EMILIO M. GARZA, Circuit Judge:
Plaintiffs Rebecca Lovelace, Ira Newman, and Gerald Klein, individually and on behalf of all those similarly situated, appeal the district court's judgment dismissing with prejudice their securities fraud claims against Defendants Software Spectrum, Inc., and Judy Sims. We affirm.
Software Spectrum is a publicly traded Texas corporation engaged in the resale of microcomputer business software. Sims is the chief executive officer of the corporation and chairman of the board of directors. Lovelace, Newman, and Klein purchased shares of Software Spectrum between October 1993 and May 1994. Software Spectrum's stock price fell sharply after the corporation announced disappointing financial results for the quarter ending December 31, 1993. Lovelace and Newman filed suit against Software Spectrum and Sims, alleging securities fraud. Software Spectrum's stock price fell sharply again after the corporation announced that publication of its financial results for the fiscal year ending March 31, 1994, would be delayed due to a change in auditors. Klein then filed suit against Software Spectrum and Sims, also alleging securities fraud. Software Spectrum and Sims filed motions to dismiss both suits for failure to plead fraud with particularity, pursuant to FED.R.CIV.P. 9(b), and for failure to state a claim upon which relief can be granted, pursuant to FED.R.CIV.P. 12(b)(6). After consolidating the suits, the district court entered an order dismissing the claims without prejudice for failure to plead fraud with particularity, finding specifically that Plaintiffs failed to sufficiently plead the scienter element of their securities fraud claims. The order allowed the Plaintiffs twenty days to replead their claims. After the twenty-day period passed without the Plaintiffs repleading their claims, the district court entered judgment dismissing the claims with prejudice. Plaintiffs filed a timely notice of appeal.
Plaintiffs argue that the district court erred in dismissing their claims for failure to plead fraud with particularity. In a pleading alleging fraud, a plaintiff must state the circumstances constituting fraud with particularity. FED.R.CIV.P. 9(b). We treat a dismissal for failure to plead fraud with particularity under Rule 9(b) as a dismissal for failure to state a claim upon which relief can be granted. Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir. 1993). Therefore, we review the district court's dismissal de novo, as we review a dismissal under Rule 12(b)(6), accepting the complaint's well-pleaded factual allegations as true. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir.1992).
Normally, in deciding a motion to dismiss for failure to state a claim, courts must limit their inquiry to the facts stated in the complaint and the documents either attached to or incorporated in the complaint. However, courts may also consider matters
Plaintiffs' complaint alleges that Software Spectrum and Sims violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and that Sims violated § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). To establish a claim for securities fraud under these provisions, a plaintiff must prove (1) a misstatement or omission (2) of a material fact (3) made with scienter (4) on which the plaintiff relied (5) that proximately caused the plaintiff's injury. Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir.1990). Scienter is defined as "a mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668 (1976).
A plaintiff will not survive a Rule 9(b) motion to dismiss on the pleadings by simply alleging that a defendant had fraudulent intent. In order to adequately plead scienter, a plaintiff must set forth specific facts to support an inference of fraud. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994). Alleged facts are sufficient to support such an inference if they
Plaintiffs allege that Defendants knew, but did not disclose, that Software Spectrum's earnings were materially affected by financial incentives from its suppliers based on product sales goals. Plaintiffs allege that the Defendants knew prior to the fiscal quarter beginning October 1, 1994, but did not disclose, that earnings for that quarter would suffer due to a failure to meet product sales goals in the previous quarter. Plaintiffs further allege that Defendants stated Software Spectrum's earnings for the first nine months of 1994 in a manner inconsistent with generally accepted accounting principles, and that Defendants changed auditors because their former auditors insisted that credits be removed and earnings restated. We must determine whether these allegations suffice to indicate conscious behavior on the part of Defendants.
A number of our recent cases have addressed the degree of particularity with which a plaintiff must plead a securities fraud claim in order to identify conscious behavior on the part of the defendant. In Tuchman, shareholders brought an action for securities fraud against the corporation and its officers. In an attempt to identify circumstances that indicate conscious behavior on the part of the defendants, the Tuchman plaintiffs alleged that corporate officers made contradictory statements regarding the corporation's commitment to quality, the adequacy of the testing of corporate software, the reasons for corporate telephone network outages, and the reasons for the corporation's economic downturn. 14 F.3d at 1069. We found these allegations inadequate to indicate conscious behavior on the part of the defendants, noting that "the complaint contains no assertion of any fact that makes it reasonable to believe that the defendants knew that any of their statements were materially false or misleading when made." Id. We thus upheld a Rule 9(b) dismissal on the pleadings for failure to adequately plead scienter. Id. at 1068-70.
