Court Opinion

ID: 6983083
Source: CourtListenerOpinion
Date Created: 2022-07-24 02:38:34.598866+00
Date Added: 2024-06-11T16:09:18.408856
License: Public Domain

BROWNING, Circuit Judge,
concurring in part and dissenting in part:
I respectfully dissent from the majority's holding that (1) the Private Securities Litigation Reform Act (the "Reform Act") eliminated recklessness and motive and opportunity to commit fraud as based for establishing scienter under § 10(b) and Rule lOb-5, and (2) the allegations of scienter in Brody's complaint were insufficient to survive a motion to dismiss.1 Congress plainly intended the Reform Act to raise the pleading standard by requiring plaintiffs to allege facts raising a "strong inference" of scienter, rather than permitting plaintiffs (as this circuit did) to plead scienter "simply by saying that scienter existed," In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547 (9th Cir.1994) (en banc), but did not intend to restrict the evidentia-ry bases from which the inference of scien-ter might be drawn. By holding to the contrary, the majority raises the pleading bar higher than that envisioned by Congress, and places the Ninth Circuit at odds with both the Second and Third Circuits.
I.
The Reform Act
The Reform Act requires plaintiff~ to "state with particularity facts giving rise to a strong inference" of scienter. 15 U.S.C. § 78u-4(b)(2). Although the majority concedes that "[t]he plain text of the [Reform Act] leaves it open for us to consider circumstantial evidence of recklessness and moiive and opportunity as evidence of [scienter]," ante, at 977, it concludes that the legislative history of. the Act establishes that allegations either of recklessness (a term the majority refers to as "mere recklessness" or "simple recklessness," ante at 974) or of motive and opportunity to commit fraud are no longer sufficient to avoid dismissal, see ante, at 979-80.
Some courts addressing the issue have also reached a similar conclusion.2 Other *992courts have held allegations of motive and opportunity to defraud are not sufficient to support the required inference of scienter, but have stopped short of eliminating allegations of recklessness as a basis for such an inference.3 A third line of cases, led by the Second Circuit in which the “strong inference” standard originated, have held that allegations of recklessness or motive and opportunity are sufficient to satisfy the “strong inference” standard. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534-35 (3d Cir.1999); Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir.1999).4
The latter approach begins and ends with the plain text of the statute. The statute nowhere mentions proof of motive and opportunity to commit fraud or any other specific means of establishing scien-ter, but simply requires that plaintiffs “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). There is no support in the text for concluding that proof of recklessness5 or motive and opportunity to commit fraud6 are not sufficient to meet the “strong inference” standard.
The majority concedes as much, but nonetheless resorts to legislative history because the language of the statute “does not indicate whether [allegations of recklessness or motive and opportunity] alone are enough to establish a ‘strong inference’ of [scienter].” Ante, at 977. In effect, the majority holds that the breadth and flexibility of the Reform Act’s unambiguous pleading standard are sufficient to justify departure from the statute’s plain text. Respectfully, that thesis is not supportable. As the Court stated in Barnhill v. Johnson, 503 U.S. 393, 401, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), “[Ajppeals to statutory history are well taken only to resolve ‘statutory ambiguity.’” See also Pennsylvania Dept. of Corrections v. Yeskey, 524 U.S. 206, 118 S.Ct. 1952, 1956, 141 L.Ed.2d 215 (1998) (“[T]he fact that a statute can be applied in situations not expressly anticipated by Congress does not demonstrate ambiguity. It demonstrates breadth.” (internal quotations omitted)).7
Even if it were appropriate to reach beyond the plain text, the Reform Act’s legislative history does not support the majority’s interpretation. Although Congress clearly intended to adopt the Second Circuit’s “strong inference” standard, the legislative history taken as a whole does not suggest that Congress intended to reject the Second Circuit’s holdings that alle*993gations of recklessness or of motive and opportunity to defraud could satisfy that standard.
The majority contends that the Conference Committee “implicitly rejected” motive, opportunity, and recklessness as bases for a “strong inference” of fraud by eliminating language incorporated in the bill in the Senate by the Specter Amendment, which purported to codify all aspects of the Second Circuit’s case law applying the “strong inference” standard. Ante, at 978. The legislative history suggests, however, that the Committee rejected language added by the Specter Amendment because it was “an incomplete and inaccurate codification” of Second Circuit case law,8 not because the Committee intended to restrict the ways in which a “strong inference” of scienter might be shown. Indeed, supporters of the defeated Specter Amendment were assured that while the Reform Act did not expressly provide that plaintiffs could plead scienter based on recklessness or motive and opportunity to defraud, “the guidance [provided by Second Circuit case law] is still going to be there.” 141 Cong. Rec. S19071 (daily ed. Dec. 21, 1995) (statement of Sen. Dodd).9
Moreover, the Specter Amendment’s codification of a specific test for pleading scienter would have been inconsistent with the provisions of the Reform Act requiring a different state of mind for different statements. Under the Reform Act’s “safe harbor” provisions, plaintiffs must prove that “forward-looking” statements were made with “actual knowledge” that they were false or misleading. .15 U.S.C. §§ 78u-5(c)(l)(B), 77z-2(c)(l)(B). A recklessness standard for pleading that would apply to all statements, such as that proposed in the Specter Amendment, would have been inconsistent with the safe harbor’s requirement of “actual knowledge” for forward-looking statements.
