Defendants-Appellants Kerry Killinger (“Killinger”), Thomas Casey (“Casey”), Deanna Oppenheimer (“Oppenheimer”) and Washington Mutual, Inc. (“WAMU”, collectively, “Defendants”) appeal the district court’s partial denial of their motion to dismiss a securities fraud action brought by Plaintiffs-Appellees South Ferry LP et al. (“South Ferry”), who allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and its underlying regulations, found at Rule 10b-5, 17 C.F.R. § 240.10b-5. Defendants argue that the district court erred by inferring that Defendants had knowledge of “core operations” at WAMU based on their management positions and argue that such an inference does not satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(2) (“PSLRA”). The district court certified for interlocutory appeal its order granting in part and denying in part defendants’ motion to dismiss. We have jurisdiction pursuant to 28 U.S.C. § 1292(b), vacate the district court’s order, and remand.
I
WAMU is a publicly-traded financial services company that serves individuals *780 and small businesses, offering consumer banking, mortgage lending, commercial banking, and other services. Defendants Killinger, Casey, and Oppenheimer all served as officers of WAMU during the class period, with Killinger serving as the Chairman of WAMU’s Board of Directors, President, and CEO, Casey serving as Executive Vice-President and CFO, and Oppenheimer as President of WAMU’s consumer group. Thus, they held not merely nominal but rather key officer positions at relevant times.
Plaintiffs are WAMU shareholders who seek to represent a class of individuals who owned WAMU stock between April 15, 2003 and June 28, 2004. The complaint relates to several related aspects of WAMU’s mortgage lending business. That business involves originating home loans, buying and selling home loans in the secondary markets, mortgage servicing, and providing mortgage-insurance products.
When WAMU originates a home loan, it may later sell that loan to another institution on the secondary market. However, WAMU typically retains the mortgage servicing rights (“MSRs”) for the loans that it sells. The holder of MSRs, WAMU here, provides billing and other services to mortgage customers for the life of the loans even though a different entity may actually own them. MSRs have an independent value to WAMU because WAMU is paid a portion of each loan payment for the services it provides.
This ease relates to two types of risk present in WAMU’s mortgage lending business, both of which are exacerbated by nationwide interest rate fluctuations. The first, “MSR-related risk,” is the risk that WAMU will lose MSR-related revenue due to the pre-payment of loans that it services. MSR-related risk is greatest in an environment in which interest rates are falling, because falling rates make it more likely that borrowers will refinance their loans to take advantage of cheaper financing. When they do so, the original mortgage loan is paid in its entirety and replaced with a lower-interest loan, often from a different lender. Because WAMU’s MSR-related revenue from a given loan comes from the services that it provides over the life of that loan, a loan that is fully repaid at an early date due to refinancing causes WAMU to lose future MSR-related revenue.
The second type of risk, “pipeline risk,” is the risk that WAMU will commit to fund a loan at a certain interest rate only to see market interest rates change by the time the loan is finalized. This may occur whenever interest rates change. Borrowers typically “lock in” an interest rate on their home mortgage loan several weeks before they actually close a mortgage deal. A loan in this lock-in period is referred to as a loan “in the pipeline.” When mortgage rates are falling, borrowers may find that the rate that they have locked in is higher than the prevailing rates at the time of their closing. Those borrowers may abandon a lender with a loan in the pipeline, such as WAMU, to take a mortgage from a different lender at the lower then-current rate. Conversely, when rates are rising, borrowers may lock in rates that turn out to be below market by the time of their closing, leaving WAMU to fund at below market rates all loans that were in the pipeline at the time that rates rose.
To manage MSR-related and pipeline risk, WAMU hedges its expected MSR and mortgage-origination revenues with securities and derivative instruments. In a rising interest rate environment, WAMU also relies on an important “natural hedge” to protect its revenues. When rates are rising, WAMU faces greater pipeline risk *781 because market rates are more likely to exceed the locked-in rates at the time mortgage deals close. However, MSR revenues provide some protection from this pipeline risk, because borrowers are less likely to refinance and pre-pay their mortgages when the rates that would apply to their refinancing loans are higher than the rates they pay on their existing mortgage. Accordingly, WAMU receives more stable MSR-related revenues when it suffers increased pipeline risk. This natural hedge, in theory, allows WAMU to have a more steady revenue stream despite volatility of interest rates.
