Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc.

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 09-10954 JANUARY 19, 2010
________________________ JOHN LEY
ACTING CLERK
D. C. Docket No. 06-01716-CV-T-23-EAJ

EDWARD J. GOODMAN LIFE INCOME TRUST,
on behalf of itself and all others similarly
situated, et al.,
Plaintiffs,

LABORERS PENSION TRUST FUND FOR NORTHERN
CALIFORNIA AND PENSION TRUST FUND FOR
OPERATING ENGINEERS,

Plaintiff-Appellant,

versus

JABIL CIRCUIT, INC.,
FORBES I.J. ALEXANDER,
SCOTT D. BROWN,
LAURENCE S. GRAFSTEIN,
MEL S. LAVITT, et al.,

Defendants-Appellees.
 ________________________

Appeal from the United States District Court
for the Middle District of Florida
_________________________

(January 19, 2010)

Before DUBINA, Chief Judge, BIRCH and BLACK, Circuit Judges.

DUBINA, Chief Judge:

Appellants Laborers Pension Trust Fund for Northern California and

Pension Trust Fund for Operating Engineers (“the shareholders”) appeal the

district court’s order dismissing their class action securities law claims against

Jabil Circuit, Inc. (“Jabil”) and its officers and directors (collectively “Appellees”)

under Fed. R. Civ. P. 12(b)(6). We affirm the district court order dismissing the

complaint and all of the claims included because its allegations fail to meet the

heightened pleading standards imposed by the Private Securities Litigation Reform

Act (“PSLRA”), 15 U.S.C. § 78u-4 (2006), and Fed. R. Civ. P. 9(b).

I. BACKGROUND

The shareholders represent a class of investors who purchased publicly

traded Jabil stock from September 19, 2001, to December 21, 2007 (the “class

period”). Jabil is a publicly traded electronics and technology company

headquartered in St. Petersburg, Florida. The remaining individual Appellees held

2
a directorship or officership at Jabil for some portion of the class period, including

Appellee Timothy Main, who served as CEO, President, and a director of the

company.

Part of Jabil’s compensation program during the class period involved

issuing stock options to officers, directors, and employees of the company. Jabil’s

own corporate policy required the exercise price of these options to be “at least

equal to fair market value.” The shareholders allege in their complaint that Jabil

violated this policy by issuing backdated options. The issue price of backdated

options comes from a day where the trading price was lower than that on the actual

date it is issued, resulting in an instant paper gain to the issuee. The specific

allegations of backdating in the complaint rely almost exclusively on

circumstantial evidence (analyst commentary and comparative graphs) to show that

stock option grants to executives were backdated. At no point does the complaint

identify any particular transaction or scheme of backdating or specific recipients of

such a scheme.

Backdating options is not itself illegal under the securities laws, nor is it

improper under accounting principles. Under Generally Accepted Accounting

Principles (“GAAP”) Board Opinion No. 25 (“APB 25"), however, backdated

options must be recorded as a compensation expense to the corporation because

3
they effectively give recipients immediate compensation in the form of options

redeemable in the marketplace for profit. A corporation that fails to follow APB

25 and record backdated options as a compensation expense will necessarily

misstate its expenses and income in its financial reports.

During the class period, Jabil represented in several financial reports that it

had followed APB 25 in constructing its periodic accounting statements.

Furthermore, in requesting approval of its employee compensation practices via

proxy solicitations during the class period, Jabil represented in those proxy

statements that (1) the policy for which it sought approval included granting stock

options only at fair market value, and (2) in the past, all stock options were granted

at fair market value.

In March 2006, the Wall Street Journal reported on various technology

companies whose executive officers received stock options that seemed

consistently timed to grant the executives stock options at a low price in the period,

followed by a run-up in the stock price. The timing aroused the author’s

suspicions, raised the possibility of backdated options, and led an expert to

conclude that the likelihood of the options granted to Appellee Main occurring

randomly was “one in one million.”

