United States Court of Appeals

For the Eighth Circuit

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No. 15-1838

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Rand-Heart of New York, Inc.; Michael Rodolico; Ian Henderson; Antonino

Floridia; Matthew Dudevoir; David Hall; Tammy Hall, individually and on behalf

of all others similarly situated

lllllllllllllllllllll Plaintiffs - Appellants

v.

James P. Dolan; Vicki J. Duncomb

lllllllllllllllllllll Defendants - Appellees

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Appeal from United States District Court 

for the District of Minnesota - Minneapolis

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 Submitted: November 17, 2015

 Filed: February 10, 2016

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Before SMITH, BYE, and BENTON, Circuit Judges.

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BENTON, Circuit Judge.

Rand-Heart of New York, Inc. brought a putative class action on behalf of

purchasers of Dolan Company’s securities between August 1, 2013 and January 2,
2014, under Sections 10(b) and 20(a) of the Securities Exchange Act. The District

Court dismissed for failure to state a claim under Federal Rule of Civil Procedure

12(b)(6). Having jurisdiction under 28 U.S.C. § 1291, this court reverses.

I.

DiscoverReady—a subsidiary of Dolan Company—performed litigation

support, working mostly for Bank of America. In May or June 2013, Bank of

America met with James P. Dolan (CEO of Dolan Company) and other

DiscoverReady representatives. Bank of America noted concerns about Dolan

Company’s finances, suspended discussions about a possible colocation agreement,

and indicated it would send no new work to DiscoverReady until the financial

concerns were resolved. A DiscoverReady representative stated, “It was our

impression and our understanding that in order to continue to do work with the Bank

of America, we have to take care of The Dolan Company’s financial problems.” 

Dolan reported what transpired at the meeting to Dolan Company’s Board of

Directors, which proceeded to authorize DiscoverReady for sale. Bank of America

stopped sending new work to DiscoverReady in June. 

On August 1, Dolan Company issued a press release announcing its financial

resultsfor the second quarter ending June 30, 2013. It reported a net loss of $4.62 per

share, on revenues of about $47 million. It announced a plan to sell assets in order

to raise cash, but also reported that DiscoverReady revenues had grown by 18%. 

Dolan Company also released a Form 10-Q, which stated:

In order to operate profitably on a continuous basis in the

future, the Company must increase revenue and eliminate

costs to achieve and maintain positive operating

margins. . . . The Company’s ability to generate sufficient

cash flows in 2013 has been negatively impacted by the

business challengesin its mortgage default foreclosure and

public notice business. These challenges make it probable

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that the Company will be unable to comply with certain of

its financial covenants in its senior secured credit facility

as measured on the last day of the third quarter of 2013. 

The Company is currently in discussions with its lenders

regarding resetting the financial covenants applicable to

the third quarter and future periods. Any failure to comply

with these covenants in the future may result in an event of

default. . . . If the Company is unable to repay such

indebtedness, the banks could foreclose on these assets.

Also on August 1, Dolan spoke with stock analysts. The District Court found

actionable for fraud the italicized statements during the conference:

For 2013, we expect both DiscoverReady and the litigation

support segment to grow at double-digit rates over the

prior year with positive EBITDA leverage. However, we

must point out that we expect DiscoverReady’s third

quarter revenues to be below last year’s all time record

revenue quarter. 

We make this comment not to dampen enthusiasm about

our growth prospects for DiscoverReady, but to set proper

expectations for a business that may experience lumpiness

on a quarter-to-quarter basis.

Asked to elaborate about “lumpiness,” Dolan stated:

Well, it’s hard to be very specific about the lumpiness now

without getting into details we normally do not

disclose. . . . We had a number of matters that were in

works in the first half [of 2013], all of which made for a

very strong quarter. We don’t see those right now in the

second half of the year but these things do come and they

come sometimes unexpectedly, sometimes quickly. So

given the lack of forward visibility on this kind of

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business, we have to be cautious in how we describe

things.

On November 12, 2013, Dolan issued a press release and filed its Form 10-Q

ending September 30. The 10-Q reported that the decline in revenue “exceeded our

expectations,” largely due to “a reduction in new work from [DiscoverReady’s]

largest customer, a reduction that we identified towards the end of the quarter. We

believe this reduction resulted from the customer’s evaluation of the Company’s

overall financial condition.” The closing price for DolanCompany stock fell to $2.08

on November 11, to $1.05 on November 12, to $0.90 on November 13.

On January 2, 2014, Dolan Company issued a final press release announcing

the appointment of a Chief Restructuring Officer and a Continuing Listing Standards

Notice from the New York Stock Exchange. Share prices then fell by $0.14. In

March, Dolan Company filed a Chapter 11 bankruptcy.

