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. e du/thir dc ir c uit_1997/258Filed November 6, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96

- 5404

MYRON WEINER; NICHOLAS SITNYCKY,

on behalf of themselves and all others similarly situated

v.

THE QUAKER OATS COMPANY; WILLIAM D. SMITHBURG

(D.C. Civi l No. 94

- 5417)

RONALD ANDERSON; ROBERT FURMAN,

on behalf of themselves and all others similarly situated

v.

THE QUAKER OATS COMPANY; WILLIAM D. SMITHBURG

(D.C. Civil No. 94

- 5418)

Myron Weiner, Nicholas Sitnycky, Ronald Anderson

and Robert Fu rman,

Appellants

On Appeal from the United States District Court

for the District of New Jersey

Argued: February 4, 1997

Before: STAPLETON and MANSMANN, Circuit Judges,

and POLLAK, District Judge*

(Opinion filed: November 6, 1997)

_________________________________________________________________ *Honorable Louis H. Pollak, United States District Judge for the Eastern

District of Pennsylvania, sitting by designation.

M. RICHARD KOMINS (argued)

LEONARD BARR ACK

Barrack, Rodos & Bacine

2001 Market Street

3300 Two Commerce Square

Philadelphia, PA 19103

JOSEPH R. SAHID

Barrack, Rodos & Bacine575 Madison Ave.

New York, NY 10022

DAVID J. BERSHAD

ROBERT A. WALLNER

Milberg, Weiss, Bershad, Hynes &

Lerach

One Pennsylvania Plaza

49th Floor

New York, NY 10119

Attorneys for Appellants

FREDERIC K. BECKER

Wilentz, Goldma n & Spitzer

90 Woodbridge Center Drive

P.O. Box 10

Woodbridge, NJ 07095

DENNIS J. BLOCK (argued)

Weil, Gotshal & Manges

767 Fifth Ave.

New York, NY 10153

Attorneys for Appellees

OPINIO N OF THE COURT

POLLAK, District Judge:

This case raises the question whether and in what

circumstances a corporation and its officers have an

obligation to investors to update, or at least not to repeat,

2

particular projections regarding the corporation'sfinancial

situation. Plaintiffs in this securities

- fraud action are

purchasers of stock in The Quaker Oats Company

("Quaker") who contend that defendants, Quaker and its

chief executive officer, William D. Smithburg, disseminated

false or misleading information to the investment

community. Plaintiffs assert that defendants violated

Sections 10(b) and 20(a) of the Securities Exchange Act of

1934, and the Securities and Exchange Commission's Rule

10b

- 5, by continuing to announce or let stand certain

projected figures for earnings growth and debt

- to

- equity

ratio which defendants allegedly knew had become

inaccurate in light of Quaker's planned, highly leveraged,

acquisition of Snapple Beverage Corp. ("Snapple").

The district court, on motion by defendants, dismissedthe case for failure to state a claim under Fed. R. Civ. P.

12(b)(6). For the reasons given below, the judgment of the

district court will be reversed.

I.

In reviewing a judgm ent dismissing a complaint for

failure to state a claim, all well

- pleaded allegations are

taken to be true. Lorenz v. CSX Corp., 1 F.3d 1406, 1411

(3d Cir. 1993). The following recitation of the facts of this

case is therefore drawn from the "Second Am ended Class

Action Complaint."1

This action was brought "on behalf of a class of persons

who purchased the common stock of Quaker during the

period from August 4, 1994 through and including

November 1, 1994." Complaint at P 4. Plaintiffs Myron

Wein er, Nicholas Sitnycky, Ronald Anderson and Robert

Furman all purchased Quaker stock during the proposed

class period.

Defendant Quaker is a New Jersey corporation which

produces and markets a variety of consumer food products

and beverages, includin g Gatorade soft drink. Defendant

William D. Smithburg is Quaker's chairman and chief

executive. The complaint asserts that, in 1994, Quaker was

_________________________________________________________________

1. The class has not yet been certified.

3

widely considered vulnerable to takeover. Allegedly in order

to make Quaker a less attractive candidate for takeover and

thereby to protect their own positions, Quaker's

management resolved to increase the co mpany's debt by

acquiring Snapple, a manufacturer of bottled juices and

flavored tea products. On November 2, 1994, the two

companies announced that they would combine in a $1.7

billion tender offer and merger transaction. The deal was

financed entire ly with new debt, significantly increasing

Quaker's debt

- load and making the company a far less

appealing takeover prospect.2

A. Factual Background

Negotiations between Quaker and Snapple apparently

began in the spring of 1994. As Smithburg later told

Bloomberg Business News, "[R]ight after some discussions

started, it was so obvious that [Snapple] had an interest

and we had an interest and these two great brands,

Gatorade and Snapple, [would] benefit from a put

- together,and it just snowballe d from then...." Complaint at P 29. By

early August 1994, Quaker had advised Snapple that it was

interested in pursuing a merger of the two companies and

had commenced a due diligence investigation. Id. The deal

was consummated in November of that year

.