In Melder v. Morris, 27 F.3d 1097 (5th Cir.1994), shareholders brought an action for securities fraud against the corporation and its officers, directors, accountants, and underwriters. The Melder plaintiffs attempted to establish scienter by alleging that the corporation's officers, directors, accountants, and underwriters entered into a conspiracy to inflate the price of the corporation's stock. Id. at 1102. We found these allegations insufficient to indicate the defendants' motive to commit securities fraud, and we also found them insufficient to identify circumstances that indicate conscious behavior by the defendants. Id. at 1102-04. We thus upheld a Rule 9(b) dismissal on the pleadings for failure to adequately plead scienter. Id. at 1100-04. In so holding, we noted that rote conclusory allegations that the defendants "knowingly did this" or "recklessly did that" fail to meet the heightened pleading requirements of Rule 9(b). Id. at 1104.
In the present case, Plaintiffs' first allegation claims that Defendants knew, but did not disclose, that Software Spectrum's earnings were materially affected by financial incentives from its suppliers based on product sales goals. As required by law, Software Spectrum filed its 1991 and 1992 prospectuses with the SEC. Both of these documents contain a paragraph, under the general heading "Risk Factors," titled "Reliance on Rebates, Marketing Funds and Volume Discounts." This paragraph discloses that Software Spectrum, "[a]s part of its supply agreements with certain publishers and distributors . . . receives substantial incentives in the form of rebates, cooperative advertising funds, market development funds and volume purchase discounts," the reduction or discontinuance of which "could have a material adverse effect" on Software Spectrum's business and financial results. Thus, Defendants did disclose that Software
Plaintiffs next allege that, according to industry custom, rebates paid by a supplier in one quarter are based on a company's sales of the supplier's products in the previous quarter. Accordingly, Plaintiffs allege, Defendants must have known, but did not disclose, that Software Spectrum's earnings for the fiscal quarter beginning October 1, 1994, would suffer because Defendants must have known that Software Spectrum failed to meet product sales goals in the previous quarter. However, Plaintiffs do not plead specifically what Software Spectrum's rebate arrangements with its suppliers actually were, and consequently do not allege who at Software Spectrum would have had knowledge about the award of future rebates or when such a person would have obtained such knowledge. In fact, Plaintiffs' bare allegation about industry custom is precisely the type of conclusory allegation that motivated the heightened pleading standards of Rule 9(b) in the first place. See Tuchman, 14 F.3d at 1067 ("In securities fraud suits, this heightened pleading standard provides defendants with fair notice of the plaintiffs' claims, protects defendants from harm to their reputation and goodwill, reduces the number of strike suits, and prevents plaintiffs from filing baseless claims and then attempting to discover unknown wrongs.") (emphasis added). Therefore, we find that this allegation also fails to set forth specific facts that indicate conscious behavior on the part of Defendants.
Lastly, Plaintiffs allege that Defendants published Software Spectrum's earnings for the first nine months of 1994 in a manner inconsistent with generally accepted accounting principles,
Considering all of the allegations in Plaintiffs' complaint, we find that Plaintiffs have failed to set forth specific facts sufficient to indicate conscious behavior on the part of Defendants. We are not unsympathetic to Plaintiffs' predicament. The poor financial performance of Software Spectrum has surely cost them substantial investment sums. However, § 10(b) provides a remedy only for those victimized by securities fraud, and Rule 9(b) requires that such claims be pleaded with particularity. Plaintiffs have failed to do so in this case. Because we find that Plaintiffs have failed to adequately plead scienter under Rule 9(b), we hold that the district court did not err in dismissing Plaintiffs' claims for failure to plead fraud with particularity.
For the foregoing reasons, we AFFIRM the judgment of the district court dismissing Plaintiffs' claims with prejudice.
Kramer, 937 F.2d at 774.