stockpiled slow moving inventory that posed a significant markdown risk to pier one however defendants repeatedly claim to investors that pier one had no significant markdown risk those statements were false they misled investors and they artificially inflated pier one stock price our position is that plaintiffs has pled the elements of a section ten dollars b violation and that the dismissal of the case should be reversed we base our position on three points  compelling contemporaneous evidence that defendants were aware of a historic backlog of stockpiled inventory that inventory was in thousands of storage containers and pier ones store and distribution center parking lots and planted evidence includes not only circumstantial evidence but direct evidence defendants does what is your evidence high mark down risk rather than just high in the tory in the record i think your expert guts stricken that is correct john as a matter of fact however the complaint plead significant circumstantial evidence that defendants were aware of red flags of actual markdown risk those red flags and  go through them in a moment those red flags included the fact that they were aware of the slow moving inventory which is pure one standard for taking markdowns if they admitted internally that carolyn over bought merchandise over but merchandise means simply that there is too much merchandise not simply that there is a lot of merchandise and pier one was not hitting its sales goals and its distribution centers were not quickly processing the inventory all of this led to significant markdown risk at the company and defendants were severely reckless to claim otherwise the nd major point of touch upon is that the district court engaged in inappropriate and incorrect fact finding it is well established under supreme court in th circuit law that at the pleading stage the court must accept plaintiff's well played allegations as true and not resolve facts in defendant's favor here the district court repeatedly violated those principles rd the defendant have offered no compelling competing inference of scienter my st main point is that the defendant's par overseas bring them into the u s market and mark up those products it's a margin business investors are paying attention to peer wins margins and its ability to mark up the risk that one might need to take significant markdowns would be a serious threat to pure ones margins its and it would threaten its investment value and its stock price during the class period defendants repeatedly claim to investors and public statements that peer ones inventory was clean and that it did not present a significant markdown risk but at the time the defendants made these statements they were on notice of facts demonstrating significant markdown risk to understand a defendant's claims were false we must begin with pier one standard for taking markdowns so what the district court found that pier one repeatedly disclosed digimon tory growth increased cost in expenses and disappointing sales to investors and analysts that's just a quote from them from the record is that is that clearly erroneous i mean what do what was the what was the nature of that finding order do you agree or disagree with it here one to disclose the numbers of it's the amount of its inventory in dollars and dollar value down hundreds of millions of dollars  inventory that pier one had accumulated however what pier one repeatedly told investors to reassure them that that did not create a problem was that that enormous stockpile of inventory which was slow moving within the company that did not pose a significant markdown risk to the company to make that claim based on what they knew at the time based on what was happening inside of pier one that was severely reckless of its own so it wasn't a pier one didn't say enough it was that it said too much right here what that is correct on here one said too much that those statements particularly when they made the statements repeatedly during the class period including they made the statements four times within the five months from december of two thousand and fourteen through april of two thousand and fifteen to make the claim affirmatively to investors that the facts inside the company do not present a case of significant markdown risk that sort of behavior is severely behavior and within that umbrella severely reckless behavior you have the two elements of behavior that's outside the scope of the ordinary prudence and then the risk that statements could mislead buyers here as a matter of fact the statements did mislead buyers including our client the fact is that each time defendants from december th team through april th in each time these fans came into the market affirmatively and told investors that the high numbers of inventory of the company the hundreds of one million dollars in inventory at the company that is not a problem for investors because quote there is no significant markdown risk the reality is that the i nature of its business pier one needs to be one tells investors that its success it depends on its ability to predict trends and to satisfy consumer demand in a timely manner if you want to home furnishings company the trends in home furnishings are changing constantly if you're one wants to be able to anticipate a meta trend that it sees coming in the home furnishing space they need to purchase new inventory and make sure that that's coming down the line what we're dealing with here and what this case is dealing with here is the inventory that was currently already at the company the backlog that they are the saw