Over the course of the year prior to its acquisition of

Snapple, Quaker had announced in several public

documents and public statements the company's

expectations for earnings growth and its guideline for debt

to

- equity ratio. It is these announc ements, and the

numbers contained therein, which form the basis for the

instant action.

On October 4, 1993, in its Annual Report for the fiscal

year ended June 30, 1993, Quaker included the following

statement:

_____________________________________ ____________________________

2. According to press reports, two years after the acquisition Quaker

undertook to sell Snapple

-- for some $1.4 billion less than the

acquisition price. See Barnaby J. Feder, Quaker to Sell Snapple for $300

Million, N.Y. Times, March 28, 1997, at D1, D16 ("Closing the books on

what some analysts have called the worst acquisition in recent memory"

and "touch[ing] off another round in the almost incessant takeover

speculation that has surrounded Quaker in recent years").

4

One way to measure debt is to compute the ratio of

[total] debt as a percent of total debt plus preferred and

common shareholders' equity. Total debt includes both

short

- term and lo ng

- term borrowing. Our debt

- to

- total

capitalization ratio at June 30, 1993 was 59 percent,

up from 49 percent in fiscal 1992. Quaker's total debt

remained essentially even. Therefore, this increase was

primarily due to the d ecrease in the book value of

common shareholders' equity which resulted from our

share repurchases and the $116 million charge for

adopting new accounting principles. For the future, our

guideline will be in the upper

- 60 per cent range.

Complaint at P22.

Smithburg reiterated this "guideline" in a letter contained

in the same Annual Report:

[O]ur Board of Directors [has] authorized an increase in

our leverage guideline, along with a share repurchase

program of up to 5 million shares. Our guideline for

leverage in the future will be to maintain a total debt

-

to

- total capitalization ratio in the upper

- 60 percentrange.

Complaint at P 23.

Quaker's Form 10

- Q for the quar ter ended September 30,

1993, which was filed with the SEC in November 1993,

repeated the total debt

- to

- total capitalization ratio

guideline:

Short

- term and long

- term debt (total debt) as of

September 30, 1993, increased $98.6 million from

June 30, 1993. The total

- debt

- to

- total capitalization

ratio . . . was 63.5 percent and 59.0 percent as of

September 30, 1993 and June 30, 1993, respectively.

. . . One of the Company's financial objectives is to

generate economic value through the use of leverage,

while maintaining a solid financial position through

strong operating cash flows. The Company has decided

to increase its guideline for leverage in the future to the

uppe r

- 60 percent range.

Complaint at P 24.

5

Quaker did not, at any time before the November 1994

announcement of the acquisition of Snapple, make any

public statement or public filing that amended or qualified

t he above quoted recitals from the 1993 Annual Report and

the Form 10

- Q.

On August 4, 1994, Quaker announced its financial

results for the fourth quarter and the fiscal year that had

ended June 30, 1994. In a published report and a public

meeting, Qu aker announced a growth in earnings of 5%

over earnings for fiscal 1993. The Dow Jones News Wire

reported that at the August 4 meeting Smithburg had

stated Quaker was " `confident' of achieving at least 7% real

earnings growth" in fiscal 1995. Complain t at P 27.

On September 23, 1994, Quaker disseminated its Annual

Report for fiscal 1994. The report, which was incorporated

into Quaker's Form 10

- K filed the same day with the SEC,

stated that "we are committed to achieving a real earnings

growth of at least 7 percent over time." Complaint at P 33.

The 1994 Annual Report also contained a statement

regarding the company's total debt

- to

- total capitalization

ratio. Quaker noted that

[a]t the end of fiscal 1994, our total debt

- to

- total

capitalization ratio was 68.8 percent on a book

- valuebasis, in line with our guideline in the upper

- 60

percent range.

Complaint at P 32.

On November 2, 1994, Quaker and Snapple announced

that Quaker would acquire Snapple in a t ender offer and

merger transaction for $1.7 billion in cash. Subsequent to

this announcement, the price of Quaker stock fell $7.375

per share

-- approximately 10% of the stock's value.

Complaint at P 34.

To finance the acquisition, Quaker had obtain ed a $2.4

billion credit from a banking group led by NationsBank

Corp. The Snapple acquisition nearly tripled Quaker's debt,

from approximately $1 billion to approximately $2.7 billion.

The acquisition also increased Quaker's total debt

- to

- total

capit alization ratio to approximately 80%. Complaint at

P 35.

6

Securities analysts suggested that the merger would

make Quaker less attractive as a takeover target. One noted

that "[Quaker's] takeover potential seem s quite low,"

another that "[i]t was a do

- or

- die deal. Quaker had to buy

something or they were going to be taken out." A third

asserted that "[i]t is clearly a defensive move. They're paying

a fair amount for Snapple. Suddenly someone can't swoop

in and buy up Quaker. Even a leveraged buyout investor

can't break things up because of a huge gorilla like

Snapple." Complaint at P 35.

