Lormand v. US Unwired, Inc.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

April 9, 2009

No. 07-30106 Charles R. Fulbruge III

Clerk

BILLY LORMAND,

Plaintiff-Appellant

v.

US UNWIRED, INC; WILLIAM L. HENNING, JR; ROBERT W. PIPER;

JERRY E. VAUGHN

Defendants-Appellees

Appeal from the United States District Court

for the Eastern District of Louisiana

Before BARKSDALE, DENNIS, and SOUTHWICK, Circuit Judges.

DENNIS, Circuit Judge:

The plaintiff brings this putative class action on behalf of persons who

allegedly (1) bought the common stock of US Unwired, Inc. (“US Unwired” or

“the Company”) between May 23, 2000 and August 13, 2002, at prices falsely

inflated by the defendants’ material misrepresentations that violated Sections

10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5; and

(2) suffered economic loss when the true facts about the company’s operations

and programs were publicly disclosed and its stock price declined as a result.

The defendants are US Unwired and a number of its executive officers and

directors.1 The plaintiff alleges two main fraud claims: (a) a claim regarding

defendants’ implementation of subprime subscriber programs; and (b) a claim

regarding defendants’ drastic alteration of the relationship between US Unwired

and the Sprint network, of which US Unwired is an affiliate. They moved to

dismiss the plaintiff’s second amended complaint (“SAC”) on grounds that (1) the

alleged misleading statements are not actionable as a matter of law; (2) the facts

pleaded do not give rise to a strong inference that the defendants acted with

scienter; (3) the complaint fails to allege “loss causation,” i.e., a causal connection

between the alleged misrepresentations and the stock’s subsequent depreciation;

and (4) the complaint did not plead with sufficient particularity the factual basis

for their allegations of misrepresentation. The district court granted the

defendants’ motion to dismiss under Rule 12(b)(6) after concluding that (1) some

of the alleged misleading statements were not actionable because they are

protected by the “safe harbor” provision of the Private Securities Litigation

Reform Act (“PSLRA”), and (2) the plaintiff’s SAC fails to sufficiently allege loss

causation. Reviewing the defendants’ motion to dismiss de novo, we conclude

that the plaintiff’s SAC adequately pleads the subprime subscriber program

claim upon which relief can be granted, but fails to adequately plead loss

causation as to his other claim. The district court’s decision must be reversed in

part and the case remanded for further proceedings.2

1

The individual defendants are: William L. Henning Jr., who was the Chairman of US

Unwired’s Board of Directors during the class period; Robert Piper, who was the Chief

Executive Officer (“CEO”) of US Unwired from 2000 until the end of the class period and Chief

Operating Officer from 1995 to 2000; and Jerry E. Vaughn, who was the Chief Financial

Officer during the class period.

2

The plaintiff also appeals the district court’s denial of its motion for leave to amend

before the district court dismissed the case with prejudice. Because we reverse the 12(b)(6)

dismissal, we do not reach the subsequent denial of the motion for leave to amend. “Because

we find a claim has been sufficiently stated to withstand 12(b)(6), we need not reach the

2

1. Factual and Procedural Background

We review de novo a district court’s dismissal for failure to state a claim

under Rule 12(b)(6). Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007).

Motions to dismiss under Rule 12(b)(6) “are viewed with disfavor and are rarely

granted.” Test Masters Educ. Servs., Inc. v. Singh, 428 F.3d 559, 570 (5th Cir.

2005). When faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts

must, as with any motion to dismiss for failure to plead a claim on which relief

can be granted, accept all factual allegations in the complaint as true. Tellabs,

Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499, 2509 (2007) (citing

Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507

U.S. 163, 164 (1993)). We must also draw all reasonable inferences in the

plaintiff’s favor. See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Lovick v.

Ritemoney, Ltd., 378 F.3d 433, 437 (5th Cir. 2004). “[A] complaint ‘does not need

detailed factual allegations,’ but must provide the plaintiff's grounds for

entitlement to relief -- including factual allegations that when assumed to be

true ‘raise a right to relief above the speculative level.’” Cuvillier, 503 F.3d at

401 (quoting Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007)).

The plaintiff’s SAC alleges the following facts:3

In the mid-1990s, Sprint Corporation (“Sprint”), a nationwide

telecommunications company, obtained licenses from the Federal

Communications Commission (“FCC”) to establish a wireless communications

network. Sprint established an “affiliate program” through which it contracted

question of the trial court's denial of leave to amend [the plaintiff’s] complaint.” Xerox Corp.

v. Genmoora Corp., 888 F.2d 345, 358 n.70 (5th Cir. 1989).

3

All references to admissions, testimony, corporate documents, internal emails, and

depositions are references to quotations from documents, prior testimony or depositions found

in the complaint and its attached exhibits. See FED . R. CIV . P. 10(c).

3

with third-party affiliates to construct networks in designated areas in exchange

for the exclusive right to sell Sprint products and services in each area. Sprint

offered three types of affiliations (Types I, II, and III) that involved varying

levels of Sprint control over the third party affiliate’s operations. Type III

affiliation granted an affiliate the maximum amount of autonomy and control

over its operations and customer base. Types I and II affiliations, in effect, gave

Sprint control of an affiliate’s customer care, servicing and billing.

In 1998, US Unwired, a Louisiana corporation, contracted with Sprint to

become a Type III affiliate, rejecting Type I and II affiliations because US

Unwired’s management knew US Unwired’s success depended on maintaining

direct control of operations, billings, revenues, and customer relations. In

exchange, Sprint granted US Unwired the exclusive right to provide Sprint

products and services to over 500,000 customers in parts of 14 states.

As the complaint details: in 1999, Sprint began to pressure US Unwired

to convert to a Type II affiliation by improperly delaying US Unwired’s ability

to market new services and the latest products, such as Wireless Web

technology. Sprint allowed its Type I and II affiliates to market these new

services first. As a result, US Unwired, as a Type III affiliate, became out-of-sync

with the nationwide marketing of Sprint services and programs. Sprint then

demanded that US Unwired pay some $30 million to finance its integration into

the Sprint systems. But Sprint offered to waive this fee if US Unwired converted

to a Type II affiliate. US Unwired initially elected to remain a Type III affiliate

and attempt to negotiate more favorable terms for the cost and scope of its

integration with Sprint. US Unwired was determined to retain control over its

customer billings and service, which it knew was essential to its business plan.

Throughout the negotiations, US Unwired’s management internally voiced

numerous concerns to its board about Sprint’s coercive tactics aimed at forcing

4

US Unwired into a Type II affiliation. For example, in July 2000, Henning wrote

to the Board recommending that the Board put the company up for sale rather

than transfer its core functions to Sprint as a Type II affiliate. However, each

time US Unwired disagreed with Sprint, Sprint threatened to declare that US

Unwired had breached its affiliation contract.

According to the complaint, at a March 10, 2000 meeting, Sprint conducted

a presentation that effectively informed US Unwired that if US Unwired did not

convert into a Type II affiliate, it would face a future of exorbitant fees,

threatened contractual breach, and indefinite withholding of products. In a

separate instance, US Unwired signaled its desire to operate a Type III affiliate

out of Jackson, Mississippi. Sprint wanted a Type II affiliate to service the

Jackson market. In an effort to force US Unwired to serve the Jackson market

as a Type II affiliate, Sprint threatened to issue a public letter declaring US

Unwired in breach of its contract for failing to supply Wireless Web technology

to its customers even though Sprint’s refusal to supply the technology to US

Unwired, unless exorbitant integration fees were paid, was the cause of the

failure. Such a public letter would have devastated US Unwired’s public offering

plans.

On May 23, 2000, US Unwired (after filing its Securities & Exchange

Commission (“SEC”) registration on May 17, 2000) issued 8 million shares of its

common stock at the price of $11 per share. US Unwired received net proceeds

of $80.6 million after an underwriting discount of $6.2 million and expenses of

$1.2 million. In the prospectus for the stock offering filed with the SEC

(attached as an exhibit to the complaint), US Unwired noted that it planned to

use the proceeds to “accelerate the construction” of its network and “for other

general corporate purposes.” Throughout the class period, US Unwired

subsequently conducted several stock offerings to fund its corporate acquisitions.

5

After protracted negotiations, Sprint and US Unwired still could not agree

on the details of the integration plan. In order to force concessions, Sprint

stopped all marketing activities for US Unwired. On July 22, 2000, US Unwired

informed Sprint that it wanted to remain a Type III affiliate. Sprint refused to

accept this decision and threatened to declare US Unwired in breach unless US

Unwired fully funded the integration plan.

The complaint asserts that ultimately, in September 2000, US Unwired

succumbed to Sprint’s coercive economic pressure and abusive tactics, and

agreed to become a Type II affiliate, thus giving Sprint control of US Unwired’s

customer service and billing operations. In becoming a Type II affiliate, US

Unwired ceded to Sprint control of billing and the receipt of customer payments,

which amounted to approximately $300 million dollars annually. Sprint thereby

gained control of US Unwired’s cash-flow and its relationships with its

subscribers. US Unwired no longer had direct access to subscriber payments

and data. With control over US Unwired’s cash-flow, Sprint withheld payments

or under-paid US Unwired based on Sprint’s revenue estimates rather than its

actual collections from US Unwired customers.

Despite fierce economic struggles and the personal acrimony between US

Unwired and Sprint management, US Unwired’s officers, throughout the class

period in this case, disseminated positive public representations. For example,

as alleged in the complaint, in a November 8, 2000 press release, US Unwired

noted that integration into Sprint would “position[] [US Unwired] to fully

capitalize on Sprint’s successes. . . .” US Unwired publicly disclosed the transfer

of billing and customer services to Sprint, but never accurately disclosed the

known risks involved. In fact, US Unwired stated, in an August 8, 2001 press

release, that any success could be attributed to an “adherence to the sound

fundamentals of our business plan over the last two years. . .” even when

6

management knew at the outset that the forced migration of customer care,

billing and cash flow control to Sprint would be disastrous for the company. In

a March 5, 2002 report filed with the SEC, US Unwired disclosed some of the

general risks involved with the transfer of customer care and billing to Sprint,

but did not disclose the potential magnitude of those risks nor the fact that some

of those risks had already materialized.

The complaint notes that in May 2001, Sprint instituted a nationwide

calling program for subprime credit class customers called the “no-deposit

account spending limit,” or the NDASL. Sprint launched this program to

increase its national market share by targeting the sub-prime credit class

customers. Prior to this program, Sprint required sub-prime credit class

customers to pay a deposit of $125 to $250 as a condition of subscription. Under

NDASL, Sprint would waive the deposit except in extraordinary circumstances.

The “ClearPay” program soon replaced the NDASL program. Under “ClearPay,”

customers could subscribe without a deposit or a credit check. Instead, as long

as their accounts were current, customers would be able to use the phone within

spending limits.

The complaint alleges that based on US Unwired’s previous unsatisfactory

experience with sub-prime credit class customers, US Unwired’s management

adamantly protested the decision to implement these programs in its designated

areas. Piper noted that US Unwired viewed the ClearPay program as a “colossal

mistake.” US Unwired’s management knew that it was not going to work and

told Sprint that it did not want to offer the ClearPay program. Piper also noted

that US Unwired told Sprint that these programs would generate bad debt and

7

churn 4 levels beyond the levels the company could support. US Unwired was

concerned about the implementation of these programs in its service areas,

because those areas contained a higher percentage of potential sub-prime credit

subscribers as compared to other markets and other Sprint affiliates.

The complaint alleges that US Unwired saw huge increases in

deactivations and a significant rise in churn and debt levels for its sub-prime

credit class customers after the programs’ implementation. A former employee

later testified that US Unwired, at the time, knew that many of these sub-prime

credit class subscribers used their initially allotted minutes and then never paid

for them, causing increased bad debt and churn, or turnover, of subscribers.

However, as a recent Type II convert, US Unwired no longer had the ability to

refuse implementation.

Nevertheless, its management, from the outset, sought to renegotiate for

permission from Sprint to stop offering the programs. The complaint provides

several examples: Piper, in an August 2, 2001 letter to Clint Slusher, Sprint’s

Director of Affiliate Management, noted that the no-deposit program produced

“unacceptable and inconclusive results” for US Unwired in test trials. In that

same letter, Piper warned that, by adding so many no-deposit subscribers, the

Company expected “high churn rates and bad debt percentages” that would

cause “our business plan to fail.’” Piper also stated that, if forced to take such

subscribers, US Unwired “will do all [it] can to limit the appeal of [the no-deposit

program].” In an internal email to US Unwired executives on August 7, 2001,

Piper stated his belief that “it is critically important to stop the sale of [the no

deposit program] immediately” because “[the no deposit program]. . . has the

4

“Churn” is the “number of customers that drop service” in a given period. See

BARBARA J. ETZEL , WEBSTER ’S NEW WORLD FINANCE AND INVESTM ENT DICTIONARY 222 (2003)

(“net adds”)(emphasis in the original).

8

potential for double-digit churn . . . .” In early 2002, a former Director of US

Unwired had a conversation with Piper wherein they agreed that US Unwired

needed to “sell to quality customers” and not just focus on the quantity of

subscribers, an ongoing problem with Sprint’s no-deposit initiative that was

aimed at creating subscriber growth with sub-prime credit class customers. In

a January 21, 2002 email to Sprint and US Unwired representatives, Piper

stated, “Our position on NDASL has been clear from the beginning. We have

never approved of eliminating the deposit.” Despite US Unwired’s protests,

Sprint refused US Unwired’s requests for permission to stop the program.

Finally, in February 2002, Sprint permitted US Unwired to reinstate the deposit

for NDASL and ClearPay customers. Nevertheless, US Unwired continued to

offer by choice the no-deposit program in certain areas and US Unwired

continued to face ClearPay and NDASL’s ill effects.

Despite the foregoing, in a March 2002 public conference call, which is

referenced and quoted in the complaint, US Unwired’s management continued

to tout the no-deposit programs’ long-term benefits. As the complaint alleges,

in this call, Piper misrepresented to the public that “[w]e think these [no-deposit]

customers are necessary to reach our full market penetration potential and we

think you can do it profitably.” In the same press conference, and in connection

with the no-deposit customer market, Piper also misrepresented that “we think

we’re still getting our market share and we think our growth opportunity is alive

and well.” Moreover, Piper, reinforcing his public predictions of positive growth,

indicated that the churn rate “top[ped] out” at 3.5% in the first quarter. Chief

Financial Officer Vaughn also indicated in the same call that the churn rate

“will start to decrease” in subsequent quarters. However, soon thereafter, on

July 24, 2002, Piper sent a private letter to Chuck Levine, Sprint’s President,

noting that US Unwired’s conversion to Type II affiliation created long-term

9

challenges and US Unwired was still “reeling from the damage” caused by

ClearPay and NDASL.

