                   FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

T. JEFFREY SIMPSON, on behalf of         
himself and all others similarly
situated,
                            Plaintiff,
                and
CALIFORNIA STATE TEACHERS                      No. 04-55665
RETIREMENT SYSTEM,
                 Plaintiff-Appellant,           D.C. No.
                                             CV-01-11115-MJP
                 v.                             OPINION
AOL TIME WARNER INC.; CENDANT
CORPORATION; RICHARD A. SMITH;
L90, aka Max Worldwide; DAVID
COLBURN; ERIC KELLER,
             Defendants-Appellees.
                                         
        Appeal from the United States District Court
           for the Central District of California
        Marsha J. Pechman, District Judge, Presiding

                   Argued and Submitted
           February 6, 2006—Pasadena, California

                      Filed June 30, 2006

     Before: Robert R. Beezer, Thomas G. Nelson, and
             Ronald M. Gould, Circuit Judges.

                   Opinion by Judge Gould




                              7233
          CAL. STATE TEACHERS v. AOL TIME WARNER         7237




                         COUNSEL

Joseph W. Cotchett (argued) and Nancy L. Fineman, Cotchett,
Pitre, Simon & McCarthy, Burlingame, California, for
plaintiff-appellant California State Teachers’ Retirement Sys-
tem.

Peter T. Barbur (argued), Cravath, Swaine & Moore LLP,
New York, New York; John B. Quinn, Quinn Emanuel
Urquhart Oliver & Hedges LLP, Los Angeles, California, for
defendant-appellee Time Warner Inc. Samuel Kadet, Skad-
den, Arps, Slate, Meagher & Flom LLP, New York, New
York; Jeffrey Speiser, Stern & Kilcullen, Roseland, New Jer-
sey, for defendants-appellees Cendant Corporation and Rich-
ard A. Smith. Carl S. Kravitz, Zuckerman Spaeder LLP,
Washington, DC, for defendant-appellee David Colburn. J.
Christian Word, Latham & Watkins LLP, Washington, DC,
for defendant-appellee Eric Keller. Daniel J. Tyukody, Orrick,
Herrington & Sutcliffe LLP, Los Angeles, California, for
defendant-appellee L90, Inc. d/b/a MaxWorldwide, Inc.

Michael L. Post, Senior Counsel, Washington, DC, on behalf
of the Securities and Exchange Commission as amicus curiae
in support of appellant. Peter H. Mixon, General Counsel,
Sacramento, California; Keith Johnson, Chief Legal Counsel,
Madison, Wisconsin, on behalf of the California Public
Employees’ Retirement System and the State of Wisconsin
Investment Board as amici curiae in support of appellant. Eric
Alan Isaacson, Lerach Coughlin Stoia & Robbins LLP, San
Diego, California, on behalf of the Regents of the University
of California as amicus curiae in support of appellant. Law-
rence S. Robbins, Robbins, Russell, Englert, Orseck & Unter-
7238      CAL. STATE TEACHERS v. AOL TIME WARNER
einer LLP, Washington, DC, on behalf of the American
Institute of Certified Public Accountants as amicus curiae in
support of appellees. David H. Braff, Sullivan & Cromwell
LLP, New York, New York, on behalf of the Bond Market
Association, et al., as amici curiae in support of appellees.


                          OPINION

GOULD, Circuit Judge:

   This consolidated class action litigation alleges that multi-
ple actors engaged in a scheme to commit securities fraud by
overstating the reported revenues of an Internet company,
Homestore.com (“Homestore”). Homestore eventually
restated its revenues, resulting in a decrease in revenues of
more than $170 million and corresponding declines in Home-
store’s stock value. The district court dismissed the securities
claims against Defendants-Appellees, relying on the Supreme
Court’s decision in Central Bank of Denver, N.A. v. First
Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).

   In this appeal, the lead plaintiff, California State Teachers’
Retirement System (“CalSTRS” or “Plaintiff”), seeks to
reverse the district court’s dismissal with prejudice of its
claims under § 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), against six outside defendants
(“Defendants”): AOL Time Warner (“AOL”) and two of its
officers, Eric Keller and David Colburn; Cendant Corporation
and one of its officers, Richard Smith; and L90, Inc. (“L90”).
Plaintiff alleges Homestore entered into fraudulent transac-
tions with these Defendants in which Homestore purchased
revenue for itself and then recorded that revenue in violation
of SEC accounting rules. In the alleged “triangular transac-
tions,” Homestore entered into sham transactions with “Third
Party Vendors” who then returned the money to Homestore
through contracts with AOL or L90. Plaintiff alleges Home-
          CAL. STATE TEACHERS v. AOL TIME WARNER           7239
store overpaid for an asset owned by Cendant in return for
Cendant’s agreement that it would funnel some of the money
back to Homestore through a related business entity. The
complaint further alleged that the recording of gross revenue
from these transactions contravened SEC rules regarding bar-
ter transactions or the buying of revenue, and that the triangu-
lar transactions were often done without the full knowledge of
Homestore’s auditor.

  The Supreme Court held in Central Bank that § 10(b) does
not allow recovery for aiding and abetting liability, Cent.
Bank, 511 U.S. at 177-78, but cautioned that secondary actors
were not always free from liability under § 10(b) because they
may still be liable as a primary violator. 511 U.S. at 191. We
address here the scope of primary violation liability that the
Supreme Court did not fully define in Central Bank.

   Plaintiff asserts that Defendants are primary violators under
§ 10(b) for engaging in a “scheme to defraud.” In response,
Defendants argue that the Supreme Court in Central Bank
limited primary liability under § 10(b) to defendants who per-
sonally made a public misstatement, violated a duty to dis-
close or engaged in manipulative trading activity, and not to
those engaged in a broader scheme to defraud. Although we
hold that the scope of § 10(b) includes deceptive conduct in
furtherance of a “scheme to defraud,” when all elements of
§ 10(b) are otherwise satisfied, we conclude that Plaintiff’s
complaint insufficiently alleged that Defendants were primary
violators of § 10(b) based on their conduct in the furtherance
of the scheme.

