                     FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT


 JAMES WEBB, Lead Plaintiff,                       No. 16-16440
                Plaintiff-Appellant,
                v.                                   D.C. No.
                                                  5:14-cv-01435-
 SOLARCITY CORPORATION; LYNDON                         BLF
 R. RIVE; ROBERT D. KELLY,
              Defendants-Appellees.
                                                      OPINION

        Appeal from the United States District Court
            for the Northern District of California
       Beth Labson Freeman, District Judge, Presiding

          Argued and Submitted December 4, 2017
                 San Francisco, California

                       Filed March 8, 2018

Before: MILAN D. SMITH, JR. and SANDRA S. IKUTA,
  Circuit Judges, and JOHN D. BATES, * District Judge.

             Opinion by Judge Milan D. Smith, Jr.




     *
       The Honorable John D. Bates, Senior United States District Judge
for the District of Columbia, sitting by designation.
2                      WEBB V. SOLARCITY

                          SUMMARY **


                         Securities Fraud

    The panel affirmed the district court’s dismissal of a
securities fraud action brought on behalf of a class of
plaintiffs who bought SolarCity shares.

    The complaint alleged that the defendants violated
§§ 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 when they changed the company’s
accounting formula prior to the initial public offering in
order to misrepresent SolarCity’s profitability. The panel
held that plaintiff’s third amended complaint failed to
adequately plead facts giving rise to a strong inference of
scienter, as required by the Private Securities Litigation
Reform Act. Rather, based on the facts alleged, an inference
of scienter was not at least as compelling as the inference of
an honest mistake made by a mismanaged organization.


                            COUNSEL

Jeremy A. Lieberman (argued), Emma Gilmore, and Jennifer
B. Sobers, Pomerantz LLP, New York, New York, Plaintiff-
Appellant.

Ignacio E. Salceda (argued), Benjamin M. Crosson, and
Cheryl W. Foung, Wilson Sonsini Goodrich & Rosati, Palo
Alto, California, for Defendants-Appellees.

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

                        OPINION

M. SMITH, Circuit Judge:

    Plaintiff-Appellant James Webb brought this class action
lawsuit      against     Defendants-Appellees      SolarCity
Corporation (SolarCity or the company), Lyndon R. Rive,
and Robert D. Kelly on behalf of the class of plaintiffs who
bought SolarCity shares between December 12, 2012—the
date of the company’s initial public offering (IPO)—and
March 18, 2014 (the Class Period). Webb claims that
Defendants-Appellees violated § 10(b) of the Securities
Exchange Act of 1934 (the Act), 15 U.S.C. § 78j(b), and
17 C.F.R. § 240.10b-5 (Rule 10b-5), and that Rive and Kelly
also violated § 20(a) of the Act, 15 U.S.C. § 78t(a), when
Defendants-Appellees changed the company’s accounting
formula prior to the IPO in order to misrepresent SolarCity’s
profitability. After allowing Webb to amend his complaint
three times, the district court held that Webb’s Third
Amended Complaint (TAC) failed to adequately plead
scienter, and dismissed it with prejudice. We have
jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.

  FACTUAL AND PROCEDURAL BACKGROUND

I. SolarCity’s     Business    Model     and    Accounting
   Protocols

    During the relevant time period, SolarCity was a
Delaware corporation that sells renewable energy through
the leasing and sale of solar energy systems. Defendant-
Appellee Rive, who cofounded SolarCity in 2006 with his
brother, Peter Rive, and cousin, Elon Musk, was the
company’s Chief Executive Officer. Defendant-Appellee
Kelly was the company’s Chief Financial Officer.
4                   WEBB V. SOLARCITY

    Since 2006, SolarCity has grown significantly. The
company went public in 2012, raising over $92 million, of
which the company received $85,305,010 after expenses.
SolarCity now operates in fourteen states and serves a mix
of commercial entities, government entities, and residential
users. The company claims to have “provided or contracted
to provide solar systems or services to more than 50,000
customers” since its founding.

    SolarCity generates its revenues by both selling and
leasing its solar energy systems to these customers.
SolarCity “offers its customers the option to either purchase
and own solar energy systems, or to purchase the energy that
its solar energy systems produce through various financed
arrangements, i.e. long-term contracts structured as leases
and power purchase agreements.” If a customer chooses the
second route, and executes a lease or power purchase
agreement (PPA), SolarCity then “installs its solar energy
system at the customer’s premises and charges the customer
a monthly fee for the power produced.” With a lease, “the
monthly payment is predetermined and includes a
production guarantee.” With a PPA, SolarCity charges the
customer “a fee per kilowatt hour (kWh), based on the
amount of electricity actually produced by the solar energy
system.” Thus, “[t]he amount of operating lease revenues
depends partly on the amount of energy generated by solar
energy systems under power purchase agreements, which in
turn depends in part on the amount of sunlight.” The
standard lease or PPA agreement term is 20 years.

