United States Court of Appeals
For the First Circuit
CITY OF DEARBORN HEIGHTS ACT 345 POLICE & FIRE RETIREMENT SYSTEM,
Individually and on Behalf of All Others Similarly Situated,
INTER-LOCAL PENSION FUND GCC/IBT,
WATERS CORPORATION, DOUGLAS A. BERTHIAUME, and JOHN A. ORNELL,
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Lynch, Chief Judge,
Howard, Circuit Judge,
and DiClerico,* District Judge.
Susan K. Alexander, with whom David A. Rosenfeld, Samuel H.
Rudman, Mark T. Millkey, and Robbins Geller Rudman & Dowd LLP were
on brief, for appellant.
Steven W. Hansen, with whom T. Peter R. Pound, Michael C.
Moran, and Bingham McCutchen LLP were on brief, for appellees.
Of the District of New Hampshire, sitting by designation.
January 20, 2011
LYNCH, Chief Judge. This securities fraud class action
raises one type of question under the category of questions about
whether plaintiff investors have pled facts supporting a strong
inference that defendants acted with scienter under the Private
Securities Litigation Reform Act of 1995 (PSLRA), Pub. L. 104-67,
109 Stat. 737.
The dispute here is not about whether the facts alleged
support the inference that the defendants knew of certain
undisclosed facts during the class period. We addressed that type
of scienter question in New Jersey Carpenters Pension & Annuity
Funds v. Biogen Idec Inc., 537 F.3d 35
, 44 (1st Cir. 2008).
Rather, the question here is whether there is a strong inference
that the defendants' failure to disclose certain facts was a result
of wrongful intent, or scienter, even assuming defendants knew of
those facts. Answering this question involves an inquiry into the
relationship between scienter and the materiality of the
undisclosed information. We affirm the district court's dismissal
of this action for failing to meet the "strong inference" of
scienter standard set forth in the PSLRA.
To set the stage, we describe the complaint (and theory
of liability) brought against Waters Corporation ("Waters") and two
of its senior executives, Douglas A. Berthiaume and John A. Ornell,
under Sections 10(b) and 20(a) of the Securities Exchange Act of
[End Page 3]
1934, 15 U.S.C. Â§Â§ 78j(b), 78t, and Securities Exchange Commission
Rule 10b-5, 17 C.F.R. Â§ 240.10b-5. Plaintiff-Appellant is Inter-
Local Pension Fund GCC/IBT.
The complaint alleges that during the class period of
July 24, 2007 to January 22, 2008, defendants intentionally or
recklessly failed to disclose a March 2007 change in Japanese
regulations that predictably reduced demand for Waters' products
and services in Japan, a significant market for the company. The
omission of this government regulatory change was, plaintiff
alleges, material and misleading, both in its own right and because
disclosure was needed to ensure that defendants' other statements
about sales and the Japanese market would not mislead investors.
Building on this, plaintiff contends that there is a strong
inference of scienter, one which is further strengthened by the
fact that Berthiaume and Ornell, along with other insiders,
collectively sold 637,500 shares of stock for gross proceeds in
excess of $42 million during the class period. When defendants
eventually disclosed the change in Japanese regulations with their
fourth quarter results on January 22, 2008, the price of the stock
dropped by approximately 20%.
The district court dismissed the suit under Fed. R. Civ.
P. 12(b)(6). City of Dearborn Heights Act 345 Police & Fire Ret.
Sys. v. Waters Corp., 699 F. Supp. 2d 331
, 346 (D. Mass. 2010). We
agree, albeit on different reasoning.
[End Page 4]
The appellate court, like the district court, must accept
all well-pleaded factual allegations in the complaint as true. ACA
Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46
, 58 (1st Cir. 2008).
Waters, a publicly traded company, designs, manufactures,
sells, and services high performance liquid chromatography, ultra
performance liquid chromatography, and mass spectrometry instrument
systems, as well as support products. During the class period,
defendant Douglas A. Berthiaume was the company's Chairman, CEO,
and President, and defendant John A. Ornell was the company's CFO,
Principal Accounting Officer, and Vice President of Finance and
Administration. Berthiaume and Ornell are alleged to have been
"controlling persons" within the meaning of Section 20(a) of the
Securities Exchange Act of 1934.