                               I

   CalSTRS alleges in its First Amended Consolidated Com-
plaint (“FACC”) that Homestore and its officers, along with
its auditor PriceWaterhouseCoopers (“PWC”), AOL, Cen-
dant, L90, and additional Third Party Vendors, committed
securities fraud by engaging in round-trip or barter transac-
7240      CAL. STATE TEACHERS v. AOL TIME WARNER
tions whereby Homestore recorded net revenues from its
receipt of monies that came from Homestore’s own cash
reserves.

   Homestore created an online real estate website in 1996. In
the late 1990s, there was an explosion of Internet start-up
companies which consistently posted net losses and negative
cash flows as those companies sought to develop leadership
and market share in their industries. This development caused
a corresponding shift in emphasis by financial analysts to the
tracking and evaluation of revenues as an indicator of future
earnings. Until 2001, Homestore was perceived as an Internet
company that consistently matched or exceeded its estimated
revenue goals. To meet its revenue expectations, Homestore
relied increasingly on barter or round-trip transactions with
other companies. In such transactions, Homestore paid a com-
pany, the company returned part of the money to Homestore
by way of a different transaction, and Homestore recorded
these returned funds as revenue.

   Internet companies have historically engaged in barter
transactions between themselves, often in order to place
advertising on each other’s websites. Beginning in fiscal year
2000, the SEC implemented a new accounting standard that
required companies engaging in barter transactions to report
only the net revenue that was earned from these related trans-
actions, rather than the gross revenue received. Facing
increasing scrutiny from its auditor PWC, Homestore’s barter
transactions grew more complex. Homestore engaged in trian-
gular transactions, with the result that PWC did not recognize
that the revenue that Homestore recorded was related to a
prior transaction funded by Homestore. As the district court
succinctly summarized, in these triangular transactions:

    Homestore would find some third party corporation,
    one that was thinly capitalized and in search of reve-
    nues in order to “go public.” Homestore then agreed
    to purchase shares in that company for inflated val-
          CAL. STATE TEACHERS v. AOL TIME WARNER           7241
     ues or to purchase services or products that Home-
     store did not need. This transaction was contingent
     on the third party company “agreeing” to buy adver-
     tising from AOL for most or all of what Homestore
     was paying them. The money thus flowed through
     the third party to AOL, which then took a commis-
     sion and shared “revenue” with Homestore.

In re Homestore.com, Inc. Securities Litigation, 252 F. Supp.
2d 1018, 1023 (C.D. Cal. 2003). Against this background, we
consider the allegations against the particular Defendants.

A.   Allegations Involving AOL, and its officers Keller
     and Colburn

   The history of Homestore and AOL for purposes of this
appeal began with the creation of a legitimate partnership in
April 1998, whereby Homestore purchased the “exclusive
right to have the only online real estate listing product on
AOL.” In a second legitimate deal with AOL, Homestore
entered into an advertising reseller agreement, under which
AOL agreed in March 1999 to sell advertising on the Home-
store website and retain a commission.

   The triangular transactions at issue here occurred during the
first two quarters of fiscal year 2001. Plaintiff alleges that
Homestore entered into a series of sham transactions with var-
ious Third Party Vendors for some product or service that
Homestore did not need. The Third Party Vendors would then
contract with AOL for advertising on Homestore’s website
and AOL would give this money back to Homestore under
their advertising reseller agreement. Both the Third Party
Vendors and AOL would keep a portion of the money as a
commission. Plaintiff only alleges that the first leg of the
transaction was truly a sham because nothing of value was
given in exchange for Homestore’s payment. AOL continued
to sell advertising on Homestore’s website to Third Party
7242        CAL. STATE TEACHERS v. AOL TIME WARNER
Vendors, withholding commissions before passing the Ven-
dors’ payments on to Homestore.

   Plaintiff alleges that Defendant Eric Keller, as an employee
of AOL, jointly developed these transactions with Homestore.
Keller was also alleged to have contacted some of the Third
Party Vendors that took part in these triangular transactions.
Plaintiff alleges, without detailed support, that Defendant Col-
burn, Keller’s supervisor, approved the improper transactions.
AOL placed Keller on administrative leave in June 2001.
AOL then attempted to include more accurate documentation
of the round trip nature of additional triangular transactions
that occurred at the close of the second quarter of 2001.
Homestore convinced AOL to accept less descriptive docu-
ments, which would not alert PWC to the nature of the round-
trip transaction. AOL included a list of the “potential referral
advertisers” as part of the second deal in 2001, but let Home-
store add other companies not involved in the round-trip
transactions so that the Third Party Vendors could not be
identified.

B.     Allegations Involving Cendant and its officer Smith

   Cendant Corporation is a conglomerate with holdings in
real estate, travel, and vehicle rentals. In 2001, it owned
Move.com, the second largest real estate internet website after
Homestore. Cendant sold Move.com to Homestore in the first
quarter of 2001. In exchange for the site, Homestore trans-
ferred $750 million worth of Homestore stock to Cendant and
placed Cendant’s president, Richard Smith, on Homestore’s
board of directors. Plaintiff alleges that, although an outside
firm appraised the site, Homestore “grossly overpaid” Cen-
dant for this website, which Cendant considered a “bad asset.”

   Plaintiff alleges that the Move.com transaction was contin-
gent on a promise by Cendant to recycle some of Homestore’s
payment for Move.com back to Homestore. To accomplish
this, Cendant set up a separate corporate entity, the Real
            CAL. STATE TEACHERS v. AOL TIME WARNER                     7243
Estate Technology Trust (“RETT”), and funded it with $95
million. Cendant, through RETT, then agreed to the payment
of $80 million over two years in exchange for products and
services from Homestore. There are no allegations that Cen-
dant made efforts to conceal the contingent nature of these
transactions.

