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United States Court of Appeals,Ninth Circuit.

LIVID HOLDINGS LTD., Plaintiff-Appellant, v. SALOMON SMITH BARNEY, INC.;  Salomon Smith Barney Holdings Inc.;  BNY Clearing Services LLC, Successor in interest to Schroders & Co, Inc.;  Andrew Van Der Vord;  Robert Chamine;  Michael Dura;  Robert Hamecs;  William Hurst;  Leon Kalvaria;  Ilan Kaufthal;  John O'Donogue;  Herc Segalas;  Jed Sherwindt;  James Stone;  Frederick Taylor;  Samuel Weinhoff, Defendants-Appellees.

No. 03-35374.

Decided: April 06, 2005

Before D.W. NELSON, REINHARDT, and THOMAS, Circuit Judges. Marc M. Seltzer (argued), Susman Godfrey, LLP, Los Angeles, CA, and Paula K. Jacobi (on the briefs), Sugar, Friedberg & Felsenthal, LLP, Chicago, IL, for the plaintiff-appellant. William F. Alderman, Orrick, Herrington & Sutcliffe, LLP, San Francisco, CA, for the defendants-appellees.

Livid Holdings, Ltd. (“Livid”) appeals the district court's dismissal with prejudice of its complaint against the corporate successors to Schroders & Co., Inc. (collectively referred to as “Schroders” or “Defendants”) under Federal Rule of Civil Procedure 12(b)(6).   Livid's complaint alleges that Defendants violated:  (1) § 10(b) of the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder;  (2) the Washington Securities Act (“WSA”), Wash. Rev.Code § 21.20.010;  and (3) Washington tort law.   We hold that the district court erred in dismissing Livid's complaint.


Livid's claims arise out of its December 1999 purchase of $10 million worth of shares in Purely Cotton, Inc. (“PCI”) stock.   In January 1999, Schroders helped PCI arrange a private placement of $25 million worth of its stock.   For this purpose, Schroders created a Confidential Offering Memorandum (“the Memorandum”), which outlined PCI's operations, business plan, and financial position.   After the distribution of the Memorandum to potential investors, Livid alleges that UAE Investments, Ltd. (“UAE”), a Gibralter-based company, agreed to purchase over 98% of the offering.   The individual Defendants, who were directors and/or officers of Schroders, agreed to purchase the remaining stock.   Livid alleges that there was never a contractual document requiring UAE to pay more than $2 million of the $25 million purchase price.

In September 1999, PCI asked Schroders for additional copies of the Memorandum in order to solicit additional investors.   Livid alleges that before providing PCI with these extra copies, Defendant Van der Vord, the managing director at Schroders in charge of the offering, and his team amended the Memorandum by attaching the following notice:

This Memorandum was written in January 1999 and represents the original Offering Memorandum distributed to potential investors in the Company's $25 million private equity fund raising.   Subsequent to the writing and distribution of this document the Company may have undergone various changes including but not limited to management changes, ownership changes and business strategy changes.   This document has not been updated or amended to reflect any events that have occurred since January 1999.   As such, it does not reflect the fact that the above-mentioned $25 million private equity fund raising has been completed.

(emphasis added).

Livid's claims against Defendants arise out of the last sentence of this notice.   This sentence, Livid contends, implies that the proceeds of the initial $25 million sale had been received by PCI, but that the Memorandum had not yet been updated to reflect this additional capital.   At the time this notice was written, however, UAE and the Defendants had actually paid less than $2 million to PCI. Livid alleges that additional payments on UAE's balance were conditional on UAE's approval of a PCI business plan and a new chief executive officer-meaning that UAE was not actually bound to pay for the PCI stock.   Livid further alleges that all of the named Defendants bought stock through this initial offering on the same terms as UAE, and therefore knew that the sale was incomplete when the notice was attached to the Memorandum for the express purpose of attracting additional investors.   Defendants do not contest that they had such knowledge.   In addition, Livid alleges that Defendants had a motive to deceive potential investors because PCI had not yet paid Schroders for the services it provided in connection with the first fund-raising campaign.   In essence, Livid contends that Defendants had a motive to try to bring additional capital into PCI-to increase the likelihood that it would be paid for past services rendered.

The district court dismissed each of Livid's claims with prejudice.   With respect to the federal claim, the district court found that Livid failed to plead adequately that the notice statement was a material misrepresentation, upon which it reasonably relied in purchasing PCI stock.   In addition, the district court found that Livid's complaint did not satisfy the heightened pleading standards for scienter under the 1995 Private Securities Litigation Reform Act (“PSLRA”).   The district court dismissed Livid's state securities claim because it found the alleged misrepresentation immaterial, and that Defendants were not sellers of securities within the meaning of the WSA. Because the district court found that Livid's reliance on the representations in the notice was unreasonable, the court also dismissed the state tort claims.   Finally, the district court refused to grant Livid leave to amend its complaint, concluding that any such attempt would be futile.


