In Re Silicon Graphics Inc. Securities Litigation. Edmund J. Janas v. Edward R. McCracken Michael Ramsay Robert K. Burgess Thomas J. Oswald Teruyasu Sekimoto Forest Baskett Stephen Goggiano William M. Kelly Lucille Shapiro Silicon Graphics, Inc., Deanna Brody Andrea S. Donald Israel Buck Ruth Buck Denise Struthers Thomas G. Di Cicco Ira Steven B. Ewall Rosalyn Golaine Jerry Krim Mary Anne Beke Herman Grossman Samuel J. Reiner Dennis Lucas v. Edward R. McCracken Michael Ramsay Robert K. Burgess Thomas J. Oswald Teruyasu Sekimoto Forest Baskett Stephen Goggiano William M. Kelly Lucille Shapiro Silicon Graphics, Inc.

This case requires us to interpret the Private Securities Litigation Reform Act of 1995 ("PSLRA").2 Congress enacted the PSLRA to deter opportunistic private plaintiffs from filing abusive securities fraud claims, in part, by raising the pleading standards for private securities fraud plaintiffs. See, e.g., H.R. REP. CONF. NO. 104-369, at 32-41 (1995); see also 15 U.S.C. S 78u-4(b)(1), (2) (1997). In doing so, Congress generated a flood of litigation and commentary regarding the proper interpretation of these standards. Much of this litigation deals specifically with the pleading issue now before us, i.e., what must a plaintiff allege in order to satisfy the requirement that he state facts giving rise to a "strong inference" of there quired state of mind? See 15 U.S.C. S 78u-4(b)(2) (requiring that the complaint "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind").

Due to the nature of this litigation, we shall depart somewhat from the customary form of opinions of this Court by discussing generally what we hold to be the pleading standard under the PSLRA. Thereafter, we will set forth the facts of this case and then apply that standard to those facts.

THE PSLRA PLEADING STANDARD: THIS COURT'S INTERPRETATION

We hold that a private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct. Our holding rests, in part, on our conclusion that Congress intended to elevate the pleading requirement above the Second Circuit standard requiring plaintiffs merely to provide facts showing simple recklessness or a motive to commit fraud and opportunity to do so. We hold that although facts showing mere recklessness or a motive to commit fraud and opportunity to do so may provide some reasonable inference of intent, they are not sufficient to establish a strong inference of deliberate recklessness. In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity. Accordingly, we hold that particular facts giving rise to a strong inference of deliberate recklessness, at a minimum, is required to satisfy the heightened pleading standard under the PSLRA. We think that our holding represents the best way to reconcile Congress' express adoption of the Second Circuit's so-called "strong inference standard" with its express refusal to codify that circuit's case law interpreting the standard. However, we are mindful that not all courts share our view.

There is widespread disagreement among courts as to the proper interpretation of the PSLRA's heightened pleading requirement. See 15 U.S.C. S 78u-4(b)(1), (2). To date, the Second, Third and Sixth Circuits are the only other courts of appeals to address the issue squarely. See In re Comshare, Inc. Sec. Litig.,180 F.3d 542(6th Cir.1999) (holding that "plaintiff may survive a motion to dismiss by pleading facts that give rise to a `strong inference' of recklessness"); In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir.1999) (holding that "it remains sufficient for plaintiffs plead [sic] scienter by alleging facts `establishing a motive and an opportunity to commit fraud, or by setting forth facts that constitute circumstantial evidence of either reckless or conscious behavior'"); Press v. Chemical Inv. Serv. Corp., 166 F.3d 529 (2d Cir. 1999) (holding that a plaintiff "must either (a) allege facts to show that `defendants had both motive and opportunity to commit fraud' or (b) allege facts that `constitute strong circumstantial evidence of conscious misbehavior or recklessness'"). Of the district courts considering the issue, roughly sixty percent (some twenty cases) have followed the Second Circuit, while the others have interpreted the PSLRA as adopting some higher standard.

