Sandra Hunter v. Elanco Animal Health Incorporated

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 23-3061
SANDRA HUNTER and MARLA STRAPPE,
Plaintiffs-Appellants,
v.
E
LANCO ANIMAL HEALTH INCORPORATED, et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:20-cv-01460 — Sarah Evans Barker, Judge.
____________________
ARGUED MAY 23, 2024 — DECIDED AUGUST 14, 2026
____________________
Before JACKSON-AKIWUMI, LEE, and PRYOR, Circuit Judges.
PRYOR, Circuit Judge. This appeal arises from the dismissal
of a proposed securities class action lawsuit against Elanco
Animal Health Inc. and several of its officers and directors
(collectively, “Elanco”). Lead Plaintiff Sandra Hunter and
plaintiff Marla Strappe (collectively, “Plaintiffs”), proposing
to lead a class of investors, alleged that Elanco deceived the
securities market by asserting that there was significant un-
derlying demand for Elanco’s products when, in fact, the

2 No. 23-3061
demand was a facade created by so-called “channel stuffing.”
Channel stuffing is the practice of foisting inventory on dis-
tributors to create an illusion of greater profitability.
Concluding Plaintiffs failed to state a claim and that their
proposed amendment was futile, the district court dismissed
the lawsuit with prejudice. On appeal, Plaintiffs assert that
their proposed second amended complaint states claims un-
der the Securities Act of 1933 and the Securities Exchange Act
of 1934. We conclude, however, that Plaintiffs h ave not met
the heightened pleading standards of the Private Securities
Litigation Reform Act or Federal Rule of Civil Procedure 9(b).
Accordingly, we affirm the district court’s judgment dismiss-
ing the case.
I. B
ACKGROUND
Because the proposed second amended complaint was
dismissed for failure to state a claim, we accept the Plaintiffs’
factual allegations as true. Tellabs, Inc. v. Makor Issues & Rts.,
Ltd., 551 U.S. 308, 322 (2007) (“Tellabs II”).
A. Factual Background
1. Elanco’s Business Model
Elanco Animal Health Inc. is an Indiana corporation that
was spun off from Eli Lilly and Company as a separate corpo-
rate entity in September 2018. About 97% of Elanco’s revenue
comes from Elanco’s health products for “companion ani-
mals” (i.e., pets) and “food animals” (e.g., swine, cattle, and
poultry).
Elanco primarily sells its animal health products to whole-
sale distributors, who in turn sell those products to the even-
tual end users of those products, such as veterinary clinics.

No. 23-3061 3
Before its spin off as a separate corporate entity, Elanco em-
ployed a “move out” sales model that prioritized balancing
sales to distributors with end-user demand. In other words,
Elanco strove to sell the amount of products its distributor
customers needed to meet that end-user demand. In about the
fourth quarter of 2017, however, Elanco switched to a “move
in” sales model. A move-in sales model “incentivizes distrib-
utors to purchase as much product as possible” by offering
discounts, rebates, and other favorable terms, “rather than
aiming to balance sales to true end-user demand.” Put an-
other way, the amount Elanco decided to sell to its distributor
customers—with less regard for the amount end users de-
manded—was the controlling metric for this sales model.
Elanco also expanded its business on occasion by acquir-
ing smaller companies. For example, on April 26, 2019, Elanco
announced that it planned to acquire Aratana Therapeutics, a
company focused on commercializing therapeutics for dogs
and cats, in a transaction valued at $245 million. The acquisi-
tion closed on July 18, 2019. In exchange for Aratana share-
holders’ stock in Aratana, Elanco issued about 7.2 million new
shares of stock in Elanco. Those new shares were valued at
$238 million based on Elanco’s stock price ($33.18 per share)
the day before the transaction closed.
In another example, on August 20, 2019, Elanco an-
nounced it planned to acquire Bayer Animal Health’s animal
health business. That deal was worth a total of $7.6 billion,
consisting of $5.3 billion in cash and the rest in a stock offer-
ing. The deal closed on August 3, 2020, though Elanco an-
nounced the sale of shares to help finance the deal as early as
January 21, 2020.

4 No. 23-3061
2. Elanco’s Alleged Channel-Stuffing Practices
The “core” of this lawsuit is the allegation that Elanco de-
ceived the market by asserting that strong end-user demand
for Elanco’s products drove Elanco’s revenues when, in fact,
those revenues resulted from channel stuffing.
The proposed second amended complaint’s allegations
rest partly on publicly available information, such as Elanco’s
public statements through its Chief Executive Officer Jeffrey
Simmons, Chief Financial Officer Todd Young, and various
other corporate filings. The Plaintiffs also relied on infor-
mation provided by five anonymous former Elanco employ-
ees. Though the complaint does not reveal these former em-
ployees’ identities, it does provide varying degrees of infor-
mation about each one to bolster the credibility of their anon-
ymous reports.
Confidential Witness 1 (CW1) was a “Corporate Account
Manager” in Elanco’s Food Animal division from January
2015 through January 2020. CW1 managed Elanco’s relation-
ship with four of Elanco’s critical distributors, including MWI
Animal Health, Elanco’s largest distributor. CW1 reported to
Courtney Shriver, an Elanco employee who oversaw Elanco’s
Food Animal and Companion Animal channel distribution
and “had a ‘direct conversation pipeline’” to, and participated
in “monthly management meetings” with, Simmons. CW1
also participated in at least two of those meetings, during
which sales strategy, sales data, and distributor inventory lev-
els were reviewed.
Confidential Witness 2 (CW2) was also a “Corporate Ac-
count Manager” who worked in “Elanco’s Companion Ani-
mal division” from March 2018 to January 2020. CW2 also

No. 23-3061 5
reported to Shriver and worked on the MWI account, appar-
ently because CW2 used to work at MWI as a “National Ac-
count Manager.”
Confidential Witness 3 (CW3) “was a National Accounts
Manager in Elanco’s Food Animal division from January 2015
to January 2020.” CW3 was also involved in managing the
MWI account, worked with CW1, and reported to Shriver.
Confidential Witness 4 (CW4), a former Vice President at
Elanco from January 2020 to July 2020, is the highest-ranking
confidential witness. Before January 2020, CW4 was “Elanco’s
Global Head of Animal Care Expansion, Business Develop-
ment & Licensing and Alternate Innovation from September
2018 to January 2020.” CW4 worked with and had “regular
and frequent direct contact” with both Simmons and Young.
CW4 also attended “monthly meetings” hosted by Young.
Confidential Witness 5 (CW5) was “a District Sales Man-
ager” from January 2017 until March 2020, when CW5 became
“a Senior District Sales Manager.” CW5 changed roles in
April 2020 to “National Account Manager” for one of Elanco’s
major veterinary accounts, “which ran exclusively through”
MWI.
The confidential witnesses provided insight into Elanco’s
sales operations. CW1 and CW2 report that, before and dur-
ing the class period, Elanco pushed hard to sell its products
to distributors, even when those distributors already had sig-
nificant product on hand. Elanco incentivized distributors to
take on additional product by “offering discounts, additional
rebates, and extended payment terms.”
These incentives were tied to distributors’ purchases from
Elanco, not the distributors’ sales to end users. According to

