mattel historically had varied between eight and ten percent return discount sort of rate what it called a there was over time throughout the year including the holiday period yes your honor so historically they had managed to have what they would amount of inventory that they shipped out that they inevitably created a situation where that discounting and returns would have to increase far beyond what those historical rate was now there's nothing inherently wrong with that  a business strategy the concern was that this was not disclosed to the market that significantly included increased the risk that investors faced when they saw the historical amount of gross shipping and sales they a where's the complaint where does the complaint make those allegations specific allegations you're now telling us about very i that's an attempted it's your question so the answer is in a number of places point one in terms of specific numbers it's best measured by the adjustment that's paragraph twenty nine of the complaint that page three o two of the record your article in terms of the change that is best described i think from the accounts from the various former employees of mattel who were at all levels of the company we have former employees some of them were one of the chief information officer so quite a senior executive we have a down to senior marketing and we have a couple of people in between so and they all describe a very similar pattern give me for interrupting again but your time is ticking and you know that the district court thought otherwise so as to the person yes as i read it for all of your confidential people yes the court either said you know they weren't there during the operative period of time or they weren't really place in a position to be applying on this with firsthand knowledge so it worked for me it would be helpful if you could respond to those is and with respect to it i don't think i don't think the district court found they didn't have the st hand knowledge he found that the knowledge that they had was not zero i that's what you wanted you didn't want to go ahead of inventory joe cool to have a question of similar to to milan and i think that instead of talking about a lie and i'm talking about a heightened risk and talk about the heightened risk to wish to become was exposed but i think that the district court found that there was nothing to support this notion of a heightened risk that you claim the deal was to oversupply inventory if i was not selling through you are inherently creating a risk that inventory will have to be returned or have to be discounted in the future it's a very commonsense inference when you have a hope that if you have a toy that's mean marketed for christmas in january you can sell it for the same way you can in december i mean that's that's the right not to have to support that you have to demonstrate that the current risk was greater than the risk from prior years and we're you feel really from that again i would go back meetings this issue that of oversupply of inventory was understood and talked about the company itself talked about how later on emitted that had a difficulty pushing we took inventory during the th quarter aren't really any allegations about what was happening during the months leading up to the end of the year where there were allegations comes from the evidence or the allegations coming from the former employees you talk about they hav s make a difference surely we take that more seriously than the district court well i would submit so that the former employees you know build upon each other to create a whole picture and customers so about three customers including target target wal mart and toys r us i think it is about thirty nine percent of all their sales and their top ten tailors you know something over fifty percent of their sales so they have very an was aware of this information received regular reports weekly reports about this it before so they knew when they made a statement saying we are aligning and if it looks ok and we're still telling the investors that you should rely on historical rates of sales adjustments that  may please the court praed rally jr for the mattel defendants like to start with a question a judge a cute ass and that judge kristen stuff on because i think it gets to the heart of touch phillips's concerns with the complaint and that is the nature of the business here there's no dispute but that mattel's business is seasonal it's played in the complaint at paragraph twenty five dollars the ten k discloses that the nature of the toy business is seasonal in nature that the holiday period it's very significant it's also disclosed in the ten k that sales adjustments and concessions are a common practice the complaint itself acknowledges that and so i think what judge philips was was trying to say in analyzing the complaint is in a situation like this where the business is seasonal where you're going to have front loaded shipments with possibly some concessions on the back end there has to be something that distinguishes the sales period that's in question from your general or usual business cycle and there's simply nothing in the complaint that would tell you that and so when you have a quote channel stuffing scheme that's alleged and that's still what's on the table here the plaintiff is a band a lot of the allegations and statements that are challenge in the complaint but paragraphs thirty nine million four hundred and seven thousand and seventy one which we think are the main allegations that plaintiff is pressing still resonate in channel stuff in case like that you have to plead specific facts to show that what the defendant tried to do was to take advantage of the inflated sales and that's going to be in the short run if you had for example stock sales when the retail the retail  sales figures were highest and you don't have those kind of facts played here that's the fundamental problem with the complaint but it's risp reflected in the specific defects that judge phillips found so if you take for example the statements about alignment those are very general statements they