USCA1 Opinion
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 96-1088
DAVID GROSS,
Plaintiff, Appellant,
v.
SUMMA FOUR, INC., BARRY R. GORSUN, JAMES J. FIEDLER,
JOHN A. SHANE, WILLIAM M. SCRANTON, AND ROBERT A. DEGAN,
Defendants, Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Paul J. Barbadoro, U.S. District Judge]
___________________
____________________
Before
Stahl, Circuit Judge,
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Campbell, Senior Circuit Judge,
____________________
and Lynch, Circuit Judge.
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____________________
Arthur R. Miller, with whom Lee S. Shalov, Milberg Weiss Bershad
________________ _____________ ______________________
Hynes & Lerach LLP, Jules Brody, Mark A. Levine, Stull Stull & Brody,
__________________ ___________ _______________ ___________________
Edward L. Hann, McLane, Graf, Raulerson & Middleton, Joseph H. Weiss,
______________ ____________________________________ _______________
and Weiss & Yourman, were on brief for appellant.
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Peter J. Macdonald, with whom Donald J. Williamson and Hale and
___________________ _____________________ _________
Dorr, were on brief for appellees.
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____________________
August 12, 1996
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STAHL, Circuit Judge. Investor David Gross appeals
STAHL, Circuit Judge.
_____________
from the district court's dismissal of his securities fraud
claim against Summa Four, Inc., its president, and other
Summa Four officers and directors.1 Gross claims that Summa
Four committed "fraud on the market" by making a series of
public statements from January to July 1994 that were either
materially misleading in and of themselves, or incomplete and
misleading due to the omission of materially relevant facts.
Gross further complains that Summa Four improperly overstated
its revenue during the same time period. After careful
review, we affirm the district court's dismissal of Gross's
claims.
I.
I.
__
Background
Background
__________
Summa Four is a Delaware corporation with its
principal place of business in Manchester, New Hampshire. It
develops and manufactures advanced-technology switching and
signaling systems for use in telecommunications networks,
which it markets and distributes to clients worldwide.
On September 23, 1993, Summa Four successfully
completed an initial public offering ("IPO") of its common
____________________
1. The individual defendants are Barry Gorsun, current
president, CEO and Chairman of the Board; James J. Fiedler,
president and director from July 1993 through July 1994; John
A. Shane, director since 1976; William M. Scranton, director
since 1976; and Robert A. Degan, director since 1984. Unless
otherwise indicated we will refer to all defendants
collectively as "Summa Four" or "the company."
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2
stock. The individual defendants sold a portion of their
shares into the IPO (at a price of $17 per share), but
remained significant shareholders following the offering. As
provided in a "lock-up" agreement with the underwriter, the
individual defendants were prohibited from selling any
retained shares in the company for 180 days following the
date of the offering. In late February 1994, however, the
individual defendants obtained special permission from the
underwriter to sell, and did sell, over 130,000 shares of
Summa Four stock at an average market price in excess of $38
per share.
Gross, who purports to sue on behalf of himself and
all other investors similarly situated, purchased 200 shares
of Summa Four stock in late May 1994 at a price of
approximately $27.50 per share. On July 5, 1994 (the closing
date of the class period),2 Summa Four's stock price fell
from $22.25 to $11.75 per share following the company's
announcement that its expected results for the first quarter
of fiscal year 1995 (ending June 30, 1994) would fall short
of earlier projections. Shortly thereafter, Summa Four
terminated defendant James Fiedler who had served as its
president throughout the class period.
A. Summa Four's Public Statements
__________________________________
____________________
2. The purported "class period" extends from January 18,
1994, to July 5, 1994. The district court never certified
the class.
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3
From January to July 1994, Summa Four issued
several public statements touting the company's performance
and profitability. In the complaint, Gross relies on
excerpts from three such statements to establish his claims
of securities fraud. The first two excerpts are taken from
press releases dated January 18 and May 3, 1994, that
accompanied the release of Summa Four's results for the third
and fourth quarters of its 1994 fiscal year. The third
excerpt is taken from a June 29, 1994, letter to the
shareholders from Summa Four's then president James Fiedler.