6 No. 23-3061
CW4, Elanco’s goal was “to induce distributors to purchase
more and more inventory regardless of end-user demand.”
For example, CW1 says that by the end of the second quarter
of 2019, MWI had greater than typical reserves of Elanco in-
ventory, yet Shriver directed CW1 to sell an extra $10 million
of inventory to MWI anyway. To achieve that goal, CW1 had
to offer MWI extra rebates. CW2 says that Elanco kept close
track of MWI’s “days-on-hand” inventory levels, so Elanco
knew that MWI had more inventory than it typically stored.
In fact, MWI ended up renting additional storage space for
the excess inventory it purchased.
CW3 reports similar pressure to sell inventory to distribu-
tors who were already “bursting” with inventory. CW3 re-
ports that Shriver would relay Simmons’s instructions to
“make the quarter[’ s sales goals] no matter what.” Shriver
would also push CW3 to try to get distributors to purchase
“an extra million” in inventory “to make the quarter look bet-
ter.”
CW4 reports that Simmons and Young were well aware of
these sales pressures and the resulting consistent difference
“between dispensing numbers and selling numbers.” During
these meetings, CW4, Simmons, Young, and others reviewed
the data and, by 2019, “senior executives challenged Simmons
on Elanco’s apparent channel stuffing.”
Even so, Elanco’s sales strategy did not result in distribu-
tors returning more products. In 2018, Elanco had a product
return rate equal to 0.6% of net revenues. That figure dropped
to 0.2% of net revenues in 2019.
In 2019, Elanco posted revenues of $781.6 million in the
second quarter, $771.3 million in the third quarter, and

No. 23-3061 7
$787 million in the fourth. Elanco touted these revenues in its
press releases and earnings calls.
On May 9, 2019, Elanco announced its first quarter 2019
financial results in a press release and a subsequent earnings
call. The release stated that Elanco’s 2% sales growth “re-
flect[ed] underlying volume growth.” During the earnings
call, Simmons said that “it’s particularly important to put our
sales results into context. My key message is that the funda-
mentals of our business are strong and we are tracking to our
goals.” He went on to say that “the leading indicators of de-
mand at the vet clinic are consistent with this longer-term
sales trajectory.” Later, Young responded to a market ana-
lyst’s question about “distributor stocking dynamics” that
hurt quarterly earnings by saying that “we feel very good
about the underlying demand in the vet channel.” Another
analyst on the same call followed up, asking for more detail
about Elanco’s growth. Simmons responded that “we look
every day at that vet clinic demand. We feel very good about
that. That’s the lead indicator.”
In a press release on August 13, 2019, Elanco announced
its second quarter 2019 financial results. The press release
stated that the “results reflect underlying price and volume
growth.” It quoted Simmons as stating Elanco was “confident
in the growth of our underlying business.” The same day,
Elanco hosted an earnings call. On the call, Simmons stated
that “[o]ur top line results represent the solid underlying de-
mand for our products and the strength of our fundamen-
tals.” In response to an analyst’s questions on that call about
“true underlying organic growth,” Simmons reported that
“we’re growing the underlying demand for core revenue ...
at 5%.”

8 No. 23-3061
On November 6, 2019, Elanco announced its financial re-
sults for the third quarter. In an earnings call the same day,
Simmons said that “our top line results showed a solid under-
lying demand for our products and the strength of our funda-
mentals.” Young, on the same call, said that Elanco was “con-
fident in the underlying growth of our core business.”
On January 10, 2020, Elanco held a guidance call to discuss
Elanco’s financial guidance. During the call, Simmons stated
that “[o]ur growth is durable and resilient” and that “we are
confident in our growth because of the fundamentals driving
this growth.”
Meanwhile, according to CW4, Elanco’s channel stuffing
peaked in the fourth quarter of 2019. By that point, says CW2,
MWI had “at least 100 to 120 days of inventory” on hand, far
above the typical 45- to 60-day average. CW3 reports that a
different distributor (Nutra Blend) refused to purchase inven-
tory in excess of demand at about the same time.
Having reached the limits of its distributors’ capacity in
the fourth quarter of 2019, Elanco switched back to a “move
out” sales model. In doing so, Elanco based distributors’ in-
centives on their sales to end users, not the distributors’ pur-
chases from Elanco.
3. The Channel Inventory Reduction Announcement
On May 7, 2020, Elanco announced that, compared to the
first quarter of 2019, its revenues in the first quarter of 2020
decreased by 10% “due to a reduction of approximately $60
million in channel inventory driven by factors resulting from
the COVID-19 pandemic.” On an earnings call the same day,
Simmons announced that during the first quarter of 2020,
Elanco “reduced the amount of product in distributor

No. 23-3061 9
inventory by approximately $60 million ... and ... expect[ed]
to further reduce an additional $80 million to $100 million
mainly in the second quarter.” Elanco’s stock price immedi-
ately fell from $22.93 to $19.88 per share, a 13% drop.
1

B. Procedural Background
Lead Plaintiff Sandra Hunter, who had purchased Elanco
securities, filed a proposed class action against Elanco, Sim-
mons, and Young. A few months later, Hunter and plaintiff
Marla Strappe filed a first amended complaint against those
parties, Elanco’s board of directors, and its Chief Account Of-
ficer. The complaint alleged that Elanco artificially inflated its
sales and growth numbers during the class period by oversat-
urating Elanco’s product distribution channels beyond end-
user demand. They alleged that Elanco’s sales figures were
misleading and that Elanco misled investors by attributing its
revenue growth to underlying end-user demand rather than
its practice of selling more product to its distributors than
they could distribute. The ruse was revealed, the Plaintiffs al-
leged, when Elanco finally announced it had to reduce its
channel inventory. T he district court dismissed without prej-
udice the first amended complaint for failure to state a claim,
giving the Plaintiffs 45 days to seek leave to amend their com-
plaint.
The Plaintiffs timely sought leave to file their proposed
second amended complaint. In this complaint, t hey sought to
represent a class of people or entities who had purchased

1
For fluctuations in Elanco’s stock price, “[t] he parties have not used econ-
ometric methods to separate firm-specific changes from movements of the
market as a whole, so we give raw numbers.” Higginbotham v. Baxter Int’l,
Inc., 495 F.3d 753, 756 (7th Cir. 2007).

