                  FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

DALTON PETRIE, individually and on          No. 12-55620
behalf of all others similarly
situated,                                      D.C. No.
                               Plaintiff,   8:10-cv-00252-
                                              DOC-RNB
                  and

DR. THOMAS LEE; MARGARET YU;                  OPINION
SCOTT LOVELL,
                     Appellants,

                   v.

ELECTRONIC GAME CARD, INC.; LEE
J. COLE; LINDEN BOYNE; KEVIN
DONOVAN; PAUL FARRELL; EUGENE
CHRISTIANSEN; ANNA HOUSSELS;
LYNNE ROCHELLE ATTIAS;
JONATHAN STEINBERG, as Executor
of the Estate of Lord Leonard
Steinberg,
                Defendants-Appellees.


       Appeal from the United States District Court
          for the Central District of California
        David O. Carter, District Judge, Presiding

               Argued and Submitted
        December 4, 2013—Pasadena, California
2          PETRIE V. ELECTRONIC GAME CARD, INC.

                        Filed July 30, 2014

     Before: Harry Pregerson and Morgan Christen, Circuit
      Judges, and Roslyn O. Silver, Senior District Judge.*

                    Opinion by Judge Christen


                           SUMMARY**


                         Securities Fraud

    Reversing the district court’s dismissal of an action under
§§ 10(b) and 20(a) of the Securities Exchange Act against
officers and directors of Electronic Game Card, Inc., the
panel held that the court did not properly strike portions of
the third amended complaint and that the complaint
adequately pleaded false statements and scienter.

    The panel held that the stricken allegations were not
based on discovery obtained in violation of the Private
Securities Litigation Reform Act, which provides that all
discovery shall be stayed during the pendency of a motion to
dismiss, where the discovery materials were subpoenaed
before the defendant former chief executive officer gave
notice of his intent to file a motion for judgment on the
pleadings. The panel held that a party does not violate a


    *
   The Honorable Roslyn O. Silver, Senior District Judge for the U.S.
District Court for the District of Arizona, sitting by designation.
  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
         PETRIE V. ELECTRONIC GAME CARD, INC.                3

PSLRA discovery stay by relying on materials provided by a
third party pursuant to a valid subpoena issued when no
PSLRA discovery stay was in effect.

   The panel held that with the stricken allegations, the third
amended complaint adequately pleaded falsity and scienter.
The panel remanded the case for further proceedings.


                         COUNSEL

Laurence M. Rosen (argued), The Rosen Law Firm, New
York, New York, for Appellants.

Michael L. Cypers (argued), Crowell & Moring, Los Angeles,
California; Ethan P. Shulman, Crowell & Moring, San
Francisco, California, for Defendant-Appellee Linden Boyne.

Lawrence B. Steinberg, Buchalter Nemer, Los Angeles,
California; Jeffrey J. Greenbaum and Hervé Gouraige, Sills
Cummis & Gross, Newark, New Jersey, for Defendant-
Appellee Lee Cole.

Jonathan D. Cogan (argued), Steven G. Kobre, and Andrew
M. Meehan, Kobre & Kim, New York, New York;
Christopher Kim, Bryan Sheldon, and Lisa J. Yang, Lim,
Ruger & Kim, Los Angeles, California, for Defendants-
Appellees Kevin Donovan, Eugene Christiansen, Paul Farrell,
Anna Houssels, Lynne Rochelle Attias, and Jonathan
Steinberg.
4        PETRIE V. ELECTRONIC GAME CARD, INC.

                         OPINION

CHRISTEN, Circuit Judge:

    Electronic gaming has become ubiquitous; even slot
machines are now made to operate at the push of a button
rather than the pull of a lever. Electronic Game Card, Inc. set
out to further this trend by producing electronic “scratch off”
devices for casinos, lotteries, and other gaming
establishments. The company appeared to be flying high,
with millions of dollars in reported assets as late as
September 2009. But a little over a year later, Electronic
Game Card, Inc. filed for bankruptcy and reported it was
broke.

    A group of investors filed suit, alleging that the
company’s former Chief Executive Officer and Chief
Financial Officer violated section 10(b) of the Securities
Exchange Act, and that others violated section 20(a) of the
Act. The Private Securities Litigation Reform Act of 1995
(PSLRA) provides that “all discovery . . . shall be stayed
during the pendency of any motion to dismiss” in a private
securities litigation action. 15 U.S.C. § 78u-4(b)(3)(B). The
complaint at issue in this appeal, the Third Amended
Complaint, was based in large part on discovery materials
subpoenaed before the company’s former CEO gave notice of
his intent to file a motion for judgment on the pleadings.
These materials were not received until after the CEO gave
such notice.

