedule. Because that dis-
closure schedule was never released to the public, InVision
argues that no reasonable investor would have relied on the
representations and warranties contained in the merger agree-
ment.
[2] The context of InVision’s alleged misstatements is cer-
tainly relevant to the issue of scienter, as discussed later.
However, we do not accept InVision’s argument that the mere
context of the statements is enough to render these statements
inactionable as a matter of law. InVision’s proposed merger
with GE was a very significant event for the company. InVi-
sion could have expected intense investor interest in the
details of the merger, particularly from institutional investors
15770 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
like Glazer. The mere fact that the company chose to commu-
nicate the details of the merger in the form of an attachment
to its publicly-filed Form 10-K, as opposed to in the body of
the document itself, cannot work as a per se bar to securities
law liability. Moreover, that the merger agreement was a pri-
vate document and included reference to a non-public disclo-
sure schedule would not, as a matter of law, prevent a
reasonable investor from relying on its terms. Therefore, we
must move on to examine the substance of Glazer’s 10b-5
pleading.
B.
The first step in our 10b-5 analysis requires us to determine
whether Glazer has adequately pled facts showing InVision’s
representations to be false or misleading. 17 C.F.R.
§ 240.10b-5. Glazer identifies three alleged misstatements in
the merger agreement.
First, section 3.8(a) of the agreement broadly warrants that
InVision is “in compliance in all material respects with all
laws . . . .” Second, section 3.5(d) provides that InVision is
in compliance with the books and records provision of Sec-
tion 13(b) of the Exchange Act, 15 U.S.C. § 78m(b)(2).
Finally, section 3.5(d) provides: “Neither the Company . . .
nor, to the Knowledge of the Company, any director, officer,
agent, employee or other Person acting on behalf of the Com-
pany” has violated the anti-bribery provisions of Section 30A
of the Exchange Act, 15 U.S.C. § 78dd-1.
To plead falsity properly under the PSLRA, Glazer was
required to “specify each statement alleged to have been mis-
leading,” and provide “the reason or reasons why the state-
ment is misleading.” 15 U.S.C. § 78u-4(b)(1). If we were to
accept the sweeping scope of the warranty contained in sec-
tions 3.8(a), Glazer could probably meet this standard merely
by demonstrating that InVision was in violation of any law at
the time the warranty was made.
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15771
The district court, however, did not read section 3.8(a) so
broadly. The court held that the broad representation at the
start of section 3.8(a) was implicitly modified by the follow-
ing sentence, which appeared later in the same section of the
agreement:
Since January 1, 2002, neither the Company nor any
of its Subsidiaries has received written notice to the
effect that a Governmental Authority claimed or
alleged that the Company . . . was not in compliance
. . . with any Law applicable to the Company . . . .
The district court read this section as welding a knowledge
element onto the broad warranty contained at the start of sec-
tion 3.8(a). Under this interpretation, InVision was not war-
ranting that it was in compliance with all laws; merely that it
was in compliance with all laws, as far as it knew then. This
interpretation is not directly supported by the text of the
merger agreement, and it appears to conflate the issue of
scienter with the issue of falsity. Moreover, the district court
did not address the other alleged misstatements contained in
section 3.5(d).
[3] Under the plain language of the merger agreement,
InVision warranted that it was “in compliance in all material
respects with all laws,” and more specifically, that it was “in
compliance in all material respects with the provisions of Sec-
tion 13(b) of the Exchange Act.”] Glazer has pled facts dem-
onstrating that InVision was not in compliance with Section
13(b) of the Exchange Act at the time the warranties were
made: the SEC cease and desist order of February 14, 2005
stated that “InVision violated Section 13(b)(2)(A) by improp-
erly recording in its books and records payments it made [in
violation of the FCPA]” and that InVision “violated Section
13(b)(2)(B) by failing to devise and maintain an effective sys-
tem of internal controls to prevent and detect violations of the
FCPA.” Therefore, we conclude that Glazer has satisfied the
15772 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
pleading requirements of the PSLRA with respect to the issue
of falsity.