At about the same time, between June 6, 2002 and August 13, 2002,

several public disclosures reached the marketplace related to the no-deposit and

ClearPay programs’ detrimental effects upon US Unwired’s financial condition,

causing its stock price to decline from $4.94 to $0.90 per share.

Throughout the class period, after US Unwired began implementing the

no-deposit programs in May 2001, US Unwired engaged in a series of

acquisitions using its stock price revenues. On February 28, 2001, US Unwired

purchased from Cameron Corporation its minority interest in Louisiana

Unwired in exchange for approximately 4.63 million Class A shares of common

stock for a total price of $36.5 million. On the same day, US Unwired purchased

a 20% minority interest in Texas Unwired with 307,664 shares of Class A

common stock for a purchase price of approximately $2.4 million. On December

20, 2001, US Unwired acquired all outstanding shares of IWO Holdings and

issued a public offering of approximately 45.9 million shares with an aggregate

value of $459 million based on US Unwired’s December 19, 2001 stock price of

$10.00 per share to cover the acquisition. On February 11, 2002, US Unwired

acquired another Sprint affiliate, Georgia PCS. US Unwired issued

approximately 5.5 million shares of common stock with a value of $35.7 million

based on US Unwired’s closing price on February 8, 2002 of $6.49. Pursuant to

an October 1, 1999 agreement with its lenders, US Unwired’s ability to obtain

credit with those lenders was specifically tied to its ability to maintain a certain

level of subscriptions. During the class period, US Unwired's ability to issue debt

to fund its acquisitions and to obtain credit from lenders was directly dependent

on its maintaining certain levels in both its customer subscriptions and its stock

prices.

10

During the class period, members of US Unwired management also sold

over 463,000 of their personally-owned shares at inflated prices ranging from $5

to $13 and pocketed more than $4.94 million. Henning, Piper, and Vaughn sold

73%, 82%, and 100% respectively of their actual stock holdings at inflated

prices.5

In a private email in October 2002 shortly after the class period, Piper

recounted management’s state of mind when the no-deposit program was rolled-

out and its collective foresight that the program would cause US Unwired’s stock

to decline. This email, sent to Tom Mateer, Sprint’s Vice President of the

Affiliations group, as quoted in the complaint, stated that:

US Unwired finds itself in a precarious position today. Our growth

rate has declined to almost zero, our churn and bad debt lead the

industry, our free cash flow timeline has been pushed out

indefinitely, and our stock and bonds are perceived to be virtually

worthless. This is exactly the business environment US Unwired

(USU) predicted it would be in when Sprint rolled out NDASL.

USU’s plea with Sprint not to offer NDASL fell on deaf ears.

On August 12, 2004, plaintiff Clodile Romero filed a securities fraud class

action against US Unwired and certain directors of the company -- the named

individual defendants -- seeking to recover for persons who purchased US

Unwired securities between May 23, 2000 and August 13, 2002, i.e., the class

period. Later, Billy Lormand became the lead plaintiff and amended the

5

In July 2003, US Unwired filed an action against Sprint in the United States District

Court of the Western District of Louisiana claiming Racketeer Influenced and Corrupt

Organizations (“RICO”) Act violations, breach of fiduciary duty, breach of contract, and fraud.

The SAC incorporates some of the fraud allegations from that action along with the alleged

facts that support those allegations, such as: factual details regarding the strife between

Sprint and US Unwired and deposition testimony discussing management’s knowledge and

beliefs during the affiliation conversion and the no-deposit programs’ implementation. After

extensive litigation, the parties settled; under the terms of the settlement agreement, Sprint

acquired US Unwired for approximately $1.3 billion dollars in 2005.

11

complaint to add claims for violations of §§ 10(b) and 20(a) of the Securities

Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated pursuant

to the Exchange Act. On August 25, 2004, Don Feyler filed a shareholder

derivative action on behalf of US Unwired against the same defendants for

breach of fiduciary duties, abuse of control, mismanagement, waste of corporate

assets, unjust enrichment, and against Sprint for aiding and abetting a breach

of fiduciary duty. On November 11, 2004, the Lormand and Feyler actions were

consolidated. After the Supreme Court decision on securities pleadings in Dura

Pharmas., Inc. v. Broudo, 544 U.S. 336 (2005) issued, Lormand successfully

moved to amend his consolidated complaint, which is now the second amended

complaint (“SAC”) filed on September 16, 2005.

In sum, the plaintiff’s SAC alleges that US Unwired and the individual

defendants misled the public by concealing material facts of which they were

aware, viz., that Sprint was forcing US Unwired against its will and business

judgment to enlist low income and credit risky subscribers without deposits or

credit checks; and that, as the defendants knew from previous experience, this

business strategy would be financially disastrous for US Unwired, given the

demographics of its designated network areas. The plaintiff also alleges the

defendants misrepresented to the public the nature of US Unwired’s relationship

with Sprint and concealed the fact that Sprint had coerced US Unwired into a

Type II affiliation, which enabled Sprint to force US Unwired to adopt the sub-

prime credit class strategy and to take away from US Unwired its control over

customer care, billing, and cash-flow. The plaintiff alleges that the defendants

also continued to mislead the public regarding the financially harmful nature of

these programs even as they received adverse financial information confirming

their dire predictions in respect to the affiliation conversion and the no-deposit

programs. The plaintiff alleges that the concealment and misrepresentation of

12

these facts caused US Unwired’s stock to be falsely inflated and that the later

disclosures of the truth caused a stock decline from a high of $4.94 to a low of

$0.90 per share.

In response, the defendants filed motions to dismiss for failure to state a

claim relying on four arguments: (1) the complaint does not plead with sufficient

particularity the factual basis for their allegations of misrepresentation; (2) the

alleged misleading statements are not actionable as a matter of law, because the

PSLRA’s safe harbor applies to their alleged misrepresentations and the

defendants had no duty to disclose the alleged material omissions; (3) the facts

pleaded do not give rise to a strong inference that the defendants acted with

scienter; (4) the complaint fails to allege loss causation, i.e., a causal connection

between the alleged misrepresentations and the stock’s subsequent depreciation.

On August 11, 2006, the district court “dismissed without prejudice” Lormand’s

complaint pursuant to Rule 12(b)(6) after ruling on three of the defendants’

arguments.

The district court: (1) decided that plaintiff's SAC satisfied the

particularity requirement; (2) decided that some of the alleged

misrepresentations were not actionable as they were protected under the

PSLRA's safe harbor provision; (3) pretermitted deciding whether, under the

SAC’s charges, the defendants had a duty to disclose the alleged material

omissions in the misrepresentations; (4) pretermitted deciding whether

plaintiff's SAC adequately alleged scienter; (5) decided that the SAC failed to

sufficiently plead loss causation under Rule 12(b)(6).

Plaintiff then requested leave to amend the complaint for a third time, but

the district court denied leave to amend, concluding that any further amendment

would be futile. Based on its decision that further amendment would be futile,

the district court dismissed the case with prejudice. The plaintiff timely

13

appealed.

2. Discussion

Private federal securities fraud actions are based on federal securities

statutes and their implementing regulations. Dura, 544 U.S. at 341. Section

10(b) of the Securities Exchange Act of 1934 forbids (1) the “use or employ[ment].

. .of any. . .deceptive device,” (2) “in connection with the purchase or sale of any

security,” and (3) “in contravention of” Securities and Exchange Commission

“rules and regulations.” 15 U.S.C. § 78j(b). Commission Rule 10b-5 forbids,

among other things, the making of any “untrue statement of a material fact” or

the omission of any material fact “necessary in order to make the statements

made . . . not misleading.” 17 C.F.R. § 240.10b-5 (2004).

The courts have implied from these statutes and Rule 10b-5 a private

damages action, which resembles, but is not identical to, common-law tort

actions for deceit and misrepresentation. Dura, 544 U.S. at 341 (citing Blue

Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 744 (1975); Ernst & Ernst

v. Hochfelder, 425 U.S. 185, 196 (1976)). Congress has imposed statutory

requirements on that private right of action. Id.

In cases involving publicly traded securities and purchases or sales in

public securities markets, the action’s basic elements are: (1) a material

misrepresentation (or omission), (2) scienter, i.e., a wrongful state of mind, (3)

a connection with the purchase or sale of a security, (4) reliance, often referred

to in cases involving public securities markets (fraud-on-the-market cases) as

“transaction causation”; (5) economic loss; and (6) “loss causation,” i.e., a causal

connection between the material misrepresentation and the loss. Id. at 341-42.

In addition to pleading these basic elements, a plaintiff must also comply

with the standards of the PSLRA, codified at 15 U.S.C. § 78u-4. Among other

things, the PSLRA requires a plaintiff to identify each allegedly misleading

14

statement with particularity and explain why it is misleading, the so-called

“particularity” requirement. 15 U.S.C. § 78u-4(b)(1). The PSLRA also provides

that a plaintiff must allege 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).

Only the last requirement alters the usual contours of a Rule 12(b)(6)

ruling. Usually, under Rule 12(b)(6), we must draw all reasonable inferences in

the plaintiff’s favor. However, for scienter only, as required by the PSLRA, “a

court must take into account plausible inferences opposing as well as supporting

a strong inference of scienter.” Ind. Elec. Workers’ Pension Trust Fund IBEW v.

Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir. 2008) (citing Tellabs, 127 S.Ct. at

2509). “The inference of scienter must ultimately be ‘cogent and compelling,’ not

merely ‘reasonable’ or ‘permissible.’” Id. (quoting Tellabs, 127 S.Ct. at 2510).

In the present case, the defendants do not contend that the plaintiff’s SAC

fails to allege the basic elements of: a connection with the purchase or sale of a

security, reliance or transaction causation, or economic loss. The defendants

challenge only the SAC’s allegations of actionable material misrepresentations

or omissions, scienter, and loss causation.6

I. Pleading Material Misrepresentations and Omissions.

A. Specific allegations of misrepresentations and omissions.

Cognizant of the strictures of the PSLRA and Fed. R. Civ. P. 9(b), the

plaintiff alleges that the defendants made twenty-four specific material

misrepresentations and omissions in press releases, conference calls, interviews,

6

The district court concluded that plaintiff’s pleadings satisfied the PSLRA’s

particularity requirement. The district court stated: “[c]onsidering plaintiff’s detailed, 81-page

second amended complaint and without weighing the substance of plaintiff’s allegations, the

Court finds the plaintiff has plead[ed] his claims with sufficient particularity.” The defendants

do not contend on appeal that plaintiff’s complaint pleads with insufficient particularity.

Considering the detail of the allegations, we agree with the district court that the complaint

satisfies the particularity requirement.

15

and filings with the SEC,7 as follows:

1. On April 4, 2000, US Unwired filed a registration statement with the

SEC promoting an initial public offering of its common stock, which included

statements emphasizing the beneficial relationship between US Unwired and

Sprint. It listed the benefits of its affiliation contract with Sprint, essentially its

access to Sprint’s marketing, national network, handset availability, traveling

services, and technology.

2. The same April 4, 2000 filing also discussed US Unwired’s rights under

its contract with Sprint, including the possibility of selling US Unwired’s

business to Sprint or of buying a license from Sprint if Sprint breached the

contract.

3. The same April 4, 2000 filing also discussed US Unwired’s reliance on

Sprint and its contract with Sprint, noting that US Unwired was dependent on

Sprint and had to maintain a good relationship with Sprint or else its “business

may not succeed.”

The plaintiff alleges these statements were materially misleading because

US Unwired was already embroiled in a bitter dispute with Sprint. Sprint had

threatened to declare US Unwired in breach of its affiliation contract and had

demanded that US Unwired either undertake ruinous costs to integrate its

operations or become a Type II affiliate and thereby give up control of its

operations. The defendants, through these factual misrepresentations and

concealments, artificially inflated the stock price. Thus, On June 14, 2000,

Credit Suisse First Boston initiated coverage of US Unwired with a “Buy” rating

and a 2001 target price of $25, stating that “[s]imilar to other Sprint PCS

affiliates, we believe US Unwired will benefit financially and strategically from

7

These documents are referenced and quoted in the complaint and/or attached as

exhibits to the complaint.

16

its relationship with Sprint.”

4. On August 9, 2000, US Unwired issued a press release announcing

record second quarter revenues for the period ending June 30, 2000. Piper

publicly commented: “We had a very productive second quarter. Operationally,

we launched Sprint PCS service in nine new markets and added 109 cell sites

to the network. Our sales team brought 11,000 new PCS subscribers onto the

system. Financially, we executed a successful public offering during a very

difficult market.”

5. On August 11, 2000, US Unwired filed with the SEC its Form 10-Q for

the period ending June 30, 2000, which repeated the financial results reported

in the August 9, 2000 press release and several of the positive statements from

the April 4, 2000 registration statement concerning US Unwired’s beneficial

relationship with Sprint PCS.

The plaintiff alleges that these statements were materially misleading

because the defendants failed to disclose and otherwise omitted that Sprint had

intensified its pressure on US Unwired to convert to a Type II affiliate by

threatening to declare it in default of the affiliation contract and by giving it a

deadline of August 31, 2000 to either convert or pay an exorbitant fee of up to

$30 million to obtain access to Sprint systems. The stock price continued to be

artificially inflated during this period. On September 6, 2000, First Union

Securities issued a report on US Unwired, rating it as a “Strong Buy,” and

concluding that “US Unwired’s affiliation with Sprint . . . coupled with its

attractive market footprint, allows it to receive many of the benefits of a national

wireless service provider . . . .” On October 2, 2000, Hibernia Southcoast Capital

rated US Unwired a “Strong Buy” and concluded that “[a]s a network partner,

[US Unwired] should be able to leverage its relationship with [Sprint], the

fastest growing nationwide wireless provider, to grow its subscriber base faster

17

than the industry average.” On October 6, 2000, Morgan Keegan also reviewed

favorably US Unwired’s adoption of Sprint’s “pricing strategies.”

6. On November 8, 2000, US Unwired issued a press release touting the

benefits of migrating customer care and billing functions to Sprint. US Unwired

noted that the migration would “help [US Unwired] to more fully use [Sprint’s]

national sales efforts,” “to capitalize on [Sprint’s] successes,” and “to achieve full

network compatibility.”

7. On November 9, 2000, US Unwired reported very good financial

numbers and increased subscriptions. Piper publicly commented on the results

noting that US Unwired had “executed [its] business plan.”

8. On November 13, 2000, US Unwired filed its Form 10-Q. It disclosed

the migration of customer and billing services to Sprint only insofar as it noted

that US Unwired “amended [its] management agreements with” Sprint, and that

Sprint “will begin providing substantially all of [US Unwired’s] billing and

customer care services.”