B. Procedural History

On November 10, 1994, purchasers of Quaker stock in

the period before the Snapple acquisiti on filed two actions,

which were later consolidated, in federal court in New

Jersey. In each action, plaintiff stock purchasers alleged

that defendants Quaker and Smithburg had violated

sections 10(b) and 20(a) of the Securities Exchange Act of

1934,3 15 U.S.C. SS 78j(b) and 78t, and the Securities and

Exchange Commission's Rule 10b

- 5,4 17 C.F.R. S 240.10b

5. Plaintiffs maintained that defendants had known that

the impending purchase of Snapple would drive Quaker's

total debt

- to

- total capitalizati on ratio up and earnings

growth down, but had nonetheless failed to adjust their

public projections for those figures. This failure, plaintiffs

_________________________________________________________________

3. Section 10(b) prohibits the "use or e mploy[ment], in connection with

the purchase or sale of any security, . . . [of] any manipulative ordeceptive device or contrivance in contravention of such rules and

regulations as the Commission may prescribe." 15 U.S.C. S 78j(b).

Section 20(a) prov ides liability for "controlling persons" in a

corporation.

15 U.S.C. S 78t(a).

4. Rule 10b

- 5 provides, in pertinent part:

It shall be unlawful for any person, directly or indirectly, by

the

use of any means or instrumentality of inte rstate commerce, or of

the mails or of any facility of any national securities exchange, .

. .

. . . .

(b) To make any untrue statement of a material fact or to omit to

state a material fact necessary in order to make the statements

made, in the light of the circumstances under which they were

made, not misleading . . . , in connection with the purchase or

sale

of any security.

7

claimed, had artificiall y inflated the price of Quaker's stock

in the period from August 4 to November 1, 1994. Keeping

the stock price up during this period, plaintiffs alleged, had

kept Quaker from itself being taken over. When the deal

with Snapple was revealed, and the pr ice of Quaker stock

fell to reflect what plaintiffs maintain was the true value of

a company that had just taken on an additional $1.7 billion

in debt, investors who had believed defendants'

representations as to growth and total debt

- to

- total

capital ization ratio projections experienced a 10% loss in

the worth of their stock.

On July 27, 1995, defendants moved, under Federal

Rules of Civil Procedure 12(b)(6) and 9(b), to dismiss

plaintiffs' Second Amended Class Action Complaint.

Plaintiffs file d a memorandum in opposition, and Quaker

and Smithburg responded with a reply brief and a

document entitled "Supplemental Affidavit of Dennis J.

Block." Plaintiffs moved to strike certain documents

appended to the Supplemental Affidavit on the ground t hat

plaintiffs had neither quoted nor relied upon the documents

in the complaint. On May 23, 1996, the district court

denied the motion to strike and dismissed the complaint for

failure to state a claim.5 In so ruling, the court found

immaterial as a matter of law Quaker's statements

concerning the company's "guideline" for the ratio of total

debt

- to

- total capitalization that it would maintain in 1995and the projection of 7% earnings growth in 1995. It

further found that the latter figure was per se reasonable

because Quaker's average annual earnings growth over the

previous five years had exceeded 7%. The court therefore

decided that there had been no violation of S 10(b) or Rule

10b

- 5 and that, because a S 20(a) claim could not be

sustained absent a finding of liability underS 10(b), the

S 20(a) claim would also be dismissed. This appeal followed.

On appeal, plaintiffs challenge the district court's

determination that Quaker's statements concerning the

company's total debt

- to

- total capi talization guideline were

immaterial, and that Quaker's projections of earnings

_________________________________________________________________

5. Because it dismissed the case under Rule 12(b)(6), the court found

moot defendants' motion to dismiss under Rule 9(b).

8

growth were (a) per se reasonable and (b) per se immaterial.

In addition, plaintiffs contest the district court's ruling that

Quaker's Schedules 14D

- 1 and 14D

- 9, documents filed

with the SEC soon after the acquisition of Snapple, could

be considered on a motion to dismiss.6 Defendants in turn

press the argument that Federal Rule of Civil Procedure

9(b) offers an alternative ground upon which to affirm the

district court's dismissal of the complaint.

C. Jurisdiction

The district court had jurisdiction pursuant to 15 U.S.C.

SS 78aa and 28 U.S.C. S 1331. We have jurisdiction over the

appeal pursuant to 28 U.S.C. S 1291.

In examining the grant of a motion to dismiss pursuant

to Rul e 12(b)(6), we exercise plenary review. Lorenz, 1 F.3d

at 1411. In so doing, we must accept the allegations of the

complaint as true and draw all reasonable inferences in the

light most favorable to plaintiffs. Id. We may affirm only if

it appears cert ain that plaintiffs could prove no set of facts

supporting their claim which would entitle them to relief.

See Wisniewski v. Johns

- Manville Corp., 759 F.2d 271, 273

(3d Cir. 1985).

II.

