                  FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


In Re: VERIFONE HOLDINGS, INC.             No. 11-15860
SECURITIES LITIGATION ,
                                              D.C. No.
NATIONAL ELEVATOR INDUSTRY                 3:07-cv-06140-
PENSION FUND , Lead plaintiff on                MHP
behalf of itself and all others
similarly situated,
                    Plaintiff-Appellant,     OPINION

                  v.

VERIFONE HOLDINGS, INC.;
DOUGLAS G. BERGERON ; BARRY
ZWARENSTEIN ,
             Defendants-Appellees.


     Appeal from the United States District Court
         for the Northern District of California
    Marilyn H. Patel, Senior District Judge, Presiding

                 Argued and Submitted
        May 17, 2012—San Francisco, California

                 Filed December 21, 2012
2                  IN RE: VERIFONE HOLDINGS

    Before: Sidney R. Thomas, M. Margaret McKeown,
         and William A. Fletcher, Circuit Judges.

                  Opinion by Judge McKeown


                           SUMMARY*


                         Securities Fraud

    The panel reversed in part and affirmed in part the
dismissal of investors’ securities fraud class action alleging
violations of §§ 10(b), 20(a), and 20A of the Securities
Exchange Act of 1934 and Securities and Exchange
Commission Rule 10-b in connection with a restatement of
financial results of the company in which the investors had
purchased stock.

     The panel held that the third amended complaint
adequately pleaded the § 10(b), § 20A and Rule 10-b claims.
Considering the allegations of scienter holistically, as the
Supreme Court directed in Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1324 (2011), the panel
concluded that the inference that the defendant company and
its chief executive officer and former chief financial officer
were deliberately reckless as to the truth of their financial
reports and related public statements following a merger was
at least as compelling as any opposing inference.




  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                IN RE: VERIFONE HOLDINGS                   3

    The panel held that the district court properly dismissed
the § 20(a) “control person” claims.


                        COUNSEL

Sanford Svetcov (argued), Susan K. Alexander, Christopher
P. Seefer, Robbins Geller Rudman & Dowd LLP, San
Francisco, California; Patrick J. Coughlin, Robbins Geller
Rudman & Dowd LLP, San Diego, California, for
Plaintiffs-Appellants.

Brendan P. Cullen (argued), Sverker K. Hogberg, Achyut J.
Phadke, Sullivan & Cromwell LLP, Palo Alto, California;
Robert A. Sacks, Sullivan & Cromwell LLP, Los Angeles,
California, for Defendants-Appellees VeriFone Systems, Inc.
and Douglas Bergeron.

Jordan Eth (argued), D. Anthony Rodriguez, Morrison &
Foerster LLP, San Francisco, California, for Defendant-
Appellee Barry Zwarenstein.


                        OPINION

McKEOWN, Circuit Judge:

    This case invokes the old adage that the sum is greater
than the parts. National Elevator Industry Pension Fund
(“National Elevator”), lead plaintiff on behalf of investors
who purchased VeriFone Holdings, Inc. (“VeriFone”) stock
between August 31, 2006 and April 1, 2008, appeals the
dismissal of its securities fraud class action. National
Elevator alleged that VeriFone, Douglas Bergeron (the
4                  IN RE: VERIFONE HOLDINGS

company’s Chief Executive Officer and former Chairman of
the Board of Directors), and Barry Zwarenstein (the
company’s former Chief Financial Officer and Executive
Vice President), violated §§ 10(b), 20(a), and 20A of the
Securities Exchange Act of 1934 and Securities and
Exchange Commission Rule 10-b in connection with a
December 2007 restatement of financial results.1

    In three consecutive quarters, VeriFone’s preliminary
internal reports accurately showed it had fallen short of its
earnings and gross margins projections. Three consecutive
times, VeriFone’s CEO and CFO supervised accounting staff
as they made baseless multimillion-dollar adjustments that
brought reported results in line with expectations. Each time,
the CEO and CFO accepted the adjustments without question,
representing publicly that a recent merger was driving the
company’s success even as the adjustments grew in size and
negatively impacted key metrics.           National Elevator
characterizes the conduct as either intentionally directing a
subordinate to make false adjustments or being deliberately
reckless in failing to question and account for unsupported
entries. In contrast, VeriFone paints itself as the victim of a
difficult acquisition complicated by incompatible systems.




    1
     National Elevator initially appealed the district court’s order with
respect to W illiam Atkinson (VeriFone’s former Executive Vice President
of Global Marketing and Business Development), Craig Bondy (a former
VeriFone director), and Paul Periolat (VeriFone’s former supply chain
controller). It has since voluntarily dismissed its appeal as to these
defendants.
                IN RE: VERIFONE HOLDINGS                     5

    The district court dismissed National Elevator’s Third
Amended Complaint for failure to sufficiently allege scienter
as to each of the defendants. Viewed in isolation, any one
allegation may not compel an inference of scienter.
However, when we consider the allegations holistically, as
the Supreme Court directed in Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1324 (2011), the inference that
Bergeron, Zwarenstein, and VeriFone were deliberately
reckless as to the truth of their financial reports and related
public statements is “at least as compelling as any opposing
inference.” Id. (citing Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 324 (2007)). We reverse in part and
affirm in part. National Elevator adequately pleaded its
§ 10(b), § 20A and Rule 10-b claims. It did not sufficiently
plead its § 20(a) claims, which the district court properly
dismissed.

I. BACKGROUND

    VeriFone, based in San Jose, California, engages in the
design, marketing and service of transaction automation
systems, including point-of-sale devices that enable secure
electronic payments among consumers, merchants, and
financial institutions. Its main customers include global
financial institutions, payment processors, large retailers,
government organizations, and healthcare companies. In
November 2006, VeriFone acquired Lipman Electronic
Engineering Ltd. (“Lipman”), an Israel-based developer,
manufacturer, and seller of electronic payment systems and
software, and began integrating the two companies.

