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        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT        United States Court of Appeals
                                                       Fifth Circuit

                                                                            FILED
                                                                        January 13, 2016
                                 No. 14-41141
                                                                          Lyle W. Cayce
                                                                               Clerk
LOCAL 731 I.B. OF T. EXCAVATORS AND PAVERS PENSION TRUST
FUND,

             Plaintiff - Appellant

v.

DIODES, INCORPORATED; KEH-SHEW LU; RICHARD WHITE,

             Defendants - Appellees



                Appeal from the United States District Court
                     for the Eastern District of Texas


Before JONES, SMITH, and SOUTHWICK, Circuit Judges.
EDITH H. JONES, Circuit Judge:
      A putative class of purchasers of Diodes, Inc. (“Diodes”) common stock
sued Diodes and two of its corporate officers alleging that Diodes and its
officers committed securities law violations between February and June, 2011.
Despite publicly admitting that labor problems existed at its Shanghai
production facility, and accurately predicting the impact of the problems on its
quarterly financial results, Diodes is alleged to have omitted significant
information about the extent and causes of the problems. Diodes moved to
dismiss the complaint for failure to state a claim under the heightened
pleading requirements of the Private Securities Litigation Reform Act
(“PSLRA”), and the district court granted the motion. We affirm the judgment.
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                                 No. 14-41141
The complaint does not adequately allege facts from which a “strong inference
of scienter” may be drawn against Diodes and the individual defendants.
                              BACKGROUND
      Diodes, headquartered in Plano, Texas, is a manufacturer and seller of
semiconductor devices. Though it has factories around the world, most of its
employees are located in Asia, where it produces and packages its
semiconductors.      On February 9, 2011, Diodes issued a press release
announcing its financial results for the fourth quarter and fiscal year 2010, as
well as looking ahead to the first quarter of 2011.       In this press release,
defendant Keh-Shew Lu (“Lu”), the company CEO, alerted investors that
Diodes’s manufacturing output in the first quarter would be affected by labor
shortages in China. As a result, Lu predicted that revenue would be flat or
down 5 percentage points compared to the fourth quarter of 2010 and that
gross profit margin would be 36.5 percent, plus or minus 1 percent.
      Following the press release, Lu further elaborated on the labor shortage
problems in a conference call with analysts and attributed it to the recently
announced Chinese policy seeking to drive economic development inland and
the Chinese New Year holiday. Despite these obstacles, Lu predicted that the
problem would be resolved by the second quarter of 2011, noting that Diodes
started hiring new workers, but cautioning that it takes six to eight weeks of
training before they would be productive.
      On May 10, 2011, Diodes issued a press release reporting on its first
quarter results. Notably, Diodes’s gross profit margin for the first quarter was
35.5 percent, meaning that Lu’s prediction in February 2011 was accurate. In
the press release, Diodes again noted that its first quarter output was affected
by the Chinese labor shortage, and a “larger than normal” number of workers
did not return to work after the Chinese New Year holiday. Nonetheless,
Diodes reiterated that it was continuing to hire new workers to deal with the
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                                 No. 14-41141
