FILED
                                                            United States Court of Appeals
                                                                    Tenth Circuit

                                                                    July 19, 2016
                       UNITED STATES COURT OF APPEALS
                                                    Elisabeth A. Shumaker
                                                                    Clerk of Court
                                    TENTH CIRCUIT


 ANTONIO PEDRERA SANCHEZ;
 FERNANDO PEDRERA SANCHEZ;
 HARVEY BABBITT; DANIEL J.
 LUNDBERG,

           Plaintiffs-Appellants,
 v.

 CROCS, INC; RON SNYDER; PETER
 CASE; DELOITTE & TOUCHE;                                No. 11-1116
 RUSS HAMMER; SCOTT                         (D.C. No. 1:07-CV-02351-PAB-KLM)
 CRUTCHFIELD,                                             (D. Colo.)

           Defendants-Appellees,

 and

 MICHAEL C. MARGOLIS; JOHN P.
 MCCARVEL; RAYMOND D.
 CROGHAN; MICHAEL E. MARKS;
 RICHARD L. SHARP; THOMAS J.
 SMACH,

           Consol Defendant-Appellees.


                              ORDER AND JUDGMENT *


Before LUCERO, HARTZ, and HOLMES, Circuit Judges.



       *
             This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. It may be cited,
however, for its persuasive value consistent with Federal Rule of Appellate
Procedure 32.1 and Tenth Circuit Rule 32.1.
      Plaintiffs-Appellants Antonio Pedrera Sanchez, Fernando Pedrera Sanchez, 1

Harvey Babbitt, and Daniel J. Lundberg (collectively, “Plaintiffs”) filed a

putative securities fraud class action complaint against Crocs Inc., several

company officers (collectively, “Crocs Defendants”), and the company’s auditor,

Deloitte & Touche, LLP (“Deloitte”), alleging that various company reports

fraudulently represented the value of Crocs’s inventory and the adequacy of its

internal controls over financial reporting. The district court dismissed the

complaint for failure to state a claim, and Plaintiffs appealed. The National

Roofing Industry Pension Plan (“National Roofing”), which pursued a separate

appeal after the district court denied its motion for appointment as lead plaintiff,

see Sanchez v. Crocs, Inc., No. 11-1142 (10th Cir., filed Apr. 5, 2011), filed a

motion to dismiss Plaintiffs’ appeal. While the case was pending before our

court, Plaintiffs reached a settlement with the Crocs Defendants; thus Deloitte is

the only remaining defendant in this case. National Roofing also agreed to

voluntarily dismiss its own appeal in Case No. 11-1142 with prejudice.

      Exercising jurisdiction under 28 U.S.C. § 1291, we now deny as moot

National Roofing’s motion to dismiss and affirm the district court’s dismissal of

Plaintiffs’ complaint.


      1
             At times, when referring only to Antonio and Fernando Sanchez, we
follow the convention of the parties and the district court and identify them as the
“Sanchez Group.”

                                          2
                                          I

                                         A2

      Crocs, Inc. is a Colorado-based shoe manufacturer. When it went into

business in 2002, it sold only one product, in six different colors: “colorful shoes

with holes in them made of a closed cell resin.” Aplt.’s App. at 45 (Compl., filed

Dec. 31, 2008). The shoe proved successful, and the company rapidly grew: by

2006, it had expanded its product line to include a variety of footwear, apparel,

accessories, and sports equipment. Its products were sold in over 11,000

domestic retail store locations and over 8,000 international retail stores. It also

ran manufacturing facilities, or contracted with third-party manufacturers, all over

the world. “The majority of its footwear” was manufactured by a Chinese

company. 

      Yet despite its expansion, according to the complaint, Crocs continued to

use “archaic, error-prone Excel spreadsheets to track inventory and forecast

sales,” instead of adopting “the modern standard of using appropriate inventory

control software which provides a real-time, up-to-the-minute picture” of a

company’s inventory. 

Additionally, the same barcode was assigned to



      2
             At the motion to dismiss stage, “we accept the well-pleaded
allegations of the complaint” as true and we recite the facts in the light most
favorable to the plaintiffs. Nakkhumpun v. Taylor, 

, 1146 (10th
Cir. 2015); accord In re Gold Res. Corp. Sec. Litig., 

, 1108 (10th
Cir. 2015).

                                          3
multiple products, and there were no written company procedures or any formal

operations manual.

      This primitive system created a host of problems with the company’s

inventory. Because its inventory data was frequently wrong, the company

continually “bulk” ordered various styles, colors, and sizes of shoes, many of

which did not sell. 

In fact, some of the style/color/size combinations

that the company had manufactured “guaranteed the shoes would never sell, e.g.,

pallets of size 13 shoes in fuchsia or a color called ‘Butter’ that was aimed at

women.” 

Further, ten thousand pairs of unsold size 13 shoes in “a light

green color called Sage” were found in a warehouse in Aurora, Colorado. 

At the same time, the company frequently ran short of its best-selling shoes,

and could not keep up with the demand for those models. Moreover, “pulling

together an order to send to a retailer was extremely difficult because no one had

reliable data on inventory, and the inventory would often be far away from the

retailer who sought it.” 

As a result, Crocs often sent retailers the

wrong orders. Crocs also ordered its Chinese manufacturing facility to keep

producing up to 1.5 million shoes a week in order to combat counterfeit Crocs

shoes that were being sold on the black market. In many instances, the Chinese

factories produced inferior products, resulting in a rise in shoe returns.

      Because of these alleged missteps, Crocs’s inventory “increased four-fold

from August to December 2006, and increased the same amount again in 2007

                                          4
through the end of the third quarter, and then again in the fourth quarter of 2007

and the first quarter of 2008.” 

