all right our second case for this morning is run by the pension trust fund for operating engineers and others against cults  they please the court on joseph daly for the institutional investor plaintiff appellant this morning your honor to be discussing two issues first whether this under this court's do novo review we've sufficiently alleged the strong inference of c answer in connection with the defendant's concededly false financial results reported to investors over five straight years and second let's just be careful you say coles made corrections to its accounting for the leases right that's correct so one set of corrections and two thousand and five later corrections which may or may not be related enough to give rise to some inference a there is obviously just a few between the parties about that then we also there are the two individual defendants the c e o and the c f o and then cole stuff and then the second issue that i'll be talking about is whether or not the district court of used its discretion when it dismissed with with prejudice without leave to amend let me ask you about that and not m we can dispose of that fairly quickly all right i agree with a lot of the law that you cited in your brief on that point but i have yet to see any indication from you all as to how you would have amended in order to address the problems and given that what would be the point we didn't have to show that because there was no there was no pending motion for leave why didn't you tell us in your blue brief that you had some cure for the ills of the district court found many elements of these cases and i would it's exactly a stretch hamilton saying i would have thought that you would say oh you know we didn't put enough about so you enter here's we were prepared to add this in that he never gave us a chance to but there's no this and that in the record so the question is could you have used that second opportunity to good purpose well in that that is on your honor's i did not put that in my i didn't think it was appropriate that at that point i was focused on the clear legal error that that the second judge made in thinking that judge kluivert had pointed out quote weaknesses to us on the you're right about that judge clever didn't but on the other hand there's an overall harmless error rule that applies to all civil litigation and if even if it was a mistake not to give you a second chance it was futile for example then there's no harm no some factual information that ties the defendants to knowledge that with satisfy the c and your requirement you know something that shows more than just they ought to have no well judge rober you said two things you've said one thing just then circumstantial evidence is enough and you said another thing in the in the prior presentation where it was the sum total of the parts and under the supreme court's decision and tell us we are allowed to give the court an amalgamation of the facts that must be considered together i agree there's no one single piece of direct evidence tying the two individual defendants with their c enter and look at this case revolves around accounting errors and counting it seems to me it's a typo fart for which there is usually a lot of paper trial shouldn't there be some evidence that it's about how and when cole so officers came to know about the accounting errors well there either is within the record there are no dishy of things like there let's not forget the earlier two thousand and five restatement both of these gentlemen were in their present position o and c f o of the company at that time but your that i don't suggest that the two thousand and five errors were of a different type now if you if you're just saying at some general level there are generally accepted accounting principles about the way you account for least stores kohl's has sixty five percent of its stores least ok fine that's certainly not with the p s l array is looking for if you start digging down you say well you know some leases carry with them enough in addition of ownership that from an accounting point of view never mind who's paying the property taxes but from an accounting point of view you actually report them in a way that looks much more like owned assets that's correct ok fine you can do that but how how do we go from the fact that there are these generally accepted accounting principles to either the knowledge or the reckless disregard of mr man accountants are not doing what they should be doing when they are portraying calls financial results will judge would when at one point you said something about general rules and you weren't necessarily talking about  said just generally but the thing about the leasehold accounting it is a very specific type of accounting in fact that if the defendant stand and defend his briefs are permeated with the details of that lease accounting him frankly it didn't look all that hard to me to tell you the truth meaning they're not complex or technical it's a binary choice when you are faced with when you're faced with a leasehold you need to account for that lease either when you start paying rent or when you start moving fixtures into the building or doing repairs or mcdonald told our clients the class in at least ten c c filings we have put into place specific financial specific national controls over our financial process and they were mistaken you agree that just a mistake or negligence isn't it now of course i would agree with that but this was recklessness at the least and probably deliberate and why i mean that's a label then what we need is some meat on the bones all right coming coming  there is no direct evidence there's no e mail there's no transcript of a phone call when somebody from accounting called mr mansell up and said we've got a problem here what we do have and i realize i'm sounding a little bit like a broken record but it's true what we do have is a very strong circumstantial evidence of a seven year restatement which i disagree judge wood with our opponent's characterization the earlier restatement involved the beginning and the end of leaseholds that was part of the problem here in this latest restatement it involved the beginning of the leasehold coals came out in conceded that we had used an approximation of a