Construction Laborers Pension Trust of Greater St. Louis v. Funko Inc

FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT CONSTRUCTION LABORERS No. 24-4909 PENSION TRUST OF GREATER D.C. No. ST. LOUIS, Lead Plaintiff; PAUL 2:23-cv-00824- HADDOCK, JLR Plaintiffs - Appellants, ORDER AND and AMENDED OPINION JONATHAN STUDEN, Plaintiff, v. FUNKO INC; ANDREW PERLMUTTER; JENNIFER FALL JUNG, Defendants - Appellees. Appeal from the United States District Court for the Western District of Washington James L. Robart, District Judge, Presiding Argued and Submitted May 23, 2025 San Francisco, California 2 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. Filed February 4, 2026 Amended September 2, 2026 Before: Marsha S. Berzon, Michelle T. Friedland, and Salvador Mendoza, Jr., Circuit Judges. Opinion by Judge Mendoza, Jr. SUMMARY* Securities Fraud The panel affirmed in part and reversed in part the district court’s dismissal, for failure to state a claim, of an action under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against Funko, Inc., and two of its officers. Funko’s share price lost more than half its value when millions of its pop culture collectibles were written off at a loss of tens of millions of dollars. Funko shareholders alleged that defendants misled investors as to the progress of a major warehouse relocation, the quality and management of the company’s inventory, its use and upgrade of information technology, and its distribution capabilities. The district court dismissed the complaint for failing to sufficiently allege falsity and scienter. The panel held that to establish falsity, securities plaintiffs may rely on either an affirmative misrepresentation * This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 3 theory or an omission theory. An allegedly misleading statement must be capable of objective verification. Scienter means the intent to mislead investors or deliberate recklessness to an obvious danger of misleading investors. The panel affirmed the district court’s dismissal with respect to the falsity of affirmative statements regarding distribution center operations in Buckeye, Arizona, and the quality of Funko’s inventory, and Funko’s distribution capabilities, as well as risk factor statements in SEC filings regarding Funko’s upgrade of technology. The first group of statements were not demonstrably false, and to the extent that defendants embellished the quality of inventory, these statements were "puffery.” The risk disclosures concerning upgrade of technology also were not false. The panel reversed as to the falsity of risk factor statements in SEC filings regarding Funko’s inventory management and the company’s use of its existing information technology systems, as well as with respect to scienter regarding the falsity of those statements. The risk disclosures concerning inventory management were not “forward-looking statements” protected by the safe harbor provision of the Private Securities Litigation Reform Act. Plaintiffs pleaded with sufficient particularity factual allegations regarding the falsity of risk disclosures concerning existing technology. As to scienter, the panel concluded that a reasonable trier of fact could find that it would be absurd to believe that the defendant officers did not know that their statements related to Funko’s inventory and information technology system were misleading at the time they were made. The panel also reversed as to plaintiff’s § 20(a) control liability claim. The panel remanded the case to the district 4 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. court. COUNSEL Andrew S. Love (argued), Robbins Geller Rudman & Dowd LLP, San Francisco, California; Hillary B. Stakem, Ting H. Liu, and Jessica E. Robertson, Robbins Geller Rudman & Dowd LLP, San Diego, California; Gretchen F. Cappio, Matt Melamed, and Garrett Heilman, Keller Rohrback LLP, Seattle, Washington; for Plaintiffs-Appellants. Kevin M. McDonough (argued), Thomas J. Giblin, and Elizabeth A. Parvis, Latham & Watkins LLP, New York, New York; Christine C. Smith, Latham & Watkins LLP, Washington, D.C.; Graham Ambrose, Latham & Watkins LLP, Boston, Massachusetts; David I. Freeburg and Lianna Bash, DLA Piper LLP (US), Seattle, Washington; for Defendants-Appellees. ORDER The opinion filed on February 4, 2026, is amended as follows: On slip opinion page 2, line 6, replace <MENDOZA> with <MENDOZA, JR.