United States Court of Appeals FOR THE EIGHTH CIRCUIT

_____________ No. 96-4132EM

_____________ In re NationsMart Corporation * Securities Litigation *
*
* Jack Carlon, Helen S. Palmquist, * Brian Palmquist, John D. Palmquist, *
* Appellants, *
*
v. * On Appeal from the
* United States District Court
* for the Eastern District Michael E. Thaman, Alice E. * of Missouri. Brueggemann, S. Leslie Flegel, * Mel A. Friedman, Alan G. Johnson, * Franklin A. Jacobs, S. Lee Kling, * Michael J. Dunlap, RAS Securities * Corp., Pauli & Company, Inc., * and NationsMart Corporation, *
* Appellees. *

___________ Submitted: September 11, 1997 Filed: November 21, 1997

___________ Bef ore RICHARD S. ARNOLD, Chief Judge, FLOYD R. GIBSON and BEAM , Circuit Judges.

___________The plaintiffs also filed Securities Act and Securities Exchange Act claim s 1 against 25 ad ditional underwriters in a complaint filed on July 12, 1995. The District Court dismissed the claims against these underwriters on statute -of-limitations grounds. The class representative s do not contest the dismissal of these additional underwriters on appeal. See Appellee’s Br. at 7.
-2- RICHARD S. ARNOLD, Chief Judge.

In this cas e, Jack Carlon, Helen S. Palmquist, Brian Palmquist, and John D

. Pa lmquist appeal the District Court’s dismissal of their class action brought unde r Sect ions 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a) and 77( o ) (1 994); Section 12(2) of the Securities Act, 15 U.S.C. § 77 l (2) (1994); and Sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78 t (1994 ). This litigation involves alleged misrepresentations, misstatements, an d omissions made in connection with an initial public offering on December 22, 1993, of shares in NationsMart, a Missouri corporation formed to manage lau ndry, dry-cleaning, and shoe -repair centers in large retail stores such as Wal-Mart and Kmart. Th e defendants in the action below, and the appellees before this court, includ e Natio nsMart; eight of NationsMart’s officers and directors; and NationsMart’s tw o lead underwriters, RAS Securities Corporation and Pauli & Company, Inc. Th e 1 Dis trict Court dismissed the plaintiffs’ complaint for failure to state a claim unde r Federal Rule of Civil Procedure 12(b)(6) and for failure to plead fraud wit h particularity under Federal Rule 9(b). We now affirm in part and reverse in part.

I.

Nations Mart was formed in 1992 with the goal of applying the low-price, onestop shopping concept, made successful by Wal-Mart and Kmart “supercenters,” to the dry -cleaning, laundry, and shoe-repair markets. After filing a Registration Statement and a Prospectus with the Securities and Exchange Commis sion (“SEC”), NationsMartA “unit” consisted of one share of common stock and a warrant to purchase an 2 additional share of common stock. Consolidated Amended Class Action Complain t (“Complaint”) ¶ 1.
-3- commenced an initial public offering of two million units at $7.00 per unit on December 22, 1993. The Prospectus stated that NationsMart expected to raise $11.7 million in

2 its public offering, and that it intended to use the net proceeds to fund the 51 existing NationsMart

stores and to open 108 new stores by November 1994. Under the plan forgr owth set forth in the Prospectus, the company would open 600 new stores b y 1998.
The Prospectus contained detailed financial data about NationsMart, a disc ussion andanalysis of the company’s financial situation and the results of its operation, and its strategy for future growth. It acknowledged that NationsMart had previousl y experienced financial losses, but stated that NationsMart’s management believed that, based on a “financial model,” projected income from existing stores, as well as th e procee ds of the public offering, would “significantly improve the capital resources of the Company and thereby address c ertain of the going concern conditions.” A section of the Prospectus labeled “Risk Factors” included some of the risks investors faced in buying offered units , such as NationsMart’s limited operating history and the absence of a prior market for its shares; its dependence on leases from Wal-Mart, Kmart, and other “hos t retailers”; the competition it faced from other retailers; and its need fo r additional financing in the future. The Prospectus also cautioned that NationsMart’s financial model refle cted “only the best judgment of management” and was subject to conditions beyond the company’s control.
On July 14, 1994, NationsMart announced that it wa s experiencing slower-thanexpectedgrowth and that it would open 35 to 45 fewer stores than anticipated in the P rospectus. NationsMart also disclosed that it had settled a “whistleblower” lawsuit with Alice Brueggemann, a former senior vice president a nd chief financial officer who had sued NationsMart after she was discharged in March 1994. Following theseIn the original complaint filed by Mr. Carlon, James Tellatin was named as a 3 plaintiff and class representative. Mr. Carlon filed an amended complaint o n November 14, 1994, which dropped Mr. Tellatin as a named party in this action. OnNovember 22, 1995, the District Court entered an order certifying tw o 4 classes of plaintiffs pursuant to Federal Rules of Civil Procedure 23(a) and 23(b)(3). The first class, represented by Jack Ca rlon and Helen Palmquist, included “all persons who purchased the securities o f NationsMart . . . in the Offering . . . and who suffered damages as a result thereof.” The second class, represented by Helen Palmquist , i ncluded “all persons who purchased NationsMart securities in the Offering . . . or in the open market during the period from Decem ber 22, 1993, through August 18, 1994, and who suffered da

mages as a result thereof.” Both classes excluded the defendants and their f amily members or successors. See Appellants’ Appendix at 216-221. The first class appears to be entirely included within the second.
-4- announcements, NationsM art’s common stock fell to $1.875 and continued to decline until mid-1995, when the stock was delisted.