    The revenues generated by SolarCity’s sales and leases
are accounted for differently in SolarCity’s financial records.
Under generally accepted accounting principles (GAAP),
“[r]evenue is comprised of the gross income generated by
selling goods (sales) or by performing services (professional
                    WEBB V. SOLARCITY                         5

fees, commission income).” Accounting for sales revenues
is simple: They “are generally recognized when the
Company installs the solar energy system and it passes
inspection by the utility or applicable authority.” All costs
associated with a sale are realized at the time of the sale, and
subtracted from sales revenue to calculate gross profit.
These costs include both the direct costs of each individual
sale or lease, such as the cost of the solar system and its
installation, and the indirect overhead costs that apply to the
whole company, such as factory or facilities costs.

    Accounting for lease and PPA revenues—which are
treated as operating leases for GAAP purposes—is more
complex. Under GAAP, SolarCity must account for these
revenues ratably, on a straight-line basis, over the term of
each lease. This means that notwithstanding the “typically
significant” total revenues collected over a lease’s 20-year
term, “SolarCity can only recognize a fraction of those
revenues per year.” Installation and overhead costs are
amortized over the lease term, while costs from the
underlying solar system itself are depreciated over its longer,
thirty-year life.

    SolarCity uses a specific “burden ratio” (BR) to allocate
its indirect overhead costs between its sales and lease
divisions. The formula for its calculation is:

         Allocable Indirect Overhead Costs
  BR = ———————————————————
           Prior Period Direct Costs
                       +
          Current Period Direct Costs

SolarCity applies this ratio to its total direct expenses to
determine how much overhead to allocate to each division.
The burden ratio percentage is first allocated to the Leasing
6                  WEBB V. SOLARCITY

Division’s total direct expenses, and then the remainder is
allocated to the sales division. For example, if prior period
allocable overhead costs were $10 million, and direct costs
were $20 million, the correct burden ratio pursuant to the
formula would be 50%. The Leasing Division would be
allocated this percentage of the $20 million in total direct
costs, resulting in an allocation of $10 million of overhead
costs to leases. The $10 million remainder would be
allocated to sales.

II. SolarCity’s Accounting Error and its Aftermath

    Beginning in the first quarter of 2012 and continuing for
seven consecutive quarters, SolarCity failed to adhere to its
GAAP-compliant protocols.          During this period, the
company retained prior period overhead costs in the
numerator of its burden ratio formula, but omitted prior
period direct costs from the denominator. As a result of
that error, if $5 million of the $20 million direct costs in
our example above were related to the prior period, the
company would have calculated its burden ratio as 66.6%
($10 million / $15 million). Applying this ratio to the total
direct costs of $20 million would result in an allocation of
$13.3 million of overhead costs to leases, with only $6.7
million of overhead costs allocated to sales. Thus, SolarCity
was able to push the costs associated with its sales from the
sales’ revenue onto leases, “where they would be amortized
over the 20-year lease term.”

    This error inflated the gross margins of the company’s
sales, which led the company to report profits inaccurately
for both sales and leases. For example, while SolarCity
reported gross sales margins of -19% in 2010 and -14% in
2011, beginning in Q1 2012, the company’s sales margin
jumped, and it reported a gross sales margin of +21% in
2012. SolarCity’s accounting error also affected the
                   WEBB V. SOLARCITY                       7

company’s reported net income and earnings per share,
which led the company to materially understate net loss and
report higher earnings per share.

    SolarCity’s improved financial situation allowed the
company to expand in 2013. After its December 2012 IPO,
SolarCity made two secondary offerings on October 15,
2013, which generated net proceeds of $174.2 million from
the issuance of 3,910,000 shares of stock and $222.4 million
from the issuance of convertible senior notes. The company
also made two major acquisitions. First, on September 6,
2013, SolarCity purchased assets from Paramount Energy
Solutions, LLC, a direct-to-consumer marketer and one of
SolarCity’s channel partners. This purchase enabled
SolarCity to develop and offer solar energy systems directly
to a broader customer base, to compete better with other
energy producers, and to lower its customer acquisition
costs. SolarCity paid $3.7 million in cash and 3,674,565
shares—worth $108.8 million, or 95% of the total sale
price—for Paramount’s assets. Second, on December 11,
2013, SolarCity acquired Zep Solar, Inc., a manufacturer and
licenser of solar system mounting apparatuses, and one of
SolarCity’s key suppliers.        This acquisition enabled
SolarCity to control the design and manufacture of the Zep
Solar products, which are critical components in the
installation of SolarCity’s solar energy systems. SolarCity
paid $157.823 million for Zep Solar with $2.4 million in
cash and roughly three million shares of stock—equal to
98% of the total sale price.

    It was not until 2014 that SolarCity realized that it had
made a serious accounting error. On March 3, 2014, the
company “announced that it [had] discovered tens of
millions in overhead expenses that it had incorrectly
classified.”     The company explained that the
8                   WEBB V. SOLARCITY

misclassification resulted from “an error in the formula for
allocating overhead expenses between operating lease assets
and the cost of solar energy systems sales originating in Q1
2012.” Specifically, the company had omitted prior period
direct costs from the denominator of the burden ratio. This
error was identified by “senior management,” who noticed
that gross sales margins appeared inconsistent during the
course of their review of preliminary year-end financial
statements and internal controls. SolarCity announced that
it would “reallocate overhead expenses from leased systems
to systems sales,” which it expected would increase “the cost
of solar energy systems sales [by] approximately $16–$20
million on the statement of operations for the nine month
period [ending on] September 30, 2013” and by
“approximately $20–$23 million” for the full year of 2012.
In response, SolarCity’s securities declined by $1.70 per
share—just over 2%—to close on the day of the
announcement at $83.26 per share.

