# U ni te d S ta te s Co ur t of A pp ea ls

For the Eig hth Circu it

__ __ __ __ __ __ __ __ __ __ __ __ __ _

No. 1 5- 18 38

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Ran d- Heart of Ne w York , Inc .; Mi ch ael Ro do li co ; Ia n Hen de rs on ; An to ni no Fl or id ia ; M at th ew Dud ev oi r; Da vi d Hal l; Tam m y Hall , in di vi du al ly and on be ha lf
of all ot he rs si m il arl y

si tu at ed

ll ll ll ll ll ll ll ll ll ll l Pla in ti

ff s - Ap pe ll an ts

v.

Ja m es P. Dol an ; Vi ck i J . Dun co m b

ll ll ll ll ll ll ll ll ll ll l Defe nd

an ts - App el le es

__ __ __ __ __ __
App eal fro m

Uni te d S ta te s Di st ric t Co ur t fo r th e Dis tri ct of M in ne so ta - Mi nn eap ol is

__ __ __ __ __ __

Su bm it te d: Nov em

be r 17 , 20 15
Fil ed : Fe br

ua ry 10 , 20 16

__ __ __ __ __ __

Befo re SM ITH, BYE, and BENTON, Circu it Ju dg es

.

__ __ __ __ __ __

BENTON, Circu it Ju dg e.

Ran d

- H eart of New Yor k, In c. br ou gh t a pu ta ti ve cl as s act io n on be ha lf of

pu rch as ers of Dol an Co m pa ny’ s se cu rit ie s be twee n Aug us t 1, 20 13 an d Ja nu ary 2,2 01 4, un de r Sect io ns 10 (b ) an d 20 (a) of th e Secu rit ie s Exc ha ng e Act. The Dis tri c t

Co ur t d i s mi s s e d fo r fai lu re to st at e a cl ai m un de r Fed eral Ru le of Ci vi l Pro ced ur e

12 (b )(6 ). Havi ng juri sd ic ti on un de r 28 U.S.C. § 1 29 1, t hi s co ur t re ve rs es

.

I.

Dis co ve rRea d y—a su bs id ia ry of Dol an Co m pa ny—pe rfo rm ed li ti ga ti on

su pp or t, wor ki ng m os tl y fo r Ban k of Am eri ca. In May or Ju ne 20 13

, Ban k of

Am eri ca m et wit h Ja m es P. Dol an (CEO of Dol an Co m pa ny) a n d o t h er
Dis co ve rRea dy rep res en ta ti ve s. Ban k o f A mer ic a no te d co nc ern s ab ou t Dol an

Co m pa ny’ s fin an ces , su sp en de d di sc us si on s ab ou t a po ss ib le co lo cat io n ag reem en t,

a n d in di cat ed it wou ld se nd no ne w wor k to Dis co ve rRea dy un ti l th e fin an ci a l

co nc ern s were res ol ve d. A Dis co ve rRea dy rep res en ta ti ve st at ed

, “It was ou r

im pr es si on an d ou r un de rs ta nd in g th at in or de r to co nt in ue to do wor k wit h th e Ban k

of Am eri ca, we ha ve to ta ke care of The Dol an Co m pa ny’ s f i n a n ci al pr ob le m s.”

Dol an r e p o r t e d wha t tra ns pi red at th e m eet in g to Dol an Co m pa ny’ s Bo ard of

Dire ct or s, wh ic h p ro ceed ed to au th or iz e Dis co ve rRea dy for s al e. Ban k of Am eri ca

st op pe d s en di ng ne w work to Dis co ve rRea dy in J un e.

On Aug us t 1, Dol an Co m pa ny is su ed a pr es s rel eas e an no un ci ng it s fin an ci al

res ul ts fo r th e se co nd qu art er en di ng Ju ne 30

, 20 13

. It rep or te d a ne t lo ss of $4 .62 pe r
sh are, o n re ve nu es of a bo ut $4 7 m il li on

. It an no un ced a pl an to se ll as se ts in ord er

to rai se cas h, bu t al so rep or te d th at Dis co ve rRea dy rev en ue s ha d gr own by 18 %.

Dol an Co m

pa ny als o re le as ed a Fo rm 10 -Q, whi ch st at ed :

In or de r to op erat e p ro fit ab ly on a co nt in uo us ba si s in th e fu tu re, t he Co m

pa ny m us t i nc reas e rev en ue an d e li m in at e

co st s to ach ie ve an d m ai nt ai n po si ti v e op erat in g

m arg in s. . .