    VeriFone touted the merger as likely to improve its
financial condition, increasing its pro forma gross margin
expectations from 41-44% to 42-47%. However, in the five
6               IN RE: VERIFONE HOLDINGS

quarters prior to the merger, VeriFone’s own gross margins
had never exceeded 45.6%; Lipman’s had just dropped to
41.9% after five years of declines and were skewed towards
low-margin areas. National Elevator alleges that defendants
were aware of these facts and knew that “their representations
of increasing gross margins of up to 48% during the Class
Period had no reasonable basis.”

    In the three quarters following the merger (the first three
quarters of VeriFone’s fiscal 2007, referred to as 1Q07,
2Q07, and 3Q07), VeriFone reported gross margins of 47.1%,
48.1%, and 48.2%, respectively, allowing the company to
claim the merger was an immediate success. It is undisputed
that these reports were false.

    In each quarter, VeriFone’s initial internal financial
reports (known as “flash” reports) painted a different,
accurate picture, in which VeriFone’s gross margins were
well short of its projections. National Elevator alleges that
Bergeron and Zwarenstein characterized these results as an
“unmitigated disaster” and directed company management to
“figure . . . it out” and “fix the problem.” The “fixes” focused
on accounting decisions, not operations. Zwarenstein and
Bergeron gave VeriFone’s supply chain controller, Paul
Periolat, analyses of the shortfalls and suggested accounting
adjustments, but their figures apparently had no basis other
than VeriFone’s desire to meet market expectations.
Nonetheless, Periolat made the adjustments, enabling
VeriFone to report results in line with its projections.

    National Elevator alleges that these “manipulations were
deliberate and pervasive and done for the specific purpose of
meeting public guidance” and were made possible by
VeriFone’s lack of appropriate internal controls. In March
                IN RE: VERIFONE HOLDINGS                    7

2007, VeriFone auditors Ernst & Young (“E&Y”) raised
concerns about inventory controls, requesting that VeriFone
add “further measures” to address inaccuracies in inventory
counts and other deficiencies. VeriFone told E&Y it was
addressing the issues, but, as it turns out, any remedial
measures did not prevent financial misstatements. Instead,
the company continued to double-count and inflate inventory
even though Bergeron, who received internal reports showing
“a sharp and unprecedented increase in inventory as a result
of [Periolat’s] adjustments” had earlier stated that reducing
inventory was as “important as any goal we’ve set in the
past.”

    In accordance with accepted standards, E&Y did not audit
VeriFone’s quarterly reports during fiscal year 2007, relying
instead on the accuracy of information from Zwarenstein and
Periolat. When E&Y did audit VeriFone’s annual financials
in November 2007 and Periolat “was unable to explain his
adjustments,” the accounting irregularities came to light.

    On December 3, 2007, VeriFone announced that its
consolidated financial statements for 1Q07, 2Q07, and 3Q07
should not be relied upon due to errors in accounting related
to the valuation of in-transit inventory and allocation of
manufacturing and distribution overhead to inventory. This
restatement resulted in reductions to net revenue of
approximately $7.7 million, $11.5 million, and $8.4 million
in the respective quarters. Those revenue reductions, in turn,
resulted in reductions to previously reported income:
approximately $11.8 million (with a net loss of $602,000),
$10.2 million, and $14.7 million. Cumulatively, operating
income for the three quarters fell from $65.6 million to $28.6
million, reflecting an overstatement of 129%. Gross margins
were accordingly reduced from 47.1%, 48.1%, and 48.2% to
8               IN RE: VERIFONE HOLDINGS

41.4%, 42.3%, and 41.2%. National Elevator further alleges
that VeriFone overstated earnings per share by 600%, 200%,
and 418%.

     On the day of the restatement, VeriFone shares dropped
over 45%, falling from $48.03 to $26.03. The next day, the
first of nine securities fraud class actions was filed in the
district court. The cases were consolidated pursuant to the
Private Securities Litigation Reform Act (“PSLRA”), with
National Elevator designated as lead plaintiff.

    National Elevator’s First Amended Complaint, which was
dismissed for failure to adequately plead scienter, advanced
six allegations of fraud committed by Bergeron and
Zwarenstein. In a Second Amended Complaint, VeriFone,
Atkinson, Bondy, and Periolat were added as defendants.
The Second Amended Complaint relied on a Securities and
Exchange Commission complaint (the “SEC complaint”)
filed in September 2009. The SEC complaint charged
VeriFone and Periolat with books and records violations.
Before the district court ruled on VeriFone’s motion to
dismiss the Second Amended Complaint, National Elevator
filed its Third Amended Complaint adding new allegations
based on transcripts of SEC investigatory interviews with
VeriFone executives and employees. For ease of reference,
the complaint at issue in this appeal—the Third Amended
Complaint—is simply referred to as the complaint.

    The district court concluded that National Elevator’s
allegations failed to raise a strong inference of scienter with
respect to any of the defendants and granted the motion to
dismiss with prejudice. In reaching this conclusion, the
district court grouped individual allegations by topic and
discussed their sufficiency. After determining that the
                IN RE: VERIFONE HOLDINGS                      9

allegations associated with each grouping were insufficient to
establish scienter, the district court engaged in a one-
paragraph holistic analysis, stating that “[t]here are many
allegations in this case, but they fare no better when read in
combination than when read independently.” National
Elevator appeals the dismissal with respect to Bergeron,
Zwarenstein, and VeriFone.