10 No. 23-3061
Elanco common stock between May 9, 2019, and May 6, 2020,
and they clarified that they were alleging multiple statutory
and regulatory violations arising from Elanco’s failure to dis-
close its channel-stuffing practices. First, the Plaintiffs con-
tend that Elanco, as a corporation, and Simmons and Young
as individuals, violated § 10(b) of the Securities Exchange Act
of 1934 (Exchange Act) and Securities and Exchange Commis-
sion (SEC) Rule 10b–5(b). See 15 U.S.C. § 78j; 17 C.F.R.
§ 240.10b–5. Second, the Plaintiffs allege that Elanco, Sim-
mons, Young, Elanco’s directors, and its Chief Account Of-
ficer are liable under § 11 of the Securities Act of 1933 (Secu-
rities Act) and Elanco is liable under § 12(a) of the Securities
Act, in each case for making material misstatements. See
15 U.S.C. §§ 77k(a), 77l(a)(2). Third, the complaint alleges that
Simmons, Young, Elanco’s directors, and its Chief Account
Officer are secondarily liable as “control persons” under § 15
of the Securities Act, see 15 U.S.C. § 77o(a), as are Simmons
and Young under § 20 of the Exchange Act, see 15 U.S.C.
§ 78t(a), for the underlying securities fraud claims. Last, the
complaint alleges that Elanco violated Item 303 of SEC Regu-
lation S-K. See 17 C.F.R. § 229.303(a)(3)(ii) (2019).
The court denied leave to amend, concluding that permit-
ting the proposed amendment was futile. The court started
with the Plaintiffs’ claim under Exchange Act § 10(b) and SEC
Rule 10b–5(b). That claim required Plaintiffs to adequately
plead six elements: (1) a material misrepresentation or omis-
sion, (2) scienter, (3) a connection with the purchase or sale of
a security, (4) reliance, (5) economic loss, and (6) loss causa-
tion. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42
(2005). The court held that under the heightened pleading
standards required by the Private Securities Litigation Re-
form Act (PSLRA), Plaintiffs failed to adequately allege three

No. 23-3061 11
of those elements. First, in the court’s view, the complaint
failed to allege an actionable misstatement or omission be-
cause “only fraudulent channel stuffing is actionable,” but the
complaint did not suggest that Elanco had engaged in such a
scheme. Second, the court concluded that the complaint did
not allege a strong inference of scienter—that is, that Elanco,
Simmons, or Young intended to deceive the market. To the
court, the most compelling inference to draw from the com-
plaint was that the COVID-19 pandemic caused the channel
inventory reduction. Third, the court concluded that the com-
plaint failed to allege that any misrepresentation caused the
“minor decline” in Elanco’s stock price.
The court then quickly dispensed with the Plaintiffs’ re-
maining claims. The court held that the Plaintiffs’ claims un-
der §§ 11 and 12(a) of the Securities Act were “bestrewn with
averments of fraud,” so the Plaintiffs had to plead Elanco’s
alleged fraud with specificity under Federal Rule of Civil Pro-
cedure 9(b). But the complaint failed on that measure because
it alleged neither “a channel stuffing scheme nor any material
misstatements or omissions.” And the claims under § 15 of the
Securities Act and § 20(a) of the Exchange Act failed because
there must be an underlying securities fraud before corporate
officers can be secondarily liable.
The court thus denied leave to amend as futile and dis-
missed the complaint with prejudice.
Plaintiffs have timely appealed.
II. A
NALYSIS
On appeal, Plaintiffs argue that their proposed second
amended complaint stated claims under each of these provi-
sions of law. “Generally, denials of leave to amend are

12 No. 23-3061
reviewed for abuse of discretion.” Runnion ex rel. Runnion v.
Girl Scouts of Greater Chi. & Nw. Ind., 786 F.3d 510, 524 (7th Cir.
2015). “But when the basis for denial is futility, we apply the
legal sufficiency standard of Rule 12(b)(6) to determine
whether the proposed amended complaint fails to state a
claim.” Id. We review de novo the district court’s conclusion
that Plaintiffs failed to state a claim. See Makor Issues & Rts.,
Ltd. v. Tellabs, Inc., 437 F.3d 588, 594 (7th Cir. 2006) (“Tellabs
I”), rev’d on other grounds, Tellabs II, 551 U.S. 308. We review
the court’s interpretation of the PSLRA de novo, too. Id.
A. Exchange Act Claim Under Section 10(b) and Rule
10b–5(b)
In the aftermath of the Great Depression, Congress en-
acted a set of securities laws that impose a burden of full dis-
closure on public companies. Id. at 595 (quoting Sec. & Exch.
Comm’n v. Cap. Gains Rsch. Bureau, Inc., 375 U.S. 180, 186
(1963)). Under § 10(b) of the Exchange Act, it is unlawful to
“use or employ ... any manipulative or deceptive device or
contrivance” that violates SEC rules. 15 U.S.C. § 78j(b). Using
its statutory authority to ensure honest market disclosures,
the SEC promulgated Rule 10b–5, which provides that:
It shall be unlawful for any person ...
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material
fact or to omit to state a material fact neces-
sary in order to make the statements made,
in the light of the circumstances under
which they were made, not misleading, or

No. 23-3061 13
(c) To engage in any act, practice, or course of
business which operates or would operate as
a fraud or deceit upon any person,
in connection with the purchase or sale of any
security.
17 C.F.R. § 240.10b–5. These three provisions create independ-
ent grounds of liability, meaning that a violation of one pro-
vision does not depend on a violation of another. See Lorenzo
v. Sec. & Exch. Comm’n, 587 U.S. 71, 78 (2019).
Though neither the statute nor the rule expressly creates a
private right of action, the Supreme Court has held that
§ 10(b) provides an implied right of action by which private
parties can seek to enforce § 10(b) and Rule 10b–5. Janus Cap.
Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011) (ci-
tation omitted). The ability of private parties to enforce our
securities laws creates significant, countervailing incentives.
On the one hand, “[t]he magnitude of the federal interest in
protecting the integrity and efficient operation of the market
for nationally traded securities cannot be overstated.” Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78
(2006). And “meritorious private actions ... are an essential
supplement” to federal enforcement of the securities laws.
Tellabs II, 551 U.S. at 313. On the other hand, “[p]rivate secu-
rities fraud actions ... can be employed abusively to impose
substantial costs on companies and individuals whose con-
duct conforms to the law.” Id.
To combat perceived abuses in private securities litigation,
Congress enacted the Private Securities Litigation Reform Act
of 1995. See id. at 320–21 (describing the impetus for passing
the PSLRA). Among other reforms, the PSLRA imposes a

