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.

TORRUELLA, Chief Judge.
____________

On May

26, 1994, Plaintiffs-

____________________
Appellants
1

The

Vicki Match

Suna ("Suna")

officers included

and Lori

William A.

Rosen ("Rosen")

Taylor, who

served as

(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

common
served

all relevant

times; and

John G.

Owens, who

stock during the class period.

The suit alleges that
in various management capacities and as a director of

Bailey during the class period.

appellees
2

violated Section 12 of the Securities Act2 of 1933 and

Any person who --

Sections

10(b)3 and

20(a)4 of

the Securities Exchange

(1) offers or sells a security . . . by means

of

a prospectus or oral communication, which

includes

an untrue

statement of

fact

omits

state

or

to

a material

material

fact

necessary in order to make the statements, in

the
they

light of

the circumstances

were made, not

who shall

not sustain

under which

misleading . .
the

burden of

. , and
proof

Act

of

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).

Section 10(b) provides:

It

shall

be

unlawful

indirectly, by the use

of

for any

person,

directly

of any means or instrumentality

interstate commerce

or

of the

mails,

or of

facility of any national securities exchange --

* * *

(b)
the

To use or employ,
purchase

or

or

any

security

manipulative
contrivance
and

not

or
in

in connection with

sale

registered on a national

of

any

so

registered,

deceptive

as

security

securities exchange

device

contravention of

regulations

the

interest or

for

the

any
or

such rules

Commission

prescribe as necessary or appropriate

public

or

may

in the

protection

of

any

-2-

1934,

as well as Rule

Exchange Commission

made,

or caused

to

10b-55 promulgated by

("SEC").

be made,

the Securities and

Appellants allege

materially

that appellees

false and

misleading

statements either through Bailey's corporate documents or through

analysts'

1994,

reports disseminated to

the District

____________________

Court

of New

the public.

On November 10,

Hampshire granted

appellees'

investors.

15 U.S.C.

78j(b) (1981).

Section 20(a) provides, in part:

Every

person

controls

who,

any

provision of
regulation

directly or

person

liable

this chapter or of
thereunder

jointly and

indirectly,
under

any rule or

shall also

severally with

be liable

and to

extent

as

such

controlled

person

to

whom

such controlled

any

the same

person

to

person

any
is

liable . . . .

15 U.S.C.

78t (1981).

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

artifice to defraud,

device,

scheme,

or

(b)

To

make

any untrue

material fact or to
fact

necessary

statements

omit to state a material

in

made,

statement of

order
in

the

to

make

light

of

the
the

circumstances under which they were made, not

misleading, or
(c)
court

To

engage in

of business

any act,

which

practice, or

operates or

would

operate as a fraud or deceit upon any person,

in

connection with the

any security.

17 C.F.R.

240.10b-5 (1996).

-3-

purchase or

sale of

motion to dismiss this

pleading requirements

The

district

court

complaint for failure to comply

of Federal

then

Rule of Civil

allowed

appellants

first amended

with the

Procedure 9(b).

to

amend

complaint,

but rejected the

submitted.

The district court "reluctantly grant[ed]

their

complaint appellants

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

did

not meet Rule 9(b)'s

pleading requirements.

29,

1995.

court then

prejudice.

The district

Appellants now

appeal the

dismissed the

ruled

Order of Dec.

action with

dismissal of the

Second

Amended Complaint.

BACKGROUND
BACKGROUND

We

accept as

true

Second Amended Complaint.

F.3d

1124, 1125

1994).

manufacturers of

utility vehicles and minivans.

Company,

1993.

Of

sales in

the remaining

cars,

molded

to North American

light trucks,

sport

Bailey's primary customer is Ford

which accounted

percent of Bailey's

appellants'

Bailey manufactures

components and supplies them

original equipment

Motor

alleged in

Shields v. Citytrust Bancorp, Inc., 25

_______
_______________________

(1st Cir.

plastic exterior

all facts

for

approximately ninety-three

the nine months

sales, three

ending April

percent were

Motors Corporation and four percent to other customers.