    A second announcement was made on March 18, 2014.
The company issued its restated financials for the year of
2012 and for each quarter of that year and 2013. “These
disclosures revealed for the first time that the Company’s
solar energy systems sales unit had operated at a loss for six
quarters (each quarter of 2013 as well as Q2 and Q4 2012)
and barely broke even in two quarters (Q1 2012 and Q3
2012).” SolarCity securities declined again, dropping $4.40
per share—nearly 6%—to close at $72.70 per share on
March 19, 2014, on unusually high trading volume. Overall,
SolarCity’s share price fell by $23.58, or 27.8%, between
Friday, February 28 (the final close before the
announcement) and Friday, March 28.
                    WEBB V. SOLARCITY                       9

III.   Prior Proceedings

    The present suit was filed on March 28, 2014. Webb was
appointed lead plaintiff on August 11, 2014. Twice Webb
amended his complaint and twice his pleadings were
dismissed. The appeal now before us arises from the district
court’s August 9, 2016 dismissal—its third dismissal
overall—of Webb’s TAC for failure to adequately plead
scienter.

               STANDARD OF REVIEW

    We review de novo the district court’s dismissal for
failure to state a claim under Federal Rule of Civil Procedure
12(b)(6). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d
694, 700–01 (9th Cir. 2012). We may affirm the judgment
of the district court on any ground supported by the record.
Glick v. Edwards, 803 F.3d 505, 508 (9th Cir. 2015).

                        ANALYSIS

    Webb believes that the TAC adequately alleges scienter.
He contends that in miscalculating its profits during the
Class Period, SolarCity sought to “have its cake and eat it
too.” That is, Defendants-Appellees intentionally changed
SolarCity’s burden ratio in order to make the sales division
and company as a whole appear more profitable than it
actually was, and thereby maximize their gains from the
company’s IPO. We disagree for the reasons that follow.
10                  WEBB V. SOLARCITY

I. Webb’s § 10(b) and Rule 10b-5 Claims

     A. The Applicable Pleading Requirements

     Under § 10(b) of the Securities Exchange Act, it is

        unlawful for any person, directly or
        indirectly, by the use of any means or
        instrumentality of interstate commerce or of
        the mails, or of any facility of any national
        securities exchange . . . [t]o use or employ, in
        connection with the purchase or sale of any
        security registered on a national securities
        exchange or any security not so registered, or
        any securities-based swap agreement any
        manipulative or deceptive device or
        contrivance in contravention of such rules
        and regulations as the Commission may
        prescribe as necessary or appropriate in the
        public interest or for the protection of
        investors.

15 U.S.C. § 78j (footnote omitted).          Rule 10b-5,
promulgated by the SEC under § 10(b), further provides that
a person may not

        employ any device, scheme, or artifice to
        defraud[;] . . . make any untrue statement of
        a material fact or [] omit to state a material
        fact necessary in order to make the statements
        made, in the light of the circumstances under
        which they were made, not misleading[;] or
        . . . engage in any act, practice, or course of
        business which operates or would operate as
        a fraud or deceit upon any person[;] in
                    WEBB V. SOLARCITY                      11

       connection with the purchase or sale of any
       security.

17 C.F.R. § 240.10b-5. To state a claim under § 10(b) and
Rule 10b-5, Webb must show “(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.” Matrixx Initiatives, Inc. v. Siracusano,
563 U.S. 27, 37–38 (2011) (quoting Stoneridge Inv.
Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157
(2008)).

    Our focus in this appeal is on scienter, the second of
these elements. The standard for pleading scienter is
established by the Private Securities Litigation Reform Act
(PSLRA), which requires that a complaint “state with
particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” 15 U.S.C.
§ 78u-4(b)(2)(A). A “strong inference” that a defendant
acted with scienter is not an irrefutable inference, though it
“must be more than merely plausible or reasonable . . . .”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
314 (2007). A “strong inference” cannot be identified “in a
vacuum,” as “[t]he inquiry is inherently comparative[.]” Id.
at 323. Rather, a “strong inference” is an inference that is
“cogent and at least as compelling as any opposing inference
one could draw from the facts alleged.” Id. at 324. To
determine whether a “strong” inference has been pleaded,
“the reviewing court must ask: When the allegations are
accepted as true and taken collectively, would a reasonable
person deem the inference of scienter at least as strong as
any opposing inference?” Id. at 326; see also Matrixx
Initiatives, 563 U.S. at 48–50.
12                 WEBB V. SOLARCITY

    We have held that plaintiffs can meet this standard by
alleging facts demonstrating an “intent to deceive,
manipulate, or defraud” or “deliberate recklessness.” In re
Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1144 (9th Cir.
2017) (quoting Schueneman v. Arena Pharm., 840 F.3d 698,
705 (9th Cir. 2016)). “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.” City of Dearborn Heights Act
345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d
605, 619 (9th Cir. 2017) (alterations omitted) (quoting
Schueneman, 840 F.3d at 705).