The company’s management was

apparently aware that its inventory was ballooning; this issue appears to have

been discussed in internal communications. But although management recognized

that demand for the shoes was decreasing, it anticipated that demand would

rebound, and therefore the company sustained its high production level despite

the inventory build-up. The company’s antiquated data management system was

also brought to management’s attention; for example, in September 2007, soon

after he joined the company, the newly-hired head of information technology sent

the company’s Chief Operating Officer a highly critical report detailing flaws in

the data management system. 3

      Despite these problems, Crocs valued its inventory at cost on both the 2006

and 2007 Form 10-K’s it filed with the Securities and Exchange Commission

(“SEC”). 4 Deloitte, the company’s auditor, issued unqualified audit opinions in

both years. On the 2006 10-K, for instance, it stated:




      3
              While the company did eventually purchase better software, it was
not used for inventory control until 2008. Further, although the company
conducted a manual count of inventory at the end of 2007, the complaint alleges
that management ordered trucks filled with unsold shoes to remain in transit
during the inventory and shipped approximately 400,000 shoes to a European
facility in order to avoid including them in the inventory.
      4
           A Form 10-K is a comprehensive financial report filed annually with
the SEC. See 15 U.S.C. § 78m; 17 C.F.R. § 249.310.

                                          5
             We conducted our audits in accordance with the standards of the
             Public Company Accounting Oversight Board (United States).
             Those standards require that we plan and perform the audit to
             obtain reasonable assurance about whether the financial
             statements are free of material misstatement. The Company is
             not required to have, nor were we engaged to perform, an audit
             of its internal control over financial reporting. Our audits
             included consideration of internal control over financial reporting
             as a basis for designing audit procedures that are appropriate in
             the circumstances, but not for the purpose of expressing an
             opinion on the effectiveness of the Company’s internal control
             over financial reporting. Accordingly, we express no such
             opinion. . . .

             In our opinion, such consolidated financial statements present
             fairly, in all material respects, the financial position of CROCS,
             Inc. and subsidiaries as of December 31, 2006 and 2005, and the
             results of their operations and their cash flows for each of the
             three years in the period ended December 31, 2006 in conformity
             with accounting principles generally accepted in the United
             States of America.

In its 2007 audit opinion, Deloitte not only expressed its

unqualified opinion regarding Crocs’s financials, but also with respect to the

company’s internal controls, stating:

             In our opinion, such consolidated financial statements present
             fairly, in all material respects, the financial position of CROCS,
             Inc. and subsidiaries as of December 31, 2007 and 2006, and the
             results of their operations and their cash flows for each of the
             three years in the period ended December 31, 2007, in conformity
             with accounting principles generally accepted in the United
             States of America. . . .

             We have also audited, in accordance with the standards of the
             Public Company Accounting Oversight Board (United States), the
             Company’s internal control over financial reporting as of
             December 31, 2007, based on the criteria established in Internal
             Control-Integrated Framework issued by the Committee of

                                             6
              Sponsoring Organizations of the Treadway Commission and our
              report dated February 29, 2008 expressed an unqualified opinion
              on the Company’s internal control over financial reporting.

      Starting in late 2007, however, the company began to publicly disclose

issues with its inventory and distribution. For example, on October 31, 2007,

Crocs partially revealed its build-up of inventory, causing its stock price to drop

thirty-six percent in a single day. On April 14, 2008, Crocs announced that its

inventory had increased between five and ten percent in three months, triggering a

forty-five percent fall in the stock’s price. Finally, in November 2008, the

company wrote down the value of its inventory by over seventy million dollars.

                                           B

      In November 2007, a year prior to the write-down, several plaintiffs filed

securities fraud class action lawsuits against the company. These complaints

were consolidated, and the Sanchez Group, National Roofing, and others moved

to be appointed lead plaintiff. See 15 U.S.C. § 78u–4(a)(3)(B)(i) (providing for

the appointment of a lead plaintiff “capable of adequately representing the

interests of class members”). The district court appointed the Sanchez Group as

lead plaintiff, finding that it had the largest financial interest based on its loss of

$34.5 million on contracts for difference (“CFDs”) that it had purchased through

a bank in Denmark. See 

(creating a rebuttable


                                           7
presumption that the “most adequate plaintiff” is the one, inter alia, with “the

largest financial interest in the relief sought by the class”). 5

       The Sanchez Group then filed the complaint at issue in this case. In doing

so, it added as named plaintiffs Harvey Babbitt and Daniel J. Lundberg, both of

whom lost money on Crocs common stock that they owned. 6 The complaint

alleged, inter alia, that Crocs, its management, and Deloitte had violated § 10(b)

of the Securities Exchange Act (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule

10b-5, 17 C.F.R. § 240.10b-5. According to Plaintiffs, Crocs knew well before

2008 that the “bulk” of its inventory “consisted of unsalable or unsuitable shoes”

that could not be sold at cost. Aplt.’s App. at 76. But, instead of disclosing this

problem, it valued its inventory at cost on the 2006 and 2007 Form 10-Ks. By

doing so, according to the complaint, Crocs materially overstated the value of its

inventory, in contravention of generally accepted accounting principles

(“GAAP”), under which companies should write down inventory when “there is



       5
            These CFDs, entered into between the Sanchez Group and the Danish
bank, were matched to Crocs common stock purchased by a broker in the United
States. The CFDs were “priced based on the purchase and sale price for matching
underlying shares of Crocs”; thus, “the price of [the Sanchez Groups’] Crocs
CFDs was identical to the contemporaneously quoted price of Crocs common
stock.” Nat’l Roofing App. at 125 (Decl. of Saxo Bank A/S, filed Jan. 28, 2008).
See generally Tim Bennett, CFDs Explained, M ONEY W EEK (Jan. 29, 2013)
(“CFDs are similar to spread betting in that you can bet on stock price movements
without having to actually own the shares.”).
       6
             The complaint defined the putative class as all persons or entities
that purchased Crocs shares between April 2, 2007 and April 14, 2008.

                                             8
evidence that the utility of goods, in their disposal in the ordinary course of

business, will be less than cost, whether due to physical deterioration,

obsolescence, changes in price levels, or other causes.” 

(quoting

Accounting Research Bulletin (“ARB”) No. 43).

      Plaintiffs further averred that, as the company’s auditor, Deloitte was

complicit in the fraud. “By virtue of its relationship with CROCS and the nature

of the auditing and tax services” it rendered, “and the fact that Deloitte’s

personnel were regularly present” at Crocs, the auditor had “access to confidential

internal corporate, financial, operating and business information.” 

