Lucia v. Prospect Street ( 1994 )


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    United States Court of Appeals
    United States Court of Appeals
    For the First Circuit
    For the First Circuit
    ____________________

    No. 93-2055

    ROBERT LUCIA, ET AL.,

    Plaintiffs, Appellants,

    v.

    PROSPECT STREET HIGH INCOME PORTFOLIO, INC., ET AL.,

    Defendants, Appellees.

    ____________________

    No. 93-2056

    ERIC MILLER, ET AL.,

    Plaintiffs, Appellants,

    v.

    THE NEW AMERICAN HIGH INCOME FUND, ET AL.,

    Defendants, Appellees.

    ____________________

    APPEALS FROM THE UNITED STATES DISTRICT COURT

    FOR THE DISTRICT OF MASSACHUSETTS

    [Hon. A. David Mazzone, U.S. Senior District Judge]
    __________________________

    ____________________

    Before

    Cyr, Circuit Judge,
    _____________
    Aldrich, Senior Circuit Judge,
    ____________________
    and Stahl, Circuit Judge.
    _____________

    ____________________

    Eugene A. Spector, with whom Robert M. Roseman, Mark S. Goldman,
    _________________ __________________ ________________



















    Robert G. Eisler, Spector & Roseman, Nancy Gertner, Jody L. Newman,
    _________________ __________________ _____________ ______________
    Dwyer, Collora & Gertner, Garwin, Bronzaft, Gerstein & Fisher, Elwood
    ________________________ ____________________________________ ______
    S. Simon & Associates, Elwood S. Simon, Wechsler, Skirnick Harwood,
    ______________________ _______________ ___________________________
    Halebian & Feffer, Robert I. Harwood, Levin, Fishbein, Sedran &
    __________________ __________________ ____________________________
    Berman, Arnold Levin, Esq., Kohn, Nast & Graf, P.C., Robert S.
    ______ ____________________ ___________________________ __________
    Kitchenoff, Chertow & Miller, Marvin Miller, Shapiro Grace & Haber,
    __________ ________________ _____________ ______________________
    and Edward Haber were on brief for appellants.
    ____________
    Thomas J. Dougherty, with whom Skadden, Arps, Slate, Meagher &
    ____________________ _________________________________
    Flom, was on brief for appellees Messrs. Omohundro, Frabotta, Carey,
    ____
    Cote, Meyohas and Platt.
    John D. Donovan, Jr., with whom Ivan B. Knauer, Timothy J.
    ______________________ ________________ ___________
    Hinkle, Kurt S. Kusiak, and Ropes & Gray, were on brief for appellees
    ______ _______________ ____________
    The New High Income Fund, Inc., Patricia Ostrander, Ellen Terry, and
    Richard E. Floor.
    Robert A. Buhlman, with whom Gerald F. Rath and Bingham, Dana &
    __________________ _______________ _______________
    Gould, were on brief for Prudential Securities Incorporated.
    _____
    Peter M. Saparoff and Palmer & Dodge were on brief for appellees
    _________________ ______________
    Ernest E. Monrad, Joseph L. Bower, Bernard J. Korman, and Franco
    Modigliani.
    Paul C. Madden, Paul D. Shaffner, David Moffit, and Saul, Ewing,
    ______________ ________________ ____________ _____________
    Remick & Saul were on brief for appellees Butcher Corporation and
    ______________
    Bateman Eichler, Hill Richards, Inc.
    Harry L. Manion, III, Thomas G. Guiney, and Cooley, Manion, Moore
    ____________________ _________________ _____________________
    & Jones, P.C. were on brief for appellee Ostrander Capital Management
    ______________
    Corp.
    Eric A. Deutsch, Margaret A. Flanagan, and Testa, Hurwitz &
    _________________ ______________________ _________________
    Thibeault were on brief for Prospect Street High Income Portfolio,
    _________
    Inc. and Prospect Street Investment Management Co., Inc.


