Court Opinion

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Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

4-30-2009

Inst Inv Grp v. Avaya Inc
Precedential or Non-Precedential: Precedential

Docket No. 06-4595

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                                       PRECEDENTIAL

      UNITED STATES COURT OF APPEALS
           FOR THE THIRD CIRCUIT

                     No. 06-4595

INSTITUTIONAL INVESTORS GROUP, Lead Plaintiff;
     HOWARD CHARATZ, individually and on
        behalf of all others similarly situated,
                                           Appellants

                          v.

              AVAYA, INC.;
DONALD K. PETERSON; GARRY K. McGUIRE, SR.

    On Appeal from the United States District Court
           for the District of New Jersey
         D.C. Civil Action No. 05-cv-2319
            (Honorable Mary L. Cooper)

                Argued March 3, 2008
            Before: SCIRICA, Chief Judge,
          FISHER and ROTH, Circuit Judges.

               (FiledL: April 30, 2009)

SANFORD SVETCOV, ESQUIRE (ARGUED)
Coughlin Stoia Geller Rudman & Robbins
100 Pine Street, Suite 2600
San Francisco, California 94111
      Attorney for Appellants

STEVEN M. SCHATZ, ESQUIRE (ARGUED)
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304

KERRI E. CHEWNING, ESQUIRE
Archer & Greiner
One Centennial Square
P.O. Box 3000
Haddonfield, New Jersey 08033
      Attorneys for Appellees

             OPINION OF THE COURT

                          2
SCIRICA, Chief Judge.

        This is a shareholders securities action, putatively a class
action, alleging defendants made false or misleading statements
about earnings growth potential and pricing pressure in violation
of the Securities and Exchange Act of 1934. Shareholders’
central theory is that investors and analysts viewed the key to
Avaya’s success to be its ability to increase sales revenues
without cutting prices. The District Court granted defendants’
motion to dismiss for failure to meet the pleading requirements
of the Private Securities Litigation Reform Act of 1995
(PSLRA). We will affirm in part and reverse in part and remand
for proceedings consistent with this opinion.

                                 I.

       Defendant Avaya Inc. sells communications products and
services.1 Shareholders allege Avaya, through its Chairman and
CEO, defendant Peterson, and its CFO, defendant McGuire, (1)
affirmatively denied unusual price competition was occurring
during the class period, despite knowing there was price

      1
       During the relevant period, its Chairman and Chief
Executive Officer was Donald Peterson, and its Chief Financial
Officer and Senior Vice President of Corporate Development
was Garry McGuire. The allegations in this case all involve the
2005 fiscal year; Shareholders propose a class period running
from October 26, 2004, to April 19, 2005 (the company’s fiscal
year ends on September 30).

                                 3
competition that was hurting profit margins; and (2) issued
baseless financial projections and positive portrayals to the
market despite knowing the projections and portrayals were
impossible to fulfill in light of intense price competition and
problems with the company’s “go-to-market” (GTM) strategy.2
Shareholders support their claims through a variety of
circumstantial allegations of falsity and knowledge, including
the accounts of confidential witnesses (CWs), analyst reports,
and alleged “admissions” by Peterson and McGuire.

      Statements during three separate portions of the class
period form the basis of Shareholders’ claims: (1) in late
October 2004, after the start of Avaya’s 2005 fiscal year

    2
      For purposes of background explanation, we note that,
according to Avaya’s SEC filing, the GTM strategy “realign[ed]
our sales and marketing efforts by expanding direct sales
coverage of key accounts; by enlarging the number of strategic
accounts; by identifying a second tier of named accounts served
by a combination of our direct sales team and our channel
partners; and by servicing our medium and small business
customers primarily through our channel partners. This had the
result, among other things, of reassigning accounts among
different channels and sales teams.” Avaya Inc., Quarterly
Report for the Period Ended March 31, 2005 (Form 10-Q), at 35
( M a y       1 0 ,    2 0 0 5 ) ,      a v a i l a b l e    a t
http://idea.sec.gov/Archives/edgar/data/1116521/0001104659
05021893/a05-8780_110q.htm.

                               4
(FY2005), Avaya, through Peterson and McGuire, announced
results for FY2004 and made projections for FY2005; (2) in late
January 2005, Avaya announced results for the first quarter of
FY2005 and made positive portrayals; (3) in the first two weeks
of March 2005, McGuire allegedly increased his revenue
projections for FY2005 and made false or misleading comments
about the state of Avaya’s business. All of the statements fall
into one of two general categories. First, there are “pricing-
pressure statements,” in which McGuire and Peterson are
alleged to have falsely denied Avaya was offering unusual
discounts and facing significant pricing pressure from market
rivals. Second, there are “forecast-related statements,” in which
defendants projected financial results (such as operating margin
and revenue growth) and made positive portrayals, notably the
statement that Avaya was “on track” to achieve its goals or
projections.

       The Complaint alleges the following facts.3

                               A.

      On October 26, 2004, Avaya released financial results for
FY2004 and the fourth quarter of 2004 (Q4 FY2004), which had
ended September 30, 2004. A press release stated in part: “We

  3
    Where the Complaint refers to other documents, we draw on
information in those documents beyond what is directly quoted
in the Complaint. See infra Section II.C (citing Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2509 (2007)).

                               5
have entered the new year well positioned to translate our
ongoing success in the marketplace into enhanced shareholder
value.” In a conference call for analysts and investors, Peterson
elaborated: “Clearly we are enjoying significant momentum in
the marketplace, and we are converting that momentum into
increased profitability and financial strength. Underlying this
momentum are our Company’s strategic advantages.” Peterson
added that “[t]he end result is that today we are a stronger more
competitive organization that enjoyed [sic] significant potential
. . . to further build shareholder value.” When asked about
prospects for operating margins, McGuire said he expected
continued improvement in FY2005. Peterson commented on
pricing: “I’d say pricing as a general comment is not different
than what it has been. There continues to be . . . pressure in the
market, it’s a very competitive marketplace but I wouldn’t say
there’s anything particularly noteworthy in the trend line one
way or the other.” 4

   4
     The Complaint alleges analysts reported optimistically on
the results and management’s statements, focusing especially on
the strong expected gross and operating margins for FY2005.
A JP Morgan analyst stated “management indicated that not only
are the margins likely sustainable but, in fact, there is room for
additional expansion,” and “[p]ricing pressure remains under
control.” “Management noted that no unusual pricing pressure
in the quarter affected margins, and while they expect pricing to
continually decline, the shift towards products such as higher-
margin IP software would benefit Avaya’s gross margin.” A

                                6
       On October 29, Avaya issued a set of financial
projections. For FY2005, the company projected an operating
margin 5 of 8.5% to 9% and revenue growth of 25% to 27%. For
FY2006, it projected an operating margin of 10% to 12%.
McGuire and Peterson spoke at a conference and made positive
portrayals, focusing particularly on the 8.5% to 9% estimate for
operating margin.

       On January 25, 2005, defendants announced Avaya’s
financial and operational results for Q1 FY2005. The results
were “in line with, or better than, analysts’ expectations.” First
quarter operating income grew 70% year-over-year and the

Prudential analyst reported the statements by McGuire,
characterizing them as follows: “While competitors have cut
prices and may have sacrificed margins on some individual
deals, [Avaya] remains committed to growing its share
profitably, and it is not seeing any widespread change in the
telephone pricing environment.” The analyst added that Avaya
“believes these margins are sustainable.”
     5
      Operating margin is determined by dividing operating
income by total revenue. Operating margin measures the
proportion of a company’s revenue left over after paying for
variable costs (e.g., wages, raw materials, etc.). It gives
investors and analysts an indication of how much a company
makes on each dollar of sales (before interest and taxes).

                                7
gross margin percentage 6 was 47.3%. Total revenues grew 18%
compared with Q1 FY2004.7 Notably, defendants stated: “Our
first quarter results position us to meet our goals for the year”;
and “we are on track to meet our goals for the year, even though
there were some aspects of our performance that are below our
expectations and that we are working on to improve.” 8

        During a conference call with analysts, Peterson
reiterated Avaya’s FY2005 expectations:

          Growing revenue 25 to 27 percent. Increasing
          operating income by 40 percent. Increasing our
          annualized margin to the 8.5 to 9 percent range,

      6
    Gross margin percentage equals: Revenue minus Cost of
Goods Sold, divided by Revenue. The gross margin represents
the percent of total sales revenue the company retains after
incurring the direct costs associated with producing the goods
and services sold by the company.
  7
   Excluding the impact of two business acquisitions—Tenovis
and Spectel—revenues grew 5% compared to Q1 FY2004.
      8
     See also Statement of Don Peterson, Chairman and CEO,
Avaya, Q1 2005 Avaya Earnings Conference Call (Jan. 25,
2005) (“While our results put us in line to achieve our goals for
the year, there are some elements to our performance that we are
focused on improving. Product sales in the U.S. were not up to
our expectations.”).

                                 8
        which would put us on the trajectory to go beyond
        that in 2006. All those things are on track. We
        do have a business that is somewhat more
        seasonal in its pattern than some of our data
        industry brethren, and this is a fall-over or
        holdover of the telecom business even though
        these things are merging in IP telephony. But we
        think that we had a solid quarter that is
        positioning us well to go on through the rest of
        the year and achieve those goals.

        We will obviously report to you as we make that
        progress at the very least in our quarterly results.
        And if there is something particularly important,
        we will come to you before that, but otherwise
        assume that we are on track and going to make
        that—going to deliver on those promises as the
        year goes on.

       On March 2, 2005, McGuire adjusted Avaya’s projected
annual revenue growth to 28% 9 and noted that “we are building
on the momentum that we’ve got in the market relative to the
technology lead, our applications, . . . and our global services.”
In response to analyst inquiries about the effect of pricing

    9
     The increase in projected revenue growth was due to the
earlier-than-predicted completion of the acquisition of Tenovis.
The acquisition allowed Avaya to recognize an additional 3% of
revenues in 2005 for that “stub” period.

                                 9
pressure from Cisco, McGuire stated that Cisco is “a good
competitor . . . to have relative to the pricing environment. . . .
[I]f they start a price war in IP telephony, they’re only going to
further exacerbate the pressure they’ve got on gross margins. So
in that regard, I kind of view them as a nice competitor to have
because that’s a problem they’ve got to live with.” Similarly, on
several occasions in March, McGuire said there were no
significant changes to the pricing environment. See Statement
of Garry McGuire, CFO, Avaya, Fourth Annual JMP Securities
Research Conference (Mar. 2, 2005) (“Pricing environment is
not significantly different. I mean, there are people that will buy
a deal from time to time, but in general, the pricing environment
is—has been fairly stable.”); Statement of Garry McGuire, CFO,
Avaya, Morgan Stanley Semiconductor and Systems Conference
(Mar. 7, 2005) (“[C]learly from time to time people will want to
buy a deal here or there, but the market itself has been fairly
stable with just modest declines over the last 12 months.”);
Statement of Garry McGuire, CFO, Avaya, Deutsche Bank
Securities Inc. IT Hardware Conference (Mar. 10, 2005)
(“Pricing has been fairly steady for the last couple of years. . . .
I don’t see any reason that that would change significantly. I
think that in the last year or so, it has really been a 2-horse race
with us and Cisco in the IP telephony area.”).

       Also in March, analyst reports identified potential
obstacles faced by Avaya. On March 4, 2005, members of the
Buckingham Research Group performed a sales channel check
and concluded that Avaya was experiencing “weak” spending

                                10
for its products and had fired sales staff in order to cut costs.
The analysts predicted Avaya’s actions would “negatively effect
[sic] growth.” In addition, a March 21, 2005, Equity Research
Update by Lehman Brothers analysts reported that Avaya
resellers had indicated that the company was “offering
aggressive [30–40%] discounts for its mid-range products
(150–400 lines) since [the] beg[inning] of March [2005].” 10
Lehman Brothers characterized the discounts as “quite unusual”
and warned that if the promotion were highly successful,
“Avaya’s product margins would be somewhat impacted.”

       On April 19, 2005,11 Avaya announced that it would be
unable to meet its previously stated goals for growing revenues,
operating income, and operating margin in FY2005. Avaya’s
Q2 FY2005 revenues increased 21% compared to the revenue
in Q2 FY2004. The revenue growth “reflected the impact of
Avaya’s recent acquisitions and revenue growth internationally.”
But “U.S. product and services revenues declined year-over-
year.” On April 20, 2005, Avaya’s stock price dropped

   10
    The report indicated that “[w]hile accurate industry data is
hard to obtain, we estimate sales of 150–400 line systems
constitute a significant portion of the enterprise telephony
industry sales.”
   11
        As noted, Q2 FY2005 ended on March 31, 2005.

                               11
approximately 25%—from $10.69 to $8.01.12

        Peterson blamed internal problems, especially the GTM
strategy, for the missed benchmarks. See Statement of Don
Peterson, Chairman and CEO, Avaya, Q2 2005 Avaya Earnings
Conference Call (Apr. 19, 2005) (“[W]ell over a majority of this
shortfall I would attribute more to issues related to us than issues
related to the market. . . . I think most of this [sic] are things
that if I have to get to and fix and therefore they’re within our
control and we will fix them and get back on track.”); id. (“The
implementation of our new go-to-market strategy . . . is taking
longer and has been somewhat more disruptive than we had
envisioned. While we still believe it is the right strategy and it
will ultimately strengthen our presence in the marketplace it has
in the short-term negatively affected our direct sales in the
U.S.”).

       McGuire noted that during the first two months of the
second quarter, Avaya was “tracking slightly at or just a little bit
below the quarter before” and was “track[ing] well for March
closure both on the indirect and the direct side.” According to
McGuire, “all of the indicators that we had gave us comfort that
that would come through.” But Avaya was “caught . . . by
surprise in the last week” of the quarter when distributors
decided not to “reload” at the rates they had done in the past and
when Avaya was unable to close several deals during the

    12
    On April 20, 2005, the S&P 500 dropped 1.3% and the
Dow Jones Industrial Average dropped 1.1%.

                                12
quarter.

