may please the court jacob gold burn on behalf of appellant sets placement reserving three minutes the district court dismissed for lack of c enter all doing that there was no clear duty to disclose but item three hundred and three provides a clear obvious and simple duty to disclose and there really is no way out of this item three of three a thirty one states clearly that issuers must describe any unusual or infrequent events or transactions that a forty five day delinquency and without meaning to get caught up in whether they disclose that in positive light or negative light they certainly disclose that what they didn't do your honor was disclose that the trend was continuing because but for the loan they are seventy five dollars days delinquent and not three thousand and forty five dollars and but for the loan at the end of the nd quarter they are one hundred and thirty five ninety days delinquent and they're only ninety days delinquent because the landlord has paid forty five dollars days of their rent for them through the loan transferring the loan obligated for and for him the rent obligation into an undisclosed lo yes that's what they've done but if i could step back even further and put the trend to aside for a nd because i think we prevail on trend but i ask you please to focus on on usual or in frequent events or transactions that affect operating results in the st quarter of two thousand and seventeen omega reported one hundred and nine million dollars of net income eleven million dollars of those dollars or over ten percent were monies that it would not have been able to report but made a loan in essentially made the rental payments for oriana and reported that as income yes your honor that's exactly what they did they reported their own cash as income that is not improper that does not violate gap but if we consider together the purpose of item three o three it is issuer registrant you have disclosed accurate financial statements is there anything else that we must know for us to assess those financial statements ten percent of net income for the st quarter ten percent was the loan of the funds from operation of one hundred and eighty million dollars during the quarter six percent is from the loan those numbers are material and because those numbers are material and because there is no wiggle room in section one of item three hundred and three with respect to livingston not to trends but to actual events they omega was required to disclose this low without it analysts cannot assess the quality of the source and the recurring nature of that rent payment there in the dark with respect to the that payment alone and therefore i'm making sure i understand and the infrequent event that you're focusing on the reporting of legation is a megan's the fifty million dollars event is of sufficient importance that to understand or make a situation need they need to report that oriana otherwise couldn't have paid rent under any standard a district court found its material and therefore i think you make a very good case that material because you and the and the district court to some degree agreed with you but what about the  there's no self dealing there's no there's no enrichment of corp anybody within the corporation itself and so and and you pretty much conceded that you don't have it you haven't played any of that that's not your fault i mean just because you don't have  but but so you hang your hat on recklessness and that's where the three all three argument starts to come in it does your honor and if i could take you please to judge livingston's opinion in in that mcclure and also judges the morgan stanley case and also judge lo yes case in s a i c if you juxtapose those cases one to the other you'll find that judge livingston found no c enter because morgan stanley was in the process of assessing the actual issue whereas in the essay i see case se i see had already completed its investigation and was well aware of the ro omega disclosed that oreo was experiencing difficulties and was sure already with regard to his friend forty five dollars days short on rent that here proposed certain remedies it was selling off seven of its of its nursing homes within the north where in a certain segment of the of the country in that three are already under contract that they had also were retooling their management they were doing a number of things they expressed some limited optimism that was that it was going to work out but that there's no kind of representation that they were clear of it because risk that they didn't disclose a lot they loaned they made a fifty million dollars loan they did disclose that they made the loan does that indicate that they they were hopeful or that for some reason they want are jumping that thinking that indeed they are going to pull out of yes your honor and they be hopeful yes absolutely we don't question any opinion they made then then is it reckless for them to not disclose yes your honor because the fact of the loan and what it hid is not only material as i think you and i would agree but it's a hard and fast fact fact they lent oriana fifteen million dollars without which could not pay its rent at the time they lent oriana that money on may nd of two thousand and seventeen oriana was at that point plus seventy dollars days delinquent without that loan what we know is that they would have been one hundred and thirty five dollars days delinquent because of the illicit a casual cruel your honor i noticed which is the event which then caused the four percent tom though their inability to pay rent ultimately causes