Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-26-2000

EP Medsystems Inc v. Echocath Inc
Precedential or Non-Precedential:

Docket 98-6461




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Filed December 26, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

NO. 98-6461

EP MEDSYSTEMS, INC.,
       Appellant

v.

ECHOCATH, INC.

On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 97-cv-04926)
District Judge: Hon. Alfred J. Lechner, Jr.

Argued December 6, 1999

Before: SLOVITER, ROTH and COWEN, Cir cuit Judges

(Filed: December 26, 2000)

       John J. Murphy, III (Argued)
       Stradley, Ronon, Stevens & Young,
       LLP
       Cherry Hill, New Jersey 08002

        Attorney for Appellant

       Richard G. Primoff (Argued)
       Rubin Baum Levin Constant &
       Friedman
       New York, New York 10112

        Attorney for Appellee
OPINION OF THE COURT

SLOVITER, Circuit Judge.

EP MedSystems, Inc. appeals the dismissal with
prejudice of its securities action against EchoCath, Inc.
According to the complaint, the Chief Executive Officer of
EchoCath enticed MedSystems into investing $1.4 million
in EchoCath by assuring MedSystems that lengthy
negotiations had already taken place with four prominent
companies to market certain new EchoCath products and
that contracts with these companies were "imminent."
Relying on cautionary language contained in several public
documents filed by EchoCath with the Securities Exchange
Commission, the District Court held that these
representations, as well as other r elated representations,
were immaterial as a matter of law under the"bespeaks
caution" doctrine and the general test for materiality. It also
held that MedSystems failed to adequately plead scienter,
reasonable reliance, and loss causation and could not do
so. It accordingly dismissed the complaint without leave to
amend.

Our review of a decision granting a motion to dismiss is
plenary. We must accept as true all the factual allegations
in the complaint. See United States v. Gaubert , 

, 327 (1991).

I.

BACKGROUND

The following facts are drawn largely fr om the amended
complaint and the documents attached to the pleadings by
the parties, including several EchoCath public filings with
the Securities Exchange Commission (SEC).

EchoCath is a small New Jersey research and
development company engaged in developing,
manufacturing, and marketing medical devices to enhance
and expand the use of ultrasound technology for medical

                               2
applications and procedures. Among the pr oducts that
EchoCath has developed with the company's pr oprietary
ultrasound technology are ColorMark, which highlights
metallic objects such as needles and other interventional
instruments in color to permit them to be seen on existing
ultrasound imaging screens, and EchoMark, which
electronically marks and displays the position of non-
metallic objects such as catheters within the body. The
parties refer to these two products as the"women's health
products." EchoCath describes its women's health products
as enabling physicians to perform pr ocedures such as
needle biopsies, catheterizations, and intravascular imaging
more safely and efficiently.

EchoCath consummated its initial public offering on
January 17, 1996 and issued a lengthy Prospectus that
included details of the company's technologies, future
plans, capitalization, collaborative agreements, and selected
financial data. The Prospectus also included the caution
that "[a]n investment in the securities of fered . . . is
speculative in nature and involves a high degr ee of risk,"
App. at 81, and set forth several pages of risk factors. In
particular, EchoCath cautioned investors that the company
"intend[ed] to pursue licensing, joint development and other
collaborative arrangements with other strategic partners
. . . [but] [t]here can be no assurance . . . that the Company
will be able to successfully reach agreements with any
strategic partners, or that other strategic partners will ever
devote sufficient resources to the Company's technologies."
App. at 84.

More than six months after the public of fering,
MedSystems began consideration of a sizable investment in
EchoCath. MedSystems is itself a small company involved
in the development, marketing, and sales of car diac
electrophysiology products used to diagnose and treat
certain cardiac disorders. See Amended Complaint P 5. In
August 1996, the chief executive officers of the two
companies met at EchoCath's plant in Monmouth Junction,
New Jersey, where MedSystems management tour ed
EchoCath's facilities to evaluate the technology under
development. See 

                               3
Frank DeBernardis, the Chief Executive Officer (CEO) of
EchoCath, made a lengthy presentation during the August
meeting to David Jenkins, MedSystems President and CEO,
James Caruso, its Chief Financial Officer (CFO), and
Anthony Varrichio, a Director.See 

10. DeBernardis
represented that EchoCath had engaged in lengthy
negotiations to license its products and was on the verge of
signing contracts with a number of prominent medical
companies, which he identified as including Ur oHealth,
Johnson & Johnson, Medtronic, and C.R. Bar d, Inc., to
develop and market EchoCath's women's health pr oducts.
See 

MedSystems and EchoCath
commenced "in earnest" in November 1996. See 

Throughout the negotiations and until the closing in
February 1997, EchoCath's CEO continued to r epresent to
MedSystems officials that EchoCath was actively moving
forward with the line of women's health pr oducts described
in the August meeting, see 

the contracts with
UroHealth, Johnson & Johnson, Medtronic and C.R. Bard
to develop these products were "imminent," see 

The complaint points to a specific telephone conversation
between December 16 and December 20, 1996 during
which EchoCath's CEO DeBernardis r eiterated these
representations to the CFO of MedSystems. See 

On December 20, 1996, DeBernardis deliver ed a group of
documents to MedSystems, which included the pr eviously
issued 1996 EchoCath Prospectus and EchoCath'sfinancial
projections and marketing plan for fiscal years 1997 and
1998 entitled "EchoCath's Operating Model." See 

14. The Operating Model "outline[d] the sales and
marketing goals for the next two years (February 1996 -
January 1998)." App. at 29. It projected sales from the
women's health products of $852,000 in 1997 ($736,000
for ColorMark and $116,000 for EchoMark) and $3,286,000
in 1998 ($2.5 million for ColorMark and $786,000 for
EchoMark) and represented that these sales projections
were "conservative" estimates. App. at 19. The Operating
Model contained the statements that the Model "is intended
as a beginning guide, and it is expected that it will be
revised," and it is "a simplified for m of accounting" but it

                               4
"does reflect accurately cash and incomeflows." App. at 19,
29. The Operating Model included the statement that"[t]his
Model is driven by a number of assumptions." App. at 19.

The Operating Model also stated that EchoCath expected
other income in 1996 and 1997, including $450,000 in the
form of license fees and Milestone payments fr om
Medtronic, arising out of a licensing agr eement EchoCath
had with Medtronic for the use of leads with permanent
pacemakers and defibrillators, a grant of $560,000 from the
National Institute of Health, and $500,000 fr om another
company interested in using the EchoMark technology.
App. at 19. In the same paragraph, it noted that
"[n]egotiations for these contracts ar e in process." App. at
19.

In an additional communication to MedSystems on
December 23, 1996, this one by Daniel Mulvena, the Co-
Chairman of EchoCath's Board, EchoCath stated that it
anticipated that other outside investment in the company
would provide sufficient operating funds to allow EchoCath
to actively develop the women's health products for at least
18 to 24 months. See Amended Complaint P 26.

On February 27, 1997, MedSystems entered into a
subscription agreement with EchoCath to pur chase
280,000 shares of preferred EchoCath stock for
$1,400,000. See 

In the agr eement, MedSystems
specified that it "ha[d] not relied upon any representation or
other information (oral or written) other than as contained
in documents or answers to questions so furnished to
[MedSystems] by [EchoCath]," that it had "relied on the
advice of, or has consulted with, only its own Advisors,"
and acknowledged that "an investment in the Shar es
involves a number of very significant risks and
[MedSystems was] able to bear the loss of its entire
investment." App. at 63. Nonetheless, MedSystems alleges
in the complaint that it relied on the r epresentations from
EchoCath's CEO of imminent contracts, the for ecasted
sales, the expected fees and payments referr ed to in the
Operating Model, and the assurance that EchoCath would
have sufficient liquidity to continue operation for 18 to 24
months. See Amended Complaint P 32.

