This appeal involves claims for securities fraud against Spirit AeroSystems, Inc., and four of its executives. Spirit produced shipsets of components for jetliners, including Boeings 737 MAX. But Boeing stopped producing the 737 MAX, and Spirits sales tumbled. At about the same time, Spirit acknowledged an unexpected loss from inadequate accounting controls.
After learning about Spirits downturn in sales and the inadequacies in accounting controls, some investors sued Spirit and four executives for securities fraud. See 17 C.F.R. § 240.10b–5. The district court dismissed the suit, and the investors appealed.
For claims involving securities fraud, pleaders bear a stiff burden when alleging scienter. In our view, the investors have not satisfied that burden. So we affirm the dismissal.
1. Spirit reassures investors, but Boeing then halts production of the 737 MAX.
When two jetliners crashed, the Federal Aviation Administration grounded flights for the 737 MAX. After the grounding, Boeing reduced production of the 737 MAX from 52 jetliners per month to 42. But Boeing kept purchasing the same monthly number of shipsets (52) from Spirit.
These purchases proved critical to Spirit, which obtained roughly half of its yearly revenue from sales of the shipsets to Boeing. So investors nervously monitored Boeings continued purchases from Spirit.
Spirits chief executive officer (Thomas Gentile, III) allegedly reassured investors in a call on October 31, 2019, stating that Spirit would “be at 52 [shipsets of components produced per month] for an extended period of time.”
1
Appellants’ Appx vol. 2, at 244. On the same day, Mr. Gentile, Spirits chief financial officer (Jose Garcia), and Spirits corporate controller (John Gilson) filed documents with the Securities and Exchange Commission, stating that Spirit expected to continue selling Boeing 52 shipsets every month.
On November 24, 2019, a market observer reported on “takeaways” from a meeting with Spirit executives. This report suggested that Spirit would continue monthly sales of 52 shipsets until at least May 2020. On December 16, 2019, Boeing announced that it would soon temporarily stop producing the 737 MAX.
Three days later, Boeing told Spirit to stop delivering shipsets for the 737 MAX. The next day, Spirit disclosed that it would stop producing the shipsets.
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More bad news followed, this time about Spirits method of accounting for contingent liabilities. Spirit had filed documents on October 31, 2019, certifying the adequacy of its accounting controls. Months later, Spirit disclosed that
• material weaknesses had existed in the accounting controls and
• two executives (Jose Garcia and John Gilson) had quit.
At about the same time, Spirit fired another executive (Shawn Campbell).
When investors learned of Boeings halt in production and the inadequacy of Spirits accounting controls, Spirits stock price plummeted.
2. The plaintiffs must plead facts giving rise to a strong inference of scienter.
When considering the district courts grant of the defendants’ motion to dismiss, we conduct de novo review. Nakkhumpun v. Taylor, 782 F.3d 1142, 1146 (10th Cir. 2015). When conducting that review, we credit the allegations in the complaint and view them in the light most favorable to the plaintiffs. Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006).
Though we view the allegations favorably to the plaintiffs, federal law creates a heavy burden on claimants alleging securities fraud. See In re Level 3 Commcns, Inc. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012) (“A plaintiff suing under Section 10(b) [of the Exchange Act] bears a heavy burden at the pleading stage.”). This burden requires the plaintiffs to “state with particularity facts giving rise to a strong inference that the defendant[s] acted with” scienter. Smallen v. W. Union Co., 950 F.3d 1297, 1305 (10th Cir. 2020) (emphasis & alteration in original) (quoting In re Level 3, 667 F.3d at 1333); see 15 U.S.C. § 78u-4(b)(2)(A) (requiring the pleader to “state with particularity facts giving rise to a strong inference” of scienter).
To assess the strength of this inference, we “consider ․ competing inferences rationally drawn from the facts alleged.” Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). An inference of scienter is considered “strong” only if proof of the allegations would lead a reasonable factfinder to determine that an inference of fraudulent intent or recklessness is at least as compelling as an innocent inference. See Smallen, 950 F.3d at 1305 (fraudulent intent); In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1200–01 (10th Cir. 2015) (recklessness). “Conduct is considered reckless only if the defendants (1) acted in ‘an extreme departure from the standards of ordinary care’ and (2) presented ‘a danger of misleading buyers or sellers’ that was [ ] known to the defendants or [ ] so obvious that the defendants must have been aware of the danger.” Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1237 (10th Cir. 2016) (quoting In re Level 3, 667 F.3d at 1343 n.12).
The dissent suggests that a plaintiff can allege fraudulent intent or recklessness through executives’ access to information that contradicts their statements. Dissent at 3. For this suggestion, the dissent relies solely on a Second Circuit opinion: Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000). But some other circuits regard allegations of access to contradictory information as inadequate to plead scienter. See PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 688 (6th Cir. 2003) (stating that “fraudulent intent cannot be inferred merely from the [two corporate officers’] positions in the Company and alleged access to information”), abrogated on other grounds by Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051, 1063 (9th Cir. 2014) (“Mere access to reports containing undisclosed sales data is insufficient to establish a strong inference of scienter.”); see also Anderson, 827 F.3d at 1246 (“[M]ere attendance at meetings does not contribute to an inference of scienter.”).
For the sake of argument, we can assume that access to contradictory information can sometimes contribute to a strong inference of scienter. Even with that assumption, however, the plaintiffs would need particularized allegations that, if proven, would show a speakers knowledge or reckless disregard of contradictory information. See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 620 (9th Cir. 2017) (concluding that the plaintiff failed to adequately allege the speakers direct knowledge of flawed accounting even though access to the disputed information could contribute to a strong inference of scienter). For example, its not enough for the plaintiffs to allege briefings to a speaker on the underlying data or the speakers access to internal reports. See Anderson, 827 F.3d at 1246 (briefings and attendance at meetings); In re Level 3 Commcns, Inc. Sec. Litig., 667 F.3d 1331, 1344–45 (10th Cir. 2012) (internal reports).
Through briefings and internal reports, Spirits top executives presumably had access to a broad swath of information shared among subordinates within Spirit. But an executives position in the company doesnt show knowledge of specific facts. See Anderson, 827 F.3d at 1245 (“We cannot infer scienter based only on a defendants position in a company.”); In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1205 (10th Cir. 2015) (rejecting “the notion that knowledge may be imputed solely from an individuals position within a company” (quoting Wolfe v. Aspenbio Pharma, Inc., 587 F. Appx 493, 497 (10th Cir. 2014))). So it would make little sense to draw a strong inference of scienter from access to information. If access alone were enough, a strong inference of scienter would exist for high-level executives whenever they make a public statement contradicting something in the companys files.
A plaintiff must thus allege facts with particularity showing not only the executives access to contradictory information but also the executives fraudulent intent or reckless disregard of accessible information. See p. 6, above (discussing recklessness). So we must consider what Spirits speakers knew when they made the public disclosures, focusing on the particularity of the plaintiffs’ allegations and the strength of the related inferences.
3. The plaintiffs didnt adequately plead scienter for Spirits statements about continued sales to Boeing.
In these public disclosures, Spirits executives reassured investors that Boeing would continue buying 52 shipsets each month. According to the plaintiffs, the executives made these statements even though Boeing had privately told Spirit about plans to reduce purchases of the shipsets.
The defendants deny such private statements from Boeing. So we consider the particularity of the plaintiffs’ allegations of knowledge on the part of Spirits speakers. These speakers include Mr. Gentile, Mr. Garcia, and Mr. Gilson.
A. Mr. Gentiles oral statements
In our view, the plaintiffs havent adequately alleged Mr. Gentiles awareness of Boeings plan to reduce purchases of the shipsets.
i. The complaint lacks particularized allegations of Mr. Gentiles scienter.
The plaintiffs complain that Mr. Gentile said on October 31, 2019, that he expected to continue selling shipsets to Boeing at the same rate “for an extended period of time.” Appellants’ Appx vol. 2, at 244. According to the plaintiffs, Mr. Gentile knew that Boeing was planning to reduce the purchases of shipsets. We thus consider the particularity of the plaintiffs’ allegations and the strength of an inference that Mr. Gentile had known by October 31, 2019, of Boeings decision to reduce purchases of shipsets.
The plaintiffs argue that the complaint reflects Mr. Gentiles knowledge based on reports from Spirits former employees and his stock sales. We disagree.