Whether Glazer has adequately pled falsity with respect to
InVision’s third alleged misstatement in section 3.5(d) is a
closer question, but it is a question we need not decide. As
discussed later, even if Glazer properly pled falsity, the dis-
trict court’s dismissal would still be appropriate if Glazer
failed to plead scienter adequately with respect to the three
statements.
C.
[4] The next step in our 10b-5 analysis is to determine
whether Glazer has properly pled the element of scienter,
defined as “a mental state embracing intent to deceive, manip-
ulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185,
194 n.12 (1976). To plead scienter properly under the
PSLRA, Glazer was required to “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). Such an
inference “must be more than merely plausible or reasonable
—it must be cogent and at least as compelling as any oppos-
ing inference of nonfraudulent intent.” Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 127 S. Ct. 2499, 2504-05 (2007). As we
described in Janas v. McCracken (In re Silicon Graphics Inc.
Securities Litigation), “plaintiffs proceeding under the
PSLRA can no longer aver intent in general terms of mere
‘motive and opportunity’ or ‘recklessness,’ but rather, must
state specific facts indicating no less than a degree of reck-
lessness that strongly suggests actual intent.” 183 F.3d 970,
979 (9th Cir. 1999).
The three alleged misstatements on which Glazer relies to
show scienter all appeared in the merger agreement. The
agreement was signed by two InVision officers, but Glazer
has alleged scienter only on the part of one of them, Sergio
Magistri. Glazer also alleges scienter on the part of Ross Mul-
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15773
holland, InVision’s CFO, based on his sworn Sarbanes-Oxley
certification included with InVision’s Form 10-K. We will
discuss later whether this certification is sufficient to meet the
scienter pleading requirements of the PSLRA.
[5] The first issue we must consider, then, is whether
Glazer was required to plead scienter as to Magistri as an
individual, or whether it can rely on a theory of “collective
scienter,” which would hold the company as a whole respon-
sible for the statements contained in the merger agreement.
1.
Glazer urges us to follow the Second and Seventh Circuits
in adopting a theory of “collective scienter” for purposes of
PSLRA pleading. As the Second Circuit described in Team-
sters Local 445 Freight Division Pension Fund v. Dynex Cap-
ital, Inc.:
In most cases, the most straightforward way to raise
[an inference of scienter] for a corporate defendant
will be to plead it for an individual defendant. But it
is possible to raise the required inference with regard
to a corporate defendant without doing so with
regard to a specific individual defendant.
531 F.3d 190, 195 (2d Cir. 2008). The Seventh Circuit
reached a similar conclusion in Makor Issues & Rights, Ltd.
v. Tellabs Inc., holding that “it is possible to draw a strong
inference of corporate scienter without being able to name the
individuals who concocted and disseminated the fraud.” 513
F.3d 702, 710 (7th Cir. 2008). To illustrate the point, the court
gave the following example:
Suppose General Motors announced that it had sold
one million SUVs in 2006, and the actual number
was zero. There would be a strong inference of cor-
porate scienter, since so dramatic an announcement
15774 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
would have been approved by corporate officials
sufficiently knowledgeable about the company to
know that the announcement was false.
Id.; see also Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d
955, 962 (7th Cir. 1995) (stating, in dictum, “there are con-
ceivable situations where the individual actors would not be
liable but their corporate employer would be, for example
where a case depends on the collective scienter of its employ-
ees”).
Other circuits have disagreed with the collective scienter
theory of liability. In Southland Securities Corp. v. INSpire
Insurance Solutions Inc., the Fifth Circuit rejected the concept
of “group pleading” whereby plaintiffs could presume “that
statements in prospectuses, registration statements, annual
reports, press releases, or other group-published information,
are the collective work of those individuals with direct
involvement in the everyday business of the company.” 365
F.3d 353, 363-64 (5th Cir. 2004) (internal quotation marks
omitted). The court concluded that the “group pleading doc-
trine conflicts with the scienter requirement of the PSLRA”
because “the PSLRA requires . . . plaintiffs to distinguish
among those they sue and enlighten each defendant as to his
or her particular part in the alleged fraud.” Id. at 365 (internal
quotation marks omitted). The Eleventh Circuit reached a
similar conclusion in Phillips v. Scientific-Atlanta, Inc., when
it stated in dictum that “the most plausible reading [of the
PSLRA] in light of congressional intent is that a plaintiff, to
proceed beyond the pleading stage, must allege facts suffi-
ciently demonstrating each defendant’s state of mind regard-
ing his or her alleged violations.” 374 F.3d 1015, 1018 (11th
Cir. 2004) (footnote omitted).
