complaint in a securities fraud case where the district court found that plaintiff did not adequately pled as a court's well aware plaintiffs in a class action securities case complete cmdr one of two ways they could plead it through allegations of support actual knowledge and they could also put it through allegations that support deliberate recklessness we put out a minimum deliberate recklessness here in two ways first we plead it through personal first hand knowledge allegations of confidential witnesses who  the company during the class period second we also plead at a minimum deliberate recklessness through hearsay allegations that when looked at holistically you could also determine that we pled at a minimum deliberate recklessness so i just want to take the  personal first hand knowledge allegations first and just as a quick background i'm sure you're all familiar with the company life lock their business model is really to exploit the public's fear of identity theft because it's so rampant we allege that when the compan said they were providing near real time fraud alerts to assuage these fears they were misleading the public and the market well to do a fraction of their customers well actually the allegations in the complaint suggest that it wasn't to a fraction of their customers so we have confidential witness number five and that confidential witness tells us based on her personal knowledge that she prepared these reports and report showed that seventy percent of credit check alerts were stale or a week old  doesn't answer what i was referring to what i was referring to an old paula jones to you as well from my voice is that the product that the company sells as different levels and it's my understanding that only i've now forgotten the name of a bit only the ultimate service is the one that that identifies real time alerts as part of their service further i got to say i've been besieged like many other people have been by ads and e mail and so forth for my life lock and it's easy what they're mostly selling is the follow up afterwards and so when i say to a fraction of their customers what i mean is the notion that they're giving realtime alerts is not to their whole customer base it's to one part of it the ultimate customer and is only part of the service and indeed maybe not that important part of the service that it's advertising and promoting so i lean back and i say to myself ok you're saying these notices are stale we're not talking about bread here what's stale mean in this context so so first your honor i think you may be incorrect about the fact that it will be the first time or only respectfully that they're only providing these alerts to the ultimate customers that the three the three tiers the standard the ultimate the ultimate plus whatever they are the first one actually does provide near real time alerts based on an algorithm so the highest one provides the alerts every single time you're standing in a store and you buy something like when you use your amex and it pops up on your phone that's definitely the highest level the lowest level also provides near real time alerts when it detects through the algorithm that they think it's fraud so you're getting the near real time alerts any time life lock thinks it detects fraud and at the highest level you're getting it every single time there is a clear which one c was talking about yes the w five is definitely talking about the highest level these are seventy percent still there a week old which means when you're standing in the horizon storing your opening your you know your phone countering at the banana republic like schneider says you're not getting these alerts especially government data breaches i'm now subscribed to several credit check services and as recently as last summer i got a notice that somebody was trying to use deed it was my government travel card at a gas station in georgia but i didn't get that noticed a couple days later it really didn't affect me i couldn't have done anything about it they the complaint and not the other materials you presented talk about how the customer is really like this is a lesson of the search but i don't know that it's such an important part of what i would actually get from life lock work by a customer that that i wonder does it matter that i get it while i'm standing in line as opposed to two days or a week later in terms of the ultimate impact to my credit report well defended say it does they say if you get it when you're standing on line you can stop the fraud from happening we have other allegations though that don't just limit it to these credit check alerts are out this is a top level we have allegations from another confidential witness t w four she was very through october twenty fourth at the class period and she tells us that life lo had planned weekly shutdowns tuesday and thursday for up to twelve hours and at that time no alerts were going out not just credit check alerts but the idea analytical lurks and all the alerts so you have a situation where a zero percent of the alerts are going out in terms of securities fraud you have to remember that the reason why defendants are telling the market you should invest in our company is because they know customers like getting these real time alerts that's what adds value that's what their business model is and you also have to take into consideration that life lock was operating under an f t c consent decree during this time and what the chris said was you know you got in trouble in the past because you lied about providing these new near real time alerts so the consent decree says you need to be on top of this you need to make sure that when you say you're providing near real time alerts you are was really focused on this real time aspect or other aspects of what they had said in the past so there were several aspects the near real time alerts was part of it they were also concerned about the security of the customer's data but if you look at the corrective disclosure at the end of the class period one of the things that the f t c didn't come on was the fact that they weren't providing near real time alerts so obviously this was important and in terms of materiality for investors themselves i would just say that the near real time alerts if those weren't working then lot then phlox business model is kind of broken i mean if they're not able to prevent fraud which is one of the things that they build themselves at as then you know people would stop signing up for the service and investors would stop buying the stock so you're making a leap the that this is the the piece that prevents fraud i'm really skeptical about that well it's it's not me