Reese v. Malone (747 F.3d 557, 2014)

OPINION

DEARIE, Senior District Judge:

In March of 2006, an oil leak in one of BP’s Alaskan pipelines spilled approximately 200,000 gallons of oil onto the Alaskan tundra. Despite BP’s public statements suggesting that the spill was an anomaly, a second leak was discovered five months later in a different BP oil transit line in the region. As a result, the company temporarily shut down regional operations.

This class action complaint was filed by BP shareholders, who allege that the company knowingly, or with deliberate recklessness, made false and misleading statements about the condition of the pipelines and BP’s pipeline maintenance and leak detection practices prior to and in the wake of the first spill. They seek relief under Sections 10(b), 18(a) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, for investment losses incurred when the second spill and shutdown allegedly caused a four percent decline in BP’s share price.

The district court granted defendants’ motion to dismiss with prejudice. Although the court found that some of the statements were actionably false or misleading, it dismissed the claims because plaintiffs did not plead facts sufficient to show that the challenged statements gave rise to a strong inference of scienter. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we reverse in part and affirm in part.

I. BACKGROUND

A. The Parties

Plaintiffs-appellants (hereinafter “plaintiffs”) in this class action are purchasers of BP’s common stock and American Depository Receipts (“ADRs”) between June 30, 2005, and August 4, 2006. Defendants-appellees (hereinafter “defendants”) in this case are: (1) BP, the largest oil and gas producer in the United States; (2) BP Exploration Alaska (“BPXA”) (hereinafter “BP-Alaska”), a Delaware corporation and wholly-owned subsidiary of BP based in Anchorage, Alaska; (3) John Browne, BP’s CEO during the class period; and (4) Maureen Johnson, BP-Alaska’s Senior Vice President and Greater Prudhoe Bay Performance Unit Leader during the class period.

B. BP’s Corrosion Monitoring Practices and the Prudhoe Bay Spills

Prudhoe Bay, the area where the spills took place, is located on the Northern Slope of Alaska and contains more than sixteen miles of oil transit lines (“OTLs”). BP-Alaska operates “three similar low-stress pipelines” at Prudhoe Bay — the Western Operating Area (“WOA”), the Eastern Operating Area (“EOA”), and the Lisburne lines. There are a variety of methods of maintaining pipelines, but the principal process is called “pigging.” “Maintenance pigging” consists of inserting a mechanical tool to clean the inside of the pipeline and remove debris and undesirable material. “Smart pigging” is used to detect the presence of cracks, corrosion, and pitting within the pipeline. According to media coverage and the company’s eventual admissions, BP “pigged” the Pru-dhoe Bay OTLs infrequently and at a rate that fell significantly below industry standards for this type of pipeline. Instead, BP monitored for internal corrosion using less accurate methods, including an ultrasonic device used to measure the thickness of pipeline wall and “corrosion coupons,” small metal plates placed inside the pipeline every ninety days to inspect for corrosion.

On March 2, 2006, an oil spill was discovered in the WOA pipeline. Estimates suggest the leak went undetected for at least five days, spilling approximately 4,800 barrels of oil (about 200,000 gallons) onto the Alaskan tundra. Subsequent investigation found that the leak was the result of a quarter-inch wide hole in a pipeline caused by internal corrosion. The second spill was discovered five months later on August 5 and 6, 2006. This leak occurred in a different corroded pipeline in the EOA, on the opposite side of Prudhoe Bay, spilling another twenty-five barrels of oil (about 1,000 gallons). Following the second spill, BP temporarily shut down the Prudhoe Bay oil field, which accounts for more than eight percent of total U.S. oil production.

The complaint alleges that BP had ample notice of, and disregarded, corrosion monitoring deficiencies at Prudhoe Bay. In 2001, the Alaska Department of Environmental Conservation hired Coffman Engineers, Inc. (“Coffman”) to evaluate a report BP submitted on its corrosion prevention efforts. Coffman raised many questions about BP-Alaska’s pigging practices and ultimately concluded that “the reporting style makes it difficult to develop a qualitative understanding of the basis for [BP’s] corrosion strategy.” Plaintiffs also claim that BP’s Board of Directors was warned about the severe corrosion problems at Prudhoe Bay in 2004, when Chuck Hamel, an advocate for BP workers in Alaska, voiced concerns about corrosion and environmental threats at Prudhoe Bay. The warnings are documented in a letter from Hamel to Walter Massey, the chairman of the environmental committee of BP’s non-executive board of directors, advising Massey of “serious corrosion” and predicting a “major catastrophic event.”