The majority relies on a statement in the Conference Report that “[b]ecause the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit’s case law interpreting this pleading standard.... For this reason, the Conference Report chose not to include in the pleading standard certain language relating to motive, opportunity, or recklessness.” H.R. Conf. Rep. 104-369, at 41 & n. 23 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 740, 747 n. 23. The majority infers from this comment that Congress intended to impose a “more stringent” standard than that of the Second Circuit by rejecting the sufficiency of allegations of motive and opportunity and circumstantial evidence of recklessness to establish a “strong inference” of scienter. Ante, at 978. The more plausible and direct explanation is that Congress chose *994not to include language relating to these specific modes of proving the required intent to defraud because it was concerned only with adopting the Second Circuit’s pleading standard, not with adopting (or rejecting) particular factual patterns that might satisfy that standard. That task was left to the courts. See Advanta, 180 F.3d 525, 1999 WL 395997, at *16 n. 8 (“[I]f Congress had desired to eliminate motive and opportunity or recklessness as a basis for scienter, it could have done so expressly in the text of the Reform Act. In our view, the fact that Congress considered inserting language directly addressing this line of eases, but ultimately chose not to, suggests that it intended to leave the matter to judicial interpretation.”).10
Congress also declined to include in the Reform Act language relating to a variation of the second method of meeting the Second Circuit’s standard (by alleging and proving “circumstantial evidence of conscious misbehavior”11), but the majority does not suggest that because of this omission conscious misbehavior no longer provides an appropriate basis for inferring scienter. Indeed, the majority’s own “deliberate or conscious recklessness” test focuses on conscious misbehavior. See ante, at 979-80.
The majority relies heavily upon the fact that in announcing his reasons for vetoing the Reform Act, the President expressed his concern that the legislation would elevate the pleading standard above that previously adopted in the Second Circuit. The majority argues that by overriding the President’s veto, “Congress provided powerful evidence of its intent to elevate the pleading standard to a level beyond that in the Second Circuit.” Ante, at 979. This argument rests on the assumption that Congress, in overriding the President’s veto, agreed with the President that the Reform Act, as passed by Congress, adopted a pleading standard more demanding than the Second Circuit’s standard. During Senate debate on overriding the President’s veto, however, the sponsors of the bill explicitly disagreed with the President’s interpretation and reaffirmed their own view that, contrary to the President’s belief, the Reform Act’s pleading standard was “faithful to the Second Circuit’s test.” 141 Cong. Rec. S19067 (daily ed. Dec. 21, 1995) (Sen. Dodd quoting from memorandum of Prof. Grundfest).12
Other provisions of the Reform Act undermine the majority’s holding, particularly the majority’s across-the-board elimination of “mere” recklessness as a basis of liability. Before the Reform Act was *995adopted, every court of appeal addressing the issue, including this one, had concluded that recklessness13 satisfied section 10(b)’s scienter requirement. See Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 & n. 6 (9th Cir.1990).14 When Congress intended to proscribe liability for recklessness in the Reform Act, it did so explicitly. As noted, the standard of liability for “forward-looking” fraudulent statements in the Reform Act’s “safe harbor” provisions requires plaintiffs to allege that such statements were made with “actual knowledge” of falsity. See 15 U.S.C. §§ 78u-5(c)(l)(B), 77z-2(e)(l)(B). Similarly, the provisions governing proportionate liability provide that joint and several liability is to be imposed only if the plaintiff has shown that the defendant “knowingly committed a violation of the securities laws,” 15 U.S.C. § 78u — 4(g)(2)(A), a term which Congress expressly defined to exclude “reckless conduct,” 15 U.S.C. § 78u-4(g)(10)(B). These provisions suggest that if Congress had intended to proscribe liability for recklessness in other circumstances it would have done so directly.15
The Securities and Exchange Commission is uniquely qualified to assess “the proper balance between the need to insure adequate disclosure and the need to avoid the adverse consequences of setting too low a threshold for civil liability[.]” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 n. 10, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (giving deference to the SEC’s interpretation of Rule 14a-9). The Commission “often relies on the recklessness standard in its own law enforcement cases,”16 and argues forcefully that the Reform Act did not eliminate recklessness as a basis for liability generally. In the Commission’s view, liability for recklessness is “essential to the effective functioning of Section 10(b),” and “necessary to protect investors and the integrity of the disclosure process.”17 The Commission’s amicus brief states:
Construing the Reform Act’s pleading standard provision as eliminating recklessness would convert what was intended to be a procedural provision into a substantive change in the definition of scienter. It would, in effect, eliminate recklessness (in private actions) from the uniformly accepted definition of scienter. Because the substantive law allows liability for recklessness, it follows that plaintiffs must be allowed to *996plead that the defendants acted recklessly. If plaintiffs can state with particularity facts giving rise to a strong inference that defendants acted recklessly, their complaint is sufficient under the Reform Act.
Brief of Amicus SEC at 18-19 (emphases in original).18 The Commission’s rationale is shared by the Third Circuit, which recently stated: “Retaining recklessness not only is consistent with the Reform Act’s expressly procedural language, but also promotes the policy objectives of discouraging deliberate ignorance and preventing defendants from escaping liability solely because of the difficulty of proving conscious intent to commit fraud.” Advanta, 180 F.3d 525, 534-35.
The Senate Report stated that “[t]he Committee does not adopt a new and untested pleading standard that would generate additional litigation.”19 The pleading standard proposed by the majority, however, would require plaintiffs to plead “deliberate or conscious recklessness,” a formulation not found in the text of the statute, in the legislative history, or in any case heretofore litigated, and rejected by the responsible administrative agency; it would eliminate recklessness as a basis for liability, and treat allegations of motive and opportunity to commit fraud as insufficient to allege scienter. It is “new,” “untested,” and certain to “generate additional litigation.”
II.

