your honors my name is solomon sara i am the counsel for the appellant eminence capital who is the designated lead plaintiff in the district court in the securities class action i want to talk initially about the procedural history of this matter because i think it's highly germane this is the second time we have been before the ninth circuit in this case and the first time led to an opinion which was published at three sixteen fifth third granting eminence capital leave to amend its complaint now in the context of that first appeal we were dealing with an order signed by the district judge in september tenth two thousand and one that order in the five or six year history of this case is the only substantive written order that has ever been delivered by the district court analyzing in detail the allegations of the complaint this the prior appeal was taken from that order that right yes right ok the order merges into our opinion and you go forward now with a clean slate back to comply with you and yes your honor and now a new judge from the center and that's what we're dealing with here not the part that's correct your honor but the point i was going to make was that the district court in the september order actually indicated that in many respects  allegations of that time were sufficient and in a few respects they were deficient and she identified with those were and when we presented argument to this court the first time around we said in our  how we believe we can correct the deficiencies that the district court found we will be able to make these additional allegations and that led this court to make a finding in its appellate decision that it appears and i quote most importantly quote it appears that plaintiffs had a reasonable chance of successfully stating a claim if given another opportunity and quote and i think it's fair to say that that determination was based on the properties in the arguments that were made absolutely absolutely your honor i don't disagree with that and all right you are when we went back after a rematch and we tendered a second amended complaint to the district court that incorporated specific allegations that had previously been omitted that directly answered the omissions that the court had previously identified in that september two thousand and one order there were certain specific things that the judge said at that time that she was looking for in the way of temporal matters dates source information and the like we tendered that complaint and the defendants went ahead and they why the district court should at that point time find the complaint to be sufficient it contained the very detail that the district court had previously said we had not provided now there never was a substantive written order on the adequacy of those changes that we made all that happened at that point in time is that we went before the district judge on the argument on the motion to dismiss the second man a complaint and we had a hearing and the judge started out the hearing by saying essentially and this is tab four to the pelleas ex urbs i think it's still deficient i'm going to let you tell me what you want but for all the reasons in the defendant's moving papers i find  the complaint is deficient and there was nothing beyond that there was nothing beyond that there was no analysis whatsoever by the district court of the import of the things that we had added to the complaint which were very substantive and very responsive directly to the district court's prior concerns at that point in time the district court engaged me in a discussion about is there anything else that you feel you have to add at that at this point and i reminded him there was a cochlear with the district court at that time about the fact that this company in march of two thousand and one had issued an eight case saying we had knowledge there were accounting errors accounting the statements and we are going to commands the special investigation by an independent committee of directors to get to the bottom of what happened we had a discussion about that because that's obviously a very significant announcement it's an acknowledgement if you will that there were serious problems they were trying to discover what happened what turned out was that investigative committee never issued any report despite a public statement being made to the investing public that there was going to be an investigation analysis nothing ever came of that and based on that announcement the auditing firm for this company pricewaterhouse resigned and  indicated that there were significant problems that they had uncovered and we told the judge that in the hearing that we have learned of a state court lawsuit between ascii on and its outside independent auditors pricewaterhouse some of them are your honor but most of what i'm talking about now are in the third amana complaint which is what is at issue obviously before this court certainly the thirty minute complaint contains all the things that we added in the second amount of complaint which the district judge never directly addressed but it also included what i am now discussing which is information that we drew from the public files of a state court lawsuit between ascii on and pricewaterhouse and those allegations and information were extremely significant and there were cited in detail as relevant in our third amanda complaint and they include sworn deposition testimony of the price waterhouse auditors effectively saying that they were pricewaterhouse was misled by the management of this company in the conduct of the audit that the company failed to cooperate with pricewaterhouse in its effort to conduct reviews of the quarterly reports and the audits that there was an abysmal failure to provide requested information repeatedly over a lengthy period of time that the chief executive officer in the chief financial officer of ass beyond where the most uncooperative unhelpful and hostile executives that pricewaterhouse had ever encountered we also dug up from that litigation the new information