       Also, in response to questions about discounting,
McGuire stated: “There is no new specific discounting policy
we put in place. I can tell you that our discounts were relatively
black or improved in most parts of the world, except for
international direct where they were up slightly.” During a
conference call with Merrill Lynch on April 28, 2005,13
McGuire was asked about “some reports published recently
saying that Avaya gave a 30% to 40% discount in the first
quarter.” McGuire responded: “Now, I hear the noise that, yes,
we were out with a 30% to 40% discount on a program in last
quarter. . . . [I]t’s not unusual . . . . And quite frankly, a 30% to
40% discount is not out of the norm for any of these programs.”

                                 B.

       Based on the following “true facts,” Shareholders allege
a “two-pronged fraud scheme to increase Avaya’s stock price.”

    13
      Although Shareholders’ proposed class period ran from
October 26, 2004, to April 19, 2005, the April 28 statements
may be relevant. See In re Merck & Co. Sec. Litig., 432 F.3d
261, 272 (3d Cir. 2005) (“[B]oth post-class-period data and pre-
class data could be used to ‘confirm what a defendant should
have known during the class period’” because “‘[a]ny
information that sheds light on whether class period statements
were false or materially misleading is relevant.’” (quoting In re
Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001))).

                                 13
Shareholders’ Br. 5. First, Shareholders allege that, beginning
in October 2004, and continuing throughout the class period,
defendants denied that Avaya was offering unusual price
discounts and that its profit margins were being impaired.
Shareholders contend the “true facts” show Avaya was in fact
encountering serious pricing pressures and was forced to grant
unusually large discounts in negotiations with clients, which
would manifest themselves in less-profitable contracts booked
in subsequent quarters (since the negotiation process “regularly
lasted months”), eviscerating margins. Second, Shareholders
allege the financial projections Avaya released on October 29,
2004, and reaffirmed in January and March 2005, were false or
misleading. According to Shareholders, defendants knew the
projections could not be achieved because of unusual pricing
discounts and declining sales due to Avaya’s sales force
realignment under the GTM strategy, which impaired both
earnings and revenues.

       CW3 is a confidential witness and former Global
Contract Manager who worked at Avaya “for many years prior
to leaving in November 2004” and who “participated in the
negotiation of contracts with many of Avaya’s biggest clients,”
including work on the top forty accounts in the U.S. According
to CW3, “Avaya’s operational model had essentially broken
down” in the months prior to his November 2004 departure,
“resulting in Avaya’s inability to compete with the business
models of rivals in the industry such as Cisco and AT&T
Solutions.” CW3 asserts it was “well-recognized within Avaya

                              14
that its business model faced significant problems” and that its
inability to compete with an “outsourcing” product offered by
AT&T Solutions allowed numerous large clients, such as Merrill
Lynch and Citigroup, to pressure Avaya “as a means of winning
substantial price concessions.” Citigroup allegedly forced
Avaya to accept a 20% price reduction with no change in
services because Avaya feared losing Citigroup to AT&T
Solutions’s “outsourcing” product. In the months leading up to
the beginning of the class period, CW3 contends “defendants
realized Avaya’s margins on business with relatively small
accounts . . . had substantially declined,” so that it had become
unprofitable to negotiate such contracts. Avaya shifted to a
policy of non-negotiation on those accounts, leading to a decline
in business as Avaya lost those accounts to competitors.

       CW4 is a former Avaya employee “who was at the
Company prior to and throughout the Class Period and who was
responsible for evaluating the profitability of special bids in the
Services organization,” which allegedly provided half of
Avaya’s revenues. See Shareholders’ Br. 11. According to
CW4, “Avaya gave substantial discounts to win business in the
period leading up to the beginning of the Class Period through
May 2005.” The customers receiving such discounts were
among Avaya’s largest. CW4 provided the names of four of the
customers. CW4 stated that, historically, Avaya gave 20%
discounts to 20% of its special bid customers. But between
January and May 2005, at the request of the sales force, Avaya
management gave 20% discounts to 80% of its special bid

                                15
customers. In 2004 and 2005, “Avaya was facing substantial
competition from newer companies that were aggressively
pursuing Avaya’s customers by competing on price.” 14 “[I]n
many instances Avaya was granting price concessions in excess
of 30%–40% in order to win business . . . .” 15 Finally, CW4
contends, Avaya inherited a number of low-margin contracts
from its acquisition of a company called Expanets in October
2003. This problem allegedly continued throughout the class
period, and by March 2005, Avaya was “happy to merely break
even on such contracts.”

       CW5, a former Senior Client Executive at Avaya from
2001 until March 2004, said Avaya’s GTM strategy had begun
in October 2003 and involved reassigning Client Executives
from larger “enterprise” accounts to “mid-market” accounts.

    14
       According to CW4, one such company, United Assets
Coverage, specifically targeted customers who received Avaya’s
Maintenance Software Permission product. In October 2004,
“defendants learned about United Assets Coverage’s tactic to
target Avaya customers.”
    15
       CW6, an independent Avaya sales manager who sold
Avaya products but was not employed by the company,
confirmed that in March 2005, Avaya was cutting prices on
some of its mid-range systems. According to CW6, “Cisco was
attacking Avaya on price and hurting Avaya in the small and
midsized business markets.”

                             16
CW5 realized in October 2003 that the GTM strategy would
cause “a substantial loss of business already in the pipeline.”
The effect of the GTM strategy was that “many customers lost
confidence and trust in Avaya and certain large sales were lost.”
For example, CW5 allegedly lost $7 million in sales through
2004, “including lucrative contracts with ACS in Utica, New
York for $1.5 million and a $750,000 deal with Alcoa.”
According to CW5, these and other similar FY2004 losses
attributable to the GTM strategy “were to have a substantial
impact on Avaya’s financial results during the Class Period”
because Avaya’s “sales cycle” for enterprise accounts ranged
from six months to a year and a half.

       Two CWs (a former Director of Operations for Global
Solutions Sales and Support and a former Senior Client
Executive) claimed McGuire established the financial
projections on a “top-down basis,” meaning he did not solicit
input from salespeople. The resulting forecast was allegedly
“dictated” from the top and was not realistically attainable.
Finally, according to CW3, Avaya fired employees in September
2004 “specifically because the Company’s business was not
doing well,” demonstrating that despite the “positive spin”
Peterson and McGuire issued in October 2004, internally they
were “taking drastic steps to reduce costs” in order to meet the
projections.

                               II.

       The District Court granted defendants’ motion to dismiss

                               17
under the Private Securities Litigation Reform Act (PSLRA) for
three reasons: (1) some statements defendants allegedly made
were “forward-looking” and protected under the PSLRA’s Safe
Harbor provision; (2) other alleged statements were not
actionably false or misleading; and (3) with respect to remaining
statements that may have been actionable, Shareholders failed
to plead facts giving rise to a strong inference of scienter as the
PSLRA requires. See Charatz v. Avaya, Inc., No. 05-2319
(MLC), 2006 WL 2806229, at *12–20 (D.N.J. Sept. 28, 2006).
Shareholders timely appealed.16

       We exercise plenary review over the District Court’s
dismissal of the Complaint for failure to meet the pleading
requirements of the PSLRA and over the District Court’s
interpretation of the federal securities laws. Winer Family Trust
v. Queen, 503 F.3d 319, 325 (3d Cir. 2007).

               A. Section 10(b) and Rule 10b-5

       Section 10(b) of the Securities Exchange Act of 1934
prohibits the “use or employ[ment], in connection with the
purchase or sale of any security . . . , [of] any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe.” 15 U.S.C.

     16
       The District Court had jurisdiction over Shareholders’
federal securities fraud claims under 28 U.S.C. § 1331 and 15
U.S.C. § 78aa. We have jurisdiction over this appeal from the
District Court’s final order of dismissal under 28 U.S.C. § 1291.

                                18
§ 78j(b). Rule 10b-5, promulgated by the Securities and
Exchange Commission, makes it unlawful

       (a) To employ any device, scheme, or artifice to
       defraud,
       (b) To make any untrue statement of a 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 they were made,
       not misleading, or
       (c) To engage in any act, practice, or course of
       business which operates or would operate as a
       fraud or deceit upon any person, in connection
       with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

        To state a claim for securities fraud under Rule 10b-5,
plaintiffs must “allege defendants made a misstatement or an
omission of material fact with scienter in connection with the
purchase or the sale of a security upon which plaintiffs
reasonably relied and plaintiff’s [sic] reliance was the proximate
cause of their injury.” Winer Family Trust, 503 F.3d at 326.
Although Shareholders’ Complaint focuses on the statements of
McGuire and Peterson, liability for these statements, if they
were fraudulent, can also be imputed to Avaya because “[a]
corporation is liable for statements by employees who have
apparent authority to make them.” Makor Issues & Rights, Ltd.
v. Tellabs Inc. (Tellabs II), 513 F.3d 702, 708 (7th Cir. 2008)

                                19
(citing Am. Soc’y of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456
U.S. 556, 568 (1982); In re Atlantic Fin. Mgmt., Inc., 784 F.2d
29, 31–32 (1st Cir. 1986)).

        Avaya does not dispute that the following elements of the
cause of action are properly pleaded: materiality, reliance, loss
causation, and damages. Falsity and scienter are disputed. With
respect to falsity, Shareholders must specify each allegedly
misleading statement and the reasons why the statement is
misleading. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.
Ct. 2499, 2508 (2007). Scienter is a “mental state embracing
intent to deceive, manipulate, or defraud,” Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 194 n.12 (1976), and requires a
knowing or reckless state of mind, In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 534–35 (3d Cir. 1999).

                       B. Section 20(a)

       Section 20(a) of the Securities Exchange Act of 1934
creates a cause of action against individuals who exercise
control over a “controlled person,” including a corporation, that
has committed a violation of Section 10(b). 15 U.S.C. § 78t(a);
In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 284
(3d Cir. 2006). Accordingly, liability under Section 20(a) is
derivative of an underlying violation of Section 10(b) by the
controlled person. In re Alpharma Inc. Sec. Litig., 372 F.3d
137, 153 (3d Cir. 2004) (“[P]laintiffs must prove not only that
one person controlled another person, but also that the
‘controlled person’ is liable under the Act.” (internal quotation

                               20
marks omitted)). Shareholders allege the individual defendants
are liable under Section 20(a) for the allegedly fraudulent
statements made by Avaya, a “controlled person,” during the
class period.

               C. Heightened Pleading Rules

        “[F]aced with a Rule 12(b)(6) motion to dismiss a § 10(b)
action, courts must, as with any motion to dismiss for failure to
plead a claim on which relief can be granted, accept all factual
allegations in the complaint as true.” Tellabs, 127 S. Ct. at
2509. As is also true generally, “courts must consider the
complaint in its entirety, as well as . . . documents incorporated
into the complaint by reference, and matters of which a court
may take judicial notice.” Id. Because this is a securities fraud
case, however, we do not merely ask, as we normally would
under Rule 12(b)(6), “whether, under any reasonable reading of
the complaint, the plaintiff may be entitled to relief.” Phillips
v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)
(internal quotation marks omitted) (applying standard set forth
in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)). Instead,
Shareholders must satisfy the heightened pleading rules codified
in the PSLRA.

       The PSLRA provides two distinct pleading requirements,
both of which must be met in order for a complaint to survive a
motion to dismiss. First, under 15 U.S.C. § 78u-4(b)(1), the

                               21
complaint must “specify each allegedly misleading statement,17
why the statement was misleading, and, if an allegation is made
on information and belief, all facts supporting that belief with
particularity.” Winer Family Trust, 503 F.3d at 326 (footnote
added) (construing 15 U.S.C. § 78u-4(b)(1)). Second, the
complaint must, “with respect to each act or omission alleged to
violate this chapter, 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).

        Significantly, both provisions require facts to be pleaded
“with particularity.”       As we have explained, “[t]his
[‘particularity’] language echoes precisely Fed. R. Civ. P. 9(b).”
Advanta, 180 F.3d at 534; see Fed. R. Civ. P. 9(b) (“[A] party
must state with particularity the circumstances constituting fraud
or mistake.”). Indeed, although the PSLRA replaced Rule 9(b)
as the pleading standard governing private securities class
actions, see Tellabs, 127 S. Ct. at 2507–08, Rule 9(b)’s
particularity requirement “is comparable to and effectively
subsumed by the requirements of [§ 78u-4(b)(1) of] the
PSLRA.” Miss. Pub. Employees’ Ret. Sys. v. Boston Scientific
Corp., 523 F.3d 75, 85 n.5 (1st Cir. 2008); see Rubke v. Capitol
Bancorp Ltd., 551 F.3d 1156, 1165 (9th Cir. 2009) (“[T]he

    17
      Here, the District Court found Shareholders adequately
identified defendants’ allegedly misleading statements with the
requisite particularity. Charatz, 2006 WL 2806229, at *9.
Defendants do not dispute this finding on appeal.

                                22
inquiry into whether plaintiffs have pled falsity with the
requisite particularity under the PSLRA is nearly identical to
that under Federal Rule of Civil Procedure 9(b) . . . .”); Cent.
Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d
546, 550 (5th Cir. 2007) (Section 78u-4(b)(1) “appears to
comport with this Court’s relatively strict interpretation of Rule
9(b), which requires a plaintiff to specify the statements
contended to be fraudulent, identify the speaker, state when and
where the statements were made, and explain why the
statements were fraudulent.” (internal quotation marks
omitted)). This standard “requires plaintiffs to plead the who,
what, when, where and how: the first paragraph of any
newspaper story.” Advanta, 180 F.3d at 534 (internal quotation
marks omitted). Section 78u-4(b)(1) adds an additional
requirement where “an allegation regarding [a defendant’s]
statement or omission is made on information and belief.” 15
U.S.C. § 78u-4(b)(1). In those circumstances, plaintiffs must
also “state with particularity all facts on which that belief is
formed.” Id.; see ABC Arbitrage Plaintiffs Group v. Tchuruk,
291 F.3d 336, 350 (5th Cir. 2002). That is, when allegations are
made on information and belief, the complaint must not only
state the allegations with factual particularity, but must also
describe the sources of information with particularity, providing
the who, what, when, where and how of the sources, as well as
the who, what, when, where and how of the information those
sources convey.