Brody’s Complaint

The Reform Act, properly interpreted, permits plaintiffs to plead a strong inference of scienter by alleging with particularity facts that constitute circumstantial evidence of reckless or conscious misbehavior, or a motive and opportunity to defraud. Brody’s complaint satisfies this standard by setting forth, in adequate detail, the factual basis for a strong inference that Silicon Graphics, Inc. (“SGI” or “the Company”) and its officers knowingly or recklessly misrepresented the state of the Company’s affairs and, as evidenced by the individual defendants’ insider stock sales, had the motive and opportunity to defraud. Dismissal is not warranted because it does not “appear[ ] beyond doubt that plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief,” Neubronner v. Milken, 6 F.3d 666, 669 (9th Cir.1993) (emphasis added, internal quotations omitted), even under the majority’s “deliberate recklessness” standard.
1.

Particularity

Before considering whether they support a “strong inference” of fraud, the court must assess the particularity of Bro-dy’s allegations. Federal Rule of Civil Procedure 9(b) provides that “the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R.Civ.P. 9(b). The Reform Act modifies this requirement, providing that a securities fraud complaint shall identify: (1) each statement alleged to have been misleading; (2) the reason or reasons why the statement is misleading; and (3) all facts on which that belief is formed. See 15 U.S.C. § 78u-4(b)(l). Brody satisfies each requirement.
Brody alleged that during the class period-September 13, 1995 to December 29, 1995-SGI and the individual defendants made material misrepresentations regarding the condition of the Company in order to inflate the price of its stock and facili*997tate profitable insider trading. Brody challenged eleven allegedly misleading statements made by officers of SGI,20 described the content of each, and either named the individuals who made the statements, or identified them with enough specificity to permit SGI to determine the source. Thus, Brody has given the defendants adequate notice of the specific instances of alleged fraud grounding her complaint to permit them to respond. See 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1298 (2d ed. 1990) (“Perhaps the most basic consideration in making a judgment as to the sufficiency of a pleading is the determination of how much detail is necessary to give adequate notice to an adverse party and enable him to prepare a responsive pleading.”).
Brody also adequately pled facts showing why these eleven statements were false when made, alleging “specific problems undermining a defendant’s optimistic claimsf.]” Fecht v. Price Co., 70 F.3d 1078, 1083 (9th Cir.1995). The statements challenged by Brody can be grouped into three categories: (1) statements assuring investors that there were no problems with the production and distribution of SGI’s improved line of graphic design computers called the “Indigo2 Impact Workstation” (“Indigo2”); (2) statements acknowledging sluggish sales in North America and Europe, but downplaying their significance; and (3) statements predicting SGI would meet its goal of 40% growth for Fiscal Year 1996. Brody’s complaint pleads facts that conflict with each of these categories of statements, alleging that confidential SGI reports informed officers as early as September 1995 that: (1) SGI was encountering difficulty securing enough components to produce Indigo2 workstations in volume; (2) SGI continued to experience sluggish sales in North America and Europe; and (3) these problems made it impossible for SGI to meet its annual or *998quarterly growth targets for Fiscal Year 1996.
Because Brody’s allegations are based on information and belief,21 she was required to “state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(l). She must therefore allege facts reflecting “the who, what, when, where, and how” with respect to the facts underlying her claim. Advanta, 180 F.3d 525, 533-34 (internal quotations omitted).22 The facts alleged by Brody are of two kinds: (1) internal SGI reports indicating that the defendants were aware of problems that made their favorable statements false and misleading; and (2) allegations of “suspicious” insider trading by the defendants. There is no dispute that the allegations in the second category were sufficiently particularized, but the majority concludes that the allegations in the first category are “too generic” to meet the Reform Act’s pleading requirements. Ante, at 988.
Brody’s complaint identified three types of internal status reports allegedly containing information contrary to the defendants’ public statements: (1) daily reports; (2) monthly financial reports; and (3) “Stop Ship” reports. The daily and monthly reports included manufacturing, sales, and financial data. Monthly reports were broken down into “Flash Reports,” brief reports distributed at the end of the month, and “Monthly Financial Statements/Packages,” more detailed reports distributed within ten days of the close of the month. Brody alleged that daily and monthly reports: (1) were prepared by “SGI’s financial department” (who); (2) informed “SGI’s top managers, such as [the individual defendants]” of production problems with the Indigo2, as well as sluggish sales in North America and Europe which resulted in SGI’s inability to meet its financial goals (what); (3) were distributed at specific times during the class period23 (when); (4) were presented in the form of daily reports, “Flash Reports,” and “Monthly Financial Statements/Packages” (where); and (5) were suppressed by the named defendants in an alleged cover-up, leading to false statements about the Indi-go2, North American and European sales, and the Company’s ability to meet its financial goals (how).
The “Stop Ship” report: (1) was prepared by “the marketing, engineering and manufacturing managers” in conjunction with Indigo2’s “Program Director” (who); (2) informed the named defendants of “serious quality and performance problems” with Indigo2 due to defects in the computer chip (what); (3) was distributed to the officers in “mid-Sept.1995” (when); (4) was presented in report form (where); and (5) was suppressed by the named defendants in an alleged cover-up, leading to false statements about the production and shipping of Indigo2 (how).
*999Admittedly, Brody’s allegations are not as detailed as they could have been. The complaint did not identify the specific person who drafted the reports, nor did it state with exacting detail the content of the reports; it did not include specific information about component shortages, volume shortages, or negative financial news in the internal reports, for example.24 Such precise detail, however, is neither expected nor required at the pleading stage of the proceedings:
[W]e cannot hold plaintiffs to a standard that would effectively require them, pre-discovery, to plead evidence. Rule 9(b) proscribes the pleading of “fraud by hindsight,” but neither can plaintiffs be expected to plead fraud with complete insight.
Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1225 (1st Cir.1996) (citation omitted).25
Because Brody’s complaint sets forth, in adequate detail, the factual basis for her belief that SGI and its officers committed fraud, the majority erroneously concludes that the complaint failed to satisfy the Reform Act’s particularity requirements.
2.

