     12-3981
     In Re ProShares Trust Sec. Litig.

 1                      UNITED STATES COURT OF APPEALS
 2
 3                           FOR THE SECOND CIRCUIT
 4
 5
 6
 7                              August Term, 2012
 8
 9        (Argued: May 2, 2013                  Decided: July 22, 2013)
10
11                              Docket No. 12-3981
12
13
14              IN RE PROSHARES TRUST SECURITIES LITIGATION
15
16   MARK KARASICK, STEVEN S. NOVICK, SUSAN ASAI, STEPHEN C. HERMAN,
17   CHARLES SANKOWICH, MICHAEL A. HYMAN, HOWARD SCHWACK, FRANCISCO JAVIER
18   DE LION DIAZ, RENE LACROIX, ANTHONY KOURI, ANTHONY ALEXANDER, JAY
19   BILYEU, JUDY BILYEU, MICHAEL ERIC CODLIN, WENDY ROCKWELL-GOFF, ROBERT
20   SCHUMACHER, JAMES HERSHMAN, DOROTHY HERSHMAN, SCOTT TESSLER, RICHARD
21   RHOADS, MARTIN GARY NORRIS, DOROTHY LOWELL, NANCY HITCHINS, THOMAS
22   TRUONG, EDWARD CISNEROS, CHRIS HONCIK, STEPHEN SHOAP, DMITRI ROUTSKI,
23   ELENA LAVENDER-BOWEN, DAVID BOWMAN, DAVID CHOW, MARK EVERETT BROWN,
24   JONATHAN DEAN, LAWRENCE LEWIS SINSEL, JR., KENNETH L. KRAMER, LAWRENCE
25   I. WEINER, JOHN E. KILLOUGH, ALAN PARKER, SCOTT A. SMELTZ, HOWARD
26   SCHWACK, DOUGLAS JONES, STEPHEN HERMAN, ON BEHALF OF THEMSELVES AND ALL
27   OTHERS SIMILARLY SITUATED, STEVEN SCHNALL, SHERRI SCHNALL, ON BEHALF OF
28   THEMSELVES,
29
30                                                   Plaintiffs-Appellants,
31
32                                       –v.–
33
34   PROSHARES TRUST, PROSHARE ADVISORS LLC, SEI INVESTMENTS DISTRIBUTION
35   CO., MICHAEL L. SAPIR, LOUIS M. MAYBERG, RUSSELL S. REYNOLDS, III,
36   MICHAEL WACHS, SIMON D. COLLIER, PROSHARES TRUST II, EDWARD KARPOWICZ,
37   WILLIAM E. SEALE, CHARLES TODD, BARRY PERSHKOW,
38
39                                                    Defendants-Appellees.
40
41
42
 1   Before:
 2               WESLEY, CARNEY, WALLACE,* Circuit Judges.
 3
 4        Appeal from an order of the United States District
 5   Court for the Southern District of New York (John G. Koeltl,
 6   Judge), entered on September 12, 2012, dismissing
 7   Plaintiffs-Appellants’ third amended complaint, with
 8   prejudice, pursuant to Federal Rule of Civil Procedure
 9   12(b)(6). Plaintiffs complain that Defendants offered
10   investments in forty-four leveraged exchange-traded funds
11   (“ETFs”) through prospectuses that failed to warn them about
12   the magnitude and probability of loss in beyond-a-day
13   investments even when investors correctly predicted the
14   overall direction of the ETFs’ underlying index.
15   Furthermore, Plaintiffs allege that Defendants included
16   various contra-indicators of successful long-term
17   investments in the prospectuses which the alleged omissions
18   made misleading. Accordingly, Plaintiffs seek to hold
19   Defendants liable for the alleged omissions and misleading
20   statements pursuant to sections 11 and 15 of the Securities
21   Act of 1933, 15 U.S.C. §§ 77k & 77o. After a comprehensive
22   review of the relevant prospectuses, the district court
23   concluded that the alleged omissions were immaterial as a
24   matter of law because the prospectuses warned of the risks
25   that materialized and no reasonable investor who read them
26   would have been misled about the risks of leveraged-ETF
27   investments. After our own review of the complaint and of
28   the prospectuses, we agree with that conclusion.
29
30        AFFIRMED.
31
32
33             CHRISTOPHER LOVELL, Lovell Stewart Halebian
34                  Jacobson LLP, New York, NY (Jacob H. Zamansky,
35                  Zamansky & Associates LLC, New York, NY, on
36                  the brief), for Plaintiffs-Appellants.
37
38             ROBERT A. SKINNER, Ropes & Gray LLP, Boston, MA
39                  (Nick W. Rose, Ropes & Gray LLP, Boston, MA;

          *
           The Honorable J. Clifford Wallace, of the United States
     Court of Appeals for the Ninth Circuit, sitting by designation.

                                    2
 1                  Douglas H. Hallward-Driemeier, Ropes & Gray
 2                  LLP, Washington, D.C., on the brief), for
 3                  Defendants-Appellees ProShares Trust,
 4                  ProShares Trust II, ProShare Advisors LLC, SEI
 5                  Investments Distribution Co., Michael Sapir,
 6                  Louis Mayberg, Edward Karpowicz, William
 7                  Seale, Simon Collier, Charles Todd, and Barry
 8                  Pershkow.
 9
10                  Arthur H. Aufses III, Steven S. Sparling,
11                  Kramer Levin Naftalis & Frankel LLP, New York,
12                  NY, for Defendants-Appellees Russell Reynolds
13                  and Michael Wachs.
14
15
16   WESLEY, Circuit Judge:

17        In this putative class action, Plaintiffs collectively

18   purchased shares in forty-four leveraged ProShares exchange-

19   traded funds (“ETFs”) during the August 6, 2006 through June

20   23, 2009 class period.    Third Amended Complaint (“TAC”)

21   ¶¶ 1-2.   They seek to hold Defendants-Appellees ProShares

22   Trust and ProShares Trust II (collectively, “ProShares”)

23   liable for material omissions and misrepresentations in the

24   prospectuses for those ETFs pursuant to sections 11 and 15

25   of the Securities Act of 1933 (“‘33 Act”), 15 U.S.C. §§ 77k

26   & 77o.1

          1
           Defendant-Appellee ProShares Trust (“ProShares I”)
     registered with the Securities and Exchange Commission (“SEC”) as
     an open-end management investment company under the Investment
     Company Act of 1940. TAC ¶ 62(a). Defendant-Appellee ProShares
     Trust II (“ProShares II,” collectively with ProShares I
     “ProShares”) registered with the Commodity Futures Trading

                                    3
 1       A.      Exchange-Traded Funds

 2        In a series of press releases, ProShares indicated

 3   that their ETFs were for “investors interested in pursuing

 4   more sophisticated” trading strategies.      See TAC ¶¶ 104-08

 5   (internal quotation marks omitted).      With ProShares ETFs,

 6   investors could hedge and manage risk without having “‘to go

 7   through the process of setting up margin accounts or

 8   covering margin calls - they [could] simply trade

 9   ProShares.’”    TAC ¶ 104 (quoting June 21, 2006 Press

10   Release).    “‘And unlike a margin account,[an investor] can’t

11   lose more than [she] invest[s].’”     TAC ¶ 106 (quoting Feb.

12   1, 2007 Press Release). This is because ETFs operate like

13   indexed mutual funds but trade like stocks.      TAC ¶ 82.

14       “ETFs frequently track an index, a sector of stocks, or

15   a commodity or currency.”    TAC ¶ 81.    They are considered to

16   be “indexed mutual funds that trade like stocks,” TAC ¶ 82,

17   but they differ from mutual funds because they are generally

18   sold to institutional investors in large blocks of shares,

     Commission as a commodity pool. TAC ¶ 62(b). ProShares I
     offered thirty-eight of the ETFs underlying this action;
     ProShares II offered six. TAC ¶ 62(a), (b). Plaintiffs have not
     identified any meaningful distinction between ProShares I’s and
     ProShares II’s securities or registration statements such that
     one of the fund defendants would be subject to liability while
     the other would not.

                                     4
 1   called Creation Units.   These investors generally purchase

 2   Creation Units in exchange for “baskets” of securities that

 3   mirror the securities in the ETF portfolio.    Investors who

 4   purchase Creation Units often split up the Units into

 5   individual shares and sell them on a secondary market to

 6   retail investors who otherwise might not be able to access

 7   ETFs because of the cost of Creation Units.    These retail

 8   investors are then able to sell shares of ETFs on the

 9   secondary market, but they generally cannot redeem shares

10   with the ETFs because the ETFs often redeem shares only when

11   they are packaged in Creation Units.   TAC ¶ 82.

12       ProShares offered three types of ETFs: (1) an Inverse

13   ETF, (2) an Ultra Long ETF, and (3) an Ultra Short ETF.       TAC

14   ¶ 93(a)-(c).   An Inverse ETF aimed to “replicate the inverse

15   movement of the specified index over one day.”     TAC ¶ 93(a).

16   An Ultra Long ETF tried to “double the performance of the

17   underlying index or benchmark on a daily basis.”     TAC ¶

18   93(b).   And an Ultra Short ETF was designed to “double the

19   inverse of the performance of the underlying index or

20   benchmark on a daily basis.”   TAC ¶ 93(c).   Accordingly, if

21   the “specific index, benchmark, sector or commodity on which

22   an ETF [was] based[] increase[d] by 1% on a given day, then

                                    5
 1   [the Inverse ETF] would decrease by 1%; the [Ultra Long ETF]

 2   would increase by 2%; and [the Ultra-Short ETF] would

 3   decrease by 2%.”     TAC ¶ 94.   Each one of the ETFs in this

 4   case is leveraged.

 5       B.   Registration Statements

 6       ProShares I filed its registration statement on SEC

 7   Form N-1A.   TAC ¶ 89.    ProShares II filed its registration

 8   statement on Forms S-1 and S-3.       TAC ¶ 91.   The registration

 9   statements consisted of, inter alia, a prospectus and a

10   statement of additional information (“SAI”).        Though

11   ProShares I and ProShares II provided investors with several

12   different offering documents relevant to this appeal,

13   ProShares’ key disclosures relating to the ETFs at issue

14   here were materially consistent across all of the documents.