       The PSLRA’s requirement for pleading scienter, on the

                               23
other hand, marks a sharp break with Rule 9(b). Under § 78u-
4(b)(2), “a plaintiff can no longer plead the requisite scienter
element generally, as he previously could under Rule 9(b).”
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1238 (11th Cir.
2008); see Fed. R. Civ. P. 9(b) (“Malice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.”).
Instead, under the PSLRA’s “[e]xacting” pleading standard for
scienter, “any private securities complaint alleging that the
defendant made a false or misleading statement must . . . state
with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” Tellabs, 127
S. Ct. at 2504, 2508 (internal quotation marks omitted).

                           D. Safe Harbor

       Plaintiffs must satisfy these pleading requirements
whether the alleged fraudulent statement at issue is an assertion
of current fact or a prediction of the future. The PSLRA
imposes additional burdens, however, with respect to allegations
involving predictions. The Safe Harbor provision, 15 U.S.C. §
78u-5(c), immunizes from liability any forward-looking
statement, provided that: the statement is identified as such and
accompanied by meaningful cautionary language; or is
immaterial; or the plaintiff fails to show the statement was made
with actual knowledge of its falsehood.18 The District Court

   18
        The Safe Harbor provides:
          [A] person . . . shall not be liable with respect to
          any forward-looking statement, whether written or

                                  24
found that many of the allegedly misleading statements
identified in the Complaint were protected by the Safe Harbor
provision. Charatz, 2006 WL 2806229, at *18–19. It
concluded that defendants’ statements were “forward-looking
predictions of future economic performance” indicating
“management’s plans and objectives,” id. at *18, and were

      oral, if and to the extent that—
          (A) 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
              from those in the forward-looking statement;
              or
              (ii) immaterial; or
          (B) the plaintiff fails to prove that the
          forward-looking statement—
              (i) if made by a natural person, was made with
              actual knowledge by that person that the
              statement was false or misleading; or
              (ii) if made by a business entity; was—
                   (I) made by or with the approval of an
                   executive officer of that entity; and
                   (II) made or approved by such officer with
                   actual knowledge by that officer that the
                   statement was false or misleading.
15 U.S.C. § 78u-5(c)(1).

                             25
accompanied by meaningful cautionary language.

                               III.

            A. Applicability of the Safe Harbor

       Shareholders contend the District Court erred in applying
the Safe Harbor to immunize certain statements. First, they
argue the court improperly held the “on track” statements were
forward-looking. Second, as for the other forecast-related
statements, they contend the Safe Harbor should not be applied
on the pleadings because jurors could reasonably disagree over
the meaningfulness of Avaya’s cautionary language.
Shareholders argue Avaya’s cautionary statements were
“diluted” by the later “assurances” that it was “on track” to meet
its projections and was not impairing profits with price
concessions. Finally, Shareholders contend the Safe Harbor
does not apply here because they have sufficiently alleged
defendants had actual knowledge of the false or misleading
nature of the forecast-related statements.

       On January 25, 2005, defendants announced Avaya’s
financial and operational results for Q1 FY2005. Notably,
defendants stated: “Our first quarter results position us to meet
our goals for the year”; and “we are on track to meet our goals
for the year, even though there were some aspects to our
performance that are below our expectations and that we are

                               26
working on to improve.”19 Defendants assert that these
statements are forward-looking because their accuracy can only
be discerned at a future date. Furthermore, they contend these
statements are inactionable puffery and that, in any case, “a
statement that a company is ‘on track’—even if to meet a
specific goal—is simply too vague and general to be
actionable.” Defendants’ Br. 37. Shareholders contend these
“on track” recitals are positive statements of current fact and,
accordingly, are not forward-looking.

        The term “forward-looking statement” is broadly defined
in the statute to include statements “containing a projection of
revenues, income (including income loss), earnings (including
earnings loss) per share, capital expenditures, dividends, capital
structure, or other financial items”; statements of “the plans and
objectives of management for future operations, including plans
or objectives relating to the products or services of the issuer”;
or statements of “future economic performance, including any
such statement contained in a discussion and analysis of

  19
     See also Statement of Don Peterson, CEO, Q1 2005 Avaya
Earnings Conference Call, Jan. 25, 2005 (“I would just . . . take
a moment and reiterate again what we have said we plan to do
for the year. Growing revenue 25 to 27 percent. Increasing
operating income by 40 percent. Increasing our annualized
margin to the 8.5 to 9 percent range, which would put us on the
trajectory to go beyond that in 2006. All those things are on
track.”).

                               27
financial condition by the management or in the results of
operations included pursuant to the rules and regulations of the
Commission.” 15 U.S.C. § 78u-5(i)(1)(A)–(C). Further,
forward-looking statements include “any statement of the
assumptions underlying or relating to any statement described”
in the definition. § 78u-5(i)(1)(D).

        “[A] mixed present/future statement is not entitled to the
safe harbor with respect to the part of the statement that refers
to the present.” Tellabs II, 513 F.3d at 705; accord In re Stone
& Webster, Inc., Sec. Litig., 414 F.3d 187, 213 (1st Cir. 2005)
(“The mere fact that a statement contains some reference to a
projection of future events cannot sensibly bring the statement
within the safe harbor if the allegation of falsehood relates to
non-forward-looking aspects of the statement.”). In Tellabs II,
defendants stated that sales of their product were “still going
strong.” 513 F.3d at 705. The Seventh Circuit interpreted the
communication as “saying both that current sales were strong
and that they would continue to be so, at least for a time, since
the statement would be misleading if Tellabs knew that its sales
were about to collapse.” Id. Accordingly, defendants were not
entitled to “a safe harbor with regard to the statement’s
representation concerning current sales.” Id. In Stone &
Webster, defendants had asserted that the company “has on hand
and has access to sufficient sources of funds to meet its
anticipated . . . needs.” 414 F.3d at 207. Even though “the
statement includes a reference to anticipated future needs for
funds,” the First Circuit found a portion of defendants’ assertion

                               28
to be a statement of present fact ineligible for the Safe Harbor
provision. Id. at 212. “[T]he alleged falsehood was in the fact
that the statement claimed that the Company had access to
ample cash at a time when the Company was suffering a dire
cash shortage. The claim was not that the Company was
understating its future cash needs.” Id. at 213.

       Unlike the language in Tellabs II and Stone & Webster,
the “on track” and “position us” portions of the January 25,
2005 statements, when read in context, cannot meaningfully be
distinguished from the future projection of which they are a part.
Shareholders argue that these phrases make claims of current
fact. Here, however, the assertions of current fact are too vague
to be actionable. These statements do not justify the financial
projections in terms of any particular aspect of the company’s
current situation; they say only that, whatever that situation is,
it makes the future projection attainable. Such an assertion is
necessarily implicit in every future projection. At issue in
Tellabs II, by contrast, was a specific assertion about the current
state of sales that could be distinguished from the future
projections: it could be true, for example, both that current sales
are weak, and that future sales will be strong.

       Similarly, defendants in Stone & Webster made a claim
about the company’s current level of funding. Insofar as that
present situation was related to future projections, the Stone &
Webster language bears a superficial resemblance to the
language here. But the claim in Stone & Webster was not
merely that the company would hit a certain target in the future,

                                29
but rather that the company had, at the present moment, enough
funding to meet anticipated future liabilities. As the First
Circuit explained, the question was not whether “the Company
was understating its future cash needs,” but whether it “had
access to ample cash” at the time the statement was made. Id.
The “on track” and “position us” language here, however, does
not advert to a particular current fact such as cash on hand, but
expresses only defendants’ continuing comfort with the earlier,
October annual projection, which they were then reiterating; that
is, it amounts in essence to a reaffirmation of that projection.20
It does not transform the statements, or any part of them, into
non-forward-looking assertions outside of the Safe Harbor.21

       Shareholders also contend that their allegations based on
defendants’ forward-looking statements throughout the class
period were improperly dismissed because reasonable jurors
could disagree on the meaningfulness of the cautionary language
associated with the forecasts. Specifically, Shareholders assert
that defendants “diluted” cautionary language associated with
the forecasts by later assuring investors that Avaya was “on
track” to meet projections, by increasing the revenue growth

   20
        See also infra note 48.
   21
     Even if parts of the January statements do not enjoy Safe
Harbor protection, Shareholders have not adequately pled either
the falsity of the statements, or defendants’ scienter. See infra
Section III.B–C.

                                  30
forecast in March, and by indicating that Avaya was not offering
unusual and increased discounts.

       Forward-looking statements are protected under § 78u-
5(c) if they are identified as forward-looking 22 and are
“accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ
materially from those in the forward-looking statement.” 15
U.S.C. § 78u-5(c)(1)(A)(i). “Cautionary language must be
‘extensive and specific.’” GSC Partners CDO Fund v.
Washington, 368 F.3d 228, 243 n.3 (3d Cir. 2004) (quoting
Semerenko v. Cendant Corp., 223 F.3d 165, 182 (3d Cir. 2000)).
“[A] vague or blanket (boilerplate) disclaimer which merely
warns the reader that the investment has risks will ordinarily be
inadequate to prevent misinformation.          To suffice, the
cautionary statements must be substantive and tailored to the
specific future projections, estimates or opinions in the
prospectus which the plaintiffs challenge.” Id. (quoting
Semerenko, 223 F.3d at 182).23

   22
     Defendants noted in each of their conference calls, press
releases, and presentations that forward-looking statements were
contained therein. Shareholders do not contest this point.
  23
    Shareholders suggest the very fact that Avaya’s share price
dropped precipitously upon the announcement of its Q2 results
is proof that the cautionary language provided insufficient
warning. But the case on which Shareholders rely, Asher v.

                               31
       Defendants’ cautionary language here was extensive and
specific. Avaya’s SEC filings contain a detailed list of specific
factors and uncertainties that could affect its future economic
performance. See, e.g., Avaya Inc., Quarterly Report for the
Period Ended December 31, 2004 (Form 10-Q), at 44–45 (Feb.
8, 2005). These documents explicitly warned that Avaya’s
forward-looking statements “may turn out to be wrong” because
“[t]hey can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties.” Id. at
44. Avaya included in a list of these “risks and uncertainties”
the very “price and product competition” Shareholders assert
was responsible for Avaya’s missing its projections. Id.; see

Baxter International Inc., 377 F.3d 727 (7th Cir. 2004), rejected
that argument. The Asher court acknowledged the intuitive
appeal of Shareholders’ position, noting that “one can complain
that the cautionary statement must have been inadequate”
whenever “the firm’s disclosures (including the accompanying
cautionary statements) are false or misleadingly incomplete.”
Id. at 729. But such a view would divest the Safe Harbor of any
function, since there is no potential liability—and thus no need
for Safe Harbor protection—where there is nothing false or
misleading about a firm’s statements. In other words, if the Safe
Harbor were automatically inapplicable whenever a firm’s
disclosures actually misled investors, then the Safe Harbor
would be superfluous. “Yet it would be unsound to read the
statute so that the safe harbor never works; then one might as
well treat . . . § 78u-5 as defunct.” Id.

                               32
also id. at 47–48 (“We face intense competition from our current
competitors and . . . may face increased competition from
companies that do not currently complete [sic] directly against
us. . . . Competitors with greater resources also may be able to
offer lower prices . . . .”). Avaya also warned about
uncertainties related to its marketing strategy, stating that “if we
do not successfully execute our strategy to expand our sales in
market segments with higher growth rates, our revenue and
operating results may continue to be adversely affected.” Id. at
46. In each conference call24 and press release,25 defendants also

  24
    For example, Avaya’s Vice President of Investor Relations,
Matt Booher, began the January 25, 2005 conference call with
analysts with the following admonition:
       These remarks may contain forward-looking
       statements regarding the Company’s outlook.
       This outlook is based on current expectations,
       forecasts and assumptions that involve risks and
       uncertainties that could cause actual outcomes
       and results to differ. Additional information
       regarding these risks and uncertainties may be
       found in our filings with the Securities and
       Exchange Commission and in particular our fiscal
       2004 Form 10-K and in our 10-Q filings.
       25
      For example, Avaya’s January 25, 2005 Press Release
stated:
        This news release contains forward-looking

                                33
statements regarding the company’s outlook for
operating results based on current expectations,
forecasts and assumptions that involve risks and
uncertainties that could cause actual outcomes
and results to differ materially. These risks and
uncertainties include, but are not limited to,
general industry market conditions and growth
rates and general domestic and international
economic conditions including interest rate and
currency exchange rate fluctuations and the
economic, political, and other risks associated
with international sales and operations, U.S. and
foreign government regulation, price and product
competition [emphasis added], rapid technological
development, dependence on new product
development, the successful introduction of new
products, the mix of our products and services,
customer demand for our products and services,
the ability to successfully integrate acquired
companies, control of costs and expenses, the
ability to implement in a timely manner our
restructuring plans, and the ability to form and
implement alliances.
       For a further list and description of such
risks and uncertainties, see the reports filed by
Avaya with the Securities and Exchange

                       34
explained that the forward-looking statements involved risks and
uncertainties that could cause actual outcomes and results to
differ materially from projections and specifically directed
readers to Avaya’s SEC filings. We agree with the District
Court’s assessment that “[t]hese cautionary statements are not
vague or blanket disclaimers, but instead are substantive,
extensive, and tailored to the future-looking statements they
reference.” Charatz, 2006 WL 2806229, at *19.

       Shareholders assert defendants’ “on track” statements,
March forecast increase, and assurances regarding price stability
“diluted” the impact and meaningfulness of the cautionary
language. Shareholders rely on EP MedSystems, Inc. v.
EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000), suggesting that
“repeat assurances may preclude invocation of the safe harbor
defense as a matter of law, because reasonable jurors could
differ about whether the warning was meaningful.”
Shareholders’ Br. 46. But EP MedSystems is distinguishable.
In EP MedSystems, plaintiffs brought a Section 10(b) suit
alleging EchoCath enticed them into investing $1.4 million by
assuring them that contracts with four prominent companies to
market EchoCath products were imminent. Id. at 867. Several
of EchoCath’s Annual and Quarterly reports cautioned investors
that there could be no assurance that the company would ever
successfully commercialize any of its products or complete any
of the expected license agreements or strategic alliances on

       Commission.