The Securities and Exchange Commission launched an informal

4
investigation of Jabil’s stock option practices, and the company itself assembled a

special committee to review the allegations. Though the committee found no

evidence that high-level employees had been issuing themselves backdated

options, it did conclude that Jabil had misapplied APB 25 to many of the stock

options it had granted for fiscal years 1996 through 2005. This misapplication

resulted in an overstatement of earnings by $54.3 million during that period,

forcing Jabil to restate its earnings for each of those years.

The company explained that the restatement resulted from misdating stock

options, not backdating them. Specifically, Jabil cited three primary causes of the

accounting errors: (1) changes to groups of people receiving grants, though the

initial measurement date was not changed correspondingly; (2) new grants issued

after initial grants had gone “underwater” but not properly accounted; and (3)

improperly accounted stock option grants to a non-employee director for

consulting services. The company denied, and continues to deny, that it ever

purposely backdated stock options to its directors. Of the restated amount, $48.9

million actually resulted from increased compensation expense for non-executive

employees.

Shortly after the allegations of backdating appeared in the Wall Street

Journal, Jabil issued a press release raising projections for the third quarter in

5
fiscal year 2006. The shareholders allege that Jabil raised these forecasts in order

to divert attention from the allegations concerning backdating, and that Jabil knew

that the factual bases for its improved forecasts were false even at the time it made

the projections. The complaint relies on the testimony of several confidential

witnesses described to have access to corporate information at the time of the

revised projections. The witnesses allege that the Appellees must have known that

the factual bases for the improved forecasts were false. Only one of those

witnesses, however, identifies a single individual Appellee, Main, as having any

specific knowledge.

The shareholders allege that the Appellees’ securities law violations caused

them economic loss during the class period. After the first voluntary amendment,

the district court dismissed the complaint without prejudice on April 9, 2008.

Edward J. Goodman Life Income Trust v. Jabil Circuit, Inc., 560 F. Supp. 2d 1221

(M.D. Fla. 2008). The shareholders amended and refiled their complaint, which

the district court dismissed with prejudice, Edward J. Goodman Life Income Trust

v. Jabil Circuit, Inc., 595 F. Supp. 2d 1253 (M.D. Fla. 2009) (“Goodman”), leading

to the instant appeal.

II. STANDARD OF REVIEW

We review the dismissal of a complaint for failure to state a claim de novo.

6
Rosenberg v. Gould, 554 F.3d 962, 965 (11th Cir. 2009).

III. DISCUSSION

A. Section 10(b) and Rule 10b-5 Claims: Policy Statements and Financial Reports

To state a fraud claim under section 10(b) of the Securities Exchange Act, 15

U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege:

(1) the existence of a material misrepresentation or omission, (2) made with

scienter, (3) in connection with the purchase or sale of a security, (4) on which the

plaintiff relied, and (5) which was causally connected to (6) the plaintiff’s

economic loss. Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42, 125 S. Ct.

1627, 1631 (2005). As with any fraud claim, a plaintiff must plead the

circumstances of the conduct with particularity. See Fed. R. Civ. P. 9(b); Garfield

v. NDC Health Corp., 466 F.3d 1255, 1262 (11th Cir. 2006). Complaints alleging

falsity “shall specify each statement alleged to have been misleading [and] the

reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(1).

Additionally, a complaint must present facts from which “a reasonable person

would deem the inference of scienter cogent and at least as compelling as any

opposing inference one could draw from the facts alleged.” Tellabs, Inc. v. Makor

Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S. Ct. 2499, 2510 (2007); see also 15

U.S.C. § 78u-4(b)(2).

7
 The district court held that the shareholders failed to adequately plead that

Jabil’s statements about its stock-option practices during the class period were

fraudulent under section 10(b) and Rule 10b-5. Goodman, 595 F. Supp. 2d at

1265–66. Specifically, the district court held that the shareholders failed to

adequately plead falsity of the allegedly fraudulent statements, failed to raise a

sufficient inference of scienter on the part of the Appellees, and failed to plead

enough facts to show loss causation. Id. at 1266–79. Because we agree with the

district court’s conclusion about the insufficient inference of scienter raised by the

complaint, we need not address its conclusion on loss causation.

1. Falsity

The district court viewed the complaint as an attempt to construct a narrative

based on a scheme of backdating options and granting them to corporate officers.

