Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-16430/USCOURTS-ca9-12-16430-0/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

POLICE RETIREMENT SYSTEM OF ST.

LOUIS, individually and on behalf of

all others similarly situated,

Plaintiff-Appellant,

v.

INTUITIVE SURGICAL, INC.;

BENJAMIN GONG; ALEKS CUKIC;

JEROME MCNAMARA; MARK J.

RUBASH; GARY GUTHART;

MARSHALL MOHR; LONNIE SMITH,

Defendants-Appellees.

No. 12-16430

D.C. No.

5:10-cv-03451-

LHK

OPINION

Appeal from the United States District Court

for the Northern District of California

Lucy H. Koh, District Judge, Presiding

Argued and Submitted

March 14, 2014—San Francisco, California

Filed July 16, 2014

Before: Jerome Farris, A. Wallace Tashima,

and M. Margaret McKeown, Circuit Judges.

Opinion by Judge McKeown

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2 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

SUMMARY*

Securities Fraud

The panel affirmed the dismissal of a securities fraud

action brought under §§ 10(b) and 20(a) of the Securities

Exchange Act of 1934 and Securities and Exchange Rule

10b-5 by purchasers of the stock of a company that designed,

manufactured, and marketed robotic surgical devices.

The complaint alleged that through its executives the

company knowingly issued false and misleading statements

regarding its growth and financial health, which caused

artificial inflation of the share price. The panel held that the

company’s statements were, in large part, non-actionable

forward-looking statements or garden variety corporate

optimism. The panel also held that the complaint was

deficient in suggesting that the executives made false

statements with knowing or reckless disregard for the

company’s economic circumstances. The panel concluded

that the complaint did not meet the heightened pleading

requirements under Federal Rule of Civil Procedure 9(b) and

the Private Securities Litigation Reform Act of 1995.

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 3

COUNSEL

Ian D. Berg (argued) and Takeo A. Kellar, Abraham, Fruchter

& Twersky, LLP, San Diego, California; Atara Hirsch and

Mitchell M.Z. Twersky, Abraham, Fruchter, & Twersky,

LLP, New York, New York, for Plaintiff-Appellant.

Michael D. Celio (argued), Robert A. Van Nest, and Cody S. 

Harris, Keker & Van Nest LLP, San Francisco, California, for

Defendants-Appellees.

OPINION

McKEOWN, Circuit Judge:

This case, involving robotic surgical devices, raises the

question of how precise public statements of a company’s

potential growth must be to comply with the anti-fraud

protections of the securities laws. Intuitive Surgical, Inc.

(“Intuitive”) is a corporation that designs, manufactures, and

markets da Vinci Surgical Systems (“Systems”), cutting-edge

robotic devices used for minimally invasive surgeries. The

Police Retirement System of St. Louis (“PRS”) is a public

pension fund that purchased shares of Intuitive stock.

PRS brought a class action suit against Intuitive on behalf

of purchasers of Intuitive common stock, alleging violations

of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934

and Securities and Exchange Commission (“SEC”) Rule 10b5. See 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b–5. 

PRS also named as defendants the following Intuitive

executives(collectively, the “individual defendants”): Lonnie

M. Smith, the CEO and Chairman of the Board of Directors;

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4 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

Gary S. Guthart, the President and COO;1Jerome J.

McNamara, the ExecutiveVice President of Worldwide Sales

and Marketing; Marshall L. Mohr, the Senior Vice President

and CFO; Aleks Cukic, the Vice President of Business

Development and Strategic Planning; and Benjamin Gong,

the Vice President of Finance.

