                 FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT


TODD SCHUENEMAN, on behalf of             No. 14-55633
himself and all others similarly
situated; WILLIAM SUTLIFF; JEAN              D.C. No.
SUTLIFF; ARENA INVESTORS GROUP;           3:10-cv-01959-
ANTHONY CARAVELLA,                          CAB-BLM
                            Plaintiffs,

                 and                        OPINION

CARL SCHWARTZ,
                  Plaintiff-Appellant,

                  v.

ARENA PHARMACEUTICALS, INC.;
JACK LIEF; ROBERT E. HOFFMAN;
DOMINIC P. BEHAN; WILLIAM R.
SHANAHAN; CHRISTY ANDERSON,
             Defendants-Appellees,

                  v.

CHRIS GEORGAKOPOULOS; LARRY
SPROWL; MAXAT AMANKOSSOV;
DAVID PRINCE; FORD L. WILLIAMS;
JOHN LEE; BABAK GHAYOUR,
                         Movants.
2          SCHWARTZ V. ARENA PHARMACEUTICALS

       Appeal from the United States District Court
           for the Southern District of California
      Cathy Ann Bencivengo, District Judge, Presiding

              Argued and Submitted May 4, 2016
                    Pasadena, California

                      Filed October 26, 2016

            Before: Harry Pregerson, Jay S. Bybee,
             and N. Randy Smith, Circuit Judges.

                     Opinion by Judge Bybee


                            SUMMARY*


                          Securities Fraud

    The panel reversed the district court’s dismissal of a
putative securities class action in connection with defendants’
public statements about their weight-loss drug, lorcaserin.

   The district court held that the plaintiffs did not
adequately plead scienter because defendants and the FDA
were engaged in a good-faith scientific dispute regarding the
cause of cancer in lab rats that were given the drug.

   The panel held that a strong inference of scienter was
properly pleaded under Federal Rule of Civil procedure 9(b)

    *
      This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
        SCHWARTZ V. ARENA PHARMACEUTICALS                3

and the Private Securities Litigation Reform Act because
when the defendants touted the safety and likely FDA
approval of lorcaserin, they referred to animal studies
supporting their FDA application. Once they raised the
animal studies, they were obligated to disclose the cancer
studies on rats.


                       COUNSEL

Peter K. Stris (argued), Dana Berkowitz, and Victor
O’Connell, Stris & Maher LLP, Los Angeles, California;
Laurence D. King and Mario M. Choi, Kaplan Fox &
Kilsheimer LLP, San Francisco, California; Robert N. Kaplan
and Jeffery P. Campisi, Kaplan Fox & Kilsheimer LLP, New
York, New York; for Plaintiff-Appellant.

John C. Dwyer (argued), Cooley LLP, Palo Alto, California;
Koji F. Fukumura, Mary Kathryn Kelley, and Ryan E. Blair,
Cooley LLP, San Diego, California; for Defendants-
Appellees.
4         SCHWARTZ V. ARENA PHARMACEUTICALS

                             OPINION

BYBEE, Circuit Judge:

    Lead plaintiff Carl Schwartz filed a putative federal
securities class action against Defendants Arena
Pharmaceuticals, Jack Lief, Dominic Behan, William
Shanahan, and Christen Anderson1 in connection with public
statements made about Arena’s weight-loss drug, lorcaserin.
At various times, Defendants all made positive public
statements about lorcaserin’s safety and the likelihood of
FDA approval. On certain occasions, Defendants claimed
that lorcaserin was not carcinogenic and referred to
supporting “animal studies.”         When Arena filed its
application with the FDA, the FDA’s advisory panel
published a briefing document that disclosed, for the first
time, that Arena had been in a “highly unusual” back-and-
forth with the FDA regarding the results of cancer studies on
rats (the “Rat Study”). For years, Arena knew that the rats
receiving lorcaserin were getting cancer. And the FDA
wanted evidence that it was not a threat to humans. The
market was surprised by the undisclosed Rat Study, and
Arena’s stock dropped significantly. Schwartz filed suit after
news of the Rat Study broke. After further study, the FDA
ultimately signed off on lorcaserin, and the product is now on
the market.