Our circuit has not previously adopted a theory of collec-
tive scienter. In Nordstrom, Inc. v. Chubb & Son, Inc., we
touched on the issue indirectly in the context of an insurance
dispute. 54 F.3d 1424 (9th Cir. 1995). There the plaintiff
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15775
sought to compel payment on an insurance policy covering
the actions of its directors and officers. The dispute arose after
a group of shareholders brought suit against the directors and
officers of Nordstrom and successfully obtained a $7.5 mil-
lion settlement. The defendant insurance company refused to
cover one-half of the settlement on the ground that the share-
holders’ lawsuit had named both the directors and officers,
who were insured, as well as Nordstrom, which was not
insured. The defendant argued that because Nordstrom could
have been found liable independent of the actions of its direc-
tors and officers, the insurance policy covered only one-half
of the settlement. We rejected this argument and held that
“there is no case law supporting an independent ‘collective
scienter’ theory.” Id. at 1435. We then concluded that “corpo-
rate scienter relies heavily on the awareness of the directors
and officers,” and that on the facts of the case, “we see no
way that [the defendant] could show that the corporation, but
not any individual [director or officer], had the requisite intent
to defraud.” Id. at 1436.
At least one district court in our circuit has also discussed
the issue of collective scienter. In In re Apple Computer, Inc.,
the court cited Nordstrom and concluded that “[t]he Ninth
Circuit has rejected the concept of ‘collective scienter.’ ” 243
F. Supp. 2d 1012, 1023 (N.D. Cal. 2002). The court went on
to hold:
It is not enough to establish fraud on the part of
a corporation that one corporate officer makes a false
statement that another officer knows to be false. A
defendant corporation is deemed to have the requi-
site scienter for fraud only if the individual corporate
officer making the statement has the requisite level
of scienter . . . .
Id., citing Nordstrom, 54 F.3d at 1435-36. The district court
in Apple appears to have overstated our holding in Nordstrom.
We had at that time not categorically rejected the concept of
15776 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
“collective scienter.” Rather, Nordstrom merely held that, on
the facts of the case, it was impossible to allege corporate
scienter without also implicating the directors and officers.
Nordstrom does not foreclose the possibility that, in certain
circumstances, some form of collective scienter pleading
might be appropriate. For instance, as outlined in the hypo-
thetical posed in Makor, there could be circumstances in
which a company’s public statements were so important and
so dramatically false that they would create a strong inference
that at least some corporate officials knew of the falsity upon
publication. See Makor, 513 F.3d at 710.
[6] We need not decide whether we agree with Makor
because the facts of this case are different from the hypotheti-
cal in Makor. Glazer rests its securities fraud claim on three
statements, all of which appear in a sixty-page legal docu-
ment. If the doctrine of collective scienter excuses Glazer
from pleading individual scienter with respect to these legal
warranties, then it is difficult to imagine what statements
would not qualify for an exception to individualized scienter
pleadings. In fact, because the merger agreement warranted
that the company was in compliance “with all laws,” then
under the collective scienter theory urged by Glazer, so long
as any employee at InVision had knowledge of the violation
of any law, scienter could be imputed to the company as a
whole. This result would be plainly inconsistent with the
pleading requirements of the PSLRA. We are thus not faced
with whether, in some circumstances, it might be possible to
plead scienter under a collective theory. That issue is not
before us. Rather, given the limited nature and unique context
of the alleged misstatements in this case, we hold that the
PSLRA requires Glazer to plead scienter with respect to those
individuals who actually made the false statements in the
merger agreement. Therefore, to succeed on its claim, Glazer
must “plead, in great detail, facts that constitute strong cir-
cumstantial evidence of deliberately reckless or conscious
misconduct” on the part of Magistri. See In re Silicon Graph-
ics, 183 F.3d at 974.