your honor if you look at the false statements that we've alleged throughout the class period i mean i counted like twenty times that defendant davis on the one time defendant schneider said you know in describing the service this is why people buy our service when there are that's a different statement that that may suggest it's an important marketing tool but it doesn't suggest that's the piece that prevents fraud sure but if well the more they know they do say that it's the piece that prevents fraud i believe defendant point me to that because when i saw is the kind of statement that you just gave us which is the customers like that they're really impressed by it sure of course the customer he's using his example is standing a line of arisan himself initiated the transaction there's no fraud there so so what what prevents the fraud from this so the the fraud is prevented if someone  your identity and wants to open up a phone and goes into the horizon store and tries to use your identity and your work and you're sitting in your office and you get a pop up that says we just detected someone trying to use your personal information of horizon is this you and you can click no that immediately goes to the horizon store in the horizon store says hey mr so and so we're going to need some more information and he leaves that's exactly in what about this so that no one would even care about real time alerts if it wasn't for the idea t saying of course yes thank you your honor that is what i'm saying and that's one of the services that life lock touted and so if you go back to the confidential witnesses that we have c w five who is very important to our case because she's the one who aggregates these alerts and puts them into reports and says seventy percent staleness c w four who talks about the system shut down that when alerts actually do go out only twenty percent we're getting through behind that backdrop we have another important allegation from c w five who through her own personal knowledge talks about a meeting where defendant schneider said i am aware of the stale alerts should use those words like your arguments first enter our strongest as to schneider you focus a lot on snyder and then it seems like you kind of connect davis to snyder and then i'm wondering where power is like are you even still pursuing power what is your evidence of an argument against power so we are your honor and i would i would say i agree with you that i think our allegations against her are very very strong but i would put power in davis under the bucket of the oracle standard for recklessness just like i would and the standard in oracle this is six twenty thirty three ninety says an actor is deliberately reckless if he has reasonable grounds to believe material facts existed but nonetheless failed to obtain and disclose such facts although he could have done so without extraordinary effort so i think for schneider let's talk about power charges of about absolutely let's talk about power and davis so we have a similar inference from them and that we know that there are reports that talk about the problem with the alerts and they could have access these reports without extraordinary effort because they could have gotten them from senior levels of management we know from c w five that senior levels of management scott these reports we'd like the inference that davis in power are senior levels of management but even if you don't want to agree with that there is definitely an inference that the c e o and the c f o could have obtained these reports from the senior levels of management and again just going back to that f t c consent decree which puts them on notice they all know that the f t c is paying attention to these alerts and that if they don't pay attention to these these alerts there's they're subjecting the company to regulatory action so i would say that those who are allegations against davis in power along with allegations that we plead that happened before the class period now i understand that they may not care it's much weight can i jump you distortion so you have a lot of statements that you say are false if we think some of them are false but not all of them and there are like sprinkled through the middle some that are false does it matter if we were to not agree with you about the statements in the middle this is all hypothetical i have no idea if will agree with you about any of it but let's say we agree with you about the start period at the start of the period the end of the period and a few things in the middle but not the rest does that change your legal claim or not because it is long as there are periodic that's enough yes as long as there are periodic it would be enough and is there a case that says that i have trouble figuring out where to find  i believe as long as you find that the first statement you find is false is at the beginning of our class period and you agree with our corrected disclosure that it's our star class period now if you find that the first statement isn't false the ark last heard will start with the first false statement that you believe is false  leading and then would have been their obligation to come up with something that cured in the middle of if the middle became long enough is that how this works i don't understand this i mean so like you had to say you had a false statement and then two years later another false statement i guess the defense could say somewhere in the middle  so the class period ended and then had to restart again or something probably but i think that would later become a fact question like at the pleading stage if you decide that our class period starts here and ends here then we would get into discovery and figure out what was really false and maybe this wasn't false and it should start here but i think that would come later and so i do want to address the risk language that defendants say is a competing non culpable in france and i think that  mr feldman might get up here and say that this is exactly like the b n case and the court there analyzed the same exact riffling which and found that that carried the day for defendants i think this is a really important argument because the language the risk language that defendants use say that life law could be affected by service outages and i've looked through the warnings that defendant cited throughout their throughout their their brief and what they said was they use a word could i couldn't find anywhere with a warning saying life lock would experience outages or that it was experience out outages experiencing outages like we allege in our case so hypotheticals voters absolutely and i think i think the caller case here actually