C. Government Intervention

The first spill on March 2, 2006, received significant publicity and sparked immediate government intervention. It quickly came to light that BP had not tested the integrity of the WOA with a smart pig since 1998.

On March 15, 2006, the U.S. Department of Transportation Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued a Corrective Action Order (“CAO”) to BP-Alaska, addressed to defendant Maureen Johnson, Greater Pru-dhoe Bay Performance Unit Leader. The CAO preliminary findings identified six additional “anomalies” of internal corrosion, including one area with ninety percent corrosion and only 0.04 inches of wall remaining. It also noted the similarities between the three Prudhoe Bay Lines:

The PBWOA [WOA line] is one of three similar low-stress pipelines operated by Respondent that feed into PS-1 ... All three pipelines were constructed around the same time, operate in similar environmental conditions, transport ■ the same quality crude oil that contributed to the cause of the internal corrosion in PBWOA, and are operated and maintained in a similar manner by Respondent.

The order concluded that “continued operation of [BP’s] WOA, EOA and Lisburne hazardous liquid pipelines without corrective measures would be hazardous to life, property and the environment.” . It mandated several specific corrective actions, including the requirement that BP inspect all three lines with smart pigs within certain deadlines.

Under the terms of the Corrective Action Order, BP had three months to smart pig the EOA line by June 15, 2006. It failed to do so. The FS2-FS1 segment of the EOA line was not inspected until July 22, 2006, more than a month after the deadline. The delayed results showed significant corrosion, including sixteen different corroded areas with wall loss exceeding seventy percent, including two spots with greater than eighty percent loss. One hundred eighty-seven tested areas showed wall loss of close to fifty percent. As a result, BP decided to bypass certain parts of the pipelines instead of fixing them.

The second leak, this time in the EOA transit line, was discovered on August 5 and 6, 2006. In response, the Pipeline and Hazardous Materials Safety Administration issued Amendment No. 2 to the Corrective Action Order on August 10, 2006, adding more stringent directives and corrective actions including periodic reporting requirements and tight deadlines.

Both the Senate and the House of Representatives launched investigations regarding the spills. On September 7, 2006, several BP executives were called to testify about the shutdown of Prudhoe Bay at a hearing before’ the House Subcommittee on Oversight and Investigations. During the hearing, Richard C. Woolam, leader of the Corrosion Inspection and Chemicals Group at BP-Alaska for many years before the spills, was asked when he became aware of the “pipeline integrity problems” at Prudhoe Bay, “including concerns about accelerated localized corrosion, microbial corrosion and [the fact] that the failure to send maintenance pigs or smart pigs down the transmission lines was placing those pipelines at high risk of failure.” Mr. Woolam invoked the Fifth Amendment and refused to answer. Several parties testified that BP’s maintenance practices deviated from industry standards. PHMSA Administrator Thomas J. Barrett stated, “Given the multiple risk factors for corrosion in the Prudhoe Bay environment and the low velocities on these lines, it is mystifying that BP did not run cleaning pigs regularly on these transit lines. Most pipeline operators demonstrate a higher standard of care than this regardless of whether they are federally regulated or not.” Kevin Hostler, President and CEO of Alyeska Pipeline Service, a pipeline design, building, and maintenance company in Alaska, testified that pigging is particularly important for low-stress lines and should be part of a routine maintenance program.

In October of 2007, BP-Alaska pled guilty to a misdemeanor violation of the Clean Water Act, 33 U.S.C. §§ 1319(c)(1), 1321(b)(3), for the negligent discharge of a harmful quantity of oil to a water of the United States, and agreed to pay a $20 million fíne in settlement of federal and state criminal violations. In the plea agreement, BP admitted that it was aware of the corrosion in the WOA pipelines in 2005. BP also conceded knowledge of the company’s “insufficient inspection data” on the EOA line and awareness of sediment buildup in those pipelines prior to both spills. With respect to the company’s corrosion monitoring practices, BP also knew that the WOA line had not been pigged since 1998, eight years before the leak, and that the EOA line had not been pigged since 1990, sixteen years before the leak.