    ____________________

    September 28, 1994
    ____________________
































    STAHL, Circuit Judge. In the late 1980's,
    ______________

    plaintiffs-appellants purchased shares of two separate "junk

    bond" funds. After the value of the purchased shares

    plummeted, plaintiffs alleged various federal securities law

    violations. In a series of related rulings, the district

    court dismissed some of plaintiffs' allegations for failure

    to state a claim, and granted summary judgment in favor of

    defendants on all remaining claims. We affirm in part and

    reverse in part.

    I.
    I.
    __

    FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
    FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
    ________________________________________

    Prior to this appeal, the proceedings in these two

    cases were not formally consolidated. As the district court

    noted, the two cases raise many identical issues. Thus, our

    discussion, unless we specifically state otherwise, applies

    equally to both cases.

    In 1988, both New America High Income Fund, Inc.

    and Prospect Street High Income Portfolio, Inc. ("the New

    America Fund," and "the Prospect Street Fund," or

    collectively "the funds") were first publicly offered on the

    New York Stock Exchange. Each fund's purpose, as stated in

    their nearly identical prospectuses, was to invest in a

    diversified portfolio of high yield fixed-income securities,

    commonly known as "junk bonds."





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    In April 1989, well after the initial public

    offerings, a study headed by Professor Paul Asquith ("the

    Asquith study") disclosed that the default rate of junk bonds

    was much higher than had been previously believed.1 This

    conclusion was reached by calculating the adverse effects of

    "aging" on junk bonds.2

    Within months of the study, though not necessarily

    as a direct result of the study, the market for junk bonds

    began to collapse. By November 1989, both funds had reduced

    their dividends, and the share value of each fund had

    declined considerably.



    ____________________

    1. The results of the Asquith study were first made public
    through various financial and general periodicals in April of
    1989. See, e.g., Kenneth N. Gilpin, Further Rise in Rates is
    ___ ____ ________________________
    Expected, N.Y. Times, Apr. 10, 1989, at D9; Linda Sandler &
    ________
    Michael Siconolfi, Junk Bonds are Taking Their Lumps, Wall
    ___________________________________
    St. J., Apr. 14, 1989, at C1. The study itself was not
    published until September 1989. See Paul Asquith, et al.,
    ___
    Original Issue High Yield Bonds: Aging Analyses of Defaults,
    _____________________________________________________________
    Exchanges and Calls, 44 J. Fin., No. 4 (September 1989).
    ___________________

    2. The record reveals that, prior to the Asquith study, the
    traditionally accepted method of determining annual bond
    default rates was to divide the total number of defaults per
    year by the total size of the relevant market sector for that
    year. As the affidavit of Professor Asquith points out,
    however, this method loses its accuracy in a rapidly
    expanding market, such as the junk bond market of the 1970's
    and '80's, where new issues greatly enlarged the existing
    market. In other words, the traditional method does not
    reveal whether a preponderance of older or newer issues are
    defaulting in a given year.
    Breaking from the traditional method of
    calculation, Asquith's study tracked the default rate of
    bonds based on their dates of issuance. The study revealed
    that junk bonds become more likely to default as they grow
    older, hence the term "aging."

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    Plaintiffs, who consist of putative classes of

    purchasers of each fund, commenced parallel actions against

    the two funds. The First Amended Complaints (hereinafter

    "the original complaints") were lengthy, alleging violations

    of a variety of federal securities laws, including section

    10(b) of the Securities Exchange Act of 1934, 15 U.S.C.