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15777
In a final effort to meet the stringent FCPA requirements,
Glazer moved to file a Third Amended Consolidated Com-
plaint naming Pillor, the former senior vice president for sales
and marketing at InVision. But Glazer was required to plead
individual scienter with respect to Magistri because Magistri
was responsible for actually making the statements in the
merger agreement. As the district court correctly held in deny-
ing the motion, the fact that Glazer could have shown that a
different executive knew about the FCPA violations would do
nothing to resuscitate Glazer’s claims. This ruling was not an
abuse of discretion.
2.
Glazer has pled no facts that directly demonstrate Magistri
possessed the requisite scienter when he made the representa-
tions contained in the merger agreement. Although the SEC
and DOJ concluded that certain illegal payments were
approved by InVision’s regional sales manager and senior
vice president for sales and marketing, Glazer has not pled
any facts to demonstrate that Magistri was personally aware
of the illegal payments or that he was actively involved in the
details of InVision’s Asian sales. Instead, Glazer asks us to
infer scienter on the part of Magistri based on a number of
factors, including (1) the nature of InVision’s business, (2) the
fact that Magistri signed a Sarbanes-Oxley certification
required by Sarbanes-Oxley Act of 2002, Pub. L. No. 107-
204, (3) the discovery of FCPA violations by GE during the
due diligence process, (4) the personal financial incentives for
Magistri to consummate the merger, and (5) the conclusions
contained in the DOJ and SEC settlement documents. To
determine whether Glazer has met the PSLRA pleading
requirements, we must determine whether these five events,
“even though individually lacking, are sufficient to create a
strong inference” of scienter. In re Daou, 411 F.3d at 1022(internal quotation marks omitted); see also South Ferry LP,
#2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008) (holding
that courts must consider scienter allegations “holistically”).
15778 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
First, Glazer argues that the very size and nature of InVi-
sion’s business creates a strong inference that Magistri knew
about the FCPA violations. In its complaint, Glazer describes
InVision as a small company which sold a relatively small
number of devices to a limited number of customers. The
pleadings also allege that overseas sales formed an important
part of the company’s business, and point out that Magistri
was able to name several of the company’s overseas partners
in Thailand and the Philippines. Glazer argues that we can
therefore infer that Magistri, as CEO, knew about the FCPA
violations when he signed the merger agreement.
We have had occasion to address arguments similar to
Glazer’s in the past. In Daou, a group of shareholders brought
suit against five individual officers and directors of a com-
pany, alleging they systematically violated generally accepted
accounting principles in order to inflate the company’s stock
price artificially. Plaintiffs alleged scienter, in part, based on
the theory that the officers must have known about the
accounting irregularities given their positions within the com-
pany and their roles in the day-to-day decision making. In
responding to this argument, we held that “[g]eneral allega-
tions of defendants’ ‘hands-on’ management style, their inter-
action with other officers and employees, their attendance at
meetings, and their receipt of unspecified weekly or monthly
reports are insufficient” to create a strong inference of
scienter. Id. at 1022, citing Fischer v. Vantive Corp. (In re
Vantive Corp. Sec. Litig.), 283 F.3d 1079, 1087 (9th Cir.
2002). However, we cautioned that “specific admissions from
top executives that they are involved in every detail of the
company and that they monitored portions of the company’s
database are factors in favor of inferring scienter . . . .” Id.,citing Nursing Home Pension Fund, Local 144 v. Oracle
Corp., 380 F.3d 1226, 1234 (9th Cir. 2004). Against this
backdrop, we concluded in Daou that the plaintiffs had suffi-
ciently pled scienter, based on the officers’ “direct involve-
ment in the production of false accounting statements,” as
well as their suspicious insider stock sales.
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15779
[7] We confronted the same argument more recently in
Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th
Cir. 2008). There, shareholders filed a securities fraud class
action against Applied Signal and two of its officers, after the
company announced an unexpected 25% drop in revenue. At
issue were certain “stop-orders” received from Berson’s cus-
tomers, which the company failed to report accurately to
investors. On the issue of scienter, plaintiffs did not allege any
specific facts showing that the individually named officers
actually knew about the stop-work orders. Nevertheless, we
held that plaintiffs had adequately demonstrated a “strong
inference” of scienter, based on the officers’ positions and the
nature of the misstatements. In particular, we concluded the
named officers “were directly responsible for Applied Sig-
nal’s day-to-day operations” and that the stop-work orders
“were prominent enough that it would be ‘absurd to suggest’
that top management was unaware of them.” Id. at 988-89,
citing No. 84 Employer-Teamster Joint Council Pension Trust
Fund v. America West, 320 F.3d 920, 943 n.21 (9th Cir.
