In Re Burlington Coat Factory Securities Litigation. P. Gregory Buchanan, Jacob Turner and Ronald Abramoff

OPINION OF THE COURT

Burlington Coat Factory Warehouse Corporation (“BCF ”), a Delaware corporation based in New Jersey, announced its fourth quarter and full fiscal year results for 1994 on September 20, 1994. The results were below the investment community’s expectations, and BCF’s common stock fell sharply, losing approximately 30% in one day. Within a day of the initial announcement, the first investor suit was filed. In the next few days, the company made additional explanatory disclosures, and the stock price fell even further. More investor suits were filed. The action at hand is the product of the consolidation of these suits.

BCF and certain of its principal officers and directors were sued under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). 15 U.S.C. §§ 78j(b), 78t(a). Section 10(b) provides a broad prohibition on the use of “manipulative or deceptive devices” in connection with the purchase or sale of a security. 15 U.S.C. § 78j(b). Section 20, in turn, provides liability for “controlling persons.” 15 U.S.C. § 78t(a). Plaintiffs assert that they represent the class of investors who purchased BCF common stock between October 4,1993, and September 23, 1994. Plaintiffs claim that, as a result of BCF’s misleading statements and omissions during the class period, the company’s stock price was artificially inflated.

The district court dismissed the case both for failure to state claims on which relief could be granted and for failure to plead those claims with adequate particularity. The court also denied plaintiffs’ request that they be allowed to amend and replead their claims in the event of a dismissal.

On appeal, plaintiffs challenge the dismissal of four of their six original claims. Since the fourth claim has two distinct parts, we describe the four claims as five. According to plaintiffs, the district court erred in ruling: (1)that the alleged earnings overstatements during fiscal year 1994 were not materially misleading because no violation of GAAP had been shown and that, in any event, the claim stated was, at most, a claim for negligence; (2) that the failure to disclose that the company had not received its usual discounts in its inventory build-up in January and February of 1994 was “largely irrelevant”; (3) that overstatements regarding the sales attributable to an extra, 53rd week in 1993 were not actionable; (4) that management’s expression of “comfort” with certain specific earnings forecasts by analysts was not actionable because BCF did not “adopt” the analysts’ estimates; and (5) that a statement that the company’s earnings would continue to grow faster than revenues was not actionable because it was no more than “puffery.” Plaintiffs argue that these were proper, viable claims under Section 10(b) and that they pled facts in support of their claims that met the particularity requirements for fraud claims. As a final matter, plaintiffs contend that even if the district court’s dismissal of their claims on particularity grounds was justified, they should have been given leave to amend and replead their claims.

We affirm the district court’s dismissals on claims (2), (3), and (5). Claims (1) and (4) were properly dismissed on particularity grounds, but we disagree with the district court’s holding that these claims could not be *1415 viable. Since leave to amend appears to have been denied on the grounds of futility alone, we hold that plaintiffs may amend their complaint and replead claims (1) and (4).

I.

BCF is one of the leading retailers of coats in the United States. Its specialty is selling brand name clothes at discount prices. By mid-1993, BCF was operating a total of 185 stores in 39 states. The stores ranged in size from 16,000 to 133,000 square feet and featured outerwear (coats, jackets, and raincoats) and complete lines of clothing for men, women, and children.

BCF opened in 1924, under the management of Abe Milstein, and specialized in wholesale outerwear. In the 1950’s, Abe’s son, Monroe, joined the business. In 1972, BCF acquired a coat factory and outlet store in Burlington, New Jersey, and began operation as a retailer.

BCF is a public company traded on the New York Stock Exchange. During the class period for this case, the average daily trading volume for BCF common stock was 100,000 shares. Plaintiffs assert that BCF’s securities are actively followed by numerous analysts and that the market in BCF stock was “efficient” at all periods relevant to this case. 1

BCF’s fortunes have been on the rise over the past decade. BCF’s 1992 Annual Report stated that “[t]he Company’s revenues have increased each year for the past 13 years, from $24 million in 1978 to over $1 billion in 1992.” Further, BCF’s earnings per share rose from $0.60 in 1990 to $1.06 in 1993.