14 No. 23-3061
significantly heightened pleading burden on private plain-
tiffs. See 15 U.S.C. § 78u–4(b). Plaintiffs must “state with par-
ticularity both the facts constituting the alleged violation, and
facts evidencing scienter.” Tellabs II, 551 U.S. at 313 (cit-
ing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 & n.12 (1976),
and § 78u–4(b)(1), (2)). Put another way, the PSLRA imposes
two burdens. To satisfy the particularity requirement, the
complaint must list each allegedly misleading statement (or
omission) and explain why the statement (or omission) is mis-
leading. § 78u–4(b)(1). T he complaint also must “state with
particularity facts giving rise to a strong inference” of scienter.
§ 78u–4(b)(2). Scienter, in this context, is “a mental state em-
bracing intent to deceive, manipulate, or defraud.” Ernst &
Ernst, 425 U.S. at 193 n.12.
A “strong inference” of scienter is an inference that is
“more than merely plausible or reasonable—it must be cogent
and at least as compelling as any opposing inference of non-
fraudulent intent.” Tellabs II, 551 U.S. at 314. In evaluating
competing inferences at the pleading stage, we still “accept all
factual allegations ... as true,” including those in the com-
plaint and documents incorporated by reference, and we
scrutinize the facts collectively, not in isolation. See id. at 322–
23. After reviewing the complaint holistically, and recogniz-
ing that the “inquiry is inherently comparative,” we ask
whether “the inference of scienter [is] cogent and at least as
compelling as any opposing inference one could draw from
the facts alleged.” Id. at 323–24.
With those pleading standards in mind, there are six
“basic elements” of a Rule 10b–5 claim: (1) “a material mis-
representation (or omission),” (2) “scienter,” (3) “a connection
with the purchase or sale of a security,” (4) “reliance,”

No. 23-3061 15
(5) “economic loss,” and (6) “loss causation.” Dura Pharms.,
544 U.S. at 341–42 (italics omitted). Notice that the first ele-
ment has two parts: (1) a misrepresentation or omission (2) of
material information. Tellabs I, 437 F.3d at 595. In other words,
a misrepresentation of an immaterial fact does not create lia-
bility. See id.
In this case, the parties contest whether the proposed sec-
ond amended complaint properly alleges that Elanco made a
material misrepresentation or omission with scienter and
caused the Plaintiffs’ losses, so we limit our discussion ac-
cordingly. But we do not reach the issue of loss causation be-
cause we conclude that even if Plaintiffs’ proposed complaint
adequately alleges a material misrepresentation or omission,
it fails to allege a strong inference of scienter.
1. Material Misrepresentation or Omission
The district court concluded that because Plaintiffs had
not alleged Elanco’s channel stuffing was itself a fraudulent
practice, the court did not have to consider whether Plaintiffs
adequately pleaded that defendants made misstatements or
omissions about it. The Plaintiffs argue this was error. We
agree. Whether a defendant makes a material misrepresenta-
tion under Rule 10b–5(b) does not depend on whether the un-
derlying conduct or practice is fraudulent.
Rule 10b–5(b) prohibits the making of “any untrue state-
ment of a material fact” or omitting “a material fact,” the ab-
sence of which makes a statement misleading. 17 C.F.R.
§ 240.10b–5(b). As the Supreme Court explained in Lorenzo, li-
ability under one subsection of Rule 10b–5 does not depend
on liability under another subsection of the same rule.
587 U.S. at 78. Rule 10b–5(b) centers on untrue statements and

16 No. 23-3061
misleading omissions, not on whether the conduct underly-
ing the statement is itself fraudulent—that i s the domain of
other parts of Rule 10b–5. See § 240.10b–5(a) (barring “any de-
vice, scheme, or artifice to defraud”); § 240.10b–5(c) (barring
“engag[ement] in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person”). Accordingly, an untrue statement or mislead-
ing omission relating to a legitimate business strategy is still
prohibited under Rule 10b–5(b). See § 240.10b–5(b); cf. Makor
Issues & Rts., Ltd. v. Tellabs Inc., 513 F.3d 702, 709 (7th Cir. 2008)
(“Tellabs III”) (recognizing that channel stuffing is not inher-
ently fraudulent). Under Rule 10b–5(b), the essential question
is whether Elanco’s statements or omissions were untrue or
misleading, not whether their practice of channel stuffing was
itself fraudulent. A fraudulent channel stuffing scheme may
violate Rule 10b–5(a) or (c) too, but it is not a prerequisite for
liability under Rule 10b–5(b).
Our colleagues in the Second Circuit were recently con-
fronted with a similar scenario and came to much the same
conclusion. In assessing Rule 10b–5, the Second Circuit noted
that the Rule “prohibits three different things,” and that
“[c]lause (b) is significantly different” from (a) and (c) because
“[i]t focuses not on schemes, devices, or practices, but on
statements made.” In re Hain Celestial Grp., Inc. Sec. Litig.,
20 F.4th 131, 136 (2d Cir. 2021). The focus of Rule 10b–5(b),
then, is on “whether something said was materially mislead-
ing.” Id. So, because liability under Rule 10b–5(b) “does not
depend on whether the alleged channel stuffing practices
themselves were fraudulent or otherwise illegal,” the Second
Circuit concluded the district court erred in dismissing the
complaint because the channel stuffing was not inherently
fraudulent. Id. at 137. Given the text of Rule 10b–5(b) and the

No. 23-3061 17
Supreme Court’s decision in Lorenzo, we agree with the Sec-
ond Circuit that the success of a Rule 10b–5(b) claim depends
on demonstrating misleading or untrue “statements,” not
fraudulent “schemes, devices, or practices.” Id. at 136.
Here, the district court’s view that “only fraudulent chan-
nel stuffing is actionable” led the court mostly to forgo ana-
lyzing whether Elanco’s statements or omissions were mate-
rial and misleading or untrue. We note that some of the state-
ments made by Simmons and Young are at least close calls on
this point. The proposed second amended complaint alleges
that the executives gave specific assurances of strong under-
lying demand in response to specific analyst questions about
Elanco’s “stocking dynamics” and distributors’ stocking prac-
tices. Compare Eisenstadt v. Centel Corp., 113 F.3d 738, 746 (7th
Cir. 1997) (“Mere sales puffery is not actionable under Rule
10b–5.”), with Tellabs I, 437 F.3d at 597 (explaining “direct re-
sponse[s] to” analysts’ specific inquiries go “well beyond” im-
material puffery).
At bottom, however, we need not resolve the parties’ dis-
pute over whether these and other statements misleadingly
assured investors of strong demand while omitting any refer-
ence to Elanco’s channel stuffing practices. That i s because we
agree with the district court that the proposed second
amended complaint fails to allege a strong inference of scien-
ter.
2. Scienter
Recall that another required element of a Rule 10b–5 claim
is scienter. Dura Pharms., 544 U.S. at 341 (italics omitted). In
other words, there must be allegations of “the defendant’s