25,

to General

-4-

During

the class

signed various SEC filings.

public

reports

condition and

board

at

documents

which

the

individual

defendants

Each received or had access to non-

depicting

business prospects.

meetings

discussed.

and

period,

Bailey's

financial

Each participated

in Bailey

information

A secondary public

about

the

offering was held

company

was

on August 18,

1993,

during which

Bailey

and the

individual defendants

sold

shares at $11 each.

On April 5, 1994, both

stock.

Suna and Rosen purchased Bailey

During the class period, the stock reached a high of more

than $18 per share.

The public

appellants

include

documents issued

by Bailey and

alleged by

to contain materially false and misleading statements

Bailey's

April

18, 1993,

Prospectus

and Registration

Statement, its 1993 Annual Report, and 10-K, quarterly reports to

shareholders,

and

contend

reports published

earnings

that

prospects

earnings per

press

and

releases.

its

In

addition,

by analysts

ability to

regarding Bailey's

continue

share are imputable to Bailey.

appellants

to

increase

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

We will not

relevant

Appellants

reproduce all

of these quotes,

portions as becomes

contend that the

from these documents.

but will

necessary throughout

statements at issue

-5-

highlight

the opinion.

were false and

misleading because

and

its

Bailey's anticipated growth did

revenue declined.

decrease

in the value

share.

Appellants

"materially

false

The

of Bailey's

argue

and

that

misleading

recklessly disregarded, .

decline

in revenue

common stock

the

not continue

led

to $6

1/8 per

representations

because

. . that Bailey's

appellees

to a

were

knew, or

profitability would

decline sharply because of a much less profitable mix of parts to

be supplied to Ford."

Bailey

knew or

Appellant's Brief at 8.

should have known

that there

They

claim that

was no

reason to

expect sustained growth based

on knowledge gathered from, "among

other

forecasts

things,

'26-week

[sic]

requirements,'" id., supplied to Bailey by Ford.

___

allegedly

of

production

These forecasts

indicated a shift in the product mix required by Ford.

Appellants

would

indicate that the

Ford was

phasing out

prove more profitable than the product mix to which Bailey

was shifting

have

product mix

production.

Appellants contend

disclosed that it was

moving to a

that Bailey should

less profitable product

mix.

In September

1993, the

investment firm of

McDonald &

Company Securities, Inc. ("McDonald"), in a publicly disseminated

report,

projected

gave Bailey

an

"aggressive buy

earnings per share for

$1.15 and $1.60 respectively.

Hancock

Institutional

a co-lead underwriter

reviewed

with

That report

fiscal years 1994

and 1995 of

In December 1993, an

analyst for

Equity Services,

Anthony,

rating."

an affiliate

of Bailey's

defendant-appellee

Leonard

of Tucker

secondary offering,

Heilman

written

-6-

research

opinion

regarding Bailey

disseminate publicly.

her

earnings

per

assumptions

in

Heilman

her

of

The

share

Hancock

was about

Hancock analyst informed

estimates

reaching those

view

that

regarding

and

estimates.

Bailey's

her

Heilman of

methodology

She also

to

and

informed

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

were "wildly optimistic"

projections that

and the

result of "guidance" from Bailey.

In

report

regarding

quarter,

ending January

earnings

increases, attributing

improvements."

Bailey

experiencing severe

western

plants,"

materially

however,

impact

that

31,

Bailey's

1994, Bailey

failed

to

which

appellants

future

earnings.

"that

at newly

contend

it

was

acquired mid-

could

Appellants

did

and

to "productivity

disclose

problems

second

claimed revenue

the increases

production problems

these production

fiscal 1994

and

did

acknowledge,

not arise

until

February, 1994.

On May

20, 1994, Bailey

announced that it

had earned

$0.16

per share

projected

$0.37

attributable

product mix

in

its

per

to, among

third

share.

