                             NOT FOR PUBLICATION                         FILED
                    UNITED STATES COURT OF APPEALS                       AUG 17 2017
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                             FOR THE NINTH CIRCUIT

MICHAEL CUTLER, Lead Plaintiff,                 No.    15-56897

                Plaintiff-Appellant,            D.C. No.
                                                2:14-cv-02066-CBM-E
and

MICHAEL J. ANGLEY,                              MEMORANDUM*

                Plaintiff,

 v.

ERIC W. KIRCHNER; et al.,

                Defendants-Appellees.

                   Appeal from the United States District Court
                       for the Central District of California
                  Consuelo B. Marshall, District Judge, Presiding

                        Argued and Submitted June 7, 2017
                              Pasadena, California

Before: THOMAS, Chief Judge, REINHARDT, Circuit Judge, and KORMAN,**
District Judge.



      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The Honorable Edward R. Korman, United States District Judge for
the Eastern District of New York, sitting by designation.
      We assume familiarity with the facts as presented in the complaint. Lead

plaintiff Michael Cutler alleges two theories of securities fraud: First, he claims UTi

told investors that the 1View rollout was going well, while its invoicing delays were

in fact putting the company in mortal danger. We call that the “slow invoice theory.”

Second, he alleges that UTi told investors the company’s internal controls over

financial reporting were functioning effectively, while they were actually suffering

from a material weakness. We call that the “accounting problems theory.”

      To state a claim under SEC Rule 10b-5, Cutler must allege: “(1) a material

misrepresentation or omission by the defendant; (2) scienter; (3) a connection

between the misrepresentation or omission and the purchase or sale of a security; (4)

reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss

causation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148,

157 (2008). Each of those elements must be pled with particularity in accordance

with Federal Rule of Civil Procedure 9(b). Or. Pub. Emps. Ret. Fund v. Apollo Grp.

Inc., 774 F.3d 598, 605 (9th Cir. 2014).

I.    Loss Causation

      To plead loss causation, Cutler must provide “sufficient detail to give [the]

defendants . . . notice of [his] loss causation theory, and give us some assurance that

the theory has a basis in fact.” Berson v. Applied Signal Tech., Inc., 527 F.3d 982,

989–90 (9th Cir. 2008). Our traditional approach tests whether a misstatement


                                           2
caused loss by asking whether “subsequent public disclosures” revealed or at least

suggested the truth, see Apollo Group, 774 F.3d at 608, and whether that revelation

“was a substantial factor in causing a decline in the security’s price,” Nuveen Mun.

High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir.

2013) (internal citation and quotation marks omitted).

      If the defendants’ statements about 1View’s progress were materially

misleading, the slow invoice theory states a plausible claim that those statements

caused Cutler’s losses. 1View was the signal project for UTi’s executive team, and

a matter of keen interest to the company’s investors. For months, UTi executives

assured investors, in essence, that the project was going according to plan. A

reasonable investor could plausibly have understood UTi’s subsequent disclosure—

that 1View’s invoicing difficulties materially contributed to a liquidity crisis—to

indicate that the company’s prior assurances that things were going well had been

false or misleading. And it is eminently plausible that such a revelation about such

a critical program was a substantial factor in causing UTi’s stock price to collapse.

      The accounting problems theory, however, does not adequately allege loss

causation. UTi announced in March of 2014 that it had identified a material

weakness in its internal financial controls. “Internal control over financial reporting”

is a defined term in the SEC’s regulations, describing a particular set of accounting

processes. See 17 C.F.R. § 240.13a-15(f). The basic shortcoming of the accounting


                                           3
problems theory is one of timing. UTi expressly disclosed a weakness in its financial

controls at the end of March 2014, but Cutler alleges that his loss occurred a month

earlier, when UTi made its other disclosures at the end of February. To overcome

this disjunct, Cutler must allege that markets understood the February disclosure of

delayed invoicing to indicate a material weakness in UTi’s internal financial

controls, and that that understanding contributed to a fall in its share price.

      The complaint, however, presents no factual details that would tip that claim

from possibility into plausibility. Internal financial controls go to a company’s

accounting practices—its ability to accurately track revenues as they are realized

and cash as it comes in the door. None of those functions are called into question by

delayed invoicing; as the defendants point out, UTi operated under accounting rules

that decoupled revenue recognition from invoice generation, and nothing about

getting money late implies tracking it inaccurately.

