City of Roseville Employees' Retirement System v. Sterling Financial Corp., 691 F. App'x 393

Plaintiff City of Roseville Employees’ Retirement System brought a class action under Section 10(b) and Rule 10b-5 against Sterling Financial, alleging Sterling’s repeated statements that its operations were "safe and sound" were false and misleading.
The complaint relied on a Federal Deposit Insurance Corporation Cease and Desist Order (CDO) and a June 2009 regulatory report to show Sterling engaged in unsafe and unsound banking practices before Sterling’s last statement on July 23, 2009.
Roseville also relied on testimony from a confidential witness (CW4), who allegedly relayed regulators’ findings to Sterling, and alleged circumstantial indicia of scienter (knowledge) including executive firings and executives’ positions.
The district court dismissed the Second Amended Complaint (SAC) under Rule 12(b)(6) for failing to plead falsity and scienter with the particularity required by the PSLRA and Rule 9(b).
On appeal, the Ninth Circuit reviewed de novo and affirmed: the CDO and June 2009 report did not establish falsity as of July 23, 2009, and the complaint failed to raise a "strong inference" of scienter. Because the Section 10(b) claim failed, the Section 20(a) control-person claim also failed.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Falsity of "safe and sound" statements	Statements were false because regulators (CDO and June 2009 report) found unsafe/unsound practices before statements	CDO and report reflect regulators’ beliefs and do not prove Sterling engaged in unsafe practices at time of last statement	Dismissed — plaintiff failed to plead facts showing statements were false as of last statement
Particularity under PSLRA/Rule 9(b)	SAC specified misleading statements and relied on CDO and CW4 to satisfy PSLRA particularity	Defendants argued plaintiff did not plead with required specificity that defendants knew of violations before last statement	Dismissed — pleading did not meet PSLRA/Rule 9(b) particularity requirements
Scienter (intent to deceive)	Circumstantial evidence: regulators’ presence, CW4, executive firings, executives’ roles establish knowledge	Evidence was speculative or equivocal; no pleading that executives received the June 2009 report or had actual knowledge before last statement	Dismissed — plaintiff failed to raise a strong inference of scienter
Section 20(a) control-person liability	Executives controlled Sterling and thus are liable if primary violation exists	No primary Section 10(b) violation was pled, so no control-person liability	Dismissed — because Section 10(b) claim fails, Section 20(a) claim fails

Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (standard for pleading falsity and scienter under PSLRA and Rule 9(b))
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (elements of securities fraud include economic loss and transaction causation)
In re Daou Sys., Inc., 411 F.3d 1006 (9th Cir. 2005) (PSLRA pleading requirements for securities claims)
Reese v. Malone, 747 F.3d 557 (9th Cir. 2014) (statements of legal compliance require documents showing specific violations existing when warranties were made)
Metzler Inv. GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049 (9th Cir. 2008) (requirement of a strong inference of scienter under the PSLRA)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (analysis for determining whether alleged facts give rise to a strong inference of scienter)
Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151 (9th Cir. 1996) (elements of control-person liability under Section 20(a))