FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRENT BERSON, individually and on 

behalf of all others similarly

situated,

Plaintiff,

No. 06-15454 and

D.C. No. FRANK WHITING,  CV-05-01027-SBA Plaintiff-Appellant,

OPINION

v.

APPLIED SIGNAL TECHNOLOGY, INC.;

GARY YANCEY; JAMES DOYLE,

Defendants-Appellees. 

Appeal from the United States District Court

for the Northern District of California

Saundra B. Armstrong, District Judge, Presiding

Argued and Submitted

December 6, 2007—San Francisco, California

Filed June 5, 2008

Before: Alex Kozinski, Chief Judge, Robert E. Cowen,* and

Michael Daly Hawkins, Circuit Judges.

Opinion by Chief Judge Kozinski

*The Honorable Robert E. Cowen, Senior United States Circuit Judge

for the Third Circuit, sitting by designation. 

6387
COUNSEL

Mark Kindall, Andrew M. Schatz and Jeffrey S. Nobel,

Schatz & Nobel, P.C., Hartford, Connecticut; Alan R. Plutzik,

Kathryn Scholfield, Bramson, Plutzik, Mahler & Birkhaeuser,

LLP, Walnut Creek, California, for the plaintiff-appellant. 

6390 WHITING v. APPLIED SIGNAL TECHNOLOGY
David Priebe, DLA Piper Rudnick Gray Cary US LLP, East

Palo Alto, California; Shirli Fabbri Weiss, DLA Piper Rudnick Gray Cary US LLP, San Diego, California; and Kathryn

E. Karcher, DLA Piper Rudnick Gray Cary US LLP, Seattle,

Washington, for the defendants-appellees. 

OPINION

KOZINSKI, Chief Judge: 

We consider whether plaintiffs adequately pled a claim of

securities fraud—something that is much harder now than in

days gone by. 

Facts

Plaintiffs bought stock in Applied Signal Technology, Inc.,

during the six months before the company revealed that its

revenue had fallen 25% from the preceding quarter. Immediately following this disclosure, the stock price dropped 16%.

Plaintiffs sued the company and two of its officers under

Securities Exchange Act § 10(b), 15 U.S.C. § 78j(b), and Rule

10b-5, 17 C.F.R. § 240.10b-5. 

Applied Signal’s customers are almost all agencies of the

federal government. Two civilian agencies together account

for 80% of the company’s revenue; military agencies account

for most of the rest. According to plaintiffs, these government

customers can, at any time and for any reason, order the company to stop working on existing contracts for up to 90 days.

Compl. ¶ 26; see 48 C.F.R. § 52.242-15(a) (model contract

provision); id. § 42.1305(b)(1) (agencies “may” use this provision). The company only gets paid for work it actually performs, so when the government issues a “stop-work order,”

Applied Signal immediately ceases to earn money. And,

because stopped work often is eventually cancelled altogether,

WHITING v. APPLIED SIGNAL TECHNOLOGY 6391
a stop-work order signals a heightened risk that the company

never will earn the money. See Compl. ¶ 26; 48 C.F.R.

§ 52.242-15(a) (after issuing a stop-work order, agencies may

unilaterally modify or cancel the contract). According to

plaintiffs, the precipitous drop in Applied Signal’s revenue

was caused by four stop-work orders the company received,

which halted tens of millions of dollars of work it had contracted to do. Investors were surprised by the drop in revenue,

plaintiffs claim, because Applied Signal continued to count

the stopped work as part of its “backlog”—a term the company defines as the dollar value of the work it has contracted

to do but hasn’t yet performed. Plaintiffs claim that the company’s backlog reports misled them into believing that

Applied Signal was likely to perform work that, in reality, had

been halted and was likely to be lost forever. 

The district court dismissed the complaint on several

grounds and plaintiffs, naturally, appeal. 

Analysis

We first consider whether plaintiffs have pled with sufficient particularity the existence, content and effect of the stopwork orders. We then discuss whether defendants’ alleged

practice of counting stopped work as backlog was misleading,

before weighing plaintiffs’ allegations of scienter and loss

causation. Finally, we ponder whether the backlog reports are

immune from liability as “forward-looking” statements. 

1. Fed. R. Civ. P. 9(b) and the requirement of

particularity

Defendants claim that plaintiffs haven’t alleged sufficient

facts to show that the company ever received three of the four

stop-work orders, or that these orders halted any work that

was later reported as backlog, and that plaintiffs therefore

haven’t pled with “particularity” the “reasons” why the back6392 WHITING v. APPLIED SIGNAL TECHNOLOGY
log figures were misleading. 15 U.S.C. § 78u-4(b)(1); Fed. R.