Two former Spirit employees (FE7 and FE8) allegedly reported that
• unidentified employees of Boeing had told suppliers and Spirit executives that Boeing would cut production of the 737 MAX or reduce purchases of shipsets from Spirit and
• Spirit had then projected the number of layoffs when Boeing implemented its plan to reduce production of the 737 MAX and purchases of shipsets.
Despite the reliance on the former employees, the complaint doesnt allege that the former employees
• told Mr. Gentile that Boeing had planned to reduce purchases of shipsets or
• knew of other statements to Mr. Gentile about Boeings plan to reduce purchases.
The two former employees allegedly heard that Boeing had planned to cut production of the 737 MAX and purchases of shipsets. FE8s information came from suppliers who had worked with Boeing.
And FE7s information came from Shawn Campbell and Angela Little, two Spirit executives who in turn had obtained their information from unidentified employees of Boeing.
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No matter what FE7 or FE8 had heard, scienter would exist only if Mr. Gentile was aware of what the Boeing employees had said. See Smallen v. W. Union Co., 950 F.3d 1297, 1313 (10th Cir. 2020) (stating that we consider the state of mind of the corporate officials making the statement, approving it, or furnishing the underlying information); accord Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 366 (5th Cir. 2004) (“[T]he required state of mind must actually exist in the individual making (or being a cause of the making of) the misrepresentation.”). But the complaint doesnt allege Mr. Gentiles awareness of the information allegedly reported to FE7, FE8, Mr. Campbell, or Ms. Little. To the contrary, the complaint says only that two former Spirit employees had heard others relay what unidentified Boeing employees had said; the complaint doesnt allege that anyone at Spirit had informed Mr. Gentile about these conversations.
Despite that gap in the complaint, the plaintiffs argue that Mr. Gentile knew about layoff projections that FE7 had helped create. The complaint states that the layoff projections had proceeded in four steps:
1. A supervisor told FE7 and other Spirit employees to provide data about the adjustments that Spirit would need to make.
2. Spirit used the data to create the layoff projections.
3. Spirit provided these layoff projections to FE7s supervisor for his review.
4. If FE7s supervisor agreed with the projections, he would send them to Mr. Gentile.
Appellants’ Appx vol. 1, at 71. Through these steps, the plaintiffs contend that the layoff projections show Mr. Gentiles knowledge about Boeings impending production cuts.
The plaintiffs allege that Mr. Gentile saw the first round of the layoff projections. But this allegation is conclusory, and the plaintiffs elsewhere explain that the projections wouldnt go to Mr. Gentile unless FE7s supervisor had agreed “with the results of the exercise (i.e., the number of layoffs).” Id. And in the complaint, the plaintiffs dont identify anyone with personal knowledge of the supervisors approval of the layoff projections or their delivery to Mr. Gentile. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th Cir. 2009) (“[T]he complaint must provide an adequate basis for determining that the witnesses in question have personal knowledge of the events they report.”). So the plaintiffs fail to adequately allege that Mr. Gentile saw FE7s input into the layoff projections.
The complaint also lacks particularized allegations about the contents of the final layoff projections. Given the limitations on FE7s role, the allegations address only some of the data incorporated at an early stage of preparation. For example, the plaintiffs allege that
• FE7 had submitted information about what would happen if Boeing reduced purchases of shipsets,
• other individuals submitted additional information, and
• still other individuals then combined the submissions into a set of projections.
If the supervisor were to approve these projections, they would go to Mr. Gentile.
But the complaint contains no information beyond the contribution of FE7s own data: Theres nothing about the contributions from other Spirit employees, the content of the final projections, or the supervisors approval or rejection of the projections.
In light of these omissions, FE7s input resembles the confidential witnesss input that we considered insufficient in Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229 (10th Cir. 2016). In Anderson, the plaintiffs alleged securities fraud based on public statements that had contradicted reports from confidential witnesses. Id. at 1240–41. We concluded that the plaintiffs hadnt adequately alleged the content of the reports or the defendants’ receipt of the reports. Id. Though one confidential witness had contributed data to the reports, we noted that Spirit had
• combined this data with data collected from other employees and
• revised the reports before they went to the defendants.
Id. at 1241.
Like the confidential witness in Anderson, FE7 allegedly contributed information to larger reports. But like the larger reports in Anderson, Spirits final layoff projections included additional information from other employees. The complaint thus doesnt tell us what was in the final version of the projections.
The dissent tries to distinguish Anderson. According to the dissent, Anderson sensibly declined to infer scienter because the witnesses there had lacked a close connection to the defendants. Dissent at ––––. For example, the dissent notes that
• one witness “was four levels removed from” executives who made allegedly fraudulent statements and
• other witnesses had no reporting relationship to those executives.
Id. But FE7 also lacked a “reporting relationship” to Mr. Gentile. FE7 instead reported to Ms. Little, who in turn reported to Spirits Senior Vice President for the Boeing Program (Mr. Bill Brown), who in turn reported to Mr. Gentile. See Appellants’ Appx vol. 1, at 45–46.
In fact, the complaint acknowledges that FE7 had only “occasional contact with [Mr.] Gentile” at meetings. Id. at 46.
Though Anderson undercuts the significance of the layoff projections, FE7s alleged knowledge could support an inference that Mr. Gentile had obtained similar information from someone else. See Dissent at –––– – –––– (noting that unlike Anderson, the executives in this case could have learned of the information from third parties). But the possibility of that inference isnt enough; the plaintiffs must identify facts with particularity that create a strong inference of Mr. Gentiles fraudulent intent or recklessness. See p. 6, above. And the complaint contains no particularized allegations that anyone told Mr. Gentile of Boeings plan to reduce purchases.
Without such an allegation, the plaintiffs point to Spirits layoff projections. But what did those projections say? Spirit characterizes the final version as a compilation of various contingencies, including a drop in Boeings purchases. And the plaintiffs have not questioned Spirits characterization of the final version. Given the contingencies in the projections, the plaintiffs’ allegations dont create a strong inference of Mr. Gentiles knowledge of Boeings plan to reduce purchases of the shipsets. See Smallen v. W. Union Co., 950 F.3d 1297, 1310 (10th Cir. 2020) (rejecting an inference of scienter when a complaint had failed to provide “particularized facts tying the [officers]” to facts known by other company executives).
The plaintiffs rely not only on the layoff projections but also on allegations that Mr. Gentile actively participated in the 737 MAX program and served as a hands-on executive with close ties to Boeing. Based on these allegations, the plaintiffs argue that Mr. Gentile would have quickly learned of any decision by Boeing to cut purchases. See, e.g., Appellants’ Appx vol. 1, at 162 (alleging in the complaint that Mr. Gentile had “communicated with Boeing daily regarding the 737 MAX” (emphasis in original)); see also id. at 164 (alleging that Mr. Gentile had “communicated daily with Boeing regarding the 737 MAX”); Appellants’ Opening Br. at 6 (“[T]hroughout the Class Period, Spirit and Boeing employees worked onsite at each others facilities, and Gentile himself communicated daily with Boeing.” (emphasis in original)); id. at 39–41 (stating that Mr. Gentile was a hands-on executive and that the 737 MAX was “crucial” to Spirits bottom line); Appellants’ Reply Br. at 3 (arguing that Mr. Gentile “had daily communications with Boeing” (emphasis added)); id. at 9 (arguing that the plaintiffs had pleaded Mr. Gentiles close monitoring of production of the 737 MAX through “daily communications with Boeing” (emphasis in original)). The plaintiffs point out that these daily communications led Mr. Gentile to express confidence that he would quickly learn from Boeing about plans to reduce purchases of the shipsets. Appellants’ Appx vo1. 1, at 162–63. But to show scienter, the plaintiffs cant rely solely on Mr. Gentiles active involvement in a “particular project” even when the project involves “Spirits core operations.” Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1245–46 (10th Cir. 2016). The plaintiffs allege Mr. Gentiles close involvement with the 737 MAX program, but dont provide any particularized allegations that would create a strong inference of scienter. See id.
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In a footnote, the plaintiffs also point to their allegations that Mr. Gentile sold Spirit stock in early February 2020. By then, however, Spirit had already announced that it was no longer selling shipsets for the 737 MAX. How can we infer scienter from Mr. Gentiles sale of stock after the public had all of the same information about Spirits loss in business?