they're the kind of corporate optimist optimistic statements that corporations often make the plaintiff i would fall well so judge mobley i think she said a couple of things about that alignment statement one is that it's corporate property it's too general to be susceptible of objective verification it also has word looking bent and that also makes some of these statements non actionable and i would also note this is very important that the plaintiff when you're talking about the rd quarter of two thousand and sixteen says at no footnote six of the opening brief so this is on page eleven that they are not challenging statements about rd quarter results in gross margin targets so backward looking statements when you're talking about rd quarter performance are off the table and that only makes sense right because mattel made disclosures about sales net sales gross sales sales adjustments these disclosures were made in their earnings statements and in their  quarter ten q and those statements aren't being challenged by the plaintiff so really when you're talking about the phrase alignment with the plaintiff is trying to do is challenge the forward looking aspect of those statements and those aren't actionable to add to the confusion the plaintiff has actually abandoned in their complaint i'm sorry in their opening brief and here i'm thinking of page thirty four no ten has abandoned any challenge to the district court's analysis of could be viewed as a real time statement about whether or not too much product was being shipped so that a glut was or was not occurring you know the retailer location i think it says we were especially encouraged by the momentum of our top line where a positive consumer to love this language if one could translate it says we were especially encouraged by the momentum of our top line where our positive consumer takes way i think i mean sales yes is aligning nicely with shipping so right i think translated that means that mr sinclair is telling people on the phone that sales are keeping up with shipping is that a fair translation st of all is that we say that that is your honor you're right that takes consumer takeaway does refer to say also consumer sales and the other thing that is being referred to the relationship that's being described there is retail sales i'm sorry consumer sales to retail shipping sometimes that's called gross cyclical sales history it's all going to happen at christmas pretty much right and so this is why isn't this a real time statement that a glut isn't being created and that it's moving the products moving through the pipeline so j kristen a couple of points about that st to the extent that it's a real time statement a statement about the current level of retail shipments versus consumer sales the plaintiff has abandoned that challenge and there were underlying which is about gross sales i'm sorry and also net sales and then sales adjustments these were made in the earnings statements and the plaintiff has said we're not challenging those allegations referring to those figures anymore so the underlying figures here aren't aren't being challenge and that's the that's the problem i have because there's a question about whether their statements left maybe exactly what's left what's left so that this is one state number one ally is simply too vague to be susceptible of objective verification it is the kind of statement of corporate optimism that investors know not to rely on and it leads importantly it leads directly into a statement about future projections that is actually cautious right so the next statement is this increases our confidence as we set it get set for the holiday season and we look to deliver on our challenging two thousand and sixteen top line objective so they're saying we're heading into the holiday season everybody knows that this is significant we have challenging objectives and we have some confidence leading into that holiday season most of the part that's why the st thing we talked about was the  question i asked about isn't this just a question of degree because i think it's a contest it has this is terrible yes right right and i think judge kristen would judge phillips concluded in just looking at the allegations as a whole is that there aren't specific facts that are played to show that what management was trying to do here was something different than the ordinary business cycle that they were trying to inflate retail sales to prop up the stock price to benefit in some way there simply aren't specific allegations of the kind that you would need to see in a channel stuffing case in order to support that inference i would like to just quickly get to the confidential witnesses because there were a couple of questions about about that as well and judge phillips carefully analyzed the allegations that were made about those confidential witnesses and we submit that her analysis is exactly right the problem is that there if you look at the case law in the circuit sukkot partners in video  there are fundamental problems with each of these witnesses and there are different but with each of them there is a real problem with respect to former employee number one he had left mattel five months before the class period the main contention from former employee one is that the c e o sinclair received a report that drew on sales figures so that's the contention but this this witness wouldn't of known would have no basis to know whether mr sinclair actually received those reports what's more there is no specific allegations about what the contents of the report were because again this witness was not there this is a significant defect if you look at the court cases including intuitive surgical and zuko these kind of reports have to be pled with particularities and going all the way back to silicon graphics there's a good reason for that because if you could just allege well the executive must have known that this problem existed at the time of the class period they were running the company and there must have been reports about this all securities class actions would be able to proceed and that is exactly what