Based on this access, the complaint claims, Deloitte knew about various warning

signs, or recklessly disregarded them by failing to exercise professional

skepticism or obtain sufficient competent evidential matter. Specifically, Deloitte

allegedly either knew of, or turned a blind eye to, “red flags” regarding the

following: Crocs’s flawed data management system and inventory reporting,

including Crocs’s use of “error-prone Microsoft Excel spreadsheets” to monitor

its inventory, 

the lack of “formal written operating procedures or

accounting processes,” 

increase in Crocs’s inventory, and the

existence of several “risk factors,” such as the company’s rapid growth and

expansion across international boundaries, 

      The complaint alleges that these flaws were obvious. For example, the

problems with Crocs’s data management system were “so apparent[] that the head

                                           9
of CROCS IT identified significant problems within months of being hired.” 

Yet, despite these warning signs, “which should have raised questions in

the auditors’ minds” about the value of Crocs’s inventory and its internal

controls, 

Deloitte issued unqualified audit opinions regarding Crocs’s

financial statements and, in the case of the 2007 audit, with respect to its internal

controls over financial reporting as well. By knowingly or recklessly

disregarding these red flags and failing to adequately investigate Crocs’s internal

controls, the complaint claims that Deloitte did not, in fact, conduct its audit in

compliance with generally accepted accounting standards (“GAAS”).

      The defendants moved to dismiss the complaint for failure to state a claim,

and the district court granted their motion. With respect to Deloitte—the only

remaining defendant on appeal—the district court held that the complaint failed to

sufficiently allege scienter. It found that allegations of Deloitte’s “access to

confidential internal . . . information” and “the existence of ‘red flags’” were too

general, and “could be charged against any auditor in the context of an audited

company’s alleged fraudulent financial filings.” 

(Order on Mots. to

Dismiss, filed Feb. 28, 2011). It concluded that Plaintiffs had not specifically

alleged that Deloitte had “actual knowledge of the alleged false or omitted facts,”




                                          10
and thus, the complaint at most established negligence on the auditor’s part.

7

       Plaintiffs then appealed the dismissal of their complaint, in Case No. 11-

1116, and National Roofing appealed the district court’s lead plaintiff selection in

Case No. 11-1142. 8 National Roofing also moved to dismiss the appeal in Case

No. 11-1116 for lack of jurisdiction. However, in February 2012, Plaintiffs and

the Crocs Defendants agreed to a proposed settlement. We issued a limited

remand in both appeals to allow the district court to consider the settlement, and

the district court issued its final approval in September 2014. It thus dismissed

the action against the Crocs Defendants “in its entirety with prejudice and on the

merits.” Dist. Ct. Doc. 222, at 15 (Final J. and Order, filed Sept. 19, 2014).

       After the district court entered its final judgment, National Roofing

stipulated to a voluntary dismissal of its appeal in Case No. 11-1142 with

prejudice. In Case No. 11-1116, only the claims against Deloitte are still before

       7
              National Roofing also moved for a reconsideration of the lead
plaintiff selection, arguing that the Sanchez Group lacked standing in light of the
Supreme Court’s decision in Morrison v. National Australia Bank Ltd., which
held that the Exchange Act only reaches deceptions “in connection with the
purchase or sale of a security listed on an American stock exchange, and the
purchase or sale of any other security in the United States.” 

, 273
(2010). In National Roofing’s view, the CFDs purchased by the Sanchez Group
did not fall within § 10(b)’s purview under Morrison. The district court denied
National Roofing’s motion as moot.
       8
             We denied National Roofing’s motion to consolidate the two appeals
because the parties specifically wished to file separate briefs. However, we did
coordinate the briefing schedule for both cases.

                                         11
us. Additionally, National Roofing’s motion to dismiss Case No. 11-1116 for

lack of jurisdiction remains before the court.

                                         II

      At the outset, we must determine whether we need to address National

Roofing’s motion to dismiss Plaintiffs’ appeal for lack of jurisdiction. In this

motion, National Roofing claims that “the Sanchez Group lacks standing to

pursue the appeal.” Mot. to Dismiss, No. 11-1116, at 1 (10th Cir., filed May 11,

2011). The alleged standing deficiency National Roofing identifies in its motion

rests on the Supreme Court’s decision in Morrison v. National Australia Bank

Ltd., 

(2010). There, the Court held that § 10(b) of the Exchange

Act “reaches the use of a manipulative or deceptive device or contrivance only in

connection with the purchase or sale of a security listed on an American stock

exchange, and the purchase or sale of any other security in the United 

. National Roofing claims that because the Sanchez Group’s

CFDs are not listed on a domestic exchange and were purchased abroad, the

Sanchez Group “lacked standing under Morrison to pursue § 10(b) claims in a

United States court for its losses on investments in foreign CFDs.” Mot. to

Dismiss at 13.

      National Roofing filed this motion in Case No. 11-1116 after the other

parties opposed its suggestion that Case No. 11-1142—which raises the identical

Morrison-based argument for dismissal—be heard and decided first. The motion

                                         12
to dismiss was thus a vehicle to raise in this case the same issue presented in Case

No. 11-1142. National Roofing’s primary motivation for filing the motion was its

“concern[] that the Sanchez Group w[ould] attempt to settle its claims with

defendants.” Mot. to Dismiss at 2.

      But since National Roofing filed its motion to dismiss, Plaintiffs have in

fact settled with most of the defendants, and National Roofing has stipulated to a

voluntary dismissal of its own appeal in Case No. 11-1142 with prejudice.

“[A] stipulation of dismissal with prejudice . . . normally constitutes a final

judgment on the merits . . . .” Astron Indus. Assocs., Inc. v. Chrysler Motors

Corp., 

, 960 (5th Cir. 1968); accord Norfolk S. Corp. v. Chevron

U.S.A., Inc., 

, 1288 (11th Cir. 2004); United States v. Cunan, 

, 114 (1st Cir. 1998). By agreeing to voluntarily dismiss its related

appeal—which raised the same argument presented in the motion to

dismiss—with prejudice, National Roofing obtained “a complete adjudication on

the merits” of its claim, Harrison v. Edison Bros. Apparel Stores, Inc., 

, 534 (4th Cir. 1991), and removed itself from the litigation.