Other allegations diminish the significance of Mr. Gentiles sale of stock. For example, the complaint points out that Mr. Gentile had actually increased his holdings in late January 2020. According to the complaint, Mr. Gentile had acquired more than 60,000 shares of Spirit stock and then sold fewer than 48,000 shares. Appellants’ Appx vol. 1, at 170. So Mr. Gentiles total shares increased despite his sales after the public announcement.
On appeal, the plaintiffs attribute the increase in Mr. Gentiles stock to grants and options. But the plaintiffs forfeited this argument by failing to present it in district court. Richison v. Ernest Grp., Inc., 634 F.3d 1123, 1127 (10th Cir. 2011). Even if the plaintiffs had preserved the argument, though, it wouldnt support scienter. After all, Mr. Gentile received the new shares after Spirit had already announced that it was no longer selling the shipsets.
* * *
In summary, the complaint doesnt allege facts with particularity that would reflect Mr. Gentiles knowledge or reckless disregard of Boeings plan to cut purchases of the shipsets. Mr. Gentile presumably knew, as the public did, that Boeing might reduce purchases. But the complaint doesnt contain particularized allegations showing that Mr. Gentile was aware, by October 31, 2019, that Boeing had decided to reduce purchases of shipsets. So the district court properly concluded that scienter was missing for the claims involving Mr. Gentiles reassurance of continued sales to Boeing.
ii. The district court considered the plaintiffs’ allegations holistically.
The plaintiffs also criticize the district court for considering the allegations individually rather than holistically. We reject this criticism. The district court said four times that it was viewing the plaintiffs’ allegations holistically. Meitav Dash Provident Funds & Pension Ltd. v. Spirit AeroSystems Holdings, Inc., No. 20-cv-00077-SPF-JFJ, 2022 WL 377415, at *18, *21, *23, *25 (N.D. Okla. Jan. 7, 2022). We have no reason to question the district courts statement. See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1093 (10th Cir. 2003) (“In light of the district courts express statement that it considered the pleadings in their entirety, we have no reason to conclude otherwise.”); accord In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 702–03 (9th Cir. 2012) (stating that when courts have discussed specific allegations, “a brief statement that the court has also viewed the claims holistically has been sufficient”).
Granted, the district court separately discussed each of the plaintiffs’ allegations. But “[a] district court may best make sense of scienter allegations by first looking to the contribution of each individual allegation to a strong inference of scienter.” Owens v. Jastrow, 789 F.3d 529, 537 (5th Cir. 2015). So the court can analyze the allegations separately before considering them as a whole. See id. at 536–37. We take the same approach because of the need to consider each of the plaintiffs’ allegations before considering them together.
Though individual allegations might not suffice, they can sometimes complement each other. Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874, 893 (4th Cir. 2014). For example, the dissent argues that six factual allegations complement each other:
1. Mr. Gentile was Spirits chief executive officer.
2. Spirit obtained most of its revenue from sales to Boeing.
3. Mr. Gentile acknowledged a close relationship with Boeing.
4. Mr. Gentile may have received the layoff projections.
5. Mr. Gentile had access to meetings where production cuts may have been discussed.
6. Mr. Gentile sold stock during the class period.
Dissent at 12–14.
We view many of these allegations differently. For example, the complaint contains no particularized allegations stating what was in the layoff projections that went to Mr. Gentile. See Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1241 (10th Cir. 2016) (rejecting an inference of scienter because Spirits reports had undergone multiple revisions before the final versions would have gone to Spirits chief executive officer or chief financial officer). And the stock sales dont reflect scienter because Mr. Gentile sold the stock months after Boeing had publicly announced that it would stop production of the 737 MAX and Spirit had announced that it would stop selling shipsets to Boeing. See p. 19, above.
The other allegations involve Mr. Gentiles position and the significance of Boeing to Spirits core operations. But Mr. Gentiles position and Spirits core operations do little to create an inference of scienter. See Anderson, 827 F.3d at 1245–46 (concluding that the plaintiffs didnt adequately allege scienter based on core operations, a defendants position within a company, or the opportunity to attend meetings); Smallen v. W. Union Co., 950 F.3d 1297, 1307–08 (10th Cir. 2020) (concluding that the plaintiffs didnt adequately allege scienter based on a defendants position within a company and attendance at meetings); In re Level 3 Commcns., Inc. Sec. Litig., 667 F.3d 1331, 1344 (10th Cir. 2012) (concluding that the plaintiff didnt adequately allege scienter based on the defendants’ attendance at meetings and a motive to defraud).
Whether we view these factual allegations in isolation or together, they dont create a particularized basis to draw a strong inference of Mr. Gentiles awareness of Boeings plan to cut purchases of the shipsets. Even in combination, second-hand reports from other Spirit employees dont show that Mr. Gentile knew of or consciously disregarded Boeings plans when he made the disputed statements.
B. Spirits regulatory reports on October 31, 2019
On October 31, 2019, Spirit not only made oral statements through Mr. Gentile but also filed documents with the federal government. These reports echoed Mr. Gentiles optimistic projections of continued sales to Boeing. The regulatory statements came from Spirits chief financial officer (Mr. Garcia) and corporate controller (Mr. Gilson).
In the complaint, the plaintiffs alleged that Mr. Garcia and Mr. Gilson had learned of Boeings decision to cut purchases of shipsets. In response, Mr. Garcia and Mr. Gilson urged an inference that they hadnt known of Boeings plan. So the issue of scienter turned on a comparison of the competing inferences. In addressing this issue, the district court concluded that the plaintiffs had not adequately alleged a reason for Mr. Garcia or Mr. Gilson to know about Boeings plan to cut purchases from Spirit.
On appeal, Mr. Garcia and Mr. Gilson argue that (1) the plaintiffs failed to challenge this ruling and (2) any appellate challenge is thus waived. The plaintiffs do not address this waiver argument in their reply brief. Given this omission, we consider only the possibility of an obvious error in the defendants’ assertion of a waiver. Eaton v. Pacheco, 931 F.3d 1009, 1031 (10th Cir. 2019).
We see no obvious error in the defendants’ assertion of a waiver. For example, the plaintiffs’ opening brief refers only three times to Mr. Garcia or Mr. Gilson in connection with their regulatory statements about continued sales to Boeing:
1. a footnote stating that Spirits chief financial officer and corporate controller would certainly know of Boeings impending cut in purchases of shipsets based on the importance to Spirits core operations,
2. a passing reference to the scienter of Mr. Garcia and Mr. Gilson, and
3. a footnote stating that the district court should have considered Mr. Garcias certifications despite his exposure to contrary information.
Appellants’ Opening Br. at 36 n.17, 38, 42 n.19.
The plaintiffs disavow an argument that core operations alone can establish scienter. And the plaintiffs’ three passing references to the scienter of Mr. Garcia and Mr. Gilson dont address any flaws in the district courts reasoning. Without an argument from the plaintiffs, we see no obvious flaw in the defendants’ assertion of waiver as to the scienter of Mr. Garcia and Mr. Gilson.
C. The market observers report on November 24, 2019
A securities analyst, Jefferies LLC, distributed a statement on November 24, 2019, about Spirits expectations. Jefferies based the statement on a prior meeting with Mr. Gentile (Spirits chief executive officer) and Mr. Garcia (Spirits chief financial officer). In the report, Jefferies stated the “takeaways” from the meeting with Spirits management. One of the “takeaways” was Spirits expectation that Boeing would continue to buy the same number of shipsets for the next six months. Appellants’ Appx vol. 2, at 324. The plaintiffs attribute this statement to Mr. Gentile and Mr. Garcia because the report identifies them as sources.
The district court concluded that the Jefferies report couldnt support a strong inference of scienter. We agree because the complaint doesnt
• identify facts showing Spirits control over the content of the Jefferies report or
• say when Spirit met with Jefferies.
The district court could attribute the Jefferies report to Mr. Gentile and Mr. Garcia only if they had controlled the contents and method of communication. Janus Cap. Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 141–42, 131 S.Ct. 2296, 180 L.Ed.2d 166 (2011). Nothing in the complaint or the report suggests that Mr. Gentile or Mr. Garcia had controlled the contents of the report or method of communication.