15       All relevant ProShares registration statements

16   disclosed that the ETFs pursued daily investment objectives

17   and daily investment results.        See Skinner Decl., App’x A,

18   Item 1; App’x B, Item 1.     ProShares I’s offering documents

19   make clear that these daily objectives were bets that it

20   could return a stated multiple of an ETF’s underlying index

21   each day by investing in different components of the

22   underlying index through various financial instruments.         For

                                      6
 1   example, “principal investment strategies include[d

 2   i]nvesting in equity securities and/or financial instruments

 3   (including derivatives) that ProShare Advisors believe[d],

 4   in combination, [w]ould have similar daily price return

 5   characteristics” of a stated multiple of the ETF’s

 6   underlying index.    June 19, 2006 ProShares I Reg. Stmt at 7.

 7       To achieve the predicted daily investment results,

 8   ProShare Advisors or a Sponsor would determine the type,

 9   quantity, and mix of investment positions that an ETF should

10   hold.    In addition, ProShares reserved the right to

11   substitute a different index or security for an ETF’s

12   underlying index and disclosed that it might over-weight or

13   under-weight certain components contained in the underlying

14   index.    See, e.g., id. at 59-60; see also, e.g., Nov. 17,

15   2008 ProShares II Reg. Stmt. at 33-34.    Furthermore, the

16   ETFs never took a defensive position and would remain “fully

17   invested at all times in securities and/or financial

18   instruments that provide exposure to its [u]nderlying

19   [i]ndex without regard to market conditions, trends, or

20   direction.”    June 19, 2006 ProShares I Reg. Stmt at 60; see

21   also Nov. 17, 2008 ProShares II Reg. Stmt. at 33.       The ETFs’

22   views were expressly myopic: long-term objectives were

                                    7
 1   blurred because they were focused only on meeting a

 2   benchmark tied to an underlying index one day at a time with

 3   a portfolio of different securities.

 4       Moreover, ProShares warned that its decision to invest

 5   in a particular stock or financial instrument was not based

 6   on the “investment merit of a particular security,

 7   instrument, or company” and that it did not use

 8   “conventional stock research or analysis, or forecast stock

 9   movement or trends” in managing the assets of the funds.

10   June 19, 2006 ProShares I Reg. Stmt at 60; see also Nov. 17,

11   2008 ProShares II Reg. Stmt. at 34.    Instead, ProShares ETFs

12   pursued daily results through aggressive investment

13   techniques.   For ProShares I, each registration statement

14   warned that the ETFs used financial instruments and

15   “investment techniques . . . that may be considered

16   aggressive, including the use of futures contracts, options

17   on futures contracts, securities and indices, forward

18   contracts, swap agreements, and similar instruments.”       See

19   Skinner Decl., App’x A, Item 6.   ProShares I also disclosed

20   that use of these techniques and financial instruments

21   exposed the ETFs to “potentially dramatic” losses.    Id.

22   Similarly, each relevant ProShares II prospectus warned that

                                   8
 1   the aggressive financial instruments had “volatile [trading

 2   prices, and that] even a small movement in market prices

 3   could cause large losses” because an ETF investment was

 4   “speculative” and involved a high degree of risk.      See id.,

 5   App’x B, Item 6.

 6        ProShares also warned that ETFs could not pursue their

 7   stated objectives for beyond-a-day periods because

 8   mathematical compounding and leveraging prevented the ETFs

 9   from reaching those results.    See id., App’x A, Item 2;

10   App’x B, Item 2.   In that regard, ProShares disclosed that

11   “[o]ver time, the cumulative percentage increase or decrease

12   in the net asset value of the [ETFs] may diverge

13   significantly from the cumulative percentage increase or

14   decrease in the multiple of the return of the Underlying

15   Index” due to a compounding effect of daily gains and

16   losses.2   For ProShares II, the warning was even more

17   direct: “[u]sing leverage . . . should be considered . . .

18   speculative and could result in the total loss of an

19   investor’s investment.”    See id., App’x B, Item 6.    In its

20   brief, ProShares provided a hypothetical illustration of two

          2
           Beginning with its September 2007 registration statement,
     this information was moved to the SAI.

                                     9
 1   investors who invested in an Ultra Long ETF at separate

 2   times to illustrate the effect an index’s volatility would

 3   have on those investments’ returns.    We have provided that

 4   example in Appendix A.

 5       C.   Alleged Omissions and Misstatements

 6       Plaintiffs principally complain that ProShares failed

 7   to disclose the magnitude and probability of loss for

 8   beyond-a-day investments in ProShares ETFs despite

 9   investors’ correct predictions regarding the overall

10   movement of the indices underlying the ETFs.    Furthermore,

11   Plaintiffs allege that the registration statements contained

12   various “contra-indicators” of successful long-term

13   investments which the above omissions made materially

14   misleading.   The district court rejected these arguments and

15   dismissed the complaint with prejudice pursuant to Federal

16   Rule of Civil Procedure 12(b)(6).     In re ProShares Trust

17   Sec. Litig., 889 F. Supp. 2d 644 (S.D.N.Y. 2012).     In sum,

18   the district court concluded that ProShares warned of the

19   risks that materialized.   For the reasons that follow, we

20   agree.

21

22

                                   10
 1                              DISCUSSION

 2        The standard of review is neither contested nor

 3   determinative.3

 4        A.   Alleged Omissions

 5        Liability attaches to a security’s issuer, its

 6   underwriter, and certain other statutorily enumerated

 7   parties pursuant to section 11 of the `33 Act if “any part”

 8   of the operative registration statements “omitted to state a

 9   material fact required to be stated therein or necessary to

10   make the statements therein not misleading.”     15 U.S.C. §

11   77k(a); see also In re Morgan Stanley Info. Fund Sec.

12   Litig., 592 F.3d 347, 360 (2d Cir. 2010).     To state a

13   plausible section 11 claim based on an alleged omission, a

14   complaint must pass two distinct hurdles: it must identify

15   an omission that is (1) unlawful and (2) material.      See

16   Morgan Stanley, 592 F.3d at 360.    In other words,

17   “[m]ateriality alone does not demand disclosure, nor does

18   the duty to disclose encompass non-material information.”

          3
           “We review de novo the dismissal of a complaint under
     [Federal] Rule [of Civil Procedure] 12(b)(6), accepting all
     factual allegations as true and drawing all reasonable inferences
     in favor of the plaintiff.” Litwin v. Blackstone Grp., L.P., 634
     F.3d 706, 715 (2d Cir. 2011) (internal quotation marks omitted).

                                    11
 1   Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 538

 2   F.Supp.2d 662, 668 (S.D.N.Y. 2008).

 3       A plaintiff who plausibly pleads an unlawful omission

 4   comes close to stating a section 11 claim because

 5   materiality “will rarely be dispositive in a motion to

 6   dismiss.”   See Morgan Stanley, 592 F.3d at 360.

 7   Nevertheless, the materiality hurdle remains a meaningful

 8   pleading obstacle, and we will dismiss a section 11 claim

 9   where the alleged omission was “so obviously unimportant to

10   a reasonable investor” that reasonable minds would agree on

11   that omission’s unimportance.        Id. (internal quotation marks

12   omitted).   In fact, the Supreme Court has been “‘careful not

13   to set too low a standard of materiality,’ for fear that

14   management would ‘bury the shareholders in an avalanche of

15   trivial information.’”   Matrixx Initiatives, Inc. v.

16   Siracusano, 131 S.Ct. 1309, 1318 (2011) (quoting Basic

17   Inc. v. Levinson, 485 U.S. 224, 231 (1988)).

18       In judging whether an alleged omission was material in

19   light of the information already disclosed to investors, we

20   consider whether there is “‘a substantial likelihood that

21   the disclosure of the [omitted material] would have been

22   viewed by the reasonable investor as having significantly

                                     12
 1   altered the total mix of information [already] made

 2   available.’”   DeMaria v. Andersen, 318 F.3d 170, 180 (2d

 3   Cir. 2003) (emphasis added) (quoting TSC Indus., Inc. v.

 4   Northway, Inc., 426 U.S. 438, 449 (1976)).   “It is not

 5   sufficient to allege that the investor might have considered

 6   the misrepresentation or omission important.”   Ganino v.

 7   Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000).

 8   While the “objective of a prospectus is to solicit

 9   investment by the general public” and “the intended audience

10   . . . encompasse[s] both sophisticated financial analysts

11   and untutored lay persons,” Greenapple v. Detroit Edison

12   Co., 618 F.2d 198, 210 (2d Cir. 1980), the prospectuses are

13   not “‘required to address [reasonable investors] as if they

14   were children in kindergarten,’” id. (quoting Richland v.

15   Crandall, 262 F. Supp. 538, 554 (S.D.N.Y. 1967)).     In the

16   words of the district court below, “[w]hen a registration

17   statement warns of the exact risk that later materialized, a

18   [s]ection 11 claim will not lie as a matter of law.”

19   ProShares, 889 F. Supp. 2d at 653.

20       Here, the district court concisely summarized

21   Plaintiffs’ allegations: the “thrust of the [P]laintiffs’

22   [s]ection 11 claim is that the registration statements

                                   13
 1   omitted the risk that the ETFs, when held for a period of

 2   greater than one day, could lose substantial value in a

 3   relatively brief period of time, particularly in periods of

 4   high volatility.”     Id. at 654.    The district court dismissed

 5   that claim in equally concise language: “the disclosures in

 6   the registration statements accurately conveyed the specific

 7   risk that the [P]laintiffs assert materialized: when

 8   investors held the ETFs for periods longer than one day the

 9   funds’ performance widely diverged from the performance of

10   the underlying indices sometimes resulting in losses despite

11   the overall direction of the underlying indices.”       Id. at

12   656.     We agree that the relevant prospectuses adequately

13   warned the reasonable investor of the allegedly omitted

14   risks.

15               1.   The Magnitude of Beyond-A-Day Losses

16          Plaintiffs allege that the registration statements

17   omitted the risk that correctly predicting the long-term

18   movement in an ETF’s underlying index could result in a

19   substantial loss in their investment over that same period

20   of time.     Plaintiffs acknowledge that the prospectuses

21   warned that the value of long-term ETF investments “may

22   diverge significantly” from that ETF’s underlying index.