prospective date and i started at least cold when we had actually told you over ten times that we will start counting for the leasehold when we take possession of the building you can approximate their systems some talk in their briefs about rocks meeting looking for that will they had to make these estimated possession dates but you know financial reporting financial figures look backwards in time at the end of the year when they're signing a ten k when they're filing their and we're report they know what the date was when that leasehold began they may have approximated it back in the middle of the year we think we're going to move into our madison wisconsin store on august first but lone behold what happens july first they actually happen to move in and they know at the end of the year the exact date and they know that and the and as you know i don't if i could with th  certainly i would think any one of the four would matter to reasonable investors but that's not a question that could be answered at this no but you're arguing that the magnitude and severity and frequency of these issues helps support an in enter when you're talking about the c e o and c f o but they seem to have had at best extremely modest effects on repairing the net income and shareholder equity and i did hear that he said what net income materiality i understood the question is about what at least looks to me like something with no effect on cash flow and very modest effects which seems to me  that's that's not enough i mean there are two billion dollars in understated debt how about understated assets i don't know the figure well in isn't isn't the question here maybe i'm not fully appreciating the issues but i thought the question in essence is when do you treat these obligations as just expenses and when do you treat them as both as a capital league where you which you have to list as i understand it is both an asset and magnitude of the corrections is what supports the inference of c n n or among other things such church so please answer the question all right and again the magnitude it's one almost one point four billion dollars every year for five years understated liabilities and what about understated assets again i don't know that figure speaking of things that you say you don't know let me ask you this do you agree that both of the individual defendants expanded their stock holdings in coles over the class period i don't know that's not in the record your honor it's not in the record but you are form fours matters of public record the initial they are but the units they are u s district court decided not to look at those these this big publicly held company are simply lying about their own personal stock holdings seems unlikely but it's possible but is it reasonable to infer that you've played the strongest case you can with respect to insider trading i imagine that is true yes it is reasonable and i when you focused on sales and those documents would also have answered my question about the defendant's point that is that the net transactions over the class period expanded their holdings right but that argument in their briefs is based upon materials that were stricken from the district court record so i don't know why we're even discussing it i'll tell you why because you're asking us to draw inferences yes and you're asking us to draw inferences from a very selected piece of the public record and that was really able to you the so that's why i'm asking you the question all right i appreciate that but the sales as you also know from our briefing is a very small piece of the overall the in the year prior to the class period we also have alleged that they did not sell again in the year two thousand and eleven in on just two days in the middle of the class period the c e o sold seven point something billion dollars million dollars of his own stock that's an allegation must be accepted as true at this point and other items about your trading plans and perhaps overall holdings that is simply just not in the record i'd like to reserve my twenty two seconds very little  good morning your honor a rubber tour for a for mr man self destruct donald and for the colts corporation this complaint was filed in two thousand and thirteen since that time i've been looking for exactly what the court has been looking for which is actually particularized allegations that mr mann cell or mr mcdonald actually knew about these accounting issues before they were disclosed to the shareholders of the company was worries me most about this whole case actually given that p s l a can be and we can be very difficult to find that magic moment when the inference is in favor of the liability are equally balanced for those against and i'm bothered that the successor district court judge didn't just say you know you'll have one chance to file an amended complaint people may not realize that they've got to conjure up all of the hypothetical things and put an amended complaint i mean i would like to know for example and i was looking at the public record you know how many shares is coles have you know what what percentage are we talking about what you know to just different things that might help you understand why they are either is your is not either recklessness with the honor i think that the reason is because when i look at these types of complaints in this complaint there's no allegation of a government investigation there's no allegation of a single confidential witness you know what you have what you have  very unusual here is the sequence from two through the two thousand and five restatement of the two thousand and eleven restatement and i'd be very interested to have you explain as specifically as you can what you understand to be the differences between the issues with attention to kohls promise in two thousand and five to stop using estimated starting dates for the leases your honor would happen in two thousand and why was the f c c came out with it some some guidance on accounting immediately the company did it's already taylor's generally it was with respect to what you do with respect to how do you calculate amortize we sold improvements over the course of the lease and you look just look to the term you look to the expected renewal periods and these