The June 29 letter was sent in advance of the end of the
first quarter of Summa Four's 1995 fiscal year. The relevant
portions of the three statements are quoted below.
1. January 18, 1994, press release:
Competition at all levels and alternative
technologies caused by divestiture in the
U.S. and privatization in other markets
are fueling growth for new customized
services. We are also seeing increased
_________
demand for our SDS distributed switch in
______ ___ ___ ___ ___________ ______
a number of international markets
including China, Chile and Columbia where
there is rapid development in
infrastructure. . . . The SDS
distributed switch is becoming the
platform of choice for rapidly developing
and deploying network-based enhanced
services worldwide.
2. May 3, 1994, press release:
In the fourth quarter [ending March 31,
1994], the Company received significant
________ ___________
orders from AT&T, McCaw, Sprint, GTE,
______
Unisys, and IBM to address a broad range
of applications . . . . These new orders
-4-
4
were for both new and existing
applications, domestically and
internationally.
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5
3. June 29, 1994, letter to shareholders:
We are pleased to report to you that
fiscal year 1994, ended March 31, 1994,
was a watershed year in Summa Four's
history. It was a year in which we
strengthened our competitive position,
recorded our eighth consecutive increase
in quarterly revenues, and generated
record net income.
Our strong financial performance is
___ ______ _________ ___________
primarily the result of our initiatives
in the highly competitive long distance
market . . . . Summa Four is committed
to maintaining its worldwide leadership
position in the public network-based
distributed switch market. We have
preeminent customers worldwide, broad-
based strategic distribution channels,
public network-certified products, a
_
strong financial position, and an
______ _________ ________
experienced management team.
Gross alleges that, during the class period, Summa
Four possessed internal reports, documents, and board meeting
minutes revealing that the company was experiencing declining
growth in revenue and earnings, delayed orders, significant
increases in expenses, and difficulties in its international
operations. Specifically, in order to support his claims
that the three public statements were materially false or
misleading, Gross relies on certain internal "Flash Reports"
and "Monthly Operating Reports" for the months of January
through April 1994, and recorded minutes from board and
internal operation meetings held in May and June 1994. As we
progress with our analysis, we will discuss in more detail
the content of these internal documents.
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6
B. The Present Lawsuit
_______________________
On July 12, 1994, shortly after Summa Four's
announcement of its expected results for the first quarter of
fiscal year 1995 and the ensuing sudden decline in Summa
Four's stock price, Gross filed this securities fraud action
in the New Hampshire federal district court. Gross purported
to bring the complaint on behalf of all investors who
purchased Summa Four stock during the class period.
Following Summa Four's initial motion to dismiss, the
district court granted Gross limited discovery. Upon
completion of that discovery, Gross amended his complaint.
Subsequently, Summa Four moved to dismiss the
amended complaint. After briefing and oral argument, the
district court granted the motion, rejecting all of Gross's
claims. The court disagreed with Gross that the excerpted
portions of the statements could be viewed as affirmative
misrepresentations, stating that:
A reasonable person could not infer from
the pleaded acts that demand for [Summa
Four's products] was no longer growing,
that significant orders had not been
received from major corporations, or that
the company was not in a "strong
financial position" simply because it did
not meet its short-term budget
projections, its orders for one month
were lower than expected, and its
international operations were in a state
of disarray.
The court also rejected Gross's claim that the
statements were misleading by omission. The court noted
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7
that, while many of the facts Gross alleged to support that
allegation "might have been important to the reasonable
investor," they were not sufficient to indicate that the
challenged statements were so incomplete as to be misleading.
The court further rejected Gross's final claim that Summa
Four had overstated its revenue, reasoning that the
allegations on which Gross relied did not reasonably support
the claim. Gross now appeals.3
II.