Civ. P. 9(b). 

[1] But the complaint identifies four confidential witnesses

who worked for Applied Signal and who allegedly will testify

to the existence and effect of the stop-work orders. Defendants quibble that these witnesses weren’t in a position to see

the stop-work orders first-hand because they were “engineers

or technical editors” rather than managers. But any number of

company employees would be in a position to infer the issuance of stop-work orders, which would have had the very

obvious effect of putting numerous employees out of work.

It’s entirely plausible that “engineers or technical editors”

would know, or could reasonably deduce, that the company

had suffered such setbacks. See In re Daou Sys., Inc., 411

F.3d 1006, 1015-16 (9th Cir. 2005) (complaint described confidential witnesses “with sufficient particularity to support the

probability” that they knew about the fraud). 

[2] The complaint also alleges with particularity that defendants counted stopped work as backlog. Defendants admitted

as much in two conference calls with analysts (transcripts of

which were included in the company’s SEC filings). See

pp.6395-96 infra. And the complaint alleges that the stopwork orders were still in effect when defendants touted the

company’s backlog; defendants’ arguments to the contrary

simply misread the complaint.1 Defendants suggest that the

1The complaint alleges that in January 2005, defendants’ backlog figure

included work that “probably would not be realized as a result of StopWork Order No. 1.” Compl. ¶ 34. That is just another way of saying that

the order was still in effect. The complaint also alleges that the third stopwork order removed “customer funding” from a “major project” that was

“abandoned” several months later. Id. ¶ 43. Again, this is a more detailed

and powerful way of making the same point. And the complaint alleges

that the fourth stop-work order was received in December 2004. Id.

¶ 35(c). Because the default duration of stop-work orders is 90 days, see

48 C.F.R. § 52.242-15(a), this order was likely still in effect in January

2005. For the same reason, the second stop-work order, which was

received in “late May or early June,” Compl. ¶ 30, was likely still in effect

when defendants announced their backlog figure on August 25. 

WHITING v. APPLIED SIGNAL TECHNOLOGY 6393
stop-work orders may have expired (and work may have

resumed) before they announced the backlog, and they speculate that two of the orders may have actually been “renewals”

of an earlier order. But plaintiffs’ confidential witnesses suggest otherwise, so these disputes must at least await discovery. 

2. Ruminations on “misleading” 

[3] Defendants argue that, even if they did count stopped

work as backlog, this couldn’t have misled reasonable investors, who would have understood that this was just what

defendants were doing. See Brody v. Transitional Hospitals

Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (a statement is misleading if it would give a reasonable investor the “impression

of a state of affairs that differs in a material way from the one

that actually exists”). Reasonable investors, defendants claim,

would grasp that stopped work was included in backlog upon

reading the following paragraph in the company’s SEC filings:

Our backlog . . . consists of anticipated revenues

from the uncompleted portions of existing contracts

. . . . Anticipated revenues included in backlog may

be realized over a multi-year period. We include a

contract in backlog when the contract is signed by us

and by our customer. We believe the backlog figures

are firm, subject only to the cancellation and modification provisions contained in our contracts. . . .

Because of possible future changes in delivery

schedules and cancellations of orders, backlog at any

particular date is not necessarily representative of

actual sales to be expected for any succeeding

period, and actual sales for the year may not meet or

exceed the backlog represented. We may experience

significant contract cancellations that were previously booked and included in backlog. 

6394 WHITING v. APPLIED SIGNAL TECHNOLOGY
(Emphasis added.) According to defendants, reasonable investors would interpret the underlined phrase to mean that backlog includes stopped work: Because a stop-work order doesn’t

actually cancel the contract, the contract continues to

“exist[ ]”; and because stopped work is perforce “uncompleted,” it still counts as backlog, even though Applied Signal

may never get to complete it. 

[4] While this is a conceivable interpretation of this paragraph, it is hardly the only—or even the most plausible—one.

It is just as likely that investors would interpret the underlined

phrase as limited to work still in progress or work yet to be

started on ongoing contracts. And, though the paragraph

refers to customers’ rights to “cancel[ ]” or “modif[y]” existing contracts, it says nothing about the right to simply stop

work and thus immediately interrupt the company’s revenue

stream. The passage, moreover, speaks entirely of as-yetunrealized risks and contingencies. Nothing alerts the reader

that some of these risks may already have come to fruition,

and that what the company refers to as backlog includes work

that is substantially delayed and at serious risk of being cancelled altogether. 