On March 31, 2009, both the Department of Justice (“DOJ”) and the State of Alaska filed separate civil lawsuits. The DOJ’s civil complaint was for violations of the Clean Water Act, the Clean Air Act, and Federal Pipelines Safety Laws. On July 20, 2011, BP-Alaska entered into a consent decree to settle the claims, agreeing to pay $25 million in civil penalties and make $60 million in improvements to its pipelines in Alaska.

The State of Alaska’s civil suit addressed BP-Alaska’s alleged violations of state laws mandating compliance with a State-approved oil discharge prevention and contingency plan (“the Plan”) and requirements for operating and maintaining a leak detection system. The State’s complaint alleged that BP-Alaska “failed to adequately monitor corrosion rates [and] failed to adjust corrosion inhibitor levels in the OTLs” pursuant to the Plan. State of Alaska Compl. ¶¶ 142-45. With respect to BP’s failure to adequately monitor corrosion rates, the State’s complaint relied on BP-Alaska’s October 2007 Guilty Plea to allege that BP “knew that it had insufficient inspection data on the EOA OTL.” Id. ¶¶41, 50. The State also pointed to BP-Alaska’s EOA Incident Investigation Report, which concluded that the number of ultrasonic thickness measurements collected by BP “were not sufficient to accurately represent the true condition of the line.” Id. ¶ 62.

D. Procedural History

Plaintiffs filed the complaint in 2008, alleging that defendants made false and misleading statements in violation of Sections 10(b), 18(a) and 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934. The United States District Court for the Western District of Washington granted in part and denied in part defendants’ motion to dismiss, finding only one of the twenty-five statements to be actionable. That one statement was contained in quarterly filings with the SEC, made in connection with BP-Alaska’s obligations to its shareholders, in which the company represented that it would operate Prudhoe Bay pursuant to the “Prudent Operator Standard.” Ruling on interlocutory appeal, a panel of this Court reversed, concluding that “[BP-Alaska’s] contractual promise to act as a prudent operator did not expressly or implicitly assert that [BP-Alaska] was in full compliance with its obligations thereunder....” Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 693 (9th Cir.2011). The Court did not reach the issue of scienter.

Plaintiffs’ First and Second Amended Complaints add significant facts that came to light during the investigations and lawsuits arising out of the spills. They focus on five types of false or misleading statements: (i) a press statement made by Johnson regarding the most recent inspection data indicating that corrosion was occurring at a low and manageable rate; (ii) two press statements by Johnson suggesting that the March spill was anomalous and distinguishing the WO A OTL conditions with those of the other Prudhoe Bay pipelines; (iii) a statement by CEO Browne at an April 2006 press conference stating that the first spill occurred “in spite of the fact that [BP has] both world class corrosion monitoring and leak detection systems”; (iv) a statement in BP’s 2005 Annual Report stating that management believed BP was in compliance, in all material respects, with applicable environmental laws and regulations; and (v) statements in the 2004 and 2005 Annual Reports touting BP’s “environmental best practices.”

The district court dismissed the Second Amended Complaint in its entirety with prejudice for failure to state a claim. Although the court found that some of the statements were actionably false, it dismissed the claims based on the finding that plaintiffs did not plead facts giving rise to a strong inference of scienter. The court concluded that the Second Amended Complaint’s allegations “portray a company that poorly understood the challenges it faced in Prudhoe Bay, not one that engaged in securities fraud.” This appeal followed.

II. THE PLEADING STANDARDS

“We review de novo a district court’s grant of a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and for failure to allege fraud with particularity under Federal Rule of Civil Procedure 9(b).” WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., et al., 655 F.3d 1039, 1047 (9th Cir.2011).

A. The Dual Pleading Requirements

Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered ... any manipulative or deceptive device or contrivance-” 15 U.S.C. § 78j(b). Pursuant to this section, the Securities and Exchange Commission promulgated Rule 10b-5, which makes it unlawful, among other things, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b).

To state a securities fraud claim, plaintiff must plead: “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Thompson v. Paul, 547 F.3d 1055, 1061 (9th Cir.2008) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).