    The questions we must decide are: (1) whether the district
court properly struck allegations and exhibits from the Third
Amended Complaint because they were based on discovery
obtained in violation of a PSLRA discovery stay; and
           PETRIE V. ELECTRONIC GAME CARD, INC.                        5

(2) whether the Third Amended Complaint adequately
pleaded false statements and scienter. For the reasons
explained below, we reverse the district court’s judgment
dismissing this action and remand for further proceedings.

                         BACKGROUND

     In September 2010, the lead plaintiffs (Investors),
appellants here, filed a First Amended Complaint (FAC)
alleging violations of section 10(b) of the Securities
Exchange Act of 1934 by defendants-appellees Lee Cole and
Linden Boyne, and violations of section 20(a) of the Act by
all remaining defendants-appellees. Cole and Boyne are the
former CEO and CFO, respectively, of Electronic Game
Card, Inc. (Company)1. The other individual defendants-
appellees served as Company executives, on its board of
directors, or both.2 Section 10(b) prohibits securities fraud by
use of deceptive and manipulative practices. 15 U.S.C. § 78j;
17 C.F.R. § 240.10b-5. Section 20(a) makes “control
persons” liable for violations of other rules or regulations
under the Act, including securities fraud. 15 U.S.C. § 78t(a).

     According to Investors, until 2010 the Company owned
all shares of a subsidiary called Electronic Game Card, Ltd.
(Subsidiary) that operated in the United Kingdom and
Europe. The Subsidiary played an essential role in the
Company’s business. In fact, Investors alleged that “nearly



  1
   We use “Company” to refer to both Electronic Game Card, Inc., a
Nevada corporation, and its previous iteration as a Delaware corporation.
  2
    This opinion refers to members of this second group of defendants-
appellees as “Control Persons.”
6          PETRIE V. ELECTRONIC GAME CARD, INC.

all of the Company’s reported revenues and income were
derived from” the Subsidiary.

    Under the purported terms of a 2002 agreement through
which the Company acquired all shares of the Subsidiary, if
the Company attempted to “change the Memorandum or
Articles or other governing instruments of [the Subsidiary],”
“change the number of persons constituting the Board of
Directors of [the Subsidiary],” or “change the persons
constituting the Board of Directors of [the Subsidiary],” a
default would be declared and the shares would revert to the
original owners.3

    In 2009, Control Persons Kevin Donovan and Eugene
Christiansen assumed control of the Company in place of
Cole and Boyne. The record indicates substantial infighting
during this period. Under new leadership, the Company
removed the Subsidiary’s board, causing ownership of the
Subsidiary’s stock to revert back to its original owner
sometime in early 2010.

    In February 2010, the Company announced that its
auditor, Mendoza Berger & Company (Auditor), had
withdrawn its audit opinions of the Company’s financial
statements for fiscal years 2006 to 2008 after becoming
“aware of irregularities in the audit confirmation of a bank
account represented . . . as having been held by [the
Subsidiary].”    In May 2010, the Company publicly
announced that these financial statements should no longer be
relied upon because of “significant concerns as to the[ir]


    3
    The agreement was amended in 2006 in a manner that did not affect
the relevant terms at issue in this case. This opinion refers to both the
agreement and amendment collectively as the “2002 Agreement.”
         PETRIE V. ELECTRONIC GAME CARD, INC.               7

integrity.” The Company’s announcement revealed that it
was “concerned that reported revenue may be materially
overstated and that the reported carrying value of its assets
and investments in third-party companies may not be fairly
stated.” Investors alleged that the withdrawal of the
Company’s financial statements and related information in its
annual reports filed with the SEC demonstrated that these
statements were false when made. They also alleged that the
“highly adverse fact” that the Company could lose ownership
of the Subsidiary was hidden from them, “rendering [its]
statements about its ownership of [the Subsidiary], its assets
and revenue stream, materially false and misleading.”

     Control Persons moved to dismiss the FAC, and the
district court granted the motion, in part. It dismissed the
10(b) claims against Control Persons, but it did not dismiss
the 20(a) claims. The court ruled that Investors had
adequately pleaded a primary 10(b) violation by the
Company, as well as each moving defendant’s status as a
control person. The court also concluded that Investors
adequately pleaded the Company’s scienter—a prerequisite
to finding a violation of section 10(b)—through its
allegations relating to Cole and Boyne. The court observed:
“none of the Moving Defendants contest the notion that the
[FAC] contains viable allegations of Boyne’s and Cole’s
scienter, which may be imputed to [the Company].” But Cole
and Boyne had not answered the FAC by this point in the
litigation. From the record available on appeal, it appears
they lived abroad and had not been served with the FAC at
the time of the district court’s ruling.

    Investors filed their Second Amended Complaint (SAC)
in February 2011. It alleged 10(b) violations by all
defendants except Control Persons Christiansen, Farrell, and
8          PETRIE V. ELECTRONIC GAME CARD, INC.