II. PLEADING REQUIREMENTS

    In our de novo review of the district court’s grant of the
motion to dismiss for failure to state a claim under Federal
Rule of Civil Procedure 12(b)(6) and for failure to allege
fraud with particularity under Rule 9(b), we pay particular
attention to the heightened pleading requirements for
securities fraud cases. These requirements present no small
hurdle for the securities fraud plaintiff. A securities fraud
complaint under § 10(b) and Rule 10b-5 must satisfy the dual
pleading requisites of Federal Rule of Civil Procedure 9(b)
and the PSLRA. Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981, 990–91 (9th Cir. 2009). Under Rule 9(b),
claims alleging fraud are subject to a heightened pleading
requirement, which requires that a party “state with
particularity the circumstances constituting fraud . . . .” Fed.
R. Civ. P. 9(b). The PSLRA mandates that “the complaint
shall specify each statement alleged to have been misleading,
[and] the reason or reasons why the statement is
misleading . . . .” 15 U.S.C. § 78u-4(b)(1)(B). The PSLRA
further provides that the complaint “state with particularity
facts giving rise to a strong inference that the defendant acted
with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

   To satisfy the requisite state of mind element, “a
complaint must ‘allege that the defendant[] made false or
10               IN RE: VERIFONE HOLDINGS

misleading statements either intentionally or with deliberate
recklessness.’” Zucco, 552 F.3d at 991 (citation omitted).
Facts showing mere recklessness or a motive to commit fraud
and opportunity to do so provide some reasonable inference
of intent, but are not sufficient to establish a strong inference
of deliberate recklessness. In re Silicon Graphics Inc. Sec.
Litig., 183 F.3d 970, 974 (9th Cir. 1999), abrogated on other
grounds by South Ferry LP, No. 2 v. Killinger, 542 F.3d 776,
784 (9th Cir. 2008).

    The falsity of VeriFone’s financial reports is undisputed.
The only issue on appeal is whether National Elevator’s
allegations were sufficient to create a strong inference of
scienter.

     A. TELLABS AND SCIENTER

    In Tellabs, the Supreme Court clarified the appropriate
inquiry for determining whether a plaintiff’s allegations are
sufficient as to scienter, stating that “[t]he ‘strong inference’
standard ‘unequivocally raise[d] the bar for pleading
scienter.’” Tellabs, Inc., 551 U.S. at 321 (first alteration
added). Under this analysis, a court must first accept all
factual allegations in the complaint as true. Id. at 322. The
court then must “consider the complaint in its entirety, as well
as other sources courts ordinarily examine when ruling on
Rule 12(b)(6) motions to dismiss, in particular, documents
incorporated into the complaint by reference.” Id. The
relevant inquiry is “whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not
whether any individual allegation, scrutinized in isolation,
meets that standard.” Id. at 323 (emphasis in original); see
also New Mexico State Inv. Council v. Ernst & Young LLP,
641 F.3d 1089, 1095 (9th Cir. 2011).
                IN RE: VERIFONE HOLDINGS                     11

    In “determining whether the pleaded facts give rise to a
‘strong’ inference of scienter, the court must take into
account plausible opposing inferences.” Tellabs, 531 U.S. at
323. Thus, “[t]he strength of an inference cannot be decided
in a vacuum” and “a court must consider plausible,
nonculpable explanations for the defendant’s conduct, as well
as inferences favoring the plaintiff.” Id. at 323–24. Under
the proper analysis, “[a] complaint will survive . . . only if a
reasonable person would deem the inference of scienter
cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.” Id. at 324 (emphasis
added).

    Scienter can be established by intent, knowledge, or
certain levels of recklessness. SEC v. Platform Wireless Int’l
Corp., 617 F.3d 1072, 1092 (9th Cir. 2010). We adopted the
following standard in Hollinger v. Titan Capital Corp.,
914 F.2d 1564, 1569 (9th Cir. 1990) (en banc):

       [R]eckless conduct may be defined as a highly
       unreasonable omission, involving not merely
       simple, or even inexcusable negligence, but an
       extreme departure from the standards of
       ordinary care, and which presents a danger of
       misleading buyers or sellers that is either
       known to the defendant or is so obvious that
       the actor must have been aware of it. . . .
       [T]he danger of misleading buyers must be
       actually known or so obvious that any
       reasonable man would be legally bound as
       knowing, and the omission must derive from
       something more egregious than even ‘white
       heart/empty head’ good faith.
12               IN RE: VERIFONE HOLDINGS

(first alteration in original) (emphasis added) (citations
omitted). Scienter requires either “deliberate recklessness” or
“conscious recklessness”—a “form of intent rather than a
greater degree of negligence.” Platform Wireless, 617 F.3d
at 1093. We have also clarified that “although we may
consider the objective unreasonableness of the defendant’s
conduct to raise an inference of scienter, the ultimate question
is whether the defendant knew his or her statements were
false, or was consciously reckless as to their truth or falsity.”
Gebhart v. SEC, 595 F.3d 1034, 1042 (9th Cir. 2010).

     B. HOLISTIC ANALYSIS UNDER MATRIXX

    In Matrixx, the Supreme Court reiterated that courts must
“review ‘all the allegations holistically’” when determining
whether scienter has been sufficiently pled. Matrixx, 131 S.
Ct. at 1324 (quoting Tellabs, 551 U.S. at 326). Other than
this general directive, the Court did not prescribe a particular
analysis that a court must undertake, nor did it purport to alter
the scienter analysis previously articulated in Tellabs. See id.
(“A complaint adequately pleads scienter under the PSLRA
‘only if a reasonable person would deem the inference of
scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged.’” (quoting
Tellabs, 551 U.S. at 324)).

     Prior to Matrixx, we adhered to a dual inquiry in which

        first, [the court] will determine whether any of
        the plaintiff’s allegations, standing alone, are
        sufficient to create a strong inference of
        scienter; [and] second, if no individual
        allegations are sufficient, [the court] will
        conduct a ‘holistic’ review of the same
                IN RE: VERIFONE HOLDINGS                    13

       allegations to determine whether the
       insufficient allegations combine to create a
       strong inference of intentional conduct or
       deliberate recklessness.