. The Co m

pa ny’ s abi li ty to ge ne rat e su ffi ci en t

cas h f l ows in 20 13 ha s be en ne ga ti ve ly im pa ct ed by th e bu si ne ss ch al le ng es in it s m or tg ag e de fau lt fo recl os ur e an d

pu bl ic no ti ce bu si ne ss

. The se ch al le ng es m ak e it pr ob ab le

-2

-th at th e Co m pa ny wil l be un ab le to co m pl y wit h cert ai n of
it s fin an ci al co ve na nt s in it s se n i o r s ecu red cred it faci li ty

as m eas ur ed on th e l as t da y of th e th ird qu art er of 20 13

. The Co m pa ny is cu rren tl y in di sc us si on s wit h it s le nd ers
reg ard in g res et ti ng th e fin an ci al co ve na nt s ap pl ic ab le to th e th ird qu art er an d fu tu re pe rio ds

. Any fai lu re to co m pl y wit h th es e co ve na nt s in th e fu tu re m ay res ul t in an ev en t of
de fau lt

. . . . If th e Co m pa ny is un ab le to rep ay su ch
in de bt ed ne ss , th e b an ks co ul d fo recl os e o n t he se ass et s.

Als o on Aug us t 1, Dol an sp ok e wit h st oc k an al y st s. Th e Dis tri ct Co ur t fo un d

act io na bl e fo r frau d t he it al ic iz ed st at em en ts du rin g t he co nf eren ce:

For 20 13

, we exp ect bo th Dis co ver Rea dy an d th e li ti

ga ti on

su pp or t se gme nt to gr o w at do ub le -d ig it ra te s ov er th e

pr io r yea r wi th po si ti ve EBITDA le ver ag e. Howev er, we

m us t p o in t ou t th at we ex pe ct Dis co ve rRea dy’ s th ird

qu art er r e v e n u es to be be lo w la st y ear’s al l ti m e reco rd

rev en ue qu art er.

W e mak e t hi s co mment no t to da mpe n en th us ia sm ab ou t

ou r gr ow th pr os

pe ct s fo r Dis co ver

Rea dy

, bu t to se t pr op er

exp ect at io ns fo r a bu si ne ss th at may exp er ie nc e lu mpi ne ss

on a q ua rt er -to -q ua rt er

ba si s.

Ask ed to ela bo rat e ab ou t “ lu m pi ne ss ,” Dol an st at ed :

W el l, it ’s ha rd to be ve ry sp eci fic ab ou t th e lu m pi ne ss no w wit ho ut ge tt in g in to de ta il s we no rmall y do no t di sc lo se

. . . . W e ha d a nu m b e r o f mat te rs th at were in

wor ks in th e fir st ha lf [o f 20 13 ], al l of whi ch m ad e fo r a

ve ry st ro ng qu art er. We do n’t se e th os e rig ht no w in th e

se co nd ha lf of th e y ear bu t t he se th in gs do co m e an d th ey

co m e s om et im es un ex pe ct ed ly, so m et im es qu ic kl y

. So gi ve n th e la ck of fo rward vi si bi li ty on th is ki nd of

-3

-bu si ne ss , we ha ve to be cau ti ou s in ho w we de sc rib e th in gs

.

On Nov em

be r 12

, 20 13

, Dol an is su ed a pr es s rel eas e an d fil ed it s Form 10 -Q

en di ng Sep te m

be r 30

. The 10 -Q rep or te d th at th e de cl in e in rev en ue “ ex ceed ed ou r

ex pe ct at io ns ,” la rg el y du e t o “a r ed uc ti on in ne w wor k fro m [Dis co ve rRea dy’ s]

la rg es t cu st om er, a red uc ti on th at we id en ti fie d to ward s th e en d o f th e q ua rte r. W e
b e l i ev e th is red uc ti on res ul te d fro m th e cu st om er’s ev al ua ti on of th e Co m pa n y’s

ov eral l fin an ci al co nd it io n.” The cl os in g pr ic e fo r Dol an Co m pa ny st oc k fel l to $2 .08

on Nov em

be r 11 , to $1 .05 on Nov em be r 12 , to $0 .90 on Nov em be r 13

.

On J an ua ry

2, 2 01 4, Do la n C om

pa ny iss ue d a fin al pre ss rel eas e an no un ci ng

th e ap po in tm en t of a Ch ie f Res tru ct ur in g Offi cer an d a Co nt in ui ng Lis ti ng St an da rd s

Not ic e fro m th e New Yor k St oc k Exc ha ng e. S h a r e p ric es th en fel l by $0 .14

. In

Mar ch , Dol an Co m

pa ny file d a Ch ap te r 11 ba nk ru pt cy

.