                               35
acceptable terms. Id. at 877. But when negotiating with EP
MedSystems, EchoCath’s CEO made repeated assurances that
license agreements with four companies were imminent. Id. at
876–77. These representations were not accompanied by any
cautionary language. Id. at 877. We concluded that whether the
cautionary language found elsewhere was “sufficient to
neutralize” EchoCath’s initial representations and repeated
assurances could not be decided as a matter of law. Id. In
contrast to the statements made by EchoCath, Avaya’s alleged
assurances were, as noted, accompanied by cautionary
language.26 Accordingly, the cautionary language issue was

  26
     EP MedSystems may be distinguishable for another reason.
The court acknowledged that the case “is more akin to a contract
action than a securities action”:
        [T]here are important distinctions between this
        case and the usual securities actions for which
        these principles were developed. Although
        EchoCath . . . sought to sell its securities in the
        market . . . MedSystems does not base its claim on
        public misrepresentations or omissions that
        affected the price of the stock it purchased.
        Instead, it contends that it was induced to make
        the substantial $1.4 million investment as a result
        of personal representations directly made to its
        executives by EchoCath’s executives and that
        those representations were false and misleading.
Id. at 871.

                              36
properly decided as a matter of law.27

        Finally, Shareholders contend that the Safe Harbor
provision does not apply because they have sufficiently alleged
defendants had actual knowledge of the falsehood of the
forecast-related statements. The parties dispute whether
statements made with actual knowledge of falsity can
nonetheless be immunized by cautionary language under the
Safe Harbor. Defendants note the Safe Harbor is written
disjunctively and thus argue that the cautionary-language prong
provides a separate, independent “inlet” of protection even
where plaintiffs can show (or, for purposes of Rule 12(b)(6),
adequately allege) defendants’ knowledge of a statement’s
falsity. Shareholders, by contrast, contend that cautionary

   27
      Shareholders also cite Asher v. Baxter International Inc.,
377 F.3d 727 (7th Cir. 2004), for support.             Asher is
distinguishable. In Asher, the plaintiffs contended defendant’s
cautionary language was not meaningful because it did not
identify the major risks Baxter International faced during the
relevant period. Id. at 734. In contrast, the major risks that
allegedly were realized here—failure of the GTM strategy,
intense competition, and pricing pressure—were identified and
disclosed by Avaya throughout the relevant period.
       We also reject any implication that the mere repetition of
the projections by defendants somehow “serve[d] to neutralize
the cautions.” Shareholders’ Br. 46. Each statement was
accompanied by the appropriate cautionary language.

                               37
language cannot be “meaningful,” see 15 U.S.C. § 78u-
5(c)(1)(A)(i), when it identifies possible risks that defendants
know have already eventuated. Compare In re SeeBeyond
Techs. Corp. Sec. Litig., 266 F. Supp. 2d 1150, 1165–67 (C.D.
Cal. 2003) (supporting Shareholders’ position),28 with Miller v.
Champion Enters., Inc., 346 F.3d 660, 672 (6th Cir. 2003)
(supporting defendants’ position), Southland Sec. Corp. v.
INSpire Ins. Solutions, Inc., 365 F.3d 353, 371–72 (5th Cir.
2004) (same), Greebel v. FTP Software, Inc., 194 F.3d 185, 201
(1st Cir. 1999) (same), and Harris v. Ivax Corp., 182 F.3d 799,
803–04 (11th Cir. 1999) (same).

        Shareholders do not deny, however, that defendants’
forward-looking statements come within the Safe Harbor as long
as the Complaint’s allegations fail to give rise to a strong
inference that defendants actually knew of the statements’
falsity. See 15 U.S.C. § 78u-5(c)(1). This point is dispositive
here, since we conclude below, see infra Section III.C, that
Shareholders have not sufficiently pleaded a strong inference
that defendants acted with actual knowledge that their

   28
      Shareholders also seek support from our opinion in In re
Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999).
Because there was no cautionary language to consider in that
case, however, we did not address whether cautionary language
could immunize a statement made with actual knowledge of its
falsity.

                              38
projections were false or misleading.29 This scienter conclusion
provides a ground for dismissing Shareholders’ claims relating
to the forward-looking statements, one that would apply even
assuming defendants’ cautionary language was inadequate.

                              B. Falsity

          Under Rule 10b-5, it is unlawful to “make any untrue
statement of a 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 they were made, not misleading
. . . in connection with the purchase or sale of any security.” 17
C.F.R. § 240.10b-5(b)–(c). The first requirement under the
PSLRA obliges a plaintiff to specify each allegedly misleading
statement, the reason or reasons why the statement is
misleading, and, if an allegation is made on information and
belief, all facts supporting that belief with particularity. 15
U.S.C. § 78u-4(b)(1);30 Tellabs, 127 S. Ct. at 2508; Winer

   29
     As explained below, this is a more demanding standard of
scienter than applies to statements of current fact.
   30
        Section 78u-4(b)(1) states, in its entirety:
          (1) Misleading statements and omissions
          In any private action arising under this chapter in
          which the plaintiff alleges that the defendant—
              (A) made an untrue statement of a material
              fact; or
              (B) omitted to state a material fact

                                  39
Family Trust, 503 F.3d at 326.           Defendants contend
Shareholders’ allegations are insufficient because they fail to
demonstrate with sufficient particularity that defendants’
statements were false or misleading when made—i.e., “the
reason or reasons why the statement[s are] misleading.”

               1. Pricing-Pressure Statements

       First, defendants challenge the sufficiency of the
Shareholders’ pricing-pressure allegations. As noted, Peterson
and McGuire repeatedly assured analysts and investors that,
although there was pressure in the market, there were no
significant changes to the pricing environment. Shareholders
challenge several of defendants’ statements denying the
existence of significant pricing pressure from competitors,
contending that defendants knew of or recklessly disregarded
the fact that competition was forcing 20% to 40% price
discounts that impaired profit margins. Shareholders attempt to

           necessary in order to make the statements
           made, in the light of the circumstances in
           which they were made, not misleading;
       the complaint shall specify each statement alleged
       to have been misleading, the reason or reasons
       why the statement is misleading, and, if an
       allegation regarding the statement or omission is
       made on information and belief, the complaint
       shall state with particularity all facts on which that
       belief is formed.

                                40
show falsity by alleging various sources for the “true facts”
known or recklessly disregarded by defendants.

        Defendants contend the CW statements and Lehman
Brothers report provide, at most, anecdotal evidence of
discounts. They note that the CWs and the Lehman Brothers
analysts only had access to information on a product level and
did not have access to national data. Furthermore, defendants
assert that the discounts were not unusual during the class period
compared to prior years.31 Defendants assert any price

      31
         As evidence, defendants compare the gross margin
percentage during the class period (46%) to the same period
during the prior fiscal year (46%). See supra note 6 (defining
gross margin percentage).         Although the gross margin
percentage did not differ from the same period in the previous
year, many different factors in addition to discounting can affect
this figure. For example, Avaya’s second quarter 10-Q report
indicated several factors affecting its gross margin percentage:
increased volume, cost reduction initiatives, product mix, and
the acquisition of Tenovis. Avaya Inc., Quarterly Report for the
Period Ended March 31, 2005 (Form 10-Q), at 32 (May 10,
2005). Because the gross margin percentage is not conclusive
as to the existence of unusual discounting, defendants’ reliance
on similar gross margin percentage numbers to “demonstrat[e]
that any supposed price concessions were in line with prior
practice,” Defendants’ Br. 34, is misplaced.
        Insofar as Avaya’s gross margin percentage and other

                               41
concessions were in line with prior practice.

        Shareholders’ allegations primarily rely on the
representations of confidential witnesses. As noted, CW3 is a
confidential witness and former Global Contract Manager who
worked at Avaya until November 2004. CW3 worked on the top
forty accounts in the United States. According to CW3, Avaya’s
business model had “essentially broken down” prior to his
departure. Due to Avaya’s “inability to compete” with Cisco

reported financial results are in tension with the reports of the
CWs and analysts, a jury could decide to discredit the latter. But
in reviewing a district court’s dismissal under Rule 12(b)(6), we
do not resolve factual disputes—even in cases governed by the
PSLRA. Rather, we “must, as with any motion to dismiss for
failure to plead a claim on which relief can be granted, accept all
factual allegations in the complaint as true.” Tellabs, 127 S. Ct.
at 2509; see Cent. Laborers’ Pension Fund v. Integrated Elec.
Servs. Inc., 497 F.3d 546, 551 (5th Cir. 2007) (“[T]he strong-
inference pleading standard does not license us to resolve
disputed facts at this stage of the case.” (internal quotation
marks omitted)). We then test these allegations to see whether
they are adequately particularized and whether they satisfy the
pleading requirements for falsity and scienter. When we
consider allegations of scienter under 15 U.S.C. § 78u-4(b)(2),
Tellabs instructs us to consider competing inferences from the
allegations, but we nonetheless assume the truth of the specific
facts alleged. See Integrated Elec. Servs., 497 F.3d at 551.

                                42
and AT&T Solutions, numerous large clients, such as Merrill
Lynch and Citigroup, were able to pressure Avaya into large
price concessions. For example, Citigroup allegedly forced
Avaya to accept a 20% price reduction with no change in
services because Avaya feared losing Citigroup to AT&T
Solutions’s “outsourcing” product.

        CW4 is a former Avaya employee who was employed
throughout the class period and was responsible for evaluating
the profitability of special bids in the Services organization.
According to CW4, Avaya was facing substantial pricing
pressure 32 and was forced to give substantial discounts to win
business throughout the class period. “In many instances Avaya
was granting price concessions in excess of 30%–40% in order
to w in business.”            Several of Avaya’s largest
customers—American Express, Hilton Hotels, Dell and Wynn
Resorts—received discounts in 2004 and 2005. Furthermore,
CW4 stated that, historically, Avaya gave 20% discounts to 20%
of its special bid customers. But between January and May
2005, at the request of the sales force, Avaya management gave
20% discounts to 80% of its special bid customers.

      CW6, an independent Avaya sales manager who sold
Avaya product but was not employed by the company, noted

  32
    For example, several companies specifically targeted Avaya
customers. According to CW4, in October 2004, Avaya learned
of United Assets Coverage’s tactic to target Avaya customers.

                              43
that, in March 2005, Avaya was cutting prices on some of its
mid-range systems. According to CW6, “Cisco was attacking
Avaya on price and hurting Avaya in the small and midsized
business markets.”

       In a case decided before Tellabs, we stated:

       [W]here plaintiffs rely on confidential personal
       sources but also on other facts, they need not
       name their sources as long as the latter facts
       provide an adequate basis for believing that the
       defendants’ statements were false. Moreover,
       even if personal sources must be identified, there
       is no requirement that they be named, provided
       they are described in the complaint with sufficient
       particularity to support the probability that a
       person in the position occupied by the source
       would possess the information alleged.

Cal. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394 F.3d 126,
146 (3d Cir. 2004) (quoting Novak v. Kasaks, 216 F.3d 300, 314
(2d Cir. 2000)). In other words, “a complaint can meet the
pleading requirement [of the PSLRA] by providing sufficient
documentary evidence and/or a sufficient description of the
personal sources of the plaintiff’s beliefs.” Id. at 147. We
consider the “detail provided by the confidential sources, the
sources’ basis of knowledge, the reliability of the sources, the
corroborative nature of other facts alleged, including from other
sources, the coherence and plausibility of the allegations, and

                               44
similar indicia.” Id. Where, as here, plaintiffs lack documentary
evidence such as internal memoranda, “reliance on confidential
sources to supply the requisite particularity for their fraud claims
. . . assumes a heightened importance.” Id. at 148.

        We must determine whether this jurisprudence remains
good law after Tellabs. As one court of appeals has observed,
“Tellabs did not [specifically] address . . . how courts should go
about evaluating allegations based on statements made by
unidentified, confidential witnesses.” Mizzaro v. Home Depot,
Inc., 544 F.3d 1230, 1239 (11th Cir. 2008). Nonetheless,
several of our sister circuits have considered where anonymous
witnesses stand in the wake of the Supreme Court’s decision.
An early Seventh Circuit opinion concluded that Tellabs
required it to “discount allegations that the complaint [at bar]
attributes to five ‘confidential witnesses.’” Higginbotham v.
Baxter Int’l Inc., 495 F.3d 753, 756 (7th Cir. 2007). “Tellabs
requires judges to weigh the strength of plaintiffs’ favored
inference in comparison to other possible inferences,” but in
Higginbotham’s view, “anonymity frustrates that process”
because it “conceals information that is essential to th[is] sort of
comparative evaluation.” Id. at 757. The Higginbotham court
nonetheless acknowledged that anonymous sources can
sometimes “corroborate or disambiguate” other evidence, and
that the precise weight to be given to confidential witness
allegations can be determined only in the context of all the other
allegations presented in a specific case. Id. For these reasons,
the court concluded that information alleged by confidential

                                45
sources “must be ‘discounted’ rather than ignored.” Id. But it
emphasized that “[u]sually that discount will be steep.” Id.

        Other courts, however, have qualified Higginbotham’s
strong skepticism of confidential sources. The Seventh Circuit
itself distinguished Higginbotham in Tellabs II. As the latter
case observed, not only were the sources in the Higginbotham
complaint anonymous, but they were also “described merely as
three ex-employees of [the defendant company] and two
consultants.” Tellabs II, 513 F.3d at 712. The confidential
sources listed in the Tellabs II complaint, on the other hand, “are
numerous and consist of persons who from the description of
their jobs were in a position to know at first hand the facts to
which they are prepared to testify . . . . The information that the
confidential informants are reported to have obtained is set forth
in convincing detail, with some of the information, moreover,
corroborated by multiple sources.” Id. The Tellabs II court
conceded that, all else being equal, a complaint with named
sources “would be better” than one with confidential witnesses,
but “the absence of proper names does not invalidate the
drawing of a strong inference from informants’ assertions.” Id.
Tellabs II apparently circumscribes Higginbotham’s broad
pronouncement that confidential witness allegations will
“usually” be steeply discounted, clarifying that the weight
accorded to anonymous sources will depend in large part on the
level of detail with which they are described. In Tellabs II, then,
the Seventh Circuit appears to have reached essentially the same
conclusion we set forth earlier in Chubb. Tellabs II cites that

                                46
case approvingly. See id.