that's included in the thirty minute complaint which includes power point presentations that were made to high officials and asked beyond which included e mails that are directly on point with regard to the improper revenue recognition allegations that we have alleged in our complain the district court said virtually nothing about the thirty minute complaint your honor there was a brief hearing in which she reiterated that she continued to find it deficient and there was a short minute order of a few lines in length which is attached to our own reasons stated by the opposition week right well you are i don't recall that with respect to that hearing i recall it with respect to the hearing on the second amount complaint that the judge did identify in the minute order she backed away from the conclusion that there were no false statements and the issue was see answer that is the state of mind deliberate recklessness well the information that we have on c n n or your honor is the following and i think this has to be considered it's played you are all what i'm discussing this plant i'm not i'm not i'm not making arguments i'm reviewing for the court to be very helpful for  offs very well your honor we have tried to write and your honor we have tried to do that and i think we did do it in great detail in our briefs but all happy happy to to review that here because it is set forth  first of all the deception of the auditor is laid out in great detail in our complaints in paragraphs forty and forty one second of all the recognizing of service revenue up front which violated the company's own grab a new recognition policies in connection with the allied domecq contract reviewed reports and are reviewing the quarterly reports that's some of the strongest evidence i think you can possibly have on c n n with respect to the revenue ignition it's identified in paragraphs five thirty nine forty and one thirteen where we have identified e mails also in paragraph forty one went back and forth from high thistles of this company internal e mails which were disclosed in the course of the pricewaterhouse litigation which talk about the fact that this company's revenue recognition policies are improper that there had been discussions with pricewaterhouse regarding proper revenue recognition that is had been documented that it was improper as of january of two thousand and that there was there's a whole track record in this complaint of detailed evidence which we were fortunate to be able to get because we had been permitted to proceed to a third man the complaint we told the judge we had it we did have it and we put it in the allegations with respect was inventory that this company knew it could not use these people were expert in this business it was not a particularly large company their own disclosure said that the technology was constantly changing and we have identified in the complaint the specifics on the  atory allegations which the district judge initially said we didn't have this isn't paragraph seventy nine and and eighty one we also have the allegations with respect to the discount of inventory there was one point four million dollars out of seven million dollars worth of inventory that was and could not be accounted for we recite in the complaint in paragraph seventy nine and any one eighty one the numerous conversations internally about what this could could be done with this and the fact that the executive officers of this company absolutely refused to take down the necessary write down at that time because it would reflect and require a hit to their earnings which they were not prepared to accept and this was a point of controversy again with with pricewaterhouse paragraph are there's two aspects to that that is one aspect of it missing inventory and lack of control over inventory and there's a second aspect to it which is obsolete in the torah they're separate and they're both in the complaint your honor and the inventory discrepancy in the conversations among purpose about ordering concealment of the of the discrepancy from the investing public is alleged in paragraph eighty one paragraphs eighty four eighty five and eighty six talk about the failure to take increased warranty reserves because this company was using old and reclaimed parts and selling them as new and they were experiencing as a result of that extraordinarily high returns of their product gap requires that when that occurs you've got to increase your warranty reserves now if you do that it's going to reduce your net income and the allegations in the paragraph cyber cited talk about that in great detail a refusal to increase warranty reserves as demanded by the auditor as required by gap and the c e o and c f o not doing that improper purchase accounting celestion paragraphs eighty seven and ninety this has to do with in  nine dynamics technologies acquisition and the goodwill of that company goodwill being what you paid over the value of the net assets of the company that you acquired that is required to be amortized over a period of years but gap says you have to really determine what the useful life is of the technology and the goods that you prefer required and use that period to amortize the good well the longer you take years and again the district court in its orders had previously re some concerns about this and about the details of this how the c e o and c f o would have known about this amortize ation period we've provided that detail in the paragraphs that i've cited because of first of all their intimate knowledge of this company again it's a small company it's not a huge conglomerates a small company with a discrete easily defined type of technology these people are fully knowledgeable about the technology of this company and the companies that they acquired and they were informed by other knowledgeable employees of this company the director of technology in the controller the director of purchasing people who have would have knowledge are in a position to know and paragraph forty eight and fifty one talked about in detail