City of Miami Fire Fighters' & Police Officers' Retirement Trust v. Quality Systems, Inc.

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE QUALITY SYSTEMS, INC. No. 15-55173
SECURITIES LITIGATION,
Debtor. D.C. No.
8:13-cv-01818-
CJC-JPR
CITY OF MIAMI FIRE FIGHTERS’ AND
POLICE OFFICERS’ RETIREMENT
TRUST; ARKANSAS TEACHER OPINION
RETIREMENT SYSTEM,
Plaintiffs-Appellants,

v.

QUALITY SYSTEMS, INC.; STEVEN T.
PLOCHOCKI; PAUL A. HOLT;
SHELDON RAZIN,
Defendants-Appellees.

Appeal from the United States District Court
for the Central District of California
Cormac J. Carney, District Judge, Presiding

Argued and Submitted December 5, 2016
Pasadena, California

Filed July 28, 2017
2 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

Before: Stephen Reinhardt, William A. Fletcher,
and Richard A. Paez, Circuit Judges.

Opinion by Judge W. Fletcher

SUMMARY*

Securities Fraud

The panel reversed the district court’s dismissal of an
action under § 10(b) of the Securities Exchange Act of 1934.

The district court found that some of the defendants’
allegedly false or misleading statements were not forward-
looking, but found these statements to be “non-actionable
puffery.” The district court found that the remainder of the
defendants’ allegedly false or misleading statements were
forward-looking, were accompanied by appropriate
cautionary language, and were made without actual
knowledge of their falsity, and therefore were protected by
the safe harbor provision of the Private Securities Litigation
Reform Act.

Disagreeing with the district court, the panel concluded
that some of the defendants’ statements were “mixed
statements,” containing non-forward-looking statements as
well as forward-looking statements of projected revenue and
earnings. The panel held that a defendant may not transform
non-forward-looking statements into forward-looking

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 3

statements that are protected by the safe harbor provision of
the PSLRA by combining non-forward-looking statements
about past or current facts with forward-looking statements
about projected revenues and earnings. The panel held that
many of the defendants’ non-forward-looking statements
were materially false or misleading. The panel also held that
some of the defendants’ forward-looking statements were
materially false or misleading, were not accompanied by
appropriate cautionary statements, and were made with actual
knowledge of their false or misleading nature. The panel
remanded the case for further proceedings.

COUNSEL

Joseph D. Daley (argued), Christopher D. Stewart, and
Robert R. Henssler, Jr., Robbins Geller Rudman & Dowd
LLP, San Diego, California; Benjamin Galdston, Blair A.
Nicholas, Brandon Marsh, and Lucas E. Gilmore, Bernstein
Litowitz Berger & Grossmann LLP, San Diego, California;
Avi Josefson and Gerald Silk, Bernstein Litowitz Berger &
Grossman LLP, New York, New York; Stephen H. Cypen,
Cypen & Cypen, Miami Beach, Florida; for Plaintiffs-
Appellants.

Peter A. Wald (argued), Latham & Watkins, San Francisco,
California; Andrew R. Gray and Michele D. Johnson, Latham
& Watkins LLP, Costa Mesa, California; Colleen C. Smith,
Latham & Watkins LLP, San Diego, California; for
Defendants-Appellees.
4 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

OPINION

W. FLETCHER, Circuit Judge:

Lead Plaintiffs City of Miami Fire Fighters’ and Police
Officers’ Retirement Trust and Arkansas Teacher Retirement
System brought this would-be class action on behalf of all
persons or entities who purchased or otherwise acquired the
common stock of Quality Systems, Inc. (“QSI”) between May
26, 2011, and July 25, 2012 (“the Class Period”). Plaintiffs
allege that during the Class Period defendant QSI and several
of its officers (“Defendants”) made false or misleading
statements about the current and past state of QSI’s sales
“pipeline,” and used those statements to support public
guidance to investors about QSI’s projected growth and
revenue. Individual defendants are Sheldon Razin, QSI’s
founder and Chairman of the Board; Steven Plochocki, QSI’s
Chief Executive Officer (“CEO”); and Paul Holt, QSI’s Chief
Financial Officer (“CFO”). Plaintiffs allege that the
individual defendants had real-time sales information
showing a decline in sales due to market saturation beginning
as early as April 2011, and that individual defendants knew
that their public statements denying any decline were false or
misleading.

The district court dismissed Plaintiffs’ complaint with
prejudice, finding that Defendants’ non-forward-looking
statements about the past and current state of QSI’s sales
pipeline were non-actionable puffery, and that their forward-
looking statements about projected growth and revenue were
protected by the safe harbor provision of the Private
Securities Litigation Reform Act, 15 U.S.C. § 78u-5. We
reverse and remand for further proceedings.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 5

I. Background

QSI is a California corporation that “develops and
markets practice management and electronic health records
(‘EHR’) software to medical and dental care providers.” QSI
was founded in 1974 by defendant Sheldon Razin, who was
President and CEO until 2000. QSI benefited significantly
from the passage of the 2009 American Recovery and
Reinvestment Act, which provided $60 billion in incentives
for healthcare providers to convert from paper to electronic
records. During the Class Period, QSI’s stock price largely
depended on investors’ belief that its revenues were growing
rapidly. QSI’s growth largely depended, in turn, on sales and
maintenance of new software systems for healthcare
providers, which “included software, hardware, third-party
software, supplies and implementation and training services
components.” New system sales were particularly important
because they “included the promise of future, high-margin
maintenance revenue.” During QSI’s Fiscal Year 2012 (April
2011 through March 2012), over 66 percent of QSI’s total
revenues came from sales and maintenance of such new
software systems.

QSI’s largest division, NextGen, develops and sells
software systems for medical offices. During FY 2012,
NextGen accounted for 75 percent of QSI’s total revenue.
During that same period, NextGen accounted for 83 percent
of QSI’s revenue from software systems sales and 84 percent
of its revenue from software systems maintenance.

QSI’s primary source of growth was sales of software
systems to healthcare providers who were adopting electronic
healthcare systems for the first time, referred to as
“greenfield” sales. QSI’s most profitable source of revenue
6 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

was new practice management and electronic health records
software. Sales and maintenance of this software had gross
margins of 75.7 percent and 61.6 percent, respectively.

