promoted their invention the fracs software application that was designed to be the solution to the marketing problems that slow slow tech was countering with respect to marketing its cns products which were which they describe as the hallmark products they were trying to overcome a reluctant industry and the product is quite expensive and so they need to be able to prove its efficacy but that promotional campaign is based upon multiple false leads all of  comparisons second defendants represented that the evidence that frac max provided was conclusive in other words irrefutable any reasonable investor hearing that would assume that they had verify the accuracy of that data but in fact they recklessly failed to do so third they were it actually in the process for several months during the class period of replacing the allocation algorithm which was the the one that was responsible for doing the well by well comparisons for at least three months perhaps longer and yet they never said anything about that to investors or said i'm sorry i missed that yes you're on what they were doing is that during the class period for several months at least three perhaps more i think you can infer more into this court's decision in pl they were replacing the allocation algorithm that was the portion of the frac macsoftware that was responsible for doing their well by a well comparisons this was the first part of the usually algorithm or worse  where is it the defendant it was the defendants your honor there was a third party that was providing them with the texas railroad commission i guess gets the data reported to them and they would provide it to drilling info and then drilling info would provide it to the defendants to use in there what is the exact is the standard a that you are arguing would apply to reliance on third party data a third party process but it being you that you're grossly negligent in relying on it that you're negligent seems like it would require more than just negligently relying on it or is it deliberately indifferent to your argument is that these defendants the principals of the defendant had to know had to know that this data was being publicized and that it was incorrect as i understand it that's your argument and they're in in part they're claiming oh we relied on a third party or software program or something texas railroad commission data what is the standard that should be applied for a defendant to rely on a third party when when does that become a reasonable and illegal but at the standard here is severe recklessness but if i could address the fundamentals of your question your honor that really is the position that the defendants are taking in this brief but what we're focusing on is the defendant's own conduct here not drilling infos conduct because what happens here is that drilling infill provides the information to the defendants the defendant stand to have a software application that that through an algorithm changes the leasehold by leasehold data into well by well data so that's all on the defendants and they're the ones that do that drilling info doesn't do that so that's number one number two they came out and said that this evidence is conclusive i e irrefutable so it was their responsibility to verify that their own evidence that they were they were telling people where that was irrefutable and not just once or twice we were talking over a period of time from november of two thousand and fourteen to november of two thousand and fifteen ray said at least twelve times i think and that applies equally to the three individuals involved mr trizone mr walton and mr schmidt yes your honor i'll though i am candor that the case is strongest as to mr chisholm because he's identified as one of the inventors of frac max so i think the inference of his knowledge of its workings is the strongest however the district court found that that that the fact that this is flow techs invention was sufficient to impute knowledge of the workings of its low tech to all of the defendants but it's definitely strongest as point was is does frac max provide new customers with a basis for choosing to buy the c n n product that was the purpose of it because their problem was that their product was difficult to demonstrate its efficacy number one and number two it was expensive so what was important for them to be able to grow their business was to be able to attract new customers and the way they wanted to attract new customers was through using this frac max application so this case is really about the ever representations that they were making and in this instance after the information came out of amber's night of two thousand and fifteen everyone knew that the frac max data was unavailable the stock dropped significantly on november ninth when they revealed that and then on november tenth after mr chisholm provided his explanation it dropped even more was one thousand percent on the ninth and then thirty eight percent on the tenth if your clients  here prepared to talk about science or your honor and then i know the value of your your case your honor i personally don't i didn't handle this case in the district court responsibles you don't know if they s claim that that that this company's what he called it their product it was it was was clearly producing  allowing someone else to produce more than others how many wells are involved in that comparison i got the impression there's only about seven well and what what happened was the defenders represented that the wells that work using their product weren't doing as well but they think they mistakenly made an adjustment because they they thought those wells were producing from units with many wells and so they had to reduce it down to one well per unit to compare with with the wells that were using their product i mean is it that is it that simple or is it more complicated does it involve i also see a reference the digits talked about eighty what your honor said is correct it was a small number of wells and what they did was that they reduced by a large percentage of the forty percent of the function the actual production of three of the wells that were using their product and didn't reduce the one that did use their product but the point your honor is is that number one once they do that they had to reveal it which they did on november tenth when the stock dropped even more was that they actually were using an algorithm to adjust the data which they had been explaining but what they were saying at the same time including