                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 04-1687
MAKOR ISSUES & RIGHTS, LTD., et al.,
                                            Plaintiffs-Appellants,
                                 v.

TELLABS, INC., et al.,
                                            Defendants-Appellees.
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
              No. 02 C 04356—Amy J. St. Eve, Judge.
                          ____________
  ARGUED JANUARY 21, 2005—DECIDED JANUARY 25, 2006
                    ____________


  Before RIPPLE, WOOD, and SYKES, Circuit Judges.
  WOOD, Circuit Judge. This class action against Tellabs,
Inc., a manufacturer of specialized equipment used in
fiber optic cable networks, presents the first opportunity for
this court to address the heightened pleading requirements
of the Private Securities Litigation Reform Act of 1995
(PSLRA), 15 U.S.C. § 78u-4(b). The plaintiffs have accused
Tellabs and its executives of engaging in a scheme to
deceive the investing public about the true value of
Tellabs’s stock. The district court dismissed the plaintiffs’
second amended complaint, pursuant to Federal Rule of
Civil Procedure 12(b)(6), after finding that the plaintiffs had
failed to meet the PSLRA’s pleading threshold. We affirm
in part and reverse in part.
2                                               No. 04-1687

                             I
  With the aid of 27 confidential sources, the plaintiffs, a
putative class of Tellabs stockholders, allege that Tellabs’s
fraudulent conduct began on December 11, 2000. (We
assume the truth of the well-pleaded allegations in the
complaint, as we must upon review of a Rule 12(b)(6)
dismissal. See, e.g., Harrell v. Cook, 169 F.3d 428, 431 (7th
Cir. 1999). On that day, Tellabs issued a press release
stating that Tellabs and Sprint had signed a multi-year,
$100 million contract for one of Tellabs’s next-generation
products, the TITAN 6500. The release proclaimed that
“[t]he TITAN 6500 system is available now.” In a call to
financial analysts later that day, Tellabs’s Chief Execu-
tive Officer (CEO), Richard Notebaert, predicted that in
addition to the contract with Sprint for the 6500, there
would be “continuing growth of the TITAN 5500,” referring
to the 6500’s predecessor. Based in part on these repre-
sentations, most market analysts recommended that
investors buy Tellabs’s stock.
  On January 23, 2001, in a press release announcing
Tellabs’s “record sales and earnings in the fourth quarter of
2000,” Notebaert proclaimed that “customers are buy-
ing more and more Tellabs equipment.” In an accompanying
call to analysts, Notebaert stated that Tellabs had “set the
stage for sustained growth with the successful launches of
several products.” Later, in response to a question,
Notebaert stated, “On the 6500, demand for that product is
exceeding our expectations.” In another interview that day,
Notebaert said, “we feel very, very good about the robust
growth we’re experiencing.”
  Continuing with these sunny assessments, on February
14, 2001, Tellabs sent a letter to stockholders, signed by
Notebaert and Richard Birck, Tellabs’s chairman and
former CEO, that stated: “Tellabs’[s] growth is robust. . . .
Our markets hold significant potential for sustained
No. 04-1687                                                    3

growth. . . . Our core business is performing well. . . . [S]ales
of our TITAN 5500 digital cross-connect systems soared
56% in 2000. . . . The new TITAN 6500 multiservice trans-
port switch emerged from our laboratories in 2000, and
customers are embracing it.” In the annual report
that accompanied this letter, Birck and Notebaert re-
sponded as follows to investors’ frequently asked questions:
    Q. Your core business is built on the TITAN 5500—are
       you worried that this product has peaked?
    A. No. In 2000, TITAN 5500 revenues grew 56%, its
       best year so far. Although we introduced this
       product nearly 10 years ago, it’s still going
       strong. . . .
  The first public glimmer that business was not quite so
healthy came in March 2001. At that time, Tellabs modestly
reduced its first quarter sales projections from a range of
$865 million to $890 million to a range of $830 million to
$865 million. This revision was attributable to lower-than-
expected growth in Tellabs’s CABLESPAN® business, a
product unrelated to this action. As Tellabs announced this
reduction, it reiterated its positive forecasts for its other
products. In a conference call with analysts, Notebaert
stated:
    [D]emand for our core optical products, or our core
    networking products remains strong. . . . Interest in and
    demand for the 6500 continues to grow. . . . We continue
    to ship the 6100 and 6500 through the first quarter. We
    are satisfying very strong demand and growing cus-
    tomer demand. We are as confident as ever—that may
    be an understatement—about the 6500. . . . Tellabs will
    meet the adjusted revenue and earnings targets.
  Notebaert maintained this upbeat tone while discussing
the TITAN 5500. In response to an investor’s question
whether Tellabs was experiencing “any weakness [ ] at all”
in demand for the 5500, Notebaert responded, “No, we’re
4                                               No. 04-1687

not. We’re still seeing that product continue to maintain its
growth rate.” Tellabs’s 10-K statement for the fiscal year
ended December 29, 2000, filed three months later on
March 29, 2001, maintained this rosy outlook.
   Nevertheless, on April 6, 2001, Tellabs reduced its first
quarter sales projections once again—down to $772 mil-
lion from the $830 to $865 million range it had forecast just
a month earlier. Notebaert cautioned that Tellabs’s custom-
ers were deploying their new equipment slowly
and “exercising a high degree of prudence over every dol-
lar spent.” In the face of this downward revision, Notebaert
informed investors that “everything we hear from the
customers indicates that . . . demand for services continues
to grow.” Notebaert insisted that the demand for the TITAN
6500 was “very strong” and explained that the only reason
for the downward projections was that Tellabs’s customers
were pushing orders back from the first to the second
quarter of 2001.
  Less than two weeks later, Tellabs announced that
sales for the first quarter were in fact $772 million. While
significantly below the original projections, this still
represented a 21% increase in sales over the first quarter of
2000. Nonetheless, Tellabs announced that it was abandon-
ing one of the products it had been touting, the SALIX
program, just 14 months after purchasing it for $300
million.
  Despite the mixed news, analysts still thought that
Tellabs was a stock worth buying. By this point, though, the
company’s stock price had fallen from a high of $67 per
share to somewhere in the low $30 range. Over the next few
months, while Tellabs’s executives kept mum, the com-
pany’s stock crept back up to over $38. Then, on June 19,
2001, the last day of the class period, Tellabs announced a
substantial reduction in its second quarter projections. It
had projected that sales would be between $780 and $820
No. 04-1687                                                  5

