Opinion by Judge SNEED; Concurrence and Dissent by Judge BROWNING.
SNEED, Circuit Judge:
This case requires us to interpret the Private Securities Litigation Reform Act of 1995 ("PSLRA").
Due to the nature of this litigation, we shall depart somewhat from the customary form of opinions of this Court by discussing generally what we hold to be the pleading standard under the PSLRA.
THE PSLRA PLEADING STANDARD: THIS COURT'S INTERPRETATION
We hold that a private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct. Our holding rests, in part, on our conclusion that Congress intended to elevate the pleading requirement above the Second Circuit standard requiring plaintiffs merely to provide facts showing simple recklessness or a motive to commit fraud and opportunity to do so. We hold that although facts showing mere recklessness or a motive to commit fraud and opportunity to do so may provide some reasonable inference of intent, they are not sufficient to establish a strong inference of deliberate recklessness. In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity. Accordingly, we hold that particular facts giving rise to a strong inference of deliberate recklessness, at a minimum, is required to satisfy the heightened pleading standard under the PSLRA. We think that our holding represents the best way to reconcile Congress' express adoption of the Second Circuit's so-called "strong inference standard" with its express refusal to codify that circuit's case law interpreting the standard. However, we are mindful that not all courts share our view.
There is widespread disagreement among courts as to the proper interpretation of the PSLRA's heightened pleading requirement. See 15 U.S.C. § 78u-4(b)(1), (2). To date, the Second, Third and Sixth Circuits are the only other courts of appeals to address the issue squarely. See In re Comshare, Inc. Sec. Litig., 183 F.3d 542 (6th Cir.1999) (holding that "plaintiff may survive a motion to dismiss by pleading facts that give rise to a `strong inference' of recklessness"); In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999) (holding that "it remains sufficient for plaintiffs plead [sic] 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'"); Press v. Chemical Inv. Serv. Corp., 166 F.3d 529 (2d Cir.1999) (holding that a plaintiff "must either (a) allege facts to show that `defendants had both motive and opportunity to commit fraud' or (b) allege facts that `constitute strong circumstantial evidence of conscious misbehavior or recklessness'"). Of the district courts considering the issue, roughly sixty percent (some twenty cases) have followed the Second Circuit, while the others have interpreted the PSLRA as adopting some higher standard.
Generally, the district courts have taken three different approaches: (1) apply the Second Circuit standard requiring plaintiffs to plead mere motive and opportunity or an inference of recklessness, see e.g., Epstein v. Itron Inc., 993 F.Supp. 1314 (E.D.Wash.1998); Robertson v. Strassner, 32 F.Supp.2d 443, 447 (S.D.Tex.1998); In re Wellcare Management Group, Inc. Sec. Litig., 964 F.Supp. 632 (N.D.N.Y.1997); (2) apply a heightened Second Circuit standard rejecting motive and opportunity, but accepting an inference of recklessness, see e.g., Myles v. MidCom Communications, Inc., No. C96-614D (W.D.Wash. Nov. 19, 1996); Queen Uno Ltd. Partnership v. Coeur v. D'Alene Mines Corp., 2 F.Supp.2d 1345 (D.Colo.1998); or (3) reject the Second Circuit standard and accept only an inference of conscious conduct, see e.g., Voit v. Wonderware Corp., 977 F.Supp. 363 (E.D.Pa.1997); Powers v. Eichen, 977 F.Supp. 1031 (S.D.Cal.1997); Friedberg v. Discreet Logic Inc., 959 F.Supp. 42 (D.Mass.1997); Norwood Venture Corp. v. Converse, Inc., 959 F.Supp. 205, 209 (S.D.N.Y.1997). For further discussion
We embrace the approach requiring a strong inference of deliberate recklessness which lies between the second and third approaches. We do this because we believe that Congress intended to bar those complaints that fail to raise a strong inference of intent or deliberateness. The "deliberate recklessness" standard best serves the PSLRA's purpose. The PSLRA text and legislative history support our conclusion.
The Bases for Our Interpretation
To determine the proper pleading standard under the PSLRA, we turn first to the text of the statute. If the language is plain and its meaning clear, that is the end of our inquiry. See Northwest Forest Resource v. Glickman, 82 F.3d 825, 831 (9th Cir.1996).
1. The Plain Language of the PSLRA
The PSLRA provides, in pertinent part:
15 U.S.C. § 78u-4(b)(2) (bold emphasis in original; underline emphasis added). Under this provision, the mental state required for securities fraud liability is distinct from the level of pleading required to infer that mental state. Therefore, we must make two separate determinations: (1) what is the required state of mind; and (2) what constitutes a strong inference of that state of mind.
a. Required state of mind
The "required state of mind" in § 78u-4(b)(2) refers to the scienter requirement applicable to the underlying securities fraud claim brought by the plaintiff. In this case, Brody brought her securities fraud action under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which establishes a private cause of action for securities fraud. See 17 C.F.R. § 240.10b-5. Therefore, we look to § 10(b) for the required state of mind.
The Supreme Court has defined "scienter" in the context of § 10(b) as a "mental state embracing intent to deceive, manipulate, or defraud." See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n. 12, 96 S.Ct. 1375, 1381 n. 12, 47 L.Ed.2d 668 (1976). In Hochfelder, the Supreme Court addressed the question of whether a civil action for damages under § 10(b) would lie for negligent conduct. It decided that no conduct—negligent or otherwise—is actionable under § 10(b) unless plaintiffs make a showing of "scienter," i.e., "intent to deceive, manipulate, or defraud." Id. at 193, 96 S.Ct. at 1381, 47 L.Ed.2d 668. The Supreme Court reasoned that § 10(b) makes unlawful the use of "any manipulative or deceptive device or contrivance" in contravention of SEC Rules. Hochfelder, 425 U.S. at 197, 96 S.Ct. at 1383, 47 L.Ed.2d 668. As a result, the Court held that "[t]he words `manipulative and deceptive' used in conjunction with `device or contrivance' strongly suggest that § 10(b) was intended to proscribe knowing or intentional misconduct." Id. (citations omitted) (emphasis added).