the p s l r a was meant to avoid how long  knowledge and trend data so judge morley i want to be precise in my answer i think that he worked there and have this right october two thousand and fourteen to may two thousand and sixteen so it's about eighteen months but the only contention that he makes is that sinclair had asked for this report so he doesn't make any contention about what was actually in the report he says it would be asked for a report that would draw on sales but he wasn't there at the time of the class period and it's not even enough to pull he could you actually have to plead facts to show that the executive got the report and then you have to plead factually what was in the report to some language from intuitive surgical is directly on point here missing or allegations linking specific reports and their contents to the executives not to mention the link between the witnesses and executives that's just the situation you have here with former employee number one it does referred to  disappointing sales and increasingly inventories everything yes your honor but again that is the kind of general contention lacking and specificity that the court has repeatedly rejected in cases like zuko partners and in cases like in video indeed it is we submit in our in our brief the court has rejected an inference of in cases involving many more confidential witnesses with more details allegations than what you have before you here judge phillips consider these witnesses even in the aggregate and when you add up the witnesses contentions because there is such fundamental problems with the information that they provide you can't draw the strong inference of scienter that the p s already requires indeed the most compelling and cogent inference from the allegations in the complaint and from the other judicially noticeable documents is that this was a situation where you have a cyclical business they made some optimistic projections about the two thousand and sixteen holiday season they didn't make their numbers they had a disappointing holiday season they disclosed that in january they they projected that they would be able to deal with the retail overhang and then that didn't work out also they had a disappointing  situation with the retail overhang that is not securities fraud you need to plead much more with much greater specificity in order to support a strong inference of scienter and this kind of channel stuff in case you have to plead specific facts to show that the scheme was improper if you look at the paragraphs that address the allegations that remain on the table if you look at paragraph forty five and forty six dollars of the complaint you look at paragraph seventy two  complaint what you have there is a general conclusory allegation about why what happened was fraudulent it's just these statements are false and misleading because it was channel stuffing that's conclus precisely the way that metzler rejects it's almost the case though that it will be impossible to prove because based on you have eerie the only people who would have that type of specificity o contentions there's enough to support an inference of science or it is not the case that you have to have current employees it's just that what you have before you here is not enough there are cases that were you have allegations by former employees that have the specificity that describe the kind of reports that are inverted to in the complaint here that are sufficient to support security but this isn't one of those cases and i think that's why judge phillips rejected the or failed to disclose the true nature of the state of the business mattel's business in october two thousand and sixteen and i know you just to watch your clock there because you don't have to go over them if you could i just identify which do you think of these statements that we've gotten we've all looked at all of them just existing pockets and is not a significant issue that that in january that's where he makes the statement i looked hard at january because it seems to me at that point they're not projecting it's a fact at that point that they've had this really off year correct but that's where he just in the same sentence i think says well it's not horrendous at this point or something's for it's not exactly inspiring confidence at that point to be in this thing no but the problem the problem they have is that they created a much bigger problem that they never really disclosed they didn't disclose in october the exco but the problem they not an accurate presentation of its business so counsel for defendants said you had to show something which are alleged allegations that the practice here you know we talked about the change of degree that this was really very different for stafford practices if i could for you want to back to the court back to paragraph twenty nine with there's a chart which i think very graphically shows how much this was out of out of this star practice where we have the i mean it's reflected using backward looking numbers but it reflects the the practice which shows a fairly you know regular line of a similar level adequate level and then a dramatic increase in the  quarter before coming back kind of back to normal so that shows the sort the extent of the problem that that mattel and the defendant created here and failed to disclose that dramatic risk of that happening to investors and finally on the question of  nature of the reports and so on and the cases that the founders of cited to this is there are more allegations here than they must have known there were c e o s you know they were executives and the information was available so they quote must have known we have allegations where for two years leading up to the class period ending in major to sixteen they were receiving reports of sales and inventory and shipments based on weekly monthly figures created by former employee one we've got got allegations that during the class period they received this inventories and shipments were discussed at executive meetings which was countered by former employee three we have the fact that they spoke about shipment and