omega to believe that the situation is hopeless however the difference between any opinion case and this is and i direct the court to the supreme court's opinion in opinion as ok we are not challenging their opinions however when you make that opinion when you say and again you and i don't have to quibble about whether they were overwhelmingly positive a little positive or negative this is a pleading and understood so we're entitled to that inference but when they say we are comfortable with we have we have investigated this plan thoroughly it is afoot and has been since early two thousand and sixteen and we are comfortable that this operator will recover so we are not revising our guidance when you say that that's ok they actually could have held that opinion judge leslie however the hard and fast facts that they were actually but for the loan seventy five dollars days delinquent that there was no prospect for oriana to resume paying rent at that time and we know that because they did not pay in the nd quarter that the fact of the loan alerts investors that the risk is they they expressed cautious optimism and as you run a will recall we pleaded july's a partial disclosure because in july for the st time they start to discuss with the market the possibility of cash a cruel so now the market has an inkling not withstanding defendants cautious optimism but i will i will say again that for the six months ended june th oriana delinquency was now not ten million dollars or eleven million dollars but for the loan it was twenty two million dollars but for the loan and again in the context of the six month results that means that that is material and that without that disclosure no one can assess the investors cannot assess the quality of the revenue the net income and ultimately the funds from operations which are the reporting that trick that is so critical not a fair inference that the motivation of the loan was to keep a tenant afloat who was who was responsible for such an important part income valen the context of judge westley's comment yes all right so so the reason they do it's a fair inference that this is not hey we've got a great lending opportunity we know about somebody because of our inside connections who we can make a wonderful loan to this is a company that is in danger of failing and oriana i mean and the motivation for lending to them is because their ability to keep paying us so much in large part of our income is very important to our financial success our financial statements right yes it is not in congress for omega to have believed both that there was a ariana's payment of the amount of rent that they did pay in that period was only because we played it for them we transferred their rent obligation into a loan obligation if that had here to determine whether there was a clear duty that was material i'm asking you a different question than it a fair inference is not a fair inference that the stock market would have would have reacted badly with respect omega stock by information that a major tenant that is responsible for a force of approximately seven percent of all makers in income abayas rental justice alito wrote in orange vs stafford when he was on the rd circuit among the intuition of materiality is the fall of the end of the class period and to the extent analysts believed and investors believed that the stock orients problems were were deepening and deeper then that that certainly should have caused if it was material should have caused the stock to go down and what we know now is judge buchwald herself decided and i think we all agree that that alone was material you know i guess my the thing that's troubling me and i'm trying to figure out and saw last year the standard recklessness sense yet so recklessness amused by old state court training recklessness is knowing disregard of risk right and so could you were traveling for me for what your view news what were the how was this rattler's and then i won't trouble you again no no no no no trouble at all so with a clear duty and i think item three or three establishes a plus everything they said establishes that clear duty up and exactly and it's known and it's obvious step two is it material i think that judge buchwald found it was and i'm not hearing that we disagree that the loan was material then step three years did they know about it there could be a case where the duty exists the fact is material but defendants had no knowledge the complaint can't plead that they had all along that they may well i'm talking generally get in this particular case there's wesley yes there's no question they knew about the loan they knew they made the loan right but also there's no fair reading of this that says that they didn't make a decision not to disclose that's what her owner said in the transcript  here so i think that the answer your question is if duty if materiality and if actual knowledge of the fact that's the dots the ball game because in that instance defendants again can be positive and  themselves well we don't want to disclose alone we want everyone to think that that things are positive as we see them the bat doesn't matter because in that instance they're minimally reckless for their failure to disclose a fact they had a duty to disclose that is material and which their actual knowledge and that's judged low yays that's the distinction between judge lawyers opinion in sai see and judge living one final point about this and i think that this is another critical point if i tell you judge wesley that i have a one million dollars problem i may also then i may have a one