      As such, National Roofing no longer has any “personal stake” in the

present dispute, Genesis Healthcare Corp. v. Symczyk, --- U.S. ----, 

, 1530 (2013), and because it lacks “a legally cognizable interest in the

outcome” of this appeal, we must deny its motion to dismiss the appeal as moot,

Already, LLC v. Nike, Inc., --- U.S. ----, 

, 726 (2013) (quoting

                                          13
Murphy v. Hunt, 

, 481 (1982) (per curiam)); see Genesis Healthcare

(“In order to invoke federal-court jurisdiction, a

plaintiff must demonstrate that he possesses a legally cognizable interest, or

‘personal stake,’ in the outcome of the action.” (quoting Camreta v. Greene, 

, 701 (2011))); see also Kan. Judicial Review v. Stout, 

,

1245 (10th Cir. 2009) (“If, during the pendency of the case, circumstances change

such that the plaintiff’s legally cognizable interest in a case is extinguished, the

case is moot, and dismissal may be required.”).

      Although National Roofing’s motion to dismiss is moot because National

Roofing does not have a conceivable basis at this juncture to be heard in this

appeal, we nevertheless must pause and focus on the substance of its motion

because it purports to raise a jurisdictional issue—namely, that the Sanchez

Group “lacked standing under Morrison to pursue § 10(b) claims” because its

losses arose from foreign securities. Mot. to Dismiss at 13. We have an

“independent obligation to determine whether subject-matter jurisdiction exists,”

Devon Energy Prod. Co. v. Mosaic Potash Carlsbad, Inc., 

, 1208

n.10 (10th Cir. 2012) (quoting 1mage Software, Inc. v. Reynolds & Reynolds Co.,

, 1048 (10th Cir. 2006)), even where a jurisdictional challenge is

raised in a filing that is not properly before the court, see United States v. Rubio,

, 711 n.1 (10th Cir. 2000) (“Although the motion was untimely, we

cannot ignore the jurisdictional issue because we have an independent obligation

                                          14
to examine our subject matter jurisdiction.”), overruled on other grounds by

United States v. Hahn, 

(10th Cir. 2004) (en banc) (per curiam).

      Thus, while we do not resolve the motion itself, we do take notice of the

issue it raises—viz., whether the Supreme Court’s decision in Morrison deprives

the Sanchez Group of standing to sue—and must assess whether Morrison in fact

impacts our jurisdiction over this case. In short, it does not. Although National

Roofing casts its Morrison-based argument as jurisdictional, the Morrison Court

explicitly held that the extraterritorial reach of § 10(b) is a merits issue. See

(observing that “to ask what conduct § 10(b) reaches is

to ask what conduct § 10(b) prohibits, which is a merits question,” and

concluding that the district court “had jurisdiction . . . to adjudicate the question

whether § 10(b) applie[d] to [the defendant’s extraterritorial] conduct” (emphasis

added)). We have similarly recognized that, in light of Morrison, “the extent to

which a statute applies extraterritorially proceeds exclusively as a merits issue,

not a question of jurisdiction.” CGC Holding Co. v. Broad & Cassel, 

, 1096 (10th Cir. 2014); accord Absolute Activist Value Master Fund Ltd. v.

Ficeto, 

, 67 (2d Cir. 2012).

      Assured that Morrison’s holding does not implicate our jurisdiction, we do

not pursue this merits-based argument any further because it is raised by a party

with no “legally cognizable interest” in its resolution. Already, 

726. We are satisfied that subject-matter jurisdiction exists, 9 and now proceed to

the merits of Plaintiffs’ appeal.

                                          III

      Plaintiffs challenge the district court’s dismissal of their securities fraud

claim against Deloitte. They argue that the complaint adequately sets out the

false and misleading statements made by Deloitte in the 2006 and 2007 Form 10-

Ks, 10 and that their allegations give rise to a strong inference of scienter against

      9
              Plaintiffs have sufficiently alleged the elements of standing. To
demonstrate standing, a plaintiff must establish “(1) an ‘injury in fact,’ (2) a
sufficient ‘causal connection between the injury and the conduct complained of,’
and (3) a ‘likel[ihood]’ that the injury ‘will be redressed by a favorable
decision.’” Colo. Outfitters Ass’n v. Hickenlooper, --- F.3d ----, 

, at *2 (10th Cir. Mar. 22, 2016) (alteration in original) (quoting Susan B.
Anthony List v. Driehaus, --- U.S. ----, 

, 2341 (2014)). Here, the
Sanchez Group has alleged a $34.5 million loss on its CFDs—which are tied to
underlying Crocs common stock—as a result of the alleged misstatements of
Crocs, its management, and Deloitte. Messrs. Babbitt and Lundberg, the other
named plaintiffs, similarly allege that they suffered losses on Crocs stock they
purchased on the NASDAQ stock exchange as a result of this purportedly
fraudulent conduct. “[A]t the pleadings stage, ‘the burden imposed’ on plaintiffs
to establish standing ‘is not onerous,’” NB ex rel. Peacock v. District of
Columbia, 

, 82 (D.C. Cir. 2012) (quoting Equal Rights Ctr. v. Post
Props., Inc., 

, 1141 n.3 (D.C. Cir. 2011)), and Plaintiffs satisfy the
minimum requirements, see State of Utah v. Babbitt, 

, 1204 (10th
Cir. 1998) (“[A]t the pleading stage, ‘general factual allegations of injury
resulting from the defendant’s conduct may suffice.’” (quoting Lujan v. Defs. of
Wildlife, 

, 561 (1992))).
      10
              Deloitte claims that Plaintiffs have waived any claim based on the
2007 financial statements because the cause of action section of their complaint
does not mention the 2007 10-K, and because Plaintiffs failed to respond to this
argument when Deloitte raised it before the district court. We are not persuaded.
First, while the cause of action section of the complaint does not specifically
                                                                      (continued...)

                                          16
Deloitte. We disagree. Below, after elaborating on the elements of a § 10(b)

securities-fraud claim and a plaintiff’s burden at the pleadings stage, we conclude

that the complaint founders on the heightened pleading standard for scienter

imposed by securities law.