This

other

things, a

and production

mid-western plants.

quarter,

in

contrast

earnings

to

the

shortfall

was

substantial change

problems at Bailey's

in

newly acquired

After this announcement, the market price of

Bailey common stock fell to $6 1/8 per share.

-7-

DISCUSSION
DISCUSSION

We

review

the

dismissal

of

complaint

Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d

________
____________________________

Cir. 1994).

"Generally,

dismissal of

we will

a claim only if

uphold

de novo.
________

357, 361

district

it appears that the

court's

plaintiff can

prove no set of facts upon which relief may be granted."

v. Citytrust Bancorp, Inc.,

_______________________

25 F.3d 1124, 1127 (1st

Nevertheless,

of

heightened

Federal Rule

pleading requirement

Civil Procedure

on

(1st Cir. 1994).

Rule 9(b)

Shields
_______

Cir. 1994).

9(b) imposes

plaintiffs alleging

Lucia v. Prospect St. High Income Portfolio, Inc., 36

_____
_________________________________________

174

states:

"In

(1st

fraud.

F.3d 170,

all averments of

fraud or mistake, the circumstances constituting fraud or mistake

shall be

and

stated with particularity.

other

conditions

generally."

where and

mind

Fed. R. Civ.

allegations must

contends

of

of

P. 9(b).

Malice, intent, knowledge,

person

be

averred

"[A] complaint making such

'(1) specify the statements

were fraudulent,

may

(2) identify

that the plaintiff

the speaker,

(3) state

when the statements were made, and (4) explain why the

statements

were

fraudulent.'"

Shields, 25
_______

F.3d

at

(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170,

_____
______________________

1127-28

1175 (2d

Cir. 1993)).

The goals

with

fair

notice

of Rule

of

9(b) are

plaintiff's

"'to provide a

claim,

to

defendant

safeguard

wrongdoing, and to protect a defendant against the institution of

strike suit.'"

Id. at

1128

(quoting O'Brien

v.

National

___

_______

Property Analysts Partners, 936

___________________________

F.2d 674, 676

________

(2d Cir. 1991)).

-8-

Rule

9(b)'s

intended

to

relaxation

allow

of

the

plaintiffs

scienter

to

"base

speculation and conclusory allegations.

requirement

claims

of

is

not

fraud

on

Therefore, to serve the

purposes of Rule 9(b), we require plaintiffs to allege facts that

give

rise

to

(citations

and

strong inference

internal

of

quotations

fraudulent

intent." Id.
___

omitted).

securities

plaintiff must allege "'specific facts that make it reasonable to

believe that

false

or

defendant[s] knew

misleading.'"

that a statement

Serabian, 24
________

F.3d

was materially

at

361

(quoting

Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)).

__________
____________

impose this heightened requirement

to

matters

party.'"

peculiarly

Lucia, 36
_____

within

F.2d at

We

"'even when the fraud relates

the knowledge

174 (quoting

of

the

opposing

Romani, 929 F.2d

______

at

878).

We recently

balance

between

securities fraud

the

set forth guidelines intended

pleadings

required

litigation and the concern

of

to strike a

plaintiffs

in

that defendants not

be subject to

settlement

strike suits

intended to increase

the amount

awards rather than set forth a legitimate claim.

New England Data Servs., Inc. v. Becher,

______________________________
______

than that
and

[p]laintiffs must

plead more

defendants acted irresponsibly

unwisely, but

that they

were aware

that 'mismanagement had occurred and made

a

material

state
with

public

of corporate
the

statement about

the

affairs inconsistent

existence

mismanagement.'"

-9-

See
___

829 F.2d 286, 289 (1st

Cir. 1987).

"First,

of

of

the

"Second,
liable

defendants

under

the

may not

securities

accurate reports of past

be held
laws

for

successes, even

if present circumstances are less rosy, .

. . and
future

optimistic predictions about the

that

prove

likewise are
meet

to be

off

the mark

immunized unless plaintiffs

their

burden

of

demonstrating

intentional deception . . . ."