                               5
In the fifteen months after MedSystems made its
investment, EchoCath failed to enter into a single contract
or to receive any income in connection with the marketing
and development of the women's health products. It also
did not receive the expected payments fr om license fees.
See 

In September 1997, EchoCath advised
MedSystems that EchoCath would run out of operating
funds in 90 days if new investment in the company was not
forthcoming. See 

MedSystems filed suit in the United States District Court
for the District of New Jersey, alleging that EchoCath
intentionally or recklessly made misrepr esentations to
MedSystems in connection with the sale of securities in an
effort to induce MedSystems to purchase its securities, in
violation of Section 10 of the Securities Exchange Act of
1934, 15 U.S.C. S 78j, and Rule 10b-5. See 

35.
MedSystems also alleged a supplemental state law fraud
claim. MedSystems alleged that EchoCath was not on the
verge of signing contracts with any company to develop its
line of women's health products in August of 1996, or any
other time up to the closing on February 27, 1997. See 

MedSystems also alleged that EchoCath knew when it
drew up the Operating Model that it was highly unlikely the
company would meet the performance r equirements on
which the Milestone payments were contingent. See 

It further alleged that EchoCath made this misleading
projection in an effort to conceal EchoCath's true financial
condition and to induce MedSystems to invest in the
company. See 

EchoCath moved to dismiss the complaint under Rule
12(b)(6) and Rule 9(b) of the Federal Rules of Civil
Procedure. It attached to its motion: (1) the January 17,
1996 Prospectus; (2) the February 27, 1997 Subscription
Agreement between EchoCath and MedSystems for the
purchase of the stock; (3) its annual 10-KSB r eport filed
with the SEC on December 12, 1996 for the 1996 fiscal
year ending August 31, 1996 ("Annual Report"), which
reported, inter alia, that as of August 31, 1996, EchoCath's
operations had not generated significant r evenues and
which contained substantial cautionary language; 1 (4)
_________________________________________________________________

1. Among the cautions contained in the Annual Report were statements
that "[n]o assurance can be given that the Company will successfully

                               6
EchoCath's quarterly update filed with the SEC on January
21, 1997 for the three months ending on November 30,
1996 ("Quarterly Report"), which reported that EchoCath
had minimal sales in the quarter, and that EchoCath "will
receive a series of payments totaling $950,000[from its
agreement with Medtronic] after the completion of certain
milestones," that its current cash r eserves, together with
anticipated sales, should be sufficient to fund r esearch and
development and other capital needs through December
1997, that it anticipated additional cash resources that
would be provided by the completion of unspecified
licensing agreements and strategic alliances, but that there
"can be no assurances that the Company will be able to
complete the aforementioned license agr eements and
strategic alliances on acceptable terms." App. at 214-15.
EchoCath took the position that these documents
established that any alleged misrepresentations were
immaterial under the "bespeaks caution" doctrine because
they contained sufficient cautionary language.

The District Court concluded as an initial matter that it
was appropriate to examine these documents without
transforming the motion to dismiss into a motion for
summary judgment, as they were expressly or implicitly
relied upon by MedSystems in its complaint. EP
MedSystems, Inc. v. EchoCath, Inc., 30 F . Supp. 2d 726,
741-42 (D.N.J. 1998). Although the complaint contains no
direct reference to the Annual Report or the Quarterly
Report, MedSystems does not contest that decision. There
is no indication that MedSystems ever received a copy of
these documents, but they were readily available to the
public.

The District Court then dismissed the complaint with
prejudice. In an exhaustive and lengthy opinion, the court
concluded that the representations wer e immaterial as a
_________________________________________________________________

commercialize any of its products or achieve profitable operations," that
the report contained "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995, and that many
known and unknown risks may cause the actual r esults to be materially
different from the company's futur e predictions. App. at 157-58.

                               7
matter of law under the "bespeaks caution" doctrine
because of the cautionary language accompanying these
alleged misrepresentations. See 

760-69. The
court also stated that MedSystems had failed to plead
scienter with sufficient particularity as r equired by Rule
9(b) and 15 U.S.C. S 78u-4(b)(2). See 

Next,
the court found that MedSystems could not have
reasonably relied on EchoCath's optimisticfinancial
projections. See 

Finally, the court concluded
that MedSystems failed to plead loss causation. See 

Having dismissed the federal securities claim, the
District Court declined to retain jurisdiction over the
remaining state law fraud claim pursuant to 28 U.S.C.
S 1367(c)(3). See 

The District Court had jurisdiction over the federal
securities claim under 15 U.S.C. SS 77v and 78aa and the
state fraud claim under 28 U.S.C. S 1367(a). W e have
jurisdiction under 28 U.S.C. S 1291. W e exercise plenary
review over the District Court's dismissal of MedSystems'
complaint under Rule 12(b)(6). See Wheeler v. T owanda
Area School Dist., 

, 129 (3d Cir. 1991).

II.

DISCUSSION

Section 10(b) of the Securities Exchange Act pr ovides
that it is unlawful for any person to "use or employ, in
connection with the purchase or sale of any security . . . ,
any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
Commission may prescribe." 15 U.S.C. S 78j(b). Rule 10b-5
makes it unlawful for a person 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 . . . in connection with the pur chase or sale
of any security." 17 C.F.R. S 240.10b-5(b). Together, these
provisions establish a private right of action for plaintiffs to
recover for false or misleading statements or omissions of
material fact. See In re Advanta Corp. Sec. Litig., 

, 535 (3d Cir. 1999).

                               8
Under the legal principles governing actions alleging
securities fraud, MedSystems must prove that EchoCath (1)
made misstatements or omissions of material fact; (2) with
scienter; (3) in connection with the purchase or sale of
securities; (4) upon which MedSystems relied; and (5) that
MedSystems' reliance was the proximate cause of its injury.
See Weiner v. Quaker Oats Co., 129 F .3d 310, 315 (3d Cir.
1997). The District Court relied on these principles, and the
precedents applying them, in dismissing MedSystems'
complaint as a matter of law.

At the outset, it is important to recognize that there are
important distinctions between this case and the usual
securities actions for which these principles wer e
developed. Although EchoCath, like the companies sued in
those cases, sought to sell its securities in the market by
an offering accompanied by the January 1996 Pr ospectus,
MedSystems does not base its claim on public
misrepresentations or omissions that af fected the price of
the stock it purchased. Instead, it contends that it was
induced to make the substantial $1.4 million investment as
a result of personal representations directly made to its
executives by EchoCath's executives and that those
representations were false and misleading.

In one sense, this action is more akin to a contract action
than a securities action, and that may be the claim
encompassed in its state law fraud count that the District
Court did not consider. However, as MedSystems chose to
base its initial claim on the securities law, we cannot fault
the District Court for analyzing it as such. Nevertheless, the
distinction between the fact pattern alleged here and that
in the typical securities cases explains why it is difficult to
apply the precedent from those cases to many of the issues.
It is like the proverbial difficulty of fitting a square peg in
a round hole. While the question whether EchoCath's
alleged misrepresentations are immaterial as a matter of
law can be readily considered under the pr ecedent, it is far
more difficult to do so with the subsequent issues, such as
whether MedSystems pled scienter with sufficient
particularity, failed to plead reasonable r eliance, and failed
to plead loss causation. We consider each of these issues
hereafter, keeping in mind throughout not only this

                               9
distinction but also that the District Court dismissed the
complaint without leave to amend.