On No vember 4, 1994, Helen, Brian, and John Palmquist filed a class actio n against the defendants in the Northern District of Illinois; and on November 7, 1994, Jack Carlo n filed a class action against the defendants in the Eastern District o f Missouri. The Palmquists’ case w as transferred to the Eastern District of Missouri in

3 February 1995, and the four plaintiffs were permitted to file a consolidated class-action complaint on May 1, 1995. It is this complaint that is the subject of this appeal. 4
In the consolidated complaint, the plaintiffs asserted three bases for relief. Count I allege d violations of Sections 11 and 15 of the Securities Act of 1933 by all of th e defendant s. Count II alleged violations of Section 12(2) of the Securities Act of 1933 by Nations Mart and the two lead underwriters. And Count III alleged violations o f S e ction 10(b) and 20 of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by all defendants. Factually, the complaint alleged that the defendants made fals e statemen ts in and omitted material information from the Prospectus. It alleged that , given the projections of NationsMart’s underwriters, the defendants knew that the-5-

compa ny would not be able to implement the business plan outlined in the Prospectus with the proceeds of the offeri ng. Complaint ¶¶ 22-25, 30. The plaintiffs also claimed that the defendants failed to disclose certain facts learned by NationsMart’ s management in the months before the effective date of the public offering, including the fact that favorable trends described in the Prospectus were not materializing and were not likely to materialize; that the costs to operate existing NationsMart stores and the

co stto open new stores had been increasing; and that corporate overhead wa s increasing. Complai nt ¶¶ 40-43. The complaint went on to allege that after the public offerin g the defendants continued to make statements touting NationsMart’s plans t o ope n new stores which they knew had no reasonable basis in fact, including allegedly misleading statements made to investors and statements made in annual and quarterly reports filed with the SEC. Complaint ¶¶ 45-51.

In a memo randum opinion and order on April 11, 1996, the District Court dismissed all claims against NationsMart and its directors and officers, and it dismissed most of the claims against RAS and Pau li & Company, the two lead underwriters. The Court allowed part of the § 12(2) claim in Count II of the complaint to survive with respec t to the two lead underwriters. In a second opinion on November 6, 1996, th e District Court dismissed the remainder of the § 12(2) claim against RAS and Pauli & Company. In these opinions, the District Court held that the plaint iffs had failed to state

aclaim under Federal Rule of Civil Procedure 12(b)(6) and had failed to allege fraud with particularity under Federal Rule of Civil Procedure 9(b). In the April 11 opinion and order, the District Court dismissed the case with prejudice and without leave t o amend. Nevertheless, the plaintiffs later sought leave to amend the complaint an d vacate t he April 11 order. The District Court denied this motion in its November 6 order, stating that the plaintiffs’ failure to amend the complaint before the Court entered its April 11 order constituted undue delay.

This case is now before us o n appeal of Jack Carlon and Helen, Brian, and John Palmquist.-6- II.

Forthe re asons given below, we hold that the District Court erred when i t dismissed the plaintiffs’ claim against all de fendants under § 11 of the Securities Act of 1933.

A.

The District Court based its dismissal of the complaint in part on the plaintiffs’ failur e to plead specific facts pursuant to Federal Rule of Civil Procedure 9(b) t o support the allegations of liability under § 11 of th e Securities Act. Under Federal Rule 9(b), in a complaint averring fraud, “the circumstances constituting fraud or mistak e shall be stated with particularity.” We hold that the particularity requirement of Rule 9(b) does not apply to claims under § 11 of the Securities Act, because proof of fraud or mistake is not a prerequisite to establishing liability under § 11.

Sect ion11 imposes civil liability on persons preparing and signing materiall y misleading registration statements. 15 U.S.C. § 77k(a) (1994). A registration statement is mat erially misleading if it contains an untrue statement of material fact or if it omits

a material fact necessary to prevent the statement from being misleading. Id. An y person who purchases a registered security is entitled to sue under this section. Id

. Section 11 imposes “a stringent standard of liability on the parties wh o play a direct role in a registered offering.” Herman & MacLean v. Huddleston , 459 U.S. 375, 381-8 2 (1983) (footnotes omitted). To establish a prima fac ie § 11 claim, a plaintiff need show only that he bought the security and that there wa s a material misstatement or omission. Scienter is not required for establishing liability under this sect ion. Id. at 382; In re Stac Electronics Securities Litigation , 89 F.3d 1399 (9th Cir. 1996), cert. denied , 117 S. Ct. 1105 (1997). The liability of the issuer of a materially m isleading registration statement is “virtually absolute, even for innocent misstatements.” Herma n & MacLean , 459 U.S. at 382 (footnote omitted). Persons beside the issuer who face-7-

liability under § 11 -- which includes anyone who signed the registrati on statement, such as officers, directors, and underwriters -- must prove that, after reasonable investigation, they had reasonable grounds to believe that the statement was not materially misleading. 15 U.S.C. § 77k(b)(3); Herman & MacLean , 459 U.S. at 382.
In their complaint, the plaintiffs made clear that they did not allege in the context of their § 11 claim that the defendants were liable f or fraudulent or intentional conduct. Complain t

¶ 74. Therefore, their claim should not have been dismissed for failing t o comply with Rule 9(b). And even if the plaintiffs were alleging fraudulent conduc t under § 11, as the defendants argue in their brief, any such allegation would be mer e surplusage. The only consequence of a holding that Rule 9(b) is violated with respect to a § 11 claim would be that any allegations of fraud w ould be stripped from the claim. The allegations of innocent or negligent misrepresentation, which are at the heart of a § 11 claim, would survive. The plaintiffs’ case should not ha ve been dismissed because they alleged more than was necessary to recover under § 11 of the Securities Act.