    78j(b), and sections 11 and 12(2) of the Securities Act of

    1933, 15 U.S.C. 77k, 77l(2).3 The gist of the original

    complaints was that the funds' directors, advisors and

    underwriters ("defendants") knew of, but failed to disclose,

    adverse information about the junk bond market. In

    particular, the complaints alleged that defendants had agreed

    to act, and had in fact acted, as purchasers of last resort

    for undesirable junk bonds; that they knew of infirmities in



    ____________________

    3. Sections 10(b), 11 and 12(2) all prohibit the use of
    materially misleading information in the sale of securities,
    and the same conduct may be actionable under all three
    sections. See, e.g., Herman & MacLean v. Huddleston, 459
    ___ ____ _________________ __________
    U.S. 375, 382-83 (1983) (stating that the same conduct may be
    actionable under sections 10(b) and 11); Shapiro v. UJB Fin.
    _______ ________
    Corp., 964 F.2d 272, 279, 286-89 (3d Cir.) (explaining that
    _____
    single set of factual allegations may state claim under
    sections 11 and 12(2)), cert. denied, 113 S. Ct. 365 (1992).
    _____ ______
    While sections 10(b), 11 and 12(2) differ significantly
    from one another, see, e.g., Herman & MacLean, 459 U.S. at
    ___ ____ ________________
    382; Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210-11
    ______________ __________
    (1976), the parties focus solely on the materiality
    requirement, which is common to all three sections. Cf. In
    ___ __
    re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 368 n.10
    ______________________________________
    (3d Cir. 1993) ("Because our analysis here is predicated on
    the materiality requirement, which is common to [plaintiffs'
    section 10(b), 11 and 12(2) claims], we do not here
    distinguish between [those provisions.]"), cert. denied, 114
    _____ ______
    S. Ct. 1219 (1994).

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    the junk bond market at the time they publicly offered shares

    of the funds and thereafter; and that misleading statistics

    were used in the prospectuses to portray the historical

    performance of junk bonds.4

    The district court dismissed many of plaintiffs'

    claims on the pleadings, see Miller v. New Am. High Income
    ___ ______ ____________________

    Fund, 755 F. Supp. 1099 (D. Mass. 1991) ("Miller I"); Lucia
    ____ _________ _____

    v. Prospect St. High Income Portfolio, Inc., 769 F. Supp. 410
    ________________________________________

    (D. Mass. 1991) ("Lucia I"), but nonetheless allowed both
    _______

    sets of plaintiffs to replead.

    Plaintiffs' Second Amended Complaints (hereinafter

    "the revised complaints") alleged causes of action only under

    sections 11 and 12(2). All section 10(b) claims presented in

    the original complaints were dropped. Among other things,

    the revised complaints focused on a ten-year comparison

    between junk bonds and United States Treasury securities

    ("Treasury securities") that was included in the

    prospectuses.5 Though the ten-year figure showed that junk


    ____________________

    4. The original complaints also alleged RICO claims and
    common law fraud claims, which were dismissed by the district
    court. Plaintiffs do not appeal these dismissals.

    5. The relevant portion of the New America Fund's prospectus
    states:

    The Fund's portfolio will consist
    primarily of "high yield" corporate
    bonds. . . .

    "High yield" bonds offer a higher yield
    to maturity than bonds with higher

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    ____________________

    ratings as compensation for holding an
    obligation of an issuer perceived to be
    less credit worthy. The DBL composite
    measures the performance of the most
    representative bonds in the "high yield"
    market and is compiled monthly by Drexel
    Burnham Lambert Incorporated. As of
    December 31, 1987, the DBL Composite
    offered a yield spread of 484 basis
    points (i.e., 4.84%; 1% equals 100 basis
    points) over the comparable Treasury
    security, 7% U.S. Treasury due 1994.
    U.S. Treasury securities are considered
    to have minimal risk. The average spread
    between the DBL Composite and the
    comparable U.S. Treasury issue was 358
    basis points for 1980, 397 basis points
    for 1981, 503 basis points for 1982, 337
    basis points for 1983, 311 basis points
    for 1984, 362 basis points for 1985, 496
    basis points for 1986 and 451 basis
    points for 1987.

    For the years 1977 through 1986, the
    spread in yields between "high yield"
    securities and representative U.S.
    Treasury securities has averaged
    approximately 393 basis points. For this
    period, the loss in principal and
    interest due to defaults on "high yield"
    securities has averaged approximately 97
    basis points. Thus, for the period 1977
    to 1986, the net average spread between
    "high yield" securities and
    representative U.S. Treasury securities
    (i.e., the average spread between "high
    yield" securities and U.S. Treasury
    securities, minus the average default
    loss on "high yield" securities) was 296
    basis points. For 1987, the loss of
    principal and interest due to defaults is
    estimated to have been 125 basis points.*
    However, past performance is not
    necessarily indicative of future
    performance. . . .

