FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SOUTH FERRY LP, # 2, individually 

and on behalf of all others

similarly situated, No. 06-35511 Plaintiff-Appellee,

D.C. No.

v.  CV-04-01599-JCC

KERRY K. KILLINGER; DEANNA W. OPINION OPPENHEIMER; WASHINGTON

MUTUAL, INC.,

Defendants-Appellants. 

Appeal from the United States District Court

for the Western District of Washington

John C. Coughenour, District Judge, Presiding

Argued and Submitted

April 8, 2008—Seattle, Washington

Filed September 9, 2008

Before: Raymond C. Fisher, Ronald M. Gould, and

Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Gould

12533
COUNSEL

Stephen M. Rummage, Davis Wright Tremaine LLP, Seattle,

Washington, and Jay B. Kasner (argued), and Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP, New York,

New York, for the appellants. 

Melvyn I. Weiss, Lori G. Feldman, and John Rediker, Milberg Weiss & Bershad LLP, New York, New York, and Stuart J. Guber and James Evangelista, Motley Rice LLC,

Atlanta, Georgia, and Professor Arthur R. Miller (argued),

New York University School of Law, for the appellee. 

SOUTH FERRY LP v. KILLINGER 12537
OPINION

GOULD, Circuit Judge: 

Defendants-Appellants Kerry Killinger (“Killinger”),

Thomas Casey (“Casey”), Deanna Oppenheimer

(“Oppenheimer”) and Washington Mutual, Inc. (“WAMU”,

collectively, “Defendants”) appeal the district court’s partial

denial of their motion to dismiss a securities fraud action

brought by Plaintiffs-Appellees South Ferry LP et al. (“South

Ferry”), who allege violations of Sections 10(b) and 20(a) of

the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b),

78t(a), and its underlying regulations, found at Rule 10b-5, 17

C.F.R. § 240.10b-5. Defendants argue that the district court

erred by inferring that Defendants had knowledge of “core

operations” at WAMU based on their management positions

and argue that such an inference does not satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(2)

(“PSLRA”). The district court certified for interlocutory

appeal its order granting in part and denying in part defendants’ motion to dismiss. We have jurisdiction pursuant to 28

U.S.C. § 1292(b), vacate the district court’s order, and

remand.

I

WAMU is a publicly-traded financial services company

that serves individuals and small businesses, offering consumer banking, mortgage lending, commercial banking, and

other services. Defendants Killinger, Casey, and Oppenheimer all served as officers of WAMU during the class period,

with Killinger serving as the Chairman of WAMU’s Board of

Directors, President, and CEO, Casey serving as Executive

Vice-President and CFO, and Oppenheimer as President of

WAMU’s consumer group. Thus, they held not merely nominal but rather key officer positions at relevant times. 

12538 SOUTH FERRY LP v. KILLINGER
Plaintiffs are WAMU shareholders who seek to represent a

class of individuals who owned WAMU stock between April

15, 2003 and June 28, 2004. The complaint relates to several

related aspects of WAMU’s mortgage lending business. That

business involves originating home loans, buying and selling

home loans in the secondary markets, mortgage servicing, and

providing mortgage-insurance products. 

When WAMU originates a home loan, it may later sell that

loan to another institution on the secondary market. However,

WAMU typically retains the mortgage servicing rights

(“MSRs”) for the loans that it sells. The holder of MSRs,

WAMU here, provides billing and other services to mortgage

customers for the life of the loans even though a different

entity may actually own them. MSRs have an independent

value to WAMU because WAMU is paid a portion of each

loan payment for the services it provides. 

This case relates to two types of risk present in WAMU’s

mortgage lending business, both of which are exacerbated by

nationwide interest rate fluctuations. The first, “MSR-related

risk,” is the risk that WAMU will lose MSR-related revenue

due to the pre-payment of loans that it services. MSR-related

risk is greatest in an environment in which interest rates are

falling, because falling rates make it more likely that borrowers will refinance their loans to take advantage of cheaper

financing. When they do so, the original mortgage loan is paid

in its entirety and replaced with a lower-interest loan, often

from a different lender. Because WAMU’s MSR-related revenue from a given loan comes from the services that it provides

over the life of that loan, a loan that is fully repaid at an early

date due to refinancing causes WAMU to lose future MSRrelated revenue. 

