plaintiff's appeal of the district court's decision granting the defendant's motion to dismiss the second amended complaint is presented under did novo standard of review the facts allege in the second amended complaint which i refer to throughout as the s a c comply with all of the elements of security fraud pursuant to both the p s l or a and the federal rules the two issues on appeal are saying after and last causation and if it's ok with your honor's i would like to take last causation first the plaintiffs have properly pled lost causation pursuant to the supreme court and ninth circuit standards the standard which is been clearly enunciated time and time again and recently and the ninth circuit two thousand and sixteen case of lloyd v c b c v v where the court quotes the supreme court  heller burton stating this the burden of plating loss causation is typically satisfied by allegations that the defendant revealed the truth through corrective disclosures which caused the company's stock price to drop and investors to lose money in this case the plaintiffs have clearly complied with the pleading standard the january fifteenth two thousand and fifteen disclosure of calaveras pervasive gap violations which led to a restatement and wiped out the company's profits unquestionably was a corrective disclosure there's no dispute there the essay seal edges that the disclosure directly undermine defendant's statements about net income and the state of the company's financial us further the s a c alleges that upon this disclosure analysts attributed the stock decline of  accounting mission ations substantially to the markets knowledge of calaveras accounting treatment for the contingent consideration which is the fraud alleged in this case how the defendants book that contingent consideration that is all the ninth circuit in the supreme court requires the district court here committed reversible error by requiring plaintiffs to isolate what portion of the stacked drop at the pleading stage  was due to the alleging fraud and what portion may have been due to as defendant state mr earnings and the district court doesn't cite any authority for that but in  its ruling it basically compared the plausibility of defendant's reason for the stock price miss earnings and defend and plaintiff's reason for the stock price which was the disclosure of the fraud which the defendant it could be due to the restatement and at the same thought i could be due to the fact that the profits are reported to be less than what was hoped for and those are each equally plausible inferences a can be drawn i think that's what the rationale was what do you say about that that was the district court's rationale but that's that's not what the ninth circuit requires the ninth circuit is very clear that in pleading last causation a plaintiff is not required to show that the misrepresentation taishan was the sole reason for the investments decline in value in other words that that's a fact question and time and time again nine circuit courts have held that in especially in this case the district court based its decision on an analyst report that was proffered by defendants and not referred to in the complaint anywhere so here the plaintiffs have an analyst saying the stock price decline was due to the markets of a a value and of of what went on with the contingent consideration and then the defendants proffer their own analyst that wasn't referred to it all and the district court takes these competing what what plaintiffs in defendants in securities cases do later on after discovery the plaintiffs will retain a damage expert and the defendants will retain a decrease it is a matter of law that from a pleading perspective that's sufficient court disregarded the plaintiff alleges and obvious gap violation which caused profits to be overstated by two thousand percent at the same time the production of california avocados had declined fifty percent the complaint also alleges that the contingent consideration the accounting for the contingent consideration here it is she was a significant accounting element for which the c f o defendant bruno would have been a know made aware and that the motives both the motives lend give context to the overall picture and i'm going to going to each one individually first when we talk obviousness of the error the defendants claim this this was an arcane accounting rule of sorts but here you have one hundred million dollar deal by the company huge deal where they knew that if they hit certain targets they would end up having to pay eighty six million dollars over the next five years and the complaint alleges that for these types of deals the gap provision was simple and clear and obvious the big four accounting firms and the literature and the gap provision state that the majority of these transactions are booked in equity there's no dispute there what it urged and young say this is ok for the chill obvious wireless it's ok well for the period in question ernst didn't say anything because ernst didn't well there was a couple of years when they were saying that this was ok correct and that is entirely a fact question we don't know what happened behind the scenes wasn't negligent urns negligent was there and telling the company you need to do this and the company didn't do it was the boy's ernst doing an audit and compliance with gas these are all factual questions that can't be resolved at the state of the litigation all we know at this stage is that immediately upon the new partner coming on it aren't they why did that new partner come on maybe they recognise that the old partners were doing things these are questions that we can't answer but we doesn't bear upon the issue of obviously this and you can accept that audit report and take judicial notice of the i'm