                                         A

      Under § 10(b) of the Exchange Act, it is illegal to “use or employ, in

connection with the purchase or sale of any security . . . any manipulative or

deceptive device or contrivance in contravention of such rules and regulations as

the [SEC] may prescribe.” 15 U.S.C. § 78j(b). Rule 10b-5, in turn, prohibits the

making of “any untrue statement of a material fact” or the omission of “a material

fact necessary in order to make the statements made . . . not misleading . . . in


      10
        (...continued)
mention the 2007 10-K, it does incorporate paragraphs contained elsewhere in the
complaint that do explicitly allege that the 2007 10-K was false and misleading.
Second, in responding to the motions to dismiss filed by the Crocs Defendants
and Deloitte, Plaintiffs discussed both the 2006 and 2007 10-Ks, stating, for
example, that Deloitte “provided unqualified Independent Auditors’ Reports
which were included in Crocs’ 2006 and 2007 10Ks [and,] [i]n rendering its false
audit opinions, Deloitte ignored the inflated value of the growing unsalable
inventory.” Dist. Ct. Doc. 121, at 8 (Pls.’ Resp. to Defs.’ Mots. to Dismiss, filed
June 4, 2009) (citations omitted). The district court also interpreted the
complaint’s allegations against Deloitte to encompass both the 2006 and 2007
audit opinions.

       Thus, it is evident that Plaintiffs neither intentionally relinquished, nor
failed “to make the timely assertion of,” their argument regarding Crocs’s 2007
10-K. United States v. Cruz-Rodriguez, 

, 1183 (10th Cir. 2009)
(quoting United States v. Olano, 

, 733 (1993)). That is, they have
neither waived nor forfeited any claim with respect to the 2007 audit opinion.

                                         17
connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5. A

plaintiff alleging a violation of § 10(b) and Rule 10b-5 must demonstrate that a

defendant’s communications (1) “contained false or misleading statements of

material fact”; (2) “related to the purchase or sale of a security”; (3) “were made

with intent to defraud investors or conscious disregard of a risk that shareholders

would be misled”; (4) “led to reliance by the plaintiff”; and (5) “caused the

plaintiff’s loss.” Nakkhumpun v. Taylor, 

, 1146–47 (10th Cir.

2015); accord In re Gold Res. Corp. Sec. Litig., 

, 1108 (10th Cir.

2015).

         The scienter element of a § 10(b) claim may be satisfied by allegations of

either intent or recklessness. “Intentional misconduct is easily identified since it

encompasses deliberate illegal behavior.” City of Phila. v. Fleming Cos., 

, 1260 (10th Cir. 2001) (quoting Novak v. Kasaks, 

, 308

(2d Cir. 2000)); accord Gould v. Winstar Commc’ns, Inc., 

, 158 (2d

Cir. 2012). Recklessness involves “conduct that is an extreme departure from the

standards of ordinary care, and which presents a danger of misleading buyers or

sellers that is either known to the defendant or is so obvious that the actor must

have been aware of it.” 

(emphases added) (quoting

Anixter v. Home-Stake Prod. Co., 

, 1232 (10th Cir. 1996)); accord

Anderson v. Spirit AeroSystems Holdings, Inc., No. 15-3142, --- F.3d ----, 

, at *2 (10th Cir. July 6, 2016) (quoting In re Level 3 Commc’ns, Inc.


                                          18
Sec. Litig., 

, 1343 n.12 (10th Cir. 2012)); Edward J. Goodman Life

Income Tr. v. Jabil Circuit, Inc., 

, 790 (11th Cir. 2010).

      Generally, recklessness requires that a defendant have “knowledge of a fact

that was so obviously material that the defendant must have been aware both of

its materiality and that its non-disclosure would likely mislead investors.”

; see also Weinstein v. McClendon, 

,

1113 (10th Cir. 2014) (noting that the key determinant of scienter is “whether

Defendants knew that not disclosing the [underlying facts] posed substantial

likelihood of misleading a reasonable investor” (quoting 

) (alteration in original)). Thus, recklessness involves conscious misconduct;

negligence, and even gross negligence, fall “below the high threshold for liability

under Section 10(b) of the Exchange Act.” Dronsejko v. Thornton, 

,

668 (10th Cir. 2011); see South Cherry St., LLC v. Hennessee Grp. LLC, 

, 109 (2d Cir. 2009) (defining recklessness as “a state of mind approximating

actual intent, and not merely a heightened form of negligence” (quoting 

); In re Comshare Inc. Sec. Litig., 

, 550 n.7 (6th Cir.

1999) (describing recklessness as “far from negligence and closer to a ‘lesser

form of intent’” (quoting Sanders v. John Nuveen & Co., 

, 793 (7th

Cir. 1977))).




                                         19
                                           B

      Our review of the district court’s dismissal under Federal Rule of Civil

Procedure 12(b)(6) is de novo. See 

. While, at

this stage of the litigation, “we must accept all the well-pleaded allegations of the

complaint as true and must construe them in the light most favorable to the

plaintiff,” Gold Res. 

(quoting Grossman v. Novell, Inc.,

, 1118 (10th Cir. 1997)), a securities-fraud plaintiff’s burden at the

pleadings stage is nevertheless a heavy one, see In re Level 3 Commc’ns, Inc. Sec.

.

      First, Federal Rule of Civil Procedure 9(b) requires that “circumstances

constituting fraud” be alleged with particularity. Fed. R. Civ. P. 9(b); see

. Second, the Private Securities Litigation Reform

Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1), (2), has created a heightened pleading

standard for both the falsity and scienter elements of a § 10(b) action. See

Anderson, 

, at *2 (“[T]he [PSLRA] creates a heightened duty

for the plaintiffs to ‘state with particularity facts giving rise to a strong inference

that the defendant[s] acted with the required state of mind.’” (third alteration in

original) (emphasis added) (quoting 15 U.S.C. § 78u–4(b)(2)(A))). Under the

PSLRA, to be deemed legally sufficient, the complaint must “specify each

statement alleged to have been misleading, the reason or reasons why the

statement is misleading, and, if an allegation regarding the statement or omission

                                          20
is made on information and belief, the complaint shall state with particularity all

facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1)(B). To

demonstrate scienter, the plaintiff must, “with respect to each act or omission

alleged . . . , state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.” 

accord

Anderson, 

, at *2.

       In assessing the strength of an inference of scienter, a court must look at

“the complaint in its entirety,” 

; accord Matrixx

Initiatives, Inc. v. Siracusano, 

, 48 (2011); Anderson, 

, at *2, and “engage in a comparative evaluation; it must consider, not

only inferences urged by the plaintiff, . . . but also competing inferences

rationally drawn from the facts alleged” in order to determine whether the

inference of fraudulent intent is “cogent and at least as compelling as any

opposing inference of nonfraudulent intent,” Tellabs, Inc. v. Makor Issues &

Rights, Ltd., 

, 314 (2007) (emphasis added); accord Anderson, 

, at *2; see also Adams v. Kinder-Morgan, Inc., 

, 1105

(10th Cir. 2003) (“We . . . understand a ‘strong inference’ of scienter to be a

conclusion logically based upon particular facts that would convince a reasonable

person that the defendant knew a statement was false or misleading.”).