Even if the contents or method of communication could be attributed to Mr. Gentile or Mr. Garcia, the complaint doesnt create a strong inference of scienter in light of the failure to say when Mr. Gentile and Mr. Garcia met with Jefferies. Although weve concluded earlier that the complaint doesnt adequately allege scienter as of October 31, 2019, the plaintiffs argue that Mr. Gentile or Mr. Garcia would have learned of Boeings plans at a staff meeting in mid-November 2019.
But did Mr. Gentile or Mr. Garcia talk to Jefferies after this staff meeting? We ordinarily require the plaintiffs to state when the defendants had made the false representation. Koch v. Koch Indus., Inc., 203 F.3d 1202, 1236 (10th Cir. 2000). Here the plaintiffs dont say when Mr. Gentile or Mr. Garcia had met with Jefferies.
This lack of particularity matters because the meeting with Jefferies could have preceded the disclosure of Boeings plans in mid-November. Jefferies distributed the report on November 24, 2019, so the preparation must have started earlier. But how much earlier? The report spans roughly 30 pages, so the preparation time could have been substantial. Given the uncertainty over the preparation time, the complaint fails to allege with particularity that the November staff meeting had preceded Jefferies’ meeting with Mr. Gentile and Mr. Garcia.
So the district court couldnt draw a strong inference of scienter from the general allegations that Jefferies had met with Mr. Gentile and Mr. Garcia at some unspecified date.
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4. The plaintiffs didnt adequately plead scienter for false statements about Spirits accounting controls.
The plaintiffs also complain about statements involving the adequacy of Spirits accounting controls. These complaints stemmed from Mr. Campbells undervaluation of claims against Spirit. While Mr. Campbell was undervaluing claims, Mr. Garcia and Mr. Gilson were certifying the adequacy of Spirits accounting controls.
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Spirit later acknowledged inadequacies in these controls.
For the sake of argument, we can assume that the regulatory filings were false. This assumption triggers an issue involving the scienter of Mr. Garcia and Mr. Gilson: Does the complaint allege with particularity that they knew about the inadequacies in Spirits accounting controls for estimating contingent liabilities? The plaintiffs urge awareness based on two resignations, a firing, and information from two former employees.
With the public announcement of inadequacies in accounting controls, Spirit fired Mr. Campbell; and Mr. Garcia and Mr. Gilson quit. The plaintiffs also rely on information from two former employees, FE9 and FE10. According to the complaint, FE9 questioned Mr. Campbells accounting and expressed concern to Mr. Gilson. Mr. Gilson allegedly responded by “shut[ting] down” FE9s concerns. Appellants’ Appx vol. 1, at 107. The plaintiffs allege that FE10 also questioned Mr. Campbells accounting of contingent liabilities, but the plaintiffs dont allege that FE10 shared this skepticism with anyone else.
Based on the resignations, firing, and information from FE9 and FE10, the plaintiffs make three arguments:
1. Mr. Gilson knew about the inadequacy in accounting controls because FE9 had expressed concern.
2. Suspicion arises from the firing of Mr. Campbell and the resignations of Mr. Garcia and Mr. Gilson.
3. Mr. Garcia and Mr. Gilson must have known about the inadequacy in accounting controls because Spirit had estimated customer claims on most contracts and had regularly discussed Boeings claims.
Individually or combined, these allegations dont create a strong inference of scienter.
The plaintiffs’ allegations reflect FE9s communication of concerns to Mr. Gilson in early 2019—months before Mr. Gilson had certified Spirits regulatory reports. These concerns involved Spirits lack of appropriate training, delegation of too much control to Mr. Campbell, and his manipulation of the accounting. Id. at 105–07. The complaint alleges that “FE 9 discussed her concerns with Defendant Gilson and other Finance personnel, but to no avail.” Id. at 107.
But the complaint doesnt suggest that Mr. Gilson had agreed with FE9. To the contrary, the complaint states that Mr. Gilson and other finance personnel had “shut [FE9] down.” Id. And the complaint doesnt allege Mr. Gilsons awareness of anyone else who agreed with FE9.
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Granted, a factfinder might infer that Mr. Gilson knew from FE9s expression of concern that the accounting controls were inadequate. See Dissent at 10–11, 15–16. But an even more plausible inference is that Mr. Gilson disagreed with FE9 and maintained confidence in Spirits accounting controls.
Weve elsewhere rejected an inference of scienter in part because the allegations didnt show that a Spirit executive had doubted his own accounting. Anderson v. Spirit Aerosystems Holdings, Inc., 827 F.3d 1229, 1245 (10th Cir. 2016).
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Here, too, the plaintiffs’ witness accounts dont suggest that Mr. Gilson had questioned Mr. Campbells accounting. To the contrary, the witness account suggests that Mr. Gilson and other finance personnel did not agree with FE9s concerns. We thus have little basis to infer scienter from FE9s expression of concern.
The complaint does allege that Mr. Gilson “knew of and permitted Defendant Campbell to manipulate the value of the Boeing claims.” Appellants’ Appx vol. 1, at 107. But the complaint says only that FE9 expressed concern to Mr. Gilson about Mr. Campbell. Because theres no indication that Mr. Gilson believed FE9 or otherwise harbored these concerns, the complaint lacks the required particularity for a strong inference of scienter from FE9s communication with Mr. Gilson. Nor does the complaint say how Mr. Gilson would have learned from someone other than FE9 that Mr. Campbell had been making overly optimistic projections.
Those projections involved estimates about how much Spirit would eventually need to pay on outside claims. According to the plaintiffs, these claims were subject to negotiation. As a hypothetical example, FE9 described a situation in which Spirit could get Boeing to cut its customer claims from $10 million to $5 million. Appellants’ Appx vol. 1, at 105. The eventual loss wouldnt be known until Spirit had completed its negotiations with Boeing. Given the need for negotiation, Mr. Gilson could not have learned that the controls were inadequate until the negotiations were complete.
In fact, the complaint suggests that Mr. Gilson might not have recognized the inadequacy in accounting controls even after Boeing had completed its negotiations. After all, the plaintiffs allege that Mr. Gilson didnt monitor Mr. Campbells projections. For example, FE9 allegedly said that Spirit hadnt adequately discussed “discrepancies between the actual value of Boeing Claims based on Spirits contracts with Boeing, and the value that Campbell accounted for in the [estimates] he submitted.” Id. at 110 (emphasis omitted). FE9 attributed the lack of discussion to Spirits delegation of final authority to Mr. Campbell for estimates on the claims. Id.
Given the uncertainty, the need for negotiation, and the delegation of final authority to Mr. Campbell, the complaint lacks a particularized reason to infer that Mr. Gilson would have recognized an inadequacy in accounting controls as early as October 2019. The nature of Mr. Campbells projections entailed uncertainty; according to the complaint, Mr. Gilson was ill equipped to recognize an inadequacy in accounting controls because he wasnt monitoring Mr. Campbells estimates.
9
The plaintiffs rely not only on FE9s expression of concern but also on the firing of Mr. Campbell and the resignations of Mr. Garcia and Mr. Gilson. Different inferences are possible. One is that Spirit forced Mr. Garcia and Mr. Gilson to resign because they had been complicit in Mr. Campbells understatements of contingent liabilities. Another inference is that Mr. Garcia and Mr. Gilson quit because their inattention had allowed Mr. Campbell to undervalue claims. The inference of inattention is justifiable, and the plaintiffs didnt make particularized allegations of scienter based on the later resignations. See In re Zagg, Inc., Sec. Litig., 797 F.3d 1194, 1205 (10th Cir. 2015) (stating that a “forced resignation [was] at most an acknowledgment that the company identified a better way of doing things moving forward, not an indicator that fraudulent intent existed at the time the alleged omissions occurred”); see also In re Hertz Global Holdings Inc., 905 F.3d 106, 118 (3d Cir. 2018) (“[F]or corporate departures to strengthen an inference of scienter, there must be particularized allegations connecting the departures to the alleged fraud.”).
Apart from these personnel moves, the plaintiffs point out that Spirit used the same accounting process for most of its sales contracts. But we see little reason to attribute complicity in the misconduct. After all, the plaintiffs allege that Spirit delegated virtually unchecked authority to Mr. Campbell. Ultimately, Mr. Campbell failed to record an unpredicted loss of about $8 million in the third quarter of 2019. Appellants’ Appx vol. 1, at 172, 201. This loss was minor compared to Spirits revenue that quarter, which amounted to almost $1.92 billion. See Appellants’ Appx vol. 2, at 356 (noting that Spirit had a revenue approximating $1,919,900,000 in the quarter ending September 26, 2019); see also Smallen v. W. Union Co., 950 F.3d 1297, 1306–07 (10th Cir. 2020) (rejecting an inference of scienter, even though the fraudulent transactions involved over $632 million during a 12-year period, in part because the transactions had constituted a relatively small amount of the defendants business).