      Cutler also contends that he has alleged loss causation under the

“materialization-of-the-risk” approach. We have not yet ruled on the merits of that

test, Nuveen, 730 F.3d at 1122 n.5, and do not do so here because it would make no

difference to the outcome of this case.

II.   Actionable Misstatements

      We now turn to whether Cutler pleads the existence of any actionably

misleading statements in support of the slow invoice theory. We consider only those


                                           4
statements which Cutler has actually raised on appeal. To plead a misstatement

actionable under Rule 10b-5, Cutler must allege that a defendant 1) made 2) a false

or misleading statement, that is 3) material, and 4) not immunized from liability by

the safe harbor provisions of the Private Securities Litigation Reform Act

(“PSLRA”). Per the PSRLA and Rule 9(b), falsity and materiality must be pled with

particularity, specifying the reason why each statement was misleading. See 15

U.S.C. § 78u-4(b)(1). Cutler has raised fourteen statements on appeal that relate to

the slow invoice theory, which we group into two categories.

      The first category contains five risk disclosures made in reports to the SEC

signed by CEO Eric Kirchner and CFO Richard Rodick. See SEC v. Jensen, 835

F.3d 1100, 1112 (9th Cir. 2016) (corporate officers are considered to have made

statements in filings that they sign). Cutler challenges the following five disclosures:

       Disclosure 1 (Form 10-K filed April 1, 2013): “We are currently engaged
        in a multi-year business transformation initiative that involves risks, could
        result in higher than expected costs and/or could otherwise adversely
        impact our operations [and/or] profitability.”
       Disclosure 2 (Form 10-K filed April 1, 2013): “We may . . . experience
        difficulties consolidating our current systems, moving to a common set of
        operational processes, implementing shared services and implementing a
        successful change management process. These difficulties may impact our
        clients and our ability to efficiently meet their needs.”
       Disclosure 3 (Form 10-K filed April 1, 2013): “We make significant
        advances and disbursements on behalf of our clients for transportation
        costs . . . . If we are unable to recover a significant portion of these
        disbursements . . . in a timely manner, we may experience losses and our
        cash flows and results of operations would be negatively impacted.”


                                           5
       Disclosure 4 (Form 10-Q filed June 7, 2013): “There have been no
        material changes to the risk factors as disclosed . . . on Form 10-K.”
       Disclosure 5 (Form 10-Q filed September 9, 2013): “There have been no
        material changes to the risk factors as disclosed . . . on Form 10-K.”
      These statements were misleading because they disclosed a risk “in the

abstract” but omitted the fact that it had “already . . . come to fruition.” Siracusano

v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1181 (9th Cir. 2009) (internal quotation

marks omitted). In the wake of the February 2014 disclosures, the defendants

admitted that invoicing delays had routinely slowed collections in countries that

switched to 1View. The company came to expect these problems, and made efforts

to fix them. That is enough to conclude that the risk disclosures were misleading.

      The second category of challenged statements were made by individual UTi

executives during earnings calls and investor conferences. We treat each executive’s

statements as also made by UTi. In re Chinacast Educ. Corp. Sec. Litig., 809 F.3d

471, 476 (9th Cir. 2015). Cutler raises nine such statements on appeal:

       Individual Statement 1 (Earnings Call on March 28, 2013) (Feitzinger):
        “As you get to the five or six country phase [in the 1View rollout], . . .
        that’s where you test the system to see whether it scales. That’s where you
        see how the change management’s working, as people adopt their
        processes to the system and the different countries. And that’s kind of
        what’s behind us now at this point.”