We rec ognize that other courts have sometimes applied Rule 9(b) to claim s brought under §§ 11 and 12(2) of the Securities Act of 1933. Such claims are said to be subject to Rule 9(b) whe n they are “grounded in fraud.” Melder v. Morris , 27 F.3d 1097, 1100 n .6 (5th Cir. 1994); In re Stac Electronics Securities Litigation , 89 F.3d at 1404 -05 (footnote omitted). Accord , Shapiro v. UJB Financial Corp. , 964 F.2d 272 , 288 (3d Cir.), cert. denied , 506 U.S. 934 (1992); Sears v. Likens , 912 F.2d 889, 892-93 (7t h Cir. 1990). Defendants ask that we follow these authorities and affirm th e dismi ssal of the §§ 11 and 12 (2) counts of this complaint for failure to comply with Rule 9(b). We decline to do so for two reasons. First, the complaint in this cas e expressly disavows a

ny claim of fraud in connection with the § 11 and § 12(2) counts, as we have already noted. See Shaw v. Digital Equipment Corp. , 82 F.3d 1194, 1223 (1st Cir. 1996) (complaint avoids grounding in fraud; al legation that defendants actually possessed th e information they failed to disclose is not an averment of fraud sufficient-8-

to subject the complaint to Rule 9(b)). In addition, a pleading standard which requires a party to plead particular facts to support a cause of action that does not include fraud or mistake as an e lement comports neither with Supreme Court precedent nor with the liber al system of “notice pleading” embodied in the Federal Rules of Civil Procedure. Federal Rule 8(a)(2) requires a plaintiff to plead only “a sho rt and plain statement of the claim showing that the pleader is entitled to relief . . . .” See Conley v. Gibson , 355 U.S. 41, 47 (1957 ) (“[T]he Federal Rules of Civil Procedure do not require a claimant to set out in d etail the facts on which he bases his claim.”). Rule 9(b) imposes a heightened pleading requir ement for allegations of fraud and mistake; but, as we noted above, § 11 does not requireproof of fraud for recovery. The Supreme Court has held that federal courts may not apply the heig htened pleading standard of Rule 9(b) outside the two spec ific instances -- fraud and mistake -- explicitly found in the Rule. Se e Leatherman v. Tarra

nt County Narcotics Intelligence and Coordination Unit , 507 U.S. 163, 168 (1993) (holding that a federal c ourt may not impose a standard more stringent th anthe pleading requirements of Rule 8(a) in civil rights cases alleging municipa l liability under 42 U.S.C. § 1983).

The plaintiffs’ allegations complied with the “short and plain statement ” requirement of Federal Rule 8(a). The plaintiffs alleged that they bought NationsMart stock and that “[t]he Offering Materials contained untrue statements of material facts and omitted facts necessary in order to make the statements made, in light of th e circumstances under which they were made, not misleading.” Co mplaint ¶ 68. Specific instances of misstatements were also p leaded. Given the broad scope of liability under § 11 a nd the liberal pleading requirements of Federal Rule 8(a), these allegations ar e sufficient to state

a claim. Therefore, the District Court should not have dismissed the complaint under Rule 12(b)(6).-9- B.

The District Court also based its dismis sal of part of the plaintiffs’ § 11 claim on the “sa fe harbor” provision of SEC Rule 175, which protects “forward-lookin g statements” made in documents file d with the SEC. Under this regulation, a “forwardlooking statement” can include statements containing projections of revenue, income, earnings per share, capital expenditures, dividends, or capital structure; statements of managem ent’s future plans and objectives; and statements of future economi c perfo rmance contained in the management’s discussion and analysis of financia l conditions. 17 C.F. R. § 230.175(c) (1997). A forward-looking statement is protected from liability under the Securities Act of 1933 and “shall be deemed not to be a fraudulent statement . . . unless it is shown that such a statement was made or reaffirmed with out a reasonable basis or was disclosed other than in good faith.” 17 C.F.R. § 230.175(a) (1997 ). “Fraudulent” for purposes of Rule 175 does not mean fraud in the trad itional sense, but instead simply denotes any of the bases of liability under th e Securities Act, including liability under § 11. See Wielgos v. Commonwealth Edison Co , 892 F.2d 509, 513 (7th Cir. 1989); 17 C.F.R. § 230.175(d) (1997). Therefore , material mis statements in a registration statement may be protected from § 11 liability if they are forward-looking.
Many of the statements in the Prospectus challenged by the plainti ffs were indeed forward-looking. The plaintiffs challenged NationsMart’s projections that i t would open 108 new stores by 1994 and 600 new stores by 1998; that the proceeds from the public offering would be sufficient to cover the plans for expansion; and that NationsMart’s history of operating losses would give way to future growth. Complaint ¶ 22-26, 29. The plaintiffs did not argue in their complaint or before the District Court that thes e sta tements were not forward-looking; rather, they alleged that the defendants ’ statements “were false and had no reasonablebasis because [the defendants] knew that there were no valid assumptions underlying the projections.” Complaint ¶ 3 1. Forwardlooking statements are not protected by Rule 175 if they are not generally-10-