Given these allegations, the district court properly regarded the plaintiffs’ collective allegations of scienter as weak rather than strong. Mr. Campbells alleged misuse of the accounting processes may reflect inadequate oversight. But the plaintiffs dont identify a cogent reason to infer the defendants’ awareness of the inadequacy in Spirits accounting controls.
5. The complaint lacks particularized allegations to impute Mr. Campbells scienter to Spirit.
The plaintiffs seek to impute liability to Spirit based on the alleged scienter of its executives. We have already concluded that the complaint doesnt adequately allege scienter on the part of Mr. Gentile, Mr. Garcia, and Mr. Gilson. But the plaintiffs also point to Mr. Campbell.
The plaintiffs dont allege fraudulent or reckless statements by Mr. Campbell. Instead, the plaintiffs attribute liability to Spirit because its other executives had misled the public based on false information from Mr. Campbell.
The court can impute scienter to a corporation if an official intentionally or recklessly
• makes a false statement or
• furnishes false information for inclusion in a statement.
Smallen v. W. Union Co., 950 F.3d 1297, 1313 (10th Cir. 2020). The plaintiffs thus try to pin liability on Spirit for its false statements based on information that Mr. Campbell had furnished.
The plaintiffs allege that when Spirit was reassuring investors, Mr. Campbell knew about Boeings plan to cut purchases of the shipsets. But the plaintiffs dont allege that Mr. Campbell reported his information to anyone making the public disclosures or preparing a public statement. To the contrary, the plaintiffs allege only that Mr. Campbell had a chance to report what he knew. The chance to disclose information doesnt imply an actual disclosure.
Nor do the plaintiffs allege a basis to infer that Mr. Campbell disclosed Spirits inadequate accounting controls. The plaintiffs allege that Mr. Campbell fudged the numbers to make himself look better.
10
But the plaintiffs dont allege that Mr. Campbell told others about his improper accounting techniques.
The plaintiffs instead allege that Mr. Campbell provided overly optimistic estimates to other executives. But those estimates didnt appear in any of the alleged statements by Mr. Gentile, Mr. Garcia, or Mr. Gilson. Those statements involved the adequacy of Spirits accounting controls—not the accuracy of Mr. Campbells projections. And the complaint contains no allegations that Mr. Campbell provided information about the adequacy of Spirits accounting controls to the other defendants or to anyone preparing a public statement.
11
The complaint thus fails to tie the certifications to information from Mr. Campbell. See Smallen v. W. Union Co., 950 F.3d 1297, 1313 (10th Cir. 2020).
12
The plaintiffs also attribute Mr. Campbells scienter to Spirit because he was a senior officer. The Court may be able to impute scienter to a corporation when a senior officer recklessly or intentionally approves a false statement to the public. See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106 (10th Cir. 2003) (imputing scienter to a corporation when executives had signed fraudulent financial statements with an intent to deceive investors). But the complaint doesnt allege Mr. Campbells approval of a public statement.
The plaintiffs try to fill the gap by arguing that any senior officers scienter can be imputed to a corporation. We have not gone that far. Some circuits have allowed plaintiffs to plead scienter through a senior officials knowledge of a misrepresentation. For example, the Second Circuit recognizes corporate scienter when a plaintiff alleges that statements “ ‘would have been approved by corporate officials sufficiently knowledgeable about the company to know’ that those statements were misleading.” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 177 (2d Cir. 2015) (quoting Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex Cap. Inc., 531 F.3d 190, 195–96 (2d Cir. 2008)). And the Sixth Circuit allows courts to impute scienter to a corporation if a “high managerial agent or member of the board of directors ․ ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance.” In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 476 (6th Cir. 2014).
But even if we were to follow the approach in the Second or Sixth Circuit, the plaintiffs dont allege Mr. Campbells knowledge of a false statement. In the complaint, the plaintiffs allege that Mr. Campbell had provided inaccurate estimates to others. But these allegations didnt encompass Mr. Campbells knowledge of regulatory filings on the adequacy of Spirits accounting controls. So the plaintiffs have not shown how a court could impute Mr. Campbells scienter to Spirit.
6. The lack of direct liability prevents liability as a controlling person.
When direct liability exists, an individual can incur joint and several liability for control over someone who has committed securities fraud. 15 U.S.C. § 78t(a). But we have upheld the dismissal of each individual defendant. Without direct liability, no basis exists for joint and several liability as a controlling person.
7. The district court did not abuse its discretion by denying leave to amend the complaint.
The district court dismissed the action with prejudice. The plaintiffs challenge the dismissal, arguing that the court should have allowed them to amend.
But the plaintiffs didnt seek leave to amend the complaint. They instead opposed dismissal, adding a request to amend if the court were to regard the complaint as inadequate. Weve held that a request like this is inadequate to preserve a request for leave to amend the complaint. Calderon v. Kan. Dept of Soc. & Rehab. Servs., 181 F.3d 1180, 1187 (10th Cir. 1999); see also Garman v. Campbell Cnty. Sch. Dist. No. 1, 630 F.3d 977, 986 (10th Cir. 2010) (stating that its insufficient for a claimant to request a chance to amend if the court concludes that “her pleadings were infirm”).
Once the district court dismissed the complaint, the plaintiffs needed to “move to reopen the case under Federal Rule of Civil Procedure 59(e) or 60(b) and then move for leave to amend under Rule 15.” Brooks v. Mentor Worldwide LLC, 985 F.3d 1272, 1283 (10th Cir. 2021). With no motion to reopen or amend the complaint, the district court didnt abuse its discretion in disallowing amendment. Id.
Affirmed.
APPENDIX 13
I disagree with the majoritys scienter analysis. In my view, the majority errs by affirming the dismissal of this case based on its conclusion that the complaint does not allege with particularity that either Chief Executive Officer Thomas C. Gentile III or Vice President and Corporate Controller John Gilson knew that their statements to investors were materially false.
First, the majority requires Plaintiffs to make this showing against CEO Gentile by alleging that someone told him about Boeings upcoming jetliner production cuts. Second, even though a former employee told VP Gilson about Spirits accounting misconduct, the majority requires Plaintiffs to allege more facts to bolster the former employees credibility. Third, for both CEO Gentile and VP Gilson, the majority uncritically accepts Spirits post-hoc assertions that the pair could not have known about Boeings production cuts and Spirits accounting failures. In other words, the majority reads Plaintiffs’ complaint as alleging that CEO Gentile and VP Gilson did not know about two seismic problems bubbling at the company but that several low-level employees did. I would conclude that Plaintiffs’ complaint pleads a strong inference of scienter for CEO Gentile and VP Gilson.
I
I disagree with the majoritys view that the complaint fails to allege facts giving rise to a strong inference of CEO Gentiles scienter. According to the majority, “scienter would exist only if Mr. Gentile was aware of what the Boeing employees had said,” meaning someone at Boeing or Spirit had to have told him about the jetliner production cuts. Maj. Op. 11–12.
1
But weve ruled that to “assess[ ] the sufficiency of a plaintiffs allegations under the PSLRA, a court ‘must consider the complaint in its entirety’ and decide ‘whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.’ ” Ind. Pub. Ret. Sys. v. Pluralsight, Inc., 45 F.4th 1236, 1259 (10th Cir. 2022) (quoting Smallen, 950 F.3d at 1305). No single fact is dispositive in a scienter analysis because we assess all the facts alleged, not individual allegations. The majority simply elevates the complaints failure to allege a particular fact to a dispositive status not warranted by precedent.
