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USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 96-1138
VICKI MATCH SUNA AND LORI ROSEN,
Plaintiffs - Appellants,
v.
BAILEY CORPORATION, ET AL.,
Defendants - Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Steven J. McAuliffe, U.S. District Judge] ___________________
____________________
Before
Torruella, Chief Judge, ___________
Boudin, Circuit Judge, _____________
and Lisi,* District Judge. ______________
_____________________
Jules Brody, with whom Stull, Stull & Brody, Backus, Meyer, ___________ _____________________ ______________
Solomon & Rood and Weiss & Yourman were on brief for appellants. ______________ _______________
Sydelle Pittas, with whom Law Offices of Sydelle Pittas was ______________ ______________________________
on brief for appellee Bailey Corporation.
____________________
February 26, 1997
____________________
____________________
* Of the District of Rhode Island, sitting by designation.
TORRUELLA, Chief Judge. On May 26, 1994, Plaintiffs- TORRUELLA, Chief Judge. ____________
____________________
Appellants Vicki Match Suna ("Suna") and Lori Rosen ("Rosen")
1 The officers included William A. Taylor, who served as a
(collectively "plaintiffs" or "appellants") brought this class consultant and as a Bailey director at all relevant times; Roger
R. Phillips, who served as Chairman of the Board, President,
action suit against Bailey Corporation ("Bailey") and individual Chief Executive Officer and Secretary of Bailey during the class
period; Leonard Heilman, who served as Senior Vice President --
officers1 of the corporation (collectively "defendants" or Finance and Administration, Chief Financial Officer, Treasurer,
and Assistant Secretary of Bailey during the class period; E.
"appellees") on behalf of all persons who purchased Bailey's Gordon Young, who served as a director of Bailey and as Executive
Vice President at all relevant times; and John G. Owens, who
common stock during the class period. The suit alleges that served in various management capacities and as a director of
Bailey during the class period.
appellees violated Section 12 of the Securities Act2 of 1933 and
2 Any person who --
Sections 10(b)3 and 20(a)4 of the Securities Exchange Act of
(1) offers or sells a security . . . by means
of a prospectus or oral communication, which
includes an untrue statement of a material
fact or omits to state a material fact
necessary in order to make the statements, in
the light of the circumstances under which
they were made, not misleading . . . , and
who shall not sustain the burden of proof
that he did not know, and in the exercise of
reasonable care could not have known, of such
untruth or omission,
shall be liable to the person purchasing such security from him
. . . .
15 U.S.C. 771 (1976).
3 Section 10(b) provides:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any
facility of any national securities exchange --
* * *
(b) To use or employ, in connection with
the purchase or sale of any security
registered on a national securities exchange
or any security not so registered, any
manipulative or deceptive device or
contrivance in contravention of such rules
and regulations as the Commission may
prescribe as necessary or appropriate in the
public interest or for the protection of
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1934, as well as Rule 10b-55 promulgated by the Securities and
Exchange Commission ("SEC"). Appellants allege that appellees
made, or caused to be made, materially false and misleading
statements either through Bailey's corporate documents or through
analysts' reports disseminated to the public. On November 10,
1994, the District Court of New Hampshire granted appellees'
____________________
investors.
15 U.S.C. 78j(b) (1981).
4 Section 20(a) provides, in part:
Every person who, directly or indirectly,
controls any person liable under any
provision of this chapter or of any rule or
regulation thereunder shall also be liable
jointly and severally with and to the same
extent as such controlled person to any
person to whom such controlled person is
liable . . . .
15 U.S.C. 78t (1981).
5 Rule 10b-5 provides:
It shall be unlawful for any person, directly
or indirectly, by the use of any means or
instrumentality of interstate commerce, or of
the mails or of any facility of any national
securities exchange,
(a) To employ any device, scheme, or
artifice to defraud,
(b) To make any untrue statement of a
material fact or to omit to state a material
fact necessary in order to make the
statements made, in the light of the
circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or
court of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of
any security.