Houssels, and 20(a) violations against all individual
defendants.

    Both the FAC and SAC made substantially similar factual
and legal allegations as to the primary 10(b) violations. In
particular, Investors alleged that the Company and its
management made false statements concerning the
Company’s ownership of the Subsidiary, and that the
subsequent retraction of the Auditor’s opinions shows that the
Company’s public financial statements were false over
several years.4

    These basic factual allegations of the Company’s scienter
were not initially challenged by the defendants. After the
district court ruled on Control Person Donovan’s motion to
dismiss the SAC, it set a schedule for discovery, and on June
23, 2011, Investors commenced discovery by issuing a third-
party subpoena to the Company’s Auditor. The subpoena
was returnable on July 25, 2011.

    At some point after filing the SAC, Investors managed to
contact Cole, and he agreed to answer the Investors’
allegations. On August 8 or 9, 2011, Cole’s counsel notified
Investors of his intent to file a motion for judgment on the
pleadings. In Cole’s opinion, this notification gave rise to a
stay of discovery under the PSLRA, but Investors
communicated their disagreement with the contention that a
PSLRA discovery stay was in effect.



 4
    A copy of the 2002 Agreement was not provided to Investors until after
the SAC was filed, but Investors were aware from the outset of the
litigation of the existence of an agreement that caused ownership of the
subsidiary “to revert or transfer to a third party.”
           PETRIE V. ELECTRONIC GAME CARD, INC.                          9

    On August 22, 2011, Investors received materials from
the Auditor in response to their previously-issued discovery
requests. Cole filed a motion for judgment on the pleadings
shortly thereafter, along with a motion to confirm the
existence of a PSLRA discovery stay, and Boyne filed a
motion to dismiss. The district court granted both dispositive
motions without prejudice and denied as moot Cole’s motion
to confirm the existence of a discovery stay.

    The Third Amended Complaint (TAC) was filed in
November 2011, and it presents a substantially more detailed
and unified account of the alleged misfeasance by Cole and
Boyne. Specifically, the TAC alleges that Cole and Boyne
actively concealed the existence of the 2002 Agreement from
the Auditor, and perhaps from the Company’s board as well.5
In support of their earlier efforts to have the SAC dismissed,
Cole and Boyne argued that the board knew about the 2002
Agreement, and Boyne pointed to the minutes of a February
1, 2006 board meeting at which the agreement was
supposedly discussed. But Cole and Boyne were the only two
directors listed as “present” for this meeting, and the TAC
asserts that Cole and Boyne either concealed or fabricated
these minutes. In support of this contention, the TAC alleges
that while Cole and Boyne claimed to have provided the
Auditor with all Company board minutes for 2006, discovery
from the Auditor did not include the February 1 minutes,


 5
   The parties dispute whether the existence of the 2002 Agreement was
disclosed to Control Persons prior to the change in the Subsidiary’s board.
We need not decide this issue, though we note that there is no explanation
in the record why the Company’s leadership would willingly follow a
course (changing the Subsidiary’s board) that would cut off most of the
Company’s revenue, if the Company’s leadership had known the terms of
the 2002 Agreement.
10         PETRIE V. ELECTRONIC GAME CARD, INC.

despite including minutes for other board meetings around the
same time.

    The TAC also alleges the Company was able to report
millions of dollars in cash and cash equivalents at the end of
fiscal years 2006, 2007, and 2008 because its financial
statements were wrongfully consolidated with its
Subsidiary’s. Allegedly, much of this cash was represented
to the Auditor as being held in a bank account with Credit
Suisse in Gibraltar, Spain that was controlled by the
Company and its Subsidiary.

    Relying on the newly-acquired Auditor discovery
materials, the TAC claims that the multi-million dollar
Gibraltar account never existed. Discovery materials
obtained from the Auditor and appended as exhibits to the
TAC include allegedly false bank audit confirmations and
bank statements on Credit Suisse stationary, which appear to
bear Boyne’s signature.6 The TAC alleges that these forms
also bear forged bank employee signatures and a fabricated
address for a Credit Suisse “Audit Confirmation Unit” in
Malaga, Spain. The exhibits, if authentic and accurate, would
be consistent with Investors’ theory that false representations
concerning the Company’s finances began when Cole and
Boyne were CEO and CFO of the Company, respectively, and
continued while Boyne remained CFO. The TAC alleges that
forms were sent in Credit Suisse’s name to the Auditor in


     6
       We generally consider exhibits attached to a complaint and
incorporated by reference to be part of the complaint. See Swartz v.
KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007). Defendants-appellees do
not argue that the exhibits to the TAC may not be considered on any basis
other than their argument that the materials incorporated therein were
obtained in violation of the PSLRA discovery stay.
            PETRIE V. ELECTRONIC GAME CARD, INC.                        11

order to falsely confirm the existence of bank accounts
represented as the Company’s or the Subsidiary’s.