The Supreme Court has had frequent occasion to observe

that " the fundamental purpose of the [Securities Exchange]

Act [was] `to substitute a policy of full disclosure for the

philosophy of caveat emptor . . . .' " Santa Fe Industries, Inc.

v. Green, 430 U.S. 462, 477 (1977) (quoting Affiliated UteCitizens v. Un ited States, 406 U.S. 128, 151 (1972), in turn

quoting SEC v. Capital Gains Research Bureau, 375 U.S.

180, 186 (1963)); see also Basic, Inc. v. Levinson, 485 U.S.

224, 230 (1988). Rule 10b

- 5, promulgated pursuant to

S 10(b) of the Act, provides the fra mework for a private

cause of action for violations involving false statements or

omissions of material fact. See Basic, at 230

- 31. To

establish a valid claim of securities fraud under Rule 10b

- 5,

_______________________________________________________ __________

6. There is no indication in plaintiffs' briefs that they seek to appeal

from

the district court's dismissal of the S 20(a) "controlling person" claim

against Smithburg.

9

plaintiffs "must prove tha t the defendant[s] (1) made

misstatements or omissions of material fact; (2) with

scienter; (3) in connection with the purchase or sale of

securities; (4) upon which plaintiffs relied; and (5) that

plaintiffs' reliance was the proximate cause of their injury."

Kline v. First Western Government Securities, Inc., 24 F.3d

480, 487 (3d Cir.), cert. denied, 513 U.S. 1032 (1994); see

also In re Phillips Petroleum Securities Litigation, 881 F.2d

1236, 1244 (3d Cir. 1989).

In the present litigation, the plaintiffs allege that during

the proposed class period they purchased shares in reliance

on statements made by Quaker and Smithburg about (1)

Quaker's guideline for the ratio of total debt

- to

- total

capitalization (in the upper 60 percent range) govern ing the

company's financial planning and (2) Quaker's expected

earnings growth in fiscal 1995.

The statements about expected earnings growth were

made in August and September of 1994

-- at the

commencement of, and mid

- way through, the proposed

clas s period

-- and it is plaintiffs' contention that, at a

point when Quaker was in active pursuit of Snapple,

Quaker and Smithburg must have known that the

projections were illusory.

The statements about the guideline for the ratio of total

debt

- to

- to tal capitalization were made either prior to the

proposed class period or during the class period as a

description of completed events. Plaintiffs' central complaint

with respect to these statements is that, when the Snapple

negotiations went into high gear, Quaker and Smithburg

had to have known that a total debt

- to

- total capitalization

ratio in the high 60 percent range was no longer a realistic

possibility. At that point, plaintiffs contend, defendants hada duty publicly to set the guidelines re cord straight.

We will first consider the statements regarding Quaker's

guideline for the ratio of total debt

- to

- total capitalization.

Then we will turn to the statements about expected growth

in earnings.

A. The Total Debt

- to

- Total Capitalization Ratio Guideline

Plaintiffs' claims under this heading are claims of

nondisclosure. "When an allegation of fraud under section

10

10(b) is based upon a nondisclosure, there can be no fraud

absent a duty to spe ak." Lorenz, 1 F.3d at 1418. In general,

Section 10(b) and Rule 10b

- 5 do not impose a duty on

defendants to correct prior statements

-- particularly

statements of intent

-- so long as those statements were

true when made. See In re Phillips Petroleum, 881 F.2d at

1245. However, "[t]here can be no doubt that a duty exists

to correct prior statements, if the prior statements were

true when made but misleading if left unrevised." Id. To

avoid liability in such circumstances, "notice of a change of

int ent [must] be disseminated in a timely fashion." Id. at

1246. Whether an amendment is sufficiently prompt is a

question that "must be determined in each case based

upon the particular facts and circumstances." Id.

In the present case, plaintiffs alle ge that defendants'

statements in the months leading up to the merger with

Snapple improperly omitted mention of a planned increase

in the total debt

- to

- total capitalization ratio guideline. The

district court, discounting the allegation, found that "[ n]o

reasonable investor could interpret the Leverage[total debt

to

- total capitalization] Ratio Guideline as an absolute

restriction on Quaker's ability to take advantage of a

corporate opportunity which might cause Quaker to exceed

the Leverage [tota l debt

- to

- total capitalization] Ratio

Guideline." 928 F. Supp. at 1386. On this appeal, in urging

the correctness of the district court's determination,

defendants contend that plaintiffs are unable to establish

the first element of a claim under S10(b ) and Rule 10b

- 5:

the materiality of defendants' repetition of Quaker's "upper

60

- percent range" total debt

- to

- total capitalization ratio

guideline after the merger with Snapple became a

probability.