17 C.F.R. 240.10b-5 (1996).
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motion to dismiss this complaint for failure to comply with the
pleading requirements of Federal Rule of Civil Procedure 9(b).
The district court then allowed appellants to amend their
complaint, but rejected the first amended complaint appellants
submitted. The district court "reluctantly grant[ed] plaintiffs
leave to file a second amended complaint," Order of November 10,
1994, at 2, but cautioned that if "the second complaint fail[ed]
to satisfy the pleading requirements, the action [would] then be
dismissed with prejudice." Id. On September 1, 1995, appellants ___
filed a Second Amended Complaint, which the district court ruled
did not meet Rule 9(b)'s pleading requirements. Order of Dec.
29, 1995. The district court then dismissed the action with
prejudice. Appellants now appeal the dismissal of the Second
Amended Complaint.
BACKGROUND BACKGROUND
We accept as true all facts alleged in appellants'
Second Amended Complaint. Shields v. Citytrust Bancorp, Inc., 25 _______ _______________________
F.3d 1124, 1125 (1st Cir. 1994). Bailey manufactures molded
plastic exterior components and supplies them to North American
original equipment manufacturers of cars, light trucks, sport
utility vehicles and minivans. Bailey's primary customer is Ford
Motor Company, which accounted for approximately ninety-three
percent of Bailey's sales in the nine months ending April 25,
1993. Of the remaining sales, three percent were to General
Motors Corporation and four percent to other customers.
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During the class period, the individual defendants
signed various SEC filings. Each received or had access to non-
public reports and documents depicting Bailey's financial
condition and business prospects. Each participated in Bailey
board meetings at which information about the company was
discussed. A secondary public offering was held on August 18,
1993, during which Bailey and the individual defendants sold
shares at $11 each.
On April 5, 1994, both Suna and Rosen purchased Bailey
stock. During the class period, the stock reached a high of more
than $18 per share.
The public documents issued by Bailey and alleged by
appellants to contain materially false and misleading statements
include Bailey's April 18, 1993, Prospectus and Registration
Statement, its 1993 Annual Report, and 10-K, quarterly reports to
shareholders, and press releases. In addition, appellants
contend that reports published by analysts regarding Bailey's
earnings prospects and its ability to continue to increase
earnings per share are imputable to Bailey. Appellants contend
that all of these documents artificially inflated the market
price of Bailey common stock.
Large sections of appellants' brief and Second Amended
Complaint are devoted to quoting at length from these documents.
We will not reproduce all of these quotes, but will highlight
relevant portions as becomes necessary throughout the opinion.
Appellants contend that the statements at issue were false and
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misleading because Bailey's anticipated growth did not continue
and its revenue declined. The decline in revenue led to a
decrease in the value of Bailey's common stock to $6 1/8 per
share. Appellants argue that the representations were
"materially false and misleading because appellees knew, or
recklessly disregarded, . . . that Bailey's profitability would
decline sharply because of a much less profitable mix of parts to
be supplied to Ford." Appellant's Brief at 8. They claim that
Bailey knew or should have known that there was no reason to
expect sustained growth based on knowledge gathered from, "among
other things, a '26-week forecasts [sic] of production
requirements,'" id., supplied to Bailey by Ford. These forecasts ___
allegedly indicated a shift in the product mix required by Ford.
Appellants indicate that the product mix Ford was phasing out
would prove more profitable than the product mix to which Bailey
was shifting production. Appellants contend that Bailey should
have disclosed that it was moving to a less profitable product
mix.
In September 1993, the investment firm of McDonald &
Company Securities, Inc. ("McDonald"), in a publicly disseminated
report, gave Bailey an "aggressive buy rating." That report
projected earnings per share for fiscal years 1994 and 1995 of
$1.15 and $1.60 respectively. In December 1993, an analyst for
Hancock Institutional Equity Services, an affiliate of Tucker
Anthony, a co-lead underwriter of Bailey's secondary offering,
reviewed with defendant-appellee Leonard Heilman a written
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research opinion regarding Bailey that Hancock was about to
disseminate publicly. The Hancock analyst informed Heilman of
her earnings per share estimates and her methodology and
assumptions in reaching those estimates. She also informed
Heilman of her view regarding Bailey's financial prospects.