During the Class Period, QSI kept continuous track, in
real time, of its sales “pipeline.” The pipeline comprised four
categories. Category 1 included deals that were expected,
with 70 percent certainty, to close within three to four
months. Category 2 included deals that were expected, with
70 percent certainty, to close within six to eight months.
Categories 3 and 4 included deals that were not expected to
close within eight months.

The gravamen of Plaintiffs’ suit is that the individual
defendants knew during the Class Period that the market for
healthcare software systems was becoming increasingly
saturated, and that greenfield sales opportunities were
decreasing. The complaint alleges that from late 2011
through mid-2012 (roughly, from the beginning of the second
half of FY 2012 through the first quarter of FY 2013),
Defendants misrepresented the state of QSI’s current and past
sales pipeline and used the misrepresentations to support
projections of growth in revenue and earnings. The
complaint alleges that QSI’s projected growth “lacked any
objective basis and . . . [was] totally inconsistent with QSI’s
actual business performance.” (Quotation marks omitted).

On July 26, 2012, QSI issued a press release finally
admitting publicly that the company’s business was in steep
decline. As a result of this announcement, QSI stock prices
dropped precipitously, causing Plaintiffs significant losses.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 7

A. False or Misleading Statements

The following narrative is taken from Plaintiffs’ amended
complaint. We take as true the complaint’s plausible and
properly pleaded allegations, which we recount below. Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 989 (9th Cir.
2009).

The complaint alleges that on a number of occasions
Defendants, particularly CEO Plochocki, made false or
misleading statements of current and past facts, as well as
false or misleading statements of projected growth in revenue
and earnings per share.

On June 9, 2011, at a Goldman Sachs Global Healthcare
Conference, CFO Holt stated that the market for QSI’s
products in ambulatory health care facilities was “greenfield
for the most part” and that he thought “it’s going to be that
way for a while.”

On October 27, 2011, QSI held an analyst conference call.
When asked whether the electronic health records market was
becoming saturated, Plochocki responded that “the greenfield
opportunities are plentiful. [M]ore than half the large
practice market, more than 75% of the midsize practice
market is still fair game for new system sales.” During that
call, Plochocki predicted a “revenue range of growth of 21%
to 24% for the year and an EPS [earnings per share] growth
of 29% to 33% for the year.”

On November 7, 2011, Investor’s Business Daily
published an interview with Plochocki entitled “Quality
Systems Chief Says Boom Just Getting Started.” Plochocki
8 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

was quoted as saying, “There is nothing drying up and there
is nothing slowing down.”

On December 14, 2011, Plochocki participated in an
Oppenheimer & Company, Inc., Healthcare Conference. At
that conference, he stated, “So the bottom line is that our
pipeline current and our pipeline future are very robust.” In
response to a comment that large and mid-size medical
practices may be totally penetrated, Plochocki stated, “You
wouldn’t know that by our pipeline and you certainly would
not know that by our categories three and four in our
pipeline.”

On January 9, 2012, at a J.P. Morgan Healthcare
Conference, Plochocki stated that QSI had “given analysts
prognostications for . . . earnings per share growth [in the]
29% to 34% range.”

On January 26, 2012, in a conference call with analysts,
Plochocki stated, “Our pipeline continues to build to record
levels.” In that same conference call, after stating that he had
access to current internal data, NextGen President Scott
Decker stated, “[W]e haven’t changed any of the model in
our reporting pipeline, so it’s very consistent, and there’s
nothing out of character in the pipeline that we’re reporting
today versus what we have seen there the past couple of
years.”

On February 7, 2012, Plochocki participated in a UBS
Global Healthcare Services Conference. At that conference,
he stated, “[W]e have $183 million worth of pipeline, the
business we intend to close within the next six to eight
months. That sales pipeline has grown every quarter since
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 9

the announcement of the stimulus bill back in February of
2009 and we view it as continually growing[.]”

On May 7, 2012, Plochocki participated in a Deutsche
Bank Healthcare Conference. At that conference, he stated
that he had access to up-to-the-minute sales information that
showed that “[t]he deals are elongated.” “[T]he deals are
taking a little bit longer to get done.” On May 8, J.P Morgan
characterized Plochocki’s commentary as “downbeat.”

On May 9, 2012, in response to J.P. Morgan’s negative
characterization, Decker appeared before investors at a
Robert W. Baird & Co. Growth Stock Conference. In
response to a question about Plochocki’s statement two days
earlier, Decker said, “[S]ome comments earlier this week at
another conference were made . . . that [the sales cycle] may
be lengthening. . . . [I]t is absolutely not a macro trend we are
seeing. In fact, I went back through the data over the last few
days and objectively looked at it. Sales cycle has not
lengthened for us across the board, and in fact, over the last
year, you’ve seen a compression of it.”

On May 10, 2012, QSI issued a press release that was
filed that same day with the Securities and Exchange
Commission on Form 8-K. In the press release, QSI
announced that it expected to miss by material amounts its
previously announced guidance for FY 2012. The press
release attributed the declining sales to delays in closing
deals. The press release provided optimistic guidance for FY
2013, stating that “earnings per share are expected to grow
between 20 and 25 percent versus the 2012 fiscal year.”

On May 14, 2012, Holt appeared at a JMP Securities
Research Conference. He reiterated the guidance provided in
10 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

the press release four days earlier. He stated, “[W]e tried to
be very thoughtful about it and I think it’s certainly—we’re
confident I think in the guidance that we gave.”

On May 17, 2012, in a conference call, Plochocki told
analysts that the poor FY 2012 results were a one-time event.
He attributed the poor results to “delays in both the closing of
several fourth-quarter opportunities, as well as recognition of
revenue related to a large customer implementation.” He
emphasized the current state of QSI’s sales pipeline: “Our
pipeline is deep. Our categories one and two are strong. . . .
[I]f the fundamentals have changed, that would be a different
story. But our fundamentals haven’t changed. Our pipeline
keeps growing, categories one and two are very deep and
vibrant for us this quarter. We haven’t seen any fundamental
change to any of the dynamics that have been feeding into our
system for the last two to three years.” Plochocki stated that
“we remain confident about the growth opportunities, as
evidenced by our recent guidance in the 2013 fiscal year. We
have stated that we expect . . . earnings per share to grow
20% to 25%.” During that same conference call, CFO Holt
also emphasized the current state of QSI’s sales pipeline:
“We are confident in our ability to deliver on this guidance.
. . . Supporting our confidence in this guidance range are a
number of factors, including our current sales pipeline[.]”