    The capital structure of the Fund has
    been designed to take advantage of the

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    bonds had outperformed Treasury securities, the revised

    complaints alleged that during the six years leading up to

    each fund's public offering, Treasury securities had actually

    outperformed junk bonds.6

    Shortly after the revised complaints were filed,

    defendants moved for summary judgment. The district court

    began by ruling as a matter of law that the comparison to

    Treasury securities in the prospectuses was not misleading.


    ____________________

    historical spread in yields between "high
    yield" securities and representative U.S.
    Treasury securities, compared with the
    average default loss on "high yield"
    securities.

    * Statistical data appearing above are
    based on information provided by Drexel
    Burnham Lambert Incorporated.

    The Prospect Street prospectus is similarly structured and
    worded.
    We note in passing that the Prospect Street
    prospectus reports significantly different annual spreads for
    the years 1980 through 1987. Because neither the Miller nor
    ______
    the Lucia plaintiffs have argued, either below or on appeal,
    _____
    that these inconsistencies are actionable, we deem the issue
    waived.

    6. Both revised complaints at 29 state:

    29. The [Asquith] Study also disclosed
    that high yield debt had not in fact
    produced higher realized returns and
    lower standard deviations of returns than
    either investment grade or treasury bonds
    for the period 1982 through 1987 . . . .

    The Asquith study, in turn, relies on statistics from
    Marshall E. Blume & Donald B. Keim, Volatility Patterns of
    _______________________
    Fixed Income Securities, Rodney L. White Center For Financial
    _______________________
    Research, Wharton School, University of Pennsylvania (March
    1989) ("the Blume and Keim study").

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    See In re New Am. High Income Fund Sec. Litig., 834 F. Supp.
    ___ __________________________________________

    501, 506-07 (D. Mass. 1993) ("Miller II"). It went on to
    __________

    grant summary judgment in favor of defendants on all other

    claims. Id.; Lucia v. Prospect St. High Income Portfolio,
    ___ _____ _____________________________________

    Inc., No. 90-10781-MA (D. Mass. Aug. 26 1993) ("Lucia II").
    ____ ________

    Plaintiffs appeal these various rulings. We address

    plaintiffs' claims in the order in which they were decided by

    the district court.

    II.
    II.
    ___

    DISCUSSION
    DISCUSSION
    __________

    A. Section 10(b) Claims
    ________________________

    The district court dismissed plaintiffs' section

    10(b) claims at the first of these cases' two pleading

    stages. We affirm that dismissal, though on somewhat

    narrower grounds than those relied upon by the district

    court.

    1. Standard of Review
    ______________________

    Rule 12(b)(6) dismissals are subject to de novo
    __ ____

    review. Northeast Doran, Inc. v. Key Bank of Maine, 15 F.3d
    ______________________ _________________

    1, 2 (1st Cir. 1994). While we generally credit all

    allegations in the complaint and draw all reasonable

    inferences favorable to the plaintiff, id., Rule 9(b) imposes
    ___

    heightened pleading requirements for allegations of fraud.

    "In all averments of fraud or mistake, the circumstances





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    constituting fraud or mistake shall be stated with

    particularity." Fed. R. Civ. P. 9(b).

    As we have stated in a recent discussion of Rule

    9(b) in the securities context:

    [G]eneral averments of the defendants'
    knowledge of material falsity will not
    suffice. Consistent with Fed. R. Civ. P.
    9(b), the complaint must set forth
    specific facts that make it reasonable to
    believe that defendant[s] knew that a
    statement was materially false or
    misleading. The rule requires that the
    particular times, dates, places or other
    details of the alleged fraudulent
    involvement of the actors be alleged.

    Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st
    ________ __________________________

    Cir. 1994) (citations and internal quotation marks omitted).