Following this conversation, Hancock publicly disseminated a very
positive report on Bailey. Appellants contend that these reports
contained materially false and misleading statements in the form
of financial projections that were "wildly optimistic" and the
result of "guidance" from Bailey.
In a report regarding Bailey's fiscal 1994 second
quarter, ending January 31, 1994, Bailey claimed revenue and
earnings increases, attributing the increases to "productivity
improvements." Bailey failed to disclose "that it was
experiencing severe production problems at newly acquired mid-
western plants," which appellants contend could and did
materially impact future earnings. Appellants acknowledge,
however, that these production problems did not arise until
February, 1994.
On May 20, 1994, Bailey announced that it had earned
$0.16 per share in its third quarter, in contrast to the
projected $0.37 per share. This earnings shortfall was
attributable to, among other things, a substantial change in
product mix and production problems at Bailey's newly acquired
mid-western plants. After this announcement, the market price of
Bailey common stock fell to $6 1/8 per share.
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DISCUSSION DISCUSSION
We review the dismissal of a complaint de novo. ________
Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st ________ ____________________________
Cir. 1994). "Generally, we will uphold a district court's
dismissal of a claim only if it appears that the plaintiff can
prove no set of facts upon which relief may be granted." Shields _______
v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (1st Cir. 1994). _______________________
Nevertheless, Federal Rule of Civil Procedure 9(b) imposes a
heightened pleading requirement on plaintiffs alleging fraud.
Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d 170, _____ _________________________________________
174 (1st Cir. 1994). Rule 9(b) states: "In all averments of
fraud or mistake, the circumstances constituting fraud or mistake
shall be stated with particularity. Malice, intent, knowledge,
and other conditions of mind of a person may be averred
generally." Fed. R. Civ. P. 9(b). "[A] complaint making such
allegations must '(1) specify the statements that the plaintiff
contends were fraudulent, (2) identify the speaker, (3) state
where and when the statements were made, and (4) explain why the
statements were fraudulent.'" Shields, 25 F.3d at 1127-28 _______
(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d _____ ______________________
Cir. 1993)).
The goals of Rule 9(b) are "'to provide a defendant
with fair notice of a plaintiff's claim, to safeguard a
wrongdoing, and to protect a defendant against the institution of
a strike suit.'" Id. at 1128 (quoting O'Brien v. National ___ _______ ________
Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991)). ___________________________
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Rule 9(b)'s relaxation of the scienter requirement is not
intended to allow plaintiffs to "base claims of fraud on
speculation and conclusory allegations. Therefore, to serve the
purposes of Rule 9(b), we require plaintiffs to allege facts that
give rise to a strong inference of fraudulent intent." Id. ___
(citations and internal quotations omitted). A securities
plaintiff must allege "'specific facts that make it reasonable to
believe that defendant[s] knew that a statement was materially
false or misleading.'" Serabian, 24 F.3d at 361 (quoting ________
Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)). We __________ ____________
impose this heightened requirement "'even when the fraud relates
to matters peculiarly within the knowledge of the opposing
party.'" Lucia, 36 F.2d at 174 (quoting Romani, 929 F.2d at _____ ______
878).
We recently set forth guidelines intended to strike a
balance between the pleadings required of plaintiffs in
securities fraud litigation and the concern that defendants not
be subject to strike suits intended to increase the amount of
settlement awards rather than set forth a legitimate claim. See ___
New England Data Servs., Inc. v. Becher, 829 F.2d 286, 289 (1st ______________________________ ______
Cir. 1987).
