this case essentially during the summer of two thousand and into the fall of the year two thousand there was a fixed retail a lecture crazy a stablished under state a five point four cents per kilowatt hour it's also one disputed that during the summer and fall when electricity rates exploded they were being charged as their cost of electricity between fifteen and twenty cents a kilowatt hour now most corporations were concluded under generally accepted accounting principles that they had an operating loss that their cost of good sold their cost of their which it was substantially in excess of what they could charge their customers instead p g and e corp was recording and publishing to the financial community and to their investors profits that they had earned a net profit in the second quarter of two thousand of two hundred fifty million and during the third quarter of two thousand second quarter they did not then in their tents you as your honor pointed out there was in the second quarter way down some disclosure in their ten q and also when their third quarter there was some compared to their earnings statements which is what the financial community focuses on was here they're reporting record profits and their c e o was saying we're expecting to grow warnings here at the same time by the third quarter of two thousand they had two point nine billion dollars in operating losses that they had taken off of their earnings statement and placed them on the balance sheet but if you but if you look at the numbers you can see the numbers and you can see how they're being treated you might disagree as to the likelihood that the p c will eventually allow them to kick them into the ra records kept saying you know they're reporting the profits of the stock's going to go up by this stock yes there was some publicity reporting about the about their operating costs but the fact is they continue to report and maintain that they were earning hundreds of millions of dollars a year and the stock was going to go up or not go up there was going to be in the end in trouble or not  stated that they specifically stated among many other factors such as weather and a number of other factors that whether they could get the p u c to change its mind was a fa both state and federal regulation and in fact for example they made an emergency filing to the p c in october of two thousand and the single p u c commissioner said the utilities noted that if they did financial community how does the reasonable investor react so that there's a reasonable investor have on his radar screen what's in some notes to in the ten q or is it what's being blared on the on the in their press releases as their earnings numbers certainly the earnings is a major major factor to any investor making an investment  now they for example relied upon an accounting provision in federal accounting standards seventy one which basically applies to regulated industries that were operating under an old regime of cost based regulation where they were guaranteed a rate of return and if there was a momentary capitalization of cost because they were guaranteed a rate of return then under this accounting procedure improbable because that was state  left without our misunderstanding each other it's the entire regulatory process and the state of california which the p c s apart that is to say if the p c is as it concluded that was powerless to get the state to change the law at seventy one applies to cost regulation where the utility is guaranteed a rate of return and the regulators under the california constitution the p c was powerless so if in fact what they were gambling on was that they could get the state of the state legislature to change the law that was certainly not a probability determination that could be made that under any generally accepted accounting procedure that would allow them to then take their operating losses and put it on the  yes there was some disclosure in their ten fuse and you and you counterbalance that with their earnings numbers and the analyst reports went right along with their earnings numbers well for example that the defendants make much of the fact that in a related case i had noticed that and i have filed a complaint back in october of two thousand against southern cal edison on behalf we're going to get this change we're going to get this fixed we're earning this money thing this state the c p u c regulation what really what they were saying was we're going to get the p c to change following year and so what changed what changed from the time that they put it on their books as an asset to use me their operating costs as an asset and the time that they wrote it all off that's one of our points is that there was no change in the landscape there was no change in the law or p u c regulation and that whack of a negative external intervening event under this court's precedent is a factor demonstrating science or if nothing changed why did they make the probability determination in the fall which they maintained right through to april of the next year that they were going to recover every penny of this and then all of a sudden right it all off with the defendants have pointed to is a march twenty seventh two thousand and one key and again holding that up as the negative external intervening event where the cited in the complaint in this case that three cents a kilowatt hour went to the state because by that point the state of taken over buying electricity during the second quarter of two thousand and then we earned two hundred fifty million during the third quarter and that statement comes from the mistreatment of these under collections correct generally accepted accounting principles and the treatment of these under collection it is however stated accurately that is to say if you look you can see how they treated it if you look hard enough in their notes to the financial misleading is that they've mischaracterized it with the consequence that they have earnings that you say in fact they didn't have and by the time the p c comes along on march twenty seventh and says you know we're not going to allow you to get those back very anytime soon it forces them into their stock certainly earnings reports are among the pieces of data that investors rely on the most after they reported this that that kept them from going into credit and if their credit rating went down as they stated in their annual report that was an event of default which would have had the whole house of cards collapse so by having these earnings credit reports remained high it wasn't until january when of the next year that the state had to come in and take over the buying and they went down to junk status but if they had reported billions of dollars in losses rather than the profits would that have changed their stock price certainly under under most decisions and i certainly am aware of none that says the opposite earnings is the morning many employees of the court i'd like to start with the point where mr raines started that is his comment that when you're selling widgets you look at operating