believed, if they lack a reasonable basis, or if the speaker knows of undisclosed facts wh ichseriously undermine the accuracy of the statement. In re Apple Compute r Securitie s Litigation , 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied , 496 U.S. 943 (1990). However, the District Court held that the plaintiffs could not avoid the “safe harbor” of SEC Rule 175 by claiming that the defendants had no reasonable basis for theirproj ections because, under Rule 9(b), the plaintiffs did not plead specific fact s which showed that the statements either had no reasonable basis or were not believed by the defendants.
We have already held that the specificity requirement of Rule 9(b) does not apply to claims brought under § 11 of the Securities Act. The District Court and th e defendants have cited several cases which require plaintiffs to plead specific facts i n order to avoid the safe-harbor rule. See In re Healthcare Compare Corp. Securitie s Litigation , 75 F.3d 276 (7th Cir. 1996); Arazie v. Mullane , 2 F.3d 1456 (7th Cir. 1993); Roots Partnership v. Lands’ End, Inc. , 965 F.2d 1411 (7th Cir. 1992). However, the clai ms in these cases were brought only under § 10(b) of the Securities Exchange Act of 19 34, which requires proof of fraud as one of its elements. Application of th e specificity requirement of Rule 9(b) would be appropri ate if the “safe harbor” protected the defendan t from a cause of action involving true fraud. But § 11 claims do no t involvefraud, and the plaintiffs did not have to plead specific facts to avoid the safe

harbor rule.
In the complaint, the plaintiffs attacked statements of historical fact as well as the def endants’ forward-looking statements. The District Court dismissed the plaintiffs ’ allegation s under § 11 of false statements of historical fact on the basis that thes e allegations did not comport with F ederal Rule 9(b). These challenged statements from the Prospectus include the statement that NationsMart dealt with its affiliates at arm’s length; the statement that NationsMart was complying with federal wag e and hour laws; the dollar figure representing the cost of opening a new store; a nd statements describing revenue, profit, and expense trends. Complaint ¶¶ 2, 33, 41. The-11-

plaintif fs also alleged that the defendants omitted material information from th e prosp ectus in failing to disclose adverse trends the company was experiencing in th e mont hs immediately preceding the public offering. Complaint ¶ 42. As we note d above, Rule 9(b) does not apply to cla ims brought under § 11. The allegations of false statements o f historical fact and of material omissions were sufficient to state a claim.
The defendants argue that the plaintiffs have waived on app eal any argument that statement s of historical fact in the Prospectus do not comply with Rule 9(b) becaus e “the pl aintiffs’ brief does not discuss or dispute this aspect of the district court’ s ruling.” Appellees’ Br. at 30. We do not agree. The plaintiffs forcefullyargued in their brief that R

ule 9(b) should not apply to claims brought under § 11 and argued that the defendants omitted material facts from the Prospectus. Appellants ’ Br. at 17-20, 25-27. Accordingly, we hold that they did not waive this argument on appeal.

C.

The District Court also dismissed the plaintiffs’ § 11 claim because, according to the Court, the Prospectus contained numerous statements which “bespoke caution” and warned investors of the finan cial risks they were taking when they bought stock in NationsMart. This Court has recognized that s pecific cautionary statements in offering materials which disclose potential investment risks may defeat a plaintiff’s claim that the offering materials were materially misleading under federal securities law. Se e Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 949 F.2d 243, 245-46 (8th Cir. 1991); Polin v. Conductron Corp. , 552 F.2d 797, 806-07 (8th Cir.), cert. denied , 434 U.S. 857 (1977). Cautionary statements, however, cannot be general risk warnings

or mere boilerplate; they must be detailed and specific. See Moorhead , 949 F.2d a t 245-46.

The Pr ospectus contained a section labeled “Risk Factors” which warned o f potential problems NationsMart faced as a growing company. The Ris k Factors section-12-

emphasi zed NationsMart’s limited operating history, its dependence on third partie s such as Wal-Mart an d Kmart, its inability to continue operations without the proceeds of the offering, and its need for financing other than the proceeds of the offering t o operate beyond October 1994. Appendix at 584-588. NationsMart’s operating losses up to September 26, 1993, were also reported in the Risk Factors section. Id. at 584. Inanother part of the Prospectus, in which the defendants described NationsMart’ s business plan for future growth, they stated that “the financial model used by th e Comp any reflects only the best judgment of management and actual results ar e substantially dependent on numerous factors . . ..” Id. at 597.
Many of the warnings of short-term risks to investors, however, were generic and

non specific. The complaint alleges that the defendants did not adequately warn inve stors of the potential risks faced by NationsMart between the time of the offering and October 1994, when the Prospe ctus admitted that the company would have to find

new sources of revenue. Many statements in the Risk Factors section -- such as th e warning that “[t]here can be no assurance that any of the Company’ s Centers or that the Company as a whole will generate income from operations or provide cash fro m operating activities in the future” -- do not provide the sort of detail that woul d “bespeak cau tion” to a potential investor. Though the Prospectus did state that “th e Company expects to continue to incur net losses and negative cash flow from operations during 1994 and 1995,” Appendix at 584, this warning must be read in conjunction with statements elsewhere in the Prospectus that