sorry  doesn't the bear and then young's determinations very upon the issue of whether this was obviously a complex no because it was obvious to the to the earth's partner that came on and immediately forced the company to disclose and the case law but let's let's suppose we're looking at the prior years a clean audit does not negate scientists are at this stage of the litigation and you've got the only the only law that the district court cited to support their position was the day the in my diamonds case which the district court didn't took one half of a sentence and i'd like to read because this this is exactly what your honour's are asking and this is the law in the circuit if i could read the passage that actually is in the case the diamonds district court stated a clean out opinion may possibly support the conclusion the defendants did not act with scienter and that's where the district court stopped but the case goes  but it is not dispositive in order to know how much reasonable reliance should be accorded the audit opinion we will eventually have to evaluate what communications passed between the company and the auditor as well as what if anything was hidden from the auditor senior management a diamond had an independent duty to ensure compliance with gatt and maintaining a fact of internal controls this duty cannot be delegated to dylan who was the auditor in knowledge of falsity or well yeah knowledge or force so that was another error by the district court that the defendants that the plaintiffs must  have the obviousness of the gap violation you have the magnitude of the fraud a two thousand percent overstatement you have the fact that this was a significant accounting element for the company you have the motives which we haven't even gotten t but two motives both of which support santer in this case especially where you have analysts focused on the issue of the declining production of avocadoes in fact in the third quarter of thousand and fourteen when the false financials were issued the defendants only because of the accounting fraud were able to report positive earnings and had had they had accounted for the earn out in the right way they would not have met analyst consensus the analyst the and the nature of the transaction i mean there are firing she worth they're doing with the with the continuing liability so there is the i would disagree that they're not hiding they are they have disclosed the terms of the deal over and over again but the financial statements were very unclear as to how they booked that transaction and from an individual investors point of view they're not required to go out and get an accounting expert to go back and look at the terms and i was yelling clear i mean it seems clear enough to me what they did they'll be how it was unclear it was unclear because when you look at the financial statements for instance the the earn out contingent consideration required fifty five million dollars that would that ultimately if they hit their triggers would be booked in cash and one thousand million dollars in equity and when you look at how they booked it there was a line item that said one point five million dollars in cash and seven point four million in cash and then they had different headings one said contingents consideration one said r f g and from an investor's standpoint they're not required they're laying that right you have an individual investor relying on analysts relying on the market relying on the price of the stack to say you know what i'm going to go out and buy this stock and put money away for my retirement and then they're not required to go out and hire an expert to look at the financials and you have analysts that were closely following this stack that they too i didn't understand what was going on because when the truth came out and the company was report choir to restate and analysts said oh the stock dropped and part of the reason the stock no authority for that that's that's an issue of damages and i think that the district court and the defendants were conflating whether plaintiffs have properly pled lost causation and what the damages ultimately will be quick acquisition of a company called renaissance food group renaissance food group does a variety of packaged fresh foods the structure of the deal was in her now and it was done in that way so that there could be downside protection in the event that r f c didn't hit the milestones and there were two miles of the first was to meet an eva da number within a five year period and the second metric would be with respect to revenues there were two milestones it was an initial payment part of that was in cash that was booked as a liability the balance which was twenty three million dollars was booked in the form of shareholder equity and was recorded accordingly in that line item on the shareholder side of the financials the second thing that happened during the three and a half years preceding this restatement was that the company our if she met its milestones exceeded its milestones and to pursue into the milestones or was a title to the full measure of the earn out an amendment occurred to them in two thousand and thirteen to the agreement that allowed r f c to take what would have been cash which would have been an expense to the bottom line of the company and instead be paid in equity the stock price had been moving so it was twenty three dollars as of june of two thousand and eleven it moved up s also converted that cash liability part was converted into in kind payment in equity at a share current share price of roughly forty five and a half dollars that brings us  quote unquote wipes out profits so now we're at a point where we are facing an obligation in the first complaint to file even wise day as a defendant and it is alleged to