    Allegations of securities fraud must also satisfy the
heightened pleading requirements of Federal Rule of Civil
Procedure 9(b), which requires a plaintiff to “state with
particularity the circumstances constituting fraud.” Fed. R.
Civ. P. 9(b); see In re VeriFone, 704 F.3d at 701.

     B. Webb’s Scienter Allegations

    Webb alleges that Defendants-Appellees knew or were
reckless not to know that SolarCity’s accounting system was
at a high risk of manipulation. He alleges that Rive and
Kelly were involved in the company’s accounting and
financial decision making, understood SolarCity’s
accounting practices, and knew that the company’s sales
division had been performing poorly. In light of these facts,
Webb claims that Defendants-Appellees’ explanation of the
accounting error—that SolarCity left prior period overhead
costs in the numerator of the burden ratio and accidentally
omitted prior period direct costs from the denominator after
calculating the burden ratio properly in both 2010 and
2011—“strains credulity.”
                       WEBB V. SOLARCITY                             13

    Though we ultimately review Webb’s allegations
holistically, “it would be folly to simply skirt the major
allegations.” In re VeriFone, 704 F.3d at 704. Thus, we will
summarize the TAC’s primary scienter allegations
individually in the sections below before addressing their
legal sufficiency. Id.

         1. Confidential Witness Statements

    Eleven confidential witnesses (CWs) who worked at
SolarCity—mostly prior to the Class Period—described
flaws in the company’s accounting and financial systems,
and their knowledge of the company’s negative gross sales
margins. 1

    CW1, an Accounts Payable Specialist at SolarCity from
January 2010 to July 2012, stated that the company’s
accounting and financials were “a mess.” Specifically, CW1
indicated that SolarCity’s monthly and annual “close
process,” which “required the Company to accrue all of its
debt, its credit, revenue,” was “never on time.”


    1
       The district court discounted many of the CWs’ statements, in part
because “the majority of the CWs were not employed during the Class
Period and [could] therefore offer ‘little reliable insight into what
occurred during the class period.’” The court still considered the
statements though, and was correct to do so. Information from before
the class period is relevant because it can “confirm what a defendant
should have known during the class period.” In re Scholastic Corp. Sec.
Litig., 252 F.3d 63, 72 (2d Cir. 2001); see also In re Quality Sys.,
865 F.3d at 1145 (crediting statements from witness who “was not at
[defendant company] during the Class Period,” but who “had personal
knowledge of executive-level management’s real-time access to”
relevant reports); In re Merck & Co. Sec. Litig., 432 F.3d 261, 272 (3d
Cir. 2005). Accordingly, we will consider all of the CWs’ statements in
our holistic analysis.
14                 WEBB V. SOLARCITY

    CW2 was a Senior Accountant at SolarCity’s San Mateo,
California, headquarters from January 2012 to the end of
May 2012. CW2 reported that as of his/her hiring, SolarCity
“hadn’t closed the books in a year.” He also stated that
Ajmer Dale, the corporate controller, had talked with
Defendant-Appellee Rive and his brother regarding
accounting issues, including the recognition of revenue and
allocation of overhead costs.

   CW3 was a Senior Manager for fund relations in
SolarCity’s Structured Finance Department from September
2011 to September 2012. CW3 described the cost
accounting team as “lean,” composed of six or seven people
based at SolarCity’s corporate headquarters, who all
reported to Dale. CW3 was aware that Defendant-Appellee
Kelly “was involved in financial and accounting policy
decisions at SolarCity” because CW3 “was responsible for
providing financial information to third party vendors.”

   CW4 was an Accounts Payable Specialist at SolarCity
from January 2011 to August 2014. CW4 “was responsible
for paying and keeping books of the invoices for
subcontractors on solar installation projects.”    CW4
observed “that a separate team of [about seven] Accounts
Payable Specialists worked on overhead cost accounting”
exclusively, and submitted overhead reports to the
Accounting Manager, who reported to Dale.

    CW5, who the parties and court below identified as the
strongest witness, was “directly involved in solar system
sales during the Class Period.” Specifically, CW5 was a
Project Development Manager at SolarCity from July 2011
to May 2014. CW5 stated that during his/her tenure at
SolarCity, the company’s “sales segment often showed
negative margins.” CW5 believed Defendant-Appellee Rive
                    WEBB V. SOLARCITY                       15

was “aware of the negative margins of the cash sale projects
and the costs for the projects.”

    CW5’s job involved the regular sale of large solar
systems to public entities. CW5 was required to charge a
mark-up margin of at least 10% on all sales, though the
mark-up on smaller sales was sometimes greater. Even so,
at least 60% of CW5’s twelve cash sales projects “came in
with a negative margin at the time construction of the system
was completed.” CW5 knew “from talking with other sales
people at SolarCity” that “cash sale projects in general at the
Company were showing negative or far below expected cash
margins—not just [CW5’s] own sales.”                SolarCity
employees shared a general understanding that the
company’s cash sales were not profitable.