the distribution centers that were in disarray and were in crisis and unable to process that majority even bring it to the consumers all it was just that it wasn't being properly processed and delivered part of the improper being part of it being not being able to be delivered in process that makes the inventory slow moving that  peer one's own stated standard for markdowns if inventory is slow moving if they have a majority that is not getting to the consumer then that satisfies pure one's own stated standard in its form ten k is that it states to investors it takes markdown that until september two thousand and fifteen and then in addition all of that the over buying and the that failure to meet sales goals that caused this significant destruction within the distribution centers and the stores and i share a contradiction there and i'm i'm i'm raising the question sure you can give us a good answer but it's if if there are stores that are waiting for inventory that the stores can't get and that assumes that that inventory excess inventory on hand it has to be marked down and inventory that hasn't arrived yet at the stores that ordinarily would sell in terms of the demand that the stores are pulling in the toy the complaint actually pleads that the stores were pushing back and telling headquarters that they did not want more inventory the stores themselves were overwhelmed with excess inventory the stores themselves so how was there a problem in with to do with the distribution chain of thought are you referring to that earlier with their with that there were problems with getting getting the goods delivered to stores if i misunderstood but it cleared up for us so that so the distribution chain includes pier one taking the products from overseas there in giant tractor trailer sized shipping container they under an ideal situation here one of those those shipping containers into the distribution centers then the distribution centers get those products out to the stores and to the consumers who are buying things on line the problem here is that during the class period each element of that chain were significantly disrupted by the fact that the company had over bought inventory defendant smith admitted that during the class period in march th teen internal town hall meeting that the company had been overly ambitious and they had over but inventory your record show what percentage is going to retail i don't believe the complaint cleans the allegation but at the end of the class period what the defendants admitted was that the markdowns that they eventually took were was the result of the fact that they had over bought inventory and we have accounts from former employees who stated that the company over but inventory across the board that's the words they used so across the board whether or not it's the e commerce or whether or not it's the store inventory they overbought that and in addition at the march th teen internal town hall meeting smith emitted that one pure one's e commerce initiative that i'm sorry that dear ones e commerce initiative which is called one pier one that initiative had been overly ambitious and that that initiative had led to over purchase of products so as of the bill as of right before the beginning of the class period defendant smith is emitting to his ntory i have two questions doesn't high in the tory only apply high mark down risk if the high inventory can't be sold slowly at the market price them how does the pleading show that pier one executives knew that they could not do that that's the st question and the nd question is can we affirm on the alternative ground that there's not an that the the idea that the company could simply sell off the large not of inventory through to sales is contradicted by the fact that throughout the class period the company was not meeting its own internal sales goals that the executives knew the enough to say it's a high markdown risk yes pier one i think didn't meet the sales goals that's the reason the reason was among other reasons i mention in terms of the problems in the distribution centers the the company didn't just miss the sales goals once or twice as of the beginning of the class period the defense myth admitted they had over but in the tory and then throughout the the complete daily sales data sent to smith and turner showed pier one could not meet its aggressive sales goals for two thousand and fourteen a quarterly business review smith and turner became aware multiple times of the disparity between the growing inventory and the fact they're having disappointing sales the comp the company also set internally a a limit on the amount of markdowns that it can take of markdown dollars and they didn't tell that to investors because what they want to do is meet the margin numbers least four times during a class period said there is no significant markdown risk at the cup markdown risk is critically important to pier one investors the distance circuits decision in  understand the risk that the company is aware of a serious risk the company can't understate it and this isn't a case where the company simply withheld information from the market the company affirmatively went into the market to assure investors that the inventory was not a problem that the same missing sales goals were no problem and they didn't see any significant marked interest just the next month after the last statement on the issue just the next month they marked down everything at the company by up to fifty percent of those facts don't square with each other if there's anything else that you want to cover in your