After Hochfelder, but long before enactment of the PSLRA, we answered that question in the affirmative, holding that "Congress intended the ambit of § 10(b) to reach a broad category of behavior, including knowing or reckless conduct." Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). In Nelson, we declined to define recklessness, but our opinion indicates that we viewed it as a form of intentional, not merely negligent, conduct. We expressly acknowledged the Supreme Court's words in Hochfelder that "[i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." Id. (quoting Hochfelder, 425 U.S. at 193-94 n. 12, 96 S.Ct. at 1381, n. 12, 47 L.Ed.2d 668). Moreover, we stated that "the evidence supports a finding of recklessness, or some degree of intent not sufficiently aggravated to be characterized as `deliberate and cold-blooded.'" Id. at 1338. Thus, we apparently followed the Supreme Court's guidance in Hochfelder that reckless behavior in the § 10(b) context is merely a lesser form of intentional conduct.
In Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir.1990) (en banc), we again held that "recklessness satisfies the element of scienter in a civil action for damages under § 10(b) and Rule 10b-5." 914 F.2d at 1568-69. This time, we explicitly defined recklessness:
Hollinger, 914 F.2d at 1569 (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)). Our definition of recklessness, as taken from Sundstrand, strongly suggests that we continued to view it as a form of intentional or knowing misconduct.
These cases indicate that recklessness only satisfies scienter under § 10(b) to the extent that it reflects some degree of intentional or conscious misconduct.
We now turn to our second inquiry, i.e., what constitutes a strong inference of deliberate recklessness?
b. What constitutes a strong inference of the required state of mind
Again, we begin with the language of the statute because if the language is clear, we need inquire no further. See Glickman, 82 F.3d at 830-31. In this case, the statute is silent as to the central issue: the text of the PSLRA does not state whether motive and opportunity or circumstantial evidence of simple recklessness are sufficient to raise a "strong inference" of deliberate recklessness. The plain text of the PSLRA leaves it open for us to consider circumstantial evidence of recklessness and motive and opportunity as evidence of deliberate recklessness. However, it does not indicate whether they alone are enough to establish a "strong inference" of deliberate recklessness. In the absence of a clear command in the text, we turn to the legislative history for guidance. See id.
2. The Legislative History of the PSLRA
When examining the legislative history, we first look to the conference report because, apart from the statute itself, it is the most reliable evidence of congressional intent. See id. at 835. In this case, the conference report suggests both that Congress generally intended to raise the pleading standards to eliminate abusive securities litigation and that it specifically intended to raise the pleading standard above that in the Second Circuit. See, e.g., H.R. CONF. REP. 104-369, at 31, 41.
It is clear from this conference report that Congress sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers to prevent plaintiffs from asserting baseless securities fraud claims. In a joint statement, managers from the House and Senate declared that "Congress has been prompted by significant evidence of abuse in private securities lawsuits to enact reforms to protect investors and maintain confidence in our
It is also clear from the legislative history that Congress sought more specifically to raise the pleading standard above that in the Second Circuit. First, Congress declined to enact an amendment that would have adopted the Second Circuit rule. It is true that during the floor debate of its version of the PSLRA, the Senate tentatively adopted the Specter Amendment which codified the Second Circuit's two-pronged "motive and opportunity" and "recklessness" test. See 141 CONG. REC. S9,170 (daily ed. June 27, 1995). However, the joint conference committee—consisting of House and Senate managers charged with reconciling differences between the House and Senate bills—declined to incorporate the Specter Amendment in the final version of the PSLRA. See H.R. CONF. REP. 104-369, at 41. In doing so, they implicitly rejected the Second Circuit's two-pronged test. See Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200, 95 S.Ct. 392, 401, 42 L.Ed.2d 378 (1974) (holding that where the conference committee has expressly declined to adopt proposed statutory language, its action "strongly militates against a judgment that Congress intended [the] result that it expressly declined to enact").
Second, the joint committee expressly rejected the Second Circuit's two-prong test in favor of a more stringent standard. The joint committee stated:
H.R. CONF. REP. 104-369, at 41 n.23 (emphasis added). See also S. Rep. 104-98, at 15 ("The Committee does not intend to codify the Second Circuit's caselaw interpreting [the strong inference] pleading standard, although courts may find this body of law instructive."). Thus, although Congress derived the PSLRA "strong inference" language from the Second Circuit, it rejected the less stringent Second Circuit case law interpreting that "strong inference" language. To repeat, the conference committee purposely chose not to include in its pleading standard language derived from Second Circuit case law relating to motive, opportunity or recklessness.
Thus, Congress did not codify the Second Circuit case law. The joint committee sought to "strengthen existing pleading requirements." See H.R. CONF. REP. 104-369, at 41. The Second Circuit case law setting forth its two-prong test existed at the time the PSLRA was passed. Clearly, Congress sought to raise the standard above all existing requirements. Congress could have adopted outright the Second Circuit standard. It did not do so. It follows that Congress sought to raise the standard above that in the Second Circuit.
Congress further provided very strong evidence of its intent to go beyond the Second Circuit standard when it overrode President Clinton's veto of the PSLRA. In his veto message to Congress, President Clinton expressed concern that Congress had elevated the pleading standard above that required in the Second Circuit. President Clinton stated:
141 CONG. REC. H15,214 (daily ed. Dec. 10, 1995). Notwithstanding the President's concerns, Congress overrode his veto, and the PSLRA became law. In doing so, Congress provided powerful evidence of its intent to elevate the pleading standard to a level beyond that in the Second Circuit.
In sum, the legislative history supports our conclusion that the PSLRA pleading standard is higher than the standard of the Second Circuit. We find that because the joint committee expressly rejected the "motive and opportunity" and "recklessness" tests when raising the standard, Congress must have intended a standard that lies beyond the Second Circuit standard. Had Congress merely sought to adopt the Second Circuit standard, it easily could have done so. It did not do so. Instead, Congress adopted a standard more stringent than the Second Circuit standard. It follows that 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 recklessness that strongly suggests actual intent. Thus, we agree with the district court that the PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate or conscious recklessness. We believe that this "deliberate recklessness" standard best reconciles Congress' adoption of the Second Circuit's so-called "strong inference standard" with its express refusal to codify that circuit's two-prong "motive and opportunity" and "recklessness" test.
Having determined that the PSLRA requires plaintiffs to plead particular facts giving rise to a strong inference of deliberate recklessness, we must determine whether the plaintiffs in this case have satisfied that requirement.