On June 26, 2012, QSI filed with the SEC an Open Letter
to Shareholders, signed by Plochocki and Razin, as part of
proxy materials. Plochocki’s and Razin’s letter stated, “We
are also confident about our growth prospects. For fiscal
2013, we expect . . . earnings per share to grow by 20–25%.”
On June 30, 2012, four days later, the first quarter of QSI’s
FY 2013 ended. During that quarter, QSI’s earnings per
share had declined by 19 percent compared to the same
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 11

quarter one year earlier. QSI did not release this information
publicly at that time. On July 9, 10, 13, and 23, 2012, QSI
submitted proxy materials to the SEC, signed by Plochocki
and Razin, in which it repeated the statement that it expected
earnings and earnings per share to grow by 20–25 percent.

On July 26, 2012, QSI issued a press release announcing
that its earnings per share had declined by 19 percent as
compared to the first quarter of FY 2011. Plochocki stated
publicly that “we are not affirming our previous guidance nor
providing revised guidance.”

B. Scienter

The complaint alleges that the individual defendants were
aware in real time of QSI’s financial information, and knew
that their statements about the current and past state of QSI’s
sales pipeline as well as their projections of future revenue
and earnings were inconsistent with this information.

The complaint includes information about Defendants’
knowledge provided by three high-level officers of QSI.
First, Ahmed Hussein is a major shareholder of QSI. He was
a member of the Board of Directors beginning in 1999. He
resigned as a Director in May 2013. In his letter of
resignation submitted to the Board, Hussein described what
he characterized as securities laws violations by QSI,
Plochocki, and Razin. He subsequently filed a verified
complaint in California state court against QSI, Plochocki,
and Razin. During his time as a Director, Hussein routinely
interacted with Defendants Plochocki, Razin, and Holt.
According to Hussein, QSI engaged in a “‘continuous
reforecasting process’ based on real-time information
concerning QSI revenues and income,” “business
12 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

performance [and] sales pipeline.” According to Hussein,
Defendants “were aware of real time data that contradicted
their public statements.”

Second, Confidential Witness 6 (“CW6”) was a QSI
Director from June 2008 through September 2009, and was
QSI’s Chief Operating Officer from September 2009 through
May 2010. CW6 stated that Salesforce reports were available
“at the push of a button.” CW6 stated that he could see in
early 2010 that the market was going to a recurring revenue
model and that the big license sales that had fueled QSI’s
growth were no longer going to work. CW6 warned Razin
that changes needed to be made in QSI’s business model to
take this into account.

Third, Confidential Witness 7 (“CW7”) was a QSI
Director from 2004 to September 2009. CW7 stated that
QSI’s senior executives continually monitored QSI’s
revenues and earnings. According to CW7, QSI management
knew on a monthly basis how QSI was doing.

The complaint also contains information about
Defendants’ knowledge provided by five lower-level QSI
employees. First, Confidential Witness 1 (“CW1”) was a
product manager in Pennsylvania, between approximately
November 2010 and September 2013, in QSI’s NextGen
division. CW1 noticed a slowdown in QSI’s business
beginning in April 2011, and noticed that “new sales
opportunities had gone away.” CW1 stated that QSI
communicated to its employees that QSI was entering a
“replacement market whereby QSI sought to replace
competitors’ systems.” About 15 percent of CW1’s
compensation was based on NextGen sales figures. Between
November 2010 and November 2011, QSI cut back and then
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 13

stopped paying this portion of his compensation because QSI
“was failing to hit its sales targets.”

Second, Confidential Witness 2 (“CW2”) was the Chief
Information Officer (“CIO”) of Practice Management
Partners, a company acquired by QSI in late 2008. CW2
became CIO of QSI’s Revenue Cycle Management division.
CW2 stated that NextGen had experienced a slowdown in
business by April 2011. CW2 recounted that Plochocki
explained in internal conference calls sometime around
March 2011 that the market for new systems “had become
saturated, and that any sales QSI was making were largely to
replace existing EHR [electronic health record] systems.”

Third, Confidential Witness 3 (“CW3”) was a NextGen
Sales Executive from September 2011 to September 2012 for
a sales region in California. According to CW3, everyone in
his region was missing their sales targets, often by more than
50 percent. CW3 believed that other regions were also
missing their sales targets by about 50 percent.

Fourth, Confidential Witness 4 (“CW4”) was a NextGen
Sales Executive from 2008 to December 2011, with
responsibilities for sales in Virginia, Pennsylvania, and West
Virginia. According to CW4, all executives at QSI had
access to sales data that were compiled on the company’s
Salesforce software. QSI executives became increasingly
involved with prospective deals in the pipeline as the end of
a quarter approached.

Fifth, Confidential Witness 5 (“CW5”), based in
Pennsylvania, was a Sales Analyst at NextGen from July
2010 to October 2012. CW5 compiled reports of booked and
forecasted business, and arranged for the reports to be
14 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

automatically delivered to the office of defendant Holt on a
weekly or monthly basis. According to CW5, QSI officials
monitored NextGen closely because it provided the vast
majority of QSI’s revenue.

C. Declines in Share Price

During the Class Period, QSI stock traded at a high of
$50.04 on September 27, 2011.

On Friday, May 4, 2012, QSI stock traded at $36.99 per
share. On Monday, May 7, Plochocki disclosed that “deals
are taking a little bit longer to get done.” On Tuesday, May
8, analysts cut their forecasts for QSI earnings. At the end of
the day on Tuesday, QSI stock had fallen to $30.99 per share,
a decline of about 16 percent.

On July 26, 2012, QSI announced that its earnings per
share during the first quarter of FY 2013 had fallen
19 percent, and Plochocki withdrew his earlier guidance.
QSI’s stock price immediately dropped from $23.63 per share
to $15.95, a decline of about 33 percent.