The plaintiff alleges that these statements were materially misleading,

because the defendants knowingly concealed that Sprint had forced them into

the new Type II relationship that fundamentally altered US Unwired’s business

plan and its contractual relationship with Sprint. The defendants knowingly

concealed their knowledge that the transfer of control of US Unwired’s billing

and customer care -- a consequence of the affiliation conversion -- risked US

Unwired’s financial failure. On December 14, 2000, investor advisory company

Johnson Rice said US Unwired was a buy, because it stood out among other

wireless stocks due to its growth potential.

9. On January 17, 2001, US Unwired issued a press release reporting

strong subscriber growth. Piper publicly commented that “US Unwired

employees did a fantastic job in continuing to accelerate the expansion of [its]

18

consumer base.”

10. On February 22, 2001, US Unwired issued a press release touting its

rapid growth in subscriptions. Piper commented that US Unwired “exceeded all

the growth components of [US Unwired’s] business model.”

The plaintiff alleges that these statements were materially misleading

because they ignored the known problems associated with the Type II conversion

and omitted the known risks associated with conversion to its business model.

11. On March 26, 2001, US Unwired filed its Form 10-K Annual Report.

It briefly reiterated without comment the fact that US Unwired had migrated

billing and customer care functions to Sprint.

The plaintiff alleges that this statement was materially misleading,

because it omitted the known risk associated with the forced migration of these

functions to Sprint, and the magnitude of that risk, i.e., the certain or high

potential for company failure.

12. On May 7, 2001, US Unwired issued a press release announcing large

net subscriber additions. Piper praised the reduced churn rate in the release.

13. On May 8, 2001, US Unwired filed with the SEC its Form 10-Q stating

that US Unwired had migrated billing and customer care functions to Sprint.

The plaintiff alleges that these statements were materially misleading,

because they omitted disclosure of the company’s forced conversion to Type II

affiliation and the defendants’ knowledge that US Unwired’s loss of control of its

customer care, billing and cash flow functions would be financially disastrous for

the company.

14. On August 8, 2001, US Unwired issued a press release stating that

“[o]ur outstanding operational performance and adherence to the sound

fundamentals of our business plan over the last two years positioned us for the

early achievement of [earnings before interest, taxes, depreciation, amortization,

19

and non-cash compensation].”

15. Also on August 8, 2001, US Unwired filed with the SEC a Form 10-Q,

which generally discussed the relationship with Sprint and the migration of

billing and customer service operations, but omitted any specific discussion of

risks and their magnitude.

16. On August 9, 2001, US Unwired hosted a conference call celebrating

its positive earnings. Piper publicly noted that the conversion to Type II

affiliation was “going quite well.” First Union Securities reacted by labeling US

Unwired as a “strong buy.”

17. On November 8, 2001, US Unwired issued a press release that

discussed the completion of the migration of customer service and billing

operations to Sprint.

18. On November 8, 2001, US Unwired filed with the SEC its Form 10-Q.

US Unwired noted that because Sprint was responsible for customer service and

billing, it depended on Sprint for the “reporting of a significant portion” of US

Unwired’s “service and revenues and certain operating, selling, and

administrative expenses.”

The plaintiff alleges that these statements in the Form 10-Q and the press

release were materially misleading, because members of US Unwired’s

management knew that the transfer of services was contentious, coerced, and

would cause enormous problems. US Unwired would depend on Sprint for the

reporting of revenue, costs, and subscriber data and thus, the transfer of these

functions would be financially disastrous for US Unwired as it would lose control

over its core functions. They omitted any mention of that known risk and the

magnitude of that risk.

19. On March 5, 2002 US Unwired issued a press release noting significant

gains in subscriptions and a churn rate of approximately 2.5%.

20

20. On March 5, 2002 US Unwired filed with the SEC its Form 10-K

Annual Report for 2001. The report reiterated previous statements regarding the

benefits associated with Sprint affiliation.

21. In the same 10-K Report, US Unwired disclosed new potential risks

associated with Sprint affiliation, including possible adoption of business

decisions not in US Unwired’s best interests and the migration of customer

service’s possible effects on customer satisfaction.

22. On March 6, 2002, US Unwired hosted a conference call with

investors. Piper touted the “very successful conversion to Sprint’s billing and

customer services.” He noted that US Unwired management thought sub-prime

credit class customers “are necessary to reach [US Unwired’s] full market

penetration potential and we think we can do it profitably.”

The plaintiff alleges that these statements were materially misleading,

because the US Unwired management was aware that Sprint was forcing US

Unwired against its will and business judgment to enlist low income and credit

risky subscribers without deposits or credit checks; that, as the defendants knew

from previous experience, this business strategy would be financially disastrous

for US Unwired, given the demographics within its designated network areas;

that the defendants continued to mislead the public regarding the viability of

this strategy even as they received adverse financial information confirming

their dire predictions in respect to the no-deposit programs; that Sprint forced

US Unwired to turn over control of its critical core functions of customer care,

billing, and cash-flow; and that management knew relinquishing control over

those core functions would lead to financial disaster. Piper’s comments in the

public conference call misrepresented management’s view concerning the

migration of billing and customer services to Sprint and the compelled

marketing of these plans to sub-prime credit class customers. Piper continued

21

to tout the past success and potential for both the forced migration of its core

functions and coerced implementation of the no-deposit programs.

23. On May 9, 2002, US Unwired reported favorable increases in

subscriber growth in a press release, which Piper publicly attributed to US

Unwired’s “continued focus on operational excellence.”

24. On May 9, 2002, US Unwired filed with the SEC its Form 10-Q. In

this filing, US Unwired discussed its allowances for subscribers canceling their

subscriptions and also the debt collections costs in its accounting disclosures. US

Unwired also noted that these allowance estimates were consistent with

“historical trends.”

The plaintiff alleges that these statements were materially misleading,

because these statements failed to disclose the defendants’ certain knowledge

from previous experience that the no-deposit programs would increase churn and

bad debt because of US Unwired’s subscribers’ demographics; that subscriber

growth figures were based on no-deposit subscribers who had a potential for high

churn, and therefore were misleading; and that no-deposit programs would lead

to higher costs caused by the increased churn and bad debt, and such costs

would not be consistent with historical trends.

A reasonable person may draw the plausible inferences from the foregoing

allegations that the defendants made the material misrepresentations and

omissions as described above. The defendants do not dispute this conclusion;

instead, the defendants contend that the alleged misrepresentations are not

actionable because the representations are protected by PSLRA’s safe harbor

and, alternatively, the defendants were under no duty to disclose the omitted

information.

B. Safe Harbor.

The defendants argue that certain of the misrepresentations and

22

omissions were not actionable because they were “forward-looking” and subject

to the “Safe Harbor” clause of the PSLRA; and that some of the omissions were

not material because the defendants had no duty to disclose the omitted

information.

Under the Safe Harbor clause, a “forward-looking” statement is not

actionable if: (1) the statement is “identified as . . . forward-looking . . .and is

accompanied by meaningful cautionary statements identifying important factors

that could cause actual results to differ materially. . .”; (2) it is “immaterial”; or

(3) “the plaintiff fails to [plead] that the forward-looking statement. . . was made

with actual knowledge. . . that the statement was false or misleading.” 15 U.S.C.

§ 78u-5(c)(1)(A-B); see also Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,

365 F.3d 353, 371-72 (5th Cir. 2004) (applying clause to securities fraud

allegations). The district court applied the safe harbor provision to alleged

misrepresentations 6 through 10.8

As we noted earlier, the plaintiff’s SAC alleges that US Unwired and the

individual defendants misled the public by concealing from it material facts of

which they were aware, viz., that Sprint was forcing US Unwired against its will

and business judgment to enlist low income and credit risky subscribers without

deposits or credit checks; and that, as the defendants knew from previous

experience, this business strategy would be financially disastrous for US

Unwired, given the demographics of its designated network areas. The plaintiff

also alleges the defendants misrepresented to the public the nature of US

Unwired’s relationship with Sprint and concealed that Sprint had coerced US

Unwired into a Type II affiliation, which enabled Sprint to force US Unwired to

8

The district court pretermitted the safe harbor analysis for the rest of the claims

based on the other misrepresentations because it ultimately dismissed them for failure to

plead loss causation, which is discussed below.

23

adopt the sub-prime credit class strategy and took away US Unwired’s control

over customer care, billings, and cashflow. The plaintiff alleges that the

defendants also continued to mislead the public regarding the financially

harmful nature of these programs and the affiliation conversion even as they

received adverse financial information confirming their dire predictions.

Because the plaintiff adequately alleges that the defendants actually

knew that their statements were misleading at the time they were made, the

safe harbor provision is inapplicable to all alleged misrepresentations. See 15

U.S.C. § 78u-5(c)(1)(A)-(B) (noting that the “safe harbor” would apply only if “the

plaintiff fails to [plead] that the forward-looking statement. . . was made with

actual knowledge. . . that the statement was false or misleading.”); Southland

Sec. Corp., 365 F.3d at 371-72.

The district court erroneously rejected this argument, stating that “beyond

the blanket assertions by plaintiff that defendants knew that these statements

had already become false when they were made, the Court can find no other

suggestions of this alleged fraud.” The district court did not reach the issue of

scienter in its opinion and provides no basis for its determination that the

defendants did not know the statements were false as the plaintiff alleges. The

district court is in error, because we must accept as true the well-pleaded factual

allegations in the complaint during the pleadings stage. See Twombly, 127 S.Ct.

at 1965; Tellabs, 127 S.Ct. at 2509; Cent. Laborers' Pension Fund v. Integrated

Elec. Servs. Inc., 497 F.3d 546, 550 (5th Cir. 2007). The defendants do not defend

this part of the district court’s reasoning on appeal; instead they contend that

the plaintiff fails to sufficiently plead scienter, and, for the same reasons, would

lack actual knowledge. We address and reject this argument in the scienter

section below.

Even if the plaintiff had failed to plead actual knowledge, the safe harbor

24

provision still would not apply here, because the alleged misrepresentations are

not accompanied by “meaningful cautionary language.” See 15 U.S.C. §

78u-5(c)(1)(A)(i) (authorizing the application the safe harbor only if forward-

looking statement “is accompanied by meaningful cautionary statements

identifying important factors that could cause actual results to differ materially

from those in the forward-looking statement”).

The district court concluded that US Unwired’s generic disclaimer that

accompanied the forward-looking statements amounted to meaningful

cautionary language. The disclaimer says that US Unwired’s statements in its

documents are “not guarantees of future performance . . . and involve known and

unknown risks and other factors that could cause actual results to be materially

different from any future results expressed or implied by them.” We disagree

with the district court’s conclusion, because the language urged here is

boilerplate and does not qualify as meaningful cautionary language.

Congress clearly intended that boilerplate cautionary language not

constitute “meaningful cautionary” language for the purpose of the safe harbor

analysis. Private Securities Reform Act of 1995, Conference Report, H. Rep. No.

104-369 (1995), reprinted in Fed. Sec. L. Rep. (CCH) ¶ 85,710, at 87,209 (1995);

Southland Sec. Corp., 365 F.3d at 372 (“The requirement for ‘meaningful’

cautions calls for ‘substantive’ company-specific warnings based on a realistic

description of the risks applicable to the particular circumstances, not merely a

boilerplate litany of generally applicable risk factors.”).

The disclaimer language cited by the district court is very similar to

language we determined to be boilerplate and not meaningfully cautionary in

Plotkin v. IP Axess, Inc., 407 F.3d 690 (5th Cir. 2005). In Plotkin, we considered

the following broad disclaimer found in a company’s press releases to constitute

boilerplate cautionary language: “These forward-looking statements involve

25

numerous risks, uncertainties and assumptions, and actual results could differ

materially from anticipated results.” Id. at 694.

The disclaimer in this case is similarly generic and formulaic, and,

likewise, is also boilerplate and not meaningful cautionary language. As further

evidence that the disclaimer is mere boilerplate, the disclaimer, only with slight

variations, was used in conjunction with each alleged misrepresentation the

district court exempted from analysis under the safe harbor provision.

The district court, in effect, granted blanket safe harbor protections for the

statements, because each was perfunctorily accompanied by essentially nothing

more than the same boilerplate language.. The district court therefore

erroneously neglected to address how each excluded statement (or portions of

those statements) is specifically and meaningfully protected by the safe harbor.

Each statement that benefits from the safe harbor must be addressed

individually. Cf. Southland Sec. Corp., 365 F.3d at 379 (examining an individual

statement and concluding that “[w]hile this is a forward looking statement, it

cannot be ascertained from the record whether it was accompanied by

meaningful cautionary language”); Kapps v. Torch Offshore, Inc., 379 F.3d 207,

215 n.11 (5th Cir. 2004) (“[C]ourts must assess the communication on a

case-by-case basis.”) (quoting In re Donald J. Trump Casino Sec. Litig., 7 F.3d

357, 371 (3d Cir. 1993)). Here, in not one instance did this generic language

amount to “‘substantive’ company-specific warnings based on a realistic

description of the risks applicable to the particular circumstances” specifically

described in any of the alleged misrepresentation so as to constitute meaningful

cautionary language. See Southland Sec. Corp., 365 F.3d at 372. The generic

language is merely a “litany of generally applicable risk factors” applied as

boilerplate to every alleged misrepresentation the district considered to be

protected under PSLRA’s safe harbor. Id. The district court fell into legal error

26

in its application of the safe harbor provision to misrepresentations 6-10.

Moreover, the defendants do not defend this part of the district court’s

analysis on appeal. Instead, the defendants point to different disclaimers in

documents (attached as exhibits to the complaint) that contain the alleged

misrepresentations and contend that those disclaimers meaningfully warn about

or fully disclose the potential specific risks allegedly omitted in the

misrepresentations. The disclaimers they rely on provide:

(1) “Our agreements with Sprint PCS are central to our business plan . . . . These

agreements give Sprint PCS a substantial amount of control over the conduct of

our business. Sprint PCS may make decisions that adversely affect our business

like setting the prices for its national plans at levels that may not be

economically sufficient for our business.”

(2) “We will rely on Sprint PCS's internal support systems, including customer

care, billings and backoffice support, in some of our markets . . . . Problems with

Sprint PCS's internal support systems could cause: delays or problems in our

own operations or service[,] delays or difficulty in gaining access to customer and

financial information[,] a loss of Sprint PCS customers[, and] an increase in the

costs of customer care, billing and back-office services.”

(3) “We currently have employees to handle billing, customer care, accounting,

treasury and legal services in our markets where we currently offer PCS service

and in most of our new markets. We believe that providing these functions

ourselves is more cost-effective than having third parties provide them. In a

limited number of markets, however, Sprint PCS will provide us on a contract

basis with selected back office functions like billing and customer care. We

anticipate that we may over time transfer control of these functions to Sprint

PCS if Sprint PCS can provide them more cost effectively and efficiently than we

can.”

27

(4) “Changes in technology could adversely affect us . . . . If Sprint PCS changes

its standard, we will need to change ours as well, which will be costly and time

consuming. If we cannot change our standard, we may not be able to compete

with other systems.”