II.

Section 10(b) of the Act makes it unlawful “to use or employ, in connection

with the purchase or sale of any security . . . any manipulative or deceptive device or

contrivance in contravention ofsuch rules and regulations asthe [SEC] may prescribe

as necessary or appropriate in the public interest or for the protection of investors.” 

15 U.S.C. § 78j(b). “SEC Rule 10b-5 implements [§ 10(b)] by making it unlawful

to, among other things, ‘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.’” Matrixx

Initiatives, Inc. v. Siracusano, 563 U.S. 27, 36 (2011), quoting 17 C.F.R. § 240.10b5(b). Section 10(b) and Rule 10b-5 claims require the claimant to show

(1) misrepresentations or omissions of material fact or acts that operated as a fraud

or deceit in violation of the rule, (2) loss-causation, (3) scienter, and (4) economic

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harm. In re K-telIntern., Inc. Sec. Litig., 300 F.3d 881, 888 (8th Cir. 2002). Section

20(a) imposes secondary liability on every person “who, directly or indirectly,

controls any person liable under any provision ofthis chapter or any rule or regulation

thereunder. . . .” 15 U.S.C. § 78t(a). 

Rand-Heart brought a class action suit alleging Dolan made material

misrepresentations and omissions about DiscoverReady’s financial stability. It

alleged a class-period of August 1, 2013 through January 2, 2014. The district court

granted Dolan’s motion to dismiss both the § 10(b) and § 20(a) claims. It found that

Rand-Heartfailed to allege scienter under § 10(b) and Rule 10b-5, thereby precluding

secondary liability under the control-person theory of § 20(a). It further held RandHeart failed to establish loss-causation for the period between November 12, 2013

and January 2, 2014. The district court also denied Rand-Heart’s motion to amend

the complaint.

This court reviews de novo the dismissal of a complaint for failure to state a

claim. In re K-telIntern., 300 F.3d at 888-89. To allege a securities-fraud claim, the

complaint must “specify each statement alleged to have been misleading, the reason

or reasons why the statement is misleading, and if an allegation regarding the

statement or omission is made on information and belief, the complaint shall state

with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). 

The complaint is construed liberally, all factual allegations taken as true, but

“conclusory or catch-all assertions of law and unwarranted inferences” are rejected. 

In re K-Tel Intern., 300 F.3d at 889. This court may consider the pleadings,

materials embraced by the pleadings, and public records. Id. 

A.

Rand-Heart argues the district court erred in finding inadequate allegations of

scienter. The complaint must “state with particularity facts giving rise to a strong

inference that the defendant acted with the requisite state of mind.” 15 U.S.C. § 78u-

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4(b)(2). Inferences of scienter must be “at least as compelling as any opposing

inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551

U.S. 308, 314 (2007). The question “is whether all of the facts alleged, taken

collectively, give rise to a strong inference of scienter, not whether any individual

allegation, scrutinized in isolation, meets that standard.” Id., quoted in Minneapolis

Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc., 641 F.3d 1023,

1029 (8th Cir. 2011). 

Scienter can be established by a deceitful or manipulative state of mind, severe

recklessness, or motive and opportunity. In re K-Tel Intern., 300 F.3d at 893. The

district court found no motive, noting Dolan never sold his shares of the company

stock. See Fla. State Bd. of Admin. v. Green Tree Financial Corp., 270 F.3d 645,

661 (8th Cir. 2001) (“[T]he magnitude of [the CEO’s] compensation package,

together with the timing coincidence of an overstatement of earnings at just the right

time to benefit [the CEO], provides an unusual, heightened showing of motive to

commit fraud.”). This does not end the inquiry. However, “without a showing of

motive or opportunity ‘other allegations tending to show scienter would have to be

particularly strong in order to meet the [Act’s] standard.” In re K-Tel Intern, 300

F.3d at 894 (internal citations omitted), quoting id. at 660. 

Rand-Heart maintains it adequately pled scienter by alleging that Dolan had

been severely reckless. Severe recklessness is defined as “highly unreasonable

omissions or misrepresentations involving an extreme departure from the standards

of ordinary care, and presenting the danger of misleading buyers or sellers which is

either known to the defendant or is so obvious that the defendant must have been

aware of it.” Id. at 893 (internal quotations omitted). 

Rand-Heart first argues Dolan acted recklessly in making two omissions of

material fact: that Bank of America (1) suspended discussions of a colocation

agreement and (2) demanded restructuring. “Silence, absent a duty to disclose, is not

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misleading under Rule 10b-5.” Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17

(1988), quoted in MEMC, 641 F.3d at 1029. Disclosure is required “only when

necessary to make statements made, in the light of the circumstances under which

they were made, not misleading.” MEMC, 641 F.3d at 1028, quoting 17 C.F.R.