>. On page 35, line 15, at the end of the paragraph add: <Falsity has been even more clearly alleged here than in Facebook or Alphabet because all of these facts demonstrate that the harms had already come to fruition, even though the risk disclosures from that same period framed these realities as mere hypotheticals. The harms had already happened and were ongoing, but Funko executives continued to tell  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 5 investors only there was a risk of conditions arising that could cause future harm.>. With these amendments, Judges Berzon, Friedland, and Mendoza vote to deny the petitions for panel rehearing and rehearing en banc, filed on April 3, 2026. The Petitions for Rehearing and Rehearing En Banc are DENIED, no further petitions for rehearing will be accepted. OPINION MENDOZA, JR., Circuit Judge: Not all misfit toys are lucky enough to be spirited away to happy homes by a red-nosed reindeer on Christmas. Rudolph the Red-Nosed Reindeer (NBC television broadcast, aired Dec. 6, 1964). In our world, unwanted stock is often labeled “dead inventory” and discarded. Such is the story of millions of misfits produced by Funko, Inc. (“Funko” or “the Company”), which were written off at a loss of tens of millions of dollars in November 2022. After news of the write off broke, Funko’s share price lost more than half its value. Funko’s shareholders sued the Company, its then-Chief Executive Officer Andrew Perlmutter (“CEO Perlmutter”), and then-Chief Financial Officer Jennifer Jung (“CFO Jung”) under the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a). The shareholders alleged that the Company and its officers misled investors as to the progress of a major warehouse relocation, the quality and management of its inventory, its use and upgrade of information technology, and its distribution capabilities. 6 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. To survive dismissal in a suit under the Exchange Act, Plaintiffs must allege, among other elements, that Defendants made a “material misrepresentation or omission” (what we in this opinion call “falsity”), and that they did so with the “intent to mislead investors” or with “deliberate recklessness to an obvious danger of misleading investors” (what we call “scienter”). Glazer Cap. Mgmt., L.P. v. Forescout Techs., Inc., 63 F.4th 747, 764–65 (9th Cir. 2023) (quotation marks omitted). Further, such claims are evaluated under a heightened pleading standard—plaintiffs must allege “the who, what, when, where, and how of the misconduct charged.” In re Cloudera, Inc. Sec. Litig., 121 F.4th 1180, 1187 (9th Cir. 2024) (quotation marks omitted). The district court dismissed Plaintiffs’ complaint for failing to sufficiently allege falsity and scienter. We affirm in part and reverse in part. I. Funko sells pop culture collectibles, including the popular FunkoPop! vinyl figurines that depict superheroes, wizards, villains, and other protagonists and minor characters from the public’s favorite fandoms. Funko’s president, Perlmutter, was promoted to CEO and joined the company’s Board of Directors in January 2022. Jung became Funko’s CFO in August 2019. Plaintiffs are Construction Laborers Pension Trust of Greater St. Louis (“Pension Trust”) and Paul Haddock, both of whom purchased Funko Class A common stock between March 3, 2022, and March 1, 2023 (“Class Period”). They allege and argue that Defendants misled them into purchasing the stock at an artificially inflated price and bring Exchange Act claims on behalf of all others similarly situated. The operative complaint sets out the following factual  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 7 allegations, which we presume at the motion to dismiss stage to be true. Cloudera, 121 F.4th at 1186. A. Funko sells products for “evergreen” intellectual properties (“IPs”) that are always en vogue, like Darth Vader or Harry Potter, and “current release” IPs, whose popularity comes and goes—Baby Yoda, for example. In 2021, Funko had licenses for more than 900 IPs. If an IP license expires or is otherwise terminated, Funko cannot sell products featuring that IP, even if it has a surplus of that product in its warehouses. A key feature of Funko’s business model is its ability to ride the ever-changing wave of pop culture trends. Funko strikes while the iron is hot, boasting the ability to go from design to shelf in 110 to 200 days. IP holders give Funko insight into movie release schedules, so products with new IP are on the shelf by opening day. But given the fickle nature of pop culture, after an IP falls out of favor (or fails to gain traction in the first place), Funko products may wind up as “dead inventory”—unsellable figurines that take up Funko’s limited warehouse space. Storing dead inventory also costs money, so Funko’s business model requires careful market forecasting and inventory management. Failing to do the forecasting and management adequately can cause significant problems. In one 2019 incident, Funko accumulated 10 to 12 million units of dead inventory. The dead inventory clogged a warehouse, which resulted in hundreds of shipping containers with new product sitting in the parking lot, the lease of a new warehouse, and an eventual write-down of $16.8 million to dispose of the dead inventory. Funko’s share price fell 40% in a single day when news of the write-down broke. 