II.

Sect io n 10 (b ) of th e Act m ak es it un la wfu l “ to us e or e mp l o y, i n c on ne ct io n
wit h th e pu rch as e or sa le of an y se cu rit y

. . . an y m an ip ul at iv e or de cep ti ve de vi ce or

co nt riv an ce in co nt rav en ti on of su ch ru le s an d reg ul at io ns as th e [SEC] m ay pr es cri be

as ne ces sa ry

or a pp ro pr ia te in th e pu bl ic in te res t o r fo r th e p ro te ct io n o f in ve st or s.”

15 U.S.C. § 78 j(b)

. “ SEC Ru le 10 b- 5 i mp l em en ts [§ 10 (b )] b y m ak in g it un la wfu l

to

, am on g ot he r th in gs , ‘m ak e an y u n t r u e s ta te m en t of a m at eri al fact or to om it to

s t a t e a m at eri al fact ne ces sa ry in or de r to m ak e th e st at em en ts m ad e, in th e li g h t o f

th e ci rcu m st an ces un de r whi ch th ey were m ad e, no t m is le ad in g.’” Ma tr ix x

In it ia ti ves , In c. v. Si ra cus an o , 56 3 U.S. 27

, 36 (2 01 1)

, qu ot in g 17 C.F.R. § 24 0.1 0b

5( b)

. Sect io n 10 (b ) an d Ru le 10 b- 5 cl ai m s req ui re th e cl ai m an t t o s ho w (1 ) m is re p r e s e nt at io ns or om is si on s of m at eri al fact or act s th at op erat ed as a frau d

or de cei t in vi ol at io n o f t h e r u le

, (2 ) lo ss -cau sa ti on , (3 ) sc ie nt er, an d (4 ) eco no m ic

-4

-ha rm

. In re K-t el In te rn ., In c. Sec. Lit

ig

. , 30 0 F.3 d 88 1, 88 8 (8 th Ci r. 20 02 ). Sect io n

20 (a) im po se s se co nd ary li ab il it y on ev ery pe rs on “ who

, di rect ly or in di rect ly,

co nt ro ls an y pe rs on li ab le un de r an y pr ov is io n of th is ch ap te r or an y ru le or reg ul at io n

th ereu nd er. . . .” 15 U.S.C. § 78 t(a )

.

Ran d- Heart b r o u gh t a cl as s act io n su it al le gi ng Dol an m ad e m at eri al

m is r e pr es en ta ti on s an d om is si on s ab ou t Dis co ve rRea dy’ s fin an ci al st ab il it y

. It

al le ge d a cl as s- pe rio d of Aug us t 1, 20 13 th ro ug h Ja nu ary 2, 20 14

. The di st ric t co ur t

gr an te d Dol an ’s m ot io n to di sm is s bo th th e § 10 (b ) an d § 20 (a) cl ai m s. It fo un d th at

Ran d- Heart fai le d to al le ge sc ie nt er un de r § 10 (b ) an d Ru le 10 b- 5, th ereb y pr ecl ud in g

se co nd ary li ab il it y un de r th e co nt ro l-p ers on th eo ry of § 20 (a). It fu rth er he ld Ran dHeart fai le d to es ta bl is h lo ss -cau sa ti on fo r th e pe rio d be twee n Nov em be r 1 2

, 2 0 13

an d Ja nu ary 2 , 2 01 4. The di st ric t co ur t al so de ni ed Ran d- Heart ’s m ot io n to am en d

th e co m pl ai nt

.

Thi s co ur t rev ie ws de no vo th e di sm is sa l of a co m pl ai n t f o r f a i l u re to st at e a

cl ai m

. In re K-t

el In te rn

. , 30 0 F.3 d at 88 8- 89

. To al le ge a se cu rit ie s- frau d cl ai m , th e

co m pl ai nt m us t “ sp eci fy each st at em en t al le ge d to ha ve be en m is le ad in g, th e reas on

or reas on s why th e st at em en t is m i s l e a d i n g, an d if an al le ga ti on reg ard in g th e

st at em en t or om is si on is m ad e on in fo rm at io n an d be li ef, th e co m pl a i n t s h a l l st at e

wit h pa rti cu la rit y al l fact s on whi ch th at be li ef is fo rm ed .” 15 U.S.C. § 78 u-4 (b)( 1)

. The co m pl ai nt is co ns tru ed li be ral ly, al l fact ua l al le ga ti on s ta ke n as tru e, bu t

“ co nc lu so ry or cat ch -al l as se rti on s of la w an d un warra nt ed in fere nc es ” are reject ed

. In re K-Tel In te rn

. , 30 0 F.3 d at 88 9. Thi s co ur t m ay co ns id er th e pl ead in gs ,

m at eri al s embrace d b y

th e p le ad in gs , and pu bl ic reco rd s. Id

.