“Strong Inference” of Fraud

Brody’s complaint alleges two factual bases for inferring scienter: (1) internal SGI reports indicating the defendants were aware of problems that made their favorable statements false and misleading; and (2) “massive” insider sales of SGI stock by the defendants during a period when the Company’s stock price was peaking.
a.

Internal Reports

Brody alleged that numerous internal reports generated by SGI revealed financial and production problems not fully disclosed to the public until months later. The majority concludes that Brody’s allegations are “too generic” to raise a strong inference of scienter. Ante, at 988. The internal reports referred to in Brody’s complaint were described in sufficient detail as to the source, relevant content, and distribution to form the basis for a strong inference that SGI’s officers knew the representations they were making to the public were false when made. Brody alleged *1000that “SGI’s top managers, such as [the individual defendants]” received “Flash Reports” and “Monthly Financial Statements/Packages” prepared by “SGI’s financial department.” These reports, which were distributed in October, November, and December of 1995,26 allegedly described production problems with the Indi-go2, as well as sluggish sales in North America and Europe which were inhibiting the Company’s ability to meet its financial goals.27 The complaint alleged that although these reports disclosed “weak” sales and “net income and earnings per share well below forecasted and budgeted levels,” SGI repeatedly assured investors that it would meet revenue and growth goals.
Brody also alleged the defendants received a “Stop Ship” report prepared in “mid-Sept.1995” by “the marketing, engineering and manufacturing managers” in conjunction with the Indigo2’s “Program Director,” which informed the named defendants of “serious quality and performance problems with the Indigo2 IMPACT Workstations due to the ASIC chip performance problems as it attempted to assemble and ship the Indigo2 IMPACT Workstations in volume in Sept. 1995.” •The complaint alleged that despite this information, McCracken told Morgan Stanley on September 13, 1995 that “there were no supply constraints” with respect to Indigo2, and on September 22, 1995 confirmed that “there is no problem with the product, nor is there an engineering halt.”
Allegations similar to Brody’s have been held sufficient to preclude dismissal under the “strong inference” standard. In Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357 (1st Cir.1994), the plaintiffs claimed officers and directors of a bank holding company artificially inflated stock prices by misrepresenting the bank’s true financial condition. See id. at 360. The complaint alleged that while the company’s public statements characterized its loan review capabilities as “strong” and its approach to loan reserves as “conservative,” internal reports warned directors of problems in the loan review department and “serious deficiencies” in the bank’s loan reserves. Id. at 363-64. The allegations were held sufficient:
[Plaintiffs do more than simply identify management problems or point to statements that put a positive spin on the company’s circumstances, without indicating how or why defendants should have known the descriptions were inaccurate. Rather, these paragraphs present a contrast between what company officials were hearing internally about their loan review effectiveness and the adequacy of their [loan reserves], and what the company was telling the public at the same time.
Id. at 365 (emphasis in original).28 Similarly, Brody’s complaint alleges how and why SGI should have known its public statements about sales growth and Indigo2 production were false and misleading, and provided the basis for a strong inference of fraud by contrasting what Company officials were hearing internally and what *1001they were telling investors at the same time. See also, e.g., Cosmas v. Hassett, 886 F.2d 8, 12-13 (2d Cir.1989) (strong inference test met where directors allegedly knew of import restrictions on Chinese trade but still predicted a significant part of the company’s revenue would come from exports to China).
b.