        Other circuits have staked out similar positions. See, e.g.,
Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 995 (9th
Cir. 2009) (evaluating “whether a complaint has provided
sufficient detail about a confidential witness’ position within the
defendant company to provide a basis for attributing the facts
reported by that witness to the witness’ personal knowledge”);
Mizzaro, 544 F.3d at 1240 (Although there are “reasons why
courts may be skeptical of confidential sources cited in
securities fraud complaints . . . [,] [c]onfidentiality . . . should
not eviscerate the weight given [to these sources] if the
complaint otherwise fully describes the foundation or basis of
the confidential witness’s knowledge, including the position(s)
held, the proximity to the offending conduct, and the relevant
time frame.”); see also Ley v. Visteon Corp., 543 F.3d 801, 811
(6th Cir. 2008) (endorsing Higginbotham’s steep discount where
plaintiffs not only withheld the names of employees who knew
of defendant’s “alleged accounting improprieties,” but also
failed to allege “what, when, where, and how” the employees
knew of that information).

        In our view, the case law interpreting the Supreme
Court’s Tellabs opinion confirms the position we took in Chubb.
The PSLRA imposes a particularity requirement on all
allegations, whether they are offered in support of a statement’s
falsity or of a defendant’s scienter. 15 U.S.C. § 78u-4(b)(1),
(b)(2). In the case of confidential witness allegations, we apply
that requirement by evaluating the “detail provided by the

                                47
confidential sources, the sources’ basis of knowledge, the
reliability of the sources, the corroborative nature of other facts
alleged, including from other sources, the coherence and
plausibility of the allegations, and similar indicia.” Chubb, 394
F.3d at 147. If anonymous source allegations are found wanting
with respect to these criteria, then we must discount them
steeply. This is consistent with Tellabs’s teaching that
“omissions and ambiguities count against inferring scienter”
under the PSLRA’s particularity requirements. Tellabs, 127 S.
Ct. at 2511. If, on the other hand, a complaint’s confidential
witness allegations are adequately particularized, we will not
dismiss them simply on account of their anonymity.33 In short,

     33
        Of course, confidential witness allegations may score
highly on the Chubb test yet fail either to establish the falsity of
a statement, or to give rise to a strong inference of scienter.
Nonetheless, for analytical purposes, it is important to
distinguish deficiencies relating to the content of allegations
from those relating to their form. The Chubb test addresses only
the latter issue. See, e.g., Metzler Inv. GMBH v. Corinthian
Colls., Inc., 540 F.3d 1049, 1069 n.13 (9th Cir. 2008) (The
confidential witnesses’ “identity and knowledge . . . are
described with sufficient specificity to meet the PSLRA’s
standards generally. The problem for [plaintiff] is not that the
confidential witnesses are inadequately identified—the problem
is that these witnesses do not convey information sufficient to
support the strong inference of scienter that the PSLRA
requires.” (internal citation omitted)).

                                48
Chubb remains good law.

       Referring to the Chubb factors, the District Court here
concluded that “[p]laintiffs have appropriately described the
positions formerly held by each of [the confidential] sources as
well as the basis of the sources’ personal knowledge.” Charatz,
2006 WL 2806229, at *10. We agree. Shareholders have
adequately described the duration of each CW’s employment,
the time period during which the CWs acquired the relevant
information, and how each CW had access to such information.
See Chubb, 394 F.3d at 150.

        In addition to the CW statements, Shareholders cite the
March 2005 Lehman Brothers report, which was based upon
discussions with Avaya resellers. The report indicated that
Avaya offered “aggressive” and “unusually attractive” 30% to
40% discounts on its mid-range products (150–400 lines)
beginning in March 2005.34 Lehman Brothers estimated that
sales of the mid-range systems “constitute a significant portion
of the enterprise telephony industry sales” and warned that if the
promotion were highly successful, “Avaya’s product margins
would be somewhat impacted.” According to Shareholders, this
report corroborates CW3’s, CW4’s, and CW6’s allegations and
directly contradicts McGuire’s assurances that pricing remained

      34
       The report stated: “According to some resellers, the
aggressive 30–40% discount Avaya has been offering on its
mid-range (150–400 lines) systems since the beginning of
March is quite unusual.”

                               49
normal.

        Furthermore, Shareholders allege that after denying the
existence of unusual discounting and pricing pressure, McGuire
admitted that Avaya was in fact providing discounts. On April
19, 2005,35 in response to questions about discounting, McGuire
stated: “There is no new specific discounting policy we put in
place. I can tell you that our discounts were relatively black or
improved in most parts of the world, except for international
direct where they were up slightly.” On April 28, 2005,
McGuire was asked about “some reports published recently
saying that Avaya gave a 30% to 40% discount in the first
quarter.” As noted, McGuire responded: “Now, I hear the noise
that, yes, we were out with a 30% to 40% discount on a program
in last quarter.36 . . . [I]t’s not unusual . . . . And quite frankly,

   35
        As noted, Q2 FY2005 ended on March 31, 2005.
   36
     Shareholders interpret “last quarter” to mean Q1 FY2005
(October 2004 to December 2004). Defendants disagree,
contending that since the statement was made in Q3 FY2005,
McGuire was referring to the discount reported by Lehman
Brothers in Q2 FY2005. Because the quarter referred to by
McGuire remains unclear, we will assume for purposes of this
appeal that Shareholders’ interpretation is correct. See supra
note 31; Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d
Cir. 2008) (accepting “all factual allegations as true” and
construing “the complaint in the light most favorable to the

                                 50
a 30% to 40% discount is not out of the norm for any of these
programs.”

       The CW statements allege a series of unusual and
substantial discounts across several business lines—both sales
of products and services. The Complaint alleges that Avaya
provided significant and unusual discounts to some of its biggest
customers in order to retain their business. Furthermore, the
Complaint lists several of the large customers awarded
discounts. The Lehman Brothers report and McGuire’s April
28, 2005 statement reinforce the CWs’ account that a 30% to
40% discount was in place on the mid-range products.
Furthermore, the Lehman Brothers report, based on
conversations with resellers, characterized the discount as “quite
unusual” and “aggressive.”

        In Chubb, plaintiffs alleged that defendants issued false
or misleading statements representing that a rate initiative was
ameliorating the problems in their business and was doing so
more quickly than anticipated. To substantiate these allegations,
plaintiffs proffered confidential witness statements identifying
specific customers that Chubb lost as a result of their rate
initiative. Nonetheless, we concluded that the “anecdotal
examples of profitable customers lost or policies renewed at flat
or slightly raised rates does not demonstrate that the rate
initiative was failing, especially in light of defendants’ Class
Period disclosures.” Id. at 156. But here, the CW statements

plaintiff” (internal quotation marks omitted)).

                               51
identifying deep and unusual discounting, although anecdotal,
represent the range of Avaya’s U.S. businesses—including both
products and services. Furthermore, the statements directly
conflict with McGuire’s repeated assurances throughout the
class period that pricing remained “fairly steady.” Accordingly,
Shareholders have pled unusual price discounting with the
particularity required by the PSLRA. While we find that
Shareholders have sufficiently pled falsity with respect to all of
the discounting statements, it is worth noting that the allegations
of discounting are significantly stronger—that is, broader, more
detailed, and more interlocking—for Q2 (January to March
2005) than for Q1 (October to December 2004).

               2. Forecast-Related Statements

        Shareholders also challenge defendants’ revenue and
operating margin growth forecasts made throughout the class
period, alleging that defendants’ January 2005 “on track”
statements were materially false or misleading because Avaya
was not “on track” and had no basis for claiming Avaya would
do better in the United States as the year progressed. They
assert that “defendants knew at the time of making their
statements that Avaya was experiencing substantial disruption
in its sales channels as a result of the [GTM] program.” 37 On

     37
       According to a former Avaya Director of Operations,
Global Solutions Sales and Support and a former Avaya Senior
Client Executive, McGuire established financial projections on
a “top down” basis; he did not solicit any input from the sales

                                52
several occasions during FY2005, defendants represented they
were “on track” to meet their projected goals. Furthermore, in
March 2005, approximately a month and a half before the April
19, 2005 announcement, McGuire expressed confidence in the
forecast.

        Defendants contend Shareholders’ reliance on the CWs
in the Complaint is insufficient to meet the particularity
requirements of the PSLRA because none of the CWs worked
in positions which would provide them with insight or visibility
into Avaya’s corporate-wide forecasts.         According to
defendants, Shareholders point to relatively low-level former
employees (or non-employees)—none of the CWs are officers,
none worked at headquarters, and none claimed to participate in
the forecasting process.38 Defendants assert that, at most, the
CWs’ statements consist of random anecdotes that, when
juxtaposed against defendants’ statements, do not meet the

representatives. Shareholders allege that “McGuire’s quotas
were based upon the unreasonable financial projections
McGuire made to investors, as opposed to reasonable
assessments as to what was realistically attainable.”
    38
     As stated above, CW3 was a Global Contract Manager,
CW4 evaluated the profitability of special bids in the Services
organization, CW5 was a Senior Client Executive who left the
company in March 2004, and CW6 was an independent sales
manager who was not employed by the company.

                              53
standard for pleading falsity.

        As noted, in October 2004, Avaya set its operating
margin goal for FY2005 between 8.5% and 9% and its expected
revenue growth rate between 25% and 27%. At the end of the
first quarter, defendants said “we are on track to meet our goals
for the year, even though there were some aspects of our
performance that are below our expectations and that we are
working on to improve.” During a January conference call with
analysts, Peterson reiterated the October 2004 forecast and
explained that even though Avaya’s business is “somewhat . . .
seasonal” and that U.S. product sales were “not up to our
expectations,” “we think that we had a solid quarter that is
positioning us well to go on through the rest of the year and
achieve those goals.”

      On March 2, 2005, McGuire adjusted Avaya’s projected
revenue growth to 28%,39 expressed comfort with the October
2004 forecast, and noted that “we are building on the
momentum that we’ve got in the market relative to the
technology lead, our applications, . . . and our global services.”

       On April 19, 2005, Avaya announced that it would be
unable to meet its previously stated goals for growing revenues,
operating income, and operating margin in FY2005. Peterson
blamed internal problems, especially the GTM strategy, for the
missed benchmarks. McGuire claimed that during January and

   39
        See supra note 9.

                                 54
February 2005, Avaya was “tracking slightly at or just a little bit
below the quarter before” and was “track[ing] well for March
closure both on the indirect and the direct side.” According to
McGuire, the internal indicators provided “comfort” that Avaya
would remain on track to achieve the year-end goals. But Avaya
was caught by “surprise” in the last week of March when
distributors did not repurchase at rates consistent with prior
practice and when Avaya failed to close several deals.

       Shareholders allege various sources and “true facts,” in
addition to those described above, to show that defendants’
forecast-related statements were materially false or misleading.
In addition to the facts alleged by CW3 and CW4—Avaya was
faced with and succumbed to significant pricing
pressure—CW5, a former Senior Client Executive with Avaya
from 2001 to March 2004, alleged that it became apparent in
October 2003 that Avaya’s sales strategy40 would cause a
“substantial loss of business.” He noted many customers lost
confidence and trust in Avaya when Client Executives were
reassigned to mid-market accounts. CW5 averred that he
personally lost approximately $7 million in sales, including
contracts with ACS in Utica, New York and Alcoa. According
to CW5, due to the long sales cycle—between six months and
one-and-a-half years—losses experienced in October 2003

    40
     According to CW5, the GTM strategy began in October
2003. In contrast, defendants state that the GTM strategy was
launched in October 2004. See supra note 31.

                                55
would have a “substantial impact” on Avaya’s financial results
in FY2005.

        Shareholders also assert defendants’ March forecasting
statements were false or misleading when made. As evidence,
Shareholders cite a March 4, 2005 report by members of the
Buckingham Research Group who performed a sales channel
check. The report concluded that Avaya was experiencing
“weak” spending for its products and had fired sales staff in
order to cut costs. The analysts predicted Avaya’s actions would
“negatively effect [sic] growth.”

        As noted, a plaintiff must explain “how or why” their
confidential source would have the knowledge alleged. Chubb,
394 F.3d at 149. Shareholders have adequately alleged when
their sources were employed by Avaya, when they obtained the
information they allegedly possess, and whether their supposed
knowledge is first or second hand. See id. at 150. Shareholders
contend that defendants’ forecast-related statements were
materially false or misleading at the time they were made based
on the collection of information before us.

        This information sufficiently pleads the falsity of the
March projections, for many of the same reasons it adequately
pleaded the falsity of the March pricing statements. If we
assume the allegations of significant Q2 discounting are true, it
is reasonable to infer that the reaffirmed projections of revenue
and margins were, by March, no longer sound (and were thus
misleading). The anecdotal allegations, however, are less

                               56
persuasive with regard to the earlier statements. To begin with,
they are both less focused chronologically and less mutually
reinforcing than the allegations of Q2 discounts. An even larger
stumbling block for plaintiffs, however, is that Avaya exceeded
expectations for Q1 FY2005—October 2004 to December
2004.41 Defendants contend that, at the time of the forecast-
related statements (first issued in October and reiterated in
January), the projections were possible to achieve. The facts
alleged in the Complaint, when viewed against the backdrop of
the successful Q1 results, do not belie this conclusion. We
therefore agree with defendants that Shareholders have failed to
plead with the requisite particularity the allegation that the
October and January forecasts were false or misleading when
made. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1330
(3d Cir. 2002) (“To be actionable, a statement or omission must
have been misleading at the time it was made; liability cannot be
imposed on the basis of subsequent events.”).

                    3. Falsity Conclusion

       Shareholders have adequately specified the reasons why
defendants’ pricing-pressure statements and March projections
were false or misleading when made. In contrast, we find
insufficient the allegations that defendants’ January and October

  41
    See Compl. ¶ 58 (“Avaya’s first quarter results were in line
with, or better than, analysts’ expectations. For instance, Avaya
reported Earnings Per Share (“EPS”) of 20 cents, beating
consensus estimates of 18 cents.”).

                               57
forecast-related statements were false or misleading when made.

                           C. Scienter

        As discussed above, the PSLRA’s first pleading
requirement is that a plaintiff must “specify each allegedly
misleading statement, why the statement was misleading, and,
if an allegation is made on information and belief, all facts
supporting that belief with particularity.” Winer Family Trust,
503 F.3d at 326 (construing 15 U.S.C. § 78u-4(b)(1)). As noted,
only Shareholders’ pricing-pressure and March-projection
allegations satisfy this requirement. Under the PSLRA’s second
pleading requirement, a plaintiff 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). This
scienter standard requires plaintiffs to allege facts giving rise to
a “strong inference” of “either reckless 42 or conscious behavior.”