controls if you look at the color case which is the ninth circuit case the court found the statement misleading because the risk they disclosed use main language like this may happen exactly what life like to hear and the ninth circuit there found that this was insufficient because it omitted the fact that the risk had already come to fruition and that's what we're arguing that this is zero percent of alerts go out twice a week for up to twelve hours seventy percent of credit check alerts and twenty percent of all alerts that the severity of that w happening at the time and the risk language can't protect them from that site just like to reserve one minute thank  may please the court boris feldman for life lock and the police judge edelman we gave you a california welcome this morning at four forty five in the morning when we had a three point two earthquake in berkeley i hope that you know it's important to step back a little since this is the second securities class action before the ninth circuit and look at it in that context judge bolton the district judge in both cases she had life for three and a half years she had life luck one bean in this case life luck too this one was filed just after she dismissed life luck one in the court of appeals unanimously affirmed life luck won the class period in this case follows right after the class period in that in many of the issues not all but many of the issues of the same i think is judge clifton was pointing out there's a difference between being dissatisfied with the product in potentially having a consumer claim versus having a securities fraud claim the securities fraud claim it's about misleading the market into thinking things are going way better for the company than they are in that respect if you look at what the news in the market disclosed by life lock was leading up to and during the class period i think the last conclusion any court could draws or they were hyping the stock february nineteenth two thousand and fourteen five months before the class period this is e r one fifty six life lock discloses that there had been a whistleblower claim against the company about its compliance with the two thousand and ten f t c order that it was a spectacle to receive quote a formal or informal investigatory request from the f t c for documents and information close quote and that anytime at any time the f t c make amends quote an inquiry or investigation of flux compliance with the f t c order close quote leading into the class spirit so they're already saying we have whistleblowers and we have a request from the f t c that doesn't tell the market that when they're advertising real time alerts or actual alerts are not real time when i'm going to address that your honor but the context is very important this was not a happy talk company's saying everything's going great here there was a drumbeat they said that the company received quote a request from the f t c for documents and information related to life locks compliance with the order closed so is there a case that says that if the company announces that it's having one problem that gets them out of a securities fraud case for another problem i'm not sure that's the same problem here ron or well but but it's not clear i mean if it's vague about what the investigation is about then we don't know the market doesn't know if it's the same problem i think there's a real difference between the announcement that there's an investigation going on and the knowledge of actually possessed by the corporate exactly who's the individual defendants that our product doesn't offer what it says it offers that in fact even though we have promised real time alerts we're not giving them the fact that there's an investigation is not an acknowledgement that there's a problem with the product the second the allegation which in the client complaint in front of us is something a little different that is that we're not giving the customer what we've promised the customer will give them what in the disclosures made by the company tells the market about problem number two so that disclosures that this court relied on in the life lock won about the rapid growth of the company and the problems managing that growth that's a little different as well this is not unanticipated inability because we've grown too fast this is allegedly reports given to the top executives that say we're not delivering we're still not delivering we're still not delivering that's not unexpected results that's not a surprise that's a continuing problem and the company has a continuing problem it can't claim forever that gee we're surprised because we're growing so fast if they're not delivering period a period b period c that's something different i understand your honor and then the question is have the allegations stablished  is receiving all these detailed reports about these still is is that pretty you pretty much know your honor if you have to separate what counsel says in the brief from what the allegations in the it not implied that the same time period is an issue in the next paragraph no not at all it's a totally separate allegation about the grammar priests and patients and as judge judge bolton carefully went through each allegation is to presentation she said there's no indication that any of the individual defendants attended or heard paragraph one twenty about c w five mentions the seventy percent it does not say when and elsewhere in the complaint when it identifies c w five it said that she worked at life lock since two thousand and seven so what about paragraph one twenty one at the end of the paragraph where it says w five also confirm that still arthur pervasive in occurred through at least june of two thousand and fifteen and her tenure yes that doesn't indicate that the seventy percent rate applied there there's a big difference between saying some alerts were late and judge clifton got his a few days later about ga there's a difference between saying occasionally there would ladle or in saying seventy percent of them were delayed the allocation and paragraph one twenty doesn't indicate what time period nor more important when she's when c w five says well mr ryan told me that he sent these reports to management nothing the alleges that the report showed a seventy percent staleness rate so what do you have sort of the legal equivalent of the game of telephone where it keeps with each retelling from ryan and to c w five to the pla but judge bolton am allies c w five in detail in said her statement that even if credited does not establish knowledge of fraud on the part of hilary schneider who are we supposed to figure out the most likely inference is that what