    The district court dismissed the First, Second, and
Proposed Third Amended Complaints, holding that Arena and
the FDA were engaged in a good-faith scientific dispute


    1
      Lief, Behan, Shanahan, and Anderson were, during the Class Period,
Arena’s CEO, Chief Scientific Officer, Chief Medical Officer, and VP of
Clinical Development, respectively.
         SCHWARTZ V. ARENA PHARMACEUTICALS                  5

regarding the cause of the rat cancer and that, therefore,
scienter was not adequately pleaded. Schwartz filed this
timely appeal. We conclude that Schwartz has properly
pleaded scienter, and we reverse.

                    I. BACKGROUND

A. Arena Pharmaceuticals and Lorcaserin

    Arena is a bio-pharmaceutical company that developed
(and eventually marketed) a weight-loss drug called
lorcaserin. Lorcaserin is a “serotonin agonist,” and functions
in some ways similar to the notorious drug, “Fen-Phen.”
Given the disastrous health consequences of Fen-Phen, the
FDA gives close scrutiny to serotonin agonists when it comes
to potential cardiovascular problems, and lorcaserin’s safety
was of obvious importance to investors for the same reason.
Prior to approving a drug, the FDA requires extensive clinical
studies (testing on humans) and nonclinical studies (testing
on animals and in labs). Clinical testing is done in three
phases. Each phase of clinical testing attempts to gather more
information on drug safety and efficacy in human subjects,
and each phase requires a larger and larger population size.

    Between September 2006 and July 2009, Arena
conducted two Phase III clinical tests with lorcaserin—known
as the “BLOOM” (Behavioral modification and Lorcaserin
for Overweight and Obesity Management) and “BLOSSOM”
(Behavioral modification and Lorcaserin Second Study for
Obesity Management) tests. They involved thousands of
patients who used lorcaserin for up to two years. At the same
time, Arena was conducting the Rat Study—a nonclinical
study in which lorcaserin was given to lab rats to test
lorcaserin’s carcinogenicity. The animal tests are run so that
6          SCHWARTZ V. ARENA PHARMACEUTICALS

the FDA can see whether there is a risk of humans developing
cancer from the drug. If the rats develop cancer, the burden
is then on the drug developer to show the FDA that the
carcinogenic mechanism is not relevant to humans. This is
generally done in one of two ways: (a) demonstrating that the
biological mechanism causing the cancer is unique to rats (or
at least not present in humans), or (b) showing that there is a
sufficiently large safety threshold to make risk to humans
irrelevant (e.g., the cancer-causing dosage levels for rats is
significantly higher than human prescription-level dosages).

    By February 2007, the Rat Study’s initial results indicated
that lorcaserin was causing mammary tumors, brain cancer,
skin cancer, and nerve sheath cancer in the rats. In May
2007, Arena reported these results to the FDA. Arena
believed that the cause of the carcinogenic mechanism was
the hormone prolactin, a theory it deemed the “Prolactin
Hypothesis.” Prolactin is a hormone that has been linked to
cancer in rats. The FDA did not halt the clinical studies, but
requested follow-up testing and bi-monthly updates on
whether the rats taking lorcaserin experienced increased
prolactin levels.2 Arena complied and submitted “initial
readings” of the ongoing Rat Study.

   In April 2008, Defendants Shanahan, Behan, and
Anderson sat down with the FDA to discuss these and other
matters. Once again, the FDA did not put the BLOOM and
BLOSSOM studies on hold, instead insisting that Arena


    2
      The FDA’s regulations permit this sort of request. See 21 C.F.R.
§ 312.32(c)(1)(v)(3) (giving FDA regulatory flexibility in demanding
interim safety reports). Arena’s CEO, Jack Lief, however, later called this
request “highly unusual and not part of the normal process with the FDA.”
He also referred to it as “an out-of-process type of procedure.”
          SCHWARTZ V. ARENA PHARMACEUTICALS                           7

submit a draft of the final Rat Study report as soon as
possible. The FDA permitted the human testing to continue
because:

         1) the updated informed consent forms
         included the nonclinical [Rat Study] findings;
         2) [it] learned that drug exposure in rats was
         nearly twice as high as predicted, which
         increased the safety margin to clinical
         exposure; 3) preliminary data showed a
         modest increase in serum prolactin levels after
         a single dose in male rats . . . ; 4) [it]
         acknowledged that the interim tumor
         incidence data would change (e.g., might be
         less worrisome) . . . ; 5) only with continued
         clinical study was it possible to assess
         whether long-term dosing with lorcaserin
         increased serum prolactin levels in humans;
         6) only with continuation of clinical dosing
         would [it] obtain an accurate assessment of
         lorcaserin’s weight-loss efficacy and safety in
         diabetics; and 7) given that lorcaserin is non-
         genotoxic, [it] believed that cancer risk was
         low under the conditions of use in the ongoing
         clinical trials . . . .3

   In February 2009, Arena put together the final report,
concluding that follow-up studies substantiated the
connection between prolactin and the cancer.




