accounting misstatement was a result of either recklessness or knowing falsity or just really an honest mistake and that's really the fight here and the debate between the parties your honor your honors and really what we have here is a scenario where a negative one thousand percent two thousand levenson negative fourteen percent to magically twenty percent positive twenty percent in two thousand and twelve the first three quarters similarly very positive numbers in the company as opposed to a trend by the company and they a history of the company of having negative gross margins and the question is is was this mistake really just a happy coincidence that somehow benefit the company your honor we was we was say decidedly not and we would we would we would argue decidedly not here the timing of the of the misstatements is very suspicious as the court itself acknowledged let me let me ask you this counsel plain to the court  basically are thrown back on this concept of a holistic view of things tell us what case law what facts what should we be looking to to get you to where you think you need to be your honor w would say is that holistic analysis is where you you simply was as what the court had done has looked at allegations regarding motive number to me have looked at allegations regarding the size or statement i looked at the allegations regarding the confidential informants and really each one found some excuse or found some benign explanation which kind of freed the company from any liability and the question is when you look at these allegations as a whole do they lead to the gut instincts of the i have a couple things one was the five was referencing specific projects as opposed to the sales division that there wasn't other then sort of generic well everybody had the same experiences with sales projects having negative numbers there there wasn't anything specific about the division as a whole is is that right or is there there other evidence that i haven't focused on you are we think if you do look at  that everyone knew the entire division was having problems no but there's also discussions amongst with management saying discussing why cash sales generally are underperforming castle's here means the sell segment that's for that's explicit from high the sales division number a mistake as assuming they were aware of the mistake when the lease division was so much larger more important more over the long term more lucrative  and yet they were reporting ninety million dollars loss for the company so it was unclear to me how important the the sales division was in the context of this i p o in the acquisitions and the like which which revenues a bit like i mean the least division it appears from the record was highly more lucrative larger and going to realize more is just more of an accounting thing so it didn't seem like the sixty percent revenues was made it that the  it was something that people cared about astri's cared about it just it just wasn't clear from the pleadings you're on or would you do as a result of the of the misstatements gross profits for the company as a whole overseed about twenty three million and over forty overstated by its twenty three million dollars which was forty six percent with respect to two thousand and twelve that is material and scores profit for the company as a whole as material wherever however you look at whoever the reasonable vester is that's material and if you look at the allegation that i'm of returning to judge could question on the motivation the i p o said that there were huge losses in two thousand and twelve ninety some million and the accounting change would just increase those losses to one hundred thirteen million so what's the motivation motivation is if most of your revenues are coming from one source sixty percent of coming from cash cells and then you want to show your business on a long term basis something that can last it doesn't last if your gross margins in that business are just simply not going to occur but one of the district court do wrong here i mean she gave you three shots at it through continuing to amend the complaint and then she wrote a very thorough opinion including holistic analysis as well as an individualized analysis what did she make this mistake right in the lead up to the i p o you have a miscalculation the burden ratio they know how to calculate the bird ratio in two thousand and eight two thousand and two thousand and ten works all of a sudden they go public they don't know how to do burn a calculator ratios actually they just simply forget to put a number in the denominator magically how does that happen i'm not sure that would be enough isn't your point more that when there was a change of thirty four percent they didn't notice it but when there was a change the other direction is seven percent they did notice that certainly doesn't add to it the question is how did that they said that all of a sudden they they saw that the it was inconsistent numbers in gross margins for the sales segment how they don't see that in the first quarter when all of sudden they have to have twenty seven percent gross margins in the first and second quarters in two thousand and twelve they don't see that in essence a simple question how in this very critical segment are we all of a sudden doing great and those accounts up point to a paragraph in the complaint that says ernst and young also didn't catch this error is that we don't have a complaint currently guests are so young if you maybe have at a certain point would be appropriate wherever looking just of the defendants here and the question is you see you've got negative twenty percent gross margins or negative fourteen percent they get ninety percent and this is for the year this is  key segment this is sixty one percent of revenues and you don't ask yourself a simple question geez how are we making so much money now and you have see the u five in meetings with the executives where they're discussing negative margins while companies reporting positive margins for the cell of pleading post that's not yet that we think basically south ferry says you can look at allegations you look at the even imprecise or vague allegations which we think we don't have year and that can add to the overall picture as simply the ninth circuit saying if you do look at individually if you fail individually on the very front case even if you might fail individually on various points if you look at a holistic analysis and overall it leads to the conclusion that it's more likely than not that this is either reckless or