"First, [p]laintiffs must plead more
than that defendants acted irresponsibly
and unwisely, but that they were aware
that 'mismanagement had occurred and made
a material public statement about the
state of corporate affairs inconsistent
with the existence of the
mismanagement.'"
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"Second, defendants may not be held
liable under the securities laws for
accurate reports of past successes, even
if present circumstances are less rosy, .
. . and optimistic predictions about the
future that prove to be off the mark
likewise are immunized unless plaintiffs
meet their burden of demonstrating
intentional deception . . . ."
"Third, and finally, general 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.' Id. ___
The rule requires that the particular
'"times, dates, places or other details
of [the] alleged fraudulent involvement"'
of the actors be alleged."
Serabian, 24 F.3d at 361. In order to succeed on their claim, ________
appellants must have complied with these pleading requirements by
showing that the statements presented to the public were false or
misleading at the time they were made and showing that it is
reasonable to believe that the defendants knew they were false or
misleading. In addition, appellants must show that statements
made were more than tempered predictions about the future that
later proved incorrect. See id. at 366 ("It is well established ___ ___
that plaintiffs in a securities action have not alleged
actionable fraud if their claim rests on the assumption that the
defendants must have known of the severity of their problems
earlier because conditions became so bad later on."). We turn to
appellants' Second Amended Complaint.
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I. STATEMENTS IN BAILEY'S PROSPECTUS I. STATEMENTS IN BAILEY'S PROSPECTUS
A. Section 10(b) & Rule 10b-5 Claims A. Section 10(b) & Rule 10b-5 Claims _________________________________
The complaint quotes extensively from various Bailey
corporate documents, alleging that these quotes were materially
false and misleading. These statements tend to fall into two
categories: (1) statements about past performance of the
company; and (2) statements about future performance. The
district court succinctly and accurately summarized the alleged
false representations made by Bailey:
1. The Company falsely stated that it would
achieve increased profits by moving
production from its plant in Seabrook,
New Hampshire, to newly acquired
factories in Michigan. Complaint, 2.
2. The Company knowingly issued false
predictions regarding future earnings
prospects during pre-offering road
shows. Complaint, 5.
3. When the Company made the public
offering it knew but failed to disclose
that its profitability would decline
sharply because of a much less
profitable mix of parts to be supplied
to Ford. Complaint, 8.
4. The Company failed to disclose to the
public "severe" problems it began
experiencing at its Contour facility
beginning in February, 1994 (i.e., 6
months after the first day of the public
offering and after issuance of all but
one of the public documents of which
plaintiffs complain). Complaint, 13.
Order of December 29, 1995, at 6. Paragraph 62 of the Second
Amended Complaint attempts to describe why these statements were
false and misleading: "Bailey's earnings would not continue to
grow, they would decline materially due to a massive shift of
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Bailey's production to a much less profitable product mix."
Second Amended Complaint at 62(a).
Regarding statements about past performance, appellants
present no argument that such statements were false or
inaccurate. At most, appellants suggest that Bailey's
presentation of figures indicating past performance somehow imply
that the company would attain the same level of profitability in
the future. In presenting figures of past performance, Bailey's
prospectus does not in any way project future earnings.
Instead, the contention here is that the company's
predictions would prove to be false and that earnings would not
continue to grow. Appellants contend that Bailey's Prospectus
promised increased revenue. See Second Amended Complaint, 54, ___
55, 57, 61. The statements cited by appellants, however, make no
such representations and, in fact, are tempered with cautionary
language. For example, appellants cite the following sentence to
support its contention that Bailey's prospectus indicated that
revenues would continue to grow rapidly: "While the Company
expects continued revenue growth, revenue may or may not increase
at the same rate as the number of components in the Company's
product line." This statement is certainly not a promise of
future profitability and contains language indicating uncertainty
as to future revenues. Appellants cite the following statement
as indicating that Bailey would become "even more profitable":
"The Company intends to transfer certain labor intensive
operations from Seabrook to Hillsdale and Madison to take
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advantage of lower average labor cost and more fully utilize
existing capacity." Again, there is no suggestion or promise of
increased profits in this statement. Finally, the following is
quoted in support of the contention that the company had secured
supply agreements that would make up for the loss of certain
discontinued products: "[T]he Company believes that these
components in aggregate, will provide the Company with
opportunities comparable to those that have been provided by the
Taurus/Sable and Tempo/Topaz models." While the company states
that it believes the opportunities will be comparable, the
statement contains no promise to that effect.