    3
      From the record before us, there is no evidence that the FDA said
anything further to Defendants about the Rat Study until September 2010.
8        SCHWARTZ V. ARENA PHARMACEUTICALS

    On March 12, 2009, less than one month after Arena put
together the final Rat Study report for the FDA, CEO Jack
Lief told investors that Arena was confident about
lorcaserin’s approval. That confidence was “based on the
Phase II data, the Phase I data, the preclinical studies that
was [sic] done, [and] all the animal studies that have been
completed.” (Emphasis added.) A May 2009 SEC filing,
signed by Lief, similarly represented that “the long-term
safety and efficacy” of lorcaserin had been “demonstrated,”
in part, through “long-term preclinical toxicity and
carcinogenicity studies. These preclinical, animal studies are
required to help us and regulatory authorities assess the
potential risk that drug candidates may be toxic or cause
cancer in humans.” (Emphasis added.) In a shareholder call
on September 18, 2009, Christen Anderson, Vice President of
Clinical Development, represented that Arena “ha[d]
favorable results on everything that we’ve compiled so far.”
(Emphasis added.) During a shareholder call on November
10, 2009, Lief stated that “at [that] time [they] ha[d] all of the
data in hand that [would] be included” in the soon-to-be-
submitted application. (Emphasis added.) Arena’s Chief
Scientific Officer, Dominic Behan, told investors that “[a]s
you can see from the data, we believe that lorcaserin is a
game changer.” And when discussing the upcoming
Advisory Committee meeting, Arena’s Chief Medical
Officer, William Shanahan, said, “we’re not expecting any
surprises associated with the panel.”

    In December 2009, Arena submitted its final application
(which included all study data and the Rat Study conclusions)
to the FDA. The FDA scheduled an Advisory Committee
meeting to consider whether lorcaserin should be
recommended for FDA approval. In preparation for this
meeting, Arena hired Dr. Gary Williams, a world-renowned
           SCHWARTZ V. ARENA PHARMACEUTICALS                           9

toxicologist (specializing in carcinogenicity) to answer
questions for the Committee.4

    On September 14, 2010, the FDA published Arena’s and
the FDA’s briefing documents on the FDA’s website. In its
briefing documents, the FDA disclosed the existence of the
Rat Study and concerns about lorcaserin’s possible
carcinogenicity for the first time. Investors and analysts were
“caught off guard,” “surprised,” and “completely blindsided”
by the “unforseen,” “[un]disclosed,” “significant concern”
about “pre-clinical cancers in rats.” Arena’s stock took a
plunge, declining in value by 40% in a single day.

    At a later meeting with the Advisory Committee, Arena
interpreted the data to support the safety of lorcaserin. Arena
explained that the Rat Study showed that (a) the dosage rates
for rats getting cancer were 82 times higher than human
exposure, thus creating an acceptable safety margin, and
(b) the timing of prolactin increases substantiated the
Prolactin Hypothesis and that the amount of prolactin
increase should not be the focus of the inquiry.

    The FDA Advisory Committee disagreed, initially. It
believed that in order to prove the Prolactin Hypothesis, the
studies needed to show robust and sustained increases in
prolactin levels in the rats, which the data did not show.
Advisory Committee members recognized that there was a
difference of opinion among its members regarding how to


    4
       Dr. Williams would explain that the timing of prolactin increase
relative to rat mammary development substantiated the Prolactin
Hypothesis and that the amount of prolactin increase (which turned out to
be pretty insubstantial in the Rat Study) should not be the focus of the
inquiry.
10       SCHWARTZ V. ARENA PHARMACEUTICALS

translate the data to apply to humans, but ultimately voted 9
to 5 against recommending lorcaserin for approval. A month
later, the FDA denied the application and requested that
Arena provide further independent pathological review of the
Rat Study.

    An independent panel of pathologists later uniformly
concluded that Arena had overreported the incidents of
tumors to the FDA. Moreover, after Arena submitted a new
application, the FDA Advisory Committee found that there
was a high-enough safety margin for the drug and that the
Prolactin Hypothesis was a “plausible” explanation for the rat
cancer. The FDA approved lorcaserin in June 2012, and it is
currently on the market.