Further, requiring allegations that someone told CEO Gentile about the production cuts, the majority does not sufficiently consider that in our circuit, plaintiffs can proceed by pleading reckless conduct. Recklessness is “conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” In re Zagg, Inc. Sec. Litig., 797 F.3d 1194, 1201 (10th Cir. 2015) (citation omitted). It requires proof of a “defendants knowledge of a fact that was so obviously material that the defendant must have been aware both of its materiality and that its non-disclosure would likely mislead investors.” City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1261 (10th Cir. 2001). “In the securities-fraud context, recklessness is akin to conscious disregard ․” Smallen, 950 F.3d at 1305. So securities plaintiffs need not always plead that defendants actually knew their statements were false when made. Plaintiffs can survive dismissal by pleading, for instance, that defendants made reckless misstatements when they have “knowledge of facts or access to information contradicting their public statements” such that they “should have known that they were misrepresenting material facts related to the corporation.” Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).
Nor does the PSLRA require allegations of a defendants direct knowledge. As several courts have noted, the PSLRA permits securities plaintiffs to prove scienter through circumstantial evidence of a defendants state of mind and motive. E.g., In re Level 3 Commcns, Inc. Sec. Litig., 667 F.3d 1331, 1347 (10th Cir. 2012) (“[A] plaintiff may adequately plead scienter by identifying circumstances that indicate conscious behavior on the part of the defendant, though the strength of the circumstantial allegations must be correspondingly greater.” (citation omitted)); Nathenson v. Zonagen Inc., 267 F.3d 400, 410 (5th Cir. 2001) (“There does not appear to be any question that under the PSLRA circumstantial evidence can support a strong inference of scienter.”); In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 276 (3d Cir. 2006) (“The requisite strong inference of fraud may be established ․ by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” (cleaned up) (citation omitted)). The majority imposes too high a pleading burden at the dismissal stage by mandating allegations of direct evidence of CEO Gentiles knowledge.
I also disagree with the majoritys view that the complaint fails to allege facts giving rise to a strong inference of VP Gilsons scienter. Here, the majority acknowledges that the complaint alleges that VP Gilson knew of the accounting misconduct after learning of it from a concerned employee, FE 9. Maj. Op. 29. But rather than find its self-made necessary condition of direct knowledge satisfied, the majority creates more pleading conditions for securities plaintiffs: they must allege “that Mr. Gilson had agreed with FE9” and must allege “Mr. Gilsons awareness of anyone else who agreed with FE9.” Maj. Op. 30. The majority cites no law to support such stringent pleading requirements. Absent discovery, I am unsure how Plaintiffs could faithfully plead whether VP Gilson, a named Defendant, agreed with FE 9s concerns. Or whether VP Gilson was aware of communications to and from other employees.
2
We do not require this level of evidentiary pleading under the PSLRA. See Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1101 (10th Cir. 2003) (“The PSLRA did not ․ purport to move up the trial to the pleadings stage. While the PSLRA certainly heightened pleading standards for securities fraud lawsuits, we believe that if Congress had intended in securities fraud lawsuits to abolish the concept of notice pleading that underlies the Federal Rules of Civil Procedure, Congress would have done so explicitly.”).
The majority suggests that VP Gilson didnt find FE 9 credible, noting that the complaint alleges that he and others “shut [FE9] down.” Maj. Op. 30 (alteration in original). That approach runs counter to our standard of review for Rule 12(b)(6) dismissals. Level 3 Commcns Sec. Litig., 667 F.3d at 1339 (“We review de novo the district courts dismissal under Rule 12(b)(6) ․, accepting all well-pleaded factual allegations in the complaint as true and construing them in the light most favorable to the plaintiff.” (cleaned up) (citations omitted)). But more importantly, “a court cannot dismiss a complaint by assessing the credibility of an informant.” Nakkhumpun v. Taylor, 782 F.3d 1142, 1152 (10th Cir. 2015) (citing Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). We instead assess whether Plaintiffs have alleged that FE 9 provided sufficiently reliable information. See Adams, 340 F.3d at 1102–03; Makor Issues & Rts., Ltd. v. Tellabs, Inc., 513 F.3d 702, 712 (7th Cir. 2008) (Posner, J.) (“The information that the confidential informants are reported to have obtained is set forth in convincing detail, with some of the information, moreover, corroborated by multiple sources.”). And here, taking all inferences in Plaintiffs’ favor, the complaint provides us with several indicia of the reliability of FE 9s information, including that she oversaw a team working on the 737 MAX program, that she worked closely with VP Campbell, and that she was familiar with Spirits accounting-control processes. E.g., app. vol. 1, at 47–48 (¶ 54), 97–100 (¶¶ 158–62), 100–03 (¶¶ 164–68).
Finally, in my view, the majority at times misconstrues the relevant inference-balancing analysis we undertake in securities litigation. Under that analysis, we assess whether “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324, 127 S.Ct. 2499 (emphasis added). We conduct this analysis after holistically considering plaintiffs’ allegations of scienter. See Pluralsight, 45 F.4th at 1267–68; Smallen, 950 F.3d at 1311–12; Nakkhumpun, 782 F.3d at 1153. But the majority instead isolates the individual allegations of scienter and fashions competing inferences to defeat those allegations.
3
But see Tellabs, 551 U.S. at 323, 127 S.Ct. 2499 (noting that the standard of review is “not whether any individual allegation, scrutinized in isolation,” gives rise to a strong inference of scienter). The majority should assess all the allegations together and then assess whether the competing inferences are stronger than the complaints allegations of scienter.
II
In the majoritys quest to reject the common-sense inference of scienter for CEO Gentile and VP Gilson, it misapplies our decision in Anderson v. Spirit AeroSystems Holdings, Inc., 827 F.3d 1229 (10th Cir. 2016). There, the plaintiffs accused four Spirit executives of bilking investors by concealing several cost overruns and project delays on Spirits core projects. Id. at 1239. The plaintiffs tried to establish scienter by alleging accounts from ten low-level employees—all of whom attested to the overruns and delays. Id. at 1239–40. And the plaintiffs pointed to an internal cost-study report and internal quarterly reports that purported to document these problems. Id. at 1240.
We refused to impute these employees’ accounts to the Spirit executives. We reasoned that “[t]he witnesses’ accounts do not allege that the four Spirit executives actually received the internal business groups cost-study report,” that “[t]he witness accounts do not adequately describe the contents of the quarterly reports allegedly sent to the Spirit executives,” and that “[g]eneral accounts of mismanagement and delay do not imply that the four Spirit executives knew that the projects would fall short of long-term cost forecasts.” Id. Motivating our reasoning was that the “witnesses were too far removed from the four Spirit executives and did not provide sufficiently particularized accounts of what the Spirit executives must have known.” Id. at 1244. Indeed, we were wise to reject these employees’ accounts because, otherwise, “[g]eneralized claims about corporate knowledge” from far-removed employees could morph into a strong inference of scienter. Id. (quoting Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 998 (9th Cir. 2009)).
Anderson made sense because the plaintiffs asked us to accept the untenable inference of scienter that a constellation of internal complaints from low-level employees about problems on specific projects bubbled up to the Spirit executives. In that situation, as we said, the plaintiffs must describe with particularity what information the executives saw and how that information made its way to the executives. Id. at 1240–44. And the plaintiffs failed to do so—for instance, one employee was four levels removed from Spirits executives, and many other employees “had no alleged reporting relationship to the defendants.” Id. at 1242–43. So we declined to impute these internal complaints of overruns and project delays to Spirits executives without a showing that the executives would have concerned themselves with the day-to-day minutiae of project costs and timelines.
This case is different. For CEO Gentile, Plaintiffs’ inference of scienter does not depend solely on whether he saw and knew about internal reports or a patchwork of employee accounts. Thats because, unlike the information the executives allegedly should have pieced together in Anderson, the key information here is a single, critical, external data point: Boeings decision to cut production of (and eventually stop producing) the 737 MAX. So what matters is whether Plaintiffs have alleged with particularity an inference of scienter that CEO Gentile had access to this 737 MAX information from Boeing and should have known from Boeing that the company was cutting production of the 737 MAX. That several employees at Spirit knew about Boeings production cuts thus supports an inference that CEO Gentile should have also known about Boeings intentions.