1. Materiality

The Supreme Court set forth the standard for materiality

of an omitted statement under S 10(b) and Rule 10b

- 5 inBasic, Inc. v. Levinson, 485 U.S. 224 (1988). Plaintiffs in

Basic had been stockholders in Basic Incorporated, a

company whose directors, in December of 1978, approved

a friendly tender offer from Combustion Engineers to

acquire Basic's common stock. The December 1978

announcement was the culmination of over two years of

11

negotiations between Basic and Combustion

-- a period

during which Basic on three occasions publicly denied that

merger discussions or other developments likely to have

significant effect on share values were pending. Plaintiffs

sold their holdings in Basic subsequent to the first of

Basic's public denial s. After the merger, plaintiffs sued

Basic and those who had been Basic directors during the

two years leading up to the merger. Plaintiffs alleged that

Basic's public denials were material misrepresentations

which had, to plaintiffs' detriment, weaken ed the market in

Basic's stock.

In Basic, the Court adopted in the context of S 10(b) and

Rule 10b

- 5 the standard of materiality set forth in TSC

Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), a

case arising under S 14(a) of the 1934 Act. See Basic, 485

U.S. at 232. The Basic Court approved, for cases involving

undisclosed merger plans, the principle that "[a]n omitted

fact is material if there is a substantial likelihood that a

reasonable shareholder would consider it important in

dec iding how to [proceed]." Id. at 231 (quoting TSC

Industries, 426 U.S. at 449). Under this standard, there

must be "a substantial likelihood that the disclosure of the

omitted fact would have been viewed by the reasonable

investor as having significantl y altered the `total mix' of

information made available." Id.

In Basic, the Court rejected a proposed bright

- line test

that "preliminary merger discussions do not become

material until `agreement

- in

- principle' as to the price and

structure of the tr ansaction has been reached between the

would

- be merger partners." Basic, 485 U.S. at 233. In its

place, the Court called for a fact

- specific inquiry: "Whether

merger discussions in any particular case are material . . .

depends on the facts. . . . No p articular event or factor

short of closing the transaction need be either necessary or

sufficient by itself to render merger discussions material."

Id. at 239.

Subsequent to Basic, this court has had occasion to

address with greater particularity th e standard of

materiality to be applied, in a securities

- fraud action, to a

motion to dismiss: "[M]ateriality is a mixed question of lawand fact, and the delicate assessments of the inferences a

12

reasonable s hareholder would draw from a given set of facts

are peculiarly for the trier of fact." Shapiro v. UJB Financial

Corp., 964 F.2d 272, 281 n.11 (3d Cir.), cert. denied,

506 U.S. 934 (1992). Therefore, "[o]nly if the alleged

misrepresentations or omission s are so obviously

unimportant to an investor that reasonable minds cannot

differ on the question of materiality is it appropriate for the

district court to rule that the allegations are inactionable as

a matter of law." Id.

Applying the standard se t forth in Shapiro to the pending

case, we note first that the emphasis on a fact

- specific

determination of materiality militates against a dismissal on

the pleadings. The complaint identifies three separate

documents in which Quaker described its tota l debt

- to

- total

capitalization ratio policy: the 1993 Annual Report issued

October 4, 1993 ("Our guideline for leverage in the future

will be to maintain a total debt

- to

- total capitalization ratio

in the upper

- 60 percent range"), Complaint at P22; the

Form 10

- Q filed in November 1993 ("The Company has

decided to increase its guideline for leverage in the future to

the upper

- 60 percent range"), Complaint at P 24; and the

1994 Annual Report issued September 23, 1994 ("At the

end of fiscal 1994, our t otal debt

- to

- total capitalization ratio

was 68.8 percent on a book

- value basis, in line with our

guideline in the upper

- 60 percent range"), Complaint at

P 32. None of these statements was actually incorrect at the

time of its publication. Even the last , which plaintiffs assert

was "false when made," in isolation appears a

straightforward statement of fact; there is no indication

that as of the end of fiscal 1994 Quaker's total debt

- to

- total

capitalization ratio was anything but 68.8%.

But, of cou rse, the statements were not made in

isolation. Rather, by including the total debt

- to

- total

capitalization ratio guideline in the 1993 Annual Report

-- indeed, by setting it forth in at least three separate places

in that document

-- Quaker may well h ave created the

reasonable understanding among investors that the ratio

guideline was a number to which Quaker attached

considerable significance. And any such understanding

could well have been reinforced by the iteration of the ratio

guideline in th e November 1993 Form 10

- Q and the 1994

13Annual Report published on September 23, 1994. Taken

together, the statements could indeed have induced a

reasonable investor to expect either that the ratio guideline

w ould remain in "the upper

- 60 percent range," or that

Quaker would announce any anticipated significant

change. That is, it would have been entirely reasonable for

an investor to assume that if defendants believed, as of

September 23, 1994, that Quaker' s total debt

- to

- total

capitalization ratio would soon change significantly, the

company would have said so in its Annual Report forfiscal

1994 issued on that date. As noted earlier, Smithburg had

stated in a letter contained in Quaker's 1993 Annual

Re port that "[o]ur guideline for leverage in the future will be

to maintain a total debt

- to

- total capitalization ratio in the

upper

- 60 percent range" (emphasis added); there is no

evident reason to confine the phrase "in the future" to the

single year af ter the initial announcement.