Insider Stock Sales

Brody alleged that the six individual defendants engaged in “massive” insider trading, collectively selling 388,188 shares of stock and realizing aggregate proceeds of $13,821,053 during the fifteen-week class period. The majority determines that sales by two of the individual defendants “appear somewhat suspicious,” ante, at 987, but holds that the allegations fail to raise a strong inference of scienter.
“Suspicious” stock sales by corporate insiders are circumstantial evidence of intent to defraud. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117 (9th Cir.1989). Insider trading is suspicious when “dramatically out of line with prior trading practices at times calculated to maximize personal benefit from undisclosed inside information.” Id. As the majority indicates, sales during the class period by three defendants with significant trading histories-McCracken, Baskett, and Ramsay-did not deviate dramatically from their prior sales. McCracken sold 60,000 shares during the class period, but routinely sold comparable blocks of SGI stock in previous quarters. Baskett and Ramsay sold 30,-000 and 20,000 shares respectively during the class period, but both previously sold larger quantities of SGI stock. If vested stock options are considered, four of the individual defendants sold relatively modest portions of the shares they could have Sold: McCracken sold 2.6% of his holdings and options; Baskett 7.7%; Ramsay 4.1%; and Sekimoto 6.9%. These facts weigh against Brody’s claim. See Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir.1995) (sale by retired director of “less than 11% of his holdings”); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir.1994) (sale of “only a minuscule fraction” of stock holdings); Apple Computer, 886 F.2d at 1117 (collective sale of 8% of stock holdings).
However, Senior Vice Presidents Kelly and Burgess sold significant percentages (43.6% and 75.3% respectively) of the shares they could have sold, if vested options are included. If vested options are excluded, Kelly and Burgess sold 95% and 99.8% of their holdings respectively. Viewed in the light most favorable to Bro-dy, either set of data provides support for an inference of fraud sufficient to preclude dismissal, see Stevelman v. Alias Research Inc., 174 F.3d 79, 81, 84-86 (2d Cir.1999) (strong inference of fraud where complaint alleged sale of 40% of shares by CEO, and “thousands” of shares by two vice presidents); Shaw, 82 F.3d at 1224 (sales of 68% and 20% by two directors militates against motion to dismiss),29 especially considering the allegation that all of the named defendants sold some stock during the class period, see Friedberg v. Discreet Logic Inc., 959 F.Supp. 42, 51-52 (D.Mass.1997) (refusing to dismiss complaint brought under the Reform Act where two officers sold 33% and 50% of their respective stock holdings, and each of the named defendants sold some stock).30
*1002The majority concedes that the sales by Burgess of more than a quarter-million shares valued at $8 million appear “extremely significant for purposes of Brody’s class action,” ante, at 987, but nonetheless concludes that the allegations were insufficient:
Brody overlooks crucial facts pertaining to Burgess’s sales. Brody states that “Burgess had never before sold any of his SGI' stock”; however, she omits mention of the fact that SGI acquired his Toronto company, Alias, Inc., in June 1995, and that he was legally forbidden to trade his new SGI stock until the second quarter of 1995, which embraced the period in which his sales occurred. Nor does Brody mention that Burgess remained in Toronto, in charge of Alias, Inc., without any day-to-day contact with SGI’s officers or involvement in its operations. Moreover, Burgess — unlike Kelly — did not make any of the allegedly misleading statements. Under these circumstances, Burgess’s stock sales do not give rise to a strong inference of fraudulent intent.
Ante, at 987-88. While benign explanations for insider stock-sales, if unrebut-ted,31 are properly considered on a motion for summary judgment, see, e.g., Provenz v. Miller, 102 F.3d 1478, 1491 (9th Cir.1996), review under Rule 12(b)(6) is confined to the allegations of the complaint, which must be accepted as true, see, e.g., Rubinstein v. Collins, 20 F.3d 160, 169 n. 38 (5th Cir.1994) (refusing to look beyond the four corners of the complaint when reviewing a motion to dismiss even though defendants claimed that the alleged insider stock sales “were innocuous because they were made in response to tax considerations”).32
Considering the allegations regarding insider sales and the allegations regarding internal corporate memoranda together, Brody successfully surmounted the Reform Act’s pleading hurdle. As the Supreme Court has noted, “[Ijndividual pieces of evidence, insufficient in themselves to prove a point, may in cumulation prove it. The sum of an evidentiary presentation may well be greater than its constituent parts.” Bourjaily v. United States, 483 U.S. 171, 179-80, 107 S.Ct. 2775, 97 L.Ed.2d 144 (1987) (examining the “simple facts of evidentiary life”). The allegations regarding the internal reports, if true, tend to show that the defendants knowingly misrepresented SGI’s ability to meet its growth targets, and knowingly or recklessly misrepresented the Company’s internal affairs, particularly with respect to the production and distribution of Indi-*1003go2 workstations. Coupled with the allegations of suspicious stock sales by Burgess and Kelly and across-the-board stock sales by all the individual defendants, plaintiffs’ allegations are sufficient to raise a “strong inference” of fraud. Because it does not “appear[ ] beyond doubt that plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief,” Neubronner, 6 F.3d at 669 (emphasis added, internal quotations omitted), dismissal was unwarranted.