the pricewaterhouse uncovering the accounting violations while working while working on the fiscal year in two thousand audit uncovering improper loans that were made to the c e o of this company that were never disclosed to the board that were never disclosed until it was insisted upon by pricewaterhouse that they be repaid and disclosed to the investing public again clear evidence of the c answer of the executive officers of this company we have have alleged that the c f o resigned in june of two thousand under pressure from pricewaterhouse because all the improper accounting health allegations that i've discussed here and your honour's of that's a summary of what's in the complaint and the paragraph numbers there's even more i think than i've given we tried in our brief to be complete about this because obviously we recognize that this is going to turn on the allegations of the thirty minute complaint my point simply has been we gave the district court what she said she needed and more with the pricewaterhouse allegations this is sufficient under this court's precedents to survive a motion to dismiss including under the recent decision and i will reserve the rest of my time rise to a strong and fronts divide or intentional conduct or deliberate recklessness it's a very high standard i would suggest that as i go through my argument the most important principle to keep in mind is one that was set forth by this court in the vantive opinion which is that typically what you need to satisfy that standard in revenue recognition or an accounting manipulation case are allegations  of specific contemporaneous facts that the defendants understood that they were engaging in improper revenue recognition specific contemporaneous facts i'm a meeting that pete stone the c f o was in where someone told him he had to recognize this revenue next quarter not this quarter and i said no we're going to do it this quarter that's the kind of information that you see in cases that have found the standard met the newco case comes to mind that's the mind your own business case i'm told i have to do something as a c f o and i say you know what mind your own business i'm going to take care of that how i want there are none of those facts in this complaint there are a lot of what you just from counsel in this complaint generalizations coupled with some specific facts that either are outside the class period have nothing to do with the issue that they're talking about or are not specific i well your honor the inventory write down is a good example of what i was saying when you have specific facts but they they don't put they they don't satisfy the vance of principle in that case you have an allegation that the vice president of purchasing who left the company prior to the class period by several years had discussion with the c e o and the c f o that some of the inventory having to do with their original product around and that person said yes you then skip ahead to one more specific fact which is a discussion that the first v p of purchasing supposedly had with a unnamed executive from the u who came to irvine headquarters sometimes who told him that the inventory was still around and quote had not been properly accounted for now in my mind there are a couple of failings with those allegations law the congress has spoken in this area twice in the in the last ten or eleven years as to the abuses that they've seen and they raise the bar fairly high which this court in cases like silicon graphics and recognize with that issue is this twofold i think one you have you have a bear conclusion by some person from the u k that the accounting wasn't done properly how does that person have the the foggiest notion of whether the inventory was accounted for or not and even if they did bear in mind in this case the overt statement of inventories supposedly four hundred thousand dollars on a company that has in this three quarters that are at issue sixty million dollars in revenue and the company has a million  second of all there isn't there isn't anything in those allegations that puts the individual defendants contemporaneously in the middle of this and i guess i was i do have a third point which is that isn't this just a business judgment question i mean if someone thinks it's obsolete c e o thinks it's not wise the inference that's wrong i think that's the question you could ask and in most of these instances th acquisition which you asked about amortization question is exactly the same thing your honor you have there and getting into the specifics you have an acquisition at about fourteen million dollars the actual assets physical assets of the company are a million dollars so you have a thirteen million dollars of excess cost over the purchase price over what the assets are you have to account for that the way you counter that is by calling it good will then you have to amortize that over a period of time you amortize that over the useful time of the period of the good will there's a lot of stuff in the complaint about how the assets are fleeting and the shelf life that's really that's really kind of a bait and switch because the the question is how is the goodwill amortize not as it relates to the shelf life of the products and they pick a ten year period the point is come in and say it should be three years why is that not just a disagreement about a business judgment how is that fr e it is it is a pleading issue it's a pleading issue under the gompa case your honor because the inferences from the complaint have to be drawn in all the directions they can be drawn and then you you know under the talk about these these are the two best pieces that they have their inference is that absolute go the other way and then you take in this case that the the context of the restatement the size of the restatement which i'm going to get into now and other facts and those inferences directly contradict the notion of fraud here you have a very small restatement over three quarters you have about a six hundred seventy five thousand dollars