The complaint alleges that through its executives Intuitive

knowingly issued false and misleading statements regarding

the company’s growth and financial health, which caused

artificial inflation of the share price throughout the Class

Period, from February 1, 2008 to January 7, 2009, resulting

in losses to the class members. Despite the nearly six

hundred allegations contained in the over three-hundred-page

complaint, the company’s statements are, in large part,

forward-looking statements or garden variety corporate

optimism—neither category is actionable under the securities

laws. The complaint is also deficient in suggesting that the

executives made false statements with knowing or reckless

disregard for Intuitive’s economic circumstances. Although

PRS tries to paint a picture of Intuitive’s affirmative

misrepresentations, we conclude that after two amendments,

the complaint does not meet the heightened pleading

requirements under Federal Rule of Civil Procedure 9(b) and

the Private Securities Litigation Reform Act of 1995

(“PSLRA”), 15 U.S.C. § 78u-4.

BACKGROUND AND PROCEDURAL HISTORY

Intuitive sells Systems and instruments for robotic

surgeries, specifically da Vinci Prostatectomy procedures

1 Guthart served as President and COO during the Class Period. He now

serves as CEO and Director.

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 5

(“dVP”) and da Vinci Hysterectomy procedures (“dVH”). 

The sale of new Systems2and instruments (“system

placement”) and of replacement instruments (“recurring

revenue”) to hospitals generates Intuitive’s revenue. Revenue

grew continuously from 1999, when the Systems were first

introduced, to 2007. For example, Intuitive share price closed

at $87.11 in January 2007 and grew to $353.00 by December

2007.

The landscape changed significantly in the first quarter of

2008 when the share price fell to $280.50. Shortly after

Intuitive announced these results, Oppenheimer & Co.

released a report (“the Oppenheimer Report”), expressing the

view, corroborated by other sources, that Intuitive’s first

quarter of 2008 share price “was nowhere near enough to

sustain [its] valuation” and that system placement was

decelerating.

Stock prices and revenues continued to fall, and, by the

end of the Class Period, the share price closed at $110.54. 

Around this time, the Board of Directors adopted a severance

plan providing for generous benefits to the individual

defendants in the event of a change in control of the

company. Ultimately, Intuitive disclosed that “it was unable

to sustain system placement growth,” and 2008 revenue

2 The Systems are comprised of “a Surgeon’s Console, a Patient-Side

Cart, a high performance Vision System and proprietary ‘wristed’

instruments—called EndoWrist instruments—and other surgical

accessories.” Using the Systems, which employ “hardware, software,

algorithms, mechanics and optics to translate the surgeon’s hand

movements on the controls into precise and corresponding real-time micro

movements of the EndoWrist instruments positioned inside the patient,”

surgeons “operate while seated at a console and viewing a high resolution,

3-Dimensional (3-D) image of the surgical field.”

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6 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

increased only 46%, meeting the company’s guidance of 40%

growth, but falling slightly short of its expected 49–50%

growth for 2007.

PRS alleges that in the 2007 Annual Report filed with the

SEC and in four analyst calls in 2008, Intuitive knowingly or

recklessly misrepresented the company’s financial situation. 

The report warned that an economic downturn “may have

significant impact on the ability of our customers to secure

funding to buy our products or might cause purchasing

decisions to be delayed. . . . [, which] may result in decreased

revenues and also allow our competitors additional time to

develop products that may have a competitive edge, making

future sales of our products more difficult.” The analyst calls

also contained warnings that certain forward-looking

statements might be made and that “[a]ctual results may

differ materially from those expressed or implied, as a result

of certain risks and uncertainties,” such that “investors are

cautioned not to place undue reliance on such

forward-looking statements.”

Relying on witness accounts, PRS alleges that the

individual defendants “by virtue of their positions with the

company, had access to adverse undisclosed information

about the company’s business, operations, operational trends,

financial statements, markets and present and future business

prospects via internal corporate documents, conversations and

connections with other corporate officers and employees,

attendance at management and board of directors meetings

and committees thereof, and via reports and other information

provided to them in connection therewith.” According to the

witnesses, Intuitive’s proprietarysoftware tracked each use of

the Systems for each procedure down to the types of

movements involved, and this information,“was used to track

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 7

all aspects of [Intuitive’s] business in real-time and to

generate reports on [Intuitive’s] business operations and

business goals.” PRS also points to witness accounts that this

software was “accessible on-line and thus available at all

times” to the individual defendants. One witness described

the company’s management as “top-down,” with the

individual defendants “play[ing] very active roles in running

the day-to-day operations.”

