978-1285770178 Case Printout Case CPC-07-05 Part 2

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The company explained that the restatement resulted from misdating stock options, not backdating them. Specifical-

ly, Jabil cited three primary causes of the accounting errors: (1) changes to groups of people receiving grants, though

Shortly after the allegations of backdating appeared in the Wall Street Journal, Jabil issued a press release raising

projections for the third quarter in fiscal year 2006. The shareholders allege that Jabil raised these forecasts in order

to divert attention from the allegations concerning backdating, and that Jabil knew that the factual bases for its im-

proved forecasts were false even at the time it made the projections. The complaint relies on the testimony of several

riod. After the first voluntary amendment, the district court dismissed the complaint without prejudice on April 9,

the initial measurement date was not changed correspondingly; (2) new grants issued after initial grants had gone

options to its directors. Of the restated amount, $48.9 million actually resulted from increased compensation expense

confidential witnesses described to have access to corporate information at the time of the revised projections. The

about the insufficient inference of scienter raised by the complaint, we need not address its conclusion on loss causa-

tion.

1. Falsity

[5] The district court viewed the complaint as an attempt to construct a narrative based on a scheme of backdating

options and granting them to corporate officers. As a result, the district court concluded that the speculative allega-

tions in the complaint fifail[ ] to adequately allege backdating” because they detail fineither any particular defend-

ant’s role in the backdating scheme nor when or how any particular stock option was backdated.” Goodman, 595

F.Supp.2d at 1268-69.

The shareholders respond that the falsity they allege is not false option grants, but rather false statements about the

dating of those grants contained in financial and policy statements. They contend that Jabil’s decision to restate fi-

nancial reports during the class period is an overt admission that the prior statements were in fact false. The Appel-

lees insist that the district court’s conclusion was correct because the shareholders failed to comply with the PSLRA

and explain why each of the statements was false. Specifically, they contend that the complaint explains the errors in

the restatement as a result of an intentional backdating scheme, not as the result of an accounting error. Because the

shareholders have not pled the intentional backdating scheme with particularity, the Appellees contend that the

complaint inadequately pleads falsity because there is no allegation about why the statements are false.

We agree with the shareholders and conclude that the complaint adequately presents a claim of falsity. Our review

of the complaint leads us to depart from the district court‘s narrow construction of the complaint. Though we concur

with the district court’s initial conclusion that the shareholders failed to plead any particularized facts about the al-

leged backdating scheme, their failure to show a backdating scheme only limits the actionable conduct here-it does

not foreclose all potential claims. Here, a contention that the financial reports and policy statements were false is

plausible, but there is no plausible case of an intentional backdating scheme that can be constructed from the com-

plaint.

2. Scienter

[6] The shareholders allege a number of facts that they contend raise a substantial inference of scienter. They allege

insider trades by the Jabil officers during the class period and point to the insider status of each Appellee, financial

benefits and motivation to artificially inflate the stock price, the admitted GAAP violation, the membership of sev-

eral Appellees in the corporate committee that directed stock option grants, and the accounting expertise of several

of the Appellees. The district court evaluated all of these circumstances and concluded that, taken together, they

failed to create a strong inference of scienter. Goodman, 595 F.Supp.2d at 1272-73.

[7][8] In this circuit, scienter consists of intent to defraud or fisevere recklessness” on the part of the defendant.

McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir.1989).

Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not mere-

ly simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that

present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the

defendant must have been aware of it.

Id. (internal quotation marks omitted). The shareholders offer a mixed set of circumstantial facts that they claim

indicate intent to defraud, or at least the Appellees’ severe recklessness in failing to discover the accounting errors.

The shareholders charge the district court with failing to aggregate their factual allegations in evaluating the infer-

Cir.2004). They effectively concede that no single allegation, standing alone, is sufficient to meet the Tellabs stand-

ard, see 551 U.S. at 324, 127 S.Ct. at 2510, which requires the complaint to offer a cogent and compelling inference

of scienter, but contend that the district court erred by considering each allegation in a vacuum. Jabil responds that

all of the allegations here, even after aggregation, fail to raise a cogent and compelling inference of scienter.

In Rosenberg v. Gould, 554 F.3d 962 (11th Cir.2009), we recently confronted the specific question of whether simi-

lar allegations in a complaint that alleged a backdating scheme satisfied the standard for pleading scienter. There, the

plaintiff alleged that the defendant fraudulently issued backdated stock options, signed false securities filings, and

overstated earnings during the plaintiff’s stock ownership. To provide a strong inference of scienter, the plaintiff

alleged that (1) the defendant had responsibility to make decisions about stock option grants; (2) the mismeasure–

ment of stock option grants resulted in substantial additional compensation expenses; (3) the defendant himself was

granted allegedly misdated stock options; (4) the defendant made materially false statements; (5) the defendant sold

approximately 39 percent of his shares during the class period; and (6) the defendant resigned from the corporation

after the discrepancies came to light. Id. at 966.