Waters sells its products primarily in the United States,
Europe, and Asia. In 2006, sales to the Japanese market accounted
for approximately 10% of the company's global sales. These sales
were, in part, generated by stringent Japanese government water
testing regulations that had, for the past several years, created
a strong demand for Waters' products and services.
In March 2007, Japanese authorities issued amendments
easing these regulations, which presumably reduced the demand for
Waters' goods. Plaintiff alleges that defendants were aware of
this change, that the change was material to investors, and that
[End Page 5]
defendants intentionally or recklessly misled investors by failing
to disclose the change during the class period and by issuing
statements that were misleading in light of this omission.1 We
identify and add emphasis to those statements made by defendants
that are said to be misleading or otherwise indicative of
On July 24, 2007, the first day of the class period,
Waters announced its second quarter results in a press release and
held a conference call with analysts and investors. The press
release included the following statement from Berthiaume commenting
on the quarter:
The generally broad-based growth that we
experienced in the first quarter accelerated
with continued rapid uptake of our new
products and strengthening demand from life
science customers, including our large
pharmaceutical accounts. Our first half
results are very encouraging and we are
optimistic that our new system offerings will
continue to stimulate demand going forward.
In the conference call, Ornell likewise stated that the company's
"business prospects continue to look very positive with most of our
end markets and geographies enjoying strong customer demand."
Plaintiff argues that these statements are false or misleading,
alleging that in Japan sales were already "dwindling" and that
Although the complaint also alleged that certain of
Ornell's statements as to predicted tax rates made on October 23,
2007 were misleading, those allegations have been abandoned on
[End Page 6]
defendants knew that these sales would continue to do so. However,
Berthiaume did in fact acknowledge in the conference call that the
company was "seeing some finalization of investments in places like
Japan, where the drinking water regulations . . . spurred a great
deal of investment . . . up through 2006," and that the company was
"seeing that begin to tail itself off." Other than this statement,
the level of sales in Japan was not specifically mentioned in the
company's earnings press release or conference call. In the
conference call, Ornell issued general guidance for the third
quarter, forecasting quarterly sales growth of 14% and earnings per
share in the range of $0.56 - $0.60.
In the following months, before the release of the third
quarter results, company insiders sold 475,000 shares of Waters
common stock for just over $30 million in proceeds. Berthiaume
sold 180,000 shares. Ornell sold 20,000 shares. Both had acquired
the shares that they sold through the simultaneous exercise of
options, and they sold these shares at a price of approximately
$63. During this period, Waters repurchased 402,000 shares of its
stock, at a cost of over $24.2 million.
On October 23, 2007, Waters announced its third quarter
results, which exceeded the July forecasts as to both sales and
earnings. Waters reported sales growth of 17% (compared to the
forecast of 14%) and earnings per share of $0.62 (compared to the
forecast of $0.56-$0.60). Waters did not separate out sales in
[End Page 7]
Japan for the third quarter, but the topic came up in the quarterly
conference call. During that call, Berthiaume stated:
Outside the United States, the only really
major market where we saw some softness in
demand was in Japan. I think this weakness
appeared related to general economic
conditions and we are confident that our
competitive position in Japan remains strong
and that our sales there are likely to pick up
as general spending conditions improve.
Plaintiff alleges that the failure to disclose the change in water
testing regulations made it misleading for Berthiaume to state that
the "softness in Japan" was related to general economic conditions
and that sales would likely improve with better spending
In the same conference call, Ornell issued guidance for
the fourth quarter, forecasting sales growth of 12% and earnings
per share in a range of $1.04 - $1.08. Following the company's
earnings announcement and forecasts, which were issued on the
morning of October 23, the price of Waters' stock rose 9%, closing
at $73.92 per share in the afternoon.
In the following months, before the release of fourth
quarter results, company insiders at Waters collectively sold
162,500 shares of stock for more than $12.3 million in gross
proceeds. Ornell sold 60,000 shares at approximately $76 a share.