Zucco, 552 F.3d at 992. Matrixx on its face does not preclude
this approach and we have consistently characterized this
two-step or dual inquiry as following from the Court’s
directive in Tellabs. See id. In cases where an individual
allegation meets the scienter pleading requirement, whether
we employ a dual analysis is most likely surplusage because
the individual and the holistic analyses yield the same
conclusion. Also, as a practical matter, some grouping and
discussion of individualized allegations may be appropriate
during a holistic analysis.

    Post-Matrixx, our cases have employed varied
approaches—some discuss first the sufficiency of specific
allegations and then conduct a holistic review, while others
conduct only a holistic analysis. Compare WPP Luxembourg
Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039,
1052–53 (9th Cir. 2011) (providing a brief summary of
plaintiffs’ allegations and defendants’ arguments and
concluding that, taken as a whole, plaintiffs’ complaint
sufficiently alleged fraudulent intent) with New Mexico State,
641 F.3d at 1095–1103 (examining first plaintiffs’ specific
allegations and then briefly surmising that the allegations
were sufficient under a holistic analysis). Other circuits have
also used both approaches. See generally In re Level 3
Commc’ns, Inc. Sec. Litig., 667 F.3d 1331, 1343–47 (10th
Cir. 2012) (assessing allegations holistically and then
analyzing relevant individual allegations); Saltz v. First
Frontier, L.P., No. 11-265cv, 2012 WL 2096399, at *2–*3
(2d Cir. June 12, 2012) (analyzing allegations individually,
14              IN RE: VERIFONE HOLDINGS

though noting Tellabs’s requirement for collective
consideration); FindWhat Investor Grp. v. FindWhat.com,
658 F.3d 1282, 1302 (11th Cir. 2011) (“[V]iewing all of the
Plaintiffs’ allegations in concert, the Complaint contains no
allegations from which we can infer that anyone in [the
company]’s management knew or ‘must have’ known about
the . . . fraud . . . .”); Ashland, Inc. v. Oppenheimer & Co.,
648 F.3d 461, 469–71 (6th Cir. 2011) (explaining that district
court’s factor-by-factor analysis was not proper but
concluding on holistic basis that competing inferences were
more compelling).

    In cases where courts have undertaken a dual analysis, a
brief statement that the court has also viewed the claims
holistically has been sufficient to meet the demands of
Matrixx. See, e.g., New Mexico State, 641 F.3d at 1102–03.
Because the Court in Matrixx did not mandate a particular
approach, a dual analysis remains permissible so long as it
does not unduly focus on the weakness of individual
allegations to the exclusion of the whole picture. The risk, of
course, is that a piecemeal analysis will obscure a holistic
view. Cf. Frank v. Dana Corp., 646 F.3d 954, 961 (6th Cir.
2011) (holding that former method of reviewing each
allegation before reviewing them holistically “risks losing the
forest for the trees” and that such a method is unnecessarily
inefficient). To avoid potential pitfalls that may arise from
conducting a dual analysis, we approach this case through a
holistic review of the allegations to determine whether they
combine to create a strong inference of intentional conduct or
deliberate recklessness. In doing so, however, we do not
simply ignore the individual allegations and the inferences
drawn from them.
                IN RE: VERIFONE HOLDINGS                     15

     The district court here did not err as a matter of law by
first engaging in an individualized discussion of the
complaint’s allegations and then summarily concluding that
“in combination” the allegations did not sufficiently allege
scienter. The court’s error lies in its undue discounting of the
claims and the conclusion that an inference of deliberate
recklessness was not warranted.

III.   EXCHANGE ACT SECTION 10(B) AND SEC RULE
       10B-5 CLAIMS

    Section 10(b) of the Exchange Act makes it unlawful for
“any person . . . [t]o use or employ, in connection with the
purchase or sale of any security registered on a national
securities exchange . . . any manipulative or deceptive device
or contrivance in contravention of such rules and regulations
as the Commission may prescribe as necessary or . . . for the
protection of investors.” 15 U.S.C. § 78j(b). “SEC Rule 10b-
5 implements this provision by making it unlawful to, among
other things, ‘make any untrue statement of material fact or
to omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which
they were made, not misleading.’” Matrixx, 131 S. Ct. at
1317 (quoting 17 C.F.R. § 240.10b-5(b)). The Rule also
makes it unlawful for any person “[t]o employ any device,
scheme, or artifice to defraud” or “[t]o engage in any act,
practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b-5(a), (c).         National Elevator alleges that
Zwarenstein, Bergeron, and, by extension, VeriFone violated
each subsection of Rule 10b-5.
16                 IN RE: VERIFONE HOLDINGS

      A. SUMMARY OF ALLEGATIONS

    The complaint pleads intentional or deliberately reckless
conduct on the basis of a host of allegations. A summary of
these allegations follows. Although our ultimate analysis is
holistic, it would be folly to simply skirt the major
allegations.

    According to VeriFone executives, VeriFone’s gross
margin was one of the most important financial measures of
the company’s overall financial condition. “Defendants
touted the Company’s gross margin in every major earnings
press release, conference call and SEC filing and
acknowledged that they closely monitored gross margins.”
National Elevator alleges that Zwarenstein and Bergeron
knew the merger would put downward pressure on margins,
noting that they emailed each other expressing concern about
their projections regarding post-merger gross margins.
Nonetheless, defendants were determined to show the market
that the Lipman merger was an immediate and unqualified
success.

    National Elevator further alleges that investors and
analysts were troubled by VeriFone’s increased projections,
and VeriFone knew it had to deliver gross margins and
earnings to convince investors that the Lipman merger was a
success and would drive future growth. VeriFone thus had
sufficient motive to manipulate its actual gross margin
percentages.2


  2
     National Elevator characterizes Zwarenstein and Bergeron’s stock
sales during the Class Period as evidence of their motive and support an
inference of scienter. However, as the district court noted, these stock
sales took place under preexisting trading plans and were not out of line
                  IN RE: VERIFONE HOLDINGS                          17

        1. Repeated Accounting Manipulations

    Each of the three restated quarters followed the same
pattern. Just after quarter-end, internal flash reports showed
VeriFone’s gross margins at approximately 40–42 %, far off
the company’s projections and market expectations.
Although certain documents and testimony from VeriFone
executives revealed that flash reports typically contained
inaccuracies and required revision, prior preliminary reports
had not reflected such a drastic difference from initial
projections.