have been knowingly and intentionally complaint and here today number one the court concluded correctly that restatement alone is insufficient c n to require more than a misapplication of an accounting policy to  failing to see the obvious does not constitute for all three there is no dispute in council acknowledged that court judge will in again here today that the facts of the transaction were disclose the terms of the merger accurately reported the accounting judgments as to how the classification would occur were set forth on the financial statements that the market was able to see these and sophisticated investors institutional investors of folks who read for a living balance sheets including the analysts who commented on the restatement also could look at this so it is a bit of a more than a conflict to characterize this as so blatant an obvious in air at the same time to suggest that if the court indicated it was so blatant and obvious why didn't he why i see it the answer we just heard is well have to do some discovery to find out why that wasn't worth the pleading stage the addition to obviousness and the fact of the restatement that's magnitude the number is not sufficient to establish a strong inference of c enter that and that's the court's most recent conclusion in the dearborn case that  was issued a few months ago and trying to make sense because if one were to look at magnitude as they solar primary or even a particularly relevant indication of sea hunter then one  then fall into the trap of hot fraud by hindsight people make big dollar mistakes for in good faith they make big dollar accounting misjudgments negligently they make them as some cases have seen with regard to with reckless disregard or with intent to defraud none of that has been a wedge so the inference falls decisively against finding c enter based on the obvious the fact that it passed review by professional auditors and the fact that one might have had one opinion in the other came in to a different conclusion only further underscores that point so does the fact that the error if it was so blatant and obvious and so clear to the counting that came in the part of the came in you have to look at the fact that there was a consistent disclosure to open a notorious way of the judgments that the year and annual reports and in the certified financial says reviewed by the count's cuts again against the notion that this was in disha of misrepresentation players actually end up indicates that the guidelines for classifying the contingent consideration is complex and difficult to analyze and interestingly the second shot at the actually the third and this was the obvious which took fifteen pages to make that explanation and the explanation covered by my count no less than nine different accounting rules or guidelines to be applied and this give me were any indication is given to the auditors or internal controls or anything that there were red warning signs or an internal discussion about concerns number three you have the admitted fact that there was a change in  is that it is not in his words material and so when you have the b b b analysts making a comment about the lack of in his view of materiality of the restatement you have exactly the point that was identified metzler you've got a number of things that are going on at once and you have the annals looking at it from the perspective of the street and saying to the investors we don't regard the fact of the historic restatement as being material when after the transaction when it was first interior where both the cash and the stack payments carried as equity no your honor the is wrong the cash was carried is a liability from the outside it was booked accordingly and the the stock consideration was booked and are the shareholder equity along in the in the financials i just want to make just to be clear on him one point on this analysts and that is that the this analyst is the same analyst that was identified in the plaintiff's flea they pointed to a his report september and i was a half the court not to look at his report in january so nor do they called to the court's attention the their own analysts report on the twentieth of january but your adversary says that that's left to a trial that was court has said repeatedly not that it is must be shown at the pleading stage that it is a sole reason but it is a substantial cause and so it is left to the court at the pleading stage to look at all inferences that may lead to the conclusion that there was causation is the adversary's statement that is sufficient for pleading purposes just to plead that there was a drop at the time of the restatement i i i do your honor and i do because that's what metzler has said and that's what other courts have said when they have looked at my so you believe that the fact that the earnings were reported at the same time as the restatement is somewhat muddies the water and therefore that makes the pleading deficient i believe that it makes the pleading deficient i also believe that the court was entitle to in the looking at what constitutes a substantial cause if you make that made in consultation with the auditor so there's no suggestion at all at all in this record that somehow there was a linkage between the earnings announcement which had been scheduled and the decision to make destruction was a curiosity it happened at the same time well and that a joke argument and as i said we can only play with the facts that have been dealt to us and this is not an allegation or an inference that was drawn on the other hand the court correctly was entitle to make the competing balances under the rule nine b standard which is the rule to apply to get analysis of causation as a couple other of points with respect there's nothing to suggest that there were