BCF’s top corporate officers, some of whom are defendants in this case, hold large portions of BCF’s outstanding common stock. This seems especially true of those officers who are members of the Milstein family, which as a whole owned approximately 55% of BCF’s common stock. 2

The defendant-officers are: (1) Monroe G. Milstein, BCF’s chief executive officer and chairman of the board, who owned approximately 30.7% of the stock; (2) Stephen E. Milstein, a vice-president, director, and general merchandise manager, who owned approximately 4.9% of the stock; (3) Andrew R. Milstein, a vice-president, director, and executive merchandise manager, who owned approximately 5.4% of the stock; (4) Robert R. LaPenta, controller, and chief accounting officer; and (5) Mark A. Nesci, vice-president for store operations, director, and chief operating officer.

This ease was brought as a class action on behalf of all purchasers of BCF common stock during the period from October 4,1993, through and including September 23, 1994. 3 Plaintiffs claim that during this period defendants (the company and the individual officer-defendants), through a number of misstatements in and omissions from disclosures made to the public, defrauded plaintiffs into purchasing BCF stock at artificially high prices.

Plaintiffs explain that the individual defendants, as a result of their positions of control in the company, were able to manipulate BCF’s press releases and other disclosures *1416 so as to deceive the market into overpricing the company’s stock. Allegedly, the individual defendants behaved in this manner so as to:

(i) artificially inflate and maintain the market price of BCF’s common stock during the Class Period and thereby cause plaintiffs and the other members of the Class to purchase such common stock at artificially inflated prices and, in the case of certain of the defendants, to personally gain from the sale of inflated stock; and

(ii) protect, perpetuate and enhance their executive positions and the substantial compensation, prestige and other perquisites of executive compensation obtained thereby.

Complaint, ¶ 15.

Defendants who are alleged to have personally gained from selling their stock during the class period are Andrew R. Milstein (who sold 10,000 shares on March 17 and March 21,1994, at $27.75 per share), Mark A. Nesci (who sold 10,000 shares on March 18 and March 25, 1994, at $27.50), and Robert R. LaPenta (who sold 1,500 shares on March 4, 1994 at $28.00 per share and 2,500 shares on April 6,1994, at $26.25 per share). The price drop between September 20 and September 23, 1994 — the days of the announcements that allegedly caused a correction in the stock price to reflect the true state of BCF’s fortunes — was from a high of $23.25 to a low of $13.63. Assuming that the price drop of approximately $10 was due entirely to the correction of false information, Andrew Mil-stein’s and Mark Nesci’s trading gains would each amount to approximately $100,000, and Robert LaPenta’s gains would be approximately $40,000.

II.

On September 20, 1994, BCF reported its year-end revenues and earnings for fiscal 1994. These results were below the market’s expectations, with the earnings per share for fiscal 1994 being $1.12 as compared to the $1.37 that analysts had been predicting. On September 20 itself, the price of BCF stock fell almost 30%, from $23.25 to $15.75 per share. Between September 20 and September 23 both BCF and outside analysts attempted to explain the reasons for the worse-than-expected results. By the close of the market on September 23, 1994, the price of BCF stock had fallen to $13.63.

The first of plaintiffs’ three suits was filed within a day of the first price drop on September 20, alleging that BCF had violated Sections 10(b) and 20(a) of the Exchange Act. Two other similar actions were filed two days later, on September 23, 1994. The three actions were consolidated, and the consolidation resulted in the filing, in January 1995, of the “Consolidated Amended and Supplemental Class Action Complaint” (the “Complaint”).

Defendants moved to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief could be granted and under Federal Rule of Civil Procedure 9(b) for failure to plead fraud with particularity.

The district court determined that the Complaint contained six distinct claims:

First, plaintiffs allege that BCF’s 1993 annual report misrepresented the impact of an additional week (the“fifty-third week”) on the fiscal year-end sales revenue____

Second, plaintiffs allege that defendants failed to announce that the discounts BCF received on merchandise purchased for January, 1994, and February, 1994, were substantially less than the discounts received in previous years____

Third, plaintiffs claim that “during each quarter during the Class Period, defendants overstated BCF’s profits from operations by 2-3 cents EPS (earnings per share) per quarter by failing to properly match their operating expenses with sales.” ...