During this time period, Waters repurchased 250,000 shares of its
stock, at a cost of over $19.8 million. [End Page 8]
On January 22, 2008, Waters reported its fourth quarter
results. It reported that sales were higher than had been
expected, up 13% for the quarter (compared to the October forecast
of 12%) and up 15% for the full year (compared to the July forecast
of 14%). Indeed, the company reported record high yearly sales of
Reported earnings, however, were lower than had been
forecast in October. Earnings per share were $0.98 for the fourth
quarter (compared to the forecasted range of $1.04 - $1.08) and
$2.75 for the year (compared to the forecasted range of $2.82 -
$2.86). In a conference call the same day, Berthiaume discussed
these results. Explaining why the company had not met its earnings
predictions, he stated:
While our fourth quarter results reflect
strong operating income performance, . . . our
earnings per share growth in the fourth
quarter did not materialize quite as we had
anticipated, as an unexpected increase in our
annual tax rate, among other factors,
adversely affected our bottom-line
On the earnings side, this statement identified increased costs,
such as taxation, among other factors, as the cause of the earnings
falling short of defendants' forecast. Berthiaume noted that
"sales growth was in line with our October outlook," but explained
foreign currency translation was a larger
factor than we expected. In addition, our
sales in Japan were weaker than anticipated
[End Page 9]
due to a combination of a sluggish economic
condition and a change in the testing
protocols for drinking water analysis in
On the income side, though income was greater than forecast, this
statement acknowledged the role of foreign currency "translation"
and weaker Japanese sales due to sluggish economic conditions and
the regulatory change in Japan. This was the first time that
defendants expressly stated that there had been a change in Japan's
drinking water regulations.
In response to a question regarding the slowdown in the
Japanese market, which amounted to a 12% decline in sales for the
quarter, Berthiaume further discussed the regulatory change:
[W]hat happened last year is that the Japanese
government substantially reduced the sampling
requirements and as a result we saw a
reduction in our business. We had a leading
share in this marketplace. And we saw a
reduction in both the consumable side of the
business because of the samples, as well as
the instruments that were required to run it.
He stated that he needed to "take a little bit of the blame,"
We probably should have seen this a little
earlier. We knew that the slope wasn't going
to be as strong forever in these applications,
but the down turn came much faster than we
anticipated. So the slope in the fourth
quarter was a pretty significant one and
that's what caught us up by a little bit of a
Plaintiff alleges these statements are an admission that the change
in testing regulations was at least partly responsible for the
[End Page 10]
decline in Japanese sales, that the defendants had been aware of
the regulatory change, and that they had known it would cause a
decline in the Japanese market.
After the release of these fourth quarter results, with
Waters' report that earnings had failed to meet its predictions,
the price of its stock dropped $14.65 per share, or approximately
However, defendants' optimistic statements about Waters'
future sales in the Japanese market eventually proved to be well
founded. In 2008, Waters' sales in Japan increased to about $151.7
million, up from $134.8 million in 2007 and $135.7 million in 2006.
We review de novo whether plaintiff's complaint has met
the pleading requirements imposed by the PSLRA. ACA Fin., 512 F.3d
at 58. A complaint must plead six elements to state a claim for
securities fraud under Section 10(b) and Rule 10b-5: (1) a material
misrepresentation or omission; (2) scienter, or a wrongful state of
mind; (3) a connection with the purchase or sale of a security; (4)
reliance; (5) economic loss; and (6) loss causation. Dura Pharm.,
Inc. v. Broudo, 544 U.S. 336
, 341-42 (2005). This case turns on
scienter, but we also set forth the requirements for materiality,
which are relevant here.
A fact is material when there is "a substantial
likelihood" that a reasonable investor would have viewed it as
[End Page 11]
"significantly alter[ing] the 'total mix' of information made
available." Basic Inc. v. Levinson, 485 U.S. 224
, 231-32 (1988)
(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438
(1976)) (internal quotation mark omitted). A statement can be
"false or incomplete" but not actionable "if the misrepresented
fact is otherwise insignificant." Id. at 238. Materiality is most
often a mixed question of fact and law. TSC Indus., 426 U.S. at
Scienter is a "mental state embracing intent to deceive,
manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185
, 193 n.12 (1976); see also ACA Fin., 512 F.3d at 58. The
scienter element may be satisfied by showing that the defendant
engaged in "intentional or willful conduct designed to deceive or
defraud investors by controlling or artificially affecting the
price of securities." Hochfelder, 425 U.S. at 199. A plaintiff
can also demonstrate scienter by showing that defendants "acted
with a high degree of recklessness." Aldridge v. A.T. Cross Corp.,
284 F.3d 72
, 82 (1st Cir. 2002). Under the recklessness standard,
a defendant can be held liable for "a highly unreasonable omission,
involving not merely simple, or even inexcusable, negligence, but
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 the actor must have been
aware of it." Greebel v. FTP Software, Inc., 194 F.3d 185
[End Page 12]
(1st Cir. 1999) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033
, 1045 (7th Cir. 1977)) (internal quotation mark omitted);
see also SEC v. Fife, 311 F.3d 1
, 9-10 (1st Cir. 2002).
