witness test fail to demonstrate the deliberate recklessness required to survive the second prong. Instead, these re-
maining allegations demonstrate only that there was some disagreement within the corporation over its accounting
© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.
Company’s missing market expectations.” Although this statement, considered in isolation, might be enough to
demonstrate scienter, it is notable that Digimarc did write down significant amounts of obsolete inventory in 2004.
As a whole, the SAC’s plethora of confidential witness statements fail to create a an inference of scienter more co-
gent or *1000 compelling than an alternative innocent inference. Tellabs, 127 S.Ct. at 2510. The complaint’s only
specific allegation that could be used to infer scienter (that Ranjit ordered CW1 to write-down inventory) is contra-
dicted by other physical evidence. The remaining confidential witness statements are either not indicative of scienter
[15] In general, the mere publication of a restatement is not enough to create a strong inference of scienter. In par-
ticular, we have previously found inadequate complaints alleging that “facts critical to a business’s core operations
or an important transaction generally are so apparent that their knowledge may be attributed to the company and its
rizing the exceptions). Specifically, falsity may itself be indicative of scienter where it is combined with “allegations
regarding a management‘s role in the company” that are “particular and suggest that the defendant had actual access
to the disputed information,” and where “the nature of the relevant fact is of such prominence that it would be ‘ab-
surd’ to suggest that management was without knowledge of the matter.” Id. at 786 (quotation marks and citation
their complaint “specific admissions from top executives that they are involved in every detail of the company and
that they monitored portions of the company’s database,” id. (quoting Daou, 411 F.3d at 1022–23), a specific admis-
sion from a top executive that “ ‘[w]e know exactly how much we have sold in the last hour around the world,’ ” id.
(quoting Nursing Home, 380 F.3d at 1231), or other particular “details about the defendants’ access to information
$113,000. Zucco’s complaint also alleges that Davis and Ranjit were rewarded for Digimarc’s 2003 financial per-
formance with substantial stock option grants: specifically, on January 2, 2004, Digimarc granted Davis 110,000
defendant] awarded [thousands of options to executive officers] in March 1998[for performance allegedly increased
by misrepresentations] … a strong inference of scienter can be inferred from Plaintiffs’ allegations.” Id.; see also
Tellabs, 127 S.Ct. at 2511 (“[P]ersonal financial gain may weigh heavily in favor of a scienter inference.”).
while “none of the executive officers received*1005 option awards in 1997 for the previous year,” in the year in
question “America West awarded Franke 350,000 options … [and] awarded 110,000 options to Goodmanson, 35,000
options to Parker, and 20,000 options to Garel in March 1998.” Id.
price could be forced to defend securities fraud actions.” Id. (quoting Acito v. IMC-ERA Group, Inc., 47 F.3d 47, 54
(2d Cir.1995)).
6
od (those exercisable options that had a stock price above the market price of Digimarc’s stock).
[23][24] As we have previously articulated, “[a]lthough ‘unusual’ or ‘suspicious’ stock sales by corporate insiders
may constitute circumstantial evidence of scienter, insider trading is suspicious only when it is ‘dramatically out of
© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.
*1007 [28] Although the allegations in this case are legion, even together they are not as cogent or compelling as a
plausible alternative inference-namely, that although Digimarc was experiencing problems controlling and updating
its accounting and inventory tracking practices, there was no specific intent to fabricate the accounting misstate-
more plausible that Digimarc‘s management was unable to control the accounting processes within the corporation
during this integration than that it was systematically using accounting manipulations to make the company seem
slightly more financially successful. As a result, we hold that the district court did not err when it dismissed Zucco’s
Second Amended Complaint for failure to sufficiently allege scienter under Federal Rule of Civil Procedure 9(b)
when justice so requires.” A district court, however, may in its discretion deny leave to amend “due to ‘undue delay,
bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previous-
ly allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of
amendment.’ ” Leadsinger, Inc. v. BMG Music Publ’g, 512 F.3d 522, 532 (9th Cir.2008) (quoting Foman v. Davis,
The district court, when dismissing the First Amended Complaint, held that Zucco had failed to satisfy the scienter
requirements of the PSLRA with respect to its allegations based on confidential witness statements and stock sales.
The fact that Zucco failed to correct these deficiencies in its Second Amended Complaint is “a strong indication that
The allegations of scienter in the SAC, though voluminous, are not pled with the particularity required to survive a
Federal Rule of Civil Procedure 12(b)(6) dismissal under the standards enumerated in Federal Rule of Civil Proce-
dure 9(b) and the PSLRA. Instead, the plaintiffs in this case assume that compiling a large quantity of otherwise
questionable allegations will create a strong inference of scienter through the complaint’s emergent properties. Alt-
Company’s missing market expectations.” Although this statement, considered in isolation, might be enough to
demonstrate scienter, it is notable that Digimarc did write down significant amounts of obsolete inventory in 2004.