losses what  what's the course is that this is not a case about widgets this is a case about regulatory counting that's controlled by seventy one which creates a unique regime regulatory accounting is further a unique is because in this case the specifics about the under collections and about the rest in a regulatory counting machine were specifically disclosed to investors nobody could have read those financial report for the second quarter the analysts were saying this is an arcane arena of regulatory accounting and while the accounting is proper we have some concerns because the regulatory is going to cause a problem in the very first analyst report that we presented to the court which is on the very day that the genie announced on july twenty second quarter results specifically in the district court or in the record to this court in which discussions of earnings alone without some cautionary language with respect to the regulatory counting issue investors and analysts  about his persistent argument that the p c was powerless to raise the rates he not only gets that wrong as a matter of law because he confuses actually the state of california acting through one of its other branches could raise the rates there were at least a half a dozen routes by which he could recover these under collections  change its peak hour at a rate making determinations so as to allow the other collections to be recovered after the end of the rate freeze we acknowledge  suggested in a strange isn't any better position to assess the probability than any other reasonable observer armed with the same information the point is that all the information was out there for anybody to look  cut and we get back to my prior point which is that there were a lot of ways other than the p c allowing recovery under collections post transition period for the under collections to be recovered the the state legislature could obviously change the law governor davis had made clear his position that utilities shouldn't be left holding the bag for these under collections and in light of the unexpected spiking in electric prices and you know we now know what the benefit of hindsight why those prices spiked so badly and we know that it was not due to any fault of the utilities so we could have we could have state relief we could have federal relief in the form of a further determination federal energy regulatory commission we could have the first determination that's what the district court in san francisco has now held in p g county versus one inch thereby validating the expectation that that at least was one of the routes by which  outcome as a basis for investment particularly where is here we have full disclosure right from the get go of the seven hundred million dollars and under collections in the second quarter and action that would not in any way be immunised to use your honour's words like see in the books are going well but even a statement of like what if on statement of what is actually in the books in your view would not you know what is actually a particular issue that's controlled by gap provision that's unique the public utilities and it's a situation where all of the underlying facts were fully disclosed  case boils down to is a claim that they should have called the shot differently in terms of probability bearing in mind that they had to call the shots one way or the other fast seventy one didn't give them the option of saying we're not you saying that it doesn't matter what is stated in a report that is directed to the public only and public state found what is what the financial condition of the utility is it doesn't matter because it's the total mess of information that's available to the investing public whether it be from the press release or from other sources that reach the market with the same degree of intensity to use the with information that's traditionally noticeable if the court can determine as a matter of law that enough information is available for the public to determine that there is no material falsity an question well i think it depends on what the the disclosures are in our situation for example it's clearly a legal question because of the record it is so overloaded disclosures not only the specifics of the other collections and the way they were being treated and the discussion which is routinely acknowledged to be part of the ten q and that is most important to investors so there was absolutely full disclosure the fee analysts picked up on  it from the get go there were at least a half a dozen ways that these other collections could have been recovered another one that i hadn't even gotten to yet is that of course if the wholesale electric rates come back to normal levels before the end of the rate freeze once again creating headroom then the very mechanism invision by the original deregulation formula would provide an ability to recover the under collections because that's the way the process was supposed to work let me just make sure that everyone understands how fundamental the change was that retroactively we're now going to require the utilities to also transfer the negative amounts from the t r a into the t c the effect of course r is that they have that they knew that their earnings numbers were false when they published them they knew that under the existing law as repeatedly reaffirmed by the mission is a fact specific determination that should ordinarily be assessed by a jury only if the adequacy of the disclosure or the materiality of the statement is so obvious that reasonable board builds on momentum of first quarter p g and e corp reported second quarter earnings from operations of sixty nine cents per share or two hundred fifty three million pacific gas and electric posted second quarter earnings of two hundred sixteen million results reflect an increase of twenty six percent compared with the second quarter nine hundred ninety nine diluted earnings of one hundred seventy two million  no mention at all about the under collections in that second quarter press release their third quarter press release e third quarter diluted earnings from operations were sixty eight cents per share or two hundred forty eight million compared with the looted earnings from operations in the same quarter last year of fifty cents per share or one hundred eighty five corp chairman c e o and president we remain on track to surpass by several percentage points our goal of growing operating earnings per share by eight to ten percent for two thousand now at that point they had lost two point nine billion that they had put on their balance sheet and taken off their earnings statement is it so obvious from those press releases to any reasonable investor that they could that they really had these losses their stock price certainly didn't reflect it their stock price kept going up they raised two point two billion dollars in the fall based upon these numbers if they had reported those earnings those actual losses the credit agencies would have downgraded them to junk they never would have been able to raise that two point two billion