    The TAC alleges that these falsified confirmations were
the reason the Company’s Auditor withdrew its audit
opinions for fiscal years 2006, 2007, and 2008. In support of
this allegation, the TAC includes an exhibit that purports to
be a letter from Credit Suisse stating that a bank account
represented by Boyne as belonging to the Company in fact
belonged solely to Cole and Boyne, not the Company.
Another exhibit appears to be a letter Credit Suisse
subsequently wrote to Control Person Donovan (who had
become the Company’s new CEO) stating that the bank
would be reporting the matter to the Royal Gibraltar Police
and advising the Company to do the same.

    Investors allege that the dramatic shift in the Company’s
fortunes, illustrated by the withdrawal of the audit opinions,
was principally explained by its loss of the Subsidiary in
2010. They allege that, had the Auditor known the Company
could lose ownership of the Subsidiary under the terms of the
2002 Agreement, it would not have allowed the Company’s
and Subsidiary’s financial reports to be consolidated because
this would have been contrary to generally accepted
accounting principles (GAAP).7 Investors claim that Cole



 7
     The TAC cites a provision of GAAP that reads:

          A majority-owned subsidiary shall not be consolidated
          if control is likely to be temporary or if it does not rest
          with the majority owner (as, for instance, if the
          subsidiary is in legal reorganization or in bankruptcy or
          operates under foreign exchange restrictions, controls,
          or other governmentally imposed uncertainties so
12        PETRIE V. ELECTRONIC GAME CARD, INC.

and Boyne concealed the existence of the 2002 Agreement
from the Company’s Auditor because the agreement’s
restrictions on changing the Subsidiary’s board and articles of
association deprived the Company of its ability to exercise
control, and that this limitation, in turn, made the
consolidation of the Company’s financial statements with the
Subsidiary’s inappropriate under GAAP. The TAC alleges
that the Company’s consolidated financial statements were
therefore “false,” and that as a result of this alleged pattern of
fraud, Investors lost the entire value of their investment when
the value of the Company’s stock collapsed. Cole responded
to the TAC by filing a motion to strike several of its exhibits,
and to strike allegations in the TAC that were derived from
the Auditor discovery materials. Cole, Boyne, and Control
Persons filed motions to dismiss the TAC.

    The district court ruled that a discovery stay arose
automatically on August 8 or 9 pursuant to the PSLRA, when
Cole announced his intent to file a motion for judgment on
the pleadings. The court opined that Investors “should have
immediately ceased all discovery” at that point.
Acknowledging that motions to strike pleadings are
disfavored, the court nonetheless ruled that Investors “cannot
be permitted to openly flaunt a direct violation of the
PSLRA.” Under Federal Rule of Civil Procedure 12(f), the
court struck the portions of the TAC referring to or relying
upon the Auditor discovery materials, in light of its



        severe that they cast significant doubt on the parent’s
        ability to control the subsidiary).

Research and Dev. Arrangements, Statement of Fin. Accounting Standards
No. 94, § 13 (Fin. Accounting Standards Bd. 1987).
          PETRIE V. ELECTRONIC GAME CARD, INC.                   13

conclusion that the materials were obtained in violation of the
PSLRA discovery stay.

    The district court ultimately ruled: “Without the stricken
allegations, the TAC does not contain sufficient facts to state
a claim for violations of Section 10(b) or Section 20(a) of the
Exchange Act,” and Investors’ allegations did “not
sufficiently allege falsity or scienter to meet the heightened
pleading requirements of the PSLRA.” The district court
dismissed the TAC with prejudice and entered final judgment
in favor of defendants. Investors appealed.8

   JURISDICTION AND STANDARD OF REVIEW

    We have jurisdiction over this appeal from the district
court’s final order dismissing the action with prejudice under
28 U.S.C. § 1291. We review the district court’s decision to
strike the pleadings under Rule 12(f) for abuse of discretion.
Nurse v. United States, 226 F.3d 996, 1000 (9th Cir. 2000).
We review dismissal of an action under Rule 12(b)(6) de
novo. See Metzler Inv. GMBH v. Corinthian Colls., Inc.,
540 F.3d 1049, 1061 (9th Cir. 2008). We accept the
appellants’ factual allegations as true and construe them in
the light most favorable to the appellants. Id. “Review is
limited to the complaint, materials incorporated into the
complaint by reference, and matters of which the court may
take judicial notice.” Id. (citing Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 322 (2007)).




  8
    The Company filed for bankruptcy and did not participate in this
appeal.
14       PETRIE V. ELECTRONIC GAME CARD, INC.