"Third, and finally, general averments

of the defendants' knowledge
falsity

will

not

of material

suffice.

with Fed. R. Civ. P. 9(b),

Consistent
the complaint

must set forth 'specific facts

it

reasonable

defendant[s]
materially

knew
false

to

believe

that a
or

that make
that

statement was

misleading.'

Id.
___

The

rule

requires

that the

'"times, dates, places

particular

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.

made

In addition,

were more than

appellants must show

that statements

tempered predictions about

the future that

later proved incorrect.

that

plaintiffs

in

See id. at 366

___ ___

securities

("It is well established

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.").

appellants' Second Amended Complaint.

-10-

I.
I.

STATEMENTS IN BAILEY'S PROSPECTUS

STATEMENTS IN BAILEY'S PROSPECTUS

A.
A.

Section 10(b) & Rule 10b-5 Claims

Section 10(b) & Rule 10b-5 Claims
_________________________________

We turn to

The

corporate

complaint quotes

extensively from

documents, alleging that

false and misleading.

These

these quotes were materially

statements tend to

categories:

(1)

statements

about

company;

(2)

statements

about future

and

district court

various Bailey

past

fall into

performance

performance.

succinctly and accurately summarized

The Company falsely stated that it would

achieve

increased

profits

production from its

New

Hampshire,

The

Company

predictions
prospects

Seabrook,

newly

acquired

to

shows.

3.

When

regarding

Complaint,

the

Complaint,

knowingly

during

Company

moving

plant in

factories in Michigan.

2.

by

issued
future

2.

false

earnings

pre-offering

road

5.

made

the

the

The

the alleged

false representations made by Bailey:

1.

of

two

public

offering
that

its

sharply

it knew but failed to disclose

profitability
because

of

profitable mix of
to Ford.

4.

The

Complaint,

"severe"

experiencing
beginning

in

at

decline

much

parts to be

less

supplied

8.

Company failed

public

would

to disclose
problems

its

it

Contour

February,

to the
began
facility

1994 (i.e.,

months after the first day of the public

offering
one

of

and after issuance

the public

plaintiffs complain).

Order of December

29, 1995, at

Amended Complaint attempts to

false

and misleading:

grow, they would

6.

of all but

documents

of which

Complaint,

Paragraph

13.

62 of the

Second

describe why these statements were

"Bailey's earnings

decline materially

-11-

would not continue to

due to a

massive shift

of

Bailey's

production

to a

Second Amended Complaint at

much

less

profitable product

mix."

62(a).

Regarding statements about past performance, appellants

present

no

inaccurate.

argument

At

that

most,

such

statements

appellants

suggest

were

that

false

or

Bailey's

presentation of figures indicating past performance somehow imply

that

the

the company would attain the same level of profitability in

future.

In presenting figures of past performance, Bailey's

prospectus does not in any way project future earnings.

Instead,

the

contention here

predictions would prove to

continue to

grow.

Appellants contend that

would not

Bailey's Prospectus

See Second Amended Complaint,

___

and, in fact, are

54,

tempered with cautionary

For example, appellants cite the following sentence to

support its contention

revenues

the company's

The statements cited by appellants, however, make no

such representations

language.

that

be false and that earnings

promised increased revenue.

55, 57, 61.

is

would continue

that Bailey's

to grow

prospectus indicated

rapidly:

"While the

that

Company

expects continued revenue growth, revenue may or may not increase

at the same

product

rate as the

line."

number of components

This statement

is certainly

in the

Company's

not a

promise of

future profitability and contains language indicating uncertainty

as to future revenues.

as indicating

"The

that Bailey

Company

operations

Appellants cite the following

intends

from

would become "even

to

Seabrook

transfer

to

more profitable":

certain

Hillsdale

and

statement

labor

Madison

intensive

to

take

-12-

advantage of

existing

lower average

capacity."

labor

cost and

more fully

utilize

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

discontinued

components

products:

in

opportunities

it

"[T]he

aggregate,

up for

Company

will

the loss

of certain

believes

that

these

the

Company

with

provide

comparable to those that have been provided by the

Taurus/Sable and

that

would make

Tempo/Topaz models."

believes

the

While

opportunities will

the company states

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

strengthen our

help to sustain growth

competitive position in future years."

and

That same

document

labels Bailey's mid-western plants as "cost-efficient."