problems caused by the labor shortage. In a conference call following the press
release, Lu stated that Diodes expected the labor shortage issues to be resolved
during the second quarter and that the second quarter gross profit margin
would be comparable to the first quarter margin. On the same day, defendant
Richard White (“White”), Diodes’s CFO, spoke at an industry conference where
he answered questions about the labor shortage. He stated that Diodes noticed
the problem around the Chinese New Year and that it was replacing non-
returning workers; he also cautioned that it takes six to eight weeks for a new
worker to be fully trained and up to six months before the worker becomes fully
efficient. Following these announcements, Diodes’s stock price dropped.
      On June 9, 2011, Diodes revised its guidance for the second quarter and
lowered its gross margin prediction to 32.5 percent, plus or minus 1.5 percent.
Diodes stated that this adjustment was due in part to a “slower than expected”
recovery from the labor shortage problem in China.                Following this
announcement, the stock price fell again. Notably, an August 2011 press
release following the second quarter reported that Diodes’s gross margin for
the second quarter was 32.8 percent.        Diodes’s management accurately
predicted its gross profit margin for the second quarter.
      Almost two years later, on March 15, 2013, the plaintiff pension fund
(“the Fund”) filed this securities fraud class action against Diodes, CEO Lu and
CFO White. Plaintiff’s amended complaint alleges violations of Section 10(b)
of the Securities Exchange Act of 1934, Securities and Exchange Commission
(“SEC”) Rule 10(b)-5, and Section 20(a) of the Exchange Act (the control person
provision). See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78t(a).
The class period spans February 9 to June 9, 2011, and the complaint’s core
allegations home in on the series of press releases and statements made by Lu
and White during that period. There is no allegation of any false statement.
The Fund contends instead that Diodes’s alleged omissions evince intentional
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                                     No. 14-41141
or severely reckless conduct that misled investors and creates a strong
inference of scienter against Defendants.            Three arguments support this
contention. First, it is implausible that Lu and White, as top company officials,
did not know about the Chinese labor shortage in a facility critical to Diodes’s
profitability. They must have known about or consciously disregarded the
scope of the problem and that the labor shortage was principally caused by
company policies that alienated workers and caused them to quit. Second,
Diodes’s early shipment of orders to customers in January 2011 implies an
attempt to conceal the severity and duration of the labor shortage. Third, Lu’s
and other insiders’ stock sales during the class period strongly support an
inference of scienter. 1
      The district court thoughtfully explained its decision granting Diodes’s
motion to dismiss for failure to state a claim. Fed. R. Civ. Pr. 12(b)(6). The
court held, in essence, that the complaint insufficiently alleged facts to
establish an inference of scienter under the PSLRA’s heightened pleading
requirements. The Fund timely appealed.
                                    DISCUSSION
      We review a district court’s ruling on a motion to dismiss de novo.
Spitzberg v. Hous. Am. Energy Corp., 758 F.3d 676, 683 (5th Cir. 2014). A
plaintiff’s complaint will survive a Rule 12(b)(6) motion to dismiss if, accepting
its factual allegations as true, the complaint plausibly states a claim for relief.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Where, as here, the complaint
involves an allegation of fraud, Federal Rule of Civil Procedure 9(b) imposes a
higher standard on the complainant, requiring that he plead with
“particularity the circumstances constituting fraud.” The PSLRA has raised