D. Stock Sale by Plochocki

On February 24, 2012, Plochocki sold 88,500 shares of
QSI stock at a price of $43.99 per share. The sale represented
87 percent of Plochocki’s holdings of QSI stock. The
proceeds of the sale were more than seven times Plochocki’s
FY 2012 salary.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 15

II. Standard of Review

We review de novo a district court’s dismissal for failure
to state a claim. “We take all allegations of material fact as
true and construe them in the light most favorable to the
nonmoving party.” Parks Sch. of Bus., Inc. v. Symington,
51 F.3d 1480, 1484 (9th Cir. 1995). A complaint alleging a
violation of Section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b), must meet both the heightened
pleading requirements for fraud claims under Fed. R. Civ. P.
9(b), which requires that the complaint “state with
particularity the circumstances constituting fraud,” and the
“exacting pleading requirements,” Tellabs, Inc. v. Makor
Issues & Rights, Ltd. (Tellabs), 551 U.S. 308, 313 (2007), of
the Private Securities Litigation Reform Act (“PSLRA”),
which require that the 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). In
determining whether the complaint has satisfied these
standards, we “consider the complaint in its entirety, as well
as . . . documents incorporated into the complaint by
reference, and matters of which a court may take judicial
notice.” Tellabs, 551 U.S. at 322–23.

III. Discussion

The complaint alleges that Defendants’ non-forward-
looking statements about the current and past state of QSI’s
sales pipeline were materially false or misleading. The
complaint also alleges that Defendants’ forward-looking
statements about projected revenue and earnings were
materially false or misleading, were made without adequate
cautionary statements, and were made with actual knowledge
of their false or misleading nature. The complaint alleges that
16 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

Defendants’ statements—both non-forward-looking and
forward-looking—violated 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.

As we have explained,

Section 10(b) of the Securities Exchange Act
of 1934 makes it unlawful ‘[t]o use or
employ, in connection with the purchase or
sale of any security . . . any manipulative or
deceptive device or contrivance in
contravention of such rules and regulations as
the Commission may prescribe.’ 15 U.S.C.
§ 78j(b). Pursuant to this section, the
Securities and Exchange Commission
promulgated Rule 10b-5, which makes it
unlawful . . . ‘[t]o make any untrue statement
of a material fact or to omit to state a material
fact necessary in order to make the statements
made, in light of the circumstances under
which they were made, not misleading.’ 17
C.F.R. § 240.10b-5(b).

In re Cutera Securities Litigation, 610 F.3d 1103, 1108 (9th
Cir. 2010).

“To recover damages for violations of section 10(b) and
Rule 10b-5, a plaintiff must prove (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.” Halliburton Co. v. Erica P. John Fund,
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 17

Inc., 134 S. Ct. 2398, 2407 (2014) (internal quotation marks
omitted). Only the first two elements are at issue here.

Even where a plaintiff has properly pleaded all six
elements of a Section 10(b) violation, the allegedly false or
misleading statement may still be shielded from liability by
the “safe harbor” provision of the PSLRA. The PSLRA
exempts from liability any forward-looking statement that is
“identified as a forward-looking statement, and is
accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
differ materially from those in the forward-looking
statement,” or that the plaintiff fails to prove was made “with
actual knowledge . . . that the statement was false or
misleading.” 15 U.S.C. § 78u-5(c)(1). That is, a defendant
will not be liable for a false or misleading statement if it is
forward-looking and either is accompanied by cautionary
language or is made without actual knowledge that it is false
or misleading. Cutera, 610 F.3d at 1112–13.

The district court found that some of Defendants’
allegedly false or misleading statements were not forward-
looking, but found these statements to be “non-actionable
puffery.” The district court found that the remainder of
Defendants’ allegedly false or misleading statements were
forward-looking, were accompanied by appropriate
cautionary language, and were made without actual
knowledge of their falsity. In reaching its conclusion about
cautionary language, the district court took judicial notice of
a number of PowerPoint slides containing cautionary
language that Defendants contend were displayed during
presentations at six health care conferences.
18 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

We disagree with the district court. First, some of
Defendants’ statements were “mixed statements,” containing
non-forward-looking statements as well as forward-looking
statements of projected revenue and earnings. We hold a
defendant may not transform non-forward-looking statements
into forward-looking statements that are protected by the safe
harbor provisions of the PSLRA by combining non-forward-
looking statements about past or current facts with forward-
looking statements about projected revenues and earnings.
Second, we hold that many of Defendants’ non-forward-
looking statements were materially false or misleading.
Third, we hold that some of Defendants’ forward-looking
statements were materially false or misleading, were not
accompanied by appropriate cautionary statements, and were
made with actual knowledge of their false or misleading
nature.

We therefore reverse and remand for further proceedings.

A. Non-Forward-Looking Statements

1. Mixed Statements

Plaintiffs contend that a number of Defendants’
statements were “mixed,” containing non-forward-looking
statements about current and past facts as well as forward-
looking statements about projected growth in revenue and
earnings. They contend that the non-forward-looking parts of
Defendants’ statements reciting current and past facts are not
protected by the safe harbor provision of the PSLRA.

We have not previously addressed in this circuit the status
of mixed statements under the PSRLA. In Police Retirement
System of St. Louis v. Intuitive Surgical, Inc., 759 F.3d 1051
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 19

(9th Cir. 2014), plaintiffs contended that the non-forward-
looking portions of mixed statements were not protected by
the safe harbor provision. However, we did not need to
“resolve whether the safe harbor covers non-forward-looking
portions of forward-looking statements” in that case because
“examined as a whole” the statements were forward-looking
statements. Id. at 1059.

Several of our sister circuits have, however, addressed
mixed statements. The First, Second, Third, Fifth, and
Seventh Circuits have all concluded that where defendants
make mixed statements containing non-forward-looking
statements as well as forward-looking statements, the non-
forward-looking statements are not protected by the safe
harbor of the PSLRA. See In re Stone & Webster, Inc.,
Securities Litigation, 414 F.3d 187, 211–13 (1st Cir. 2005);
In re Vivendi, S.A., Securities Litigation, 838 F.3d 223, 246
(2d Cir. 2016); Institutional Investors Group v. Avaya, Inc.,
564 F.3d 242, 255 (3d Cir. 2009); Spitzberg v. Houston
American Energy Corp., 758 F.3d 676, 691–92 (5th Cir.
2014); Makor Issues & Rights, Ltd. v. Tellabs Inc. (Tellabs
II), 513 F.3d 702, 705 (7th Cir. 2008). We agree with these
circuits.