B. The Suit

    After the FDA posted the briefing documents online and
Arena’s stock plummeted, Schwartz filed suit alleging
violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The district
court dismissed the First Amended Complaint (FAC) without
prejudice for failure to plead scienter. The court first held
that the FAC failed to plead sufficient details permitting the
court to infer that the Defendants had knowledge about the
Rat Study or the FDA’s concerns. Second, the court held that
reading the FAC holistically, it was more plausible that,
assuming they did know about the results, the Defendants
“reasonably believed the results to be positive” and thus they
did not act with deliberate recklessness regarding the
omissions.

  Schwartz filed a Second Amended Complaint (SAC) in
May 2013, adding details regarding the Defendants and their
           SCHWARTZ V. ARENA PHARMACEUTICALS                            11

personal knowledge of the Rat Study and allegations from
numerous confidential informants regarding Arena’s financial
health. The district court dismissed the SAC, holding that the
case boiled down to a scientific dispute between Arena and
the FDA regarding the safety of lorcaserin. The court then
invited a proposed Third Amended Complaint (TAC) to give
Schwartz the opportunity to plead facts to “show this case to
be about more than a difference of scientific opinion.”

    Schwartz proffered a TAC, but the district court denied
leave to amend saying that amendment would be futile. In
the district court’s view, the strongest inference from the
alleged facts was that Arena experienced an unexpected
scientific disagreement with the FDA, and that because there
was a reasonable basis to believe that the data supported the
Prolactin Hypothesis, the Defendants did not make their
omissions with scienter. Schwartz filed a timely appeal.5

                            II. ANALYSIS

    Schwartz’s theory is simple. At the same time
Defendants touted the safety and likely approval of
lorcaserin, they referred to the animal studies supporting the
FDA application. But once they raised the animal studies,
Defendants were obligated to disclose the Rat Study’s
existence to the market. Failure to do so, in Schwartz’s view,
demonstrates scienter. Recognizing that this is a close case,
we agree. First, we set out the background legal principles


    5
      We review de novo the grant of a motion to dismiss, Nat’l Elevator
Indus. Pension Fund v. VeriFone Holdings, Inc. (In re Verifone Holdings,
Inc. Sec. Lit.), 704 F.3d 694, 700–01 (9th Cir. 2012), as well as denials of
leave to amend based on futility, Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981, 1007 (9th Cir. 2009).
12         SCHWARTZ V. ARENA PHARMACEUTICALS

governing private securities fraud claims. Second, we apply
these standards to conclude that Schwartz has adequately
alleged scienter.

A. Background Legal Principles

     Under Section 10(b) of the Securities Exchange Act of
1934 (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 (17 C.F.R.
§ 240.10b-5),6 Schwartz must allege “(1) a material
misrepresentation or omission by the defendant; (2) scienter;
(3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the
misrepresentation or omission; (5) economic loss; and
(6) loss causation.” Lloyd v. CVB Financial Corp., 811 F.3d
1200, 1206 (9th Cir. 2016) (quoting Erica P. John Fund, Inc.
v. Halliburton Co., 563 U.S. 804, 810 (2011)). Only scienter
is at issue in this appeal.

    Ordinarily, when we review a motion to dismiss under
Federal Rule of Civil Procedure 12(b)(6), we accept a
plaintiff’s allegations as true “and construe them in the light
most favorable” to the plaintiff, Zucco Partners, LLC v.
Digimarc Corp., 552 F.3d 981, 989 (9th Cir. 2009),
dismissing the complaint only if it fails “to ‘state a claim to
relief that is plausible on its face.’” Id. (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). But because
Schwartz here alleges that Defendants fraudulently violated

     6
       Schwartz has also raised a claim under Section 20(a) of the
Securities Exchange Act of 1934, for controlling-person liability. Such
claims hinge on an underlying violation of section 10(b). Zucco, 552 F.3d
at 990. Accordingly, because we reverse the district court and hold that
Schwartz has sufficiently pleaded scienter on his section 10(b) claim, we
similarly reverse, without analysis, the district court’s dismissal on the
section 20(a) claim. Id.
         SCHWARTZ V. ARENA PHARMACEUTICALS                     13

federal securities laws, the equation is altered by the “dual
pleading requirements of Federal Rule of Civil Procedure
9(b) and the [Private Securities Litigation Reform Act
(PSLRA), 15 U.S.C. § 78u-4].” Zucco, 552 F.3d at 990.