. I concur in two parts of the majority opinion: section IV(A)(4) (affirming summary judgment in favor of Baskett, Burgess, Ramsay, and Sekimoto) and section IV(B) (affirming the dismissal of Janas' complaint).

. See, e.g., Norwood Venture Corp. v. Converse Inc., 959 F.Supp. 205, 208 (S.D.N.Y.1997); *992Friedberg v. Discreet Logic Inc., 959 F.Supp. 42, 49-50 (D.Mass.1997).

. See, e.g., In re: Comshare, Inc. Sec. Litig., 183 F.3d at 548-49 (6th Cir.1999); Malin v. IVAX Corp., 17 F.Supp.2d 1345, 1356-57 (S.D.Fla.1998).

. See also, e.g., In re Health Management, Inc. Sec. Litig., 970 F.Supp. 192, 201 (E.D.N.Y.1997); Fugman v. Aprogenex, Inc., 961 F.Supp. 1190, 1195 (N.D.Ill.1997).

. "Recklessness” involves "a highly unreasonable omission, 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.” Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1569 (9th Cir.1990) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)).

. The Second Circuit defines "motive and opportunity” as follows: "Motive would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged.” Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir.1994).

. See also In re Catapult Enter., Inc., 165 F.3d 747, 753 (9th Cir.1999) ("[Bjecause we discern no ambiguity in the plain statutory language, we need not resort to legislative history.”); United States v. Phelps, 895 F.2d 1281, 1283 (9th Cir.1990) (Kozinski, J., dissenting from order denying petition for rehearing en banc) ("In deciding whether it is appropriate to go beyond statutory language, the touchstone is not breadth but ambiguity[.]”).

. 141 Cong. Rec. S19067 (daily ed. Dec. 21, 1995) (Sen. Dodd quoting from memorandum of Prof. Grundfest); see also 141 Cong. Rec. S17960 (daily ed. Dec. 5, 1995) (statement of Sen. Dodd) (“The Senator's amendment adopted the guidance of the [S]econd [C]ir-cuit, but the amendment ... completely omits a critical qualification in the case law. The courts have held that 'where motive is not apparent, a plaintiff may plead scienter by identifying circumstances' indicating wrongful behavior, but 'the strength of the circumstantial allegations must be correspondingly greater’ from the number of cases.”); 141 Cong. Rec. SI9068 (daily ed. Dec. 21, 1995) (statement of Sen. Dodd) ("The Specter amendment ... did not really follow the guidance of the [S]econd [CJircuit. So that is the reason that amendment was taken out.... But the suggestion that the standard and-the guidance, rather, was included in the Specter amendment, omits-omits that where a motive is not apparent, the strength of circumstantial allegations must be correspondingly greater. That was omitted.”).

. Accord 141 Cong. Rec. S19068 (daily ed. Dec. 21, 1995) (statement of Sen. Dodd) ("We have left out the guidance. That does not mean you disregard it.”); see also H.R. Conf. Rep. 104-369, at 41 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 740 ("The Conference Committee language is based in part on the pleading standard of the Second Circuit.”); S. Rep. 104-98,, at 15 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 694 ("The Committee does not intend to codify the Second Circuit’s caselaw interpreting this pleading standard, although courts may find this body of law instructive.”).

. See also, e.g., 141 Cong. Rec. S17960 (daily ed. Dec. 5, 1995) (statement of Sen. Dodd) (“[Ijnstead of trying to take each case that came under the [S]econd [C]ircuit, we are trying to get to the point where we would have well-pleaded complaints. We are using the standards in the [S]econd [Cjircuit in that regard, then letting the courts-as these matters will-test. They can then refer to specific cases, the [Sjecond [Cjircuit, otherwise, to determine if these standards are based on facts and circumstances in a particular case.”).

. Press, 166 F.3d at 538 (“As a pleading requirement, a plaintiff must either (a) allege facts to show that 'defendants had both motive and opportunity to commit fraud’ or (b) allege facts that 'constitute strong circumstantial evidence of conscious misbehavior or recklessness.'" (emphasis added) (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir.1994))).

. Accord 141 Cong. Rec. S19150 (daily ed. Dec. 22, 1995) (statement of Sen. Domenici) (“The President objected to the pleading standard. Yet it is the Second Circuit's pleading standard.”); 141 Cong. Rec. S19,068 (daily ed. Dec. 21, 1995) (statement of Sen. Dodd) (the Reform Act “met the [Sjecond [Cjircuit standard”); see also 141 Cong. Rec. H15219 (daily ed. Dec. 20, 1995) (statement of Rep. Lofgren) ("The President says he supports the [Sjecond [Cjircuit standard for pleading. So do I. That is what is included in this bill.”); 141 Cong. Rec. H15218 (daily ed. Dec. 20, 1995) (statement of Rep. Moran) ("We know we are going to have the Second Circuit standard applied, and that in fact when legislation is at variance with legislative history or report language, that it is the bill itself that prevails.”).