    This understanding was shared by “everybody at the high
level” as well. The sales projects’ negative margins were
discussed in “a number of conference calls” in which CW5,
the Rive brothers, and sometimes Kelly participated. In
these calls the Rive brothers questioned the negative
margins, asked about timelines for revenue recognition, and
evinced an awareness of both specific cost information and
purchasing information. CW5 was aware that Rive and
Kelly received reports about cash sales projects that “showed
the negative and low margins of the projects,” as well as a
verbal overview of the situation. CW5 believed the Rive
brothers were smart, as well as “knowledgeable and adept
with complex accounting rules and issues, such as revenue
recognition requirements.” It was apparent to CW5 that the
Rive brothers “had an understanding of what overhead is”
and “kn[ew] what they [were] doing.”

    CW5 reports that as of mid-2012, SolarCity’s
salespeople were discouraged from doing cash deals and
directed to transition away from cash sales and toward
16                 WEBB V. SOLARCITY

leases. CW5 explained this move was made because leases
“allowed SolarCity to spread costs . . . out over several
years,” which improved profits. While a PPA would allow
the company “to make [a] (negative margin) up with cash
flow analysis,” a cash deal would not.

    CW6 was Director of Fund Accounting at SolarCity
from June 2012 to September 2012. This position “involved
accounting for the funds set up with third party investors to
pay for the cost of installation of solar systems.” CW6
explained that “on the fund side” where he/she was involved,
Defendants-Appellees Kelly and Rive were involved “[a]t a
high level” in discussions and decisions about accounting
policies. CW6 also reported that Rive “appeared to fully
understand and grasp the accounting issues discussed.”

    CW7 worked as a Project Development Associate on
SolarCity’s Walmart account from June 2011 to May 2013,
and worked as a B2B Marketing Manager at the company
from May 2013 to April 2014. “CW7 learned from his/her
conversations with SolarCity’s Director of Corporate
Finance, Carlo Woods[,] that Woods met weekly with CFO
Robert Kelly, CEO Lyndon Rive and COO Peter Rive to
discuss the financial health of the Company, and that Kelly
and the Rive brothers were actively involved in SolarCity’s
financials.” CW7 knew that sales projects had a lower
margin than lease projects.

   CW8 was a solar consultant for SolarCity from
November 2007 to March 2010, and a Commercial Project
Development Manager from March 2010 to September
2012. CW8 recalled that the Rive brothers held internal
meetings once or twice each year in 2010, 2011, and 2012,
where they admitted that SolarCity “was not profitable on a
GAAP basis,” though it was if its finances were viewed in a
                    WEBB V. SOLARCITY                      17

different light. CW8 indicated that Kelly’s desk was located
in the accounting department.

    CW9 was an Administrative Assistant and Sales
Operations Administrator at SolarCity from October 2008 to
January 2012. In this position, CW9 “was regularly
involved in presenting the Rive brothers with proposals from
CW9’s department that needed the Rive brothers’ approval.”
CW9 believed that the Rive brothers were “intimately
involved in the Company in all aspects.” Though others
participated in the decision-making process, CW9 said that
the Rive brothers made all final decisions. Thus, CW9
believed the Rive brothers “totally would have been aware
of” any decision to change the company’s accounting
method for overhead costs. CW9 recalled the Rive brothers
discussing accounting methods at company-wide meetings,
admitting that the company was not profitable according to
the accounting method required of a public company. And
“[d]uring the last few months of CW9’s employment, CW9
said the Company was making shifts in how it was doing
things in preparation for going public.”

    CW10 worked as Director of Sales at SolarCity from
May 2008 to January 2011. CW10 reported that the Rive
brothers were very hands-on, and Defendant-Appellee Rive
in particular was hands-on with regard to sales, participating
often in CW10’s regional sales calls.            CW10 also
remembered the discussion of profitability at the company’s
meetings, and the admission that the company was not
profitable “in terms of GAAP accounting standards.”

    CW11 was the Office Manager for SolarCity’s corporate
headquarters in San Mateo, California, from June 2010 to
September 2013. “From discussions CW11 had with his/her
colleagues and from comments made by CEO Lyndon Rive,
COO Pete Rive[,] and CFO Bob Kelly in meetings, CW11
18                  WEBB V. SOLARCITY

was aware that SolarCity was not earning a profit during
his/her employment,” and wondered how the company
stayed in business.

       2. Motive

    Webb alleges that a sales-division-profitability
turnaround was critical to the company’s successful IPO.
The sales division’s performance was an obvious
vulnerability; though it generated the majority of SolarCity’s
annual revenues, the sales division had run losses in 2010
and 2011. Moreover, the TAC alleges that the company
needed a successful IPO to generate badly needed cash, to
allow SolarCity to attract and retain employees, and to fund
capital expenditures and strategic acquisitions that would
increase the company’s efficiency and lower its costs.
Maintaining the company’s inflated stock price after the IPO
was critical to these goals.