I. Standard of Review

 We review dismissals for failure to state a claim pursuant to Federal Rule 12(b)(6) de novo.  Decker v. Advantage Fund, Ltd., 362 F.3d 593, 595-96 (9th Cir.2004).   In conducting such a review, we generally limit consideration to the complaint and construe all allegations of material fact in the light most favorable to the nonmoving party.  Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1141 n. 5 (9th Cir.2003);  No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. W. Holding Corp., 320 F.3d 920, 931 (9th Cir.), cert. denied, 540 U.S. 966, 124 S.Ct. 433, 157 L.Ed.2d 311 (2003).   A Federal Rule 12(b)(6) dismissal is inappropriate unless it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim entitling plaintiff to relief.  No. 84 Employer-Teamster Joint Council, 320 F.3d at 931.   The district court's dismissal of a complaint without leave to amend is reviewed de novo and is improper unless it is clear that the complaint could not be saved by any amendment.  Thinket Ink Infor. Res., Inc. v. Sun Microsystems, Inc., 368 F.3d 1053, 1061 (9th Cir.2004).

II. Federal Securities Law Claim

 Section 10(b) of the 1934 Act makes it unlawful “for any person, directly or indirectly, ․ [t]o 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 Commission may prescribe.”  15 U.S.C. §§ 78j, 78j(b).  Rule 10b-5, promulgated under § 10(b), in turn provides:  “It shall be unlawful for any person ․ [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. The elements of a Rule 10b-5 claim are:  (1) a misrepresentation or omission of a material fact;  (2) scienter;  (3) causation;  (4) reliance;  and (5) damages.  In re Daou Sys., Inc. Sec. Litig., 397 F.3d 704, 710 (9th Cir.2005).

Claims brought under Rule 10b-5 must meet the particularity requirement of Federal Rule of Civil Procedure 9(b), which requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.”  Fed.R.Civ.P. 9(b).  The PSLRA raised the pleading standards for Rule 10b-5 claims by requiring that plaintiffs plead scienter by “stat[ing] 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. Material Misrepresentations or Omissions

 For the purposes of a 10b-5 claim, a misrepresentation or omission is material if there is a substantial likelihood that a reasonable investor would have acted differently if the misrepresentation had not been made or the truth had been disclosed.  Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988).   We conclude that Livid has sufficiently pled materiality by raising a substantial likelihood that a reasonable investor would not have purchased $10 million worth of PCI stock after learning that the company had $25 million less in cash than the investor was led to believe.   If this misrepresentation had not been made, Livid would likely have believed that PCI's financial status was closer to the negative net worth of $743,646 reported in the Memorandum, rather than $24.2 million predicted to result from the stock offering.1  This misrepresentation radically altered the picture of PCI's overall economic health and viability presented to Livid by the Memorandum.   Thus, Livid successfully pled the materiality of Defendants' misrepresentation regarding PCI's capital.

The district court, however, found that the notice Defendants attached to the Memorandum contained cautionary language rendering “any statement made in the [n]otice legally immaterial.”   In making this finding, the district court relied on the “bespeaks caution” doctrine, which “provides a mechanism by which a court can rule as a matter of law that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud.”  In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1408 (9th Cir.1996) (quoting Fecht v. The Price Co., 70 F.3d 1078, 1081 (9th Cir.1995)).   We have applied the bespeaks caution doctrine in situations where “optimistic projections coupled with cautionary language ․ affect[ ] the reasonableness of reliance on and the materiality of those projections.”  In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1414 (9th Cir.1994).

 Dismissal on the pleadings under the bespeaks caution doctrine, however, requires a stringent showing:  There must be sufficient “cautionary language or risk disclosure [such] that reasonable minds could not disagree that the challenged statements were not misleading.”  In re Stac, 89 F.3d at 1409 (quoting Fecht, 70 F.3d at 1082).   We cannot agree that the only reasonable interpretation of the contested sentence is that it warned potential investors that PCI may not have received all of the capital from the $25 million stock sale.   Instead, the most obvious interpretation of this sentence is that this cash had already been received, but that this “fact” and the resulting cash increase was not yet updated in the Memorandum.