(5) “Each Sprint management agreement requires us to follow program

requirements that are used throughout the nationwide Sprint PCS network. We

must continue to follow these program requirements if Sprint PCS changes

them. The program requirements involve . . . our participation in Sprint PCS

distribution programs on a national and regional basis [and] adherence to Sprint

technical program requirements . . . . We will comply with Sprint PCS’s program

requirements for technical standards, customer service standards, national and

regional distribution, national accounts programs and traveling and inter-service

area services. Sprint PCS can adjust the program requirements from time to

time.”

(6) “Our PCS business may suffer because more subscribers generally disconnect

their service in the PCS industry than in the cellular industry . . . . We plan to

keep our subscriber churn down by expanding network coverage, improving

network reliability, marketing affordable plans and enhancing customer care.

We cannot assure that these strategies will be successful. A high rate of PCS

subscriber churn could harm our competitive position and the results of

operations of our PCS services.”

(7) “US Unwired is a leading proponent of prepaid products in the wireless

industry. Industry experts believe that 70% of all new wireless activations will

be prepay by 2002.”

After surveying these warnings, and after drawing inferences in favor of

the plaintiff, we conclude that the referenced precautionary language only

warned the public that US Unwired’s affiliation conversion may cause a limited,

28

general, and vague risk to customer satisfaction and to US Unwired’s

independent discretion in business decisions in limited areas on a case-by-case

basis. The cautionary language disclaimer (1) uses the phrase Sprint “may make

decisions that adversely affect our business,” (emphasis added) which is a very

vague and general warning. Disclaimer (2) stated that “[p]roblems with Sprint[

]’s internal support systems could cause” delays and costs to customer service,

and disclaimer (5) represents that Sprint’s contractual authority over US

Unwired was both limited in scope (“can adjust the program”) and limited

temporally (“from time to time”). These disclaimers also limit the possible risk

to certain areas, “delays and costs to customer service,” with a limited temporal

scope. These warnings did not disclose that defendants knew from past

experience that the sub-prime subscriber programs and US Unwired's loss of

control of customer care, billings and service posed an imminent threat of

business and financial ruin and that some damage from these risks had already

materialized. For example, cautionary language disclaimers (3) and (4) merely

disclose the possibility of transferring functions to Sprint without disclosing any

material risks.

As for the no-deposit program, US Unwired publicly stated that its

management believed the program would generally succeed and was necessary.

Cautionary language disclaimer (7) actually promotes an impression that the no-

deposit programs, if considered to be a pre-paid program,9 was necessary.

Cautionary language disclaimer (6) states that US Unwired’s business “may

suffer” as a result of churn, but also noted that they “plan to keep our subscriber

churn down.” This warning does not disclose the specific risks and their

9

The plaintiff states in his complaint that there is some confusion as to whether the

no-deposit programs are “pre-pay programs.” The plaintiff alleges in his complaint that the

no-deposit programs were sometimes erroneously characterized as “pre-pay programs.”

29

magnitude, such as the sub-prime subscriber programs’ alleged certain grave

threat to US Unwired’s entire business, which it was powerless to control,

caused primarily by severe churn and bad debt. Morever, warnings about the

risks associated with the no-deposit programs were glossed over as a future risk

of limited magnitude that would be averted rather than certain dangers that had

already begun to materialize.

These warnings failed to correct the false impression created by the

defendants’ public statements or to supply the truth that they omitted, viz., that

the defendants knew that the no-deposit programs and affiliation conversion

threatened to severely harm the company financially by increasing churn and

bad debt; that this insidious damage process had already begun; and that US

Unwired was unable to contain it because its core operations had been

transferred to Sprint. From the context of the alleged misrepresentations and

drawing all inferences in favor of the plaintiff, these warnings, while somewhat

specific, do not provide sufficiently meaningful caution about clearly present

danger that was materializing. See Rubinstein v. Collins, 20 F.3d 160, 167-68

(5th Cir. 1994) (noting that alleged misrepresentations and cautionary language

must be analyzed in context and the presence of cautionary language is not per

se dispositive) (“Under our precedent, cautionary language is not necessarily

sufficient, in and of itself, to render predictive statements immaterial as a

matter of law.”); see also Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1213 (1st

Cir. 1996), superseded on other grounds by statute as recognized in Greebel v.

FTP Software, Inc., 194 F.3d 185, 197 (1st Cir. 1999) (noting how the

“surrounding context” failed to caution “against such an implication with

sufficient clarity to be thought to bespeak caution”). Viewing all of the

statements in context, we conclude that the defendants’ safe harbor argument

is without merit. The misrepresentations and omissions were not accompanied

30

by specific, concrete explanations that clearly identified and quantified the

clearly present financial dangers to US Unwired, i.e., the disastrous effects of

the no-deposit programs and US Unwired's loss of control of customer care,

billings and cash flow.10

Because “reasonable minds could ... disagree as to whether the mix of

information in the [allegedly actionable] document is misleading,” the statutory

safe harbor provision cannot provide the basis for dismissal as matter of law.

Shaw, 82 F.3d at 1214 (citation omitted). “[W]hen a complaint adequately states

a claim, it may not be dismissed based on a district court's assessment [pursuant

to Rule 12(b)(6)] that the plaintiff will fail to find evidentiary support for his

allegations or prove his claim to the satisfaction of the factfinder.” Twombly, 127

S.Ct. at 1969 n.8.11

C. Materiality - Duty to Disclose.12

10

Furthermore, many of the alleged misrepresentations, such as the statements in

misrepresentations 6-10, are not necessarily “forward-looking,” which is one requirement for

safe harbor protection. 15 U.S.C. § 78u-5(1)(A). In many of these statements, US Unwired’s

management discusses past events along with future projections, such as their recent

“execution” of their business plan, recent efforts to migrate functions to Sprint, and the

current state of their relationship with Sprint. See 15 U.S.C. § 77z-2(i)(1) (defining “forward-

looking” statements as statements that are projections about future financial status, future

operations, and future economic performance).

11

This does not foreclose the safe harbor’s possible applicability in latter stages of these

proceedings. See Asher v. Baxter Int’l, Inc., 377 F.3d 727, 734 (7th Cir. 2004) (“Thus this

complaint could not be dismissed [at the pleading stage] under the safe harbor, though we

cannot exclude the possibility that if after discovery [the defendant] establishes that the

cautions did reveal what were, ex ante, the major risks, the safe harbor may yet carry the

day.”).

12

The defendants’ argument focuses on whether they had a “duty to disclose” the

omitted information as alleged. The defendants’ argument is, in effect, an argument that the

omitted information is not “material.” See Banc One Capital Partners Corp. v. Kneipper, 67

F.3d 1187, 1192 n.3 (5th Cir. 1995) (“The issue of whether a fact is material as a matter of law

will also turn on . . . whether the defendant has a duty to disclose.”). The district court did

not reach this argument.

31

“[T]o fulfill the materiality requirement ‘there must be a substantial

likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the “total mix” of information

made available.’” Basic v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC

Inds., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). Accordingly, the

disclosure required by the securities laws is measured not by literal truth, but

by the ability of the statements to accurately inform rather than mislead

prospective buyers. Cf. Isquith ex rel. Isquith v. Middle S. Utils., Inc., 847 F.2d

186, 203 (5th Cir. 1988) (noting that “emphasis and gloss can, in the right

circumstances create liability” under Rule 10b-5).

The omission of a known risk, its probability of materialization, and its

anticipated magnitude, are usually material to any disclosure discussing the

prospective result from a future course of action. See Milton v. Van Dorn Co.,

961 F.2d 965, 969-70 (1st Cir. 1992); see generally SEC v. Merchant Capital,

LLC, 483 F.3d 747, 768-71 (11th Cir. 2007); Kowal v. MCI Commc’ns, 16 F.3d

1271, 1277 (D.C. Cir. 1994).13 Once the defendants engaged in public discussions

concerning the benefits of Type II affiliation and the no-deposit programs, they

had a duty to disclose a “mix of information” that is not misleading.

[W]e have long held under Rule 10b-5, a duty to speak the full truth

arises when a defendant undertakes a duty to say anything.

Although such a defendant is under no duty to disclose every fact or

assumption underlying a prediction, he must disclose material,

firm-specific adverse facts that affect the validity or plausibility of

that prediction.

13

For securities fraud cases, “[a]n opinion or prediction is actionable if there is a gross

disparity between prediction and fact.” First Va. Bankshares v. Benson, 559 F.2d 1307, 1314

(5th Cir. 1977). Here, the disparity as pleaded is obvious. The plaintiff alleges the company

misrepresented to the public the viability and promise of corporate actions that company

officials knew would be disastrous.

32

Rubinstein, 20 F.3d at 170 (internal quotations and citations omitted).

As discussed earlier, the plaintiff sufficiently alleges that the defendants

omitted serious risks inherent to the no-deposit initiatives and the company’s

conversion to Type II affiliation when they made statements regarding their

benefits. They omitted known risks of severe magnitude, such as the known risk

that long-term subscriber growth fueled by sub-prime credit class customers

would almost certainly lead towards disaster. Their statements touting the

benefits of US Unwired’s conversion to Type II affiliation also omitted known

risks of severe magnitude to their business plan as a result of the transfer of core

services and customer billing to Sprint. Company officials publicly touted the

migration of services and the use of no-deposit programs although they

recognized signs that the dangers they privately predicted had already

materialized (i.e., churn, bad debt, lack of independent control) and they had

protested privately to Sprint regarding both actions; further, they continued to

tout the programs and the conversion even after re-instating deposits for certain

customer areas. See Rubinstein, 20 F.3d at 171 (“‘To warn that the untoward

may occur when the event is contingent is prudent, to caution that it is only

possible for the unfavorable events to happen when they have already occurred

is deceit.’”) (quoting Huddleston v. Herman & MacLean, 640 F.2d 534, 543-44

(5th Cir. 1981)); id. at 170 n.41 (“[A]t least facially, it appears that defendants

have a duty under Rule 10b-5 to correct statements if those statements have

become materially misleading in light of subsequent events.”). We have also

noted that:

Perception of future events may take on a different cast as the

future approaches, and, what is more important, later

correspondence may act to bury facts previously disclosed. A balance

once struck will not ensure a balance in the future. As new

communications add a dash of recommendation, a pinch of promise,

33

and a dusting of repetition, the scale may be tipped. To prevent an

injustice to the shareholders, the elements must be weighed each

time that the shareholders are requested (or encouraged) to make

a new decision.

Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605-06 (5th Cir. 1974).

Here, the total mix of information was misleading, because it was highly

skewed toward the promised benefits of Type II affiliation and the marketing

and subscriber growth fueled by the sub-prime credit classes. The defendants

continually skewed the mix of information by omitting the known severe risks

associated with these business actions even as they recognized signs that those

risks had already materialized. These “omitted fact[s] would have been viewed

by the reasonable investor as having significantly altered the “total mix” of

information made available.” Basic, 485 U.S. at 231-32.14

The defendants argue that their internal discussions regarding the

14

The defendants rely on a Massachusetts district court opinion, In re Boston Tech.,

Inc. Sec. Litig., 8 F. Supp.2d 43, 59 (D. Mass. 1998) in arguing that the defendants had no duty

to disclose those omitted future risks. In Boston Tech, the district court ruled that “[the

defendant’s] announcement is not alleged to have been false, and it strictly concerned the past.

It is therefore not actionable. . . . An issuer is not obliged, when reporting past [ ] results, to

inform the public that future [results] appear less rosy.” Id. at 61. Lormand’s complaint is

distinguishable. Here, the alleged material omissions about future performance concern

company statements that actually proffer misleading opinions regarding the promise and

future performance of the no-deposit program, Type II affiliation, and the migration of

company functions to Sprint. Unlike Boston Tech, the plaintiff alleges material omissions of

known risks in future performance in relation to representations that actually concern the

future and do not just describe the past.

The defendants also argue that the alleged misrepresentations are mere “puffery.”

Statements “are non-actionable puffery [if] they are ‘of the vague and optimistic type that

cannot support a securities fraud action . . . and contain no concrete factual or material

misrepresentation.’” Southland Sec. Corp., 365 F.3d at 372 (ellipsis in original) (quoting Lain

v. Evans, 123 F. Supp.2d 344, 348 (N.D. Tex. 2002)). We reject the defendants’ argument,

because the plaintiff alleges concrete factual and material misrepresentations and omissions

concerning statements that discuss the very specific benefits of the no-deposit programs and

Type II affiliations; these alleged misrepresentations and omissions are not “vague” or

“generalizations” and therefore cannot be considered mere “puffery.” See Nathenson v. Zonagen

Inc., 267 F.3d 400, 419 (5th Cir. 2001).

34

inevitable failure of the no-deposit initiatives and Type II affiliation constituted

solely their own personal (and dissenting) beliefs that need not be disclosed to

the public. See Cooperman v. Individual, Inc., 171 F.3d 43, 51 (1st Cir. 1999)

(“[D]isclosure of the business strategy supported by the majority of the Board did

not obligate defendants also to disclose the fact that [the dissenter] -- a distinct

minority of a multi-member Board -- opposed that strategy.”). We disagree.

Unlike the situation in Cooperman, the plaintiff here alleges that the entire

management team of the company knew that disastrous effects would result

from no-deposit initiatives and Type II affiliation. Accepting all alleged facts as

true and drawing all inferences in favor of the plaintiff, a reasonable person

could infer that the alleged views were neither an “isolated” nor a minority

viewpoint. See id. at 51 & n.12 (noting that the Cooperman complaint “makes

clear that [the dissenter] was ‘isolated’ in his views regarding the strategic

direction the Company should take.”). Accordingly, we reject the defendants’

arguments that they had no duty to disclose the truth underlying their

misleading statements pertaining to the no-deposit programs and the company’s

loss of control of its customer care, billing and cash-flow functions.

II. Pleading Scienter or Wrongful State of Mind

At trial, a plaintiff alleging fraud in a § 10(b) action must prove her case,

including the element of scienter, by a preponderance of the evidence. Tellabs,

1217 S.Ct. at 2513. That is, “she must demonstrate that it is more likely than

not that the defendant acted with scienter.” Id. (citing Herman & MacLean v.

Huddleston, 459 U.S. 375, 390 (1983)(emphasis in original)). At the pleading

stage, however, a plaintiff alleging fraud in a § 10(b) action must only "plead

facts rendering an inference of scienter at least as likely as any plausible

opposing inference.” Id. (emphasis in original).