Generally, the district courts have taken three different approaches: (1) apply the Second Circuit standard requiring plaintiffs to plead mere motive and opportunity or an inference of recklessness, see e.g., Epstein v. Itron v. Inc., 993 F. Supp. 1314 (E.D. Wash. 1998); Robertson v. Strassner, 32 F. Supp. 2d 443, 447 (S.D. Tex. 1998); In re Wellcare Management Group, Inc. Sec. Litig., 964 F. Supp. 632 (N.D.N.Y. 1997); (2) apply a heightened Second Circuit standard rejecting motive and opportunity, but accepting an inference of recklessness, see e.g., Myles v. MidCom Communications, Inc., No. C96-614D (W.D. Wash. Nov. 19, 1996); Queen Uno Ltd. Partnership v. Coeur d'Alene Mines Corp., 2 F.Supp2d 1345(D. Colo. Apr. 13, 1998); or (3) reject the Second Circuit standard and accept only an inference of conscious conduct, see e.g., Voit v. Wonderware Corp., 977 F.Supp.2d 363 (E.D. Pa. 1997); Powers v. Eichen, 977 F.Supp. 1031 (S.D. Cal. 1997); Friedberg v. Discreet Logic Inc., 959 F. Supp. 42 (D. Mass. 1997); Norwood Venture Corp. v. Converse, Inc., 959 F. Supp. 205, 209 (S.D.N.Y. 1997). For further discussion of the cases, see, e.g., Richard H. Walker and J. Gordon Seymour, Recent Judicial and Legislative Developments Affecting the Private Securities Fraud Class Action, 40 ARIZ. L. REV. 1003 (1998).

We embrace the approach requiring a strong inference of deliberate recklessness which lies between the second and third approaches. We do this because we believe that Congress intended to bar those complaints that fail to raise a strong inference of intent or deliberateness. The "deliberate recklessness" standard best serves the PSLRA's purpose. The PSLRA text and legislative history support our conclusion.

To determine the proper pleading standard under the PSLRA, we turn first to the text of the statute. If the language is plain and its meaning clear, that is the end of our inquiry. See Northwest Forest Resource v. Glickman, 82 F.3d 825, 831 (9th Cir. 1996).

(b) Requirements for securities fraud actions . . . (2) Required state of mind

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

15 U.S.C. S 78u-4(b)(2) (bold emphasis in original; underline emphasis added). Under this provision, the mental state required for securities fraud liability is distinct from the level of pleading required to infer that mental state. Therefore, we must make two separate determinations: (1) what is the required state of mind; and (2) what constitutes a strong inference of that state of mind.

a. Required state of mind

The "required state of mind" in S 78u-4(b)(2) refers to the scienter requirement applicable to the underlying securities fraud claim brought by the plaintiff. In this case, Brody brought her securities fraud action under S 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which establishes a private cause of action for securities fraud. See 17 C.F.R. S 240.10b-5. Therefore, we look to S10(b) for the required state of mind.3

The Supreme Court has defined "scienter" in the context of S10(b) as a "mental state embracing intent to deceive, manipulate, or defraud." See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12, 96 S. Ct. 1375, 1381 n.12, 47 L. Ed. 2d 668 (1976). In Hochfelder, the Supreme Court addressed the question of whether a civil action for damages under S10(b) would lie for negligent conduct. It decided that no conduct -- negligent or otherwise -- is actionable under S10(b) unless plaintiffs make a showing of "scienter," i.e., "intent to deceive, manipulate, or defraud." Id. at 193, 96 S. Ct. at 1381, 47 L. Ed. 2d 668. The Supreme Court reasoned that S10(b) makes unlawful the use of "any manipulative or deceptive device or contrivance" in contravention of SEC Rules. Hochfelder, 425 U.S. at 197, 96 S. Ct. at 1383, 47 L. Ed. 2d 668. As a result, the Court held that "[t]he words `manipulative and deceptive' used in conjunction with `device or contrivance' strongly suggest that S 10(b) was intended to proscribe knowing or intentional misconduct." Id. (citations omitted) (emphasis added).4

Although the Supreme Court concluded that S10(b) was intended to proscribe "knowing" or "intentional" conduct as opposed to negligent conduct, it noted that "[i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." Id. at 193-94 n.12, 96 S. Ct. at 1381 n.12, 47 L. Ed. 2d 668. Accordingly, the Supreme Court left open the question of whether, in some circumstances, "reckless behavior is sufficient for civil liability under S10(b) and Rule 10b-5." Id.