The PSLRA’s safe harbor is designed to protect
companies and their officials from suit when optimistic
projections of growth in revenues and earnings are not borne
out by events. But the safe harbor is not designed to protect
companies and their officials when they knowingly make a
materially false or misleading statement about current or past
facts. Nor is the safe harbor designed to protect them when
they make a materially false or misleading statement about
current or past facts, and combine that statement with a
forward-looking statement. As the First Circuit observed:
20 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

The mere fact that a statement contains some
reference to a projection of future events
cannot sensibly bring the statement within the
safe harbor if the allegation of falsehood
relates to non-forward-looking aspects of the
statement. The safe harbor, we believe, is
intended to apply only to allegations of
falsehood as to the forward-looking aspects of
the statement.

Stone & Webster, 414 F.3d at 213.

Stone & Webster provides a useful example of an
unprotected false or misleading non-forward-looking
statement embedded in a mixed statement. Company
representatives had repeatedly stated, with slight variations in
wording, that the company “has on hand and has access to
sufficient sources of funds to meet its anticipated operating,
dividend and capital expenditure needs.” Id. at 211. The
First Circuit held that the portion of the statement referring to
accessible funds was not protected:

[T]he alleged falsehood was in the fact that
the statement claimed that the Company had
access to ample cash at a time when the
Company was suffering a dire cash shortage.
The claim was not that the Company was
understating its future cash needs. In our
view the safe harbor of the PSLRA does not
confer a carte blanche to lie in such
representations of current fact.

Id. at 213.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 21

Tellabs II provides another useful example. In that case,
the company had stated that sales were “still going strong.”
Tellabs II, 513 F.3d at 705. The Seventh Circuit held that this
statement was not protected by the safe harbor:

[A] mixed present/future statement is not
entitled to the safe harbor with respect to the
part of the statement that refers to the present.
When Tellabs told the world that sales of its
5500 system were “still going strong,” it was
saying both that the current sales were strong
and that they would continue to be so, at least
for a time, since the statement would be
misleading if Tellabs knew that its sales were
about to collapse. The element of prediction
in saying that the sales are “still going strong”
does not entitle Tellabs to a safe harbor with
regard to the statement’s representation
concerning current sales.

Id.

2. Non-Forward-Looking Statements

On eight separate occasions, QSI officers knowingly
made materially false or misleading non-forward-looking
statements about the state of QSI’s sales pipeline.

On June 9, 2011, at a Goldman Sachs Healthcare
Conference, CFO Holt stated that the market for QSI’s
products in ambulatory health care facilities was “greenfield
for the most part.” On an October 27, 2011, conference call,
in response to a question whether the electronic health
records market was becoming saturated, CEO Plochocki
22 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

stated that “more than half the large practice market, more
than 75% of the midsize practice market is still fair game for
new system sales.” On November 7, 2011, Plochocki was
quoted in Investor’s Business Daily as saying, “There is
nothing drying up and there is nothing slowing down.” On
December 14, 2011, at an Oppenheimer Healthcare
Conference, in response to a comment that the large and mid-
sized medical practices may be totally penetrated, Plochocki
stated, “You wouldn’t know that by our pipeline.” On a
January 26, 2012, conference call, Plochocki stated, “Our
pipeline continues to build to record levels.” During that
conference call, NextGen President Decker stated, “[I]t’s very
consistent, and there’s nothing out of character in the pipeline
that we’re reporting today versus what we have seen there the
past couple of years.” On February 7, 2012, at a UBS
Healthcare Conference, Plochocki stated, “Th[e] pipeline has
grown every quarter since the announcement of the stimulus
bill back in February of 2009.” On May 9, 2012, at a Robert
W. Baird & Co. Growth Stock Conference, responding to
concerns that the sales cycle might be lengthening, Decker
stated, “I went back through the data . . . and objectively
looked at it. Sales cycle has not lengthened for us across the
board, and in fact, over the last year, you’ve seen a
compression of it.” On a May 17, 2012, conference call,
Plochocki stated, “Our pipeline is deep. Our categories one
and two are strong. . . . [O]ur fundamentals haven’t changed.
Our pipeline keeps growing, categories one and two are very
deep and vibrant for us this quarter. We haven’t seen any
fundamental change to any of the dynamics that have been
feeding into our system for the last two or three years.”

During the Class Period, no one at QSI corrected the
foregoing non-forward-looking statements about the state of
QSI’s sales pipeline.
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 23

a. Materiality

The district court concluded that any non-forward-looking
statements were mere puffery, and therefore non-material.
We disagree.

“When valuing corporations, . . . investors do not rely on
vague statements of optimism like ‘good,’ ‘well-regarded,’ or
other feel good monikers. . . . [P]rofessional investors, and
most amateur investors as well, know how to devalue the
optimism of corporate executives.” Cutera, 610 F.3d at 1111
(internal quotation marks omitted). Examples of “mere
corporate puffery” include statements such as “the
opportunity for system placement at hospitals ‘is still very,
very large,’” and that a company “‘will come out stronger’
and ‘is in a pretty good position’ despite the economic crisis.”
Intuitive Surgical, 759 F.3d at 1060. But even “general
statements of optimism, when taken in context, may form a
basis for a securities fraud claim” when those statements
address specific aspects of a company’s operation that the
speaker knows to be performing poorly. Warshaw v. Xoma
Corp., 74 F.3d 955, 959 (9th Cir. 1996). For example,
reassuring investors that “everything [was] going fine” with
FDA approval when the company knew FDA approval would
never come was materially misleading. Id.; see also In re
Syntex Corp. Sec. Litig., 95 F.3d 922, 927–28 (9th Cir. 1996)
(analyzing Xoma). Similarly, a statement that the company
“anticipates a continuation of its accelerated expansion
schedule” when the expansion had already failed was
materially misleading. Fecht v. Price Co., 70 F.3d 1078,
1081 (9th Cir. 1995).