                       DISCUSSION

I. The Private Securities Litigation Reform Act’s
   Discovery Stay Provision

    The PSLRA was enacted in 1995 “in response to several
perceived abuses in securities litigation, including discovery
abuses.” SG Cowen Sec. Corp. v. U.S. Dist. Court for N.
Dist. of Cal., 189 F.3d 909, 911 (9th Cir. 1999). The PSLRA
creates heightened pleading requirements for private
securities fraud actions like this one. Metzler, 540 F.3d at
1054–55. In addition, under the heading “Stay of discovery,”
the PSLRA provides:

       In any private action arising under this
       chapter, all discovery and other proceedings
       shall be stayed during the pendency of any
       motion to dismiss, unless the court finds upon
       the motion of any party that particularized
       discovery is necessary to preserve evidence or
       to prevent undue prejudice to that party.

15 U.S.C. § 78u-4(b)(3)(B). Our decision in SG Cowen
analyzed this provision. There, we observed that the PSLRA
discovery stay was designed to avoid the “unnecessary
imposition of discovery costs on defendants.” SG Cowen,
189 F.3d at 911 (quoting H.R. Rep. No. 104-369, at 32
(1995), reprinted in 1995 U.S.C.C.A.N. Sess. 730, 731). We
held that the “failure to muster facts sufficient to meet the
Act’s pleading requirements cannot constitute the requisite
‘undue prejudice’ to the plaintiff justifying a lift of the
discovery stay.” Id. at 913. “‘Congress clearly intended that
complaints in these securities actions should stand or fall
based on the actual knowledge of the plaintiffs rather than
         PETRIE V. ELECTRONIC GAME CARD, INC.               15

information produced by the defendants after the action has
been filed.’” Id. at 912 (quoting Medhekar v. U.S. Dist. Ct.
for N. Dist. of Cal., 99 F.3d 325, 328 (9th Cir. 1996)). “The
‘Stay of Discovery’ provision of the Act clearly contemplates
that ‘discovery should be permitted in securities class actions
only after the court has sustained the legal sufficiency of the
complaint.’” Id. at 912–13 (quoting S. Rep. No. 104–98, at
14 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 693)
(emphasis in original).

    The district court relied on Federal Rule of Civil
Procedure 12(f) when it struck the portions of the TAC that
were based on the Auditor discovery materials. We review
this ruling for abuse of discretion. Nurse, 226 F.3d at 1000.
Rule 12(f) provides: “The court may strike from a pleading an
insufficient defense or any redundant, immaterial,
impertinent, or scandalous matter.” The district court
emphasized (without elaboration) the term “immaterial,”
which suggests that it struck part of the TAC because it
believed the Auditor’s discovery was rendered immaterial by
Investors’ violation of the statutorily-imposed stay.

    We have defined “immaterial” as “that which has no
essential or important relationship to the claim for relief or
the defenses being plead.” Fantasy, Inc. v. Fogerty, 984 F.2d
1524, 1527 (9th Cir. 1993) (citation and internal quotation
marks omitted), rev’d on other grounds, 510 U.S. 517 (1994).
Under this definition, even if the incorporation of the Auditor
discovery materials into the TAC was improper, the
discovery would not be “immaterial” under Rule 12(f).
Evidence of forgery and fraud clearly has an “essential or
important relationship” to Investors’ claim for relief in their
securities fraud action. See Fantasy, Inc., 984 F.2d at 1527.
Nor are the discovery materials “redundant,” “impertinent,”
16        PETRIE V. ELECTRONIC GAME CARD, INC.

or “scandalous” as contemplated by Rule 12(f). The district
court may have cited the “immaterial” provision of Rule 12(f)
to signal that it concluded the discovery could not be
considered because it had been obtained in violation of the
PSLRA’s discovery stay, but this interpretation of Rule 12(f)
does not accord with how our court has defined the term
“immaterial.” See id.

    We recognize that the district court may have relied on
Rule 12(f) because Congress did not expressly provide a
remedy for violations of the PSLRA stay. Investors do not
offer any convincing argument that the district court would
not have the discretion to sanction a violation of the PSLRA
stay provision, as it would any court-ordered discovery stay.
Cf. Fed. R. Civ. P. 37(b)(2)(A)(iii) (permitting courts to strike
pleadings when a party fails to obey a discovery order). But
because, as discussed below, we decide the Auditor discovery
materials were not obtained in violation of a PSLRA
discovery stay, we do not need to define the contours of the
district court’s authority to strike pleadings obtained in
violation of this type of stay. Even if a PSLRA discovery
stay arose on August 8 or 9 when Cole announced his intent
to file a motion for judgment on the pleadings, such stay
would not have been violated by the use of discovery
received in response to discovery requests properly issued
before any stay arose.