    Bergeron and Zwarenstein viewed these results as
“unacceptable” and oversaw the company’s efforts to remedy
the situation, providing accounting staff with dollar figures
and particular adjustments that would bring results in line
with projections. Their efforts included near-constant
monitoring of specific adjustments and their impact on
earnings and margins. Even though Zwarenstein and
Bergeron knew in each quarter the adjustments were
“unusually high” (in fact, inventory adjustments increased in
magnitude each quarter), they “recklessly failed to question
or demand supporting documentation” for them.
Significantly, their communications did not reflect concern
with operational issues that might have been driving margins
down: their priority was the financial statements and publicly
reported results.




with prior trading volume. These trades do not by themselves support an
inference of scienter. Silicon Graphics, 183 F.3d at 986.
18                 IN RE: VERIFONE HOLDINGS

             a. 1Q07

    At the end of 1Q07, Bergeron and Zwarenstein received
internal flash reports indicating that the actual gross margins
were 42.8%, markedly lower than the 45–47% VeriFone had
estimated for the quarter. At least with respect to 1Q07, the
gap between the preliminary flash reports and the initial gross
margin forecast “was one of the bigger ones, if not the
biggest” gap VeriFone had ever seen. Zwarenstein emailed
Periolat directly, saying that “it would be an unmitigated
disaster if COGS [cost of goods sold] are truly what is in” the
flash report. Bergeron sent an expletive-laden email to
Zwarenstein that week saying, “We need to get to 36.5 cents
[in earnings]. Figure it out.” When Zwarenstein replied “Can
I speak to you?” Bergeron responded “You should wait until
I cool down, use the time to figure out how we get to 36.5
cents.” Bergeron had a history of putting accounting staff
under pressure: already that quarter he had advocated against
a “more stringent revenue recognition policy,” telling
Zwarenstein that “if we need to be a bit aggressive” on
accounting to hit VeriFone’s revenue target, “do it.”

    Zwarenstein repeatedly emailed Periolat the week after
the end of 1Q07, providing him with the specific dollar
amounts necessary to hit targets: “we are still off by
$10,784,000 versus the forecasting. Is there an error in there
somewhere?”3 However, the email traffic does not reflect a


 3
   National Elevator’s claims that Zwarenstein in these emails explicitly
instructed Periolat to falsify the numbers misrepresent Merkl’s testimony.
Merkl instead testified as to her interpretation of a statement made by
Zwarenstein to Periolat, admitting that she did not know what Zwarenstein
intended. The district court was correct in not crediting National
Elevator’s characterization and selective quotation of Merkl’s testimony.
                IN RE: VERIFONE HOLDINGS                     19

search for errors. Instead, Periolat emailed VeriFone
controller Merkl to say that “we have to put a $10 million
plug into direct material,” which according to Merkl meant
that an unsupported $10 million entry was required for
VeriFone to hit its goals. The next day, Zwarenstein
circulated a revised flash report to Bergeron and others
showing that VeriFone had met its projections, saying, “I
needed to reduce COGS by 10.7 [million] to get to what I
think is 36.6 cents,” as Bergeron had insisted. Zwarenstein
later concluded that even larger revisions were required to hit
projections; those increases were incorporated into Periolat’s
adjustments. The adjustments were without basis and were
reversed during the restatement.

    National Elevator acknowledges that Zwarenstein
communicated to VeriFone staff that the company’s
accounting had to comply with Generally Accepted
Accounting Principles (“GAAP”), though it states without
support that this directive was a “wink-wink cover.” Merkl’s
testimony before the SEC also indicated that Zwarenstein
would not have directed Periolat to falsify numbers and that
the company was attempting to determine the true cause of
the discrepancy. However genuine these instructions and
inquiries were, Zwarenstein and Bergeron did not concern
themselves with the accuracy of or basis for the manual
accounting adjustments. During 1Q07, they received weekly
reports on COGS and margins and specifically monitored
how inventory costs impacted company financials. Bergeron
had also committed to reducing inventory and making the
company’s supply chain a “profit center.” Yet, when
Periolat’s adjustment increased inventory by millions of
dollars, they neither objected nor inquired further, and in fact
repeated this silence in the coming quarters even as inventory
20              IN RE: VERIFONE HOLDINGS

manipulations grew in size. This complacency can be
described only as willful at this stage of the pleadings.

           b. 2Q07

    VeriFone’s flash reports for 2Q07 showed a gross margin
of 43.7% which, as with the prior quarter, was significantly
lower than the 46–48% guidance provided to investors.
Although they received reports during the quarter that
margins would likely deteriorate, Bergeron and Zwarenstein
rejected these initial reports and instructed accounting staff,
including Periolat, to determine the source of the discrepancy.
Zwarenstein worked directly with Periolat and personally
reviewed Periolat’s adjustments, even directing their timing.
Periolat “fixed” the problem by preparing a journal entry that
increased in-transit (shipped from Lipman to Verifone but not
yet received) inventory by $10.6 million and decreased
COGS by the same amount. There was no basis for this
adjustment because “goods were never actually shipped
between the international headquarters and the United
States.” After checking with a subordinate, Periolat gave his
calculations to another subordinate to prepare a manual
journal voucher that was used to make manual adjustments to
VeriFone’s corporate records. Periolat signed the vouchers
as a “reviewer,” despite the fact that he made the initial
calculations.