   According to the allegations in the FACC, Cendant later
agreed to use the remaining $15 million in RETT to purchase
virtual tours from Homestore. At first, Cendant proposed a
reciprocal agreement in which Homestore would purchase
$15 million in products from Cendant at a later date. Home-
store refused because this reciprocal transaction would pre-
vent PWC from allowing Homestore to report the first $15
million as revenue. Cendant then dropped the reciprocal
requirement and purchased the tours.

C.    Allegations Involving L90

   L90 entered into triangular transactions with Homestore
and various third parties during the second and third quarters
of 2001. These transactions followed the business model cre-
ated with AOL’s participation.1 At the end of the third quarter
of 2001, PWC required a confirmation letter from L90 before
it would certify Homestore’s 10-Q filing. Initially, Mark
Roah, a corporate officer for L90, refused to sign the confir-
mation letter. Fearing personal liability, Roah requested pay-
ment from Homestore and said that he wanted only to do
“legitimate deals” with the company. Roah later dropped his
demands and confirmed the revenue, but shortly thereafter
Homestore’s Chief Financial Officer Joseph Shew refused to
sign the Form 10-Q report that included the revenues Roah
had confirmed. Homestore then announced that it would
restate its financial results to reflect lower revenue.
  1
    There are no allegations that L90 or its officers helped to develop these
transactions such as Keller was alleged to have done.
7244       CAL. STATE TEACHERS v. AOL TIME WARNER
D.     Procedural History

   Multiple class action complaints were filed between
December 27, 2001, and February 13, 2002. These complaints
were consolidated on February 22, 2002. On September 25,
2002, Homestore’s former Chief Operating Officer, John Gie-
secke; former Chief Financial Officer, Joseph Shew; and Vice
President of Finance, John DeSimone, pled guilty to securities
fraud violations. On November 15, 2002, Plaintiff filed the
FACC, which relied on the details recited in the plea agree-
ments for these officers. Homestore and Peter Tafeen, former
Executive Vice President of Business Development and Sales,
answered the FACC, but all other defendants moved to dis-
miss. On March 7, 2003, the district court denied the motions
to dismiss for Stuart Wolff, Homestore’s former CEO, and its
auditor PWC. The district court dismissed without prejudice
the complaint as to the remaining Homestore insider defen-
dants. Relevant to this appeal, the district court also dismissed
the complaint as to the outside defendants with prejudice.

   In dismissing the complaint against the outside defendants,
which it referred to as the “Business Partner Defendants,” the
district court observed that in previous cases in which courts
found primary liability, a special relationship existed between
the defendants and the shareholders. The district court ulti-
mately determined that the outside defendants did not commit
a primary violation because they only facilitated and partici-
pated in Homestore’s fraud. The district court also determined
that Plaintiff had not demonstrated reliance because the share-
holders did not rely on the outside defendants’ scheme but
only on the statements made about the scheme by Homestore.

                               II

   We review de novo the dismissal of claims pursuant to Fed-
eral Rule of Civil Procedure 12(b)(6). Decker v. Advantage
Fund, Ltd., 362 F.3d 593, 595-96 (9th Cir. 2004). We may
affirm a dismissal on any basis fairly supported by the record,
           CAL. STATE TEACHERS v. AOL TIME WARNER             7245
even if the district court did not reach the issue or relied on
different grounds or reasoning. Adams v. Johnson, 355 F.3d
1179, 1183 (9th Cir. 2004). “All allegations and reasonable
inferences are taken as true, and the allegations are construed
in the light most favorable to the non-moving party, but con-
clusory allegations of law and unwarranted inferences are
insufficient to defeat a motion to dismiss.” Id. (internal quota-
tions omitted). “Dismissal is proper under Rule 12(b)(6) if it
appears beyond doubt that the non-movant can prove no set
of facts to support its claims.” Id. “The district court’s dis-
missal of a complaint without leave to amend is reviewed de
novo and is improper unless it is clear that the complaint
could not be saved by any amendment.” Livid Holdings Ltd.
v. Salomon Smith Barney, Inc., 416 F.3d 940, 946 (9th Cir.
2005).

   Securities fraud must be pled with specificity. In the Private
Securities Litigation Reform Act (“PSLRA”), Congress
required that “a complaint must ‘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.’ ” Lipton v. Pathogenesis Corp., 284 F.3d
1027, 1034 (9th Cir. 2002) (quoting 15 U.S.C. § 78u-4(b)(1)).
In addition, all allegations of deceptive conduct are generally
subject to Federal Rule of Civil Procedure 9(b), which
requires that “the circumstances constituting fraud or mistake
shall be stated with particularity.”

                               III

   We determine whether the Defendants’ conduct, as alleged,
is a primary violation of § 10(b). Section 10(b) prohibits, in
pertinent part, “any person, directly or indirectly, . . . [t]o use
or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contriv-
ance in contravention of such rules and regulations as the
7246      CAL. STATE TEACHERS v. AOL TIME WARNER
Commission may prescribe.” Securities Exchange Act of
1934 § 10(b), 15 U.S.C. § 78j(b). To implement § 10(b), the
SEC promulgated Rule 10b-5, 17 CFR § 240.10b-5. Rule
10b-5 is composed of three parts that describe the type of con-
duct prohibited by § 10(b). The second part proscribes the
making of “any untrue statement of a material fact” or the
omission of any material fact that is necessary in order to
make the statements made not misleading. Rule 10b-5(b), 17
CFR § 240.10b-5(b). The first and third parts make it unlaw-
ful for any person “to employ any device, scheme, or artifice
to defraud” or “to engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit
upon any person.” Rule 10b-5(a) & (c), 17 CFR § 240.10b-
5(a) & (c).