are we supposed to analyze this to determine and if that's so hot is there any other inference that the president of this company that's going through all this  travail doesn't have a clue who is sort of what you're arguing about this seems highly unlikely i don't think i would use the phrase doesn't have a clue the question is when the company described the products when they said we provide all these services were they acting with fraudulent intent in saying a low level employee said my experience which began in two thousand seven is that this one feature might have seventy percent staleness that you can't infer from that that hillary schneider acted with fraudulent intent when she talked about her son buying blue jeans that a department store that i don't think you have to say this inference is more likely than that and for him there are situations where you do that under the reform act but here did jim arcus set out a turn on the part of the corporate executives the contrast here between a lower level employee c w five who didn't say that she sent the reports to them she said well ryan told me that he forwarded reports to management compare that with the quality systems decision i mean it doesn't see w five though so in paragraph one twenty one of c w five seems to understand that she's writing these reports that will be sent to executive management and then it says c w five confirm that snyder was aware of and receive this report as early as november two thousand and fourteen so it then is confirmed by ryan but wouldn't c w five know who the audience was for the reports she's report so it's not only hearsay it's they as to when he did it in a bubble it doesn't say that those reports reflected a seventy percent staleness rate that's why a judge bolton rejected it if you compare c w five in her second hand undated allegations with a quality systems decision the judge fletcher wrote the c w there were the major shareholder and director in the chief operating officer and you're saying we can't take the paragraph one twenty seventy percent credit check alerts were stale and then the reference back to the aware ness of the stillers in the next paragraph and say that the seventy percent number carries into the next paragraph about the reports correct it doesn't say that it so i mean it certainly could be implied so i mean if that's the failure should they have a chance to amend the spell it out more they they had ample opportunity to amend and in fact after the second round of motion to dismiss they submitted a declaration from c w five that said i meant ultimate plus as well as ultimate but it didn't say the reports during the class period showed a seventy percent staleness rate so if that's what she said the reason this matters part of catching the voice my influence spreads the reason it matters is because there's kind of an arms race on these pleading motions between what the c w told the lawyers what the c w didn't president schneider there is nothing that she set that contradicted by this for example when when i think most of the statements in fact that are challenged by the c davis as your honor indicated there's nothing about power but even as to schneider even if you assume that she said at a luncheon that yeah i know we have a staleness issue that doesn't establish that she was committing securities fraud in describing the company's products if if that were enough then every time a company either in its investor presentations or its s c c filings are on its website described its products and you could a former employee who said well it didn't always do that and we had reports that showed it always did didn't always do that there would be enough to get you past a securities fraud claim and it can't be that that's what it does the the fundamental reason in my opinion why the case should be affirmed is what this court held in life like one quote federal securities laws do not protect investors from quality control problems s lapses or management miscues that was the earlier court's opinion at nine fifty three in fundamentally that what you have here you have allegations that the product didn't work as well as the company may have represented in its promotional materials and that that constitutes securities fraud remember during the class period no defendant is alleged to have sold a single share of stock the company was not doing acquisitions with the stock in all the motive and opportunity is not a sign ikhwan non of a ten b five claim it is an element that this court regularly looks at in here where they are in the midst of disclosed contentiousness with the f t c about compliance with the consent decree and nobody is selling any stock the courts should be wary of converting a consumer complaint situation into federal securities fraud thank you your own  i just want to address the still alert issue and what still means confidential witness number five actually gives the definition of what still is in paragraph one twenty she says he meant that the alert was at least one week old so when she's referring to still alert and these are her words that's what she's referring to a curious into paragraph one twenty one that the executives were aware of the siller issue and the reports had the still alerts in them that's out line twenty four paragraph one twenty one the reports included fifteen in addition to the allegations of c w four who provides even more ramp and pervasive allegations about how the oh so you're posing council is arguing that because only paragraph one twenty has the seventy percent number and not the next paragraph we can't carry it over and we don't know that the time period from the later paragraph carried to the earlier one so do you have a case that talks about how we're supposed to read paragraphs of the complaint under the p s l are and whether we can come out of the dock like you're wanting to i think we're entitled to a fair inference as to what see get you five said taken together what it all means and i think the fact that she defined what a sailor means means that it should carry through the rest of her allegations for the still earth's and so we would encourage the courts to look at this through the lens of oracle which requires a court to determine whether defendants actually had access to these reports and deliberately ignored the reports or whether they actually knew a new it was in the reports because they had access to them i think if you look at the oracle standard that i mentioned earlier schneider and the other defendants reese had reasonable grounds to believe material facts existed but they nonetheless failed to obtain and disclose these facts although they could have done so without