A.

General Principles of Materiality

That materiality is a prerequisite to a viable securities
action based on a misrepresentation is too well established
to require citation. Nor can there be any disagreement as to
the general definition of materiality under the securities
laws. As the Supreme Court has defined it, a
misrepresentation or omitted fact "is material if there is a
substantial likelihood that a reasonable shar eholder would
consider it important in deciding how to [act]." TSC
Industries, Inc. v. Northway, Inc., 

, 449 (1976).
Although the TSC Industries case involved a proxy
solicitation dispute, the TSC Industries standard of
materiality was expressly applied by the Court to the S 10(b)
and Rule 10b-5 context in Basic Inc. v. Levinson , 

, 232 (1988). According to the Court, for a
misrepresentation or omission to be material " `there must
be a substantial likelihood that the disclosur e of the
omitted fact [or misrepresentation] would have been viewed
by the reasonable investor as having significantly altered
the `total mix' of information made available.' " 

(quoting TSC 

).

Material representations must be contrasted with
statements of subjective analysis or extrapolations, such as
opinions, motives and intentions, or general statements of
optimism, which " `constitute no mor e than `puffery' and are
understood by reasonable investors as such.' " In re
Advanta Corp. Sec. 

(quoting In re
Burlington Coat Factory Sec. Litig., 114 F .3d 1410, 1428
n.14 (3d Cir. 1997)). In other words, some statements
would not alter the total mix of relevant infor mation
available to a reasonable investor. W e have recognized that
"[a]lthough questions of materiality have traditionally been
viewed as particularly appropriate for the trier of fact,
complaints alleging securities fraud often contain claims of
omissions or misstatements that are obviously so

                                10
unimportant that courts can rule them immaterial as a
matter of law at the pleading stage." In r e Burlington Coat
Factory Sec. 

.

The materiality requirement has been further refined in
recent years. In 1995, Congress enacted the Private
Securities Litigation Reform Act (the "Reform Act") because
of significant evidence of abuse in private securities
litigation, particularly the filing of frivolous suits alleging
securities violations designed solely to coer ce companies to
settle quickly and avoid the expense of litigation. See S.
Rep. No. 104-98, at 4 (1990), reprinted in 1995
U.S.C.C.A.N. 679, 683; H.R. Conf. Rep. No. 104-369, at 31
(1990), reprinted in 1995 U.S.C.C.A.N. 730, 730. The
Reform Act contains, inter alia, a statutory safe harbor for
forward-looking written or oral statements. 2 Under that
provision, an issuer is not liable for a forwar d-looking
statement if it is "identified as a forwar d-looking statement,
and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual
_________________________________________________________________

2. The Act defines "forward-looking statement" to include:

         (A) a statement containing a projection of r evenues, income
         (including income loss), earnings (including earnings loss) per
share,
       capital expenditures, dividends, capital structure, or other
financial
       items;

         (B) a statement of the plans and objectives of man agement for
         future operations, including plans or objectives relating to the
         products or services of the issuer;

         (C) a statement of future economic per formance, including any such
         statement contained in a discussion and analysis offinancial
         condition by the management or in the results of operations
         included pursuant to the rules and regulations of the Commission;

         (D) any statement of the assumptions underlying or relating to any
         statement described in subparagraph (A), (B), or (C);

       (E) any report issued by an outside r eviewer retained by an
issuer,
       to the extent that the report assesses a forwar d-looking statement
       made by the issuer; or

         (F) a statement containing a projection or es timate of such other
         items as may be specified by rule or regulation of the Commission.

15 U.S.C.A. S 78u-5(i)(1) (West Supp. 2000).
11
results to differ materially from those in the forward-looking
statement." 15 U.S.C.A. S 78u-5(c)(1)(A)(i) (West Supp.
2000). The safe harbor is also available for oral forward-
looking statements under certain conditions.3

In this case, the District Court did not rely on, nor did
EchoCath cite, the safe harbor provision as a basis for
finding the representations at issue immaterial as a matter
of law. This may be because the oral misrepr esentations on
which MedSystems brought suit were not identified as
forward-looking as required by the safe harbor provision.
See supra note 3. Instead, the District Court found that the
misrepresentations were immaterial under the "bespeaks
caution" doctrine as adopted by this court in In re Donald
J. Trump Casino Sec. Litig., 

(3d Cir. 1993).

Under the "bespeaks caution" doctrine, "cautionary
language, if sufficient, renders the alleged omissions or
misrepresentations immaterial as a matter of law." 

In In re Trump Casino Sec. Litig., we held that a suit
brought by a class of investors who pur chased bonds to
provide funding for the acquisition and completion of the
Taj Mahal, a lavish casino/hotel on the boar dwalk of
Atlantic City, could not be maintained because the alleged
misrepresentations and omissions in the pr ospectus were
accompanied by warning signals in the text of the
prospectus that conveyed to potential investors the extreme
risks inherent in the venture and the variety of obstacles
the venture would face. See 

We stated that
"bespeaks caution" represents new nomenclature, but it "is
essentially shorthand for the well-established principle that
a statement or omission must be considered in context, so
that accompanying statements may render it immaterial as
a matter of law." Id.
_________________________________________________________________

3. Under the Reform Act, an issuer is not liable for any oral forward-
looking statements if (1) the issuer informs the audience that the
statement is forward-looking and that actual r esults may differ
materially from the predictions; (2) the issuer orally directs the
audience
to other "readily available" written documents that contain the additional
information about important factors relating to the forward-looking
statement; and (3) the identified documents set forth satisfactory
cautionary statements. See 15 U.S.C.A. S 78u-5(c)(2)(B) (West Supp.
2000).

                               12
Shortly thereafter, in Kline v. First Western Gov't Sec.,
Inc., 

(3d Cir. 1994), we considered application
of the "bespeaks caution" doctrine to alleged
misrepresentations and omissions in an opinion letter
written by a law firm to its client. W e rejected the position
that the disclaimers in the opinion letter entitled the law
firm to summary judgment. As we stated,"[n]ot just any
cautionary language will trigger application of the doctrine.
Instead, disclaimers must relate directly to that on which
investors claim to have relied." 

Quoting In re
Trump Casino Sec. Litig., we recognized that:

       [A] vague or blanket (boilerplate) disclaimer which
       merely warns the reader that the investment has
       risks will ordinarily be inadequate to pr event
       misinformation. To suffice, the cautionary statements
       must be substantive and tailored to the specific future
       projections, estimates or opinions in the pr ospectus
       which the plaintiffs 

.

In re Westinghouse Sec. Litig., 

(3d
Cir. 1996), we reversed the dismissal of a suit based on
alleged misstatements in Westinghouse's 1991 Prospectus.
The district court had held that the cautionary language in
the prospectus rendered the alleged misstatements
immaterial under the "bespeaks caution" doctrine. See 

We held that "notwithstanding the cautionary
language" in the prospectus, the alleged misrepresentations
about the adequacy of the loan loss reserves likely "would
have assumed actual significance to a reasonable investor
contemplating the purchase of securities." 

By its terms, the "bespeaks caution" doctrine, like the
safe harbor provision in the Reform Act, is directed only to
forward-looking statements. When we first r ecognized the
doctrine, we stated that "when an offering document's
forecasts, opinions or projections are accompanied by
meaningful cautionary statements, the forwar d-looking
statements will not form the basis for a securities fraud
claim . . . ." In re Trump Casino Sec. 