In sum, in the present case, we find that a trier of fact

could conclude that a reasonable investor reading the 1993

Annual Report published on October 4, 1993, and then the

1994 Annual Report published on September 23, 1994,

would have no ground for anticipating that the total debt

to

- total capitalization ratio would rise as significantly as it

did in fiscal 1995. There was after all no abjuration of the

"upper 60

- percent range" guideline. The company had

predicted the rise from 59 percent to the "upper 60

- percent

range" in the 1993 report and that rise had occurred by

and was confirmed in the 1994 report. Therefore, it was

reasonable for an investor to expect that the company

would make another such prediction if it expected the ratio

to change markedly in the ensuing year.

The district court held that "[t]o require Quaker to

disclose the possibility it might seek loans to finance an

acquisition is tantamount to requiring the disclosure of the

acquisition negotiations." 928 F. Supp. at 1383. But

plaintiffs do not argue that Quaker should have stated that

the guideline would be adjusted "to finance an acquisition."

The more relevant question is whether Quaker could have

communicated a projected increase in the level of the total

debt

- to

- total capitalization ratio guideline without alerting

investors to the impending merger with Snapple. There is

14

reason to believe Quaker had the ability to do just that. The

company had announced plans to increase the ratio

substantially in its 1993 Annual Report for a variety of

reasons unrelated to acquiring other companies. Quaker

then observed in its 1994 Annual Report, in a paragraph

discussing the ratio guideline, th at among other things"increased debt" had allowed the company to "acquire four

businesses." Defendants do not argue that the 1993

announcement alerted investors to Quaker's potential

acquisition of these four businesses. Thus, Quaker's own

actions st rongly suggest that a change in a ratio guideline

can be projected without explicitly or implicitly alerting the

investment community.

Furthermore, even if an announced change in the ratio

guideline would have alerted the reasonably savvy investor

t o an imminent acquisition, the Supreme Court has made

clear that it is not the role of the courts to interfere with the

policy of disclosure "chosen and recognized" in the

securities laws. Basic, 485 U.S. at 234. "We think that

creating an exception to a regulatory scheme founded on a

prodisclosure legislative philosophy, because complying

with the regulation might be `bad for business,' is a role for

Congress, not this Court." Id. at 240 n.17.

We recognize that it is quite likely that Quaker and

Snapple had not yet agreed on the precise terms of their

merger by the beginning of August 1994, or indeed even

until shortly before the deal was announced on November

2 of that year. But plaintiffs do not allege that the terms of

the agreement were s et by the opening of the proposed

class period in early August. Instead, they urge that,

whatever the terms of the agreement may have been by the

time of the purported false or misleading statements, it

must by then have been clear to defendants that t he merger

would compel Quaker to take on sufficient additional debt

to raise the total debt

- to

- total capitalization ratio to a level

far higher than the "upper

- 60 percent" range. 7 We think

that a fact

- finder could so find.

___________________________ ______________________________________

7. Therefore, it makes no difference to the outcome of this appeal

whether the district court erred in considering Quaker's Schedule 14D

- 1

and Schedule 14D

- 9, which were apparently filed two days after the

15

We hold, therefore, that defendants have failed to

establish that plaintiffs can prove no set of facts in support

of their claim which would entitle them to relief. The

complaint alleges facts on the basis of which a reasonable

factfinder could determine that Quaker's statements

regarding its total debt

- to

- total capitalization ratio guideline

would have been material to a reasonable investor, and

hence that Quaker had a duty to update such statements

when they became unreliable.8

2. Rule 9(b)Defendants offer as an alternative basis for affirmance

_________________________________________________________________

announcement of the merger. These documents, defendants argue,

include statements that "th rough September and October 1994" Quaker

and Snapple continued to discuss "alternative structures for the

transaction," including one scenario "that would have provided for

partial payment in Quaker stock." We note that defendants do not argue

that thi s alternative structure would have made the deal one paid for

entirely by stock

-- or even primarily by stock. That is, defendants do

not

argue that at any time during the proposed class period Quaker believed

that the amount of debt that it would have to assume as a result of the

merger would be so small as to have no significant impact on the

company's total debt

- to

- total capitalization ratio. Accordingly,

consideration vel non of the Schedule 14D

- 1 and Schedule 14D

- 9 does

not affect the outcome of this appeal, and we need not answer the

question whether the district court properly addressed the documents in

deciding the motion to dismiss.

8. Defendants also argue that plaintiffs failed adequately to plead

scienter, a necessary element of any 10b

- 5 action. Scienter "need not be

[pleaded] with `great specificity.' " In re Time Warner Securities

Litigation,

9 F.3d 259, 268 (2d Cir. 1993) (quoting Goldman v. Belden, 754 F.2d

1059, 1070 (2d Cir. 1985)), cert. denied, 511 U.S. 1017 (1994). It may be

adequately alleged by setting forth facts establishing a motive and an

opportunity to commit fraud, or by setting forth facts that constitute

circumstantial evidence of either reckless or conscious behavior. See id.

at 269. The complaint alleges th at Quaker's management took advantage

of specific opportunities to communicate with the investment community

in order to inflate the price of Quaker stock, fend off a widely

- rumored

potential takeover, and preserve management's own jobs. Because the

co mplaint therefore sets forth facts establishing both motive and

opportunity to commit fraud, we hold that plaintiffs have adequately

alleged scienter.