8 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. Given the importance to its business of effectively managing inventory, Funko’s leadership discussed inventory needs and availability at monthly Sales Operations meetings. CEO Perlmutter and CFO Jung attended these meetings, as did members of the Sales and Operations Planning group (who reported to CFO Jung), the Sales team (which CEO Perlmutter was involved with), and the Fulfillment Operations group (led by Chief Operating Officer Joe Sansone (“COO Sansone”)). Funko tracked inventory, sales, distribution, and other data with information systems including its enterprise resources planning (“ERP”) software Microsoft NAV, which enabled leadership to decide what products to prioritize, send to retailers, and so on. B. Funko experienced exceptional sales growth, fueled by popular demand for its products amidst the COVID-19 pandemic. But growth requires investment. Funko outgrew its ERP software and, in 2020, started planning an ERP upgrade to the “Oracle platform.” Microsoft NAV was designed for small and mid-sized companies and was failing to meet Funko’s growing needs. For example, employees on the Sales and Operations Planning group had to turn to Microsoft Excel for analytics instead of using Microsoft NAV. With Oracle, data from various groups inside the company would be better integrated and more useful. But the transition would be a significant endeavor, involving third-party contractors, a dedicated manager, and eventually, personal oversight by COO Sansone. Funko also needed more space. In September 2021, Funko leased an 860,000 square foot warehouse and distribution center in Buckeye, Arizona (“Buckeye DC”),  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 9 with an occupancy term to begin April 1, 2022. Buckeye DC was to be run by a director who reported to COO Sansone. It would be designed with the Oracle ERP’s integration in mind and would employ high-tech equipment. With Oracle, employees would be able to scan and verify inventory coming off of trucks at Buckeye DC and immediately know where it should go in the warehouse. The software would also allow employees to find products to fulfill orders more seamlessly. Funko’s leadership met with warehouse supervisors and managers throughout 2021 to plan the Buckeye DC project, integrate Oracle, and review Oracle test modules for the new warehouse. By 2022, the Oracle project remained in progress. To transition to the Oracle ERP, Funko’s data needed to be “clean[ed]”—that is, reformatted and recategorized in a manner that Oracle could use. But Funko lacked “data governance,” meaning a system of controls to ensure consistency in its data. And deep disagreements in leadership and turnover in management resulted in confusion about the project’s direction. In January or February 2022, an employee told CFO Jung that the Oracle transition project was not going well and was unlikely to be completed on time. Around the same time, IT systems and logistics employees in Funko’s United Kingdom office warned that it was “quite clear” the Oracle project was “not in a good place” given the lack of clear management or vision. As late as January 2022, IT management did not have any timeline for employees as to when Oracle would go live. C. In their operative complaint and in the briefing in the district court, Plaintiffs highlighted many of Defendants’ 10 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. public statements during the Class Period that they contended were false or misleading. Plaintiffs narrow their theories of liability on appeal. We limit our review to only those statements identified in the briefing before us. See Indep. Towers of Washington v. Washington, 350 F.3d 925, 929 (9th Cir. 2003) (“[W]e ‘review only issues which are argued specifically and distinctly in a party’s opening brief.’” (quoting Greenwood v. Fed. Aviation Admin., 28 F.3d 971, 977 (9th Cir. 1994)). On March 3, 2022, Funko filed with the Security and Exchange Commission (“SEC”) a Form 8-K for the fourth quarter of 2021 (“4Q21”; other quarters will be denoted