FACTS AND PROCEDURAL BACKGROUND
Deanna Brody ("Brody") filed a securities fraud class action in the United States
Based on the same events, Edmund J. Janas ("Janas") filed a shareholders' derivative suit claiming that SGI's officers breached their fiduciary duties to SGI, were grossly negligent in managing the company, and engaged in improper insider trading. Again, the district court dismissed the complaint, holding that Janas failed to allege a pre-suit demand on SGI's directors as required by Federal Rule of Civil Procedure 23.1. Janas now appeals. On appeal, he argues that the district court abused its discretion when it concluded that it would not have been futile for Janas to make a demand on the directors. Janas also claims that the district court improperly denied him leave to amend. Again, we disagree.
We have jurisdiction pursuant to 28 U.S.C. § 1291 and affirm. We hold that although Brody has stated facts giving rise to some inference of fraudulent intent, her factual allegations are insufficient to create a strong inference of deliberate recklessness. We also conclude that the uncontested affidavits offered by the individual officers were adequate to support summary judgment in their favor. With regard to Janas's derivative suit, we hold that he was not excused from making a pre-suit demand upon the directors and that he could not have amended his complaint to show that such a demand would have been futile. As a result, we hold that dismissal with prejudice was appropriate.
Brody's First Amended Complaint
Brody's First Amended Complaint asserts
By mid-September 1995, Brody further asserts, SGI began encountering quality control problems with a primary Indigo2 component, the Toshiba ASIC chip. Toshiba sent SGI a large number of defective chips, causing SGI to fall behind its production schedule. Brody alleges that the officers learned immediately of the defective chips through SGI internal reports, but continued to represent to investors
The shortage of ASIC chips for the Indigo2 workstation compounded other major problems for SGI. The company was suffering through declining sales to the United States government and Original Equipment Manufacturers ("OEM"), languishing demand in Europe, and complications resulting from the reorganization of its sales force. As these problems became apparent, investors began to lose confidence in SGI's ability to maintain its high growth rate, and as a result, SGI's stock dropped to a low of $29 7/8 on October 9, 1995.
On October 19, 1995, SGI announced that its revenue had grown just 33% during the first quarter of FY96, well below the projected growth of 40%. The disappointing first quarter performance, according to Brody, caused SGI's officers to fear another drop in the value of SGI stock. To prevent such a drop, Brody asserts that SGI's officers allegedly conspired to restore investor confidence by downplaying SGI's problems. In furtherance of their alleged "conspiracy," SGI's officers made the following statements which were intended to artificially inflate the value of SGI stock:
To further inflate the value of SGI stock, the company announced its plan to repurchase 1.3 million of its own shares immediately and another 5.7 million over a longer period. According to Brody, the statements had their intended effect: SGI's stock price dropped only slightly despite its disappointing first quarter results.
SGI's problems continued throughout October 1995. SGI again failed to ship the Indigo2 in volume and its sales continued to decline because the sales force reorganization had been ineffective. Moreover, demand for the Indigo2 remained low among OEM and European customers. As a result, SGI fell even farther below its target of 40% growth for FY96.
Brody alleges that SGI's officers learned of these problems through internal company reports. Notwithstanding the negative reports, the officers continued to make positive public statements in their allegedly conscious effort to mislead investors:
Again, Brody contends that these false and misleading statements had their intended effect: SGI's stock rose from $31 on November 1, 1995 to $36 1/4 on November 3, 1995. During the month of November, the individually named SGI officers allegedly took advantage of SGI's inflated stock value by selling 388,188 shares of SGI stock at prices as high as $37 7/8. On December 5, 1995, SGI stock reached a class-period high of $38 3/4. By mid-December, however, rumors began to circulate that SGI would again fall short of projected growth in the second quarter and its stock price began to drop. In effort to revive once more the value of the stock, SGI officers continued to make what Brody claims were false statements about SGI's performance:
Despite these reassurances, the price of SGI's stock continued to fall during the month of December and by the end of the month, it had dropped to $26 7/8.
Soon thereafter, SGI began to publicly confirm the negative rumors about its performance. On January 2, 1996, the company announced its disappointing second quarter results and acknowledged that revenue growth for the year would be much lower than expected. The next day, SGI's stock fell to $21 1/8. On January 17, 1996, SGI's officers admitted to securities analysts that SGI had been unable to fill Indigo2 orders because of a shortage of ASIC chips and other primary components. They also acknowledged that OEM, North American, and European sales had all been down.
On January 26, 1996, Brody filed a securities fraud class action in federal district court, asserting claims for relief under sections 10(b) and 20A of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) & 78t-1, and Rule 10b-5, 17 C.F.R. § 240.10b-5. Brody alleged, as already indicated, that during the class period—September 13, 1995, to December 29, 1995—SGI and its officers made material misrepresentations about the condition of the company and initiated a stock repurchase plan to inflate the price of SGI's stock. Brody claimed that six SGI officers took advantage of the inflated price and sold large blocks of stock.
On May 22, 1996, Janas filed a shareholders' derivative suit against SGI's officers and directors based on essentially the same allegations set forth in Brody's complaint. Janas claimed that SGI's officers breached their fiduciary duties to SGI, were grossly negligent in managing the company, and engaged in improper insider trading.
The district court consolidated Brody's class action, Janas' derivative suit, and two other securities claims.
STANDARDS OF REVIEW
We review de novo the district court's dismissal of Brody's and Janas' complaints for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). See Johnson v. Knowles, 113 F.3d at 1117. On review, we accept Brody's allegations as true and construe them in the light most favorable to her. See id. This Court reviews a grant of summary judgment de novo. See Ghotra v. Bandila Shipping, Inc., 113 F.3d 1050, 1054 (9th Cir.1997), cert. denied, ___ U.S. ___, 118 S.Ct. 1034, 140 L.Ed.2d 101 (1998). We review for abuse of discretion the district court's finding that it would not have been futile for Janas to make a demand on SGI's directors, see Greenspun v. Del E. Webb Corp., 634 F.2d 1204, 1208 (9th Cir.1980), but review de novo the district court's dismissal of Janas' complaint without leave to amend, see Polich v. Burlington N., Inc., 942 F.2d 1467, 1472 (9th Cir.1991).
We turn now to the question of whether the district court was correct in dismissing the complaints in this case.