II.
___
Discussion
Discussion
__________
Gross contends that the district court erred in
dismissing his claims. He argues that the amended complaint
adequately alleged that Summa Four had a duty, which it
breached, to disclose material nonpublic information in its
possession necessary to make its public statements not
materially misleading. Gross also contends that Summa Four
improperly overstated its revenue and earnings during the
class period by not following generally accepted accounting
principles ("GAAP"). After discussing the standard of review
and the relevant securities law, we address each issue in
turn.
____________________
3. The amended complaint also included claims regarding
alleged misstatements of future performance and alleged
misstatements by third-party analysts. Gross has expressly
abandoned those claims on appeal.
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A. Standard of Review
______________________
We review the district court's dismissal of Gross's
amended complaint de novo, taking all well-pleaded
__ ____
allegations as true and giving Gross the benefit of all
reasonable inferences. See Roeder v. Alpha Indus., Inc., 814
___ ______ __________________
F.2d 22, 25 (1st Cir. 1987). Nonetheless, because Gross
alleges fraud, he is subject to the heightened pleading
requirements of Fed. R. Civ. P. 9(b), which provides that
"[i]n all averments of fraud or mistake, the circumstances
constituting the fraud or mistake shall be stated with
particularity."
Rule 9(b) sets a demanding standard in order to
"minimize the chance that a plaintiff with a largely
groundless claim will bring a suit and conduct extensive
discovery in the hopes of obtaining an increased settlement,
rather than in the hopes that the process will reveal
relevant evidence." Romani v. Shearson Lehman Hutton, 929
______ _______________________
F.2d 875, 878 (1st Cir. 1991) (internal quotations and
citations omitted). We have been especially strict in
demanding adherence to Rule 9(b) in the securities context,
id., expressly stating that
___
"general averments of defendants'
knowledge of material falsity will not
suffice. Consistent with Fed. R. Civ. P.
9(b), the complaint must set forth
specific facts that make it reasonable to
believe that the defendant[s] knew that a
statement was materially false or
misleading. The rule requires that the
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particular times, dates, places, or other
details of the alleged fraudulent
involvement of the actors be alleged."
Lucia v. Prospect St. High Income Fund, 36 F.3d 170, 174 (1st
______ _____________________________
Cir. 1994) (quoting Serabian v. Amoskeag Bank Shares, Inc.,
________ ___________________________
24 F.3d 357, 361 (1st Cir. 1994)).
Furthermore, we have consistently held that a
securities plaintiff does not satisfy the requirements of
Rule 9(b) merely by pleading "`fraud by hindsight.'"
Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir. 1992)
__________ _____________
(quoting Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978)).
_____ ______
In other words, "a general averment that defendants `knew'
earlier what later turned out badly" does not convey the
necessary particularity that Rule 9(b) requires. Id. In
___
addition, the heightened pleading requirement of Rule 9(b)
applies even when the fraud relates to matters peculiarly
within the defendant's knowledge. Lucia, 36 F.3d at 174;
_____
Romani, 929 F.2d at 878.
______
B. Requirements of a 10b-5 Claim
_________________________________
Gross bases his fraud claims on alleged violations
of 10(b) of the Securities Exchange Act and the Securities
and Exchange Commission's Rule 10b-5 promulgated thereunder.
15 U.S.C. 78j(b); 17 C.F.R. 240.10b.5. Together these
provisions prohibit any person, directly or indirectly, from
committing fraud in connection with the purchase or sale of
securities. Id.; Shaw v. Digital Equip. Corp., 82 F.3d 1194,
___ ____ ____________________
-10-
10
1217 (1st Cir. 1996). To state a cause of action under
10(b) and Rule 10(b)(5), a plaintiff must plead, with
sufficient particularity, that the defendant made a false
statement or omitted a material fact, with the requisite
scienter, and that the plaintiff's reliance on this statement
or omission caused the plaintiff's injury. Shaw, 82 F.3d at
____
1217; see also San Leandro Emergency Medical Group Profit
___ ____ _____________________________________________
Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808 (2d Cir.