    National Elevator claims as to 2Q07 that Bergeron and
Zwarenstein deliberately concealed these manipulations from
investors. Specifically, when asked by analysts during a
2Q07 conference call if there were any “unusual” items that
caused VeriFone to report such high gross margins,
“Zwarenstein falsely replied, ‘no, there was [sic] no unusual
items.’” Whether he truly believed the company’s results,
                IN RE: VERIFONE HOLDINGS                   21

Zwarenstein at least knew at the time of the substantial
accounting adjustments and that the company’s inventory
levels were unusual.

           c. 3Q07

     The third quarter of 2007 proved no different. After it
appeared that business pressures might drive margins down,
initial reports came in significantly lower than VeriFone’s
projections. Zwarenstein realized that to meet the 48% gross
margin target, VeriFone would need to reduce COGS by
approximately $18 million, resulting in a corresponding
increase in inventory, which would end up at approximately
$150 million. He had “never seen an inventory projection
quite that high . . . .” Zwarenstein and Periolat discussed
specific adjustments over email, including an $11.3 million
“true-up” of “receiving inventory” and a $5.5 million increase
in “in transit” inventory, totaling $16.8 million. National
Elevator notes that Bergeron, who focused on inventory
levels, admitted that VeriFone had been “less than perfect” in
its ability to manage inventory levels. Despite awareness of
the inventory management problems, and that for the third
straight quarter Periolat’s adjustments had increased company
inventories by millions, Zwarenstein and Bergeron accepted
Periolat’s manual adjustments without question or without
conducting a separate review. Again, Periolat’s adjustments
had no legitimate basis.

       2. THE SEC COMPLAINT

   The SEC complaint incorporated into National Elevator’s
complaint focuses primarily on VeriFone and on Periolat,
who National Elevator has dismissed from its appeal of the
22                 IN RE: VERIFONE HOLDINGS

district court’s order.4 Although the complaint makes no
direct allegation that anyone knew that Periolat’s accounting
adjustments were false at the time they were made, it alleges
that there was no reasonable basis for any of Periolat’s
manual entries, which relied on “an unfounded assumption
that goods were in transit between VeriFone’s international
headquarters and the United States.”5 The SEC also alleges
that for each of the three quarters, no one reviewed Periolat’s
work during the quarter closing process.               “Senior
management was aware of his adjustments but never
questioned them. . . . [Senior management] simply assumed
the preliminary actual results were wrong when they differed
from the forecasts.” In fact, according to the SEC, senior
management never questioned the increases despite monthly
reports showing a sharp and unprecedented increase in
inventory as a result of Periolat’s adjustments.

    The errors did not come to light until the annual audit in
November 2007, at which time Periolat concluded that his
adjustments were wrong and reported the problem to senior
management. The SEC complaint suggests that because
Bergeron and Zwarenstein did not ask about the basis for
Periolat’s manual adjustments, they were not actually aware
that the adjustments were erroneous until November 2007.


   4
     Though the complaint does not specifically name Bergeron and
Zwarenstein, referring only to “senior management,” their roles as CEO
and CFO, respectively, would likely include them in the “senior
management” reference.

  5
    W e draw no inference from the SEC’s decision not to plead scienter
or charge defendants with fraud. The district court erred in concluding
that “the SEC’s decision not to plead scienter hurts plaintiffs’ ability to
plead a strong inference of scienter.” At this stage, we accept National
Elevator’s allegations as true. Tellabs, 551 U.S. at 322.
                IN RE: VERIFONE HOLDINGS                     23

The December 2007 press release announcing the need for a
restatement followed shortly thereafter.

       3. V E R I F O N E ’ S      SARBANES-OXLEY
          CERTIFICATIONS

    As part of VeriFone’s Form 10-Q filings, Bergeron and
Zwarenstein certified that, as CEO and CFO, they “‘carried
out an evaluation of the effectiveness of [VeriFone’s]
disclosure controls and procedures’ and ‘[b]ased on that
evaluation . . . concluded that [VeriFone’s] disclosure
controls and procedures were effective as of the end of the
period covered by this report.’” In compliance with
Sarbanes-Oxley, Bergeron and Zwarenstein also signed
sworn certifications to each Form 10-Q indicating, among
other things, that they (1) “‘[d]isclosed’ any change that has
materially affected, or is ‘reasonably likely to materially
affect, [VeriFone’s] internal control over financial reporting’”
and (2) “‘disclosed . . . [a]ll significant deficiencies and
material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely
to adversely affect [VeriFone’s] ability to record, process,
summarize and report financial information.’”

    National Elevator alleges that the disarray caused by the
Lipman integration and prior awareness of lost or missing
inventory sufficiently evinces that Zwarenstein and Bergeron
were aware of problems related to VeriFone’s internal
controls. Statements from two confidential witnesses suggest
there were significant inventory problems at the facility
where much if not all of the Lipman inventory was eventually
transferred, although the timing of their employment does not
directly coincide with the time at which the accounting
adjustments were made.
24              IN RE: VERIFONE HOLDINGS

    National Elevator also references a March 19, 2007 letter
from E&Y informing “VeriFone’s Audit Committee and
management regarding VeriFone’s control deficiency by
stating that entire pallets of inventory were missed, part
numbers were wrong and incomplete boxes were being
counted as full.” (internal quotation marks omitted).
According to the complaint, “E&Y then asked VeriFone to
add further measures to validate the correctness of the counts
performed, and the VeriFone Board represented to E&Y that
it was enhancing its training materials and also taking
additional steps to identify and remove the poor performers.”
(internal quotation marks omitted).           The complaint
acknowledges that VeriFone took certain remedial measures,
but alleges that these measures were insufficient because they
“did not have any material impact in preventing VeriFone’s
false financial reporting.” The complaint further alleges that
these inventory control deficiencies enabled Periolat to enter
the incorrect manual adjustments that allowed VeriFone to hit
its targets. National Elevator also notes that in 2008
disclosures and press communications issued after Bergeron
and Zwarenstein certified the 2007 SEC filings, VeriFone
admitted numerous material weaknesses in its internal control
over financial reporting throughout 2007.