 In finding the statement immaterial, the district court also extended the bespeaks caution doctrine to statements of fact, despite the lack of approval from this circuit for such application of the doctrine as well as the explicit rejection of such an extension by two other circuits.   See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir.1996) (holding that the bespeaks caution doctrine does not apply to representations of “present facts” that were false when made);  Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392, 1405-06 (7th Cir.1995) (similarly holding that the doctrine does not apply to misrepresentations of “hard facts,” but only to subjective or “soft information”).   To date, this circuit has only applied the doctrine to forward-looking statements, such as estimates of future performance or economic projections.   See Gray v. First Winthrop Corp., 82 F.3d 877, 883 (9th Cir.1996) (acknowledging that “the bespeaks caution rule is not applicable to misrepresentations of historical facts,” but refusing to find that a district court clearly erred when considering the doctrine when the contested historical facts formed the basis of projections about future profitability);  see also PSLRA § 21E(c)(2), 15 U.S.C. § 78u-5(c)(1) (expressly codifying the bespeaks caution doctrine for “forward-looking statements”).   We now expressly adopt the logic of the First and Seventh Circuits and hold that extension of the bespeaks caution doctrine to statements of historical fact is inappropriate.   See also Worlds of Wonder, 35 F.3d at 1414 (“[A]n overbroad application of the [bespeaks caution] doctrine would encourage management to conceal deliberate misrepresentations beneath the mantle of broad cautionary language.”) (quoting In re Worlds of Wonder Sec. Litig., 814 F.Supp. 850, 858 (N.D.Cal.1993)).   Accordingly, we hold that the district court erred in concluding that the contested statement was immaterial.

B. Scienter

 This circuit has interpreted the PSLRA's heightened pleading standard as requiring plaintiff to “plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.”  In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir.1999).  “[T]o show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity[to commit fraud].”  Id. When determining whether plaintiffs have sufficiently plead scienter, we must consider “whether the total of plaintiffs' allegations, even though individually lacking, are sufficient to create a strong inference that defendants acted with deliberate or conscious recklessness.”  No. 84 Employer-Teamster Joint Council, 320 F.3d at 938 (citation omitted).   In making this assessment, we consider all reasonable inferences, whether or not favorable to the plaintiff.  Gompper v. VISX, Inc., 298 F.3d 893, 897 (9th Cir.2002).

 Defendants, who purchased PCI stock on the same terms as UAE, do not contest that they were fully aware that the initial stock sale had not been completed.   Nonetheless, Defendants wrote and attached the notice statement, which at best omitted crucial information about the prior sale's terms and status, and at worst was an intentional attempt to trick potential investors into believing that the sale had been completed and the cash had been received by PCI but was simply not incorporated into the previously written Memorandum.   The district court, however, believed that the Defendants lacked the requisite mental state because “if [they] had intended to mislead investors, [they] would have made the misrepresentation more explicit.”   We disagree.   There are few ways to make the misrepresentation more explicit as it states as “fact” that the initial stock offering “has been completed,” but that the attached Memorandum had not been updated to reflect this alleged fact.   If Defendants' intention was to warn potential investors that the Memorandum was not current and to make no statement on whether or not the sale was successfully concluded, the Defendants could have conveyed this warning in a much clearer way.   For example, had the sentence read: “The document does not reflect any capital that may have been generated by the private equity fund-raising,” it would not imply that the $25 million fund-raising effort had been successfully completed and that PCI had received these funds, but the Memorandum did not yet reflect this fact.

Because Livid alleges, and Defendants do not contest, that they knew the contested statement's most obvious interpretation was false when made, Livid has met the heightened pleading standard for scienter by raising a strong inference of Defendants' deliberate recklessness.   See Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1230 (9th Cir.2004).   In combination with Livid's allegation that Defendants had a motive to misrepresent the status of the stock sale, Livid has pled facts constituting a strong inference of scienter.   Although this court has found that allegations of a motive to mislead, standing alone, cannot satisfy the heightened scienter standard, we are not precluded from considering allegations of motive in combination with other allegations of Defendants' intent to mislead or deliberate recklessness.  In re Silicon Graphics, 183 F.3d at 974.   Therefore, we hold that the totality of the allegations creates a strong inference that the Defendants acted with the requisite scienter and reverse the district court's conclusion to the contrary.

C. Causation

 The causation requirement for Rule 10b-5 actions includes “both transaction causation, that the violations in question caused the plaintiff to engage in the transaction, and loss causation, that the misrepresentation or omissions caused the harm.”  Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir.1999).   Livid has sufficiently pled both elements of causation because it has alleged both that they would not have purchased the PCI stock but for the misrepresentation and that the Defendants' misrepresentation induced a disparity between the transaction price and the true investment quality of the stock at the time of the transaction.   See id. at 938-39.   Our case law requires no more.   Accordingly, Livid pled causation sufficient to survive a Rule 12(b)(6) motion to dismiss.