    Webb also alleges motives of a more personal nature:
Because Rive and Kelly owned 4,160,711 and 96,840
SolarCity shares, respectively, they were incentivized to
maintain the company’s stock price. Additionally, Rive and
Kelly were motivated to help Elon Musk—Rive’s cousin,
SolarCity’s founder and largest shareholder, and the
Chairman of the company’s Board of Directors—who
needed stock prices to stay high to avoid a forced sale of his
shares. Six million of Musk’s 18,849,991 shares of
SolarCity stock were collateral for $275 million in loans
from Goldman Sachs, and Goldman’s loans allowed it to
issue a margin call requesting that Musk provide additional
collateral or sell shares if SolarCity’s stock price declined.
Webb points out that the SEC frowns upon such borrowing
for precisely the reason it was a problem here: namely,
because it “ha[s] the potential to influence management’s
performance and decisions.”
                    WEBB V. SOLARCITY                       19

       3. Leadership Reshuffling

    Webb alleges that the shake-up of SolarCity’s leadership
adds another piece to the scienter puzzle. On February 24,
2014, a week before releasing its statement regarding the
allocation error, SolarCity announced that COO Peter Rive
had been replaced by Tanguy Serra. Then, on July 30, 2014,
Kelly announced he would resign as CFO. He left within
weeks, on August 18, 2014.

       4. Sarbanes-Oxley Certifications

    Webb alleges cursorily that because Rive and Kelly
discussed and provided Sarbanes-Oxley certifications and
executed SolarCity’s Form 10-K, they “are deemed
knowledgeable” about the “cost of revenues associated with
the sales and lease systems, including the gross margins for
these units . . . .”

       5. Core Operations Inference

    Finally, Webb also invokes the “core operations”
doctrine. This doctrine allows us to infer “that facts critical
to a business’s ‘core operations’ or an important transaction
are known to a company’s key officers.” S. Ferry LP, No. 2
v. Killinger, 542 F.3d 776, 783 (9th Cir. 2008).
“[A]llegations regarding management’s role in a company
may . . . help to satisfy the PSLRA scienter requirement in
three circumstances”: (1) “in any form,” as part of a holistic
analysis; (2) on their own, “where they are particular and
suggest that defendants had actual access to the disputed
information”; and (3) on their own “in a more bare form,
without accompanying particularized allegations, in rare
circumstances where the nature of the relevant fact is of such
prominence that it would be ‘absurd’ to suggest that
20                  WEBB V. SOLARCITY

management was without knowledge of the matter.” Id. at
785–86.

     Here, Webb alleges that it “strains credulity that
SolarCity could include the prior period overhead in the
numerator but exclude the related prior period direct costs
from the denominator, yet have no idea whatsoever that this
calculation was improper.” He wonders how SolarCity
could “properly place[] prior period overhead costs in the
numerator and prior period direct costs in the denominator
for the years of 2011 and 2010, [and] yet conveniently forget
to apply such costs in the denominator for 2012 and the first
three quarters of 2013.” After all, to avoid the current
situation, “[a]ll SolarCity needed to do was to apply the same
formula it had applied in prior years.” Instead, SolarCity
changed its burden ratio calculation in a way that permitted
it to realize a sudden, dramatic increase of over 100% in
gross margins for solar energy sales in fiscal year 2012.
Thus, Webb contends that the core operations doctrine
should apply because this turnaround was so dramatic that it
would be absurd to think that Defendants-Appellees did not
know about the burden-ratio change during the Class Period.

     C. Webb’s Allegations Are Insufficient

    Webb takes issue with the district court’s dismissal for
several reasons; namely, the district court (1) did not conduct
a properly holistic review of his allegations; (2) rejected
relevant confidential witness testimony; (3) failed to account
for the TAC’s allegations regarding motive, GAAP non-
compliance, the company’s leadership reshuffling, and Rive
and     Kelly’s      Sarbanes-Oxley      certifications;    and
(4) improperly analyzed Webb’s core operations theory. We
reject these arguments. Our own holistic review of the
TAC’s allegations confirms that Webb has not pleaded facts
giving rise to a strong inference of scienter.
                    WEBB V. SOLARCITY                      21

       1. No Individual Allegation Was Sufficient on its
          Own

    Webb argues that the district court erred because it
unduly focused on his allegations one-by-one. We disagree.
The district court was correct that each of Webb’s
allegations, considered alone, would be insufficient to
establish scienter. See, e.g., City of Dearborn Heights,
856 F.3d at 621–23 (failure to follow GAAP, employee
resignations, and magnitude of error); Lloyd v. CVB Fin.
Corp., 811 F.3d 1200, 1207 (9th Cir. 2016) (accounting
inaccuracies and failure to follow GAAP); Zucco Partners,
LLC v. Digimarc Corp., 552 F.3d 981, 1002 (9th Cir. 2009)
(corporate reshuffling); Glazer Capital Mgmt., LP v.
Magistri, 549 F.3d 736, 747–48 (9th Cir. 2008) (motive
allegations and Sarbanes-Oxley certifications). The court
did not err in considering each allegation on its own before
holding that they also failed to support a strong inference of
scienter in combination; although we have recognized its
“potential pitfalls,” In re VeriFone, 704 F.3d at 703, such an
analytical process is permitted under our precedents. See
City of Dearborn Heights, 856 F.3d at 620; In re VeriFone,
704 F.3d at 703–04.