[5] In ruling otherwise, the district court thought it significant that in a conference call with analysts,2

 one defendant

hinted that stopped work counted as backlog. (As discussed

above, see p.6393 supra, this conversation supports plaintiffs’

allegation that Applied Signal did count stopped work as

backlog.) The brief exchange went as follows: 

Q. [O]ne more question for you . . . please. Does

the $143 million [of backlog] include—is that

net of any potential debooking? 

2The district court’s memorandum cites two conference calls, but the

second call occurred on the final day of the period in which plaintiffs

bought stock, so this call cannot have had any effect on what a reasonable

investor would have thought during that period. 

WHITING v. APPLIED SIGNAL TECHNOLOGY 6395
A. That includes the $12 million that has not been

debooked. 

Q. So it’s not net of any potential debooking?

Includes? 

A. That’s right. 

With the benefit of hindsight and some help from the briefs,3

we can see how this exchange might be interpreted to communicate that defendants counted stopped work as backlog. The

$12 million figure matches the amount of work halted by the

first stop-work order (which the company had disclosed some

three months earlier) and the company representative (who

was one of the two individual defendants) admits that backlog

still “[i]ncludes” this stopped work. But it’s far from clear that

a reasonable investor could have decoded this meaning at the

time. Neither speaker made clear what $12 million was being

referred to, nor said anything about stop-work orders, nor

explained what the words “debook” and “potential debooking” mean. Absent undisputed evidence that these were terms

of art that investors would have understood to refer to stopwork orders, we cannot find, as a matter of law, that defendants disclosed that backlog included a significant amount of

work that had been halted by the company’s customers. 

Defendants also argue that reasonable investors wouldn’t

have been misled because federal regulations warned them

that Applied Signal’s customers might issue stop-work orders.

See 48 C.F.R. § 52.242-15(a) (agencies may contract for this

authority); Whirlpool Fin. Corp. v. GN Holdings, Inc., 67

3Plaintiffs cite this conversation as proof that defendants counted

stopped work as backlog. See p.6393 supra. Defendants mention the conversation in passing, see Appellees’ Br. at 8 n.4, but do not rely on it to

argue that their backlog statements weren’t misleading, see id. at 33-37.

We discuss the phone call here because the district court relied on it in

finding that the backlog statements weren’t misleading. 

6396 WHITING v. APPLIED SIGNAL TECHNOLOGY
F.3d 605, 609 (7th Cir. 1995) (investors are presumed to

know the law under which companies operate). But learning

that stop-work orders might be issued is quite different from

knowing they were in fact issued. One indicates a risk, the

other a certainty. It goes without saying that investors would

treat the two differently. 

[6] None of this means that defendants had an affirmative

duty to disclose the stop-work orders. See Gallagher v. Abbott

Labs., Inc., 269 F.3d 806, 808-09 (7th Cir. 2001) (the securities laws don’t require firms to disclose all information). Had

defendants released no backlog reports, their failure to mention the stop-work orders might not have misled anyone. But

once defendants chose to tout the company’s backlog, they

were bound to do so in a manner that wouldn’t mislead investors as to what that backlog consisted of. We cannot say, as

a matter of law, that defendants fulfilled this duty. 

3. Mental states and strong inferences 

[7] Plaintiffs must “state with particularity facts giving rise

to a strong inference” that defendants acted with the intent to

deceive or with deliberate recklessness as to the possibility of

misleading investors. 15 U.S.C. § 78u-4(b)(2); In re Silicon

Graphics, Inc. Sec. Litig., 183 F.3d 970, 983 (9th Cir. 1999).

Plaintiffs have done so by alleging that defendants Gary

Yancey and James Doyle (Applied Signal’s CEO and CFO)

were aware that stop-work orders had halted significant

amounts of work, yet counted the stopped work as backlog

anyway. 

[8] As described above, plaintiffs allege the existence and

effect of the stop-work orders with particularity. See pp.6392-

93 supra. But plaintiffs allege no particular facts indicating

that Yancey and Doyle actually knew about the stop-work

orders.4 Instead, plaintiffs infer that these high-level managers

4

It’s undisputed that defendants knew about the first stop-work order by

September 9, 2004 at the latest—that’s the day they disclosed the order in

WHITING v. APPLIED SIGNAL TECHNOLOGY 6397
must have known about the orders because of their devastating effect on the corporation’s revenue. We approved a similar inference in No. 84 Employer-Teamster Joint Council

Pension Trust Fund v. America West, 320 F.3d 920 (9th Cir.

