CACD Federal MTD — Securities Fraud (PSLRA Scienter)

Securities-fraud plaintiffs in CACD must clear the PSLRA's heightened scienter pleading bar: facts giving rise to a "strong inference" of scienter that is "cogent and compelling, thus strong in light of other explanations." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). The Ninth Circuit operationalizes Tellabs through a dual inquiry under Zucco that walks through scienter theories serially before holistic review.

The PSLRA standard

The Private Securities Litigation Reform Act requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). The inference must be "cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, 551 U.S. at 324.

Zucco's dual inquiry

The Ninth Circuit applies a two-step analysis: first determine whether any individual allegation, standing alone, suffices to create a strong inference of scienter; if not, conduct a holistic review of all allegations together. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009).

Theories the court walks through serially

• Motive and opportunity. Insufficient alone under the PSLRA. Howard v. Everex Systems, Inc., 228 F.3d 1057 (9th Cir. 2000). Generic motives like debt-covenant compliance or stock-price maintenance do not suffice.
• Confidential witnesses. Must be described "with sufficient particularity to establish their reliability and personal knowledge," AND their statements must be "indicative of scienter." Zucco, 552 F.3d at 995. CW reports of meetings the CW did not attend, or generic complaints about leadership, fail.
• Core operations inference. Applies only "in rare circumstances" where it would be "absurd" to suggest management was unaware of the matter. Reese v. Malone, 747 F.3d 557, 576 (9th Cir. 2014).
• Magnitude of restatement. "Rarely enough by themselves to show scienter" without specific allegations of mental state. Thomas v. Magnachip Semiconductor Corp., 167 F. Supp. 3d 1029, 1042 (N.D. Cal. 2016).
• Executive resignations. Plaintiff must "plead facts refuting the reasonable assumption that the resignation occurred as a result of the restatement's issuance itself." Zucco, 552 F.3d at 1002. Bare timing facts do not suffice.
• SOX certifications. "Add nothing substantial to the scienter calculus." Zucco, 552 F.3d at 1004.
• Simplicity of accounting standards. Allegations that a standard was "simple" must be assessed against the actual text — 192 pages of ASC 842 are judicially noticeable.

Counter-inferences defendants raise

• Absence of insider stock sales during the class period weighs against scienter. Webb v. Solarcity Corp., 884 F.3d 844, 856 (9th Cir. 2018).
• Retention of an independent auditor (with no allegation that information was withheld from the auditor) weighs against scienter.

Section 20(a) is derivative

A controlling-person claim under Section 20(a) "may be dismissed summarily . . . if a plaintiff fails to adequately plead a primary violation of section 10(b)." Zucco, 552 F.3d at 990. When § 10(b) fails, § 20(a) falls automatically.

How CACD applies it (corpus examples)

• 450471057 (Sonder Holdings — Blumenfeld): granted with leave to amend; court walked Tellabs framework serially across all seven theories (motive, CW1/CW2, core operations, restatement magnitude, resignations, SOX, accounting simplicity), applied Zucco's holistic review, weighed defendants' counter-inferences (no insider sales, independent auditor retained), and dismissed § 20(a) as derivative.

If you're the moving party

• Walk Zucco's framework serially. Take each scienter theory in turn and identify what is missing under each.
• For confidential witnesses, demand particularity — attendance at meetings, specific dates, what was actually said.
• Press counter-inferences: any insider stock sales? Independent auditor? Was information withheld?
• Cite the Sonder template structure — a clean roman-numeral order keyed to Tellabs' theories increases the chance the court adopts your framework.

If you're the opposing party

• For each scienter theory, plead specific facts — dates, attendees, documents, statements — not generic motive.
• For confidential witnesses, plead reliability/personal-knowledge facts AND content that is itself indicative of scienter, not negligence.
• Anticipate the holistic-review step — plead facts that combine to make the inference "cogent and at least as compelling" as innocent alternatives.
• Address counter-inferences proactively: explain stock-sale data, auditor independence, internal controls.