16

the complaint's alleged lack of compliance with the

requi rements of Federal Rule of Civil Procedure 9(b).9 That

rule dictates that "[i]n all averments of fraud or mistake,

the circumstances constituting fraud or malice shall be

stated with particularity." Our cases warn, however, that

"focusing exclusively o n the particularity requirement is too

narrow an approach and fails to take account of the general

simplicity and flexibility contemplated by the rules."

Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628,

645 (3d Cir. 1989). Because, in cases alleging corporate

fraud, "plaintiffs cannot be expected to have personal

knowledge of the details of corporate internal affairs," wehave relaxed the particularity rule "when factual

information is peculiarly within the defendant's knowledge

or contr ol." Id. Nevertheless, "even under a non

- restrictive

application of the rule, pleaders must allege that the

necessary information lies within defendants' control, and

their allegations must be accompanied by a statement of

the facts upon which the alle gations are based." Id.

In Craftmatic, we held that where a projection is alleged

to have been issued "without a reasonable basis" and

"knowingly and recklessly," a complaint must allege not

only "the dates, the speaker, and the actual projections at

issue" and that "there was no reasonable basis for the

projections," but also "facts indicating why the charges

against defendants are not baseless and why additional

information lies exclusively within defendants' control." Id.

at 646. In Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d

Cir. 1992), we refined the Craftmatic standard, holding that

"a boilerplate allegation that plaintiffs believe the necessary

information `lies in defendants' exclusive control,' " if made,

must be accompanied by " a statement of facts upon which

_________________________________________________________________

9. Defendants are free to make such an argument despite the absence of

a cross

- appeal. See Colautti v. Franklin, 439 U.S. 379, 397 n.16 (1979)

("Appelle es, as the prevailing parties, may of course assert any ground in

support of that judgment, whether or not that ground was relied upon

or even considered by the trial court"); New Castle County v. Hartford

Accident and Indemnity Co., 933 F.2d 1162, 1205 (3d Cir. 1990) ("A

cross

- appeal is unnecessary when an appellee endeavors to affirm a

judgment in its favor by proffering an alternative theory in support of

the

district court's decision").

17

their allegation is based." Id. at 285 (citing James W. Moore

and Jo D. Lucas, Moore's Federal Practice P 9.03[1] at 9

- 29

(1991) ("where the facts are in the exclusive possession of

the adversary, courts should permit the pleader to allege

the facts on information and belief, provided a statement of

the facts upon which the belief is founded is proffered")).

Specifically, we required that "[t]o avoid dismissal in these

circumstances, a complaint must delineate at least the

nature and scope of plaintiffs' effort to obtain, before filing

the complaint, the information needed to plead with

particularity." Shapiro, 964 F.2d at 285. We directed that

"plaintiffs thoroughly investigate all possible sources of

information, including but not limited to all publicly

avai lable relevant information, before filing a complaint." Id.

The complaint in the case before us directly addressesthese standards. Paragraph 43, for example, restates the

Shapiro standard word

- for

- word, then goes on to list the

sources of informatio n which plaintiffs have reviewed. App.

at 36. The proffered list of "publicly available information"

is expansive, including filings with the SEC, annual reports,

press releases, recorded interviews, media reports on the

company, and reports of securit ies analysts and investor

advisory services.10 Further, plaintiffs

-- presumably

cognizant that their efforts were required to be "not limited

to" publicly available information

-- "consulted with and

obtained the advice of an expert in financial analy sis in

connection with the meaning and method of calculation of

[Quaker's] leverage ratios and the implications of

defendants' decision to change [Quaker's] leverage ratio."

App. at 37. Finally, the complaint makes the requisite

assertion that "the un derlying information relating to

defendants' misconduct and the particulars thereof are not

available to plaintiffs and the public and lie exclusively

within the possession and control of defendants."

Complaint at P 44.

The complaint therefore meets the requirements of Rule

9(b). Accordingly, we hold that Rule 9(b) does not offer a

viable alternative ground for dismissal.

_________________________________________________________________

10. It is not clear whether these last reports were "publi cly available."

18

B. The Earnings Growth Projections

For the reasons discussed above, we have concluded that

plaintiffs' claim based on defendants' statements about the

total debt

- to

- total capitalization guid eline ratio should not

have been dismissed. We do not, however, think that

plaintiffs' claim based on defendants' projections of

earnings growth merits resuscitation. The district court

correctly held that, in the particular circumstances of this

case , these projections were immaterial.11

Smithburg's statement at the August 4, 1994 "public

meeting" that Quaker was "confident of achieving at least

7% real earnings growth" in fiscal 1995, Complaint at P 27,

might

-- if left unmodified until the an nouncement of the

merger

-- have supported an action under 10b

- 5. 12

Statements of "soft information" from high

- ranking

corporate officials can be actionable if they are made

without a reasonable basis. See Shapiro, 964 F.2d at 283.