similarly), and a Form 10-K for fiscal year 2021 (“FY21”).1 CEO Perlmutter and CFO Jung signed and certified the Form 10-K. The Form 10-K disclosed certain “Risk Factors” including the following: Our success depends, in part, on our ability to successfully manage our inventories. We must maintain sufficient inventory levels to operate our business successfully, but we must also avoid accumulating excess 1 Form 10-Ks are filed annually by most publicly traded companies, a requirement under rules set forth by the Securities and Exchange Commission (SEC). They detail a company’s financial and business information. See How To Read a 10-K, U.S. Sec. & Exch. Comm’n (July 1, 2011), https://www.sec.gov/answers/reada10k.htm. Form 8-Ks, on the other hand, are only filed when there is a triggering event, such as management change or certain cybersecurity incidents. The SEC requires that Form 8-Ks be filed within four days of the triggering event. See Exchange Act Form 8-K Questions and Answers of General Applicability, U.S. Sec. & Exch. Comm’n (June 24, 2024), https://www.sec.gov/rules-regulations/staff-guidance/compliance- disclosure-interpretations/exchange-act-form-8-k.  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 11 inventory, which increases working capital needs and lowers gross margin. If demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long period of time, write down, sell at prices lower than expected or discard. For example, in the fourth quarter of 2019, we wrote-down $16.8 million of inventory due to our decision to dispose of slower moving inventory to increase operational capacity which contributed to the Company’s net loss for the period. On an earnings call on March 3, 2022, CFO Jung indicated that costs were expected to be elevated in the first half of the year, given the move to Buckeye DC and the Oracle upgrade. She said, “[w]e will probably launch in the beginning early [in] the Q3 for the ERP [(meaning Oracle)], but the distribution center move will happen in the first half.” At the time, employees were skeptical that Oracle could be operative by early Q3. There would also need to be substantial construction and outfitting work at Buckeye DC to make it operational after the lease began on April 1, 2022. On April 4, 2022, Buckeye DC opened for management employees, who came to Arizona from Washington to begin work. Much was to be done, including building storage racks and offices and equipping loading bays to receive product. Workers began training in late April. Issues with equipment were immediately evident, including that the conveyor belt system was too tall for most employees to use. Inventory began to arrive from Funko’s Washington warehouses in April, when only 12 of the anticipated 84 12 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. loading bays were operable. Funko used rented trailers to deliver inventory, and so incurred added costs when there were delays unloading them. When shipments first arrived, workers had not yet been trained or given operating procedures for unloading incoming inventory. One worker reported that he and other prospective employees were asked during interviews to begin work immediately to help unload incoming trucks. Workers were told to put inventory on any open racks, without any scanning or tracking. One Operations Lead saw that incoming inventory was being placed in the warehouse without review by stockers of shipping documentation or inventory count checks; he reported to management that the gaps would be a problem if not addressed. Adding to the chaos, when shipping documentation was reviewed, it often revealed that incoming trailers were missing product, had extra product, or had the wrong product. Workers at Buckeye DC were directed to update Microsoft NAV to reflect the product that was actually received, which changed inventory counts in the system and made tracking inventory “nearly impossible.” An Operations Lead reported that workers had to deal with 50 “investigations” per day to find product misplaced in the warehouse. That Operations Lead wrote a letter to an Operations Manager describing the issues he saw, and, after returning to Washington, relayed his concerns to Senior Director of Fulfillment Operations Dave Tarnosky. Tarnosky worked under Vice President of Operations Alex Poole and COO Sansone. If Oracle had been operational, workers would have scanned incoming product, Oracle would have told the workers where to put it, and workers would have scanned the storage rack to confirm the inventory’s location in the system. Instead, workers were  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 