after september eleventh in september twenty eighth and october fifth and and the twenty eighth and october fifth that their data was on adjusted allegations that were making before this court today which was that throughout that entire year they told people that the data was on it justice that proved to be false because one and as was revealed other member nine in fact it was adjust very significantly and apparently not not always accurately number two they said this evidence was conclusive when you say that evidence is conclusive you're basically saying that is irrefutable that creates a duty on your part to make sure that you actually have a basis for your statement but on november tenth mr chisholm admitted that in fact they never verified the results of that data so both of those bases which judge bennett didn't focus on i think that the defendants clearly represented demonstrated their severe recklessness by number one falsely saying that their data was on adjusted and number two severely recklessly saying that their data was irrefutable and they had no basis for saying that that's basically the basis for a claim in a nutshell right there in a n there's also the fact that that during the class period for several months they actually realized they had to change that the allocation algorithm that was performing this particular function but they never said anything about that to their  to their shareholders but instead they continued on and made the same representation i've been talking about this morning they're replacing the allocation algorithm but they still said that it was that it was conclusive so how can it be both they need to replace it and that it's providing conclusive evidence and basically if it's not broke you don't fix it if it's already providing conclusive evidence they didn't need to change it and in fact when on november tenth when they made their announcements where they admitted these various things they focused on what they hoped to be the the accuracy of their new algorithm after they'd spent a year telling everybody that basically their old algorithm was the best thing since sliced bread so that basically is the focus of the claim he yours i believe at one point the defendants in their brief say basically that c n n works but it doesn't work as great as we thought it did originally would you agree with that as a factual proposition i still contest that it had to do junk and it was an entirely misleading because it's completely ineffective when our case is really about the frac max application as the marketing tool to to get the have product greater acceptance and particularly greater acceptance as to new customers that's why and i think a lot this is largely outside of the record when the defendant say you know there was a mass exodus but that's really not in the complaint but the fact that there isn't a mass exodus really isn't relevant to what the purpose will here but it was i think it is relevant to say enter if it if it works but not to the extent that it was represented based upon whatever exemplar data they had that's one thing if it doesn't work at all if it is a useless exercise and it's being trumpeted as this great product doesn't that have to do with this santer of the defendants well i think that it could well but our point here is that they were using this frac max two to market because even if it's a great product but people don't know about it or they're daunted by the price of it or it's very difficult to figure out whether or not there really is an effect on production then they're not going to buy it but in order for throat for flow tech to to grow its business develop new customers and you know and sell more and more and increase their top line that was the point in fact if you look at all the analysts comments right time buyers that's at paragraph one fifty five very similar thing at paragraph one fifty six very similar at one fifty eight and one fifty nine this case is all about their ability to market the cns and when the information came out in november nine of two thousand and fifteen and of ember ten of two thousand and fifteen that everything they had been saying for the previous year was not true they lost a significant amount of value from the stock and the analysts react as i just described there is less you have any further  and it sets a very high stringent pleading requirement that the plaintiffs must meet in order to get past the pleading stage of these cases and they must plead particular allies facts demonstrating a strong cogent and compelling inference of fraud and that's what they failed to do not to get the judge dennis's question about the particular lies of facts regarding and error the particulars facts in this case or that there was an error in the three wells in those three wells are all within a four mile square radius of each other all operated by the same operator sabine oil and gas all in south central texas and there was an error in those three wells they're all on single well lisa's the c e o said it may have been as simple as putting a two instead of a one in the software code and you have a glitch in the you have a glitch in the software a glitch in the software does not make out a securities fraud class action case well or better but i was really a little bit about that argument is if you are going to make a pitch t designed a program for the department of agriculture all of which is described in the in the materials before the court the program for the department of agriculture where chemicals were put in the ground determine what the what the production was going to be from the beat the fertilizers on the ground rather culture just like chemicals being put into a well and what's the production from those wells so this is a man who had expertise in providing this kind of data sixteen fifty two in which they describe and these three wells are three of ninety eight thousand wells in seven states the three that had the three and ninety eight thousand has had record fourteen ninety three to fourteen ninety five by the way there was a mention of drilling info drilling info is not the third party provided from drilling info is an aggregator of information from the texas railroad commission coming in and you've got seventeen different states each state has slightly different information from their respective railroad commissions or their commissions it all comes in on one of adjusted basis it's not being adjusted for temperature of my being adjusted for pressure is not being addressed a friend