    "We have been especially rigorous in demanding such factual

    support in the securities context." Romani v. Shearson
    ______ ________

    Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991). Moreover,
    ______________

    this heightened pleading is required "even when the fraud

    relates to matters peculiarly within the knowledge of the

    opposing party." Id.
    ___

    2. The Original Complaints
    ___________________________

    Plaintiffs' original complaints alleged various

    wrongdoing by defendants. The common thread running

    throughout the original complaints, however, was that

    defendants knew of infirmities in the junk bond market, and

    that they nonetheless entered a vast web of illicit

    agreements with Drexel Burnham Lambert, and with former junk



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    bond dealer Michael Milken, in order to become purchasers of

    last resort for undesirable junk bonds.

    The district court properly concluded that these

    general allegations in the original complaints were wholly

    conclusory. No factual basis is put forward to support

    plaintiffs' theory that defendants consorted with Drexel,

    that they dealt with Michael Milken, that they agreed to act

    as purchasers of last resort for undesirable bonds, or that

    they knew enough to anticipate the impending fall-out of the

    junk bond market. Because all of plaintiffs' 10(b) claims

    rely fundamentally on such unsupported allegations, the

    district court properly dismissed these claims for failure to

    meet Rule 9(b).7 Cf. Romani, 929 F.2d at 878 (finding that
    ___ ______

    complaint failed to satisfy Rule 9(b) where it contained "no

    factual allegations that would support a reasonable inference

    that adverse circumstances existed at the time of the

    offering, and were known and deliberately or recklessly

    disregarded by defendants").

    B. Section 11 and 12(2) Claims
    _______________________________







    ____________________

    7. Given adequate grounds to support dismissal of
    plaintiffs' section 10(b) claims, we expressly decline to
    address the district court's "loss causation" analysis, and
    its use of Bastian v. Petren Resources Corp., 892 F.2d 680
    _______ ______________________
    (7th Cir.), cert. denied, 496 U,S. 906 (1990), in rejecting
    _____ ______
    these same claims.

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    As noted above, plaintiffs were allowed to replead.

    Defendants' motions for summary judgment soon followed, and

    summary judgment was granted in favor of defendants.

    1. Standard of Review
    ______________________

    "A district court's grant of summary judgment is

    subject to plenary review." Calenti v. Boto, 24 F.3d 335,
    _______ ____

    338 (1st Cir. 1994). We read the record indulging all

    inferences in favor of the non-moving party. Id. Summary
    ___

    judgment is appropriate only "if the pleadings, depositions,

    answers to interrogatories, and admissions on file, together

    with the affidavits, if any, show that there is no genuine

    issue as to any material fact and that the moving party is

    entitled to a judgment as a matter of law." Fed. R. Civ. P.

    56(c). In seeking to forestall the entry of summary

    judgment, a nonmovant may not rely upon allegations in its

    pleadings. Rather, the nonmovant must "set forth specific

    facts showing that there is a genuine issue for trial." Fed.

    R. Civ. P. 56(e).

    2. Parallel Paths Diverge
    __________________________

    Both complaints alleged that the six-year

    comparison favored Treasury securities. And the Miller
    ______

    plaintiffs, unlike the Lucia plaintiffs, in their response to
    _____

    defendants' motion for summary judgment, set forth facts

    showing that the six-year figure, as well as a shorter three-

    year figure, actually favored Treasury securities. Moreover,



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    the district court squarely addressed this argument in ruling

    on the Miller defendants' motion for summary judgment. See
    ______ ___

    In re New Am. High Income Fund Sec. Litig., 834 F. Supp. 501,
    __________________________________________

    506-07 (D. Mass. 1993). Accordingly, we see no merit to

    defendants' argument that the Miller plaintiffs waived this
    ______

    issue.