13 forced to use Excel spreadsheets and handwritten notes to track inventory. By the end of May, Buckeye DC’s storage racks were full. Disorganized inventory was stacked on the floor and went untracked in any identification system. Workers spent hours trying to find product that had been placed on the floor in this haphazard manner, causing order fulfillment backup. An Operations Manager estimated that half of the inventory from Washington had been misplaced in the warehouse. In addition, Funko had not destroyed any dead inventory in two years, meaning it was beginning to pile up and comprised a quarter of one of Funko’s Washington warehouses. Funko’s management decided to move dead inventory to Buckeye DC rather than identify and destroy it. One warehouse supervisor estimated that 30% of the inventory sent to Buckeye DC was dead. On May 5, 2022, Funko filed with the SEC a Form 10-Q for 1Q22, which CEO Perlmutter and CFO Jung signed and certified. 2 The Form 10-Q included “Risk Factors” and reiterated the risk disclosure from the March 3 Form 10-Q concerning inventory management. It included the following additional “Risk Factor”: Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability. We rely extensively on various information technology systems and software 2 The Form 10-Q is a quarterly report that certain securities issuers are required to file with the SEC under the Exchange Act. 17 C.F.R. § 240.13a-13. 14 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. applications, including our enterprise resource planning software, to manage many aspects of our business, including product development, management of our supply chain, sale and delivery of our products, financial reporting and various other processes and transactions. We are critically dependent on the integrity, security and consistent operations of these systems and related back-up systems. ... The failure of these information systems to perform as designed, our failure to operate them effectively, or a security breach or disruption in operation of our information systems could disrupt our business, require significant capital investments to remediate a problem or subject us to liability. We are also in [sic] process of upgrading our enterprise resource planning software globally, beginning in the United States. If the potential upgrades are not successful or result in delays, our business could be disrupted or harmed. Funko held an earnings call the same day, in which CFO Jung explained that costs would remain high through the first half of the year, and that “we did launch the new [distribution center] in April, and the ERP is set to come out at the end of the [(second)] quarter.” At the time, certain employees felt Oracle would not be functional by June (the end of the second quarter) and commented that CFO Jung’s statement “was a weird thing to say.” But analysts who reported on Funko took CFO Jung’s statement at face value, writing that  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 15 “the [selling, general, and administrative] expense ratio will be up sequentially due to the one-time spending, which should be complete by the end of 2Q22.” In June, Poole, the Vice President of Operations who had been responsible for the new warehouse, quit. COO Sansone began visiting Buckeye DC for at least a week per month, taking charge of the project. The build-out was ongoing and necessary equipment was still being acquired. Storage racks were filled as soon as they went up, and the warehouse was operating at over 95% capacity. The inventory tracking problems continued; the number of investigations to find lost inventory increased to 120 per day. By late June and early July, incoming shipping containers that had been delayed due to COVID-19-related supply chain slowdowns began arriving, further clogging the warehouse. With nowhere to put the product, Funko stacked between 300 and 500 rented shipping containers in the parking lot during 3Q22, accruing late fees as the FunkoPop!s baked in the Arizona sun. On August 4, 2022, Funko filed with the SEC a Form 10- Q for 2Q22, which CEO Perlmutter and CFO Jung signed and certified. It disclosed a “Risk Factor” concerning managing inventory levels nearly identical to the March 3 and May 5 filings, with additions that we emphasize here: [W]e must also avoid accumulating excess inventory, which increases working capital needs and lowers gross margin . . . . We have recently experienced canceled orders and if demand or future sales do not reach forecasted levels, we could have excess inventory that we may need to hold for a long 16 