At the pleading stage, a complaint stating claims under Section 10(b) and Rule 10b-5 must satisfy the dual pleading requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 701 (9th Cir.2012). Under Rule 9(b), claims alleging fraud are subject to a heightened pleading requirement, which requires that a party “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). And since 1995, all private securities fraud complaints are subject to the “more exacting pleading requirements” of the PSLRA, which require that the complaint plead with particularity both falsity and scienter. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir.2009).

B. Falsity and Materiality

To plead falsity, the complaint must “specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading.” 15 U.S.C. § 78u-4(b)(l)(B). If an allegation regarding the statement or omission is made on information and belief; the complaint must “state with particularity all facts on which that belief is formed.” Id.

“Central to a 10b-5 claim is the requirement that a misrepresentation or omission of fact must be material.” In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir.2010). A statement is material when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1976) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)). To plead materiality, the complaint’s allegations must “suffice to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement, and to allow the court to draw the reasonable inference that the defendant is liable.” Matrixx Initiatives, Inc. v. Siracusano, — U.S.-, 131 S.Ct. 1309, 1323, 179 L.Ed.2d 398 (2011) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)) (internal citations and quotation marks omitted). “Although determining materiality in securities fraud cases should ordinarily be left to the trier of fact, conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim.” In re Cutera, 610 F.3d at 1108 (internal citations and quotation marks omitted).

C. Scienter

Scienter is defined as “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). To adequately plead scienter, the complaint 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)(A) (emphasis added). Under the analysis set forth by the Supreme Court in Tellabs, a court must first accept all factual allegations in the complaint as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The court must then “consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.” Id.

A strong inference of scienter “must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. at 314, 127 S.Ct. 2499. The inference must be that “the defendant ] made false or misleading statements either intentionally or with deliberate recklessness.” Zucco, 552 F.3d at 991 (emphasis added) (internal quotation marks omitted). Deliberate recklessness means that the reckless conduct “reflects some degree of intentional or conscious misconduct.” S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 782 (9th Cir.2008). “[A]n actor is [deliberately] reckless if he had reasonable grounds to believe material facts existed that were misstated or omitted, but nonetheless failed to obtain and disclose such facts although he could have done so without extraordinary effort.” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 390 (9th Cir.2010) (quoting Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir.2000)).

Facts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not independently sufficient. In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir.1999), abrogated on other grounds by S. Ferry LP, 542 F.3d at 784. It may also be reasonable to conclude that high-ranking corporate officers have knowledge of the critical core operation of their companies. S. Ferry LP, 542 F.3d at 785-86.

The Supreme Court, has emphasized that courts “must review all the allegations holistically” when determining whether scienter has been sufficiently pled. Matrixx, 131 S.Ct. at 1324 (quoting Tellabs, 551 U.S. at 326, 127 S.Ct. 2499). The relevant inquiry is “whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard.” Tellabs, 551 U.S. at 323, 127 S.Ct. 2499; N.M. State Inv. Council v. Ernst & Young LLP, 641 F.3d 1089, 1095 (9th Cir.2011).

III. DISCUSSION

A. Johnson’s Assurances About the Low Manageable Corrosion Rate

Turning to the statements at issue, on March 15, 2006, approximately two weeks after the first spill, Maureen Johnson, BP-Alaska Senior Vice President and Greater Prudhoe Bay Performance Unit Leader, told the Associated Press (“AP”) that “corrosion was seen in the 34 inch oil transit line [that caused the March 2 spill] in a September [2005] inspection but appeared to be occurring at a ‘low manageable corrosion rate.’ ”

1. Falsity

We agree with the district court that plaintiffs have adequately pled the falsity of this statement. Plaintiffs allege that BP’s internal documents at the time showed that the corrosion rate at one of the tested areas was 32 mills (thousands of an inch) per year (“MPY”) in 2005, compared to only 3 MPY in 2004. They argue that a level of corrosion above 30 MPY is the highest of three levels in BP’s own internal classification metric and represents a “sharp and rapid spike in the corrosion rate.” Plaintiffs also reference a detailed report of their expert, Dr. Smart, who opined that a corrosion rate of 32 MPY was “high” and “not manageable.”