      Rule 9(b) imposes “a heightened pleading requirement,
which requires that a party ‘state with particularity the
circumstances constituting fraud.’” Nat’l Elevator Indus.
Pension Fund v. VeriFone Holdings, Inc. (In re Verifone
Holdings, Inc. Sec. Lit.), 704 F.3d 694, 701 (9th Cir. 2012)
(quoting Fed. R. Civ. P. 9(b)). Under the rule, however, the
“heightened pleading standard” only applies to the
circumstances of the fraud and not to the defendant’s state of
mind. ESG Capital Partners, LP v. Stratos, 828 F.3d 1023,
1031–32 (9th Cir. 2016). The PSLRA, however, ups the ante
by requiring that “‘the complaint . . . specify each statement
alleged to have been misleading, [and] the reason or reasons
why the statement is misleading,’” VeriFone, 704 F.3d at 701
(quoting 15 U.S.C. § 78u-4(b)(1)(B)) (alteration in original),
and by requiring that the allegations give “rise to a strong
inference that the defendant acted with the required state of
mind.” 15 U.S.C. § 78u-4(b)(2)(A) (emphasis added). These
“heightened pleading requirements for securities fraud cases
. . . present no small hurdle for the securities fraud plaintiff.”
VeriFone, 704 F.3d at 701.

    Schwartz’s burden, therefore, is to allege sufficiently
particular facts to demonstrate a strong inference of
scienter—a mental state that not only covers “intent to
deceive, manipulate, or defraud,” Matrixx Initiatives, Inc. v.
Siracusano, 563 U.S. 27, 48 (2011) (quoting Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)), but
also “deliberate recklessness,” Zucco, 552 F.3d at 991
14         SCHWARTZ V. ARENA PHARMACEUTICALS

(quotation marks omitted).7 We have defined “deliberate
recklessness” as more than “mere recklessness or a motive to
commit fraud.” Id. (emphasis added). Instead, deliberate
recklessness is “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.” Id.
(emphasis added) (internal quotation marks omitted); accord
Ottmann v. Hanger Orthopedic Grp., Inc., 353 F.3d 338, 343
(4th Cir. 2003). “A complaint will survive,” the Supreme
Court has instructed, “only if a reasonable person would
deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from
the facts alleged.” Tellabs, 551 U.S. at 324. All in all,
though not impossible, this “is not an easy standard to comply
with—it was not intended to be—and plaintiffs must be held
to it.” Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d
1048, 1052 (9th Cir. 2003) (per curiam).

    Of particular importance to Schwartz’s theory is the idea
that the securities laws “do not create an affirmative duty to
disclose any and all material information.” Matrixx, 563 U.S.
at 44. Instead, “companies can control what they have to
disclose under these provisions by controlling what they say
to the market.” Id. at 45. But “once defendants cho[o]se to
tout” positive information to the market, “they [are] bound to
do so in a manner that wouldn’t mislead investors,” including


     7
      Although the Supreme Court has never decided “whether reckless
behavior is sufficient for civil liability under § 10(b) and Rule 10b-5,”
Tellabs, 551 U.S. at 319 n.3, “[e]very Court of Appeals that has
considered the issue has held that a plaintiff may meet the scienter
requirement by showing that the defendant acted intentionally or
recklessly . . . .” Id.
         SCHWARTZ V. ARENA PHARMACEUTICALS                    15

disclosing adverse information that cuts against the positive
information. Berson v. Applied Signal Tech., Inc., 527 F.3d
982, 987 (9th Cir. 2008). Three cases are particularly
relevant here: Matrixx, Berson, and In re AstraZeneca Sec.
Lit., 559 F. Supp. 2d 453 (S.D.N.Y. 2008).

    In Matrixx, the makers of Zicam, Matrixx Initiatives,
began receiving complaints from doctors saying that patients
were losing their sense of smell when using Zicam to treat the
common cold. 563 U.S. at 31. A research doctor, Dr.
Linschoten, drew Matrixx’s attention to studies linking zinc
(the main active ingredient in Zicam) to loss of smell. Id. at
32. Matrixx told Dr. Linschoten that it had hired a consultant
to review Zicam. A second researcher, Dr. Jafek, soon
thereafter published an abstract noting about a dozen patients
who had all lost their sense of smell after using Zicam. Id. at
32–33. When Drs. Linschoten and Jafek prepared a
presentation on Zicam and loss of smell, Matrixx told Dr.
Jafek not to use Zicam’s name in the presentation. Id. at 33.
Shortly thereafter, several product liability suits were filed by
plaintiffs complaining of damage to their sense of smell. Id.