D. Reliance and Damages

 The district court concluded, as a matter of law, that Livid could not establish reliance because the notice contained sufficient cautionary language to make any reliance unreasonable.   For the reasons discussed above, we refuse to extend the bespeaks caution doctrine to misrepresentations of historical facts as opposed to forward-looking projections.   Therefore, we reverse the district court's finding that Livid inadequately pled reliance.

Finally, although the district court claims to have made its reliance finding as a matter of law, it stated that even if the Defendants could have expected potential investors to “draw such a faulty inference” that the initial stock offering had been completed, that Defendants “would have had to assume further that the same investors would fail to perform even the most cursory due diligence,” which would have quickly revealed the truth.   Such a factual determination by the court is inappropriate in a Rule 12(b)(6) dismissal, especially when, as here, the Defendants do not contest that Livid conducted adequate due diligence, which produced statements from UAE and PCI falsely claiming that the sale had been completed.   If Livid justifiably relied on Defendants' misrepresentation about the stock sale and, in turn, bought PCI stock based on this reliance, it incurred damages from Defendants' fraud.   Livid's assertions to this effect are sufficient to survive Defendants' motion to dismiss under Rule 12(b)(6).

E. Statute of Limitations

 As an alternative ground for affirming the district court, Defendants argue that Livid's federal securities claim is time-barred.   This court can affirm the district court's dismissal on any ground supported by the record, even if the district court did not rely on the ground.   See, e.g., United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall, 355 F.3d 1140, 1144 (9th Cir.2004);  Cardenas v. Anzai, 311 F.3d 929, 938 (9th Cir.2002).   Because the record does not establish that the statute of limitations for the federal securities claim has run, we refuse to affirm the district court on this alternative ground.

Rule 10b-5 does not contain its own statute of limitations.   The Supreme Court, however, has construed the limitations period in § 9(e) of the 1934 Act to apply to Rule 10b-5 actions.  Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). Since this decision, Rule 10b-5 actions have been required to be filed within the earlier of either “one year after the discovery of facts constituting the violation” or three years after such violation.  Id. In 2002, Congress passed the Sarbanes-Oxley Act (SOA) extending the statute of limitations for Rule 10b-5 actions.  Pub.L. No. 107-204, 116 Stat. 745 (2002), codified in part at 28 U.S.C. § 1658(b).  Section 804(a) states that:

a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 ․, may be brought not later than the earlier of-

(1) 2 years after the discovery of the facts constituting the violation;  or

(2) 5 years after such violation.

Id. § 804(a).   This new statute of limitations period “appl[ies] to all proceedings ․ that are commenced on or after the date of enactment of this Act,” which was July 30, 2002.   Id. § 804(b).

Livid filed its complaint on August 1, 2002, two days after the SOA's effective date.   This fact alone does not bring the complaint within the SOA's longer statute of limitations period as the SOA also contains a statement warning that the new limitations period should not be interpreted as “creat [ing] a new, private right of action.”   Id. § 804(c).  The Defendants argue that when Livid filed its complaint, the pre-SOA limitations period had already run.   If this were true, in order to uphold the complaint, we would have to find that Congress clearly intended the SOA's new statute of limitations to revive previously expired claims.   Because we cannot conclude that the pre-SOA statute of limitations had run when Livid filed its complaint, we refuse to decide, based on this record, whether the new statute of limitations period revives dead claims.

According to the pre-SOA standard, Livid's claim is time-barred if Livid discovered the “facts constituting the violation” it alleges a year before filing its complaint.  Lampf, 501 U.S. at 364, 111 S.Ct. 2773.   The Defendants argue that this statute of limitations began to run over two years before Livid filed its complaint when, on March 19, 2000, three PCI employees filed an involuntary bankruptcy petition against PCI, which put Livid on inquiry notice of the alleged fraud.   This court has considered, but not made a final determination on whether actual or inquiry notice of the alleged fraud triggers the running of Rule 10b-5's statute of limitations.  Berry v. Valence Tech., Inc., 175 F.3d 699, 704 (9th Cir.1999).   In Berry, the court declined to adopt either an inquiry or actual notice standard, but noted that “[i]f we were to adopt inquiry notice, we would agree with the ․ formulation of ․ most circuits” which apply “an inquiry notice standard coupled with some form of reasonable diligence requirement.”  Id. (citation omitted).   Since Berry, this court has left the notice standard unresolved and applies both the actual notice and inquiry-plus-due diligence standards in applicable cases.