II. Appellants did not violate the PSLRA discovery stay
    provision.

   The PSLRA requires that “all discovery and other
proceedings shall be stayed” during a pending motion to
dismiss. 15 U.S.C. § 78u-4(b)(3)(B). Defendants argue that
Investors impermissibly obtained the Auditor discovery
           PETRIE V. ELECTRONIC GAME CARD, INC.                         17

materials in violation of this stay provision. Their theory
depends on the assumption that the PSLRA prevents the use
of discovery that was properly requested, but received after
a stay arose.9

    Our decision in SG Cowen makes clear that no discovery
may proceed until the court has sustained the legal
sufficiency of a complaint. 189 F.3d at 912–13. The
Supreme Court recently noted that the PSLRA “permits
defendants to obtain automatic stays of discovery.”
Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058, 1063
(2014) (emphasis added).10 When an amended complaint is
filed after an earlier complaint has been upheld (at least in
part), the bulk of district courts have ruled that filing a motion


 9
    Defendants Cole and Boyne also argue that Investors violated Federal
Rule of Civil Procedure 45 by failing to provide timely notice of the
receipt of the Auditor discovery materials. Rule 45 requires a party to
give notice to other parties before service of a subpoena commanding the
production of documents. Defendants cite no authority holding that notice
must be given upon receipt of discovery when prior notice of the subpoena
was properly provided. Aside from the fact that the district court did not
strike portions of the TAC pursuant to Rule 45, this argument fails
because it appears Investors did provide such notice to all defendants who
had appeared in the action as of the time the subpoena was issued.
  10
      Most district courts that have directly addressed the question have
recognized that a PSLRA discovery stay arises automatically, without the
need for judicial declaration, upon the filing of a dispositive motion. See,
e.g., In re Am. Funds Sec. Litig., 493 F. Supp. 2d 1103, 1104 (C.D. Cal.
2007); Sedona Corp. v. Ladenburg Thalmann, No. 03 CIV. 3120
LTSTHK, 2005 WL 2647945, at *3 (S.D.N.Y. Oct. 14, 2005). But see
Lane v. Page, No. CIV 06-1071 JB/ACT, 2009 WL 1312896, at *1
(D.N.M. Feb. 9, 2009) (“The Court interprets the PSLRA to require the
Court to stay discovery while a motion to dismiss is pending, but does not
read the statute to automatically stay the case upon the filing of a
motion.”).
18         PETRIE V. ELECTRONIC GAME CARD, INC.

to dismiss the amended complaint also triggers a stay of any
discovery. See, e.g., Fosbre v. Las Vegas Sands Corp., No.
2:10-CV-00765-KJD-GWF, 2012 WL 5879783, at *3 (D.
Nev. Nov. 20, 2012) (“[I]t is proper to impose the stay of
discovery pending the decision on the motion to dismiss the
Second Amended Complaint, notwithstanding that the parties
engaged in discovery prior to its filing.”); McGuire v.
Dendreon Corp., No. C07-800-MJP, 2009 WL 666863 (W.D.
Wash. Mar. 11, 2009); In re Smith Barney Transfer Agent
Litig., No. 05 Civ. 7583 WHP, 2012 WL 1438241, at *2
(S.D.N.Y. Apr. 25, 2012); Sedona Corp., 2005 WL 2647945,
at *3; cf. In re Lantronix, Inc. Sec. Litig., No. CV 02-03899
PA, 2003 WL 22462393, at *2 (C.D. Cal. Sept. 26, 2003)
(refusing to lift stay even when defendant did not challenge
part of plaintiffs’ claim). Nonetheless, assuming that a
discovery stay arose when Cole gave notice of his intent to
file a motion for judgment on the pleadings, we do not read
the statute to have retroactive application; that is, the
admonition that “all discovery and other proceedings shall be
stayed during the pendency of any motion to dismiss” does
not prohibit a party from accepting third-party responses to
properly-issued requests for written discovery.

    The common sense reading of the PSLRA’s plain
language “all discovery and other proceedings shall be
stayed” is that no litigant shall take any steps in pursuit of
discovery during the pendency of any motion to dismiss.11

     11
       The parties do not distinguish between motions to dismiss and
motions for judgment on the pleadings. We therefore assume the PSLRA
discovery stay provision is triggered by a motion for judgment on the
pleadings in the same manner it is trigger by a motion to dismiss. Cf.
Harris v. Cnty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) (internal
citation omitted) (a motion for judgment on the pleadings is the functional
equivalent of a motion to dismiss).
          PETRIE V. ELECTRONIC GAME CARD, INC.                 19

There is no indication that Investors did so here. Instead, on
June 6, 2011, after the district court had ruled on the first
dispositive motions and upheld part of the FAC, the court
issued a scheduling order allowing the parties to proceed with
discovery. Neither Cole’s counsel nor any other party
represented at the June 6 scheduling conference objected to
the district court’s proposed schedule. The parties (except
Boyne) subsequently exchanged initial disclosures consistent
with the scheduling order, and no party argues on appeal that
the scheduling order was improperly entered. Furthermore,
it is undisputed that there was no dispositive motion
pending—and therefore no discovery stay in effect—as of
June 23, 2011, when Investors subpoenaed records from the
Company’s Auditor. No party objected to the subpoena at
that time, and Cole did not notify Investors of his intent to file
a motion for judgment on the pleadings until August 8 at the
earliest. The subpoena to the Auditor was therefore properly
issued, and the only question here is whether Investors could
permissibly rely on tardy discovery responses, delivered to
them after a PSLRA discovery stay allegedly came into effect
again.