     Notwithstanding this information, Matrixx continued to
make public statements promoting its belief in Zicam’s
market growth in the upcoming months. Id. at 33–34. In all
of its public statements, Matrixx failed to mention either the
researchers’ concerns or the pending lawsuits over the loss of
smell. Id. at 33–34, 45–47. Moreover, once investment
analysts reported that the FDA was looking into the issue,
Matrixx put out press releases saying that the allegations were
“unfounded and misleading,” and that “[i]n no clinical trial”
had the kind of zinc in Zicam caused “a single report of lost
or diminished [smell].” Id. at 34. Within days, Good
Morning America highlighted Dr. Jafek’s findings. Id. at 35.
16       SCHWARTZ V. ARENA PHARMACEUTICALS

The defendants then told the SEC it had put together a panel
of doctors and scientists to review Zicam. Id. Because of the
volatility in Matrixx’s stock price, the plaintiffs filed suit.
See id. at 36.

    Matrixx argued that in order to meet the deliberate
recklessness standard of scienter, the plaintiffs would have to
plead that the defendants “knew of statistically significant
evidence of causation” of loss of smell. Id. at 48–49. In
other words, Matrixx argued it was not required to divulge
the information because the information was not strong
enough to raise alarm bells. The Supreme Court rejected that
argument, noting that there was a strong inference of
deliberate recklessness based on Matrixx’s (1) telling Dr.
Linschoten that it was having an outside consultant review
the matter; (2) getting a panel of physicians and scientists to
review Dr. Jafek’s presentation; (3) demanding that Dr. Jafek
remove Zicam’s name from the presentation; and
(4) suggesting that studies had been done that had not been
done. Id. at 49. Matrixx was obligated to disclose the issue
given its positive statements to the market and the fact that it
had “received information that plausibly indicated a reliable
causal link between Zicam and [loss of smell].” Id. at 45.

    In Berson, the defendant, Applied Signal Technology, had
publically discussed the value of its “backlog”—defined as
“the dollar value of the work it ha[d] contracted to do but
ha[d]n’t yet performed”—to investors. 527 F.3d at 984.
However, Applied Signal failed to disclose that “four stop-
work orders” had been issued by its clients, leading to a
significant risk that the “stopped work” would be “cancelled
altogether” and that the company would never actually earn
the money from those backlogged orders. Id. We explained
that, generally, Applied Signal had no obligation to discuss
         SCHWARTZ V. ARENA PHARMACEUTICALS                   17

the backlog at all: “Had [Applied Signal] released no backlog
reports, their failure to mention the stop-work orders might
not have misled anyone.” Id. at 987. “But,” we continued,
“once defendants chose to tout the company’s backlog, they
were bound to do so in a manner that wouldn’t mislead
investors as to what that backlog consisted of.” Id.

    In contrast, the defendants in AstraZeneca were
developing a blood thinner, Exanta, to compete with the
existing gold-standard drug, Warfarin. 559 F. Supp. 2d at
457. The defendants released numerous press releases, made
SEC filings, and held teleconferences touting the likely
approval of the drug and its safety profile. Id. at 458–62.
However, as an Advisory Committee meeting approached,
the FDA published a briefing document online that disagreed
with the safety profile of the drug and took an overall
negative view of it. Id. at 462. When the stock price
dropped, the plaintiff filed suit. But the district court
dismissed the complaint on scienter grounds. Id. at 472. The
court noted that the collective statements of the defendants
had disclosed risks of injury associated with the drug in
public statements, and that, in the end, the FDA simply had
a different interpretation of the safety profile. Id. at 470–71.
Thus, because there were no allegations “to indicate that the
[public] statements made did not reflect the honest belief of
the authors,” the court held there was no strong inference of
deliberate recklessness. Id. at 471–72.