As a result, the district court concluded that the speculative allegations in the

complaint “fail[] to adequately allege backdating” because they detail “neither any

particular defendant’s role in the backdating scheme nor when or how any

particular stock option was backdated.” Goodman, 595 F. Supp. 2d at 1268–69.

The shareholders respond that the falsity they allege is not false option

grants, but rather false statements about the dating of those grants contained in

financial and policy statements. They contend that Jabil’s decision to restate

8
financial reports during the class period is an overt admission that the prior

statements were in fact false. The Appellees insist that the district court’s

conclusion was correct because the shareholders failed to comply with the PSLRA

and explain why each of the statements was false. Specifically, they contend that

the complaint explains the errors in the restatement as a result of an intentional

backdating scheme, not as the result of an accounting error. Because the

shareholders have not pled the intentional backdating scheme with particularity,

the Appellees contend that the complaint inadequately pleads falsity because there

is no allegation about why the statements are false.

We agree with the shareholders and conclude that the complaint adequately

presents a claim of falsity. Our review of the complaint leads us to depart from the

district court’s narrow construction of the complaint. Though we concur with the

district court’s initial conclusion that the shareholders failed to plead any

particularized facts about the alleged backdating scheme, their failure to show a

backdating scheme only limits the actionable conduct here—it does not foreclose

all potential claims. Here, a contention that the financial reports and policy

statements were false is plausible, but there is no plausible case of an intentional

backdating scheme that can be constructed from the complaint.

2. Scienter

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 The shareholders allege a number of facts that they contend raise a

substantial inference of scienter. They allege insider trades by the Jabil officers

during the class period and point to the insider status of each Appellee, financial

benefits and motivation to artificially inflate the stock price, the admitted GAAP

violation, the membership of several Appellees in the corporate committee that

directed stock option grants, and the accounting expertise of several of the

Appellees. The district court evaluated all of these circumstances and concluded

that, taken together, they failed to create a strong inference of scienter. Goodman,

595 F. Supp. 2d at 1272-73.

In this circuit, scienter consists of intent to defraud or “severe recklessness”

on the part of the defendant. McDonald v. Alan Bush Brokerage Co., 863 F.2d

809, 814 (11th Cir. 1989).

Severe recklessness is limited to those highly unreasonable omissions
or misrepresentations that involve not merely simple or even
inexcusable negligence, but an extreme departure from the standards
of ordinary care, and that present a danger of misleading buyers or
sellers which is either known to the defendant or is so obvious that the
defendant must have been aware of it.

Id. (internal quotation marks omitted). The shareholders offer a mixed set of

circumstantial facts that they claim indicate intent to defraud, or at least the

Appellees’ severe recklessness in failing to discover the accounting errors.

The shareholders charge the district court with failing to aggregate their

10
factual allegations in evaluating the inference of scienter, as permitted by our

decision in Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1017 (11th Cir.

2004). They effectively concede that no single allegation, standing alone, is

sufficient to meet the Tellabs standard, see 551 U.S. at 324, 127 S. Ct. at 2510,

which requires the complaint to offer a cogent and compelling inference of

scienter, but contend that the district court erred by considering each allegation in a

vacuum. Jabil responds that all of the allegations here, even after aggregation, fail

to raise a cogent and compelling inference of scienter.

In Rosenberg v. Gould, 554 F.3d 962 (11th Cir. 2009), we recently

confronted the specific question of whether similar allegations in a complaint that

alleged a backdating scheme satisfied the standard for pleading scienter. There, the

plaintiff alleged that the defendant fraudulently issued backdated stock options,

signed false securities filings, and overstated earnings during the plaintiff’s stock

ownership. To provide a strong inference of scienter, the plaintiff alleged that (1)

the defendant had responsibility to make decisions about stock option grants; (2)

the mismeasurement of stock option grants resulted in substantial additional

compensation expenses; (3) the defendant himself was granted allegedly misdated

stock options; (4) the defendant made materially false statements; (5) the defendant

sold approximately 39 percent of his shares during the class period; and (6) the

11
defendant resigned from the corporation after the discrepancies came to light. Id.

at 966.