§ 240.10b-5(b). Dolan never publicly spoke about the failed colocation agreement,

nor the restructuring demand. The question is whether these alleged omissions made

statements about the Company’s financial state “misleading.”

Dolan warned of the Company’s precariousfinancialstate during the August 1

conference call and in the Form10-Q. On the call, he forecasted low third-quarter

revenues, explaining that the Company “had a number of matters that were in works

for the first half [of 2013]” no longer at play “in the second half of the year. . . .” The

Form 10-Q stated “to operate profitably on a continuous basis in the future, the

Company must increase revenue and eliminate costs” and financial challenges “make

it probable that the Company will be unable to comply with certain of its financial

covenants.” It further cautioned, “If the maturity of the indebtedness is accelerated,

sufficient cash resources to satisfy the debt obligations may not be available and the

Company may not be able to continue operations as planned.” (Emphasis added). 

“Cautionary language which relates directly to that which the Plaintiffs claimto have

been mis[leading], if sufficient, renders the alleged misrepresentation or omissions

immaterial as a matter of law.” In re AMDOCS Ltd. Sec. Litig., 390 F.3d 542, 548

(8th Cir. 2004). Due to these disclosures of the company’s financial problems, this

court does “not believe the inference of scienter is as compelling as the more

innocent, simpler inference that [Dolan] did not believe [he] had a continuing duty

to disclose information. . . .” MEMC, 641 F.3d at 1030, citing Tellabs, 551 U.S. at

324. 

Rand-Heart next argues that Dolan wasrecklessin failing to disclose that Bank

of America had stopped sending new work to DiscoverReady in May or June 2013. 

Bank of America was DiscoverReady’s biggest client, providing over 50% of

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DiscoverReady’s work. In the second half of 2013, however, Bank of America work

sharply declined. The complaint quoted DiscoverReady’s Chief Operating Officer’s

acknowledgment: “We were, our work, our revenues were dropping and our case

origination had dropped, as I said earlier, to almost nothing from Bank of America.”1

By May or June 2013, DiscoverReady had “completed a large document review

project for Bank of America” immediately causing “great concerns.” This decline

prompted the Company’s Board in June 2013 to “authorize the marketing of

DiscoverReady for sale.” Taking these allegations astrue, DiscoverReady’s financial

instability caused by the decline in Bank of America was, at the least, “so obvious

that [Dolan] must have been aware of it.” In re K-tel Intern, 300 F.3d at 893. The

facts pled are sufficient to survive a motion to dismiss. 

B. 

Dolan maintainsthat his August 1 statements about “double-digit” growth and

“lumpiness” are protected by the Act’s safe-harbor provision. A “forward-looking

statement” is not actionable for fraud if immaterial, accompanied by “meaningful

cautionary language,” or made without actual knowledge that it was false or

misleading. Julianello v. K-V Pharmaceutical Co., 791 F.3d 915, 920 (8th Cir.

2015), citing 15 U.S.C. § 78u-5(c)(1). 

At oral argument, counsel for Dolan argued this statement (from page 49 of 1

the transcript) addresses information the COO had in September, after the allegedly

misleading statements in August. Counsel pointed to a quote from page 104 of the

transcript—“So revenues started to fall probably in September, is my recollection,

and through the fall and into the New Year.” However, the Complaint’s statement

(in-text) answered a question about revenue declines during “the second half of

2013.” It is not clear that the quote on page 104 provides the context for the broad

statement about revenues falling in the second half of 2013 on page 49. This issue

may be addressed at the summary judgment stage.

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Even if the statements were “forward-looking,” Dolan’s argument fails. 

Statements about DiscoverReady’s expected performance are not immaterial, and the

complaint sufficiently alleges Dolan had actual knowledge that the statements were,

at least, misleading. Additionally, the statements were not accompanied with

“meaningful cautionary language.” Dolan cites as cautionary language the following

excerpts from the 2012 Form 10-K, filed on March 8, 2013: 

Our failure to comply with the covenants in our debt

instruments could result in an event of default that could

adversely affect our financial condition and ability to

operate our business as planned if we are not successful in

obtaining a waiver of our failure to comply with our

covenants.

. . . .

DiscoverReady’s business revenues have traditionally been

concentrated among a few customers and if these large

repeat customers choose to manage their discovery with

their own staff or with another provider and if we are

unable to develop new customer relationships, our

operating results and the ability to execute our growth

strategy at DiscoverReady may be adversely affected. 