4
Anderson also does not help resolve the question of VP Gilsons scienter. In Anderson, we assessed whether one of Spirits vice presidents (Terry George) knowingly misrepresented the projected future costs on Spirits 787 project with Boeing. Id. at 1244. The plaintiffs alleged that, in an undated meeting, George told an employee that “the cost projections were too high” and “threatened to find managers who ‘could achieve [lower] forecasts.’ ” Id. We ruled that these allegations did not give rise to actionable scienter because, at best, they showed that “George was too optimistic about Spirits ability to reduce costs on the Boeing 787 project.” Id. at 1245. That conclusion made sense because these cost projections were future estimates. Cf. In re Syntex Corp. Sec. Litig., 95 F.3d 922, 930 (9th Cir. 1996) (finding that a corporate statement that the FDA would approve the companys drug by 1993 was nonactionable because it was “forecasting a future event” and “the company could have known of problems in the testing procedures, planned to remedy those deficiencies, and still thought it would achieve FDA approval by the estimated date”). Thus, the plaintiffs hadnt defeated the innocuous and more compelling explanation that George had been hopeful that the cost overruns would abate in the future. See Anderson, 827 F.3d at 1245 (“[The employees] account does not suggest that Mr. George believed his cost-control efforts were unrealistic or that he wished to intentionally mislead investors.”).
Here, the complaint alleges that VP Gilson recklessly disregarded FE 9s account of past accounting misconduct and thus misrepresented the efficacy of Spirits “estimate at completion” (or EAC) process. E.g., app. vol. 1, at 107 (¶ 178), 137–38 (¶ 241) (alleging that statement that Spirits financial statements complied with generally accepted accounting principles was false “because in order to comply with GAAP, a company must implement adequate internal controls for financial reporting”). The complaint alleges neither forward-looking vagaries nor doubts about what VP Gilson knew.
5
FE 9 raised concerns about past “failures in the EAC process” to VP Gilson—including the “impossib[ility] to even come close to the numbers [VP Campbell] had put into the EAC for Boeing Claims.” App. vol. 1, at 106–07 (¶¶ 176, 178). I see no lurking innocent explanation here: If VP Gilson believed FE 9s account, then he knew Spirits statements about the EAC process were false. If he discounted FE 9s account, then he consciously disregarded a known failure of Spirits EAC process.
All to say that Anderson did not create a prohibitive evidence-pleading standard; it simply ruled that the plaintiffs hadnt come close to alleging the specifics of what Spirits executives knew.
III
Under de novo review, I would conclude that Plaintiffs have sufficiently alleged that both CEO Gentile and VP Gilson made recklessly misleading statements. In doing so, I would of course “accept the well-pleaded allegations of the complaint and construe them in the light most favorable to the plaintiff.” Nakkhumpun, 782 F.3d at 1146. I would conclude that the complaint “state[s] with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Level 3 Commcns Sec. Litig., 667 F.3d at 1333. On that point, I would further conclude that the complaint alleges a strong inference of recklessness, which, as mentioned, requires proof of a “defendants knowledge of a fact that was so obviously material that the defendant must have been aware both of its materiality and that its non-disclosure would likely mislead investors.” Fleming Cos., 264 F.3d at 1261. And then unlike the majority, I would “consider the complaint in its entirety” and consider “all of the facts alleged, taken collectively.” Pluralsight, 45 F.4th at 1259 (citation omitted).
For CEO Gentile, the complaint contains six categories of allegations that give rise to a strong inference that he consciously disregarded information about the production cuts:
1. Gentile was the CEO of Spirit. App. vol. 1, at 40–41 (¶ 37). Though his role is not dispositive to a scienter analysis, it is a “relevant fact” because he had motive to learn about any of Boeings production cuts as CEO. See Zagg Sec. Litig., 797 F.3d at 1205 (“A defendants position is a relevant fact, but we have previously rejected the notion that knowledge may be imputed solely from an individuals position within a company.” (emphases added) (citation and internal quotation marks omitted)).
2. The complaint alleges that “sales to Boeing accounted for roughly 79% of Spirits net revenues” and the 737 MAX program “accounted for more than 50% of Spirits annual revenue during the Class Period.” App. vol. 1, at 53–54 (¶ 70) (emphases omitted). These facts alone furnish strong evidence that CEO Gentile was likely aware of all things Boeing. See Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 988 n.5 (9th Cir. 2008) (“The size of the contract and the prominence of the client raise a strong inference that defendants would be aware of this order.”); Adams, 340 F.3d at 1106 (reasoning that fraud pertaining to “more than one quarter of the $22.4 million in net income” in the first quarter of 1998 “[s]trengthen[ed] the inference” that the CEO knew the falsity of his statements); Anderson, 827 F.3d at 1255 (Lucero, J., concurring and dissenting in part) (noting as relevant to the scienter analysis that “Spirits cost overruns on the 787 project resulted in forward-losses of $184 million, approximately one quarter of reported earnings across 2010-2011”).
3. The complaint alleges that CEO Gentile made several public statements about Spirit and Boeings close working relationship. For example, in June 2019, CEO Gentile told analysts and investors, “So, were going to work very closely with Boeing to understand when does the MAX go back into service, what is their production plan and whats the right number of aircraft to split between producing this year and next year.” App. vol. 1, at 61 (¶ 85) (emphasis omitted); see also, e.g., id. at 57 (¶ 75) (alleging that, in May 2019, CEO Gentile told investors, “We work very closely with Boeing every day” (emphasis omitted)); id. at 70 n.11 (“According to another former Spirit employee, FE 5, Defendant Gentile had daily communications with Boeing ․”). CEO Gentiles own words tell us that he would be monitoring Boeings production of the 737 MAX. See Pluralsight, 45 F.4th at 1263–64 (finding Chief Financial Officers prior statements to investors and analysts touting his careful attention to sales data relevant to the scienter analysis).
4. The complaint alleges that CEO Gentile saw layoff analyses based on the production cuts. App. vol. 1, at 71–72 (¶ 105); see Level 3 Commcns Sec. Litig., 667 F.3d at 1345 (“ ‘[D]ivergence between internal reports and external statements on the same subject’ and ‘disregard of the most current factual information before making statements’ can be factors supporting scienter.” (quoting Frank v. Dana Corp., 646 F.3d 954, 959 n.2 (6th Cir. 2011))).6
5. The complaint alleges that CEO Gentile had access to meetings where the production cuts would have been discussed. App. vol. 1, at 67–68 (¶ 98), 70–71 (¶ 103), 110–11 (¶ 183). The complaint alleges that FE 7, a Business Operations Specialist that often reported to CEO Gentile about “data on the performance of Spirits 737 MAX program,” attended a “regular production meeting” in late September or early October 2019 about Boeings jetliner production cuts. Id. at 67 (¶ 98).
6. The complaint alleges that CEO Gentile sold securities during the class period. Id. at 170–71 (¶¶ 317–20); see Pluralsight, 45 F.4th at 1264–65 (observing that suspicious trades in the class period support a strong inference of scienter).
Viewed holistically, these allegations raise a strong inference that the CEO—who touted Spirits close relationship with Boeing, the companys most important customer—knew about Boeings 737 MAX production cuts by early October 2019. Though independently nonactionable, as a whole, these categories of allegations lead to a strong inference of scienter. They allege with particularity that CEO Gentile likely knew about, or was reckless in not knowing about, the production cuts before he told investors about them. See Pluralsight, 45 F.4th at 1267–69; Southland Sec. Corp., 365 F.3d at 380.
This strong inference of recklessness is at least as plausible as any competing inference that CEO Gentile did not know about the production cuts. The competing inference depends on CEO Gentiles being inattentive in his duty as head of Spirit—that he didnt talk to Boeing about its jetliner cuts, that he didnt attend meetings where his employees discussed the impact of those cuts, and that he never viewed layoff analyses that his direct reports worked closely on (or that he viewed these layoff analyses as mere contingency plans). And all this concerning Boeing, Spirits biggest customer, which accounted for almost 80% of Spirits net revenue. See Makor Issues & Rts., 513 F.3d at 711 (“Is it conceivable that [the CEO] was unaware of the problems of his companys two major products and merely repeating lies fed to him by other executives of the company? It is conceivable, yes, but it is exceedingly unlikely.”).
As for VP Gilsons scienter, the complaint alleges that he “knew of and permitted Defendant Campbell to manipulate the value of the Boeing Claims in the 737 EAC.” App. vol. 1, at 107 (¶ 178). As mentioned, the complaint alleges with particularity that FE 9 discussed VP Campbells accounting misconduct with VP Gilson and that VP Gilson “did not take any appropriate actions to remedy the problems.” Id.; see also id. at 104 (¶ 173) (“Campbells manipulation was simple and out in the open for everyone at Spirit to see ․”).