thing but in the state of texas that information is on a lease basis and and remember this is a customer facing you show it to the customer if you show them their data they know their data they know what's being produced from their wells you can't you cannot mislead them about what's being produced from those wells and wouldn't want to anymore than you would try to mislead somebody about what they're paying in property taxes because they know what they're paying in property taxes and they can if you don't and they can look it up publicly so in single well he says you can look at a public place so the idea that you would engage in a fraud to mislead your own customers about their own data is is bizarre is bizarre but that's what's happening here but you're showing them their own data and that data is they know is they know in the state of texas is reported by the texas rebel commission on a lease basis and and in it and it is an adjusted as reported in front mechs on a leas basis but now it's a computer program it's an app what do these do they analyze the data they analyze the data and if you want to see the data on an individual well basis then there has to be an allocation there has to be an allocation formula to allocate that to individual wells and there is an allocation formula and they allocate it to the individual wells no one is deceived by that no one thinks that the texas railroad commission which they all know is where you're getting the information reports of on an individual well basis but it provides them some more information about about how those wells compare so there's an allocation formula it doesn't mean that there's anybody that's being misled that's being deceived about any of this then he says well you know you didn't verify the data you didn't do that by the out so what john chism the c e o said after the fact there was a there was a glitch in the software and he says ok we should have done a better job looking at what a responsible c e o would say absolutely it doesn't mean that you didn't do any verification or back checking you've got a third party provider who is the who is this you know ph d in this area and there's no allegation here that he was a fact checking and verify but and thousands of lines of code you can have a problem i use google maps to get from my hotel here to the courthouse this morning sometimes google maps sends to the wrong place i don't think they're trying to defraud me i think they got the algorithm wrong it happens in these large multi line software programs where you can have a glitch in the algorithm and it's a small thing that can have a a an effect  as was there any attempt to question further when we talk about dr collins and his expertise is is there no obligation whatsoever for the recipient of that information to question or hades or cross examine or critique or peer review this kind of data are they entitled to just accept it and trumpeted as successful there's no particular lies that legation that they didn't do that that they didn't talk to him about the data that they didn't ask him to stress test the data there's no particulars allegation that that did not happen here so so what we've got on the record is he was the one and and look you could say well maybe they should have done put in the evidence incorporated by reference by the plaintiffs in this case in which describes dr collins and what he did and how he went about doing so and then the third argument is well you're moving to a new algorithm so  is moving to a new algorithm but the company and i'm just going to read to these two on the record so that you have them told the public from the beginning that the software would go through various versions it said it's an internal application the whole thing is just in its infancy and was being refined that's at one o seven and one twelfth then it said chisholm referred they happened as this was in november twenty fourth think as frank next version one point five and then he said and keep in mind that it's only been out this is now later on in february of two thousand and fifteen in the transcript it's only been out three months with with the latest version you're going to see and that's that one eleven ninety one and then he says and in sixty days we'll have version three point zero you have different versions of software it's not they say conclusively don't they use a pretty pretty strong word that they think do and there's nothing that says that it doesn't conclusive you can have a software application remember this is big data this is big data analytics so you're looking at ninety eight thousand wells and you're not looking at really one well and comparing it to another you're looking at  make some strong worker representation based on own that data there is no evidence one way or the other the record but remember these pages that have incorrect data are three pages out severest departure from the standard ordinary care for there to be a problem with us and to to take somebody who is as as distinguished and we're liable who has a history of doing these types of applications and validated and there's no particular eyesight indicating that it wasn't back checked validated by john by mr of collins but they still messed the two or three pages out of the hundred  eighty some just make you know just like i mean i was i'm suspect that google maps back tracks and validates their data constantly but still on occasion they will send you to the wrong location software can have glitches in it it's not intentional it's not it's not even reckless it's it happens in software because of the nature of the program it is so intense and then when you when you test it you run test codes through it and if those test codes are handled exactly perfectly then it just it creates a problem in the in the software it doesn't mean anybody is doing anything to it to deceive or and there's no question or you've heard the answer is that no one's saying that the product doesn't work or that they're challenging the not mis represented had less effect or know they were like you know what they were still they weren't as they weren't as affected but they were still they were still they still had an uplift in them but they weren't as if they weren't as the uplift and that's all in the record by the way but the rip me up with wasn't as great as they as it appeared from that glitch in the software so so there's nothing that says it that the product doesn't work and you know in sort of the proof of the putting in the oil industry is when you