   42
     “A reckless statement is one involving not merely simple,
or even inexcusable negligence, but an extreme departure from
the standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware
of it.” Advanta, 180 F.3d at 535 (internal quotation marks
omitted).    “[C]laims essentially grounded on corporate
mismanagement” do not adequately plead recklessness. Id. at
540 (internal quotation marks omitted).
        In Tellabs, the Supreme Court continued to reserve
judgment on “whether reckless behavior is sufficient for civil

                                58
Advanta, 180 F.3d at 534–35 (footnote added). Two cases
clarifying the PSLRA standard for pleading scienter were
decided after the District Court issued its order in this case:
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499
(2007), and Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir.
2007).

        As interpreted by Tellabs, the second requirement of the
PSLRA—that the plaintiff plead with particularity facts giving
rise to a “strong inference” of scienter—obliges courts to weigh
the “plausible nonculpable explanations for the defendant’s
conduct” against the “inferences favoring the plaintiff.” 127 S.
Ct. at 2510. A “strong inference” of scienter is one that is
“cogent and at least as compelling as any opposing inference of
nonfraudulent intent.” Id. at 2504–05; see also id. at 2510 (“The
inference that the defendant acted with scienter need not be
irrefutable, i.e., of the ‘smoking-gun’ genre, or even the most
plausible of competing inferences.” (internal quotation marks
omitted)). The pertinent question is “whether all of the facts
alleged, taken collectively, give rise to a strong inference of
scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.” Id. at 2509; see also id. at 2511

liability under § 10(b) and Rule 10b-5,” but it noted that
“[e]very Court of Appeals that has considered the issue has held
that a plaintiff may meet the scienter requirement by showing
that the defendant acted intentionally or recklessly.” 127 S. Ct.
at 2507 n.3.

                               59
(“[T]he court’s job is not to scrutinize each allegation in
isolation but to assess all the allegations holistically.”).
Omissions and ambiguities “count against inferring scienter.”
Id. at 2511.

        The District Court concluded that Shareholders failed to
plead scienter sufficiently. Shareholders assert error, contending
the District Court did not consider the combination of specific
facts from various sources “collectively.” They maintain that,
when considered collectively, the pleaded facts “meet and
exceed” the strong-inference pleading standard. Specifically,
they argue that “[t]aken together, plaintiffs’ witness reports,
analyst and reseller information, and defendants’ own
admissions, bolstered by the core business inference, the
magnitude of the missed forecasts in April 2005, and their
temporal proximity to defendants’ ‘on track’ assurances and
increased forecast in March 2005, support a strong inference of
scienter.” Shareholders’ Br. 40. Further, they assert their
“motive allegations are consistent with scienter, even if,”
standing alone, they “do[] not establish a strong inference.” Id.
Defendants contend the pleaded facts, including Shareholders’
confidential witness accounts, do not show defendants’
knowledge (or reckless disregard of the risk) that their
statements were false or misleading when made. Furthermore,
defendants assert that Shareholders’ motive allegations are not
indicative of fraud.

             1. Conscious or Reckless Behavior

                               60
       Peterson and McGuire repeatedly assured analysts and
investors that, although there was pressure in the market, there
were no significant changes to the pricing environment.
Shareholders allege that defendants knew of or recklessly
disregarded the fact that competition was forcing unusually
large 20% to 40% price discounts that were hurting profit
margins. In addition to the CWs’ statements, the Lehman
Report, and defendants’ alleged admissions (described above),
Shareholders assert that since competition, pricing policies, and
pricing concessions are “core matters” of central importance to
Avaya and its principal executives, a “core operations inference”
supports scienter. Shareholders contend that “[i]t strains reason
to suggest” that Peterson and McGuire did not know about the
discounts impairing Avaya’s profit margin. Shareholders’ Reply
Br. 18. Furthermore, Shareholders assert that the magnitude of
the missed forecasts in April 2005, and their temporal proximity
to defendants’ assurances, also support a strong inference of
scienter. According to Shareholders, the core operations
inference, the magnitude of the miss, and its temporal proximity
do not stand alone, but instead “bolster” the “true facts”
alleged—the confidential witness reports, the Lehman Brother’s
report, and McGuire’s alleged admissions. In response,
defendants contend none of the CWs claimed to have had any
connection to or communication with Peterson or McGuire, or
knowledge about the information or records to which Peterson
or McGuire had access. According to defendants, the CWs offer
no factual basis to show that Peterson or McGuire knew, or were
reckless regarding the risk that, their statements were false or

                               61
misleading when made.

The March Pricing-Pressure Statements

        It is true that Shareholders do not point to any particular
document or conversation that would have informed Peterson or
McGuire of unusual discounting during the class period. The
existence of such a direct link would fortify Shareholders’
allegations that defendants’ statements about discounting were
knowingly or recklessly false. But the Supreme Court has made
clear that plaintiffs’ allegations of scienter “need not be
irrefutable, i.e., of the ‘smoking-gun’ genre.” Tellabs, 127 S.
Ct. at 2510. Instead, our inquiry is “whether all of the facts
alleged, taken collectively, give rise to a strong inference of
scienter.” Id. at 2509. Accordingly, as with all totality-of-the-
circumstances tests, our analysis will be case specific. It will
ultimately rest not on the presence or absence of certain types of
allegations but on a practical judgment about whether, accepting
the whole factual picture painted by the Complaint, it is at least
as likely as not that defendants acted with scienter. See South
Ferry LP, #2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008)
(“Tellabs counsels us to consider the totality of circumstances,
rather than to develop separately rules of thumb for each type of
scienter allegation.”); see also In re Cabletron Sys., Inc., 311
F.3d 11, 32 (1st Cir. 2002) (“Each securities fraud complaint
must be analyzed on its own facts; there is no one-size-fits-all
template.”).

       We believe the totality of the facts alleged by

                                62
Shareholders here establishes a strong inference of scienter with
respect to McGuire’s March denials of unusual pricing pressure.
Contrary to defendants’ arguments, Shareholders do not simply
allege “fraud by hindsight,” that is, they do not claim merely that
McGuire’s statements turned out to be wrong, and therefore
must have been fraudulent. Rather, Shareholders’ allegations
proffer an array of circumstantial evidence giving rise to a
strong inference that McGuire’s discounting statements were at
least reckless, which is enough to survive a motion to dismiss
under the PSLRA.

       Among the facts alleged by Shareholders, the most
powerful evidence of scienter is the content and context of
McGuire’s statements themselves. McGuire did not simply
make statements inconsistent with the existence of widespread
and unusual discounting; he explicitly denied the existence of
such discounting in response to repeated questions about pricing
by analysts. During a conference call with analysts on March 2,
McGuire was asked for his “sense of what the environment is
out there right now.” McGuire responded that the “[p]ricing
environnment is not significantly different. I mean, there are
people that will buy a deal from time to time, but in general, the
pricing environment has been fairly stable.” During another
conference call with analysts on March 7, McGuire was asked
whether there had been “[a]ny significant changes one way or
the other in the pricing environment.” McGuire answered,
“Perhaps not in the last 12 months. I mean, clearly from time to
time people will want to buy a deal here or there, but the market

                                63
itself has been fairly stable with just modest declines over the
last 12 months.” And during a third conference call for analysts
just three days later, on March 10, McGuire was queried yet
again on pricing: “Now that you say [Cisco] put . . . a decent
team in place after losing market share last year, what should we
expect in terms of the competitive position that is here in the
market? What should we expect in terms of pricing?”
McGuire’s answer was consistent with his earlier responses:
“Pricing has been fairly steady for the last couple of years. I
don’t anticipate—I don’t see any reason that that would change
significantly.”

        It is one thing for a plaintiff to claim that a defendant
must have known its earnings projections were false because of
the existence of unusual price reductions. Earnings are the
bottom-line result of many different components, only one of
which is pricing. The mere fact that a defendant made a
statement about earnings, therefore, does not necessarily imply
he would have been aware of particular pricing developments.
But it is another thing when a defendant chief financial officer
is specifically asked, directly and repeatedly, whether the
company’s pricing has held steady despite the competitiveness
of the market. Although McGuire acknowledged that Avaya
inhabited a competitive industry and offered discounts to some
customers on some products and services, Shareholders’ central
allegation is that Avaya engaged in massive discounting on an
unusually large scale during the class period, and this McGuire
flatly denied in statements evincing certitude.

                               64
        We do not suggest that the specific nature of the analysts’
inquiries, by itself, creates a strong inference of a culpable state
of mind. But the focused questions do mark an important
distinction between this case and those in which defendants win
dismissal on a showing that defendants were most likely simply
ignorant of the facts that made their statements false. See, e.g.,
Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049,
1068 (9th Cir. 2008) (“[C]orporate 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.”); ACA Fin. Guar. Corp.
v. Advest, Inc., 512 F.3d 46, 62–63 (1st Cir. 2008) (“The
plaintiffs have not included details about . . . whether this
information [allegedly belying defendants’ statements] was
known to the defendants at the relevant time.”). Because of the
context (specific analyst queries) and content (consistent denials
of unusual discounting) of McGuire’s statements, the possibility
that McGuire was ignorant is not necessarily exculpatory. Even
if McGuire were not aware of the full extent of the unusual
discounting, or the entirety of the other circumstances alleged by
Shareholders, he might be culpable as long as what he knew
made obvious the risk that his confident, unhedged denials of
unusual discounting would mislead investors.43 See Advanta,

    43
     Of course, if McGuire simply had no idea whether there
was unusual discounting, and nonetheless confidently denied its
existence, this would also have presented an obvious risk of

                                65
180 F.3d at 535 (explaining that allowing recklessness to serve
as a sufficient basis for liability “promotes the policy objective[]
of discouraging deliberate ignorance”); Tellabs II, 513 F.3d at
704 (“When the facts known to a person place him on notice of
a risk, he cannot ignore the facts and plead ignorance of the
risk.”). Given the specificity and repetition of the analysts’
questions, McGuire’s position as Chief Financial Officer, and
the alleged state of Avaya’s business at the time the questions
were asked, there is a strong inference that McGuire’s behavior
reached this threshold of recklessness.

        If the alleged discounting were minor or restricted to only
a few products or customers, we would be reluctant to infer that
McGuire’s denials were culpable. In those circumstances,
nonculpable ignorance might be the more likely explanation.
But as we have discussed, Shareholders’ CWs allege widespread
discounting involving many different product lines and
accounts, including some of Avaya’s largest clients. Allegations
that the discounting was of a substantial magnitude are
supported by analyst reports and by Avaya’s disappointing Q2
results. Avaya’s Q2 operating margins were particularly
weak—4.3%, about 50% lower than the 8.5% to 9% margins
predicted for the year, and 44% lower than the first quarter’s

misleading investors.

                                66
operating margin of 7.7%.44 That Avaya’s second quarter
margins were significantly contracting itself lends support to the
inference of scienter. Throughout the class period, one of
investors’ and analysts’ central questions about Avaya was
whether it could sustain and expand its margins in the face of a
very competitive market. In fact, Avaya’s operating margin was
viewed as so important to the health of the company (and its
attractiveness to investors) that its supposed ability to hold and
grow this margin was described as the “Avaya story.” The
perceived importance of margins supports an inference that
McGuire, Avaya’s Chief Financial Officer, was paying close
attention to these numbers. Cf. Dorsey v. Portfolio Equities,
Inc., 540 F.3d 333, 342 (5th Cir. 2008) (“[T]here can be a
number of special circumstances which, taken together with an
officer’s position, may support a strong inference of scienter.”

   44
    Defendants attempt to minimize the significance of the Q2
results, emphasizing that the financial projections at issue
concerned expected results for the entirety of the 2005 fiscal
year, not for individual quarters. Defendants’ Br. 42–43. This
point would be relevant if it suggested that Q2 results, while less
impressive than the Q1 figures, were nonetheless satisfactory
and consistent with the annual projections. Not only, however,
did the April figures disappoint the market and analysts, but
these results also prompted Avaya itself to announce that its
previous annual projections were no longer realizable. Id. at
12–13. Defendants’ insistence that Avaya did not “‘miss’ the
quarter,” see id. at 43 n.17, is mere wordplay.

                                67
(internal quotation marks omitted)); In re Stone & Webster, Inc.,
Sec. Litig., 414 F.3d 187, 211 (1st Cir. 2005) (“The financial
strength of the Company was undoubtedly a matter of principal
concern to its Chief Executive Officer and Chief Financial
Officer.”). And because, all else being equal, a change in
pricing would directly affect margins, an executive inquiring
into a change in margins would be expected to look to pricing
for a possible explanation. Accordingly, the steep decline in
Avaya’s all-important margins in the second quarter of 2005
bolsters the inference that McGuire would have been alerted to
the discounting.

          Just as the magnitude of the alleged discounting and
margin contraction strengthens the inference of scienter, so does
the temporal proximity of McGuire’s March denials to the end
of the quarter. The second quarter ended on March 31, and
Avaya reported its quarterly results on April 19. CW4 reported
that Avaya had been offering discounts to an unusually large
number of its customers since January. Taken in their entirety,
the allegations suggest that Avaya’s Chief Financial Officer
was, by early March, aware of Avaya’s sharply contracting
margins, which were crucial to its “story.” And as we have said,
upon realizing that Avaya’s margins were drastically shrinking,
it is at least as likely as not that McGuire would have discovered
the massive discounting, if he had not already done so.

        Defendants suggest McGuire would not have been aware
of the “horrid” (as one analyst called them) impending Q2
results in early March because the shortfall was, according to

                               68
defendants, mostly the product of an unexpected decision by
distributors not to “reload” at the very end of March. Although
defendants will, of course, have an opportunity to adduce
evidence in support of this explanation at a later stage of the
litigation, in light of the alleged facts we may consider (and
must assume true) at this stage, we find it more likely that
unusual discounting explains the disappointing results. “The
plausibility of an explanation depends on the plausibility of the
alternative explanations. As more and more alternatives to a
given explanation are ruled out, the probability of that
explanation’s being the correct one rises.” Tellabs II, 513 F.3d
at 711 (internal citations omitted). Here, the centrality of
operating margins to the “Avaya story,” the magnitude and
pervasiveness of the alleged discounting, and the proximity of
the March statements to the end of the quarter and the release of
Avaya’s disappointing results, all diminish the plausibility of
innocent explanations for McGuire’s flat denials of unusual
pricing—for example, that developments subsequent to the
statements account for the mediocre results, or that the
discounting would not have been apparent to McGuire at the
time analysts asked about it. As the plausibility of these benign
explanations shrinks, the cogency of the culpable
explanation—that McGuire either knew his denials of
discounting were false or recklessly disregarded the obvious risk
of their falsity—correspondingly grows.