B. Analysis

    Applying these principles, we conclude that Schwartz has
alleged scienter with sufficient particularity to survive a
motion to dismiss. There is no question that Schwartz has
alleged that Defendants knew that the Rat Study existed. See
18       SCHWARTZ V. ARENA PHARMACEUTICALS

Matrixx, 563 U.S. at 31–32 (defendants made aware of
negative studies); Berson, 527 F.3d at 984 (defendants knew
of stop-work orders). Similarly, Schwartz has alleged that
Defendants knew that the FDA’s request for bi-monthly
reports and follow-up studies was “highly unusual” and “out-
of-process.” But in full knowledge of this, Defendants went
ahead and told investors about their confidence in lorcaserin’s
approval being based on “the preclinical studies that [were]
done, [and] all the animal studies that have been completed.”
(Emphasis added.) The public was assured that lorcaserin’s
“long-term safety and efficacy” (and thus the likelihood of its
imminent approval) were “demonstrated” through “long-term
preclinical toxicity and carcinogenicity studies.” These
“preclinical, animal studies” were done, according to Arena,
“to help [Arena] and regulatory authorities assess the
potential risk that drug candidates may be toxic or cause
cancer in humans.”

    Defendants may not have had a duty to disclose the Rat
Study had they not been representing that animal studies
supported lorcaserin’s safety and therefore its likelihood of
being approved. “[C]ompanies can control what they have to
disclose under these provisions by controlling what they say
to the market.” Matrixx, 563 U.S. at 45. But here, to
paraphrase our holding in Berson, “once defendants chose to
tout [lorcaserin’s likely approval by referencing allegedly
positive animal and preclinical studies], they were bound to
do so in a manner that wouldn’t mislead investors as to
[potentially negative information within their possession].”
Berson, 527 F.3d at 987. Arena’s failure to inform the market
about the risk of non-approval or delayed approval based on
the FDA’s “concerns” about the Rat Study was “an extreme
departure from the standards of ordinary care . . . [that]
present[ed] a danger of misleading buyers or sellers that
         SCHWARTZ V. ARENA PHARMACEUTICALS                  19

[was] either known to [Arena] or [was] so obvious that
[Arena] must have been aware of it.” Zucco, 552 F.3d at 991
(internal quotation marks omitted).

    Arena did more than just express its confidence in
lorcaserin’s future. It affirmatively represented that “all the
animal studies that [had] been completed” supported Arena’s
case for approval. And at the time these statements were
made by various Arena officials in 2009, Arena knew that the
animal studies were the sticking point with the FDA.
Contrary to Arena’s representations to investors, it was not
true that the “preclinical, animal studies” demonstrated the
“long-term safety and efficacy” of lorcaserin or “the potential
risk that [it] may be toxic or cause cancer in humans.” It was
also not true that Arena had “all of the data in hand” or that
“everything that [they had] compiled so far” was “favorable.”
These statements were representations about lorcaserin that
Arena could not, in fact, support at the time they were made.
Arena was free to express confidence in FDA approval. It
might have represented that Arena was working through some
requests from the FDA and was confident the data would
vindicate lorcaserin. But what it could not do was express
confidence by claiming that all of the data was running in
lorcaserin’s favor. It was not.

   To be sure, as Defendants point out, there is not any
specific allegation about the content of the FDA’s concerns
with the Rat Study prior to the publication of the briefing
document. But as Arena’s 2010 disclosure, following the
FDA’s announcement, makes crystal clear:

           [W]e conducted long-term carcinogenicity
       preclinical studies of lorcaserin. The FDA
       identified in the [Complete Response Letter
20       SCHWARTZ V. ARENA PHARMACEUTICALS

       (“CRL”)] for lorcaserin issues related to such
       studies. We intend to provide in our response
       to the CRL data and other information to
       support our view related to such issues, but
       the FDA may disagree with our view or
       impose conditions that could delay or
       preclude approval of our lorcaserin
       [Application].

(Emphasis added.) In other words, it seems quite clear that
Arena understood that the FDA did not entirely agree with
Arena’s views of the Rat Study. Indeed, FDA documents
note that “[Arena] was made aware of [the FDA’s] concerns”
and was asked to “defend continuation” of the clinical testing
in light of the “nonclinical tumor/cancer data.” (Emphasis
added.) Defendants obviously felt the need to respond by
complying with the follow-up test requests. And they
obviously felt the need to hire a pre-eminent expert to make
the case that the Prolactin Hypothesis was supported.
Defendants’ own response to the issue contributes to an
inference of scienter here. Cf. Matrixx, 563 U.S. at 49–50
(defendant’s decision to “convene[] a panel of physicians and
scientists” in response to undisclosed allegations of negative
health effects from the defendants’ product contributed to a
“‘cogent and compelling’ inference that [the defendant]
elected not to disclose the reports of adverse events not
because it believed they were meaningless but because it
understood their likely effect on the market”). This further
buttresses our conclusion that Schwartz has adequately
alleged scienter.