                                            21
                                          C

      In their complaint, Plaintiffs allege that Deloitte knew about or recklessly

disregarded numerous red flags which “should have raised questions in the

auditors’ minds and led them to procure additional evidential matter.” Aplt.’s

App. at 197. These red flags included Crocs’s archaic, error-prone system for

keeping track of its inventory, the build-up of its inventory, the existence of

defective or unsalable shoes in its inventory, and the broader context of its rapid

growth and international expansion. Yet, as we explain below, the complaint

insufficiently demonstrates that Deloitte knew about these red flags, or that the

warning signs were so obviously indicative of fraud that Deloitte’s failure to see

them as such constituted willful blindness. Thus, Plaintiffs have not established a

strong inference that Deloitte acted recklessly, and consequently, their § 10(b)

claim fails.

                                          1

      An inference of recklessness may be justified where the defendant was

“aware of, but failed to investigate, certain ‘red flags’ that plainly indicated

misconduct was afoot.” In re Raytheon Sec. Litig., 

, 154 (D.

Mass. 2001) (emphasis added); see, e.g., N.M. State Inv. Council v. Ernst &

Young LLP, 

, 1098 (9th Cir. 2011) (discerning recklessness where

the auditor knew an options grant was suspicious based on specific email

exchanges recited in the complaint, yet failed to investigate further); AUSA Life

                                          22
Ins. Co. v. Ernst & Young, 

, 221 (2d Cir. 2000) (concluding that the

auditor was culpable, even if it did not intend to defraud investors, where it knew

of the company’s accounting abuses but nonetheless “forged ahead” with issuing

unqualified opinions); see also Stephenson v. PricewaterhouseCoopers, LLP, 

, 574 (S.D.N.Y. 2011) (“A defendant has reason to look where it

is aware of red flags . . . .” (emphasis added)).

      In contrast, the “mere fact that an auditor missed what a plaintiff labels

warning signs gives little support on its own to the conclusion that an auditor was

reckless, much less wilfully blind.” In re Stone & Webster, Inc., Sec. Litig., 

, 214 (1st Cir. 2005) (emphasis added); see Ziemba v. Cascade Int’l, Inc.,

, 1210 (11th Cir. 2001) (stating that, without allegations that the

auditor had “actual awareness . . . of any fraud,” missed red flags at best

supported an inference of gross negligence). In short, “an unseen red flag cannot

be heeded.” 

.

      Here, the sole alleged basis for Deloitte’s knowledge of the red flags is “the

fact that Deloitte’s personnel were regularly present at” Crocs and had “access to

confidential internal corporate, financial, operating and business information.”

Aplt.’s App. at 164. But generalized averments that an auditor “had continual

access to, and knowledge of, [the company’s] confidential financial and business

information” are “insufficiently concrete” to demonstrate that the auditor was

aware of red flags. PR Diamonds, Inc. v. Chandler, 

, 696 (6th Cir.

                                          23
2004), abrogated on other grounds by Matrixx Initiatives, 

–50; see DSAM Global Value Fund v. Altris Software, Inc., 

, 390

(9th Cir. 2002) (noting that “access to the documents” revealing improper

accounting practices does not “strongly compel” an inference of fraudulent

scienter “as opposed to ordinary carelessness”); 

(“[P]ossession of documents and other information which . . . should have

revealed” red flags “[a]t most . . . raise[s] an inference of gross negligence, but

not fraud.”); cf. Anderson, 

, at *9 (refusing to infer scienter by

“top executives” who “personally monitored” relevant projects because “[w]e

cannot infer scienter based only on a defendant’s position in a company or

involvement with a particular project”).

      In order to show that Deloitte was aware of the red flags, Plaintiffs needed

to “specifically identify the reports or statements” Deloitte had access to that

contained these warning signs. Teamsters Local 445 Freight Div. Pension Fund

v. Dynex Capital Inc., 

, 196 (2d Cir. 2008) (quoting 

); see Iowa Pub. Emp.’s Ret. Sys. v. Deloitte & Touche LLP, 

321, 337 (S.D.N.Y. 2013) (“To survive Defendant’s motion, IPERS would

have had to . . . show that D & T had access to the pertinent records at the stated

time . . . .”), aff’d, 558 F. App’x 138 (2d Cir. 2014). Yet the complaint does not

identify any particular document reviewed by Deloitte that would have alerted the

auditor to the fact that Crocs’s day-to-day inventory tracking system was error-

                                           24
prone, that the company’s inventory was growing rapidly, or that the inventory

consisted of largely unsalable items. Cf. N.M. State Inv. 

(identifying certain email exchanges that revealed the suspiciousness of the

company’s stock options grant).

       In the absence of such specific allegations, the complaint does not

demonstrate that Deloitte was, in fact, aware of the red flags central to Plaintiffs’

claim. If Deloitte did not know about the vulnerabilities in Crocs’s inventory

management system, it could not have known or recklessly ignored the risk that

withholding this information would render its unqualified audit opinions false or

misleading. See 

(stating that recklessness may be

found where the “danger of misleading buyers or sellers . . . is . . . known to the

defendant”). Thus, these unseen warning signs, while conceivably indicative of

negligence on Deloitte’s part, fall short of establishing the kind of intentional or

conscious misconduct necessary to make out a viable § 10(b) claim.

                                           2

      Plaintiffs alternatively argue that even if Deloitte did not actually know of

the red flags, the auditor’s conduct was nonetheless reckless because these

warning signs would be “clearly evident to any auditor performing its duties.”

Aplt.’s Supp. Br. at 12 (citation omitted); see also Aplt.’s Reply Br. to Deloitte at

17 (“[T]he fraud at Crocs was so serious and pervasive that Deloitte either knew

about it, or recklessly ignored the clear signs of it.” (emphasis added)).

                                          25
      Where warning signs are “so irregular as to put an auditing company on

notice for fraud,” Garfield v. NDC Health Corp., 

, 1269 (11th Cir.