.In Hollinger, this court adopted the Seventh Circuit's widely-accepted definition of recklessness: " '[R]eckless conduct may be defined as a highly unreasonable omission, 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.’ ” Hollinger, 914 F.2d at 1569 (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)). By adopting a definition of recklessness accepted by a majority of circuits, the en banc court intended "to bring greater uniformity to the law of the various circuits.” Id. at 1569 n. 7. The majority departs from Hollinger's holding by displacing our pre-Reform Act definition of recklessness (a term the majority refers to as "simple recklessness” or "mere recklessness,” ante at 974) with a new and untested “deliberate recklessness” standard. Ante at 977. This holding undermines Hol-linger 's attempt to establish a uniform definition of recklessness, and places the Ninth Circuit squarely at odds with the Third and Sixth Circuits, both of which have held that the Reform Act did not eliminate liability for recklessness and did not alter the definition of that term. See Comshare, 183 F.3d at 549-50 & 551 n. 8; Advanta, 180 F.3d at 535; see also Press, 166 F.3d at 538.

. See also Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir.1978) (per curiam) ("Although the Supreme Court left undecided the question whether recklessness is sufficient to sup- . port liability under Rule 1 Ob-5, distinguished jurists have long considered it so.”).

. See Advanta, 180 F.3d at 534 n. 8 ("[I]f Congress had desired to eliminate motive and opportunity or recklessness as a basis for scienter, it could have done so expressly in the text of the Reform Act.”).

. Brief of Amicus SEC at 21.

. Brief of Amicus SEC at 17, 20.

. See also Richard H. Walker & J. Gordon Seymour, Recent Judicial and Legislative Developments Affecting the Private Securities Fraud Class Action, 40 Ariz. L.Rev. 1003, 1027-28 (1998) (''[Njeither the Reform Act nor its legislative history reflects any intention to eliminate recklessness as a basis of liability. The recklessness standard has long been recognized by the federal courts and is essential to investor protection.”).

. S. Rep. 104-98, at 15 (1995) (Report of Senate Committee on Banking, Housing and Urban Affairs), reprinted in 1995 U.S.C.C.A.N. 679, 694.

. (1) September 13, 1995: SGI CEO Edward McCracken told Morgan Stanley that there were "no supply constraints” on the production of an improved line of graphic design computers called the "Indigo2 Impact Workstation” ("Indigo2”); (2) September 21, 1995: McCracken announced at a computer conference that sales growth was "accelerating”; (3) September 22, 1995: McCracken told Morgan Stanley there was "no problem with [the Indigo2], nor is there an engineering halt”; (4) September 26, 1995: SGI announced "volume shipments” of the Indigo2; (5) October 19, 1995: SGI issued a press release announcing 33% revenue growth, and reporting that the Indigo2 was shipping in volume; (6) October 19, 1995: SGI held a conference call during which McCracken and other executives told securities analysts and institutional investors SGI had not met its goal of 40% revenue growth during the first quarter of fiscal year 1996. SGI executives explained that the reorganization of its sales force temporarily hurt sales, but the reorganization had been successful. The executives also attributed the shortcoming to a drop in North American and European orders. SGI assured investors that (a) there were no manufacturing problems with or supply constraints on the Indigo2; (b) demand was strong for the workstation, and it was being shipped in volume; and (c) the revenue target of 40% for Fiscal Year 96 would be achieved; (7) October 19, 1995: McCracken stated in an interview that SGI's first quarter growth was "probably less” than the growth the Company would see during Fiscal Year 1996; (8) November 2, 1995: SGI executives held a press conference for securities analysts and investors, stating that (a) SGI would still achieve its goal of 40% revenue growth, and its second quarter performance should better its first quarter performance; (b) the failure to meet growth expectations for the first quarter resulted from temporary sales force reorganization problems and a temporary drop in sales; and (c) Indigo2 sales were beating expectations, and the product was now shipping in volume after some initial problems with the supply of a key chip component; (9) Early November, 1995: SGI's first quarter report to shareholders included a letter from McCracken stating that the Indigo2 "began shipping in volume in September”; (10) December 15, 1995: McCracken and another SGI executive told Dean Witter that (a) SGI had a strong November; (b) sales force productivity was improving; (c) European and North American sales were likely to improve; and (d) the Company would meet its goal of 40% growth for the second quarter; (11) Mid-December, 1995: McCracken and another SGI executive told Smith Barney that SGI would meet its goal of 40% growth, notwithstanding sluggish sales in some areas.

.Brody contends the pleading requirements applicable to allegations made on information and belief do not apply to her because her allegations are based on the investigations of her counsel, and therefore on information known personally to her. Brody’s complaint includes a paragraph entitled "Basis of Allegations,” which states that "Plaintiffs have alleged the foregoing based upon the investigation of their counsel, which included a review of SGI's SEC filings, securities analysts reports and advisories about the Company and discussions with consultants, and believe that substantial evidentiary support will exist for the allegations ... after a reasonable opportunity for discovery.” Brody relies on these sources precisely because she does not have direct personal knowledge of the defen-danls’ alleged misconduct. Her complaint is therefore pled on information and belief.

. See also Stevelman v. Alias Research Inc., 174 F.3d 79, 83-84 (2d Cir.1999) ("To state a claim with the required particularity, a complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” (citations and internal quotations omitted)).