After Hochfelder, but long before enactment of the PSLRA, we answered that question in the affirmative, holding that "Congress intended the ambit of S10(b) to reach a broad category of behavior, including knowing or reckless conduct." Nelson v. Serwold, 576 F.2d 1332, 1337 (9th Cir. 1978). In Nelson, we declined to define recklessness, but our opinion indicates that we viewed it as a form of intentional, not merely negligent, conduct. We expressly acknowledged the Supreme Court's words in Hochfelder that "[i]n certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act." Id. (quoting Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381, n.12, 47 L. Ed. 2d 668). Moreover, we stated that "the evidence supports a finding of recklessness, or some degree of intent not sufficiently aggravated to be characterized as `deliberate and cold-blooded.'" Id. at 1338. Thus, we apparently followed the Supreme Court's guidance in Hochfelder that reckless behavior in the S10(b) context is merely a lesser form of intentional conduct.

In Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) (en banc), we again held that "recklessness satisfies the element of scienter in a civil action for damages under S10(b) and Rule 10b-5." 914 F.2d at 1568-69. This time, we explicitly defined recklessness:

Today we adopt the standard of recklessness articulated by the Seventh Circuit in Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 54 L.Ed.2d 155 (1977) . . . [R]eckless conduct may be defined as a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.

Hollinger, 914 F.2d at 1569 (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977)). Our definition of recklessness, as taken from Sundstrand, strongly suggests that we continued to view it as a form of intentional or knowing misconduct.5 We used the words "known" and "must have been aware," which suggest consciousness or deliberateness. Indeed, we expressly acknowledged our own prior statement that "recklessness is a form of intent rather than a greater degree of negligence," see id. (citing Vucinich v. Paine, Webber, Jackson & Curtis Inc. , 739 F.2d 1434, 1435 (9th Cir.1984)), and the Supreme Court's statement that recklessness in the context of S10(b) is a form of intentional conduct, see id. at 1568 (quoting Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381, n.12, 47 L. Ed. 2d 668).6

These cases indicate that recklessness only satisfies scienter under S10(b) to the extent that it reflects some degree of intentional or conscious misconduct.7 To repeat, recklessness in the S10(b) context is, in the words of the Supreme Court, a form of intentional conduct. See Hochfelder, 425 U.S. at 193-94 n.12, 96 S. Ct. at 1381 n.12, 47 L. Ed. 2d 668. For this reason, we read the PSLRA language that the particular facts must give rise to a "strong inference . . . [of] the required state of mind" to mean that the evidence must create a strong inference of, at a minimum, "deliberate recklessness."

We now turn to our second inquiry, i.e., what constitutes a strong inference of deliberate recklessness?

b. What constitutes a strong inference of the required state of mind

Again, we begin with the language of the statute because if the language is clear, we need inquire no further. See Glickman, 82 F.3d at 830-31. In this case, the statute is silent as to the central issue: the text of the PSLRA does not state whether motive and opportunity or circumstantial evidence of simple recklessness are sufficient to raise a "strong inference" of deliberate recklessness. The plain text of the PSLRA leaves it open for us to consider circumstantial evidence of recklessness and motive and opportunity as evidence of deliberate recklessness. However, it does not indicate whether they alone are enough to establish a "strong inference" of deliberate recklessness. In the absence of a clear command in the text, we turn to the legislative history for guidance. See id.

When examining the legislative history, we first look to the conference report because, apart from the statute itself, it is the most reliable evidence of congressional intent. See id. at 835. In this case, the conference report suggests both that Congress generally intended to raise the pleading standards to eliminate abusive securities litigation and that it specifically intended to raise the pleading standard above that in the Second Circuit. See, e.g., H.R. CONF. REP. 104-369, at 31, 41.

It is clear from this conference report that Congress sought to reduce the volume of abusive federal securities litigation by erecting procedural barriers to prevent plaintiffs from asserting baseless securities fraud claims. In a joint statement, managers from the House and Senate declared that "Congress has been prompted by significant evidence of abuse in private securities lawsuits to enact reforms to protect investors and maintain confidence in ourcapital markets." H.R. CONF. REP. 104-369, at 31. The managers observed that plaintiffs routinely were filing lawsuits "against issuers of securities and others whenever there [was] a significant change in an issuer's stock price, without regard to any underlying culpability of the issuer, and with only faint hope that the discovery process might lead eventually to some plausible cause of action[.]" Id. They recognized that plaintiffs, by targeting "deep pocket defendants," could misuse the discovery process "to impose costs so burdensome that it [was] often economical for the victimized party to settle[.]" Id. In general, the conference report makes it clear that Congress designed the PSLRA to deter non-meritorious lawsuits by creating procedural barriers such as heightened pleading standards. Id. at 41.