18 No. 23-3061
intention ‘to deceive, manipulate, or defraud.’” Tellabs II,
551 U.S. at 313 (quoting Ernst & Ernst, 425 U.S. at 194 & n.12).
The PSLRA imposes heightened pleading requirements
for the scienter element. Id. at 314. Plaintiffs who allege a
claim under Rule 10b–5 must “state with particularity facts
giving rise to a strong inference” of scienter. Id. ( quoting
15 U.S.C. § 78u–4(b)(2)). Although the term “strong infer-
ence” is not defined by statute, see 15 U.S.C. § 78u–4(b)(2), the
Supreme Court in Tellabs II explained that a strong inference
of scienter is one that is “more than merely plausible or rea-
sonable—it must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent.” 551 U.S. at 314.
This “inquiry is inherently comparative,” meaning that we
“must consider plausible, nonculpable explanations for the
defendant’s conduct, as well as inferences favoring the plain-
tiff.” Id. at 323–24.
To plead scienter with the requisite specificity, it i s often
necessary to get information from corporate insiders. See Tell-
abs III, 513 F.3d at 711. Yet those insiders frequently seek as-
surances that they will not suffer retaliation. One way to do
so is for the plaintiffs to grant them anonymity at the pleading
stage.
2
Id. So, it i s common for securities fraud litigants, like
the Plaintiffs here, to rely on confidential sources. Tellabs I,
437 F.3d at 596; Tellabs III, 513 F.3d at 711.
The problem with this arrangement “is that allegations
based on anonymous informants are very difficult to assess.”
Tellabs III, 513 F.3d at 711. Accordingly, in Higginbotham v.

2
That anonymity is temporary, though, because confidential witnesses’
identities will have to be disclosed in pretrial discovery. Tellabs III,
513 F.3d at 711.

No. 23-3061 19
Baxter International, Inc., after noting confidential witnesses’
allegations must usually be discounted steeply, we dis-
counted allegations based on five confidential witnesses’ ac-
counts. 495 F.3d 753, 756–57 (7th Cir. 2007). We did so in large
part because we knew virtually nothing about their positions,
their titles, their access to knowledge, or their motivations. See
id. at 757. But the degree to which confidential witness testi-
mony needs to be discounted is contextual. Tellabs III, 513 F.3d
at 711–12. When numerous confidential sources tell an over-
lapping, corroborated story and we are able to assess those
sources’ access to the knowledge they claim to have, we can
still draw “a strong inference from [the] informants’ asser-
tions.” Id. at 712.
Here, the Plaintiffs rely on five confidential witnesses,
only one of whom appears to have had personal access to
knowledge about Simmons’s and Young’s mental states.
Thus, allegations of scienter based on the accounts of CW1,
CW2, CW3, and CW5 should be discounted steeply. See Hig-
ginbotham, 495 F.3d at 757. Based on what we can discern from
the proposed second amended complaint about their posi-
tions and access to knowledge, there i s no reason to think they
have first-hand information about the defendants’ mental
states. The exception is CW4, a Vice President during the class
period who attended monthly management meetings and in-
teracted personally with Simmons and Young. Though we
know nothing about CW4’s motivations, a person in CW4’s
position would have access to the knowledge that CW4 claims
to have. Moreover, CW4’s version of events is at least partly
corroborated by the proposed second amended complaint’s
other allegations. Thus, we choose not to steeply discount al-
legations based on CW4’s testimony. See Tellabs III, 513 F.3d
at 712.

20 No. 23-3061
With that preliminary point out of the way, we turn to the
“inherently comparative” exercise that is determining
whether the complaint raises a strong inference of scienter.
Tellabs II, 551 U.S. at 323. We see three possible inferences re-
garding scienter that could be drawn from the allegations in
the proposed second amended complaint.
Inference One: COVID-19. The district court concluded that
the strongest inference to be drawn from the complaint re-
garding the defendants’ scienter was that their decision to re-
duce channel inventory was based on the COVID-19 pan-
demic, not an intent to deceive the market. This flowed from
the court’s view that the Plaintiffs needed to allege that the
underlying channel-stuffing scheme was fraudulent.
We respectfully disagree that this is the strongest infer-
ence to be drawn for two reasons. First, our focus is on
whether the defendants’ statements were misleading, not
whether the underlying scheme itself was fraudulent. As a re-
sult, what matters is whether the defendants made knowingly
false material statements (or made material omissions) with
an intent to deceive the market, not whether COVID-19 was,
in fact, the reason Elanco pared back its distributors’ supply
levels. See Hain, 20 F.4th at 136–37. Second, the proposed sec-
ond amended complaint alleges that Elanco began the process
of reducing distributors’ inventory levels before the pan-
demic began. Indeed, Elanco switched back to a “move out”
sales model in the fourth quarter of 2019 after maxing out its
distributors’ capacity. From that, it is hard to infer COVID-19
caused the reduction.
Inference Two: Intentional Fraud. Plaintiffs argue that the
strongest inference to be drawn is that Simmons and Young
knew demand for Elanco’s products was weak but persisted

No. 23-3061 21
in claiming that sales growth was driven by strong end-user
demand. Plaintiffs point out the following allegations in sup-
port. Simmons and Young publicly stated that they closely
monitored demand levels. CW4 says that Simmons and
Young attended monthly management meetings where they
reviewed sales data, were informed of a consistent difference
between sales and inventory levels and were challenged at
least once on channel stuffing. After some of these meetings,
CW1 was pressured to sell even more product to MWI, in-
cluding at discounted rates. And as the alleged channel-stuff-
ing scheme reached its peak, in November 2019 filings Elanco
subtly adjusted its public disclosures about payment terms
and noted that risks included “the impact of increased or de-
creased sales to our channel distributors resulting in higher or
lower inventory levels ... in advance of or trailing actual cus-
tomer demand.”
We agree that these allegations raise a plausible inference
that Simmons and Young realized distributor inventory levels
did not match end-user demand and they intended to deceive
the market by omitting information about that difference. But
under the PSLRA, the question is whether the Plaintiffs have
raised a “strong inference” of scienter, not merely a plausible
one. § 78u–4(b)(2); see Tellabs II, 551 U.S. at 314. To determine
whether a plausible inference is a strong one, we must com-
pare this inference to Elanco’s proposed opposing inference
of nonfraudulent intent, namely the pursuit of a legal sales
strategy. Tellabs II, 551 U.S. at 323–24.
Inference Three: Pursuit of a Legal Sales Strategy. Elanco con-
tends that the strongest inference to be drawn from the pro-
posed second amended complaint is that Simmons and
Young knew about Elanco’s “move in” sales model and