The PSLRA mandates "a special standard for measuring
whether allegations of scienter survive a motion to dismiss."
Greebel, 194 F.3d at 195. A complaint alleging securities fraud
must, with respect to each alleged act or omission, "state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind." 15 U.S.C.
Â§ 78u-4(b)(2) (emphasis added). A plaintiff must allege facts that
make an inference of scienter "more than merely plausible or
reasonable--it must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent." Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308
, 314 (2007). When there
are equally strong inferences for and against scienter, the draw is
awarded to the plaintiff. ACA Fin., 512 F.3d at 59.
The question of whether a plaintiff has pled facts
supporting a strong inference of scienter has an obvious connection
to the question of the extent to which the omitted information is
material. A plaintiff must provide evidence showing not only that
a statement or omission "was false or misleading," but also "that
it was made in reference to a matter of material interest to
investors." Geffon v. Micrion Corp., 249 F.3d 29
, 35 (1st Cir.
2001); see also Jackvony v. RIHT Financial Corp., 873 F.2d 411
[End Page 13]
415 (1st Cir. 1989) (Breyer, J.) (finding that the fact that a
hospital received general expressions of interest in acquisition
from time to time had no special significance). "[T]he question of
whether Defendants recklessly failed to disclose [a fact] is . . .
intimately bound up with whether Defendants either actually knew or
recklessly ignored that the [fact] was material and nevertheless
failed to disclose it." City of Philadelphia v. Fleming Cos., 264 F.3d 1245
, 1265 (10th Cir. 2001). If it is questionable whether a
fact is material or its materiality is marginal, that tends to
undercut the argument that defendants acted with the requisite
intent or extreme recklessness in not disclosing the fact. See In
re Carter-Wallace, Inc., Sec. Litig., 220 F.3d 36
, 42 (2d Cir.
A. Defendants' Revenues and Earnings Statements
Plaintiff makes a two-part argument. The first part is
that the inferences drawn in its favor require the conclusion that
defendants knew, during the class period, that Japan had relaxed
its water testing regulations and that this change would ultimately
lead to less demand for Waters' products and services in Japan.
The second part is that the fact of this knowledge alone provides
In this case, we do not decide the question of the
materiality of the Japanese change in regulations, only that of
whether there is a strong inference of scienter. Cf. New Jersey
Carpenters Pension & Annuity Funds v. Biogen Idec, Inc., 537 F.3d 35
, 44 (1st Cir. 2008) ("We discuss materiality only insofar as it
is relevant to the pleading of omissions said to be relevant to scienter.").
[End Page 14]
a sufficient basis for a cogent and compelling inference that
defendants acted with scienter in failing to disclose earlier the
The first is based on Berthiaume's January 2008
statements that the "Japanese government substantially reduced the
sampling requirements and as a result we saw a reduction in our
business" and that the company "knew the slope wasn't going to be
as strong forever in these applications." These statements,
plaintiff argues, establish that the decline in revenues in Japan
was in part attributable to the change in testing regulations and
that defendants knew much earlier that there would likely be such
a decline. This is a fair inference, and defendants do not
themselves dispute that they had knowledge of the regulatory change
at least at some time earlier in the class period. However, this
is not sufficient to meet plaintiff's burden on scienter.
Plaintiff's argument that defendants' "actual knowledge
of the facts withheld amply establishes the necessary degree of
scienter . . . misconstrues the relevant inquiry." Schlifke v.
Seafirst Corp., 866 F.2d 935
, 946 (7th Cir. 1989). The key
question in this case is not whether defendants had knowledge of
certain undisclosed facts, cf. id., but rather whether defendants
knew or should have known that their failure to disclose those
facts "present[ed] a danger of misleading buyers or sellers."
Greebel, 194 F.3d at 198 (quoting Sundstrand, 553 F.2d at 1045). [End Page 15]
That is, the danger must be "either known to the defendant or . .