2006), we may infer that the “danger of misleading buyers or sellers . . . is so

obvious that the [auditor] must have been aware of it,” 

(quoting 

); see 

(stating that

recklessness may be established where the defendant “ignored obvious signs of

fraud” (quoting 

)); see also Air Wis. Airlines Corp. v.

Hoeper, --- U.S. ----, 

, 862 (2014) (stating, in interpreting “reckless

disregard” in another statute, that a speaker “cannot avoid liability . . . by sticking

its head in the sand to avoid ‘actual knowledge’ that its statements are false”).

Such an inference may be warranted where an auditor’s “accounting practices

were so deficient that the audit amounted to no audit at all, or an egregious

refusal to see the obvious.” DSAM Global Value 

(quoting

In re Software Toolworks Inc. Sec. Litig., 

, 627–28 (9th Cir. 1994));

accord In re Advanced Battery Techs., Inc., 

, 644 (2d Cir. 2015); see

also In re Suprema Specialties, Inc. Sec. Litig., 

, 279 (3d Cir. 2006)

(stating that the audit must be “so shoddy that [it] amounted at best to a

‘pretended audit’”).

      Here, however, the red flags identified by Plaintiffs are not so patently

indicative of fraud that Deloitte’s failure to perceive them as such constituted “an

egregious refusal to see the obvious.” DSAM Global Value 

                                           26
(quoting In re Software Toolworks Inc. Sec. 

–28). For

example, even accepting the complaint’s allegations that Crocs’s system for

monitoring its day-to-day inventory was flawed, a faulty data management system

does not obviously suggest either that Crocs’s annual inventory was overvalued

or that its controls over financial reporting did not comply with the “Internal

Control-Integrated Framework.” It is especially unclear that Deloitte should have

immediately linked weaknesses in the daily inventory tracking system to flaws in

annual accounting data given the complaint’s acknowledgment that a “physical

inventory count was taken once a year, and reconciled to the general ledger.” 11


      11
             While the complaint cites to a PricewaterhouseCoopers white paper
and an article in Computer World describing the flaws in spreadsheet-based
systems, neither indicates that an Excel-based inventory system violates any
regulations. Relatedly, the complaint does not allege that these articles expressed
the industry consensus, such that it would have been clear to Deloitte that Crocs’s
inventory system was noncompliant with industry standards. In any event, even if
Crocs’s inventory system did violate some regulatory or industry standard, and
Deloitte was aware of this, “without some other facts,” In re Zagg, Inc. Sec.
Litig., 

, 1204 (10th Cir. 2015), we would not be inclined to
conclude that it would have been perforce obvious to Deloitee that its 10K
representations—insofar as they implicated Crocs’s inventory—were fraudulent,
see Anderson, 

, at *14 (“Even if we assume that Spirit had
violated established accounting principles or internal policies, these violations
would not have been enough to state a valid cause of action”).

       Further, although the newly-hired head of Crocs’s information technology
department “identified significant problems [with Crocs’s data management
system] within months of being hired,” Aplt.’s App. at 173, this does not mean
that these issues should have been clear to an auditor tasked with assessing
annual inventory valuation and controls over financial reporting. The cases
Plaintiffs cite to us for the proposition that the rapid discovery of errors by a new
                                                                         (continued...)

                                          27
Aplt.’s App. at 161; see also 

(indicating that a physical count was done

in connection with Crocs’s 2007 audit). 12

      Nor would the buildup of inventory, some of which the complaint alleges

was unsalable, have ineluctably led Deloitte to the conclusion that the annual

inventory figures were fraudulently inflated. Cf. Anderson, 

, at

*14 (refusing to infer scienter of top executives because they announced a large

forward loss on the relevant projects, because “this argument relies on hindsight

review based on the size of Spirit’s eventual loss and does not include

particularized allegations that the four executives knew . . . that Spirit would lose

money on the three projects”). The complaint alleges that under Accounting

Research Bulletin (“ARB”) 43, Crocs should have written down its inventory

because many of its shoes were obsolete, defective, or unsuitable for most



      11
        (...continued)
employee is indicative of recklessness largely involve accounting violations, and
thus do not convince us that flaws that were evident to an IT employee should
have been obvious to an accountant. See, e.g., In re New Century, 

1206, 1231 (C.D. Cal. 2008); In re First Merchs. Acceptance Corp. Sec. Litig.,
97 C 2715, 

, at *11 (N.D. Ill. Nov. 4, 1998).
      12
              To the extent that Crocs’s management ordered shipments to remain
in transit and moved 400,000 shoes to Rotterdam in order to reduce the amount of
inventory included in the physical count, management’s deceptive tactics would
not support a finding that Deloitte acted recklessly. See Pub. Emps.’ Ret. Ass’n of
Colo. v. Deloitte & Touche LLP, 

, 314 (4th Cir. 2009) (discerning no
strong inference of scienter where the auditor was “attempting to ensure” that the
company was in compliance, but was deceived by the company’s production of
falsified documents).

                                         28
consumers. However, ARB 43 cautions that “judgment should always be

exercised and no loss shall be recognized unless the evidence indicates clearly

that a loss has been sustained.” Aplee.’s Supp. App. at 407 (Fin. Accounting

Standards Bd. Accounting Standards, dated June 1, 2008).

      Courts are not well-situated to second-guess an auditor’s “complex and

subjective professional judgments,” N.M. State Inv. 

(quoting In re Countrywide Fin. Corp. Sec. Litig., 

1132, 1197

(C.D. Cal. 2008)), and we certainly cannot conclude that it would have been

pellucid to Deloitte that the existence of unsalable and defective shoes in Crocs’s

inventory meant that the value of its entire inventory should be written down.

See, e.g., Yates v. Mun. Mortg. & Equity, LLC, 

, 889 (4th Cir. 2014)

(declining to find that an auditor behaved recklessly because an alleged

accounting error “was not especially obvious, at least with respect to the

[c]ompany’s financial bottom-line”); 

(holding that the

auditor’s resolution of an ambiguous auditing standard did not support a finding

of recklessness).

      Ultimately, considered “in its entirety,” Gold Res. 