    The Lucia plaintiffs, however, failed to preserve
    _____

    this issue. In fact, the Lucia plaintiffs' opposition to
    _____

    defendants' summary judgment motion fails to even mention the

    six-year comparison. Despite the striking similarities in

    these two cases, the Lucia plaintiffs pursued a significantly
    _____

    different tack in opposing defendants' motion for summary

    judgment, and failed to argue that the Prospect Street

    prospectus was misleading due to its failure to include a

    shorter-term comparison to Treasury securities. As noted

    above, a nonmovant faced with a motion for summary judgment

    may not rest on its pleadings. Moreover, we see no reason in

    this case to relax our general rule that "theories not raised

    squarely before the district court cannot be surfaced for the

    first time on appeal." McCoy v. Massachusetts Inst. of
    _____ ________________________

    Technology, 950 F.2d 13, 22 (1st Cir. 1991), cert. denied,
    __________ _____ ______

    112 S. Ct. 1939 (1992). Accordingly, our discussion of the

    six-year comparison applies only to the Miller case.
    ______

    3. Materiality under Sections 11 and 12(2) and the
    ___________________________________________________
    Omission of the Six-Year Comparison
    ___________________________________




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    Sections 11 and 12(2) both prohibit, inter alia,
    _____ ____

    the use of any "untrue statement of a material fact," 15

    U.S.C. 77l(2), as well the use of any information which

    "omits to state a material fact necessary in order to make

    the statements, in the light of the circumstances under which

    they are made, not misleading." Id.; see also 15 U.S.C.
    ___ ___ ____

    77k(a).

    The boundaries of materiality in the securities

    context are clearly enunciated in our case law.

    The mere fact that an investor might find
    information interesting or desirable is
    not sufficient to satisfy the materiality
    requirement. Rather, information is
    "material" only if its disclosure would
    alter the "total mix" of facts available
    _____ ___
    to the investor and "if there is a
    substantial likelihood that a reasonable
    ___________ __________
    shareholder would consider it important"
    to the investment decision.

    Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir. 1992)
    ______ ____________

    (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32
    ____________ ________

    (1988)). It is equally well established that "[w]hen a

    corporation does make a disclosure--whether it be voluntary

    or required--there is a duty to make it complete and

    accurate." Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26
    ______ ___________________

    (1st Cir. 1987). Moreover, disclosed facts may "not be `so

    incomplete as to mislead.'" Backman v. Polaroid Corp., 910
    _______ _______________

    F.2d 10, 16 (1st Cir. 1990) (en banc) (quoting SEC v. Texas
    ___ _____

    Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968), cert.
    ________________ _____

    denied, 394 U.S. 976 (1969)).
    ______


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    In addition, the fact that a statement is literally

    accurate does not preclude liability under federal securities

    laws. "Some statements, although literally accurate, can

    become, through their context and manner of presentation,

    devices which mislead investors. For that reason, the

    disclosure required by the securities laws is measured not by

    literal truth, but by the ability of the material to

    accurately inform rather than mislead prospective buyers."

    McMahan v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579
    _______ _______________________________

    (2d Cir. 1990), cert. denied, 501 U.S. 1249 (1991). Under
    _____ ______

    the foregoing standards, "emphasis and gloss can, in the

    right circumstances, create liability." Isquith v. Middle S.
    _______ _________

    Utils., Inc., 847 F.2d 186, 203 (5th Cir.), cert. denied, 488
    ____________ _____ ______

    U.S. 926 (1988).

    Finally, we note that the question of whether an

    omission or misleading statement is material "is normally a

    jury question and should not be taken from it unless the

    court has engaged in meticulous and well articulated analysis

    of each item of withheld or misrepresented information." SEC
    ___

    v. Seabord Corp., 677 F.2d 1301, 1306 (9th Cir. 1982). See
    _____________ ___

    also Milton, 961 F.2d at 970 ("`[T]he [objective]
    ____ ______

    determination [of materiality] requires delicate assessments

    of the inferences a `reasonable shareholder' would draw from

    a given set of [undisputed] facts and the significance of

    those inferences to him and those assessments are peculiarly



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    ones for the trier of fact.'") (quoting TSC Indus. Inc. v.
    ________________

    Northway, Inc., 426 U.S. 438, 450 (1976)); Isquith, 847 F.2d
    _______________ _______

    at 208 (stating that the adequacy of disclosures in

    securities cases is generally a question for a jury).