The second type of risk, “pipeline risk,” is the risk that

WAMU will commit to fund a loan at a certain interest rate

only to see market interest rates change by the time the loan

is finalized. This may occur whenever interest rates change.

SOUTH FERRY LP v. KILLINGER 12539
Borrowers typically “lock in” an interest rate on their home

mortgage loan several weeks before they actually close a

mortgage deal. A loan in this lock-in period is referred to as

a loan “in the pipeline.” When mortgage rates are falling, borrowers may find that the rate that they have locked in is

higher than the prevailing rates at the time of their closing.

Those borrowers may abandon a lender with a loan in the

pipeline, such as WAMU, to take a mortgage from a different

lender at the lower then-current rate. Conversely, when rates

are rising, borrowers may lock in rates that turn out to be

below market by the time of their closing, leaving WAMU to

fund at below market rates all loans that were in the pipeline

at the time that rates rose. 

To manage MSR-related and pipeline risk, WAMU hedges

its expected MSR and mortgage-origination revenues with

securities and derivative instruments. In a rising interest rate

environment, WAMU also relies on an important “natural

hedge” to protect its revenues. When rates are rising, WAMU

faces greater pipeline risk because market rates are more

likely to exceed the locked-in rates at the time mortgage deals

close. However, MSR revenues provide some protection from

this pipeline risk, because borrowers are less likely to refinance and pre-pay their mortgages when the rates that would

apply to their refinancing loans are higher than the rates they

pay on their existing mortgage. Accordingly, WAMU

receives more stable MSR-related revenues when it suffers

increased pipeline risk. This natural hedge, in theory, allows

WAMU to have a more steady revenue stream despite volatility of interest rates. 

South Ferry alleges that the individual defendants made

materially false or misleading statements concerning

WAMU’s ability to manage MSR-related and pipeline risk

during the class period. South Ferry also alleges that the individual defendants repeatedly assured investors that the natural

hedge and additional securities and derivative hedges would

allow WAMU to thrive in an environment where interest rates

12540 SOUTH FERRY LP v. KILLINGER
were increasing, and that the individual defendants assured

investors that WAMU had fully integrated the information

systems that are central to WAMU’s ability to maintain and

update their various hedges in a timely fashion during periods

of interest rate volatility. According to South Ferry, WAMU

was unprepared for the interest rate volatility that occurred

later because it failed to integrate its information systems to

permit it to keep a close watch on the hedges that it maintains.

Defendants moved to dismiss South Ferry’s complaint on

May 17, 2005, and the district court granted the motion to dismiss as to defendants Chapman, Longbrake, and Vanesek, but

denied the motion as to the remaining defendants. South Ferry

LP No. 2 v. Killinger, 399 F. Supp. 2d 1121 (W.D. Wash.

2005). The district court found that South Ferry satisfied the

PSLRA’s heightened pleading standard1 by inferring that the

remaining defendants had knowledge of WAMU’s difficulties

with their information systems “because of the nature of the

statements they [Defendants] were making and the nature of

these specific alleged operational problems,” relying on In re

Northpoint Communications Group, Inc. Securities Litigation,

184 F. Supp. 2d 991, 998 (N.D. Cal. 2001), for the principle

that it may be inferred that facts critical to a business’s “core

operations” or important transactions are known to key company officers (sometimes referred to in this opinion as the

“core operations inference”). South Ferry, 399 F. Supp. 2d at

1141. Defendants moved for reconsideration or, alternatively,

for a certification from the district court that interlocutory

appeal was appropriate under 28 U.S.C. § 1292(b) to determine whether the district court properly imputed scienter in

the complaint’s allegations based on the inference that key

officers had knowledge of the “core operations” of the company. 

1The PSLRA requires, among other things, that a plaintiff “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). 

SOUTH FERRY LP v. KILLINGER 12541
The district court denied the motion for reconsideration, but

granted the certification motion. In the order granting the certification motion, the district court recognized that “the complaint does rely on circumstantial evidence and an inference

of knowledge arising from the connection between Defendants’ job roles and the core operations of the business,” and

that “[s]hould the Ninth Circuit rule that the core operations

inference is improper, even Defendants’ specific statements

indicating first-hand knowledge of WAMU’s technological

and operational systems may be insufficient to support a

strong inference of scienter.” Defendants timely pursued this

interlocutory appeal.

II

The decisions of a district court on motions to dismiss are

reviewed de novo. In re Silicon Graphics Inc. Sec. Litig., 183

F.3d 970, 983 (9th Cir. 1999). We must accept as true all

well-pleaded allegations in the complaint. Id.

III

[1] Under the PSLRA, South Ferry 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. § 78u4(b)(2). “Under this provision, the mental state required for

securities fraud liability is distinct from the level of pleading

required to infer that mental state.” Silicon Graphics, 183

F.3d at 975. In a securities fraud action like this one, there is

no dispute as to the required state of mind: the plaintiffs must

show that defendants engaged in “knowing” or “intentional”

conduct. Id. We have held that reckless conduct can also meet

this standard “to the extent that it reflects some degree of

intentional or conscious misconduct,” or what we have called

“deliberate recklessness.” Id. at 977 (internal quotation marks

omitted). 

[2] The United States Supreme Court has recently discussed this scienter requirement, holding in Tellabs, Inc. v.

12542 SOUTH FERRY LP v. KILLINGER
Makor Issues and Rights, Ltd., 127 S.Ct. 2499, 2510 (2007),

that a strong inference “must be cogent and compelling, thus

strong in light of other explanations.” According to the Court,

“[t]he reviewing court must ask: When the allegations are

accepted as true and taken collectively, would a reasonable

person deem the inference of scienter at least as strong as any

opposing inference?” Id. at 2511. 

[3] Before the Tellabs decision, we construed this pleading

standard in light of the applicable substantive legal standard,

explaining that, “the PSLRA requires plaintiffs to plead, at a

minimum, particular facts giving rise to a strong inference of

deliberate recklessness,” Silicon Graphics, 183 F.3d at 979,

and specifying that “plaintiffs proceeding under the PSLRA

can no longer aver intent in general terms of mere ‘motive

and opportunity’ or ‘recklessness,’ but rather, must state specific facts indicating no less than a degree of recklessness that

strongly suggests actual intent.” Id.

The district court concluded that the PSLRA scienter standard was satisfied in this case because of alleged public statements by Defendants that WAMU’s information systems

were fully integrated and effective at a time when WAMU

was suffering technology problems that affected its ability to

control MSR related and pipeline risk and hedge effectively.

It concluded: “Defendants’ knowledge of this information can

be inferred because of the nature of the statements they were

making and the nature of the alleged operational problems”

because “[i]t may be inferred that the facts critical to a business’s core operations or important transaction are known to

a company’s key officers.” South Ferry, 399 F. Supp. 2d at

1141 (citing Northpoint, 184 F. Supp. 2d at 998). Defendants

argue that the district court’s reliance on the “core operations”

inference was erroneous in light of In re Read-Rite Corp.

Securities Litigation, 335 F.3d 843, 848-49 (9th Cir. 2003). In

Read-Rite, we held that while it might be a “reasonable inference” to conclude that high-ranking corporate officers have

knowledge of the core operations of their companies, it was

SOUTH FERRY LP v. KILLINGER 12543
not a “strong inference” as required by the PSLRA in that

case. Id. (internal quotation marks omitted). 

To evaluate the district court’s judgment, we must consider

whether a scienter theory that infers that facts critical to a

business’s “core operations” or an important transaction are

known to a company’s key officers satisfies the PSLRA’s

heightened pleading standard. 

We have visited these issues before in several cases, most

notably in Silicon Graphics, In re Vantive Securities Litigation, 283 F.3d 1079, 1087-88 (9th Cir. 2002), and Read-Rite.

Silicon Graphics does not specifically address whether the

core operations inference can satisfy the heightened PSLRA

pleading standard, but it sets a very high bar for securities

plaintiffs under the PSLRA. As we there explained, the

PSLRA requires that plaintiffs state with particularity all facts

on which their belief of scienter is formed. 15 U.S.C. § 78u4(b)(1); Silicon Graphics, 183 F.3d at 985. “This means that

a plaintiff must provide, in great detail, all the relevant facts

forming the basis of her belief. It is not sufficient for a plaintiff’s pleadings to set forth a belief that certain unspecified

sources will reveal, after appropriate discovery, facts that will

validate her claim.” Id. We held that the plaintiffs’ complaint

was deficient in Silicon Graphics because it did not contain

the requisite detail.2 Without those details, we held that we

could not conclude that the defendants had actual knowledge

of the facts they were alleged to have misstated and that we

2

See id. at 985 (“In this case, Brody’s complaint does not include adequate corroborating details. She does not mention, for instance, the

sources of her information with respect to the reports, how she learned of

the reports, who drafted them, or which officers received them. Nor does

she include an adequate description of their contents which we believe—

if they did exist—would include countless specifics regarding ASIC chip

shortages, volume shortages, negative financial projections, and so on. We

would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those

reports as well as such facts as may indicate their reliability.”) 

12544 SOUTH FERRY LP v. KILLINGER
were forbidden by the PSLRA from finding a strong inference

from such general allegations. Id.

Three years later, in Vantive, 283 F.3d at 1087-88, we elaborated on the Silicon Graphics standard, explaining that Silicon Graphics required “ ‘corroborating details’ ” to support

the allegations in the complaint. (quoting Silicon Graphics,

183 F.3d at 985). In Vantive, plaintiffs alleged that internal

company reports contained information contrary to the public

statements of company management, and that said management would have known of the reports because of their

“hands-on managerial style.” Id. (internal quotation marks

omitted). We held that these allegations did not meet the

PSLRA requirements because plaintiffs did not offer details

that would bridge the gap between the existence of the reports

and actual knowledge on the part of the defendants. Id. We

concluded that we could not infer such knowledge from the

general allegation that management was informed about

important issues in the company. 

Finally, in Read-Rite, we rejected the notion that “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” under the PSLRA.

Read-Rite, 335 F.3d at 848. The Read-Rite plaintiffs argued

that defendants alleged false statements and high rank within

the company, viewed in conjunction with the importance of

the products that were the subject of the statements, created

a strong inference of scienter under Silicon Graphics. We

rejected that argument, holding that those facts presented only

a “reasonable inference,” but were not sufficiently detailed to

meet the PSLRA and Silicon Graphics standard. Read-Rite,

335 F.3d at 848-49. While such an inference may have sufficed before the enactment of the PSLRA, it was not enough

under the PSLRA’s heightened pleading standard. See id.

[4] Silicon Graphics, Vantive, and Read-Rite, read without

reference to Tellabs, will generally prevent a plaintiff from

SOUTH FERRY LP v. KILLINGER 12545
relying exclusively on the core operations inference to plead

scienter under the PSLRA. See Read-Rite, 335 F.3d at 848-49.

Plaintiffs recognize this. However, the Supreme Court’s

recent Tellabs decision also discusses the level of detail

required under the PSLRA, and with its controlling and persuasive weight, it suggests that perhaps Silicon Graphics,

Vantive, and Read-Rite are too demanding and focused too

narrowly in dismissing vague, ambiguous, or general allegations outright. In Tellabs, the Court explained that “omissions

and ambiguities count against inferring scienter,” but held that

they were still properly considered. 127 S. Ct. at 2511. Tellabs suggests that while a high level of detail is required

under the PSLRA, a court should look to the complaint as a

whole, not to each individual scienter allegation as Silicon

Graphics suggests. Thus, Tellabs counsels us to consider the

totality of circumstances, rather than to develop separately

rules of thumb for each type of scienter allegation. 

Consistent with this thematic idea, though without the benefit of later-decided Tellabs, Plaintiffs argue that Read-Rite

prevents only total reliance on the core-operations inference

absent other particularized supporting allegations. In Plaintiffs

view, the core-operations inference can be one relevant part

of a complaint that raises a strong inference of scienter. 

[5] We conclude that this position is correct in light of Tellabs. The Supreme Court’s reasoning in Tellabs permits a

series of less precise allegations to be read together to meet

the PSLRA requirement, the prior holdings of Silicon Graphics, Vantive, and Read-Rite notwithstanding. Vague or ambiguous allegations are now properly considered as a part of a

holistic review when considering whether the complaint raises

a strong inference of scienter. See 127 S. Ct. at 2511 (“We

reiterate, however, that the court’s job is not to scrutinize each

allegation in isolation but to assess all the allegations holistically.”). Allegations that rely on the core-operations inference

are among the allegations that may be considered in the complete PSLRA analysis. The allegations, read as a whole, must

12546 SOUTH FERRY LP v. KILLINGER
raise an inference of scienter that is “cogent and compelling,

thus strong in light of other explanations,” id. at 2510, to satisfy the PSLRA standard. In assessing the allegations holistically as required by Tellabs, the federal courts certainly need

not close their eyes to circumstances that are probative of

scienter viewed with a practical and common-sense perspective. 

[6] A question remains, however, about reliance on the

core-operations inference when it is the only basis for scienter

in the complaint. Where a complaint relies on allegations that

management had an important role in the company but does

not contain additional detailed allegations about the defendants’ actual exposure to information, it will usually fall short

of the PSLRA standard. In such cases the inference that

defendants had knowledge of the relevant facts will not be

much stronger, if at all, than the inference that defendants

remained unaware. As a general matter, “corporate management’s general awareness of the day-to-day workings of the

company’s business does not establish scienter—at least

absent some additional allegation of specific information conveyed to management and related to the fraud” or other allegations supporting scienter. See Metzler Inv. GmbH v.

Corinthian Colleges, Inc., no. 06-55826, 2008 WL 2853402

at *13 (9th Cir. July 25, 2008) (concluding that the bare core

operations inference fell short of the Tellabs standard). However, in some unusual circumstances, the core operations

inference, without more, may raise the strong inference

required by the PSLRA.3

3

In Berson v. Applied Signal Technology, Inc., 527 F.3d 982 (9th Cir.

2008), we permitted a securities plaintiff to rely on the core operations

inference without particularized allegations about defendants’ access to

the relevant information. In Applied Signal, the defendants allegedly failed

to disclose “stop-work orders” from its largest customers even though

those orders had “a devastating effect on the corporation’s revenue.” Id.

at 987. The first stop-work order “halted between $10 and $15 million of

work on the company’s largest contract with one of its most important

SOUTH FERRY LP v. KILLINGER 12547
[7] Allegations regarding management’s role in a corporate

structure and the importance of the corporate information

about which management made false or misleading statements may also create a strong inference of scienter when

made in conjunction with detailed and specific allegations

about management’s exposure to factual information within

the company. For example, in In re Daou Systems, Inc., 411

F.3d 1006, 1022-23 (9th Cir. 2005), plaintiffs relied in part on

“specific admissions from top executives that they are

involved in every detail of the company and that they monitored portions of the company’s database” to support a strong

inference of scienter. The complaint in Daou relied on specific and particular accusations about the role played by the

defendants in managing the company, including specific allegations that defendants actually did monitor the data that were

the subject of the allegedly false statements. Id. That is sufficient under the PSLRA. Similarly, in Nursing Home Pension

Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1231 (9th

Cir. 2004), we held that the plaintiffs had pleaded facts showing a strong inference of scienter because, among other

things, the CEO of the defendant company was quoted as saying: “All of our information is on one database. We know

exactly how much we have sold in the last hour around the

world,” a specific and detailed statement about defendants’

actual knowledge. Id. (emphasis omitted); see also id.