Based on the witness accounts, PRS asserts that the

individual defendants knew of or recklessly disregarded the

falsity of certain public statements and disclosures because

the proprietary software reflected a different situation. 

Although the individual defendants publicly claimed that the

companywould remain in a growth position, PRS alleges that

the individual defendants knew or should have known that

system placement was decreasing because of the economic

downturn, market saturation, and sales and service trends, and

that this decreased growth was evident from the

software-generated reports to which the executives had

access.

In addition to alleging false statements, PRS claims that

statements about increased revenue were misleading because

Intuitive did not disclose known trends, including the facts

that revenue increased due to price increases for Systems

rather than higher system placement rates; the economic

crisis would continue to impact system placement negatively;

market saturation was also causing decreased system

placement; diminished system placement would impact

recurring revenue; and the number of dVP procedures, which

generate the most revenue per procedure, was decelerating

faster than disclosed and would result in decreased system

placement that the growth in dVH procedures would not

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8 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

offset. These representations allegedly “misled investors

about the sustainability of system placement growth . . . and

[r]ecurring revenue growth.”

PRS also highlights other allegedly suspicious activity

during the Class Period. The already-significant

compensation of Intuitive executives spiked. Smith, Guthart,

McNamara, and Mohr made lucrative sales of Intuitive stock

allegedly based on insider information. Finally, in March

2009, three months following the end of the Class Period, the

Board of Directors, led by Smith, authorized a stock buy

back, which was privately negotiated with the individual

defendants.

After two amendments, the district court dismissed the

complaint with prejudice for failure to state a claim under

Federal Rules of Civil Procedure 9(b) and (12)(b)(6).

ANALYSIS

The adoption of the PSLRA in 1995 spurred a growing

body of appellate precedent related to pleading requirements

in securities suits. See, e.g., Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 551 U.S. 308 (2007); In re VeriFone Holdings,

Inc. Sec. Litig., 704 F.3d 694 (9th Cir. 2012). The PSLRA

standards, though well known, require careful application in

each case, particularly in evaluating dismissal under Federal

Rules of Civil Procedure 9(b) and 12(b)(6). See Tellabs,

551 U.S. at 313. Rule 10b-5, which implements the antifraud provisions of section 10(b) of the Securities Exchange

Act, makes it “unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce, or of the mails or of any facility of any national

securities exchange . . . [t]o make any untrue statement of a

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 9

material fact or to omit to state a material fact necessary in

order to make the statements made, in the light of the

circumstances under which theywere made, not misleading.” 

17 C.F.R. § 240.10b–5. To state a claim for securities fraud,

a complaint must allege: “(1) a material misrepresentation or

omission by the defendant; (2) scienter; (3) a connection

between the misrepresentation or omission and the purchase

or sale of a security; (4) reliance upon the misrepresentation

or omission; (5) economic loss; and (6) loss causation.” 

Halliburton Co. v. Erica P. John Fund, Inc., —S. Ct.—, No.

13-317, 2014 WL 2807181, at *6 (June 23, 2014) (citations

omitted). Only the first and second elements—material

misrepresentations or omissions and scienter—are at issue in

this appeal.

In our de novo review of the district court’s dismissal for

failure to state a claim, we accept as true all allegations of

material fact and “construe them in the light most favorable

to the nonmoving party.” Parks Sch. of Bus., Inc. v.

Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). A fraud

claim must satisfy both the pleading requirements of the

PSLRA and the heightened pleading standard of Rule 9(b),

which requires that the complaint “state with particularity the

circumstances constituting fraud.” Fed. R. Civ. P. 9(b); see

also Reese v. Malone, 747 F.3d 557, 568 (9th Cir. 2014). The

PSLRA also imposes “more exacting pleading requirements”

including, among other things, that the complaint “state with

particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind,” 15 U.S.C.