                                     14
 1   Pls. Br. at 42.     The complaint even recognizes that the

 2   ProShares ETFs “did not seek to achieve long[-]term

 3   cumulative investment returns in their ETFs” and that they

 4   “could not seek such returns.”       TAC ¶ 100.   Plaintiffs

 5   assert, however, that the “diverge significantly” disclosure

 6   does not speak to a divergence that results in actual,

 7   substantial loss.

 8       “In evaluating a prospectus, we read it as a whole.”

 9   DeMaria, 318 F.3d at 180 (internal quotation omitted).         As

10   we read the prospectus cover-to-cover, we consider whether

11   the disclosures and representations, “taken together and in

12   context, would have misl[ed] a reasonable investor about the

13   nature of the [securities].’”        Id. (quoting McMahan & Co. v.

14   Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990)).

15   “As we have explained, ‘[a] prospectus will violate federal

16   securities laws if it does not disclose material objective

17   factual matters, or buries those matters beneath

18   information, or treats them cavalierly.’”         DeMaria, 318 F.3d

19   at 180 (quoting Olkey v. Hyperion 1999 Term Trust, Inc., 98

20   F.3d 2, 5 (2d Cir. 1996) (internal quotation marks

21   omitted)).

22

                                     15
 1       Here, the district court concluded that it was “not

 2   possible to read the registration statements . . . without

 3   understanding that the ETFs were particularly risky and

 4   speculative and were intended to meet their stated goal only

 5   over the course of a single day.”    ProShares, 889 F. Supp.

 6   2d at 656.   The district court reasoned that while “some

 7   [P]laintiffs lost money while guessing correctly on the

 8   direction of the underlying index, this possibility is

 9   plainly consistent with the significant divergence that was

10   disclosed in the registration statements.”    Id.   On appeal,

11   Plaintiffs maintain that the district court overvalued the

12   “diverge significantly” disclosure because “‘[d]iverge

13   significantly’ is not a synonym for ‘loss’” and “refers only

14   to [an ETFs’] outperforming or underperforming” a perfect

15   long-term correlation with its index.   At the very least,

16   they argue, “diverge significantly” does not include large,

17   rapid losses.   Pls. Br. at 42-43.

18       We are unpersuaded by this argument, and Plaintiffs’

19   efforts to find a meaningful distinction between “diverge

20   significantly” and “actual loss” strains the plain meaning

21   of the former phrase.   Because one might expect the long-

22   term value of an ETF to correlate with the long-term value

                                   16
 1   of its underlying index, ProShares warned that the actual

 2   results might diverge significantly from that prediction.

 3   “Significant” means large or important; in the context of

 4   the offering documents, “divergence” means the opposite from

 5   one’s expectation.     ProShares’ “significant divergence”

 6   disclosures, fairly read, put investors on notice that an

 7   ETF’s value might move in a direction quite different from

 8   and even contrary to what an investor might otherwise

 9   expect.

10       Plaintiffs use a linguistic preference to read out of

11   the prospectuses a scenario which the ProShares disclosures

12   clearly contemplate.     Time and again, we have said that

13   “disclosure is not a rite of confession or exercise in

14   common law pleading.”     Morgan Stanley, 592 F.3d at 365

15   (internal quotation marks omitted).     Because the “role of

16   the materiality requirement is not to attribute to investors

17   a child-like simplicity,” we presume that a reasonable

18   investor can comprehend the basic meaning of plain-English

19   disclosures and will not credit Plaintiffs’ narrow reading

20   of “diverge significantly.”     See Basic, 485 U.S. at 234

21   (citations omitted).

22       Perhaps more importantly, the “diverge significantly”

23   disclosure takes on additional meaning within the context of

                                     17
 1   the prospectus as a whole.    The earliest relevant

 2   prospectuses make absolutely clear that the ETFs operated

 3   pursuant to daily investment objectives, that they utilized

 4   leveraged investment techniques to achieve those objectives,

 5   and that mathematical compounding combined with leveraging

 6   prevented the ETFs from achieving their stated objectives

 7   over a period of time greater than one day.    All the

 8   ProShares I prospectuses make clear that ETFs used

 9   aggressive financial instruments and investment techniques

10   that exposed the ETFs to potentially “dramatic” losses “in

11   the value of its portfolio holdings and imperfect

12   correlation to the index underlying”; ProShares II warned

13   that volatility could result in a “total loss of an

14   investor’s investment.”   See Skinner Decl., App’x A, Item 6;

15   App’x B, Item 6.

16       Accordingly, we conclude that it is implausible that

17   substituting “actual loss” for “diverge significantly” is a

18   change substantially likely to be viewed by a reasonable

19   investor as having significantly altered the import of the

20   total mix of information ProShares made available.

21   See Basic, 485 U.S. at 232.

22            2.   The Probability of Long-Term Loss

23       Plaintiffs also complain that ProShares omitted that

                                    18
 1   certain market circumstances would “necessarily [cause]

 2   quick and potentially large losses” despite an investor’s

 3   correct prediction of the overall, beyond-a-day direction of

 4   an ETF’s underlying index.    Pls. Br. at 1 (emphasis added);

 5   see also id. at 24-25; TAC ¶¶ 12-26.    The complaint further

 6   asserts that ProShares possessed an “undisclosed

 7   mathematical formula” which “very accurately predicted and

 8   described the relationship between the movements in each

 9   type of ETF’s price and the movements in the index

10   underlying the ETF in any market scenario.”    See TAC ¶ 13.

11   Based on this formula, Plaintiffs allege that ProShares knew

12   and omitted that certain market conditions could materialize

13   that would put investors “who held ProShares products for

14   extended periods of more than a day” in “a ‘must lose’

15   position.”   TAC ¶ 15.   These market conditions existed,

16   Plaintiffs maintain, when “the volatility (i.e., the day-to-

17   day changes in prices) of the underlying index significantly

18   exceeded its performance over time.”    TAC ¶ 16.

19       The district court concluded that the existence of the

20   undisclosed mathematical formula was implausible on its

21   face. ProShares, 889 F. Supp. 2d at 656.    In the

22   alternative, the district court concluded that such a

23   formula would “rely on inputs from the underlying index or

                                    19
 1   benchmark, that those inputs could not be known in advance,”

 2   and that failure to predict future market performance was an

 3   immaterial omission.   Id.

 4       Here, Plaintiffs continue to pursue the argument and

 5   allege that ProShares “knew and could simulate from their

 6   mathematical formula exactly what was going to happen to

 7   investors for each market scenario, including the

 8   continuation of the actual, existing current daily

 9   volatility circumstances.”   Pls. Br. at 11 (emphasis in

10   original) (complaint citations omitted).     According to

11   Plaintiffs, ProShares knew “to the day when, if current

12   actual volatility circumstances continued, their ETFs would

13   become dysfunctional and an investor necessarily would lose

14   from a correct judgment about the market.”     Pls. Br. at 24-

15   25 (complaint citations omitted).

16       We remain unpersuaded.   Assuming, arguendo, that

17   ProShares possessed an undisclosed mathematical formula that

18   accurately predicted potential market conditions and the

19   effect market volatility would have on ETF shares,

20   Plaintiffs’ argument amounts to nothing more than an

21   allegation that ProShares failed to disclose that the more

22   an ETF’s underlying index changed value day-to-day for a

23   particular investor, the more likely it became that the

                                   20
 1   investor would experience long-term losses depending on when

 2   she invested.   That does not constitute an actionable

 3   omission of an objective fact, but rather a general omission

 4   regarding the risks associated with (1) hypothetical

 5   investments over (2) hypothetical periods of time during (3)

 6   hypothetically volatile market conditions.    ProShares cannot

 7   be expected to predict and disclose all possible negative

 8   results across any market scenario.    Appendix A illustrates

 9   this point.

10       In tandem with this argument, Plaintiffs assert that

11   ProShares failed to disclose the risks of “excess daily

12   index volatility” which its mathematical formula predicted

13   and that eventually materialized.4    ProShares, however,

14   consistently disclosed the effect market volatility had on

15   ETFs.   The first relevant ProShares I prospectus warned,

16   under Principal Risk Considerations, that the “equity

17   markets are volatile, and the value of securities, futures,

18   options, contracts and other instruments correlated with the

19   equity markets may fluctuate dramatically from day-to-day.”

         4
           Plaintiffs make a distinction between “inherent facts” and
     “materialization facts.” For example, Plaintiffs argue that ETFs
     were subject to an inherent risk of excess market volatility
     which ProShares omitted and that once the markets became
     excessively volatile those inherent risks became materialized
     risks. For the purpose of our analysis, this distinction is
     without a difference.

                                   21
 1   June 19, 2006 ProShares I Prospectus at 8, 64.    “This

 2   volatility may cause the value of an investment in a[n ETF]

 3   to decrease.”   Id. at 65.   ProShares also warned that the

 4   net asset value of an ETF and its market price would be made

 5   more volatile than its underlying index on account of

 6   leveraged investment techniques that magnify exposure to the

 7   underlying index.    Finally, ProShares highlighted and

 8   bullet-pointed the risk: “Volatility Risk – [Leveraged ETFs]

 9   seek to achieve a multiple of an index and therefore will

10   experience greater volatility than the index underlying its

11   benchmark and consequently ha[ve] the potential for greater

12   losses.” Id. at 9.    In addition, the earliest ProShares II

13   prospectus warned that price “volatility, which is

14   exacerbated by the use of leverage, may possibly cause the

15   total loss of an investor’s investment.”    Nov. 17, 2008

16   ProShares II Reg. Stmt. at 4.

17       While “it is not sufficient that overtones might have

18   been picked up by the sensitive antennae of investment

19   analysts,” Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281,

20   1297 (2d Cir. 1973) (Friendly, Judge), no reasonable

21   investor could read these prospectuses without realizing

22   that volatility, combined with leveraging, subjected that

23

                                     22
 1   investment to a great risk of long-term loss as market

 2   volatility increased.

 3       B.     Misleading Statements

 4       “Our conclusion that the [`33 Act] did not directly

 5   require defendants to disclose the allegedly omitted

 6   information does not mark the end of our inquiry.”     Morgan

 7   Stanley, 592 F.3d at 365.    “Section 11 [also] call[s] for

 8   the disclosure of information that is necessary to avoid

 9   rendering misleading the representations in prospectuses.”