[b ]ased upon its financial model, management believes that previousl y experienced operating losses will diminish as currently operating Centers, most of which have been open fewer than six months, begin to generate income fr om operating activities. Additionally, the net proceeds of thi s offering will significantly improve the capital resources of the Company and thereby address certain of the going concern conditions.-13-

Appendix at 597. There is no warning anywhere in the Prospectus det ailing the specific risk that NationsMart wou ld continue to face severely declining profits and ballooning corporate overhead in the short term, between the date of the offering, December 1993, and October 1994, which threatened the company’s ability to operate.
In addition, the bespeaks-caution do ctrine cannot immunize the defendants from liability under § 11 if they omitted material information from the offering materials. See Griffin v. McNiff

, 744 F. Supp. 1237, 1254 (S.D.N.Y. 1990), aff’d without opinion , 996 F.2d 303 (2d Cir. 1993); Robbins v. Moore Medical Corp. , 788 F. Supp. 179, 185 (S.D.N.Y. 1992). In their complaint, the plaintiffs alleged that NationsMart’ s
mana gement

failed to disclose specific facts indicating that its judgment was flawed

. Complaint ¶¶ 41-42. If taken as true, these allegations would cal l into question whether management

was in fact exercising its “best judgment” in formulating the company’s fin ancial model, as it claimed in the Prospectus. See Appendix at 597. Because o f inadequate and nonspecific warnings of short-term risks, and because of the plaintiffs’ allega tions that the defendants omitted material information from the Prospectus, th e bespeaks-caution doctrine cannot, simply as a matter of pleading, defeat the plaintiffs’ § 11 claim.

III.

We also hold that the complaint stated a claim against NationsMart, RAS, and Pauli & Company under § 12(2) of the Securities Act of 1933.

A.
Section 12(2) of the Securities Act of 1933 creates a private remedy fo r the buyer of a secur ity against the seller for material misrepresentations in connection with th e offer and the sale. See 15 U.S.C. § 77 l (1994). A “seller” of the security is defined as anyone who offers or sells a security “by the use of any means or instruments of-14-

transportation or communi cation in interstate commerce or of the mails, by means of a pro spectus or oral communication . . . .” 15 U.S.C. § 77 l (2). Once a buyer ca n esta blishprivity with a seller, the buyer need prove only that there was a materia l misstatement

or omission in the prospectus or oral communication. The seller’s only defens e is that he did not know of the false material misstatement and, in the exercise of due diligence, could not have discovered the misst atement. 15 U.S.C. § 77 l (2). The plaint iff need not prove reliance on the prospectus or oral statement. Austin v

. Loftsgaarden , 675 F.2d 168, 176 n.16 (8th Cir. 1992). Fraud and scienter are no t elem ents of a § 12(2) claim. Wigand v. Flo-Tek, Inc. , 609 F.2d 1028, 1034 (2d Cir

. 1980).

The District Court dis missed the plaintiffs’ § 12(2) claim in part because it held that many of the statements in the Prospectus challenged by th e plaintiffs were forwardlookin g and fell into the “safe harbor” of SEC Rule 175, which applies to § 12(2) a s well as § 11 of the 1933 Act. See 17 C .F.R. § 230.175 (1997). We hold that the safeharbor rule do es not apply to the plaintiffs’ § 12(2) claim, as pleaded, for the sam e
reaso n that it does not apply to the § 11 claim: The plaintiffs adequately pleaded that the defendants had no reasonable basis fo r the forward-looking statements found in the offerin g materials. The District Court also dismissed the plaintiffs’ § 12(2) clai m because it thought that the statements of historical fact, to which the safe-harbor rul e does not apply, and allegations of false statements made by the defendant s after the date of the offering were not pleaded with sufficient particularit y under Federal Rule of Civil Procedure 9(b). But Rule 9(b) does not apply to claims b rought under § 12(2) because, as in the case of § 11, proof of fraud and scienter are not necessary for recovery. Any allegations of fraud or scienter by the plaintiffs to sustain the § 12(2) claim wer e surplu sage, and the complaint should not have been dismissed for pleading more than the Federal Rules required.

The District Court also dism issed the plaintiffs’ § 12(2) claim on the theory that the Risk Factors stated in the Prospectus “bespoke caution” and warned investors ofThe District Court, in its April 11, 1996 order, allowed part of the § 12(2) claim 5 to survive with respect to RAS and Pauli & Company, the two lead underwriters , because they did not dispute that they were “sellers” under § 12(2) . The Court allowed the § 12(2) claim to survive against RAS and Pauli & Company to the extent that they may have had

a duty to update or correct the Prospectus if it became misleading after the date o f the offering, pending briefing by the parties on the issue. In an order filed on November 6, 1996, the District Court dismissed the rem aining § 12(2) claim against RAS and Paul i & Company, holding that they had no duty to update any statement s which may have become misleading after the date of the offering. Because th e plaintiffs do not contest on appe al the District Court’s ruling that the two underwriters
-15- any potential risks. We hold that the “bespeaks cau tion” doctrine does not apply to the § 12(2 ) claim for the same reason that it does not apply to the § 11 claim: Th e
c o mplaint alleges that the Prospectus did not adequately warn investors of short-term risks, and the bespeaks caution doctrine does not apply to the alleged materia l omissions from the Prospectus.