§ 78u-4(b)(2)(A). Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 991 (9th Cir. 2009). Although we examine

individual allegations in order to benchmark whether they are

actionable, we consider the allegations collectively and

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10 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

examine the complaint as a whole. See Tellabs, 551 U.S. at

322–23.

I. Material Misstatements or Omissions

To meet the materiality requirement of Rule 10b-5, the

complaint must allege facts sufficient to support the inference

that there is “a substantial likelihood that the disclosure of the

omitted fact would have been viewed by the reasonable

investor as having significantly altered the total mix of

information made available.” Basic Inc. v. Levinson,

485 U.S. 224, 231–32 (1988) (internal quotation marks

omitted). The heart of PRS’s allegations, which target

misstatements made during various analyst calls, are not

actionable because they are forward-looking statements

covered by the safe harbor provision of the PSLRA or mere

corporate puffery. Nor are the claimed omissions in the 2007

Annual Report actionable because they are not material.

A. Safe Harbor for Forward-Looking Statements

The PSLRA’s safe harbor provision exempts, under

certain circumstances, a forward-looking statement, which is

“any statement regarding (1) financial projections, (2) plans

and objectives of management for future operations,

(3) future economic performance, or (4) the assumptions

underlying or related to any of these issues.” No. 84

Emp’r-Teamster Joint Council Pension Trust Fund v. Am. W.

Holding Corp., 320 F.3d 920, 936 (9th Cir. 2003) (internal

quotation marks omitted). The safe harbor applies if the

forward-looking statement is “(i) identified as a

forward-looking statement, and is accompanied by

meaningful cautionary statements identifying important

factors that could cause actual results to differ materially

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 11

from those in the forward-looking statement,” or (ii) if it is

not identified as a forward-looking statement and not

accompanied by cautionary language, unless the statement

was “made with actual knowledge . . . that the statement was

false or misleading.” 15 U.S.C. § 78u-5(c)(1); see In re

Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010).

The alleged misstatements in analyst calls are classic

growth and revenue projections, which are forward-looking

on their face. See id. at 1111 (“[An] earnings projection is by

definition a forward-looking statement.”). Statements such

as “[i]nstrument and accessor[ies] revenues . . . are expected

to grow approximately 55% over 2007,” “we continue to

expect dVP procedures to grow approximately 40% . . . .,”

and “we are now forecasting our system revenue to grow

45–46% over 2007,” are illustrative examples of Intuitive’s

revenue projections. Contrary to PRS’s assertions, the

statements are not “misleading as to the then-present effects

and circumstances,”of known trends on Intuitive’s financial

health; they plainly project expectations for future growth. 

We adopt the district court’s analysis regarding these

statements.

We also identifythree additional statements, beyond those

the district court identified, as falling within the safe harbor.3

As with the other statements, these responses during the

analyst calls relate to future economic performance or

assumptions underlying those projections:

3 The district court deemed these statements were not actionable because

they were not false or misleading and were not made with scienter. Police

Ret. Sys. of St. Louis v. Intuitive Surgical, Inc., No. 10-CV-03451, 2012

WL 1868874, at *15 (N.D. Cal. May 22, 2012).

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12 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

• “Gynecology plays a bigger and bigger role each

day . . .[G]ynecology is a big player in that, and I

think will continue to be and continue to expand.”

• “So those procedures, GYN procedures . . . you’ll

see that the addition of those procedures has required

a lot of hospitals to get third and fourth systems. And

we see that continuing.”

• “You guys probably know more than we do. 

Clearly it’s not a positive for anyone. We haven’t

seen a significant impact yet [on System leasing]. 

And that is all I can say . . . . I suspect that they may

increase—our leasing companies still have an appetite

for these devices.”