As a whole, the SAC’s plethora of confidential witness statements fail to create a an inference of scienter more co-
gent or *1000 compelling than an alternative innocent inference. Tellabs, 127 S.Ct. at 2510. The complaint’s only
specific allegation that could be used to infer scienter (that Ranjit ordered CW1 to write-down inventory) is contra-
dicted by other physical evidence. The remaining confidential witness statements are either not indicative of scienter
[15] In general, the mere publication of a restatement is not enough to create a strong inference of scienter. In par-
ticular, we have previously found inadequate complaints alleging that “facts critical to a business’s core operations
or an important transaction generally are so apparent that their knowledge may be attributed to the company and its
rizing the exceptions). Specifically, falsity may itself be indicative of scienter where it is combined with “allegations
regarding a management‘s role in the company” that are “particular and suggest that the defendant had actual access
to the disputed information,” and where “the nature of the relevant fact is of such prominence that it would be ‘ab-
surd’ to suggest that management was without knowledge of the matter.” Id. at 786 (quotation marks and citation
their complaint “specific admissions from top executives that they are involved in every detail of the company and
that they monitored portions of the company’s database,” id. (quoting Daou, 411 F.3d at 1022–23), a specific admis-
sion from a top executive that “ ‘[w]e know exactly how much we have sold in the last hour around the world,’ ” id.
(quoting Nursing Home, 380 F.3d at 1231), or other particular “details about the defendants’ access to information
$113,000. Zucco’s complaint also alleges that Davis and Ranjit were rewarded for Digimarc’s 2003 financial per-
formance with substantial stock option grants: specifically, on January 2, 2004, Digimarc granted Davis 110,000
defendant] awarded [thousands of options to executive officers] in March 1998[for performance allegedly increased
by misrepresentations] … a strong inference of scienter can be inferred from Plaintiffs’ allegations.” Id.; see also
Tellabs, 127 S.Ct. at 2511 (“[P]ersonal financial gain may weigh heavily in favor of a scienter inference.”).
while “none of the executive officers received*1005 option awards in 1997 for the previous year,” in the year in
question “America West awarded Franke 350,000 options … [and] awarded 110,000 options to Goodmanson, 35,000
options to Parker, and 20,000 options to Garel in March 1998.” Id.
price could be forced to defend securities fraud actions.” Id. (quoting Acito v. IMC-ERA Group, Inc., 47 F.3d 47, 54
(2d Cir.1995)).
6
od (those exercisable options that had a stock price above the market price of Digimarc’s stock).
[23][24] As we have previously articulated, “[a]lthough ‘unusual’ or ‘suspicious’ stock sales by corporate insiders
may constitute circumstantial evidence of scienter, insider trading is suspicious only when it is ‘dramatically out of
© 2009 Thomson Reuters. No Claim to Orig. US Gov. Works.
*1007 [28] Although the allegations in this case are legion, even together they are not as cogent or compelling as a
plausible alternative inference-namely, that although Digimarc was experiencing problems controlling and updating
its accounting and inventory tracking practices, there was no specific intent to fabricate the accounting misstate-
more plausible that Digimarc‘s management was unable to control the accounting processes within the corporation
during this integration than that it was systematically using accounting manipulations to make the company seem
slightly more financially successful. As a result, we hold that the district court did not err when it dismissed Zucco’s
Second Amended Complaint for failure to sufficiently allege scienter under Federal Rule of Civil Procedure 9(b)
when justice so requires.” A district court, however, may in its discretion deny leave to amend “due to ‘undue delay,
bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previous-
ly allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of
amendment.’ ” Leadsinger, Inc. v. BMG Music Publ’g, 512 F.3d 522, 532 (9th Cir.2008) (quoting Foman v. Davis,
The district court, when dismissing the First Amended Complaint, held that Zucco had failed to satisfy the scienter
requirements of the PSLRA with respect to its allegations based on confidential witness statements and stock sales.
The fact that Zucco failed to correct these deficiencies in its Second Amended Complaint is “a strong indication that
The allegations of scienter in the SAC, though voluminous, are not pled with the particularity required to survive a
Federal Rule of Civil Procedure 12(b)(6) dismissal under the standards enumerated in Federal Rule of Civil Proce-
dure 9(b) and the PSLRA. Instead, the plaintiffs in this case assume that compiling a large quantity of otherwise
questionable allegations will create a strong inference of scienter through the complaint’s emergent properties. Alt-