10   Id. (citing 15 U.S.C. § 77k(a)).     Our inquiry here is the

11   same as it was above: “we review documents holistically and

12   in their entirety.”     Id. (citing Olkey, 98 F.3d at 5).   “The

13   literal truth of an isolated statement is insufficient; the

14   proper inquiry requires an examination of defendants’

15   representations, taken together and in context.”     Id.

16   (quotation marks and citation omitted).

17       Plaintiffs complain that ProShares prospectuses

18   included “numerous” misleading statements about the positive

19   results of 1, 3, 5, and 10 year investments in ProShares

20   ETFs.    See Pl. Br. at 38 (complaint citations omitted).

21   Indeed, Plaintiffs provide us with a string citation to the

22   complaint outlining at least eight categories of misleading

23   statements across various prospectuses. See, e.g., TAC ¶

                                     23
 1   102(a)-(h).   Plaintiffs’ appeal, however, focuses on only

 2   three specific alleged misrepresentations.         See Tolbert v.

 3   Queens College, 242 F.3d 58, 75 (2d Cir. 2001) (“[I]ssues

 4   adverted to in a perfunctory manner, unaccompanied by some

 5   effort at developed argumentation, are deemed waived.”

 6   (internal quotation omitted)).

 7            1.   1, 3, 5, and 10 Year Cost Projections

 8       Plaintiffs contend that ProShares provided tables which

 9   illustrated the hypothetical costs of investing in ProShares

10   I ETFs for 1, 3, 5, and 10 year periods, which misleadingly

11   implied that ProShares ETFs were suitable 1, 3, 5, and 10

12   year investments.   See TAC ¶ 102(a).        The district court

13   dismissed the argument for two reasons.        First, it reasoned

14   that the “various projections . . . fall far short of

15   undercutting the emphasis on the daily nature of the ETFs.”

16   ProShares, 889 F. Supp. 2d at 655.        Second, it concluded

17   that because Form N-1A required disclosure of that exact

18   information, ProShares could not expect that the SEC would

19   require that information be specifically “identified,

20   qualified, or tempered.”   Id.        We agree with the first half

21   of the district court’s analysis and affirm its conclusion.

22       The contested tables are presented as an example of the

23   costs of investing in ProShares I ETFs assuming a $10,000

                                      24
 1   investment for time periods spanning 1, 3, 5, and 10 years -

 2   assuming a 5% return each year.     Form N-1A requires those

 3   assumptions.   This makes sense because the example is

 4   intended to help investors compare the cost of investing in

 5   ProShares with the cost of investing in other funds.       It

 6   would be difficult to cross-compare the costs of investing

 7   in different funds were prospectuses to use different time

 8   periods, different assumptions about annual returns, and

 9   different assumptions about the amount invested.     The

10   ProShares I prospectuses also tie cautionary language to the

11   tables, which Form N-1A does not expressly require: the

12   table was for “illustration purposes only” and was not

13   “meant to suggest actual or expected fees and expenses or

14   returns, all of which may vary.”     See, e.g., Sept. 28, 2007

15   Reg. Stmt. at 20.

16       We conclude that the cost tables, placed in context,

17   would not lead a reasonable investor into thinking that

18   ProShares I ETFs were safe 1, 3, 5, and 10 year investments.

19   We also agree with the district court that the tables do not

20   undercut the disclosures regarding the ETFs’ daily

21   objectives with all the attendant warnings already described

22   in this opinion.    Accordingly, we are unpersuaded by

23   Plaintiffs’ attempt to isolate and construe a single element

                                    25
 1   of ProShares I’s prospectuses.         See DeMaria, 318 F.3d at

 2   180.       It is therefore implausible that a reasonable investor

 3   would have been misled by the cost tables.5

 4                 2.   Correlation Risks and Line Graphs

 5          Beginning with the September 28, 2007 ProShares I

 6   prospectus, Plaintiffs assert that ProShares I included

 7   correlation-risk disclosures which included line-graph

 8   examples that misled them into thinking that an ETF’s

 9   divergence from its underlying index would be somewhere in

10   the ballpark of 0.6%-2.2%.       TAC ¶¶ 29-43, 102, 203-220.

11          The correlation-risk disclosure expressly warns that

12   there is no guarantee that an ETF will achieve a high degree

13   of correlation with its benchmark and lists factors that

14   prevent perfect correlation.       For Plaintiffs’ leveraged

15   funds “there [was] a special form of correlation risk[:] for

16   periods greater than one day, the use of leverage tends to

            5
             The district court also commented that the tables did not
     create liability because the “plaintiffs point[ed] to no case
     that holds that information that the SEC requires must be
     specifically identified, qualified, or tempered.” ProShares, 889
     F. Supp. 2d at 655. While Form N-1A requires the allegedly
     misleading table, it also requires this information to be “in
     plain English under rule 421(d) under the Securities Act.” See
     Skinner Decl. Ex. 5 at 11 (SEC Form N-1A). Rule 421(d) requires
     that financial data be presented in “an understandable manner”
     and that any information provided “must not be misleading.” 17
     C.F.R. § 230.421(d)(3). Accordingly, there remains a possibility
     that an issuer might present required information in a misleading
     manner. That, however, is not this case.

                                       26
 1   cause the performance of an [ETF] to be either greater than

 2   or less than the index performance.” See Sept. 28, 2007

 3   ProShares I Reg. Stmt at 8.

 4       To “illustrate” how leveraging increases correlation

 5   risk, the prospectus included three line graphs that

 6   “simulated [a] hypothetical one year performance of an index

 7   compared with the performance of a fund that perfectly

 8   achieved its investment objective of twice (200%) the daily

 9   index return.”     Id.   “Each of the graphs [assumed] a

10   volatility rate of 15%, which [was] an approximate average

11   of the five-year historical volatility rate” of certain

12   indices.   Id.    But, “[o]ther indexes to which the [ETFs] are

13   benchmarked ha[d] different historical volatility rates;

14   certain of the [ETFs] historical volatility rates [were]

15   substantially in excess of 15%.”      Id.

16       The line graphs show that where a leveraged ETF meets

17   its daily objectives each day, with the above assumptions,

18   its value could diverge from the index’s performance by 2.2%

19   in a flat market, 0.7% in an upward-trending market, and

20   0.6% in a downward-trending market.         After the presentation

21   of the graphs, the prospectus referred potential investors

22   to the SAI “for a further discussion of how both index

23   volatility and index performance can impact” ETF

24   performance.     The SAI includes a “wedge graph” that

                                      27
 1   represents the effect market volatility would have on a

 2   leveraged ETFs’ annual correlation with index volatility

 3   ranging from 0%-40% at 5% intervals.   The wedge graphs

 4   clearly demonstrate that at high levels of volatility an

 5   ETF’s value could move in the opposite direction from its

 6   underlying benchmark.   We have included an example wedge

 7   graph in Appendix B.

 8       Plaintiffs complain that the line graphs misled them

 9   into believing that annual ETF returns ran the risk of only

10   a slight disconnection (.6% - 2.2%) from an index’s

11   performance.   We have already concluded that the ProShares

12   prospectuses, absent the wedge graphs, clearly described the

13   daily investment objectives, the nature of ETFs, and, in

14   plain English, warned that leveraging, volatility, and

15   compounding could cause an ETF’s performance to

16   significantly diverge from its underlying index.   We have

17   also already concluded that the relevant prospectuses

18   disclosed that aggressive investment techniques exposed the

19   ETFs to dramatic losses and an imperfect correlation with

20   its index.

21       The addition of the line graphs does not alter those

22   conclusions, and we agree with the district court that this

23   one-year representation does not undercut the

24   representations throughout the rest of the prospectuses.

                                   28
 1   This is especially true because the disclosure introducing

 2   the line graphs clearly explained that the line graphs

 3   assumed 15% volatility and that many of the ETF indices have

 4   historically experienced volatility substantially in excess

 5   of 15%.   It is therefore implausible that a reasonable

 6   investor would expect that an ETF’s divergence from its

 7   underlying index would be only minimal.

 8             3.   SAIs and Wedge Graphs

 9       Plaintiffs argue that the district court impermissibly

10   relied upon the wedge graphs to dilute their cost-table and

11   line-graphs arguments and to bolster ProShares’ disclosures.

12   See Pls. Br. at 46-47.    That argument is misplaced, however,

13   because the district court concluded, as we do here, that it

14   was “not possible to read the registration statements - even

15   those issued before the wedge graphs were added in September

16   2007 - without understanding that the ETFs were particularly

17   risky and speculative and were intended to meet their stated

18   goal only over the course of a single day.”    ProShares, 889

19   F. Supp. 2d at 655.   Moreover, the district court also

20   concluded that the “diverge significantly” disclosures

21   plainly contemplated the possibility that certain investors

22   would lose money despite correctly predicting the direction

23   of an underlying index.   Accordingly, the district court did

24

                                    29
 1   not rely on the wedge graphs to reach its conclusions; nor

 2   do we.

 3        Plaintiffs also contend that the wedge graphs

 4   constitute a unique principal-risk disclosure that ProShares

 5   impermissibly buried in the SAI.    Plaintiffs’ argument,

 6   however, merely repackages what they argued earlier:

 7   ProShares failed to disclose the effect of excess daily

 8   volatility in the principal-risk portion of the

 9   prospectuses.   Because we concluded that ProShares’

10   volatility disclosures and prospectuses sufficiently warned

11   of the effects excess market volatility would have on an

12   ETF, spelling out the details of those disclosures in the

13   SAI does not violate the securities laws.     As we have

14   recognized: “to avoid prospectus disclosures that are too

15   long and complex, Form [N-1A] calls for a streamlined,

16   simplified prospectus” and an SAI which “offer[s] issuers

17   the opportunity to provide more detailed discussions of

18   matters required to be in the prospectus.”     Morgan Stanley,

19   592 F.3d at 352 n.2 (quotation marks and citations

20   omitted).6

          6
           ProShares asserts that the law of this Circuit permits
     reliance on information contained in the SAI in evaluating
     section 11 claims. See ProShares’ Br. at 53 (citing Hunt v.
     Alliance N. Am. Gov’t Income Trust, Inc., 159 F.3d 723, 730-31
     (2d Cir. 1998)). Hunt, however, only looked at an SAI to