Fourth, plaintiffs allege that defendants, in a press release of March 1, 1994, stated that BCF’s store expansion program would be internally funded, when, in truth, BCF was borrowing heavily to fund that expansion____

*1417 Fifth, plaintiffs claim that defendants, in promoting the store expansion program, asserted in various reports ... that 95% of ail new stores were profitable within six months, and that the new stores were opened efficiently and without great expense—

Finally, plaintiffs allege that throughout the putative class period, defendants championed their growth in revenue, profit margins and earnings, but did not disclose shortcomings in their accounting and cost control systems.

(Dist.Ct.Op. at 3).

On February 20, 1996, the district court dismissed plaintiffs’ claims pursuant to Rules 12(b)(6) and 9(b). Plaintiffs had requested leave to amend should the Complaint be dismissed, but the district court dismissed the action in its “entirety.”

Plaintiffs then took this appeal. Plaintiffs contest the district court’s dismissal of four of the six claims. 4 Plaintiffs also challenge the court’s denial of their request for leave to amend.

III.

A Section 10(b) Claims

Plaintiffs assert claims under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The private right of action under Section 10(b) and Rule 10b-5 5 reaches beyond statements and omissions made in a registration statement or prospectus or in connection with an initial distribution of securities and creates liability for false or misleading statements or omissions of material fact that affect trading on the secondary market. See Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A, 511 U.S. 164, 171, 114 S.Ct. 1439, 1445, 128 L.Ed.2d 119 (1994); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216-17 (1st Cir.1996); Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1123-24 (7th Cir.1993).

The first step for a Rule 10b-5 plaintiff is to establish that defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading. See In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1243 (3rd Cir.1989); Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir.1996). Next, plaintiff must establish that defendant acted with scienter and that plaintiffs reliance on defendant’s misstatement caused him or her injury. See Phillips, 881 F.2d at 1244; San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 808 (2nd Cir.1996). Finally, since the claim being asserted is a “fraud” claim, plaintiff must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). See Suna v. Bailey Carp., 107 F.3d 64, 68 (1st Cir.1997).

Rule 9(b) requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” This particularity requirement has been rigorously applied in securities fraud cases. See Suna, 107 F.3d at 73; Gross v. Summa Four, Inc., 93 F.3d 987, 991 (1st Cir.1996). For example, where plaintiffs allege that defendants distorted certain data disclosed to the public by using unreasonable accounting practices, we have required plaintiffs to state what the unrea *1418 sonable practices were and how they distorted the disclosed data. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284-85 (3rd Cir.1992). Rule 9(b)’s heightened pleading standard gives defendants notice of the claims against them, provides an increased measure of protection for their reputations, and reduces the number of frivolous suits brought solely to extract settlements. See Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994); Cosmos v. Hassett, 886 F.2d 8, 11 (2nd Cir.1989). Despite Rule 9(b)’s stringent requirements, however, we have stated that “courts should be ‘sensitive’ to the fact that application of the Rule prior to discovery ‘may permit sophisticated defrauders to successfully conceal the details of their fraud.’ ” Shapiro, 964 F.2d at 284(eit-ing Christidis v. First Pa. Mortgage Trust, 717 F.2d 96, 99 (3rd Cir.1983)). Accordingly, the normally rigorous particularity rule has been relaxed somewhat where the factual information is peculiarly within the defendant’s knowledge or control. See Shapiro, 964 F.2d at 285. But even under a relaxed application of Rule 9(b), boilerplate and conelusory allegations will not suffice. Id. Plaintiffs must accompany their legal theory with factual allegations that make their theoretically viable claim plausible. Id.

Rule 9(b) also says that “[mjaliee, intent, knowledge, and other condition of mind of a person may be averred generally.” The meaning of this sentence has been the source of considerable debate. The Second Circuit, among others, has emphasized that although state of mind may be “averred generally,” a plaintiff alleging securities fraud must still allege specific facts that give rise to a “strong inference” that the defendant possessed the requisite intent. See, e.g., Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2nd Cir.1995); see also Suna, 107 F.3d at 68; Tuchman, 14 F.3d at 1068. “The requisite ‘strong inference’ of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” Acito, 47 F.3d at 52; see also DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir.1990) (“People sometimes act irrationally, but indulging ready inferences of irrationality would too easily allow the inference that ordinary business reverses are fraud”).