The Sufficiency of Brody's Complaint
We begin with Brody's class action. Brody contends that the district court erred in dismissing her complaint and insists that she pleaded facts sufficient to satisfy the PSLRA's pleading requirements. We disagree. Under the PSLRA, to repeat, Brody is required to state with particularity all facts giving rise to a "strong inference" of the required state of mind. See 15 U.S.C. § 78u-4(b)(1), (2). As we discussed, in order to create a strong inference of the required state of mind, Brody must state with particularity facts demonstrating deliberate recklessness. In order to plead "with particularity," Brody must provide all the facts forming the basis for her belief in great detail.
The PSLRA, to repeat, provides that plaintiffs alleging securities fraud shall "state with particularity all facts" on which their belief is based. 15 U.S.C. § 78u-4(b)(1) (emphasis added); see also 15 U.S.C. § 78u-4(b)(2). Although the words "facts" and "particularity" are not defined in the statute, their meaning is plain. When a statute does not define its terms, we employ the ordinary meaning of the words. See Glickman, 82 F.3d at 834. A "fact" is an "event or circumstance," see BLACK'S LAW DICTIONARY 591 (6th ed.1990), or "a truth known by actual experience or observation," see RANDOM
Here, Brody neither states facts with sufficient particularity nor raises a strong inference of deliberate recklessness. In her First Amended Complaint, Brody advances two primary grounds for her information and belief: (1) the existence of internal SGI reports that contradicted positive public statements made by the officers; and (2) the unusual sale of a massive amount of SGI stock by the officers. Specifically, Brody alleges that the SGI officers received SGI internal reports notifying them of serious production and sales problems with the Indigo2. Notwithstanding the alleged negative reports, the SGI officers continued to make positive representations to investors regarding production and sales of the Indigo2. Brody contends that the SGI officers intended for their positive comments to mislead investors and temporarily restore their faith in the company. According to Brody, the positive comments had their intended effect: SGI's stock remained artificially inflated long enough for the officers to profit from massive and improper insider trading.
Although Brody's complaint suggests an inference of deliberate recklessness, it lacks sufficient detail and foundation necessary to meet either the particularity or strong inference requirements of the PSLRA. For example, Brody fails to state facts relating to the internal reports, including their contents, who prepared them, which officers reviewed them and from whom she obtained the information. In short, Brody's complaint is not sufficiently specific to raise a strong inference of deliberate recklessness. As the district court recognized, mere boilerplate pleadings
1. Internal reports
Brody alleges that SGI's internal reports
According to Brody, the officers conducted several meetings during which they entered into a "conspiracy of silence" whereby they agreed to downplay the seriousness of the company's problems. However, Brody does not plead facts to corroborate her allegations. Instead, she merely provides a list of sources from which she allegedly obtained her information. The boilerplate section of her complaint, titled "Basis of Allegations," states that:
This paragraph is an insufficient basis for fraud allegations because it fails to state "with particularity all facts on which [her] belief is formed." See 15 U.S.C. § 78u-4(b)(1). This means that a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief. It is not sufficient for a plaintiff's pleadings to set forth a belief that certain unspecified sources will reveal, after appropriate discovery, facts that will validate her claim. In this case, Brody's complaint does not include adequate corroborating details. She does not mention, for instance, the sources of her information with respect to the reports, how she learned of the reports, who drafted them, or which officers received them. Nor does she include an adequate description of their contents which we believe-if they did exist-would include countless specifics regarding ASIC chip shortages, volume shortages, negative financial projections, and so on. We would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability.
In the absence of such specifics, we cannot ascertain whether there is any basis for the allegations that the officers had actual or constructive knowledge of SGI's problems that would cause their optimistic representations to the contrary to be consciously misleading. In other words, in the absence of such specifics, we cannot determine whether there is any basis for alleging that the officers knew that their statements were false at the time they were made-a required element in pleading fraud. See, e.g., Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978). Brody would have us speculate as to the basis for the allegations about the reports, the severity of the problems, and the knowledge of the officers. We decline to do so.
Brody is required to state facts giving rise to a strong inference of deliberate recklessness or intent. It is not enough for her to state facts giving rise to a mere speculative inference of deliberate recklessness, or even a reasonable inference of deliberate recklessness. The PSLRA requires, to repeat, that Brody state with particularity facts giving rise to a strong inference of the required state of mind, i.e., at least deliberate recklessness. See 15 U.S.C. § 78u-4(b)(2). We understand this to mean that Brody must plead in great detail facts demonstrating, at a minimum, a degree of recklessness that strongly suggests the required degree of intent. While we hold that the unsubstantiated internal reports alone are insufficient to demonstrate such recklessness, we cannot yet answer the larger question of whether Brody's complaint, considered in its entirety, states facts which give rise to a strong inference of deliberate recklessness. Accordingly, we turn to the allegedly suspicious stock sales.
2. Stock sales
Brody alleges that six individual officers engaged in massive insider trading during the fifteen-week class period, collectively
Although "unusual" or "suspicious" stock sales by corporate insiders may constitute circumstantial evidence of scienter, see Provenz, 102 F.3d at 1491,
Brody argues that the district court erred in concluding that the officers' sales of SGI stock during the class period did not give rise to a strong inference of fraudulent intent. Specifically, she contends that the district court (1) improperly considered SEC filings in ruling on the motion to dismiss; (2) improperly treated the officers' stock options as stock shares for purposes of evaluating their stock sales; and (3) erroneously concluded that the officers' stock sales were not unusual or suspicious. We address each argument in turn.
First, we disagree and hold that it was proper to consider the SEC filings under the incorporation by reference doctrine. That doctrine permits a district court to consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff's] pleading." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir.1994). In this case, Brody alleges the contents of the SEC filings in her complaint. She states that her allegations are based in part on a review of SGI's SEC filings, and she clearly gleaned from the SEC Form 3 and 4 filings many of the facts regarding the officers' stock sales. Although Brody questions the veracity of the SEC forms, her ongoing and substantial reliance on the forms as a basis for her allegations substantially weakens her position. As the district court pointed out, "[h]aving raised questions about [officers'] stock sales, based [her] allegations on [officers'] SEC filings, and submitted expert declarations that rely on the SEC forms at issue, [Brody] can hardly complain when [the officers] refer to the same information in their defense." The district court did not err in considering SGI's SEC filings in ruling on the motion to dismiss.