     We would expect that if Congress intended a PSLRA
discovery stay to prohibit the use of documents received in
response to previously-issued discovery requests, it would
have said so explicitly. The determinative fact for this appeal
is that Investors subpoenaed the Auditor’s records pursuant
to the district court’s discovery schedule at a time when no
motion to dismiss was pending. The PSLRA was enacted to
reform “abusive practices committed in private securities
litigation.” H.R. Rep. No. 104-369, at 31 (1995), reprinted in
1995 U.S.C.C.A.N. 730, 730. In arguing that Investors
engaged in abusive practices, defendants rely heavily on our
decision in SG Cowen, which noted that “discovery should be
20       PETRIE V. ELECTRONIC GAME CARD, INC.

permitted in securities class actions only after the court has
sustained the legal sufficiency of the complaint.” 189 F.3d at
912–13 (citation and internal quotation marks omitted)
(emphasis in original). But here, the district court did sustain
the sufficiency of the complaint, and it initially allowed
discovery to proceed pursuant to its discovery scheduling
order. None of the defendants objected to this scheduling
order. Even on appeal, no party has asked us to hold that a
district court may not allow discovery in a securities class
action case when a prior complaint has been upheld as to
some parties and no motion to dismiss is pending or
anticipated, simply because the court has not expressly
upheld every part of the complaint as to all parties. This
record does not show that Investors engaged in abusive
practices or violated a statutory stay.

    Defendants contend that Investors violated the stay by
incorporating some of the Auditor discovery materials into
the TAC. The purpose of the PSLRA would not be furthered
by the broad reading of the discovery stay provision that
defendants-appellees advocate. The discovery stay was
intended to prevent discovery abuses such as the
“unnecessary imposition of discovery costs on defendants,”
particularly as a means to coerce settlement. SG Cowen,
189 F.3d at 911 (quoting H.R. Rep. No. 104–369, at 32
(1995), reprinted in 1995 U.S.C.C.A.N. 730, 731). Discovery
costs may also affect third parties like the Company’s
Auditor. But if the Auditor was concerned about the costs of
complying with the subject subpoena, it did not object, nor
did it argue that a discovery stay was in effect such that it
            PETRIE V. ELECTRONIC GAME CARD, INC.                          21

should be relieved of the obligation to respond.12 Similarly,
if defendants believed Investors’ subpoenas were issued
improperly, they could have sought immediate relief from the
court. They did not do so, and we see no basis for such an
objection; defense counsel conceded at oral argument before
our court that no discovery stay was in place when the June
23 subpoena was issued to the Auditor.13

    If the receipt of discovery was not a violation of the
PSLRA, surely the use of the discovery materials in the TAC
was not prohibited. The mere reliance on validly-obtained
materials is not an abusive practice, nor does it impose
unnecessary discovery costs on defendants. We hold that a
party does not violate a PSLRA discovery stay by relying on
materials provided by a third-party pursuant to a valid
subpoena issued when no PSLRA discovery stay was in
effect. Because we conclude that Investors did not violate the
PSLRA, we reverse the district court’s order striking portions
of the TAC that incorporated the Auditor discovery materials.




 12
    Faulkner v. Verizon Commc’ns, Inc., 156 F. Supp. 2d 384 (S.D.N.Y.
2001), cited by defendants, is distinguishable on this basis. In Faulkner,
a third party objected to discovery, and the court refused to lift an existing
PSLRA discovery stay to allow plaintiffs to enforce their subpoena. Id.
at 401–06.
  13
     Defendants cite Anderson v. First Sec. Corp., 249 F. Supp. 2d 1256
(D. Utah 2002) in support of their argument that plaintiffs may not use
discovery materials obtained when a stay is in effect, but Anderson is
distinguishable. There, plaintiffs violated a specific court order intended
to preserve a PSLRA stay that was undeniably in place. Id. at 1272.
22        PETRIE V. ELECTRONIC GAME CARD, INC.

III.    The TAC adequately pleads falsity and scienter.

    We now consider whether the full TAC—including the
portions the district court struck pursuant to Rule
12(f)—adequately pleads falsity and scienter as to defendants
Cole and Boyne.