       2. The Allegations Were Not Sufficient in
          Combination

    Considered holistically, we find that Webb’s scienter
allegations—consisting of the CW statements, Defendants-
Appellees’ motive, the magnitude and duration of the GAAP
violations, the Sarbanes-Oxley certifications, and the core
operations inference—likewise are insufficient. The bar set
by Tellabs is not easy to satisfy: It requires that Webb plead
an inference of scienter that is “cogent and at least as
compelling as any opposing inference one could draw from
the facts alleged.” 551 U.S. at 324. Here, Webb falls short
22                  WEBB V. SOLARCITY

of meeting that standard. Admittedly, Webb has alleged
facts that give us pause insofar as they indicate that all was
not right at the helm of SolarCity during the Class Period.
However, with all things relevant considered, we hold that
Webb’s allegations do not support a strong inference of
scienter.

    At best, Webb’s allegations paint a picture of a
mismanaged organization in need of closer financial
oversight that made a minute error at a critical stage in its
development. Confidential witness statements demonstrate
that Defendants-Appellees Rive and Kelly knew that
SolarCity was generally unprofitable, that they were hands-
on managers who generally understood the company’s
accounting obligations, and that they had reason to suspect
that the company’s internal accounting controls were
imperfect. We also credit the allegation that there is a strong
incentive to present an appearance of profitability and to
keep stock prices high in the months immediately preceding
and following a company’s IPO.

    However, these facts do not give rise to an inference of
scienter that is at least as compelling as the inference of an
honest mistake. See Tellabs, 551 U.S. at 314. For example,
Webb’s allegations regarding Defendants-Appellees’
behavior are not consistent with scienter. Neither Rive nor
Kelly are alleged to have sold any SolarCity stock during the
Class Period, and we have recognized that a lack of stock
sales can detract from a scienter finding. See In re Rigel
Pharm., Inc. Sec. Litig., 697 F.3d 869, 884–85 (9th Cir.
2012). To the contrary, Defendants-Appellees’ actions with
regard to their stock support an inference of innocence:
Rive, for example, granted a third-party entity an option to
purchase over 330,000 of his shares prior to the Class Period,
evidencing an expectation that stock prices would not rise.
                   WEBB V. SOLARCITY                      23

Moreover, rather than selling shares, both Rive and Musk
purchased additional stock during the Class Period.

    We note also that, by all accounts, Rive and Kelly were
accurate when speaking about the company’s profitability.
For example, confidential witnesses confirm that Rive and
Kelly were forthcoming with their employees, admitting at
company meetings that the sales division and the company
as a whole were not profitable. In particular, Defendants-
Appellees acknowledged that the company was not
profitable under GAAP, which is compelling evidence of
their expectation that GAAP-compliant protocols would be
applied after the company transitioned from private to
public. Moreover, and even more importantly, Defendants-
Appellees were forthcoming with the public. SolarCity
showed in its Prospectus for the IPO that it was not
profitable. Thus, the 2014 restatement merely increased the
company’s stated losses.

    Next, we find Webb’s motive allegations unhelpful.
First, Webb’s allegations regarding Defendants-Appellees’
motive to boost the company’s profitability and stock prices
in the months surrounding the company’s IPO are not
“specific” or “particularized,” as our precedents require. To
the contrary, they speak to precisely the “routine corporate
objectives such as the desire to obtain good financing and
expand” that we have rejected in the past. In re Rigel
Pharm., 697 F.3d at 884; see also Lipton v. Pathogenesis
Corp., 284 F.3d 1027, 1038 (9th Cir. 2002). Surely every
company that goes public wants to maximize its apparent
profitability prior to its IPO and to maintain a high share
price afterward in order to finance acquisitions and expand.
Second, we are skeptical that Defendants-Appellees were
motivated to help Musk avoid a hypothetical margin call,
concerning which we see no evidence, or that Musk would
24                  WEBB V. SOLARCITY

not have been able to meet such a call if it were made. Webb
has not pleaded any facts that support an inference that
Defendants-Appellees were at all interested in or concerned
for Musk’s relationship with Goldman Sachs.

     Webb’s corporate reshuffling allegations are similarly
unpersuasive. Correctly, Webb points out that COO Peter
Rive was replaced just before the restatement and that Kelly
left five months thereafter. However, Webb pleads no facts
to rebut the “reasonable assumption” that the reshuffling
“occurred as a result of [the] restatement’s issuance itself.”
Zucco Partners, 552 F.3d at 1002. Without such allegations,
that reasonable assumption guides our analysis.

