MICHAEL CUTLER, Lead v. Eric W. Kirchner;

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MICHAEL CUTLER, Lead Plaintiff,
Plaintiff-Appellant,
and
MICHAEL J. ANGLEY,
Plaintiff,
v.
ERIC W. KIRCHNER; et al.,
Defendants-Appellees.
No. 15-56897
D.C. No.
2:14-cv-02066-CBM-E
MEMORANDUM*
Appeal from the United States District Court
for the Central District of California
Consuelo B. Marshall, District Judge, Presiding
Argued and Submitted June 7, 2017
Pasadena, California
Before: THOMAS, Chief Judge, REINHARDT, Circuit Judge, and KORMAN,**
District Judge.
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
** The Honorable Edward R. Korman, United States District Judge for
the Eastern District of New York, sitting by designation.
FILED
AUG 17 2017
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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We assume familiarity with the facts as presented in the complaint. Lead
plaintiff Michael Cutler alleges two theories of securities fraud: First, he claims UTi
told investors that the 1View rollout was going well, while its invoicing delays were
in fact putting the company in mortal danger. We call that the “slow invoice theory.”
Second, he alleges that UTi told investors the company’s internal controls over
financial reporting were functioning effectively, while they were actually suffering
from a material weakness. We call that the “accounting problems theory.”
To state a claim under SEC Rule 10b-5, Cutler must allege: “(1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security; (4)
reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss
causation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148,
157 (2008). Each of those elements must be pled with particularity in accordance
with Federal Rule of Civil Procedure 9(b). Or. Pub. Emps. Ret. Fund v. Apollo Grp.
Inc., 774 F.3d 598, 605 (9th Cir. 2014).
I. Loss Causation
To plead loss causation, Cutler must provide “sufficient detail to give [the]
defendants . . . notice of [his] loss causation theory, and give us some assurance that
the theory has a basis in fact.” Berson v. Applied Signal Tech., Inc., 527 F.3d 982,
989–90 (9th Cir. 2008). Our traditional approach tests whether a misstatement

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caused loss by asking whether “subsequent public disclosures” revealed or at least
suggested the truth, see Apollo Group, 774 F.3d at 608, and whether that revelation
“was a substantial factor in causing a decline in the security’s price,” Nuveen Mun.
High Income Opportunity Fund v. City of Alameda, 730 F.3d 1111, 1119 (9th Cir.
2013) (internal citation and quotation marks omitted).
If the defendants’ statements about 1View’s progress were materially
misleading, the slow invoice theory states a plausible claim that those statements
caused Cutler’s losses. 1View was the signal project for UTi’s executive team, and
a matter of keen interest to the company’s investors. For months, UTi executives
assured investors, in essence, that the project was going according to plan. A
reasonable investor could plausibly have understood UTi’s subsequent disclosure—
that 1View’s invoicing difficulties materially contributed to a liquidity crisis—to
indicate that the company’s prior assurances that things were going well had been
false or misleading. And it is eminently plausible that such a revelation about such
a critical program was a substantial factor in causing UTi’s stock price to collapse.
The accounting problems theory, however, does not adequately allege loss
causation. UTi announced in March of 2014 that it had identified a material
weakness in its internal financial controls. “Internal control over financial reporting”
is a defined term in the SEC’s regulations, describing a particular set of accounting
processes. See 17 C.F.R. § 240.13a-15(f). The basic shortcoming of the accounting

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problems theory is one of timing. UTi expressly disclosed a weakness in its financial
controls at the end of March 2014, but Cutler alleges that his loss occurred a month
earlier, when UTi made its other disclosures at the end of February. To overcome
this disjunct, Cutler must allege that markets understood the February disclosure of
delayed invoicing to indicate a material weakness in UTi’s internal financial
controls, and that that understanding contributed to a fall in its share price.
The complaint, however, presents no factual details that would tip that claim
from possibility into plausibility. Internal financial controls go to a company’s
accounting practices—its ability to accurately track revenues as they are realized
and cash as it comes in the door. None of those functions are called into question by
delayed invoicing; as the defendants point out, UTi operated under accounting rules
that decoupled revenue recognition from invoice generation, and nothing about
getting money late implies tracking it inaccurately.
Cutler also contends that he has alleged loss causation under the
“materialization-of-the-risk” approach. We have not yet ruled on the merits of that
test, Nuveen, 730 F.3d at 1122 n.5, and do not do so here because it would make no
difference to the outcome of this case.
II. Actionable Misstatements
We now turn to whether Cutler pleads the existence of any actionably
misleading statements in support of the slow invoice theory. We consider only those