A.

Ran d- Heart arg ue s th e di st ric t co ur t erre d in fin di ng in ad eq ua te al le ga ti on s of

sc ie nt e r

. The co m

pl ai nt m us t “ st at e wit h pa rti cu la rit y fact s gi vi ng ris e to a st ro ng

in fere nc e th at th e de fen da nt act ed wit h th e req ui si te st at e of m in d.” 15 U.S.C. § 78 u-

-5

-4( b)(2 )

. In fere nc es of sc ie nt er mu s t be “ at le as t as co m pe ll in g as an y op po si ng

in fere nc e of no nf

rau du le nt in te nt .” Tell

ab s, In c. v. Ma ko r Is su es & Ri gh ts , Ltd

. , 55 1

U

. S

. 30 8, 31 4 (2 00 7)

. The qu es ti on “ is whe th er al l of th e fact s al le ge d, ta k e n

co ll ect iv el y , gi ve ris e to a st ro ng in fere n c e o f s c ie nt er, no t whe th er an y in di vi du al

al le ga ti on , sc ru ti ni zed in is ol at io n, m eet s th at st an da rd .” Id

. , qu ot ed in Mi

nnea po li s

Fi re fig ht er s’ Rel ie f As s’ n v. MEM

C El ect ro ni c Ma te ri al

s, In c. , 64 1 F.3 d 10 23

, 10 29 (8t h C ir. 2 01 1)

.

Sci en te r can be es ta bl is he d by a de cei tfu l or m an ip ul at iv e st at e of m in d, se ve re

reck le ss ne ss , or m ot iv e an d op po rtu ni ty. In re K-Tel In te rn

. , 30 0 F.3 d at 89 3. The

di st ric t co ur t fo un d no m ot iv e, n o t i n g Dol an ne ve r so ld hi s sh ares of th e co m pa ny

st oc k. Se e Fl

a. St at e Bd . of Adm in

. v. Gre en Tree Fina nci al Co rp

. , 27 0 F.3d 64 5,

66 1 (8 th Ci r. 20 01 ) (“ [T]he m ag ni tu de of [t h e CEO’s] co m pe ns at io n pa ck ag e,

to ge th er wit h th e ti m in g co in ci de nc e of an ov ers ta te m en t of earn in gs at jus t th e rig ht

ti me to be ne fit [th e CEO], pr ov id es an un us ua l, he ig ht en ed sh owi ng of m ot iv e to

co m m it frau d.” ). Thi s do es no t en d th e in qu ir y. H o w e v e r, “ wit ho ut a sh owi ng of

m ot iv e or op po rtu ni ty ‘oth er al le ga ti on s te nd in g to sh ow sc ie nt er wou ld ha ve to be

pa rti cu la rly st ro ng in or de r t o mee t th e [Act ’s] st an da rd .” In re K-Tel In te rn , 30 0

F.3 d a t 8 94 (in te rn al cit at io ns om it te d)

, qu ot in g id

. at 6 60

.

Ran d- Heart m ai nt ai n s i t ad eq ua te ly pl ed sc ie nt er by al le gi ng th at Dol an ha d

be en se ve rel y rec k l e s s

. Sev ere reck le ss ne ss is de fin ed as “ hi gh ly un reas on ab le

om is si on s or m is rep res en ta ti on s in vo lv in g an ext rem e de pa rtu re from th e st an da rd s

of or di na ry care , and pre se nt in g th e da ng er of m is le ad in g bu y ers or se ll ers whi ch is

ei th er kn own to th e de fen da nt or is so ob vi ou s th at th e de fen da nt m u s t h a v e b een

aware of i t.” Id

. at 8 93 (in te rn al qu ot at io ns om it te d)

.

