thank you your honors and good morning my name is david goldsmith and together with my partner carol vegas we represent the plaintiff pension fund and the class in this securities class action appeal this case comes to your honor's on de no review from the dismissal of our securities class action complaint on grounds of failure to plead a false or misleading statement falsity is the overarching issue before this court c n tower as it as an element one product to build these components that store a lot of information and they had a commercial business segment that sought to sign up customers which were smaller mid sized companies  they wanted to break into what we they called in what we call the enterprise business segment which basically means to try to sign up to the largest five thousand or five thousand largest companies in the in the world which they called the g five thousand or the global five thousand that was a failure in order to in order to do that however they moved all of their internal resources of sales and marketing and so on from their commercial side qualitative statements of the growth that they stated that they were enjoying during the class period they had statements of the nature of bookings growing by one hundred percent during a given quarter or or record growth this was a growth company they had no profits but they claim to be enjoying exponential or or record growth during the class period which was about a year so one of the issues in the case  s just following up on the same question what specifically was the false statement that you were relying on there are there are are a number of states give us of strongest on shore so one of the statements that that allege was was false is say you know you know we added more g five thousand customers and you know than any previous quarter saw the highest ever contribution to bookings compared to any previous quarter another statement this is in may of two thousand and fifteen is in why is that false one of the reasons why it's false is that they gave a false impression of the growth that they were enjoying because the  false impression was because they were reclassified i mean if they said they added more g five thousand customers is that true or false that's leeson it was false it was the reason it was false is because starting in december of tw they were reclassifying their commercial customers as enterprise customers as g five thousand customers because they were failing to sign up these g five thousand cosseted they specifically had then of them as commercial versus enterprise they did at one point so in the beginning that you're not relying on that one now we're not relying on that one but at one point it is then i'm then i'm having trouble because why can't they combine or talk about a total customers why and why is it up to them specifically the car commercial versus enterprise they don't have to carve out commercial versus enterprise but when your entire thesis says as a growth company is based on your trying to break into the five thousand and you say we're we're signing up more g five thousand customers than ever before and you're not doing that and in fact what you're doing is your your your fussing around with who you treat as who you consider to be a g five thousand customer and who you consider to be a commercial customer and you're creating a false impression to the market i mean one of the one of the allegations we have you know your honor which was provided  by two of our confidential witnesses is that we have we have we identified our complaint seven customer accounts including the jeffries investment bank the new york presbyterian hospital and air b n b and others  which were classified as enterprise customers but which never appeared on the g five thousand database or in their internal it doesn't matter if the if the number was not in accurately reporting i think it does matter what we do have we do have one number which they did report during the class period where they say they added forty one five thousand customers during the quarter that was in february twenty customers than in any other quarter was that in a quarterly report was that in a stockholder meeting where it was yes statement me it was made in a shareholder letter so every quarter they shouldn't eight k current report that attached what they called a shareholder letter where they provided various information and updates to the market and that is where most of the false statements that we allege were found where they would boast about their progress they would boast about their customer data their their customer levels and their and their growth they didn't have any profits so so from their perspective and from analysts perspective what was most important was how they were doing in signing up new customers and trying to get new business and they were trying to break into a whole area of new business so it wasn't good enough to have the current type of customers that they had the sort of you know you know plain vanilla customers that they were getting they wanted to break into the big time they wanted to be like the big boys what they called the incumbent partners which were the huge data storage companies like e m c and others that were having they had it getting the big contracts they wanted to be like that and something wrong with that but when they were failing to do that and the reason they were failing to do that was because they rolled out this product  just before the end of a class period in november of two thousand and fourteen called fiber channel and fiber channel didn't work fiber channel failed to have the features and failed to have the type of technology that these in that these companies that  contracted with the in comfort nerds wanted to have something called an all flash array and certain other types of features channel wasn't selling the enterprise companies were refusing to buy fiber channel so when they what our allegation is that when one fiber channel you know met up with a brick wall they wanted to try to fill in the gap by basically pumping up the numbers of the five thousand customers they have and we have allegations from multiple c w's that the reason why they were doing these reclassification zx was to make the enterprise business appear to be more successful than it really counsel did any of the actually taking issue with the numbers that were reported by the company they said your honor that the purpose that we have about six or seven that said this or at least you know you know gave that gave that impression and they're in there in the complaint that the purpose of this program was to make the enterprise