Second, Brody argues that it was improper for the district court to consider the officer's vested stock options in evaluating the proper proportions of their stock sales. Brody contends that because vested stock options are not shares, they should not be treated as such for the purpose of calculating the percentage of shares that each officer sold. We disagree. When evaluating stock sales, we have held that the proportion of shares actually sold by an insider to the volume of shares he could have sold is probative of whether the sale was unusual or suspicious. See In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427 (9th Cir.1994); see also Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995). In this case, we see no reason to distinguish vested stock options from shares because vested stock options can be converted easily to shares and sold immediately.
Third, we reject Brody's contention that the district court erroneously concluded that the officers' stock sales were not unusual or suspicious. This Court has recognized that only "[i]nsider trading in suspicious amounts or at suspicious times is probative of bad faith and scienter." Apple Computer, 886 F.2d at 1117. Insider trading is suspicious when "dramatically out of line with prior trading practices at times calculated to maximize personal benefit from undisclosed inside information." Id. In this case, we conclude that the stock trading was not dramatically out of line with prior trading practices or otherwise suspicious enough to create a strong inference of the required deliberate recklessness.
All but two of the officers in this case sold a relatively small portion of their total holdings and traded in a manner consistent with prior practice. Collectively, the officers-even including the two who sold the greatest percentage of their holdings-retained 90 percent of their available holdings. President McCracken sold just 2.6 percent of his holdings and options. Vice President Baskett sold 7.7 percent. Senior Vice Presidents Ramsay and Sekimoto sold 4.1 and 6.9 percent, respectively. Senior Vice President Kelly's and Burgess's sales appear somewhat suspicious-they sold 43.6 and 75.3 percent of their respective holdings.
However, we hold that even Kelly's and Burgess's sales fail to give rise to a strong inference of deliberate recklessness on the part of them or other directors. Kelly sold 43.6 percent of his shares and options during the class period, but his sales represent an insignificant portion of the allegedly suspicious sales. Of the 388,188 shares with which Brody is concerned, only 20,000 were sold by Kelly. In other words, his sales amount to just five percent of the total stock sales with which Brody is concerned. And although Kelly had never before sold such a large quantity of stock, he had only been with SGI for a year and had no significant trading history for purposes of comparison. In light of the relatively low percentage of holdings sold by the other officers, Kelly's relatively insignificant trading activity alone does not give rise to a strong inference of deliberate recklessness.
Burgess, on the other hand, sold a vast quantity of shares. His 250,588 shares sold represent sixty-five percent of the sales with which Brody is concerned. In fact, in the absence of Burgess's sales, the officers' sales activity during October 1995 would have looked much more like any other month. Burgess's sales, in other words, appear extremely significant for purposes of Brody's class action. However, they are not. Brody overlooks crucial facts pertaining to Burgess's sales. Brody states that "Burgess had never before sold any of his SGI stock"; however, she omits mention of the fact that SGI acquired his Toronto company, Alias, Inc., in June 1995, and that he was legally forbidden to trade his new SGI stock until the second quarter of 1995, which embraced the period in which his sales occurred. Nor does Brody mention that Burgess remained in Toronto,
3. Summary: No strong inference of deliberate recklessness
Brody's allegations are insufficient to create a strong inference that the officers acted with at least deliberate recklessness. Her complaint does not create a strong inference of deliberate recklessness or knowing misrepresentation on the part of the defendants. It is too generic and contains little more than evidence of mere motive and opportunity to commit fraud. Her assertions in the complaint differ very little from the conjectures of many concerned and interested investors. At one time, an immensely successful company and its officers state publicly that the company will continue to succeed. The officers then sell a noticeable quantity of shares at a considerable profit. Shortly thereafter, the company takes a turn for the worse and suddenly, suspicion abounds. See, e.g., DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990) ("The story in this complaint is familiar in securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less rosy. The plaintiff contends that the difference must be attributable to fraud."). In the absence of greater particularity and more incriminating facts, we have no way of distinguishing Brody's allegations from the countless "fishing expeditions" which the PSLRA was designed to deter. See H.R. CONF. REP. 104-369, at 37.
Congress enacted the PSLRA to put an end to the practice of pleading "fraud by hindsight." See e.g., Medhekar v. United States Dist. Ct., 99 F.3d 325, 328 (9th Cir.1996) (holding that Congress intended for complaints under the PSLRA to stand or fall based on the actual knowledge of the plaintiffs rather than information produced by the defendants after the action has been filed).
4. Summary Judgment
In addition to dismissing the entire complaint, the district court granted summary judgment to individual officers Baskett, Burgess, Ramsay and Sekimoto based upon their declarations stating that they were not involved in any of the misrepresentations alleged by Brody. Brody argues that this summary judgment was improper because she was prevented by a discovery stay from securing evidence necessary
Brody was subject to a mandatory discovery stay, see 15 U.S.C. § 78u-4(b)(2), when the district court entered summary judgment against her. Brody claims that the stay should have been lifted in order to permit her to engage in discovery prior to the decision on the motion for summary judgment. The district court may permit discovery, and continue a summary judgment hearing, when a party is otherwise unable to present "facts essential to justify his opposition," and offers an explanation of why this inability exists. See Fed. R.Civ.P. 56(f). "Rule 56(f) requires affidavits setting forth the particular facts expected from the movant's discovery," Brae Transp., Inc. v. Coopers & Lybrand, 790 F.2d 1439, 1443 (9th Cir.1986), and specifying "how [those facts] would preclude summary judgment," Garrett v. City and County of S.F., 818 F.2d 1515, 1518 (9th Cir.1987).
Brody failed to comply with Rule 56(f). "Failure to comply with the requirements of Rule 56(f) is a proper ground for denying discovery and proceeding to summary judgment." Brae, 790 F.2d at 1443. In this case, Brody failed to file a motion seeking discovery
We also agree with the district court's conclusion that the evidence offered by the individual officers was adequate to support summary judgment. Baskett, Burgess, Ramsay, and Sekimoto submitted uncontested affidavits that they neither participated in the preparation of any of the written statements nor made any of the oral statements challenged by Brody. She offers no evidence to the contrary. Thus, the individual officers negated the factual basis for Brody's claim. Summary judgment was proper.
The Sufficiency of Janas' Complaint
Janas, to repeat, filed a derivative suit against SGI and the individual officers making virtually the same allegations as Brody. Janas contends that SGI's officers breached their fiduciary duties to SGI, were grossly negligent in managing the company, and engaged in improper insider trading. After consolidating the Janas and Brody cases, the district court dismissed Janas's claims because he failed to make and allege a pre-suit demand on SGI's board of directors as required under the rules governing derivative suits. The district court held that it would not have been futile for Janas to make such a demand, and dismissed the complaint without leave to amend. We hold that the district court did not abuse its discretion in finding that a pre-suit demand would not have been futile. We also hold that it was proper to dismiss the suit without leave to amend.