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. period of time, write down, sell at prices lower than expected or discard. For example, in the fourth quarter of 2019, we wrote-down $16.8 million of inventory due to our decision to dispose of slower moving inventory to increase operational capacity which contributed to the Company’s net loss for the period. If we are not successful in managing our inventory, our business, financial condition and results of operations could be adversely affected. That same August 4, 2022 Form 10-Q also included a “Risk Factor” concerning the operation and upgrade of Funko’s information technology, nearly identical to the Risk Factor identified in the May 5, 2022, Form 10-Q concerning the same, with two changes emphasized here: The efficient operation and successful growth of our business depends on these information systems, including our ability to operate and upgrade them effectively and to select and implement adequate disaster recovery systems successfully. . . . We are also in process of upgrading our enterprise resource planning software globally, beginning in the United States. In August 2022, we announced that we are delaying the remaining steps for implementation of our enterprise resource planning software to 2023. If the potential upgrades are not  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 17 successful or result in further delays, our business could be disrupted or harmed. The Form 10-Q told investors that Funko expected costs “to remain elevated through at least the end of 2022 to support the final transitions of [its] U.S. distribution warehouses” and that the Company expected “to finalize the remaining steps” of the Oracle upgrade “in early 2023.” And in a Form 8-K filed the same day, signed by CFO Jung, Funko reported that inventories were inflated over the prior year due to “receipt of delayed inventory as pandemic-related supply chain disruptions began to improve toward the end of the quarter.” Also on August 4, 2022, Funko held an earnings call with investors and analysts. CFO Jung, speaking about the switch to Oracle, explained that “we recently made the difficult decision to delay the remaining steps until 2023” due to “a number of factors,” but “ultimately, we did not want to impair the momentum that we have today by shifting to a platform that we felt wasn’t yet fully ready to support our business.” Discussing Funko’s inventory levels, she explained that “[w]hile our inventory levels are up year- over-year, we believe that inventory is generally high quality and leave[s] us well positioned to meet our consumer demand and support our strong second half growth forecast.” An analyst asked CFO Jung about the inventory, and she explained: [I]n Q4 [we] had a lot of delays that rolled into Q1 just due to the congestion within the supply chain. And you’re seeing a little bit of that in Q2 as well. Although as we’re now looking into the back half of the year, we feel 18 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. the inventory is in a really good healthy position, and we’re poised to deliver on our back half results. It was really about just managing through the congestion that we saw so far. Knowing that, we’re seeing those transit times come down and delivery dates to be more on time than they had earlier in the year. So there is a large portion of the in- transit, but we’re working to get that into the DC and get that out to our customers. Another analyst asked CFO Jung about Funko’s “cash flow,” and she replied: What you’re seeing underneath the covers there [are] a couple high [uses] of cash, whether it be the distribution center, that was a major feat to get that up and running . . . then we had the inventory that came in all at once as you got in Q4 inventory, Q1 inventory. And so . . . inventory and some of the uses of cash is what you’re seeing. Following the call, Funko’s share price dropped 18%. In August 2022, the warehouse lagged 50 days behind on order fulfillment. In September, the Sales team had difficulty meeting sales quotas due to missing product and product shortages. The product that sat in shipping containers was not listed as available and would not be listed as available until it was unloaded in the warehouse. All the while the busy holiday season approached. Operations at Buckeye DC floundered: the warehouse lacked appropriate equipment, product on the top shelf could  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 19 not be reached in a timely manner, and the conveyor belts (designed for the yet-to-be-launched Oracle) laid inoperable. Funko began to ship partial orders. Retail customers