It is also clear from the legislative history that Congress sought more specifically to raise the pleading standard above that in the Second Circuit. First, Congress declined to enact an amendment that would have adopted the Second Circuit rule. It is true that during the floor debate of its version of the PSLRA, the Senate tentatively adopted the Specter Amendment which codified the Second Circuit's two-pronged "motive and opportunity" and "recklessness" test. See 141 CONG. REC. S9,170 (daily ed. June 27, 1995). However, the joint conference committee -- consisting of House and Senate managers charged with reconciling differences between the House and Senate bills -- declined to incorporate the Specter Amendment in the final version of the PSLRA. See H.R. CONF. REP. 104-369, at 41. In doing so, they implicitly rejected the Second Circuit's two- pronged test. See Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 200, 95 S. Ct. 392, 401, 42 L. Ed. 2d 378 (1974) (holding that where the conference committee has expressly declined to adopt proposed statutory language, its action "strongly militates against a judgment that Congress intended [the] result that it expressly declined to enact").

Second, the joint committee expressly rejected the Second Circuit's two-prong test in favor of a more stringent standard. The joint committee stated:

The Conference Committee language is based in part on the pleading standard of the Second Circuit. . . . Regarded as the most stringent pleading standard, the Second Circuit requirement is that the plaintiff state facts with particularity, and that these facts, in turn, must give rise to a "strong inference" of the defendant's fraudulent intent. Because the Conference Committee intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law interpreting this pleading standard23.

H.R. CONF. REP. 104-369, at 41 n.23 (emphasis added). See also S. REP. 104-98, at 15 ("The Committee does not intend to codify the Second Circuit's caselaw interpreting [the strong inference] pleading standard, although courts may find this body of law instructive."). Thus, although Congress derived the PSLRA "strong inference" language from the Second Circuit, it rejected the less stringent Second Circuit case law interpreting that "strong inference" language. To repeat, the conference committee purposely chose not to include in its pleading standard language derived from Second Circuit case law relating to motive, opportunity or recklessness.

Thus, Congress did not codify the Second Circuit case law. The joint committee sought to "strengthen existing pleading requirements." See H.R. CONF. REP. 104-369, at 41. The Second Circuit case law setting forth its two-prong test existed at the time the PSLRA was passed. Clearly, Congress sought to raise the standard above all existing requirements. Congress could have adopted outright the Second Circuit standard. It did not do so. It follows that Congress sought to raise the standard above that in the Second Circuit.

We recognize that the PSLRA's "strong inference" language is taken directly from the Second Circuit. That is not determinative, however. The legislative history leads us to conclude that Congress adopted the Second Circuit's "strong inference" language only because it was facially more stringent than the "reasonable inference" standard in other circuits, see, e.g., Provenz, 102 F.3d at 1490. It does not indicate that Congress intended to adopt the Second Circuit's underlying two- prong test. After all, Congress expressly rejected the Second Circuit case law interpreting the "strong inference" standard.8

To repeat, Congress intended for the PSLRA to raise the pleading standard even beyond the most stringent existing standard.

Congress further provided very strong evidence of its intent to go beyond the Second Circuit standard when it overrode President Clinton's veto of the PSLRA. In his veto message to Congress, President Clinton expressed concern that Congress had elevated the pleading standard above that required in the Second Circuit. President Clinton stated:

I believe that the pleading requirements of the Conference Report with regard to a defendant's state of mind impose an unacceptable procedural hurdle to meritorious claims being heard in Federal courts. I am prepared to support the high pleading standards of the U.S. Court of Appeals for the Second Circuit--the highest pleading standard of any Federal circuit court. But the conferees make crystal clear in the Statement of the Managers their intent to raise the standard even beyond that level. I am not prepared to accept that.

141 CONG. REC. H15,214 (daily ed. Dec. 10, 1995). Notwithstanding the President's concerns, Congress overrode his veto, and the PSLRA became law. In doing so, Congress provided powerful evidence of its intent to elevate the pleading standard to a level beyond that in the Second Circuit.