Additionally,

an annual report filed

year 1993 stated

provided the

lower

these

that the acquisition of

company with "additional

average

Seabrook[,

on a Form

labor

costs

New Hampshire]

statements

disclose that

were

the shift

than

misleading

the mid-western plants

manufacturing capacity at

prevail

facility."

at

because

in production would

mid-western plants were not

the

Appellants

Company's

contend that

Bailey

failed

to

"materially reduce

the Company's revenue and earnings," Complaint,

the

10-K for fiscal

cost efficient.

74, and because

No facts have

been provided in support of the contention that Bailey had reason

-13-

to know that the

do appellants

production shift would be less

indicate why

Bailey should

profitable, nor

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,

securities

laws .

forecast might

predictions

'are

are

affect a

but they

not

actionable only

'reasonable investor'

the value of a corporation's stock."

exempt'

from

the

if

the

in contemplating

Colby v. Hologic, Inc., 817

_____
_____________

F.

Supp. 204,

these statements

performance

future

211 (D.

Mass. 1993)

(citation omitted).

may convey the company's

While

desire for profitable

in the future, they do not convey any promises about

performance and do not

project specific numbers that the

company will certainly attain.

No reasonable investor would have

read

these statements,

cautionary

language,

especially

as

as they

promises

or

are accompanied

guarantees

of

by

future

performance.

The statements above, standing

misleading.

alone, are not false or

Had the appellants presented facts known by

and contemporaneous

with the

statements above, that

that Bailey's anticipated success

have adequately alleged

a claim of

Bailey,

would show

was unlikely, such facts would

securities fraud.

Instead,

all appellants

Bailey of

present

as factual

26-week forecasts from

appellants as to what

support

is the

Ford, with no

receipt

by

indication from

information contained within those reports

contradicts Bailey's projections, other than a vague reference in

-14-

paragraph 67 of

below, Ford's

the complaint

demand for

that, "[a]s [will

certain parts

be] set

supplied by

forth

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."

information

"set forth

demand for

parts was

below"

discussed in

publicly disseminated on

Ford in

Form 10-K were

hardly

indicating

regarding

June 8, 1994.

this document suggest that,

prepared, nearly a

This

regarding a

amounts

to

that statements

Ford's

Hancock analyst's

report

The comments

at the time the

report was

Annual Report and

contemporaneous factual

made

regarding

scaling back production

by Bailey

future prospects were false

was unreasonable for Bailey to make such

profitability.

decrease in

year after the Prospectus,

issued, Ford was

The only

in

plans.

allegation

August of

1993

or misleading, or that it

statements about future

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

contend were

appellants

specify

fraudulent, identify

statements

the speaker, and

that

they

state where

and when the statements were made, they fail, on every allegation

of

fraud,

Appellants

to

explain

offer

no

why

factual

the

statements

support

-15-

for

were

fraudulent.

their

conclusory

allegations that

Bailey knew

unprofitable or that

that

a product

production problems would arise

it was not even operating at the time

Thus, there

is no

factual support

false or misleading statements

expectations.

the "26-week

Ford's

mix would

become

at a plant

the Prospectus was issued.

that Bailey made

materially

when it presented positive future

Appellants repeatedly recite their contention that

forecasts" received

projected

supply

from Ford indicated

requirements

through

the

to Bailey

company's

"fiscal third quarter," the time at which the actual requirements

allegedly diminished, causing

per share.