7
In addition, the complaint alleges that VP Gilson had ready access to meetings where Spirits accounting controls were discussed, that he signed the companys third-quarter Form 10-Q (which contained assurances that Spirits financial statements were GAAP-compliant), and that he soon after resigned. App. vol. 1, at 109–11 (¶¶ 182–83), 111–12 (¶ 186), 137–38 (¶¶ 240–43), 153–54 (¶ 277). Taken together, these allegations create a strong inference that VP Gilson likely knew about and ignored Spirits accounting failures. Any competing inference pales in comparison, especially given the complaints detailed allegations of FE 9s description of the accounting failures to VP Gilson.
Because I would find actionable scienter for both CEO Gentile and VP Gilson, I would also impute that scienter to Spirit. “The scienter of the senior controlling officers of a corporation may be attributed to the corporation itself to establish liability as a primary violator of § 10(b) and Rule 10b-5 when those senior officials were acting within the scope of their apparent authority.” Adams, 340 F.3d at 1106–07 (citations omitted). I would impute to Spirit CEO Gentiles scienter for the statements on the production cuts and VP Gilsons scienter for the statements on Spirits accounting controls.
I respectfully dissent.
FOOTNOTES
1
. The allegedly fraudulent statements are listed in the appendix. See pp. 41–45, below.
2
. The complaint sometimes frames Spirits economic hardship as a decline in Spirits production rather than in its sales. See, e.g., Appellants’ Appx vol. 1, at 29 (alleging that “Boeing told Spirit to cut production of the 737 MAX in half”). But a decline in Spirits production led to a decline in sales. We thus refer to the decline in Spirits production as a decline in Spirits sales.
3
. At oral argument, the plaintiffs acknowledged that they didnt know who at Boeing had made the statements.
4
. For example, if a defendant makes a false statement about a data point involving the companys core operations, a claimant might base scienter on the defendants act of monitoring the data point. See Ind. Pub. Ret. Sys. v. Pluralsight, Inc., 45 F.4th 1236, 1263–64 (10th Cir. 2022). But no such allegations exist here. For example, the plaintiffs dont allege with particularity that• anyone told Mr. Gentile about Boeings plan to cut purchases of the shipsets or• Mr. Gentile saw data that would have alerted him to Boeings plan.
5
. The defendants also rely on Boeings public statements that it was planning to continue buying shipsets from Spirit. We need not address the defendants’ reliance on Boeings public statements.
6
. In the complaint, the plaintiffs also allege that Mr. Gentile had made public statements about the adequacy of Spirits accounting controls. But the plaintiffs’ opening brief on appeal doesnt mention Mr. Gentiles alleged scienter regarding the accounting controls. See Appellants’ Opening Br. at 43–48.
7
. The complaint does allege that some of FE9s colleagues “shared [FE9s] concerns” about Mr. Campbells faulty accounting. Appellants’ Appx vol. 1, at 108. But the plaintiffs dont allege that these colleagues had told Mr. Gilson about these concerns. So Mr. Gilson had to rely solely on a single conversation with FE9, where Mr. Gilson and other finance personnel had shut down FE9s concerns.
8
. The dissent tries to distinguish Anderson on the ground that Anderson concerned optimistic statements about “cost projections [that] were future estimates.” Dissent at 9–11 & n.5. We dont see the purported distinction. Mr. Campbell was responsible for estimating future liabilities. As in Anderson, the estimates were allegedly too optimistic.
9
. Given the allegations, Spirit might have used poor judgment or acted negligently in failing to exercise greater oversight over Mr. Campbell. But we cannot base scienter on either negligence or poor business judgment. See Smallen v. W. Union Co., 950 F.3d 1297, 1312 (10th Cir. 2020) (negligence); Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000) (“poor business judgment”).
10
. When others learned of the flaws in Mr. Campbells accounting, he was fired. This firing doesnt create a strong inference of complicity. To the contrary, the firing suggests that others at Spirit had not known what Mr. Campbell was doing. See pp. 32–34, above. So the complaint doesnt imply scienter for Spirit itself.
11
. Because the complaint lacks particularized allegations showing that Mr. Campbell furnished false information for inclusion in a public statement, we need not consider his potential scienter.
12
. In their opening brief, the plaintiffs argue that the “Complaint ․ adequately alleged that Campbell ․ furnished false information for inclusion in Defendants’ misstatements regarding Spirits compliance with [generally accepted accounting principles].” Appellants’ Opening Br. at 50. This argument misstates the allegations in the complaint. The complaint contains no allegations that Mr. Campbell provided information about the accounting controls to the other executives making the false statements.
1
. As support, the majority relies on Smallen v. Western Union Co., 950 F.3d 1297, 1313 (10th Cir. 2020), and Southland Securities Corp. v. INSpire Insurance Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004). Neither case holds that individual securities defendants must have direct knowledge of their fraudulent statements. For instance, in Smallen, we said that “Plaintiff does not plead any particularized facts either tying the Individual Defendants to the consumer complaints or the agent arrests, or otherwise demonstrating the Individual Defendants were aware Western Unions compliance program had failed to redress these issues.” 950 F.3d at 1307. We thus recognized that individual defendants’ awareness of their fraudulent statements is one way—but not the exclusive way—to show scienter under the securities laws.
2
. Notably, the complaint tries to meet the majoritys prohibitive standard. It alleges, for example, that several of FE 9s colleagues “shared her concerns about the inappropriate handling” of the companys accounting. App. vol. 1, at 108 (¶ 179).
3
. For example, when discussing the layoff analyses, the majority notes that “the plaintiffs have not questioned Spirits characterization” that the final layoff analyses were mere contingency plans. Maj. Op. 17.
4
. Indeed, the majority focuses on the form of the final version of the layoff analyses, see Maj. Op. 13–17, while sidestepping the common-sense inference those analyses create. Why were employees at Spirit preparing layoff analyses in the first place?
5
. The majority sees this case as no different from Anderson because VP Gilson didnt doubt VP Campbells accounting of contingent liabilities. Maj. Op. 30–32. But in Anderson, we assessed whether an executives statements about cost controls rendered future-looking cost projections false or misleading. So, it made sense for us to assess whether the executive doubted his own cost-control measures. Here, we are assessing whether VP Gilsons public statements about the effectiveness of Spirits accounting controls are misleading because he recklessly omitted past accounting misconduct. App. vol. 1, at 137–38 (¶ 241), 142 (¶ 250). In my view, the complaint doesnt need to allege that VP Gilson knew VP Campbells contingencies to be false so long as it alleges that he recklessly ignored information about past failures in Spirits EAC process.
6
. The majority misreads the complaints allegations about CEO Gentiles direct knowledge of the layoff analyses. According to the majority, the allegation that CEO Gentile saw the first round of layoff analyses is “conclusory” and conflicts with other allegations in the complaint. Maj. Op. 13. But taking all inferences in favor of Plaintiffs and reading the complaint holistically, we can deduce much about what CEO Gentile saw. Plaintiffs allege that FE 7 was tasked to “provide necessary data so that others could analyze the appropriate level of workers needed to continue production at the new lower [shipset] rate.” App. vo1. 1, at 71 (¶ 104). And, undercutting the majoritys assertion that the complaint alleges “nothing about the contributions from other Spirit employees,” Maj. Op. 14, Plaintiffs allege that “planning personnel examined staffing levels and costs and considered the financial impact of staffing reductions, such as the impact on earnings per share, in order to come up with the number of layoffs with which the executive leadership and Spirits Board of Directors would be comfortable,” app. vol. 1, at 71 (¶ 104). The complaint then alleges that FE 7 presented the layoff analyses to Senior Vice President Bill Brown and VP Campbell. Id. And then that the analyses were “presented to Spirits executive leadership, including Defendant Gentile.” Id. (¶ 105). I see nothing conclusory or conflicting in these allegations. It is a reasonable inference that SVP Brown and VP Campbell approved the layoff analyses and sent them to CEO Gentile for review. And Plaintiffs tell us that CEO Gentile received the layoff analyses, which I infer he read based on the analyses’ financial and earnings-per-share implications.
7
. The majority asserts that VP Gilson couldnt have learned of Spirits accounting failures until negotiations over what VP Campbell projected were complete. Maj. Op. 31–32. But that inference for Defendants skirts that the complaint alleges that VP Gilson ignored FE 9s concerns about the accounting failures in the first place.
BACHARACH, Circuit Judge.