actually at he had about hearing the court actually said it is equally plausible that defendants were it was a knock us well it was equally plausible then then actually it was a win that could be that the district or backtracked from that and that argument that certainly was articulate good morning your honor may please the court it does us all say it on behalf of the defendants hellenes the district court properly dismissed the complaint which was the third amended complaint for failure to raise the required strong inference of cmdr the supreme court in the tel apps case explained that the factual allegations to raise a strong inference have to be compelling persuasive and powerful the district court as judge bates noted did exhaustive analysis here gave the plaintiff's repeated opportunities had two lengthy hearings issued three orders and found that individually and also collectively in an in a holistic analysis the allegations are not sufficient under tellabs and also under this court's extensive teachings about the nature of what it is to raise a strong inference of cmdr but one of the most problematic points is that solar city says it discovered the accounting change when margin sales morgan seems inconsistent and that was when the margins appeared to drop by seven percent in two thousand and fourteen but didn't notice when the margins went up by thirty five percent in two thousand and eleven from a look two thousand and eleven to two thousand and twelve how's a plausible that they wouldn't notice that shoots increase but then i'm honest decrease was what led to find this well your honor i just don't seem plausible well though because i think that you're missing part of the story here the plaintiffs have their seven percent solution so to speak but if you look at page forty five and there are three or thirty five percent solution would go ahead i know but that is what you raised the seven percent delta and here they're talking about two quarters that happened before that or not the quarter when the issue was discovered in the fourth quarter of two thousand and thirteen the company did a number of things and this is it supplemental excerpt of record thirty three where the company announces the issue and how it was discovered and a key aspect of it was a new internal controls ot which was a new requirement that the company had to to meet it didn't have to deal with an end an internal controls audit beforehand because the company was an emerging growth company and you can see that on the cover of the prospectus which is the first page of plaintiff's request for judicial notice so the company was doing a new internal audit for purposes of section four of four sarbanes oxley and discovered the error and yes it looked at the fact that the numbers for the fourth quarter didn't quite look right in part because it had a large uptake in the number of deployments that quarter but there is no allegation whatsoever anywhere in the complaint that anyone at the company not senior management not the seven person cost accounting team not the auditors and ernst and young even suspected that there was an error and i thought my friend to look at interesting stuff by saying well c w five said that arnstein young had concerns i quickly looked over the paragraphs regarding c w five i don't think that because mr small a c w five was not in finance he was in sales and in fact based on the discussion there he doesn't really even seem to know how the company accounted for the overhead costs because as relevant fact that we'd have to infer that the defendants knew the burden formula mistake or the thirty five percent jump well number one the the burden formula mistake nobody is alleged know so really the thirty five percent isn't really the thirty five percent jump that would put them on notice what no that's a different issue but on the error nobody is alleged of not even the people who were directly responsible for calculating the costs and remember we're talking about something truly in the weeds because we're talking about a denominator of a formula that takes prior period and current period costs and  change from the whatever it was minus five to plus twenty two isn't that enough to alert someone at that there's an error that something needs to be further reviewed no what why not and here because mr lieberman's entire theory of the case is that the company misstated its financial statements in order to go public that their their theory is an illusion of profitability and there are a couple of problems with it first of all as your honor noted the company lost a lot of money it was very clear that it lost over seventy five million dollars in the three quarters before the i p o it lost over ninety million dollars in all of two thousand and twelve and the the ultimate  financial statements just added a few more dollars to that but the company was never in a profitable as but it's interesting that you mention this is the change in the gross margins of the sail segment in twenty eleven there were minus nineteen and minus eleven percent respect all right and the plan to say all of these magically became very profitable where in fact that wasn't what plan of so meant to tell you is that in the first quarter of twenty twelve in the run up to the i p o the margins on the sales segment were profit or were positive and in the third quarter immediately before the i p o also the margins were were positive so in fact the trend line was consistent it was getting better now that the company have an error in its formula absolutely it did and it discovered it and corrected it but nobody is alleged to have directed a manipulation of the data or had any inkling that the data was erroneous and i think you have to take into account the the relative importance of the sale segment vs the lease segment and i think judges who do you raise this very clearly the least segment was over ninety percent of the company's installations the least segment is what is the overwhelming majority of the company and although because of the accounting rules revenue and costs are recognized up front in the very small sale segment the overwhelming majority of the value comes in the least segment at the time of the i p o those future lease payments were eight hundred thirty one million dollars at the time that the company announced its restatement in march of twenty fourteen those future payments were two billion dollars that is the focus of the business that is where the value is now what also have a very difficult time dealing with is the question of motive and here i think