We held that all of these allegations failed to create an inference of scienter

that exceeded other inferences of nonfraudulent intent. Id. We reasoned that it

was most plausible that the defendant did not realize that the backdated options

would affect later financial statements because he had no accounting experience.

Id. We also concluded that the restatement, as a percentage of total revenue during

the class period, was de minimis and would not have alerted the defendant to the

false statements. Id. Finally, we rejected the assertion that backdating stock

options is inherently an intentional fraud that demonstrates scienter. Id.

The allegations in this case are strikingly similar to those we encountered in

Rosenberg. The shareholders contend that the accounting expertise of several of

the Appellees in this case distinguishes the two cases, because some Jabil

executives should have known about the proper accounting practices. The

accounting experience of some of the Jabil executives, however, fails to provide

the critical distinction here because the shareholders do not plead any facts that

indicate that any individual Appellee knew about the accounting irregularities

during the class period. As a result, the allegations of misrepresentations,

responsibility for granting misdated options, and personal profiteering fail to raise

12
a strong enough inference of scienter here, just as they failed to do so in

Rosenberg.

The shareholders strongly insist that the $54.3 million accounting error was

too large for Jabil to ignore without some fraudulent intent. In their complaint,

they detail the restated amounts during the class period as a percentage of net

income during each fiscal year, reaching nearly 50% in one year. These allegations

fall short of those evaluated in Rosenberg, however, because they present the

restated amounts as a percentage of net income and not total revenue. Because net

income can vary so widely period to period, using it as a baseline for comparison

provides the court no real standard on which to judge the significance of the

accounting error. This pleading strategy—picking the metric that will yield the

highest percentage values—adds nothing to the inference of scienter that the

shareholders attempt to create.

We will, however, address the weight of scienter allegations cumulatively,

and next consider several individual allegations not addressed by our decision in

Rosenberg. The shareholders contend that the district court improperly resolved a

factual dispute by determining that the GAAP provision at issue here, APB 25, was

not a simple accounting policy, a violation of which would be reckless. See

Goodman, 595 F. Supp. 2d at 1277. Evaluating whether alleged conduct rises to

13
the required level of scienter is not prohibited fact-finding. Because we permit

recklessness to suffice as scienter only when “highly unreasonable” and “an

extreme departure from the standards of ordinary care,” it is necessary for a court

to determine at the pleading stage whether the conduct alleged conformed to

standards that exist outside the face of the complaint. Cf. McDonald, 863 F.2d at

814.

The shareholders demand that we accept all allegations in the complaint as

true—that we must credit not only the allegation that Jabil violated APB 25 but

also that doing so is so severely reckless as to raise a compelling inference of

scienter. The former is a factual allegation, but the latter is a legal conclusion that

we are not required to accept. Under the PSLRA, it is our duty to determine

whether the facts alleged raise a cognizable claim. We emphasize that the unique

nature of the PLSRA requires us to resolve this question, whether the alleged

conduct is severely reckless, at the pleadings stage, though doing so would be

improper in most other contexts. But evaluating the complexity of APB 25 is not

necessary in this case, because the shareholders have failed to allege any facts

indicating that any individual Appellee knew that the accounting standard was

being violated.

In Ziemba v. Cascade International, Inc., 256 F.3d 1194, 1209–10 (11th Cir.

14
2001), we noted that a violation of GAAP by a corporation can raise an inference

of scienter when the defendants also ignored “red flags” warning them of the

accounting irregularities. Here, the shareholders contend that the gross amount of

the error was itself a “red flag” that should have pointed Jabil insiders to the

accounting error. Without an allegation that puts this amount in context of total

corporate business, however, it is impossible for us to determine from the

complaint whether any insider should have noticed the errors.

The shareholders also insist that the Wall Street Journal article alleging

backdated stock options received by Main was a “red flag” recklessly ignored by

Jabil insiders. This “red flag” does not match the allegations that the shareholders

now pursue in the complaint—that this is a case of known accounting fraud, not

intentional backdating of stock options. The Wall Street Journal article may

support a case for actual backdating, but would not raise suspicion that numerous

stock options had been misdated and misaccounted. The article raised the claim

that one particular insider received intentionally backdated options; it did not raise

the claim that numerous options granted by Jabil to many classes of employees

were improperly recorded in Jabil’s financial statements throughout the class

period.