business appear more successful than it actually was right but the court i thought the district court determined that there was no assertion that any of the actual numbers of the customers were controverted by the well that's correct but the c w s didn't talk about the the the public statements you know that the f c c filings that the company made i mean our former employees they're not usually focused on they're not analysts they're not usually focused on the ten k s and the ten cues that are out in the market they're they're focused on what they do inside the company i mean and you know they focus on the facts relating to their the scope of their employment so that if the assertion is that the numbers were misleading and none of the con confidential witnesses confirmed that the numbers were false how do you stand a claim so it's not just the numbers you roger i mean it's the qualitative statements about the degree of growth the the exponential nature of the growth one hundred percent growth in a core record gro and so forth that the analysts relied on the analysts were of were very very surprised at the end of the class period when they said when they said that they said that they they for the first time failed to meet their guidance for the third fiscal quarter of twenty sixteen the analysts were stunned they were particulars of how how they were reported to the market in fact i think you need to have an inference i bet your theory below was linked to the global five thousand customers was a net link to the global five thousand customers but also linked to the nature of the growth of the company which was also linked to the g five thousand customers the whole point was this was a g five thousand an issue tive to which growth was linked and one of our c w c w fourteen to which was you know which win during that quarter and announced to the market as such and that's paragraph two two hundred two in our complaint and our contention here your honour's is that judge gonzales rogers you know miss apprehended that  focused first of all on the questions regarding the g five thousand numbers and how they were lead to the alleged misstatements regarding the enterprise segment now the one thing we should focus upon are the things which are uncontested in the record right now announced in the market before the you know the beginning of the class period that had two hundred sixty g five thousand customers at the end of the class period they announced that they had over four hundred g five thousand customers and that is a fifty percent increase that is undeniably an advancement in their penetration of that segment and the key things to know with respect to what happened at the lower court was that the plaintiffs conceded in their papers that they could not muster sufficient facts to show that either of those numbers was false you know and it bears repeating the exact language that they used in their opposition they said that they cannot quote directly any given number of g five thousand accounts was false and then they went on to repeat that on the same page they said quote plaintiff cannot allege sufficient facts to show the actual number of g five thousand customers is false  and then in another place in the same brief that said we cannot tie any specific reclassification to any particular timeframe during the class counsel in your view is that fatal to their complaint absolutely  because if you if you're going that examine the question of is it false or misleading for nimble to say that we are broadening our base of customers in the g five thousand space one of the key metrics that you look as well how many customers are there you know they themselves plead these numbers in their complaint and if they're going to tell you that once you quantify the number of customers that they don't have facts to show that those numbers were incorrect then that is fatal their case in fact that is what the vera phone case tells us which is whatever optimistic statements a company may make about a particular segment if you put hard data behind that there can you can't be nice misleading the market because then the market can just look at those numbers and decide for itself is going from two hundred sixty to over four hundred is that you know a successful penetration of the market will decide for yourself and they have admitted that they cannot they don't have the facts you know irrespective of what they might say about re classifications or cloud nine they've admitted we don't have the facts to dispute those numbers and so that isn't fact fatal to their claims so council was very careful to say that it was not only a quantitative assertion but also qualitative and that the growth of the statement in addition to the number of g five thousand customers was also misleading what's your response to his reliance on the growth statement i don't see how you can disentangle quantitative and qualitative statements if you're going to say something like we've successfully broaden our base in large enterprise companies if you're go of that how would you do that you'd say well let's look at the numbers i'm not sure in fact if you just leave these qualitative statements on their own there would be no way to test that until you actually look at the hard data that supports that assumption and if they cannot contest the veracity of that hard data were done there needs to be no furthering kori on that front and the only response that they had when we pointed out and when the district court pointed out that they've conceded that they can't provide facts to show that these numbers are false so the only response they had was to say well just because we didn't plead we can't believe that's false doesn't mean that it's true but that flips the burden of pleading on its head especially under the reform act the reform act does not place a burden on defendants to prove that statements are true the burden is on them to come up with particularize facts that show that certain statements are false and that is the thing that you know and they fail to do that and that's the reason why we don't even need to get into the questions of reclassification though i'm obviously happy to do that if you say if they say that they have achieved something that leads the reader to believe that they've achieved a lot more than they know they actually have is that this lady well i'm not sure how that and this is again the vary from case i'm not sure how you could create that misperception if you tell them what the numbers are right if you say well we started with two hundred sixty four ending with over four hundred i'm not sure how anyone could be misled