     Finally, we reject Webb’s invocation of the core
operations doctrine. Webb has alleged that Defendants-
Appellees had a hands-on style and general accounting
acumen, but not that they were involved in accounting
decisions as minute as the calculation of the burden ratio and
inclusion of prior period direct costs in the ratio’s
denominator. Webb has not alleged that Defendants-
Appellees had actual access to the accounting formula, but
only generalized access to reports that may have documented
its application. See Police Ret. Sys. of St. Louis v. Intuitive
Surgical, Inc., 759 F.3d 1051, 1062 (9th Cir. 2014) (holding
that proof under the core operations doctrine “is not easy,”
and requires “either specific admissions by one or more
corporate executives of detailed involvement in the minutia
of a company’s operations, such as data monitoring, . . . or
witness accounts demonstrating that executives had actual
involvement in creating false reports”); see also Zucco,
552 F.3d at 1000 (finding “allegations that senior
management . . . closely reviewed the accounting numbers
generated . . . each quarter . . . and that top executives had
                    WEBB V. SOLARCITY                       25

several meetings in which they discussed quarterly inventory
numbers” insufficient to establish scienter).

    Webb also has not alleged facts supporting the inference
that the accounting error’s impact on the company’s
financials was so dramatic that it would be absurd to think
that Defendants-Appellees did not know that something was
wrong. SolarCity’s sales division is a relatively minor
portion of the company’s overall business. In 2012 and
2013, for example, cash sales accounted for less than 10% of
installations per year. Cf. Berson v. Applied Signal Tech.,
Inc., 527 F.3d 982, 988 & n.5 (9th Cir. 2008) (applying core
operations inference because it was “hard to believe” that
defendants—executives who were “directly responsible” for
day-to-day operations—would not have known about stop-
work orders that halted a large amount of work, including
work on “the company’s largest contract with one of its most
important customers”). Moreover, the accounting error was
so subtle that it appears that even the company’s specialized
accounting division and professional auditors missed it: The
error was not discovered for seven consecutive quarters, and
the record indicates that SolarCity’s management and Board
of Directors only concluded that there was an error—on the
basis of which the company’s financials “should no longer
be relied upon”—after consultation with the company’s
“independent registered public accounting firm, Ernst &
Young, LLP.”          True, CW statements indicate that
Defendants-Appellees were concerned about the
performance of the sales division and encouraging
employees to transition from sales to leases. However,
Defendants-Appellees had no reason to suspect this strategy
was not working, such that the sales division’s apparently
improved performance must have been the result of an
accounting error. Notwithstanding that accounting error, the
sales division was actually improving to the point of “flirting
26                  WEBB V. SOLARCITY

with profitability” during the Class Period. SolarCity’s
restatement indicated that the sales division’s gross margins
improved from -19% in 2010 to -14% in 2011 to -5% in
2012, and were positive in Q1 and Q3 of 2012. Thus, rather
than projecting a “facade of profitability,” the company’s
original financials only misstated the degree of the
company’s unprofitability: SolarCity reported a net loss of
$91.575 million in 2012, even with the accounting error,
which was later restated to $113.726 million. These facts
preclude us from holding that the falsity of the erroneous
financials was necessarily “immediately obvious” to
Defendants-Appellees. Zucco Partners, 552 F.3d at 1001.
To be sure, Webb’s allegations regarding Defendants-
Appellees’ hands-on approach to management are relevant,
and we have taken them “into account when evaluating all
circumstances together.” S. Ferry, 542 F.3d at 786.
Independently though they are not strong enough to create
an inference of involvement sufficient to satisfy the PSLRA.
See id.

    Therefore, we conclude that on the whole, Webb’s
narrative of fraud is simply not as plausible as a
nonfraudulent alternative. See ESG Capital Partners, LP v.
Stratos, 828 F.3d 1023, 1035 (9th Cir. 2016). Admittedly,
the magnitude of the requisite restatement—15% to 67% per
quarter—and the seven-quarter duration of the alleged fraud
are troubling and potentially indicative of scienter. See In re
Daou Sys., Inc., 411 F.3d 1006, 1018, 1023 (9th Cir. 2005).
But even those facts, cobbled together with all of the others
aforementioned, are not enough to satisfy the standard
required by the PSLRA. Therefore, we affirm the dismissal
of Webb’s § 10(b) and Rule 10b-5 claims.
                    WEBB V. SOLARCITY                      27

II. Webb’s § 20(a) Claim

    Section 20(a) of the Securities Exchange Act establishes
that “[e]very person who, directly or indirectly, controls any
person liable under [the Securities Exchange Act and its
implementing regulations] shall also be liable jointly and
severally with and to the same extent as such controlled
person to any person to whom such controlled person is
liable.” 15 U.S.C. § 78t(a). A plaintiff suing under § 20(a)
must demonstrate: “(1) a primary violation of federal
securities laws” and “(2) that the defendant exercised actual
power or control over the primary violator.” Howard v.
Everex Sys., Inc., 228 F.3d 1057, 1065 (9th Cir. 2000).

    The district court dismissed Webb’s § 20(a) claim
against Rive and Kelly because Webb failed to state a claim
of a primary violation of the securities laws. Because we
also find that Webb failed to state a claim for a primary
violation, we affirm the dismissal of Webb’s § 20(a) claim.

                      CONCLUSION

    For the foregoing reasons, we affirm the district court’s
dismissal of the TAC. Plaintiff-Appellant’s pending motion
for judicial notice is granted. Plaintiff-Appellant shall bear
the costs on appeal.

   AFFIRMED.