                                    30
 1        Finally, Plaintiffs allege that the wedge graphs

 2   themselves were materially misleading for not contemplating

 3   the effects of volatility above 40% and the effect

 4   volatility would have on short-term investments.7        But, as

 5   the district court concluded, no reasonable investor could

 6   read the prospectuses without understanding beyond-a-day

 7   risk exposure or that risks increased as volatility

 8   increased above 40%.   In fact, the complaint itself

 9   acknowledges that ProShares could not meet its objectives

10   beyond a day,   TAC ¶ 100, and all of the ProShares

11   prospectuses made clear that leveraging, compounding,

12   volatility, and aggressive investment techniques subject the

13   ETFs to high degrees of risk.8      Accordingly, it is

     contextualize a prospectus’ disclosures. Id. Accordingly,
     Hunt does not permit relegating to the SAI material risk
     disclosures that Form N-1A requires to be in the prospectus; nor
     could it.
          7
           We note a bit of an internal inconsistency in Plaintiffs’
     theories of liability: Plaintiffs argue that the district court
     impermissibly relied upon the wedge graphs “buried” in the SAI in
     analyzing the complaint while simultaneously maintaining that
     this same buried information misled them about ETF risks.
     Plaintiffs’ complaint actually presents the point heading
     “Additional Misleading Statements in the SAI.” TAC ¶¶ 44-47.
     It’s curious that Plaintiffs could not find this information to
     get a more in-depth understanding of the funds but have no
     trouble using that same information to shoulder ProShares with
     liability.
          8
           Plaintiffs argue that In re Direxion Shares ETF Trust
     counsels against reliance on the “daily objective” disclosures.
     279 F.R.D. 221 (S.D.N.Y. 2012). The district court here,

                                    31
 1   implausible that a reasonable investor would read these

 2   offering documents without understanding the potential for

 3   rapid, substantial loss.

 4        C.   Corrective Disclosures

 5        Plaintiffs allege that ProShares made new disclosures

 6   beginning on the last day of the class period, thereby

 7   tacitly conceding that the class-period disclosures failed

 8   to reveal critical facts.    These new disclosures include,

 9   inter alia, (1) acknowledging that volatility could cause an

10   ETF to “move in [the] opposite direction as the index,” TAC

11   ¶ 181 (quoting July 31, 2009 Am. No. 16 of Reg. Stmt. at

12   410); (2) stating that an “investor’s views on the future

13   direction and volatility of the markets can be useful tools

14   for investors,” TAC ¶ 185-186 (quoting July 31, 2009

15   Amendment No. 16 of Reg. Stmt. at 410); and (3) advising

16   that investors should be willing to “monitor and/or

17   periodically rebalance their portfolios,” id.

18        We have previously noted that where the “quality of [a]

19   disclosure could have been improved[,] the advisability of

20   revision does not render what was done deceptive or

     however, relied on the total mix of ProShares’ disclosures and
     correctly identified significant differences between Direxion’s
     offering documents and ProShares’ offering documents. Without
     commenting on Direxion’s merits, Plaintiffs have not persuaded us
     that the district court erred in parsing these differences.

                                    32
 1   misleading.”   Greenapple, 618 F.2d at 211.    The question

 2   always remains “whether the prospectuses, as written,

 3   adequately apprise the reader of the essential nature” of

 4   the securities.   See id.   Accordingly, these revisions do

 5   not alter our conclusion that the earlier ProShares

 6   prospectuses adequately warned of volatility’s effect on the

 7   magnitude and probability of loss.    It is of no matter that

 8   ProShares came to use different, arguably clearer language.

 9   To hold an issuer who alters disclosures deemed adequate in

10   the first instance suddenly liable because it found a better

11   way to say what has already been said would perversely

12   incentivize issuers not to strive for better, clearer

13   disclosure language.   Accordingly, the “corrective

14   disclosures” do not alter our conclusions.

15       D.   Section 15

16       Plaintiffs also brought claims under section 15 of the

17   `33 Act against the individual defendants.     “To establish

18   [section] 15 liability, a plaintiff must [first] show a

19   ‘primary violation’ of [section] 11 . . . .”     Hutchinson v.

20   Deutsche Bank Secs. Inc., 647 F.3d 479, 490 (2d Cir. 2011)

21   (internal quotation marks omitted).   Having affirmed the

22   dismissal of Plaintiffs’ section 11 claims, we also affirm

23   the dismissal of their section 15 claims.     See id.

                                    33
 1                            CONCLUSION

 2       The order of the United States District Court for the

 3   Southern District of New York (John G. Koeltl, Judge.),

 4   entered on September 12, 2012, dismissing Plaintiffs-

 5   Appellants’ third amended complaint, with prejudice,

 6   pursuant to Federal Rule of Civil Procedure 12(b)(6), is

 7   hereby AFFIRMED.