the

the decline

Appellants fail,

requirements

Bailey

26

does not

weeks

contemporaneously

put Bailey on

guarantee

prior

to

with

the

after

Those

that

the

forecasts

third

Because

quarter,

dissemination

Bailey with its

appellants

anything in the 26-week

notice of a

presented

of

to

and

perhaps

the

Bailey

requirements of the

requirements may have changed dramatically

Ford presented

quarter.

notice that supply

That Ford presented forecasts of its

Prospectus, accurately identified the actual

third quarter.

earnings

however, to identify information in

forecasts that would have

requirements would decline.

in Bailey's

fail to

forecasts for

cite

with

forecasts that would have put

decline in products

to be

that third

specificity

Bailey on

supplied, they have

not

shown

that

Bailey's

expectations

fraudulently presented.

That Bailey

its

were

projections,

which

were

unreasonable

may have been

apparently based

on

appellants do not contend were false, is not enough.

-16-

"[Appellants]

record[]

statements

by

defendants predicting a prosperous future

and

hold[] them up

against the backdrop

of what actually transpired.

. . .

This

or

mistaken in

facts

that

technique

is

sufficient to

the defendants were wrong;

allege that
but misguided

optimism

is not a

does not

support an inference

We

rejected

have

cause of

the

action, and
of fraud.

legitimacy

of

'alleging fraud by "hindsight."'"

Shields,
_______

claims

25 F.3d

at 1129.

"Because

rely fundamentally on

district

court properly

meet Rule 9(b)."

B.
B.

Securities

Exchange

plaintiffs' 10(b)

such unsupported

dismissed these

allegations, the

claims for

failure to

the district court

improperly

Lucia, 36 F.3d at 174.

_____

Sections 12(2) and 20(a)

Sections 12(2) and 20(a)
________________________

Appellants contend that

dismissed

all of

their

claims

arising

Act of 1933 and

Act

of 1934.

under

Section

Section 20(a) of

They

argue

that the

12(2)

of

the

the Securities and

district court's

dismissal

of

appellants

element

their complaint

correctly note,

of fraud

requirements

and

do not

was pursuant

neither of

Rule 9(b)'s

apply.

to

Rule 9(b).

these claims

pleading with

Nevertheless,

As

contain an

particularity

the district

court

properly dismissed these claims as well.

1.
1.

Section 12(2)
Section 12(2)
_____________

First, for a violation

must

show that

the

of Section 12(2), the plaintiff

defendant made

an

untrue statement

material fact or omitted such material fact.

that Rule

9(b)'s pleading

requirements do

Appellants

not apply

of

contend

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

-17-

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

statements of

material fact,

facts

omission

whose

misleading.

would

would

"[I]nformation is

alter the 'total mix'

to

point us

nor have they

render

to

any

untrue

identified material

previous

statement

'material' only if the disclosure

of facts available

to the investor

and

'if there

shareholder

decision."

1992)

consider

(quoting Basic, Inc.

____________

The statements

at

the time

consisted

incorrect.

need

would

a substantial

to be

addressed

it

likelihood

important'

that a

to

the

Milton v. Van Dorn Co., 961 F.2d 965, 969

______
_____________

(1988)).

true

is

of

future

These

(1st Cir.

224, 231-32

that appellants challenge

were either

made and

predictions

predictions were

corrected

investment

485 U.S.

they were

v. Levinson,
________

reasonable

by a

later

by appellants indicate

that

continued

to be

later

proved

not of the

statement.

so, or

to

sort that

The

be

would

statements

that Bailey projected positive

future earnings, but these statements were tempered with language

indicating

future

that Bailey

profitability

did not,

of

the

and could

company.

not, guarantee

"'Soft,'

the

'puffing'

statements such

market

price

as these generally lack

of a

predicting growth."

share is

Raab
____

not

materiality because the

inflated by

vague statements

v. General Physics Corp., 4

_____________________

F.3d 286,

289 (4th Cir. 1993).