Ran d- Heart fir st arg ue s Dol an act ed re c k l e ss ly in m ak in g two om is si on s of

m at eri al fact : th at Ban k of A m eri ca (1 ) su sp en de d di sc us si on s of a co lo cat io n

ag reem en t an d (2 ) de m an de d res tru ct ur in g. “ Si le nc e, ab se nt a du ty to di sc lo se , is no t

-6

-m i s l e a d i ng un de r Ru le 10 b- 5.” Ba si c In c. v. Levi ns on , 48 5 U.S. 22 4, 23 9 n.1 7

(1 98 8)

, qu ot ed in MEM

C

, 64 1 F.3 d at 10 2 9

. D is cl os ur e is req ui red “ on ly whe n

ne ces sa ry to m ak e st at em en ts m ad e, in th e li gh t of th e c i rcu m st an ces un de r whi ch

th ey w e re m ad e, no t m is le ad in g.” MEM C

, 64 1 F.3 d at 10 28

, qu ot in g 17 C.F.R.
§ 24 0.1 0b -5 (b)

. Dol an ne ve r pu bl ic ly sp ok e ab ou t th e fai le d co lo cat io n ag reem en t,

no r th e res tru ct ur in g de m an d. The qu es ti on is whe th er th es e al le ge d om is si on s m ad e

st at em en ts ab ou t t he Co m pa ny’ s fi na nc ia l s ta te “ m is le ad in g.”

Dol an warn ed of th e Co m pa ny’ s pr ecar io us fin an ci al st at e du rin g th e Aug us t 1

co nf eren ce cal l an d in th e Fo rm 10 -Q. On th e cal l, he fo reca st ed lo w th i r d

- q u a rte r

rev en ue s, ex pl ai ni ng th at th e Co m pa ny “ ha d a nu m

be r of m at te rs th at were in wor ks

fo r th e fir st ha lf [o f 20 13 ]” no lo ng er at pl ay “ in th e se co nd ha lf of th e y ear.

. . .” The

Fo rm 10 -Q st a t e d “t o op erat e pr of it ab ly on a co nt in uo us ba si s in th e fu tu re, th e

Co m pa ny m us t in crea se rev en ue an d el im in at e co st s” an d fin an ci al ch al le ng es “ m ak e

it pr ob ab le th at th e Co m

pa ny wil l be un ab le to co m pl y wit h cert ai n of it s fin an ci al

co ve na nt s.” It fu rth er cau ti on ed

, “ If th e m at ur it y of th e in de bt ed ne ss is acce le rat ed

,

su ffi ci en t cas h res ou rces to sa ti sf y th e de bt ob li ga ti on s m ay no t be av ai la bl e an d th e

Co mpa ny may no t b e a b le to co nt in ue op er at io ns as pl an ne d. ” (Em ph as is ad de d)

.

“ Cau ti on ary la ng ua ge whi ch rel at es di rect ly to th at whi ch th e Pl ai nt iff s cl ai m to ha ve
be en m is [le ad in g], i f su ffi ci en t, r e n d e r s th e al le ge d m is rep res en ta ti on or om is si on s

im m at eri al as a m at te r of la w.” In re AMDOCS Ltd

. Sec. Liti g. , 39 0 F.3d 54 2, 54 8
(8 th Ci r. 20 04 ). Due t o t he se di sc lo su res of t he co m pa ny’ s fi na nc ia l pro bl em s, thi s

co ur t do es “ no t b e l i ev e th e in fere nc e of sc ie nt er is as co m pe ll in g as th e m or e

in no cen t, si m

pl er in fere nc e t h a t [ D o la n] d id no t be li ev e [h e] h ad a co nt in ui ng du ty

to di sc lo se in fo rm at io n. .

. .” MEM C

, 64 1 F.3d at 10 30

, ci ti ng Tell ab s , 55 1 U.S. at

32 4.

Ran d- Heart ne xt arg ue s th at Dol an was reck le ss in fai li ng to di sc lo se th at Ban k

of Am eri ca ha d st op pe d sen di ng ne w wor k to Dis co ve rRea dy in May or Ju ne 20 13

. Ban k o f Am eri ca was Dis co ve rRea dy’ s bi gg es t cl ie nt

, pr ov id in g ov er 50 % of

-7

-Dis co ve rRea dy’ s wor k. In th e se co nd ha lf of 20 13

, ho wev er, Ban k of Am eri ca wor k

sh arp ly de cl in ed

. The co m pl ai nt qu ot ed Dis co ve rRea dy’ s Ch ie f Ope rat in g Offi cer’s

ack no wled gm en t: “ W e were, ou r wor k, ou r rev en ue s were d r o p p i n g an d ou r cas e

or ig in at io n ha d dr op pe d, as I sa id earl ie r, to al m os t no th in g fro m Ban k of Am eri ca.” 1

By May or Ju ne 20 13

, Di s co ve rRea dy ha d “ co m pl et ed a la rg e do cu m en t rev ie w

pr ojec t fo r Ban k of Am eri ca” im m ed ia te ly cau si ng “ gr eat co nc ern s.” Thi s de cl in e

pr om pt ed th e Co m

pa ny’ s Bo ard in J u n e 20 13 to “ au th or iz e th e m ark et in g of

Dis co ve rRea dy fo r sa le .” Tak in g th es e al le ga tio ns as tru e, Dis co ve rRea dy’ s fin an ci al

in st ab il it y cau se d by t h e d e c li ne in Ban k of Am eri ca was , at th e le as t, “ so ob vi ou s

th at [Dol an ] m

us t h av e b een aware o f it .” In re K -te l I nt er n , 30 0 F .3d at 8 93 . The

fact s p le d a re s uf

fic ie nt to su rv iv e a m ot io n t o d is m is s.