   Liability under Rule 10b-5 does not extend beyond the lim-
its of § 10(b). See Cent. Bank, 511 U.S. at 173 (“But the pri-
vate plaintiff may not bring a 10b-5 suit against a defendant
for acts not prohibited by the text of § 10(b).”); Ernst & Ernst
v. Hochfelder, 425 U.S. 185, 214 (1976) (“Thus, despite the
broad view of the Rule advanced by the Commission in this
case, its scope cannot exceed the power granted the Commis-
sion by Congress under § 10(b).”). In Central Bank, the
Supreme Court held “that the text of the 1934 Act does not
itself reach those who aid and abet a § 10(b) violation.” 511
U.S. at 177; see also id. at 177-78 (“We cannot amend the
statute to create liability for acts that are not themselves
manipulative or deceptive within the meaning of the stat-
ute.”). The Court cautioned, however, that secondary actors,
other than the securities issuer, may be liable as primary vio-
lators under § 10(b) when all elements of the statute are satis-
fied:

    The absence of § 10(b) aiding and abetting liability
    does not mean that secondary actors in the securities
    markets are always free from liability under the
    securities Acts. Any person or entity, including a
    lawyer, accountant, or bank, who employs a manipu-
            CAL. STATE TEACHERS v. AOL TIME WARNER                    7247
      lative device or makes a material misstatement (or
      omission) on which a purchaser or seller of securities
      relies may be liable as a primary violator under 10b-
      5, assuming all of the requirements for primary lia-
      bility under Rule 10b-5 are met.

Cent. Bank, 511 U.S. at 191.

   A private action under § 10(b) and Rule 10b-5 must allege
and prove all of the elements for primary liability for each
defendant. The elements of a securities fraud claim are: (1) to
use or employ any manipulative or deceptive device or con-
trivance; (2) scienter, i.e. wrongful state of mind; (3) a con-
nection with the purchase or sale of a security; (4) reliance,
often referred to in fraud-on-the-market cases as “transaction
causation;” (5) economic loss; and (6) loss causation, i.e. a
causal connection between the manipulative or deceptive
device or contrivance and the loss. See Dura Pharmaceuti-
cals, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005).

   The district court and the parties have questioned the suffi-
ciency of the allegations concerning three elements: (1) the
use or employment of a deceptive device or contrivance by
the Defendants; (2) in connection with the purchase or sale of
securities; (3) that has been relied upon by the public.2

A.    The Use or Employment of a Deceptive Device or
      Contrivance

  [1] The Supreme Court tells us that § 10(b) is intended to
prohibit the use or employment of any deceptive device in
  2
    We do not consider the possibility of liability based on actionable
omissions or manipulation sufficient to satisfy the requirement of a “ma-
nipulative or deceptive device or contrivance” under § 10(b). There are no
allegations that any Defendant was subject to a duty to disclose in the con-
text of these transactions or engaged in manipulative trading activity. See
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977).
7248      CAL. STATE TEACHERS v. AOL TIME WARNER
connection with the purchase or sale of securities, including
deception as part of a larger scheme to defraud the securities
market. See Ernst & Ernst, 425 U.S. at 199 n.20 (defining
“device” as “an invention; project; scheme; often, a scheme
to deceive”); Superintendent of Ins. v. Bankers Life & Cas.
Co., 404 U.S. 6, 10 n.7 (1971) (“ ‘We believe that § 10(b) and
Rule 10b-5 prohibit all fraudulent schemes in connection with
the purchase or sale of securities, whether the artifices
employed involve a garden type variety of fraud, or present
a unique form of deception.’ ” (quoting A. T. Brod & Co. v.
Perlow, 375 F.2d 393, 397 (2d Cir. 1967))). The Supreme
Court has also held that a non-speaking actor who engages in
a “scheme to defraud” has used or employed a deceptive
device within the meaning of § 10(b). See SEC v. Zandford,
535 U.S. 813, 821-22 (2002).

   [2] In Central Bank, the Supreme Court held that liability
under § 10(b) only extends to “primary violators” and there is
no liability for merely “aiding and abetting” a violation. 511
U.S. at 191. Since Central Bank, it is the duty of courts to
determine what constitutes a “primary violation” of § 10(b).
With respect to the making of false statements or omissions,
we have held that “substantial participation or intricate
involvement in the preparation of fraudulent statements is
grounds for primary liability even though that participation
might not lead to the actor’s actual making of the statements.”
Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th
Cir. 2000); see id. at 1061 (holding that signing and attesting
to a statement, such that for all intents and purposes the
signor-attestor made the statement, is sufficient to be consid-
ered a primary violator); see also In re Software Toolworks
Inc. Sec. Litig., 50 F.3d 615, 628-29 & n. 3 (9th Cir. 1994)
(holding that drafting or editing false statements that the
drafter-editor knows will be publicly disseminated is suffi-
cient to be considered a primary violator).

   [3] What it means to be a “primary violator” with respect
to an alleged “scheme to defraud” has been less extensively
             CAL. STATE TEACHERS v. AOL TIME WARNER                       7249
discussed. In Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir.
1997), we held that to be liable for a “scheme to defraud,”
“each defendant [must have] committed a manipulative or
deceptive act in furtherance of the scheme.” The relevant
inquiry is: what conduct constitutes a manipulative or decep-
tive act in the furtherance of a scheme to defraud sufficient to
render the defendant a “primary violator” of § 10(b)?

   [4] The SEC argues in its amicus brief that “Any person
who directly or indirectly engages in a manipulative or decep-
tive act as part of a scheme to defraud can be a primary violator.”3
The SEC defines “a deceptive act” as “engaging in a transac-
tion whose principal purpose and effect is to create a false
appearance of revenues.” We agree with the SEC that engag-
ing in a transaction, the principal purpose and effect of which
is to create the false appearance of fact, constitutes a “decep-
tive act.”4 Participation in a fraudulent transaction by itself,
however, is insufficient to qualify the defendant as a “primary
violator” if the deceptive nature of the transaction or scheme
was not an intended result, at least in part, of the defendant’s
own conduct. We hold that to be liable as a primary violator
of § 10(b) for participation in a “scheme to defraud,” the
defendant must have engaged in conduct that had the princi-
pal purpose and effect of creating a false appearance of fact
  3
     The arguments of the SEC are only persuasive authority to the extent
that they are reasonable in light of the statutory authority. See Zandford,
535 U.S. at 819-20 (“[The SEC’s] interpretation of the ambiguous text of
§ 10(b), in the context of formal adjudication, is entitled to deference if it
is reasonable”). To the extent that the SEC’s proposed test purports to
include aiding and abetting or coconspirator liability, we are constrained
to reject it. See In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir.
1995).
   4
     “The consideration of purpose and effect of challenged actions not
infrequently assists in determining whether a prohibition is to be applied
to complex conduct. . . . [and its] importance . . . [in] judg[ing] the legality
of challenged action is also a recurring theme in statutory law.” The Wil-
derness Soc’y v. U.S. Fish & Wildlife Serv., 353 F.3d 1051, 1064 (9th Cir.
2003).
7250        CAL. STATE TEACHERS v. AOL TIME WARNER
in furtherance of the scheme. It is not enough that a transac-
tion in which a defendant was involved had a deceptive pur-
pose and effect; the defendant’s own conduct contributing to
the transaction or overall scheme must have had a deceptive
purpose and effect.5