-18-

Appellants'

complaint

contends

that

the

market's

reliance

on

company's

statement

price

per

by

share.

reasonable investor would

certainly

market.

the

not

specific

Analysts and

spokesmen."

artificially

We

find,

inflated

however,

that

the

"[n]o

rely on these statements, and they are

enough

to perpetrate

fraud

arbitrageurs rely on facts in

value of a security,

company

Bailey

not mere expressions

Id. at
___

290.

on the

determining

of optimism from

reasonable purchaser would

know that these statements consisted of optimistic predictions of

future

potential

Therefore,

the

and

would

district

court

Section 12(2) claims.

2.
2.

not

Section 20(a)
Section 20(a)
_____________

have

properly

been

misled

by

them.

dismissed appellant's

Finally,

attempts

to

individual

failed

The

regarding

attribute

defendants

the

joint

as

Section

and

"control

20(a)

several

claim,

liability

persons,"

which

to

appellants

the

have

to allege an underlying violation of the securities acts.

district court properly

dismissed appellants' Section 20(a)

claims.

II.
II.

REPORTS OF SECURITIES ANALYSTS

REPORTS OF SECURITIES ANALYSTS

Appellants

liable for false

independent

these

David

that

Bailey

and misleading statements

reports disseminated to

reports

Appellants

also allege

was

disseminated

allege that

Garrity, spoke

the

to

the

be

held

made by analysts

the public.

analyst who

with Leonard

should

public

The

first of

by

McDonald.

prepared that

Heilman,

in

an officer

report,

of the

-19-

company, in preparing the report.

his earnings estimates and

those

estimates.

Garrity reviewed with

the methodology and/or assumptions of

Thereafter,

McDonald

giving Bailey an "aggressive buy rating."

it expected

Bailey to earn

$1.15 per

$1.60 per share in fiscal 1995.

it estimated that the price

Heilman

disseminated

a report

The report stated that

share in fiscal

Finally, the

1994 and

report stated that

of Bailey stock would reach

$20 per

share, with a down-side risk to the $10 level.

The

Gilday,

second report,

estimates and

Heilman of

She also

financial

disseminated on

per share

goes

profitability in the

business

and the

western plants.

indicated to Heilman

December 21,

on

Hancock's

1993, projected

fiscal 1994

to

and earnings

and assumptions used

prospects.

at $1.05 for

report

her revenue

the methodology

estimates.

Bailey's

The

Hancock analyst

Jane

was reviewed with Heilman on or about December 20, 1993.

Gilday informed

those

prepared by

make

coming year

her opinion of

publicly

Bailey's earnings

fiscal 1995.

regarding

based on growth

company's shift of

in reaching

report,

and $1.25 for

predictions

per share

Bailey's

in its

manufacturing to

parts

the mid-

A third report, disseminated

on March

18, 1994,

Bailey's

product mix shift

forecasts slightly.

indicated that

to the public by McDonald

McDonald had concerns

and lowered

its earnings

about

per share

The report still gave Bailey an "Aggressive

Buy" rating.

-20-

After Bailey disclosed that

quarter of fiscal 1994 were

its earnings for the third

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

appellants

alleged

misstatements in

these

analysts' reports,

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.

Myers, Inc., 635

___________

F.2d 156, 163

See, e.g., Elkind v. Liggett &

___ ____ ______
_________

(2d Cir.

1980) (holding that

company may sufficiently entangle itself with analysts' forecasts

to

render

the

predictions

attributable to

the

company,

but

finding

no such liability);

No. C-93-20349, 1994 WL

(finding

which

that

expressly

or

618970, at *3 (N.D. Cal.

"[a] company

it fostered

In re RasterOps Corp. Sec. Litig.,

__________________________________

and

may be

reviewed but

impliedly

represented

liable for

failed

that

Oct. 31, 1994)

analyst reports

to correct

if

the information

it

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

company

forecasts where

and

may

for

not correcting

to provide

analysts' forecasts,

company officer

analyst's report);

Binder]

liable

it undertakes

pass on the

where a

be

information regarding

but finding

merely examines

analysts'

and

no liability

comments upon

an

In re Aldus Sec. Litig., [1992-1993 Transfer

________________________

Fed. Sec. L. Rep. (CCH

97,376 at 95,984-85 (W.D. Wash.