      1  On appeal, the Fund relies only on Lu’s trades and has abandoned complaints about
others’ stock sales in the wake of the district court’s adverse reasoning.
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                                  No. 14-41141
the pleading bar even higher and enhances Rule 9(b)’s particularity
requirement for pleading fraud in two ways. Indiana Elec. Workers Pension
Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 533 (5th Cir. 2007). First
the plaintiff must “specify each statement alleged to have been misleading, and
the reason or reasons why the statement is misleading.” Id. (citing 15 U.S.C.
§ 78u-4(b)(1)(B)). Second, “for ‘each act or omission alleged’ to be false or
misleading, plaintiffs must ‘state with particularity facts giving rise to a strong
inference that the defendant acted with the requisite state of mind.’” Id. (citing
15 U.S.C. § 78u-4(b)(2)).
      The elements of securities fraud claims include a material misstatement
or omission; a defendant acting with “scienter” concerning the fraud; reliance;
damages; and loss causation.       Indiana Elec., 537 F.3d at 532 (citations
omitted).    Although the appellees challenge the elements of scienter and
materiality, we need consider only scienter.
       In evaluating a complaint’s scienter allegations, a court must “assess
all the allegations holistically.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 326 (2007).       A three-step framework guides this holistic
evaluation. First, the factual allegations in the pleadings must be accepted as
true. Indiana Elec., 537 F.3d at 533 (citing Tellabs, 551 U.S. at 322). Second,
the court must consider the entire complaint, including documents
incorporated into the complaint by reference and matters subject to judicial
notice. Id. Third, the court must consider plausible inferences supporting as
well as opposing a strong inference of scienter. Id. (citing Tellabs, 551 U.S. at
323). Ultimately, in order to create an inference of scienter, the allegations in
the complaint must be “cogent and compelling,” not simply “reasonable,” or
“permissible.” Id. A court may employ a “two-step method” by first assessing
each allegation individually and then considering the allegations as a whole.
Owens v. Jastrow, 789 F.3d 529, 537 (5th Cir. 2015).
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                                  No. 14-41141
      Scienter in a securities fraud case connotes “an intent to deceive,
manipulate, defraud or severe recklessness.” Id. at 536 (internal brackets and
citation omitted). Severe recklessness is marked by “an extreme departure
from the standard of ordinary care,” and “is limited to highly unreasonable
omissions or misrepresentations that involve not merely simple or even
inexcusable negligence.” Id. (citing Abrams v. Baker Hughes, Inc., 292 F.3d
424, 430 (5th Cir. 2002)).      Indeed, severe recklessness is only present in
situations where there is “a danger of misleading buyers or sellers which is
either known to the defendant or is so obvious that the defendant must have
been aware of it.” Id.
      Consequently, “allegations of motive and opportunity standing alone will
not suffice,” though such circumstantial evidence can “enhance the strength of
the inference of scienter.” Indiana Elec., 537 F.3d at 533 (internal citation
omitted). Moreover, this court has rejected the “group pleading approach to
scienter,” and focuses on the state of mind of the corporate officials who make,
issue, or approve the statement rather than the “collective knowledge of all the
corporation’s officers and employees.”      Id. (citing Southland Sec. Corp. v.
INSpire Ins. Solutions, Inc., 365 F.3d 353, 368 (5th Cir. 2004)).
      The Fund does not allege that it has direct proof of intentional or severely
reckless omissions of material facts on the part of Diodes or its corporate
executives. Rather, the Fund argues that circumstantial evidence supports a
strong inference of scienter. First, the Fund argues that, as top company
executives, Lu and White knew the profound importance of the Shanghai
facility to Diodes, and accordingly, they must have known (or were severely
reckless in not knowing) that their internal labor policies would exacerbate the
labor problems’ length and severity.             These are allegedly “special
circumstances” giving rise to the strong inference of scienter. Second, the Fund
argues that Diodes’s early shipments of customer orders in January 2011 imply
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                                       No. 14-41141
an attempt to conceal the extent of the problems caused by the labor shortage
and provide another basis for the strong inference of scienter. Finally, the
Fund argues that Lu’s stock sales during the class period constitute a powerful
reason for inferring scienter. We consider each argument in turn.
A. Special Circumstances
       The Fund asserts that the labor shortage affecting Diodes’s Shanghai
facility was due principally to Diodes’s own harsh labor practices that alienated
workers and caused them to quit. The company allegedly doubled work hours
and restricted employee leave before the Chinese New Year.                  2   Because an
experienced workforce is essential to Diodes’s competitive advantage, the Fund
reasons, Lu and White must have been aware of how these internal labor
policies exacerbated the external influences on the company’s productivity.
Since Lu did not reveal the contribution of company-specific policies to the
labor shortage in press releases and conference calls during the class period, it