In sum, the legislative history supports our conclusion that the PSLRA pleading standard is higher than the standard of the Second Circuit. We find that because the joint committee expressly rejected the "motive and opportunity" and "recklessness" tests when raising the standard, Congress must have intended a standard that lies beyond the Second Circuit standard. Had Congress merely sought to adopt the Second Circuit standard, it easily could have done so. It did not do so. Instead, Congress adopted a standard more stringent than the Second Circuit standard. It follows that plaintiffs proceeding under the PSLRA can no longer aver intent in general terms of mere "motive and opportunity" or "recklessness," but rather, must state specific facts indicating no less than a degree of recklessness that strongly suggests actual intent. Thus, we agree with the district court that the PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate or conscious recklessness. We believe that this "deliberate recklessness" standard best reconciles Congress' adoption of the Second Circuit's so-called "strong inference standard" with its express refusal to codify that circuit's two-prong "motive and opportunity" and "recklessness" test.

Having determined that the PSLRA requires plaintiffs to plead particular facts giving rise to a strong inference of deliberate recklessness, we must determine whether the plaintiffs in this case have satisfied that requirement.

Deanna Brody ("Brody") filed a securities fraud class action in the United States District Court for the Northern District of California alleging that Silicon Graphics, Inc. ("SGI") and six of its top officers ("officers")9 made a series of misleading statements to inflate the value of SGI's stock while they engaged in "massive" insider trading. The district court dismissed Brody's complaint for failure both: (1) to state a claim under Federal Rule of Civil Procedure 12(b)(6); and (2) to satisfy the PSLRA pleading requirements. The district court also granted summary judgment to four individual officers on the issue of misrepresentation. Brody now appeals, arguing that dismissal was improper because her complaint included facts sufficient to meet the PSLRA pleading standard and that summary judgment was improper in the absence of discovery. We disagree.

Based on the same events, Edmund J. Janas ("Janas") filed a shareholders' derivative suit claiming that SGI's officers breached their fiduciary duties to SGI, were grossly negligent in managing the company, and engaged in improper insider trading. Again, the district court dismissed the complaint, holding that Janas failed to allege a pre-suit demand on SGI's directors as required by Federal Rule of Civil Procedure 23.1. Janas now appeals. On appeal, he argues that the district court abused its discretion when it concluded that it would not have been futile for Janas to make a demand on the directors. Janas also claims that the district court improperly denied him leave to amend. Again, we disagree.

We have jurisdiction pursuant to 28 U.S.C. S 1291 and affirm. We hold that although Brody has stated facts giving rise to some inference of fraudulent intent, her factual allegations are insufficient to create a strong inference of deliberate recklessness. We also conclude that the uncontested affidavits offered by the individual officers were adequate to support summary judgment in their favor. With regard to Janas's derivative suit, we hold that he was not excused from making a pre-suit demand upon the directors and that he could not have amended his complaint to show that such a demand would have been futile. As a result, we hold that dismissal with prejudice was appropriate.

Brody's First Amended Complaint asserts10 that SGI is a Delaware Corporation that manufactures desktop graphic workstations and software. In July 1995, SGI reported 45% revenue growth for Fiscal Year 1995 ("FY95") and projected similar growth for Fiscal Year 1996 ("FY96"). At the same time, SGI announced plans to produce a line of graphic design computers called the "Indigo2 Impact Workstation" ("Indigo2") which it developed to compete with a new line of Hewlett-Packard workstations. SGI planned to ship the Indigo2 in volume by September 30, 1995, the end of the first quarter of FY96, and an upgraded version by January 1, 1996. SGI assured investors that Indigo2 would help sustain a 40% growth rate and exceed $1 billion in sales in FY96. SGI's projections drove its stock price to an all-time high of $44 on August 21, 1995.

By mid-September 1995, Brody further asserts, SGI began encountering quality control problems with a primary Indigo2 component, the Toshiba ASIC chip. Toshiba sent SGI a large number of defective chips, causing SGI to fall behind its production schedule. Brody alleges that the officers learned immediately of the defective chips through SGI internal reports, but continued to represent to investors that production was proceeding without incident. Brody's complaint also included the following statements as examples of alleged misrepresentations:

September 19, 1995: McCracken told Morgan Stanley that there were "no supply constraints" on the Indigo2.

September 21, 1995: McCracken announced at an industry conference that Indigo2 sales growth "was accelerating."