. Brody alleged that the individual defendants received monthly financial reports "and/or” Flash Reports "on or about” October 3-4, and 10, 1995, "no later than Nov. 3 or 6 and 10, 1995,” and "no later than Dec. 4 or 5 and 10, 1995.”

. The majority faults Brody for "failing] to state facts relating to the internal reports, including their contents, who prepared them, which officers reviewed them and from whom she obtained the information.” Ante, at 984. This criticism is not justified. As noted, the complaint described the content of the reports, identified the officers who reviewed them (e.g., the named defendants), and who prepared them, albeit by department or job title (e.g., "SGI's financial department” and “the marketing, engineering and manufacturing managers” in conjunction with Indigo2’s "Program Director”). Greater detail was not required. See, e.g., Stevelman, 174 F.3d 79, 85-86 (strong inference of scienter found despite plaintiff's "fail[ure] to allege in his Amended Complaint what percentage of their [stock] holdings the other officers, besides [CEO] Bingham, liquidated in the period at issue, or how many shares they retained; he also fails to allege whether all [company] officers sold at the inflated prices, or only some of them”).
The Reform Act neither explicitly nor implicitly mandates disclosure in the complaint itself of the sources of the facts alleged. The majority cites no authority to the contrary. Although disclosure will be required during discovery, see Fed.R.Civ.P. 26(a)(1)(A), at that time the district court can enter an appropriate order to protect informants, etc., see Fed. R.Civ.P. 26(c); Seattle Times Co. v. Rhinehart, 467 U.S. 20, 34-35 & n. 21, 104 S.Ct. 2199, 81 L.Ed.2d 17 (1984). Considering “the possible retaliation that frequently results when a whistleblower is identified,” Management Info. Techs., Inc. v. Alyeska Pipeline Serv. Co., 151 F.R.D. 478, 481 (D.D.C.1993), the majority’s criticism of Brody's complaint on this ground is unjustified.

. See also Press, 166 F.3d at 538 (refusing to interpret the Reform Act's pleading standard in a manner that "would make virtually impossible a plaintiff's ability to plead scienter in a financial transaction involving a corporation, institution, bank or the like that did not involve specifically greedy comments from an authorized corporate individual”).

. See supra note 24.

. Paragraph 36 of the complaint is representative:
36. As a result of the problems with the ASIC chips for use in the Indigo2 IMPACT Workstation, as well as weak sales in North America due to problems with SGI’s North American direct sales force, weak OEM sales and weaker than expected sales in Europe, SGI's results for the month and quarter ended Sept. 30, 1995 were significantly below forecasted or budgeted levels. Each of the individual defendants received this information by way of the Sept. "Flash” report on or about Oct. 3-4, 1995, and/or the Sept. Monthly Financial Statement/Package on or about Oct. 10, 1995.

.The First Circuit, like the Second Circuit, applied a "strong inference” standard with respect to scienter prior to the Reform Act. See Maldonado v. Dominguez, 137 F.3d 1, 9 & n. 5 (1st Cir.1998) (citing Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir.1992)). As the First Circuit recently observed, albeit in dicta, the Reform Act’s heightened pleading requirements do not differ from that circuit’s historical standard. See id. at 9 n. 5.

. Cf. Advanta, 180 F.3d at 540-41 (upholding dismissal of complaint where not all defendants sold stock, and those who did sold "only small percentages of their holdings”).

. Cf. Advanta, 180 F.3d at 540 ("Here, three of the individual defendants sold no stock at all during the class period, raising doubt whether the sales were motivated by an intent to profit from inflated stock prices before the upcoming losses were reported.”); Stevelman, 174 F.3d 79, 85-86, 1999 WL 187646, at *6 ("[W]e have suggested that scienter may not be inferred 'strongly' when the alleged fraud is alleged to have benefitted only a single defendant in a corporate entity.”); San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 814 (2d Cir.1996) ("In the context of this case, we conclude that the sale of stock by one company executive does not give rise to a strong *1002inference of the company's fraudulent intent; the fact that other defendants did not sell their shares during the relevant class period sufficiently undermines plaintiffs’ claim regarding motive.”); Acito, 47 F.3d at 54 ("The fact that the other defendants did not sell their shares during the relevant class period undermines plaintiffs’ claim that defendants delayed notifying the public so that they could sell their stock at a huge profit.” (citation and quotations omitted)).

. The "crucial facts” upon which the majority relies conflict with the allegations in the complaint. For example, the majority claims that Burgess was "without any day-to-day contact with SGI’s officers or involvement in its operations,” ante, at 987, but the complaint alleges that Burgess was "a Senior Vice President of the Company in charge of software development including the software used in the Indigo2 IMPACT workstation gate arrays. Because of defendant Burgess’ position with the Company, he knew of the adverse non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith.”

. The majority also relies on the fact that the defendants "[cjollectively” retained a large percentage of their stock holdings. Ante, at 987. However, "an insider may not always trade all his shares in the company for which he possesses the inside information; the trader may hold on to a portion of his shares to hedge against the- unforeseen or to obscure the insider trading from the SEC.” Worlds of Wonder, 35 F.3d at 1427.