The complaint alleges that Livid did not have actual notice of the alleged fraud until “late September 2001” when it received a report from the independent auditor for the bankruptcy proceeding.   If actual notice is required to trigger the statute of limitations, we cannot hold, as a matter of law, that Livid filed its complaint more than one year after it discovered the alleged fraud.   It is not evident, based on the allegations in the complaint, whether Livid timely filed this action if inquiry notice triggers the running of the statute of limitations.

 We cannot decide on this record whether under this circuit's modified inquiry notice standard Livid should have been aware of the fraud one year before it filed its complaint.   This court has held that financial problems alone are generally insufficient to suggest fraud.  Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d 873, 878 (9th Cir.1984).   Therefore, the filing of the bankruptcy petition alone seems unlikely to satisfy the inquiry-plus-due diligence standard, especially since we have held that “[t]he question of what a reasonably prudent investor should have known is particularly suited to a jury determination,” id. at 879.   Livid alleges that it first learned of the bankruptcy proceedings against PCI on May 25, 2001, which caused it to evaluate the filings submitted in this proceeding.   This investigation revealed a verified pleading affirmatively representing that the $25 million stock sale had been received by PCI. Therefore, we cannot decide, as a matter of law, whether Livid should have been on notice of the alleged fraud one year before the complaint was filed.

III. State Securities Law Claim

 The district court dismissed Livid's state securities claim based on its finding regarding Livid's federal securities claim that “the alleged misrepresentation was immaterial as a matter of law.” 2  Because we reverse the district court's immateriality finding on Livid's federal securities claim, we also reverse the immateriality finding on the state securities law claim.

 Alternatively, the district court concluded that Livid's state securities claim must be dismissed because the Defendants were not sellers of securities under the WSA. Washington case law suggests otherwise.   Under Washington law, Livid need not allege that Defendants directly sold it the PCI stock, but must simply allege that Defendants were a “substantial contributive factor in the sales transaction.”  Haberman v. Wash. Pub. Power Supply Sys., 109 Wash.2d 107, 744 P.2d 1032, 1052 (1987);  Herrington v. Hawthorne, 111 Wash.App. 824, 47 P.3d 567, 570-71 (2000).   The district court analogizes Defendants' role in Livid's stock purchase to the role of the law firm in Hines v. Data Line Systems, Inc., 114 Wash.2d 127, 787 P.2d 8, 20 (1990).   In Hines, the Washington Supreme Court upheld summary judgment for the law firm, which served as the legal preparer for a private stock offering, but otherwise had no personal contact with any of the investors alleging fraud under the WSA and was not involved in the solicitation process.   The Washington Supreme Court concluded that the law firm did nothing more than provide routine professional advice about the materiality of certain facts in connection with the offer.  Id. Therefore, the Washington Supreme Court found that others “had the predominant effect of bringing about the sale.”  Id. Defendants, however, did not simply provide routine professional advice.   Instead, Livid alleges that Defendants wrote and inserted a prominent, misleading statement in the Memorandum being used to solicit investors and that this statement induced it to purchase PCI stock.   Therefore, the complaint raises a genuine issue of fact as to whether Defendants served as a catalyst for the sale and, thus, can be considered sellers under the WSA. Accordingly, we hold that the district court erred in finding, as a matter of law, that Defendants were not a substantial contributive factor in the sales transaction at issue.

IV. State Tort Law Claims

 The district court based its dismissal of Livid's state tort claims for fraudulent and negligent misrepresentation on its holding that Livid's reliance on the notice's statements was unreasonable.   Under either tort claim, Washington law requires plaintiffs to show reasonable reliance.   ESCA Corp. v. KPMG Peat Marwick, 135 Wash.2d 820, 959 P.2d 651, 654 (1998) (negligent misrepresentation);  Haberman, 744 P.2d at 1070 (fraudulent misrepresentation).   Here again, because we find that the district court erred in determining, as a matter of law, that Livid failed to allege adequately reasonable reliance on the statements in the notice as to Livid's federal securities claim, we must similarly reverse the district court's decision as to Livid's state tort claims.


Plaintiff's complaint states a claim for federal securities fraud, state securities fraud, and state tort violations-even under the heightened pleading standards of the PSLRA.   The case is remanded to the district court for further proceedings consistent with this opinion.



1.   This amount reflects the $25 million in income from the offering less expenses from the sale.

2.   Livid did not allege a violation of the WSA in its original complaint.   This allegation was added in Livid's proposed First Amended Complaint.   The district court refused to allow Livid leave to file either its first or second amended complaints, finding that amendment would be futile.   Nonetheless, the district court considered the proposed amended complaints in its order dismissing Livid's claims.

D.W. NELSON, Circuit Judge.