PRS also argues that, in the case of mixed statements, the

non-forward looking portions of statements are actionable. 

We need not resolve whether the safe harbor covers nonforward-looking portions of forward-looking statements

because, examined as a whole, the challenged statements

related to future expectations and performance. See Cutera,

610 F.3d at 1111–12. Only two statements plausibly fall in

this category. In answer to a question about lower capital

expenditures by hospitals, Mohr stated: “At the present time,

we don’t have any indicators that tell us that’s the case. But

we’re early into this.” This statement is properly classified as

an assumption “underlying or related to” projections for

lower hospital expenditures on Systems. See No. 84

Emp’r-Teamster Joint Council Pension Trust Fund, 320 F.3d

at 936. Similarly, when asked if anything in the “external

environment” made the executives nervous about System

purchases in the next twelve months, Smith responded:

“[T]here’s always a decision within a hospital of how do they

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 13

prioritize their capital investment . . . I think we come up

typically fairly high on that priority list. . . . We aren’t

hear[ing] anything that causes us any significant concern

. . . no change from last quarter, I guess . . . .” In context, this

statement is properly understood as regarding Smith’s

expectations of the future impact of the external economic

environment on Intuitive.

Next, PRS challenges the warnings accompanying the

forward-looking statements as inadequate under 15 U.S.C.

§ 78u-5(c)(1)(A)(i). The following disclaimer accompanied

each of the statements:

Before we begin, I would like to inform you

that comments mentioned on today’s call may

be deemed to contain forward-looking

statements. Actual results may differ

materially from those expressed or implied, as

a result of certain risks and uncertainties. 

These risks and uncertainties are described in

detail in the company’s [SEC] filings. 

Prospective investors are cautioned not to

place undue reliance on such forward-looking

statements.

This cautionary language is virtually identical to the

cautionary language approved in Cutera: “[T]hese prepared

remarks contain forward-looking statements concerning

future financial performance and guidance . . . management

may make additional forward-looking statements in response

to questions, and . . . factors like Cutera’s ability to continue

increasing sales performance worldwide could cause variance

in the results.” 610 F.3d at 1112 (internal quotation marks

and alteration omitted). Because the cautionarylanguage was

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14 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

sufficient, the forward-looking statements are exempt under

the PSLRA’s safe harbor provision.

B. Corporate Puffery

Statements of mere corporate puffery, “vague statements

of optimism like ‘good,’ ‘well-regarded,’ or other feel good

monikers,” are not actionable because “professional investors,

and most amateur investors as well, know how to devalue the

optimism of corporate executives.” Id. at 1111 (internal

quotation marks omitted). Four of the challenged statements

fall into this category. Intuitive communicated optimism

(i) that the opportunity for system placement at hospitals “is

still very, very large”; (ii) that there is potential for growth in

the dVP market; (iii) that the company is “reservedly

optimistic” about sales; and (iv) wishing it had “a crystal

ball,” that Intuitive “will come out stronger” and “in a pretty

good position” despite the economic crisis.

According to PRS, these pronouncements are objectively

verifiable and thus qualify as material misstatements, not

mere puffery. The statements are, however, the antithesis of

facts. They represent the “feel good” speak that characterizes

“non-actionable puffing.” See id. In Cutera, we detailed

similar statements, noting that such “optimistic, subjective

assessment hardly amounts to a securities violation.” Id.; see

e.g., id. (“[N]one of our employees is represented by a labor

union, and we believe our employee relations are good” and

“everything is clicking [for the 1990s] . . . new products are

coming in a wave, not in a trickle . . . old products are doing

very well”); see also In re Syntex Corp. Sec. Litig., 95 F.3d

922, 934 (9th Cir. 1996) (holding that general statements of

optimism made in an unstable market were “inactionable

forecasts”).