By contrast, the Ninth Circuit has rejected such a requirement that plaintiff allege facts from which intent to commit fraud may be inferred. See In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir.1994) (in banc). In GlenFed, the court argued that since the second sentence of Rule 9(b) states that “malice, intent, knowledge, and other condition of mind may be averred generally,” the Rule leaves no room for requiring specific facts to be pled. Id. at 1545-47.

We agree with the Second Circuit’s approach. Cf. In re ValueVision Int'l Inc., Sec. Litig., 896 F.Supp. 434, 446 (E.D.Pa.1995) (noting the Third Circuit’s silence on the issue). While state of mind may be averred generally, plaintiffs must still allege facts that show the court their basis for inferring that the defendants acted with “scienter.” Otherwise, strike suits based on no more than plaintiffs’ detection of a few negligently made errors in company documents or statements (errors detected in the aftermath of a stock price drop) could survive the pleading threshold and subject public companies to unneeded litigation expenditures. Public companies make large quantities of information available to the public, as a result of both mandatory disclosure requirements and self-initiated voluntary disclosure. Cf. Roberta Romano, The Genius of American Corporate Law 93-95 (1993). Large volumes of disclosure make for a high likelihood of at least a few negligent errors. To allow plaintiffs and their attorneys to subject companies to wasteful litigation based on the detection of a few negligently made errors found subsequent to a drop in stock price would be contrary to the goals of Rule 9(b), which include the deterrence of frivolous litigation based on accusations that could hurt the reputations of those being attacked. 6 See Tuchman, 14 F.3d at 1067; In re Discovery Zone Sec. Litig., 943 F.Supp. 924, 934 (N.D.Ill.1996).

Plaintiffs’ Complaint advances numerous claims of nondisclosure and misstate-

*1419 ment. On appeal, the myriad allegations have been whittled down to five: (1) that BCF overstated certain quarterly earnings reports; (2) that BCF wrongfully failed to disclose the receipt of certain reduced discounts on purchases; (3) that BCF misrepresented the sales attributable to the 53rd week of 1993; and (4) & (5) that BCF made certain forward-looking statements without a reasonable basis. 7 Plaintiffs have further alleged that the nondisclosures and misstatements were made with fraudulent intent, that defendants’ conduct artificially inflated the market price of BCF stock, and that this fraud on the market caused plaintiffs to suffer damages. 8 Defendants counter that none of the statements or omissions identified by plaintiffs was materially false, misleading, or otherwise actionable. Defendants protest that:

This lawsuit constitutes a frivolous attempt by appellants to extort money from a healthy, successful company that saw its revenues and earnings per share increase steadily from fiscal 1990 through fiscal 1994. The Company’s only alleged sin is to have reported accurately on September 20, 1994 its year-end revenues and earnings for fiscal 1994, which, while surpassing the performance of any prior year in its history, failed to meet the eamings-pershare projections of a handful of bullish securities analysts.

(Appellees’ Br. at 18) (internal citations omitted). We address each of plaintiffs’ claims in turn.

(1) Earnings Overstatements

Plaintiffs allege that “during each quarter during the Class Period, defendants over *1420 stated BCF’s profits from operations by 2-3 cents [earnings per share] per quarter by failing to properly match their operating expenses with sales.” Complaint, ¶ 73(c). The Complaint explains:

In order to achieve their goal of inflating the Company’s stock price, defendants manipulated BCF’s financial statements through improper and misleading accounting practices in violation of GAAP. Statement of Financial Accounting Concepts 6 (SFAC [No.] 6), set forth by the Financial Accounting Standards Board (FASB), provides that expenses — which are defined as decreases in assets or increases in liabilities during a period resulting from delivery of goods, rendering of services, or other activities constituting the enterprise’s central operations — must be matched with revenues resulting from those expenses. See SFAC [No.] 6[ ]. The matching principle requires that all expenses incurred in the generating of revenue should be recognized in the same accounting period as the revenues are recognized. Defendants violated SFAC [No.] 6 by failing to properly account for the expenses associated with BCF’s purchases of inventory during the Class Period, and thereby artificially inflated the reported net income and earnings per share during the first, second and third quarters of fiscal year 199k. Because of the Company’s inadequate financial and accounting controls, defendants were able to and did, in fact, ... materially understate BCF’s expenses, on a quarter-by-quarter basis during fiscal year 1994, and thereby overstate very significantly during the Class Period BCF’s profitability, earnings and prospects for fiscal year 199k.