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statements which Cutler has actually raised on appeal. To plead a misstatement
actionable under Rule 10b-5, Cutler must allege that a defendant 1) made 2) a false
or misleading statement, that is 3) material, and 4) not immunized from liability by
the safe harbor provisions of the Private Securities Litigation Reform Act
(“PSLRA”). Per the PSRLA and Rule 9(b), falsity and materiality must be pled with
particularity, specifying the reason why each statement was misleading. See 15
U.S.C. § 78u-4(b)(1). Cutler has raised fourteen statements on appeal that relate to
the slow invoice theory, which we group into two categories.
The first category contains five risk disclosures made in reports to the SEC
signed by CEO Eric Kirchner and CFO Richard Rodick. See SEC v. Jensen, 835
F.3d 1100, 1112 (9th Cir. 2016) (corporate officers are considered to have made
statements in filings that they sign). Cutler challenges the following five disclosures:
 Disclosure 1 (Form 10-K filed April 1, 2013): “We are currently engaged
in a multi-year business transformation initiative that involves risks, could
result in higher than expected costs and/or could otherwise adversely
impact our operations [and/or] profitability.”
 Disclosure 2 (Form 10-K filed April 1, 2013): “We may . . . experience
difficulties consolidating our current systems, moving to a common set of
operational processes, implementing shared services and implementing a
successful change management process. These difficulties may impact our
clients and our ability to efficiently meet their needs.”
 Disclosure 3 (Form 10-K filed April 1, 2013): “We make significant
advances and disbursements on behalf of our clients for transportation
costs . . . . If we are unable to recover a significant portion of these
disbursements . . . in a timely manner, we may experience losses and our
cash flows and results of operations would be negatively impacted.”

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 Disclosure 4 (Form 10-Q filed June 7, 2013): “There have been no
material changes to the risk factors as disclosed . . . on Form 10-K.”
 Disclosure 5 (Form 10-Q filed September 9, 2013): “There have been no
material changes to the risk factors as disclosed . . . on Form 10-K.”
These statements were misleading because they disclosed a risk “in the
abstract” but omitted the fact that it had “already . . . come to fruition.” Siracusano
v. Matrixx Initiatives, Inc., 585 F.3d 1167, 1181 (9th Cir. 2009) (internal quotation
marks omitted). In the wake of the February 2014 disclosures, the defendants
admitted that invoicing delays had routinely slowed collections in countries that
switched to 1View. The company came to expect these problems, and made efforts
to fix them. That is enough to conclude that the risk disclosures were misleading.
The second category of challenged statements were made by individual UTi
executives during earnings calls and investor conferences. We treat each executive’s
statements as also made by UTi. In re Chinacast Educ. Corp. Sec. Litig., 809 F.3d
471, 476 (9th Cir. 2015). Cutler raises nine such statements on appeal:
 Individual Statement 1 (Earnings Call on March 28, 2013) (Feitzinger):
“As you get to the five or six country phase [in the 1View rollout], . . .
that’s where you test the system to see whether it scales. That’s where you
see how the change management’s working, as people adopt their
processes to the system and the different countries. And that’s kind of
what’s behind us now at this point.”