opening in any other issue you can you can have a minute to do then you can have an additional minute if there is something else that you haven't covered and if not you still have your full five minutes for voting so it's up to you i think i'll use the additional minute to just highlight the fact that the district court improperly results stacked questions at the pleading stage here one standard for taking markdowns is  whether or not they're slow moving in it or plaintiff has pled cogent compelling evidence that there was no moving in the tory of the defendants were aware of it the defeated district court took the alternative approach which is not supported by the facts to hold that defendants needed to be aware of excess seasonal or obsolete inventory that's not pure ones own standard and when the district court did that it informed the district court's holding in on a number of the other scienter points the district court also held for example that pier one could have been prioritizing the product and making sure that even though it's in the backlog it would take up a seasonal product and prioritize that and make sure that got to the market but there's no facts to support that it actually happened here at the end of the class period the company marked down in the middle of that and made two thousand and fifteen the company mark down everything by up to twenty five to fifty percent off not just seasonal not just absolutely not just outdoor products which is their additional pretext explanation they offer now it's not just about those specific categories of merchandise the company overbought across the board i was too much inventory it was a crisis that's that's what happened here all right thank you m bring your other good morning and that please the court my name is stephen crane i represent pier one alex smith and carrie turner judges fitzwater and schiller got the case right appellant has not sufficiently pled scienter to sustain a securities fraud case in this circuit or in any circuit for that matter that are subject to the court's direction and it's been much my time talking about the specific slander allegations made by appellant focusing on specific statements made to or by alex smith i note that on appeal kerry turner the former c f o is not mentioned there are allegations about carrie turner where you did it the company did it one point say that the situation didn't quote did not pose a significant immediate markdown risk is actually an accurate representation of the record that is an accurate reputation that ation in the record and that's that's a pretty strong statement that supports the players position it seems to me well your honor if we focus on for example the april th two thousand and fifteen statement this misstatement that they're now saying is the is the misrepresentation the rely upon what alex smith actually says is that the the inventories are healthy and not believed to pose a substantial mark down the risk turning to judge question is we are is a very very high standard in the court has a limited what that standard means in need in neiman's situation was the c f o made representations about a particular well well number four in the production of will number four at seven thousand dollars barrels a day which accounted for twenty two percent of the company's overall production made that recitation for two months and then a couple months later revealed that he that the well was only producing at three thousand five hundred barrels a day in the interim there were allegations that he had received reports from confidential witnesses indicating that it representations were wrong in that case in that case under those facts the th circuit did not find healthy and they didn't see substantial market risk and there's a point there on the substantial more generous i don't know it's a stance on mortgages i don't know if it ever occurred what i do know is that by the end of the class period the margin on products sold remained at over fifty five percent and was only down by two percent from the prior year so i don't know if there's any compelling allegation that some substantial markdowns ever actually occurred in this context i'll skip ahead in this context why did they have to have those marked down dollar in turning if there wasn't a risk discloses that part of what it does is sells things at markdowns you can't drive a pier one where you don't see things for sale at pier one that's part of what they do and in fact judge fitzwater cited earlier comments from earnings calls where pier one indicates that its business model is based upon selling things that at promotional supposedly the individual defendants were aware that there were constriction placed in the types of markdowns can be taken but that's just part of their ordinary business is in reckoning response to any kind of crisis pending no there's no there's no allegation whatsoever that that's not part of their ordinary business and in fact it is so what a top very quickly about or as quickly as i can about motive because where we are today is that the plaintiffs are asserting a circumstantial case based on a recklessness standard without any evidence of motive so there's no stock  sales there is nothing no transactions no financings during the class period nothing of the sort of thing that even this court looks skeptically in terms of serving as motive in fact the record tells the opposite story and that gave alex smith a greater chance of achieving his his bonus and then they rely upon the court's ruling in barry for the proposition that in case lee and sin of compensation can