22 No. 23-3061
approved it, but they did not intend to deceive anyone. As
Elanco points out, there are no allegations that demand was
not strong enough to sustain the channel-stuffing practice—
the sales were real and, though distributors had substantial
inventory, they were not returning it more frequently than be-
fore. More importantly for scienter, there i s no allegation that
Simmons or Young knew that demand was not strong or that
the strategy was unsustainable over the long haul. In fact, de-
spite the consistent difference between sales and inventory
levels, distributors kept buying Elanco’s products at a high
rate and successfully selling them during the class period.
There are no allegations that Elanco’s revenues were reported
improperly or that its financials had to be restated at any
point. Relatedly, we know that Simmons was confronted by
others about potential channel stuffing, but we have no infor-
mation about Simmons’s response to that charge. Moreover,
there is no allegation that the sales were illusory, let alone that
the defendants knew as much.
As we have recognized before, “there may be legitimate
reasons for attempting to achieve sales earlier.” Tellabs I,
437 F.3d at 598. To be sure, “[a] certain amount of channel
stuffing could be innocent,” as “a seller might have a realistic
hope that stuffing the channel of distribution would incite his
distributors to more vigorous efforts to sell the stuff lest it pile
up in inventory.” Tellabs III, 513 F.3d at 709. In contrast,
“[c]hannel stuffing becomes a form of fraud only when it is
used ... to book revenues on the basis of goods shipped but
not really sold because the buyer can return them.” Id. Here,
distributors’ persistently low rate of returning Elanco prod-
ucts undermines an inference that Simmons, Young, and
Elanco knew the “move in” sales model was fraudulent. Thus,
we think the strongest inference to be drawn from the

No. 23-3061 23
proposed second amended complaint is that Simmons,
Young, and Elanco had a realistic hope that their efforts to in-
centivize their distributors were working. See id. Perhaps Sim-
mons and Young were overly optimistic in pursuing a chan-
nel stuffing strategy, but “there is no securities fraud by hind-
sight.” Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d
1047, 1050 (7th Cir. 2012) (citation omitted). Simmons and
Young pursued a lawful sales strategy that worked for nearly
two years. In the absence of allegations establishing that Sim-
mons or Young knew that their channel-stuffing practice was
going to implode but kept saying demand was strong any-
way, we cannot draw a strong inference of fraudulent intent.
Plaintiffs contend Simmons’s and Young’s alleged mo-
tives should change our analysis, but we disagree. The Plain-
tiffs point out that Simmons and Young likely wanted to keep
stock prices high to facilitate the Aratana acquisition and the
January 2020 equity offering that financed part of the Bayer
acquisition. We recognize that motive can be a “relevant con-
sideration” in assessing fraudulent intent. Tellabs II, 551 U.S.
at 325. But every executive is motivated to keep their com-
pany’s stock price high, and a motive shared by all executives
does not move the scienter needle. Pension Tr. Fund for Oper-
ating Eng’rs v. Kohl’s Corp., 895 F.3d 933, 939–40 (7th Cir. 2018).
There i s also a timing mismatch for both transactions. Elanco
switched to a “move in” sales model around the fourth quar-
ter of 2017, well before Elanco announced the Aratana acqui-
sition in April 2019, and kept this model well after that trans-
action closed in July 2019. And if the goal was to inflate the
stock price for the January 2020 equity offering, Elanco’s de-
cision to end its channel-stuffing practice in the fourth quarter
of 2019 may fit uneasily with that alleged motivation. In short,
the motives alleged here do not move the scienter needle.

24 No. 23-3061
We conclude the Plaintiffs have not adequately pleaded a
strong inference of scienter—that Simmons, Young, or Elanco
knew they were misleading investors by omitting channel
stuffing from their explanations of sales growth. And for that
reason, we do not consider whether the Plaintiffs adequately
pleaded loss causation.
In sum, the district court was right to dismiss the Plain-
tiffs’ claims that arise under § 10 of the Exchange Act and SEC
Rule 10b–5(b).
B. Securities Act Claims Under Sections 11 and 12(a)(2)
The Plaintiffs’ proposed second amended complaint al-
leges that two misleading statements in Elanco’s Aratana
Merger Registration Statement and Prospectus violate
15 U.S.C. §§ 77k(a) and 77l(a)(2).
3
Sections 11 and 12(a)(2) of
the Securities Act prohibit material misstatements in registra-
tion statements and prospectuses, respectively. §§ 77k &
77l(a)(2). Unlike claims under § 10(b) of the Exchange Act,
however, claims under §§ 11 and 12(a) of the Securities Act do
not require proof of fraudulent intent—instead, these statutes
create “virtually absolute” liability “even for innocent mis-
statements.” Herman & MacLean v. Huddleston, 459 U.S. 375,

3
Specifically, Elanco relayed that “[t]otal revenue increased $177.8 million
or 6% in 2018 as compared to 2017, reflecting a 3% increase due to higher
realized prices and a 3% increase due to higher volumes.” This was mis-
leading, Plaintiffs allege, because it omitted that the revenue growth was
due to channel stuffing, not increased demand. In the same document,
Elanco also stated that its risks included “increased use of alternative dis-
tribution channels, or changes within existing distribution channels,
[which] could negatively impact its market share, margins and distribu-
tion of its products.” This was misleading, Plaintiffs allege, because Elanco
had already changed its distribution strategy.