(emphasis added). In later cases, we confir med that the
doctrine only applied to forward-looking statements. See,

                               13
e.g., Semerenko v. Cendant Corp., 

, 182 (3d
Cir. 2000) (noting that the plaintiffs"maintain that the
`bespeaks caution' doctrine is inapplicable, because the
statements related to present and historical facts that were
capable of verification and, as such, not forwar d-looking"
whereas "[t]he defendants . . . characterize the statements
. . . as forward-looking, and thus subject to the bespeaks
caution doctrine.").

The other courts of appeals have also held that the
"bespeaks caution" doctrine only applies to forward-looking
statements. See Grossman v. Novell, Inc. , 

,
1123 (10th Cir. 1997) (holding "bespeaks caution" doctrine
inapplicable to alleged statements relating to the company's
increased market share, pace of mer ger integration, and
"smooth" merger); In re Stac Elec. Sec. Litig., 

,
1408 (9th Cir. 1996) ("By definition, the bespeaks caution
doctrine applies only to affirmative, forwar d-looking
statements."); Shaw v. Digital Equip. Corp. , 

,
1213 (1st Cir. 1996) (explaining that a statement may
contain "both a forward-looking aspect and an aspect that
encompasses a representation of pr esent fact," and "[t]o the
extent that plaintiffs allege that the . . . statement
encompasses the latter representation of present fact, and
that such a representation was false or misleading when
made, the surrounding cautionary language could not have
rendered the statement immaterial as a matter of law.")
(emphasis omitted); Harden v. Raffensperger, Hughes & Co.,
Inc., 

, 1405-06 (7th Cir . 1995) (refusing to
apply "bespeaks caution" doctrine to statement of "hard
fact" regarding the company's "plans to restore profitability
to its day-to-day operations"); Rubinstein v. Collins, 

, 167 (5th Cir. 1994) (discussing the"bespeaks caution"
doctrine's applicability to "predictive statements"). But cf.
Harris v. Ivax Corp., 

, 805-06 (11th Cir. 1999)
(holding that statements made on the last day of a quarter
concerning the results for the quarter ar e forward-looking).

We have also recognized that for the"bespeaks caution"
doctrine to apply, the cautionary language must be directly
related to the alleged misrepresentations or omissions. See

. Although we have never explicitly
held that the cautionary language must actually

                               14
accompany the alleged misrepresentation or omission, we
have noted in many cases that the cautionary language did
accompany the representation. For example, in In re Trump
Casino Sec. Litig., we evaluated the plaintif fs' "assertion
that the Partnership believed the Taj Mahal could meet the
obligations of the bonds [set forth in the pr ospectus], [and]
also other relevant statements contained in the

. W e noted that "an
accompanying statement may neutralize the ef fect of a
misleading statement." 

In Kline, we pointed out that the opinion letters at issue
contained cautionary language but ultimately concluded
that the disclaimer did not directly relate to the statements
by which plaintiffs claimed to have been misled, and thus
we concluded the claim could be maintained. 

. Similarly, in In re Westinghouse Sec. Litig., even
though the cautionary language appeared in the
prospectus, we held that it did not sufficiently negate some
of the claims. 

.

EchoCath argues that the cautionary language need not
accompany the alleged misrepresentation, citing to our
decision in Weiner v. Quaker Oats Co., 

(3d
Cir. 1997). One of the alleged misrepr esentations was the
statement made by the CEO of Quaker Oats at a public
meeting on August 4, 1994 that he was "confident of
achieving at least 7% real earnings gr owth" in fiscal year
1995. 

The district court dismissed this claim,
ruling that the projections of earnings growth were per se
reasonable and per se immaterial. Although we affirmed the
dismissal of this claim, we did so only after finding that a
subsequent statement in the 1994 Annual Report that the
company is "committed to achieving a real earnings growth
of at least 7 percent over time" neutralized the alleged oral
misrepresentation. 

(emphasis in original). The
phrase "over time" inoculated Quaker Oats fr om any claims
of fraud based on a decline in earnings gr owth.

EchoCath seeks to draw from Weiner the general
proposition that the "bespeaks caution" doctrine applies if
the cautionary language in public filings addr esses the
substance of the alleged misrepresentations and provokes
uncertainty, even if the cautionary language does not

                               15
accompany or directly negate the misrepr esentations.
Weiner cannot stand for that proposition because we
specifically noted that the "bespeaks caution" doctrine was
only applicable if the forecasts, opinions and projections
were accompanied by a meaningful cautionary statement,
and the August 4 statement "was accompanied by no such
language." See 

Instead, we held that the
earnings growth projection was immaterial as a matter of
law under the general test for materiality because after
issuance of the Annual Report with its "over time"
language, "[n]o reasonably careful investor would find
material a prediction of seven-percent gr owth followed by
the qualifier `over time.' " 

.

Notwithstanding our precedent suggesting that the
"bespeaks caution" doctrine requir es the cautionary
language to accompany the misrepresentation, we need not
make such a holding today. Ultimately, this court may
recognize such a requirement, but we choose to exercise
restraint in that connection because we r ecognize that
possible fact scenarios may arise that we cannot now
envision. See Grossman, 120 F .3d at 1122 (rejecting notion
that cautionary language must accompany the
representation at issue).

Nonetheless, the absence of accompanying cautionary
language is an important factor in determining the
materiality of the misrepresentation. If the representation is
so obviously unimportant to an investor that r easonable
minds could not differ on the question of materiality, the
representation or omission will be immaterial as a matter of
law. See 

. On the other hand,
"[m]ateriality is a mixed question of law and fact, and the
delicate assessments of the inferences a r easonable
shareholder would draw from a given set of facts are
peculiarly for the trier of fact." Shapir o v. UJB Financial
Corp., 

, 280 n. 11 (3d Cir . 1992). We turn to
consideration of the misrepresentations alleged by
MedSystems in light of these general principles to
determine if dismissal at the pleading stage should be
upheld.

                               16
B.

Alleged Misrepresentations

1. "Imminent Contracts"

The principal allegation of MedSystems is that EchoCath
repeatedly misrepresented the existence of imminent
contracts for its women's health products. The complaint
alleges that EchoCath's CEO represented that it "had
engaged in lengthy negotiations with and was on the verge
of signing contracts with a number of companies including
UroHealth, Johnson & Johnson, Medtronic and C.R. Bard,
Inc. to develop and market [EchoCath's] women's health
products." Amended Complaint P 10; see also 

13,
15, 17. MedSystems also alleges that "[t]hr oughout the
negotiations and until the closing in February, 1997,"
EchoCath "continued to represent . . . that EchoCath was
actively moving forward with the line of women's health
products . . . ." 

Allegedly, EchoCath's CEO
repeated these assurances to MedSystems' CFO during a
telephone conversation between December 16 and
December 20, 1996 and again on December 20 when
MedSystems was given the Operating Model. See 

14. On or about January 30, 1997, EchoCath's CEO
further assured MedSystems that "the deals he had
promised with outside companies to develop these products
were imminent." 

The District Court, referring to this claim as the Possible
Contracts Allegation, concluded that this repr esentation
was immaterial as a matter of law under both the
"bespeaks caution" doctrine and the general test of
materiality.4 Applying the "bespeaks caution" doctrine, the
court assumed that the imminent contracts repr esentation
was forward-looking but never explicitly deter mined that it
was. In addition, the court found that the documents
containing the cautionary language were "for the most
part contemporaneous" with the imminent contracts
_________________________________________________________________

4. We note that the District Court discussed the "bespeaks caution"
doctrine under its section on reliance, see EP MedSystems, 

at 760, though the doctrine actually concer ns materiality.