1. Failure to make demand
A shareholder seeking to vindicate the interests of a corporation through a derivative suit must first demand action from the corporation's directors or plead with particularity the reasons why such demand would have been futile. See Fed. R.Civ.P. 23.1. Rule 23.1, however, does
a. Independent and disinterested
Janas insists that he created a reasonable doubt as to the independence and disinterestedness of SGI's officers by averring that (1) the Board engaged in a fraudulent scheme to inflate the value of SGI stock and facilitate profitable insider trading; (2) Board members benefitted from the inflated value of SGI stock; and (3) officer McCracken dominated the Board. We disagree.
At the pleading stage, Board independence and compliance with the business judgment rule are presumed. See id. at 815. Demand will be excused only if the plaintiff's allegations show the defendants' actions "were so egregious that a substantial likelihood of director liability exists." Id. "[T]he mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors." Id.
Janas fails to plead particular facts showing that the directors' actions were so egregious that they faced a significant threat of liability. He fails to provide specific facts showing that the Board approved the stock repurchasing plan to inflate SGI's stock price artificially, or that the Board approved the alleged insider trading or the allegedly fraudulent statements. Indeed, his claim rests on a general allegation that the Board participated in the fraudulent scheme. Such general allegations are insufficient to demonstrate that the Board engaged in conduct that resulted in a substantial risk of personal liability. Accord Seminaris v. Landa, 662 A.2d 1350, 1354 (Del.Ch.1995) (holding that plaintiff's general allegation that the directors "looked the other way" when the board's chairman engaged in misconduct did not show "substantial likelihood of liability").
Moreover, Janas fails to plead facts demonstrating that Board members benefitted from the inflated value of SGI stock. Janas alleged that only two out of nine directors sold SGI stock during the class period. As to the allegation that McCracken dominated the Board, Janas advances no particularized facts to rebut the presumption that the individual directors were independent. Therefore, the district court did not abuse its discretion in concluding that Janas failed to establish a reasonable doubt that the majority of the Board was independent and disinterested.
b. Business judgment rule
Plaintiffs can also demonstrate the futility of a pre-suit demand by creating a reasonable doubt as to whether the challenged conduct is protected by the business judgment rule. Under the business judgment rule, directors are presumed to make sound business decisions, and to inform themselves properly prior to making those decisions. See Grobow v. Perot, 539 A.2d 180, 189 (Del.1988). As discussed, Janas has not pleaded with particularity facts showing that the Board approved, acquiesced in, or otherwise supported the alleged false statements or the allegedly improper insider trading of SGI stock. He has not stated facts that demonstrate that the Board intended for the stock repurchase plan to inflate artificially the value of SGI stock in order to facilitate insider trading. In the absence of such facts, we must presume that the Board had a legitimate business purpose when it repurchased SGI stock.
2. Dismissal without leave to amend
Finally, we must determine whether the district court erred in dismissing Janas's derivative action without granting him leave to amend. We have held that "[d]ismissal without leave to amend is improper unless it is clear that the complaint could not be saved by any amendment." Polich, 942 F.2d at 1472. Here, Janas has failed to set forth any facts which he could add to save his complaint. See In re VeriFone Sec. Litig., 11 F.3d 865, 872 (9th Cir.1993) (denying leave to amend when plaintiffs failed to allege additional facts which might cure defects in complaint). Moreover, we hold that it is clear that Janas could not have amended his complaint to show that it would have been futile to make a demand upon the directors. As a result, we hold that dismissal with prejudice was appropriate.
For the foregoing reasons, we conclude that the district court did not err in dismissing Brody's complaint, granting summary judgment to the individual officers, and dismissing Janas's complaint without leave to amend.
AMENDED CONCURRING AND DISSENTING OPINION
Aug. 25, 1999.
BROWNING, Circuit Judge, concurring in part and dissenting in part:
I respectfully dissent from the majority's holding that (1) the Private Securities Litigation Reform Act (the "Reform Act") eliminated recklessness and motive and opportunity to commit fraud as bases for establishing scienter under § 10(b) and Rule 10b-5, and (2) the allegations of scienter in Brody's complaint were insufficient to survive a motion to dismiss.
The Reform Act
The Reform Act requires plaintiffs to "state with particularity facts giving rise to a strong inference" of scienter. 15 U.S.C. § 78u-4(b)(2). Although the majority concedes that "[t]he plain text of the [Reform Act] leaves it open for us to consider circumstantial evidence of recklessness and motive and opportunity as evidence of [scienter]," ante, at 977, it concludes that the legislative history of the Act establishes that allegations either of recklessness (a term the majority refers to as "mere recklessness" or "simple recklessness," ante at 974) or of motive and opportunity to commit fraud are no longer sufficient to avoid dismissal, see ante, at 979-80.
Some courts addressing the issue have also reached a similar conclusion.
The latter approach begins and ends with the plain text of the statute. The statute nowhere mentions proof of motive and opportunity to commit fraud or any other specific means of establishing scienter, but simply requires that plaintiffs "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). There is no support in the text for concluding that proof of recklessness
The majority concedes as much, but nonetheless resorts to legislative history because the language of the statute "does not indicate whether [allegations of recklessness or motive and opportunity] alone are enough to establish a `strong inference' of [scienter]." Ante, at 977. In effect, the majority holds that the breadth and flexibility of the Reform Act's unambiguous pleading standard are sufficient to justify departure from the statute's plain text. Respectfully, that thesis is not supportable. As the Court stated in Barnhill v. Johnson, 503 U.S. 393, 401, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), "[A]ppeals to statutory history are well taken only to resolve `statutory ambiguity.'" See also Pennsylvania Dept. of Corrections v. Yeskey, 524 U.S. 206, 118 S.Ct. 1952, 1956, 141 L.Ed.2d 215 (1998) ("[T]he fact that a statute can be applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth." (internal quotations omitted)).