Even if cautionary, these excerpts are not meaningfully cautionary; they are not

“company-specific warnings based on a realistic description of the risks applicable

to the particular circumstances. . . .” Id. at 922. Rather, the excerpts are “merely a

boilerplate litany of generally applicable risk factors.” Id. Dolan’s statements are not

protected by the Act’s safe-harbor provision.

The district court erred in dismissing the § 10(b) and Rule 10b-5 claim for

failure to state a claim, and thus also erred in dismissing secondary liability claim

under § 20(a).2

Rand-Heart contends it should have been permitted to amend the complaint. 

2

The request to amend stated, “If this Court isinclined to grant Defendants’ motion [to

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III.

Rand-Heart argues the district court erred in finding no loss-causation for the

period between November 12, 2013 and January 2, 2014. “Loss causation in a

securities fraud case is analogous to the common law’s requirement of proximate

causation. The plaintiff must show that the loss wasforeseeable and that the loss was

caused by the materialization of the concealed risk.” McAdams v. McCord, 584 F.3d

1111, 1114 (8th Cir. 2009) (internal citations omitted). “A complaint must ‘provide

a defendant with some indication of the loss and the causal connection that the

plaintiff has in mind.’” Id., quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 347

(2005). The securities statutes make fraud actions available “not to provide investors

with broad insurance against market losses, but to protect them against those

economic losses that misrepresentations actually cause.” Dura Pharm, 544 U.S. at

345. See also 15 U.S.C. § 78u-4(b)(4) (requiring plaintiffs to prove the defendant

“caused the loss”). 

 

According to Rand-Heart’s fraud-on-the-market theory, Dolanmisled investors

in August by concealing information about the lack of new Bank of America work

and the need to restructure. Dolan fully disclosed on November 12, 2013, telling

securities analysts that litigation support revenues “decreased primarily as a result of

a reduction in new work from DiscoverReady’s largest customer.” Dolan believed

the reduction “resulted from the customer’s evaluation of the Company’s overall

financial condition.” On that same day, Dolan Company’s Form 10-Q stated that

Discover Ready’s third quarter revenues “decreased primarily asthe result of a period

of reduced work from [its] largest customer.” The 10-Q reported an amended credit

agreement, requiring $50 million more in cash “through one or more liquidity

dismiss], Plaintiffs respectfully request that any such dismissal be without prejudice

to their ability to cure any defects via amendment.” Because the dismissal is

reversed, this court need not consider whether the district court properly denied leave

to amend the complaint.

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transactions separate from its operating activities, such as a sale of assets or issuance

of equity or subordinated debt, by March 31, 2014. . . .” The stock price fell to $2.08

on November 11, to $1.05 on November 12, to $0.90 on November 13. 

Despite the November 12 disclosures, Rand-Heart contends the fraud was not

fully revealed until a January 2 press release announcing the new restructuring

officer. The stock price then fell by $0.14 (20%). A drop in stock price is not

necessarily caused by an earlier misrepresentation. Lower stock prices “may reflect,

not the earlier misrepresentation, but changed economic circumstances, changed

investor expectations, new industry-specific or firm-specific facts, conditions, or

other events, which taken separately or together account for some or all of that lower

price.” Dura Pharm, 544 U.S. at 343. Rand-Heart must show that Dolan’s

fraud—“and not other events”—caused the price to fall after the January 2 press

release. See Schaaf v. Residential Funding Corp., 517 F.3d 544, 550 (8th Cir.

2008). 

Nothing in the January 2 press release corrects previous misrepresentations. 

“Corrective disclosures must present facts to the market that are new, that is, publicly

revealed for the first time, because, if investors already know the truth, false

statements won’t affect the price.” Katyle v. Penn Nat. Gaming, Inc., 637 F.3d 462,

473 (4th Cir. 2011) (internal quotations omitted). Announcing the appointment of a

restructuring officer on January 2 does not correct a misrepresentation; it elaborates

on the previously disclosed plan to restructure. “In the financial markets, not every

bit of bad news that has a negative effect on the price of a security necessarily has a

corrective effect for purposes of loss causation.” Meyer v. Greene, 710 F.3d 1189,

1202 (11th Cir. 2013). See also In re Williams Sec. Litig.-WCG Subclass, 558 F.3d

1130, 1140 (10th Cir. 2009) (“To be corrective, the disclosure need not precisely

mirror the earlier misrepresentation, but it must at least relate back to the

misrepresentation and not to some other negative information about the company.”). 

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The district court did not err in finding no loss-causation for the period

between November 12 and January 2.

* * * * * * * 

The district court’s decision is affirmed in part, reversed in part, and remanded

for proceedings consistent with this opinion.

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