-21-

1993)

(finding

defendants

plaintiffs'

placed their

claim

imprimatur

sufficiently

on

alleged

analysts' reports,

employing a lower Rule 9(b) pleading requirement than

in this circuit);

that

but

is applied

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

defendants provided information to

only

allege

the securities analysts

"that

upon

which the reports were based").

Appellants argue that we

approach adopted

by these

should adopt the more liberal

courts, rather than

approach," Appellant's Brief at 35,

the "restrictive

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,

Where

the

requires

reports

if not the same as, that applied by the court below.

cases

in

order to

is

in

sufficiently

are attributable to

emphasized Rule

of our

may differ

the

allege

the defendant.

9(b)'s heightened pleading

concern that plaintiffs will bring

pleadings each

that the

court

analysts'

We have repeatedly

requirements because

baseless strike suits

against securities

amounts

or to

defendants in

engage in

which to base its claim.

we

have

been

especially

order

a fishing

See
___

to increase

expedition for

settlement

evidence on

Lucia, 36 F.3d at 174 (noting that

_____

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

-22-

do not differ

substantially from

the law applied

by the

court

below.

This circuit has not

an

analyst's report may be

As appellants claim that

who prepared

these

requirements apply.

liable

where

yet decided whether statements in

attributable to a defendant company.

Bailey fraudulently misled the analysts

reports,

Rule

9(b)'s

heightened

pleading

Assuming arguendo that a company may be held

________

for false or misleading statements in an analysts' report

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

above,

Rule

statements

identify

their claim

9(b) requires

that the

that

plaintiff

the speaker,

must fail.

plaintiffs

contends

(3) state

As we

noted

"'(1) specify

the

fraudulent,

(2)

were

where and when

the statements

were made, and (4) explain why

the statements were fraudulent.'"

Shields,
_______

The district court pointed out to

appellants

25 F.3d at 1127-28.

that their

9(b)'s requirements.

10, 1994 at 13.

earlier

complaints failed

Order of July 31,

to meet

Rule

1995 at 2; Order of Nov.

In an apparent attempt to cure these defects, in

their Second Amended Complaint, appellants alleged the following:

[I]t was the

top

managers,

Officer
with

Company's practice to

Heilman,

securities

discuss,
Company's

namely,

among

have

Chief

Financial

communicate

regularly

analysts
other

earnings

things,

prospects,

to
the
its

products, the efficiency of the Company's

manufacturing
financial
detailed

plants,

performance,
'guidance'

to

anticipated
and

to

these

provide
analysts

-23-

with respect to
including

the Company's

business,

projected revenues,

earnings,

and of particular importance to analysts,

earnings per share.

In

its

district

order

dismissing

court found

the

Second

that appellants'

Amended

Complaint,

attempts to

the

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

1995.

We

agree with

failed

to

allege with

statements made

have

induced

false or

the district

to

Order

court that

particularity

by Heilman, or

analysts'

misleading.

the

of Dec.

29,

appellants have

false or

misleading

any other defendant,

that would

publicly

disseminate

misleading

forecasts.

We also find

to any

that appellants have failed

facts to support their conclusory

to direct us

allegation that Bailey

"endorsed the contents of those reports, adopted them as its own,

and placed

36.

to

its imprimatur on

them."

Second

Amended Complaint,

As presented by the appellants, the reports do not

quote any Bailey officer or employee,

appear

nor do they imply that

the forecasts were supplied or confirmed by any Bailey officer or

employee.

fail

to

Appellants'

meet the

allegations regarding

pleading requirements

of

analysts' reports

Rule 9(b)

and the

district court properly dismissed this count of the complaint.

CONCLUSION
CONCLUSION

For

the

foregoing

reasons,

affirmed.
affirmed
________

-24-

the

decision

below

is