2003). In America West, as here, plaintiffs alleged no particular facts to show that certain defendants knew about maintenance problems at America West or about the government’s

investigation of those problems. In place of particularized

allegations, plaintiffs relied on an inference based on defendants’ position as outside directors on America West’s board:

The company’s maintenance problems, and the government’s

investigation into them, were so important to the company

that it was “absurd to suggest that the Board of Directors

would not discuss” them. Id. at 943 n.21. 

[9] Plaintiffs’ inference here is far stronger than the one we

approved in America West. Defendants in America West were

outside directors who did no more for the company than

attend board meetings and serve on a board committee. Id. at

943. Here, by contrast, Yancey and Doyle were directly

responsible for Applied Signal’s day-to-day operations, see

Compl. ¶¶ 8-10, 13, so it is hard to believe that they would

not have known about stop-work orders that allegedly halted

tens of millions of dollars of the company’s work.5 If plaina filing with the SEC. They also referred to it, rather obliquely, in a conference call with investors three months later. See p.6395-96 supra. The

relevant question is whether defendants knew about this order on August

24, 2004, when they announced their backlog to investors in a conference

call without disclosing the order. 

5The first stop-work order halted between $10 and $15 million of work

on the company’s largest contract with one of its most important customers. Compl. ¶ 29. The size of the contract and the prominence of the client

raise a strong inference that defendants would be aware of this order. And

defendants clearly did know about it later, when they disclosed it in an

SEC filing. That disclosure occurred just two weeks after defendants’

allegedly misleading backlog statement, and the “temporal proximity” of

the misleading statement and the subsequent disclosure “bolster[s]” the

6398 WHITING v. APPLIED SIGNAL TECHNOLOGY
tiffs in America West could rely on an inference that outside

directors were aware of maintenance problems over which

they had no direct management responsibility, then plaintiffs

here are entitled to rely on a similar inference as to the four

stop-work orders. 

Defendants argue that America West conflicts with our later

decision in In re Read-Rite Corp., 335 F.3d 843 (9th Cir.

2003), where we said: 

Plaintiffs also rely upon Epstein v. Itron, Inc., in

which a district court held, “facts critical to a business’s core operations or an important transaction

generally are so apparent that their knowledge may

be attributed to the company and its key officers.”

. . . . Epstein, however, predates Silicon Graphics,

inference that defendants knew about the order when they made the statement. Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir. 2001). 

The second stop-work order halted $8 million of work. Compl. ¶ 30(b).

According to a confidential witness, the order followed a “series” of client

meetings where “management” tried unsuccessfully to “negotiate away”

certain contract requirements. Id. Those alleged meetings raise a strong

inference that defendants were aware of this client’s dissatisfaction and

thus also aware of the stop-work order that resulted from it. 

A different confidential witness will allegedly testify that the third stopwork order caused the company to reassign “50-75 employees,” with the

result that one of the company’s facilities became a “ghost town.” Id. ¶ 43.

The magnitude of this reallocation of personnel raises a strong inference

that defendants were aware of it, and thus also aware of the stop-work

order that caused it. 

The fourth stop-work order came from a difficult client, an agency that

required Applied Signal to “complete massive volumes of paperwork” to

meet the agency’s reporting requirements. Id. ¶ 35(c). Applied Signal was

“unable to comply” with the agency’s demands and, apparently as a result,

the head of the project was “demoted.” Id. Such difficulties make it highly

likely that defendants were aware of this customer’s problems; this customer in particular would be on defendants’ radar screen because it had

previously canceled other large contracts with Applied Signal. Id.

WHITING v. APPLIED SIGNAL TECHNOLOGY 6399
which clarified the requirement that a plaintiff must

plead with particularity . . . . 

. . . 

Plaintiffs may have established a “reasonable

inference” that, based upon their job duties at ReadRite, [defendant officers] “would be aware of the falsity of some or all of the statements” regarding the

[company’s] products. The existence of a “reasonable inference,” however, does not satisfy the

PSLRA’s requirement that Plaintiffs allege particular

facts . . . . 

Id. at 848-49 (citations omitted). Defendants misread ReadRite. In that case, plaintiffs hadn’t even alleged that defendants’ optimistic statements were false or misleading when

made. (Plaintiffs tried to show that these statements were

inconsistent with defendants’ later admissions, but on close

inspection, it turned out that there wasn’t any inconsistency at

all—and therefore no support for the proposition that the earlier optimistic statements were false. See id. at 847-48.) So

plaintiffs in Read-Rite were drawing a different inference

from the kind at issue here and in America West. The ReadRite plaintiffs were trying to show that defendants ought to

have discovered as-yet-unalleged facts that would have convinced defendants that their optimism was unfounded. We

held that this was an inference too far: Where defendants

make cheerful predictions that do not come to pass, plaintiffs

may not argue, based only on defendants’ prominent positions

in the company, that they ought to have known better. Instead,

the PSLRA requires “particular allegations which strongly

imply Defendant[s’] contemporaneous knowledge that the

statement was false when made.” Id. at 847. 