. so obvious the actor must have been aware of it." Id.; see also
SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072
, 1092-93 (9th
Cir. 2010) (adopting this formulation of the question); City of
Philadelphia, 264 F.3d at 1260, 1264 (same); In Re Advanta Corp.
Sec. Litig., 180 F.3d 525
, 535 (3rd Cir. 1999) (same); Schlifke,
866 F.2d at 946 (same).
This evaluation of the inference of scienter involves "an
objective test." Platforms Wireless, 617 F.3d at 1093; Sundstrand,
553 F.2d at 1045.3 And here, the inference of a nonculpable
explanation for the lack of disclosure is much stronger than the
inference of scienter, even viewing scienter as involving either
intentionality or extreme recklessness. That is, viewed
objectively, the inferences are stronger that defendants did not
knowingly or recklessly risk misleading the reasonable investor, as
defendants reasonably did not expect that the change in Japanese
drinking water testing regulations would itself have a significant
impact on Waters' overall worldwide sales during 2007, such as to
Given our disposition of this case, we need not engage in
an additional inquiry that involves a "subjective test," requiring
that "the omission derive from something more egregious than even
'white heart/empty head' good faith." Sundstrand Corp. v. Sun
Chem. Corp., 553 F.2d 1033
, 1045 & n.20 (7th Cir. 1977); see also
SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072
, 1093 (9th
Cir. 2010) (discussing the two part--objective and subjective--test
for scienter); Backman v. Polaroid Corp., 893 F.2d 1405
, 1418 (1st
Cir. 1990) (discussing the good faith defense).
[End Page 16]
It is true that the entire Japanese market constituted
10% of Waters' global sales. Yet in considering the significance
of an event that impacts sales, management must weigh "the
anticipated magnitude of the event in light of the totality of the
company activity." City of Philadelphia, 264 F.3d at 1265 (quoting
SEC v. Fehn, 97 F.3d 1276
, 1291 (9th Cir. 1996)) (internal
quotation mark omitted); see also Greebel, 194 F.3d at 206 ("At
best, plaintiffs' additional evidence supports an inference that
FTP improperly recognized from $416,000 to $1.55 million in revenue
. . . . Because FTP reported overall revenue . . . of $37.1
million, these transactions do not support a strong inference of
Here, the third and fourth quarters' overall global sales
were not below projected figures, but rather above them. Waters
reported that in the third quarter total sales grew 17% (compared
to a forecasted 14%) and that in the fourth quarter they grew 13%
(compared to a forecasted 12%), despite the decline in Japanese
sales. For 2007 overall, the company reported record high yearly
sales of $1.47 billion. Plaintiff does not argue that these
figures are themselves inaccurate or misleading. That the decline
in Japanese sales caused by the regulatory change was not
inconsistent with the forecasted increase in overall sales--which
were the focus of defendants' quarterly reports--weighs against
[End Page 17]
plaintiff's attempts to draw a strong inference of scienter. Cf.
Ronconi v. Larkin, 253 F.3d 423
, 432 (9th Cir. 2001).
Although there was a drop of 12% in Japanese sales for
the fourth quarter of 2007--and defendants admit that the change in
water testing was, among the variety of causes, the "most
significant"--it is far from evident what fraction of this decline
was predictably due to the regulatory change itself. Cf. Ezra
Charitable Trust v. Tyco Int'l, Ltd., 466 F.3d 1
, 6 (1st Cir. 2006)
("Pleading 'fraud by hindsight,' essentially making general
allegations 'that defendants knew earlier what later turned out
badly,' is not sufficient.") (quoting Gross v. Summa Four, Inc., 93 F.3d 987
, 991 (1st Cir. 1996)). Moreover, sales in Japan rebounded
in 2008, as defendants had predicted.
Nor, contrary to plaintiff's arguments, can a strong
inference of scienter be drawn from Berthiaume's July 24 statement
that he was "optimistic" about future sales, or his October 23
statement explaining that the "softness in demand" in Japan was due
to "general economic conditions" and forecasting increased sales as
"general spending conditions improve."4 An inference of scienter
There is no need to reach defendants' alternative
argument that their future guidance statements are protected by the
PSLRA's safe harbor provisions, under which a "forward-looking" statement, such as an earnings forecast, is not actionable under
Section 10(b) if it is either (a) "identified as a forward-looking statement, and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
differ materially from those in the forward-looking statement," or
(b) the plaintiff fails to prove that it was made "with actual
knowledge . . . that the statement was false or misleading." 15
[End Page 18]
is especially unwarranted here, given that Berthiaume also stated
in the July 24 conference call that the company saw "some
finalization of investments" in Japan, "where drinking water
regulations . . . spurred a great deal of investment . . . up
through 2006," and this had "beg[un] to tail itself off."