                                17
representation. EP MedSystems, 

at 767. It
later stated that cautionary language neutralized the
alleged misrepresentation "[i]rr espective of the time of
issuance of the [documents]." 

As we noted earlier, the "bespeaks caution" doctrine
applies only to forward-looking statements. On review, we
cannot say as a matter of law that the repr esentation was
not a present statement of fact. EchoCath's CEO had told
MedSystems that lengthy negotiations with the four
companies had already taken place and that the contracts
were "imminent." See Amended Complaint P 15. An event is
"imminent" if it is "ready to take place." WEBSTER'S THIRD NEW
INTERNATIONAL DICTIONAR Y 1130 (1976). A statement by the
CEO of EchoCath that contracts with four companies were
"ready to take place" may reasonably be construed as a
representation about the current state of negotiations
between EchoCath and the four companies it had
identified. As such, the representation could be reasonably
construed by a trier of fact to be a statement of fact rather
than a prediction of future events.

This view is consistent with that of other cir cuits. See,
e.g., 

(concluding that the
"bespeaks caution" doctrine would not apply because the
statements at issue contained "then-present factual
conditions, or implied background factual assumptions a
reasonable investor would regard the speaker as believing
to be true."); 

(finding a statement
that the company's reserves were adequate to cover costs
contained both "forward-looking" and"present-oriented"
aspects and was therefore not subject to the "bespeaks
caution" doctrine); Harden, 65 F .3d at 1405-06
(determining that a statement regar ding the company's
"plans" to restore profitability was "a present assertion of
fact, i.e., `plans' exist or are being for mulated").

There is also a question whether the cautionary language
cited by the District Court was sufficiently pr oximate to the
imminent contracts representations to meet the relatedness
test established by our precedent. The r epresentations were
not accompanied by any cautionary language. The
cautionary language referred to by the District Court to
have put MedSystems on notice that the contracts might

                               18
never be consummated was contained in the 1996
Prospectus, published in January 1996 in connection with
the initial public offering and given to MedSystems in
December 1996. That Prospectus had numer ous cautionary
warnings regarding the futur e of EchoCath.5

However, the 1996 Prospectus was published seven
months before the August 1996 meeting wher e EchoCath's
CEO first made the representation that it was "on the verge
of signing contracts" with the four companies. By the time
EchoCath gave the Prospectus to MedSystems, over ten
months had passed since its initial publication. W e cannot
discount the possibility that MedSystems executives would
have treated the cautionary language as applicable to the
earlier date when the Prospectus was issued. Whatever the
state of the negotiations between EchoCath and the four
companies when the Prospectus was published in January
1996, the MedSystems executives might have r easonably
believed that significant progress in the negotiations had
been made in the interim. This may be particularly so when
EchoCath's CEO has personally and repeatedly given
assurances that four contracts were "imminent."

The District Court found the necessary relatedness
because the Prospectus contained repr esentations similar
to those made by EchoCath's CEO in the August 1996
meeting. See EP MedSystems, 

at 747-48.
However, the Prospectus contained general language of
intentions to make arrangements and agreements with
_________________________________________________________________

5. For example, the Prospectus includes the following:

       [EchoCath] has no binding commitments fr om any third parties to
       provide funds to [EchoCath] . . . [and] there can be no assurance
       that [EchoCath] will be able to obtain financing from any other
       sources on acceptable terms. App. at 99.

       [EchoCath] intends to pursue licensing, joint development and other
       collaborative arrangements with other strategic partners. There can
       be no assurance, however, that [EchoCath] will be able to
       successfully reach agreements with any strategic partners, or that
       other strategic partners will ever devote sufficient resources to
       [EchoCath's] technologies. App. at 84.

       No assurance can be given that [EchoCath] will ever be able to
       establish commercial scale manufacturing operations. App. at 84.

                               19
third parties. Nothing in the Prospectus specifically refers
to the imminent contracts with the four companies
EchoCath identified in August 1996.

The District Court also cited to cautionary language
contained in EchoCath's Annual Report for the fiscal year
ending August 31, 1996 and the Quarterly Report for the
quarter ending November 30, 1996, which both cautioned
investors that there could be no assurance that EchoCath
would ever successfully commercialize any of its products
or complete any of the expected license agreements or
strategic alliances on acceptable terms. The Annual Report
was filed with the SEC on December 12, 1996 and pr ovided
information as of August 31, 1996, and the Quarterly
Report was filed on January 21, 1997 and pr ovided
information as of November 30, 1996. Whether they were
sufficient to neutralize the initial repr esentation of the four
imminent contracts made in the August 1996 meeting is
not so obvious as to be decided as a matter of law.
Moreover, MedSystems also alleged that EchoCath's CEO
repeated his assurance that the four contracts were
imminent between November 1996, when the parties began
negotiations for the subscription agreement, and February
1997, when the subscription agreement was finally closed.
See Amended Complaint P 12. Ther efore, we cannot agree
with the District Court that the cautionary language
contained in these documents rendered the imminent
contracts representation immaterial under the "bespeaks
caution" doctrine.

Nor do we agree that dismissal of the complaint should
be affirmed under the general test for materiality. The
District Court justified dismissal of the imminent contracts
claim because "[a]bsent a statement by EchoCath that the
contracts would be consummated, such statements, taken
in context, are not false and misleading," EP MedSystems,

at 748, and cited as support our decision in
Weiner. The District Court also held that the 1996
Prospectus put MedSystems on notice of the possibility that
the four contracts might not be consummated. Ther efore,
according to the court, no reasonable sophisticated investor
would view such representations as altering the total mix of
information.

                               20
We find little support in Weiner where, as discussed
above, the claim that was dismissed was based on a public
statement of earnings growth projections that was followed
by an equally public qualifier. Her e, MedSystems bases its
claim on oral representations personally made by
EchoCath's CEO to executives of MedSystems fr om August
1996 until its subscription was finalized in February 1997,
a qualitatively different situation. A r easonable investor
could have viewed these representations as altering the
total mix of information.

EchoCath argues that even if MedSystems executives
believed that the contracts were imminent in August of
1996, they should have known by February 1997 when the
contracts had not been consummated that they could not
rely on the veracity of the representation. See Br. of
Appellee at 4. On the other hand, MedSystems had r eceived
no information from EchoCath during that period to
suggest that the contracts would not be consummated.
Thus, MedSystems could have reasonably consider ed that
there was no change in the information on which the
representation was based, inasmuch as EchoCath, which
was in a superior position than was MedSystems to
ascertain the facts, failed to update its earlier
representations. See 

.

It follows that we cannot agree with the District Court
and EchoCath that the imminent contracts repr esentation
is immaterial as a matter of law.

2. Sales Projections

The MedSystems complaint states that DeBernar dis,
EchoCath's CEO, made representations to MedSystems
concerning anticipated income from the"women's health
products it had always represented it was committed to
marketing and developing." Amended ComplaintP 14.
These representations were contained in the Operating
Model for the fiscal years 1997 and 1998, which EchoCath
delivered to MedSystems in December 1996. Specifically,
the Operating Model states: "ColorMark sales ar e projected
to be $736,000 in the coming year and $2.5 million in the
second year. The EchoMark SSG catheter sales are
projected at $116,000 and $786,000 in the 1st and 2nd

                                21
year, respectively. We believe these sales projections are
conservative." App. at 19.