The non-forward-looking statements, recounted above,
about the current and past state of QSI’s pipeline went
24 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

beyond “feel good” optimistic statements. Plochocki and the
others did not just describe the pipeline in subjective or
emotive terms. Rather, they provided a concrete description
of the past and present state of the pipeline. They repeatedly
reassured investors during the class period that the number
and type of prospective sales in the pipeline was unchanged,
or even growing, compared to previous quarters. Plochocki
did not just say that he believed plenty of opportunities for
new system sales existed; he told investors what proportion
of the large and mid-sized practice markets he believed were
greenfield, and reassured them that the pipeline was full and
growing. These statements “affirmatively create[d] an
impression of a state of affairs that differ[ed] in a material
way from the one that actually exist[ed].” Brody v.
Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir.
2002).

b. False or Misleading

The non-forward-looking statements of Plochocki and
other QSI officers were inconsistent with real-time financial
information and were materially false or misleading. CW2,
the Chief Information Officer of a division acquired by QSI
in 2008, recounted that Plochocki explained in internal QSI
conference calls as early as March 2011 that the market for
new systems “had become saturated, and that any sales QSI
was making were largely to replace existing EHR [electronic
health record] systems.” CW2 described a slowdown in
NextGen’s business beginning in April 2011. CW2 stated
that Plochocki personally explained on conference calls as
early as April 2011 that the market had become saturated
after a “bubble” and that QSI would be forced to switch from
greenfield sales to replacement systems. CW1, a product
manager in NextGen, reported that the bonus portion of
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 25

CW1’s compensation, which was based on NextGen sales
figures, had been eliminated by November 2011. Ahmed
Hussein, a member of QSI’s Board of Directors until May
2013, stated that “QSI’s sales pipeline had been declining in
the fourth quarter of fiscal 2012 [beginning January 1,
2012].” CW3, a NextGen Sales Executive from September
2011 to September 2012, stated that in CW3’s region, sales
executives were falling short “often by more than 50%” and
that CW3 “believed other regions were similarly missing
their targets by about 50%.”

c. Scienter

Plaintiffs’ complaint has adequately pleaded scienter.
Under the PSLRA, Plaintiffs must “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).
In this circuit, the “required state of mind” is a mental state
that not only covers “‘intent to deceive, manipulate, or
defraud,’ but also ‘deliberate recklessness.’” Schueneman v.
Arena Pharamceuticals, 840 F.3d 698, 705 (9th Cir. 2016)
(citations omitted). To assess whether the complaint meets
this standard, we “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?” Tellabs, 551 U.S. at 326. Where the
plaintiff relies upon statements by confidential witnesses, the
complaint must also pass two additional hurdles: “First, the
confidential witnesses whose statements are introduced to
establish scienter must be described with sufficient
particularity to establish their reliability and personal
knowledge. Second, those statements which are reported by
confidential witnesses with sufficient reliability and personal
26 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

knowledge must themselves be indicative of scienter.” Zucco
Partners, 552 F.3d at 995 (citations omitted).

The complaint describes the confidential witnesses on
whose statements Plaintiffs rely “with sufficient particularity
to support the probability that a person in the position
occupied by the source would possess the information
alleged.” In re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir.
2005) (quoting Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.
2000)). As in Daou, the complaint includes each confidential
witness’s job description and responsibilities, and, in some
instances, the witness’s “exact title and to which [QSI]
executive the witness reported.” Id. at 1016. For example,
CW6 was a QSI director who served as the Company’s COO
from September 2009 through May 2010. Although CW6
was not at QSI during the Class Period, as COO CW6 had
personal knowledge of executive-level management’s real-
time access to Salesforce reports forecasting quarterly sales.
CW2 was Chief Information Officer of one of QSI’s
divisions. In that capacity, CW2 was on a conference call
during which Plochocki stated in March 2011 that the market
for electronic health records software (produced and sold by
the NextGen division) had become saturated. See Zucco
Partners, 552 F.3d at 999 (confidential witness report of
statement made directly to CW by defendant can be
“indicative of scienter”). CW5, a NextGen Sales Analyst
during the Class Period, personally compiled sales reports
using Salesforce, NextGen’s sales management software, and
“arranged for sales reports to be automatically delivered to
. . . the CFO [Holt]’s office, either on a weekly or a monthly
basis.”

“Taken collectively,” statements by confidential witnesses
establish that members of executive-level management,
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 27

including individual defendants, had access to and used
reports documenting in real time the decline in sales during
the Class Period. See Tellabs, 551 U.S. at 323. The
complaint includes multiple statements from confidential
witnesses with personal knowledge of QSI’s declining sales
during the Class Period. CW1’s and CW4’s statements
establish the existence of “funnel reports” and sales forecasts
through the Salesforce software that were available to
executives. CW5 had personal knowledge of the fact that
sales reports were “automatically delivered to the
management team.” And CW7 “confirm[s] that QSI’s senior
executives” were in the habit of “continually monitor[ing] the
Company’s revenues and earnings.” These “particularized
allegations that defendants had ‘actual access to the disputed
information,’ . . . raise a strong inference of scienter.” City of
Dearborn Heights Act 345 Police & Fire Retirement Sys. v.
Align Tech., Inc., 856 F.3d 605, 620 (9th Cir. 2017) (quoting
Reese v. Malone, 747 F.3d 557, 575 (9th Cir. 2014)).

QSI’s executives themselves told investors they had real-
time access to, and knowledge of, sales information.
Plochocki and Decker repeatedly described the state of QSI’s
sales pipeline to analysts and investors. For example,
Plochocki told analysts on the May 26, 2011, conference call
that QSI used information maintained in Salesforce databases
to report its sales pipeline and make revenue forecasts for its
SEC filings. His statement is comparable to statements in
Nursing Home Pension Fund, Local 144 v. Oracle Corp.,
380 F.3d 1226, 1231 (9th Cir. 2004), where “top executives
admit[ted] to having monitored [a] database” of sales data,
and “Plaintiffs…[made] specific allegations regarding large
portions of” that sales data that contradict those same
executives’ public statements. In its SEC filings, QSI stated
28 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

that it “continually updated” its revenue estimates using
Salesforce software.