Defendants characterize Johnson’s statement as merely incomplete, emphasizing that only one of the 47 locations tested showed a corrosion rate of 32 MPY, and only seven locations showed an increase in corrosion. See, e.g., Brody v. Transitional Hosp. Corp., 280 F.3d 997, 1006 (9th Cir.2002) (acknowledging that Rule 10b-5 does not contain a “freestanding completeness requirement”). However, Johnson’s statement about the “low and manageable” corrosion rate effectively denied that BP had any warning of high corrosion before the first pipeline leak. This is objectively misleading; according to facts as alleged, inspection data showed objectively high corrosion rates and dramatically increased corrosion in certain places. Given the obvious reality that it only takes corrosion in one spot — and a hole as small as 0.25 inches — to leak 200,000 gallons of oil into the environment, it is self-evident that Johnson’s statement was misleading. By omitting information regarding BP’s detection of high corrosion levels, Johnson affirmatively created an “impression of a state of affairs that differ[ed] in a material way from the one that actually exist[ed].” Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 985 (9th Cir.2008) (quoting Brody, 280 F.3d at 1006).

We also reject defendants’ argument that Johnson’s statement was immaterial in the wake of the first leak. The complaint focuses on the falsity of Johnson’s statement with respect to BP’s knowledge of the pipeline problems in advance of the spill. It also alleges facts demonstrating that this was a key question raised in the media and government investigations. Facts demonstrating public interest in the withheld information support its materiality. See, e.g., In re 2The-Mart.com, Inc. Sec. Litig., 114 F.Supp.2d 955, 961 (C.D.Ca.2000) (pointing to public interest in the company’s website development on an online message board as evidence of materiality). And while the spill itself certainly raised public skepticism with respect to BP’s pipeline maintenance and corrosion monitoring practices, disclosure of the fact that the company ignored troubling warning signs may have altered the “total mix” of information available to investors, who depend upon BP’s management team to make sound decisions. Basic, 485 U.S. at 231-32, 108 S.Ct. 978.

2. Scienter

The key question is whether plaintiffs have adequately pled the element of scienter. By way of background, Johnson was BP-Alaska’s Senior Vice President and Greater Prudhoe Bay Performance Unit Leader during the class period and was directly responsible for the Prudhoe Bay pipeline operations. She holds a Bachelor of Science degree in Chemical Engineering and a Ph.D. in Environmental Science and Engineering. The complaint recites Johnson’s involvement in working with various government bodies to comply with the Corrective Action Order and her responsibility for reporting to BP leadership regarding the March spill.

Johnson’s statement about the low corrosion rates was made on March 15, 2006, about two weeks after the first pipeline leak was discovered on March 2, 2006. The district court found that the timing of Johnson’s statement “undermines Plaintiffs argument” that Johnson made them with scienter. More specifically, the court reasoned that Johnson “had no way of knowing in March 2006 that another leak would occur six months later in a separate pipeline on the other side of the Prudhoe Bay, so it seems unlikely she would have intended that her statements deceive investors about the possibility of future spills in other areas.”

We disagree. With respect to timing, the fact that Johnson, given her position, made the statement about corrosion data supports the inference that she made it with scienter. In the wake of a crisis that has the potential to repeat itself, Johnson had every reason to review the results of BP-Alaska’s corrosion monitoring to understand what happened, as well as to assess the possibility of future leaks in similar pipelines. Evidence of high levels of corrosion would be central to this inquiry. Indeed, BP’s monitoring practices and the question of whether the spill could have been prevented were the focus of both public and government inquiries after the March 2006 spill. In this context, Johnson also had a clear motive for omitting information about the detection of high corrosion levels. See Tellabs, 551 U.S. at 325, 127 S.Ct. 2499 (acknowledging that motive can be a relevant consideration in the scienter analysis); In re Daou Sys., Inc., 411 F.3d 1006, 1024 (9th Cir.2005) (considering evidence of executives’ personal motive to perpetuate fraud as one factor in examining the totality of the circumstances). The revelation that BP ignored red flags would portend serious corporate mismanagement, a portent that would be detrimental both to BP and to Johnson personally, as head of the Pru-dhoe Bay Unit responsible for the spill. In common parlance, if anyone knew of the flawed monitoring program and the likelihood of failures in the pipeline system, Dr. Johnson did.

Furthermore, plaintiffs need not demonstrate that Johnson intended to deceive investors about the likelihood of future spills. The fact that she knew her statement was materially misleading is sufficient. See, e.g., Berson, 527 F.3d at 987 (finding that once the company “chose to tout [its] backlog, they were bound to do so in a manner that did not mislead investors” by obscuring evidence of past customer stop-work orders). Johnson’s statement was misleading, which is significant regardless of whether another pipeline was likely to fail in the immediate future.