Under the PSLRA’s heightened pleading instructions, any private

35

securities complaint alleging that the defendant made a false or misleading

statement must: (1) “specify each statement alleged to have been misleading

[and] the reason or reasons why the statement is misleading,” Tellabs, 127 S.Ct.

at 2508 (quoting 15 U.S.C. § 78u-4(b)(1)); and (2) “state with particularity facts

giving rise to a strong inference that the defendant acted with the required state

of mind,” id.(quoting 15 U.S.C. § 78u-4(b)(2)). In the instant case, the District

Court held that the plaintiff met the first of the two requirements: The

complaint sufficiently specified that the defendants alleged misleading

statements or omissions and the reasons why they were misleading; and the

defendants have not challenged that holding on appeal. But the district court

pretermitted whether the plaintiff, as required by 15 U.S.C. § 21D(b)(2), “state[d]

with particularity facts giving rise to a strong inference that [the defendants]

acted with [scienter],” § 78u-4(b)(2). See Tellabs, 127 S.Ct. at 2508. Because the

defendants presented arguments on this issue both here and below, we now

address it de novo.

“The required state of mind [for scienter] is an intent to deceive,

manipulate, or defraud or severe recklessness.” Ind. Elec. Workers' Pension

Trust, 537 F.3d at 533 (internal quotations omitted).15 In addition to accepting

all of the factual allegations in the complaint as true, courts must consider the

15

In Tellabs, the Supreme Court stated that “[t]o establish liability under § 10(b) and

Rule 10b-5, a private plaintiff must prove that the defendant acted with scienter, ‘a mental

state embracing intent to deceive, manipulate, or defraud.’” 127 S.Ct. at 2507 (quoting Ernst

& Ernst v. Hochfelder, 425 U.S. 185, 193-94 & n. 12 (1976)). But the Court also noted that it

had previously reserved the question whether reckless behavior is sufficient for civil liability

under § 10(b) and Rule 10b-5, id. at 2507 n.3, and recognized that every Court of Appeals that

has considered the issue has held a plaintiff may meet the scienter requirement by showing

that the defendant acted intentionally or recklessly, though the Circuits differ on the degree

of recklessness required. Id. (citing Ottmann v. Hanger Orthopedic Group, Inc., 353 F.3d 338,

344 (4th Cir. 2003)) (collecting cases).

36

complaint in its entirety, as well as other sources courts ordinarily examine

when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents

incorporated into the complaint by reference, and matters of which a court may

take judicial notice. Tellabs, 127 S.Ct. at 2509 (citing 5B W RIGHT & M ILLER §

1357 (3d ed. 2004 and Supp. 2007)). The inquiry is whether all of the facts

alleged, taken collectively, give rise to a strong plausible inference of scienter,

not whether any individual allegation, scrutinized in isolation, meets that

standard. Id. (citing Abrams v. Baker Hughes Inc., 292 F.3d 424, 431 (5th Cir.

2002); Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir. 2002)). “Allegations of

circumstantial evidence justifying a strong inference of scienter will suffice.”

Goldstein v. MCI WorldCom, 340 F.3d 238, 246 (5th Cir. 2003).

Further, in determining whether the pleaded facts give rise to a “strong”

inference of scienter, the court must take into account plausible opposing

inferences. In § 21D(b)(2), Congress did not merely require plaintiffs to provide

a factual basis for their scienter allegations from which an inference of scienter

rationally could be drawn. Instead, Congress required plaintiffs to plead with

particularity facts that give rise to a “strong” -- i.e., a powerful or cogent --

inference.16 Tellabs, 127 S.Ct. at 2510. However, it “need not be irrefutable, i.e.,

of the smoking-gun genre, or even the most plausible of competing inferences.”

Id. (internal quotation marks and citations omitted). “To qualify as ‘strong’

within the intendment of § 21D(b)(2), . . . an inference of scienter must be more

than merely plausible or reasonable -- it must be cogent and at least as

compelling as any opposing inference of nonfraudulent intent.” Id. at 2404-05.

Reviewing the issue de novo, we conclude that the plaintiff satisfied the

16

The Court elaborated that “[t]he strength of an inference cannot be decided in a

vacuum. The inquiry is inherently comparative. . . .” Tellabs, 127 S.Ct. at 2510 (footnote and

internal citations omitted).

37

PLSRA’s requirement that he state with particularity facts giving rise to a

strong inference that the defendants acted with scienter or the required state of

mind; that is, the plaintiff’s SAC survives the Rule 12(b)(6) motion for dismissal

because, when the allegations are accepted as true and taken collectively, a

reasonable person would deem the plausible inference of scienter cogent and at

least as strong as any opposing inference one could draw from the facts alleged.

See id. at 2510-11.

The plaintiff’s SAC alleges that the defendants acted with scienter or the

required state of mind, i.e., intentionally or with severe recklessness, in respect

to two principal types of misrepresentations or omissions of material facts. First,

the defendants knew at the time of their public statements to the contrary that

US Unwired’s offering of no-deposit and ClearPay programs to lower income and

credit risky subscribers had been forced on US Unwired by Sprint, would not be

beneficial to US Unwired, and would almost certainly lead to the company’s

severe economic harm or disaster. Second, the defendants knew at the time of

their public statements to the contrary that US Unwired’s conversion to a Sprint

Type II affiliate had been coerced by Sprint, that the conversion would not be

beneficial to US Unwired, that it entailed US Unwired’s loss of control of its

customer care, billing and cash flow functions, which had been key to US

Unwired’s prior business and financial success, and that it would and did

severely hamper US Unwired’s ability to cope with the disastrous effects of the

no-deposit and ClearPay programs that Sprint forced on the company. When

these allegations are accepted as true and taken collectively, we conclude that

a reasonable person would deem the plausible inference of the defendants’

scienter to be cogent and at least as strong as any opposing inference.

Contrary to their public statements applauding US Unwired’s conversion

from a Type III to a Type II Sprint affiliate, Piper and Henning

38

contemporaneously but privately admitted repeatedly, as quoted and referenced

in the pleadings, that US Unwired’s management disapproved and strongly

protested to Sprint against US Unwired’s conversion to Type II affiliation. Most

importantly, Henning drafted a long memo to US Unwired’s Board in July of

2000 in which he predicted in detail the detrimental impact on the company

should the Board decide to switch to Type II affiliation and thus cede control of

billing and customer service operations to Sprint. He wrote, as quoted in the

complaint, that “[t]he heart of our system is the billing system. To remove the

heart from our system and make a transplant to Sprint billing would have a

devastating effect on our subscribers and employees.” The plaintiff also alleges

that the US Unwired’s corporate comptroller immediately recognized the

detrimental effects on US Unwired’s finances after switching to Type II

affiliation -- US Unwired lost control over the billing system and control over its

cash-flow. In later admissions as alleged, Piper confirmed that the management

recognized these clearly present dangers at the time of their alleged

misrepresentations.

The SAC’s allegations also give rise to a strong inference that the

defendants acted with scienter in concealing their knowledge that US Unwired’s

use of the no-deposit programs in its demographic areas would inevitably be

severely harmful or disastrous economically for the company. The complaint

alleges that the defendants predicted publicly that US Unwired’s use of the no-

deposit programs would bring it long-range benefits and success, even though

they knew the programs were a colossal mistake and would be economically

disastrous for the company. As alleged, Piper and Vaughn testified that from

the beginning, and at the time US Unwired’s management made the foregoing

public misrepresentations and omissions, they had privately protested against

Sprint’s assumptions and projections regarding the no-deposit plans. As quoted

39

in the complaint, Piper testified that Sprint “ignored our pleas not to require [US

Unwired] to offer it.” In a January 14, 2002 email from Piper to Sprint and US

Unwired representatives, as quoted in the complaint, he stated that “we have

never approved of eliminating the deposit.” Plaintiff quotes from corporate

documents in his complaint indicating that US Unwired’s managers

misrepresented or concealed the truth because they knew that the no-deposit

program would be harmful rather than beneficial to US Unwired. Piper noted

in an August 2, 2001 letter to Clint Slusher, Sprint’s Director of Affiliate

Management, that the no-deposit program produced “unacceptable and

inconclusive results” for US Unwired in test trials. In that same letter

discussing the test trials result, “Piper warned that, by adding so many [no-

deposit] subscribers, the Company expected ‘high churn rates and bad debt

percentages’ would cause ‘our business plan [to] fail[].’” Piper also stated in the

letter that, if forced to take such subscribers, US Unwired “will do all [it] can to

limit the appeal of [the no-deposit program].” In an internal email to US

Unwired executives, including Vaughn, on August 7, 2001, Piper stated his belief

that “it is critically important to stop the sale of [the no deposit program]

immediately” because “[the no deposit program]. . . has the potential for double-

digit churn . . . .” The plaintiff also alleges that in early 2002, a former Director

of US Unwired had a conversation with Piper wherein they agreed that US

Unwired needed to “sell to quality customers” and not just focus on the quantity

of subscribers, an ongoing problem with Sprint’s no-deposit initiative that was

aimed at creating subscriber growth with sub-prime credit class customers. In

an email shortly after the class period, as quoted in the complaint, CEO Piper

recounted the management’s beliefs at the time of the roll-out of the no-deposit

program. He wrote in a private October 2002 email to Tom Mateer, Sprint’s Vice

President of the Affiliations group, that:

40

US Unwired finds itself in a precarious position today. Our

growth rate has declined to almost zero, our churn and bad

debt lead the industry, our free cash flow timeline has been

pushed out indefinitely, and our stock and bonds are

perceived to be virtually worthless. This is exactly the

business environment US Unwired (USU) predicted it would

be in when Sprint rolled out NDASL. USU’s plea with Sprint

not to offer NDASL fell on deaf ears.

The current pleadings sufficiently establish a compelling inference of

scienter that the defendants knew at the outset the no-deposit initiatives and

the affiliation conversion would be detrimental to the company and that they

intentionally made contrary public representations and omitted this material

information from their public disclosures. The defendants contend the pleadings

support a competing inference that while the defendants knew about the

problems with the no-deposit programs and the affiliation conversion, they did

not intend to deceive the public because they believed the information was not

material or otherwise subject to public disclosure. The defendants’ argument

does not accurately reflect the plaintiff’s allegations because: (a) based on our

materiality discussion, the alleged omissions would have “been viewed by the

reasonable investor as having significantly altered the “total mix” of information

made available” and therefore was material, Basic, 485 U.S. at 231-32 (citation

omitted); and (b) the plaintiff clearly alleges the defendants had direct

knowledge and vociferously protested the affiliation conversion and no-deposit

programs privately while they touted them positively in public.

In the exhibits to his complaint, the plaintiff provides numerous

contemporaneous documents, such as internal emails and memos, that support

a strong inference that the defendants had a wrongful state of mind at the time

of their representations. The plaintiff also provides admissions from the

defendants themselves regarding their state of mind at the time of their

41

representations (as found in the defendants’ post-class period deposition

testimony and emails). The contemporaneous documents and post-period

admissions both consistently tell the same story: the defendants privately knew,

at the time of the representations, that the no-deposit programs and Type II

affiliation conversion would be disastrous for the company but continued to tout

their benefits publicly.

Contrary to the defendants’ argument, the plaintiff’s partial reliance on

alleged facts dating from the post-class period does not amount to “fraud by

hindsight”; that is, it does not “infer[] earlier knowledge based only on the

situation that later came to pass.” Rodriguez-Ortiz v. Margo Caribe, Inc., 490

F.3d 92, 95 (1st Cir. 2007).

This is not the classic fraud by hindsight case where a plaintiff

alleges that the fact that something turned out badly must mean

defendant knew earlier that it would turn out badly. Nor is this a

case where there is no contemporaneous evidence at all that

defendants knew earlier what they chose not to disclose until later.

Miss. Pub. Employees' Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 91 (1st

Cir. 2008) (internal citation omitted); see also ACA Fin. Guar. Corp. v. Advest,

Inc., 512 F.3d 46, 62 (1st Cir. 2008) (applying “fraud by hindsight” because

“[t]here is nothing in the amended complaint to establish that the defendants

were aware of facts, at the time they made their predictions, that would have

made those predictions unreasonable, if they were unreasonable”).

Here, the admissions by the individual defendants, as alleged in the

complaint, directly and cogently tend to prove their state-of-mind at the time of

their misleading statements and omissions, i.e., they are evidence that the

defendants actually knew earlier that the course of action would turn out badly.

Cf. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1020 n.4 (5th Cir. 1996).

Here, “[t]he plaintiff[’s] claim, then, was neither one of second-guessing decisions

42

by management nor one alleging fraud by hindsight because the plaintiffs had

identified specific facts known to the defendants that had been omitted . . .”

United States v. Morris, 80 F.3d 1151, 1164 (7th Cir. 1996) (internal quotations

and citations omitted).

The inference of intentional deception is, at the very least, equally as

compelling as any alternative inference, and a tie favors the plaintiff.17 Tellabs,

127 S.Ct. at 2510 (“A complaint will survive, we hold, only if 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.”) (emphasis added).

III. Pleading Loss Causation

A. Legal Standards

The PSLRA provides that a private plaintiff who claims securities fraud

has the burden of proving that the defendant’s fraudulent act or omission caused

the loss for which the plaintiff seeks to recover.18 The PSLRA does not, however,

specifically answer the question of what must a plaintiff allege in a complaint in

order to plead the “loss causation” element of such a claim for relief. The Supreme

Court, in Dura, rejected the Ninth Circuit’s answer to this question and identified

the basic principles of pleading loss causation under Federal Rule of Civil

Procedure 8(a)(2). 544 U.S. at 345-46. Later, in Twombly, the Court, partially

17

Because the allegations of direct knowledge sufficiently support a compelling

inference of scienter even in absence of insider trading, we need not address the plaintiff’s

allegations of insider trading and company acquisitions with stock sale revenues that may

bolster this inference, see Cent. Laborers’ Pension Fund v. Integrated Elec. Servs., Inc., 497

F.3d 546, 552-53 (5th Cir. 2007) (“Insider trading can be a strong indicator of scienter if the

trading occurs at suspicious times or in suspicious amounts.”); Rothman v. Gregor, 220 F.3d

81, 93-95 (2d Cir. 2000).

18

15 U.S.C. § 78u-4(b)(4) provides: “Loss causation. In any private action arising under

this chapter, the plaintiff shall have the burden of proving that the act or omission of the

defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover

damages.”

43

relying on Dura, decided that Rule 8(a)(2) implies a “plausibility” standard that

any complaint must meet in order to state a claim for relief. 127 S.Ct. at 1965.

Both Dura’s and Twombly’s reading of what Rule 8(a)(2) requires must be applied

here to determine whether the plaintiffs pleading of loss causation is sufficient.

In Dura, the Ninth Circuit held that in a fraud-on-the-market case

plaintiffs can satisfy the “loss causation” pleading and proof requirements simply

by alleging in the complaint and subsequently proving that “the price” of the

security “on the date of purchase was inflated because of the misrepresentation.”