because then the reader can see if you dispute that that is a successful penetration well you can decide for yourself no one can say well i didn't know what the true stat state of of penetration of the market was because we told you what the numbers were and they can't dispute those numbers and they're relying on  proper to reclassify a customer if it's if it's if it used to not be in the g five thousand and now it isn't the five thousand it is proper to reclassify them so yes there probably were some customers include in that number that used to not be in the g five thousand but are now properly classified there what the plaintiffs argue if i understand mr goldsmith's argument he's suggesting that it was false and misleading to say notwithstanding these numbers that the penetration it had occurred without revealing that some of the some of that alleged growth was really a transfer from one category to another that is right there that's their allegation now the question is are there are sufficient particularize facts to show that if that was happening that these numbers were actually incorrect and again their concession is even that does not lead them to a point where they can or where they can say we've got enough facts to show that the numbers were incorrect and it bears repeating their concession their brief plaintive cannot tie any specific re classification to any particular time frame during the class period that is the opposite of pleading with particularized facts particularize facts means we show you the how and the what and the why and the when they've admitted that they cannot do that and again we have to keep in mind what this reclassification mean there witnesses said that reclassification just meant that you were taking certain commercial accounts and you gave them to enterprise account managers you know this is on  excerpt of record page one thirty two because enterprise account manager at the enterprise accounts had longer sales cycles so sometimes they needed they had band with so they could take on additional they could take on additional accounts and so they would take that on that's very different from saying that well when we go to the market we are going to report the number of the five thousand customers that we're going to take non g five thousand customers and put them into into that bucket and they don't have a single client confidential witness who could actually see who actually was involved in the process of public disclosure and in fact opposing counsel admit that during you know his argument that none of them had paid any attention or knew anything about public disclosures so how could any confidential witness be in the position to say that when the people in finance were publishing those numbers that they were including non g five thousand customers into those figures they've admitted they don't have any confidential witnesses that say that they want the court to infer that you know that is the language they use throughout their briefing we want the court to infer that that's what was happening as opposed to witness who's who are providing facts that  happened so i think we don't have to go when you further than that like they have not shown that any of these reached classifications were were sufficient to establish that the published numbers were incorrect so loser i think all all we need to say with respect to reclassification i do want to spend a brief amount of time also with respect to the cloud nine internal reporting in particular with respect to the case law just because their reply brief  actually had some lengthy discussion about the case law with respect to internal reports and just in interests of time will focus on one case they place the most reliance upon the quality systems case to try to support the notion that the cloud nine reports that we're giving updates about the company's progress and sales they've admitted they don't have any confidential witnesses that can tell you what those reports actually said what they want the court to do was say well we should assume that they were predicting a myth because that's what actually happened and that's what the courts that's what the courts and congress have deemed fraud by hindsight you know assuming that certain things must have been the case just because the company eventually experience a setback and they've cited the quality systems and saying that well that that's a case that shows that you're allowed to do that but you could not find a case that is more factually distinguish one in the quality systems case the main witness that was relied upon there was not even confidential it was a number of the of that company's board of directors he's actually he actually not only not only was not confidential he came out openly resigned from the company and filed a complaint against the company for misconduct and he said at the time that the company's real time reports that they were directly contradicted the things that the company was saying to the public at the time you could not find a case that is more distinguishable we do not have anybody here who was as highly situated as mr hussein was in the systems he actually said i saw those reports this is what they said and they contradicted what the what management was saying to the public at the time we do not have a single confidential witness who is willing to say that we don't have a single confidential witness who's willing to say what those reports indicated at all and the court in the lower court pressed opposing counsel very strongly on this point said to tell us why why why can't they just tell us what the report said if they had access to it and there was never a response to that how does that p s l are a change the way that we analyze this case so this is not no this pleading and the ninth circuit has said what it does is it heightens significantly the pleading burden that must that they must that they must meet in their fridays never been noticed pleading correct but it says that with respect to falsity that it must be pleaded with you with factual particularities so again you've got to show the who and the what and the where and the why and specifically the legislative intent behind the reform act and the silicon graphics case talks about the said we're trying to snuff out what we call fraud by hindsight saying that well because a company suffered a setback we're just going to assume that they must have known about that and that everything that they were saying up to that point was false and that's exactly what we're seeing here that the tide the brand of pleading that they're trying to engage in is to say well in this is particularly