Bailey's 1993 Annual Report to Shareholders, registered
with the SEC on October 28, 1993, indicated that Bailey "expected
[certain accomplishments of 1993] to help to sustain growth and
strengthen our competitive position in future years." That same
document labels Bailey's mid-western plants as "cost-efficient."
Additionally, an annual report filed on a Form 10-K for fiscal
year 1993 stated that the acquisition of the mid-western plants
provided the company with "additional manufacturing capacity at
lower average labor costs than prevail at the Company's
Seabrook[, New Hampshire] facility." Appellants contend that
these statements were misleading because Bailey failed to
disclose that the shift in production would "materially reduce
the Company's revenue and earnings," Complaint, 74, and because
the mid-western plants were not cost efficient. No facts have
been provided in support of the contention that Bailey had reason
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to know that the production shift would be less profitable, nor
do appellants indicate why Bailey should have known, prior to
operating a plant with lower labor costs, that the plant would be
less cost efficient than the Seabrook plant, at which labor costs
were higher.
"Certainly, predictions 'are not exempt' from the
securities laws . . . but they are actionable only if the
forecast might affect a 'reasonable investor' in contemplating
the value of a corporation's stock." Colby v. Hologic, Inc., 817 _____ _____________
F. Supp. 204, 211 (D. Mass. 1993) (citation omitted). While
these statements may convey the company's desire for profitable
performance in the future, they do not convey any promises about
future performance and do not project specific numbers that the
company will certainly attain. No reasonable investor would have
read these statements, especially as they are accompanied by
cautionary language, as promises or guarantees of future
performance.
The statements above, standing alone, are not false or
misleading. Had the appellants presented facts known by Bailey,
and contemporaneous with the statements above, that would show
that Bailey's anticipated success was unlikely, such facts would
have adequately alleged a claim of securities fraud. Instead,
all appellants present as factual support is the receipt by
Bailey of 26-week forecasts from Ford, with no indication from
appellants as to what information contained within those reports
contradicts Bailey's projections, other than a vague reference in
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paragraph 67 of the complaint that, "[a]s [will be] set forth
below, Ford's demand for certain parts supplied by Bailey was ___
lower in the Company's first calendar quarter of 1994 and Bailey
knew that would be so as of the day [of] the Offering." The only
information "set forth below" regarding a decrease in Ford's
demand for parts was discussed in a Hancock analyst's report
publicly disseminated on June 8, 1994. The comments regarding
Ford in this document suggest that, at the time the report was
prepared, nearly a year after the Prospectus, Annual Report and
Form 10-K were issued, Ford was scaling back production plans.
This hardly amounts to a contemporaneous factual allegation
indicating that statements made by Bailey in August of 1993
regarding future prospects were false or misleading, or that it
was unreasonable for Bailey to make such statements about future
profitability.
In addition, appellants state that "Bailey's earnings
. . . would decline materially due to a massive shift of Bailey's
production to a much less profitable product mix." Appellants
allege no facts to indicate that Bailey had any reason to suspect
at the time the statements were made that the product mix would
prove to be less profitable.
Although appellants specify statements that they
contend were fraudulent, identify the speaker, and state where
and when the statements were made, they fail, on every allegation
of fraud, to explain why the statements were fraudulent.
Appellants offer no factual support for their conclusory
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allegations that Bailey knew that a product mix would become
unprofitable or that production problems would arise at a plant
it was not even operating at the time the Prospectus was issued.