       2  For purposes of this analysis, we assume arguendo that the allegations of the
Confidential Witnesses in the complaint may be considered in determining the complaint’s
sufficiency. However, the allegations of some of the witnesses, particularly those on the
factory floor, give us pause.
        Allegations by confidential sources “afford no basis for drawing the plausible
competing inferences required by Tellabs.” Indiana Elec., 537 F.3d at 535. “At the very least,
such sources must be described with sufficient particularity to support the probability that a
person in the position occupied by the source would possess the information pleaded.” Id.
(internal quotations and citations omitted). We doubt that the allegations by the confidential
witnesses on the factory floor—CWs 1, 2, 3, and 4—satisfy this standard. First, it is unclear
from the descriptions of these witnesses, all former employees, whether their employment
status at the Shanghai facility conferred sufficient insights into the effect of the company
policies on the 2,000 person labor force as a whole. Even accepting that these witnesses
occupied some kind of supervisory positions, it is far from clear that their anecdotal
statements about the reasons for the departure of a few employees can be imputed to the
workforce beyond their departments. Moreover, there is no way to compare the CW
statements about employee departures with (a) prior experiences at the Diodes facility or
(b) other Shanghai production companies.
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                                  No. 14-41141
can be inferred that he was attempting to conceal the extent and duration of
the problem from investors.
      It is important to note the curious nature of the Fund’s claims. To recap
the relevant facts: during the class period, Diodes repeatedly warned investors
of a labor shortage that would affect its output in the first two quarters of 2011;
Diodes accurately warned the precise impact this labor shortage would have
on its financial results, not once, but twice. Yet the Fund contends that more
disclosure was required. Most reasonable investors would rather receive an
accurate “bottom line” assessment of a disclosed company problem than all of
its assumptions and nuances.       Even assuming, however, that a case can
theoretically be made for more disclosure, the Fund’s pleadings are insufficient
to support its contention.
      As an initial matter, the Fund’s amended complaint pleads no facts
indicating that Lu and White knew that the labor shortage was principally
caused by Diodes’s workplace policies. The complaint does not allege that Lu
and White knew (a) that there were new policies, (b) that workers were upset
about the new policies, or (c) that workers were quitting for that reason. Nor
does the complaint allege that Lu’s or White’s views on the expected extent or
duration of the labor shortage were any different from their public statements.
Rather, the Fund contends that a strong inference of scienter can be drawn
simply from the magnitude of disruption caused by the company’s labor
policies, which, from their top executive positions, Lu and White must or
should have known about. Accordingly, their concealment of the facts from
investors must have been intentional or severely reckless.
        The Fund, however, candidly acknowledges the predominant theme in
this circuit’s case law that “an officer’s position with a company does not suffice
to create an inference of scienter.” Nathenson v. Zonagen Inc., 267 F.3d 400,
424 (5th Cir. 2001); see also Indiana Elec., 537 F.3d at 535; Abrams, 292 F.3d
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at 432. Indeed, it is the “rare case” where motive and opportunity allegations
alone can support a strong inference of scienter. Owens, 789 F.3d at 539-40.
Nonetheless, the Fund seizes upon a handful of cases in which special
circumstances, “taken together with an officer’s position, may support a strong
inference of scienter,” Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 342 (5th
Cir. 2008). On analysis, the special circumstances cases are inapposite.
      The “special circumstances” cases exhibit some combination of four
considerations that might tip the scales in favor of an inference of scienter.
First, the smaller the company the more likely it is that corporate executives
would be familiar with the intricacies of day to day operations.          Dorsey,
540 F.3d at 342 (no employees); Nathenson, 267 F.3d at 425 (32 to 35
employees). Second, the transaction at issue may have been critical to the
company’s continued vitality. Dorsey, 540 F.3d at 342; Plotkin v. IP Axess Inc.,
407 F.3d 690, 700 (5th Cir. 2005); Nathenson, 267 F.3d at 425. Third, the
misrepresented or omitted information at issue would have been readily
apparent to the speaker. Dorsey, 540 F.3d at 342; Plotkin, 407 F.3d at 700;
Nathenson, 267 F.3d at 425.        Fourth, the defendant’s statements were
internally inconsistent with one another. Plotkin, 407 F.3d at 700; Nathenson,
267 F.3d at 425.
      None of these considerations is present here. Diodes is a large company
with over 4,000 employees at locations across the world. It is not at all clear
that Diodes’s top executives in Dallas would have been aware of labor policies
at the Shanghai facility, much less the chatter on the factory floor and the
varying reasons for employee attrition before and after the Chinese New Year.
      Second, although the efficiency of Diodes’s production and packaging of
semiconductors is key to its competitive advantage, the Fund does not allege
that the extent and duration of the labor shortage, whatever its cause,
jeopardized the company’s existence. In contrast, a strong inference of scienter
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                                      No. 14-41141
could be drawn where a biopharmaceutical company allegedly falsely stated
that it had acquired a patent covering its single product. Nathenson, 267 F.3d
at 425.    Similarly, omissions concerning the poor financial condition of a
technology company’s contractual counterparty allowed a strong inference of
scienter because the counterparty’s weakness posed a serious risk to the
company’s long-term existence, and it had predicted that the contracts would
bring in millions of dollars. Plotkin, 407 F.3d at 700.
       Third, whether Diodes’s workplace conditions “profoundly” contributed
to the labor shortage is an adverb, not a factual assertion. The proximity of
Diodes’s new policies in early 2011 to China’s new economic initiatives and the
Chinese New Year makes it difficult to isolate the effect of the workplace
policies on the factory floor. The company policies’ impact could not have been
readily apparent to Lu and White. Finally, the defendants’ statements were
both consistent and accurate: management consistently maintained that labor
shortages were affecting its output and accurately predicted the impact that
this shortage would have on the company’s financial results.
B. Early Product Shipment
       The Fund seeks to draw a strong inference of scienter from Diodes’s early
shipments of orders without prior customer authorization.                 The practice, it
contends, indicates that Diodes intended to conceal the true impact of the labor
problems from the public and to deceive investors by artificially pushing
forward its earnings. This argument is beset with difficulties, not the least of
which is that early shipping is a legal 3 practice that may be supported by “any
number of legitimate reasons,” and usually “does not support a strong