We held that all of these allegations failed to create an inference of scienter that exceeded other inferences of non-

fraudulent intent. Id. We reasoned that it was most plausible that the defendant did not realize that the backdated

options would affect later financial statements because he had no accounting experience. Id. We also concluded that

executives should have known about the proper accounting practices. The accounting experience of some of the

Jabil executives, however, fails to provide the critical distinction here because the shareholders do not plead any

facts that indicate that any individual Appellee knew about the accounting irregularities during the class period. As a

result, the allegations of misrepresentations, responsibility for granting misdated options, and personal profiteering

nue. Because net income can vary so widely period to period, using it as a baseline for comparison provides the

court no real standard on which to judge the significance of the accounting error. This pleading strategy-picking the

metric that will yield the highest percentage values-adds nothing to the inference of scienter that the shareholders

attempt to create.

fice as scienter only when fihighly unreasonable” and fian extreme departure from the standards of ordinary care,” it

is necessary for a court to determine at the pleading stage whether the conduct alleged conformed to standards that

exist outside the face of the complaint. Cf. McDonald, 863 F.2d at 814.

unique nature of the PLSRA requires us to resolve this question, whether the alleged conduct is severely reckless, at

the pleadings stage, though doing so would be improper in most other contexts. But evaluating the complexity of

APB 25 is not necessary in this case, because the shareholders have failed to allege any facts indicating that any

individual Appellee knew that the accounting standard was being violated.

insider should have noticed the errors.

The shareholders also insist that the Wall Street Journal article alleging backdated stock options received by Main

was a fired flag” recklessly ignored by Jabil insiders. This fired flag” does not match the allegations that the share-

[9] The shareholders also note a large number of stock trades made by the insider Appellees during the class period.

They claim that these trades serve as evidence that the officers knew that the financial statements were false and

intended to capitalize on that knowledge at the expense of the uninformed public. Stock sales by insiders are only

relevant to scienter when they are suspicious. Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1253 (11th Cir.2008).

those made out of line with earlier trading customs).

The shareholders failed to plead any information about any Appellee’s trading history before the class period. As a

result, there is no way to determine from the complaint that the sales of large numbers of shares is suspicious enough

we have in other circumstances rejected the additional allegations contained in the complaint not addressed by the

Rosenberg decision. The shareholders are correct to insist that the inference of scienter be aggregated from all of the

complaint’s allegations, but we simply have no substantial allegations to aggregate. The section 10(b) and Rule 10b–

5 claims based on the financial restatements fail because they lack sufficient allegations of scienter.

knowledge of the statement‘s falsity when he made it. Id. at 244. Because all allegations are considered true at the

see also Miller v. Champion Enters. Inc., 346 F.3d 660, 672 (6th Cir.2003) (noting the same). We agree with the

Appellees and hold that an allegation of actual knowledge of falsity will not deprive a defendant of protection by the

statutory safe harbor if his forward-looking statements are accompanied by meaningful cautionary language. The

language and structure of the statutory provision mandate this result.

fails to prove that the statement was made with actual knowledge that it was false. Id. § 78u-5(c)(1)(B). Any one of

these suffices for the defendant; a top-to-bottom reading of the statute shows that the plaintiff’s inability to show

knowledge of falsity is only relevant if the defendant is unable to produce meaningful cautionary statements or evi-

dence of immateriality.

cautionary statements on a motion to dismiss). So long as the language accompanying the projections is meaningful-

ly cautionary, the law requires us to be unconcerned with the speaker’s state of mind at the time he makes the projec–

tions.

353, 371 (5th Cir.2004) (emphasis added); see also In re LeapFrog Enters., Inc. Sec. Litig., 527 F.Supp.2d 1033,

1047 (N.D.Cal.2007). FN1

FN1. In Harris, we declined to articulate a specific standard for pleading scienter when the statements at is-

sue are forward-looking. 182 F.3d at 803-04.

Our conclusion is further informed by this circuit’s judicially created bespeaks caution doctrine, whose fistatutory

equivalent” is the PSLRA safe harbor provision. See SEC v. Merchant Capital, LLC, 483 F.3d 747, 767 n. 18 (11th

Cir.2007); see also H.R. Conf. Rep. No. 104-369, at 43 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 742 (noting

that the safe harbor provision fiis based on aspects of … the judicial created ‘bespeaks caution’ doctrine”). Under the

bespeaks caution doctrine, a forward-looking statement is rendered immaterial as a matter of law when accompanied

by meaningful cautionary language. Merchant Capital, 483 F.3d at 767. The anti-fraud provisions of the securities

laws are plainly disinterested with immaterial statements, no matter the state of mind of the speaker. See Basic Inc.

v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988). However we cast forward-looking

statements accompanied by meaningful cautionary language, an allegation that the speaker knew the statements

were false does not convert those statements, mitigated by adequate warnings of risks, into actionable frauds. We

affirm the district court’s dismissal of the shareholders‘ fraud claims stemming from the earnings projections because

ers allege in their complaint that several individual Jabil insiders violated section 14(a) by making false statements

in proxy solicitations related to Jabil’s stock option compensation policy. Specifically, they claim that throughout the

class period, the Jabil insiders represented that the stock option compensation policy was to grant all options at fair

market value, and that this practice had been followed in the past. They contend that they relied on these false state-

particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction.” Mills

v. Elec. Auto–Lite Co., 396 U.S. 375, 385, 90 S.Ct. 616, 622, 24 L.Ed.2d 593 (1970). The transaction at issue must

be the source of the plaintiff’s injury. See id.; Koppel v. 4987 Corp., 167 F.3d 125, 137 (2d Cir.1999) (noting that

both transaction causation and loss causation are components of a section 14(a) claim).

The Cathcart court held that the plaintiff’s real injuries came from mismanagement of the corporation, not the trans-

actions approved via the proxy solicitation materials. Id. The court reasoned that the harm to the plaintiffs was only

indirect and not sufficient on which to base a section 14(a) claim. Id. Essentially, it was management’s failure to

an essential link to the losses of which the shareholders complain; the insiders’ decision to violate company policies

was not accomplished or endorsed by any proxy solicitation materials. Because the complaint fails to allege a link

between the proxy solicitation and the shareholders’ loss, we affirm the dismissal of the proxy solicitation claims.