No. 23-3061 25
382 (1983) (discussing Section 11); see, e.g., Panther Partners Inc.
v. Ikanos Commc’ns, Inc., 681 F.3d 114, 120 (2d Cir. 2012) (“Sec-
tion 12(a)(2) imposes liability under similar circumstances for
misstatements or omissions in a prospectus.” (citing
§ 77l(a)(2))).
The threshold issue we must resolve is which pleading
standard governs: Federal Rule of Civil Procedure 8(a) or 9(b).
The district court decided that Rule 9(b) applied because the
Plaintiffs’ allegations were “bestrewn with averments of
fraud.” Concluding that the proposed second amended com-
plaint could not meet Rule 9(b)’s heightened pleading re-
quirements, the district court dismissed Plaintiffs’ §§ 11 and
12(a) claims.
Under Federal Rule of Civil Procedure 8(a), a complaint
merely needs to include a short and plain statement that plau-
sibly suggests the plaintiff is entitled to relief. Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555–57 (2007); Ashcroft v. Iqbal, 556 U.S.
662, 678–79 (2009). Rule 8 imposes, in essence, a “fair notice”
rule that requires Plaintiffs to “give enough details about the
subject-matter of the case to present a story that holds to-
gether.” Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir.
2010) (citation modified). This, of course, does not require
comparing opposing inferences. Id. (citing by comparison
Tellabs III, 513 F.3d at 705).
Federal Rule of Civil Procedure 9(b) imposes a higher
pleading burden that applies to claims that sound in fraud.
The Rule provides that “[i]n alleging fraud or mistake, a party
must state with particularity the circumstances constituting
fraud or mistake.” F
ED. R. CIV. P. 9(b). This heightened plead-
ing requirement applies to “averments of fraud,” not just
claims of fraud. Borsellino v. Goldman Sachs Grp., Inc., 477 F.3d

26 No. 23-3061
502, 507 (7th Cir. 2007). Thus, what matters is whether the al-
legations rest on fraud. If so, then Rule 9(b) kicks in, no matter
whether the legal theory itself requires proof of fraud. Ken-
nedy v. Venrock Assocs., 348 F.3d 584, 593 (7th Cir. 2003).
On appeal, Plaintiffs do not contend that they can satisfy
the requirements of Rule 9(b); rather, they argue that Rule
8(a)’s more liberal standard applies because their claims do
not rely on a fraud theory. In fact, the Securities Act section of
their proposed second amended complaint expressly forsakes
any reliance on fraud in favor of negligence and strict liability.
Accordingly, our analysis begins and ends with the pleading
standards.
Because proving fraud is not necessary under §§ 11 or
12(a), Huddleston, 459 U.S. at 382; Panther Partners, 681 F.3d at
120, whether we apply Federal Rule of Civil Procedure 8(a) or
9(b) depends on the allegations of the complaint. See Kennedy,
348 F.3d at 593; Cozzarelli v. Inspire Pharms., Inc., 549 F.3d 618,
629 (4th Cir. 2008). Rule 8(a) applies when the complaint al-
leges negligence or strict liability; Rule 9(b) applies when the
complaint relies on allegations of fraud. Rombach v. Chang,
355 F.3d 164, 171 (2d Cir. 2004); see also Sears v. Likens, 912 F.2d
889, 892–93 (7th Cir. 1990) (applying Rule 9(b) to Securities
Act claims, including those brought under § 12). If the com-
plaint alleges both fraud-based and non-fraud-based theories
of relief, the proper course is to separate the fraud allegations
and then consider whether what i s left states a claim under
Rule 8. Kennedy, 348 F.3d at 593. If the complaint relies on “a
course of fraudulent conduct,” however, the complaint
“sounds in fraud” and Rule 9(b) applies. Borsellino, 477 F.3d
at 507 (citation modified).

No. 23-3061 27
We agree with the majority of courts to have resolved the
issue that when the same course of conduct allegedly violates
Rule 10b–5 and §§ 11 and 12(a) of the Securities Act, then Rule
9(b) governs the §§ 11 and 12(a) theories. Rombach, 355 F.3d at
171, 175; Cozzarelli, 549 F.3d at 629; Rubke v. Capitol Bancorp
Ltd., 551 F.3d 1156, 1161 (9th Cir. 2009); but see In re Na-
tionsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1997) (ap-
plying Rule 8 to claims under Securities Act §§ 11 and 12(a)
when plaintiffs “expressly disavow[ed] any claim of fraud in
connection” with those claims). If “a complaint employs the
exact same factual allegations to allege violations of section 11
as it uses to allege fraudulent conduct under section 10(b) of
the Exchange Act, we can assume that it sounds in fraud.”
Rubke, 551 F.3d at 1161 (citation omitted). Nor can a plaintiff
“escape the requirements of Rule 9(b) by adding a superficial
label of negligence or strict liability.” Cozzarelli, 549 F.3d at
629. What matters is whether the allegation “has the sub-
stance of fraud.” Id.
We conclude that Plaintiffs’ claims under §§ 11 and 12(a)
of the Securities Act sound in fraud because “[t]he complaint
treats the allegedly false statements ... as part of a single, co-
ordinated scheme to defraud investors.” Id. The proposed sec-
ond amended complaint alleges a single course of conduct:
Elanco’s alleged habit of failing to mention that its revenues
were bolstered by its channel-stuffing practices. In relation to
their Rule 10b–5(b) theory, the Plaintiffs allege that Elanco’s
financial statements, press releases, and earnings calls were
all fraudulent because they misleadingly omitted the fact that
Elanco was engaging in channel stuffing. Then, in relation to
their §§ 11 and 12(a) claims, the Plaintiffs maintain that the
Aratana Merger Statement and Prospectus negligently, but
misleadingly, omitted that Elanco was engaged in channel

28 No. 23-3061
stuffing. The documents that contained the misleading state-
ments differ, but the reason that they are allegedly misleading
is the same.
In the first batch of omissions, the Plaintiffs assert know-
ing, intentional deceit; in the second, they assert negligent
omission. But the substance of those allegations suggests a
single course of conduct carried out across various medi-
ums—in other words, the misleading omissions are all “part
of a single, coordinated scheme to defraud investors.” Cozza-
relli, 549 F.3d at 629. The same course of conduct is used to
support both the Plaintiffs’ Rule 10b–5 theory and their Secu-
rities Act §§ 11 and 12(a) theories, so the heightened pleading
standard under Rule 9(b) applies. See id.; Rombach, 355 F.3d at
171–72; Rubke, 551 F.3d at 1161.
The fact that the proposed second amended complaint ex-
pressly disavows a fraud theory does not change our analysis.
We look to “the substance of [P] laintiffs’ allegations,” not to
“a conclusory disclaimer.” Cozzarelli, 549 F.3d at 629; see also
Rombach, 355 F.3d at 172 (rejecting an express-disavowal rule);
Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 160–61
(3d Cir. 2004) (same). Despite the disclaimer, Plaintiffs allege
that Elanco’s statements were “false and misleading,” a char-
acterization that is “classically associated with fraud.” Rom-
bach, 355 F.3d at 172. Indeed, the entire basis of this lawsuit is
Elanco’s practice of withholding from investors information
about channel stuffing. Prioritizing substance over form, we
conclude that the “gravamen of the complaint is plainly
fraud.” In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 n.2 (9th
Cir. 1996).
We recognize that the Fifth and Eighth Circuits appear to
disagree with the Second, Third, Fourth, and Ninth Circuits