million six thousand dollar problem and if i failed to disclose the additional six thousand dollars you might say to me goldberg i don't really care about six thousand dollars it's less than less than one percent but if i tell you that i have a one million dollars problem when i actually have a one thousand dollars problem now we're talking a different story i think we'd agree if you extrapolate from that example to and apply it to this case seventy five days delinquency is a sixty seven percent greater amount of time delinquent than forty five and one hundred and thirty five if i was newer at all just words that i tell you the percentage i don't know it but it's great enough to be the one million six hundred thousand dollars in our example and so i think it's critical for the court to recognize that even as they disclose the forty five days they did there's no question that in our complaint the problem for defendants is if the magnitude is materially greater if the problem isn't a seed but an overgrown field they must disclose that the field is overgrown they can't simply say there's a seed that might become an overgrown field bolt from the blue it's not a case where the plaintiffs are alleging that no one knew before those disclosures that this tenant was having serious problems it's undisputed that in the two quarters prior to that the only two quarters of disclosure target for financial health for ten operators and disclosed that the backlog got worse over those two quarters and then disclosed that impairment in cash basis accounting were in prospect leading to the stock price drop in july that judge livingston referred to you know dispute to you that were not for the that it's a fair inference of the complaint that were not from the loan when when home again disclosed  ninety days overdue on rental payments it would have been one hundred and thirty five dollars days overdue on rental payments were not for the fact that doma got paid made forty five dollars days of the rent for the tenant your honor with respect to that issue for the st quarter of the loan couldn't have affected the st quarter calculations because about the loan was asked about that i asked you about the ninety day overdue that they as of june th they did the the t tenant is ninety days overdue the tenant would have been one hundred and thirty five days overdue had omega not provided the wherewithal by making a loan had not essentially paid forty five days of the give makes them a nineteen million dollars loan or however it's a fifteen million dollars one million dollar loan then at the end of the next quarter they are declared to be forty five dollars did more days overdue  it's not the fear inference that their ability to pay some of the of the rent apparently they paid forty five dollars days of the ninety days that i took that is it conceivable omega had a conversation with another person in in his on his team and they said gee it will be really bad for our stock given how important ori is to our finances in that it pays a seven brut its rental payments amount to seven percent of our income it would be really bad for our stock if the market found out how far in arrears they are so in order that the market not find out the that that the stock market analysts not find out how badly in the rear is oriana is it would be very helpful if we provide financing by a lo n that enables oriana to pay its rent for a period of time so we won't tell the market about about how far in arrears they really are because we'll pay it for them buy or rent and we won't tell would you answer my question would that be a sufficient complaint i'm not sure that would be a sufficient play but even even if it assume it is a sufficiently gauge assume it is a sufficient point it presents a dramatically different factual scenario here the quarter you're talking about the nd quarter is the quarter when omega disclosed sufficiently negative information regarding working out in the situation that it caused a stock price drop  all the rest of the facts are the same that if if coupled with the fact you're saying now on my facts oh my god declared ariana's having trouble said all the things all morning things that they said here  addition the complaint alleges this conversation and if that would be a sufficient complaint why isn't it the same if the fair inference of the complaint is that that was what are all my guess motivation because that's not a fair inference of a complaint the fair inference of the complaint is that they made a loan believing that this tenant was working through problems and that they expressed faith in the tenants ability to recover by making that loan as judge buckled said you wouldn't make a well in believing the tenant had no chance to recover your argument on c n n or is there are two narratives you'd probably say the more plausible narrative from this complaint is that is that they made a they had tent that was having problems it was doing a work through as they said in their disclosures it's like we can be the c e o we know what's going on over there they have a plan they made them alone hoping that plan will work out but at the same time they said it might not they told the market that they're in a rear it could get worse by july those cautionary instructions were serious enough that the stock price was affected by the cautionary that that's possible that's what they were doing helping to give making a lo expecting to be repaid in thinking that the problems cautious optimism the problems will be worked out and that's not see answered the other narrative is that they were