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.