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 Individual Statement 2 (Earnings Call on March 28, 2013) (Rodick1):
“[T]he system is now ready to scale. So, the system itself will be able to
handle the additional transactions as we add the volume into it.”
 Individual Statement 3 (Earnings Call on June 6, 2013) (Kirchner):
“[1View] is performing well.”
 Individual Statement 4 (Earnings Call on June 6, 2013) (Kirchner):
“[G]enerally, the platforms and process improvement on both sides are
definitely in place, and in freight forwarding, it’s about leveraging what
you have in place, and then even be able to leverage that even further once
the system is in place.”
 Individual Statement 5 (Earnings Call on September 6, 2013) (Kirchner):
“The US launch is a notable milestone for UTi . . . . We’ve demonstrated
that [1View] works, the deployment in the recently added large countries
shows that it’s scalable.”
 Individual Statement 6 (Presentation to RBC Capital Markets Global
Industrials Conference on September 10, 2013) (Rodick): “We built a
platform that we can integrate [acquisitions] quickly and really not only
get the revenue, but take the cost out. So I think we can do these things
pretty quick.”
 Individual Statement 7 (Presentation to RBC Capital Markets Global
Industrials Conference on September 10, 2013) (Rodick): “[T]he
transformation, I think that everybody believes we’ve proven, especially
with US going live, we got that . . . . There won’t be as much focus on
getting the transformation done as there has been . . . , because now we’ve
proven it works.”
 Individual Statement 8 (Presentation to Morgan Stanley Industrials &
Autos Conference on September 17, 2013) (Misakian): “I would say on
balance things are—the system is performing as we would expect it to right
now. But we have had some issues as we’ve gone through. We have found
that when we launch the system and specific markets that some of the
standardized processes and procedures we put in place were not being
1 The parties have each submitted transcripts that conflict as to whether Kirchner or Rodick made
this statement. This factual dispute is not properly presented at the pleading stage, where the
complaint’s allegation that Rodick made the statement is controlling.

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followed entirely. So each market was not as standard as we thought it
would be. And that caused things to slow down a little bit.”
 Individual Statement 9 (Earnings Call on December 5, 2013) (Kirchner):
“I think that we’ve made excellent progress. The fact that we’ve got more
than—or half of our transactions in [1View] today, and it’s functioning and
working and we’re seeing the benefits that we expected in terms of how
that system performs, I think we’re doing a great job with that.”
Cutler alleges that these statements of opinion were misleading because they
omitted the fact that as 1View rolled out, it was causing a decline in cash collections
in essentially every new country. To state such a claim, Cutler must allege “facts
going to the basis for the . . . opinion whose omission makes the . . . statement . . .
misleading to a reasonable person reading the statement fairly and in context.” City
of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d
605, 616 (9th Cir. 2017) (internal quotation marks and modifications omitted). It is
plausible that a reasonable investor, hearing that 1View was “working,” “ready to
scale,” and capable of integrating acquisitions “quickly” would have “the impression
of a state of affairs” materially different from the reality that 1View caused up to a
half-year decline in cash collections in each country it rolled out to. See In re Cutera
Sec. Litig., 610 F.3d 1103, 1109 (9th Cir. 2010) (internal citation and quotation
marks omitted).
The defendants also argue that the individual statements are immaterial. We
disagree. Individual Statements 1 and 2 assert that 1View is ready to scale up from
its current number of countries, that is, that the system is prepared to handle a greater

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volume of transactions than it is currently dealing with. Individual Statement 6
claims that 1View is presently capable of quickly integrating companies that UTi
might acquire in the future. This is not the sort of generalized cheerleading that
courts have classed as puffery.
The remaining Individual Statements—3, 4, 5, 7, 8, and 9—each use general
language to describe 1View’s performance. Such language does not make a
statement immaterial as a matter of law. Rather, the question is whether a reasonable
investor would understand them, in context, to communicate only a general
optimism, or a factual representation about the actual condition of UTi’s business
and 1View’s capabilities. See generally Police Ret. Sys. of St. Louis v. Intuitive
Surgical, Inc., 759 F.3d 1051, 1060 (9th Cir. 2014). Here, a reasonable investor
would understand statements like “1View is working” in the context of UTi’s other
statements, made over a long period of time, describing what 1View did and what
practical aims it was supposed to achieve. In context, these statements represented
that 1View was doing the particular things UTi had told investors it was going to do.
With respect to Individual Statements 1, 2, 3, 5, 6, and 7, the defendants also
invoke the PSLRA’s safe harbor for forward-looking statements. The statements at
issue are not forward-looking. Each incorporates an opinion about 1View’s then-
existing capabilities. It makes no difference if some of those opinions about then-
present circumstances were expressed in the same breath as forward-looking