The District Court discussed the sales projections along
with the imminent contracts representation, apparently
recognizing that the projections would necessarily be based
on the consummation of the contracts for the women's
health products. We agree with this approach. Ordinarily,
sales projections such as these are characterized as
forward-looking statements that may fall within the
"bespeaks caution" doctrine. See In r e Advanta Corp. Sec.

. In fact, the pr ojections were
accompanied by a number of warnings. The Operating
Model stated at the outset that "[t]his Model is driven by a
number of assumptions," and warned that"[t]his Model is
a simplified form of accounting, but does r eflect accurately
cash and income flows." App. at 19. It further stated that
the sales and marketing goals outlined were"intended as a
beginning guide, and it is expected that [they] will be
revised." App. at 29. Such statements could be sufficient to
neutralize the materiality of the sales projections in the
same document.

However, we do not understand MedSystems to be
arguing that its claim can be maintained on the basis of the
sales projections independent of the imminent contracts
representation. At oral argument, its counsel stated that
the sales projections and financial model wer e tied into the
representation that these contracts wer e imminent. He
further conceded that the sales projections tur n on the
validity of that representation and that the imminent
contracts representation is by far the most important
misrepresentation in this case. Ther efore, we are not
prepared to hold that the sales pr ojections are completely
immaterial at this pleading stage of the proceeding, as they
may reinforce the materiality of the imminent contracts
representation.6
_________________________________________________________________

6. Because the sales projections are not an independent basis for the
action, we need not consider whether they would be actionable under
our language in Weiner, where we declined to recognize a per se rule of
immateriality for earnings growth projections. 

n.12.
We noted that a per se rule would immunize companies from "the need

                               22
3. Milestone Payment and Other Licensing Receipts

MedSystems also alleged that EchoCath's Operating
Model misrepresented the likelihood that it would receive
$450,000 in "Milestone payments" under its r ecent contract
with Medtronic, and $500,000 from a company that wished
to use EchoMark technology for "guiding pr ostrate
treatments." Amended Complaint PP 22, 24. Like the
imminent contracts, none of the payments eventuated.
However, unlike the imminent contracts r epresentation
which was made by the CEO of EchoCath personally to
MedSystems executives on various occasions, the
statements regarding the expected r eceipts cannot be
viewed as statements of present fact but rather are forward-
looking. The Operating Model described the Milestone
payment and other licensing fees as "[o]ther income over
the coming two-year period." App. at 19 (emphasis added).
The statement is thus akin to the "over time" statement in
Weiner which neutralized an earnings growth projection.

. Indeed, the qualifying language
accompanied the representation and we see no reason why
the "bespeaks caution" doctrine would be inapplicable. The
District Court did not err in holding these statements to be
immaterial.

4. Sufficiency of Funds

The final misrepresentation alleged in the complaint
concerns the statement made on December 23, 1996 by the
Co-Chairman of EchoCath's Board to r epresentatives of
MedSystems that the investment by MedSystems together
with "other outside investments" would pr ovide EchoCath
_________________________________________________________________

to speak truthfully about the future." Id.; see also 

(stating that opinions are actionable under federal securities law if made
without a reasonable genuine belief or factual basis); Eisenberg v.
Gagnon, 

, 776 (3d Cir . 1985) ("opinion must not be made
with reckless disregard for its truth or falsity") (quotation omitted).
MedSystems did allege that EchoCath "did not genuinely believe and
ha[s] no reasonable basis to support the projections set forth" in its
Operating Model, an allegation that, if proven, will be equally relevant
to
the representation about the imminence of the contracts upon which
this case is based. Amended Complaint P 18.

                               23
with sufficient operating funds to allow it to actively develop
and market the products for at least 18 to 24 months.
Amended Complaint P 26. The District Court concluded
that this statement was neither misleading nor material
when examined in light of cautionary language surr ounding
a similar statement in the January 1996 Prospectus. See
EP MedSystems, 

at 751. But nearly a year
had passed from issuance of the Prospectus until the
representation at issue, which would likely have negated
whatever effect might be attributable to the cautionary
language in the Prospectus. MedSystems executives could
have reasonably believed that new developments had
occurred that prompted the Co-Chair man to make that oral
representation.

However, we agree with the District Court's conclusion
that the representation is not material. As alleged, the
representation was of "anticipated" investment in EchoCath
-- not guaranteed. Amended Complaint P 26. Unlike the
imminent contracts representation, the Co-Chairman's
statements did not refer to specific companies (besides
MedSystems itself). Nor was this representation repeated
over a six-month period. MedSystems was well awar e that
it was dealing with a start-up company and should have
expected that cash flow would be an issue. No r easonable
investor could find that one optimistic statement made by
the company's board member affects the total mix of
information available to that investor . Therefore, the
claimed misrepresentation relating to anticipated
sufficiency of funds is immaterial.

To summarize, in applying the materiality principle to the
alleged misrepresentations, we conclude that the imminent
contracts representation as well as the r elated sales
projection do not fall within the "bespeaks caution" doctrine
as the District Court held but that they may be viewed by
a factfinder as statements of present fact. Therefore, they
may not be dismissed as immaterial as a matter of law. On
the other hand, the District Court did not err in dismissing
the claims regarding the expected r eceipts from other
contracts and the anticipated sufficiency of funds, although
our analysis differs to some extent fr om the District
Court's.

                                24
C.

Scienter

EchoCath argues on appeal that the District Court
correctly held that dismissal of the complaint was also
warranted on the ground that MedSystems failed to meet
the heightened pleading required for the scienter element in
securities fraud cases. Rule 9(b) of the Federal Rules of
Civil Procedure, which applies to all complaints filed in
federal court, provides that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake
shall be stated with particularity." Fed. R. Civ. P. 9(b). The
1995 Reform Act requires, inter alia, that a "complaint
shall, with respect to each act or omission alleged to violate
[the Securities Exchange Act], state with particularity facts
giving rise to a strong inference that the defendant acted
with the required state of mind." 15 U.S.C.A. S 78u-4(b)(2)
(West Supp. 2000). After considering these r equirements,
we recently held that it "remains sufficient for plaintiffs [to]
plead scienter by alleging facts `establishing a motive and
an opportunity to commit fraud, or by setting forth facts
that constitute circumstantial evidence of either reckless or
conscious behavior.' " In r e Advanta Corp. Sec. 

(quoting 

n.8).

The District Court read our decision in In re
Westinghouse Sec. Litig., 

, to hold that we must
analyze the allegations of the complaint separately rather
than in their totality. We need not decide how In re
Westinghouse Sec. Litig. would apply her e. Our earlier
conclusion that the representations as to expected receipts
from other contracts and the representation as to the
anticipated sufficiency of funds are immaterial obviates any
need to consider whether these allegations meet the
standard for pleading scienter. It follows that we need only
analyze the sufficiency of the pleading as to the
representation of the imminence of the contracts with four
identified companies and the related sales pr ojections.

MedSystems' complaint alleges that "[c]ontrary to
EchoCath's repeated representations to EP MedSystems,
EchoCath was not on the verge of signing contracts with

                               25
UroHealth, Johnson & Johnson, Medtronic, C.R. Bard, Inc.
or any other company to market and develop a line of
women's health products in September, 1996 or at any
other time up to the closing of February 27, 1997."
Amended Complaint P 17. Moreover,"EchoCath knew at all
times relevant hereto that it had no r easonable prospects of
entering into the contracts it had identified to EP
MedSystems." 

The complaint then notes that
"EchoCath has failed to entered [sic] in to a single contract
and has yet to receive any income fr om the sale of women's
health products" since September 1996. 

(emphasis
in original).