"[A]ttempts to provide investors with warnings of risks generally
weaken the inference of scienter." Ezra Charitable Trust, 466 F.3d
at 8; see also Micrion Corp., 249 F.3d at 37. At the end of the
fourth quarter, when it was clear that sales in the Japanese market
had to some extent suffered a downturn, defendants identified the
decline. Their characterization of the downturn as "modest" is
accurate given the increase in global sales that beat forecasts and
the record aggregate earnings.
The inferences as to scienter also run in defendants'
favor from the fact that it was higher costs and expenses, not
lower sales, that caused earnings to be below expectations. The
report of below expected earnings could well have caused the share
price to drop as it did. Plaintiff's allegations, though, go to
revenues, not higher costs and expenses.
Defendants admitted that they should have caught the
trend earlier and that it might well have been more prudent for
them to have disclosed the change in the Japanese regulations
sooner. These admissions do not, however, establish scienter. Cf.
[End Page 19]
Micrion Corp., 249 F.3d at 37 (finding that although the defendant
"could have provided still more information" regarding the alleged
omission, "absent the type of evidence we have previously found
probative of scienter, its failure to do so does not mean that the
omission was purposely deceptive in a manner actionable under Rule
10b-5"). A company does not commit securities fraud merely by
failing to disclose all non-public material information that it
knows. ACA Fin., 512 F.3d at 61. Allegations of corporate
mismanagement are not actionable under Rule 10b-5. Santa Fe
Indus., Inc. v. Green, 430 U.S. 462
, 479 (1977); Stevelman v. Alias
Research Inc., 174 F.3d 79
, 85 (2d Cir. 1999). Nor are allegations
of mere negligence. Platforms Wireless, 617 F.3d at 1093; Greebel,
194 F.3d at 198-99.
It would have been easy enough for management to have
disclosed the change in the regulations. It was not unreasonable
for plaintiff to have been suspicious of why that was not done.
But mere suspicion is not enough.
B. Defendants' Insider Trading As Support for Scienter
We consider all of the allegations in plaintiff's
complaint. Tellabs, 551 U.S. at 322; Biogen Idec, 537 F.3d at 51.
Our conclusion as to scienter does not change when we add to the
mix plaintiff's insider trading allegations. Cf. Biogen Idec, 537
F.3d at 55-57.
[End Page 20]
Depending on context, allegations of insider trading may
offer some support for inferences of scienter. Mississippi Pub.
Emps. Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75
, 92 (1st
Cir. 2008) ("Insider trading in suspicious amounts or at suspicious
times may be probative of scienter."); see also In re Cabletron
Sys., Inc., 311 F.3d 1
1, 39-40 (1st Cir. 2002); Shaw v. Digital
Equip. Corp., 82 F.3d 1194
, 1224 (1st Cir. 1996). "The vitality of
the inference to be drawn depends on the facts, and can range from
marginal to strong." Greebel, 194 F.3d at 197-98 (citations
Plaintiff alleges that during the class period,
Berthiaume sold 6.08% of his stock holdings and Ornell sold 83.24%
of his holdings, and that these sales support a strong inference of
scienter. In calculating the percent of holdings sold, however, it
is appropriate to consider not only the shares of stock that
Berthiaume and Ornell held prior to their sales, but also the
shares that they could have sold through the exercise of options,
which plaintiff did not do. See Ronconi, 253 F.3d at 435 n.25
("Stock options should be considered in calculating the percentage
of shares sold unless the insider could not have exercised them.");
In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970
, 986-87 (9th
Cir. 1999) ("Actual stock shares plus exercisable stock options
represent the owner's trading potential more accurately than the
stock shares alone"); see also Cozzarelli v. Inspire Pharm. Inc.,
[End Page 21]
549 F.3d 618
, 628 (4th Cir. 2008) (considering both shares and
vested stock options in determining the significance of a sale);
Cornelia I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778
783 (8th Cir. 2008) (same); Acito v. IMCERA Grp., Inc., 47 F.3d 47
54 (2d Cir. 1995) (same). The consideration of options is
especially warranted here, as Berthiaume and Ornell sold shares
that were acquired through the simultaneous exercise of options.