Broudo v. Dura Pharm., Inc., 339 F.3d 933, 938 (9th Cir. 2003). The Supreme

Court reversed, holding that the Ninth Circuit was wrong, both “[1] in respect to

what a plaintiff must prove and [2] in respect to what the plaintiff’s complaint

here must allege.” 544 U.S. at 338.

Rather, to prove loss causation in such a case, the Court in Dura held, “an

inflated purchase price will not itself constitute or proximately cause the relevant

economic loss.” Id. at 342. Based on logic, precedent and the common law roots

of the securities fraud action, the Court concluded that the federal securities

statutes and regulations “permit private securities fraud actions for recovery

where, but only where, plaintiffs adequately allege and prove the traditional

elements of causation and loss.” Id. at 346. In other words, the federal laws

require “that a plaintiff prove that the defendant’s misrepresentations (or other

fraudulent conduct) proximately caused the plaintiff’s economic loss.” Id. In order

to establish this proximate causation, the plaintiff must prove that when the

“relevant truth” about the fraud began to leak out or otherwise make its way into

the marketplace it caused the price of the stock to depreciate and thereby

proximately cause the plaintiff’s economic loss. Id. at 342, 346.

The Dura Court’s articulation of the proof of loss causation requirement in

a private securities fraud-on-the-market case is very similar to that adopted by

44

this court prior to Dura in Greenberg v. Crossroads Systems, Inc., 364 F.3d 657,

666 (5th Cir. 2004).19 The only difference, if any, is that in Greenberg, we required

the plaintiff to prove that the truth that emerged was “related to” rather than

“relevant” 20 to the defendants’ fraud and that the same truth proximately caused

the depreciation in price and plaintiff’s economic loss.21 Compare Dura, 544 U.S.

at 342 with Greenberg, 364 F.3d at 666.

From the requirements for the “proof” of loss causation, the Dura Court

reasoned, for a plaintiff’s complaint to adequately allege or plead these

requirements, it need only set forth “a short and plain statement of the claim

showing that the pleader is entitled to relief,” pursuant to Federal Rules of Civil

19

In reviewing a summary judgment, rather than a Rule 12(b)(6) dismissal, we

described in detail in Greenberg what a plaintiff must prove on the merits in respect to “loss

causation” to recover on a securities fraud claim. We held that:

[I]n order for plaintiffs to show that a stock's price was actually affected

through evidence of a significant price decrease following the revelation of the

alleged “truth” of earlier false statements, plaintiffs must demonstrate: (1) that

the negative “truthful” information causing the decrease in price is related to

an allegedly false, non-confirmatory positive statement made earlier and (2)

that it is more probable than not that it was this negative statement, and not

other unrelated negative statements, that caused a significant amount of the

decline.

Greenberg, 364 F.3d at 666.

20

“Relevance” may require more than “relatedness,” but even if it does, neither are

steep or difficult standards to satisfy. At most, “relevance” here may require something similar

to the evidentiary "relevance" test, i.e., that the truth disclosed must simply make the

existence of the actionable fraud more probable than it would be without that alleged fact

(taken as true). Cf. FED . R. EVID . 401 (“‘Relevant evidence’ means evidence having any

tendency to make the existence of any fact that is of consequence to the determination of the

action more probable or less probable than it would be without the evidence.”).

21

Prior to Greenberg, we had said that the plaintiff was only required to prove that the

defendant’s misrepresentation “touches upon the reasons for the investment's decline in

value.” Huddleston, 640 F.2d at 549. That test was expressly overruled by Dura. See Dura, 544

U.S. at 343.

45

Procedure 8(a)(2), and provide the defendant with “fair notice of what the

plaintiff’s claim is and the grounds upon which it rests.” 544 U.S. at 346 (citing

Conley v. Gibson, 355 U.S. 41, 47(1957)). In Dura, the complaint was held to be

inadequate because the plaintiffs merely alleged they “paid artificially inflated

prices for Dura[’s] securities and suffered damage[s].” Id. at 347. On the other

hand, the Court indicated that the pleadings would have been adequate if they

had “claim[ed] that Dura’s share price fell significantly after the truth became

known,” id., or had otherwise “provid[ed] the defendants with notice of what the

relevant economic loss might be or of what the causal connection might be

between that loss and the misrepresentation[.]” Id. The Court further indicated

that ordinary pleading rules are not burdensome but call “for a plaintiff who has

suffered an economic loss to provide a defendant with some indication of the loss

and the causal connection that the plaintiff has in mind.” Id. The Court observed

that “allowing a plaintiff to forgo giving any indication of the economic loss and

proximate cause that the plaintiff has in mind would . . . [permits] the routine

filing of lawsuits . . . with only [a] faint hope that the discovery process might

lead eventually to some plausible cause of action. . . .rather than [a lawsuit based

on] a reasonably founded hope that the [discovery] process will reveal relevant

evidence.” Id. (emphasis added) (internal quotations omitted).22

22

The Court cited the following sources for the concept of weeding out claims that fail

to show “reasonably founded hope” of leading to a “plausible cause of action”: (1) Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 741 (1975)(“The potential for possible abuse of

the liberal discovery provisions . . . may likewise exist in this type of case to a greater extent

than they do in other litigation. . . . [T]o the extent that it permits a plaintiff with a largely

groundless claim to simply take up the time of a number of other people, with the right to do

so representing an in terrorem increment of the settlement value, rather than a reasonably

founded hope that the process will reveal relevant evidence, it is a social cost rather than a

benefit.”); and (2) the PSLRA’s legislative history as reflected in H.R. Conf. Rep. No. 104-369,

p. 31 (1995) (criticizing “abusive” practices including “the routine filing of lawsuits . . .with

only [a] faint hope that the discovery process might lead eventually to some plausible cause

of action”).

46

Subsequently, in Twombly, the Court drew upon the “reasonably founded

hope” and “plausible cause of action” requisites alluded to by Dura to formulate

a “plausibility”23 standard that a complaint must satisfy in order to show that the

pleader is entitled to relief under Rule 8(a)(2):24 The complaint (1) on its face 25 (2)

must contain enough factual matter 26 (taken as true ) (3) to raise a reasonable

hope or expectation 27 (4) that discovery will reveal relevant evidence of each

element of a claim.28 “Asking for [such] plausible grounds to infer [the element of

a claim] does not impose a probability requirement at the pleading stage; it simply

23

In discerning the “plausibility” standard from Rule 8(a)(2) and general pleadings

jurisprudence, the Twombly Court explicitly disavowed and “retired” the oft-quoted statement

in Conley, 355 U.S. at 45-46: the generally “‘accepted rule that a complaint should not be

dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can

prove no set of facts in support of his claim which would entitle him to relief.’” 127 S.Ct. at

1968-69 (quoting Conley, 355 U.S. at 45-46) (emphasis added).

24

Though Twombly is an anti-trust case, it interprets Rule 8(a)(2) and how it applies

generally. See infra note 29.

25

Twombly, 127 S. Ct. at 1974.

26

The Twombly Court cites to 5 C. WRIGHT & MILLER , FEDERAL PRACTICE AND

PRO CEDURE § 1202, at 94, 95 (3d ed. 2004), which states that Rule 8(a) “contemplate[s] the

statement of circumstances, occurrences, and events in support of the claim presented” and

does not authorize a pleader's “bare averment that he wants relief and is entitled to it.” See

Twombly, 127 S.Ct. at 1965 n.3.

27

The Twombly Court stated “[f]actual allegations must be enough to raise a right to

relief above the speculative level . . . on the assumption that all the allegations in the

complaint are true (even if doubtful in fact).” 127 S.Ct. at 1965. (emphasis added). The

Twombly Court quotes Wright and Miller for support. See 127 S.Ct. at 1965 (quoting 5 C.

WRIGHT & A. MILLER , FEDERAL PRACTICE AND PROCEDURE § 1216, pp. 235-36 (3d ed. 2004)

(“[T]he pleading must contain something more. . . than . . . a statement of facts that merely

creates a suspicion [of] a legally cognizable right of action.”)(citing some sixty-four federal

court of appeals and district court cases for this proposition)).

28

The Twombly Court referred to Dura when it concluded that with its “plausibility”

pleading standard, “[the Court] can hope to avoid the potentially enormous expense of

discovery in cases with no ‘reasonably founded hope that the [discovery] process will reveal

relevant evidence.’” 127 S.Ct. at 1967 (quoting Dura, 544 US at 347 (quoting Blue Chip

Stamps, 421 U.S. at 741)).

47

calls for enough facts to raise a reasonable expectation that discovery will reveal

[that the elements of the claim existed].” Twombly, 127 S.Ct. at 1965 (emphasis

added).

Although Twombly provides new insight into Rule 8(a)(2) by reading the

Rule as implying a “plausibility” standard, it merely explicates, rather than

alters, the meaning of the Rule. See Twombly, 127 S.Ct. at 1964-65, 1973 n.14.29

In the present case, from Dura’s holding about the need to allege and prove

proximate causation and economic loss, as well as Twombly’s explanation of the

plausibility standard, we conclude that Rule 8(a)(2) requires the plaintiff to

allege, in respect to loss causation, a facially “plausible” causal relationship

between the fraudulent statements or omissions and plaintiff’s economic loss,

including allegations of a material misrepresentation or omission, followed by the

leaking out of relevant or related truth about the fraud that caused a significant

part of the depreciation of the stock and plaintiff’s economic loss, see Dura, 544

U.S. at 342; or, as Twombly indicates, the complaint must allege enough facts to

give rise to a reasonable hope or expectation that discovery will reveal evidence

29

The Twombly Court pointed out that its “plausibility” standard is not a heightened

pleading standard beyond what the Federal Rules of Civil Procedure had always required.

Twombly, 127 S.Ct. at 1973 n.14. Changes to general pleading requirements “can only be

accomplished ‘by the process of amending the Federal Rules, and not by judicial

interpretation.’” Id. (quoting Swierkiewicz v. Sorema N. A., 534 U.S. 506, 515 (2002)).

Twombly’s merger of the “plausibility” standard with the general pleading jurisprudence and

the Federal Rules indicates that it is a gloss on Rule 8(a)(2), and therefore generally applies

to all complaints. See generally Iqbal v. Hasty, 490 F.3d 143, 157-58 (2nd Cir. 2007) (describing

the standard as a “flexible plausibility standard” of general applicability to all areas of law)

(applying Twombly to a Bivens claim). We have applied the “plausibility” standard to many

different areas of the law. See, e.g., Lane v. Halliburton, 529 F.3d 548, 557 (5th Cir. 2008)

(state law fraud and other tort claims); Cuvillier, 503 F.3d at 401 (§ 1983 suit). Other circuits

have applied Twombly to securities cases. See, e.g., N.J. Carpenters Pension & Annuity Funds

v. Biogen IDEC Inc., 537 F.3d 35, 44 (1st Cir. 2008); ATSI Communications, Inc. v. Shaar

Fund, Ltd., 493 F.3d 87, 98 & n.2 (2d Cir. 2007) (applying the “plausibility” standard to

securities fraud cases).

48

of the foregoing elements of loss causation. 127 S.Ct. at 1965.

B. Application to the Plaintiff’s Second Amended Complaint

Applying these principles to the plaintiff’s second amended complaint, we

conclude that it sufficiently alleges loss causation in respect to a certain number,

but not all, of the alleged misrepresentations. The plaintiff’s second amended

complaint (SAC) alleges the following:

i. Background

Beginning on or about May 12, 2001, Sprint made a concerted nationwide

effort to target lower income and credit risky subscribers as a way to fuel

subscriber growth and increase its national market share. Specifically, Sprint,

through its affiliates, began to offer no-deposit (service without requiring

deposits) and ClearPay (service without credit checks) programs. It is reasonable

to infer from the alleged facts that consumers, analysts, and investors had

knowledge of the Sprint affiliates’ enrollment of lower income and credit risky

subscribers nationwide without the requirement of deposits or credit checks

during the class period.

The defendants privately knew from previous experience that the no-

deposit and ClearPay programs would prove to be a colossal mistake for Sprint

and its affiliates because of their propensity to produce excessive churn and bad

debt, and that the programs would be particularly devastating for US Unwired

because of the high percentage of lower income and credit risky potential

subscribers in its designated service areas. The defendants privately warned

Sprint of these dangers but intentionally concealed this material information

from the market. Ultimately, the negative impacts of the no-deposit and ClearPay

programs were financially devastating to both Sprint and its affiliates, including

US Unwired.

Because Sprint’s no-deposit and ClearPay programs initially created

49

subscriber and revenue growth, and, because the defendants concealed from the

market the harmful effects they would cause to US Unwired by increased churn

and bad debts, the defendants’ material omissions of these facts caused US

Unwired’s stock prices to artificially inflate. During the class period the market

for US Unwired’s stock was an efficient market for the reasons set forth in detail

in the SAC. As a result, the market for the stock digested information regarding

US Unwired from all publicly available sources and reflected this information in

the stock prices. Thus, the plaintiff unknowingly bought US Unwired stock at

fraudulently and artificially inflated prices.

ii. The pertinent actionable misrepresentations.

Throughout this period, US Unwired issued positive statements related to

the no-deposit and ClearPay programs, i.e., misrepresentations 12, 14, 19, 22-24

as discussed earlier. US Unwired (1) issued press releases noting significant

gains in subscriptions and a low churn rate; (2) hosted a conference call with

investors touting the “very successful conversion to Sprint’s billing and customer

services” and that sub-prime credit class customers “are necessary to reach [US

Unwired’s] full market penetration potential and we think we can do it

profitably”; (3) issued reports of favorable increases in subscriber growth

attributed to US Unwired’s “continued focus on operational excellence” and

praised its “adherence to the sound fundamentals of our business plan”; and (4)

an SEC filing concluding that allowances for subscribers canceling their

subscriptions and also the debt collections costs were consistent with “historical

trends.” As we noted in our discussion of materiality, these representations

omitted material information that distorted the mix of information presented.

iii. Leaking of the truth

When the truth about the artificial inflation of US Unwired’s stock leaked

out or made its way into the marketplace, its revelation caused the stock price to

50

drop significantly. As a result of the revelation of the truth, and the

corresponding decline in the US Unwired stock, the investors who bought the

stock during the class period were proximately caused to suffer actual economic

loss. Specifically, the plaintiff’s SAC alleges that the truth about the inflation

of US Unwired’s stock leaked out or made its way into the marketplace through

a series of disclosures: On June 6, 2002, shares of US Unwired’s common stock

fell from an opening high of $4.94 to a low of $3.69 in response to a warning

issued by AirGate PCS, another Sprint affiliate, that it would not meet its

subscriber growth forecast due to the reinstatement of the deposit requirement

for its ClearPay customers. On June 13, 2002, several analysts downgraded their

ratings of US Unwired and industry participants. For example, Morgan Keegan

& Company issued a report downgrading US Unwired “due to continued industry

uncertainties surrounding growth and profitability.” Similarly, J.P. Morgan

Securities issued a report “downgrading US Unwired to Market Perform from

Long Term Buy after Sprint PCS drastically reduced guidance for 2Q02 net

adds.”30 On or about June 21, 2002, Moody’s Investor Service placed the ratings

for Sprint affiliates, including US Unwired, on review for possible downgrade and

changed its outlook on the entire wireless industry to negative. On July 19, 2002,

US Unwired issued a press release revealing that during 2Q02 it added 19,600

subscribers and 24,000 post-pay customers, and its churn for post-pay customers

was up to 3.4%. On August 13, 2002, Piper in a US Unwired press release

revealed that: “Historically, demand for new wireless services has been weak in

our markets during the second quarter. This year, that softness was compounded

30

“Net adds” is defined as “[t]he number of new subscribers, or gross adds, minus the

number of customers that drop service, which is called churn. Though this term can be used

in many different contexts, it is frequently used in the telecom industry.” BARBARA J. ETZEL ,

WEBSTER ’S NEW WORLD FINANCE AND INVESTMENT DICTIONARY 222 (2003) (emphasis in the

original).