some person somebody a customer a former employees somebody who would say that they knew at the time that the information was wrong that doesn't exist or the other other examples when they have a document nathans and is a good example of that they had the patent itself that said that the drug is not covered by that drug applications are from about the past they have an actual document here they don't have a document and they don't have suspicious stock sales this isn't a case where you're running  selling into the run up made this is this would be a bizarre conspiracy where you're trying to mislead customers or a bizarre scheme where you're trying to mislead customers about their very own data which on the single well leases is publicly available to them it doesn't make any sense the you have got to you've got to under tellabs you've got to look at competing inferences and the competing inference here is that it's a glitch and that's what everything indicates that it is the with i mean these are all i don't know if he actually explained that but they were all within a small area beach other they're all in the eagle furred they're all i mean you know it could have been that be i've got a i think i've got an apple eight you know so it doesn't mean that the other ones were false and misleading applications because you've gone through you know a series of them and you're always looking to be more precise in how you provide the information doesn't mean that the information provided before was wrong or that you knew about a glitch in the earlier software in fact that's what judge bennett found he said the fact that you're using algorithms doesn't mean that you know that there's a grip a glitch in the prior so separately and then he combined them many analyzed them holistically and he did it thoughtfully he went he did it rigorously he did exactly what you're what a trial judge is supposed to do and he came to the right conclusion returning to our main points which are that number one that the data was being adjusted and they said over and over and over again that it wasn't and number two that they said it was conclusive and yet they never verified it though those are the main points of the claim edition there's also the notion that they were changing the allocation algorithm during the class period and didn't tell anybody now i understand it software evolves and it isn't always mean that there's something wrong but here we have a situation where on the very day that mr chisholm is trying to explain why the data went so wrong the day before he says pacifically that it was a problem this isn't paragraph one fifty one of the complaint there was a problem with the allocation algorithm and lo and behold what was it that we were specifically working on for the past three months to change is the allocation algorithm and what does he say it's going to be more accurate now so that's we're not talking about just because they happen to come up with a new version that that means that the old version must have been bad obviously oh my i phone is just as good as my previous one but in this specific instance we're not talking about just an entire upgrade if you look at this court's decision in abrams there was a change over  internal controls and in that particular case they actually said in the beginning that the purpose of the change in the internal controls was to create more efficiency and to save money there's no such allegation here the inference that in the most the most reasonable inference to draw from the fact that they the very thing that went wrong is the very thing that they had spent three months changing and it still wasn't ready at all they could actually say was that we hope or we feel that it's going to be more accurate i think that th court can draw an inference that that means that they knew that there was something wrong with it for a significant period of time several months plus based on this course decision and clock in this as you can infer previous conditions from present conditions so so that's number one number  two what's the thread that joins this case two other cases from this court it's mr chisholm status as one of the inventors of frac macs we're not just saying that you know because he's the c e o that you should infer that he knows about this he is an inventor now the complaint alleges that he's an inventor so all the comments about dr collins can't change the fact that the most reasonable inference here is that mr chisholm knew how this software application worked and he knew that it did in fact just data the application is the software application that's used to model to market the most important product there he was an inventor of the stuff they put in the wells and made them perform better they were no we've pledged in the complaint that he's an inventor of the software application and from that i think this court can draw inferences regarding his knowledge and regard the other defendants knowledge of it's working and you can conclude from that based upon the information that was provided over  years period of time that they were severely reckless in making those false claims i've also like to briefly touch on the notion that you know that frac max is somehow in its infancy and that you know people wouldn't have really relied on it and the whole purpose of this marketing campaign was to get people to rely on it specifically the target audience was new customers they wanted to drive new customers and so it wasn't in its infancy they said ten times that it was a premier in its infancy in that people should you have their their eyes wide open before relying on it simply doesn't make any sense in the context of the campaign that these defendants and gauged in over a period of an entire year and then lastly i don't think that the that we've alleged in any way an irrational conspiracy but i would like to suggest a motive to your honor's who put this in the opening brief in that in the tellabs version the henri man of the seventh circuit judge posner talked about how a guy and an individual industry might make false statements in the hopes that the good news will overtake the bad news well you have here's a situation where the defendants didn't want to say that maybe the evidence wasn't conclusive they didn't want to admit that they actually did it just data and they were hoping that the changes that they were making to the allocation program or the allocation algorithm would in fact eliminate these problems it just turned out that that gamble didn't pay off