The shareholders also note a large number of stock trades made by the

15
insider Appellees during the class period. They claim that these trades serve as

evidence that the officers knew that the financial statements were false and

intended to capitalize on that knowledge at the expense of the uninformed public.

Stock sales by insiders are only relevant to scienter when they are suspicious.

Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1253 (11th Cir. 2008). The

complaint must allege some information about the insider’s trading history for us

to determine whether “the level of trading is dramatically out of line with prior

trading practices at times calculated to maximize the personal benefit from

undisclosed inside information.” See id. (quoting In re Navarre Corp. Sec. Litig.,

299 F.3d 735, 747 (8th Cir. 2002)); see also Metzler Inv. GMBH v. Corinthian

Colls., Inc., 540 F.3d 1049, 1067 (noting that “whether the sales were consistent

with the insider’s trading history” is a relevant factor); Ind. Elec. Workers’ Pension

Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 543 (5th Cir. 2008) (noting

that suspicious sales are those made out of line with earlier trading customs).

The shareholders failed to plead any information about any Appellee’s

trading history before the class period. As a result, there is no way to determine

from the complaint that the sales of large numbers of shares is suspicious enough

to add to an inference of scienter. We give the conclusory allegations of insider

trading no weight in considering the inference of scienter raised by the complaint.

16
 Ultimately, we hold that the allegations contained in the complaint do not

create an inference of scienter that is at least as probable as a non-fraudulent

explanation—namely that none of the Appellees knew of the accounting errors

until the investigation began in 2006. The allegations here fit almost entirely

within the confines of Rosenberg, and we have in other circumstances rejected the

additional allegations contained in the complaint not addressed by the Rosenberg

decision. The shareholders are correct to insist that the inference of scienter be

aggregated from all of the complaint’s allegations, but we simply have no

substantial allegations to aggregate. The section 10(b) and Rule 10b-5 claims

based on the financial restatements fail because they lack sufficient allegations of

scienter.

B. Section 10(b) and Rule 10b-5 Claims: Insider Trading

The shareholders next contend that the district court erred in dismissing their

section 10(b) and Rule 10b-5 claims against the individual Appellees for insider

trading. Though we recognize that an insider trading scheme can itself be a

deceptive act or practice under the anti-fraud provisions, see Chiarella v. United

States, 445 U.S. 222, 230, 100 S. Ct. 1108, 1115–16 (1980), the complaint

inadequately alleges fraudulent insider trades. The district court correctly noted

that “the plaintiffs fail to state which defendant knew what information and why

17
the information was material.” Goodman, 595 F. Supp. 2d at 1288.

Scienter is a component of section 10(b) and Rule 10b-5 insider trading

claims. SEC v. Adler, 137 F.3d 1325, 1340 (11th Cir. 1998). “Scienter necessarily

requires that the insider have possession of material nonpublic information at the

time the insider trades.” Id. And, because of this state of mind requirement, the

complaint must “state with particularity facts giving rise to a strong inference that

the defendant acted” with scienter. 15 U.S.C. § 78u-4(b)(2). Though the

complaint contains numerous allegations of trades made by individual Appellees

during the class period, it fails to make any particularized allegation that any

individual Appellee knew about the accounting errors at the time of trading.

The shareholders also allege that the individual Appellees knew about

execution problems at Jabil that would cause it to miss quarterly projections, but

traded Jabil stock anyway despite their duty to disclose the information or abstain

from trading. Through a litany of confidential witnesses, the shareholders contend

that the Jabil insiders, collectively, knew at the time of the disputed projections that

Jabil would be unable to meet those projections. Our review of the complaint’s

allegations reveals, however, a dearth of facts indicating any individual Appellee’s

knowledge about the execution problems at Jabil during the relevant times.

