## Facts

- Investors brought a putative class action against Silicon Graphics, Inc. (SGI) and certain officers and directors based on public statements and stock-price movements in fall 1995.
- SGI’s stock reached a high in August 1995, then declined amid concerns about whether SGI could maintain high growth in the face of competition.
- After announcing first-quarter fiscal 1996 results in October 1995, SGI characterized results and prospects optimistically and reiterated confidence in meeting growth targets through press releases, analyst communications, and periodic updates.
- SGI later reported weaker-than-anticipated results, after which the stock price dropped.
- Plaintiffs alleged SGI’s optimistic statements were materially misleading because defendants knew, or were reckless in not knowing, that sales were slowing, orders were being canceled, and revenue would miss targets.
- Plaintiffs also alleged insiders sold significant shares while in possession of adverse nonpublic information, and asserted control-person liability.

## Issues

1. What level and type of factual detail must a private plaintiff plead under the PSLRA to create a “strong inference” of scienter for a § 10(b) and Rule 10b-5 claim.
2. Whether generalized allegations about internal reports, operational problems, accounting practices, and insider stock sales sufficiently plead deliberate recklessness or conscious misconduct.
3. Whether § 20(a) control-person and § 20A insider-trading claims can proceed when the underlying § 10(b) claim is inadequately pled.

## Decision

- The Ninth Circuit affirmed dismissal under Rule 12(b)(6).
- The court held the PSLRA requires plaintiffs to plead, in great detail, particularized facts constituting strong circumstantial evidence of deliberately reckless or conscious misconduct.
- The court ruled that allegations of “motive and opportunity” or mere recklessness, without more, do not satisfy the PSLRA’s strong-inference scienter requirement.
- The court concluded the complaint’s assertions about internal reports, sales and product issues, accounting improprieties, and insider trading were too general and lacked the specificity needed to support a strong inference of scienter.
- Because the primary § 10(b) claim was not adequately pled, the derivative § 20(a) and § 20A claims also failed.

## Legal Principles

- Under the PSLRA, a securities-fraud complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
- In the Ninth Circuit, the “required state of mind” for PSLRA scienter pleading demands strong circumstantial evidence of deliberate recklessness or conscious misconduct, not simple recklessness.
- Allegations based on information and belief must include, with particularity, all facts forming the belief, including details such as the source, contents, timing, and contradiction between internal information and public statements.
- Assertions that later disappointing results show earlier fraud are insufficient; plaintiffs must plead contemporaneous facts showing defendants knew, or were deliberately reckless to, the falsity when statements were made.
- Insider stock sales may support scienter only if pled with context showing unusual or suspicious trading (e.g., proportion sold, timing, and departure from prior practices); a generic profit motive does not create a strong inference.

## Conclusion

The Ninth Circuit construed the PSLRA to impose a stringent scienter pleading requirement, demanding highly particularized allegations that strongly imply deliberate recklessness or conscious misconduct; because plaintiffs did not meet that standard, the court affirmed dismissal of the securities-fraud, control-person, and insider-trading claims.


In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999)