Complaint, ¶ 67 (emphasis added).

The court dismissed the earnings overstatement claim because it “fail[ed] to allege how defendants intentionally or recklessly deviated from generally accepted accounting principles.” (Dist.Ct.Op. at 19). Although defendants argued that plaintiffs had failed to state a legally cognizable claim because they did not point to a violation of GAAP, the district court’s decision to dismiss this claim is most easily read as being on Rule 9(b) grounds alone, ie., a failure to plead with particularity. However, to read the district court’s opinion as dismissing the claim under Rule 9(b) alone would be inconsistent with the court’s simultaneous failure to grant leave to amend on the ground of futility. See Section B, infra. Hence, we review the district court’s dismissal as if it were based on both Rule 12(b)(6) and Rule 9(b). In evaluating the Rule 12(b)(6) dismissal we assume that the district court accepted defendants’ arguments on the issue.

(i) Rule 12(b)(6)

Defendants argue here, as they did before the district court, that the earnings overstatement claim fails under Rule 12(b)(6). A motion to dismiss pursuant to Rule 12(b)(6) may be granted only if, accepting all well pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief. Bartholomew v. Fischl, 782 F.2d 1148, 1152 (3rd Cir.1986). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).

Defendants argue that their earnings statements could not have been materially misleading because BCF’s accounting practices were consistent with GAAP. 9 Defendants assert that violations of mere account *1421 ing “concepts” such as SFAC No. 6, which is what plaintiffs have alleged, are not violations of GAAP, and therefore are not enough to give rise to disclosure violations under the securities laws. 10 Defendants suggest that the earnings overstatement claim is based on no more than the fact that BCF uses one accounting method to value merchandise on a quarterly basis (the “gross profit” method) and a different method to value its merchandise on an annual basis (the “retail inventory” method). In addition, defendants inform us that the market knew about this practice because the use of the different methods was disclosed to investors in BCF’s quarterly 10-Q filings with the SEC.

If BCF is correct (a) that the alleged overstatements of quarterly earnings are merely the result of the use of valid, accepted, and understood accounting methods, and (b) that this concurrent use of different accounting methods was fully and adequately disclosed to the market (alleged here to be efficient), plaintiffs’ claims would likely fail. However, at this stage, we cannot say, as a matter of law, that the alleged earnings overstatements can be fully explained by BCF’s use of different accounting methods for analyzing quarterly versus annual data (even assuming that these were fully disclosed to the market). Moreover, assuming that consistency with GAAP is enough to preclude liability, it is a factual question whether BCF’s accounting practices were consistent with GAAP. Cf. Discovery, 943 F.Supp. at 935 n. 9 (“This Court finds that whether FASB [SFAC] No. 6 constitutes GAAP is best resolved by expert testimony, and thus should not be addressed on a motion to dismiss”); cf. also In re Westinghouse Sec. Litig., 90 F.3d 696, 709 n. 9 (3rd Cir.1996). And, of course, since the claim at issue was dismissed at the pleading stage, we are required to credit plaintiffs’ allegations rather than defendants’ responses. See, e.g., Westinghouse, 90 F.3d at 706 (“we must accept as true plaintiffs’ factual allegations, and we may affirm the district court’s dismissals only if it appears certain that plaintiffs can prove no set of facts entitling them to relief’) (citation omitted). Consequently, we cannot sustain the district court’s dismissal of this claim under Rule 12(b)(6).