B.

Dol an m ai nt ai ns th at hi s Aug us t 1 st at em en ts ab ou t “ do ub le -d ig it ” gr owt h an d

“ lu m pi ne ss ” are pr ot ect ed by th e Act’s sa fe-h arb or pr ov is io n. A “ fo r w a rd -lo ok in g

st at em en t” is no t act io na bl e fo r frau d if im m at e r i a l

, acco m pa ni ed by “ m ean in gf

ul

cau ti on ary la ng ua g e , ” o r made wit ho ut act ua l kn owl ed ge th at it was fal se or

m is le ad in g. Ju li an el

l o v. K-V Phar m ac eut

ic al Co

. , 79 1 F.3 d 91 5, 92 0 (8 th Ci r.

20 15 ), ci ti ng 15 U.S.C. § 78 u-5 (c)( 1)

.

At oral arg um en t, cou ns el fo r Dol an arg ue d th is st at em en t (f ro m pa ge 49 of 1

th e tra ns cri pt ) ad dr es se s in fo rm at io n th e COO ha d in Sep te m be r, aft er th e al le ge dl y

m is le ad in g st at em en ts in Aug us t. Co un se l p oi nt ed to a qu ot e fro m pa ge 10 4 of th e
tra ns c r i p t— “ So rev en ue s st art ed to fal l pr ob ab ly in Sep te m be r, is m y reco ll ect io n,

an d th ro ug h th e fal l an d in to th e New Ye a r .” Howev er, th e Co m pl ai nt ’s st at em en t (in -te xt ) an s w e r ed a qu es ti on ab ou t rev en ue de cl in es du rin g “ th e se co nd ha lf of
20 13 .” It is no t cl ear th a t t h e q u o t e on pa ge 10 4 pr ov id es th e co nt ex t fo r th e br oa d

st at em en t ab ou t rev en ue s fal li ng in th e se co nd ha lf of 20 13 on pa ge 4 9. Thi s is su e

m ay be ad dr es se d a t t he su m

m ary jud gm en t s ta ge

.

-8

-Eve n if th e st at em en ts were “ fo rward -lo ok in g,” Dol an ’s arg um en t fai ls

.

St at em en ts ab ou t Dis co ve rRea dy’ s ex pe ct ed pe rfo rm an ce are no t im m at eri al

, an d th e

co m pl ai nt su ffi ci en tl y al le ge s Dol an ha d act ua l kn owl ed ge th at th e st at em en ts were,

at le as t, m is le a d i n g

. A dd it io na ll y , th e st at em en ts were no t acco m pa ni ed wit h

“ m ean in gf

ul cau ti on ary la ng ua ge .” Dol an ci te s as cau ti on ary la ng ua ge th e fo ll owi ng

ex cerp ts fro m

th e 2 01 2 F or m

10 -K, fil ed on Marc h 8 , 20 13 :

Our fai lu re to co m

pl y wit h th e c o v e n a nt s in ou r de bt
in st ru m en ts co ul d res ul t in an ev en t of de fau lt th at co ul d
ad ve rs el y affe ct ou r fi na nc ia l co nd it io n an d ab il it y to

op erat e ou r bu si ne ss as pl an ne d if we are no t su cces sf ul in
ob ta in in g a waiv er of ou r fai lu re to co m pl y wit h ou r

co ve na nt s.

. . . . Dis co ve rRea dy’ s bu sines s re ve nue s ha ve tr ad iti ona lly be en

co nc en tra te d am on g a few cu st om ers an d if th es e la rg e
rep eat cu st om er s ch oo se to m an ag e th ei r di sc ov ery wit h
th ei r own st aff or wit h an ot he r pr ov id er an d i f we are

un ab le to de ve lo p ne w cu st om er rel at io ns hi p s , ou r
op erat in g res ul ts an d th e ab il it y to ex ecu te ou r gr owt h

st rat eg y at Di sc ov erRe ad y

m ay be ad ve rs el y

affe ct ed

.