In fact, in only one paragraph of the complaint’s relevant allegations is a

18
single Appellee mentioned by name. There, the shareholders allege that Appellee

Main knew about Jabil’s delayed performance on a single contract before Jabil

revealed that it had missed its third quarter projections. The shareholders

specifically allege trades by Main in January and March, 2006, while stating that

Main knew “as early as February 2006” about the contract execution issues. This

is hardly a particularized allegation that Main knew about material issues at Jabil

before he traded. The complaint, by its very terms, admits that Main may or may

not have known about the execution issues when he traded in Jabil stock. This

inadequate allegation of scienter fails to preserve the insider trading claim against

Main. We affirm the dismissal of all the section 10(b) and Rule 10b-5 insider

trading claims.

C. Section 10 and Rule 10b-5 Claims: Business Condition Projections

The shareholders contest the district court’s conclusion that the quarterly

projections about which they complain are not a basis for liability because Jabil

and its officers and directors are shielded by the PSLRA’s safe harbor provision.

See Goodman, 595 F. Supp. 2d at 1271; see also 15 U.S.C. § 78u-5(c)(1)

(exempting from liability forward-looking statements “accompanied by meaningful

cautionary statements identifying important factors that could cause actual results

to differ materially from those in the forward-looking statement”). We consider

19
Jabil’s cautionary statements that accompanied the projections in reviewing the

dismissal in accordance with 15 U.S.C. § 78u-5(e) (permitting consideration of

cautionary statements on a motion to dismiss).

The shareholders contend that the safe harbor provision is inapplicable when

the defendant makes the forward-looking statement with actual knowledge of its

falsity, no matter how accurate the accompanying cautionary language. By

pleading that Jabil insiders knew the falsity of the statements when they made

them, the shareholders claim that they have precluded the Jabil officers and

directors from invoking the safe harbor in their motion to dismiss. The

shareholders do not contend on appeal that the risk factors Jabil enumerated were

not meaningfully cautionary within the meaning of the statute.

The shareholders rely on Lormand v. US Unwired, Inc., in which the Fifth

Circuit held that the PSLRA’s safe harbor provision is not available to defendants

who have actual knowledge that their forward-looking statements are false at the

time they are made. 565 F.3d 228, 244–45 (5th Cir. 2009). The court cited the

statutory safe harbor for the proposition that a defendant may only seek shelter if

the plaintiff fails to plead that the defendant had actual knowledge of the

statement’s falsity when he made it. Id. at 244. Because all allegations are

considered true at the pleadings stage, the Lormand court accepted the plaintiff’s

20
assertion that the defendant knew his projection was false before he made it. Id.

The Appellees argue that the Fifth Circuit’s decision in Lormand is incorrect

and is in conflict with this circuit’s statements about the statutory safe harbor. In

Harris v. Ivax Corp., we noted that “if a statement is accompanied by ‘meaningful

cautionary language,’ the defendants’ state of mind is irrelevant.” 182 F.3d 799,

803 (11th Cir. 1999); see also Miller v. Champion Enters. Inc., 346 F.3d 660, 672

(6th Cir. 2003) (noting the same). We agree with the Appellees and hold that an

allegation of actual knowledge of falsity will not deprive a defendant of protection

by the statutory safe harbor if his forward-looking statements are accompanied by

meaningful cautionary language. The language and structure of the statutory

provision mandate this result.

The statute offers several ways for a defendant to avoid liability, all written

in the disjunctive. See H.R. Conf. Rep. No. 104-369, at 43 (1995), reprinted in

1995 U.S.C.C.A.N. 730, 742 (noting that the statute creates “a bifurcated safe

harbor”). First, a defendant may avoid liability by showing that his statement was

issued with meaningful cautionary language. 15 U.S.C. § 78u-5(c)(1)(A)(i). Or,

the defendant can show that the statement was simply immaterial. Id. § 78u-

5(c)(1)(A)(ii). As a third alternative, the defendant can avail himself of the safe

harbor if the plaintiff fails to prove that the statement was made with actual

21
knowledge that it was false. Id. § 78u-5(c)(1)(B). Any one of these suffices for

the defendant; a top-to-bottom reading of the statute shows that the plaintiff’s

inability to show knowledge of falsity is only relevant if the defendant is unable to

produce meaningful cautionary statements or evidence of immateriality.