serve as evidence of murder very very different very different circumstances one hundred and seventy five percent of his salary that he was able to achieve and even then the court said that's not enough to get scienter it has to be tied to other facts in that case there were facts alleged that the c e o received the bonus based on the revenues of the company was aware that his actions were improper and he was frightfully booking revenues smith received no compensation during eggs it's in a compensation during the class period and i think i have this right even in every case where ya say with a court of said excuse me with a  plain it can explain how lowering the evatt daughter target in any way helped smith achieve it after all the allegations are that smith and pier one continue to purchase inventory while selling off inventory at discounts and that's going to have the absolute opposite effect on to make sure that i have this correct when the senior executives limited the total amount of markdown dollars pair want to at any given time that was in normal day to day business occurrence it is your honor and there's no allegations to suggest otherwise what's more there is no allegations that specifically identify any act by smith or turn there's no allegation in fact that smith or turner at or at that turner anyway there is no direct tie that to the defendants and that's required under the high standards set by this court and other courts regarding whether you can rely upon confidential witnesses as a basis of science if you want to speak case sure so in pontiac versus dell sure i have all my cases in front of me what was represented was that dell expected revenues to be in line with projections and they missed it by a half one billion dollars so it's a massive massive massive miss and the allegations in that case were that dill had in its warehouses stores of high gear and computers and this was at a point in time when the world shifted from you know very expensive high end laptops and desktop to a cheaper computer and the evidence in that case was that the defendants prior to making the statements that reveled in were going to be in line with expectations were aware that the market had shifted away from their products which is very very different from pier pir one discloses as as the quarters where pier one discloses that it has products that it buys year after year and sells year after year and the timing rooms chairs dining room tables and pops on chairs and things of that nature if i can to turn to this this issue of whether the courts below found facts it's not overstatement and  the problem that the plaintiffs hands was that judge fitzwater pointed out that in the mix a pure ones inventory half of that is rebuy goods tables and chairs that they order year after year and they still year after year and his suggestion based upon the disclosures of pier one and the fact that the pier one was during the class period able to moderate its purchases and lower the inventory that is those goods or not inherently subject markdown you could just warehouse them and trot them out as as the stores need them so there's an invention in the nd complaint in the invention is that pier one is a trim based fashion retailer and judge are found that that was a conclusory allegation and did not find it was a reasonable inference now it's not overstatement to say that the pellets case really rises and falls on the notion that we are a trend  the courts obligation as you know is to consider other plausible non complex what nations when determining whether appellant has pled cogent and compelling scientific scienter scienter allegations the courts hands are not tied behind its back or the full text documents to avoid cherrypicking as judge harmon has noted the court cannot fulfill its gatekeeping role plaintiffs are free to quote selectively or out of context from documents this court has also noted recently that public disclosure versus a rex agenda i think supports the analysis undertaken by the courts below they are the th circuit wrote the incorporation by reference doctrine exists to prove it plaintiff from selecting only portions of documents that support their claims while admitting portions of those very documents that we can or doom their claims now with that in context i want to to show what what what the what the plaintiffs have done here miss coffee says approximately half of our inventory is comprised of new and seasonal skews including outdoor while the remaining fifty percent is comprised of long standing collections of our products that do well for us  out they want you to skip over that part because it doesn't fit with the new invention that everything we have is trend based the comment is in fact i think poison to their claim that pier one is a trend based fashion retailer compare what she said as coffee said about the product mix with the conclusion reallocations this one's from page seven of the reply brief trim based fashion retailer is puppets on chairs for example you know unless some just wrong about this and not in trendy state since you know call it one hundred and sixty dollars but they sell them year after year after year so we're not a trend based fashion re april th statement not believe poses substantial markdown risk they say all of this is borne out and revealed to be a line at the end of may may st when there's a sale of fifty percent off and everything council just said that that's not what those ads said ok just show it to judicial notice the ads the answer in the record the ads say by the way the sale ins on that same day up to fifty