million, but it now revealed that its second quarter reve-
nues would amount to only $500 million. On yet another
conference call, Notebaert informed investors that the
reduction was almost entirely because of an enormous
reduction in TITAN 5500 sales. The next day, Tellabs’s
stock price plunged to $15.87 per share.
  On December 3, 2002, the plaintiffs filed their first
complaint against Tellabs and 10 of its executives. The
complaint alleged that Tellabs’s executives knowingly lied
to the public, in the following particular ways: (1) they
had informed the market that the TITAN 6500 was avail-
able when in fact it was not; (2) they had represented that
demand for the TITAN 5500 was stable or even growing
when in fact they knew that it was waning; (3) they said
that the SALIX line of products was bound for success when
in fact Tellabs knew that it was bound to fail; (4) they
portrayed Tellabs’s fourth quarter revenues and earnings
for 2000 as stellar when in fact they were fraudulently
inflated; and (5) they announced that Tellabs’s future
earnings would be greater than actually expected.
  The defendants moved to dismiss the complaint for failure
to state a claim. The district court granted the motion, with
leave to amend, finding that (1) all but one of Tellabs’s
projections were accompanied by meaningful cautionary
language, and thus fell within the scope of the “safe harbor”
provisions of the PSLRA; (2) the plaintiffs had failed to offer
particularized facts to support their claim that Tellabs
misrepresented its fourth quarter 2000 results; and (3) the
complaint failed adequately to allege that the defendants
met the scienter standard for securities fraud, which
requires that they likely intended “to deceive, manipulate,
or defraud.” See Ernst & Ernst v. Hochfelder, 425 U.S. 185,
194 & n.12 (1976).
  On July 3, 2003, the plaintiffs filed a second amended
complaint, bolstering their allegations with references to 27
6                                                No. 04-1687

confidential sources, shortening the list of defendants by
four, eliminating a few of their weaker claims, and adding
more specific scienter allegations against each of the
remaining defendants. While the district court found that
a number of the statements are actionable, it nonetheless
dismissed again because, it thought, the plaintiffs still had
failed adequately to allege scienter for any of the defen-
dants. The court echoed its earlier holding that the PSLRA
safe harbor provision protected Tellabs’s forecasts. The
plaintiffs appeal, arguing that (1) some of the statements
the court dismissed as “mere puffery” are legally actionable;
(2) their complaint provided enough detail to support a
strong inference of scienter for each of the defendants; and
(3) the disclaimer accompanying Tellabs’s forecasts was
insufficient and therefore Tellabs could not rely on the
PSLRA’s safe harbor provision.


                              II
  The plaintiffs’ complaint alleges three distinct statu-
tory violations. First, the plaintiffs contend that Tellabs, as
a company, and Birck and Notebaert, as individuals,
violated § 10(b) of the Securities Exchange Act of 1934,
codified in 15 U.S.C. § 78j, and Securities Exchange Com-
mission (SEC) Rule 10b-5, 17 C.F.R. § 240.10b-5. Second,
the complaint alleges that Notebaert, Birck, and two other
Tellabs executives were “control persons” and therefore
liable under § 20(a) of the Securities Exchange Act, 15
U.S.C. § 78(t), for the corporation’s fraudulent acts. Finally,
the plaintiffs allege that Birck engaged in illegal insider
trading in violation of § 20A of the Act, 18 U.S.C. § 78t-1.
The control person and insider-trading allegations require
an underlying securities fraud violation. Because the
district court rejected the plaintiffs’ underlying securities
fraud complaint, it also dismissed these attendant claims.
We as always review the district court’s decision to dismiss
No. 04-1687                                                   7

under Rule 12(b)(6) de novo, see In re: Cerner Corp. Sec.
Litig., 425 F.3d 1079, 1083 (8th Cir. 2005), as well as its
interpretation of the heightened pleading requirements of
the PSLRA.
   Unlike a run-of-the-mill complaint, which will survive a
motion to dismiss for failure to state a claim so long as it is
“possible to hypothesize a set of facts, consistent with the
complaint, that would entitle the plaintiff to relief,” Sanville
v. McCaughtry, 266 F.3d 724, 732 (7th Cir. 2001) (quotation
omitted), the PSLRA essentially returns the class of cases
it covers to a very specific version of fact pleading—one that
exceeds even the particularity requirement of Federal Rule
of Civil Procedure 9(b). See, e.g., In re: Rockefeller Ctr.
Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002)
(noting that the PSLRA “imposes another layer of factual
particularity to allegations of securities fraud”). Under the
PSLRA, a securities fraud complaint must (1) “specify each
statement alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if an allega-
tion 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” and (2)
“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)(1), (2). In other words,
plaintiffs must not only plead a violation with particularity;
they must also marshal sufficient facts to convince a court
at the outset that the defendants likely intended “to
deceive, manipulate, or defraud.” Ernst & Ernst, 425 U.S.
at 194 & n.12. Most of the debate within the courts of
appeals has concerned the second requirement: how much,
in the way of factual detail in the pleadings, is sufficient to
create this “strong inference” of the requisite scienter?
Before we address that question, however, it is helpful to
review Tellabs’s actionable statements and the district
court’s assessment of them.
8                                                No. 04-1687