  Defendants argue that imposing liability for participation in
an overall scheme to defraud would impose liability for con-
duct other than the making of a material misstatement or
omission and would conflict with Central Bank. We disagree.
We see no justification to limit liability under § 10(b) to only
those who draft or edit the statements released to the public.
To the contrary, § 10(b) prohibits any person or entity from
  5
    The “principal purpose” prong is related to but different from the ele-
ment of scienter. For the element of scienter, we require “that a private
securities plaintiff proceeding under the PSLRA must plead, in great
detail, facts that constitute strong circumstantial evidence of deliberately
reckless or conscious misconduct.” In re Silicon Graphics Inc. Sec. Litig.,
183 F.3d 970, 974 (9th Cir. 1999). Previous cases have found the scienter
requirement satisfied by indirect evidence of a culpable state of mind, such
as suspicious insider trading activity or knowledge of accounting viola-
tions. See In re Daou Systems, Inc., 411 F.3d 1006, 1017 (9th Cir. 2005);
Silicon Graphics, 183 F.3d at 986. While the scienter element ensures a
culpable state of mind and must be satisfied for recovery under § 10(b),
the “principal purpose” prong examines instead whether the challenged
conduct of the defendant had a principal purpose, and not just an acciden-
tal effect, of creating a false appearance as part of a deceptive transaction
or fraudulent scheme. Unlike the scienter requirement, the “purpose and
effect” test is focused on differentiating conduct that may form the basis
of a primary violation under § 10(b) from mere aiding and abetting activ-
ity that the Supreme Court has held does not constitute a primary viola-
tion. A defendant may intend to deceive the public by substantially
assisting another’s misconduct as part of a scheme to defraud, but fail to
perform personally any action that created a false appearance as part of
this scheme. The scienter requirement, therefore, will not in all cases dis-
tinguish aiding and abetting from primary liability. In applying the
“scienter” element, we look at whether a defendant’s state of mind was
sufficiently culpable for § 10(b) liability. By contrast, we may examine the
“principal purpose and effect” of the defendant’s challenged conduct in a
fraudulent scheme as an aid to assessing whether the defendant’s conduct
was sufficiently deceptive for § 10(b) liability.
          CAL. STATE TEACHERS v. AOL TIME WARNER            7251
using or employing any deceptive device, directly or indi-
rectly, in connection with the purchase and sale of securities.
See Robert A. Prentice, Locating That “Indistinct” and “Vir-
tually Nonexistent” Line Between Primary and Secondary
Liability under Section 10(b), 75 N.C. L. Rev. 691, 731
(1997) (asserting that “the view that one can be liable only for
one’s own statements arguably ignores the fact that both Sec-
tion 10(b) and Rule 10b-5 condemn those who employ
devices or make misstatements ‘directly or indirectly’ ”). Fur-
thermore, § 10(b) “should be construed not technically and
restrictively, but flexibly to effectuate its remedial purposes.”
Zandford, 535 U.S. at 819 (internal quotation marks omitted).
Nor is “scheme to defraud” liability a substitute for aiding and
abetting liability that the Supreme Court precludes in Central
Bank. The focus of the inquiry on the deceptive nature of the
defendant’s own conduct ensures that only primary violators
(that is, only those defendants who use or employ a manipula-
tive or deceptive device) are held liable under the Act.

   Trial courts which have imposed liability under a “scheme
to defraud” theory have often required that the defendant’s
actions in fraudulent transactions have a principal purpose and
effect of creating a false appearance of fact in furtherance of
the scheme to defraud. See Quaak v. Dexia S.A., 357 F. Supp.
2d 330, 342 (D. Mass. 2005) (finding sufficient allegations for
primary liability under § 10(b) when “defendant was a pri-
mary architect of the scheme to finance the sham entities”);
In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319,
336-337 (S.D.N.Y. 2004) (allowing claims of primary liabil-
ity to go forward where auditors “masterminded” company’s
misleading accounting practices); In re Lernout & Hauspie
Sec. Litig., 236 F. Supp. 2d 161, 173 (D. Mass. 2003) (deny-
ing a motion to dismiss for outside business partners who
invented sham corporate entities that allowed a corporation
“to hide research and development expenses, create fictitious
revenue, and ultimately overstate profits in [its] financial
reports”).
7252      CAL. STATE TEACHERS v. AOL TIME WARNER
   [5] Conduct by the defendant that does not have a principal
legitimate business purpose, such as the invention of sham
corporate entities to misrepresent the flow of income, may
have a principal purpose of creating a false appearance. See
In re Enron Corp. Sec., Derivative & “ERISA” Litig., 310 F.
Supp. 2d 819, 830 (S.D. Tex. 2004) (“Sham business transac-
tions with no legitimate business purpose that are actually
guaranteed ‘loans’ employed to inflate Enron[’s] financial
image are not above-board business practices.”). Conduct that
is consistent with the defendants’ normal course of business
would not typically be considered to have the purpose and
effect of creating a misrepresentation. See In re Enron Corp.
Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 580
(S.D. Tex. 2002) (finding that “conclusory allegations that are
consistent with the normal activity of such a business entity,
standing alone, . . . are insufficient to state a claim of primary
liability under Central Bank” (internal quotation marks omit-
ted)). Participation in a legitimate transaction, which does not
have a deceptive purpose or effect, would not allow for a pri-
mary violation even if the defendant knew or intended that
another party would manipulate the transaction to effectuate
a fraud. See In re Charter Commc’ns, Inc., Sec. Litig., 443
F.3d 987, 992 (8th Cir. 2006) (refusing to impose primary lia-
bility “on a business that entered into an arm’s length non-
securities transaction with an entity that then used the transac-
tion to publish false and misleading statements to its investors
and analysts”); In re Parmalat Sec. Litig., 376 F. Supp. 2d
472, 505 (S.D.N.Y. 2005) (“At worst, the banks designed and
entered into the transactions knowing or even intending that
Parmalat or its auditors would misrepresent the nature of the
arrangements. That is, they substantially assisted fraud with
culpable knowledge — in other words, they aided and abetted
it.”).