South Ferry alleges that the individual defendants made materially false or misleading statements concerning WAMU’s ability to manage MSR-related and pipeline risk during the class period. South Ferry also alleges that the individual defendants repeatedly assured investors that the natural hedge and additional securities and derivative hedges would allow WAMU to thrive in an environment where interest rates were increasing, and that the individual defendants assured investors that WAMU had fully integrated the information systems that are central to WAMU’s ability to maintain and update their various hedges in a timely fashion during periods of interest rate volatility. According to South Ferry, WAMU was unprepared for the interest rate volatility that occurred later because it failed to integrate its information systems to permit it to keep a close watch on the hedges that it maintains.
Defendants moved to dismiss South Ferry’s complaint on May 17, 2005, and the district court granted the motion to dismiss as to defendants Chapman, Long-brake, and Vanesek, but denied the motion as to the remaining defendants.
South Ferry LP No. 2 v. Killinger,
The district court denied the motion for reconsideration, but granted the certification motion. In the order granting the certification motion, the district court recognized that “the complaint does rely on circumstantial evidence and an inference of knowledge arising from the connection between Defendants’ job roles and the core operations of the business,” and that “[s]hould the Ninth Circuit rule that the core operations inference is improper, even Defendants’ specific statements indicating first-hand knowledge of WAMU’s techno *782 logical and operational systems may be insufficient to support a strong inference of scienter.” Defendants timely pursued this interlocutory appeal.
II
The decisions of a district court on motions to dismiss are reviewed de novo.
In
re
Silicon Graphics Inc. Sec. Litig.,
III
Under the PSLRA, South Ferry must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). “Under this provision, the mental state required for securities fraud liability is distinct from the level of pleading required to infer that mental state.”
Silicon Graphics,
The United States Supreme Court has recently discussed this scienter requirement, holding in
Tellabs, Inc. v. Makor Issues and Rights, Ltd.,
— U.S. —,
Before the
Tellabs
decision, we construed this pleading standard in light of the applicable substantive legal standard, explaining that, “the PSLRA requires plaintiffs to plead, at a minimum, particular facts giving rise to a strong inference of deliberate recklessness,”
Silicon Graphics,
The district court concluded that the PSLRA scienter standard was satisfied in this case because of alleged public statements by Defendants that WAMU’s information systems were fully integrated and effective at a time when WAMU was suffering technology problems that affected its ability to control MSR related and pipeline risk and hedge effectively. It concluded: “Defendants’ knowledge of this information can be inferred because of the nature of the statements they were making and the nature of the alleged operational problems” because “[i]t may be inferred that the facts critical to a business’s core operations or important transaction are known to a company’s key officers.”
South Ferry,
To evaluate the district court’s judgment, we must consider whether a scienter theory that infers that facts critical to a business’s “core operations” or an important transaction are known to a company’s key officers satisfies the PSLRA’s heightened pleading standard.
We have visited these issues before in several cases, most notably in
Silicon Graphics, In re Vantive Securities Litigation, 283 F.3d
1079, 1087-88 (9th Cir.2002), and
Read-Rite. Silicon Graphics
does not specifically address whether the core operations inference can satisfy the heightened PSLRA pleading standard, but it sets a very high bar for securities plaintiffs under the PSLRA. As we there explained, the PSLRA requires that plaintiffs state with particularity all facts on which their belief of scienter is formed. 15 U.S.C. § 78u—4(b)(1);
Silicon Graphics,
Three years later, in
Vantive,
Finally, in
Read-Rite,
we rejected the notion that “facts critical to a business’s core operations or an important transaction generally are so apparent that their knowledge may be attributed to the company and its key officers” under the PSLRA.
Read-Rite,
Silicon Graphics, Vantive,
and
Read-Rite,
read without reference to
Tel-labs,
will generally prevent a plaintiff from relying exclusively on the core operations inference to plead scienter under the PSLRA.