Even if it were appropriate to reach beyond the plain text, the Reform Act's legislative history does not support the majority's interpretation. Although Congress clearly intended to adopt the Second Circuit's "strong inference" standard, the legislative history taken as a whole does not suggest that Congress intended to reject the Second Circuit's holdings that allegations
The majority contends that the Conference Committee "implicitly rejected" motive, opportunity, and recklessness as bases for a "strong inference" of fraud by eliminating language incorporated in the bill in the Senate by the Specter Amendment, which purported to codify all aspects of the Second Circuit's case law applying the "strong inference" standard. Ante, at 978. The legislative history suggests, however, that the Committee rejected language added by the Specter Amendment because it was "an incomplete and inaccurate codification" of Second Circuit case law,
Moreover, the Specter Amendment's codification of a specific test for pleading scienter would have been inconsistent with the provisions of the Reform Act requiring a different state of mind for different statements. Under the Reform Act's "safe harbor" provisions, plaintiffs must prove that "forward-looking" statements were made with "actual knowledge" that they were false or misleading. 15 U.S.C. §§ 78u-5(c)(1)(B), 77z-2(c)(1)(B). A recklessness standard for pleading that would apply to all statements, such as that proposed in the Specter Amendment, would have been inconsistent with the safe harbor's requirement of "actual knowledge" for forward-looking statements.
The majority relies on a statement in the Conference Report that "[b]ecause 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 . . . . For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness." H.R. Conf. Rep. 104-369, at 41 & n.23 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 740, 747 n. 23. The majority infers from this comment that Congress intended to impose a "more stringent" standard than that of the Second Circuit by rejecting the sufficiency of allegations of motive and opportunity and circumstantial evidence of recklessness to establish a "strong inference" of scienter. Ante, at 978. The more plausible and direct explanation is that Congress chose
Congress also declined to include in the Reform Act language relating to a variation of the second method of meeting the Second Circuit's standard (by alleging and proving "circumstantial evidence of conscious misbehavior"
The majority relies heavily upon the fact that in announcing his reasons for vetoing the Reform Act, the President expressed his concern that the legislation would elevate the pleading standard above that previously adopted in the Second Circuit. The majority argues that by overriding the President's veto, "Congress provided powerful evidence of its intent to elevate the pleading standard to a level beyond that in the Second Circuit." Ante, at 979. This argument rests on the assumption that Congress, in overriding the President's veto, agreed with the President that the Reform Act, as passed by Congress, adopted a pleading standard more demanding than the Second Circuit's standard. During Senate debate on overriding the President's veto, however, the sponsors of the bill explicitly disagreed with the President's interpretation and reaffirmed their own view that, contrary to the President's belief, the Reform Act's pleading standard was "faithful to the Second Circuit's test." 141 Cong. Rec. S19067 (daily ed. Dec. 21, 1995) (Sen. Dodd quoting from memorandum of Prof. Grundfest).
Other provisions of the Reform Act undermine the majority's holding, particularly the majority's across-the-board elimination of "mere" recklessness as a basis of liability. Before the Reform Act was
The Securities and Exchange Commission is uniquely qualified to assess "the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability[.]" TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 n. 10, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (giving deference to the SEC's interpretation of Rule 14a-9). The Commission "often relies on the recklessness standard in its own law enforcement cases,"
Brief of Amicus SEC at 18-19 (emphases in original).
The Senate Report stated that "[t]he Committee does not adopt a new and untested pleading standard that would generate additional litigation."
The Reform Act, properly interpreted, permits plaintiffs to plead a strong inference of scienter by alleging with particularity facts that constitute circumstantial evidence of reckless or conscious misbehavior, or a motive and opportunity to defraud. Brody's complaint satisfies this standard by setting forth, in adequate detail, the factual basis for a strong inference that Silicon Graphics, Inc. ("SGI" or "the Company") and its officers knowingly or recklessly misrepresented the state of the Company's affairs and, as evidenced by the individual defendants' insider stock sales, had the motive and opportunity to defraud. Dismissal is not warranted because it does not "appear[ ] beyond doubt that plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief," Neubronner v. Milken, 6 F.3d 666, 669 (9th Cir.1993) (emphasis added, internal quotations omitted), even under the majority's "deliberate recklessness" standard.
Before considering whether they support a "strong inference" of fraud, the court must assess the particularity of Brody's allegations. Federal Rule of Civil Procedure 9(b) provides that "the circumstances constituting fraud or mistake shall be stated with particularity." Fed. R.Civ.P. 9(b). The Reform Act modifies this requirement, providing that a securities fraud complaint shall identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which that belief is formed. See 15 U.S.C. § 78u-4(b)(1). Brody satisfies each requirement.
Brody alleged that during the class period-September 13, 1995 to December 29, 1995-SGI and the individual defendants made material misrepresentations regarding the condition of the Company in order to inflate the price of its stock and facilitate
Brody also adequately pled facts showing why these eleven statements were false when made, alleging "specific problems undermining a defendant's optimistic claims[.]" Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir.1995). The statements challenged by Brody can be grouped into three categories: (1) statements assuring investors that there were no problems with the production and distribution of SGI's improved line of graphic design computers called the "Indigo2 Impact Workstation" ("Indigo2"); (2) statements acknowledging sluggish sales in North America and Europe, but downplaying their significance; and (3) statements predicting SGI would meet its goal of 40% growth for Fiscal Year 1996. Brody's complaint pleads facts that conflict with each of these categories of statements, alleging that confidential SGI reports informed officers as early as September 1995 that: (1) SGI was encountering difficulty securing enough components to produce Indigo2 workstations in volume; (2) SGI continued to experience sluggish sales in North America and Europe; and (3) these problems made it impossible for SGI to meet its annual or
Because Brody's allegations are based on information and belief,
Brody's complaint identified three types of internal status reports allegedly containing information contrary to the defendants' public statements: (1) daily reports; (2) monthly financial reports; and (3) "Stop Ship" reports. The daily and monthly reports included manufacturing, sales, and financial data. Monthly reports were broken down into "Flash Reports," brief reports distributed at the end of the month, and "Monthly Financial Statements/Packages," more detailed reports distributed within ten days of the close of the month. Brody alleged that daily and monthly reports: (1) were prepared by "SGI's financial department" (who); (2) informed "SGI's top managers, such as [the individual defendants]" of production problems with the Indigo2, as well as sluggish sales in North America and Europe which resulted in SGI's inability to meet its financial goals (what); (3) were distributed at specific times during the class period
The "Stop Ship" report: (1) was prepared by "the marketing, engineering and manufacturing managers" in conjunction with Indigo2's "Program Director" (who); (2) informed the named defendants of "serious quality and performance problems" with Indigo2 due to defects in the computer chip (what); (3) was distributed to the officers in "mid-Sept.1995" (when); (4) was presented in report form (where); and (5) was suppressed by the named defendants in an alleged cover-up, leading to false statements about the production and shipping of Indigo2 (how).