 8

 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

                                  34
1                                       APPENDIX A

2   Hypothetical ETF Investments Seeking to Double the Daily Return of its Underlying Index

3

4

5

6

                                              35
1      APPENDIX B

2   Example Wedge Graph

3

            36


356 U.S. 369 (1958)
SHERMAN
v.
UNITED STATES.
No. 87.
Supreme Court of United States.
Argued January 16, 1958.
Decided May 19, 1958.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT.
*370 Henry A. Lowenberg argued the cause and filed a brief for petitioner.
James W. Knapp argued the cause for the United States. On the brief were Solicitor General Rankin, Warren Olney, III, then Assistant Attorney General, Beatrice Rosenberg and Robert G. Maysack.
MR. CHIEF JUSTICE WARREN delivered the opinion of the Court.
The issue before us is whether petitioner's conviction should be set aside on the ground that as a matter of law the defense of entrapment was established. Petitioner was convicted under an indictment charging three sales of narcotics in violation of 21 U. S. C. § 174. A previous conviction had been reversed on account of improper instructions as to the issue of entrapment. 200 F. 2d 880. In the second trial, as in the first, petitioner's defense was *371 a claim of entrapment: an agent of the Federal Government induced him to take part in illegal transactions when otherwise he would not have done so.
In late August 1951, Kalchinian, a government informer, first met petitioner at a doctor's office where apparently both were being treated to be cured of narcotics addiction. Several accidental meetings followed, either at the doctor's office or at the pharmacy where both filled their prescriptions from the doctor. From mere greetings, conversation progressed to a discussion of mutual experiences and problems, including their attempts to overcome addiction to narcotics. Finally Kalchinian asked petitioner if he knew of a good source of narcotics. He asked petitioner to supply him with a source because he was not responding to treatment. From the first, petitioner tried to avoid the issue. Not until after a number of repetitions of the request, predicated on Kalchinian's presumed suffering, did petitioner finally acquiesce. Several times thereafter he obtained a quantity of narcotics which he shared with Kalchinian. Each time petitioner told Kalchinian that the total cost of narcotics he obtained was twenty-five dollars and that Kalchinian owed him fifteen dollars. The informer thus bore the cost of his share of the narcotics plus the taxi and other expenses necessary to obtain the drug. After several such sales Kalchinian informed agents of the Bureau of Narcotics that he had another seller for them. On three occasions during November 1951, government agents observed petitioner give narcotics to Kalchinian in return for money supplied by the Government.
At the trial the factual issue was whether the informer had convinced an otherwise unwilling person to commit a criminal act or whether petitioner was already predisposed to commit the act and exhibited only the natural hesitancy of one acquainted with the narcotics trade. *372 The issue of entrapment went to the jury,[1] and a conviction resulted. Petitioner was sentenced to imprisonment for ten years. The Court of Appeals for the Second Circuit affirmed. 240 F. 2d 949. We granted certiorari. 353 U. S. 935.
In Sorrells v. United States, 287 U. S. 435, this Court firmly recognized the defense of entrapment in the federal courts. The intervening years have in no way detracted from the principles underlying that decision. The function of law enforcement is the prevention of crime and the apprehension of criminals. Manifestly, that function does not include the manufacturing of crime. Criminal activity is such that stealth and strategy are necessary weapons in the arsenal of the police officer. However, "A different question is presented when the criminal design originates with the officials of the Government, and they implant in the mind of an innocent person the disposition to commit the alleged offense and induce its commission in order that they may prosecute." 287 U. S., at 442. Then stealth and strategy become as objectionable police methods as the coerced confession and the unlawful search. Congress could not have intended that its statutes were to be enforced by tempting innocent persons into violations.
However, the fact that government agents "merely afford opportunities or facilities for the commission of the offense does not" constitute entrapment. Entrapment occurs only when the criminal conduct was "the product of the creative activity" of law-enforcement officials. (Emphasis supplied.) See 287 U. S., at 441, 451. To determine whether entrapment has been established, a line must be drawn between the trap for the unwary innocent and the trap for the unwary criminal. The principles *373 by which the courts are to make this determination were outlined in Sorrells. On the one hand, at trial the accused may examine the conduct of the government agent; and on the other hand, the accused will be subjected to an "appropriate and searching inquiry into his own conduct and predisposition" as bearing on his claim of innocence. See 287 U. S., at 451.
We conclude from the evidence that entrapment was established as a matter of law. In so holding, we are not choosing between conflicting witnesses, nor judging credibility. Aside from recalling Kalchinian, who was the Government's witness, the defense called no witnesses. We reach our conclusion from the undisputed testimony of the prosecution's witnesses.
It is patently clear that petitioner was induced by Kalchinian. The informer himself testified that, believing petitioner to be undergoing a cure for narcotics addiction, he nonetheless sought to persuade petitioner to obtain for him a source of narcotics. In Kalchinian's own words we are told of the accidental, yet recurring, meetings, the ensuing conversations concerning mutual experiences in regard to narcotics addiction, and then of Kalchinian's resort to sympathy. One request was not enough, for Kalchinian tells us that additional ones were necessary to overcome, first, petitioner's refusal, then his evasiveness, and then his hesitancy in order to achieve capitulation. Kalchinian not only procured a source of narcotics but apparently also induced petitioner to return to the habit. Finally, assured of a catch, Kalchinian informed the authorities so that they could close the net. The Government cannot disown Kalchinian and insist it is not responsible for his actions. Although he was not being paid, Kalchinian was an active government informer who had but recently been the instigator of at least *374 two other prosecutions.[2] Undoubtedly the impetus for such achievements was the fact that in 1951 Kalchinian was himself under criminal charges for illegally selling narcotics and had not yet been sentenced.[3] It makes no difference that the sales for which petitioner was convicted occurred after a series of sales. They were not independent acts subsequent to the inducement but part of a course of conduct which was the product of the inducement. In his testimony the federal agent in charge of the case admitted that he never bothered to question Kalchinian about the way he had made contact with *375 petitioner. The Government cannot make such use of an informer and then claim disassociation through ignorance.
The Government sought to overcome the defense of entrapment by claiming that petitioner evinced a "ready complaisance" to accede to Kalchinian's request. Aside from a record of past convictions, which we discuss in the following paragraph, the Government's case is unsupported. There is no evidence that petitioner himself was in the trade. When his apartment was searched after arrest, no narcotics were found. There is no significant evidence that petitioner even made a profit on any sale to Kalchinian.[4] The Government's characterization of petitioner's hesitancy to Kalchinian's request as the natural wariness of the criminal cannot fill the evidentiary void.[5]
The Government's additional evidence in the second trial to show that petitioner was ready and willing to sell narcotics should the opportunity present itself was petitioner's record of two past narcotics convictions. In 1942 petitioner was convicted of illegally selling narcotics; in 1946 he was convicted of illegally possessing them. However, a nine-year-old sales conviction and a five-year-old possession conviction are insufficient to prove petitioner had a readiness to sell narcotics at the time Kalchinian approached him, particularly when we must *376 assume from the record he was trying to overcome the narcotics habit at the time.
The case at bar illustrates an evil which the defense of entrapment is designed to overcome. The government informer entices someone attempting to avoid narcotics not only into carrying out an illegal sale but also into returning to the habit of use. Selecting the proper time, the informer then tells the government agent. The setup is accepted by the agent without even a question as to the manner in which the informer encountered the seller. Thus the Government plays on the weaknesses of an innocent party and beguiles him into committing crimes which he otherwise would not have attempted.[6] Law enforcement does not require methods such as this.
It has been suggested that in overturning this conviction we should reassess the doctrine of entrapment according to principles announced in the separate opinion of Mr. Justice Roberts in Sorrells v. United States, 287 U. S. 435, 453. To do so would be to decide the case on grounds rejected by the majority in Sorrells and, so far as the record shows, not raised here or below by the parties before us. We do not ordinarily decide issues not presented by the parties and there is good reason not to vary that practice in this case.
At least two important issues of law enforcement and trial procedure would have to be decided without the benefit of argument by the parties, one party being the Government. Mr. Justice Roberts asserted that although the defendant could claim that the Government had induced him to commit the crime, the Government could not reply by showing that the defendant's criminal conduct was due to his own readiness and not to the persuasion of government *377 agents. The handicap thus placed on the prosecution is obvious.[7] Furthermore, it was the position of Mr. Justice Roberts that the factual issue of entrapment now limited to the question of what the government agents didshould be decided by the judge, not the jury. Not only was this rejected by the Court in Sorrells, but where the issue has been presented to them, the Courts of Appeals have since Sorrells unanimously concluded that unless it can be decided as a matter of law, the issue of whether a defendant has been entrapped is for the jury as part of its function of determining the guilt or innocence of the accused.[8]
To dispose of this case on the ground suggested would entail both overruling a leading decision of this Court and brushing aside the possibility that we would be *378 creating more problems than we would supposedly be solving.
The judgment of the Court of Appeals is reversed and the case is remanded to the District Court with instructions to dismiss the indictment.
Reversed and remanded.
MR. JUSTICE FRANKFURTER, whom MR. JUSTICE DOUGLAS, MR. JUSTICE HARLAN, and MR. JUSTICE BRENNAN join, concurring in the result.
Although agreeing with the Court that the undisputed facts show entrapment as a matter of law, I reach this result by a route different from the Court's.
The first case in which a federal court clearly recognized and sustained a claim of entrapment by government officers as a defense to an indictment was, apparently, Woo Wai v. United States, 223 F. 412. Yet the basis of this defense, affording guidance for its application in particular circumstances, is as much in doubt today as it was when the defense was first recognized over forty years ago, although entrapment has been the decisive issue in many prosecutions. The lower courts have continued gropingly to express the feeling of outrage at conduct of law enforcers that brought recognition of the defense in the first instance, but without the formulated basis in reason that it is the first duty of courts to construct for justifying and guiding emotion and instinct.
Today's opinion does not promote this judicial desideratum, and fails to give the doctrine of entrapment the solid foundation that the decisions of the lower courts and criticism of learned writers have clearly shown is needed.[1] Instead it accepts without re-examination the *379 theory espoused in Sorrells v. United States, 287 U. S. 435, over strong protest by Mr. Justice Roberts, speaking for Brandeis and Stone, JJ., as well as himself. The fact that since the Sorrells case the lower courts have either ignored its theory and continued to rest decision on the narrow facts of each case, or have failed after penetrating effort to define a satisfactory generalization, see, e. g., United States v. Becker, 62 F. 2d 1007 (L. Hand, J.), is proof that the prevailing theory of the Sorrells case ought not to be deemed the last word. In a matter of this kind the Court should not rest on the first attempt at an explanation for what sound instinct counsels. It should not forego re-examination to achieve clarity of thought, because confused and inadequate analysis is too apt gradually to lead to a course of decisions that diverges from the true ends to be pursued.[2]
It is surely sheer fiction to suggest that a conviction cannot be had when a defendant has been entrapped by government officers or informers because "Congress could not have intended that its statutes were to be enforced by tempting innocent persons into violations." In these cases raising claims of entrapment, the only legislative intention that can with any show of reason be extracted from the statute is the intention to make criminal precisely the conduct in which the defendant has engaged. That conduct includes all the elements necessary to constitute criminality. Without compulsion and "knowingly," *380 where that is requisite, the defendant has violated the statutory command. If he is to be relieved from the usual punitive consequences, it is on no account because he is innocent of the offense described. In these circumstances, conduct is not less criminal because the result of temptation, whether the tempter is a private person or a government agent or informer.
The courts refuse to convict an entrapped defendant, not because his conduct falls outside the proscription of the statute, but because, even if his guilt be admitted, the methods employed on behalf of the Government to bring about conviction cannot be countenanced. As Mr. Justice Holmes said in Olmstead v. United States, 277 U. S. 438, 470 (dissenting), in another connection, "It is desirable that criminals should be detected, and to that end that all available evidence should be used. It also is desirable that the Government should not itself foster and pay for other crimes, when they are the means by which the evidence is to be obtained. . . . [F]or my part I think it a less evil that some criminals should escape than that the Government should play an ignoble part." Insofar as they are used as instrumentalities in the administration of criminal justice, the federal courts have an obligation to set their face against enforcement of the law by lawless means or means that violate rationally vindicated standards of justice, and to refuse to sustain such methods by effectuating them. They do this in the exercise of a recognized jurisdiction to formulate and apply "proper standards for the enforcement of the federal criminal law in the federal courts," McNabb v. United States, 318 U. S. 332, 341, an obligation that goes beyond the conviction of the particular defendant before the court. Public confidence in the fair and honorable administration of justice, upon which ultimately depends the rule of law, is the transcending value at stake.
*381 The formulation of these standards does not in any way conflict with the statute the defendant has violated, or involve the initiation of a judicial policy disregarding or qualifying that framed by Congress. A false choice is put when it is said that either the defendant's conduct does not fall within the statute or he must be convicted. The statute is wholly directed to defining and prohibiting the substantive offense concerned and expresses no purpose, either permissive or prohibitory, regarding the police conduct that will be tolerated in the detection of crime. A statute prohibiting the sale of narcotics is as silent on the question of entrapment as it is on the admissibility of illegally obtained evidence. It is enacted, however, on the basis of certain presuppositions concerning the established legal order and the role of the courts within that system in formulating standards for the administration of criminal justice when Congress itself has not specifically legislated to that end. Specific statutes are to be fitted into an antecedent legal system.
It might be thought that it is largely an academic question whether the court's finding a bar to conviction derives from the statute or from a supervisory jurisdiction over the administration of criminal justice; under either theory substantially the same considerations will determine whether the defense of entrapment is sustained. But to look to a statute for guidance in the application of a policy not remotely within the contemplation of Congress at the time of its enactment is to distort analysis. It is to run the risk, furthermore, that the court will shirk the responsibility that is necessarily in its keeping, if Congress is truly silent, to accommodate the dangers of overzealous law enforcement and civilized methods adequate to counter the ingenuity of modern criminals. The reasons that actually underlie the defense of entrapment can too easily be lost sight of in the pursuit of a wholly fictitious congressional intent.
*382 The crucial question, not easy of answer, to which the court must direct itself is whether the police conduct revealed in the particular case falls below standards, to which common feelings respond, for the proper use of governmental power. For answer it is wholly irrelevant to ask if the "intention" to commit the crime originated with the defendant or government officers, or if the criminal conduct was the product of "the creative activity" of law-enforcement officials. Yet in the present case the Court repeats and purports to apply these unrevealing tests. Of course in every case of this kind the intention that the particular crime be committed originates with the police, and without their inducement the crime would not have occurred. But it is perfectly clear from such decisions as the decoy letter cases in this Court, e. g., Grimm v. United States, 156 U. S. 604, where the police in effect simply furnished the opportunity for the commission of the crime, that this is not enough to enable the defendant to escape conviction.
The intention referred to, therefore, must be a general intention or predisposition to commit, whenever the opportunity should arise, crimes of the kind solicited, and in proof of such a predisposition evidence has often been admitted to show the defendant's reputation, criminal activities, and prior disposition. The danger of prejudice in such a situation, particularly if the issue of entrapment must be submitted to the jury and disposed of by a general verdict of guilty or innocent, is evident. The defendant must either forego the claim of entrapment or run the substantial risk that, in spite of instructions, the jury will allow a criminal record or bad reputation to weigh in its determination of guilt of the specific offense of which he stands charged. Furthermore, a test that looks to the character and predisposition of the defendant rather than the conduct of the police loses sight of the underlying reason for the defense of entrapment. No *383 matter what the defendant's past record and present inclinations to criminality, or the depths to which he has sunk in the estimation of society, certain police conduct to ensnare him into further crime is not to be tolerated by an advanced society. And in the present case it is clear that the Court in fact reverses the conviction because of the conduct of the informer Kalchinian, and not because the Government has failed to draw a convincing picture of petitioner's past criminal conduct. Permissible police activity does not vary according to the particular defendant concerned; surely if two suspects have been solicited at the same time in the same manner, one should not go to jail simply because he has been convicted before and is said to have a criminal disposition. No more does it vary according to the suspicions, reasonable or unreasonable, of the police concerning the defendant's activities. Appeals to sympathy, friendship, the possibility of exorbitant gain, and so forth, can no more be tolerated when directed against a past offender than against an ordinary law-abiding citizen. A contrary view runs afoul of fundamental principles of equality under law, and would espouse the notion that when dealing with the criminal classes anything goes. The possibility that no matter what his past crimes and general disposition the defendant might not have committed the particular crime unless confronted with inordinate inducements, must not be ignored. Past crimes do not forever outlaw the criminal and open him to police practices, aimed at securing his repeated conviction, from which the ordinary citizen is protected. The whole ameliorative hopes of modern penology and prison administration strongly counsel against such a view.
This does not mean that the police may not act so as to detect those engaged in criminal conduct and ready and willing to commit further crimes should the occasion arise. Such indeed is their obligation. It does mean *384 that in holding out inducements they should act in such a manner as is likely to induce to the commission of crime only these persons and not others who would normally avoid crime and through self-struggle resist ordinary temptations. This test shifts attention from the record and predisposition of the particular defendant to the conduct of the police and the likelihood, objectively considered, that it would entrap only those ready and willing to commit crime. It is as objective a test as the subject matter permits, and will give guidance in regulating police conduct that is lacking when the reasonableness of police suspicions must be judged or the criminal disposition of the defendant retrospectively appraised. It draws directly on the fundamental intuition that led in the first instance to the outlawing of "entrapment" as a prosecutorial instrument. The power of government is abused and directed to an end for which it was not constituted when employed to promote rather than detect crime and to bring about the downfall of those who, left to themselves, might well have obeyed the law. Human nature is weak enough and sufficiently beset by temptations without government adding to them and generating crime.
What police conduct is to be condemned, because likely to induce those not otherwise ready and willing to commit crime, must be picked out from case to case as new situations arise involving different crimes and new methods of detection. The Sorrells case involved persistent solicitation in the face of obvious reluctance, and appeals to sentiments aroused by reminiscences of experiences as companions in arms in the World War. Particularly reprehensible in the present case was the use of repeated requests to overcome petitioner's hesitancy, coupled with appeals to sympathy based on mutual experiences with narcotics addiction. Evidence of the setting in which the inducement took place is of course highly relevant in *385 judging its likely effect, and the court should also consider the nature of the crime involved, its secrecy and difficulty of detection, and the manner in which the particular criminal business is usually carried on.
As Mr. Justice Roberts convincingly urged in the Sorrells case, such a judgment, aimed at blocking off areas of impermissible police conduct, is appropriate for the court and not the jury. "The protection of its own functions and the preservation of the purity of its own temple belongs only to the court. It is the province of the court and of the court alone to protect itself and the government from such prostitution of the criminal law. The violation of the principles of justice by the entrapment of the unwary into crime should be dealt with by the court no matter by whom or at what stage of the proceedings the facts are brought to its attention." 287 U. S., at 457 (separate opinion). Equally important is the consideration that a jury verdict, although it may settle the issue of entrapment in the particular case, cannot give significant guidance for official conduct for the future. Only the court, through the gradual evolution of explicit standards in accumulated precedents, can do this with the degree of certainty that the wise administration of criminal justice demands.
NOTES
[1]  The charge to the jury was not in issue here.
[2]  "Q. And it was your [Kalchinian's] job, was it not, while you were working with these agents to go out and try and induce somebody to sell you narcotics, isn't that true?