MedSystems argues that these allegations constitute
strong circumstantial evidence of conscious misbehavior or
recklessness. The District Court, on the other hand, viewed
the complaint as merely alleging fraud by hindsight. It is, of
course, true that we generally require mor e than a showing
that a predicted event did not occur in or der to sustain a
claim of fraud. See In re Advanta Sec. 

-37. And in In re Burlington Coat Factory Sec. 

, we stated that it is not enough for a plaintiff
to state that defendants had no reasonable basis for
making the representation. However , we believe that when
multiple promised events fail to occur, there is a point
where a strong inference of fraud can be made. As
MedSystems notes, four contracts with independent
companies, each characterized as imminent, failed to
materialize within a year of the representations. While it is
possible that all of these companies discover ed some
characteristic of EchoCath or its products that explained
why the putative contracts did not materialize, we cannot
dismiss the possibility that EchoCath, in an ef fort to coax
a substantial investment, did not fairly repr esent to
MedSystems the status of its negotiations with these
companies.

As we noted earlier, this case presents a factual situation
unlike that in our prior precedent and, indeed, unlike those
that were the basis for the 1995 Reform Act. The legislative
history of the Reform Act makes clear that it was primarily
directed at the abuse and misuse of securities class action
lawsuits where defendant companies "choose to settle

                               26
rather than face the enormous expense of discovery and
trial." S. Rep. No. 104-98, at 9 (1995), r eprinted in 1995
U.S.C.C.A.N. 679, 688. As the Senate Report states:

        The fact that many of these lawsuits arefiled as
       class actions has had an in terrorem ef fect on
       Corporate America. A whole stable of "professional
       plaintiffs," who own shares--or sometimes fractions of
       shares--in many companies, stand ready to lend their
       names to class action complaints.

       * * *

        The "victims" on whose behalf these lawsuits are
       allegedly brought often receive only pennies on the
       dollar in damages. Even worse, long-term investors
       ultimately end up paying the costs associated with the
       lawsuits. As the Council for Institutional Investors
       advised: "We are * * * hurt if a system allows someone
       to force us to spend huge sums of money in legal costs
       by merely paying ten dollars and filing a meritless
       cookie cutter complaint against a company or its
       accountants when that plaintiff is disappointed in his
       or her investment."

MedSystems stands in contrast to the professional
plaintiffs who were the focus of the statute. MedSystems
invested the substantial sum of $1.4 million in EchoCath.
It did so on the basis of personal repr esentations by
EchoCath executives to MedSystems officers concer ning
negotiations that had occurred and the imminent results
expected of those negotiations. MedSystems' complaint is
not a "cookie cutter complaint" or a class action brought by
shareholders with an insignificant inter est in the company;
it is an individual action, based on a transaction arising
from direct negotiations between the parties to the action.

It is difficult to see how MedSystems could have pled
fraud or scienter with more specificity without having been
given the opportunity to conduct any discovery. Her e, the
necessary information as to the status of EchoCath's
negotiations with the four companies lies in the defendant's
hands. In cases prior to the Reform Act, we noted that the

                               27
pleading standard required by Fed. R. Civ. P. 9(b) could be
relaxed "when factual information is peculiarly within the
defendant's knowledge or control." Craftmatic Sec. Litig. v.
Kraftsow, 

, 645 (3d Cir . 1990); see also

(r eversing the dismissal of the
complaint and granting the plaintiff an opportunity to state
in the complaint that the necessary information is held by
the defendant). We acknowledge the Refor m Act's
heightened pleading requirement for the defendant's state
of mind, but we believe that MedSystems' allegations are
sufficient under the particular facts of this case, which is
not the typical class action that Congress intended to
target.

In analyzing the effect of the Reform Act on pleading
scienter, the Second Circuit concluded that the Reform Act
"effectively raised the nationwide pleading standard to that
previously existing in this circuit and no higher (with the
exception of the `with particularity' requir ement)." Novak v.
Kasaks, 

, 310 (2d Cir . 2000). In In re Advanta
Corp. Sec. Litig., we noted that Congress essentially adopted
the Second Circuit's interpretation. 

.
This court's earlier requirement for pleading scienter did
not differ materially from that of the Second Circuit. See In
re Burlington Coat Factory Sec. 

.
MedSystems has conceded that it does not have
information as to the status of the EchoCath negotiations
with the four companies, if indeed there wer e negotiations,
as it has not had the opportunity to acquire such
information. We conclude that will suffice under the Reform
Act.

The District Court also found that the cautionary
language in the January 1996 Prospectus and EchoCath's
Operating Model eviscerated any inference of the requisite
intent to commit fraud. However, as we commented earlier,
cautionary language in the publicly disseminated
Prospectus in January 1996 hardly negates any possible
inference of fraud as to personal statements made from
August 1996 to February 1997. There is no suggestion that
EchoCath ever cautioned MedSystems before it made its
investment in February 1997 that there was a change in
the status of its four "imminent" contracts. Under these

                                28
circumstances, we believe that the scienter pleading
requirement has been adequately met.

D.

Reliance

It is undisputed that a plaintiff seeking r elief under Rule
10b-5 must show reasonable reliance on a false statement
or omission of material fact. See 

.
MedSystems' complaint alleges that its executives believed
the "representations concerning EchoCath's line of women's
health products were true and would not have made its
substantial investment in EchoCath if it had known these
representations were false." Amended Complaint P 16. The
District Court treated the imminent contracts
representation as involving future pr edictions by EchoCath
that contained no guarantee that the contracts would be
consummated. The court repeated its position that the
representation was contradicted by disclaimers and
cautionary language in the 1996 Prospectus, the Annual
Report, and the Quarterly Report filed with the SEC. See EP
MedSystems, 

at 758. Thus, the court found
that any reliance by MedSystems on the r epresentation was
unreasonable as a matter of law.

Our consideration of the District Court's analysis leads
us to a conclusion similar to that we reached in our
discussion on materiality where we concluded that none of
the documents containing cautionary language sufficiently
neutralized the materiality of the imminent contracts
representation. It follows that reliance on the repeated oral
representations by EchoCath's CEO was not unreasonable
as a matter of law because of those documents.

In Straub v. Vaisman & Co., Inc., 

, 598 (3d
Cir. 1976), we identified a variety of factors that should be
considered in determining whether the plaintiff 's reliance
was reasonable. These factors include the existence of a
fiduciary relationship, plaintiff 's opportunity to detect the
fraud, the sophistication of the plaintiff, the existence of
long-standing business or personal relationships, and
access to the relevant information. See 

                               29
that MedSystems was a very sophisticated investor and
that it should have taken more care to per form due
diligence before it signed the subscription agr eement. But,
as we noted in Straub, "a sophisticated investor is not
barred by reliance upon the honesty of those with whom he
deals in the absence of knowledge that the trust is
misplaced. Integrity is still the mainstay of commer ce . . . ."

MedSystems have access to information that
would have suggested that the imminent contracts
representation was false. Whether MedSystems, after being
told by EchoCath's CEO for the second time that contracts
with four companies were imminent, should have
approached one or more of the four companies and asked
for a verification of the present state of negotiations is an
issue for the trier of fact, not for a judge ruling on the
sufficiency of the pleadings. We cannot say that
MedSystems' reliance on the imminent contracts
representation was unreasonable as a matter of law.

E.