concealing the extent to which the rent was in a rear they weren't concealing that the root was in  to which it was in a rear and that that was reckless conduct but and i do think the narrative the st narrative is by far the more compelling is judge book would help especially operators which turns out to be oriana has been facing liquidity pressures following management transition that was the subject of and discussed in the earlier analyst conversation also and in the in the may telephone call i think it was but then curiously says but has been showing signs of operational improvement and is currently making partial monthly rent payments  it wasn't making partial rent payments from from from income from receivables he was making partial rent payments from a loan wasn't it think the inference could be made that was making partial rent payments from both of those sources why but i mean i think of myself as an investor in a piece of real estate in the landlord has me everything's hunky dory rents you know everybody's current on the rent and everything in two months later i find out that three of the tenants are in default and the landlord has been paying the rent because he doesn't want me to know that that through the tennis represented a sizable portion of the income stream aren't paying it that i mean when you having enough income flow to meet their obligations right your honor there was disclosure though that the tenant was having significant what they say making partial monthly rent payments were i mean and judge as judge found there is nothing enthusiastic i appreciate that but but funds from our operation are gap sensitive in the sense that they were they were just on measuring what coming in right and it can come in from a loan i appreciate that and so to some degree if someone accepts the phone the funds from operation figure they're accepting something that can have such in some degree reflect law and i'll give you that but when they say making partial monthly rent payment doesn't the big question where the money's coming from it doesn't specify where the money is ok from but that the question is did the defendants have to know that they needed to disclose that when there is no showing no allegation that their accountants had an issue with this or thought it needed to be disclosed no allegation that created a financial statement problem no in terms of in the accuracy or irregularity no allegation that there was a motive to do raise their in their funds from operations by ten million dollars or love one million dollars but it did not result in omega being able to hide from the market that a major tenant was having real problems because they told the market t see where one of the analysts said to the current guidance is sort of good case scenario where these issues get resolved which sounds like is your expectation but if they don't get it resolved the guidance will be at risk is that right you have another question for you about the loan isn't it correct that to view extent that this loan i think i think it's i think we know that the loan went primarily to two things the tax payments by arianna and rental payments to omega i believe isn't it correct r and other expenses as well isn't it correct that you're talking about this long as if it were an ordinary commercial loan and saying that the district judge said you know one doesn't make a loan without the expectation of being repaid but to the extent to the extent that the loan was going to rental payments to the lender or omega it didn't change your maker's financial situation at all it wasn't putting out money it was just transferring an obligation from a rental obligation into a loan repayment obligation so that wasn't really a loan at all it a disguise of of default in and rental payments there was no that money didn't get put out and there was no additional money put out at risk to the extent that that money went to ariana's rent is not correct your honor to the extent it was used to pay rent that's correct to the extent it was used to pay government taxes or to the extent it was used to pay other extensive expenses of the tenet those are the three purposes that it was used for it that's not me was to the extent it went to pay rent it wasn't putting out money at risk at all it was just transferring the category of obligation from one dollar that was that would been disclosed as a real of rental to one that was not disclosed as a loan is not right well it was not done to for the purpose of avoiding disclosure that this tenet was having major problems and was well behind in its rent so i do add since i don't think it is correct and non disclosure of the fact that but for the loan they would have been substantially funder behind in their en understood your honor but when you look at that i think the key point here is that one draw the inference then that this is not a loan that was made because it was a great lending opportunity for a lender it was a loan that was made that's an expression of optimism and faith in ultimately the optimism you know did not prove well founded and they quickly disclose from quarter to quarter over two quarters this is a problem the problems are getting worse we're still hopeful that our or cover but it doesn't make it soon we're going to have to pull the plug and go to cash basis getting impairment in the very next quarter they went to that that sequence of events monitoring the situation making adjustments and then quickly taking action and in the midst of it in giving such cautionary language as a cause a major stock price drop as alleged by tell by the