are long long leases where there are multiple renewal periods in the lease you could have the property for fifty years literally and so the question was the you have to extend it over that fifty year period over or over something that's twenty five years and so it was at the backend as it was reducing the amount of depreciation that could be to read that's correct and then in two thousand and ten the issue was that the company had started to do much more aggressive in expansive involvement in construction of the properties and the question was will do you look at an actual lease term begins or do you look to where do you look to when the construction actually is going on and then there's a whole question again about whether you're dealing with things for example if the construction costs are being given to you back by the like by the landlord as a form of my credit rent for we have no idea whether that should be something that should be advertised part of the problem here i think is that because these leases are so long ultimately when they started to look into it in two thousand and ten and two thousand and eleven it became quite clear in this question the judge would ask legal title was not with coles legal titles with someone else but for know that there was a problem with respect to how the slease accounting was being done there is nothing in the complaint and the if you look to literally a fifty two to fifty five that's there additional scienter allegations there is you know no notice from even why that there's a problem we're still young we're the best accounting firms in the country was involved in this all the way through there are no audit reports indicating that a reference in the complaint to kidding there's a problem there's no real those no allegation about a meeting there's no allegation about an internal document they gave to keep themselves sufficiently inform seven if they know that they're filing accurate financials no question your honor and but there's no allegation that they were on notice in any way shape or form so could you know but could you address this apparent disjunction between the magnitude as alleged by plaintiffs in the order of you know more than a billion dollar difference in reported liabilities and what seemed to be very modest effects on cash holder equity and or net income well there's no question the impacts are relatively small on net income in two thousand and six one seven percent two thousand and fact that coles was actually occurring the expense of doing for example putting together conditioning systems in these buildings they had to be treated as capital lisas when they get treated as capital leases they become assets on the books of the comp they also become a liability on the books of the company depreciation goes up red expense goes down so numbers will change but in terms of your question before about cash flows the cash flows are not different and in fact in this particular case in two thousand and five and in august fourth two thousand and eleven the company announced that it was continuing to look into the issue of the leases stock price went down because and this is this was something that was stricken by judge claude vert the company also announced in its public disclosures that sales on the eleventh's august eleventh the company detailed what the errors were the stock price went up seven percent so this was not something that the market cared about it was really technical accounting issues that the company had made mistakes and in the not done a good job but of course the rain makes it quite clear that mistakes negligence is not enough and even if one takes the recklessness you need to show something that we're so would consciously avoid it recognizing something they should have known and there's no particular arised allegation  mr macdonald knew anything that was written was wrong with the accounting of this company they had every right to rely upon the accounting staff and on earth to send out ordinarily that carries a lot of weight have argument in these circumstances but what we keep hearing from plaintiffs is look after the two thousand and five restatement that went back six or seven years in dealing with what at least seems like a related issue the timing for treating leases as capital leases  seems to me that there's a decent argument that there's a an obligation even at the top levels of the company who are dealing directly with investors and explaining those problems back in two thousand and five for more oversight  basically on their radar screen at that point they know and what you're kind of saying is it's i have the assets and changes and depreciation and changes in treatment somehow miraculously everything balanced out but i'm not sure that would necessarily get kate but i think the answer your honor is that the me that i'm hearing that coles needed to have actual knowledge that the errors were occurring it's an recklessness sufficient here yes but reckless this is defined in this circuit as someone you know ignoring the obvious and the issue here coles wasn't doing that with it continue to kind of sail along so they were just somebody leasing a warehouse for six months and that's just not treated the same under the you know your honor i think again two thousand and five was really about the l of the period looking under the owner and the length tells you that it's a capital asset right it's i mean it's looking at the projected useful life of the property it's if you exhaust the useful life of the property doesn't mean much that you're going to give a nothing back to the less or at the end but but again your honor it goes to the basic point that under the p s lori the plaintiff has to come up with some sort of particularized allegations in this complaint and the question the judge hamilton asked on whether there should be an amendment granted they have never identified anything other than what they perceive strong together from the company's public disclosure so right now it's let but here's the paradox of the p s l ira which the district courts are struggling with which the supreme court it's all well and good to say you need detail but unless coles is willing to invite the plaintiffs in to browse through its books which of course coles