Loss Causation

Finally, we turn to EchoCath's contention that dismissal
was appropriate because the complaint fails to plead loss
causation. The Reform Act provides that in a securities law
action, "the plaintiff shall have the bur den of proving that
the act or omission of the defendant . . . caused the loss for
which the plaintiff seeks to recover damages." 15 U.S.C.A.
S 78u-4(b)(4) (West Supp. 2000). Although this provision
does not deal with pleading, the District Court, describing
loss causation as the "causal link between the alleged
misrepresentations and the harm incurred when a security
is purchased and sold," EP MedSystems , 

at
770 (quotation omitted), concluded that MedSystems failed
to plead loss causation. The court stated that the plaintiff
must show that the misrepresentations"caused the decline
in value rather than merely inducing the transaction," 

and noted that MedSystems did not
allege that the value of its investment has declined, but

                               30
rather "that it has `sustained substantialfinancial losses'
as a direct result of the fraudulent misr epresentations [by
EchoCath]." 

(quoting Amended Complaint P 34).

Before our recent decision in Semer enko v. Cendant
Corp., 

(3d Cir. 2000), we generally stated that
the "misrepresentation must touch upon the reasons for
the investment's decline in value." In r e Phillips Petroleum
Sec. Litig., 

, 1244 (3d Cir . 1989) (citing
Huddleston v. Herman & MacLean, 640 F .2d 534, 549 (5th
Cir. 1981)). In Semerenko, we equated loss causation with
proximate cause, stating that there must be a "sufficient
causal nexus between the loss and the alleged

. The plaintiff class in
Semerenko, which is representative of the usual securities
case, alleged that it purchased shares at a price that was
inflated due to misrepresentations by several directors and
officers and that when the truth was made known, the
price dropped to its true value. See 

The complaint in Semerenko stated:

       [T]he misrepresentations . . . dir ectly or proximately
       caused, or were a substantial contributing cause of,
       the damages sustained by plaintiff and the other
       members of the Class. The misstatements . . . had the
       effect of creating in the market an unr ealistically
       positive assessment of Cendant, as well as of its
       financial condition, causing ABI's common stock to be
       overvalued and artificially inflated at all r elevant 

.

The defendants argued that the plaintif f class did not
adequately plead loss causation, but we rejected that
argument. Drawing all reasonable infer ences in a light most
favorable to plaintiffs, we found that an allegation that the
misrepresentations "directly or pr oximately caused, or were
a substantial contributing cause of, the damages sustained
by plaintiff " adequately pled loss causation. 

was issued after the District Court decided this case,
adopted a practical approach, in effect applying general
causation principles.

Some of the other courts of appeals have also adopted a
practical view of loss causation. For example, the Eighth

                               31
Circuit has stated that "[p]laintif fs are not required to meet
a strict test of direct causation under Rule 10b-5; they need
only show some causal nexus between [the defendant's]
improper conduct and plaintiff 's losses." In re Control Data
Corp. Sec. Litig., 

, 619 (8th Cir. 1991)
(quotation omitted). The Second Circuit similarly held that
loss causation "embodies notions of the common law tort
concept of proximate causation." AUSA Life Ins. Co. v. Ernst
and Young, 

, 216 (2d Cir. 2000) (quotation
omitted). In Ambassador Hotel Co., Ltd. v. W ei-Chuan
Investment, 

, 1027 (9th Cir . 1999), the Ninth
Circuit stated that "the loss causation r equirement limits
the ability of plaintiffs to recover for losses sustained on the
basis of factors unrelated to any misrepr esentation or
fraud." As the Eleventh Circuit stated in Robbins v. Koger
Properties, Inc., 

, 1447 (11th Cir. 1997), "the
loss causation requirement must be applied on a case-by-
case basis."

In considering loss causation, it is important to r ecognize
once again how this case differs from the usual securities
action. In the usual securities action, plaintif fs complain
because some announcement emanating from the
company, whether regarding a tender of fer, see 

, earnings, see In r e Burlington Coat Factory
Sec. 

, pr ojected earnings, see

, or the company's financial
condition, see In re Westinghouse Sec. 

,
fraudulently represented the actual state of affairs.
Plaintiffs claim that, as a result, they purchased the
securities at a price that was artificially inflated, only to
suffer a loss when the true situation was made known. See,
e.g., Hayes v. Gross, 982 F .2d 104, 105 (3d Cir. 1992)
(involving a claim that defendants knowingly or r ecklessly
misrepresented the company's financial condition, thus
artificially inflating the stock price).

This case differs. In this case, MedSystems claims that as
a result of fraudulent misrepresentations made in personal
communications by EchoCath executives, it was induced to
make an investment of $1.4 million which tur ned out to be
worthless.7 None of the cases in this circuit is analogous,
_________________________________________________________________

7. While the complaint may not have set forth that damage theory with
specificity, MedSystems' counsel clarified its damage theory at the oral
argument.

                               32
and counsel have not referred us to a similar case in
another circuit nor have we found one. It follows that
although we take guidance from the language in other
cases enunciating general principles, the holdings are to
some extent inapplicable here.

The causation issue becomes most critical at the pr oof
stage. Whether the plaintiff has proven causation is usually
reserved for the trier of fact. See, e.g. , 

(reversing for failure to submit causation to the
jury). MedSystems' complaint was dismissed at the pleading
stage. Although, as noted above, the allegation that it
"sustained substantial financial losses as a direct result of
the aforementioned misrepresentations and omissions on
the part of EchoCath" could have more specifically
connected the misrepresentation to the alleged loss, i.e.,
investment in a company with little prospects, when we
draw all reasonable inferences in plaintif f 's favor, we
conclude that MedSystems has adequately alleged loss
causation.

III.

CONCLUSION

The District Court, in its scholarly opinion leading to its
conclusion to dismiss MedSystems' complaint in its entirety
as a matter of law, applied the law of the cir cuit as to some
of the requirements of a securities action too restrictively.
While Congress and some judicial decisions have tended to
cabin the large securities class actions that may have been
filed without adequate basis, some of the District Court's
conclusions do not withstand our analysis. W e are informed
by more recent precedent of this court that was not
available to the District Court. Moreover , the District Court
failed to recognize that this complaint by MedSystems does
not fall into the pattern of the usual securities action and
that application of certain legal requir ements must be
adjusted to fit the particular action.

Specifically, we have concluded that MedSystems' central
allegation, that EchoCath's CEO gave MedSystems
executives assurances that, after lengthy negotiations,

                               33
contracts with four identified companies wer e "imminent"
and provided sales projections that wer e an integral part of
these assurances, should not have been dismissed. This
was a statement of fact in the context in which pr esented
by MedSystems' complaint that could be found to meet the
requirement of materiality. The allegation that EchoCath
knew or had reason to know that this was not the case
adequately met the requirement of pleading scienter. A trier
of fact could find that reliance was r easonable and that
there was the requisite causal connection between the
assurances and MedSystems' loss, i.e., its investment.

On the other hand, we have concluded that the District
Court did not err in dismissing the allegations as to certain
other expected income and anticipated sufficiency of funds
because there was qualifying language that should have
put a reasonable investor on notice of the risk. It follows
that we will reverse the dismissal of the complaint, and also
direct reinstatement of the state fraud count.

In remanding to the District Court we do not suggest that
it is obliged now to permit a wide ranging discovery effort
by plaintiff. We have been influenced to some extent by
MedSystems' counsel's statements that limited discovery
into the facts surrounding the central allegation should
disclose in short order whether there was an adequate
basis in fact for the assurances given from August 1996
through February 1997. If there is some evidence that there
was inadequate basis for such assurances, then, of course,
it becomes an issue for the jury.

For the reasons set forth, we will reverse the order
dismissing the complaint and remand for further
proceedings in accordance with this opinion. Each party to
bear its own costs.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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