____________ __________________
1996). A misrepresented or omitted fact will be considered
material only if a reasonable investor would have viewed the
misrepresentation or omission as "having significantly
altered the total mix of information made available." Basic,
______
Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
____ ________
By itself, however, Rule 10b-5, does not create an
affirmative duty of disclosure. Indeed, a corporation does
not commit securities fraud merely by failing to disclose all
nonpublic material information in its possession. Roeder,
______
814 F.2d at 26 (citing Chiarella v. United States, 445 U.S.
_________ ______________
222, 235 (1980)); see also Shaw, 82 F.3d at 1202. The
___ ____ ____
corporation must first have a duty to disclose the nonpublic
material information before the potential for any liability
under the securities laws emerges. Roeder, 814 F.2d at 26.
______
Such a duty may arise if, inter alia, a corporation has
_____ ____
previously made a statement of material fact that is either
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false, inaccurate, incomplete, or misleading in light of the
undisclosed information. See id. at 27.4
___ ___
Thus, "[w]hen a corporation does make a disclosure-
-whether it be voluntary or required--there is a duty to make
it complete and accurate." Id. at 26. "This, however, does
___
not mean that by revealing one fact about a product, one must
reveal all others that, too, would be interesting, market-
wise, but means only such others, if any, that are needed so
that what was revealed would not be `so incomplete as to
mislead.'" Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st
_______ ______________
Cir. 1990) (en banc) (quoting SEC v. Texas Gulf Sulphur Co.,
__ ____ ___ ______________________
401 F.2d 833, 862 (2d Cir. 1968) (en banc), cert. denied, 394
__ ____ _____ ______
U.S. 976 (1969)). Furthermore, the fact that a company has
reported accurately about past successes does not by itself
burden the company with a duty to inform the market that
present circumstances are less positive. Shaw, 82 F.3d at
____
1202; Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357,
________ ___________________________
361 (1st Cir. 1994).
C. Analysis
____________
We turn first to Gross's claims that Summa Four's
various public statements during the class period were either
____________________
4. In Roeder, we also alluded to two other situations that
______
could give rise to a duty to disclose material facts: (1)
when an insider trades in the company's securities on the
basis of nonpublic material information; (2) when a statute
or regulation mandates disclosure. See Shaw, 82 F.3d at 1202
___ ____
n.3 (discussing Roeder).
______
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12
false and misleading in and of themselves or false and
misleading by omission. We take the claims arising from the
June 29 letter first, and then address the claims arising
from the earlier January 18 and May 3 press releases.
Finally, we turn to Gross's claim that, by employing improper
accounting procedures, Summa Four overstated its revenue
during the class period.
1. June 29 Letter
__________________
Gross complains that, given the letter's failure to
disclose Summa Four's impending poorer-than-expected results
for the first quarter of fiscal year 1995, its statements
that the company had experienced a "strong financial
performance" and was in "a strong financial position" are
either patently false or clearly misleading by omission.
Summa Four disputes this contention, arguing that both
statements are completely borne out by the facts alleged in
the amended complaint. Summa Four argues that the "strong
financial performance" statement is a backward-looking
statement referring to its record results in fiscal year
1994. Summa Four further adds that nothing in the amended
complaint, viz., allegations concerning its disappointing
____
first quarter 1995 results, supports the inference that the
company was not in a "strong financial position."
While the issues raised by the June 29 letter
represent, perhaps, Gross's strongest claims, we need not
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choose between the parties' contrary positions. Regardless
of the merits, because Gross purchased his stock on May 27,
1994, well before Summa Four issued the June 29 letter, he
has no standing to complain about the statements included in
the letter. See Shaw, 82 F.3d at 1222 (only individuals who
___ ____
purchased shares after allegedly misleading statement could
_____
have suffered a cognizable injury); Roots Partnership v.