isn't and wouldn't be and you don't expect  that there's only so much detail you're going to get from the public record so plaintiffs have the burden of putting these complaints together without the benefit of discovery that's the whole point after all be a salary get away from summary judgment save the money you know don't go through all th discovery but it's it's a real there's a real tension in the system and so people do have to rely on circumstantial evidence for things like recklessness well but your honor you can focus they can certainly as they did in the tel apps case where they had twenty six confidential witnesses they could speak to people work at the company they could speak to formal former employees that the accounting firm in y which has its own public reporting obligations has accused anyone of fraud and they were presumably all over this accounting issue and how it was done and not done so you all don't have any problems with put it with investors council talking to current employees and i'm sure they're on your honor they certainly do it sometimes we send them a letter saying that that's privileged can't be privileged spending what it is but i certainly haven't been involved in many many cases in courts all around the country where the plaintiff has spoken to current employees and had them become potential witnesses in this case they don't cite a single confidential witness the only thing they cite where they are being ethical while that but they can certainly speak to former employees and they could certainly try to speak to the car to places they want to and they have nothing now on this the issue of the of the securities trading which was referenced before by judge hamilton i think it's important to note there that i actually think judge cliff very got it covered got it wrong because once they put in what the trades are were allowed to put in the other side of the trades that in fact the record based on the foreign force does show that mansell mcdonald increased their ownership of coal stock over the course of the class period and that's why they don't want to put in the platforms three it's a force they just reference the trade with africa fighting any context for it and then in any event and were required to take that is for the for the truth of information contained in the farms and certainly for the fact that it's been reported as such sure that for the truth i think the problem they have your honor is they don't provide any context as the district court found for their allegations about trading and they've got to show that the trading was unusual and suspicious and just putting trades on a you know the fact that the c e o and the c f o just traded eight million dollars of shares over a two year period it's hardly problematic in this cou dealing with for having one and a half the navistar case that was over five million there are other cases that we cite words as up as high as fifty million dollars so the mere fact that there a sale by itself is not sufficient to show unusual or suspicious trading by striking the first version of a complete without leave to put but in this case anybody's of discretion based on a mistake because reading judge verts opinion makes it very clear that he is not in any way criticize this complaint for failing adequately  after but that's what there's no rule in the adversary system that you have to take your opponent's criticism of your complaint as gospel right i mean you criticize and are stand up went to the judge not until judge stat miller  after judge that means opinion they were supposed to somehow come in and say please reconsider and let us file an amended version but they had their opportunity what they did in the in the motion to dismiss the second time around in a footnote they s in a proforma way to hand let us let us let us amend they never identified what the additional pleadings would be but they didn't know what that but but but they knew what we were saying about their pleading that's the counsel that look that's a nonstarter of an argument as far as i'm in this court they could have they could have if they could have said something could put a paragraph in there in their brief in this court and so that's an argument within this a court definitely go questioning this court they could have said we're going to plead the following seven things would have taken one page they have not done that even sitting here today plaintiff's counsel can't cite a single allegation other than what was in the original complaint that was filed back in two thousand and thirteen that they would add to this complaint nothing and they certainly could have added something and it would make no sense for a case that's going on and on and on to send it back again when they haven't identified for this court what is the specific allegation that they would add that would get them to the point where under tellabs they could show that the reasonable inference was one that was cogent more compelling than the  known fraud so your honor we think the court should affirm the decision below is correct they have never identified any particular as the allegations that the c f o or c f o knew about the issues with the accounting fraud they were entitled to rely upon their accounting staff as well as mon why and the court should affirm it in all respects and should not send this back to have the planes finally maybe identify something that would just be a complete waste of judicial important resources thank you very much all right thank you very much mr danley i'll give you a argue endo their insistence that these accounting rules were technical and complex one would think of the two thousand and five restatement restating seven years of financials having to do with lease accounting that in this technical  complex area these two individual executives sitting at the two of coles would have paid even more attention to the lease accounting issues going forward and we know that they recklessly did not they reassured investors in ten consecutive s t c filings that they were paying attention to the financial controls but that is not what happened thank you very much all right thank you very much thanks to both counsel will take this case under advisement in the court will take a brief recess