Eve n if c a ut io na ry , th es e ex cerp ts are no t mea ni ng fu ll y cau ti on ary; th ey are no t

“ co m pa ny-s p eci fic warn in gs ba se d on a real is ti c de sc rip ti on of th e ris ks ap pl ic ab le

to th e pa rti cu la r ci rcu m st an ces

. . . .” Id

. at 92 2. Rat he r, th e ex cerp ts are “ m erel y a

bo il erp la te li ta ny of ge ne ral ly ap pl ic ab le ris k fact or s.” Id

. Dol an ’s st at em en ts are no t

pr ot ect ed by the Act’s s afe- ha rb or pro vi si on

.

The di st ric t co ur t erre d in di sm is si n g t h e § 1 0( b) an d Ru le 10 b- 5 cl ai m fo r

fai lu re to st at e a cl ai m , an d th us al so erre d in di sm is si ng se co nd ary li a b i l i t y c l ai m

un de r § 2 0( a). 2

Ran d- Heart co nt en ds it sh ou ld ha ve be en pe rm it te d to am en d th e co m pl ai nt

. 2

The req ue st to am en d st at ed

, “ If th is Co ur t is in cl in ed to gr an t Defen da nt s’ m ot io n [to

-9

-III.

Ran d- Heart arg ue s th e di st ric t co ur t erre d in fin di ng no lo ss -cau sa ti on fo r th e

pe rio d be twee n Nov em

be r 12

, 20 13 an d Ja nu ary 2, 20 1 4

. “Lo s s cau sa ti on in a

s ecu rit ie s frau d cas e is an al og ou s to th e co m m on la w’ s req ui rem en t of pr ox i mat e

cau sa ti on

. The pl ai nt iff m us t sh ow th at th e lo ss was fo res eeab le an d th at th e lo ss was

cau se d by th e m at eri al iz at io n of th e co nc eal ed ris k.” McA da m s v. McC or d

, 58 4 F.3 d

11 11

, 11 14 (8 th Ci r. 20 09 ) (in te rn al ci ta ti on s om it te d)

. “ A co m pl ai nt m us t ‘pro vi de

a de fen da nt wit h so m e in di cat io n of th e lo ss an d th e cau sa l co nn ect io n th at th e pl ai nt iff ha s in m in d.’” Id

. , qu ot in g Dura Phar m ., In c. v. Br ou do

, 54 4 U.S. 33 6, 34 7
(2 00 5)

. The se cu rit ie s st at ut es m ak e frau d act io ns av ai la bl e “ no t to pr ov id e in ve st or s
wit h br oa d in su ran ce ag ai ns t m ark et lo ss es , bu t to pr ot ect th em ag ai ns t th os e

eco no m ic lo ss es th at m is rep res en ta ti on s actu al ly cau se .” Dura Phar m , 54 4 U.S. at

34 5. Se e al

so 15 U.S.C. § 78 u- 4 ( b ) ( 4 ) (req ui rin g pl ai nt iff s to pr ov e th e de fen da nt

“ cau se d t he lo ss ”).

Accor din g to Ra

nd- H ea rt ’ s fr au d- on- the -m ar

ke t theory, Dol an m is le d in ve st or s

in Aug us t by co nc eal in g in fo rm at io n ab ou t th e la ck of ne w Ban k of Ameri ca wor k

an d th e ne ed to res tru ct ur e. Dol an fu ll y di sc lo se d on Nov em be r 12

, 20 13

, te ll in g

se cu rit ie s an al y st s th at li ti ga ti on su pp or t rev en ue s “ de crea se d pr im ari ly as a res ul t of

a red uc ti on in ne w wo rk fro m Dis co ve rRea dy’ s la rg es t c u s to m er.” Dol an be li ev ed

th e red uc ti on “ res ul te d fro m th e cu st om er’s ev al ua ti on of th e Co m pa n y’s o v eral l

fin an ci al co nd it io n.” On th at sa m e da y , Dol an Co m pa ny’ s Fo rm 10

- Q s ta te d th at

Dis co ve r Rea dy’ s th ird qu art er rev en ue s “ de crea se d pr im ari ly as th e res ul t of a pe rio d

of red uc ed wor k fro m [it s] la rg es t cu st om er.” The 10 -Q rep or te d an am en de d cred it

ag reem en t, req ui rin g $ 50 m il li on m or e in cas h “ th ro ug h on e or m or e li qu id it y

di sm is s], Pl ai nt iff

s res pe ct fu ll y req ue st th at an y su ch di sm is sa l be wit ho ut pr ejud ic e
to th ei r ab il it y to cu re an y de fect s vi a am en dm en t.” Bec au se th e di sm is sa l is

rev ers ed

, th is co ur t ne ed no t co ns id er whe th er th e di st ric t co ur t pr op erl y de ni ed le av e
to am en d t he co m

pl ai nt

.