The district court went on to apply the Tellabs analysis, weighing the competing inferences of fraudulent and nonfraudulent intent. In doing so, the court concluded that “the inference that ... Johnson intended to mislead investors by falsely reassuring them that BP’s corrosion efforts were adequate ... is not as strong as the opposing inferences that Johnson misunderstood BP’s data or that she did not have access to the data.” Plaintiffs argue that this reasoning does not comply with Tellabs because the district court “sua sponte ” created hypothetical facts outside the Second Amended Complaint to create a stronger non-culpable inference.

In Tellabs, the Supreme Court imposed a duty upon courts to weigh plausible competing inferences. Tellabs, 551 U.S. at 323-24, 127 S.Ct. 2499 (“The strength of an inference cannot be decided in a vacuum ... a court must consider plausible, nonculpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff.”). Here, while it is possible that Johnson misunderstood the data or did not, despite her position, have access to it, such a scenario is unlikely under these circumstances.

First, the inference that Johnson misunderstood the data is simply not plausible. The complaint alleges and supports the fact that the high corrosion levels detected were objectively alarming — the highest of three levels in BP’s own internal classification metric — and a dramatic increase from baseline levels. Accepting these allegations as true, there is little room for misunderstanding on Johnson’s part, especially given her role and responsibility as Greater Prudhoe Bay Performance Unit Leader and her expertise as a doctor of Chemical Engineering.

Second, the inference that Johnson, did not have access to the corrosion data is directly contradicted by the fact that she specifically addressed it in her statement. As discussed, the timing of the statements and the heightened significance of high corrosion rates in the wake of the first oil spill also undermine it. This case is distinguishable from situations where information may have been obscured from high-level executives. See, e.g., Glazer Capital Mgmt. v. Magistri, 549 F.3d 736, 743-49 (9th Cir.2008) (no strong inference of scienter on the part of the company CEO in the absence of facts showing he was personally aware of illegal payments or that he was actively involved in details of Asian sales). Unlike in Glazer, Johnson addressed corrosion rate data specifically, rendering it unlikely that she was not aware of it or the concerning aspects of the company’s findings. Moreover, Johnson is not like the CEO of a large enterprise, who may be removed from the details of a specific business line or remote business activity. As Greatei* Prudhoe Bay Performance Unit Leader, Johnson was directly responsible for the WOA and EOA operations. In this role, not only would Johnson be aware of corrosion problems, but she would be among the first to know. A strong inference of scienter is therefore found in the pled facts.

But perhaps most importantly, Johnson “bridge[d] the [scienter] gap” herself by referencing the data directly. S. Ferry, 542 F.3d at 783. It is unclear what further facts plaintiffs would need to plead to create a stronger inference that she had access to information she discussed publicly. To that extent, we agree with plaintiffs’ argument that “[b]y making a detailed factual statement, contradicting important data to which she had access, a strong inference arises that she knowingly misled the public as to its clear meaning.” See S. Ferry, 542 F.3d at 785 (holding that “detailed and specific allegations about management’s exposure to factual information within the company” support an inference of scienter); see also Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir.2004) (“The most direct way to show both that a statement was false when made and that the party making the statement knew that it was false is via contemporaneous reports or data, available to the party, which contradict the statement.”) (emphasis added). Furthermore, when we consider the totality of the circumstances, including the timing of the statement and Johnson’s motive to mischaracterize the September 2005 inspection results, there is a strong inference of scienter that is not only cogent, but far more compelling than speculation regarding misunderstanding or lack of access.

B. Statements Distinguishing the WOA and EOA Lines

Plaintiffs also challenge two statements Johnson made after the first spill contrasting the conditions in the WOA pipeline (where the March spill occurred) and the EOA pipeline (where the August spill would later occur). The first statement was reported in the AP article on March 15, 2006: “Similar problems have not been found in other lines downstream and elsewhere in.Prudhoe Bay, and Johnson said it appears the highly corrosive conditions were unique to that line . ” The second statement attributed to Johnson appeared in Petroleum News, a weekly oil and gas trade publication, on May 14, 2006: