Opinion ID: 3169454
Heading Depth: 2
Heading Rank: 2

Heading: Early Product Shipment

Text: The Fund seeks to draw a strong inference of scienter from Diodes’s early shipments of orders without prior customer authorization. The practice, it contends, indicates that Diodes intended to conceal the true impact of the labor problems from the public and to deceive investors by artificially pushing forward its earnings. This argument is beset with difficulties, not the least of which is that early shipping is a legal 3 practice that may be supported by “any number of legitimate reasons,” and usually “does not support a strong 3 We note that the Fund has not alleged that the early shipments at issue were fabricated, nor does it allege that Diodes’s accounting of those sales violated GAAP or other applicable accounting principles. Thus, it appears from the pleadings that the Fund does not contest that Diodes’s early shipments of orders were legal. 10 Case: 14-41141 Document: 00513341407 Page: 11 Date Filed: 01/13/2016 No. 14-41141 inference of scienter.” Greebel v. FTP Software, Inc., 194 F.3d 185, 203 (1st Cir. 1999). To be sure, allegations that a defendant is concealing company problems to inflate earnings may create the inference when the complaint alleges that the defendant had “actual knowledge” of the problems and engaged in “deliberate or intentional behavior” to conceal them. Abrams, 292 F.3d at 43233. Fatal to the Fund’s argument, however, are two facts noted previously. First, Diodes did not attempt to conceal the labor shortage problem—it repeatedly alerted investors that labor issues would affect the company’s output and correctly predicted the extent to which these issues would affect the company’s bottom line. Second, the amended complaint offers no specific facts that Lu and White had “actual knowledge” that the labor shortage was caused by company-specific problems. In any event, as the district court observed, shipping orders early would tend to enhance the labor shortage problem, not disguise it. Because shipping orders early would deplete the inventory, Diodes’s ensuing inability to keep up with orders would quickly become apparent, and its revenue and gross profit margin would decrease. Were Diodes attempting to conceal a severe labor shortage problem, shipping orders early would be counterproductive. Diodes’s theory is neither “compelling” nor “cogent.” Tellabs, 551 U.S. at 323.