(ii) Rule 9(b)

The district court specifically ruled that the earnings overstatement claim failed the particularity requirements of Rule 9(b). Rule 9(b) requires a plaintiff to plead here (1) a specific false representation of material fact, (2) knowledge of its falsity by the person who made it, (3) ignorance of its falsity by the person to whom it was made, (4) the maker’s intention that it should be acted upon, and (5) detrimental reliance by the plaintiff. Westinghouse, 90 F.3d at 710. The district court held that plaintiffs did not comply with Rule 9(b) because they failed to allege:

how defendants intentionally or recklessly deviated from generally accepted aecount *1422 ing principles. The Amended Consolidated Complaint is devoid of any indication as to the particular error(s), [and/or] the standard(s) from which defendants deviated and even the allegation of scienter.

(Dist. Ct. Op. at 19) (emphasis added). The court concluded that plaintiffs had offered no more than “rote allegations of fraud predicate ed on the drop in price of BCF stock,” and that these allegations fell below the “who, what, when,where and how” elements necessary to establish an intentional or reckless misstatement or omission under Rule 9(b). (Dist. Ct. Op. at 19). See DiLeo, 901 F.2d at 627(equating the particularity required by Rule 9(b) with “the first paragraph of any newspaper story”). In addition,according to the court, plaintiffs’ claim sounded in “negligence.” (Dist. Ct. Op. at 18).

We disagree that plaintiffs’ claim, at this stage, boils down to a blanket assertion of fraud premised on no more than a drop in stock price. 11 Plaintiffs have alleged that 2-3 cent overstatements of earnings occurred in the company’s public announcements of results for the first, second, and third quarters of 1994 and that these overstatements occurred because BCF failed to account properly for expenses associated with purchases of inventory and thereby violated a specific accounting concept: SFAC No. 6. This is an adequate allegation of “how” BCF overstated its earnings, so we cannot say that plaintiffs have failed to state their claim with adequate particularity. Cf. Westinghouse, 90 F.3d at 711 (where plaintiffs alleged that defendant had arbitrarily moved loans from non-earning to earning status just before mandated public reporting, when nothing had changed regarding the likelihood of collection on the loans, allegations were adequate under Rules 12(b)(6) and 9(b)).

The district court also ruled that plaintiffs inadequately pled scienter. Here, we agree. To satisfy the scienter requirement, plaintiffs “must allege facts that give rise to an inference that [BCF] knew or was reckless in not knowing that [BCF’s] financial statements” were misleading. Id. at 712. It is not enough for plaintiffs to allege generally that defendants “knew or recklessly disregarded each of the false and misleading statements for which [they were] sued,” Complaint, ¶ 16; plaintiffs must allege facts that could give rise to a “strong” inference of scienter. Suna, 107 F.3d at 68; San Leandro, 75 F.3d at 813-14. Plaintiffs must either (1) identify circumstances indicating conscious or reckless behavior by defendants or (2) allege facts showing both a motive and a clear opportunity for committing the fraud. San Leandro, 75 F.3d at 813.

In this case, plaintiffs have failed to allege facts that would constitute circumstantial evidence of reckless or conscious misbehavior on the part of defendants in making the overstatements of earnings. Cf. id. at 812-13 (describing the types of allegations of fact that would indicate conscious or reckless behavior).

Plaintiffs have also endeavored to plead scienter by alleging facts that point towards motive and opportunity to commit fraud. Plaintiffs have alleged (and it is undisputed) that the individual defendants were top officers of BCF and hence had the opportunity to manipulate BCF’s disclosures to the public. Id. at 813. In addition, plaintiffs have alleged that defendants artificially inflated the price of BCF’s stock so as to enable certain top BCF officials to sell portions of their stock holdings at these prices. 12 See *1423 Acito v. IMCERA Group, Inc., 47 F.3d 47, 53 (2nd Cir.1995) (“Plaintiffs may plead scienter by alleging ‘facts establishing a motive to commit fraud and an opportunity to do so,’ or alleging ‘facts constituting circumstantial evidence of either reckless or conscious misbehavior.”) (quoting In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 269 (2nd Cir.1993)); see also Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1224 (1st Cir.1996). In support of this theory, plaintiffs’ Complaint provides us with the names of the insiders who sold stock, the quantities of stock sold and the prices at which the sales occurred, and the dates of the sales. Complaint, ¶ 51.