                              A
   Passed in the 1930s in reaction to the stock market
crash of 1929 and the Great Depression, the modern
securities laws were designed, according to the Supreme
Court, to “substitute a philosophy of full disclosure for the
philosophy of caveat emptor and thus to achieve a high
standard of business ethics in the securities industry.” SEC
v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186
(1963). “ ‘There cannot be honest markets without honest
publicity. Manipulation and dishonest practices of the
market place thrive upon mystery and secrecy.’ ” Basic Inc.
v. Levinson, 485 U.S. 224, 230 (1988) (quoting H.R. Rep. No.
1383, 73d Cong., 2d Sess., 11 (1934)). Under § 10(b) of the
Securities Exchange Act and Rule 10b-5, a plaintiff can
obtain damages if she can prove (1) the defendant made a
false statement or omission (2) of material fact (3) with
scienter (4) in connection with the purchase or sale of
securities (5) upon which the plaintiff justifiably relied and
(6) that the false statement proximately caused the plaintiff’s
damages. See, e.g., Caremark, Inc. v. Coram Healthcare
Corp., 113 F.3d 645, 648 (7th Cir. 1997).
  The first pleading hurdle of the PSLRA requires the
plaintiff to support with particularity the first two elements
noted above: the falsity of the statement of fact or the
omission, and its materiality. It is not enough simply to
allege in general that the defendant’s statement was false
and material. Looking first at the “falsity” requirement, we
see that the PSLRA requires the complaint to specify each
statement that is allegedly misleading, the reasons why it
is so, and, if based on information and belief, what specific
facts support that information and belief. See 15 U.S.C.
§ 78u-4(b)(1). Although § 78u-4(b)(1) requires a complaint
to state “all facts on which that belief is formed,” this does
not mean that a complaint automatically survives if it lists
“all” of the facts supporting the plaintiff’s belief. Nor does
it mean that if the plaintiff alleges sufficient facts but
No. 04-1687                                                  9

leaves out a redundant detail, the court must dismiss the
complaint. As the Second Circuit has held, such exactitude
would render the statute meaningless:
    Reading “all” literally would produce illogical results
    that Congress cannot have intended. Contrary to the
    clearly expressed purpose of the PSLRA, it would allow
    complaints to survive dismissal where “all” the facts
    supporting the plaintiff’s information and belief
    were pled, but those facts were patently insufficient
    to support that belief. Equally peculiarly, it would
    require dismissal where the complaint pled facts fully
    sufficient to support a convincing inference if any
    known facts were omitted.
Novak v. Kasaks, 216 F.3d 300, 314 n.1 (2d Cir. 2000). We
agree with the Second Circuit that the relevant question is
“whether the facts alleged are sufficient to support a
reasonable belief as to the misleading nature of the state-
ment or omission.” Id.
  Often, as is the case here, plaintiffs rely at the plead-
ing stage on confidential sources to meet this require-
ment, creating yet another knotty complication. Does the
identity of the plaintiffs’ sources necessarily fall within the
facts required to support a reasonable belief that the
defendant has committed fraud? Other circuit courts have
said that it does not. California Pub. Employees’ Ret. Sys. v.
Chubb Corp., 394 F.3d 126, 146 (3d Cir. 2004); ABC
Arbitrage Plaintiffs Group v. Tchuruk, 291 F.3d 336, 351-54
(5th Cir. 2002); In re: Cabletron Systems, Inc., 311 F.3d 11,
29-31 (1st Cir. 2002); Fla. State Bd. of Admin. v. Green Tree
Fin. Corp., 270 F.3d 645, 667-68 (8th Cir. 2001); Novak, 216
F.3d at 314. We agree with our colleagues that it would be
too much to require plaintiffs to provide “name, rank, and
serial number” for each of these sources. They must,
however, describe their sources with sufficient particularity
“to support the probability that a person in the position
10                                               No. 04-1687

occupied by the source would possess the information
alleged,” Novak, 216 F.3d at 314, or in the alternative
provide other evidence to support their allegations. This
standard protects the privacy of the sources while still
ensuring that the court has enough information to assess
the soundness of the plaintiffs’ allegations. A bright line
rule obliging the plaintiffs to reveal their sources has the
potential to deter informants from exposing malfeasance.
Such a rule might also invite retaliation. Nonetheless,
plaintiffs must still provide significant detail about their
informants. If the descriptions indicate that the sources
would not have access to, or knowledge of, the facts under-
lying the allegations, the allegations would be insufficient.
  Turning to the materiality requirement, we note ini-
tially that materiality depends upon the facts. It is neces-
sary to examine “the significance the reasonable investor
would place on the withheld or misrepresented informa-
tion.” Basic, 485 U.S. at 240. As the Fourth Circuit has
clarified, there must be “a substantial likelihood that a
reasonable purchaser or seller of a security (1) would
consider the fact important in deciding whether to buy
or sell the security or (2) would have viewed the total mix of
information made available to be significantly altered by
disclosure of the fact.” Longman v. Food Lion, Inc., 197 F.3d
675, 682-83 (4th Cir. 1999); see also Searls v. Glasser, 64
F.3d 1061, 1066 (7th Cir. 1995) (finding that materiality
exists when “there is a substantial likelihood that disclo-
sure of the information would have been viewed by the
reasonable investor to have significantly altered the total
mix of information”). The crux of materiality is whether, in
context, an investor would reasonably rely on the defen-
dant’s statement as one reflecting a consequential fact
about the company. If the statement amounts to vague
aspiration or unspecific puffery, it is not material. See
Eisenstadt v. Centel Corp., 113 F.3d 738, 746 (7th Cir. 1997)
(“Mere sales puffery is not actionable under Rule 10b-5.”).
No. 04-1687                                                 11