B.
The District Court’s application of Rule 9 (b), SEC Rule 175, and the “bespeaks caution” doctrine did not entirely dispose of the § 12(2) claim. Section 12(2), unlike § 11, imposes liability for miss tatements and omissions made after the public offering,

as well as th ose made in the offering materials. Because § 12(2) extends liability beyond the date of the off

ering, some courts have found a duty to update a prospectus after the offering date if any statements in it become fals e or misleading over time. See Ackerman v. Schwartz , 947 F.2d 841, 848 (7th Cir. 1991) (recognizing a duty t o update a prospectus in the context of a claim brought under § 10(b) of the Securities Exc hange Act of 1934). The District Court did not have to reach the question o f whether NationsMart could be liable under § 12(2) for breach of a duty to update the Prospectus because it dismissed the plaintiffs’ § 12(2) claim on the alternative ground that the plaintiffs did not adequately allege that NationsMart was a “s eller” of securities under the meaning of § 12(2). A “seller ,” under § 12(2), is “anyone who successfully 5had no duty to update, we do not need to reach that question now.
-16- solicits the purchase of securities, motivated at least in part by a desire to serve his own fi nancial interests or those of the securities owner.” In re Crafmatic Securitie s Litigation v. Kraftsow , 890 F.2d 628, 635 (3d Cir. 1990) (citing Pinter v. Dahl , 48 6 U.S. 622, 6 47 (1988)). The District Court recognized that in the consolidate d complai nt, the plaintiffs alleged that “NationsMart and the Underwriter Defendant s offered, so ld, and solicited sales of shares, by means of the Prospectus . . .

. NationsMart and the Underwriter Defendants were sellers of the s hares of NationsMart stock within the meaning of Section 12(2) of the Securities Act.” Complaint ¶ 76. The District Cour

t held that the plaintiffs should have alleged specific facts demonstrating that NationsMart actively s olicited the sale of shares to the plaintiffs. Once again, the Distr ict Court applied the heightened pleading standard of Federal Rule of Civi l Procedure 9(b) to a § 12(2) claim, which does not require proof of fraud or mistake for recovery. We disagree, and hold that the plai ntiffs adequately alleged in the complaint that NationsMart was a seller under § 12(2).

The defendants argue that the plaintiffs waived the argument on appeal that NationsMart was a seller under § 12 (2) because the plaintiffs did not specifically refer to it in theirappellate brief. However, the plaintiffs did argue at length that th e particul arity requirement of Federal Rule 9(b) should not apply to § 12(2) claims

. Appellant s’ Br. at 17-20. We therefore hold that the plaintiffs did not waive th e argumentth at Rule 9(b) did not require the plaintiffs to plead with specificity that NationsMart was a seller under § 12(2).-17- IV.

Forthe r easons given below, we uphold the District Court’s dismissal of th e plaintiffs’ c laim under §§ 10(b) and 20 of the Securities Exchange Act of 1934 an d SEC Rule 10b-5.

A.

Rule 1 0b-5, promulgated by the SEC pursuant to § 10(b) of the Securitie s Exchange Act of 1934, prohibits fraudulent conduct in the sale and purchase o f securities. 15 U.S.C. § 78j (1994); 17 C.F.R. § 240.10b-5 (1997); Harris v. Unio n Electric Co. , 787 F.2d 355, 362 (8 th Cir.), cert. denied , 479 U.S. 823 (1986). Section 20 of the Securities Exchange Act extends liability under § 10(b) and R ule 10b-5 to any “controlling person.” 15 U.S.C. § 78t(a) (1994). To recover in a private actio n brought under Rule 10b-5, a plaintiff must establish:
1) that the defendant acted in a manner prohibited by the Rule, whether it be that the defendant employed a device, s cheme, or artifice to defraud, made misrepresentations or omissions of material fac t, or engaged in acts, pr actices or courses of business that operate as a fraud or deceit; 2 ) causation, often analyzed in terms of materiality and relian ce; 3) damages; and 4) that the fraudulent activity occurred in connection with th e purchase and sale of a security.

Harr is v. Union Electric Co. , 787 F.2d at 362. Proof of scienter, or the “intent t o deceive, mani pulate, or defraud,” is necessary to prevail in a 10b-5 action. Ernst & Erns t v. Hochfelder , 425 U.S. 185, 193 (1976). Because a Rule 10b-5 claim i s necessarily grounded in fraud, the more stringent pleading requirements of Federal Rule of Civil Pro cedure 9(b) apply to complaints alleging a 10b-5 violation. Arazie v