_________________
Lands' End, Inc., 965 F.2d 1411, 1420 (7th Cir. 1992)
_________________
(similar). In other words, because Summa Four issued the
letter after Gross had purchased his stock, the statements in
the letter could not possibly have inflated the market price
that he paid for those shares. Roots Partnership, 965 F.2d
__________________
at 1420. Moreover, although Gross purports to bring a class
action on behalf of all individuals who purchased Summa Four
shares during the class period, he cannot maintain an action
on behalf of class members to redress an injury for which he
has no standing in his own right. Id. at 1420 n.6; see Britt
___ ___ _____
v. McKenny, 529 F.2d 44, 45 (1st Cir.) ("If none of the named
_______
plaintiffs may maintain action on their own behalf, they may
not seek such relief on behalf of a class."), cert. denied,
_____ ______
429 U.S. 854 (1976); see also Lewis v. Casey, 64 U.S.L.W.
___ ____ _____ _____
4587, 4590 (U.S. June 25, 1996).
2. January 18 Press Release: False
_________________________________________
Statement of Current Facts
__________________________
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14
Apart from the claims arising from the June 29
letter, Gross points to one statement excerpted from the
January 18, 1994, press release as constituting a false
statement of current facts. Gross contends that the amended
complaint sufficiently alleged that Summa Four's statement
that "We are seeing increased demand for our SDS distributed
_________ ______
switch in a number of international markets including China,
Chile and Colombia" is patently false and a violation of Rule
10b-5. We disagree.
Though Gross adamantly contends that the statement
is false, the amended complaint provides little in the way of
specific facts to support this contention. See Greenstone,
___ __________
975 F.2d at 25 ("complaint must set forth specific facts that
make it reasonable to believe that the defendant knew that a
statement was materially false or misleading"); see also
___ ____
Glassman v. Computervision Corp., No. 95-2240, slip op. at
________ ____________________
31-34 (1st Cir. July 31, 1996) (complaint failed to allege
sufficient factual basis for claim that up-to-date
information was ignored in setting offering prices). Indeed,
when pressed by the district court on this very issue
following the limited discovery, Gross's counsel conceded
that the amended complaint failed to point to any "documents
that expressly say that on January 18th or thereabouts that
the [SDS] switch [was] experiencing declining orders." The
only document contemporaneous to the January 18 press release
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15
that Gross cites to support his claim, a January 20 "Flash
Report," made no comment on any product, or on any particular
international market. At best, the January 20 "Flash Report"
revealed that Summa Four had experienced some slight negative
variances from its overall budgeted revenues and costs for
the reporting period ending December 31, 1993. Such evidence
hardly supports the inference that the demand for the SDS
switch was not increasing in the named international markets.
Moreover, the additional statement in the January
20 "Flash Report" that Summa Four's "overall International
sales and marketing efforts are currently under review and
will be revised" provides little further support for Gross's
claim. That Summa Four was reviewing its overall
international marketing efforts does not contradict the
assertion in the January 18 press release that demand for the
SDS switch was increasing in certain areas. Neither do the
later reports and meeting minutes adverted to in the amended
complaint adequately support the inference that the excerpt
from the January 18 press release was false when made.5
____________________
5. Summa Four's January Monthly Operating Report, issued
February 25, 1994, states, inter alia, that
_____ ____
[a] major reorganization of sales
responsibilities in [the company's
international operations] is planned to
take place during March. It is intended
to refocus that organization on European
opportunities and to emphasize the
development of distribution channels in
major marketplaces such as France and
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16
See, e.g., Shaw, 82 F.3d at 1223 (under Rule 9(b), a
___ ____ ____
plaintiff may not contrast a defendant's past optimism with
less favorable actual results, and then simply contend the
difference is fraud). None of these later reports or minutes
specifically reflect on demand for the SDS switch in the
China, Chile, or Colombia markets. More importantly,
although they arguably suggest that Summa Four was
experiencing growing difficulties in the management of its
international operations at the time those documents or
minutes were issued (in late February, April, and June), they
do not adequately support the inference that the company knew
of these difficulties (or that they even existed) when it
issued the January 18 press release.