   [6] If a defendant’s conduct or role in an illegitimate trans-
action has the principal purpose and effect of creating a false
appearance of fact in the furtherance of a scheme to defraud,
then the defendant is using or employing a deceptive device
          CAL. STATE TEACHERS v. AOL TIME WARNER          7253
within the meaning of § 10(b). A test that examines the pur-
pose and effect of a defendant’s conduct in an alleged scheme
to defraud, as a means to assess whether the defendant used
or employed a deceptive device, ensures that the defendant’s
conduct is sufficiently deceptive to justify imposing primary
liability. Thus, when determining whether a defendant is a
“primary violator,” the conduct of each defendant, while eval-
uated in its context, must be viewed alone for whether it had
the purpose and effect of creating a false appearance of fact
in the furtherance of an overall scheme to defraud.

B.   In Connection with the Purchase or Sale of Securities

   [7] In addition to the use or employment of a deceptive or
manipulative device or contrivance, § 10(b) requires that the
primary violation must be “in connection with the purchase or
sale of any security.” 15 U.S.C. § 78j. In Zandford, the
Supreme Court held that a broker’s misappropriation of a bro-
kerage account was a fraudulent “scheme to defraud” that was
“in connection with” the sale of securities despite lacking any
deception about the value of a security or “manipulation of a
particular security.” Zandford, 535 U.S. at 821. In Zandford,
the broker fraudulently wrote checks to himself from a bro-
kerage account that required the sale of securities in order to
cash the checks. See id. Although the misappropriation of
money did not affect the securities market until the check was
later redeemed, the broker’s scheme to defraud was not com-
plete until the victim’s securities were sold and the check was
redeemed. See id. The Supreme Court held that the scheme to
defraud “coincided” with the sale of securities, which satis-
fied the “in connection with” requirement of § 10(b). Id. at
820.

   [8] Similarly, a scheme to misrepresent the publicly
reported revenue of a company may coincide with the pur-
chase or sale of securities because the scheme will not be
complete until the fraudulent information is introduced into
the securities market. That every participant in the scheme did
7254       CAL. STATE TEACHERS v. AOL TIME WARNER
not release the information to the public does not diminish the
causal connection between all defendants in the scheme and
the securities market. See Cent. Bank, 511 U.S. at 191 (stating
that “[i]n any complex securities fraud, moreover, there are
likely to be multiple violators”). If multiple participants used
or employed a deceptive device in furtherance of a scheme to
misrepresent the reported revenues of a company, then all par-
ticipants may be viewed as having acted in connection with
the purchase or sale of securities.

C.     Reliance

   [9] Another requirement for liability under § 10(b) is reli-
ance. See Cent. Bank, 511 U.S. at 180. “Reliance provides the
requisite causal connection between a defendant’s misrepre-
sentation and a plaintiff’s injury.” Basic Inc. v. Levinson, 485
U.S. 224, 243 (1988). A plaintiff may be presumed to have
relied on a misrepresentation if the misleading or false infor-
mation was injected into an efficient market. “Indeed, nearly
every court that has considered the proposition has concluded
that where materially misleading statements have been dis-
seminated into an impersonal, well-developed market for
securities, the reliance of individual plaintiffs on the integrity
of the market price may be presumed.” Id. at 247. The fraud-
on-the-market presumption requires the dissemination of the
misrepresentation into an efficient market, but not personal
involvement by the defendant in disseminating this statement.
See Knapp v. Ernst & Whinney, 90 F.3d 1431, 1436 (9th Cir.
1996) (“Because a material misrepresentation or omission is
generally embedded in the market price of the security, an
investor who purchases or sells the security will have presum-
ably relied on the misrepresentation.”).

   The requirement of reliance is satisfied if the introduction
of misleading statements into the securities market was the
intended end result of a scheme to misrepresent revenue. See
In re ZZZZ Best Sec. Litig., 864 F. Supp. 960, 973 (C.D. Cal.
1994) (“Instead, the market’s overall reliance on the Z Best
          CAL. STATE TEACHERS v. AOL TIME WARNER            7255
fraudulent scheme, or at least the additional statements as
released and issued by Z Best, is sufficient to satisfy the reli-
ance element in the Rule 10b-5(a) & (c) claims.”); see also 4
Alan R. Bromberg & Lewis D. Lowenfels, Bromberg &
Lowenfels on Securities Fraud § 7:469 (2d ed. 2006)
(“Despite some earlier disagreement, it now seems settled that
FOMT [the fraud-on-the-market-theory] applies to all three
clauses of Rule 10b-5: (1) scheme to defraud, (2) misrepre-
sentation or omission, and (3) fraudulent course of business,
not just to clauses (1) and (3).”). The scheme to defraud
would not be complete until the fraudulent information has
entered the securities market. See Parmalat, 376 F. Supp. 2d
at 509 (“The banks made no relevant misrepresentations to
those markets, but they knew that the very purpose of certain
of their transactions was to allow Parmalat to make such mis-
representations. In these circumstances, both the banks and
Parmalat are alleged causes of the losses in question.”). We
may presume, absent persuasive conflicting evidence, that
purchasers relied on misstatements produced by a defendant
as part of a scheme to defraud, even if the defendant did not
publish or release the misrepresentations directly to the secur-
ities market.