.....
"A. No, it wasn't my job at all to do anything of the kind.
"Q. Do you remember this question [asked at the first trial] . . .
`Q. And it was your job while working with these agents to go out and try and induce a person to sell narcotics to you, isn't that correct?
A. I would say yes to that.' Do you remember that?
"A. If that is what I said, let it stand just that way.
.....
"Q. So when you testify now that it was not your job you are not telling the truth?
"A. I mean by job that nobody hired me for that. That is what I inferred, otherwise I meant the same thing in my answer to your question." R. 100.
[3]  "Q. But you had made a promise, an agreement, though, to co-operate with the Federal Bureau of Narcotics before you received a suspended sentence from the court?

"A. [Kalchinian]. I had promised to cooperate in 1951.
"Q. And that was before your sentence?
"A. Yes, that was before my sentence." R. 99.
Kalchinian received a suspended sentence in 1952 after a statement by the United States Attorney to the Judge that he had been cooperative with the Government. R. 89, 98.
[4]  At one point Kalchinian did testify that he had previously received the same amount of narcotics at some unspecified lower price. He characterized this other price as "not quite" the price he paid petitioner. R. 80.
[5]  It is of interest to note that on the first appeal in this case the Court of Appeals came to the same conclusion as we do as to the evidence discussed so far. See United States v. Sherman, 200 F. 2d 880, 883.
[6]  Cf. e. g., Lutfy v. United States, 198 F. 2d 760; Wall v. United States, 65 F. 2d 993; Butts v. United States, 273 F. 35.
[7]  In the first appeal of this case Judge Learned Hand stated: "Indeed, it would seem probable that, if there were no reply [to the claim of inducement], it would be impossible ever to secure convictions of any offences which consist of transactions that are carried on in secret." United States v. Sherman, 200 F. 2d 880, 882.
[8]  For example, in the following cases the courts have, in affirming convictions, held that the issue of entrapment had been properly submitted to the jury. United States v. Lindenfeld, 142 F. 2d 829 (C. A. 2d Cir.); United States v. Brandenburg, 162 F. 2d 980 (C. A. 3d Cir.); Demos v. United States, 205 F. 2d 596 (C. A. 5th Cir.); Nero v. United States, 189 F. 2d 515 (C. A. 6th Cir.); United States v. Cerone, 150 F. 2d 382 (C. A. 7th Cir.); Louie Hung v. United States, 111 F. 2d 325 (C. A. 9th Cir.); Ryles v. United States, 183 F. 2d 944 (C. A. 10th Cir.); Cratty v. United States, 82 U. S. App. D. C. 236, 163 F. 2d 844. And in the following cases the courts have reversed convictions where the issue of entrapment was either not submitted to the jury or was submitted on improper instructions. United States v. Sherman, 200 F. 2d 880 (C. A. 2d Cir.); United States v. Sawyer, 210 F. 2d 169 (C. A. 3d Cir.); Wall v. United States, 65 F. 2d 993 (C. A. 5th Cir.); Lutfy v. United States, 198 F. 2d 760 (C. A. 9th Cir.); Yep v. United States, 83 F. 2d 41 (C. A. 10th Cir.).
[1]  Excellent discussions of the problem can be found in Mikell, The Doctrine of Entrapment in the Federal Courts, 90 U. Pa. L. Rev. 245; Donnelly, Judicial Control of Informants, Spies, Stool Pigeons, and Agent Provocateurs, 60 Yale L. J. 1091, 1098-1115; Note, Entrapment by Government Officials, 28 Col. L. Rev. 1067.
[2]  It is of course not a rigid rule of this Court to restrict consideration of a case merely to arguments advanced by counsel. Presumably certiorari was not granted in this case simply to review the evidence under an accepted rule of law. The solution, when an issue of real importance to the administration of criminal justice has not been argued by counsel, is not to perpetuate a bad rule but to set the case down for reargument with a view to re-examining that rule.


421 S.W.2d 661 (1967)
Jimmie Dee ISAAC, Appellant,
v.
The STATE of Texas, Appellee.
No. 40789.
Court of Criminal Appeals of Texas.
December 6, 1967.
*662 R. E. Murphey, H. O. Woodward, Coleman, for appellant.
Gordon Griffin, Jr., Brownwood, and Leon B. Douglas, State's Atty., Austin, for the State.

OPINION
BELCHER, Judge.
The conviction is for robbery and the punishment was assessed by the jury at twenty years.
The testimony of the state reveals that the assaulted party, while testifying, identified the appellant as the person who exhibited a shotgun, threatened to kill him, and put him in fear of his life and bodily injury, and took fifty-five dollars in money from his possession and without his consent.
Testifying in his own behalf, the appellant denied that he committed the robbery.
The admission of testimony that the appellant escaped while in custody at the scene of the offense alleged is urged as a ground of error.
Immediately after his arrest, the appellant was taken to the railway depot, where the alleged offense occurred according to the testimony of the state. While in the depot, the appellant jumped through a glass window and ran from the officers.
Evidence of flight and escape are admissible as evidence of guilt. Cawley v. State, 166 Tex.Cr.R. 37, 310 S.W.2d 340; Hutchins v. State, 172 Tex.Cr.R. 525, 360 S.W.2d 534. Further, while testifying in his own behalf, the appellant admitted jumping through the widow at the depot.
It is contended that the admission in evidence of a hat, shoes, coins and jacket was error on the ground they were found as the result of an illegal search of a residence where the appellant was found after the alleged robbery.
It is undisputed that the officers were invited into the residence at the time they first located the appellant. It is the seizure of the hat and shoes on return to the house after going to the depot, that the appellant urges as error.
The hat, shoes, and the shotgun were all seen, as they were in open view, on the first visit to the house, when the officers were invited to enter. The officers took the shotgun on the first visit and no complaint about this is urged.
*663 Testifying in his own behalf on direct examination, the appellant admitted his possession of the coins and stated that he had earned them. The appellant first offered evidence that the officers returned to the house, about one block from the depot, and got the shoes which he put on at the depot and he also put on the hat. The state never inquired about the jacket before the jury and it was not exhibited to them. The contention presents no error.
Error is urged on the ground that appellant was compelled to put on the hat and shoes at the depot so he could be viewed for identification.
The putting on of the hat and shoes was first introduced in evidence before the jury by the appellant. No error is shown. Turner v. State, Tex.Cr.App., 371 S.W.2d 891. However, these acts did not violate appellant's privileges against self-incrimination. United States v. Wade, 388 U.S. 218, 87 S.Ct. 1926, 18 L.Ed.2d 1149, 1151.
The judgment is affirmed.


399 F.Supp. 330 (1975)
R. L. POHLMAN COMPANY, Plaintiff,
v.
KEYSTONE CONSOLIDATED INDUSTRIES, INC., a corporation (d/b/a Impex Division of Keystone Consolidated Industries), Defendant.
No. 74-58C(3).
United States District Court, E. D. Missouri, E. D.
July 3, 1975.
*331 R. W. Jacobsmeyer, Leyhe, Jacobsmeyer & Meyer, Clayton, Mo., for plaintiff.
Dominic Troiani, James W. Herron, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for defendant.