51

as we curtailed demand by requiring a deposit from credit-challenged customers

in our southern markets and experienced high involuntary disconnects in our

sub-prime credit classes.” On August 13, 2002, US Unwired’s Form 10-Q filed

with the SEC stated: “Churn was 3.4% for the three-month period ended June 30,

2002 compared to 2.2% for the three-month period ended June 30, 2001. The

increase is due to adding a higher number of credit challenged subscribers in

2002 that elected voluntarily to not continue using our service or that were

involuntarily terminated from using our service because of non-payment.” At the

end of the day on August 13, US Unwired’s stock price fell to $0.90.

iv. Relationship Between the Misrepresentations, the Truth, and the Loss

These alleged disclosures of relevant truth concern only subscriber growth

and the sub-prime credit marketing strategy. We therefore agree with the

defendants that the plaintiff fails to allege any disclosure that relates to US

Unwired’s conversion to Type II affiliation or the transfer of core functions to

Sprint. Although the plaintiff sufficiently alleges that the defendants made

material misrepresentations and omissions about the dangers inherent in US

Unwired’s conversion to Type II affiliation and the transfer of its core functions

to Sprint, none of the SAC’s alleged disclosures plausibly suggests that a

significant part of the stock price’s decline and plaintiff's consequent economic

loss was caused by a revelation of truth about that conversion or transfer.

Accordingly, we conclude that the plaintiff’s allegations are not sufficient to

provide the defendants with notice of the plaintiff’s loss causation theory in

respect to the affiliation conversion and the transfer of core functions claims and

thereby fails to plead loss causation in respect to those claims. For this reason,

we have limited the “loss causation” discussion to only alleged misrepresentations

related to subscriber growth and the sub-price credit marketing strategy.

Combined with the allegations of the facts that the defendants knew that

52

the no-deposit and ClearPay programs would be disastrous for US Unwired, but

intentionally omitted and concealed those facts from the market, the alleged

series of disclosures that revealed the suppressed truth, at first partially but

ultimately in full, satisfies Twombly’s plausibility standard by giving rise to a

reasonable expectation that discovery will lead to further evidence of loss

causation. As Dura recognizes, a plaintiff may recover under § 10(b) by pleading

and proving that the relevant truth “leak[ed] out” and “ma[de] its way into the

marketplace” if all the other elements are satisfied. See Dura, 544 U.S. at 342.

Thus, loss causation may be pleaded on the theory that the truth gradually

emerged through a series of partial disclosures and that an entire series of partial

disclosures caused the stock price deflation.31

Plausibly, the series of disclosures here began with the revelation that

AirGate, a sister Sprint affiliate in substantially the same business, a company

in substantially the same business as US Unwired, and having substantially the

same relationship with Sprint as US Unwired, had been seriously damaged by

31

The courts that have confronted this issue acknowledge the possibility that loss

causation may be pleaded on a theory of partial disclosures. See, e.g., Metzler Inv. GMBH v.

Corinthian Colls., Inc., 540 F.3d 1049, 1063 n.6 (9th Cir. 2008); In re Daou Sys., Inc., 411 F.3d

1006, 1026-27 (9th Cir. 2005); In re Bradley Pharms. Sec. Litig., 421 F. Supp.2d 822, 828-29

(D. N.J. 2008) (citation omitted); In re Bristol Myers Squibb Co. Sec. Litig., 2008 WL 3884384,

at *14 (S.D. N.Y. Aug. 20, 2008) (unpublished) (“It is also clear that a corrective disclosure

need not take the form of a single announcement, but rather, can occur through a series of

disclosing events.”); In re Motorola Sec. Litig., 505 F. Supp.2d 501, 533 (N.D. Ill. 2007); Ong

ex rel. Ong v. Sears, Roebuck & Co., 459 F. Supp.2d 729, 746 (N.D. Ill. 2006); In re Apollo

Group Inc. Sec. Litig., 509 F. Supp.2d 837, 845, 847 (D. Ariz. 2007); Freeland v. Iridium World

Commc’ns, Ltd., 233 F.R.D. 40, 47 & n.9 (D. D.C. 2006) (citing more cases); Greater Penn.

Carpenters Pension Fund v. Whitehall Jewellers, Inc., No. 04-C-1107, 2005 WL 1563206 (N.D.

Ill. June 30, 2005) (crediting as “partial disclosures of prior misrepresentations and omissions”

the company's issuance of a press release announcing a lawsuit, a SEC and a DOJ

investigation against the defendants); In re Vivendi Universal S.A., 2004 WL 876050, at *7

(S.D .N.Y. Apr. 22, 2004) (unpublished) (finding loss causation adequately pleaded when a

complaint alleged that a series of corrective disclosures was followed by a material price

decline, and the price decline was attributable to the series of corrective disclosures).

53

the same sub-prime customer programs implemented by US Unwired and

consequently had been forced to terminate those programs and reinstate the

deposit requirement for its ClearPay or sub-prime credit class customers. The

AirGate disclosure provided the initial indication to the market that the nation-

wide programs aimed at the sub-prime credit-class market had failed and caused

severe damage to one Sprint affiliate.

The AirGate disclosures were soon followed by partially revealed truth from

disclosures regarding Sprint’s drastically reduced guidance for 2Q02 net adds.

Sprint’s reduced guidance gives rise to a plausible inference that highly elevated

churn rates caused by the nation-wide sub-prime customer programs that Sprint

implemented through its affiliates had severely infected its entire network

system.

Following these disclosures, expert stock analysts considered downgrading

US Unwired stock and even the entire wireless industry because they viewed the

previous disclosures as evidence that the sub-prime customer programs was

having a severe and widespread impact on Sprint affiliates, including US

Unwired, and other similar businesses. This series of disclosures culminated in

the final and completing disclosures on April 13, 2002 wherein US Unwired

explicitly discussed the continuation of high churn and high involuntary

disconnects as a consequence of the sub-prime credit class programs. These final

disclosures squarely aligned US Unwired with previous disclosures concerning

the severe negative effect of the sub-prime credit class programs on similarly

situated sister Sprint affiliate companies and the entire Sprint network. The final

public disclosures completed the revelation of the truth, viz., that the defendants

omitted and concealed from the market that they knew at the outset that the sub-

prime programs would be particularly devastating for US Unwired and that the

programs in fact wreaked havoc with the company's business and financial plans

54

during the class period. The price of US Unwired stock dropped from $4.94 on

June 6, 2002 (the date of the AirGate disclosure) to $0.90 on August 13, 2002 (the

date of the final disclosures).

The disclosures regarding continued high churn rates and continued lower

subscriber growth in, first, a sister affiliate, then, the Sprint network, and finally,

US Unwired specifically, plausibly reveals, as a whole, the leaking out of the

truth underlying US Unwired’s prior misrepresentations that US Unwired’s

churn had topped out, churn would start to decrease, and the sub-prime credit

class market still presented a great and necessary growth opportunity. The two

final disclosures on August 13, 2002 completed the revelation of the truth that

had been omitted and concealed by the defendants, viz., that the sub-prime

subscriber programs would and did produce churn and bad debts that were

financially devastating to US Unwired. The complaint also explicitly links this

series of disclosures to a significant stock price drop from $4.94 to $0.90.

C. Pleading of Loss Causation is Adequate under Dura and Twombly.

Rather than changing the meaning of Rule 8(a)(2), both Dura and Twombly

purport only to explain why the complaints in those cases failed to satisfy the

rule’s requirements and had to be dismissed. In Dura, because the complaint

alleged nothing more than that the prices of the securities the plaintiff purchased

were artificially inflated, the complaint failed to “provide the defendants with

notice of what the relevant economic loss might be or of what the causal

connection might be between that loss and the [alleged] misrepresentation.” 544

U.S. at 347. In Twombly, under the plausibility standard, plaintiff's complaint

was insufficient because it was bare of any factual allegation that suggested an

antitrust conspiracy or that raised a reasonable expectation that discovery would

reveal evidence of such an illegal agreement. Twombly, 127 S.Ct. at 1970 n.10.

The plaintiff’s SAC sufficiently pleads loss causation and is clearly

55

distinguishable from the inadequate complaints in Dura and Twombly. The

plaintiff clearly (1) provided the defendants with notice of what the relevant

economic loss might be and of what the causal connection might be between that

loss and the defendants’ alleged misrepresentations by describing how the

leaking of the relevant truth underlying those misrepresentations caused the

loss, as required by Dura; and (2) alleged enough facts to raise a reasonable hope

or expectation that discovery will reveal evidence that the elements of loss

causation existed, as required by Twombly.

The SAC here, unlike the complaint in Dura, contains more than the mere

allegation that the prices the plaintiff paid for his stock was artificially inflated

by the defendants’ omissions and misrepresentation. Rather, as required by

Dura, the SAC provides the defendants with notice of what the relevant loss

might be, viz., from a high of $4.94 on June 6, 2002 to $0.90 on August 13, 2002

(a decline of $4.04) (approximately 82%), and of what the causal connection might

be between that loss and the defendants’ misrepresentations. Thus, under Dura,

the complaint has enough factual matter (taken as true) to give the defendants

fair notice of the theory of loss causation that the plaintiff has in mind: a causal

relationship between (1) the defendants’ knowing omission and concealment that

the sub-prime credit class customer programs were bound to be disastrous for US

Unwired; (2) the disclosure of relevant or related truth regarding the severe

negative effects of the sub-prime credit class programs that were clearly foreseen

and readily observed by the defendants; and (3) a consequent significant drop in

the US Unwired stock. Dura, 544 U.S. at 347. Furthermore, under Dura and

Greenberg, the plaintiff alleges a plausible nexus (whether of “relatedness” or

“relevance”) between the revelation that the entire Sprint network, including US

Unwired, had been seriously damaged by the sub-prime customer programs, and

the defendants’ misrepresentations that those programs would be beneficial to

56

US Unwired and that it was necessary to continue them. Unlike the complaint

in Dura, the plaintiff pleads all elements of loss causation -- the alleged

misrepresentations, the disclosures, the attendant loss, and their inter-

relationships.

The complaint likewise sufficiently pleads loss causation under Twombly,

because it clearly presents enough factual allegations (taken as true) to give rise

to a reasonable hope or expectation that discovery will lead to evidence that the

elements of loss causation existed. 127 S.Ct. at 1965. Unlike the complaint in

Twombly, the plaintiff pleads enough facts (taken as true) to give rise to such a

reasonable expectation, because it provides the defendant and the court with

particular facts that identify the specific misrepresentations, the disclosures of the

truth omitted, and the attendant loss. Compare Twombly, 127 S.Ct. at 1970 n.10

(justifying the 12(b)(6) dismissal of the plaintiffs’ pleadings, because “[a]part from

identifying a seven-year span” they “mentioned no specific time, place, or person

involved in the alleged conspiracies” and gave the defendant “little idea where to

begin” his answer to the plaintiff’s “conclusory allegations”). Each disclosure

considered together with the others illumines the entire series or pattern of

disclosures and, as a whole, alleges sufficient facts (taken as true) that raise a

reasonable expectation that discovery will reveal evidence of loss causation.

D. The District Court’s Erroneous Analysis

The district court concluded, however, that the alleged disclosures did not

constitute emerging truth sufficient to show that defendants’ alleged

misrepresentations proximately caused the drop in US Unwired’s share price

during the class period. The district court dismissed the plaintiff’s complaint

stating that “Lormand has failed to detail the statements made during the class

period that would have revealed the truth about defendants’ alleged

misrepresentations and shown these misrepresentations to be the proximate cause

57

of plaintiff’s losses.” Romero v. US Unwired, Inc., 2006 WL 2366342, at *8 (E.D.

La. August 11, 2006). Specifically, the district court reasoned: (1) The first three

alleged disclosures “refer to statements that were not made by defendants”; (2)“In

its next allegation, plaintiff notes that, in a press release, defendants ‘failed to

disclose any known information about the Company's relationship with Sprint

PCS or the true state of the Company's financial condition’; there is no discussion,

however, as to how defendants’ failure to disclose information may have caused

the truth regarding defendants’ alleged misrepresentations to emerge”; and (3)

“Neither of [the two April 13, 2002 disclosures] appears to suggest that any of

defendants’ previous statements may have been misleading” or that they

“necessarily contradict[]” the defendants’ previous representations. Id. at *8-*9

(footnotes omitted).

We do not agree with the district court’s analysis. First, nothing in the

Federal Rules, the Supreme Court’s decisions or our precedents bars a private

securities fraud plaintiff from pleading loss causation based on alleged facts

constituting circumstantial rather than direct evidence. See Herman & MacLean

v. Huddleston, 459 U.S. 375, 390-91 & n.30 (1983). Accordingly, we conclude that

a plaintiff in such a case may plead loss causation based on truth about the

alleged fraud disclosed to the market by persons other than the defendants. We

agree with the great weight of federal courts, which have held that Dura does not

prevent a plaintiff from alleging or proving loss causation by showing partial or

indirect disclosures of such truth by persons other than the defendants.32

32

To require that a plaintiff can successfully allege loss causation only by alleging the

fact or evidence of a confession or statement out of the defendant’s own mouth would narrow

the pleading requirement for loss causation in a way not authorized by Rule 8(a)(2) or

anything contained in Dura pertaining to pleading loss causation. See In re Winstar Commc’ns,

No. 01-CV-3014, 2006 WL 473885 (S.D. N.Y. Feb. 27, 2006) (unpublished) (stating that in

Dura, “[t]he Court did not address the means by which the information is imparted to the

public. Specifically, Dura did not set forth any requirements as to who may serve as the source

58

Second, the district court was required to consider plaintiff’s fourth alleged

disclosure regarding the company’s July 19, 2002 press release in its entirety, to

accept all factual allegations as true, and to draw all reasonable plausible

inferences from the complaint in favor of the plaintiff. But its analysis deviates

from these standards in several important respects. The plaintiff’s SAC alleged

that:

On July 19, 2002, US Unwired issued a short press release

announcing that, during the second quarter of 2002, [US Unwired]

added 19,600 PCS subscribers and 24,400 post-pay customers, and its

churn rate for post-pay customers was approximately 3.4%. The

Company further stated that it would discuss the quarterly financial

results several weeks later on August 13, 2002.Defendants failed to

disclose any known information about the Company’s

relationship with Sprint PCS or the true state of the

Company’s financial condition resulting from Sprint PCS’

imposition of the “financially disastrous” NDASL and ClearPay

programs.