       3 We note that the Fund has not alleged that the early shipments at issue were
fabricated, nor does it allege that Diodes’s accounting of those sales violated GAAP or other
applicable accounting principles. Thus, it appears from the pleadings that the Fund does not
contest that Diodes’s early shipments of orders were legal.
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                                  No. 14-41141
inference of scienter.” Greebel v. FTP Software, Inc., 194 F.3d 185, 203 (1st
Cir. 1999).
        To be sure, allegations that a defendant is concealing company problems
to inflate earnings may create the inference when the complaint alleges that
the defendant had “actual knowledge” of the problems and engaged in
“deliberate or intentional behavior” to conceal them. Abrams, 292 F.3d at 432-
33.    Fatal to the Fund’s argument, however, are two facts noted previously.
First, Diodes did not attempt to conceal the labor shortage problem—it
repeatedly alerted investors that labor issues would affect the company’s
output and correctly predicted the extent to which these issues would affect
the company’s bottom line. Second, the amended complaint offers no specific
facts that Lu and White had “actual knowledge” that the labor shortage was
caused by company-specific problems.
        In any event, as the district court observed, shipping orders early would
tend to enhance the labor shortage problem, not disguise it. Because shipping
orders early would deplete the inventory, Diodes’s ensuing inability to keep up
with orders would quickly become apparent, and its revenue and gross profit
margin would decrease. Were Diodes attempting to conceal a severe labor
shortage problem, shipping orders early would be counterproductive. Diodes’s
theory is neither “compelling” nor “cogent.” Tellabs, 551 U.S. at 323.
C. Insider Trading Allegation
        The Fund’s final allegation centers on Lu’s stock sales during the class
period. It argues that his sales confirm Diodes’s misleading of stockholders
because they occurred before the May 2011 announcement of the lingering
labor shortage problem and were not plagued by the stock price decline
following the May 2011 press release.
        Because corporate executives, whose compensation often includes
company stock, “will trade those securities in the normal course of events,” In
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                                  No. 14-41141
re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997) (Alito,
J.), insider trading, by itself, “cannot create a strong inference of scienter, but
it may meaningfully enhance the strength of the inference of scienter.” Cent.
Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 553 (5th
Cir. 2007) (internal quotation omitted). Insider stock sales can enhance an
inference of scienter if the trading occurs “at suspicious times or in suspicious
amounts.” Cent. Laborers’, 497 F.3d at 552. A trade is suspicious if “sales are
out of line with prior trading practices or at times calculated to maximize
personal profit.” Id. at 553 (citing Abrams, 292 F.3d at 435). This court has
repeatedly cautioned, however, that “even unusual sales by one insider do not
give rise to scienter when other defendants do not sell some or all of their
shares during the Class Period.” Abrams, 292 F.3d at 435; see also Southland
Sec. Corp., 365 F.3d at 369 (“The fact that 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.”).   Importantly, a court must consider “both culpable and
nonculpable explanations for stock sales, as revealed in the pleadings and
associated documents.” Indiana Elec., 537 F.3d at 543.
       Viewed in isolation, Lu’s sales during the class period might be
considered suspicious. They are out of line with his prior trades, which were
infrequent and in much smaller amounts. On the other hand, Lu sold only 12.1
percent of his Diodes shares, leaving 87.9 percent of his holdings, worth
millions of dollars, invested in the company. Moreover, although other non-
defendant insiders sold Diodes stock during the class period, there is no basis
to infer that those trades were suspicious absent allegations about the
individuals’ prior trading practices. The district court actually rejected any
adverse inferences about White’s sales of a meager 1.7 percent of his stock
during the class period, a conclusion not challenged by the Fund on appeal.
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    On the allegations before us, Lu’s significant stock sales alone will not
support a strong inference that he either knew the importance to investors of
the company-specific contributions to the labor shortage or was severely
reckless in his ignorance. See Cent. Laborers, 497 F.3d at 553. The sales
represented a small portion of his investment in the company, and there are
many innocent reasons why an individual would sell stock at a given time.
Thus, the nonculpable inferences that may be drawn from sales of stock are
more cogent and compelling than the Fund’s contrary proposition.
D. Totality of the Circumstances
      Whether viewing the above three classes of allegations individually or as
a whole, the Fund has inadequately pled facts in its amended complaint that
give rise to a strong inference of scienter on the part of the defendants. Tellabs,
551 U.S. at 323; Indiana Elec., 537 F.3d at 533.              The Fund’s amended
complaint fails to satisfy the PSLRA’s requirement to plead with particularity
facts supporting a strong inference concerning the defendants’ requisite state
of mind. 15 U.S.C. § 78u-4(b)(2).
                                CONCLUSION
      Because the Fund’s amended complaint fails to plead facts giving rise to
a strong inference of scienter on the part of the defendants, we AFFIRM the
district court’s judgment dismissing the case.




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