Thus, there is no factual support that Bailey made materially
false or misleading statements when it presented positive future
expectations. Appellants repeatedly recite their contention that
the "26-week forecasts" received from Ford indicated to Bailey
Ford's projected supply requirements through the company's
"fiscal third quarter," the time at which the actual requirements
allegedly diminished, causing the decline in Bailey's earnings
per share. Appellants fail, however, to identify information in
the forecasts that would have put Bailey on notice that supply
requirements would decline. That Ford presented forecasts of its
requirements does not guarantee that forecasts presented to
Bailey 26 weeks prior to the third quarter, and perhaps
contemporaneously with the dissemination of the Bailey
Prospectus, accurately identified the actual requirements of the
third quarter. Those requirements may have changed dramatically
after Ford presented Bailey with its forecasts for that third
quarter. Because appellants fail to cite with specificity
anything in the 26-week forecasts that would have put Bailey on
notice of a decline in products to be supplied, they have not
shown that Bailey's expectations were unreasonable or
fraudulently presented. That Bailey may have been mistaken in
its projections, which were apparently based on facts that
appellants do not contend were false, is not enough.
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"[Appellants] record[] statements by
defendants predicting a prosperous future
and hold[] them up against the backdrop
of what actually transpired. . . . This
technique is sufficient to allege that
the defendants were wrong; but misguided
optimism is not a cause of action, and
does not support an inference of fraud.
We have rejected the legitimacy of
'alleging fraud by "hindsight."'"
Shields, 25 F.3d at 1129. "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)." Lucia, 36 F.3d at 174. _____
B. Sections 12(2) and 20(a) B. Sections 12(2) and 20(a) ________________________
Appellants contend that the district court improperly
dismissed their claims arising under Section 12(2) of the
Securities Act of 1933 and Section 20(a) of the Securities and
Exchange Act of 1934. They argue that the district court's
dismissal of their complaint was pursuant to Rule 9(b). As
appellants correctly note, neither of these claims contain an
element of fraud and Rule 9(b)'s pleading with particularity
requirements do not apply. Nevertheless, the district court
properly dismissed these claims as well.
1. Section 12(2) 1. Section 12(2) _____________
First, for a violation of Section 12(2), the plaintiff
must show that the defendant made an untrue statement of a
material fact or omitted such material fact. Appellants contend
that Rule 9(b)'s pleading requirements do not apply to claims
under Section 12(2), claiming that Section 12 does not contain an
element of fraud. As we find that appellants have failed to even
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meet the minimal requirements of a Section 12(2) claims, we need
not decide whether their Section 12(2) claim sufficiently sounds
in fraud such that Rule 9(b)'s pleading requirements apply.
Appellants have failed to point us to any untrue
statements of material fact, nor have they identified material
facts whose omission would render a previous statement
misleading. "[I]nformation is 'material' only if the 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)). The statements that appellants challenge were either
true at the time they were made and continued to be so, or
consisted of future predictions that later proved to be
incorrect. These predictions were not of the sort that would
need to be corrected by a later statement. The statements
addressed by appellants indicate that Bailey projected positive
future earnings, but these statements were tempered with language
indicating that Bailey did not, and could not, guarantee the
future profitability of the company. "'Soft,' 'puffing'
statements such as these generally lack materiality because the
market price of a share is not inflated by vague statements
predicting growth." Raab v. General Physics Corp., 4 F.3d 286, ____ _____________________
289 (4th Cir. 1993).
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Appellants' complaint contends that the market's
reliance on statement by Bailey artificially inflated the
company's price per share. We find, however, that "[n]o
reasonable investor would rely on these statements, and they are
certainly not specific enough to perpetrate a fraud on the
market. Analysts and arbitrageurs rely on facts in determining
the value of a security, not mere expressions of optimism from
company spokesmen." Id. at 290. A reasonable purchaser would ___
know that these statements consisted of optimistic predictions of
future potential and would not have been misled by them.