                                          6
        Individual Statement 2 (Earnings Call on March 28, 2013) (Rodick1):
         “[T]he system is now ready to scale. So, the system itself will be able to
         handle the additional transactions as we add the volume into it.”
        Individual Statement 3 (Earnings Call on June 6, 2013) (Kirchner):
         “[1View] is performing well.”
        Individual Statement 4 (Earnings Call on June 6, 2013) (Kirchner):
         “[G]enerally, the platforms and process improvement on both sides are
         definitely in place, and in freight forwarding, it’s about leveraging what
         you have in place, and then even be able to leverage that even further once
         the system is in place.”
        Individual Statement 5 (Earnings Call on September 6, 2013) (Kirchner):
         “The US launch is a notable milestone for UTi . . . . We’ve demonstrated
         that [1View] works, the deployment in the recently added large countries
         shows that it’s scalable.”
        Individual Statement 6 (Presentation to RBC Capital Markets Global
         Industrials Conference on September 10, 2013) (Rodick): “We built a
         platform that we can integrate [acquisitions] quickly and really not only
         get the revenue, but take the cost out. So I think we can do these things
         pretty quick.”
        Individual Statement 7 (Presentation to RBC Capital Markets Global
         Industrials Conference on September 10, 2013) (Rodick): “[T]he
         transformation, I think that everybody believes we’ve proven, especially
         with US going live, we got that . . . . There won’t be as much focus on
         getting the transformation done as there has been . . . , because now we’ve
         proven it works.”
        Individual Statement 8 (Presentation to Morgan Stanley Industrials &
         Autos Conference on September 17, 2013) (Misakian): “I would say on
         balance things are—the system is performing as we would expect it to right
         now. But we have had some issues as we’ve gone through. We have found
         that when we launch the system and specific markets that some of the
         standardized processes and procedures we put in place were not being


1
  The parties have each submitted transcripts that conflict as to whether Kirchner or Rodick made
this statement. This factual dispute is not properly presented at the pleading stage, where the
complaint’s allegation that Rodick made the statement is controlling.

                                               7
          followed entirely. So each market was not as standard as we thought it
          would be. And that caused things to slow down a little bit.”
       Individual Statement 9 (Earnings Call on December 5, 2013) (Kirchner):
        “I think that we’ve made excellent progress. The fact that we’ve got more
        than—or half of our transactions in [1View] today, and it’s functioning and
        working and we’re seeing the benefits that we expected in terms of how
        that system performs, I think we’re doing a great job with that.”
      Cutler alleges that these statements of opinion were misleading because they

omitted the fact that as 1View rolled out, it was causing a decline in cash collections

in essentially every new country. To state such a claim, Cutler must allege “facts

going to the basis for the . . . opinion whose omission makes the . . . statement . . .

misleading to a reasonable person reading the statement fairly and in context.” City

of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d

605, 616 (9th Cir. 2017) (internal quotation marks and modifications omitted). It is

plausible that a reasonable investor, hearing that 1View was “working,” “ready to

scale,” and capable of integrating acquisitions “quickly” would have “the impression

of a state of affairs” materially different from the reality that 1View caused up to a

half-year decline in cash collections in each country it rolled out to. See In re Cutera

Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (internal citation and quotation

marks omitted).

      The defendants also argue that the individual statements are immaterial. We

disagree. Individual Statements 1 and 2 assert that 1View is ready to scale up from

its current number of countries, that is, that the system is prepared to handle a greater


                                           8
volume of transactions than it is currently dealing with. Individual Statement 6

claims that 1View is presently capable of quickly integrating companies that UTi

might acquire in the future. This is not the sort of generalized cheerleading that

courts have classed as puffery.

      The remaining Individual Statements—3, 4, 5, 7, 8, and 9—each use general

language to describe 1View’s performance. Such language does not make a

statement immaterial as a matter of law. Rather, the question is whether a reasonable

investor would understand them, in context, to communicate only a general

optimism, or a factual representation about the actual condition of UTi’s business

and 1View’s capabilities. See generally Police Ret. Sys. of St. Louis v. Intuitive

Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014). Here, a reasonable investor

would understand statements like “1View is working” in the context of UTi’s other

statements, made over a long period of time, describing what 1View did and what

practical aims it was supposed to achieve. In context, these statements represented

that 1View was doing the particular things UTi had told investors it was going to do.

      With respect to Individual Statements 1, 2, 3, 5, 6, and 7, the defendants also

invoke the PSLRA’s safe harbor for forward-looking statements. The statements at

issue are not forward-looking. Each incorporates an opinion about 1View’s then-

existing capabilities. It makes no difference if some of those opinions about then-

present circumstances were expressed in the same breath as forward-looking


                                         9
statements. “[W]here defendants make mixed statements . . . the non-forward-

looking statements are not protected by the safe harbor.” In re Quality Sys., Inc. Sec.