   We conclude that conduct by a defendant that had the prin-
cipal purpose and effect of creating a false appearance in
deceptive transactions as part of a scheme to defraud is con-
duct that uses or employs a deceptive device within the mean-
ing of § 10(b). Furthermore, such conduct may be in
connection with the purchase or sale of securities if it is part
of a scheme to misrepresent public financial information
where the scheme is not complete until the misleading infor-
mation is disseminated into the securities market. Finally, a
plaintiff may be presumed to have relied on this scheme to
defraud if a misrepresentation, which necessarily resulted
from the scheme and the defendant’s conduct therein, was dis-
seminated into an efficient market and was reflected in the
market price.
7256       CAL. STATE TEACHERS v. AOL TIME WARNER
                              IV

   With these principles in mind, we address the adequacy of
the allegations of the FACC at issue here. If the Defendants’
conduct, as alleged in the FACC, had the purpose and effect
of creating a false appearance from illegitimate transactions in
furtherance of a scheme to misrepresent revenues, then Plain-
tiff has alleged a primary violation of § 10(b). If the relevant
actions by the Defendants were not deceptive, however, but
only facilitated or assisted the fraudulent misreporting of
legitimate transactions by Homestore, then Defendants were
not primary violators under § 10(b) and this complaint was
correctly dismissed.

A.     Primary Liability of America Online (AOL) and its
       officers

   [10] AOL and its officers are alleged to have played a role
in the scheme to overstate the revenues of Homestore.
According to the FACC, Eric Keller, a Senior Vice President
at AOL, helped Homestore to organize and create the triangu-
lar transactions. The FACC further alleges that the triangular
transactions were necessary to allow Homestore to overstate
its revenues, and that the actions of AOL, Colburn and Keller
assisted Homestore in misrepresenting the revenues from
these transactions. But primary liability requires more than
assertions of “helping” or “assisting” another’s deception. To
allege a primary violation, the complaint must allege that
AOL or its officers actually engaged in a deceptive act. We
have examined the specific allegations involving AOL and its
officers to determine whether the FACC alleges conduct by
the AOL Defendants that had the purpose and effect of creat-
ing a false appearance in fraudulent transactions that were
part of a scheme to defraud. We conclude that the allegations
are insufficient.

  [11] It is not alleged that AOL or its officers created sham
business entities or engaged in deceptive conduct as part of
           CAL. STATE TEACHERS v. AOL TIME WARNER                 7257
illegitimate transactions, and so we conclude that the element
of using or employing a deceptive device is not adequately
alleged in this respect. There is no indication from the FACC
that the transactions engaged in by AOL were completely ille-
gitimate or in themselves created a false appearance.6 The
substance of the allegations shows that AOL’s role in the
transactions was to act as a conduit for the flow of revenue
between the Third Party Vendors and Homestore as an adver-
tising agent, in accord with AOL’s advertising reseller agree-
ment with Homestore.

   The FACC does allege that Homestore entered into sham
transactions with “Third Party Vendors” in return for a “quid
pro quo” obligation from these vendors to buy Homestore
advertising from AOL. Assuming the truth of allegations that
no products of value were exchanged between the Third Party
Vendors and Homestore, the FACC nonetheless does not
allege that AOL itself entered into a transaction that had no
legitimate economic value or created a false appearance.
While the advertising transactions between the Third Party
Vendors and AOL are alleged to contain suspect qualities,
such as exaggerated commissions by AOL, there is no sugges-
tion that actual advertisements were not purchased and sold
by these companies. The FACC does not allege that the trans-
actions contained a false appearance or other deceptive quali-
ties, but rather that they were an opportunity for Homestore
to take advantage of the advertising reseller agreement. This
may pin liability on Homestore, but not on AOL or its offi-
cers.

  The FACC also alleges that AOL attempted to include
additional documentation in subsequent transactions that
would connect the referral agreements between Homestore
  6
    Defendants urge that the challenged transactions were not deceptive,
and that only the reporting of revenues from these transactions by Home-
store, conduct in which Homestore was not assisted by the Defendants,
deceived the investing public about revenues of Homestore.
7258        CAL. STATE TEACHERS v. AOL TIME WARNER
and the Third Party Vendors with the advertising revenues
from AOL. While the absence of this additional documenta-
tion allowed Homestore to misreport the revenues from the
AOL advertising referrals as stand-alone transactions, any
misrepresentation in the transactions involving AOL resulted
from the additional agreements between Homestore and the
Third Party Vendors and the misreporting of the income by
Homestore. The transactions involving AOL did not create a
false appearance until they were viewed in conjunction with
Homestore’s actions before and after the transaction. While
AOL would be liable under § 10(b) for its deceptive conduct
as part of a scheme to defraud if AOL engaged in deceptive
conduct, it may not be held liable for participating in legiti-
mate transactions that became “deceptive” only when dis-
torted by the willful or intentional fraud of another party. See
Parmalat, 376 F. Supp. 2d at 505 (“Any deceptiveness
resulted from the manner in which Parmalat or its auditors
described the transactions on Parmalat’s balance sheets and
elsewhere.”). In this case, the FACC does not allege with the
required particularity that the transactions negotiated by Kel-
ler and performed by AOL created a false appearance.

   [12] We conclude that the FACC failed to sufficiently
allege with particularity that AOL committed actions with the
purpose and effect of creating a false appearance in further-
ance of a scheme to defraud.

B.     Primary Liability of Cendant and its officer Smith

  The FACC also alleges that Cendant participated in a
scheme to defraud by engaging in triangular transactions.
Cendant argues that the transactions were simply “simulta-
neously agreed upon business transactions” and were not
deceptive or manipulative absent the application of improper
accounting principles by Homestore.