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 15

PRS relies on Warshaw v. Xoma Corp., 74 F.3d 955 (9th

Cir. 1996), for the uncontroversial proposition that “general

statements of optimism, when taken in context, may form a

basis for a securities fraud claim.” Id. at 959. Though that

broad statement is undoubtedly true, as PRS underscores, the

context in which the statements were made is key. In

Warshaw, “the company, whose financial success depended

on FDA approval . . . made repeated assurances that FDA

approval was ‘imminent’” when it knew that it was not. 

Syntex Corp. Sec. Litig., 95 F.3d at 927 (analyzing Warshaw). 

So too in Fecht v. Price Co., 70 F.3d 1078 (9th Cir. 1995),

“where company officials had made statements that the

company’s expansion of its retail warehouse operations was

successful and that the expansion increased the company’s

prospects for earnings,” when the officials knew that the

expansion had failed. Syntex Corp. Sec. Litig., 95 F.3d at 927

(analyzing Fecht). In this case, “the market already knew” of

the difficulties facing Intuitive through the Oppenheimer

Report and other sources. See In re Stac Elecs. Sec. Litig., 89

F.3d 1399, 1407 (9th Cir. 1996). In context, any reasonable

investor would have understood Intuitive’s statements as

mere corporate optimism.

Citing In re Apple Computer Securities Litigation,

886 F.2d 1109 (9th Cir. 1989), PRS argues that these four

statements are not puffery because they were in fact relied on

by investors. However, Apple does not suggest that in

determining whether a statement is mere puffing we should

consider the mindset of the public. See id. at 1116

(“[E]vidence of stock price movements provides no rational

basis for determining whether [the product’s] risks were

adequately conveyed to the public.”). PRS’s construct skips

a step. Absent an actionable misstatement, reliance does not

come into play. See id. at 1113 (“In the usual claim under

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16 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

Section 10(b), the plaintiff must show individual reliance on

a material misstatement.”). Theoretical reliance cannot

transform corporate optimism into a securities violation.

C. Actionable Omissions

PRS takes aim at the 2007 Annual Report Intuitive filed

with the SEC. Acknowledging that the report was factually

accurate, PRS nonetheless claims that certain statements in

the report altered the “total mix” of information available to

investors by failing to disclose “known trends.” In particular,

PRS faults the report for not detailing that system placement

was declining because of market saturation and the economic

downturn, that new Systems were being purchased at higher

utilization rates, and that dVP growth was declining faster

than anticipated.

In other words, PRS faults Intuitive for not providing a

more fulsome report. The securities laws do not demand such

reporting. Rule 10b–5 prohibits “only misleading and untrue

statements, not statements that are incomplete.” Brody v.

Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.

2002). We have expressly declined to require a rule of

completeness for securities disclosures because “[n]o matter

how detailed and accurate disclosure statements are, there are

likely to be additional details that could have been disclosed

but were not.” Id. In practical terms, “[t]o be actionable

under the securities laws, an omission must be misleading . . .

it must affirmatively create an impression of a state of affairs

that differs in a material way from the one that actually

exists.” Id.

Nothing about the statements in the 2007 Annual Report

would give a reasonable investor the impression that

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 17

Intuitive’s growth was different than it was in reality. The

statements accurately reflect the company’s growth in 2007;

they do not purport to speak to any trends in Intuitive’s

growth or revenues and do not alter the total mix of

information available to investors.4 The 2007 Annual Report

is neither incomplete nor misleading.

II. Scienter

The remaining challenged statements relate to denials that

the Intuitive sales force observed delayed deals, reduced

System sales, or an impact on buying patterns due to the

economic downturn. Because the complaint failed to allege

facts sufficient to raise a strong inference that the individual

defendants knew of these circumstances, PRS has not

established the necessary scienter under the PSLRA.