some events that were brought to the attention in fact one of the most interesting and important and admissions by the plaintiffs is what they said at paragraph one thirty seven their allegation is that accounting group met monthly to review the accounting records and to ensure their accuracy at paragraph one thirty seven that's really cuts against the idea that they were internally trying to avoid finding out the correctness and so at the end of the day we don't have an allegation that question the accounting just treatment instead we have first in a complaint that suzy wife of fraud and then not it certainly is completely at odds with the requirement not only to lead a peculiarity of the who what when and where but the problem of the allegations that somehow a transaction that was formulated in the two thousand and eleven it is now the basis to conclude that events that occurred three years ago based on the identical accounting judgments the haven't changed somehow constitutes fraud just as the suggestion that the idea that seeing increases in the volume of avocados who find from the state of california there's nothing in the speculative nature that somehow the defendants could have conceived of the scheme and left it in a i'd like to hit one quick point on lost causation and then i'll move on to the science argument i urge your honour's to look at the case law because there is just no authority that at the pleading stage plaintiffs have to isolate what portion of the drop is caused by the fraud there is no dispute here that the fraud was disclosed in the metzler case that was the issue and the case in that is the only case cited to by defendants and by the by the judge in the lower court it's just a misstatement of the law and if what defendants are saying they would like the law to be is true then any company on any given day can disclose miss earnings when they decide they're going to disclose their fraud and they will always escape liability for securities fraud but he said that they had no option in that respect who says that when is i mean that that's just maybe that's a factual question later but that is not the law in this circuit i would like to move on now to just state a quick a quick few points number one with respect to this issue that defendants disclose this for three years and and the whole market knew about it that's just not the truth the the court in fact the district court in this case has already rejected that argument and finding what they're essentially making is a materiality argument that this was all this flows so none of this really matters anyway and that's not the truth the court said investors are entitle to rely on i c c filings and whereas here plaintiffs adequately allege that they were materially misled the court would not reject their claim  the fact specific grounds that a sufficient disclosure was made and that's it a three fifty nine so that's not an issue in this case they didn't record the cash as a liability as defendants have stated they only recorded one point five million dollars in cash nobody knows where that number came from or why they recorded that amount and this wasn't a judgment gap gap requires this to be booked a certain way this was not a judgment call and in fact if it was they wanted restated a s e to fifty the accounting rules state that restatements emanate from material errors based on information available and known at the time the original financial statements were issued this is not a judgment call as defendants are calling us this was a material error defendants have still to this date not come forward and said why they booked something why they booked it wrong there the obviousness is is by the fact that when you look at the gap provisions and it's so stringent to book this in equity in the reason why it's so strange and is because they don't want companies avoiding avoiding a liability on the bottom line and the majority of these transactions are booked the defendants have to go out of their way to book it as a liability and you're telling me that the c f o of a public company wouldn't have known or would have discussed that the gap provisions usually provide that you do it this way but no we're going to go out of our way we're going to look at in a way that effects are that that affects our financials in a positive way and the fact that this went on for three years who knows what was going ited by the court that says something to the opposite defendant's argument belies the whole purpose of gap in the securities laws and that's to present the financial statements fairly and accurately to investors net income is what investors look to to determine profitability of a company and whether or not they want to invest or sell in a stock this net income was overstated by two thousand percent and in fact in the period for which the financials were misstated the defendants had reported a sixteen million dollars profit which was the exact number the defendants needed to hit their bonus so when you look at this holistically you're not looking at it ok so this is what the district court did we look it we say this was an obvious put that aside i don't believe in the magnitude even though the ninth circuit finds magnitude it presents in dish of science or the district court instead pulled two cases from out of this circuit two to rule otherwise and then they said ok there's no magnitude and then what the district court says in their opinion is now we move on to motive no that's not how we're supposed to look at this case pursuant to tell apps we're supposed to look at this case holistically that you have an obvious gap violation with a two thousand percent over statement in that over statement led to the defendant's being able to achieve a bonus and altogether this case unquestionably present