it goes directly to the question you raised judge smith about the holistic an think it's unfair to say that judge freeman below did not engage in a holistic analysis as you know to judge bates she did she looked at the factors individually and then looked at it collectively and there is a requirement that this court house to look at which is that it's it it has to look at both positives and negatives in terms of the holistic analysis and has to look for facts which run counter to any inference of cmdr and here there is a crucial absence of any motive to defraud the company went public but that is not enough this court in in case after case has said that ordinary corporate transactions are not enough and also while they  acquisitions there are two acquisitions and there is also a desire to shield us from our margin call the other two items eat well first of all acquisitions again ordinary course and this court has held for example in lipton and privately negotiated transaction i get that but involves a lot of money compared to the size of this company i mean ordinary course calling office depot i get that but by a couple of pretty good sized companies and use the proceeds of the the stock and let's talk about mr musk and because i think a key point here is the absence of motive so mr musk who's the chairman of the board he's not a defendant here he was dismissed and the plaintiffs did not appeal the dismissal he purchased two point one million shares of the company's stock at the market price that is dramatically inconsistent with anything to judge his holdings of the company to represent he had approximately eighteen million shares when the before the i p o in analysis is the other way where a large shareholder sell stock and the question is are those sales sufficient to trigger any concern so for example in your honour's decision in the airline case a few months ago your honor looked at that in the question of the sales engaged in by the c e o there and whether they were large and dramatic and out of out of the ordinary here there are no allegations of sales not at all and it's not only mr moss who bought two point one million shares mr ron the c e o bought over one hundred thousand shares during the class period again the notion that individuals would buy stock that they know is artificially inflated makes no sense and the court has repeatedly held that the absence of a benefit from a an artificial inflation of the stock is significant i think the phrase has been used that where the insiders missed the boat so so clearly that it militates strongly against a tell us anything about the interactions of senior management with the people who were actually in charge of the accounting application structure of the sales division words how often did they meet with where did they meet with them voluntarily well you've raised an excellent point which is the complaint is devoid of allegations regarding the individual defendants involvement in the accounting decisions l alone the accounting decision at issue here and the accounting practice involving the allocation of overhead costs with respect it's all been in but there are some allegations from confidential witnesses about knowledge of those no no no the confidential witnesses don't seem to know anything about cost accounting and the allocation they have very general allegations that the management team would interface for example with the controller of the company and so quote unquote they must of know this court has held repeatedly that those kinds of allegations are not sufficient and it is not enough to say that the management team is involved in the management that's their job and if that was sufficient then every case would lead to  plausibility aspect of it called but rather the strong inference of the reform act and the requirement of tell abs and this court's many cases subsequent to that that there be compelling evidence of fraudulent intent or conscious misbehavior and so that is aspect that aspect of things is entirely missing here i think that the statements of the confidential witnesses who left the company before the start of the class period ha be disregarded entirely i think i don't know if it's disregard entirely this court has taught very clearly that you look at the allegations and the zuko case in particular examines those allegations and they they don't carry very much weight but there are many problems with the confidential witness allegations among them but you don't you're not arguing that they have to be disregarded entire i don't think that you need to disregard them entirely even if you take them entirely at face value they don't get the plaintiffs anywhere because finance who was responsible but the but now we're back looking at this accounting mistake where is the thrust of the argument is that if everyone in your sales division says every project i've worked on loses money then should manage my understand that the sales division is doing poorly and therefore that is profitability numbers are wrong but as your honor noted in the question to my friend that isn't what the complaint says the complaint only says that c w five had sixty percent of his projects with negative margins and forty percent obviously with positive ma since and he has no insight into the margins on the the sale segment as a whole and if you step back the allegation that the segment as a whole had negative margins founder's on the fact that in the first quarter of twenty thirty twenty twelve and the third quarter of two thousand and twelve the segment had positive margins so the implication that they're trying  to portray which is that all of these projects have noted margins is not only not supported in the complaint but it's contrary because a portion even of c w five's projects had positive margins and of course the segment as a whole core was essentially rick requiring a smoking gun it was saying that you needed somebody who was working in the overhead allocation department talking to one of the c e o s and ordering them to make a change and we didn't have that your honor and that  terms of a smell test to say these are smart people this is core management this just can't be right i'm struggling with it i got to be out there i am really struggling with it because it's a good district judge worked very hard talked meetings with management where they're saying stay away from cash sales and go into leases it's not talking about his projects it's talking about that your best that your best argument aside from the general holistic view seven is well talking about how there