Therefore, the district court properly dismissed appellant's
Section 12(2) claims.
2. Section 20(a) 2. Section 20(a) _____________
Finally, regarding the Section 20(a) claim, which
attempts to attribute joint and several liability to the
individual defendants as "control persons," appellants have
failed to allege an underlying violation of the securities acts.
The district court properly dismissed appellants' Section 20(a)
claims.
II. REPORTS OF SECURITIES ANALYSTS II. REPORTS OF SECURITIES ANALYSTS
Appellants also allege that Bailey should be held
liable for false and misleading statements made by analysts in
independent reports disseminated to the public. The first of
these reports was disseminated to the public by McDonald.
Appellants allege that the analyst who prepared that report,
David Garrity, spoke with Leonard Heilman, an officer of the
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company, in preparing the report. Garrity reviewed with Heilman
his earnings estimates and the methodology and/or assumptions of
those estimates. Thereafter, McDonald disseminated a report
giving Bailey an "aggressive buy rating." The report stated that
it expected Bailey to earn $1.15 per share in fiscal 1994 and
$1.60 per share in fiscal 1995. Finally, the report stated that
it estimated that the price of Bailey stock would reach $20 per
share, with a down-side risk to the $10 level.
The second report, prepared by Hancock analyst Jane
Gilday, was reviewed with Heilman on or about December 20, 1993.
Gilday informed Heilman of her revenue and earnings per share
estimates and the methodology and assumptions used in reaching
those estimates. She also indicated to Heilman her opinion of
Bailey's financial prospects. Hancock's report, publicly
disseminated on December 21, 1993, projected Bailey's earnings
per share at $1.05 for fiscal 1994 and $1.25 for fiscal 1995.
The report goes on to make predictions regarding Bailey's
profitability in the coming year based on growth in its parts
business and the company's shift of manufacturing to the mid-
western plants.
A third report, disseminated to the public by McDonald
on March 18, 1994, indicated that McDonald had concerns about
Bailey's product mix shift and lowered its earnings per share
forecasts slightly. The report still gave Bailey an "Aggressive
Buy" rating.
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After Bailey disclosed that its earnings for the third
quarter of fiscal 1994 were only $0.16, Hancock lowered Bailey's
investment rating from buy to sell, based in part on the "serious
credibility problem" of Bailey management. Hancock called
Bailey's third quarter earnings "a major negative surprise."
In support of their argument that Bailey should be held
liable for alleged misstatements in these analysts' reports,
appellants cite cases in which courts have held that a defendant
company may be held liable for any false or misleading statements
contained in analysts' reports. See, e.g., Elkind v. Liggett & ___ ____ ______ _________
Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980) (holding that a ___________
company may sufficiently entangle itself with analysts' forecasts
to render the predictions attributable to the company, but
finding no such liability); In re RasterOps Corp. Sec. Litig., __________________________________
No. C-93-20349, 1994 WL 618970, at *3 (N.D. Cal. Oct. 31, 1994)
(finding that "[a] company may be liable for analyst reports
which it fostered and reviewed but failed to correct if it
expressly or impliedly represented that the information was
accurate or reflected the view of the company"); Alfus v. Pyramid _____ _______
Technology Corp., 764 F. Supp. 598, 603 (N.D. Cal. 1991) (finding ________________
that a company may be liable for not correcting analysts'
forecasts where it undertakes to provide information regarding
and pass on the analysts' forecasts, but finding no liability
where a company officer merely examines and comments upon an
analyst's report); In re Aldus Sec. Litig., [1992-1993 Transfer ________________________
Binder] Fed. Sec. L. Rep. (CCH 97,376 at 95,984-85 (W.D. Wash.
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1993) (finding plaintiffs' claim sufficiently alleged that
defendants placed their imprimatur on analysts' reports, but
employing a lower Rule 9(b) pleading requirement than is applied
in this circuit); In re Cypress Semiconductor Sec. Litig., [1993 _______________________________________
Transfer Binder] Fed. Sec. L. Rep. (CCH) 97,060 at 94,698 (N.D.