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statements. “[W]here defendants make mixed statements . . . the non-forward-
looking statements are not protected by the safe harbor.” In re Quality Sys., Inc. Sec.
Litig., — F.3d —, 2017 WL 3203558, at *7 (9th Cir. 2017). So in addition to the
risk disclosures, we hold the individual statements were also actionably misleading.
III. Scienter
Scienter is “a mental state that not only covers intent to deceive, manipulate,
or defraud, but also deliberate recklessness.” City of Dearborn Heights, 856 F.3d at
619 (citation and internal quotation marks omitted). Under the PSLRA, Cutler must
“state with particularity facts giving rise to a strong inference” of scienter. 15 U.S.C.
§ 78u-4(b)(2)(A). Scienter may be pled based on allegations attributed to
confidential witnesses, so long as two conditions are met: “First, the confidential
witnesses . . . must be described with sufficient particularity to establish their
reliability and personal knowledge. Second, those statements which are reported . . .
must themselves be indicative of scienter.” Zucco Partners, LLC v. Digimarc Corp.,
552 F.3d 981, 995 (9th Cir. 2009) (citations omitted).
CW15 is the key to Cutler’s scienter allegations. As UTi’s President of the
Americas, CW15 was one of twelve people to participate in quarterly meetings of
UTi’s International Executive Board. He describes how UTi’s senior management
team kept abreast of 1View’s progress. In that telling—which we have no reason to
doubt is based on personal knowledge—a group of executives including Kirchner,

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Feitzinger, and CFO Richard Rodick received an update on 1View’s progress from
UTi’s Chief Information Officer at every single quarterly executive board meeting.
With respect to Kirchner, Rodick, and Feitzinger, CW15’s description of
quarterly updates on 1View’s development brings this case within the “core
operations” approach to pleading scienter. “[G]eneral allegations about
management’s role in a corporate structure and the importance of the corporate
information about which management made . . . misleading statements” can satisfy
the PSLRA when they “are buttressed with detailed and specific allegations about
management’s exposure to factual information within the company.” Zucco
Partners, 552 F.3d at 1000 (citations and internal quotation marks omitted).
Here, Cutler has alleged the prominent roles that Kirchner, Rodick, and
Feitzinger played in UTi’s corporate structure. Information about 1View’s ability to
generate invoices would have been tremendously important to UTi management.
The company operated a low-margin business and made large outlays based on
promises of reimbursement from its customers. It consequently depended on cash
collections to stay afloat on a quarter-to-quarter basis, so prompt invoicing was
critical. As to Kirchner, Rodick, and Feitzinger, CW15’s recollection of the quarterly
meetings is the “specific allegation about management’s exposure to factual
information,” needed for a strong inference of scienter. The complaint, however,
contains no allegations about Misakian’s exposure to such information.

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IV. Controlling Person Liability
Cutler also appeals from the dismissal of his claims under § 20(a) of the
Exchange Act—the elements of which are 1) “a primary violation of federal
securities law” and 2) a defendant who “exercised actual power or control over the
primary violator.” Zucco Partners, 552 F.3d at 990. (internal citation and quotation
marks omitted). The district judge dismissed those claims for failure to plead a
primary violation by UTi, several of which we have revived. The defendants concede
that Cutler has alleged that Kirchner and Rodick were control persons, but are correct
that Cutler has failed to plead any facts showing the same of Feitzinger or Misakian.
CONCLUSION
The judgment of the district court is REVERSED IN PART to the extent it
dismissed 1) Cutler’s 10b-5 claims against UTi, Kirchner, Rodick, and Feitzinger,
and 2) Cutler’s § 20(a) claims against Kirchner and Rodick. The judgment is
otherwise AFFIRMED, and the case REMANDED for further proceedings
consistent with this opinion.2
2 We deny as moot Cutler’s motion for judicial notice of the contents of an order of the Securities
and Exchange Commission, imposing a cease-and-desist order against defendants Eric Kirchner
and Richard Rodick. Because we reinstate Cutler’s claims against Kirchner and Rodick on the
basis of the complaint alone, there is no reason to decide—without the benefit of full briefing—
whether to take Cutler up on his invitation to consider the Commission’s factual findings as if he
had incorporated them by reference in the first instance. If Cutler wishes to add the Commission’s
findings to his complaint on remand, Federal Rule of Civil Procedure 15(a)(2) lets him ask the
district judge for leave to do so.

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