3. May 3 Press Release: Misleading Omissions of
___________________________________________________
Current Facts
_____________
Gross also contends that Summa Four made several
technically accurate statements about its receipt of orders
without disclosing facts known to the company that were
____________________
Germany.
The report further states that a "corporate reorganization of
Austrel's domestic and international marketing
responsibilities has slowed completion of the Australian
opportunities."
Summa Four's March Monthly Operating Report, issued
in April 1994, indicated that the company had replaced the
Managing Director of Summa Four's European operations along
with two other members of the international management team.
In addition, an excerpt from the minutes of a June 20, 1994,
meeting indicated that Summa Four was experiencing further
difficulties in its international operations.
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necessary to make the disclosed statements not misleading.
Gross points principally to an excerpt from the May 3 press
release, stating that "[i]n the fourth quarter [ending March
31, 1994], the Company [had] received significant orders from
________ ___________ ______
AT&T, McCaw, Sprint, GTE, Unisys, and IBM to address a broad
range of applications."6 Gross contends that this statement
was materially misleading because Summa Four did not also
tell investors that, at that time, it was experiencing delays
in consummating contracts for at least one of these orders,
in receiving other orders, and in shipping products. We find
Gross's arguments unavailing.7
First, assuming arguendo that Gross has alleged
________
sufficiently particular facts to support the inference that
the company knew about the purported delays at the time it
issued the May 3 press release, we do not believe that those
alleged delays make Summa Four's statement that it had
received "significant orders" in the prior quarter materially
____________________
6. In the amended complaint, Gross never quotes the portion
of the challenged statement that expressly indicates that it
refers to orders received "[i]n the fourth quarter."
Nevertheless, in reviewing a motion to dismiss, we may
consider in its entirety a relevant document explicitly
relied on by the plaintiff in the complaint. See Shaw, 82
___ ____
F.3d at 1220; Philip Morris, 75 F.3d at 809.
_____________
7. Gross also points to an excerpt from the January 18 press
release, which noted that Summa Four had received orders from
Unisys, Sprint, IBM, DEC, Pacific Bell, USWest and AT&T. We
reject Gross's claims with regard to this statement for
essentially the same reasons that we reject his claim that
the May 3 statement was materially misleading.
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misleading. As Gross acknowledges, the statement about the
orders is not false: Gross does not contend that Summa Four
did not receive the orders. Moreover, the statement
specifically concerns past events -- the receipt of orders in
the prior quarter. We have consistently held that the fact
that a company makes an affirmative true statement about past
results does not give rise to a duty to comment on its
current status. Serabian, 24 F.3d at 361; Capri Optics
________ _____________
Profit Sharing v. Digital Equip. Corp., 950 F.2d 5, 8 (1st
______________ _____________________
Cir. 1991).