  With these principles in mind, we turn to the plaintiffs’
allegations against Notebaert and Birck. The plaintiffs’
allegations fall into four categories: (1) statements overstat-
ing the demand for the TITAN 5500; (2) statements con-
cerning the availability of the TITAN 6500; (3) statements
regarding Tellabs’s financials for the fourth quarter of 2000;
and (4) statements exaggerating Tellabs’s earnings and
revenue projections. We begin with the question whether
the complaint adequately alleged that the statements were
misleading. It identifies 27 confidential sources, noting the
position each held within Tellabs and the dates of each
person’s employment with the company. Cf. Chubb Corp.,
394 F.3d at 148 (finding problematic the complaint’s failure
to detail when the plaintiffs’ confidential sources worked for
the defendant). The list includes former managers and
high-level executives. The descriptions provided in the
complaint reveal that many of the informants were in a
position to provide reliable information concerning whether
Birck’s and Notebaert’s statements were false and material
and whether Birck and Notebaert knew this to be the case.
  By January 2001, the complaint asserts, demand for
Tellabs’s “best seller”—the TITAN 5500—was drying up.
Verizon, Tellabs’s largest customer, reduced its orders for
the TITAN 5500 by roughly 25% in late 2000 and by
roughly 50% in January 2001. Customers in Latin America
and Central America were no longer buying the product. By
late 2000, according to a couple of the confidential sources,
Tellabs had excess TITAN 5500s on hand because of the
lack of demand. One confidential source informed the
plaintiffs that Tellabs paid Probe Research, an outside
company, $100,000 to forecast demand for the TITAN 5500.
Completed “in or about early 2001,” the report showed that
the market need for the TITAN 5500 was evaporating.
Based on this research, Tellabs’s marketing strategy
department distributed an internal memorandum that
12                                              No. 04-1687

concluded that revenue from the TITAN 5500 would decline
by about $400 million.
  Even taking into account this declining demand, we agree
with the district court that some of the statements attrib-
uted to Notebaert during this time amount to no more than
puffery. It is doubtful that an investor would rely on
statements like “we feel very, very good about the robust
growth we’re experiencing,” or “demand for our core optical
products . . . remains strong.” These vague comments did
not identify the TITAN 5500 in particular and were un-
likely to induce an investor to purchase Tellabs’s stock.
  Other statements are more troublesome, especially
when viewed against the backdrop of the company’s up-
beat attitude. On March 8, 2001, in response to a question
from a Deutsche Bank analyst about whether Tellabs
was experiencing any weakness in TITAN 5500 sales,
Notebaert responded: “We’re still seeing that product
continue to maintain its growth rate; it’s still experiencing
strong acceptance.” (Emphasis added.) In context, this went
well beyond puffery: it was a direct response to an analyst’s
inquiry about a possible decline in TITAN 5500 sales. It is
reasonable that an analyst or investor would take
Notebaert at his word, and it is misleading to describe a
decline as equivalent to a continued growth rate.
  Similarly, in Tellabs’s 2000 Annual Report, published in
February 2001, Notebaert and Birck responded to a fre-
quently asked question (“[A]re you worried that [the TITAN
5500] has peaked?”) by stating flatly, “No. . . . Although we
introduced the product nearly 10 years ago, it’s still going
strong.” Perhaps in a different context this statement would
amount to puffery, but its place in the “frequently asked
questions” section of the Annual Report suggests that the
answer was particularly important to investors. It would be
reasonable for an investor to rely on the statement, believ-
ing that sales for the TITAN 5500 were “still going strong.”
No. 04-1687                                               13

   As with the statements pertaining to the TITAN 5500,
some of the statements concerning the TITAN 6500 are
not the type on which an investor would reasonably
rely. Notebaert’s statement, for example, that “[o]n the
6500, demand for that product is exceeding our expecta-
tions” essentially is meaningless. As one court has put
it, “[i]t is hard to imagine a more subjective or vague
statement than ‘exceeded our expectations.’ This is precisely
the type of statement that the marketplace views as pure
hype, and accordingly discounts entirely.” In re Allaire
Corp. Sec. Litig., 224 F. Supp. 2d 319, 331 (D. Mass. 2002).
   As the district court found, however, some of Tellabs’s
statements regarding the TITAN 6500 crossed into the
realm of material falsity. According to the complaint, the
TITAN 6500 was not available for delivery until well after
the class period ended. Yet on December 11, 2000, the
first day of the class period, Tellabs flatly stated, “The
TITAN 6500 system is available now.” On March 8, 2001,
Notebaert told analysts, “Interest in and demand for the
6500 continues to grow. . . . We continue to ship the . . .
6500 through the first quarter. We are satisfying very
strong demand and growing customer demand.” Again,
on April 6, 2001, in response to an analyst’s question
whether Tellabs was still on track to recognize TITAN 6500
revenue in the second quarter, Notebaert stated, “we should
hit our full manufacturing capacity in May or June to
accommodate the demand we are seeing. Everything we can
build, we are building and shipping. The demand is very
strong.” These statements are particular, specific, and,
according to the complaint, completely false. The plaintiffs
have alleged with sufficient particularity that some of
Notebaert’s statements regarding the TITAN 6500 were
material and false.
  The plaintiffs further allege that the defendants falsely
represented Tellabs’s financial results for the fourth
quarter of 2000. Although the amended complaint al-
14                                               No. 04-1687

leges that Tellabs inflated its fourth quarter numbers
through the use of fictitious sales, back-dated orders, and
“creative” incentives, the only allegation that the plain-
tiffs pleaded with sufficient particularity is the charge
that Tellabs flooded its downstream customers with
unordered TITAN 5500s. This practice, known as channel
stuffing, creates a short-term illusion of increased demand
between the time when the company sends the extra
product down the line and the time when the distributors
return the unwanted excess. According to the plaintiffs’
confidential sources, Tellabs had to lease extra storage
space in January and February 2001 to accommodate
the large number of returns.
   While there may be legitimate reasons for attempting
to achieve sales earlier via channel stuffing, providing
excess supply to distributors in order to create a misleading
impression in the market of the company’s financial health
is not one of them. The complaint relies on several confiden-
tial sources to support the channel stuffing allegation. For
example, one source informed class counsel that Verizon’s
chairman had asked Tellabs to stop providing Verizon,
Tellabs’s largest customer, with products that Verizon did
not request or require. Given the consistency and specificity
of the plaintiffs’ channel stuffing allegations, the district
court found, and we agree, that the amended complaint
provided sufficient detail of channel stuffing to overcome
the PSLRA’s material falsity hurdle.
  Finally, the plaintiffs identify a series of what turned out
to be overstated revenue projections made by Tellabs,
which, according to the complaint, were meant to induce
investors to purchase Tellabs stock. The district court found
that because Tellabs included disclaimers along with each
of these projections, the statements fell within the PSLRA’s
safe harbor provision. “The statutory safe harbor forecloses
liability if a forward-looking statement ‘is accompanied by
meaningful cautionary statements identifying important
No. 04-1687                                               15