No. 23-3061 29
on this point. It appears that the Fifth Circuit has held that if
the complaint expressly disavows reliance on a fraud theory,
then Rule 8 applies. See Lonestar Ladies Inv. Club v. Schlotzsky’s
Inc., 238 F.3d 363, 368–69 (5th Cir. 2001). But our case is dis-
tinguishable because the complaint at issue in Lonestar alleged
claims under the Securities Act only. See id. at 367. Here, the
Plaintiffs have asserted claims under both the Securities Act
and the Exchange Act, raising the problem of using the same
course of conduct to prove violations of both Acts. See Rubke,
551 F.3d at 1161.
In NationsMart, t he Eighth Circuit confronted claims un-
der both the Securities Act and the Exchange Act. The Eighth
Circuit appears to have adopted an express disavowal rule:
“[T]he plaintiffs made clear that they did not allege in the con-
text of their § 11 claim that the defendants were liable for
fraudulent or intentional conduct. ... Therefore, their claim
should not have been dismissed for failing to comply with
Rule 9(b).” 130 F.3d at 315. But that statement followed from
the Eighth Circuit’s conclusion that “Rule 9(b) does not apply
to claims under § 11 of the Securities Act” because § 11 claims
do not require proof of fraud. Id. at 314. We implicitly rejected
that position in Kennedy, when we pointed out that if a plain-
tiff charges a fraudulent violation of a statute that does not
require proof of fraud, compliance with Rule 9(b) is still re-
quired. 348 F.3d at 593. Similarly, we do not think that simply
disavowing reliance on a fraud theory is sufficient to remove
a complaint from the auspices of Rule 9(b); instead, we choose
substance over form. See Cozzarelli, 549 F.3d at 629. The point
of Rule 9(b) is to protect defendants from frivolous allegations
of fraud and to “discourage a ‘sue first, ask questions later’
philosophy” when it comes to fraud. Pirelli Armstrong Tire
Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441

30 No. 23-3061
(7th Cir. 2011) (citations omitted). We decline to create a sig-
nificant loophole by permitting Plaintiffs to allege fraud in
substance but avoid Rule 9(b)’s heightened pleading standard
by including formalistic disavowals. See Cozzarelli, 549 F.3d at
629; Cal. Pub. Emps.’ Ret. Sys., 394 F.3d at 160–61.
Plaintiffs do not argue on appeal that their proposed sec-
ond amended complaint satisfies the Rule 9(b) standard, and
we will not craft any such argument on their behalf. See Brad-
ley v. Village of University Park, 59 F.4th 887, 897–98 (7th Cir.
2023). Accordingly, we conclude that the district court both
properly applied Rule 9(b) and correctly dismissed Plaintiffs’
claims under §§ 11 and 12(a)(2) of the Securities Act.
C. Item 303 Claim
Plaintiffs separately allege that Elanco violated Item 303 of
SEC Regulation S-K when it failed to disclose its channel-
stuffing practices in the Aratana Merger Registration State-
ment and Prospectus as a “known trend.” Under § 13(a) of the
Exchange Act, Elanco was required to file periodic informa-
tional statements. See 15 U.S.C. §§ 78m(a)(1), 78l(b)(1). Among
those statements is Item 303. The version in effect at the rele-
vant time required Elanco to disclose “known trends or un-
certainties that have had or [reasonably can be expected to
have] a material favorable or unfavorable impact on net sales
or revenues ... from continuing operations.” 17 C.F.R.
§ 229.303(a)(3)(ii) (2019). The failure to make a disclosure re-
quired by Item 303 can support a claim under § 11 of the Se-
curities Act. See Macquarie Infrastructure Corp. v. Moab Partners,
L.P., 601 U.S. 257, 264–65 (2024); Silverstrand Invs. v. AMAG
Pharms., Inc., 707 F.3d 95, 102 (1st Cir. 2013); see also Stratte-
McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015)
(“[F]ailing to comply with Item 303 by omitting known trends

No. 23-3061 31
or uncertainties from a registration statement or prospectus is
actionable under Sections 11 and 12(a)(2) of the Securities Act
of 1933.”), overruled on other grounds by, Macquarie Infrastruc-
ture Corp., 601 U.S. at 262–63.
It would be futile to grant Plaintiffs leave to amend this
claim. As the Second Circuit has explained, the “trends” that
Item 303 deals with are external trends that might affect a
company’s exposure, not internal business strategies for deal-
ing with those trends. Stratte-McClure, 776 F.3d at 105. In this
case, the channel stuffing practices that Plaintiffs have alleged
appear to be internal sales strategies, not external trends in
the market. We are reluctant to interpret Item 303 in a way
that “requires companies to give competitors notice of propri-
etary strategies and information.” Id. We conclude that Elanco
did not run afoul of Item 303 by failing to disclose that it was
using a “move in” sales strategy that heavily incentivized dis-
tributors to purchase above-average levels of Elanco product.
D. Securities Act Claim Under Section 15 and Exchange
Act Claim Under Section 20(a)
The Exchange Act and the Securities Act create secondary
liability for “control persons”—those who “directly or indi-
rectly” control the alleged violator. See Tellabs I, 437 F.3d at
605 (citation omitted). Secondary liability under § 20(a) of the
Exchange Act depends on whether the Plaintiffs have alleged
an independent violation of the Exchange Act. See 15 U.S.C.
§ 78t(a). “[T]o state a claim under § 20(a), a plaintiff must first
adequately plead a primary violation of securities laws—
here, a violation of § 10(b) and Rule 10b–5.” Pugh v. Tribune
Co., 521 F.3d 686, 693 (7th Cir. 2008) (citation omitted). Given
our conclusion that the Plaintiffs have failed to state a claim
under Rule 10b–5(b), we affirm the dismissal of the § 20(a)

32 No. 23-3061
claim, too. Similarly, liability under § 15 of the Securities Act
depends on a viable claim of securities fraud. See 15 U.S.C.
§ 77o(a); Donohoe v. Consol. Operating & Prod. Corp., 30 F.3d
907, 911 (7th Cir. 1994). Thus, we also affirm dismissal of the
§ 15 claim.
III. C
ONCLUSION
For these reasons, we AFFIRM the district court’s judgment
in all respects.