2003).
[8] The facts of this case are quite different. The alleged
misstatements here involved a discrete set of illegal payments
made by InVision’s foreign sales agents operating in China,
the Philippines, and Thailand. Unlike the misstatements in
Daou and Berson, these payments were not, by their nature,
the type of transaction of which it would be “hard to believe”
senior officials were unaware. Berson, 527 F.3d at 989. To the
contrary, the surreptitious nature of the transactions creates an
equally strong inference that the payments would have delib-
erately been kept secret—even within the company. This
inference is supported by the fact that the sales and marketing
director responsible for approving the payments received the
bulk of his salary from commissions earned on sales. Based
on the allegations made in this case, it would not be “absurd
to suggest” that Magistri was unaware of the details of pay-
ments made through foreign sales agents in Asia. Id. There-
fore, we hold that given the nature of the alleged
15780 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
misstatements, the mere size and nature of InVision’s busi-
ness are not sufficient to create a strong inference of scienter.
Glazer next points to the Sarbanes-Oxley certification
which Magistri and InVision’s CFO, Ross Mulholland, signed
and attached to the company’s Form 10-K. In that certifica-
tion, Magistri and Mulholland stated:
The registrant’s other certifying officer and I are
responsible for establishing and maintaining disclo-
sure controls and procedures . . . and have:
(a) Designed such disclosure controls and proce-
dures, or caused such disclosure controls and proce-
dures to be designed under our supervision, to ensure
that material information relating to the registrant . . .
is made known to us . . . ;
(b) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures . . . .
Glazer argues that this statement is sufficient to infer knowl-
edge of the FCPA violations, because the controls and proce-
dures put into place by Magistri and Mulholland would have
necessarily alerted them to any FCPA violations.
[9] Our circuit has yet to examine the precise interplay
between the reporting requirements of Sarbanes-Oxley and
the scienter pleading requirements of the PSLRA. However,
at least two other circuits have specifically addressed the
issue. In Garfield v. NDC Health Corp., the Eleventh Circuit
rejected the plaintiffs’ argument that Sarbanes-Oxley certifi-
cations signed by senior executives were sufficient to demon-
strate scienter. 466 F.3d 1255, 1267 (11th Cir. 2006). The
court held:
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15781
The plain language of Sarbanes-Oxley evidences no
congressional intent to alter the pleading require-
ments set forth in the PSLRA. . . . If we were to
accept [the plaintiff’s] proffered interpretation of
Sarbanes-Oxley, scienter would be established in
every case where there was an accounting error or
auditing mistake made by a publicly traded com-
pany, thereby eviscerating the pleading requirements
for scienter set forth in the PSLRA.
Id. at 1266. The Fifth Circuit recently reached a similar con-
clusion in Indiana Electrical Workers’ Pension Trust Fund
IBEW v. Shaw Group, Inc., explicitly adopting the holding of
Garfield. 537 F.3d 527, 544-45 (5th Cir. 2008). We agree
with the reasoning of the Eleventh and Fifth Circuits. Because
Congress expressed no intent to alter the pleading require-
ments of the PSLRA, “Sarbanes-Oxley certification is only
probative of scienter if the person signing the certification
was severely reckless in certifying the accuracy of the finan-
cial statements.” Garfield, 466 F.3d at 1266. Because Glazer
has pled no facts to that effect, the Sarbanes-Oxley certifica-
tions are not sufficient, without more, to raise a strong infer-
ence of scienter on the part of Magistri.