Litig., — F.3d —, 2017 WL 3203558, at *7 (9th Cir. 2017). So in addition to the

risk disclosures, we hold the individual statements were also actionably misleading.

III.   Scienter

       Scienter is “a mental state that not only covers intent to deceive, manipulate,

or defraud, but also deliberate recklessness.” City of Dearborn Heights, 856 F.3d at

619 (citation and internal quotation marks omitted). Under the PSLRA, Cutler must

“state with particularity facts giving rise to a strong inference” of scienter. 15 U.S.C.

§ 78u-4(b)(2)(A). Scienter may be pled based on allegations attributed to

confidential witnesses, so long as two conditions are met: “First, the confidential

witnesses . . . must be described with sufficient particularity to establish their

reliability and personal knowledge. Second, those statements which are reported . . .

must themselves be indicative of scienter.” Zucco Partners, LLC v. Digimarc Corp.,

552 F.3d 981, 995 (9th Cir. 2009) (citations omitted).

       CW15 is the key to Cutler’s scienter allegations. As UTi’s President of the

Americas, CW15 was one of twelve people to participate in quarterly meetings of

UTi’s International Executive Board. He describes how UTi’s senior management

team kept abreast of 1View’s progress. In that telling—which we have no reason to

doubt is based on personal knowledge—a group of executives including Kirchner,


                                           10
Feitzinger, and CFO Richard Rodick received an update on 1View’s progress from

UTi’s Chief Information Officer at every single quarterly executive board meeting.

      With respect to Kirchner, Rodick, and Feitzinger, CW15’s description of

quarterly updates on 1View’s development brings this case within the “core

operations” approach to pleading scienter. “[G]eneral allegations about

management’s role in a corporate structure and the importance of the corporate

information about which management made . . . misleading statements” can satisfy

the PSLRA when they “are buttressed with detailed and specific allegations about

management’s exposure to factual information within the company.” Zucco

Partners, 552 F.3d at 1000 (citations and internal quotation marks omitted).

      Here, Cutler has alleged the prominent roles that Kirchner, Rodick, and

Feitzinger played in UTi’s corporate structure. Information about 1View’s ability to

generate invoices would have been tremendously important to UTi management.

The company operated a low-margin business and made large outlays based on

promises of reimbursement from its customers. It consequently depended on cash

collections to stay afloat on a quarter-to-quarter basis, so prompt invoicing was

critical. As to Kirchner, Rodick, and Feitzinger, CW15’s recollection of the quarterly

meetings is the “specific allegation about management’s exposure to factual

information,” needed for a strong inference of scienter. The complaint, however,

contains no allegations about Misakian’s exposure to such information.


                                         11
IV.    Controlling Person Liability

       Cutler also appeals from the dismissal of his claims under § 20(a) of the

Exchange Act—the elements of which are 1) “a primary violation of federal

securities law” and 2) a defendant who “exercised actual power or control over the

primary violator.” Zucco Partners, 552 F.3d at 990. (internal citation and quotation

marks omitted). The district judge dismissed those claims for failure to plead a

primary violation by UTi, several of which we have revived. The defendants concede

that Cutler has alleged that Kirchner and Rodick were control persons, but are correct

that Cutler has failed to plead any facts showing the same of Feitzinger or Misakian.

                                       CONCLUSION

       The judgment of the district court is REVERSED IN PART to the extent it

dismissed 1) Cutler’s 10b-5 claims against UTi, Kirchner, Rodick, and Feitzinger,

and 2) Cutler’s § 20(a) claims against Kirchner and Rodick. The judgment is

otherwise AFFIRMED, and the case REMANDED for further proceedings

consistent with this opinion.2




2
  We deny as moot Cutler’s motion for judicial notice of the contents of an order of the Securities
and Exchange Commission, imposing a cease-and-desist order against defendants Eric Kirchner
and Richard Rodick. Because we reinstate Cutler’s claims against Kirchner and Rodick on the
basis of the complaint alone, there is no reason to decide—without the benefit of full briefing—
whether to take Cutler up on his invitation to consider the Commission’s factual findings as if he
had incorporated them by reference in the first instance. If Cutler wishes to add the Commission’s
findings to his complaint on remand, Federal Rule of Civil Procedure 15(a)(2) lets him ask the
district judge for leave to do so.

                                               12