-1 0-tra ns act io ns se pa rat e fro m it s op erat in g act iv it ie s, su ch as a sa le of as se ts or is su an ce

of eq ui ty or su bo rd in at ed de bt

, by Mar ch 31

, 20 14

. . . .” The st oc k pr ic e fel l to $2 .08

on Nov em

be r 11 , to $1 .05 on Nov em be r 12 , to $0 .90 on Nov em be r 13

.

Des pi te th e Nov em

be r 12 di sc lo su res , Ran d- Heart co nt en ds th e frau d was no t

fu ll y rev eal ed un ti l a Ja nu ary 2 pr es s rel eas e an no un ci ng th e ne w res tru ct ur in g

of fic er. The st o c k pr ic e th en fel l by $0 .14 (2 0%)

. A dr op in st oc k pr ic e is no t

ne ces sa ril y cau se d by an earl ie r m is rep res en ta ti on

. Lower st oc k pr ic es “ m ay refl ect

,

no t th e earl ie r m is rep res e n t a t i on , bu t ch an ge d eco no m ic ci rcu m st an ces , ch an ge d

in ve st or ex pe ct at io ns , ne w in du st ry -s pe ci fic or fir m -s pe ci fic fact s, co nd it io ns , or

ot he r ev en ts

, whi ch ta ke n se pa rat el y or to ge th er acco un t fo r so m e or al l of th at lo wer

pr ic e.” Dura Phar m , 54 4 U

. S

. at 34 3. Ran d- Heart m us t sh ow th at Dol an ’s

frau d— “ an d no t ot he r ev en ts ”—c au se d th e pr ic e to fal l aft er th e Ja nu ary 2 pr es s

rel eas e. Se e Scha af v. R e s i d e n t ia l Fund in g Co rp

. , 51 7 F.3 d 54 4, 55 0 (8 th Ci r.

20 08 ).

Not hi ng in th e Ja nu ar y 2 pr es s rel eas e co rrec ts pr ev io us m is rep res en ta ti on s.

“ Co rrec ti ve di sc lo su res m us t pr es en t fact s to th e m ark et th at are ne w, th at is

, pu bl ic ly

rev eal ed fo r th e fir st ti m e, be cau se , if in ve st or s al read y kn ow th e tru th

, fal se

st at em en ts won ’t affe ct th e pr ic e.” Ka ty le v. Penn Nat

. Gam in g, In c. , 63 7 F.3 d 46 2,

47 3 (4 th Ci r. 20 11 ) (in te rn al qu ot at io ns om it te d)

. Ann ou nc in g th e ap po in tm en t of a

res tru ct ur in g of

fic er on Ja nu ary 2 do es no t co rrec t a m is rep res en ta ti on ; it el ab or at es

on th e pr ev io us ly di sc lo se d pl an to res tru ct ur e. “ In th e fin an ci al m ark et s, no t ever y
bi t of ba d ne ws tha t has a ne ga ti ve effe ct on th e pr ic e of a se cu rit y ne ces sa ril y ha s a

co rr ect iv e effe ct fo r pu rp os es of l os s ca us at io n.” Mey er v. Gree ne , 71 0 F.3d 11 89

, 12 02 (1 1t h Ci r. 20 13 ). Se e al so In re Wi ll

ia m s Sec. Lit

ig .-WCG Sub cl

as s , 55 8 F.3 d

11 30

, 11 40 ( 1 0 t h Ci r. 20 09 ) (“ To be co rrec ti ve , th e di sc lo su re ne ed no t pr eci se ly

m irr o r th e earl ie r m is rep res en ta ti on , bu t it m us t at le as t rel at e ba ck to th e

m is rep res en ta ti on an d no t to so m e ot he r ne ga ti ve in fo rm at io n ab ou t th e co m pa ny.”).

-1 1-The di st ric t co ur t di d no t err in fin di ng no lo ss -cau sa t i o n fo r th e pe rio d

be twee n No ve m

be r 12 an d J an ua ry

2.

* * * * * * *

The di st ric t co ur t’s de ci si on is affi rm ed in pa rt, rev ers ed in pa rt, an d rem an de d

fo r pr oc eed in gs co ns is te nt wit h t hi s o pi ni on

.

__ __ __ __ __ __ __ __ __ __ __ __ __ __ __

-1 2-