       Having considered the totality of the particularized facts
alleged by Shareholders, we find that the culpable explanation

                               69
of McGuire’s March discounting statements is at least as
compelling as the nonculpable alternatives. Taken together, the
extent of the alleged discounting, the importance to the “Avaya
story” of maintaining margins, the amount by which the second
quarter results missed expectations, the proximity of McGuire’s
statements to the end of the quarter and the release of results,
McGuire’s position as Chief Financial Officer, and most
significantly, the content and context of the statements
themselves, give rise to a strong inference that McGuire either
knew at the time that his statements were false or was reckless
in disregarding the obvious risk of misleading the public.
Accordingly, under Tellabs, Shareholders’ claims relating to the
March discounting statements survive defendants’ motion to
dismiss.45

        Defendants’ primary strategy in resisting this conclusion
is to focus on particular types of allegations and argue for the
insufficiency of each.       For example, in responding to
Shareholders’ argument that the temporal proximity of the Q2

  45
     Of course, these conclusions assume the truth of plaintiffs’
allegations and are based only on the limited information we
may consider on a motion to dismiss. “Our ruling does not
mean that plaintiffs’ claims have any merit. It means only that
the claims are not to be dismissed at this very early stage.
Nothing has been proven yet.” Miss. Pub. Employees’ Ret. Sys.
v. Boston Scientific Corp., 523 F.3d 75, 79 (1st Cir. 2008)
(internal quotation marks omitted).

                               70
2005 results to the March statements bolsters the inference of
scienter, defendants contend “[c]ourts reject inferences premised
on such proximity rationales.” Defendants’ Br. 42 (citing Arazie
v. Mullane, 2 F.3d 1456, 1467–68 (7th Cir. 1993)); see also id.
at 42 n.16 (citing Ronconi v. Larkin, 253 F.3d 423, 437 (9th Cir.
2001), for the proposition that “temporal proximity alone is
never enough to show scienter” (emphasis added)). Whatever
the merits of this approach before Tellabs, it is in tension with
the prescriptions issued in that case. We are to judge “whether
all of the facts alleged, taken collectively, give rise to a strong
inference of scienter, not whether any individual allegation,
scrutinized in isolation, meets that standard.” Tellabs, 127 S. Ct.
at 2509. Given this instruction, we are hesitant to formulate
categorical rules about the sufficiency of different types of
allegations in the abstract. Each case will present a different
configuration of factual allegations, and it is the composite
picture, not the isolated components, that judges must evaluate
in the last instance. “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.” South Ferry,
542 F.3d at 784.46

    46
      For the same reasons that we approve of South Ferry’s
holistic approach to inference, we decline to follow two recent
Ninth Circuit opinions calling on courts to undertake two
separate scienter inquiries. According to this proposed
analytical framework, courts will first “determine whether any

                                71
of the plaintiff’s allegations, standing alone, are sufficient to
create a strong inference of scienter; second, if no individual
allegations are sufficient, we will conduct a ‘holistic’ review of
the same allegations to determine whether the insufficient
allegations combine to create a strong inference of intentional
conduct or deliberate recklessness.” Zucco Partners, LLC v.
Digimarc Corp., 552 F.3d 981, 992 (9th Cir. 2009); accord
Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1165 (9th Cir.
2009). Perhaps we misunderstand this new standard, but it
appears to graft Tellabs’s holistic analysis onto the Ninth
Circuit’s earlier jurisprudence as an extra layer. If this is true,
the result, in our view, misinterprets the Supreme Court’s
decision, which calls only for “consider[ing] the complaint in its
entirety” and explicitly warns against “scrutiniz[ing]”
allegations “in isolation.” Tellabs, 127 S. Ct. at 2509; see also
id. at 2511 (“In sum, the 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?”). As an earlier Ninth Circuit
opinion had recognized, “the Tellabs Court’s directive that a
complaint must be read in its entirety cuts both ways. Although
a defendant cannot gain dismissal by de-contextualizing every
statement in a complaint that goes to scienter, a plaintiff cannot
avoid dismissal by reliance on an isolated statement . . . .”
Metzler Inv. GMBH, 540 F.3d at 1069. Just as facts innocent in
themselves may appear more suspicious in the company of other

                                72
        For this reason, we are unconvinced by defendants’
attempt to downplay Shareholders’ argumentative focus on the
“totality of the circumstances alleged.” Defendants’ Br. 45.
“The sum of several zeros,” defendants state, “is still zero.” Id.
But inference is not arithmetic. The inferential significance of
any single allegation can be determined only by reference to all
other allegations.

The Earlier Statements

       Shareholders have failed to establish a strong inference
of scienter with respect to the other statements identified in their
Complaint. Each of these statements lacks at least some of the
inculpating circumstances surrounding the March discounting
statements. The closest case is presented by McGuire’s
reaffirmation 47 of the earlier financial projections on March 2,

facts, so too can a fact that seems damning when presented
alone sometimes be explained away by reference to other
circumstances.
    47
      The parties dispute whether the March statement, which
adjusted Avaya’s projected revenue growth to 28% due to the
earlier-than-predicted close of the acquisition of Tenovis, see
supra note 9, “increased” revenue estimates. Since the
“increase” was solely a result of the early close of the
acquisition, which had occurred before the statement, the
predictive portion of the guidance essentially reaffirmed the
earlier estimates.

                                73
the same day as one of his pricing statements. On the one hand,
the projection of revenue and margins has a less direct
relationship to the crucial alleged discounting than does the
pricing statements. But because unusual discounting would be
expected to diminish revenues and margins, and because we
have already found the Complaint adequately pleads scienter
with respect to the pricing statements, one might conclude that
the financial-projection allegations must also satisfy the
PSLRA’s requirements.

        Unlike the pricing statements, however, the March
projections are a classic forward-looking statement under the
PSLRA’s Safe Harbor provision. See 15 U.S.C. § 78u-
5(i)(1)(A) (defining “forward-looking statement” to include “a
projection of revenues, income (including income loss), . . . or
other financial items”); see also supra Section III.A.48 As such,

    48
       In oral argument, counsel for Shareholders implied the
March financial projections were assertions of current fact
insofar as McGuire explicitly expressed “comfort” with them.
Oral Arg. Tr. 12–13, Mar. 3, 2008 (contending this court has
held “that when a company expresses comfort with a projection
that that endorses it and it’s actionable”) (citing Burlington, 114
F.3d 1410). We disagree. McGuire’s “comfort” about the
projection is, of course, a current fact, but the statement about
corporate finances remains forward-looking. Burlington stands
only for the proposition that a corporate officer’s expression of
“comfort” with an analyst’s projections makes those projections

                                74
they are not actionable unless Shareholders can “prove that the
forward-looking statement . . . was made with actual knowledge
. . . that the statement was false or misleading.” § 78u-
5(c)(1)(B). Since this provision specifies an “actual knowledge”
standard, the scienter requirement for forward-looking
statements is stricter than that for statements of current fact.
Whereas liability for the latter requires a showing of either
knowing falsity or recklessness, liability for the former attaches
only upon proof of knowing falsity. See Miller v. Champion
Enters., Inc., 346 F.3d 660, 672 (6th Cir. 2003); Greebel v. FTP
Software, Inc., 194 F.3d 185, 200–01 (1st Cir. 1999); Bryant v.
Avado Brands, Inc., 187 F.3d 1271, 1283–84 (11th Cir. 1999).

       This distinction is fatal to Shareholders’ allegations
regarding the March projections. With the pricing statements,
Shareholders’ failure to identify the precise means by which
McGuire would have learned of the discounting was not
determinative. Even if he had not known his denials of unusual
discounting were false, the facts alleged gave rise to a strong
inference of recklessness. Assuming the truth of those
allegations, we concluded the inference that McGuire’s denials

attributable to the officer. It says nothing to suggest an
expression of comfort somehow renders the statement itself
ineligible for Safe Harbor protection. To the contrary,
Burlington consistently describes the statement at issue as
“forward-looking,” a “prediction,” and a “projection.”
Burlington, 114 F.3d at 1428–29.

                               75
were knowingly false or reckless was at least as compelling as
the possible nonculpable explanations. In the case of the
forward-looking statements, however, an inference of
recklessness does not avail plaintiffs—that is, it must be placed
on the nonculpable-explanation side of the balance when we
weigh competing inferences. In light of all the facts alleged, as
well as what is not alleged, we find it more likely that the March
financial projections were the product of recklessness or other
nonculpable ignorance, rather than knowing deception.49

       Shareholders’ allegations regarding the January
projections fare no better. In Shareholders’ view, defendants’
assurances that Avaya was “on track” to meet its financial goals
were not forward-looking, as the District Court found, but rather
statements of current fact outside of the statutory safe harbor.
We have rejected this argument, see supra Section III.A, but
even if we agreed, Shareholders have not adequately pleaded
scienter. The January forecast is a statement about Avaya’s
overall financial picture rather than specific pricing levels.
Furthermore, it is more distant from the end of the quarter and
the release of actual results than were the March statements.
Most importantly, the January statement was made on the same

    49
      Our decision to dismiss the allegations concerning the
March 2 financial projections is unlikely to be of any practical
consequence. Because we have found a discounting statement
made on the same day to be well pleaded, the projection
statement would not extend the class period.

                               76
day as the release of Avaya’s Q1 results, which, as the
Complaint itself concedes, were “in line with, or better than,
analysts’ expectations.” Compl. ¶ 58. Even if these statements
were somehow false (which, as we concluded above, has not
been adequately pleaded), the most compelling inference would
be that McGuire and Peterson did not yet know this and believed
that January had picked up where the first quarter had left off.

       Shareholders make two arguments in an attempt to avoid
this conclusion, but neither is convincing. First, they point to an
April statement by McGuire, which they construe as an
“admission” that “he was fully aware [of unusual discounting]
during the Class Period,” even as early as the first quarter.
Compl. ¶ 93; Oral Arg. Tr. 6, Mar. 3, 2008. But McGuire’s
words, as quoted in the Complaint, simply cannot bear this
interpretation: “Now, I hear that noise that, yes, we were out
with a 30% to 40% discount on a program in last quarter . . . .”
Compl. ¶ 93. There is no indication that McGuire was informed
of the discounting at any particular point in the past. The
statement “admits” only that he was, in April, aware of a
discount.

        Second, Shareholders rely on allegations that Avaya’s
sales cycle could be quite long. “Because of Avaya’s 6–18
month cycle for completing sales negotiations with its larger
clients, it would have been evident to defendants six months in
advance that Avaya was forced into offering huge 30–40% price
discounts beginning in October 2004 . . . .” Shareholders’ Reply
Br. 15. The implication is that in order for discounting, or

                                77
problems with the GTM strategy, to affect Avaya’s bottom line
in the second quarter, the contracts affected by these issues
would have to have been negotiated at least six months in
advance, at which point McGuire and Peterson presumably
would have known of the problems. This type of allegation
might carry some weight if the Complaint provided more
specific information about particular contracts, or provided a
narrower spectrum of sales-cycle variation. But in light of the
fact that the first quarter results met expectations, it is difficult
to grant much credit to this allegation. Plaintiffs point to
contracts going back as far as October 2003 and tell us only that
these contracts had a sales cycle somewhere between six and
eighteen months. Plaintiffs then urge us to conclude that
somehow these contracts were structured in such a way that the
problems lay dormant during the first quarter, not menacing
financial results, only to explode and lay waste to revenues and
margins during the second quarter. The Complaint’s sales-cycle
allegations are too vague to support this inference. See Tellabs,
127 S. Ct. at 2511 (“[O]missions and ambiguities count against
inferring scienter.”).

       Just as the sale-cycle and post-hoc admission allegations
cannot give rise to scienter with respect to the January
statements, they fail to save the earlier October statements. We
have held that Shareholders failed to plead the falsity of the
January and October projections adequately. Even if the
Complaint were not deficient on that score, it would not
sufficiently allege scienter. The satisfactory Q1 results fatally

                                 78
weaken any inference of scienter regarding the statement made
in January, the first month of the second quarter, and they a
fortiori vitiate any inference of scienter with respect to
projection-related statements made at the beginning of the first
quarter itself.

       Nor is the inference of scienter any stronger with respect
to the October pricing-pressure statements. Even if we grant
these statements were false, as we did above, the Q1 results
suggest that any unusual Q1 discounts were not
significant—certainly, not significant enough to support the
conclusion that Peterson and McGuire were aware of them, or
were otherwise reckless, at the time of the October statements.
Accordingly, the Complaint does not give rise to a strong
inference that these statements were knowingly or recklessly
false or misleading.

                 2. Motive and Opportunity

        Shareholders have also attempted to support their scienter
pleadings with allegations of defendants’ motive and
opportunity to commit fraud. In a case decided before Tellabs,
we held that plaintiffs may plead scienter “by alleging facts
establishing a motive and opportunity to commit fraud, or by
setting forth facts that constitute circumstantial evidence of
either reckless or conscious behavior.” Advanta, 180 F.3d at
534–35 (internal quotation marks omitted) (emphasis added). A
showing of motive and opportunity, in other words, was an
independent means of establishing scienter, one viable even if

                               79
plaintiffs could not allege facts from which to infer defendants’
knowing deceit or recklessness. That had been the law in this
circuit before the PSLRA was enacted, and after examining “the
statutory language and supporting legislative history” of the
Reform Act, we concluded “it did not . . . alter the substantive
contours of scienter.” Id. at 534.