September 22, 1995: McCracken told Morgan Stanley that "that there is no problem with [Indigo2], nor is there an engineering halt."

September 26, 1995: SGI announced "volume shipments" of the Indigo2 workstation.

The shortage of ASIC chips for the Indigo2 workstation compounded other major problems for SGI. The company was suffering through declining sales to the United States government and Original Equipment Manufacturers ("OEM"), languishing demand in Europe, and complications resulting from the reorganization of its sales force. As these problems became apparent, investors began to lose confidence in SGI's ability to maintain its high growth rate, and as a result, SGI's stock dropped to a low of $29 on October 9, 1995.

On October 19, 1995, SGI announced that its revenue had grown just 33% during the first quarter of FY96, well below the projected growth of 40%. The disappointing first quarter performance, according to Brody, caused SGI's officers to fear another drop in the value of SGI stock. To prevent such a drop, Brody asserts that SGI's officers allegedly conspired to restore investor confidence by downplaying SGI's problems. In furtherance of their alleged "conspiracy," SGI's officers made the following statements which were intended to artificially inflate the value of SGI stock:

October 19, 1995: SGI issued a press release reporting that the Indigo2 was shipping in volume.

October 19, 1995: In a conference call, McCracken and other officers told securities analysts and institutional investors that SGI's sales force reorganization had been successful. The officers attributed the shortcoming in first quarter growth to a "temporary pause" in OEM sales, and a brief drop in demand from the U.S. Government and French businesses. SGI assured investors that (1) there were no manufacturing problems with or supply constraints on the Indigo2; (2) demand was strong for the workstation, and it was being shipped in volume; (3) the Indigo2 upgrade was on schedule and would be introduced in January 1996 as planned; and (4) the goal of 40% revenue growth for FY96 would be achieved.

October 19, 1995: McCracken stated during an interview that SGI's first quarter performance was "probably less" than the growth the company would see during FY96.

To further inflate the value of SGI stock, the company announced its plan to repurchase 1.3 million of its own shares immediately and another 5.7 million over a longer period. According to Brody, the statements had their intended effect: SGI's stock price dropped only slightly despite its disappointing first quarter results.

SGI's problems continued throughout October 1995. SGI again failed to ship the Indigo2 in volume and its sales continued to decline because the sales force reorganization had been ineffective. Moreover, demand for the Indigo2 remained low among OEM and European customers. As a result, SGI fell even farther below its target of 40% growth for FY96.

Brody alleges that SGI's officers learned of these problems through internal company reports. Notwithstanding the negative reports, the officers continued to make positive public statements in their allegedly conscious effort to mislead investors:

November 2, 1995: SGI officers held a press conference for securities analysts and investors, stating that (1) SGI would still achieve its goal of 40% revenue growth; (2) the failure to meet growth expectations for the first quarter resulted from temporary sales force reorganization problems and a temporary pause in OEM sales; (3) Indigo2 sales were beating expectations, and the product was now shipping in volume after some initial problems with the Toshiba ASIC chips; (4) development of the Indigo2 upgrade was proceeding as scheduled; and (5) SGI's second quarter performance would exceed its first quarter performance.

Early November 1995: SGI's first quarter report to shareholders included a letter from McCracken stating that the Indigo2 "began shipping in volume in September."

Again, Brody contends that these false and misleading statements had their intended effect: SGI's stock rose from $31/ on November 1, 1995 to $36 on November 3, 1995. During the month of November, the individually named SGI officers allegedly took advantage of SGI's inflated stock value by selling 388,188 shares of SGI stock at prices as high as $37 . On December 5, 1995, SGI stock reached a class-period high of $38/. By mid- December, however, rumors began to circulate that SGI would again fall short of projected growth in the second quarter and its stock price began to drop. In effort to revive once more the value of the stock, SGI officers continued to make what Brody claims were false statements about SGI's performance:

December 15, 1995: McCracken and another SGI executive told Dean Witter that (1) SGI did well in November; (2) SGI's sales force productivity was improving; (3) SGI's sales to the U.S. government and in Europe were likely to improve; and (4) SGI would meet its goal of 40% growth for the second quarter.

Mid-December 1995: McCracken and another SGI executive told Smith Barney that despite sluggish sales, SGI would meet its goal of 40% growth.

Despite these reassurances, the price of SGI's stock continued to fall during the month of December and by the end of the month, it had dropped to $26 7/8.