This linear reading of the statute comports with its legislative history. “The

first prong of the safe harbor requires courts to examine only the cautionary

statement accompanying the forward-looking statement. Courts should not

examine the state of mind of the person making the statement.” H.R. Conf. Rep.

No. 104-369, at 44 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 743. Congress

contemplated that we would consider the cautionary language accompanying

forward-looking statements at the pleadings stage. See 15 U.S.C. § 78u-5(e)

(permitting consideration of cautionary statements on a motion to dismiss). So

long as the language accompanying the projections is meaningfully cautionary, the

law requires us to be unconcerned with the speaker’s state of mind at the time he

makes the projections.

Additionally, allowing an allegation of knowledge of falsity to prevent safe

harbor would also produce a counterintuitive result. A plaintiff wishing to

preclude a defendant from statutory safe harbor “must prove that ‘forward-looking’

statements were made with ‘actual knowledge’ that they were false or misleading.”

22
In re Daou Sys., Inc., 411 F.3d 1006, 1021 (9th Cir. 2005); see also 15 U.S.C. §

78u-5(c)(1)(B). This burden of production has led some courts to conclude that

“[t]o avoid the safe harbor, plaintiffs must plead facts demonstrating that the

statement was made with actual knowledge of its falsity.” See, e.g., Southland Sec.

Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 371 (5th Cir. 2004) (emphasis

added); see also In re LeapFrog Enters., Inc. Sec. Litig., 527 F. Supp. 2d 1033,

1047 (N.D. Cal. 2007).1

Therefore, not only must a plaintiff prove actual knowledge of falsity when

contesting forward-looking statements, but, under the shareholders’ rationale, by

so pleading the plaintiff precludes the defendant from utilizing the safe harbor at

the pleadings stage entirely. In light of Congress’s specific provision for courts to

evaluate disputes over forward-looking statements at the pleadings stage, see 15

U.S.C. § 78u-5(e), we cannot reach the conclusion that a properly formed

complaint prohibits us from doing so.

Our conclusion is further informed by this circuit’s judicially created

bespeaks caution doctrine, whose “statutory equivalent” is the PSLRA safe harbor

provision. See SEC v. Merchant Capital, LLC, 483 F.3d 747, 767 n. 18 (11th Cir.

2007); see also H.R. Conf. Rep. No. 104-369, at 43 (1995), reprinted in 1995

1
In Harris, we declined to articulate a specific standard for pleading scienter when the
statements at issue are forward-looking. 182 F.3d at 803–04.

23
U.S.C.C.A.N. 730, 742 (noting that the safe harbor provision “is based on aspects

of . . . the judicial created ‘bespeaks caution’ doctrine”). Under the bespeaks

caution doctrine, a forward-looking statement is rendered immaterial as a matter of

law when accompanied by meaningful cautionary language. Merchant Capital,

483 F.3d at 767. The anti-fraud provisions of the securities laws are plainly

disinterested with immaterial statements, no matter the state of mind of the

speaker. See Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S. Ct. 978, 983 (1988).

However we cast forward-looking statements accompanied by meaningful

cautionary language, an allegation that the speaker knew the statements were false

does not convert those statements, mitigated by adequate warnings of risks, into

actionable frauds. We affirm the district court’s dismissal of the shareholders’

fraud claims stemming from the earnings projections because of the applicability

of the safe harbor provision.

D. Section 14(a) Proxy Solicitation Claims

Section 14(a) of the Securities Exchange Act and Rule 14a-9 collectively

prohibit the use of false statements in proxy solicitations associated with registered

securities. 15 U.S.C. § 78n(a); 17 C.F.R. § 240.14a-9. The shareholders allege in

their complaint that several individual Jabil insiders violated section 14(a) by

making false statements in proxy solicitations related to Jabil’s stock option

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compensation policy. Specifically, they claim that throughout the class period, the

Jabil insiders represented that the stock option compensation policy was to grant

all options at fair market value, and that this practice had been followed in the past.