true with respect to these cloud nine reports and the guidance in q three of two thousand and sixteen they're saying  we don't know what those reports said but we'd like you to assume that they were predicting and miss because that's eventually what happened and that's exactly what the what congress put the reform act in place to eradicate you were not allowed to plead inferences in that manner and so you will see replete throughout the throughout the opposing counsel's filings is this this request to please infer for us the facts that we need in order to plea the claim and that is not what you're allowed to do in the reform act but even under the heel this are a if you plead that the number of customers were exaggerated by a material number and therefore misled the reader to think that this was a more successful company then it was you don't have to plead does you have to plead exactly how many numbers because i don't even know the exact number of the exaggeration before you have any discovery take a look at what they're that i don't it seems to be too high a bird i don't think that you would need to say what the exact number was but one you would have to make that threshold allegation that the numbers were false they have not done that here but secondly even if you did do that you must then say ok well i may not know what the actual number is but here are the particularized facts i have to show that i know that that number is wrong whatever the correct number maybe i can come forward and tell you that here the reasons why it's incorrect you know they conceded they don't have the facts to show that they want the court to infer that those numbers must have been wrong even though they themselves don't have the courage of their convictions to plead that in their complaint and so those are the reasons why i think the the court was clearly correct in the instances and should be affirmed all right thank you counsel thank you for bottle all right thank you your honors let's talk about courage of convictions for a second so mr lee's says that the quality systems case which is a recent ninth circuit case is a case that could not be more factually distinguishable from this case so in our opening brief we cited quality system many times all right in mr lee's answering brief he cited quality systems of zero times one would have to wonder why that is i think that's an important thing to note i would suggest your honor the quality systems while not factually identical to this case there are no two cases that rely heavily on confidential witnesses that would be i think quality systems is very similar to this case in the in the ways that count with regard to the nature of reporting the nature of the degree of detail that has to be in the reporting the nature of the degree of detail that comes from confidential witnesses and most importantly your honour's what quality system stands for is the fact that you can take disparate vermins from confidential witnesses who come from different parts of the company and you can put them together and take them as a whole and read them together in order to decide whether the complaint is adequate what happens i'm confident others argument about the fact th i see well are statements you know show we think equally that the statements that were made by the company regarding the growth of the company were false i mean i mean one of the things that mr li doesn't mention is we've got forty five specific names of nimble customers they come from the seven customers i mentioned in my opening argument and from the southern california enterprise e mail which is discussed in detail in our complaint which has another set of more than thirty eight  customers which none of which not one appears in the g five thousand database or in nimble zx similar internal g five thousand sales incentive list at any time during the class period the council what's your response to opposing counsel's observation that in the papers your client conceded that it could not challenge the numbers well here's the thing about that your honor i mean number one well is that true though it isn't it  isn't and if i can explain why i'm saying that you can excuse my you know on the one hand on the other hand number one we were trying to deal with but you don't get those concessions were made in writing what we were doing there your order at the concessions were made in writing correct yes what we were doing there your honor was we were trying to deal with with judge gonzales's rogers demands for replating the complaint which we were having a difficult time dealing with now the reason why the four hundred number was not specifically alleged to be false that's at the end the class period is because that number was given was was issued by the company at the on the last day of the class period epa same time as a flurry of corrective disclosures and we decided that that number was not likely to lead to damages because that was on the same day as a whole bunch of corrective disclosures so we had made a judgment in our in our pleading that calling that number false wouldn't be wouldn't be helpful in terms of down in terms of damage is entirely consistent with our theory of how they all of a sudden stopped disclosing the number of g five thousand customers specifically they started saying oh we have this many this many g five thousand customers then all of a sudden they go quiet and stop talking about that number while they're shifting around the classifications because they don't want to give specific numbers and none of the specific numbers that were provide it were started to be false there was only there was one number that was a be false the added the where they say we added forty one new g five thousand customers during the class period and we did assert that number to be false so it's not it's not correct that we asserted that none of the numbers were to be false and there isn't there's another problem which had to do with  hundred as opposed to the global five thousand and this was a something that got modeled in the proceedings below and the one of the things one of the numbers that the company did talk about and did give a specific numbers for was the global five hundred now it stands to reason just by logic that that would be the largest five hundred companies except there is no such thing as the global five hundred it's not a subset of the global five thousand it's something that the company made up for its own use counsel you to see to your time thank you for your argument thank you to both counsel for your argument the case is argued is that made it for decision by the court the next case on calendar