factors that could cause actual results to differ materially
from those in the forward-looking statement.’ ” Asher v.
Baxter Intern. Inc., 377 F.3d 727, 729 (7th Cir. 2004)
(quoting 15 U.S.C. § 77z-2(c)(1)(A)(i)). Here, Tellabs accom-
panied each projection with the following statement:
    Actual results may differ from the results discussed
    in the forward-looking statements. Factors that might
    cause such a difference include, but are not limited to,
    risks associated with introducing new products, enter-
    ing new markets, availability of resources, competitive
    response, and a downturn in the telecommunications
    industry. The company undertakes no obligation to
    revise or update these forward-looking statements to
    reflect events or circumstances after today or to reflect
    the occurrence of unanticipated events.
  After the district court’s decision, this court decided
Asher, 377 F.3d 727, which confronted the issue of what
constitutes a “meaningful cautionary statement.” In Asher,
the defendant listed a host of consequential variables in its
safe harbor disclaimer similar to those mentioned by
Tellabs. The Asher plaintiffs argued that the defendant’s
disclaimer was mere boilerplate, while the defendant,
Baxter International, argued that it need not provide
greater detail, as the disclaimer mentioned each of its
business segments. Id. at 732-33. We rejected both ex-
tremes:
    Plaintiffs say that Baxter’s cautions were boilerplate,
    but they aren’t. Statements along the lines of “all
    businesses are risky” or “the future lies ahead” come
    to nothing other than caveat emptor (which isn’t
    enough); these statements, by contrast, at least in-
    cluded Baxter-specific information and highlighted
    some parts of the business that might cause prob-
    lems. For its part, Baxter says that mentioning these
    business segments demonstrates that the caution is
    sufficient; but this also is wrong, because then any
16                                                No. 04-1687

     issuer could list its lines of business, say “we could have
     problems in any of these,” and avoid liability
     for statements implying that no such problems were
     on the horizon even if a precipice was in sight.
Id. at 733. We concluded that a disclaimer falls within the
safe harbor provision only if it mentions “those sources of
variance that (at the time of the projection) were the
principal or important risks.” Id. at 734. Since we could not
assess this question on the pleadings and record then
available to us, we remanded the case to district court.
  According to the complaint, the defendants knew at
the time they made the projections that demand for the
TITAN 5500 was drying up and that production of the
TITAN 6500 was far behind schedule. Tellabs argues that
the disclaimer covered these contingencies by warning
investors that a “downturn in the telecommunications
industry” could affect its forecasts and that there are “risks
associated with introducing new products.” Without doubt,
these generalized statements encompass Tellabs’s troubles
with the TITAN 5500 and 6500; they also encompass a
whole world of other possible contingencies. The breadth of
these warnings makes it impossible for us to conclude that
they meaningfully described “the principal or important
risks” facing Tellabs at the time it made the projections.
Indeed, this level of generality exemplifies the useless
caveat emptor boilerplate we criticized in Asher. See id. at
733. Accordingly, we find that Tellabs’s warnings were not
particularized enough for it to claim shelter under the
PSLRA’s safe harbor provision.
  In sum, we agree with the district court that some of the
defendants’ statements regarding the TITAN 5500 and 6500
amounted to nothing more than immaterial puffery. The
defendants do not contest the district court’s finding that
other statements made in connection with these products
and the company’s past results are actionable. We too
No. 04-1687                                                 17

conclude that this is the case. Finally, we disagree with the
district court’s conclusion that Tellabs was entitled to take
advantage of the safe harbor; to the contrary, we find that
it did not accompany its financial projections with a
“meaningful cautionary statement.”


                              B
  All of this will not affect the ultimate outcome of this
case, however, unless the plaintiffs can clear another, even
more arduous, hurdle: adequately alleging scienter. In
passing the PSLRA, some in Congress recorded their
belief that Federal Rule of Civil Procedure 9(b) had “not
prevented abuse of the securities laws by private litigants.”
H.R. Conf. Rep. No. 104-369, at 41 (1995), reprinted in 1995
U.S.C.C.A.N. 730, 740. To address this perceived abuse, the
PSLRA changes the threshold pleading rules by requiring
that the complaint “with respect to each act or omission
alleged to violate this chapter, 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).
  According to the Ninth Circuit, in enacting § 78u-4(b)(2),
Congress also raised the substantive state of mind require-
ment for securities fraud allegations. See In re Silicon
Graphics Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999)
(determining that a plaintiff must allege facts that
create a strong inference of “deliberate or conscious reckless-
ness” or a “degree of recklessness that strongly suggests
actual intent”). We are not persuaded by this position. Prior
to the passage of the PSLRA, every circuit to consider the
substantive scienter standard—including the Ninth—had
held that a showing of recklessness was sufficient to allege
scienter. See Hollinger v. Titan Capital Corp., 914 F.2d
1564, 1569-70 (9th Cir. 1990); In re Phillips Petroleum Sec.
Litig., 881 F.2d 1236, 1244 (3d Cir. 1989); Van Dyke v.
Coburn Enter., Inc., 873 F.2d 1094, 1100 (8th Cir. 1989);
18                                              No. 04-1687

McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814-
15 (11th Cir. 1989); Hackbart v. Holmes, 675 F.2d 1114,
1117-18 (10th Cir. 1982); Broad v. Rockwell Int’l Corp., 642
F.2d 929, 961-62 (5th Cir. 1981) (en banc); Mansbach v.
Prescott, Ball & Turben, 598 F.2d 1017, 1023-25 (6th Cir.
1979); Cook v. Avien, Inc., 573 F.2d 685, 692 (1st Cir. 1978)
(assuming without deciding that recklessness was suffi-
cient); Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 44-
47 (2d Cir. 1978); Sundstrand Corp. v. Sun Chem. Corp.,
553 F.2d 1033, 1044 (7th Cir. 1977). Since § 78u-4(b)(2)
refers to the “required state of mind,” it seems more likely
to us that Congress did not object to the substance of the
state of mind standard found in the law before the passage
of the Act. If Congress had wanted to impose a more
stringent scienter standard, we believe that it would have
done so explicitly, just as it expressly changed the pleading
requirements. Save the Ninth Circuit, all other circuits to
have considered this issue have concluded that the sub-
stance remained unchanged. Accordingly, we will apply the
same scienter standard now as we did prior to the passage
of the PSLRA: “an extreme departure from the standards of
ordinary care, [ ] 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.”
Sundstrand Corp., 553 F.2d at 1045 (quotation removed)
(applying the standard to omissions); see also SEC v.
Jakubowski, 150 F.3d 675, 681-82 (7th Cir. 1998) (applying
the Sundstrand scienter standard in a case decided after
the passage of the PSLRA).
  While § 78u-4(b)(2) did not impose a more stringent
substantive scienter standard, it did unequivocally raise the
bar for pleading scienter. Not only must plaintiffs meet a
particularity requirement; they must also meet
a substantive requirement by pleading sufficient facts to
create “a strong inference” of scienter. Congress did not,
unfortunately, throw much light on what facts will suffice
No. 04-1687                                                19

to create such an inference. Currently three different
approaches toward the way to demonstrate the required
“strong inference” exist among the courts of appeals. The
Second and Third Circuits take the position that the statute
adopted the Second Circuit’s pre-PSLRA pleading standard
for scienter, “and thus plaintiffs may continue to state a
claim by pleading either motive and opportunity or strong
circumstantial evidence of recklessness or conscious misbe-
havior.” Novak, 216 F.3d at 309-10; In re: Advanta Corp.
Sec. Litig., 180 F.3d 525, 530-35 (3d Cir. 1999). The Ninth
and Eleventh Circuits disagree, believing that Congress
considered, but ultimately rejected the Second Circuit’s
approach, opting instead for a more onerous burden. See
Silicon Graphics, 183 F.3d at 974 (“Congress intended to
elevate the pleading requirement above the Second Circuit
standard requiring plaintiffs merely to provide facts
showing simple recklessness or a motive to commit fraud
and opportunity to do so.”); Bryant v. Avado Brands, Inc.,
187 F.3d 1271, 1286 (11th Cir. 1999) (“[B]ecause the clear
purpose of the [PSLRA] was to curb abusive securities
litigation, and because we believe that the motive and
opportunity analysis is inconsistent with that purpose, we
decline to adopt it.”).
  The remaining six circuits that have considered this issue
take a middle ground, reasoning that “Congress chose
neither to adopt nor reject particular methods of pleading
scienter—such as alleging facts showing motive and
opportunity—but instead only required plaintiffs to plead
facts that together establish a strong inference of scienter.”
Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338,
345 (4th Cir. 2003); accord Green Tree, 270 F.3d at 659-60
(8th Cir. 2001); Nathenson v. Zonagen, Inc., 267 F.3d 400,
411-12 (5th Cir. 2001); City of Philadelphia v. Fleming Cos.,
264 F.3d 1245, 1261-63 (10th Cir. 2001); Helwig v. Vencor,
Inc., 251 F.3d 540, 550-52 (6th Cir. 2001) (en banc); Greebel
v. FTP Software, Inc., 194 F.3d 185, 195-97 (1st Cir. 1999).
20                                               No. 04-1687

We find this position persuasive. While some legislators
may have thought that they were adopting the Second
Circuit’s pre-PSLRA approach, others may have envisioned
a stricter standard, and still others may have had yet
another view. See Advanta Corp., 180 F.3d at
533 (reviewing the PSLRA’s legislative history and conclud-
ing that it is “contradictory and inconclusive”). In any
event, “[l]egislation is an objective text approved in con-
stitutionally prescribed ways; its scope is not limited by the
cerebrations of those who voted for or signed it into law.”
United States v. Mitra, 405 F.3d 492, 495 (7th Cir. 2005).
The text of the statute states only that the complaint must
support “a strong inference” of scienter. Without more
detailed instruction, we conclude that the best approach is
for courts to examine all of the allegations in the complaint
and then to decide whether collectively they establish such
an inference. Motive and opportunity may be useful indica-
tors, but nowhere in the statute does it say that they are
either necessary or sufficient.
  Another concern, independent of the question of what
type of information will support a finding of scienter, is the
degree of imagination courts can use in divining whether a
complaint creates a “strong inference.” The Sixth Circuit
has said that “the strong inference requirement creates
a situation in which ‘plaintiffs are entitled only to the
most plausible of competing inferences,’ but that it does not
mandate that the inference be ‘irrefutable.’ ” Fidel v. Farley,
392 F.3d 220, 227 (6th Cir. 2004) (quoting Helwig, 251 F.3d
at 553). As the Sixth Circuit itself has hinted, however, this
standard could potentially infringe upon plaintiffs’ Seventh
Amendment rights. See City of Monroe Employees Ret. Sys.
v. Bridgestone Corp., 399 F.3d 651, 683 n.25 (6th Cir. 2005)
(“One might argue that for cases where a juror could
conclude that the facts pleaded show scienter, but that
conclusion would not be the most plausible of competing
inferences, a Seventh Amendment problem is presented.”).
No. 04-1687                                                 21