See Read-Rite,
Consistent with this thematic idea, though without the benefit of later-decided Tellabs, Plaintiffs argue that Read-Rite prevents only total reliance on the core-operations inference absent other particularized supporting allegations. In Plaintiffs view, the core-operations inference can be one relevant part of a complaint that raises a strong inference of scienter.
We conclude that this position is correct in light of
Tellabs.
The Supreme Court’s reasoning in
Tellabs
permits a series of less precise allegations to be read together to meet the PSLRA requirement, the prior holdings of
Silicon Graphics, Vantive,
and
Read-Rite
notwithstanding. Vague or ambiguous allegations are now properly considered as a part of a holistic review when considering whether the complaint raises a strong inference of scienter.
See
A question remains, however, about reliance on the core-operations inference when it is the only basis for scienter in the complaint. Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants’ actual exposure to information, it will usually fall short of the PSLRA standard. In such cases the inference that defendants had knowledge of the relevant facts will not be much stronger, if at all, than the inference that defendants remained unaware. As a general matter, “corporate management’s general aware
*785
ness of the day-to-day workings of the company’s business does not establish scienter&emdash;at least absent some additional allegation of specific information conveyed to management and related to the fraud” or other allegations supporting scienter.
See Metzler Inv. GmbH v. Corinthian Colleges, Inc.,
Allegations regarding management’s role in a corporate structure and the importance of the corporate information about which management made false or misleading statements may also create a strong inference of scienter when made in conjunction with detailed and specific allegations about management’s exposure to factual information within the company. For example, in
In re Daou Systems, Inc.,
In summary, allegations regarding management’s role in a company may be relevant and help to satisfy the PSLRA scienter requirement in three circumstances. First, the allegations may be used in any form along with other allegations that, when read together, raise an inference of scienter that is “cogent and compelling, thus strong in light of other explanations.”
Tellabs,
IV
We pause to consider again the district court’s order. South Ferry contends that the district court had adequate alternative bases for its decision even if the core operations inference was improperly applied. However, the district court made clear in its certification order that it had serious doubts about the viability of the complaint unless South Ferry could rely on the core operations inference:
“It is also apparent that the viability of the core operations inference is central to the outcome of this case .... Should the Ninth Circuit rule that the core operations inference is improper, even Defendants’ specific statements indicating first-hand knowledge of WAMU’s technological and operational systems may be insufficient to support a strong inference of scienter.”
This also suggests that the district court was concerned whether an alternative basis might exist for affirming the complaint if the core operations inference was improper.
Regardless of the district court’s uncertainty as to the outcome under a different standard, the parties urge us to resolve the entirety of the case in this interlocutory appeal. South Ferry urges us to conclude that the complaint contained an alternative basis for a strong showing of scienter, while WAMU urges us to dismiss the entire action if the core operations inference is improper. Although we have jurisdiction to reach the merits of the entire complaint because it was at issue in the certified order, we decline to do so.
The district court and the parties at the time of the certified order were without the benefit of much of the case law underlying this opinion, including the Supreme Court’s guidance on theory in
Tellabs.
We conclude that the district court in the first instance, and with its detailed knowledge of the facts, should have the opportunity to review Defendants’ motion to dismiss under the appropriate standard.
See Tellabs,
JUDGMENT VACATED, ORDER VACATED IN PART AND REMANDED.
Notes
. The PSLRA requires, among other things, that a plaintiff “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2).
. See id. at 985 ("In this case, Brody’s complaint does not include adequate corroborating details. She does not mention, for instance, the sources of her information with respect to the reports, how she learned of the reports, who drafted them, or which officers received them. Nor does she include an adequate description of their contents which we believe- — if they did exist — would include countless specifics regarding ASIC chip shortages, volume shortages, negative financial projections, and so on. We would expect that a proper complaint which purports to rely on the existence of internal reports would contain at least some specifics from those reports as well as such facts as may indicate their reliability.”)
. In
Berson v. Applied Signal Technology, Inc.,