Scienter is “a mental state embracing intent to deceive,

manipulate, or defraud.” Ernst & Ernst v. Hochfelder,

425 U.S. 185, 193 n.12 (1976). To plead scienter, the

complaint must “state with particularity facts giving rise to a

strong inference that the defendant acted with the required

state of mind.” 15 U.S.C. § 78u–4(b)(2)(A). Scienter is

adequately pleaded when “all of the facts alleged, taken

4 To the extent that PRS’s argument relies on the failure to comply with

Rule S-K, which requires that “known trends” be disclosed in certain SEC

filings, that allegation is insufficient for a claim under Rule 10(b). See In

re VeriFone Sec. Litig., 11 F.3d 865, 870 (9th Cir. 1993) (“While

§ 229.303(a)(3)(ii) provides that ‘known trends or uncertainties’ be

disclosed in certain SEC filings, another SEC regulation, which expressly

addresses forecasts, states that forward-looking information need not be

disclosed.” (citing 17 C.F.R. § 229.303(a))). Intuitive cannot be liable for

failing to make disclosures it was expressly notrequired to make under the

securities laws.

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18 POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL

collectively, give rise to a strong inference of scienter.” 

Tellabs, 551 U.S. at 323. This means that “[a] complaint will

survive . . . only if a reasonable person would deem the

inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” 

Id. at 324.

PRS endeavors to establish scienter through three

different avenues: (i) a core operations theory; (ii) witness

accounts; and (iii) evidence of insider trading. The factual

allegations fall short of establishing a strong inference of

scienter. Read as a whole, the allegations in the complaint at

best establish “mere recklessness or a motive to commit fraud

and opportunity to do so,” and are “not independently

sufficient.” Reese, 747 F.3d at 569.

A. Core Operations

The core operations theory of scienter relies on the

principle that “corporate officers have knowledge of the

critical core operation of their companies.” Id. Core

operations may support a strong inference of scienter under

three circumstances:

First, the allegations may be used in any form

along with other allegations that, when read

together, raise an inference of scienter that is

cogent and compelling, thus strong in light of

other explanations . . . . Second, such

allegations may independently satisfy the

PSLRA where they are particular and suggest

that defendants had actual access to the

disputed information . . . . Finally, such

allegations may conceivably satisfy the

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 19

PSLRA standard in a more bare form, without

accompanying particularized allegations, in

rare circumstances where the nature of the

relevant fact is of such prominence that it

would be absurd to suggest that management

was without knowledge of the matter.

S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 785–86 (9th

Cir. 2008) (internal quotation marks omitted).

Proof under this theory is not easy. A plaintiff must

produce either specific admissions by one or more corporate

executives of detailed involvement in the minutia of a

company’s operations, such as data monitoring, see id.

(collecting cases); or witness accounts demonstrating that

executives had actual involvement in creating false reports. 

See id. at 785 (explaining that information about corporate

structure may raise a strong inference of scienter “in

conjunction with detailed and specific allegations about

management’s exposure to factual information within the

company”); see, e.g., In re Daou Sys., Inc., 411 F.3d 1006,

1022–23 (9th Cir. 2005).

The complaint lacks allegations of specific admissions by

the individual defendants regarding their involvement with

Intuitive’s operations or with the software-generated reports. 

Instead, PRS points to the impressions of witnesses who

lacked direct access to the executives but claim that the

executives were involved with Intuitive’s day-to-day

operations and were familiar with the contents of the

software-generated reports because the substance of the

reports was discussed in meetings. PRS also references

remarks by the individual defendants that they were “going

through the sales pipeline.” The closest PRS gets is a

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statement from Smith that “no one has seen any deal delays”

due to “the overall credit crunch market,” which the

complaint misleadingly paraphrases as Smith admitting that

he “actively sought and received information from the sales

force regarding the effects of the economic crisis and credit

crunch on system placements.”

At best, these facts support a “mere inference of [the

defendants’] knowledge of all core operations,” not scienter. 