   While we express no view on whether the Sixth Circuit’s
approach is in fact unconstitutional, we think it wiser to
adopt an approach that cannot be misunderstood as a
usurpation of the jury’s role. Instead of accepting only
the most plausible of competing inferences as sufficient
at the pleading stage, we will allow the complaint to survive
if it alleges facts from which, if true, a reasonable person
could infer that the defendant acted with the required
intent. “Faced with two seemingly equally strong infer-
ences, one favoring the plaintiff and one favoring the
defendant, it is inappropriate for us to make a determina-
tion as to which inference will ultimately prevail, lest
we invade the traditional role of the factfinder.” Pirraglia
v. Novell, Inc., 339 F.3d 1182, 1188 (10th Cir. 2003).
“Scienter is normally a factual question to be decided by a
jury, but the complaint must at least provide a factual basis
for its scienter allegations.” Cerner Corp., 425 F.3d at 1084-
85. If a reasonable person could not draw such an inference
from the alleged facts, the defendants are entitled to
dismissal; the complaint would fail as a matter of law to
meet the requirements of § 78u-4(b)(2). See Adams v.
Kinder-Morgan, Inc., 340 F.3d 1083, 1105 (10th Cir. 2003)
(“We [ ] understand a ‘strong inference’ of scienter to be a
conclusion logically based upon particular facts that would
convince a reasonable person that the defendant knew a
statement was false or misleading.”).
  The final piece of the scienter puzzle is whether the
scienter allegations made against one defendant can be
imputed to all other defendants in the same action. The so-
called “group pleading presumption” is “premised on the
assumption that in cases of corporate fraud where the false
or misleading information is conveyed in prospectuses,
registration statements, annual reports, press releases, or
other ‘group-published information,’ it is reasonable to
presume that these are the collective actions of the officers.”
Bridgestone Corp., 399 F.3d at 689. There is significant
22                                               No. 04-1687

debate among the various circuits on the question whether
the group pleading doctrine survived the heightened
pleading requirements of the PSLRA, see Southland Sec.
Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 364 (5th
Cir. 2004); Cabletron Sys., 311 F.3d at 40, as well as among
the district courts of this circuit. Compare Danis v. USN
Communications, Inc., 73 F. Supp. 2d 923, 939 n.9 (N.D. Ill.
1999) (concluding that group pleading continues after the
PSLRA) with Chu v. Sabratek Corp., 100 F. Supp. 2d 827,
835-37 (N.D. Ill. 2000) (concluding that it does not). The
answer, in our view, lies in the language of the statute.
Section 78u-4(b)(2) requires that the complaint “state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” As the
Fifth Circuit recently held, “PSLRA references to ‘the defen-
dant’ may only reasonably be understood to mean ‘each
defendant’ in multiple defendant cases, as it is incon-
ceivable that Congress intended liability of any defen-
dants to depend on whether they were all sued in a single
action or were each sued alone in several separate actions.”
Southland, 365 F.3d at 365-66. See also Phillips v.
Scientific-Atlanta, Inc., 374 F.3d 1015, 1018 (11th Cir. 2004)
(“[W]e believe that the most plausible reading in light of
congressional intent is that a plaintiff, to proceed beyond
the pleading stage, must allege facts sufficiently demon-
strating each defendant’s state of mind regarding his or her
alleged violations.”). We find this reasoning persuasive.
While we will aggregate the allegations in the complaint to
determine whether it creates a strong inference of scienter,
plaintiffs must create this inference with respect to each
individual defendant in multiple defendant cases.
  The district court found that the plaintiffs’ complaint
adequately alleged that Notebaert and Birck made false
or misleading material statements in regards to the TITAN
5500, the TITAN 6500, and the company’s past results. We
have drawn the same conclusion with respect to Tellabs’s
No. 04-1687                                              23

future projections. We can now assess whether the com-
plaint states, with respect to each of these actionable
statements, facts that give rise to a strong inference of
scienter. We conclude that the complaint meets this
threshold for Notebaert, but not for Birck. Since Notebaert
was acting within the scope of his position as CEO, his
alleged knowledge of the falsity of his statements can be
imputed to the corporate entity Tellabs. See United States
v. 7326 Highway 45 North, 965 F.2d 311, 316 (7th Cir.
1992) (“Where a corporate agent obtains knowledge while
acting in the scope of his agency, he presumably reports
that knowledge to his corporate principal so the court
imputes such knowledge to a corporation.”).
   First, as for the TITAN 5500, the Probe Research report
revealed, “in or about early 2001,” that the market for the
TITAN 5500 had faded. In reaction to this news, Tellabs’s
marketing strategy department concluded that revenue
from the TITAN 5500 would decline by about $400 million.
According to one confidential source, a Tellabs market
analyst who worked for the company throughout the
class period, internal reports revealed by March 2001
that the market for the 5500 was drying up. Yet, in April
2001, Notebaert told financial analysts that “everything
we hear from the customers indicates that our in-user
demand for services continues to grow.” While it is con-
ceivable that Notebaert had yet to see the reports sug-
gesting his company was in trouble (“in or about early 2001”
is somewhat vague), the plaintiffs have provided enough for
a reasonable person to infer that Notebaert knew that his
statements were false. According to another confidential
source, a Tellabs business manager, Notebaert stayed on
top of the company’s financial health through weekly
conversations with his fellow executives. Given
the significance of the TITAN 5500 and the number of
reports suggesting that it was in trouble, we find it suffi-
ciently probable that Notebaert had information suggesting
24                                               No. 04-1687