   [13] We agree that the FACC does not indicate how these
transactions involving Cendant created a false appearance,
            CAL. STATE TEACHERS v. AOL TIME WARNER                      7259
independent from Homestore’s misreporting of the income
from these transactions as unrelated to any previous transac-
tion. There are no allegations that show how the creation of
the RETT and its funding by Cendant for future transactions
with Homestore had the potential to misrepresent the reality
behind the transactions.7 In fact, the press release from Cen-
dant quoted in the FACC acknowledges that subsequent pur-
chases by Cendant were planned in conjunction with
Homestore’s acquisition of Cendant’s websites.

   [14] Although the creation of separate entities may indicate
an attempt to conceal the source of funding for related trans-
actions, see Lernout, 236 F. Supp. 2d at 173, the FACC does
not allege that Cendant’s specific actions in these transactions
created a false appearance independent of the improper
accounting by Homestore. The FACC does not allege with
particularity that Cendant acted with the purpose and effect of
creating a false appearance of Homestore revenues with the
aim of deceiving the investing public, and we conclude that
the complaint was properly dismissed against Cendant and
Smith.

C.    Primary Liability of L90

  [15] The allegations involving L90 similarly fail to allege
sufficiently that L90 used or employed a deceptive device by
engaging in a fraudulent transaction as part of a scheme to
defraud. There are no allegations that L90 helped to create or
concoct this scheme, which allegedly followed the model set
by AOL. As with AOL, there are no allegations that L90
acted with the purpose and effect of creating a false appear-
ance in these transactions.
  7
    In its opening brief, Plaintiff argues that Cendant took affirmative steps
to conceal the true nature of the Move.com transaction. The paragraph in
the complaint cited for this assertion only states that Cendant classified the
$95 million funding of RETT as a “one time non-recurring expense.” The
FACC does not explain how this classification is false or a mischaracter-
ization of the transaction.
7260         CAL. STATE TEACHERS v. AOL TIME WARNER
   Mark Roah, an officer for L90, allegedly signed a false
statement attesting to the fact that the transactions were not
contingent on other related transactions, which may suffice to
state a valid claim for primary liability under § 10(b). The day
after the false confirmation letter was signed by Roah, how-
ever, Homestore’s CFO refused to sign the financial report
based on the misstatements within the report. The information
contained in the false confirmation letter by L90, or any other
false statement which resulted from this confirmation letter,
was never introduced into the securities market as part of a
scheme to defraud. Therefore, this statement was never used
or employed in connection with the purchase or sale of securi-
ties and the allegations concerning the statement cannot state
a valid claim under § 10(b).

                                      V

   [16] Because the FACC does not allege a valid claim for
primary liability under any theory of liability, the district
court properly dismissed the claims in the FACC against the
Defendants. Dismissal without leave to amend is improper,
however, unless it is clear that Plaintiff could not propose an
amended complaint that states a valid claim under § 10(b) for
any of these Defendants. See Livid Holdings, 416 F.3d at 946.
“Leave to amend need not be granted when an amendment
would be futile.” In re Vantive Corp. Sec. Litig., 283 F.3d
1079, 1097 (9th Cir. 2002). Futility of amendment may be
shown by Plaintiff’s failure to plead additional facts when
given the opportunity. See id. at 1098 (“When given the
opportunity, the plaintiffs declined to say what additional
facts they might plead if given the chance to amend.”). Here,
the district court applied a more restrictive test of primary lia-
bility than called for under § 10(b). Plaintiff was not offered
the opportunity to state any additional facts that, if alleged,
would state a valid claim for relief under the standards we
have set forth.8
  8
    Plaintiff raised the issue of amendment of the complaint in its briefing
in the district court and on appeal. In the district court, Plaintiff argued in
            CAL. STATE TEACHERS v. AOL TIME WARNER                      7261
   We conclude that Plaintiff should have the opportunity to
seek leave to file an amended complaint that may take advan-
tage of the reasoning in this opinion. “In this technical and
demanding corner of the law, the drafting of a cognizable
complaint can be a matter of trial and error.” Eminence Capi-
tal, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003).
On remand to the district court, Plaintiff may argue to the dis-
trict court that an amendment would not be futile based on the
presence of additional relevant facts which it may plead.
Defendants may argue any ground that they assert for denial
of any proposed amendment. The district court may then
decide in the first instance whether any amended complaint
may be filed.9

its opposition to Defendants’ motions to dismiss that leave to amend
should be granted if the district court found that the current complaint
failed to state a valid claim. In its briefing to us, Plaintiff did not seek
leave to amend until its reply brief. “We will not ordinarily consider mat-
ters on appeal that are not specifically and distinctly argued in appellant’s
opening brief.” United States v. Ullah, 976 F.2d 509, 514 (9th Cir. 1992)
(internal quotation marks omitted). However, “we may review an issue if
the failure to raise the issue properly did not prejudice the defense of the
opposing party.” Id. We determine that review of the issue of amendment
does not prejudice the defense of the Defendants because we only remand
the issue of amendment for the district court to assess in the first instance,
after the parties have had an opportunity to address the standards for
amendment and whether it is futile under the legal standard we have
announced concerning the elements of § 10(b).
   9
     If the district court decides to grant leave to amend, then the motion
to dismiss filed by Defendant Smith must be resolved. Smith argues that
he must be dismissed from any further litigation in this case because a Set-
tlement Agreement between Plaintiff and Homestore released from liabil-
ity all former officers and directors of Homestore, which included Smith.
Plaintiff argues that Smith was excluded from this release because of his
position with Cendant, which was the primary source of his alleged liabil-
ity in this case. This issue will be moot if amendment is not permitted.
Moreover, if necessary, the district court, which approved this Settlement
Agreement, may interpret this Agreement and any admissible extrinsic
evidence in the first instance. We leave this motion for consideration by
the district court.
7262      CAL. STATE TEACHERS v. AOL TIME WARNER
                              VI

   [17] We affirm the district court’s dismissal of the current
complaint against Defendants. We remand so that Plaintiff
may seek leave in the district court to amend the complaint if
that can be done consistent with this opinion. Costs are
awarded to Defendants-Appellees.

  AFFIRMED and REMANDED for further proceedings
consistent with this opinion.