percent off on everything and then if you look in the margins sort of upper left side you'll see that there's a very specific limit on indoor cd that is only fifteen percent off and then a print underneath that says excluding dining scene so the notion that we had a fire sale as opposed to simply a promotion to drive sales is unwarranted what's more if you take that sale and the next sale where it was sixty percent off and the next sale were at seven percent off during the summer summer sales well the plaintiffs are right and that is the moment where we reveal that we have to get rid of all are in the board inventory and that we are so burdened by this massive amount of inventory that we just have to sell it at rock bottom prices where is the impact on margin product margin product margin and i do know that the world the real gnosis pier one sells at a high product margin and they maintained about a fifty five percent margin versus fifty seven percent the year before so we're is this moment where these massive mortgages which gets me back to the point i was making earl on i'm not sure substantial markdowns ever occurred i don't think there's any suggestion that they actually ever ever occurred from an al you account huge drop huge that's a great question judgment when or so the huge stop huge drop drop in stop follows news of adjustment and guidance for the following year so pier one has disappointing sales they report disappointing sales and then they adjust their guidance for the following year and their guidance for the following year is lower than previously been indicated and that's what causes your stock to drop in the reaction there's there's no question because of this is revealed in our public filings that pier one disclosed every quarter without restatement rising inventory and it also disclosed lagging s for assuming that the sales would continue improve pier one sales during the kind of period are actually ticking up until right at the very end when they get flat they actually take up they just don't tick up as much as pier one anticipated  and the reaction this is on the record on the break in the reaction by pier one is today moderate its purchases for future goods so that its inventory level inventory level and sales levels can get extra mines is the record saying anything at the record the record doesn't say either way i had a temptation to say hey look at all these other ads by pier one but it seems so obvious and i did in the briefing at the lower courts to him to do it but it seems like was objecting at that question that given what pure run routinely discloses and that is that it sells goods on a promotional basis and on a discount basis as a routine part of its business it's only safe to assume that that was simply a typical sale of retailers like pier one or pottery barn or whatever that has significant sales from time to time to drive people to the stores you can if there was another point you wanted to cover i think there was you can have two more manage if not you don't have to thank you owners i just want to start with the last point i was covered as to whether or not these sales were out of the ordinary they certainly were out of the ordinary in the facts as we put in the complaint demonstrate that that was the fact in september of two thousand and fifteen if you want to disclose the area of greatest challenge has been merchandise margin he's focused on margin because the analysts and investors are focused on margin let's talk about the specific amount of margin the margin went down from fifty nine and a half percent to fifty five  seven percent sure that is still a high margin but if it's but investors are focused on how focused on humans ability to generate high margins now and into the future so that was a three eight percent historical level we've still got more clarity inventory than we used to have and we're at the very very early stages of this process that's paragraph one hundred and seventy dollars the complaint they just took an entire summer of markdowns that that impacted their margins now it's december and they're still needing to take markdowns and they're saying that they're just at the beginning of this process ok white while you still have time so address the point that mr crane made about  assertion that pier one never described a shop as a trim based fashion retailer but that you seem to have described it that way the the phrase trend based fashion retailer in quotes we don't we don't allege that anyone actually ever said pier one is in fact a quote trend based fashion retailer what we allege in the complaint is that pure one told us investors repeatedly that our business depends on our ability to meet current trends and do that in a timely fashion they see that in their form ten k s were describing to the s e c and the investors what is the nature of their business their home furnishings business they have to meet trends they also make statements about the fact that the company needs to meet meet fashion trends it's it's the defendants are splitting hairs and they're they're being it's not exactly the fac that's that's really what happened here say well no we have this hidden unknown markdown dollar policy we're going to limit the the senior executive decisions the senior executives were in control of them the markdown process they were at the meetings and this is the company's policy to on the on the issue of what facts the court may consider on a motion to dismiss under tellabs the court is permitted to to consider competing inferences of santa but the universe of facts that the court may use to rely