        This conclusion is no longer tenable in light of Tellabs.50
Even before the Supreme Court’s decision, several of our sister
circuits had rebuffed plaintiffs’ attempts to establish scienter
through proof of motive and opportunity alone. As the Seventh
Circuit observed:

         The Second and Third Circuits take the position
         that the [PSLRA] adopted the Second Circuit’s
         pre-PSLRA pleading standard for scienter, and
         thus plaintiffs may continue to state a claim by
         pleading either motive and opportunity or strong

    50
      “Although a panel of this court is bound by, and lacks
authority to overrule, a published opinion of a prior panel, a
panel may reevaluate a precedent in light of intervening
authority . . . .” Reich v. D.M. Sabia Co., 90 F.3d 854, 858 (3d
Cir. 1996); see also Williams v. Ashland Eng’g Co., 45 F.3d
588, 592 (1st Cir. 1995) (“An existing panel decision may be
undermined by controlling authority, subsequently announced,
such as an opinion of the Supreme Court . . . .”), overruled on
other grounds by Carpenters Local Union No. 26 v. U.S. Fid. &
Guar. Co., 215 F.3d 136 (1st Cir. 2000).

                                80
       circumstantial evidence of recklessness or
       conscious misbehavior. The Ninth and Eleventh
       Circuits disagree, believing that Congress
       considered, but ultimately rejected the Second
       Circuit’s approach, opting instead for a more
       onerous burden.
               The remaining six circuits that have
       considered this issue take a middle ground,
       reasoning that Congress chose neither to adopt
       nor reject particular methods of pleading
       scienter—such as alleging facts showing motive
       and opportunity—but instead only required
       plaintiffs to plead facts that together establish a
       strong inference of scienter. We find this position
       persuasive. . . . The text of the statute states only
       that the complaint must support “a strong
       inference” of scienter. Without more detailed
       instruction, we conclude that the best approach is
       for courts to examine all of the allegations in the
       complaint and then to decide whether collectively
       they establish such an inference. Motive and
       opportunity may be useful indicators, but nowhere
       in the statute does it say that they are either
       necessary or sufficient.

Makor Issues & Rights, Ltd. v. Tellabs, Inc. (Tellabs I), 437 F.3d
588, 601 (7th Cir. 2006) (internal quotation marks and citations
omitted), rev’d on other grounds, 127 S. Ct. 2499 (2007).

                                81
       Although the Supreme Court rejected the Seventh
Circuit’s interpretation of “strong inference,” it left its reasoning
about “motive and opportunity” undisturbed. In fact, the Court
appeared to endorse this reasoning:

       While it is true that motive can be a relevant
       consideration, and personal financial gain may
       weigh heavily in favor of a scienter inference, we
       agree with the Seventh Circuit that the absence of
       a motive allegation is not fatal. As earlier stated,
       allegations must be considered collectively; the
       significance that can be ascribed to an allegation
       of motive, or lack thereof, depends on the entirety
       of the complaint.

Tellabs, 127 S. Ct. at 2511 (internal citations omitted). If the
significance of the presence, or absence, of motive allegations
can be ascertained only by reference to the complete complaint,
then a general rule that motive allegations are sufficient—or
necessary—is unsound.

       We do not rely solely on this one passage of the Court’s
opinion. Our conclusion that “motive and opportunity” may no
longer serve as an independent route to scienter follows also
from Tellabs’s general instruction to weigh culpable and
nonculpable inferences. Individuals not infrequently have both
strong motive and ample opportunity to commit bad acts—and
yet they often forbear, whether from fear of sanction, the
dictates of conscience, or some other influence. It cannot be

                                 82
said that, in every conceivable situation in which an individual
makes a false or misleading statement and has a strong motive
and opportunity to do so, the nonculpable explanations will
necessarily not be more compelling than the culpable ones. And
if that is true, then allegations of motive and opportunity are not
entitled to a special, independent status. Instead, as the Seventh
Circuit has said, they are to be considered along with all the
other allegations in the complaint.51

        Here, Shareholders’ allegations of motive and
opportunity do not relate to particular statements but rather
purport to bolster a general inference of fraudulent conduct.
Shareholders allege that defendants were “further motivated” to
inflate Avaya’s stock in order to (1) complete a $549 million
repurchase of Liquid Yield Option Notes (LYONs) through
common stock in November 2004, and (2) secure a $400 million
unsecured revolving credit facility on favorable terms in
February 2005. Furthermore, Shareholders allege that McGuire

     51
      The Second Circuit has continued to treat motive and
opportunity allegations as a separate category, but it does not
appear to have explicitly examined whether that practice is
consistent with Tellabs. See ECA & Local 134 IBEW Joint
Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187,
198–99 (2d Cir. 2009); Teamsters Local 445 Freight Div.
Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.
2008); ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87,
99 (2d Cir. 2007).

                                83
and Peterson were motivated to make the alleged false or
misleading statements because they sold Avaya common stock
through March 1, 2005, for personal gain.

       Shareholders contend that their “motive allegations are
consistent with scienter, even if,” standing alone, they “do[] not
establish a strong inference.” Shareholders’ Br. 40. In other
words, the stock sales, the LYONs redemption, and the receipt
of a $400 million credit facility are alleged to “bolster scienter
by providing a coherent reason for fraud.” Id. at 43. We agree
that these allegations provide a plausible motive for fraud, but
the bottom-line question is not whether defendants were likely
to have a motive to commit fraud, but whether they were at least
as likely as not to have acted on that motive and actually
committed fraud. For the reasons that follow, we find the
allegations of motive presented here do not strengthen the
inference of scienter.

       On November 18, 2004, Avaya announced it would
redeem all of its LYONS due 2021. Pursuant to the terms of
these notes, holders had the choice of redeeming the notes with
a face value of $1,000 at maturity for a present payment in cash
of $545.67, or alternatively the LYONs were convertible into
37.4437 shares of Avaya common stock per $1,000 principal at
maturity.52 LYONs holders were given until December 20,

    52
     37.4437 shares of Avaya stock at $14.58 a share equals
$545.93. On November 18, 2004, Avaya’s stock closed at
$16.45. On that date, a LYON redemption would have been

                               84
2004, to choose which method of redemption, cash or stock,
they preferred. Prior to December 20, 2004, holders of LYONs
with an aggregate principal amount at maturity of $549 million
converted their outstanding LYONs into 20,546,199 shares of
Avaya common stock. On December 20, 2004, LYONs with an
aggregate principal amount at maturity of $61,000, which
represented all remaining outstanding LYONs, were redeemed
for cash at an aggregate redemption price of $33,000.
Shareholders allege defendants were “strongly motivated . . . to
artificially inflate (and maintain) the price of Avaya’s common
stock” to avoid paying cash for the LYONs.

        On February 24, 2005, Avaya announced it had
completed a $400 million five-year unsecured revolving credit
facility. The new unsecured credit facility replaced Avaya’s
existing $250 million secured credit facility, scheduled to expire
in September 2005. Shareholders allege defendants were
motivated to inflate and maintain the price of Avaya’s common
stock in order to obtain the increased financing on more
favorable terms.

      According to our pre-Tellabs jurisprudence, “[m]otive
must be supported by facts stated with particularity, and must

worth $615.95. On December 20, 2004, Avaya’s stock closed
at $17.16. A LYON redemption would have been worth
$642.53. During the period between November 18 and
December 20, the closing price of Avaya’s stock ranged from
$15.82 to $17.73.

                               85
give rise to a strong inference of scienter.” GSC Partners CDO
Fund v. Washington, 368 F.3d 228, 237 (3d Cir. 2004) (internal
quotation marks omitted).53 That proposition is no less true after
Tellabs, although we no longer make an independent search for
scienter on the basis of motive and opportunity allegations
alone. “[M]otives that are generally possessed by most
corporate directors and officers do not suffice; instead, plaintiffs
must assert a concrete and personal benefit to the individual
defendants resulting from this fraud.” Id. (quoting Kalnit v.
Eichler, 264 F.3d 131, 139 (2d Cir. 2001)); see id. (“In every
corporate transaction, the corporation and its officers have a
desire to complete the transaction, and officers will usually reap
financial benefits from a successful transaction.             Such
allegations alone cannot give rise to a ‘strong inference’ of
fraudulent intent.”); cf. Tellabs, 127 S. Ct. at 2511 (“[P]ersonal
financial gain may weigh heavily in favor of a scienter
inference.” (emphasis added)). Here, we do not look at motive
allegations alone, but the same reasoning undermines any
inference of scienter resting upon general motives to aid the
company. Corporate officers always have an incentive to
improve the lot of their companies, but this is not, absent
unusual circumstances, a motive to commit fraud. Certainly, the

    53
      In GSC Partners, plaintiffs alleged that they purchased
notes from Washington Group International, Inc. due to false or
misleading statements contained in Washington’s circular.
Washington used the money raised from selling the notes to
purchase another company.

                                86
LYONs redemption and the acquisition of the credit facility fail
to contribute meaningfully to a “strong inference” of scienter
here. Both actions reflect merely a general corporate desire to
retire debt and raise funds and obtain credit on favorable
terms.54 Cf. Cozzarelli v. Inspire Pharmaceuticals Inc., 549
F.3d 618, 627 (4th Cir. 2008) (“[T]he motivations to raise
capital or increase one’s own compensation are common to
every company and thus add little to an inference of fraud.”).

       We now turn to the allegations about defendants’ stock
sales. “[W]e will not infer fraudulent intent from the mere fact
that some officers sold stock.” Advanta, 180 F.3d at 540
(quoting Burlington, 114 F.3d at 1424). “But if the stock sales
were unusual in scope or timing, they may support an inference
of scienter.” Id.; see also In re Alpharma Inc. Sec. Litig., 372
F.3d 137, 152 (3d Cir. 2004) (reviewing complaint for
allegations that stock sales were “unusual in scope (e.g.,
compared to their total level of compensation or the size of
previous sales) or timing (e.g., compared to the timing of past
trades)”).

        As of October 1, 2004, Peterson owned 5,784,834 shares

   54
     Furthermore, the LYONs redemption was announced and
occurred in November and December 2004—before most of the
challenged statements alleged in the Complaint.

                              87
of common stock 55 and McGuire owned 1,418,454 shares of
common stock.56 Avaya Inc., Proxy Statement (Schedule 14A),
at 15–16 (Jan. 4, 2005). During the proposed class period,
Peterson sold 100,000 shares for proceeds of $1,416,500 and
McGuire sold 251,760 shares for proceeds of $3,772,094. As a
percentage of total shares owned, Peterson sold 1.7% and
McGuire sold 17.7%. All 100,000 shares sold by Peterson
during the class period were sold pursuant to the terms of a Rule
10b5-1 plan. During the same period of the previous year,
Peterson sold 200,000 shares. Similarly, 140,000 shares sold by
McGuire were sold pursuant to the terms of a Rule 10b5-1 plan

  55
    This total includes 4,694,660 stock options, 358,280 shares
to be received upon termination of employment with Avaya,
722,934 shares under a deferred compensation plan, and 8,960
shares held in a deferred account. Avaya Inc., Proxy Statement
(Schedule 14A), at 15–16 (Jan. 4, 2005).
   56
     This total includes 1,300,832 stock options and 111,761
shares owned by a limited liability company in which McGuire’s
spouse owned the controlling interest and had voting control.
McGuire disclaimed any beneficial ownership in those 111,761
shares, except to the extent of his pecuniary interests therein.
Avaya Inc., Proxy Statement (Schedule 14A), at 15–16 (Jan. 4,
2005).

                               88
and the other 111,760 57 were sold by the LLC controlled by
McGuire’s spouse. During the same period of the previous year,
McGuire sold 236,083 shares.

       Shareholders’ allegations concerning defendants’ stock
transactions do not significantly enhance the inference of
scienter. Defendants’ trading practices remained consistent
year-over-year and each retained a large percentage of his
common stock holdings in Avaya. Accordingly, the sales do not
marginally increase the likelihood that defendants made
knowingly false or misleading statements out of a desire for
personal financial gain.

                    3. Scienter Conclusion

       Although we have discussed each of the alleged facts
bearing on defendants’ scienter one at a time, we have heeded
Tellabs’s command to evaluate Shareholders’ allegations
collectively rather than individually. As we have taken up each
allegation in turn, we have added it to the picture painted by the
previously considered allegations and asked: How does this
addition affect the relative strengths of the culpable and non-
culpable inferences?

       Having considered all of the allegations of scienter, we
reach the following conclusions. With respect to the March
pricing statements, the Complaint successfully “state[s] with

     57
      Garry McGuire, Avaya Inc., Statement of Changes in
Beneficial Ownership (Form 4) (Nov. 3, 2004).

                               89
particularity facts giving rise to a strong inference” that the
defendants acted consciously or recklessly in making false
statements. 15 U.S.C. § 78u-4(b)(2). The Complaint fails to
allege scienter adequately, however, with respect to defendants’
other statements.

                 D. Section 20(a) Conclusion

       Correctly noting that, where there is “no liability for the
underlying company [under Section 10(b)], there can be no
‘controlling person’ liability under Section 20(a),” the District
Court dismissed the claims brought under the latter provision.
Charatz, 2006 WL 2806229, at *20. This conclusion followed
ineluctably from the court’s finding that Shareholders had not
adequately pleaded any violations of Section 10(b). But
because, unlike the District Court, we hold that plaintiffs have
sufficiently pleaded a Section 10(b) claim with respect to
McGuire’s March pricing statements, we will vacate the
dismissal of the Section 20(a) claims insofar as those statements
are concerned.58 See Suprema, 438 F.3d at 284–86. We will
affirm the District Court’s dismissal of Shareholders’ Section

   58
     Since none of the March pricing statements were made by
Peterson, all Section 10(b) claims against him are dismissed.
Accordingly, he may be liable only, if at all, as a “controlling
person” under Section 20(a). Because the parties have not
briefed the issue of whether the Complaint properly pleads a
Section 20(a) claim, we leave this issue to the District Court.

                               90
20(a) claims with respect to the remaining statements.

                              IV.

        For the foregoing reasons, we will reverse the District
Court’s judgment with respect to Shareholders’ claims relating
to the March pricing statements, affirm it with respect to claims
relating to the remaining statements, and remand for further
proceedings consistent with this opinion. Our disposition entails
a shorter class period than Shareholders propose. Because the
Complaint has not adequately pleaded fraud for any statements
made before March 2, 2005, the class period can begin to run no
earlier than that date.

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