See S. Ferry LP, 542 F.3d at 785 (internal quotation marks

omitted). Missing are allegations linking specific reports and

their contents to the executives, not to mention the link

between the witnesses and the executives. See, e.g., Zucco,

552 F.3d at 1000 (“[A]llegations that senior management . . .

closely reviewed the accounting numbers generated . . . each

quarter (through the use of the Access databases), and that top

executives had several meetings in which they discussed

quarterly inventory numbers” insufficient to establish

scienter). “[N]egative characterizations of reports relied on

by insiders, without specific reference to the contents of those

reports, are insufficient to meet the heightened pleading

requirements of the PSLRA.” Lipton v. Pathogenesis Corp.,

284 F.3d 1027, 1036 (9th Cir. 2002). The allegations here are

insufficient to defeat the competing inference and conclude

that the executives “had reasonable grounds to believe

material facts existed that were misstated or omitted, but

nonetheless failed to obtain and disclose such facts although

[they] could have done so without extraordinary effort.” 

Reese, 747 F.3d at 569 (internal quotation marks omitted).

Finally, this is not the “rare circumstance” in which it

would be “absurd” to suggest that management was without

knowledge of the contents of the reports because there are no

allegations regarding discussions of the reports’

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POLICE RETIREMENT SYS. V. INTUITIVE SURGICAL 21

contents—other than that some discussions occurred at some

point. See S. Ferry LP, 542 F.3d at 786. Mere access to

reports containing undisclosed sales data is insufficient to

establish a strong inference of scienter. See Zucco, 552 F.3d

at 1001.

B. Witness Accounts

Next, PRS points to a single statement by a lone witness,

a clinical sales representative in Florida who worked for

Intuitive for three months and said, “100% that hospitals were

cutting back.” This impression of a low-level employee is

just that—an unsubstantiated statement without substance or

context. The complaint lacks critical information about

whether the statement refers exclusively to the Florida

market, how many hospitals were cutting back, how much

and when the hospitals were cutting back, or whether they

were cutting back on system placement or recurring revenue

sources. This vague and incomplete statement hardly

supports a claim that the individual defendants knew or

should have known that sales were slowing and that Intuitive

would not meet its financial projections.

Although PRS does not rely on any other witness

accounts to support an inference of scienter, on de novo

review we consider the complaint in its entirety. Other

witness statements similarly lack foundation because they do

not detail the actual contents of the reports the executives

purportedly referenced or had access to; the statements

provide only snippets of information, not a view of the

company’s overall health; and the witnesses lack first hand

knowledge regarding what the individual defendants knew or

did not know about Intuitive’s financial health. Taken as a

whole and crediting the statements, although incomplete,

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these allegations do not defeat the competing inference that

the individual defendants thought that Intuitive could get

through the economic downturn without suffering the losses

it ultimately suffered.

C. Insider Trading

Intuitive also relies on evidence of insider trading, which

can serve as circumstantial evidence of scienter, but “is

suspicious only when it is dramatically out of line with prior

trading practices at times calculated to maximize the personal

benefit from undisclosed inside information.” Zucco,

552 F.3d at 1005 (internal quotation marks omitted). The

allegations that the individual defendants (excluding Cukic

and Gong) made significant profits from the sale of Intuitive

stock do not raise an inference of scienter, let alone a strong

inference, because the complaint contains no allegations

regarding the defendants’ prior trading history, which are

necessary to determine whether the sales during the Class

Period were “out of line with” historical practices.5 See id.

CONCLUSION

We affirm the district court’s dismissal of the complaint

with prejudice. Read as a whole, PRS’s allegations do not

satisfy the heightened pleading requirements imposed in

5

 PRS also asserts that the spike in compensation raises an inference of

scienter, but offers no support for this proposition.

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securities fraud cases and do not identify any material

misstatements made with scienter.6

AFFIRMED.

6 We also affirm the dismissal of PRS’s claim under Section 20(a) of the

Securities Exchange Act, 15 U.S.C. § 78t(a), because PRS has failed to

establish “a primary violation of the securities laws.” See Howard v.

Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000).

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