Moreover, the cases on which Gross relies for the
proposition that the failure to disclose information similar
to that alleged here was a material omission are clearly
distinguishable. For example, Gross cites Alfus v. Pyramid
_____ _______
Technology Corp., 764 F. Supp. 598, 603-04 (N.D. Cal. 1991),
________________
as holding that a company's failure to disclose, inter alia,
__________
"manufacturing delays" and "flattening sales" was an omission
sufficient to survive the company's motion to dismiss. In
Alfus, however, the public statements allegedly undermined by
_____
the nondisclosed information were more specific statements
about the company's revenue and earnings potentials than
those Gross alleges here. Where Gross only points to two
public statements concerning past orders received by Summa
Four, the statements in Alfus dealt with definite projections
_____
(e.g., "[W]e forecast total revenue growth of 40 percent, to
____
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$110-120 million. We view this as a conservative
estimate."). Id. at 602; see also In re Sunrise Technologies
___ ___ ____ __________________________
Sec. Litig., [1992 Transfer Binder] Fed. Sec. L. Rep. (CCH)
___________
97,042 (N.D. Cal. Sept. 22, 1992) (similar). In short, we do
not believe that Gross's allegations that the company knew,
but failed to disclose, that it was suffering various delays
in closing contracts, receiving orders, and shipping products
are sufficient to support a claim that its statement in the
May 3 press release about past orders received was materially
misleading. Furthermore, to the extent that the statement
that Summa Four had received "significant orders" carries a
positive implication about the its future success (viz., that
____
Summa Four received significant orders last quarter implies
that it would fill and profit from those orders this
quarter), an so might, arguably, be the basis for a duty to
update claim, we think this statement falls in the category
of vague and loosely optimistic statements that this court
has held nonactionable as a matter of law. See Glassman,
___ ________
slip op. at 49-50; Shaw, 82 F.3d at 1217-19.
____
In any event, the amended complaint does not set
forth sufficiently particular facts from which one could
reasonably infer that Summa Four knew about the alleged
delays at the time it issued the May 3 press release. Gross
first points to a March 17 report that stated both that Summa
Four had experienced "delays in resolving several customer
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issues and gaining closure on contracts [that] caused some
[revenue] slippage out of [February]" and that, due to delays
of several major orders in February, Summa Four had reduced
________
its internal bookings and revenue forecasts for the quarter
ending March 31, 1994. Both of these excerpts, however,
speak to events that occurred in February 1994 and do not
support the inference that Summa Four was continuing to
experience delays in May substantial enough to make the
statements in the May 3 press release materially misleading.
Moreover, neither do we believe that the references
in the minutes of the June 14 board meeting to delays in
orders that the company was experiencing at that time
sufficiently support the inference that Summa Four was (and
knew that it was) experiencing the alleged delays and other
difficulties at the time of the May 3 press release. The
June 14 board meeting was held five weeks after the company
issued the May 3 press release. Compare Philip Morris, 75
_______ ______________
F.3d at 812 (cannot infer that company knew statements in
prospectus concerning retail sales were false when made on
the basis that decline in sales was announced three weeks
later) with Shaw, 82 F.3d at 1224-25 (where prospectus was
____ ____
issued just eleven days prior to the end of the quarter with
disappointing results -- and three weeks prior to the actual
disclosure of the disappointing results -- the proximity in
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time, although not sufficient by itself to survive Rule 9(b),
provided some support for the fraud claims).
4. Overstatement of Revenue
____________________________
Gross also claims that Summa Four's statements
regarding its revenue and earnings during the class period
were materially misleading because, contrary to GAAP, Summa
Four recognized revenue upon receipt of orders rather than on
shipment of products. Gross claims that this premature
recognition of income allowed Summa Four to overstate
significantly its revenues and earnings during the class
period.
To support this claim, Gross alleges that, although
Summa Four typically requires twelve to twenty weeks to ship
its switches following the placement of an order, Fiedler
stated at a June 14 board meeting that the company could
generate up to $4.7 million in new revenues through the
receipt of new orders in the two weeks remaining before the
end of the quarter. Gross contends that, given the time it
takes Summa Four to fill orders, the statement is
inexplicable unless the company was recognizing revenue upon
receipt of orders instead of upon shipment. Gross finds
further corroboration for this claim in Summa Four's May 1994
board meeting minutes where it is recorded that the company's
chief financial officer was working on a new "revenue
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recognition policy" that was to be "more formalized and
somewhat more restrictive" than its previous policy.
Though these contentions give us some pause, we
nonetheless agree with the district court that Gross failed
to plead this claim with sufficient particularity for
purposes of Rule 9(b). As we have noted, "a general
allegation that the practices at issue resulted in a false
report of company earnings is not a sufficiently particular
claim of misrepresentation [to satisfy Rule 9(b)]."