started to cancel orders, particularly those for product with current- release IP that was so delayed it was no longer considered “new.” In one case, a retailer needed Valentine’s Day product shipped by October but was told it would not be shipped until the following May. On September 13, 2022, Funko held a “Press and Investor Day.” An investor asked CFO Jung, “[c]an you help us quantify how much investment is needed for that internal growth, or how much internal investment is needed for the growth?” CFO Jung responded by explaining that, “[o]bviously, down the road, we’ll eventually need probably more distribution capabilities to continue [to] support the growth, but that’s more of a future down the road within the 5-year plan, but not directly related within the next, call it, 12 months or so.” That autumn, Buckeye DC’s parking lot sat full of inaccessible Halloween and Christmas product. By the end of September, Funko hired a third-party logistics company to store slow and dead inventory elsewhere in Arizona. That warehouse filled up within a few months, so Funko rented another. On November 3, 2022, Funko filed with the SEC a Form 10-Q for 3Q22, signed and certified by CEO Perlmutter and CFO Jung. This 10-Q included a “Risk Factor” concerning inventory management with language identical to that in the August 4, 2022, Form 10-Q. It did not include a risk factor concerning information technology. Funko held an earnings call the same day. CEO Perlmutter told investors and analysts that Buckeye DC was 20 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. designed for Oracle and running it without Oracle caused “higher-than-expected short-term operating expenses.” CFO Jung said that the higher expenses were primarily due to labor and machinery costs to move the product. Though the inventory levels were 88.7% higher than a year prior, CFO Jung reiterated that the inventory was “generally high quality.” The revelations caused a stir among analysts, who noted that they “believe a credibility issue could weigh on shares over the foreseeable future,” and that “it feels like we were hit with a bomb.” Funko’s share price dropped 59% the following day. In December 2022, Perlmutter was demoted back to President and CFO Jung stepped down. In March 2023, the Company announced it was abandoning the Oracle project and writing down $32.5 million in associated costs and between $30 and $36 million in inventory to “manag[e] inventory levels to align with the operating capacity of [its] distribution center.” Also in March, Buckeye DC workers finally unloaded Christmas-themed inventory, which had been sitting in the parking lot for months. D. Jonathan Studen, formerly a named plaintiff, filed a putative class action complaint in June 2023. That summer, the district court granted the Pension Trust’s motion to be appointed lead plaintiff. The Pension Trust filed an amended complaint on behalf of itself and Paul Haddock, asserting that Funko, CEO Perlmutter, and CFO Jung violated Section 10(b) of the Exchange Act and SEC Rule 10b-5, and seeking to hold the same Defendants liable as control persons under Section 20(a). 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. 240.10b-5. Specifically, they asserted that, during the class period, Defendants’ statements misrepresented the status of  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 21 its inventory management, distribution capabilities, and use of information technology systems. They further asserted that Defendants acted with scienter when making these allegedly false or misleading statements. Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, which the district court granted in May 2024. The district court also granted Plaintiffs leave to amend. Plaintiffs declined to amend and instead pursued this appeal. II. We review a district court’s dismissal under Rule 12(b)(6) de novo. In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130, 1140 (9th Cir. 2017). Typically, a complaint need only contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Cloudera, 121 F.4th at 1186 (quoting Fed. R. Civ. P. 8(a)(2)). To survive a motion to dismiss, a complaint must contain “sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). In addition, a complaint attempting to state a claim for fraud must meet Rule 9(b)’s heightened pleading standard. Fed. R. Civ. P. 9(b); Glazer, 63 F.4th at 765. Rule 9 requires a plaintiff alleging fraud to “state with particularity the circumstances constituting fraud.” Glazer, 63 F.4th at 765 (quoting Fed. R. Civ. P. 9(b)). “To properly plead fraud with particularity under Rule 9(b), ‘a pleading must identify the who, what, when, where, and how of the misconduct charged.’” Cloudera, 121 F.4th at 1187 (citation omitted). A plaintiff initiating a cause of action pursuant to the Exchange Act must also meet the Private Securities Litigation Reform Act’s (“PSLRA”) pleading standards. 