    As we have said, plaintiffs argue that the ten-year

    comparison between Treasury securities and junk bonds, though

    accurate, was misleading because a shorter, six-year

    comparison favored Treasury securities. We begin by noting

    that the six years at issue are the six years leading up to

    the fund's public offering. Moreover, while any one or two

    years might favor Treasury securities without amounting to an

    unfavorable trend, we think that a six-year comparison

    favoring Treasury securities is substantial enough to cast

    some doubt on the reliability of the reported ten-year

    figure. In other words, we cannot say as a matter of law

    that the undisclosed information about the six-year period

    would not alter the total mix of facts available to the

    investor. Rather, a jury could find that there is a

    substantial likelihood that a reasonable shareholder would

    consider the six-year comparison important to the investment

    decision. See Milton, 961 F.2d at 969.
    ___ ______

    We expressly decline to make hard and fast rules

    about the time length of reported investment results, i.e.,

    we do not hold that ten-year comparisons must always be

    accompanied by shorter-term comparisons. Nor do we hold that



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    a plaintiff always creates a triable issue of fact by merely

    unearthing unfavorable news regarding shorter time intervals

    than those reported.

    Moreover, the unfavorable six-year figure in this

    case does not necessarily render the ten-year comparison
    ___________

    misleading. Rather, a jury, knowing the individual annual

    returns over the ten-year period at issue (which are not now

    ascertainable on the record before us) and perhaps having

    other guideposts for determining the relative reliability of

    shorter- and longer-term bond comparisons, may conclude that

    the ten-year comparison standing alone is not misleading at

    all. Because the district court felt it irrelevant

    that defendants had not reported the claimed six-year

    negative trend, it gave no attention to whether the Miller
    ______

    plaintiffs had adequately established a factual base -- viz.,

    that defendants knew, or reasonably should have known, of

    that change of circumstances. While we have some doubt about

    the adequacy of the Miller plaintiffs' proof of defendants'
    ______

    knowledge, we nonetheless recognize that discovery on this

    issue was limited. We reverse and remand to permit further

    discovery in this area. Following such discovery, the court

    may then reconsider defendants' motion for summary judgment,

    if defendants choose to renew it.

    Thus, on the current state of the record in the

    Miller case, summary judgment on this issue was improper. We
    ______



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    agree with the district court that the ten-year comparison

    "paints a much rosier picture," New America, 834 F. Supp. at
    ___________

    507, than the six-year comparison. Having established this

    fact, the district court erred in concluding in the Miller
    ______

    case that the comparison nonetheless was not misleading as a

    matter of law.

    4. Other Summary Judgment Issues
    _________________________________

    While fact issues remain with regard to the

    Treasury security comparison in the Miller case, the district
    ______

    court properly granted summary judgment on all other issues

    in both cases. For example, plaintiffs alleged that (1)

    defendants knew or should have known of the effect that

    "aging" calculations have on determining junk bond returns,

    and (2) defendants should not have used the DBL composite as

    an indicator of past performance of junk bonds because that

    composite failed to account for "forced bond exchanges."8

    It is doubtless true, as plaintiffs allege, that

    several significant studies with regard to "aging" discovered

    statistical infirmities in the traditional methods of

    calculating junk bond returns. However, these studies were

    completed only after the prospectuses were issued. Moreover,

    according to affidavits in the record, the Asquith study was



    ____________________

    8. Forced bond exchanges, also known as "distressed" bond
    exchanges, occur when a bond issuer, rather than default on
    its existing obligations, exchanges them for a new set of
    obligations.

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    18















    the first study of its kind to display the infirmities of

    previous calculation methods. Plaintiffs failed to adduce

    any facts which, contrary to defendants' affidavits, would

    tend to show that defendants were aware of these infirmities,

    or that they could or should have been aware of the effects

    of "aging" analysis at the time the funds were initially

    offered to the public. Given plaintiffs' failure to raise a

    triable issue of fact, we affirm the district court's grant

    of summary judgment on this issue.