[10] Here, unlike Read-Rite, plaintiffs alleged particular

facts (the stop-work orders) that support the inference that the

backlog statements were misleading when made. These facts

6400 WHITING v. APPLIED SIGNAL TECHNOLOGY
were prominent enough that it would be “absurd to suggest”

that top management was unaware of them. America West,

320 F.3d at 943 n.21. 

4. Particular causes of loss 

Plaintiffs must allege that defendants’ misleading backlog

statements caused them a “later economic loss.” Dura

Pharm., Inc. v. Broudo, 544 U.S. 336, 343 (2005); see 15

U.S.C. § 78u-4(b)(4) (at trial, plaintiff must prove that defendant “caused the loss”). 

The parties dispute the standard for pleading loss causation.

Plaintiffs claim that Rule 8(a)(2) applies, and that they need

only provide a “short and plain statement” of their loss causation theory. Fed. R. Civ. P. 8(a)(2). Defendants argue that

plaintiffs must satisfy Rule 9(b), which requires them to “state

with particularity the circumstances constituting fraud.” Fed.

R. Civ. P. 9(b). We have not yet answered this question; nor

has the Supreme Court. Broudo, 544 U.S. at 346 (assuming,

but not deciding, that Rule 8 governs the pleading of loss causation). 

[11] We need not decide the question here. Assuming—

without deciding—that Rule 9(b) governs, such that plaintiffs

bringing a 10b-5 securities fraud claim must plead the element of loss causation with particularity, plaintiffs have done

so here by alleging particular facts indicating that “but for the

circumstances that the fraud concealed”—namely, the fact

that much of Applied Signal’s backlog had been halted by

stop-work orders—“[plaintiffs’] investment . . . would not

have lost its value.” Caremark, Inc. v. Coram Healthcare

Corp., 113 F.3d 645, 648-49 (7th Cir. 1997). The complaint

describes the stop-work orders in detail, explains that the

orders halted a significant amount of work, alleges that the

reduced workload caused revenue to fall by 25%, and claims

that this revenue reduction caused the stock price to drop by

16%. It’s true, as defendants point out, that plaintiffs haven’t

WHITING v. APPLIED SIGNAL TECHNOLOGY 6401
alleged precisely which parts of which contracts three of the

stop-work orders affected. But the complaint describes the

orders in sufficient detail to give defendants ample notice of

plaintiffs’ loss causation theory, and to give us some assurance that the theory has a basis in fact. See 5A Charles Alan

Wright & Arthur R. Miller, Federal Practice and Procedure

§ 1297 (3d ed. 2004) (one reason for Rule 9(b)’s heightened

pleading standard is to prevent baseless claims). Rule 9(b)

requires no more. See Daou, 411 F.3d at 1025-26 (where

defendants overstated the firm’s revenues, and where stock

prices dropped immediately after defendants revealed the

firm’s “true financial condition,” plaintiffs adequately pled

loss causation) (citing Broudo). 

5. Backlog doesn’t look forward 

[12] Defendants argue that the PSLRA bars liability for

their statements about backlog because those statements were

“forward-looking.” 15 U.S.C. § 78u-5(c). But, as Applied Signal uses the term, “backlog” isn’t a “projection” of earnings

or a “statement” about “future economic performance.” Id.

§ 78u-5(i)(1). Applied Signal’s backlog is, instead, a snapshot

of how much work the company has under contract right now,

and descriptions of the present aren’t forward-looking. See

America West, 320 F.3d at 936-37 (defendant’s statements

weren’t forward-looking because they described the “present

effects” of a settlement agreement). Backlog is much like

accounts receivable: It represents Applied Signal’s contractual

entitlement to perform certain work, just like accounts receivable represents the company’s contractual entitlement to be

paid for work already performed. See In re Complete Mgmt.

Inc. Sec. Litig., 153 F. Supp. 2d 314, 340 (S.D.N.Y. 2001)

(accounts receivable is not forward-looking). 

REVERSED and REMANDED.

6402 WHITING v. APPLIED SIGNAL TECHNOLOGY