What these allegations boil down to is that two of the five officer-defendants made a profit of approximately $100,000 each and that a third officer-defendant made a profit of approximately $40,000 as a result of the artificial inflation of the price of BCF’s stock. The two officer-defendants who are not alleged to have traded are Monroe Milstein, the CEO and chairman of the board, who owned 30.7% of BCF’s stock, and Stephen Milstein, a vice-president and general merchandise manager, who owned 4.9% of the stock.

Of the three defendants who are alleged to have traded on nonpublie information, plaintiffs have provided us with the total stock holdings of only one defendant. This defendant, Andrew Milstein, owned 5.4% of the stock. The Complaint tells us that as of May 11, 1994, there were 41,119,463 shares of BCF’s common stock outstanding. A 5.4% holding, therefore, translates to approximately 2,220,451 shares. Of these, Andrew Mil-stein is alleged to have profited on the sale of 10,000 shares, i.e., approximately 0.5% of his holdings. With respect to the other two officer-defendants who are alleged to have traded on the nonpublic information, the Complaint provides us with the number of shares they traded, but not what their total stock holdings were.

These allegations are inadequate to produce a “strong” inference of “fraudulent intent.” See San Leandro, 75 F.3d at 814. First, two officer-defendants are not alleged to have traded at all, and these two defendants appear to be two of the more powerful among the group of five. One of them was the CEO, chairman of the board, and holder of over 30% of the stock. Second, the one defendant for whom we have information as to his total stock holdings appears to have sold no more than a minute fraction of his holdings, 0.5%. Further, we have no information as to whether such trades were normal and routine for this defendant. Nor do we have information as to whether the profits made were substantial enough in relation to the compensation levels for any of the individual defendants so as to produce a suspicion that they might have had an incentive to commit fraud. Finally, for two of the officer-defendants who are alleged to have traded during the class period, we do not even have information as to their total BCF stock holdings, and we therefore have even less of a basis to infer that their sales were unusual or suspicious. To the extent plaintiffs choose to allege fraudulent behavior based on what they perceive as “suspicious” trading, they have to allege facts that support that suspicion.

*1424 A large number of today’s corporate executives are compensated in terms of stock and stock options. Cf. Elliott J. Weiss, The New Securities Fraud Pleading Requirement: Speed Bump or Road Block?, 38 Ariz. L.Rev. 675, 687 (1996). It follows then that these individuals will trade those securities in the normal course of events. We will not infer fraudulent intent from the mere fact that some officers sold stock. See Shaw, 82 F.3d at 1224; cf. Tuchman, 14 F.3d at 1068 (noting that if “incentive compensation” could be the basis for an allegation of fraud, “the executives of virtually every corporation in the United States would be subject to fraud allegations”) (citation omitted). Instead, plaintiffs must allege that the trades were made at times and in quantities that were suspicious enough to support the necessary strong inference of scienter. See Shaw, 82 F.3d at 1224; see also Searls v. Glasser, 64 F.3d 1061, 1068 (7th Cir.1995); cf. Weiss, Securities Fraud Pleading at 686-87 (question courts should ask is whether the benefits realized by executives as a result of the inflation in stock price are “sufficiently large to constitute evidence of motive” to commit fraud).

We conclude, therefore, that while dismissal on Rule 12(b)(6) alone would not have been proper, the dismissal on Rule 9(b) grounds was. We do not discard the possibility, however, that plaintiffs will be able to amend the Complaint to allege trading by the defendant-officers that adequately supports the requisite strong inference of scienter.

(2) The 53rd Week

Fiscal year 1993 for BCF contained an extra, 53rd week. In its 1993 annual report, filed with the SEC on October 4, 1993, BCF represented that this 53rd week had accounted for an increase of $12.2 million in sales. Specifically, the 1993 annual report stated:

Fiscal 1993 was a 53 week fiscal year compared with 52 week fiscal years in 1992 and 1991. Net sales for the 53rd week in fiscal 1993 amounted to $12.2 million.

(Dist.Ct.Op. at 15). According to plaintiffs, however, this statement was false when made. Claiming that the true increase in sales attributable to the 53rd week was $23.2 million, not $12.2 million, plaintiffs rely on the following statement made by BCF in a September 20,1994, press release:

[T]he fourth quarter of 1994 was a 13 week quarter compared with