. Mullane , 2 F.3d 1456, 1465 (7th Cir. 1993).-18-

The Cod e of Federal Regulations applies a “safe harbor” rule to Rule 10b- 5 which protects forward-looking statements from liability. 17 C.F.R. § 240.3b-6 (1997). This regulation is identical to the regulations which protect forward-looking statements under the Securities Act of 1933. See 17 C.F.R. § 230.175 (1997). As noted above, the plaintiff does not deny that m any of the challenged statements from the Prospectus -- such a s NationsMart’s plan to open 108 new stores in 1994 and 600 new stores by 1998, the intended uses of proceeds from the offering, and predictions about futur e sales and diminishing operating losses -- were forward-looking. Rather, the plaintiffs allege in the complaint that management had no reasonable basis to make suc h statements. If pleaded properly, these allegations would allow the plaintiffs to avoid the safe-harbor rule.
We agree with the District Court that the p laintiffs’ allegations that the forwardlooking statements were made without a reasonable basis do not conform to th e particularit

y requirements of Federal Rule 9(b). In the complaint, the plaintiffs allege that management’s business plan was “false and misleading and no t reasonably based”; that sales forecasts “were not justifiable or reasonable based on historical data”; and that “t here were no valid assumptions underlying the [future business] projections. ” Complaint ¶¶ 30, 31. While these state ments are “short and plain” enough for Federal Rule 8(a), and therefore are sufficient to avoid the safe-harbor rule for the §§ 11 and 12(2) c laims, they do not include enough particular facts to show management’ s alleg edly fraudulent statements lacked a reasonable basis. To satisfy Rule 9(b), th e plaint iffs should have alleged, for example, who prepared the relevant figures an d projections, when they were prepared, and who reviewed and evaluated the figures

. See Arazie v. Mullane , 2 F.3d at 1465-67. Because the complaint does not provide that level o f specificity, the District Court properly dismissed the 10b-5 claim as to th e challenged forward-looking statements in the Prospectus.
We also agree with the District Court that the plaintiffs’ attempts tostate a 10b-5 claim with respect to false statements of historical f act in the Prospectus, which are not-19-

covered b y the safe-harbor rule, fall short of Federal Rule 9(b)’s specificity requireme nts. In the complaint, the plaintiffs allege some misstatements of fact, such

as t hat NationsMart’s management misrepresented negative business trends , misrepresented the costs of opening new stores, and omitted material information about the operation of NationsMart stores. Complaint ¶¶ 31, 33, 37, 41, 42. The plaintiffs did not qu antify these business trends or say which business trends were describe d inacc urately in the prospectus. They did not demonstrate how the actual cost o f opening a new store differed from the cost found in the prospectus. And the plaintiffs did not plead specific facts showing how omission s from the prospectus were material. See In re GlenFed, Inc. Securities Litigation , 42 F.3d 1541, 1548 (9th Cir. 1994 ) (holding that a “plaintiff must set forth what is false or misleading about [a] statement, and why it is false”); Shushany v. Allwaste, Inc. , 992 F.2d 51 7, 522 n.9 (5th Cir. 1993) (holding that a plaintiff must state facts showing that a false representation is material). Therefore, the statements of historical fact also did not comply with Federal Rule 9(b) and were properly dismissed.

Because some courts have found a duty to update and correct projections i n offering materials to the extent they become materially misleading over time, th e Distric t Court recognized that the safe-harbor rule would not foreclose liability under Rule 10b-5 if the defendants in this case had such a d uty. And the Court noted that the plaintiffs alleged that NationsMart’s directors and officers made false and misleading statements after the date of the offering, which also would not have been covered by the safe harbor rule. The Court disposed of both of these issues by holding that th e plaintiffs failed adequately to p lead reliance, which is a necessary element of recovery under Rule 10b-5. Basic, Inc. v. Levinson , 485 U.S. 224, 243 (1988).

Reli ance typically requires plaintiffs to prove that alleged misrepresentation s induced them to do something different from what they would otherwise have done in maki ng investment decisions. Austin v. Loftsgaarden , 675 F.2d 168, 177 (8th Cir

. 1982). In some situations, courts may presume reliance. In a case involving a failure-20-

to disclo se information to investors, courts will presume reliance if the omitte d information is shown to be material. Affiliated Ute Citizens v. United States , 406 U.S. 128, 153-54 (1972); Austin v. Loftsgaarden , 675 F.2d at 177. The presumption o f reliance in failure-to-disclose cases has been limited to situat ions where the parties deal directly with one another in face-to-face transactions. See Laventhall v. Genera l Dynamics Corp. , 704 F.2d 407, 413 n.4 (8th Cir.), cert. denied , 464 U.S. 846 (1983). Reliance may also be presumed under a fraud-on -the-market theory, “where materially mis leading statements have been disseminated into an impersonal, well-develope d market f or securities . . ..” Basic Inc. v. Levinson , 485 U.S. at 247. Some court s recognize a “fraud-created-the-market” theory, where reliance may be presumed if the defendants’ fraudulent activity is “so pervasive that it goes to the very existence of the [securities ] and the validity of their presence on the market.” Ross v. Bank South , N.A. , 885 F.2d 72 3, 729 (11th Cir. 1989), cert. denied , 495 U.S. 905 (1990). Not all courts have accepted the fraud-created-the-market theor y. See Eckstein v. Balcor Film Investors , 8 F.3d 1121, 1130 (7th Cir. 1993), cert. denied , 510 U.S. 1073 (1994).