A showing of scienter specific to Plochocki is reinforced
by his sale of 87 percent of his QSI stock holdings on
February 24, 2012, netting him proceeds of more than seven
times his FY 2012 salary. “‘Unusual’ or ‘suspicious’ stock
sales by corporate insiders may constitute circumstantial
evidence of scienter . . . .” In re Silicon Graphics Inc.
Securities Litigation, 183 F.3d 970, 986 (9th Cir. 1999),
superseded by statute on other grounds (citation omitted).
“To evaluate suspiciousness of stock sales, we consider, inter
alia, three factors: (1) the amount and percentage of shares
sold; (2) timing of the sales; and (3) consistency with prior
trading history.” Oracle Corp., 380 F.3d at 1232.
Plochocki’s massive and uncharacteristic sale in February,
made near the apogee of QSI’s stock price during the Class
Period, and shortly before the stock went into a steep decline
(bottoming out on July 26, 2012) is, to say the least,
“suspicious.” Compare Silicon Graphics, 183 F.3d at 987
(sale of 43.6 and 75.3 percent of respective holdings
“somewhat suspicious”). Plochocki’s sale came
approximately a month after he had personally reaffirmed
earnings per share guidance on January 26, 2012, stating that
QSI’s “pipeline continues to build to record levels.” A mere
two weeks before the sale, he had told audiences at the UBS
Global Healthcare Services Conference that “we view [the
pipeline] as continually growing.” That Plochocki chose to
sell the vast majority of his shares in QSI shortly after
boasting to investors that QSI anticipated record levels of
sales in the next six to eight months gives rise to a “strong
inference” that Plochocki knew adverse information about the
state of QSI’s sales he was not sharing with the general
public. See 15 U.S.C. § 78u-4(b)(2)(A); No. 84 Employer-
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 29

Teamster Joint Council Pension Trust Fund v. Am. W.
Holding Corp., 320 F.3d 920, 939–40 (9th Cir. 2003) (sales
of large percentages of various executives’ holdings, more
than twenty months after the previous sale and near the
stock’s peak price gives rise to a “strong inference of
scienter”).

B. Forward-Looking Statements

During the Class Period, Defendants repeatedly made
revenue and earnings projections. Such projections are, by
definition, forward-looking statements. 15 U.S.C. § 78u-
5(i)(1)(A), see also Cutera, 610 F.3d at 1111. The district
court found that all of Defendants’ forward-looking
statements were accompanied by “sufficiently meaningful”
cautionary language, and that plaintiffs “fail[ed] to ‘state with
particularity facts giving rise to a strong inference that
defendant[s] acted with the required state of mind’” for
forward-looking statements. (Quoting In re Vantive Corp.
Sec. Litig., 283 F.3d 1079, 1085 (9th Cir. 2002).) The district
court therefore concluded that all of Defendants’ forward-
looking statements were protected by the PSLRA’s safe
harbor. We disagree.

Defendants’ forward-looking statements may be divided
into two groups: forward-looking statements made as part of
mixed statements in which the non-forward-looking
statements were materially false or misleading; and free-
standing forward-looking statements. We take them in turn.
30 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

1. Forward-Looking Statements as Part of Mixed
Statements

Where a forward-looking statement is accompanied by a
non-forward-looking factual statement that supports the
forward-looking statement, cautionary language must be
understood in the light of the non-forward-looking statement.
If the non-forward-looking statement is materially false or
misleading, it is likely that no cautionary language—short of
an outright admission of the false or misleading nature of the
non-forward-looking statement—would be “sufficiently
meaningful” to qualify the statement for the safe harbor.

Defendants made a number of forward-looking statements
as part of mixed statements. Some were made on conference
calls, and some were made at conferences.

Defendants made mixed statements on three conference
calls. On the October 27, 2011, conference call, at the same
time Plochocki stated that “greenfield opportunities are
plentiful,” he predicted a “revenue range of growth of 21% to
24% for the year and an EPS growth of 29% to 33% for the
year.” Plochocki characterized these predictions as “quite
conservative” given QSI’s “large” pipeline of future business.
On the January 26, 2012, conference call Plochocki provided
an “update” on guidance for FY 2012, predicting that QSI
would report “21% to 24% revenue growth for the year . . .
that will be ending in two months” and that they had
“upgraded” their earnings per share predictions to increases
of 29% to 34% with “a pretty good shot at 35%.” In support
of these predictions, Plochocki characterized the pipeline as
“growing,” and Decker stated that “there’s nothing out of
character in the pipeline that we’re reporting today versus
what we have seen there in the past couple of years.” On the
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 31

May 17, 2012, conference call, Plochocki reaffirmed his
prediction that QSI earnings per share would grow 20 percent
to 25 percent, and Holt attributed QSI’s confidence in the
prediction to the state of the current sales pipeline. The
predictions made during these conference calls were not
borne out by events. QSI announced earnings per share for
FY 2012 that were 36 percent less than had been predicted.
Rather than increasing, earnings per share in the first quarter
of FY 2013 declined by 19 percent from the previous year.

The October 27, 2011, and May 17, 2012, conference
calls were prefaced by the following identical cautionary
language:

Please note that the comments made on this
call may include statements that are forward-
looking within the meaning of securities laws,
including, without limitation, statements
related to anticipated industry trends, the
Company’s plans, products, perspectives, and
strategies, preliminary and projected, and
capital equity initiatives in the implementation
of potential impacts of legal, regulatory, or
accounting principles.

There is nothing before us to show what, if any, cautionary
language accompanied the January 26, 2012, conference call.

Defendants also made mixed statements at four
conferences. At the June 9, 2011, Goldman Sachs Global
Healthcare Conference, Holt stated that the market for QSI’s
products in ambulatory health care facilities was “greenfield
for the most part” and that he thought “it’s going to be that
way for a while.” At the December 14, 2011, Oppenheimer
32 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

Healthcare Conference, Plochocki stated that “our pipeline
current and our pipeline future are very robust.” In response
to a comment that large and mid-size medical practices might
be totally penetrated, Plochocki responded, “You wouldn’t
know that by our pipeline[.]” At the February 7, 2012, UBS
Global Healthcare Conference, Plochocki stated, “[W]e have
$183 million worth of pipeline, the business we intend to
close within the next six to eight months. That sales pipeline
has grown every quarter since . . . February of 2009 and we
view it as continually growing[.]” At the May 9, 2012,
Robert W. Baird Growth Stock Conference, Decker stated, “I
went back through the data . . . and objectively looked at it.
Sales cycle has not lengthened for us across the board, and in
fact, over the last year, you’ve seen a compression of it.”