They contend that they relied on these false statements in approving corporate

compensation and stock option policies and that the nondisclosure prevented them

from removing the offending corporate directors. The district court held that the

lack of an adequately pled backdating scheme precluded the shareholders from

showing a falsity in proxy solicitation materials. Goodman, 595 F. Supp. 2d at

1290.

To sustain a private claim under section 14(a), a plaintiff must show “that

the proxy solicitation itself, rather than the particular defect in the solicitation

materials, was an essential link in the accomplishment of the transaction.” Mills v.

Elec. Auto-Lite Co., 396 U.S. 375, 385, 90 S. Ct. 616, 622 (1970). The transaction

at issue must be the source of the plaintiff’s injury. See id.; Koppel v. 4987 Corp.,

167 F.3d 125, 137 (2d Cir. 1999) (noting that both transaction causation and loss

causation are components of a section 14(a) claim).

In General Electric Co. v. Cathcart, the Third Circuit addressed a section

14(a) claim against corporate insiders based on their alleged non-disclosure of

criminal activity and mismanagement of the company. 980 F.2d 927 (3d Cir.

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1992). The plaintiff claimed that the absence of this information caused him to

vote to reelect board members and approve corporate governance rules during the

class period. The court affirmed dismissal of the claim and held that the plaintiff’s

injuries were too attenuated to support a proxy solicitation claim. Id. at 933.

The Cathcart court held that the plaintiff’s real injuries came from

mismanagement of the corporation, not the transactions approved via the proxy

solicitation materials. Id. The court reasoned that the harm to the plaintiffs was

only indirect and not sufficient on which to base a section 14(a) claim. Id.

Essentially, it was management’s failure to follow corporate policies, and not the

actual election of directors, that contributed to the shareholder’s loss.

The claims asserted by the shareholders in this case are analogous to those

dismissed by the court in Cathcart. Here, the damages suffered by the

shareholders were caused not by the policies that they approved via proxy, but by

management’s failure to follow those policies. Additionally, the election of

directors who violated those policies only indirectly caused the shareholders’ loss.

The adoption of a compensation scheme and reelection of directors was not an

essential link to the losses of which the shareholders complain; the insiders’

decision to violate company policies was not accomplished or endorsed by any

proxy solicitation materials. Because the complaint fails to allege a link between

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the proxy solicitation and the shareholders’ loss, we affirm the dismissal of the

proxy solicitation claims.

E. Section 20A Insider Trading Claims

Section 20A of the Securities Exchange Act grants a private right of action

to shareholders who contemporaneously trade with “[a]ny person who violates any

provision [of the act] or the rules or regulations thereunder by purchasing or selling

a security while in possession of material, nonpublic information.” 15 U.S.C. §

78t-1(a). This language means that a plaintiff must first plead a violation of the

Securities Exchange Act or its rules before pursuing section 20A insider trading

claims. Jackson Nat’l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 703 (2d

Cir. 1994); In re AFC Enters., Inc. Sec. Litig., 348 F. Supp. 2d 1363, 1375 (N.D.

Ga. 2004). Because there is no predicate violation on which to base the insider

trading claims, we affirm the dismissal of the shareholders’ section 20A claims.

F. Section 20(a) Control Person Liability Claims

Section 20(a) of the Securities Exchange Act makes persons “who, directly

or indirectly, control[] any person liable under any provision of [the act] or of any

rule or regulation thereunder . . . liable jointly and severally with . . . such

controlled person.” 15 U.S.C. § 78t(a). The complaint must adequately allege

primary liability for another Securities Exchange Act violation in order to state a

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claim for secondary liability under section 20(a). Rosenberg, 554 F.3d at 967.

Because the shareholders have failed to properly plead their fraud and proxy

solicitation claims, we affirm the dismissal of their section 20(a) claims.

IV. C ONCLUSION

We affirm the district court’s order granting the motion to dismiss the

shareholders’ entire complaint—one that the district court previously dismissed

without prejudice, while giving the shareholders specific instructions about ways to

remedy the complaint’s deficiencies. The shareholders were unable to follow those

instructions, and have failed to adequately allege any actionable securities law

violations.

AFFIRMED.

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