[10] Glazer next argues that because GE was able to dis-
cover evidence of FCPA violations relatively early in the due
diligence process, the information must have been readily
available and therefore known to Magistri when he signed the
merger agreement. This argument is not sufficient to create a
strong inference of scienter. The mere fact that GE was able
to discover the FCPA violations does not create a direct infer-
ence that Magistri personally knew about the violations. At
most, it creates the inference that he should have known of the
violations. This is not sufficient to meet the stringent scienter
pleading requirements of the PSLRA. See In re Silicon
Graphics, 183 F.3d at 977 (requiring “some degree of inten-
tional or conscious misconduct”).
15782 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
Moreover, the material misrepresentations at issue in this
case appeared in the public filing of a private merger agree-
ment. This fact undercuts any inference that Magistri knew
about the FCPA violations when he signed the merger agree-
ment, because such knowledge would have required him to
make false representations knowingly, not only to the invest-
ing public, but also to the very company that would shortly be
conducting a due diligence inquiry.
[11] Glazer next argues that a strong inference of scienter
arises from the fact that Magistri had a motive to make false
statements, because he was positioned to profit personally
from the proposed merger. Although neither side has cited
any Ninth Circuit law on this issue, a number of out-of-circuit
cases have rejected Glazer’s argument. In Phillips v. LCI
International, Inc., the Fourth Circuit explained that because
personal profit motive is present in almost every merger,
inferring scienter from motive would “force the directors of
virtually every company to defend securities fraud actions
every time that company effected a merger or acquisition.”
190 F.3d 609, 623 (4th Cir. 1999) (internal citation omitted).
The Third Circuit echoed this sentiment in GSC Partners
CDO Fund v. Washington, when it held that “[i]n every cor-
porate transaction, the corporation and its officers have a
desire to complete the transaction, and officers will usually
reap financial benefits from a successful transaction. Such
allegations alone cannot give rise to a ‘strong inference’ of
fraudulent intent.” 368 F.3d 228, 237-38 (3d Cir. 2004); see
also, Kalnit v. Eichler, 264 F.3d 131, 139-40 (2d Cir. 2001)
(holding that officers’ motive to maintain or increase compen-
sation was insufficient to support scienter); Tuchman v. DSC
Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994) (holding
that “incentive compensation can hardly be the basis on which
an allegation of fraud is predicated”). We join our sister cir-
cuits and hold that evidence of a personal profit motive on the
part of officers and directors contemplating a merger is insuf-
ficient to raise a strong inference of scienter.
GLAZER CAPITAL MANAGEMENT v. MAGISTRI 15783
[12] Finally, Glazer argues that the settlement agreements
InVision entered into with the DOJ and SEC are sufficient to
create a strong inference of scienter. In those agreements,
InVision accepted responsibility for misconduct and admitted
that the company “was aware of the high probability that its
foreign sales agents or distributors paid or offered to pay
something of value to government officials in order to obtain
or retain business for InVision.” The company further admit-
ted that it “improperly accounted for certain payments . . . in
its books and records in violation of the FCPA.” The district
court correctly held that these agreements were not sufficient
to meet the pleading requirements of the PSLRA. First, the
admissions in these settlement agreements were largely legal
conclusions, rather than particularized facts giving rise to a
strong inference of scienter. More importantly, even if InVi-
sion accepted the SEC’s and DOJ’s statements of fact, there
is nothing in either settlement agreement that would support
the conclusion that Magistri had actual knowledge of the vio-
lations. As discussed earlier, the mere fact that someone at
InVision had knowledge of the illegal transactions is not suf-
ficient to satisfy the scienter pleading requirements of the
PSLRA, given the context and limited nature of the misrepre-
sentations at issue.
Therefore, we hold that the five identified events, individu-
ally or collectively, fail “to create a strong inference” of
scienter. In re Daou, 411 F.3d at 1022.
III.
The district court did not err when it dismissed Glazer’s
Second Amended Consolidated Complaint, did not abuse its
discretion when it denied leave to file a Third Amended Con-
solidated Complaint, and did not err when it entered a judg-
ment dismissing the action. Glazer has not pled facts that
would either directly or indirectly give rise to a strong infer-
ence of scienter on the part of those officers responsible for
15784 GLAZER CAPITAL MANAGEMENT v. MAGISTRI
making the false statements contained in the merger agree-
ment.
AFFIRMED.