plaintiffs that's not consistent with a scheme to defraud that's consistent with trying to give the information we think we need it's ok there is no way that the council if they needed those more and so that's why it's understandable that they could think they were disclosing the material facts they needed to disclose even if alone is viewed in hindsight as arguably material that's the distinction between clearly material where like the christine asia case where it's a game changing  event either without the information you don't know that there is a problem with this tenet with the information you know that there is a problem with this tenet that's not this case this case is about the particular degree of the problem with a particular things that was doing to help lieutenant those but those considerations of degree the difference is not substantial enough to support that the idea that the they had to know  needed to disclose it given all the absent given the absence of all of the other indicators that normally accompany fraudulent intent in a non disclosure like this and i they were negligent in their assessment of that materiality but entirely understandable given the size of the loan given the lack of any any crying need to do to disclose that that is by far the my my friend and i agree that this is a case of the particular degree and my friend says the question is whether the difference is substantial and i'd like to enunciate a danger in his position if you have the duty judge wesley and you have materiality which the court will assess at the pleading stage based on an objective standard as will the finder of fact ultimately and actual knowledge to say that we are going to quibble about the difference is to say that we are giving a nd bite at the materiality apple and nowhere in the statute and nowhere in the supreme court's this court's jurisprudence does that nd bite appear once you have shown objective materiality the subjective thoughts of the defendants evaporate in the face of their knowledge if they are not to if they don't have actual knowledge that's when this well this might be not clearly material arises absolutely a danger that you will allow registrants to avoid disclosing judge lavelle the degree of the problem as you no i mean the question really turns on whether the they had a duty and they just turn their back on the obligation to disclose such wesley the danger because because you've got of the enter into the recklessness part because you can't i do that if i may i want to take you back to the supreme court's tellabs decision which requires a holistic analysis and i believe that there is some tension between this court's dual track motive an opportunity or recklessness paradigm i think it's wrong and it's wrong because what fortunately you're stuck with it until all of the actors in an opinion i sure am to trust me but but here's but but here's what i want you to consider in the context of the supreme court's mandate i don't think you'd write that the lender is the landlord and the loan is simply enabling the tenant to pay the rent so the landlord is saying ok you can't pay your rent now it's paid because i've long you have money and i'm i'm marking your rent is paid and i'm marking that you have hours that amount of money as along instead of as rent under that circumstance it is simply not true that landlords don't lend without the expectation of being paid the motivation of such a loan is just to get the tenants rental paid for whatever purpose which in this case would be a very important purpose of of of improving the financial situation of omega by not revealing that one of its major tenants responsible for seven percent of its income is completely incapable of paying rent to answer charges i want to take us back to the fact that we're at the pleading stage and i ask you this if we are entitled to reasonable inferences or equally as cogent and compelling inferences with respect to see enter i ask you to consider that if that's the way defendants felt and they know they have made the loan and they know under three o three they're obligated to disclose it then why aren't they shouting from the rooftops we just lent them money the there is an equally cogent and compelling inference that they wanted to hide the loan to hide the continuing to link wincey and again they can have an opinion that ultimately only oriana will pay omega back but at this point why didn't they if if if if judge buc found there is something positive about this loan why then not disclose it just say hey we want the money right number one number two i also commend you to judge louise response to sai c's identical defense and essentially they said why would we hide this rogue employee why would we hide this for three months well if you don't know could you just how do you do you can see the rule thirty three obligation to be i paragraph seventy eight dollars which is i'm sorry paragraph seventy six which is in the record a fifty five if you're fifty and we lay it out verbatim describe any unusual or infrequent events were transactions or any significant economic changes that materially affected the amount reported income of reported income from continuing operations and in each case indicate the extent to which income was so effective in addition describe any other significant component of revenues or expenses in the regiment registrants judgment should be described in order to understand the registrants results of operations in order to understand the results the results are accurate there may be material information that you have failed to disclose and