15 22 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. U.S.C. § 78u-4; Cloudera, 121 F.4th at 1187. Section 10(b) of the Exchange Act prohibits “‘manipulative or deceptive’ practices in connection with the purchase or sale of a security.” In re Facebook, Inc. Sec. Litig., 87 F.4th 934, 947 (9th Cir. 2023) (citing 15 U.S.C. § 78j(b)). SEC Rule 10b-5 prohibits making “any untrue statement of a material fact” or omitting material facts “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). The PSLRA requires that an Exchange Act plaintiff set out in their complaint each statement alleged to be misleading, and the “reason or reasons why the statement is misleading,” 15 U.S.C. § 78u-4(b)(1), as well as “facts giving rise to a strong inference that the defendant acted with the required state of mind,” Quality Sys., 865 F.3d at 1140. This is an “exacting standard, under which a litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false, is insufficient.” Cloudera, 121 F.4th at 1187 (citation modified). Importantly, the PSLRA “did not impose an insurmountable standard.” In re VeriFone Holdings, Inc. Sec. Litig., 704 F.3d 694, 708 (9th Cir. 2012). “The PSLRA was designed to eliminate frivolous or sham actions, but not actions of substance.” Glazer, 63 F.4th at 769 (quoting Nursing Home Pension Fund, Loc. 144 v. Oracle Corp., 380 F.3d 1226, 1235 (9th Cir. 2004)). A complaint’s factual allegations remain entitled to a presumption of truth, Facebook, 87 F.4th at 947; Quality Sys., 865 F.3d at 1136, and an Exchange Act claim survives dismissal if the factual allegations in the complaint “allow[] the court to draw the reasonable inference that the defendant is liable for the  CONSTR. LABORERS PENSION TRUST V. FUNKO INC. 23 misconduct alleged.” Glazer, 63 F.4th at 763 (quoting Iqbal, 556 U.S. at 678). III. A plaintiff asserting a claim under Section 10(b) and Rule 10b-5 must allege “(1) a material misrepresentation or omission by the defendant [(“falsity”)]; (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.” Glazer, 63 F.4th at 764 (quoting In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046, 1052 (9th Cir. 2014)). “Section 20(a) imposes liability on a person who is in control of the person who is directly responsible for a securities fraud violation.” In re Alphabet, Inc. Sec. Litig., 1 F.4th 687, 701–02 (9th Cir. 2021). Section 20(a) claims are derivative and require an underlying violation of the statute. Id. (quoting 15 U.S.C. § 78t(a)). The district court dismissed the complaint for failure to sufficiently allege falsity and scienter. Before we turn to Plaintiffs’ arguments, we note that we remain at the pleading stage. We are therefore required to afford the allegations in the complaint reasonable inferences and presume their truth. Facebook, 87 F.4th at 948; Quality Sys., 865 F.3d at 1136. Where we can “draw the reasonable inference” of falsity or scienter, the claims survive. Glazer, 63 F.4th at 763. Our analysis is limited solely to whether Plaintiffs’ allegations are sufficiently plausible and particular to survive a motion to dismiss. Whether Plaintiffs can recover will require resolution of factual questions by a trier of fact. Because “generally ‘a federal appellate court does not consider an issue not passed upon below,’” we limit our review only to the falsity and scienter elements: the two 24 CONSTR. LABORERS PENSION TRUST V. FUNKO INC. grounds upon which the district court dismissed Plaintiffs’ complaint. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1008 (9th Cir. 2018) (quoting In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008)) (limiting review solely to elements of falsity and materiality). A. We begin with falsity. To establish falsity, “securities plaintiffs may rely on either an affirmative misrepresentation theory or an omission theory.” Wochos v. Tesla, Inc., 985 F.3d 1180, 1188 (9th Cir. 2021) (citing 17 C.F.R. § 240.10b- 5(b)). “An allegedly misleading statement must be ‘capable of objective verification,’” Weston Fam. P’ship LLLP v. Twitter, Inc., 29 F.4th 611, 619 (9th Cir. 2022) (quoting Oregon Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 606 (9th Cir. 2014)), and “[w]e apply the objective standard of a ‘reasonable investor’ to determine whether a statement is misleading.” Alphabet, 1 F.4th at 699 (quoting VeriFone, 11 F.3d at 869). Pla