(quoting 

), the complaint paints a picture of a rapidly

growing company with increasing inventory, some of which was useless, and an

outdated method of tracking its stock on a real-time basis. But even if Crocs’s

expansion, “juxtaposed with its archaic accounting and internal control systems,”

                                         29
Aplt.’s Supp. Br. at 5, created a risk that the company’s finances would be

incorrectly reported, these are not the sort of highly suspicious “in your face

facts” that would “cry out” that the company’s inventory value or financial

controls were fraudulently misrepresented, N.M. State Inv. 

(quoting In re Oxford Health Plans, Inc., Sec. Litig., 

,

294 (S.D.N.Y. 1999)), such that Deloitte must have taken notice.

      Far more blatant misconduct is necessary before we would infer that

Deloitte refused to see the obvious. See, e.g., 

–69

(holding that corporation’s increase of “its allowance for doubtful accounts” to

“nearly seven times the average” was not “so irregular” that the auditor should

have been on notice of fraud); DSAM Global Value 

(concluding that auditor’s approval of the company’s recognition of revenue

despite the fact that there was “no signed, fixed agreement,” the “fee was not

fixed,” and the corporation still had “significant obligations to perform,” did not

constitute “deliberate recklessness or conscious misconduct”); In re Ikon Office

Sols., Inc., 

, 675 (3d Cir. 2002) (concluding that auditor’s failure to

account for four million dollars’ worth of “intercompany balances . . . suggest[ed]

nothing more than simple error, at best approaching negligence”); cf. Suprema

Specialties, 

–81 (holding that indicators of fraud were

obvious where the company “restricted [the auditor’s] access to key accounting



                                         30
personnel” and checks to various suppliers were “deposited into the same account

from which a purported customer . . . wrote checks back to” the company). 13




      13
              Plaintiffs liken the allegations in their complaint to those in In re
Oxford Health Plans, Inc., Securities Litigation, 

(S.D.N.Y.
1999), but that case is distinguishable. There, the district court found persuasive
the plaintiffs’ allegation that the auditor “recklessly disregarded, or outright
ignored, blatant evidence of Oxford’s extreme accounting irregularities,
particularly Oxford’s complete lack of internal controls and utterly ineffective
computer 

. Yet in that case, the company’s
fraudulent practices were plainly evident: at the time of the audits at issue, the
company was being investigated by both the New York State Insurance
Department (“NYSID”) and the New York Attorney General’s office for
misconduct related to its accounting system. See 

Indeed, the NYSID
had already found the company’s internal controls severely deficient six years
before the audits, and “quickly determined” that the company “had not remedied
any of the internal control problems [previously] found by the NYSID.” 

Notably, in contrast, the complaint here does not allege that Crocs’s
accounting practices had previously been investigated by regulators; so, this
significant factor—that patently should have put the auditor in Oxford Health
Plans on notice of accounting irregularities—could not have served to tip Deloitte
off to the the potential inadequacy of Crocs’s daily inventory management
system.

       For similar reasons, Plaintiffs’ reliance on In re Longwei Petroleum
Investment Holding Ltd. Securities Litigation, No. 13 CV 214(HB), 

(S.D.N.Y. Jan. 27, 2014), is unavailing. There, the district court stated
that the auditors, at a minimum, reviewed the company’s financial statements,
which would have revealed “record revenues, [a] sudden upward trajectory, and
[an] undisclosed tourism investment. These data points alone should have
prompted further investigation.” 

, at *6. In contrast, here, a
deficient system for tracking inventory would not have so obviously indicated to
Deloitte that Crocs’s inventory was overvalued—especially under an accounting
principle that explicitly cautions that “judgment should always be exercised” and
that losses should only be recognized if there is clear evidence to this effect.
Aplee.’s Supp. App. at 407.

                                        31
                                          3

      Thus, weighing the averments of culpable scienter Plaintiffs advance

against the competing inference of non-fraudulent intent, see 

, Plaintiffs have failed to allege a “strong inference” that Deloitte acted

recklessly in auditing Crocs’s finances and internal controls. While an outdated

inventory management system, increasing inventory, and a growing number of

unsalable or defective shoes may have been indicators that Crocs’s inventory

figures were dubious, the complaint does not sufficiently allege that either

Deloitte knew of these warning signs, or that the signs were so clearly evident

that Deloitte’s failure to take heed was an “egregious refusal to see the obvious.”

N.M. State Inv. 

(quoting In re Software Toolworks 

). Indeed, the more compelling inference to be drawn from these

facts is one of negligence on Deloitte’s part. Consequently, Plaintiffs’ complaint

clearly falls short of the “high standard” for culpable scienter imposed by

securities law. 

.

                                         IV

      Finally, Plaintiffs claim that the district court should have given them leave

to amend their complaint. We review the denial of leave to amend a complaint

for an abuse of discretion, Berneike v. CitiMortgage, Inc., 

, 1145

(10th Cir. 2013), and require that such a request “give adequate notice to the

district court and to the opposing party of the basis of the proposed amendment,”

                                         32
Hall v. Witteman, 

, 868 (10th Cir. 2009) (quoting Calderon v. Kan.

Dep’t of Soc. & Rehab. Servs., 

, 1186–87 (10th Cir. 1999)).

Without this information, a district court need not independently determine

whether grounds justifying an amendment exist. See 

.

      Plaintiffs point to only one place in the record as articulating their basis for

seeking leave to amend; it is a footnote in their response to the defendants’

motion to dismiss. There, Plaintiffs merely request “dismissal . . . without

prejudice to the filing of an amended complaint” but do not offer any hints of

what such an amendment might contain. Aplee.’s Supp. App. at 416 n.76 (Pls.’

Resp. to Defs.’ Mots. to Dismiss, filed June 4, 2009). While, on appeal, Plaintiffs

claim that they explained to the district court that the defendants had sought “to

silence their ex-employees by use of non-disclosure agreements,” 

was raised as a reason to lift the discovery stay imposed by the PSLRA,

and not as a reason for why they should be allowed to amend their complaint.

      Thus, because Plaintiffs did not offer any details that would have provided

“notice to opposing parties and to the court of . . . the particular basis for the

amendment,” 

, the district court did not abuse its

discretion in denying leave to amend the complaint.




                                          33
                                V

For the foregoing reasons, we AFFIRM the judgment of the district court.



                              ENTERED FOR THE COURT



                              Jerome A. Holmes
                              Circuit Judge




                                34