And Smithburg's wa s not a vague expression of optimism

like those that we have in the past held to be immaterial.

See, e.g., In re Burlington Coat Factory Securities Litigation,114 F.3d 1410, 1432 (3d Cir. 1997) (finding vague and

therefore immaterial "a general, non

- s pecific statement of

optimism or hope that a trend will continue"); Shapiro, 964

F.2d at 283 n.12 (holding "United Jersey looks to the future

_________________________________________________________________

11. We are not, however, persuaded by the district court's view that the

earnings projections were per se reasonable because they were in accord

with the company's performance over the previousfive years. 928 F.

Supp. at 1386. A per se rule immunizing Quaker from the need to speak

truthfully a bout the future merely because the company had performed

well in the past seems to us improvident. It is not difficult to imagine

situations in which the management of a company is well aware of

circumstances, not previously present, which are very like ly to have a

grievous (or, for that matter, salutary) impact on future earnings; in

such circumstances, a mere repetition of earnings figures for previous

years might indeed give rise to liability.

12. On the other hand, the effect of the merger on e arnings growth,

whatever it might have been, was almost certainly less direct and

immediate than the effect of the merger on the total debt

- total

capitalization ratio. An increase in debt level is concrete and, in these

circumstances, easy to foresee. A decrease in earnings growth seems to

us a less readily foreseeable outcome of an acquisition.

19

with great optimism" to be "inactionable puffing"). Instead,

it was a specific figure regarding a particular, def ined time

period

-- namely, fiscal 1995.

Furthermore, the statement contained no explicit

cautionary language. The "bespeaks caution" doctrine,

adopted by this court in In re Trump Casino Securities

Litigation, 7 F.3d 357 (3d Cir. 1993), cert. denie d, 510 U.S.

1178 (1994), provides that when "forecasts, opinions or

projections are accompanied by meaningful cautionary

statements, the forward

- looking statements will not form

the basis for a securities fraud claim if those statements

did not affect the `total mix' of information . .. provided

investors. In other words, cautionary language, if sufficient,

renders the alleged omissions or misrepresentations

immaterial as a matter of law." Id. at 371. Smithburg's

statement was accompanied by no suc h language.13

However, for the statement to have had deleterious effect,

it would have had to remain "alive" in the market,

unmodified, until the merger was announced. See

Burlington, 114 F.3d at 1432. Plaintiffs allege that the harm

caused by defen dants' conduct

-- a reduction in the value

of plaintiffs' shares

-- occurred only after the November 2

announcement of the Snapple acquisition. If defendantsmade a public statement tending to cure any misleading

effects of Smithburg's statement betwee n August 4, the

date of the news conference, and November 2, then

Smithburg's statement would essentially be neutralized,

and thereby made immaterial.

Quaker's 1994 Annual Report

-- issued on September

23, 1994, more than five weeks prior to the Nov ember 2

merger announcement

-- contained the statement that "we

_________________________________________________________________

13. We note, as did the district court, that at the same meeting at which

Smithburg stated that Quaker was " `confident' of achieving at least 7%

real earnings growth," he also acknowledged that the company had

"missed its 7% target" for fiscal 1994. But we do not believe that this

latter statement constituted meaningfully cautionary language. Indeed, it

seems to us jus t as likely that the fact that Smithburg expressed

"confidence" in his projected figure while openly acknowledging a missed

target the previous year would inspire greater belief in his current

prediction.

20

are committed to achieving a real earnings growth of at

least 7 percent over time." Complaint at P 33 (emphasis

added). We conclude that the phrase "over time" in this

second statement inoculates Quaker from any claims of

fraud that point to a decline in earnings growth in the

immediate aftermath of the Snapple acquisition. No

reasonably careful investor would find material a prediction

of seven

- percent growth followed by the qualifier "over

time." Therefore, we hold that no reasonablefinder of fact

c ould conclude that the projection influenced prudent

investors.

Accordingly, we hold that the projections of earnings

growth cannot form a basis for an action under S 10(b),

S 20(a), and Rule 10b

- 5 because any misleading effect the

August 4 statemen t might have had was cured by the

qualifier "over time" that appeared in the 1994 Annual

Report. Given our decision with regard to the total debt

- to

total capitalization ratio guideline, this holding does not

prevent plaintiffs' suit from going forwar d. It may, however,

limit the "class period"

-- should the district court, on

remand, decide to certify a class

-- to the period between

September 23, 1994, the date of the first potentially

misleading restatement of the guideline

-- and November 2,

1 994, the date of the merger announcement.

Therefore, we will affirm the dismissal of the earnings

growth claim, albeit for reasons different from those given

by the district court.III. Conclusion

The order of the district court dismissing plai ntiffs'

complaint for failure to state a claim is reversed and the

case remanded for further proceedings consistent with this

opinion.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

21