Cal. 1992) (holding that plaintiffs need only allege "that
defendants provided information to the securities analysts upon
which the reports were based").
Appellants argue that we should adopt the more liberal
approach adopted by these courts, rather than the "restrictive
approach," Appellant's Brief at 35, employed by the court below.
Appellant's arguments are unpersuasive. Our review of the cases
appellant cites indicates that the law applied by those courts is
similar to, if not the same as, that applied by the court below.
Where the cases may differ is in the pleadings each court
requires in order to sufficiently allege that the analysts'
reports are attributable to the defendant. We have repeatedly
emphasized Rule 9(b)'s heightened pleading requirements because
of our concern that plaintiffs will bring baseless strike suits
against securities defendants in order to increase settlement
amounts or to engage in a fishing expedition for evidence on
which to base its claim. See Lucia, 36 F.3d at 174 (noting that ___ _____
we have been especially rigorous in applying Rule 9(b) to
securities claims because of these concerns); Romani, 929 F.2d at ______
878 (same). We find, however, that the cases cited by appellants
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do not differ substantially from the law applied by the court
below.
This circuit has not yet decided whether statements in
an analyst's report may be attributable to a defendant company.
As appellants claim that Bailey fraudulently misled the analysts
who prepared these reports, Rule 9(b)'s heightened pleading
requirements apply. Assuming arguendo that a company may be held ________
liable for false or misleading statements in an analysts' report
where that company has adopted, endorsed, or sufficiently
entangled itself with the analysts' reports, see Elkind, 635 F.2d ___ ______
at 163, we find that appellants have failed to meet Rule 9(b)'s
pleading requirements and their claim must fail. As we noted
above, Rule 9(b) requires that plaintiffs "'(1) specify the
statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements
were made, and (4) explain why the statements were fraudulent.'"
Shields, 25 F.3d at 1127-28. The district court pointed out to _______
appellants that their earlier complaints failed to meet Rule
9(b)'s requirements. Order of July 31, 1995 at 2; Order of Nov.
10, 1994 at 13. In an apparent attempt to cure these defects, in
their Second Amended Complaint, appellants alleged the following:
[I]t was the Company's practice to have
top managers, namely, Chief Financial
Officer Heilman, communicate regularly
with securities analysts . . . to
discuss, among other things, the
Company's earnings prospects, its
products, the efficiency of the Company's
manufacturing plants, anticipated
financial performance, and to provide
detailed 'guidance' to these analysts
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with respect to the Company's business,
including projected revenues, earnings,
and of particular importance to analysts,
earnings per share.
In its order dismissing the Second Amended Complaint, the
district court found that appellants' attempts to satisfy the
requirements of Rule 9(b) were insufficient because appellants
failed to identify the statements made by Heilman or describe how
those statements were false or misleading. Order of Dec. 29,
1995. We agree with the district court that appellants have
failed to allege with particularity the false or misleading
statements made by Heilman, or any other defendant, that would
have induced analysts' to publicly disseminate misleading
forecasts.
We also find that appellants have failed to direct us
to any facts to support their conclusory allegation that Bailey
"endorsed the contents of those reports, adopted them as its own,
and placed its imprimatur on them." Second Amended Complaint,
36. As presented by the appellants, the reports do not appear
to quote any Bailey officer or employee, nor do they imply that
the forecasts were supplied or confirmed by any Bailey officer or
employee. Appellants' allegations regarding analysts' reports
fail to meet the pleading requirements of Rule 9(b) and the
district court properly dismissed this count of the complaint.
CONCLUSION CONCLUSION
For the foregoing reasons, the decision below is
affirmed. affirmed ________
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Document Info
Docket Number： 96-1138
Filed Date： 2/27/1997
Precedential Status： Precedential
Modified Date： 9/21/2015