Serabian, 24 F.3d at 362 n.5. In this case, Gross has failed
________
to allege any particulars to support his general allegation
of inflated earnings through the use of improper accounting
methods. Specifically, he has not alleged the amount of the
putative overstatement or the net effect it had on the
company's earnings. See Shushany v. Allwaste, Inc., 992 F.2d
___ ________ ______________
517, 522 (5th Cir. 1993) (allegation that company had
adjusted the accounting of its inventory to inflate revenues
and earnings does not sufficiently plead fraud where
complaint does not explain, inter alia, how the adjustments
_____ ____
affected the company's financial statements and whether they
were material in light of the company's overall financial
position); Roots Partnership, 965 F.2d at 1419 (allegation
__________________
that company "failed to establish adequate reserves for its
excessive and outdated inventory" does not satisfy Rule 9(b)
where investor does not allege "what the reserves were or
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suggest how great the reserves should have been"); Decker v.
______
Massey-Ferguson, Ltd., 681 F.2d 111, 116 (2d Cir. 1982)
______________________
(allegation that company's failure to write down value of
obsolete equipment does not sufficiently plead fraud where
plaintiff did not allege amounts at which equipment was
carried--or should have been carried--on company's books);
Schick v. Ernst & Young, 141 F.R.D. 23, 27 (S.D.N.Y. 1992)
______ _____________
(allegations that accountants "significantly overstated"
assets of company in prospectus did not adequately
particularize the alleged misrepresentations and omissions
where plaintiff failed to allege the amount of the purported
overstatement); cf. Cohen v. Koenig, 25 F.3d 1168, 1173 (2d
___ _____ ______
Cir. 1994) (fraud pleaded with sufficient particularity by
setting out representations made, what financial figures they
were given, and what they alleged to be the true financial
figures).
Moreover, the single statement by Fiedler during
the minutes of the June 14 board meeting is far too tenuous a
foundation (at least for Rule 9(b) purposes) to support
Gross's claim that Summa Four had fraudulently overstated its
revenue. Arguably, the statement supports a reasonable
inference that the company, or at least Fiedler, may have
contemplated booking revenue upon the receipt of orders
rather than shipment for the quarter ending on June 30, 1994;
however, we do not think that the statement, by itself, is
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sufficient to indicate that the company had actually booked
as revenue sales instead of shipments in any previous
quarter.8 Moreover, we do not think the ambiguous
statements taken from the minutes of the May 1994 board
meeting concerning review of the company's accounting system
corroborate Fiedler's June 14 statement sufficiently to
overcome the deficiencies in Gross's pleadings.9
III.
III.
____
Conclusion
Conclusion
__________
For the foregoing reasons, we affirm the judgment
affirm
______
of the district court. Costs to appellee.
Costs to appellee.
_________________
____________________
8. As with the June 29 letter, Gross would have no standing
to assert a securities fraud claim that Summa Four misstated
its revenue only for the quarter ending June 30, 1994.
9. Gross also contends that the district court erred in
refusing to consider two additional affidavits Gross filed
with the court to accompany his motion for reconsideration
pursuant to Fed R. Civ. P. 59(e). The district court refused
to consider the additional affidavits, noting that Gross had
"not demonstrated that he could not have produced this
information in response to defendant's motion to dismiss."
In that the affidavits address whether the amended complaint
adequately alleged undisclosed facts to support the inference
that a reasonable investor would have considered Summa Four's
public statements to be false and misleading -- an issue
clearly before the court on Summa Four's motion to dismiss --
we find no abuse of discretion by the district court in its
refusal to consider them. See, e.g., Williams v. Poulos, 11
___ ____ ________ ______
F.3d 271, 289 (1st Cir. 1993) (reconsideration rulings
reviewed only for abuse of discretion).
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