restatement on revenues of sixty million dollars those are the care what is the character of the restatement you have the shifting of revenues from one quarter to another so actually the second quarter the of the subject of the restatement the revenues go up not down as you move some money into that quarter and away from a different work very small and so shifting revenues it's not a case like mckesson where you have three hundred twenty seven million dollars restatement on revenue that should never been recognized at all here you have a very small largest shareholders of the company they don't sell a single share during the class period in fact in the form fours that we submitted you see that the c e o actually bought stock twice during the class period now what kind of fraud buy stock when he's inflating it is that is there an inference to be drawn from that  i think there are also inferences to be drawn in favor of the defense on when you look at the heart of the theory of the case it's a kitchen sink kind of a complaint and there are internally contradictory allegations and i don't think you can when that happens i don't think you can just accept all inferences in favor of the plaintiff in every instance for example there's an allegation that pricewaterhouse coopers found the c f o to be an absentee c f o the same time the plaintiffs are arguing everything that the referenced like the the mckesson case or the oracle case in oracle case you have nine hundred million dollars of insider sales here you don't have a dollar the oracle case you have i mean it is after all oracle a computer company saying we can punch a key and find out any information of our company at a keystroke here the allegation is precisely opposite that that there isn't that kind of a system in place  couldn't see parse them carefully they have theirs too i think fundamental truths about the emails the first is that they're not surprising at all when you consider a company that has significant operations that you'd have people at a generally have with them a command by someone in management fix this problem correct this problem they hire a consultant whose job it is to assist with the audit so i think there are inferences to be drawn from that as well  there's also a fair amount of mudslinging in the complaint regarding the pricewaterhouse coopers audit and i think that tends to fall into two categories first there are some deposition remarks about the circumstances repeat of you see eventually resigned without any disagreement with management i don't think you could draw an inference of see enter from that certainly far from the mckesson case and second you have a certain amount of just an oculus statements about how the audit went we asked for schedules they didn't give it to us on time we tested twenty items a couple of them didn't pan out the kind of thing you would see in a mid sized public company like ask young ones for all these reasons your hon republic i would just say i think counsel has really glossed over the detail in these two categories of allegations that we talked about in the tory obsolescence and with respect to the d t i goodwill write off which are at paragraph seventy seven seventy nine and eighty seven through ninety what you heard is not reflective of what we have alleged there is great detail the sources that are identified for these allegations the reasons they would have to have knowledge and the communication of that knowledge to the c e o in the c f o are alleged in great detail and bite the panel to review these allegations because they are not as described it is however important to remember that one must consider the  allegations here and counsel tried to make a business judgment rule argument or a materiality argument the materiality argument i don't think was ever presented before but it's clearly wrong because this company was forced by pricewaterhouse to make  restatements of previously issued financial statements and that's why at the end of the day there was no disagreement with pricewaterhouse pricewaterhouse had succeeded in forcing them to reveal accurate numbers to the investing public and the fact of the matter is when you consider the restatements caused this companies publicly traded securities to go from thirty dollars to zero and when you consider the allegations with respect to the price waterhouse interventions the lawsuit these are not these are not just casual statements this council refer to them it's sworn deposition testimony in a lawsuit seeking substantial damages that is the deposition testimony of pricewaterhouse personnel with respect to the lack of cooperation the they were receiving this financial statements which this auditor ultimately succeeded in requiring this company to correct these are not general allegations in this complaint these allegations are detailed these e mails are meaningful all of the things that we have a ledger supported by evidentiary material that we were able to gain access to outside of the context of the security for litigation when you look at the totality of these allegations i don't think there can be but any conclusion that at least for pleading purposes at least for an opportunity to try and through discovery support the allegations that we have made here which are greatly detailed on c an't or this should be enough it certainly is under this court's most recent decision that we have the right allegations in here for see enter this is not just plaintiff's counsel saying that you know this was an appropriate goodwill amateur's ation period that's not correct we haven't made these things up we've got them from sources inside the company with knowledge so the suggestion that this is just you know disagreements about business practices and business judges is totally f exclusive but if there ever was a case i think where one could reasonably conclude from the allegations that what you're really talking about is a misstatement of publicly issued financial statements restatements investigations that should have happened that never happened th