     B. SUFFICIENCY OF THE ALLEGATIONS

    While the PSLRA “significantly altered pleading
requirements in private securities fraud litigation,” In re Daou
Systems, Inc., 411 F.3d 1006, 1014 (9th Cir. 2005), it did not
impose an insurmountable standard. It may well be the case
that, as the district court concluded, the complaint does not
establish or create a strong inference that anyone at VeriFone,
including Periolat, actually knew that the manual adjustments
were improper. However, that was not the only permissible
                IN RE: VERIFONE HOLDINGS                   25

inference. Recklessly turning a “blind eye” to impropriety is
equally culpable conduct under Rule 10b-5.

    National Elevator’s allegations, viewed holistically, give
rise to a strong inference that Bergeron, Zwarenstein and
VeriFone were deliberately reckless to the truth or falsity of
their statements regarding VeriFone’s financial results,
particularly gross margin percentages. This inference is
cogent and equally as compelling as the competing inference
that VeriFone “was simply overwhelmed with integrating a
large new division into its existing business.” Zucco,
552 F.3d at 1007. The difficulty of the Lipman integration
combined with general downward pressure on gross margins
makes Zwarenstein and Bergeron’s claims that they
innocently relied on the company’s optimistic models and
projections implausible at best. See Frank v. Dana Corp.,
646 F.3d 954, 961–62 (6th Cir. 2011) (finding that it was
“difficult to grasp the thought” that the top two executives
who reported “gangbuster earnings” “really had no idea” that
their company was headed towards bankruptcy given their
knowledge of operational problems and industry difficulties).
An inference of scienter is more compelling in light of
Bergeron and Zwarenstein’s public statements celebrating the
merger as an unprecedented success, particularly those early
statements touting the merged entity’s supposed financial
transparency.

    In three consecutive quarters, Bergeron and Zwarenstein
received accurate reports at quarter-end indicating that
VeriFone had not met its financial targets. Each time, they
addressed these “unacceptable” results by providing Periolat
with accounting adjustments necessary to conform results to
expectations. Each time, Periolat entered those adjustments
almost to the dollar. Bergeron and Zwarenstein monitored
26              IN RE: VERIFONE HOLDINGS

and checked on the adjustments, particularly their impact on
margins and earnings. However, according to the allegations,
a critical element was missing—they appear not to have
asked Periolat whether the adjustments were based in fact or
even why changes of that magnitude were necessary in the
first place. See Daou Systems, 411 F.3d at 1023 (finding
scienter where top executives directed improper recognition
before projects were completed “without regard to any actual
percentage of completion”). Their overriding concern was
avoiding the “unmitigated disaster” of missing earnings
targets, which led them to ignore unprecedented increases in
inventory at the same time Bergeron was “obsessed” with
reducing it and claimed publicly that VeriFone had achieved
supply chain efficiencies.

    The logical inference here—that VeriFone’s priority was
meeting projections even at the expense of accuracy—is not
rebutted by the argument that it was entitled to rely on
internal projections simply because they had been accurate in
the past. It defies common sense that for three straight
quarters following a merger, when preliminary reports came
in substantially below expectations and the acquired company
had lower margins, the correct “adjustments” to flash reports
also happened to be the precise amounts Zwarenstein and
Bergeron had identified as necessary to hit earnings targets.
Yet Periolat’s adjustments consistently matched the figures
Zwarenstein and Bergeron gave him. In the face of repeated
such adjustments, the company cannot simply close its eyes
with a sigh of relief. See Nursing Home Pension Fund v.
Oracle Corp., 380 F.3d 1226, 1234 (9th Cir. 2004) (inferring
scienter based on top executives’ detail-oriented management
style that would have made them “aware of the allegedly
improper revenue recognition of such significant magnitude
                IN RE: VERIFONE HOLDINGS                   27

that the company would have missed its quarterly earnings
projection but for the adjustments”).

    VeriFone argues that this appeal is analogous to our
decision in Zucco, a factually similar case in which we
ultimately concluded that the plaintiffs failed to plead
scienter. The plaintiffs in Zucco alleged that defendant
Digimarc Corporation manipulated its accounting to
deceptively bolster the company’s financial condition,
improperly capitalizing payroll costs and failing to recognize
ordinary expenses. 552 F.3d at 988. The plaintiffs’
allegations included

       (1) statements of six confidential witnesses,
       (2) Digimarc’s April 5, 2005 restatement of
       earnings, (3) the resignations of [a defendant],
       two members of the accounting department,
       and the corporation’s auditing firm during the
       class period, (4) statements made in filing the
       corporation’s Sarbanes-Oxley certifications,
       (5) the compensation packages of the
       individual defendants, (6) the stock sales of
       the individual defendants occurring during the
       class period, and (7) a private placement by
       the corporation during the class period.

Id. at 992. We concluded that

       the facts alleged by Zucco point towards the
       conclusion that Digimarc was simply
       overwhelmed with integrating a large new
       division into its existing business. . . . This
       acquisition eventually mandated the
       integration of several accounting systems . . . .
28              IN RE: VERIFONE HOLDINGS

       It is more plausible that Digimarc’s
       management was unable to control the
       accounting processes within the corporation
       during this integration than that it was
       systematically using accounting
       manipulations to make the company seem
       slightly more financially successful.

Id. at 1007.       Similar to Digimarc, VeriFone faced
complications integrating two distinct accounting systems, as
well as two different methods for calculating inventory. But
the similarity between these two cases does not swallow the
critical differences.

     Importantly, the complaint alleges in detail that Bergeron
and Zwarenstein were hands-on managers with respect to
operational details and financial statements, and that they
would have been aware of the complications associated with
the Lipman merger. See Daou Systems, 411 F.3d at 1022
(management’s hands-on style, including monitoring of
relevant databases, weighed in favor of scienter). At the very
least, both executives were on notice that there might be
issues with either VeriFone’s forecasts model or the process
of integrating Lipman. VeriFone disclosed neither concern
to investors. To the contrary, Bergeron reassured investors
and analysts of the success of the Lipman integration and
provided concrete (though apparently baseless) explanations
for the unprecedented increases in VeriFone’s gross margins.
The invocation of those previously undisclosed merger
complications in their defense rings hollow.