(emphasis added). Considering all of the foregoing allegations together with other

of the information, nor is there any requirement that the disclosure take a particular form or

be of a particular quality.”). Dura uses the term “leak out,” which contemplates the release of

information from third-parties outside the company's official lines of communication. See In

re Intelligroup Sec. Litig., 527 F. Supp.2d 262, 297 n.18 (D. N.J. 2007). The courts that have

addressed this question unanimously reject the district court’s approach here. See, e.g., Hunt

v. Enzo Biochem, Inc., 530 F.Supp. 2d 580, 597 (S.D. N.Y. 2008); In re Williams Sec. Litig., 496

F. Supp.2d 1195, 1265 (N.D. Okla. 2007); In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266,

297 & n.237 (S.D. N.Y. 2006) (“Dura imposed no requirement that corrective disclosures

emanate from the company itself, so long as the truth is disclosed in some fashion.”); In re

Enron Corp. Sec., Derivative and ERISA Litig., No. MDL-1446, 2005 WL 3504860, at *16 (S.D.

Tex. Dec. 22, 2005) (“[B]esides a formal corrective disclosure by a defendant . . . the market

may learn of possible fraud from a number of sources [such as] whistleblowers, analysts’

questioning financial results, resignations of CFOs or auditors, announcements by the

company of changes in accounting treatment going forward, newspapers and journals, etc.”);

In re Worldcom, Inc. Sec. Litig., No. 02 Civ. 3288, 2005 WL 2319118, at *23 (S.D. N.Y. Sept.

21, 2005) (to satisfy loss causation under Dura, plaintiff must “establish that his losses were

attributable to some form of revelation to the market of the wrongfully concealed

information”).

59

facts alleged in the complaint, a reasonable person could draw the plausible

inferences that US Unwired’s excessive churn rate was a partial emergence of the

truth about defendants’ alleged fraud, viz., that they had knowingly omitted and

concealed from the programs’ outset that the NDASL (no-deposit) and ClearPay

programs would and did severely harm the company through excessive churn and

bad debts; and that their prior positive assurances about the programs were

intentionally false. Further, the foregoing allegations gave rise to a reasonable

expectation that discovery would reveal evidence that this partial emergence of

truth, combined with the others alleged, proximately caused at least a significant

part of the decline in stock price as well as plaintiff’s alleged economic loss. In its

opinion, however, the district court acknowledged and addressed only the

statement in bold italics in the block quotation above, passing over the other

relevant alleged facts in silence. Consequently, the district court erroneously

failed to accept all of the facts alleged as true, to consider them in the context of

all facts alleged by the complaint and to draw all plausible inferences favorable

to the plaintiff. Also, the district court's opinion disregards that loss causation

may be pleaded, as plaintiff does, by alleging that Defendants omitted material

facts in their public statements, which falsely inflated stock values (or at least

skewed the mix of information previously presented), and that the subsequent

public revelation of the truth concealed or misrepresented by Defendants caused

the stock price's decline and plaintiff's consequent economic loss. Contrary to the

district court’s conclusion, the complaint contains ample discussion of how

defendants’ suppression of the truth caused both the artificial inflation of the

stock price and its later decline when relevant truth emerged into the

marketplace.

Third, plaintiff’s SAC alleges that on August 13, 2002, US Unwired’s press

release revealed that it had begun to withdraw from the no-deposit program by

60

reinstating the requirement of a deposit from credit-challenged customers in its

southern markets, which had caused it to experience high involuntary disconnects

in its sub-prime credit classes and compound a softness in the demand for new

wireless services; and that on August 13, 2002, the US Unwired’s 10-Q SEC form

stated: “Churn was 3.4% for the three-month period ended June 30, 2002 as

compared to 2.2% for the three-month period ended June 30, 2001. The increase

is due to adding a higher number of credit challenged subscribers in 2002 that

elected voluntarily to not continue using our service or that were involuntarily

terminated from using our service because of non-payment.” In response, on

August 13, 2002, the price of US Unwired stock dropped to $0.90 per share.

Combined with the SAC’s allegations of the four preceding partial disclosures,

together with the defendants’ intentional omission and concealment of material

facts, viz., the disastrous effects that would result from the no-deposit and

ClearPay programs, as well as the materialization of such damage during the

class period, these August 13, 2002 disclosures plausibly suggest that the truth

of defendants’ fraud, which had gradually been leaking out, had completely

emerged causing the decline of the stock price and the plaintiff’s consequent

economic loss.

The district court, however, disregarded the plaintiff’s allegations that

defendants omitted and concealed the material facts from the market that they

knew the sub-prime subscriber programs would be financially disastrous for US

Unwired. Instead, it found that the August 13, 2002 disclosures did not constitute

emerging relevant truth because they did not “appear to suggest that any of

defendants’ previous statements may have been misleading” or “necessarily

contradict[ory]” of defendants’ previous alleged misrepresentations. Romero, 2006

WL 2366342, at *9. Thus, the district court overlooked that the plaintiff had

alleged a claim based on the defendants’ omissions of material facts that skewed

61

the mix of information previously presented to the public thereby creating the

misrepresentations. Consequently, the court either erred legally in not recognizing

that a plaintiff can state a claim based on material omissions that created the

misrepresentations or again failed to accept as true all factual allegations in the

complaint and to attribute to the plaintiff the benefit of all plausible favorable

inferences. 15 U.S.C. § 78u-4(b)(4) (“Loss causation”) (“[T]he plaintiff shall have

the burden of proving that the act or omission of the defendant alleged to violate

this chapter caused the loss for which the plaintiff seeks to recover damages”)

(emphasis added); see also Dura, 544 U.S. at 342.

For these reasons, we conclude that the plaintiff has successfully pleaded

loss causation with respect to his claim based on the defendants’ omissions and

misrepresentations pertaining to US Unwired's use of the no-deposit and

ClearPay programs.

Echoing the district court’s erroneous conclusions, the defendants also

contend on appeal that the plaintiff does not allege a necessarily contradictory

relationship between the disclosures and the defendants’ material

misrepresentations and omissions concealing the known threat and later

materialization of financial harm to the company by the sub-prime subscriber

credit programs. Their argument is without merit because the alleged disclosures

considered with the entire complaint reveals the relevant truth about these

misrepresentations and omissions by defendants.

The defendants also contend that other market forces and events caused all

of the plaintiff’s economic loss.33 The thrust of this argument is that the

33

The defendants also argue that the plaintiff’s SAC fails to plead loss causation

because one disclosure was followed immediately by a stock price increase rather than a

decrease. This argument deals with the actual timing of the loss, and not whether the plaintiff

pleaded a plausible causal relationship between the defendants’ fraud and the plaintiff’s

economic loss. The market could plausibly have had a delayed reaction; a delayed reaction can

62

defendants believe that a more plausible alternate inference may be drawn as to

the proximate cause of all of the plaintiff’s economic loss.34 As we have explained,

however, under Rules 8(a)(2) and 12(b)(6), at the pleading stage, the plaintiff is

only required to plead a plausible cause of action; we are not authorized or

required to determine whether the plaintiff’s plausible inference of loss causation

is equally or more plausible than other competing inferences, as we must in

still satisfy the pleading requirements for “loss causation” though proof of causation would be

more difficult when significant time elapses before the market allegedly reacts. See Dura, 544

U.S. at 343. The actual timing issue is a factual question, and is not enough to dismiss a

complaint that alleges a specific causal link, as is the case here, under Rule 12(b)(6). See, e.g.,

In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1058 (9th Cir. 2008)(“A limited temporal gap

between the time a misrepresentation is publicly revealed and the subsequent decline in stock

value does not render a plaintiff's theory of loss causation per se implausible.”); In re Cardinal

Health, Inc. Sec. Litig., 426 F. Supp.2d 688, 760-61 & n.75 (S.D. Ohio 2006) (“[T]his Court is

convinced that this issue of timing alone is not enough to defeat Plaintiffs’ allegations of loss

causation where they have clearly specified causal connections between [the defendants’]

misstatements over the four-year Class Period and their resulting damages.”). The plaintiff

alleges that the stock dropped after the last disclosure in the series of disclosure events. This

is sufficient for pleading purposes here, because increases in stock prices after a partial

disclosure that is within a series of disclosures does not preclude a final showing of loss

causation. See, e.g., In re Take-Two Interactive Sec. Litig., 551 F. Supp.2d 247, 289-90 (S.D.

N.Y. 2008); In re Seitel, Inc. Sec. Litig., 447 F. Supp.2d 693, 712-13 (S.D. Tex. 2006); see also

In re Daou Sys., Inc., 411 F.3d at 1026-27; In re Apollo Group Inc. Sec. Litig., 509 F. Supp.2d

at 845, 847; Ong ex rel. Ong, 459 F. Supp.2d at 746; In re Bristol Myers Squibb Co., 2008 WL

3884384, at *14; Plumbers & Pipefitters Local 572 Pension Fund v. Cisco Systems, Inc., 411 F.

Supp.2d 1172, 1177-78 (N.D. Cal. 2005); In re Vivendi Universal S.A., 2004 WL 876050, at *7

(finding loss causation adequately pleaded when a complaint alleged that a series of corrective

disclosures was followed by a material price decline, and the price decline was attributable to

the series of corrective disclosures); see also In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1319

(3d Cir. 2002). The plaintiff thereby alleges a plausible causal relationship between the series

of disclosure events and this final loss.

34

In addition, the defendants argue that the March 2002 conference call disclosed the

material omissions in full, and therefore subsequent disclosures could not have caused the

loss. For similar reasons stated earlier in the safe harbor section, we disagree with the

defendants’ characterization of the conference call as a full disclosure of all material risks

associated with the no-deposit and ClearPay programs. The conference call continued to tout

the benefits of these programs and omitted the serious risk that these programs would be

disastrous. Despite some limited disclosures, the defendants arguably skewed the mix of

information regarding the no-deposit programs, particularly its future prospects.

63

assessing allegations of scienter under the PSLRA. See Tellabs, 127 S.Ct. at 2510;

Twombly, 127 S.Ct. at 1965 (“Asking for plausible grounds [for an element of a

claim] does not impose a probability requirement at the pleading stage; it simply

calls for enough fact to raise a reasonable expectation that discovery will reveal

evidence of [that element].”); Dura, 544 U.S. at 347-48; see also Scheuer, 416 U.S.

at 236 (“When a federal court reviews the sufficiency of a complaint . . . its task

is necessarily a limited one. The issue is not whether a plaintiff will ultimately

prevail but whether the claimant is entitled to offer evidence to support the

claims. Indeed it may appear on the face of the pleadings that a recovery is very

remote and unlikely but that is not the test.”); Leatherman, 507 U.S. at 168-69

(“[The] federal courts and litigants must rely on summary judgment and control

of discovery to weed out unmeritorious claims. . .”) (emphasis added);

Swierkiewicz, 534 U.S. at 512 (noting that the “simplified notice pleading

standard” of the Federal Rules “relies on liberal discovery rules and summary

judgment motions to define disputed facts and issues and to dispose of

35

unmeritorious claims.”) (emphasis added).

3. Conclusion

For these reasons, the district court’s judgment is affirmed in part and

35

Moreover, several circuit courts and district courts point out that it is often

inappropriate to use a Rule 12(b)(6) motion as a vehicle to resolve disputes over “loss

causation.” See In re Gilead Scis., 536 F.3d at 1057; McCabe v. Ernst & Young, LLP, 494 F.3d

418, 427 n.4 (3rd Cir. 2007) (citing authorities for concluding that “loss causation becomes

most critical at the proof stage” (internal quotation marks omitted)); Emergent Capital Inv.

Mgmt., LLC. v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) (noting that loss

causation “is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to

dismiss”); accord In re Coca-Cola Enters. Inc. Secs. Litig., 510 F. Supp.2d 1187, 1204 n.5 (N.D.

Ga. 2007) (“Finally, several previous securities fraud cases have held that proof of loss

causation is not an issue that typically should be resolved on a motion to dismiss.”) (citing In

re PSS World Med., Inc. Sec. Litig., 250 F. Supp.2d 1335, 1351 (M.D. Fla. 2002); In re

Rent-Way Sec. Litig., 209 F. Supp.2d 493, 513 (W.D. Pa. 2002)); see also 3 HAZEN , SECURITIES

REGULATION § 12.11[3] (“Loss causation issues can be highly factual, thus frequently

precluding judgment on the pleadings.”).

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reversed in part. Accordingly, the district court’s judgment dismissing without

prejudice the plaintiff’s claims pertaining to US Unwired's conversion from a Type

III to Type II affiliate and transfer of its core functions to Sprint is AFFIRMED.36

The district court’s judgment dismissing the plaintiff’s claims pertaining to US

Unwired’s use of the no-deposit and ClearPay programs is REVERSED, and the

case is remanded to the district court for further proceedings consistent with this

opinion.37

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

36

Because we are reversing in part and affirming in part the Rule 12(b)(6) dismissal,

we do not reach the district court’s denial of leave to amend and subsequent dismissal with

prejudice of the claims. See Genmoora Corp., 888 F.2d at 358 n.70. The district court’s denial

of leave to amend on futility grounds and subsequent dismissal with prejudice of the claims

was dependent on its Rule 12(b)(6) dismissal without prejudice, which we now reverse in part.

We remand with reservation of the possibility that the district court may grant leave to amend

under Fed. R. Civ. P. 15 so as to cure any deficiencies in respect to other potential claims after

considering our guidance from this opinion. See, e.g., Buckey v. County of Los Angeles, 968

F.2d 791, 794 (9th Cir. 1992) (remanding to allow district court to consider if plaintiff should

be able to amend complaint after claims were dismissed without prejudice).

37

See Plotkin, 407 F.3d at 702 (reversing in part and affirming in part a 12(b)(6)

dismissal in a securities fraud action). For these reasons, we also reverse in part the dismissal

of the derivative controlling person liability § 20(a) claim for the same reasons that we reverse

in part the district court’s dismissal without prejudice the § 10(b) claim. See Rosenzweig v.

Azurix Corp., 332 F.3d 854, 863 (5th Cir. 2003) (noting that the § 20(a) claim is a derivative

claim of the § 10(b) claim).

65