MEMORANDUM
WANGELIN, District Judge.
This action is before the Court for a decision on the merits following the trial to the Court sitting without a jury.
Plaintiff, R. L. Pohlman Company, brought this contract action seeking cover and incidental damages for the failure to deliver a quantity of extruded aluminum blanks against defendant, Keystone Consolidated Industries, Inc. Defendant has in turn counterclaimed for failure to pay for a shipment of the extruded aluminum blanks.
The Court being fully apprised of the premises hereby makes the following findings of fact and conclusions of law.

Findings of Fact
1. Plaintiff, R. L. Pohlman Company is a corporation organized and existing under the laws of the State of Missouri with its principal place of business in St. Louis County, Missouri.
2. Defendant, Keystone Consolidated Industries, Inc., is a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Peoria, Illinois.
3. At all times relevant, Impex Division of Keystone Consolidated Industries, Inc.'s principal place of business was in Crawfordsville, Indiana.
4. On or about August 7, 1972, the United States Army Munitions Command, Joliet, Illinois, issued an invitation for bid, Bid No. DAAA09-73-B-0008 for 1,025,000 Cup Booster F/Fuse, Bomb Nose N904E3.
*332 5. The basic manufacturing process in manufacturing Cup Boosters is:
A. The raw material used in the manufacture of a Cup Booster is an aluminum slug.
B. The aluminum slug is manufactured into a Cup Booster Blank (hereinafter referred to as a Blank) on an impact machine.
C. The Blank is then machined and coated to make the finished Cup Booster (hereinafter referred to as a Finished Booster Cup) furnished to the government.
6. For several years prior to August 1972, defendant had been awarded contracts by the United States Army for Finished Booster Cups. In these years, defendant secured aluminum slugs from outside suppliers and manufactured both the Blank and the Finished Booster Cups.
7. Both plaintiff and defendant submitted bids in response to the aforesaid invitation for bid for 1,025,000 Finished Booster Cups.
8. On or about August 31, 1972, all bids submitted to the United States Army were opened.
9. Defendant submitted a bid to plaintiff dated September 5, 1972, offering to supply plaintiff Blanks in the event plaintiff was awarded a contract by the Army. The bid was:

  "Lots of 1,000 impact only
    (Blanks)                   $.145 each
    machined OD                 .185 each"

10. Mueller Brass Company also sent to plaintiff a letter quotation dated September 12, 1972, offering to supply plaintiff Blanks. The quotation read:

  "1 million pieces           $15.30 per
                                hundred"

11. On or about October 12, 1972, the United States Army Munitions Command awarded plaintiff a contract for 1,025,000 Finished Booster Cups. At the same time, it also awarded a contract for 1,025,000 Finished Booster Cups to American Technical Industries.
12. Defendant submitted to American Technical Industries, Inc. a quotation offering to also supply American Technical with Blanks.
13. Thereafter, plaintiff orally placed an order with defendant for 500,000 Blanks at a price of $.145 each.
14. Defendant sent to Aluminum Company of America (Alcoa) its Purchase Order No. 47190 dated November 3, 1972, and received from Alcoa a document entitled "Sales Order" dated November 3, 1972.
15. Plaintiff sent to Mueller Brass Company a document entitled "Purchase Order No. 1018" dated November 21, 1972, for 525,000 Blanks upon a certain delivery schedule.
16. On December 11, 1972, plaintiff sent to defendant its Purchase Order ARM1044 which was received by defendant on December 13, 1972. That document contained, among other items, an initial quantity for the Order, 400,000, a delivery schedule, at the price of $.145 each, f.o.b. defendant's plant, and the language after the item description, "with an option for one hundred percent (100%) increase."
17. The defendant was aware of the quantity of Booster Cups required by the contract awarded to plaintiff Pohlman when it submitted its quotations to Pohlman and American Technical Industries. The defendant was also aware of, having the bid packet for the government contract, the fact that the Pohlman contract contained a provision allowing the government to order an increase in quantity of up to, but not exceeding, two hundred percent (200%) of the originally contracted for quantity of Booster Cups.
18. Plaintiff commenced its attempts to produce the Finished Booster Cups in January of 1973, and encountered difficulty in machining the raw material. Because of these difficulties, it placed *333 its delivery schedule for Booster Cup Blanks on hold for both defendant and Mueller Brass Company.
19. On or about August 29, 1973, plaintiff sent to defendant "Change #2" to its Purchase Order in which it exercised its option for and ordered the additional 400,000 Booster Cups to be delivered as soon as possible. That document was received by the defendant on August 31, 1973.
20. On the date that plaintiff sent to defendant the change to the Purchase Order increasing the quantity by 400,000, defendant was still shipping to plaintiff the initial quantity of 400,000 Booster Cup Blanks originally ordered.
21. On or about November 5, 1973, shortly after defendant had shipped the last of the initial 400,000 Booster Cup Blanks, it sent to plaintiff a Purchase Order revision declaring "Consider this order complete at 413,911 pieces shipped".
22. The evidence produced at trial shows that on December 10, 1973, defendant's employee, Howard Fulford, considered his company "out of the business of [producing] Booster Cups."
23. During the time period, as discussed in Findings of Fact paragraphs 19 through 22, plaintiff continued to insist that defendant provide information as to when defendant would ship the additional quantity.
24. Defendant offered to sell to plaintiff the additional 400,000 Booster Cup Blanks on January 11, 1974.
25. That offer to sell by defendant was not acceptable to the plaintiff for several reasons. These reasons were: the proposed delivery schedule of the defendant was not acceptable to the plaintiff because it would force the plaintiff into an unacceptable delivery schedule with regards to the United States Government Procurement Agency for the end item, the Finished Booster Cup; and the defendant's offer also required that an additional 400,000 Booster Cup Blanks (over and above the original option quantity of 400,000) be purchased by the plaintiff.
26. As a result of the aforementioned difficulties with defendant's order conditions, plaintiff placed an order for the Booster Cup Blanks with Mueller Brass Company.
27. The Purchase Order to Mueller Brass Company was for a higher price, initially $.263 each, and allowed the price to be varied in accordance with current aluminum prices. Eventually, plaintiff was paying Mueller Brass Company $.271 each for the Booster Cup Blanks. In total, plaintiff paid to Mueller Brass Company $97,517.50 for the 362,500 Booster Cup Blanks used by the plaintiff to complete the contract. That quantity of Blanks would have cost $52,562.50 at the price of $.145 each, the defendant's contract price. As a result, plaintiff paid $44,955.00 more for the same quantity of Blanks than it would have if the Blanks had been supplied by defendant at the contract price.
28. Mueller's plant is located in Port Huron, Michigan, farther from the City of St. Louis than defendant's plant at Crawfordsville, Indiana. As a result, plaintiff paid an extra $1159.94 in shipping costs as a result of its purchase from Mueller Brass Company.
29. Due to defendant's refusal to sell the optioned Booster Cup Blanks to the plaintiff, plaintiff was required to amend its delivery schedule with the United States government. This delivery schedule change resulted in a contract price reduction from the United States government to plaintiff of $250,000.
30. The plaintiff has failed to pay the defendant for 104,782 Blanks. At the contractual rate of $.145 each defendant is entitled to recover from plaintiff $15,193.39.
31. As discussed in Findings of Fact 27 through 30 above, the Court finds that the plaintiff was damaged in the amount of $45,364.94 which shall be reduced by defendant's counterclaim amount of $15,193.39.

*334 Conclusions of Law

The Court has jurisdiction over the parties pursuant to 28 U.S.C. § 1332.
The central issue in this contract case is the effect to be given the language on plaintiff's Purchase Order to defendant which stated: "400,000 Cup Booster Blank No. 8839359 with an option for 100% increase."
It is defendant's assertion that the option was not exercised within a reasonable time, and, therefore, plaintiff's later order for an additional 400,000 Blanks need not have been accepted by the defendant. In the absence of any specific time perimeters in a contract, it is clear that terms such as options shall be exercised within a reasonable time. § 400.2-309 R.S.Mo., 1969. Absent such a specific time requirement, the reasonable period of time for the exercise of such an option must be considered from the totality of the circumstances submitted to the Court. Weis v. Wanstrath, 149 S.W.2d 442 (Mo. Ct.App., 1941).
It is this Court's opinion after carefully reviewing the factual evidence presented to it that the plaintiff did exercise its option within a reasonable time. The record shows that the defendant was aware of plaintiff's machining problems. The evidence shows that defendant acquiesced and allowed plaintiff to vary its delivery schedule with the defendant. If defendant was aware that it would be damaged by such changes or that it felt that the time to exercise the option had run, it should have so stated to the plaintiff. The Court regards defendant's silence as to the effect of the option as indicating that defendant felt the option was still in force.
Once it is established that the option between the parties remained in effect, it follows that upon defendant's statement to plaintiff that the order for approximately 400,000 Blanks was complete upon shipment of the final delivery, that plaintiff was entitled to seek cover for damages arising out of defendant's breach. § 400.2-712 R.S.Mo., 1969.
As stated in the Findings of Fact, the price that plaintiff had to pay for obtaining substitute goods is clearly established, and such prices will be the main measure of damages for the plaintiff.
The plaintiff also seeks incidental and consequential damages pursuant to § 400.2-715 R.S.Mo., 1969. The costs attributable to extra freight and decrease in the contract price paid by the United States government due to defendant's breach have been clearly identified to the Court and will be allowed. However, plaintiff has attempted to prove other consequential and incidental damages such as transportation of plaintiff's agent in seeking substitution of goods, and "downtime" of plaintiff's machinery due to defendant's failure to deliver the optioned goods. Such damages have not been adequately proved to the satisfaction of the Court since the records involved were clearly prepared at a time inconsistent with defendant's breach.
As to the defendant's counterclaim, the record is clear that plaintiff has failed to make the necessary payment to the defendant for the last shipment of Blanks. As a result, defendant will be allowed a set-off of the prayed for amount against the damages plaintiff shall recover in this action.
For the reasons stated above, judgment will be entered for the plaintiff on its complaint, and judgment will be entered for the defendant on its counterclaim.