Berthiaume's sales during the class period, calculated to
include options, amounted to only 4.82% of the shares that he could
have sold. He sold these shares entirely in the third quarter at
a price of approximately $63 per share. His sales price was less
than 10% above the low of $58.58 to which the price dropped after
the release of fourth quarter results, and substantially lower than
the high of $80.77 that it reached during the fourth quarter.
These facts offer, as to Berthiaume, little support for a strong
inference of scienter. Cf. Ronconi, 253 F.3d at 435 ("[S]elling
stock for $54, when the price subsequently rises to $74 and then
sinks to $49, does not support an inference of knowing
The facts of Ornell's trades are different: he sold
approximately 7% of the shares that he could have sold in the third
quarter, and approximately 22% of the remainder in the fourth
quarter. While his third quarter sales were at a price of
approximately $63 per share, his much more significant fourth
[End Page 22]
quarter sales were at $76, only slightly lower than the fourth
quarter high of $80.77. The fact that Ornell sold this significant
percentage of his holdings, and that he made many of these sales
near the high price, could lend some support to plaintiff's
inference of scienter. See Greebel, 194 F.3d at 197-98.
Plaintiff failed to allege any facts that these sales
were unusual. "At a minimum, the trading must be . . . unusual,
well beyond the normal patterns of trading by those defendants."
Greebel, 194 F.3d at 198. Here, plaintiff's complaint provided no
information about Ornell's trading history that would support such
a determination. This is in marked contrast to In re Cabletron
Systems, where the complaint detailed stock sales by defendants in
the months prior to the class period. See In re Cabletron Systems,
311 F.3d at 27; see also Nursing Home Pension Fund, Local 144 v.
Oracle Corp., 380 F.3d 1226
, 1232 (9th Cir. 2004) ("[T]he Complaint
alleges that Ellison had not sold any of his Oracle stock for five
years. This makes Ellison's January 2001 trades highly
inconsistent with his prior trading history."); In re Apple
Computer Sec. Litig., 886 F.2d 1109
, 1117-18 (9th Cir. 1989)
(comparing the 10 months preceding the 10 month class period to
determine whether the alleged insider trading was consistent with
the prior pattern of sales). Trading histories are not a sine qua
non of an allegation of unusual insider trading. Some trades may,
from the face of things, be unusual. But Ornell's trades do not
[End Page 23]
fit into this category, and no context is provided. Cf. Ronconi,
253 F.3d at 436 ("[T]he plaintiffs have not alleged sufficient
trading history for us to conclude that [the] trading was
'dramatically out of line with prior trading practices.'").
The stock sales by Berthiaume and Ornell do not, under
these circumstances, offer the requisite support for a strong
inference of scienter, either standing alone or in combination with
the other evidence.5
Finally, the fact that Waters repurchased its own stock
during the third and fourth quarters of 2007 does not, on these
facts, have much weight one way or another. Given our conclusion
that there is no strong inference of scienter from the other facts,
even considering insider trading, we do not think it a fair
inference that the stock repurchases were fraudulently motivated
to augment market demand and thereby mask the insider sales.
The district court properly dismissed the plaintiff's
Section 10(b) and Rule 10b-5 claims. Because the plaintiff's
Section 20(a) claim was derivative of the Rule 10b-5 claim, it was
Plaintiff also alleges that seven non-defendant insiders
sold 377,500 shares for proceeds of $25,119,276 during the class
period. This court has considered stock sales by non-defendant
insiders when evaluating the sufficiency of a pleading of scienter.
See Shaw v. Digital Equipment Corp., 82 F.3d 1194
, 1224 (1st Cir.
1996). However, listing only bare facts about the shares sold,
plaintiff here does not provide any information about the trades
indicating that they were unusual. Under these circumstances, it
was not error for the district court to conclude that these sales
were not probative.
[End Page 24]
properly dismissed as well. See 15 U.S.C. Â§Â§ 78t(a), 78t-1; Biogen
Idec, 537 F.3d at 58; ACA Fin., 512 F.3d at 67?68; In re Stone &
Webster, Inc., Sec. Litig., 424 F.3d 24
, 27 (1st Cir. 2005).
The judgment of the district court is affirmed.
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