    Defendants attempt to avoid this conclusion by noting that
all of the relevant statements contained in Schwartz’s
pleadings came after the sit-down meeting with the FDA, and
         SCHWARTZ V. ARENA PHARMACEUTICALS                21

that the result of that meeting was to permit Arena to go on
with the BLOOM and BLOSSOM studies. Moreover,
Defendants heard nothing between the time they submitted
the final Rat Study report in 2009 and the 2010 disclosure by
the FDA. Thus, in Defendants’ view, because the last thing
they heard from the FDA was “positive,” they were free to
make the comments they did without disclosing the Rat
Study. But the mere fact that the BLOOM and BLOSSOM
studies were allowed to continue is insufficient to override
the “highly unusual” nature of the procedures invoked by the
FDA concerning the Rat Study. Nor can the FDA’s silence
be taken as tacit approval such that Defendants were relieved
from the duty to disclose the Rat Study when they chose to
invoke “animal studies” as a grounds for their confidence in
lorcaserin’s approval.

     Defendants contend that this case is really just like
AstraZeneca: a good-faith scientific disagreement between
the FDA and Arena about the meaning of the Rat Study and
support for the Prolactin Hypothesis. If it were simply the
case that this dispute turned on whether scienter could exist
based on the reasonableness of Arena’s interpretation of the
Rat Study versus the FDA’s interpretation, there would be
little question Defendants would have the better argument.
See AstraZeneca, 559 F. Supp. 2d at 471 (“As of the time
when the FDA Advisory Committee met . . . , AstraZeneca
had its side of the case and the FDA staff had its side. The
FDA staff view prevailed before the Advisory Committee.
This does not mean that AstraZeneca was not conscientious
in advocating the drug . . . before the FDA, nor does it mean
that the information issued publicly over the course of more
than a year was dishonest or recklessly disseminated.”).
However, the simple fact that Arena had an explanation for
its view of the data does not mean investors would not want
22         SCHWARTZ V. ARENA PHARMACEUTICALS

to know that Arena and the FDA were at odds. Arena could
have remained silent about the dispute or it could have
addressed its discussions with the FDA head-on. But it could
not represent that there was no controversy here because all
the data was favorable. As Schwartz explains, his “theory of
fraud is not that Defendants intentionally misled the market
about the objective safety of lorcaserin. Rather, [Schwartz’s]
theory of fraud is that Defendants intentionally withheld
information material to the market’s assessment of whether
and when the FDA would likely approve lorcaserin.” It is the
failure to disclose “issues” and “concerns” with the Rat Study
and the FDA’s interest in the outcome of those studies—not
who was ultimately right about the underlying science—that
matters. Cf. Matrixx, 563 U.S. at 43 (“Given that medical
professionals and regulators act on the basis of evidence of
causation that is not statistically significant, it stands to
reason that in certain cases reasonable investors would as
well.”). And it sure mattered to investors, who were
understandably concerned by the information revealed in the
FDA’s 2010 briefing documents.8




     8
      We reject Schwartz’s argument, however, that the vague and largely
unsubstantiated allegations from confidential informants support a strong
inference of scienter. We have cautioned securities plaintiffs that, absent
some truly compelling allegations, we will not consider routine business
behavior (like firing people or raising capital) to serve as the basis for
scienter. See In re Rigel Pharm., Inc. Sec. Lit., 697 F.3d 869, 884–85 (9th
Cir. 2012) (“[A]llegations of routine corporate objectives such as the
desire to obtain good financing and expand are not, without more,
sufficient to allege scienter.”). Holding otherwise “would support a
finding of scienter for any company that seeks to enhance its business
prospects.” Id. at 884. Although this deprives Schwartz’s complaint of
allegations about Defendants’ motives, “absence of a motive allegation,
though relevant, is not dispositive.” Matrixx, 563 U.S. at 48.
           SCHWARTZ V. ARENA PHARMACEUTICALS                          23

                        III. CONCLUSION

    Rule 9(b) and the PSLRA create a significant barrier for
private securities plaintiffs. But it is not an impossible
barrier; nor was it meant to be. We “must review all the
allegations holistically” to determine whether Schwartz has
met the relevant pleading standards. Matrixx, 563 U.S. at 48
(internal quotation marks omitted). We conclude that he has.9

    REVERSED and REMANDED.




    9
       Because the district court also dismissed the Section 20(a),
controlling-person liability claim on scienter grounds, we reverse on that
point as well. See supra n.6; Zucco, 552 F.3d at 990.