    A similar analysis disposes of plaintiffs'

    allegation that the DBL composite, relied on extensively by

    defendants in the prospectuses, failed to account for forced

    bond exchanges. Defendants offered affidavits to the effect

    that forced bond exchanges in fact were accounted for in the

    DBL composite. Plaintiffs offer no evidence to the contrary.

    Accordingly, we find no error in the district court's grant

    of summary judgment on this issue. Because further discovery

    will occur in the Miller case, we leave to the district court
    ______

    the formulation of the extent of that discovery, consistent

    with the ruling made herein.

    Lastly, defendant Prudential Bache, an underwriter

    of the New America Fund, argues that claims against it were

    untimely filed. The district court did not rule on when the

    statute of limitations in this case began to run, nor can we

    make such a determination on the record before us.



    -19-
    19















    Accordingly, we leave this important procedural issue to be

    determined in the first instance by the district court.

    III.
    III.
    ____

    CONCLUSION
    CONCLUSION
    __________

    We have carefully considered all other arguments

    and find them to be either waived or without merit. For the

    foregoing reasons, the various orders of the district court

    are

    Affirmed in full as to the Lucia case, and, as to
    ___________________________________________________

    the Miller case, affirmed in part, reversed in part, and
    _____________________________________________________________

    remanded for further proceedings consistent with this
    _____________________________________________________________

    opinion.
    ________





























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    20







Document Info

Docket Number: 93-2055

Filed Date: 9/28/1994

Precedential Status: Precedential

Modified Date: 9/21/2015

Authorities (22)

Serabian v. Amoskeag Bank Shares, Inc. , 24 F.3d 357 ( 1994 )

Fed. Sec. L. Rep. P 95,389 Irving A. Backman v. Polaroid ... , 910 F.2d 10 ( 1990 )

Richard Romani v. Shearson Lehman Hutton , 929 F.2d 875 ( 1991 )

Merino Vinas v. Merino-Calenti , 24 F.3d 335 ( 1994 )

Gilbert Roeder, Etc. v. Alpha Industries, Inc. , 814 F.2d 22 ( 1987 )

Northeast Doran, Inc. v. Key Bank of Maine , 15 F.3d 1 ( 1994 )

R. Richard Bastian, III v. Petren Resources Corporation , 892 F.2d 680 ( 1990 )

securities-and-exchange-commission-v-texas-gulf-sulphur-co-a-texas , 401 F.2d 833 ( 1968 )

Fed. Sec. L. Rep. P 96,601 James W. Milton v. Van Dorn ... , 961 F.2d 965 ( 1992 )

James L. McCoy Administrator of the Electrical Workers ... , 950 F.2d 13 ( 1991 )

mcmahan-company-froley-revy-investment-co-inc-and-wechsler , 900 F.2d 576 ( 1990 )

in-re-donald-j-trump-casino-securities-litigation-taj-mahal-litigation , 7 F.3d 357 ( 1993 )

rita-isquith-for-and-on-behalf-of-fred-taylor-isquith-jr-under-the , 847 F.2d 186 ( 1988 )

irwin-shapiro-on-behalf-of-himself-and-all-others-similarly-situated-v , 964 F.2d 272 ( 1992 )

fed-sec-l-rep-p-98722-securities-and-exchange-commission-v-the , 677 F.2d 1301 ( 1982 )

Ernst & Ernst v. Hochfelder , 96 S. Ct. 1375 ( 1976 )

TSC Industries, Inc. v. Northway, Inc. , 96 S. Ct. 2126 ( 1976 )

Lucia v. Prospect Street High Income Portfolio, Inc. , 769 F. Supp. 410 ( 1991 )

Miller v. New America High Income Fund , 755 F. Supp. 1099 ( 1991 )

In Re New America High Income Fund Securities Litigation , 834 F. Supp. 501 ( 1993 )

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