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1225 (1st Cir.1996) (citation omitted).
Because Brody's complaint sets forth, in adequate detail, the factual basis for her belief that SGI and its officers committed fraud, the majority erroneously concludes that the complaint failed to satisfy the Reform Act's particularity requirements.
"Strong Inference" of Fraud
Brody's complaint alleges two factual bases for inferring scienter: (1) internal SGI reports indicating the defendants were aware of problems that made their favorable statements false and misleading; and (2) "massive" insider sales of SGI stock by the defendants during a period when the Company's stock price was peaking.
Brody alleged that numerous internal reports generated by SGI revealed financial and production problems not fully disclosed to the public until months later. The majority concludes that Brody's allegations are "too generic" to raise a strong inference of scienter. Ante, at 988. The internal reports referred to in Brody's complaint were described in sufficient detail as to the source, relevant content, and distribution to form the basis for a strong inference that SGI's officers knew the representations they were making to the public were false when made. Brody alleged
Brody also alleged the defendants received a "Stop Ship" report prepared in "mid-Sept.1995" by "the marketing, engineering and manufacturing managers" in conjunction with the Indigo2's "Program Director," which informed the named defendants of "serious quality and performance problems with the Indigo2 IMPACT Workstations due to the ASIC chip performance problems as it attempted to assemble and ship the Indigo2 IMPACT Workstations in volume in Sept. 1995." The complaint alleged that despite this information, McCracken told Morgan Stanley on September 13, 1995 that "there were no supply constraints" with respect to Indigo2, and on September 22, 1995 confirmed that "there is no problem with the product, nor is there an engineering halt."
Allegations similar to Brody's have been held sufficient to preclude dismissal under the "strong inference" standard. In Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357 (1st Cir.1994), the plaintiffs claimed officers and directors of a bank holding company artificially inflated stock prices by misrepresenting the bank's true financial condition. See id. at 360. The complaint alleged that while the company's public statements characterized its loan review capabilities as "strong" and its approach to loan reserves as "conservative," internal reports warned directors of problems in the loan review department and "serious deficiencies" in the bank's loan reserves. Id. at 363-64. The allegations were held sufficient:
Id. at 365 (emphasis in original).
Insider Stock Sales
Brody alleged that the six individual defendants engaged in "massive" insider trading, collectively selling 388,188 shares of stock and realizing aggregate proceeds of $13,821,053 during the fifteen-week class period. The majority determines that sales by two of the individual defendants "appear somewhat suspicious," ante, at 987, but holds that the allegations fail to raise a strong inference of scienter.
"Suspicious" stock sales by corporate insiders are circumstantial evidence of intent to defraud. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir.1989). Insider trading is suspicious when "dramatically out of line with prior trading practices at times calculated to maximize personal benefit from undisclosed inside information." Id. As the majority indicates, sales during the class period by three defendants with significant trading histories-McCracken, Baskett, and Ramsay-did not deviate dramatically from their prior sales. McCracken sold 60,000 shares during the class period, but routinely sold comparable blocks of SGI stock in previous quarters. Baskett and Ramsay sold 30,000 and 20,000 shares respectively during the class period, but both previously sold larger quantities of SGI stock. If vested stock options are considered, four of the individual defendants sold relatively modest portions of the shares they could have sold: McCracken sold 2.6% of his holdings and options; Baskett 7.7%; Ramsay 4.1%; and Sekimoto 6.9%. These facts weigh against Brody's claim. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995) (sale by retired director of "less than 11% of his holdings"); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir.1994) (sale of "only a minuscule fraction" of stock holdings); Apple Computer, 886 F.2d at 1117 (collective sale of 8% of stock holdings).
However, Senior Vice Presidents Kelly and Burgess sold significant percentages (43.6% and 75.3% respectively) of the shares they could have sold, if vested options are included. If vested options are excluded, Kelly and Burgess sold 95% and 99.8% of their holdings respectively. Viewed in the light most favorable to Brody, either set of data provides support for an inference of fraud sufficient to preclude dismissal, see Stevelman v. Alias Research Inc., 174 F.3d 79, 81, 84-86 (2d Cir.1999) (strong inference of fraud where complaint alleged sale of 40% of shares by CEO, and "thousands" of shares by two vice presidents); Shaw, 82 F.3d at 1224 (sales of 68% and 20% by two directors militates against motion to dismiss),
Ante, at 987-88. While benign explanations for insider stock sales, if unrebutted,
Considering the allegations regarding insider sales and the allegations regarding internal corporate memoranda together, Brody successfully surmounted the Reform Act's pleading hurdle. As the Supreme Court has noted, "[I]ndividual pieces of evidence, insufficient in themselves to prove a point, may in cumulation prove it. The sum of an evidentiary presentation may well be greater than its constituent parts." Bourjaily v. United States, 483 U.S. 171, 179-80, 107 S.Ct. 2775, 97 L.Ed.2d 144 (1987) (examining the "simple facts of evidentiary life"). The allegations regarding the internal reports, if true, tend to show that the defendants knowingly misrepresented SGI's ability to meet its growth targets, and knowingly or recklessly misrepresented the Company's internal affairs, particularly with respect to the production and distribution of Indigo2
The Reform Act neither explicitly nor implicitly mandates disclosure in the complaint itself of the sources of the facts alleged. The majority cites no authority to the contrary. Although disclosure will be required during discovery, see Fed.R.Civ.P. 26(a)(1)(A), at that time the district court can enter an appropriate order to protect informants, etc., see Fed. R.Civ.P. 26(c); Seattle Times Co. v. Rhinehart, 467 U.S. 20, 34-35 & n. 21, 104 S.Ct. 2199, 81 L.Ed.2d 17 (1984). Considering "the possible retaliation that frequently results when a whistleblower is identified," Management Info. Techs., Inc. v. Alyeska Pipeline Serv. Co., 151 F.R.D. 478, 481 (D.D.C.1993), the majority's criticism of Brody's complaint on this ground is unjustified.