The parties dispute whether a PowerPoint slide that
contained cautionary language was shown at these
conferences, but there is no dispute about the language on the
slide. The print on the slide was relatively small, necessitated
by the 372-word length of the cautionary statement. Inter
alia, the cautionary language provided:

[T]hese forward-looking statements are
subject to a number of risks and uncertainties,
some of which are outlined below. As a
result, actual results may vary substantially
from those anticipated by the forward-looking
statements. Among the important factors that
could cause actual results to differ materially
from those indicated by such forward-looking
statements are: the volume and timing of
systems sales and installations; length of sales
cycles and the installation process; the
possibility that products will not achieve or
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 33

sustain market acceptance; [followed by
fifteen more “important factors”].

That the non-forward-looking statement accompanying the
forward-looking statement might be false or misleading was
not mentioned. For present purposes, we will assume that the
slide containing the cautionary language was shown in a
manner that gave conference attendees a reasonable
opportunity to read and understand it.

Adequate cautionary language under the PSLRA must
identify “important factors that could cause actual results to
differ materially from those in the forward-looking
statement.” See 15 U.S.C. § 78u-5(c)(1)(A)(i). For
cautionary language accompanying a forward-looking portion
of a mixed statement to be adequate under the PSLRA, that
language must accurately convey appropriate, meaningful
information about not only the forward-looking statement but
also the non-forward-looking statement. Where, as here,
forward-looking statements are accompanied by non-forward-
looking statements about current or past facts, that the non-
forward-looking statements are, or may be, untrue is clearly
an “important factor” of which investors should be made
aware.

In both the conference calls and at the conferences,
Defendants repeatedly told investors that they could rely on
predictions of growth in revenue and earnings because the
current state of QSI’s sales pipeline was consistent with, or
better than, the state of the pipeline in previous quarters. The
cautionary language used by Defendants failed to correct
these materially false or misleading non-forward-looking
statements. We need not delve deeply into what might, in
other cases, constitute adequate cautionary language for
34 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

mixed statements, for the answer is clear in the case now
before us. Because Defendants made materially false or
misleading non-forward-looking statements about the state of
QSI’s sales pipeline, virtually no cautionary language short
of an outright admission that the non-forward-looking
statements were materially false or misleading would have
been adequate. No such cautionary language was provided.

2. Free-Standing Forward-Looking Statements

It appears from the materials now before us that
Defendants made only two free-standing forward-looking
statements, unaccompanied by non-forward-looking
statements. Both were at conferences. First, at the January
9, 2012, J.P. Morgan Healthcare Conference, Plochocki
predicted “earnings per share in the 29% to 34% range.” The
complaint does not allege that any non-forward-looking
statement accompanied Plochocki’s statement. Second, at the
May 14, 2012, JMP Securities Research Conference, Holt
reaffirmed the guidance given in a press release four days
earlier predicting FY 2013 growth in earnings per share of
between 20 percent and 25 percent. The complaint does not
allege that any non-forward-looking statement accompanied
Holt’s statement.

The district court took judicial notice of a PowerPoint
slide, containing cautionary language described above, that
Defendants contend were shown at the conferences.
Defendants submitted copies of the slide to the court,
accompanied by a statement by one of Defendants’ attorneys
that he had “personal knowledge” of the fact that the printouts
were “true and correct cop[ies] of the written presentation
materials” at the conferences. The statement does not say
that the slide was actually shown at the conferences. A
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 35

different defense attorney represented to the district court
during oral argument in support of Defendants’ motion to
dismiss that it was his “understanding” that these materials
“were . . . up on a screen projected while the speaker was
speaking” and “also posted to the website.” The district court
concluded, “At each conference, an entire written slide
dedicated to the safe harbor provision was shown. Thus, the
oral statements were accompanied by cautionary language, by
way of the printed slide.”

Plaintiffs argue vigorously that the district court erred in
taking judicial notice of the fact that the PowerPoint slides
containing cautionary language were shown in a meaningful
way at the conferences as part of Plochocki’s and Holt’s
presentations. We need not decide whether the district court
erred. As described above, there were numerous other
statements by Defendants—both non-forward-looking
statements and forward-looking statements embedded in
mixed statements—upon which to premise Defendants’
liability if it turns out that the allegations in the complaint are
true. We therefore assume without deciding that the
PowerPoint slide containing the cautionary language
accompanied Plochocki’s and Holt’s forward-looking
statements on January 9 and May 14, 2012. In the absence of
any materially false or misleading non-forward-looking
statements, the cautionary language was sufficiently
meaningful to qualify for safe harbor.

3. Actual Knowledge

Even if a forward-looking statement is not accompanied
by adequate cautionary language, it is protected by PSLRA’s
safe harbor if the speaker did not have “actual knowledge”
that the statement was false or misleading. See Cutera,
36 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG.

610 F.3d at 1112–13 (“actual knowledge” and “cautionary
language” safe harbor prongs are disjunctive). As described
above, Defendants had actual knowledge that their non-
forward-looking statements were false and misleading. Their
forward-looking statements were premised on those non-
forward-looking statements. It necessarily follows that they
also had actual knowledge that their forward-looking
statements were false or misleading.

IV. Control Person Liability

The complaint alleges that individual defendants Razin,
Plochocki, and Holt are liable under Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78t, which
assigns joint and several liability for any person who
“controls any person liable” under Section 10(b). The district
court dismissed the complaint in its entirety based on its
conclusion that Plaintiffs had failed to state a claim for relief
under Section 10(b). The court thus did not address
individual defendants’ liability under Section 20(a), which is
derivative of liability under Section 10(b). We leave it to the
district court to address in the first instance whether Razin,
Plochocki, and Holt were control persons within the meaning
of Section 20(a).

Conclusion

We hold that non-forward-looking portions of mixed
statements are not eligible for the safe harbor provisions of
the PSLRA, 15 U.S.C. § 78u-5. In the case before us,
Defendants made a number of mixed statements that included
projections of growth in revenue and earnings based on the
state of QSI’s sales pipeline. For the reasons given above,
both the non-forward-looking and the forward-looking
 IN RE QUALITY SYSTEMS, INC. SECURITIES LITIG. 37

portions of these statements were materially false or
misleading. We reverse and remand for further proceedings
consistent with this opinion.

REVERSED AND REMANDED.