(“Plaintiffs here [also] have hard numbers and make specific

allegations regarding large portions of Oracle’s sales data.”).

The allegations at issue in Daou and Oracle go beyond a mere

inference of management knowledge of all “core operations,”

customers,” and the second halted $8 million. Id. at 988 n.5. The complaint alleged that only two government agencies made up 80% of the

company’s revenue, making the loss of even one contract disastrous for

the entire company. Id. at 983. Moreover, the defendants admittedly knew

about the stop-work orders only two weeks after the alleged false statements. Id. at 988 n.5. All of these factors put Applied Signal into the

exceedingly rare category of cases in which the core operations inference,

without more, is sufficient under the PLSRA. 

12548 SOUTH FERRY LP v. KILLINGER
and were sufficient under the PSLRA because they included

details about the defendants’ access to information within the

company. 

[8] In summary, allegations regarding management’s role

in a company may be relevant and help to satisfy the PSLRA

scienter requirement in 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.” Tellabs, 127 S.Ct. at 2510. This view takes such allegations into account when evaluating all circumstances

together. Second, such allegations may independently satisfy

the PSLRA where they are particular and suggest that defendants had actual access to the disputed information, as in

Daou and Oracle. Finally, such allegations may conceivably

satisfy the 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. See Allied Signal, 527

F.3d at 988 (internal quotation marks omitted).

IV

We pause to consider again the district court’s order. South

Ferry contends that the district court had adequate alternative

bases for its decision even if the core operations inference was

improperly applied. However, the district court made clear in

its certification order that it had serious doubts about the viability of the complaint unless South Ferry could rely on the

core operations inference:

“It is also apparent that the viability of the core operations inference is central to the outcome of this case

. . . . Should the Ninth Circuit rule that the core operations inference is improper, even Defendants’ specific statements indicating first-hand knowledge of

SOUTH FERRY LP v. KILLINGER 12549
WAMU’s technological and operational systems

may be insufficient to support a strong inference of

scienter.” 

This also suggests that the district court was concerned

whether an alternative basis might exist for affirming the

complaint if the core operations inference was improper. 

[9] Regardless of the district court’s uncertainty as to the

outcome under a different standard, the parties urge us to

resolve the entirety of the case in this interlocutory appeal.

South Ferry urges us to conclude that the complaint contained

an alternative basis for a strong showing of scienter, while

WAMU urges us to dismiss the entire action if the core operations inference is improper. Although we have jurisdiction to

reach the merits of the entire complaint because it was at issue

in the certified order, we decline to do so. 

[10] The district court and the parties at the time of the certified order were without the benefit of much of the case law

underlying this opinion, including the Supreme Court’s guidance on theory in Tellabs. We conclude that the district court

in the first instance, and with its detailed knowledge of the

facts, should have the opportunity to review Defendants’

motion to dismiss under the appropriate standard. See Tellabs,

127 S. Ct. at 2513; Bassiri v. Xerox Corp., 463 F.3d 927, 934

(9th Cir. 2006) (remanding to the district court for consideration of alternative basis for its dismissal order after initial

basis was rejected on interlocutory appeal). Accordingly, we

VACATE the order of the district court with regard to the

PSLRA scienter requirement and REMAND the case to the

district court for further proceedings consistent with Tellabs

and consistent with this opinion. This opinion does not disturb

the other conclusions reached by the district court. 

JUDGMENT VACATED, ORDER VACATED IN

PART AND REMANDED.

12550 SOUTH FERRY LP v. KILLINGER