   National Elevator also advanced detailed allegations that
Bergeron and Zwarenstein reviewed the internal flash reports,
which included worksheets tracking changes on a day-to-day
                IN RE: VERIFONE HOLDINGS                   29

basis. Cf. South Ferry, 542 F.3d at 784 (holding that a
complaint relying on allegations that management had an
important role in the company but lacking additional detailed
allegations about the defendants’ actual exposure to
information falls short of the PSLRA); see also Metzler Inv.
GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1068 (9th
Cir. 2008) (“[C]orporate management’s general awareness of
the day-to-day workings of the company’s business does not
establish scienter—at least absent some additional allegation
of specific information conveyed to management and related
to the fraud.”); but see Zucco, 552 F.3d at 1000 (holding that
allegations that senior management closely reviewed
accounting numbers and that top executives had several
meetings to discuss quarterly inventory numbers did not
support the inference that management was in a position to
know that such data was being manipulated).

    Although VeriFone, Bergeron, and Zwarenstein attack
individual allegations in isolation, they cannot overcome the
overwhelming inference drawn from a holistic view. Upon
receiving accurate reports that VeriFone’s margins and
earnings were short of projections, Bergeron and Zwarenstein
repeatedly “remedied” the problem by directing baseless
adjustments to the company’s financial statements, failing to
inquire further once projections were met at the same time
they encouraged employees to engage in “aggressive”
accounting to ensure VeriFone hit other financial targets.

    To be sure, National Elevator’s selective quotation and
mischaracterization of the SEC transcripts detracts from some
of the complaint’s allegations. See Tellabs, 551 U.S. at 326
(stating that omissions and ambiguities count against
inferring scienter). However, these misstatements and
omissions do not significantly undercut the strength of the
30              IN RE: VERIFONE HOLDINGS

inference of scienter. When compared to the inference that
VeriFone was grossly negligent and overwhelmed during the
Lipman integration, the inference that Bergeron, Zwarenstein,
and by extension VeriFone, were deliberately reckless to the
truth or falsity of the financial reports is equally compelling.
Accordingly, we reverse the district court’s dismissal of the
complaint.

IV.    SECTION 20A INSIDER TRADING CLAIMS

    National Elevator also appeals the dismissal of its § 20A
claims. Section 20A, in relevant part, states:

       Any person who violates any provision of this
       chapter or the rules or regulations thereunder
       by purchasing or selling a security while in
       possession of material, nonpublic information
       shall be liable . . . to any person who,
       contemporaneously with the purchase or sale
       of securities that is the subject of such
       violation, has purchased . . . or
       sold . . . securities of the same class.

15 U.S.C. § 78t-1(a). To prevail on its claims for violations
of § 20A, National Elevator must first sufficiently allege a
violation of § 10(b) or Rule 10b-5. Lipton v. Pathogenesis
Corp., 284 F.3d 1027, 1035 n.15 (9th Cir. 2002). The district
court dismissed National Elevator’s § 20A claims on the basis
that National Elevator failed to sufficiently plead scienter,
thus failing to establish a § 10(b) or Rule 10b-5 violation.
Because we reverse the district court’s dismissal of the
§ 10(b) and Rule 10b-5 claims, we also reverse the court’s
dismissal of National Elevator’s § 20A claims.
                IN RE: VERIFONE HOLDINGS                    31

V. SECTION 20(A ) CONTROL PERSON CLAIMS

    Section 20(a) of the Exchange Act makes certain
“controlling” individuals liable for violations of § 10(b) and
its underlying regulations. Zucco, 552 F.3d at 990. In
relevant part, § 20(a) provides:

       Every person who, directly or indirectly,
       controls any person liable under any provision
       of this chapter or of any rule or regulation
       thereunder shall also be liable jointly and
       severally with and to the same extent as such
       controlled person . . . is liable . . . unless the
       controlling person acted in good faith and did
       not directly or indirectly induce the act or acts
       constituting the violation or cause of action.

15 U.S.C. § 78t(a). “Thus, a defendant employee of a
corporation who has violated the securities laws will be
jointly and severally liable to the plaintiff, as long as the
plaintiff demonstrates ‘a primary violation of federal
securities law’ and that ‘the defendant exercised actual power
or control over the primary violator.’” Zucco, 552 F.3d at 990
(citation omitted).

    Dismissal of the § 20(a) claim was proper because there
is no underlying claim against the “controlled” person,
Periolat. The district court found that National Elevator
failed to sufficiently plead scienter as to Periolat, which
National Elevator does not challenge on appeal. Without
establishing a securities violation by Periolat, National
Elevator cannot sustain its § 20(a) control person liability
claims. See Zucco, 552 F.3d at 990 (“Section 20(a) claims
may be dismissed summarily . . . if a plaintiff fails to
32              IN RE: VERIFONE HOLDINGS

adequately plead a primary violation of section 10(b).”).
Regardless of National Elevator’s reasons for dismissing
Periolat from its appeal, we are bound by the district court’s
determination that National Elevator failed to establish that
Periolat violated § 10(b) or Rule 10-b.

VI.    CONCLUSION

    National Elevator adequately pleaded violations of
§ 10(b) of the Securities Exchange Act of 1934 and Securities
and Exchange Commission Rule 10b as to VeriFone,
Bergeron, and Zwarenstein. Its § 20A claim against Bergeron
and Zwarenstein was sufficiently pled as well. National
Elevator’s § 20(a) claim was properly dismissed.

    AFFIRMED in part and REVERSED in part. Costs
on appeal shall be awarded to National Elevator.