We a gree with the District Court that the plaintiffs failed to plead reliance i n accordanc e with the specificity requirements of Federal Rule 9(b). The complain t explicitly mentioned reliance only once:

Plaint iffs and other members of the Class, at the time of the allege d misrepresentations and omissions, were ignorant of the falsity of th e statements, and believed them to be true. In reliance upon the defendants’ misrepresentations , the integrity of the market and the securities offering proce ss, and upon the fidelity, integrity and superior knowledge of th e defend ants, and in ignorance of truth, plaintiffs and the other Clas s members were induced to and did obtain NationsMart securities. Ha d plaintiffs and the other members of the Class known the truth, they would not have taken such action.-21-

Complaint ¶

88. The plaintiffs did not adequately plead actual reliance, because they did not allege specific facts showing that they relied on the prospectus or any post

offering statements by the defendants. They did not claim that they ever read th e prospect us or specify which allegedly fraudulent statements they relied on i n purchasing NationsMart stock.
The plaintiffs also failed properly toinvoke any of the presumptions of reliance. T he complaint alleged no direct contact between the plaintiffs and the defendants, so the pl aintiffs are not entitled to the presumption of reliance for the non-disclosure o f mater ial information. As for the fraud-on-the-market theory, though the complain t mentioned that NationsMart stock was traded on the NASDAQ market, it did not allege specific facts showing that a large number of people could buy or sell the stock; that tradin g information on the stock was widely available; and that the market rapidl y reflected new info rmation in price. See Freeman v. Laventhold & Horwath , 915 F.2d 193, 199 (6th Cir. 1990). Finally, even if this Co urt were to accept the “fraud-createdthe-market” theory, the plaintiffs do not allege facts indicating that if th e defendants had not made fraudulent statements, there would not have been any mar ket for NationsMart securiti es. Therefore, because the plaintiffs do not plead reliance specifically a s required by Rule 9(b), the District Court pro perly dismissed the allegations under Rule 10b-5 that the defendants had a post-offering duty to update material misstatements and the claim that the defendants made fraudulent statements after the date of the offering.

B.

Be cause the plaintiffs failed to state a claim under § 10(b) of the Securitie s Exchange Act in their complaint, it is necessary to determine whether the district judge abused her discretion in denying the plaintiffs’ request for leave to amend to correc t defects in the complaint. We hold that the judge did not abuse her discreti on in denying leave to amend.-22-

A review of the procedural history of the case is necessary to explain ou r holding. On July 17 and July 20, 1995, the defendants filed various motions to dismiss the p laintiffs’ consolidated complaint. As the District Court explained in it s November 6, 19 96, order, the basis of many of these motions was the failure to plead fraud with particularity under Rule 9(b). Therefore, as ea rly as July 1995, the plaintiffs

were on notice that the sufficiency of their pleadings was being attacked by th e defe ndants. On July 31, 1995, the District Court issued a pretrial order which se t September

30, 1995, as the last day for amendments to pleadings. Over the next few months, the plaintiffs made no attempt to remedy the defects in the complaint claimed by the defendants, and made no request of the District Court that they be allowed t o amend if the Court granted the defendants’ motion s to dismiss. On April 11, 1996, the distri ctjudge granted the defendants’ motions to dismiss in large part. Two week s later, the plaintiffs filed a motion to vacate the April 11 order and a motion seekin g leave to amend the complaint. The district judge denied this motion on November 6, 1996.

The applicable standard of review is whether the District Court abused it s discretion in denying leave to amend. Buder v. Merrill Ly nch, Pierce, Fenner & Smith , 644 F.2d 690 , 694 (8th Cir. 1981). Typically, in keeping with the policy of Federa l Rule of Civil Procedure 15(a), leave to amend pleadings should be liberally granted

. Foman v. Davi s , 371 U.S. 178, 182 (1962); Buder , 644 F.2d at 694. However , differe nt considerations apply when a party seeks to amend the pleadings after th e dis trict court dismisses the complaint. United Food and Commercial Worker s Int ernational Union v. Brown Group, Inc. , 50 F.3d 1426, 1432 (8th Cir. 1995), rev’d

on other grounds , 116 S. Ct. 1529 (1996). While the district court, in its discretion , maystill grant leave to amend after it dismisses a complaint, unexcused delay by the plaintiff in seeking to amend is sufficient to justify the court’s denial. Humphreys v. Roche Biomedical Laboratories, Inc. , 990 F.2d 1078, 1082 (8th Cir. 1993).-23-

Gi ven that the plaintiffs had nearly ten months between the time they were put on notice and the time the District Court dismissed most of the counts in the complaint,

w ecannot say that the District Court abused its discretion in denying leave to amend after its April 11 order. The plaintiffs cite as their primary reason for delay thei r inability to obtain discovery from the defendants; yet, in their br ief, they admit that they

we re receiving new information throughout late 1995 and early 1996 which the y eventually used in the amended complaint fi led on April 25. Appellants’ Br. at 36. At the very least, before the April 11 dismissal, the plaintiffs could have requested leave to amend in the event the District Court found the defendants’ 9(b) argument s per suasive. Because the plaintiffs waited until two weeks after the dismissal of most of their case to attemp t to remedy problems of which they were aware months before,

we uphold the denial of leave to amend and the District Court’s dismissal of th e plaintiffs’ Rule 10b-5 claim. The Court could well have granted leave to amend, but we cannot say it was obliged to do so.

V.

For the reasons discussed above, we affirm the judgment of the District Court in part, reverse in part, and remand for further proceedings not inconsistent with this opinion.
BEAM, Circuit Judge, concurring and dissenting.
I concur in Parts I, II A and B and IV A and B of the court's opinion . As to Parts II C and III A and B, I dissent. It is difficult for me to envis ion how or in what manner, defendant s could have advanced greater warnings to potential investors so as to avail themselves of the "bespeaks caution" doctrine. Accordingl y, I would affirm the district court under that holding.-24-

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.