    We review the dismissal of a complaint pursuant to
12(b)(6) de novo. Metzler, 540 F.3d at 1061. “The required
elements of a private securities fraud action are: (1) a material
misrepresentation or omission of fact, (2) scienter, (3) a
connection with the purchase or sale of a security,
(4) transaction and loss causation, and (5) economic loss.”
Id. (internal quotations omitted). “[T]he complaint shall
specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation regarding the statement or omission is made on
information and belief, the complaint shall state with
particularity all facts on which that belief is formed.” 15
U.S.C. § 78u–4(b)(1). “For a misrepresentation to be
material, there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total
mix’ of information made available.” S.E.C. v. Todd, 642
F.3d 1207, 1215 (9th Cir. 2011) (citation and internal
quotation marks omitted).

    A complaint alleging securities fraud must raise a “strong
inference” of scienter. Metzler, 540 F.3d at 1061. To
sufficiently plead scienter, “the complaint must allege that the
defendants made false or misleading statements either
intentionally or with deliberate recklessness.” In re Daou
Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) (citation
omitted). “[T]he danger of misleading buyers must be
         PETRIE V. ELECTRONIC GAME CARD, INC.              23

actually known or so obvious that any reasonable man would
be legally bound as knowing.” In re VeriFone Holdings, Inc.
Sec. Litig., 704 F.3d 694, 702 (9th Cir. 2012) (internal
quotation marks and emphasis omitted). A “strong inference”
of scienter is “more than merely plausible or reasonable—it
must be cogent and at least as compelling as any opposing
inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314.
While motive is helpful in establishing scienter, “the absence
of a motive allegation is not fatal.” Id. at 325. Finally, the
court reviews all allegations holistically, rather than in
isolation, to determine if a complaint is well-pleaded.
Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1324
(2011) (citing Tellabs, 551 U.S. at 326).

    The adequacy of the TAC might be a close question if we
were to uphold the decision to strike the Auditor discovery
materials, but because we do not, our task is straightforward.
The TAC alleges that Boyne forged documents and signatures
in order to misrepresent the Company’s assets. An exhibit to
the TAC includes a purported record of a Credit Suisse bank
account in the Subsidiary’s name that was previously
confirmed by Boyne and represented as having a balance of
over 12 million dollars as of September 2009. We must
accept the allegations in the TAC as true, and if the exhibits
incorporated into the TAC are what they purport to be, this
bank account never existed. Investors contend that the
misrepresented assets from this account were reported in
public statements by the Company, including financial
statements for fiscal years 2006, 2007, and 2008. Finally, as
noted, Investors allege that Cole and Boyne knowingly
concealed the existence of the 2002 Agreement from the
Company’s Auditor in order to wrongfully consolidate the
Company’s financial statements with its Subsidiary’s. In
particular, Cole and Boyne allegedly concealed or fabricated
24         PETRIE V. ELECTRONIC GAME CARD, INC.

minutes for a board meeting at which the 2002 Agreement
was purportedly discussed.

    We express no opinion on the merits of these factual
allegations. In this appeal, Cole and Boyne do not attempt to
dispute the authenticity of the Auditor discovery materials.
Their focus has been on their assertion that these materials
should not be considered in assessing the sufficiency of the
TAC. Given that we have rejected that assertion, the
allegations described in the preceding paragraph are sufficient
to plead both falsity and scienter under the PSLRA. The
order dismissing this action must be reversed because it was
based on the insufficiency of the falsity and scienter
allegations against Cole and Boyne.

    Finally, Control Persons ask us to affirm the district
court’s dismissal of the section 20(a) claims against them
because, they argue, the TAC alleged facts establishing that
they acted in good faith. The district court did not reach this
question; it dismissed the derivative claims alleged against
Control Persons after dismissing the primary 10(b) claims
against Cole and Boyne. It is not our practice to consider
arguments in the first instance on appeal.14 “[O]ur general
assumption is that we operate more effectively as a reviewing
court than as a court of first instance.” Detrich v. Ryan,
740 F.3d 1237, 1248–49 (9th Cir. 2013).




  14
     We are mindful that at this stage in the litigation, the allegations
against all defendants-appellees in the TAC are just that: allegations that
have not yet been tested in court.
         PETRIE V. ELECTRONIC GAME CARD, INC.           25

                     CONCLUSION

    Because the Auditor discovery materials were not
obtained or used in violation of the PSLRA, we reverse the
district court’s decision to strike portions of the TAC.
Considering all of the allegations in the TAC, we conclude
that it adequately pleads both falsity and scienter as to
defendants Cole and Boyne. We reverse the judgment of the
district court and remand this case for further proceedings
consistent with this opinion.

   REVERSED and REMANDED.