that his statements were false. See Green Tree, 270 F.3d at
665 (“One of the classic fact patterns giving rise to a strong
inference of scienter is that defendants published state-
ments when they knew facts or had access to information
suggesting that their public statements were materially
inaccurate.”).
  Creating the required strong inference that Birck knew
about the 5500’s market weakness is more difficult. On the
one hand, he signed a letter in February 2001 informing
investors that the 5500 was “still going strong.” Plaintiffs
also alleged generally that he regularly attended “town hall
meetings” with Notebaert, that he (with Notebaert) had his
“hands on the pulse,” and that he knew the status of each
product. Furthermore, Birck sold 80,000 Tellabs shares in
the first week of February 2001, which the plaintiffs
suggest supplies circumstantial evidence that he knew that
his February statement was false. On the other hand,
undermining the inference of Birck’s knowledge is the fact
that it was not until March 2001 that the TITAN 5500’s
declining status was obvious, and Birck’s last public
comment regarding the 5500 was that February letter. This
particular insider trading evidence also adds little to the
overall picture. While insider trading may be sufficient
circumstantial evidence of scienter, plaintiffs must show
that the sale of stock is “dramatically out of line with prior
trading practices at times calculated to maximize the
personal benefit from undisclosed inside information.”
Silicon Graphics, 183 F.3d at 936 (internal quotation
omitted); see also Cerner Corp., 423 F.3d at 1085. Here, the
plaintiffs allege that Birck made a significant stock sale,
but the complaint provides no information as to how this
sale compared to Birck’s past or subsequent trading.
Indeed, while 80,000 shares may be a lot of shares, it
represented only one percent of Birck’s holdings. The
complaint does not provide any reference point from which
to judge Birck’s sales, and we do not believe that the mere
No. 04-1687                                                 25

fact that he sold one percent of his stock necessarily
establishes a strong inference of scienter. Finally, the
complaint fails to allege with particularity that Birck made
any actionable statements regarding the TITAN 6500.
  While we consider it a close question, we conclude that
the plaintiffs did not meet the strict PSLRA standards for
pleading Birck’s scienter. We thus confine the remain-
der of our scienter discussion with respect to the 6500 to
Notebaert. According to the complaint, Notebaert made
a number of false statements regarding the 6500, suggest-
ing that it was available and being shipped, when, in fact,
Tellabs did not ship a single TITAN 6500 during the
class period. If it is true that the TITAN 6500 was not in
fact available during the class period, it is hard to ac-
cept that Notebaert’s statements were simply honest
mistakes. According to a Tellabs sales director, Notebaert
saw weekly sales reports and production projections.
Another confidential source, a former high-level sales
executive, reported that Notebaert knew that “the TITAN
6500 was not ready for deployment despite Tellabs’[s] public
announcements.” We conclude that the plaintiffs have
pleaded sufficient facts to “giv[e] rise to a strong inference,”
15 U.S.C. § 78u-4(b)(2), that Notebaert knowingly lied when
he informed investors that the 6500 was “available now”
and was “being shipped.”
  Although both Birck and Notebaert signed Tellabs’s 10-K
for the fourth quarter of 2000, once again the complaint
does not contain enough information to create a strong
inference that Birck recklessly disregarded the truth of
Tellabs’s financial health. According to the complaint,
Tellabs fabricated the appearance of demand through
channel stuffing. Although Birck should have assured
himself that the numbers being represented were accurate,
his trust in his CEO does not constitute the level of reck-
lessness that the statute requires. The plaintiffs do,
however, allege sufficient facts to suggest that Note-
26                                                No. 04-1687

baert was aware of the channel stuffing. Indeed, a former
senior business manager at Tellabs informed the plain-
tiffs that Notebaert “worked directly with Tellabs’[s]
sales personnel” to effect the channel stuffing. Another
confidential source, a high-level sales executive, admitted
that his employees fabricated purchase orders for products
that customers had not ordered. He claimed that Notebaert
“unquestionably knew” about the channel stuffing. As with
the TITAN 5500 and 6500, we find that the complaint
contains enough detail to establish a strong inference that
Notebaert knew of the channel stuffing and therefore knew
Tellabs had exaggerated its fourth quarter 2000 revenues.
  Finally, since the allegedly overstated revenue projections
rest on the company’s statements that its products were
doing better than they actually were, the scienter for those
alleged misrepresentations serves as sufficient circumstan-
tial evidence of scienter here. Thus, the complaint is
sufficient to state a claim that Notebaert, but not Birck,
recklessly disclosed overstated projections.


                              III
  Both the Securities Act of 1933 and the Securities
Exchange Act of 1934 impose liability not only on the
person who actually commits the securities law violation,
but also on the persons who “directly or indirectly” control
the violator. See 15 U.S.C. § 78t(a). Thus, the plaintiffs’
claims against Notebaert, Birck, and the other Tellabs
executives for controlling person liability under § 78t(a)
survive because the complaint adequately alleges a com-
plaint against Tellabs, a “person” these individuals alleg-
edly controlled. See In re Stone & Webster, Inc. Sec. Litig.,
424 F.3d 24, 27 (1st Cir. 2005) (holding that “it is
an essential element of the § 20(a) controlling person claims
[in that case] . . . that plaintiffs show a Rule 10b-5 violation
by the controlled entity”). While this is something of a back
No. 04-1687                                                 27

door to liability, given our finding that the complaint
adequately alleges only that Notebaert acted with scienter,
§ 78t(a) allows a defendant to nullify control person liability
by proving that he acted in “good faith.” If, in the end, the
plaintiffs are able to sustain a charge against Tellabs, Birck
and the other executives will have an opportunity to prove
that they acted in good faith.
  Likewise, the plaintiffs’ claim against Birck for insider
trading survives. A private cause of action exists under
§ 20A of the Securities Exchange Act against persons
who purchase or sell a security “while in possession of
material, nonpublic information.” See 15 U.S.C. § 78t-1(a).
To create potential liability under § 20A, the plaintiffs must
prove an independent violation of “this chapter or the rules
or regulations thereunder.” Id. In other words, § 20A claims
are “derivative, requiring proof of a separate underlying
violation of the Exchange Act.” Advanta Corp., 180 F.3d at
541. Thus, because Birck may be liable as a control person
under § 78t(a), it is premature to dismiss the plaintiffs’
§ 20A allegation against him.


                             IV
  For these reasons, we AFFIRM in part and REVERSE in
part the judgment of the district court, and REMAND for
further proceedings consistent with this opinion.
28                                        No. 04-1687

A true Copy:
      Teste:

                    ________________________________
                    Clerk of the United States Court of
                      Appeals for the Seventh Circuit




               USCA-02-C-0072—1-25-06
